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Chip Maker Shifts Product Line Toward a More Profitable Mix

Alex Lidow, chief executive of International Rectifier Corp., gets amped up when he talks about the energy needs of China and India. But steer clear if you’re an analyst with a question about options expensing.


On a conference call last week, Lidow, a physicist with a booming voice, cut off one analyst who questioned why the company took a $6 million pre-tax charge for the accelerated vesting of stock options. Investors haven’t been too happy about the expensing, particularly since the company has been overly generous in doling out options over the years.


“This was previously announced,” Lidow said on the conference call, as he tried unsuccessfully to steer analysts away from questions about the chip maker’s weak sales in its commodity and non-aligned product sectors.


While it’s had its share of troubles, El Segundo-based International Rectifier is humming along in a number of fronts, including high-performance servers and analog chips used by networking companies. The company’s chips are used in a variety of products, including hybrid cars, digital TVs, video game consoles, computers and even energy-efficient washing machines.


Its stock has surged 63.4 percent in the past year, to $55.03 a share, as of Thursday’s close.


Lidow has restructured the company over the past few years along product lines. To boost profit margins, he is trying to sell off its low-margin items that continue to be a drag on earnings.


“This is the story of a company that is focusing only on products that naturally throw off higher returns than others,” said William Conroy, an analyst at Sanders Morris Harris Group, who has a “hold” rating on the stock based on its valuation.


For the fourth quarter ended June 30, International Rectifier reported a 16 percent drop in net income to $24.7 million, compared with $29.4 million a year earlier. Revenue fell 6 percent to $281.8 million.



Low-end rivals


International Rectifier continues to suffer from competition on commodity chips used in appliances like clocks and toasters that don’t require the most advanced chips. These make up nearly one-fifth of total revenues but have lower profit margins.


Lidow said the company has been hit “by very strong channel stuffing and price declines by competitors,” which has been a drag on overall results. (“Channel stuffing” refers to manufacturers who ship goods to distributors without commensurate demand from actual customers.)


By far the company’s blow-out segment is in energy-saving products.


Sales in that sector rose 20 percent in fiscal 2005, to $300.5 million, which threw off gross margins of 55 percent.


Lidow attributed the demand to a booming housing market that is driving demand for energy-conserving appliances. Appliance and lighting product revenues alone rose 41 percent in fiscal 2005.


“What’s the first thing anyone in China wants? An air conditioner,” said Lidow, in an interview. “In China and India, you have a rapidly growing economy with chronic energy shortages.”


Another area of strength was aerospace and defense, with a 19 percent jump in revenue. The company’s intellectual property revenues dipped slightly to $41.2 million for the year, although it added 100 new patents to its growing portfolio of 400 U.S. patents. It has 800 worldwide patent applications pending.


Lidow said International Rectifier is racing against a deadline of hitting 50 percent overall gross margins for the company by fiscal 2006. Analysts say that to hit the goal it will have to sell off its non-aligned products.


Despite expectations that the overall business will accelerate in the second half of 2005, Lidow said he expects International Rectifier’s revenues to be either flat or to rise 4 percent in the fiscal first quarter ended September 30.


“Industry conditions are steadily improving with the strongest part of the year still ahead,” he said.



*Staff reporter Kate Berry can be reached at (323) 549-5225, ext. 228, or at

kberry@labusinessjournal.com

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