**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**Form 10-Q/A**

 

**(MARK ONE)**
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|----------------------------------------------------------------------------------------------|

 

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**

 

**COMMISSIONFILE NUMBER:**      **1-7935**

 

**International RectifierCorporation**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **DELAWARE**                                                    | ** ** | **95-1528961**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION) |       | (IRS EMPLOYER IDENTIFICATION  NUMBER) |
|                                                            |       |                                  |
| **233 KANSAS STREET  EL SEGUNDO, CALIFORNIA**                   | ** ** | **90245**                             |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        |       | (ZIP CODE)                            |

 

REGISTRANT’S TELEPHONE NUMBER,INCLUDING AREA CODE:**  (310) 726-8000**

 

INDICATE BY CHECK MARK WHETHERTHE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS(OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCHREPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90DAYS.       YES ý  NO o

 

INDICATE BY CHECK MARK WHETHERTHE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THEEXCHANGE ACT). YES ý     NOo

 

INDICATE BY CHECK MARK WHETHERTHE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGEACT). YES o     NOý

 

THERE WERE 70,794,310 SHARES OFTHE REGISTRANT’S COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING ON NOVEMBER8, 2005.

 

 

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**Table of Contents**

 
| **PART I.**   | ** ** | **FINANCIAL INFORMATION**                                                                                              | ** ** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** ** | ** **                                                                                                             | ** ** |
| **ITEM 1.**   | ** ** | **Financial Statements**                                                                                               |       |
|          |       |                                                                                                                   |       |
|          |       | Unaudited  Consolidated Statements of Income for the Three Months Ended September 30,  2005 and 2004                   |       |
|          |       |                                                                                                                   |       |
|          |       | Unaudited  Consolidated Statements of Comprehensive Income for the Three Months Ended  September 30, 2005 and 2004     |       |
|          |       |                                                                                                                   |       |
|          |       | Unaudited Consolidated Balance Sheets as of September 30, 2005 and  June 30, 2005                                      |       |
|          |       |                                                                                                                   |       |
|          |       | Unaudited  Consolidated Statements of Cash Flows for the Three Months Ended September  30, 2005 (as Restated) and 2004 |       |
|          |       |                                                                                                                   |       |
|          |       | Notes to Unaudited Consolidated Financial Statements                                                                   |       |
|          |       |                                                                                                                   |       |
| **ITEM 2.**   | ** ** | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                        |       |
| ** **    | ** ** | ** **                                                                                                             |       |
| **ITEM 3.**   | ** ** | **Quantitative and Qualitative Disclosures  about Market Risk**                                                        |       |
|          |       |                                                                                                                   |       |
| **ITEM 4.**   | ** ** | **Controls and Procedures**                                                                                            |       |
|          |       |                                                                                                                   |       |
| **PART  II.** | ** ** | **OTHER  INFORMATION**                                                                                                 | ** ** |
| ** **    | ** ** | ** **                                                                                                             | ** ** |
| **ITEM 1A.**  | ** ** | **Risk Factors**                                                                                                       |       |
|          |       |                                                                                                                   |       |
| **ITEM 2.**   | ** ** | **Unregistered Sales of Equity Securities and  Use of Proceeds**                                                       |       |
|          |       |                                                                                                                   |       |
| **ITEM 6.**   | ** ** | **Exhibits**                                                                                                           |       |

 

2

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**EXPLANATORY NOTE**

 

This amendment to our QuarterlyReport on Form 10-Q for the fiscal quarter ended September 30, 2005, initiallyfiled with the Securities and Exchange Commission on November 14, 2005, isbeing filed to reflect the restatement of our unaudited consolidated statementof cash flows for the three months ended September 30, 2005, to correct anerror in the classification of the excess tax benefits generated from theexercise of stock options.  As more fullydescribed in Note 1, “Certain Accounting Policies”, of the Notes to theunaudited consolidated financial statements, the excess tax benefits from stockoptions exercised that was previously reported in the consolidated statement ofcash flows as an operating activity has been restated to correctly present itas a financing activity.

 

Generally, no attempt has beenmade in this Form 10-Q/A to modify or update other disclosures presented in theoriginal report on Form 10-Q except as required to reflect the effects of therestatement.  This Form 10-Q/A generallydoes not reflect events occurring after the filing of the original Form 10-Q ormodify or update those disclosures affected by subsequent events. Informationnot affected by the restatement is unchanged and reflects the disclosures madeat the time of the original filing of the Form 10-Q, including any amendmentsto those filings.  The following itemshave been amended as a result of the restatement:

 

•      PartI, Item 1, Financial Information;

 

•      PartI, Item 2, Management’s Discussion and Analysis of Financial Condition andResults of Operations;

 

•      PartI, Item 4, Controls and Procedures; and

 

•      PartII, Item 6, Exhibits.

 

Our Chief Executive Officer andChief Financial Officer have also reissued certifications required by Sections302 and 906 of the Sarbanes-Oxley Act of 2002.

 

3

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**PART I.****                                                    FINANCIALINFORMATION**

 

**ITEM 1.****                                                     FinancialStatements.**

 

**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**(In thousands except per share amounts)**

 
| ** **                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                  |       |                                  |       |   |   |
| Revenues                                                                              |       | $                                     | 272,573    |   | $ | 312,225 |   |
| Cost of  sales                                                                        |       | 161,680                               |       | 178,788 |   |
| Gross profit                                                                          |       | 110,893                               |       | 133,437 |   |
|                                                                                  |       |                                  |       |   |   |
| Selling and  administrative expense                                                   |       | 45,166                                |       | 46,415 |   |
| Research and  development expense                                                     |       | 25,212                                |       | 25,366 |   |
| Amortization  of acquisition-related intangibles                                      |       | 1,453                                 |       | 1,439 |   |
| Impairment  of assets, restructuring and severance charges                            |       | 4,293                                 |       | 6,691 |   |
| Other  expense (income), net                                                          |       | 124                                   |       | (36 | ) |
| Interest  (income) expense, net                                                       |       | (1,552                                | )          | 1,717 |   |
| Income  before income taxes                                                           |       | 36,197                                |       | 51,845 |   |
|                                                                                  |       |                                  |       |   |   |
| Provision  for income taxes                                                           |       | 9,954                                 |       | 14,265 |   |
| Net income                                                                            |       | $                                     | 26,243     |   | $ | 37,580 |   |
|                                                                                  |       |                                  |       |   |   |
| Net income  per common share – basic                                             |       | $                                     | 0.37       |   | $ | 0.56 |   |
|                                                                                  |       |                                  |       |   |   |
| Net income  per common share – diluted                                           |       | $                                     | 0.36       |   | $ | 0.53 |   |
|                                                                                  |       |                                  |       |   |   |
| Average  common shares outstanding – basic                                       |       | 70,329                                |       | 66,516 |   |
|                                                                                  |       |                                  |       |   |   |
| Average  common shares and potentially dilutive securities outstanding – diluted |       | 72,277                                |       | 75,711 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONSOLIDATED STATEMENTS OF**

**COMPREHENSIVEINCOME**

**(In thousands)**

 
| ** **                                                                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                                                              |       |                                  |       |   |   |
| Net income                                                                                                                        |       | $                                     | 26,243     |   | $ | 37,580 |   |
|                                                                                                                              |       |                                  |       |   |   |
| Other  comprehensive (loss) income:                                                                                               |       |                                  |       |   |   |
| Foreign currency translation adjustments                                                                                          |       | (5,136                                | )          | 139 |   |
|                                                                                                                              |       |                                  |       |   |   |
| Unrealized (losses) gains on securities:                                                                                          |       |                                  |       |   |   |
| Unrealized holding losses on  available-for-sale securities, net of tax effect of $1,686 and $5,521,  respectively                |       | (2,872                                | )          | (9,401 | ) |
| Unrealized holding gains on foreign  currency forward contract, net of tax effect of ($154) and ($477),  respectively             |       | 263                                   |       | 811 |   |
| Less: Reclassification adjustments of net  (gains) losses on available-for-sale securities and foreign currency forward  contract |       | (23                                   | )          | 216 |   |
|                                                                                                                              |       |                                  |       |   |   |
| Other comprehensive loss                                                                                                          |       | (7,768                                | )          | (8,235 | ) |
|                                                                                                                              |       |                                  |       |   |   |
| Comprehensive  income                                                                                                             |       | $                                     | 18,475     |   | $ | 29,345 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands)**

** **
| ** **                                                       | ** ** | **September 30,  2005** | ** ** | **June 30,****2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **(Unaudited)**         | ** ** | ** **           | ** ** |
| **ASSETS**                                                       |       |                    |       |                 |       |
| Current  assets:                                                 |       |                    |       |                 |       |
| Cash and cash equivalents                                        |       | $                       | 359,138    |                 | $          | 359,978 |   |
| Short-term cash investments                                      |       | 224,499                 |       | 278,157              |       |
| Trade accounts receivable, less allowance  for doubtful accounts |       | 159,685                 |       | 158,510              |       |
| Inventories, net                                                 |       | 193,781                 |       | 177,560              |       |
| Deferred income taxes                                            |       | 33,982                  |       | 34,784               |       |
| Prepaid expenses and other receivables                           |       | 64,952                  |       | 53,387               |       |
|                                                             |       |                    |       |                 |       |
| Total current assets                                             |       | 1,036,037               |       | 1,062,376            |       |
| Long-term  cash investments                                      |       | 348,311                 |       | 302,585              |       |
| Property,  plant and equipment, net                              |       | 502,517                 |       | 488,204              |       |
| Goodwill                                                         |       | 152,329                 |       | 152,457              |       |
| Acquisition-related  intangible assets, net                      |       | 33,862                  |       | 35,354               |       |
| Long-term  deferred income taxes                                 |       | 74,038                  |       | 76,158               |       |
| Other assets                                                     |       | 103,756                 |       | 106,410              |       |
|                                                             |       |                    |       |                 |       |
| Total assets                                                     |       | $                       | 2,250,850  |                 | $          | 2,223,544 |   |
|                                                             |       |                    |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                    |       |                    |       |                 |       |
| Current  liabilities:                                            |       |                    |       |                 |       |
| Bank loans                                                       |       | $                       | 20,437     |                 | $          | 18,168 |   |
| Long-term debt, due within one year                              |       | 47                      |       | 163                  |       |
| Accounts payable                                                 |       | 78,157                  |       | 81,893               |       |
| Accrued salaries, wages and commissions                          |       | 29,353                  |       | 33,344               |       |
| Other accrued expenses                                           |       | 82,415                  |       | 91,328               |       |
|                                                             |       |                    |       |                 |       |
| Total current liabilities                                        |       | 210,409                 |       | 224,896              |       |
| Long-term  debt, less current maturities                         |       | 542,322                 |       | 547,259              |       |
| Other long-term  liabilities                                     |       | 25,188                  |       | 26,186               |       |
|                                                             |       |                    |       |                 |       |
| Stockholders’  equity:                                      |       |                    |       |                 |       |
| Common stock                                                     |       | 70,736                  |       | 69,826               |       |
| Capital contributed in excess of par value  of shares            |       | 882,388                 |       | 854,045              |       |
| Retained earnings                                                |       | 461,388                 |       | 435,145              |       |
| Accumulated other comprehensive income                           |       | 58,419                  |       | 66,187               |       |
| Total stockholders’ equity                                  |       | 1,472,931               |       | 1,425,203            |       |
| Total liabilities and stockholders’ equity                  |       | $                       | 2,250,850  |                 | $          | 2,223,544 |   |

 

The accompanying notes are an integral part of these statements.

 

6

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**INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(As Restated)**                     | ** ** | ** ** | ** ** |
| Cash flows  from operating activities:                                             |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 26,243     |   | $ | 37,580 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                      |       | 20,043                                |       | 16,922 |   |
| Amortization of acquisition-related  intangible assets                             |       | 1,453                                 |       | 1,439 |   |
| Stock compensation expense                                                         |       | 491                                   |       | — |   |
| Unrealized (gains) losses on swap  transactions                                    |       | (1,175                                | )          | 773 |   |
| Deferred income taxes                                                              |       | 4,270                                 |       | (4,681 | ) |
| Tax benefits from options exercised                                                |       | 6,980                                 |       | 1,063 |   |
| Excess tax benefits from options exercised                                         |       | (4,083                                | )          | — |   |
| Change in operating assets and liabilities,  net                                   |       | (44,477                               | )          | (30,019 | ) |
| Net cash  provided by operating activities                                         |       | 9,745                                 |       | 23,077 |   |
|                                                                               |       |                                  |       |   |   |
| Cash flows  from investing activities:                                             |       |                                  |       |   |   |
| Additions to property, plant and equipment                                         |       | (37,009                               | )          | (28,514 | ) |
| Proceeds from sale of property, plant and  equipment                               |       | 2                                     |       | 32 |   |
| Acquisition of business                                                            |       | —                                |       | (41,468 | ) |
| Sale or maturities of cash investments                                             |       | 110,987                               |       | 101,103 |   |
| Purchase of cash investments                                                       |       | (105,277                              | )          | (78,437 | ) |
| Change in other investing activities, net                                          |       | (3,785                                | )          | (1,990 | ) |
| Net cash  used in investing activities                                             |       | (35,082                               | )          | (49,274 | ) |
|                                                                               |       |                                  |       |   |   |
| Cash flows  from financing activities:                                             |       |                                  |       |   |   |
| Proceeds from short-term debt, net                                                 |       | 2,457                                 |       | 2,924 |   |
| Repayments of capital lease obligations,  net                                      |       | (59                                   | )          | (57 | ) |
| Proceeds from exercise of stock options and  stock purchase plan                   |       | 21,782                                |       | 5,084 |   |
| Excess tax benefits from options exercised                                         |       | 4,083                                 |       | — |   |
| Other, net                                                                         |       | (4,492                                | )          | 588 |   |
| Net cash  provided by financing activities                                         |       | 23,771                                |       | 8,539 |   |
|                                                                               |       |                                  |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 726                                   |       | 48 |   |
|                                                                               |       |                                  |       |   |   |
| Net decrease  in cash and cash equivalents                                         |       | (840                                  | )          | (17,610 | ) |
| Cash and  cash equivalents, beginning of period                                    |       | 359,978                               |       | 339,024 |   |
|                                                                               |       |                                  |       |   |   |
| Cash and  cash equivalents, end of period                                          |       | $                                     | 359,138    |   | $ | 321,414 |   |

 

The accompanying notes are an integral part of these statements.

 

7

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**INTERNATIONAL RECTIFIER CORPORATION ANDSUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2005**

 

1.             CertainAccounting Policies

 

Basis of Consolidation

 

The consolidated financial statements include the accounts ofInternational Rectifier Corporation and its subsidiaries (“the Company”), whichare located in North America, Europe and Asia. Intercompany transactions have been eliminated in consolidation.

 

The consolidated financial statements included herein are unaudited;however, they contain all normal recurring adjustments which, in the opinion ofthe Company’s management, are necessary to state fairly the consolidatedfinancial position of the Company at September 30, 2005, and the consolidatedresults of operations and the consolidated cash flows for the three months endedSeptember 30, 2005 and 2004.  The resultsof operations for the three months ended September 30, 2005 are not necessarilyindicative of the results to be expected for the full year.

 

The accompanying unaudited consolidated financial statements should beread in conjunction with the Annual Report on Form 10-K for the fiscal yearended June 30, 2005.

 

The Company operates on a 52-53 week fiscal year under which the threemonths ended September 2005 and 2004 consisted of 13 weeks ending October 2,2005 and October 3, 2004, respectively. For ease of presenting the accompanying consolidated financialstatements, the fiscal quarter-end for all periods presented is shown asSeptember 30 or June 30.  Fiscal 2006will consist of 52 weeks ending July 2, 2006.

 

Certainreclassifications have been made to the September 30, 2004 (i) cash flows frominvesting activities, (ii) net decrease in cash and cash equivalents, and (iii)ending cash and cash equivalents, as a result of reclassification of auctionrate securities (“ARS”) from cash and cash equivalents to short-terminvestments.  Previously, the Company’sinvestments in ARS were recorded in cash and cash equivalents rather thanshort-term cash investments.  The Companyreclassified ARS from cash and cash equivalents to short-term investmentsbecause the underlying instruments have maturity dates exceeding ninety days.As a result of the reclassifications, the Company’s consolidated cash flowswere affected as follows:

 

•      netcash used for the purchase of cash investments decreased by $51.0 million for thethree months ended September 30, 2004; and

•      netchange in cash and cash equivalents increased by $51.0 million for the threemonths ended September 30, 2004.

 

8

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The reclassificationshad no impact on the Company’s total current assets, stockholders’ equity, cashflows provided by operating activities or total consolidated results reportedin any period presented.  At September30, 2005 and June 30, 2005, the Company had no investments in these securities.

 

Restatement of Statement of Cash Flows

 

The Companyhas restated the consolidated statement of cash flows for the three monthsended September 30, 2005 to correct an error in the classification of the excesstax benefits generated from the exercise of stock options. Previously, theCompany classified the excess tax benefits from options exercised in cash flowsfrom operating activities rather than as a cash flow from financing activity asrequired by Statement of Financial Accounting Standards No. 123(R),“Share-Based Payment,” which the Company adopted as of the beginning of itsfiscal year 2006 in July 2005.  Therestatement had no impact on the Company’s statement of cash flows for thethree months ended September 30, 2004. The restatement also had no impact onthe Company’s overall net change in cash and cash equivalents, the unauditedconsolidated statements of income, the unaudited consolidated statements ofcomprehensive income, or the unaudited consolidated balance sheet for any ofthe periods presented.

 

A summary ofthe effects of the restatement is as follows:

 
| ** **                                                        | ** ** | **Three Months Ended  September 30,  2005** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Net cash  provided by operating activities as previously reported |       | $                                           | 13,828     |   |
| Restatement  of the excess tax benefits from options exercised    |       | (4,083                                      | )          |
| Restated net cash provided by operating  activities               |       | $                                           | 9,745      |   |
| ** **                                                        | ** ** | ** **                                  | ** ** |
| Net cash  provided by financing activities as previously reported |       | $                                           | 19,688     |   |
| Restatement  of the excess tax benefits from options exercised    |       | 4,083                                       |       |
| Restated net cash provided by financing  activities               |       | $                                           | 23,771     |   |

 

2.             NetIncome Per Common Share

 

Net income per common share - basic is computed by dividing net incomeavailable to common stockholders (the numerator) by the weighted average numberof common shares outstanding (the denominator) during the period. Thecomputation of net income per common share - diluted is similar to thecomputation of net income per common share - basic except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding for the exercise of stock options using the treasury stockmethod and the conversion of the Company’s convertible subordinated notes usingthe if-converted method.  The Company’suse of the treasury stock method reduces the gross number of dilutive shares bythe number of shares purchasable from the proceeds of the options assumed to beexercised.  The Company’s use of theif-converted method increases reported net income by the interest expense relatedto the convertible subordinated notes when computing net income per commonshare – diluted.

 

9

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The following table provides a reconciliation of the numerator anddenominator of the basic and diluted per-share computations for the threemonths ended September 30, 2005 and 2004 (in thousands except per shareamounts):

 
| ** **                                  | ** ** | **Net Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share   Amount** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|
|                                        |       |                        |       |                      |       |                   |       |
| Three months  ended September 30, 2005:     |       |                        |       |                      |       |                   |       |
|                                        |       |                        |       |                      |       |                   |       |
| Net income  per common share – basic   |       | $                           | 26,243     |                      | 70,329     |                   | $          | 0.37 |   |
| Effect of  dilutive securities:             |       |                        |       |                      |       |                   |       |
| Stock options                               |       | —                      |       | 1,948                     |       | (0.01                  | )          |
|                                        |       |                        |       |                      |       |                   |       |
| Net income  per common share – diluted |       | $                           | 26,243     |                      | 72,227     |                   | $          | 0.36 |   |
|                                        |       |                        |       |                      |       |                   |       |
| Three months  ended September 30, 2004:     |       |                        |       |                      |       |                   |       |
|                                        |       |                        |       |                      |       |                   |       |
| Net income  per common share – basic   |       | $                           | 37,580     |                      | 66,516     |                   | $          | 0.56 |   |
| Effect of  dilutive securities:             |       |                        |       |                      |       |                   |       |
| Stock options                               |       | —                      |       | 1,756                     |       | (0.01                  | )          |
| Conversion of subordinated notes            |       | 2,386                       |       | 7,439                     |       | (0.02                  | )          |
|                                        |       |                        |       |                      |       |                   |       |
| Net income  per common share – diluted |       | $                           | 39,966     |                      | 75,711     |                   | $          | 0.53 |   |

 

The conversion effect of the Company’s outstanding convertiblesubordinated notes into 7,439,000 shares of common stock was not included inthe computation of diluted income per share for the three months endedSeptember 30, 2005, since such effect would be anti-dilutive.

 

3.             Cashand Investments

 

The Company classifiesall highly liquid investments purchased with original or remaining maturitiesof ninety days or less at the date of purchase as cash equivalents.  The cost of these investments approximatesfair value.

 

The Company investsexcess cash in marketable securities consisting primarily of commercial paper,corporate notes, corporate bonds and U.S. government securities.  At September 30, 2005 and June 30, 2005, allof the Company’s marketable securities are classified asavailable-for-sale.  In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, unrealized gains and losseson these investments are included in accumulated other comprehensive income, aseparate component of stockholders’ equity, net of any related tax effect.  Realized gains and losses and declines invalue considered to be other than temporary are included in interest income andexpense.  At September 30, 2005 and June30, 2005, no investment was in a material loss position for greater than oneyear.

 

10

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Cash, cash equivalentsand cash investments as of September 30, 2005 and June 30, 2005 are summarizedas follows (in thousands):

 
| ** **                                         | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| Cash and  cash equivalents                         |       | $                       | 359,138    |               | $          | 359,978 |   |
| Short-term  cash investments                       |       | 224,499                 |       | 278,157            |       |
| Long-term  cash investments                        |       | 348,311                 |       | 302,585            |       |
| Total cash, cash equivalents and cash  investments |       | $                       | 931,948    |               | $          | 940,720 |   |

 

Available-for-salesecurities as of September 30, 2005 are summarized as follows (in thousands):

 

*Short-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Net   Unrealized Loss** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------|------------|
| Corporate  debt                        |       | $                   | 155,359    |                        | $          | 2                           |       | $                         | (1,220     | )                 | $          | (1,218 | ) | $ | 154,141 |   |
| U.S. government and agency obligations |       | 70,237              |       | —                      |       | (322                        | )          | (322                      | )          | 69,915            |       |
| Other debt                             |       | 443                 |       | —                      |       | —                      |       | —                    |       | 443               |       |
| Total short-term cash investments      |       | $                   | 226,039    |                        | $          | 2                           |       | $                         | (1,543     | )                 | $          | (1,541 | ) | $ | 224,499 |   |

 

*Long-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized    Cost** | ** ** | **Gross   Unrealized   Gain** | ** ** | **Gross   Unrealized  Loss** | ** ** | **Net   Unrealized  Loss** | ** ** | **Market   Value** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------------------|------------|------------------------------|------------|----------------------------|------------|--------------------|------------|
| Corporate  debt                        |       | $                     | 144,813    |                          | $          | 8                            |       | $                          | (654       | )                  | $          | (646 | ) | $ | 144,167 |   |
| U.S. government and agency obligations |       | 130,171               |       | 54                            |       | (597                         | )          | (543                       | )          | 129,628            |       |
| Other debt                             |       | 74,729                |       | 26                            |       | (239                         | )          | (213                       | )          | 74,516             |       |
| Total long-term cash investments       |       | $                     | 349,713    |                          | $          | 88                           |       | $                          | (1,490     | )                  | $          | (1,402 | ) | $ | 348,311 |   |

 

Available-for-salesecurities as of June 30, 2005 are summarized as follows (in thousands):

 

*Short-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized    Cost** | ** ** | **Gross   Unrealized   Gain** | ** ** | **Gross   Unrealized  Loss** | ** ** | **Net   Unrealized  Loss** | ** ** | **Market   Value** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------------------|------------|------------------------------|------------|----------------------------|------------|--------------------|------------|
| Corporate  debt                        |       | $                     | 179,372    |                          | $          | 6                            |       | $                          | (1,477     | )                  | $          | (1,471 | ) | $ | 177,901 |   |
| U.S. government and agency obligations |       | 99,728                |       | —                        |       | (576                         | )          | (576                       | )          | 99,152             |       |
| Other debt                             |       | 1,105                 |       | —                        |       | (1                           | )          | (1                         | )          | 1,104              |       |
| Total long-term cash investments       |       | $                     | 280,205    |                          | $          | 6                            |       | $                          | (2,054     | )                  | $          | (2,048 | ) | $ | 278,157 |   |

 

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*Long-Term Cash Investments:*

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Net   Unrealized  (Loss) Gain** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-------------------|------------|
| Corporate  debt                        |       | $                   | 124,727    |                        | $          | 249                         |       | $                                 | (355       | )                 | $          | (106 | ) | $ | 124,621 |   |
| U.S. government and agency obligations |       | 116,082             |       | 239                         |       | (134                        | )          | 105                               |       | 116,187           |       |
| Other debt                             |       | 61,765              |       | 131                         |       | (119                        | )          | 12                                |       | 61,777            |       |
|                                   |       |                |       |                        |       |                        |       |                              |       |              |       |
| Total long-term cash investments       |       | $                   | 302,574    |                        | $          | 619                         |       | $                                 | (608       | )                 | $          | 11 |   | $ | 302,585 |   |

 

The Company holds as strategic investments the common stock of twopublicly-traded Japanese companies, one of which is Nihon Inter ElectronicsCorporation (“Nihon”), a related party as further disclosed in Note 15.  The Company accounts for theseavailable-for-sale investments under SFAS 115. These stocks are traded on the Tokyo Stock Exchange.  The market values of the equity investmentsat September 30, 2005 and June 30, 2005 were $66.6 million and $71.2 million,respectively, compared to their purchased cost of $24.2 million.  Mark-to-market losses, net of tax, of $2.9million and $9.8 million for the three months ended September 30, 2005 and2004, respectively, were included in accumulated other comprehensive income, aseparate component of equity.

 

The amortized cost and estimated fair value of cash investments atSeptember 30, 2005, by contractual maturity, are as follows (in thousands):

 
| ** **             | ** ** | **Amortized  Cost** | ** ** | **Estimated Fair Value** | ** ** |
|------------------------|------------|---------------------|------------|--------------------------|------------|
| Due in 1  year or less |       | $                   | 226,039    |                     | $          | 224,499 |   |
| Due in 1-2  years      |       | 176,052             |       | 175,121                  |       |
| Due in 2-5  years      |       | 138,657             |       | 138,277                  |       |
| Due after 5  years     |       | 35,004              |       | 34,913                   |       |
|                   |       |                |       |                     |       |
| Total cash investments |       | $                   | 575,752    |                     | $          | 572,810 |   |

 

In accordance with the Company’s investment policy which limits thelength of time that cash may be invested, the expected disposal dates may beless than the contractual maturity dates as indicated in the table above.

 

Gross realized gains were $0.01 million and gross realized losses were$0.3 million for the three months ended September 30, 2005.  Gross realized gains were $0.01 million and grossrealized losses were $0.05 million for the three months ended September 30,2004.  The cost of marketable securitiessold is determined by the weighted average cost method.

 

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4.             DerivativeFinancial Instruments

 

*ForeignCurrency Risk*

 

TheCompany conducts business on a global basis in several foreign currencies, andat various times, is exposed to fluctuations with the British Pound Sterling,the Euro and the Japanese Yen.  TheCompany’s risk to the European currencies is partially offset by the naturalhedge of manufacturing and selling goods in both U.S. dollars and the Europeancurrencies.  Considering its specificforeign currency exposures, the Company has the greatest exposure to theJapanese Yen, since it has significant yen-based revenues without the yen-basedmanufacturing costs.  The Company hasestablished a foreign-currency hedging program using foreign exchange forwardcontracts, including the Forward Contract described below, to hedge certainforeign currency transaction exposures. To protect against reductions in value and volatility of future cashflows caused by changes in currency exchange rates, it has established revenue,expense and balance sheet hedging programs. Currency forward contracts and local Yen and Euro borrowings are used inthese hedging programs.  The Company’shedging programs reduce, but do not always eliminate, the impact of currencyexchange rate movements.

 

InMarch 2001, the Company entered into a five-year foreign exchange forwardcontract (the “Forward Contract”) for the purpose of reducing the effect ofexchange rate fluctuations on forecasted intercompany purchases by the Company’ssubsidiary in Japan. The Company has designated the Forward Contract as a cashflow hedge under which mark-to-market adjustments are recorded in accumulatedother comprehensive income, a separate component of stockholders’ equity, untilthe forecasted transactions are recorded in earnings.  Under the terms of the Forward Contract, the Companyis required to exchange 1.2 billion yen for $11.0 million on a quarterly basisfrom June 2001 to March 2006.  AtSeptember 30, 2005, two quarterly payments of 1.2 billion yen remained to beswapped at a forward exchange rate of 109.32 yen per U.S. dollar.  The market value of the forward contract was$0.5 million and $0.1 million at September 30, 2005 and June 30, 2005,respectively.  Mark-to-marketgains, included in other comprehensive income, net of tax, were $0.3 millionand $0.8 million for the three months ended September 30, 2005 and 2004,respectively.  At September 30, 2005,based on effectiveness tests comparing forecasted transactions through theForward Contract expiration date to its cash flow requirements, the Companydoes not expect to incur a material charge as a result of the Forward Contractto income during the next six months through its maturity.

 

TheCompany had approximately $111.7 million and $75.9 million in notional amountsof forward contracts not designated as accounting hedges under SFAS No. 133 atSeptember 30, 2005 and June 30, 2005, respectively.  Netrealized and unrealized foreign-currency net gains recognized in earnings were less than $1million for the three months ended September 30, 2005 and 2004.

 

*InterestRate Risk*

 

In December2001, the Company entered into an interest rate swap transaction (the “Transaction”)with an investment bank, JP Morgan Chase Bank (the “Bank”), to modify theCompany’s effective interest payable with respect to $412.5 million of

 

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its $550million outstanding convertible debt (the “Debt”) (see Note 8, “Bank Loans andLong-Term Debt”).   In April 2004, theCompany entered into an interest rate swap transaction (the “April 2004Transaction”) with the Bank to modify the effective interest payable withrespect to the remaining $137.5 million of the Debt.  The Company will receive from the Bank fixedpayments equal to 4.25 percent of the notional amount, payable on January 15and July 15.  In exchange, the Companywill pay to the Bank floating rate payments based upon the London InterBankOffered Rate (“LIBOR”) multiplied by the notional amount.  At the inception of the Transaction, interestrates were lower than that of the Debt and the Company believed that interestrates would remain lower for an extended period of time.  The variable interest rate paid since theinception of the swaps has averaged 2.36 percent, compared to a coupon of 4.25percent on the Debt.  During the threemonths ended September 30, 2005 and 2004, this arrangement reduced interestexpense by $0.9 million and $2.2 million, respectively.

 

Accounted foras fair value hedges under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”, the mark-to-market adjustments of the Transaction andApril 2005 Transaction were offset by the mark-to-market adjustments on theDebt, resulting in no material impact to earnings.  The market value of the Transaction was aliability of $3.9 million and $0.3 million at September 30, 2005 and June 30,2005, respectively.  The market value ofthe April 2005 Transaction was a liability of $3.8 million and a $3.4 millionat September 30, 2005 and June 30, 2005, respectively.

 

Both Transactionsterminate on July 15, 2007 (“Termination Date”), subject to certain earlytermination provisions.  On or after July18, 2004 and prior to July 14, 2007, if the ten-day average closing price ofthe Company’s common stock equals or exceeds $77.63, both transactions willterminate.  Depending on the timing ofthe early termination event, the Bank would be obligated to pay the Company anamount equal to the redemption premium called for under the terms of the Debt.

 

In support of theCompany’s obligation under the two transactions, the Company is required toobtain irrevocable standby letters of credit in favor of the Bank, totaling$7.5 million plus a collateral requirement for the Transaction and the April2005 Transaction, as determined periodically. At September 30, 2005, $15.8 million in letters of credit wereoutstanding related to both transactions.

 

The Transaction and theApril 2005 Transaction qualify as fair value hedges under SFAS No. 133.  To test effectiveness of the hedge,regression analysis is performed quarterly comparing the change in fair valueof the two transactions and the Debt. The fair values of the Transaction, the April 2005 Transaction and theDebt are calculated quarterly as the present value of the contractual cashflows to the expected maturity date, where the expected maturity date is basedon probability-weighted analysis of interest rates relating to the five-yearLIBOR curve and the Company’s stock prices. For the three months ended September 30, 2005 and 2004, the hedges werehighly effective and therefore, the ineffective portion did not have a materialimpact on earnings.

 

InApril 2002, the Company entered into an interest rate contract (the “Contract”)with an investment bank, Lehman Brothers (“Lehman”), to reduce the variableinterest rate risk of the Transaction. The notional amount of the Contract is $412.0

 

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million,representing approximately 75 percent of the Debt.  Under the terms of the Contract, the Companyhas the option to receive a payout from Lehman covering its exposure to LIBORfluctuations between 5.5 percent and 7.5 percent for any four designatedquarters.  The market value of theContract at September 30, 2005 and June 30, 2005, was $0.2 million and $0.1million, respectively, and was included in other long-term assets.  Mark-to-market gains (losses) of $0.1 millionand ($0.3) million for the three months ended September 30, 2005 and 2004,respectively, were charged to interest expense.

 

5.             Inventories

 

Inventories are stated at the lower of cost (principally first-in,first-out) or market.  Inventories arereviewed for excess and obsolescence based upon demand forecast within aspecific time horizon and reserves are established accordingly.  Inventories at September 30, 2005 and June30, 2005 were comprised of the following (in thousands):

 
| ** **        | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** |
|-------------------|------------|-------------------------|------------|--------------------|------------|
| Raw  materials    |       | $                       | 36,322     |               | $          | 33,328 |   |
| Work-in-process   |       | 82,727                  |       | 82,802             |       |
| Finished  goods   |       | 74,732                  |       | 61,430             |       |
|              |       |                    |       |               |       |
| Total inventories |       | $                       | 193,781    |               | $          | 177,560 |   |

 

6.             Goodwilland Acquisition-Related Intangible Assets

 

TheCompany accounts for goodwill and acquisition-related intangible assets inaccordance with SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwilland Other Intangible Assets”.  TheCompany classifies the difference between the purchase price and the fair valueof net assets acquired at the date of acquisition as goodwill.  The Company classifies intangible assetsapart from goodwill if the assets have contractual or other legal rights or ifthe assets can be separated and sold, transferred, licensed, rented orexchanged.  Depending on the nature ofthe assets acquired, the amortization period may range from four to twelveyears for those acquisition-related intangible assets subject to amortization.

 

The Company evaluates the carrying value of goodwill andacquisition-related intangible assets, including the related amortizationperiod, in the fourth quarter of each fiscal year.  In evaluating goodwill and intangible assetsnot subject to amortization, the Company completes the two-step goodwillimpairment test as required by SFAS No. 142. The Company identified its reporting units and determined the carryingvalue of each reporting unit by assigning the assets and liabilities, includingthe existing goodwill and intangible assets, to those reporting units, in orderto assess goodwill for impairment.  Areporting unit is the lowest level of the Company for which there is discreteinformation and whose results are regularly reviewed by the Company.

 

In the first of a two-step impairment test, the Company determined thefair value of these reporting units using a discounted cash flow valuationmodel.  The Company

 

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compared the discounted cash flows for the reporting unit to itscarrying value.  If the fair value of areporting unit exceeds its carrying value, goodwill of the reporting unit isconsidered not impaired and no further testing is required.  If the fair value does not exceed thecarrying value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any.  The second step compared the implied fairvalue of the reporting unit with the carrying amount of that goodwill.  Based on its annual impairment test in thefourth quarter of fiscal year ended June 30, 2005, the Company determined thatgoodwill was not impaired.

 

At September 30, 2005 and June 30, 2005 acquisition-related intangibleassets included the following (in thousands):

 
| ** **                                   | ** ** | ** **                        | ** ** | **September 30, 2005**        | ** ** | **June 30, 2005**              | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **Amortization Periods  (Years)** | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| Acquisition-related  intangible assets:      |       |                              |       |                          |       |                           |       |   |   |   |   |
| Complete technology                          |       | 4 – 12                       |       | $                             | 35,962     |                           | $          | (11,948 | ) | $ | 36,665 |   | $ | (11,859 | ) |
| Distribution rights and customer lists       |       | 5 – 12                       |       | 15,667                        |       | (7,634                         | )          | 15,667 |   | (7,243 | ) |
| Intellectual property and other              |       | 5 – 12                       |       | 7,313                         |       | (5,498                         | )          | 7,313 |   | (5,189 | ) |
| Total  acquisition-related intangible assets |       |                              |       | $                             | 58,942     |                           | $          | (25,080 | ) | $ | 59,645 |   | $ | (24,291 | ) |

 

As of September 30, 2005,estimated amortization expense for the next five years is as follows (inthousands): remainder of fiscal 2006: $3,015; fiscal 2007: $2,899; fiscal 2008:$2,527; fiscal 2009: $2,489, fiscal 2010: $2,489 and fiscal 2011: $1,710.

 

The carrying amount of goodwill by businesssegment as of September 30, 2005, is as follows (in thousands):

 
| ** **                    | ** ** | **September 30,  2005** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| Energy-Saving  Products       |       | $                       | 70,310     |   |
| Aerospace  and Defense        |       | 45,765                  |       |
| Computing  and Communications |       | 28,803                  |       |
| Non-Aligned  Products         |       | 4,190                   |       |
| Intellectual  Property        |       | 3,261                   |       |
|                          |       |                    |       |
| Total goodwill                |       | $                       | 152,329    |   |

 

Asof September 30, 2005 and June 30, 2005, $43.3 million of goodwill isdeductible for income tax purposes.

 

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The changes in thecarrying amount of goodwill for the period ended September 30, 2005 and June30, 2005 are as follows (in thousands):

 
| ** **                   | ** ** | **Goodwill** | ** ** |
|------------------------------|------------|--------------|------------|
| Balance,  June 30, 2004      |       | $            | 139,919    |   |
| New  acquisition             |       | 12,958       |       |
| Foreign  exchange impact     |       | (420         | )          |
| Balance,  June 30, 2005      |       | $            | 152,457    |   |
| Foreign  exchange impact     |       | (128         | )          |
|                         |       |         |       |
| Balance,  September 30, 2005 |       | $            | 152,329    |   |

 

New acquisitions in the fiscalyear ended June 30, 2005, primarily relates to the acquisition of the specialtysilicon epitaxial services business from Advanced Technology Materials,Inc.  The goodwill associated with thisacquisition has been assigned to the Computing and Communications,Energy-Saving Products and Intellectual Property segments based on revenues.

 

7.             Otheraccrued expenses

 

Other accrued expenses at September 30,2005 and June 30, 2005 were comprised of the following (in thousands):

 
| ** **              | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** |
|-------------------------|------------|-------------------------|------------|--------------------|------------|
| Accrued  taxes          |       | $                       | 41,165     |               | $          | 46,704 |   |
| Other  accrued expenses |       | 41,250                  |       | 44,624             |       |
|                    |       |                    |       |               |       |
| Total accrued expenses  |       | $                       | 82,415     |               | $          | 91,328 |   |

 

8.             BankLoans and Long-Term Debt 

 

A summary of the Company’s long-term debtand other loans at September 30, 2005 and June 30, 2005 is as follows (inthousands):

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| Convertible subordinated notes at 4.25% due  in 2007 ($550,000 principal amount, plus accumulated fair value adjustment of  ($8,351) and  ($3,360) at September 30, 2005 and June 30, 2005, respectively) |       | $                       | 541,649    |               | $          | 546,640 |   |
| Other loans  and capitalized lease obligations                                                                                                                                                            |       | 3,069                   |       | 782                |       |
| Debt, including current portion of long-term  debt ($47 and $163 at September 30, 2005 and June 30, 2005, respectively)                                                                                   |       | 544,718                 |       | 547,422            |       |
| Foreign  revolving bank loans at rates from 1.38% to 3.88%                                                                                                                                                |       | 18,088                  |       | 18,168             |       |
|                                                                                                                                                                                                      |       |                    |       |               |       |
| Total debt                                                                                                                                                                                                |       | $                       | 562,806    |               | $          | 565,590 |   |

 

In July 2000, the Company sold $550million principal amount of 4.25 percent Convertible Subordinated Notes due2007. The interest rate is 4.25 percent per year on the principal amount,payable in cash in arrears semi-annually on January 

 

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15 and July 15.  The notes are subordinated to all of theCompany’s existing and future debt. The notes are convertible into shares ofthe Company’s common stock at any time on or before July 15, 2007, at aconversion price of $73.935 per share, subject to certain adjustments.  The Company may redeem any of the notes, inwhole or in part, subject to certain call premiums on or after July 18, 2004,as specified in the notes and related indenture agreement.  In December 2001 and April 2005, the Companyentered into two transactions with JP Morgan Chase Bank for $412.5 million and$137.5 million in notional amounts, respectively, which had the effect to theCompany of converting the interest rate to variable and requiring that theconvertible notes be marked to market (see Note 4, “Derivative FinancialInstruments”).

 

In November 2003, the Company entered into athree-year syndicated multi-currency revolving credit facility, led by BNPParibas, expiring in November 2006 (the “Facility”).  The Facility provides a credit line of $150million of which up to $150 million may be used for standby letters ofcredit.  The Facility bears interest at(i) local currency rates plus (ii) a margin between 0.75 percent and 2.0percent for base rate advances and a margin of between 1.75 percent and 3.0percent for euro-currency rate advances. Other advances bear interest as set forth in the credit agreement.  The annual commitment fee for the Facility issubject to a leverage ratio as determined by the credit agreement and was 0.375percent of the unused portion of the total facility at each period-end.  The Company pledged as collateral shares ofcertain of its subsidiaries.  TheFacility also contains certain financial and other covenants, with which theCompany was in compliance at September 30, 2005.  At September 30, 2005, the Company had $16.9million borrowings and $20.2 million letters of credit outstanding under theFacility.  At June 30, 2005, the Companyhad $17.1 million borrowings and $16.4 million letters of credit outstandingunder the Facility.  Of the letters ofcredit outstanding, $15.8 million and $12.0 million were related to the interestrate swap transactions (see Note 3) at September 30, 2005 and June 30, 2005,respectively.

 

At September 30, 2005, the Company had $166.6million in total revolving lines of credit, of which $38.2 million had beenutilized, consisting of $20.2 million in letters of credit and $18.0 million inforeign revolving bank loans, which are included in the table above.

 

9.             Impairmentof Assets, Restructuring and Severance

 

During fiscal 2003 second quarter ended December 31, 2002, the Companyannounced its restructuring initiatives. Under these initiatives, the goal wasto reposition the Company to better fit the market conditions and de-emphasizeits commodity business. The Company’s restructuring plan included consolidatingand closing certain manufacturing sites, upgrading equipment and processes in designatedfacilities and discontinuing production in a number of others that cannotsupport more advanced technology platforms or products within its Focus Productsegments.  The Company also planned tolower overhead costs across its support organizations.  The Company has substantially completed theserestructuring activities as of September 30, 2005.  The Company expects to complete the remainingactivities, primarily the closing of a fabrication line at El Segundo,California by fiscal year end 2006 or sooner.

 

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Total charges associated with the December 2002 initiatives areexpected to be approximately $280 million. These charges will consist ofapproximately $220 million for asset impairment, plant closure and othercharges, $6 million of raw material and work-in-process inventory, and $54million for severance-related costs.

 

For the three months ended September 30,2005, the Company recorded $4.3 million in total restructuring-related charges,consisting of: $3.1 million for asset impairment, plant closure costs and othercharges, and $1.2 million for severance-related costs.   For the three months ended September 30,2004, the Company recorded $6.7 million in totalrestructuring-related charges, consisting of: $4.9 million for impairment,plant closure costs and other charges, and $1.8 million for severance-relatedcosts.  Restructuring-relatedcosts were charged as incurred in accordance with SFAS No. 146, “Accounting forthe Costs Associated with Exit or Disposal Activities”.  Asset impairments were calculated inaccordance with SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets”.  In determining theasset groups, the Company grouped assets at the lowest level for which independentidentifiable cash flows were available. In determining whether an asset wasimpaired the Company evaluated undiscounted future cash flows and other factorssuch as changes in strategy and technology. The undiscounted cash flows fromthe Company’s initial analyses were less than the carrying amount for certainof the asset groups, indicating impairment losses.  Based on this, the Company determined thefair value of these asset groups using the present value technique, by applyinga discount rate to the estimated future cash flows that was consistent with therate used when analyzing potential acquisitions.

 

As of September 30,2005, the Company had recorded $265.7 million in total charges, consisting of:$213.2 million for asset impairment, plant closure costs and other charges,$6.0 million for raw material and work-in-process inventory charges, and $46.5million for severance-related costs.  Components of the $213.2 million asset impairment, plant closure and othercharges included the following items:

 

•      As the Companyemphasizes more advanced generation planar products, it expects the futurerevenue stream from its less advanced facilities in Temecula, California todecrease significantly.  These facilitieshad a net book value of $138.3 million and were written down by $77.7million.  It is expected that thesefacilities will continue in use until approximately December 2007 and theremaining basis is being depreciated over units of production during thisperiod. It is assumed that salvage value will equal disposition costs.

 

•      As the Companyemphasizes more advanced generation trench products, it expects the futurerevenue stream from its less advanced facility in El Segundo, California todecrease significantly. This facility had a net book value of $59.5 million andwas written down by $57.2 million.  Thisfacility had significantly reduced production as of fiscal year ended June 30,2003 and is used primarily for research and development activities.

 

•      As the Companyemphasizes more advanced generation Schottky products, it expects the futurerevenue stream from its less advanced facility in Borgaro, Italy to decreasesignificantly. This facility had a net book value of $20.5 million and waswritten down by $13.5 million.  It isexpected that this facility will continue in 

 

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use until approximately December 2007 andthe remaining basis is being depreciated over units of production during thisperiod.  It is assumed that salvage valuewill equal disposition costs.

 

•      The Companyrestructured its manufacturing activities in Europe.  Based on a review of its Swansea, Walesfacility, a general-purpose module facility, the Company determined in theDecember 2002 quarter that this facility would be better suited to focus onlyon automotive applications.  Thegeneral-purpose module assets at this facility, with a net book value of $13.6million, were written down by $8.2 million. In addition, the Company has completed the move of its manufacturingactivities from its automotive facility in Krefeld, Germany to its Swansea,Wales and Tijuana, Mexico facilities as of September 30, 2005. The Company hasalso moved the production from its Venaria, Italy facility to its Borgaro,Italy and Mumbai, India facilities, which was completed as of December 31,2003.  The Company stopped manufacturingproducts at its Oxted, England facility as of September 30, 2003.

 

•      The Company haseliminated the manufacturing of its non-space military products in its SantaClara, California facility as of July 31, 2004. Currently, subcontractorshandle the Company’s non-space qualified products previously manufactured inthis facility. The Company is also transitioning the assembly and test ofnon-space Power Components from its Leominster, Massachusetts facility to itsTijuana, Mexico facility, and expects to complete this activity by calendaryear end 2005.  Associated with thesereductions in manufacturing activities, certain assets with a net book value of$4.0 million were written down by $2.0 million.

 

•      $54.6 millionin other miscellaneous items were charged, including $45.8 million inrelocation costs and other impaired asset charges and $8.8 million in contracttermination and settlement costs.

 

As a result of therestructuring initiatives, certain raw material and work-in-process inventorieswere impaired, including products that could not be completed in otherfacilities, materials that were not compatible with the processes used in thealternative facilities, and materials such as gases and chemicals that couldnot readily be transferred. Based on these factors the Company wrote down theseinventories, with a carrying value of $98.2 million, by $6.0 million. For thethree months ended September 30, 2005 and 2004, the Company disposed of $0 and$0.5 million, respectively, of these inventories, which did not have a materialimpact on gross margin for the periods then ended.  As of September 30, 2005, $1.2 million ofthese inventories remained to be disposed.

 

As ofSeptember 30, 2005, the Company has recorded $46.5 million in severance-relatedcharges:  $41.3 million in severancetermination costs related to approximately 1,200 administrative, operating andmanufacturing positions, and $5.1 million in pension termination costs at its manufacturingfacility in Oxted, England.  Theseverance charges associated with the elimination of positions, which includedthe persons notified to date, had been and will continue to be recognized overthe future service period, as applicable, in accordance with SFAS No. 146.  The Company measured the total terminationbenefits at the communication date based on the fair value of the liability asof the termination 

 

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date.  A change resulting from a revision to eitherthe timing or the amount of estimated cash over the future service period willbe measured using the credit-adjusted risk-free rate that was used to initiallymeasure the liability.  The cumulative effectof the change will be recognized as an adjustment to the liability in theperiod of the change.

 

During fiscal2002, the Company had recorded an estimated $5.1 million in severance costsassociated with the acquisition of TechnoFusion GmbH in Krefeld, Germany.  In fiscal 2003, the Company finalized itsplan and determined that total severance would be approximately $10 million,and accordingly, the Company adjusted purchased goodwill by $4.8 million.  The Company communicated the plan and theelimination of approximately 250 positions primarily in manufacturing to itsaffected employees at that time.    Theassociated severance is expected to be paid by calendar year end 2005.

 

Thefollowing summarizes the Company’s severance accrual related to the June 2001restructuring, the TechnoFusion acquisition and the December 2002 restructuringplan for the three months ended September 30, 2005 and the fiscal year endedJune 30, 2005.  Severance activityrelated to the elimination of 29 administrative and operating personnel as partof the previously reported restructuring in the fiscal quarter ended June 30,2001, is also disclosed.  The remainingJune 2001 severance relates primarily to certain legal accruals associated withthat restructuring, which will be paid or released as the outcome is determined(in thousands):

 
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December   2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total   Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|----------------------------------|------------|
| Accrued  severance, June 30, 2004                                                                   |       | $                             | 697        |                               | $          | 7,180                                  |       | $                                | 6,067      |   | $ | 13,944 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance charges” |       | —                        |       | 8,677                              |       | —                                 |       | 8,677                            |       |
| Costs paid                                                                                          |       | (326                          | )          | (7,810                             | )          | (3,770                                 | )          | (11,906                          | )          |
| Foreign  exchange impact                                                                            |       | —                        |       | 77                                 |       | (190                                   | )          | (113                             | )          |
|                                                                                                |       |                          |       |                               |       |                                   |       |                             |       |
| Accrued  severance, June 30, 2005                                                                   |       | $                             | 371        |                               | $          | 8,124                                  |       | $                                | 2,107      |   | $ | 10,602 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance”         |       | —                        |       | 1,231                              |       | —                                 |       | 1,231                            |       |
| Costs paid                                                                                          |       | (64                           | )          | (3,055                             | )          | (406                                   | )          | (3,525                           | )          |
| Foreign  exchange impact                                                                            |       | —                        |       | (14                                | )          | (14                                    | )          | (28                              | )          |
| Accrued  severance, September 30, 2005                                                              |       | $                             | 307        |                               | $          | 6,286                                  |       | $                                | 1,687      |   | $ | 8,280 |   |

 

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10.           Segmentand Geographic Information

 

Revenues for the three months ended September 30, 2005 and 2004, by thethree broad product categories, are as follows (in thousands):

 
| ** **                                         | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Power Management ICs and Advanced Circuit  Devices |       | $                       | 175,360    |                    | $          | 169,782 |   |
| Power Components                                   |       | 54,874                  |       | 99,586                  |       |
| Power Systems                                      |       | 31,899                  |       | 32,838                  |       |
| Total product revenues                             |       | 262,133                 |       | 302,206                 |       |
| Intellectual Property                              |       | 10,440                  |       | 10,019                  |       |
|                                               |       |                    |       |                    |       |
| Total consolidated revenues                        |       | $                       | 272,573    |                    | $          | 312,225 |   |

 

Segment results for the three months ended September 30, 2005 and 2004and as of September 30, 2005 and June 30, 2005, are as follows (in thousandsexcept percentages):

 
| ** **                   | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Business Segment**         | ** ** | **Revenues**            | ** ** | **Gross  Profit**       | ** ** | **Revenues** | ** ** | **Gross  Profit** | ** ** |
| Computing and Communications |       | $                       | 89,640     |                    | 41.6       | % | $ | 105,991 |   | 43.7 | % |
| Energy-Saving Products       |       | 72,386                  |       | 52.4                    |       | 73,151 |   | 53.6 |   |
| Aerospace and Defense        |       | 29,401                  |       | 43.8                    |       | 32,277 |   | 41.3 |   |
| Intellectual Property        |       | 10,440                  |       | 100.0                   |       | 10,019 |   | 100.0 |   |
|                         |       |                    |       |                    |       |   |   |   |   |
| Subtotal Focus Products      |       | 201,867                 |       | 48.8                    |       | 221,438 |   | 49.2 |   |
|                         |       |                    |       |                    |       |   |   |   |   |
| Commodity Products           |       | 42,152                  |       | 19.3                    |       | 59,524 |   | 30.9 |   |
| Non-Aligned Products         |       | 28,554                  |       | 14.6                    |       | 31,263 |   | 19.6 |   |
| Subtotal Non-Focus Products  |       | 70,706                  |       | 17.4                    |       | 90,787 |   | 27.0 |   |
|                         |       |                    |       |                    |       |   |   |   |   |
| Consolidated total           |       | $                       | 272,573    |                    | 40.7       | % | $ | 312,225 |   | 42.7 | % |

 

Product revenues from unaffiliated customers are based on the locationin which the sale originated. The Company includes in long-lived assets, alllong-term assets excluding long-term cash investments, long-term deferredincome taxes, goodwill and acquisition-related intangibles.

 

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Geographic information for the Company on an aggregate basis, for thethree months ended September 30, 2005 and 2004, is presented below (inthousands):

 
| ** **                            | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Revenues from Unaffiliated  Customers | ** ** | ** **              | ** ** | ** **              | ** ** |
| United States                         |       | $                       | 74,611     |                    | $          | 91,977 |   |
| Asia                                  |       | 129,628                 |       | 140,686                 |       |
| Europe                                |       | 57,894                  |       | 69,543                  |       |
|                                  |       |                    |       |                    |       |
| Subtotal                              |       | 262,133                 |       | 302,206                 |       |
| Unallocated royalties                 |       | 10,440                  |       | 10,019                  |       |
|                                  |       |                    |       |                    |       |
| Total                                 |       | $                       | 272,573    |                    | $          | 312,225 |   |

 
| ** **                             | ** ** | **September 30, 2005** | ** ** | **June 30,  2005** | ** ** |
|----------------------------------------|------------|------------------------|------------|--------------------|------------|
| Long-Lived Assets                      |       |                   |       |               |       |
| North America, primarily United States |       | $                      | 348,306    |               | $          | 347,892 |   |
| Asia                                   |       | 27,500                 |       | 23,598             |       |
| Europe                                 |       | 230,467                |       | 223,124            |       |
|                                   |       |                   |       |               |       |
| Total                                  |       | $                      | 606,273    |               | $          | 594,614 |   |

 

No single original equipment manufacturer (“OEM”), customer, distributoror subcontract manufacturer accounted for more than ten percent of the Company’sconsolidated revenues for the three months ended September 30, 2005 or2004.  For its Focus Product segments asa whole, the Company primarily sells direct to OEM customers.  Three distributors accounted forapproximately 41 percent of Computing and Communications segment revenues forthe three months ended September 30, 2005. One distributor accounted for approximately 17 percent of CommodityProducts segment revenues for the three months ended September 30, 2005.  Two OEM customers, individually accountingfor greater than 10 percent of Non-Aligned Products (“NAP”) segment revenues,accounted for approximately 35 percent of NAP segment revenues for the threemonths ended September 30, 2005.  Nosingle OEM customer, distributor or subcontract manufacturer accounted for morethan ten percent of the Company’s other reportable segments revenues for thequarter.  No customer accounted for morethan 10 percent of the Company’s accounts receivable at September 30, 2005 andJune 30, 2005.

 

11.           Stock–BasedCompensation

 

For the threemonths ended September 30, 2005, equity-based compensation awards were grantedunder one of two stock option plans:  the1997 Employee Stock Incentive Plan (“1997 Plan”) and the 2000 Incentive Plan (“2000Plan”). Options granted before November 22, 2004, generally became exercisablein annual installments of 25 percent beginning on the first anniversary date,and expire after seven years.  Optionsgranted after November 22, 2004, generally became exercisable in annualinstallments of 33 percent beginning on the first anniversary date, and expireafter five years.

 

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Under the 1997 Plan, options to purchase shares of the Company’s commonstock may be granted to the Company’s employees and consultants.  In addition, other stock–based awards (e.g.,restricted stock units (“RSUs”), SARs and performance shares) may also begranted.  During the three months endedSeptember 30, 2005 and 2004, non-qualified options and RSUs were issued underthe 1997 Plan. As noted below, on November 22, 2004, the Company’s stockholdersapproved an amendment to the 2000 Plan to increase the authorized number ofshares from 7,500,000 to 12,000,000, at which point no awards may be grantedunder the 1997 Plan.

 

Under the 2000 Plan, options to purchase shares of the Company’s commonstock and other stock-based awards may be granted to the Company’s employees,consultants, officers and directors.  Theterms of the 2000 Plan were substantially similar to those under the 1997 Plan.On November 22, 2004, the Company’s shareholders approved an amendment to the2000 Plan which increased the authorized number of shares to be granted from7,500,000 to 12,000,000.  The amendment changedthe options expiration term on future grants to five years, and containedcertain limitations on the maximum number of shares that may be awarded to anindividual. No awards may be granted under the 2000 Plan after August 24, 2014.As of September 30, 2005, there were 4,097,698 shares available for futuregrants.

 

The following table summarizes the stock option activities for theperiod ended September 30, 2005 (in thousands except per share data):

 
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Option  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Grant Date  Fair  Value Per  Share** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, June 30, 2005      |       | 13,558     |       | $                                                         | 38.01      |                                                      | —     |                            | $          | 149,290 |   |
| Granted                         |       | 580        |       | $                                                         | 48.16      |                                                      | $          | 13.27                           |       | — |   |
| Exercised                       |       | (922       | )          | $                                                         | 23.86      |                                                      | —     |                            | $          | 21,339 |   |
| Expired or canceled             |       | (114       | )          | $                                                         | 40.65      |                                                      | —     |                            | —     |   |
| Outstanding, September 30, 2005 |       | 13,102     |       | $                                                         | 39.51      |                                                      | —     |                            | $          | 100,692 |   |
|                                 |            |            |            |                                                           |            |                                                           |            |                                 |            |  |  |  |

 

The following table summarizes the RSU activities for the period endedSeptember 30, 2005 (in thousands except per share data): 

 
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair  Value Per  Share** | ** ** |
|---------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|
| Outstanding, June 30, 2005      |       | 24         |       | —                                                    |       |
| Granted                         |       | 6          |       | $                                                         | 48.10      |   |
|                            |       |       |       |                                                      |       |   |
| Outstanding, September 30, 2005 |       | 30         |       | —                                                    |       |

 

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The following table summarizes the non-vested stock option and RSUactivities for the period ended September 30, 2005 (in thousands):

 
| ** **                            | ** ** | **Stock  Options** | ** ** | **Restricted  Stock Units** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| Non-vested shares, June 30, 2005      |       | 137                |       | 24                          |       |
| Granted                               |       | 580                |       | 6                           |       |
|                                  |       |               |       |                        |       |
| Non-vested shares, September 30, 2005 |       | 717                |       | 30                          |       |

 

The followingtable summarizes the stock options and RSUs outstanding at September 30,2005, and related weighted average price and life information (in thousandsexcept years and price data):

 
| ** **                             | ** ** | **September 30, 2005**  | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **Outstanding**         | ** ** | **Exercisable** | ** ** |
| **Range of Exercise  Price per Share** | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|   $0.00  to $15.38           |       | 490                     |       | 3.43 |   | $ | 11.07 |   | 461 |   | $ | 11.79 |   |
| $15.62 to $25.35                       |       | 2,095                   |       | 3.60 |   | $ | 20.63 |   | 2,095 |   | $ | 20.63 |   |
| $26.00 to $35.90                       |       | 1,484                   |       | 5.69 |   | $ | 33.93 |   | 1,484 |   | $ | 33.93 |   |
| $36.39 to $45.87                       |       | 6,539                   |       | 4.65 |   | $ | 42.78 |   | 6,530 |   | $ | 42.78 |   |
| $46.50 to $54.69                       |       | 1,530                   |       | 4.85 |   | $ | 50.52 |   | 822 |   | $ | 52.41 |   |
| $55.31 to $63.88                       |       | 994                     |       | 5.15 |   | $ | 62.01 |   | 993 |   | $ | 62.01 |   |
|                                   |       | 13,132                  |       | 4.61 |   | $ | 39.42 |   | 12,385 |   | $ | 39.00 |   |

 

Additionalinformation relating to the stock option plans, including employee stockoptions and RSUs, at September 30, 2005 and June 30, 2005 is as follows(in thousands):

 
| ** **                                                 | ** ** | **September 30, 2005** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| Options exercisable                                        |       | 12,385                 |       | 13,422             |       |
| Options available for grant                                |       | 4,098                  |       | 4,632              |       |
| Total reserved common stock shares for  stock option plans |       | 17,229                 |       | 18,214             |       |

 

Beginning in thefiscal year 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment” (“SFASNo. 123(R)”) on a modified prospective transition method to account for itsemployee stock options.  The adoption ofSFAS No. 123(R) did not affect the stock-based compensation associated with theCompany’s RSUs, whichwere already based on the market price of the stock at date of grant andrecognized over the service period. Under the modified prospective transition method, fair value of new andpreviously granted but unvested equity awards are recognized as compensationexpense in the income statement, and prior period results are notrestated.  As a result of the adoption,the Company’s income from continuing operations, which is the same as incomebefore income taxes, decreased by $0.4 million, net income was decreased by$0.3 million, and basic and diluted earnings per share were negatively impactedby $0.01. In addition, cash flows from operating

 

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and financingactivities decreased and increased, respectively, by $4.1 million for the threemonths ended September 30, 2005, reflecting the proper classification of theexcess tax benefits from options exercised from operating to a financingactivity (see Note 1, “Certain Accounting Policies”).

 

For the three monthsended September 30, 2005, stock-based compensation expense recognized in theincome statement is as follows (in thousands):

 
| ** **                             | ** ** | **September 30,  2005** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| Selling and administrative expense     |       | $                       | 258        |   |
| Research and development expense       |       | 82                      |       |
| Cost of sales                          |       | 30                      |       |
|                                   |       |                    |       |
| Total stock-based compensation expense |       | $                       | 370        |   |

 

The total compensationexpense for outstanding stock options and RSUs was $7.9 million as of September30, 2005, which will be recognized over a weighted average vesting period ofapproximately three years. The fair value of the options associated with theabove compensation expense for the three months ended September 30, 2005, wasdetermined at the date of the grant using the Black–Scholes option pricingmodel with the following weighted average assumptions:

 
| ** **              | ** ** | **September 30,  2005** | ** ** |
|-------------------------|------------|-------------------------|------------|
| Expected life           |       | 3.5 years               |       |
| Risk free interest rate |       | 3.8                     | %          |
| Volatility              |       | 30.0                    | %          |
| Dividend yield          |       | 0.0                     | %          |

 

In March 2005, the Securitiesand Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB No. 107”)that provided the Staff’s views regarding valuation of share-based paymentpursuant to SFAS No. 123(R).  Withrespect to volatility, SAB No. 107 clarified that there is not a particularmethod of estimating volatility and to the extent that the Company has tradedfinancial instruments from which it can derive the implied volatility, it maybe appropriate to use only implied volatility in its assumptions.  The Company has certain financial instrumentsthat are publicly traded from which it can derive the implied volatility.  Therefore, beginning in January 2005, theCompany used implied volatility for valuing its stock options, whereaspreviously, it had used historical volatility. The Company believes implied volatility is a better indicator of expectedvolatility because it is generally reflective of both historical volatility andexpectations of how future volatility will differ from historical volatility.

 

SAB No. 107 alsoprovided certain “simplified” method for determining expected life in valuingstock options.  To the extent that an entitycannot rely on its historical exercise data to determine the expected life, SABNo. 107 has prescribed a simplified “plain-vanilla” formula.  Subsequent to the 2000 Plan amendments onNovember 22, 2004, the Company issued stock options having five-year expirationwith generally athree-year annual vesting term, whereas, prior to then, the Company grantedstock options having seven or ten-year expiration with generally

 

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a four or five-year annual vesting term.   Therefore, beginning in January 2005, theCompany applied SAB No. 107 “plain-vanilla” method for determining the expectedlife, whereas previously, it had used historical exercise data to determine theexpected life.

 

Had the Company accounted for stock–basedcompensation plans using the fair value based accounting method described bySFAS No. 123 for the periods prior to fiscal year 2006, the Company’s dilutednet income per common share—basic and diluted for the three months endedSeptember 30, 2004, would have approximated the following (in thousands exceptper share data):

 
| ** **                                                                                                                  | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
|                                                                                                                        |       |                    |       |
| Net income                                                                                                                  |       | $                       | 37,580     |   |
| Less: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of tax |       | (13,243                 | )          |
| Pro forma net income                                                                                                        |       | $                       | 24,337     |   |
|                                                                                                                        |       |                    |       |
| Net income per common share–basic, as  reported                                                                        |       | $                       | 0.56       |   |
| Net income per common share–basic, pro  forma                                                                          |       | $                       | 0.37       |   |
|                                                                                                                        |       |                    |       |
| Net income per common share–diluted, as  reported                                                                      |       | $                       | 0.53       |   |
| Net income per common share–diluted, pro  forma                                                                        |       | $                       | 0.35       |   |

 

On April 17, 2005, the Company accelerated thevesting of all then outstanding equity awards, including employee stock optionsand restricted stock units, primarily to avoid recognizing in its incomestatement approximately $108 million in associated compensation expense infuture periods, of which approximately $60 million would have been recognizedin fiscal year 2006 upon the adoption of SFAS No. 123(R). As a result of theaccelerated vesting, the Company recorded $6.0 million in non-cash compensationcharge, of which $3.9 million is related to the excess of the intrinsic valueover the fair market value of the Company’s stock on the acceleration date ofthose options that would have been forfeited or expired unexercised had thevesting not been accelerated, and $2.1 million is related to the recognition ofoutstanding RSUs, including $0.3 million for the excess of the intrinsic valueover the fair market value of the Company’s stock on the acceleration date. In determining the forfeiture rates of the stock options, the Companyreviewed the unvested options’ original life, time remaining to vest andwhether these options were held by officers and directors of the Company. The compensation charge is adjusted in future period financial results asactual forfeitures are realized.  For thethree months ended September 30, 2005, there were no material changes in actualforfeitures from estimates.

 

12.           Environmental Matters

 

Federal,state, foreign and local laws and regulations impose various restrictions andcontrols on the storage, use and discharge of certain materials, chemicals andgases used in semiconductor manufacturing processes. The Company does notbelieve that compliance with such laws and regulations as now in effect willhave a

 

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materialadverse effect on the Company’s results of operations, financial position orcash flows.

 

However,under some of these laws and regulations, the Company could be held financiallyresponsible for remedial measures if properties are contaminated or if waste issent to a landfill or recycling facility that becomes contaminated. Also, theCompany may be subject to common law claims if it releases substances thatdamage or harm third parties. The Company cannot make assurances that changesin environmental laws and regulations will not require additional investmentsin capital equipment and the implementation of additional compliance programsin the future, which could have a material adverse effect on the Company’sresults of operations, financial position or cash flows, as could any failureby the Company to comply with environmental laws and regulations.

 

The Company and RachelleLaboratories, Inc. (“Rachelle”), a former operating subsidiary of theCompany that discontinued operations in 1986, were each named a potentiallyresponsible party (“PRP”) in connection with the investigation by the UnitedStates Environmental Protection Agency (“EPA”) of the disposal of allegedlyhazardous substances at a major superfund site in Monterey Park, California (“OIISite”). Certain PRPs who settled certain claims with the EPA under consentdecrees filed suit in Federal Court in May 1992 against a number of otherPRPs, including the Company, for cost recovery and contribution under theprovisions of the Comprehensive Environmental Response, Compensation andLiability Act (“CERCLA”). IR has settled all outstanding claims that havearisen against it out of the OII Site. No claims against Rachelle have been settled.  The Company has taken the position that noneof the wastes generated by Rachelle were hazardous.

 

Counsel for Rachelle received aletter dated August 2001 from the U.S. Department of Justice, directed to allor substantially all PRPs for the OII Site, offering to settle claims againstsuch parties for all work performed through and including the final remedy forthe OII Site.  The offer required apayment from Rachelle in the amount of approximately $9.3 million in order totake advantage of the settlement. Rachelle did not accept the offer.

 

In asmuch as Rachelle has not accepted the settlement, the Company cannot predictwhether the EPA or others would attempt to assert an action for contribution orreimbursement for monies expended to perform remedial actions at the OIISite.  The Company cannot predict thelikelihood that the EPA or such others would prevail against Rachelle in anysuch action.  It remains the position ofRachelle that its wastes were not hazardous. The Company’s insurer has not accepted liability, although it has madepayments for defense costs for the lawsuit against the Company.  The Company has made no accrual for potentialloss, if any; however, an adverse outcome could have a material adverse effecton the Company’s results of operations and cash flows.

 

The Company received a letter inJune 2001 from a law firm representing UDT Sensors, Inc. relating toenvironmental contamination (chlorinated solvents such as trichlorethene)assertedly found in UDT’s properties in Hawthorne, California.  The letter alleges that the Company operateda manufacturing business at that location in the 1970’s and/or 1980’s and thatit may have liability in connection with the

 

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claimed contamination.  The Company has made no accrual for anypotential losses since there has been no assertion of specific facts on whichto form the basis for determination of liability.

 

13.           Litigation

 

In June 2000, the Company filed suit inFederal District Court in Los Angeles, California against IXYS Corporation,alleging infringement of its key U.S. patents 4,959,699; 5,008,725 and5,130,767.  The suit sought damages andother relief customary in such matters. The Federal District Court entered a permanent injunction, effective onJune 5, 2002, barring IXYS from making, using, offering to sell or selling in,or importing into the United States, MOSFETs (including IGBTs) covered by theCompany’s U.S. patents 4,959,699; 5,008,725 and/or 5,130,767.  In August 2002, the Court of Appeals for theFederal Circuit stayed that injunction, pending appeal on the merits.  In that same year, following trial on damagesissues, a Federal District Court jury awarded the Company $9.1 million incompensatory damages.  The FederalDistrict Court subsequently tripled the damages, increasing the award from $9.1million to approximately $27.2 million, and ruled that the Company is entitledto an additional award of reasonable attorney’s fees for a total monetaryjudgment of about $29.5 million.  InMarch 2004, the U.S. Court of Appeals for the Federal Circuit reversed thesummary judgment granted the Company by the Federal District Court in LosAngeles of infringement by IXYS of the Company’s U.S. patents 4,959,699;5,008,725 and 5,130,767. The Federal Circuit reversed in part and vacated inpart infringement findings of the District Court, granted IXYS the right topresent certain affirmative defenses, and vacated the injunction against IXYSentered by the District Court. The ruling by the Federal Circuit had the effectof vacating the damages judgment obtained against IXYS. The Federal Circuitaffirmed the District Court’s rulings in the Company’s favor regarding thevalidity and enforceability of the three Company patents. Following remand, afederal court jury in Los Angeles, California held on September 15, 2005, thatIXYS elongated octagonal MOSFETs and IGBTs infringed the Company’s 4,959,699patent but did not infringe the Company’s 5,008,725 and 5,130,767 patents. OnOctober 6, 2005 the jury awarded the Company $6.2 million in damages. Furtherproceedings are required in the trial court before final judgment can beentered. The Company anticipates that IXYS will appeal the judgment.  No amount has been recognized in the incomestatement from the pending litigation for the three months ended September 30,2005.

 

14.           Income Taxes

 

The Company’s effective tax provision for thethree months ended September 30, 2005 and 2004 was 27.5 percent and 24.0percent, respectively, rather than the U.S. federal statutory tax provision of35 percent as a result of lower statutory tax rates in certain foreignjurisdictions, the benefit of foreign tax credits and research and developmentcredits, partially offset by state taxes and certain foreign losses withoutforeign tax benefit.

 

In December 2004, the FASB issued FASB StaffPosition No. 109-2, “Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creations Act of 2004”,which introduces a limited time 85 percent

 

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dividends received deduction on therepatriation of certain foreign earnings to a U.S. tax payer (“repatriationprovision”), provided certain criteria are met. The Company is currently evaluating the range of possible amounts ofunremitted earnings that may be repatriated as a result of the repatriationprovision; the related range of income tax effects of such repatriation cannotbe reasonably estimated at this time.

 

15.           Related PartyTransactions

 

As discussed inNote 3, the Company holds as strategic investment common stock of Nihon InterElectronics Corporation (“Nihon”), a related party.  At September 30, 2005 and June 30, 2005, theCompany owned approximately 17.5 percent of the outstanding shares ofNihon.  As previously reported, theCompany’s Chief Financial Officer was the Chairman of the Board and a directorof Nihon until June 28, 2005.  Inaddition, the general manager of the Company’s Japan subsidiary is a directorof Nihon.  Although the Company has amember on the Board of Directors of Nihon, it does not exercise significantinfluence, and accordingly, the Company records its interest in Nihon based onreadily determinable market values in accordance with SFAS No. 115 (see Note 3,“Cash and Investments”).

 

16.           Subsequent Event

 

On November 1, 2005, the Company’s Board of Directors authorized andthe Company announced a stock repurchase program, under which up to $100million of the Company’s common shares may be repurchased without prior notice,through block trades or otherwise.  TheCompany intends that any shares repurchased will be held as treasury sharesthat may be used for general corporate purposes.  From the date of the repurchase through thefollowing thirty days, no amounts under the Company’s $150 million creditfacility will be available.  Sharesrepurchased will be paid with the Company’s existing cash and cashinvestments.  As of November 11, 2005, noshares had been repurchased under the program.

 

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**ITEM 2.**                  **MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion of our financial condition and results of operations should be readtogether with the consolidated financial statements and notes to consolidatedfinancial statements included elsewhere in this Form 10-Q.  Except for historic information containedherein, the matters addressed in this Item 2 constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  Forward-looking statements maybe identified by the use of terms such as “anticipate,” “believe,” “expect,” “intend,”“project,” “will,” and similar expressions. Such forward-looking statements are subject to a variety of risks anduncertainties, including those discussed under the heading “Statement ofCaution Under the Private Securities Litigation Reform Act of 1995” andelsewhere in this Quarterly Report on Form 10-Q, that could cause actualresults to differ materially from those anticipated by the Company.  We undertake no obligation to update theseforward-looking statements to reflect events or circumstances after the date ofthis report or to reflect actual outcomes.

 

**Restatement of Statement of Cash Flows**

 

Asdiscussed in Note 1 of Notes to the unaudited consolidated financialstatements, we have corrected the classification of the excess tax benefitsgenerated from options exercised of $4.1 million for the three months endedSeptember 30, 2005 to present the tax benefits from options exercised as cashflows from financing activities rather than operating activities in ourconsolidated statement of cash flows, as required by Statement of FinancialAccounting Standards No. 123(R), “Shared-Based Payment,” which we adopted as ofthe beginning of our fiscal year 2006 in July 2005.  The correction had no impact on our overallnet change in cash and cash equivalents, the unaudited consolidated statementsof income, the unaudited consolidated statements of comprehensive income, orthe unaudited consolidated balance sheet for any of the periods presented.

 

**Overviewof Results of Operations for the Three Months Ended September 30, 2005**

 

We report our results insix segments: Computing and Communications (“C&C”), Energy-Saving Products(“ESP”), Aerospace and Defense (“A&D”), Intellectual Property (“IP”),Commodity Products (“CP”) and Non-Aligned Products (“NAP”).  We include our C&C, ESP, A&D and IPsegments in our Focus Product group, and our CP and NAP segments in ourNon-Focus Product group.

 

For the three monthsended September 30, 2005, consolidated revenues were $272.6 million compared to$312.2 million in the prior year three months ended September 30, 2004.  Revenues for our Focus Products were $201.9million (74.1 percent of revenues) and $221.4 million (70.9 percent ofrevenues) for the three months ended September 30, 2005 and 2004,respectively.  Revenues for our Non-FocusProducts were $70.7 million (25.9 percent of revenues) and $90.8 million (29.1percent of revenues) for the three months ended September 30, 2005 and 2004,respectively.  Revenues for the threemonths ended September 30, 2005 were lower than the prior year.  Some of the factors that adversely affectedrevenues for the quarter ended September 30, 2005 included price pressure oncertain component products, changes in distributor purchasing patterns and alogistics bottleneck that delayed certain shipments at the end of the fiscalquarter in our A&D segment. Additionally, in our C&C and ESP segments, revenues were inhibitedby and lower due to capacity constraints and an inventory mix

 

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that was different thanthe demand for certain products.  For thethree months ended December 31, 2005, we expect our overall revenues toincrease by only one to four percent, in part, reflecting continuing capacitylimitations in our C&C and ESP segments.

 

Forthe quarter ended September 30, 2005, total inventory increased by $16.2million to $193.8 million from $177.6 million at June 30, 2005.  Finished goods increased by $13.3 million asa result of an inventory build that was different than the demand for certainproducts principally within our C&C and ESP segments in the fiscal firstquarter.

 

Forthe three months ended September 30, 2005, gross profit margin was 40.7 percentcompared to 42.7 percent for the prior year three months ended September 30,2004.  Gross profit margin for our FocusProducts were 48.8 percent and 49.2 percent for the three months endedSeptember 30, 2005 and 2004, respectively. Gross profit margin for our Non-Focus Products was 17.4 percent and 27.0percent for the three months ended September 30, 2005 and 2004,respectively.  The gross profit margindeclined primarily due to price declines, product mix, and profit sharing andemployee stock option expense.  We expectour overall Company gross margin for the three months ended December 31, 2005to be approximately two percentage points lower than the three months endedSeptember 30, 2005, largely due to pricing pressures, product mix and costsassociated with our Newport, Wales facility.

 

Revenuesas a percentage of total product revenues based on sales location wereapproximately 28 percent, 50 percent and 22 percent for North America(primarily United States), Asia and Europe, respectively, for the three monthsended September 30, 2005.  Revenues as apercentage of total product revenues based on sales location were approximately30 percent, 47 percent and 23 percent for North America (primarily UnitedStates), Asia and Europe, respectively, for the three months ended September30, 2004.

 

Asof September 30, 2005, we have substantially completed our restructuringactivities previously announced in 2002 and 2003.  For the three months ended September 30,2005, we recorded $4.3 million in total restructuring-related charges,consisting of: $3.1 million for asset impairment, plant closure costs and othercharges and $1.2 million for severance-related costs.  We estimate that charges associated with therestructuring will be approximately $280 million. These charges will consist ofapproximately $220 million for asset impairment, plant closure costs and othercharges, $6 million of raw material and work-in-process inventory, andapproximately $54 million for severance-related charges.  Of the $280 million in total charges, weexpect cash charges to be approximately $110 million.  Asof September 30, 2005, we have realized annualized savings of approximately $80million from the restructuring activities, with approximately 70 percent ofthat savings affecting cost of goods sold. We are also continuing with our plan to review product lines andproducts not aligned with our long-term objectives to increase our overallgross margins.

 

Asof September 30, 2005, demand for our Focus Products, primarily those reportedin our C&C and ESP segments, exceeded our worldwide capacity.  To help address our capacity limitations, weare starting production on our new eight-inch sub-micron wafer fabricationfacility in Newport, Wales in the December 2005 quarter.  During the three months ended September 30,2005, we spent $37.0 million in capital expenditure, of

 

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which$13.9 million was at the Newport, Wales facility. We anticipate that nearly 70percent of capital expenditures for fiscal year 2006 will be in the first halfof the year.

 

Weadopted Statement of Financial Accounting Standards No. 123(R), “Share-BasedPayment” (“SFAS No. 123(R)”) that became effective for us in the fiscal firstquarter ended September 30, 2005.  SFASNo. 123(R) required that we recognize the fair value of equity awards grantedto our employees as compensation expense in the income statement over therequisite service period.  For the threemonths ended September 30, 2005, we recognized $0.4 million in stock-basedcompensation expense as a result of the adoption of SFAS No. 123(R).  As a consequence of SFAS No. 123(R), we havereduced the number of employees who will receive stock options.  To offset the impact of the option grantreduction and to continue to attract and retain the industry’s best qualifiedtechnical, sales, marketing and managerial personnel, we have established a newprofit sharing plan that became effective beginning in the fiscal year2006.  For the three months endedSeptember 30, 2005, we recognized $2.8 million in profit sharing plan expense.

 

During the three months ended September 30,2005, operating activities generated cash flows of $9.7 million.  Cash flows from operating activitiesdecreased by $4.1 million for the three months ended September 30, 2005,reflecting the proper classification of the excess tax benefits from optionsexercised as a cash flow from financing activity (see Note 1, “CertainAccounting Policies”). Our cash, cash equivalents and cash investments totaled$931.9 million at September 30, 2005. Additionally, we have $128.3 million in unused credit facilities foroperating needs.

 

On November 1, 2005, our Board of Directorsauthorized and we announced a stock repurchase program, under which up to $100million of our common shares may be repurchased without prior notice, throughblock trades or otherwise.  We intendthat any shares repurchased will be held as treasury shares that may be usedfor general corporate purposes.  As ofNovember 11, 2005, no shares had been repurchased under the program.

 

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**Resultsof Operations for the Three Months Ended September 30, 2005 Compared with theThree Months Ended September 30, 2004**

 

Thefollowing table sets forth certain items as a percentage of revenues (inmillions except percentages):

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Revenues                                                   |       | $                                     | 272.6      |   | 100.0 | % | $ | 312.2 |   | 100.0 | % |
| Cost of  sales                                             |       | 161.7                                 |       | 59.3 |   | 178.8 |   | 57.3 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |
| Gross profit                                               |       | 110.9                                 |       | 40.7 |   | 133.4 |   | 42.7 |   |
| Selling and  administrative expense                        |       | 45.2                                  |       | 16.7 |   | 46.4 |   | 14.9 |   |
| Research and  development expense                          |       | 25.2                                  |       | 9.2 |   | 25.4 |   | 8.1 |   |
| Amortization  of acquisition-related intangible assets     |       | 1.5                                   |       | 0.5 |   | 1.4 |   | 0.5 |   |
| Impairment  of assets, restructuring and severance charges |       | 4.3                                   |       | 1.6 |   | 6.7 |   | 2.1 |   |
| Other  expense (income), net                               |       | 0.1                                   |       | 0.0 |   | (0.0 | ) | (0.0 | ) |
| Interest  (income) expense, net                            |       | (1.6                                  | )          | (0.6 | ) | 1.7 |   | 0.5 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |
| Income  before income taxes                                |       | 36.2                                  |       | 13.3 |   | 51.8 |   | 16.6 |   |
| Provision  for income taxes                                |       | 10.0                                  |       | 3.7 |   | 14.2 |   | 4.6 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |
| Net income                                                 |       | $                                     | 26.2       |   | 9.6 | % | $ | 37.6 |   | 12.0 | % |

 

Revenues and Gross Margin

 

Forthe three months ended September 30, 2005, consolidated revenues decreased by12.7 percent from the prior year three months ended September 30, 2004.  Revenues for the three months ended September30, 2005 were lower than the prior year, due to the combination of pricepressure on certain component products, changes in distributor purchasingpatterns, and a logistics bottleneck that delayed certain shipments at the endof the fiscal quarter in our A&D segment. Additionally, in our C&C and ESP segments, revenues were inhibited byand lower due to capacity constraints and an inventory mix that was differentthan the demand for certain products. Gross profit margin was 40.7 percent for the three months endedSeptember 30, 2005, compared to 42.7 percent in the prior year three monthsended September 30, 2004.  The grossprofit margin declined primarily due to price declines, product mix, profitsharing and employee stock options expense. In general, our wafer manufacturing facilities serve all business unitsas necessary and their operating costs are reflected in the segments’ cost ofrevenues on the basis of product cost. General manufacturing overhead and variances are allocated to thesegments based on the percentage of total revenues.

 

Forthe quarter ended September 30, 2005, total inventory increased by $16.2million to $193.8 million from $177.6 million at June 30, 2005.  Finished goods increased by $13.3 million asa result of an inventory build that was different than the demand for certainproducts principally within our C&C and ESP segments in the fiscal firstquarter.

 

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Revenuesas a percentage of total product revenues based on sales location wereapproximately 28 percent, 50 percent and 22 percent for North America (primarilyUnited States), Asia and Europe, respectively, for the three months endedSeptember 30, 2005.  Revenues as apercentage of total product revenues based on sales location were approximately30 percent, 47 percent and 23 percent for North America (primarily UnitedStates), Asia and Europe, respectively, for the three months ended September30, 2004.

 

Revenues for ourFocus Products were $201.9 million (74.1 percent of revenues) and $221.4million (70.9 percent of revenues) for the three months ended September 30,2005 and 2004, respectively.  Revenuesfor our Non-Focus Products were $70.7 million (25.9 percent of revenues) and$90.8 million (29.1 percent of revenues) for the three months ended September30, 2005 and 2004, respectively.

 

Revenues and grossmargin by business segments are as follows (in thousands except percentages):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                    | ** ** | **Revenues**           | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** | **Revenues** | ** ** | **Percentage  of Total** | ** ** | **Gross  Margin** | ** ** |
| **Business  Segment**         | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Computing  and Communications |       | $                      | 89,640     |   | 32.9 | % | 41.6 | % | $ | 105,991 |   | 33.9 | % | 43.7 | % |
| Energy-Saving  Products       |       | 72,386                 |       | 26.6 |   | 52.4 |   | 73,151 |   | 23.4 |   | 53.6 |   |
| Aerospace  and Defense        |       | 29,401                 |       | 10.8 |   | 43.8 |   | 32,277 |   | 10.4 |   | 41.3 |   |
| Intellectual  Property        |       | 10,440                 |       | 3.8 |   | 100.0 |   | 10,019 |   | 3.2 |   | 100.0 |   |
|                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Subtotal Focus Products       |       | 201,867                |       | 74.1 |   | 48.8 |   | 221,438 |   | 70.9 |   | 49.2 |   |
|                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Commodity  Products           |       | 42,152                 |       | 15.4 |   | 19.3 |   | 59,524 |   | 19.1 |   | 30.9 |   |
| Non-Aligned  Products         |       | 28,554                 |       | 10.5 |   | 14.6 |   | 31,263 |   | 10.0 |   | 19.6 |   |
| Subtotal Non-Focus Products   |       | 70,706                 |       | 25.9 |   | 17.4 |   | 90,787 |   | 29.1 |   | 27.0 |   |
|                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated total            |       | $                      | 272,573    |   | 100.0 | % | 40.7 | % | $ | 312,225 |   | 100.0 | % | 42.7 | % |

 

***Computing and Communications (“C&C”)***

 

Our Computing andCommunication segment is comprised of our Power Management ICs, AdvancedCircuit Devices, including iPowirTM multi-chip modules and DirectFETTMsolutions, and Power Components (primarily MOSFET Power Components) thataddress servers and high-end desktops, notebooks, communications networking,and digitally-oriented consumer products like game consoles.  Our C&C products are also used in digitaltelevision, liquid crystal displays (“LCDs”), portable handheld devices andcellular phones.

 

C&C revenuesdeclined by $16.4 million, 15.4 percent, compared to the prior year threemonths ended September 30, 2004, primarily reflecting price pressures oncertain of our component products and changes in our distributor purchasingpatterns.  Additionally, C&C revenueswere inhibited by and lower due to capacity constraints and an inventory mixthat was different than the demand for certain products.  To help address our

 

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capacitylimitations, we are starting production on our new eight-inch sub-micron waferfabrication facility in Newport, Wales in the December 2005 quarter.

 

Gross margin forC&C was 41.6 percent for the three months ended September 30, 2005,compared to 43.7 percent for the prior year three months ended September 30,2004.  Gross margin declined reflectingprice declines, product mix, profit sharing and employee stock options expense,partially offset by increased sales of higher margin DirectFETs and FlipFETsinto the computing and communications market.

 

*Energy-SavingProducts (“ESP”)*

 

Our Energy-SavingProduct segment is comprised of our Power Management ICs, Advanced CircuitDevices and Power Components (primarily HEXFET and IGBT Power Components) thatprovide solutions for variable speed motion control in energy-saving appliances(such as washing machines, refrigerators and air conditioners), and industrialsystems (such as fans, pumps and compressors), advanced lighting products(including fluorescent lamps, high intensity discharge (“HID”) lamps, coldcathode fluorescent (“CCFL”) tubes and light emitting diodes (“LED”) lighting),advanced automotive solutions (primarily diesel injection, electric-gasolinehybrid and electric power steering systems), and consumer applications (forexample, plasma TVs and digital-audio units).

 

ESP revenues forthe three months ended September 30, 2005, declined by $0.8 million, 1.0percent, compared to the prior year three months ended September 30, 2004,primarily due to price pressures on certain of our component products andchanges in our distributor purchasing patterns. Additionally, ESP revenues were inhibited by capacity constraints and aninventory mix that was different than the demand.  The negative impact on the ESP segment’srevenues from these factors was partially offset by increased sales of our highvoltage ICs into the consumer and automotive markets.

 

Gross margin forESP was 52.4 percent for the three months ended September 30, 2005, compared to53.6 percent for the three months ended September 30, 2004.  The gross margin decline reflected primarilyprice declines, product mix, profit sharing and employee stock options expense.

 

*Aerospaceand Defense (“A&D”)*

 

The Aerospace andDefense segment is comprised of advanced power management solutions, such asradiation-hardened power management modules, radiation-hardened PowerComponents, and other high-reliability Power Components that address powermanagement requirements in satellites, launch vehicles, aircrafts, ships,submarines and other defense and high-reliability applications.  Revenues for the three months ended September30, 2005, declined by $2.9 million, 8.9 percent, from the three months endedSeptember 30, 2004, primarily reflecting a logistics bottleneck that delayedshipments at the end of the fiscal quarter. This revenue is included in thefiscal second quarter ending December 31, 2005 operating results, and we expectA&D revenues to increase from the September 2005 quarter.

 

Gross margin forthe A&D segment increased to 43.8 percent for the fiscal quarter endedSeptember 30, 2005, from 41.3 percent in the comparable prior year period,

 

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reflectingmanufacturing efficiencies and restructuring cost savings. Gross margin improvementwas partially offset by profit sharing and employee stock option expense.

 

*IntellectualProperty (“IP”)*

 

**TheIntellectual Property segment reports our royalty income from licensing ourintellectual property to third parties, which may include claims settlementfrom successful defense of our licenses. Our licensed MOSFET patents expire between 2005 and 2010, with thebroadest remaining in effect until 2007 and 2008.  We continue to commit to research anddevelopment to generate new patents and other intellectual property andconcentrate on incorporating our technologies into our Focus Products.**

** **

**IPrevenues were $10.4 million and $10.0 million for the three months endedSeptember 30, 2005 and 2004, respectively.**

 

*CommodityProducts (“CP”)*

 

The CommodityProduct segment is comprised primarily of older-generation Power Componentsthat are sold with margins generally below our strategic targets and aretypically commodity in nature.  Theseproducts have widespread use throughout the power management products industryand are often complementary to many of our Focus Products offerings or allow usto provide a full range of customer or application offerings. We often offerthese products to take advantage of cross-selling opportunities for our otherproduct families.

 

For the threemonths ended September 30, 2005, CP revenues were $42.2 million, down 29.1percent from $59.5 million for the three months ended September 30, 2004,reflecting a one-month shut down at one of our European facilities in thecurrent year versus a one-week shut down in the prior year quarter, changes inour distributor purchasing patterns, price pressures on our component productsand discontinuation of certain business opportunities since the prior year.

 

Gross margin forCP was 19.3 percent for the fiscal quarter ended September 30, 2005, comparedto 30.9 percent in the comparable prior year quarter, reflecting pricepressures, profit sharing and employee stock option expense.

 

*Non-AlignedProducts (“NAP”)*

 

**TheNon-Aligned Product segment includes businesses, product lines or products thatwe are targeting for realignment, whether by changing the business model forhow we participate in the business, or by divestiture or other strategictransactions, such as joint venture or partnership. We plan to support ourNon-Focus Products to the extent we believe appropriate, to manage, maintain orincrease their value in line with our long-term goals for those segments.  Currently, product lines reported in thissegment include certain modules, rectifiers, diodes and thyristors used in theautomotive, industrial, welding and motor control applications.**

 

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**Revenuesfor the three months ended September 30, 2005 were $28.6 million, decreasing8.7 percent from $31.2 million in the three months ended September 30, 2004,reflecting negative impacts from the restructuring of certain of our Europeanfacilities and the Euros foreign currency fluctuations.**

 

Gross margin forour NAP segment was 14.6 percent for the three months ended September 30, 2005,compared to 19.6 percent for the three months ended September 30, 2004,reflecting lower manufacturing efficiency and product mix.

 

Selling and Administrative Expense

 

For the threemonths ended September 30, 2005, selling and administrative expense was $45.2million (16.6 percent of revenues), compared to $46.4 million (14.9 percent ofrevenues) for the three months ended September 30, 2004.  The increase in the selling andadministrative expense ratio primarily reflected a lower revenue base in thecurrent year.  The absolute selling andadministrative expense decreased reflecting lower sales commissions and othervariable costs paid on a lower revenue base, partially offset by higherSarbanes-Oxley Rule 404 compliance, profit sharing and employee stock optionsexpense. 

 

Research and Development Expenses

 

For the threemonths ended September 30, 2005 and 2004, research and development expense was$25.2 million and $25.4 million (9.2 percent and 8.1 percent of revenues),respectively, reflecting primarily continued development activities on ourFocus Products.

 

Impairmentof Assets, Restructuring and Severance

 

Duringfiscal 2003 second quarter ended December 31, 2002, we announced ourrestructuring initiatives. Under our restructuring initiatives, our goal was toreposition us to better fit the market conditions and de-emphasize thecommodity business.  Our restructuringplan included consolidating and closing certain manufacturing sites, upgradingequipment and processes in designated facilities and discontinuing productionin a number of others that cannot support more advanced technology platforms orproducts.  We also planned to loweroverhead costs across our support organizations.  We have substantially completed theserestructuring activities as of September 30, 2005.  We expect to complete the remainingactivities, primarily the closing of a fabrication line at El Segundo,California by fiscal year end 2006 or sooner.

 

Weestimate that charges associated with the restructuring will be approximately$280 million. These charges will consist of approximately $220 million forasset impairment, plant closure costs and other charges, $6 million of rawmaterial and work-in-process inventory, and approximately $54 million forseverance.  Of the $280 million in totalcharges, we expect cash charges to be approximately $110 million.  As ofSeptember 30, 2005, we have realized annualized savings of approximately $80million from the restructuring activities, with approximately 70 percent ofthat savings affecting cost of goods sold.

 

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Forthe three months ended September 30, 2005, we recorded $4.3 million in totalrestructuring-related charges, consisting of: $3.1 million for assetimpairment, plant closure costs and other charges and $1.2 million forseverance-related costs.  For the threemonths ended September 30, 2004, we recorded $6.7 million in totalrestructuring-related charges, consisting of: $4.9 million for impairment,plant closure costs and other charges, and $1.8 million for severance-relatedcosts.  Restructuring-related costs weremeasured in accordance with SFAS No. 146, “Accounting for the Costs Associatedwith Exit or Disposal Activities”.  Assetimpairments were calculated in accordance with SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets”.  In determining the asset groups, we groupedassets at the lowest level for which independent identifiable cash flowsinformation was available. In determining whether an asset was impaired weevaluated undiscounted future cash flows and other factors such as changes instrategy and technology. The undiscounted cash flows from our initial analyseswere less than the carrying amount for certain of the asset groups, indicatingimpairment losses.  Based on this, wedetermined the fair value of these asset groups using the present valuetechnique, by applying a discount rate to the estimated future cash flows thatis consistent with the rate used when analyzing potential acquisitions.

 

As ofSeptember 30, 2005, we had recorded $265.7 million in total charges, consistingof: $213.2 million for asset impairment, plant closure costs and other charges,$6.0 million for raw material and work-in-process inventory charges, and $46.5million for severance-related costs. Components of the $213.2 million asset impairment, plant closure andother charges included the following items:

 

•      As we emphasize more advanced generation planar products, we expect thefuture revenue stream from our less advanced facilities in Temecula, Californiato decrease significantly. These facilities had a net book value of $138.3million and were written down by $77.7 million. It is expected that these facilities will continue in use untilapproximately December 2007 and the remaining basis is being depreciated overunits of production during this period. It is assumed that salvage value willequal disposition costs.

 

•      As we emphasize more advanced generation trench products, we expect thefuture revenue stream from our less advanced facility in El Segundo, Californiato decrease significantly. This facility had a net book value of $59.5 millionand was written down by $57.2 million. This facility had significantly reduced production as of fiscal yearended June 30, 2003, and is being used primarily for research and developmentactivities.

 

•      As we emphasize more advanced generation Schottky products, we expect thefuture revenue stream from our less advanced facility in Borgaro, Italy todecrease significantly. This facility had a net book value of $20.5 million andwas written down by $13.5 million.  It isexpected that this facility will continue in use until approximately December2007 and the remaining basis is being depreciated over units of productionduring this period.  It is assumed thatsalvage value will equal disposition costs.

 

•      We are restructuring our manufacturing activities in Europe.  Based on a review of our Swansea, Walesfacility, a general-purpose module facility, we determined in the December 2002quarter that this facility would be better suited to focus only on automotiveapplications.  The general-purposeassembly assets in this facility, with a

 

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net bookvalue of $13.6 million, were written down by $8.2 million.  In addition, we have completed the move ofour manufacturing activities at our automotive facility in Krefeld, Germany toour Swansea, Wales and Tijuana, Mexico facilities as of September 30,2005.  We have also moved the productionfrom our Venaria, Italy facility to our Borgaro, Italy and Mumbai, Indiafacilities, which was completed as of December 31, 2003.  We stopped manufacturing activities in ourOxted, England facility as of September 30, 2003.

 

•      We have eliminated the manufacturing of our non-space military products inour Santa Clara, California facility as of July 31, 2004. Currently,subcontractors handle our non-space qualified products formerly manufactured inthis facility. We are also transitioning the assembly and test of non-spacePower Components from our Leominster, Massachusetts facility to our Tijuana,Mexico facility, and expect to complete this activity by calendar year end2005.  Associated with this reduction inmanufacturing activities, certain assets with a net book value of $4.0 millionwere written down by $2.0 million.

 

•      $54.6 million in other miscellaneous items were charged, including $45.8million in relocation costs and other impaired asset charges and $8.8 millionin contract termination and settlement costs.

 

As aresult of the restructuring initiatives, certain raw material andwork-in-process inventories were impaired, including products that could not becompleted in other facilities, materials that were not compatible with theprocesses used in the alternative facilities, and materials such as gases andchemicals that could not readily be transferred. Based on these factors wewrote down these inventories, with a carrying value of $98.2 million, by $6.0 million.  For the three months ended September 30, 2005and 2004, we had disposed of $0 and $0.5 million, respectively, of theseinventories, which did not have a material impact on gross margin for the threemonths then ended.  As of September 30,2005, $1.2 million of these inventories remained to be disposed.

 

Ourrestructuring activities are expected to result in severance charges ofapproximately $54 million through June 2006. Below is a table of approximate severance charges by major activity andlocation:

 
| **Location**                                          | ** ** | **Activity**                                                  | ** ** | **Amount**  | ** **  |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------|-------------|
| ** **                                            | ** ** | ** **                                                    | ** ** | ** **  | ** **  |
| El Segundo, California                                |       | Close manufacturing facilities                                |       | $           | 10  million |   |
| Santa Clara, California and Leominster, Massachusetts |       | Eliminate certain manufacturing activities                    |       | 4  million  |        |
| Oxted, England                                        |       | Close manufacturing facility                                  |       | 9  million  |        |
| Venaria, Italy                                        |       | Move manufacturing to India and discontinue certain  products |       | 11  million |        |
| Company-wide                                          |       | Realign business processes                                    |       | 20  million |        |
| Total                                                 |       |                                                          |       | $           | 54  million |   |

 

To date, of the $54 million noted above, wehave recorded $46.5 million in severance-related charges: $41.4 million inseverance termination costs related to approximately 1,200 administrative,operating and manufacturing positions, and $5.1 million in pension terminationcosts at our manufacturing facility in Oxted, England.  The severance charges associated with theelimination of positions, which included the 1,200 persons

 

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notified to date, had been and will continueto be recognized over the future service period, as applicable, in accordancewith SFAS No. 146, “Accounting for the Costs Associated with Exit or DisposalActivities”.  We measured the totaltermination benefits at the communication date based on the fair value of theliability as of the termination date.  Achange resulting from a revision to either the timing or the amount ofestimated cash over the future service period will be measured using thecredit-adjusted risk-free rate that was used to initially measure theliability.  The cumulative effect of thechange will be recognized as an adjustment to the liability in the period ofthe change.

 

Infiscal 2002, we had recorded an estimated $5.1 million in severance costsassociated with the acquisition of TechnoFusion GmbH in Krefeld, Germany.  In fiscal 2003, we finalized our plan anddetermined that total severance would be approximately $10 million, andaccordingly, we adjusted purchased goodwill by $4.8 million.  We communicated the plan and the eliminationof approximately 250 positions primarily in manufacturing to its affectedemployees at that time.  The associatedseverance is expected be paid by calendar year end 2005.

 

Thefollowing summarizes our severance accrued related to the June 2001restructuring, the TechnoFusion acquisition and the December 2002 restructuringplan for the three months ended September 30, 2005 and the fiscal year endedJune 30, 2005.  Severance activityrelated to the elimination of 29 administrative and operating personnel as partof the previously reported restructuring in the fiscal quarter ended June 30,2001, is also disclosed.  The remainingJune 2001 severance relates primarily to certain legal accruals associated withthat restructuring, which will be paid or released as the outcome is determined(in thousands):

 
| ** **                                                                                          | ** ** | **June  2001  Restructuring** | ** ** | **December  2002  Restructuring** | ** ** | **TechnoFusion  Severance  Liability** | ** ** | **Total  Severance  Liability** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Accrued severance, June 30, 2004                                                                    |       | $                             | 697        |                              | $          | 7,180                                  |       | $                               | 6,067      |   | $ | 13,944 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance charges” |       | —                        |       | 8,677                             |       | —                                 |       | 8,677                           |       |
| Costs paid                                                                                          |       | (326                          | )          | (7,810                            | )          | (3,770                                 | )          | (11,906                         | )          |
| Foreign exchange impact                                                                             |       | —                        |       | 77                                |       | (190                                   | )          | (113                            | )          |
|                                                                                                |       |                          |       |                              |       |                                   |       |                            |       |
| Accrued severance, June 30, 2005                                                                    |       | $                             | 371        |                              | $          | 8,124                                  |       | $                               | 2,107      |   | $ | 10,602 |   |
| Costs incurred or charged to “impairment of  assets, restructuring and severance”         |       | —                        |       | 1,231                             |       | —                                 |       | 1,231                           |       |
| Costs paid                                                                                          |       | (64                           | )          | (3,055                            | )          | (406                                   | )          | (3,525                          | )          |
| Foreign exchange impact                                                                             |       | —                        |       | (14                               | )          | (14                                    | )          | (28                             | )          |
| Accrued severance, September 30, 2005                                                               |       | $                             | 307        |                              | $          | 6,286                                  |       | $                               | 1,687      |   | $ | 8,280 |   |

 

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Other Income and Expenses

 

Otherincome (expense) income was $0.1 million and ($0.04) million for the threemonths ended September 30, 2005 and 2004, respectively.

 

Interest Income and Expenses

 

Interest incomewas $7.1 million and $3.3 million for the three months ended September 30, 2005and 2004, respectively, reflecting higher prevailing interest rates on higheraverage cash and cash investment balance in the current year.

 

Interestexpense was $5.5 million and $5.1 million for the three months ended September30, 2005 and 2004, respectively, primarily reflecting higher effective interestrate payable on our $550 million convertible subordinated notes outstanding,partially offset by higher income from the mark-to-market adjustments on ourinterest rate swaps (see Notes 4, “Derivative Financial Instruments” and 8, “BankLoans and Long-Term Debt” of the Notes to the unaudited consolidated financialstatements, regarding the modification of the effective interest payable on ourconvertible notes).

 

Income Taxes

 

Our effective tax provision for the three months endedSeptember 30, 2005 and 2004 was 27.5 percent and 24.0 percent, respectively,rather than the U.S. federal statutory tax provision of 35 percent, as a resultof lower statutory tax rates in certain foreign jurisdictions, the benefit offoreign tax credits and research and development credits, partially offset bystate taxes and certain foreign losses without foreign tax benefits.

 

In December 2004, the FASB issued FASB Staff Position No.109-2, “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creations Act of 2004”, whichintroduces a limited time 85 percent dividends received deduction on therepatriation of certain foreign earnings to a U.S. tax payer (“repatriationprovision”), provided certain criteria are met. We are currently evaluating the range of possible amounts of unremittedearnings that may be repatriated as a result of the repatriation provision; therelated range of income tax effects of such repatriation cannot be reasonablyestimated at this time.

 

**Liquidity and Capital Resources**

 

AtSeptember 30, 2005, we had cash and cash equivalent balances of $359.1 millionand cash investments in marketable debt securities of $572.8 million. We alsohave $128.3 million in unused credit facilities.  Our investment portfolio consists ofavailable-for-sale fixed-income, principally investment-grade securities as ofSeptember 30, 2005.

 

For the three months ended September 30, 2005, cash provided byoperating activities was $9.7 million compared to $23.1 million in thecomparable prior year three months ended September 30, 2004.  Cash flows from operating activitiesdecreased by $4.1 million for the three months ended, reflecting the properclassification of the excess tax benefits from options exercised from operatingto financing activities (see Note 1, “Certain Accounting Policies”).Depreciation and amortization adjusted cash flows from operations by $21.5million.  Changes in operating assets andliabilities decreased cash by $44.5 million during the three months endedSeptember 30, 2005.  The increase in

 

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working capital reflected the increase in our inventory balance as aresult of the build up of inventory that was different than the demand forcertain products principally within our C&C and ESP segments during thefiscal first quarter, and the timing of accounts and other receivablecollections, and taxes, salaries, wages and other accrued expense payments.

 

For the three months ended September 30, 2005, cash used in investingactivities was $35.1 million.  Wepurchased $105.3 million and sold $111.0 million of cash investments. Certainprior year’s amounts have been reclassified to conform to the current-yearpresentation.  Auction rate securitiesare now classified as available-for-sale securities and reported as short-termcash investments instead of cash and cash equivalents, for all periodspresented.  For the three months endedSeptember 30, 2004, proceeds from the sale of auction rate securities decreasednet cash used in investing activities by $49.6 million.

 

Duringthe three months ended September 30, 2005, we spent $37.0 million in capitalexpenditure, of which $13.9 million was at the Newport, Wales facility. Weanticipate that nearly 70 percent of capital expenditures for fiscal year 2006will be in the first half of the year. As of September 30, 2005, demand for our Focus Products exceeded ourworldwide capacity.  To help address ourcapacity limitations, we are starting production on our new eight-inchsub-micron wafer fabrication facility in Newport, Wales in the December 2005 quarter.  Purchase order commitments for capitalexpenditures were $26.0 million as of September 30, 2005.  We intend to fund capital expenditures andworking capital requirements through cash and cash equivalents on hand,anticipated cash flow from operations and available credit facilities.

 

Financingactivities for the three months ended September 30, 2005 generated $23.8million. Cash flows from financing activities increased by $4.1 million for thethree months ended, reflecting the proper classification of the excess taxbenefits from options exercised as a financing activity (see Note 1, “CertainAccounting Policies”). Proceeds from the exercise of employee stock options andstock participation plan contributed $21.8 million. As of September 30, 2005,we had revolving, equipment and foreign credit facilities of $166.6 million,against which $38.2 million had been used. As discussed in Note 4 of the unaudited consolidated financialstatements, we are required to obtain irrevocable standby letters of credit infavor of JP Morgan Chase Bank, for $7.5 million plus the collateral requirementfor the interest rate swap transactions, as determined periodically.  At September 30, 2005, $15.8 million inletters of credit were outstanding related to the transactions.  The collateral requirement of the transactionsmay be adversely affected by an increase in the five-year LIBOR curve, adecrease in our stock price, or both.  Wecannot predict what the collateral requirement of the transactions and theletter of credit requirement will be over time. To illustrate the potential impact, had a 10 percent increase in thefive-year LIBOR curve and a 10 percent decrease in our stock price occurred atthe close of the fiscal quarter ended September 30, 2005, our letter of creditcommitment would have increased by $4.9 million to $20.7 million.  We do not have any off balance sheetarrangements as of September 30, 2005.

 

On November 1, 2005, ourBoard of Directors authorized and we announced a stock repurchase program,under which up to $100 million of our common shares may be repurchased withoutprior notice, through block trades or otherwise.  Any shares repurchased will be paid with ourexisting cash and cash investments.

 

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Our $550 million convertiblesubordinated notes are due in July 2007. We anticipate that this debt will be refinanced through public orprivate offerings of debt or equity, or be paid down with our existing cash andcash investments.

 

We believe that our currentcash and cash investment balances, cash flows from operations and borrowingcapacity, including unused amounts under the $150 million Credit Facility asdiscussed in Note 8 of the unaudited consolidated financial statements, will besufficient to meet our operations in the next twelve months. Although webelieve that our current financial resources will be sufficient for normaloperating activities, we may also consider the use of funds from other externalsources, including, but not limited to, public or private offerings of debt orequity.

 

**Recent Accounting Pronouncements**

 

On October 18, 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position onFinancial Accounting Standard No. 123(R)-2 (“FSP FAS No. 123(R)-2”). FSP FASNo. 123(R)-2 provides guidance on the application of grant date as defined inFASB Statement No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”).  As a practical accommodation, in determiningthe grant date of an award, assuming all other criteria in the grant datedefinition have been met, FSP FAS No. 123(R)-2 provides that a mutualunderstanding of the key terms and conditions of an award to an individualemployee shall be presumed to exist at the date the award is approved inaccordance with the relevant corporate governance requirements (that is, by theBoard or management with the relevant authority) if both of the followingconditions are met:

 

a. The award is a unilateralgrant and, therefore, the recipient does not have the ability to negotiate thekey terms and conditions of the award with the employer.

 

b. The key terms andconditions of the award are expected to be communicated to an individualrecipient within a relatively short time period(1) from the date of approval.

 

The guidance in this FSP iseffective upon initial adoption of SFAS No. 123(R) or if an entity has adoptedSFAS No. 123(R) prior to the issuance of this FSP and did not apply theprovisions of FSP FAS 123(R)-2, this FSP will be effective in the firstreporting period after October 18, 2005, the date the FSP was posted to theFASB website.  We have applied theprovisions under FSP FAS 123(R)-2 in accounting for our equity awards as ofJuly 4, 2005, the start of our fiscal year 2006.

 

**CriticalAccounting Estimates**

 

Theconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States which require usto make estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the consolidated financial statements and revenuesand expenses during the periods reported. Actual results could differ fromthose estimates. Information with respect to our critical accounting policieswhich we believe could have the most significant effect on our reported resultsand require subjective or complex judgments is contained in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, ofour Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

 

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Effectivein the first fiscal quarter ended September 30, 2005, in July 2005, we adoptedthe provisions of Statement of Financial Accounting Standards No. 123 “Share-BasedPayment” (“SFAS No. 123(R)”) to account for stock-based compensation.Under SFAS No. 123(R), we estimate the fair value of stock options grantedusing the Black-Scholes option pricing model. The fair value for awards thatare expected to vest is then amortized on a straight-line basis over therequisite service period of the award, which is generally the option vestingterm. The amount of expense attributed is based on estimated forfeiture rate,which is revised as information is updated. This option pricing model requiresthe input of highly subjective assumptions, including the expected volatilityof our common stock and an option’s expected life. The financial statementsinclude amounts that are based on our best estimates and judgments.

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**Statement of Caution Under thePrivate Securities Litigation Reform Act of 1995**

 

ThisQuarterly Report on Form 10-Q includes some statements and other informationthat are not historical facts but are “forward-looking statements” as that termis defined in the Private Securities Litigation Reform Act of 1995.  The materials presented can be identified bythe use of forward-looking terminology such as “anticipate,” “believe,” “estimate,”“expect,” “may,” “should,” “view,” or “will” or the negative or othervariations thereof.  We caution that suchstatements are subject to a number of uncertainties, and actual results maydiffer materially. Factors that could affect our actual results include thoseset forth below under Part II, Item 1A, “Risk Factors” and other uncertaintiesdisclosed in our reports filed from time to time with the Securities andExchange Commission.  Unless required bylaw, we undertake no obligation to publicly update or revise any forwardlooking statements, to reflect new information, future events or otherwise.

 

**ITEM 3.****                 ****Quantitative and QualitativeDisclosures about Market Risk**

 

Weare exposed to various risks, including fluctuations in interest and foreigncurrency rates. In the normal course of business, we also face risks that areeither non-financial or non-quantifiable. Such risks principally includecountry risk, credit risk and legal risk and are not discussed or quantified inthe following analyses, as well as risks set forth under the heading “Factorsthat May Affect Future Results” in this Quarterly Report on From 10-Q and inour Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

 

*Interest Rate Risk*

 

Ourfinancial assets and liabilities subject to interest rate risk are cashinvestments, convertible debt, credit facilities and interest rate swaps.  Our primary objective is to preserveprincipal while maximizing yield without significantly increasing risk.  At September 30, 2005, we evaluated theeffect that near-term changes in interest rates would have had on these transactions.  A change of as much as ten percent in theLondon InterBank Offered Rate (“LIBOR”) would have had a favorable impact ofapproximately $0.4 million on net interest income/expense for the currentquarter since the interest income on our cash and cash investments would haveoutweighed additional interest expense on our outstanding debt.  For ourinterest rate contract with Lehman Brothers, an increase of ten percent ininterest rates would have had a favorable impact of $0.3 million, and adecrease of ten percent in interest rates would have had an adverse impact of($0.1) million, on net interest income/expense. These changes would not have had a material impact on our results ofoperations, financial position or cash flows.

 

In December 2001, weentered into an interest rate swap transaction (the “Transaction”) with JPMorgan Chase Bank (the “Bank”), to modify our effective interest payable withrespect to $412.5 million of our $550 million outstanding convertible debt (the“Debt”) (see Notes 4, “Derivative Financial Instruments,” and 8, “Bank Loansand Long-Term Debt”).  At the inceptionof the Transaction, interest rates were lower than that of the Debt and webelieved that interest rates would remain lower for an extended period oftime.  In April 2005, we entered into aninterest rate swap transaction (the “April 2005 Transaction”) with the Bank tomodify the effective interest payable with respect to the remaining $137.5million of the Debt.  The variableinterest rate we have paid since the

 

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inception of the swaphas averaged 2.36 percent, compared to a coupon of 4.25 percent on theDebt.  During the three months endedSeptember 30, 2005 and 2004, this arrangement reduced interest expense by $0.9million and $2.2 million, respectively.

 

Accounted for as fairvalue hedges under SFAS No. 133, the mark-to-market adjustments of the twoTransactions were offset by the mark-to-market adjustments on the Debt,resulting in no material impact to earnings. To measure the effectiveness of the hedge relationship, we used aregression analysis.  To evaluate therelationship of the fair value of the two transactions and the changes in fairvalue of the Debt attributable to changes in the benchmark rate, we discountedthe estimated cash flows by the LIBOR swap rate that corresponds to the Debt’sexpected maturity date.  In addition, ourability to call the Debt was considered in assessing the effectiveness of thehedging relationship.  For those yearsthat were projected to include at least a portion of redemption of theconvertible debentures, we employed a valuation model known as a Monte Carlosimulation.  This simulation allowed usto project probability-weighted contractual cash flows discounted at the LIBORswap rate that corresponded to the Debt’s expected maturity date.  The market value of the December 2001Transaction was a liability of $3.9 million and $0.3 million at September 30,2005 and June 30, 2005, respectively. The market value of the April 2005 Transaction was a liability of $3.8million and $3.4 million at September 30, 2005 and June 30, 2005, respectively.

 

In April 2002, weentered into an interest rate contract (the “Contract”) with an investmentbank, Lehman Brothers (“Lehman”), to reduce the variable interest rate risk ofthe Transaction.  The notional amount ofthe Contract is $412.0 million, representing approximately 75 percent of theDebt. Under the terms of the Contract, we have the option to receive a payoutfrom Lehman covering our exposure to LIBOR fluctuations between 5.5 percent and7.5 percent for any four designated quarters. The market value of the Contract at September 30, 2005 and June 30,2005, respectively, was $0.2 million and $0.1 million, respectively, and wasincluded in other long-term assets. Mark-to-market gains (losses) of $0.1 million and ($0.3) million for thethree months ended September 30, 2005 and 2004, respectively, were charged tointerest expense.

 

*Foreign Currency Risk*

 

Weconduct business on a global basis in several foreign currencies, and atvarious times, we have currency exposure related to the British Pound Sterling,the Euro and the Japanese Yen.  Our riskto the European currencies is partially offset by the natural hedge ofmanufacturing and selling goods in both U.S. dollars and the Europeancurrencies.  Considering our specificforeign currency exposures, we have the greatest exposure to the Japanese Yen,since we have significant yen-based revenues without the yen-basedmanufacturing costs.  We have establisheda foreign-currency hedging program using foreign exchange forward contracts,including the Forward Contract described below, to hedge certain foreigncurrency transaction exposures.  Toprotect against reductions in value and volatility of future cash flows causedby changes in currency exchange rates, we have established revenue, expense andbalance sheet hedging programs.  Currencyforward contracts and local Yen and Euro borrowings are used in these hedgingprograms.  Our hedging programs reduce,but do not always eliminate, the impact of currency exchange rate movements. Weconsidered an adverse near-term change in exchange rates of ten percent for theBritish Pound Sterling, the Euro and the Japanese Yen.  Such a change, after taking into account ourderivative

 

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financialinstruments and offsetting positions, would have resulted in an annualizedadverse impact on income before taxes of less than $1 million for the threemonths ended September 30, 2005 and 2004.

 

InMarch 2001, we entered into a five-year foreign exchange forward contract (the “ForwardContract”) for the purpose of reducing the effect of exchange rate fluctuationson forecasted intercompany purchases by our subsidiary in Japan.  We have designated the Forward Contract as acash flow hedge under which mark-to-market adjustments are recorded inaccumulated other comprehensive income of stockholders’ equity, until theforecasted transactions are recorded in earnings.  Under the terms of the Forward Contract, weare required to exchange 1.2 billion Yen for $11.0 million on a quarterly basisfrom June 2001 to March 2006.  AtSeptember 30, 2005, two quarterly payments of 1.2 billion Yen remained to beswapped at a forward exchange rate of 109.32 Yen per U.S. dollar.  The market value of the forward contract was$0.5 million and $0.1 million at September 30, 2005 and June 30, 2005,respectively, and was included in other long-term assets.  Mark-to-market gains (losses), included inother comprehensive income, net of tax, were $0.3 million and $0.8 million forthe three months ended September 30, 2005 and 2004, respectively.  At September 30, 2005, based on effectivenesstests comparing forecasted transactions through the Forward Contract expirationdate to its cash flow requirements, we do not expect to incur a material chargeto income during the next six months through its maturity.

 

Wehad approximately $111.7 million and $75.9 million in notional amounts offorward contracts not designated as accounting hedges under SFAS No. 133 atSeptember 30, 2005 and June 30, 2005, respectively.  Net realized and unrealized foreign-currencygains recognized in earnings were less than $1 million for the three monthsended September 30, 2005 and 2004.

 

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**ITEM 4****.****                 ****CONTROLS AND PROCEDURES**

 

(a)   Evaluation of disclosure controls andprocedures

 

Theterm “disclosure controls and procedures” refers to the controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by the company in the reports that it files under theSecurities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,summarized and reported, within required time periods.  Our management, with the participation of ourChief Executive Officer, Alexander Lidow, and Chief Financial Officer, MichaelP. McGee, carried out an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(b).

 

Inour September 30, 2005 Quarterly Report on Form 10-Q previously filed onNovember 14, 2005, we originally reported that our disclosure controls andprocedures were effective as of September 30, 2005.  As further discussed in Note 1 to ourconsolidated financial statement included in Item 1 of this Quarterly Report, wehave restated the financial statements, specifically the statement of cashflows, included in this Form 10-Q/A to reflect the amended correctclassification of the excess tax benefits from stock options exercised as cashflows from financing activities rather than operating activities for the threemonths ended September 30, 2005. In light of the restatement, we have reassessedthe effectiveness of our disclosure controls and procedures as of September 30,2005, and have concluded that our disclosure controls and procedures were noteffective as of September 30, 2005 due to the material weakness discussedbelow.

 

Disclosurecontrols and procedures, no matter how well designed and implemented, canprovide only reasonable assurance of achieving an entity’s disclosureobjectives.  The likelihood of achievingsuch objectives is affected by limitations inherent in disclosure controls andprocedures.  These include the fact thathuman judgment in decision-making can be faulty and that breakdowns in internalcontrol can occur because of human failures such as simple errors, mistakes orintentional circumvention of the established processes.

 

(b)   Material weakness in internal controlover financial reporting

 

Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.

 

Asof September 30, 2005, we did not maintain effective controls over thepreparation, review, presentation and disclosure of our consolidated statementof

 

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cashflows.  Specifically, the controls werenot effective to ensure that cash flows from the excess tax benefits from stockoption exercised were presented as cash flows from financing activities in theconsolidated statement of cash flows in accordance with generally acceptedaccounting principles.  This controldeficiency resulted in the restatement of our interim consolidated financialstatements for the first quarter of fiscal 2006.  In addition, this control deficiency couldresult in a misstatement of our cash flows from operating activities and cashflows from financing activities that would result in a material misstatement toour annual or interim consolidated statements of cash flows that would not beprevented or detected.  Accordingly, wehave determined that this control deficiency constitutes a materialweakness.  

 

Plan for remediation of material weakness 

 

Duringthe fourth quarter of fiscal 2006, we are implementing enhanced procedures andcontrols which include improved training and review processes to ensure properpreparation, review, presentation and disclosure of amounts included in ourconsolidated statement of cash flows.

 

(c)   Changes in internal controls

 

Therewas no change in our internal controls during the fiscal first quarter 2006that has materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

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### **PARTII.**                OTHER INFORMATION

 

**ITEM 1A.****              ****Risk Factors**

 

***Changes in end market demand ordownturns in the highly cyclical semiconductor industry could affect ouroperating results and the value of our business.***

 

Wemay experience significant changes in our profitability as a result ofvariations in sales, changes in product mix sought by customers, seasonality,price competition for orders and the costs associated with the introduction ofnew products and start-up of new facilities and additional capacity lines. Themarkets for our products depend on continued demand with the producttechnological platforms and in the mix we plan for and produce in theinformation technology, consumer, industrial, aerospace and defense andautomotive markets.  Changes in thedemand mix, needed technologies and these end markets may adversely affect ourability to match our products, inventory and capacity to meet customer demandand could adversely affect our operating results and financial condition.

 

Inaddition, the semiconductor industry is highly cyclical and the value of ourbusiness may decline during the down portion of these cycles.  We have experienced these conditions in ourbusiness in the recent past and we cannot predict when we may experience suchdownturns in the future.  Futuredownturns in the semiconductor industry, or any failure of the industry torecover fully from its recent downturns could seriously impact our revenues andharm our business, financial condition and results of operations. Althoughmarkets for our semiconductors appear stable, we cannot assure you that theywill continue to be stable or that our markets will not experience renewed,possibly more severe and prolonged, downturns in the future.

 

***Consumer and/or corporate spendingfor the end market applications which incorporate our products may be reduceddue to increased oil prices or otherwise.***

 

Ourrevenues and gross margin guidance is dependent on a certain level of consumerand/or corporate spending for the specific mix of products we produce and havethe capacity to produce. If our projections of these expenditures fail tomaterialize, or materialize in a mix different from that for which we anticipateand build inventory, whether due to reduced consumer or corporate spending fromincreased oil prices or otherwise, our revenues and gross margin could beadversely impacted.

 

***We maintain backlog of customerorders that is subject to cancellation, reduction or delay in deliveryschedules, which may result in lower than expected revenues.***

 

Withcertain exceptions related to products within our Aerospace and Defense andNon-Aligned Product segments, we manufacture primarily pursuant to purchaseorders for current delivery or to forecast, rather than pursuant to long-termsupply contracts.  The semiconductorindustry is subject to rapid changes in customer outlooks or unexpected buildups of inventory in the supply channel as a result of shifts in end market demandgenerally or in the mix of that demand. Accordingly, many of these purchase orders or forecasts may be revisedor canceled without penalty.  As aresult, we must commit resources to the manufacturing of products, and aspecific mix of products, without any advance purchase commitments fromcustomers.  Our inability to sellproducts after we

 

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devotesignificant resources to build them could have a material adverse effect on ourlevels of inventory, our revenues and our operating results generally.

 

***We build and maintain inventory inorder to meet our historic and projected needs, but cannot guarantee that ourinventory will be adequate to meet our needs or will be usable at a futuredate.***

 

Atthe end of fiscal quarter ended September 30, 2005, we reported net inventoriesof approximately $194 million. We build and maintain inventory in order to meetour historic and projected needs, but cannot guarantee that the inventory webuild will be adequate or the right mix of products to meet market demand.  If we do not project and build the proper mixand amount of inventory, our revenues and gross margins may be adverselyaffected.  Additionally, if we produce orhave produced inventory that does not meet current or future demand, we maydetermine at some point that certain of the inventory may only be sold at adiscount or may not be sold at all, resulting in the reduction in the carryingvalue of our inventory and an adverse effect on our financial condition andoperating results.

 

***The semiconductor business is highlycompetitive and increased competition could adversely affect the price of ourproducts and otherwise reduce the value of an investment in our company.***

 

Thesemiconductor industry, including the sectors in which we do business, ishighly competitive. Competition is based on price, product performance,technology platform, product availability, quality, reliability and customerservice. Price pressures often emerge as competitors attempt to gain a greatermarket share by lowering prices or by offering a more desirable technologicalsolution.  Pricing and other competitivepressures can adversely affect our revenues and gross margin, and hence, ourprofitability.  We also compete invarious markets with companies of various sizes, many of which are larger andhave greater financial and other resources than we have, and thus they may bebetter able to withstand adverse economic or market conditions. In addition,companies not currently in direct competition with us may introduce competingproducts in the future.

 

***Failure to timely complete ourexpansion plans for our wafer fabrication facility could adversely affect ourrevenue growth and ability to achieve our margin targets.***

 

Weare operating in the mid to high 90s percent of our worldwide semiconductorfabrication and assembly/module manufacturing capacities, without taking intoaccount subcontract or foundry capacity. We are also expanding our most advanced wafer fabrication facility inNewport, Wales to provide additional capacity to support the growth of ourFocus Products.  We expect to startproduction on certain of such new facilities by the end of the December 2005quarter, and expect to complete our expansion of that facility in aboutcalendar year 2006. If we fail to timely execute on those plans in advance ofdemand for our products, that failure could adversely affect our revenue growthand ability to achieve our margin targets. We cannot assure you that we will complete our plans timely, that theramp-up of the expanded facilities will occur effectively and without error ordelay, or that sufficient third party sources would be available to satisfy ourability to meet customer demand.  Even ifwe fully execute and implement our plans, we cannot guarantee that we will havesufficient worldwide semiconductor fabrication and

 

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assembly/modulemanufacturing capacities to meet demand and there may be unforeseen factorsthat could adversely impact our operating results.

 

***Delaysin initiation of production at new facilities, implementing new productiontechniques or resolving problems associated with technical equipmentmalfunctions could adversely affect our manufacturing efficiencies***.

 

Ourmanufacturing efficiency has been and will be an important factor in our futureprofitability, and we may not be able to maintain or increase our manufacturingefficiency.  Our manufacturing andtesting processes are complex, require advanced and costly equipment and arecontinually being modified in our efforts to improve yields and productperformance. Difficulties in the manufacturing process can lower yields.  Technical or other problems could lead toproduction delays, order cancellations and lost revenue.  In addition, any problems in achievingacceptable yields, construction delays, or other problems in upgrading orexpanding existing facilities, building new facilities, problems in bringingother new manufacturing capacity to full production or changing our processtechnologies, could also result in capacity constraints, production delays anda loss of future revenues and customers. Our operating results also could be adversely affected by any increasein fixed costs and operating expenses related to increases in productioncapacity if net sales in the appropriate mix do not increase proportionately,or in the event of a decline in demand for some or all of our products.

 

***If we are unable to implement ourbusiness strategy, our revenues and profitability may be adversely affected.***

 

Ourfuture financial performance and success are largely dependent on our abilityto implement our business strategy successfully of transforming our business toone led by our Focus Products and succeeding on our plans to restructure ourcompany. We cannot assure you that we will continue to successfully implementour business strategy or that implementing our strategy will sustain or improveour results of operations.

 

***The failure to execute on our plansto divest or discontinue product lines that are not consistent with ourbusiness objectives, and replace those revenues with higher-margin productsales could adversely affect our operating results.***

 

Wehave announced the divestiture, discontinuation or change in business model ofcertain of our Non-Focus Products that are not consistent with our businessobjectives or margin targets.  Our planis to replace the divested or discontinued revenues with (or change thebusiness model to achieve) higher-margin product sales and target gross marginof greater 50 percent.  We cannot assureyou that we will complete our plans or achieve our target gross margin.  The activities involved with the divestiture,discontinuation and re-alignment of product sales could involve changes tovarious aspects of our business which could adversely affect our profitabilityto an extent we have not anticipated. Even if we fully execute and implement our plans, there may beunforeseen factors that could adversely impact our operating results.

 

***The failure to implement andcomplete our restructuring programs and accomplish planned cost reductionscould adversely affect our business.***

 

InDecember 2002, we announced a number of restructuring initiatives.  Our goal was to reposition our company tobetter fit the market conditions, de-emphasize our commodity

 

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businessand accelerate the move to what we categorize as our proprietary products,which refer to our Power Management ICs, Advanced Circuit Devices, and PowerSegments.  The restructuring includesconsolidating and closing certain manufacturing sites, upgrading equipment andprocesses in designated facilities and discontinuing production in a number ofothers that cannot support more advanced technology platforms or products.  The restructuring also includes loweringoverhead costs across our support organization. We cannot assure you that theserestructuring initiatives will achieve their goals, accomplish the cost reductionsplanned, or be accomplished within our expectations as to the amount of chargesto be taken in connection with that activity. Additionally, because our restructuring activities involve changes tomany aspects of our business, the activities could adversely affectproductivity and sales to an extent we have not anticipated.  Even if we fully execute and implement theserestructuring activities, and they generate the anticipated cost savings, theremay be other unforeseen factors that could result in the amount of charges tobe taken in connection with our restructuring activities or otherwise adverselyimpact our profitability and business.

 

***Our products may be found to be defective and, as a result, productclaims may be asserted against us, which may harm our business and ourreputation with our customers and significantly adversely affect our resultsand financial condition.***

 

Ourproducts are typically sold at prices that are significantly lower than thecost of the equipment or other goods in which they are incorporated.  Although we maintain rigorous quality controlsystems, we shipped large quantities of semiconductor devices in 2004 to a widerange of customers around the world, in a variety of high profile and criticalapplications.  In the ordinary course ofour business we receive warranty claims for some of these products that aredefective, or that do not perform to published specifications.  Since a defect or failure in our productscould give rise to failures in the end products that incorporate them (andconsequential claims for damages against our customers from their customersdepending on applicable law and contract), we often need to defend againstclaims for damages that are disproportionate to the revenues and profits wereceive from the products involved.  Inaddition, our ability to reduce such liabilities may be limited by the laws orthe customary business practices of the countries where we do business.  Even in cases where we do not believe we havelegal liability for such claims, we may choose to pay for them to retain acustomer’s business or goodwill or to settle claims to avoid protractedlitigation.  Our results of operationsand business would be adversely affected as a result of a significant allegedquality or performance issues in our products, if we are required or choose topay for the damages that result. Although we currently have product liability and other types ofinsurance, we have certain deductibles and exclusions to such policies and maynot have sufficient insurance coverage. We also may not have sufficient resources to satisfy all possibleproduct liability claims.  In addition,any perception that our products are defective would likely result in reducedsales of our products, loss of customers and harm to our business andreputation.

 

***While we attempt to monitor the credit worthiness of our customers, wemay from time to time be at risk due to the adverse financial condition of oneor more customers.***

 

Wehave established procedures for the review and monitoring of the creditworthiness of our customers and/or significant amounts owing from customers.However, from time to time, we may find that despite our efforts one or more ofour customers become

 

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insolventor face bankruptcy proceedings (Delphi, one of our largest OEM customers, iscurrently one such customer). Such events could have an adverse effect on ouroperating results if our receivables applicable to that customer becomeuncollectible in whole or in part, or if our customers’ financial situationresult in reductions in whole or in part of our ability to continue to sell ourproducts or services to such customers at the same levels or at all.

 

***If some original equipment manufacturers (“OEMs”)do not design our products into their equipment, a portion of our revenue maybe adversely affected.***

 

A“design win” from a customer does not guarantee future sales to that customer.We also are unable to guarantee that we will be able to convert design winsinto sales for the life of any particular program, or at all, or that therevenues from such wins would be significant. We also cannot guarantee that we will achieve the same level of designwins as we have in the past, or at all. Without design wins from OEMs, we would only be able to sell our productsto these OEMs as a second source, if at all. Once an OEM designs anothersupplier’s semiconductor into one of its product platforms, it is moredifficult for us to achieve future design wins with that OEM’s product platformbecause changing suppliers involves significant cost, time, effort and risk.Achieving a design win with a customer does not ensure that we will receivesignificant revenue from that customer and we may be unable to convert designwins into actual sales.

 

***Corporate investment and expendituresin the Information Technology sector and in Information Technology purchasesmay not materialize as we have planned.***

 

Ourrevenues and gross margin guidance is dependent on a certain level of corporateinvestment and expenditures in the Information Technology sector and inInformation Technology purchases. If our projections of these expenditures failto materialize, whether due to increased oil prices or otherwise, our revenuesand gross margin could be adversely impacted.

 

***New technologies could result in thedevelopment of new products and a decrease in demand for our products, and wemay not be able to develop new products to satisfy changes in demand.***

 

Ourfailure to develop new technologies or react to changes in existingtechnologies could materially delay our development of new products, whichcould result in decreased revenues and a loss of market share to ourcompetitors. Rapidly changing technologies and industry standards, along withfrequent new product introductions, characterize the semiconductor industry. Asa result, we must devote significant resources to research and development. Ourfinancial performance depends on our ability to design, develop, manufacture,assemble, test, market and support new products and enhancements on a timelyand cost-effective basis. We cannot assure you that we will successfullyidentify new product opportunities and develop and bring new products to marketin a timely and cost-effective manner, or that products or technologiesdeveloped by others will not render our products or technologies obsolete ornoncompetitive. A fundamental shift in technologies in our product marketscould have a material adverse effect on our competitive position within theindustry. In addition, to remain competitive, we must continue to reduce diesizes and improve manufacturing yields. We cannot assure you that we canaccomplish these goals.

 

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***Our failure to obtain or maintainthe right to use certain technologies may negatively affect our financialresults.***

 

Ourfuture success and competitive position may depend in part upon our ability toobtain or maintain certain proprietary technologies used in our principalproducts, which is achieved in part by defending and maintaining the validityof our patents and defending claims by our competitors of intellectual propertyinfringement. We license certain patents owned by others. We have also beennotified that certain of our products may infringe the patents of thirdparties. Although licenses are generally offered in such situations, we cannoteliminate the risk of litigation alleging patent infringement.  We are currently a defendant in intellectualproperty claims and we could become subject to other lawsuits in which it is allegedthat we have infringed upon the intellectual property rights of others.

 

Ourinvolvement in existing and future intellectual property litigation couldresult in significant expense, adversely affect sales of the challenged productor technologies and divert the efforts of our technical and managementpersonnel, whether or not such litigation is resolved in our favor. If any suchinfringements exist, arise or are claimed in the future, we may be exposed tosubstantial liability for damages and may need to obtain licenses from thepatent owners, discontinue or change our processes or products or expendsignificant resources to develop or acquire non-infringing technologies. Wecannot assure you that we would be successful in such efforts or that such licenseswould be available under reasonable terms. Our failure to develop or acquirenon-infringing technologies or to obtain licenses on acceptable terms or theoccurrence of related litigation itself could have a material adverse effect onour operating results and financial condition.

 

***Our ongoing protection and relianceon our intellectual property assets expose us to risks and continued levels ofrevenues in our IP segment is subject to our ability to maintain currentlicenses, licensee and market factors not within our control and our ability toobtain new licenses.***

 

Wehave traditionally relied on our patents and proprietary technologies. Patentlitigation settlements and royalty income substantially contribute to ourfinancial results. Enforcement of our intellectual property rights is costly,risky and time-consuming. We cannot assure you that we can successfullycontinue to protect our intellectual property rights, especially in foreignmarkets. Our key MOSFET patents expire between 2005 and 2010, although ourbroadest MOSFET patents expire in 2007 and 2008.

 

Ourroyalty income is largely dependent on the following factors: the remainingterms of our MOSFET patents; the continuing introduction and acceptance ofproducts that are not covered by our patents; remaining covered under unexpiredMOSFET patents; the defensibility and enforceability of our patents; changes inour licensees’ unit sales, prices or die sizes; the terms, if any, upon whichexpiring license agreements are renegotiated; and our ability to obtainrevenues from new licensing opportunities. Market conditions and mix oflicensee products, as well as sales of non-infringing devices can significantlyadversely affect royalty income.  We alsocannot guarantee that we can obtain new licenses to offset reductions inroyalties from existing licenses. While we try to predict the effects of thesefactors and efforts, often there are variations or factors that cansignificantly affect results different from that predicted.  Accordingly, we cannot guarantee that ourpredictions of our IP segment revenues will be consistent with actualresults.  We also cannot guaranty thatour royalty income will continue at levels consistent with prior

 

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periods.  Any decrease in our royalty income could havea material adverse effect on our operating results and financial condition.

 

***Our international operations exposeus to material risks.***

 

We expect revenuesfrom foreign markets to continue to represent a significant portion of totalrevenues. We maintain or contract with significant operations in foreigncountries.  Among others, the followingrisks are inherent in doing business internationally: changes in, orimpositions of, legislative or regulatory requirements, including tax laws inthe United States and in the countries in which we manufacture or sell ourproducts; trade restrictions; transportation delays; work stoppages; economicand political instability; and foreign currency fluctuations.

 

Inaddition, certain of our operations and products are subject to restrictions orlicensing under U.S. export laws.  Ifsuch laws or the implementation of these restrictions change, or if in thecourse of operating under such laws we become subject to claims, we cannot assureyou that such factors would not have a material adverse effect on our financialcondition and operating results.

 

Inaddition, it is more difficult in some foreign countries to protect ourproducts or intellectual property rights to the same extent as is possible inthe United States. Therefore, the risk of piracy or misuse of our technologyand products may be greater in these foreign countries. Although we have notexperienced any material adverse effect on our operating results as a result ofthese and other factors, we cannot assure you that such factors will not have amaterial adverse effect on our financial condition and operating results in thefuture.

 

***Delays in initiation of productionat new facilities, implementing new production techniques or resolving problemsassociated with technical equipment malfunctions could adversely affect ourmanufacturing efficiencies.***

 

Ourmanufacturing efficiency will be an important factor in our futureprofitability, and we cannot assure you that we will be able to maintain orincrease our manufacturing efficiency to the same extent as our competitors.Our manufacturing processes are highly complex, require advanced and costlyequipment and are continuously being modified in an effort to improve yieldsand product performance. Impurities, defects or other difficulties in themanufacturing process can lower yields.

 

Inaddition, as is common in the semiconductor industry, we have from time to timeexperienced difficulty in beginning production at new facilities or ineffecting transitions to new manufacturing processes. As a consequence, we haveexperienced delays in product deliveries and reduced yields. We may experiencemanufacturing problems in achieving acceptable yields or experience productdelivery delays in the future as a result of, among other things, capacityconstraints, construction delays, upgrading or expanding existing facilities orchanging our process technologies, any of which could result in a loss offuture revenues. Our operating results could also be adversely affected by theincrease in fixed costs and operating expenses related to increases inproduction capacity if revenues do not increase proportionately.

 

Weare transferring manufacturing from our Krefeld, Germany to our Swansea, Walesand Tijuana, Mexico facilities.  We areramping up our Newport, Wales facility, and

 

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anticipateto transfer our El Segundo manufacturing to the Newport, Wales facility byfiscal year end June 2006 or sooner.  Wehave experienced some delays and/or technical problems in moving our variousfacilities.  Continued delays and/ortechnical problems in completing the remaining transfers could lead toincreased costs, reduced yields, delays in product deliveries, ordercancellations and/or lost revenue.

 

***Interruptions, delays or costincreases affecting our materials, parts or equipment may impair ourcompetitive position and our operations.***

 

Ourmanufacturing operations depend upon obtaining adequate supplies of materials,parts and equipment, including silicon, mold compounds and leadframes, on atimely basis from third parties. Our results of operations could be adverselyaffected if we were unable to obtain adequate supplies of materials, parts andequipment in a timely manner from our third party suppliers or if the costs ofmaterials, parts or equipment increase significantly. From time to time,suppliers may extend lead times, limit supplies or increase prices due tocapacity constraints or other factors. We have a limited number of suppliersfor some materials, parts and equipment, and any interruption could materiallyimpair our operations.

 

Wemanufacture a substantial portion of our wafer product at our Temecula,California and Newport, Wales facilities. Any disruption of operations at thosefacilities could have a material adverse effect on our business, financialcondition and results of operations.

 

Also,some of our products are assembled and tested by third party subcontractors. Wedo not have any long-term assembly agreements with these subcontractors. As aresult, we do not have immediate control over our product delivery schedules orproduct quality. Due to the amount of time often required to qualify assemblersand testers and the high cost of qualifying multiple parties for the sameproducts, we could experience delays in the shipment of our products if we areforced to find alternative third parties to assemble or test them. Any productdelivery delays in the future could have a material adverse effect on ouroperating results and financial condition. Our operations and ability tosatisfy customer obligations could be adversely affected if our relationshipswith these subcontractors were disrupted or terminated.

 

***We must commit resources to product manufacturingprior to receipt of purchase commitments and could lose some or all of theassociated investment.***

 

Wesell products primarily pursuant to purchase orders for current delivery or toforecast, rather than pursuant to long-term supply contracts. Many of thesepurchase orders or forecasts may be revised or canceled without penalty. As aresult, we must commit resources to the manufacturing of products without anyadvance purchase commitments from customers. Our inability to sell productsafter we devote significant resources to them could have a material adverseeffect on our levels of inventory and our business, financial condition andresults of operations.

 

***We receive a significant portion ofour revenues from a small number of customers and distributors.***

 

Historically,a significant portion of our revenues has come from a relatively small numberof customers and distributors. The loss or financial failure of any significantcustomer or

 

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distributor,any reduction in orders by any of our significant customers or distributors, orthe cancellation of a significant order, could materially and adversely affectour business.

 

***We may fail to attract or retain thequalified technical, sales, marketing and managerial personnel required tooperate our business successfully.***

 

Ourfuture success depends, in part, upon our ability to attract and retain highlyqualified technical, sales, marketing and managerial personnel. Personnel withthe necessary semiconductor expertise are scarce and competition for personnelwith these skills is intense. We cannot assure you that we will be able toretain existing key technical, sales, marketing and managerial employees orthat we will be successful in attracting, assimilating or retaining otherhighly qualified technical, sales, marketing and managerial personnel in thefuture. If we are unable to retain existing key employees or are unsuccessfulin attracting new highly qualified employees, our business, financial conditionand results of operations could be materially and adversely affected.

 

***We are acquiring and may continue toacquire other companies and may be unable to successfully integrate suchcompanies with our operations.***

 

Wehave acquired several companies over the past three years.  We may continue to expand and diversify ouroperations with additional acquisitions. If we are unsuccessful in integratingthese companies with our operations, or if integration is more difficult thananticipated, we may experience disruptions that could have a material adverseeffect on our business, financial condition and results of operations.

 

***The price of our common stock hasfluctuated widely in the past and may fluctuate widely in the future.***

 

Ourcommon stock, which is traded on The New York Stock Exchange, has experiencedand may continue to experience significant price and volume fluctuations thatcould adversely affect the market price of our common stock without regard toour operating performance.  In addition,we believe that factors such as quarterly fluctuations in financial results,earnings below analysts’ estimates and financial performance and otheractivities of other publicly traded companies in the semiconductor industrycould cause the price of our common stock to fluctuate substantially.  In addition, in recent periods, our commonstock, the stock market in general and the market for shares of semiconductorindustry-related stocks in particular have experienced extreme pricefluctuations which have often been unrelated to the operating performance ofthe affected companies.  Any similarfluctuations in the future could adversely affect the market price of ourcommon stock.

 

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***Our investments in certain securitiesexpose us to market risks.***

 

Weinvest excess cash in marketable securities consisting primarily of commercialpaper, corporate notes, corporate bonds and governmental securities.  We also hold as strategic investments thecommon stock of two publicly-traded Japanese companies, one of which is NihonInter Electronics Corporation.  The valueof these investments is subject to market fluctuations, which if adverse, couldhave a material adverse effect on our operating results and financialcondition.

 

***If we fail to maintain an effective systemof internal controls or discover material weaknesses in our internal controlsover financial reporting, we may not be able to report our financial resultsaccurately or detect fraud, which could harm our business and the trading priceof our stock.***

 

Wehave disclosed that we have discovered a material weakness in our internalcontrol over financial reporting. While we are implementing enhanced proceduresand controls in our fourth quarter of fiscal 2006 to cure the material weaknessand management believes that it will cure such weakness within areasonable period of time, wecannot assure you that such procedures will timely cure such weakness.

 

Effectiveinternal controls are necessary for us to produce reliable financial reportsand are important in our effort to prevent financial fraud. We are required toperiodically evaluate the effectiveness of the design and operation of ourinternal controls. These evaluations may result in the conclusion thatenhancements, modifications or changes to our internal controls are necessaryor desirable.  As noted with thedisclosed material weakness, while management evaluates the effectiveness ofour internal controls on a regular basis, we cannot provide absolute assurancethat these controls will always be effective. There are inherent limitations onthe effectiveness of internal controls including collusion, managementoverride, and failure of human judgment. Because of this, control procedures andfinancial reporting practices are designed to reduce rather than eliminatebusiness risks. If we fail to maintain an effective system of internal controlsor if, and for so long as management or our independent registered publicaccounting firm were to discover material weaknesses in our internal control overfinancial reporting (or if our system of controls and audits result in a changeof practices or new information or conclusions about our financial reportinglike the disclosed material weakness), we may be unable to produce reliable financialreports or prevent fraud and it could harm our financial condition and resultsof operations and result in loss of investor confidence and a decline in ourstock price.

 

***Large potential environmentalliabilities, including those relating to a former operating subsidiary, mayadversely impact our financial position.***

 

Federal,state, foreign and local laws and regulations impose various restrictions andcontrols on the discharge of materials, chemicals and gases used in oursemiconductor manufacturing processes. In addition, under some laws andregulations, we could be held financially responsible for remedial measures ifour properties are contaminated or if we send waste to a landfill or recyclingfacility that becomes contaminated, even if we did not cause the contamination.Also, we may be subject to common law claims if we release substances thatdamage or harm third parties. Further, we cannot assure you that changes inenvironmental laws or regulations will not require additional investments in capitalequipment or the implementation of additional compliance programs in thefuture. Any failure to comply with environmental laws or regulations couldsubject us to serious liabilities and could have a material adverse effect onour operating results and financial condition.

 

***Some of our facilities are locatednear major earthquake fault lines.***

 

Ourcorporate headquarters, one of our manufacturing facilities, one of ourresearch facility and certain other critical business operations are locatednear major earthquake fault lines. We could be materially and adverselyaffected in the event of a major

 

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earthquake.Although we maintain earthquake insurance, we can give you no assurance that wehave obtained or will maintain sufficient insurance coverage.

 

***There can be no assurance that wewill have sufficient capital resources to make necessary investments inmanufacturing technology and equipment.***

 

Thesemiconductor industry is capital intensive. Semiconductor manufacturingrequires a constant upgrading of process technology to remain competitive, asnew and enhanced semiconductor processes are developed which permit smaller,more efficient and more powerful semiconductor devices. We maintain certain ofour own manufacturing, assembly and test facilities, which have required andwill continue to require significant investments in manufacturing technologyand equipment. We are also attempting to add the appropriate level and mix ofcapacity to meet our customers’ future demand. There can be no assurance thatwe will have sufficient capital resources to make necessary investments inmanufacturing technology and equipment. Although we believe that anticipatedcash flows from operations, existing cash reserves and other equity or debtfinancings that we may obtain will be sufficient to satisfy our future capitalexpenditure requirements, there can be no assurance that this will be the caseor that alternative sources of capital will be available to us on favorableterms or at all.

 

***Unforeseen changes in marketconditions, tax laws and other factors could impact our judgment about therealizability of our deferred tax assets.***

 

Wehave made certain judgments regarding the realizability of our deferred taxassets.  In accordance with SFAS No. 109,“Accounting for Income Taxes”, the carrying value of the net deferred taxassets is based on the belief that it is more likely than not that we willgenerate sufficient future taxable income in certain jurisdictions to realizethese deferred tax assets, after considering all available positive andnegative evidence.  If our assumptionsand estimates change in the future given unforeseen changes in marketconditions, tax laws or other factors, then the valuation allowances establishedmay be increased, resulting in increased income tax expense.  Conversely, if we are ultimately able to useall or a portion of the deferred tax assets for which a valuation allowance hasbeen established, then the related portion of the valuation allowance will bereleased to income as a credit to income tax expense.

 

***Final outcomes from the various taxauthorities’ audits are difficult to predict and an unfavorable finding maynegatively impact our financial results.***

 

Asis common with corporations of our size, we are from time to time under auditby various taxing authorities.  It isoften difficult to predict the final outcome or the timing of resolution of anyparticular tax matter.  We have providedcertain tax reserves which have been included in the determination of ourfinancial results.  However, unpredictedunfavorable settlements may require additional use of cash and negativelyimpact our financial position or results of operations.

 

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***Terrorist attacks, such as thosethat took place on September 11, 2001, or threats or occurrences of otherterrorist activities whether in the United States or internationally may affectthe markets in which our common stock trades, the markets in which we operateand our profitability.***

 

Terroristattacks, such as those that took place on September 11, 2001, or threats oroccurrences of other terrorist or related activities, whether in the UnitedStates or internationally, may affect the markets in which our common stocktrades, the markets in which we operate and our profitability.  Future terrorist or related activities couldaffect our domestic and international sales, disrupt our supply chains andimpair our ability to produce and deliver our products.  Such activities could affect our physicalfacilities or those of our suppliers or customers, and make transportation ofour supplies and products more difficult or cost prohibitive.  Due to the broad and uncertain effects thatterrorist attacks have had on financial and economic markets generally, wecannot provide any estimate of how these activities might affect our futureresults.

 

***Natural disasters, like thoserelated to Hurricanes Katrina and Wilma, or occurrences of other naturaldisasters whether in the United States or internationally may affect themarkets in which our common stock trades, the markets in which we operate andour profitability.***

 

Naturaldisasters, like those related to Hurricanes Katrina and Wilma, or threats oroccurrences of other similar events, whether in the United States orinternationally, may affect the markets in which our common stock trades, themarkets in which we operate and our profitability.  Such events could affect our domestic and internationalsales, disrupt our supply chains, and impair our ability to produce and deliverour products.  While we do not havefacilities located near the affected areas, such activities could affectphysical facilities, primarily for raw materials and process chemicals andgases of our suppliers or customers, and make transportation of our suppliesand products more difficult or cost prohibitive.  Due to the broad and uncertain effects thatnatural events have had on financial and economic markets generally, we cannotprovide any estimate of how these activities might affect our future results.

 

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**ITEM 2.****                 ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

On November 1, 2005, our Boardof Directors authorized a stock repurchase program, under which up to $100million of our common shares may be repurchased without prior notice, throughblock trades or otherwise.  We intendthat any shares repurchased will be held as treasury shares that may be usedfor general corporate purposes.  The followinglists the number of the shares purchased under the repurchase program and, asof each month, the number of shares that may yet be repurchased under announcedplans (in thousands):

 
| **Period**                                 | ** ** | **(a) Total Number  of Shares (or  Units) Purchased** | ** ** | **(b) Average Price  Paid per Share (or  Unit)** | ** ** | **(c) Total Number  of Shares (or  Unites) Purchased  as part of Publicly  Announced Plans  or Programs** | ** ** | **(d) Maximum  Number (or  Approximate  Dollar Value) of  Shares (or Units)  that can be  Purchased Under  the Plans or  Programs** | ** **  |
|--------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|-------------|
| ** **                                 | ** ** | ** **                                            | ** ** | ** **                                       | ** ** | ** **                                                                                                | ** ** | ** **                                                                                                                          | ** **  |
| Month #1 (November 1 to November 11, 2005) |       | 0                                                     |       | 0                                                |       | 0                                                                                                         |       | $                                                                                                                                   | 100 million |   |
|                                            |            |                                                       |            |                                                  |            |                                                                                                           |            |                                                                                                                                     |             |  |

 

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**ITEM 6.****                                                    ****Exhibits**

 

Index:

 

3.1           Certificate of Incorporation, as amended todate (incorporated by reference to Exhibit 3.1 to the Company’s RegistrationStatement on Form S-8 filed with the Commission on July 19, 2005; RegistrationNo. 333-117489)

 

3.2           Bylaws as Amended (incorporated by referenceto Exhibit 3.2 to the Company’s quarterly report on Form 10-Q filed with the Commissionon November 11, 2005)

 

11.1         Statement Regarding Computation of Per ShareEarnings (incorporated by reference to Note 2, “Net Income Per Common Share”,of the Notes to Unaudited Consolidated Financial Statements contained herein)

 

31.1         Certification Pursuant to Rule 13a-14(a) ofthe Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

31.2         Certification Pursuant to Rule 13a-14(a) ofthe Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

 

32.1         Certification Pursuant to 18 U.S.C. 1350,Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2         Certification Pursuant to 18 U.S.C. 1350,Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 

**INTERNATIONAL RECTIFIER CORPORATION**

**Registrant**

 

 
| May  17, 2006 | /s/  Michael P. McGee                        |   |
|---------------|----------------------------------------------|--------|
|          | Michael P. McGee                             |
|          | Executive  Vice President,                   |
|          | Chief  Financial Officer                     |
|          | (Duly  authorized officer and                |
|          | principal  financial and accounting officer) |

 

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