International Rectifier Corporation F4Q09 (Qtr End 06/28/09) Earnings Call Transcript

Aug.25.09 | About: International Rectifier (IRF)

International Rectifier Corporation (NYSE:IRF)

F4Q09 Earnings Call

August 25, 2009 5:15 pm ET

Executives

Portia Switzer – VP, IR

Ilan Daskal – CFO

Oleg Khaykin – President and CEO

Analysts

Ramesh Misra – Brigantine Advisors

James Schneider – Goldman Sachs

Steve Smigie – Raymond James

Craig Berger – FBR Capital Markets

Brian Piccioni – BMO Capital Markets

Analyst for Uchi Orji – UBS

Terence Whalen – Citi

Operator

Welcome everyone to the International Rectifier fiscal year fourth quarter results conference call. (Operator instructions) I will now turn the call over to our host, Ms. Portia Switzer. Madam, you may begin your conference.

Portia Switzer

Thank you, operator. Good afternoon, everyone and welcome to IR’s 2009 Fiscal Year fourth quarter conference call. If you have not already read through our press release and SEC filing, they can be found on our website at investor.irf.com in the investor relations section. The 2009 annual report on form 10K is expected to be filed with the SEC this Thursday, August 27, 2009 and can be accessed using the same web address and the link is also listed on our press release.

This call is being broadcast over the Internet and can be accessed through IR’s web address. A conference call replay will also be available through September 1, 2009. With me today are Oleg Khaykin, Chief Executive Officer and Ilan Daskal, Chief Financial Officer. After our prepared comments we will open the line for questions.

Our discussion today will include some forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. We caution that such statements are subject to a number of uncertainties and actual results may differ materially. Risk factors that could affect the company’s actual results are included in our press release issued today and the company’s filings with the SEC, including the most recent Forms 10K and 10Q.

Now Ilan will discuss our most recent financials. Ilan?

Ilan Daskal

Thank you, Portia. Good afternoon and thank you for joining us. Before I begin I would like to briefly provide some information regarding a change in our method of accounting for patent related costs. During the fourth quarter the company changed its method for accounting for legal fees related to patent applications. Previously the company had capitalized and amortized such fees to selling, general and administrative expense over the life of the patent. Now, such fees will be expensed as incurred. The effect of the change was retroactively applied to prior periods. The change in SG&A expense and net income for each of the past seven quarters is attached in our press release issued earlier today.

In addition, during the first three quarters of fiscal year 2009 the company’s statement of cash flows were misstated in that cash flows used in operating activities were better than had been previously reported with the offsetting amount being recorded in the effect of exchange rate changes on cash and cash equivalents. The correction to each of those two lines of the prior statement of cash flows are included in our press release issued earlier today.

For the fourth quarter fiscal 2009 IR reported total revenue of $159.6 million. Our IP segment revenue was $2.7 million and our transition services revenue for the quarter was also $2.7 million. Excluding IP and transition services segments our ongoing customer segment revenue was $154.1 million, up approximately 16.2% sequentially from $132.6 million last quarter.

We saw an increase across four of our five ongoing business segments driven mainly by inventory management and also an increase in end demand toward the second half of the quarter. On a GAAP basis, gross margin was 20.8%. This is down from the prior quarter gross margin of 21.1%. Excluding our IP and transition services segment gross margin in our five ongoing customer segments was 20.9%, down from 21.5% last quarter. Our gross margin in the June quarter was negatively impacted by inventory sold in the quarter that had the higher unit cost as it was produced during periods when our manufacturing utilization was very low.

Also, during the June quarter we saw a higher mix of lower margin consumer products. These negative impacts to gross margin were partially offset by higher than expected revenue. We reported net income of $29.1 million or $0.41 per share compared with a net loss of $82.6 million or $1.15 per share in the prior quarter. Included in the June quarter net income was a $96.1 million gain on the PCS divestiture related to the settlement with Vishay, a $45 million charge related to the agreement in principle to settle the pending securities class action litigation, $9.6 million tax benefit, a $9.5 million insurance reimbursement and a $2 million investment impairment.

For the June quarter R&D expenses were $26.2 million. We expect R&D to be slightly higher over the next few quarters in view of new products and technology production and a higher amount of engineering builds.

Selling, general and administrative expenses were $83 million. Excluding the $45 million expense related to the agreement in principle to settle the pending security class action litigation and a $9.5 million insurance reimbursement our SG&A was approximately $47.5 million, down about $5 million compared with the prior quarter. We expect SG&A expenses to be higher in the September quarter due to severance charges and a year-end audit expense. However, we remain on track to reduce our March quarter SG&A levels by 20% by the end of calendar 2009.

Other expense net was $2.9 million in the June quarter, down $8.7 million from the prior quarter primarily due to a decrease in investment impairments. For the fourth quarter investment impairments were $2 million. Interest income net was $3.3 million which is primarily from our investments. Tax was a $9.6 million benefit primarily due to a net favorable release of tax contingency reserves.

The total cash, cash equivalents and investments at the end of the fourth quarter was $604.4 million from which $3.9 million was received in cash. Currently, 83% of cash and cash equivalents and short-term investments are invested in money market funds and U.S. government and [inaudible] publications.

Our cash and cash equivalents were $365.8 million. Our short-term and long-term investments were $113.2 million and $121.5 million respectively. Our current investment in mortgage backed and asset backed securities totaled $40.8 million. Our level two securities now total $52.9 million, down $29.5 million from the March quarter.

Inventory was $151.1 million down about $11 million from the prior quarter. That amounts to about 16 weeks which is down about 4 weeks compared with the last quarter. We used $9.4 million in cash for operating activities in the quarter. Capital expenditures were about $6 million. Depreciation and amortization expenses were $17 million and stock based compensation was $2.4 million.

During the quarter we purchased 579,000 shares of our stock at a cost of about $8.2 million. We had 71.2 million shares outstanding at the end of the quarter.

Moving on to our outlook, as of our first fiscal quarter of 2010 we will report five ongoing business segments and IT revenue. Transition services will no longer be reported. We expect our ongoing segments total revenue which includes IP for the September quarter to be between $165-175 million. This is a 5-12% increase from the comparable June quarter revenue of $156.8 million. With this projected revenue increase combined with the higher factor utilization that we have been experiencing, we estimate that our gross margin in the September quarter will rise to the mid 20’s. Although it is too early to guide, initial indicators show that currently the December backlog is trending higher than the September quarter.

Now, Oleg will give you the latest update on our business. Oleg?

Oleg Khaykin

Thank you Ilan. In the second half of the quarter we experienced strong momentum in excess of our forecast driven by the inventory replenishment and the inventory recovery in computing and consumer end markets.

During the quarter we observed dramatic differences in end market demand across our sales geographies. We saw very strong demand and demand growth in China and Taiwan. North America remained weak but we saw encouraging signs of stabilization. Europe and Japan were both weak as a reflection of continued challenges faced by our industrial automotive customers.

At the business unit level both enterprise power and power management devices experienced very strong growth in the June quarter. Enterprise power growth was driven primarily by the launch of the new Intel server platform. Power management device growth was driven by strong demand in computing and consumer products in both China and Taiwan along with IR’s renewed focus on the discrete products market.

In automotive we saw some improvement from the March quarter. Demand in North America and Europe remained well below the historical levels. We also saw some weakness in our energy saving products driven by seasonal drops in appliance markets and continued soft demand in the industrial markets.

HiREL stayed relatively flat despite short-term weakness in commercial aviation. We expect demand for our HiREL products to remain steady.

In terms of outlook we expect to see continued strong growth in our enterprise power business unit driven by the server ramp up and significant design wins in the notebook space. The PMD business unit also continues to see strong demand growth particularly in Asia. The ESP business unit should return to growth driven by a number of tier one consumer electronic design wins that are ramping this quarter.

In automotive we are starting to see some order recovery in both Europe and North America.

Now an update on inventory. During the June quarter we had seen a significant reduction in both internal and channel inventories. Our channel sell through sales have outpaced our sell in sales. As a result, distribution inventory came down 15% in absolute dollar terms and is now at levels below 10 weeks. The lead time for most of our products remain in the 8-12 week range. However, there are several products where we see lead times expanding due to strong demand.

Our internal inventory closed at $151.1 million down $11 million from last quarter. That also includes about $6 million of safety stock we had pre-billed in anticipation of the consolidation of two of our fabs. Operationally, we tried to strike a balance between meeting customer demand and moving forward with our previously announced fab consolidation. In view of the strong demand we have decided to postpone the decommissioning of a portion of our Newport fab location by 2-3 quarters or when alternative external capacity comes on line.

As a result of this postponement we have revised our projected savings by the manufacturing consolidation of the Newport facility from $37.9 million to $30.6 million on an annualized basis. We began realizing the savings already in this past June quarter. Our plans to close our El Segundo fab remain on track and we expect to complete the closure by the end of calendar 2010. The closure of this facility is expected to save approximately $12.7 million per year upon completion.

Over the course of the past 12 months we have made significant progress on a number of fronts while facing the severe economic downturn. The settlement with Vishay and the agreement in principle to settle the pending securities class action litigation are significant steps towards resolving IR’s legacy legal issues. We have also taken significant steps in restructuring our operational and product strategy and continue positioning the company for success over the long haul.

This concludes our prepared remarks. We will now open the session to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Ramesh Misra – Brigantine Advisors.

Ramesh Misra – Brigantine Advisors

Related to R&D, obviously it is much higher than last quarter. What are the key drivers in that? Is this related to gallium nitrate products or is it a more broader aspect?

Oleg Khaykin

It is a broader aspect. During the last quarter we have been running a very large number of new products through the engineering build so it is a lot of mask sets, a lot of the engineering wafers. That has pushed the R&D expenditures higher than the $25 million we are guiding. We did not really increase the R&D expense in terms of headcount or anything like that. We expect the last quarter probably over the next 1-2 quarters running slightly higher expenses due to the sheer number of new products and new technologies that will be coming up for launch. We embarked on a big portfolio refresher strategy about a year ago and now we are starting to see a lot of these products coming to fruition.

Ramesh Misra – Brigantine Advisors

In regard to the gallium nitride products, do we expect first products and first product revenue sometime in the middle of 2010 timeframe?

Oleg Khaykin

That is about right. We are already sampling products with our customers. We probably should see some revenue starting maybe first half of next calendar year. As I said a lot of that revenue will be fairly immaterial relative to overall IR revenue. It is kind of the early adopters that will start taking the initial product revenues.

Ramesh Misra – Brigantine Advisors

Your long-term investments declined from I guess $153 million to $121 million. Was that mostly because of the L2 assets coming down? Was there a write down affiliated with that? I missed some of the commentary on that.

Ilan Daskal

Most of it is the L2 that came down in Q3 it was about $84 million level and it came down to about $61-62 million. The write offs were the impairment of $2 million of level three the MBS and ABSs.

Ramesh Misra – Brigantine Advisors

So the decline was mostly because it got reclassified as some short-term, is that what happened?

Ilan Daskal

Some cash we used and some cash was reclassified.

Ramesh Misra – Brigantine Advisors

In terms of gross margins, the improvement in the mid 20’s level next quarter what are the key driving factors for that?

Oleg Khaykin

The next quarter and September quarter going forward? Clearly the revenue growth is a big one. As you can imagine it drives utilization higher thereby driving the lower manufacturing costs on a unit cost basis. Also, as we start seeing some of the higher margin products in the industrial automotive space starting to come back that will improve the margin mix. As I pointed out, last quarter a lot of our growth came out of Taiwan and China that was overwhelmingly focused on the consumer and computing segments which have fairly aggressive pricing and not very rich margins.

So I would say between revenue growth and the revenue mix trending more towards the historical mix we will see some of the biggest drivers of gross margin recovery. Another level here is remember some of the inventory we are selling through today was built in the days when we had very low utilization so the result as we sell through more of that higher cost on a unit basis inventory that will release some of the margin potential that we have in the pipeline.

Operator

The next question comes from the line of James Schneider – Goldman Sachs.

James Schneider – Goldman Sachs

A follow-up on the gross margin if you could. Could you address utilization levels, where they are today, how sustainable you think utilization increase will be going forward and kind of what the split was in terms of your September quarter guidance in terms of improvement from mix versus utilization?

Oleg Khaykin

I am not going to break out for you the mix versus utilization. It is all over the place until we have the final numbers it would be hard to tell. In terms of the utilization, we were at about 60% utilization in the June quarter and it was significantly lower as you can imagine in the beginning of the quarter and quite a bit higher in the end of the quarter. We expect the September quarter utilization to be somewhat higher than 60% overall.

James Schneider – Goldman Sachs

Maybe if you could expand on your commentary about better visibility going into December and increase in bookings? Can you talk about the areas you are seeing that? Is it industrial automotive? Is it continued improvement across all areas, etc.?

Oleg Khaykin

It is a continuous improvement across all areas but clearly where the mix matters is in the industrial automotive and it is mainly North American and European as well as Japanese phenomenon. Clearly we are seeing some return of orders in those segments although I would be mindful to say they are still running well below the historical levels of a year ago. So it is coming back growth across all segments. One word of caution I will say and this is what we are seeing today and we are only about one month away from the end of the quarter so the December quarter we are seeing the bookings but if you remember last year the bookings looked very good for the December quarter up until about the middle of October.

Typically you have to expect that customers are going to take a look and assess how much they have shipped and how much they will need to ship in the December quarter and there may be some adjustments in the first part of October. At this point in time the December quarter bookings are trending above the September quarter.

Operator

The next question comes from the line of Steve Smigie – Raymond James.

Steve Smigie – Raymond James

Just to clarify, on the level two cash or I guess the stuff that is not in the 83% money market stuff, how much of that is still at risk for getting impaired?

Ilan Daskal

Most of the level two are in uni’s. Some hybrid corporate debt and agency bonds. So there is not a high risk. The high risk stuff is all in the level three in terms MBS and ABS.

Steve Smigie – Raymond James

Whatever you can, speak generally about gross margin progression going forward. Assuming revenues keep moving up steadily would we expect to see continued gross margin improvement over the coming quarters? One from utilization and obviously some of the factory costs coming off should we generally expect to see that moving up here?

Ilan Daskal

Yes. Clearly we expect our gross margins to continue to expand.

Steve Smigie – Raymond James

In terms of the overall SG&A spending, I know you gave some short-term color but as things recover here how much of your temporary stuff has to come back yet and what is the SG&A expense going to look like? As a part of that, how much of that is SG&A that is sort of the temporary stuff if you will, the stuff for helping you out with the accounting and the staff and finance and consultants?

Ilan Daskal

First of all for this quarter we did call out the $45 million in there for the securities litigation and on the up side the insurance reimbursement of $9.5 million. For the December quarter we still maintain our goal to reduce the SG&A level by 20% from the March level meaning it was about 52-53 in the March quarter. It will go down to around about 41 to 42. It still will include higher than let’s say what we would like in the long run costs associated mainly with legal and [inaudible] assistance. We don’t quote those out but it will be 20% lower by December at about 41 to 42. Assuming from there on it may go a bit further down. We don’t project that portion.

Steve Smigie – Raymond James

Just to clarify, that 41 or 42 takes into account any kind of 401K matching coming back, temporary furloughs and all that stuff is in that 41-42?

Ilan Daskal

Can you repeat that please?

Steve Smigie – Raymond James

Any sort of temporary or forced vacations you have had or bonuses you have had in the past. Does any of that stuff come back online that could surprise us to make that 41-42 be higher?

Ilan Daskal

That is a steady state. It does not take into account any force review or any unusual items for higher than what is our long-term goal in terms of legal expenses and the like.

Operator

The next question comes from the line of Craig Berger – FBR Capital Markets.

Craig Berger – FBR Capital Markets

I guess just on the gross margins can you help us understand in the June quarter what the period expenses were for depreciation that you couldn’t allocate to product? I think the March quarter was a $9 million charge. Also excess and obsolete inventory which I think in March was a $6 million charge.

Ilan Daskal

For the comparable $8.8 number that was in the prior quarter we had about $2.5 million that was taken through the P&L this quarter, the June quarter. Bear in mind this is only one quarter and this is part of on top of the higher than usual per unit costs of inventory that we saw in the June quarter that was not manufactured in the prior quarter with a much lower utilization rate. So the $2.5 is only one component of it.

As we go along forward, utilization rates have started to pick up towards the second half of the quarter and it continues to pick up that impact probably will start to be lower and lower over time.

Craig Berger – FBR Capital Markets

And the excess and obsolete inventory?

Ilan Daskal

I don’t have that number with me. It will be filed with the K in two days when we file it.

Craig Berger – FBR Capital Markets

Looking at your business, if you were intermediately targeting a kind of 40-50 model that implies 25% OpEx, on a $200 million quarter implies about $50 million of quarterly OpEx which is quite a ways down from here. Should we think about OpEx continuing to come down over time or are you scaling the company around a larger revenue base?

Oleg Khaykin

I think as Ilan said we are targeting to take our OpEx down on the SG&A to be down somewhere in the $41-42 million range by the end of this calendar year. We are keeping our R&D at about $25 million plus or minus a couple of million dollars. At this point I am comfortable we are as far down as we want to go. So that means really we are looking to scale the revenue up rather than just keep scaling OpEx down. If you keep pushing further than that, especially on the R&D side, you will start jeopardizing future revenue streams.

Craig Berger – FBR Capital Markets

So $1 billion of annual revenue. As a follow-up to that can you update us where you are with the discrete products that you are kind of re-rolling out? I know R&D went up a lot to support some of this stuff. How long does it take to start driving meaningful revenues on that front?

Oleg Khaykin

We have done some tactical deals on the discrete sector. As you know there is a big market especially in the computing space where if you are willing to accept kind of the commodity price you can get some volume. We have taken some of the business just to get the manufacturing assets loaded. As we are now starting to roll out our next generation technologies and kind of the benchmark products that are coming out with much stronger margins. So, that makes our mix shifting towards new products we will see that product line becoming more profitable.

That said, we are already seeing quite a bit of traction in our discrete markets and our share and we have seen that business growing very nicely for us.

Operator

The next question comes from the line of Brian Piccioni – BMO Capital Markets.

Brian Piccioni – BMO Capital Markets

Getting back to the question of gross margin obviously modeling is a little challenging on account of the inflection point and all the changes you are doing to the business. Can you tell us again what your target gross profit range is and when you expect to achieve that?

Oleg Khaykin

I think just in the short-term as Ilan is pointing out that we are guiding margins to be in the mid 20’s. As the revenue and mix continues to recover I would imagine we will get to the margins somewhere in low 30’s. From then it is revenue growth and the product mix adjustments and we are still targeting our longer term model to be in a range of revenue back to significant enough levels to be about 40%.

Ilan Daskal

So that assumes obviously the recovery and the growth of the revenue quarter-over-quarter, increasing utilization rates, the proper mix we have in our historic and strategic plans and if it all comes back that is where we think we can get to.

Brian Piccioni – BMO Capital Markets

So those are achievable goals. Not stretch goals. Not easy goals. Basically?

Oleg Khaykin

It is not easy goals and obviously it factors significant inventory recovery back to where we were a year ago and then some.

Brian Piccioni – BMO Capital Markets

Tax has been all over the map. How would we model that on a go forward basis?

Ilan Daskal

For an ongoing, for this fiscal year 10-15% obviously once the administration will come up with their new guidelines and we will have to remodel everything and see what is the outcome there. I can tell you that our tax structure is not subject to the check the box structure, the P&L subject to those off-shore limitations you find with some other companies. So for this fiscal year I would model probably 10-15%.

Operator

The next question comes from the line of Analyst for Uchi Orji – UBS.

Analyst for Uchi Orji – UBS

I had a question on gross margin. In terms of your back end packaging services that you outsource, is there any tightness in terms of capacity in the industry and has that impacted your margins at all?

Ilan Daskal

You are asking if the outsourced back end has impacted our margins.

Analyst for Uchi Orji – UBS

Correct. Has the available capacity from your service providers pretty good or is there some tightness that may be cost pressure for you?

Oleg Khaykin

I would not say cost pressures but I would say the capacity with certain back end service providers is getting a bit tighter as demand is coming back. We have not had any issues with getting capacity and we are not seeing any particular threat to our margins from that part of the supply chain.

Analyst for Uchi Orji – UBS

A quick question on some of the new product you alluded to that would be entering production over the next few quarters. Are those typically higher margin and higher ASP compared to the lights production or are these completely new and thus higher margin ASP compared to anything else?

Ilan Daskal

The newer products in many cases it is the same kind of technology at a lower cost so it gives you a little better margin but by and large it is based on new technology platforms and it is a new product we are bringing to the market. As you refresh the portfolio clearly you are able to get better margins on each product.

Analyst for Uchi Orji – UBS

Will these new products allow you to potentially increase your content in the various products you sell into or is this just the better margin and consumer or higher ASP dollars?

Ilan Daskal

It is a combination of both. In some cases we are modularizing some products so we increase the content. In others it is just clearly discrete so it is just one for one replacement.

Operator

The next question comes from the line of Terence Whalen – Citi.

Terence Whalen – Citi

My question relates to a comment you said about channel inventory. I think you said channel inventory came down around 10 weeks. I think you said it declined by about 15%. Can you help us understand what the dollar impact of that on revenue was given your sell in recognition? Also talk a little bit about what expectation for channel inventory is embedded in that revenue guidance you gave for the September quarter?

Oleg Khaykin

I don’t believe we break out what it means in terms of dollar amount or the details in that. We haven’t reported it in the past and we are not going to provide detail on that. However, what I will tell you is I think our channel inventories are probably around the levels where I would be hesitant to take them down given the expanding lead time across the industry. I think we are going to seek to strive to drive equilibrium between selling and sell through this quarter. At a certain point you have to start getting concerned about the stack out condition at your distribution.

I think from this point we may keep the same number of weeks, maybe a little bit higher, but as revenue grows the corresponding amount of product in the channel needs to go up. One thing we are trying to do is get closer to the equilibrium of what is being sold through and what is being sold in.

Terence Whalen – Citi

I think your operating cash flow was a draw of about $9.5 million. What is the expectation for next quarter? Will cash flow from operations be positive? I may have missed this but what is the expectation for CapEx as well?

Ilan Daskal

In terms of the cash flow, we don’t see that we will be in the September quarter cash flow positive yet. In terms of the SG&A it is going to be higher than the level in this quarter, the June quarter. The two main reasons are severance payments and the other one is the annual [ODCs]. However, as we guided for the December quarter we still maintain our projected 20% decrease from the March quarter so it is going to…

Oleg Khaykin

On SG&A. But in the operating cash flows I think we are also pointing out we had insurance reimbursement that partially offset some of the numbers.

Ilan Daskal

Now the outlook for the CapEx we predict will be on an annual basis between $40-60 million.

Operator

The next question comes from the line of Craig Berger – FBR Capital Markets.

Craig Berger – FBR Capital Markets

I actually had a question similar to Terrence. You said just the inventories fell by 15% in dollars sequentially. If they don’t burn inventory in Q3 doesn’t that mean sales grow 15% on that front and seasonality would probably add another 5-10. So you are talking about a 20-25% growth in discrete. That is 40% of your business. So that basically accounts for all of the sequential revenue guidance you are providing. Is it fair to say if things continue that potentially there is upside if some of the other non-distributor pieces of the business seasonally grow and buying less inventory in Q3 than you did in Q2. Can you address that? Then I wanted to ask on the lead times.

Oleg Khaykin

I think your math is pretty good. However, there is one more constraint you have to ask yourself and that is how many products you can physically ship out. If you want to deplete your die bank and whatever you had in the whip you have to pretty much wait for the wafers to fab before…That does not mean necessarily you will be able to meet all of your demand because there is a certain amount of lag time to take the wafers through the fab. The easy low hanging fruit things like die bank, and finished goods inventory and we have some whip that you can expedite from the fab. Once that thing gets exhausted then you just have to physically sit and wait until the wafers make their way through the fab and then through the back end assembly.

So there is a limiting factor related to the manufacturing as well that you have to consider.

Craig Berger – FBR Capital Markets

As a follow-up, on the lead times you said lead times were expanding for some products. Can you detail potentially what some of those products are? What the implications are for pricing on a go forward basis and whether your customers have the chip supplier ability to replenish in the third quarter and I am distinguishing that from shipping closer to consumption or an operating inventory; I mean true replenishment, building inventory, or is that likely a fourth quarter and first quarter phenomenon?

Oleg Khaykin

I think there are a lot of moving parts here. I think clearly some of the products our customers do not have alternative source and clearly we give priority to those customers who don’t have a backup. What we have seen in the June quarter and it has continued into this quarter is the customers are coming in and increasing their forecast and also in that forecast is the lead time. Just because you put in a bigger forecast it doesn’t mean you will be able to get your product unless I already have it sitting in a die bank or in a finished goods inventory. So once those things get exhausted you just have to wait until the wafers physically make their way through the fab.

The second thing is in terms of we do have some products where there are multiple sources but we are seeing similar things with some of our competitors as the lead times are starting to expand. Obviously once supply becomes a little bit tighter there is definitely no price reductions because nobody is talking about lower price. They want supply. To what extent pricing will recover it depends on a particular situation. I think looking into the December quarter I expect we will continue to see even with a softening in end market demand there will be at least some momentum for the supply chain to rebuild some inventory which in my view have been taken down way too much during the March and December quarters.

Craig Berger – FBR Capital Markets

Specific lead time expansion on products?

Oleg Khaykin

It is not any particular product. It is really more depending upon the particular production line or site. So as I said, there is a constraint but what we do is we give first priority to the single source customers followed by the other products. At the same time we are bringing on some external capacity and as that comes on line it will alleviate some of the shortages.

Craig Berger – FBR Capital Markets

When does that come up?

Oleg Khaykin

It is coming on practically on a weekly basis in small increments. It is a function of two things. One is the process qualification. T the other one is the specific product qualification.

Operator

That appears to be all the time we have for questions today. Are there any closing remarks?

Ilan Daskal

We do not have any closing remarks. Thank you very much for joining us today. We will talk to you again in about six weeks.

Operator

Ladies and gentlemen this concludes today International Rectifier fiscal year fourth quarter results conference call. You may now disconnect.

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