The mystery deepens at International Rectifier Corp. In July, the power management company fired longtime CFO Michael P. McGee several months after launching an investigation into accounting irregularities at a foreign subsidiary. While the company refuses to make any connection, it's hard not to suspect a link.
The El Segundo, California-based company has been reticent in explaining where and when the irregularities took place. So far, it has admitted only that there were unsubstantiated sales to warehouses outside the company's logistical system and that the result was "material weaknesses in internal control over financial accounting." In addition, the company has said that its last six quarters of results are suspect.
However, at least one analyst, Todd Cooper of Stephens & Co., noted in a recent report that the errors were "likely at International Rectifier's Japanese subsidiary." And McGee knows a lot about international finance and accounting — particularly in Japan. For five years, he served as co-CEO and chairman of Japan-based Nihon Inter Electronics Corp., in which International Rectifier holds a 5 percent stake (see On the Record, January 2006).
Still, several analysts wonder whether McGee may be taking the heat for someone else. "Whether or not he's responsible, I don't know," says Craig Berger, an analyst at Wedbush Morgan Securities. "But he's probably the fall guy." Morningstar analyst Irina Logovinsky adds that while she doesn't "know if the firing is related to [the accounting issues] or if there were any other issues," the timing of the events is suspect.
What's clear is that interim CFO Linda J. Pahl, most recently the vice president of corporate finance, will eventually have a lot of explaining to do. "They've done some bad things, and no one really knows how bad at this point," Berger says. "Until they know the details and how high up it goes, it could drag on for some time."
Farewell, Judy Lewent
Peter Kellogg has big shoes to fill. This month, the former Biogen Idec CFO replaces legendary Merck CFO Judy C. Lewent, who is retiring from the $23 billion (in revenue) pharmaceuticals company after 27 years, 17 as finance chief.
Lewent was as close to a finance celebrity as one can get. One of the first female CFOs of a Fortune 500 company, she pioneered Monte Carlo–simulation techniques in the drug industry, had a hand in Merck's most successful strategic alliances, and helped pull the company through the recall of its top-selling pain drug Vioxx. In fact, Merck's stock is up 25 percent from last year, and the company anticipates long-term revenue growth of 4 to 6 percent through 2010. But the Vioxx episode left an indelible mark: it dampened Lewent's chances of ever becoming Merck's CEO.
Despite the solid financials Lewent is bequeathing, Kellogg will have his work cut out for him. Competition from generic drugs, looming legal costs, and patent expirations of the company's top-selling drugs are only some of the challenges ahead. And Kellogg will have to draw on much more than the affable personality that he is known for, say analysts. "If they lose patent protection on those [top drugs], he may have to navigate through a difficult transition," says Morningstar analyst Heather Brilliant. — K.P.