TEXT - Fitch affirms International Rectifier 'BB' rating
Feb 4 - Fitch Ratings has affirmed the 'BB' long-term Issuer Default Rating (IDR) for International Rectifier Corp. (IR) (NYSE: IRF) and assigned a 'BB' rating to the company's $100 million senior unsecured revolving credit (RCF) facility expiring 2016. The Rating Outlook is Stable. The company has no outstanding public debt. The ratings and Stable Outlook incorporate Fitch's expectations for revenues gradually strengthening through calendar 2013 from cyclical lows reached in calendar 2012. Positive momentum for new orders in several businesses point to a modest recovery in the back half of calendar 2013. Operating profitability will be negative (low- to mid-single digits) in calendar 2013, due to lower revenues and IR reducing utilization rates to clear excess inventory. Restructuring initiatives should reduce operating expenses to enable break-even operating profitability at $240 million of quarterly revenues over the intermediate-term. Free cash flow (FCF) should be modestly negative to break-even for calendar 2013, depending upon the pace of recovery and inventory liquidations. Beyond the near term, annual FCF likely will remain uneven, ranging from -$100 million to $100 million. The company's plans to increase outsourcing should reduce capital intensity over the longer term, strengthening the company's FCF profile. Over the longer term, increasing power management needs for energy efficiency will provide solid revenue growth opportunities. Leading positions in automotive and aerospace will provide longer product life cycle growth with greater demand visibility. Industrial, appliance, and computing markets will remain cyclical but with attractive long-term growth characteristics. The company currently is on track with restructuring its footprint to achieve annual cost savings of $26 million. IR should achieve $15 million of these savings beginning in the June 2013 quarter, with the balance being realized in the middle of calendar 2015. IR's plans to increase its level of outsourcing for manufacturing to 50% from 30% and packaging and test to 70% from 50% will reduce structural capital spending. Fitch believes the customized nature of many of IR's solutions may limit further manufacturing outsourcing from 50% of total. The rating and Outlook continue to be supported by IR's: --Technology leadership and resultant leading share in core power management markets; --Addressable market growth driven by long-term secular trends of increased electronics content and demand for energy efficiency; and --Diversified customer and geographic sales mix. Ratings concerns continue to center on the company's: --Uneven annual FCF; --Substantial structural investments in research and development (R&D) and, to a lesser degree, capital spending, pro forma for the company's plan to increase outsourcing; --Small revenue base in its sole focus on the discrete power management market, which includes several participants with greater scale and financial flexibility. SENSITIVITY/RATING DRIVERS Fitch believes positive rating action is unlikely in the absence of: --Significant market share gains, likely from robust penetration of gallium nitride based products that also will increase the size of the company and diversification of its customer base; --Strengthened FCF profile from a combination of higher mid-cycle revenues and lower capital intensity. Negative rating actions could result from: --Weaker than expected revenue growth, suggesting a weakening of the company's technology leadership position. --Significant cash usage in fiscal 2013 from i) lower than expected revenue growth or lingering excess inventory, or ii) aggressive share repurchases. As of Dec. 31, 2012, Fitch believes IR's liquidity was sufficient and supported by: --Approximately $377 million of cash, cash equivalents and short-term investments; and --An undrawn $100 million RCF expiring November 2016. Annual FCF should continue to range from slightly negative to modestly positive over the longer term. The company has no public debt and Fitch believes the company has limited capacity at the current rating for debt incurrence.