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Fitch Affirms International Rectifier's IDR at 'BB'; Outlook Negative

^{Published on 2008-12-17 14:13:19 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed and removed from Rating Watch Negative International Rectifier Corp.'s (IR) (NYSE: IRF) 'BB' Issuer Default Rating (IDR) following Fitch's review of IR's restated financial reports, as well as the operating and financial policies under the company's new management team. Fitch has also withdrawn the 'BB+' rating on IR's senior secured revolving credit facility, following the company's recent termination of the facility. The Rating Outlook is Negative.

The rating reflects IR's sufficient liquidity and all-equity capital structure at present, although future debt issuance of up to approximately $500 million, while not expected within the near-term, is incorporated into the rating. The ratings further reflects IR's leading positions in a variety of end markets for power management products, which Fitch believes will remain modestly less cyclical than the broader semiconductor market over the longer term and continue benefiting from the secular trends of increased electronics content and demand for energy efficiency.

The rating also considers IR's new senior management team, which has yet to articulate longer-term financial policies but recently initiated a $100 million share repurchase program. Also considered is IR's slightly weakened competitive position due in part to management's focus on resolving its accounting issues rather than growing the business. As a result, IR's operating performance has deteriorated, including negative year-over-year revenue growth in each of the last seven quarters and operating EBITDA margins declining nearly 500 basis points to a Fitch estimated 15% for the latest 12 months (LTM) ended Sept. 30, 2008 from the low- to mid-20s in each of the preceding three years.

The Negative Outlook reflects Fitch's expectations for a challenging operating environment for IR through at least calendar year 2009. As a result, Fitch believes that, following the aforementioned deterioration, operating results will erode further over the near-term. The company's revenues are expected to decline 10%-25% in the fourth calendar quarter of 2008, driven primarily by weaker demand across all end markets and excess inventories within the distribution channel. In calendar year 2009, Fitch anticipates IR's revenues will roughly track Fitch's forecast for the broader semiconductor industry of a decline in the mid- to high-single digits, despite the company's participation in historically less volatile power management markets.

Lower utilization rates, as well as IR accelerating near-term revenue opportunities by re-entering lower gross margin commodity markets, should negatively affect profitability over the near-term. While targeted cost reductions, including consolidated back-end subcontractors and modestly reduced headcount, should mitigate a portion of these pressures, Fitch believes that IR's cost structure remains subject to a high degree of operating leverage. As a result, Fitch expects IR's free cash flow will range, depending upon the company's ability to work down currently inflated inventory levels, from modestly negative to slightly positive over the near-term.

The Negative Outlook also reflects the company's unresolved material weaknesses identified in connection with IR concluding its investigation into accounting irregularities relating to revenue recognition and restating the associated financial reports with the Securities and Exchange Commission (SEC). Fitch will continue to monitor IR's ongoing implementation of remediation steps to resolve the material weaknesses, including improving the control environment, the period end financial reporting process, training, and new procedures around record retention, revenue recognition, and accounting for income taxes. IR's failure to resolve these material weaknesses within the near-term could result in negative rating actions.

Fitch may take negative rating actions if IR:

-- Experiences greater than anticipated erosion in operating metrics, resulting in meaningful cash usage;

-- Depletes cash balances for share repurchases or acquisitions, in conjunction with negative free cash flow.

Conversely, ratings may be stabilized if IR:

-- Successfully resolves the aforementioned material weaknesses; and

-- Free cash flow usage is at worst only slightly negative through calendar year 2009 or replaces the recently terminated revolving credit facility with another committed credit line.

As of Sept. 30, 2008, IR's sufficient liquidity position was supported by more than $400 million of cash and short-term investments, as well as approximately $290 million of long-term investments, approximately $100 million of which Fitch believes were liquid at quarter end. Nonetheless, IR recently terminated its revolving credit facility due to meaningfully less favorable terms offered by the lending group. Fitch expects annual free cash flow, which has ranged from slightly negative to modestly positive (-$12 million in fiscal year 2002 to $86 million in fiscal year 2005) in each of the last seven years, will be modestly negative to slightly positive in fiscal year 2009, depending upon the company's ability to quickly reduce excess inventories. The company currently has no debt.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ www.fitchratings.com ]. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.