Fitch Ratings has affirmed International Rectifier Corp.'s (IR) (NYSE:
IRF) 'BB' long-term Issuer Default Rating (IDR) and 'BB' rating for the
company's $100 million senior unsecured revolving credit facility (RCF)
expiring 2016. The Rating Outlook is Stable. The company has no
outstanding public debt.
The ratings and Stable Outlook incorporate Fitch's expectations for
solid revenue growth over the near term from new product ramps, strong
automotive and aerospace demand, and the anticipation of improving
industrial and appliance markets. Beyond the near term, Fitch expects
secular growth driven by electronics proliferation and increased power
management content, albeit within a cyclical context.
In addition, profitability will remain volatile, driven by cyclical
demand, variable pricing pressures, limited turns business (receiving
and fulfilling orders within the same quarter) visibility, and
meaningful operating leverage. Over the near term, operating EBITDA
margin should increase to the mid- to high-teens versus a Fitch
estimated 6.2% in fiscal 2013.
The completion of IR's restructuring initiatives by the end of fiscal
2015 should improve operating profitability through the semiconductor
cycle. The company's actions include right-sizing the manufacturing
footprint and scaling operating expenses for break-even profitability at
the $240 million quarterly revenue level.
Annual free cash flow (FCF) will remain uneven with Fitch's expectations
for annual FCF of breakeven to $100 million within the context of a
normal cycle. Over the longer term, Fitch anticipates structurally
higher FCF through the cycle, due to restructuring-driven higher
profitability and increased outsourcing. IR plans to increase
manufacturing outsourcing to 50% from 30% and already increased
packaging and test outsourcing to 70% from 50%. Fitch believes the
customized nature of many of IR's solutions may limit further
manufacturing outsourcing from the current 50% of total.
Leading positions in automotive and aerospace will provide longer
product lifecycle growth with greater demand visibility. Industrial,
appliance, and computing markets will remain cyclical but with
attractive long-term growth characteristics. Meanwhile, IR will benefit
in calendar 2014 from the anticipated ramp of Intel's new server
platform and other digital power design wins, and solid adoption of IGBT
modules and next-generation low-voltage MOSFETS. The company's Gallium
Nitride products are anticipated to meaningfully contribute to revenues
over the longer term.
Distributors remain reluctant to build inventory, preferring instead to
increase turns orders until end market demand demonstrates more stable
patterns, which adds a degree of volatility to the company's business.
As a result, Fitch expects inventory to remain at slightly higher levels
in order to have ample supply for unexpected upturns. Nonetheless,
obsolescence risk is less pronounced for the majority of IR's products.
RATING DRIVERS
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;
--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 capital spending, the latter of which should
decline longer-term from increased outsourcing;
--Small revenue
base in its sole focus on the power-management market, which includes
several participants with greater scale and financial flexibility.
KEY RATINGS SENSITIVITIES
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 will also 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 market share losses from a weakening of the
company's technology leadership;
--Significant cash usage from
lower than expected revenue growth or aggressive share repurchases.
As of Dec. 29, 2013, Fitch believes IR's liquidity was sufficient and
supported by:
--Approximately $503 million of cash, cash
equivalents and short-term investments; and
--An undrawn $100
million RCF expiring November 2016.
Fitch expects annual FCF ranging from break-even to $100 million within
the context of a normal cycle. The company has no public debt and Fitch
believes the company has limited capacity at the current rating for debt
incurrence.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating
Methodology: Including Short-Term Ratings and Parent and Subsidiary
Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819533
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