Fitch Ratings has affirmed International Rectifier Corp.'s 'BB' Issuer Default Rating (IDR) and revised the Rating Outlook to Stable from Negative.

Fitch also anticipates the company will benefit from its ongoing restructuring initiatives, which should provide meaningful operating leverage within the context of even modest revenue growth. Fitch believes the company will be challenged to return profitability to cycle peak levels (in the mid-20%) over the next few years, given IR's increased emphasis on its lower gross margin Power Management Devices segment and outsourcing initiatives. Nonetheless, Fitch anticipates operating EBITDA margin will approach and potentially exceed 10% in fiscal year 2010, versus 2.5% in the prior fiscal year, and reach the mid-teens beyond the near-term.

Fitch believes free cash flow likely will be modestly negative for the full fiscal year 2010, driven mostly by cash payments related to settling outstanding litigation and restructuring charges. Nonetheless, Fitch anticipates modestly positive annual free cash flow beyond the current full fiscal year ending on approximately June 30, 2010, due to the combination of higher anticipated profitability and Fitch's belief that IR will maintain capital spending at or below 6% of annual sales versus 10% historically and more than 15% for the broader semiconductor industry. Capital spending likely will be slightly elevated from maintenance levels over the next few years, as the company implements a new enterprise resource planning system and facilitizes capacity for its gallium nitride (GaN) platform production capabilities. This will be partially offset over time by IR's efforts to increase manufacturing outsourcing to approximately 30% from approximately 2% of total output.

The ratings and Outlook incorporate Fitch's expectations that the company will remediate its material weaknesses related to its historical accounting issues and subsequent financial reporting restatements over the near-term. Remediation of the material weaknesses represents the last step in resolving these legacy issues, following the Securities and Exchange Commission's (SEC) recent announcement that it had concluded its investigation and does not intend to recommend any enforcement action against IR.

The ratings and Outlook contemplate Fitch's belief that IR's capital structure will not remain debt-free over the longer-term and proceeds of any issuance would most likely be used for share repurchases (or some other form of shareholder friendly distribution) or consolidating acquisitions, given the fragmented nature of the power management semiconductor market. Fitch believes that the former is more likely, given the current rich valuations for potential acquisitions and IR's announcement that it will provide more visibility into its intended use of cash to deliver shareholder value in the coming months. IR has approximately $65 million remaining outstanding under the up to $100 million share repurchase program authorized in October 2008. Fitch estimates IR's minimum operating cash levels currently are approximately $200 million, given that the company currently does not have a revolving credit facility. 

The ratings are supported by:

--IR's leading positions in a variety of end markets for power management semiconductors and increased electronics penetration and adoption of more energy efficient devices. 

--The relatively low technology risk and capital spending requirements associated with power management semiconductors.

--Diversified customer, end market and product portfolios.

Ratings concerns center on IR's:

--Modest free cash flow profile. 

--Relatively limited scale, potentially constraining opportunities for market share consolidation.

--Lack of clarity on financial policies.

--Operating volatility associated with significant industry cyclicality.

Fitch may take negative rating actions if:

--IR meaningfully depletes cash balances via accelerating share repurchases;

--annual free cash flow remains negative through the intermediate-term, likely stemming from a combination of market share erosion, the inability to expand profit margins, or excess inventory levels within the context of a meaningfully slower than expected macroeconomic recovery.

Fitch believes positive rating actions are unlikely over the near-term, however, could be achieved through IR generating meaningfully stronger than anticipated annual free cash flow over the longer-term, likely from a combination of substantially reduced capital spending associated with the company's efforts to outsource manufacturing, the consolidation of market share, or strong adoption of its GaN technology platforms.

Fitch believes IR's liquidity position was sufficient as of Dec. 27, 2009 and supported by:

--$209 million of cash and cash equivalents; 

--$337 million of short- and long-term investments.

Fitch believes free cash flow will be modestly negative in fiscal year 2010 (approximately $50 million) but modestly positive beyond fiscal year 2010, driven by expectations for improved profitability and lower than historical capital spending.

Additional information is available at 'www.fitchratings.com'. 

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