Overview

International Rectifier Corporation ("IR") designs, manufactures and markets power management semiconductors. Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices and prolonging battery life.

We pioneered the fundamental technology for power metal oxide semiconductor field effect transistors ("MOSFETs") in the 1970s, and estimate that the majority of the world's planar power MOSFETs use our technology. Power MOSFETs are instrumental in improving the ability to manage power efficiently. Our products include power MOSFETs, high voltage analog and mixed signal integrated circuits ("HVICs"), low voltage analog and mixed signal integrated circuits ("LVICs"), digital integrated circuits ("ICs"), radiation-resistant ("RAD-Hard™") power MOSFETs, insulated gate bipolar transistors ("IGBTs"), high reliability DC-DC converters, PowerStage ("PS") modules, and DC-DC converter type applications.

During the quarter ended March 29, 2009, we continued to experience declining demand along with the overall market decline, resulting in a 22.7 percent decline in revenue in the quarter compared to the prior quarter. During the quarter, we decreased our production output at a rate greater than our revenue declined in order to reduce our inventory, which we decreased by $13.9 million from the prior quarter. As a result of our decision to significantly reduce production levels, our factory capacity utilization rates declined to abnormally low levels during the quarter. This low level of factory utilization contributed to lower gross margins during the quarter as we were not able to reduce our fixed manufacturing overhead costs commensurate with our decline in production. In addition, this low factory utilization increased the unit cost of inventory that was produced but did not ship during the period. As this higher unit cost inventory will be shipped in future periods, we expect that our gross margins will continue to be negatively impacted. We expect demand visibility to remain uncertain, and we are closely monitoring our production levels and shipments to our channel distributors to ensure that our manufacturing output matches our customer demand.

We are proceeding with our plans to consolidate our manufacturing sites in order to reduce our costs. During the second fiscal quarter, we decided to reduce the size of our Newport, Wales wafer fabrication facility, and we estimate achieving savings from this initiative of about $7.9 million per year beginning in calendar year 2010. Also during the second quarter of fiscal year 2009, we decided to close our El Segundo, California wafer fabrication facility which we estimate will be completed by the end of calendar year 2010. We estimate that this factory closure will save us about $12.7 million per year beginning in calendar year 2011.

In addition to reducing our manufacturing costs, we will continue our efforts to align our operating expense structure with our revenue levels. Although we plan to reduce our manufacturing and selling and administrative costs in the near term, we expect to maintain our investment levels in new product development in order to meet our longer term revenue goals. Last quarter, we announced that we planned to reduce our worldwide workforce by about 850 employees for the fiscal year ended June 28, 2009 compared to the fiscal year ended June 29, 2008. Through the nine months ended March 29, 2009, we have reduced our workforce by more than 75% of our plan. Once these planned headcount reductions are completed by the end of the fiscal year, we expect to save about $31.0 million on an annualized basis. We expect to incur severance related costs for the 2009 fiscal year of about $13.0 million associated with these reductions.

Our cash, cash equivalents and investments as of March 29, 2009 totaled $639.4 million compared to $682.0 million as of the quarter ended December 28, 2008. The quarterly decline in cash and

investments was driven primarily by cash used in operations. In addition, during the quarter ended March 29, 2009, we re-purchased about 663,000 shares of our common stock at an aggregate cost of about $8.0 million.

Results of Operations

Segments

At the beginning of the first quarter of fiscal year 2009, our Chief Executive Officer ("CEO"), who is our Chief Operating Decision Maker, refined the definition of our Company's business segments by renaming our Aerospace and Defense ("A&D") segment as our HiRel ("HR") segment, combining our previously identified PS segment with our Enterprise Power ("EP") segment and creating a new Automotive Products ("AP") segment which was previously reported within the Energy-Saving Products ("ESP") and Power Management Devices ("PMD") segments. Furthermore, some products that were previously reported under the EP segment are now reported under the PMD segment. Consequently, we now report in seven segments: EP, PMD, ESP, HR, AP, IP, and TS. Prior year segment presentation has been recast to conform with current year presentation. For a description of our reporting segments, see Note 13, "Segment Information", in the notes to our unaudited condensed consolidated financial statements.

Selected Operating Results

    The following table sets forth certain operating results for the three and
nine months ended March 29, 2009 and March 30, 2008 as a percentage of revenues
(in millions, except percentages):

                                      Three Months Ended                          Nine Months Ended
                             March 29, 2009        March 30, 2008        March 29, 2009        March 30, 2008
Revenues                    $ 146.6     100.0 %   $ 252.2     100.0 %  $  580.8     100.0 %   $ 781.2     100.0 %
Cost of sales                 115.7      78.9       185.7      73.6       389.2      67.0       525.2      67.2

     Gross profit              30.9      21.1        66.5      26.4       191.6      33.0       256.0      32.8
Selling and
administrative expense         51.8      35.4        76.1      30.2       178.6      30.8       212.6      27.2
Research and development
expense                        22.4      15.3        26.0      10.3        72.0      12.4        81.3      10.4
Impairment of goodwill         23.9      16.3           -         -        23.9       4.1           -         -
Amortization of
acquisition-related
intangible assets               1.1       0.8         1.1       0.4         3.3       0.6         3.2       0.4
Asset impairment,
restructuring and other
charges                         7.1       4.9         1.9       0.8        56.6       9.7         2.0       0.3

     Operating loss           (75.4 )   (51.4 )     (38.5 )   (15.3 )    (142.8 )   (24.6 )     (43.1 )    (5.5 )
Other expense, net             11.6       7.9         3.8       1.5        36.8       6.3        11.3       1.5
Interest income, net           (4.1 )    (2.8 )      (6.8 )    (2.7 )      (8.4 )    (1.4 )     (22.6 )    (2.9 )

     Loss before income
     taxes                    (82.9 )   (56.5 )     (35.5 )   (14.1 )    (171.2 )   (29.5 )     (31.8 )    (4.1 )
Provision for (benefit
from) income taxes             (1.2 )    (0.8 )     (13.9 )    (5.5 )     101.0      17.4       (21.0 )    (2.7 )

     Net loss               $ (81.7 )   (55.7 )%  $ (21.6 )    (8.6 )% $ (272.2 )   (46.9 )%  $ (10.8 )    (1.4 )%

Results of Operations for the Three and Nine Months Ended March 29, 2009 compared with the Three and Nine Months Ended March 30, 2008

Revenue and Gross Margin

Ongoing segment revenue, which excludes the TS segment, for the three and nine months ended March 29, 2009 was $135.0 million and $545.5 million, respectively, compared to $237.8 million and $734.7 million in the comparable three and nine months ended March 30, 2008, respectively. During this period, revenues decreased by 43.3 percent and 25.8 percent for the three and nine months ended March 29, 2009, respectively, compared to the three and nine months ended March 30, 2008, respectively. The decline for the three and nine months ended March 29, 2009 was primarily due to a continuing slowdown in the economy, customer draw down of their inventories and lower sales of our game station related products. Sales declined in all of our segments in the quarterly and year-to-date comparison.

Ongoing segment gross margin decreased to 22.8 percent for the three months ended March 29, 2009 compared to 27.8 percent for the three months ended March 30, 2008, and increased to 35.6 percent for the nine months ended March 29, 2009 compared to 34.7 percent in the nine months ended March 30, 2008.

Our quarter gross margin declined from the year ago quarter, primarily due to a $7.9 million decline in royalty revenue which is recorded at 100% gross margin, lower product revenue which increased our fixed costs as a percentage of revenue, and much lower capacity utilization during the three months ended March 29, 2009 compared to the three months ended March 30, 2008. During the three months ended March 29, 2009, we incurred $8.8 million of costs associated with abnormally low factory utilization. The abnormally low factory utilization resulted in excess capacity costs which were recognized in cost of goods sold in the current period. The abnormally low utilization and excess capacity costs were a result of our decision to reduce our inventory levels during the period. These increased costs associated with our low capacity utilization partially offset a $14.7 million favorable gross margin impact from the reduction in inventory related costs, which declined from $20.7 million in the three months ended March 30, 2008 to $6.0 million in the three months ended March 29, 2009. These inventory related costs represent write-offs associated with excess inventory. Since we reduced our production levels during the quarter, and we were not able to reduce our fixed manufacturing costs at the same rate as our production levels, our manufacturing costs did not decline at the same rate as our revenue, resulting in decreased margins. In addition, the low factory utilization increased the unit cost of inventory that was produced but did not ship during the period. As this higher unit cost inventory will be shipped in future periods, we expect to continue to operate at low factory utilization levels, and we expect that our gross margins will continue to be negatively impacted. During the three months ended March 29, 2009, we also incurred manufacturing employee severance of $0.8 million associated with the lower production levels.

For the nine months ended March 29, 2009, ongoing segment gross margin increased due to the reduction of inventory related charges and favorable product mix as our higher gross margin HiRel, ESP and IP business segments contributed a higher percentage of our year-to-date revenue and we experienced steeper revenue declines in our lower gross margin Power Management Devices and Automotive Products segments. These favorable margin impacts were partially offset by the negative impact of much lower capacity utilization compared to the nine month period ended March 30, 2008. During the nine months ended March 29, 2009 we also recorded manufacturing employee severance of $4.1 million as a result of headcount reductions in response to the lower production levels

Revenue and gross margin by business segments are as follows (in thousands, except percentages):

                                     Three Months Ended                       Three Months Ended
                                       March 29, 2009                           March 30, 2008
                                       Percentage                                  Percentage     Gross
Business Segment          Revenues      of Total     Gross Margin     Revenues      of Total     Margin
Power Management          $  42,593           29.0 %          (3.5 )% $  83,815           33.3 %    17.1 %
Devices
Energy-Saving Products       35,272           24.1            34.7       46,734           18.5      21.8
HiRel                        33,954           23.2            47.1       39,421           15.6      46.8
Automotive Products           9,453            6.4             4.2       22,440            8.9      24.0
Enterprise Power             11,315            7.7            11.8       35,109           13.9      21.3

   Ongoing customer         132,587           90.4            21.5      227,519           90.2      24.5
   segments total
Intellectual Property         2,365            1.6           100.0       10,286            4.1     100.0

   Ongoing segments         134,952           92.0            22.8      237,805           94.3      27.8
   total
Transition Services          11,690            8.0             0.9       14,419            5.7       2.9

   Consolidated total     $ 146,642          100.0 %          21.1 %  $ 252,224          100.0 %    26.4 %

                                  Nine Months Ended                     Nine Months Ended
                                    March 29, 2009                        March 30, 2008
                                       Percentage     Gross                  Percentage     Gross
Business Segment          Revenues      of Total     Margin     Revenues      of Total     Margin
Power Management          $ 180,505           31.1 %    14.8 %  $ 265,978           34.0 %    21.6 %
Devices
Energy-Saving Products      120,830           20.8      40.6      125,698           16.1      33.4
HiRel                       110,739           19.1      52.4      117,529           15.0      51.5
Automotive Products          40,521            7.0      24.8       62,897            8.1      30.7
Enterprise Power             67,944           11.7      37.4      133,225           17.1      35.0

   Ongoing customer         520,539           89.6      32.5      705,327           90.3      32.0
   segments total
Intellectual Property        24,925            4.3     100.0       29,382            3.8     100.0

   Ongoing segments         545,464           93.9      35.6      734,709           94.1      34.7
   total
Transition Services          35,398            6.1      (7.3 )     46,444            5.9       1.4

   Consolidated total     $ 580,862          100.0 %    33.0 %  $ 781,153          100.0 %    32.8 %

PMD revenue for the three months ended March 29, 2009 decreased by 49.2 percent from the three months ended March 30, 2008. PMD revenue for the nine months ended March 29, 2009 decreased by 32.1 percent from the nine months ended March 30, 2008. The year-over-year and year-to-date decrease in revenue for our PMD products was due to a continued slowdown in the market, a continued decline in demand for notebooks and other consumer related products as well as declines in demand for our older generation products. Gross margin for the PMD segment decreased to (3.5) percent and 14.8 percent for the three and nine months ended March 29, 2009, from 17.1 percent and 21.6 percent in the three and nine months ended March 30, 2008, respectively. These quarterly and year-to-date reductions in gross margins were primarily driven by a significant drop in revenue as we were not able to reduce our fixed manufacturing costs at the same rate as our revenue declined. During the three months ended March 29, 2009, we incurred $3.2 million of costs associated with abnormally low factory utilization. These increased costs associated with our low capacity utilization offset a $1.9 million favorable gross margin impact from the reduction in inventory related costs, which declined from $4.9 million in the three months ended March 30, 2008 to $3.0 million in the three months ended March 29, 2009. During the nine months ended March 29, 2009, we incurred $4.0 million of costs associated with abnormally low factory utilization. These increased costs associated with our low capacity utilization offset a $1.5 million favorable gross margin impact from the reduction in inventory related costs, which declined from $6.2 million in the nine months ended March 30, 2008

to $4.7 million in the nine months ended March 29, 2009. Also, the gross margin was impacted by a decline in average selling price for the three and nine months ended March 29, 2009 compared with the three and nine months ended March 30, 2008.

ESP revenue for the three months ended March 29, 2009 decreased by 24.5 percent from the three months ended March 30, 2008. ESP revenue for the nine months ended March 29, 2009 decreased by 3.9 percent from the nine months ended March 30, 2008. The year-over-year revenue decrease was due to a continued slowdown in the market and a year-over-year decline for our industrial and consumer appliances related products. The year-to-date revenue decrease was also due to poor market conditions and a decline in demand for products sold in Plasma Display Panels. Gross margin for the ESP segment was 34.7 percent and 21.8 percent for the three months ended March 29, 2009 and March 30 2008, respectively, compared to 40.6 percent and 33.4 percent for the nine months ended March 29, 2009 and March 30 2008, respectively. For the three months ended March 29, 2009 the improvement in gross margin was primarily driven by a significant reduction in inventory related costs which offset costs associated with lower capacity utilization. During the three months ended March 29, 2009, we recorded an $8.0 million favorable gross margin impact from the reduction in inventory related costs, which declined from $8.2 million in the three months ended March 30, 2008 to $0.2 million in the three months ended March 29, 2009. This favorable gross margin impact was partially offset by $2.0 million of costs associated with abnormally low factory utilization. For the nine months ended March 29, 2009 the improvement in gross margin was primarily driven by improved manufacturing efficiencies as we reduced our manufacturing costs on flat revenue compared to the nine months ended March 30, 2008. During the nine months ended March 29, 2009, we also recorded a $2.1 million favorable gross margin impact from the reduction in inventory related costs, which declined from $4.2 million in the nine months ended March 30, 2008 to $2.1 million in the nine months ended March 29, 2009. These favorable gross margin impacts were partially offset by $2.6 million of costs associated with abnormally low factory utilization. Also, gross margins were impacted by a decline in average selling price for the three and nine months ended March 29, 2009 compared with the three and nine months ended March 30, 2008.

HiRel revenue for the three months ended March 29, 2009 decreased by 13.9 percent from the three months ended March 30, 2008. Revenue for the nine months ended March 29, 2009 decreased by 5.8 percent from the nine months ended March 30, 2008. This revenue decrease was primarily due to lower sales of our satellite and military related products. Gross margin for the HiRel segment increased to 47.1 percent for the three months ended March 29, 2009, from 46.8 percent in the three months ended March 30, 2008, and increased to 52.4 percent for the nine months ended March 29, 2009, from 51.5 percent for the nine months ended March 30, 2008. The year-over-year increase in gross margin was primarily due to increased sales of higher margin HiRel products. The year-to-date increase in margin is mainly attributable to a one-time design change and expedite fee of $1.7 million for a major customer which commands a significantly higher margin than the base business in the first quarter of fiscal year 2009, partially offset by lower average selling prices.

AP revenue for the three months ended March 29, 2009 decreased by 57.9 percent from the three months ended March 30, 2008. Revenue for the nine months ended March 29, 2009 decreased by 35.6 percent from the nine months ended March 30, 2008. The year-over-year and year-to-date revenue decline was due to a slowdown in the automotive industry and production cuts in the U.S. market. Gross margin for the AP segment decreased to 4.2 percent for the three months ended March 29, 2009, from 24.0 percent in the three months ended March 30, 2008, and to 24.8 percent for the nine months ended March 29, 2009, from 30.7 percent for the nine months ended March 30, 2008. These quarterly and year-to-date reductions in gross margins were primarily driven by a significant drop in revenue as we were not able to reduce our fixed manufacturing costs at the same rate as our revenue declined. In addition, during the three months ended March 29, 2009, we incurred $0.6 million of costs associated with abnormally low factory utilization. These increased costs associated with our low

capacity utilization partially offset a $1.0 million favorable gross margin impact from the reduction in inventory related costs, which declined from $1.8 million in the three months ended March 30, 2008 to $0.8 million in the three months ended March 29, 2009. During the nine months ended March 29, 2009, we incurred $0.8 million of costs associated with abnormally low factory utilization. These increased costs associated with our low capacity utilization offset a $0.1 million favorable gross margin impact from the reduction in inventory related costs, which declined from $1.4 million in the nine months ended March 30, 2008 to $1.3 million in the nine months ended March 29, 2009. Also, gross margin was impacted by a decline in average selling price for the three and nine months ended March 29, 2009 compared with the three and nine months ended March 30, 2008.

EP revenue for the three months ended March 29, 2009 decreased by 67.8 percent from the three months ended March 30, 2008. Revenue for the nine months ended March 29, 2009 decreased by 49.0 percent from the nine months ended March 30, 2008. This decrease was primarily due to lower sales of our game station related products, reduced content in our newer game station parts and lower sales to enterprise server customers. Gross margin for the EP segment decreased to 11.8 percent for the three months ended March 29, 2009, from 21.3 percent in the three months ended March 30, 2008, and an increase to 37.4 percent for the nine months ended March 29, 2009, from 35.0 percent for the nine months ended March 30, 2008. The quarterly reduction in gross margin was primarily driven by a significant drop in revenue as we were not able to reduce our fixed manufacturing costs at the same rate as our revenue declined. During the three months ended March 29, 2009, we incurred $0.6 million of costs associated with abnormally low factory utilization. These increased costs associated with our low capacity utilization partially offset a $3.4 million favorable gross margin impact from the reduction in inventory related costs, which declined from $4.8 million in the three months ended March 30, 2008 to $1.4 million in the three months ended March 29, 2009. In addition, EP gross margins, excluding the negative impacts of reduced volume and under utilization, improved due to favorable product mix as we shipped less of our lower margin game station products. The year to date improvement in gross margin was primarily driven by lower inventory related charges and favorable product mix as we shipped fewer of our lower margin game station products. During the nine months ended March 29, 2009 we recorded a $5.4 million favorable gross margin impact from the reduction in inventory related costs which, declined from $7.3 million in the nine months ended March 30, 2008 to $1.9 million in the nine months ended March 29, 2009. These favorable gross margin impacts were partially offset by $0.4 million of costs associated with abnormally low factory utilization. Also, the gross margins were impacted by a decline in average selling price for the three and nine months ended March 29, 2009 compared with the three and nine months ended March 30, 2008.

IP revenue was $2.4 million for the three months ended March 29, 2009 compared to $10.3 million for the three months ended March 30, 2008. IP revenue was $24.9 million for the nine months ended March 29, 2009 compared to $29.4 million for the prior nine months ended March 30, 2008. Revenue for the three months ended March 29, 2009 declined by $7.9 million from the prior year third quarter due to the expiration of our broadest MOSFET patents. Revenue for the nine months ended March 29, 2009 included the recognition of $18.7 million from the one-time amendment of a patent license agreement with one of our principal licensees. We expect that with the expiration of our broadest MOSFET patents in 2009, our quarterly royalty revenue will not exceed approximately $2.0 million in each of the next several quarters absent the consummation of additional license agreements.

TS revenue was $11.7 million for the three months ended March 29, 2009 compared to $14.4 million for the three months ended March 30, 2008. TS revenue was $35.4 million for the nine months ended March 29, 2009 compared to $46.4 million for the nine months ended March 30, 2008. TS costs for the nine months ended March 29, 2009 included $2.3 million due to the revision of the deferred gain on the Divestiture related to the PCS business. On January 15, 2009, the Company received a written notification from Vishay that terminated certain wafer processing services under the Transition Product Services Agreement ("TPSA") entered into by us with Vishay, effective April 30,

2009. The revenue received by us from such terminating services represents a majority of the revenue reported under our TS segment. We therefore expect revenues in our TS segment to decline by more than 70% in the fiscal quarter ended June 28, 2009 compared to the fiscal quarter ended March 29, 2009. In addition, with the expected drop in revenue during the fiscal quarter ended June 28, 2009, we expect TS segment gross margins in future periods to be negatively impacted by a dramatic reduction in utilization of our Temecula, California fabrication facility that has provided most of the wafer services to Vishay.

Selling and Administrative Expense

Selling and administrative expense was $51.8 million (35.4 percent of revenue) and $76.1 million (30.2 percent of revenue) for the three months ended March 29, 2009 and March 30 2008, respectively, and $178.6 million (30.8 percent of revenue) and $212.6 million (27.2 percent of revenue) for the nine months ended March 29, 2009 and March 30 2008, respectively.

During the three and nine months ended March 29, 2009, we incurred fees and costs related to the Audit Committee-led Investigation, 2007 annual meeting and contested proxy fees and costs, and consulting fees and costs associated with preparing and filing our financial statements and tax returns, totaling approximately $2.2 million and $36.4 million for the three and nine months ended March 29, 2009, as compared to approximately $24.9 million and $64.6 million of costs related solely to the Audit Committee-led Investigation in the three and nine months ended March 30, 2008. The costs related to the Audit Committee-led Investigation include legal, audit and consulting fees and other costs associated with the Investigation, reconstruction of the financial results at . . .