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Fitch Affirms Flex's Ratings at 'BBB-'; Outlook Positive
June 1, 2017 / 5:05 PM / 6 months ago

Fitch Affirms Flex's Ratings at 'BBB-'; Outlook Positive

(The following statement was released by the rating agency) NEW YORK, June 01 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) and senior unsecured ratings of Flex Ltd. (Nasdaq: FLEX; Flex) at 'BBB-'. The Rating Outlook is Positive. The ratings affect approximately $3 billion of debt outstanding as of March 31, 2017. A complete list of rating actions follows at the end of this release. The rating affirmation reflects Flex's electronic manufacturing services (EMS) market leadership position, global footprint, increasing revenue diversification and profitability, and free cash flow (FCF) generation profile. The Positive Outlook reflects Fitch's view that several evolving trends in the EMS sector (electronification of everything, product agnostic strategies, internal and external design collaboration) are addressing the cyclicality, customer concentration and low margins that have long been the primary credit risks relevant to Flex and other EMS providers. Fitch believes these evolving trends can fundamentally improve Flex's credit profile over the long term. KEY RATING DRIVERS Market Leadership, Scale: The second largest EMS provider in the world, Flex offers customers a global footprint that optimizes logistics, accelerates time to market and provides economies of scale in purchasing materials. Fitch believes Flex is likely to sustain its leadership position due to its massive scale that would be difficult to replicate and growing design collaboration with original equipment manufacturers that elevates the company from an outsourced manufacturer to a strategic partner. End Market Diversification: Flex's Industrial & Emerging Industries (IEI) and High Reliability Solutions (HRS) segments accounted for 38% of revenue and over half of operating profit in FY17. Fitch expects these non-traditional electronics segments to outgrow the rest of the business over the next several years, further improving diversification and reducing volatility from longer product lifecycles. Increasing Margins: Fitch expects mid-cycle EBIT margins to approach 4% over the intermediate term from 2%-3% historically due to a richer sales mix to non-traditional markets and increased co-innovation and collaboration (i.e. sketch-to-scale). Fitch believes Flex's strategy of deeper engagement provides additional support for a structural increase in company margins. Customer Concentration: Like most EMS providers, Flex derives a significant portion of its revenue from a select few customers. In FY17, the company's 10 largest customers accounted for 43% of sales, a material improvement from 63% 10 years ago. Fitch expects customer concentration to further reduce as Flex executes its product agnostic strategy. Customer concentration risk is further offset by the multitude of products and programs per customer. FCF Generation: Fitch expects about $600 million - $700 million of mid-cycle annual FCF, driven by improved profitability. Fitch believes Flex's ability to moderate capital spending in the face of lower demand supports the industry's maturity and strengthened FCF profile. Fitch expects Flex will use FCF for share repurchases and acquisitions focused on access to technologies and customers in growth markets. Financial Policy: Fitch expects leverage (total debt-to-operating EBITDA, including A/R sale programs) to decline to around 2.5x from 3.4x over the ratings horizon. Short-term spikes in leverage to accommodate non-recurring capital investments or modest acquisitions would be consistent with the rating. Exposure to Cyclicality: Flex derives about 60% revenue from its Communications & Enterprise Compute (CEC) and Consumer Technologies Group (CTG) businesses, which are vulnerable to cyclicality, although the company has made progress diversifying away from traditional EMS business. Fitch views more than half of Flex's EBIT coming from its IEI and HRS segments and a countercyclical working capital profile as key offsets to this risk. DERIVATION SUMMARY Flex's market leadership and scale, progress diversifying its end markets, and key credit metrics are comparable to similarly rated peers within the EMS sector. Flex, along with other similarly rated EMS providers, is poised to benefit from positive trends within the sector as a whole including electronification of everything, product-agnostic strategies and design collaboration. These trends will help address the cyclicality, customer concentration and low margins that have long been the primary credit risks relevant to Flex and other EMS providers. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer are: --Low to mid single-digit long-term revenue growth driven by an increasing mix of higher growth IEI and HRS segments; --Revenue diversification and reduction in customer concentration continues, driven by faster growth in IEI and HRS segments and product agnostic strategy; --Operating margin approaches 4% over the rating horizon based on increasing mix of higher margin IEI and HRS segments; --Mid-cycle FCF of $600 million - $700 million annually through the rating cycle; --Approximately 50% of annual FCF will be returned to shareholders via share repurchases. RATING SENSITIVITIES Positive Rating Action: Fitch's expectations for leverage to sustain below 2.5x and FCF to total debt above 25%, coinciding with successful execution on the company's expansion into non-traditional markets and design services. Indications of successful execution include increasing profitability (i.e. operating margins approaching 4%) and at least half of total operating profit deriving from the company's HRS and IEI segments. Negative Rating Action: Expectations for leverage sustaining above 3x as a result of debt-financed acquisition(s) or shareholder friendly activities, or structurally lower EBITDA; reduced profitability with no expectation to return to normalized levels. LIQUIDITY Liquidity as of March 31, 2017 was adequate, supported by $1.8 billion of cash on hand, an undrawn $1.5 billion revolving credit facility and Fitch's expectation for annual mid-cycle FCF of $600 million to $700 million. Total debt as of March 31, 2017 is approximately $3 billion and consists of: --$19 million of capital leases; --$1.5 billion senior unsecured revolver debt due March 2019 ($0 outstanding); --$503 million senior unsecured term loan debt due March 2019; --$700 million senior unsecured term loan debt due November 2021; --$53 million of euro denominated senior unsecured term loan debt due September 2020; --$107 million of euro denominated senior unsecured term loan debt due January 2022; --$500 million of 4.625% senior unsecured notes due February 2020; --$500 million of 5.000% senior unsecured notes due February 2023; --$600 million of 4.750% senior unsecured notes due June 2025; FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Flex Ltd. --Long-Term IDR at 'BBB-'; --Senior unsecured revolving credit facility at 'BBB-'; --Senior unsecured debt at 'BBB-'; --Senior unsecured term loans at 'BBB-'. The Rating Outlook is Positive. Fitch criteria for rating non-financial corporate entities consider accounts receivable factoring facilities to be debt. Flex utilizes such facilities in the form of trade receivable securitization and sale programs. Previous analysis added receivables sold but not collected, as opposed to the balance of trade receivables sold outstanding, to adjusted debt instead of total gross debt. To correct this, Fitch has added the outstanding balance on receivables sold to gross debt and appropriately considered the inclusion in calculation of total leverage. Contact: Primary Analyst Kevin McNeil Director +1-646-582-4768 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jason Pompeii Senior Director +1-312-368-3210 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Fitch added back the outstanding balance of receivables sold for cash to accounts receivable and included the balance in total debt. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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