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Rating Action:

Moody's upgrades Flex's senior unsecured debt to Baa3, changes outlook to stable

09 Jun 2016

New York, June 09, 2016 -- Moody's Investors Service has upgraded Flextronics International Ltd.'s ("Flex") senior unsecured debt ratings to Baa3 from Ba1 and changed the outlook to stable from positive. In addition, Moody's withdrew the company's Ba1 Corporate Family Rating, the Ba1-PD Probability of Default Rating and the SGL-1 Speculative Grade Liquidity Rating.

The rating upgrade reflects Moody's views that Flex has demonstrated steady progress in diversifying its capabilities beyond its roots in electronics manufacturing services ("EMS"). The new collaborative design and build model between the company and its customers allows it to capture growth opportunities from new customers and markets. The company has delivered steady financial performance and now has a customer base that is less concentrated and that extends across an expanded industry set.

RATINGS RATIONALE

The Baa3 rating reflects Flexs' diversification drive, solid cash generating capacity, and Moody's expectation that the company will maintain a leading global position in electronics manufacturing services ("EMS") and complete supply chain solutions. Flex has a global manufacturing footprint with facilities located in low labor cost regions, but has also been expanding its capabilities and services so as to provide complete end-to-end product life cycle capabilities, to support its customers from concept through commercialization. This strategy should lead to steadily improving operating margins and returns on invested capital that are commensurate with an investment grade rating.

The company has been diversifying its end markets into business areas that are more recent adopters of EMS outsourcing, which has been driven in large part by increasing electronics content in an ever-expanding array of products and devices. This increased contribution from the automotive, energy, medical and industrial segments delivers higher margins and longer product cycles that offset the more volatile legacy consumer oriented electronics sectors. Over the next several years, Moody's expects revenue and operating profits from the company's high reliability solutions and industrial and emerging industries segments to exceed the contribution from the consumer technology and communications & enterprise compute units which have historically accounted for the majority of profitability.

While Flexs' financial leverage will be elevated in the near term, due to debt raises to fund recent acquisition activity, Moody's expects the company to reduce leverage to the mid 2.0 times levels over the next year. This should be driven by revenue growth, margin improvements from its recent restructuring efforts, its increased customer engagement and continued expansion into higher margin industries.

Moody's also notes that the EMS sector has demonstrated enduring resiliency as the industry evolved from contract manufacturing to involve full supply chain services and greater design and build collaboration with its customers. These trends have minimized the historic cyclical volatility in the EMS sector, resulting from limited demand visibility, historic customer concentration and high fixed costs associated with maintaining manufacturing operations to serve customers across the globe. As the EMS providers are more fully integrated within the overall supply chains of their expanding customer base, the industry has delivered more consistent and stable returns.

Flexs' has a very good liquidity position. This is supported by Moody's expectation of cash balances of at least $1.5 billion (cash was over $1.6 billion as of March 31, 2016) and consistent generation of free cash flow. Cash flow could be slightly affected by ongoing margin pressure in the consumer technology segment over the next year, although Moody's expects relatively stable capital expenditures compared to prior years. Liquidity is also supported by Flexs' full access to a $1.5 billion committed unsecured revolving credit facility maturing October 2019 and our expectation that Flextronics will maintain substantial cushion relative to financial covenants over the next twelve months.

Outlook

The stable outlook reflects Flexs' strong credit profile as it affords it the flexibility to manage operating and business challenges, which are persistent in its line of business, especially as the industry evolves from contract manufacturing to involve greater design and collaboration with its customers.

What Could Change the Rating - Up

Flexs' ratings could be upgraded if the company continues its path of tangible progress in business line diversification that delivers operating and financial metrics improvement, evidenced by operating margins sustained above 4.0%, sustained total debt to EBITDA below 2.0x (Moody's adjusted) and free cash flow to adjusted debt above 25%.

What Could Change the Rating - Down

The rating could be downgraded if Flexs reverses its operating improvements, experiences substantial revenue erosion or experiences material customer/program losses without offsetting increases in new customer wins/program ramps, such that its profitability metrics deteriorate (e.g., operating margins approach 2.0%), or total debt to EBITDA is sustained above 3.0x (Moody's adjusted).

..Rating Actions:

Corporate Family Rating -- Ba1 Withdrawn

Probability of Default Rating -- Ba1-PD Withdrawn

Speculative Grade Liquidity Rating -- SGL-1 Withdrawn

Senior Unsecured Notes -- Upgraded to Baa3 from Ba1

Outlook changed to Stable from Positive

Based in Singapore, with operating headquarters in Santa Clara, CA, Flex is a leading electronics manufacturing services company that provides innovation, design, engineering, manufacturing and supply chain and logistics services to its customers in various industries and end-markets.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Gerald Granovsky
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Flex's senior unsecured debt to Baa3, changes outlook to stable
No Related Data.
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