Fitch Affirms Flextronics at BBB-; Outlook Stable

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Fitch Ratings has affirmed the ratings for Flextronics International Ltd. (Flextronics), including the Long-Term Issuer Default Rating at 'BBB-'. Fitch's action affects $4.2 billion of debt, including the undrawn $1.5 billion revolving credit facility (RCF). The Rating Outlook is Stable.

The ratings and Outlook reflect Fitch's expectations for stable profitability and solid annual free cash flow (FCF) through the intermediate term, despite capital spending returning to normalized levels beginning in the current fiscal year.

Fitch expects flat-to-positive low-single-digit organic revenue growth for fiscal 2016, driven by new program ramps more than offsetting lower sales from Motorola Mobility following its acquisition by Lenovo Group Ltd.

Nonetheless, Fitch expects low-single-digit revenue growth through the cycle, driven by strong customer relationships and share in mature traditional end-markets. Fitch believes faster-growing end-markets, including medical, automotive, and industrial automation, will drive positive mid-cycle revenue growth.

Fitch expects profitability will gradually strengthen over the longer term from a richer sales mix of non-traditional markets and lower exposure to high-velocity markets, particularly handsets. Fitch expects operating EBITDA will trough at $1.2 billion in the near term and expand through intermediate term.

Fitch expects more than $500 million of annual FCF through the cycle, driven by strengthening profitability and cash flow from the liquidation of inventory during a downturn. Additionally, Fitch believes Flextronics' increasing ability to moderate capital spending in the face of lower demand supports the industry's maturity and strengthened FCF profile.

Fitch expects Flextronics will use annual FCF for acquisitions and share repurchases, and that acquisitions will be focused on access to technologies and customers in faster-growing markets. At the same time, Flextronics is targeting 50% of FCF to be distributed to shareholders through stock buybacks.

Fitch anticipates Flextronics would fund larger acquisitions with debt and the company recently issued $600 million of senior notes for general corporate purposes, including the EUR457 million ($494 million) acquisition of automotive mirror electronics supplier, MCi.

Credit protection measures should remain sound for the rating. Fitch expects total leverage (total debt-to-operating EBITDA) below 3x and debt adjusted for off-balance-sheet accounts receivable securitization and operating leases below 4x. Fitch estimates total leverage was 2.1x, for the fiscal year ended March, 31, 2015, pro forma for the recent senior notes offering.



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