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Flextronics Ratings Affirmed Despite Risk to Revenues from Motorola Sale

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Fitch Ratings has affirmed Flextronics's debt ratings at 'BBB '. The Rating Outlook is Stable.

Fitch said that the ratings and Outlook reflect Fitch's expectations for stable operating profit margins and solid annual free cash flow (FCF) over the intermediate term, despite the potential for continued top line volatility.

For fiscal 2015, Fitch anticipates flat to slightly negative revenue growth, driven by the delay of new programs ramps until the second half of the year. ­Fitch believes Lenovo's acquisition of Motorola Mobility, Flextronics' largest customer, will weigh on Flextronics' top line beginning in fiscal 2016, given Lenovo's internalized manufacturing model.

Over the longer term, 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, industrial automation, could accelerate growth to mid-single digits through the cycle.

Fitch expects operating profit margin will remain in the low single digits but strengthen gradually from an increasing mix of sales in non-traditional end markets and lower exposure to high-velocity markets, mainly handsets. As a result, Fitch anticipates operating EBITDA to bottom in fiscal 2016 at just over $1 billion and resume growth in fiscal 2017.

Fitch anticipates annual FCF will exceed $500 million through the cycle, driven by consistent profitability and solid working capital efficiency. Fitch believes advance payments received from customers in fiscal 2014 to offset inventory investments associated with underperforming programs support the industry's maturity and strengthened FCF profile.

Fitch anticipates Flextronics will use annual FCF for a combination of acquisitions and share repurchases. Fitch expects acquisitions will be smaller and 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.

Credit protection measure should remain in-line with the rating. Fitch expects total leverage (total debt to operating EBITDA) below 2.5x and debt adjusted for off-balance sheet accounts receivable securitization and operating leases below 3.5x. Fitch estimates total leverage was 1.9x and operating EBITDA to gross interest expense was more than 17.8x for fiscal 2014.

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