Fitch Revises Outlook on Flextronics to Negative

NEW YORK--(BUSINESS WIRE)--Oct. 27, 2005--Fitch Ratings has revised the Rating Outlook on Flextronics International, Ltd. (Flextronics) to Negative from Stable. Flextronics' 'BBB-' issuer default rating and senior unsecured bank credit facility are affirmed, as is the 'BB+' senior subordinated debt. Fitch's action affects approximately $1.6 billion of debt.

The Negative Outlook reflects Flextronics' expectations for lower organic revenue growth, Fitch's belief that the company will be challenged to meet near-term operating margin targets, and the potential use of high cash balances for shareholder-friendly transactions and/or acquisitions. Flextronics' meaningful reduction of revenue guidance for fiscal 2006 ended March 31, 2006, is due to delays in revenue from new program ramps, weaker demand in all end markets except wireless handsets, and faster than expected reduction in revenues from two significant wireless handset customers. Operating margins for the second quarter, ended Sept. 30, 2005, were lower than Fitch had expected, primarily as a result of costs associated with the Nortel Networks (Nortel) integration and other product ramps, as well as the divestiture of higher margin businesses. Fitch believes the size and complexity of recent program wins, including Nortel, may result in further delays in achieving intermediate-term revenue and profitability improvement, as winning components manufacturing services and transferring certain activities to Flextronics' low-cost industrial parks are key to expanding the company's addressable market and driving margin expansion.

The ratings continue to reflect the company's industry-leading cash conversion cycle (CCC), which has consistently contributed to annual free cash flow and one of the industry's best-positioned low-cost manufacturing footprints. The ratings incorporate longer term industry growth trends supported by increased penetration of the manufacturing and design outsourcing model and expectations that tier 1 electronics manufacturing services (EMS) providers will continue to benefit from original equipment manufacturers (OEM), consolidating their EMS suppliers. Ratings concerns center on integration risks related to the acquisition of Nortel's manufacturing facilities, Flextronics' acquisitive history and more aggressive operating strategy, and increased operating leverage associated with the company's vertical model. The ratings also reflect the EMS industry's thin operating margins and ongoing competition from original design manufacturers (ODM).

Liquidity is sufficient to meet upcoming debt maturities and the company generated significant free cash flow of approximately $327 million for the quarter, due mostly to lower working capital requirements. However, Fitch remains concerned about Flextronics' potential use of cash for shareholder friendly transactions and/or acquisitions, as the company is expected to remain acquisitive and indicated that it will use the approximately $320 million of remaining net proceeds from recent asset divestitures for share or debt repurchases if these proceeds are not reinvested in its businesses.

As of Sept. 30, 2005, Flextronics' liquidity was supported by approximately $1.15 billion of cash and cash equivalents and an undrawn $1.35 billion senior unsecured revolving credit facility expiring 2010. Additional sources of liquidity include a $250 million A/R program, expiring March 2006, of which approximately $175 million was outstanding as of Sept. 30, 2005, and annual free cash flow. Flextronics' CCC continues to lead the tier 1 EMS industry but increased to a Fitch-estimated 26 days, adjusting for A/R sales, for the latest 12 months (LTM) ended Sept. 30, 2005, from a record low 23 days at the end of fiscal 2004. Total debt was approximately $1.6 billion as of Sept. 30, 2005, and consisted primarily of $500 million 1% convertible subordinated notes due 2010, approximately $400 million 6 1/2% senior subordinated notes due 2013, approximately $462 million 6 1/4% senior subordinated notes due 2014, and $195 million zero-coupon convertible junior subordinated notes due 2008.

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