Patroller, all,
Here is a report from Moody's on FLEX. Seems like a reasonable summary of "Where we are now" of the company. Any corrections, additions from anyone?
Best,
Sam
Friday February 19, 4:40 pm Eastern Time
Moody's raises Flextronics snr sub notes
(Press release provided by Moody's Investors Service)
NEW YORK, Feb 19 - Moody's Investors Service raised the rating on
Flextronics International Ltd.'s $150 million of 8-3/4% senior subordinated
notes, due 2007, to B1 from B2.
At the same time, Moody's confirmed the Ba2 ratings on Flextronics' amended and restated $63 million senior secured
revolving credit facility and $57 million senior secured revolving credit facility of its wholly-owned subsidiary,
Flextronics International USA, Inc. (FIUI).
The company's senior implied rating is Ba2.
The ratings outlook is stable.
The rating upgrade takes into account Flextronics' improved balance sheet resulting from its recent $194 million
secondary public offering, a portion of the proceeds of which were applied to repay borrowings outstanding under the
revolving credit facility.
As a result, the company's debt to cash flow ratio was reduced to a moderate 2.5 times for the LTM ended December 31,
1998.
However, the ratings are tempered by the company's substantial capital spending, which is not covered by free cash flow
from operations; the company's continued moderately highly leveraged capitalization, even after the issuance of equity;
challenges associated with managing its dramatic growth and assimilating future acquisitions; its use of the
pooling-of-interests financing of acquisitions which could entail future write-offs if acquired operations do not meet
performance expectations; the company's dependence on a relatively small number of major customers; the near-term
difficulties of its two largest customers, Philips Electronics and Ericsson, which accounted for 19% and 18%,
respectively, of sales; the relatively sizable proportion of revenues derived from the manufacture of lower margin
consumer electronics products; and, despite its exercise of hedging strategies, the continued exposure of its international
operations to significant currency devaluations.
While the company continues to diversify its product and customer portfolio, each new product launch entails an initial
ramp prior to achievement of full volume manufacturing which can erode gross margins.
The ratings also reflect Flextronics' uncertain revenue base due to the difficulty of forecasting demand for products that
have changing technology and potentially short product lives; the vulnerability of many of the company's end use markets
to recession, which may cause a decrease in overall demand for contract manufacturing services; and competition in its
fast growing industry sector, which may put pressure on margins.
The rapidly converging telecommunications and networking sectors now account for a disproportionately high 46% of
total business.
Although Flextronics has grown to command one of the top five electronics manufacturing services market shares, the
company must contend with the sizable resources, scale economies and, in certain instances, more established customer
relationships of its three significantly larger rivals, Solectron, SCI Systems and Celestica.
However, the ratings also recognize Flextronics' marked improvement in returns on assets and invested capital, which
measured 10.2% and 14.4%, respectively, based on EBITA plus rents, over the LTM ended December 31, 1998.
Flextronics accomplished this performance by means of a very good inventory turnover of 8.6 times and solid fixed asset
turnover of about 4.8 times, offsetting about a 120 YOY basis point decline in gross margin stemming from changing
customer and product mix, new plant start-up expenses, pricing softness in printed circuit board (PCB) sales, and a
reclassification of information technology expenses to COGS from SG&A.
The company benefits from a strong marketing and sales operation which promotes the company's global reach and its
vertically integrated services.
Flextronics implements its business plan through the operation of campus-like fully integrated, high volume industrial
park facilities in strategically located, low wage international labor markets where key suppliers and transportation
providers are offered space to co-locate their facilities, thereby reducing logistical barriers and costs.
Currently, the company conducts its manufacturing at 26 sites totaling over 2.7 million square feet of capacity on four
continents.
The company has developed unique competencies in advanced interconnect and packaging technologies, and, by way of
its 1996 acquisition of Astron Group Limited, the capability to fabricate miniature gold-finished printed circuit boards for
specialized applications such as cellular phones, optoelectronics, liquid crystal displays, pagers and automotive electronics.
At 2.5 times EBITDA plus rentals, Flextronics' total debt, including the capitalization of annual rental payments due under
the company's operating leases, is reasonable.
EBITA plus rentals coverage of pro forma fixed charges for the LTM ended December 31, 1998 was nearly 3 times.
After deducting estimated FY1999 capital expenditures of about $145 million, free cash would not have been sufficient to
provide coverage of pro forma fixed charges.
Among the current capital projects are the initial building at the second industrial park in Hungary; expansion of the PCB,
PCB assembly and plastics operations at Doumen, China; and an industrial park in Sao Paulo, Brazil, with construction
expected to commence in FY2000Q1.
As a result of the equity offering, the company's unaudited capitalization is now comprised of 58% consolidated net
worth, and 42% long term debt and capitalized leases.
Moody's calculation of net worth recognizes the modest amount of goodwill remaining on the balance sheet after
write-offs of in-process research and development taken at the time of various acquisitions.
The company's liquidity position is excellent, with just over $201 million in cash on the December 31, 1998 balance sheet
and all but $12 million available under the revolvers.
The confirmation of the amended and restated credit facility rating is based on a cautionary approach to the collateral
package. As of the end of FY1998, less than one-third of the company's assets were situated within the United States.
The enforceability of security interests in certain foreign countries where the company's assets are located is uncertain.
Additionally, the credit facility is guaranteed on a secured basis by all direct and indirect subsidiaries of Flextronics, but
there exist certain excluded subsidiaries of the company that in the aggregate account for a significant portion of the asset
base.
These include the various entities operating in China; Neutronics, the company's Austrian electronics manufacturing
service provider operating in Austria and Hungary acquired in late 1997; and Conexao, the company's Brazil-based
electronics manufacturing services provider acquired at the end of FY1998.
Obligations under the credit facility are secured by a security interest on all accounts receivable and inventory of the
borrower, and by a pledge of subsidiary stock.
Except for permitted liens, all assets of Flextronics and its subsidiaries are subject to a negative pledge.
Total funded debt to EBITDA is limited to a maximum of 4.5 times, significantly less stringent than the restrictions under
the original credit facility in which debt to EBITDA would have been required to decline to 2.75 times over time.
There is also a coverage covenant stipulating that EBITDA, on a rolling four quarter basis, cover interest by at least 3.25
times.
Flextronics International Ltd., headquartered in Singapore, has its main U.S. offices in San Jose, California.
The company provides contract manufacturing services to OEMs in the communications, computer, consumer
electronics and medical industries. |
