Flex Ltd. -- Moody's says Flex's proposed $400 million notes add-on improves maturity profile; no impact on Baa3 rating
Announcement: Moody's says Flex's proposed $400 million notes add-on improves maturity profile; no impact on Baa3 rating
Global Credit Research - 13 Aug 2020
New York, August 13, 2020 -- Moody's Investors Service, ("Moody's") said earlier today, Flex Ltd. ("Flex") announced a $400 million add-on to the company's existing 3.75% senior unsecured notes due 2026 and 4.875% senior unsecured notes due 2030. We expect net proceeds from the new notes will be used primarily to refinance short term borrowings and near term debt maturities as well as to fund other general corporate purposes including working capital and capital expenditures. Although the proposed offering is largely debt and leverage neutral, the add-ons are credit positive as they extend near term debt maturities.
Flex's Baa3 senior unsecured rating is supported by its scale as one of the largest North American EMS providers with good business diversification and cash generating capacity as well as our expectation that Flex will maintain a leading position in the electronics manufacturing services (EMS) industry. Although Flex has 11% revenue exposure to the telecom sector, the company is successfully diversifying into sectors that are more recent adopters of EMS outsourcing.
Disruptions caused by the COVID-19 pandemic on Flex's global supply chain, manufacturing operations, and customer demand combined with unfavorable revenue comparisons given the winding down of high volatility, short cycle revenues in the second fiscal quarter of last year, resulted in a (16.6%) revenue decline in 1Q21 (ending June 2020) compared to the same three months in the prior year. During its recent earnings call, the company guided to revenues for the second fiscal quarter ending September 2020 increasing in the 5%-10% range. Due to uncertainties regarding the pandemic, however, we conservatively expect revenues for the remainder of calendar 2020 will be flat to modestly higher, which still reflects improvement from our prior expectation for revenues to continue declining in the second half of calendar 2020.
Although adjusted operating margins of 3.4% for fiscal year March 2020 were at the highest level in several years and remained above 3% for the fiscal quarter ending June 2020, margins will continue to be pressured for the remainder of calendar 2020 by incremental expenses related to enhanced health and safety measures for employees as well as reduced capacity utilization given lower demand from certain product categories, including automotive. Despite these challenges, Flex benefits from solid cash flow from operations and positive free cash flow. There could be downward pressure on Flex's credit profile to the extent demand for EMS offerings remain weak, particularly in automotive and retail sectors, beyond calendar 2020 in a scenario in which COVID-19 is not contained.
Flex has improved free cash flow by over $780 million for FY March 2020 compared to the prior year, and we expect the company will be able to effectively continue managing working capital over the next year to support free cash flow. Inventory levels have declined to $3.5 billion as of June 2020 from a peak of $4.4 billion as of September 2018, and management is focused on further reducing inventory levels over the next few quarters. In addition to pay cuts and furloughs, Flex preserved cash by suspending share buybacks through June 2020 (roughly $60 million per quarter) and postponing non-critical capital spending, and we expect the company to remain prudent with discretionary spending.
Debt reduction since June 2019 contributed to improvement in adjusted leverage to less than 3.0x pro forma for the proposed add-ons and expected refinancings. Past economic downturns have shown that reduced working capital requirements will free up cash for debt repayment allowing Flex to maintain adjusted leverage within its current range. In addition to countercyclical cash flows, we believe Flex is well positioned to return to historical capacity utilization and operating margins when demand rebounds across affected sectors given the company's leading position and scale with global reach.
Flex has robust liquidity supported by our expectation for cash balances of $1 billion or more (cash was $1.9 billion as of June 2020), good free cash flow (Moody's adjusted), and full access to a $1.75 billion committed unsecured revolving credit facility maturing June 2022. After free cash flow (including Moody's standard adjustments) fell to negative territory in FY March 2019, it has since increased to just over $670 million for FY March 2020.
Based in Singapore with operating headquarters in San Jose, CA, Flex Ltd. is one of the largest global providers of contract electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) across several industries and end markets. Primary areas of focus include Lifestyle; Communications, Enterprise & Cloud; Consumer Devices; Automotive; Health Solutions; and Industrials.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
Carl Salas VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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