Fitch Ratings has affirmed Flextronics International Ltd.'s (Flextronics) long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB-'. The Rating Outlook is Stable.

Rating strengths include the following:

• Significant advantage in scale and scope of operations as the second largest provider of electronics manufacturing services in the world;
• Favorable industry trends toward increased manufacturing outsourcing, particularly in the emerging industrial, medical, and clean tech space where Flextronics has a leading position;
• Strategic positioning in increasingly complex EMS product offerings including product design, engineering, and product lifecycle management which enhance the value of EMS partnerships for customers;
• High working capital nature of the business model which provides a source of liquidity in a market downturn.

Ratings concerns include the following:

• Recent execution missteps, as exemplified by Flextronics's exiting the PC ODM business and prolonged difficulty in creating sustained profitability in the components space, which highlight the vulnerability to execution risk inherent in the low margin business profile;
• A highly competitive environment which pressures profitability across the industry;
• Customer concentration risk with its top 10 customers accounting for approximately 55% of revenue in fiscal 2012 (end March 2012);
• Exposure to the cyclicality of the IT industry and the broader macro economy through a high proportion of consumer and networking infrastructure business.

The affirmation and Stable Outlook reflect the following considerations:

• Fitch believes that, while near term challenges for Flextronics highlight important risk factors, Flextronics remains well-positioned at its current rating. Recent difficulties (components profitability issues, PC ODM business exit, estimated close to 10% RIM exposure) are unlikely to materially impact the credit as management has taken decisive actions to address the issues. Flextronics EBITDA margin did drop to 3.5% in the September 2011 quarter but rebounded to a 4.5% in the recent March 2012 quarter. In addition, Flextronics has produced positive free cash flow each of the past five quarters despite these operational issues.
• While outsourcing growth is maturing in areas like high velocity consumer and enterprise and infrastructure, Fitch expects Flextronics to continue to focus on under-penetrated, rapidly growing areas like the industrial, medical, and clean tech space. Fitch believes this segment's deeper customer engagements, longer product life-cycles, and increased opportunity for cross-selling may offer reduced revenue volatility, higher margins, and meaningful growth opportunities.