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Investing.com -- Fitch Ratings has upgraded the Rating Outlook for FLEX Ltd. from Stable to Positive, while affirming its Long-Term Issuer Default Rating (IDR), senior unsecured notes ratings, and rating on the $2.5 billion revolver at ’BBB-’ on June 9, 2025.
The revised positive outlook is attributed to Flex (NASDAQ:FLEX)’s enhanced financial profile, boosted by steady financial policies and improved profitability. The company’s consistent annual Free Cash Flow (FCF) and increased profitability are expected to maintain EBITDA leverage below Fitch’s 2.5x positive rating sensitivity throughout the forecast period. This is despite potential macroeconomic and indirect trade challenges.
Fitch also highlighted Flex’s strong market position, diversified exposure to end markets experiencing secular growth, and a countercyclical working capital profile.
Flex’s financial strength has improved due to consistent financial discipline and increased profitability, despite the absence of a public leverage target. Debt levels are expected to remain near current levels ($4.0 billion-$4.5 billion), resulting in EBITDA leverage below Fitch’s 2.5x positive rating sensitivity, even as EBITDA margins range from 7% to 8%.
Flex ended fiscal 2025 and fiscal 2024 with EBITDA leverage of 2.3x and 2.4x, respectively, despite lower revenue levels following the sale of Nextracker. The company plans to use annual FCF for modest acquisitions and share repurchases.
Flex’s global presence, characterized by large scale and scope, provides significant competitive advantages. The company is expected to continue gaining market share from smaller competitors as customers consolidate suppliers. The company’s global footprint positions it to benefit from supply chain regionalization trends, reducing exposure to U.S.-China geopolitical and trade tensions.
Flex’s profitability, though weak compared to investment-grade peers, is consistent with EMS peers and has structurally improved. Increasing contributions from higher-margin datacenter (DC) and Health Solutions businesses, alongside reduced contribution from lower-margin consumer devices and lower fixed costs due to recent restructuring actions, should support Flex’s recent gross profit margin expansion.
Flex’s countercyclical working capital model, which constrains FCF during up-cycles and supports FCF through downturns, is expected to generate annual FCF of $500 million to $1 billion throughout the forecast period.
The company’s increased end market and customer diversification, including a focus on markets with higher electronics content and longer product life cycles, are driving more stable revenue growth.
Fitch views Flex as directly comparable to its closest peer, Jabil Inc. (BBB-/Stable). While Flex has slightly lower scale, it offers more end-market diversification and relies more on vertical integration than Jabil. Fitch expects Flex to maintain EBITDA leverage in the low-2x range, similar to Jabil’s metric.
Fitch’s key assumptions include flat to slightly down revenue in fiscal 2026, EBITDA margins remaining in the 7%-8% range, stable inventory efficiency ratios, modest acquisition activity, and Flex refinancing upcoming debt maturities.
Factors that could lead to a downgrade include EBITDA leverage sustained over 3.0x, Fitch-adjusted FCF margin sustained below 1%, or Operating EBITDA margin sustained below 5%. Conversely, factors that could lead to an upgrade include EBITDA leverage sustained below 2.5x, Fitch-adjusted FCF margin sustained above 3%, or Operating EBITDA margins sustained in the high single digits.
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