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Tickers in this Article: FLEX, NT, CLS, SANM
The rather abrupt bankruptcy filing By Nortel Networks (NYSE:NT) may cause some collateral damage to the contract manufacturers who do business with the company, including Flextronics International (NYSE:FLEX), but it shouldn't be life threatening to the company. (For related reading, see An Overview Of Corporate Bankruptcy.)

Although the market was particularly spooked because Nortel specifically mentioned Flextronics in its press release as a "key supplier", it looks like the market overreacted because Flextronics is no longer heavily dependent on Nortel for business.

Flextronics is a freelance manufacturer that has factories in 30 countries, with 28 million square feet at its disposal. Revenues in the last 12 months ending September 26, 2008 were $34 billion. The company makes everything from printed circuit boards to mobile phones to power supply units. Companies generally utilize contract manufacturers so they can reduce fixed costs and concentrate on marketing, branding, and research and development.

Nortel No Big Deal
Although the market sold off Flextronics on the day of the Nortel filing, a look at the numbers shows that in the 12 months ending September 26, 2008, Nortel revenues totalled only 4% of Flextronics total revenue base. Flextronics has worked diligently to reduce its revenue concentration. In fiscal 2007, the company had a stunning 35% of revenue from Nortel and Sony Ericsson.

Debt and Liquidity
Is there any chance that the actions by Nortel could tip Flextronics into a cash or liquidity crisis? It's unlikely. The company made full disclosure of its liquidity and cash position at its analyst day in November 2008. The company has $1.7 billion in cash, and $3.4 billion in debt. Another $1.5 billion is available to borrow under its credit facility. It has two covenants that are worth watching. The first is debt to total EBITDA, which can't exceed 4:1, and the fixed coverage charge, which can't go below 1.5:1. These measures are currently at 2.79 and 3.28, respectively in its most recent quarter.

The debt is also laddered with maturities stretching out to 2014. Flextronics has to rollover $195 million in 2009, and $500 million in 2010.

Nortel also agreed to purchase $120 million of existing inventory by July 2009.

It's not clear how Flextronics competitors are being impacted by the bankruptcy. Sanmina-SCI Corp. (Nasdaq:SANM) said during its fourth quarter conference call held at the end of October 2008, that its top ten customers were responsible for 48% of revenues in the quarter, but that no customer was over 10%. Nortel was also not mentioned in Sanmina's 10-K filing either. Celestica (NYSE:CLS) said in its filing that two customers comprised 21% of revenues during fiscal 2007, but did not mention any names.

Flextronics also discussed its exposure to Nortel during its last conference call held at the end of October 2008. Michael McNamara, the CEO said that after its purchase of Solectron, the company lost about $800 million in Nortel business, and that Nortel was "probably more around 3 or 4% of our revenue and that's very, very comfortable levels to work with."

The sell-off in Flextronics, after news of the Nortel bankruptcy hit the tape, was likely an overreaction as Nortel is no longer a large customer of Flextronics, and the company's debt situation is manageable based on current levels of business.

Use debt securities to attack bankrupt companies and scavenge them for profits, learn more in Profit From Corporate Bankruptcy Proceedings.

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