Flextronics convertible buyers step in after 6-point drop, seeing jury award "absurd"

By Ronda Fears

Nashville, Sept. 25 - The shocking nearly $1 billion jury award against Flextronics International Ltd. sent the convertibles 6 points lower, while the stock lost $1.10, but buyers stepped in and at the end of the day and traders said the issue richened nicely against the stock decline.

The shock of the award comes from a suit which originated as a $2.2 million contract dispute.

Flextronics said it was appalled.

Beyond the specific situation at hand, market watchers said it raises concern about disclosure and the definition of a "material" event.

"There were actually some buyers" on the weakness, said one trader.

"There's a lot of headline risk, but the award really was absurd."

Another trader said the bonds got richer toward the end of the session even as the stock continued to slide. Flextronic shares moved steadily lower throughout the session, ending down $1.10, or 7.33%, to $13.90.

Flextronics' 1% convertible due 2010 - a $500 million issue sold in late July - was pegged at the close at 114 bid, 115 offered. That's 6 points behind where the issue closed Wednesday.

Flextronics stock and the converts halted trading at about 1.30 p.m. ET on Wednesday on news of the $934 million jury award, mostly in punitive damages, against the Singapore circuit board maker.

A California jury on Wednesday awarded the sum to medical device maker Beckman Coulter Inc. in a breach-of-contract lawsuit against Flextronics. The suit stemmed from circuit boards that Flextronics had agreed to supply to Beckman Coulter, as Flextronics ended the five-year contract prematurely in 2000 amid a dispute.

"We believe that the verdict is clearly unsupported by either the law or the facts and that the award of punitive damages is excessive and unwarranted, since the jury found only $3 million of actual contract and tort damages to Beckman," said Michael Marks, chief executive of Flextronics.

The company had already scheduled an analyst and investor conference call Thursday to discuss business trends and its general financial picture. But, given the news, about the first 15 to 20 minutes of the call was devoted to the matter.

"We intend to mount a vigorous challenge of this runaway jury verdict and are fully confident that this award will be almost entirely eliminated in subsequent legal proceedings."

The judge presiding over the case could review and amend the amount, and if not, Flextronics said it will appeal if necessary. There could be up to six months of reviews before a formal appeal to a higher court.

"That this irrational verdict could be rendered, even if subsequently corrected, exemplifies the need for reform of a legal system in which juries are allowed to impose absurd punitive damages," noted Marks.

Indeed, convertible market participants were shocked that a $2 million dispute could balloon into a potential $1 billion liability.

Even if Flextronics disclosed the lawsuit during the road show of the convertible deal in July, as the dispute was well under way, it would have been dismissed as a "non-event," one sellside analyst surmised.

Flextronics had about $860 million in cash before the recent $500 million convertible issue, so the magnitude of such a liability weighs heavily on its financial picture. There also was a good deal of negative reaction to several insider stock sales over the past month.

"I was horrified at the judgment amount, and then to see all these insider sales right after the stock got a pop from the company's mid-quarter update in August, it just leaves a bad taste in your mouth," said the sellside analyst, who spoke on condition of anonymity.

When asked whether the convertibles looked to be a buy opportunity on the weakness, the analyst said: "No. I would be reviewing this whole space, revisiting the credits to see, basically, did we gloss over the credits in this space?"

Yet, while the analyst acknowledged the lawsuit seemed very routine and the judgment abnormal, it "begs the question of disclosure and what defines a material event."

Standard & Poor's confirmed its ratings on Flextronics (BB+ senior, BB- subordinated) but revised the outlook to negative from stable, based on the initial jury award and uncertainties regarding the ultimate outcome.

Despite Flextronics' expectation of an ultimate liability of less than $10 million, S&P said the verdict raises the possibility of a significant future payment. But, S&P said that if the jury award is materially reduced, the outlook could be changed back to stable, given Flextronics' liquidity and debt profile.

S&P described Flextronics' liquidity as favorable compared to its peers in the electronic manufacturing services industry, noting the company showed cash flow from operations in the June quarter of $246 million and cash balances increased to $860 million.

The judge presiding over the Flextronics case is expected to enter a judgment on the verdict following a hearing Oct. 23.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.