Flextronics International Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2012; filed February 4, 2013. Unless noted, amounts are U.S. dollars. Flextronics provides design, manufacturing, supply-chain and related services to electronics OEMs. Its markets include Integrated Network Solutions (INS), High Velocity Solutions (HVS), Industrial and Emerging Industries (IEI), and High Reliability Solutions (HRS).
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $6.12B | $7.47B | $18.27B | $22.97B |
| Gross profit / margin | $246.5M / 4.0% | $385.7M / 5.2% | $970.6M / 5.3% | $1.16B / 5.0% |
| Income from continuing operations | $32.3M | $106.2M | $329.5M | $377.5M |
| Net income | $25.0M | $102.2M | $304.1M | $364.0M |
| Diluted EPS | $0.04 | $0.14 | $0.45 | $0.49 |
- Q3 sales declined 18.0% year over year; nine-month sales declined 20.5%. The decreases were concentrated in HVS, reflecting the prior exit from ODM PC manufacturing and lower business with a major smartphone OEM.
- Q3 gross margin fell 1.2 percentage points, including $98.3M of restructuring charges recorded in cost of sales. Nine-month gross margin rose 0.3 points, which management attributed primarily to a shift away from lower-margin HVS business.
- Operating cash flow was $1.01B for the nine months, versus $665.6M a year earlier. Free cash flow, as defined by the company, was $678.0M versus $335.8M. Investing cash outflow was $583.0M; financing cash outflow was $226.5M.
Balance sheet and liquidity
- At December 31, 2012, cash and cash equivalents were $1.71B, total current assets $8.28B and total current liabilities $6.43B. Cash was up from $1.52B at March 31, 2012.
- Debt and capital lease obligations were approximately $2.09B, including $233.4M classified as current on the balance sheet. The $1.5B revolving credit facility was undrawn; the company reported compliance with credit covenants.
- Management said existing cash, expected operating cash flows and available credit were expected to fund operations for at least the next 12 months. Substantially all cash was held by foreign subsidiaries; repatriation could incur withholding taxes.
- Receivables sales provide liquidity: at quarter-end, about $1.0B of receivables had been sold through securitization programs, with $462.0M retained as deferred purchase price receivables. A further $182.0M of receivables sold to third-party banks remained uncollected.
Material changes, outlook and risks
- Flextronics began a global restructuring in Q3 to reduce excess workforce and capacity and shift production to more efficient locations. It recorded $102.7M of charges: $20.6M cash and $82.1M non-cash. Management expected another $100M–$125M of charges in fiscal Q4 2013 and projected annualized savings of $140M–$160M.
- Management said multiple new programs were ramping and expected higher-volume production in early fiscal 2014. Start-up costs, inefficiencies, under-absorbed overhead and low initial volumes were expected to pressure margins until volumes increased; management expected margins to improve over time.
- Q3 interest and other income included a $41.8M fair-value gain on supplier warrants; the nine-month gain was $64.8M. The warrants’ future fair-value changes will affect reported results. The nine-month effective tax rate was 11.4%; a $10.5M Brazilian deferred-tax valuation allowance was released in Q3.
- Flextronics completed the sale of non-core businesses during fiscal 2013. Discontinued operations produced a $25.5M nine-month net loss, including $12.1M of losses on sale. Saturn Electronics and Engineering was acquired in December for total consideration of about $208.7M; the purchase-price allocation was preliminary.
- Key risks described include macroeconomic and customer-demand changes, customer order cancellations or delays, product and customer concentration, component availability, program ramp execution, manufacturing yields and capacity utilization, and integration of acquisitions. The ten largest customers accounted for 48% of nine-month sales, although no individual customer exceeded 10% in the 2012 periods.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The independent accountant conducted an interim review, not an audit. Management said ordinary-course legal matters were not expected to have a material effect beyond amounts accrued.
Investor verification priorities
- Track whether restructuring charges stay within the expected Q4 range and whether projected savings are realized.
- Assess the pace and profitability of new-program ramps, especially given continued sales weakness in HVS and the expected shift in business mix.
- Separate recurring operating performance from the supplier-warrant fair-value gain and other unusual items.
- Monitor operating cash conversion, working-capital needs, receivables securitization exposure and upcoming debt maturities, including $175.5M of Asia term loans due in September 2013.
- Review the final Saturn acquisition allocation and the performance and customer commitments associated with customer-specific assets and the $88.0M manufacturing-technology license.