FLEX LTD. (Flextronics International Ltd.) — Form 10-Q Summary
Business context and period: Global provider of design, manufacturing and supply-chain services to electronics OEMs. This filing covers fiscal Q2 and the six months ended September 28, 2012, compared with periods ended September 30, 2011. Interim financial statements are unaudited; Deloitte & Touche conducted a review, not an audit.
Key financial metrics
| Metric | Three months ended Sept. 28, 2012 | Six months ended Sept. 28, 2012 |
|---|---|---|
| Net sales | $6.175 billion | $12.151 billion |
| Gross profit / margin | $366.8 million / 5.9% | $724.1 million / 6.0% |
| Continuing-operations income | $160.5 million | $297.2 million |
| Net income, including discontinued operations | $150.5 million | $279.0 million |
| Diluted EPS | $0.22 | $0.41 |
| Operating cash flow | Not separately presented for the quarter | $527.8 million |
| Free cash flow | Not separately presented for the quarter | $282.6 million |
At September 28, 2012, cash and cash equivalents were $1.562 billion, total assets $11.189 billion, and shareholders’ equity $2.453 billion. Bank and other borrowings were approximately $2.1 billion; the $1.5 billion revolving facility had no outstanding balance. The company reported compliance with credit-facility covenants. Cash plus operating cash flow and available borrowings were expected to fund operations for at least 12 months.
Material changes versus prior comparable periods
- Quarterly sales fell 22.9% year over year; six-month sales fell 21.6%. The largest driver was lower High Velocity Solutions (HVS) revenue, reflecting the prior exit from ODM PCs and reduced business with a major smartphone OEM, as well as weaker demand across customers.
- Gross margin improved from 4.6% to 5.9% for the quarter and from 5.0% to 6.0% for six months, despite lower gross-profit dollars. Management attributed the improvement mainly to a shift toward higher-margin businesses and prior-year manufacturing and transition costs.
- Quarterly net income rose from $129.9 million to $150.5 million, while six-month net income rose from $261.9 million to $279.0 million. Continuing-operations income also increased in both comparisons.
- Six-month operating cash flow increased to $527.8 million from $436.9 million; free cash flow increased to $282.6 million from $199.9 million.
- The company repaid the $140 million drawn on its revolving facility, borrowed an additional $50 million under its 2016 term loan, and repurchased 20.4 million shares for approximately $134 million during the first fiscal quarter. The share count was lower year over year.
Outlook, commentary, risks and unusual items
- Management said new programs were launching across its portfolio and expected increased production volumes in early fiscal 2014. It cautioned that start-up costs, inefficiencies, under-absorbed overhead and low initial volumes could weigh on margins until revenues ramp; margins were expected to improve as volumes grow. No specific numerical earnings or revenue guidance was provided.
- Management linked the sales decline to portfolio rebalancing and a weaker macroeconomic environment. Key risks cited include changing customer demand and orders, product acceptance and short life cycles, component availability, capacity utilization, customer concentration or financial distress, and integration of acquisitions. The ten largest customers represented 49% of quarterly sales; no single customer exceeded 10%.
- A $23.0 million gain from revaluing supplier warrants benefited interest and other expense (income), net. The gain included a $12.8 million out-of-period adjustment for the quarter and $5.7 million for the six-month period; management said the error was not material, but future warrant fair-value changes could materially affect results.
- Discontinued operations generated losses of $9.9 million for the quarter and $18.2 million for six months. These included a $10.0 million impairment charge related to a non-core business expected to be sold for $8.4 million, and a $4.7 million loss on the earlier sale of the camera modules business, which generated $16.5 million in proceeds.
- Legal matters arose in the ordinary course; management expected any probable or reasonably possible losses above accrued amounts not to be material. Substantially all cash was held by foreign subsidiaries; repatriation could incur withholding taxes, although management did not expect current restrictions to impair operations.
Important facts for investors to verify
- Whether new program ramps deliver the anticipated early-fiscal-2014 volume growth and margin improvement.
- How much of the reported earnings improvement reflects underlying operations versus the $23.0 million warrant valuation gain.
- Whether sales declines and weaker demand persist, particularly in HVS and Integrated Network Solutions.
- Working-capital and receivables-funding trends: the cash conversion cycle was 27 days, and receivables sales and deferred purchase-price balances are significant liquidity factors.
- Completion and final proceeds of the planned non-core business sale, and any subsequent changes in debt, share repurchases or cash availability.