Flextronics International Ltd. — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended September 30, 2011; comparable periods ended October 1, 2010. The interim financial statements were reviewed, not audited. Flextronics provides design, electronics manufacturing, supply-chain and related services to OEMs across four markets: High Velocity Solutions, Integrated Network Solutions, Industrial & Emerging Industries, and High Reliability Solutions.
Financial performance
| Metric | Quarter ended Sep. 30, 2011 | Comparable quarter | Six months ended Sep. 30, 2011 | Comparable six months |
|---|---|---|---|---|
| Net sales | $8,044 million | $7,422 million | $15,592 million | $13,988 million |
| Gross profit / margin | $375 million / 4.7% | $398 million / 5.4% | $776 million / 5.0% | $768 million / 5.5% |
| Net income | $130 million | $144 million | $262 million | $263 million |
| Diluted EPS | $0.18 | $0.18 | $0.35 | $0.33 |
| Cash from operations | Not presented quarterly | $437 million | $598 million | |
| Free cash flow | Not presented quarterly | $200 million | $376 million |
Quarterly revenue rose 8%, but gross profit fell about 6% and net income fell about 10%. For the six-month period, revenue increased 11%, gross profit increased about 1%, and net income was nearly flat. Lower gross margins reflected a greater mix of low-margin products, particularly ODM personal computing, reduced capital-equipment sales, and unfavorable manufacturing and product-transition costs. SG&A rose in dollars but remained 2.7% of quarterly sales and 2.8% of six-month sales.
Financial position and liquidity
- At September 30, cash and cash equivalents were $1.596 billion; total current assets were $9.936 billion and current liabilities were $7.880 billion.
- Bank borrowings, long-term debt and capital lease obligations totaled approximately $2.209 billion, implying net debt of approximately $613 million against reported cash. The company reported covenant compliance.
- Six-month operating cash flow was $437 million, down from $598 million. Working capital and other uses reduced cash by $61 million; higher receivables and inventory were partly offset by higher payables and other current liabilities.
- Net capital expenditures were approximately $237 million. Free cash flow, defined by the company as operating cash flow less net property and equipment purchases, declined to $200 million from $376 million.
- Cash declined by $153 million during the six months to $1.596 billion. Financing activities used $304 million, primarily for share repurchases; investing activities used $256 million.
- Working-capital indicators: cash conversion cycle was 19 days, versus 14 days a year earlier; average net working capital rose to 6% of annualized sales from 4%.
Receivables securitization is a notable liquidity factor: the company reported $1.073 billion of deferred purchase price receivables in current assets, compared with $460 million at March 31, 2011. It had sold approximately $1.7 billion of receivables under its asset-backed programs by quarter-end, receiving $601 million in net cash and retaining the deferred purchase price receivable.
Changes, outlook and notable items
- Sales increased in the quarter across High Velocity, Integrated Network and High Reliability Solutions, partly offset by lower Industrial & Emerging Industries sales. The ODM personal-computing business was a significant source of High Velocity sales growth.
- Flextronics accelerated its exit from ODM personal computing, which generated $743 million of quarterly sales and an approximately $20 million operating loss. Management expected to complete the exit by the end of the December 2011 quarter, with quarterly revenue declining sequentially by about $550 million. Expected third-quarter losses were $30–$50 million; management anticipated no material revenue or significant losses from the business thereafter and expected improved operating results following the phase-out.
- On October 19, 2011, after quarter-end, the company entered a five-year, $2.0 billion credit facility: a $1.5 billion revolver and a $500 million term loan. It replaced the previous $2.0 billion revolver and refinanced a $480 million outstanding tranche scheduled to mature in October 2012.
- The company repurchased 48.2 million shares for $306 million during the six months and retired them. A further $93.9 million remained authorized under the Board’s July 2011 repurchase approval at September 30.
- The effective tax rate was 11.0% for the six months, versus 7.5% a year earlier, reflecting jurisdictional earnings mix and discrete tax adjustments; management did not anticipate a significant fiscal-2012 effective-rate impact from changes in jurisdictional mix.
- A shareholder class action related to the Solectron merger was dismissed without prejudice on September 26, 2011; the plaintiff had 60 days to appeal. The company considered the claims without merit and any potential loss immaterial. Other ordinary-course legal matters were not expected to be material beyond accrued amounts.
- Risks highlighted include customer order changes or cancellations, customer and product concentration, component shortages, supply-chain disruptions, foreign exchange, demand and utilization changes, and execution of the ODM exit. The company was monitoring potential supply-chain effects from Japan’s 2011 disaster and flooding in Thailand. Its ten largest customers represented 59% of quarterly sales and 57% of six-month sales; HP exceeded 10% in both periods, and Research In Motion exceeded 10% in the quarter.
Important facts for investors to verify
- Whether the ODM personal-computing exit met its timing and loss estimates, and whether manufacturing and design resources were redeployed as planned.
- Whether margin performance improves after the exit, given the quarter’s lower gross margin and product-mix and transition-cost pressures.
- The sustainability and quality of operating cash flow, including working-capital growth and the increased reliance on receivables securitization and deferred purchase price receivables.
- Customer concentration, component availability and any supply-chain effects from geopolitical or natural events.
- Terms, covenant headroom and debt-service implications of the post-quarter credit facility, along with the use of cash for debt reduction versus share repurchases.
- Any appeal or further developments in the dismissed Solectron-related class action.