Flextronics International Ltd. — FY2011 Form 10-K
Reporting period: Fiscal year ended March 31, 2011. Although the request metadata says “2010 Q4,” this filing reports FY2011; its fourth fiscal quarter ended March 31, 2011.
Business context
Flextronics is a global electronics manufacturing services provider, offering design, components, manufacturing, logistics and after-sales services across infrastructure, mobile, computing, consumer, industrial, automotive and medical markets. It operated in 30 countries, with approximately 176,000 employees and 25.1 million square feet of manufacturing capacity. One operating segment is reported.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $28.68 billion | $24.11 billion |
| Gross profit / margin | $1.58 billion / 5.5% | $1.22 billion / 5.0% |
| Net income | $596.2 million | $18.6 million |
| Diluted EPS | $0.75 | $0.02 |
| Cash from operations | $857.3 million | $798.9 million |
| Free cash flow | $463.5 million | $622.5 million |
- FY2011 SG&A was $816.3 million, or 2.8% of sales, versus $767.1 million, or 3.2%, in FY2010. Interest and other expense fell to $75.8 million from $155.6 million.
- At March 31, 2011, cash and equivalents were $1.75 billion, working capital was $2.23 billion, total assets were $11.63 billion and shareholders’ equity was $2.29 billion.
- Debt and capital lease obligations totaled approximately $2.22 billion, including $21.2 million current; the $2.0 billion revolver had $160 million drawn. The company reported compliance with debt covenants and no significant borrowings due within 12 months. The revolver expires May 2012.
- Capital expenditures, net of disposals, were approximately $393.9 million. Cash declined $179.1 million during the year. Management said cash, operating cash flow and available facilities should fund operations for at least 12 months.
Changes and notable items
- Sales rose 19% year over year, attributed mainly to improved end-market demand, new customer and program wins, and higher sales across all served markets and geographic regions. FY2010 sales had fallen 22% amid weak demand and customer-specific setbacks.
- Gross margin improved 50 basis points, with management citing higher utilization, fixed-cost absorption and prior restructuring benefits; FY2011 had no restructuring charge, compared with $107.5 million in FY2010.
- FY2011 earnings also benefited from lower interest expense and SG&A leverage. Other charges, net were $6.3 million, including debt-redemption and divestiture losses partly offset by an $18.6 million gain on sale of a previously impaired investment.
- Share repurchases totaled approximately 65.4 million shares for $400.4 million. The company redeemed $240 million of 1% convertible notes at maturity and $302.2 million principal of 6.25% notes early.
- Cash from operations increased, but free cash flow declined because capital spending rose to support growth. Working capital increased, including a $664.7 million increase in inventory; the cash conversion cycle improved to 15 days from 17.
Outlook, risks and contingencies
- Management described the EMS industry as recovering and expressed confidence in long-term outsourcing growth, design and engineering services, and after-market services. The filing provides no specific revenue, earnings or margin guidance.
- Component product services, less than 10% of revenue, were operating below optimal levels and continued to incur aggregate operating losses, though yields and losses improved. Ramp inefficiencies and raw-material and labor inflation also pressured margins in high-volume computing design programs.
- Component shortages that affected production in FY2010 and early FY2011 had largely normalized by the end of FY2011’s third quarter. Management was monitoring possible broader supplier disruption following Japan’s earthquake and tsunami; it did not expect direct Japan operations to materially affect results.
- Key risks include short-term and cancellable customer orders, customer concentration (top ten represented 52% of FY2011 sales; Research In Motion represented about 11%), intense competition, utilization and ramp risks, supply interruptions, international and currency exposure, tax incentives and audits, and product quality, regulatory and intellectual-property claims.
- Contractual obligations totaled $6.37 billion, including $3.43 billion of purchase obligations due within one year. A shareholder class action relating to the Solectron merger had been certified as a class; the company said it believed the claims lacked merit. Management did not expect other ordinary-course legal matters to have a material adverse effect.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether sales growth and gross-margin improvement persist, especially as start-up costs, inflation and product mix change.
- Whether component businesses improve profitability and whether computing program ramps deliver expected efficiencies.
- Customer concentration, changing major-customer relationships, and the durability of new wins and order forecasts.
- Debt maturity and refinancing plans, revolver renewal before May 2012, covenant headroom, and cash needs for working capital and investment.
- Exposure of receivables, inventory and supply availability to customer distress and disruption among component suppliers, including any continuing Japan-related effects.
- Realization of deferred tax assets and tax-loss carryforwards, expiring tax holidays, and outcomes of tax examinations and the Solectron-related litigation.