Flextronics International Ltd. — Form 10-Q Summary
Business context and reporting period
Flextronics provides design, electronics manufacturing, and supply-chain services to original equipment manufacturers across infrastructure, mobile communications, computing, consumer, industrial, automotive, and other markets. This report covers the three months ended July 3, 2009, the first quarter of fiscal 2010, and compares results with the three months ended June 27, 2008.
Financial performance and liquidity
- Revenue: $5.783 billion, down 31% from $8.350 billion.
- Profitability: Gross profit was $224.0 million, or 3.8% of sales, versus $456.8 million, or 5.5%. The company reported a net loss of $154.0 million, or $0.19 per diluted share, compared with net income of $119.2 million, or $0.14 per diluted share.
- Costs and unusual charges: Restructuring charges totaled $64.8 million, including $52.1 million in cost of sales. Other charges included a $107.4 million impairment of an investment and related notes receivable. The company also reported $8.0 million of incremental, non-cash interest expense from adopting convertible-debt accounting guidance.
- Cash flow: Operating activities provided $106.9 million, compared with $8.5 million used in the prior-year quarter. Investing activities used $45.4 million, including $38.6 million of net capital expenditures; financing activities used $208.0 million. Cash declined $145.3 million to $1.677 billion.
- Debt and liquidity: Debt and capital lease obligations totaled approximately $2.744 billion at July 3, including $213.1 million classified as current. Cash was $1.677 billion; the $2.0 billion credit facility was undrawn, and the company reported covenant compliance. Working capital was approximately $1.3 billion. The filing states that cash, expected operating cash flows, and available credit were expected to fund operations for at least 12 months.
Material changes versus the prior-year quarter
- Sales declined across all served markets and geographic regions, attributed primarily to weakened economic conditions and lower customer demand. Infrastructure had the largest disclosed market decline, at $1.1 billion.
- Lower capacity utilization and higher restructuring costs contributed to the gross-margin decline. SG&A fell to $201.7 million from $248.6 million, but rose as a percentage of sales, from 3.0% to 3.5%, because revenue fell faster than costs.
- Management said its ten largest customers accounted for 49% of sales, down from 55%; no customer represented more than 10% of current-quarter sales.
- In June, the company paid $203.2 million to repurchase approximately $199.7 million face amount of senior subordinated notes. The filing reports that $195.0 million of zero-coupon convertible notes was redeemed at maturity on July 31, 2009, after quarter-end.
Outlook, commentary, risks, and contingencies
- Management cited the global downturn, reduced customer outsourcing, and lower utilization, and said it would continue cost-control measures. It estimated up to approximately $35 million of further charges related to the restructuring plans announced in March 2009; approximately $215 million had been recognized since their announcement.
- No specific revenue or earnings guidance is provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Receivables sales and securitization support liquidity. Management warned that customer defaults above program limits could impair future receivables sales. Local restrictions may also limit movement of cash between jurisdictions.
- The potential sale of the impaired investment was under discussion and its outcome was uncertain. Ordinary-course legal matters were not expected by management to materially harm financial position, results, or cash flows.
- The interim financial statements were reviewed, not audited, by Deloitte & Touche; the review report expressed no audit opinion. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand and factory utilization stabilized after the sharp year-over-year revenue decline, and the resulting effect on margins.
- Cash costs, completion timing, and realized savings from restructuring; compare the remaining estimated charges with subsequent filings.
- Recoverability and any eventual proceeds from the impaired investment and notes receivable.
- Debt maturities, liquidity after the July 2009 note redemption, and continued access to receivables-securitization programs.
- Whether the expected tax benefits and deferred tax assets are realizable, and the effect of convertible-debt accounting and the employee stock-option exchange on future expense and dilution.