Flextronics International Ltd. — FY2010 Form 10-K
Business context and reporting period. Flextronics provides global electronics design, manufacturing, component, logistics and after-sales services to OEMs across infrastructure, mobile, computing, consumer, industrial, automotive and medical markets. This annual report covers the fiscal year ended March 31, 2010; the filing also reports fourth-quarter results. The company operated in 30 countries and reported approximately 165,000 employees.
Financial performance and liquidity
- Revenue: FY2010 net sales were $24.11 billion, down 22% from $30.95 billion in FY2009. Sales declined across all markets and regions. Management attributed the decline mainly to weak demand, reduced outsourcing, mobile-market share/strategy changes and distress at an infrastructure customer.
- Profit and margins: Gross profit was $1.22 billion versus $1.28 billion; gross margin improved to 5.0% from 4.1%, reflecting cost reductions, restructuring benefits and improved utilization, as well as a prior-year Nortel-related comparison. Net income was $18.6 million, or $0.02 per diluted share, compared with a $6.14 billion loss in FY2009, which included a $5.95 billion non-cash goodwill impairment. FY2010 pretax loss was $16.8 million, offset by a $35.4 million income-tax benefit. SG&A was $767.1 million, or 3.2% of sales.
- Fourth quarter: FY2010 Q4 sales were $5.94 billion and net income was $60.1 million, compared with sales of $5.58 billion and a net loss of $249.2 million in FY2009 Q4. The FY2010 Q4 sales figure was below FY2010 Q3 sales of $6.56 billion.
- Cash flow: Operating cash flow was $798.9 million, down from $1.32 billion. Investing activities provided $7.8 million, including proceeds from an investment and note-receivable sale; net capital expenditures were $176.5 million. Financing activities used $713.3 million, primarily for debt repayments and redemptions. Operating cash flow less net capital expenditures was approximately $622 million.
- Liquidity and debt: Cash and equivalents were $1.93 billion; working capital was $1.64 billion. Debt and capital lease obligations totaled approximately $2.26 billion, including $1.69 billion under the term loan. The $2.0 billion revolving facility had no borrowings outstanding. Flextronics reported compliance with debt covenants. A $234.2 million convertible note balance was due August 2010; management was evaluating cash repayment or refinancing.
- Other metrics: Total assets were $10.64 billion and shareholders’ equity was $1.98 billion. Top ten customers represented 47% of sales, down from 50% in FY2009; Hewlett-Packard accounted for more than 10% in FY2010.
Material changes, outlook and risks
- Revenue fell sharply from FY2009, while gross margin improved. Restructuring charges declined to approximately $107.5 million from $179.8 million; management said it did not anticipate further material charges from the cited plans.
- Management reported positive signs of improving customer end-product demand beginning in the second half of FY2010, but provided no quantified revenue or earnings guidance. It expected component supply constraints to persist through at least the first, and possibly the second, quarter of FY2011 before easing. Shortages included connectors, capacitors, LCD panels and memory.
- FY2010 included approximately $199.4 million of investment and notes-receivable impairment charges. The company sold an investment and related note for approximately $252.5 million net of closing costs. It also redeemed the remaining 6.5% notes and repaid the zero-coupon notes at maturity.
- Key risks include volatile customer demand and short order lead times; customer concentration and customer financial distress; intense competition; component shortages and capacity utilization; restructuring execution; international, currency, tax and regulatory exposures; and substantial debt. Environmental cleanup liabilities and ordinary-course legal proceedings remain contingencies, though management did not expect the legal matters to materially affect results.
- From April 2010, accounting changes were expected to bring the Global Asset-Backed Securitization program onto the balance sheet, with related cash proceeds treated as borrowings. The company reported that its financial statements and internal control over financial reporting received unqualified audit opinions.
Investor verification priorities
- Verify the sustainability of the 5.0% gross margin and whether demand recovery offsets the 22% annual sales decline.
- Review the August 2010 convertible-note repayment or refinancing outcome and the company’s cash and debt position after maturity.
- Assess customer exposure, particularly the largest customer and the 47% sales concentration in the top ten.
- Track component availability, customer order changes and their effects on production utilization and working capital.
- Review the assumptions behind investment impairments, tax-asset recoverability and receivables-securitization accounting changes.