Flextronics International Ltd. — Form 10-Q Summary
Business context and reporting period
Flextronics provides design, electronics manufacturing, and global supply-chain services to OEMs across infrastructure, mobile, computing, consumer, industrial, automotive, and medical markets. This filing covers the fiscal third quarter and first nine months ended December 31, 2009; comparisons are with the same periods in 2008. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended Dec. 31, 2009 | Nine months ended Dec. 31, 2009 |
|---|---|---|
| Net sales | $6.56 billion | $18.17 billion |
| Gross profit / margin | $373.1 million / 5.7% | $896.6 million / 4.9% |
| Net income (loss) | $92.9 million; $0.11 per diluted share | $(41.5) million; $(0.05) per diluted share |
| Cash from operations | Not reported for the quarter | $749.7 million |
At December 31, cash and cash equivalents were $2.24 billion, total current assets $8.32 billion, and current liabilities $6.49 billion. Total bank borrowings and debt were approximately $2.55 billion, including $255.3 million current; long-term debt and capital lease obligations were $2.29 billion. Cash exceeded reported debt by roughly $306 million. The $2.0 billion credit facility had no borrowings outstanding, and the company reported compliance with its debt covenants.
Operating cash flow was $749.7 million, down from $1.03 billion in the prior-year nine-month period. Investing activities provided $73.1 million, primarily reflecting proceeds from an investment and note-receivable sale, partly offset by capital spending and acquisition-related payments. Financing activities used $410.5 million, including debt repayments and debt repurchases. Cash increased $420.0 million from March 31, 2009.
Changes versus the prior comparable periods
- Quarterly sales fell 20% year over year; nine-month sales fell 28%, primarily due to lower customer demand amid the economic downturn. Nine-month declines occurred across all served markets and regions.
- Quarterly gross margin rose to 5.7% from 3.6%, reflecting improved utilization and cost reductions, as well as comparison against prior-year Nortel-related charges. Nine-month gross margin increased to 4.9% from 4.6%, despite lower sales and utilization pressures.
- The quarter returned to net income from a prior-year loss of $6.03 billion, which included a $5.95 billion goodwill impairment charge. The current nine-month period recorded a $41.5 million loss, versus a $5.89 billion prior-year loss that also included that impairment.
- SG&A declined to $205.6 million for the quarter and $583.6 million for nine months, reflecting restructuring and discretionary cost reductions. Interest and other expense also declined year over year, partly due to lower debt and variable interest rates.
- Cash rose from $1.82 billion at March 31, 2009. Inventory declined to $2.78 billion from $3.00 billion, while accounts payable increased to $4.43 billion from $4.05 billion.
Outlook, management commentary, and risks
Management said cost-reduction measures and manufacturing efficiencies improved margins, while the recession and customers’ reduced outsourcing continued to weigh on sales and capacity utilization. Restructuring plans announced in March 2009 are intended to reduce excess workforce and capacity; cumulative charges were approximately $237.8 million, against an estimated total of approximately $250 million. Nine-month charges included $33.1 million of employee termination costs for 4,286 identified employees and $38.4 million of property-and-equipment write-downs.
No specific revenue or earnings guidance was provided. Management believed cash, expected operating cash flow, and available credit would be sufficient to fund operations for at least the next 12 months. The next significant debt maturity was approximately $240 million of 1% convertible subordinated notes due August 2010.
- Customer and demand risk: the ten largest customers represented 49% of quarterly sales and 47% of nine-month sales; Hewlett-Packard exceeded 10% in both periods.
- Receivables financing: receivables sold and not included on the balance sheet totaled $569.5 million, net of company participation, at December 31. Management warned that customer defaults above facility limits could restrict future receivables sales.
- Investment impairments: the company recorded $199.4 million of nine-month charges on equity investments and notes receivable after deterioration in affiliates’ business prospects, cash-flow expectations, and liquidity.
- Other exposures include customer order cancellations or delays, component availability, utilization, restructuring execution, foreign-exchange and interest-rate movements, and the company’s substantial debt. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Deloitte & Touche performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and utilization recover enough to sustain gross-margin improvement after restructuring and prior-period comparison effects.
- The cash-flow sustainability and working-capital effects of receivables sales, including the facilities’ customer-default limits and the company’s retained participation or recourse.
- Ability to meet the August 2010 convertible-note maturity and subsequent debt maturities while funding operations and restructuring.
- Recoverability of remaining affiliate investments and notes receivable following the $199.4 million impairment charge.
- The filing’s cover page states ordinary shares outstanding “at January 28, 2009,” although the filing is dated February 2, 2010; verify whether this date is a typographical error.