Flextronics International Ltd. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended December 31, 2011. The company provides design, electronics manufacturing, and supply-chain services to OEMs. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance and position
- Third-quarter revenue: $7.493 billion, versus $7.833 billion a year earlier. Gross profit was $381.9 million (5.1% margin), versus $433.6 million (5.5%). Net income was $102.2 million versus $198.3 million; diluted EPS was $0.14 versus $0.26.
- Nine-month revenue: $23.085 billion, versus $21.821 billion. Gross profit was $1.157 billion (5.0% margin), versus $1.202 billion (5.5%). Net income was $364.0 million versus $460.9 million; diluted EPS was $0.49 versus $0.58.
- Cash flow, nine months: Operating cash flow was $665.6 million, compared with $582.8 million. Capital expenditures, net of property-disposal proceeds, were $329.8 million; company-defined free cash flow was $335.8 million, versus $255.5 million. Investing cash use was $423.0 million and financing cash use was $408.5 million.
- Liquidity and debt at December 31: Cash and cash equivalents were $1.546 billion, and bank borrowings, long-term debt, and capital leases totaled approximately $2.199 billion. The company reported $140 million drawn on its revolving facility and compliance with debt covenants. Total current assets were $9.004 billion and current liabilities $6.889 billion.
- Balance-sheet movements since March 31: Cash declined by $202.7 million; total assets declined to $11.528 billion from $11.633 billion. Shareholders’ equity was $2.221 billion, compared with $2.295 billion.
Changes versus comparable periods
- Management attributes the quarter’s lower sales principally to the exit from ODM personal computing and lower sales in certain consumer-product programs. High Reliability Solutions revenue increased, supported by medical, drug-delivery, and automotive programs.
- Nine-month sales increased across all four reported markets. Integrated Network Solutions and High Reliability Solutions had notable increases; the company cited program wins, while some server-market demand declined as products reached end of life or shifted suppliers.
- Gross margin declined in both comparison periods. Management cited a higher mix of low-margin products, ODM exit costs, and costs from right-sizing and facility-related actions. SG&A increased, including severance and impairment costs associated with the ODM exit.
- Interest and other expense declined year over year for the nine-month period, mainly because of lower interest expense and increased foreign-exchange gains. The comparative 2010 periods included debt-redemption and divestiture-related charges.
Outlook, risks, and unusual items
- The company completed its exit from ODM personal computing in the third quarter. That business recorded operating losses of approximately $70 million in the quarter and $109 million in the nine months; the quarterly loss included wind-down costs. Management expected no material future revenue, impairment charges, or additional exit costs from those activities and anticipated improved operating results. Associated assets were redeployed, which management said should reduce capital-expenditure needs.
- No specific numeric earnings or revenue guidance is provided in the supplied filing text. Management cautions that interim results are not necessarily indicative of full-year results.
- The new five-year credit facility, entered into in October 2011, totals $2.0 billion: a $1.5 billion revolving facility and a $500 million term loan, both maturing in October 2016. The facility includes leverage and interest-coverage covenants.
- Receivables programs are a meaningful liquidity source: at December 31, the company reported a $750.3 million deferred purchase-price receivable related to asset-backed securitizations. The company also noted that substantially all cash was held by foreign subsidiaries; repatriation could incur withholding taxes, and some earnings are intended to remain invested outside Singapore.
- Key stated risks include macroeconomic and customer-demand changes, customer concentration, component shortages, order cancellations or delays, product life cycles, manufacturing utilization and yields, and acquisition integration. The company monitored potential supply-chain disruption related to flooding in Thailand.
- The 2007 Solectron-related shareholder class action was dismissed without prejudice in September 2011; no appeal was filed and the company reported the matter closed. Other ordinary-course legal matters were not expected by management to result in material losses beyond accrued amounts.
- Deloitte & Touche performed an interim review, not an audit, and reported that it was not aware of material modifications needed for GAAP conformity.
Most important facts for investors to verify
- Reconcile the filing’s stated sales growth rates with its reported amounts: management describes the quarterly decline as 3.8% and nine-month growth as 6.0%; the displayed sales figures calculate to approximately a 4.3% decline and 5.8% growth, respectively.
- Assess whether the completed ODM exit and redeployed capacity deliver the improvement in operating results anticipated by management, given the reported wind-down losses.
- Review cash conversion and working capital: the cash conversion cycle rose to 22 days from 14 days a year earlier, while deferred purchase-price receivables increased to $750.3 million.
- Track customer concentration: the ten largest customers represented approximately 56% of quarterly sales and 57% of nine-month sales; Research In Motion exceeded 10% in both periods.
- Compare the $415.8 million aggregate share-repurchase amount disclosed in the share-repurchase note with the $395.6 million of repurchase payments shown in the cash-flow statement, and confirm timing and accounting treatment.
- Monitor debt covenant compliance, foreign-currency exposure, component availability, and the potential tax cost or constraints associated with repatriating overseas cash.