Flextronics International Ltd. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 31, 2014. The filing also reports fourth-quarter results for the three months ended March 31, 2014. Flextronics provides global electronics design, manufacturing, supply-chain and aftermarket services across High Reliability, High Velocity, Industrial and Emerging Industries, and Integrated Network Solutions.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $26.109 billion | $23.569 billion |
| Gross profit / margin | $1.440 billion / 5.5% | $1.166 billion / 4.9% |
| Income from continuing operations | $365.6 million | $302.5 million |
| Net income | $365.6 million | $277.1 million |
| Diluted EPS | $0.59 | $0.41 |
| Cash from operating activities | $1.216 billion | $1.115 billion |
| Free cash flow (company-defined) | $701.5 million | $680.1 million |
FY2014 cash and cash equivalents were $1.594 billion; total debt was approximately $2.103 billion, implying roughly $509 million of net debt. Working capital was $1.744 billion, and the $1.5 billion revolving facility was undrawn at year-end. The company reported $2.953 billion of purchase obligations due within one year. Current ratio was approximately 1.23, based on reported current assets and liabilities.
Fourth-quarter FY2014 sales were $6.724 billion, gross profit $362.1 million, and net income $43.0 million. The comparable FY2013 quarter had sales of $5.295 billion, gross profit of $195.7 million, and a net loss of $49.3 million.
Material changes versus prior periods
- Annual sales increased 10.8%, primarily reflecting the acquisition of certain Motorola Mobility manufacturing operations; the FY2013 disengagement from BlackBerry had reduced the comparison base by about $0.9 billion of revenue.
- High Velocity Solutions sales rose 40.0% to $8.910 billion; Integrated Network Solutions sales fell 4.7% to $10.136 billion, reflecting softness in connected-home, telecom, server, storage and networking markets.
- Gross margin improved 60 basis points, mainly because cost-of-sales restructuring charges fell to $58.6 million from $215.8 million. Total pretax restructuring charges were $75.3 million, down from $227.4 million.
- Profit improvement was partly offset by a $55.0 million customer-contractual charge and a $7.1 million loss on sale of supplier shares. FY2013 results had included a $74.4 million warrant fair-value gain.
- Operating cash flow rose about $101 million. Capital spending, net of asset-sale proceeds, was $515.0 million; acquisitions used $238.0 million. Inventory and receivables grew with business expansion, while customer advances helped fund working-capital needs.
Outlook, risks and unusual items
- Management expects programs launched in FY2013–FY2014 to ramp in volume during FY2015 and beyond. It cautions that gross and operating margins may remain pressured during ramp-up by start-up costs, inefficiencies, under-absorbed overhead and low initial volumes, with margins expected to improve as volumes grow. No specific revenue or earnings guidance is provided.
- Management expects FY2014 restructuring actions to yield approximately $15 million of annualized cost reductions. It also describes ongoing investment in innovation, design, automation and supply-chain capabilities.
- The $55 million customer obligation, associated with a manufacturing agreement that runs through August 2016, was recorded as probable; the company said it was negotiating an amendment that could waive the obligation. Any reversal depends on execution of that amendment.
- Key risks include customer concentration and order cancellations, short product cycles and seasonal demand, intense competition, component shortages, production ramps, international and foreign-exchange exposure, debt and covenant constraints, and environmental, regulatory, tax, intellectual-property, cybersecurity and product-liability exposures. Google (including Motorola) accounted for about 13% of FY2014 sales; the ten largest customers represented about 52%.
- Contingencies include a Xilinx lawsuit, for which management did not expect excess probable or reasonably possible losses to be material, and Brazilian sales/import-tax assessments whose outcome and potential loss could not be estimated. The filing also reports $243.9 million of unrecognized tax benefits.
- Cash and cash equivalents included approximately $779 million of indefinitely reinvested foreign earnings; repatriation could result in additional tax. Receivables-sale programs were significant: $1.1 billion of receivables sold for cash remained outstanding at year-end.
- The company reported an unqualified audit opinion and effective internal control over financial reporting, but the assessment excluded acquired Motorola operations and Riwisa, together representing 10.9% of assets and 11.6% of sales.
Important facts for investors to verify
- Whether the customer amendment waiving the $55 million obligation was executed, and whether the charge was reversed.
- Whether new programs ramped as expected in FY2015 and whether resulting margins improved after initial start-up costs.
- How much of cash generation reflects sustainable operations versus customer advances and receivables sales, and the availability and cost of those funding sources.
- Customer concentration, especially Google/Motorola exposure, and trends in HVS and the weaker INS businesses.
- Resolution and potential financial effects of the Xilinx litigation, Brazilian tax assessments, and uncertain tax positions.
- Integration and control remediation for acquired operations excluded from the FY2014 internal-control assessment.