Flextronics International Ltd. — Form 10-Q Summary
Business context and period
Flextronics, now known as Flex Ltd., provides design, manufacturing and supply-chain services to electronics OEMs. This unaudited quarterly report covers the first quarter of fiscal 2013, the three months ended June 29, 2012; comparisons are with the three months ended July 1, 2011. The interim financial statements received an independent accountant’s review, not an audit.
Key financial metrics
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Net sales | $5.990 billion | $7.506 billion |
| Gross profit / margin | $358.3 million / 6.0% | $400.8 million / 5.3% |
| Income from continuing operations | $137.5 million | $135.4 million |
| Net income | $128.5 million | $132.0 million |
| Diluted EPS | $0.19 | $0.17 |
| Operating cash flow | $45.6 million | $136.4 million |
| Free cash flow, as defined by company | $(59.0) million | $23.7 million |
At June 29, 2012, cash and cash equivalents were $1.285 billion, down from $1.518 billion at March 31. Bank borrowings, debt and capital lease obligations totaled approximately $2.20 billion; $140 million was drawn on the $1.5 billion revolving credit facility, which expires in October 2016. The company reported compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Sales declined 20.2%, principally due to a $1.4 billion decrease in High Velocity Solutions (HVS). HVS sales fell to $1.543 billion from $2.986 billion, reflecting the exit from ODM PCs and lower sales of certain consumer products.
- Gross profit fell $42.4 million, but gross margin rose to 6.0% from 5.3%, mainly because lower-margin HVS made up a smaller share of sales. SG&A declined in dollars to $191.1 million from $212.8 million, but increased as a share of sales to 3.2% from 2.8%.
- Continuing-operations income rose modestly; net income declined as discontinued operations recorded an $9.0 million loss, versus a $3.4 million loss in the prior-year quarter.
- Operating cash flow decreased, with working-capital changes and other items using $194.6 million. The cash conversion cycle lengthened to 30 days from 19 days a year earlier.
Outlook, commentary, risks and unusual items
- Management is rebalancing the portfolio toward a target mix of approximately 70% non-HVS and 30% HVS revenue. It expects HVS to continue declining into fiscal 2013 and plans to redeploy HVS assets and capacity into non-HVS businesses. Management expects this mix to support expanded margins, while noting lower overall revenue in the near term. No specific earnings or revenue guidance was provided.
- The company completed the sale of its Vista Point Technologies camera-modules assets to Tessera Technologies and its subsidiary for $16.5 million. It recorded a $4.7 million sale loss; the business’s results are presented as discontinued operations.
- Two acquisitions were completed; consideration paid, including earn-outs, was $61.3 million, while cash acquired exceeded consideration, producing $18.8 million of net cash acquired. The acquisitions generated $35.4 million of goodwill. A related customer manufacturing-rights license was recorded at $88.0 million, with the obligation to be reduced as products are manufactured under the customer arrangement.
- Receivables programs include a $513.9 million deferred purchase price receivable retained by the company. Management also cites customer order changes or cancellations, demand and product acceptance, component availability, program yields, capacity utilization, customer concentration, and acquisition integration among factors that can affect results. The ten largest customers represented 48% of sales; none exceeded 10% in the quarter.
- Cash was substantially held by foreign subsidiaries. Repatriation could trigger additional withholding taxes; management said it did not currently plan to repatriate funds held for indefinite reinvestment. Ordinary-course legal matters were not expected to result in material losses beyond amounts accrued. Management reported disclosure controls were effective and no material change in internal controls.
Important facts for investors to verify
- Whether portfolio rebalancing can sustain margin improvement while replacing the revenue lost from HVS and the ODM PC exit.
- Whether working-capital performance, cash conversion cycle and free cash flow recover after the weak quarter.
- The quality, availability and concentration of liquidity, including the retained receivables-program balance and cash held outside Singapore.
- Debt maturities, facility terms and covenant headroom, and any subsequent shareholder approval for a new share-repurchase mandate.
- The realized results of the discontinued-business sale, acquisitions and customer manufacturing-rights arrangement, and any updates to the company’s risk disclosures.