Flextronics International Ltd. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended June 28, 2013; comparison is the three months ended June 29, 2012. Flextronics provides design, manufacturing, supply-chain and related services to electronics OEMs across HRS, HVS, IEI and INS markets. Financial statements are unaudited interim statements reviewed by Deloitte; the review is not an audit.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $5,791.1 million | $5,976.0 million |
| Gross profit / margin | $311.0 million / 5.4% | $357.4 million / 6.0% |
| Income before tax | $59.5 million | $148.4 million |
| Net income | $59.3 million | $128.5 million |
| Continuing-operations diluted EPS | $0.09 | $0.20 |
| Operating cash flow | $198.6 million | $45.6 million |
| Free cash flow (company-defined) | $57.2 million | $(59.0) million |
- Sales fell 3.1% year over year, primarily due to softness in telecom-related business. Gross profit declined $46.4 million; reported gross margin fell 60 basis points, with restructuring charges accounting for approximately 60 basis points.
- Cash and cash equivalents were $1.280 billion at June 28, down from $1.587 billion at March 31. Total current assets were $8.228 billion and current liabilities $6.948 billion.
- Debt carrying value was approximately $2.060 billion, including $409.9 million current and $1.651 billion long-term. The company reported a $1.5 billion revolving facility with no quarter-end borrowings and compliance with credit and indenture covenants.
- Investing activities used $298.7 million, including $187.5 million for acquisitions and $141.4 million in net property and equipment purchases. Financing activities used $197.6 million, including $215.2 million of share repurchases.
Material changes and notable items
- Sales by market were INS $2.532 billion (44% of sales), HVS $1.546 billion (27%), IEI $906.2 million (16%) and HRS $806.3 million (13%). Compared with the prior period, INS sales declined while HRS sales increased.
- SG&A rose to $218.0 million from $190.3 million, attributed primarily to acquisition-related costs, investment in supply-chain technology, increased selling and business-development activity, and corporate infrastructure.
- Interest and other expense increased to $19.7 million from $10.8 million. Items included a $7.1 million loss on sale of supplier shares and higher net interest costs following refinancing of $1.0 billion of lower-rate floating-rate loans with fixed-rate notes. A $6.0 million contingent-consideration fair-value gain partly offset the increase.
- The company recorded $40.8 million in restructuring charges, including $32.2 million for termination of 5,106 employees. Accrued restructuring costs were $111.0 million at quarter-end, mostly current.
- On April 16, 2013, Flextronics acquired certain Motorola Mobility manufacturing operations for $178.9 million and entered a related manufacturing and services agreement. The acquired operations contributed less than 10% of quarterly revenue; purchase accounting remained preliminary.
- Repurchased and retired approximately 29.0 million shares during the quarter for about $209.3 million. A further authorization, approved July 29, 2013, permits repurchases of up to 61.2 million shares.
Outlook, risks and contingencies
- Management expects approximately $40 million of restructuring-related cost savings per quarter beginning in Q4 FY2014 and said it did not currently expect additional restructuring charges in FY2014.
- New programs launched in FY2013 are expected to ramp in FY2014. Management cautioned that startup costs, lower initial volumes, inefficiencies and under-absorbed overhead may weigh on margins before higher volumes improve them.
- The Motorola acquisition is expected to raise the HVS share of revenue in FY2014 and beyond, though management did not expect HVS to return to its historical concentration levels.
- Management said existing cash, expected operating cash flows and available credit were sufficient for at least the next 12 months. It also noted that repatriating certain foreign cash could incur withholding taxes, and that approximately $457.7 million of foreign earnings was considered indefinitely reinvested as of March 31, 2013.
- Operating risks include demand and macroeconomic conditions, customer order cancellations or delays, product acceptance and short life cycles, component availability, capacity utilization, customer concentration, and acquisition integration. The ten largest customers represented approximately 49% of quarterly sales; no customer exceeded 10%.
- Receivables sales supported liquidity: the company said increased receivables sold for cash added $87.1 million to operating cash flow during the quarter. Approximately $807.6 million of receivables sold for cash was outstanding under its programs and excluded from the balance sheet at quarter-end.
- Ordinary-course legal matters were disclosed; management expected any probable or reasonably possible losses beyond accrued amounts not to be material to the financial statements as a whole. No material changes in contractual commitments or market-risk exposure were reported.
Key facts for investors to verify
- Whether telecom-related demand and the decline in INS sales persist, and how the Motorola-related HVS ramp affects revenue mix and margins.
- Progress toward the stated $40 million quarterly restructuring savings target, and whether additional restructuring charges become necessary.
- Underlying cash generation excluding receivables-sale activity, changes in working capital, acquisition spending and share repurchases.
- Debt refinancing costs, cash repatriation tax implications, and the company’s ability to maintain liquidity and covenant compliance.
- Final purchase accounting and subsequent operating contribution from the Motorola Mobility acquisition.
- Any developments in legal matters, customer demand, component supply, or other risks referenced in the filing and the FY2013 Form 10-K.