Flextronics International Ltd. — Form 10-Q Summary
Business context and reporting period
Reports the first quarter of fiscal 2012, the three months ended July 1, 2011, compared with the three months ended July 2, 2010. Flextronics provides design, electronics manufacturing, supply-chain and related services to OEMs across four markets: High Reliability Solutions, High Velocity Solutions, Industrial & Emerging Industries, and Integrated Network Solutions. Interim financial statements were reviewed, not audited.
Financial performance and liquidity
| Metric | Quarter ended July 1, 2011 | Prior-year quarter |
|---|---|---|
| Net sales | $7.548 billion | $6.566 billion |
| Gross profit / margin | $400.2 million / 5.3% | $370.8 million / 5.6% |
| Income before taxes | $148.8 million | $129.6 million |
| Net income | $132.0 million | $118.2 million |
| Diluted EPS | $0.17 | $0.14 |
| Operating cash flow | $136.4 million | $88.8 million |
| Free cash flow | $23.7 million | $(9.6) million |
At July 1, 2011, cash and cash equivalents were $1.558 billion; total bank borrowings, long-term debt and capital lease obligations were approximately $2.214 billion. The $2.0 billion revolving facility, due May 2012, had $160 million outstanding; the company was in compliance with debt covenants. Current assets were $9.569 billion and current liabilities $7.611 billion. Capital expenditures, net of property-disposition proceeds, were $112.7 million. Cash declined $190.7 million during the quarter, including $200 million used to repurchase shares.
Material changes versus the prior-year quarter
- Sales rose 15%, with increases across all four markets; the largest reported market increase was High Velocity Solutions. China sales increased to $3.199 billion from $2.275 billion.
- Net income increased about 12%, while diluted EPS rose to $0.17 from $0.14. Weighted-average diluted shares fell to 759.8 million from 824.0 million.
- Gross margin declined 0.3 percentage points, which management attributed primarily to a higher mix of low-margin products, including ODM personal computing. SG&A rose in dollars but fell as a percentage of sales, to 2.8% from 3.0%.
- Interest and other expense declined to $22.2 million from $27.5 million, primarily reflecting lower interest expense.
- Operating cash flow improved, but working-capital changes remained a use of cash. The cash conversion cycle was 19 days, versus 16 days a year earlier.
Outlook, management commentary, risks and unusual items
- Flextronics announced it would exit its ODM personal computing business, which generated $663.2 million in quarterly sales and an operating loss of approximately $19 million. Management expected approximately $20 million of operating losses in each of the next two quarters and targeted completion of the exit by fiscal year-end March 31, 2012, with associated assets expected to be redeployed.
- Management said the Japan earthquake and tsunami had not materially affected revenue or operations and was not expected to have a significant annual impact. Results remain exposed to macroeconomic and customer demand, product mix, component availability, customer order changes, short product cycles, capacity utilization, and execution of the ODM exit and other operations.
- The company sold receivables through securitization and factoring programs. At quarter-end, approximately $1.3 billion of receivables had been sold under the ABS programs; the company retained a $681.3 million deferred purchase price receivable recorded in other current assets. These arrangements support liquidity and involve retained exposure to receivables.
- The company repurchased approximately 29.0 million shares for $200 million during the quarter. Shareholders subsequently approved a further authorization for up to $200 million of repurchases.
- A shareholder class action relating to the 2007 Solectron merger remained pending; the company considered the claims without merit and potential losses not material. A court show-cause hearing was scheduled for August 12, 2011. Management also expected any excess losses from other ordinary-course legal matters to be immaterial.
- Substantially all cash was held outside Singapore. Management noted that repatriation could create additional tax payments and stated its intent to keep certain foreign earnings invested abroad. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress, timing and remaining costs or losses associated with the ODM personal computing business exit.
- Whether gross-margin pressure persists as product mix changes, and whether sales growth converts into stronger operating cash flow.
- Liquidity and funding implications of the May 2012 revolving-facility maturity, debt levels, and continued use of receivables programs.
- Collection and valuation of the $681.3 million deferred purchase price receivable, along with working-capital and cash-conversion trends.
- Use of the additional $200 million share-repurchase authorization and its effect on cash and outstanding shares.
- Developments in the Solectron-related litigation, including the scheduled court hearing.