Flextronics International Ltd. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2010, ended October 2, 2009. The company provides electronics design, manufacturing, and supply-chain services to OEMs. Interim statements were reviewed by Deloitte & Touche, not audited.
Financial performance and position
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Net sales | $5.832 billion | $8.863 billion | $11.614 billion | $17.213 billion |
| Gross profit | $299.6 million | $417.5 million | $523.6 million | $874.2 million |
| Gross margin | 5.1% | 4.7% | 4.5% | 5.1% |
| Net income (loss) | $19.7 million | $27.1 million | $(134.4) million | $146.3 million |
| EPS, diluted | $0.02 | $0.03 | $(0.17) | $0.18 |
- Q2 sales fell 35% year over year; six-month sales fell 33%, chiefly reflecting weaker customer demand amid the economic downturn. Sales declined across all markets and regions.
- Six-month operating cash flow was $418.4 million, versus $748.0 million a year earlier. Investing activities provided $116.1 million, including approximately $255.3 million net proceeds from an investment and note-receivable sale. Financing activities used $405.3 million. Cash increased $144.6 million to $2.0 billion.
- At October 2, cash was $1.966 billion and total debt and capital lease obligations were approximately $2.553 billion, implying roughly $587 million of net debt. Current assets were $7.714 billion and current liabilities $6.157 billion, a current ratio of approximately 1.25.
- The company had no borrowings under its $2.0 billion credit facility and reported compliance with its financial covenants. Debt maturities include $240 million principal on 1% convertible notes due August 2010; the next major scheduled maturity shown is approximately $479.7 million in fiscal 2013.
Material changes, unusual items, and management commentary
- Management attributed lower utilization to reduced customer outsourcing and demand. It cited restructuring and discretionary cost reductions as responses; lower utilization remained a drag on profitability.
- Q2 gross margin improved year over year partly because the prior-year quarter included a $96.7 million customer-related inventory and contractual-obligation charge. For the six-month comparison, gross margin declined 60 basis points, reflecting lower utilization and more restructuring charges, partly offset by that prior-year charge.
- Other charges were $92.0 million in Q2 and $199.4 million for the six months, primarily impairments of affiliate notes receivable and an equity investment. The six-month total also included a $107.4 million impairment associated with the August sale of an investment and related note receivable, which generated approximately $252.5 million net proceeds.
- Restructuring charges were $12.6 million in Q2 and $77.4 million for the six months; the company reported approximately $228 million of cumulative charges since announcing the program in March 2009 and estimated about $22 million of related charges remained. Six-month actions included 3,046 identified employee terminations.
- The Q2 net profit followed a $29.7 million pretax loss and a $49.3 million income-tax benefit. The six-month tax provision included a $75.2 million benefit from settlements in various tax jurisdictions; tax benefits materially affected reported results.
- Debt actions included redeeming $195 million principal of zero-coupon notes at maturity and paying $203.2 million to repurchase about $199.7 million principal of 2013 and 2014 subordinated notes. The company stated it was assessing whether to use available cash to reduce debt or repurchase shares.
- Management said existing cash, expected operating cash flow, and available credit were expected to fund operations for at least the next 12 months. This is not a quantified earnings or revenue forecast. It warned that receivables-securitization capacity could be affected if customer defaults exceed program limits and counterparties do not waive them.
- Other stated risks include continued weak demand, customer order cancellations or delays, customer financial distress, capacity utilization and product-mix changes, component availability, and execution of restructuring and integration. Management did not expect ordinary-course legal matters to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether demand and factory utilization recover, and whether restructuring delivers savings sufficient to offset the revenue decline.
- Cash conversion and liquidity quality, including reliance on receivables sales and the effect of securitization limits, fees, and customer defaults.
- Near-term debt repayment capacity, particularly the August 2010 convertible-note maturity, alongside planned uses of cash.
- Recoverability of remaining affiliate investments and notes, and the full cash and earnings effects of impairment and restructuring charges.
- How tax settlements and benefits affect reported earnings versus ongoing operating performance.