Flextronics International Ltd. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 27, 2013. The quarter’s comparative period ended September 28, 2012. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Business context and results
Flextronics provides design, manufacturing, supply-chain and after-sales services to electronics OEMs across High Reliability Solutions (HRS), High Velocity Solutions (HVS), Industrial and Emerging Industries (IEI), and Integrated Network Solutions (INS). Amounts below are in U.S. dollars.
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $6.410 billion | $6.175 billion | $12.201 billion | $12.151 billion |
| Gross profit / margin | $368.4 million / 5.7% | $366.8 million / 5.9% | $679.5 million / 5.6% | $724.1 million / 6.0% |
| Income from continuing operations | $118.2 million | $160.5 million | $177.5 million | $297.2 million |
| Net income | $118.2 million | $150.5 million | $177.5 million | $279.0 million |
| Diluted EPS | $0.19 | $0.22 | $0.28 | $0.41 |
Financial position and cash flow
- At September 27, 2013, cash and cash equivalents were $1.127 billion, total debt was approximately $2.057 billion, and net debt was approximately $930 million. The $1.5 billion revolving credit facility was undrawn; the company reported covenant compliance.
- Current assets were $8.943 billion and current liabilities $7.377 billion. Inventory rose to $3.876 billion from $2.723 billion at March 31, 2013.
- Six-month operating cash flow was $353.8 million, down from $527.8 million. Capital expenditures, net of asset-sale proceeds, were $311.0 million; reported free cash flow was $42.8 million versus $282.6 million.
- Cash declined $460.0 million over the six months. Financing included $324.6 million of share repurchases and $544.8 million of payments for early debt retirement; the company also borrowed $933.4 million and repaid $404.8 million of debt and leases.
Changes, outlook and risks
- Quarterly sales increased 3.8% year over year, while six-month sales rose 0.4%. HVS and HRS sales increased; INS and IEI sales declined, with management citing softness in telecom and emerging industries. Google, including Motorola, exceeded 10% of quarterly sales; the top ten customers represented 52% of quarterly sales.
- Quarterly gross margin declined 20 basis points year over year, primarily because HVS represented a larger share of sales and carries lower margins. Six-month gross margin fell 40 basis points, including a 30-basis-point impact from $35.1 million of first-quarter restructuring charges.
- The Motorola Mobility manufacturing-operations acquisition closed April 16, 2013 for $178.9 million. Those operations contributed approximately 10% of quarterly and 8% of six-month sales. Management said new programs should ramp to higher production volumes in fiscal 2015; margins may be pressured during ramp-up by start-up costs, inefficiencies and under-absorbed overhead.
- Management expected restructuring initiatives to generate approximately $40 million of savings per quarter beginning in fiscal Q4 2014, and did not expect additional fiscal 2014 restructuring charges.
- A new $600 million unsecured term loan due August 2018 refinanced earlier loans. The filing provides no specific revenue or earnings guidance. Management believed available cash, operating cash flow and credit facilities would fund operations for at least 12 months.
- Risks include customer order changes or cancellations, product acceptance and short life cycles, program ramps and utilization, component availability, customer concentration, acquisition integration, foreign-exchange exposure and tax changes. Mexican tax reform approved October 31, 2013 was still being assessed and could materially affect future tax expense. Ordinary-course legal matters were not expected to have a material financial-statement impact.
- Receivables sales supported liquidity: approximately $1.1 billion of sold receivables remained uncollected and off balance sheet at quarter-end across programs. The filing also reports $558.3 million of deferred purchase-price receivables associated with securitization sales.
Most important facts for investors to verify
- Whether the expected restructuring savings materialize and whether new program ramps improve margins as projected.
- How much operating cash flow depends on receivables sales, and the ongoing availability and terms of those programs.
- Inventory growth, working-capital needs, capital spending and the sustainability of free cash flow.
- Customer and segment concentration, including Motorola-related revenue and continuing softness in INS and IEI.
- The eventual effect of Mexican tax reform and the company’s compliance with debt covenants.
- Reconciliation of share-repurchase disclosures: the filing reports 41.2 million shares repurchased for $312.7 million in the six-month note and $324.6 million of repurchase cash outflow in the cash-flow statement.