Flextronics International Ltd. — Form 10-Q Summary
Reporting period: Second fiscal quarter ended October 1, 2010; financial comparisons are against the quarter ended October 2, 2009. Six-month results cover the periods ended on those same dates. The interim statements were reviewed, not audited, by Deloitte & Touche.
Business context and results
Flextronics provides design, electronics manufacturing, supply-chain and after-market services to OEMs across infrastructure, mobile, computing, consumer, industrial and other markets. Management said revenue growth reflected improving customer demand and market-share gains, with sales increasing across all reported markets and geographic regions.
| Metric | Three months ended Oct. 1, 2010 | Three months ended Oct. 2, 2009 | Six months ended Oct. 1, 2010 | Six months ended Oct. 2, 2009 |
|---|---|---|---|---|
| Net sales | $7.422 billion | $5.832 billion | $13.988 billion | $11.614 billion |
| Gross profit | $397.6 million | $299.6 million | $768.5 million | $523.6 million |
| Gross margin | 5.4% | 5.1% | 5.5% | 4.5% |
| Income (loss) before taxes | $154.4 million | $(29.7) million | $284.0 million | $(187.7) million |
| Net income (loss) | $144.4 million | $19.7 million | $262.6 million | $(134.4) million |
| Diluted earnings (loss) per share | $0.18 | $0.02 | $0.33 | $(0.17) |
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $597.5 million, versus $418.4 million a year earlier. Investing activities used $211.1 million; financing activities used $545.3 million. Cash declined $139.4 million to $1.788 billion.
- At October 1, cash was $1.788 billion and total bank borrowings and debt were approximately $2.232 billion, implying approximately $444 million of net debt. Current liabilities were $7.490 billion and current assets were $9.370 billion.
- Capital expenditure purchases were $273.2 million for the six months; after $51.4 million of property-disposal proceeds, net purchases were about $221.7 million. Management reported second-quarter free cash flow of $385.4 million, defined as operating cash flow less net purchases of property and equipment.
- Inventory was $3.639 billion, up from $2.876 billion at March 31; accounts receivable was $2.978 billion, up from $2.439 billion; accounts payable was $5.714 billion, up from $4.448 billion.
- The company had $60 million outstanding under its $2.0 billion credit facility and stated it was in compliance with debt covenants. Management believed cash, expected operating cash flow and available borrowing capacity would fund operations for at least twelve months.
Material changes and unusual items
- Second-quarter sales rose 27% year over year; six-month sales rose 20%. Management attributed improved gross margins to higher volumes and capacity utilization, as well as the absence of prior-year restructuring charges.
- No restructuring charges were recorded in the current quarter or six-month period. The company said the previously announced restructuring activities were complete and no additional material charges were anticipated.
- Interest and other expense declined year over year, reflecting debt repayments and lower interest expense. Current-period results included an $18.6 million six-month gain from selling a previously impaired equity investment and an $11.7 million loss on divestiture of international entities.
- The company repurchased 51.1 million shares for $299.9 million during the six months, funded in part alongside other financing activity. It also paid $240 million to redeem 1% convertible subordinated notes at maturity; no shares were issued on conversion.
- New accounting standards adopted April 1 changed consolidation and receivables-transfer accounting. Amendments to securitization programs resulted in certain receivables being removed from the balance sheet as sales, with related cash receipts reported in operating activities. Deferred purchase price interests were recorded in other current assets.
Outlook, commentary and risks
- Management said revenue growth had accelerated into the quarter and expected component shortages experienced in the first quarter to become less significant in future quarters. It did not provide numerical earnings or revenue guidance in the supplied filing text.
- Management described demand for component product solutions as growing, while emphasizing manufacturing-efficiency challenges; these offerings represented less than 10% of revenue.
- Key exposures include changes in customer demand and order timing, customer product acceptance and short product cycles, capacity utilization and manufacturing yields, component availability, financially troubled customers, and reliance on outsourcing trends. The ten largest customers represented approximately 53% of quarterly sales; Research In Motion and Hewlett-Packard each exceeded 10%.
- Working-capital needs increased with growth: inventory and receivables rose, while accounts payable also increased. The company noted that securitization facilities have customer-default limits that could restrict future receivables sales if exceeded.
- Legal proceedings arise in the ordinary course; management did not expect their resolution to materially adversely affect financial position, results or cash flows. Disclosure controls were reported effective, with no material quarterly change in internal controls over financial reporting.
Important facts for investors to verify
- Whether sales growth and improved capacity utilization translated into durable margins, given the modest 5.4% quarterly gross margin.
- Customer concentration and the contribution of the largest customers to future revenue.
- Receivables, inventory and payable trends, including the cash-flow and balance-sheet effects of securitization and factoring programs.
- Debt maturities, covenant compliance and the company’s ability to sustain liquidity while funding capital spending and share repurchases.
- The recurring versus nonrecurring portions of earnings, including investment-sale gains, divestiture losses and prior-period restructuring effects.