Flextronics International Ltd. — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013. Although the request metadata refers to 2012 Q4, the filing is an annual report for FY2013; its unaudited quarterly schedule includes the fourth quarter ended March 31, 2013. Amounts below are U.S. dollars.
Business context
Flextronics provides global design, manufacturing, supply-chain, logistics and after-market services to electronics OEMs. Its markets are Integrated Network Solutions (INS), High Velocity Solutions (HVS), Industrial and Emerging Industries (IEI), and High Reliability Solutions (HRS). The company operated in more than 30 countries and had approximately 149,000 employees.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $23.57 billion | $29.34 billion |
| Gross profit / margin | $1.17 billion / 4.9% | $1.52 billion / 5.2% |
| Income from continuing operations | $302.5 million | $520.8 million |
| Net income | $277.1 million | $488.8 million |
| Diluted EPS | $0.41 | $0.67 |
| Cash provided by operating activities | $1.12 billion | $804.3 million |
| Free cash flow, as defined by the company | $680.1 million | $416.3 million |
| Cash and cash equivalents at year-end | $1.59 billion | $1.52 billion |
| Total debt at year-end | $2.07 billion | $2.19 billion |
| Working capital at year-end | $1.60 billion | $2.25 billion |
Net sales fell 19.7%. Management attributed the decline primarily to reduced HVS revenue following the exit from low-margin ODM PC activity and the disengagement from assembly work for a major smartphone OEM. HVS sales declined 46.2%; HRS sales increased 19.5%, supported by automotive demand and the Saturn acquisition. INS and IEI sales also declined. HRS represented 13% of FY2013 sales, compared with 8% in FY2012.
Gross profit fell 23.2%. FY2013 included $215.8 million of restructuring charges in cost of sales, equivalent to about 90 basis points of sales; reported gross margin declined by 30 basis points. Net income and diluted EPS also fell substantially year over year. Operating cash flow rose by approximately $311 million, and free cash flow increased to $680.1 million, reflecting working-capital movements and lower revenue-related receivables and inventory, partly offset by higher capital spending.
Fourth-quarter FY2013: Net sales were $5.30 billion and gross profit was $195.7 million. Continuing operations reported a $49.3 million loss, and net loss was also $49.3 million. The corresponding prior-year quarter had sales of $6.37 billion, gross profit of $358.9 million and net income of $124.7 million.
Material changes and capital position
- The company recorded $227.4 million of FY2013 restructuring charges: $123.0 million cash charges, mainly severance, and $104.4 million non-cash charges, mainly impairments and exit costs. The plan involved 9,138 identified employee terminations. Accrued restructuring costs were $97.9 million at year-end.
- Management expected a further $40 million of restructuring charges in Q1 FY2014 and estimated annualized cost reductions of approximately $150 million. These were expectations, not realized savings.
- In February 2013, Flextronics issued $500 million of 4.625% notes due 2020 and $500 million of 5.000% notes due 2023, using the proceeds to refinance $1 billion of term-loan debt. Management expected interest expense to rise in FY2014 due to the higher fixed rates.
- The company had no outstanding borrowing on its $1.5 billion revolving credit facility at March 31, 2013 and reported compliance with debt covenants. Approximately $416.7 million of debt was current. Credit ratings on the notes were below investment grade.
- Flextronics repurchased approximately 51.7 million shares for about $334 million in FY2013. It reported 35.3 million shares remaining under its repurchase authorization at year-end. The company had not paid cash dividends and did not expect to do so in the near future.
- Receivables-sale programs provided financing outside the consolidated balance sheet: $720.5 million of receivables sold for cash remained outstanding at year-end. The associated deferred purchase-price receivable was $412.4 million.
Outlook, commentary, risks and unusual items
Management said its portfolio shift toward more complex, higher-margin HRS, IEI and INS businesses and its global restructuring were intended to improve operational efficiency. It described long-term outsourcing opportunities as strong. The April 16, 2013 acquisition of certain Motorola Mobility manufacturing operations from Google, for $170.6 million, occurred after year-end and was not included in FY2013 results; management expected it to increase the HVS share of revenue in FY2014 and beyond.
- Concentration and demand: The ten largest customers contributed 47% of FY2013 sales. Customer orders are generally firm only 30 to 90 days ahead and may be rescheduled or cancelled. Competition, product lifecycle changes, seasonality and customer product performance can affect volumes and margins.
- Restructuring and execution: Savings depend on completing actions as planned; delays, excess capacity, further charges or failure to achieve targeted savings could weigh on results.
- Tax and liquidity considerations: Cash held by foreign subsidiaries may face withholding taxes if repatriated; approximately $457.7 million of foreign earnings was considered indefinitely reinvested. Unrecognized tax benefits were $230 million. Management said cash, operating cash flows and available facilities should cover needs for at least 12 months.
- Other exposures: Risks include foreign exchange and interest rates, component availability, customer or supplier financial distress, intellectual-property and product-liability claims, regulatory and environmental compliance, international operations, and potential impairment of goodwill or other assets.
- Unusual items: A $74.4 million gain from revaluing supplier warrants materially benefited FY2013 other income. The warrants were exercised and shares sold after year-end for $67.3 million, with a $7.1 million realized loss expected to be recognized in the June 2013 quarter. FY2013 also included a $22.3 million tax benefit from acquisition accounting and a $9.3 million tax benefit related to prior years.
- Accounting and audit: The filing reports prior-period accounting errors corrected as out-of-period adjustments, including a $23.9 million FY2012 cost-of-sales correction and a warrant-valuation adjustment in FY2013 that management said was not material. The auditor issued unqualified opinions on the financial statements and internal controls. The control assessment excluded the recently acquired Saturn business.
Management reported that ordinary-course litigation losses beyond amounts accrued were not expected to be material; outcomes remained uncertain. The filing also disclosed an $88 million customer-related minimum-volume reimbursement commitment associated with an acquired business, for which payment was not considered probable at year-end.
Important facts for investors to verify
- Whether customer and HVS volume losses stabilize, and whether the move toward higher-complexity markets supports margins.
- Progress, cash costs and realized savings from restructuring, compared with the approximately $150 million annualized savings target and further $40 million expected charge.
- Post-year-end performance and integration of the Motorola Mobility operations, and the final purchase accounting for acquisitions.
- Debt maturities, refinancing needs, covenant headroom and the effect of higher fixed-rate borrowing costs.
- The sustainability and quality of operating cash flow, including reliance on receivables-sale programs and working-capital changes.
- Customer concentration, the $230 million unrecognized tax-benefit balance, foreign cash repatriation considerations and the status of disclosed contingencies.