Flextronics International Ltd. — Form 10-Q Summary
Business context and reporting period
Flextronics provides design, electronics manufacturing, supply-chain and related services to OEMs across infrastructure, mobile, computing, consumer, industrial and other markets. This Form 10-Q covers the fiscal third quarter and nine months ended December 31, 2010, compared with the same periods in 2009. Interim statements were reviewed by Deloitte & Touche, not audited; the review found no material modifications needed for GAAP conformity.
Financial performance and position
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Net sales | $7.833B in 2010; $6.556B in 2009 (+19%) | $21.821B in 2010; $18.171B in 2009 (+20%) |
| Gross profit / margin | $433.6M / 5.5%; prior year $373.1M / 5.7% | $1.202B / 5.5%; prior year $896.6M / 4.9% |
| Net income (loss) | $198.3M; prior year $92.9M | $460.9M; prior-year loss $41.5M |
| Diluted EPS | $0.26; prior year $0.11 | $0.58; prior-year loss $0.05 per share |
| Operating cash flow | Not separately reported for the quarter | $582.8M; prior year $749.7M |
| Capital expenditure and free cash flow | Not separately reported for the quarter | Net property/equipment purchases $327.4M; company-defined free cash flow $255.5M |
At December 31, 2010, cash and equivalents were $1.598B, total assets $11.704B, and total debt and capital lease obligations approximately $2.230B. Current assets were $9.103B and current liabilities $7.035B. The company had $360M drawn on its $2.0B revolving facility and reported compliance with its credit-facility covenants.
Changes versus prior comparable periods
- Sales grew across all reported markets and geographic regions, attributed by management to improved end-market conditions and market-share gains. China was the largest manufacturing-location sales contributor.
- Quarterly gross margin was lower year over year, partly because the prior-year quarter included a $26.3M benefit from revised estimates for Nortel claims. Nine-month gross margin improved, reflecting higher utilization and no restructuring charges versus $74.1M in the prior-year period.
- Operating cash flow fell $166.9M year over year, mainly due to working-capital investment as receivables and inventory increased with higher sales; payables and other liabilities partly offset the use.
- SG&A rose in dollars but declined as a share of sales, to 2.8% from 3.1% for the quarter and 3.2% for the nine-month period. Interest and other expense also declined year over year.
- Cash fell $329.5M from March 31, 2010. The company repurchased 60.9M shares for $368.0M during the nine months and redeemed the $240M 1% convertible notes at maturity and $302.2M principal of 6.25% notes.
Outlook, commentary, risks and unusual items
- Management described improving demand and continued revenue growth through the quarter. It expects available cash, operating cash flow and borrowing capacity to fund operations for at least the next 12 months; no specific earnings or revenue guidance was provided.
- Component product solution services were less than 10% of revenue but had been performing below optimal levels. Management reported improved yields and progress reducing operating losses, and said further efficiency and margin improvement remained a focus.
- Component shortages experienced earlier in the fiscal year had largely normalized by the end of the quarter. Risks include customer order delays or cancellations, product-mix and utilization changes, customer concentration, short product cycles, production ramp/yield challenges, component availability, customer financial distress and reliance on financing and receivables-sale programs. The ten largest customers represented 55% of quarterly sales and 52% of nine-month sales; Research In Motion exceeded 10% in both periods.
- Net income includes a $34.7M tax benefit from conclusion of a tax litigation matter. Quarterly other charges include a $13.2M loss on early redemption of 6.25% notes. Nine-month other charges were a net $6.3M, including the redemption loss and an $11.7M divestiture loss, partly offset by an $18.6M gain on sale of a previously impaired investment. Foreign-exchange gains were $12.9M for the quarter and $21.4M for the nine months.
- Receivables-sale programs generated substantial deferred purchase-price receivables: $821.4M combined from the Global and North American programs at December 31. These interests are recorded in other current assets, with valuation dependent on underlying receivable collections and program terms. Management also noted that customer default rates above program limits could impair future receivables sales.
- Ordinary-course legal proceedings are ongoing; management did not expect their resolution to materially adversely affect financial position, results or cash flows. No restructuring charges were recorded in the current nine-month period; $37.2M of prior restructuring accruals remained at December 31.
Most important facts for investors to verify
- Whether sales growth converts into durable margins, particularly given the quarterly gross-margin decline and continuing component-service losses.
- Working-capital requirements, inventory growth and the sustainability of operating cash flow and company-defined free cash flow.
- Debt maturities, revolving-credit usage, covenant headroom and the effect of further share repurchases or debt refinancing.
- Collection and valuation of deferred purchase-price receivables, and continued availability and terms of securitization and factoring facilities.
- Customer concentration and the sensitivity of demand, production yields and utilization to customer programs and market conditions.
- The effect of tax benefits and other unusual items on reported earnings compared with underlying recurring performance.