Flextronics International Ltd. — Q1 FY2011 Form 10-Q
Reporting period: Three months ended July 2, 2010; comparatives are the three months ended July 3, 2009. Flextronics provides design, electronics manufacturing, and supply-chain services to OEMs across multiple end markets. The interim statements were reviewed by Deloitte & Touche, not audited.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data. Balance-sheet comparisons are July 2, 2010 versus March 31, 2010.
| Metric | Q1 FY2011 / July 2, 2010 | Comparable / prior balance date |
|---|---|---|
| Revenue | $6,565.9; up 13.5% | $5,782.7 |
| Gross profit and margin | $370.8; 5.6% | $224.0; 3.8% |
| Income (loss) before taxes | $129.6 | $(158.0) |
| Net income (loss) | $118.2; diluted EPS $0.14 | $(154.0); diluted loss per share $0.19 |
| Cash from operating activities | $88.8 | $106.9 |
| Net capital expenditures | $98.3 | Not stated here |
| Free cash flow | $(9.6), as defined by the company | Not stated here |
| Cash and equivalents | $1,730.5 | $1,927.6 |
| Total debt and borrowings | $2,392.1 | $2,254.8 |
| Total current assets / liabilities | $8,640.5 / $7,063.8; current ratio about 1.22 | $7,990.0 / $6,347.2 |
Cash declined by $197.0 million during the quarter. Net debt, calculated as reported debt less cash, was approximately $661.5 million at July 2. The company had no borrowings under its $2.0 billion credit facility and reported compliance with its debt covenants. Inventory was $3,320.9 million, up from $2,875.8 million at March 31.
Changes versus the prior comparable period
- Sales rose 14%, principally on improved demand and higher sales from many major customers. Industrial, automotive, medical and other markets increased by $492.5 million; infrastructure sales decreased by $64.7 million.
- Gross margin improved to 5.6% from 3.8%, reflecting higher volume and capacity utilization, completion of restructuring activity, and no current-quarter restructuring charges. The prior period included $64.8 million of restructuring charges and a $107.4 million impairment charge related to an investment sale.
- SG&A fell to $195.7 million from $201.7 million, and interest and other expense declined to $27.5 million from $36.9 million. The company attributed lower interest expense primarily to reduced debt and lower interest rates.
- Operating cash flow decreased to $88.8 million from $106.9 million. Higher receivables and inventory absorbed working capital, partly offset by higher accounts payable.
Liquidity, outlook, risks and notable items
- Management said existing cash, expected operating cash flows and available credit facilities should fund operations for at least the next 12 months. The company continued to assess whether to use cash to reduce debt or repurchase shares.
- Component shortages, including capacitors, connectors, semiconductor and power components, were estimated to have reduced quarterly revenue by approximately $200 million, without a material profitability impact. Management expected shortages to begin abating in Q2 FY2011 and become less significant in following quarters.
- Management reported improving end-market demand and continued revenue acceleration, but identified risks including customer order cancellations or delays, demand and product-mix changes, capacity utilization, component availability, production ramp challenges and customer concentration. The ten largest customers represented 48% of sales; no individual customer exceeded 10%.
- The company reported no formal earnings or revenue guidance in the supplied filing text. Management described long-term outsourcing growth prospects as strong and said it was focused on improving efficiency in component product solutions, which were less than 10% of quarterly revenue.
- Effective April 1, 2010, new accounting standards required consolidation of the Global Asset-Backed Securitization entity. Under the program as structured, receivables remain on the balance sheet and cash proceeds are treated as borrowings; $149.9 million was reported as short-term borrowings at quarter-end. This accounting change affected reported receivables, debt and cash-flow classification.
- On August 2, 2010, after quarter-end, the company redeemed $240.0 million principal of 1% convertible notes at par plus accrued interest; no shares were issued. It also reported that aggregate share repurchases had reached the $200 million authorized limit since quarter-end. During the quarter, it repurchased about 21.9 million shares for $135.4 million, with $104.9 million paid in cash during the quarter.
- Ordinary-course legal proceedings were disclosed; management did not expect their resolution to materially adversely affect financial position, results or cash flows. The filing reported no material change in market-risk exposure and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether component shortages eased as management expected, and whether production ramps and component-product efficiency improved.
- Whether working-capital requirements, particularly inventory and receivables, convert into stronger operating and free cash flow.
- The effect of receivables-securitization accounting and any changes to the Global program on reported debt, liquidity and cash-flow comparability.
- Debt maturities and liquidity after the August 2010 convertible-note redemption, alongside the company’s capital-allocation decisions following the completed share-repurchase authorization.
- Whether revenue recovery and margin gains persist, given customer, end-market, product-mix and capacity-utilization risks.