Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended July 2, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-23354
FLEXTRONICS INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
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Singapore
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Not Applicable |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2 Changi South Lane,
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Singapore
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486123 |
(Address of registrants principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code
(65) 6890 7188
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
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Class |
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Outstanding at July 30, 2010 |
Ordinary Shares, No Par Value
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785,457,012 |
FLEXTRONICS INTERNATIONAL LTD.
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flextronics International Ltd.
Singapore
We have reviewed the accompanying condensed consolidated balance sheet of Flextronics International
Ltd. and subsidiaries (the Company) as of July 2, 2010, and the related condensed consolidated
statements of operations and cash flows for the three-month periods ended July 2, 2010 and July 3,
2009. These interim financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Notes 2 and 8 to the condensed consolidated financial statements, on April 1, 2010
the Company adopted new accounting standards related to the accounting for variable interest
entities and the transfers of financial assets.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Flextronics International Ltd.
and subsidiaries as of March 31, 2010, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year then ended (not presented herein); and in our
report dated May 21, 2010, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of March 31, 2010 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
August 5, 2010
3
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
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As of |
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As of |
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July 2, 2010 |
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March 31, 2010 |
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(In thousands, |
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except share amounts) |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
1,730,533 |
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$ |
1,927,556 |
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Accounts receivable, net of allowance for doubtful accounts of $11,514 and
$13,163 as of July 2, 2010 and March 31, 2010, respectively |
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2,873,859 |
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2,438,950 |
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Inventories |
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3,320,940 |
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2,875,819 |
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Other current assets |
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715,175 |
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747,676 |
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Total current assets |
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8,640,507 |
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7,990,001 |
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Property and equipment, net |
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2,148,672 |
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2,118,576 |
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Goodwill and other intangible assets, net |
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235,417 |
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254,717 |
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Other assets |
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270,630 |
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279,258 |
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Total assets |
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$ |
11,295,226 |
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$ |
10,642,552 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities: |
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Bank borrowings, current portion of long-term debt and capital lease
obligations |
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$ |
415,103 |
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$ |
266,551 |
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Accounts payable |
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4,919,997 |
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4,447,968 |
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Accrued payroll |
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341,709 |
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347,324 |
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Other current liabilities |
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1,386,963 |
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1,285,368 |
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Total current liabilities |
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7,063,772 |
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6,347,211 |
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Long-term debt and capital lease obligations, net of current portion |
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1,978,683 |
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1,990,258 |
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Other liabilities |
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281,684 |
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320,516 |
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Commitments and contingencies (Note 10) |
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Shareholders equity |
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Ordinary shares, no par value; 845,223,642 and 843,208,876 shares issued, and
793,546,425 and 813,429,154 outstanding as of July 2, 2010 and
March 31, 2010, respectively |
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8,941,462 |
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8,924,769 |
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Treasury stock, at cost; 51,677,217 and 29,779,722 shares as of July 2, 2010
and March 31, 2010, respectively |
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(395,914 |
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(260,074 |
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Accumulated deficit |
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(6,546,545 |
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(6,664,723 |
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Accumulated other comprehensive loss |
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(27,916 |
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(15,405 |
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Total shareholders equity |
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1,971,087 |
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1,984,567 |
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Total liabilities and shareholders equity |
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$ |
11,295,226 |
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$ |
10,642,552 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three-Month Periods Ended |
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July 2, 2010 |
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July 3, 2009 |
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(In thousands, except per share |
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amounts) |
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(Unaudited) |
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Net sales |
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$ |
6,565,880 |
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$ |
5,782,679 |
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Cost of sales |
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6,195,062 |
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5,506,575 |
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Restructuring charges |
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52,109 |
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Gross profit |
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370,818 |
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223,995 |
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Selling, general and administrative expenses |
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195,718 |
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201,692 |
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Intangible amortization |
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17,990 |
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23,334 |
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Restructuring charges |
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12,730 |
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Other charges, net |
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107,399 |
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Interest and other expense, net |
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27,529 |
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36,886 |
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Income (loss) before income taxes |
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129,581 |
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(158,046 |
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Provision for (benefit from) income taxes |
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11,403 |
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(4,003 |
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Net income (loss) |
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$ |
118,178 |
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$ |
(154,043 |
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Earnings (loss) per share: |
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Basic |
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$ |
0.15 |
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$ |
(0.19 |
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Diluted |
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$ |
0.14 |
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$ |
(0.19 |
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Weighted-average shares used in computing per share amounts: |
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Basic |
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810,637 |
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810,174 |
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Diluted |
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824,017 |
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810,174 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three-Month Periods Ended |
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July 2, 2010 |
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July 3, 2009 |
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(In thousands) |
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(Unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
118,178 |
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$ |
(154,043 |
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Depreciation, amortization and other impairment charges |
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111,464 |
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257,075 |
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Changes in working capital and other |
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(140,878 |
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3,834 |
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Net cash provided by operating activities |
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88,764 |
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106,866 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(119,045 |
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(45,939 |
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Proceeds from the disposition of property and equipment |
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20,710 |
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7,304 |
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Acquisition of businesses, net of cash acquired |
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(477 |
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(8,652 |
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Other investments and notes receivable, net |
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(5,136 |
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1,860 |
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Net cash used in investing activities |
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(103,948 |
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(45,427 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from bank borrowings and long-term debt |
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512,350 |
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782,167 |
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Repayments of bank borrowings, long-term debt and
capital lease obligations |
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(589,506 |
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(788,055 |
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Payments for repurchase of long-term debt |
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(7,029 |
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(203,183 |
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Payments for repurchase of ordinary shares |
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(104,875 |
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Net proceeds from issuance of ordinary shares |
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2,203 |
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1,067 |
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Net cash used in financing activities |
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(186,857 |
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(208,004 |
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Effect of exchange rates on cash |
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5,018 |
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1,258 |
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Net decrease in cash and cash equivalents |
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(197,023 |
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(145,307 |
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Cash and cash equivalents, beginning of period |
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1,927,556 |
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1,821,886 |
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Cash and cash equivalents, end of period |
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$ |
1,730,533 |
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$ |
1,676,579 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE COMPANY
Flextronics International Ltd. (Flextronics or the Company) was incorporated in the
Republic of Singapore in May 1990. The Company is a leading provider of advanced design and
electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) of a broad
range of products in the following markets: infrastructure; mobile communication devices;
computing; consumer digital devices; industrial, semiconductor capital equipment, clean technology,
aerospace and defense, and white goods; automotive and marine; and medical devices. The Companys
strategy is to provide customers with a full range of cost competitive, vertically-integrated
global supply chain services through which the Company designs, builds, ships and services a
complete packaged product for its OEM customers. OEM customers leverage the Companys services to
meet their product requirements throughout the entire product life cycle.
The Companys service offerings include rigid printed circuit board and flexible circuit
fabrication, systems assembly and manufacturing (including enclosures, testing services, materials
procurement and inventory management), logistics, after-sales services (including product repair,
re-manufacturing and maintenance) and multiple component product offerings. Additionally, the
Company provides market-specific design and engineering services ranging from contract design
services (CDM), where the customer purchases services on a time and materials basis, to original
product design and manufacturing services, where the customer purchases a product that was
designed, developed and manufactured by the Company (commonly referred to as original design
manufacturing, or ODM). ODM products are then sold by the Companys OEM customers under the OEMs
brand names. The Companys CDM and ODM services include user interface and industrial design,
mechanical engineering and tooling design, electronic system design and printed circuit board
design. The Company also provides after market services such as logistics, repair and warranty
services.
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP or GAAP) for interim financial information and in accordance with the requirements of Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements, and should be read in conjunction with the
Companys audited consolidated financial statements as of and for the fiscal year ended March 31,
2010 contained in the Companys Annual Report on Form 10-K. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-month period ended July 2, 2010
are not necessarily indicative of the results that may be expected for the fiscal year ended
March 31, 2011.
The first fiscal quarters ended on July 2, 2010 and July 3, 2009, respectively, and the second
fiscal quarter ends on October 1, 2010 and October 2, 2009, respectively. The Companys third
fiscal quarter ends on December 31, and the fourth fiscal quarter and year ends on March 31 of each
year.
7
Inventories
The components of inventories, net of applicable lower of cost or market write-downs, were as
follows:
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As of |
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As of |
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July 2, 2010 |
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March 31, 2010 |
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(In thousands) |
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Raw materials |
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$ |
2,244,864 |
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$ |
1,874,244 |
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Work-in-progress |
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539,984 |
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480,216 |
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Finished goods |
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536,092 |
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521,359 |
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$ |
3,320,940 |
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$ |
2,875,819 |
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Property and Equipment
Depreciation expense associated with property and equipment amounted to approximately $93.5
million and $94.5 million for the three-month periods ended July 2, 2010 and July 3, 2009,
respectively.
Goodwill and Other Intangibles
The following table summarizes the activity in the Companys goodwill account during the
three-month period ended July 2, 2010:
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Amount |
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(In thousands) |
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Balance, beginning of the year |
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$ |
84,360 |
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Foreign currency translation adjustments |
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(1,035 |
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Balance, end of the quarter, net of accumulated impairment of $5,949,977 |
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$ |
83,325 |
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The components of acquired intangible assets are as follows:
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As of July 2, 2010 |
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As of March 31, 2010 |
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Gross |
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Net |
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Gross |
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Net |
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Carrying |
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Accumulated |
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Carrying |
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Carrying |
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Accumulated |
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Carrying |
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Amount |
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Amortization |
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Amount |
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Amount |
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Amortization |
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Amount |
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(In thousands) |
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(In thousands) |
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Intangible assets: |
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Customer-related |
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$ |
500,699 |
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$ |
(365,781 |
) |
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$ |
134,918 |
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$ |
506,595 |
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$ |
(355,409 |
) |
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$ |
151,186 |
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Licenses and other |
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52,485 |
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(35,311 |
) |
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17,174 |
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54,792 |
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(35,621 |
) |
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19,171 |
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Total |
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$ |
553,184 |
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$ |
(401,092 |
) |
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$ |
152,092 |
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$ |
561,387 |
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$ |
(391,030 |
) |
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$ |
170,357 |
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The gross carrying amounts of intangible assets are removed when the recorded amounts have
been fully amortized. Total intangible amortization expense was $18.0 million and $23.3 million
during the three-month periods ended July 2, 2010 and July 3, 2009, respectively. The estimated
future annual amortization expense for acquired intangible assets is as follows:
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Fiscal Year Ending March 31, |
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Amount |
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(In thousands) |
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2011 (1) |
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$ |
46,168 |
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2012 |
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42,311 |
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2013 |
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28,786 |
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2014 |
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18,964 |
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2015 |
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9,506 |
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Thereafter |
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6,357 |
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Total amortization expense |
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$ |
152,092 |
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(1) |
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Represents estimated amortization for the nine-month period ending March 31, 2011. |
8
Other Assets
The Company has certain equity investments in non-publicly traded companies which are included
within other assets in the Companys Condensed Consolidated Balance Sheets. As of July 2, 2010 and
March 31, 2010, the Companys equity investments in these non-publicly traded companies totaled
$32.0 million and $27.3 million, respectively. The Company monitors these investments for
impairment and makes appropriate reductions in carrying values as required. Fair values of these
investments, when required, are estimated using unobservable inputs, which are primarily discounted
cash flow projections.
In August of 2009, we sold our interest in one of our non-majority owned investments and
related note receivable for approximately $252.2 million, net of closing costs and recognized an
impairment charge associated with the sale of $107.4 million in the three-month period ended July
3, 2009.
Provision for income taxes
The Company has tax loss carryforwards attributable to operations for which the Company has
recognized deferred tax assets. The Companys policy is to provide a reserve against those
deferred tax assets that in managements estimate are not more likely than not to be realized.
During the three-month periods ended July 2, 2010 and July 3, 2009, the provision for income taxes
includes a benefit of approximately $8.4 million and $11.9 million, respectively, for the net
change in the liability for unrecognized tax benefits and settlements in various tax
jurisdictions.
Recent Accounting Pronouncements
In June 2009, a new accounting standard was issued which amends the consolidation guidance
applicable to variable interest entities (VIEs), the approach for determining the primary
beneficiary of a VIE, and disclosure requirements of a companys involvement with VIEs. Also in
June 2009, a new accounting standard was issued which removes the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of
a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferors interest in transferred financial assets. These standards are
effective for fiscal years beginning after November 15, 2009 and were adopted by the Company
effective April 1, 2010. The adoption of these standards did not impact the Companys consolidated
statement of operations. Upon adoption, accounts receivables sold in the Global Asset-Backed
Securitization program, as currently structured, are consolidated by the Company and remain on its
balance sheet; cash received from the program is treated as a bank borrowing on the Companys
balance sheet and as a financing activity in the statement of cash flows. As a result of the
adoption of these standards, the Company recorded accounts receivables and related bank borrowings
of $217.1 million as of April 1, 2010; subsequent changes to these balances are reflected as an
operating activity and a financing activity, respectively, on a net basis in the consolidated
statement of cash flows for the three-month period ended July 2, 2010. The Company is currently
investigating alternative structures to amend or replace the Global Asset-Backed Securitization
program such that sales of accounts receivable under the amended program will be removed from the
Consolidated Balance Sheet.
The North American Asset-Backed Securitization program and the accounts receivable factoring
program were amended such that sales of accounts receivable from these programs continue to be
accounted for as sales of financial assets and are removed from the consolidated balance sheets.
Cash received from the sale of accounts receivables, under these programs, including amounts
received for the beneficial interest that are paid upon collection of accounts receivables, are
reported as cash provided by operating activities in the statement of cash flows (see Note 8).
3. STOCK-BASED COMPENSATION
The Company historically granted equity compensation awards to acquire the Companys ordinary
shares under four plans; effective July 23, 2010, future equity awards will be granted under the
Companys 2010 Equity Incentive Plan, which was approved by the Companys shareholders at the 2010
Annual General Meeting. These plans collectively are referred to as the Companys equity
compensation plans below. For further discussion of these Plans, refer to Note 2, Summary of
Accounting Policies, of the Notes to Consolidated Financial Statements in the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2010 and the Companys Definitive Proxy
Statement, which was filed with the Securities and Exchange Commission on June 7, 2010.
9
Compensation expense for the Companys stock options and unvested share bonus awards was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
|
(In thousands) |
|
Cost of sales |
|
$ |
2,723 |
|
|
$ |
2,640 |
|
Selling, general and administrative expenses |
|
|
11,767 |
|
|
|
12,564 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
14,490 |
|
|
$ |
15,204 |
|
|
|
|
|
|
|
|
For the three months ended July 2, 2010, the Company granted 616,410 stock options, at a
weighted average fair
value per option of $2.83. Total unrecognized compensation expense related to stock options
is $51.6 million, net of estimated forfeitures, and will be recognized over a weighted average
vesting period of 1.9 years. As of July 2, 2010, total unrecognized compensation expense related to
unvested share bonus awards is $92.0 million, net of estimated forfeitures, and will be recognized
over a weighted average vesting period of 2.8 years. Approximately $26.4 million of the
unrecognized compensation cost is related to awards where vesting is contingent upon meeting both a
service requirement and achievement of longer-term goals. As of July 2, 2010, management believes
achievement of these goals is probable for approximately 315,000 of these awards and approximately
$2.4 million of compensation expense is expected to be recognized in fiscal year 2011.
The number of options outstanding and exercisable was 62.3 million and 30.0 million,
respectively, as of July 2, 2010, at weighted average exercise prices of $7.23 and $9.48,
respectively.
The following table summarizes share bonus award activity for the Companys equity
compensation plans during the three-month period ended July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
Unvested share bonus awards as of March 31, 2010 |
|
|
8,801,609 |
|
|
$ |
10.31 |
|
Granted |
|
|
8,222,675 |
|
|
|
6.97 |
|
Vested |
|
|
(1,095,920 |
) |
|
|
10.81 |
|
Forfeited |
|
|
(745,536 |
) |
|
|
10.99 |
|
|
|
|
|
|
|
|
|
Unvested share bonus awards as of July 2, 2010 |
|
|
15,182,828 |
|
|
$ |
8.43 |
|
|
|
|
|
|
|
|
|
Of the 8.2 million share bonus awards granted during the three-month period ended July 2,
2010, approximately 1.2 million represents the target amount of grants made to certain key
employees whereby vesting is contingent on meeting a certain market condition. The number of shares
that ultimately will vest are based on a measurement of Flextronicss total shareholder return
against the Standard and Poors (S&P) 500 Composite Index. The actual number of shares issued can
range from zero to 1.8 million. These awards vest over a period of four years, subject to
achievement of total shareholder return levels relative to the S&P 500 Composite Index. The
grant-date fair value of these awards was estimated to be $7.32 per share and was calculated using
a Monte Carlo simulation.
10
4. EARNINGS PER SHARE
The following table reflects the basic and diluted weighted-average ordinary shares
outstanding used to calculate basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
|
(In thousands, except per share |
|
|
|
amounts) |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
118,178 |
|
|
$ |
(154,043 |
) |
Shares used in computation: |
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding |
|
|
810,637 |
|
|
|
810,174 |
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.15 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
118,178 |
|
|
$ |
(154,043 |
) |
Shares used in computation: |
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding |
|
|
810,637 |
|
|
|
810,174 |
|
Weighted-average ordinary share equivalents from stock options and awards
(1) |
|
|
13,380 |
|
|
|
|
|
Weighted-average ordinary share equivalents from convertible notes (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares and ordinary share equivalents outstanding |
|
|
824,017 |
|
|
|
810,174 |
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.14 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ordinary share equivalents from stock options to purchase
approximately 26.7 million and 57.2 million shares outstanding during
the three-month periods ended July 2, 2010 and July 3, 2009,
respectively, were excluded from the computation of diluted earnings
per share primarily because the exercise price of these options was
greater than the average market price of the Companys ordinary shares
during the respective periods. As a result of the Companys net loss
for the three-month period ended July 3, 2009, ordinary share
equivalents from approximately 4.7 million options and share bonus
awards were excluded from the calculation of diluted earnings (loss)
per share. |
|
(2) |
|
The Company has the positive intent and ability to settle the
principal amount of its 1% Convertible Subordinated Notes due August
2010 in cash, approximately 15.5 million ordinary share equivalents
related to the principal portion of the Notes are excluded from the
computation of diluted earnings per share. The Company intends to
settle any conversion spread (excess of the conversion value over
conversion price) in stock. The conversion price is $15.525 per share
(subject to certain adjustments). During the three-month periods
ended July 2, 2010 and July 3, 2009, the conversion obligation was
less than the principal portion of these notes and accordingly, no
additional shares were included as ordinary share equivalents. On
August 2, 2010 the Company redeemed its 1% Convertible Subordinated
Notes at par and issued no ordinary shares for the conversion spread.
|
|
|
|
Additionally, for the three-month period ended July 3, 2009, the
Company had outstanding Zero Coupon Convertible Junior Subordinated
Notes. On July 31, 2009, the principal amount of the Zero Coupon
Convertible Junior Subordinated Notes was settled in cash upon
maturity. These notes carried conversion provisions to issue shares to
settle any conversion spread (excess of the conversion value over the
conversion price) in stock. The conversion price was $10.50 per
share. On the maturity date, the Companys stock price was less than
the conversion price, and therefore no shares were issued. |
5. OTHER COMPREHENSIVE INCOME
The following table summarizes the components of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
|
(In thousands) |
|
Net income (loss) |
|
$ |
118,178 |
|
|
$ |
(154,043 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(9,319 |
) |
|
|
10,292 |
|
Unrealized gain (loss) on derivative instruments, and other income (loss) |
|
|
(3,192 |
) |
|
|
11,430 |
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
105,667 |
|
|
$ |
(132,321 |
) |
|
|
|
|
|
|
|
11
6. BANK BORROWINGS AND LONG-TERM DEBT
Bank borrowings and long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
July 2, 2010 |
|
|
March 31, 2010 |
|
|
|
(In thousands) |
|
Short-term bank borrowings |
|
$ |
158,828 |
|
|
$ |
6,688 |
|
1.00% convertible subordinated notes due August 2010 |
|
|
238,395 |
|
|
|
234,240 |
|
6.25% senior subordinated notes due November 2014 |
|
|
302,172 |
|
|
|
302,172 |
|
Term Loan Agreement, including current portion, due in installments
through October 2014 |
|
|
1,687,440 |
|
|
|
1,691,775 |
|
Other |
|
|
5,239 |
|
|
|
19,955 |
|
|
|
|
|
|
|
|
|
|
|
2,392,074 |
|
|
|
2,254,830 |
|
Current portion |
|
|
(414,563 |
) |
|
|
(265,954 |
) |
|
|
|
|
|
|
|
Non-current portion |
|
$ |
1,977,511 |
|
|
$ |
1,988,876 |
|
|
|
|
|
|
|
|
As of July 2, 2010 and March 31, 2010, there were no borrowings outstanding under the
Companys $2.0 billion credit facility, and the Company was in compliance with the financial
covenants under this credit facility. Short-term bank borrowings includes approximately $149.9
million in proceeds received from the sale of accounts receivable under our Global Asset-Backed
Securitization program, see Note 8 for further discussion.
During May 2010, the Company repurchased approximately $7.0 million of other debt and
recognized an immaterial loss in connection with the transaction.
During June 2009, the Company paid approximately $203.2 million to purchase an aggregate
principal amount of $99.8 million of its outstanding 6.5% Senior Subordinated Notes due 2013 and an
aggregate principal amount of
$99.9 million of its outstanding 6.25% Senior Subordinated Notes due 2014 collectively
referred to as the Notes in a cash tender offer. The cash paid included $8.8 million in consent
fees paid to holders of the Notes that were tendered but not purchased as well as to holders that
consented but did not tender, which were capitalized and are being recognized as a component of
interest expense over the remaining life of the Notes. The Company recognized an immaterial gain
during fiscal year 2009 associated with the partial extinguishment of the Notes, net of
approximately $5.3 million for transaction costs and the write-down of related debt issuance costs,
which is included in Other charges, net in the Condensed Consolidated Statement of Operations.
On August 2, 2010 the Company paid $240.0 million to redeem the entire principal amount of its
1% Convertible Subordinated Notes at par plus accrued interest. The notes carried conversion
provisions to issue shares to settle any conversion spread (excess of conversion value over the
conversion price of $15.525 per share). On the maturity date, the Companys stock price was less
than the conversion price, and therefore, no ordinary shares were issued in connection with the
redemption.
Fair Values
As of July 2, 2010, the approximate fair values of the Companys 6.25% Senior Subordinated
Notes and debt outstanding under its Term Loan Agreement were 100.5% and 93.2% of the face values
of the debt obligations, respectively, based on broker trading prices. Due to the short remaining
maturity, the carrying amount of the 1% Convertible Subordinated Notes approximates fair value.
Interest Expense
During the three-month periods ended July 2, 2010 and July 3, 2009, the Company recognized
interest expense of $31.3 million and $46.2 million, respectively, on its debt obligations
outstanding during the period.
12
7. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
The Company enters into cash flow hedges, forward contracts and foreign currency swap
contracts to manage the foreign currency risk associated with monetary accounts and anticipated
foreign currency denominated transactions. The Company hedges committed exposures and does not
engage in speculative transactions. As of July 2, 2010, the aggregate notional amount of the
Companys outstanding foreign currency forward and swap contracts was $2.2 billion as summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Notional |
|
|
|
|
|
|
|
Currency |
|
|
Contract Value |
|
Currency |
|
Buy/Sell |
|
|
Amount |
|
|
in USD |
|
|
|
|
|
|
|
(In thousands) |
|
Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
CNY |
|
Buy |
|
|
787,385 |
|
|
$ |
116,118 |
|
EUR |
|
Buy |
|
|
22,368 |
|
|
|
27,594 |
|
EUR |
|
Sell |
|
|
9,936 |
|
|
|
13,788 |
|
HUF |
|
Buy |
|
|
14,911,000 |
|
|
|
64,153 |
|
MXN |
|
Buy |
|
|
1,554,000 |
|
|
|
120,486 |
|
MYR |
|
Buy |
|
|
273,750 |
|
|
|
84,687 |
|
SGD |
|
Buy |
|
|
47,224 |
|
|
|
33,818 |
|
Other |
|
Buy |
|
|
N/A |
|
|
|
77,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
537,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Forward/Swap Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
CAD |
|
Buy |
|
|
24,858 |
|
|
|
23,473 |
|
CAD |
|
Sell |
|
|
83,856 |
|
|
|
79,343 |
|
EUR |
|
Buy |
|
|
128,940 |
|
|
|
161,488 |
|
EUR |
|
Sell |
|
|
274,557 |
|
|
|
338,136 |
|
GBP |
|
Buy |
|
|
36,404 |
|
|
|
54,445 |
|
GBP |
|
Sell |
|
|
48,576 |
|
|
|
72,720 |
|
JPY |
|
Buy |
|
|
11,458,308 |
|
|
|
126,788 |
|
JPY |
|
Sell |
|
|
8,629,130 |
|
|
|
97,460 |
|
SEK |
|
Buy |
|
|
2,017,001 |
|
|
|
258,743 |
|
SEK |
|
Sell |
|
|
522,979 |
|
|
|
67,130 |
|
Other |
|
Buy |
|
|
N/A |
|
|
|
239,103 |
|
Other |
|
Sell |
|
|
N/A |
|
|
|
144,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,663,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Notional Contract Value in USD |
|
|
|
|
|
|
|
|
|
$ |
2,200,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain of these contracts are designed to economically hedge the Companys exposure to
monetary assets and liabilities denominated in a non-functional currency and are not treated as
hedges under the accounting standards. Accordingly, changes in fair value of these instruments are
recognized in earnings during the period of change as a component of Interest and other expense,
net in the Condensed Consolidated Statement of Operations. As of July 2, 2010 and July 3, 2009 the
amount recognized in earnings related to these contracts was not material. As of July 2, 2010 and
March 31, 2010, the Company also has included net deferred gains and losses, respectively, in other
comprehensive income, a component of shareholders equity in the Condensed Consolidated Balance
Sheet, relating to changes in fair value of its foreign currency contracts that are accounted for
as cash flow hedges. These deferred gains and losses were not material, and the deferred gains as
of July 2, 2010 are expected to be recognized as a component of gross profit in the Condensed
Consolidated Statement of Operations over the next twelve month period. The gains and losses
recognized in earnings due to hedge ineffectiveness were not material for all fiscal periods
presented and are included as a component of Interest and other expense, net in the Condensed
Consolidated Statement of Operations.
13
The following table presents the Companys assets and liabilities related to foreign currency
contracts measured at fair value on a recurring basis as of July 2, 2010, aggregated by level in
the fair-value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
$ |
|
|
|
$ |
19,133 |
|
|
$ |
|
|
|
$ |
19,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
|
|
|
|
|
(26,752 |
) |
|
|
|
|
|
|
(26,752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
|
|
|
$ |
(7,619 |
) |
|
$ |
|
|
|
$ |
(7,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between levels in the fair value hierarchy during the three-month
period ended July 2, 2010. The Companys foreign currency forward contracts are measured on a
recurring basis at fair value based on foreign currency spot and forward rates quoted by banks or
foreign currency dealers.
The following table presents the fair value of the Companys derivative instruments located on
the Condensed Consolidated Balance Sheets utilized for foreign currency risk management purposes at
July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Information |
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance Sheet |
|
Fair |
|
|
Balance Sheet |
|
Fair |
|
|
|
Location |
|
Value |
|
|
Location |
|
Value |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Other current assets |
|
$ |
5,356 |
|
|
Other current liabilities |
|
$ |
(9,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Other current assets |
|
$ |
13,777 |
|
|
Other current liabilities |
|
$ |
(16,834 |
) |
Interest Rate Swap Agreements
The Company is also exposed to variability in cash flows associated with changes in short-term
interest rates primarily on borrowings under its revolving credit facility and term loan agreement.
Swap contracts that were outstanding during the three-month period ended July 2, 2010, which were
entered into during fiscal years 2009 and 2008 to mitigate the exposure to interest rate risk
resulting from unfavorable changes in interest rates resulting from the term loan agreement, are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Fixed Interest |
|
|
Interest Payment |
|
|
|
|
|
|
|
(in millions) |
|
Rate Payable |
|
|
Received |
|
|
Term |
|
|
Expiration Date |
|
Fiscal 2009 Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100.0 |
|
|
1.00 |
% |
|
1-Month Libor |
|
12 month |
|
April 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$250.0 |
|
|
3.61 |
% |
|
1-Month Libor |
|
34 months |
|
October 2010 |
$250.0 |
|
|
3.61 |
% |
|
1-Month Libor |
|
34 months |
|
October 2010 |
$175.0 |
|
|
3.60 |
% |
|
3-Month Libor |
|
36 months |
|
January 2011 |
$72.0 |
|
|
3.57 |
% |
|
3-Month Libor |
|
36 months |
|
January 2011 |
These contracts provide for the receipt of interest payments at rates equal to the terms of
the various tranches of the underlying borrowings outstanding under the term loan arrangement
(excluding the applicable margin), other than the two $250.0 million swaps, expiring October 2010.
These swaps provided for the receipt of interest at one-month Libor while the underlying borrowings
are based on three-month Libor. As of July 2, 2010, the Company had an aggregate notional amount
of $747.0 million in swaps outstanding with a weighted average fixed interest rate of 3.60%.
14
All of the Companys interest rate swap agreements are accounted for as cash flow hedges, and
there was no charge for ineffectiveness during the three-month periods ended July 2, 2010 and July
3, 2009. For the three-months ended July 2, 2010 and July 3, 2009, the net amount recorded as
interest expense from these swaps was not material. As of July 2, 2010 and March 31, 2010, the fair
value of the Companys interest rate swaps was not material and is included in Other current
liabilities in the Condensed Consolidated Balance Sheets, with a corresponding decrease in other
comprehensive income. The deferred losses included in other comprehensive income will effectively
be released through earnings as the Company makes fixed, and receives variable, interest payments
over the remaining term of the swaps through January 2011.
8. TRADE RECEIVABLES SECURITIZATION
The Company continuously sells designated pools of trade receivables under two asset backed
securitization programs and under an accounts receivable factoring program.
Global Asset-Backed Securitization Agreement
The Company continuously sells a designated pool of trade receivables to a special purpose
entity, which in turn sells an undivided ownership interest to a commercial paper conduit,
administered by an unaffiliated financial institution. In addition to the commercial paper
conduit, the Company participates in the securitization agreement as an investor in the conduit.
The securitization agreement allows the operating subsidiaries participating in the securitization
program to receive a cash payment for sold receivables, less a deferred purchase price receivable.
The Company continues to service, administer and collect the receivables on behalf of the
special purpose entity and receives a servicing fee of 1.00% of serviced receivables per annum.
Servicing fees recognized during the three-month periods ended July 2, 2010 and July 3, 2009 were
not material and are included in Interest and other expense, net within the Condensed Consolidated
Statements of Operations. As the Company estimates the fee it receives in return for its obligation
to service these receivables is at fair value, no servicing assets and liabilities are recognized.
Effective April 1, 2010, the Company adopted two new accounting standards, the first of which
removed the concept of a qualifying special purpose entity and created more stringent conditions
for reporting the transfer of a financial asset as a sale. The second standard also amended the
consolidation guidance for determining the primary beneficiary of a variable interest entity, such
that the Company is deemed the primary beneficiary of this special purpose entity and as such is
required to consolidate the special purpose entity. Upon adoption of these standards, the balance
of receivables sold as of March 31, 2010, totaling $217.1 million, was recorded as accounts
receivables and short-term bank borrowings in the opening balance sheet of fiscal 2011 and the
collection of those accounts receivables was classified as a repayment of bank borrowings in the
Condensed Consolidated Statements of Cash Flows during the three-month period ended July 2, 2010.
Beginning April 1, 2010, accounts receivable sold under this program remain on the Companys
balance sheet, as currently structured, and cash received from the program is accounted for as a
borrowing on the Companys balance sheet and as a financing activity in the statement of cash
flows. As of July 2, 2010, $326.4 million in receivables were sold to this special purpose entity
and the Company received $149.9 million in net cash proceeds, which was reported as short-term bank
borrowings in the Condensed Consolidated Balance Sheet and as cash received from financing
activities in the Condensed Consolidated Statement of Cash Flows.
As of March 31, 2010, approximately $352.5 million of the Companys accounts receivable had
been sold to a third-party qualified special purpose entity. The third-party special purpose entity
was a qualifying special purpose entity, and accordingly, the Company did not consolidate this
entity. The amount represented the face amount of the total outstanding trade receivables on all
designated customer accounts on that date. The accounts receivable balances that were sold under
this agreement were removed from the Condensed Consolidated Balance Sheet and the amount received
were included as cash provided by operating activities in the Condensed Consolidated Statements of
Cash Flows. The Company had a recourse obligation that was limited to the deferred purchase price
receivable, which approximated 5% of the total sold receivables, and its own investment
participation, the total of which was approximately $135.4 million as of March 31, 2010, and was
recorded in Other current assets in the Consolidated Balance Sheet. As the recoverability of the
trade receivables underlying the Companys own investment participation was determined in
conjunction with the Companys accounting policies for determining provisions for doubtful accounts
prior to sale into the third party qualified special purpose entity, the fair value of the
Companys own investment participation reflected the estimated recoverability of the underlying
trade receivables.
15
North American Asset-Backed Securitization Agreement
The Company continuously sells a designated pool of trade receivables to an affiliated special
purpose vehicle, which in turn sells such receivables to an agent on behalf of two commercial paper
conduits administered by unaffiliated financial institutions. The Company continues to service,
administer and collect the receivables on behalf of the special purpose entity and received a
servicing fee of 0.50% per annum on the outstanding balance of the serviced receivables. Servicing
fees recognized during the three-month periods ended July 2, 2010 and July 3, 2009 were not
material and were included in Interest and other expense, net within the Condensed Consolidated
Statements of Operations. As the Company estimates that the fee it receives in return for its
obligation to service these receivables is at fair value, no servicing assets or liabilities are
recognized.
The maximum investment limit of the two commercial paper conduits is $300.0 million. The
Company pays commitment fees of 0.80% per annum on the aggregate amount of the liquidity
commitments of the financial institutions under the facility (which approximates the maximum
investment limit) and an additional program fee of 0.70% on the aggregate amounts invested under
the facility by the conduits to the extent funded through the issuance of commercial paper.
The Company has the power to direct the activities of the special purpose vehicle and had the
obligation to absorb the majority of expected losses or the rights to receive benefits from
transfers of trade receivables into the special purpose vehicle and, as such, was deemed the
primary beneficiary of the special purpose vehicle. Accordingly, the Company consolidated the
special purpose vehicle and only those receivables sold to the two commercial paper conduits for
cash have been removed from the Condensed Consolidated Balance Sheet. Effective April 1, 2010, the
securitization agreement was amended to provide for the sale by the special purpose vehicle of 100%
of the eligible receivables to the commercial paper conduits. The transferred receivables are
isolated from the Company and its affiliates as a result of the special purpose entity, and
effective control is passed to the conduits, which have the right to pledge or sell the
receivables. As a result, although the Company still consolidates the special purpose vehicle,
100% of the receivables sold to the commercial paper conduits are removed from the Condensed
Consolidated Balance Sheet beginning April 1, 2010.
A portion of the purchase price for the receivables is paid by the two commercial paper
conduits in cash and the balance is in a new asset, a deferred purchase price receivable, which is
paid to the special purpose vehicle as payments on the receivables are collected from account
debtors. The deferred purchase price receivable represents a beneficial interest in the
transferred financial assets and is recognized at fair value as part of the sale transaction. The
Company sold approximately $316.9 million of accounts receivable to the two commercial paper
conduits as of July 2, 2010, and received approximately $205.0 million in net cash proceeds for the
sales. The deferred purchase price receivable was approximately $111.2 million, and was recorded in
Other current assets in the Condensed Consolidated Balance Sheets. The deferred purchase price
receivable was valued using unobservable inputs (i.e., level three inputs), primarily discounted
cash flow, and due to its high credit quality and short maturity the fair value approximated
book value. The accounts receivable balances sold under this agreement were removed from the
Condensed Consolidated Balance Sheets and were reflected as cash provided by operating activities
in the Condensed Consolidated Statements of Cash Flows. The amount of the Companys deferred
purchase price receivable will vary primarily depending on the financing requirements of the
Company and the performance of the receivables sold.
As of March 31, 2010, the Company had transferred approximately $356.9 million of receivables
into the special purpose vehicle. The Company sold approximately $200.7 million of this $356.9
million to the two commercial paper conduits as of March 31, 2010, and received approximately
$200.0 million in net cash proceeds for the sales. The accounts receivable balances that were sold
to the two commercial paper conduits under this agreement were removed from the Condensed
Consolidated Balance Sheets and were reflected as cash provided by operating activities in the
Condensed Consolidated Statements of Cash Flows, and the difference between the amount sold and net
cash proceeds received was recognized as a loss on sale of the receivables, and was recorded in
Interest and other expense, net in the Condensed Consolidated Statements of Operations. The
remaining trade receivables transferred into the special purpose vehicle and not sold to the two
commercial paper conduits comprised the primary assets of that entity, and were included in trade
accounts receivable, net in the Condensed Consolidated Balance Sheets of the Company. The
recoverability of these trade receivables, both those included in the Condensed Consolidated
Balance Sheets and those sold but uncollected by the commercial paper conduits, were determined in
conjunction with the Companys accounting policies for determining provisions for doubtful
accounts. Although the special purpose vehicle is fully consolidated by the Company, it is a
separate corporate entity and its assets are available first to satisfy the claims of its
creditors.
16
Factored Accounts Receivable
Effective April 1, 2010, the Company amended its accounts receivable factoring program under
which the Company sells accounts receivables in their entirety to certain third-party banking
institutions. The outstanding balance of receivables sold and not yet collected was approximately
$246.4 million and $164.2 million as of July 2, 2010 and March 31, 2010, respectively. These
receivables that were sold were removed from the Condensed Consolidated Balance Sheets and were
reflected as cash provided by operating activities in the Condensed Consolidated Statement of Cash
Flows.
9. RESTRUCTURING CHARGES
The Company did not recognize restructuring charges during the three-month period ended July
2, 2010.
The Company recognized restructuring charges of approximately $64.8 million during the
three-month period ended July 3, 2009 as a part of its restructuring plans previously announced in
March 2009 in order to rationalize the Companys global manufacturing capacity and infrastructure
as a result of macroeconomic conditions. The Company classified approximately $52.1 million of
these charges as a component of cost of sales.
The following table summarizes the provisions, respective payments, and remaining accrued
balance as of July 2, 2010 for charges incurred in fiscal year 2010 and prior periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Severance |
|
|
Exit Costs |
|
|
Total |
|
|
|
(In thousands) |
|
Balance as of March 31, 2010 |
|
$ |
28,216 |
|
|
$ |
36,029 |
|
|
$ |
64,245 |
|
Cash payments for charges incurred in fiscal year 2010 |
|
|
(6,692 |
) |
|
|
(416 |
) |
|
|
(7,108 |
) |
Cash payments for charges incurred in fiscal year 2009 and prior |
|
|
(2,333 |
) |
|
|
(4,535 |
) |
|
|
(6,868 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of July 2, 2010 |
|
|
19,191 |
|
|
|
31,078 |
|
|
|
50,269 |
|
Less: current portion (classified as other current liabilities) |
|
|
(18,244 |
) |
|
|
(14,588 |
) |
|
|
(32,832 |
) |
|
|
|
|
|
|
|
|
|
|
Accrued restructuring costs, net of current portion (classified as
other liabilities) |
|
$ |
947 |
|
|
$ |
16,490 |
|
|
$ |
17,437 |
|
|
|
|
|
|
|
|
|
|
|
|
As of July 2, 2010 and March 31, 2010, the remaining accrued balance for restructuring charges
incurred during fiscal year 2010 were approximately $6.6 million and $13.7 million, respectively,
the entire amount of which was classified as current. As of July 2, 2010 and March 31, 2010, the
remaining accrued balance for restructuring charges incurred during fiscal years 2009 and prior
were approximately $43.7 million and $50.6 million, respectively, of which approximately $17.4
million and $22.2 million, respectively, were classified as long-term
obligations.
As of July 2, 2010 and March 31, 2010, assets that were no longer in use and held for sale,
totaled approximately $40.1 million and $46.9 million, respectively, primarily representing
manufacturing facilities that have been closed as part of the Companys historical facility
consolidations. These assets are recorded at the lesser of carrying value or fair value, which is
based on comparable sales from prevailing market data. For assets held for sale, depreciation
ceases and an impairment loss is recognized if the carrying amount of the asset exceeds its fair
value less cost to sell. Assets held for sale are included in Other current assets in the Condensed
Consolidated Balance Sheets.
17
For further discussion of the Companys historical restructuring activities, refer to Note 9
Restructuring Charges to the Consolidated Financial Statements in the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2010.
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary
course of business. The Company defends itself vigorously against any such claims. Although the
outcome of these matters is currently not determinable, management does not expect that the
ultimate costs to resolve these matters will have a material adverse effect on its condensed
consolidated financial position, results of operations, or cash flows.
11. BUSINESS AND ASSET ACQUISITIONS
During the three-month period ended July 3, 2009, the Company paid $8.7 million relating to
the deferred purchase price from a certain historical acquisition. The purchase price for certain
historical acquisitions is subject to adjustments for contingent consideration and generally has
not been recorded as part of the purchase price, pending the outcome of the contingency.
12. SHARE REPURCHASE PLAN
On May 26, 2010, the Companys Board of Directors authorized the repurchase of up to $200.0
million of the Companys outstanding ordinary shares. Until the Companys 2010 Annual General
Meeting, held on July 23, 2010, the Company was authorized under its shareholder approved Share
Purchase Mandate to repurchase up to approximately 81.2 million shares (representing 10% of the
outstanding shares on the date of the 2009 Annual General Meeting.). Following shareholder
approval at the 2010 Extraordinary General Meeting, the amount authorized for repurchase under the
Share Purchase Mandate is approximately 78.5 million shares (representing 10% of the outstanding
shares on the date of the 2010 Extraordinary General Meeting). The Company may not exceed in the
aggregate the $200.0 million repurchase authorized by the Board in May without further Board
action. Share repurchases will be made in the open market at such times and in such amounts as
management deems appropriate. The timing and actual number of shares repurchased will depend on a
variety of factors including price, market conditions and applicable legal requirements. The share
repurchase program does not obligate the Company to repurchase any specific number of shares and
may be suspended or terminated at any time without prior notice. During the three-month period
ended July 2, 2010, the Company repurchased approximately 21.9 million shares under this plan for
an aggregate purchase price of $135.4 million for which the Company made $104.9 million in cash
payments during the quarter. Since the end of our first fiscal quarter, we have purchased
additional shares resulting in aggregate repurchases in the amount of $200.0 million.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise specifically stated, references in this report to Flextronics, the
Company, we, us, our and similar terms mean Flextronics International Ltd. and its
subsidiaries.
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. The words expects, anticipates, believes, intends, plans and similar
expressions identify forward-looking statements. In addition, any statements which refer to
expectations, projections or other characterizations of future events or circumstances are
forward-looking statements. We undertake no obligation to publicly disclose any revisions to these
forward-looking statements to reflect events or circumstances occurring subsequent to filing this
Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject
to risks and uncertainties, including, without limitation, those discussed in this section, as well
as in Part II, Item 1A, Risk Factors of this report on Form 10-Q, and in Part I, Item 1A, Risk
Factors and in Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2010. In
addition, new risks emerge from time to time and it is not possible for management to predict all
such risk factors or to assess the impact of such risk factors on our business. Accordingly, our
future results may differ materially from historical results or from those discussed or implied by
these forward-looking statements. Given these risks and uncertainties, the reader should not place
undue reliance on these forward-looking statements.
OVERVIEW
We are a leading global provider of advanced design and electronics manufacturing services
(EMS) to original equipment manufacturers (OEMs) of a broad range of products in the following
markets: infrastructure; mobile communication devices; computing; consumer digital devices;
industrial, semiconductor capital equipment, clean technology, aerospace and defense, and white
goods; automotive and marine; and medical devices. We provide a full range of vertically-integrated
global supply chain services through which we can design, build, ship and service a complete
packaged product for our customers. Customers leverage our services to meet their product
requirements throughout the entire product life cycle. Our vertically-integrated service offerings
include: design; rigid printed circuit board and flexible circuit fabrication; systems assembly and
manufacturing; after-sales services; and multiple component product offerings including, camera
modules for consumer products such as mobile devices and power supplies for computing and other
electronic devices.
We are one of the worlds largest EMS providers, with revenues of $6.6 billion during the
three-month period ended July 2, 2010, and $24.1 billion in fiscal year 2010. As of March 31, 2010,
our total manufacturing capacity was approximately 26.6 million square feet. We help customers
design, build, ship and service electronics products through a network of facilities in 30
countries across four continents. The following tables set forth net sales and net property and
equipment, by country, based on the location of our manufacturing site:
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
Net sales: |
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
|
(In thousands) |
|
China |
|
$ |
2,275,329 |
|
|
$ |
1,894,996 |
|
Mexico |
|
|
959,402 |
|
|
|
884,953 |
|
U.S. |
|
|
807,241 |
|
|
|
873,122 |
|
Malaysia |
|
|
647,914 |
|
|
|
489,101 |
|
Hungary |
|
|
571,756 |
|
|
|
374,603 |
|
Other |
|
|
1,304,238 |
|
|
|
1,265,904 |
|
|
|
|
|
|
|
|
|
|
$ |
6,565,880 |
|
|
$ |
5,782,679 |
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
Property and equipment, net: |
|
July 2, 2010 |
|
|
March 31, 2010 |
|
|
|
(In thousands) |
|
China |
|
$ |
883,546 |
|
|
$ |
879,440 |
|
Mexico |
|
|
371,925 |
|
|
|
361,492 |
|
U.S. |
|
|
164,403 |
|
|
|
165,029 |
|
Hungary |
|
|
155,147 |
|
|
|
154,759 |
|
Malaysia |
|
|
149,950 |
|
|
|
131,606 |
|
Other |
|
|
423,701 |
|
|
|
426,250 |
|
|
|
|
|
|
|
|
|
|
$ |
2,148,672 |
|
|
$ |
2,118,576 |
|
|
|
|
|
|
|
|
We believe that the combination of our extensive design and engineering services, significant
scale and global presence, vertically-integrated end-to-end services, advanced supply chain
management, industrial campuses in low-cost geographic areas and operational track record provide
us with a competitive advantage in the market for designing, manufacturing and servicing
electronics products for leading multinational OEMs. Through these services and facilities, we
offer our OEM customers the ability to simplify their global product development, their
manufacturing process, and their after sales services, and enable them to achieve meaningful time
to market and cost savings.
Our operating results are affected by a number of factors, including the following:
|
|
|
changes in the macroeconomic environment and related changes in consumer demand; |
|
|
|
the mix of the manufacturing services we are providing, the number and size of new
manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal
demand, shortages of components and other factors; |
|
|
|
the effects on our business when our customers are not successful in marketing their
products, or when their products do not gain widespread commercial acceptance; |
|
|
|
our increased components offerings which have required that we make substantial
investments in the resources necessary to design and develop these products; |
|
|
|
our ability to achieve commercially viable production yields and to manufacture
components in commercial quantities to the performance specifications demanded by our OEM
customers (recent difficulties in product ramping have adversely affected our ability to
achieve desired operating performance); |
|
|
|
the effect on our business due to our customers products having short product life
cycles; |
|
|
|
our customers ability to cancel or delay orders or change production quantities; |
|
|
|
our customers decision to choose internal manufacturing instead of outsourcing for
their product requirements; |
|
|
|
our exposure to financially troubled customers; and |
|
|
|
integration of acquired businesses and facilities. |
20
Historically, the EMS industry experienced significant change and growth as an increasing
number of companies elected to outsource some or all of their design and manufacturing
requirements. We have seen an increase in the penetration of the global OEM manufacturing
requirements since the 2001 2002 technology downturn as more and more OEMs pursued the benefits
of outsourcing rather than internal manufacturing. In the second half of fiscal 2009, we
experienced dramatically deteriorating macroeconomic conditions and demand for our customers
products slowed in all of the industries we served. This global economic crisis, and related
decline in demand for our customers products, put pressure on certain of our OEM customers cost
structures and caused them to reduce their manufacturing and supply chain outsourcing requirements.
In response, we announced in March 2009 restructuring plans intended to rationalize our global
manufacturing capacity and infrastructure with the intent to improve our operational efficiencies
by reducing excess workforce and capacity. We have recognized approximately $258.1 million of
associated charges since the announcement, with approximately $107.5 million and $150.6 million
recognized during fiscal years 2010 and 2009, respectively. We do not anticipate additional
material charges in future periods relating to these restructuring plans. Beginning in the second
half of fiscal year 2010, we began seeing some positive signs that demand for our OEM customers
end products was improving, and this trend of accelerated revenue continued in the quarter ended
July 2, 2010. We believe the long-term, future growth prospects for
outsourcing of advanced manufacturing capabilities, design and engineering services and
after-market services remains strong.
We procure a wide assortment of materials, including electronic components, plastics and
metals. We experienced shortages of numerous commodity components, such as capacitors, connectors,
semiconductor and power components, during the quarter ended July 2, 2010. We estimated that these
shortages reduced our revenue by approximately $200.0 million, but did not have a material impact
on profitability. We anticipate that these shortages will begin to abate during our second fiscal
quarter, and become less significant in the following quarters.
We have experienced significant volume
increases in our component product solution services. This steep growth is
challenging due to the complexities of the products and processes involved. We
are encouraged by the increased demand for these product solutions and the
successful achievement of acceptance in the market, and we are intensely
focused on improving our manufacturing efficiencies for these component product
offerings. Our component product solution services, on a combined basis, was
less than 10% of our consolidated revenue for the quarter ended July 2,
2010.
Our cash provided by operations declined approximately $18.1 million to $88.8 million for the
quarter ended July 2, 2010 as compared with $106.9 million for the quarter ended July 3, 2009. As
discussed further in Liquidity and Capital Resources below, primarily as a result of higher sales
and anticipated growth our accounts receivable, inventory and accounts payable all increased, which
resulted in cash being used to increase our working capital. Our free cash flow, which we define
as cash from operating activities less net purchases of property and equipment, was negative $9.6
million for the quarter ended July 2, 2010 as we invested in our current and anticipated growth.
We did not redeem or repurchase a significant amount of debt during the quarter ended July 2, 2010,
however, since we began our deleveraging efforts in June 2008 our consolidated debt has been
reduced by approximately $1.3 billion.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe the accounting policies discussed under Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2010, affect our more significant judgments and estimates used in
the preparation of the Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2, Summary of
Accounting Policies of the Notes to Condensed Consolidated Financial Statements.
21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations
data expressed as a percentage of net sales. The financial information and the discussion below
should be read in conjunction with the Condensed Consolidated Financial Statements and notes
thereto included in this document. In addition, reference should be made to our audited
Consolidated Financial Statements and notes thereto and related Managements Discussion and
Analysis of Financial Condition and Results of Operations included in our 2010 Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
July 2, 2010 |
|
|
July 3, 2009 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
94.4 |
|
|
|
95.2 |
|
Restructuring charges |
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
5.6 |
|
|
|
3.8 |
|
Selling, general and administrative expenses |
|
|
3.0 |
|
|
|
3.5 |
|
Intangible amortization |
|
|
0.3 |
|
|
|
0.4 |
|
Restructuring charges |
|
|
|
|
|
|
0.2 |
|
Other charges, net |
|
|
|
|
|
|
1.9 |
|
Interest and other expense, net |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2.0 |
|
|
|
(2.8 |
) |
Provision for (benefit from) income taxes |
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
|
1.8 |
% |
|
|
(2.7 |
)% |
|
|
|
|
|
|
|
Net sales
Net sales during the three-month period ended July 2, 2010 totaled $6.6 billion, representing
an increase of $0.8 billion, or 14%, from $5.8 billion during the three-month period ended July 3,
2009, primarily due to an improved macroeconomic environment as we recognize increased sales from
many of our major customers. Sales increased across most of the markets we serve, consisting of:
(i) $492.5 million in the industrial, automotive, medical and other markets, (ii) $152.3 million in
the computing market, (iii) $132.9 million in the mobile communications market, and (iv) $70.2
million in the consumer digital market. Net sales decreased $64.7 million in the infrastructure
market. Net sales increased across all of the geographic regions we serve including $612.1 million
in Asia, $19.7 million in the Americas, and $151.4 million in Europe.
The following tables set forth net sales by market:
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
Market: |
|
July 2, 2010 |
|
|
July 3, 2009 |
|
|
|
(In thousands) |
|
Infrastructure |
|
$ |
1,801,971 |
|
|
$ |
1,866,627 |
|
Industrial, Automotive, Medical and Other |
|
|
1,457,178 |
|
|
|
964,675 |
|
Mobile |
|
|
1,328,616 |
|
|
|
1,195,723 |
|
Computing |
|
|
1,261,956 |
|
|
|
1,109,659 |
|
Consumer digital |
|
|
716,159 |
|
|
|
645,995 |
|
|
|
|
|
|
|
|
|
|
$ |
6,565,880 |
|
|
$ |
5,782,679 |
|
|
|
|
|
|
|
|
Our ten largest customers during the three-month periods ended July 2, 2010 and July 3, 2009
accounted for approximately 48% and 49% of net sales, respectively, with no customer accounting for
greater than 10% of our net sales in either period.
Gross profit
Gross profit is affected by a number of factors, including the number and size of new
manufacturing programs, product mix, component costs and availability, product life cycles, unit
volumes, pricing, competition, new product introductions, capacity utilization and the expansion
and consolidation of manufacturing facilities. Gross profit during the three-month period ended
July 2, 2010 increased $146.8 million to $370.8 million, or 5.6% of net sales, from $224.0 million,
or 3.8% of net sales, during the three-month period ended July 3, 2009. The increase in gross
margin was primarily attributable to increased demand resulting in improved capacity utilization
driven by the 14% increase in our revenues, and in part, due to the completion of our restructuring
activities and there being no restructuring costs for the three-month period ended July 2, 2010
versus restructuring costs of $52.1 million for the three-month period ended July 3, 2009.
22
Restructuring charges
We did not incur restructuring charges during the three-month period ended July 2, 2010 and
have completed all activities associated with previously announced plans. We recognized
approximately $64.8 million during the three-month period ended July 3, 2009 in connection with our
restructuring plans announced in March 2009 to rationalize our global manufacturing capacity and
infrastructure as a result of weak macroeconomic conditions. Our restructuring activities were
intended to improve our operational efficiencies by reducing excess workforce and capacity. The
cost associated with these restructuring activities included employee severance, costs related to
owned and leased facilities and equipment that is no longer in use and is to be disposed of, and
costs associated with the exit of certain contractual arrangements due to facility closures. As of
July 2, 2010, there have been no changes to these plans. See Note 9, Restructuring Charges in the
Notes to the Condensed Consolidated Financial Statements for a summary of the current quarter
payments and remaining accrued balance as of July 2, 2010 for charges incurred in fiscal year 2010
and prior periods. The cost reductions associated with the restructuring activities, primarily
reduced wages and benefits due to employee terminations, decreased depreciation expense resulting
from equipment impairments and
reduced costs associated with leased equipment and buildings have been achieved as
anticipated. The overall impact on future operating results and cash flows from these restructuring
activities is difficult to measure as there are offsetting reductions in revenues at affected
locations as well as increases in certain costs at other locations related to transition activities
for transferred programs or increased production ramp up costs. We do not separately track all of
the interrelated components of these activities.
Refer to Note 9, Restructuring Charges, of the Notes to Condensed Consolidated Financial
Statements for further discussion of our restructuring activities.
Selling, general and administrative expenses
Selling, general and administrative expenses, or SG&A, amounted to $195.7 million, or 3.0% of
net sales, during the three-month period ended July 2, 2010, decreasing $6.0 million from $201.7
million, or 3.5% of net sales, during the three-month period ended July 3, 2009. The overall
decreases in SG&A expense and SG&A as a percentage of sales during the three-month period ended
July 2, 2010 were primarily the result of our discretionary cost reduction efforts offset by an
increase in corporate support activities, such as information technology and supply chain
management, necessary to support the growth of our operations.
Intangible amortization
Amortization of intangible assets during the three-month period ended July 2, 2010 decreased
by $5.3 million to $18.0 million from $23.3 million during the three-month period ended July 3,
2009, primarily due to the use of the accelerated method of amortization for certain customer
related intangibles, which results in decreasing expense over time.
Other charges, net
During the three-month period ended July 3, 2009, we recognized an approximate $107.4 million
impairment charge associated with the sale of our interest in one of our non-majority owned
investments.
Interest and other expense, net
Interest and other expense, net was $27.5 million during the three-month period ended July 2,
2010 compared to $36.9 million during the three-month period ended July 3, 2009, a decrease of $9.4
million. The decrease in expense is the result of less debt outstanding during the period
resulting from the approximate $400.0 million tender and redemption of the 6.5% Senior Subordinated
Notes and the $100.0 million tender of the 6.25% Senior Subordinated Notes. Further reduction in
interest expense was due to lower interest rates as a result of $400.0 million in fixed rate debt
associated with interest rate swaps expiring and converting to variable rate debt, and a $4.3
million decrease in non-cash interest expense from the redemption of our Zero Coupon Convertible
Junior Subordinated Notes in July 2009. This decrease in interest expense was partially offset by
less interest income resulting from the reduction in other notes receivable that were sold during
the third quarter of fiscal year 2010.
23
Income taxes
Certain of our subsidiaries have, at various times, been granted tax relief in their
respective countries, resulting in lower income taxes than would otherwise be the case under
ordinary tax rates. Refer to Note 8, Income Taxes, of the Notes to the Consolidated Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 for further
discussion.
We have tax loss carryforwards attributable to operations for which we have recognized
deferred tax assets. Our policy is to provide a reserve against those deferred tax assets that in
managements estimate are not more likely than not to be realized. During the three-month periods
ended July 2, 2010 and July 3, 2009, the provision for income taxes includes a benefit of
approximately $8.4 million and $11.9 million, respectively, for the net change in the liability for
unrecognized tax benefits as a result of settlements in various tax jurisdictions.
The consolidated effective tax rate for a particular period varies depending on the amount of
earnings from different jurisdictions, operating loss carryforwards, income tax credits, changes in
previously established valuation allowances for deferred tax assets based upon our current analysis
of the realizability of these deferred tax assets, as well as certain tax holidays and incentives
granted to our subsidiaries primarily in China, Malaysia, Israel, Poland and Singapore.
LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 2010, we had cash and cash equivalents of approximately $1.7 billion and bank
and other borrowings of approximately $2.4 billion. We also had a $2.0 billion credit facility,
under which we had no borrowings outstanding as of July 2, 2010. As of July 2, 2010, we were in
compliance with the covenants under the Companys indentures and credit facilities.
Cash provided by operating activities amounted to $88.8 million during the three-month period
ended July 2, 2010. This resulted primarily from $118.2 million of net income for the period before
adjustments to include approximately $111.5 million of non-cash expenses for depreciation and
amortization. Our working capital accounts increased $125.4 million on a net basis, primarily due
to higher sales and anticipated growth resulting in increases in inventory of $462.3 million and
accounts receivable of $210.4 million, partially offset by increases in accounts payable of $465.9
million and other current liabilities of $80.3 million.
As a result of the adoption of new accounting standards, accounts receivables sold under our
Global Asset-Backed Securitization program totaling $326.4 million remained on the Condensed
Consolidated Balance Sheet and proceeds of $149.9 million were reported as short-term bank
borrowings. Accounts receivable sold under our North American Asset-Backed Securitization program
totaling $316.9 million were removed from our Condensed Consolidated Balance Sheet and the
Companys deferred purchase price receivable associated with the sale of $111.2 million was
recorded in Other current assets in the Condensed Consolidated Balance Sheet. In addition, we sold
$246.4 million of accounts receivable under our accounts receivable factoring program which were
removed from our Condensed Consolidated Balance Sheet.
For the quarterly periods indicated, certain of managements key liquidity metrics were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
July 2, |
|
|
March 31, |
|
|
December 31, |
|
|
October 2, |
|
|
July 3, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days in trade accounts receivable |
|
37 days |
|
37 days |
|
33 days |
|
34 days |
|
35 days |
Days in inventory |
|
46 days |
|
46 days |
|
40 days |
|
44 days |
|
47 days |
Days in accounts payable |
|
69 days |
|
72 days |
|
62 days |
|
63 days |
|
63 days |
24
Days in trade accounts receivable was calculated as the average accounts receivable for the
current and prior quarters divided by annualized sales for the current quarter by day. During the
three-month period ended July 2, 2010, days in trade accounts receivable increased by two days to
37 days compared to the three-month period ended July 3, 2009. This increase in trade accounts
receivable was primarily attributable to our adoption of new accounting standards, which requires
that receivables sold under our Global Asset-Backed Securitization program remain on the Condensed
Consolidated Balance Sheet. Days in trade receivables excludes the effect of approximately $111.2
million of the deferred purchase price from the North American Asset-Backed Securitization program
which was recorded in Other current assets in the Condensed Consolidated Balance Sheet. See Note 8
in our Notes to Condensed Consolidated Financial Information regarding changes to our accounting of
accounts receivables sold under our asset-backed securitization and factoring programs as a result
of the adoption of a new accounting standard effective April 1, 2010.
Days in inventory was calculated as the average inventory for the current and prior quarters
divided by annualized cost of sales for the current quarter by day. During the three-month period
ended July 2, 2010, days in inventory
decreased one day compared to the three-month period ended July 3, 2009. The component
shortages discussed above have hampered our efforts to reduce our inventory days on hand.
Days in accounts payable was calculated as the average accounts payable for the current and
prior quarters divided by annualized cost of sales for the current quarter by day. During the
three-month period ended July 2, 2010, days in accounts payable increased six days to 69 days
compared to the three-month period ended July 3, 2009 primarily due to the increase in inventory as
a result of component shortages and anticipated growth.
Cash used by investing activities amounted to $103.9 million. This resulted primarily from
$98.3 million in net capital expenditures for property and equipment.
Cash used in financing activities amounted to $186.9 million during the three-month period
ended July 2, 2010, which was primarily from $104.9 million in payments to repurchase 21.9 million
of our ordinary shares. The net use of $67.2 million of cash for the repayments of bank
borrowings, long-term debt and capital lease obligations resulted primarily from net repayments
related to our Global Asset-Backed Securitization program in connection with the adoption of new
accounting standards, effective April 1, 2010.
As of July 2, 2010, quarterly maturities of our bank borrowings and long-term debt were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
Fiscal Year |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Total |
|
|
|
(In thousands) |
|
2011 |
|
$ |
|
|
|
$ |
401,893 |
|
|
$ |
4,252 |
|
|
$ |
4,209 |
|
|
$ |
410,354 |
|
2012 |
|
|
4,209 |
|
|
|
4,167 |
|
|
|
4,167 |
|
|
|
4,167 |
|
|
|
16,710 |
|
2013 |
|
|
4,167 |
|
|
|
479,662 |
|
|
|
2,937 |
|
|
|
2,937 |
|
|
|
489,703 |
|
2014 |
|
|
2,937 |
|
|
|
2,937 |
|
|
|
305,079 |
|
|
|
2,907 |
|
|
|
313,860 |
|
2015 |
|
|
2,907 |
|
|
|
1,153,301 |
|
|
|
|
|
|
|
|
|
|
|
1,156,208 |
|
Thereafter (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,392,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cumulative maturities for years subsequent to March 31, 2015. |
We continue to assess our capital structure, and evaluate the merits of redeploying available
cash to reduce existing debt or repurchase shares.
On August 2, 2010, we paid $240.0 million to redeem the entire principal amount of the 1%
Convertible Subordinated Notes at par plus accrued interest. On the maturity date, our stock price
was less than the conversion price, and therefore, no ordinary shares were issued in connection
with the redemption. Additionally, on May 26, 2010, our Board of Directors authorized the
repurchase of up to $200.0 million of our outstanding ordinary shares. During the quarter ended
July 2, 2010, we repurchased approximately 21.9 million shares for an aggregate purchase price of
$135.4 million. Since the end of our first fiscal quarter, we have purchased additional shares
resulting in aggregate repurchases in the amount of $200.0 million.
25
Liquidity is affected by many factors, some of which are based on normal ongoing operations of
our business and some of which arise from fluctuations related to global economics and markets.
Cash balances are generated and held in many locations throughout the world. Local government
regulations may restrict our ability to move cash balances to meet cash needs under certain
circumstances. We do not currently expect such regulations and restrictions to impact our ability
to pay vendors and conduct operations throughout our global organization. We believe that our
existing cash balances, together with anticipated cash flows from operations and borrowings
available under our existing credit facilities, will be sufficient to fund our operations through
at least the next twelve months.
Future liquidity needs will depend on fluctuations in levels of our working capital
requirements, the maturity profile of our existing debt, the timing of capital expenditures for new
equipment, the extent to which we utilize operating leases for new facilities and equipment, timing
of cash outlays associated with historical restructuring and integration activities, and levels of
shipments and changes in volumes of customer orders.
Historically, we have funded our operations from existing cash and cash equivalents, cash
generated from operations, proceeds from public offerings of equity and debt securities, bank debt
and lease financings. We also continuously sell a designated pool of trade receivables under
asset-backed securitization programs and sell certain trade receivables to certain third-party
banking institutions with limited recourse under our accounts receivable factoring program. Our
asset-backed securitization programs include certain limits on customer default rates. Given the
current macroeconomic environment, it is possible that we will experience default rates in excess
of those limits, which, if not waived by the counterparty, could impair our ability to sell
receivables under these arrangements in the future.
We may enter into debt and equity financings, sales of accounts receivable and lease
transactions to fund acquisitions and future growth. The sale or issuance of equity or convertible
debt securities could result in dilution to current shareholders. Additionally, we may issue debt
securities that have rights and privileges senior to those of holders of ordinary shares, and the
terms of this debt could impose restrictions on operations and could increase debt service
obligations. This increased indebtedness could limit our flexibility as a result of debt service
requirements and restrictive covenants, potentially affect our credit ratings, and may limit our
ability to access additional capital or execute our business strategy. Any downgrades in credit
ratings could adversely affect our ability to borrow by resulting in more restrictive borrowing
terms.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Information regarding our long-term debt payments, operating lease payments, capital lease
payments and other commitments is provided in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations of our Annual Report on our Form 10-K for the fiscal
year ended March 31, 2010. Aside from the foregoing, there have been no material changes in our
contractual obligations since March 31, 2010.
OFF-BALANCE SHEET ARRANGEMENTS
As a result of new accounting guidance effective April 1, 2010 and an amendment to our North
American Asset-Backed Securitization program, 100% of the accounts receivable sold under this
program are removed from our balance sheet. We continuously sell a designated pool of trade
receivables to investment conduits administered by an unaffiliated financial institution under this
program, and in addition to cash, we receive a deferred purchase price receivable for the
receivables sold. The deferred purchase price receivable we retain serves as additional credit
support to the investment conduits and is recorded at its estimated fair value. The fair value of
our deferred purchase price receivable was approximately $111.2 million as of July 2, 2010. At
March 31, 2010, under our Global Asset-Backed Securitization program, we sold a designated pool of
receivables to a third-party qualified special purpose entity, which in turn sold an undivided
interest to an investment conduit administered by an unaffiliated financial institution. We
participate in this securitization arrangement as an investor in the conduit. The fair value of our
investment participation, together with our recourse obligation that approximated 5% of the total
receivables sold, was approximately $135.4 million. The adoption of new accounting guidance,
effective April 1, 2010, eliminated the concept of a qualifying special purpose entity and we are
now required to consolidate this special purpose entity. As a result, as currently structured, 100%
of the accounts receivable sold under this program remain on our balance sheet and cash received
from the program is accounted for as a secured borrowing. The receivables we retain that previously
represented our investment participation and our recourse obligation under the prior accounting
guidance continues to serve as additional credit support to the investment conduits and is recorded
at its estimated fair value within accounts receivable. As of July 2, 2010, the fair value of these
receivables was approximately $176.4 million.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our exposure to market risk for changes in interest and
foreign currency exchange rates for the three-month period ended July 2, 2010 as compared to the
fiscal year ended March 31, 2010.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of July 2,
2010, the end of the quarterly fiscal period covered by this quarterly report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 2,
2010, such disclosure controls and procedures were effective in ensuring that information required
to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934,
as amended, is (i) recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms and (ii) accumulated and communicated
to our management, including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during
our first quarter of fiscal year 2011 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to legal proceedings, claims, and litigation arising in the ordinary course of
business. We defend ourselves vigorously against any such claims. Although the outcome of these
matters is currently not determinable, management does not expect that the ultimate costs to
resolve these matters will have a material adverse effect on our consolidated financial position,
results of operations, or cash flows.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended March 31, 2010, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be not material also may materially adversely affect our business, financial
condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our ordinary shares made by us
for the period from April 1, 2010 through July 2, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Approximate Dollar Value |
|
|
|
Total Number |
|
|
|
|
|
|
Purchased as Part of |
|
|
of Shares that May Yet |
|
|
|
of Shares |
|
|
Average Price |
|
|
Publicly Announced |
|
|
Be Purchased Under the |
|
Period |
|
Purchased (1) |
|
|
Paid per Share |
|
|
Plans or Programs (2) |
|
|
Plans or Programs (2) |
|
April 1 April 30, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
200,000,000 |
|
May 1 May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000,000 |
|
June 1 July 2, 2010 |
|
|
21,897,495 |
|
|
|
6.19 |
|
|
|
21,897,495 |
|
|
|
64,559,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
21,897,495 |
|
|
|
6.19 |
|
|
|
21,897,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the period from April 1, 2010 through July 2, 2010 all
purchases were made pursuant to the program discussed below in open
market transactions. All purchases were made in accordance with Rule
10b-18 under the Securities Exchange Act of 1934. |
|
(2) |
|
On May 26, 2010, our Board of Directors authorized the purchase of up
to $200.0 million of the Companys outstanding ordinary shares. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
28
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Exhibit |
|
|
|
|
|
|
10.01 |
|
|
Flextronics International Ltd. 2010 Equity Incentive Plan* |
|
10.02 |
|
|
Form of Share Option Award Agreement under 2010 Equity Incentive Plan |
|
10.03 |
|
|
Form of Restricted Share Unit Award Agreement under 2010 Equity Incentive Plan |
|
10.04 |
|
|
Form of Share Bonus Unit Award Agreement under 2001 Equity Incentive Plan |
|
10.05 |
|
|
Description of Annual Incentive Bonus Plan for Fiscal 2011 |
|
10.06 |
|
|
Executive Incentive Compensation Recoupment Policy |
|
10.07 |
|
|
Compensation Arrangements of Executive Officers of Flextronics International Ltd. |
|
10.08 |
|
|
Award Agreement for Francois Barbier under Senior Management Deferred Compensation Plan,
dated July 22, 2005 |
|
10.09 |
|
|
Award Agreement for Werner Widmann Deferred Compensation Plan, dated as of July 22, 2005** |
|
10.10 |
|
|
Addendum to Award Agreement for Werner Widmann Deferred Compensation Plan, dated as of
June 30, 2006*** |
|
10.11 |
|
|
Description of Non-Executive Chairmans Compensation |
|
15.01 |
|
|
Letter in lieu of consent of Deloitte & Touche LLP. |
|
31.01 |
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
31.02 |
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
32.01 |
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**** |
|
32.02 |
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**** |
101.INS
|
|
|
XBRL Instance Document**** |
101.SCH
|
|
|
XBRL Taxonomy Extension Scheme Document**** |
101.CAL
|
|
|
XBRL Taxonomy Extension Calculation Linkbase Document**** |
101.DEF
|
|
|
XBRL Taxonomy Extension Definition Linkbase Document**** |
101.LAB
|
|
|
XBRL Taxonomy Extension Label Linkbase Document**** |
101.PRE
|
|
|
XBRL Taxonomy Extension Presentation Linkbase Document**** |
|
|
|
* |
|
Incorporated by reference to Exhibit 10.01 to the Companys Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 28, 2010. |
|
** |
|
Incorporated by reference to Exhibit 10.01 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 7, 2006. |
|
*** |
|
Incorporated by reference to Exhibit 10.02 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 7, 2006. |
|
**** |
|
This exhibit is furnished with this Quarterly Report on Form 10-Q, is not deemed filed with
the Securities and Exchange Commission, and is not incorporated by reference into any filing of
Flextronics International Ltd. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of
any general incorporation language contained in such filing. |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FLEXTRONICS INTERNATIONAL LTD.
(Registrant)
|
|
|
/s/ Michael M. McNamara
|
|
|
Michael M. McNamara |
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Date: August 5, 2010 |
|
|
|
|
|
|
/s/ Paul Read
|
|
|
Paul Read |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
Date: August 5, 2010 |
|
|
30
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Exhibit |
|
|
|
|
|
|
10.01 |
|
|
Flextronics International Ltd. 2010 Equity Incentive Plan* |
|
10.02 |
|
|
Form of Share Option Award Agreement under 2010 Equity Incentive Plan |
|
10.03 |
|
|
Form of Restricted Share Unit Award Agreement under 2010 Equity Incentive Plan |
|
10.04 |
|
|
Form of Share Bonus Award Agreement under 2001 Equity Incentive Plan |
|
10.05 |
|
|
Description of Annual Incentive Bonus Plan for Fiscal 2011 |
|
10.06 |
|
|
Executive Incentive Compensation Recoupment Policy |
|
10.07 |
|
|
Compensation Arrangements of Executive Officers of Flextronics International Ltd. |
|
10.08 |
|
|
Award Agreement for Francois Barbier under Senior Management Deferred Compensation Plan,
dated July 22, 2005 |
|
10.09 |
|
|
Award Agreement for Werner Widmann Deferred Compensation Plan, dated as of July 22, 2005** |
|
10.10 |
|
|
Addendum to Award Agreement for Werner Widmann Deferred Compensation Plan, dated as of
June 30, 2006*** |
|
10.11 |
|
|
Description of Non-Executive Chairmans Compensation |
|
15.01 |
|
|
Letter in lieu of consent of Deloitte & Touche LLP. |
|
31.01 |
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
31.02 |
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
32.01 |
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**** |
|
32.02 |
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**** |
101.INS
|
|
|
XBRL Instance Document**** |
101.SCH
|
|
|
XBRL Taxonomy Extension Scheme Document**** |
101.CAL
|
|
|
XBRL Taxonomy Extension Calculation Linkbase Document**** |
101.DEF
|
|
|
XBRL Taxonomy Extension Definition Linkbase Document**** |
101.LAB
|
|
|
XBRL Taxonomy Extension Label Linkbase Document**** |
101.PRE
|
|
|
XBRL Taxonomy Extension Presentation Linkbase Document**** |
|
|
|
* |
|
Incorporated by reference to Exhibit 10.01 to the Companys Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 28, 2010. |
|
** |
|
Incorporated by reference to Exhibit 10.01 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 7, 2006. |
|
*** |
|
Incorporated by reference to Exhibit 10.02 to the Companys Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 7, 2006. |
|
**** |
|
This exhibit is furnished with this Quarterly Report on Form 10-Q, is not deemed filed with
the Securities and Exchange Commission, and is not incorporated by reference into any filing of
Flextronics International Ltd. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of
any general incorporation language contained in such filing. |
31