-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OtADYTAI/DZfcBZR3hiptGUx+b+Y+aEf+e4W0+KFBiUFTKNouU8egc0l0TPGjZE8 bd7ooJdDyEgnoSarCPiqSw== 0000891554-00-000381.txt : 20000215 0000891554-00-000381.hdr.sgml : 20000215 ACCESSION NUMBER: 0000891554-00-000381 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEXTRONICS INTERNATIONAL LTD CENTRAL INDEX KEY: 0000866374 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23354 FILM NUMBER: 543121 BUSINESS ADDRESS: STREET 1: BLK 514 CHAI CHEE LANE #04-13 STREET 2: BODEK INDUSTRIAL ESTATE REPUBLIC OF SING CITY: SINGAPORE 1646 STATE: U0 BUSINESS PHONE: 0654495255 FORMER COMPANY: FORMER CONFORMED NAME: FLEX HOLDINGS PTE LTD DATE OF NAME CHANGE: 19940201 10-Q 1 QUARTERLY REPORT PERIOD ENDED 12/31/99 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 1999 OR { } 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) SINGAPORE NOT APPLICABLE (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ------------------------ SINGAPORE 469029 (65) 449-5255 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MICHAEL E. MARKS CHIEF EXECUTIVE OFFICER FLEXTRONICS INTERNATIONAL LTD. 11 UBI ROAD 1 #07-01/02 MEIBAN INDUSTRIAL BUILDING SINGAPORE 408723 (65) 449-5255 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ 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 {X} No { } At February 8, 2000, there were 115,466,882 Ordinary Shares, S$0.01 par value, outstanding. 1 FLEXTRONICS INTERNATIONAL LIMITED INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1999 and March 31, 1999 .............................................. 3 Condensed Consolidated Statements of Income - Three Months Ended December 31, 1999 and December 31, 1998 ............... 4 Condensed Consolidated Statements of Income - Nine Months Ended December 31, 1999 and December 31, 1998 ..................... 5 Condensed Consolidated Statements of Cash Flow - Nine Months Ended December 31, 1999 and December 31, 1998 ........ 6 Notes to Condensed Consolidated Financial Statements .......... 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 11-20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K .............................. 21 Signatures .................................................. 22 2 ITEM 1. FINANCIAL STATEMENTS FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) December 31, March 31, 1999 1999 ----------- ----------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents ....................... $ 472,380 $ 184,860 Accounts receivable, net ........................ 462,572 273,203 Inventories ..................................... 469,791 221,352 Short-term investments and other current assets . 174,916 66,109 ----------- ----------- Total current assets .................... 1,579,659 745,524 Property and equipment, net ....................... 550,671 397,167 Other non-current assets .......................... 122,661 75,178 ----------- ----------- Total assets ............................ $ 2,252,991 $ 1,217,869 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank borrowings and current portion of long-term debt ................................ $ 159,153 $ 83,976 Capital lease obligations ....................... 18,278 11,475 Accounts payable and accrued liabilities ........ 610,050 292,757 Other current liabilities ....................... 125,610 105,718 ----------- ----------- Total current liabilities ............... 913,091 493,926 ----------- ----------- Long-term debt, net of current portion ............ 183,261 188,808 Capital lease obligations, net of current portion . 49,969 31,187 Deferred income taxes ............................. 4,504 4,831 Other long-term liabilities ....................... 6,794 10,157 Minority interest ................................. 4,998 4,022 ----------- ----------- Total long-term liabilities ............. 249,526 239,005 ----------- ----------- Shareholders' Equity: Ordinary Shares ................................. 711 620 Additional paid-in capital ...................... 887,846 425,397 Retained earnings ............................... 153,126 82,768 Accumulated other comprehensive income (loss) ... 48,691 (23,847) ----------- ----------- Total shareholders' equity .............. 1,090,374 484,938 ----------- ----------- Total liabilities and shareholders' equity $ 2,252,991 $ 1,217,869 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three months ended --------------------------- December 31, December 31, 1999 1998 ----------- ----------- Net sales ...................................... $ 1,179,488 $ 580,395 Cost of sales .................................. 1,098,587 534,053 ----------- ----------- Gross margin ......................... 80,901 46,342 ----------- ----------- Operating expenses: Selling, general and administrative .......... 34,700 19,783 Goodwill and intangibles amortization ........ 1,470 893 ----------- ----------- Total operating expenses ............. 36,170 20,676 ----------- ----------- Income from operations ............... 44,731 25,666 Other income and expenses: Interest expense ............................. 8,803 6,044 Interest income .............................. (5,324) (1,308) Other expense, net ........................... 2,247 3,055 ----------- ----------- Income before income taxes ........... 39,005 17,875 Provision for income taxes ..................... 4,680 2,079 ----------- ----------- Net income ........................... $ 34,325 $ 15,796 =========== =========== Earnings per share: Basic ........................................ $ 0.31 $ 0.18 Diluted ...................................... $ 0.29 $ 0.16 Shares used in computing per share amounts: Basic ........................................ 110,286 90,178 Diluted ...................................... 119,983 95,766 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Nine months ended --------------------------- December 31, December 31, 1999 1998 ----------- ----------- Net sales ...................................... $ 2,661,578 $ 1,448,557 Cost of sales .................................. 2,469,479 1,329,240 ----------- ----------- Gross margin ......................... 192,099 119,317 ----------- ----------- Operating expenses: Selling, general and administrative .......... 85,653 52,742 Goodwill and intangibles amortization ........ 4,344 2,667 ----------- ----------- Total operating expenses ............. 89,997 55,409 ----------- ----------- Income from operations ......................... 102,102 63,908 Other income and expenses: Interest expense ............................. 22,820 16,577 Interest income .............................. (8,609) (2,789) Merger related expenses ...................... 2,455 -- Other expense, net ........................... 2,421 4,165 ----------- ----------- Income before income taxes ........... 83,015 45,955 Provision for income taxes ..................... 10,473 5,381 ----------- ----------- Net income ........................... $ 72,542 $ 40,574 =========== =========== Earnings per share: Basic ........................................ $ 0.70 $ 0.46 Diluted ...................................... $ 0.64 $ 0.44 Shares used in computing per share amounts: Basic ........................................ 103,927 87,898 Diluted ...................................... 112,654 92,142 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine months ended ------------------------- December 31, December 31, 1999 1998 ------------ ------------ Net cash provided by operating activities ............ $ 13,962 $ 27,058 --------- --------- Cash flows from investing activities: Purchases of property and equipment ................ (178,715) (109,433) Proceeds from sale of property and equipment ....... 6,533 5,905 Net cash paid for acquisition of net assets ........ (76,544) -- Other investments .................................. (8,721) (2,265) Effect of acquisition on cash ...................... (253) -- Payment of earnout and remaining purchase price related to the acquisition of FICO ........ (1,500) -- Payment of earnout and remaining purchase price related to the acquisition of Astron ...... -- (24,000) --------- --------- Net cash used in investing activities ................ (259,200) (129,793) --------- --------- Cash flows from financing activities: Bank borrowings and proceeds from long-term debt ... 165,144 95,381 Repayment of bank borrowings and long-term debt .... (94,563) (68,236) Repayment of capital lease obligations ............. (16,096) (7,452) Proceeds from mortgage of equipment ................ 18,663 -- Proceeds from exercise of stock options and Employee Stock Purchase Plan ..................... 12,005 8,341 Net Proceeds from equity offering .................. 448,924 194,000 --------- --------- Net cash provided by financing activities ............ 534,077 222,034 --------- --------- Effect of exchange rate changes on cash .............. (501) (1,574) Effect of Kyrel fiscal year conversion ............... (818) -- --------- --------- Net increase in cash and cash equivalents ............ 287,520 117,725 Cash and cash equivalents at beginning of period ..... 184,860 91,827 --------- --------- Cash and cash equivalents at end of period ........... $ 472,380 $ 209,552 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 6 FLEXTRONICS INTERNATIONAL LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 (unaudited) Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the annual audited consolidated statements as of and for the year ended March 31, 1999 contained in the Company's 1999 annual report on Form 10-K and Form 8-K dated December 23, 1999 which reflects restated financial statements including the results of Kyrel EMS. 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 and nine month period ended December 31, 1999 are not necessarily indicative of the results that may be expected for the year ending March 31, 2000. On July 15, 1999, Flextronics acquired 100% of the outstanding shares of Kyrel EMS Oyj ("Kyrel"), a provider of electronics manufacturing services with two facilities in Finland and one in Luneville, France, in exchange for 3,643,610 Ordinary Shares, of which 364,361 Ordinary Shares are to be issued upon resolution of certain contingencies. The acquisition was accounted for as a pooling-of-interests and, accordingly, the Company's condensed consolidated financial statements have been restated to reflect the merger as if it occurred at the beginning of the first period presented. Kyrel's fiscal year ends December 31. The condensed consolidated income statement combined Kyrel's results for the three and nine months ended December 31, 1999 with Flextronics results for the three and nine ended December 31, 1999. The condensed consolidated income statements also combined Kyrel's results for the three and nine months ended September 30, 1998 with Flextronics results for the three and nine months ended December 31, 1998. The condensed consolidated balance sheets as of March 31, 1999 include Kyrel's balance sheet as of December 31, 1998. Kyrel's net loss of $818,000 for the three months ended March 31, 1999 has been recorded as an adjustment to retained earnings. A reconciliation of the previously reported results for the three and nine months ended December 31, 1998 to the results in this form 10-Q is as followings (in thousands): Three months Nine months ended ended December 31, December 31, 1998 1998 ---------- ---------- Net Sales : As previously reported .............. $ 499,901 $1,298,928 Kyrel ............................... 80,494 149,629 ---------- ---------- As restated ......................... $ 580,395 $1,448,557 ========== ========== Net Income : As previously reported .............. $ 15,493 $ 40,013 Kyrel ............................... 303 561 ---------- ---------- As restated ......................... $ 15,796 $ 40,574 ========== ========== Note B - Inventories Inventories consist of the following (in thousands): December 31, March 31, 1999 1999 ---------- ---------- Raw materials ............................ $ 377,418 $ 173,739 Work-in-process .......................... 61,330 25,740 Finished goods ........................... 31,043 21,873 ---------- ---------- $ 469,791 $ 221,352 ========== ========== Note C - EARNINGS PER SHARE Reconciliation between basic and diluted earnings per share is as follows for the three and nine month periods ended December 31, 1999 and December 31, 1998 (in thousands, except per share data): 7 Three months ended Nine months ended December 31 December 31 ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Shares issued and outstanding (1) .. 110,286 90,178 103,927 87,898 -------- -------- -------- -------- Weighted average ordinary shares - basic ..................... 110,286 90,178 103,927 87,898 Ordinary shares equivalents: Stock options (2) .................. 9,697 5,588 8,727 4,244 -------- -------- -------- -------- Weighted average ordinary shares and equivalents - diluted .......... 119,983 95,766 112,654 92,142 ======== ======== ======== ======== Net income ......................... $ 34,325 $ 15,796 $ 72,542 $ 40,574 ======== ======== ======== ======== Basic earnings per share ........... $ 0.31 $ 0.18 $ 0.70 $ 0.46 ======== ======== ======== ======== Diluted earnings per share ......... $ 0.29 $ 0.16 $ 0.64 $ 0.44 ======== ======== ======== ======== (1) Ordinary Shares issued and outstanding based on the weighted average method. (2) Stock options of the Company calculated based on the treasury stock method using average market price for the period, if dilutive. Options to purchase 39,414 shares and 31,947 shares outstanding during the three months ended December 31, 1999 and 1998, respectively, and options to purchase 44,844 shares and 824,394 shares outstanding during the nine months ended December 31, 1999 and 1998, respectively, were excluded from the computation of diluted earnings per share because the options' exercise price were greater than the average market price of the Company's Ordinary Shares during those periods. Note D - COMPREHENSIVE INCOME (in thousands)
Three months ended Nine months ended December 31 December 31 -------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net income ...................................................... $ 34,325 $ 15,796 $ 72,542 $ 40,574 Other comprehensive income/(loss), net of tax: Foreign currency translation adjustments ...................... (7,293) (2,244) (10,602) 878 Unrealized holding gain on available-for-sale securities ...... 66,032 -- 73,967 -- --------- --------- --------- --------- Comprehensive income ............................................ $ 93,064 $ 13,552 $ 135,907 $ 41,452 ========= ========= ========= =========
Note E - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities. It requires that companies recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company expects to adopt SFAS No. 133 the first quarter of fiscal 2001 and anticipates that SFAS No. 133 will not have a material impact on its consolidated financial statements. 8 Note F - SEGMENT REPORTING The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131") during the fourth quarter of fiscal 1999. SFAS No. 131 establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. Mr. Michael Marks, Chairman and chief executive officer, is the Company's chief decision maker. The Company operates and is managed internally by four geographic business segments. The operating segments include Asia, Americas, Western Europe and Central Europe. Each operating segment has a regional president who reports to Mr. Michael Marks. Information about segments were as follows (in thousands):
Three months ended Nine months ended December 31 December 31 ------------------------------- ------------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net Sales : Asia ............................................. $ 211,126 $ 113,411 $ 466,537 $ 291,966 Americas ......................................... 416,535 161,423 947,244 482,981 Western Europe ................................... 316,497 187,356 735,228 422,072 Central Europe ................................... 256,434 134,978 555,915 291,888 Intercompany eliminations ........................ (21,104) (16,773) (43,346) (40,350) ----------- ----------- ----------- ----------- $ 1,179,488 $ 580,395 $ 2,661,578 $ 1,448,557 =========== =========== =========== =========== Income (Loss) before Income Tax : Asia ............................................. $ 15,712 $ 6,552 $ 30,297 $ 16,828 Americas ......................................... 8,259 1,110 18,517 13,565 Western Europe ................................... 6,597 4,996 15,449 9,937 Central Europe ................................... 6,545 5,067 14,108 10,389 Intercompany eliminations ........................ 1,892 150 4,644 (4,764) ----------- ----------- ----------- ----------- $ 39,005 $ 17,875 $ 83,015 45,955 =========== =========== =========== ===========
9 As of As of December 31, March 31, 1999 1999 -------- -------- Long-lived assets : Asia ................................... $127,040 $109,513 Americas ............................... 198,239 117,526 Western Europe ......................... 92,458 75,435 Central Europe ......................... 132,934 94,693 -------- -------- $550,671 $397,167 ======== ======== For purposes of the preceding tables, "Asia" includes China, Malaysia, and Singapore, "Americas" includes the U.S, Mexico, and Brazil, "Western Europe" includes Sweden, Finland, France Scotland and United Kingdom and "Central Europe" includes Austria and Hungary. Geographic revenue transfers are based on selling prices to unaffiliated companies, less discounts. Income before tax is net sales less operating expenses, interest or other expenses, but prior to income taxes. Note G - EQUITY OFFERING In October 1999, the Company completed an equity offering of 13.8 million Ordinary Shares at $33.85 per share with net proceeds of $448.9 million. The Company intends to use the net proceeds from the offering to fund the further expansion of its business including additional working and capital expenditures, and for other general corporate purposes. The Company may also use a portion of the net proceeds for strategic acquisitions or investments. Note H - STOCK SPLIT The Company set a record date of December 8, 1999 for a two-for-one stock split to be effected as a bonus issue (the Singapore equivalent of a stock dividend). The distribution of 57,497,204 Ordinary Shares occurred on December 22, 1999. This stock dividend has been reflected in the Company's financial statements for all periods presented. All share and per share amounts have been retroactively restated to reflect the stock split. Note I - DII GROUP MERGER AGREEMENT AND FUJITSU SIEMENS MANUFACTURING AGREEMENT On November 22, 1999, the Company announced the signing of a definitive merger agreement with the Dii Group. Under the agreement, Dii shareholders will receive 1.61 Flextronics ordinary shares for each share of the Dii Group. This merger is intended to be accounted for as a pooling-of-interest and is subject to approval by shareholders of both companies. This merger is expected to be completed by April 2000. On November 30, 1999, the Company announced a joint agreement in which Fujitsu Siemens Computer will outsource advanced network server production to the Company. The terms of the manufacturing agreement provide the Company will acquire Fujitsu Siemens manufacturing facilities in Paderborn, Germany for approximately $70 million and employ the existing 650 employees of this facility. This transaction closed in January 2000. Note J - SUBSEQUENT EVENTS On January 19, 2000 the Company announced the signing of an agreement to acquire certain manufacturing facilities of Cabletron Systems Inc. These facilities are located in Rochester, New Hampshire and Limerick, Ireland. Under the terms of the agreement, the Company will acquire the manufacturing related assets and inventories at these locations for approximately $100 million and will employee approximately 1,000 employees currently employed by Cabletron. This transaction is expected to close in the fourth quarter of fiscal 2000. On February 1, 2000 the Company announced the signing of a definitive merger agreement to acquire Palo Alto Products International Pte. Ltd., an enclosure design and plastic injection molding company with operations in Taiwan, Thailand and the United States. This merger is intended to be accounted for as a pooling-of-interest and is expected to be completed by April 2000. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, the matters discussed in this Form 10-Q are 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, which speak only as of the date hereof. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes 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 certain risks and uncertainties, including, without limitation, those discussed in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors Affecting Operating Results." Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. OVERVIEW Flextronics is a leading provider of advanced electronics manufacturing services to original equipment manufacturers ("OEMs") primarily in the telecommunications and networking, consumer electronics and computer industries. The Company provides a wide range of integrated services, from initial product design to volume production and fulfillment. In addition, the Company provides advanced engineering services, including product design, PCB layout, quick-turn prototyping and test development. Throughout the production process, the Company offers logistics services, such as materials procurement, inventory management, and packaging and distribution. In recent years, the Company has substantially expanded its manufacturing capacity, technological capabilities and service offerings, through both acquisitions and internal growth. In October, 1999, the Company completed an equity offering of 13.8 million Ordinary Shares at $33.85 per share with net proceeds of $448.9 million. The Company intends to use the net proceeds from the offering to fund the further expansion of its business including additional working and capital expenditures, and for other general corporate purposes. The Company may also use a portion of the net proceeds for strategic acquisitions or investments. On November 22, 1999, the Company announced the signing of a definitive merger agreement with Dii Group. Under the agreement, Dii shareholders will receive 1.61 Flextronics ordinary shares for each share of the Dii Group. This merger is intended to be accounted for as a pooling-of-interest and is subject to approval by shareholders of both companies. This merger is expected to be completed by April 2000. On November 30, 1999, the Company announced a joint agreement in which Fujitsu Siemens Computer will outsource advanced network server production to the Company. The terms of the manufacturing agreement allow the Company to acquire the existing manufacturing facilities in Paderborn, Germany for approximately $70 million and employ the existing 650 employees of this facility. This transaction closed in January 2000. The acquired facilities provides approximately 400,000 square feet of capacity. On December 22, 1999, the Company completed a two-for-one stock split to be effected as a bonus issue (the Singapore equivalent of a stock dividend). This stock dividend has been reflected in the Company's financial statements as of and for the three and nine months ended December 31, 1999, unless otherwise noted. All share and per share amounts have been retroactively restated to reflect the stock split. On January 19, 2000 the Company announced the signing of an agreement to acquire certain manufacturing facilities of Cabletron Systems Inc. These facilities are located in Rochester, New Hampshire with approximately 200,000 square feet and Limerick, Ireland with approximately 100,000 square feet. Under the terms of the agreement, the Company will acquire the manufacturing related assets and inventories at these locations for approximately $100 million and will employ approximately 1,000 employees currently employed by Cabletron. This transaction is expected to close in the fourth quarter of fiscal 2000. On February 1, 2000 the Company announced the signing of a definitive merger agreement to acquire Palo Alto Products international Pte. Ltd., an enclosure design and plastic injection molding company with operations in Taiwan, Thailand and in the United States. The Company would issue up to approximately 3.6 million Ordinary Shares in exchange for substantially all of the outstanding Ordinary Shares of Palo Alto Products (including assumed options). This merger is intended to be accounted for as a pooling-of-interest and is expected to be completed by April 2000. On July 15, 1999, Flextronics acquired 100% of Kyrel EMS Oyj ("Kyrel"), a provider of electronics manufacturing services with two facilities in Finland and one in Luneville, France in exchange for 3,643,610 Ordinary shares, of which 364,361 Ordinary Shares are to be issued upon resolution of certain contingencies. The acquisition has been accounted for as a pooling-of-interests and, accordingly, the company's condensed consolidated financial statements have been restated to reflect the combined results as if it occurred at the beginning of the first period presented. On June 30, 1999, Flextronics purchased the manufacturing facilities and related assets of Ericsson's Visby, Sweden operations for $39.4 million. Ericsson's Visby facility manufactures mobile systems infrastructure, primarily radio base stations. Flextronics also offered employment to approximately 900 persons who had been employed by Ericsson at this facility. In connection with the acquisition of assets, the Company has also entered into a manufacturing service agreement with Ericsson. On May 31, 1999, Flextronics purchased the manufacturing facilities and related assets of ABB Automation Products in Vasteras, Sweden for approximately $24.5 million. This facility provides printed circuit board assemblies and other electronic equipment. Flextronics has also offered employment to 575 ABB personnel who were previously employed by ABB Automation Products. In connection with the acquisition of the manufacturing facilities, the Company has also entered into a manufacturing service agreement with ABB Automation Products. In addition to acquisitions, the Company has substantially increased overall capacity by expanding operations in its industrial parks in China, Hungary, and Mexico. The Company is continuing to expand operations and capacity at each of the industrial parks and is developing an industrial park in Brazil. See "-Certain Factors Affecting Operating Results -- If we do not manage effectively the expansion of our operations, our business may be harmed." 11 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. Three months Nine months ended ended December 31 December 31 -------------- -------------- 1999 1998 1999 1998 ----- ----- ----- ----- Net sales .................................. 100.0 100.0 100.0 100.0 Cost of sales .............................. 93.1 92.0 92.8 91.8 ----- ----- ----- ----- Gross margin ............................. 6.9 8.0 7.2 8.2 Selling, general and administrative ........ 2.9 3.4 3.2 3.6 Goodwill and intangibles amortization ...... 0.2 0.2 0.2 0.2 ----- ----- ----- ----- Income from operations ..................... 3.8 4.4 3.8 4.4 Other expenses, net ........................ 0.5 1.3 0.7 1.2 ----- ----- ----- ----- Income before income taxes ................. 3.3 3.1 3.1 3.2 Provision for income taxes ................. 0.4 0.4 0.4 0.4 ----- ----- ----- ----- Net income ............................... 2.9 2.7 2.7 2.8 ===== ===== ===== ===== Net Sales Substantially all of the Company's net sales have been derived from the manufacture and assembly of products for OEM customers. Net sales for the third quarter of fiscal 2000 increased 103% to $1.2 billion from $580.4 million for the third quarter of fiscal 1999. Net Sales for the nine months ended December 31, 1999 increased 84% to $2.7 billion from $1.4 billion for the same period of fiscal 1999. The increase in net sales was primarily due to increased sales to certain existing customers and, to a lesser extent, sales to new customers. The Company's five largest customers in the first nine months of fiscal 2000 accounted for approximately 55.2% of net sales. During the third quarter of fiscal 2000, the Company's five largest customers accounted for approximately 58.5% of net sales, with no single customer exceeding 20% of net sales. See "-Certain Factors Affecting Operating Results - A majority of our sales comes from small number of customers: if we loss any of these customers, our sales could decline significantly" and "We are dependent upon the electronics industry which continually produces technologically advanced products with short life cycles; our inability to continually manufacture such products on a cost-effective basis would harm our business." Gross Profit Gross profit varies from period to period and is affected by, among other things, product mix, component costs, customer's product life cycles, unit volumes, expansion and consolidation of manufacturing facilities, pricing, competition and new product introductions. Gross profit margin for the third quarter of fiscal 2000 decreased to 6.9% from 8.0% for the third quarter of fiscal 1999. Gross profit margin decreased to 7.2% for the first nine months of fiscal 2000 from 8.2% for the first nine months of fiscal 1999. Gross profit was adversely affected by several factors, including costs associated with expanding facilities, manufacturing overhead cost associated with the startup of new customer and projects, changes in product mix, as well as other factors. Prices paid to the Company by its significant customers can vary based on the customer's order level, with per unit prices typically declining as volumes increase. These changes in price and volumes can materially affect the Company's gross profit. We believe our gross margin will continue to be affected by start-up costs associated with new programs. See "-Certain Factors Affecting Operating Results - If we do not manage effectively the expansion of our operations, our business may be harmed." 12 Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for the third quarter of fiscal 2000 increased to $34.7 million from $19.8 million for the third quarter of fiscal 1999 but decreased as a percentage of net sales to 2.9% for the third quarter of fiscal 2000 from 3.4% for the third quarter of fiscal 1999. SG&A increased to $85.7 million in the first nine months of fiscal 2000 from $52.7 million in the first nine months of fiscal 1999. The dollar increase in SG&A was mainly due to SG&A expenses from increased expansion of operations in Brazil and Hungary, increased staffing and related administrative expenses, and increased sales and marketing expenses. The Company anticipates its SG&A expenses will continue to increase in absolute terms in the future. However, to the extent that net sales continue to grow faster than SG&A expenses, SG&A expenses may decline as a percentage of net sales. Goodwill and Intangibles Amortization Goodwill and intangible assets are amortized on a straight-line basis over the estimated life of the benefits received, which ranges from three to twenty-five years. Goodwill and intangible asset amortization for the third quarter of fiscal 2000 increased to $1.5 million from $0.9 million for the same period of fiscal 1999. Goodwill and intangible assets amortization was $4.3 million and $2.7 million for the first nine months of fiscal 2000 and fiscal 1999, respectively. The increase in goodwill and intangible assets amortization in the third quarter and first nine months of fiscal 2000 was primarily due to the goodwill and intangible assets amortization associated with acquisition of Advanced Component Labs HK Ltd ("ACL") in Asia and the increase in the Company's ownership interest in FICO Investment Holding Ltd ("FICO"). Interest Expense, Net Interest expense, net was $3.5 million for the third quarter of fiscal 2000 compared to $4.7 million for the third quarter of fiscal 1999. Interest expenses, net increased to $14.2 million for the first nine months of fiscal 2000 from $13.8 million for the first nine months of fiscal 1999. Interest expense, net decreased for the quarter compared to fiscal 1999 primarily due to the increase in interest income from the Company's equity offering proceeds invested in money market funds and corporate debt securities. The increase in interest expense, net for the first nine months of fiscal 2000 was primarily attributable to a $1.0 million interest expense charge related to the write off of the remaining bank arrangement fees associated with the termination of the Bank of Boston credit facilities during the second quarter of fiscal 2000, increase in costs of factoring accounts receivable in Sweden after assuming Ericsson's and ABB's facilities, offset by the increase in interest income from the Company's equity offering proceeds invested in money market funds and corporate debt securities. As discussed above, included in net interest expense of $14.2 million was the accelerated amortization of approximately $1.0 million in bank arrangement fees associated with termination of the Company's credit facilities with the Bank of Boston. The Bank of Boston credit facilities were secured facilities that contained a number of convenants that restrict the operations of the Company. During the third quarter of fiscal 2000, the Company replaced the Bank of Boston credit facilities with an unsecured credit facility from another bank that contains fewer restrictions on the Company's operations. Merger Expenses In the nine months ended December 31, 1999, the Company incurred $2.5 million of merger expenses associated with the pooling-of-interest acquisition of Kyrel. The merger expenses included a transfer tax of $1.7 million and legal and accounting fees of approximately $0.8 million. Other expenses, net Other expenses, net was a net expenses of $2.2 million for the third quarter of fiscal 2000 compared to a net expenses of $3.1 million for the third quarter of fiscal 1999. The net expenses of $2.2 million primarily consists of foreign exchange loss, loss on disposal of fixed assets and minority interests from FICO and the Company's Austrian subsidiary, partially offset by compensation received in settlement of a claim. Other expenses, net was a net expenses of $2.4 million for the first nine months of fiscal 2000 compared to a net expenses of $4.2 million for the first nine months of fiscal 1999. The net expenses of $4.2 million for the first nine months of fiscal 1999 was primarily due to a foreign exchange loss, partially offset by income from the previous associated company, FICO. Provision for Income Taxes The Company's consolidated effective tax rates were 12.0% and 12.6% for the third quarter and the first nine months of fiscal 2000, respectively. 13 The Company is structured as a holding company, conducting its operations through manufacturing and marketing subsidiaries in Austria, Brazil, China, Finland, France, Hungary, Italy, Malaysia, Mauritius, Mexico, Singapore, Sweden, the United Kingdom, and the United States. These subsidiaries are subject to taxation in the country in which they have been formed. The Company's Asian and Hungarian manufacturing subsidiaries have, at various times, been granted certain tax relief in each of these countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. See "- Certain Factors Affecting Operating Results - We are subject to Risk of Increased Taxes." Liquidity and Capital Resources The Company has funded its operations from the proceeds of public offerings of equity and debt securities, cash and cash equivalents generated from operations, bank debt and lease financing of capital equipment. As of December 31, 1999, the Company had cash and cash equivalents totaling $472.4 million, total bank and other debts totaling $410.7 million and $40.0 million available for future borrowing under its credit facility subject to compliance with certain financial covenants. Cash provided by operating activities was $14.0 million and $27.1 million for the first nine months of fiscal 2000 and fiscal 1999, respectively. Cash used in investing activities was $259.2 million and $129.8 million for the first nine months of fiscal 2000 and fiscal 1999, respectively. Cash used in investing activities for the first nine months of fiscal 2000 was primarily related to (i) capital expenditures of $178.7 million to purchase equipment and expand existing facilities, (ii) $72.3 million related to the acquisition of manufacturing facilities and related assets from Ericsson and ABB in Sweden, (iii) $4.2 million related to the acquisition of assets from Newport Technology in North Carolina and (iv) payment of $1.5 million to the former shareholders of FICO for the remaining purchase price payable in connection with the Company's acquisition of FICO. Cash used in investing activities for the first nine months of fiscal 1999 consisted primarily of capital expenditures of $109.5 million to purchase equipment and payment of $24.0 million to the former shareholders of Astron for the remaining purchase price payable in connection with the Company's acquisition of Astron. Net cash provided by financing activities was $534.1 million and $222.0 million for the first nine months of fiscal 2000 and fiscal 1999, respectively. Cash provided by financing activities for the first nine months of fiscal 2000 and fiscal 1999 were both primarily resulting from net proceeds from equity offerings of $448.9 million and $194.0 million, respectively, and short-term bank borrowing partially offset by repayments of capital leases. In the first nine months of fiscal 2000, proceeds from the mortgage of equipment in Austria amounted to $18.7 million. The Company has currently incurred in excess of $20 million in total hardware, software, and system related costs in connection with remediation of Year 2000 issues. These costs are primarily costs associated with the implementation of the Company's new information system and have primarily been capitalized as fixed assets. The Company anticipates that its working capital requirements will increase in order to support anticipated increases in its business. In addition, the Company anticipates incurring significant capital expenditures in order to support the anticipated expansions of its facilities in Brazil, China, Hungary and Mexico. Future liquidity needs will depend on fluctuations in inventory levels, the timing of expenditures by the Company on new equipment, the extent to which the Company utilizes leases to finance new facilities and equipment, levels of shipments by the Company and changes in volumes of customer orders. The Company believes that its existing cash balances, together with anticipated cash flows from operations and amounts available under its credit facilities, will be sufficient to fund its operations at its current level of business. To the extent the Company finances its working capital and capital expenditures through increased borrowings, its interest expense may increase. From time to time, the Company may consider alternative financing opportunities, including certain off-balance sheet transactions such as sale leasebacks transactions or receivable financings. See "- Certain Factors Affecting Operating Results - If we do not manage effectively the expansion of our operations, our business may be harmed." YEAR 2000 COMPLIANCE The Company is aware of the issues associated with programming code in existing computer systems. The Year 2000 computer issue refers to a condition in computer software where a two digit field rather than a four digit field is used to distinguish a calendar year. While the Company has not experienced material year 2000 problems, some computer programs could be unable to function and the Company may experience errors or interruptions due to the Year 2000 problem. Such an uncorrected condition could significantly interfere with the conduct of the Company's business, could result in disruption of its operations, and could subject it to potentially significant legal liabilities. 14 Qualitative and Quantitative Disclosures About Market Risk There were no material changes during the three months ended December 31, 1999 to the Company's exposure to market risk for changes in interest rates and foreign currency exchange rates. CERTAIN FACTORS AFFECTING OPERATING RESULTS If we do not manage effectively the expansion of our operations, our business may be harmed. We have grown rapidly in recent periods, and this growth may not continue. Internal growth will require us to develop new customer relationships and expand existing ones, improve our operational and information systems and further expand our manufacturing capacity. We plan to increase our manufacturing capacity by expanding our facilities and by adding new equipment. Such expansion involves significant risks. For example: o we may not be able to attract and retain the management personnel and skilled employees necessary to support expanded operations; o we may not efficiently and effectively integrate new operations, expand existing ones and manage geographically dispersed operations; o we may incur cost overruns; o we may encounter construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems that could adversely affect our growth and our ability to meet customers' delivery schedules; and o we may not be able to obtain funds for this expansion, and we may not be able to obtain loans or operating leases with attractive terms. In addition, we expect to incur new fixed operating expenses associated with our expansion efforts, including substantial increases in depreciation expense and rental expense, that will increase our cost of sales. If our revenues do not increase sufficiently to offset these expenses, our operating results would be adversely affected. Our expansion, both through acquisitions and internal growth, has contributed to our incurring significant merger related expenses and experiencing volatility in our operating results and may continue to do so in the future. We may encounter difficulties with acquisitions, which could harm our business. We have completed a number of acquisitions of businesses and facilities and expect to continue to pursue growth through acquisitions in the future. Acquisitions involve a number of risks and challenges, including: o diversion of management's attention; o the need to integrate acquired operations; o potential loss of key employees and customers of the acquired companies; o lack of experience operating in the geographic market of the acquired business; and o an increase in our expenses and working capital requirements. To integrate acquired operations, we must implement our management information systems and operating systems and assimilate and manage the personnel of the acquired operations. The difficulties of this integration may be further complicated by geographic distances. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. 15 Any of these and other factors could adversely affect our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition. Furthermore, any future acquisitions may require additional debt or equity financing, which could increase our leverage or be dilutive to our existing shareholders. No assurance can be given that we will consummate any acquisitions in the future. We have new customer relationships from which we are not yet receiving significant revenues, and orders from these customers may not reach anticipated levels. We have recently announced major new customer relationships from which we anticipated significant future sales. However, similar to our other customer relationships, there are no volume purchase commitments under these new programs, and the revenues we actually achieve may not meet our expectations. In anticipation of future activities under these programs, we are incurring substantial expenses as we add personnel, manufacturing capacity, and new manufacturing programs for existing customers and procure materials. Our operating results will be adversely affected if sales do not develop to the extent and within the time frame we anticipate. Finally, if we are unable to achieve the increases in our manufacturing capacity necessary to support these new and expanded relationships in a timely manner, or are unable to implement these infrastructures to support these expanded operations, we will not achieve the sales that we expect from these new and expanded relationships. Our customer requirements and operating results vary significantly. Electronics manufacturing service providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers. We continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons. Cancellations, reductions or delays by a significant customer or by a group of customers would adversely affect our results of operations. In addition to the variable nature of our operating results due to the short-term nature of our customers' commitments, other factors may contribute to significant fluctuations in our results of operations. These factors include: o the timing of customer orders; o the volume of these orders relative to our capacity; o market acceptance of customers' new products; o changes in demand for customers' products and product obsolescence; o the timing of our expenditures in anticipation of future orders; o our effectiveness in managing manufacturing processes; o changes in the cost and availability of labor and components; o changes in our product mix; o changes in economic conditions; o local factors and events that may affect our production volume such as local holidays; and o seasonality in customers' product requirements. One of our significant end-markets is the consumer electronics market. This market exhibits particular strength towards the end of the calendar year in connection with the holiday season. As a result, we have experienced relative strength in our revenues in the third fiscal quarter ended December 31, 1999. 16 We make significant decisions, including the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers' commitments and the possibility of rapid changes in demand for their products reduces our ability to estimate accurately future customer requirements. On occasion, customers may require rapid increases in production, which can stress our resources and reduce margins. Although we have increased our manufacturing capacity and plan further increases, we may not have sufficient capacity at any given time to meet our customers' demands. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can adversely affect our gross margins and operating income. Customer Concentration; Dependence on Electronics Industry Our five largest customers accounted for approximately 62% of consolidated net sales in fiscal 1999 and 57% in fiscal 1998. Our largest customers during fiscal 1999 were Philips, Ericsson and Cisco accounting for approximately 18%, 16% and 13% of consolidated net sales, respectively. Sales to our five largest customers have represented a majority of our net sales in recent periods. The identity of our principal customers has varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, would have a material and adverse effect on us. We can not assure the timely replacement of expired, canceled, or reduced contracts with new business. See "--Variability of Customer Requirements and Operating Results." Factors affecting the electronics industry in general could have a material adverse effect on our customers and, as a result on us. Such factors include: o the inability of our customers to adapt to rapidly changing technology and evolving industry standards, which results in short product life cycles; o the inability of our customers to develop and market their products, some of which are new and untested. If customers' products become obsolete or fail to gain widespread commercial acceptance, our business may be materially and adversely affected; and o recessionary periods in our customers' markets. Risk of Increased Taxes We have structured our operations in a manner designed to maximize income in countries where tax incentives have been extended to encourage foreign investment or where income tax rates are low. Our taxes could increase if these tax incentives are not renewed upon expiration, or tax rates applicable to us are increased. Substantially all of the products manufactured by our Asian subsidiaries are sold to customers based in North America and Europe. We believe that profits from our Asian operations are not sufficiently connected to jurisdictions in North America or Europe to give rise to income taxation there. However, tax authorities in jurisdictions in North America and Europe could challenge the manner in which profits are allocated among our subsidiaries, and we may not prevail in any such challenge. If our Asian profits became subject to income taxes in such other jurisdictions, our worldwide effective tax rate could increase. Significant Leverage Our level of indebtedness presents risks to investors, including: o the possibility that we may be unable to generate cash sufficient to pay the principal of and interest on the indebtedness when due; o making us more vulnerable to economic downturns; o limiting our ability to pursue new business opportunities; and o reducing our flexibility in responding to changing business and economic conditions. 17 Risks of Competition The electronics manufacturing services industry is extremely competitive and includes hundreds of companies, several of which have achieved substantial market share. Current and prospective customers also evaluate our capabilities against the merits of internal production. Certain of our competitors, including Solectron and SCI Systems, have substantially greater market shares than us, and substantially greater manufacturing, financial, research and development and marketing resources. In recent years, many participants in the industry, including us, have substantially expanded their manufacturing capacity. If overall demand for electronics manufacturing services should decrease, this increased capacity could result in substantial pricing pressures, which could adversely affect our operating results. Risks of International Operations The geographical distances between Asia, the Americas and Europe create a number of logistical and communications challenges. Our manufacturing operations are located in a number of countries, including Austria, Brazil, China, Finland, France, Hungary, Malaysia, Mexico, Sweden, the United Kingdom and the United States. As a result, we are affected by economic and political conditions in those countries, including: o fluctuations in the value of currencies; o changes in labor conditions; o longer payment cycles; o greater difficulty in collecting accounts receivable; o burdens and costs of compliance with a variety of foreign laws; o political and economic instability; o increases in duties and taxation; o imposition of restrictions on currency conversion or the transfer of funds; o limitations on imports or exports; o expropriation of private enterprises; and o reversal of the current policies (including favorable tax and lending policies) encouraging foreign investment or foreign trade by our host countries. 18 The attractiveness of our services to our U.S. customers can be affected by changes in U.S. trade policies, such as "most favored nation" status and trade preferences for certain Asian nations. For example, trade preferences extended by the United States to Malaysia in recent years were not renewed in 1997. In addition, some countries in which we operate, such as Brazil, Mexico and Malaysia, have experienced periods of slow or negative growth, high inflation, significant currency devaluations and limited availability of foreign exchange. Furthermore, in countries such as Mexico and China, governmental authorities exercise significant influence over many aspects of the economy, and their actions could have a significant effect on us. Finally, we could be adversely affected by inadequate infrastructure, including lack of adequate power and water supplies, transportation, raw materials and parts in countries in which we operate. Risks Relating to China. Under its current leadership, the Chinese government has been pursuing economic reform policies. There can be no assurance that the Chinese government will continue to pursue such policies, or that such policies will be successful if pursued. In addition, China does not have a comprehensive and highly developed system of laws, and enforcement of laws and contracts is uncertain. The United States annually reconsiders the renewal of most favored nation trading status of China. China's loss of most favored nation status could adversely affect us by increasing the cost to U.S. customers of products manufactured by us in China. Risks relating to Mexico. The Mexican government exercises significant influence over many aspects of the Mexican economy and its action could have a significant effect on private sector entities in general and the Company in particular. In addition, during the 1980s, Mexico experienced periods of slow or negative growth, high inflation, significant devaluation of the peso and limited availability of foreign exchange. Risks Relating to Hungary. Hungary has undergone significant political and economic change in recent years. Political, economic, social and other developments, and changes in laws could have a material and adverse effect on our business. Annual inflation and interest rates in Hungary have historically been much higher than those in Western Europe. Exchange rate policies have not always allowed for the free conversion of currencies at the market rate. Laws and regulations in Hungary have been, and continue to be, substantially revised during its transition to a market economy. As a result, laws and regulations may be applied inconsistently. Also in some circumstances, it may not be possible to obtain the legal remedies provided for under those laws and regulations in a reasonably timely manner, if at all. Risks Relating to Brazil. During the past several years, the Brazilian economy has been affected by significant intervention by the Brazilian government. The Brazilian government has changed monetary, credit, tariff and other policies to influence the course of Brazil's economy. The Brazilian government's actions to control inflation and effect other policies have often involved wage, price and exchange controls as well as other measures such as freezing bank accounts and imposing capital controls. Risks of Currency Fluctuations and Hedging Operations A significant portion of our business is conducted in the Swedish kronor, European Euro and Brazilian real. In addition, some of our costs, such as payroll and rent, are denominated in currencies such as the Singapore dollar, the Hong Kong dollar, the Malaysian ringgit, the Hungarian forint, the Mexican peso, and the British pound, as well as the kronor, the euro and the real. In recent years, the Hungarian forint, Brazilian real and Mexican peso have experienced significant devaluations, and in January 1999 the Brazilian real experienced further significant devaluations. Changes in exchange rates between these and other currencies and the U.S. dollar will affect our cost of sales and operating margins. We cannot predict the impact of future exchange rate fluctuations. We use financial instruments, primarily forward purchase contracts, to hedge Japanese yen, European euro, U.S. dollar, and other foreign currency commitments arising from trade accounts payable and fixed purchase obligations. Because we hedge only fixed obligations, we do not expect that these hedging activities will have a material effect on our results of operations or cash flows. However, our hedging activities may be unsuccessful, and we may change or reduce our hedging activities in the future. We may experience significant unexpected expense from fluctuations in exchange rates. Dependence of Key Personnel Our success depends to a larger extent upon the continued services of our key executives and skilled personnel. Generally our employees are not bound by employment or non-competition agreements, and there can be no assurance that we will retain our officers and key employees. We could be materially and adversely affected by the loss of such personnel. 19 Limited Availability of Components A substantial majority of our net sales are derived from turnkey manufacturing in which we are responsible for procuring materials, which typically results in our bearing the risk of component price increases. At various times, there have been shortages of certain electronic components. Component shortages could result in manufacturing and shipping delays or higher prices, which could have a material adverse effect on us. Environmental Compliance Risks We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals. Although we believe that our facilities are currently in material compliance with applicable environmental laws, there can be no assurances that violations will not occur. The costs and penalties that could result from a violation of environmental laws could materially and adversely affect us. Volatility of Market Price of Ordinary Shares The stock market in recent years have experienced significant price and volume fluctuations that have affected the market prices of technology companies. Such fluctuations have often been unrelated to or disproportionately impacted by the operating performance of such companies. The market for our Ordinary Shares may be subject to similar fluctuations. Factors such as fluctuations in our operating results, announcements of technological innovations or events affecting other companies in the electronics industry, currency fluctuations and general market conditions may have a significant effect on the market price of our Ordinary Shares. 20 PART II - OTHER INFORMATION (a) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.01 Financial Data Schedule (b) Reports on Form 8-K On October 29, 1999 the Company filed Form 8-K including an Underwriting Agreement (the "Underwriting Agreement") with Banc of America Securities LLC, Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc., SG Cowen Securities Corporation and Thomas Weisel Partners LLC providing for the public offering of 6,000,000 pre-split Ordinary Shares of Flextronics, all of which were sold by Flextronics, at a public offering price of $67.68 pre-split per share. In addition, Flextronics granted the underwriters an option to purchase an additional 900,000 pre-split Ordinary Shares to cover over-allotments. On December 6, 1999, the Company filed Form 8-K relating to its execution of the Agreement and Plan of Merger with the Dii Group. On December 23, 1999, the Company filed Form 8-K including audited restated consolidated financial statements in connection with the July 15, 1999 merger with Kyrel EMS Oyj. 21 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) Date : February 14, 2000 /s/ MICHAEL E.MARKS ---------------------------- Michael E. Marks Chief Executive Officer Date : February 14, 2000 /s/ ROBERT R.B. DYKES ---------------------------- Robert R.B. Dykes President, Systems Group and Chief Financial Officer (principal financial and accounting officer) 22 EX-27 2 FDS -- 12/31/99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1999 (UNAUDITED) AND THE STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAR-31-2000 APR-01-1999 DEC-31-1999 472,380 0 469,796 7,224 469,791 1,529,659 723,470 172,799 2,252,991 913,091 0 0 0 711 1,089,663 2,252,991 2,661,578 2,661,578 2,469,479 2,469,479 4,876 0 14,211 83,015 10,473 72,542 0 0 0 72,542 0.70 0.64
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