10-Q 1 f75040e10-q.txt FORM 10-Q QUARTER ENDED JUNE 30, 2001 1 ================================================================================ 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 JUNE 30, 2001 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.) ---------------- MICHAEL E. MARKS CHIEF EXECUTIVE OFFICER FLEXTRONICS INTERNATIONAL LTD. 11 UBI ROAD 1 #07-01/02 MEIBAN INDUSTRIAL BUILDING SINGAPORE 408723 (65) 844-3366 (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 August 06, 2001, there were 482,809,864 ordinary shares, S$0.01 par value, outstanding. ================================================================================ 2 FLEXTRONICS INTERNATIONAL LTD. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets -- June 30, 2001 and March 31, 2001 .... 3 Condensed Consolidated Statements of Operations - Three Months Ended June 30, 2001 and June 30, 2000 ............................................ 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended June 30, 2001 and June 30, 2000 ............................................ 5 Notes to Condensed Consolidated Financial Statements ......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk ................... 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ............................................. 24 Signatures ................................................................... 25
2 3 ITEM 1. FINANCIAL STATEMENTS FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
JUNE 30, MARCH 31, 2001 2001 ----------- ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ....................................... $ 543,304 $ 631,588 Accounts receivable, net ........................................ 1,703,208 1,651,252 Inventories, net ................................................ 1,525,728 1,787,055 Other current assets ............................................ 587,331 386,152 ----------- ----------- Total current assets ............................................ 4,359,571 4,456,047 ----------- ----------- Property, plant and equipment, net ................................ 1,997,692 1,828,441 Goodwill and other intangibles, net ............................... 1,034,543 983,384 Other assets ...................................................... 319,973 303,783 ----------- ----------- Total assets ................................................... $ 7,711,779 $ 7,571,655 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank borrowings and current portion of long-term debt ........... $ 340,115 $ 298,052 Current portion of capital lease obligations .................... 22,554 27,602 Accounts payable ................................................ 1,477,169 1,480,468 Other current liabilities ....................................... 834,667 735,184 ----------- ----------- Total current liabilities ....................................... 2,674,505 2,541,306 ----------- ----------- Long-term debt, net of current portion ............................ 870,284 879,525 Capital lease obligations, net of current portion ................. 34,727 37,788 Other liabilities ................................................. 81,706 82,675 SHAREHOLDERS' EQUITY: Ordinary shares, S$0.01 par value; authorized -- 1,500,000,000; issued and outstanding -- 484,713,214 and 481,531,339 as of June 30, 2001 and March 31, 2001, respectively ............... 2,889 2,871 Additional paid-in capital ...................................... 4,217,185 4,266,908 Retained deficit ................................................ (44,564) (132,892) Accumulated other comprehensive loss ............................ (124,953) (106,526) ----------- ----------- Total shareholders' equity .............................. 4,050,557 4,030,361 ----------- ----------- Total liabilities and shareholders' equity .............. $ 7,711,779 $ 7,571,655 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED ---------------------------- JUNE 30, JUNE 30, 2001 2000 ----------- ----------- Net sales ...................................... $ 3,110,598 $ 2,676,974 Cost of sales .................................. 2,878,803 2,470,408 Unusual charges ................................ -- 83,721 ----------- ----------- Gross profit ............................... 231,795 122,845 Selling, general and administrative ............ 108,816 94,918 Goodwill and intangibles amortization .......... 2,256 9,370 Unusual charges ................................ -- 409,383 Interest and other expense (income), net ....... 22,366 (4,199) ----------- ----------- Income (loss) before income taxes .......... 98,357 (386,627) Provision for (benefit from) income taxes ...... 10,029 (16,065) ----------- ----------- Net income (loss) .......................... $ 88,328 $ (370,562) =========== =========== Earnings (loss) per share: Basic ....................................... $ 0.18 $ (0.88) =========== =========== Diluted ..................................... $ 0.17 $ (0.88) =========== =========== Shares used in computing per share amounts: Basic ....................................... 484,794 418,857 =========== =========== Diluted ..................................... 511,987 418,857 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 FLEXTRONICS INTERNATIONAL LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ---------- ---------- Net cash provided by (used in) operating activities .......... $ 383,493 $ (219,150) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net of proceeds from sale of equipment ..................................... (111,224) (148,734) Purchases of OEM facilities and related assets ............. (301,738) (163,517) Proceeds from sales of investments ......................... 6,288 32,894 Acquisitions of businesses, net of cash acquired ........... (11,601) (28,838) Other investments .......................................... (5,048) (885) ---------- ---------- Net cash used in investing activities ........................ (423,323) (309,080) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank borrowings and proceeds from long-term debt ........... 224,344 650,749 Repayments of bank borrowings and long-term debt ........... (180,746) (427,428) Repayments of capital lease obligations .................... (9,835) (5,158) Proceeds from exercise of stock options and Employee Stock Purchase Plan ..................................... 15,712 19,251 Net proceeds from sale of ordinary shares in public offering ................................................ -- 375,920 Repurchase of equity instrument issued ..................... (112,000) -- Dividends paid to former shareholders ...................... -- (190) ---------- ---------- Net cash provided by (used in) financing activities .......... (62,525) 613,144 ---------- ---------- Effect on cash from: Exchange rate changes ..................................... 14,071 (2,733) Adjustment to conform fiscal year of pooled entities ...... -- (32,706) ---------- ---------- Net increase (decrease) in cash and cash equivalents ......... (88,284) 49,475 Cash and cash equivalents at beginning of period ............. 631,588 747,049 ---------- ---------- Cash and cash equivalents at end of period ................... $ 543,304 $ 796,524 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 FLEXTRONICS INTERNATIONAL LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (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 Company's audited consolidated financial statements as of and for the fiscal year ended March 31, 2001 contained in the Company's 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 June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. Note B - INVENTORIES Inventories, net of applicable reserves, consist of the following (in thousands):
JUNE 30, MARCH 31, 2001 2001 ---------- ---------- Raw materials ......................... $1,111,355 $1,346,427 Work-in-process ....................... 283,001 301,875 Finished goods ........................ 131,372 138,753 ---------- ---------- $1,525,728 $1,787,055 ========== ==========
Note C - UNUSUAL CHARGES The Company recognized unusual pre-tax charges of approximately $973.3 million during fiscal year 2001. Of this amount, $493.1 million was recorded in the first quarter and was comprised of approximately $286.5 million related to the issuance of an equity instrument to Motorola, Inc. ("Motorola") combined with approximately $206.6 million of expenses resulting from The DII Group, Inc. and Palo Alto Products International Pte. Ltd. mergers and related facility closures. In the second quarter, unusual pre-tax charges amounted to approximately $48.4 million associated with the mergers with Chatham Technologies, Inc. and Lightning Metal Specialties (and related entities) and related facility closures. In the third quarter, the Company recognized unusual pre-tax charges of approximately $46.3 million, primarily related to the merger with JIT Holdings Ltd. and related facility closures. During the fourth quarter, the Company recognized unusual pre-tax charges, amounting to $385.6 million related to closures of several manufacturing facilities. On May 30, 2000, the Company entered into a strategic alliance for product manufacturing with Motorola. In connection with this strategic alliance, Motorola paid $100.0 million for an equity instrument that entitled it to acquire 22.0 million Flextronics ordinary shares at any time through December 31, 2005, upon meeting targeted purchase levels or making additional payments to the Company. The issuance of this equity instrument resulted in a one-time non-cash charge equal to the excess of the fair value of the equity instrument issued over the $100.0 million proceeds received. As a result, the one-time non-cash charge amounted to approximately $286.5 million offset by a corresponding credit to additional paid-in capital in the first 6 7 quarter of fiscal 2001. In June 2001, the Company entered into an agreement with Motorola under which it repurchased this equity instrument for $112.0 million. In connection with the aforementioned mergers and facility closures, in fiscal 2001, the Company recorded aggregate unusual charges of $686.8 million, which included approximately $584.4 million of facility closure costs and approximately $102.4 million of direct transaction costs. As discussed below, $510.5 million of the charges relating to facility closures have been classified as a component of Cost of Sales during the fiscal year ended March 31, 2001. The components of the unusual charges recorded in fiscal 2001 are as follows (in thousands):
TOTAL FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER 2001 NATURE OF CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES ---------- ---------- ---------- ---------- ---------- ------------- Facility closure costs: Severance ............................ $ 62,487 $ 5,677 $ 3,606 $ 60,703 $ 132,473 cash Long-lived asset impairment .......... 46,646 14,373 16,469 155,046 232,534 non-cash Exit costs ........................... 24,201 5,650 19,703 169,818 219,372 cash/non-cash ---------- ---------- ---------- ---------- ---------- Total facility closure costs ..... 133,334 25,700 39,778 385,567 584,379 Direct transaction costs: Professional fees .................... 50,851 7,247 6,250 -- 64,348 cash Other costs .......................... 22,382 15,448 248 -- 38,078 cash/non-cash ---------- ---------- ---------- ---------- ---------- Total direct transaction costs ... 73,233 22,695 6,498 -- 102,426 ---------- ---------- ---------- ---------- ---------- Total Unusual Charges .................. 206,567 48,395 46,276 385,567 686,805 ---------- ---------- ---------- ---------- ---------- Income tax benefit ..................... (30,000) (6,000) (6,500) (110,000) (152,500) ---------- ---------- ---------- ---------- ---------- Net Unusual Charges .................... $ 176,567 $ 42,395 $ 39,776 $ 275,567 $ 534,305 ========== ========== ========== ========== ==========
In connection with the fiscal 2001 facility closures, the Company developed formal plans to exit certain activities and involuntarily terminate employees. Management's plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closure and the identification of manufacturing and administrative facilities for consolidation into other facilities. Management currently anticipates that the facility closures and activities to which all of these charges relate will be substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations. The following table summarizes the balance of the facility closure costs as of March 31, 2001 and the type and amount of closure costs utilized during the first quarter of fiscal 2002.
EXIT SEVERANCE COSTS TOTAL ---------- ---------- ---------- Balance at March 31, 2001 ......... $ 71,734 $ 95,343 $ 167,077 Activities during the quarter: Cash charges .................... (28,264) (17,219) (45,483) Non-cash charges ................ -- (3,947) (3,947) ---------- ---------- ---------- Balance at June 30, 2001 ......... $ 43,470 $ 74,177 $ 117,647 ========== ========== ==========
Of the total pre-tax facility closure costs recorded in fiscal 2001, $132.5 million relates to employee termination costs, of which $67.8 million has been classified as a component of Cost of Sales. As a result of the various exit plans, the Company identified 11,269 employees to be involuntarily terminated related to the various mergers and facility closures. As of June 30, 2001, 8,027 employees have been terminated, and another 3,242 employees have been notified that they are to be terminated upon completion of the various facility closures and consolidations. During the first quarter of fiscal 2002, the Company paid employee termination costs of approximately $28.3 million. The remaining $43.5 million of employee termination costs is classified as accrued liabilities as of June 30, 2001 and is expected to be paid out within one year of the commitment dates of the respective exit plans. 7 8 The unusual pre-tax charges recorded in fiscal 2001, included $232.5 million for the write-down of long-lived assets to fair value. This amount has been classified as a component of Cost of Sales during fiscal 2001. Included in the long-lived asset impairment are charges of $229.1 million, which related to property, plant and equipment associated with the various manufacturing and administrative facility closures which were written down to their net realizable value based on their estimated sales price. Certain facilities will remain in service until their anticipated disposal dates pursuant to the exit plans. Since the assets will remain in service from the date of the decision to dispose of these assets to the anticipated disposal date, the assets are being depreciated over this expected period. The impaired long-lived assets consisted primarily of machinery and equipment of $153.0 million and building and improvements of $76.1 million. The long-lived asset impairment also included the write-off of the remaining goodwill and other intangibles related to certain closed facilities of $3.4 million. The unusual pre-tax charges recorded in fiscal 2001, also included approximately $219.4 million for other exit costs. Approximately $210.2 million of this amount has been classified as a component of Cost of Sales. The other exit costs recorded, primarily related to items such as building and equipment lease termination costs, warranty costs, current asset impairments and payments to suppliers and vendors to terminate agreements and were incurred directly as a result of the various exit plans. The Company paid approximately $17.2 million of other exit costs during the first quarter of fiscal 2002. Additionally, approximately $3.9 million of other exit costs were non-cash charges utilized during the first quarter of fiscal 2002. The remaining $74.2 million is classified in accrued liabilities as of June 30, 2001 and is expected to be substantially paid out within one year from the commitment dates of the respective exit plans, except for certain long-term contractual obligations. The direct transaction costs recorded in fiscal 2001, included approximately $64.3 million of costs primarily related to investment banking and financial advisory fees as well as legal and accounting costs associated with the merger transactions. Other direct transaction costs which totaled approximately $38.1 million were mainly comprised of accelerated debt prepayment expense, accelerated executive stock compensation and benefit-related expenses. The Company paid approximately $1.3 million of the direct transaction costs during the first quarter of fiscal 2002. Approximately, $70.9 million of direct transaction costs were paid by the Company during fiscal 2001. Additionally, approximately $28.2 million of the direct transaction costs were non-cash charges utilized during fiscal 2001. The remaining $2.0 million is classified in accrued liabilities as of June 30, 2001 and is expected to be substantially paid out in the ensuing quarter. Note D - EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of ordinary shares outstanding during the applicable periods. Diluted earnings per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the applicable periods. Ordinary share equivalents include ordinary shares issuable upon the exercise of stock options and other equity instruments, and are computed using the treasury stock method. Earnings per share data were computed as follows (in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ---------- ---------- Basic earnings (loss) per share: Net income (loss) ........................................... $ 88,328 $ (370,562) ---------- ---------- Shares used in computation: Weighted-average ordinary shares outstanding ................ 484,794 418,857 ========== ========== Basic earnings (loss) per share ............................. $ 0.18 $ (0.88) ========== ==========
8 9
THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ---------- ---------- Diluted earnings (loss) per share: Net income (loss) ........................................... $ 88,328 $ (370,562) Shares used in computation: Weighted-average ordinary shares outstanding ................ 484,794 418,857 Shares applicable to exercise of dilutive options(1),(2) .... 27,193 -- ---------- ---------- Shares applicable to diluted earnings ..................... 511,987 418,857 ========== ========== Diluted earnings (loss) per share ........................... $ 0.17 $ (0.88) ========== ==========
(1) Stock options of the Company calculated based on the treasury stock method using average market price for the period, if dilutive. Options to purchase 7,397,542 shares outstanding during the three months ended June 30, 2001 were excluded from the computation of diluted earnings per share because the exercise price of these options were greater than the average market price of the Company's ordinary shares during the period. (2) The ordinary share equivalents from stock options and other equity instruments were anti-dilutive for the three months ended June 30, 2000, and therefore not assumed to be converted for diluted earnings per share computation. Note E - COMPREHENSIVE INCOME The following table summarizes the components of comprehensive income (in thousands):
THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ---------- ---------- Net income (loss) .......................................... $ 88,328 $ (370,562) Other comprehensive income (loss): Foreign currency translation adjustments, net of tax ..... (24,274) (6,222) Unrealized holding gain (loss) on investments and derivatives, net of tax ............................... 8,544 (35,363) ---------- ---------- Comprehensive income (loss) ................................ $ 72,598 $ (412,147) ========== ==========
Note F - SEGMENT REPORTING Information about segments was as follows (in thousands):
THREE MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 ----------- ----------- Net Sales: Asia ................................................. $ 628,119 $ 545,245 Americas ............................................. 1,128,596 1,199,064 Western Europe ....................................... 618,319 515,975 Central Europe ....................................... 756,389 461,052 Intercompany eliminations and corporate allocations .. (20,825) (44,362) ----------- ----------- $ 3,110,598 $ 2,676,974 =========== =========== Income (Loss) before Income Tax: Asia ................................................. $ 43,968 $ 12,121 Americas ............................................. 26,091 (172,454) Western Europe ....................................... 8,527 11,046 Central Europe ....................................... 15,613 9,738 Intercompany eliminations,corporate allocations and Motorola one-time non-cash charge (see Note G) ..... 4,158 (247,078) ----------- ----------- $ 98,357 $ (386,627) =========== ===========
9 10
AS OF AS OF JUNE 30, MARCH 31, 2001 2001 ------------ ---------- Long-lived Assets: Asia............................................. $ 599,694 $ 503,094 Americas......................................... 659,814 636,399 Western Europe................................... 400,243 371,064 Central Europe................................... 337,941 317,884 ---------- ---------- $1,997,692 $1,828,441 ========== ==========
For purposes of the preceding tables, "Asia" includes China, India, Malaysia, Singapore, Thailand and Taiwan, "Americas" includes Brazil, Mexico and the United States, "Western Europe" includes Denmark, Finland, France, Germany, Norway, Poland, Sweden, Switzerland and the United Kingdom, and "Central Europe" includes Austria, the Czech Republic, Hungary, Ireland, Israel, Italy and Scotland. Geographic revenue transfers are based on selling prices to unaffiliated companies, less discounts. Note G -- SHAREHOLDERS' EQUITY In connection with the Company's strategic alliance with Motorola in May 2000, Motorola paid $100.0 million for an equity instrument that entitled it to acquire 22.0 million Flextronics ordinary shares at any time through December 31, 2005 upon meeting targeted purchase levels or making additional payments to the Company. The issuance of this equity instrument resulted in a one-time non-cash charge equal to the excess of the fair value of the equity instrument issued over the $100.0 million proceeds received. As a result, the one-time non-cash charge amounted to approximately $286.5 million offset by a corresponding credit to additional paid-in capital in the first quarter of fiscal 2001. In June 2001, the Company entered into an agreement with Motorola under which it repurchased this equity instrument for $112.0 million. The fair value of the equity instrument on the date it was repurchased exceeded the amount paid to repurchase the equity instrument. Accordingly, the Company accounted for the repurchase of the equity instrument as a reduction to shareholders' equity in the accompanying condensed consolidated financial statements. Note H -- PURCHASE OF ASSETS In April 2001, the Company entered into a definitive agreement with Ericsson Telecom AB ("Ericsson") with respect to its management of the operations of Ericsson's mobile telephone operations. Operations under this arrangement commenced in the first quarter of fiscal 2002. Under this agreement, the Company is to provide a substantial portion of Ericsson's mobile phone requirements. The Company assumed responsibility for product assembly, new product prototyping, supply chain management and logistics management in which we process customer orders from Ericsson and configure and ship products to Ericsson's customers. In connection with this relationship, the Company employed the existing workforce for certain operations, and purchased from Ericsson certain inventory, equipment and other assets, and assumed certain accounts payable and accrued expenses at their net book value. The Company has not completed the purchase of certain assets, but estimates that the net asset purchase price will be approximately $416.0 million of which $301.7 million was purchased in the first quarter of fiscal 2002. The Company anticipates completing the purchase by the end of the second quarter of fiscal 2002. Note I - NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 and No. 142, "Business Combinations" and "Goodwill and Other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Additionally, an 10 11 acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. Other intangible assets will continue to be valued and amortized over their estimated useful lives; in-process research and development will continue to be written off immediately. The Company only adopted SFAS 142 in the first quarter of fiscal 2002 as allowed under the statement and will no longer amortize goodwill, thereby eliminating annual goodwill amortization of approximately $124.2 million, based on anticipated amortization for fiscal 2002. At June 30, 2001, unamortized goodwill approximated $1.0 billion. The pro forma effect of the adoption on net income and earnings per share of the Company during the three months ended June 30, 2000 is as indicated below:
THREE MONTHS ENDED JUNE 30, 2000 ------------- Net loss as reported ................................ $ (370,562) Add back: Goodwill amortization expense ............... (8,670) ---------- Proforma net loss ................................... $ (361,892) ========== Basic earnings (loss) per share: As reported ........................................ $ (0.88) ---------- Proforma ........................................... $ (0.86) ---------- Diluted earnings (loss) per share: As reported ........................................ $ (0.88) ---------- Proforma ........................................... $ (0.86) ----------
On April 1, 2001, the Company adopted, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138. The Company transacts business in various foreign currencies. The Company has established revenue, expense and balance sheet risk management programs to protect against reductions in value and volatility of future cash flows caused by changes in foreign exchange rates. The Company enters into short-term foreign currency forward contracts and borrowings to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. These contracts' fair value is recorded on the balance sheet with corresponding charges or credits to income. The fair value of these short-term foreign currency forward contracts was not material from adoption of the standard through June 30, 2001. In addition, as part of the Company's investment program, the Company from time to time will enter into derivative financial instruments to manage certain equity market risks. These instruments are designed to hedge the equity price risk of marketable equity securities in its investment portfolio. These instruments were designated as fair value hedges upon adoption of the standard and the ineffective portion of the hedge was not material. Accordingly, changes in the fair value of these instruments are included in Other Comprehensive Income ("OCI"). Adoption of SFAS No. 133 on April 1, 2001, resulted in recording the fair value of the equity derivative instruments of approximately $8.9 million as an asset on the balance sheet with the corresponding credit to OCI. Note J - SUBSEQUENT EVENTS 11 12 In July 2001, the Company acquired Alcatel's manufacturing facility and related assets located in Laval, France. All of Alcatel's GSM handset production will be consolidated from Illkirch, France, to the Company's facility in Laval. The acquisition will be accounted for as a purchase of assets. In connection with this acquisition, the Company entered into a long-term supply agreement with Alcatel to provide printed circuit board assembly, final systems assembly and various engineering support services. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 "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. ACQUISITIONS We have actively pursued mergers and other business acquisitions to expand our global reach, manufacturing capacity and service offerings and to diversify and strengthen customer relationships. The significant business combinations completed in fiscal 2001, included the following:
DATE ACQUIRED COMPANY NATURE OF BUSINESS CONSIDERATION ---- ---------------- ------------------ ------------------------ November 2000 JIT Holdings Ltd. Provides electronics 17,323,531 ordinary shares manufacturing and design services August 2000 Chatham Technologies, Inc. Provides industrial and 15,234,244 ordinary shares electronics manufacturing and design services August 2000 Lightning Metal Provides injection molding, 2,573,072 ordinary shares Specialties metal stamping and integration and related entities services April 2000 Palo Alto Products Provides industrial and 7,236,748 ordinary shares International Pte. Ltd. electronics manufacturing and design services April 2000 The DII Group, Inc. Provides electronics 125,536,310 ordinary shares manufacturing services
Each of these acquisitions was accounted for as a pooling of interests and our condensed consolidated financial statements have been restated to reflect the combined operations of the merged companies for all periods presented. Additionally, we completed other immaterial pooling of interests transactions in fiscal 2001. Prior period statements had not been restated for these transactions. We have also made a number of business acquisitions of other companies. These transactions were accounted for using the purchase method and, accordingly our consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis. 12 13 OTHER STRATEGIC TRANSACTIONS In April 2001, we entered into a definitive agreement with Ericsson Telecom AB ("Ericsson") with respect to our management of the operations of Ericsson's mobile telephone operations. Operations under this arrangement commenced in the first quarter of fiscal 2002. Under this agreement we are to provide a substantial portion of Ericsson's mobile phone requirements. We assumed responsibility for product assembly, new product prototyping, supply chain management and logistics management in which we process customer orders from Ericsson and configure and ship products to Ericsson's customers. In connection with this relationship, we employed the existing workforce for certain operations, and purchased from Ericsson certain inventory, equipment and other assets, and assumed certain accounts payable and accrued expenses at their net book value. We have not completed the purchase of certain assets, but estimate that the net asset purchase price will be approximately $416.0 million of which $301.7 million was purchased in the first quarter of fiscal 2002. We anticipate completing the purchase by the end of the second quarter of fiscal 2002. 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 ENDED JUNE 30, JUNE 30, 2001 2000 --------- --------- Net sales ................................... 100.0% 100.0% Cost of sales ............................... 92.5 92.3 Unusual charges ............................. -- 3.1 --------- --------- Gross margin ........................... 7.5 4.6 Selling, general and administrative ......... 3.5 3.5 Goodwill and intangibles amortization ....... 0.1 0.4 Unusual charges ............................. -- 15.3 Interest and other expense (income), net .... 0.7 (0.2) --------- --------- Income (loss) before income taxes ...... 3.2 (14.4) Provision for (benefit from) income taxes ... 0.3 (0.6) --------- --------- Net income (loss) ..................... 2.9% (13.8)% ========= =========
Net Sales We derive our net sales from our wide range of service offerings, including product design, semiconductor design, printed circuit board assembly and fabrication, enclosures, material procurement, inventory and supply chain management, plastic injection molding, final system assembly and test, packaging, logistics and distribution. Net sales for the first quarter of fiscal 2002 increased 16% to $3.1 billion from $2.7 billion for the first quarter of fiscal 2001. The increase in net sales was primarily the result of expanding sales to our existing customer base and, to a lesser extent, sales to new customers. However, net sales for the first quarter of fiscal 2002, declined slightly as compared to net sales for the fourth quarter of fiscal 2001. This decrease in net sales was the result of the continued decline in demand due to the economic downturn experienced by the electronics industry, which was driven by a combination of weakening end-market demand (particularly in the telecommunications and networking sectors) and our customers' inventory imbalances. Our ten largest customers in the first three months of fiscal 2002 and 2001 accounted for approximately 62% and 58% of net sales, respectively. Our only customer that exceeded 10% of sales during the first three months of fiscal 2002 & fiscal 2001 was Ericsson. 13 14 "Certain Factors Affecting Operating Results - The Majority of our Sales Comes from a Small Number of Customers; If We Lose any of these Customers, our Sales Could Decline Significantly" and "Certain Factors Affecting Operating Results - We Depend on the Telecommunications, Networking, Electronics and Computer Industries which Continually Produce 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 a number of factors, including product mix, component costs and availability, product life cycles, unit volumes, startup, expansion and consolidation of manufacturing facilities, capacity utilization, pricing, competition and new product introductions. Gross margin for the first quarter of fiscal 2002 increased to 7.5% from 4.6% for the first quarter of fiscal 2001. The increase in gross margin in the first quarter of fiscal 2002 is primarily attributable to unusual pre-tax charges amounting to $83.7 million in the first quarter of fiscal 2001, which were associated with the integration costs primarily related to the various business combinations, as more fully described below in "Unusual Charges". Excluding these unusual charges, gross margin for the first quarter of fiscal 2001 was 7.7%. Gross margin after considering these charges, decreased due to several factors, including (i) under absorbed fixed costs caused by the underutilization of capacity, resulting from the economic downturn experienced by the electronics industry; (ii) costs associated with the startup of new customers and new projects, which typically carry higher levels of underabsorbed manufacturing overhead costs until the projects reach higher volume production; (iii) higher costs associated with expanding our facilities; and (iv) changes in product mix to higher volume printed circuit board assembly projects and final systems assembly projects, which typically have a lower gross margin. See "Certain Factors Affecting Operating Results - If We Do Not Manage Effectively Changes in Our Operations, Our Business May be Harmed," and "- We may be Adversely Affected by Shortages of Required Electronic Components". Increased mix of products that have relatively high material costs as a percentage of total unit costs can adversely affect our gross margins. Further, we may enter into supply arrangements in connection with strategic relationships and original equipment manufacturer ("OEM") divestitures. These arrangements, which are relatively larger in scale, could adversely affect our gross margins. We believe that these and other factors may adversely affect our gross margins, but we do not expect that this will have a material effect on our income from operations. Unusual Charges We recognized unusual pre-tax charges of approximately $973.3 million during fiscal year 2001. Of this amount, $493.1 million was recorded in the first quarter and was comprised of approximately $286.5 million related to the issuance of an equity instrument to Motorola combined with approximately $206.6 million of expenses resulting from the DII Group, Inc. and Palo Alto Products International Pte. Ltd. mergers and related facility closures. In the second quarter, unusual pre-tax charges amounted to approximately $48.4 million associated with the mergers with Chatham Technologies, Inc. and Lightning Metal Specialties (and related entities) and related facility closures. In the third quarter, we recognized unusual pre-tax charges of approximately $46.3 million, primarily related to the merger with JIT Holdings Ltd. and related facility closures. During the fourth quarter, we recognized unusual pre-tax charges, amounting to $385.6 million related to closures of several manufacturing facilities. On May 30, 2000, we entered into a strategic alliance for product manufacturing with Motorola. In connection with this strategic alliance, Motorola paid $100.0 million for an equity instrument that entitled it to acquire 22.0 million Flextronics ordinary shares at any time through December 31, 2005, upon meeting targeted purchase levels or making additional payments to us. The issuance of this equity instrument resulted in a one-time non-cash charge equal to the excess of the fair value of the equity instrument issued over the $100.0 million proceeds received. As a result, the one-time non-cash charge amounted to approximately $286.5 million offset by a corresponding credit to additional paid-in capital in the first quarter of fiscal 2001. In June 2001, we entered into an agreement with Motorola under which we repurchased this equity instrument for $112.0 million. In connection with the aforementioned mergers and facility closures, in fiscal 2001, we recorded aggregate unusual charges of $686.8 million, which included approximately $584.4 million of facility closure costs and approximately $102.4 14 15 million of direct transaction costs. As discussed below, $510.5 million of the charges relating to facility closures have been classified as a component of Cost of Sales during the fiscal year ended March 31, 2001. The components of the unusual charges recorded in fiscal 2001 are as follows (in thousands):
TOTAL FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER 2001 NATURE OF CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES --------- --------- --------- --------- --------- --------- Facility closure costs: Severance ............................ $ 62,487 $ 5,677 $ 3,606 $ 60,703 $ 132,473 cash Long-lived asset impairment .......... 46,646 14,373 16,469 155,046 232,534 non-cash Exit costs ........................... 24,201 5,650 19,703 169,818 219,372 cash/non-cash --------- --------- --------- --------- --------- Total facility closure costs ..... 133,334 25,700 39,778 385,567 584,379 Direct transaction costs: Professional fees .................... 50,851 7,247 6,250 -- 64,348 cash Other costs .......................... 22,382 15,448 248 -- 38,078 cash/non-cash --------- --------- --------- --------- --------- Total direct transaction costs ... 73,233 22,695 6,498 -- 102,426 --------- --------- --------- --------- --------- Total Unusual Charges .................. 206,567 48,395 46,276 385,567 686,805 --------- --------- --------- --------- --------- Income tax benefit ..................... (30,000) (6,000) (6,500) (110,000) (152,500) --------- --------- --------- --------- --------- Net Unusual Charges .................... $ 176,567 $ 42,395 $ 39,776 $ 275,567 $ 534,305 ========= ========= ========= ========= =========
In connection with the fiscal 2001 facility closures, we developed formal plans to exit certain activities and involuntarily terminate employees. Management's plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closure and the identification of manufacturing and administrative facilities for consolidation into other facilities. Management currently anticipates that the facility closures and activities to which all of these charges relate will be substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations. The following table summarizes the balance of the facility closure costs as of March 31, 2001 and the type and amount of closure costs utilized during the first quarter of fiscal 2002.
EXIT SEVERANCE COSTS TOTAL --------- --------- --------- Balance at March 31, 2001 ......... $ 71,734 $ 95,343 $ 167,077 Activities during the quarter: Cash charges .................... (28,264) (17,219) (45,483) Non-cash charges ................ -- (3,947) (3,947) --------- --------- --------- Balance at June 30, 2001 .......... $ 43,470 $ 74,177 $ 117,647 ========= ========= =========
Of the total pre-tax facility closure costs recorded in fiscal 2001, $132.5 million relates to employee termination costs, of which $67.8 million has been classified as a component of Cost of Sales. As a result of the various exit plans, we identified 11,269 employees to be involuntarily terminated related to the various mergers and facility closures. As of June 30, 2001, 8,027 employees have been terminated, and another 3,242 employees have been notified that they are to be terminated upon completion of the various facility closures and consolidations. During the first quarter of fiscal 2002, we paid employee termination costs of approximately $28.3 million. The remaining $43.5 million of employee termination costs is classified as accrued liabilities as of June 30, 2001 and is expected to be paid out within one year of the commitment dates of the respective exit plans. The unusual pre-tax charges recorded in fiscal 2001, included $232.5 million for the write-down of long-lived assets to fair value. This amount has been classified as a component of Cost of Sales during fiscal 2001. Included in the long-lived asset impairment are charges of $229.1 million, which related to property, plant and equipment associated with the various manufacturing and administrative facility closures which were written down to their net realizable value based on their estimated sales price. Certain facilities will remain in service until their 15 16 anticipated disposal dates pursuant to the exit plans. Since the assets will remain in service from the date of the decision to dispose of these assets to the anticipated disposal date, the assets are being depreciated over this expected period. The impaired long-lived assets consisted primarily of machinery and equipment of $153.0 million and building and improvements of $76.1 million. The long-lived asset impairment also included the write-off of the remaining goodwill and other intangibles related to certain closed facilities of $3.4 million. The unusual pre-tax charges recorded in fiscal 2001, also included approximately $219.4 million for other exit costs. Approximately $210.2 million of this amount has been classified as a component of Cost of Sales. The other exit costs recorded, primarily related to items such as building and equipment lease termination costs, warranty costs, current asset impairments and payments to suppliers and vendors to terminate agreements and were incurred directly as a result of the various exit plans. We paid approximately $17.2 million of other exit costs during the first quarter of fiscal 2002. Additionally, approximately $3.9 million of other exit costs were non-cash charges utilized during the first quarter of fiscal 2002. The remaining $74.2 million is classified in accrued liabilities as of June 30, 2001 and is expected to be substantially paid out within one year from the commitment dates of the respective exit plans, except for certain long-term contractual obligations. The direct transaction costs recorded in fiscal 2001, included approximately $64.3 million of costs primarily related to investment banking and financial advisory fees as well as legal and accounting costs associated with the merger transactions. Other direct transaction costs which totaled approximately $38.1 million were mainly comprised of accelerated debt prepayment expense, accelerated executive stock compensation and benefit-related expenses. We paid approximately $1.3 million of the direct transaction costs during the first quarter of fiscal 2002. Approximately, $70.9 million of direct transaction costs were paid during fiscal 2001. Additionally, approximately $28.2 million of the direct transaction costs were non-cash charges utilized during fiscal 2001. The remaining $2.0 million is classified in accrued liabilities as of June 30, 2001 and is expected to be substantially paid out in the ensuing quarter. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for the first quarter of fiscal 2002 increased to $108.8 million from $94.9 million in the same quarter of fiscal 2001, but remained constant as a percentage of net sales of 3.5% for the first quarter of fiscal 2002 and fiscal 2001. The dollar increase in SG&A was primarily due to the continued investment in infrastructure such as sales, marketing, supply-chain management, information systems and other related corporate and administrative expenses. The constant SG&A as percentage of net sales reflects our continued focus on controlling our operating expenses, while expanding our net sales. Goodwill and Intangibles Amortization Goodwill and intangibles asset amortization for the first quarter of fiscal 2002 decreased to $2.3 million from $9.4 million for the same period of fiscal 2001. The decrease in goodwill and intangibles assets amortization in the first quarter of fiscal 2002 was a direct result of the adoption of Statement of Financial Accounting Standards (SFAS) 142, effectively discontinuing the amortization of goodwill. As of June 30,2001, unamortized goodwill approximated $1.0 billion. Such goodwill is now subject to at least annual impairment testing, as discussed in Note I, "New Accounting Standards," of the Notes to Condensed Consolidated Financial Statements. Interest and Other Expense, Net Interest and other expense, net was $22.4 million for the first quarter of fiscal 2002 compared to net income of $4.2 million for the corresponding quarter of fiscal 2001. The increase in interest and other expense, net in the first quarter of fiscal 2002 was attributable to increased interest expense associated with the approximately $645.0 million of senior subordinated notes we issued in June 2000, offset by lower gains recorded on the sale of marketable securities as compared to the $22.4 million gain on sale of marketable securities we recorded in the first quarter of fiscal 2001. 16 17 Provision for Income Taxes Our consolidated effective tax rate was a 10.2% provision for the first quarter of fiscal 2002 compared to a 4.2% benefit for the first quarter of fiscal 2001. Excluding the unusual charges, the effective income tax rate for the first quarter of fiscal 2001 was 13.1%. 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 and changes in previously established valuation allowances for deferred tax assets based upon management's current analysis of the realizability of these deferred tax assets. See "Certain Factors Affecting Operating Results - We are Subject to the Risk of Increased Taxes". Liquidity and Capital Resources As of June 30, 2001, we had cash and cash equivalents totaling $543.3 million, total bank and other debts totaling $1.3 billion and $422.0 million available for future borrowing under our credit facility subject to compliance with certain financial covenants. Cash provided by operating activities was $383.5 million and cash used in operating activities was $219.2 million for the first three months of fiscal 2002 and fiscal 2001, respectively. Cash provided by operating activities in the first three months of fiscal 2002 was primarily due to significant reductions of inventory and cash used in operations for the first three months of fiscal 2001 was the result of significant increases in accounts receivable and inventory, partially offset by an increase in accounts payable. Accounts receivable, net of allowance for doubtful accounts was $1.7 billion at June 30, 2001 and March 31, 2001. Accounts receivable remained relatively unchanged primarily because net sales was relatively unchanged as a result of the recent economic slowdown. Inventories decreased 15% to $1.5 billion at June 30, 2001 from $1.8 billion at March 31, 2001. The decrease in inventories was primarily the result of the focused effort by the Company to reduce inventories that were built up for customers in March, in their anticipation of stronger demand which did not materialize. Cash used in investing activities was $423.3 million and $309.1 million for the first three months of fiscal 2002 and fiscal 2001, respectively. Cash used in investing activities for the first three months of fiscal 2002 was primarily related to (i) net capital expenditures of $111.2 million to purchase equipment and for continued expansion of manufacturing facilities, (ii) payment of $301.7 million for purchases of manufacturing facilities and related assets and (iii) payment of $11.6 million for acquisitions of businesses. Cash used in investing activities for the first three months of fiscal 2001 consisted primarily of (i) net capital expenditures of $148.7 million to purchase equipment and for continued expansion of manufacturing facilities, (ii) payment of $163.5 million for purchases of manufacturing facilities and related assets and (iii) payment of $28.8 million for acquisitions of businesses and offset by proceeds of $32.9 million for sale of minority investments in the stocks of various technology companies. Net cash used in financing activities was $62.5 million for the first three months of fiscal 2002 and net cash provided by financing activities was $613.1 million for the first three months of fiscal 2001. Cash used in financing activities for the first three months of fiscal 2002 primarily resulted from the payment of $112.0 million related to the repurchase of the equity instrument from Motorola, $180.7 million of short-term credit facility and long-term debt repayments, offset by $224.3 million of proceeds from long-term debt and bank borrowings. Cash provided by financing activities for the first three months of fiscal 2001 primarily resulted from $650.7 million of proceeds from long-term debt and bank borrowings, $375.9 million of net proceeds from equity offerings, offset by $427.4 million of short-term credit facility and long-term debt repayments. We anticipate that our working capital requirements and capital expenditures 17 18 will continue to increase in order to support the anticipated continued growth in our operations. We also anticipate incurring significant capital expenditures and operating lease commitments in order to support our anticipated expansions of our industrial parks in China, Hungary, Mexico, Brazil and Poland. We intend to continue our acquisition strategy and it is possible that future acquisitions may be significant and may require the payment of cash. Future liquidity needs will also depend on fluctuations in levels of inventory, the timing of expenditures by us on new equipment, the extent to which we utilize operating leases for the new facilities and equipment, levels of shipments and changes in volumes of customer orders. Historically, we have funded our operations from the proceeds of public offerings of equity securities and debt offerings, cash and cash equivalents generated from operations, bank debt, sales of accounts receivable and capital equipment lease financings. We believe that our existing cash balances, together with anticipated cash flows from operations, borrowings available under our credit facility and the net proceeds from our recent equity offerings will be sufficient to fund our operations through at least the next twelve months. We anticipate that we will continue to enter into debt and equity financings, sales of accounts receivable and lease transactions to fund our acquisitions and anticipated growth. Such financings and other transactions may not be available on terms acceptable to us or at all. See "Certain Factors Affecting Operating Results - If We Do Not Manage Effectively the Expansion of Our Operations, Our Business May be Harmed". ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes during the three months ended June 30, 2001 to our exposure to market risk for changes in interest rates and foreign currency exchange rates. CERTAIN FACTORS EFFECTING OPERATING RESULTS IF WE DO NOT MANAGE EFFECTIVELY CHANGES IN OUR OPERATIONS, OUR BUSINESS MAY BE HARMED. We have grown rapidly in recent periods. Our workforce has more than doubled in size over the last year as a result of internal growth and acquisitions. This growth is likely to strain considerably our management control systems and resources, including decision support, accounting management, information systems and facilities. If we do not continue to improve our financial and management controls, reporting systems and procedures to manage our employees effectively and to expand our facilities, our business could be harmed. We plan to increase our manufacturing capacity in low-cost regions by expanding our facilities and adding new equipment. This expansion involves significant risks, including, but not limited to, the following: - we may not be able to attract and retain the management personnel and skilled employees necessary to support expanded operations; - we may not efficiently and effectively integrate new operations and information systems, expand our existing operations and manage geographically dispersed operations; - we may incur cost overruns; - we may encounter construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems that could harm our growth and our ability to meet customers' delivery schedules; and - 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. 18 19 In addition, we expect to incur new fixed operating expenses associated with our expansion efforts that will increase our cost of sales, including substantial increases in depreciation expense and rental expense. If our revenues do not increase sufficiently to offset these expenses, our operating results would be seriously harmed. Our expansion, both through internal growth and acquisitions, has contributed to our incurring significant unusual charges. For example, in connection with our acquisitions of DII, Palo Alto Products International, Chatham, Lightning and JIT, we recorded merger related charges and related facility closure costs of approximately $258.7 million, net of tax. WE DEPEND ON THE TELECOMMUNICATIONS, NETWORKING, ELECTRONICS AND COMPUTER INDUSTRIES WHICH CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS WOULD HARM OUR BUSINESS. We depend on sales to customers in the telecommunications, networking, electronics and computer industries. Factors affecting these industries in general could seriously harm our customers and, as a result, us. These factors include: - the inability of our customers to adapt to rapidly changing technology and evolving industry standards, which results in short product life cycles; - the inability of our customers to develop and market their products, some of which are new and untested, the potential that our customers' products may become obsolete or the failure of our customers' products to gain widespread commercial acceptance; and - recessionary periods in our customers' markets. If any of these factors materialize, our business would suffer. Currently, many sectors of the telecommunications, networking, electronics and computer industries are experiencing a significant decrease in demand for their products and services, which has led to reduced demand for the services provided by EMS companies. These changes in demand and generally uncertain economic conditions have resulted, and may continue to result, in some customers deferring delivery schedules for some of the products that we manufacture for them, which could affect our results of operations. Further, a protracted downturn in these industries could have a significant negative impact on our business, financial condition and results of operation. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION. EMS providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers and 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. The generally uncertain economic condition of several of the industries of our customers has resulted, and may continue to result, in some of our customers delaying the delivery of some of the products we manufacture for them. Cancellations, reductions or delays by a significant customer or by a group of customers would seriously harm our results of operations. In addition, we make significant decisions, including determining 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 reduce our ability to estimate accurately future customer requirements. This makes it difficult to schedule production and maximize utilization of our 19 20 manufacturing capacity. We often increase staffing, purchase materials and incur other expenses to meet the anticipated demand of our customers. Anticipated orders may not materialize, and delivery schedules may be deferred as a result of changes in demand for our customers' products. 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 could harm our gross profit and operating income. OUR OPERATING RESULTS VARY SIGNIFICANTLY. We experience significant fluctuations in our results of operations. The factors that contribute to fluctuations include: - the timing of customer orders; - the volume of these orders relative to our capacity; - market acceptance of customers' new products; - changes in demand for customers' products and product obsolescence; - our ability to manage the timing and amount of our procurement of components to avoid delays in production and excess inventory levels; - the timing of our expenditures in anticipation of future orders; - our effectiveness in managing manufacturing processes and costs; - changes in the cost and availability of labor and components; - changes in our product mix; - changes in economic conditions; - local factors and events that may affect our production volume, such as local holidays; and - seasonality in customers' product requirements. One of our significant end-markets is the consumer electronics market. This market exhibits particular strength toward the end of the calendar year in connection with the holiday season. As a result, we have historically experienced stronger revenues in our third fiscal quarter as compared to our other fiscal quarters. We are reconfiguring certain of our operations to further increase our concentration in low-cost locations. This shift of operations resulted in a restructuring charge of $275.6 million, net of tax, in the fourth quarter of fiscal 2001, and may result in additional restructuring charges in fiscal 2002. In addition, many of our customers are currently experiencing increased volatility in demand, and in some cases reduced demand, for their products. This increases the difficulty of anticipating the levels and timing of future revenues from these customers, and could lead them to defer delivery schedules for products, which could lead to a reduction or delay in such revenues. Any of these factors or a combination of these factors could seriously harm our business and result in fluctuations in our results of operations. WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS. In the past fiscal year, we completed a significant number of acquisitions of businesses and facilities, including our acquisitions of DII, Palo Alto Products International, Chatham, Lightning and JIT. We expect to continue to acquire additional businesses and facilities in the future and are currently in 20 21 preliminary discussions to acquire additional businesses and facilities. Any future acquisitions may require additional debt or equity financing, which could increase our leverage or be dilutive to our existing shareholders. We cannot assure the terms of, or that we will complete, any acquisitions in the future. To integrate acquired businesses, 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. In addition, acquisitions involve a number of other risks and challenges, including, but not limited to: - diversion of management's attention; - potential loss of key employees and customers of the acquired companies; - lack of experience operating in the geographic market of the acquired business; and - an increase in our expenses and working capital requirements. Any of these and other factors could harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition. OUR STRATEGIC RELATIONSHIPS WITH ERICSSON AND OTHER MAJOR CUSTOMERS CREATE RISKS. In April 2001, we entered into a definitive agreement with Ericsson with respect to our management of its mobile telephone operations. Our ability to achieve any of the anticipated benefits of this new relationship with Ericsson is subject to a number of risks, including our ability to meet Ericsson's volume, product quality, timeliness and price requirements, and to achieve anticipated cost reductions. If demand for Ericsson's mobile phone products declines, Ericsson may purchase a lower quantity of products from us than we anticipate. If Ericsson's requirements exceed the volume anticipated by us, we may not be able to meet these requirements on a timely basis. Our inability to meet Ericsson's volume, quality, timeliness and cost requirements, and to quickly resolve any issues with Ericsson, could seriously harm our results of operations. As a result of these and other risks, we may be unable to achieve anticipated levels of profitability under this arrangement, and it may not result in any material revenues or contribute positively to our net income per share. Due to our relationship with Ericsson, other OEMs may not wish to obtain logistics or operations management services from us. We have entered into strategic relationships with other customers, have recently announced our plans to enter into a strategic relationship with Alcatel, and plan to continue to pursue such relationships. These relationships generally involve many, or all, of the risks involved in our new relationship with Ericsson. Similar to our other customer relationships, there are no volume purchase commitments under these relationships, and the revenues we actually achieve may not meet our expectations. In anticipation of future activities under these strategic relationships, we are incurring substantial expenses as we add personnel and manufacturing capacity and procure materials. Our operating results will be seriously harmed if sales do not develop to the extent and within the time frame we anticipate. WE DEPEND ON THE CONTINUING TREND OF OUTSOURCING BY OEMS. A substantial factor in our revenue growth is the transfer to us of manufacturing and supply chain management activities from our OEM customers. Future growth partially depends on new outsourcing opportunities. To the extent that these opportunities are not available, our future growth would be unfavorably 21 22 impacted. These outsourcing opportunities may include the transfer of assets such as facilities, equipment and inventory. THE MAJORITY OF OUR SALES COMES FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES COULD DECLINE SIGNIFICANTLY. Sales to our ten largest customers have represented a significant percentage of our net sales in recent periods. Our ten largest customers in the first three months of fiscal 2002 and 2001 accounted for approximately 62% and 58% of net sales in the first three months of fiscal 2002 and fiscal 2001, respectively. Our largest customer during the first three months of fiscal 2002 and fiscal 2001 was Ericsson, who accounted for approximately 23% and 11% of net sales in the first three months of fiscal 2002 and fiscal 2001, respectively. No other customer accounted for more than 10% of net sales in the first three months of fiscal 2002 and fiscal 2001. We anticipate that our strategic relationship with Ericsson will substantially increase the percentage of our sales attributable to Ericsson. The identity of our principal customers have 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 seriously harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues could be harmed. OUR INDUSTRY IS EXTREMELY COMPETITIVE. The EMS 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. Some of our competitors have substantially greater market share and manufacturing, financial and marketing resources than us. 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 seriously harm our operating results. WE MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS. At various times, there have been shortages of some of the electronic components that we use, and suppliers of some components have lacked sufficient capacity to meet the demand for these components. In some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production, of assemblies using that component, which has contributed to an increase in our inventory levels. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing and shipping delays, which could harm our relationships with current or prospective customers and reduce our sales. OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE. Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvement in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers' products become obsolete or fail to gain widespread commercial acceptance, our business could be adversely affected. WE ARE SUBJECT TO THE RISK OF INCREASED INCOME 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; 22 23 or - income tax rates are low. We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law which may have retroactive effect. We cannot determine in advance the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes. Several countries in which we are located allow for tax holidays or provide other tax incentives to attract and retain business. We have obtained holidays or other incentives where available. Our taxes could increase if certain tax holidays or incentives are not renewed upon expiration, or tax rates applicable to us in such jurisdictions are otherwise increased. In addition, further acquisitions of businesses may cause our effective tax rate to increase. WE CONDUCT OPERATIONS IN A NUMBER OF COUNTRIES AND ARE SUBJECT TO RISKS OF INTERNATIONAL OPERATIONS. The geographical distances between the Americas, Asia and Europe create a number of logistical and communications challenges. Our manufacturing operations are located in a number of countries throughout East Asia, the Americas and Europe. As a result, we are affected by economic and political conditions in those countries, including: - fluctuations in the value of currencies; - changes in labor conditions; - longer payment cycles; - greater difficulty in collecting accounts receivable; - the burdens and costs of compliance with a variety of foreign laws; - political and economic instability; - increases in duties and taxation; - imposition of restrictions on currency conversion or the transfer of funds; - limitations on imports or exports; - expropriation of private enterprises; and - a potential reversal of current tax or other policies encouraging foreign investment or foreign trade by our host countries. 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 some Asian nations. In addition, some countries in which we operate, such as Brazil, the Czech Republic, Hungary, Mexico, Malaysia and Poland, have experienced periods of slow or negative growth, high inflation, significant currency devaluations or limited availability of foreign exchange. Furthermore, in countries such as China and Mexico, 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 seriously harmed by inadequate infrastructure, including lack of adequate power and water supplies, transportation, raw materials and parts in countries in which we operate. WE DEPEND ON OUR KEY PERSONNEL. 23 24 Our success depends to a large extent upon the continued services of our key executives, managers and skilled personnel. Generally our employees are not bound by employment or non-competition agreements, and we cannot assure that we will retain our key officers and employees. We could be seriously harmed by the loss of key personnel. In addition, in order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to grow could be harmed. WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS. We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. In addition, we are responsible for cleanup of contamination at some of our current and former manufacturing facilities and at some third party sites. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances, we may be subject to additional remediation liability. Further, additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. Currently unexpected costs that we may incur with respect to environmental matters may result in additional loss contingencies, the quantification of which cannot be determined at this time. THE MARKET PRICE OF OUR ORDINARY SHARES IS VOLATILE. The stock market in recent years has experienced significant price and volume fluctuations that have affected the market prices of technology companies. These fluctuations have often been unrelated to or disproportionately impacted by the operating performance of these 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 cause the market price of our ordinary shares to decline. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K None. 24 25 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: August 14, 2001 /s/ ROBERT R.B. DYKES ------------------------------------------- Robert R.B. Dykes President, Systems Group and Chief Financial Officer (principal financial and accounting officer) 25