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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 26, 1998
OR
[n] 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.
514 CHAI CHEE LANE #04-13
BEDOK INDUSTRIAL ESTATE
SINGAPORE 469029
(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 August 7, 1998, there were 20,496,846 S$0.01 par value, Ordinary Shares
outstanding.
<PAGE>
FLEXTRONICS INTERNATIONAL LIMITED
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 26, 1998
and March 31, 1998 3
Condensed Consolidated Statements of Income - Three Months
Ended June 26, 1998 and June 30, 1997 4
Statements of Comprehensive Income - Three Months Ended June 26,
1998 and June 30, 1997 5
Condensed Consolidated Statements of Cash Flow - Three Months
Ended June 26, 1998 and June 30, 1997 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Statements
Condition and Results of Operations 10-20
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K 21
Signatures 22
<PAGE>
PART 1. FINANCIAL INFORMATION
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
June 26, March 31,
1998 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................. $ 51,165 $ 89,390
Accounts receivable, net ............................... 173,917 155,125
Inventories ............................................ 191,299 157,077
Deferred income taxes and other current assets ......... 45,427 37,942
--------- ---------
Total current assets ........................... 461,808 439,534
Property and equipment, net .............................. 285,173 255,573
Other non-current assets ................................. 47,602 49,016
--------- ---------
Total assets ................................... $ 794,583 $ 744,123
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings and current portion of long-term debt .. $ 53,460 $ 43,209
Capital lease obligations .............................. 8,630 9,587
Accounts payable and accrued liabilities ............... 238,279 177,084
Other current liabilities .............................. 61,975 85,118
--------- ---------
Total current liabilities ...................... 362,344 314,998
--------- ---------
Long-term debt, net of current portion ................... 162,396 166,497
Capital lease obligations, net of current portion ........ 22,080 23,181
Deferred income taxes .................................... 4,624 4,812
Other long-term liabilities .............................. 12,860 18,832
Minority interest ........................................ 1,198 994
--------- ---------
Total long-term liabilities ................... 203,158 214,316
--------- ---------
Shareholders' equity:
Ordinary shares ........................................ 135 134
Additional paid-in capital ............................. 216,229 214,466
Retained earnings ...................................... 18,591 6,934
Accumulated other comprehensive loss ................... (5,874) (6,725)
--------- ---------
Total shareholders' equity ..................... 229,081 214,809
--------- ---------
Total liabilities and shareholders' equity ..... $ 794,583 $ 744,123
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months ended
June 26, June 30,
1998 1997
-------- --------
Net sales .......................................... $376,079 $235,547
Cost of sales ...................................... 343,023 212,517
-------- --------
Gross margin .............................. 33,056 23,030
-------- --------
Operating expenses:
Selling, general and administrative .............. 14,355 12,569
Goodwill and intangibles amortization ............ 880 745
-------- --------
Total operating expenses .................. 15,235 13,314
-------- --------
Income from operations .................... 17,821 9,716
Interest expense and other expense, net ............ 4,577 2,423
-------- --------
Income before income taxes ................ 13,244 7,293
Provision for income taxes ......................... 1,588 747
-------- --------
Net income ................................ $ 11,656 $ 6,546
======== ========
Earnings per share:
Basic ............................................ $ 0.56 $ 0.39
Diluted .......................................... $ 0.54 $ 0.37
Shares used in computing per share amounts:
Basic ............................................ 20,669 16,953
Diluted .......................................... 21,748 17,492
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months ended
June 26, June 30,
1998 1997
------- -------
Net income .............................................. $11,656 $ 6,546
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments .............. 743 (1,459)
------- -------
Comprehensive income .................................... $12,399 $ 5,087
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 26, June 30,
1998 1997
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (1,755) $ 17,526
-------- --------
Investing activities:
Purchases of property and equipment ........................ (39,894) (30,122)
Proceeds from sale of property and equipment ............... 1,357 88
Other investments .......................................... (1,613) --
Payment for Astron earnout ................................. -- (6,250)
-------- --------
Net cash used in investing activities ...................... (40,150) (36,284)
-------- --------
Financing activities:
Bank borrowings and proceeds from long-term debt ........... 10,754 31,680
Repayment of bank borrowings and long-term debt ............ (6,165) (277)
Repayment of capital lease obligations ..................... (2,437) (2,129)
Proceeds from exercise of stock options .................... 1,765 308
-------- --------
Net cash provided by financing activities ................... 3,917 29,582
-------- --------
Effect of exchange rate changes on cash ...................... (237) (60)
-------- --------
Net increase (decrease) in cash and cash equivalents ......... (38,225) 10,764
Cash and cash equivalents, beginning of period ............... 89,390 24,159
-------- --------
Cash and cash equivalents, end of period ..................... $ 51,165 $ 34,923
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 26, 1998
(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 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, 1998 contained in
the Company's 1998 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
quarter ended June 26, 1998 are not necessary indicative of the results that may
be expected for the year ending March 31, 1999.
Note B - Inventories
Inventories consist of the following:
June 26, March 31,
1998 1998
-------- ---------
Raw materials .......................... $126,999 $130,868
Work-in-process ........................ 35,035 21,536
Finished goods ......................... 29,265 4,673
-------- --------
$191,299 $157,077
======== ========
<PAGE>
Note C - Acquisitions
On October 30, 1997, the Company acquired 92% of the outstanding Ordinary
Shares of Neutronics Holdings A.G. ("Neutronics"), an electronic manufacturing
services provider with operations located in Austria and Hungary. The
acquisition was accounted for as a pooling-of-interests and, accordingly, all
financial statements presented have been retroactively restated to include the
results of Neutronics.
A reconciliation of the financial statements for the three months ended
June 30, 1997, to previously reported information is as follows (in thousands).
Net sales:
Previously reported $196,883
Neutronics 38,664
--------
As restated $235,547
========
Net income:
Previously reported $ 5,312
Neutronics 1,234
--------
As restated $ 6,546
========
Note D - EARNINGS PER SHARE
In the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Under SFAS
No. 128, the Company presents two earnings per share (EPS) amounts. Basic EPS is
computed using the weighted average number of Ordinary Shares outstanding during
the applicable periods. Diluted EPS is computed using the weighted average
number of Ordinary Shares and dilutive Ordinary Share equivalents outstanding
during the applicable periods. Ordinary Share equivalents include dilutive
Ordinary Shares issuable upon the exercise of stock options and are computed
using the treasury method.
Note E - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Comprehensive Income" in the first
quarter of fiscal 1999. SFAS No. 130 requires companies to report an additional
measure of income on the income statement referred to as "comprehensive income"
or to create a separate financial statement that reflects comprehensive income.
The Company's "Comprehensive Income" includes net income, foreign currency
translation gains and losses, and other unrealized gains and losses reflected in
equity.
<PAGE>
The following table sets forth the components of other comprehensive income
(loss) on a pre-tax and after-tax basis.
<TABLE>
<CAPTION>
Three months ended June 26, 1998 Three months ended June 30, 1997
-------------------------------- ---------------------------------
Tax Tax
Pre-tax (Expense) Net-of-Tax Pre-tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
------- ---------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustments $ 843 $ (100) $ 743 $(1,626) $ 167 $(1,459)
------- ------- ------- ------- ------- -------
Other comprehensive income (loss) $ 843 $ (100) $ 743 $(1,626) $ 167 $(1,459)
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
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. 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. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this Report and in the Company's other reports filed with the Securities and
Exchange Commission, including its Form 10-K and its other Form 10-Q, that
attempt to advise interested parties of the risks and factors that may affect
the Company's business. 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 Future Operating Results," that could
cause future results to differ materially from historical results or anticipated
results.
OVERVIEW
In recent years, the Company has substantially expanded its manufacturing
capacity, technological capabilities and service offerings, through both
acquisitions and internal growth. See "-Certain Factors Affecting Future
Operating Results -- Management of Expansion and Consolidation."
On March 31, 1998, the Company acquired Conexao Informatica Ltda., a
Brazil-based electronics manufacturing service provider, in exchange for a total
of 421,593 Ordinary Shares, of which 118,305 Ordinary Shares are to be issued
upon resolution of certain general and specific contingencies. On March 31,
1998, the Company also acquired Altatron, Inc., an electronics manufacturing
service provider headquartered in Fremont, California, with facilities in
Fremont, California; Richardson, Texas; and Hamilton, Scotland, in exchange for
788,650 Ordinary Shares, of which 157,730 Ordinary Shares are to be issued upon
resolution of certain general and specific contingencies. Altatron has
approximately 800 employees. Conexao has approximately 400 employees with
manufacturing facilities totaling 110,000 square feet. The acquisitions of
Conexao and Altatron have been accounted for as poolings-of-interests. The
Company did not restate its prior period financial statements with respect to
these acquisitions because such acquisitions did not have a material impact on
its consolidated financial statements. Accordingly, the balance sheets of
Conexao and Altatron as of March 31, 1998 were included in the Company's
consolidated balance sheet as of March 31, 1998 and the results of operations
for Conexao and Altatron have been included in the Company's results of
operations from March 31, 1998 onward.
On December 1, 1997, the Company acquired DTM Products, Inc., a
Colorado-based producer of injection molded plastics for North American OEMs, in
exchange for 252,469 Ordinary Shares, and acquired Energipilot AB, a Swedish
company principally engaged in providing cables and engineering services to
Northern European OEMs, in exchange for 229,990 Ordinary Shares. The
acquisitions of DTM and Energipilot have been accounted for as
poolings-of-interests. The Company did not restate its prior period financial
statements with respect to these
<PAGE>
acquisitions because they did not have a material impact on its consolidated
financial statements. Accordingly, the results of operations for DTM and
Energipilot from December 1, 1997 onward are included in the Company's
consolidated statements of operations.
On October 30, 1997, the Company acquired 92% of the outstanding shares of
Neutronics, an Austrian electronics manufacturing service provider with
operations in Austria and Hungary for 2,806,000 Ordinary Shares of the Company.
The acquisition was accounted for as a pooling-of-interests and accordingly, the
Company has restated its prior period financial statements to give effect to
this acquisition.
The ability of the Company to obtain the benefits of these acquisitions is
subject to a number of risks and uncertainties, including the Company's ability
to successfully integrate the acquired operations and its ability to maintain,
and increase, sales to customers of the acquired companies. There can be no
assurance that any acquisitions will not materially affect the Company. See
"-Certain Factors Affecting Future Operating Results -- Acquisitions."
In addition to acquisitions, the Company has also substantially increased
overall capacity by expanding operations in North America, Asia and Europe. In
June 1997, the Company leased a new 71,000 square foot facility in North America
from which the Company offers a wide range of engineering services, and in July
1997 the Company completed construction of a new 73,000 square foot facility in
North America dedicated to high volume PCB assembly. These new facilities are
located adjacent to the Company's other California operations. Also in July
1997, the Company completed construction of a 101,000 square foot manufacturing
facility on a 32-acre campus site in Guadalajara, Mexico. In Asia, the Company
has expanded its Doumen, China facilities by developing an additional 224,000
square feet for miniaturized gold-finished PCB fabrication and for PCB and full
system assembly. The Company has commenced production at the new and expanded
facilities. The Company is also expanding facilities in Brazil, Hungary, and
Mexico.
<PAGE>
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 26, June 30,
-------- --------
1998 1997
----- -----
Net sales ............................................ 100.0 100.0
Cost of sales ........................................ 91.2 90.2
----- -----
Gross margin ....................................... 8.8 9.8
Selling, general and administrative .................. 3.9 5.4
Goodwill and intangible amortization ................. 0.2 0.3
----- -----
Income from operations ............................. 4.7 4.1
Interest expense and other expense, net .............. 1.2 1.0
----- -----
Income before income taxes ........................ 3.5 3.1
Provision for income taxes ........................... 0.4 0.3
----- -----
Net income ......................................... 3.1 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 first
quarter of fiscal 1999 increased 59.7% to $376.1 million from $235.5 million for
the first quarter of fiscal 1998. The increase in net sales was primarily due to
an increase in sales to certain existing customers and to a lesser extent sales
to certain new customers. The Company's five largest customers in the first
quarter of fiscal 1999 accounted for approximately 60% of consolidated net
sales, with no single customer exceeding 20% of consolidated net sales. During
the first quarter of fiscal 1998, the Company's five largest customers accounted
for approximately 57% of consolidated net sales, with one customer exceeding 20%
of consolidated net sales. See "-Certain Factors Affecting Operating Results --
Customer Concentration; Dependence on Electronics Industry."
Gross Profit
Gross profit varies from period to period and is affected by, among other
things, product mix, component costs, product life cycles, unit volumes,
startup, expansion and consolidation of manufacturing facilities, pricing,
competition and new product introductions. Gross profit margin decreased to 8.8%
for the first quarter of fiscal 1999 from 9.8% for the same period of fiscal
1998. The gross profit margin for the first quarter of fiscal 1999 was adversely
affected by changes in customer and product mix and costs associated with the
startup of expanded facilities in Doumen, China and new facilites in
Guadalajara, Mexico. Prices paid to the Company by its significant customers can
vary significantly based on the customer's order level, with per unit prices
typically declining as volumes increase. These changes in price and volume can
materially affect the Company's gross profit margin. See "-Certain Factors
Affecting Operating Results -- Management of Consolidation and Expansion."
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the first quarter
of fiscal 1999 increased to $14.4 million from $12.6 million in the first
quarter of 1998 but decreased as a percentage of net sales to 3.9% for the first
quarter of fiscal 1999 from 5.4% for the first quarter of fiscal 1998. The
dollar increase in SG&A was mainly due to the inclusion of the SG&A from Conexao
and Altatron after the acquisitions of these companies on March 31, 1998 and
increased staffing and related administrative expenses and increased investments
in information systems to support the expansion of the Company's business. 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, the Company expects SG&A expenses will continue to
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 first
quarter of fiscal 1999 increased to $880,000 from $744,000 for same period of
fiscal 1998. The increase in the goodwill and intangible asset amortization was
primarily due to the Company's reduction of its estimate of the useful lives of
goodwill and intangible assets related to the Astron acquisition effective from
the second quarter of fiscal 1998 and onward. The increase was partially offset
by the effect of a write-off of goodwill in March 1998 as a result of the
closure of the Wales facility after the acquisition of Altatron's Scotland
facility.
Interest Expense and Other Expense, Net
Net interest expense increased to $4.0 million for the first quarter of
fiscal 1999 from $3.4 million for the first quarter of fiscal 1998. The increase
was primarily due to the issuance of $150.0 million principal amount of 8.75%
senior subordinated notes in October 1997. The Company anticipates that its
interest expense will increase in future periods as a result of borrowings under
its credit facility.
Other expense, net increased to a loss of $0.6 million for the first
quarter of fiscal 1999 from a $1.0 million gain for the first quarter of fiscal
1998. The change in other expense, net for the first quarter of fiscal 1999 was
primarily due to foreign exchanges losses related to the devaluation of the yen
against certain European currencies partially offset by income from associated
companies. The other expense, net for the first quarter of fiscal 1998, was
primarily related to foreign exchange gains and income from associated
companies.
Provision for Income Taxes
The Company's consolidated effective tax rate was 12.0% for the quarter
ended June 26, 1998 compared to 10.2% for the quarter ended June 30, 1997. The
Company's effective tax rate increased primarily due to increased expansion of
operations in jurisdictions with higher tax rates.
The Company is structured as a holding company, conducting its operations
through manufacturing and marketing subsidiaries in Austria, Brazil, China,
Hungary, Malaysia, Mauritius, Mexico, Singapore, Sweden, the United Kingdom, and
the United States. These subsidiaries are subject to
<PAGE>
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 taxes than
would otherwise be the case under ordinary tax rates in those countries. The
Company's United States subsidiaries have benefitted from net loss carry
forwards. See "- Certain Factors Affecting Operating Results -- Risk of
Increased Taxes."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations from the proceeds of public offerings
of equity securities, cash and cash equivalents generated from operations, bank
debt and lease financing of capital equipment. At June 26, 1998, the Company had
cash and cash equivalents balances totaling $51.2 million, total bank and other
debts amounting to $246.6 million and $74.9 million available for borrowing
under its credit facilities subject to compliance with certain financial ratios.
Cash used for operating activities was $1.8 million for the quarter ended
June 26, 1998. Cash provided by operating activities was $17.5 million for the
quarter ended June 30, 1997. Cash provided by operating activities decreased
primarily due to the increase in accounts receivable and inventories of $53.3
million due to increased sales.
Cash used in investing activities was $40.2 million and $36.3 million for
the quarter ended June 26, 1998 and June 30, 1997, respectively. Cash used in
investing activities for the quarter ended June 26, 1998 was primarily related
to capital expenditures of $39.9 million to purchase equipment in Doumen, China;
Guadalajara, Mexico; San Jose, California and Karlskrona, Sweden. Cash used in
investing activities for the quarter ended June 30, 1997 consisted primarily of
expenditures for newly expanded facilities including plant construction at the
Company's industrial parks in Doumen, China and Guadalajara, Mexico.
Cash provided by financing activities was $3.9 million and $29.6 million
for the quarter ended June 26, 1998 and June 30, 1997, respectively. Cash
provided by financing activities for the quarter ended June 26, 1998 resulted
primarily from net proceeds from short-term borrowings from credit facilities
partially off-set by repayments of capital leases. Cash provided by financing
activities for the quarter ended June 30, 1997 consisted primarily of bank
borrowings.
<PAGE>
The Company anticipates expending an aggregate of $15.0 million of which
$9.5 million has already been expended to implement a new management information
systems, and anticipates funding these expenditures with cash from operations
and borrowings under its credit facility. The Company is also required to expend
cash in fiscal 1999 pursuant to the terms of the Astron acquisition. Subsequent
to the first quarter of fiscal 1999, the Company made a $14.0 million payment in
cash to an entity affiliated with the Chairman of Astron and another $10.0
million in cash for the remaining purchase price to Astron's former
shareholders.
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 and operating
lease commitments in order to support its anticipated expansions of its
facilities in Brazil, China, Hungary and Mexico. Future liquidity needs will
depend on fluctuations in levels of inventory, 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 flow from operations and amounts
available under its credit facilities, will be sufficient to fund its operations
at its current level of business. However, to the extent that the Company's
operations continue to expand or the level of business increases, the Company
may be required to obtain additional debt or equity financing. See "- Certain
Factors Affecting Operating Results -- Management of Expansion and
Consolidation."
Certain Factors Affecting Operating Results
The Company's future operating results will depend upon conditions in its market
that may affect demand for its services. The following factors, among others,
have in some cases affected, and in the future could affect, the Company's
actual results and could cause such results to differ materially from those
expressed in forward-looking statements made by the Company.
Management of Expansion and Consolidation
The Company is currently experiencing a period of rapid expansion both
through internal growth and acquisitions. There can be no assurance that the
Company's historical growth will continue or that the Company will successfully
manage the integration of acquired operations. Expansion has caused, and is
expected to continue to cause, strain on the Company's infrastructure, including
its managerial, technical, financial and other resources. To manage further
growth, the Company must continue to enhance financial controls and hire
additional engineering and sales personnel. The Company's ability to manage any
future growth effectively will require it to attract, train, motivate and manage
new employees successfully, to integrate new employees into its overall
operations and to continue to improve its operational systems. The Company may
experience certain inefficiencies as it integrates new operations and manages
geographically dispersed operations. There can be no assurance that the Company
will be able to manage its expansion effectively, and a failure to do so could
have a material adverse effect on the Company. In addition, the Company would be
adversely affected if its new facilities do not achieve growth sufficient to
offset increased expenditures associated with expansion.
Expansion through acquisitions and internal growth has contributed to the
Company's incurring significant accounting charges and experiencing volatility
in its operating results. There can be no assurance that the Company will not
continue to experience volatility in its operating results or incur write-offs
in connection with its expansion efforts.
The Company plans to further expand its manufacturing capacity by expanding
its facilities and by adding new equipment. The Company expects substantial new
capital expenditures and operating lease commitments in connection with this
expansion. The Company plans to utilize operating leases, net cash from
operations, existing cash balances and borrowings under its credit facility to
support this expansion. No assurance can be given as to the availability of such
net cash from operations or borrowings, or as to the availability or terms of
any operating leases. The Company may encounter unforeseen difficulties, costs
or delays in developing, constructing and equipping the new manufacturing
facilities, and there can be no assurance as to when it will complete
<PAGE>
construction. The development and construction of the new facilities are subject
to significant risks and uncertainties, including cost estimation errors and
overruns, construction delays, weather problems, equipment delays or shortages,
labor shortages and disputes, production start-up problems and other factors. As
many of such factors are beyond the Company's control, the Company cannot
predict the length of any such delays, which could be substantial and could
result in substantial cost overruns. Such delays would adversely affect the
Company's sales growth and the Company's ability to timely meet delivery
schedules. Furthermore, the Company's development and construction of the new
facilities will result in new fixed and operating expenses, including
substantial increases in depreciation expense and rental expense that will
increase the Company's cost of sales. If revenue levels do not increase
sufficiently to offset these new expenses, the Company's operating results could
be materially adversely affected.
Acquisitions
Acquisitions have represented a significant portion of the Company's growth
strategy. Acquisitions involve a number of risks, including the diversion of
management's attention, the integration and assimilation of the operations and
personnel of the acquired companies, and the potential loss of key employees and
customers of the acquired companies. The Company may not have had any experience
with technologies, processes and markets involved with the acquired business and
accordingly may lack the management and marketing experience that will be
necessary to successfully operate and integrate the business. The successful
operation of an acquired business will require communication and cooperation in
product development and marketing among senior executives and key technical
personnel. There can be no assurance that the integration of the acquired
businesses will be successful and will not result in disruption in one or more
sectors of the Company's business. In addition, there can be no assurance that
the Company will realize any of the other anticipated benefits of the
acquisition. Furthermore, additional acquisitions would require investment of
financial resources, and may require debt or equity financing. No assurance can
be given that the Company will consummate any acquisitions in the future, that
any past or future acquisition by the Company will not materially adversely
affect the Company, or that any such acquisition will enhance the Company's
business.
The acquisitions in the last two years represent a significant expansion of
the Company's operations and entail a number of risks. The acquired operations
are now being integrated into the Company's ongoing manufacturing operations.
This requires optimizing production lines, implementing new management
information systems, implementing the Company's operating systems, and
assimilating and managing existing personnel. The difficulties of this
integration may be further complicated by geographic distances. In addition,
these acquisitions have increased and will continue to increase the Company's
expenses and working capital requirements, and place burdens on the Company's
management resources. In the event the Company is unsuccessful in integrating
these operations, the Company would be materially adversely affected. In
addition, prior to the acquisitions of the Karlskrona Facilities, Neutronics and
Conexao, the Company had no experience operating in Sweden, Central Europe or
Brazil, and there can be no assurance that the Company will achieve acceptable
levels of profitability at the acquired operations, or that the acquisitions
will not adversely affect its gross margins.
<PAGE>
Variability of Customer Requirements and Operating Results
Electronics manufacturing service providers must provide increasingly rapid
product turnaround and respond to ever-shorter lead times. The Company generally
does not obtain firm long-term purchase commitments from its customers and over
the past few years has experienced reduced lead-times in customer orders. In
addition, customer contracts can be canceled and volume levels can be changed or
delayed and such cancellations and delays could affect the ability of the
Company to forecast purchase commitments accurately. The Company must
continually make other significant decisions for which it is responsible,
including the levels of business that it will seek and accept, production
schedules, component procurement commitments, personnel needs and other resource
requirements, based on estimates of future customer requirements that are
subject to significant change. A variety of conditions, both specific to the
individual customer and generally affecting the industry, may cause customers to
cancel, reduce or delay orders. Cancellations, reductions or delays by a
significant customer or by a group of customers would adversely affect the
Company. On occasion, customers may require rapid increases in production, which
can stress the Company's resources and reduce margins. Although the Company has
increased its manufacturing capacity, there can be no assurance that the Company
will have sufficient capacity at any given time to meet its customers' demands
if such demands exceed anticipated levels.
In addition to the variability resulting from the short-term nature of its
customers' commitments, other factors have contributed, and may contribute in
the future, to significant periodic and quarterly fluctuations in the Company's
results of operations. These factors include, among other things: timing of
orders; volume of orders relative to the Company's capacity; customers'
announcements, introductions and market acceptance of new products or new
generations of products; evolution in the life cycles of customers' products;
timing of expenditures in anticipation of future orders; effectiveness in
managing manufacturing processes; changes in cost and availability of labor and
components; product mix; and changes or anticipated changes in economic
conditions. In addition, the Company's net sales may fluctuate throughout the
year as a result of local factors and events that may affect production volumes
and seasonality in products requirements by certain customers.
<PAGE>
Customer Concentration; Dependence on Electronics Industry
The composition of the group comprising the Company's largest customers has
varied from year to year, and there can be no assurance that the Company's
principal customers will continue to purchase products and services from the
Company at current levels, if at all. Significant reductions in sales to any of
these customers, or the loss of one or more major customers, would have a
material adverse effect on the Company. The timely replacement of expired,
canceled, delayed, or reduced contracts with new business cannot be assured. See
"-- Variability of Customer Requirements and Operating Results."
The factors affecting the electronics industry in general could have a
material adverse effect on the Company's customers and as a result on the
Company as well. The markets in which the Company's customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. These conditions frequently
result in short product life cycles. The Company's success will depend to a
significant extent on the success achieved by its customers in developing and
marketing their products, some of which are new and untested. If technologies or
standards supported by customers' products become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be materially
adversely affected. The market segments served by the Company are also subject
to economic cycles and have in the past experienced, and are likely in the
future to experience, recessionary periods. A recessionary period affecting the
industry segments served by the Company could have a material adverse effect on
the Company.
Significant Leverage
The Company's total indebtedness and capital lease obligations on June 28,
1998 were $246.6 million compared to $242.5 million at March 31, 1998. In
addition, on June 28, 1998, the Company and its subsidiaries had approximately
$74.9 million available for additional borrowings under its credit facilities.
The Company's level of indebtedness presents risks to investors, including the
possibility that the Company may be unable to generate cash sufficient to pay
the principal of and interest on the indebtedness when due. Additionally, the
Company's level of indebtedness could have a material adverse effect on the
Company's future operating performance, including, but not limited to, the
following: (i) a significant portion of the Company's cash flow from operations
will be dedicated to debt service payments, thereby reducing the funds available
to the Company for other purposes; (ii) the Company's leverage may place the
Company at a competitive disadvantage; (iii) the Company's operating flexibility
is limited by covenants that, among other things, limit its ability to incur
additional indebtedness, grant liens, make capital expenditures and enter into
sale and leaseback transactions; and (iv) the Company's degree of leverage may
make it more vulnerable to economic downturns, may limit its ability to pursue
other business opportunities and may reduce its flexibility in responding to
changing business and economic conditions. See"-- Liquidity and Capital
Resources."
Replacement of Management Information Systems; Year 2000 Compliance
The Company is in the process of replacing its management information
system with a new enterprise management information system that is designed to
provide enhanced functionality and to be Year 2000 compliant. The new enterprise
management system will significantly affect many aspects of the Company's
business, including its manufacturing, sales and marketing, and accounting
functions. In addition, the successful implementation of this system will be
important to facilitate future growth. The Company currently anticipates that
the complete installation of its new enterprise management information system
will take at least eighteen months, and implementation of the new system could
cause significant disruption in operations. If the Company is not successful in
implementing its new system or if the Company experiences difficulties in such
implementation, the Company could experience problems with the delivery of its
products or an adverse impact on its ability to access timely and accurate
financial and operating information.
The Company has been advised that its new enterprise management information
system is Year 2000 compliant. However, there can be no assurance that the new
enterprise management information system will be Year 2000 compliant or that the
new system will be implemented by January 1, 2000, and any failure to be Year
2000 compliant or to effectively implement the new enterprise management system
by Year 2000 could have a material adverse effect on the Company. There can be
no assurance that the Company's customers and suppliers have, or will have,
management information systems that are Year 2000 compliant.
Risk of Increased Taxes
The Company has structured its operations in a manner designed to maximize
income in countries where tax incentives have been extended to encourage foreign
<PAGE>
investment or where income tax rates are low. If these tax incentives are not
renewed upon expiration, if the tax rates applicable to the Company are
rescinded or changed, or if tax authorities successfully challenge the manner in
which profits are recognized among the Company's subsidiaries, the Company's
taxes would increase. Substantially all of the products manufactured by the
Company's Asian subsidiaries are sold to customers based in other jurisdictions
in North America and Europe. While the Company believes that profits from its
Asian operations are not sufficiently connected to such other jurisdictions to
give rise to income taxation by such other jurisdictions, there can be no
assurance that tax authorities in such other jurisdictions will not challenge
the Company's position or, if such challenge is made, that the Company would
prevail in any such dispute. If the Company's Asian profits became subject to
income taxes in such other jurisdictions, the Company's worldwide effective tax
rate would increase and its results of operations and cash flow would be
adversely affected. See "- Management's Discussion and Analysis of Financial
Condition and Result of Operations -- Provision for Income Taxes."
Competition
The electronics contract manufacturing industry is extremely competitive
and includes hundreds of companies, several of whom have achieved substantial
market share. Current and prospective customers also evaluate the Company's
capabilities against the merits of internal production. In addition, in recent
years many participants in the industry, including the Company, have
substantially expanded their manufacturing capacity by expanding their existing
facilities and adding new facilities. In the event of a decrease in overall
demand for contract manufacturing services, this increased capacity could result
in substantial pricing pressures, which could adversely affect the Company's
operating results. Certain of the Company's competitors, including Solectron
Corporation and SCI Systems, have substantially greater manufacturing,
financial, research and development and marketing resources than the Company.
Risks of International Operations
The geographical distances between Asia, the United States, Mexico and
Europe create a number of logistical and communications challenges. The
Company's manufacturing operations are located in a number of countries
including Austria, Brazil, China, Hungary, Malaysia, Mexico, Sweden, the United
Kingdom and the United States. Because of the location of manufacturing
facilities in a number of countries, the Company is affected by economic and
political conditions in those countries, including fluctuations in the value of
currency, duties, possible employee turnover, labor unrest, lack of developed
infrastructure, longer payment cycles, greater difficulty in collecting accounts
receivable, the burdens and costs of compliance with a variety of foreign laws
and, in certain parts of the world, political instability. Changes in policies
by the local governments resulting in, among other things, increased duties,
higher taxation, currency conversion limitations, restrictions on the transfer
of funds, limitations on imports or exports, or the expropriation of private
enterprises could also have a material adverse effect on the Company. The
Company could also be adversely affected if the current policies encouraging
foreign investment or foreign trade by its host countries were to be reversed.
In addition, the attractiveness of the Company's services to its U.S. customers
is affected by 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. The Company could also be adversely affected by the inadequate development
or maintenance of infrastructure or the unavailability of adequate power and
water supplies, transportation, raw materials and parts in the countries in
which it operates.
The Company does not believe that a material portion of its products are
sold by its customers to end users in Asian markets. As a result, the Company's
results of operations have been significantly affected by recent adverse
economic conditions in East and Southeast Asian markets. However, continued
decline in such markets could have a material adverse affect on the Company's
results of operations.
<PAGE>
Currency Fluctuations
Historically, the Company transacted its business predominantly in U.S.
dollars and most of its revenues were collected in U.S. dollars, a portion of
the Company's costs such as payroll, rent and indirect operation costs, were
denominated in other currencies such as the Singapore dollar, the Hong Kong
dollar and the Malaysian ringgit. As a result, fluctuations in foreign currency
exchange rates have not created significant exchange losses to the Company. With
the acquisitions of the Karlskrona facilities, Neutronics and Conexao, a
significant portion of the Company's business is now also conducted in the
Swedish kronor, Austrian schilling, Hungarian forint and Brazilian real. In
recent years, the Hungarian forint, Brazilian real and Mexican peso have
depreciated, principally by way of devaluation. Changes in the relation of these
and other currencies to the U.S. dollar will affect the Company's cost of goods
sold and operating margins and could result in exchange losses. The impact of
future exchange rate fluctuations on the Company's results of operations cannot
be accurately predicted.
The Company's European operations have limited involvement in the normal
course of business with derivative financial instruments with off-balance sheet
risks as a means of hedging fixed Japanese yen, U.S. dollar and other foreign
currency commitments in relation to trade accounts payable and fixed purchase
obligations. Because the Company hedges only fixed obligations, the Company does
not expect that these hedging activities will have a material effect on its
results of operations or cash flows. However, there can be no assurance that the
Company will engage in any hedging activities in the future or that any of its
hedging activities will be successful.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-k
27.1 Financial Data Schedule
<PAGE>
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 10, 1998 /s/ MICHAEL E.MARKS
----------------------------------
Michael E. Marks
Chief Executive Officer
Date : August 10, 1998 /s/ ROBERT R.B. DYKES
----------------------------------
Robert R.B. Dykes
Senior Vice president of Finance
and Administration and Chief
Financial Officer (principal
financial and accounting
officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 26, 1998 (UNAUDITED) AND THE STATEMENTS OF INCOME FOR THE
QUARTER ENDED JUNE 26, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-26-1998
<CASH> 51,165
<SECURITIES> 0
<RECEIVABLES> 182,895
<ALLOWANCES> 8,978
<INVENTORY> 191,299
<CURRENT-ASSETS> 461,808
<PP&E> 368,510
<DEPRECIATION> 83,336
<TOTAL-ASSETS> 794,583
<CURRENT-LIABILITIES> 362,344
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 228,946
<TOTAL-LIABILITY-AND-EQUITY> 794,583
<SALES> 376,079
<TOTAL-REVENUES> 376,079
<CGS> 343,023
<TOTAL-COSTS> 343,023
<OTHER-EXPENSES> 588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,989
<INCOME-PRETAX> 13,244
<INCOME-TAX> 1,588
<INCOME-CONTINUING> 11,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,656
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.54
</TABLE>
