===============================================================================
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 25, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to _________
COMMISSION FILE NUMBER: 0-23354
FLEXTRONICS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SINGAPORE NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
------------------------
SINGAPORE 469029
(65) 449-5255
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL E. MARKS
CHIEF EXECUTIVE OFFICER
FLEXTRONICS INTERNATIONAL LTD.
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 2, 1999, there were 49,784,043 Ordinary Shares, S$0.01 par value,
outstanding.
1
<PAGE>
FLEXTRONICS INTERNATIONAL LIMITED
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 25, 1999 and March 31, 1999................ 3
Condensed Consolidated Statements of Income - Three Months Ended June 25,
1999 and June 26, 1998 ............................................................... 4
Condensed Consolidated Statements of Cash Flow - Three Months Ended June 25,
1999 and June 26, 1998 ............................................................... 5
Notes to Condensed Consolidated Financial Statements ................................... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................................. 9-17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................................. 18
Signatures .................................................................................... 19
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 25, March 31,
1999 1999
-------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 134,573 $ 172,984
Accounts receivable, net........................................... 261,087 225,790
Inventories........................................................ 269,034 192,766
Deferred income taxes and other current assets..................... 69,922 62,492
---------- ----------
Total current assets....................................... 734,616 654,032
Property and equipment, net.......................................... 393,835 367,507
Other non-current assets............................................. 73,653 72,840
---------- ----------
Total assets............................................... $1,202,104 $1,094,379
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings and current portion of long-term debt.............. $ 70,926 $ 54,086
Capital lease obligations.......................................... 15,623 9,807
Accounts payable and accrued liabilities........................... 309,988 251,796
Other current liabilities.......................................... 98,837 97,198
---------- ----------
Total current liabilities.................................. 495,374 412,887
---------- ----------
Long-term debt, net of current portion............................... 173,229 173,753
Capital lease obligations, net of current portion ................... 33,975 23,426
Deferred income taxes................................................ 4,538 4,831
Other long-term liabilities.......................................... 7,860 9,213
Minority interest.................................................... 4,290 4,018
---------- ----------
Total long-term liabilities 223,892 215,241
---------- ----------
Shareholders' Equity:
Ordinary Shares.................................................... 300 299
Additional paid-in capital......................................... 427,044 425,652
Retained earnings.................................................. 76,055 58,464
Accumulated other comprehensive loss............................... (20,561) (18,164)
---------- ----------
Total shareholders' equity................................. 482,838 466,251
---------- ----------
Total liabilities and shareholders' equity................. $1,202,104 $1,094,379
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended
June 25, June 26,
1999 1998
--------- --------
Net sales.............................................. $ 529,827 $ 376,079
Cost of sales.......................................... 483,884 343,023
--------- ---------
Gross margin.................................. 45,943 33,056
--------- ---------
Operating expenses:
Selling, general and administrative.................. 21,073 14,355
Goodwill and intangibles amortization................ 1,414 880
--------- ---------
Total operating expenses...................... 22,487 15,235
--------- ---------
Income from operations........................ 23,456 17,821
Other income and expenses:
Interest expense .................................... 5,358 4,871
Interest income ..................................... (1,918) ( 882)
Other expense, net .................................. 14 588
--------- ---------
Income before income taxes.................... 20,002 13,244
Provision for income taxes............................. 2,410 1,588
--------- ---------
Net income.................................... $ 17,592 $ 11,656
========= =========
Earnings per share:
Basic................................................ $ 0.36 $ 0.28
Diluted.............................................. $ 0.34 $ 0.27
Shares used in computing per share amounts:
Basic................................................. 48,291 41,338
Diluted............................................... 52,413 43,496
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 25, June 26,
1999 1998
--------- ----------
<S> <C> <C>
Net cash used in operating activities............................ $ (10,229) $ (1,755)
---------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................ (37,545) (39,894)
Proceeds from sale of property and equipment................... 91 1,357
Net cash paid for acquisition of net assets from ABB........... (24,524) --
Other investments.............................................. (2,150) (1,613)
--------- ---------
Net cash used in investing activities............................ (64,128) (40,150)
--------- ---------
Cash flows from financing activities:
Bank borrowings and proceeds from long-term debt............... 18,925 10,754
Repayment of bank borrowings and long-term debt................ (2,044) (6,165)
Repayment of capital lease obligations......................... (2,495) (2,437)
Proceeds from mortgage of equipment............................ 18,663 --
Proceeds from exercise of stock options and Employee Stock
Purchase Plan................................................ 1,393 1,765
--------- ---------
Net cash provided by financing activities........................ 34,442 3,917
--------- ---------
Effect of exchange rate changes on cash ......................... 1,504 (237)
--------- ---------
Net decrease .................................................... (38,411) (38,225)
Cash and cash equivalents at beginning of period ................ 172,984 89,390
--------- ---------
Cash and cash equivalents at end of period ...................... $ 134,573 $ 51,165
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 25, 1999
(unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements, and should be read in conjunction with the annual audited
consolidated statements as of and for the year ended March 31, 1999 contained in
the Company's 1999 annual report on Form 10-K. 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 25, 1999 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2000.
Note B - Inventories
Inventories consist of the following (in thousands):
June 25, March 31,
1999 1999
-------- --------
Raw materials................................... $204,748 $153,193
Work-in-process................................. 40,562 24,964
Finished goods.................................. 23,724 14,609
-------- --------
$269,034 $192,766
======== ========
Note C - EARNINGS PER SHARE
Reconciliation between basic and diluted earnings per share is as follows
for the three month periods ended June 25, 1999 and June 26, 1998 (in thousands,
except per share data):
<TABLE>
<CAPTION>
Three months ended
June 25, June 26,
1999 1998
-------- --------
<S> <C> <C>
Shares issued and outstanding (1)................................... 48,291 41,338
-------- --------
Weighted average ordinary shares - basic............................ 48,291 41,338
Ordinary shares equivalents:
Stock options (2)................................................. 4,122 2,158
-------- --------
Weighted average ordinary shares and equivalents - diluted.......... 52,413 43,496
======== ========
Net income.......................................................... $ 17,592 $ 11,656
======== ========
Basic earnings per share............................................ $ 0.36 $ 0.28
======== ========
Diluted earnings per share.......................................... $ 0.34 $ 0.27
======== ========
</TABLE>
(1) Ordinary Shares issued and outstanding based on the weighted average method.
(2) Stock options of the Company calculated based on the treasury stock method
using average market price for the period, if dilutive. Options to purchase
28,086 shares and 104,400 shares outstanding during the three months ended June
25, 1999 and June 26, 1998, respectively, were excluded from the computation of
diluted earnings per share because the options' exercise price were greater than
the average market price of the Company's Ordinary Shares during those periods.
6
<PAGE>
Note D - COMPREHENSIVE INCOME (in thousands)
Three months ended
June 25, June 26,
1999 1998
-------- --------
Net income............................................ $ 17,592 $ 11,656
Other comprehensive loss, net of tax:
Foreign currency translation adjustments............ (2,110) 743
-------- --------
Comprehensive income.................................. $ 15,482 $ 12,399
======== ========
Note E - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133") which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts and for hedging activities. It requires
that companies recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company expects to adopt SFAS No. 133 the first quarter of fiscal 2001 and
anticipates that SFAS No. 133 will not have a material impact on its
consolidated financial statements.
Note F - SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131") during the fourth quarter
of fiscal 1999. SFAS No. 131 establishes standards for reporting information
about operating segments in financial statements. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
chief decision making group, in deciding how to allocate resources and in
assessing performance. Mr. Michael Marks, the Chairman and chief executive
officer, is the Company's chief decision maker. The Company operates and is
managed internally by four geographic business segments. The operating segments
include Asia, Americas, Western Europe and Central Europe. Each operating
segment has a regional president who reports to Mr. Michael Marks.
Information about segments were as follows (in thousands):
Three months ended
June 25, June 26,
1999 1998
--------- -------
Net Sales :
Asia.......................................... $ 112,410 $ 79,168
Americas...................................... 208,075 168,286
Western Europe................................ 89,350 66,580
Central Europe................................ 128,707 72,134
Intercompany eliminations..................... (8,715) (10,089)
--------- ---------
$ 529,827 $ 376,079
========= =========
Income (Loss) before Income Tax :
Asia.......................................... $ 6,699 $ 5,699
Americas...................................... 5,515 6,908
Western Europe................................ 1,643 248
Central Europe................................ 3,068 2,224
Intercompany eliminations..................... 3,077 (1,835)
--------- ---------
$ 20,002 $ 13,244
========= =========
7
<PAGE>
As of As of
June 25, March 31,
1999 1999
-------- ---------
Long-lived assets :
Asia ...................................... $109,866 $109,513
Americas .................................. 132,492 117,526
Western Europe ............................ 45,436 45,775
Central Europe ............................ 106,041 94,693
-------- --------
$393,835 $367,507
======== ========
For purposes of the preceding tables, "Asia" includes China, Malaysia, and
Singapore, "Americas" includes the U.S, Mexico, and Brazil, "Western Europe"
includes Sweden, Scotland and United Kingdom and "Central Europe" includes
Austria and Hungary.
Geographic revenue transfers are based on selling prices to unaffiliated
companies, less discounts. Income before tax is net sales less operating
expenses, interest or other expenses, but prior to income taxes.
Note G - SUBSEQUENT EVENTS
On June 30, 1999, Flextronics signed the final agreement to purchase the
manufacturing facilities and related assets of Ericsson's Visby, Sweden
operations for approximately $27.6 million. Ericsson's Visby facility
manufactures mobile systems infrastructure, primarily radio base stations. Under
the terms of the agreement, Flextronics will acquire the facility, including
equipment and materials. In connection with the acquisition of assets, the
Company has also entered into a manufacturing service agreement with Ericsson.
The asset transfer is effective on June 30, 1999.
On July 15, 1999, Flextronics acquired 100% of Kyrel EMS Oyj ("Kyrel"), a
provider of electronics manufacturing services with two facilities in Finland
and one in Luneville, France in exchange for 1,821,825 Ordinary shares, of which
182,183 Ordinary Shares to be issued upon resolution of certain general and
specific contingencies. The acquisition will be accounted for as a
pooling-of-interests.
8
<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 Forms 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 Operating Results," that could cause
future results to differ materially from historical results or anticipated
results.
OVERVIEW
Flextronics is a leading provider of advanced electronics manufacturing
services to original equipment manufacturers ("OEMs") in the telecommunications,
networking, computer, consumer electronics and medical device industries. The
Company provides a wide range of integrated services, from initial product
design to volume production and fulfillment. In addition, the Company provides
advanced engineering services, PCB layout, quickturn prototyping and test
development. Throughout the production process, the Company offers logistics
services, such as materials procurement, inventory management, and packaging and
distribution. In recent years, the Company has substantially expanded its
manufacturing capacity, technological capabilities and service offerings,
through both acquisitions and internal growth.
On July 15, 1999, Flextronics acquired 100% of Kyrel EMS Oyj ("Kyrel"), a
provider of electronics manufacturing services with two facilities in Finland
and one in Luneville, France in exchange for 1,821,825 Ordinary shares, of which
182,183 Ordinary Shares to be issued upon resolution of certain general and
specific contingencies. The acquisition will be accounted for as a
pooling-of-interests.
On June 30, 1999, Flextronics signed the final agreement to purchase the
manufacturing facilities and related assets of Ericsson's Visby, Sweden
operations for $23.7 million. Ericsson's Visby facility manufactures mobile
systems infrastructure, primarily radio base stations. Under the terms of the
agreement, Flextronics will acquire the facility, including equipment and
materials. In connection with the acquisition of assets, the Company has also
entered into a manufacturing service agreement with Ericsson. The asset transfer
is effective on June 30, 1999.
On May 31, 1999, Flextronics purchased the manufacturing facilities and
related assets of ABB Automation Products in Vasteras, Sweden for $24.5 million.
This facility provides printed circuit board assemblies and other electronic
equipment. Flextronics has also offered employment to 575 ABB personnel who were
previously employed by ABB Automation Products. In connection with the
acquisition of the manufacturing facilities, the Company has also entered into a
manufacturing service agreement with ABB Automation Products.
In addition to acquisitions, the Company has substantially increased
overall capacity by expanding operations in its industrial parks in China,
Hungary, and Mexico. As a result of these acquisitions and expansions, the
Company's overall capacity has increased from approximately 1.0 million square
feet to over 2.7 million square feet at December 31, 1998, providing an
extensive network of manufacturing facilities in the world's major electronics
markets - Asia, the Americas and Europe. The Company is continuing to expand
operations and capacity at each of the industrial parks and also plans to
establish an industrial park in Brazil. See "-Certain Factors Affecting
Operating Results -- Risks of Expansion of Operations."
9
<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 25, June 26,
1999 1998
-------- --------
Net sales ...................................... 100.0 100.0
Cost of sales .................................. 91.3 91.2
----- -----
Gross margin ................................. 8.7 8.8
Selling, general and administrative ............ 4.0 3.9
Goodwill and intangibles amortization .......... 0.3 0.2
----- -----
Income from operations ....................... 4.4 4.7
Other expenses, net ............................ 0.6 1.2
----- -----
Income before income taxes ................... 3.8 3.5
Provision for income taxes ..................... 0.5 0.4
----- -----
Net income ................................... 3.3 3.1
===== =====
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 2000 increased 41% to $529.8 million from $376.1 million for
the first quarter of fiscal 1999. The increase in net sales was primarily due to
increased sales to certain existing customers and, to a lesser extent, from
sales to new customers. The Central Europe region net sales grew by
approximately 78% and was the region with the most significant net sales growth.
The Company's five largest customers in the first quarter of fiscal 2000
accounted for approximately 51% of consolidated net sales with no single
customer exceeding 20% of consolidated net sales. During the first quarter of
fiscal 1999, the Company's five largest customers accounted for approximately
60% of consolidated net sales, with no single 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, customer's product life cycles, unit
volumes, expansion and consolidation of manufacturing facilities, pricing,
competition and new product introductions. Gross profit margin for the first
quarter of fiscal 2000 was 8.7%, approximately the same as the 8.8% for the
first quarter of fiscal 1999. See "-Certain Factors Affecting Operating Results
- --Risks of Expansion of Operations."
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the first quarter
of fiscal 2000 increased to $21.1 million from $14.4 million in the first
quarter of fiscal 1999 and increased slightly as a percentage of net sales to
4.0% for the first quarter of fiscal 2000 from 3.9% for the first quarter of
fiscal 1999. The dollar increase in SG&A was mainly due to SG&A expenses from
FICO Investment Holding Ltd. ("FICO"), which the Company acquired on March 1,
1999, increased expansion of operations in Brazil and Hungary, increased
staffing and related administrative expenses, and increased sales and marketing
expenses. The Company anticipates its SG&A expenses will continue to increase in
absolute terms in the future. However, to the extent that net sales continue to
grow faster than SG&A expenses, the Company believes SG&A expenses may decline
as a percentage of net sales.
Goodwill and Intangibles Amortization
Goodwill and intangible assets are amortized on a straight-line basis over
the estimated life of the benefits received, which ranges from three to
twenty-five years. Goodwill and intangible asset amortization for the first
quarter of fiscal 2000 increased to $1.4 million from $880,000 for the same
period of fiscal 1999. The increase in goodwill and intangible assets
amortization in the first quarter of fiscal 2000 was primarily due to the
goodwill and intangible assets amortization associated with acquisition of FICO
and Advanced Component Labs HK Ltd. ("ACL") in Asia.
10
<PAGE>
Interest Expense, Net
Interest expense, net was $3.4 million for the first quarter of fiscal 2000
compared to $4.0 million for the first quarter of fiscal 1999. The decrease in
interest expense, net for the quarter ended June 25, 1999 was primarily
attributable to the increase of interest income from the Company's investment in
the money market funds and corporate debt securities.
Provision for Income Taxes
The Company's consolidated effective tax rates were 12% for the first
quarter of fiscal 2000 and fiscal 1999.
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 taxation in the country in
which they have been formed. The Company's Asian and Hungarian manufacturing
subsidiaries have, at various times, been granted certain tax relief in each of
these countries, resulting in lower income taxes than would otherwise be the
case under ordinary tax rates. See "- Certain Factors Affecting Operating
Results -- Risk of Increased Taxes."
Liquidity and Capital Resources
The Company has funded its operations from the proceeds of public offerings
of equity and debt securities, cash and cash equivalents generated from
operations, bank debt and lease financing of capital equipment. As of June 25,
1999, the Company had cash and cash equivalents balances totaling $134.6
million, total bank and other debts totaling $293.8 million and $92.0 million
available for future borrowing under its credit facility subject to compliance
with certain financial covenants.
Cash used for operating activities was $10.2 million and $1.8 million for
the quarter ended June 25, 1999 and June 26, 1998, respectively. Cash used for
operating activities increased primarily due to the increase in accounts
receivable.
Cash used in investing activities was $64.1 million and $40.2 million for
the quarter ended June 25, 1999 and June 26, 1998, respectively. Cash used in
investing activities for the quarter ended June 25, 1999 was primarily related
to (i)capital expenditures of $36.9 million to purchase equipment and expanded
facilities in Brazil, United States, Sweden, Hungary and Mexico and (ii)$24.5
million related to the acquisition of assets from ABB in Sweden. Cash used in
investing activities for the quarter ended June 26, 1998 consisted primarily of
capital expenditures of $39.9 million to purchase equipment in China, Mexico,
Sweden and United States.
Net cash provided by financing activities was $34.4 million and $3.9
million for the quarter ended June 25, 1999 and June 26, 1998, respectively.
Cash provided by financing activities for the quarters ended June 25, 1999 and
June 26, 1998 were both primarily resulting from net proceeds from short-term
bank borrowing partially offset by repayments of capital leases and for the
quarter ended June 25, 1999 proceeds from the mortgage of equipment in Austria
amounted to $18.7 million.
The Company has currently incurred in excess of $16.0 million in total
hardware, software, and system related costs in connection with remediation of
Year 2000 issues. These costs are primarily costs associated with the
implementation of the Company's new information system and have primarily been
capitalized as fixed assets. The Company anticipates expending an additional
$2.0 to $4.0 million before January 1, 2000 to complete the implementation of
the new information system and address any Year 2000 compliance issues. See
"--Year 2000 Compliance."
The Company anticipates that its working capital requirements will increase
in order to support anticipated increases in its business. In addition, the
Company anticipates incurring significant capital expenditures in order to
support the anticipated expansions of its facilities in Brazil, China, Hungary
and Mexico. Future liquidity needs will depend on fluctuations in inventory
levels, the timing of expenditures by the Company on new equipment, the extent
to which the Company utilizes leases to finance new facilities and equipment,
levels of shipments by the Company and changes in volumes of customer orders.
The Company believes that its existing cash balances, together with anticipated
cash flows from operations and amounts available under its credit facilities,
will be sufficient to fund its operations at its current level of business. To
the extent the Company finances its working capital and capital expenditures
through increased borrowings, its interest expense may increase. From time to
time, the Company may consider alternative financing opportunities, including
certain off-balance sheet transactions such as sale leasebacks transactions or
receivable financings. See "- Certain Factors Affecting Operating Results --
Risks of Expansion of Operations."
11
<PAGE>
Qualitative and Quantitative Disclosures About Market Risk
There were no material changes during the three months ended June 25, 1999
to the Company's exposure to market risk for changes in interest rates and
foreign currency exchange rates.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with programming code in
existing computer systems as the Year 2000 approaches. The Year 2000 computer
issue refers to a condition in computer software where a two digit field rather
than a four digit field is used to distinguish a calendar year. Unless
corrected, some computer programs could be unable to function on January 1, 2000
(and thereafter until corrected), as they will be unable to distinguish the
correct date. Such an uncorrected condition could significantly interfere with
the conduct of the Company's business, could result in disruption of its
operations, and could subject it to potentially significant legal liabilities.
The Company has been addressing the Year 2000 issue with a project plan
divided into major initiatives: enterprise wide applications, manufacturing and
related equipment and facilities and infrastructure. The Company has established
geographic regional teams to follow established policies and guidelines on the
remediation of the Year 2000 issue. The Company created an internal intranet
database to record the status and remediation activity on all internal
equipment.
The Company is primarily addressing the Year 2000 issue concerning
enterprise wide applications by replacing its management information system with
a new enterprise management information system that is designed to provide
enhanced functionality. We have been advised that our new enterprise management
information system is Year 2000 compliant. The Company currently has implemented
this new information system in a majority of its facilities in Asia, Central
Europe, Western Europe, and the Americas and anticipates that the installation
of the new system will be completed in August 1999. The Company is currently
evaluating the implementation of this new management information system for its
recent acquisitions in Sweden. However, there can be no assurance that the new
system will be Year 2000 compliant. The new system will significantly affect
many aspects of our business, including our manufacturing, sales and marketing
and accounting functions. In addition, the successful implementation of this
system will be important to our future growth.
Although the Company currently anticipates the installation of the new
system will be completed by August 1999, it could be delayed until later.
Implementation of the new system could cause significant disruption in
operations. In the event the new information system is not implemented by
September 1999, the Company's contingency plan is to upgrade the existing
information system currently in use by a majority of the Company's operations to
a new version which the Company has been advised is Year 2000 compliant. The
Company estimates the cost to upgrade the existing information system to be
approximately $500,000. There can be no assurance that such measures will
prevent the occurrence of Year 2000 problems, which can have a material adverse
effect upon the Company's business, operating results and financial condition.
The Year 2000 issue also could affect the Company's infrastructure and
production lines. The possibility also exists that the Company could
inadvertently fail to correct a Year 2000 problem with a mechanical equipment
micro-controller. The Company believes the impact of such an occurrence would be
minor, as substantial Year 2000 compliant equipment additions and upgrades have
occurred in recent years. The Company has been in contact with the manufacturers
of mechanical equipment to fully validate the readiness of its microprocessors.
Additional testing is planned during fiscal 2000 to reasonably ensure their Year
2000 readiness.
The Company has sent a Year 2000 Readiness Questionnaire to most of its
critical and significant suppliers. These critical suppliers have been
classified into risk categories and the Company is in the process of identifying
and devoting resources to verify Year 2000 compliance of these suppliers. The
Company may need to find alternative suppliers based on the results of the
questionnaires. There can be no assurance that the Company will be able to find
suitable alternative suppliers and contract with them on reasonable prices and
terms, and such inability could have a material and adverse impact on the
Company's business and results of operations.
The Company is currently working with many of its major customers to ensure
year 2000 compliance and has been audited by many of its customers. The Company
currently works with many of its major customers to formulate contingency plans.
These contingency plans include the movement of manufacturing production,
identification of alternative suppliers and logistics companies. The Company
intends to review its contracts with customers and suppliers with respect to
responsibility for Year 2000 issues and to seek to address such issues in future
agreements with customers and suppliers.
12
<PAGE>
The Company has currently incurred in excess of $16.0 million in total
hardware, software, and system related costs in connection with remediation of
Year 2000 issues. These costs are primarily costs associated with the
implementation of the Company's new information system and have primarily been
capitalized as fixed assets. The Company anticipates expending an additional
$2.0 to $4.0 million before January 1, 2000 to complete the implementation of
the new information system and address any Year 2000 compliance issues. There
can be no assurances that the cost estimates associated with the Company's Year
2000 issues will prove to be accurate or that the actual costs will not have a
material adverse effect on the Company's results of operations and financial
condition.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
Risks of Expansion of Operations
We have grown rapidly in recent periods, and this growth may not continue.
Internal growth will require us to develop new customer relationships and expand
existing ones, improve our operational and information systems and further
expand our manufacturing capacity.
We plan to further expand our manufacturing capacity by expanding our
facilities and by adding new equipment. Such expansion involves significant
risks. For example:
o we may not be able to attract and retain the management personnel and
skilled employees necessary to support expanded operations;
o we may not efficiently and effectively integrate new operations, expand
existing ones and manage geographically dispersed operations;
o we may incur cost overruns;
o we may encounter construction delays, equipment delays or shortages, labor
shortages and disputes and production start-up problems that could
adversely affect our growth and our ability to meet customers' delivery
schedules; and
o we may not be able to obtain funds for this expansion, and we may not be
able to obtain loans or operating leases with attractive terms.
In addition, we expect to incur new fixed operating expenses associated
with our expansion efforts, including substantial increases in depreciation
expense and rental expense, that will increase our cost of sales. If our
revenues do not increase sufficiently to offset these expenses, our operating
results would be adversely affected. Our expansion, both through acquisitions
and internal growth, has contributed to our incurring significant accounting
charges and experiencing volatility in our operating results. We may continue to
experience volatility in operating results in connection with future expansion
efforts.
Risks of Acquisitions
Acquisitions have represented a significant portion of the Company's growth
strategy, and the Company intends to continue to pursue attractive acquisitions
opportunities. Our acquisitions during the last two fiscal years represented a
significant expansion of our operations. Acquisitions involve a number of risks
and challenges, including:
o diversion of management's attention;
o the need to integrate acquired operations;
o potential loss of key employees and customers of the acquired companies;
o lack of experience operating in the geographic market of the acquired
business; and
o an increase in our expenses and working capital requirements.
To integrate acquired operations, we must implement our management
information systems and operating systems and assimilate and manage the
personnel of the acquired operations. The
13
<PAGE>
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.
Any of these and other factors could adversely affect our ability to
achieve anticipated levels of profitability at acquired operations or realize
other anticipated benefits of an acquisition. Furthermore, any future
acquisitions may require additional debt or equity financing, which could
increase our leverage or be dilutive to our existing shareholders. No assurance
can be given that we will consummate any acquisitions in the future.
Variability of Customer Requirements and Operating Results
Electronics manufacturing service providers must provide increasingly rapid
product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers, and over the past few years
we have experienced reduced lead-times in customer orders. Customers may cancel
their orders, change production quantities or delay production for a number of
reasons. Cancellations, reductions or delays by a significant customer or by a
group of customers would adversely affect our results of operations. In addition
to the variable nature of our operating results due to the short-term nature of
our customers' commitments, other factors may contribute to significant
fluctuations in our results of operations. These factors include:
o the timing of customer orders;
o the volume of these orders relative to our capacity;
o market acceptance of customers' new products;
o changes in demand for customers' products and product obsolescence;
o the timing of our expenditures in anticipation of future orders;
o our effectiveness in managing manufacturing processes;
o changes in the cost and availability of labor and components;
o changes in our product mix;
o changes in economic conditions;
o local factors and events that may affect our production volume (such as
local holidays); and
o seasonality in customers' product requirements.
One of our significant end-markets is the consumer electronics market. This
market exhibits particular strength towards the end of the year in connection
with the holiday season. As a result, we have experienced relative strength in
our revenues in the third fiscal quarter.
We make significant decisions, including the levels of business that we
will seek and accept, production schedules, component procurement commitments,
personnel needs and other resource requirements, based on our estimates of
customer requirements. The short-term nature of our customers' commitments and
the possibility of rapid changes in demand for their products reduces our
ability to estimate accurately future customer requirements. On occasion,
customers may require rapid increases in production, which can stress our
resources and reduce margins. Although we have increased our manufacturing
capacity and plan further increases, there can be no assurance we will have
sufficient capacity at any given time to meet our customers' demands. In
addition, because many of our costs and operating expenses are relatively fixed,
a reduction in customer demand can adversely affect our gross margins and
operating income.
14
<PAGE>
Customer Concentration; Dependence on Electronics Industry
Our five largest customers accounted for approximately 62% of consolidated
net sales in fiscal 1999 and 57% in fiscal 1998. Our largest customers during
fiscal 1999 were Philips, Ericsson and Cisco accounting for approximately 18%,
16% and 13% of consolidated net sales, respectively. Sales to our five largest
customers have represented a majority of our net sales in recent periods. The
identity of our principal customers has varied from year to year, and our
principal customers may not continue to purchase services from us at current
levels, if at all. Significant reductions in sales to any of these customers, or
the loss of major customers, would have a material and adverse effect on us. We
can not assure the timely replacement of expired, canceled, or reduced contracts
with new business. See "--Variability of Customer Requirements and Operating
Results."
Factors affecting the electronics industry in general could have a material
adverse effect on our customers and, as a result on us. Such factors include:
o the inability of our customers to adapt to rapidly changing technology and
evolving industry standards, which results in short product life cycles;
o the inability of our customers to develop and market their products, some
of which are new and untested. If customers' products become obsolete or
fail to gain widespread commercial acceptance, our business may be
materially and adversely affected; and
o recessionary periods in our customers' markets.
Risk of Increased Taxes
We have structured our operations in a manner designed to maximize income
in countries where tax incentives have been extended to encourage foreign
investment or where income tax rates are low. Our taxes could increase if these
tax incentives are not renewed upon expiration, or tax rates applicable to us
are increased. Substantially all of the products manufactured by our Asian
subsidiaries are sold to customers based in North America and Europe. We believe
that profits from our Asian operations are not sufficiently connected to
jurisdictions in North America or Europe to give rise to income taxation there.
However, tax authorities in jurisdictions in North America and Europe could
challenge the manner in which profits are allocated among our subsidiaries, and
we may not prevail in any such challenge. If our Asian profits became subject to
income taxes in such other jurisdictions, our worldwide effective tax rate could
increase.
Significant Leverage
Our level of indebtedness presents risks to investors, including:
o the possibility that we may be unable to generate cash sufficient to pay
the principal of and interest on the indebtedness when due;
o making us more vulnerable to economic downturns;
o limiting our ability to pursue new business opportunities; and
o reducing our flexibility in responding to changing business and economic
conditions.
Risks of Competition
The electronics manufacturing services industry is extremely competitive
and includes hundreds of companies, several of which have achieved substantial
market share. Current and prospective customers also evaluate our capabilities
against the merits of internal production. Certain of our competitors, including
Solectron and SCI Systems, have substantially greater market shares than us, and
substantially greater manufacturing, financial, research and development and
marketing resources. In recent years, many participants in the industry,
including us, have substantially expanded their manufacturing capacity. If
overall demand for electronics manufacturing services should decrease, this
increased capacity could result in substantial pricing pressures, which could
adversely affect our operating results.
15
<PAGE>
Risks of International Operations
The geographical distances between Asia, the Americas and Europe create a
number of logistical and communications challenges. Our manufacturing operations
are located in a number of countries, including Austria, Brazil, China, Hungary,
Malaysia, Mexico, Sweden, the United Kingdom and the United States. As a result,
we are affected by economic and political conditions in those countries,
including:
o fluctuations in the value of currencies;
o changes in labor conditions;
o longer payment cycles;
o greater difficulty in collecting accounts receivable;
o burdens and costs of compliance with a variety of foreign laws;
o political and economic instability;
o increases in duties and taxation;
o imposition of restrictions on currency conversion or the transfer of funds;
o limitations on imports or exports;
o expropriation of private enterprises; and
o reversal of the current policies (including favorable tax and lending
policies) encouraging foreign investment or foreign trade by our host
countries.
The attractiveness of our services to our U.S. customers can be affected by
changes in U.S. trade policies, such as "most favored nation" status and trade
preferences for certain Asian nations. For example, trade preferences extended
by the United States to Malaysia in recent years were not renewed in 1997. In
addition, some countries in which we operate, such as Brazil, Mexico and
Malaysia, have experienced periods of slow or negative growth, high inflation,
significant currency devaluations and limited availability of foreign exchange.
Furthermore, in countries such as Mexico and China, governmental authorities
exercise significant influence over many aspects of the economy, and their
actions could have a significant effect on us. Finally, we could be adversely
affected by inadequate infrastructure, including lack of adequate power and
water supplies, transportation, raw materials and parts in countries in which we
operate.
Risks Relating to China. Under its current leadership, the Chinese
government has been pursuing economic reform policies. There can be no assurance
that the Chinese government will continue to pursue such policies, or that such
policies will be successful if pursued. In addition, China does not have a
comprehensive and highly developed system of laws, and enforcement of laws and
contracts is uncertain. The United States annually reconsiders the renewal of
most favored nation trading status of China. China's loss of most favored nation
status could adversely affect us by increasing the cost to U.S. customers of
products manufactured by us in China.
Risks relating to Mexico. The Mexican government exercises significant
influence over many aspects of the Mexican economy and its action could have a
significant effect on private sector entities in general and the Company in
particular. In addition, during the 1980s, Mexico experienced periods of slow or
negative growth, high inflation, significant devaluation of the peso and limited
availability of foreign exchange.
16
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Risks Relating to Hungary. Hungary has undergone significant political and
economic change in recent years. Political, economic, social and other
developments, and changes in laws could have a material and adverse effect on
our business. Annual inflation and interest rates in Hungary have historically
been much higher than those in Western Europe. Exchange rate policies have not
always allowed for the free conversion of currencies at the market rate. Laws
and regulations in Hungary have been, and continue to be, substantially revised
during its transition to a market economy. As a result, laws and regulations may
be applied inconsistently. Also in some circumstances, it may not be possible to
obtain the legal remedies provided for under those laws and regulations in a
reasonably timely manner, if at all.
Risks Relating to Brazil. During the past several years, the Brazilian
economy has been affected by significant intervention by the Brazilian
government. The Brazilian government has changed monetary, credit, tariff and
other policies to influence the course of Brazil's economy. The Brazilian
government's actions to control inflation and effect other policies have often
involved wage, price and exchange controls as well as other measures such as
freezing bank accounts and imposing capital controls.
Risks of Currency Fluctuations and Hedging Operations
With the recent acquisitions of operations in Sweden, Austria and Brazil, a
significant portion of our business is conducted in the Swedish kronor, European
Euro and Brazilian real. In addition, some of our costs, such as payroll and
rent, are denominated in currencies such as the Singapore dollar, the Hong Kong
dollar, the Malaysian ringgit, the Hungarian forint, the Mexican peso, and the
British pound, as well as the kronor, the euro and the real. In recent years,
the Hungarian forint, Brazilian real and Mexican peso have experienced
significant devaluations, and in January 1999 the Brazilian real experienced
further significant devaluations. Changes in exchange rates between these and
other currencies and the U.S. dollar will affect our cost of sales and operating
margins. We cannot predict the impact of future exchange rate fluctuations. We
use financial instruments, primarily forward purchase contracts, to hedge
Japanese yen, European euro, U.S. dollar, and other foreign currency commitments
arising from trade accounts payable and fixed purchase obligations. Because we
hedge only fixed obligations, we do not expect that these hedging activities
will have a material effect on our results of operations or cash flows. However,
our hedging activities may be unsuccessful, and we may change or reduce our
hedging activities in the future.
Dependence of Key Personnel
Our success depends to a larger extent upon the continued services of our
key executives and skilled personnel. Generally our employees are not bound by
employment or non-competition agreements, and there can be no assurance that we
will retain our officers and key employees. We could be materially and adversely
affected by the loss of such personnel.
Limited Availability of Components
A substantial majority of our net sales are derived from turnkey
manufacturing in which we are responsible for procuring materials, which
typically results in our bearing the risk of component price increases. At
various times, there have been shortages of certain electronic components.
Component shortages could result in manufacturing and shipping delays or higher
prices, which could have a material adverse effect on us.
Environmental Compliance Risks
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals. Although we believe
that our facilities are currently in material compliance with applicable
environmental laws, there can be no assurances that violations will not occur.
The costs and penalties that could result from a violation of environmental laws
could materially and adversely affect us.
Volatility of Market Price of Ordinary Shares
The stock market in recent years have experienced significant price and
volume fluctuations that have affected the market prices of technology
companies. Such fluctuations have often been unrelated to or disproportionately
impacted by the operating performance of such companies. The market for the
Ordinary Shares may be subject to similar fluctuations. Factors such as
fluctuations in our operating results, announcements of technological
innovations or events affecting other companies in the electronics industry,
currency fluctuations and general market conditions may have a significant
effect on the market price of the Ordinary Shares.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.01 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June
25, 1999.
18
<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 6, 1999 /s/ MICHAEL E.MARKS
----------------------------
Michael E. Marks
Chief Executive Officer
Date : August 6, 1999 /s/ ROBERT R.B. DYKES
----------------------------
Robert R.B. Dykes
President, Systems Group
and Chief Financial Officer
(principal financial and
accounting officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 25, 1999 (UNAUDITED) AND THE STATEMENTS OF INCOME FOR THE THREE
MONTHS ENDED JUNE 25, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-25-1999
<CASH> 134,573
<SECURITIES> 0
<RECEIVABLES> 266,146
<ALLOWANCES> 5,059
<INVENTORY> 269,034
<CURRENT-ASSETS> 734,616
<PP&E> 514,553
<DEPRECIATION> 120,718
<TOTAL-ASSETS> 1,202,104
<CURRENT-LIABILITIES> 495,374
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<COMMON> 300
<OTHER-SE> 482,538
<TOTAL-LIABILITY-AND-EQUITY> 1,202,104
<SALES> 529,827
<TOTAL-REVENUES> 529,827
<CGS> 483,884
<TOTAL-COSTS> 483,884
<OTHER-EXPENSES> 14
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,440
<INCOME-PRETAX> 20,002
<INCOME-TAX> 2,410
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