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EXHIBIT 99.02
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the supplemental consolidated
financial statements and the related notes included elsewhere in this filing.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements.
ACQUISITIONS, PURCHASES OF FACILITIES AND OTHER STRATEGIC TRANSACTIONS
We have actively pursued mergers and other business acquisitions to expand
our global reach, manufacturing capacity and service offerings and to diversify
and strengthen customer relationships. We have completed several significant
business combinations since the end of fiscal 1999. In April 2000, we acquired
all of the outstanding shares of DII and Palo Alto Products International. In
March 2000, we acquired all of the outstanding shares of PCB Assembly, Inc. In
July 1999, we acquired all of the outstanding shares of Kyrel EMS Oyj. Each of
these acquisitions was accounted for as pooling of interests and our
consolidated financial statements have been restated to reflect the combined
operations of Flextronics, DII, Palo Alto Products International, PCB Assembly
and Kyrel for all periods presented.
In connection with our mergers with DII and Palo Alto Products
International, we expect to record a one-time charge of approximately $180.0
million in the first fiscal quarter of fiscal 2001. We estimate that
approximately $120.0 million of this one-time charge will consist of cash
charges relating to severance payments, investment banking and financial
advisory fees and professional services fees.
Additionally, we have completed a number of other smaller
pooling-of-interests transactions. Prior period statements have not been
restated for these transactions. We have also made a number of purchase
acquisitions of other companies and manufacturing facilities. Our consolidated
financial statements include the operating results of each business from the
date of acquisition. Pro forma results of operations have not been presented
because the effects of these acquisitions were not material on either an
individual or an aggregate basis.
We are currently in preliminary discussions to acquire additional
businesses and facilities. We cannot assure the terms of, or that we will
complete, such acquisitions.
On May 30, 2000, we entered into a strategic alliance for product
manufacturing with Motorola. This alliance provides incentives for Motorola to
purchase over $30.0 billion of products and services from us through December
31, 2005. We anticipate that this relationship will encompass a wide range of
products, including cellular phones, pagers, set-top boxes and infrastructure
equipment, and will involve a broad range of services, including design, PCB
fabrication and assembly, plastics, enclosures and supply chain services. The
relationship is not exclusive and does not require that Motorola purchase any
specific volumes of products or services from us. Our ability to achieve any of
the anticipated benefits of this relationship is subject to a number of risks,
including our ability to provide our services on a competitive basis and to
expand our manufacturing resources, as well as demand for Motorola's products.
In connection with this strategic alliance, Motorola will pay $100.0 million for
an equity instrument that entitles it to acquire 11,000,000 Flextronics ordinary
shares at any time through December 31, 2005 upon meeting targeted purchase
levels or making additional payments to us. The issuance of this equity
instrument will result in a one-time non-cash charge equal to the excess of the
fair value of the equity instrument issued over the $100.0 million proceeds to
be received. As a result, the one-time non-cash charge will be approximately
$290.0 million, offset by a corresponding credit to shareholders' equity in the
first quarter of fiscal 2001. During the term of the strategic alliance, if
Motorola meets targeted purchase levels, no additional payments may be required
by Motorola to acquire 11,000,000 Flextronics ordinary shares. However, there
may be additional non-cash charges of up to $300.0 million over the term of the
strategic alliance.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, some statements
of operations data expressed as a percentage of net sales. The information has
been derived from our supplemental audited consolidated financial statements and
should be read in conjunction with the supplemental consolidated financial
statements and related notes included elsewhere in this filing.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 87.4 89.5 91.2
Unusual charges............................................. 0.4 2.3 --
----- ----- -----
Gross margin.............................................. 12.2 8.2 8.8
Selling, general and administrative......................... 6.5 5.5 4.2
Goodwill and intangible amortization........................ 0.4 0.3 0.2
Acquired in-process research and development................ -- 0.1 --
Merger-related expenses..................................... 0.3 -- 0.1
Interest and other expense, net............................. 0.9 1.2 0.8
----- ----- -----
Income before income taxes................................ 4.1 1.1 3.5
Provision for (benefit from) income taxes................... 1.0 (0.4) 0.4
----- ----- -----
Net income................................................ 3.1% 1.5% 3.1%
===== ===== =====
</TABLE>
Net Sales
We derive our net sales from our wide range of service offerings, including
product design, semiconductor design, printed circuit board assembly and
fabrication, material procurement, inventory management, plastic injection
molding, final system assembly and test, packaging and distribution.
Net sales for fiscal 2000 increased 76.4% to $5.7 billion from $3.3 billion
in fiscal 1999. The increase in sales for fiscal 2000 was primarily the result
of our ability to continue to expand sales to our existing customer base
(primarily our five largest customers) and, to a lesser extent, sales to new
customers. The increase in sales in part reflects the incremental revenue
associated with the purchases of several manufacturing facilities and other
acquisitions during fiscal 2000. In fiscal 2000, our five largest customers
accounted for approximately 44% of net sales, with Ericsson accounting for
approximately 12% and Philips accounting for approximately 10%.
Net sales for fiscal 1999 increased 47.7% to $3.3 billion from $2.2
billion in fiscal 1998. The increase in sales for fiscal 1999 was primarily due
to expanding sales to existing customers and, to a lesser extent, sales to new
customers. In fiscal 1999, our five largest customers accounted for
approximately 36% of net sales, with Philips accounting for approximately 10%.
Gross Profit
Gross profit varies from period to period and is affected by a number of
factors, including product mix, component costs, product life cycles, unit
volumes, startup, expansion and consolidation of manufacturing facilities,
pricing, competition and new product introductions.
Gross margin increased to 8.8% for fiscal 2000 from 8.2% in fiscal 1999.
The increase in gross margin is primarily attributable to $76.2 million of
unusual pre-tax charges during fiscal 1999, of which $70.8 million
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were associated with our exit from semiconductor wafer fabrication. Excluding
these unusual charges, our gross margin decreased from 10.5% to 8.8%. Gross
margin decreased due to several factors, including:
- costs associated with expanding our facilities;
- costs associated with the startup of new customers and new projects,
which typically carry higher levels of underabsorbed manufacturing
overhead costs until the projects reach higher volume production; and
- changes in product mix to higher volume projects and final systems
assembly projects, which typically have a lower gross margin.
Gross margin decreased to 8.2% for fiscal 1999 from 12.2% in fiscal 1998.
The decrease in gross margin is attributable in part to $76.2 million of unusual
pre-tax charges during fiscal 1999, of which $70.8 million was primarily
non-cash and were associated with our exit from semiconductor wafer fabrication.
Excluding unusual charges, our gross margin decreased from 12.6% to 10.5%. Gross
margin decreased due to several factors, including:
- costs associated with expanding our facilities;
- costs associated with the startup of new customers and new projects which
typically carry higher levels of underabsorbed manufacturing overhead
costs until the projects reach higher volume production;
- changes in product mix to higher volume projects and final systems
assembly projects, which typically have a lower gross margin; and
- manufacturing inefficiencies, underutilization, and yield problems at our
semiconductor fabrication facility.
Increased mix of products that have relatively high materials costs as a
percentage of total unit costs can adversely affect our gross margins. We
believe that this and other factors may adversely affect our gross margins, but
we do not expect that this will have a material effect on our income from
operations.
Unusual Charges
During fiscal 1999, we recognized unusual pre-tax charges of $76.2 million,
of which $70.8 million was primarily non-cash and related to the operations of
Orbit Semiconductor. DII purchased Orbit in August 1996, and supported Orbit's
previously-made decision to replace its wafer fabrication facility with a
fabrication facility that would incorporate more advanced technology. The
transition to the new fabrication facility was originally scheduled for
completion during the summer of 1997, but the changeover took longer than
expected and was finally completed in the first quarter of fiscal 1999.
The delayed changeover and the resulting simultaneous operation of both
fabrication facilities put pressure on the work force, and resulted in quality
problems. Compounding these problems, the semiconductor industry was
characterized by excess capacity, which led to increased competition. Further,
many of Orbit's customers migrated faster than expected to a technology that was
not supported by Orbit's fabrication capabilities, requiring Orbit to outsource
more of its manufacturing requirements than originally expected. Based upon
these continued conditions and the future outlook, we took an unusual charge of
$51.2 million in the first quarter of fiscal 1999 to correctly size Orbit's
asset base to allow its recoverability based upon its then current business
size. In fiscal 1999, we decided to sell Orbit's fabrication facility and
outsource semiconductor manufacturing, resulting in an additional unusual charge
of $19.6 million in the fourth quarter of fiscal 1999. The facility was sold in
the first quarter of fiscal 2000.
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The components of the unusual charges recorded in fiscal 1999 are as
follows:
<TABLE>
<CAPTION>
FIRST FOURTH FISCAL NATURE
QUARTER QUARTER 1999 OF CHARGE
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Severance...................................... $ 498 $ 2,371 $ 2,869 cash
Long-lived asset impairment.................... 38,257 16,538 54,795 non-cash
Losses on sales contracts...................... 2,658 3,100 5,758 non-cash
Incremental uncollectible accounts
receivable................................... 900 -- 900 non-cash
Incremental sales returns and allowances....... 1,500 500 2,000 non-cash
Inventory write-downs.......................... 5,500 250 5,750 non-cash
Other exit costs............................... 1,845 2,238 4,083 cash/non-cash
------- ------- -------
Total unusual pre-tax charges................ $51,158 $24,997 $76,155
======= ======= =======
</TABLE>
The following table summarizes the components and activity related to
fiscal 1999 unusual charges:
<TABLE>
<CAPTION>
LONG-LIVED LOSSES ON UNCOLLECTIBLE SALES RETURNS OTHER
ASSET SALES ACCOUNTS AND INVENTORY EXIT
SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES WRITE-DOWNS COSTS TOTAL
--------- ---------- --------- ------------- ------------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1998.................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Activities during the
year:
1999 provision.......... 2,869 54,795 5,758 900 2,000 5,750 4,083 76,155
Cash charges............ (1,969) -- -- -- -- -- (900) (2,869)
Non-cash charges........ -- (54,795) (4,658) (767) (1,500) (5,500) (643) (67,863)
------- -------- ------- ----- ------- ------- ------- --------
Balance at March 31,
1999.................... 900 -- 1,100 133 500 250 2,540 5,423
Activities during the
period:
Cash charges............ (900) -- -- -- -- -- (2,540) (3,440)
Non-cash charges........ -- -- (1,100) (133) (500) (250) -- (1,983)
------- -------- ------- ----- ------- ------- ------- --------
Balance at March 31,
2000.................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ======== ======= ===== ======= ======= ======= ========
</TABLE>
Of the total unusual pre-tax charges, $2.9 million relates to employee
termination costs. As of the first quarter of fiscal 2000, approximately 290
people had been terminated, and another 170 people were terminated when the
fabrication facility was sold. We paid approximately $0.9 million and $2.0
million of employee termination costs during fiscal 2000 and 1999.
The unusual pre-tax charges include $54.8 million for the write-down of
long-lived assets to fair value. Included in the long-lived asset impairment are
charges of $50.7 million, which relate to the fabrication facility, which were
written down to its net realizable value based on its sales price. We kept the
fabrication facility in service until the sale date in the first quarter of
fiscal 2000. We discontinued depreciation expense on the fabrication facility
when we determined that it would be disposed of and its net realizable value was
known. The impaired long-lived assets consisted primarily of machinery and
equipment of $52.4 million, which were written down to a carrying value of $9.0
million and building improvements of $7.3 million, which were written down to a
carrying value of zero. The long-lived asset impairment also includes the write-
off of the remaining goodwill related to Orbit of $0.6 million. The remaining
$3.5 million of asset impairment relates to the write-down to net realizable
value of plant and equipment relating to other facilities we closed during
fiscal 1999.
We entered into some non-cancellable sales contracts to provide
semiconductors to customers at fixed prices. Because we were obligated to
fulfill the terms of the agreements at selling prices which were not sufficient
to cover the cost to produce or acquire these products, a liability for losses
on sales contracts was recorded for the estimated future amount of these losses.
The unusual pre-tax charges include $8.7 million for losses on sales contracts,
incremental amounts of uncollectible accounts receivable, and estimated
incremental costs for sales returns and allowances.
The unusual pre-tax charges also include $9.8 million for losses on
inventory write-downs and other exit costs. We have written off and disposed of
approximately $5.8 million of inventory. The remaining
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$4.0 million relates primarily to the loss on the sale of the fabrication
facility relating to incremental costs and contractual obligations for items
such as lease termination costs, litigation, environmental clean-up costs, and
other costs incurred directly as a result of the exit plan.
We also recognized unusual pre-tax charges of $8.9 million in fiscal 1998
related to costs incurred in closing the Wales, United Kingdom facility. This
charge consisted primarily of the write-off of goodwill and intangible assets of
$3.8 million, $1.6 million for severance payments, $1.1 million for
reimbursement of government grants, and $2.4 million of costs associated with
the disposal of the factory. This closure was a result of our acquisition of
Altatron, which resulted in duplicative facilities in the United Kingdom.
Selling, General and Administrative
Selling, general and administrative expenses, or SG&A, for fiscal 2000
increased 33.6% to $240.3 million from $179.8 million in fiscal 1999, but
decreased as a percentage of net sales to 4.2% in fiscal 2000 from 5.5% in
fiscal 1999. SG&A for fiscal 1999 increased 25.2% to $179.8 million from $143.6
million in fiscal 1998, but decreased as a percentage of net sales to 5.5% in
fiscal 1999 from 6.5% in fiscal 1998. The dollar increase in SG&A for each
fiscal year was primarily due to the continued investment in infrastructure such
as sales, marketing, supply-chain management and other related corporate and
administrative expenses. The dollar increase in SG&A also was due to expenses
related to continued investment in information systems necessary to support the
expansion of our business. Additionally, the dollar increase in SG&A for each
fiscal year was attributable to the incremental expenses associated with the
several manufacturing facility purchases. The decline in SG&A as a percentage of
each fiscal year's net sales reflects increases in our net sales, as well as our
continued focus on controlling our operating expenses.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets amortization in fiscal 2000 increased to
$12.8 million from $9.2 million in fiscal 1999. This increase is attributable to
the acquisitions of ACL, Greatsino and an additional 50% equity interest in FICO
in March 1999, combined with the amortization of debt issue costs associated
with our increased borrowings.
Goodwill and intangible assets amortization in fiscal 1999 increased to
$9.2 million from $8.5 million in fiscal 1998. This increase was primarily
attributable to the amortization of debt issue costs associated with the
increased borrowings used to fund our acquisitions and the amortization of
goodwill associated with our acquisitions completed in late fiscal 1999.
Acquired In-Process Research and Development
Based on an independent valuation of some of the assets of ACL and other
factors, we determined that the purchase price of ACL included in-process
research and development costs, totaling $2.0 million, that had not reached
technological feasibility and had no probable alternative future use.
Accordingly, we wrote-off $2.0 million of in-process research and development in
fiscal 1999.
Merger-Related Expenses
In fiscal 2000, we incurred merger-related expenses of $3.5 million
associated with the pooling-of-interests acquisitions of Kyrel and PCB. The
merger expenses consisted of a transfer tax of $1.7 million, approximately $0.4
million of investment banking fees and approximately $1.4 million of legal and
accounting fees.
In fiscal 1998, we incurred $7.4 million of merger-related expenses
associated with the acquisitions of Neutronics, EnergiPilot, DTM, Altatron and
Conexao. The Neutronics merger expenses included $2.2 million in costs
associated with the cancellation of Neutronics's public offering and $0.9
million in other legal and
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accounting fees. The remaining $4.3 million consisted of $3.1 million in
brokerage and finders fees incurred in the Altatron acquisition and $1.2 million
in legal and accounting fees for all of the fiscal 1998 acquisitions.
In connection with our recently completed mergers with DII and Palo Alto
Products International, we expect to record a one-time charge of approximately
$180.0 million in the first fiscal quarter of fiscal 2001. We estimate that
approximately $120.0 million of this one-time charge will consist of cash
charges relating to severance payments, investment banking and financial
advisory fees and professional services fees.
Interest and other expense, net
Interest and other expense, net increased to $44.9 million in fiscal 2000
from $38.8 million in fiscal 1999. The following table sets forth information
concerning the components of interest and other expense.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Interest expense............................................ $28,675 $44,645 $ 56,481
Interest income............................................. (4,996) (9,129) (20,420)
Foreign exchange loss (gain)................................ (4,137) 5,112 2,705
Equity in earnings of associated companies.................. (1,194) (1,036) --
Minority interest........................................... 356 1,319 1,002
Other expense (income), net................................. (166) (2,152) 5,139
------- ------- --------
Total interest and other expense, net....................... $18,538 $38,759 $ 44,907
======= ======= ========
</TABLE>
Net interest expense increased to $36.1 million in fiscal 2000 from $35.5
million in fiscal 1999. The increase was attributable to increased borrowings
used to fund our acquisitions, purchases of manufacturing facilities, strategic
investments, expansion of various facilities and capital expenditures, offset by
an increase in interest income from our equity offering proceeds invested in
money market funds and corporate debt securities. Fiscal 2000 net interest
expense includes accelerated amortization of approximately $1.0 million in bank
arrangement fees associated with the termination of a credit facility.
Net interest expense increased to $35.5 million in fiscal 1999 from $23.7
million in fiscal 1998. The increase was primarily due to increased bank
borrowings to finance the capital expenditures and expansion of our facilities
in Sweden, Hungary, Mexico and China and the purchases of manufacturing
facilities.
In fiscal 2000, foreign exchange loss decreased to $2.7 million from $5.1
million foreign exchange loss in fiscal 1999. The foreign exchange loss in
fiscal 2000 mainly relates to net non-functional currency monetary liabilities
in Austria, Finland and Hungary. Foreign exchange loss increased to $5.1 million
from a foreign exchange gain of $4.1 million in fiscal 1998. The foreign
exchange loss in fiscal 1999 mainly relates to net non-functional currency
monetary liabilities in Austria, Finland, Brazil and Hungary. The foreign
exchange gain in fiscal 1998 was mainly due to the strengthening of the U.S.
dollar against Asian currencies.
Equity in earnings of associated companies for fiscal 2000 was nil as
compared to $1.0 million in fiscal 1999. This decrease is the result of
increasing our ownership of FICO to 100% by acquiring an additional 50% of its
equity interests in March 1999 and the remaining 10% in March 2000. Prior to the
increased ownership, we accounted for this investment according to the equity
method of accounting, and as a result did not recognize revenue from sales by
FICO, but recognized 40% of the net income or loss of the associated company,
based on our ownership interest.
Equity in earnings of associated companies for fiscal 1999 remained
relatively unchanged at $1.0 million versus $1.2 million in fiscal 1998. The
equity in earnings of associated companies resulted primarily from our previous
40% investment in FICO and, to a lesser extent, certain minority investments of
Neutronics.
Minority interest expense for fiscal 2000 and fiscal 1999 was comprised
primarily of the 8% minority interest in Neutronics and 10% minority interest in
FICO not acquired by us in March 1999.
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Minority interest expense for fiscal 1998 was comprised primarily of the 8%
minority interest in Neutronics not acquired by us in October 1997 and the 4.1%
minority interest in Ecoplast, a subsidiary of Neutronics held by a third party.
Other expense (income), net decreased from $2.1 million of income in fiscal
1999 to $5.1 million of expense in fiscal 2000. The other expense in fiscal 2000
was comprised mainly of a loss on disposal of fixed assets in Hungary and
increased provisions for doubtful accounts offset by compensation received in a
settlement of a claim. The other income in fiscal 1999 comprised mainly of a
gain from the sale of land in Mexico.
Provision for Income Taxes
Some of our subsidiaries have, at various times, been granted tax relief in
their respective countries, resulting in lower income taxes than would otherwise
be the case under ordinary tax rates. See Note 7 of Notes to Supplemental
Consolidated Financial Statements included elsewhere in this filing.
The consolidated effective tax rate for a particular year varies depending
on the mix of earnings, operating loss carryforwards, income tax credits and
changes in previously established valuation allowances for deferred tax assets
based upon management's current analysis of the realizability of these deferred
tax assets. Our consolidated effective tax rate was 10.5% for fiscal year 2000
compared to (32.7)% for fiscal year 1999. Excluding the unusual charges, the
effective income tax rate in fiscal 1999 was 14.9%. The decrease in the
effective tax rate was due primarily to the expansion of operations and increase
in profitability in countries with lower tax rates or a tax holiday, the
recognition of income tax loss and tax credit carryforwards and management's
current assessment of the required valuation allowance.
BACKLOG
Although we obtain firm purchase orders from our customers, OEM customers
typically do not make firm orders for delivery of products more than thirty to
ninety days in advance. We do not believe that the backlog of expected product
sales covered by firm purchase orders is a meaningful measure of future sales
since orders may be rescheduled or canceled.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash and cash equivalents balances totaling
$725.6 million, total bank and other debts amounting to $776.1 million and $63.0
million available for borrowing under our credit facilities subject to
compliance with certain financial ratios. Since March 31, 2000, we have incurred
approximately $120.0 million of one-time cash charges related to the DII merger,
have paid approximately $178.0 million for acquisitions, refinanced DII's 8.50%
Senior Subordinated Notes and have also increased our net working capital. As a
result, our cash and cash equivalents have been reduced significantly and
borrowings under our credit facilities have increased.
Cash used by operating activities was $18.9 million in fiscal 2000 compared
to cash provided by operating activities of $143.8 million and $110.0 million in
fiscal 1999 and 1998, respectively. Cash provided by operating activities
decreased in fiscal 2000 from fiscal 1999 because of increases in accounts
receivable, inventories and other current assets, offset by increases in net
income, depreciation and amortization and accounts payable. Cash provided by
operating activities increased in fiscal 1999 from fiscal 1998 due to an
increase in net income, depreciation and amortization and accounts payable,
partially offset by increases in accounts receivables and inventories.
Accounts receivable, net of allowance for doubtful accounts increased to
$861.8 million at March 31, 2000 from $470.3 million at March 31, 1999. The
increase in accounts receivable was primarily due to an increase of 76.4% in
sales in fiscal 2000.
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Inventories increased to $992.7 million at March 31, 2000 from $324.8
million at March 31, 1999. The increase in inventories was primarily the result
of increased purchases of material to support the growing sales combined with
the inventory acquired in connection with the manufacturing facility purchases
in the fourth quarter of fiscal 2000.
Cash used in investing activities was $789.1 million in fiscal 2000, $449.9
million in fiscal 1999 and $242.8 million in fiscal 1998. Cash used in investing
activities in fiscal 2000 was primarily related to:
- $433.1 million of capital expenditures to purchase equipment and
continued expansion of our manufacturing facilities in Brazil, China,
Hungary, Mexico, United States and Sweden;
- $288.8 million for the manufacturing facilities and related asset
purchases during fiscal 2000;
- $26.8 million for the acquisitions of Vastbright, FICO and other
acquisitions;
- $42.7 million for minority investments in the stocks of various
technology companies in software and related industries; and
- $75.0 million for a loan to another company.
Additionally, we received proceeds of $35.9 million from the sale of
certain subsidiaries and $41.5 million from the sale of property, plant and
equipment.
Cash used in investing activities in fiscal 1999 was primarily related to:
- $343.0 million of capital expenditures to purchase equipment and
continued expansion of our manufacturing facilities in Brazil, China,
Hungary, Mexico, United States and Sweden;
- $76.1 million for the acquisitions of ACL, Greatsino and FICO;
- $24.0 million of contingent purchase price adjustments (earn-out
payments) relating to the acquisition of Astron, which occurred in fiscal
1996; and
- $17.7 million for minority investments in the stocks of various
technology companies in software and related industries.
Cash provided by financing activities was $1,263.7 million in fiscal 2000,
$386.7 million in fiscal 1999 and $273.0 million in fiscal 1998. Cash provided
by financing activities in fiscal 2000 was primarily related to our completion
of three public stock offerings. In February 2000, we sold a total of 8.6
million ordinary shares in a public offering at a price of $59.00 per share
resulting in net proceeds to us of approximately $494.1 million. In October
1999, we sold a total of 13.8 million ordinary shares in a public offering at a
price of $33.84 per share, resulting in net proceeds to us of approximately
$448.9 million. In addition, in October 1999, DII sold a total of 6.9 million
shares of its common stock in a public offering at a price of $33.00 per share,
resulting in net proceeds of approximately $215.7 million. Additionally, cash
provided by financing activities in fiscal 2000 resulted from:
- $97.9 million of net proceeds from bank borrowings, capital leases, and
long-term debts; and
- $26.2 million in proceeds from stock issued under our stock plans; offset
by
- $23.5 million for dividends paid to former shareholders of PCB Assembly
prior to its acquisition by us in March 2000.
Cash provided by financing activities in fiscal 1999 resulted primarily
from:
- our equity offering of 10.8 million ordinary shares in December 1998 with
net proceeds of $194.0 million;
- $197.9 million of net proceeds from bank borrowings, capital leases, and
long-term debts; and
- $18.7 million in proceeds from stock issued under our stock plans; offset
by
- $24.3 million from DII's repurchase of 1.5 million shares of its common
stock.
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In October 1999, we entered into a credit facility with a syndicate of
banks providing for revolving credit borrowings by us and a number of our
subsidiaries of up to $200.0 million. As of March 31, 2000, there were $137.0
million in borrowings outstanding under this facility and the weighted-average
interest rate for these borrowings was 6.87%. We were in compliance with all
loan covenants at March 31, 2000.
On April 3, 2000, we replaced our $200.0 million credit facility and a DII
credit facility of $210.0 million with a $500.0 million credit facility with a
syndicate of domestic and foreign banks. This new credit facility consists of
two separate credit agreements, one providing for up to $150.0 million principal
amount of revolving credit loans to Flextronics and designated subsidiaries and
one providing for up to $350.0 million principal amount of revolving credit
loans to our United States subsidiaries. Both agreements are split equally
between a 364-day facility and a three-year facility. At the maturity of the
364-day facility, outstanding borrowings under that facility may be converted
into one-year term loans. Borrowings under the credit facility bear interest, at
our option, at either the agent's base rate or the LIBOR Rate, as defined in the
credit facility, plus a margin for LIBOR loans ranging between 0.625% and 1.75%,
based on our ratio of debt to EBITDA (earnings before interest, taxes,
depreciation, and amortization). The credit facility is secured by a pledge of
stock of certain of our subsidiaries.
The credit facility contains covenants that restrict our ability to (1)
incur secured debt (other than purchase money debt and capitalized leases), (2)
incur liens on our property, (3) make dispositions of assets, and (4) make
investments in companies that are not our subsidiaries. The credit facility also
prohibits us from paying dividends. The credit facility also requires that we
maintain a maximum ratio of total indebtedness to EBITDA, and maintain a minimum
ratio of EBITDA to the sum of our net interest expense plus the current portion
of our long-term debt and a specified portion of certain other debt.
We plan to increase the size of our credit facility, or enter into
additional credit facilities, to fund anticipated growth in our operations. We
cannot provide any assurances that we will be able to complete any such
transaction, or as to its potential terms. In addition, we maintain smaller
credit facilities for a number of our non-U.S. subsidiaries, typically on an
uncommitted basis. We have also entered into relationships with financial
institutions for the sale of accounts receivable, and for leasing transactions.
On June 6, 2000, we entered into a $50.0 million senior note agreement with
Bank of America, N.A., as lender. We plan to replace the senior note agreement
with a new senior note agreement to increase availability to up to $200.0
million. We intend to use borrowings under these agreements for general
corporate purposes. We cannot provide any assurances that we will be able to
complete this transaction, or as to its potential terms.
In the first fiscal quarter of 2001, we announced our intentions to
purchase the manufacturing facilities and related assets from Ascom Business
Systems AG located in Solothurn, Switzerland and Bosch Telecom GmbH in Pandrup,
Denmark, as well as acquire Uniskor, Ltd, located in Israel. The expected
aggregate cost for the purchases of the manufacturing facilities and business
combination are expected to aggregate $178.0 million.
We anticipate that our working capital requirements and capital
expenditures will continue to increase in order to support the anticipated
continued growth in our operations. In addition to our anticipated manufacturing
facility purchases, we anticipate incurring significant capital expenditures and
operating lease commitments in order to support our anticipated expansions of
our industrial parks in China, Hungary, Mexico, Brazil and Poland. We intend to
continue our acquisition strategy and it is possible that future acquisitions
may be significant. Future liquidity needs will also depend on fluctuations in
levels of inventory, the timing of expenditures by us on new equipment, the
extent to which we utilize operating leases for the new facilities and
equipment, levels of our shipments and changes in volumes of customer orders.
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Historically, we have funded our operations from the proceeds of public
offerings of equity securities and debt offerings, cash and cash equivalents
generated from operations, bank debt, sales of accounts receivable and lease
financings of capital equipment. We recently announced plans to effect an
underwritten public offering of 5,500,000 ordinary shares. We are also planning
a private offering of senior subordinated notes to qualified institutional
buyers for an aggregate principal amount of approximately $450 million, a
portion of which is expected to be denominated in Euros. We cannot assure you
that such offerings will be successful or that such offerings will be completed
on terms favorable to us. We believe that our existing cash balances, together
with anticipated cash flows from operations, borrowings available under our
credit facility and our net proceeds from our planned public equity offering and
private offering of senior subordinated notes will be sufficient to fund our
operations for at least the next twelve months. We anticipate that we will
continue to enter into debt and equity financings, sales of accounts receivable
and lease transactions to fund our acquisitions and anticipated growth. Such
financings and other transactions may not be available on terms acceptable to us
or at all.
Recently Issued Accounting Standards
See Note 2 of Notes to Supplemental Consolidated Financial Statements for
recently issued accounting standards.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
A portion of our exposure to market risk for changes in interest rates
relates to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
As stated in our policy, we protects our invested principal funds by limiting
default risk, market risk and reinvestment risk. We mitigate default risk by
investing in safe and high-credit quality securities and by constantly
positioning our portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer, guarantor or depository. The portfolio
includes only marketable securities with active secondary or resale markets to
ensure portfolio liquidity. Maturities of short-term investments are timed,
whenever possible, to correspond with debt payments and capital investments. As
of March 31, 2000, the outstanding amount in the investment portfolio was $505.7
million, with an average maturity of 33 days and an average return of 5.90%.
We also have exposure to interest rate risk with certain variable rate
lines of credit. These credit lines are located throughout the world and are
based on a spread over that country's inter-bank offering rate. We primarily
enter into debt obligations to support general corporate purposes including
capital expenditures, acquisitions and working capital needs. As of March 31,
2000, the outstanding short-term debt, including capitalized leases was $396.5
million. The following table presents principal cash flows and related interest
rates by fiscal year of maturity for debt obligations. The variable interest
rate for future years assumes the same rate as March 31, 2000.
Expected Fiscal Year of Maturity
(dollars in thousands)
<TABLE>
<CAPTION>
There-
Debt 2001 2002 2003 2004 2005 after Total
---- ------ ------ ------ ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sr. Subordinated Notes -- -- -- -- -- 3000,000 150,000
Average interest rate 8.63% 8.63% 8.63% 8.63% 8.63% 8.63% 8.63%
Fixed Rate 35,226 17,825 12,554 7,018 1,112 6,657 71,793
Average interest rate 5.8% 8.1% 7.5% 7.8% 8.6% 9.0% 7.1%
Variable Rate 361,305 6,493 6,121 11,772 2,752 7,300 395,743
Average interest rate 6.3% 3.8% 4.0% 5.4% 4.1% 7.5% 6.2%
</TABLE>
Foreign Currency Exchange Risk
We transact business in various foreign countries. We manage our foreign
currency exposure by borrowing in various foreign currencies and by entering
into foreign exchange forward contracts only with respect to transaction
exposure. Our policy is to maintain a fully hedged position for all certain,
known transactions exposures. These exposures are primarily, but not limited
to, vendor payments and inter-company balances in currencies other than the
functional unit of the operating entity. We will first evaluate and, to the
extent possible, use non-financial techniques, such as currency of invoice,
leading and lagging payments, receivable management or local borrowing to reduce
transaction exposure before taking steps to minimize remaining exposure with
financial instruments. As of March 31, 2000, the total cumulative outstanding
amounts of forward contracts in French Franc, German Deutsche Mark, Japanese
Yen, Swedish Kronor and United States dollar was approximately $61.1 million.
YEAR 2000 COMPLIANCE
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. We developed a comprehensive Year 2000 project plan to address
the issues associated with programming code in existing computer systems as the
year 2000 approached. While we have not experience material Year 2000 problems
to date, some computer programs may be unable to function and we may experience
errors or interruptions due to the Year 2000 problem. Such an uncorrected
condition could significantly interfere with the conduct of our business, could
result in disruption of our operations, and could subject us to potentially
significant legal liabilities. the issues associated with programming code in
existing computer systems as the year 2000 approached. While we have not
experience material Year 2000 problems to date, some computer programs may be
unable to function and we may experience errors or interruptions due to the Year
2000 problem. Such an uncorrected condition could significantly interfere with
the conduct of our business, could result in disruption of our operations, and
could subject us to potentially significant legal liabilities.
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