UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One) | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended March 31, 2004 | ||
or | ||
o | 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 000-23354
FLEXTRONICS INTERNATIONAL LTD.
Singapore | Not Applicable | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
36 Robinson Road, #18-01City HouseOne Marina Boulevard, #28-00
Singapore 06887018989
(65) 299-88886890 7188
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, S$0.01 Par Value
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. Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo
As of September 30, 20022003, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 517,111,664525,472,319 shares of the Registrant’s ordinary shares outstanding.
As of March 31, 2004 there were 529,944,282 shares of the Registrant’s ordinary shares outstanding, and the aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the NASDAQ National Market on September 30, 2002)March 31, 2004) was approximately $3.5$9.1 billion.
As of May 15, 2003,14, 2004, there were 520,931,534530,548,030 shares of the Registrant’s ordinary shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement, to be delivered to shareholders in connection with the Registrant’s 20032004 Annual General Meeting of Shareholders, are incorporated by reference into Part III of this Report on Form 10-K.
TABLE OF CONTENTS
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PART I
FORWARD LOOKING STATEMENTS
Unless otherwise specifically stated, references in this report to “Flextronics,” “the Company,” “we,” “us,” “our” and similar terms mean Flextronics International Ltd. and its subsidiaries.
Except for historical information contained herein, thecertain matters discussed in this annual report on Form 10-K are, or may be deemed as, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “will,” “may,” “designed to,” “believe,” “should,” “anticipate,” “plan,” “expect,” “intend,” “estimate” and similar expressions identify forward-looking statements, which speak only as of the date of this annual report. These forward-looking statements are contained principally under Item 1, “Business,” and under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include those described below in this section under “Risk Factors.” We undertake no obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.
Unless otherwise specifically stated, references to “Flextronics”, “we”, “us” and similar terms refer to Flextronics International Ltd. and our subsidiaries.
ITEM 1. BUSINESS
OVERVIEW
Flextronics International Ltd. isWe are a leading provider of advanced electronics manufacturing services or EMS,(EMS) to original equipment manufacturers or OEMs, primarily in the handheld electronics devices, information technologies(OEMs) that span a broad range of products and communicationsindustry segments, including cellular phones, printers and imaging, telecom/datacom infrastructure, computer and office automation,medical, automotive, industrial systems and consumer devices industries. We provide design, engineering, manufacturing, logistics, and network services. Our strategy is to provide customers with end-to-end operational services where we take responsibility for engineering, supply chain management, new product introduction and implementation, manufacturing, and logistics management, with the goal of delivering a complete packaged product.
In addition to the assembly of printed circuit boards and complete systems and products, our manufacturing services include the fabrication and assembly of plastic and metal enclosures, the fabrication of printed circuit boards and backplanes (which are printed circuit boards into which other printed circuit boards or cards may be inserted) and the fabrication and assembly of photonics components. Throughout the production process, we offer design and technology services; logistics services, such as materials procurement, inventory management, vendor management, packaging and distribution; and automation of key components of the supply chain through advanced information technologies. We have recently begun providing original design manufacturing, or ODM, services wherein we design and develop products, such as cell phones and related products, using Flextronics owned intellectual property. ODM products are sold to the end user by our OEM customers under their brand name. Finally, we offer after-market services such as repair and warranty services and network and communications installation and maintenance. By working closely with our customers and being highly responsive to their requirements throughout the design, manufacturing and distribution process, we believe that we can be an integral part of their operations, accelerate their time-to-market and time-to-volume production, and reduce their production costs.electronics.
Through a combination of internal growth and acquisitions, we have become one of the world’s largest EMS providers, with revenues of $13.4$14.5 billion in fiscal 2003 withyear 2004 and over 14.512.5 million manufacturing square feet in 2829 countries across five continents as of March 31, 2003.2004. We believe that our size, global presence, broad service offerings and expertise and advanced engineering and design capabilities enable us to win large programs from leading multinational OEMs for the design and manufacture of electronic products.
Our customers include industry leaders such as Alcatel SA, Casio Computer Co., Ltd., Dell Computer Corporation, Ericsson Telecom AB, Hewlett-Packard Company, Microsoft Corporation, Motorola, Inc., Siemens AG, Sony-Ericsson, Telia Companies, and Xerox Corporation.
We provide a complete range of services that are designed to meet our customers’ product requirements throughout their product development life cycle. Our strategy is to provide customers with global end-to-end supply chain services that include design and related engineering, new product introduction, manufacturing, and logistics with the goal of delivering a complete packaged product. We also provide after-market services such as repair and warranty services as well as network and communications installation and maintenance. By working closely with our customers and being highly responsive to their requirements throughout the design and supply chain processes, we believe that we can be an integral part of their operations, accelerate their time-to-market and time-to-volume production, and reduce their product costs.
Our contract design and related engineering services include all aspects of product design including industrial and mechanical design, hardware design, embedded and application software development, semiconductor design, system validation, and test development through which we offer our customers the choice of full product development, system integration, cost reductions and software application development.
In addition to the assembly of printed circuit boards (PCBs) and complete systems and products, our manufacturing services include the fabrication and assembly of plastic and metal enclosures, the fabrication of printed circuit boards and backplanes and the fabrication and assembly of photonics components. We have established an extensive network of manufacturing facilities in the world’s major electronics markets (the Americas, Asia, and Europe) in order to serve the increased outsourcing needs of both
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multinational and regional OEMs. In fiscal 2003,year 2004, production in the Americas, Asia, and Europe represented 22%14%, 36%45% and 42%41% of our net sales, respectively.
We have established fully integrated, high volume industrial parks in low cost regions nearalso combine our customers’ end markets. Our industrial parksdesign and manufacturing services to design, develop and manufacture complete products, such as cellular phones and other consumer-related devices, which are located in Brazil, China, Hungary, Mexicosold by our OEM customers under the OEM’s brand names. This service offering is referred to original design manufacturing (ODM).
INDUSTRY OVERVIEW
Due to the intensely competitive nature of the electronics industry, ever increasing complexity and Poland. These industrial parks provide total supply chain management by co-locating our manufacturing and distribution operations with our suppliers at a single location. This approachsophistication of electronics products, pressure on OEMs to production and distribution is designed to benefit our customers by reducing logistical barriers and costs, increasing flexibility, lowering transportationreduce product costs, and reducing turnaround times. We also have a number of regional manufacturing operations located in the Americas, Asia and Europe. In addition, we have established design and engineering centers and product introduction centers which provide engineering expertise in developing new products and preparing them for high volume manufacturing. For more information about the geographic segments in which we operate, please see Note 12, “Segment Reporting,” of the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.”
INDUSTRY OVERVIEW
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As electronic products grow in technical complexity and experienceincreasingly shorter product lifecycles, in response to customer requirements, the demand for advanced manufacturing capabilities and related services has grown rapidly, leading manyresulting in an increasing number of OEMs in the electronics industry to increasingly utilize EMS providers as part of their business and manufacturing strategies. OutsourcingThis allows OEMs to take advantage of the global design, manufacturing and supply chain management expertise and capital investments of EMS providers, so thatin addition to EMS economies of scale, enabling OEMs mayto concentrate on their core competencies, such as product research and development, marketing and sales. We believe that by developing strategic relationships with EMS providers, OEMs can enhance their competitive position by:
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We believe that the market for electronics manufacturing services will continue to grow, driven largely by the need of OEMs for increasing flexibility to respond to rapidly changing markets and technologies and shortening of product life cycles, as well as forto reduce manufacturing costs. OEMs also need advanced global design, engineering and manufacturing and engineering capabilities as a result ofto meet the increased complexity and shorter life cycles of today’s electronic products.
COMPETITIVE STRENGTHS
Over the past several years, we have focused on the enhancement of our business through the development of our various supply chain services. We believe that the following competitive strengths differentiate us from our competitors and enable us to better serve our customers:
End-to-End Solutions.We offer a comprehensive range of worldwide supply chain services to our customers that simplify the global product development process and provide meaningful time and cost savings. Our strategy is to provide customers with global end-to-end supply chain services that include design and related engineering, new product introduction, manufacturing, and logistics with the goal of delivering a complete packaged product. We also provide after-market services such as repair and warranty services as well as network and communications installation and maintenance. Our capabilities also help our customers improve product quality, manufacturability, performance, and reduce costs. As part of our service offering, we provide complete supply chain analysis on existing manufacturing strategies and recommend an optimal supply chain solution to our customers utilizing our global service footprint.
Extensive Design and Engineering Services.We provide contract design services and a range of related engineering services which include all aspects of product design, such as industrial and mechanical design, hardware design, embedded and application software development, semiconductor design, system validation and test development through which we offer our customers the choice of full product development, system integration, cost reductions and software application development.
We also combine our design and manufacturing services to design, develop and manufacture complete products, such as cellular phones and other consumer-related devices, which are sold by our OEM customers under the OEM’s brand names.
We provide these design and engineering services through our global team of over 2,500 product design engineers.
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Global Presence.We have established an extensive network of design, manufacturing and logistics facilities in the world’s major electronics markets (the Americas, Asia and Europe) to serve the increased outsourcing needs of both multinational and regional OEMs. Our extensive global network of manufacturing facilities in 29 countries gives us the flexibility to transition customer projects to any of our locations.
Low-Cost Manufacturing Services.In order to provide customers with the lowest cost, we have invested in manufacturing facilities in low-cost regions. As of March 31, 2004, greater than 70% of our manufacturing capacity is in low-cost locations such as Mexico, Brazil, Poland, Hungary, China, Malaysia and other parts of Asia. Currently, we believe we have the leadership position in our industry with regard to low-cost production capabilities. A number of OEM customers are continuing to relocate their production to these locations, where our role in the local supply chain can reduce total product costs for them.
As part of our low-cost manufacturing strategy, we have also established fully integrated, high-volume Industrial Parks in Brazil, China, Hungary, Mexico and Poland. These campuses provide total supply chain management by co-locating our manufacturing and logistics operations with our suppliers at a single low-cost location. This is designed to benefit our customers by increasing flexibility while reducing distribution barriers, turnaround times, and overall transportation and product costs.
STRATEGY
Our objective is to provide customers with the ability to outsource the design and development of a complete product on a global basis,basis. To achieve this goal, we offer a complete product. We intend to achieve this objective by taking responsibility for the design, engineering, assembly, integration, test, supply chain management and logistics management, whichsolution that can be utilized in whole or in part. The solution is designed to acceleratemeet our customers’ time-to-market and time-to-volume production. To achieve this objective,objectives. Our overall strategy consists of the following:
Expand Our Original Design Manufacturing Services.We have recently expanded our design and manufacturing service offerings to include ODM services, where we design, develop and manufacture complete products that are sold by our OEM customers under their brand names. This expanded service offering accelerates our customers’ time-to-market and time-to-volume production for their products. As a result of increased customer demand and recent acquisitions, we are actively pursuing ODM projects, focusing primarily on consumer related devices, such as cellular phones and other consumer-related products. We are utilizing our established internal design and manufacturing resources, as well as increasing our research and development capabilities, expanding our engineering resources, and by developing, licensing and acquiring technology.
Capitalize on Our Industrial Park Concept.Our Industrial Parks are self-contained facilities that co-locate our manufacturing and logistics operations with our suppliers in low-cost regions. The industrial park strategy is based on minimizing logistics costs throughout the supply chain and production cycle time by co-locating a number of suppliers in one low-cost location. Each park incorporates the manufacture of printed circuit boards, components, cables, plastics and metal parts needed for product assembly. This approach to production and logistics is designed to benefit our customers by reducing distribution barriers and costs, improving communications, increasing flexibility, lowering transportation costs and reducing turnaround times. Our Industrial Parks enhance our total supply chain management, while providing a low-cost solution for our customers. We have strategically established large Industrial Parks in Brazil, China, Hungary, Mexico and Poland.
Streamline Business Processes Through Information Technologies.We incorporate advanced information technology to streamline business processes for our customers. For example, we use innovative Internet supply chain solutions to improve order placement, tracking and fulfillment. We are also able to provide our customers with online access to product design and manufacturing process information. Integrating our information systems with those of our customers allows us to assist our customers in improving their communications and relationships across their supply chain.
Pursue Strategic Opportunities.We have actively pursued acquisitions and purchases of manufacturing facilities to expand our worldwide operations, broaden our service offerings, diversify and strengthen our customer relationships, and enhance our management depth. By enhancing our capability to provide a wide range of related electronics design and manufacturing services to a global market that is increasingly dependent on outsourcing providers, these acquisitions and strategic transactions have enabled us to enhance our competitive position as a leading provider of comprehensive outsourcing technology solutions. We will continue to implement the following strategies:selectively pursue strategic transactions that we believe will further our business objectives.
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We cannot assure that our strategies can be successfully implemented or will reduce the risks associated with our business.
SERVICES
We offer a broad range of integrated services providingto provide customers with a total design, manufacturing and logistics solution that takes a product from its initial design through volume production, test, distribution and into post-sales service and support. Our integrated services include the following:include:
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Electronic System Design: we provide complete electrical design for |
Semiconductor Design: we design and deliver digital, analog and mixed-signal integrated circuits with resources that |
Optical Design: we offer a comprehensive set of resources to provide design, test, industrialization and manufacture of custom photonic components, optical modules and subsystems. Our offering includes active and optical component package capability, design of passive optical components, development of optical modules and control electronics and complex optical and electrical integration. | |||||
• | PCB Design: we provide | ||||
• | Software Development: we design |
5 We work with our customers to optimize product design to drive efficiencies in both the product development and the production processes to reduce time–to-market and overall product costs.
manufacturing. These centers coordinate and integrate our worldwide design, prototype, test development practices and, in some locations, provide dedicated production lines for prototypes.
Printed Circuit Board and Backplane Fabrication.Printed circuit boards and backplanes are platforms that are made of laminated materials and provide interconnection for integrated circuits and other electronic components. Backplanes also provide interconnection for other printed circuit boards. Semiconductor designs are currently so complex that they often require printed circuit boards with many layers of narrow, densely spaced wiring. The manufacture of complex multilayer interconnect products often requires the use of sophisticated circuit interconnections between layers, referred to as vias, and adherence to strict electrical characteristics to maintain consistent circuit transmission speeds. Our production of microvias, by laser ablation and our surface laminar circuit technology, a photo generated microvia capability, provides our customers with proven high volume production capacityWe are an industry leader in both of the major high density interconnect process solutions. We manufacture high density, complexhigh-density, multilayer printed circuit board manufacturing. We manufacture printed circuit boards and backplanes on a low-volume, quick-turn basis, as well as on a high-volume, production basis. Our quick-turn prototype service allows us to provide small test quantities to customers’ product development groups in as fewlittle as 24 hours. Our range of services enables us to respond to our customers’ demands for an accelerated transition from prototype to volume production. We have printed circuit board and backplane fabrication service capabilities on fourthree continents, (North America,including South America, Europe and Asia).Asia.
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Systems Assembly and Manufacturing.Our assembly and manufacturing operations, which reflect the majority of our revenues, include printed circuit board assembly, assembly of systems and subsystems that incorporate printed circuit boards and complex electromechanical components. A substantial portion of our net sales is derived from the manufacture and assembly of complete products. We often assemble printed circuit board assemblies that we manufacture with printed circuit boards and custom electronic enclosures that we also produce. We employ just-in-time, ship-to-stock and ship-to-line programs, continuous flow manufacturing, demand flow processes, and statistical process controls. As OEMs seek to provide greater functionality in smaller products, they increasingly require more sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and our experience and expertise in innovative miniaturization, packaging and interconnect technologies, such as chip scale packaging, chip-on-board and ball grid array, enable us to offer a variety of advanced manufacturing solutions. In addition, we have significant expertiseextensive experience in the manufacture of wireless communications products employing radio frequency technology.
We offer a comprehensive set of custom electronic enclosures and related products and services worldwide. Our services include design, manufacturing and integration of electronics packaging systems from custom enclosure systems, power and thermal subsystems to interconnect subsystems, cabling and cases. In addition to the typical sheet metal and plastic fabrication, we assist in the design of electronic packaging systems that protect sensitive electronics and enhance functionality. Our enclosure design services focus on functionality, manufacturability and testing. These services are integrated with our other assembly and manufacturing services to provide our customers with greater responsiveness, improved logistics and overall improved supply chain management.
We also offer computer-aided testing of assembled printed circuit boards, systems and subsystems, which contributes significantly to our ability to deliver high-quality products on a consistent basis. Our test capabilities include management defect analysis, in-circuit teststesting and functional tests.testing. In addition, we also provide environmental stress tests of board orand system assemblies.
We provide materialsOur manufacturing and assembly services benefit from our inventory management expertise and volume procurement information technology solutionscapabilities, which contribute to cost reductions and logistics services.reduce total cycle time. Materials procurement and management consist of the planning, purchasing, expediting and warehousing of components and materials used in the manufacturing process. Our inventory management expertise and volume procurement capabilities contribute to cost reductions and reduce total cycle time. Our industrial parks includeIndustrial Parks house providers of many of the custom components that we use to reduce material and transportation costs, simplify logistics and facilitate inventory management. We also use sophisticated automated manufacturing resources planning systems and enhanced electronic data interchange capabilities to ensure inventory control and optimization. Through our manufacturing resources planning system, we have real-time visibility on material availability and real-time tracking of work in process. We also utilize electronic data interchange with our customers and suppliers to implement a variety of supply chain management programs. Electronic data interchange allows customers to share demand and product forecasts and deliver purchase orders while also assisting suppliers with just-in-time delivery and supplier-managed inventory.
We offer our customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with customers’ inventory requirements. Increasingly, we ship products directly into customers’ distribution channels or directly to the end-user. We believe that this service can provide our customers with a more comprehensive solution and enable them to be more responsive to market demands.
We also provide design, industrialization, supply chain management and manufacturing services for the optical component and optical networking industries. We offer a broad range of photonic packaging design and industrialization services to assist in bringing products from schematics to shipment while meeting our customerscustomers’ time-to-market objectives. In addition, we offer advanced process development and volume manufacturing of active and passive photonic devices.
Logistics.We provide global logistics services and turnkey supply chain solutions for our customers. Our worldwide logistics services include freight forwarding, warehousing/inventory management and outbound/e-commerce solutions through our global supply chain network. We leverage new technologies such as XML links to factories, extranet-based management, vendor managed inventory and build-to-order programs, to simultaneously connect suppliers, manufacturing operations and OEM customers. By joining these logistics solutions with worldwide manufacturing operations and total supply chain management, we can significantly reduce costs and can create tightly integrated processes and facilities worldwide. Moreover, the combination of these capabilities allows us to react quickly to demand signals from our customers worldwide.
6Reverse Logistics.We provide a range of after-market services, including product repair, re-manufacturing and maintenance at repair depots, logistics and parts management, returns processing, warehousing, and engineering change management. We support our customer by providing software updates and design modifications that may be necessary to reduce costs or design-in alternative components due to component obsolescence or unavailability. Manufacturing support involves test engineering support and
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manufacturability enhancements. We also assist with failure product analysis, warranty and repair, and field service engineering activities.
Network Services.We offer network and communications installation and maintenance services to OEMs in the data and telecommunications industries. Our services include project planning, documentation, engineering, production, installation and commissioning of equipment. We have expertise in the installation of public and mobile telecommunications systems, exchanges, corporate networks and peripheral equipment. |
CUSTOMERS
Our customers consistinclude many of a select group of OEMs primarily in the handheld electronics devices, information technologies and communications infrastructure and computer and office automation and consumer devices industries. Within these industries, our strategy is to establish relationships withworld’s leading companies that seek to outsource significant production volumes of their products.technology companies. We have focused on buildingestablishing long-term relationships with theseour customers and have been successful in expanding our relationshiprelationships to includeincorporate additional product lines and services. In fiscal 2003,year 2004, our ten largest customers accounted for approximately 67%64% of our net sales. Our largest customers during fiscal 2003year 2004 were Hewlett-Packard and Sony-Ericsson, each accounting for approximately 12% and 11% of net sales, respectively.sales. No other customer accounted for more than 10% of net sales in fiscal 2003.year 2004.
The following table lists in alphabetical order a representative sample of our largest customers in fiscal 2003year 2004 and the products of those customers for which we provide manufacturing services:
Customer | ||
End Products | ||
Alcatel SA | Cellular phones, accessories and telecommunications infrastructure | |
Casio Computer Co., Ltd. | Consumer electronics products | |
Dell Computer Corporation | Desktop personal computers and servers | |
Ericsson Telecom AB | Business telecommunications systems and GSM infrastructure | |
Hewlett-Packard Company | Inkjet printers and storage devices | |
Microsoft Corporation | Computer peripherals and consumer electronics gaming products | |
Motorola, Inc. | Cellular phones | |
Siemens AG | Cellular phones and telecommunications infrastructure | |
Sony-Ericsson | Cellular phones | |
Telia Companies | Network and communications design, installation and | |
maintenance | ||
Xerox Corporation | Office equipment and components |
SALES AND MARKETING
We achieve worldwide sales coverage through a direct sales force, which focuses on generating new accounts, and through program managers, who are responsible for managing relationships with existing customers and making follow-on sales. In addition to our sales force, our executive staff playsmanagement focuses a significant amount of attention to expanding existing, and developing new, customer relationships, thus playing an integral role in our sales efforts.
BACKLOG
Although we obtain firm purchase orders from our customers, OEM customers typically do not make firm orders for delivery of products more than 30 to 90 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 orderscustomers may be rescheduledreschedule or canceled.cancel orders.
COMPETITION
The EMS industry is extremely competitive and includes hundreds ofmany companies, several of whom have achieved substantial market share. We compete with different companies, depending on the type of service or geographic area. We compete against numerous domestic and foreign EMS providers, andas well as our current and prospective customers, alsowho evaluate our capabilities against the meritsin light of internal production. Accordingtheir own. In recent years, we have also begun to International Data Corporation, or IDC, approximately 59% of the EMS industry’s revenues in calendar 2002 were generated from the top five EMS companies — us, Celestica, Inc., Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation. Based on revenues for calendar 2002, we were the largest of these companies. We also face competition from Taiwanese ODM suppliers, who have a substantial share of the global market for information technology hardware production, primarily related to
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notebook and desktop computers and personal computer motherboards, as well as provide consumer products and other technology manufacturing services.
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We compete with different companies depending on the type of our competitors may have greater design, engineering, manufacturing, financialservice we are providing or other resources than us. As competitors increase the scale of their operations, they may increase their ability to realize economies of scale, to reduce their prices and to more effectively meet the needs of large OEMs.geographic area in which an activity is taking place. We believe that the principal competitive factors in the segments of the EMS industry in which we operate are cost, technological capabilities, responsiveness and flexibility, delivery cycles, location of facilities, product quality, design capabilities, and range of services available. Failure to satisfy any of the foregoing requirements could seriously harm our business.
ENVIRONMENTAL REGULATION
Our operations are subject to certain federal, state and locala number of regulatory requirements relating to the use, storage, discharge, and disposal of hazardous chemicals used during theirthe manufacturing processes. We believe that our operations are currently in compliance in all material respects with applicable regulations and do not believe that costs of compliance with these laws and regulations will have a material effect on our capital expenditures, operating results, or competitive position. Currently we have no commitments with environmental authorities regarding any compliance-related matters.
We engage an environmental consulting firm to assist us in the evaluation of environmental liabilities of our ongoing operations, historical disposal activities and closed sites in order to establish appropriate accruals in our financial statements. We determine the amount of our accruals for environmental matters by analyzing and estimating the range of possible costs in light of information currently available. The imposition of more stringent standards or requirements under environmental laws or regulations, the results of future testing and analysis undertaken by us at our operating facilities, or a determination that we are potentially responsible for the release of hazardous substances at other sites could result in expenditures in excess of amounts currently estimated to be required for such matters. We do not believe that any of our potential or possible liabilities for environmental matters are material. ThereHowever, there can be no assurance that additional environmental matters will not arise in the future or that costs will not be incurred with respect to sites as to which no problem is currently known.
EMPLOYEES
As of March 31, 2003,2004, our global workforce totaled approximately 95,00082,000 employees. We have never experienced a work stoppage or strike, and we believe that our employee relations are good.
Our success depends to a large extent upon the continued services of key managerial and technical employees. The loss of such personnel could seriously harm our business, results of operations, prospects and debt service ability. To date, we have not experienced significant difficulties in attracting or retaining such personnel. Although we are not aware that any of our key personnel currently intend to terminate their employment, we cannot assure you ofguarantee their future services.
INTELLECTUAL PROPERTY
We own or have licensed various United States and foreign patents related to a variety of technologies. For certain of our proprietary processes, we rely on trade secret protection. We also have registered our corporate name and several other trademarks and service marks that we use in our business in the United States and other countries throughout the world.
Although we believe that our intellectual property assets and licenses are sufficient for the operation of our business as we currently conduct it, we cannot assure you that third parties will not assert infringement claims against us in the future. In addition, Flextronics is increasingly providing design, engineering and ODM services to its customers. As a consequence of these activities, we are required to address and allocate the ownership and responsibility for intellectual property in our customer relationships to a greater extent than in our manufacturing and assembly businesses. If a third party were to make an assertion regarding the ownership or right to use intellectual property, we would be required to either enter into licensing arrangements or to resolve the issue through litigation. We cannot assure you that such license rights would be available to us on commercially acceptable terms, if at all, or that any such litigation would be resolved in our favor. Additionally, we believe that litigation could be lengthy and costly and could materially harm our financial condition regardless of the outcome. We may also be required to incur substantial costs to redesign a product or re-perform design services.
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ADDITIONAL INFORMATION
Our Internet address is http://www.flextronics.com. We make available through our Internet website ourthe Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We were incorporated in the Republic of Singapore in May 1990. Our principal corporate office is located at 36 Robinson Road, #18-01, City House,One Marina Boulevard, #28-00, Singapore 06887.018989. Our U.S. corporate headquarters is located at 2090 Fortune Drive, San Jose, California, 95131.
RISK FACTORS
If we do not effectively manage effectively changes in our operations, our business may be harmed.
WeIn the last ten years, we have experienced significant growth in our business asthrough a resultcombination of internal growth and acquisitions. Since the beginning of fiscal 2001, ourOur global workforce has more than doubled in size.size since the beginning of fiscal year 2001. During that time, we have also reduced our workforce at some locations and closed certain facilities in connection with our restructuring activities. These changes are likely to considerablyhave placed considerable strain on our management control systems and resources, including decision support, accounting management, information systems and facilities. If we do not continue to improve our financial and management controls, reporting systems and procedures to manage our employees effectively and to expand our facilities, our business could be harmed.
We plan to continue to transition manufacturing to lower cost locations. We plan to increase our manufacturing capacity in our low-cost regions by expanding our facilities and adding new equipment. This expansion involves significant risks, including, but not limited to, the following:
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• | we may not be able to attract and retain the management personnel and skilled employees necessary to support expanded operations; | |||
• | we may not efficiently and effectively integrate new operations and information systems, expand our existing operations and manage geographically dispersed operations; | |||
• | we may incur cost overruns; | |||
• | we may incur charges related to our expansion activities; | |||
• | we may encounter construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems that could harm our growth and our ability to meet customers’ delivery schedules; and | |||
• | we may not be able to obtain funds for this expansion, and we may not be able to obtain loans or operating leases with attractive terms. |
In addition, we expect to incur new fixed operating expenses associated with our expansion efforts that will increase our cost of sales, including increases in depreciation expense and rental expense. If our revenues do not increase sufficiently to offset these expenses, our operating results could be seriously harmed. Our transition to low-cost manufacturing regions has contributed to our incurring significant unusualrestructuring and other charges that have resulted from reducing our workforce and capacity at higher-cost locations. We recognized restructuring charges of approximately $540.3 million in fiscal year 2004 and $297.0 million in fiscal year 2003 associated with the consolidation and closure of several manufacturing facilities, and impairment of certain long-lived assets at several manufacturing facilities. We may be required to take additional unusual charges in the future as a result of these activities, whichactivities. We cannot assure you as to the timing or amount of any future restructuring charges. If we are required to take additional restructuring charges in the future, it could have a material adverse impact on operating results, financial position and cash flows.
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We depend on the handheld electronics devices, computer and office automation, communications and information technologies infrastructure and consumer devices industries whichthat continually produce technologically advanced products with short life cycles; our inability to continually manufacture such products on a cost-effective basis could harm our business.
DuringFor fiscal 2003,year 2004, we derived approximately 31%derived:
• | approximately 33% of our revenues from customers in the handheld devices industry, whose products include cellular phones, pagers and personal digital assistants; | |||
• | approximately 25% of our revenues from customers in the computers and office automation industry, whose products include copiers, scanners, graphic cards, desktop and notebook computers, and peripheral devices such as printers and projectors; | |||
• | approximately 15% of our revenues from providers of communications infrastructure, whose products include equipment for optical networks, cellular base stations, radio frequency devices, telephone exchange and access switches, and broadband devices; | |||
• | approximately 11% of our revenues from the consumer devices industry, whose products include set-top boxes, home entertainment equipment, cameras and home appliances; | |||
• | approximately 7% of our revenues from providers of information technologies infrastructure, whose products include servers, workstations, storage systems, mainframes, hubs and routers; and | |||
• | approximately 9% of our revenues |
Factors affecting these industries in general could seriously harm our customers and, as a result, us. These factors include:
• | rapid changes in technology, which result in short product life cycles; | |||
• | seasonality of demand for our customers’ products; | |||
• | the inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; and | |||
• | recessionary periods in our customers’ markets. |
Our customers have and may continue to cancel their orders, change production quantities or locations, or delay production.
As a provider of electronics manufacturing services, we must provide increasingly rapid product turnaround for our customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we often experience reduced lead-times in customer orders. Customers cancel their orders, change production quantities and delay production for a number of reasons. The uncertainUncertain economic conditions and geopolitical situation hasconditions have resulted, and may continue to result, in some of our customers delaying the delivery of some of the products we manufacture for them, and placing purchase orders for lower volumes of products than previously anticipated. Cancellations, reductions or delays by a significant customer or by a group of customers have harmed, and may continue to harm, our results of operations by reducing the volumes of products we manufactured by us for thethese customers and delivered in that period, as well asby causing a delay in the repayment of our expenditures for inventory in preparation for customer orders and lower asset utilization resulting in lower gross margins. In addition, customers often require that manufacturing of their products be transitioned from one facility to another to achieve cost and other objectives. Such transfers result in inefficiencies and costs due to resulting excess capacity and overhead at one facility and capacity constraints and related stresses at the other.
In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer
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requirements. The short-term nature of our customers’ commitments and the rapid changes in demand for their products reduce our ability to estimate accurately future customer requirements. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity. We often increase staffing, increase capacity and incur other expenses to meet the anticipated demand of our customers, which cause reductions in our gross margins if customer orders continue to be delayedare or cancelled. Anticipated orders may not materialize, and delivery schedules may be deferred as a result of changes in demand for our customers’ products. On
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occasion, customers require rapid increases in production, which stress our resources and reduce margins. Although we have increased our manufacturing capacity, and plan further increases, we may not have sufficient capacity at any given time to meet our customers’ demands. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand harms our gross profit and operating income.
Our operating results vary significantly.significantly from period to period.
We experience significant fluctuations in our results of operations. Some of the principal factors that contribute to these fluctuations are:
• | changes in demand for our services; | |||
• | our effectiveness in managing manufacturing processes and costs in order to decrease manufacturing expenses; | |||
• | the mix of the types of manufacturing services we provide, as high-volume and low-complexity manufacturing services typically have lower gross margins than lower volume and more complex services; | |||
• | changes in the cost and availability of labor and components, which often occur in the electronics manufacturing industry and which affect our margins and our ability to meet delivery schedules; | |||
• | the degree to which we are able to utilize our available manufacturing capacity; | |||
• | our ability to manage the timing of our component purchases so that components are available when needed for production, while avoiding the risks of purchasing inventory in excess of immediate production needs; and | |||
• | local conditions and events that may affect our production volumes, such as labor conditions, political instability and local | |||
• | changes in demand in our customers’ end markets. |
Two of our significant end-markets are the handheld electronics devices market and the consumer devices market. These markets exhibit particular strength toward the end of the calendar year in connection with the holiday season. As a result, we have historically experienced stronger revenues in our third fiscal quarter as compared to our other fiscal quarters.
Our increased original design manufacturing (ODM) activity may reduce our profitability.
We have recently begun providing original design manufacturing, or ODM activities, whereinservices, where we design and develop products that are sold to the end user by ourwe then manufacture for OEM customers under their brand name.customers. We are actively pursuing ODM projects, focusing primarily on consumer related devices, such as cellcellular phones and related products, which requires that we make investments in research and development, technology licensing, test and tooling equipment, patent applications, facility expansion, and recruitment. Our
Although we enter into contracts with our ODM customers, we may design and develop products for these customers prior to receiving a purchase order or other firm commitment from them. We are required to make substantial investments in the resources necessary to design and develop these products, and no revenue may be generated from these efforts if our customers do not approve the designs in a timely manner or at all, or if they do not then purchase anticipated levels of products. In addition, ODM activities often require that we purchase inventory for initial production runs before we have a purchase commitment from a customer. Even after we have a contract with a customer with respect to an ODM product, these contracts may allow the customer to delay or cancel deliveries and may not obligate the customer to any volume of purchases. These contracts can generally be terminated by either party on short notice, and therenotice. There is no assurance that we will be able to maintain our current level of ODM activity at all or for an extended period of time. Due to the initial costs of investing in the resources necessary for this business, our increased ODM activities have adversely affected our profitability and mayduring fiscal year 2004. We continue to do somake investments in our ODM services, which could adversely affect our profitability during fiscal 2004.year 2005 and beyond. Further, the products we design must satisfy safety and regulatory standards and some products must also receive government certifications. If we fail to obtain these approvals or certifications on a timely basis, we would be unable to sell these products, which would harm our sales, profitability and reputation.
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The success of our ODM activity depends on our ability to protect our intellectual property rights.
CustomersWe retain certain intellectual property rights to our ODM products. As the level of our ODM activity is increasing, the extent to which we rely on rights to intellectual property incorporated into products is increasing. Despite our efforts, we cannot be certain that the measures we have taken to prevent unauthorized use of our technology will be successful. If we are unable to protect our intellectual property rights, this could reduce or eliminate the competitive advantages of our proprietary technology, which would harm our business.
Intellectual property infringement claims against our customers or us could harm our business.
Our ODM products often face competition from the products of OEMs, many of whom may own the intellectual property rights underlying those products. As a result, we could become subject to claims of intellectual property infringement as the number of our competitors increases. In addition, customers for our ODM services typically require that we indemnify them against the risk of intellectual property infringement. If any claims are brought against us or our customers for such infringement, whether or not these have merit, we could be required to expend significant resources in defense of such claims. In the event of such an infringement claim, we may be required to spend a significant amount of money to develop non-infringing alternatives or obtain licenses. We may not be successful in developing such alternatives or obtaining such a license on reasonable terms or at all. Further, the
If our ODM products are subject to design defects, our business may be damaged and we may incur significant fees.
In our contracts with ODM customers, we generally provide them with a warranty against defects in our designs. If an ODM product or component that we design must satisfy safetyis found to be defective in its design, this may lead to increased warranty claims. Although we have product liability insurance coverage, it is expensive and regulatory standardsmay not be available on acceptable terms, in sufficient amounts, or at all. A successful product liability claim in excess of our insurance coverage or any material claim for which insurance coverage was denied or limited and some products must also receive government certifications. If we fail to timely obtain these approvals or certifications, we would be unable to sell these products,for which would harmindemnification was not available could have a material adverse effect on our sales, profitabilitybusiness, results of operations and reputation.financial condition.
We are exposed to intangible asset risk.
We have a substantial amount of intangible assets. These intangible assets are generally attributable to acquisitions and represent the difference between the purchase price paid for the acquired businesses and the fair value of the net tangible assets of the acquired businesses. We are required to evaluate goodwill and other intangibles for impairment on at least an annual basis, and whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could
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result in material charges that could be adverse to our operating results and financial position.
We may encounter difficulties with acquisitions, which could harm our business.
Since the beginning of fiscal 2001, weWe have completed over 40numerous acquisitions of businesses and we expect to continue to acquire additional businesses in the future. We are currently in preliminary discussions with respect to potential acquisitions and strategic customer transactions, however, weincluding the potential transaction with Nortel Networks and the definitive agreement for the acquisition of the majority ownership stake in Hughes Software Systems described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.” We do not have any other definitive agreements or commitments to make any material acquisitions or strategic customer transactions.transactions other than our agreement to acquire outstanding shares of Hughes Software Systems Limited announced in June 2004. Any future acquisitions may require additional debt or equity financing, or the issuance of shares in the transaction.financing. This could increase our leverage or be dilutive to our existing shareholders. We may not be able to complete acquisitions or strategic customer transactions in the future to the same extent as in the past, or at all.
In addition, acquisitions involve numerous risks and challenges, including:
• | difficulties in integrating acquired businesses and operations; | |||
• | diversion of management’s attention from the normal operation of our business; | |||
• | potential loss of key employees and customers of the acquired companies; | |||
• | difficulties in managing and integrating operations in geographically dispersed locations; | |||
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• | lack of experience operating in the geographic market or industry sector of the acquired business; | |||
• | increases in our expenses and working capital requirements, which reduce our return on invested capital; and | |||
• | exposure to unanticipated contingent liabilities of acquired companies. |
Any of theseThese and other factors have harmed, and in the future could harm, our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business and operating results.
Our strategic relationships with major customers create risks.
Over the past several years, we have completed numerous strategic transactions with OEM customers, including, among others, The Orbiant Group, Xerox, Alcatel, Casio and Ericsson.Ericsson, and we are currently in discussions with respect to a potential strategic transaction with Nortel Networks as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.” Under these arrangements, we generally acquire inventory, equipment and other assets from the OEM, and lease or acquire their manufacturing facilities, while simultaneously entering into multi-year supply agreements for the production of their products. We intend to continue to pursue these OEM divestiture transactions in the future. There is strong competition among EMS companies for these transactions, and this competition may increase. These transactions have contributed to a significant portion of our revenue growth, and if we fail to complete similar transactions in the future, our revenue growth could be harmed. As part of these arrangements, we typically enter into manufacturing services agreements with these OEMs. These agreements generally do not require any minimum volumes of purchases by the OEM, and the actual volume of purchases may be less than anticipated. The arrangements entered into with divesting OEMs typically involve many risks, including the following:
• | we may need to pay a purchase price to the divesting OEMs that exceeds the value we may realize from the future business of the OEM; | |||
• | the integration | |||
• | we, rather than the divesting OEM, bear the risk of excess capacity at the facility; | |||
• | we may not achieve anticipated cost reductions and efficiencies at the facility; | |||
• | we may be unable to meet the expectations of the OEM as to volume, product quality, timeliness and cost reductions; and | |||
• | if demand for the |
�� As a result of these and other risks, we have been, and in the future may be, unable to achieve anticipated levels of profitability under these arrangements. In addition, these strategic arrangements and they have not, and in the future may not, result in any material revenues or contribute positively to our earnings per share.
We depend on the continuing trend of outsourcing by OEMs.
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Future growth in our revenue depends on new outsourcing opportunities in which we assume additional manufacturing and supply chain management responsibilities from OEMs. To the extent that these opportunities are not available, either because OEMs decide to perform these functions internally or because they use other providers of these services, our future growth would be limited.
The majority of our sales come from a small number of customers; if we lose any of these customers, our sales could decline significantly.
Sales to our ten largest customers have represented a significant percentage of our net sales in recent periods. Our ten largest customers accounted for approximately 67%64% and 64%67% of net sales in fiscal 2003year 2004 and fiscal 2002,year 2003, respectively. Our largest customers during fiscal 2003year 2004 were Hewlett-Packard and Sony-Ericsson, each accounting for approximately 12% and 11% of net sales, respectively. Our largest customer during fiscal 2002 was Ericsson, accounting for approximately 15% of net sales. No other customer accounted for more than 10% of net sales in fiscal 2003 andyear 2004 or fiscal 2002.year 2003.
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Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, would seriously harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues could be harmed.
Our industry is extremely competitive.
The EMS industry is extremely competitive and includes hundreds ofmany companies, several of which have achieved substantial market share. Current and prospective customers also evaluate our capabilities against the merits of internal production.manufacturing products themselves. Some of our competitors may have greater design, manufacturing, financial or other resources than us.we do. Additionally, we face competition from Taiwanese ODM suppliers, who have a substantial share of the global market for information technology hardware production, primarily related to notebook and desktop computers and personal computer motherboards, as well as providein addition to providing consumer products and other technology manufacturing services.
In recent years, many participants in the industry, including us, have substantially expanded their manufacturing capacity. The overall demand for electronics manufacturing services has decreased in recent years, resulting in increased capacity and substantial pricing pressures, which hashave harmed our operating results. Certain sectors of the EMS industry are currently experiencinghave experienced increased price competition, and if thiswe experience such increased level of competition should continue,in the future, our revenues and gross margin may continue to be adversely affected.
We may be adversely affected by shortages of required electronic components.
At various times, there have been shortages of some of the electronic components that we use, as a result of strong demand for those components or problems experienced by suppliers. These unanticipated component shortages have resulted in curtailed production or delays in production, which prevented us from making scheduled shipments to customers in the past and may do so in the future. Our inability to make scheduled shipments could cause usthe Company to experience a reduction in our sales, and an increase in ourinventory levels and costs, and could adversely affect our relationshiprelationships with existing customers as well asand prospective customers. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. As a result, component shortages could adversely affect our operating results for a particular period due to the resulting revenue shortfall and increased manufacturing or component costs.
Our customers may be adversely affected by rapid technological change.
Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvement in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers’ products become obsolete or fail to gain widespread commercial acceptance, our business could be adversely affected.
We are subject to the risk of increased income taxes.
We have structured our operations in a manner designed to maximize income in countries where:
• | tax incentives have been extended to encourage foreign investment; or | |||
• | income tax rates are low. |
We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect.effects. We cannot determine in advance the extent to
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which some jurisdictions may require us to pay taxes or make payments in lieu of taxes.
Several countries in which we are located allow for tax holidays or provide other tax incentives to attract and retain business. These tax incentives expire over various periods from 2004 to 2010 and are subject to certain conditions with which we expect to comply. We have obtained tax holidays or other incentives where available, primarily in China, Malaysia and Hungary. In these three countries, we generated an aggregate of approximately $5.8$8.4 billion of our total revenues for the fiscal year ended March 31, 2003.2004. Our
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taxes could increase if certain tax holidays or incentives are not renewed upon expiration, or tax rates applicable to us in such jurisdictions are otherwise increased. In addition, further acquisitions of businesses may cause our effective tax rate to increase.
We conduct operations in a number of countries and are subject to risks of international operations.
The geographical distances between the Americas, Asia and Europe create a number of logistical and communications challenges for us.the Company. These challenges include managing operations across multiple time zones, directing the manufacture and delivery of products across distances, coordinating procurement of components and raw materials and their delivery to multiple locations, and coordinating the activities and decisions of the core management team, which is based in a number of different countries. Facilities in several different locations may be involved at different stages of the production of a single product, leading to additional logistical difficulties.
Because our manufacturing operations are located in a number of countries throughout the Americas, Asia and Europe, we are subject to the risks of changes in economic and political conditions in those countries, including:
• | fluctuations in the value of local currencies; | |||
• | labor unrest and difficulties in staffing; | |||
• | longer payment cycles; | |||
• | cultural differences; | |||
• | increases in duties and taxation levied on our products; | |||
• | imposition of restrictions on currency conversion or the transfer of funds; | |||
• | limitations on imports or exports of components or assembled products, or other travel restrictions; | |||
• | expropriation of private enterprises; and | |||
• | a potential reversal of current favorable policies encouraging foreign investment or foreign trade by our host countries. |
The attractiveness of our services to our U.S. customers can be affected by changes in U.S. trade policies, such as most favored nation status and trade preferences for some Asian countries. In addition, some countries in which we operate, such as Brazil, Hungary, Mexico, Malaysia and Poland, have experienced periods of slow or negative growth, high inflation, significant currency devaluations or limited availability of foreign exchange. Furthermore, in countries such as China and Mexico, governmental authorities exercise significant influence over many aspects of the economy, and their actions could have a significant effect on us. Finally, we could be seriously harmed by inadequate infrastructure, including lack of adequate power and water supplies, transportation, raw materials and parts in countries in which we operate.
The recent outbreak of severe acute respiratory syndrome, or SARS, that began in China, Hong Kong and Singapore may have a negative impact on our operations. Our operations may be impacted by a number of SARS-related factors, including, but not limited to, disruptions at our manufacturing operations located in China, reduced demand for our customers’ products and increased supply chain costs.
We are exposed to fluctuations in foreign currency exchange rates.
We transact business in various foreign countries. As a result, we are exposed to fluctuations in foreign currencies. We have currency exposure arising from both sales and purchases denominated in currencies other than the functional currencies of our entities. Volatility in the exchange rates between the foreign currencies and the functional currencies of our entities could seriously harm our business, operating results and financial condition. We try to manage our foreign currency exposure by borrowing in various foreign currencies and by entering into foreign exchange forward contracts. Mainly, we enter into foreign exchange forward contracts intended to reduce the short-term impact of foreign currency fluctuations on current assets and liabilities denominatedenominated in foreign currency. These exposures are primarily, but not limited to, cash, receivables, payables and inter-company balances, in currencies other than the functional currency 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 transactions exposure before taking steps to minimize remaining exposure with financial instruments. Foreign exchange forward contracts intended to hedge forecasted transactions are treated as cash flow hedges and such contracts generally expire within three months. The credit risk of these forward contracts if minimalis minimized since the contracts are with large
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financial institutions. The gains and losses on forward contracts generally offset the gains and losses on the assets, liabilities and transactions hedged.
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We depend on our executive officers.officers and skilled management personnel.
Our success depends to a large extent upon the continued services of our executive officers. Generally our employees are not bound by employment or non-competition agreements, and we cannot assure you that we will retain our executive officers and other key employees. We could be seriously harmed by the loss of any of our executive officers. In addition, in order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to grow could be harmed. In addition, in connection with expanding our ODM activities, we must attract and retain experienced design engineers. Although we and a number of companies in our industry have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our failure to recruit and retain experienced design engineers could limit the growth of our ODM activities, which could adversely affect our business.
We are subject to environmental compliance risks.
We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. In addition, we are responsible for cleanup of contamination at some of our current and former manufacturing facilities and at some third party sites. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances, we may be subject to additional remediation liability. Further, additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. Currently unexpected costs that we may incur with respect to environmental matters may result in additional loss contingencies, the quantification of which cannot be determined at this time.
The market price of our ordinary shares is volatile.
The stock market in recent years has experienced significant price and volume fluctuations that have affected the market prices of technology companies. These fluctuations have often been unrelated to or disproportionately impacted by the operating performance of these companies. The market for our ordinary shares may be subject to similar fluctuations. Factors such as fluctuations in our operating results, announcements of technological innovations or events affecting other companies in the electronics industry, currency fluctuations and general market conditions may cause the market price of our ordinary shares to decline.
We are a defendant in several securities class action lawsuits and this litigation could harm our business whether or not determined adversely to us.
Between June and August 2002, Flextronics and certain of our officers and directors were named as defendants in several securities class action lawsuits that seek an unspecified amount of damages, which were filed in the Untied States District Court for the Southern District of New York. These actions, which were filed on behalf of those who purchased, or otherwise acquired, Flextronics’ ordinary shares between October 2,January 18, 2001 and June 4, 2002, including those who purchased ordinary shares in our secondary offerings on February 1, 2001 and January 7, 2002. These actions generally allege that, during this period, the defendants made misstatements to the investing public about the financial condition and prospects of Flextronics. After the Court consolidated these actions, plaintiffs amended their allegations to change the class period to January 18, 2001 to June 4, 2002. They also added claims on behalf of plaintiffs who purchased shares pursuant to, or traceable to, the secondary offerings of Flextronics on February 1, 2001 and January 7, 2002. In addition, plaintiffs added claims against the underwriters involved in those offerings. On April 23, 2003, the Court entered an order transferring these lawsuits to the United States District Court for the Northern District of California. On July 16, 2003, Flextronics filed a motion to dismiss on behalf of the Company and its officers and directors named as defendants. On November 17, 2003, the Court entered an order granting defendants’ motion to dismiss without prejudice. On January 28, 2004, plaintiffs filed an amended complaint. Flextronics’ motion to dismiss the amended complaint was filed on March 10, 2004.
These actions seek unspecified damages. Although we believe that In May 2004, the plaintiffs’parties reached a tentative settlement of all claims lack meritin the lawsuit and intendthe defendants withdrew their motion to vigorously defend these lawsuits, we are unabledismiss. The settlement would be funded entirely by funds from Flextronics’s Officers’ and Directors’ insurance. The settlement agreement is subject to predictnegotiation and documentation of a formal stipulation of settlement, as well as Court approval. If the ultimate outcome of these lawsuits. Theresettlement is not finalized, there can be no assurance we will be successful in defending the lawsuits, and, if we are unsuccessful, we may be subject to significant damages. Even if we arewere to be successful, defending the lawsuits may be expensive and may divert management’s attention from other business concerns and harm our business.
It may be difficult to effect services of process within the United States on us or to enforce civil liabilities against us.
We are incorporated in Singapore under the Companies Act, Chapter 50 of Singapore, or Singapore Companies Act. Some of our directors and officers reside outside the United States. A substantial portion of the assets of Flextronics International Ltd. are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon us or to enforce against us in United States courts, judgments obtained in such courts predicated upon the civil liability provisions of the federal securities laws of the United States. Judgments of United States courts based upon the civil liability provisions of the federal securities laws of the United States are not directly enforceable in Singapore courts and there can be no assurance as to whether Singapore courts will enter judgments in original actions brought in Singapore courts based solely upon the civil liability provisions of the federal securities laws of the United States.
ITEM 2. PROPERTIES
Our facilities consist of a global network of industrial parks, regional manufacturing operations, design and engineering and product introduction centers, providing over 14.512.5 million square feet of manufacturing capacity as of March 31, 20032004 (excluding
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facilities we have identified for closure, as described in Note 9, “Unusual“Restructuring and Other Charges” in the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data”). We own facilities with approximately 1.71.0 million square feet in the Americas, 3.73.9 million square feet in Asia and 3.62.6 million square feet in Europe. We lease facilities with approximately 1.51.4 million square feet in the Americas, 1.42.4 million square feet in Asia and 2.61.3 million square feet in Europe.
Our facilities include large industrial parks, ranging in size from approximately 300,000400,000 to 1.52.5 million square feet, in Brazil, China, Hungary, Mexico and Poland, and we have commenced construction on an additional industrial park in China.Poland. We also have regional manufacturing operations, ranging in size from approximately 50,000 to 500,000 square feet, in Austria, Brazil, China, Denmark, Finland, France, Germany, Hungary, India, Israel, Italy, Japan, Malaysia, Mexico, Netherlands, Norway, Singapore, Sweden,
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Switzerland, Taiwan, Thailand and the United States. We also have smaller design and engineering centers and product introduction centers at a number of locations in the world’s major electronics markets.
Our facilities are well maintained and suitable for the operations conducted. The productive capacity of our plants is adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS
Between June and August 2002, Flextronics and certain of our officers and directors were named as defendants in several securities class action lawsuits that seek an unspecified amount of damages, which were filed in the United States District Court for the Southern District of New York. These actions, which were filed on behalf of those who purchased, or otherwise acquired, Flextronics’ ordinary shares between October 2,January 18, 2001 and June 4, 2002, including those who purchased ordinary shares in our secondary offerings on February 1, 2001 and January 7, 2002. These actions generally allege that, during this period, the defendants made misstatements to the investing public about the financial condition and prospects of Flextronics. After the Court consolidated these actions, plaintiffs amended their allegations to change the class period to January 18, 2001 to June 4, 2002. They also added claims on behalf of plaintiffs who purchased shares pursuant to, or traceable to, the secondary offerings of Flextronics on February 1, 2001 and January 7, 2002. In addition, plaintiffs added claims against the underwriters involved in those offerings. On April 23, 2003, the Court entered an order transferring these lawsuits to the United States District Court for the Northern District of California. On July 16, 2003, Flextronics filed a motion to dismiss on behalf of the Company and its officers and directors named as defendants. On November 17, 2003, the Court entered an order granting defendants’ motion to dismiss without prejudice. On January 28, 2004, plaintiffs filed an amended complaint. Flextronics’ motion to dismiss the amended complaint was filed on March 10, 2004.
These actions seek unspecified damages. Although we believe thatIn May 2004, the plaintiffs’parties reached a tentative settlement of all claims lack meritin the lawsuit and intendthe defendants withdrew their motion to vigorously defend these lawsuits, we are unabledismiss. The settlement would be funded entirely by funds from Flextronics Officers’ and Directors’ insurance. The settlement agreement is subject to predictnegotiation and documentation of a formal stipulation of settlement, as well as Court approval. If the ultimate outcome of these lawsuits. Theresettlement is not finalized, there can be no assurance we will be successful in defending thesethe lawsuits, and, if we are unsuccessful, we may be subject to significant damages. Even if we arewere to be successful, defending the lawsuits may be expensive and may divert management’s attention from other business concerns and harm our business.
We are also subject to legal proceedings, claims, and litigation arising in the ordinary course of business. We defend ourselves vigorously against any such claims. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF ORDINARY SHARES
Our ordinary shares are quoted on the NASDAQ National Market under the symbol “FLEX”. The following table sets forth the high and low per share sales prices for our ordinary shares since the beginning of fiscal 2002year 2003 as reported on the NASDAQ National Market.
High | Low | ||||||||
FISCAL YEAR ENDED MARCH 31, 2003 | |||||||||
First Quarter | $ | 18.98 | $ | 7.11 | |||||
Second Quarter | 10.40 | 5.85 | |||||||
Third Quarter | 12.04 | 5.47 | |||||||
Fourth Quarter | 9.90 | 7.15 | |||||||
FISCAL YEAR ENDED MARCH 31, 2002 | |||||||||
First Quarter | $ | 33.10 | $ | 12.38 | |||||
Second Quarter | 29.44 | 12.53 | |||||||
Third Quarter | 29.99 | 15.27 | |||||||
Fourth Quarter | 27.65 | 13.96 |
All share prices have been adjusted to give effect to the two-for-one stock split effected as a bonus issue (the Singapore equivalent of a stock dividend), distributed to our shareholders on October 16, 2000.
High | Low | |||||||
Fiscal Year Ended March 31, 2004 | ||||||||
Fourth Quarter | $ | 19.31 | $ | 14.80 | ||||
Third Quarter | 16.00 | 13.87 | ||||||
Second Quarter. | 15.82 | 10.34 | ||||||
First Quarter | 11.56 | 8.27 | ||||||
Fiscal Year Ended March 31, 2003 | ||||||||
Fourth Quarter | $ | 9.90 | $ | 7.15 | ||||
Third Quarter | 12.04 | 5.47 | ||||||
Second Quarter. | 10.40 | 5.85 | ||||||
First Quarter. | 18.98 | 7.11 |
As of May 15, 200314, 2004 there were 3,9683,598 holders of record of our ordinary shares and the closing sale price of the ordinary shares as reported on the NASDAQ National Market was $9.74$15.78 per share.
DIVIDENDS
Since inception, we have not declared or paid any cash dividends on our ordinary shares (exclusive of dividends paid by pooled entities prior to acquisition), and our bank credit facility prohibits the payment of cash dividends without the lenders’ prior consent. The
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terms of our outstanding senior subordinated notes also restrict our ability to pay cash dividends. For more information, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
RECENT SALE OF UNREGISTERED SECURITIES19
On March 20, 2003, we issued a $200.0 million zero coupon, zero yield, convertible junior subordinated note maturing in 2008 in a private placement transaction with funds associated with Silver Lake Partners. The notes are callable by us after three years and do not provide a put option prior to maturity. The notes are convertible into our ordinary shares at a conversion price of $10.50 per share and are payable in cash or stock at maturity, at our option. The sale and issuance of the note was determined to be exempt from registration under Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. The purchasers of the notes are sophisticated investors who have access to the kind of information that registration would disclose as well as the ability to understand the risk of their investment.
TAXATION
This summary of Singapore and U.S. tax considerations is based on current law and is provided for general information. The discussion does not purport to deal with all aspects of taxation that may be relevant to particular shareholders in light of their investment or tax circumstances, or to certain types of shareholders (including insurance companies, tax-exempt organizations, regulated investment companies, financial institutions or broker-dealers, and shareholders that are not U.S. shareholders subject to special treatment under the U.S. federal income tax laws). Shareholders should consult their own tax advisors regarding the particular tax consequences to such shareholders of any investment in our ordinary shares.
Income Taxation Under Singapore Law
Under current provisions of the Income Tax Act, Chapter 134 of Singapore, corporate profits are taxed at a rate equal to 22%. In addition, 75% of up to the first S$10,000, and 50% of up to the next S$90,000 of a company’s chargeable income (other than Singapore dividends received by the company) will be exempt from corporate tax.
Singapore does not impose withholding tax on dividends. Prior to January 1, 2003, Singapore applied a full imputation system to all dividends (other than exempt dividends) paid by a Singapore resident company. With effect from January 1, 2003, tax on corporate profits is final and dividends paid by a Singapore resident company will be tax exempt in the hands of a shareholder, whether or not the shareholder is a company or an individual and whether or not the shareholder is a Singapore resident. However, if the resident company was previously under the imputation system and has unutilized dividend franking credits as at December 31, 2002, there will be a 5-year transition period from January 1, 2003 to December 31, 2007, during which a company may remain on the imputation system. Dividends declared by non-resident companies are not subject to the imputation system.
Under current Singapore tax law there is no tax on capital gains, and, thus, any profits from the disposal of shares are not taxable in Singapore unless the vendor is regarded as carrying on a trade in shares in Singapore (in which case, the disposal profits would be taxable as trade profits rather than capital gains).
There is no stamp duty payable in respect of the holding of shares. No duty is payable on the acquisition of new shares. Where existing shares are acquired in Singapore, stamp duty is payable on the instrument of transfer of the shares at the rate of S$2 for every S$1,000 of the market value of the shares. The stamp duty is borne by the purchaser unless there is an agreement to the contrary. Where the instrument of transfer is executed outside of Singapore, stamp duty must be paid if the instrument of transfer is received in Singapore. Under Article 22 (iii) of our Articles of Association, our directors are authorized to refuse to register a transfer unless the instrument of transfer has been duly stamped.
Income Taxation Under United States Law
Individual shareholders that are U.S. citizens or resident aliens (as defined in Section 7701(b) of the Internal Revenue Code of 1986), corporations or partnerships or other entities created or organized under the laws of the United States, or any political subdivision thereof, an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust which is subject to the supervision of a court within the United States and the control of section 7701(b)(30) of the Internal Revenue Code will, upon the sale or exchange of a share, recognize gain or loss for U.S. income tax purposes in an amount equal to the difference between the amount realized and the U.S. shareholder’s tax basis in such a share. If paid in currency other than U.S. dollars, certain currency translation rules will apply to determine the U.S. dollar amount realized. Such gain or loss will be capital gain or loss if the share was a capital asset in the hands of the U.S. shareholder and generally will be short-term capital gain or loss if the share has been held for less than one year, and long-term capital gain or loss if the share has been held for one year or longer. If a U.S. shareholder receives any currency other than U.S. dollars on the sale of a share, such U.S. shareholder may recognize ordinary income or loss as a result of currency fluctuations between the date of such sale and the date such sale proceeds are converted into U.S. dollars.
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U.S. shareholders will be required to report as income for U.S. income tax purposes the amount of any dividend received from us to the extent paid out of our current or accumulated earnings and profits, as determined under current U.S. income tax principles. If over 50% of our stock (by vote or value) were owned by U.S. shareholders who individually held 10% or more of our voting stock, such U.S. shareholders potentially would be required to include in income a portion or all of their pro rata share of our and our non-U.S. subsidiaries’ earnings and profits. Certain attribution rules apply in this regard. If 50% or more of our assets during a taxable year produced or were held for the production of passive income, as defined in section 1297(b) of the Code (e.g., certain forms of dividends, interest and royalties), or 75% or more of our gross income for a taxable year was passive income, adverse U.S. tax consequences could result to U.S. shareholders. As of March 31, 2003, we were not aware of any U.S. shareholder who individually held 10% or more of our voting stock.
Shareholders that are not U.S. shareholders will not be required to report for U.S. federal income tax purposes the amount of any dividend received from us. Non-U.S. shareholders, upon the sale or exchange of a share, would not be required to recognize gain or loss for U.S. federal income tax purposes.
Estate Taxation
In the case of an individual who is not domiciled in Singapore and who died before January 1, 2002, a Singapore estate tax is imposed on the value of all movable and immovable properties situated in Singapore. Our shares are considered to be situated in Singapore. Thus, an individual shareholder who is not domiciled in Singapore at the time of his or her death will be subject to Singapore estate tax on the value of any such shares held by the individual upon the individual’s death. Such a shareholder will be required to pay Singapore estate tax to the extent that the value of the shares (or in aggregate with any other assets subject to Singapore estate tax) exceeds S$600,000. Any such excess will be taxed at a rate equal to 5% on the first S$12,000,000 of the individual’s Singapore chargeable assets and thereafter at a rate equal to 10%. If the individual who is not domiciled in Singapore, dies on or after January 1, 2002, no estate duty is payable on his moveable property in Singapore.
An individual shareholder who is a U.S. citizen or resident (for U.S. estate tax purposes) also will have the value of the shares included in the individual’s gross estate for U.S. estate tax purposes. An individual shareholder generally will be entitled to a tax credit against the shareholder’s U.S. estate tax to the extent the individual shareholder actually pays Singapore estate tax on the value of the shares; however, such tax credit is generally limited to the percentage of the U.S. estate tax attributable to the inclusion of the value of the shares included in the shareholder’s gross estate for U.S. estate tax purposes, adjusted further by a pro rata apportionment of available exemptions. Individuals who are domiciled in Singapore should consult their own tax advisors regarding the Singapore estate tax consequences of their investment.
ITEM 6. SELECTED FINANCIAL DATA
These historical results are not necessarily indicative of the results to be expected in the future. The following table is qualified by reference to and should be read in conjunction with the consolidated financial statements, related notes thereto and other financial data included elsewhere herein.
Fiscal Year Ended March 31, | |||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: | |||||||||||||||||||||
Net sales | $ | 13,378,699 | $ | 13,104,847 | $ | 12,109,699 | $ | 6,959,122 | $ | 3,952,786 | |||||||||||
Cost of sales | 12,650,402 | 12,224,969 | 11,127,896 | 6,335,242 | 3,512,229 | ||||||||||||||||
Unusual charges (1) | 266,244 | 464,391 | 510,495 | 7,519 | 77,286 | ||||||||||||||||
Gross profit | 462,053 | 415,487 | 471,308 | 616,361 | 363,271 | ||||||||||||||||
Selling, general and administrative | 456,199 | 443,586 | 430,109 | 319,952 | 240,512 | ||||||||||||||||
Goodwill and other intangibles amortization | 22,146 | 12,615 | 63,541 | 41,326 | 29,156 | ||||||||||||||||
Unusual charges (1) | 38,167 | 110,035 | 462,847 | 3,523 | 2,000 | ||||||||||||||||
Interest and other expense, net | 92,780 | 91,853 | 67,115 | 69,912 | 52,234 | ||||||||||||||||
Income (loss) before income taxes | (147,239 | ) | (242,602 | ) | (552,304 | ) | 181,648 | 39,369 | |||||||||||||
Provision for (benefit from) income taxes | (63,786 | ) | (88,854 | ) | (106,285 | ) | 23,080 | (11,634 | ) | ||||||||||||
Net income (loss) | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | $ | 158,568 | $ | 51,003 | ||||||||
Diluted earnings (loss) per share (2) | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | $ | 0.42 | $ | 0.17 | ||||||||
Shares used in computing diluted per share amounts (2) | 517,198 | 489,553 | 441,991 | 383,119 | 329,352 | ||||||||||||||||
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As of March 31, | ||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
CONSOLIDATED BALANCE SHEETS DATA: | ||||||||||||||||||||
Working capital | $ | 897,741 | $ | 1,394,883 | $ | 1,914,741 | $ | 1,161,535 | $ | 384,084 | ||||||||||
Total assets | 8,394,104 | 8,644,699 | 7,571,655 | 5,134,943 | 2,783,707 | |||||||||||||||
Total long-term debt and capital lease obligations, excluding current portion | 1,049,853 | 863,293 | 917,313 | 645,267 | 789,471 | |||||||||||||||
Shareholders’ equity | 4,542,020 | 4,455,496 | 4,030,361 | 2,376,628 | 915,305 |
Fiscal Year Ended March 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||
Net sales | $ | 14,530,416 | $ | 13,378,699 | $ | 13,104,847 | $ | 12,109,699 | $ | 6,959,122 | ||||||||||
Cost of sales | 13,704,576 | 12,650,402 | 12,224,969 | 11,127,896 | 6,335,242 | |||||||||||||||
Restructuring and other charges (1) | 477,305 | 266,244 | 464,391 | 510,495 | 7,519 | |||||||||||||||
Gross profit | 348,535 | 462,053 | 415,487 | 471,308 | 616,361 | |||||||||||||||
Selling, general and administrative expenses | 487,287 | 456,199 | 443,586 | 430,109 | 319,952 | |||||||||||||||
Intangibles amortization | 36,715 | 22,146 | 12,615 | 63,541 | 41,326 | |||||||||||||||
Restructuring and other charges (1) | 63,043 | 38,167 | 110,035 | 462,847 | 3,523 | |||||||||||||||
Interest and other expense, net | 77,700 | 92,780 | 91,853 | 67,115 | 69,912 | |||||||||||||||
Loss on extinguishment of debt | 103,909 | — | — | — | — | |||||||||||||||
Income (loss) before income taxes | (420,119 | ) | (147,239 | ) | (242,602 | ) | (552,304 | ) | 181,648 | |||||||||||
Provision (benefit) from income taxes | (67,741 | ) | (63,786 | ) | (88,854 | ) | (106,285 | ) | 23,080 | |||||||||||
Net income (loss) | (352,378 | ) | (83,453 | ) | (153,748 | ) | (446,019 | ) | 158,568 | |||||||||||
Diluted earnings (loss) per share (2) | $ | (0.67 | ) | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | $ | 0.42 | ||||||
Shares used in computing diluted earnings (loss) per share amounts | 525,318 | 517,198 | 489,553 | 441,991 | 383,119 | |||||||||||||||
As of March 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
CONSOLIDATED BALANCE SHEETS DATA: | ||||||||||||||||||||
Working capital | $ | 884,816 | $ | 897,741 | $ | 1,394,883 | $ | 1,914,741 | $ | 1,161,535 | ||||||||||
Total assets | 9,583,937 | 8,394,104 | 8,644,699 | 7,571,655 | 5,134,943 | |||||||||||||||
Total long-term debt and capital lease obligations, excluding current portion | 1,624,261 | 1,049,853 | 863,293 | 917,313 | 645,267 | |||||||||||||||
Shareholders’ equity | 4,367,213 | 4,542,020 | 4,455,496 | 4,030,361 | 2,376,628 |
(1) | We recognized | |
We recognized | ||
We recognized | ||
(2) | We completed a stock split during |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-K with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section. Accordingly, our future results could differ materially from historical results or from those discussed or implied by these forward-looking statements.
OVERVIEW
We are a leading provider of advanced electronics manufacturing services (EMS) to original equipment manufacturers (OEMs) that span a broad range of products and industry segments, including cellular phones, printers and imaging, telecom/datacom infrastructure, medical, automotive, industrial systems and consumer electronics.
We provide a complete range of services that are designed to meet our customers’ product requirements throughout their product development life cycle. Our strategy is to provide customers with global end-to-end supply chain services that include design and related engineering, new product introduction, manufacturing, and logistics with the goal of delivering a complete product solution. We also provide after-market services such as repair and warranty services, as well as network and communications installation and maintenance. By working closely with our customers and being highly responsive to their requirements throughout the design and supply chain process, we believe that we can be an integral part of their operations, accelerate their time-to-market and time-to-volume production, and reduce their product costs.
We have become one of the world’s largest EMS providers, with revenues of $14.5 billion in fiscal year 2004 and over 12.5 million manufacturing square feet in 29 countries across five continents as of March 31, 2004. We believe that our size, global presence, broad service offerings and expertise, and advanced engineering and design capabilities enable us to win large programs from leading multinational OEMs for the design and manufacture of electronic products.
Our revenue is generated from sales of our services to our customers, which include industry leaders such as Alcatel SA, Casio Computer Co., Ltd., Dell Computer Corporation, Ericsson Telecom AB, Hewlett-Packard Company, Microsoft Corporation, Motorola, Inc., Siemens AG, Sony-Ericsson, Telia Companies, and Xerox Corporation. A majority of our sales come from a small number of customers. Our ten largest customers accounted for approximately 64% and 67% of net sales in fiscal year 2004 and fiscal year 2003, respectively. Our largest customers during fiscal year 2004 were Hewlett-Packard and Sony-Ericsson, each accounting for approximately 12% of net sales, respectively. No other customer accounted for more than 10% of net sales in fiscal year 2004 or fiscal year 2003. For any particular customer, we may be engaged in programs to manufacture a number of products, or may be manufacturing a single product or product line. Our gross profit is affected by a number of factors, including the number and size of new manufacturing programs, product mix, capacity utilization and the expansion and consolidation of manufacturing facilities. Typically, a new program will contribute relatively less to our gross profit in its early stages, as manufacturing volumes are low and result in inefficiencies and unabsorbed manufacturing overhead costs. As volumes increase, the contribution to gross profit and to profit margin often increases due to the ability to leverage improved utilization rates and overhead absorption. In addition, different programs can contribute different gross margins depending on factors such as the types of services involved, location of production, size of the program, complexity of the product, and level of material costs associated with the associated products. As a result, our gross margin varies from period to period.
Over the past several years, we have completed numerous strategic transactions with OEM customers, including, among others, Xerox, Alcatel, Casio and Ericsson. These strategic transactions have expanded our customer base, provided end-market diversification, and contributed to a significant portion of our revenue growth. Under these arrangements, we generally acquire inventory, equipment and other assets from the OEM, and lease or acquire their manufacturing facilities, while simultaneously entering into multi-year supply agreements for the production of their products. These agreements generally do not require any minimum volumes of purchases by the OEM. We intend to continue to pursue these OEM divestiture transactions in the future.
We are in continuing discussions with Nortel Networks regarding the potential divestiture to us of nearly all of Nortel’s optical, wireless and enterprise manufacturing operations and related supply chain activities, also referred to as “system houses”. It is currently anticipated that Nortel’s
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system house activities in Montreal and Calgary (Canada); Campinas (Brazil); Monkstown (North Ireland) and Chateaudon (France) would be transferred to Flextronics. We would assume all the systems integration activities, including the final assembly, testing and repair operations along with related activities, including the management of the supply chain and related suppliers for these locations. We anticipate making cash payments to Nortel in excess of $500 million over a period of from nine to fifteen months to acquire certain inventory and equipment, plus an unspecified amount for intangible assets. In connection with the arrangement to acquire certain assets from Nortel, we expect to enter into a multi-year supply agreement for the production of certain products for Nortel. The completion of this transaction is subject to the ability of the parties to successfully negotiate and then consummate a transaction on mutually agreeable terms.
On June 8, 2004, Flextronics, The DIRECTV Group, Inc., and Hughes Network Systems, Inc. (a wholly-owned subsidiary of DIRECTV) announced that we have signed an agreement whereby Flextronics will acquire Hughes Network Systems’ majority ownership stake of fifty-five percent (55%) in Hughes Software Systems, or HSS, a provider of software products and services to telecom infrastructure companies.
HSS reported revenue of Rs3,604 million (approximately US$80 million) and net income of Rs769 million (approximately US$17 million) in its fiscal year ended March 31, 2004.
Flextronics will pay Rs547 per share, with total cash consideration paid to Hughes Network Systems of approximately US$226.5 million. Subject to regulatory approval, the transaction is expected to close no later than October 2004. Pursuant to Indian securities regulations, Flextronics is required to make an open offer on or about June 14, 2004 to purchase an additional twenty percent (20%) of the shares outstanding. There is no obligation for shareholders to accept this open offer and there is no assurance that any shares will be offered for sale to Flextronics. The approximate total purchase price of US$226.5 million to be paid to Hughes Network Systems, along with the open offer of US$82.5 million, assuming an offer price of Rs547.93, is required to be funded by Flextronics on the date the open offer is initiated (on or about June 14, 2004).
The completion of the Nortel and HSS transactions are subject to the ability of the parties to successfully negotiate and then consummate a transaction on mutually agreeable terms and involves risks and uncertainties including fluctuations in demand for customer products, our ability to meet our customers’ needs on a cost-effective basis and the other risks described previously herein in “Risk Factors.” As with other strategic transactions, we believe the completion of these transactions may have significant impacts to our sales, end-market diversification, margins, results from operations, financial position and working capital.
The EMS industry has experienced rapid change and growth over the past decade. The demand for advanced manufacturing capabilities and related supply chain management services has escalated, as an increasing number of OEMs outsourced some or all of their manufacturing requirements. However, many OEMs experienced a significant reduction in demand beginning in 2000, due to the end of the technology boom and the worldwide downturn in economic conditions. This resulted in significant reductions in EMS industry production requirements. In fiscal year 2004, several OEM industries began to experience a return to growth, while others experienced a continued economic downturn. Additionally, severe price pressure on our customers in their end markets has led to increased demand for EMS production capacity in the lower cost regions of the world, such as China, Mexico, and Eastern Europe, where Flextronics has a significant presence. We have responded by making strategic decisions to exit certain activities and involuntarily terminate employees so as to optimize the operating efficiencies that can be provided by our global presence and to reduce our workforce and our manufacturing capacity. Accordingly, we have recognized $540.3 million and $297.0 million of restructuring charges in fiscal year 2004 and fiscal year 2003, respectively, in connection with the various facility closures and consolidations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For further discussion of our significant accounting policies, refer to Note 2, “Summary of Accounting Policies,” of the Notes to Consolidated Financial Statements in Item 8, “Financial” Financial Statements and Supplementary Data.”
Long-Lived Assets
We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. Recoverability of property and equipment is measured by comparing its carrying amount to the projected discounted cash flows that the property and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property and equipment exceeds its fair value.
We evaluate goodwill and other intangibles for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from its estimated future cash flows. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of impairment loss. If, at the time of our annual evaluation, the net asset value (or “book value”) of any reporting unit is greater than its fair value, some or all of the related goodwill would likely be considered to be impaired. To date, we have not
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recognized any impairment of our goodwill and other intangible assets in connection with our impairment evaluations. However, we have recorded impairment charges relating to our restructuring activities as further described in Note 9, “Unusual“Restructuring and Other Charges,” of the notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data.” No assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment.
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Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers’ financial condition and make provisions for doubtful accounts based on the outcome of our credit valuations. We evaluate the collectibility of our accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the age of past due receivables. Unanticipated changes in the liquidity or financial position of our customers may require additional provisions for doubtful accounts.
Inventory Valuation
Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand. We make provisions for estimated excess and obsolete inventory based on our regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. If actual market conditions or our customers’ product demands are less favorable than those projected, additional provisions may be required. In addition, unanticipated changes in liquidity or financial position of our customers and/or changes in economic conditions may require additional provisions for inventories due to our customers’ inability to fulfill their contractual obligations with regard to inventory being held on their behalf.
Exit Costs
We recognized unusualrestructuring charges in fiscal year 2004, 2003 fiscaland 2002, and fiscal 2001, related to our plans to close or consolidate duplicate manufacturing and administrative facilities. In connection with these exit activities, we recorded unusualrestructuring charges for employee termination costs, long-lived asset impairment and other exit-related costs. These charges were incurred pursuant to formal plans developed by management. Until December 31, 2002, a liability for the exit costs was recognized at the date of our commitment to the exit plans in accordance with the provisions of Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” In June 2002, the Financial Accounting Standards Board (“FASB”)(FASB) issued Statement of Financial Accounting Standards, or SFAS, No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred and not at the date of our commitment to the exit plan. We have adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.
The recognition of the unusualrestructuring charges required that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. If our actual results in exiting these facilities differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recording of additional unusualrestructuring charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.
Refer to Note 9, “Unusual“Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion of our restructuring activities.
Deferred Income Taxes
Our deferred income tax assets represent temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years, including net operating loss carryforwards. Based on estimates, the carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. If these estimates and related assumptions change in the future, we may be required to increase our valuation allowance against the deferred tax assets resulting in additional income tax expense.
ACQUISITIONS AND STRATEGIC CUSTOMER TRANSACTIONS
We have actively pursued business acquisitions and strategic transactions with customers to expand our global reach, manufacturing capacity and service offerings and to diversify and strengthen customer relationships.
Prior to June 30, 2001, we made several acquisitions, which were accounted for as pooling of interests and our consolidated financial statements have been restated to reflect the combined operations of the merged companies for all periods presented. We also completed
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other immaterial pooling of interests transactions, for which prior period statements had not been restated. In July 2001, the FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method.
We have also made a number of acquisitions and strategic customer transactions, which were accounted for using the purchase method. Accordingly our consolidated financial statements include the operating results of each business from the date of acquisition. Proforma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis.
RESULTS OF OPERATIONS
Certain operating results discussed below are not based on any standardized methodology prescribed by accounting principles generally accepted in the United States of America, or GAAP, and are not necessarily comparable to similar measures presented by other companies. As a result of the significant number of acquisitions made by us during the past few years, coupled with an unprecedented downturn in the technology industry and related end market demand for electronics hardware, we believe certain non-GAAP operating results are useful measures that facilitate period-to-period operating comparisons. These non-GAAP operating results should not be considered in isolation or as a substitute for operating results prepared in accordance with GAAP. Where disclosed, we have provided a reconciliation of non-GAAP operating results to GAAP. Non-GAAP operating results as discussed exclude the effects of unusual charges primarily associated with the consolidation and closure of several manufacturing facilities.
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales.
Fiscal Year Ended March 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Cost of sales | 94.5 | 93.3 | 91.9 | ||||||||||
Unusual charges | 2.0 | 3.5 | 4.2 | ||||||||||
Gross margin | 3.5 | 3.2 | 3.9 | ||||||||||
Selling, general and administrative | 3.4 | 3.4 | 3.6 | ||||||||||
Goodwill and other intangibles amortization | 0.2 | 0.1 | 0.5 | ||||||||||
Unusual charges | 0.3 | 0.8 | 3.8 | ||||||||||
Interest and other expense, net | 0.7 | 0.8 | 0.6 | ||||||||||
Loss before income taxes | (1.1 | ) | (1.9 | ) | (4.6 | ) | |||||||
Benefit from income taxes | (0.5 | ) | (0.7 | ) | (0.9 | ) | |||||||
Net loss | (0.6 | )% | (1.2 | )% | (3.7 | )% | |||||||
Net Sales
We derive our net sales from the assembly of printed circuit boards and complete systems and products, the fabrication and assembly of plastic and metal enclosures, the fabrication of printed circuit boards and backplanes (which are printed circuit boards into which other printed circuit boards or cards may be inserted) The financial information and the fabricationdiscussion below should be read in conjunction with the consolidated financial statements and assembly of photonics components. Throughout the production process, we offer design and technology services; logistics services, such as materials procurement, inventory management, vendor management, packaging and distribution; and automation of key components of the supply chain through advanced information technologies. We have recently begun providing original design manufacturing, or ODM, services where we design and develop products, such as cell phones and related products, that are sold to the end user by our OEM customers under their brand name. Finally, we offer after-market services such as repair and warranty services and network and communications installation and maintenance.notes thereto included in this document.
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Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS DATA: | ||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales | 94.3 | 94.5 | 93.3 | |||||||||
Restructuring and other charges | 3.3 | 2.0 | 3.5 | |||||||||
Gross profit | 2.4 | 3.5 | 3.2 | |||||||||
Selling, general and administrative expenses | 3.4 | 3.4 | 3.4 | |||||||||
Intangibles amortization | 0.3 | 0.2 | 0.1 | |||||||||
Restructuring and other charges | 0.4 | 0.3 | 0.8 | |||||||||
Interest and other expense, net | 0.5 | 0.7 | 0.8 | |||||||||
Loss on extinguishment of debt | 0.7 | — | — | |||||||||
Loss before income taxes | (2.9 | ) | (1.1 | ) | (1.9 | ) | ||||||
Benefit from income taxes | (0.5 | ) | (0.5 | ) | (0.7 | ) | ||||||
Net loss | (2.4 | )% | (0.6 | )% | (1.2 | )% | ||||||
Net sales
Net sales for fiscal 2003 increased 2% toyear 2004 totaled $14.5 billion, representing an increase of $1.2 billion, or 9%, from $13.4 billion in fiscal year 2003. The increase in net sales was attributed to the addition of new customer programs and increased customer demand on existing programs, as a consequence of a recovery in worldwide economic conditions in many markets during fiscal year 2004.
Net sales for fiscal year 2003 totaled $13.4 billion, representing an increase of $0.3 billion, or 2%, from $13.1 billion in fiscal year 2002. The increase in net sales in fiscal year 2003 was primarily attributed to revenues generated from our new customer and program wins, along with acquisitions and strategic customer transactions completedprograms, offset slightly by a net reduction in the second half of fiscal 2002 and in fiscal 2003, including Xerox, The Orbiant Group, NatSteel Broadway and Casio. The increase was partially offset by weakness in customer demand particularly in the information technology infrastructure and communications infrastructure markets,from existing customers, as a consequence of a continuingthe continued downturn in worldwide economic conditions worldwide. Our ten largest customers during fiscal 2003 accounted for approximately 67% of net sales, with Hewlett-Packard and Sony-Ericsson accounting for approximately 12% and 11% of net sales, respectively. No other customer accounted for more than 10% of net sales during fiscalyear 2003.
Net sales for fiscal 2002 increased 8% to $13.1 billion from $12.1 billion in fiscal 2001. The economic downturn experienced by the electronics industry throughout fiscal 2002, which was driven by a combination of weakening end-market demand and our customers’ inventory imbalances, slowed the rate of growth in our net sales. The increase in sales for fiscal 2002 was primarily a result of the incremental revenues associated with the purchase of several manufacturing facilities during the fiscal year, and to a lesser extent, the further expansion of sales to certain of our existing customers as well as sales to new customers. During fiscal 2002, our ten largest customers accounted for approximately 64% of net sales, with Ericsson accounting for approximately 15% of net sales. No other customer accounted for more than 10% of net sales during fiscal 2002.
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Gross Profit
Gross profit varies from period to period and is affected by a number of factors, including product mix, component costs and availability, product life cycles, unit volumes, startup, expansion and consolidation of manufacturing facilities, capacity utilization, pricing, competition and new product introductions.
Gross margin for fiscal year 2004 decreased 110 basis points to 2.4% from 3.5% in fiscal year 2003. The 110 basis point decrease in gross margin was primarily attributed to the 130 basis point increase in restructuring and other charges, offset by a 20 basis point decrease in other cost of sales. The restructuring and other charges were related to the consolidation and closure of various facilities, which is described in more detail below in the section entitled, “Restructuring and other charges”. The 20 basis point reduction in other cost of sales resulted primarily from better absorption of fixed costs that resulted from the restructuring activities and increased net sales.
Gross margin for fiscal year 2003 increased 30 basis points to 3.5% compared to 3.2% in fiscal year 2002. The 30 basis point increase in gross marginsmargin was primarily attributed to the 150 basis point reduction in fiscal 2003 primarilyrestructuring and other charges, offset by a 120 basis point increase in other cost of sales. The restructuring and other charges were related to lower unusual pre-tax charges recordedthe consolidation and closure of $266.3 millionvarious facilities, which is described in fiscal 2003 compared to $464.4 million in fiscal 2002. Excluding the unusual pre-tax charges gross margins were 5.5% and 6.7% for fiscal 2003 and fiscal 2002, respectively. The unusual charges were associated with facility closure costs, as more fully describeddetail below in “Unusual Charges.” Excluding the impactsection entitled, “Restructuring and other charges”.The 120 basis point increase in other cost of unusual charges, gross margin declined as a result of several factors, primarily,sales resulted from the (i) a shift in the product mix towards higher volume printed circuit board assembly projects and final system assembly projects, which typically have a lower gross margin because of their higher material content as a percentage of total unit cost, (ii) industry pricing pressures as a consequence of the excess capacity, resulting from the continued economic downturn, (iii)(ii) under-absorbed fixed costs caused by under utilization of capacity, resulting in part from the continued decline in ourdemand for customers’ marketsproducts and (iv)(iii) changes in product mix to lower margin(higher concentration of consumer-related products business from our historically higher marginand a demand driven reduction of information technology and communications infrastructure markets.products). Each of these three factors were a consequence of the continued downturn in worldwide economic conditions during fiscal year 2003.
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Restructuring and other charges
Gross margin for fiscal 2002 decreasedIn recent years, we have initiated a series of restructuring activities in light of the global economic downturn. These activities, which are intended to 3.2% from 3.9% in fiscal 2001. Excluding the unusual pre-tax charges of $464.4 millionrealign our global capacity and $510.5 million in fiscal 2002 and fiscal 2001, respectively, gross margin decreased to 6.7% in fiscal 2002 from 8.1% in fiscal 2001. Excluding the impact of unusual charges, gross margin declined as a result of several factors, primarily, (i) under-absorbed fixed costs caused by under utilization of capacity, resulting from the economic downturn experienced by the electronics industry, most significantly experiencedinfrastructure with demand by our printed circuit fabrication unitOEM customers and (ii) changesthereby improve our operational efficiency, include:
• | reducing excess workforce and capacity, | |||
• | consolidating and relocating certain manufacturing facilities to lower-cost regions, and | |||
• | consolidating and relocating certain administrative facilities. |
The restructuring costs include employee severance, costs related to leased facilities, owned facilities that are no longer in product mixuse and are to higher volume printed circuited board assembly projectsbe disposed of, leased equipment that is no longer in use and final system assembly projects, which typically have a lower gross margin. The decline was due to a lesser extent to, (i)will be disposed of, and other costs associated with the integrationexit of newly acquired operationscertain contractual agreements due to facility closures. The overall impact of these activities is that we have shifted our manufacturing capacity to locations with higher efficiencies and, (ii)in some instances, lower costs, associatedand are better utilizing our overall existing manufacturing capacity. This has enhanced our ability to provide cost-effective manufacturing service offerings, which enables us to retain and expand our existing relationships with the startup of new customers and attract new projects, which typically carry higher levelsbusiness. Our restructuring activities are substantially complete as of unabsorbed manufacturing overhead costs until the projects reach higher volume production.
Increased mix of products that have relatively high material costs as a percentage of total unit costs has historically been a factor that has adversely affectedMarch 31, 2004, and we believe we are realizing our gross margins.anticipated benefits from these efforts. We believe that this and other factors may continue to adversely affectmonitor our gross margins, butoperational efficiency and may utilize similar measures in the future to realign our operations relative to future customer demand. As a result, we do not expect that this willmay be required to take additional charges in the future. We cannot predict the timing or amount of any future restructuring charges. If we are required to take additional restructuring charges in the future, it could have a material effectadverse impact on our income from operations.
Unusual Chargesoperating results, financial position and cash flows.
WeDuring fiscal year 2004, we recognized net unusual pre-taxrestructuring charges of approximately $304.4$540.3 million, inwhich related to the closures and consolidations, and impairment of certain long-lived assets, at various manufacturing facilities. Restructuring charges recorded by reportable geographic region amounted to $215.4 million, $111.3 million and $213.6 million, for the Americas, Asia and Europe, respectively. The involuntary employee terminations identified by reportable geographic region amounted to 2,083 and 3,093 for the Americas and Europe, respectively. Approximately $477.3 million of the restructuring charges were classified as a component of cost of sales.
During fiscal year 2003 we recognized restructuring charges of whichapproximately $297.0 million related to the closures and consolidations of various manufacturing facilities, and other charges of $7.4 million related to the impairment of investments in certain technology companies. OfRestructuring and other charges recorded by reportable geographic region amounted to $174.5 million, $1.8 million and $128.1 million, for the total amount, approximately $266.3Americas, Asia and Europe, respectively. The involuntary employee terminations identified by reportable geographic region amounted to 2,922, 4,896 and 290 for the Americas, Europe and Asia, respectively. Approximately $266.2 million of the chargesamount relating to facility closure was classified as a component of cost of sales.
WeDuring fiscal 2002, we recognized unusual pre-taxrestructuring charges of approximately $574.4 million during fiscal 2002, of which $530.0 million related to closures of several manufacturing facilities, and other charges of $44.4 million related primarily to the impairment of investments in certain technology companies. The restructuring and other charges recorded by reportable geographic region amounted to $265.8 million, $70.7 million and $237.9 million, for the Americas, Asia and Europe, respectively. The involuntary employee terminations identified by reportable geographic region amounted to 5,844, 5,345 and 2,202 for the Americas, Europe and Asia, respectively. Approximately $464.4 million of the charges relating to facility closures were classified as a component of cost of sales.
We The restructuring charges recognized unusual pre-tax charges of approximately $973.3 million duringin fiscal year 2001. Of this amount, $574.9 million was related to the closures of numerous manufacturing facilities, $102.4 million was associated with direct transactional costs associated with several mergers and acquisitions, primarily our acquisition of the Dii Group, Inc., and $9.5 million related to the impairment of investments in certain technology companies. Additionally, we recorded2002 included approximately $286.5 million related to the issuance of an equity instrument to Motorola, which was equal to the excess of the fair value of the equity instrument issued over the proceeds received. Approximately $510.5$66.5 million of inventory impairment charges resulting from customer contracts that were terminated by the charges relating to the facility closures were classifiedCompany as a componentresult of cost of sales.various facility closures.
We believe that the potential savings in cost of goods savingssold achieved through lower depreciation and reduced employee expenses will be offset in part by reduced revenues at the affected facilities. In addition, we may incur further restructuring charges in the future as we continue to reconfigure our operations in order to address excess capacity concerns, which may materially affect our results of operations in future periods.
Refer to Note 9, “Unusual“Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” for further discussion of our restructuring activitiesactivities.
Selling, Generalgeneral and Administrative Expensesadministrative expenses
Selling, general and administrative expenses, or SG&A, for fiscal year 2004 increased by $31.1 million, or 6.8%, to $487.3 million from $456.2 million in fiscal year 2003. SG&A as a percentage of net sales in fiscal year 2004 remained flat at 3.4% from fiscal year 2003. The absolute dollar increase was primarily attributed to the continuing expansion of our ODM service offering, offset by savings generated by our control over discretionary spending combined with efficiencies generated from our restructuring activities.
SG&A for fiscal year 2003 increased to $456.2 million from $443.6 million in fiscal year 2002. As a percentage of net sales, SG&A in fiscal year 2003 remained flat at 3.4%. from fiscal year 2002. The absolute dollar increase in SG&A in fiscal year 2003 was primarily due
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to various business acquisitions and strategic transactions, which were completed in the second half of fiscal year 2002
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and in fiscal year 2003. Additionally, our SG&A costs increased due to the initial costs associated with our investments in resources necessary for our ODM activities. These increases were partially offset by efficiencies resulting from our restructuring activities. We expect SG&A will continue to increase next quarter as we expand our ODM activities.
Intangibles amortization
SG&AAmortization of intangible assets for fiscal 2002 increased to $443.6year 2004 was $36.7 million, which represents an increase of $14.6 million from $430.1$22.1 million in fiscal 2001. As a percentageyear 2003. The increase is primarily attributed to the amortization expense related to intangible assets acquired through various business acquisitions during fiscal year 2004 and in the second half of net sales, SG&A decreased to 3.4%fiscal year 2003, in fiscal 2002 from 3.6% in fiscal 2001. The absolute dollar increase in SG&A was primarilyparticular due to several business acquisitions completed during fiscal 2002. The percentage decrease in SG&A reflects savings generated bythe completion of our focus on controlling discretionary spending combined with efficiencies gainedassessment of the value of intangible assets acquired from our restructuring activities.
GoodwillTelia Companies and Other Intangibles AmortizationXerox Corporation.
Goodwill and other intangibles amortization for fiscal year 2003 increased to $22.1 million from $12.6 million in fiscal year 2002. The increase was attributable to amortization expense associated with intangible assets acquired through various business acquisitions completed in the second half of fiscal year 2002 and in fiscal 2003, in particular due to the completion of our assessment of the value of intangible assets acquired from The Orbiant Group.year 2003.
GoodwillInterest and other intangibles amortization for fiscal 2002 decreased to $12.6 million from $63.5 million in fiscal 2001. The decrease in goodwill and other intangibles amortization was the direct result of the adoption of SFAS 142, which effectively discontinued the amortization of goodwill. See Note 2, “Summary of Accounting Policies,” of the Notes to Condensed Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data.”
Interest and Other Expense, Netexpense, net
Interest and other expense, net for fiscal 2003 increased by $0.9year 2004 was $77.7 million, to $92.8a decrease of $15.1 million from $91.9$92.8 million in fiscal 2002.year 2003. The slight increasedecrease in net expense resulted from the redemption of $150 million aggregate principal amount of our 8.75% senior subordinated notes due October 2007 in June 2003 and the repurchase of $492.3 million aggregate principal amount of our 9.875% notes in August 2003. During fiscal 2003 was driven primarily by reduced gains from salesyear 2004, we issued $400 million aggregate principal amount of marketable securities combined with increased expenses related to minority ownership interests in certain subsidiaries. The increase was offset to some extent by higher invested cash balances6.5% senior subordinated notes due May 2013 and reduced outstanding borrowings.$500 million aggregate principal amount of 1% convertible subordinated notes due August 2010.
Interest and other expense, net, increased tofor fiscal year 2003 was relatively unchanged from $91.9 million in fiscal 2002year 2002.
Loss on early extinguishment of debt
We recognized a loss on early extinguishment of debt of $103.9 million during fiscal year 2004. During the first quarter of fiscal year 2004, we used a portion of the net proceeds from $67.1 million in fiscal 2001. This increase was driven primarily by lower gains recorded on the saleour issuance of marketable securities as compared to the $33.4 million gain recorded in fiscal 2001, combined with the realization of approximately $4.5$400 million of foreign exchange losses compared6.5% senior subordinated notes due May 2013 in May 2003 to foreign exchange gainsredeem our entire $150 million aggregate principal amount of $4.08.75% senior subordinated notes due October 2007. During the second quarter of fiscal year 2004, we used a portion of the net proceeds from our issuance in August 2003 of the $500 million in fiscal 2001. The foreign exchange losses in fiscal 2002 primarily relatedaggregate principal amount of the 1% convertible subordinated notes due May 2013 and other sources to net non-functional currency monetary liabilities in France, Hungary and Sweden. Additionally, foreign exchange losses in fiscal 2002 included amounts related to changes in fair valuesrepurchase $492.3 million aggregate principal amount, or 98.5% of derivative instruments due to hedge ineffectiveness, which were immaterial, as a resultthe outstanding amount, of our adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” in April 2001.9.875% senior subordinated notes due July 2010.
Provision for Income Taxesincome taxes
Certain 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, “Income Taxes,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data.”
Our consolidated effective tax rate was a benefit of 43%16%, 37%43% and 19%37% for fiscal years 2004, 2003 fiscaland 2002, and fiscal 2001, respectively. Excluding the unusualrestructuring and other charges as well as loss on early extinguishment of debt, the effective income tax rate was 10% for fiscal years 2004, 2003 and 2002 and 11% for fiscal 2001.2002. The consolidated effective tax rate for a particular period varies depending on the amount of earnings from different jurisdictions, operating loss carryforwards, income tax credits, changes in previously established valuation allowances for deferred tax assets based upon management’s current analysis of the realizability of these deferred tax assets, as well as certain tax holidays and incentives granted to us and our subsidiaries primarily in China, Hungary and Malaysia.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 20032004 we had cash and cash equivalents balances totaling $424.0$615.3 million, total bank and other debts amounting to $1.1$1.7 billion and $880.0$855.6 million available for borrowing under our credit facilities subject to compliance with certain financial ratios.covenants.
Cash provided by operating activities was $187.7 million, $607.8 million and $858.9 million in fiscal years 2004, 2003 and fiscal 2002, respectively. In fiscal 2001, operating activities used cash amounting to $469.7 million. Working capital as of March 31, 20032004 and March 31, 2002,2003, was approximately $897.7$884.8 million and $1.4 billion,$897.7 million, respectively. During fiscal year 2004, cash provided by operating activities reflected increase in trade payables and other current liabilities of approximately $535.7 million, offset by increases in accounts receivable and inventory of approximately $380.7 million
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and $40.3 million, respectively. During fiscal year 2003, cash provided by operating activities resulted fromreflected reductions in accounts receivable and inventory of approximately $449.5 million and $150.7 million, respectively, offset by reductions in trade payables and other current liabilities of approximately $338.4 million. During fiscal year 2002, cash provided by operating activities resulted fromreflected reductions in accounts receivable and inventory of approximately $215.3 million and $494.8 million, respectively, as well as increases in trade payables and other current liabilities of approximately $643.6 million.
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Cash used in investing activities was $403.8 million, $813.0 million, $1.1 billion and $1.1 billion in fiscal 2003,year 2004, fiscal 2002year 2003 and fiscal 2001,year 2002, respectively. Cash used in investing activities in fiscal year 2004 primarily related to:
• | net capital expenditures of $181.5 million to purchase manufacturing equipment for continued expansion of manufacturing facilities in certain lower-cost, high-volume centers, primarily Asia, and for expansion of our industrial parks primarily in China and Poland. | |||
• | payments of $120.0 million for acquisitions of businesses; | |||
• | other investments and notes receivable of $102.3 million; |
Cash used in investing activities in fiscal year 2003 primarily related to:
• | net capital expenditures of $208.3 million for the purchase of equipment and | |||
• | payments of $501.6 million for acquisitions of businesses, primarily NatSteel Broadway and; | |||
• |
Cash used in investing activities in fiscal year 2002 primarilyprincipally related to:to the following:
• | $330.4 million of net capital expenditures to purchase equipment and the continued expansion of our manufacturing facilities worldwide, | |||
• | $396.3 million for purchases of manufacturing facilities and related asset purchases, related to our acquisitions of several manufacturing operations from Ericsson and | |||
• | $314.5 million for acquisitions of businesses, primarily related to Xerox and | |||
• | $62.6 million of other investments |
Additionally, we We also received proceeds of $20.6 million from the sale of marketable securities in fiscal year 2002.
Financing activities generated $394.8 million in fiscal year 2004. Cash provided by financing activities during fiscal year 2004 primarily related to the following:
• | issuance of 6.5% senior subordinated notes due May 2013 in May 2003, which generated net proceeds of $393.7 million; | |||
• | issuance of 1% convertible subordinated notes due August 2010 in August 2003, which generated net proceeds of $484.7 million; | |||
• | proceeds of $220 million from borrowing under our new credit facilities; | |||
• | proceeds of $61.1 million from the sale of ordinary shares under our employee stock plans; | |||
• | redemption of 8.75% senior subordinated notes due October 2007, which used $156.6 million; and | |||
• | repurchase of $492.3 million in aggregate principal amount of our 9.875% senior subordinated notes due July 2010. |
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In connection with the early extinguishments of those notes, we incurred a loss of approximately $103.9 million, of which $91.6 million was paid in cash during the first six months of fiscal year 2004.
Net cash used in financing activities was $103.5 million in fiscal year 2003, compared to net cash provided by financing activities of $369.3 million and $1.5 billion in fiscal 2002 and fiscal 2001, respectively.year 2002. Cash used in financing activities during fiscal year 2003 primarily related to repayments of debt obligations of approximately $1.0 billion, offset by additional borrowings of $893.0 million, which included the issuance of $200.0 million zero coupon, zero yield, convertible junior subordinated notes due 2008, and $27.9 million in proceeds from the issuance of our ordinary shares pursuant to our employee stock plans.
Cash provided by financing activities in fiscal 2002 primarily related to our completion of a secondary offering of our ordinary shares. In January 2002, we sold a total of 20,000,000 ordinary shares at a price of $25.96 per share resulting in net proceeds to us of approximately $503.8 million, which was used to repay our bank borrowings under our credit facility and for general corporate purposes. Additionally, cash provided by financing activities in fiscal 2002 resulted from $57.7 million in proceeds from the issuance of our ordinary shares pursuant to our employee stock plans. Our financing activities in fiscal 2002 used $112.0 million for the repurchase of the equity instrument issued to Motorola and $33.8 million for the repayment of capital lease obligations.
Subsequent to March 31, 2003, we issued 6.5% senior subordinated notes due in May 2013 for gross proceeds of $400.0 million, in accordance with the Securities and Exchange Commission Rule 144A and Regulation S. We intend to use the net proceeds of the issuance for general corporate purposes and to redeem or repurchase our outstanding 8.75% senior subordinated notes maturing in October 2007, of which $150.0 million in principal was outstanding at March 31, 2003.
Our working capital requirements and capital expenditures could increase in order to support future expansions of our operations.operations and our potential strategic transactions with Nortel Networks and HSS, as discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.” It is possible that future acquisitions may be significant and may require the payment of cash. Future liquidity needs will also depend on fluctuations in levels of inventory, accounts receivable and accounts receivable,payable, the timing of capital expenditures by us for new equipment, the extent to which we utilize operating leases for the new facilities and equipment, the extent of unusual cash charges associated with future restructuring activities and levels of shipments and changes in volumes of customer orders.
We believe that our existing cash balances, together with anticipated cash flows from operations and borrowings available under our credit facility will be sufficient to fund our operations through at least the next twelve months. Historically, we have funded our operations and acquisitions from the proceeds of public offerings of equity and debt securities, cash and cash equivalents generated from operations, bank debt, sales of accounts receivable and capital equipment lease financings. 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. The sale of equity or convertible debt securities could result in dilution to our current shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of our ordinary shares, and the terms of this debt could impose restrictions on our operations. Such financings and other transactions may not be available on terms acceptable to us or at all.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
In March 2003,2004, we renewed and increased our existing revolving credit facility with a syndicate of domestic and foreign banks from $800.0$880.0 million to $880.0 million.$1.1 billion. The credit facility consists of two separate credit agreements, one providing for up to $440.0$550.0 million principal amount of revolving credit loans to us and designated subsidiaries; and one providing for up to $440.0$550.0 million principal amount of revolving credit loans to a U.S. subsidiary of the Company. Of the total amount of each agreement, $173.3 million relates toThis credit facility is a new 364-dayfour-year facility and $266.7 million expiresexpiring in March 2005.2008. Borrowings under the credit facility bear interest, at our option, either at
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(i) the base rate (as defined in the credit facility)facility; or 4.5% as of March 31, 2004); or (ii) the LIBOR rate (as defined in the credit facility)facility; or 1.09% as of March 31, 2004) plus the applicable margin for LIBOR loans ranging between 1.125%0.75% and 2.50%2.25%, based on our credit ratings and facility usage. We are required to pay a quarterly commitment fee ranging from 0.15% to 0.50% per annum, based on our credit ratings, of the unutilized portion of the credit facility.
The credit facility is unsecured, and contains certain restrictions on our ability to (i) incur certain debt, (ii) make certain investments and (iii) make certain acquisitions of other entities. The credit facility also requires that we maintain certain financial covenants, including, among other things, a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum ratio of fixed charge coverage, and a minimum net worth, as defined, during the term of the credit facility. Borrowings under the credit facility are guaranteed by us and certain of our subsidiaries. As of March 31, 2003,2004, there were no borrowingswas $220.0 million outstanding under the credit facility.
As of March 31, 2003,2004, our outstanding debt obligations included: (i) borrowings outstanding related to our senior subordinated notes, (ii) borrowings outstanding related to our convertible junior subordinated notes, (iii) amounts drawn by subsidiaries on various lines of credit, (iv) equipment financed under capital leases and (v) other term obligations, including mortgage loans. Additionally, we have leased certain of our facilities under operating lease commitments. Future payments due under our debt and lease obligations are as follows (in thousands):
Fiscal Year Ending March 31, | ||||||||||||||||||||||||||||
Contractual Obligations | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | |||||||||||||||||||||
Senior subordinated notes | — | — | — | — | 150,000 | 657,364 | 807,364 | |||||||||||||||||||||
Convertible junior subordinated notes | — | — | — | — | 200,000 | — | 200,000 | |||||||||||||||||||||
Lines of credit | 31,859 | — | — | — | — | — | 31,859 | |||||||||||||||||||||
Capital lease obligations (including interest) | 8,951 | 3,629 | 2,537 | 376 | 289 | 1,778 | 17,560 | |||||||||||||||||||||
Other debt obligations | 20,625 | 18,728 | 3,116 | 31 | 4,523 | 8,182 | 55,205 | |||||||||||||||||||||
Operating lease obligations | 110,484 | 70,476 | 47,522 | 34,539 | 26,933 | 153,804 | 443,758 |
In March 2002, we28
Less than | Greater than | |||||||||||||||||||
(in thousands) | Total | 1 Year | 1 - 3 Years | 4 - 5 Years | 5 Years | |||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Long term debt obligations | $ | 1,705,464 | $ | 96,287 | $ | 229,909 | $ | 287,856 | $ | 1,091,412 | ||||||||||
Capital lease obligations | 24,746 | 9,036 | 13,267 | 1,039 | 1,404 | |||||||||||||||
Operating leases, net of subleases | 360,313 | 61,089 | 78,042 | 47,319 | 173,863 | |||||||||||||||
Total contractual cash obligations | $ | 2,090,523 | $ | 166,412 | $ | 321,218 | $ | 336,214 | $ | 1,266,679 | ||||||||||
We have entered into a trade receivables securitization agreement. Under this agreement, we continuously sell a designated pool of trade receivables to a third party qualified special purpose entity, which in turn sells an undivided ownership interest to a conduit, administered by an unaffiliated financial institution. In addition to this financial institution, we participate in the securitization agreement as an investor in the conduit. The securitization agreement allows the operating subsidiaries participating in the securitization to receive a cash payment for sold receivables, less a deferred purchase price receivable. Our share of the total investment varies depending on certain criteria, mainly the collection performance on the sold receivables. The agreement, which expires in March 2004, is subject to annual renewal. Currently, the unaffiliated financial institution’s maximum investment limit is $250.0 million. We sold $320.8 million of our accounts receivable as of March 31, 2003, which represents the face amount of the total outstanding trade receivables on all designated customer accounts at that date. We received net cash proceeds of $168.3 million from the unaffiliated financial institution for the sale of these receivables. We have a recourse obligation that is limited to the deferred purchase price receivable, which approximates 5% of the total sold receivables, and our own investment participation, the total of which was $152.5 million as of March 31, 2003. The accounts receivable balances that were sold were removed from the consolidated balance sheet and are reflected as cash provided by operating activities in the consolidated statement of cash flows.
In fiscal 2002, we entered into operating leasesagreements with respect to properties located in Mexico and Texas. During fiscal 2002, we completed construction on the property in Mexico and began construction on the property in Texas, which was completed by the end of fiscal 2003.were historically accounted for as operating leases. Construction on both properties has been completed. The amounts outstanding on the Mexico and Texas properties as of March 31, 2003,2004 were $22.9 million and $67.0 million, respectively. Upon the expiration of these leases in 2006 and 2007, respectively, we may renew the leases for an additional five years subject to certain approvals and conditions, or arrange a sale of the buildings to a third party. We also have the right to purchase the buildings at cost at the end of the lease terms, or to terminate the leases at any time by paying the outstanding termination value. We have provided a residual value guarantee, which means that if the building is sold to a third party, we are responsible for making up any shortfall between the actual sales price and the amount funded under the leases. The maximum potential amount of the residual value guarantee is $76.4 million. In fiscal year 2004, we recorded the properties as fixed assets and also recorded the related debt. Refer to Note 13, “Consolidation of Variable Interest Entities,” of the Notes to Consolidated Financial Statements.
We continuously sell a designated pool of trade receivables to a third party qualified special purpose entity, which in turn sells an undivided ownership interest to a conduit, administered by an unaffiliated financial institution. In addition to this financial institution, we participate in the securitization agreement as an investor in the conduit. The securitization agreement allows the operating subsidiaries participating in the securitization to receive a cash payment for sold receivables, less a deferred purchase price receivable. Our share of the total investment varies depending on certain criteria, mainly the collection performance on the sold receivables. The agreement, which expires in March 2005, is subject to annual renewal. Currently, the unaffiliated financial institution’s maximum investment limit is $250.0 million. We sold $328.0 million of our accounts receivable as of March 31, 2004, which represents the face amount of the total outstanding trade receivables on all designated customer accounts at that date. We received net cash proceeds of $172.1 million from the unaffiliated financial institution for the sale of these receivables. We have a recourse obligation that is limited to the deferred purchase price receivable, which approximates 5% of the total sold receivables, and our own investment participation, the total of which was $161.6 million as of March 31, 2004. The accounts receivable balances that were sold were removed from the consolidated balance sheet and are reflected as cash provided by operating activities in the consolidated statement of cash flows.
RELATED PARTY TRANSACTIONS
WeSince June 2002, neither the Company nor any of our subsidiaries have loaned approximately $12.4 millionmade or will make any loans to our executive officers. Prior to that time, we extended loans to several of our executive officers. Each loan iswas evidenced by a promissory note in favor of Flextronics and iswas generally secured by a deed of trust on property of the officer. Certain notes arewere non-interest bearing and others havehad interest rates ranging from 2.48% to 7.25%5.85%. The remaining outstanding balance of the loans, including accrued interest, as of March 31, 2003,2004, was approximately $12.9$9.5 million. Additionally, in connection with an investment partnership, wethe Company made loans to several of our executive officers to fund their contributions to the investment partnership. Each loan iswas evidenced by a full-recourse promissory note in favor of the subsidiary.Company. Interest rates on the notes rangeranged from 5.05% to 6.40%. The remaining balance of these loans, including accrued interest, as of March 31, 20032004 was approximately $2.6$2.2 million. We will not make any further loans to our executive officers.
NEW ACCOUNTING PRONOUNCEMENTS
24Derivative Instruments and Hedging Activities
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” to be effective for all fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. We will adopt SFAS No. 143 in fiscal 2004. We do not believe the adoption of SFAS No. 143 will have a material impact on our financial position, results of operations or cash flows.
Extinguishment of Debt and Sale-Leaseback Transactions
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” will now be used to classify those gains and losses. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases,” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. We will adopt the provisions of SFAS No. 145 related to the rescission of Statement No. 4 in the first quarter of fiscal 2004. We do not believe the adoption of these provisions will have a material impact on our financial position, results of operations or cash flows. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 related to Statement No. 13 are required to be effective for transactions occurring after May 15, 2002 and thus the Company has adopted these provisions. The adoption of these provisions did not have any impact on our financial position, results of operations or cash flows.
Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. We adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. The adoption of these provisions did not have a material impact on our financial position, results of operations or cash flows.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to the issuance of FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 now requires a variable interest entity, as defined in FIN 46, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. It is reasonably possible that we will consolidate our synthetic leases when we adopt the consolidation requirements of FIN 46 in the first quarter of fiscal 2004. We do not believe the adoption of FIN 46 will have a material impact on our financial position, results of operations or cash flows.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation specifies the disclosures to be made by a guarantor in its interim and annual financial statements concerning its obligations under certain guarantees that it has issued. FIN 45 also requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. The initial recognition and initial measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. Accordingly, we have adopted the provisions of FIN 45. The adoption of these provisions did not have a material impact on our financial position, results of operations or cash flows.
25
In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with anand initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and2003. The adoption of the adoption isstandard did not expected to have a material impact on ourthe Company’s financial position, results of operations or cash flows.
29
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the statement, which previously were often classified as equity, must now be classified as liabilities. This statement is effective for financial periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position, results of operation or cash flows.
ITEM 7A. 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 place cash and cash equivalents with various major financial institutions and limit the amount of credit exposure to the greater of 20% of the total investment portfolio or $10.0 million in any single institution. We protect our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities and by constantly positioning the portfolio to respond appropriately to a reduction in credit rating of any investment issuer, guarantor or depository to levels below the credit ratings dictated by our investment policy. 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, 2003,2004, the outstanding amount in the investment portfolio was $190.4$131.0 million, comprised mainly of money market funds with an average return of 1.20%0.93% for dollar investments and 2.75%1.90% for Euro investments. A hypothetical 10% change in interest rates would not have a material effect on our financial position, results of operations and cash flows over the next fiscal year.
We had a portfolio of fixed and variable rate debt of approximately $1.1$1.7 billion as of March 31, 2003,2004, of which approximately 94%78% related to fixed rate debt obligations. Our fixed rate debt consists primarily of $807.4$588.7 million of senior subordinated notes with a weighted average interest rate of 9.64%7.55%, $200.0 million of zero coupon, zero yield, convertible junior subordinated notes, $500 million of 1% coupon convertible subordinated notes, and $21.8$56.8 million of other fixed rate obligations. As of March 31, 2003,2004, the approximate fair values of our 9.875% notes, 9.75% notes and 8.75%6.5% notes based on broker trading prices were 110.125%115.5%, 106.0%111.5% and 104.5%105.25% of thetheir face values on March 31, 2003,2004, respectively. Our variable rate debt includes demand notes, mortgage loans and certain variable 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. Our variable rate debt instruments create exposures for us related to interest rate risk. As of March 31, 2003,2004, the balance outstanding on our variable rate debt obligation was approximately $65.3$383.2 million. A hypothetical 10% change in interest rates would not have a material effect on our financial position, results of operations and cash flows over the next fiscal year.
FOREIGN CURRENCY EXCHANGE RISK
We transact business in various foreign countries and are, therefore, subject to risk of foreign currency exchange rate fluctuations. We have established a foreign currency risk management policy to manage this risk. To the extent possible, we manage our foreign currency exposure by evaluating and using non-financial techniques, such as currency of invoice, leading and lagging payments and receivable management. In addition, we borrow in various foreign currencies and enter into short-term foreign currency forward contracts to hedge only those currency exposures associated with certain assets and liabilities, mainly accounts receivable and accounts payable, and cash flows denominated in non-functional currencies.
We try to maintain a fully hedged position for certain transaction exposures. These exposures are primarily, but not limited to, revenues, customer and vendor payments and inter-company balances in currencies other than the functional currency unit of the operating entity. The credit risk of our foreign currency forward contracts is minimalminimized since all contracts are with large financial institutions. The gains and losses on forward contracts generally offset the gains and losses on the assets, liabilities and transactions hedged. On April 1, 2001, we adopted SFAS No. 133, as amended by SFAS No. 137 and No. 138, and as such theThe fair value of currency forward contracts areis reported on the balance sheet. The aggregate notional amount of outstanding contracts as of March 31, 20032004 amounted to $807.2 million$1.5 billion with a fair value on the balance sheet of a liabilityan asset of $1.1$8.9 million. The majority of these foreign exchange contracts expire in less than one month and almost all expire within three months. They will settle in Euro, British pound, Hong Kong dollar, Hungarian forint, Japanese yen, Malaysian ringgit, Norwegian kronor, Polish zloty, Singapore dollar, South African rand, Swedish krona, Swiss franc, Thai baht and U.S. dollar.
30
Based on our overall currency rate exposures at March 31, 2003,2004, including derivative financial instruments and nonfunctional currency-denominated receivables and payables, a near-term 10% appreciation or depreciation of the U.S. dollar would not have a material effect on our financial position, results of operations and cash flows over the next fiscal year.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and ShareholdersStockholders of
Flextronics International Ltd., and Subsidiaries:
We have audited the accompanying consolidated balance sheetsheets of Flextronics International Ltd. and Subsidiaries (the “Company”) as of March 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income (loss), shareholders’stockholders’ equity, and cash flows for the yearyears then ended. Our auditaudits also included the fiscal 2004 and 2003 consolidated financial statement schedule listed in Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the fiscal 2003these financial statements and the financial statement schedule based on our audit.audits. The consolidated financial statements and the financial statement schedules as ofschedule for the year ended March 31, 2002 and for each of the years in the two-year period then ended, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and stated that such fiscal 2002 and fiscal 2001 financial statement schedules,schedule, when considered in relation to the fiscal 2002 and fiscal 2001 basic consolidated financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their report dated April 25, 2002.
We conducted our auditaudits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the fiscal2004 and 2003 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2004 and 2003, and the results of its operations and its cash flows for the yearyears then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the fiscal 2004 and 2003 consolidated financial statement schedule, when considered in relation to the fiscal 2004 and 2003 basic consolidated financial statements taken as a whole, presentspresent fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, CaliforniaApril 21, 2003(May 5, 2003 as to Note 13)June 14, 2004
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This is a copy of the audit report previously issued by Arthur Andersen LLP, the Company’s former independent accountants, in connection with the Company’s Annual Report on Form 10-K for the year ended March 31, 2002. This audit report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided consent to the inclusion of its report in this Form 10-K. The consolidated balance sheet as of March 31, 2001,2002, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year ended March 31, 2000 and the information in the financial statement schedule (Schedule II –— Valuation and Qualifying Accounts) for the year ended March 31, 2000,2001, each of which is referenced in the audit report, are not included in the Company’s Form 10-K for the year ended March 31, 2003.2004.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Flextronics International Ltd.:
We have audited the accompanying consolidated balance sheets of Flextronics International Ltd. (a Singapore Company) and subsidiaries (collectively the “Company”) as of March 31, 2002 and 2001 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2002. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We did not audit the consolidated statement of operations, shareholders’ equity and cash flows of The DII Group, Inc., a company acquired during fiscal year 2001 in a transaction accounted for as a pooling of interests, for the year ended January 2, 2000, as discussed in Note 11. Such statements are included in the consolidated financial statements of Flextronics International Ltd. and reflect total revenues of 19% of the related consolidated total for the year ended March 31, 2000. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for The DII Group, Inc., is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Flextronics International Ltd. and subsidiaries as of March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
Our audits and the report of other auditors were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 25, 2002
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FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
As of March 31, | ||||||||||||
2003 | 2002 | |||||||||||
(In thousands, except share | ||||||||||||
and per share amounts) | ||||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS: | ||||||||||||
Cash and cash equivalents | $ | 424,020 | $ | 745,124 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $37,626 and $41,649 as of March 31, 2003 and 2002, respectively | 1,417,086 | 1,866,576 | ||||||||||
Inventories, net | 1,141,559 | 1,292,230 | ||||||||||
Deferred income taxes | 29,153 | 51,954 | ||||||||||
Other current assets | 466,942 | 597,303 | ||||||||||
Total current assets | 3,478,760 | 4,553,187 | ||||||||||
Property, plant and equipment, net | 1,965,729 | 2,032,495 | ||||||||||
Deferred income taxes | 415,041 | 312,996 | ||||||||||
Goodwill | 2,121,997 | 1,489,449 | ||||||||||
Other intangibles, net | 70,913 | 48,699 | ||||||||||
Other assets | 341,664 | 207,873 | ||||||||||
Total assets | $ | 8,394,104 | $ | 8,644,699 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
CURRENT LIABILITIES: | ||||||||||||
Bank borrowings and current portion of long-term debt | $ | 52,484 | $ | 282,478 | ||||||||
Current portion of capital lease obligations | 7,622 | 16,557 | ||||||||||
Accounts payable | 1,601,923 | 1,962,630 | ||||||||||
Other current liabilities | 918,990 | 896,639 | ||||||||||
Total current liabilities | 2,581,019 | 3,158,304 | ||||||||||
Long-term debt, net of current portion | 1,041,944 | 843,082 | ||||||||||
Capital lease obligations, net of current portion | 7,909 | 20,211 | ||||||||||
Other liabilities | 221,212 | 167,606 | ||||||||||
Commitments and contingencies | ||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||
Ordinary shares, S$.01 par value; authorized — 1,500,000,000 shares; issued and outstanding — 520,228,062 and 513,011,778 as of March 31, 2003 and 2002, respectively | 3,078 | 3,043 | ||||||||||
Additional paid-in capital | 4,948,601 | 4,898,807 | ||||||||||
Retained deficit | (370,093 | ) | (286,640 | ) | ||||||||
Accumulated other comprehensive loss | (33,419 | ) | (159,714 | ) | ||||||||
Deferred compensation | (6,147 | ) | — | |||||||||
Total shareholders’ equity | 4,542,020 | 4,455,496 | ||||||||||
Total liabilities and shareholders’ equity | $ | 8,394,104 | $ | 8,644,699 | ||||||||
(in thousands, except per share amounts)
As of March 31, | ||||||||
2004 | 2003 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 615,276 | $ | 424,020 | ||||
Accounts receivable, less allowance for doubtful accounts of $38,736 and $37,626 as of March 31, 2004, and 2003, respectively | 1,871,637 | 1,417,086 | ||||||
Inventories | 1,179,513 | 1,141,559 | ||||||
Deferred income taxes | 14,244 | 29,153 | ||||||
Other current assets | 581,063 | 466,942 | ||||||
Total current assets | 4,261,733 | 3,478,760 | ||||||
Property and equipment, net | 1,625,000 | 1,965,729 | ||||||
Deferred income taxes | 604,785 | 415,041 | ||||||
Goodwill | 2,653,372 | 2,121,997 | ||||||
Other intangible assets, net | 68,060 | 70,913 | ||||||
Other assets | 370,987 | 341,664 | ||||||
Total assets | $ | 9,583,937 | $ | 8,394,104 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Bank borrowings and current portion of long-term debt | $ | 96,287 | $ | 52,484 | ||||
Current portion of capital lease obligations | 8,203 | 7,622 | ||||||
Accounts payable | 2,145,174 | 1,601,923 | ||||||
Accrued payroll | 263,949 | 231,481 | ||||||
Other current liabilities | 863,304 | 687,509 | ||||||
Total current liabilities | 3,376,917 | 2,581,019 | ||||||
Long-term debt, net of current portion | 1,609,177 | 1,041,944 | ||||||
Capital lease obligation, net of current portion | 15,084 | 7,909 | ||||||
Other liabilities | 215,546 | 221,212 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Shareholders’ equity | ||||||||
Ordinary shares, S$0.01 par value; authorized – 1,500,000,000 shares; issued and outstanding – 529,944,282 and 520,228,062 shares as of March 31, 2004, and 2003, respectively | 3,135 | 3,078 | ||||||
Additional paid-in capital | 5,014,990 | 4,948,601 | ||||||
Accumulated deficit | (722,471 | ) | (370,093 | ) | ||||
Accumulated other comprehensive income (loss) | 78,105 | (33,419 | ) | |||||
Deferred compensation | (6,546 | ) | (6,147 | ) | ||||
Total shareholders’ equity | 4,367,213 | 4,542,020 | ||||||
Total liabilities and shareholders’ equity | $ | 9,583,937 | $ | 8,394,104 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended March 31, | ||||||||||||||
2003 | 2002 | 2001 | ||||||||||||
(In thousands, except per share amounts) | ||||||||||||||
Net sales | $ | 13,378,699 | $ | 13,104,847 | $ | 12,109,699 | ||||||||
Cost of sales | 12,650,402 | 12,224,969 | 11,127,896 | |||||||||||
Unusual charges | 266,244 | 464,391 | 510,495 | |||||||||||
Gross profit | 462,053 | 415,487 | 471,308 | |||||||||||
Selling, general and administrative | 456,199 | 443,586 | 430,109 | |||||||||||
Goodwill and other intangibles amortization | 22,146 | 12,615 | 63,541 | |||||||||||
Unusual charges | 38,167 | 110,035 | 462,847 | |||||||||||
Interest and other expense, net | 92,780 | 91,853 | 67,115 | |||||||||||
Loss before income taxes | (147,239 | ) | (242,602 | ) | (552,304 | ) | ||||||||
Benefit from income taxes | (63,786 | ) | (88,854 | ) | (106,285 | ) | ||||||||
Net loss | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | |||||
Net loss per share: | ||||||||||||||
Basic | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | |||||
Diluted | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | |||||
Weighted average shares used in computing per share amounts: | ||||||||||||||
Basic | 517,198 | 489,553 | 441,991 | |||||||||||
Diluted | 517,198 | 489,553 | 441,991 | |||||||||||
(in thousands, except per share amounts)
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Net sales | $ | 14,530,416 | $ | 13,378,699 | $ | 13,104,847 | ||||||
Cost of sales | 13,704,576 | 12,650,402 | 12,224,969 | |||||||||
Restructuring and other charges | 477,305 | 266,244 | 464,391 | |||||||||
Gross profit | 348,535 | 462,053 | 415,487 | |||||||||
Selling, general and administrative expenses | 487,287 | 456,199 | 443,586 | |||||||||
Intangibles amortization | 36,715 | 22,146 | 12,615 | |||||||||
Restructuring and other charges | 63,043 | 38,167 | 110,035 | |||||||||
Interest and other expense, net | 77,700 | 92,780 | 91,853 | |||||||||
Loss on early extinguishment of debt | 103,909 | — | — | |||||||||
Loss before income taxes | (420,119 | ) | (147,239 | ) | (242,602 | ) | ||||||
Benefit from income taxes | (67,741 | ) | (63,786 | ) | (88,854 | ) | ||||||
Net loss | $ | (352,378 | ) | $ | (83,453 | ) | $ | (153,748 | ) | |||
Net loss per share: | ||||||||||||
Basic and diluted | $ | (0.67 | ) | $ | (0.16 | ) | $ | (0.31 | ) | |||
Weighted average shares used in computing per share amounts: | ||||||||||||
Basic and diluted | 525,318 | 517,198 | 489,553 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Fiscal Year Ended March 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
(In thousands) | |||||||||||||
Net loss | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | ||||
Other comprehensive income (loss): | |||||||||||||
Foreign currency translation adjustment, net of tax | 127,518 | (44,450 | ) | (49,844 | ) | ||||||||
Unrealized loss on investments and derivatives, net of tax | (1,223 | ) | (3,799 | ) | (55,851 | ) | |||||||
Comprehensive income (loss) | $ | 42,842 | $ | (201,997 | ) | $ | (551,714 | ) | |||||
(in thousands)
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Net loss | $ | (352,378 | ) | $ | (83,453 | ) | $ | (153,748 | ) | |||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustment, net of taxes | 105,963 | 127,518 | (44,450 | ) | ||||||||
Unrealized gain (loss) on investment and derivatives, net of taxes | 5,561 | (1,223 | ) | (3,799 | ) | |||||||
Comprehensive income (loss) | $ | (240,854 | ) | $ | 42,842 | $ | (201,997 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3136
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYFor the Three Years Ended March 31, 2003
(Inin thousands)
Accumulated | |||||||||||||||||||||||||||||
Ordinary Shares | Additional | Retained | Other | Total | |||||||||||||||||||||||||
Paid-in | Earnings | Comprehensive | Deferred | Shareholders' | |||||||||||||||||||||||||
Shares | Amount | Capital | (Deficit) | Income (Loss) | Compensation | Equity | |||||||||||||||||||||||
BALANCE AT MARCH 31, 2000 | 406,436 | $ | 2,437 | $ | 1,997,046 | $ | 373,735 | $ | 8,494 | $ | (5,084 | ) | $ | 2,376,628 | |||||||||||||||
Adjustment to conform fiscal year of pooled entities | 6,882 | 40 | 4,056 | (58,306 | ) | (3,787 | ) | — | (57,997 | ) | |||||||||||||||||||
Impact of immaterial pooling of interests acquisitions | 728 | 4 | 2,482 | (2,112 | ) | — | — | 374 | |||||||||||||||||||||
Issuance of ordinary shares for acquisitions | 10,825 | 63 | 365,422 | — | — | — | 365,485 | ||||||||||||||||||||||
Exercise of stock options | 11,405 | 66 | 69,504 | — | — | — | 69,570 | ||||||||||||||||||||||
Ordinary shares issued under Employee Stock Purchase Plan | 445 | 3 | 8,911 | — | — | — | 8,914 | ||||||||||||||||||||||
Tax benefit on employee stock plans | — | — | 11,537 | — | — | — | 11,537 | ||||||||||||||||||||||
Sale of ordinary shares in public offering, net of offering costs | 39,650 | 228 | 1,421,443 | — | — | — | 1,421,671 | ||||||||||||||||||||||
Dividends paid to former shareholders | — | — | — | (190 | ) | — | — | (190 | ) | ||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | 5,084 | 5,084 | ||||||||||||||||||||||
Issuance of equity instrument (Note 9) | — | — | 386,537 | — | — | — | 386,537 | ||||||||||||||||||||||
Net loss | — | — | — | (446,019 | ) | — | — | (446,019 | ) | ||||||||||||||||||||
Change in unrealized gain (loss) on available for sale securities | — | — | — | — | (55,851 | ) | — | (55,851 | ) | ||||||||||||||||||||
Foreign currency translation | — | — | — | — | (55,382 | ) | — | (55,382 | ) | ||||||||||||||||||||
BALANCE AT MARCH 31, 2001 | 476,371 | 2,841 | 4,266,938 | (132,892 | ) | (106,526 | ) | — | 4,030,361 | ||||||||||||||||||||
Issuance of ordinary shares for acquisitions | 7,885 | 45 | 182,544 | — | — | — | 182,589 | ||||||||||||||||||||||
Exercise of stock options | 7,989 | 44 | 42,227 | — | — | — | 42,271 | ||||||||||||||||||||||
Ordinary shares issued under Employee Stock Purchase Plan | 767 | 4 | 15,407 | — | — | — | 15,411 | ||||||||||||||||||||||
Sale of ordinary shares in public offering, net of offering costs | 20,000 | 109 | 503,691 | — | — | — | 503,800 | ||||||||||||||||||||||
Repurchase of equity instrument (Note 9) | — | — | (112,000 | ) | — | — | — | (112,000 | ) | ||||||||||||||||||||
Net loss | — | — | — | (153,748 | ) | — | — | (153,748 | ) | ||||||||||||||||||||
Change in unrealized gain (loss) on available for sale securities | — | — | — | — | (3,853 | ) | — | (3,853 | ) | ||||||||||||||||||||
Change in derivative instruments | — | — | — | — | 54 | — | 54 | ||||||||||||||||||||||
Foreign currency translation | — | — | — | — | (49,389 | ) | — | (49,389 | ) | ||||||||||||||||||||
BALANCE AT MARCH 31, 2002 | 513,012 | 3,043 | 4,898,807 | (286,640 | ) | (159,714 | ) | — | 4,455,496 | ||||||||||||||||||||
Issuance of ordinary shares for acquisitions | 1,639 | 3 | 14,709 | — | — | — | 14,712 | ||||||||||||||||||||||
Exercise of stock options | 4,567 | 26 | 17,970 | — | — | — | 17,996 | ||||||||||||||||||||||
Ordinary shares issued under Employee Stock Purchase Plan | 1,010 | 6 | 9,883 | — | — | — | 9,889 | ||||||||||||||||||||||
Net loss | — | — | — | (83,453 | ) | — | — | (83,453 | ) | ||||||||||||||||||||
Deferred stock compensation | — | — | 7,232 | — | — | (7,232 | ) | — | |||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | 1,085 | 1,085 | ||||||||||||||||||||||
Change in derivative instruments, net of tax | — | — | — | — | (1,223 | ) | — | (1,223 | ) | ||||||||||||||||||||
Foreign currency translation, net of tax | — | — | — | — | 127,518 | — | 127,518 | ||||||||||||||||||||||
BALANCE AT MARCH 31, 2003 | 520,228 | $ | 3,078 | $ | 4,948,601 | $ | (370,093 | ) | $ | (33,419 | ) | $ | (6,147 | ) | $ | 4,542,020 | |||||||||||||
Retained | Accumulated | |||||||||||||||||||||||||||
Additional | earning / | other | Total | |||||||||||||||||||||||||
paid-in | (accumulated | comprehensive | Deferred | shareholders' | ||||||||||||||||||||||||
Shares | Amount | capital | deficit) | income (loss) | compensation | equity | ||||||||||||||||||||||
BALANCE AT MARCH 31, 2001 | 476,371 | $ | 2,841 | $ | 4,266,938 | $ | (132,892 | ) | $ | (106,526 | ) | $ | — | $ | 4,030,361 | |||||||||||||
Issuance of ordinary shares for acquisitions | 7,885 | 45 | 182,544 | — | — | — | 182,589 | |||||||||||||||||||||
Exercise of stock options | 7,989 | 44 | 42,227 | — | — | — | 42,271 | |||||||||||||||||||||
Ordinary shares issued under Employee Stock Purchase Plan | 767 | 4 | 15,407 | — | — | — | 15,411 | |||||||||||||||||||||
Sales of ordinary shares in public offering, net of offering costs | 20,000 | 109 | 503,691 | — | — | — | 503,800 | |||||||||||||||||||||
Repurchase of equity instrument (Note 9) | — | — | (112,000 | ) | — | — | — | (112,000 | ) | |||||||||||||||||||
Net loss | — | — | — | (153,748 | ) | — | — | (153,748 | ) | |||||||||||||||||||
Unrealized gain (loss) on investment and derivative instruments, net of taxes | — | — | — | — | (3,799 | ) | — | (3,799 | ) | |||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (49,389 | ) | — | (49,389 | ) | |||||||||||||||||||
BALANCE AT MARCH 31, 2002 | 513,012 | 3,043 | 4,898,807 | (286,640 | ) | (159,714 | ) | — | 4,455,496 | |||||||||||||||||||
Issuance of ordinary shares for acquisitions | 1,639 | 3 | 14,709 | — | — | — | 14,712 | |||||||||||||||||||||
Exercise of stock options | 4,567 | 26 | 17,970 | — | — | — | 17,996 | |||||||||||||||||||||
Ordinary shares issued under Employee Stock Purchase Plan | 1,010 | 6 | 9,883 | — | — | — | 9,889 | |||||||||||||||||||||
Net loss | — | — | — | (83,453 | ) | — | — | (83,453 | ) | |||||||||||||||||||
Deferred stock compensation | — | — | 7,232 | — | — | (7,232 | ) | — | ||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | 1,085 | 1,085 | |||||||||||||||||||||
Unrealized loss on derivative instruments, net of taxes | — | — | — | — | (1,223 | ) | — | (1,223 | ) | |||||||||||||||||||
Foreign currency translation adjustments, net of taxes | — | — | — | — | 127,518 | — | 127,518 | |||||||||||||||||||||
BALANCE AT MARCH 31, 2003 | 520,228 | 3,078 | 4,948,601 | (370,093 | ) | (33,419 | ) | (6,147 | ) | 4,542,020 | ||||||||||||||||||
Issuance of ordinary shares for acquisitions | 517 | 2 | 3,160 | — | — | — | 3,162 | |||||||||||||||||||||
Exercise of stock options | 8,235 | 49 | 54,776 | — | — | — | 54,825 | |||||||||||||||||||||
Ordinary shares issued under Employee Stock Purchase Plan | 718 | 5 | 6,283 | — | — | — | 6,288 | |||||||||||||||||||||
Issuance of restricted shares | 246 | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||||
Net loss | — | — | — | (352,378 | ) | — | — | (352,378 | ) | |||||||||||||||||||
Deferred stock compensation | — | — | 2,171 | — | — | (2,171 | ) | — | ||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | 1,772 | 1,772 | |||||||||||||||||||||
Unrealized gain on investment and derivatives, net of taxes | — | — | — | — | 5,561 | — | 5,561 | |||||||||||||||||||||
Foreign currency translation adjustments, net of taxes | — | — | — | — | 105,963 | — | 105,963 | |||||||||||||||||||||
BALANCE AT MARCH 31, 2004 | 529,944 | $ | 3,135 | $ | 5,014,990 | $ | (722,471 | ) | $ | 78,105 | $ | (6,546 | ) | $ | 4,367,213 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3237
FLEXTRONICS INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended March 31, | |||||||||||||||
2003 | 2002 | 2001 | |||||||||||||
(In thousands) | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||
Net loss | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||||||
Depreciation, amortization and non-cash impairment charges | 419,086 | 483,631 | 518,985 | ||||||||||||
Loss (gain) on sales of equipment | (1,200 | ) | 2,258 | (1,382 | ) | ||||||||||
Provision for doubtful accounts | 2,647 | 3,664 | 9,429 | ||||||||||||
Provision for lower of cost or market | 4,891 | 4,977 | 33,634 | ||||||||||||
Equity in earnings of associated companies | 515 | — | (79 | ) | |||||||||||
Amortization of deferred stock compensation | 1,085 | — | 5,084 | ||||||||||||
Non-cash charge from issuance of equity instrument | — | — | 286,537 | ||||||||||||
Minority interest expense and other non-cash unusual charges | 26,571 | 150,130 | 139,067 | ||||||||||||
Deferred income taxes | (92,798 | ) | (182,677 | ) | (179,744 | ) | |||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||||||
Accounts receivable | 496,193 | (163,712 | ) | (581,225 | ) | ||||||||||
Inventories | 184,710 | 639,954 | (559,842 | ) | |||||||||||
Other assets | 127,535 | (242,242 | ) | (159,902 | ) | ||||||||||
Other current liabilities, including accounts payable | (477,998 | ) | 316,673 | 465,732 | |||||||||||
Net cash provided by (used in) operating activities | 607,784 | 858,908 | (469,725 | ) | |||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||
Purchases of property and equipment, net of dispositions | (208,311 | ) | (330,392 | ) | (711,227 | ) | |||||||||
Purchases of OEM facilities and related assets | (8,143 | ) | (396,346 | ) | (239,042 | ) | |||||||||
Acquisitions of businesses, net of cash acquired | (501,602 | ) | (314,498 | ) | (158,882 | ) | |||||||||
Other investments and notes receivable | (94,990 | ) | (42,024 | ) | (7,488 | ) | |||||||||
Net cash used in investing activities | (813,046 | ) | (1,083,260 | ) | (1,116,639 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||
Bank borrowings and proceeds from long-term debt | 892,961 | 1,268,564 | 1,420,594 | ||||||||||||
Repayments of bank borrowings and long-term debt | (1,000,159 | ) | (1,314,881 | ) | (1,451,114 | ) | |||||||||
Repayments of capital lease obligations | (24,231 | ) | (33,822 | ) | (31,788 | ) | |||||||||
Dividends paid to former shareholders | — | — | (190 | ) | |||||||||||
Proceeds from exercise of stock options and Employee Stock Purchase Plan | 27,885 | 57,682 | 78,484 | ||||||||||||
Net proceeds from sale of ordinary shares in public offering | — | 503,800 | 1,421,671 | ||||||||||||
Proceeds from issuance of equity instrument | — | — | 100,000 | ||||||||||||
Repurchase of equity instrument | — | (112,000 | ) | — | |||||||||||
Net cash provided by (used in) financing activities | (103,544 | ) | 369,343 | 1,537,657 | |||||||||||
Effect on cash from: | |||||||||||||||
Exchange rate changes | (12,298 | ) | (31,455 | ) | (34,048 | ) | |||||||||
Adjustment to conform fiscal year of pooled entities | — | — | (32,706 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | (321,104 | ) | 113,536 | (115,461 | ) | ||||||||||
Cash and cash equivalents, beginning of year | 745,124 | 631,588 | 747,049 | ||||||||||||
Cash and cash equivalents, end of year | $ | 424,020 | $ | 745,124 | $ | 631,588 | |||||||||
(in thousands)
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (352,378 | ) | $ | (83,453 | ) | $ | (153,748 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation, amortization and impairment charges | 662,798 | 419,086 | 483,631 | |||||||||
Loss (gain) on sale of equipment | (2,206 | ) | (1,200 | ) | 2,258 | |||||||
Provision for doubtful accounts | 1,256 | 2,647 | 3,664 | |||||||||
Provision for lower of cost of market of inventories | 15,806 | 4,891 | 4,977 | |||||||||
Equity in earnings (losses) of associated companies and other charges | (181 | ) | 27,086 | 150,130 | ||||||||
Amortization of deferred stock compensation | 1,772 | 1,085 | — | |||||||||
Deferred income taxes | (97,171 | ) | (92,798 | ) | (182,677 | ) | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable | (381,948 | ) | 496,193 | (163,712 | ) | |||||||
Inventories | (56,108 | ) | 184,710 | 639,954 | ||||||||
Other assets | (139,691 | ) | 127,535 | (242,242 | ) | |||||||
Accounts payable and other current liabilities | 535,749 | (477,998 | ) | 316,673 | ||||||||
Net cash provided by operating activities | 187,698 | 607,784 | 858,908 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment, net of disposition | (181,461 | ) | (208,311 | ) | (330,392 | ) | ||||||
Purchases of OEM facilities and related assets | — | (8,143 | ) | (396,346 | ) | |||||||
Acquisition of businesses, net of cash acquired | (119,983 | ) | (501,602 | ) | (314,498 | ) | ||||||
Other investments and notes receivable | (102,323 | ) | (94,990 | ) | (42,024 | ) | ||||||
Net cash used in investing activities | (403,767 | ) | (813,046 | ) | (1,083,260 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Bank borrowings and proceeds from long-term debt | 1,446,592 | 892,961 | 1,268,564 | |||||||||
Repayments of bank borrowings and long-term debt | (1,008,692 | ) | (1,000,159 | ) | (1,314,881 | ) | ||||||
Repayment of capital lease obligations | (12,613 | ) | (24,231 | ) | (33,822 | ) | ||||||
Payment for early extinguishment of debt | (91,647 | ) | — | — | ||||||||
Proceeds from exercise of stock options and Employee Stock Purchase Plan | 61,113 | 27,885 | 57,682 | |||||||||
Net proceeds from issuance of ordinary shares in public offering | — | — | 503,800 | |||||||||
Repurchase of equity instrument | — | — | (112,000 | ) | ||||||||
Net cash provided by (used in) financing activities | 394,753 | (103,544 | ) | 369,343 | ||||||||
Effect of exchange rate on cash | 12,572 | (12,298 | ) | (31,455 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 191,256 | (321,104 | ) | 113,536 | ||||||||
Cash and cash equivalents, beginning of year | 424,020 | 745,124 | 631,588 | |||||||||
Cash and cash equivalents, end of year | $ | 615,276 | $ | 424,020 | $ | 745,124 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3338
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2003
1. ORGANIZATION OF THE COMPANY
Flextronics International Ltd. (“Flextronics” or the “Company”) was incorporated in the Republic of Singapore in May 1990. The Company is a leading provider of advanced electronics manufacturing services or EMS,(EMS) to original equipment manufacturers or OEMs, primarily in the handheld electronics devices, information technologies(OEMs) that span a broad range of products and communicationsindustry segments, including cellular phones, printers and imaging, telecom/datacom infrastructure, computer and office automation,medical, automotive, industrial systems and consumer devices industries. Flextronics provides design, engineering, manufacturing, logistics, and network services.electronics. The Company’s strategy is to provide customers with end-to-end operationala complete range of services where it takes responsibility for design, engineering,that are designed to meet their product requirements throughout their product development life cycle. The Company’s provides customers with global end-to-end supply chain management,services that include design and related engineering, new product introduction, and implementation, manufacturing, and logistics management, with the goal of delivering a complete packaged product. The Company also provides after-market services such as repair and warranty services as well as network and communications installation and maintenance.
In addition to the assembly of printed circuit boards or PCBs and complete systems and products, Flextronics’the Company’s manufacturing services include the fabrication and assembly of plastic and metal enclosures, the fabrication of PCBs and backplanes (which are PCBs into which other printed circuit boards or cards may be inserted)and backplanes and the fabrication and assembly of photonics components. ThroughoutThe Company also provides contract design and related engineering services which include all aspects of product design including industrial and mechanical design, hardware design, embedded and application software development, semiconductor design, system validation and test development through which it offers its customers the production process,choice of full product development, system integration, cost reductions and software application development.
In addition, the Company offerscombines its design and technology services; logisticsmanufacturing services such as materials procurement, inventory management, vendor management, packagingto design, develop and distribution; and automation of key components of the supply chain through advanced information technologies. The Company has recently begun providing original design manufacturing, or ODM, services where it designs and developsmanufacture complete products, such as cellcellular phones and related products, thatother consumer-related devices, which are sold to the end user by its OEM customers under theirthe OEMs’ brand name. Finally, the Company offers after-market services such as repair and warranty services and network and communications installation and maintenance.names. This service offering is referred to original design manufacturing (ODM).
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company’s fiscal year ends on March 31 of each year. Interim quarterly reporting periods end on the Friday closest to the last day of each fiscal quarter, except the third and fourth fiscal quarters which end on December 31 and March 31, respectively.
Amounts included in the financial statements are expressed in U.S. dollars unless otherwise designated as Singapore dollars (S$) or Euros (€).
The accompanying consolidated financial statements include the accounts of Flextronics and its wholly and majority-owned subsidiaries, after elimination of all significant intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
Translation of Foreign Currencies
The financial position and results of operations of certain of the Company’s subsidiaries are measured using a currency other than the U.S. dollar as their functional currency. Accordingly, for these subsidiaries all assets and liabilities are translated into U.S. dollars at the current exchange rates as of the respective balance sheet date. Revenue and expense items are translated at the average exchange rates prevailing during the period. Cumulative gains and losses from the translation of these subsidiaries’ financial statements are reported as a separate component of shareholders’ equity.
39
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Revenue from manufacturing services is generally recognized upon shipment of the manufactured product to the Company’s customers, under contractual terms, which are generally FOB shipping point. Revenue from other services and after-market services is recognized when the services have been performed. Upon shipment, title transfers and the customer assumes the risks and rewards of ownership of the product. Except in specific circumstances, there are no formal customer acceptance requirements or further Flextronics obligations subsequent to shipment. In specific circumstances in which there are such requirements or further Flextronics obligations, revenue is recognized at the point of said formal acceptance and upon completion of said obligations.
34
Cash, Cash Equivalents and Investments
All highly liquid investments with a maturitymaturities of three months or less at datefrom original dates of purchase are carried at fair market value and considered to be cash equivalents. Cash and cash equivalents consist of cash deposited in checking and money market accounts and certificates of deposit.
As of March 31, Cash and cash equivalents consisted of the following (in thousands):
2003 | 2002 | |||||||
Money market funds | $ | 180,727 | $ | 450,236 | ||||
Certificates of deposits | 9,664 | 8,877 | ||||||
$ | 190,391 | $ | 459,113 | |||||
As of March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Cash and bank balances | $ | 596,259 | $ | 233,629 | ||||
Money market funds | 14,501 | 180,727 | ||||||
Certificates of deposits | 4,516 | 9,664 | ||||||
$ | 615,276 | $ | 424,020 | |||||
The Company also has certain investments in non-publicly traded technology companies. These investments are included within Other Assets in the Company’s consolidated balance sheet and are carried at cost. As of March 31, 2004 and 2003, the investments totaled $41.9 million and $23.7 million, respectively. The Company continuously monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. During fiscal year 2003 fiscaland 2002, and fiscal 2001, the Company recorded unusual charges of $7.4 million $38.4 million and $9.5$38.4 million, respectively, for other than temporary impairment of its investments in certain of these non-publicly traded companies. See Note 9, “Unusual“Restructuring and Other Charges” for further discussion.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily accounts receivable, cash and cash equivalents, and investments. The Company performs ongoing credit evaluations of its customers’ financial condition and makes provisions for doubtful accounts based on the outcome of its credit evaluations. In fiscal year 2004, Hewlett-Packard and Sony-Ericsson each accounted for approximately 12% of the net sales. In fiscal year 2003, Hewlett-Packard and Sony-Ericsson accounted for approximately 12% and 11% of net sales, respectively. In fiscal year 2002, Ericsson accounted for approximately 15% of net sales. No other customer accounted for more than 10% of net sales in the three-year periodperiods ended March 31, 2003.2004, 2003 and 2002. The Company’s ten largest customers accounted for approximately 67%64%, 64%67% and 59%64% of its net sales, in fiscal years 2004, 2003 2002 and 2001,2002, respectively. The Company maintains cash and cash equivalents with various financial institutions that management believes to be of high credit quality. These financial institutions are located in many different locations throughout the world.
Inventories40
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Cost is comprised of direct materials, labor and overhead. As of March 31, theThe components of inventories, net of applicable reserves,lower of cost or market provisions, were as follows (in thousands):
2003 | 2002 | |||||||
Raw materials | $ | 692,881 | $ | 939,222 | ||||
Work-in-process | 231,738 | 221,846 | ||||||
Finished goods | 216,940 | 131,162 | ||||||
$ | 1,141,559 | $ | 1,292,230 | |||||
As of March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Raw materials | $ | 622,905 | $ | 692,881 | ||||
Work-in-progress | 242,435 | 231,738 | ||||||
Finished goods | 314,173 | 216,940 | ||||||
$ | 1,179,513 | $ | 1,141,559 | |||||
Property Plant and Equipment
Property plant and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets (three to thirty years), with the exception of building leasehold improvements, which are amortized over the life of the lease, if shorter. Repairs and maintenance costs are expensed as incurred. Property plant and equipment was comprised of the following as of March 31 (in thousands):
2003 | 2002 | |||||||
Machinery and equipment | $ | 1,495,633 | $ | 1,399,601 | ||||
Buildings | 770,057 | 693,764 | ||||||
Leasehold improvements | 94,901 | 98,521 | ||||||
Computer equipment and software | 230,695 | 225,706 | ||||||
Land and other | 373,369 | 447,585 | ||||||
2,964,655 | 2,865,177 | |||||||
Accumulated depreciation and amortization | (998,926 | ) | (832,682 | ) | ||||
Property, plant and equipment, net | $ | 1,965,729 | $ | 2,032,495 | ||||
As of March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Machinery and equipment | $ | 1,333,578 | $ | 1,495,633 | ||||
Buildings | 741,692 | 770,057 | ||||||
Leasehold improvements | 86,133 | 94,901 | ||||||
Computer equipment and software | 232,129 | 230,695 | ||||||
Land and other | 358,646 | 373,369 | ||||||
2,752,178 | 2,964,655 | |||||||
Accumulated depreciation and amortization | (1,127,178 | ) | (998,926 | ) | ||||
Property and equipment, net | $ | 1,625,000 | $ | 1,965,729 | ||||
Total depreciation expense associated with property and equipment is approximately $311.4 million and $327.4 million for fiscal year 2004 and 2003, respectively.
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparing its carrying amount to the projected discountedundiscounted cash flows the property and equipment are expected to generate. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value.
35
Income Taxes
The Company provides for income taxes in accordance with the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying the applicable statutory tax rate to the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
41
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair value based test. Additionally, an acquired intangible asset in a business combination should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. Other intangibles, with finite lives, will continue to be valued and amortized over their estimated useful lives; in-process research and development will continue to be written off immediately.
The Company adopted SFAS No. 142 in the first quarter of fiscal year 2002 and no longer amortizes goodwill. Goodwill of the reporting units is tested for impairment on an annual basis and between annual tests in certain circumstances. In November 2002, the date of the test was changed from March 31st to January 31st to enable the Company to meet its public reporting requirements. The Company believes that the accounting change described above is to an alternative accounting principal that is preferable under the circumstances and that the change is not intended to delay, accelerate or avoid an impairment charge. Goodwill is tested for impairment at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Reporting units are determined in accordance with SFAS 142 and represent components of the Company for which discrete financial information is available to management, and for which management regularly reviews the operating results. For purpose of the annual goodwill impairment evaluation, the Company has identified two separate reporting units: Electronic Manufacturing Services and Network Services. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment loss, if any. Further, in the event that the carrying amount of the Company as a whole is greater than its market capitalization, there is a potential likelihood that some or all of its goodwill would be considered impaired. In connection with the adoption of SFAS No. 142, and through subsequent periods, the Company has not recognized any impairment of its goodwill. However, no assurances can be given that future impairment tests of goodwill will not result in an impairment.
The Company performs its annual goodwill impairment test during its fiscal fourth quarter. During fiscal 2003, the actual date of the test was moved to an early date in the fourth quarter, to allow the Company to meet future public reporting requirements. The Company believes that the accounting change described above is to an alternative accounting principle that is preferable under the circumstances and that the change is not intended to delay, accelerate or avoid an impairment charge.
The following table summarizes the activity in the Company’s goodwill account during fiscal 2003year 2004 and fiscal 2002 (in thousands):
Balance as of April 1, 2001 | $ | 957,291 | ||
Additions | 532,158 | * | ||
Balance as of March 31, 2002 | 1,489,449 | |||
Additions | 544,090 | |||
Reclassification to other intangibles | (22,000 | ) | ||
Foreign currency translation adjustments | 112,532 | |||
Write-offs | (2,074 | )** | ||
Balance as of March 31, 2003 | $ | 2,121,997 | ||
Fiscal Year Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Balance, beginning of the year, | $ | 2,121,997 | $ | 1,489,449 | ||||
Additions | 450,959 | 544,090 | ||||||
Reclassification to other intangibles * | (2,381 | ) | (22,000 | ) | ||||
Foreign currency translation adjustments | 82,797 | 112,532 | ||||||
Write-offs ** | — | (2,074 | ) | |||||
Balance, end of the year, | $ | 2,653,372 | $ | 2,121,997 | ||||
* | ||
** | Write-offs include amounts related to our restructuring activities as further discussed in Note 9, |
Net loss for the fiscal 2001 adjusted to exclude goodwill amortization, net of tax was as follows (in thousands):
Net loss, as reported | $ | (446,019 | ) | |
Add back: goodwill amortization, net of tax | 50,573 | |||
Proforma net loss | $ | (395,446 | ) | |
The proforma effects of the adoption on net loss per share of the Company for the fiscal 2001 was as follows:
Basic net loss per share: | |||||
As reported | $ | (1.01 | ) | ||
Add back: goodwill amortization, net of tax | 0.12 | ||||
Proforma | $ | (0.89 | ) | ||
Diluted net loss per share: |
36
As reported | $ | (1.01 | ) | ||
Add back: goodwill amortization, net of tax | 0.12 | ||||
Proforma | $ | (0.89 | ) | ||
All of the Company’s acquired intangible assets are subject to amortization over their estimated useful lives. The Company’s intangible assets are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144, anAn impairment loss shall be recognized if the carrying amount of an intangible is not recoverable and its carrying amount exceeds its fair value. Intangible assets are comprised of contractual agreements, patents and trademarks, developed technologies and other acquired intangibles. Contractual agreementsintangibles and are being amortized over periods up to four years.on a straight-line basis. Patents and trademarks and developed technologies are being amortized on a straight-line basis over periods up to ten years. Other acquiredyears, while contractual agreements and other intangibles relate to favorable leases and customer lists, and are amortized on a straight-line basis over threeperiods ranging from five to ten years. No residual value is estimated for the intangible assets. During fiscal 2003,year 2004, there were $35.8$27.1 million of additions to intangible assets, primarily related to customerpurchased patents, license agreements purchasedand certain contractual agreements in connection with the Company’s acquisition of The Orbiant Group and certain other acquisitions completed in fiscal 2003.year 2004. The value of the Company’s intangible assets purchased through business combinations is principally determined based on third-party valuations of the net assets acquired. The Company is in the process of determining the value of its intangible assets acquired from various acquisitions completed in fiscal 2003year 2004 and expects to complete this by the end of the first quarter of fiscal 2004.year 2005. The components of intangible assets are as follows (in thousands):
March 31, 2003 | March 31, 2002 | ||||||||||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||||||||||
carrying | Accumulated | carrying | carrying | Accumulated | carrying | ||||||||||||||||||||
amount | amortization | amount | amount | amortization | amount | ||||||||||||||||||||
Intangibles: | |||||||||||||||||||||||||
Contractual agreements | $ | 61,629 | $ | (10,875 | ) | $ | 50,754 | $ | 44,168 | $ | (9,081 | ) | $ | 35,087 | |||||||||||
Patents and trademarks | 161 | (34 | ) | 127 | 206 | (93 | ) | 113 | |||||||||||||||||
Developed technologies | 7,633 | (5,546 | ) | 2,087 | 1,901 | (512 | ) | 1,389 | |||||||||||||||||
Other acquired intangibles | 47,639 | (29,694 | ) | 17,945 | 31,276 | (19,166 | ) | 12,110 | |||||||||||||||||
Total | $ | 117,062 | $ | (46,149 | ) | $ | 70,913 | $ | 77,551 | $ | (28,852 | ) | $ | 48,699 | |||||||||||
As of March 31, 2004 | As of March 31, 2003 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||
Contractual agreements | $ | 77,706 | $ | (31,584 | ) | $ | 46,122 | $ | 61,629 | $ | (10,875 | ) | $ | 50,754 | ||||||||||
Patents and trademarks | 2,611 | (536 | ) | 2,075 | 161 | (34 | ) | 127 | ||||||||||||||||
Developed technologies | 500 | (84 | ) | 416 | 7,633 | (5,546 | ) | 2,087 | ||||||||||||||||
Other acquired intangibles | 31,520 | (12,073 | ) | 19,447 | 47,639 | (29,694 | ) | 17,945 | ||||||||||||||||
Total | $ | 112,337 | $ | (44,277 | ) | $ | 68,060 | $ | 117,062 | $ | (46,149 | ) | $ | 70,913 | ||||||||||
42
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected future estimated annual amortization expense is as follows (in thousands):
Fiscal years ending: | |||||
2004 | $ | 27,859 | |||
2005 | 15,989 | ||||
2006 | 6,744 | ||||
2007 | 4,068 | ||||
2008 | 3,633 | ||||
Thereafter | 12,620 | ||||
Total amortization expense | $ | 70,913 | |||
Amount | ||||
Fiscal years ending March 31, | (in thousands) | |||
2005 | $ | 28,872 | ||
2006 | 14,939 | |||
2007 | 11,602 | |||
2008 | 4,925 | |||
2009 | 1,981 | |||
Thereafter | 5,741 | |||
Total amortization expenses | $ | 68,060 | ||
Other Current Liabilities
Other current liabilities were comprised of the following as of March 31 (in thousands):
2003 | 2002 | |||||||
Income taxes | $ | 17,421 | $ | 17,869 | ||||
Accrued payroll | 231,481 | 199,658 | ||||||
Sales taxes and other taxes | 88,809 | 119,144 | ||||||
Accrued expenses for unusual charges (see Note 9) | 87,807 | 161,147 | ||||||
Other accrued liabilities | 493,472 | 398,821 | ||||||
$ | 918,990 | $ | 896,639 | |||||
Derivative Instruments and Hedging Activities
On April 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and No. 138. All derivative instruments are recorded on the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded in shareholders’ equity as a separate component of accumulated other comprehensive income (loss) and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are immediately recognized in earnings. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the current period.
37
The Company is exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales, and assets and liabilities denominated in non-functional currencies. The Company has established currency risk management programs to protect against reductions in value and volatility of future cash flows caused by changes in foreign currency exchange rates. The Company enters into short-term foreign currency forward contracts to hedge only those currency exposures associated with certain assets and liabilities, mainly accounts receivable and accounts payable, and cash flows denominated in non-functional currencies.
As of March 31, 2003,2004, the fair value of these short-term foreign currency forward contracts was recorded as a liabilityan asset amounting to $1.1$8.9 million. At the same date, the Company had recorded in other comprehensive income (loss) deferred losses of approximately $1.2$2.0 million relating to the Company’s foreign currency forward contracts. These losses are expected to be recognized in earnings over the next twelve months. The gains and losses recognized in earnings due to hedge ineffectiveness were immaterial.
Trade Receivables Securitization
In March 2002, the Company entered into a trade receivables securitization agreement. Under this agreement, theThe Company continuously sells a designated pool of trade receivables to a third party qualified special purpose entity, which in turn sells an undivided ownership interest to a conduit, administered by an unaffiliated financial institution. In addition to this financial institution, the Company participates in the securitization agreement as an investor in the conduit. The securitization agreement allows the operating subsidiaries participating in the securitization to receive a cash payment for sold receivables, less a deferred purchase price receivable. The Company’s share of the total investment varies depending on certain criteria, mainly the collection performance on the sold receivables. The agreement, which expires in March 2004,2005, is subject to annual renewal. Currently, the unaffiliated financial institution’s maximum investment limit is $250.0$250 million. The Company has a recourse obligation that is
43
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
limited to the deferred purchase price receivable, which approximates 5% of the total sold receivables, and its own investment participation. Refer to Note 6, “Commitments and Contingencies,” for further discussion.
Accounting for Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. The Company adopted the transition guidance and annual disclosure provisions of SFAS No. 148 in the fourth quarter of fiscal 2003. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods after December 15, 2002. The Company will adopt the interim disclosure provisions in the first quarter of fiscal 2004.
At March 31, 2003,2004, the Company had six stock-based employee compensation plans, which are more fully described in Note 8, “Shareholders’ Equity”.Equity.” The Company accounts for its stock option awards to employees under the recognition and measurement principles of Accounting Principles Board (“APB”)(APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No compensation expense is recorded for options granted in which the exercise price equals or exceeds the market price of the underlying stock on the date of grant in accordance with the provisions of APB Opinion No. 25. The following table illustrates the effect on net loss and net loss per share had the Company applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
Fiscal Year Ended March 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Net loss, as reported | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | ||||
Deduct: Fair value compensation cost, net of tax | (56,267 | ) | (67,177 | ) | (150,475 | ) | |||||||
Proforma net loss | $ | (139,720 | ) | $ | (220,925 | ) | $ | (596,494 | ) | ||||
Basic net loss per share: | |||||||||||||
As reported | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | ||||
Proforma | $ | (0.27 | ) | $ | (0.45 | ) | $ | (1.35 | ) | ||||
Diluted net loss per share: | |||||||||||||
As reported | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | ||||
Proforma | $ | (0.27 | ) | $ | (0.45 | ) | $ | (1.35 | ) | ||||
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Net loss, as reported | $ | (352,378 | ) | $ | (83,453 | ) | $ | (153,748 | ) | |||
Less: Fair value compensation costs, net of taxes | (52,851 | ) | (71,826 | ) | (67,177 | ) | ||||||
Proforma net loss | $ | (405,229 | ) | $ | (155,279 | ) | $ | (220,925 | ) | |||
Basic and diluted net loss per share: | ||||||||||||
As reported | $ | (0.67 | ) | $ | (0.16 | ) | $ | (0.31 | ) | |||
Proforma | $ | (0.77 | ) | $ | (0.30 | ) | $ | (0.45 | ) | |||
In accordance with the disclosure provisions of SFAS No. 123, the fair value of employee stock options granted during fiscal years 2004, 2003 fiscaland 2002 and fiscal 2001 waswere estimated at the date of grant using the Black-Scholes model and the following weighted average assumptions:
Fiscal Year Ended March 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Volatility | 77 | % | 62 | % | 62 | % |
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Volatility | 84.8 | % | 77.0 | % | 62.0 | % | ||||||
Risk-free interest rate | 2.3 | % | 3.8 | % | 6.3 | % | ||||||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected option lives | 3.8 years | 3.6 years | 9.6 years |
38
Fiscal Year Ended March 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Risk-free interest rate range | 1.1% - 3.8 | % | 6.3 | % | 6.3 | % | ||||||
Dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Expected lives range | 0.5 – 3.6 yrs | 9.6 yrs | 3.6 yrs |
Fiscal Year Ended March 31, | ||||||||
2004 | 2003 | |||||||
Volatility | 44.0 | % | 44.0 | % | ||||
Risk-free interest rate | 1.4 | % | 1.1 | % | ||||
Dividend yield | 0.0 | % | 0.0 | % | ||||
Expected option lives | 0.5 years | 0.5 years |
Due to the subjective nature of the assumptions used in the Black-Scholes model, the proforma net loss and net loss per share disclosures may not reflect the associated fair value of the outstanding options.
44
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company provides restricted stock grants to key employees under its 2002 Interim Incentive Plan. Shares awarded under the plan vest in installments over a five-year period and unvested shares are forfeited upon termination of employment. During fiscal year 2004, 210,000 shares of restricted stock were granted with a fair value on the date of grant of $10.34 per share. During fiscal year 2003, 1,230,000 shares of restricted stock were granted with a fair value on the date of grant of $5.88 per share. The unearned compensation associated with the restricted stock grants was $6.5 million and $6.1 million as of March 31, 2003. This amount is2004 and March 31, 2003, respectively. The amounts are included in shareholders’ equity as a component of additional paid-in capital. Grants of restricted stock are recorded as compensation expense over the vesting period at the fair market value of the stock at the date of grant. In fiscal year 2004 and fiscal year 2003, compensation expense related to the restricted stock grants amounted to $1.8 million and $1.1 million.million, respectively.
Net Loss Per Share
Basic income (loss) per share is computed using the weighted average number of ordinary shares outstanding during the applicable periods.
Diluted income (loss) per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the applicable periods. Ordinary share equivalents include ordinary shares issuable upon the exercise of stock options and other equity instruments, and are computed using the treasury stock method.method, as well as shares issuable upon conversion of debt instruments.
Net loss per share data werewas computed as follows (in thousands, exceptfollows: Fiscal Year Ended March 31, 2004 2003 2002 (in thousands, except per share amounts) Basic and diluted net loss per share: Net loss $ (352,378 ) $ (83,453 ) $ (153,748 ) Shares used in computation: Weighted-average ordinary shares outstanding 525,318 517,198 489,553
Basic and diluted net loss per share $ (0.67 ) $ (0.16 ) $ (0.31 )
Due to the Company’s reported net losses, the ordinary share equivalents from stock options to purchase 13,668,419, 8,730,635, and 19,285,683 shares outstanding were excluded from the computation of diluted earnings per share amounts):
Fiscal Year Ended March 31, | |||||||||||||||||
2003 | 2002 | 2001 | |||||||||||||||
Basic net loss per share: | |||||||||||||||||
Net loss | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | ||||||||
Shares used in computation: | |||||||||||||||||
Weighted-average ordinary shares outstanding | 517,198 | 489,553 | 441,991 | ||||||||||||||
Basic net loss per share | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | ||||||||
Diluted net loss per share: | |||||||||||||||||
Net loss | $ | (83,453 | ) | $ | (153,748 | ) | $ | (446,019 | ) | ||||||||
Shares used in computation: | |||||||||||||||||
Weighted-average ordinary shares outstanding | 517,198 | 489,553 | 441,991 | ||||||||||||||
Diluted net loss per share | $ | (0.16 | ) | $ | (0.31 | ) | $ | (1.01 | ) | ||||||||
New Accounting Pronouncements Additionally, ordinary share equivalents from convertible debt and other equity instruments of 19,898,893, 809,772 and 1,374,358 shares outstanding were anti-dilutive for fiscal years 2004, 2003 and 2002, respectively, and therefore not assumed to be converted for diluted earnings per share computation. The ordinary share equivalents from the 1% convertible subordinated notes due August 2010 are excluded from the computation of diluted earnings per share due to its anti-dilutive nature. The Company has the positive intent and ability to settle the face value of the notes in cash and to settle any conversion spread (excess of conversion value over face value) in stock.
Asset Retirement Obligations45
39
FLEXTRONICS INTERNATIONAL LTD.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” to be effective for all fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS No. 143 establishes accounting standards for the recognitionNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
Derivative Instruments and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. The Company will adopt SFAS No. 143 in fiscal 2004. The Company does not believe the adoption of SFAS No. 143 will have a material impact on the Company’s financial position, results of operations or cash flows.
Extinguishment of Debt and Sale-Leaseback Transactions
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” will now be used to classify those gains and losses. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases,” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company will adopt the provisions of SFAS No. 145 related to the rescission of Statement No. 4 in the first quarter of fiscal 2004. The Company does not believe the adoption of these provisions will have a material impact on the Company’s financial position, results of operations or cash flows. The provisions in paragraphs 8 and 9(c) of SFAS No. 145 related to Statement No. 13 are required to be effective for transactions occurring after May 15, 2002 and thus the Company has adopted these provisions. The adoption of these provisions did not have any impact on the financial position, results of operations or cash flows of the Company.
Exit or DisposalHedging Activities
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. The adoption of these provisions did not have any impact on the financial position, results of operations or cash flows of the Company.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to the issuance of FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 now requires a variable interest entity, as defined in FIN 46, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. It is reasonably possible that the Company will consolidate its synthetic leases when it adopts the consolidation requirements of FIN 46 in the first quarter of fiscal 2004. The Company does not believe the adoption of FIN 46 will have a material impact on the Company’s financial position, results of operations or cash flows.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation specifies the disclosures to be made by a guarantor in its interim and annual financial statements concerning its obligations under certain guarantees that it has issued. FIN 45 also requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. The initial recognition and initial measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. Accordingly, the Company has adopted the disclosure provisions of FIN 45. The adoption of these provisions did not have a material impact on the Company’s financial position, results of operations or cash flows.
40
In fiscal 2002, the Company entered into “synthetic” operating leases with respect to properties located in Mexico and Texas. During fiscal 2002, the Company completed construction on the property in Mexico and began construction on the property in Texas, which was completed by the end of fiscal 2003. The amount outstanding on the Mexico and Texas properties as of March 31, 2003, was $22.9 million and $67.0 million, respectively. Upon the expiration of these leases in 2006 and 2007, respectively, the Company may renew the leases for an additional five years subject to certain approvals and conditions, or arrange a sale of the buildings to a third party. The Company also has the right to purchase the buildings at cost at the end of the lease terms, or to terminate the leases at any time by paying the outstanding termination value. The Company has provided a residual value guarantee, which means that if the building is sold to a third party, it is responsible for making up any shortfall between the actual sales price and the amount funded under the leases. The maximum potential amount of the residual value guarantee is $76.4 million.
In April 2003, the FASB issued SFAS No. 149, “AmendmentNo.149, ''Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.”’’ SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with anand initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and2003. The adoption of the adoption isstandard did not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, ''Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.’’ SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the statement, which previously were often classified as equity, must now be classified as liabilities. This statement is effective for financial periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position, results of operation or cash flows.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
The following information relates totable represents supplemental cash flow disclosure and non-cash investing and financing activities during the fiscal years ended March 31 (in thousands):
2003 | 2002 | 2001 | |||||||||||
Cash paid for: | |||||||||||||
Interest | $ | 107,395 | $ | 120,399 | $ | 68,363 | |||||||
Income taxes | 11,348 | 22,157 | 15,312 | ||||||||||
Non-cash investing and financing activities: | |||||||||||||
Equipment acquired under capital lease obligations | — | 3,921 | 10,318 | ||||||||||
Issuance of ordinary shares for purchases of OEM assets | — | — | 26,902 | ||||||||||
Issuance of ordinary shares for acquisitions of businesses | 14,712 | 182,589 | 338,583 |
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Net cash paid for: | ||||||||||||
Interest | $ | 89,244 | $ | 107,395 | $ | 120,399 | ||||||
Income taxes | $ | 36,356 | $ | 11,348 | $ | 22,157 | ||||||
Non-cash investing and financing activities: | ||||||||||||
Equipment acquired under capital lease obligations | $ | 18,713 | $ | — | $ | 3,921 | ||||||
Issuance of ordinary shares for acquisition of businesses | $ | 3,162 | $ | 14,712 | $ | 182,589 |
46
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BANK BORROWINGS AND LONG-TERM DEBT
In June 2000, the Company issued approximately $645.0 million of senior subordinated notes, consisting of $500.0 million of 9.875% notes Bank borrowings and€150.0 million of 9.75% notes. Interest is payable on July 1 and January 1 of each year, commencing January 1, 2001. The notes mature on July 1, 2010. The Company may redeem the notes on or after July 1, 2005. The approximate fair values long-term debt was comprised of the 9.875% notesfollowing: As of March 31, 2004 2003 (in thousands) Short term bank borrowings $ 89,335 $ 40,314 0.00% convertible junior subordinated notes 200,000 200,000 9.875% senior subordinated notes, net of discount 7,659 497,172 9.75% Euro senior subordinated notes 181,422 160,192 8.75% senior subordinated notes — 150,000 1.00% convertible subordinated notes 500,000 — 6.50% senior subordinated notes 399,650 — Outstanding under revolving lines of credit 220,000 — Other 107,398 46,750
1,705,464 1,094,428 Current portion (96,287 ) (52,484 )
Non-current portion $ 1,609,177 $ 1,041,944
Maturities for the Company’s bank borrowings and the 9.75% notes based on broker trading prices were 110.125%other long-term debt are as follows:
Amount | ||||
Fiscal years ending March 31, | (in thousands) | |||
2005 | $ | 96,287 | ||
2006 | 6,665 | |||
2007 | 223,244 | |||
2008 | 287,412 | |||
2009 | 444 | |||
Thereafter | 1,091,412 | |||
Total | $ | 1,705,464 | ||
Revolving Credit Facilities and 106.0% of the face values on March 31, 2003, respectively.
Additionally, the Company has $150.0 million in unsecured senior subordinated notes outstanding with an annual interest rate of 8.75%. Interest is payable on April 15 and October 15 of each year. The notes mature on October 15, 2007. The approximate fair value of the notes based on broker trading prices was 104.5% of the face value on March 31, 2003.
The indentures relating to the notes contain certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to (i) incur additional debt, (ii) issue or sell stock of certain subsidiaries, (iii) engage in asset sales, and (iv) make distributions or pay dividends. The covenants are subject to a number of significant expectations and limitations.Other Credit Lines
In March 2003, the Company issued $200.0 million zero coupon, zero yield, convertible junior subordinated notes maturing in March 2008. The notes are callable by the Company after three years and do not provide a put option prior to maturity. The notes are convertible into ordinary shares at a conversion price of $10.50 per share and are payable in cash or stock at maturity, at the Company’s option.
In March 2003,2004, the Company renewed and increased its revolving credit facility with a syndicate of domestic and foreign banks from $800.0$880 million to $880.0 million.$1.1 billion. The credit facility consists of two separate credit agreements, one providing for up to $440.0$550 million principal amount of revolving credit loans to the Company and designated subsidiaries; and one providing for up to $440.0$550 million principal amount of revolving credit loans to a U.S. subsidiary of the Company. Of the total amount of each agreement, $173.3 million relates toThis credit facility is a new 364-dayfour-year facility and $266.7 million expiresexpiring in March 2005.2008. Borrowings under the credit facility bear interest, at the Company’s option, either at (i) the base rate (as defined in the credit facility)facility; or 4.5% as of March 31, 2004); or (ii) the LIBOR rate (as defined in the credit facility)facility; or 1.09% as of March 31, 2004) plus the applicable margin for LIBOR loans ranging between 1.125%0.75% and 2.50%, based on our credit ratings and facility usage. The
41
Company is required to pay a quarterly commitment fee ranging from 0.15% to 0.50% per annum, based on the Company’s credit ratings, of the unutilized portion of the credit facility.
The credit facility is unsecured, and contains certain restrictions on the Company’s ability to (i) incur certain debt, (ii) make certain investments and (iii) make certain acquisitions of other entities. The credit facility also requires that the Company maintain certain financial covenants, including, among other things, a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation, and amortization), and a minimum ratio of fixed charge coverage, and a minimum net worth, as defined, during the term of the credit facility. Borrowings under the credit facility are guaranteed by the Company and certain of its subsidiaries. As of March 31, 2003,2004, there were no borrowingswas $220.0 million outstanding under the credit facility.
Certain subsidiaries of the Company have various lines of credit available with annual interest rates generally ranging from 3.03%2.03% to 4.0%5.49%. These lines of credit expire on various dates through 2003.2008. The Company also has term loans with annual interest rates generally ranging from 2.25%2.0% to 17.0% with terms of up to 20 years.5.49%. These lines of credit and term loans are primarily secured by assignment of account receivables and assets.
47
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.0% Convertible Subordinated Notes
In August 2003, the Company issued $500.0 million aggregate principal amount of its 1% convertible subordinated notes due August 2010. The notes are convertible at any time prior to maturity into ordinary shares of the Company’s stock at a conversion price of $15.525 (subject to certain adjustments). The Company used a portion of the net proceeds from this issuance and other cash sources to repurchase $492.3 million aggregate principal amount, or 98.5%, of its outstanding 9.875% senior subordinated notes due July 2010. In connection with the repurchase, the Company incurred a loss of approximately $95.2 million during second quarter of fiscal year 2004 associated with the early extinguishment of the notes.
6.5% Senior Subordinated Notes
In May 2003, the Company issued $400.0 million aggregate principal amount of its 6.5% senior subordinated notes due May 2013. In June 2003, the Company used $156.6 million of the net proceeds from the issuance to redeem all of its outstanding 8.75% senior subordinated notes due October 2007, of which $150.0 million aggregate principal was outstanding. In connection with the redemption, the Company incurred a loss of approximately $8.7 million during first quarter of fiscal year 2004 associated with the early extinguishment of the notes.
The indentures relating to the Company’s outstanding senior subordinated notes contain certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to (i) incur additional debt, (ii) issue or sell stock of certain subsidiaries, (iii) engage in certain asset sales, and (iv) make distributions or pay dividends. The covenants are subject to a number of significant exceptions and limitations.
Zero Coupon Convertible Junior Subordinated Notes
In March 2003, the Company issued $200.0 million, zero coupon, zero yield, convertible junior subordinated notes maturing in March 2008. The notes are callable by the Company after three years and do not provide a put option prior to maturity. The notes are convertible into ordinary shares at a conversion price of $10.50 per share and are payable in cash or stock at maturity, at the Company’s option.
Mortgages
The Company has financed the purchase of certain facilities with mortgages. The mortgages generally have terms of up to 15 years and annual interest rates up to 7.2% and are secured by the underlying properties with a net book value of approximately $6.8$5.8 million at March 31, 2003.2004.
Bank borrowings and long-term debt was comprised As of March 31, 2004, the approximate fair values of the following at March 31 (in thousands):
2003 | 2002 | |||||||
Senior subordinated notes | $ | 807,364 | $ | 778,269 | ||||
Convertible junior subordinated notes | 200,000 | — | ||||||
Outstanding under lines of credit | 31,859 | 194,609 | ||||||
Mortgages | 5,241 | 15,554 | ||||||
Term loans and other debt | 49,964 | 137,128 | ||||||
1,094,428 | 1,125,560 | |||||||
Current portion | (52,484 | ) | (282,478 | ) | ||||
Non-current portion | $ | 1,041,944 | $ | 843,082 | ||||
Maturities for the Company’s bank borrowings and other long-term debt are as follows for the years ending March 31 (in thousands):
2004 | $ | 52,484 | ||
2005 | 18,728 | |||
2006 | 3,116 | |||
2007 | 31 | |||
2008 | 354,523 | |||
Thereafter | 665,546 | |||
$ | 1,094,428 | |||
5. FINANCIAL INSTRUMENTS
The value of the Company’s cash and cash equivalents, investments, accounts receivable and accounts payable carrying amount approximates fair value. The fair value of the Company’s long-term debt (see Note 4, “Bank Borrowings and Long-Term Debt”) is determined based on current broker trading prices. The Company’s cash equivalents are comprised of cash deposited in money market accounts and certificates of deposit (see Note 2, “Summary of Accounting Policies”). The Company’s investment policy limits the amount of credit exposure to 20% of the total investment portfolio in any single issuer.
The Company enters into forward exchange contracts to hedge underlying transactional currency exposures and does not engage in foreign currency speculation. The credit risk of these forward contracts is minimalminimized since the contracts are with large financial institutions. The Company hedges committed exposures and these forward contracts generally do not subject the Company to risk of accounting losses. The gains and losses on forward contracts generally offset the gains and losses on the assets, liabilities and transactions hedged. On April 1, 2001, the Company adopted SFAS No. 133, as amended by SFAS No. 137 and No. 138, and as such the fair value of foreign currency forward contracts are reported on the balance sheet. The aggregate notional amount of outstanding contracts as of March 31, 20032004 was $807.2 million.$1.5 billion. The majority of these foreign exchange contracts expire in less than one month and
48
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
almost all expire within three months. They will settle in Euro, British pound, Hong Kong dollar, Hungarian forint, Japanese yen, Malaysian ringgit, Norwegian kronor, Polish zloty, Singapore dollar, South African rand, Swedish krona, Swiss franc, Thai Baht and U.S. dollar.
6. COMMITMENTS AND CONTINGENCIES
As of March 31, 20032004 and 2002,2003, the gross carrying amount of the Company’s machineryproperty and equipment financed under capital leases amounted to approximately $51.1$38.3 million and $117.8$51.1 million, respectively. Accumulated depreciation for property and equipment
42
under capital leases totaled $28.0$14.7 million and $36.8$28.0 million at March 31, 20032004 and 2002,2003, respectively. These capital leases have interest rates ranging from 2.75%2.5% to 13.0%9.0%. The Company also leases certain of its facilities under non-cancelable operating leases. The capital and operating leases expire in various years through 2033 and require the following minimum lease payments for the years ending March 31 (in thousands):
Capital | Operating | |||||||
2004 | $ | 8,951 | $ | 103,599 | ||||
2005 | 3,629 | 65,782 | ||||||
2006 | 2,537 | 49,404 | ||||||
2007 | 376 | 36,077 | ||||||
2008 | 289 | 27,650 | ||||||
Thereafter | 1,778 | 175,033 | ||||||
Minimum lease payments | 17,560 | $ | 457,545 | |||||
Amount representing interest | (2,029 | ) | ||||||
Present value of minimum lease payments | 15,531 | |||||||
Current portion | (7,622 | ) | ||||||
Capital lease obligations, net of current portion | $ | 7,909 | ||||||
Capital | Operating | |||||||
Fiscal year ending March 31, | Lease | Lease | ||||||
(in thousands) | ||||||||
2005 | $ | 9,036 | $ | 61,089 | ||||
2006 | 8,220 | 44,849 | ||||||
2007 | 5,047 | 33,193 | ||||||
2008 | 714 | 25,272 | ||||||
2009 | 325 | 22,047 | ||||||
Thereafter | 1,404 | 173,863 | ||||||
Total minimum lease payments | 24,746 | $ | 360,313 | |||||
Amount representing interest | (1,459 | ) | ||||||
Present value of total minimum lease payments | 23,287 | |||||||
Current portion | (8,203 | ) | ||||||
Capital lease obligation, net of current portion | $ | 15,084 | ||||||
Total rent expense was $94.1 million, $116.3 million $93.0 million and $78.7$93.0 million for fiscal years 2004, 2003 fiscaland 2002, and fiscal 2001, respectively.
Included in the above remaining operating lease payments commitments are payments under two leases located in Mexico and Texas. The amounts outstanding on the Mexico and Texas properties asRefer to Note 13, ''Consolidation of March 31, 2003, were $22.9 million and $67.0 million, respectively. Upon the expiration of these leases in 2006 and 2007, respectively, the Company may renew the leasesVariable Interest Entities '' for an additional five years subject to certain approvals and conditions, or arrange a sale of the buildings to a third party. The Company also has the right to purchase the buildings at cost at the end of the lease terms, or to terminate the leases at any time by paying the outstanding termination value. The Company has provided a residual value guarantee, which means that if the building is sold to a third party, the Company is responsible for making up any shortfall between the actual sales price and the amount funded under the leases. The maximum potential amount of the residual value guarantee is $76.4 million.further discussion.
The Company continuously sells a designated pool of trade receivables to a third party qualified special purpose entity, which in turn sells an undivided ownership interest to a conduit, administered by an unaffiliated financial institution. In addition to this financial institution, the Company participates in the securitization agreement as an investor in the conduit. The securitization agreement allows the operating subsidiaries participating in the securitization to receive a cash payment for sold receivables, less a deferred purchase price receivable. The Company’s share of the total investment varies depending on certain criteria, mainly the collection performance on the sold receivables. The agreement, which expires in March 2004,2005, is subject to annual renewal. Currently, the unaffiliated financial institution’s maximum investment limit is $250.0$250 million. The Company has sold $320.8$328 million of its accounts receivable as of March 31, 2003,2004, which represents the face amount of the total outstanding trade receivables on all designated customer accounts at that date. The Company received net cash proceeds of $168.3$172.1 million from the unaffiliated financial institution for the sale of these receivables. The Company has a recourse obligation that is limited to the deferred purchase price receivable, which approximates 5% of the total sold receivables, and its own investment participation, the total of which was $152.5$161.6 million as of March 31, 2003.2004.
The Company continues to service, administer and collect the receivables on behalf of the special purpose entity and receives a servicing fee of 1.0% of serviced receivables per annum. The Company pays facility and commitment fees of up to 0.24% for unused amounts and program fees of up to 0.34% of outstanding amounts.
49
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accounts receivable balances that were sold were removed from the consolidated balance sheet and are reflected as cash provided by operating activities in the consolidated statement of cash flows.
Between June and August 2002, the Company and certain of its officers and directors were named as defendants in several securities class action lawsuits that seek an unspecified amount of damages, which were filed in the UnitedUntied States District Court for the Southern District of New York. These actions, which were filed on behalf of those who purchased, or otherwise acquired, Flextronics’ ordinary shares between October 2,January 18, 2001 and June 4, 2002, including those who purchased ordinary shares in our secondary offerings on February 1, 2001 and January 7, 2002. These actions generally allege that, during this period, the defendants made misstatements to the investing public about the financial condition and prospects of Flextronics. After the Court consolidated these actions, plaintiffs amended their allegations to change the class period to January 18, 2001 to June 4, 2002. They also added claims on behalf of plaintiffs who purchased shares pursuant to, or traceable to, the secondary offerings of Flextronics on February 1, 2001 and January 7, 2002. In addition, plaintiffs added claims against the underwriters involved in those offerings. On April 23, 2003, the Court entered an order transferring these lawsuits to the United States District Court for the Northern District of California.
These actions seek unspecified damages. Although On July 16, 2003, Flextronics filed a motion to dismiss on behalf of the Company believes thatand its officers and directors named as defendants. On November 17, 2003, the plaintiffs’Court entered an order granting defendants’ motion to dismiss without prejudice. On January 28, 2004, plaintiffs filed an amended complaint. Flextronics’ motion to dismiss the amended complaint was filed on March 10, 2004.
In May 2004, the parties reached a tentative settlement of all claims lack meritin the lawsuit and intendsthe defendants withdrew their motion to vigorously defend these lawsuits,dismiss. The settlement would be funded entirely by funds from Flextronics Officers’ and Directors’ insurance. The settlement agreement is subject to negotiation and documentation of a formal stipulation of settlement, as well as Court approval. If the Companysettlement is unable to predict the ultimate outcome of these lawsuits. Therenot finalized, there can be no assurance the Company will be successful in defending thesethe lawsuits, and, if the Company is unsuccessful, itthe Company may be subject to significant damages. Even if the Company iswere to be successful, defending the lawsuits may be expensive and may divert management’s attention from other business concerns and harm the Company’s business.
43
The Company is also partysubject to various legal proceedings, that ariseclaims, and litigation arising in the normalordinary course of business. InThe Company defends itself vigorously against any such claims. While the opinionoutcome of these matters is currently not determinable, management does not expect that the ultimate disposition ofcosts to resolve these proceedingsmatters will not have a material adverse effect on ourthe Company’s consolidated financial position, liquidity or results of operations.operations, or cash flows.
7. INCOME TAXES
The domestic (“Singapore”) and foreign components of lossincome (loss) before income taxes were comprised of the followingfollowing: Fiscal Year Ended March 31, 2004 2003 2002 (in thousands) Domestic $ 19,251 $ 33,628 $ 146,820 Foreign (439,370 ) (180,867 ) (389,422 )
Total $ (420,119 ) $ (147,239 ) $ (242,602 )
The provision for the years ended March 31 (in thousands):
2003 | 2002 | 2001 | |||||||||||
Domestic | $ | 33,628 | $ | 146,820 | $ | (269,771 | ) | ||||||
Foreign | (180,867 | ) | (389,422 | ) | (282,533 | ) | |||||||
Total | $ | (147,239 | ) | $ | (242,602 | ) | $ | (552,304 | ) | ||||
The benefit from(benefit from) income taxes consisted of the following for the years ended March 31 (in thousands):
2003 | 2002 | 2001 | ||||||||||||
Current: | ||||||||||||||
Domestic | $ | 4,095 | $ | 2,807 | $ | 6,607 | ||||||||
Foreign | 18,361 | 22,760 | 27,170 | |||||||||||
22,456 | 25,567 | 33,777 | ||||||||||||
Deferred: | ||||||||||||||
Domestic | 700 | 1,913 | (2,206 | ) | ||||||||||
Foreign | (86,942 | ) | (116,334 | ) | (137,856 | ) | ||||||||
(86,242 | ) | (114,421 | ) | (140,062 | ) | |||||||||
Benefit from income taxes | $ | (63,786 | ) | $ | (88,854 | ) | $ | (106,285 | ) | |||||
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Current: | ||||||||||||
Domestic | $ | 3,388 | $ | 4,095 | $ | 2,807 | ||||||
Foreign | 91,282 | 18,361 | 22,760 | |||||||||
94,670 | 22,456 | 25,567 | ||||||||||
Deferred: | ||||||||||||
Domestic | (599 | ) | 700 | 1,913 | ||||||||
Foreign | (161,812 | ) | (86,942 | ) | (116,334 | ) | ||||||
(162,411 | ) | (86,242 | ) | (114,421 | ) | |||||||
Benefit from income taxes | $ | (67,741 | ) | $ | (63,786 | ) | $ | (88,854 | ) | |||
50
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The domestic statutory income tax rate was approximately 20.0%, 22.0% for fiscal 2003 and 24.5% for fiscal year 2004, 2003 and 2002, and fiscal 2001.respectively. The reconciliation of the income tax benefit expected based on domestic statutory income tax rates to the benefit for income taxes included in the consolidated statements of operations for the years ended March 31 is as follows (in thousands):
2003 | 2002 | 2001 | |||||||||||
Income taxes based on domestic statutory rates | $ | (32,392 | ) | $ | (59,438 | ) | $ | (135,315 | ) | ||||
Effect of tax rate differential | (128,969 | ) | (131,261 | ) | (138,105 | ) | |||||||
Goodwill and other intangibles amortization | 4,872 | 3,091 | 15,568 | ||||||||||
Motorola unusual charge | — | — | 70,201 | ||||||||||
Merger expenses | — | — | 16,059 | ||||||||||
Change in valuation allowance | 117,894 | 116,226 | 26,848 | ||||||||||
Other | (25,191 | ) | (17,472 | ) | 38,459 | ||||||||
Benefit from income taxes | $ | (63,786 | ) | $ | (88,854 | ) | $ | (106,285 | ) | ||||
Fiscal Year Ended March 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Income tax based on domestic statutory rates | $ | (84,024 | ) | $ | (32,392 | ) | $ | (59,438 | ) | |||
Effect of tax rate differential | (114,143 | ) | (128,969 | ) | (131,261 | ) | ||||||
Goodwill and other intangibles amortization | 3,672 | 4,872 | 3,091 | |||||||||
Change in valuation allowance | 142,556 | 117,894 | 116,226 | |||||||||
Other | (15,802 | ) | (25,191 | ) | (17,472 | ) | ||||||
Benefit from income taxes | $ | (67,741 | ) | $ | (63,786 | ) | $ | (88,854 | ) | |||
The components of deferred income taxes are as follows as of March 31 (in thousands):
2003 | 2002 | |||||||||
Deferred tax liabilities: | ||||||||||
Fixed assets | $ | (35,876 | ) | $ | (16,323 | ) | ||||
Intangible assets | (20,756 | ) | — | |||||||
Others | (11,998 | ) | (3,555 | ) | ||||||
Total deferred tax liabilities | (68,630 | ) | (19,878 | ) | ||||||
Deferred tax assets: | ||||||||||
Intangible assets | — | 8,944 | ||||||||
Deferred compensation | 26,490 | 60,939 | ||||||||
Provision for inventory obsolescence | 16,087 | 37,792 | ||||||||
Provision for doubtful accounts | 5,719 | 10,963 | ||||||||
Net operating loss and other carryforwards | 836,587 | 508,626 | ||||||||
Others | 52,149 | 50,382 | ||||||||
937,032 | 677,646 | |||||||||
Valuation allowances | (424,208 | ) | (292,818 | ) | ||||||
Total deferred tax asset | 512,824 | 384,828 | ||||||||
Net deferred tax asset | $ | 444,194 | $ | 364,950 | ||||||
The net deferred tax asset is classified as follows: | ||||||||||
Current | $ | 29,153 | $ | 51,954 | ||||||
Long-term | 415,041 | 312,996 | ||||||||
Total | $ | 444,194 | $ | 364,950 | ||||||
44
follows:
As of March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Deferred tax liabilities: | ||||||||
Fixed assets | $ | (39,373 | ) | $ | (35,876 | ) | ||
Intangible assets | (27,540 | ) | (20,756 | ) | ||||
Others | (1,684 | ) | (11,998 | ) | ||||
Total deferred tax liabilities | (68,597 | ) | (68,630 | ) | ||||
Deferred tax assets: | ||||||||
Deferred compensation | 8,229 | 26,490 | ||||||
Provision for inventory obsolescence | 15,138 | 16,087 | ||||||
Provision for doubtful accounts | 3,674 | 5,719 | ||||||
Net operating loss and other carryforwards | 1,169,906 | 836,587 | ||||||
Others | 64,245 | 52,149 | ||||||
1,261,193 | 937,032 | |||||||
Valuation allowances | (573,567 | ) | (424,208 | ) | ||||
Total deferred tax asset | 687,626 | 512,824 | ||||||
Net deferred tax asset | $ | 619,029 | $ | 444,194 | ||||
Classification of net deferred tax asset: | ||||||||
Current | $ | 14,244 | $ | 29,153 | ||||
Long-term | 604,785 | 415,041 | ||||||
Total | $ | 619,029 | $ | 444,194 | ||||
A deferred tax asset arises from available loss carryforwards and non-deductible accruals. The Company has total tax loss carryforwards of approximately $2.1$3.1 billion, a portion of which begin expiring in tax year 2010. The utilization of these tax loss deductions is limited to the future operations of the Company in the tax jurisdictions in which such loss deductions arose. As a result, management is uncertain as to when or whether these operations will generate sufficient profit to realize the deferred tax asset benefit. The valuation allowance provides a reserve against deferred tax assets that may expire or go unutilized by the Company. However, management has determined that it is more likely than not that the Company will realize certain of these benefits and, accordingly, has recognized a deferred tax asset from these benefits. Approximately $23.0$30.0 million of the valuation allowance relates to income tax
51
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
benefits arising from the exercise of stock options, which will be credited directly to shareholders’ equity and will not be available to benefit the income tax provision in any future period.
The amount of deferred tax assets considered realizable, however, could be reduced or increased in the near-term if facts, including the amount of taxable income or the mix of taxable income between subsidiaries, differ from management’s estimates.
The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries, as such earnings are not intended by management to be repatriated in the foreseeable future. Determination of the amount of the unrecognized deferred tax liability on these undistributed earnings is not practicable.
8. SHAREHOLDERS’ EQUITY
Secondary Offerings
During fiscal year 2002, and fiscal 2001, the Company completed twoa secondary offeringsoffering of 20,000,000 of its ordinary shares. Theshares, for which the Company received net proceeds of approximately $503.8 million (20,000,000 ordinary shares sold) and $1.4 billion (39,650,000 ordinary shares sold) in fiscal 2002 and fiscal 2001, respectively.million.
Stock Splits
In fiscal 2001, the Company effected a two-for-one stock split. A distribution of 209,001,331 ordinary shares occurred on October 16, 2000. The stock split was effected as a bonus issue (the Singapore equivalent of a stock dividend). The Company has accounted for this transaction as a stock split and all share and per share amounts have been retroactively restated to reflect the stock split.
Strategic Alliance
In connection with the Company’s strategic alliance with Motorola Inc. (“Motorola”) in May 2000, Motorola paid $100.0 million for an equity instrument that entitled it to acquire 22,000,000 million Flextronics ordinary shares at any time through December 31, 2005 upon meeting targeted purchase levels or making additional payments to the Company. The issuance of this equity instrument resulted in a one-time charge equal to the excess of the fair value of the equity instrument issued over the $100.0 million proceeds received. As a result, the one-time non-cash charge amounted to approximately $286.5 million offset by a corresponding credit to additional paid-in capital in the first quarter of fiscal 2001.
In June 2001, the Company entered into an agreement with Motorola under which it repurchased this equity instrument for $112.0 million. The fair value of the equity instrument on the date it was repurchased exceeded the amount paid to repurchase the equity instrument. Accordingly, the Company accounted for the repurchase of the equity instrument as a reduction to shareholders’ equity in the accompanying consolidated statement of shareholders’ equity.
Stock Option and Incentive Plans
At March 31, 2003,2004, the Company hashad six stock-based employee compensation plans,plans: the 2002 Interim Incentive Plan (the “2002 Plan”), the 2001 Equity Incentive Plan (the “2001 Plan”), the 1999 Interim Option Plan, the 1998 Interim Option Plan, and the 1997 Interim Option Plan, and the 1997 Employee Stock Purchase Plan.
The 2001 Plan provides for grants of up to 7,000,000 shares. Additionally, the remaining shares that were available under the Company’s 1993 Share Option Plan (the “1993 Plan”) upon adoption of the 2001 Plan and any shares issuable upon exercise of the options granted under the 1993 Plan that expire or become unexercisable for any reason without having been exercised in full, are available for grant under the 2001 Plan. The adoption of the 2001 Plan mandated that no additional options be granted under the 1993 Plan. Any options outstanding under the 1993 Plan will remain outstanding until exercised or until they terminate or expire by their terms. The 2001 Plan contains two separate equity incentive programs including a discretionary option grant program and an automatic option grant program. The discretionary option grant program is administered by the Compensation Committee with respect to officers and directors and by the Chairman of the Company’s Board, with respect to all other employees.
45
Options issued under the 2001 Plan and 1993 Plan generally vest over 4four years. Options granted under the 2001 Plan generally expire 10 years from the date of grant. Pursuant to an amendment to the provisions relating to the term of options provided under the 1993 Plan, options granted subsequent to October 1, 2000 expire 10ten years from the date of grant, rather than the five-year term previously provided. The 2001 Plan and 1993 Plan provide for option grants at an exercise price equal to the fair market value per ordinary share on the option grant date.
The 2002 Plan provides for grants of up to 20,000,000 shares. The plan provides grants of nonqualified stock options to employees, officers and directors. The exercise price of options granted under the 2002 Plan is determined by the Company’s Compensation Committee and generally has an exercise price equal to the fair market value of the underlying stock on the date of grant. Options issued under the 2002 Plan generally vest over 4four years and generally expire 10ten years from the date of grant.
The Company’s 1999, 1998 and 1997 Interim Option Plans provide for grants of up to 5,200,000, 3,144,000, and 2,000,000 stock options, respectively. These plans provide grants of non-statutory stock options to employees and other qualified individuals to purchase ordinary shares of the Company. Options under these plans cannot be granted to executive officers and directors. All Interim Option Plans provide for option grants at an exercise price of not less than 85% of the fair market value of the underlying stock on the date of grant. Options issued under these plans generally vest over 4four years. Options granted under the 1999 Interim Option Plan expire 5five years from the date of grant. Options granted prior to July 2002 under the 1998 and 1997 Interim Option Plans expire 5five years from the date of grant and all subsequent option grants generally expire 10ten years from the date of grant.
The Company’s 1997 Employee Stock Purchase Plan (the “Purchase Plan”) provides for issuance of up to 3,400,000 ordinary shares. The Purchase Plan was approved by the shareholders in October 1997. Under the Purchase Plan, employees may purchase, on a periodic basis, a limited number of ordinary shares through payroll deductions over a six-month period up to 10% of each participant’s compensation. The per share purchase price is 85% of the fair market value of the stock at the beginning or end of the
52
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
offering period, whichever is lower. The ordinary shares sold under this plan in fiscal 2003,year 2004, fiscal 2002year 2003 and fiscal 2001,year 2002, amounted to 717,595, 1,009,692 767,301 and 445,476,767,301, respectively. The weighted-average fair value of ordinary shares sold under this plan in fiscal years 2004, 2003 fiscaland 2002 were $10.30, $9.79 and fiscal 2001 was $9.79, $20.08 and $20.00 per share, respectively.
The following table presents the activity for options outstanding under all of the stock option plans as of March 31 (“Price” reflects the weighted average exercise price):
2003 | 2002 | 2001 | ||||||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||||||
Outstanding, beginning of year | 45,641,139 | $ | 15.00 | 47,235,431 | $ | 13.35 | 44,853,772 | $ | 7.46 | |||||||||||||||
Granted | 19,864,076 | 6.97 | 9,009,567 | 16.51 | 14,655,646 | 23.23 | ||||||||||||||||||
Exercised | (4,567,256 | ) | 4.05 | (7,989,287 | ) | 5.43 | (11,404,613 | ) | 5.54 | |||||||||||||||
Forfeited | (5,255,426 | ) | 21.25 | (2,614,572 | ) | 18.86 | (869,374 | ) | 23.98 | |||||||||||||||
Outstanding, end of year | 55,682,533 | $ | 11.35 | 45,641,139 | $ | 15.00 | 47,235,431 | $ | 13.35 | |||||||||||||||
Exercisable, end of year | 31,056,183 | 24,490,124 | 21,065,008 | |||||||||||||||||||||
Weighted average fair value per option granted | $ | 4.84 | $ | 12.43 | $ | 12.60 | ||||||||||||||||||
As of March 31, 2004 | As of March 31, 2003 | As of March 31, 2002 | ||||||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||||||
Outstanding, beginning of fiscal year | 55,682,533 | $ | 11.35 | 45,641,139 | $ | 15.00 | 47,235,431 | $ | 13.35 | |||||||||||||||
Granted | 8,841,856 | 15.60 | 19,864,076 | 6.97 | 9,009,567 | 16.51 | ||||||||||||||||||
Exercised | (8,235,283 | ) | 6.66 | (4,567,256 | ) | 4.05 | (7,989,287 | ) | 5.43 | |||||||||||||||
Forfeited | (5,985,107 | ) | 11.39 | (5,255,426 | ) | 21.25 | (2,614,572 | ) | 18.86 | |||||||||||||||
Outstanding, end of fiscal year | 50,303,999 | $ | 12.86 | 55,682,533 | $ | 11.35 | 45,641,139 | $ | 15.00 | |||||||||||||||
Options exercisable, end of fiscal year | 27,638,781 | 31,056,183 | 24,490,124 | |||||||||||||||||||||
Weighted average fair value per option granted | $ | 9.47 | $ | 4.84 | $ | 12.43 | ||||||||||||||||||
The following table presents the composition of options outstanding and exercisable as of March 31, 2003 (“Price”2004: Options Outstanding Options Exercisable Weighted Weighted Weighted Average Average Average Number of Contractual Exercise Number of Exercise Range of Exercise Prices Shares Life Price Shares Price $0.42-$7.53 9,206,720 5.36 $ 4.90 6,897,892 $ 4.54 $7.56-$7.90 11,915,344 8.05 7.90 3,326,697 7.90 $8.01-$14.50 10,163,712 4.91 12.21 7,383,533 12.64 $14.60-$17.50 10,808,613 8.65 16.61 2,919,619 15.96 $17.69-$44.13 8,209,610 4.20 24.83 7,111,040 25.05
$0.42-$44.13 50,303,999 6.43 $ 12.86 27,638,781 $ 13.59
53
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. RESTRUCTURING AND OTHER CHARGES
In recent years, the Company has initiated a series of restructuring activities in light of the global economic downturn. These activities, which are intended to realign the Company’s global capacity and “Life” reflectinfrastructure with demand by its OEM customers and thereby improve operational efficiency, include:
• | reducing excess workforce and capacity, | |||
• | consolidating and relocating certain manufacturing facilities to lower cost regions, and | |||
• | consolidating and relocating certain administrative facilities. |
The restructuring costs include employee severance, costs related to leased facilities, owned facilities that are no longer in use and are to be disposed of, leased equipment that is no longer in use and will be disposed of, and other costs associated with the weighted average exercise priceexit of certain contractual agreements due to facility closures. The overall impact of these activities is that the Company has shifted its manufacturing capacity to locations with higher efficiencies and, weighted average contractual life unless otherwise noted):
Options Outstanding | Options Exercisable | ||||||||||||||||||||||||
Range of | |||||||||||||||||||||||||
Exercise Prices | Amount | Price | Life | Amount | Price | ||||||||||||||||||||
$ | 0.00 | - | $ | 5.88 | 14,208,841 | $ | 4.03 | 5.47 | 8,885,747 | $ | 3.72 | ||||||||||||||
5.96 | - | 13.98 | 22,909,428 | 8.38 | 6.91 | 10,773,547 | 8.76 | ||||||||||||||||||
14.03 | - | 15.90 | 7,846,508 | 15.17 | 5.47 | 4,587,567 | 14.94 | ||||||||||||||||||
15.95 | - | 23.02 | 2,325,394 | 20.28 | 7.06 | 1,254,352 | 20.23 | ||||||||||||||||||
23.09 | - | 44.12 | 8,392,362 | 25.82 | 4.61 | 5,554,970 | 26.08 | ||||||||||||||||||
Total | 55,682,533 | $ | 11.35 | 6.00 | 31,056,183 | $ | 11.80 | ||||||||||||||||||
9. UNUSUAL CHARGES The Company accounts for costs associated with restructuring activities initiated after December 31, 2002 in accordance with SFAS No. 146, ''Accounting for Costs Associated with Exit or Disposal Activities’’ which supersedes previous accounting guidance, principally Emerging Issues Task force Issue (EITF) No. 94-3, ''Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activities.’’ SFAS 146 requires that the liability for costs associated with exit or disposal of activities be recognized when the liability is incurred.
Fiscal 2003Year 2004
The Company recognized restructuring charges of approximately $540.3 million during fiscal year 2004 related to the closures and consolidation of, and impairment of certain long-term assets at various manufacturing facilities. The Company has classified $477.3 million of the charges associated with facility closures as a component of cost of sales during fiscal year 2004.
Restructuring charges recorded during fiscal year 2004 by reportable geographic regions were as follows: Americas, $215.4 million; Asia, $111.3 million; and Europe, $213.6 million.
The Company currently anticipates that the facility closures and activities to which all of these charges relate will be substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations.
The components of the restructuring charges during the quarters of fiscal year 2004 were as follows:
Fiscal Year Ended March 31, 2004 | ||||||||||||||||||||||||
First | Second | Third | Fourth | |||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Total | Nature | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Restructuring charges: | ||||||||||||||||||||||||
Severance | $ | 11,891 | $ | 20,075 | $ | 33,104 | $ | 38,663 | $ | 103,733 | cash | |||||||||||||
Long-lived asset impairment | 290,572 | 19,521 | 10,281 | 10,786 | 331,160 | non-cash | ||||||||||||||||||
Other exit costs | 24,645 | 20,656 | 27,634 | 32,520 | 105,455 | cash & non-cash | ||||||||||||||||||
Total restructuring charges | $ | 327,108 | $ | 60,252 | $ | 71,019 | $ | 81,969 | $ | 540,348 | ||||||||||||||
54
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal year 2004, the Company recorded approximately $103.7 million of employee termination costs associated with the involuntary terminations of 5,176 identified employees in connection with the various facility closures and consolidations. As of March 31, 2004, approximately 3,700 employees had been terminated, and another 1,400 employees had been notified that they are to be terminated upon completion of the various facility closures and consolidations. Approximately $84.6 million of the net unusual pre-taxcharges were classified as a component of cost of sales during fiscal year 2004.
During fiscal year 2004 the Company also recorded approximately $331.2 million for the write-down of property and equipment associated with various manufacturing and administrative facility closures. Approximately $317.4 million of this amount was classified as a component of cost of sales in fiscal year 2004. Certain assets will remain in service until their anticipated disposal dates pursuant to the exit plans. For assets being held for use, impairment is measured as the amount by which the carrying amount exceeds the fair value of the asset. This calculation is measured at the asset group level, which is the lowest level for which there are identifiable cash flows. The fair value of assets held for use was determined based on projected discounted cash flows of the asset, plus salvage value. Certain other assets are held for sale, as these assets are no longer required in operations. For assets held for sale, depreciation ceases and an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. Assets held for sale as of March 31, 2004 are included in other assets on the consolidated balance sheet.
The restructuring charges recorded during fiscal year 2004 also included approximately $105.5 million for other exit costs. Approximately $75.3 million of this amount was classified as a component of cost of sales in fiscal year 2004. Other exit costs included contractual obligations totaling $59.1 million, which were incurred directly as a result of the various exit plans. The contractual obligations consisted of facility lease terminations amounting to $46.2 million, equipment lease terminations amounting to $7.3 million and payments to suppliers and third parties to terminate contractual agreements amounting to $5.6 million. Expenses associated with lease obligations are estimated based on future lease payment, less any estimated sublease income. The Company expects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal year 2024, and through the end of 2005 with respect to the other contractual obligations with suppliers and third parties. Other exit costs also included charges of $17.7 million relating to asset impairments resulting from customer contracts that were terminated by the Company as a result of various facility closures. The Company has disposed of the impaired assets, primarily through scrapping and write-offs, by the end of fiscal year 2004. Other exit costs also included $4.1 million of net facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or to return the facilities to their respective landlords. The remaining $24.6 million primarily related to legal and consulting costs, and various government obligations for which the Company is liable as a direct result of its facility closures. The legal costs mainly relate to a settlement reached in November 2003 in the lawsuit with Beckman Coulter, Inc., relating to a contract dispute involving a manufacturing relationship between the companies. Pursuant to the terms of the settlement agreement, Flextronics agreed to a $23.0 million cash payment to Beckman Coulter to resolve the matter, and Beckman Coulter agreed to dismiss all pending claims against the Company and release the Company from any future claims relating to this matter.
The following table summarizes the provisions, payments and the accrual balance relating to restructuring costs incurred during fiscal year ended March 31, 2004:
Long-Lived | ||||||||||||||||
Asset | Other | |||||||||||||||
(in thousands) | Severance | Impairment | Exit Costs | Total | ||||||||||||
Activities during the year: | ||||||||||||||||
Provision | $ | 103,733 | $ | 331,160 | $ | 105,455 | $ | 540,348 | ||||||||
Cash payments | (81,357 | ) | — | (48,852 | ) | (130,209 | ) | |||||||||
Non-cash charges | — | (331,160 | ) | (17,872 | ) | (349,032 | ) | |||||||||
Balance as of March 31, 2004 | 22,376 | — | 38,731 | 61,107 | ||||||||||||
Less: | ||||||||||||||||
Current portion (classified as other current liabilities) | (21,276 | ) | — | (18,240 | ) | (39,516 | ) | |||||||||
Accrued facility closure costs, net of current portion (classified as other long-term liabilities) | $ | 1,100 | $ | — | $ | 20,491 | $ | 21,591 | ||||||||
55
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Year 2003
The Company accounted for costs associated with restructuring activities initiated prior to December 31, 2002 in accordance with EITF No. 94-3.
The Company recognized restructuring and other charges of approximately $304.4 million during fiscal year 2003, of which $297.0 million related to the closures and consolidations of various manufacturing facilities and $7.4 million related to the impairment of investments in certain technology companies. As further discussed below, $179.4 million and $86.9 million of the charges relating to facility closures were classified as a component of cost of sales in the first and third quarters of fiscal year 2003, respectively.
Net unusualrestructuring and other charges recorded during fiscal year 2003 by reportable geographic regions were as follows: Americas, $174.5 million; Asia, $1.8 million; and Europe, $128.1 million.
46
The components of the net unusualrestructuring and other charges recorded during the first and third quarters of fiscal year 2003 were as follows (in thousands):
First Quarter | Third Quarter | Total | ||||||||||||||||
Charges | Charges | Charges | ||||||||||||||||
Facility closure costs: | ||||||||||||||||||
Severance | $ | 76,901 | $ | 41,574 | $ | 118,475 | cash | |||||||||||
Long-lived asset impairment | 56,279 | 14,285 | 70,564 | non-cash | ||||||||||||||
Exit costs | 67,187 | 40,729 | 107,916 | cash/non-cash | ||||||||||||||
Total facility closure costs | 200,367 | 96,588 | 296,955 | |||||||||||||||
Other unusual charges | 7,456 | — | 7,456 | non-cash | ||||||||||||||
Net unusual charges before income tax benefit | 207,823 | 96,588 | 304,411 | |||||||||||||||
Income tax benefit | (49,826 | ) | (29,460 | ) | (79,286 | ) | ||||||||||||
Net unusual charges | $ | 157,997 | $ | 67,128 | $ | 225,125 | ||||||||||||
Fiscal Year Ended March 31, 2003 | ||||||||||||||||
First | Third | |||||||||||||||
Quarter | Quarter | Total | Nature | |||||||||||||
(in thousands) | ||||||||||||||||
Restructuring charges: | ||||||||||||||||
Severance | $ | 76,901 | $ | 41,574 | $ | 118,475 | cash | |||||||||
Long-lived asset impairment | 56,279 | 14,285 | 70,564 | non-cash | ||||||||||||
Other exit costs | 67,187 | 40,729 | 107,916 | cash & non-cash | ||||||||||||
Total restructuring charges | 200,367 | 96,588 | 296,955 | |||||||||||||
Other charges | 7,456 | — | 7,456 | |||||||||||||
Total restructuring and other charges | $ | 207,823 | $ | 96,588 | $ | 304,411 | ||||||||||
In connection with the facility closures, the Company developed formal plans to exit certain activities and involuntarily terminate employees. Management’s plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closure or consolidation into other facilities. Management currently anticipates that theThe facility closures and activities to which all of these charges relate will bewere substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations.
During fiscal year 2003, the Company recorded approximately $118.5 million of net employee termination costs associated with the involuntary terminations of 8,108 identified employees in connection with the various facility closures and consolidations. As of March 31, 2003, 7,218 employees had been terminated, and another 890 employees had been notified that they are to be terminated upon completion of the various facility closures and consolidations. Approximately $59.6 million and $34.6 million of the net charges were classified as a component of cost of sales in the first and third quarters of fiscal year 2003, respectively. The third quarter charges reflect a reversal of prior period unusual chargestermination costs of approximately $5.8 million due to changes in estimated severance payment amounts and a reduction in the number employees that were previously identified for termination.
The unusual pre-taxrestructuring charges recorded during fiscal year 2003 included $70.6 million for the net write-down of property, plant and equipment associated with various manufacturing and administrative facility closures from their carrying value of $121.4 million. Approximately $55.3 million and $9.5 million of this net amount were classified as a component of cost of sales in the first and third quarters of fiscal year 2003, respectively. Also included in long-lived asset impairment is approximately $1.0 million for the write-off of goodwill. The third quarter charges reflect a reversal of prior period unusualrestructuring charges of approximately $26.1 million due to changes in previously estimated fair values of certain property, plant and equipment. Certain assets will bewere held for use and remainremained in service until their anticipated disposal dates pursuant to the exit plans. For assets being held for use, impairment is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of assets held for use was determined based on projected discounted cash flows of the asset, using a discount rate reflecting the Company’s average cost of funds, plus salvage value. Certain other assets will bewere held for disposalsale, as these assets arewere no
56
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal,sale, depreciation ceases and an impairment loss iswas recognized if the carrying amount of the asset exceeds its fair value less cost to sell. The impaired long-lived assets resultedAssets held for sale as of March 31, 2003 were included in net write-downs of machinery and equipment of $58.4 million and building and improvements of $11.2 million.Other Assets on the consolidated balance sheet.
The unusual pre-taxrestructuring charges recorded during fiscal year 2003, also included approximately $107.9 million for other exit costs. Approximately $64.4 million and $42.8 million of this amount were classified as a component of cost of sales in the first and third quarters of fiscal year 2003, respectively. The third quarter charges reflect a reversal of prior period unusualrestructuring charges of approximately $7.3 million relating to revisions of previous estimates, primarily related to our ability to subsequently successfully negotiate reductions in certain contractual obligations. Other exit costs included contractual obligations totaling $75.6 million, which were incurred directly as a result of the various exit plans. The contractual obligations consisted of facility lease terminations amounting to $49.9 million, equipment lease terminations amounting to $14.4 million and payments to suppliers and third parties to terminate contractual agreements amounting to $11.3 million. Expenses associated with lease obligations are estimated based on future lease payment, less any estimated sublease income. The Company expects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal 2017 and with respect to the other contractual obligations with suppliers and third parties through the end of fiscal 2004.year 2017. Other exit costs also included charges of $19.7 million relating to asset impairments resulting from customer contracts that were terminated by the Company as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. The Company disposed of the impaired assets, primarily through scrapping and write-offs, by the end of fiscal year 2003. Other exit costs also included $11.0 million of net facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or to return the facilities to their respective landlords. The remaining $1.6 million primarily included incremental amounts of legal and consulting costs, and various government obligations for which the Company is liable as a direct result of its facility closures.
The following table summarizes the balance of the net accrued facility closure costs as March 31, 2003 and the type and amount of closure costs provisioned for and utilized during fiscalFiscal Year 2002 and 2003.
47
Long-lived | |||||||||||||||||
asset | Exit | ||||||||||||||||
Severance | impairment | costs | Total | ||||||||||||||
Balance at March 31, 2001 | $ | 71,734 | $ | — | $ | 95,343 | $ | 167,077 | |||||||||
Activities during the year: | |||||||||||||||||
Provision | 153,598 | 163,724 | 212,660 | 529,982 | |||||||||||||
Cash charges | (133,453 | ) | — | (123,902 | ) | (257,355 | ) | ||||||||||
Non-cash charges | — | (163,724 | ) | (115,433 | ) | (279,157 | ) | ||||||||||
Balance at March 31, 2002 | 91,879 | — | 68,668 | 160,547 | |||||||||||||
Activities during the year: | |||||||||||||||||
Provision (net of reversals) | 118,475 | 70,564 | 107,916 | 296,955 | |||||||||||||
Cash charges | (160,563 | ) | — | (90,204 | ) | (250,767 | ) | ||||||||||
Non-cash charges | — | (70,564 | ) | (16,576 | ) | (87,140 | ) | ||||||||||
Balance at March 31, 2003 | 49,791 | — | 69,804 | 119,595 | |||||||||||||
Less: current portion (classified as other current liabilities) | 46,308 | — | 41,499 | 87,807 | |||||||||||||
Accrued facility closure costs, net of current portion (classified as other long-term liabilities) | $ | 3,483 | $ | — | $ | 28,305 | $ | 31,788 | |||||||||
Fiscal 2002
The Company recognized unusual pre-taxrestructuring and other charges of approximately $574.4 million during fiscal year 2002, of which $530.0 million related to closures of several manufacturing facilities and $44.4 million was primarily for the impairment of investments in certain technology companies. As further discussed below, $464.4 million of the charges relating to facility closures were classified as a component of cost of sales.
UnusualRestructuring and other charges recorded in fiscal year 2002 by reportable geographic regions were as follows: Americas, $265.8 million; Asia, $70.7 million; and Europe, $237.9 million.
The components of the unusualrestructuring and other charges recorded in fiscal year 2002 were as follows (in thousands):
Facility closure costs: | ||||||||||
Severance | $ | 153,598 | cash | |||||||
Long-lived asset impairment | 163,724 | non-cash | ||||||||
Exit costs | 212,660 | cash/non-cash | ||||||||
Total facility closure costs | 529,982 | |||||||||
Other unusual charges | 44,444 | cash/non-cash | ||||||||
Unusual charges before income tax benefit | 574,426 | |||||||||
Income tax benefit | (122,948 | ) | ||||||||
Net unusual charges | $ | 451,478 | ||||||||
Amount | ||||||||
(in thousands) | Nature | |||||||
Restructuring and other costs: | ||||||||
Severance | $ | 153,598 | cash | |||||
Long-lived asset impairment | 163,724 | non-cash | ||||||
Exit costs | 212,660 | cash & non-cash | ||||||
Total restructuring and other costs | 529,982 | |||||||
Other charges | 44,444 | cash & non-cash | ||||||
Total restructuring and other charges | $ | 574,426 | ||||||
In connection with the facility closures in fiscal year 2002, the Company developed formal plans to exit certain activities and involuntarily terminate employees. Management’s plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closure or consolidation into other facilities. The facility closures and activities to which all of these charges relate were substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations.
Of the total pre-tax facility closure costsrestructuring charges recorded in fiscal year 2002, $153.6 million related to employee termination costs, of which $118.4 million was classified as a component of cost of sales. As a result of the various exit plans, the Company identified 13,391 employees to be involuntarily terminated in connection with the various facility closures and consolidations.
57
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unusual pre-taxrestructuring charges recorded in fiscal year 2002 included $163.7 million for the write-down of property, plant and equipment associated with various manufacturing and administrative facility closures from their carrying value of $232.6 million. This amount was classified as a component of cost of sales during fiscal year 2002. Certain assets will be held for use and remainremained in service until their anticipated disposal dates pursuant to the exit plans. Since the assets will remain in service from the date of the decision to dispose of these assets to the anticipated disposal date, the assets are beingplans, and were depreciated over thisthe expected remaining service period. For assets being held for use, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. Certain other assets will bewere held for disposalsale, as these assets are no longer required in operations. Assets held for disposal aresale were no longer being depreciated. For assets being held for disposal,depreciated, and an impairment loss iswas recognized if the carrying amount of the asset exceedsexceeded its fair value less cost to sell. The impaired long-lived assets resulted in write-downs of machinery and equipment of $105.7 million and building and improvements of $58.0 million.
The unusual pre-taxrestructuring charges also included approximately $212.7 million for other exit costs. Approximately $182.3 million of this amount was classified as a component of cost of sales. Other exit costs included contractual obligations totaling $61.6 million, which
48
were incurred directly as a result of the various exit plans. The contractual obligations consisted of facility lease terminations amounting to $27.2 million, equipment lease terminations amounting to $13.2 million and payments to suppliers and third parties to terminate contractual agreements amounting to $21.2 million. Expenses associated with lease obligations are estimated based on future lease payment, less any estimated sublease income. The Company expects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal year 2007 and with respect to the other contractual obligations with suppliers and third parties through the end of fiscal year 2003. Other exit costs also included charges of $98.0 million relating to asset impairments resulting from customer contracts that were terminated by the Company as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. The Company disposed of the impaired assets, primarily through scrapping and write-offs, by the end of fiscal year 2002. Also included in other exit costs were charges amounting to $8.0 million for the incremental costs for warranty work incurred by the Company for products sold prior to the commitment dates of the various exit plans. Other exit costs also included $8.2 million of facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or to return the facilities to their respective landlords. The remaining $36.9 million primarily included incremental amounts of legal and environmental costs, and various government obligations for which the Company is liable for as a direct result of its facility closures.
Fiscal 2001 The following table summarizes the provisions, payments and the accrual balance relating to restructuring costs initiated prior to March 31, 2003:
Long-Lived | ||||||||||||||||
�� | Asset | Other | ||||||||||||||
(in thousands) | Severance | Impairment | Exit Costs | Total | ||||||||||||
Balance as of March 31, 2002 | $ | 91,879 | $ | — | $ | 68,668 | $ | 160,547 | ||||||||
Activities during fiscal year 2003: | ||||||||||||||||
Provision | 118,475 | 70,564 | 107,916 | 296,955 | ||||||||||||
Cash payments | (160,563 | ) | — | (90,204 | ) | (250,767 | ) | |||||||||
Non-cash charges | — | (70,564 | ) | (16,576 | ) | (87,140 | ) | |||||||||
Balance as of March 31, 2003 | 49,791 | — | 69,804 | 119,595 | ||||||||||||
Activities during fiscal year 2004: | ||||||||||||||||
Cash payments | (45,071 | ) | — | (54,146 | ) | (99,217 | ) | |||||||||
Balance as of March 31, 2004 | 4,720 | — | 15,658 | 20,378 | ||||||||||||
Less: | ||||||||||||||||
Current portion (classified as other current liabilities) | (3,120 | ) | — | (7,039 | ) | (10,159 | ) | |||||||||
Accrued facility closure costs, net of current portion (classified as other long-term liabilities) | $ | 1,600 | $ | — | $ | 8,619 | $ | 10,219 | ||||||||
10. | RELATED PARTY TRANSACTIONS |
The Company recognized unusual pre-tax charges of approximately $973.3 million during fiscal year 2001. Of this amount, $493.1 million was recorded in the first quarter and was comprised of approximately $286.5 million relatedPrior to the issuance of an equity instrument to Motorola combined with approximately $206.6 million of expenses resulting from The DII Group, Inc. and Palo Alto Products International Pte. Ltd. mergers and related facility closures. In the second quarter, unusual pre-tax charges amounted to approximately $48.4 million associated with the mergers with Chatham Technologies, Inc. and Lightning Metal Specialties (and related entities) and related facility closures. In the third quarter,June 2002, the Company recognized unusual pre-tax charges of approximately $46.3 million, primarily related to the merger with JIT Holdings Ltd. and related facility closures. During the fourth quarter, the Company recognized unusual pre-tax charges, amounting to $376.1 million related to closures of several manufacturing facilities and $9.5 million of other unusual charges, specifically for the impairment of investments in certain technology companies.
On May 30, 2000, the Company entered into a strategic alliance for product manufacturing with Motorola. In connection with this strategic alliance, Motorola paid $100.0 million for an equity instrument that entitled it to acquire 22,000,000 million Flextronics ordinary shares at any time through December 31, 2005, upon meeting targeted purchase levels or making additional payments to the Company. The issuance of this equity instrument resulted in a one-time non-cash charge equal to the excess of the fair value of the equity instrument issued over the $100.0 million proceeds received. As a result, the one-time non-cash charge amounted to approximately $286.5 million offset by a corresponding credit to additional paid-in capital in the first quarter of fiscal 2001. In June 2001, the Company entered into an agreement with Motorola under which the Company repurchased this equity instrument for $112.0 million.
Unusual charges excluding the Motorola equity instrument by segments are as follows: Americas, $553.1 million; Asia, $86.5 million; and Europe, $47.2 million. Unusual charges related to the Motorola equity instrument is not specific to a particular segment, and as such, has not been allocated to a particular geographic segment.
The components of the unusual charges recorded in fiscal 2001 were as follows (in thousands):
Facility closure costs: | ||||||||||
Severance | $ | 132,473 | cash | |||||||
Long-lived asset impairment | 232,534 | non-cash | ||||||||
Exit costs | 209,922 | cash/non-cash | ||||||||
Total facility closure costs | 574,929 | |||||||||
Direct transaction costs: | ||||||||||
Professional fees | 64,348 | cash | ||||||||
Other costs | 38,078 | cash/non-cash | ||||||||
Total direct transaction costs | 102,426 | |||||||||
Motorola equity instrument | 286,537 | non-cash | ||||||||
Other unusual charges | 9,450 | non-cash | ||||||||
Unusual charges before income tax benefit | 973,342 | |||||||||
Income tax benefit | (152,500 | ) | ||||||||
Net unusual charges | $ | 820,842 | ||||||||
In connection with the fiscal 2001 facility closures, the Company developed formal plans to exit certain activities and involuntarily terminate employees. Management’s plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closure or consolidation into other facilities. The facility closures and activities to which all of these charges relate were substantially completed within one year of the commitment dates of the respective exit plans, except for certain long-term contractual obligations. As discussed below, $510.5 million of the charges relating to facility closures have been classified as a component of cost of sales during the fiscal 2001.
49
Of the total pre-tax facility closure costs recorded in fiscal 2001, $132.5 million related to employee termination costs, of which $68.1 million has been classified as a component of cost of sales. As a result of the various exit plans, the Company identified 11,269 employees to be involuntarily terminated related to the various mergers and facility closures.
The unusual pre-tax charges recorded in fiscal 2001 included $232.5 million for the write-down of long-lived assets to fair value. This amount has been classified as a component of cost of sales during fiscal 2001. Included in the long-lived asset impairment are charges of $229.1 million, which related to property, plant and equipment associated with the various manufacturing and administrative facility closures, which were written down to their fair value of $192.0 million as of March 31, 2001. Certain assets will be held for use and remain in service until their anticipated disposal dates pursuant to the exit plans. Since the assets will remain in service from the date of the decision to dispose of these assets to the anticipated disposal date, the assets are being depreciated over this expected period. For assets being held for use, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. Certain other assets will be held for disposal, as these assets are no longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. The impaired long-lived assets consisted primarily of machinery and equipment of $153.0 million and building and improvements of $76.1 million. The long-lived asset impairment also included the write-off of the remaining goodwill and other intangibles related to certain closed facilities of $3.4 million.
The unusual pre-tax charges recorded in fiscal 2001 also included approximately $209.9 million for other exit costs, which have been classified as a component of cost of sales. Other exit costs included contractual obligations totaling $85.4 million, which were incurred directly as a result of the various exit plans. These contractual obligations consisted of facility lease terminations amounting to $26.5 million, equipment lease terminations amounting to $31.4 million and payments to suppliers and other third parties to terminate contractual agreements amounting to $27.5 million. The Company expects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal 2006. All payments with respect to the other contractual obligations with suppliers and other third parties were paid in fiscal 2002. Other exit costs also included charges of $77.0 million relating to asset impairments resulting from customer contracts that were breached, when they were terminated by the Company, as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. The Company disposed of the impaired assets, primarily through scrapping and write-offs, by the end of fiscal 2001. Also included in other exit costs were charges amounting to $16.1 million for the incremental costs for warranty work incurred by us for products sold prior to the commitment dates of the various exit plans. Other exit costs also included $11.6 million of facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or return the facilities to its landlords. The remaining $19.8 million of other exit costs recorded were primarily associated with incremental amounts of legal and environmental costs, incurred directly as a result of the various exit plans and facility closures.
The direct transaction costs recorded in fiscal 2001 included approximately $64.3 million of costs primarily related to investment banking and financial advisory fees as well as legal and accounting costs associated with the merger transactions. Other direct transaction costs, which totaled approximately $38.1 million, were mainly comprised of accelerated debt prepayment expense, accelerated executive stock compensation and benefit-related expenses.
10. RELATED PARTY TRANSACTIONS
The Company loaned approximately $12.4 millionextended loans to several of its executive officers. Each loan iswas evidenced by a promissory note in favor of the Company and iswas generally secured by a deed of trust on property of the officer. Certain notes arewere non-interest
58
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
bearing and others havehad interest rates ranging from 2.48% to 7.25%5.85%. The remaining outstanding balance of the loans, including accrued interest, as of March 31, 2003,2004, was approximately $12.9$9.5 million. Additionally, in connection with an investment partnership, one of the Company’s subsidiaries made loans to several of ourits executive officers to fund their contributions to the investment partnership. Each loan iswas evidenced by a full-recourse promissory note in favor of the subsidiary.Company. Interest rates on the notes range from 5.05% to 6.40%. The remaining balance of these loans, including accrued interest, as of March 31, 20032004 was approximately $2.6$2.2 million. The Company will not make any further loans to its executive officers.
11. BUSINESS COMBINATIONS AND PURCHASES OF ASSETS
11. | BUSINESS COMBINATIONS AND PURCHASES OF ASSETS |
Fiscal Year 2004
During fiscal year 2004, the Company completed certain acquisitions that were not individually significant to the Company’s results of operations and financial position. The aggregate cash purchase price for the acquisitions amounted to $120.0 million, net of cash acquired. The fair value of the net liabilities assumed in fiscal year 2004 amounted to approximately $321.6 million. The costs of these acquisitions have been allocated on the basis of the estimated fair value of assets acquired and liabilities assumed. The purchase price for certain of these acquisitions is subject to adjustments for contingent consideration, based upon the businesses achieving specified levels of earnings through December 2006. The contingent consideration has not been recorded as part of the purchase price, pending the outcome of the contingency.
All of the above acquisitions were accounted for using the purchase method of accounting, and accordingly, the results of the acquired businesses were included in the Company’s consolidated statements of operations from the acquisition dates forward. Comparative proforma information has not been presented, as the results of operations were not material to the Company’s consolidated financial statements on either an individual or an aggregate basis. Goodwill and intangibles resulting from the Company’s fiscal year 2004 acquisitions amounted to approximately $468.6 million. The Company has not finalized the allocation of the consideration for certain of its recently completed acquisitions and expects to complete this by the end of the first quarter of fiscal year 2005.
Fiscal Year 2003
In October 2001, the Company announced a manufacturing agreement with Xerox Corporation. The Company acquired Xerox’s manufacturing operations in Aguascalientes, Mexico; El Segundo, California; Mitcheldean, U.K.; Penang, Malaysia; Resende, Brazil; Toronto, Canada; and Venray, Netherlands. The aggregate purchase price for the acquisition amounted to approximately $179.5 million, of which $14.4 million was paid in fiscal year 2003. The fair value of the net assets acquired in fiscal year 2003, amounted to approximately $9.4 million, including estimated acquisition costs. In connection with the acquisition of the operations, the Company entered into a five-year agreement for the manufacture of certain Xerox office equipment and components. The Company completed the acquisition in September 2002.
50
In August 2002, the Company acquired all of the outstanding shares of NatSteel Broadway Ltd. for an aggregate purchase price of approximately $356.9 million, net of cash acquired. The fair value of the net assets acquired amounted to approximately $41.5 million, including estimated acquisition costs. NatsteelNatSteel Broadway’s operations include manufacturing facilities in China and Hungary.
During fiscal year 2003, the Company completed certain other business acquisitions that were not individually significant to the Company’s results of operations and financial position. The aggregate cash purchase price for these acquisitions amounted to approximately $104.9 million, net of cash acquired. The aggregate fair value of the net liabilities acquired for these acquisitions amounted to approximately $34.2 million, including estimated acquisition costs. Additionally, approximately $25.4 million was paid and approximately 1.6 million ordinary shares were issued related to contingent purchase price adjustments for certain historical acquisitions.
All of the above acquisitions have beenwere accounted for using the purchase method of accounting, and accordingly, the results of the acquired businesses were included in the Company’s consolidated statements of operations from the acquisition dates forward. Comparative proforma information has not been presented, as the results of operations were not material to the Company’s consolidated financial statements on either an individual or an aggregate basis. Goodwill and intangibles resulting from the Company’s
59
fiscal year 2003 acquisitions, as well as contingent purchase price adjustments for certain historical acquisitions amounted to approximately $557.3 million. The Company has not finalized the allocation of the consideration for certain of its recently completed acquisitions and expects to complete this by the end of the first quarter of fiscal 2004.
Fiscal Year 2002
In April 2001, the Company entered into a definitive agreement with Ericsson to provide a substantial portion of Ericsson’s mobile phone production and distribution requirements. The Company assumed responsibility for product assembly, new product prototyping, supply chain management and logistics management in which we processFlextronics processes customer orders from Ericsson and configure and ship products to Ericsson’s customers. In connection with this relationship, the Company employed the existing workforce for certain operations, and purchased from Ericsson certain inventory, equipment and other assets, and assumed certain accounts payable and accrued expenses at their net book value of approximately $363.9 million.
In July 2001, the Company acquired Alcatel SA’s manufacturing facility and related assets located in Laval, France. The acquisition was accounted for as a purchase of assets. In connection with this acquisition, the Company entered into a long-term supply agreement with Alcatel to provide printed circuit board assembly, final systems assembly and various engineering support services. The Company purchased from Alcatel certain inventory, equipment and other assets, and assumed certain accounts payable and accrued expenses at their net book value of approximately $32.4 million.
In October 2001, the Company announced a manufacturing agreement with Xerox Corporation. The Company acquired Xerox’s manufacturing business operations in Aguascalientes, Mexico; Penang, Malaysia; Resende, Brazil; Toronto, Canada and Venray; Netherlands. The Company purchased certain assets totaling $165.1 million in fiscal 2002.
In December 2001, the Company completed its acquisition of 91% of The Orbiant Group from Telia, Sweden’s largest telecommunications network provider. Orbiant is a provider of services focusing on the design, operation, maintenance and management of telecommunications networks. The cash purchase price, net of cash acquired, amounted to approximately $80.6 million.
During fiscal year 2002, the Company completed certain other business acquisitions that were not individually significant to the Company’s results of operations and financial position. The aggregate cash purchase price for these acquisitions, net of cash acquired, amounted to approximately $68.8 million. Additionally, approximately 7.3 million ordinary shares were issued for the acquisitions, which equated to approximately $163.4 million of the purchase price. The fair value of the ordinary shares issued was determined based on the quoted market prices of the Company’s ordinary shares for a reasonable period, generally three days, before and after the date the terms of the acquisitions were agreed and announced. The costs of these acquisitions, including estimated acquisition closing costs, have been allocated on the basis of the estimated fair value of assets acquired and liabilities assumed. The purchase price for certain of these acquisitions is subject to adjustments for contingent consideration, based upon the businesses achieving specified levels of earnings through December 2004. The contingent consideration has not been recorded as part of the purchase price, pending the outcome of the contingency. Goodwill and intangibles resulting from these acquisitions amounted to approximately $548.8 million. Also, during fiscal year 2002, the Company increased goodwill in the amount of approximately $34.2 million for contingent purchase price adjustments and other adjustments for historical acquisitions, which included the issuance of approximately 0.6 million ordinary shares. These acquisitions have been accounted for by the purchase method of accounting, and accordingly the results of the acquired businesses were included in the Company’s consolidated statements of operations from the acquisition dates forward. Comparative proforma information has not been presented, as the results of the acquired operations were not material to the Company’s consolidated financials statements on either an individual or an aggregate basis.
Fiscal 200160
51
FLEXTRONICS INTERNATIONAL LTD.
In fiscal 2001, Flextronics acquired 100% of the outstanding shares of The DII Group, Inc., Lightning Metal Specialties and related entities, Chatham Technologies, Inc., Palo Alto Products International Pte. Ltd. and JIT Holdings Ltd. These acquisitions were accounted for as pooling of interests and the consolidated financial statements have been prepared to give retroactive effect to the mergers.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DII was a leading provider of electronics manufacturing and design services. As a result of the merger, in April 2000, the Company issued approximately 120.8 million ordinary shares for all of the outstanding shares of DII common stock, based upon the exchange ratio of 3.22 Flextronics ordinary shares for each share of DII common stock.
Lightning was a provider of fully integrated electronic packaging systems. As a result of the merger, in August 2000, the Company issued approximately 2.6 million ordinary shares for all of the outstanding shares of Lightning common stock and interests.
Chatham was a leading provider of integrated electronic packaging systems to the communications industry. As a result of the merger, in August 2000, the Company issued approximately 15.2 million ordinary shares for all of the outstanding Chatham capital stock and interests.
DII and Lightning operated under a calendar year end prior to merging with Flextronics and, accordingly, their respective balance sheets, statements of operations, shareholders’ equity and cash flows as of December 31, 1999 and for each of the two years ended December 31, 1999 have been combined with the Company’s consolidated financial statements as of March 31, 2000 and for each of the two fiscal years ended March 31, 2000. Chatham operated under a fiscal year which ended on the Saturday closest to September 30 prior to merging with Flextronics and, accordingly, Chatham’s balance sheets, statements of operations, shareholders’ equity and cash flows as of September 24, 1999 and for each of the two years ended September 24, 1999 have been combined with the Company’s consolidated financial statements as of March 31, 2000 and for each of the two fiscal years ended March 31, 2000.
Starting in fiscal 2001, DII, Lightning and Chatham changed their respective year-ends to conform to the Company’s March 31 year-end. Accordingly, DII’s and Lightning’s operations for the three months ended March 31, 2000, and Chatham’s operations for the six months ended March 31, 2000, have been excluded from the consolidated results of operations for fiscal 2001 and reported as an adjustment to retained earnings. Total net sales, gross profit, selling, general and administrative expenses, operating loss and total net loss related to the omitted periods amounted to approximately $898.3 million, $50.0 million, $66.6 million, $33.0 million and $58.3 million, respectively. During the omitted periods, total cash flows used in operating and investing activities amounted to approximately $24.9 million and $28 million, respectively, and financing activities provided approximately $20.2 million.
The net loss of $58.3 million for the omitted period consisted primarily of the net losses of DII and Chatham, with each company representing about half of the net loss for the omitted period. With respect to Chatham, the net loss for that acquired company was relatively consistent both before and during the omitted period. In the case of DII, the results for that acquired company during the omitted period was adversely effected by the uncertainties created by the merger with the Company, which closed April 3, 2000. DII experienced several customer cancellations during the omitted period due to customer concerns over the merger and resulting supplier concentration issues. DII also experienced lower employee productivity during the omitted period due to the uncertainty over anticipated employee terminations as a result of the merger. The net loss for Chatham and DII in the omitted period prompted the Company to develop formal plans to exit certain activities, close certain facilities and involuntarily terminate employees in the periods following the acquisitions of each company, which resulted in the unusual charges recorded in fiscal 2001. See Note 9, “Unusual Charges” for further discussion.
Palo Alto Products International was an enclosure design and plastic molding company. The Company merged with Palo Alto Products International in April 2000 by exchanging approximately 7.2 million ordinary shares of Flextronics for all of the outstanding shares of Palo Alto Products International common stock.
JIT was a global provider of electronics manufacturing and design services. The Company merged with JIT in November 2000, by exchanging approximately 17.3 million ordinary shares of Flextronics for all of the outstanding shares of JIT common stock.
Palo Alto Products International and JIT operated under the same fiscal year end as Flextronics, and accordingly, their respective balance sheets, statements of operations, shareholders’ equity and cash flows have been combined with the Company’s consolidated financial statements as of March 31, 1999 and 2000 and for each of the three fiscal years ended March 31, 2000.
The Company also completed several other immaterial pooling of interests transactions. In connection with these mergers, the Company issued approximately 0.7 million ordinary shares. The historical operations of these entities were not material to the Company’s consolidated operations on either an individual or an aggregate basis; therefore, prior period statements have not been restated for these acquisitions.
Additionally, in fiscal 2001, the Company completed several immaterial business acquisitions. These transactions have been accounted for under the purchase method of accounting and accordingly, the results of the acquired businesses were included in the Company’s consolidated statements of operations from the acquisition dates forward. Comparative proforma information has not been
52
presented, as the results of the acquired operations were not material to the Company’s consolidated financial statements. In connection with these business acquisitions, the Company paid total cash consideration of approximately $146.4 million, net of cash acquired, and issued approximately 9.8 million ordinary shares, which equated to approximately $338.6 million of purchase price. The fair value of the ordinary shares issued were determined based on the quoted market prices of the Company’s ordinary shares for a reasonable period, generally three days, before and after the date the terms of the acquisitions were agreed to and announced. The aggregate purchase price paid for these business acquisitions was allocated to the net assets acquired based on their estimated fair values at the dates of the acquisitions. The purchase price for certain acquisitions is subject to adjustments for contingent consideration, based upon the businesses achieving specified levels of earnings through December 2003. The contingent consideration has not been recorded as purchase price, pending the outcome of the contingency. The fair value of the net liabilities acquired, amounted to approximately $117.3 million, including estimated acquisition costs. The costs of acquisitions have been allocated on the basis of the estimated fair value of assets acquired and liabilities assumed. Goodwill and intangibles resulting from these acquisitions amounted to approximately $602.3 million. The respective intangibles associated with these acquisitions are amortized over various years, none of which exceed ten years. Also, the Company increased goodwill in the amount of approximately $12.5 million for contingent purchase price adjustments for historical acquisitions.
12. SEGMENT REPORTING
12. | SEGMENT REPORTING |
The Company operates and is managed internally by two operating segments that have been combined for operating segment disclosures, as they do not meet the quantitative thresholds for separate disclosure established in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” 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 decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer of the Company.
Geographic information is as follows (in thousands):
2003 | 2002 | 2001 | |||||||||||
Net Sales: | |||||||||||||
Asia | $ | 5,060,085 | $ | 3,374,749 | $ | 2,467,629 | |||||||
Americas | 3,101,589 | 4,155,750 | 5,466,547 | ||||||||||
Europe | 5,933,859 | 6,283,584 | 4,504,069 | ||||||||||
Intercompany eliminations | (716,834 | ) | (709,236 | ) | (328,546 | ) | |||||||
$ | 13,378,699 | $ | 13,104,847 | $ | 12,109,699 | ||||||||
Loss before Income Taxes: | |||||||||||||
Asia | $ | 187,785 | $ | 103,722 | $ | 13,611 | |||||||
Americas | (232,094 | ) | (152,458 | ) | (319,420 | ) | |||||||
Europe | (27,127 | ) | (142,630 | ) | 41,073 | ||||||||
Intercompany eliminations, corporate allocations and Motorola one-time non-cash charge (see Note 9) | (75,803 | ) | (51,236 | ) | (287,568 | ) | |||||||
$ | (147,239 | ) | $ | (242,602 | ) | $ | (552,304 | ) | |||||
Long-Lived Assets: | |||||||||||||
Asia | $ | 758,331 | $ | 584,470 | $ | 503,094 | |||||||
Americas | 544,348 | 717,898 | 636,399 | ||||||||||
Europe | 663,050 | 730,127 | 688,948 | ||||||||||
$ | 1,965,729 | $ | 2,032,495 | $ | 1,828,441 | ||||||||
Depreciation and Amortization:* | |||||||||||||
Asia | $ | 110,485 | $ | 71,906 | $ | 54,038 | |||||||
Americas | 97,433 | 107,515 | 126,012 | ||||||||||
Europe | 141,599 | 140,486 | 106,401 | ||||||||||
$ | 349,517 | $ | 319,907 | $ | 286,451 | ||||||||
Capital Expenditures: | |||||||||||||
Asia | $ | 125,952 | $ | 109,623 | $ | 178,557 | |||||||
Americas | 50,153 | 126,761 | 284,340 | ||||||||||
Europe | 74,513 | 130,863 | 318,324 | ||||||||||
$ | 250,618 | $ | 367,247 | $ | 781,221 | ||||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Net Sales: | ||||||||||||
Asia | $ | 6,878,458 | $ | 5,060,085 | $ | 3,374,749 | ||||||
Americas | 2,099,713 | 3,101,589 | 4,155,750 | |||||||||
Europe | 6,202,207 | 5,933,859 | 6,283,584 | |||||||||
Intercompany eliminations | (649,962 | ) | (716,834 | ) | (709,236 | ) | ||||||
$ | 14,530,416 | $ | 13,378,699 | $ | 13,104,847 | |||||||
Loss Before Income Taxes: | ||||||||||||
Asia | $ | 152,117 | $ | 187,785 | $ | 103,722 | ||||||
Americas | (204,288 | ) | (232,094 | ) | (152,458 | ) | ||||||
Europe | (170,915 | ) | (27,127 | ) | (142,630 | ) | ||||||
Intercompany eliminations | (197,033 | ) | (75,803 | ) | (51,236 | ) | ||||||
$ | (420,119 | ) | $ | (147,239 | ) | $ | (242,602 | ) | ||||
Long-Lived Assets: | ||||||||||||
Asia | $ | 700,262 | $ | 758,331 | $ | 584,470 | ||||||
Americas | 402,031 | 544,348 | 717,898 | |||||||||
Europe | 522,707 | 663,050 | 730,127 | |||||||||
$ | 1,625,000 | $ | 1,965,729 | $ | 2,032,495 | |||||||
Depreciation and Amortization*: | ||||||||||||
Asia | $ | 112,357 | $ | 110,485 | $ | 71,906 | ||||||
Americas | 80,650 | 97,433 | 107,515 | |||||||||
Europe | 155,082 | 141,599 | 140,486 | |||||||||
$ | 348,089 | $ | 349,517 | $ | 319,907 | |||||||
Gross Capital Expenditures: | ||||||||||||
Asia | $ | 142,425 | $ | 125,952 | $ | 109,623 | ||||||
Americas | 81,454 | 50,153 | 126,761 | |||||||||
Europe | 102,869 | 74,513 | 130,863 | |||||||||
$ | 326,748 | $ | 250,618 | $ | 367,247 | |||||||
* | Excludes | |
Revenues are generally attributable to the country in which the product is manufactured.
53
For purposes of the preceding tables, “Asia” includes China, Japan, India, Malaysia, Mauritius, Singapore, Taiwan and Thailand, “Americas” includes Brazil, Canada, Mexico and the United States, “Europe” includes Austria, the Czech Republic, Denmark,
61
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Finland, France, Germany, Hungary, Ireland, Israel, Italy, Netherlands, Norway, Poland, Scotland, Spain, Sweden, Switzerland and the United Kingdom.
During fiscal year 2004 and 2003, net sales generated from Singapore, the principal country of domicile, was $237.6 million and $242.8 million, respectively.
China, Malaysia and Hungary accounted for approximately 26%, 18% and 14% of the consolidated net sales, respectively, during fiscal year 2004. No other foreign country accounted for more than 10% of net sales in fiscal year 2004. As of March 31, 2004, China, Malaysia, US/Canada and Hungary accounted for approximately 27%, 12%, 13% and 12% of consolidated long-lived assets, respectively. No other foreign country accounted for more than 10% of long-lived assets as of March 31, 2004.
China, Hungary, Malaysia and Mexico accounted for approximately 18%, 11%, 15% and 12% of net sales, respectively.respectively, during fiscal year 2003. No other foreign country accounted for more than 10% of net sales in fiscal 2002.year 2003. As of March 31, 2003, China and Malaysia accounted for approximately 25% and 11% of long-lived assets, respectively. No other foreign country accounted for more than 10% of long-lived assets at March 31, 2003.
During fiscal year 2002, Hungary, Malaysia, Mexico and Sweden accounted for approximately 12%, 18%, 16% and 11% of net sales, respectively. No other foreign country accounted for more than 10% of net sales in fiscal year 2002. China accounted for approximately 16% of long-lived assets at March 31, 2002. No other foreign country accounted for more than 10% of long-lived assets at March 31, 2002.
During fiscal 2001, China accounted for over 10%
13. | CONSOLIDATION OF VARIABLE INTEREST ENTITIES |
Effective April 1, 2003, the Company adopted Financial Accounting Standard Board’s Interpretation No. 46 (“FIN 46”), “Consolidation of net sales. No other foreign country accounted for more than 10%Variable Interest Entities”, which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of net salesanother entity. Prior to the issuance of FIN 46, a company generally included another entity in fiscal 2001. Asits consolidated financial statements only if it controlled the entity through voting interests. FIN 46 now requires a variable interest entity, as defined in FIN 46, to be consolidated by a company if that company is subject to a majority of March 31, 2001, Chinathe risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest.
The Company has variable interest in real estate asset subject to operating lease arrangements located in Mexico and Hungary accounted for approximately 17%Texas. The principal impact of the adoption of FIN 46 was the recording of additions to land and 11%building and long-term debt in the amount of long-lived assets, respectively. No other foreign country accounted for more than 10% of long-lived assets$89.9 million at March 31, 2001.2004. The cumulative effect of adopting FIN 46 was not material to the Company’s financial position, results of operations or cash flows.
13. SUBSEQUENT EVENTS
14. | SUBSEQUENT EVENTS |
Conversion of Notes
In April 2004, the Company announced that it intends to convert its $200 million, zero coupon, zero yield, convertible junior subordinated notes issued in March 2003 into 19,047,617 of its ordinary shares, based on the conversion price of $10.50 per share.
Acquisitions
On May 5, 2003,June 8, 2004, the Company, issued 6.5% senior subordinated notes dueThe DIRECTV Group, Inc., and Hughes Network Systems, Inc. (a wholly-owned subsidiary of DIRECTV) announced an agreement whereby the Company will acquire Hughes Network Systems’ majority ownership stake of fifty-five percent (55%) in May 2013Hughes Software Systems (HSS), a provider of software products and services to telecom infrastructure companies.
HSS reported revenue of Rs3,604 million (approximately US$80 million) and net income of Rs769 million (approximately US$17 million) in its fiscal year ended March 31, 2004.
The Company will pay Rs547 per share, with total cash consideration paid to Hughes Networks Systems of approximately US$226.5 million. Subject to regulatory approval, the transaction is expected to close no later than October 2004. Pursuant to Indian securities regulations, the Company is required to make an open offer on or about June 14, 2004 to purchase an additional twenty percent (20%) of the shares outstanding. There is no obligation for gross proceedsshareholders to accept this open offer and there is no assurance that any shares will be offered for sale to the Company. The approximate total purchase price of $400.0US$226.5 million in accordanceto be paid to Hughes Network Systems, along with the Securities and Exchange Commission Rule 144A and Regulation S. Theopen offer of US$82.5 million, assuming an offer price of Rs547.93, is required to be funded by the Company intends to useon the net proceeds ofdate the issuance for general corporate purposes and to redeemopen offer is initiated (on or repurchase its outstanding 8.75% senior subordinated notes due 2007, of which $150.0 million in principal is currently outstanding.about June 14, 2004).
14. QUARTERLY62
FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL DATA (UNAUDITED)STATEMENTS (Continued)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited quarterly financial data for fiscal 2003years 2004 and fiscal 2002:
Fiscal Year Ended March 31, 2003 | Fiscal Year Ended March 31, 2002 | ||||||||||||||||||||||||||||||||
First | Second | Third | Fourth | First | Second | Third | Fourth | ||||||||||||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||||||||||||||
Net sales | $ | 3,127,027 | $ | 3,340,613 | $ | 3,851,494 | $ | 3,059,565 | $ | 3,110,598 | $ | 3,244,918 | $ | 3,453,039 | $ | 3,296,292 | |||||||||||||||||
Cost of sales | 2,959,930 | 3,158,386 | 3,638,559 | 2,893,527 | 2,878,803 | 3,036,169 | 3,226,461 | 3,083,536 | |||||||||||||||||||||||||
Unusual charges | 179,352 | — | 86,892 | — | — | 439,448 | — | 24,943 | |||||||||||||||||||||||||
Gross profit (loss) | (12,255 | ) | 182,227 | 126,043 | 166,038 | 231,795 | (230,699 | ) | 226,578 | 187,813 | |||||||||||||||||||||||
Selling, general and administrative | 114,699 | 109,911 | 115,502 | 116,087 | 108,816 | 105,488 | 109,341 | 119,941 | |||||||||||||||||||||||||
Goodwill and other intangibles amortization | 3,234 | 5,933 | 6,147 | 6,832 | 2,256 | 3,802 | 3,053 | 3,504 | |||||||||||||||||||||||||
Unusual charges | 28,471 | — | 9,696 | — | — | 76,647 | — | 33,388 | |||||||||||||||||||||||||
Interest and other expense, net | 18,999 | 27,856 | 23,901 | 22,024 | 22,366 | 22,184 | 22,746 | 24,557 | |||||||||||||||||||||||||
Income (loss) before income taxes | (177,658 | ) | 38,527 | (29,203 | ) | 21,095 | 98,357 | (438,820 | ) | 91,438 | 6,423 | ||||||||||||||||||||||
Provision for (benefit from) income taxes | (46,486 | ) | 3,857 | (22,726 | ) | 1,569 | 10,029 | (109,015 | ) | 9,449 | 683 | ||||||||||||||||||||||
Net income (loss) | $ | (131,172 | ) | $ | 34,670 | $ | (6,477 | ) | $ | 19,526 | $ | 88,328 | $ | (329,805 | ) | $ | 81,989 | $ | 5,740 | ||||||||||||||
Diluted earnings (loss) per share | $ | (0.25 | ) | $ | 0.07 | $ | (0.01 | ) | $ | 0.04 | $ | 0.17 | $ | (0.69 | ) | $ | 0.16 | $ | 0.01 | ||||||||||||||
Shares used in computing diluted per share amounts | 515,016 | 524,452 | 517,810 | 531,118 | 511,987 | 481,381 | 507,942 | 526,797 | |||||||||||||||||||||||||
Fiscal Year Ended March 31, 2004 | Fiscal Year Ended March 31, 2003 | |||||||||||||||||||||||||||||||
First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Net sales | $ | 3,106,677 | $ | 3,503,242 | $ | 4,152,344 | $ | 3,768,153 | $ | 3,127,027 | $ | 3,340,613 | $ | 3,851,494 | $ | 3,059,565 | ||||||||||||||||
Cost of sales | 2,941,636 | 3,320,772 | 3,912,912 | 3,529,256 | 2,959,930 | 3,158,386 | 3,638,559 | 2,893,527 | ||||||||||||||||||||||||
Restructuring and other charges | 308,835 | 42,362 | 50,553 | 75,555 | 179,352 | — | 86,892 | — | ||||||||||||||||||||||||
Gross profit (loss) | (143,794 | ) | 140,108 | 188,879 | 163,342 | (12,255 | ) | 182,227 | 126,043 | 166,038 | ||||||||||||||||||||||
Selling, general and administrative | 116,415 | 108,940 | 121,597 | 140,335 | 114,699 | 109,911 | 115,502 | 116,087 | ||||||||||||||||||||||||
Intangibles amortization | 8,817 | 8,573 | 9,553 | 9,772 | 3,234 | 5,933 | 6,147 | 6,832 | ||||||||||||||||||||||||
Restructuring and other charges | 18,273 | 17,890 | 20,466 | 6,414 | 28,471 | — | 9,696 | — | ||||||||||||||||||||||||
Interest and other expense, net | 25,911 | 20,703 | 13,453 | 17,633 | 18,999 | 27,856 | 23,901 | 22,024 | ||||||||||||||||||||||||
Loss on early extinguishment of debt, net | 8,695 | 95,214 | — | — | — | — | — | — | ||||||||||||||||||||||||
Income (loss) before income taxes | (321,905 | ) | (111,212 | ) | 23,810 | (10,812 | ) | (177,658 | ) | 38,527 | (29,203 | ) | 21,095 | |||||||||||||||||||
Provision for (benefit from) income taxes | (32,190 | ) | (11,122 | ) | 2,381 | (26,810 | ) | (46,486 | ) | 3,857 | (22,726 | ) | 1,569 | |||||||||||||||||||
Net income (loss) | $ | (289,715 | ) | $ | (100,090 | ) | $ | 21,429 | $ | 15,998 | $ | (131,172 | ) | $ | 34,670 | $ | (6,477 | ) | $ | 19,526 | ||||||||||||
Basic and diluted earnings (loss) per share | $ | (0.56 | ) | $ | (0.19 | ) | $ | 0.04 | $ | 0.03 | $ | (0.25 | ) | $ | 0.07 | $ | (0.01 | ) | $ | 0.04 | ||||||||||||
Shares used in computing diluted per share amounts | 521,000 | 523,529 | 561,438 | 569,572 | 515,016 | 524,452 | 517,810 | 531,118 | ||||||||||||||||||||||||
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9A. CONTROLS AND PROCEDURES
(a) | Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined as a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Flextronics’ chief executive officer and chief financial officer, based on their evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report, concluded that our disclosure controls and procedures were effective for this purpose. | |||
(b) | During the fourth quarter of fiscal year 2004, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of ourthe Company’s directors and officers as of May 1, 20032004 are as follows:
Name | ||||||
Age | Position | |||||
Michael E. Marks | Chief Executive Officer and Director | |||||
Robert R. B. Dykes | President, Systems Group and Chief Financial Officer | |||||
Ronny Nilsson | President, Flextronics Network Services | |||||
Michael McNamara | Chief Operating Officer | |||||
Thomas J. Smach | Senior Vice President, Finance | |||||
Richard L. Sharp | Chairman of the Board |
54
James A. Davidson | Director | |||||
Patrick Foley | Director | |||||
Michael J. Moritz | Director | |||||
Lip-Bu Tan | Director |
Michael E. Marks.Mr. Marks has served as our Chief Executive Officer since January 1994. He has served as a member of ourthe Board of Directors since December 1991 and as Chairman of ourthe Board from July 1993 to January 2003. He received a B.A. and M.A. from Oberlin College and a M.B.A. from Harvard Business School.
Robert R. B. Dykes.Mr. Dykes has served as our President, Systems Group since February 1999 and our Chief Financial Officer since February 1997. In addition, he served as our Senior Vice President of Finance and Administration from February 1997 to April 1999, and as a member of ourthe Board of Directors from January 1994 to August 1997. He received a Bachelor of Commerce and Administration from Victoria University in Wellington, New Zealand.
Ronny Nilsson.Mr. Nilsson has served as our President, Flextronics Network Services since January 2002. Prior to his promotion, Mr. Nilsson served as our President, Western Europe Operations from April 1997 to December 2001. Mr. Nilsson received a certificate in Mechanical Engineering from the Lars Kagg School in Kalmar, Sweden and certificates from the Swedish Management Institute and the Ericsson Management Program.
Michael McNamara.Mr. McNamara has served as our Chief Operating Officer since January 2002. Prior to his promotion, Mr. McNamara served as our President, Americas Operations from April 1997 to December 2001, and as our Vice President, North American Operations from April 1994 to April 1997. Mr. McNamara also serves on the Board of Directors of TheraSense. Mr. McNamara received a B.S. from the University of Cincinnati and an M.B.A. from Santa Clara University.
Ronald R. Snyder.Mr. Snyder has served as our President, Flextronics Design Services since January 2002. Prior to his promotion, Mr. Snyder served as our President, Flextronics Semiconductor from April 2000, following our acquisition of the Dii Group, Inc. to December 2001. From May 1998 to April 2000, he served as Senior Vice President of Dii and President of Dii Semiconductor. From March 1994 to May 1998, he served as Senior Vice President, Sales and Marketing and Corporate Development of Dii. Mr. Snyder received a B.S. in Accounting and Finance from the University of Colorado.
Thomas J. Smach.Mr. Smach has served as our Senior Vice President Finance since March 2003. Prior to his promotion, Mr. Smach served as our Vice President of Finance from April 2000 following ourthe Company’s acquisition of the Dii Group, Inc. to February 2003. From August 1997 to April 2000, he served as the Senior Vice President, Chief Financial Officer and Treasurer of Dii. Mr. Smach is a certified public accountant and he received hisa B.Sc. in Accounting from State University of New York at Binghamton.
Richard L. Sharp.Mr. Sharp has served as a member of ourthe Company’s Board of Directors since July 1993 and Chairman of the Board since January 2003. Mr. Sharp served in various positions with Circuit City Stores, Inc., a consumer electronics and personal computer retailer, from 1982 to 2002. Most recently, Mr. Sharp was President from 1984 to 1997, Chief Executive Officer from 1986 to 2000 and Chairman of the Board from 1994 to 2002. Currently Mr. Sharp also serves as Chairman of the Board of Carmax, Inc.
James A. Davidson.Mr. Davidson has served as a member of ourthe Company’s Board of Directors since March 2003. He is a founder and principal of Silver Lake Partners, a private equity investment firm. From June 1990 to November 1998, he was an investment banker with Hambrecht & Quist, most recently serving as Managing Director and Head of Technology Investment Banking. From 1984 to 1990, Mr. Davidson was a corporate and securities lawyer with Pillsbury, Madison & Sutro. Currently, Mr. Davidson also serves on the boardsBoard of Enterasys Networks, Inc. andDirectors of Seagate Technology. He received a B.S. from the University of Nebraska and J.D. from the University of Michigan.
65
Patrick Foley.Mr. Foley has served as a member of ourthe Company’s Board of Directors since October 1997. Mr. Foley served in various positions with DHL Corporation, Inc. and its major subsidiary, DHL Airways, Inc., a global document, package and airfreight delivery company from September 1988 to 2001, most recently as its Chairman, President and Chief Executive Officer. He also serves as a directoron the Board of Continental Airlines,Directors of Health Net, Inc., Del Monte Corporation, Foundation Health Systems, Inc., and Glenborough Realty Trust, Inc.
Michael J. Moritz.Mr. Moritz has served as a member of ourthe Company’s Board of Directors since July 1993. Since 1988, he has been a General Partner of Sequoia Capital, a venture capital firm. Mr. Moritz also serves as a directoron the Board of Yahoo! Inc.,Directors of Saba Software, Red Envelope and several privately-held companies.
Lip-Bu Tan.Mr. Tan has served as a member of ourthe Board of Directors since March 2003. In 1987, he founded and since that time has served as Chairman of Walden International, a venture capital fund. Mr. Tan also currently serves on the boardsBoard of Directors of Cadence Design Systems, Centillium Communications, Creative Technology, Integrated Silicon Solution, SINA.comSINA Corporation and Semiconductor Manufacturing International Corporation. Mr. Tan received a M.S. in Nuclear Engineering from the Massachusetts Institute of Technology, a MBAM.B.A. from the University of San Francisco, and a B.S. from Nanyang University in Singapore.
55
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20032004 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20032004 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20032004 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with out 2004 Annual General Meeting of Shareholders. Such information is incorporated by reference.
66
PART IV
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) | Documents to be filed as part of this annual report on Form 10-K: | |||
1. | Financial Statements. See Item 8, “Financial Statements and Supplementary Data.” | |||
2. | Financial Statement Schedules. The following financial statement schedule is filed as part of this report and should be read together with our financial statements: | |||
Schedule II | ||||
3. | Exhibits. The following exhibits are filed with this annual report on Form 10-K: |
Incorporated By Reference | ||||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||||
2.01 | Agreement and Plan of Merger dated November 22, 1999 among the Registrant, Slalom Acquisition Corp. and The DII Group, Inc.* | 8-K | 000-23354 | 12-06-99 | 2.1 | |||||||||||
2.02 | Agreement and Plan of Reorganization dated July 31, 2000 among the Registrant, Chatham Acquisition Corporation, and Chatham Technologies, Inc.* | 8-K | 000-23354 | 09-15-00 | 2.01 | |||||||||||
2.03 | Merger Agreement dated August 10, 2000 among the Registrant, JIT Holdings Limited, Goh Thiam Poh Tommie and Goh Mui Teck William, as amended.* | S-3 | 333-46770 | 09-27-00 | 2.4 |
Incorporated By | ||||||||||||||
Reference | ||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||
3.01 | Memorandum and New Articles of Association of the Registrant. | 10-Q | 000-23354 | 02-09-01 | 3.1 | |||||||||
4.01 | Indenture dated as of October 15, 1997 between Registrant and U.S. Bank National Association (successor to State Street Bank and Trust Company of California, N.A.), as trustee. | 8-K | 000-23354 | 10-22-97 | 10.1 | |||||||||
4.02 | U.S. Dollar Indenture dated June 29, 2000 between the Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.1 | |||||||||
4.03 | Euro Indenture dated as of June 29, 2000 between Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.2 | |||||||||
4.04 | Indenture dated as of May 8, 2003 between Registrant and J.P. Morgan Trust Company, National Association, as trustee. | 10-K | 000-23354 | 06-06-03 | 4.04 | |||||||||
4.05 | Indenture dated as of August 5, 2003 between Registrant and J.P. Morgan Trust Company, National Association, as trustee. | 10-Q | 000-23354 | 08-11-03 | 4.01 | |||||||||
4.06 | Note Purchase Agreement dated as of March 2, 2003 between Registrant, acting through its branch office in Hong Kong, and Silver Lake Partners Cayman, L.P., Silver Lake Investors Cayman, L.P., Silver Lake Technology Investors Cayman, L.P. and Integral Capital Partners VI, L.P. | 10-K | 000-23354 | 06-06-03 | 4.05 | |||||||||
4.07 | Credit Agreement dated as of March 3, 2004 among Flextronics International Ltd., the lenders named therein, ABN AMRO Bank N.V. as co-lead arranger, bookrunner and agent for the lenders, Fleet National Bank, as co-lead arranger, syndication agent and issuing bank, Citicorp USA, Inc., Deutsche Banc Securities Inc., Credit Suisse First Boston Corporation, Bank of America, N.A., and Scotia Capital, as co-syndication agents, BNP Paribas and Keybank National Association, as senior managing agents, and Lehman Commercial Paper Inc., Royal Bank of Canada, HSBC Bank USA, UBS AG, Stamford Branch, as managing agents (the“FIL Credit Agreement”).* | S-3 | 333-114970 | 04-28-04 | 4.07 | |||||||||
4.08 | Credit Agreement dated as of March 3, 2004 among Flextronics International USA, Inc., the lenders named therein, ABN, AMRO Bank N.V. as co-lead arranger, bookrunner and agent for the lenders, Fleet National Bank, as co-lead arranger, syndication agent and issuing bank, Citicorp USA, Inc., Deutsche Banc Securities Inc., Credit Suisse First Boston Corporation, Bank of America, N.A., and Scotia Capital, as co-syndication agents, BNP Paribas and Keybank National Association, as senior managing agents, and Lehman Commercial Paper Inc., Royal Bank of Canada, HSBC Bank USA, UBS AG, Stamford Branch, as managing agents (the“FIUI Credit Agreement”).* | S-3 | 333-114970 | 04-28-04 | 4.08 | |||||||||
4.09 | Form of Amendment No. 1 to the FIL Credit Agreement dated as of April 26, 2004.* | X | ||||||||||||
4.10 | Form of Amendment No. 1 to the FIUI Credit Agreement dated as of April 26, 2004.* | X |
5667
Incorporated By Reference | ||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||
2.04 | Agreement and Plan of Reorganization dated August 31, 2000 among the Registrant, Lightning Metal Acquisition Corp., Coating Acquisition Corp., Lightning Tool Acquisition Corp., Lightning Metal Specialties, Incorporated, Coating Technologies, Inc., Lightning Tool and Design, Inc., Lightning Metal Specialties E.M.F., Ltd., Lightning Manufacturing Solutions-Europe, Ltd., Lightning Manufacturing Solutions Texas, L.L.C., Lightning Logistics, L.L.C., Papason, L.L.C., 200 Scott Street, L.L.C., 80 Scott Street, L.L.C., 230 Scott Street, L.L.C., 1350 Lively Blvd, L.L.C., D.A.D. Partnership, S.O.N. Partnership, S.O.N. II Partnership, and shareholders and members of such companies.* | S-3 | 333-46200 | 09-20-00 | 2.4 | |||||||||
2.05 | Exchange Agreement dated January 14, 2000, among the Registrant, Palo Alto Products International Pte. Ltd., and the shareholders of Palo Alto Products International Pte. Ltd., Palo Alto Manufacturing (Thailand) Ltd., and Palo Alto Plastic (Thailand) Ltd. | 10-K | 000-23354 | 06-29-01 | 2.06 | |||||||||
3.01 | Memorandum and New Articles of Association of the Registrant. | 10-Q | 000-23354 | 02-09-01 | 3.1 | |||||||||
4.01 | Indenture dated as of October 15, 1997 between Registrant and U.S. Bank National Association (successor to State Street Bank and Trust Company of California, N.A.), as trustee. | 8-K | 000-23354 | 10-22-97 | 10.1 | |||||||||
4.02 | U.S. Dollar Indenture dated June 29, 2000 between the Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.1 | |||||||||
4.03 | Euro Indenture dated as of June 29, 2000 between Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.2 | |||||||||
4.04 | Indenture dated as of May 9, 2003 between Registrant and J.P. Morgan Trust Company, National Association, as trustee. | X | ||||||||||||
4.05 | Note Purchase Agreement dated as of March 2, 2003 between Registrant, acting through its branch office in Hong Kong, and Silver Lake Partners Cayman, L.P., Silver Lake Investors Cayman, L.P., Silver Lake Technology Investors Cayman, L.P. and Integral Capital Partners VI, L.P. | X | ||||||||||||
4.06 | Credit Agreement dated as of March 8, 2002 among Flextronics International Ltd., the lenders named in Schedule I to the Credit Agreement, ABN AMRO Bank N.V. as agent for the lenders, ABN AMRO Bank N.V. and Fleet National Bank, as co-lead arrangers, Deutsche Banc Alex. Brown Inc., Bank of America, N.A., Citicorp USA, Inc. and Fleet National Bank, as co-syndication agents, The Bank of Nova Scotia, as senior managing agent, BNP Paribas and Credit Suisse First Boston, as managing agents, and Fleet National Bank, as the issue of letters of credit (the “FIL Credit Agreement”).* | 10-K | 000-23354 | 05-03-02 | 4.04 | |||||||||
4.07 | Credit Agreement dated as of March 8, 2002 among Flextronics International USA, Inc., the lenders named in Schedule I to the Credit Agreement, ABN AMRO Bank N.V. as agent for the lenders, ABN AMRO Bank N.V. and Fleet National Bank, as co-lead arrangers, Deutsche Banc Alex. Brown Inc., Bank of America, N.A., Citicorp USA, Inc. and Fleet National Bank, as co-syndication agents, The Bank of Nova Scotia, as senior managing agent, BNP Paribas and Credit Suisse First Boston, as managing agents, and Fleet National Bank, as the issue of letters of credit (the “FIUI Credit Agreement”).* | 10-K | 000-23354 | 05-03-02 | 4.05 | |||||||||
4.08 | Amendment No. 1 to the FIL Credit Agreement dated as of March 7, 2003.* | X | ||||||||||||
4.09 | Amendment No. 1 to the FIUI Credit Agreement dated as of March 7, 2003.* | X | ||||||||||||
10.01 | Form of Indemnification Agreement between the Registrant and its Directors and certain officers. | S-1 | 33-74622 | 10.01 | ||||||||||
10.02 | Registrant’s 1993 Share Option Plan.† | S-8 | 333-55850 | 02-16-01 | 4.2 | |||||||||
10.03 | Registrant’s 1997 Employee Share Purchase Plan.† | S-8 | 333-101327 | 11-20-02 | 4.02 | |||||||||
10.04 | Registrant’s 1997 Interim Stock Plan.† | S-8 | 333-42255 | 12-15-97 | 99.2 | |||||||||
10.05 | Registrant’s 1998 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.5 |
Incorporated By | ||||||||||||||
Reference | ||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||
10.01 | Form of Indemnification Agreement between the Registrant and its Directors and certain officers. | S-1 | 33-74622 | 10.01 | ||||||||||
10.02 | Registrant’s 1993 Share Option Plan.† | S-8 | 333-55850 | 02-16-01 | 4.2 | |||||||||
10.03 | Registrant’s 1997 Employee Share Purchase Plan.† | S-8 | 333-101327 | 11-20-02 | 4.02 | |||||||||
10.04 | Registrant’s 1997 Interim Stock Plan.† | S-8 | 333-42255 | 12-15-97 | 99.2 | |||||||||
10.05 | Registrant’s 1998 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.5 | |||||||||
10.06 | Registrant’s 1999 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.6 | |||||||||
10.07 | Registrant’s 2001 Equity Incentive Plan.† | S-8 | 333-75526 | 12-19-01 | 4.9 | |||||||||
10.08 | Registrant’s 2002 Interim Incentive Plan.† | S-8 | 333-103189 | 02-13-03 | 4.02 | |||||||||
10.09 | Flextronics U.S.A. 401(k) plan.† | S-1 | 33-74622 | 10.52 | ||||||||||
10.10 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 — I. | 10-K | 000-23354 | 06-29-01 | 10.08 | |||||||||
10.11 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 — II. | 10-K | 000-23354 | 06-29-01 | 10.09 | |||||||||
21.01 | Subsidiaries of Registrant. | X | ||||||||||||
23.01 | Consent of Independent Registered Public Accounting Firm. | X | ||||||||||||
31.01 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. | X | ||||||||||||
31.02 | Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act. | X | ||||||||||||
32.01 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.** | X | ||||||||||||
32.02 | Certification of the Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.** | X |
* | Certain schedules have been omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request. | |
** | As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Flextronics International Ltd. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings. | |
† | Management contract, compensatory plan or arrangement. |
57 (b) Reports on Form 8-K:
On January 27, 2004, Flextronics International Ltd. furnished a report on Form 8-K relating to an announcement regarding the results for fiscal quarter ended December 31, 2003, as presented in a press release on January 27, 2004.
68
Incorporated By Reference | ||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||
10.06 | Registrant’s 1999 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.6 | |||||||||
10.07 | Registrant’s 2001 Equity Incentive Plan.† | S-8 | 333-75526 | 12-19-01 | 4.9 | |||||||||
10.08 | Registrant’s 2002 Interim Incentive Plan.† | S-8 | 333-103189 | 02-13-03 | 4.02 | |||||||||
10.09 | Flextronics U.S.A. 401(k) plan.† | S-1 | 33-74622 | 10.52 | ||||||||||
10.10 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 – I. | 10-K | 000-23354 | 06-29-01 | 10.08 | |||||||||
10.11 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 – II. | 10-K | 000-23354 | 06-29-01 | 10.09 | |||||||||
10.12 | Deed of Noncompetition dated November 30, 2000 among JIT Holdings Limited and Goh Thiam Poh Tommie.† | 10-K | 000-23354 | 06-29-01 | 10.10 | |||||||||
18.01 | Letter from Deloitte & Touche LLP, dated April 21, 2003, regarding change to alternative accounting principle. | X | ||||||||||||
21.01 | Subsidiaries of Registrant. | X | ||||||||||||
23.01 | Consent of Deloitte & Touche LLP. | X | ||||||||||||
99.01 | Certification of Chief Executive Officer.** | X | ||||||||||||
99.02 | Certification of Chief Financial Officer.** | X |
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized.
Flextronics International Ltd. | ||||
Date: June 14, 2004 | By: | /s/ MICHAEL E. MARKS | ||
Michael E. Marks Chief Executive Officer and Director |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Michael E. Marks and Robert R.B. Dykes and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report (including any and all amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ MICHAEL E. MARKS Michael E. Marks | Chief Executive Officer and Director (Principal Executive Officer) | June 14, 2004 | ||
/s/ ROBERT R.B. DYKES Robert R.B. Dykes | President, Systems Group and Chief Financial Officer (Principal Financial Officer) | June 14, 2004 | ||
/s/ THOMAS J. SMACH Thomas J. Smach | Senior Vice President, Finance (Principal Accounting Officer) | June 14, 2004 | ||
/s/ RICHARD L. SHARP Richard L. Sharp | Chairman of the Board | June 14, 2004 | ||
/s/ JAMES A. DAVIDSON James A. Davidson | Director | June 14, 2004 | ||
/s/ PATRICK FOLEY Patrick Foley | Director | June 14, 2004 | ||
/s/ MICHAEL J. MORITZ Michael J. Moritz | Director | June 14, 2004 | ||
/s/ LIP-BU TAN Lip-Bu Tan | Director | June 14, 2004 |
69
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Years Ended March 31, 2004, 2003 and 2002
Additions | ||||||||||||||||||||
Balance at | Charged to | Balance at | ||||||||||||||||||
Beginning | Effect of | Costs and | Deductions/ | End of | ||||||||||||||||
(in thousands) | of Year | Acquisitions | Expenses | Write-offs | Year | |||||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||||||
Year ended March 31, 2002 | $ | 44,419 | $ | 5,935 | $ | 3,664 | $ | (12,369 | ) | $ | 41,649 | |||||||||
Year ended March 31, 2003 | $ | 41,649 | $ | 6,754 | $ | 2,647 | $ | (13,424 | ) | $ | 37,626 | |||||||||
Year ended March 31, 2004 | $ | 37,626 | $ | 9,481 | $ | 1,256 | $ | (9,627 | ) | $ | 38,736 |
70
EXHIBIT INDEX
Incorporated By | ||||||||||||||
Reference | ||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||
3.01 | Memorandum and New Articles of Association of the Registrant. | 10-Q | 000-23354 | 02-09-01 | 3.1 | |||||||||
4.01 | Indenture dated as of October 15, 1997 between Registrant and U.S. Bank National Association (successor to State Street Bank and Trust Company of California, N.A.), as trustee. | 8-K | 000-23354 | 10-22-97 | 10.1 | |||||||||
4.02 | U.S. Dollar Indenture dated June 29, 2000 between the Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.1 | |||||||||
4.03 | Euro Indenture dated as of June 29, 2000 between Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.2 | |||||||||
4.04 | Indenture dated as of May 9, 2003 between Registrant and J.P. Morgan Trust Company, National Association, as trustee. | 10-K | 000-23354 | 06-06-03 | 4.04 | |||||||||
4.05 | Indenture dated as of August 5, 2003 between Registrant and J.P. Morgan Trust Company, National Association, as trustee. | 10-Q | 000-23354 | 08-11-03 | 4.01 | |||||||||
4.06 | Note Purchase Agreement dated as of March 2, 2003 between Registrant, acting through its branch office in Hong Kong, and Silver Lake Partners Cayman, L.P., Silver Lake Investors Cayman, L.P., Silver Lake Technology Investors Cayman, L.P. and Integral Capital Partners VI, L.P. | 10-K | 000-23354 | 06-06-03 | 4.05 | |||||||||
4.07 | Credit Agreement dated as of March 3, 2004 among Flextronics International Ltd., the lenders named therein, ABN AMRO Bank N.V. as co-lead arranger, bookrunner and agent for the lenders, Fleet National Bank, as co-lead arranger, syndication agent and issuing bank, Citicorp USA, Inc., Deutsche Banc Securities Inc., Credit Suisse First Boston Corporation, Bank of America, N.A., and Scotia Capital, as co-syndication agents, BNP Paribas and Keybank National Association, as senior managing agents, and Lehman Commercial Paper Inc., Royal Bank of Canada, HSBC Bank USA, UBS AG, Stamford Branch, as managing agents (the“FIL Credit Agreement”).* | S-3 | 333-114970 | 04-28-04 | 4.07 | |||||||||
4.08 | Credit Agreement dated as of March 3, 2004 among Flextronics International USA, Inc., the lenders named therein, ABN, AMRO Bank N.V. as co-lead arranger, bookrunner and agent for the lenders, Fleet National Bank, as co-lead arranger, syndication agent and issuing bank, Citicorp USA, Inc., Deutsche Banc Securities Inc., Credit Suisse First Boston Corporation, Bank of America, N.A., and Scotia Capital, as co-syndication agents, BNP Paribas and Keybank National Association, as senior managing agents, and Lehman Commercial Paper Inc., Royal Bank of Canada, HSBC Bank USA, UBS AG, Stamford Branch, as managing agents (the“FIUI Credit Agreement”).* | S-3 | 333-114970 | 04-28-04 | 4.08 | |||||||||
4.09 | Form of Amendment No. 1 to the FIL Credit Agreement dated as of April 26, 2004.* | X | ||||||||||||
4.10 | Form of Amendment No. 1 to the FIUI Credit Agreement dated as of April 26, 2004.* | X | ||||||||||||
10.01 | Form of Indemnification Agreement between the Registrant and its Directors and certain officers. | S-1 | 33-74622 | 10.01 | ||||||||||
10.02 | Registrant’s 1993 Share Option Plan.† | S-8 | 333-55850 | 02-16-01 | 4.2 | |||||||||
10.03 | Registrant’s 1997 Employee Share Purchase Plan.† | S-8 | 333-101327 | 11-20-02 | 4.02 | |||||||||
10.04 | Registrant’s 1997 Interim Stock Plan.† | S-8 | 333-42255 | 12-15-97 | 99.2 | |||||||||
10.05 | Registrant’s 1998 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.5 | |||||||||
10.06 | Registrant’s 1999 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.6 | |||||||||
10.07 | Registrant’s 2001 Equity Incentive Plan.† | S-8 | 333-75526 | 12-19-01 | 4.9 | |||||||||
10.08 | Registrant’s 2002 Interim Incentive Plan.† | S-8 | 333-103189 | 02-13-03 | 4.02 |
Incorporated By | ||||||||||||||
Reference | ||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||
10.09 | Flextronics U.S.A. 401(k) plan.† | S-1 | 33-74622 | 10.52 | ||||||||||
10.10 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 — I. | 10-K | 000-23354 | 06-29-01 | 10.08 | |||||||||
10.11 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 — II. | 10-K | 000-23354 | 06-29-01 | 10.09 | |||||||||
21.01 | Subsidiaries of Registrant. | X | ||||||||||||
23.01 | Consent of Deloitte & Touche LLP. | X | ||||||||||||
31.01 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. | X | ||||||||||||
31.02 | Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act. | X | ||||||||||||
32.01 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.** | X | ||||||||||||
32.02 | Certification of the Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.** | X |
* | Certain schedules have been omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request. | |
** | As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Flextronics International Ltd. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings. |
† Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
58
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Michael E. Marks and Robert R.B. Dykes and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report (including any and all amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
59
CERTIFICATION
I, Michael E. Marks, certify that:
60
CERTIFICATION
I, Robert R.B. Dykes, certify that:
61
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE IIYears Ended March 31, 2003, 2002 and 2001
Additions | |||||||||||||||||||||
Balance at | Charged to | Balance | |||||||||||||||||||
Beginning | Effect of | Costs and | Deductions/ | at End | |||||||||||||||||
of Year | Acquisitions | Expenses | Write-offs | of Year | |||||||||||||||||
(in thousands) | |||||||||||||||||||||
Allowance for doubtful accounts: | |||||||||||||||||||||
Year ended March 31, 2001 | $ | 24,957 | $ | 10,293 | $ | 9,429 | $ | (260 | ) | $ | 44,419 | ||||||||||
Year ended March 31, 2002 | $ | 44,419 | $ | 5,935 | $ | 3,664 | $ | (12,369 | ) | $ | 41,649 | ||||||||||
Year ended March 31, 2003 | $ | 41,649 | $ | 6,754 | $ | 2,647 | $ | (13,424 | ) | $ | 37,626 |
62
EXHIBIT INDEX
Incorporated By Reference | ||||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||||
2.01 | Agreement and Plan of Merger dated November 22, 1999 among the Registrant, Slalom Acquisition Corp. and The DII Group, Inc.* | 8-K | 000-23354 | 12-06-99 | 2.1 | |||||||||||
2.02 | Agreement and Plan of Reorganization dated July 31, 2000 among the Registrant, Chatham Acquisition Corporation, and Chatham Technologies, Inc.* | 8-K | 000-23354 | 09-15-00 | 2.01 | |||||||||||
2.03 | Merger Agreement dated August 10, 2000 among the Registrant, JIT Holdings Limited, Goh Thiam Poh Tommie and Goh Mui Teck William, as amended.* | S-3 | 333-46770 | 09-27-00 | 2.4 | |||||||||||
2.04 | Agreement and Plan of Reorganization dated August 31, 2000 among the Registrant, Lightning Metal Acquisition Corp., Coating Acquisition Corp., Lightning Tool Acquisition Corp., Lightning Metal Specialties, Incorporated, Coating Technologies, Inc., Lightning Tool and Design, Inc., Lightning Metal Specialties E.M.F., Ltd., Lightning Manufacturing Solutions-Europe, Ltd., Lightning Manufacturing Solutions Texas, L.L.C., Lightning Logistics, L.L.C., Papason, L.L.C., 200 Scott Street, L.L.C., 80 Scott Street, L.L.C., 230 Scott Street, L.L.C., 1350 Lively Blvd, L.L.C., D.A.D. Partnership, S.O.N. Partnership, S.O.N. II Partnership, and shareholders and members of such companies.* | S-3 | 333-46200 | 09-20-00 | 2.4 | |||||||||||
2.05 | Exchange Agreement dated January 14, 2000, among the Registrant, Palo Alto Products International Pte. Ltd., and the shareholders of Palo Alto Products International Pte. Ltd., Palo Alto Manufacturing (Thailand) Ltd., and Palo Alto Plastic (Thailand) Ltd. | 10-K | 000-23354 | 06-29-01 | 2.06 | |||||||||||
3.01 | Memorandum and New Articles of Association of the Registrant. | 10-Q | 000-23354 | 02-09-01 | 3.1 | |||||||||||
4.01 | Indenture dated as of October 15, 1997 between Registrant and U.S. Bank National Association (successor to State Street Bank and Trust Company of California, N.A.), as trustee. | 8-K | 000-23354 | 10-22-97 | 10.1 | |||||||||||
4.02 | U.S. Dollar Indenture dated June 29, 2000 between the Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.1 | |||||||||||
4.03 | Euro Indenture dated as of June 29, 2000 between Registrant and J.P. Morgan Trust Company, National Association (successor to Chase Manhattan Bank and Trust Company, N.A.), as trustee. | 10-Q | 000-23354 | 08-14-00 | 4.2 | |||||||||||
4.04 | Indenture dated as of May 9, 2003 between Registrant and J.P. Morgan Trust Company, National Association, as trustee. | X | ||||||||||||||
4.05 | Note Purchase Agreement dated as of March 2, 2003 between Registrant, acting through its branch office in Hong Kong, and Silver Lake Partners Cayman, L.P., Silver Lake Investors Cayman, L.P., Silver Lake Technology Investors Cayman, L.P. and Integral Capital Partners VI, L.P. | X | ||||||||||||||
4.06 | Credit Agreement dated as of March 8, 2002 among Flextronics International Ltd., the lenders named in Schedule I to the Credit Agreement, ABN AMRO Bank N.V. as agent for the lenders, ABN AMRO Bank N.V. and Fleet National Bank, as co-lead arrangers, Deutsche Banc Alex. Brown Inc., Bank of America, N.A., Citicorp USA, Inc. and Fleet National Bank, as co-syndication agents, The Bank of Nova Scotia, as senior managing agent, BNP Paribas and Credit Suisse First Boston, as managing agents, and Fleet National Bank, as the issue of letters of credit (the“FIL Credit Agreement”).* | 10-K | 000-23354 | 05-03-02 | 4.04 | |||||||||||
4.07 | Credit Agreement dated as of March 8, 2002 among Flextronics International USA, Inc., the lenders named in Schedule I to the Credit Agreement, ABN AMRO Bank N.V. as agent for the lenders, ABN AMRO Bank N.V. and Fleet National Bank, as co-lead arrangers, Deutsche Banc Alex. Brown Inc., Bank of America, N.A., Citicorp USA, Inc. and Fleet National Bank, as co-syndication agents, The Bank of Nova Scotia, as senior managing agent, BNP Paribas and Credit Suisse First Boston, as managing agents, and Fleet National Bank, as the issue of letters of credit (the“FIUI Credit Agreement”).* | 10-K | 000-23354 | 05-03-02 | 4.05 |
Incorporated By Reference | ||||||||||||||||
Exhibit | Filing | Exhibit | Filed | |||||||||||||
No. | Exhibit | Form | File No. | Date | No. | Herewith | ||||||||||
4.08 | Amendment No. 1 to the FIL Credit Agreement dated as of March 7, 2003.* | X | ||||||||||||||
4.09 | Amendment No. 1 to the FIUI Credit Agreement dated as of March 7, 2003.* | X | ||||||||||||||
10.01 | Form of Indemnification Agreement between the Registrant and its Directors and certain officers. | S-1 | 33-74622 | 10.01 | ||||||||||||
10.02 | Registrant’s 1993 Share Option Plan.† | S-8 | 333-55850 | 02-16-01 | 4.2 | |||||||||||
10.03 | Registrant’s 1997 Employee Share Purchase Plan.† | S-8 | 333-101327 | 11-20-02 | 4.02 | |||||||||||
10.04 | Registrant’s 1997 Interim Stock Plan.† | S-8 | 333-42255 | 12-15-97 | 99.2 | |||||||||||
10.05 | Registrant’s 1998 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.5 | |||||||||||
10.06 | Registrant’s 1999 Interim Stock Plan.† | S-8 | 333-71049 | 01-22-99 | 4.6 | |||||||||||
10.07 | Registrant’s 2001 Equity Incentive Plan.† | S-8 | 333-75526 | 12-19-01 | 4.9 | |||||||||||
10.08 | Registrant’s 2002 Interim Incentive Plan.† | S-8 | 333-103189 | 02-13-03 | 4.02 | |||||||||||
10.09 | Flextronics U.S.A. 401(k) plan.† | S-1 | 33-74622 | 10.52 | ||||||||||||
10.10 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 – I. | 10-K | 000-23354 | 06-29-01 | 10.08 | |||||||||||
10.11 | Form of Secured Full Recourse Promissory Note executed by certain executive officers of the Registrant in favor of Flextronics International, NV, in connection with Glouple Ventures 2000 – II. | 10-K | 000-23354 | 06-29-01 | 10.09 | |||||||||||
10.12 | Deed of Noncompetition dated November 30, 2000 among JIT Holdings Limited and Goh Thiam Poh Tommie.† | 10-K | 000-23354 | 06-29-01 | 10.10 | |||||||||||
18.01 | Letter from Deloitte & Touche LLP, dated April 21, 2003 regarding change to alternative accounting principle. | X | ||||||||||||||
21.01 | Subsidiaries of Registrant. | X | ||||||||||||||
23.01 | Consent of Deloitte & Touche LLP. | X | ||||||||||||||
99.01 | Certification of Chief Executive Officer.** | X | ||||||||||||||
99.02 | Certification of Chief Financial Officer.** | X |