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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-23354
FLEXTRONICS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Singapore Not Applicable
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Blk 514, Chai Chee Lane
#04-13
Singapore 469029
(Address of principal executive offices) (Zip Code)
(65) 449-5255
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
----- -----
`Number of Ordinary Shares S$0.01 par value, as of June 30, 1997: 13,752,293
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FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1997 and March 31, 1997..... 3
Condensed Consolidated Statements of Income-Three months ended June 30, 1997
and 1996................................................................ 4
Condensed Consolidated Statements of Cash Flow-Three months ended June 30,
1997 and 1996........................................................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 8-15
PART II. OTHER INFORMATION
Items 1 through 6............................................................................... 16
Signatures...................................................................................... 17
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PART I - FINANCIAL INFORMATION
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
1997 MARCH 31,
(UNAUDITED) 1997 *
--------- --------
ASSETS (IN THOUSANDS)
Current assets
Cash $ 33,092 $ 23,645
Accounts receivable, net 74,001 69,331
Inventories 108,926 106,583
Other current assets 12,308 10,769
--------- --------
Total current assets 228,327 210,328
--------- -------
Property and equipment
At cost 180,255 153,137
Accumulated depreciation (44,420) (42,172)
-------- --------
Net property and equipment 135,835 110,965
------- -------
Other non-current assets 37,969 37,941
TOTAL ASSETS $402,131 $359,234
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank borrowings $69,000 $111,075
Current portion of capital lease and long-term debt 11,754 12,233
Accounts payable 82,881 73,631
Other current liabilities 63,368 38,436
-------- ---------
Total current liabilities 227,003 235,375
------- ---------
Long term debt, less current portion 72,018 25,712
Obligations under capital leases and deferred income taxes 13,860 13,847
Notes payable to shareholders 223 223
Minority interest 485 485
Shareholders' equity
Ordinary shares, S$0.01 par value:
Authorized - 100,000,000 shares at March 31, 1997 and June 30, 1997
Issued and outstanding - 13,676,243 shares at March 31,
1997 and 13,752,293 shares at June 30, 1997 89 88
Additional paid-in capital 95,207 95,570
Accumulated deficit (6,754) (12,066)
------- ---------
Total shareholders' equity 88,542 83,592
------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $402,131 $359,234
======== ========
See notes to condensed consolidated financial statements
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FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
---------------------------------------
1997 1996
---------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 196,883 $ 117,889
Costs and expenses:
Cost of sales 177,212 106,143
Selling, general and administrative expenses 10,549 5,611
Goodwill and intangibles amortization 742 659
Interest expense, net 2,947 959
Other, net (615) (443)
--------- ---------
190,835 112,929
Income before income taxes 6,048 4,960
Provision for income taxes 736 763
--------- ---------
Net income after income taxes 5,312 4,197
========= =========
Earnings per share:
Net income per share $ 0.36 $ 0.28
========= =========
Weighted average ordinary
shares and equivalents 14,955 14,914
========= =========
See notes to condensed consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- --------
(IN THOUSANDS)
Net cash provided by operating activities $ 17,955 $ 3,455
Investing activities:
Purchases of property and equipment (28,173) (5,739)
Proceeds from sale of property and equipment 88 39
Payment for business acquired (6,250) --
-------- --------
Net cash used for investing activities (34,335) (5,700)
======== ========
Financing activities:
Borrowings from banks, net 27,925 4,605
Repayment of capital lease obligations (2,129) (701)
Repayment of long-term debt (277) (342)
Repayment of loan from related party -- 350
Net proceeds from issuance of share capital 308 547
-------- --------
Net cash provided by financing activities 25,827 4,459
======== ========
Net increase in cash 9,447 2,214
Cash, beginning of period 23,645 6,546
-------- --------
Cash, end of period $ 33,092 $ 8,760
======== ========
See notes to condensed consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending March 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in Flextronics International
Ltd.'s annual report on Form 10-K for the fiscal year ended March 31, 1997.
NOTE B - INVENTORIES
The components of inventory consist of the following:
June 30 March 31
1997 1997
-------- --------
(In thousands)
Raw materials $ 95,612 $ 64,213
Work-in-process 10,753 16,561
Finished goods 2,561 25,809
-------- --------
Total $108,926 $106,583
======== ========
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128). SFAS No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be
required to present both basic net income per share and diluted net income per
share.
The Company plans to adopt SFAS No. 128 in its fourth fiscal quarter
ending March 31, 1998 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No.
128.
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which will be adopted by the Company in the fourth
quarter of 1998). SEAS No. 129 requires companies to disclose certain
information about their capital structure. The Company does not anticipate that
SFAS No. 129 will have a material impact on its financial position, results of
operations, or cash flows.
In July 1997, the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" was issued and is effective for fiscal years
ending after December 15, 1997. The adoption is not expected to have a material
effect on the financial statements.
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NOTE D-NET INCOME PER SHARE
Net income per share for each period is calculated by dividing net income by the
weighted average shares of common stock and common stock equivalents outstanding
during the period using the modified treasury stock method. Common stock
equivalents consist of shares issuable upon the exercise of outstanding common
stock options and warrants. Fully diluted net income per share is substantially
the same as primary net income per share.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. In this Report, the words "expects,"
"anticipates," "believes," "intends" and similar expressions identify
forward-looking statements, which speak only as of the date hereof. These
forward-looking statements are subject to certain risks and uncertainties,
including, without limitation, those discussed in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Affecting Future Operating Results," that could cause results to
differ materially from historical results or those anticipated. The Company
undertakes no obligation to publicly disclose any revisions to these
forward-looking statements to reflect events or circumstances occurring
subsequent to the filing of this Form 10-Q with the Securities and Exchange
Commission. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities and Exchange Commission, including its Form
10-K and its other Forms 10-Q, that attempt to advise interested parties of the
risks and factors that may affect the Company's business.
OVERVIEW
In recent years, the Company has substantially expanded its
manufacturing capacity, technological capabilities and service offerings,
through both acquisitions and internal growth. See "Certain Factors Affecting
Future Operating Results - Management of Expansion and Consolidation."
In January 1995, the Company acquired nCHIP, Inc. ("nCHIP") in exchange
for an aggregate of approximately 2,450,000 Ordinary Shares in a transaction
accounted for as a pooling of interests. Currently, the Company is engaged in
negotiations to sell nCHIP's semiconductor wafer fabrication facilities to a
third party.
In February 1996, the Company acquired Astron Group Limited in exchange
for (i) $13,440,605 in cash, (ii) $15.0 million in 8% promissory notes, ($10.0
million of which was paid in February 1997 and $5.0 million of which is payable
in February 1998), (iii) 238,684 Ordinary Shares issued at closing and (iv)
Ordinary Shares with a value of $10.0 million to be issued on June 30, 1998. The
Company also paid an earnout of an additional $6.25 million in cash in April
1997, based on the pre-tax profit of Astron for the calendar year ended December
31, 1996. In addition, in February 1996, the Company agreed to pay in June 1998
a $15.0 million consulting fee to an entity affiliated with Stephen Rees, a
former shareholder and the Chairman of Astron and a director of the Company.
Payment of the fee was conditioned upon, among other things, Mr. Rees'
continuing as Chairman of Astron through June 1998. In March 1997, the Company
and Mr. Rees' affiliate agreed to remove the remaining conditions to payment of
the fee and to reduce the amount of the fee, which remains payable in June 1998,
to $14.0 million. Of the $14.0 million, $5.0 million must be paid in cash. The
remaining $9.0 million may be paid in either cash or Ordinary Shares at the
option of the Company, and the Company intends to pay such amount in Ordinary
Shares. The acquisition of Astron has been accounted for under the purchase
method, and accordingly the purchase price has been allocated to the assets and
liabilities assumed based upon their estimated fair market values at the date of
acquisition. In the fourth quarter of fiscal 1996, the Company wrote off $29.0
million of in-process research and development related to the acquisition of
Astron.
In November 1996, the Company acquired Fine Line in exchange for
223,321 Ordinary Shares in a pooling of interests transaction. The Company's
prior financial statements were not restated because the financial results of
Fine Line did not have a material impact on the consolidated results.
On December 20, 1996, the Company acquired 40% of FICO Investment
Holding Limited ("FICO") for $5.2 million. The Company paid $3 million in
December 1996 and accrued the $2.2 million balance in the fourth quarter of
fiscal 1997. The Company has an option to purchase the remaining 60% of FICO in
1998 for a price that is dependent on the financial performance of FICO for the
period ending December 31, 1997. FICO produces injection molded plastics for
electronics companies with manufacturing facilities in Shenzhen, China.
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On March 27, 1997, the Company acquired from Ericsson Business
Networks AB ("Ericsson") two manufacturing facilities (the "Karlskrona
Facilities") located in Karlskrona, Sweden and related inventory, equipment and
other assets for approximately $82.4 million in cash. The acquisition was
financed by borrowings from banks, and accounted for under the purchase method.
The Karlskrona Facilities include a 220,000 square foot facility and a 110,000
square foot facility, each of which is ISO 9002 certified. At the same time, the
Company and Ericsson entered into a multi-year purchase agreement under which
the Company will manufacture, and Ericsson will purchase, certain products used
in the business communications systems sold by Ericsson. The Company is
currently utilizing the Karlskrona Facilities to assemble and test printed
circuit boards, network switches, cordless base stations and other components
for these systems. The Company also intends to use the Karlskrona Facilities to
offer advanced contract manufacturing services to other European OEMs.
Approximately 870 employees are currently based at the Karlskrona Facilities.
See "Certain Factors Affecting Future Operating Results Risks of Karlskrona
Acquisition."
The Company has recently consolidated and expanded its manufacturing
facilities, with the goal of concentrating its activities in a smaller number of
larger, strategically located sites. The Company has closed its Richardson,
Texas facility and downsized manufacturing operations at its Singapore facility,
while substantially increasing overall capacity by expanding operations in North
America, Asia and Europe. In North America, the Company has recently leased a
new 71,000 square foot facility, from which the Company intends to offer a wide
range of engineering services, and in July 1997 the Company completed
construction of a new 73,000 square foot facility, dedicated to high volume PCB
assembly. These new facilities are located adjacent to the Company's other San
Jose operations. Also in July 1997, the Company completed construction of a
101,000 square foot manufacturing facility on a 32-acre campus site in
Guadalajara, Mexico. In Asia, the Company is expanding its Doumen facilities by
developing an additional 224,000 square feet for miniaturized gold-finished PCB
fabrication and for PCB and full system assembly. The Company completed the
construction of this expanded facility in June 1997. The Company is currently
installing equipment and infrastructure and commencing production at its new and
expanded facilities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
THREE MONTHS ENDED
JUNE 30,
-----------------------
1996 1997
----- -----
Net sales ............................................ 100.0% 100.0%
Cost of sales ........................................ 90.0 90.0
----- -----
Gross profit .................................... 10.0 10.0
Selling, general and administrative expenses ......... 4.8 5.3
Goodwill and intangible assets amortization .......... 0.6 0.4
Operating income ................................ 4.6 4.3
Interest expense and other, net ...................... 0.4 1.2
Income before income taxes ...................... 4.2 3.1
Provision for income taxes ........................... 0.6 0.4
----- -----
Net income ...................................... 3.6% 2.7%
===== =====
Net Sales
Net sales for the three months ended June 30, 1997 increased 66.9% to
$196.9 million from $117.9 million for the three months ended June 30, 1996. The
increase in sales was primarily due to (1) sales to Ericsson following
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the March 27, 1997 acquisition of the Karlskrona Facilities, (2) an increase in
sales to certain existing customers, and (3) sales to new customers. This
increase was partially offset by reduced sales to certain existing customers,
including Minebea, Apple Computer, Visioneer and Global Village. See "Certain
Factors Affecting Future Operating Results - Customer Concentration; Dependence
on Electronics Industry" and "Certain Factors Affecting Future Operating Results
- - Risks of Karlskrona Acquisition."
Gross Profit
Gross profit varies from period to period and is affected by, among
other things, product mix, component costs, product life cycles, unit volumes,
startup, expansion and consolidation of manufacturing facilities, pricing,
competition and new product introductions. Gross profit margin remained constant
at 10.0% for both the three months ended June 30, 1997 and the three months
ended June 30, 1996. Gross profit margin in the three months ended June 30, 1997
was favorably affected by cash payments from a customer received under the
Company's agreement with that customer as a result of production volumes for
that customer that were lower than previously scheduled. The Company's new and
expanded facilities provide capacity for production volumes significantly
greater than current levels. As a result of this expansion, the Company
anticipates increased depreciation and other fixed expenses, and expects that
its gross profit margin will be adversely affected in the remainder of fiscal
1998 as it commences volume production in the new facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
June 30, 1997 increased to $10.5 million from $5.6 million for the three months
ended June 30, 1996 and increased as a percentage of net sales to 5.3% for the
three months ended June 30, 1997 from 4.8% for the three months ended June 30,
1996. The respective increases in selling, general and administrative, and
corporate expenses were $0.8 million, $2.6 million, and $1.5 million. The
increase in selling expenses is primarily due to the expansion of sales
personnel in the United States and Europe and the inclusion of Fineline's
selling expenses; the increase in general and administrative expenses is
primarily due to the inclusion of the operations of the Karlskrona Facilities;
and the increase in corporate expenses is primarily due to an increase in
staffing levels, primarily personnel related to implementation of new
information systems as well as increased corporate staff, and to increased legal
and other professional expenses.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets are amortized on a straight line basis.
Goodwill and intangible amortization for the three months ended June 30, 1997
increased to $742,000 from $659,000 for the three months ended June 30, 1996.
The goodwill and intangible asset amortization are primarily due to the
Company's acquisition of Astron.
Interest Expense, Net
Net interest expense increased to $2,947,000 for the three months ended
June 30, 1997 from $959,000 for the three months ended June 30, 1996, due to an
increase in indebtedness to finance the Ericsson acquisition. Interest income
increased to $284,000 for the three months ended June 30, 1997 from $129,000 for
the three months ended June 30, 1996. See "Certain Factors Affecting Future
Operating Results - Increased Leverage."
Other, Net
Other net expenses decreased to ($615,000) for the three months ended June 30,
1997 from ($443,000) for the three months ended June 30, 1996, primarily due to
income of $300,000 from the Company's investment in FICO.
Provision for Income Taxes
The Company is structured as a holding company, conducting its
operations through manufacturing and marketing subsidiaries in China, Malaysia,
Mauritius, the Netherlands, Singapore, Sweden, the United Kingdom and the United
States. Each of these subsidiaries is subject to taxation in the country in
which it has been formed. The Company's consolidated effective tax rate for any
given period is calculated by dividing the aggregate taxes incurred
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by each of the operating subsidiaries and the holding company by the Company's
consolidated pre-tax income. Losses incurred by any subsidiary or by the holding
company are not deductible by the entities incorporated in other countries in
the calculation of their respective local taxes. For example, the charge for the
closing of one plant in Texas in fiscal 1997 was incurred by a United States
subsidiary that did not have income against which this charge could be offset.
The Company's consolidated effective tax rate was 12.2% for the three
months ended June 30, 1997. The Company reduced the effective tax rate on
certain of its subsidiaries that had certain profitable operations by applying
net loss carry forwards. In addition, the Company has reduced the effective tax
rate by shifting some of its manufacturing operations from Singapore, which has
an ordinary corporate tax rate of 26%, to low cost manufacturing locations. The
Company has structured its operations in Asia in a manner designed to maximize
income in countries where tax incentives have been extended to encourage foreign
investment or where income tax rates are low. The Company's Asian manufacturing
subsidiaries have at various times been granted certain tax relief in each of
these countries, resulting in lower taxes than would otherwise be the case under
ordinary tax rates. If tax incentives are not renewed upon expiration, if the
tax rates applicable to the Company are rescinded or changed, or if tax
authorities challenge successfully the manner in which profits are recognized
among the Company's subsidiaries, the Company's worldwide effective tax rate
would increase and its results of operations and cash flow would be adversely
affected. In addition, the expansion by the Company of its operations in North
America and Northern Europe may increase its worldwide effective tax rate.
Variability of Results
The Company has experienced, and expects to continue to experience,
significant periodic and quarterly fluctuations in results of operations due to
a variety of factors. These factors include, among other things, timing of
orders, the short-term nature of most customers' purchase commitments, volume of
orders relative to the Company's capacity, customers' announcements,
introduction and market acceptance of new products or new generations of
products, evolution in the life cycles of customer's products, timing of
expenditures in anticipation of future orders, effectiveness in managing
manufacturing processes, changes in cost and availability of labor and
components, mix of orders filled, and changes or anticipated changes in economic
conditions. In addition, the Company's revenues are adversely affected by the
observance of local holidays during the fourth fiscal quarter in Malaysia and
China, reduced production levels in Sweden in July, and the reduction in orders
by certain customers in the fourth quarter reflecting a seasonal slowdown
following the Christmas holiday. The market segments served by the Company are
also subject to economic cycles and have in the past experienced, and are likely
in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period, and fluctuations in operating results may also result in
fluctuations in the price of the Company's Ordinary Shares. In future periods,
the Company's revenue or results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Ordinary Shares would likely be materially adversely affected.
Liquidity and Capital Resources
The Company has funded its operations from the proceeds of public
offerings of equity securities, cash generated from operations, bank debt and
lease financing of capital equipment. At June 30, 1997 the Company had cash
balances totaling $33.1 million, outstanding bank borrowings of $139.0 million,
and an aggregate of $3.7 million available for borrowing under the Company's
credit facility.
Cash provided by operating activities was $26.2 million for the three
months ended June 30, 1997, comprised primarily of net income, depreciation, and
increases in accounts payable. Cash used for operating activities was $8.3
million for the three months ended June 30, 1997, primarily due to increases in
inventory and accounts receivable. Cash provided by operating activities was
$18.7 million for the three months ended June 30, 1996, comprised primarily of
net income, depreciation, and decreases in accounts receivable. Cash used for
operating activities was $15.2 million for the three months ended June 30, 1996,
primarily due to decreases in accounts payable.
Accounts receivable, net of allowance for doubtful accounts increased
to $74.0 million at June 30, 1997 from $69.3 million at March 31, 1997. The
increase in accounts receivable was primarily due to increased sales for
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the first quarter of fiscal 1998. Inventories increased to $108.9 million at
June 30, 1997 from $106.6 million at March 31, 1997. The increase in inventories
was mainly a result of increased purchases of material to support the growing
sales. The Company's allowance for doubtful accounts decreased from $5.7
million at March 31, 1997 to $5.3 million at June 30, 1997. The Company's
allowance for inventory obsolescence decreased to $6.0 million at June 30, 1997
from $6.2 million at March 31, 1997. The decreases in the allowances were due to
the write-offs of accounts receivable and inventories during the three months
ended June 30, 1997.
Net cash used for investing activities during the three months ended
June 30, 1997 was $34.3 million which consisted primarily of expenditures for
new and expanded facilities, including: the construction in progress at the new
campuses in Doumen, China and Guadalajara, Mexico and the new facility in San
Jose, California; and machinery and equipment in the San Jose, California and
Karlskrona, Sweden facilities. Net cash used for investing activities during the
three months ended June 30, 1996 was $28.1 million which consisted primarily of
equipment acquisitions and building construction.
Net cash provided by financing activities was $25.8 million for the
three months ended June 30, 1997 and $4.5 million for the three months ended
June 30, 1996, in each case consisting primarily of bank borrowings. Bank
borrowings increased from $19.0 million at June 30, 1996 to $139.0 million at
June 30, 1997 due primarily to borrowings to fund the purchase price for the
Karlskrona Facilities.
On March 27, 1997 the Company entered into a new credit facility
consisting of two secured revolving credit and term loan agreements provided by
the BankBoston, N.A. as agent (together, the "Credit Facility"). Under the
Credit Facility, subject to compliance with certain financial ratios and the
satisfaction of customary borrowing conditions, the Company and its United
States subsidiary may borrow up to an aggregate of $175.0 million. The Credit
Facility includes $105.0 million of revolving credit facilities and a $70.0
million term loan facility. The revolving credit facilities are subject to a
borrowing base equal to 70% of consolidated accounts receivable and 20% of
consolidated inventory. As of June 30, 1997, $69.0 million of revolving credit
loans and $70.0 million of term loans were outstanding, and bore interest at a
variable rate equal, as of June 30, 1997, to approximately 8.4% per annum. The
term loan amortizes over a 5-year period and is subject to certain mandatory
prepayment provisions. Loans under the revolving credit facility will mature in
March 2000. Loans to the Company are guaranteed by certain of its subsidiaries
and loans to the Company's United States subsidiary are guaranteed by the
Company and by certain of the Company's subsidiaries. The Credit Facility is
secured by a lien on substantially all accounts receivable and inventory of the
Company and its subsidiaries, as well as a pledge of the Company's shares in
certain of its subsidiaries. The Credit Facility contains a number of operating
and financial covenants and provisions.
The Company's capital expenditures in first quarter of fiscal 1998 were
approximately $30.5 million and the Company anticipates that its aggregate
capital expenditures in fiscal 1998 will be approximately $65.0 million,
primarily relating to the development of new and expanded facilities in San
Jose, California, Guadalajara, Mexico and Doumen, China. In addition, the
Company will be required to expend cash in fiscal 1998 pursuant to the terms of
the Astron acquisition. The Company paid an earnout of $6.25 million in cash in
April 1997, and will be required to make a principal payment of $5.0 million in
February 1998 pursuant to the terms of a note issued by it in connection with
the Astron acquisition. The Company is also required to make a $14.0 million
payment to an entity affiliated with Stephen Rees in June 1998. $5.0 million of
this amount is payable in cash and $9.0 million is payable in cash or, at the
option of the Company, in Ordinary Shares, and the Company intends to pay the
$9.0 million portion in Ordinary Shares. The Company also anticipates that its
working capital requirements will increase in order to support anticipated
volumes of business. Future liquidity needs will depend on, among other factors,
the timing of expenditures by the Company on new equipment, levels of shipments
by the Company, changes in volumes of customer orders. The Company believes that
the existing cash balances, together with anticipated cash flow from operations
and amounts available under the Credit Facility, will be sufficient to fund its
operations through fiscal 1998.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's future operating results will depend upon conditions in
its market that may affect demand for its services. The following factors, among
others, have in some cases affected, and in the future could affect, the
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Company's actual results and could cause such results to differ materially from
those expressed in forward-looking statements made by the Company.
Risks Of Karlskrona Acquisition
The acquisition of the Karlskrona Facilities and the execution of a
multi-year purchase agreement between the Company and Ericsson represent a
significant expansion of the Company's operations, and entail a number of risks.
In particular, until March 27, 1997, the Karlskrona Facilities operated as
captive manufacturing facilities for Ericsson and are now being integrated into
the Company's ongoing manufacturing operations. This requires optimizing
production lines, implementing new management information systems, implementing
the Company's operating systems, and assimilating and managing existing
personnel. The difficulties of this integration may be further complicated by
the geographical distance of the Karlskrona Facilities from the Company's
current operations in Asia and the United States. In addition, the acquisition
of the Karlskrona Facilities has increased and will continue to increase the
Company's expenses and working capital requirements, and place burdens on the
Company's management resources. In the event the Company is unsuccessful in
integrating these operations, the Company would be materially adversely
affected.
The Company has no experience operating in Sweden, and there can be no
assurance that the Company can achieve acceptable levels of profitability, or
reduce costs and prices to Ericsson over time as contemplated by the Purchase
Agreement. In addition, there can be no assurance that the Company will not
encounter difficulties in meeting Ericsson's expectations as to product quality
and timeliness. The Company's inability to meet Ericsson's volume, quality,
timeliness and cost requirements, and to quickly resolve any issues with
Ericsson, could have a material adverse effect on the Company and its results of
operations.
Increased Leverage
The Company's ratio of indebtedness to shareholders equity increased
from approximately 75.6% at June 30, 1996 to 184.8% at June 30, 1997. See "--
Liquidity and Capital Resources." The degree to which the Company is leveraged
could have important consequences to the Company and its shareholders, including
the following: (i) the Company's ability to obtain additional financing may be
impaired; (ii) the Company's operating flexibility is limited by covenants that
limit its ability to incur additional indebtedness, grant liens and enter into
sale and leaseback transactions; and (iii) the Company's degree of leverage may
make it more vulnerable to economic downturns, may limit its ability to pursue
other business opportunities and may reduce its flexibility in responding to
changing business and economic conditions.
Management of Expansion and Consolidation
The Company is currently experiencing a period of rapid expansion
through both internal growth and acquisitions, with net sales increasing from
$80.7 million in fiscal 1992 to $490.6 million in fiscal 1997 and $196.9 million
in the first quarter of fiscal 1998. There can be no assurance that the
Company's historical growth will continue or that the Company will successfully
manage the integration of the acquired operations. Expansion has caused, and is
expected to continue to cause, strain on the Company's infrastructure, including
its managerial, technical, financial and other resources. To manage further
growth, the Company must continue to enhance financial controls and hire
additional engineering and sales personnel. There can be no assurance that the
Company will be able to manage its expansion effectively, and a failure to do so
could have a material adverse effect on the Company's results of operations.
Expansion through acquisition and internal growth has contributed to
the Company's incurring significant accounting charges and experiencing
volatility in its operating results. There can be no assurance that the Company
will not continue to experience volatility in its operating results or incur
write-offs in connection with its expansion efforts. See "-- Overview." In
addition, the Company has recently completed the construction of significant new
facilities in Guadalajara, Mexico, Doumen, China and San Jose, California,
resulting in new fixed expenses, including substantial increases in depreciation
expense that will increase the Company's cost of sales. There can be no
assurances that the Company will utilize a sufficient portion of the capacity of
these facilities to offset the impact of these expenses on its gross margins and
operating income.
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The Company is beginning the process of replacing its management
information systems. The new systems will significantly affect many aspects of
the Company's business including its manufacturing, sales and marketing, and
accounting functions and the Company's ability to integrate the Karlskrona
Facilities, which must be converted to the new system. In addition, the
successful implementation of the new systems will be important to facilitate
future growth. The Company currently anticipates that the complete installation
of its new management information systems will take at least 18 months, and
implementation of the new systems could cause significant disruption in
operations. If the Company is not successful in implementing its new systems or
if the Company experiences difficulties in such implementation, the Company
could experience problems with the delivery of its products or an adverse impact
on its ability to access timely and accurate financial and operating
information.
Customer Concentration; Dependence on Electronics Industry
A small number of customers are responsible for a significant portion
of the Company's net sales. The Company's largest customer during the first
three months of fiscal 1998 was Ericsson, with net sales to Ericsson accounting
for approximately 30% of total net sales. Net sales to Advanced Fibre
Communications were approximately 10% and 4% of total net sales for the three
month periods ending June 30, 1997 and June 30, 1996, respectively. No other
customer accounted for more than 10% of net sales for the period ending June 30,
1997. Net sales to the Company's top five customers during the three months
ended June 30, 1997 accounted for approximately 61% of consolidated sales,
compared to approximately 45% during the three months ended June 30, 1996. The
composition of the group comprising the Company's largest customers has varied
from year to year, and there can be no assurance that the Company's principal
customers will continue to purchase products and services from the Company at
current levels, if at all. Significant reductions in sales to any of these
customers, or the loss of one or more major customers, would have a material
adverse effect on the Company. The Company generally does not obtain firm
long-term volume purchase commitments from its customers, and over the past few
years has experienced reduced lead-times in customer orders. In addition,
customer contracts can be canceled and volume levels can be changed or delayed.
The timely replacement of canceled, delayed, or reduced contracts with new
business cannot be assured.
The factors affecting the electronics industry in general, or any of
the Company's major customers in particular, could have a material adverse
effect on the Company. The markets in which the Company's customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. These conditions frequently
result in short product life cycles. The Company's success will depend to a
significant extent on the success achieved by its customers in developing and
marketing their products, some of which are new and untested. If technologies or
standards supported by customers' products become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be materially
adversely affected.
Competition
The electronics contract manufacturing industry is extremely
competitive and includes hundreds of companies, several of whom have achieved
substantial market share. Current and prospective customers also evaluate the
Company's capabilities against the merits of internal production. In addition,
in recent years the electronics contract manufacturing industry has attracted a
significant number of new entrants, including large OEMs with excess
manufacturing capacity, and many existing participants, including the Company,
have substantially expanded their manufacturing capacity by expanding their
facilities and adding new facilities. In the event of a decrease in overall
demand for contract manufacturing services, this increased capacity could result
in substantial pricing pressures, which could adversely affect the Company's
operating results. Certain of the Company's competitors, including Solectron
Corporation and SCI Systems, have substantially greater manufacturing,
financial, research and development and marketing resources than the Company.
Risks of International Operations
The geographical distances between Asia, the United States and Europe
create a number of logistical and communications challenges. Because of the
location of manufacturing facilities in a number of countries, the Company is
affected by economic and political conditions in those countries. In particular,
the Company's operations and assets are subject to significant political,
economic, legal and other uncertainties in China and Mexico, where the Company
is substantially expanding its operations, as well as in Hong Kong, where the
Company maintains certain
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administrative and procurement operations. Changes in policies by the U.S. or
foreign governments resulting in, among other things, increased duties, higher
taxation, currency conversion limitations, restrictions on the transfer of
funds, limitations on imports or exports, or the expropriation of private
enterprises could also have a material adverse effect on the Company.
Currency Fluctuations
While Flextronics transacts business predominantly in U.S. dollars and
most of its revenues are collected in U.S. dollars, a portion of Flextronics'
costs such as payroll, rent and indirect operation costs, are denominated in
other currencies such as Singapore dollars, Swedish kronor, Hong Kong dollars,
Malaysian ringgit, British pounds sterling and Chinese renminbis. Historically,
fluctuations in foreign currency exchange rates have not resulted in significant
exchange losses to the Company. Following the consummation of the Ericsson
Transaction, a significant portion of the Company's business has been, and the
Company expects will continue to be, conducted in Swedish kronor. Changes in the
relation of these and other currencies to the U.S. dollar will affect the
Company's cost of goods sold and operating margins and could result in exchange
losses. The Company has historically not actively engaged in substantial
exchange rate hedging activities and unless such activities are successfully
implemented, the Company will be subject to significantly greater exchange rate
fluctuation risk following the Ericsson Transaction. There can be no assurance
that the Company will implement any hedging techniques or that if it does so,
that such techniques will be successful.
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PART II - OTHER INFORMATION
Items 1 through 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(11.1) Statement re: computation of earnings per share.
(27.1) Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K filed April 11, 1997, reporting the acquisition of the
Karlskrona Facilities pursuant to Item 2 of Form 8-K and reporting
the Credit Facility pursuant to Item 5 of Form 8-K. No financial
statements were filed.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
FLEXTRONICS INTERNATIONAL LTD.
(Registrant)
Date August 19, 1997 /s/ Michael E. Marks
-----------------------------------------
Michael E. Marks, Chief Executive Officer
Date August 19, 1997 /s/ Robert B. Dykes
-----------------------------------------
Robert B. Dykes, Senior Vice President,
Finance and Administration; Chief
Financial Officer
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EXHIBIT INDEX
Exhibit
Number Document Description
11.1 Statement re: computation of earnings per share
27.1 Financial data schedule