Flextronics Announces Third Quarter ResultsNet sales increase 67% to record $9.1 billionAdjusted net income increases 84% to $250 millionAdjusted EPS increases 30% to $0.30
SINGAPORE, Jan. 29 /PRNewswire-FirstCall/ -- Flextronics today announced results for its third quarter ended December 31, 2007 as follows:
(US$ in millions, except EPS)
Three Month Periods Nine Month Periods
Ended Ended
December December December December
31, 2007 31, 2006 31, 2007 31, 2006
Net sales $9,069 $5,415 $19,783 $14,177
GAAP operating income $22 $153 $317 $300
Adjusted operating income (1) $300 $161 $625 $429
GAAP net income $(774) $119 $(547) $388
Adjusted net income (1) $250 $136 $530 $356
GAAP EPS $(0.94) $0.20 $(0.80) $0.66
Adjusted EPS (1) $0.30 $0.23 $0.77 $0.60
(1) A reconciliation of non-GAAP financial measures to GAAP financial
measures is presented in Schedule II of this press release.
Third Quarter Results Revenue increased $3.7 billion, or 67%, from the year ago quarter to a record high $9.1 billion in the December 2007 quarter. Adjusted operating profit increased $139 million, or 86%, from the year ago quarter to $300 million in the December 2007 quarter while adjusted operating margin improved 30 basis points from 3.0% to 3.3% over the same time period. Adjusted net income increased $114 million, or 84%, from the year ago quarter to $250 million in the December 2007 quarter while adjusted EPS increased 30% from $0.23 to $0.30 over the same time period. Cash amounted to $1.8 billion at December 31, 2007. Operating cash flow generated $534 million and $1.05 billion in the three and nine month periods ended December 31, 2007, respectively. Free cash flow (operating cash flow less net capital expenditures) amounted to $470 million and $840 million in the three and nine month periods ended December 31, 2007, respectively. "Overall demand in the December quarter was exceptionally strong as revenues and earnings exceeded the high end of our guidance," said Thomas Smach, chief financial officer of Flextronics. "Actual revenue in the quarter was $9.1 billion versus our guidance of $8.5 billion and adjusted EPS was $0.30 versus our guidance of $0.26." "Our strong financial position provides us with substantial flexibility to make synergistic investments to enhance our competitiveness, expand our capabilities, drive revenue growth and enhance profitability," said Mike McNamara, chief executive officer of Flextronics. "We remain intensely focused on generating a higher return on capital while growing our business, as evidenced by the return on invested capital of 11.9%, which increased 70 basis points from the previous quarter." McNamara concluded by stating, "I am very proud of the dedication and hard work of our employees and management across the globe in making this a record quarter for Flextronics while successfully integrating Solectron, the largest acquisition in our company's history." Guidance The Company reiterated its previously provided March 2008 quarter guidance of revenue in the range of $7.5 - $7.9 billion and adjusted EPS in the range of $0.22 - $0.24. GAAP earnings per share are expected to be lower than the guidance provided herein by approximately $0.05 for quarterly intangible amortization and stock-based compensation expense and by approximately $0.19 - $0.27 per share for the previously announced remaining restructuring and other charges relating to the Solectron acquisition. Conference Calls and Web Casts A conference call hosted by Flextronics's management will be held today at 1:30 p.m. PST to discuss the Company's financial results for the third quarter ended December 31, 2007. This call will be broadcast via the Internet and may be accessed by logging on to the Company's website at http://www.flextronics.com. Additional information in the form of slide presentations may also be found on the Company's site. Replays of the broadcasts will remain available on the Company's website afterwards. Minimum requirements to listen to the broadcast are Microsoft Windows Media Player software (free download at http://www.microsoft.com/windows/windowsmedia/download/default.asp) and at least a 28.8 Kbps bandwidth connection to the Internet. About Flextronics Headquartered in Singapore (Singapore Reg. No. 199002645H), Flextronics is a leading Electronics Manufacturing Services (EMS) provider focused on delivering complete design, engineering and manufacturing services to automotive, computing, consumer digital, industrial, infrastructure, medical and mobile OEMs. With the acquisition of Solectron, pro forma fiscal year 2007 revenues from continuing operations are more than US$30.0 billion. Flextronics helps customers design, build, ship, and service electronics products through a network of facilities in 35 countries on four continents. This global presence provides design and engineering solutions that are combined with core electronics manufacturing and logistics services, and vertically integrated with components technologies, to optimize customer operations by lowering costs and reducing time to market. For more information, please visit http://www.flextronics.com. This press release contains forward-looking statements within the meaning of U.S. securities laws, including statements related to future revenue and earnings growth. These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these forward-looking statements. These risks include that revenue and earnings growth may not occur as expected; our dependence on industries that continually produce technologically advanced products with short life cycles; that we may not fully realize the expected synergies, revenues and earnings growth and cost savings from the Solectron acquisition, and that we may incur significant costs and charges associated with the acquisition; our ability to respond to changes in economic trends, to fluctuations in demand for customers' products and to the short-term nature of customers' commitments; competition in our industry, particularly from ODM suppliers in Asia; our dependence on a small number of customers for the majority of our sales and our reliance on strategic relationships with major customers; the challenges of effectively managing our operations, including our ability to manage manufacturing processes, control costs and manage changes in our operations; the challenges of integrating acquired companies and assets; not obtaining anticipated new customer programs, or that if we do obtain them, that they may not contribute to our revenue or profitability as expected or at all; our ability to utilize available and recently expanded manufacturing capacity; the risk of future restructuring charges that could be material to our financial condition and results of operations; our ability to design and quickly introduce world-class components products that offer significant price and/or performance advantages over competitive products; the impact on our margins and profitability resulting from substantial investments and start-up and integration costs in our components, design and ODM businesses; production difficulties, especially with new products; changes in government regulations and tax laws; not realizing expected returns from our retained interests in divested businesses; our exposure to potential litigation relating to intellectual property rights, product warranty and product liability; potential impairment of our intangible assets; our dependence on the continued trend of outsourcing by OEMs; the risks to our particular electronics and technology sector of economic instability and a slowdown in consumer spending; the effects of customer bankruptcies; supply shortages of required electronic components; the challenges of international operations, including fluctuations in exchange rates beyond hedged boundaries leading to unexpected charges; our dependence on our key personnel; and our ability to comply with environmental laws. Additional information concerning these and other risks is described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our reports on Form 10-K, 10-Q and 8-K that we file with the U.S. Securities and Exchange Commission. The forward-looking statements in this press release are based on current expectations and Flextronics assumes no obligation to update these forward-looking statements.
SCHEDULE I
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Month Periods Ended Nine Month Periods Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
GAAP:
Net sales $9,068,658 $5,415,460 $19,782,783 $14,176,936
Cost of sales 8,538,958 5,126,311 18,648,730 13,377,737
Restructuring
charges 211,780 - 221,533 95,683
Gross profit 317,920 289,149 912,520 703,516
Selling, general
and administrative
expenses 261,586 135,884 560,725 403,366
Restructuring charges 34,052 - 34,973 565
Operating income 22,282 153,265 316,822 299,585
Intangible
amortization 21,058 7,794 51,444 23,520
Other expense, net 61,078 - 51,769 -
Interest and other
expense, net 36,921 16,791 68,658 77,063
Income (loss)
before income
taxes (96,775) 128,680 144,951 199,002
Provision for
(benefit from)
income taxes 677,636 10,089 691,477 (1,224)
Income (loss)
from continuing
operations (774,411) 118,591 (546,526) 200,226
Income from
discontinued
operations (net of
tax) - - - 187,738
Net income
(loss) $(774,411) $118,591 $(546,526) $387,964
EPS:
GAAP $(0.94) $0.20 $(0.80) $0.66
Non-GAAP $0.30 $0.23 $0.77 $0.60
Shares used in
computing GAAP
per share amounts 828,147 598,534 682,024 590,658
Shares used in
computing
Non-GAAP per
share amounts 837,112 598,534 689,690 590,658
See Schedule II for the reconciliation of GAAP to non-GAAP financials
measures.
SCHEDULE II
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (1)
(In thousands, except per share amounts)
Three Month Periods Ended
December % of December % of
31, 2007 Sales 31, 2006 Sales
GAAP gross profit $317,920 3.5% $289,149 5.3%
Stock-based compensation
expense 2,498 1,708
Restructuring and other
charges (2) 211,142 -
Non-GAAP gross profit $531,560 5.9% $290,857 5.4%
GAAP SG&A Expenses $261,586 2.9% $135,884 2.5%
Stock-based compensation
expense 13,487 6,346
Restructuring and other
charges (2) 16,663 -
Non-GAAP SG&A Expenses $231,436 2.6% $129,538 2.4%
GAAP operating income $22,282 0.2% $153,265 2.8%
Stock-based compensation
expense 15,985 8,054
Restructuring and other
charges (2) 261,857 -
Non-GAAP operating income $300,124 3.3% $161,319 3.0%
GAAP net income (loss) $(774,411) -8.5% $118,591 2.2%
Stock-based compensation
expense 15,985 8,054
Restructuring and other
charges (2) 270,335 -
Intangible amortization 22,537 9,324
Other - impairment of
investments (3) 61,078 -
Other - foreign currency
gain on liquidation (4) - -
Other - gain on
divestiture of
operations (5) - -
Adjustment for taxes (6)654,377 (135)
Non-GAAP net income $249,901 2.8% $135,834 2.5%
GAAP provision for (benefit
from) income taxes $677,636 7.5% $10,089 0.2%
U.S. deferred tax asset
impairment (6) (661,274) -
Restructuring and other
charges (6) 5,537 -
Intangible amortization (6) 1,360 135
Non-GAAP provision for income
taxes $23,259 0.3% $10,224 0.2%
SCHEDULE II
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (1)
(In thousands, except per share amounts)
Nine Month Periods Ended
December % of December % of
31, 2007 Sales 31, 2006 Sales
GAAP gross profit $912,520 4.6% $703,516 5.0%
Stock-based compensation
expense 4,967 3,560
Restructuring and other
charges (2) 220,895 95,683
Non-GAAP gross profit $1,138,382 5.8% $802,759 5.7%
GAAP SG&A Expenses $560,725 2.8% $403,366 2.8%
Stock-based compensation
expense 30,341 19,758
Restructuring and other
charges (2) 16,663 9,619
Non-GAAP SG&A Expenses $513,721 2.6% $373,989 2.6%
GAAP operating income $316,822 1.6% $299,585 2.1%
Stock-based compensation
expense 35,308 23,318
Restructuring and other
charges (2) 272,531 105,867
Non-GAAP operating income $624,661 3.2% $428,770 3.0%
GAAP net income (loss) $(546,526) -2.8% $387,964 2.7%
Stock-based compensation
expense 35,308 23,874
Restructuring and other
charges (2) 281,009 105,867
Intangible amortization 55,881 34,450
Other - impairment of
investments (3) 61,078 -
Other - foreign currency
gain on liquidation (4) (9,309) -
Other - gain on divestiture
of operations (5) - (181,228)
Adjustment for taxes (6) 652,832 (14,680)
Non-GAAP net income $530,273 2.7% $356,247 2.5%
GAAP provision for (benefit
from) income taxes $691,477 3.5% $(1,224) 0.0%
U.S. deferred tax asset
impairment (6) (661,274) -
Restructuring and other
charges (6) 5,537 23,012
Intangible amortization (6) 2,905 341
Non-GAAP provision for income
taxes $38,645 0.2% $22,129 0.2%
See the accompanying notes on Schedule IV attached to this press release.
SCHEDULE III
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED GAAP CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 2007 March 31, 2007
ASSETS
Current Assets:
Cash and cash equivalents $1,800,824 $714,525
Accounts receivable, net 3,641,704 1,754,705
Inventories 4,271,688 2,562,303
Deferred income taxes 7,533 11,105
Other current assets 903,315 548,409
10,625,064 5,591,047
Property and equipment, net 2,603,512 1,998,706
Deferred income taxes 47,828 669,898
Goodwill and other intangibles, net 5,429,531 3,264,320
Other assets 890,154 817,403
$19,596,089 $12,341,374
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings, current portion
of long-term debt and capital
lease obligations $35,002 $8,385
Accounts payable 5,835,822 3,440,845
Other current liabilities 2,092,414 1,038,838
Total current liabilities 7,963,238 4,488,068
Long-term debt, net of current portion:
Acquisition Term Loan due 2012 and
2014 1,268,123 -
6 1/2 % Senior Subordinated Notes
due 2013 399,622 399,622
6 1/4 % Senior Subordinated Notes
due 2014 402,090 389,119
1 % Convertible Subordinated Notes
due 2010 500,000 500,000
Zero Coupon Convertible Junior
Subordinated Notes due 2009 195,000 195,000
Other long-term debt and capital
lease obligations 295,485 10,064
Other liabilities 336,364 182,842
Total shareholders' equity 8,236,167 6,176,659
$19,596,089 $12,341,374
SCHEDULE IV
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(1) To supplement Flextronics' unaudited selected financial data
presented on a basis consistent with Generally Accepted Accounting
Principles ("GAAP"), the Company discloses certain non-GAAP financial
measures that exclude certain charges, including non-GAAP gross
profit, non-GAAP selling, general and administrative expenses,
non-GAAP operating income, non-GAAP provision for income taxes,
non-GAAP net income and non-GAAP net income per diluted share. These
supplemental measures exclude, among other things, stock-based
compensation expense, restructuring charges, intangible amortization,
gains or losses on divestitures and certain other items. These
non-GAAP measures are not in accordance with or an alternative for
GAAP, and may be different from non-GAAP measures used by other
companies. We believe that these non-GAAP measures have limitations
in that they do not reflect all of the amounts associated with
Flextronics's results of operations as determined in accordance with
GAAP and that these measures should only be used to evaluate
Flextronics's results of operations in conjunction with the
corresponding GAAP measures. The presentation of this additional
information is not meant to be considered in isolation or as a
substitute for the most directly comparable GAAP measures. We
compensate for the limitations of non-GAAP financial measures by
relying upon GAAP results to gain a complete picture of Company
performance.
In calculating non-GAAP financial measures, we exclude certain items
to facilitate a review of the comparability of the Company's
operating performance on a period-to-period basis because such items
are not, in our view, related to the Company's ongoing operational
performance. We use non-GAAP measures to evaluate the operating
performance of our business, for comparison with forecasts and
strategic plans, for calculating return on investment, and for
benchmarking performance externally against competitors. In
addition, management's incentive compensation is determined using
these non-GAAP measures. Also, when evaluating potential
acquisitions, we exclude the items described below from consideration
of the target's performance and valuation. Since we find these
measures to be useful, we believe that investors benefit from seeing
results "through the eyes" of management in addition to seeing GAAP
results. We believe that these non-GAAP measures, when read in
conjunction with the Company's GAAP financials, provide useful
information to investors by offering:
-- the ability to make more meaningful period-to-period comparisons
of the Company's on-going operating results;
-- the ability to better identify trends in the Company's underlying
business and perform related trend analyses;
-- a better understanding of how management plans and measures the
Company's underlying business; and
-- an easier way to compare the Company's operating results against
analyst financial models and operating results of competitors that
supplement their GAAP results with non-GAAP financial measures.
The following are explanations of each of the adjustments that we
incorporate into non-GAAP measures, as well as the reasons for
excluding each of these individual items in the reconciliations of
these non-GAAP financial measures:
Stock-based compensation expense consists of non-cash charges for
the estimated fair value of stock options and unvested share bonus
awards granted to employees and assumed in business acquisitions.
The Company believes that the exclusion of these charges provides
for more accurate comparisons of its operating results to peer
companies due to the varying available valuation methodologies,
subjective assumptions and the variety of award types. In
addition, the Company believes it is useful to investors to
understand the specific impact the application of SFAS 123R has on
its operating results.
Restructuring charges include severance, impairment, lease
termination, exit costs and other charges primarily related to the
closures and consolidations of various manufacturing facilities.
These costs may vary in size based on the Company's acquisition
and restructuring activities, are not directly related to ongoing
or core business results, and do not reflect expected future
operating expenses. These costs are excluded by the Company's
management in assessing current operating performance and
forecasting its earnings trends, and are therefore excluded by the
Company from its non-GAAP measures.
Intangible amortization consists of non-cash charges that can be
impacted by the timing and magnitude of acquisitions. The Company
considers its operating results without these charges when
evaluating its ongoing performance and forecasting its earnings
trends, and therefore excludes such charges when presenting
non-GAAP financial measures. The Company believes that the
assessment of its operations excluding these costs is relevant to
its assessment of internal operations and comparisons to the
performance of its competitors.
Gains or losses on divestiture of operations relate to discrete
and unusual events associated with the sale of a non-core business
of the Company. These gains or losses can vary significantly in
size and do not reflect expected future operating impacts;
therefore, it is useful to investors to highlight the specific
results of these items on the Company's operating results. The
Company's management excludes these items when evaluating its
ongoing performance and forecasting its earnings trends, and
therefore excludes such charges when presenting non-GAAP net
income.
Other charges or gains consist of various other types of items
that are not directly related to ongoing or core business results,
such as integration costs associated with restructuring activities
undertaken in connection with various business acquisitions,
executive separation costs and cumulative foreign exchange
adjustments to the cost basis of international entities that have
been divested or liquidated. We exclude these items because they
do not affect core operations. Excluding these amounts provide
investors with a basis to compare Company performance against the
performance of other companies without this variability.
Adjustment for taxes relates to the tax effects of the various
adjustments that we incorporate into non-GAAP measures in order to
provide a more meaningful measure on non-GAAP net income.
With the exception of net income and diluted earnings per share, the
Reconciliation of GAAP to Non-GAAP Financial Measures as presented in
Schedule II and discussed further below represent results from
continuing operations. Net income and diluted earnings per share
represent results for both continuing and discontinued operations.
(2) During the three-month period ended December 31, 2007, the Company
recognized restructuring and other charges primarily related to
restructuring and integration activities initiated by the Company in
an effort to consolidate and integrate the Company's global capacity
and infrastructure as a result of its acquisition of Solectron
Corporation. These activities, which included closing, consolidating
and relocating certain manufacturing and administrative operations,
elimination of redundant assets and reducing excess workforce and
capacity, were intended to optimize the Company's operational
efficiency post acquisition.
In addition to the restructuring, integration and other costs
described above, the Company also recognized $10.7 million in
restructuring charges for employee termination costs in Europe during
the nine-month period ended December 31, 2007.
During the nine-month period ended December 31, 2006, the Company
recognized restructuring and other charges related to the impairment,
lease termination, exit costs and other charges primarily related to
the disposal and exit of certain real estate owned and leased by the
Company in order to reduce its investment in property, plant and
equipment.
(3) During the three and nine-month periods ended December 31, 2007, the
Company recognized other-than-temporary impairment and related
charges on certain of its non-core investments, primarily resulting
from a divestiture of a certain investment for which the Company
expects to receive approximately $57.4 million in cash proceeds
during the quarter ended March 31, 2008.
(4) During the nine-month period ended December 31, 2007, the Company
recognized net foreign exchange gains in connection with the
divestiture of a certain international entity.
(5) During the nine-month period ended December 31, 2006, the Company
recognized a pretax gain associated with the divestiture of the
Company's Software Development and Solutions business in September
2006.
(6) The Company recognized non-cash tax expense of $661.3 million during
the three and nine-month periods ended December 31, 2007 principally
resulting from the Company's re-evaluation of previously recorded
deferred tax assets in the United States, which are primarily
comprised of tax loss carry forwards, and the determination that the
likelihood that certain deferred tax assets will be realized has
decreased because the Company expects future projected taxable income
in the United States will be lower as a result of increased interest
expense resulting from the term loan entered into as part of the
acquisition of Solectron. During the three and nine-month periods
ended December 31, 2007 and 2006, the Company also recognized tax
benefits related to its restructuring and other activities, and
amortization of intangible assets.
During the nine-month period ended December 31, 2006, the Company
also recognized $1.3 million in tax benefits related to the
amortization of intangible assets attributable to discontinued
operations. These tax benefits were offset by $10.0 million in tax
expense attributable to discontinued operations associated with the
gain recognized on the divestiture of the Company's Software
Development and Solutions business during the nine-month period ended
December 31, 2006. Tax benefits and expense attributable to
discontinued operations are included as tax adjustments in the
Company's reconciliation of GAAP net income (loss) to non-GAAP net
income, but are not included in the Company's reconciliation of GAAP
provision for (benefit from) income taxes to the corresponding
non-GAAP measure as GAAP provision for (benefit from) income taxes
represents results from continuing operations.
(7) Return on invested capital ("ROIC") divides after-tax non-GAAP
operating income by an average of net invested capital. After-tax
non-GAAP operating income includes after-tax operating income from
divested businesses, and excludes intangible amortization,
stock-based compensation expense, restructuring and other charges.
Net invested capital is defined as total assets less current
liabilities and non-operating assets. Non-operating assets include
cash and cash equivalents, short-term investments, notes receivable,
deferred income tax assets, and other non-operating assets.
We believe ROIC is a useful measure in providing investors with
information regarding the Company's performance. ROIC is a widely
accepted measure of earnings efficiency in relation to total capital
employed. We believe that increasing the return on total capital
employed, as measured by ROIC, is an effective method to sustain and
increase shareholder value. ROIC is not a measure of financial
performance under generally accepted accounting principles in the
U.S., and may not be defined and calculated by other companies in the
same manner. ROIC should not be considered in isolation or as an
alternative to net earnings as an indicator of performance.
The following table reconciles ROIC as calculated using after-tax
non-GAAP operating income to the same performance measure calculated
using the nearest GAAP measure, which is GAAP operating income from
continuing operations adjusted for taxes. The Company's ROIC metric
for the December 31, 2007 quarter is based on pro forma amounts that
include the Company's actual balances as of September 28, 2007
adjusted for the preliminary purchase allocation for the Company's
acquisition of Solectron. Please refer to the Company's trended
financial statements included in the Investors section of our website
for further details.
Three Month Periods Ended
ROIC December 31, 2007 September 28, 2007
Non-GAAP 11.9% 11.2%
Restructuring and other charges -11.0% -0.7%
GAAP 0.9% 10.5%
Flextronics
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