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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended DECEMBER 31, 2000FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period fromFOR THE TRANSITION PERIOD FROM ________ toTO _________
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.)
----------------
MICHAEL E. MARKS
CHIEF EXECUTIVE OFFICER
FLEXTRONICS INTERNATIONAL LTD.
11 UBI36 ROBINSON ROAD 1 #07-01/02
MEIBAN INDUSTRIAL BUILDING#18-01
CITY HOUSE
SINGAPORE 40872306887
(65) 844-3366299-8888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At February 2,November 06, 2001, there were 444,494,302 Ordinary Shares,486,789,022 ordinary shares, S$0.01 par
value, outstanding.
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FLEXTRONICS INTERNATIONAL LTD.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2000-- September 30, 2001 and
March 31, 2000......2001.............................................................. 3
Condensed Consolidated Statements of Operations - Three and NineSix Months Ended
December 31,September 30, 2001 and September 30, 2000 and December 31, 1999..................................................................... 4
Condensed Consolidated Statements of Cash Flows - NineSix Months Ended
December 31,September 30, 2001 and September 30, 2000 and December 31, 1999........................................................................... 5
Notes to Condensed Consolidated Financial Statements..............................Statements ......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 13
.Operations ................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 19Risk ................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 25
Signatures........................................................................ 274. Submission of Matters to Vote of Security Holders............................. 28
Signatures ................................................................... 30
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3
ITEM 1. FINANCIAL STATEMENTS
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
DECEMBER 31,SEPTEMBER 30, MARCH 31,
2000 20002001 2001
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................................... $ 398,374400,286 $ 747,049631,588
Accounts receivable, net ........................................ 1,634,053 1,057,949......................................... 1,706,196 1,651,252
Inventories, net ................................................ 1,727,826 1,142,594................................................. 1,420,254 1,787,055
Other current assets ............................................ 339,079 275,152............................................. 765,951 386,152
----------- -----------
Total current assets .................................... 4,099,332 3,222,744............................................. 4,292,687 4,456,047
----------- -----------
Property, plant and equipment, net ....................................... 1,856,168 1,323,732................................. 2,035,303 1,828,441
Goodwill and other intangibles, net ............................... 604,211 390,351................................ 1,136,592 983,384
Other assets ...................................................... 139,300 198,116....................................................... 414,135 303,783
----------- -----------
Total assets ......................................................................................... $ 6,699,0117,878,717 $ 5,134,9437,571,655
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings and current portion of long-term debt ....................... $ 691,414421,134 $ 487,773298,052
Current portion of capital lease obligations .................... 26,551 24,037..................... 20,123 27,602
Accounts payable ................................................ 1,507,582 1,227,142
Accrued expenses ................................................ 556,550 322,257................................................. 1,727,871 1,480,468
Other current liabilities ........................................ 933,034 735,184
----------- -----------
Total current liabilities ............................... 2,782,097 2,061,209........................................ 3,102,162 2,541,306
----------- -----------
Long-term debt, net of current portion ............................ 884,839 593,830............................. 872,970 879,525
Capital lease obligations, net of current portion ................. 45,496 51,437.................. 30,642 37,788
Other liabilities ................................................. 84,339 58,133.................................................. 83,673 82,675
SHAREHOLDERS' EQUITY:
Ordinary shares, S$0.01 par value; authorized --- 1,500,000,000;
issued and outstanding - 439,386,316482,650,420 and 410,538,799481,531,339 as of
December 31, 2000September 30, 2001 and March 31, 2000,2001, respectively ........... 2,695 2,5162,876 2,871
Additional paid-in capital ...................................... 2,928,032 1,990,673....................................... 4,269,471 4,266,908
Retained earnings ............................................... 60,464 373,735deficit ................................................. (374,369) (132,892)
Accumulated other comprehensive income (loss) ................... (88,951) 8,494
Deferred compensation ........................................... -- (5,084)loss ............................. (108,708) (106,526)
----------- -----------
Total shareholders' equity .............................. 2,902,240 2,370,334............................... 3,789,270 4,030,361
----------- -----------
Total liabilities and shareholders' equity ............................. $ 6,699,0117,878,717 $ 5,134,9437,571,655
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,Three months ended Six months ended
September 30, September 30, September 30, September 30,
2001 2000 19992001 2000
1999
------------ ------------ ------------------------- ------------- ------------- ------------
Net sales .................................... $3,239,293 $1,967,740 $ 8,995,265 $4,730,4263,244,918 $ 3,078,998 $ 6,355,516 $ 5,755,972
Cost of sales ................................ 2,964,034 1,797,643 8,263,848 4,293,9193,036,169 2,829,406 5,914,972 5,299,814
Unusual charges .............................. 38,550 -- 146,539 --
---------- ----------439,448 24,268 439,448 107,989
----------- --------------------- ----------- -----------
Gross profit ............................ 236,709 170,097 584,878 436,507(loss) ..................... (230,699) 225,324 1,096 348,169
Selling, general and administrative .......... 113,736 86,534 316,585 228,263105,488 107,931 214,304 202,849
Goodwill and intangibles amortization ........ 15,141 10,735 37,016 29,2763,802 12,505 6,058 21,875
Unusual charges .............................. 7,726 -- 441,236 3,52376,647 24,127 76,647 433,510
Interest and other expense, net .............. 22,092 23,367 40,252 57,023
---------- ----------22,184 22,359 44,550 18,160
----------- --------------------- ----------- -----------
Income (loss) before income taxes ....... 78,014 49,461 (250,211) 118,422(438,820) 58,402 (340,463) (328,225)
Provision for (benefit from) income taxes ................... 10,232 1,662 2,642 12,881
---------- ----------.... (109,015) 8,475 (98,986) (7,590)
----------- --------------------- ----------- -----------
Net income (loss) ....................... $ 67,782(329,805) $ 47,79949,927 $ (252,853)(241,477) $ 105,541
========== ==========(320,635)
=========== ===================== =========== ===========
Earnings (loss) per share:
Basic ...................................... $ 0.15(0.69) $ 0.130.11 $ (0.58)(0.50) $ 0.31
========== ==========(0.75)
=========== ===================== =========== ===========
Diluted .................................... $ 0.14(0.69) $ 0.120.10 $ (0.58)(0.50) $ 0.29
========== ==========(0.75)
=========== ===================== =========== ===========
Shares used in computing per share amounts:
Basic ...................................... 441,016 357,116 433,448 342,676
========== ==========481,381 436,376 480,208 429,476
=========== ===================== =========== ===========
Diluted .................................... 478,657 384,017 433,448 368,605
========== ==========481,381 480,801 480,208 429,476
=========== ===================== =========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINESIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,SEPTEMBER 30, SEPTEMBER 30,
2001 2000
1999
----------- ---------------------- -------------
Net cash used inprovided by (used in) operating activities ................................... $ (461,817)435,500 $ (14,136)(279,835)
----------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions toPurchase of property plant and equipment, ................... (711,252) (374,679)
Proceedsnet of proceeds from
sale of property, plantequipment .................................... (232,578) (406,275)
Purchases of OEM facilities and equipment .......... 51,444 17,003related assets ............ (385,623) (163,517)
Proceeds from salesales of investments and certain subsidiaries ... 42,766 35,871
Payments for business acquisitions,........................ 11,045 37,596
Acquisitions of businesses, net of cash acquired ..... (112,852) (32,049).......... (48,779) (65,450)
Other investments ............................................ (39,508) (25,450)......................................... (9,048) (16,885)
----------- --------------------
Net cash used in investing activities .......................... (769,402) (379,304)....................... (664,983) (614,531)
----------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and proceeds from long-term debt .......... 611,737 1,095,392
Repayments of bank borrowings and long-term debt ............. (1,002,157) (131,508).......... (505,461) (883,819)
Repayments of capital lease obligations ...................... (23,282) (25,480)
Bank borrowings and proceeds from long-term debt ............. 1,386,948 311,387................... (18,591) (13,622)
Proceeds from exercise of stock issued under stock plans ................. 59,041 17,238options and Employee
Stock Purchase Plan .................................... 22,007 34,048
Net proceeds from sale of ordinary shares ....................in public
offering ............................................... -- 431,588 448,924
Proceeds from issuance of equity instrument ................................. -- 100,000
Repurchase of equity instrument issued .................... (112,000) --
Dividends paid to former shareholders of companies acquired ....................... -- (190)
(1,641)
----------- --------------------
Net cash provided by (used in) financing activities ...................... 951,948 618,920......... (2,308) 763,397
----------- --------------------
Effect on cash from:
Exchange rate changes ....................................... (36,698) (2,995).................................... 489 (33,212)
Adjustment to conform fiscal year of pooled entities ............. -- (32,706)
(818)
----------- --------------------
Net increase (decrease)decrease in cash and cash equivalents ........... (348,675) 221,667................... (231,302) (196,887)
Cash and cash equivalents at beginning of period ........................... 631,588 747,049
318,165
----------- --------------------
Cash and cash equivalents at end of period ....................................... $ 398,374400,286 $ 539,832550,162
=========== ====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000September 30, 2001
(Unaudited)
Note A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions to
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements, and should be read in conjunction with the
Company's audited consolidated financial statements as of and for the fiscal
year ended March 31, 20002001 contained in the Company's annual report on Form 10-K and the
Company's current report on Form 8-K filed on January 29, 2001.10-K.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and ninesix month periods ended December 31, 2000September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending March 31, 2001.
On July 26, 2000, the Company announced a two-for-one stock split of its
ordinary shares, to be effected in the form of a bonus issue (equivalent to a
stock dividend), payable to the Company's shareholders of record as of September
22, 2000. The Company's shareholders of record at the close of business on
September 22, 2000 received certificates representing one additional share for
every one share held at that time. Distribution of the additional shares
occurred on October 16, 2000. The stock dividend has been reflected in the
Company's financial statements for all periods presented. All share and per
share amounts have been retroactively restated to reflect the stock split.
In the current fiscal year, Flextronics acquired 100% of the outstanding
shares of the DII Group, Inc. ("DII"), Lightning Metal Specialties and related
entities ("Lightning"), Palo Alto Products International Pte. Ltd. ("Palo Alto
Products International"), JIT Holdings Ltd. ("JIT") and Chatham Technologies,
Inc. ("Chatham"). These acquisitions were accounted for as pooling of interests
and the condensed consolidated financial statements have been prepared to give
retroactive effect to the mergers.
DII is a leading provider of electronics manufacturing and design services,
operating through a global operations network in the Americas, Asia/Pacific and
Europe. As a result of the merger, in April 2000, the Company issued
approximately 125.5 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 is a provider of fully integrated electronic packaging systems with
operations in Ireland and the United States. 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.
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, 1998 and 1999
and for each of the three years ended December 31, 1999 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. Starting in fiscal
2001, DII and Lightning changed their year ends from December 31 to March 31 to
conform to the Company's fiscal year end. Accordingly, their operations for the
three 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 in the first quarter of fiscal 2001.
Palo Alto Products International is an enclosure design and plastic molding
company with operations in Taiwan, Thailand and the United States. 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 is a global provider of electronics manufacturing and design services
with operations in China, Malaysia, Hungary, Indonesia and Singapore. 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.
6
7
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.
Chatham is 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, warrants and options. 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 30, 1998 and
September 24, 1999 and for each of the three fiscal years ended September 24,
1999 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. Starting in fiscal 2001, Chatham changed its year end from the
Saturday closest to September 30 to March 31 to conform to the Company's fiscal
year end. Accordingly, 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 in the first quarter of
fiscal 2001.
A reconciliation of results of operations previously reported by the separate
companies for the three and nine month periods ended December 31, 1999 to the
condensed consolidated results of the Company is as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1999
----------- -----------
Net sales:
As previously reported ............ $ 1,251,681 $ 2,879,082
DII ............................... 365,089 892,650
Lightning ......................... 77,467 203,544
Palo Alto Products International .. 23,003 73,322
JIT ............................... 152,672 420,460
Chatham ........................... 98,743 263,432
Intercompany elimination .......... (915) (2,064)
----------- -----------
As restated ....................... $ 1,967,740 $ 4,730,426
=========== ===========
Net income:
As previously reported ............ $ 38,066 $ 85,008
DII ............................... 16,251 37,474
Lightning ......................... (4,402) (2,210)
Palo Alto Products International .. 1,060 1,642
JIT ............................... 4,944 11,124
Chatham ........................... (8,120) (27,497)
----------- -----------
As restated ....................... $ 47,799 $ 105,541
=========== ===========
2002.
Note B - INVENTORIES
Inventories, net of applicable reserves, consist of the following (in
thousands):
DECEMBER 31,SEPTEMBER 30, MARCH 31,
2000 20002001 2001
---------- ----------
Raw materials ......................... $1,225,758 $ 820,070$1,001,837 $1,346,427
Work-in-process ....................... 356,703 207,474292,346 301,875
Finished goods ........................ 145,365 115,050126,071 138,753
---------- ----------
$1,727,826 $1,142,594$1,420,254 $1,787,055
========== ==========
Note C - UNUSUAL CHARGES
Fiscal 2002
The Company recognized unusual pre-tax charges of $587.8approximately $516.1
million during the nine months endedsecond quarter of fiscal 2002, of which $500.3 million
related to closures of several manufacturing facilities and $15.8 million
primarily for the impairment of investments in certain technology companies. As
further discussed below, $439.4 million of the charges relating to facility
closures have been classified as a component of Cost of Sales.
Unusual charges recorded in the second quarter of fiscal 2002 by
segments are as follows: Americas, $224.4 million; Asia, $70.7 million; Western
Europe, $170.1 million; and Central Europe, $50.9 million.
The components of the unusual charges recorded in the second quarter of
fiscal 2002 are as follows (in thousands):
Facility closure costs:
Severance ............................ $ 123,961 cash
Long-lived asset impairment .......... 163,724 non-cash
Exit costs ........................... 212,660 cash/non-cash
---------
Total facility closure costs ..... 500,345
Other unusual charges .................. 15,750 cash/non-cash
---------
Total Unusual Charges ................ 516,095
---------
Income tax benefit ..................... (117,115)
---------
Net Unusual Charges .................. $ 398,980
=========
In connection with the September 2001 quarter 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 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.
Of the total pre-tax facility closure costs recorded in the second
quarter, $124.0 million relates to employee termination costs, of which $93.4
million has been classified as a component of Cost of Sales. As a result of the
various exit plans, the Company identified 11,168 employees to be involuntarily
terminated related to the various facility closures. As of September 30, 2001,
1,195 employees have been terminated, and another 9,973 employees have been
notified that they are to be terminated upon completion of the various facility
closures and consolidations. During the September 2001 quarter, the Company paid
employee termination costs of approximately $19.4 million related to the fiscal
2002 restructuring activities. The remaining $104.6 million of employee
termination costs is classified as accrued liabilities as of September 30, 2001
and is expected to be paid out within one year of the commitment dates of the
respective exit plans.
The unusual pre-tax charges recorded in the second quarter 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 has been classified as a component
of Cost of Sales during the September 2001 quarter. Certain assets will be held
for use and remain in service until their anticipated disposal dates pursuant to
the exit plans. Since the asset 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 the assets that are being
held for use, an impairment loss is recognized if the carrying amounts of these
assets exceed the fair value of the assets. 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 the assets that are being held
for disposal, an impairment loss is recognized if the carrying amounts of these
assets exceed the fair value less cost to sell. The impaired long-lived assets
consisted primarily of machinery and equipment of $105.7 million and building
and improvements of $58.0 million.
The unusual pre-tax charges, also included approximately $212.7 million
for other exit costs. Approximately $182.3 million of this amount has been
classified as a component of Cost of Sales. The other exit costs recorded,
primarily related to items such as building and equipment lease termination
costs, warranty costs, current asset impairments and payments to suppliers and
vendors to terminate agreements and were incurred directly as a result of the
various exit plans. The Company paid approximately $2.2 million of other exit
costs during the second quarter and $111.5 million of non-cash charges were
utilized during the same period. The remaining $99.0 million is classified as
accrued liabilities as of September 30, 2001 and is expected to be substantially
paid out within one year from the commitment dates of the respective exit plans,
except for certain long-term contractual obligations.
Fiscal 2001
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 related to
the issuance of an equity instrument to Motorola, Inc. ("Motorola") combined
with approximately $206.6 million of expenses resulting from theThe DII Group, Inc.
and Palo Alto Products 7
8
International mergers.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 mergers. UnusualMetal Specialties (and related entities) and
related facility closures. In the third quarter, the Company recognized unusual
pre-tax charges of approximately $46.3 million, were recorded in the third
quarter, primarily related to the merger
with JIT merger.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. See Note I for further information concerning the
strategic alliance. In connection with this strategic alliance,
Motorola paid $100.0 million for an equity instrument that entitlesentitled it to
acquire 22,000,00022.0 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 connection with the aforementioned mergers,June 2001, the Company recorded aggregate
merger-relatedentered into an agreement with Motorola
under which it repurchased this equity instrument for $112.0 million.
Unusual charges of $301.3 million, which included approximately $198.8
million of integration expensesexcluding the Motorola equity instrument by segments are
as follows: Americas, $553.1 million; Asia, $86.5 million; Western Europe, $32.9
million; and approximately $102.5 million of direct
transaction costs. As discussed below, $146.5 millionCentral Europe, $14.3 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 relating to integration expenses have been classified as a component of Cost of
Sales during the nine months endedrecorded in fiscal 2001. The components of the
merger-related unusual charges recorded2001 are as
follows (in thousands):
TOTAL
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER TOTALQUARTER 2001 NATURE OF
CHARGES CHARGES CHARGES CHARGES CHARGES -------- -------- -------CHARGES
--------- --------- --------- --------- --------- --------------
Integration Costs:
Severance.................................
Facility closure costs:
Severance .............................. $ 62,487 $ 5,677 $ 3,606 $ 71,77060,703 $ 132,473 cash
Long-lived asset impairment...............impairment ............ 46,646 14,373 16,469 77,488155,046 232,534 non-cash
Inventory write-downs..................... 11,863 -- 10,608 22,471 non-cash
Other exit costs.......................... 12,338Exit costs ............................. 24,201 5,650 9,095 27,08319,703 160,368 209,922 cash/non-cash
-------- -------- ---------------- --------- --------- --------- ---------
Total Integration Costs...............facility closure costs ....... 133,334 25,700 39,778 198,812376,117 574,929
Direct Transaction Costs:transaction costs:
Professional fees.........................fees ...................... 50,851 7,247 6,250 -- 64,348 cash
Other costs...............................costs ............................ 22,382 15,448 248 -- 38,078 cash/non-cash
-------- --------- ----------------- --------- --------- ---------
Total Direct Transaction Costs........direct transaction costs ..... 73,233 22,695 6,498 -- 102,426
-------- --------- ----------------- --------- --------- ---------
Motorola equity instrument ............... 286,537 -- -- -- 286,537 non-cash
--------- --------- --------- --------- ---------
Other unusual charges .................... -- -- -- 9,450 9,450 non-cash
--------- --------- --------- --------- ---------
Total Merger-Related Unusual Charges...... 206,567Charges .............. 493,104 48,395 46,276 301,238
--------385,567 973,342
--------- -------- --------- Benefit from income taxes...................--------- --------- ---------
Income tax benefit ....................... (30,000) (6,000) (6,500) (42,500)(110,000) (152,500)
--------- ---------- --------- ----------
Total Merger-Related--------- --------- ---------
Net Unusual Charges Net of Tax............................. $176,567................ $ 463,104 $ 42,395 $ 39,776 $ 258,738
========275,567 $ 820,842
========= ================= ========= ========= =========
As a result ofIn connection with the consummation of the various mergers,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 and the identification
of manufacturing and administrative facilities foror
consolidation into other facilities. Management currently anticipates that the
integration costsfacility 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 following table summarizes the
componentsAs
discussed below, $510.5 million of the integration costs and related activities incharges relating to facility closures
have been classified as a component of Cost of Sales during the fiscal 2001:
LONG-LIVED OTHER TOTAL
ASSET INVENTORY EXIT INTEGRATION
SEVERANCE IMPAIRMENT WRITE-DOWNS COSTS COSTS
--------- ---------- ----------- -------- ------------
Balance at March 31, 2000 ...... $ -- $ -- $ -- $ -- $ --
Activities during the year:
First quarter provision ...... 62,487 46,646 11,863 12,338 133,334
Cash charges ................. (35,800) -- -- (1,627) (37,427)
Non-cash charges ............. -- (46,646) (4,315) (3,126) (54,087)
-------- -------- -------- -------- ---------
Balance at June 30, 2000 ....... 26,687 -- 7,548 7,585 41,820
Activities during the year:
Second quarter provision ..... 5,677 14,373 -- 5,650 25,700
Cash charges ................. (4,002) -- -- (4,231) (8,233)
Non-cash charges ............. -- (14,373) (7,548) (526) (22,447)
-------- -------- -------- -------- ---------
Balance at September 30, 2000 .. $ 28,362 $ -- $ -- $ 8,478 $ 36,840
-------- -------- -------- -------- ---------
Activities during the year:
8
9
Third quarter provision ...... 3,606 16,469 10,608 9,095 39,778
Cash charges ................. (7,332) -- -- (2,572) (9,904)
Non-cash charges ............. -- (16,469) (10,608) (3,462) (30,539)
-------- -------- -------- -------- ---------
Balance at December 31, 2000 ... $ 24,636 $ -- $ -- $ 11,539 $ 36,175
======== ======== ======== ======== =========
year
ended March 31, 2001.
Of the total pre-tax integration charges, $71.8facility closure costs recorded in fiscal 2001,
$132.5 million relates to employee termination costs, of which $19.4$68.1 million has
been classified as a component of Cost of Sales. As a result of the various exit
plans, the Company identified 5,80711,269 employees to be involuntarily terminated
related to the various mergers.mergers and facility closures. As of December 31, 2000, approximately 2,092September 30, 2001,
9,091 employees have been terminated, and approximately another 3,7152,178 employees have been
notified that they are to be terminated upon completion of the various facility
closures and consolidations
related to the mergers.consolidations. During the nine months endedfirst and second quarters of fiscal
2001,2002, the Company paid employee termination costs of approximately $47.1 million.$28.3 million
and $11.3 million, respectively. The remaining $24.7$32.1 million of employee
termination costs is classified as accrued liabilities as of December 31, 2000September 30, 2001
and is expected to be paid out within one year of the commitment dates of the
respective exit plans.
The unusual pre-tax charges include $77.5recorded in fiscal 2001 included $232.5
million for the write-down of long-lived assets to fair value. Of these charges, approximately $46.6 million,
$14.4 million, and $16.5 million were written down in the first, second, and
third quarters of fiscal 2001, respectively. These amounts haveThis amount has
been classified as a component of Cost of Sales.Sales during fiscal 2001. Included in
the long-lived asset impairment are charges of $74.6$229.1 million, which relaterelated to
property, plant and equipment associated with the various manufacturing and
administrative facility closures which were written down to their net realizablefair value based on their estimated
sales price.of
$192.0 million. Certain facilitiesassets 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 will beare being depreciated over this
expected period. For the assets that are being held for use, an impairment loss
is recognized if the carrying amount of these assets exceed the fair value of
the assets. Certain other assets will be held for disposal, an impairment loss
is recognized if the carrying amount of these assets exceed the fair value less
cost to sell. The impaired long-lived assets consisted primarily of machinery
and equipment of $53.5$153.0 million and building and improvements of $21.1$76.1 million.
The long-lived asset impairment also includesincluded the write-off of the remaining
goodwill and other intangibles related to certain closed facilities of $2.9$3.4
million.
The unusual pre-tax charges recorded in fiscal 2001 also includeincluded
approximately $49.6$209.9 million for losses on inventory write-downs and other exit costs, which resulted from the
integration plans.costs. This amount has been
classified as a component of Cost of Sales. The Company has written off and disposed of approximately $11.9 million
of inventory related to the first quarter integration activities and
approximately $10.6 million was written off and disposed of related to the third
quarter integration activities. The $27.1 million of other exit costs relaterecorded,
primarily related to items such as building and equipment lease termination
costs, incremental amounts of
uncollectible accounts receivable, warranty-related accruals, legalwarranty costs, current asset impairments and other
exit costs,payments to suppliers and
vendors to terminate agreements and were incurred directly as a result of the
various exit plans. TheDuring the first and second quarters of fiscal 2002, the
Company paid approximately $1.6 million, $4.2 million, and $2.6 million of other exit costs during the first, secondof approximately $17.2 million and third quarters of fiscal 2001.$33.2 million,
respectively. Additionally, approximately $3.1 million, $0.5 million and $3.5$3.9 million of other exit costs were
written offnon-cash charges utilized during the first second and third quarters, respectively.quarter of fiscal 2002. The remaining
$11.6$41.0 million of other exit costs is classified inas accrued liabilities as of
December 31,
2000September 30, 2001 and is expected to be substantially paid out bywithin one year of the
endcommitment dates of fiscal 2001,
except for certain long-term contractual obligations.the respective exit plans.
The direct transaction costs includerecorded in fiscal 2001 included
approximately $64.4$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. Of these charges,
approximately $50.9 million was associated with the first quarter mergers, $7.2
million related to the second quarter mergers, and $6.3 million related to the
third quarter merger. Other direct transaction costs which totaled
approximately $38.1 million waswere mainly comprised of accelerated debt prepayment
expense, accelerated executive stock compensation and benefit-related expenses and
other merger-related costs. The Company paid approximately $55.5 million, $5.6
million and $5.3 million of the direct transaction costs during the first,
second and third quarters of fiscal 2001, respectively. Additionally,
approximately $14.7 million, $13.4 million and $0.1expenses.
Approximately $28.2 million of the direct transaction costs were written offnon-cash
charges utilized during fiscal 2001. During the first and second quarters of
fiscal 2002, the Company paid approximately $1.3 million and third quarters,
respectively. The$0.3 million of
direct transaction costs. There is a remaining $7.9balance of $1.7 million which is
classified in accrued liabilities as of December 31, 2000September 30, 2001 and is expected to be
substantially paid out byin the endsubsequent quarters.
The following table summarizes the balance of the facility closure costs
as of March 31, 2001 and the type and amount of closure costs provisioned for
and utilized during the first and second quarters of fiscal 2001.
9
102002.
LONG-LIVED
ASSET OTHER EXIT
SEVERANCE IMPAIRMENT COSTS TOTAL
--------- ---------- --------- ---------
Balance at March 31, 2001 ....... $ 71,734 $ -- $ 95,343 $ 167,077
Activities during the quarter:
First quarter provision ...... -- -- -- --
Cash charges ................. (28,264) -- (17,219) (45,483)
Non-cash charges ............. -- -- (3,947) (3,947)
--------- -------- --------- ---------
Balance at June 30, 2001 ....... 43,470 -- 74,177 117,647
Activities during the quarter:
Second quarter provision ..... 123,961 163,724 212,660 500,345
Cash charges ................. (30,743) -- (35,353) (66,096)
Non-cash charges ............. -- (163,724) (111,486) (275,210)
--------- -------- --------- ---------
Balance at September 30, 2001 .. $ 136,688 $ -- $ 139,998 $ 276,686
========= ======== ========= =========
Note D - EARNINGS PER SHARE
Basic net incomeearnings per share is computed using the weighted average number
of ordinary shares outstanding during the applicable periods.
Diluted net incomeearnings 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.
Earnings per share data were computed as follows (in thousands, except
per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,Three months ended Six months ended
September 30, September 30, September 30, September 30,
2001 2000 19992001 2000
1999
------------ ------------ ------------ ------------------------- ------------- ------------- -------------
Basic earnings (loss) per share:
Net income (loss) ......................................................................... $(329,805) $ 67,782 $ 47,799 $(252,853) $105,541
-------- --------49,927 $(241,477) $(320,635)
--------- ----------------- --------- ---------
Shares used in computation:
Weighted-average ordinary shares outstanding(1) ........... 441,016 357,116 433,448 342,676
======== ========outstanding ..... 481,381 436,376 480,208 429,476
========= ================= ========= =========
Basic earnings (loss) per share ............................................. $ 0.15(0.69) $ 0.130.11 $ (0.58)(0.50) $ 0.31
======== ========(0.75)
========= ================= ========= =========
Diluted earnings (loss) per share:
Net income (loss) ......................................................................... $(329,805) $ 67,782 $ 47,799 $(252,853) $105,541
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible
subordinated notes ..................................... -- -- -- 400
Amortization (net of tax) of debt issuance costs on
convertible subordinated notes ......................... -- -- -- 33
-------- -------- --------- --------
Net income (loss) available to shareholders ............. $ 67,782 $ 47,799 $(252,853) $105,97449,927 $(241,477) $(320,635)
Shares used in computation:
Weighted-average ordinary shares outstanding .............. 441,016 357,116 433,448 342,676..... 481,381 436,376 480,208 429,476
Shares applicable to exercise of dilutive
options(2)options(1),(3) .. 28,071 26,009(2) ................................. -- 23,124
Shares applicable to deferred stock compensation .......... -- 892 -- 860
Shares applicable to other equity instruments(3) .......... 9,57044,425 -- --
--
Shares applicable to convertible subordinated notes ....... -- -- -- 1,945
-------- -------- --------- ----------------- --------- ---------
Shares applicable to diluted earnings ................... 478,657 384,017 433,448 368,605
======== ========......... 481,381 480,801 480,208 429,476
========= ================= ========= =========
Diluted earnings (loss) per share ......................................... $ 0.14(0.69) $ 0.120.10 $ (0.58)(0.50) $ 0.29
======== ========(0.75)
========= ================= ========= =========
(1) Ordinary shares issued and outstanding based on the weighted average method.
(2) Stock options of the Company calculated based on the treasury stock
method using average market price for the period, if dilutive.
Options to purchase 3,543,796 shares and 78,8281,527,666 shares outstanding during the three
months ended December 31,September 30, 2000 and December 31, 1999, respectively, and options to
purchase 113,786 shares outstanding during the nine months ended December
31, 1999 were excluded from the computation
of diluted earnings per share because the options' exercise price wasof these
options were greater than the average market price of the Company's
ordinary shares during those periods.
(3)the period.
(2) The ordinary share equivalents from stock options and other equity
instruments were antidilutiveanti-dilutive for the ninesix months ended December 31,September
30, 2000 and the three and six months ended September 30, 2001, and
therefore not assumed to be converted for diluted earnings per share
computation.
Note E - COMPREHENSIVE INCOME
The following table summarizes the components of comprehensive income (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,Three months ended Six months ended
September 30, September 30, September 30, September 30,
2001 2000 19992001 2000
1999
------------ ------------ ------------ ------------------------- ------------- ------------- -------------
Net income (loss) ....................................... $(329,805) $ 67,782 $ 47,799 $(252,853) $ 105,54149,927 $(241,477) $(320,635)
Other comprehensive income (loss), net of tax::
Foreign currency translation adjustments, .............. 7,532 (12,061) (38,961) (16,479)net of tax .. 17,348 (40,274) (6,926) (46,496)
Unrealized holding gain (loss) on available-for-sale
securities .......................................... (31,069) 75,037 (53,170) 84,645
--------investments and
derivatives, net of tax ............................. (3,030) 13,262 5,514 (22,101)
--------- --------- --------- ---------
Comprehensive income (loss) ............................. $(315,487) $ 44,245 $ 110,775 $(344,984) $ 173,707
========22,915 $(242,889) $(389,232)
========= ========= ========= =========
10
11
Note F - SEGMENT REPORTING
Information about segments was as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,Three months ended Six months ended
September 30, September 30, September 30, September 30,
2001 2000 19992001 2000
1999
------------ ------------ ------------ ------------------------- ------------- ------------- -------------
Net Sales:
Asia .................................................................. $ 710,635878,895 $ 468,023619,482 $ 1,875,3621,507,014 $ 1,118,8981,164,727
Americas ......................... 1,526,112 794,448 4,212,587 1,998,286................................. 966,787 1,487,411 2,095,383 2,686,475
Western Europe ................... 611,071 408,177 1,683,597 969,881........................... 871,943 556,551 1,490,262 1,072,526
Central Europe ................... 495,852 322,880 1,562,862 698,111........................... 709,980 505,960 1,466,369 967,010
Intercompany eliminations ........ (104,377) (25,788) (339,143) (54,750)................ (182,687) (90,406) (203,512) (134,766)
----------- ----------- ----------- -----------
$ 3,239,2933,244,918 $ 1,967,7403,078,998 $ 8,995,2656,355,516 $ 4,730,4265,755,972
=========== =========== =========== ===========
Income (Loss) before Income Tax:
Asia .................................................................. $ 39,584(29,805) $ 31,76625,761 $ 91,09914,163 $ 72,50438,307
Americas ......................... 69,505 (7,256) 140,531 (3,326)................................. (200,950) 7,306 (174,859) (165,372)
Western Europe ................... 6,038 13,753 26,599 27,048........................... (156,462) 9,515 (147,935) 20,561
Central Europe ................... 8,865 13,644 28,396 24,253........................... (50,452) 4,637 (34,839) 14,175
Intercompany eliminations,
corporate allocations and unusual charges ................ (45,978) (2,446) (536,836) (2,057)Motorola
one-time non-cash charge (see Note C) .. (1,151) 11,183 3,007 (235,896)
----------- ----------- ----------- -----------
$ 78,014(438,820) $ 49,46158,402 $ (250,211)(340,463) $ 118,422(328,225)
=========== =========== =========== ===========
AS OF AS OF
DECEMBERAs of As of
September 30, March 31,
MARCH 31,
2000 2000
------------2001 2001
---------- ----------
Long-lived Assets:
Asia.....................................................Asia ....................................... $ 499,395558,468 $ 449,824
Americas................................................. 730,205 712,215503,094
Americas ................................... 699,970 636,399
Western Europe........................................... 311,788 275,935Europe ............................. 422,751 371,064
Central Europe........................................... 314,780 171,165Europe ............................. 354,114 317,884
---------- ----------
$1,856,168 $1,609,139$2,035,303 $1,828,441
========== ==========
For purposes of the preceding tables, "Asia" includes China, India, Malaysia,
Singapore, Thailand and Taiwan, "Americas" includes the U.S.,Brazil, Mexico and Brazil,the
United States, "Western Europe" includes Denmark, Finland, France, Germany,
Netherlands, Norway, Poland, Spain, Sweden, Switzerland and the United Kingdom,
and "Central Europe" includes Austria, the Czech Republic, Hungary, Ireland,
Israel, Italy and Scotland.
Geographic revenue transfers are based on selling prices to unaffiliated
companies, less discounts.
Note G --- SHAREHOLDERS' EQUITY OFFERING
In June 2000, the Company completed an equity offering of 11,000,000 ordinary
shares at $35.625 per share with net proceeds of $375.9 million. In July 2000,
the Company issued an additional 1,650,000 ordinary shares at $35.625 per share
with net proceeds of $56.3 million, which represents the overallotment option on
the equity offering completed in June 2000. The Company used the net proceeds
from the offering to fund the further expansion of its business including
additional working capital and capital expenditures, and for other general
corporate purposes.
Note H - SENIOR SUBORDINATED NOTES
In June 2000, the Company issued approximately $645.0 million of senior
subordinated notes, consisting of $500.0 million of 9.875% notes and euros 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 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
11
12
certain subsidiaries, (iii) engage in asset sales, and (iv) make distributions
or pay dividends. The covenants are subject to a number of significant
exceptions and limitations.
Note I - STRATEGIC ALLIANCE
On May 30, 2000, the Company entered into a strategic alliance for product
manufacturing with Motorola. This alliance provides incentives for Motorola to
purchase up to $32.0 billion of products and services from the Company through
December 31, 2005. The relationship is not exclusive and does not require that
Motorola purchase any specific volumes of products or services from the Company.
The Company's ability to achieve any of the anticipated benefits of this
relationship is subject to a number of risks, including its ability to provide
services on a competitive basis and to expand manufacturing resources, as well
as demand for Motorola's products.
In connection with thisthe Company's strategic alliance with Motorola in May
2000, Motorola paid $100.0 million for an equity instrument that entitlesentitled it to
acquire 22,000,00022.0 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.
DuringIn June 2001, the termCompany entered into an agreement with Motorola under
which it repurchased this equity instrument for $112.0 million. The fair value
of the strategic alliance, if Motorola meets targeted purchase levels, no
additional payments may be required by Motorolaequity instrument on the date it was repurchased exceeded the amount paid
to acquire 22,000,000
Flextronics ordinary shares. However, there may be additional non-cash charges
of up to $300.0 million overrepurchase the termequity instrument. Accordingly, the Company accounted for the
repurchase of the strategic alliance.
Note J - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133") which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts and for hedging activities. It requires
that companies recognize all derivativesequity instrument as either assets or liabilitiesa reduction to shareholders' equity in
the statementaccompanying condensed consolidated financial statements.
Note H -- PURCHASE OF ASSETS
In April 2001, the Company entered into a definitive agreement with
Ericsson Telecom AB ("Ericsson") with respect to its management of financial position and measure those instruments at fair value. The
Company is required to adopt SFAS No. 133the
operations of Ericsson's mobile telephone operations. Operations under this
arrangement commenced in the first quarter of fiscal 2002
and anticipates that SFAS No. 133 will not have a material impact on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the fourth quarter of fiscal 2001 and
anticipates that SAB 101 will not have a material impact on its consolidated
financial statements.
Note K - SUBSEQUENT EVENTS
In January 2001, the Company completed its acquisition of Li Xin Industries
Ltd. (Li Xin), a plastics company in Asia with operations in Singapore, Malaysia
and Northern China. Li Xin's primary activities include the manufacturing and
sales of high precision plastic injection molds and plastic injection molded
parts, design support and sub-assembly services of electrical components. The
Company issued ordinary shares having a total value of approximately $89.6
million for the acquired net assets of Li Xin. The acquisition was accounted for
as a purchase.
On February 6, 2001, the Company completed an equity offering of 27,000,000
of its ordinary shares at $37.9375 with net proceeds of approximately $990.8
million. In addition, the Company has granted the underwriters of the equity
offering an overallotment option, which is exercisable for thirty days after the
offering, to purchase up to an additional 4,050,000 ordinary shares. The Company
intends to use the net proceeds from the offering to fund anticipated expenses
related to its strategic relationship with Ericsson (as further discussed
below), to fund the further expansion of its business, and for other general
corporate purposes.
In January 2001, the Company entered into a non-binding memorandum of
understanding with Ericsson in which2002. Under this agreement,
the Company is to provide a substantial portion of Ericsson's mobile phone
requirements and will be assumingrequirements. The Company assumed responsibility for product assembly, new
product prototyping, supply chain management and logistics management. In this new relationship, the Company will
use facilities currently owned bymanagement in which
we process customer orders from Ericsson for its mobile phone operations in
Brazil, Great Britain, Malaysia and Sweden,configure and will also manufacture at the
Company's southern China and Malaysia facilities. The Company will also provide
PCBs and plastics, primarily from its Asian operations.ship products to
Ericsson's customers. In connection with this relationship, the Company will purchaseemployed
the existing workforce for certain operations, and purchased from Ericsson
certain inventory, equipment and other assets, and may assumeassumed certain accounts
payable and accrued expenses at their net book value of approximately $353.2
million.
In July 2001, the Company acquired Alcatel's manufacturing facility and
related assets located in Laval, France. All of Alcatel's GSM handset production
will be consolidated from Illkirch, France, to the Company's facility in Laval.
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.
Note I - NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 and No. 142,
"Business Combinations" and "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 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
intangible assets 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 net assetCompany adopted SFAS 142 in the first quarter of fiscal 2002 and will
no longer amortize goodwill, thereby eliminating annual goodwill amortization of
approximately $124.2 million, based on anticipated amortization for fiscal 2002.
At September 30, 2001, unamortized
goodwill approximated $1.1 billion. The Company will evaluate goodwill at least
on an annual basis and whenever events and changes in circumstances suggest that
the carrying amount may not be recoverable from its estimated future cash flow.
The Company has completed the first step of the transitional goodwill impairment
test and has determined that no potential impairment exists. As a result, the
Company has recognized no transitional impairment loss in fiscal 2002 in
connection with the adoption of SFAS 142.
Goodwill information for each reportable segment is as follows (in
thousands):
As of Goodwill As of
April 1, 2001 Acquired September 30, 2001
------------- ---------- ------------------
Segments:
Asia ...................... $ 186,515 $ 6,165 $ 192,680
Americas .................. 300,041 115,857 415,898
Western Europe ............ 346,873 14,697 361,570
Central Europe ............ 123,862 14,442 138,304
---------- ---------- ----------
$ 957,291 $ 151,161 $1,108,452
========== ========== ==========
During the first six months of fiscal 2002, $151.2 million of goodwill
resulted from several immaterial business acquisitions and contingent purchase
price adjustments for historical acquisitions.
Net income and earnings per share for the three and six months ended
September 30, 2000 adjusted to exclude goodwill amortization expenses, net of
tax, are as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2000 2000
------------------ ----------------
Net income (loss) as reported ................ $ 49,927 $(320,635)
--------- ---------
Add back: Goodwill amortization expense ...... 10,248 18,088
--------- ---------
Adjusted net income (loss) ................... $ 60,175 $(302,547)
========= =========
The pro forma effects of the adoption on net income and earnings per
share of the Company during the three and six months ended September 30, 2000
are as follows:
Three months ended Six months ended
September 30, September 30,
2000 2000
------------------ ----------------
Basic earnings (loss) per share:
As reported ................................. $ 0.11 $ (0.75)
-------- --------
Add back: Goodwill amortization expense ..... 0.03 0.05
-------- --------
Pro forma ................................... $ 0.14 $ (0.70)
======== ========
Diluted earnings (loss) per share:
As reported ................................. $ 0.10 $ (0.75)
-------- --------
Add back: Goodwill amortization expense ..... 0.03 0.05
-------- --------
Pro forma ................................... $ 0.13 $ (0.70)
======== ========
All of the Company's acquired intangible assets are subject to
amortization. Intangible assets are comprised of contractual agreements, patents
and trademarks, developed technologies and other acquired intangible assets
including work forces, favorable leases and customer lists. Contractual
agreements are being amortized over periods up to five years. Purchased
developed technologies are being amortized on a straight-line basis over periods
of up to seven years. Other acquired intangible assets relate to assembled work
forces, favorable leases and customer lists, and are amortized on a
straight-line basis over three to ten years. No significant residual value is
estimated for the intangible assets. During the first six months of fiscal
2002, there were immaterial additions to intangible assets, primarily related to
acquired developed technologies. Intangible assets amortization expense for the
first and second quarters of fiscal 2002 was approximately $2.3 million and $3.8
million, respectively. The components of intangible assets are as follows (in
thousands):
September 30, 2001 March 31, 2001
------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Intangibles:
Contractual Agreements ... $ 17,300 $ (4,256) $ 13,044 $ 17,304 $ (1,714) $ 15,590
Patents and Trademarks ... 1,100 (576) 524 7,625 (5,514) 2,111
Developed Technologies .. 13,725 (5,976) 7,749 1,275 (850) 425
All Other ................ 17,279 (10,456) 6,823 17,629 (9,662) 7,967
-------- -------- -------- -------- -------- --------
Total ..................... $ 49,404 $(21,264) $ 28,140 $ 43,833 $(17,740) $ 26,093
======== ======== ======== ======== ======== ========
The corresponding amortization expenses of the intangible assets listed
above were as follows for the three and six months ended September 30, 2001 and
2000 (in thousands):
Three months ended Six months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Intangible Assets:
Contractual Agreements ........ $1,329 $ 237 $2,542 $ 350
Patents and Trademarks ........ 30 109 60 213
Developed Technologies ........ 268 268 536 536
All Other ..................... 2,175 1,643 2,920 2,688
------ ------ ------ ------
Total Amortization Expense ..... $3,802 $2,257 $6,058 $3,787
====== ====== ====== ======
Expected future estimated annual amortization expense is as follows (in
thousands):
Fiscal Years:
2002 .......................................................... $ 5,289*
2003 .......................................................... 9,566
2004 .......................................................... 8,092
2005 .......................................................... 2,392
2006 .......................................................... 863
Thereafter .................................................... 1,938
-------
Total Amortization Expense ...................................... $28,140
=======
* Represents remaining six month period ended March 31, 2002.
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 required to be 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
Other Comprehensive Income ("OCI") and is recognized in the income statement
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. For derivative instruments not
designated as hedging instruments under SFAS 133, changes in fair values are
recognized in earnings in the current period. Such instruments are typically
forward contracts used to hedge foreign currency balance sheet exposures.
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 not been
fixed, butestablished 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 and borrowings 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.
At September 30, 2001, the fair value of the equity derivative
instruments resulted in the recording of an asset of approximately $8.1 million
with the corresponding credit to OCI. All of this amount is expected to be
between $200.0 million and $800.0 million.recognized in earnings over the next twelve months.
Note J - SUBSEQUENT EVENTS
In October 2001, the Company announced a manufacturing agreement with
Xerox Corporation ("Xerox"). The Company anticipates that operations under this arrangementis to acquire Xerox's manufacturing
facilities and related assets in Toronto, Canada; Resende, Brazil;
Aguascalientes, Mexico; and Penang, Malaysia. The agreement includes payment to
Xerox currently estimated to be approximately $220.0 million for the purchase of
certain inventory, equipment and other assets, and the assumption of certain
liabilities at their net book value. In connection with the acquisition, the
Company entered into a five-year contract for the manufacture of certain Xerox
office equipment and components. The acquisition will begin on April
1, 2001.
12
13be accounted for as a
purchase of assets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words "expects,"
"anticipates," "believes," "intends," "plans" and similar expressions identify
forward-looking statements. 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-Q with the
Securities and Exchange Commission. These forward-looking statements are subject
to risks and uncertainties, including, without limitation, those discussed in
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Certain Factors Affecting Operating Results." Accordingly, our
future results may differ materially from historical results or from those
discussed or implied by these forward-looking statements.
Acquisitions, Purchases of Facilities and Other Strategic TransactionsACQUISITIONS
We have actively pursued mergers and other business acquisitions to
expand our global reach, manufacturing capacity and service offerings and to
diversify and strengthen customer relationships. WeSince the beginning of fiscal
2001, we have completed several significant
business combinations since the endover 20 acquisitions of fiscal 2000. In the current fiscal year,
we acquired all of the outstanding shares of the DII Group, Inc. (DII), Palo
Alto Products International Pte. Ltd. (Palo Alto Products International),businesses and manufacturing
facilities, including: JIT Holdings Ltd, Chatham Technologies, Inc. (Chatham), Lightning
Metal Specialties and related entities, (Lightning),Palo Alto Products International Pte.
Ltd. and JIT Holdings Ltd. (JIT). Each of theseThe DII Group, Inc.
These acquisitions waswere accounted for as a pooling of interests and our
condensed consolidated financial statements have been restated to reflect the
combined operations of the merged companies for all periods presented. The significant business combinations that
weWe have
completed to date insince fiscal 2001 include the following:
DATE ACQUIRED COMPANY NATURE OF BUSINESS CONSIDERATION LOCATION(s)
- ------------ ------------------------ ------------------------ ------------------ ------------
November 2000 JIT Holdings Ltd. Provides electronics 17,323,531 China
manufacturing and design ordinary shares Hungary
services Indonesia
Malaysia
Singapore
August 2000 Chatham Technologies, Inc. Provides industrial and 15,234,244 Brazil
electronics manufacturing ordinary shares China
design services France
Mexico
Spain
Sweden
United States
August 2000 Lightning Metal Provides injection 2,573,072 Ireland
Specialties and related metal stamping and ordinary shares United States
entities integration services
April 2000 Palo Alto Products Provides industrial and 7,236,748 Taiwan
International Pte. Ltd. electronics ordinary shares Thailand
manufacturing United States
design services
April 2000 The DII Group, Inc. Provides electronics 125,536,310 Austria
manufacturing services ordinary shares Brazil
China
Czech
Republic
Germany
Ireland
Malaysia
Mexico
United States
Additionally, we have completed other immaterial pooling of interests transactions,
in the first nine months of fiscal 2001. Priorprior period statements havehad not been restated for these transactions.restated.
We have also made a number of business acquisitions of other companies. These transactionscompanies
since fiscal 2001, which were accounted for using the purchase method and, accordinglymethod.
Accordingly our consolidated financial statements include the operating results
of each business from the date of acquisition. Pro forma results of operations
have not been presented because the effects of these acquisitions were not
material on either an individual or an aggregate basis.
13
14RECENT STRATEGIC TRANSACTIONS
In April 2001, the nine months December 31, 2001, we purchased a number of manufacturing
facilities and related assets from customers and simultaneously entered into
manufacturing agreements to provide electronics design, assembly and test
services to these customers. The transactions were accounted for as purchases of
assets. We completed the following facilities purchases in fiscal 2001:
DATE CUSTOMER CASH CONSIDERATION FACILITY LOCATION(S)
- ------------- ------------------ ------------------ --------------------
November 2000 Siemens Mobile $29.9 million Italy
May 2000 Ascom $37.4 million Switzerland
May 2000 Bosch Telecom GmbH $126.1 million Denmark
We will continue to review opportunities to acquire OEM manufacturing
operations and enter into business combinations and selectively pursue strategic
transactions that we believe will further our business objectives. We have
recently begun to structure our business combinations as purchases rather than
pooling of interests. We are currently in preliminary discussions to acquire
additional businesses and facilities. We cannot assure the terms of, or that we
will complete, such acquisitions, and our ability to obtain the benefits of such
combinations and transactions is subject to a number of risks and uncertainties,
including our ability to successfully integrate the acquired operations and our
ability to maintain and increase sales to customers of the acquired companies.
See "Risk Factors - We May Encounter Difficulties with Acquisitions, Which Could
Harm our Business".
Other Strategic Transactions
On May 30, 2000, weCompany entered into a strategic alliance for product
manufacturingdefinitive agreement with
Motorola. This alliance provides incentives for MotorolaEricsson Telecom AB ("Ericsson") with respect to purchase up to $32.0 billion of products and services from us through December
31, 2005. We anticipate that this relationship will encompass a wide range of
products, including cellular phones, pagers, set-top boxes and infrastructure
equipment, and will involve a broad range of services, including design, PCB
fabrication and assembly, plastics, enclosures and supply chain services. The
relationship is not exclusive and does not require that Motorola purchase any
specific volumes of products or services from the Company. Our ability to
achieve anyits management of the
anticipated benefitsoperations of Ericsson's mobile telephone operations. Operations under this
relationship is subject to a
number of risks, including our ability to provide services on a competitive
basis and to expand manufacturing resources, as well as demand for Motorola's
products. In connection with this strategic alliance, Motorola paid $100.0
million for an equity instrument that entitles it to acquire 22,000,000 of our
ordinary shares at any time through December 31, 2005 upon meeting targeted
purchase levels or making additional payments to us. The issuance of this equity
instrument 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 capitalarrangement commenced in the first quarter of fiscal 2001. During the term of the strategic alliance, if
Motorola meets targeted purchase levels, no additional payments may be required
by Motorola to acquire 22,000,000 of our ordinary shares. However, there may be
additional non-cash charges of up to $300.0 million over the term of the
strategic alliance.
In January 2001, we entered into a non-binding memorandum of understanding
with Ericsson in which we were selected to manage the operations of Ericsson's
mobile phone business. We anticipate that operations under this arrangement will
begin on April 1, 2001.2002. Under this memorandum of understanding, we areagreement,
the Company is to provide a substantial portion of Ericsson's mobile phone
requirements. We will
assumeThe Company assumed responsibility for product assembly, new
product prototyping, supply chain management and logistics management in which
we will process customer orders from Ericsson and configure and ship products to
Ericsson's customers. We
will also provide PCBs and plastics, primarily from our Asian operations. In
this new relationship, we will use facilities currently owned by Ericsson for
its mobile phone operations in Brazil, Great Britain, Malaysia and Sweden, and
will also manufacture at our southern China and Malaysia facilities. In connection with this relationship, we will employthe Company employed
the existing workforce for thesecertain operations, and will purchasepurchased from Ericsson
certain inventory, equipment and other assets, and may assumeassumed certain accounts
payable and accrued expenses at their net book value.value of approximately $353.2
million.
In July 2001, the Company acquired Alcatel's manufacturing facility and
related assets located in Laval, France. All of Alcatel's GSM handset production
will be consolidated from Illkirch, France, to the Company's facility in Laval.
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 asset purchase price has not been fixed, but is
expected to be between $200.0 million and $800.0 million. We expect to receive
substantial revenue from this relationship beginning in the first quarter of
fiscal 2002. See "Certain Factors Affecting Operating Results - Our Strategic
Relationship with Ericsson Creates Risks".book value.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
14
15
THREE MONTHS ENDED NINESIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 19992001 2000
1999
------------ ------------ ------------------------- ------------- ------------- ------------
Net sales............................sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 91.5 91.4sales ............................. 93.6 91.9 90.893.1 92.1
Unusual charges...................... 1.2 -- 1.6 --charges ........................... 13.5 0.8 6.9 1.9
----- ----- ----- -----
Gross margin....................margin (loss) .................. (7.1) 7.3 8.6 6.5 9.2-- 6.0
Selling, general and administrative..administrative ....... 3.3 3.5 4.43.4 3.5 4.8
Goodwill and intangibles amortization 0.5 0.5..... 0.1 0.4 0.60.1 0.4
Unusual charges...................... 0.2 -- 5.0 0.1charges ........................... 2.4 0.8 1.2 7.5
Interest and other expense, net......net ........... 0.7 1.2 0.4 1.20.7 0.7 0.3
----- ----- ----- -----
Income (loss) before income taxes 2.4 2.5 (2.8) 2.5.... (13.6) 1.9 (5.4) (5.7)
Provision for (benefit from) income taxes...........taxes . (3.4) 0.3 0.1 -- 0.3(1.6) (0.1)
----- ----- ----- -----
Net income (loss)............... 2.1% 2.4% (2.8) ................... (10.2)% 2.2%1.6% (3.8)% (5.6)%
===== ===== ===== =====
Net Sales
We derive our net sales from our wide rangethe assembly of service offerings, including
product design, semiconductor design,complex printed circuit
boardboards, or PCBs, and complete systems and products, fabrication and assembly of
plastic and metal enclosures, and fabrication enclosures, materialof PCBs and backplanes. In
addition, through our photonics division, we manufacture and assemble photonics
components and integrate them into PCB assemblies and other systems. 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 management, plastic injection molding, final system assembly and test,
packaging, logistics and distribution.through advanced information technologies. In addition, we have
added other after-market services such as network installation.
Net sales for the thirdsecond quarter of fiscal 20012002 increased 65%5% to $3.2$3.3
billion from $2.0$3.1 billion for the thirdsecond quarter of fiscal 2000.2001. Net sales for
the first ninesix months of fiscal 20012002 increased 90%10% to $9.0$6.4 billion from $4.7$5.8
billion for the same period in fiscal 2000.2001. The increase in net sales was
primarily the result of expanding sales to our existing customer basethe incremental revenues associated with the purchase of
several manufacturing facilities during the first six months of fiscal 2002, and
to a lesser extent, the further expansion of sales to our existing customers as
well as further expansion of sales to new customers.customers worldwide. A continued
decline in demand due to the economic downturn experienced by the electronics
industry, which has been driven by a combination of weakening end-market demand
(particularly in the telecommunications and networking sectors) and our
customers' inventory imbalances has resulted in slowing the rate of growth in
our net sales.
Our ten largest customers in the first ninesix months of fiscal 20012002 and
20002001 accounted for approximately 56%64% and 59%58% of net sales, respectively. Our largest customers during the first nine months of fiscal 2001
were Cisco andrespectively, with
Ericsson accounting for approximately 11% and26% in the first six months of fiscal
2002. No other customer accounted for more than 10% of net sales,
respectively.sales. No other customerscustomer
accounted for more than 10% of net sales in the nine months ended December 31, 2000.corresponding period of fiscal
2001. See "Certain Factors Affecting Operating Results - The Majority of our
Sales Comes from a Small Number of Customers; If We Lose any of these Customers,
our Sales Could Decline Significantly" and "Certain Factors Affecting Operating
Results - We Depend on the Telecommunications, NetworkingElectronics Devices, Information Technologies
Infrastructure, Communications Infrastructure and ElectronicsComputer and Office Automation
Industries which Continually Produce Technologically Advanced Products with
Short Life Cycles; Our Inability to Continually Manufacture such Products on a
Cost-Effective Basis wouldcould Harm our Business".
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 marginprofit for the thirdsecond quarter of fiscal 20012002 decreased to 7.3%by $456.0
million from 8.6%
for$225.3 million in the thirdsecond quarter of fiscal 2000. Gross margin decreased to 6.5% for the
first nine months of fiscal 2001, from 9.2% for the same period in fiscal 2000.
The decrease in gross margin in the current fiscal year is primarily
attributable to unusual pre-tax charges amounting to $38.5$439.4 million in the
thirdsecond quarter and $146.5 million for theof fiscal year to date, which2002. The unusual charges were associated with the
integrationfacility closure costs, primarily related to the various business
combinations, as more fully described below in "Unusual Charges".
Excluding thesethe unusual charges, gross marginsmargin was 6.4% and 6.9% for the thirdsecond
quarter and first ninesix months ofended September 2001, respectively, compared to 8.1% and
7.9% for the corresponding periods in fiscal 2001 were 8.5% and 8.1%, respectively. Gross2001. Our gross margin decreased due towas affected
by several factors, including primarily,(i) under absorbed fixed costs associated with expanding our facilities;caused by the
underutilization of capacity, resulting from the economic downturn experienced
by the electronics industry; (ii) costs associated with the startup of new
customers and new projects, which typically carry higher levels of underabsorbed
manufacturing overhead costs until the projects reach higher volume production;
(iii) higher costs associated with expanding our facilities; and (iii)to a lesser
extent, (iv) changes in product mix to higher volume printed circuit board
assembly projects and final systems assembly projects, which typically have a
lower gross margin. See "Certain Factors Affecting Operating Results - If We Do
Not Manage Effectively the Expansion ofChanges in Our Operations, Our Business May be Harmed,"
and "- We may be Adversely Affected by Shortages of Required Electronic
Components".
15
16Increased mix of products that have relatively high material costs as a
percentage of total unit costs has historically been a factor that has adversely
affected our gross margins. Further, we may enter into supply arrangements in
connection with strategic relationships and original equipment manufacturer
("OEM") divestitures. These arrangements, which are relatively larger in scale,
could adversely affect our gross margins. We believe that these and other
factors may adversely affect our gross margins, but we do not expect that this
will have a material effect on our income from operations.
Unusual Charges
Fiscal 2002
We recognized unusual pre-tax charges of $587.8approximately $516.1 million
during the nine
months endedsecond quarter of fiscal 2002, of which $500.3 million related to
closures of several manufacturing facilities and $15.8 million primarily for the
impairment of investments in certain technology companies. As further discussed
below, $439.4 million of the charges relating to facility closures have been
classified as a component of Cost of Sales.
Unusual charges recorded in the second quarter of fiscal 2002 by
segments are as follows: Americas, $224.4 million; Asia, $70.7 million; Western
Europe, $170.1 million; and Central Europe, $50.9 million.
The components of the unusual charges recorded in the second quarter of
fiscal 2002 are as follows (in thousands):
Facility closure costs:
Severance ............................$ 123,961 cash
Long-lived asset impairment .......... 163,724 non-cash
Exit costs ........................... 212,660 cash/non-cash
---------
Total facility closure costs ..... 500,345
Other unusual charges .................. 15,750 cash/non-cash
---------
Total Unusual Charges ................ 516,095
---------
Income tax benefit ..................... (117,115)
---------
Net Unusual Charges ..................$ 398,980
=========
In connection with the September 2001 quarter facility closures, we
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 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.
Of the total pre-tax facility closure costs recorded in the second
quarter, $124.0 million relates to employee termination costs, of which $93.4
million has been classified as a component of Cost of Sales. As a result of the
various exit plans, we identified 11,168 employees to be involuntarily
terminated related to the various facility closures. As of September 30, 2001,
1,195 employees have been terminated, and another 9,973 employees have been
notified that they are to be terminated upon completion of the various facility
closures and consolidations. During the September 2001 quarter, we paid employee
termination costs of approximately $19.4 million related to the fiscal 2002
restructuring activities. The remaining $104.6 million of employee termination
costs is classified as accrued liabilities as of September 30, 2001 and is
expected to be paid out within one year of the commitment dates of the
respective exit plans.
The unusual pre-tax charges recorded in the second quarter 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 has been classified as a component
of Cost of Sales during the September 2001 quarter. Certain assets will be held
for use and remain in service until their anticipated disposal dates pursuant to
the exit plans. Since the asset 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 the assets that are being
held for use, an impairment loss is recognized if the carrying amounts of these
assets exceed the fair value of the assets. Certain 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 the assets that are being held for
disposal, an impairment loss is recognized if the carrying amounts of these
assets exceed the fair value less cost to sell. The impaired long-lived assets
consisted primarily of machinery and equipment of $105.7 million and building
and improvements of $58.0 million.
The unusual pre-tax charges, also included approximately $212.7 million
for other exit costs. Approximately $182.3 million of this amount has been
classified as a component of Cost of Sales. The other exit costs recorded,
primarily related to items such as building and equipment lease termination
costs, warranty costs, current asset impairments and payments to suppliers and
vendors to terminate agreements and were incurred directly as a result of the
various exit plans. We paid approximately $2.2 million of other exit costs
during the second quarter and $111.5 million of non-cash charges were utilized
during the same period. The remaining $99.0 million is classified as accrued
liabilities as of September 30, 2001 and is expected to be substantially paid
out
within one year from the commitment dates of the respective exit plans, except
for certain long-term contractual obligations.
Fiscal 2001
We 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 related to the
issuance of an equity instrument to Motorola, Inc. ("Motorola") combined with
approximately $206.6 million of expenses resulting from theThe DII Group, Inc. and
Palo Alto Products International mergers.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 mergers.
UnusualMetal Specialties (and related entities) and
related facility closures. In the third quarter, we recognized unusual pre-tax
charges of approximately $46.3 million, were recorded in the third quarter, primarily related to the merger with JIT
merger.Holdings Ltd. and related facility closures. During the fourth quarter, we
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, we entered into a strategic alliance for product
manufacturing with Motorola. See Note I for further information concerning the
strategic alliance. In connection with this strategic alliance,
Motorola paid $100.0 million for an equity instrument that entitlesentitled it to
acquire 22,000,000
of our22.0 million Flextronics ordinary shares at any time through December
31, 2005, upon meeting targeted purchase levels or making additional payments to
us. The issuance of this equity instrument 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 connectionJune 2001,
we entered into an agreement with Motorola under which it repurchased this
equity instrument for $112.0 million.
Unusual charges excluding the aforementioned mergers, we recorded aggregate
merger-relatedMotorola equity instrument by segments are
as follows: Americas, $553.1 million; Asia, $86.5 million; Western Europe, $32.9
million; and Central Europe, $14.3 million. Unusual charges of $301.3 million, which included approximately $198.8
million of integration expensesrelated to the
Motorola equity instrument is not specific to a particular segment, and approximately $102.5 million of direct
transaction costs. As discussed below, $146.5 millionas such,
has not been allocated to a particular geographic segment.
The components of the unusual charges relating to integration expenses have been classified as a component of Cost of
Sales during the nine months endedrecorded in fiscal 2001. The components of the
merger-related unusual charges recorded2001 are as follows (in
thousands):
TOTAL
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER TOTALQUARTER 2001 NATURE OF
CHARGES CHARGES CHARGES CHARGES CHARGES -------- -------- -------CHARGES
--------- --------- --------- --------- --------- ---------
Integration Costs:
Severance.................................
Facility closure costs:
Severance ........................... $ 62,487 $ 5,677 $ 3,606 $ 71,77060,703 $ 132,473 cash
Long-lived asset impairment...............impairment ......... 46,646 14,373 16,469 77,488155,046 232,534 non-cash
Inventory write-downs..................... 11,863 -- 10,608 22,471 non-cash
Other exit costs.......................... 12,338Exit costs .......................... 24,201 5,650 9,095 27,08319,703 160,368 209,922 cash/non-cash
-------- -------- ---------------- --------- --------- --------- ---------
Total Integration Costs...............facility closure costs .... 133,334 25,700 39,778 198,812376,117 574,929
Direct Transaction Costs:transaction costs:
Professional fees.........................fees ................... 50,851 7,247 6,250 -- 64,348 cash
Other costs...............................costs ......................... 22,382 15,448 248 -- 38,078 cash/non-cash
-------- -------- ---------------- --------- --------- --------- ---------
Total Direct Transaction Costs........direct transaction costs .. 73,233 22,695 6,498 -- 102,426
-------- -------- ---------------- --------- --------- --------- ---------
Motorola equity instrument ............ 286,537 -- -- -- 286,537 non-cash
--------- --------- --------- --------- ---------
Other unusual charges ................. -- -- -- 9,450 9,450 non-cash
--------- --------- --------- --------- ---------
Total Merger-Related Unusual Charges...... 206,567Charges ........... 493,104 48,395 46,276 301,238
-------- -------- -------385,567 973,342
--------- Benefit from income taxes...................--------- --------- --------- ---------
Income tax benefit .................... (30,000) (6,000) (6,500) (42,500)
-------- -------- -------(110,000) (152,500)
--------- Total Merger-Related--------- --------- --------- ---------
Net Unusual Charges Net of Tax............................ $176,567............. $ 463,104 $ 42,395 $ 39,776 $ 258,738
======== ======== =======275,567 $ 820,842
========= ========= ========= ========= =========
As a result ofIn connection with the consummation of the various mergers,fiscal 2001 facility closures, we 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
and the identification
of manufacturing and administrative facilities for
or consolidation into other facilities. Management currently anticipates that
the integration costsfacility 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 following table summarizes the
componentsAs
discussed below, $510.5 million of the integration costs and related activities incharges relating to facility closures
have been classified as a component of Cost of Sales during the fiscal 2001:
LONG-LIVED OTHER TOTAL
ASSET INVENTORY EXIT INTEGRATION
SEVERANCE IMPAIRMENT WRITE-DOWNS COSTS COSTS
--------- ---------- ----------- -------- ------------
Balance at March 31, 2000 ...... $ -- $ -- $ -- $ -- $ --
Activities during the year:
First quarter provision ...... 62,487 46,646 11,863 12,338 133,334
Cash charges ................. (35,800) -- -- (1,627) (37,427)
Non-cash charges ............. -- (46,646) (4,315) (3,126) (54,087)
-------- -------- -------- -------- ---------
Balance at June 30, 2000 ....... 26,687 -- 7,548 7,585 41,820
Activities during the year:
16
17
Second quarter provision ..... 5,677 14,373 -- 5,650 25,700
Cash charges ................. (4,002) -- -- (4,231) (8,233)
Non-cash charges ............. -- (14,373) (7,548) (526) (22,447)
-------- -------- -------- -------- ---------
Balance at September 30, 2000 .. $ 28,362 $ -- $ -- $ 8,478 $ 36,840
-------- -------- -------- -------- ---------
Activities during the year:
Third quarter provision ...... 3,606 16,469 10,608 9,095 39,778
Cash charges ................. (7,332) -- -- (2,572) (9,904)
Non-cash charges ............. -- (16,469) (10,608) (3,462) (30,539)
-------- -------- -------- -------- ---------
Balance at December 31, 2000 ... $ 24,636 $ -- $ -- $ 11,539 $ 36,175
======== ======== ======== ======== =========
year
ended March 31, 2001.
Of the total pre-tax integration charges, $71.8facility closure costs recorded in fiscal 2001
$132.5 million relates to employee termination costs, of which $19.4$68.1 million has
been classified as a component of Cost of Sales. As a result of the various exit
plans, we identified 5,80711,269 employees to be involuntarily terminated related to
the various mergers.mergers and facility closures. As of December 31, 2000, approximately 2,092September 30, 2001, 9,091
employees have been terminated, and approximately another 3,7152,178 employees have been notified
that they are to be terminated upon completion of the various facility closures
and consolidations
related to the mergers.consolidations. During the nine months endedfirst and second quarters of fiscal 2001,2002, we paid
employee termination costs of approximately $47.1$28.3 million and $11.3 million,
respectively. The remaining $24.7$32.1 million of employee termination costs is
classified as accrued liabilities as of December 31, 2000September 30, 2001 and is expected to be
paid out within one year of the commitment dates of the respective exit plans.
The unusual pre-tax charges include $77.5recorded in fiscal 2001 included $232.5
million for the write-down of long-lived assets to fair value. Of these charges, approximately $46.6 million,
$14.4 million, and $16.5 million were written down in the first, second, and
third quarters of fiscal 2001, respectively. These amounts haveThis amount has
been classified as a component of Cost of Sales.Sales during fiscal 2001. Included in
the long-lived asset impairment are charges of $74.6$229.1 million, which relaterelated to
property, plant and equipment associated with the various manufacturing and
administrative facility closures which were written down to their net realizablefair value based on their estimated
sales price.of
$192.0 million. Certain facilitiesassets 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 will beare being depreciated over this
expected period. For the assets that are being held for use, an impairment loss
is recognized if the carrying amount of these assets exceed the fair value of
the assets. Certain other assets will be held for disposal, an impairment loss
is recognized if the carrying amount of these assets exceed the fair value less
cost to sell. The impaired long-lived assets consisted primarily of machinery
and equipment of $53.5$153.0 million and building and improvements of $21.1$76.1 million.
The long-lived asset impairment also includesincluded the write-off of the remaining
goodwill and other intangibles related to certain closed facilities of $2.9$3.4
million.
The unusual pre-tax charges recorded in fiscal 2001, also includeincluded
approximately $49.6$209.9 million for losses on inventory write-downs and other exit costs, which resulted from the
integration plans.costs. This amount has been
classified as a component of Cost of Sales. We have written off and disposed of approximately $11.9 million of
inventory related to the first quarter integration activities and approximately
$10.6 million was written off and disposed of related to the third quarter
integration activities. The $27.1 million of other exit costs relaterecorded,
primarily related to items such as building and equipment lease termination
costs, incremental amounts of uncollectible
accounts receivable, warranty-related accruals, legalwarranty costs, current asset impairments and other exit costs,payments to suppliers and
vendors to terminate agreements and were incurred directly as a result of the
various exit plans. WeDuring the first and second quarters of fiscal 2002, we paid approximately
$1.6 million, $4.2 million, and $2.6 million of
other exit costs during the
first, secondof approximately $17.2 million and third quarters of fiscal 2001.$33.2 million, respectively.
Additionally, approximately $3.1 million, $0.5 million and $3.5$3.9 million of other exit costs were written offnon-cash
charges utilized during the first second and third quarters, respectively.quarter of fiscal 2002. The remaining $11.6$41.0
million of other exit costs is classified inas accrued liabilities as of December 31, 2000September
30, 2001 and is expected to be substantially paid out bywithin one year of the endcommitment dates
of fiscal 2001, except for
certain long-term contractual obligations.the respective exit plans.
The direct transaction costs includerecorded in fiscal 2001, included
approximately $64.4$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. Of these charges,
approximately $50.9 million was associated with the first quarter mergers, $7.2
million related to the second quarter mergers, and $6.3 million related to the
third quarter merger. Other direct transaction costs which totaled
approximately $38.1 million waswere mainly comprised of accelerated debt prepayment
expense, accelerated executive stock compensation and benefit-related expenses and
other merger-related costs. We paid approximately $55.5 million, $5.6 million
and $5.3 million of the direct transaction costs during the first second, and
third quarters of fiscal 2001, respectively. Additionally, approximately $14.7
million, $13.4 million and $0.1expenses.
Approximately $28.2 million of the direct transaction costs were written offnon-cash
charges utilized during fiscal 2001. During the first and second quarters of
fiscal 2002, we paid approximately $1.3 million and third quarters, respectively. The$0.3 million of direct
transaction costs. There is a remaining $7.9balance of $1.7 million which is
classified in accrued liabilities as of December 31,
2000September 30, 2001 and is expected to be
substantially paid out byin the endsubsequent quarters.
The following table summarizes the balance of the facility closure costs
as of March 31, 2001 and the type and amount of closure costs provisioned for
and utilized during the first and second quarters of fiscal 2001.2002.
LONG-LIVED
ASSET OTHER EXIT
SEVERANCE IMPAIRMENT COSTS TOTAL
--------- ---------- --------- ---------
Balance at March 31, 2001 ...... $ 71,734 $ -- $ 95,343 $ 167,077
Activities during the quarter:
First quarter provision ..... -- -- -- --
Cash charges ................ (28,264) -- (17,219) (45,483)
Non-cash charges ............ -- -- (3,947) (3,947)
--------- -------- --------- ---------
Balance at June 30, 2001 ....... 43,470 -- 74,177 117,647
Activities during the quarter:
Second quarter provision .... 123,961 163,724 212,660 500,345
Cash charges ................ (30,743) -- (35,353) (66,096)
Non-cash charges ............ -- (163,724) (111,486) (275,210)
--------- -------- --------- ---------
Balance at September 30, 2001 .. $ 136,688 $ -- $ 139,998 $ 276,686
========= ======== ========= =========
We incurred unusual pre-tax chargesbelieve that the cost of $3.5 million ingoods sold savings achieved through lower
depreciation and reduced employee expense will be offset by reduced revenues at
the second quarter of
fiscal 2000, related to the Kyrel EMS Oyj merger. The unusual charges consisted
of a transfer tax of $1.7 million, approximately $0.4 million of investment
banking fees and approximately $1.4 million of legal and accounting fees.affected facilities.
Selling, General and Administrative Expenses
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Selling, general and administrative expenses ("SG&A") for the thirdsecond
quarter of fiscal 2001 increased2002 decreased slightly to $113.7$105.5 million from $86.5$107.9 million
in the same quarter of fiscal 2000,2001, and decreased as a percentage of net sales
to 3.3% for the second quarter of fiscal 2002 compared to 3.5% for the same
period of fiscal 2001. The dollar decrease in SG&A was directly attributable to
the Company's restructuring activities and to a lesser extent a corporate-wide
austerity program that focused on reducing discretionary spending. SG&A
increased to $214.3 million in the first six months of fiscal 2002 from $202.8
million in the same period of fiscal 2001, but decreased as a percentage of net
sales to 3.5% for
the third quarter of fiscal 2001 compared to 4.4% for the same quarter of fiscal
2000. SG&A increased to $316.6 million3.4% in the first ninesix months of fiscal 20012002 from $228.3 million3.5% in the same
period of fiscal 2000, but decreased as a
percentage of net sales to 3.5% from 4.8%.2001. The dollar increasesincrease in SG&A werewas primarily due to the
continued investment in infrastructure such as sales, marketing, supply-chain
management, information systems and other related corporate and administrative
expenses. The declines indeclining SG&A as a percentage of net sales reflect the increases in our net sales, as well asreflects our continued
focus on controlling our discretionary operating expenses.expenses, while expanding our
net sales.
Goodwill and Intangibles Amortization
Goodwill and intangibles asset amortization for the thirdsecond quarter of
fiscal 2001 increased2002 decreased to $15.1$3.8 million from $10.7$12.5 million for the same period of
fiscal 2000.2001. Goodwill and intangibles asset amortization was $37.0decreased to $6.1
million and $29.3
million forin the first ninesix months of fiscal 2001 and2002 from $21.9 million in the same
period of fiscal 2000, respectively.2001. The increasedecreases in goodwill and intangibleintangibles assets
amortization in the third quarter
and first nine months of fiscal 2001 was primarily a direct result of goodwill acquired
in connection with the various purchase acquisitions during fiscal 2001 and
increasedadoption of Statement of Financial
Accounting Standards (SFAS) 142, effectively discontinuing the amortization of
debt issuance costs associated withgoodwill. As of September 30,2001, unamortized goodwill approximated $1.1
billion. Such goodwill is no longer subject to amortization but instead is now
subject to impairment testing on at least an annual basis, as discussed in Note
I, "New Accounting Standards," of the senior notes
offering in June 2000.Notes to Condensed Consolidated Financial
Statements.
Interest and Other Expense, Net
Interest and other expense, net was $22.1$22.2 million for the thirdsecond quarter
of fiscal 20012002 compared to $23.4$22.4 million for the corresponding quarter of fiscal
2000.2001. Interest and other expense, net was $40.3$44.6 million in the first six months
of fiscal 2002 compared to $18.2 million for the first nine
monthscorresponding period of fiscal
2001 compared to $57.0 million for the same period in fiscal
2000.2001. The decreasesincrease in interest and other expense, net in the third quarter and
the first ninesix months of
fiscal 2001 were attributable2002 was mainly due to lower gains recorded on the sale of marketable
equity securities offset by increased interest expense
associated with increased borrowings.as compared to the $22.4 million gain on sale of marketable
securities we recorded in the first quarter of fiscal 2001.
Provision for Income Taxes
Our consolidated effective tax rate was 13.1%a benefit of 24.8% and (1.1%)29.1% for
the thirdsecond quarter and first ninesix months of fiscal 2001,2002, respectively, compared
to 3.4%a 14.5% provision and 10.9%a benefit of 2.3% for the comparable periods of fiscal
2000.2001. Excluding the unusual charges, the effective income tax rate was 10.0% in
the thirdsecond quarter and first ninesix months of fiscal 2001 was
13.5% and 13.4%, respectively.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 and changes in previously established valuation allowances for deferred
tax assets based upon management's current analysis of the realizability of
these deferred tax assets. See "Certain Factors Affecting Operating Results - We
are Subject to the Risk of Increased Taxes".
Liquidity and Capital Resources
As of December 31, 2000,September 30, 2001, we had cash and cash equivalents totaling
$398.4$400.3 million, total bank and other debts totaling $1.6$1.3 billion and $60had $382.0
million
available for future borrowing under our credit facility subject to compliance
with certain financial covenants.
Subsequent to December 31, 2000, we have
generated additionalCash provided by operating activities was $435.5 million and cash from a public offering of our ordinary shares.
Cash used
in operating activities was $461.8 million and $14.1$279.8 million for the first ninesix months of fiscal
2002 and fiscal 2001, respectively. Cash provided by operating activities in the
first six months of fiscal 2002 was primarily due to significant reductions of
inventory and increases in accounts payable. Cash used in operations for the
first six months of fiscal 2001 and fiscal 2000, respectively. Cash used in
operating activities increased inwas the first nine months of fiscal 2001 from the
first nine months of fiscal 2000 as a result of significant increases in
inventory and accounts receivable, and inventory, partially offset by an increase in accounts
payable.
Accounts receivable, net of allowance for doubtful accounts increased 54% to
$1.6was $1.7
billion at DecemberSeptember 30, 2001 and March 31, 20002001, remaining relatively unchanged
primarily because net sales was relatively unchanged as a result of the recent
economic slowdown.
Inventories decreased 21% to $1.4 billion at September 30, 2001 from
$1.1$1.8 billion at March 31, 2000.2001. The increase in accounts receivable was primarily due to an increase of 90% in net
sales for the first nine months of fiscal 2001 over the comparable period in the
prior year.
Inventories increased 51% to $1.7 billion at December 31, 2000 from $1.1
billion at March 31, 2000. The increasedecrease in inventories was primarily the
result of increased purchasesthe focused effort by the Company to reduce inventories that were
built up for customers in March, in their anticipation of material to support the growing sales combined with
the inventory acquired in connection with the manufacturing facility purchases
from original equipment manufacturers (OEMs) in the first nine months of fiscal
2001.stronger demand which
did not materialize.
Cash used in investing activities was $769.4$665.0 million and $379.3$614.5 million
for the first ninesix months of fiscal 20012002 and fiscal 2000,2001, respectively. Cash used
in investing activities for the first ninesix months of fiscal 20012002 was primarily
related to (i) net capital expenditures of $711.3$232.6 million to purchase equipment
and for continued expansion of manufacturing facilities, including our manufacturing
facility purchases from OEMs, (ii) payment of $112.9$385.6
million for purchases of manufacturing facilities and related assets from OEMs
and (iii) payment of $48.8 million for acquisitions of businesses and (iii) payment of $39.5offset by
$11.0 million for sale of minority investments in the stockstocks of various
technology companies, offset by (iv) $51.4 million in proceeds
from the sale of equipment and (v)
18
19
$42.8 million in proceeds from the sale of marketable equity securities.companies. Cash used in investing activities for the first ninesix months
of fiscal 20002001 consisted primarily of (i) net capital expenditures of $374.7$406.3
million to purchase equipment and for continued expansion of manufacturing
facilities, including our
manufacturing facility purchases from OEMs (ii) payment of $32.0$163.5 million for purchases of manufacturing
facilities and related assets from OEMs and (iii) payment of $65.5 million for
acquisitions of businesses and (iii) paymentoffset by proceeds of $25.4$37.6 million for sale of
minority equity investments in the stocks of various technology companies, offset by (iv)
proceedscompanies.
Net cash used in financing activities was $2.3 million for the first six
months of $17.0 millionfiscal 2002 and (v) $35.9 million related to the sale of equipment
and the sale of certain subsidiaries, respectively.
Netnet cash provided by financing activities was $951.9 million and $618.9$763.4
million for the first ninesix months of fiscal 20012001. Cash used in financing
activities for the first six months of fiscal 2002 primarily resulted from the
payment of $112.0 million for the repurchase of the equity instrument from
Motorola, $505.5 million of short-term credit facility and fiscal 2000, respectively.long-term debt
repayments, offset by $611.7 million of proceeds from long-term debt and bank
borrowings. Cash provided by financing activities for the first ninesix months of
fiscal 2001 primarily resulted from $1.4$1.1 billion of proceeds from long-term debt
and bank borrowings, $59.0 million in proceeds from stock issued under stock plans,
$431.6 million of net proceeds from equity offerings,
and $100.0 million of proceeds from anthe issuance of the equity instrument issued to
Motorola, offset by $1.0 billion$883.8 million of short-term credit facility and long-term
debt repayments.
Subsequent to December 31, 2000, we substantially increased our cash balances
through an equity offering of 27,000,000 of our ordinary shares at $37.9375 with
net proceeds of approximately $990.8 million. In addition, we have granted the
underwriters of the equity offering an overallotment option, which is
exercisable for thirty days after the offering, to purchase up to an additional
4,050,000 ordinary shares.
We anticipate that our working capital requirements and capital
expenditures will continue to increase in order to support the anticipated
continued growth
inexpansion of our operations. We also anticipate incurring significant
capital expenditures and operating lease commitments in order to support our
anticipated expansions of our industrial parks in China, Hungary, Mexico, Brazil
and Poland. We intend to continue our acquisition strategy and it is possible
that future acquisitions may be significant and may require the payment of cash.
For example, we recently announced plans to acquire certain manufacturing
facilities and related assets of Xerox Corporation, currently estimated to be
approximately $220.0 million. Future liquidity needs will also depend on
fluctuations in levels of inventory, the timing of expenditures by us on new
equipment, the extent to which we utilize operating leases for the new
facilities and equipment, levels of shipments and changes in volumes of customer
orders.
Historically, we have funded our operations from the proceeds of public
offerings of equity securities and debt, offerings, cash and cash equivalents generated
from operations, bank debt, sales of accounts receivable and capital equipment
lease financings. We believe that our existing cash balances, together with
anticipated cash flows from operations, borrowings available under our credit
facility and the net proceeds from our recent equity offerings will be
sufficient to fund our operations through at least the next twelve months. We
anticipate that we will continue to enter into debt and equity financings, sales
of accounts receivable and lease transactions to fund our acquisitions and
anticipated growth. Such financings and other transactions may not be available
on terms acceptable to us or at all. See "Certain Factors Affecting Operating
Results - If We Do Not Manage Effectively the Expansion of Our Operations, Our
Business May be Harmed".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the three and ninesix months ended
December 31, 2000September 30, 2001 to our exposure to market risk for changes in interest rates
and foreign currency exchange rates.
CERTAIN FACTORS EFFECTING OPERATING RESULTS
IF WE DO NOT MANAGE EFFECTIVELY THE EXPANSION OFCHANGES IN OUR OPERATIONS, OUR BUSINESS MAY BE
HARMED.
We have grown rapidly in recent periods. Our workforce has more than
tripleddoubled in size over the last year as a result of internal growth and
acquisitions. This growth is likely to strain considerably our management
control systemsystems 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 increase our manufacturing capacity in low-cost regions by
expanding our facilities and adding new equipment. SuchThis expansion involves
significant risks, including, but not limited to, the following:
- 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;
19
20
- we may incur cost overruns;
- 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
substantial increases in depreciation expense and rental expense. If our
revenues do not increase sufficiently to offset these expenses, our operating
results would be seriously harmed. Our expansion, both through internal growth
and acquisitions, has contributed to our incurring significant accountingunusual charges.
For example,As a result of acquisitions and rapid changes in connection with our acquisitions of DII, Palo Alto
Products International, Chatham and Lightning,markets, we recorded
one-timeunusual charges for merger related costs and related facility closure costs of
approximately $255.0$534.3 million, net of tax, for the fiscal year ended March 31,
2001 and approximately $399.0 million, net of tax, for the second quarter ended
September 30, 2001.
WE DEPEND ON THE HANDHELD ELECTRONICS DEVICES, INFORMATION TECHNOLOGIES
INFRASTRUCTURE, COMMUNICATIONS INFRASTRUCTURE AND COMPUTER AND OFFICE
AUTOMATION INDUSTRIES WHICH 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.
We depend on sales to customers in the handheld devices, information
technologies infrastructure, communications infrastructure and computer and
office automation industries. For the first six months of fiscal 2002, we
derived approximately 31% of our revenues from customers in the handheld devices
industry, which includes cell phones, pagers and personal digital assistants;
approximately 22% of our revenues from providers of information technologies
infrastructure, which includes servers, workstations, storage systems,
mainframes, hubs and routers ; approximately 20% of our revenues from providers
of communications infrastructure, which includes equipment for optical networks,
cellular base stations, radio frequency devices, telephone exchange and access
switches and broadband devices; approximately 10% of our revenue from customers
in the computers and office automation industry, which includes copiers,
scanners,
graphic cards, desktop and notebook computers and peripheral devices such as
printers and projectors; and approximately 5% of our revenues from the consumer
devices industry, including set-top boxes, home entertainment equipment, cameras
and home appliances. The remaining 12% of our revenue was derived from customers
in a variety of other industries, including the medical, automotive, industrial
and instrumentation industries. Factors affecting these industries in general
could seriously harm our customers and, as a result, us. These factors include:
o Rapid changes in technology, which result in short product life cycles;
o the inability of our customers to successfully market their products,
and the failure of these products to gain widespread commercial
acceptance; and
o recessionary periods in our customers' markets.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
EMS providers must provide increasingly rapid product turnaround for
their customers. We generally do not obtain firm, long-term purchase commitments
from our customers and we continue to experience reduced lead-times in customer
orders. Customers may cancel their orders, change production quantities or delay
production for a number of reasons. Many of our customers' industries are
experiencing a significant decrease in demand for their products and services.
The generally uncertain economic condition of several of the industries of our
customers has 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 would seriously harm our results of operations by reducing
the volumes of products manufactured by us for the customers and delivered in
that period, as well as 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, 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 requirements. The short-term nature of our
customers' commitments and the possibility of 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 may cause
reductions in our gross margins if customer orders are delayed 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 occasion,
customers may require rapid increases in production, which can stress our
resources and reduce margins. Although we have increased our manufacturing
capacity, and plan further increases, 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 could harm our gross profit and operating income.
OUR OPERATING RESULTS VARY SIGNIFICANTLY.
We experience significant fluctuations in our results of operations.
Some of the principal factors that contribute to these fluctuations are:
o changes in demand for our services;
o our effectiveness in managing manufacturing processes and costs in
order to decrease manufacturing expenses;
o the mix of the types of manufacturing services we provide, as
high-volume and low-complexity manufacturing services typically have
lower gross margins than more complex and lower volume services;
o 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;
o the degree to which we are able to utilize our available
manufacturing capacity;
o 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
o local conditions and events that may affect our production volumes,
such as labor conditions, political instability and local holidays.
One of our significant end-markets is the consumer electronics market.
This market exhibits 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.
We are reconfiguring certain of our operations to further increase our
concentration in low-cost locations. This shift of operations resulted in a
restructuring charge of $275.6 million, net of tax, in the fourth quarter of
fiscal 2001 and $399.0 million, net of tax, in the second quarter of fiscal
2002. At the end of the second quarter of fiscal 2002, $276.7 million of these
closure costs remained to be paid.
In addition, many of our customers are currently experiencing increased
volatility in demand, and in many cases reduced demand, for their products. This
increases the difficulty of anticipating the levels and timing of future
revenues from these customers, and could lead them to defer delivery schedules
for products or reduce their volumes of purchases. This would lead to a delay or
reduction in our revenues from these customers. Any of these factors or a
combination of these factors could seriously harm our business and result in
fluctuations in our results of operations.
WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS.
Since the beginning of fiscal 2001, we have completed over 20
acquisitions of businesses and manufacturing facilities, and we expect to
continue to acquire additional businesses and facilities in the future. Any
future acquisitions may require additional debt or equity financing, or the
issuance of an equity
instrument to Motorola relatingshares in the transaction. This could increase our leverage or be
dilutive to our alliance with Motorola,existing shareholders. We may not be able to identify and
complete acquisitions in the future to the same extent as the past, or at all.
To integrate acquired businesses, we recordedmust implement our management
information systems and operating systems and assimilate and manage the
personnel of the acquired operations. The difficulties of this integration may
be further complicated by geographic distances. The integration of acquired
businesses may not be successful and could result in disruption to other parts
of our business.
In addition, acquisitions involve a one-time non-cash chargenumber of approximately $286.5 million.other risks and
challenges, including:
o diversion of management's attention;
o potential loss of key employees and customers of the acquired
companies;
o lack of experience operating in the geographic market or industry
sector of the acquired business;
o an increase in our expenses and working capital requirements, which
reduces our return on invested capital; and
o exposure to unanticipated contingent liabilities of acquired
companies.
Any of these and other factors could harm our ability to achieve
anticipated levels of profitability at acquired operations or realize other
anticipated benefits of an acquisition.
OUR STRATEGIC RELATIONSHIPRELATIONSHIPS WITH ERICSSON CREATESAND OTHER MAJOR CUSTOMERS CREATE
RISKS.
WhileIn April 2001, we have entered into a non-binding memorandum of understandingdefinitive agreement with Ericsson
with respect to our management of its mobile telephone operations, we
have not negotiated or entered into any definitive agreements. The memorandum of
understanding is only an expression of the parties' current intentions, and the
relationship as described in the memorandum of understanding is subject to
change in the definitive agreements. In addition, the memorandum of
understanding does not address a number of terms that will be set forth in the
definitive agreements, and these terms may affect our ability to obtain the
anticipated benefits of this relationship. We anticipate commencing this
relationship on April 1, 2001, but we cannot be sure when, or whether, we will
enter into definitive agreements for this relationship or commence operations. Further, we cannot provide any assurances as to the final terms of any
definitive agreement or as to the duration of our anticipated relationship with
Ericsson. Finally, we cannot be sure when or whether we will obtain the
regulatory approvals that are required for the relationship.
Once we commence operations, ourOur ability
to achieve any of the anticipated benefits of this new relationship with Ericsson is subject to a
number of risks, including our ability to meet Ericsson's volume, product
quality, timeliness and price requirements, and to achieve anticipated cost
reductions. If demand for Ericsson's mobile phone products declines, Ericsson
may purchase a lower quantity of products from us than we anticipate, and the memorandum of
understanding does not require that Ericsson purchase any specified volume of
products from us.anticipate. If
Ericsson's requirements exceed the volume anticipated by us, we may not be able
to meet these requirements on a timely basis. Our inability to meet Ericsson's
volume, quality, timeliness and cost requirements, and to quickly resolve any
issues with Ericsson, could seriously harm our results of operations. As a
result of these and other risks, we may be unable to achieve anticipated levels
of profitability under this arrangement, and it may not result in any material
revenues or contribute positively to our net income per share. Finally,Due to our
relationship with Ericsson, other OEMs may not wish to obtain logistics or
operations management services from us.
WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS.
In the past six months, we completed a significant number of acquisitions of
businessesWe have entered into strategic relationships with other customers, and
facilities, including our acquisitions of Chatham, Lightning and
JIT. We expectplan to continue to acquire additional businesses and facilities in
the future. We are currently in preliminary discussions to acquire additional
businesses and facilities. Any future acquisitions may require additional debtpursue such relationships. These relationships generally
involve many, or equity financing, which could increase our leverage or be dilutive to our
existing shareholders. We cannot assure the terms of, or that we will complete,
any acquisitions in the future.
To integrate acquired businesses, we must implement our management
information systems and operating systems and assimilate and manage the
personnelall, of the acquired operations. The difficulties of this integration may
be further complicated by geographic distances. The integration of acquired
businesses may not be successful and could result in disruption to other parts
of our business.
In addition, acquisitions involve a number of other risks and challenges,
including, but not limited to:
- diversion of management's attention;
- potential loss of key employees and customers of the acquired companies;
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- lack of experience operating in the geographic market of the acquired
business; and
- an increaseinvolved in our expenses and working capital requirements.
Any of these and other factors could harm our ability to achieve anticipated
levels of profitability at acquired operations or realize other anticipated
benefits of an acquisition.
OUR OPERATING RESULTS VARY SIGNIFICANTLY.
We experience significant fluctuations in our results of operations. The
factors which contribute to fluctuations include:
- the timing of customer orders;
- the volume of these orders relative to our capacity;
- market acceptance of customers' new products;
- changes in demand for customers' products and product obsolescence;
- our ability to manage the timing and amount of our procurement of
components to avoid delays in production and excess inventory levels;
- the timing of our expenditures in anticipation of future orders;
- our effectiveness in managing manufacturing processes and costs;
- changes in the cost and availability of labor and components;
- changes in our product mix;
- changes in economic conditions;
- local factors and events that may affect our production volume, such as
local holidays; and
- seasonality in customers' product requirements.
One of our significant end-markets is the consumer electronics market. This
market exhibits particular strength toward the end of the calendar year in
connectionrelationship with
the holiday season. As a result, we have historically
experienced relative strength in revenues in our third fiscal quarter.
We are reconfiguring certain of our operations to further increase our
concentration in low-cost locations. We expect that this shift of operations
will result in the recognition of unusual charges in the fourth quarter of
fiscal 2001 related to the integration activities. In addition, some of our
customers are currently experiencing increased volatility in demand, and in some
cases reduced demand, for their products. This increases the difficulty of
anticipating the levels and timing of future revenues from these customers, and
could lead them to defer delivery schedules for products, which could lead to a
reduction or delay in such revenues. Any of these factors or a combination of
these factors could seriously harm our business and result in fluctuations in
our results of operations.
WE HAVE NEW STRATEGIC RELATIONSHIPS FROM WHICH WE ARE NOT YET RECEIVING
SIGNIFICANT REVENUES, AND MAY NOT REACH ANTICIPATED LEVELS.
We have recently announced major new strategic relationships, including our
alliances with Ericsson and Motorola, from which we anticipate significant
future revenues. However, similarEricsson. Similar to our other customer relationships, there are no volume
purchase commitments under these new programs,relationships, and the revenues we actually
achieve may not meet our expectations. In anticipation of future activities
under these programs,strategic relationships, we are incurring substantial expenses as we
add personnel and manufacturing capacity and procure materials. Our operating
results will be seriously harmed if sales do not develop to the extent and
within the time frame we anticipate.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR
DELAY PRODUCTION.
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Electronics manufacturing service providers must provide increasingly rapid
product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers and we continue to experience
reduced lead-times in customer orders. Customers may cancel their orders, change
production quantities or delay production for a number of reasons.
Cancellations, reductions or delays by a significant customer or by a group of
customers would seriously harm our results of operations.
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 requirements. The short-term nature of our
customers' commitments and the possibility of 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, purchase materials and incur
other expenses to meet the anticipated demand of our customers. Anticipated
orders may not materialize, and delivery schedules may be deferred as a result
of changes in demand for our customers' products. On occasion, customers may
require rapid increases in production, which can stress our resources and reduce
margins. Although we have increased our manufacturing capacity, and plan further
increases, 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 could harm our
gross margins and operating income.
WE DEPEND ON THE CONTINUING TREND OF OUTSOURCING BY OEMS.
A substantial factorFuture growth in our revenue growth is the transfer of manufacturing
and supply base management activities from our OEM customers. Future growth
partially depends on new outsourcing opportunities.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
unfavorably
impacted.limited.
OUR ACQUISITION OF DIVESTED ASSETS AND FACILITIES FROM OEMS CAN RESULT IN
UNFAVORABLE PRICING TERMS AND DIFFICULTIES IN INTEGRATING THE ACQUIRED ASSETS,
WHICH MAY HARM OUR RESULTS OF OPERATIONS.
In the past, we have entered into arrangements to acquire manufacturing
assets and facilities from OEMs, and then to use the assets and facilities to
provide electronics manufacturing services to the OEM. For example, we recently
agreed to acquire facilities in Canada, Brazil, Mexico and Malaysia from Xerox,
and will be using these facilities to manufacture office copiers for Xerox. We
intend to continue to pursue these transactions in the future. There is
frequently competition among EMS companies for these transactions, and this
competition may increase. These outsourcing opportunitiesOEM divestiture 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 includebe less than
anticipated. The arrangements entered into with divesting OEMs typically involve
many risks, including the transferfollowing:
o to acquire the facility, 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;
o the integration into our business of the acquired assets suchand
facilities may be time-consuming and costly;
o we, rather than the divesting OEM, bear the risk of excess capacity
at the acquired facility;
o we may not achieve anticipated cost reductions and efficiencies at
the acquired facility;
o if the OEM's requirements exceed the volume anticipated by us, we may
be unable to meet the expectations of the OEM as facilities, equipmentto product quality,
timeliness and inventory.cost reductions; and
o if the volume of purchases by the OEM are less than anticipated, we may
not be able to sufficiently reduce the expenses of operating the
facility or use the facility to provide services to other OEMs, and as
a result the transaction may adversely affect our gross margins and
profitability.
If we do not successfully manage and integrate the acquired assets and achieve
anticipated cost reductions, our revenues and gross margins may decline and our
results of operations would be harmed.
THE MAJORITY OF OUR SALES COMES 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 in the
first ninesix months of fiscal 20012002 and 20002001 accounted for approximately 56%64% and
59% of net
sales. Our two largest customers during the first nine months of fiscal 2001
were Cisco and58%, respectively, with Ericsson accounting for approximately 11% and26% in the first
six months of fiscal 2002. No other customer accounted for more than 10% of net
sales. We expect that our strategic relationship with Ericsson will substantially
increase the percentage of our sales attributable to Ericsson. No other
customerscustomer accounted for more than 10% of net sales in the first nine monthscorresponding
period of fiscal 2001.
The identity of our principal customers hashave 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 wouldcould be harmed.
WE DEPEND ON THE TELECOMMUNICATIONS, NETWORKING AND ELECTRONICS INDUSTRIES WHICH
CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES;
OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS
WOULD HARM OUR BUSINESS.
We depend on sales to customers in the telecommunications, networking and
electronics industries. Factors affecting the electronics industry in general
could seriously harm our customers and, as a result, us. These factors include:
- the inability of our customers to adapt to rapidly changing technology and
evolving industry standards, which results in short product life cycles;
- the inability of our customers to develop and market their products, some
of which are new and untested, the potential that our customers' products
may become obsolete or the failure of our customers' products to gain
widespread commercial acceptance; and
- recessionary periods in our customers' markets.
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If any of these factors materialize, our business would suffer. Recently,
many sectors of the telecommunications, networking and electronics industries
have experienced pricing and margin pressures and reduced demand for many
products, and the impact of these pressures has caused, and is expected to
continue to cause, some customers to defer delivery schedules for certain
products that we manufacture for them.
OUR INDUSTRY IS EXTREMELY COMPETITIVE.
The electronics manufacturing servicesEMS industry is extremely competitive and includes hundreds of
companies, several of which have achieved substantial market share. Current and
prospective customers also evaluate our capabilities against the merits of
internal production. Some of our competitors have substantially greater market
share and manufacturing, financial and marketing resources than us.
In recent years, many participants in the industry, including us, have
substantially expanded their manufacturing capacity. If overall demand for
electronics manufacturing services should decrease, this increased capacity
could result in substantial pricing pressures, which could seriously harm our
operating results.
WE MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS.
A substantial majority of our net sales are derived from turnkey
manufacturing in which we are responsible for purchasing components used in
manufacturing our customers' products. We generally do not have long-term
agreements with suppliers of components. This typically results in our bearing
the risk of component price increases because we may be unable to procure the
required materials at a price level necessary to generate anticipated margins
from our agreements with our customers. Accordingly, component price changes
could seriously harm our operating results.
At various times, there have been shortages of some of the electronic
components that we use, and suppliers of some components have lacked sufficient
capacity to meet the demand for these components. Component shortages have
recently become more prevalent in our industry. In some cases, supply
shortages and delays in deliveries of particular components have resulted in
curtailed production, or delays in production, of assemblies using that
component, which has contributed to an increase in our inventory levels. We expect that shortages
and delays in deliveries of some components will continue. If we
are unable to obtain sufficient components on a timely basis, we may experience
manufacturing and shipping delays, which could harm our relationships with
current or prospective customers and reduce our sales.
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 (1)where:
o tax incentives have been extended to encourage foreign investmentinvestment; or
(2)o 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. We cannot determine in advance the
extent to 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. We have obtained
tax holidays or other incentives where available.available, primarily in China, Malaysia
and Hungary. In these three countries, we generated an aggregate of
approximately $2.6 billion of our total revenues for the fiscal year ended March
31, 2001. Our 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.
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The geographical distances between Asia, the Americas, Asia and Europe create
a number of logistical and communications challenges. OurThese 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 East Asia, the Americas and Europe. As a result,Europe, we are affected bysubject to the
risks of changes in economic and political conditions in those countries,
including:
-o fluctuations in the value of local currencies;
- changeso labor unrest and difficulties in labor conditions;
-staffing;
o longer payment cycles;
- greater difficultycycles resulting from differences in collecting accounts receivable;
- the burdens and costs of compliance with a variety of foreign laws;
- political and economic instability;
-local customer;
o increases in duties and taxation;
-taxation levied on our products;
o imposition of restrictions on currency conversion or the transfer of
funds;
-o limitations on imports or exports;
-exports of components or assembled
products, or other travel restrictions;
o expropriation of private enterprises; and
-o a potential reversal of current tax or otherfavorable 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 nations. In addition, some countries in
which we operate, such as Brazil, the Czech Republic, 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 MexicoChina and China,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.
WE ARE SUBJECTRECENT TERRORIST ACTIONS MAY AFFECT OUR ABILITY TO RISKSCORRECTLY TIME SHIPMENTS INTO
AND OUT OF CURRENCY FLUCTUATIONS AND HEDGING OPERATIONS.
A significant portionTHE UNITED STATES.
Our ability to effectively manage our supply chain and deliver products
on a timely basis to our customers may be adversely affected by the reduced
flight schedules of our business is conductedmany commercial airlines and delivery services, and
increased security precautions instituted in response to the European euro, the
Swedish kronaterrorist actions
in New York City and the Brazilian real. In addition, some of our costs, such as
payrollWashington, D.C., on September 11, 2001. The changes in
flight schedules and rent, are denominated in local currencies in the countries in which
we operate. In recent years, some of these currencies, including the Hungarian
forint, Brazilian real and Mexican peso, have experienced significant
devaluations. Changes in exchange rates between these and other currencies and
the U.S. dollar willadditional security measures may negatively affect our
cost of sales, operating margins and revenues.
We cannotability to accurately predict the impactdelivery times of future exchange rate fluctuations. We use
financial instruments, primarily forward purchase contracts,components and completed
systems. For example, delays in delivery of a particular component could result
in delays in production of assemblies using that component, and to hedge Japanese
yen, European euro, U.S. dollardelays in
shipping those assemblies to customers who may require timely delivery into
their distribution channels. Our inability to accurately predict these delivery
times could negatively affect our relationships with those customers and
other foreign currency commitments arising
from trade accounts payable and fixed purchase obligations. Because we hedge
only fixed obligations, we do not expect that these hedging activities willseriously harm our results of operations or cash flows. However, our hedging activities may be
unsuccessful, and we may change or reduce our hedging activities in the future.
As a result, we may experience significant unexpected expenses from fluctuations
in exchange rates.business.
WE DEPEND ON OUR KEY PERSONNEL.EXECUTIVE OFFICERS.
Our success depends to a large extent upon the continued services of
our key
executives, managers and skilled personnel.executive officers. Generally our employees are not bound by employment or
non-competition agreements, and we cannot assure that we will retain our
keyexecutive officers and other key employees. We could be seriously harmed by the
loss of key personnel.any 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
wouldcould be harmed.
WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.
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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 if the results of future testing
and analysisanalyses 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
PART II - OTHER INFORMATION
ITEMS 1-5. Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
We held our Annual General Meeting of shareholders on September 21,
2001, at which the following matters were acted upon:
2.01 Report
1a) Re-election of Independent Accountants --Mr. Chuen Fah Alain Ahkong For: 407,392,581
to the Board of Directors. Against: 522,821
1b) Re-election of Mr. Richard L. Sharp to the For: 407,499,389
Board of Directors. Against: 416,013
2) Re-election of Mr. Goh Thiam Poh Tommie to For: 407,419,439
the Board of Directors. Against: 495,963
3) Adoption of the Audited Accounts for the For: 407,086,724
fiscal year ended March 31, 2001 together Against: 91,593
with the Reports of the Directors and Abstain: 737,085
Auditors thereon.
4) Appointment of Arthur Andersen LLP.
3.01 Memorandum and New ArticlesLLP as our For: 406,351,752
independent auditors for the fiscal year Against: 936,591
ending March 31, 2002. Abstain: 627,059
5) Approval of Associationadoption of the Registrant.Company's 2001 For: 198,428,197
Equity Incentive Plan and approval of Against: 110,409,888
grant to the Board of Directors of Abstain: 831,271
authority to allot and issue or grant Non-votes: 98,246,046
options in respect of ordinary shares to
such plan.
6) Approval of grant to the Board of For: 399,534,641
Directors of authority to allot and issue Against: 6,840,415
or grant options in respect of ordinary Abstain 1,540,346
shares.
7) Approval of grant to the Board of For: 404,762,802
Directors of authority to allot and issue Against: 2,312,964
bonus share issuances. Abstain: 839,636
(b) Reports on Form 8-K
On January 29, 2001 we filed a current report on Form 8-K including our
consolidated financial statements as of March 31, 1999 and 2000 and for eachNeither abstentions nor broker non-votes are counted in tabulations of
the three years in the period ended March 31, 2000, giving retroactive effectvotes cast on proposals presented to the mergers with Chatham Technologies, Inc. and Lightning Metal Specialties and
related entities.
On February 1, 2001 we filed a current report on Form 8-K relating to: i) our
underwritten public offering of 27,000,000 of our ordinary shares, all of which
were sold by us, at a public offering price of $37.9375 per share and ii) our
announcement that we have entered into a non-binding memorandum of understanding
with Ericsson in which we were selected to manage the operations of Ericsson's
mobile phone business.
25shareholders.
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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 thereunto duly authorized.
FLEXTRONICS INTERNATIONAL LTD.
(Registrant)
Date: February 12,November 14, 2001 /s/ ROBERT R.B. DYKES
-----------------------------------------------------------------------------------
Robert R.B. Dykes
President, Systems Group and Chief
Financial Officer (principal financial
and accounting officer)
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.01 Report of Independent Accountants -- Arthur Andersen LLP.
3.01 Memorandum and New Articles of Association of the Registrant.