1 ================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549----------------FORM
10-Q/A (MARK10-Q(MARK ONE)
[X]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.FOR THE QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period endedPERIOD ENDED DECEMBER 31,20002001OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.FOR THE TRANSITION
REPORT PURSUANTPERIOD FROM ________ TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to_________COMMISSION FILE NUMBER: 0-23354
FLEXTRONICS INTERNATIONAL LTD.
(EXACT
(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.) ----------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER
IDENTIFICATION NO.)MICHAEL E. MARKS
CHIEF EXECUTIVE OFFICER
FLEXTRONICS INTERNATIONAL LTD.11 UBI
36 ROBINSON ROAD1 #07-01/02 MEIBAN INDUSTRIAL BUILDING#18-01
CITY HOUSE
SINGAPORE40872306887
(65)844-3366 (NAME,299-8888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)----------------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, 2001,05, 2002, there were444,494,302 Ordinary Shares,511,640,126 ordinary shares, S$0.01 par value, outstanding.================================================================================2TABLE OF CONTENTSFLEXTRONICS INTERNATIONAL LTD.
INDEX
PAGE ----PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets -— December 31,20002001 and March 31,2000......20013 Condensed Consolidated Statements of Operations -— Three and NineMonthsmonths Ended December 31,20002001 and December 31,1999...................................20004 Condensed Consolidated Statements of Cash Flows -— NineMonthsmonths Ended December 31,20002001 and December 31,1999.........................................20005 Notes to Condensed Consolidated Financial Statements..............................Statements6 Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations................................................................ 13 .Operations15 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K..................................................... 25 Signatures........................................................................ 27Risk23 Signatures 30 2
3ITEM 1. FINANCIAL STATEMENTS
FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS(In
(In thousands)(Unaudited)
DECEMBER 31, MARCH 31, 2000 2000 ----------- -----------ASSETS CURRENT ASSETS: Cash and cash equivalents ....................................... $ 398,374 $ 747,049 Accounts receivable, net ........................................ 1,634,053 1,057,949 Inventories, net ................................................ 1,727,826 1,142,594 Other current assets ............................................ 339,079 275,152 ----------- ----------- Total current assets .................................... 4,099,332 3,222,744 ----------- ----------- Property and equipment, net ....................................... 1,856,168 1,323,732 Goodwill and other intangibles, net ............................... 604,211 390,351 Other assets ...................................................... 139,300 198,116 ----------- ----------- Total assets ............................................ $ 6,699,011 $ 5,134,943 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank borrowings and current portion of long-term debt ........... $ 691,414 $ 487,773 Current portion of capital lease obligations .................... 26,551 24,037 Accounts payable ................................................ 1,507,582 1,227,142 Accrued expenses ................................................ 556,550 322,257 ----------- ----------- Total current liabilities ............................... 2,782,097 2,061,209 ----------- ----------- Long-term debt, net of current portion ............................ 884,839 593,830 Capital lease obligations, net of current portion ................. 45,496 51,437 Other liabilities ................................................. 84,339 58,133 SHAREHOLDERS' EQUITY: Ordinary shares, S$0.01 par value; authorized - 1,500,000,000; issued and outstanding - 439,386,316 and 410,538,799 as of December 31, 2000 and March 31, 2000, respectively ........... 2,695 2,516 Additional paid-in capital ...................................... 2,928,032 1,990,673 Retained earnings ............................................... 60,464 373,735 Accumulated other comprehensive income (loss) ................... (88,951) 8,494 Deferred compensation ........................................... -- (5,084) ----------- ----------- Total shareholders' equity .............................. 2,902,240 2,370,334 ----------- ----------- Total liabilities and shareholders' equity .............. $ 6,699,011 $ 5,134,943 =========== ===========
DECEMBER 31, MARCH 31, 2001 2001 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 448,960 $ 631,588 Accounts receivable, net 1,889,915 1,651,252 Inventories, net 1,400,573 1,787,055 Other current assets 723,094 386,152 Total current assets 4,462,542 4,456,047 Property, plant and equipment, net 2,061,876 1,828,441 Goodwill and other intangibles, net 1,371,886 983,384 Other assets 421,841 303,783 Total assets $ 8,318,145 $ 7,571,655 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Bank borrowings and current portion of long-term debt $ 574,212 $ 298,052 Current portion of capital lease obligations 17,614 27,602 Accounts payable 1,795,246 1,480,468 Other current liabilities 963,079 735,184 Total current liabilities 3,350,151 2,541,306 Long-term debt, net of current portion 858,039 879,525 Capital lease obligations, net of current portion 23,615 37,788 Other liabilities 109,556 82,675 SHAREHOLDERS’ EQUITY: Ordinary shares, S$0.01 par value; authorized — 1,500,000,000; issued and outstanding – 491,727,296 and 481,531,339 as of December 31, 2001 and March 31, 2001, respectively 2,927 2,871 Additional paid-in capital 4,390,541 4,266,908 Retained deficit (292,380 ) (132,892 ) Accumulated other comprehensive loss (124,304 ) (106,526 ) Total shareholders’ equity 3,976,784 4,030,361 Total liabilities and shareholders’ equity $ 8,318,145 $ 7,571,655 The accompanying notes are an integral part of these
condensed consolidated financial statements.3
4FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- ---------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------Net sales .................................... $3,239,293 $1,967,740 $ 8,995,265 $4,730,426 Cost of sales ................................ 2,964,034 1,797,643 8,263,848 4,293,919 Unusual charges .............................. 38,550 -- 146,539 -- ---------- ---------- ----------- ---------- Gross profit ............................ 236,709 170,097 584,878 436,507 Selling, general and administrative .......... 113,736 86,534 316,585 228,263 Goodwill and intangibles amortization ........ 15,141 10,735 37,016 29,276 Unusual charges .............................. 7,726 -- 441,236 3,523 Interest and other expense, net .............. 22,092 23,367 40,252 57,023 ---------- ---------- ----------- ---------- Income (loss) before income taxes ....... 78,014 49,461 (250,211) 118,422 Provision for income taxes ................... 10,232 1,662 2,642 12,881 ---------- ---------- ----------- ---------- Net income (loss) ....................... $ 67,782 $ 47,799 $ (252,853) $ 105,541 ========== ========== =========== ========== Earnings (loss) per share: Basic ...................................... $ 0.15 $ 0.13 $ (0.58) $ 0.31 ========== ========== =========== ========== Diluted .................................... $ 0.14 $ 0.12 $ (0.58) $ 0.29 ========== ========== =========== ========== Shares used in computing per share amounts: Basic ...................................... 441,016 357,116 433,448 342,676 ========== ========== =========== ========== Diluted .................................... 478,657 384,017 433,448 368,605 ========== ========== =========== ==========
Three months ended Nine months ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 Net sales $ 3,453,039 $ 3,239,293 $ 9,808,555 $ 8,995,265 Cost of sales 3,226,461 2,964,034 9,141,433 8,263,848 Unusual charges — 38,550 439,448 146,539 Gross profit 226,578 236,709 227,674 584,878 Selling, general and administrative 109,341 113,736 323,645 316,585 Goodwill and intangibles amortization 3,053 15,141 9,111 37,016 Unusual charges — 7,726 76,647 441,236 Interest and other expense, net 22,746 22,092 67,296 40,252 Income (loss) before income taxes 91,438 78,014 (249,025 ) (250,211 ) Provision for (benefit from) income taxes 9,449 10,232 (89,537 ) 2,642 Net income (loss) $ 81,989 $ 67,782 $ (159,488 ) $ (252,853 ) Earnings (loss) per share: Basic $ 0.17 $ 0.15 $ (0.33 ) $ (0.58 ) Diluted $ 0.16 $ 0.14 $ (0.33 ) $ (0.58 ) Shares used in computing per share amounts: Basic 485,808 441,016 480,455 433,448 Diluted 507,942 478,657 480,455 433,448 The accompanying notes are an integral part of these
condensed consolidated financial statements.4
5FLEXTRONICS INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In
(In thousands)
(Unaudited)
NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 ----------- ---------Net cash used in operating activities .......................... $ (461,817) $ (14,136) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment ................... (711,252) (374,679) Proceeds from sale of property, plant and equipment .......... 51,444 17,003 Proceeds from sale of investments and certain subsidiaries ... 42,766 35,871 Payments for business acquisitions, net of cash acquired ..... (112,852) (32,049) Other investments ............................................ (39,508) (25,450) ----------- --------- Net cash used in investing activities .......................... (769,402) (379,304) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of bank borrowings and long-term debt ............. (1,002,157) (131,508) Repayments of capital lease obligations ...................... (23,282) (25,480) Bank borrowings and proceeds from long-term debt ............. 1,386,948 311,387 Proceeds from stock issued under stock plans ................. 59,041 17,238 Net proceeds from sale of ordinary shares .................... 431,588 448,924 Proceeds from issuance of equity instrument .................. 100,000 -- Dividends paid to former shareholders of companies acquired .. (190) (1,641) ----------- --------- Net cash provided by financing activities ...................... 951,948 618,920 ----------- --------- Effect on cash from: Exchange rate changes ....................................... (36,698) (2,995) Adjustment to conform fiscal year of pooled entities ........ (32,706) (818) ----------- --------- Net increase (decrease) in cash and cash equivalents ........... (348,675) 221,667 Cash and cash equivalents at beginning of period ............... 747,049 318,165 ----------- --------- Cash and cash equivalents at end of period ..................... $ 398,374 $ 539,832 =========== =========
NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 Net cash provided by (used in) operating activities $ 605,367 $ (314,923 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net dispositions (285,071 ) (567,660 ) Purchases of OEM facilities and related assets (396,346 ) (239,042 ) Investments 6,754 3,258 Acquisitions of businesses, net of cash acquired (280,980 ) (112,852 ) Net cash used in investing activities (955,643 ) (916,296 ) CASH FLOWS FROM FINANCING ACTIVITIES: Bank borrowings and proceeds from long-term debt 1,039,153 1,386,948 Repayments of bank borrowings and long-term debt (786,459 ) (1,002,157 ) Repayments of capital lease obligations (27,685 ) (23,282 ) Proceeds from exercise of stock options and Employee Stock Purchase Plan 53,098 59,041 Net proceeds from sale of ordinary shares in public offering — 431,588 Proceeds from issuance of equity instrument — 100,000 Repurchase of equity instrument (112,000 ) — Dividends paid to former shareholders — (190 ) Net cash provided by financing activities 166,107 951,948 Effect on cash from: Exchange rate changes 1,541 (36,698 ) Adjustment to conform fiscal year of pooled entities — (32,706 ) Net decrease in cash and cash equivalents (182,628 ) (348,675 ) Cash and cash equivalents at beginning of period 631,588 747,049 Cash and cash equivalents at end of period $ 448,960 $ 398,374 The accompanying notes are an integral part of these
condensed consolidated financial statements.5
6FLEXTRONICS INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,20002001
(Unaudited)Note A
-— BASIS OF PRESENTATIONThe 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'sCompany’s audited consolidated financial statements as of and for the fiscal year ended March 31,20002001 contained in theCompany'sCompany’s annual report on Form10-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 nine month periods ended December 31,20002001 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. 67 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):2002.
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 =========== ===========Note B
-— INVENTORIESInventories, net of applicable reserves, consist of the following (in thousands):
DECEMBER 31, MARCH 31, 2000 2000 ---------- ----------Raw materials ......................... $1,225,758 $ 820,070 Work-in-process ....................... 356,703 207,474 Finished goods ........................ 145,365 115,050 ---------- ---------- $1,727,826 $1,142,594 ========== ==========
DECEMBER 31, MARCH 31, 2001 2001 Raw materials $ 1,027,154 $ 1,346,427 Work-in-process 255,810 301,875 Finished goods 117,609 138,753 $ 1,400,573 $ 1,787,055 Note C
-— UNUSUAL CHARGESFiscal 2002
The Company recognized unusual pre-tax charges of
$587.8approximately $516.1 million during thenine months endedsecond quarter of fiscal 2002, of which $500.3 million related to closures of several manufacturing facilities and $15.8 million was 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 6
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 related 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 December 31, 2001, 3,817 employees had been terminated, and another 7,351 employees had been notified that they are to be terminated upon completion of the various facility closures and consolidations. During the second and third quarters, the Company paid employee termination costs of approximately $19.4 million and $25.0 million, respectively, related to the fiscal 2002 restructuring activities. The remaining $79.6 million of employee termination costs was classified as accrued liabilities as of December 31, 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 assets will remain in service from the date of the decision to dispose of these assets to the anticipated disposal date, the assets are being depreciated over this expected period. For assets being held for use, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. Certain other assets will be held for disposal as these assets are no longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. The impaired long-lived assets consisted 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. Other exit costs included contractual obligations totaling $61.6 million, which were incurred directly as a result of the various exit plans. The contractual obligations consisted of facility lease terminations amounting to $27.2 million, equipment lease terminations amounting to $13.2 million and payments to suppliers and third parties to terminate contractual agreements amounting to $21.2 million. The Company expects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal 2007 and with respect to the other contractual obligations with suppliers and third parties through fiscal 2003. Other exit costs also included charges of $98.0 million relating to asset impairments resulting from customer contracts that were breached when they were terminated by the Company as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. The Company disposed of the impaired assets, primarily through scrapping and write-offs. The Company expects all disposals to be completed by the end of fiscal 2002. Also included in other exit costs were charges amounting to $8.0 million for the incremental costs for warranty work incurred by the Company for products sold prior to the commitment dates of the various exit plans. Other exit costs also included $8.2 million of facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or return the facilities to its landlords. The remaining $36.9 million, primarily included incremental amounts of legal and environmental costs, and various government obligations liable by the Company as a direct result of its facility closures. The Company paid approximately $2.2 million and $14.5 million of other exit costs in the second and third quarters related to the fiscal 2002 restructuring activities, respectively. Additionally, approximately $111.5 million of non-cash charges were utilized during the second quarter. The remaining balance includes approximately $65.0 million, classified as accrued liabilities as of December 31, 2001, which will be substantially paid out with one year of the commitment dates of the respective exit plans; and certain long-term contractual obligations of approximately $19.5 million, classified as other liabilities as of December 31, 2001.
7
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 Products78Internationalmergers.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 Lightningmergers. 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 JITmerger.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 thatentitlesentitled it to acquire22,000,00022.0 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. Inconnection with the aforementioned mergers,June 2001, the Companyrecorded 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; andapproximately $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 fiscal2001. The components of the merger-related unusual charges recorded2001 are as follows (in thousands):
FIRST SECOND THIRD QUARTER QUARTER QUARTER TOTAL NATURE OF CHARGES CHARGES CHARGES CHARGES CHARGES -------- -------- ------- --------- ---------Integration Costs: Severance................................. $ 62,487 $ 5,677 $ 3,606 $ 71,770 cash Long-lived asset impairment............... 46,646 14,373 16,469 77,488 non-cash Inventory write-downs..................... 11,863 -- 10,608 22,471 non-cash Other exit costs.......................... 12,338 5,650 9,095 27,083 cash/non-cash -------- -------- ------- --------- Total Integration Costs............... 133,334 25,700 39,778 198,812 Direct Transaction Costs: Professional fees......................... 50,851 7,247 6,250 64,348 cash Other costs............................... 22,382 15,448 248 38,078 cash/non-cash -------- --------- -------- --------- Total Direct Transaction Costs........ 73,233 22,695 6,498 102,426 -------- --------- -------- --------- Total Merger-Related Unusual Charges...... 206,567 48,395 46,276 301,238 -------- --------- -------- --------- Benefit from income taxes................... (30,000) (6,000) (6,500) (42,500) --------- ---------- --------- ---------- Total Merger-Related Unusual Charges, Net of Tax............................. $176,567 $ 42,395 $ 39,776 $ 258,738 ======== ========= ======== =========As a result of
TOTAL FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER 2001 NATURE OF CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Facility closure costs: Severance $ 62,487 $ 5,677 $ 3,606 $ 60,703 $ 132,473 cash Long-lived asset impairment 46,646 14,373 16,469 155,046 232,534 non-cash Exit costs 24,201 5,650 19,703 160,368 209,922 cash/non-cash Total facility closure costs 133,334 25,700 39,778 376,117 574,929 Direct transaction costs: Professional fees 50,851 7,247 6,250 — 64,348 cash Other costs 22,382 15,448 248 — 38,078 cash/non-cash Total 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 Unusual Charges 493,104 48,395 46,276 385,567 973,342 Income tax benefit (30,000 ) (6,000 ) (6,500 ) (110,000 ) (152,500 ) Net Unusual Charges $ 463,104 $ 42,395 $ 39,776 $ 275,567 $ 820,842 In 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'sManagement’s plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closureand the identification of manufacturing and administrative facilities foror consolidation into other facilities. Management currently anticipates that theintegration 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 theintegration costs and related activities incharges relating to facility closures have been classified as a component of Cost of Sales during the fiscal2001:
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:89year ended March 31, 2001.
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 ======== ======== ======== ======== =========Of the total pre-tax
integration charges, $71.8facility closure costs recorded in fiscal 2001, $132.5 millionrelatesrelated 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 identified5,80711,269 employees to be involuntarily terminated8
related to the various
mergers.mergers and facility closures. As of December 31,2000, approximately 2,0922001, 9,730 employeeshavehad been terminated, andapproximatelyanother3,7151,539 employeeshavehad been notified that they are to be terminated upon completion of the various facility closures andconsolidations related to the mergers.consolidations. During the nine months endedfiscalDecember 31, 2001, the Company paid employee termination costs of approximately$47.1$43.6 million. The remaining$24.7$28.1 million of employee termination costsiswas classified as accrued liabilities as of December 31,20002001 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 ofSales.Sales during fiscal 2001. Included in the long-lived asset impairment are charges of$74.6$229.1 million, whichrelaterelated to property, plant and equipment associated with the various manufacturing and administrative facility closures, which were written down to theirnet realizablefair valuebased on their estimated sales price.of $192.0 million as of March 31, 2000. Certainfacilitiesassets 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 assetswill beare being depreciated over this expected period. For assets being held for use, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. Certain other assets will be held for disposal, as these assets are no longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. The impaired long-lived assets consisted primarily of machinery and equipment of$53.5$153.0 million and building and improvements of$21.1$76.1 million. The long-lived asset impairment alsoincludesincluded 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 forlosses on inventory write-downs andother exit costs, whichresulted from the integration plans. This amount hashave been classified as a component of Cost of Sales. Other exit costs included contractual obligations totaling $85.4 million, which were incurred directly as a result of the various exit plans. These contractual obligations consisted of facility lease terminations amounting to $26.5 million, equipment lease terminations amounting to $31.4 million and payments to suppliers and other third parties to terminate contractual agreements amounting to $27.5 million. The Companyhas written offexpects to make payments associated with its contractual obligations with respect to facility and equipment leases through the end of fiscal 2006 and with respect to the other contractual obligations with suppliers and other third parties through fiscal 2002. Other exit costs also included charges of $77.0 million relating to asset impairments resulting from customer contracts that were breached when they were terminated by the Company as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. The Company disposed ofapproximately $11.9the impaired assets, primarily through scrapping and write-offs, by the end of fiscal 2001. Also included in other exit costs were charges amounting to $16.1 million for the incremental costs for warranty work incurred by us for products sold prior to the commitment dates of the various exit plans. Other exit costs also included $11.6 million ofinventoryfacility refurbishment and abandonment costs related to certain building repair work necessary to prepare thefirst quarter integration activities and approximately $10.6 million was written off and disposed of relatedexited facilities for sale or return the facilities tothe third quarter integration activities.its landlords. The$27.1remaining $19.8 million of other exit costsrelaterecorded were primarilyto items such as lease termination costs,associated with incremental amounts ofuncollectible accounts receivable, warranty-related accruals,legal andother exitenvironmental costs, incurred directly as a result of the various exitplans. Theplans and facility closures. During the first nine months of fiscal 2002, the Company paidapproximately $1.6 million, $4.2 million, and $2.6 million ofother exit costsduring the first, second and third quartersoffiscal 2001.approximately $68.0 million. Additionally, approximately$3.1 million, $0.5 million and $3.5$3.9 million of other exit costs werewritten offnon-cash charges utilized during the firstsecond and third quarters, respectively.quarter of fiscal 2002. The remaining$11.6$23.4 millionisof other exit costs was classifiedinas accrued liabilities as of December 31,20002001 and is expected to besubstantiallypaid outbywithin one year of theendcommitment dates offiscal 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 millionwaswere mainly comprised of accelerated debt prepayment expense, accelerated executive stock compensation and benefit-relatedexpenses and other merger-related costs. The Company paid approximately $55.5 million, $5.6 million and $5.3expenses. Approximately $28.2 million of the direct transaction costs were non-cash charges utilized during fiscal 2001. During the first nine months of fiscal 2002, the Company paid approximately $2.6 million of direct transaction costs. There is a remaining balance of $0.7 million which was classified in accrued liabilities as of December 31, 2001 and is expected to be substantially paid out in the subsequent quarter.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
9
and utilized during the first, second and third quarters of fiscal
2001, respectively. Additionally, approximately $14.7 million, $13.4 million and $0.1 million of the direct transaction costs were written off during the first, second and third quarters, respectively. The remaining $7.9 million is classified in accrued liabilities as of December 31, 2000 and is expected to be substantially paid out by the end of fiscal 2001. 9102002.
LONG-LIVED ASSET OTHER EXIT SEVERANCE IMPAIRMENT COSTS TOTAL Balance at March 31, 2001 $ 71,734 $ — $ 95,343 $ 167,077 Activities during the quarter: 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: 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 Activities during the quarter: Cash charges (29,021 ) — (32,069 ) (61,090 ) Non-cash charges — — — — Balance at December 31, 2001 $ 107,667 $ — $ 107,929 $ 215,596 Note D
-— EARNINGS PER SHAREBasic
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, or at the resolution of agreed upon contingencies; 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, 2001 2000 2001 2000 Basic earnings (loss) per share: Net income (loss) $ 81,989 $ 67,782 $ (159,488 ) $ (252,853 ) Shares used in computation: Weighted-average ordinary shares outstanding 485,808 441,016 480,455 433,448 Basic earnings (loss) per share $ 0.17 $ 0.15 $ (0.33 ) $ (0.58 ) Diluted earnings (loss) per share: Net income (loss) $ 81,989 $ 67,782 $ (159,488 ) $ (252,853 ) Shares used in computation: Weighted-average ordinary shares outstanding 485,808 441,016 480,455 433,448 Shares applicable to exercise of dilutive options(1), (2) 19,380 37,641 — — Shares applicable to holdback consideration (2), (3) 2,754 — — — Shares applicable to diluted earnings 507,942 478,657 480,455 433,448 Diluted earnings (loss) per share $ 0.16 $ 0.14 $ (0.33 ) $ (0.58 )
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER(1) Stock options of the Company calculated based on the treasury stock method using average market price for the period, if dilutive. Options to purchase 13,731,826 and 3,543,796 shares outstanding during the three months ended December 31, DECEMBER 31, DECEMBER 31, DECEMBER2001 and December 31, 20001999 2000 1999 ------------ ------------ ------------ ------------Basicwere excluded from the computation of diluted earnings(loss)pershare: Net income (loss) ......................................... $ 67,782 $ 47,799 $(252,853) $105,541 -------- -------- --------- -------- Shares used in computation: Weighted-averageshare because the exercise price of these options were greater than the average market price of the ordinary sharesoutstanding(1) ........... 441,016 357,116 433,448 342,676 ======== ======== ========= ======== Basicduring the period.(2) The ordinary share equivalents from stock options and other equity 10
instruments were anti-dilutive for the nine months ended December 31, 2001 and the nine months ended December 31, 2000, and therefore not assumed to be converted for diluted earnings (loss)per shares computation.(3) The ordinary share equivalents from holdback consideration constitute shares to be issued to the former shareholders of companies acquired by Flextronics at the resolution of agreed upon contingencies. Holdback shares are included in the computation of diluted earnings per share ........................... $ 0.15 $ 0.13 $ (0.58) $ 0.31 ======== ======== ========= ======== Diluted earnings (loss) per share: Net income (loss) ......................................... $ 67,782 $ 47,799 $(252,853) $105,541 Plus income impactduring the three months ended December 31, 2001, based on conditions existing at the end ofassumed 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) $105,974 Shares used in computation: Weighted-average ordinarythe period, that indicated that such sharesoutstanding .............. 441,016 357,116 433,448 342,676 Shares applicable to exercise of dilutive options(2),(3) .. 28,071 26,009 -- 23,124 Shares applicable to deferred stock compensation .......... -- 892 -- 860 Shares applicable to other equity instruments(3) .......... 9,570 -- -- -- Shares applicable to convertible subordinated notes ....... -- -- -- 1,945 -------- -------- --------- -------- Shares applicable to diluted earnings ................... 478,657 384,017 433,448 368,605 ======== ======== ========= ======== Diluted earnings (loss) per share ......................... $ 0.14 $ 0.12 $ (0.58) $ 0.29 ======== ======== ========= ========would be issuable if the contingency period had ended.(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 78,828 shares outstanding during the three months ended December 31, 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 was greater than the average market price of the Company's ordinary shares during those periods. (3) The ordinary share equivalents from stock options and other equity instruments were antidilutive for the nine months ended December 31, 2000, and therefore not assumed to be converted for diluted earnings per share computation.Note E
-— COMPREHENSIVE INCOMEThe following table summarizes the components of comprehensive income (loss) (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------Net income (loss) ....................................... $ 67,782 $ 47,799 $(252,853) $ 105,541 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments .............. 7,532 (12,061) (38,961) (16,479) Unrealized holding gain (loss) on available-for-sale securities .......................................... (31,069) 75,037 (53,170) 84,645 -------- --------- --------- --------- Comprehensive income (loss) ............................. $ 44,245 $ 110,775 $(344,984) $ 173,707 ======== ========= ========= =========1011
Three months ended Nine months ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 Net income (loss) $ 81,989 $ 67,782 $ (159,488 ) $ (252,853 ) Other comprehensive income (loss): Foreign currency translation adjustments, net of tax (10,975 ) 7,532 (17,901 ) (38,964 ) Unrealized holding gain (loss) on investments and derivatives, net of tax (3,402 ) (31,069 ) 2,112 (53,170 ) Comprehensive income (loss) $ 67,612 $ 44,245 $ (175,277 ) $ (344,987 ) Note F
-— SEGMENT REPORTINGInformation about segments was as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------Net Sales: Asia ............................. $ 710,635 $ 468,023 $ 1,875,362 $ 1,118,898 Americas ......................... 1,526,112 794,448 4,212,587 1,998,286 Western Europe ................... 611,071 408,177 1,683,597 969,881 Central Europe ................... 495,852 322,880 1,562,862 698,111 Intercompany eliminations ........ (104,377) (25,788) (339,143) (54,750) ----------- ----------- ----------- ----------- $ 3,239,293 $ 1,967,740 $ 8,995,265 $ 4,730,426 =========== =========== =========== =========== Income (Loss) before Income Tax: Asia ............................. $ 39,584 $ 31,766 $ 91,099 $ 72,504 Americas ......................... 69,505 (7,256) 140,531 (3,326) Western Europe ................... 6,038 13,753 26,599 27,048 Central Europe ................... 8,865 13,644 28,396 24,253 Intercompany eliminations, corporate allocations and unusual charges ................ (45,978) (2,446) (536,836) (2,057) ----------- ----------- ----------- ----------- $ 78,014 $ 49,461 $ (250,211) $ 118,422 =========== =========== =========== ===========
AS OF AS OF DECEMBER 31, MARCH 31, 2000 2000 ------------ ----------Long-lived Assets: Asia..................................................... $ 499,395 $ 449,824 Americas................................................. 730,205 712,215 Western Europe........................................... 311,788 275,935 Central Europe........................................... 314,780 171,165 ---------- ---------- $1,856,168 $1,609,139 ========== ==========
Three months ended Nine months ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 Net Sales: Asia $ 953,447 $ 710,635 $ 2,460,461 $ 1,875,362 Americas 1,047,351 1,526,112 3,142,734 4,212,587 Western Europe 891,148 611,071 2,381,410 1,683,597 Central Europe 794,559 495,852 2,260,928 1,562,862 Intercompany eliminations (233,466 ) (104,377 ) (436,978 ) (339,143 ) $ 3,453,039 $ 3,239,293 $ 9,808,555 $ 8,995,265 Income (Loss) before Income Tax: Asia $ 44,142 $ 15,737 $ 58,305 $ 54,044 Americas 36,258 51,585 (138,601 ) (113,787 ) Western Europe 8,074 6,038 (139,861 ) 26,599 Central Europe 15,918 4,356 (18,921 ) 18,531 Intercompany eliminations, corporate allocations and Motorola one-time non-cash charge (see Note C) (12,954 ) 298 (9,947 ) (235,598 ) $ 91,438 $ 78,014 $ (249,025 ) $ (250,211 )
As of As of December 31, March 31, 2001 2001 Long-lived Assets: Asia $ 585,876 $ 503,094 Americas 738,247 636,399 Western Europe 386,800 371,064 Central Europe 350,953 317,884 $ 2,061,876 $ 1,828,441 For purposes of the preceding tables,
"Asia"“Asia” includes China, India, Malaysia, Singapore, Thailand and Taiwan,"Americas"“Americas” includesthe U.S.,Brazil, Mexico andBrazil, "Western Europe"the United States, “Western Europe” includes Denmark, Finland, France, Germany, Netherlands, Norway, Poland, Spain, Sweden, Switzerland and the United Kingdom, and"Central Europe"“Central Europe” includes Austria, the Czech Republic, Hungary, Ireland, Israel, Italy and Scotland.11
Geographic revenue transfers are based on selling prices to unaffiliated companies, less discounts.
Note G
-— SHAREHOLDERS’ EQUITYOFFERING 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 1112 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 thatentitlesentitled it to acquire22,000,00022.0 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 June 2001, the Company entered into an agreement with Motorola under which it repurchased this equity instrument for $112.0 million. The fair value of the equity instrument on the date it was repurchased exceeded the amount paid to repurchase the equity instrument. Accordingly, the Company accounted for the repurchase of the equity instrument as a reduction to shareholders’ equity in the accompanying condensed consolidated financial statements.
Note H — BUSINESS COMBINATIONS AND PURCHASES OF ASSETS
In April 2001, the Company entered into a definitive agreement with Ericsson Telecom AB (“Ericsson”) to provide a substantial portion of Ericsson’s mobile phone requirements. The Company assumed responsibility for product assembly, new product prototyping, supply chain management and logistics management in which we process customer orders from Ericsson and configure and ship products to Ericsson’s customers. In connection with this relationship, the Company employed the existing workforce for certain operations, and purchased from Ericsson certain inventory, equipment and other assets, and assumed certain accounts payable and accrued expenses at their net book value of approximately $363.9 million.
In July 2001, the Company acquired Alcatel’s manufacturing facility and related assets located in Laval, France. The acquisition was accounted for as a purchase of assets. In connection with this acquisition, the Company entered into a long-term supply agreement with Alcatel to provide printed circuit board assembly, final systems assembly and various engineering support services. The Company purchased from Alcatel certain inventory, equipment and other assets, and assumed certain accounts payable and accrued expenses at their net book value of approximately $32.5 million.
In October 2001, the Company announced a manufacturing agreement with Xerox Corporation (“Xerox”). The Company acquired Xerox’s manufacturing operations in Aguascalientes, Mexico; Penang, Malaysia; Resende, Brazil; Toronto, Canada and Venray; Netherlands. In connection with the acquisition, the Company agreed to pay cash of approximately $215.9 million, of which approximately $83.0 million will be paid in the fourth quarter of fiscal 2002. Additionally, the Company entered into a five-year contract for the manufacture of certain Xerox office equipment and components.
In December 2001, the Company completed its acquisition of 91% of The Orbiant Group (“Orbiant”) from Telia, Sweden’s largest telecommunications network provider. Orbiant is a provider of services focusing on the design, operation, maintenance and management of telecommunications networks. The cash purchase price, net of cash acquired, amounted to approximately $104.5 million, of which approximately $22.0 million will be paid in the fourth quarter of fiscal 2002.
During the
termfirst nine months of fiscal 2002, the Company completed certain other business acquisitions that were immaterial to the Company’s results from operations and financial position. The aggregate cash purchase price for these acquisitions, net of cash acquired, amounted to approximately $65.6 million. Additionally, approximately 7.3 million ordinary shares were issued for the acquisitions, which equated to approximately $163.4 million of purchase price. The fair value of thestrategic alliance, if Motorola meets targetedassets acquired and the liabilities assumed from these acquisitions was immaterial.The acquisitions described above have been accounted for by the purchase
levels, no additional payments may be required by Motorola to acquire 22,000,000 Flextronics ordinary shares. However, there may be additional non-cash chargesmethod ofup to $300.0 million overaccounting, and accordingly thetermresults of thestrategic alliance.acquired businesses were included in the Company’s consolidated statements of operations from the acquisition dates forward. Comparative pro forma information has not been presented, as the results of the acquired operations were not material to the12
Company’s consolidated financials statements on either an individual or an aggregate basis.
Note
J -I — NEW ACCOUNTING STANDARDSIn
June 1998,July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.133, "Accounting for Derivative Instruments141 andHedging Activities," ("No. 142, “Business Combinations” and “Goodwill and Other Intangible Assets”. SFAS No.133") which establishes accounting141 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 andreporting standards for derivative instruments, including certain derivative instruments imbedded in other contractsamortized over their estimated useful lives; in-process research andfor hedging activities. It requires that companies recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.development will continue to be written off immediately.The Company
is required to adoptadopted SFASNo. 133142 in the first quarter of fiscal 2002 andanticipateswill no longer amortize goodwill, thereby eliminating annual goodwill amortization of approximately $124.2 million, based on anticipated amortization that would have been incurred under the prior accounting standard for fiscal 2002. At December 31, 2001, unamortized goodwill approximated $1.3 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 flows. 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. However, no assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment.Goodwill information for each reportable segment is as follows (in thousands):
As of Goodwill As of April 1, 2001 Acquired December 31, 2001 Segments: Asia $ 186,515 $ 34,190 $ 220,705 Americas 300,041 239,446 539,487 Western Europe 346,873 85,900 432,773 Central Europe 123,862 26,344 150,206 $ 957,291 $ 385,880 $ 1,343,171 During the first nine months of fiscal 2002, $385.9 million of goodwill resulted from various business acquisitions as further described above in Note H, “Business Combinations and Purchases of Assets,” as well as contingent purchase price adjustments from historical acquisitions.
Net income (loss) for the three and nine months ended December 31, 2000 adjusted to exclude goodwill amortization expense are as follows (in thousands):
Three months ended Nine months ended December 31, December 31, 2000 2000 Net income (loss) as reported $ 67,782 $ (252,853 ) Add back: Goodwill amortization expense 13,612 31,700 Adjusted net income (loss) $ 81,394 $ (221,153 ) The pro forma effects of the adoption on earnings (loss) per share of the Company during the three and nine months ended December 31, 2000 are as follows:
13
Three months ended Nine months ended December 31, December 31, 2000 2000 Basic earnings (loss) per share: As reported $ 0.15 $ (0.58 ) Add back: Goodwill amortization expense 0.03 0.07 Adjusted $ 0.18 $ (0.51 ) Diluted earnings (loss) per share: As reported $ 0.14 $ (0.58 ) Add back: Goodwill amortization expense 0.03 0.07 Adjusted $ 0.17 $ (0.51 ) 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 nine months of fiscal 2002, there were $10.5 million of additions to intangible assets, primarily related to acquired developed technologies. Intangible assets amortization expense for the three and nine months ended December 31, 2001 was approximately $3.1 million and $9.1 million, respectively. The components of intangible assets are as follows (in thousands):
December 31, 2001 March 31, 2001 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Intangibles: Contractual Agreements $ 20,131 $ (5,824 ) $ 14,307 $ 17,304 $ (1,714 ) $ 15,590 Patents and Trademarks 2,112 (1,618 ) 494 7,625 (5,514 ) 2,111 Developed Technologies 13,656 (6,186 ) 7,470 1,275 (850 ) 425 All Other 18,415 (11,971 ) 6,444 17,629 (9,662 ) 7,967 Total $ 54,314 $ (25,599 ) $ 28,715 $ 43,833 $ (17,740 ) $ 26,093 The corresponding amortization expenses of the intangible assets listed above were as follows for the three and nine months ended December 31, 2001 and 2000 (in thousands):
Three months ended Nine months ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 Intangibles: Contractual Agreements $ 1,568 $ 363 $ 4,110 $ 713 Patents and Trademarks 30 106 90 319 Developed Technologies 268 266 804 802 All Other 1,187 794 4,107 3,482 Total Amortization Expense $ 3,053 $ 1,529 $ 9,111 $ 5,316 Expected future estimated annual amortization expense is as follows (in thousands):
14
Fiscal Years: 2002 $ 3,222 * 2003 9,919 2004 9,057 2005 3,136 2006 734 Thereafter 2,647 Total Amortization Expense $ 28,715
* Represents remaining three-month period ending March 31, 2002. On April 1, 2001, the Company adopted SFAS No. 133,
will“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 nothave a material impact on its consolidated financial statements. In December 1999,designated as hedging instruments under SFAS 133, changes in fair values are recognized in earnings in theSecurities 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 principlescurrent period. Such instruments are typically forward contracts used torevenue recognition issues in financial statements.hedge foreign currency balance sheet exposures.The Company
will adopt SAB 101 as requiredis exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales and assets and liabilities denominated in non-functional currencies. The Company has established currency risk management programs to protect against reductions in value and volatility of future cash flows caused by changes in foreign currency exchange rates. The Company enters into short-term foreign currency forward contracts 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 December 31, 2001, the fair value of the equity derivative instruments resulted in the
fourth quarterrecording offiscal 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 valuean asset of approximately$89.6$4.1 millionforwith theacquired net assetscorresponding credit to OCI. All ofLi Xin. The acquisition was accounted for as a purchase.this amount is expected to be recognized in earnings over the next three months.Note J — SUBSEQUENT EVENTS
On
February 6, 2001,January 8, 2002, the Company completed an equity offering of27,000,00020.0 million of its ordinary shares at$37.9375a price of $25.96 per share with net proceeds of approximately$990.8$503.8 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 tofund anticipated expenses relatedpay down its revolving debt, toits strategic relationship with Ericsson (as further discussed below), tofundthefurther expansion of its business, including additional working capital and capital expenditures, and forothergeneral corporate purposes.In January 2001, the Company entered into a non-binding memorandum of understanding with Ericsson in which the Company is to provide a substantial portion of Ericsson's mobile phone requirements and will be assuming responsibility for product assembly, new product prototyping, supply chain management and logistics management. In this new relationship, the Company will use facilities currently owned by Ericsson for its mobile phone operations in Brazil, Great Britain, Malaysia and Sweden, and will also manufacture at the Company's southern China and Malaysia facilities.The Companywillmay alsoprovide PCBs and plastics, primarily from its Asian operations. In connection with this relationship, the Company will purchase from Ericsson certain inventory, equipment and other assets, and may assume certain accounts payable and accrued expenses at theiruse netbook value. The net asset purchase price has not been fixed, but is expected to be between $200.0 million and $800.0 million. The Company anticipates that operations under this arrangement will begin on April 1, 2001. 1213proceeds for strategic acquisitions or investments.ITEM 2.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis 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"“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“Item 2.Management'sManagement’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 Transactions15
ACQUISITIONS
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 completedseveral significant business combinations since the endover 30 acquisitions offiscal 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. andJIT Holdings Ltd. (JIT). Each of theseThe DII Group, Inc.These acquisitions
waswere accounted for asapooling 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 we 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 StatesAdditionally,we have completed other immaterial pooling of interests transactions,in the first nine months of fiscal 2001. Priorprior period statementshavehad not beenrestated 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 purchasemethod 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.1314RECENT STRATEGIC TRANSACTIONS
In
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 DenmarkWe 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, we 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 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 any of the anticipated benefits of 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 capital 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 JanuaryApril 2001, we entered into anon-binding memorandum of understandingdefinitive agreement with Ericssonin 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. Under this memorandum of understanding, we areTelecom AB (“Ericsson”) to provide a substantial portion ofEricsson'sEricsson’s mobile phone requirements. Wewill assumeassumed responsibility for product assembly, new product prototyping, supply chain management and logistics management in which wewillprocess customer orders from Ericsson and configure and ship products toEricsson'sEricsson’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, wewill employemployed the existing workforce forthesecertain operations, andwill purchasepurchased from Ericsson certain inventory, equipment and other assets, andmay assumeassumed certain accounts payable and accrued expenses at their net bookvalue.value of approximately $363.9 million.In July 2001, we acquired Alcatel’s manufacturing facility and related assets located in Laval, France. The acquisition was accounted for as a purchase of assets. In connection with this acquisition, we entered into a long-term supply agreement with Alcatel to provide printed circuit board assembly, final systems assembly and various engineering support services. We 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 expectedbook value of approximately $32.5 million.In October 2001, we announced a manufacturing agreement with Xerox Corporation (“Xerox”). We have acquired Xerox’s manufacturing operations in Aguascalientes, Mexico; Penang, Malaysia; Resende, Brazil; Toronto, Canada; and Venray, Netherlands. In connection with the acquisition, we agreed to pay cash of approximately $215.9 million, of which approximately $83.0 million will be
between $200.0 million and $800.0 million. We expect to receive substantial revenue from this relationship beginningpaid in thefirstfourth quarter of fiscal 2002.See "Certain Factors Affecting Operating Results - Our Strategic Relationship with Ericsson Creates Risks".Additionally, we entered into a five-year contract for the manufacture of certain Xerox office equipment and components.RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statementstatements of operations data expressed as a percentage of net sales.1415
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------Net sales............................ 100.0% 100.0% 100.0% 100.0% Cost of sales........................ 91.5 91.4 91.9 90.8 Unusual charges...................... 1.2 -- 1.6 -- ----- ----- ----- ----- Gross margin.................... 7.3 8.6 6.5 9.2 Selling, general and administrative.. 3.5 4.4 3.5 4.8 Goodwill and intangibles amortization 0.5 0.5 0.4 0.6 Unusual charges...................... 0.2 -- 5.0 0.1 Interest and other expense, net...... 0.7 1.2 0.4 1.2 ----- ----- ----- ----- Income (loss) before income taxes 2.4 2.5 (2.8) 2.5 Provision for income taxes........... 0.3 0.1 -- 0.3 ----- ----- ----- ----- Net income (loss)............... 2.1% 2.4% (2.8)% 2.2% ===== ===== ===== =====
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 93.4 91.5 93.2 91.9 Unusual charges — 1.2 4.5 1.6 Gross margin 6.6 7.3 2.3 6.5 Selling, general and administrative 3.2 3.5 3.3 3.5 Goodwill and intangibles amortization 0.1 0.5 0.1 0.4 Unusual charges — 0.2 0.8 4.9 Interest and other expense, net 0.7 0.7 0.6 0.5 Income (loss) before income taxes 2.6 2.4 (2.5 ) (2.8 ) Provision for (benefit from) income taxes 0.2 0.3 (0.9 ) — Net income (loss) 2.4 % 2.1 % (1.6 )% (2.8 )% 16
Net Sales
We derive our net sales from
our wide rangethe assembly ofservice offerings, including product design, semiconductor design,complex printed circuitboardboards, or PCBs, and complete systems and products, fabrication and assembly of plastic and metal enclosures, and fabricationenclosures, materialof PCBs and backplanes and assembly of photonics components. Throughout the production process, we offer design and technology services; logistics services, such as materials procurement, inventory management, vendor management, packaging, and distribution; and automation of key components of the supply chainmanagement, plastic injection molding, final system assembly and test, packaging, logistics and distribution.through advanced information technologies. We offer other after-market services such as network installation.Net sales for the third quarter of fiscal
20012002 increased65%6.6% to$3.2$3.5 billion from$2.0$3.2 billion for the third quarter of fiscal2000.2001. Net sales for the first nine months of fiscal20012002 increased90%9.0% to$9.0$9.8 billion from$4.7$9.0 billion for the same period in fiscal2000.2001. The increase in net sales was primarily the result ofexpanding sales to our existing customer basethe incremental revenues associated with the purchase of several manufacturing facilities during the first nine months of fiscal 2002, and to a lesser extent, the further expansion of sales to our existing customers as well as sales to new customers. Net sales in the third quarter significantly benefited from sales of consumer products and handheld devices, which typically exhibit particular strength at the end of the calendar year. See “Certain Factors Effecting Operating Results — Our Operating Results Vary Significantly”. The continued 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, slowed the rate of growth in our net sales.Our ten largest customers in the first nine months of fiscal
20012002 and20002001 accounted for approximately56%64% and59%56% of net sales,respectively.respectively, with Ericsson accounting for approximately 18% in the first nine months of fiscal 2002. Our largest customers during the first nine months of fiscal 2001 were Cisco Systems, Inc. and Ericsson, accounting for approximately 11% and 10%of net sales,, respectively. No othercustomerscustomer accounted for more than 10% of net salesin the nine months ended December 31, 2000.during these periods. See"Certain“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 DeclineSignificantly"Significantly” and"Certain“Certain Factors Affecting Operating Results-— We Depend on theTelecommunications, NetworkingHandheld Electronics Devices, Information Technologies Infrastructure, Communications Infrastructure andElectronicsComputer and Office Automation Industries which Continually Produce Technologically Advanced Products with Short Life Cycles; Our Inability to Continually ManufacturesuchSuch Products on a Cost-Effective BasiswouldCould Harmour Business"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 third quarter of fiscal20012002 decreasedto 7.3%by $10.1 million from8.6% for$236.7 million in the third quarter of fiscal2000. Gross margin decreased to 6.5% for2001. Excluding thefirst 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 million in the third quarter and $146.5 million for the fiscal year to date, which were associated with the integration costs primarily related to the various business combinations, as more fully described below in "Unusual Charges". Excluding theseunusual charges, grossmarginsmargin was 6.6% and 6.8% for the third quarter andfirstnine monthsof fiscalended December 31, 2001,wererespectively, compared to 8.5% and 8.1%, respectively. Grossfor the corresponding periods in fiscal 2001. Our gross margindecreased due towas affected by several factors,includingprimarily,(i) under absorbed fixed costsassociated with expandingcaused by the underutilization of capacity, resulting from the economic downturn experienced by the electronics industry, most significantly experienced by ourfacilities;printed circuit board fabrication unit; (ii) changes in product mix to higher volume printed circuit board assembly projects and final systems assembly projects, which typically have a lower gross margin; and to a lesser extent, (iii) 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 volumeproduction; and (iii) changes in product mix to higher volume projects and final systems assembly projects, which typically have a lower gross margin.production. See"Certain“Certain Factors Affecting Operating Results-— If We Do Not Manage Effectivelythe Expansion ofChanges in Our Operations, Our Business May be Harmed,"” and"-“- We may be Adversely Affected by Shortages of Required ElectronicComponents"Components”.1516Increased 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, or OEM,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
17
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 thenine months endedsecond quarter of fiscal 2002, of which $500.3 million related to closures of several manufacturing facilities and $15.8 million was 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 related 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 December 31, 2001, 3,817 employees had been terminated, and another 7,351 employees had been notified that they are to be terminated upon completion of the various facility closures and consolidations. During the second and third quarters, we paid employee termination costs of approximately $19.4 million and $25.0 million, respectively, related to the fiscal 2002 restructuring activities. The remaining $79.6 million of employee termination costs was classified as accrued liabilities as of December 31, 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 assets will remain in service from the date of the decision to dispose of these assets to the anticipated disposal date, the assets are being depreciated over this expected period. For assets being held for use, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. Certain other assets will be held for disposal as these assets are no longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. The impaired long-lived assets consisted 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
18
for other exit costs. Approximately $182.3 million of this amount has been classified as a component of Cost of Sales. Other exit costs included contractual obligations totaling $61.6 million, which were incurred directly as a result of the various exit plans. The contractual obligations consisted of facility lease terminations amounting to $27.2 million, equipment lease terminations amounting to $13.2 million and payments to suppliers and third parties to terminate contractual agreements amounting to $21.2 million. We expect to make payments associated with our contractual obligations with respect to facility and equipment leases through the end of fiscal 2007 and with respect to the other contractual obligations with suppliers and third parties through fiscal 2003. Other exit costs also included charges of $98.0 million relating to asset impairments resulting from customer contracts that were breached when they were terminated by us as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. We disposed of the impaired assets, primarily through scrapping and write-offs. We expect all disposals to be completed by the end of fiscal 2002. Also included in other exit costs were charges amounting to $8.0 million for the incremental costs for warranty work incurred by us for products sold prior to the commitment dates of the various exit plans. Other exit costs also included $8.2 million of facility refurbishment and abandonment costs related to certain building repair work necessary to prepare the exited facilities for sale or return the facilities to its landlords. The remaining $36.9 million, primarily included incremental amounts of legal and environmental costs, and various government obligations liable by us as a direct result of our facility closures. We paid approximately $2.2 million and $14.5 million of other exit costs in the second and third quarters related the fiscal 2002 restructuring activities, respectively. Additionally, approximately $111.5 million of non-cash charges were utilized during the second quarter. The remaining balance includes approximately $65.0 million, classified as accrued liabilities as of December 31, 2001, which will be substantially paid out with one year of the commitment dates of the respective exit plans; and certain long-term contractual obligations of approximately $19.5 million, classified as other liabilities as of December 31, 2001.
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 combined with approximately $206.6 million of expenses resulting from
theThe DII Group, Inc. and Palo Alto Products Internationalmergers.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 Lightningmergers. 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 JITmerger.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 thatentitlesentitled it to acquire22,000,000 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. InconnectionJune 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 chargesof $301.3 million, which included approximately $198.8 million of integration expensesrelated to the Motorola equity instrument is not specific to a particular segment, andapproximately $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 fiscal2001. The components of the merger-related unusual charges recorded2001 are as follows (in thousands):
FIRST SECOND THIRD QUARTER QUARTER QUARTER TOTAL NATURE OF CHARGES CHARGES CHARGES CHARGES CHARGES -------- -------- ------- --------- ---------Integration Costs: Severance................................. $ 62,487 $ 5,677 $ 3,606 $ 71,770 cash Long-lived asset impairment............... 46,646 14,373 16,469 77,488 non-cash Inventory write-downs..................... 11,863 -- 10,608 22,471 non-cash Other exit costs.......................... 12,338 5,650 9,095 27,083 cash/non-cash -------- -------- ------- --------- Total Integration Costs............... 133,334 25,700 39,778 198,812 Direct Transaction Costs: Professional fees......................... 50,851 7,247 6,250 64,348 cash Other costs............................... 22,382 15,448 248 38,078 cash/non-cash -------- -------- ------- --------- Total Direct Transaction Costs........ 73,233 22,695 6,498 102,426 -------- -------- ------- --------- Total Merger-Related Unusual Charges...... 206,567 48,395 46,276 301,238 -------- -------- ------- --------- Benefit from income taxes................... (30,000) (6,000) (6,500) (42,500) -------- -------- ------- --------- Total Merger-Related Unusual Charges, Net of Tax............................ $176,567 $ 42,395 $ 39,776 $ 258,738 ======== ======== ======= =========As a result of19
TOTAL FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER 2001 NATURE OF CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Facility closure costs: Severance $ 62,487 $ 5,677 $ 3,606 $ 60,703 $ 132,473 cash Long-lived asset impairment 46,646 14,373 16,469 155,046 232,534 non-cash Exit costs 24,201 5,650 19,703 160,368 209,922 cash/non-cash Total facility closure costs 133,334 25,700 39,778 376,117 574,929 Direct transaction costs: Professional fees 50,851 7,247 6,250 — 64,348 cash Other costs 22,382 15,448 248 — 38,078 cash/non-cash Total 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 Unusual Charges 493,104 48,395 46,276 385,567 973,342 Income tax benefit (30,000 ) (6,000 ) (6,500 ) (110,000 ) (152,500 ) Net Unusual Charges $ 463,104 $ 42,395 $ 39,776 $ 275,567 $ 820,842 In 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'sManagement’s plan to exit an activity included the identification of duplicate manufacturing and administrative facilities for closureand the identification of manufacturing and administrative facilities foror consolidation into other facilities. Management currently anticipates that theintegration 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 theintegration costs and related activities incharges relating to facility closures have been classified as a component of Cost of Sales during the fiscal2001:
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:1617year ended March 31, 2001.
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 ======== ======== ======== ======== =========Of the total pre-tax
integration charges, $71.8facility closure costs recorded in fiscal 2001, $132.5 millionrelatesrelated 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 identified5,80711,269 employees to be involuntarily terminated related to the variousmergers.mergers and facility closures. As of December 31,2000, approximately 2,0922001, 9,730 employeeshavehad been terminated, andapproximatelyanother3,7151,539 employeeshavehad been notified that they are to be terminated upon completion of the various facility closures andconsolidations related to the mergers.consolidations. During the nine months endedfiscalDecember 31, 2001, we paid employee termination costs of approximately$47.1 million, respectively.$43.6 million. The remaining$24.7$28.1 million of employee termination costsiswas classified as accrued liabilities as of December 31,20002001 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 ofSales.Sales during fiscal 2001. Included in the long-lived asset impairment are charges of$74.6$229.1 million, whichrelaterelated to property, plant and equipment associated with the various manufacturing and administrative facility closures, which were written down to theirnet realizablefair valuebased on their estimated sales price.of $192.0 million as of March 31, 2000. Certainfacilitiesassets 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 assetswill beare being depreciated over this expected period. For assets being held for use, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. Certain other assets will be held for disposal, as these assets are no longer required in operations. Assets held for disposal are no longer being depreciated. For assets being held for disposal, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value less cost to sell. The impaired long-lived assets consistedprimarilyof machinery and equipment of$53.5$153.0 million and building and improvements of$21.1$76.1 million. The long-lived asset impairment alsoincludesincluded 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 forlosses on inventory write-downs andother exit costs, whichresulted from the integration plans. This amount hashave been classified as a component of Cost of Sales. Other exit costs included contractual obligations totaling $85.4 million, which were incurred directly as a result of the various exit plans. These contractual obligations consisted of facility lease terminations amounting to $26.5 million, equipment lease terminations amounting to $31.4 million and payments to suppliers and other third parties to terminate contractual agreements amounting to $27.5 million. Wehave written offexpect to make payments associated with our contractual obligations with respect to facility and equipment leases through the end of fiscal 2006 and with respect to the other contractual obligations with suppliers and other third parties through fiscal 2002. Other exit costs also included charges of $77.0 million relating to asset impairments resulting from customer contracts that were breached when they were terminated by us as a result of various facility closures. These asset impairments were determined based on the difference between the carrying amount and the realizable value of the impaired inventory and accounts receivable. We disposed ofapproximately $11.9the impaired assets, primarily through scrapping and write-offs, by20
the end of fiscal 2001. Also included in other exit costs were charges amounting to $16.1 million for the incremental costs for warranty work incurred by us for products sold prior to the commitment dates of the various exit plans. Other exit costs also included $11.6 million of
inventoryfacility refurbishment and abandonment costs related to certain building repair work necessary to prepared thefirst quarter integration activities and approximately $10.6 million was written off and disposed of relatedexited facilities for sale or return the facilities tothe third quarter integration activities.its landlords. The$27.1remaining $19.8 million of other exit costsrelaterecorded were primarilyto items such as lease termination costs,associated with incremental amounts ofuncollectible accounts receivable, warranty-related accruals,legal andother exitenvironmental costs, incurred directly as a result of the various exitplans. Weplans and facility closures. During the first nine months of fiscal 2002, we paidapproximately $1.6 million, $4.2 million, and $2.6 million ofother exit costsduring the first, second and third quartersoffiscal 2001.approximately $68.0 million. Additionally, approximately$3.1 million, $0.5 million and $3.5$3.9 million of other exit costs werewritten offnon-cash charges utilized during the firstsecond and third quarters, respectively.quarter of fiscal 2002. The remaining$11.6$23.4 millionisof other exit costs was classifiedinas accrued liabilities as of December 31,20002001 and is expected to besubstantiallypaid outbywithin one year of theendcommitment dates offiscal 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 millionwaswere mainly comprised of accelerated debt prepayment expense, accelerated executive stock compensation and benefit-relatedexpenses and other merger-related costs. We paid approximately $55.5 million, $5.6 million and $5.3expenses. Approximately $28.2 million of the direct transaction costs were non-cash charges utilized during fiscal 2001. During the first nine months of fiscal 2002, we paid approximately $2.6 million of direct transaction costs. There is a remaining balance of $0.7 million which was classified in accrued liabilities as of December 31, 2001 and is expected to be substantially paid out in the subsequent 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, second and third quarters of fiscal
2001, respectively. Additionally, approximately $14.7 million, $13.4 million and $0.1 million of the direct transaction costs were written off during the first, second and third quarters, respectively. The remaining $7.9 million is classified in accrued liabilities as of December 31, 2000 and is expected to be substantially paid out by the end of fiscal 2001. We incurred unusual pre-tax charges of $3.5 million in 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.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 Activities during the quarter: Third quarter provision — — — — Cash charges (29,021 ) — (32,069 ) (61,090 ) Non-cash charges — — — — Balance at December 31, 2001 $ 107,667 $ — $ 107,929 $ 215,596 Selling, General and Administrative Expenses
1718Selling, general and administrative expenses,
("or SG&A")&A for the third quarter of fiscal2001 increased2002 decreased slightly to$113.7$109.3 million from$86.5$113.7 million in the same quarter of fiscal2000,2001, and decreased as a percentage of net sales to 3.2% for the third quarter of fiscal 2002 compared to 3.5% for the same period of fiscal 2001. The decrease in SG&A was directly attributable to our restructuring activities that were implemented in the second quarter of fiscal 2002 and to a lesser extent a company-wide effort, focused on reducing discretionary spending. SG&A increased to $323.6 million in the first nine months of fiscal 2002 from $316.6 million in the same period of fiscal 2001, but decreased as a percentage of net sales to3.5% for the third quarter of fiscal 2001 compared to 4.4% for the same quarter of fiscal 2000. SG&A increased to $316.6 million3.3% in the first nine months of fiscal20012002 from$228.3 million3.5% in the same period of fiscal2000, but decreased as a percentage of net sales to 3.5% from 4.8%.2001. The dollarincreasesincrease in SG&Awerewas primarily due to the continued investment in infrastructure such as sales, marketing, supply-chain management, and informationsystems and other related corporate and administrative expenses.systems. Thedeclines indeclining SG&A as a percentage of net salesreflect the increases in our net sales, as well asreflects our continued focus on controlling our discretionary operatingexpenses.expenses, while expanding our net sales.Goodwill and Intangibles Amortization
21
Goodwill and intangibles asset amortization for the third quarter of fiscal
2001 increased2002 decreased to$15.1$3.1 million from$10.7$15.1 million for the same period of fiscal2000.2001. Goodwill and intangibles asset amortizationwas $37.0decreased to $9.1 millionand $29.3 million forin the first nine months of fiscal2001 and2002 from $37.0 million in the same period of fiscal2000, respectively.2001. Theincreasedecreases in goodwill andintangibleintangibles assets amortizationin the third quarter and first nine months of fiscal 2001wasprimarilya direct result ofgoodwill acquired in connection withthevarious purchase acquisitions during fiscal 2001 and increasedadoption of Statement of Financial Accounting Standards (SFAS) 142, effectively discontinuing the amortization ofdebt issuance costs associated withgoodwill. As of December 31, 2001, unamortized goodwill approximated $1.3 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 thesenior notes offering in June 2000.Notes to Condensed Consolidated Financial Statements.Interest and Other Expense, Net
Interest and other expense, net was
$22.1$22.7 million for the third quarter of fiscal20012002 compared to$23.4$22.1 million for the corresponding quarter of fiscal2000.2001. Interest and other expense, net was$40.3$67.3 millionforin the first nine months of fiscal20012002 compared to$57.0$40.3 million for thesamecorresponding periodinof fiscal2000.2001. Thedecreasesincrease in interest and other expense, net in thethird quarter and thefirst nine months of fiscal2001 were attributable2002 was mainly due to lower gains recorded on the sale of marketableequitysecuritiesoffset by increased interest expense associated with increased borrowings.as compared to the $28.9 million gain on sale of marketable securities we recorded in the first nine months of fiscal 2001.Provision for Income Taxes
Our consolidated effective tax rate was
13.1%a provision of 10.3% and(1.1%)a benefit of 36.0% for the third quarter and first nine months of fiscal2001,2002, respectively, compared to3.4%a 13.1% and10.9%1.1% provision for the comparable periods of fiscal2000.2001. Excluding the unusual charges, the effective income tax rateinwas 10.3% and 13.4% for thethird quarter andfirst nine months of fiscal2001 was 13.5%2002 and13.4%,fiscal 2001, respectively. 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,andchanges in previously established valuation allowances for deferred tax assets based uponmanagement'smanagement’s current analysis of the realizability of these deferred taxassets.assets, as well as certain tax holidays and incentives grants to the Company and its subsidiaries in China, Malaysia, Hungary and Czech Republic. During the periods presented, the aggregate amount of tax holidays and similar incentives and the associated earnings per share benefits were immaterial. See"Certain“Certain Factors Affecting Operating Results-— We are Subject to the Risk of IncreasedTaxes"Income Taxes”.Liquidity and Capital Resources
As of December 31,
2000,2001, we had cash and cash equivalents totaling$398.4$449.0 million, total bank and other debts totaling$1.6$1.5 billion and$60had $219.0 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 $605.4 million and cash
from a public offering of our ordinary shares. Cashused in operating activities was$461.8 million and $14.1$314.9 million for the first nine months of fiscal20012002 and fiscal2000,2001, respectively. Cashused inprovided by operating activitiesincreasedin the first nine months of fiscal2001 from2002 was primarily due to significant reductions of inventory and increases in accounts payable. Cash used in operations for the first nine months of fiscal2000 as a2001 was the 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 $1.9 billion and $1.7 billion at December 31,2000 from $1.1 billion at2001 and March 31,2000.2001, respectively. The increase in accounts receivable wasprimarily duedirectly attributable toanthe increaseof 90%innetsalesfor the first nine months of fiscal 2001over thecomparable period in the prior year.same period.Inventories
increased 51%decreased 22% to$1.7$1.4 billion at December 31,20002001 from$1.1$1.8 billion at March 31,2000.2001. Theincreasedecrease in inventories was primarily the result ofincreased purchasesthe focused effort by the Company to reduce inventories that were built up for customers in March, in their anticipation ofmaterial 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$955.6 million and$379.3$916.3 million for the first nine months of fiscal20012002 and fiscal2000,2001, respectively. Cash used in investing activities for the first nine months of fiscal20012002 was primarily related to (i) net capital expenditures of$711.3$285.1 million to purchase equipment and for continued expansion of manufacturing facilities,including our manufacturing facility purchases from OEMs,(ii) payment of$112.9$396.3 million for purchases of manufacturing facilities and related assets from OEMs and (iii) payment of $281.0 million for acquisitions of businesses and(iii) paymentoffset by $6.8 million of$39.5 million for minoritynet investments in thestockstocks of various technologycompanies, offset by (iv) $51.4 million in proceeds from the sale of equipment and (v) 1819 $42.8 million in proceeds from the sale of marketable equity securities.companies.22
Cash used in investing activities for the first nine months of fiscal
20002001 consisted primarily of (i) net capital expenditures of$374.7$567.7 million to purchase equipment and for continued expansion of manufacturing facilities,including our manufacturing facility purchases from OEMs(ii) payment of$32.0$239.0 million for purchases of manufacturing facilities and related assets from OEMs and (iii) payment of $112.9 million for acquisitions of businesses and(iii) paymentoffset by $3.3 million of$25.4 million fornet minority equity investmentsin the stocksof various technologycompanies, offset by (iv) proceeds of $17.0 million and (v) $35.9 million related to the sale of equipment and the sale of certain subsidiaries, respectively.companies.Net cash provided by financing activities was
$951.9$166.1 million and$618.9$951.9 million for the first nine months of fiscal 2002 and 2001, respectively. Cash used in financing activities for the first nine months of fiscal 2002 primarily resulted from the payment of $112.0 million for the repurchase of the equity instrument from Motorola, $786.5 million of short-term credit facility andfiscal 2000, respectively.long-term debt repayments, offset by $1.0 billion of proceeds from long-term debt and bank borrowings. Cash provided by financing activities for the first nine months of fiscal 2001 primarily resulted from $1.4 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 fromanthe issuance of the equity instrumentissuedto Motorola, offset by $1.0 billion of short-term credit facility and long-term debt repayments.Subsequent to December 31,
2000,2001, we substantially increased our cash balances through the completion of an equity offering of27,000,00020.0 million of our ordinary shares at$37.9375a price of $25.96 per share with net proceeds of approximately$990.8$503.8 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 ourOur working capital requirements and capital expenditures
willcould continue to increase in order to supportthe anticipated continued growth in our operations. We also anticipate incurring significant capital expenditures and operating lease commitments in order to support our anticipatedfuture expansions of ourindustrial parks in China, Hungary, Mexico, Brazil and Poland. We intend to continue our acquisition strategy and itoperations. It is possible that future acquisitions may be significant and may require the payment of cash. Future liquidity needs will also depend on fluctuations in levels of inventory, 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“Certain Factors Affecting Operating Results-— If We Do Not Manage Effectively theExpansion ofChanges in Our Operations, Our Business May beHarmed"Harmed”.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes during the three and nine months ended December 31,
20002001 to our exposure to market risk for changes in interest rates and foreign currency exchange rates.CERTAIN FACTORS
EFFECTINGAFFECTING OPERATING RESULTSIF 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 lastyeartwo years as a result of internal growth and acquisitions. This growth is likely to strain considerably our management controlsystemsystems 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; 1920 - 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 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; 23
• 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 inconnection withouracquisitions of DII, Palo Alto Products International, Chatham and Lightning,markets, we recordedone-timeunusual charges for merger related costs and related facility closure costs of approximately$255.0$524.9 million, net of tax, for the fiscal year ended March 31, 2001 andin connection withapproximately $383.2 million, net of tax, for theissuance of an equity instrumentsecond 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
Motorola relating to our alliance with Motorola, we recorded a one-time non-cash charge of approximately $286.5 million. OUR STRATEGIC RELATIONSHIP WITH ERICSSON CREATES RISKS. While we have entered into a non-binding memorandum of understanding 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 describedcustomers in thememorandumhandheld devices, information technologies infrastructure, communications infrastructure and computer and office automation industries. For the first nine months ofunderstanding is subject to changefiscal 2002, we derived approximately 34% of our revenues from customers in thedefinitive agreements. In addition,handheld devices industry, which includes cell phones, pagers and personal digital assistants; approximately 19% of our revenues from providers of information technologies infrastructure, which includes servers, workstations, storage systems, mainframes, hubs and routers; approximately 18% 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 13% of our revenue from customers in thememorandumcomputers and office automation industry, which includes copiers, scanners, graphic cards, desktop and notebook computers and peripheral devices such as printers and projectors; and approximately 9% ofunderstanding doesour revenues from the consumer devices industry, including set-top boxes, home entertainment equipment, cameras and home appliances. The remaining 7% 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:
• Rapid changes in technology, which result in short product life cycles; • the inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; and • recessionary periods in our customers’ markets. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION.
Electronics Manufacturing Services, or EMS, providers must provide increasingly rapid product turnaround for their customers. We generally do not
addressobtain 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 ofterms 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 durationreasons. Many of ouranticipated relationship with Ericsson. Finally, we cannot be sure when or whether we will obtain the regulatory approvals thatcustomers industries arerequiredexperiencing a significant decrease in demand forthe relationship. Once we commence operations, our ability to achieve anytheir products and services. The generally uncertain economic condition of several of theanticipated benefitsindustries ofthis new relationship with Ericsson is subjectour customers has resulted, and may continue toa numberresult, in some ofrisks, includingourability to meet Ericsson's volume, product quality, timelinesscustomers delaying the delivery of some of the products we manufacture for them, andprice requirements, and to achieve anticipated cost reductions. If demandplacing purchase orders forEricsson's mobile phone products declines, Ericsson may purchase alowerquantityvolumes of productsfrom usthanwe anticipate, and the memorandumpreviously anticipated. Cancellations, reductions or delays by a significant customer or by a group ofunderstanding does not require that Ericsson purchase any specified volume of products from us. 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, couldcustomers 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.24
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:
• changes in demand for our services; • our effectiveness in managing manufacturing processes and costs in order to decrease manufacturing expenses; • the mix of the types of manufacturing services we provide, as high-volume and low-complexity manufacturing services typically have lower gross margins than lower volume and more complex services; • changes in the cost and availability of labor and components, which often occur in the electronics manufacturing industry and which affect our margins and our ability to meet delivery schedules; • the degree to which we are able to utilize our available manufacturing capacity; • our ability to manage the timing of our component purchases so that components are available when needed for production, while avoiding the risks of purchasing inventory in excess of immediate production needs; and • local conditions and events that may affect our production volumes, such as labor conditions, political instability and local holidays. Two of our significant end-markets are the handheld electronics devices market and the consumer devices market. These markets exhibit particular strength toward the end of the calendar year in connection with the holiday season. As a result, we have historically experienced stronger revenues in our third fiscal quarter as compared to our other fiscal quarters.
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 $266.1 million, net of tax, in the fourth quarter of fiscal 2001 and $383.2 million, net of tax, in the second quarter of fiscal 2002. At the end of the third quarter of fiscal 2002, $215.6 million of these closure costs remained to be paid.
In addition, many of our customers are currently experiencing increased volatility in demand, and
other risks, wein 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. Further, these customers may be unable toachieve anticipated levels of profitabilitypay us or otherwise meet their commitments underthis arrangement, and ittheir agreements or purchase orders with us. Any failure by our customers to pay us maynotresult inany material revenuesa reduction of our operating income and may lead to excess capacity at affected facilities. Any of these factors orcontribute positively toa combination of these factors could seriously harm ournet income per share. Finally, other OEMs may not wish to obtain logistics or operations management services from us.business and result in fluctuations in our results of operations.WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS.
InSince the
past six months,beginning of fiscal 2001, we have completeda significant number ofover 30 acquisitions25
of businesses and manufacturing facilities,
including our acquisitions of Chatham, LightningandJIT. Wewe expect to continue to acquire additional businesses and facilities in the future. We are currently in preliminary discussions with respect toacquire additional businessespotential acquisitions andfacilities.strategic investments, however, we do not have any agreements or commitments to make any material acquisitions or investments. Any future acquisitions may require additional debt or equity financing,whichor the issuance of shares in the transaction. This could increase our leverage or be dilutive to our existing shareholders. Wecannot assure the terms of, or that we willmay not be able to identify and completeanyacquisitions in thefuture.future to the same extent as the past, or at all.To integrate acquired businesses, we must 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 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; 2021 - lack of experience operating in the geographic market of the acquired business; and - an increase in our expenses and working capital requirements.including:
• diversion of management’s attention; • potential loss of key employees and customers of the acquired companies; • lack of experience operating in the geographic market or industry sector of the acquired business; • an increase in our expenses and working capital requirements, which reduces our return on invested capital; and • 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
OPERATING RESULTS VARY SIGNIFICANTLY. We experience significant fluctuations inSTRATEGIC RELATIONSHIPS WITH MAJOR CUSTOMERS CREATE RISKS.In fiscal 2002, we entered into definitive agreements with Ericsson, Xerox and others with respect to our management of certain of their operations. Our ability to achieve any of the anticipated benefits of these relationships is subject to a number of risks, including our ability to meet our customers volume, product quality, timeliness and price requirements, and to achieve anticipated cost reductions. If demand for our customers products declines, these customers may purchase a lower quantity of products from us than we anticipate. If these customers requirements exceed the volume anticipated by us, we may not be able to meet these requirements on a timely basis. Our inability to meet these customers volume, quality, timeliness and cost requirements, and to quickly resolve any issues with them, could seriously harm 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 connection with the holiday season.As a result of these and other risks, wehave historically experienced relative strength in revenues in our third fiscal quarter. We are reconfiguring certainmay be unable to achieve anticipated levels ofourprofitability under these operationsto further increase our concentration in low-cost locations. We expect that this shift of operations willmanagement arrangements, and they may not result inthe recognition of unusual charges in the fourth quarter of fiscal 2001 relatedany material revenues or contribute positively tothe integration activities. In addition, some ofourcustomers 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 themnet income per share. Due todefer 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 harmourbusiness 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 strategicrelationshipsincluding our allianceswith Ericsson andMotorola,Xerox other OEMs may not wish to obtain logistics or operations management services fromwhich we anticipate significant future revenues. However, similarus.We have entered into strategic relationships with other customers, and plan to continue to pursue such relationships. These relationships generally involve many, or all, of the risks involved in our operations management relationships with Ericsson and Xerox. Similar to our other customer relationships, there are typically 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 theseprograms,strategic relationships, we are incurring substantial expenses as we add personnel and manufacturing capacity and procure materials. Our operating resultswillcould 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. 2122 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 partiallydepends on new outsourcingopportunities.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 beunfavorably impacted.limited.26
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 acquired facilities in Canada, Mexico and Malaysia from Xerox, and will acquire additional facilities from Xerox in Brazil and the Netherlands in the fourth quarter of fiscal 2002. We 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 mayincludebe less than anticipated. The arrangements entered into with divesting OEMs typically involve many risks, including thetransferfollowing:
• 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; • the integration into our business of the acquired assets and facilities may be time-consuming and costly; • we, rather than the divesting OEM, bear the risk of excess capacity at the acquired facility; • we may not achieve anticipated cost reductions and efficiencies at the acquired facility; • if the OEM’s requirements exceed the volume anticipated by us, we may be unable to meet the expectations of the OEM as to product quality, timeliness and cost reductions; and • 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
assets such as facilities, equipment and inventory.operations would be harmed.THE MAJORITY OF OUR SALES
COMESCOME 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 nine months of fiscal
20012002 and2000fiscal 2001 accounted for approximately56%64% and59%56%, respectively, of netsales.sales in those periods, with Ericsson accounting for approximately 18% of net sales in the first nine months of fiscal 2002. Ourtwolargest customers during the first nine months of fiscal 2001 were Cisco and Ericsson, accounting for approximately 11% and 10%of net sales. We expect that our strategic relationship with Ericsson will substantially increase the percentage of our sales attributable to Ericsson., respectively. No othercustomerscustomer accounted for more than 10% of net salesin the first nine months of fiscal 2001.during these periods.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 revenueswouldcould 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. 2223 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
27
electronics manufacturing services should decrease, this increased capacity could result in substantial pricing pressures, which could seriously harm our operating results. Certain sectors of the EMS industry are currently experiencing increased price competition, and if this increased level of competition should continue, our revenues and gross margin may be adversely affected.
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'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) tax incentives have been extended to encourage foreign investment or (2)where:
• tax incentives have been extended to encourage foreign investment; or • income tax rates are low. We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect. 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. These tax incentives expire over various periods from 2002 to 2010 and are subject to certain conditions with which we expect to comply. 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.
2324The 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 areaffected bysubject to the risks of changes in economic and political conditions in those countries, including:- fluctuations in the value of currencies; - changes in labor conditions; - longer payment cycles; - greater difficulty in collecting accounts receivable; - the burdens and costs of compliance with a variety of foreign laws; - political and economic instability; - increases in duties and taxation; - imposition of restrictions on currency conversion or the transfer of funds; - limitations on imports or exports; - expropriation of private enterprises; and - a potential reversal of current tax
• fluctuations in the value of local currencies; • labor unrest and difficulties in staffing; • longer payment cycles; 28
• increases in duties and taxation levied on our products; • imposition of restrictions on currency conversion or the transfer of funds; • limitations on imports or exports of components or assembled products, or other travel restrictions; • expropriation of private enterprises; and • a potential reversal of current favorable policies encouraging foreign investment or foreign trade by our host countries. The attractiveness of our services to our U.S. customers can be affected by changes in U.S. trade policies, such as
"mostmost favorednation"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 asMexicoChina andChina,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 SUBJECT TO RISKS OF CURRENCY FLUCTUATIONS AND HEDGING OPERATIONS. A significant portion of our business is conducted in the European euro, the Swedish krona and the Brazilian real. In addition, some of our costs, such as payroll 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 will affect our cost of sales, operating margins and revenues. We cannot predict the impact of future exchange rate fluctuations. We use financial instruments, primarily forward purchase contracts, to hedge Japanese yen, European euro, U.S. dollar 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 will 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.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 ourkeyexecutive officers and other key employees. We could be seriously harmed by the loss ofkey personnel.any of our executive officers. In addition, in order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to growwouldcould be harmed.WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.
2425We 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
ifthe results of future testing andanalysisanalyses 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.PART II - OTHER INFORMATION ITEMS 1-5. Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
2.01 Report of Independent Accountants -- Arthur Andersen LLP. 3.01 Memorandum and New Articles of Association of the Registrant.(b) Reports on Form 8-K On January 29, 2001 we filed a current report on Form 8-K includingTHE 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
consolidated financial statementsordinary shares may be subject to similar fluctuations. Factors such as fluctuations in our operating results, announcements ofMarch 31, 1999 and 2000 and for each of the three yearstechnological innovations or events affecting other companies in theperiod ended March 31, 2000, giving retroactive effect toelectronics industry, currency fluctuations and general market conditions may cause themergers 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 27,000,000market price of our ordinary sharesall 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 selectedtomanage the operations of Ericsson's mobile phone business. 2526decline.29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
thisits Report to be signed on its behalf by the undersigned thereunto duly authorized.FLEXTRONICS INTERNATIONAL LTD. (Registrant) Date: February 12, 2001 /s/ ROBERT R.B. DYKES ---------------------------------------- Robert R.B. Dykes
FLEXTRONICS INTERNATIONAL LTD.
(Registrant)Date: February 12, 2002 /s/ Robert R.B. Dykes Robert R.B. Dykes
President, Systems Groupand Chief Financial Officer (principal financial and accounting officer) 2627 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- -----------2.01 Report of Independent Accountants -- Arthur Andersen LLP. 3.01 MemorandumandNew Articles of Association of the Registrant.Chief
Financial Officer (principal financial
and accounting officer)30