Flextronics Announces Fourth Quarter and Fiscal Year Results
SINGAPORE, April 27 -- Flextronics today announced results for its fourth quarter and fiscal year ended March 31, 2006. As announced last week, Flextronics entered into a definitive agreement to sell its software development and solutions business to an affiliate of Kohlberg Kravis Roberts & Co. As such, the software business and the semiconductor division, which was divested by Flextronics in September 2005, are being treated as discontinued operations in the accompanying financial statements. The network services division that was also divested by Flextronics in September 2005 does not meet the criteria for discontinued operations treatment under generally accepted accounting principles (GAAP) and as such its historical results remain in continuing operations.
(USD in millions, except EPS)
Three Months Ended Twelve Months Ended
March 31, March 31,
2006 2005 2006 2005
Non-GAAP total net
sales $3,597 $ 3,613 $15,566 $15,908
Net sales attributable
to discontinued operations $66 $73 $278 $177
GAAP net sales from
continuing operations $3,531 $ 3,540 $15,288 $15,731
GAAP net income $43 $74 $141 $340
Net income, excluding
intangible amortization,
restructuring and other
charges (1) $98 $95 $417 $388
Diluted GAAP EPS $0.07 $0.12 $0.24 $0.58
Diluted EPS, excluding
intangible amortization,
restructuring and
other charges (1) $0.16 $0.16 $0.69 $0.66
(1) See Note 1 on Schedule IV attached to this press release
Quarterly and Fiscal Year Results
Net sales from continuing operations amounted to $3.5 billion in the fourth quarters ended March 31, 2006 and 2005. Excluding the net sales from the divested Network Services division of $207 million in the fourth quarter ended March 31, 2005, net sales from continuing operations grew 6% on a year-over-year basis in the fourth quarter ended March 31, 2006.
Net sales from continuing operations amounted to $15.3 billion in the year ended March 31, 2006 as compared to $15.7 billion in the year ended March 31, 2005. Excluding the net sales from the divested Network Services division of $275 million and $766 million in the years ended March 31, 2006 and 2005, respectively, net sales from continuing operations amounted to $15.0 billion in the years ended March 31, 2006 and 2005.
Excluding intangible amortization, restructuring and other charges, net income for the fourth quarter ended March 31, 2006 increased 3% to $98 million, or $0.16 per diluted share, compared with $95 million, or $0.16 per diluted share, in the year ago quarter. After-tax amortization, restructuring and other charges amounted to $55 million in the fourth quarter ended March 31, 2006, compared to $21 million in the year ago quarter. As a result, GAAP net income amounted to $43 million, or $0.07 earnings per diluted share, in the fourth quarter ended March 31, 2006, as compared to $74 million, or $0.12 per diluted share, in the year ago quarter.
Excluding intangible amortization, restructuring and other charges, net income for the year ended March 31, 2006 increased 7% to $417 million, or $0.69 per diluted share, compared with $388 million, or $0.66 per diluted share, for the year ended March 31, 2005. After-tax amortization, restructuring and other charges amounted to $276 million in the year ended March 31, 2006, compared to $49 million in the year ended March 31, 2005. As a result, GAAP net income amounted to $141 million, or $0.24 earnings per diluted share, in the year ended March 31, 2006, as compared to $340 million, or $0.58 per diluted share, in the year ended March 31, 2005.
During the current fiscal year, the Company increased its cash and certificates of deposit by $129 million to $1 billion as of March 31, 2006 and reduced its net debt by $270 million to $596 million. The Company generated cash flow from operations of $591 million in the year ended March 31, 2006.
Mike McNamara, Chief Executive Officer of Flextronics stated, "We are extremely pleased with our working capital management for the quarter, as we were able to reduce our cash conversion cycle to 10 days compared with 15 days in the year ago quarter. Overall, we feel fiscal 2006 was very successful for the Company as we executed on our plan to divest non-core assets and focus our efforts and resources on the reacceleration of the significant growth opportunities in our core EMS business. As a result, during the year we divested our network services and semiconductor businesses and recently announced a definitive agreement to sell our software business. By monetizing these non-core assets at substantial gains over carrying values, Flextronics will have generated cash proceeds in excess of $1.1 billion, assuming the software transaction closes as expected this summer."
McNamara concluded by saying, "Fiscal 2006 was a very strong year in terms of new business wins from both new and existing customers. We think this should start showing up in our revenue growth rates in the second half of calendar 2006."
Guidance
Management provided guidance for total earnings per diluted share of $0.16 to $0.17 (including discontinued operations but excluding amortization of intangibles and stock-based compensation expense) and revenues from continuing operations of $3.7 billion to $3.9 billion for the June 2006 quarter. Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.03 per diluted share reflecting quarterly intangible amortization and stock-based compensation expense.
2004 Award Plan for New Employees
On April 13, 2006, the Company granted options from its 2004 Award Plan for New Employees to purchase an aggregate of 512,550 ordinary shares. The options have an exercise price of $10.78 (which is equal to the closing price of our ordinary shares on the grant date, as quoted on the NASDAQ National Market), will expire 10 years after the date of grant (or upon termination of employment, if earlier), and will become exercisable over four years, with the first 25% becoming exercisable on the first anniversary of the date of grant and the remainder becoming exercisable in equal monthly installments thereafter. Also on April 13, 2006, the Company granted 100,000 share bonus awards from its 2004 Award Plan for New Employees. The share bonus awards will become vested in five equal annual installments beginning on the first anniversary of the grant date, and any unvested awards will expire upon termination of employment. All options and share bonus awards were granted to new employees.
Conference Call and Web Cast
A conference call hosted by Flextronics' management will be held today at 1:30 p.m. PDT to discuss the Company's financial results and its outlook. This call will be broadcast via the Internet and may be accessed by logging on to the Company's website at www.flextronics.com. Additional information in the form of a slide presentation that summarizes the quarterly results may also be found on the Company's site. A replay of the broadcast will remain available on the Company's website after the call.
Minimum requirements to listen to the broadcast are Microsoft Windows Media Player software (free download at http://www.microsoft.com/windows/windowsmedia/download/default.asp) and at least a 28.8 Kbps bandwidth connection to the Internet.
About Flextronics
Headquartered in Singapore (Singapore Reg. No. 199002645H), Flextronics is a leading Electronics Manufacturing Services (EMS) provider focused on delivering complete design, engineering and manufacturing services to aerospace, automotive, computing, consumer digital, industrial, infrastructure, medical and mobile OEMs. With fiscal year 2006 revenues from continuing operations of USD$15.3 billion, Flextronics helps customers design, build, ship, and service electronics products through a network of facilities in over 30 countries on five continents. This global presence provides design and engineering solutions that are combined with core electronics manufacturing and logistics services, and vertically integrated with components technologies, to optimize customer operations by lowering costs and reducing time to market. For more information, please visit www.flextronics.com.
This press release contains forward-looking statements within the meaning of federal securities laws. These forward-looking statements include statements related to revenue growth, the opportunities for growth in our core EMS business and the proposed divestiture of our software services business. These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these forward-looking statements. These risks include that the divestiture may not be completed as planned; that we may not realize expected returns from our retained interests in divested businesses; that we may not be successful in redeploying cash proceeds from our recent and pending divestitures in a manner that achieves improved profitability; that growth in our core EMS business (including our agreement with Nortel) may not occur as expected or at all; that we may not be able to obtain new customer programs, or that if we do obtain them, the risk that they may not contribute to our revenue or profitability as expected or at all; competition in our industry; the challenges of international operations; our dependence on industries that continually produce technologically advanced products with short life cycles; our ability to respond to changes in economic trends, to fluctuations in demand for our customers' products and to the short-term nature of our customers' commitments; the challenges of effectively managing our operations; the challenges of integrating acquired companies or assets; our dependence on a small number of customers for the majority of our sales; our reliance on strategic relationships with major customers; the impact on our margins and profitability resulting from substantial investments and start-up and integration costs in our components, design and ODM capabilities; production difficulties, especially with new products; changes in government regulations and tax laws; our exposure to potential litigation relating to intellectual property rights, product warranty and product liability; the effects of customer bankruptcies; potential impairment of our intangible assets and the other risks described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our reports on Form 10-K, 10-Q and 8-K that we file with the U.S. Securities and Exchange Commission. The forward-looking statements in this press release are based on current expectations and Flextronics assumes no obligation to update these forward-looking statements.
SCHEDULE I
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the three months ended March 31, 2006 (2)
Non-GAAP Discontinued Continuing Required
Operations Operations Adjustments GAAP
Net sales $3,597,341 $66,452 $3,530,889 $- $3,530,889
Cost of
sales 3,359,408 41,860 3,317,548 - 3,317,548
Restructuring
and
other charges - - - 56,481 56,481
- - - 7,610 7,610
Gross
profit 237,933 24,592 213,341 (56,481) 156,860
Selling,
general and
administrative
expenses 120,542 11,183 109,359 - 109,359
Restructuring and
other charges
(income) - - - 7,668 7,668
Operating
income 117,391 13,409 103,982 (64,149) 39,833
Intangible
amortization - - - 8,270 8,270
- - - 7,121 7,121
Interest and
other expense,
net 19,354 987 18,367 (18,013) 354
Loss on early
extinguishment
of debt - - - - -
Income before
income taxes 98,037 12,422 85,615 (54,406) 31,209
Provision for
(benefit from)
income taxes 72 2,533 (2,461) (3,233) (5,694)
Net income from
continuing
operations $88,076 (51,173) 36,903
Income from
discontinued
operations
(net of tax of
$1,790 and $1,335,
respectively) $9,889 (3,844) 6,045
Net income $97,965 $ (55,017) $42,948
Earnings per share:
Net income from continuing operations
Basic $0.06
Diluted $0.06
Income from
discontinued operations
Basic $0.01
Diluted $0.01
Net income
Basic $0.17 $0.07
Diluted $0.16 $0.07
Shares used in
computing per
share amounts:
Basic 577,741 577,741
Diluted 602,218 602,218
For the three months ended March 31, 2005 (2)
Non-GAAP Discontinued Continuing Required
Operations Operations Adjustments GAAP
Net sales $3,612,912 $73,050 $3,539,862 $- $3,539,862
Cost of
sales 3,350,127 43,595 3,306,532 - 3,306,532
Restructuring
and other
charges - - - 7,610 7,610
Gross
profit 262,785 29,455 233,330 (7,610) 225,720
Selling, general
and
administrative
expenses 144,585 19,626 124,959 - 124,959
Restructuring
and other
charges
(income) - - - - -
Operating
income 118,200 9,829 108,371 (7,610) 100,761
Intangible
amortization - - - 7,121 7,121
Interest
and other
expense, net 26,250 2,063 24,187 1,415 25,602
Loss on
early
extinguishment
of debt - - - 16,328 16,328
Income before
income
taxes 91,950 7,766 84,184 (32,474) 51,710
Provision
for
(benefit from)
income taxes (3,334) 2,220 (5,554) (19,403) (24,957)
Net income
from
continuing
operations $89,738 (13,071) 76,667
Income from
discontinued
operations
(net of tax
of $1,790
and $1,335,
respectively) $5,546 (7,969) (2,423)
Net income $95,284 $(21,040) $74,244
Earnings
per share:
Net income
from continuing
operations
Basic $0.14
Diluted $0.13
Income from
discontinued
operations
Basic $-
Diluted $-
Net income
Basic $0.17 $0.13
Diluted $0.16 $0.12
Shares used
in computing
per share amounts:
Basic 566,912 566,912
Diluted 597,628 597,628
(2) See Note 2 on Schedule IV attached to this press release.
SCHEDULE II
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the twelve months ended March 31, 2006 (3)
Discontinued Continuing Required
Non-GAAP Operations Operations Adjustments GAAP
Net sales $15,565,994 $278,018 $15,287,976 $-- $15,287,976
Cost of
sales 14,527,208 172,747 14,354,461 -- 14,354,461
Restructuring
and other
charges -- -- -- 185,631 185,631
Gross
profit 1,038,786 105,271 933,515 (185,631) 747,884
Selling,
general and
administrative
expenses 525,124 61,178 463,946 -- 463,946
Restructuring
and other
charges -- -- -- 37,815 37,815
Operating
income 513,662 44,093 469,569 (223,446) 246,123
Intangible
amortization -- -- -- 37,160 37,160
Interest
and other
expense, net 88,757 5,023 83,734 (15,688) 68,046
Gain on
divestiture
of operations -- -- -- (23,819) (23,819)
Loss on
early
extinguishment
of debt -- -- -- -- --
Income before
income
taxes 424,905 39,070 385,835 (221,099) 164,736
Provision for
(benefit from)
income taxes 7,566 7,968 (402) 54,620 54,218
Net income
from
continuing
operations $386,237 (275,719) 110,518
Income from
discontinued
operations
(net of tax
of $35,535
and $5,690,
respectively) $31,102 (458) 30,644
Net income $417,339 ($276,177) $141,162
Earnings per share:
Net income
from
continuing
operations
Basic $0.19
Diluted $0.18
Income from
discontinued
operations
Basic $0.05
Diluted $0.05
Net income
Basic $0.73 $0.25
Diluted $0.69 $0.24
Shares used in
computing
per share amounts:
Basic 573,520 573,520
Diluted 600,604 600,604
For the twelve months ended March 31, 2005 (3)
Discontinued Continuing Required
Non-GAAP Operations Operations Adjustments GAAP
Net
sales $15,908,223 $177,506 $15,730,717 $-- $15,730,717
Cost of
sales 14,827,860 107,328 14,720,532 -- 14,720,532
Restructuring
and other
charges -- -- -- 78,381 78,381
Gross
profit 1,080,363 70,178 1,010,185 (78,381) 931,804
Selling,
general and
administrative
expenses 568,533 42,926 525,607 -- 525,607
Restructuring
and other
charges -- -- -- 16,978 16,978
Operating
income 511,830 27,252 484,578 (95,359) 389,219
Intangible
amortization -- -- -- 33,541 33,541
Interest
and other
expense,
net 94,205 4,209 89,996 (13,491) 76,505
Gain on
divestiture
of operations -- -- -- -- --
Loss on
early
extinguishment
of debt -- -- -- 16,328 16,328
Income
before
income
taxes 417,625 23,043 394,582 (131,737) 262,845
Provision
for (benefit
from) income
taxes 29,234 6,588 22,646 (91,298) (68,652)
Net income
from
continuing
operations $371,936 (40,439) 331,497
Income from
discontinued
operations
(net of tax
of $35,535
and $5,690,
respectively) $16,455 (8,081) 8,374
Net
income $388,391 ($48,520) $339,871
Earnings per share:
Net income
from continuing
operations
Basic $0.60
Diluted $0.57
Income from
discontinued
operations
Basic $0.02
Diluted $0.01
Net income
Basic $0.70 $0.61
Diluted $0.66 $0.58
Shares used in
computing
per share
amounts:
Basic 552,920 552,920
Diluted 585,499 585,499
(3) See Note 3 on Schedule IV attached to this press release.
SCHEDULE III
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, March 31,
2006 2005
ASSETS
Current Assets:
Cash and cash equivalents $ 942,859 $ 869,258
Certificates of deposit 55,672 -
Accounts receivable, net 1,496,520 1,787,006
Inventories 1,738,310 1,513,715
Deferred income taxes 10,688 10,815
Current assets of discontinued operations 88,464 79,852
Other current assets 564,423 526,519
Total current assets 4,896,936 4,787,165
Property and equipment, net 1,586,486 1,669,876
Deferred income taxes 628,296 684,301
Goodwill and other intangibles, net 2,791,791 3,047,511
Non-current assets of discontinued operations 575,008 494,670
Other assets 462,379 324,049
Total assets $10,940,896 $11,007,572
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings, current portion of
long-term debt and
capital lease obligations $106,099 $26,140
Accounts payable 2,758,019 2,505,719
Current liabilities of discontinued operations 58,251 66,704
Other current liabilities 1,035,935 1,281,631
Total current liabilities 3,958,304 3,880,194
Long-term debt, net of current portion:
Zero Coupon Convertible Junior
Subordinated Notes due 2008 195,000 200,000
1 % Convertible Subordinated Notes due 2010 500,000 500,000
6 1/2 % Senior Subordinated Notes due 2013 399,650 399,650
6 1/4 % Senior Subordinate Notes due 2014 390,548 490,270
Other long-term debt and capital lease
obligations 3,777 119,091
Non-current liabilities of discontinued
operations 33,419 50,995
Other liabilities 105,551 143,324
Total shareholders' equity 5,354,647 5,224,048
Total liabilities and
shareholders' equity $10,940,896 $11,007,572
SCHEDULE IV
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO PRESS RELEASE AND UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands)
(1) The non-GAAP financial measures disclosed in this press release exclude certain amounts that are included in the most directly comparable measures under Generally Accepted Accounting Principles ("GAAP"). Non-GAAP results from continuing operations include the results of our discontinued operations. Non-GAAP results also exclude after-tax intangible amortization, gains and losses from divestitures, restructuring and other charges attributable to continued and discontinued operations. The reconciliation of non-GAAP results to GAAP results is illustrated in Schedules I and II attached to this press release.
(2) The non-GAAP financial measures exclude certain amounts that are included in the most directly comparable measures under Generally Accepted Accounting Principles ("GAAP"). Non-GAAP results exclude after-tax intangible amortization, restructuring and other charges or income. The Company recorded intangible amortization expense of $12.9 million (including $4.6 million attributable to discontinued operations) and $16.0 million (including $8.9 million attributable to discontinued operations) during the quarters ended March 31, 2006 and 2005, respectively. The Company also recorded pre-tax restructuring charges of $64.1 million and $7.6 million during the quarters ended March 31, 2006 and 2005, respectively, which were primarily related to the closures and consolidations of various manufacturing facilities. The $18.0 million of income included in interest and other expense net during the quarter ended March 31, 2006 is comprised of a $20.6 million net gain recognized by the Company as the result of the liquidation of certain international entities, offset by $2.6 million of intangible amortization expense associated with the Company's equity in earnings of unconsolidated subsidiaries. In addition, during the quarter ended March 31, 2005, the Company recorded losses of $16.3 million associated with the early extinguishment of its 9 3/4% senior subordinated notes due 2010, and $1.4 million for other than temporary impairment of its investments in certain non- publicly traded companies. The tax impacts related to all of these items and other non-operational tax adjustments amounted to a tax benefit of $4.0 million and $20.3 million in the quarters ended March 31, 2006 and 2005, respectively.
(3) The non-GAAP financial measures exclude certain amounts that are included in the most directly comparable measures under Generally Accepted Accounting Principles ("GAAP"). Non-GAAP results exclude after-tax intangible amortization, gains and losses from divestitures, restructuring and other charges or income. The Company recorded intangible amortization expense of $53.8 million (including $16.6 million attributable to discontinued operations) and $42.5 million (including $9.0 million attributable to discontinued operations) during the year ended March 31, 2006 and 2005, respectively. The Company also recorded pre-tax restructuring charges of $215.7 million and $95.4 million during the year ended March 31, 2006 and 2005, respectively, which were primarily related to the closures and consolidations of various manufacturing facilities. Further, the Company recognized $7.7 million and $7.6 million in executive separation costs during the years ended March 31, 2006 and 2005, respectively. The divestitures of the Semiconductor and Network Services divisions resulted in a pre-tax gain of $67.6 million for the year ended March 31, 2006, of which $43.8 million was attributable to discontinued operations. The $15.7 million of income included in interest and other expense net during the year ended March 31, 2006 is comprised of a $20.6 million net gain recognized by the Company as the result of the liquidation of certain international entities, offset by $4.9 million of intangible amortization expense associated with the Company's equity in earnings of unconsolidated subsidiaries. In addition, during the year ended March 31, 2005 the Company recognized a $29.3 million gain from the liquidation of certain international entities. The Company also recognized a loss of $16.3 million associated with the early extinguishment of its 9 3/4% senior subordinated notes due 2010, and a $8.2 million loss for the other than temporary impairment of its investments in certain non-publicly traded companies during the year ended March 31, 2005. The tax impacts related to all of these items and other non-operational tax adjustments amounted to a tax provision of $82.2 million and a tax benefit of $92.2 million in the years ended March 31, 2006 and 2005, respectively.