Flextronics Announces Second Quarter Record Results
Record Quarterly GAAP EPS of $0.31;
Record Quarterly Net Sales Up 23% to $4.7 billion;
September Quarter Record Non-GAAP EPS Up 18% to $0.20
SINGAPORE, Oct. 24 -- Flextronics today announced results for its second quarter ended September 30, 2006 as follows:
(US$ in millions, except EPS) Three Months Ended Six Months Ended
September 30, September 30,
2006 2005 2006 2005
Net sales from continuing
operations $4,702 $3,808 $8,761 $7,631
GAAP net income (loss) $185 $(2) $269 $56
Net income, excluding intangible
amortization, stock-based
compensation expense,
restructuring and other
charges(1) $117 $101 $220 $201
Diluted GAAP EPS $0.31 $- $0.46 $0.09
Diluted EPS, excluding
after-tax gains and losses
on divestitures, intangible
amortization, stock-based
compensation expense,
restructuring and other
charges $0.20 $0.17 $0.38 $0.33
(1) The reconciliation of non-GAAP results to GAAP results is illustrated in Schedules I & II attached to this press release. See the accompanying Notes on Schedule IV attached to this press release.
Quarterly Results
Net sales from continuing operations for the second quarter ended September 30, 2006 were a record high $4.7 billion, which represents an increase of $894 million, or 23%, over the year ago quarter.
Excluding after-tax gains and losses on divestitures, intangible amortization, stock-based compensation expense, restructuring and other charges, net income for the second quarter ended September 30, 2006 increased 15% to $117 million, or a September quarter record high $0.20 per diluted share, compared to $101 million, or $0.17 per diluted share, in the year ago quarter.
GAAP net income amounted to a record high $185 million, or $0.31 per diluted share, in the second quarter ended September 30, 2006, compared to a loss of $2 million, or nil earnings per diluted share in the year ago quarter. The reconciliation of non-GAAP results to GAAP results is illustrated in Schedules I & II attached to this press release.
Return on Invested Tangible Capital ("ROITC") improved to 29% in the second quarter ended September 30, 2006 from 27% in the year ago quarter, while Return on Invested Capital ("ROIC") improved to 11.0% from 9.5% in the year ago quarter.
The Company decreased its net debt by $220 million sequentially to $701 million at September 30, 2006. The Company ended the quarter with $1.04 billion in cash at September 30, 2006.
"There has been a reacceleration of significant growth in all elements of our business, including design, vertically-integrated manufacturing services, components and logistics," said Mike McNamara, chief executive officer of Flextronics. "Revenue from continuing operations was an all-time record high, increasing 23% on a year-over-year basis and 16% on a sequential basis. Operating margin improved in the core-EMS business by 10 basis points on a year-over-year basis and gross margin improved sequentially by 10 basis points."
As previously announced, the Company sold its software development and solutions business to an affiliate of Kohlberg Kravis Roberts & Co. ("KKR") in September 2006. The Company received in excess of $600 million in gross cash proceeds (subject to post-closing working capital adjustments) and an eight- year $250 million face value promissory note with a paid-in-kind interest coupon of 10.5% per annum through year two and 12.05% per annum thereafter. The Company also retained a 15% ownership stake in the divested business. The divestiture resulted in a pre-tax gain of approximately $181 million and an after-tax gain of approximately $171 million.
Guidance
For the third quarter ending December 31, 2006, revenue from continuing operations is expected to grow 25-30% on a year-over-year basis to a range of $5.1 billion to $5.3 billion and earnings are expected to grow 10-15% on a year-over-year basis to a range of $0.22-$0.23 per diluted share. For the fiscal year ending March 31, 2007, revenue from continuing operations is expected to grow in the range of 25% on a year-over-year basis to approximately $19 billion and earnings are expected to grow in the range of 15% on a year-over-year basis to approximately $0.80 per diluted share. Management emphasized that there is a range around the fiscal 2007 guidance as demand trends and the economy are dynamic.
GAAP earnings per diluted share are expected to be lower than the December quarter guidance provided herein by approximately $0.03 per diluted share per quarter reflecting quarterly intangible amortization and stock-based compensation expense. GAAP earnings per diluted share are expected to be lower than the fiscal year guidance provided herein by approximately $0.12 per diluted share reflecting annual intangible amortization and stock-based compensation expense and by the after-tax gain on divestiture, restructuring and other charges described in footnote 3 on Schedule IV attached to this press release.
2004 Award Plan for New Employees
On October 16, 2006, options to purchase an aggregate of 1,006,200 ordinary shares were granted from the 2004 Award Plan for New Employees. The options have an exercise price of $13.13 (equal to the closing price of our ordinary shares on the grant date, as quoted on the NASDAQ Global Select 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 October 16, 2006, 20,000 share bonus awards were granted from the 2004 Award Plan for New Employees. The share bonus awards will vest 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's management will be held today at 2:00 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 automotive, computing, consumer digital, industrial, infrastructure, medical and mobile OEMs. With fiscal year 2006 revenues from continuing operations of US$15.3 billion, Flextronics helps customers design, build, ship, and service electronics products through a network of facilities in over 30 countries on four continents. This global presence provides design and engineering solutions that are combined with core electronics manufacturing and logistics services, and vertically integrated with components technologies, to optimize customer operations by lowering costs and reducing time to market. For more information, please visit www.flextronics.com.
This press release contains forward-looking statements within the meaning of U.S. securities laws, including statements related to revenue and earnings growth. These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these forward-looking statements. These risks include that revenue and earnings growth may not occur as expected or at all; that we may not be able to obtain new customer programs, or that if we do obtain them, that they may not contribute to our revenue or profitability as expected or at all; 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; 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 divestitures in a manner that achieves improved profitability; 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 (1)(2)
(In thousands, except per share amounts)
Three Months Ended September 30, 2006
Non-GAAP Required GAAP
Adjustments
Net sales $4,702,333 $- $4,702,333
Cost of sales 4,427,047 1,232 4,428,279
Restructuring and other charges - 95,683 95,683
Gross profit 275,286 (96,915) 178,371
Selling, general and
administrative expenses 131,755 16,592 148,347
Restructuring and other charges - 565 565
Operating income 143,531 (114,072) 29,459
Intangible amortization - 8,498 8,498
Interest and other
expense, net 29,280 1,792 31,072
Loss on divestitures
of operations - - -
Income (loss) before
income taxes 114,251 (124,362) (10,111)
Provision for (benefit from)
income taxes 7,056 (23,115) (16,059)
Income (loss) from
continuing operations 107,195 (101,247) 5,948
Income from discontinued
operations (net of tax) 9,490 169,432 178,922
Net income $116,685 $68,185 $184,870
Earnings per share:
Income (loss) from
continuing operations:
Basic $0.01
Diluted $0.01
Income from
discontinued operations:
Basic $0.31
Diluted $0.30
Net income:
Basic $0.20 $0.32
Diluted $0.20 $0.31
Shares used in computing
per share amounts:
Basic 579,180 579,180
Diluted 587,435 587,435
Three Months Ended September 30, 2005
Non-GAAP Required GAAP
Adjustments
Net sales $3,808,075 $- $3,808,075
Cost of sales 3,574,446 - 3,574,446
Restructuring and other charges - 38,463 38,463
Gross profit 233,629 (38,463) 195,166
Selling, general and
administrative expenses 114,336 15,000 129,336
Restructuring and other charges - 11,883 11,883
Operating income 119,293 (65,346) 53,947
Intangible amortization - 11,045 11,045
Interest and other expense, net 21,942 - 21,942
Loss on divestitures of operations - (26,945) (26,945)
Income (loss) before
income taxes 97,351 (49,446) 47,905
Provision for (benefit from)
income taxes 3,885 64,802 68,687
Income (loss) from
continuing operations 93,466 (114,248) (20,782)
Income from discontinued
operations (net of tax) 7,851 10,484 18,335
Net income $101,317 $(103,764) $(2,447)
Earnings per share:
Income (loss) from
continuing operations:
Basic $(0.04)
Diluted $(0.04)
Income from discontinued
operations:
Basic $0.03
Diluted $0.03
Net income:
Basic $0.18 $-
Diluted $0.17 $-
Shares used in computing
per share amounts:
Basic 572,376 572,376
Diluted 602,147 572,376
SCHEDULE II
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (1)(3)
(In thousands, except per share amounts)
Six Months Ended September 30, 2006
Required
Non-GAAP Adjustments GAAP
Net sales $8,761,476 $- $8,761,476
Cost of sales 8,249,574 1,852 8,251,426
Restructuring and other charges - 95,683 95,683
Gross profit 511,902 (97,535) 414,367
Selling, general and
administrative expenses 244,451 23,031 267,482
Restructuring and other charges - 565 565
Operating income 267,451 (121,131) 146,320
Intangible amortization - 15,726 15,726
Interest and other expense, net 56,074 4,198 60,272
Loss on divestitures of operations - - -
Income before income taxes 211,377 (141,055) 70,322
Provision for (benefit from)
income taxes 11,905 (23,218) (11,313)
Income from continuing
operations 199,472 (117,837) 81,635
Income from discontinued
operations (net of tax) 20,941 166,797 187,738
Net income $220,413 $48,960 $269,373
Earnings per share:
Income from continuing operations:
Basic $0.14
Diluted $0.14
Income from discontinued operations:
Basic $0.32
Diluted $0.32
Net income:
Basic $0.38 $0.47
Diluted $0.38 $0.46
Shares used in computing
per share amounts:
Basic 578,823 578,823
Diluted 586,720 586,720
Six Months Ended September 30, 2005
Required
Non-GAAP Adjustments GAAP
Net sales $7,631,130 $- $7,631,130
Cost of sales 7,147,588 - 7,147,588
Restructuring and other charges - 66,035 66,035
Gross profit 483,542 (66,035) 417,507
Selling, general and
administrative expenses 243,389 15,000 258,389
Restructuring and other charges - 17,000 17,000
Operating income 240,153 (98,035) 142,118
Intangible amortization - 19,980 19,980
Interest and other expense, net 45,807 - 45,807
Loss on divestitures of operations - (26,945) (26,945)
Income before income taxes 194,346 (91,070) 103,276
Provision for (benefit from)
income taxes 7,928 59,352 67,280
Income from continuing
operations 186,418 (150,422) 35,996
Income from discontinued
operations (net of tax) 14,546 5,718 20,264
Net income $200,964 $(144,704) $56,260
Earnings per share:
Income from continuing operations:
Basic $0.06
Diluted $0.06
Income from discontinued operations:
Basic $0.04
Diluted $0.03
Net income:
Basic $0.35 $0.10
Diluted $0.33 $0.09
Shares used in computing
per share amounts:
Basic 570,851 570,851
Diluted 600,222 600,222
SCHEDULE III
FLEXTRONICS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, 2006 March 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents $1,039,745 $942,859
Accounts receivable, net 1,883,979 1,496,520
Inventories 2,614,005 1,738,310
Deferred income taxes 12,168 9,643
Current assets of
discontinued operations - 89,509
Other current assets 573,486 620,095
6,123,383 4,896,936
Property and equipment, net 1,844,919 1,586,486
Deferred income taxes 656,215 646,431
Goodwill and other intangibles, net 2,953,220 2,791,791
Non-current assets of
discontinued operations - 574,384
Other assets 831,469 462,379
$12,409,206 $10,958,407
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings, current portion
of long-term debt and capital
lease obligations $250,404 $106,099
Accounts payable 3,693,012 2,758,019
Current liabilities of
discontinued operations - 57,213
Other current liabilities 1,150,301 1,036,973
Total current liabilities 5,093,717 3,958,304
Long-term debt, net of current portion:
Zero Coupon Convertible Junior
Subordinated Notes due 2009 195,000 195,000
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 Subordinated
Notes due 2014 386,210 384,879
Other long-term debt and
capital lease obligations 9,412 9,446
Non-current liabilities of
discontinued operations - 30,578
Other liabilities 168,371 125,903
Total shareholders' equity 5,656,846 5,354,647
$12,409,206 $10,958,407
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 exclude after-tax gains and losses on
divestitures, intangible amortization, stock-based compensation
expense, restructuring and other charges.
(2) The divestiture of the Company's Software Development and Solutions
business resulted in pre-tax income of $181.2 million during the
quarter ended September 30, 2006, which is included in discontinued
operations. The divestiture of the Semiconductor and Network
Services divisions resulted in pre-tax income of $70.7 million for
the quarter ended September 30, 2005 (including $43.8 million
attributable to discontinued operations). The Company recorded pre-
tax charges of $105.9 million during the quarter ended September 30,
2006 related to the impairment, lease termination, exit costs and
other charges related primarily to the disposal and exit of certain
real estate owned and leased by the Company in order to reduce its
investment in property, plant and equipment. The Company also
recognized pre-tax restructuring charges of $50.3 million during the
quarter ended September 30, 2005, which were primarily related to
the closures and consolidations of various manufacturing facilities.
The Company recorded pre-tax intangible amortization expense of
$12.4 million (including $2.1 million attributable to discontinued
operations) and $14.6 million (including $3.6 million attributable
to discontinued operations) during the quarters ended September 30,
2006 and 2005, respectively. The Company recognized $8.4 million
(including $0.2 million attributable to discontinued operations) of
stock-based compensation expense during the quarter ended September
30, 2006 as a result of its adoption of SFAS 123(R) beginning on
April 1, 2006. The Company recorded a $15.0 million bad debt
reserve in the quarter ended September 30, 2005 associated with
accounts receivable with Delphi who filed for bankruptcy during
October 2005. The Company reversed this provision during the
quarter ended December 31, 2005 as the receivables were subsequently
collected. The tax impacts related to all of these items amounted
to a tax benefit of $13.7 million and a tax provision of $94.5
million in the quarters ended September 30, 2006 and 2005,
respectively.
(3) The divestiture of the Company's Software Development and Solutions
business resulted in pre-tax income of $181.2 million during the six
months ended September 30, 2006, which is included in discontinued
operations. The divestiture of the Semiconductor and Network
Services divisions resulted in pre-tax income of $70.7 million for
the six months ended September 30, 2005 (including $43.8 million
attributable to discontinued operations). The Company recorded pre-
tax charges of $105.9 million during the six months ended September
30, 2006 related to the impairment, lease termination, exit costs
and other charges related primarily to the disposal and exit of
certain real estate owned and leased by the Company in order to
reduce its investment in property, plant and equipment. The Company
also recognized pre-tax restructuring charges of $83.0 million
during the six months ended September 30, 2005, which were primarily
related to the closures and consolidations of various manufacturing
facilities. The Company recorded pre-tax intangible amortization
expense of $25.1 million (including $5.2 million attributable to
discontinued operations) and $29.3 million (including $9.3 million
attributable to discontinued operations) during the six months ended
September 30, 2006 and 2005, respectively. The Company recognized
$15.8 million (including $0.6 million attributable to discontinued
operations) of stock-based compensation expense during the six
months ended September 30, 2006. The Company recorded a $15.0
million bad debt reserve in the six months ended September 30, 2005
associated with accounts receivable with Delphi who filed for
bankruptcy during October 2005. The Company reversed this provision
during the quarter ended December 31, 2005 as the receivables were
subsequently collected. The tax impacts related to all of these
items amounted to a tax benefit of $14.6 million and a tax provision
of $88.1 million in the six months ended September 30, 2006 and
2005, respectively.
(4) Return on invested capital ("ROIC") divides after-tax operating
income by a quarterly average of net invested capital. After-tax
operating income includes after-tax operating income from divested
businesses, and excludes intangible amortization, stock-based
compensation expense, restructuring and other charges. Net invested
capital is defined as total assets less current liabilities and non-
operating assets. Non-operating assets include cash and cash
equivalents, short-term investments, notes receivable, deferred
income tax assets, net hedging assets, and other non-operating
assets. Return on invested tangible capital ("ROITC") is calculated
in the same manner as ROIC except ROITC excludes net intangible
assets and goodwill in the invested capital base.
We believe ROIC and ROITC are useful measures in providing investors
with information regarding our performance. ROIC is a widely
accepted measure of earnings efficiency in relation to total capital
employed. We believe that increasing the return on total capital
employed, as measured by ROIC, is an effective method to sustain and
increase shareholder value. These are not measures of financial
performance under generally accepted accounting principles in the
U.S., and may not be defined and calculated by other companies in
the same manner. These should not be considered in isolation or as
an alternative to net earnings as an indicator of performance.
The following table reconciles ROIC and ROITC as calculated using
non-GAAP after-tax operating income to the same performance measure
calculated using the nearest GAAP measure, which is operating income
from continuing operations:
Three Months Ended
September 30,
ROIC 2006 2005
Non-GAAP 11.0% 9.5%
Restructuring and other charges -8.3% -4.8%
Discontinued operations -0.6% -0.8%
GAAP 2.1% 3.9%
ROITC
Non-GAAP 29.1% 27.0%
Restructuring and other charges -21.8% -13.6%
Discontinued operations -1.7% -2.2%
GAAP 5.6% 11.2%
FCMN Contact: renee.brotherton@flextronics.com