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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 1999.
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM
_______________ TO
_______________.
COMMISSION FILE NUMBER: 0-21272
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FLEXTRONICS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SINGAPORE 0-23354 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NO.)
------------------------
514 CHAI CHEE LANE #04-13
BEDOK INDUSTRIAL ESTATE
SINGAPORE 469029
(65) 449-5255
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL E. MARKS
CHIEF EXECUTIVE OFFICER
FLEXTRONICS INTERNATIONAL LTD.
514 CHAI CHEE LANE #04-13
BEDOK INDUSTRIAL ESTATE
SINGAPORE 469029
(65) 449-5255
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes {X} No { }
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate value of voting stock held by non-affiliates of the Registrant was
approximately $2,737 million, based upon the closing price of the Registrant's
Common Stock reported for such date on the Nasdaq National Market. Shares of
Common Stock held by each executive officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily a conclusive determination for other purposes. As of June 15,
1999, the Registrant had 48,122,058 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1998 annual general
meeting of shareholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form 10-K.
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FLEXTRONICS INTERNATIONAL LIMITED
1999 FORM 10-K
TABLE OF CONTENTS
Part I
Item 1. Business .............................................................4
Item 2. Facilities...........................................................17
Item 3. Legal Proceedings....................................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.........................................20
Item 6. Selected Financial Data..............................................21
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations...................................23
Item 8. Financial Statements and Supplementary Data..........................38
Item 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure....................................67
Part III
Item 10. Directors and Executive Officers of the Registrant...................67
Item 11. Executive Compensation...............................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management.......69
Item 13. Certain Relationships and Related Transactions.......................69
Part IV
Item 14. Exhibits and Financial Statement Schedules...........................70
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PART I
Except for historical information contained herein, the matters discussed
in this annual report Form 10-K are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words "expects,"
"anticipates," "believes," "intends," "plans" and similar expressions identify
forward-looking statements, which speak only as of the date hereof. These
forward-looking statements are subject to certain risks and uncertainties,
including, without limitation, those discussed in "Item 1-Business--Risk
Factors," that could cause future results to differ materially from historical
results or those anticipated.
Item 1. BUSINESS
Flextronics International Ltd. is a leading provider of advanced
electronics manufacturing services to original equipment manufacturers ("OEM"")
in the telecommunications, networking, computer, consumer electronics and
medical device industries. We provide a wide range of integrated services, from
initial product design to volume production and fulfillment. Our manufacturing
services range from printed circuit board fabrication and assembly to complete
product assembly and test. We believe that we have developed particular
strengths in advanced interconnect, miniaturization and packaging technologies.
In addition, we provide advanced engineering services, including product design,
PCB layout, quick-turn prototyping and test development. Throughout the
production process, we offer logistics services, such as materials procurement,
inventory management, packaging and distribution.
Through a combination of internal growth and acquisitions, we have become
the fourth largest provider of electronics manufacturing services with revenues
of $1.8 billion in fiscal 1999. We believe that our size, global presence and
expertise enable us to win large outsourced manufacturing programs from leading
multinational OEMs. We offer a complete and flexible manufacturing solution that
provides accelerated time-to-market and time-to-volume production, as well as
reduced production costs. By working closely with customers throughout the
design, manufacturing and distribution process, and by offering highly
responsive services, we believe that we can become an integral part of their
operations.
Our customers include industry leaders such as Alcatel, Bay Networks,
Cisco, Compaq, Ericsson, Hewlett-Packard, Microsoft, Nokia, Philips, Sony and
3Com. In addition, we recently entered into relationships with a number of new
customers, including Kodak, Intel, Qualcomm, Lucent and Rockwell. Due to our
focus on high growth technology sectors, our prospects are influenced by certain
major trends, such as the buildout of the communications and Internet
infrastructure, the proliferation of wireless devices and other trends in
electronics technologies. In addition, our growth is driven by the accelerating
pace at which leading OEMs are adopting outsourcing as a core business strategy.
We have established an extensive network of manufacturing facilities in the
world's major electronics markets - Asia, the Americas and Europe - to serve the
increased outsourcing needs of both multinational and regional OEMs. We
strategically locate facilities near our customers' end markets and have located
fully integrated, high volume manufacturing facilities in low cost regions
worldwide. We have established industrial parks in China, Hungary and Mexico and
are planning an industrial park in Brazil. These self-contained facilities
provide a total manufacturing and fulfillment solution from a single site by
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locating manufacturing and distribution operations and suppliers together. This
integrated approach to production and distribution benefits our customers by
reducing logistical barriers and costs, improving supply-chain management,
increasing flexibility, lowering transportation costs and reducing turnaround
times.
Since March 31, 1997, we have increased overall capacity by approximately
2.1 million square feet through internal growth and acquisitions. As a result,
we have grown to approximately 3.5 million square feet of capacity on four
continents.
Industry Overview
Many OEMs in the electronics industry are increasingly utilizing
electronics manufacturing service providers in their business and manufacturing
strategies, and are seeking to outsource a broad range of manufacturing and
related engineering services. Outsourcing allows OEMs to take advantage of the
manufacturing expertise and capital investments of electronics manufacturing
service providers, thereby enabling OEMs to concentrate on their core
competencies, such as product development, marketing and sales. OEMs utilize
electronics manufacturing service providers to enhance their competitive
position by:
o reducing production costs;
o accelerating time-to-market and time-to-volume production;
o accessing advanced manufacturing and design capabilities;
o reducing capital investment requirements and fixed overhead costs;
o improving inventory management and purchasing power; and
o accessing worldwide manufacturing capabilities.
As a result of these factors, industry sources estimate that the overall
market for electronic manufacturing services has grown at an average annual rate
of 25% from 1988 to 1997, reaching an estimated $73 billion in 1997.
Strategy
Our objective is to enhance our position as a top tier provider of advanced
electronics manufacturing services. Our strategy to meet this objective includes
the following key elements:
Serve Major Markets From Strategic, Low Cost Regions. We have established
an extensive network of manufacturing facilities in the world's major
electronics markets - Asia, the Americas and Europe - to serve the increased
outsourcing needs of both multinational and regional OEMs. We strategically
locate facilities near our customers' end markets and have located fully
integrated, high volume manufacturing facilities in low cost regions worldwide.
By operating in low cost areas, we are able to realize savings in lower labor,
overhead, tax and transportation costs, which we can pass on to our customers.
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Capitalize on Industrial Park Strategy. We have established large,
strategically located industrial parks in China, Hungary and Mexico, designed
for high volume production, and are planning a new industrial park in Brazil.
These self-contained facilities provide a total manufacturing and fulfillment
solution from a single site by locating manufacturing and distribution
operations and suppliers together. This integrated approach to production and
distribution benefits our customers by reducing logistical barriers and costs,
improving supply-chain management, increasing flexibility, lowering
transportation costs and reducing turnaround times.
Establish Close Relationships with Customers. We believe we can become an
integral part of our customers' operations by working closely with them
throughout the design, manufacturing and distribution process, and by offering
flexible, highly responsive services. We believe we develop strong customer
relationships through a management approach which fosters rapid decision-making
and a customer service orientation that responds quickly to frequently changing
customer design specifications and production requirements. In many cases, we
closely integrate our information systems with those of our customers. This
customer-focused approach allows us to accelerate our customers' time-to-market
and time-to-volume production and helps them to respond quickly to change.
Deliver Complete Manufacturing Solution. We believe OEMs are increasingly
requiring a wider range of advanced engineering and manufacturing services in
order to reduce their costs and accelerate their time to market. Building on our
integrated engineering and manufacturing capabilities, we provide services from
initial product design and test to final product assembly and distribution to
the OEM's customers. In addition, our global network of industrial parks,
manufacturing and technology centers, regional manufacturing facilities and
product introduction centers provides customers with a scalable, flexible
solution to support their needs as their products move from design and initial
introduction to high volume production and distribution.
Leverage Advanced Technological Capabilities. Our strengths in advanced
miniaturization, packaging and interconnect technologies enable us to offer
customers advanced design, technology and manufacturing solutions for their
leading-edge products. Our product introduction centers are located in North
America and Europe and provide a high level of engineering expertise to the
customer. Our technological capabilities help our customers to shrink product
size, improve product performance and reduce costs.
There can be no assurance that our strategy, even if successfully
implemented, will reduce the risks associated with the Company's business. See
"- Risk Factors."
Customers
The Company's customers consist of a select group of OEMs in the
telecommunications, networking, computer, consumer electronics and medical
device industries. Within these industries, the Company's strategy is to seek
long-term relationships with leading companies that seek to outsource
significant production volumes of complex products. The Company has increasingly
focused on sales to larger companies and to customers in the telecommunications,
networking and consumer industries. In fiscal 1998 and fiscal 1999, the
Company's five largest customers accounted for approximately 57% and 62%,
respectively, of net sales. The loss of one or more major customers would have a
material adverse effect on the Company, its results of operations, prospects or
debt service ability. See "Risk Factors -- Customer Concentration; Dependence
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on Electronics Industry" and "-- Variability of Customer Requirements and
Operating Results."
The following table lists in alphabetical order the Company's largest
customers in fiscal 1999 and the products for which the Company provides
manufacturing services.
CUSTOMER END PRODUCTS
- ------------------------------------------- -----------------------------------
3Com/US Robotics........................... Pilot electronic organizers
Advanced Fibre Communications.............. Local line loop carriers
Alcatel ................................... Business telecommunications systems
Cisco ..................................... Data communications products
Ericsson................................... Business telecommunications system
Hewlett Packard ........................... Printers
Lifescan (a Johnson & Johnson company)..... Portable glucose monitoring system
Microsoft.................................. Computer peripheral devices and
internet access devices
Nortel Networks............................ Data communications products
Philips.................................... Consumer electronics products
In addition, the Company recently began manufacturing products for a number
of new customers, including Intel (mother boards), Kodak (reusable cameras),
Lucent (data communications products), Qualcomm (cellular phones) and Rockwell
(modems). None of these customers represent more than 10% of the Company's net
sales in fiscal 1999.
The Company's largest customers during fiscal 1999 were Philips, Ericsson,
and Cisco accounting for approximately 18%, 16% and 13%of consolidated net
sales, respectively. No other customer accounted for more than 10% of
consolidated net sales in fiscal 1999.
Sales and Marketing
The Company achieves worldwide sales coverage through a direct sales force,
which focuses on generating new accounts, and through program managers, who are
responsible for managing relationships with existing customers and making
follow-on sales. The Company's Asian sales offices are located in Singapore and
Hong Kong. In North America, the Company maintains sales offices in California,
Florida and Massachusetts. In Europe, the Company maintains sales offices in
England, France, Germany, the Netherlands and Sweden. In addition to its sales
force, the Company's executive staff plays an integral role in the Company's
marketing efforts.
Services
Flextronics offers a broad range of integrated services, providing
customers with a total solution to take a product from initial design through
volume production, test and distribution into post-sales service and support.
Engineering Services. Our product introduction centers coordinate and
integrate our worldwide design, prototype, test development and other
engineering capabilities. Through these product introduction centers, we provide
a broad range of engineering services and, in certain locations, dedicated
production lines for prototypes. These services strengthen our relationships
with manufacturing customers and attract new customers requiring advanced
engineering services.
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To assist customers with initial design, we provide CAE and CAD-based
design, engineering for manufacturability, circuit board layout and test
development. We also coordinate industrial design and tooling for product
manufacturing. After product design, we provide quick-turn prototyping. During
this process, we assist with the transition to high volume production. By
participating in product design and prototype development, we can reduce
manufacturing costs and accelerate the time to high volume production.
Materials Procurement and Management. Materials procurement and management
consists of the planning, purchasing, expediting and warehousing of components
and materials. Our inventory management expertise and volume procurement
capabilities contribute to cost reductions and reduce total cycle time. Our
industrial parks in China, Hungary and Mexico include providers of many of the
custom components that we use, thus reducing material and transportation costs,
simplifying logistics and facilitating inventory management.
Assembly and Manufacturing. Our assembly and manufacturing operations
include PCB assembly, assembly of subsystems and systems that incorporate PCBs
and complex electromechanical components. A substantial portion of our net sales
is derived from the manufacture and assembly of complete products. Flextronics
employs just-in-time, ship-to-stock and ship-to-line programs, continuous flow
manufacturing, demand flow processes and statistical process control. As OEMs
seek to provide greater functionality in smaller products, they increasingly
require more sophisticated manufacturing technologies and processes. Our
investment in advanced manufacturing equipment and our experience and expertise
in innovative miniaturization, packaging and interconnect technologies (such as
chip scale packaging, chip-on-board, ball grid array and thermal vias) enable us
to offer a variety of advanced manufacturing solutions. In addition, we
manufacture miniature gold-finished PCBs and develop and produce
injection-molded plastic components.
Test. We offer computer-aided testing of assembled PCBs, subsystems and
systems, which contributes significantly to our ability to deliver high-quality
products on a consistent basis. We work with our customers to develop
product-specific test strategies. Our test capabilities include management
defect analysis, in-circuit tests and functional tests. We either custom design
test equipment and software ourselves or use test equipment and software
provided by our customers. In addition, we also provide environmental stress
tests of board or system assemblies.
Distribution. We offer our customers flexible, just-in-time delivery
programs allowing product shipments to be closely coordinated with customers'
inventory requirements. Increasingly, we ship products directly into customers'
distribution channels or directly to the end-user. We believe that this service
can provide our customers with a more comprehensive solution and enable them to
be more responsive to market demands.
Competition
The electronics manufacturing services industry is extremely competitive
and includes hundreds of companies, several of whom have achieved substantial
market share. The Company competes against numerous domestic and foreign
electronics manufacturing services providers, and current and prospective
customers also evaluate the Company's capabilities against the merits of
internal production. In addition, in recent years the electronics manufacturing
industry has attracted a significant number of new entrants, including large
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OEMs with excess manufacturing capacity, and many existing participants,
including the Company, have significantly increased their manufacturing capacity
by expanding their facilities and adding new facilities. In the event of a
decrease in overall demand for electronics manufacturing services, this
increased capacity could result in substantial pricing pressures which could
adversely affect the Company's operating results. Certain of the Company's
competitors, including Solectron, SCI Systems and Celestica, have substantially
greater manufacturing, financial, research and development and marketing
resources than the Company. As competitors increase the scale of their
operations, they may increase their ability to realize economies of scale, to
reduce their prices and to more effectively meet the needs of large OEMs. The
Company believes that the principal competitive factors in the segments of the
electronics manufacturing services industry in which it operates are cost,
technological capabilities, responsiveness and flexibility, delivery cycles,
location of facilities, product quality and range of services available. Failure
to satisfy any of the foregoing requirements could materially adversely affect
the Company's competitive position, its results of operations, prospects or debt
service ability.
Employees
As of March 31, 1999, the Company employed approximately 18,147 persons.
The Company has never experienced a work stoppage or strike and the Company
believes that its employee relations are good.
The Company's success depends to a large extent upon the continued services
of key managerial and technical employees. The loss of such personnel could have
a material adverse effect on the Company, its results of operations, prospects
or debt service ability. See "- Risk Factors -- Dependence of Key Personnel."
Recent Acquisitions
In June 1999, Flextronics entered into an agreement to acquire Kyrel EMS
Oyj, a provider of electronics manufacturing services with two facilities in
Finland and one in Luneville, France. Kyrel employs approximately 900 people and
its 1998 revenues were $230 million. Flextronics expects to issue approximately
1.9 million shares in the acquisition. Government approval is required in
Finland and the transaction is expected to close in the second quarter of fiscal
2000. The acquisition of Kyrel Ems Oyj will be accounted for as a
pooling-of-interests.
In May 1999, Flextronics purchased the manufacturing facilities and related
assets of ABB Automation Products in Vasteras, Sweden for approximately $25.9
million. This facility provides printed circuit board assemblies and other
electronic equipment. Flextronics has also offered employment to 575 ABB
personnel who were previously employed by ABB Automation Products. In connection
with the acquisition of certain fixed assets, the Company has also entered into
a manufacturing service agreement with ABB Automation Products.
In April 1999, Flextronics entered into an agreement to purchase the
manufacturing facilities and related assets of Ericsson's Visby, Sweden
operations. Ericsson's Visby facility manufactures mobile systems
infrastructure, primarily radio base stations. Under the terms of the agreement,
Flextronics will acquire the facility, including equipment and materials. In
connection with the acquisition of assets, the Company has also entered into a
manufacturing service agreement with Ericsson. The asset transfer is expected to
close during the second quarter of fiscal 2000.
On March 1, 1999, Astron, a subsidiary of the Company, acquired the
manufacturing facilities and related assets of Advanced Component Labs HK Ltd.
("ACL"), a Hong Kong based advanced technology printed
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circuit board manufacturer for $15.0 million cash. The Company believes the
acquisition of ACL will enhance Astron's advanced packaging substrate technology
to meet growing market demands for small handheld telecommunication and personal
computing devices and plans to consolidate the operations of both Astron and
ACL.
On March 1, 1999, the Company increased its ownership of FICO Investment
Holding Ltd. ("FICO") to 90% by acquiring an additional 50% of its equity
interests for (i)$7.2 million cash, (ii)127,850 Ordinary Shares issued at
closing valued at $4.8 million (iii)$3.0 million in 2% promissory notes due $1.0
million each in year 2000 through year 2002. FICO is a plastics injection
molding company located in China.
The ability of the Company to obtain the benefits of its recent
acquisitions are subject to a number of risks and uncertainties, including the
Company's ability to successfully integrate the acquired operations and its
ability to maintain, and increase, sales to customers of the acquired companies.
See "-Risk Factors - Risk of Acquisitions" and "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview.
RISK FACTORS
Risks of Expansion of Operations
We have grown rapidly in recent periods, and this growth may not continue.
Internal growth will require us to develop new customer relationships and expand
existing ones, improve our operational and information systems and further
expand our manufacturing capacity.
We plan to further expand our manufacturing capacity by expanding our
facilities and by adding new equipment. Such expansion involves significant
risks. For example:
o we may not be able to attract and retain the management personnel and
skilled employees necessary to support expanded operations;
o we may not efficiently and effectively integrate new operations, expand
existing ones and manage geographically dispersed operations;
o we may incur cost overruns;
o we may encounter construction delays, equipment delays or shortages, labor
shortages and disputes and production start-up problems that could
adversely affect our growth and our ability to meet customers' delivery
schedules; and
o 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, including substantial increases in depreciation
expense and rental expense, that will increase our cost of sales. If our
revenues do not increase sufficiently to offset these expenses, our operating
results would be adversely affected. Our expansion, both through acquisitions
and internal growth, has contributed to our incurring significant accounting
charges and
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experiencing volatility in our operating results. We may continue to experience
volatility in operating results in connection with future expansion efforts.
Risks of Acquisitions
Acquisitions have represented a significant portion of the Company's growth
strategy, and the Company intends to continue to pursue attractive acquisitions
opportunities. Our acquisitions during the last two fiscal years represented a
significant expansion of our operations. Acquisitions involve a number of risks
and challenges, including:
o diversion of management's attention; o the need to integrate acquired
operations;
o potential loss of key employees and customers of the acquired companies;
o lack of experience operating in the geographic market of the acquired
business; and
o an increase in our expenses and working capital requirements.
To integrate acquired operations, 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.
Any of these and other factors could adversely affect our ability to
achieve anticipated levels of profitability at acquired operations or realize
other anticipated benefits of an acquisition. Furthermore, any future
acquisitions may require additional debt or equity financing, which could
increase our leverage or be dilutive to our existing shareholders. No assurance
can be given that we will consummate any acquisitions in the future.
Variability of Customer Requirements and Operating Results
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 over the past few years
we have experienced 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 adversely affect our results of operations. In addition
to the variable nature of our operating results due to the short-term nature of
our customers' commitments, other factors may contribute to significant
fluctuations in our results of operations. These factors include:
o the timing of customer orders;
o the volume of these orders relative to our capacity;
o market acceptance of customers' new products;
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o changes in demand for customers' products and product obsolescence;
o the timing of our expenditures in anticipation of future orders;
o our effectiveness in managing manufacturing processes;
o changes in the cost and availability of labor and components;
o changes in our product mix;
o changes in economic conditions;
o local factors and events that may affect our production volume (such as
local holidays); and
o seasonality in customers' product requirements.
One of our significant end-markets is the consumer electronics market. This
market exhibits particular strength towards the end of the year in connection
with the holiday season. As a result, we have experienced relative strength in
our revenues in the third fiscal quarter.
We make significant decisions, including 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 reduces our
ability to estimate accurately future customer requirements. 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, there can be no assurance we will 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 can adversely affect our gross margins and
operating income.
Customer Concentration; Dependence on Electronics Industry
Our five largest customers accounted for approximately 62% of consolidated
net sales in fiscal 1999 and 57% in fiscal 1998. Our largest customers during
fiscal 1999 were Philips, Ericsson and Cisco accounting for approximately 18%,
16% and 13% of consolidated net sales, respectively. Sales to our five largest
customers had represented a majority of our net sales in recent periods. The
identity of our principal customers has 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 have a material and adverse effect on us. We
can not assure the timely replacement of expired, canceled, or reduced contracts
with new business. See "--Variability of Customer Requirements and Operating
Results."
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Factors affecting the electronics industry in general could have a material
adverse effect on our customers and, as a result on us. Such factors include:
o the inability of our customers to adapt to rapidly changing technology and
evolving industry standards, which results in short product life cycles;
o the inability of our customers to develop and market their products, some
of which are new and untested. If customers' products become obsolete or
fail to gain widespread commercial acceptance, our business may be
materially and adversely affected; and;
recessionary periods in our customers' markets.
Risk of Increased Taxes
We have structured our operations in a manner designed to maximize income
in countries where tax incentives have been extended to encourage foreign
investment or where income tax rates are low. Our taxes could increase if these
tax incentives are not renewed upon expiration, or tax rates applicable to us
are increased. Substantially all of the products manufactured by our Asian
subsidiaries are sold to customers based in North America and Europe. We believe
that profits from our Asian operations are not sufficiently connected to
jurisdictions in North America or Europe to give rise to income taxation there.
However, tax authorities in jurisdictions in North America and Europe could
challenge the manner in which profits are allocated among our subsidiaries, and
we may not prevail in any such challenge. If our Asian profits became subject to
income taxes in such other jurisdictions, our worldwide effective tax rate could
increase.
Significant Leverage
Our level of indebtedness presents risks to investors, including:
o the possibility that we may be unable to generate cash sufficient to pay
the principal of and interest on the indebtedness when due;
o making us more vulnerable to economic downturns;
o limiting our ability to pursue new business opportunities; and
o reducing our flexibility in responding to changing business and economic
conditions.
Risks of Competition
The electronics manufacturing services 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. Certain of our competitors, including
Solectron and SCI Systems, have substantially greater market shares than us, and
substantially greater manufacturing, financial, research and development and
marketing resources. In recent years, many participants in the industry,
including us, have substantially expanded their manufacturing capacity. If
overall demand for electronics manufacturing services
13
should decrease, this increased capacity could result in substantial pricing
pressures, which could adversely affect our operating results.
Risks of International Operations
The geographical distances between Asia, the Americas and Europe create a
number of logistical and communications challenges. Our manufacturing operations
are located in a number of countries, including Austria, Brazil, China, Hungary,
Malaysia, Mexico, Sweden, the United Kingdom and the United States. As a result,
we are affected by economic and political conditions in those countries,
including:
o fluctuations in the value of currencies; o changes in labor conditions;
o longer payment cycles;
o greater difficulty in collecting accounts receivable;
o burdens and costs of compliance with a variety of foreign laws;
o political and economic instability;
o increases in duties and taxation;
o imposition of restrictions on currency conversion or the transfer of funds;
o limitations on imports or exports;
o expropriation of private enterprises; and
o reversal of the current policies (including favorable tax and lending
policies) encouraging foreign investment or foreign trade by our host
countries.
The attractiveness of our services to our U.S. customers can be affected by
changes in U.S. trade policies, such as "most favored nation" status and trade
preferences for certain Asian nations. For example, trade preferences extended
by the United States to Malaysia in recent years were not renewed in 1997. In
addition, some countries in which we operate, such as Brazil, Mexico and
Malaysia, have experienced periods of slow or negative growth, high inflation,
significant currency devaluations and limited availability of foreign exchange.
Furthermore, in countries such as Mexico and China, governmental authorities
exercise significant influence over many aspects of the economy, and their
actions could have a significant effect on Flextronics. Finally, we could be
adversely affected by inadequate infrastructure, including lack of adequate
power and water supplies, transportation, raw materials and parts in countries
in which we operate.
Risks Relating to China. Under its current leadership, the Chinese
government has been pursuing economic reform policies. There can be no assurance
that the Chinese government will continue to pursue such policies, or that such
policies will be successful if pursued. In addition, China does not have a
comprehensive and highly developed system of laws, and enforcement of laws and
contracts is uncertain. The United States annually reconsiders the
14
renewal of most favored nation trading status of China. China's loss of most
favored nation status could adversely affect us by increasing the cost to U.S.
customers of products manufactured by us in China.
Risks relating to Mexico. The Mexican government exercises significant
influence over many aspects of the Mexican economy and its action could have a
significant effect on private sector entities in general and the Company in
particular. In addition, during the 1980s, Mexico experienced periods of slow or
negative growth, high inflation, significant devaluation of the peso and limited
availability of foreign exchange.
Risks Relating to Hungary. Hungary has undergone significant political and
economic change in recent years. Political, economic, social and other
developments, and changes in laws could have a material and adverse effect on
our business. Annual inflation and interest rates in Hungary have historically
been much higher than those in Western Europe. Exchange rate policies have not
always allowed for the free conversion of currencies at the market rate. Laws
and regulations in Hungary have been, and continue to be, substantially revised
during its transition to a market economy. As a result, laws and regulations may
be applied inconsistently. Also in some circumstances, it may not be possible to
obtain the legal remedies provided for under those laws and regulations in a
reasonably timely manner, if at all.
Risks Relating to Brazil. During the past several years, the Brazilian
economy has been affected by significant intervention by the Brazilian
government. The Brazilian government has changed monetary, credit, tariff and
other policies to influence the course of Brazil's economy. The Brazilian
government's actions to control inflation and effect other policies have often
involved wage, price and exchange controls as well as other measures such as
freezing bank accounts and imposing capital controls.
Risks of Currency Fluctuations and Hedging Operations
With the recent acquisitions of operations in Sweden, Austria and Brazil, a
significant portion of our business is conducted in the Swedish kronor, European
Euro and Brazilian real. In addition, some of our costs, such as payroll and
rent, are denominated in currencies such as the Singapore dollar, the Hong Kong
dollar, the Malaysian ringgit, the Hungarian forint, the Mexican peso, and the
British pound, as well as the kronor, the euro and the real. In recent years,
the Hungarian forint, Brazilian real and Mexican peso have experienced
significant devaluations, and in January 1999 the Brazilian real experienced
further significant devaluations. Changes in exchange rates between these and
other currencies and the U.S. dollar will affect our cost of sales and operating
margins. We cannot predict the impact of future exchange rate fluctuations. We
use financial instruments, primarily forward purchase contracts, to hedge
certain fixed 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 have a material effect on 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.
Dependence of Key Personnel
Our success depends to a larger extent upon the continued services of our
key executives and skilled personnel. Generally our employees are not bound by
15
employment or non-competition agreements, and there can be no assurance that we
will retain our officers and key employees. We could be materially and adversely
affected by the loss of such personnel.
Limited Availability of Components
A substantial majority of our net sales are derived from turnkey
manufacturing in which we are responsible for procuring materials, which
typically results in our bearing the risk of component price increases. At
various times, there have been shortages of certain electronic components.
Component shortages could result in manufacturing and shipping delays or higher
prices, which could have a material adverse effect on us.
Environmental Compliance Risks
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals. Although we believe
that our facilities are currently in material compliance with applicable
environmental laws, there can be no assurances that violations will not occur.
The costs and penalties that could result from a violation of environmental laws
could materially and adversely affect us.
Volatility of Market Price of Ordinary Shares
The stock market in recent years have experienced significant price and
volume fluctuations that have affected the market prices of technology
companies. Such fluctuations have often been unrelated to or disproportionately
impacted by the operating performance of such companies. The market for the
Ordinary Shares may be subject to similar fluctuations. Factors such as
fluctuations in our operating results, announcements of technological
innovations or events affecting other companies in the electronics industry,
currency fluctuations and general market conditions may have a significant
effect on the market price of the Ordinary Shares.
16
Item 2. FACILITIES
Our facilities consist of a global network of industrial parks,
manufacturing and technology centers, providing a total of over 3.5 million
square feet of capacity. Our industrial parks, each incorporating approximately
300,000 square feet of facilities, are designed for fully integrated, high
volume manufacturing. These industrial parks offer manufacturing and
distribution operations and suppliers that are located together at one site in
low cost areas close to major electronics markets. Manufacturing and technology
centers are facilities that have both medium and high volume manufacturing and
product introduction centers and, as a result, are where we focus on launching
customers' new products and transitioning them to volume production. Each center
features advanced technological competency. Regional manufacturing facilities
range from approximately 50,000 to 165,000 square feet and provide medium and
high volume production in locations close to strategic markets. Product
introduction centers provide a broad range of advanced engineering services and
prototype and low volume production capabilities. All of our manufacturing
facilities are registered to the quality requirements of the International
Organization for Standardization (ISO 9002) or are in the process of final
certification.
Certain information about the Company's manufacturing and engineering
facilities as of March 31, 1999 is set forth below:
YEAR TYPE OF APPROXIMATE OWNED/
LOCATION COMMENCED(1) FACILITY(2) SQUARE FEET LEASED(3) SERVICES
-------- ------------ ----------- ----------- --------- --------
Althofen, Austria (4)..... 1997 M,P 153,000 Owned Full system manufacturing; PCB
assembly; design, prototype and
engineering services.
Sarvar, Hungary (4)....... 1997 I 298,000 Leased(5) Full system manufacturing; PCB
assembly; plastic injection
molding.
Tab, Hungary (4).......... 1997 R 150,000 Owned Full system manufacturing; PCB
assembly.
Zalaegerszeg, Hungary (4). 1997 I 205,000 Owned Full system manufacturing; PCB
assembly.
Sao Paulo, Brazil (6)..... 1998 R 18,849 Leased Complex, high value-added PCB
assembly.
Sao Paulo, Brazil (6)..... 1998 R 39,431 Leased Full system manufacturing; PCB
assembly.
Sao Paulo, Brazil (6)..... 1998 R 18,953 Leased Full system manufacturing; PCB
assembly.
Sao Paulo, Brazil (6)..... 1998 R 18,480 Leased Repair center.
Shenzhen, China.......... 1995 R 254,390 Leased High volume PCB assembly.
Shenzhen, China (7)...... 1995 R 71,558 Leased Plastic injection molding.
Shenzhen, China (7)...... 1998 R 92,786 Owned Plastic injection molding.
Hong Kong, China (8)...... 1996 M 37,883 Leased Fabrication of high density
PCB.
Doumen, China (8)......... 1996 I 199,491(9) Owned(9) Fabrication of high density,
miniaturized PCBs, high volume
PCB assembly.
Hong Kong, China (10)..... 1999 M 73,738 Leased Fabrication of high density
PCB.
Johore, Malaysia.......... 1991 R 90,000 Owned Full system manufacturing; PCB
assembly.
Guadalajara, Mexico....... 1997 R 219,701 Owned High volume PCB assembly.
Guadalajara, Mexico....... 1998 I 77,396 Owned Warehousing.
Guadalajara, Mexico....... 1998 I 87,864 Owned Plastic injection molding.
Guadalajara, Mexico....... 1999 I 51,732 Owned High volume PCB assembly.
Karlskrona, Sweden........ 1997 M,P 419,640 Owned(11) Assembly and test of complex
PCBs and systems and design and
prototype services.
Karlskrona, Sweden........ 1998 M 25,286 Leased Tooling and distribution
services.
Stockholm, Sweden......... 1997 M 73,244 Leased Installation services and
and assembly of cables.
Stockholm, Sweden......... 1998 P 21,950 Leased Design and prototype services.
Katrineholm, Sweden....... 1998 M 33,248 Leased Assembly of cables and full
system assembly.
17
Hamilton, Scotland (12)... 1998 R,P 46,000 Leased Complex, high value-added PCB
assembly and engineering services.
Fremont, California (12).. 1998 M 48,000 Leased Complex, high value-added PCB
assembly.
Fremont, California (12).. 1998 M 83,480 Owned Complex, high value-added PCB
assembly.
Fremont, California (12).. 1998 M 41,968 Owned Complex, high value-added PCB
assembly.
San Jose, California...... 1994 M 65,000 Leased Full system manufacturing; PCB
assembly.
San Jose, California...... 1996 M 33,000 Leased Complex, high value-added PCB
assembly.
San Jose, California...... 1997 M 73,000 Owned Complex, high value-added PCB
assembly.
San Jose, California...... 1999 M 40,000 Owned Complex, high value-added PCB
assembly.
San Jose, California...... 1998 M 22,000 Leased PCBA and full system assembly.
San Jose, California...... 1998 M 24,000 Leased PCBA and full system assembly.
San Jose, California...... 1998 M 64,000 Leased Warehousing.
San Jose, California...... 1996 P 72,000 Leased Engineering services and
corporate functions.
Niwot, Colorado (13)...... 1997 M,P 37,055 Leased Plastic injection molding and
engineering services.
Richardson, Texas......... 1995 R,P 47,000 Leased Test, development, procurement,
warehousing and engineering
services.
Westford, Massachusetts... 1987 P 36,200 Leased Design and prototype services.
Monza, Italy (4).......... 1997 P --(14) -- Engineering services.
(1) Refers to year acquired, leased or constructed by Flextronics or its
predecessor.
(2) "I" designates Industrial parks.
"M" designates Manufacturing and technology centers.
"R" designates Regional manufacturing facilities.
"P" designates Product introduction centers.
(3) The leases for our leased facilities expire between the years 1999 and
2051.
(4) Acquired in fiscal 1998 in connection with the Neutronics acquisition.
(5) Flextronics currently owns the land and certain of the buildings located in
the Sarvar Industrial Park and leases other buildings at this location.
(6) Acquired in fiscal 1998 in connection with the Conexao acquisition.
(7) Acquired in fiscal 1999 in connection with the FICO acquisition.
(8) Acquired in fiscal 1996 in connection with the Astron acquisition.
(9) Excludes approximately 446,163 square feet used for dormitories,
infrastructure and other functions. The Company has land use rights for
this facility through 2042.
(10) Acquired in fiscal 1999 in connection with the ACL acquistion.
(11) Ericsson has retained certain rights with respect to the Company's use and
disposition of the Karlskrona Facilities.
(12) Acquired in fiscal 1998 in connection with the Altatron acquisition.
(13) Acquired in fiscal 1998 in connection with the DTM acquisition.
18
(14) A subsidiary has 55% ownership in this facility in Monza, Italy.
The campus facilities in China, Hungary, and Mexico are designed to be
integrated facilities that can produce certain components used by the Company,
manufacture complete products for customers, warehouse the products and
distribute them directly to customer's distribution channels. The Company
believes that by offering all of those capabilities at the same site, it can
reduce material and transportation costs, simplify logistics and communications,
and improve inventory management. This enables Flextronics to provide customers
with a more complete, cost-effective manufacturing solution.
Since March 31, 1997, we have increased overall capacity by approximately
2.1 million square feet through internal growth and acquisitions. As a result,
we have grown to approximately 3.5 million square feet of capacity on four
continents. We plan to further expand our facilities and add new equipment.
There can be no assurance that the Company will not encounter unforeseen
difficulties, costs or delays in expanding its facilities. See "Item 1 -
Business - Risk Factors - Risks of Expansion of Operations."
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
19
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF ORDINARY SHARES
The Company's Ordinary Shares are traded on the Nasdaq National Market
under the symbol "FLEX". The following table shows the high and low closing
sale prices of the Company's Ordinary Shares since the beginning of the
Company's 1998 fiscal year (giving effect to our December 1999 two-for-one stock
split).
HIGH LOW
------ -------
Fiscal 1998
First Quarter.................................... $13 1/2 $ 8 3/4
Second Quarter................................... $23 13/16 $13 3/16
Third Quarter.................................... $24 1/16 $16 1/4
Fourth Quarter................................... $23 15/16 $14 7/8
Fiscal 1999
First Quarter.................................... $25 9/16 $18 3/16
Second Quarter................................... $23 1/2 $11 5/16
Third Quarter.................................... $42 13/16 $14 9/16
Fourth Quarter................................... $51 $33 1/8
On June 15, 1999, there was 48,122,058 holders of record and the closing
sale price of the Ordinary Shares was $56.875 per share.
DIVIDENDS
Since inception, the Company has not declared or paid any cash dividends on
its Ordinary Shares, and the Credit Facility prohibits the payment of cash
dividends without the lenders' prior consent. The terms of the Company's senior
subordinated notes also restrict the Company's ability to pay cash dividends.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description of
the Credit Facility." The Company anticipates that all earnings in the
foreseeable future will be retained to finance the continuing development of its
business.
20
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the fiscal years
ended March 31, 1995, 1996, 1997, 1998 and 1999. These historical results are
not necessarily indicative of the results to be expected in the future. The
following table is qualified by reference to and should be read in conjunction
with the consolidated financial statements, related notes thereto and other
financial data included elsewhere herein.
FISCAL YEAR ENDED MARCH 31,
(IN THOUSANDS, except per share amounts)
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
Net sales ................................... $ 292,149 $ 572,045 $ 640,007 $ 1,113,071 $ 1,807,628
Cost of sales ............................... 265,426 517,732 575,142 1,004,170 1,652,891
----------- ----------- ----------- ----------- -----------
Gross margin ................................ 26,723 54,313 64,865 108,901 154,737
Selling, general and administrative ......... 15,771 28,138 36,277 53,695 68,121
Goodwill and intangible amortization ........ 762 1,296 2,648 3,659 3,622
Provision for excess facilities ............. -- 1,254(1) 5,868(2) 8,869(3) 3,361(4)
Acquired in-process research and development 91 29,000(1) -- -- 2,000(4)
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ............... 10,099 (5,375) 20,072 42,678 77,633
Merger-related expenses ..................... (816) -- -- (7,415)(3) --
Other expense, net .......................... (1,814) (4,924) (6,425) (13,092) (18,333)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ........... 7,469 (10,299) 13,647 22,171 59,300
Provision for income taxes .................. 1,588 3,847 2,027 2,258 7,770
----------- ----------- ----------- ----------- -----------
Net income (loss) ........................... $ 5,881 $ (14,146) $ 11,620 $ 19,913 $ 51,530
=========== =========== =========== =========== ===========
Diluted net income (loss) per share ......... $ 0.20 $ (0.46) $ 0.34 $ 0.52 $ 1.12
=========== =========== =========== =========== ===========
Weighted average Ordinary Shares and
equivalents outstanding -- diluted ........ 29,764 30,872 34,656 38,194 46,163
FISCAL YEAR ENDED MARCH 31,
(IN THOUSANDS)
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Total current assets ........................ $ 128,681 $ 182,296 $ 254,396 $ 439,534 $ 654,032
Property and equipment, net ................. $ 47,258 $ 91,792 $ 149,015 $ 255,573 $ 367,507
Goodwill and other non-current assets ....... $ 9,247 $ 35,179 $ 42,881 $ 49,016 $ 72,840
Total assets ................................ $ 185,186 $ 309,267 $ 446,292 $ 744,123 $ 1,094,379
Total current liabilities ................... $ 91,945 $ 156,769 $ 284,641 $ 314,998 $ 412,887
Long-term debt and capital leases, excluding
current portion ........................... $ 18,278 $ 31,894 $ 29,128 $ 189,678 $ 197,179
Other non-current liabilities ............... $ 6,530 $ 35,033 $ 33,178 $ 24,638 $ 18,062
Total liabilities ........................... $ 116,753 $ 223,696 $ 346,947 $ 529,314 $ 628,128
Total Shareholders' equity .................. $ 68,433 $ 85,571 $ 99,345 $ 214,809 $ 466,251
Total liabilities and shareholders' equity .. $ 185,186 $ 309,267 $ 446,292 $ 744,123 $ 1,094,379
Working capital ............................. $ 36,737 $ 25,527 $ (30,245) $ 124,536 $ 241,145
Long-term debt and capital leases,
including current portion.................. $ 23,055 $ 75,566 $ 165,916 $ 242,474 $ 261,072
Cash Flows Data:
Depreciation and amortization ............... $ 7,183 $ 13,864 $ 18,140 $ 30,948 $ 50,407
Cash flow from operations ................... $ (5,243) $ 2,418 $ 54,369 $ 38,286 $ 65,379
Capital expenditures ........................ $ 21,848 $ 23,520 $ 37,503 $ 98,617 $ 147,865
21
(1) In fiscal 1996, the Company wrote off $29.0 million of in-process research
and development associated with the acquisition of Astron and also recorded
charges totaling $1.3 million for costs associated with the closing of one
of the Company's Malaysian plants and its Shekou, China operations.
(2) In fiscal 1997, the Company incurred plant closing expenses aggregating to
$5.9 million in connection with closing its manufacturing facility in
Texas, downsizing manufacturing operations in Singapore, the write-off of
excess equipment and severance obligations at the nCHIP semiconductor
fabrication operations.
(3) In fiscal 1998, the Company incurred plant closing expenses aggregating to
$8.9 million in connection with closing its manufacturing facility in
Wales, UK. The Company also incurred $7.4 million of merger-related costs
as a result of the acquisitions of Neutronics, DTM, Energipilot, Altatron
and Conexao in fiscal 1998.
(4) In fiscal 1999, the Company incurred plant closing expenses aggregating to
$3.4 million in connection with consolidating its manufacturing facilities
in Hong Kong after the acquisition of ACL and restructuring some of its
U.S. manufacturing facilities. The Company also wrote off $2.0 million of
in-process research and development associated with the acquisition of ACL.
22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In recent years, the Company has substantially expanded its manufacturing
capacity, technological capabilities and service offerings, through both
acquisitions and internal growth. See "Item 1 - Business - Risk Factors -- Risks
of Expansion of Operations," "Item 1 - Business - Risk Factors -- Risks of
Acquisitions" and Note 11 of Notes to Consolidated Financial Statements.
In June 1999, Flextronics entered into an agreement to acquire Kyrel EMS
Oyj, a provider of electronics manufacturing services with two facilities in
Finland and one in Luneville, France. Kyrel employs approximately 900 people and
its 1998 revenues were $230 million. Flextronics expects to issue approximately
1.9 million shares in the acquisition. Government approval is required in
Finland and the transaction is expected to close in the second quarter of fiscal
2000. The acquisition of Kyrel EMS Oyj will be accounted for as a
pooling-of-interests.
In May 1999, Flextronics purchased the manufacturing facilities and related
assets of ABB Automation Products in Vasteras, Sweden for approximately $25.9
million. This facility provides printed circuit board assemblies and other
electronic equipment. Flextronics has also offered employment to 575 ABB
personnel who were previously employed by ABB Automation Products. In connection
with the acquisition of certain fixed assets, the Company has also entered into
a manufacturing service agreement with ABB Automation Products.
In April 1999, Flextronics entered into an agreement to purchase the
manufacturing facilities and related assets of Ericsson's Visby, Sweden
operations. Ericsson's Visby facility manufactures mobile systems
infrastructure, primarily radio base stations. Under the terms of the agreement,
Flextronics will acquire the facility, including equipment and materials. In
connection with the acquisition of assets, the Company has also entered into a
manufacturing service agreement with Ericsson. The asset transfer is expected to
close during the second quarter of fiscal 2000.
On March 1, 1999, the Company acquired the manufacturing facility and
related assets of Advanced Component Labs HK Ltd. ("ACL"), a Hong Kong based
advanced technology printed circuit board manufacturer for $15.0 million cash.
The transaction has been accounted for under the purchase method. As a result,
the purchase price was allocated to the assets based on their estimated fair
market values at the date of acquisition. As of the date of acquisition, $7.8
million of the purchase price was allocated to goodwill and which is amortized
over 10 years and $2.0 million of the purchase price was allocated to in-process
research and development related to development projects which had not reached
technological feasibility and had no probable alternative future uses;
accordingly, the Company expensed the $2.0 million on the date of acquisition as
a charge to operations. ACL's in-process research and development projects were
initiated to address the rapid technological change associated with the
miniaturized printed circuit board market. The incomplete projects include
developing technology for a low cost Ball Grid Array package, developing thermal
vias, and developing new methods that enable the use of extremely thin 1.5 mil
technology. The Company believes the efforts to complete the acquired in-process
research and development projects will consist of internally staffed engineering
costs over the next fiscal year. These costs are estimated to be approximately
$1.1 million to complete the research and development. There can be no assurance
that the Company will succeed in making commercially viable products from the
ACL research and development projects.
23
On March 1, 1999, the Company increased its ownership of FICO to 90% by
acquiring an additional 50% of its equity interests for (i)$7.2 million cash,
(ii)127,850 Ordinary Shares issued at closing valued at $4.8 million (iii)$3.0
million in 2% promissory notes due $1.0 million each in year 2000 through year
2002. This transaction has been accounted for under the purchase method and
accordingly, the results of operations for FICO have been included in the
accompanying consolidated statements of operations since March 1, 1999. The
acquisition of this additional 50% interest resulted in additional goodwill and
intangible assets of $8.5 million and $420,000 which were being amortized over 8
and 3 years, respectively.
On March 31, 1998, the Company acquired Conexao, a Brazil-based electronics
manufacturing service provider, in exchange for a total of 843,186 Ordinary
Shares, of which 236,610 Ordinary Shares were to be issued upon resolution of
certain general and specific contingencies. The contingencies were resolved and
the 236,610 Ordinary Shares were issued on March 1999. On March 31, 1998, the
Company also acquired Altatron, an electronics manufacturer service provider
headquartered in Fremont, California, with facilities in Fremont, California;
Richardson, Texas; and Hamilton, Scotland in exchange for 1,577,300 Ordinary
Shares, of which 315,460 Ordinary Shares are to be issued upon resolution of
certain general and specific contingencies. The contingencies were resolved and
the 315,460 Ordinary Shares were issued subsequent to fiscal 1999. The
acquisitions of Conexao and Altatron have been accounted for as a
pooling-of-interests. The Company did not restate its prior period financial
statements with respect to these acquisitions because they did not have a
material impact on its consolidated results of operations. Accordingly, the
balance sheets of Conexao and Altatron as of March 31, 1998 were included in the
Company's consolidated balance sheet as of March 31, 1998 and the results of
operations for Conexao and Altatron are included in the Company's results of
operations beginning in the first quarter of fiscal 1999.
On December 1, 1997 the Company acquired DTM Products, Inc., a
Colorado-based producer of injection molded plastics for North American OEMs, in
exchange for 504,938 Ordinary Shares, and acquired Energipilot AB, a Swedish
company principally engaged in providing cables and engineering services for
Northern European OEMs, in exchange for 459,980 Ordinary Shares. The
acquisitions of DTM and Energipilot have been accounted for as a
pooling-of-interests. The Company did not restate its prior period financial
statements with respect to these acquisitions because they did not have a
material impact on its consolidated results. Accordingly, the results of
operations for DTM and Energipilot beginning in December 1, 1997 are included in
the Company's consolidated statement of operations.
On October 30, 1997, the Company acquired 92% of the outstanding shares of
Neutronics, an Austrian electronics manufacturing service provider with
operations in Austria and Hungary for 5,612,000 Ordinary Shares of the Company.
The acquisition was accounted for as a pooling-of-interests and accordingly, the
Company has restated its prior period financial statements to give effect to
this acquisition.
On March 27, 1997, the Company acquired the facilities in Karlskrona,
Sweden from Ericsson for approximately $82.4 million. The acquisition was
financed by borrowings from banks, which the Company repaid in October 1997 with
the net proceeds from the Company's debt and equity offerings. The transaction
has been accounted for under the purchase method. As a result, the purchase
price was allocated to the assets based on their estimated fair market values at
the date of acquisition.
24
The ability of the Company to obtain the benefits of these acquisitions is
subject to a number of risks and uncertainties, including the Company's ability
to successfully integrate the acquired operations and its ability to maintain,
and increase, sales to customers of the acquired companies. There can be no
assurance that any acquisitions will not materially affect the Company. See
"Item 1 - Business - Risk Factors - Risks of Acquisitions."
In fiscal 1999, the Company wrote off $2.0 million of in-process research
and development associated with the acquisition of ACL. The Company also
incurred $3.4 million associated with the consolidation of excess facilities in
Hong Kong and United States. At the completion of the Hong Kong consolidation
process, all the Hong Kong facilities will occupy 60,000 square feet of
manufacturing space with approximately 300 employees. The provision for excess
facilities of $3.4 million in fiscal 1999 is comprised of $2.2 million relating
to the costs for consolidating the Company's four manufacturing and
administrative facilities in Hong Kong and $1.2 million relating to the
consolidation of certain U.S. facilities.
The Company incurred merger-related expenses of $7.4 million in fiscal 1998
associated with the acquisitions of Neutronics, DTM, Energipilot, Altatron and
Conexao, including $4.0 million associated with the Neutronics, DTM, and
EnergiPilot acquisitions and the cancellation of Neutronics' planned initial
public offering.
The Company incurred costs of $8.9 million in fiscal 1998 associated with
the consolidation of excess facilities in the United Kingdom. The recent
acquisition of Altatron's Scotland facility resulted in duplicative facilities
in Wales and Scotland. The provision for the closure of the Wales facility
includes the write-off of $3.8 million in goodwill, $1.6 million in severance
payments and pension scheme, $2.4 million in factory disposal related expenses,
and $1.1 million in government grant reimbursements and legal fees.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales.
FISCAL YEAR ENDED
MARCH 31,
--------------------------
1997 1998 1999
------ ------ ------
Net sales ........................................ 100.0 100.0 100.0
Cost of sales .................................... 89.9 90.2 91.4
------ ------ ------
Gross margin ..................................... 10.1 9.8 8.6
Selling, general and administrative .............. 5.7 4.8 3.8
Goodwill and intangible amortization ............. 0.4 0.3 0.2
Provision for excess facilities .................. 0.9 0.8 0.2
Acquired in-process research and development ..... -- -- 0.1
------ ------ ------
Income from operations ........................... 3.1 3.9 4.3
Merger-related expenses .......................... -- (0.7) --
Interest and other expense, net .................. (1.0) (1.2) (1.0)
------ ------ ------
Income before income taxes ....................... 2.1 2.0 3.3
Provision for income taxes ....................... 0.3 0.2 0.4
------ ------ ------
Net income ....................................... 1.8 1.8 2.9
====== ====== ======
25
Net Sales
Substantially all of the Company's net sales have been derived from the
manufacture and assembly of products for OEM customers.
Net sales for fiscal 1999 increased 62.4% to $1.8 billion from $1.1 billion
in fiscal 1998. The increase in sales for fiscal 1999 was primarily due to
increase in sales to certain existing customers, including Philips, Ericsson and
Cisco.
The Company's largest customers during fiscal 1999 were Philips, Ericsson
and Cisco accounting for approximately 18%, 16% and 13% of consolidated net
sales, respectively. No other customer accounted for more than 10% of
consolidated net sales in fiscal 1999. See "Item 1 - Business - Risk Factors --
Customer Concentration; Dependence on Electronics Industry".
Net sales for fiscal 1998 increased 73.9% to $1.1 billion from $640.0
million in fiscal 1997. The increase in sales for fiscal 1998 was primarily due
to (i) sales to Ericsson following the March 27, 1997 acquisition of the
Karlskrona Facilities, (ii) an increase in sales to certain existing customers,
including Advanced Fibre Communications, Cisco, Microsoft and Braun/Thermoscan
and (iii) sales to certain new customers including Bay Networks and Auspex
Systems. This increase was partially offset by reduced sales to certain
customers, including Minebea, Visioneer, 3Com/US Robotics and Global Village.
See "Item 1 - Business - Risk Factors --Customer Concentration; Dependence on
Electronics Industry".
Gross Profit
Gross profit varies from period to period and is affected by, among other
things, product mix, component costs, product life cycles, unit volumes,
startup, expansion and consolidation of manufacturing facilities, pricing,
competition and new product introductions. Gross profit margin decreased to 8.6%
for fiscal 1999 from 9.8% in fiscal 1998. The decrease in gross margin was
primarily due to the increases in higher volume projects, which typically have a
lower gross profit and startup expenses associated with new projects.
Gross profit margin decreased to 9.8% for fiscal 1998 from 10.1% in fiscal
1997. The gross profit margin in fiscal 1998 was adversely affected by changes
in customer and product mix and costs associated with the startup of new
facilities in Doumen, China and Guadalajara, Mexico. Prices paid to the Company
by its significant customers can vary significantly based on the customer's
order level, with per unit prices typically declining as volumes increase. These
changes in price and volume can materially affect the Company's gross profit
margin. See "Item 1 - Business - Risk Factors - Risks of Expansion of
Operations."
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for fiscal 1999
increased to $68.1 million from $53.7 million in fiscal 1998 but decreased as a
percentage of net sales to 3.8% in fiscal 1999 from 4.8% in fiscal 1998. The
dollar increase in SG&A was mainly due to (i) investment in infrastructure such
as personnel and other related corporate and administrative expenses and
information systems to support the expansion of the Company's business and (ii)
the addition of new sales personnel in the Asia, Europe and the United States.
The Company anticipates its SG&A expenses will continue to increase in dollars
26
in the future. However, to the extent that net sales continue to grow faster
than SG&A expenses, those expenses would continue to decline as a percentage of
net sales.
SG&A for fiscal 1998 increased to $53.7 million from $36.3 million in
fiscal 1997 but decreased as a percentage of net sales to 4.8% in fiscal 1998
from 5.7% in fiscal 1997. The dollar increase was mainly due to (i) the addition
of new sales personnel in the United States and Europe; (ii) the inclusion of
the operations of the Karlskrona Facilities and (iii) investment in
infrastructure such as personnel and other related corporate and administrative
expenses and information systems to support the expansion of the Company's
business.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets are amortized on a straight-line basis over
the estimated life of the benefits received, which ranges from three to
twenty-five years. Goodwill and intangible assets amortization in fiscal 1999
decreased slightly to $3.6 million from $3.7 million in fiscal 1998. In March
1999, the Company acquired an additional 50% equity interest in FICO increasing
its ownership of FICO to 90% and recorded $8.5 million in goodwill and $420,000
in intangible assets and is amortized over 8 and 3 years, respectively. The
Company also recorded another $7.8 million goodwill from the acquisition of ACL
which is amortized over 10 years. As a result of these acquisitions, goodwill
and intangible asset amortization expense per quarter will increase by
approximately $501,000 starting in the first quarter of fiscal 2000. See Note 2
of Notes to Consolidated Financial Statements.
Goodwill and intangible assets amortization in fiscal 1998 increased to
$3.7 million from $2.6 million in fiscal 1997. In the second quarter of fiscal
1998, the Company reduced its estimate of the useful lives of the goodwill and
intangible assets (consisting of goodwill, customer lists and trademarks and
tradenames) arising from the Astron acquisition from approximately twenty years
to ten years. This reduction increased the Company's amortization expense per
quarter by approximately $279,000, beginning in the second quarter of fiscal
1998.
Provision for Excess Facilities
The provision for excess facilities of $3.4 million in fiscal 1999 is
comprised of $2.2 million relating to the costs for consolidating the Company's
four manufacturing and administrative facilities in Hong Kong and $1.2 million
relating to the consolidation of certain U.S. facilities. The provision for
excess facilities are comprised of $1.5 million for the reduction of certain
personnel due to consolidation of certain operations, $1.5 million for the
write-off of equipment and assets related to the operations the Company has
exited, and $400 related to the consolidation of facilities. In connection with
the provision for excess facilities, the Company terminated approximately 250
employees in the areas of finance, engineering, operations, production and
purchasing. The Company anticipates the consolidation of facilities will be
substantially complete by November 1999.
The provision for excess facilities of $8.9 million in fiscal 1998 relates
to the costs incurred in closing the Wales facility. This charge consists
primarily of the write-off of goodwill and intangible assets of $3.8 million,
severance payments, reimbursement of government grants, and costs associated
with the disposal of the factory. This closure is a result of the Company's
27
acquisition of Altatron, which resulted in duplicative facilities in the United
Kingdom. See Note 9 of Notes to Consolidated Financial Statements.
The provision for excess facilities of $5.9 million in fiscal 1997 consists
of the costs incurred in downsizing the Texas facility, downsizing the Singapore
manufacturing operations and writing off obsolete equipment and incurring
certain severance obligations at the nCHIP semiconductor fabrication facility.
The Texas facility was primarily dedicated to production for Global Village
Communications and Apple Computer, to whom the Company is no longer making
sales. The nCHIP semiconductor fabrication facility was primarily dedicated to
producing PCBs for nCHIP's MCMs, and the Company has transferred these
operations to a third party. The Singapore manufacturing facilities were
downsized in connection with the shift of manufacturing operations to lower cost
manufacturing locations.
Acquired In-Process Research and Development
Based on an independent valuation of certain of the assets of ACL and other
factors, the Company determined that the purchase price of ACL included
in-process research and development costs totaling $2.0 million which had not
reached technological feasibility and had no probable alternative future use.
Accordingly, the Company wrote-off $2.0 million of in-process research and
development in fiscal 1999.
Merger Expenses
In fiscal 1998, the Company incurred $7.4 million of merger expenses
associated with the acquisitions of Neutronics, EnergiPilot, DTM, Altatron and
Conexao. The Neutronics merger expenses included $2.2 million in cost associated
with the cancellation of Neutronics's public offering and $900,000 in other
legal and accounting fees. The remaining $4.3 million consists of a $3.1 million
brokerage and finders fees incurred in the Altatron acquisition and $1.2 million
in legal and accounting fees for all of the fiscal 1998 acquisitions.
Interest and other expense, net
Interest and other expense, net increased to $18.3 million in fiscal 1999
from $13.1 million in fiscal 1998. The following table sets forth information
concerning the components of other income and expense.
FISCAL YEAR ENDED
MARCH 31,
(IN THOUSANDS)
----------------------------------
1997 1998 1999
-------- -------- --------
Interest expense ........................ $ (6,426) $(17,700) $(21,899)
Interest income ......................... 706 2,742 5,161
Foreign exchange gain(loss) ............. 1,665 1,581 (3,115)
Equity in earnings of associated
companies ............................. 133 1,194 1,036
Permanent impairment in investment ...... (3,200) -- --
Bank commitment fees .................... (750) -- --
Gain on sale of subsidiary's stock ...... 1,027 -- --
Minority interest ....................... (394) (363) (1,313)
Other income(expense), net .............. 814 (546) 1,797
-------- -------- --------
$ (6,425) $(13,092) $(18,333)
======== ======== ========
28
Net interest expense increased to $16.7 million in fiscal 1999 from $15.0
million in fiscal 1998. The increase was primarily due to increased bank
borrowings to finance the capital expenditures and expansion of the Company's
facilities in Sweden, Hungary, Mexico and China. The Company anticipates that
its interest expense will increase in future periods as a result of borrowings
under its credit facility.
Net interest expense increased to $15.0 million in fiscal 1998 from $5.7
million in fiscal 1997. The increase was primarily increased bank borrowings to
finance the acquisition of the Karlskrona Facilities, capital expenditures and
the issuance of the $150.0 million 8.75% Senior Subordinated Notes in October
1997.
In fiscal 1999, there was $3.1 million of foreign exchange loss compared to
$1.6 million foreign exchange gain in fiscal 1998. The foreign exchange loss in
fiscal 1999 mainly relates to foreign currency monetary liabilities in Austria,
Brazil and Hungary. Foreign exchange gain decreased to $1.6 million from $1.7
million gain in fiscal 1997. The foreign exchange gain for fiscal 1998 was
mainly due to the strengthening of the U.S. dollar against Asian currencies. See
Note 2 of Notes to Consolidated Financial Statements."
Equity in earnings of associated companies for fiscal 1999 decreased to
$1.0 million from $1.2 million in fiscal 1998. The equity in earnings of
associated companies results primarily from the Company's 40% investment in
FICO. In March 1999, the Company acquired an additional 50% interest in FICO and
accordingly, the Company has consolidated the balance sheets and the results of
operations of FICO from March 1999 onward.
Equity in earnings of associated companies for fiscal 1998 increased to
$1.2 million from $133,000 in fiscal 1997. The equity in earnings of associated
companies results primarily from the Company's original 40% investment in FICO
and, to a lesser extent, certain minority investments of Neutronics. The Company
acquired a 40% interest in FICO in December 1996. According to the equity method
of accounting, the Company did not recognize revenue from sales by FICO, but
based on its ownership interest recognized 40% of the net income or loss of the
associated company. The Company has recorded its 40% share of FICO's
post-acquisition net income.
The Company recognized a permanent impairment in an investment in fiscal
1997, represented by a write-off of publicly traded common stock received from a
customer in fiscal 1997 as payment of $3.2 million in accounts receivable. As a
result of a significant decline in the market value of this common stock
following its receipt by the Company, this common stock subsequently was deemed
to be permanently impaired in fiscal 1997, resulting in a $3.2 million expense.
In fiscal 1997, bank commitment fees represented $750,000 of commitment fees
written off in March 1997 when the bank's commitment expired unused.
Gain on sale of subsidiary of $1.0 million in fiscal 1997 was due to a gain
from the sale of a Hungarian subsidiary by Neutronics.
Minority interest expense for fiscal 1999 was comprised primarily of the 8%
minority interest in Neutronics and 10% minority interest in FICO not acquired
by the Company in March 1999.
Minority interest expense for fiscal 1997 and 1998 was comprised primarily
of the 8% minority interest in Neutronics not acquired by the Company in October
29
1997 and the 4.1% minority interest in Ecoplast, a subsidiary of Neutronics held
by a third party.
Other income (expense), net was an income of $1.8 million in fiscal 1999
compared to an expense of $546,000 in fiscal 1998. The other income in fiscal
1999 comprised mainly of gain from disposal of land in Mexico. Other income
(expense), net was an expense of $546,000 in fiscal 1998 compared to an income
of $814,000 in fiscal 1997. Other expense, net in fiscal 1998 primarily
consisted of the write-off of fixed assets. Other expense, net in fiscal 1997
includes $898,000 of income received under the Company's business interruption
insurance policy as a result of an April 1996 fire at its facilities in Doumen,
China.
Provision for Income Taxes
The Company is structured as a holding company, conducting its operations
through manufacturing and marketing subsidiaries in Austria, Brazil, China,
Hungary, Malaysia, Mauritius, Mexico, The Netherlands, Singapore, Sweden, the
United Kingdom, and the United States. These subsidiaries are subject to
taxation in the country in which they have been formed. The Company's Asian and
Hungarian manufacturing subsidiaries have, at various times, been granted
certain tax relief in each of these countries, resulting in lower than would
otherwise be the case under ordinary tax rates. See Note 7 of Notes to
Consolidated Financial Statements.
The Company's consolidated effective tax rate for any given period is
calculated by dividing the aggregate taxes incurred by each of the operating
subsidiaries and the holding company by the Company's consolidated pre-tax
income. Losses incurred by any subsidiary or by the holding company are not
deductible by the entities incorporated in other countries in the calculation of
their respective local taxes. The ordinary corporate tax rates for calendar 1999
were 34%, 28%, 26%, 18%, 16% and 15% in Austria, Sweden, Singapore, Hungary,
Hong Kong and China, respectively, and 30% on manufacturing operations in
Malaysia. In addition, the tax rate is de minimis in Labuan, Malaysia and
Mauritius where the Company's offshore marketing subsidiaries are located. The
Company's Hungarian subsidiaries have been on a tax holiday that expired on
December 31, 1998. Effective January 1, 1999, the Company's Hungarian
subsidiaries will be subject to corporate income taxes at a flat rate of 18%,
which will effectively be reduced to 7.2% in the years 1999 through 2003 because
a 60% exemption will apply. As a result of this change in tax status, the
Company expects to be subject to current income taxes in Hungary in future
years. The Company's U.S. and U.K. subsidiaries are subject to ordinary
corporate tax rates of 35% and 30% respectively. However, these tax rates did
not have any material impact on the Company's taxes in fiscal 1999 due to the
operating loss carry forwards benefited in this period.
The Company's consolidated effective tax rate was 13.1% for fiscal year
1999 compared to 10.2% for fiscal year 1998. The increase in the effective tax
rate was due to the expansion of operations and increase in profitability in
countries with higher tax rates.
At March 31, 1999, the Company had operating loss carryforwards of
approximately $15,208 for U.S. federal income tax purposes which will expire
between 2003 and 2012 if not previously utilized. Utilization of these net
operating loss carryforwards may be subject to an annual limitation due to the
change in ownership rules provided by the Internal Revenue Code (the "Code").
This limitation and other restrictions provided by the Code may reduce the net
30
operating loss carryforwards such that they would not be available to offset
future taxable income of the U.S. subsidiary.
At March 31, 1999, the Company had operating loss carryforwards of
approximately $9,867, $6,765 and $6,547 in U.K., Austria and Hong Kong,
respectively with various loss carryforward lives pursuant to local county tax
laws. The utilization of these net operating loss carryforwards is limited to
the future operations of the Company in the tax jurisdictions in which such
carryforwards arose.
The Company has structured its operations in Asia in a manner designed to
maximize income in countries where tax incentives have been extended to
encourage foreign investment or where income tax rates are low. The Company's
investments in its plants in Xixiang and Doumen, China fall under the "Foreign
Investment Scheme" which entitles the Company to apply for a five-year tax
incentive. The Company obtained the tax incentive for the Doumen plant in
December 1995 and the Xixiang plant in October 1996. With the approval, the
Company's tax rates on income from these facilities during the incentive period
will be 0% in years 1 and 2 and 7.5% in years 3 through 5, commencing in the
first profitable year and 15.0% thereafter. The Company has transferred its
offshore marketing and distribution functions to marketing subsidiaries located
in Labuan, Malaysia, where the tax rate is de minimis and Mauritius, where the
tax rate is 0%. The Company's facility in Shekou, China, which was closed in
fiscal 1996, was located in a "Special Economic Zone" and was an approved
"Product Export Enterprise" that qualified for a special corporate income tax
rate of 10%.
If tax incentives are not renewed upon expiration, if the tax rates
applicable to the Company are rescinded or changed, or if tax authorities were
to challenge successfully the manner in which profits are recognized among the
Company's subsidiaries, the Company's worldwide effective tax rate would
increase and its results of operations and cash flow would be adversely
affected. A significant portion of the products manufactured by the Company's
Asian subsidiaries are sold to customers based in other jurisdictions in North
America and Europe. While the Company believes that profits from its Asian
operations are not sufficiently connected to such other jurisdictions to give
rise to income taxation in such other jurisdictions, there can be no assurance
that tax authorities will not challenge the Company's position or, if such
challenge is made, that the Company will prevail in any such disagreement. If
the Company's Asian profits became subject to income taxes in such other
jurisdictions, the Company's taxes would increase and its results of operations
and cash flows would be adversely affected. The expansion by the Company of its
operations in the Americas and countries in Western Europe that have higher tax
rates is expected to increase its worldwide effective tax rate. See "Item 1 -
Business - Risk Factors -- Risk of Increased Taxes."
Quarterly Results
The following table contains selected unaudited quarterly financial data
for 1998 and 1999 fiscal years. In the opinion of management, this information
has been presented on the same basis as the annual audited consolidated
financial statements appearing elsewhere, and all necessary adjustments
(consisting of normal recurring adjustments) have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of the Company.
The Company's results of operations have varied and may continue to fluctuate
significantly from quarter to quarter. Results of operations in any period
31
should not be considered indicative of the results to be expected from any
future period.
(UNAUDITED)
FISCAL YEAR ENDED MARCH 31, 1998 FISCAL YEAR ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------ ------------------------------------------------
First Second Third Fourth First Second Third Fourth
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales .................. $ 235,545 $ 251,468 $ 295,000 $ 331,058 $ 376,079 $ 422,948 $ 499,901 $ 508,700
Cost of sales .............. 212,517 226,786 266,192 298,675 343,023 386,042 457,068 466,758
--------- --------- --------- --------- --------- --------- --------- ---------
Gross margin ............... 23,028 24,682 28,808 32,383 33,056 36,906 42,833 41,942
Selling, general and
administrative ........... 12,564 11,806 13,773 15,552 14,355 16,555 17,397 19,814
Goodwill and intangible
amortization ............. 744 1,009 951 955 880 881 879 982
Provision for excess
facilities ............... -- -- -- 8,869 -- -- -- 3,361
Acquired in-process
research and
development .............. -- -- -- -- -- -- -- 2,000
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations ..... 9,720 11,867 14,084 7,007 17,821 19,470 24,557 15,785
Merger-related expenses .... -- -- (4,000) (3,415) -- -- -- --
Interest and other
expense, net ............. (2,428) (4,333) (2,946) (3,385) (4,577) (4,853) (6,938) (1,966)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income
taxes .................... 7,292 7,534 7,138 207 13,245 14,617 17,619 13,819
Income tax expense
(benefit) ................ 746 912 1,197 (597) 1,588 1,754 2,126 2,302
--------- --------- --------- --------- --------- --------- --------- ---------
Net income ................. $ 6,546 $ 6,622 $ 5,941 $ 804 $ 11,656 $ 12,863 $ 15,493 $ 11,517
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings
per share ................ $ 0.19 $ 0.18 $ 0.15 $ 0.02 $ 0.27 $ 0.30 $ 0.34 $ 0.22
========= ========= ========= ========= ========= ========= ========= =========
Weighted average Ordinary
Shares and equivalents
outstanding - diluted ... 34,984 35,942 40,606 41,598 43,496 43,150 46,061 51,680
========= ========= ========= ========= ========= ========= ========= =========
The Company has experienced, and expects to continue to experience,
significant periodic and quarterly fluctuations in results of operations due to
a variety of factors. These factors include, among other things, timing of
orders, the short-term nature of most customers' purchase commitments, volume of
orders relative to the Company's capacity, customers' announcement, introduction
and market acceptance of new products or new generations of products, evolution
in the life cycles of customers' products, timing of expenditures in
anticipation of future orders, effectiveness in managing manufacturing
processes, changes in cost and availability of labor and components, mix of
orders filled, timing of acquisitions and related expenses and changes or
anticipated changes in economic conditions. In addition, the Company's net sales
may fluctuate throughout the year as a result of local factors and other events
that may affect production volumes. The market segments served by the Company
are also subject to economic cycles and have in the past experienced, and are
likely in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of the results to be expected for
any future period, and fluctuations in operating results may also result in
fluctuations in the price of the Company's Ordinary Shares. In future periods,
the Company's revenues or results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Ordinary Shares would likely be materially adversely affected. See "Item 1 -
32
Business - Risk Factors -- Variability of Customer Requirements and Operating
Results."
BACKLOG
Although the Company obtains firm purchase orders from its customers, OEM
customers typically do not make firm orders for delivery of products more than
30 to 90 days in advance. The Company does not believe that the backlog of
expected product sales covered by firm purchase orders is a meaningful measure
of future sales since orders may be rescheduled or canceled.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations from the proceeds of public offerings
of equity securities and debt offerings, cash and cash equivalents generated
from operations, bank debt and lease financing of capital equipment. In December
1998, the Company issued 5.4 million Ordinary Shares for net proceeds of $194.0
million. In October 1997, the Company issued $150.0 million principal amount of
Senior Subordinated Notes due in 2007 for net proceeds of $145.7 million and
issued 4,370,000 Ordinary Shares for net proceeds of $96.2 million. At March 31,
1999 the Company had cash and cash equivalents balances totaling $173.0 million,
total bank and other debts amounting to $261.1 million and $99.1 million
available for borrowing under its credit facilities subject to compliance with
certain financial ratios.
Cash provided by operating activities was $65.4 million, $38.3 million and
$54.4 million in fiscal 1999, 1998 and 1997, respectively. Cash provided by
operating activities increased in fiscal 1999 from fiscal 1998 because of the
increase in net income, depreciation and amortization and accounts payable,
partially offset by increases in accounts receivables and inventories. Cash
provided by operating activities decreased in fiscal 1998 from fiscal 1997
because of the increase in accounts receivable and inventories, partially offset
by increases in accounts payables, increases in depreciation and amortization
expenses of $30.9 million in fiscal 1998 from $18.1 million in fiscal 1997 and
the increase in profitability in fiscal 1998.
Accounts receivable, net of allowance for doubtful accounts increased to
$225.8 million at March 31, 1999 from $155.1 million at March 31, 1998. The
increase in accounts receivable was primarily due to a 62.4% increase in sales
in fiscal 1999.
Inventories increased to $192.8 million at March 31, 1999 from $157.1
million at March 31, 1998. The increase in inventories was primarily the results
of increased purchases of material to support the growing sales.
Cash used in investing activities was $204.6 million, $104.7 million and
$117.6 million in fiscal 1999, 1998 and 1997, respectively. Cash used in
investing activities in fiscal 1999 were primarily related to (i)$147.9 million
of capital expenditures to purchase equipment and expand manufacturing
facilities in Brazil, China, Hungary, Mexico, United States and Sweden.
(ii)$15.0 million for acquisition of ACL, (iii) $7.2 million for acquisition of
FICO, (iv) $24.0 million for the former shareholders of Astron for the remaining
purchase price relating to the acquisition of Astron, (v) $17.5 million for
minority investment in the stocks of various technology companies in software
and related industries. Cash used in investing activities in fiscal 1998 were
primarily related to capital expenditures of $98.6 million. Capital expenditures
in fiscal 1998 related to the purchase of equipment and construction of new
33
facilities in Doumen, China, Guadalajara, Mexico, San Jose, California and
Karlskrona, Sweden. Cash used in investing activities in fiscal 1997 consisted
primarily of $82.4 million paid for the acquisition of the Karlskrona Facilities
and $37.5 million in capital expenditures.
Cash provided by financing activities was $224.8 million, $133.1 million
and $79.0 million in fiscal 1999, 1998, and 1997, respectively. Cash provided by
financing activities in fiscal 1999 resulted primarily from the Company's equity
offering of 5.4 million Ordinary Shares in December 1998 with net proceeds of
$194.0 million. Cash provided by financing activities in fiscal 1998 resulted
primarily from net proceeds of the issuance of senior subordinated notes of
$145.7 million and net proceeds from the equity offering of $96.2 million,
partially offset by $108.6 million of net repayments of bank borrowings, capital
leases, long-term debts and payment of $5.0 million notes due to Astron's former
shareholders. Cash provided by financing activities in fiscal 1997 consisted
primarily of net bank borrowings and proceeds from long term debt of $97.0
million.
The Company maintains a credit facility with a syndicate of banks. This
facility provides for revolving credit borrowings by Flextronics and a number of
its subsidiaries of up to $120.0 million, subject to compliance with certain
financial covenants and the satisfaction of customary borrowing conditions. The
credit facility consists of two separate credit agreements, one providing for up
to $62.9 million principal amount of revolving credit loans to the Company and
designated subsidiaries and one providing for up to $57.1 million principal
amount of revolving credit loans to the Company's United States subsidiary.
Loans under the credit facility will terminate in January 2001. See Note 4 of
Notes to Consolidated Financial Statements. The Company anticipates that it will
from time to time borrow revolving credit loans to fund its operations and
growth.
The Company anticipates that its working capital requirements will increase
in order to support anticipated increases in business capacity. In addition, the
Company anticipates incurring significant capital expenditures and operating
lease commitments in order to support its anticipated expansions of these
facilities in China, Hungary, Mexico and Brazil. Future liquidity needs will
depend on fluctuations in levels of inventory, the timing of expenditures by the
Company on new equipment, the extent to which the Company utilizes operating
leases for the new facilities and equipment, levels of shipments by the Company
and changes in volumes of customer orders. The Company believes that the
existing cash balances, together with anticipated cash flow from operations and
amounts available under the credit facility, will be sufficient to fund its
operations through fiscal 1999. However, to the extent that the Company's
operations significantly expand, the Company may be required to obtain
additional debt or equity financing. See "Item 1 - Business - Risk Factors --
Risks of Expansion of Operations."
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
A portion of the Company's exposure to market risk for changes in interest
rates relates to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company ensures
the safety and preservation of its invested principal funds by limiting default
34
risk, market risk and reinvestment risk. The Company mitigates default risk by
investing in safe and high-credit quality securities and by constantly
positioning its portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer, guarantor or depository. The portfolio
includes only marketable securities with active secondary or resale markets to
ensure portfolio liquidity. Maturities of short-term investments are timed,
whenever possible, to correspond with debt payments and capital investments. As
of March 31, 1999, the outstanding amount in the investment portfolio was $130.5
million, with an average maturity of 71 days and an average return of 5.05%.
The Company also has exposure to interest rate risk with certain variable
rate lines of credit. These credit lines are located throughout the world and
are based on a spread over that country's inter-bank offering rate. The Company
primarily enters into debt obligations to support general corporate purposes
including capital expenditures and working capital needs. As of March 31, 1999,
the outstanding short-term debt, including capitalized leases was $63.9 million.
The following table presents principal cash flows and related interest rates by
fiscal year of maturity for debt obligations. The variable interest rate for
future years assumes the same rate as March 31, 1999.
Expected Fiscal Year of Maturity
(in thousands)
There-
Debt 2000 2001 2002 2003 2004 after Total
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Sr. Subordinated Notes ................ -- -- -- -- -- 150,000 150,000
Average interest rate ............. 8.75% 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
Fixed Rate ............................ 11,711 9,344 6,388 4,143 2,788 11,341 45,715
Average interest rate .............. 7.2% 7.2% 6.6% 7.4% 6.6% 7.7% 7.6%
Variable Rate ......................... 52,182 4,027 2,634 2,635 1,788 2,091 65,357
Average interest rate .............. 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1%
Foreign Currency Exchange Risk
The Company transacts business in various foreign countries. The Company
manages its foreign currency exposure by borrowing in various foreign currencies
and by entering into foreign exchange forward contracts only with respect to
transaction exposure. The Company's policy is to maintain a fully hedged
position for all certain, known transactions exposures. These exposures are
primarily, but not limited to, vendor payments and inter-company balances in
currencies other than the functional unit of the operating entity. The Company
will first evaluate and, to the extent possible, use non-financial techniques,
such as currency of invoice, leading and lagging payments, receivable management
or local borrowing to reduce trans