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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 2001
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 000-23354
FLEXTRONICS INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SINGAPORE NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11 UBI ROAD 1, #07-01/02
MEIBAN INDUSTRIAL BUILDING
SINGAPORE 408723
(65) 844-3366
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
ORDINARY SHARES, S$0.01 PAR VALUE
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 disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the 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. [ ]
As of June 21, 2001, 482,431,643 shares of the Registrant's common stock
were outstanding. The aggregate market value of the common stock held by
shareholders other than our executive officers, directors and 10% or greater
shareholders of the Registrant as of June 21, 2001 was approximately $10.8
billion.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 15
Item 3. Legal Proceedings.......................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........................................ 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 16
Item 6. Selected Financial Data.................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................. 28
Item 8. Financial Statements and Supplementary Data................................................ 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 56
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 56
Item 11. Executive Compensation..................................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 61
Item 13. Certain Relationships and Related Transactions............................................. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 65
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PART I
ITEM 1. BUSINESS
Except for historical information contained herein, the matters discussed
in this annual report on Form 10-K are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. The words "will," "may," "designed to," "outlook,"
"believes," "should," "anticipates," "plans," "expects," "intends," "estimates"
and similar expressions identify forward-looking statements, which speak only as
of the date of this annual report. These forward-looking statements are
contained principally under Item 1, "Business," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Because these forward-looking statements are subject to certain risks and
uncertainties, actual results could differ materially from the expectations
expressed in the forward-looking statements. Important factors that could cause
actual results to differ materially from the expectations reflected in the
forward-looking statements include those described in this section under "Risk
Factors," including,
- our ability to integrate acquired companies and manage change in
our operations;
- fluctuations in our customers' requirements and demand for their
products;
- increased competition;
- tax matters; and
- currency fluctuations.
We undertake no obligation to update or revise these forward-looking statements
to reflect subsequent events or circumstances.
OVERVIEW
Flextronics International Ltd. ("Flextronics") was incorporated in the
Republic of Singapore in May 1990. We are a leading provider of electronics
manufacturing services to original equipment manufacturers ("OEMs"), primarily
in the telecommunications, networking, consumer electronics and computer
industries. We provide a network of design, engineering and manufacturing
operations in 27 countries across four continents. Our strategy is to provide
customers with end-to-end solutions where we take responsibility for
engineering, new product introduction and implementation, manufacturing, supply
chain management and logistics management, with the goal of delivering a
complete packaged product.
Our manufacturing services include the fabrication and assembly of plastic
and metal enclosures, printed circuit boards or PCBs, backplanes and the
assembly of complete systems and products. In addition, through our photonics
division, we manufacture and assemble photonics components and integrate them
into PCB assemblies and other systems. Throughout the production process, we
offer design and technology services; logistics services, such as materials
procurement, inventory management, vendor management, packaging and
distribution; and automation of key components of the supply chain through
advanced information technologies. In addition, we have added other after-market
services such as network installation.
Through a combination of internal growth and acquisitions, we have become
one of the world's largest electronics manufacturing services ("EMS") providers,
with revenues of $12.1 billion and EBITDA (earnings before interest, tax,
depreciation and amortization, excluding unusual charges) of $838.0 million in
fiscal 2001. In addition, we have increased our manufacturing square footage
from 1.5 million square feet on April 1, 1998 to over 16.0 million square feet
on March 31, 2001. We offer a complete and flexible manufacturing solution that
provides accelerated time-to-market and time-to-volume production, reduced
production costs and advanced engineering and design capabilities. By working
closely with and being highly responsive to customers throughout the design,
manufacturing and distribution process, we believe that we can be an integral
part of their operations. We believe that our size, global presence, broad
service offerings and expertise enable us to win large programs from leading
multinational OEMs for the manufacture of electronic products.
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Our customers include industry leaders such as Alcatel, Cabletron Systems,
Cisco Systems, Inc., Ericsson Telecom AB ("Ericsson"), Hewlett-Packard Company,
Microsoft Corporation, Motorola, Inc. ("Motorola"), Nokia Corporation, Palm,
Inc., Philips Electronics and Siemens AG. Due to our focus on high growth
technology sectors, our prospects are influenced by such major trends as the
upgrade of the communications and Internet infrastructure, the proliferation of
wireless and optical devices, increasing product miniaturization and other
trends in electronics technologies. In addition, our growth is affected by the
pace at which leading OEMs are continuing to adopt outsourcing as a core
business strategy.
We have established an extensive network of manufacturing facilities in the
world's major electronics markets, the Americas, Asia and Europe, in order to
serve the increased outsourcing needs of both multinational and regional OEMs.
Moreover, we strategically locate facilities near our customers and their end
markets. In fiscal 2001, production in the Americas, Asia and Europe,
represented 42%, 21% and 37% of our net sales, respectively. We have also
established fully integrated, high volume industrial parks in low-cost regions
near our customers' end markets. These industrial parks provide total supply
chain management by co-locating our manufacturing and distribution operations
with our suppliers at a single location. This approach to production and
distribution is designed to benefit our customers by reducing logistical
barriers and costs, increasing flexibility, lowering transportation costs and
reducing turnaround times. Our industrial parks are located in Brazil, China,
Hungary, Mexico and Poland. In addition to our industrial parks, we have
established product introduction centers which provide engineering expertise in
developing new products and preparing them for high volume manufacturing.
INDUSTRY OVERVIEW
With electronic products growing in technical complexity and experiencing
shorter product lifecycles in response to customer requirements, the demand for
advanced manufacturing capabilities and related services has grown rapidly. Many
OEMs in the electronics industry are increasingly utilizing EMS providers in
their business and manufacturing strategies. Outsourcing allows OEMs to take
advantage of the manufacturing expertise and capital investments of EMS
providers, thereby enabling OEMs to concentrate on their core competencies, such
as product development, marketing and sales. We believe that by developing
strategic relationships with EMS providers, OEMs can enhance their competitive
position by:
- reducing production costs;
- accelerating time-to-market and time-to-volume production;
- accessing advanced manufacturing, design and engineering
capabilities;
- reducing capital investment requirements and fixed overhead costs;
- improving inventory management and purchasing power; and
- accessing worldwide manufacturing capabilities.
We believe that the market for electronics manufacturing services will
continue to grow, driven largely by OEMs' need for increasing flexibility to
respond to rapidly changing markets, technologies and accelerating product life
cycles, in addition to advanced manufacturing and engineering capabilities as a
result of increased complexity and reduced size of electronic products.
STRATEGY
Our objective is to provide customers with the ability to outsource, on a
global basis, a complete product. We intend to achieve this objective by taking
responsibility for the engineering, assembly, integration, test, supply chain
management and logistics management to accelerate their time-to-market and
time-to-volume. To achieve this objective, we will continue to implement the
following strategies:
Enhance Our Customers' Product Development and Manufacturing Strategy. 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 our customer
relationships
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are strengthened 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.
Our approach allows our customers to focus on their core competencies and thus
enables them to accelerate their time-to-market and time-to-volume production.
Leverage Our Global Presence. We have established an extensive network of
design and manufacturing facilities in the world's major electronics markets,
the Americas, Asia and Europe, to serve the increased outsourcing needs of both
multinational and regional OEMs. Our global network of manufacturing facilities
in 27 countries gives us the flexibility to transition customer projects to any
of our locations. This flexibility allows design, prototyping and initial
production to be located near the customer's own research and development
centers, so that manufacturing can then be moved to locations closer to their
end markets, or transitioned to low-cost regional manufacturing facilities or
industrial parks as volumes increase over the product life-cycle.
Expand Our Industrial Parks Strategy. Our industrial parks are
self-contained facilities that co-locate our manufacturing and distribution
operations with our suppliers in low-cost regions near our customers' end
markets. Our industrial parks provide a total supply chain management. This
approach to production and distribution benefits our customers by reducing
logistical barriers and costs, improving communications, increasing flexibility,
lowering transportation costs and reducing turnaround times. We have
strategically established large industrial parks in Brazil, China, Hungary,
Mexico and Poland.
Offer Comprehensive Solutions. We offer a comprehensive range of
engineering, assembly, integration, test, supply chain management and logistics
management services to our customers that simplify the global product
development process and provide them meaningful cost savings. Our capabilities
help our customers improve product quality and performance, reduce costs and
accelerate time-to-market.
Streamline Business Processes Through Information Technologies. We utilize
new information technologies to streamline business processes for our customers.
For example, we use innovative Internet supply chain solutions to improve order
placement, tracking and fulfillment. We are also able to provide our customers
with online access to product design and manufacturing process information.
Integrating our information systems with those of our customers allows us to
assist our customers in improving their communications and relationships across
their supply chain.
Pursue Strategic Opportunities. We have actively pursued acquisitions and
purchases of manufacturing facilities to expand our worldwide operations,
broaden our service offering, diversify and strengthen our customer
relationships and enhance our management depth. We will continue to review
opportunities and are currently in preliminary discussions to acquire
manufacturing operations and enter into business combinations. We cannot assure
the terms of, or that we will complete, such transactions. We will continue to
selectively pursue strategic transactions that we believe will further our
business objectives.
We cannot assure that our strategies can be successfully implemented, or
will reduce the risks associated with our business.
EXPANSION
We have actively pursued mergers and other business acquisitions to expand
our global reach, manufacturing capacity and service offerings, in addition to
diversifying and strengthening customer relationships. These acquisitions have
enabled us to provide more integrated outsourcing technology solutions with
time-to-market and lower cost advantages. Acquisitions have also played an
important part in expanding our presence in the global electronics marketplace.
We have completed several significant business combinations since the end of
fiscal 2000. In fiscal 2001, we acquired all the outstanding shares of The DII
Group, Inc. ("DII"), Palo Alto Products International Pte. Ltd. ("Palo Alto
Products International"), Chatham Technologies, Inc. ("Chatham"), Lightning
Metal Specialties and related entities ("Lightning") and JIT Holdings Ltd.
("JIT"). Each of these acquisitions were accounted for as pooling of interests.
Additionally, we have completed other immaterial pooling of interests
transactions in fiscal 2001. We have also made a number of business acquisitions
which were accounted for using the purchase method. In addition, we have
purchased a number of manufacturing facilities and related assets from customers
and simultaneously entered into manufacturing agreements to provide electronics
design, assembly and test services to these customers. In fiscal 2001, we
purchased a facility in Italy from Siemens Mobile, a facility in
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Switzerland from Ascom, a facility in Denmark from Bosch Telecom GmbH and a
facility in Sweden from Ericsson Radio AB. In the first quarter of fiscal 2002,
we commenced management of the operations of Ericsson's mobile telephone
operations using facilities owned by Ericsson in Brazil, Great Britain, Malaysia
and Sweden, as well as our own facilities. In connection with this relationship,
we purchased certain equipment, inventory and other assets, and assumed certain
accrued expenses, from Ericsson at their net book value of approximately $450.0
million. Additionally, in the first quarter of fiscal 2002, we announced our
intentions to purchase a manufacturing facility and related assets from Alcatel
located in Laval, France.
By enhancing our capability to provide a wide range of related electronics
design and manufacturing services to a global market that is increasingly
dependent on outsourcing providers, these acquisitions have enabled us to
enhance our competitive position as a leading provider of comprehensive
outsourcing technology solutions. For more information on our acquisitions,
please see Item 7, " Management's Discussion and Analysis of Financial Condition
and Results of Operations--Acquisitions."
CUSTOMERS
Our customers consist of a select group of OEMs primarily in the
telecommunications, networking, consumer electronics and computer industries.
Within these industries, our strategy is to establish relationships with leading
companies that seek to outsource significant production volumes of complex
products. We have focused on building long-term relationships with these
customers and expanding our relationship to include additional product lines and
services. We have increasingly focused on sales to larger companies and to
customers in the telecommunications, networking, consumer electronics and
computer industries. In fiscal 2001, our ten largest customers accounted for
approximately 59% of our net sales. No customer accounted for more than 10% of
net sales in fiscal 2001.
The following table lists in alphabetical order some of our largest
customers in fiscal 2001 and the products of those customers for which we
provide manufacturing services:
CUSTOMER END PRODUCTS
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Alcatel Cellular phones, accessories and telecommunications infrastructure
Cabletron Systems Data communications products
Cisco Systems, Inc. Data communications products
Ericsson Telecom AB Cellular phones, business telecommunications systems and GSM infrastructure
Hewlett-Packard Company Inkjet printers and storage devices
Motorola, Inc. Cellular phones, set-top boxes and telecommunications infrastructure
Nokia Corporation Cellular phone accessories, cellular phones, office phones and
telecommunications infrastructure
Palm, Inc. Pilot electronic organizers
Philips Electronics Consumer electronics products
Siemens AG Cellular phones and telecommunications infrastructure
On May 30, 2000, we entered into a strategic alliance for product
manufacturing with Motorola. In connection with this strategic alliance,
Motorola paid $100.0 million for an equity instrument that provided it with
incentives to purchase products and services from us by entitling it to acquire
22,000,000 of our ordinary shares at any time through December 31, 2005 upon
meeting targeted purchase levels of up to $32.0 billion or making additional
payments to us. In June 2001, we entered into an agreement with Motorola under
which we repurchased this equity instrument for $112.0 million. No current or
planned manufacturing programs are affected by this repurchase and we anticipate
that Motorola will continue to be a customer following the repurchase, although
our future revenue from Motorola may be less than it would have been had this
instrument remained in effect.
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In April 2001, we entered into a definitive agreement with Ericsson with
respect to our management of the operations of Ericsson's mobile telephone
operations. Operations under this arrangement commenced in the first quarter of
fiscal 2002. Under this agreement, we are to provide a substantial portion of
Ericsson's mobile phone requirements. We assumed responsibility for product
assembly, new product prototyping, supply chain management and logistics
management, in which we process customer orders from Ericsson and configure and
ship products to Ericsson's customers. We expect to also provide PCBs and
plastics, primarily from our Asian operations.
SALES AND MARKETING
We achieve 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. Our Asian sales offices are located in Hong Kong and Singapore.
In North America, we maintain sales offices in California, Florida,
Massachusetts and Texas. In Europe, we maintain sales offices in England,
France, Germany, the Netherlands and Sweden. In addition to our sales force, our
executive staff plays an integral role in our sales efforts.
SERVICES
We offer a broad range of integrated services, providing customers with a
total design and manufacturing solution that takes a product from its initial
design through volume production, test, distribution and into post-sales service
and support. We operate and are managed internally by four geographic business
segments, including Asia, the Americas, Western Europe and Central Europe. For
additional information on these geographic business segments, please see Note
12, "Segment Reporting," of the Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data."
Our integrated services include the following:
Flextronics Systems Assembly. Our assembly and manufacturing operations,
which reflect the majority of our revenues, include PCB assembly, assembly of
systems, and subsystems that incorporate PCBs and complex electromechanical
components. A substantial portion of our net sales is derived from the
manufacture and assembly of complete products. We employ just-in-time,
ship-to-stock and ship-to-line programs, continuous flow manufacturing, demand
flow processes and statistical process controls. 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 and ball grid array, enable us to offer a variety of
advanced manufacturing solutions. In addition, we have recently developed
significant expertise in the manufacture of wireless communications products
employing radio frequency technology.
We offer computer-aided testing of assembled PCBs, systems and subsystems,
which contributes significantly to our ability to deliver high-quality products
on a consistent basis. Our test capabilities include management defect analysis,
in-circuit tests and functional tests. In addition, we also provide
environmental stress tests of board or system assemblies.
Multek. Multek provides PCB and backpanel fabrication services. PCBs and
backpanels are platforms which provide interconnection for integrated circuits
and other electronic components. Backpanels also provide interconnection for
other printed circuit boards. Semiconductor designs are currently so complex
that they often require printed circuit boards with many layers of narrow,
densely spaced wiring. We manufacture high density, complex multilayer printed
circuit boards and backpanels on a low-volume, quick-turn basis, as well as on a
high-volume production basis. Our quick-turn prototype service allows us to
provide small test quantities to customers' product development groups in as
short as 24 hours. We are one of only a few independent manufacturers who can
respond to our customers' demands for an accelerated transition from prototype
to volume production, and are the only major PCB supplier with fabrication
service capabilities on four major continents (North America, South America,
Europe and Asia).
The manufacture of complex multilayer interconnect products often requires
the use of sophisticated circuit interconnections between layers, referred to as
vias, and adherence to strict electrical characteristics to maintain
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consistent circuit transmission speeds. Our production of microvias, by laser
ablation and our surface laminar circuit technology, a photo generated microvia
capability, provides our customers with proven high volume production capacity
in both of the major high density interconnect process solutions.
Flextronics Enclosures. We offer a comprehensive set of custom
electronic enclosures and related products and services worldwide. Our services
include design, manufacturing and integration of electronics packaging systems
from custom enclosure systems, power and thermal subsystems to interconnect
subsystems, cabling and cases. In addition to the typical sheet metal and
plastic fabrication, we assist in the design of electronic packaging systems
that protect sensitive electronics and enhance functionality. Our enclosure
design services focus on functionality, manufacturability and testing. These
services are integrated with our other services to provide our customers with
greater responsiveness, improved logistics and overall improved supply chain
management.
Flextronics Design Services. We offer a comprehensive spectrum of
value-added design services for products we manufacture for our customers from
product design services (hardware, software, mechanical and test) to
semiconductor design. Products designed by this group range from commercial and
military applications, including radio frequency analog, high-speed digital,
multi-chip module and flex circuits to high volume consumer products and small
quantity prototypes. We work with our customers to develop product-specific test
strategies and can custom design test equipment and software ourselves or use
test equipment and software provided by our customers. Additionally, a
significant competitive differentiator we possess is our semiconductor design
group. We provide ASIC design services to our OEM customers, which include:
- Conversion services from field programmable gate arrays to ASICs.
These services focus on designs that utilize primarily digital
signals, with only a small amount of analog signals.
- Design services for mixed-signal ASICs. These services focus on
designs that utilize primarily analog signals, with only a small
amount of digital signals.
- Silicon integration design services. These services utilize
silicon design modules that are used to accelerate complex ASIC
designs, including system-on-a-chip.
Our semiconductor design group utilizes external foundry suppliers for
its customers' silicon manufacturing requirements, thereby using a "fabless"
manufacturing approach. This enables us to take advantage of the suppliers' high
volume economies of scale and access to advanced process technology.
We believe that our semiconductor design expertise provides us with a
competitive advantage by enabling us to offer our customers reduced costs
through the consolidation of components onto silicon chips. Additionally, by
integrating the combined capabilities of design, engineering and semiconductor
services, we can compress the time from product concept to market introduction
and minimize product development costs.
To assist customers with initial design, we provide computer-aided
engineering and computer-aided design, engineering for manufacturability,
printed circuit board layout and test development. At our product introduction
centers, we employ hundreds of advanced engineers to provide the engineering
expertise in developing new products and preparing them for high volume
manufacturing. These centers coordinate and integrate our worldwide design,
prototype, test development practices and, in some locations, provide dedicated
production lines for prototypes.
Flextronics Photonics. We provide design, industrialization, supply
chain management and manufacturing services for the optical component and
optical networking industries. We offer a broad range of photonic packaging
design and industrialization services to assist in bringing products from
schematics to shipment while meeting our customers time-to-market objectives. As
the world's largest non-captive photonic component manufacturer, we offer
leading edge process development and volume manufacturing of active and passive
photonic devices.
Flextronics Network Services. We offer network installation services to
OEMs in the data and telecommunications industries. Our services include project
planning, documentation, engineering, production, installation and commissioning
of equipment. We have expertise in the installation of public and mobile
telecommunications systems, exchanges, corporate networks and peripheral
equipment.
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Supply Chain Services. We provide materials procurement, information
technology solutions and logistics. Materials procurement and management consist
of the planning, purchasing, expediting and warehousing of components and
materials used in the manufacturing process. Our inventory management expertise
and volume procurement capabilities contribute to cost reductions and reduce
total cycle time. Our industrial parks include providers of many of the custom
components that we use to reduce material and transportation costs, simplify
logistics and facilitate inventory management. We also use sophisticated
automated manufacturing resources planning systems and enhanced electronic data
interchange capabilities to ensure inventory control and optimization. Through
our manufacturing resources planning system, we have real-time visibility on
material availability and real-time tracking of work in process. We also utilize
electronic data interchange with our customers and suppliers to implement a
variety of supply chain management programs. Electronic data interchange allows
customers to share demand and product forecasts and deliver purchase orders
while also assisting suppliers with just-in-time delivery and supplier-managed
inventory.
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.
Flextronics Logistics. We provide global logistics services and turnkey
supply chain solutions for our customers. Our worldwide logistics services
include freight forwarding, warehousing/inventory management and
outbound/e-commerce solutions through our global supply chain network. We
leverage new technologies such as XML links to factories, extranet-based
management, vendor managed inventory and build-to-order programs, to
simultaneously connect suppliers, manufacturing operations and OEM customers. By
joining these logistics solutions with worldwide manufacturing operations and
total supply chain management, we can significantly reduce market costs and can
create tightly integrated processes and facilities worldwide. Moreover, the
combination of these capabilities allows us to react quickly to demand signals
from our customers worldwide, creating innovative links to suppliers while
serving the world market.
BACKLOG
Although we obtain firm purchase orders from our customers, OEM
customers typically do not make firm orders for delivery of products more than
30 to 90 days in advance. We do 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.
COMPETITION
The EMS industry is extremely competitive and includes hundreds of
companies, several of whom have achieved substantial market share. We compete
with different companies, depending on the type of service or geographic area.
We compete against numerous domestic and foreign EMS providers, and current and
prospective customers also evaluate our capabilities against the merits of
internal production. In addition, in recent years the EMS industry has attracted
a significant number of new entrants, including large OEMs with excess
manufacturing capacity, and many existing participants, including us, 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 harm our operating results.
Some of our competitors, may have greater manufacturing, financial or other
resources than us. 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. We believe that the
principal competitive factors in the segments of the EMS industry in which we
operate 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 seriously
harm our business.
ENVIRONMENTAL REGULATION
Our operations are subject to certain federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during their manufacturing processes. We believe that
our operations are currently in compliance with applicable regulations and do
not believe that costs of compliance with these laws and regulations will have a
material effect upon our capital expenditures, operating results or
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competitive position. Currently we have no commitments with environmental
authorities regarding any compliance related matters.
We determine the amount of our accruals for environmental matters by
analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by us at our operating facilities, or a determination that
we are potentially responsible for the release of hazardous substances at other
sites could result in expenditures in excess of amounts currently estimated to
be required for such matters. No assurance can be given that actual costs will
not exceed amounts accrued or that costs will not be incurred with respect to
sites as to which no problem is currently known. Further, there can be no
assurance that additional environmental matters will not arise in the future.
EMPLOYEES
As of March 31, 2001, our global workforce totaled approximately 75,000
employees. We have never experienced a work stoppage or strike and we believe
that our employee relations are good.
Our success depends to a large extent upon the continued services of
key managerial and technical employees. The loss of such personnel could
seriously harm our business, results of operations, prospects and debt service
ability. To date, we have not experienced significant difficulties in attracting
or retaining such personnel. Although we are not aware that any of our key
personnel currently intend to terminate their employment, we cannot assure you
of their future services.
RISK FACTORS
IF WE DO NOT MANAGE EFFECTIVELY THE EXPANSION OF OUR OPERATIONS, OUR BUSINESS
MAY BE HARMED.
We have grown rapidly in recent periods. Our workforce has more than
doubled in size over the last year as a result of internal growth and
acquisitions. This growth is likely to strain considerably our management
control systems and resources, including decision support, accounting
management, information systems and facilities. If we do not continue to improve
our financial and management controls, reporting systems and procedures to
manage our employees effectively and to expand our facilities, our business
could be harmed.
We plan to increase our manufacturing capacity in low-cost regions by
expanding our facilities and adding new equipment. This expansion involves
significant risks, including, but not limited to, the following:
- we may not be able to attract and retain the management personnel
and skilled employees necessary to support expanded operations;
- we may not efficiently and effectively integrate new operations
and information systems, expand our existing operations and manage
geographically dispersed operations;
- we may incur cost overruns;
- we may encounter construction delays, equipment delays or
shortages, labor shortages and disputes and production start-up
problems that could harm our growth and our ability to meet
customers' delivery schedules; and
- we may not be able to obtain funds for this expansion, and we may
not be able to obtain loans or operating leases with attractive
terms.
In addition, we expect to incur new fixed operating expenses associated
with our expansion efforts that will increase our cost of sales, including
substantial increases in depreciation expense and rental expense. If our
revenues do not increase sufficiently to offset these expenses, our operating
results would be seriously harmed. Our expansion, both through internal growth
and acquisitions, has contributed to our incurring significant unusual charges.
For example, in connection with our acquisitions of DII, Palo Alto Products
International, Chatham, Lightning and JIT, we recorded merger related charges
and related facility closure costs of approximately $258.7
10
11
million, net of tax, and in connection with the issuance of an equity instrument
to Motorola relating to our strategic alliance, we recorded a one-time non-cash
charge of approximately $286.5 million.
WE DEPEND ON THE TELECOMMUNICATIONS, NETWORKING, ELECTRONICS AND COMPUTER
INDUSTRIES WHICH CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS WITH
SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A
COST-EFFECTIVE BASIS WOULD HARM OUR BUSINESS.
We depend on sales to customers in the telecommunications, networking,
electronics and computer industries. Factors affecting these industries in
general could seriously harm our customers and, as a result, us. These factors
include:
- the inability of our customers to adapt to rapidly changing
technology and evolving industry standards, which results in short
product life cycles;
- the inability of our customers to develop and market their
products, some of which are new and untested, the potential that
our customers' products may become obsolete or the failure of our
customers' products to gain widespread commercial acceptance; and
- recessionary periods in our customers' markets.
If any of these factors materialize, our business would suffer.
Currently, many sectors of the telecommunications, networking, electronics and
computer industries are experiencing a significant decrease in demand for their
products and services, which has led to reduced demand for the services provided
by EMS companies. These changes in demand and generally uncertain economic
conditions have resulted, and may continue to result, in some customers
deferring delivery schedules for some of the products that we manufacture for
them, which could affect our results of operations. Further, a protracted
downturn in these industries could have a significant negative impact on our
business, financial condition and results of operation.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
EMS providers must provide increasingly rapid product turnaround for
their customers. We generally do not obtain firm, long-term purchase commitments
from our customers and we continue to experience reduced lead-times in customer
orders. Customers may cancel their orders, change production quantities or delay
production for a number of reasons. The generally uncertain economic condition
of several of the industries of our customers has resulted, and may continue to
result, in some of our customers delaying the delivery of some of the products
we manufacture for them. Cancellations, reductions or delays by a significant
customer or by a group of customers would seriously harm our results of
operations.
In addition, we make significant decisions, including determining the
levels of business that we will seek and accept, production schedules, component
procurement commitments, personnel needs and other resource requirements, based
on our estimates of customer requirements. The short-term nature of our
customers' commitments and the possibility of rapid changes in demand for their
products reduce our ability to estimate accurately future customer requirements.
This makes it difficult to schedule production and maximize utilization of our
manufacturing capacity. We often increase staffing, purchase materials and incur
other expenses to meet the anticipated demand of our customers. Anticipated
orders may not materialize, and delivery schedules may be deferred as a result
of changes in demand for our customers' products. On occasion, customers may
require rapid increases in production, which can stress our resources and reduce
margins. Although we have increased our manufacturing capacity, and plan further
increases, we may not have sufficient capacity at any given time to meet our
customers' demands. In addition, because many of our costs and operating
expenses are relatively fixed, a reduction in customer demand could harm our
gross profit and operating income.
OUR OPERATING RESULTS VARY SIGNIFICANTLY.
We experience significant fluctuations in our results of operations.
The factors that contribute to fluctuations include:
- the timing of customer orders;
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- the volume of these orders relative to our capacity;
- market acceptance of customers' new products;
- changes in demand for customers' products and product
obsolescence;
- our ability to manage the timing and amount of our procurement of
components to avoid delays in production and excess inventory
levels;
- the timing of our expenditures in anticipation of future orders;
- our effectiveness in managing manufacturing processes and costs;
- changes in the cost and availability of labor and components;
- changes in our product mix;
- changes in economic conditions;
- local factors and events that may affect our production volume,
such as local holidays; and
- seasonality in customers' product requirements.
One of our significant end-markets is the consumer electronics market.
This market exhibits particular strength toward the end of the calendar year in
connection with the holiday season. As a result, we have historically
experienced relative strength in revenues in our fiscal third quarter.
We are reconfiguring certain of our operations to further increase our
concentration in low-cost locations. This shift of operations resulted in a
restructuring charge of $275.6 million, net of tax, in the fourth quarter of
fiscal 2001, and may result in additional restructuring charges in fiscal 2002.
In addition, some of our customers are currently experiencing increased
volatility in demand, and in some cases reduced demand, for their products. This
increases the difficulty of anticipating the levels and timing of future
revenues from these customers, and could lead them to defer delivery schedules
for products, which could lead to a reduction or delay in such revenues. Any of
these factors or a combination of these factors could seriously harm our
business and result in fluctuations in our results of operations.
WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS.
In the past year, we completed a significant number of acquisitions of
businesses and facilities, including our acquisitions of DII, Palo Alto Products
International, Chatham, Lightning and JIT. We expect to continue to acquire
additional businesses and facilities in the future and are currently in
preliminary discussions to acquire additional businesses and facilities. Any
future acquisitions may require additional debt or equity financing, which could
increase our leverage or be dilutive to our existing shareholders. We cannot
assure the terms of, or that we will complete, any acquisitions in the future.
To integrate acquired businesses, we must implement our management
information systems and operating systems and assimilate and manage the
personnel of the acquired operations. The difficulties of this integration may
be further complicated by geographic distances. The integration of acquired
businesses may not be successful and could result in disruption to other parts
of our business.
In addition, acquisitions involve a number of other risks and
challenges, including, but not limited to:
- diversion of management's attention;
- potential loss of key employees and customers of the acquired
companies;
- lack of experience operating in the geographic market of the
acquired business; and
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- an increase in our expenses and working capital requirements.
Any of these and other factors could harm our ability to achieve
anticipated levels of profitability at acquired operations or realize other
anticipated benefits of an acquisition.
OUR STRATEGIC RELATIONSHIPS WITH ERICSSON AND OTHER MAJOR CUSTOMERS CREATE
RISKS.
In April 2001, we entered into a definitive agreement with Ericsson with
respect to our management of its mobile telephone operations. Our ability to
achieve any of the anticipated benefits of this new relationship with Ericsson
is subject to a number of risks, including our ability to meet Ericsson's
volume, product quality, timeliness and price requirements, and to achieve
anticipated cost reductions. If demand for Ericsson's mobile phone products
declines, Ericsson may purchase a lower quantity of products from us than we
anticipate. If Ericsson's requirements exceed the volume anticipated by us, we
may not be able to meet these requirements on a timely basis. Our inability to
meet Ericsson's volume, quality, timeliness and cost requirements, and to
quickly resolve any issues with Ericsson, could seriously harm our results of
operations. As a result of these and other risks, we may be unable to achieve
anticipated levels of profitability under this arrangement, and it may not
result in any material revenues or contribute positively to our net income per
share. Due to our relationship with Ericsson, other OEMs may not wish to obtain
logistics or operations management services from us.
We have entered into strategic relationships with other customers, have
recently announced our plans to enter into a strategic relationship with
Alcatel, and plan to continue to pursue such relationships. These relationships
generally involve many, or all, of the risks involved in our new relationship
with Ericsson. Similar to our other customer relationships, there are no volume
purchase commitments under these relationships, and the revenues we actually
achieve may not meet our expectations. In anticipation of future activities
under these strategic relationships, we are incurring substantial expenses as we
add personnel and manufacturing capacity and procure materials. Our operating
results will be seriously harmed if sales do not develop to the extent and
within the time frame we anticipate.
WE DEPEND ON THE CONTINUING TREND OF OUTSOURCING BY OEMs.
A substantial factor in our revenue growth is the transfer of manufacturing
and supply base management activities from our OEM customers. Future growth
partially depends on new outsourcing opportunities. To the extent that these
opportunities are not available, our future growth would be unfavorably
impacted. These outsourcing opportunities may include the transfer of assets
such as facilities, equipment and inventory.
THE MAJORITY OF OUR SALES COMES FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE ANY
OF THESE CUSTOMERS, OUR SALES COULD DECLINE SIGNIFICANTLY.
Sales to our ten largest customers have represented a significant
percentage of our net sales in recent periods. Our ten largest customers in
fiscal 2001 and 2000 accounted for approximately 59% and 57% of net sales in
fiscal 2001 and fiscal 2000, respectively. No customer accounted for more than
10% of net sales in fiscal 2001. Our largest customer during fiscal 2000 was
Ericsson, who accounted for approximately 12% of net sales. No other customer
accounted for more than 10% of net sales in fiscal 2000. We anticipate that our
strategic relationship with Ericsson will substantially increase the percentage
of our sales attributable to Ericsson.
The identity of our principal customers have varied from year to year, and
our principal customers may not continue to purchase services from us at current
levels, if at all. Significant reductions in sales to any of these customers, or
the loss of major customers, would seriously harm our business. If we are not
able to timely replace expired, canceled or reduced contracts with new business,
our revenues could be harmed.
OUR INDUSTRY IS EXTREMELY COMPETITIVE.
The EMS industry is extremely competitive and includes hundreds of
companies, several of which have achieved substantial market share. Current and
prospective customers also evaluate our capabilities against the merits of
internal production. Some of our competitors have substantially greater market
share and manufacturing, financial and marketing resources than us.
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In recent years, many participants in the industry, including us, have
substantially expanded their manufacturing capacity. If overall demand for
electronics manufacturing services should decrease, this increased capacity
could result in substantial pricing pressures, which could seriously harm our
operating results.
WE MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS.
At various times, there have been shortages of some of the electronic
components that we use, and suppliers of some components have lacked sufficient
capacity to meet the demand for these components. In some cases, supply
shortages and delays in deliveries of particular components have resulted in
curtailed production, or delays in production, of assemblies using that
component, which has contributed to an increase in our inventory levels. If we
are unable to obtain sufficient components on a timely basis, we may experience
manufacturing and shipping delays, which could harm our relationships with
current or prospective customers and reduce our sales.
OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE.
Our customers compete in markets that are characterized by rapidly
changing technology, evolving industry standards and continuous improvement in
products and services. These conditions frequently result in short product life
cycles. Our success will depend largely on the success achieved by our customers
in developing and marketing their products. If technologies or standards
supported by our customers' products become obsolete or fail to gain widespread
commercial acceptance, our business could be adversely affected.
WE ARE SUBJECT TO THE RISK OF INCREASED INCOME TAXES.
We have structured our operations in a manner designed to maximize
income in countries where:
- tax incentives have been extended to encourage foreign investment;
or
- income tax rates are low.
We base our tax position upon the anticipated nature and conduct of our
business and upon our understanding of the tax laws of the various countries in
which we have assets or conduct activities. However, our tax position is subject
to review and possible challenge by taxing authorities and to possible changes
in law which may have retroactive effect. We cannot determine in advance the
extent to which some jurisdictions may require us to pay taxes or make payments
in lieu of taxes.
Several countries in which we are located allow for tax holidays or
provide other tax incentives to attract and retain business. We have obtained
holidays or other incentives where available. Our taxes could increase if
certain tax holidays or incentives are not renewed upon expiration, or tax rates
applicable to us in such jurisdictions are otherwise increased. In addition,
further acquisitions of businesses may cause our effective tax rate to increase.
WE CONDUCT OPERATIONS IN A NUMBER OF COUNTRIES AND ARE SUBJECT TO RISKS OF
INTERNATIONAL OPERATIONS.
The geographical distances between the Americas, Asia and Europe create
a number of logistical and communications challenges. Our manufacturing
operations are located in a number of countries throughout East Asia, the
Americas and Europe. As a result, we are affected by economic and political
conditions in those countries, including:
- fluctuations in the value of currencies;
- changes in labor conditions;
- longer payment cycles;
- greater difficulty in collecting accounts receivable;
- the burdens and costs of compliance with a variety of foreign
laws;
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- political and economic instability;
- increases in duties and taxation;
- imposition of restrictions on currency conversion or the transfer
of funds;
- limitations on imports or exports;
- expropriation of private enterprises; and
- a potential reversal of current tax or other policies encouraging
foreign investment or foreign trade by our host countries.
The attractiveness of our services to our U.S. customers can be
affected by changes in U.S. trade policies, such as "most favored nation" status
and trade preferences for some Asian nations. In addition, some countries in
which we operate, such as Brazil, the Czech Republic, Hungary, Mexico, Malaysia
and Poland, have experienced periods of slow or negative growth, high inflation,
significant currency devaluations or limited availability of foreign exchange.
Furthermore, in countries such as China and Mexico, governmental authorities
exercise significant influence over many aspects of the economy, and their
actions could have a significant effect on us. Finally, we could be seriously
harmed by inadequate infrastructure, including lack of adequate power and water
supplies, transportation, raw materials and parts in countries in which we
operate.
WE DEPEND ON OUR KEY PERSONNEL.
Our success depends to a large extent upon the continued services of
our key executives, managers and skilled personnel. Generally our employees are
not bound by employment or non-competition agreements, and we cannot assure that
we will retain our key officers and employees. We could be seriously harmed by
the loss of key personnel. In addition, in order to manage our growth, we will
need to recruit and retain additional skilled management personnel and if we are
not able to do so, our business and our ability to continue to grow could be
harmed.
WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.
We are subject to various federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
discharge and disposal of hazardous substances in the ordinary course of our
manufacturing process. In addition, we are responsible for cleanup of
contamination at some of our current and former manufacturing facilities and at
some third party sites. If more stringent compliance or cleanup standards under
environmental laws or regulations are imposed, or the results of future testing
and analyses at our current or former operating facilities indicate that we are
responsible for the release of hazardous substances, we may be subject to
additional remediation liability. Further, additional environmental matters may
arise in the future at sites where no problem is currently known or at sites
that we may acquire in the future. Currently unexpected costs that we may incur
with respect to environmental matters may result in additional loss
contingencies, the quantification of which cannot be determined at this time.
THE MARKET PRICE OF OUR ORDINARY SHARES IS VOLATILE.
The stock market in recent years has experienced significant price and
volume fluctuations that have affected the market prices of technology
companies. These fluctuations have often been unrelated to or disproportionately
impacted by the operating performance of these companies. The market for our
ordinary shares may be subject to similar fluctuations. Factors such as
fluctuations in our operating results, announcements of technological
innovations 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 our ordinary shares.
ITEM 2. PROPERTIES
Our facilities consist of a global network of industrial parks,
regional manufacturing and technology centers, and design/engineering and
product introduction centers, providing over 16.0 million square feet of
capacity
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as of March 31, 2001. We own facilities with approximately 1.1 million square
feet in the Americas, 2.5 million square feet in Asia and 4.8 million square
feet of capacity in Europe. We lease facilities with approximately 2.9 million
square feet in the Americas, 1.5 million square feet in Asia and 3.5 million
square feet of capacity in Europe.
Over the past several years, we have actively increased our overall
capacity through internal growth, acquisitions and purchases of manufacturing
facilities. We plan to further expand our facilities in low cost locations,
adding new equipment and further developing our industrial parks. We cannot
assure that we will not encounter unforeseen difficulties, costs or delays in
expanding our facilities or that our expanded facilities will not prove to be in
excess of our requirements.
In connection with the consummated mergers and restructuring activities
in fiscal 2001, we developed formal plans to exit certain activities.
Management's plan to exit an activity included the identification of duplicate
manufacturing and administrative facilities for closure and the identification
of manufacturing and administrative facilities for consolidation into other
facilities. As a result of these integration activities, we identified
approximately 3.2 million of owned and leased square feet of capacity for
closure in the Americas. Approximately 700,000 of owned and leased square feet
of capacity in Asia was identified for closure. In Europe, we identified
approximately 800,000 of owned and leased square feet of capacity for closure.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Unusual Charges."
Our industrial parks, each incorporating from approximately 400,000 to
1.2 million square feet of facilities, are self-contained facilities that
co-locate our manufacturing and distribution operations with our suppliers in
low-cost regions near our customers' end markets. Our industrial parks provide a
total supply chain management. This approach to production and distribution
benefits our customers by reducing logistical barriers and costs, improving
communications, increasing flexibility, lowering transportation costs and
reducing turnaround times. We have strategically established large industrial
parks in China, Hungary, Mexico, Brazil and Poland.
Our regional 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. These regional manufacturing facilities range from
approximately 70,000 to 500,000 square feet and provide production in locations
close to strategic markets. We have established regional manufacturing and
technology centers in Austria, Brazil, China, Denmark, England, Finland, France,
Germany, Hungary, India, Indonesia, Ireland, Israel, Italy, Malaysia, Mexico,
Norway, Scotland, Sweden, Switzerland and in various states throughout the
United States.
Our design/engineering and product introduction centers provide a broad
range of advanced engineering services and prototype and low volume production
capabilities. The locations of our product introduction centers include Austria,
China, Finland, Germany, Italy, Sweden, Switzerland and the United States.
Our facilities are generally well maintained and suitable for the
operations conducted and, in substantially all cases where owned, free and clear
of any encumbrances. The productive capacity of our plants is generally adequate
for current needs. 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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF ORDINARY SHARES
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Our ordinary shares are quoted on the Nasdaq National Market under the
symbol "FLEX". The following table sets forth the high and low per share sales
prices for our ordinary shares since the beginning of fiscal 2000 as reported on
the Nasdaq National Market.
HIGH LOW
------ ------
FISCAL YEAR ENDED MARCH 31, 2000
First Quarter................................................. $14.59 $ 9.34
Second Quarter................................................ 17.03 10.63
Third Quarter................................................. 24.69 14.28
Fourth Quarter................................................ 39.88 19.16
FISCAL YEAR ENDED MARCH 31, 2001
First Quarter................................................. $38.06 $22.38
Second Quarter................................................ 44.91 32.38
Third Quarter................................................. 43.00 21.38
Fourth Quarter................................................ 40.13 14.25
All share prices have been adjusted to give effect to the two-for-one
stock splits effected as bonus issues (the Singapore equivalent of a stock
dividend), distributed to our shareholders on January 11, 1999, December 22,
1999 and October 16, 2000.
As of June 15, 2001, there were 3,703 holders of record of our ordinary
shares and the closing sale price of the ordinary shares as reported on the
Nasdaq National Market was $21.76 per share.
DIVIDENDS
Since inception, we have not declared or paid any cash dividends on our
ordinary shares (exclusive of dividends paid by pooled entities prior to
acquisition), and our bank credit facility prohibits the payment of cash
dividends without the lenders' prior consent. The terms of our outstanding
senior subordinated notes also restrict our ability to pay cash dividends. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." We anticipate that all earnings
in the foreseeable future will be retained to finance the continuing development
of our business.
TAXATION
This summary of Singapore and U.S. tax considerations is based on current
law and is provided for general information. The discussion does not purport to
deal with all aspects of taxation that may be relevant to particular
shareholders in light of their investment or tax circumstances, or to certain
types of shareholders (including insurance companies, tax-exempt organizations,
regulated investment companies, financial institutions or broker-dealers, and
shareholders that are not U.S. shareholders subject to special treatment under
the U.S. federal income tax laws. Such shareholders should consult their own tax
advisors regarding the particular tax consequences to such shareholders of any
investment in our ordinary shares.
INCOME TAXATION UNDER SINGAPORE LAW
Under current provisions of the Income Tax Act, Chapter 134 of Singapore,
corporate profits are taxed at a rate equal to 24.5%. Under Singapore's taxation
system, the tax paid by a company is deemed paid by its shareholders. Thus, the
shareholders receive dividends net of the tax paid by Flextronics. Dividends
received by either a resident or a nonresident of Singapore are not subject to
withholding tax. Shareholders are taxed on the gross amount of dividends
(meaning the cash amount of the dividend plus the amount of corporate tax paid
by Flextronics). The tax paid by Flextronics will be available to shareholders
as a tax credit to offset the Singapore income tax liability on their overall
income (including the gross amount of dividends). No tax treaty currently exists
between the Republic of Singapore and the U.S.
Under current Singapore tax law there is no tax on capital gains, and, thus,
any profits from the disposal of shares are not taxable in Singapore unless the
vendor is regarded as carrying on a trade in shares in Singapore (in which case,
the disposal profits would be taxable as trade profits rather than capital
gains).
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There is no stamp duty payable in respect of the holding and disposition of
shares. No duty is payable on the acquisition of new shares. Where existing
shares are acquired in Singapore, stamp duty is payable on the instrument of
transfer of the shares at the rate of S$2 for every S$1,000 of the market value
of the shares. The stamp duty is borne by the purchaser unless there is an
agreement to the contrary. Where the instrument of transfer is executed outside
of Singapore, stamp duty must be paid if the instrument of transfer is received
in Singapore. Under Article 22 (iii) of our Articles of Association, our
directors are authorized to refuse to register a transfer unless the instrument
of transfer has been duly stamped.
INCOME TAXATION UNDER UNITED STATES LAW
Individual shareholders that are U.S. citizens or resident aliens (as
defined in Section 7701(b) of the Internal Revenue Code of 1986), corporations
or partnerships or other entities created or organized under the laws of the
United States, or any political subdivision thereof, an estate the income of
which is subject to U.S. federal income taxation regardless of its source or a
trust which is subject to the supervision of a court within the United States
and the control of section 7701(b)(30) of the Internal Revenue Code will, upon
the sale or exchange of a share, recognize gain or loss for U.S. income tax
purposes in an amount equal to the difference between the amount realized and
the U.S. shareholder's tax basis in such a share. If paid in currency other than
U.S. dollars, certain currency translation rules will apply to determine the
U.S. dollar amount realized. Such gain or loss will be capital gain or loss if
the share was a capital asset in the hands of the U.S. shareholder and will be
short-term capital gain or loss if the share has been held for not more than one
year, mid-term capital gain or loss if the share has been held for more than one
year but not more than eighteen months and, long-term capital gain or loss if
the share has been held for more than eighteen months. If a U.S. shareholder
receives any currency other than U.S. dollars on the sale of a share, such U.S.
shareholder may recognize ordinary income or loss as a result of currency
fluctuations between the date of such sale and the date such sale proceeds are
converted into U.S. dollars.
U.S. shareholders will be required to report as income for U.S. income tax
purposes the amount of any dividend received from us to the extent paid out of
our current or accumulated earnings and profits, as determined under current
U.S. income tax principles. If over 50% of our stock (by vote or value) were
owned by U.S. shareholders who individually held 10% or more of our voting
stock, such U.S. shareholders potentially would be required to include in income
a portion or all of their pro rata share of our and our non-U.S. subsidiaries'
earnings and profits. Certain attribution rules apply in this regard. If 50% or
more of our assets during a taxable year produced or were held for the
production of passive income, as defined in section 1297(b) of the Code (e.g.,
certain forms of dividends, interest and royalties), or 75% or more of our gross
income for a taxable year was passive income, adverse U.S. tax consequences
could result to U.S. shareholders. As of March 31, 2001, we were not aware of
any U.S. shareholder who individually held 10% or more of our voting stock.
Shareholders that are not U.S. shareholders will not be required to report
for U.S. federal income tax purposes the amount of any dividend received from
us. Non-U.S. shareholders, upon the sale or exchange of a share, would not be
required to recognize gain or loss for U.S. federal income tax purposes.
ESTATE TAXATION
In the case of an individual who is not domiciled in Singapore, a Singapore
estate tax is imposed on the value of all movable and immovable properties
situated in Singapore. Our shares are considered to be situated in Singapore.
Thus, an individual shareholder who is not domiciled in Singapore at the time of
his or her death will be subject to Singapore estate tax on the value of any
such shares held by the individual upon the individual's death. Such a
shareholder will be required to pay Singapore estate tax to the extent that the
value of the shares (or in aggregate with any other assets subject to Singapore
estate tax) exceeds S$600,000. Any such excess will be taxed at a rate equal to
5% on the first S$12,000,000 of the individual's Singapore chargeable assets and
thereafter at a rate equal to 10%. An individual shareholder who is a U.S.
citizen or resident (for U.S. estate tax purposes) also will have the value of
the shares included in the individual's gross estate for U.S. estate tax
purposes. An individual shareholder generally will be entitled to a tax credit
against the shareholder's U.S. estate tax to the extent the individual
shareholder actually pays Singapore estate tax on the value of the shares;
however, such tax credit is generally limited to the percentage of the U.S.
estate tax attributable to the inclusion of the value of the shares included in
the shareholder's gross estate for U.S. estate tax purposes, adjusted further by
a pro rata apportionment of available exemptions. Individuals who are domiciled
in Singapore should consult their own tax advisors regarding the Singapore
estate tax consequences of their investment.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been prepared to give
retroactive effect to the pooling of interests mergers completed by us in fiscal
2001. In fiscal 2001, we acquired DII in April 2000, Palo Alto Products
International in April 2000, Lightning in August 2000, Chatham in August 2000
and JIT in November 2000.
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,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ...................................... $1,498,332 $2,577,926 $ 3,952,786 $6,959,122 $ 12,109,699
Cost of sales .................................. 1,289,567 2,246,135 3,512,229 6,335,242 11,127,896
Unusual charges(1) ............................. 16,443 8,869 77,286 7,519 510,495
---------- ---------- ----------- ---------- ------------
Gross profit ................................ 192,322 322,922 363,271 616,361 471,308
Selling, general and administrative ............ 113,308 169,586 240,512 319,952 430,109
Goodwill and intangibles amortization .......... 5,979 10,487 29,156 41,326 63,541
Unusual charges(1) ............................. 4,649 12,499 2,000 3,523 462,847
Interest and other expense, net ................ 8,398 21,480 52,234 69,912 67,115
---------- ---------- ----------- ---------- ------------
Income(loss) before income taxes ............ 59,988 108,870 39,369 181,648 (552,304)
Provision for (benefit from) income taxes ...... 16,415 22,378 (11,634) 23,080 (106,285)
---------- ---------- ----------- ---------- ------------
Net income (loss) ........................... $ 43,573 $ 86,492 $ 51,003 $ 158,568 $ (446,019)
========== ========== =========== ========== ============
Diluted earnings (loss) per share(2) ........... $ 0.18 $ 0.30 $ 0.17 $ 0.42 $ (1.01)
========== ========== =========== ========== ============
Shares used in computing diluted per
share amounts(2) ............................. 238,770 297,307 329,352 383,119 441,991
AS OF MARCH 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Working capital ................................ $ 87,855 $ 372,870 $ 384,084 $1,161,535 $1,914,741
Total assets ................................... 937,865 1,862,088 2,783,707 5,134,943 7,571,655
Total long-term debt, excluding current
portion ...................................... 139,383 580,441 789,471 645,267 917,313
Shareholders' equity ........................... 331,622 641,667 915,305 2,376,628 4,030,361
- ----------
(1) In fiscal 1997, we incurred approximately $4.6 million of
merger-related expenses associated with an acquisition and $16.4
million in costs associated with the closing and sale of several
manufacturing facilities.
In fiscal 1998, we incurred approximately $12.5 million of
merger-related expenses and approximately $8.9 million in costs
associated with the closure of a manufacturing operation.
In fiscal 1999, we incurred approximately $77.3 million of expenses
primarily associated with the closure of a semiconductor wafer
fabrication facility and wrote-off approximately $2.0 million of
in-process research and development associated with an acquisition.
In fiscal 2000, we incurred approximately $3.5 million of
merger-related expenses and $7.5 million in costs primarily associated
with the closure of several manufacturing facilities.
In fiscal 2001, we recognized unusual pre-tax charges of $973.3
million. Of this amount, $286.5 million related to the issuance of an
equity instrument to Motorola. The remaining $686.8 million includes
merger-related expenses of approximately $102.4 million and
approximately $584.4 million of costs associated with the closing of
several manufacturing facilities.
(2) We completed a stock split during each of fiscal 1999, 2000 and 2001.
Each of the stock splits was effected as bonus issues (the Singapore
equivalent of a stock dividend). The stock dividend has been reflected
in our financial statements for all periods presented unless otherwise
noted. All share and per share amounts have been retroactively restated
to reflect the stock splits.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words "expects,"
"anticipates," "believes," "intends," "plans" and similar expressions identify
forward-looking statements. In addition, any statements which refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. We undertake no obligation to
publicly disclose any revisions to these forward-looking statements to reflect
events or circumstances occurring subsequent to filing this Form 10-K with the
Securities and Exchange Commission. These forward-looking statements are subject
to risks and uncertainties, including, without limitation, those discussed in
this section. Accordingly, our future results could differ materially from
historical results or from those discussed or implied by these forward-looking
statements.
ACQUISITIONS
We have actively pursued mergers and other business acquisitions to expand
our global reach, manufacturing capacity and service offerings and to diversify
and strengthen customer relationships. The significant business combinations
completed in fiscal 2001, include the following:
DATE ACQUIRED COMPANY NATURE OF BUSINESS CONSIDERATION
- ---- ---------------- ------------------ -------------
November 2000 JIT Holdings Ltd. Provides electronics 17,323,531 ordinary shares
manufacturing
and design services
August 2000 Chatham Technologies, Inc. Provides industrial and 15,234,244 ordinary shares
electronics
manufacturing and design
services
August 2000 Lightning Metal Provides injection molding, 2,573,072 ordinary shares
Specialties metal
and related entities stamping and integration
services
April 2000 Palo Alto Products Provides industrial and 7,236,748 ordinary shares
International Pte. Ltd. electronics
manufacturing and design
services
April 2000 The DII Group, Inc. Provides electronics 125,536,310 ordinary shares
manufacturing
services
Each of these acquisitions was accounted for as a pooling of interests and
our consolidated financial statements have been restated to reflect the combined
operations of the merged companies for all periods presented. Additionally, we
have completed other immaterial pooling of interests transactions in fiscal
2001. Prior period statements have not been restated for these transactions. We
have also made a number of business acquisitions of other companies. These
transactions were accounted for using the purchase method and, accordingly our
consolidated financial statements include the operating results of each business
from the date of acquisition. Pro forma results of operations have not been
presented because the effects of these acquisitions were not material on either
an individual or an aggregate basis.
OTHER STRATEGIC TRANSACTIONS
On May 30, 2000, we entered into a strategic alliance for product
manufacturing with Motorola. In connection with this strategic alliance,
Motorola paid $100.0 million for an equity instrument that provided it with
incentives to purchase products and services from us by entitling it to acquire
22,000,000 of our ordinary shares at any time by meeting targeted purchase
levels of up to $32.0 billion through December 31, 2005 or by making additional
payments to us. The issuance of this equity instrument on May 30, 2000 resulted
in a one-time non-cash charge equal to the excess of the fair value of the
equity instrument issued over the $100.0 million proceeds received. As a result,
the one-time non-cash charge amounted to approximately $286.5 million offset by
a corresponding credit to additional paid-in capital in the first quarter of
fiscal 2001. In June 2001, we entered into an agreement with Motorola under
which we repurchased this equity instrument for $112.0 million. No current or
planned manufacturing programs are affected by the repurchase, and we anticipate
that Motorola will continue to be a customer following the repurchase, although
our future revenue from Motorola may be less than it would have been had this
instrument remained in effect.
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In April 2001, we entered into a definitive agreement with Ericsson with
respect to our management of the operations of Ericsson's mobile telephone
operations. Operations under this arrangement commenced in the first quarter of
fiscal 2002. Under this agreement, we are to provide a substantial portion of
Ericsson's mobile phone requirements. We will assume responsibility for product
assembly, new product prototyping, supply chain management and logistics
management, in which we will process customer orders from Ericsson and configure
and ship products to Ericsson's customers. We expect to provide PCBs and
plastics, primarily from our Asian operations. In connection with this
relationship, we purchased certain equipment, inventory and other assets, and
assumed certain accrued expenses, from Ericsson at their net book value of
approximately $450.0 million. See Item 1, "Business--Risk Factors--Our strategic
relationship with Ericsson creates risks."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statements of operations data expressed as a percentage of net sales.
FISCAL YEAR ENDED
MARCH 31,
---------------------------------
1999 2000 2001
------ ------ ------
Net sales ....................................... 100.0% 100.0% 100.0%
Cost of sales ................................... 88.9 91.0 91.9
Unusual charges ................................. 1.9 0.1 4.2
------ ------ ------
Gross margin ............................... 9.2 8.9 3.9
Selling, general and administrative ............. 6.1 4.6 3.6
Goodwill and intangibles amortization ........... 0.7 0.6 0.5
Unusual charges ................................. 0.1 0.1 3.8
Interest and other expense, net ................. 1.3 1.0 0.6
------ ------ ------
Income (loss) before income taxes .......... 1.0 2.6 (4.6)
Provision for (benefit from) income taxes ....... (0.3) 0.3 (0.9)
------ ------ ------
Net income (loss) .......................... 1.3% 2.3% (3.7)%
====== ====== ======
Net Sales
We derive our net sales from a wide range of service offerings, including
product design, semiconductor design, printed circuit board assembly and
fabrication, enclosures, material procurement, inventory and supply chain
management, final system assembly and test, packaging, logistics and
distribution.
Net sales for fiscal 2001 increased 74% to $12.1 billion from $7.0 billion
in fiscal 2000. The increase in sales for fiscal 2001 was primarily the result
of our ability to continue to expand sales to our existing customers as well as
expanding sales to new customers worldwide and, to a lesser extent, the
incremental revenue associated with the purchases of several manufacturing
facilities and related assets during fiscal 2001. During fiscal 2001, our ten
largest customers accounted for approximately 59% of net sales, with no customer
accounting for more than 10% of net sales. While we experienced significant
growth in net sales in fiscal 2001, this growth was hampered in late fiscal 2001
by a decline in demand due to the downturn experienced by the electronics
industry, which was driven by a combination of weakening end-market demand
(particularly in the telecommunications and networking sectors) and our
customers' inventory imbalances. Along with other providers of electronics
manufacturing services, our fourth quarter net sales were adversely affected by
reductions in purchase volumes and delays in purchases by certain customers, as
they continued to experience erosion in demand for their products. This trend
has continued through the first quarter of fiscal 2002 and may continue, or
worsen, in future periods, as the timing of any recovery in our customers'
markets is uncertain.
Net sales for fiscal 2000 increased 76% to $7.0 billion from $4.0 billion
in fiscal 1999. The increase in sales for fiscal 2000 was primarily due to
expanding sales to existing customers and, to a lesser extent, sales to new
customers. In fiscal 2000, our ten largest customers accounted for approximately
57% of net sales, with Ericsson accounting for approximately 12% of net sales.
No other customer accounted for more than 10% of net sales.
Gross Profit
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Gross profit varies from period to period and is affected by a number of
factors, including product mix, component costs, product life cycles, unit
volumes, startup, expansion and consolidation of manufacturing facilities,
pricing, competition and new product introductions. See Item 1, "Business--Risk
Factors."
Gross margin decreased to 3.9% for fiscal 2001 from 8.9% in fiscal 2000.
The decrease in gross margin is primarily attributable to unusual pre-tax
charges amounting to $510.5 million, which were associated with the plant
closures, as described in "Unusual Charges," below. Excluding unusual pre-tax
charges of $510.5 million and $7.5 million in fiscal 2001 and fiscal 2000,
respectively, gross margin decreased to 8.1% for fiscal 2001 from 9.0% in fiscal
2000. Gross margin decreased to 8.9% for fiscal 2000 from 9.2% in fiscal 1999.
Excluding unusual pre-tax charges of $7.5 million and $77.3 million in fiscal
2000 and 1999, respectively, gross margin decreased from 11.1% in fiscal 1999 to
9.0% in fiscal 2000. Our gross profit in each fiscal year was adversely affected
by several factors, including costs associated with expanding our facilities,
costs associated with the startup of new customers and projects, which typically
carry higher levels of under absorbed manufacturing overhead costs until the
projects reach higher volume production, and changes in our product mix to
higher volume projects, which typically have a lower gross margin because of
higher material content.
Increased mix of products that have relatively high material costs as a
percentage of total unit costs can adversely affect our gross margins. Further,
we may enter into supply arrangements in connection with strategic
relationships and OEM divestitures. These arrangements, which are relatively
larger in scale, could adversely affect our gross margins. We believe that
these and other factors may adversely affect our gross margins, but we do not
expect that this will have a material effect on our income from operations.
Unusual Charges
FISCAL 2001
We recognized unusual pre-tax charges of approximately $973.3 million
during fiscal year 2001. Of this amount, $493.1 million was recorded in the
first quarter and was comprised of approximately $286.5 million related to the
issuance of an equity instrument to Motorola combined with approximately $206.6
million of expenses resulting from the DII and Palo Alto Products International
mergers and related facility closures. In the second quarter, unusual pre-tax
charges amounted to approximately $48.4 million associated with the Chatham and
Lightning mergers and related facility closures. In the third quarter, we
recognized unusual pre-tax charges of approximately $46.3 million, primarily
related to the JIT merger and related facility closures. During the fourth
quarter, we recognized unusual pre-tax charges, amounting to $385.6 million
related to the closures of several manufacturing facilities.
On May 30, 2000, we entered into a strategic alliance for product
manufacturing with Motorola. See Note 8, "Shareholders' Equity," and Note 14,
"Subsequent Events," of the Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data" for further information
concerning the strategic alliance. In connection with this strategic alliance,
Motorola paid $100.0 million for an equity instrument that entitled it to
acquire 22,000,000 of our ordinary shares at any time through December 31, 2005,
upon meeting targeted purchase levels or making additional payments to us. The
issuance of this equity instrument resulted in a one-time non-cash charge equal
to the excess of the fair value of the equity instrument issued over the $100.0
million proceeds received. As a result, the one-time non-cash charge amounted to
approximately $286.5 million offset by a corresponding credit to additional
paid-in capital in the first quarter of fiscal 2001.
In connection with the aforementioned mergers and facility closures, we
recorded aggregate unusual charges of $686.8 million, which included
approximately $584.4 million of facility closure costs and approximately $102.4
million of direct transaction costs. As discussed below, $510.5 million of the
charges relating to facility closures have been classified as a component of
Cost of Sales during the fiscal year ended March 31, 2001. The components of the
unusual charges recorded are as follows (in thousands):
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FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL NATURE OF
CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
--------- --------- ---------- ---------- --------- -------------
Facility closure costs:
Severance..................... $ 62,487 $ 5,677 $ 3,606 $ 60,703 $ 132,473 cash
Long-lived asset impairment... 46,646 14,373 16,469 155,046 232,534 non-cash
Exit costs.................... 24,201 5,650 19,703 169,818 219,372 cash/non-cash
--------- --------- ---------- ---------- ---------
Total facility closure costs 133,334 25,700 39,778 385,567 584,379
Direct transaction costs:
Professional fees............. 50,851 7,247 6,250 -- 64,348 cash
Other costs................... 22,382 15,448 248 -- 38,078 cash/non-cash
--------- --------- ---------- ---------- ---------
Total direct transaction costs 73,233 22,695 6,498 -- 102,426
--------- --------- ---------- ---------- ---------
Total Unusual Charges........... 206,567 48,395 46,276 385,567 686,805
--------- --------- ---------- ---------- ---------
Income tax benefit.............. (30,000) (6,000) (6,500) (110,000) (152,500)
--------- --------- ---------- ---------- ---------
Net Unusual Charges............. $ 176,567 $ 42,395 $ 39,776 $ 275,567 $ 534,305
========= ========= ========== ========== =========
In connection with the facility closures, we developed formal plans to exit
certain activities and involuntarily terminate employees. Management's plan to
exit an activity included the identification of duplicate manufacturing and
administrative facilities for closure and the identification of manufacturing
and administrative facilities for consolidation into other facilities.
Management currently anticipates that the facility closures and activities to
which all of these charges relate will be substantially completed within one
year of the commitment dates of the respective exit plans, except for certain
long-term contractual obligations. The following table summarizes the components
of the facility closure costs and related activities in fiscal 2001:
LONG-LIVED
ASSET EXIT
SEVERANCE IMPAIRMENT COSTS TOTAL
--------- ---------- --------- ---------
Balance at March 31, 2000 ............. $ -- $ -- $ -- $ --
Activities during the year:
First quarter provision ............. 62,487 46,646 24,201 133,334
Cash charges ........................ (35,800) -- (1,627) (37,427)
Non-cash charges .................... -- (46,646) (7,441) (54,087)
-------- --------- --------- ---------
Balance at June 30, 2000 .............. 26,687 -- 15,133 41,820
Activities during the year:
Second quarter provision ............ 5,677 14,373 5,650 25,700
Cash charges ........................ (4,002) -- (4,231) (8,233)
Non-cash charges .................... -- (14,373) (8,074) (22,447)
-------- --------- --------- ---------
Balance at September 30, 2000 ......... 28,362 -- 8,478 36,840
Activities during the year:
Third quarter provision ............. 3,606 16,469 19,703 39,778
Cash charges ........................ (7,332) -- (2,572) (9,904)
Non-cash charges .................... -- (16,469) (14,070) (30,539)
-------- --------- --------- ---------
Balance at December 31, 2000 .......... 24,636 -- 11,539 36,175
Activities during the year:
Fourth quarter provision ............ 60,703 155,046 169,818 385,567
Cash charges ........................ (13,605) -- (14,686) (28,291)
Non-cash charges .................... -- (155,046) (71,328) (226,374)
-------- --------- --------- ---------
Balance at March 31, 2001 ............. $ 71,734 $ -- $ 95,343 $ 167,077
======== ========= ========= =========
Of the total pre-tax facility closure costs, $132.5 million relates to
employee termination costs, of which $67.8 million has been classified as a
component of Cost of Sales. As a result of the various exit plans, we identified
11,269 employees to be involuntarily terminated related to the various mergers
and facility closures. As of March 31, 2001, 4,457 employees have been
terminated, and another 6,812 employees have been notified that they are to be
terminated upon completion of the various facility closures and consolidations.
During fiscal 2001, we paid employee termination costs of approximately $60.7
million. The remaining $71.7 million of employee termination costs is classified
as accrued liabilities as of March 31, 2001 and is expected to be paid out
within one year of the commitment dates of the respective exit plans.
The unusual pre-tax charges include $232.5 million for the write-down of
long-lived assets to fair value. This amount has been classified as a component
of Cost of Sales. Included in the long-lived asset impairment are charges of
$229.1 million, which relate to property, plant and equipment associated with
the various manufacturing and administrative facility closures which were
written down to their net realizable value based on their estimated sales price.
Certain facilities will remain in service until their anticipated disposal dates
pursuant to the exit plans. Since the assets will remain in service from the
date of the decision to dispose of these assets to the anticipated disposal
date, the assets are being depreciated over this expected period. The impaired
long-lived assets consisted primarily of machinery and equipment of $153.0
million and building and improvements of $76.1 million. The long-lived
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asset impairment also includes the write-off of the remaining goodwill and other
intangibles related to certain closed facilities of $3.4 million.
The unusual pre-tax charges also include approximately $219.4 million for
other exit costs. Approximately $210.2 million of this amount has been
classified as a component of Cost of Sales. The other exit costs recorded,
primarily related to items such as building and equipment lease termination
costs, warranty costs, current asset impairments and payments to suppliers and
vendors to terminate agreements and were incurred directly as a result of the
various exit plans. We paid approximately $23.1 million of other exit costs
during fiscal 2001. Additionally, approximately $101.0 million of other exit
costs were non-cash charges utilized during fiscal 2001. The remaining $95.3
million is classified in accrued liabilities as of March 31, 2001 and is
expected to be substantially paid out within one year from the commitment dates
of the respective exit plans, except for certain long-term contractual
obligations.
The direct transaction costs include approximately $64.3 million of costs
primarily related to investment banking and financial advisory fees as well as
legal and accounting costs associated with the merger transactions. Other direct
transaction costs which totaled approximately $38.1 million were mainly
comprised of accelerated debt prepayment expense, accelerated executive stock
compensation and benefit-related expenses. We paid approximately $70.9 million
of the direct transaction costs during fiscal 2001. Additionally, approximately
$28.2 million of the direct transaction costs were non-cash charges utilized
during fiscal 2001. The remaining $3.3 million is classified in accrued
liabilities as of March 31, 2001 and is expected to be substantially paid out in
the first quarter of fiscal 2002.
FISCAL 2000
In fiscal 2000, we recognized unusual pre-tax charges of $7.5 million
related to the operations of Chatham, which included severance and related
charges of approximately $4.4 million and other facility exit costs of
approximately $3.1 million.
Additionally, unusual pre-tax charges of $3.5 million were recorded in
fiscal 2000, related to the Kyrel EMS Oyj merger. The unusual charges consisted
of a transfer tax of $1.7 million, approximately $0.4 million of investment
banking fees and approximately $1.4 million of legal and accounting fees.
FISCAL 1999
During fiscal 1999, we recognized unusual pre-tax charges of approximately
$79.3 million, substantially all of which related to the operations of our
wholly owned subsidiary, Orbit Semiconductor, Inc. ("Orbit"). We decided to sell
Orbit's 6-inch, 0.6 micron wafer fabrication facility ("Fab") and adopt a
fabless manufacturing strategy to complement Orbit's design and engineering
services. The charges were primarily due to the impaired recoverability of
inventories, intangible assets and fixed assets, and other costs associated with
the exit of semiconductor manufacturing. The Fab was ultimately sold in January
1999.
The components of the unusual charges recorded in fiscal 1999 are as
follows:
FIRST FOURTH
QUARTER QUARTER TOTAL NATURE OF
CHARGES CHARGES CHARGES CHARGES
-------- -------- -------- ----------
Severance............................... $ 498 $ 2,371 $ 2,869 cash
Long-lived asset impairment............. 38,257 16,538 54,795 non-cash
Losses on sales contracts............... 2,658 3,100 5,758 non-cash
Incremental uncollectible accounts
receivable........................... 900 -- 900 non-cash
Incremental sales returns and
allowances .......................... 1,500 500 2,000 non-cash
Inventory write-downs................... 5,500 250 5,750 non-cash
Acquired in-process research and
development.......................... -- 2,000 2,000 non-cash
Other exit costs........................ 1,845 3,369 5,214 cash/non-cash
-------- -------- --------
Total Unusual Pre-Tax Charges.... $ 51,158 $ 28,128 $ 79,286
======== ======== ========
Of the total unusual pre-tax charges, approximately $2.9 million relates to
employee termination costs. As a result of the closure of the fabrication
facility, 460 employees were terminated. The terminations were completed and
related severance costs were fully paid out by the first quarter of fiscal 2000.
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The unusual pre-tax charges include approximately $54.8 million for the
write-down of long-lived assets to fair value. Included in the long-lived asset
impairment are charges of $50.7 million related to the Fab which was written
down to its net realizable value based on its sales price. The impaired
long-lived assets consisted primarily of machinery and equipment of $43.4
million and building and improvements of $7.3 million. The long-lived asset
impairment also includes the write-off of the remaining goodwill of $0.6
million. The remaining $3.5 million of asset impairment relates to the
write-down to net realizable value of a facility we exited during fiscal 1999.
We entered into certain non-cancelable sales contracts to provide
semiconductors to customers at fixed prices. Because we were obligated to
fulfill the terms of the agreements at selling prices which were not sufficient
to cover the cost to produce or acquire such products, a liability for losses on
sales contracts was recorded for the estimated future amount of such losses. The
unusual pre-tax charges include approximately $8.7 million for losses on sales
contracts, incremental amounts of uncollectible accounts receivable, and
estimated incremental costs for sales returns and allowances, all of which were
fully utilized by the end of fiscal 2000.
The unusual pre-tax charges also include approximately $10.9 million for
losses on inventory write-downs and other exit costs. We have written off and
disposed of approximately $5.8 million of inventory. The remaining $5.1 million
relates primarily to incremental costs and contractual obligations for items
such as lease termination costs, litigation, environmental clean-up costs, and
other exit costs incurred directly as a result of the exit plan, all of which
were paid out or non-cash charges utilized by the end of fiscal 2000.
Based on an independent valuation of certain of the assets of Advanced
Component Labs ("ACL") and other factors, we 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, we wrote-off $2.0 million of in-process research and
development in fiscal 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, for fiscal 2001
increased to $430.1 million from $320.0 million in fiscal 2000 but decreased as
a percentage of net sales to 3.6% in fiscal 2001 from 4.6% in fiscal 2000. SG&A
for fiscal 2000 increased to $320.0 million from $240.5 million in fiscal 1999
but decreased as a percentage of net sales to 4.6% in fiscal 2000 from 6.1% in
fiscal 1999. The dollar increase in SG&A for each fiscal year was primarily due
to our continued investment in infrastructure such as sales, marketing,
supply-chain management and other related corporate and administrative expenses
as well as information systems necessary to support the expansion of our
business. The decline in SG&A as a percentage of each fiscal year's net sales
reflects our continued focus on controlling operating expenses relative to sales
growth and gross margin levels.
Goodwill and Intangible Assets Amortization
Goodwill and intangible assets amortization in fiscal 2001 increased to
$63.5 million from $41.3 million in fiscal 2000. This increase was directly the
result of the various acquisitions in fiscal 2001 which were accounted for as
purchase transactions, which primarily include Irish Express Cargo Ltd, Fico,
Inc. (United States), Li Xin Industries, Ltd. and Ojala Yhtyma Oy.
Goodwill and intangible assets amortization in fiscal 2000 increased to
$41.3 million from $29.2 million in fiscal 1999 primarily related to the
acquisition of ACL which was completed in late March 1999, and various business
acquisitions completed during fiscal 2000.
Interest and Other Expense, Net
Interest and other expense, net decreased to $67.1 million in fiscal 2001
from $69.9 million in fiscal 2000. The following table sets forth information
concerning the components of interest and other expense.
1999 2000 2001
-------- -------- ---------
Interest expense ................................... $ 61,430 $ 84,198 $ 135,243
Interest income .................................... (11,374) (22,681) (32,219)
Foreign exchange (gain) loss ....................... 3,543 2,128 (4,028)
Other (income) expense, net ........................ (1,365) 6,267 (31,881)
-------- -------- ---------
Total interest and other expense, net .... $ 52,234 $ 69,912 $ 67,115
======== ======== =========
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Net interest expense increased to $103.0 million in fiscal 2001 from $61.5
million in fiscal 2000. The increase was primarily attributable to the interest
expense associated with the approximately $645.0 million of senior subordinated
notes, consisting of $500.0 million of 9.875% notes and euros 150.0 million of
9.75% notes we issued in June 2000.
Net interest expense increased to $61.5 million in fiscal 2000 from $50.1
million in fiscal 1999. The increase was attributable to the increased bank
borrowings to finance our capital expenditures, expansion of various facilities
and industrial parks and purchases of manufacturing assets offset by increased
interest income from our deployment of equity offering proceeds in money market
funds and corporate debt securities. Fiscal 2000 net interest expense included
accelerated amortization of approximately $1.0 million in bank arrangement fees
associated with the termination of a credit facility.
In fiscal 2001, there was $4.0 million of foreign exchange gain compared to
foreign exchange loss of $2.1 million in fiscal 2000. The foreign exchange gain
generated in fiscal 2001 mainly relates to net non-functional currency monetary
liabilities in Singapore, Germany and Hungary. In fiscal 2000, there was $2.1
million of foreign exchange loss compared to $3.5 million foreign exchange loss
in fiscal 1999. The foreign exchange loss in fiscal 2000 mainly relates to net
non-functional currency monetary liabilities in Austria, Finland and Hungary.
Other (income) expense, net changed from $6.3 million of net other expense
in fiscal 2000 to $31.9 million of net other income in fiscal 2001 primarily due
to realized gains on sales of marketable equity securities. The other expense in
fiscal 2000 was comprised mainly of a loss on disposal of fixed assets in
Hungary offset by compensation received in a settlement of a claim.
Provision for Income Taxes
Certain of our subsidiaries have, at various times, been granted tax relief
in their respective countries, resulting in lower income taxes than would
otherwise be the case under ordinary tax rates. See Note 7, "Income Taxes," of
the Notes to Consolidated Financial Statements included in Item 8, "Financial
Statements and Supplementary Data."
The consolidated effective tax rate for a particular year will vary
depending on the mix of earnings, operating loss carryforwards, income tax
credits, and changes in previously established valuation allowances for deferred
tax assets based upon management's current analysis of the realizability of
these deferred tax assets. The Company's consolidated effective tax rate was a
19% benefit for fiscal year 2001 compared to a 13% provision for fiscal year
2000, however, excluding the unusual charges in fiscal 2001 the effective tax
rate was 11%. The slight decrease in the effective tax rate was due primarily to
the expansion of operations and increase in profitability in countries with
lower tax rates. See Item 1, "Business--Risk Factors--We are subject to the risk
of increased income taxes."
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001 we had cash and cash equivalents balances totaling $631.6
million, total bank and other debts amounting to $1.2 billion and $500.0 million
available for borrowing under our credit facilities subject to compliance with
certain financial ratios. Our working capital increased to $1.9 billion at March
31, 2001 from $1.2 billion at March 31, 2000. Additionally, our debt to equity
ratio improved to 31% at March 31, 2001 from 49% at March 31, 2000.
Cash used in operating activities was $469.7 million and $34.4 million in
fiscal 2001 and 2000, respectively. In fiscal 1999, operating activities
provided cash amounting to $160.9 million. Operating activities used cash in
fiscal 2001 primarily as a result of significant increases in accounts
receivable and inventory, partially offset by an increase in accounts payable
combined with the $446.0 million net loss. Cash provided by operating activities
decreased in fiscal 2000 from fiscal 1999 because of increases in accounts
receivable, inventories and other current assets, offset by increases in net
income and accounts payable.
Accounts receivable, net of allowance for doubtful accounts, increased to
$1.7 billion at March 31, 2001 from $1.1 billion at March 31, 2000. The increase
in accounts receivable was primarily due to an increase of approximately 74% in
net sales in fiscal 200