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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K/A
Amendment No. 1
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
000-23354
FLEXTRONICS INTERNATIONAL
LTD.
(Exact name of registrant as
specified in its charter)
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Singapore
(State or other jurisdiction
of
incorporation or organization)
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Not Applicable
(I.R.S. Employer
Identification No.)
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One Marina Boulevard, #28-00
Singapore
(Address of
registrants principal executive offices)
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018989
(Zip Code)
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Registrants telephone number, including area code
(65) 6890 7188
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Ordinary Shares, No Par Value
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The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
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Securities registered pursuant to Section 12(g) of the
Act NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of September 28, 2007, the last business day of the
registrants most recently completed second fiscal quarter,
there were 610,044,016 shares of the registrants
ordinary shares outstanding, and the aggregate market value of
such shares held by non-affiliates of the registrant (based upon
the closing sale price of such shares on the NASDAQ Stock Market
LLC (NASDAQ Global Select Market) on September 28,
2007) was approximately $6.8 billion.
As of May 19, 2008, there were 836,359,916 shares of
the registrants ordinary shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Parts into Which Incorporated
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Proxy Statement to be delivered to shareholders in connection
with the Registrants 2008 Annual General Meeting of
Shareholders
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Part II Securities Authorized For Issuance
Under Equity Compensation Plans and Part III
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EXPLANATORY
NOTE
Flextronics International Ltd. (Flextronics or
the Company) is filing this
Amendment No. 1 on
Form 10-K/A
(this Amendment No. 1) to amend its Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2008, as filed with the
Securities and Exchange Commission (SEC) on
May 23, 2008 (the Original Filing), for the
purpose of providing summary financial and other information
relating to the Companys previously held investment in the
common stock of Relacom Holding AB (Relacom) as a
result of an agreement with the staff of the SEC to provide such
information in lieu of the separate audited financial statements
of Relacom required under Rule
3-09 of
Regulation
S-X.
Amendment No. 1 amends the Original Filing as follows
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Part II, Item 7, Managements Discussion &
Analysis of Financial Condition and Results of
Operations has been amended to include additional
disclosure relating to impairment charges associated with the
Companys Relacom investment under the heading Other
charges (income), net.
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Part II, Item 8, Financial Statements and Supplementary
Data has been amended to include condensed
consolidated statements of operations and cash flows information
for Relacom for the periods from March 1, 2007 through the
date of disposition on January 7, 2008, from March 1,
2006 through February 28, 2007 and from August 19,
2005 (inception) through February 28, 2006, and to include
condensed consolidated balance sheet information as of
February 28, 2007 under the heading Summary of
Accounting Policies in Note 2 to the Consolidated
Financial Statements. In addition, an updated opinion of
Deloitte & Touche LLP is included in this Item.
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New certifications of the Companys principal executive
officer and principal financial officer have been attached as
exhibits to this Amendment No. 1. Except as set forth above, no
other changes have been made to the Original Filing. This
Amendment No. 1 continues to speak as of the date of the
Original Filing and the Company has not updated the disclosure
in this Amendment No. 1 to reflect events which occurred
following the date of the Original Filing. Accordingly, this
Amendment No. 1 should be read together with all other filings
the Company has made with the Securities and Exchange Commission
subsequent to the filing date of the Original Filing.
PART I
FORWARD-LOOKING STATEMENTS
Unless otherwise specifically stated, references in this report
to Flextronics, the Company,
we, us, our and similar
terms mean Flextronics International Ltd. and its subsidiaries.
Except for historical information contained herein, certain
matters included in this annual report on
Form 10-K
are, or may be deemed to be 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, believe, should,
anticipate, plan, expect,
intend, estimate 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 under Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Because these forward-looking statements are subject to 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
Item 1A, Risk Factors and Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations. In addition, new
risks emerge from time to time and it is not possible for
management to predict all such risk factors or to assess the
impact of such risk factors on our business. Given these risks
and uncertainties, the reader should not place undue reliance on
these forward-looking statements. We undertake no obligation to
update or revise these forward-looking statements to reflect
subsequent events or circumstances.
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OVERVIEW
We are a leading global provider of vertically-integrated
advanced design and electronics manufacturing services
(EMS) to original equipment manufacturers
(OEMs) in the following markets:
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Infrastructure, which includes networking and communications
equipment, such as base stations, core routers and switches,
optical and optical network terminal (ONT)
equipment, and connected home products, such as set-top boxes
and DSL/cable modems;
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Mobile communication devices, which includes handsets operating
on a number of different platforms such as GSM, CDMA, TDMA and
WCDMA;
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Computing, which includes products such as desktop, handheld and
notebook computers, electronic games and servers;
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Consumer digital devices, which includes products such as home
entertainment equipment, printers, copiers and cameras;
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Industrial, Semiconductor and White Goods, which includes
products such as home appliances, industrial meters, bar code
readers, self-service kiosks and test equipment;
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Automotive, Marine and Aerospace, which includes products such
as navigation instruments, radar components, and instrument
panel and radio components;
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Medical devices, which includes products such as drug delivery,
diagnostic, telemedicine devices and disposable devices.
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We are one of the worlds largest EMS providers, with
revenue of $27.6 billion in fiscal year 2008. As of
March 31, 2008, our total manufacturing capacity was
approximately 27.0 million square feet in over 25 countries
across four continents. In fiscal year 2008, our sales in Asia,
the Americas and Europe represented 56%, 28% and 16% of our
total net sales, respectively, based on the location of the
manufacturing site. We have established an extensive network of
manufacturing facilities in the worlds major electronics
markets (Asia, the Americas and Europe), with planned expansion
into emerging electronics markets, in order to serve the growing
outsourcing needs of both multinational and regional OEMs.
Our portfolio of customers consists of many of the technology
industrys leaders, including Casio, Cisco Systems, Dell,
Eastman Kodak, Ericsson, Hewlett-Packard, Microsoft, Motorola,
Nortel, Sony-Ericsson, Sun Microsystems and Xerox.
We are a globally-recognized leading provider of end-to-end,
vertically-integrated global supply chain services through which
we design, build, ship and service a complete packaged product
for our OEM customers. These vertically-integrated services
increase customer competitiveness by delivering improved product
quality, leading manufacturability, improved performance, faster
time-to-market and reduced costs. We remain firmly committed to
the competitive advantage of vertical integration, along with
the continuous development of our design capabilities in each of
our major product categories. Our OEM customers leverage our
services to meet their requirements throughout their
products entire life cycles. The services we offer across
all the markets we serve include:
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Printed Circuit Board and Flexible Circuit Fabrication;
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Systems Assembly and Manufacturing;
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Logistics;
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After-Sales Services;
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Design and Engineering Services;
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Original Design Manufacturing (ODM)
Services; and
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Components Design and Manufacturing.
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We believe that our vertically-integrated capabilities provide
us with a competitive advantage in the market for designing and
manufacturing electronics products for leading multinational and
regional OEMs. Through these services and capabilities, we
simplify the global product development process and provide
meaningful time and cost savings for our customers.
We have actively pursued acquisitions of businesses and
purchases of manufacturing facilities, design and engineering
resources and technologies in order to expand worldwide
operations, broaden service offerings, diversify and strengthen
customer relationships, and enhance our competitive position as
a leading provider of comprehensive outsourcing solutions. On
October 1, 2007, we completed the acquisition of 100% of
the outstanding common stock of Solectron Corporation
(Solectron) in a stock and cash transaction valued
at approximately $3.6 billion. Through this acquisition, we
broadened our EMS capabilities, increased our scale, diversified
our customer base and markets, and enhanced our ability to
design, build and ship products for, and service, our customers.
Refer to Note 12, Business and Asset Acquisitions and
Divestitures, to the Consolidated Financial Statements for
further discussion.
INDUSTRY
OVERVIEW
Outsourcing demand for advanced manufacturing capabilities,
design and engineering services and after-market services
continues its long-term growth pattern. The total available
market for outsourcing electronic manufacturing services
continues to remain relatively unpenetrated with penetration
rates estimated to be less than 25%. Demand continues to
increase for several reasons, including the intensely
competitive nature of the electronics industry, the continually
increasing complexity and sophistication of electronics
products, pressure on OEMs to reduce product costs, and shorter
product life cycles. As a result, the number of OEMs that
utilize EMS providers as part of their business and
manufacturing strategies continues to increase. Utilizing EMS
providers allows OEMs to take advantage of the global design,
manufacturing and supply chain management expertise of EMS
providers, and enables OEMs to concentrate on product research,
development, marketing and sales. We believe that OEMs realize
the following benefits through their strategic relationships
with EMS providers:
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Reduced production costs;
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Reduced design and development costs;
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Accelerated time-to-market and time-to-volume production;
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Reduced capital investment requirements and fixed costs;
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Improved inventory management and purchasing power;
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Access to worldwide design, engineering, manufacturing, and
logistics capabilities; and
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Ability to focus on core branding and R&D initiatives.
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We believe that the EMS industry will continue to grow, driven
largely by the needs of OEMs to respond to rapidly changing
markets and technologies and to reduce product costs.
Additionally, we believe that there are significant
opportunities for EMS providers to win additional business from
OEMs in certain markets or industry segments that have yet to
substantially utilize EMS providers.
SERVICE
OFFERINGS
We offer a broad range of customer-tailored, vertically
integrated services to OEMs. Our traditional service offerings
have been significantly enhanced by the acquisition of
Solectron. As a result of this acquisition, Flextronics now has
the broadest worldwide capabilities in the EMS industry, from
design resources to end-to-end, vertically integrated, global
supply chain services. We believe that Flextronicss
competitive advantages are that we are able to provide more
value and innovation to our customers since we offer both global
economies of scale in manufacturing, logistics and procurement,
as well as market-focused expertise and capabilities in design,
engineering and ODM services. As a result of our focus on
specific markets, we believe that we are able to better
understand complex market dynamics and anticipate trends that
impact our OEM customers businesses, and can help improve
their market positioning by effectively adjusting product plans
and roadmaps to deliver low-cost, high
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quality products and meet their time-to-market requirements. Our
vertically-integrated services allow us to design, build, ship
and service a complete packaged product to our OEM customers.
These services include:
Printed Circuit Board and Flexible Circuit
Fabrication. Printed circuit boards are platforms
composed of laminated materials that provide the interconnection
for integrated circuits and other electronic components.
Semiconductor designs are currently so complex that they often
require printed circuit boards with multiple layers of narrow,
densely spaced wiring or flexible circuits. The manufacture of
these complex multilayer interconnect and flexible circuit
products often requires the use of sophisticated circuit
interconnections between layers, referred to as vias, and
adherence to strict electrical characteristics to maintain
consistent circuit transmission speeds. We are an industry
leader in high-density, multilayer and flexible printed circuit
board manufacturing. We also provide our customers with
rigid-flex circuit board design and manufacturing. We
manufacture printed circuit boards on a low-volume, quick-turn
basis, as well as on a high-volume production basis. We provide
quick-turn prototype services that allow us to provide small
test quantities to meet the needs of customers product
development groups in as little as 48 hours. Our extensive
range of services enables us to respond to our customers
demands for an accelerated transition from prototype to volume
production. We have printed circuit board and flexible circuit
fabrication service capabilities in North America, South
America, Europe and Asia.
Systems Assembly and Manufacturing. Our
assembly and manufacturing operations, which generate the
majority of our revenues, include printed circuit board assembly
and assembly of systems and subsystems that incorporate printed
circuit boards and complex electromechanical components. We
often assemble electronics products with our proprietary printed
circuit boards and custom electronic enclosures on either a
build-to-order or configure-to-order basis. In these operations,
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, enables us to offer a variety of
advanced manufacturing solutions. Our systems assembly and
manufacturing expertise includes the following:
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Enclosures. We offer a comprehensive
set of custom electronics enclosures and related products and
services worldwide. Our services include the design, manufacture
and integration of electronics packaging systems, including
custom enclosure systems, power and thermal subsystems,
interconnect subsystems, cabling and cases. In addition to
standard sheet metal and plastic fabrication services, we assist
in the design of electronics 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 assembly
and manufacturing services to provide our customers with overall
improved supply chain management.
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Testing Services. We also offer
computer-aided testing services for assembled printed circuit
boards, systems and subsystems. These services significantly
improve our ability to deliver high-quality products on a
consistent basis. Our test services include management defect
analysis, in-circuit testing and functional testing. In
addition, we also provide environmental stress tests of board
and system assemblies.
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Materials Procurement and Inventory
Management. Our manufacturing and assembly
operations capitalize on our materials inventory management
expertise and volume procurement capabilities. As a result, we
believe that we are able to achieve highly competitive cost
reductions and reduce total manufacturing cycle time for our OEM
customers. Materials procurement and management consist of the
planning, purchasing, expediting and warehousing of components
and materials used in the manufacturing process. In addition,
our strategy includes having third-party suppliers of custom
components located in our industrial parks to reduce material
and transportation costs, simplify logistics and facilitate
inventory management. We also use a sophisticated automated
manufacturing resources planning system and enhanced electronic
data interchange capabilities to ensure inventory control and
optimization. Through our manufacturing resources planning
system, we have real-time
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visibility of material availability and tracking of work in
process. We 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 and assists suppliers with satisfying
just-in-time
delivery and supplier-managed inventory requirements.
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Design and Engineering Services. We offer a
comprehensive range of value-added design and engineering
services that are tailored to the various markets of our
customers. These services range from contract design services
(CDS), where the customer purchases services on a
time and materials basis, to ODM services, where the customer
purchases a product that we design, develop and manufacture. ODM
products are then sold by our OEM customers under the OEMs
brand names. Our design and engineering services are provided by
our global team of design engineers and include:
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User Interface and Industrial
Design: We design and develop innovative,
stylish and cost-effective products that address the needs of
the user and the market. Our front-end creative capabilities
offer our OEM customers assistance with the product creation
process. These services include preliminary product exploration,
market research,
2-D sketch
level drawings,
3-D
mock-ups and
proofs of concept, interaction and interface models, detailed
hard models and product packaging.
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Mechanical Engineering and Tooling
Design: We offer detailed product and
enclosure design for static and dynamic solutions in both
plastic and metal for low-to high-volume applications.
Additionally, we provide design and development services for
prototype and production tooling equipment used in manufacturing.
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Electronic System Design: We provide
complete electrical design for products ranging in size from
small handheld consumer devices to large high-speed,
carrier-grade, telecommunications equipment, which includes
embedded system and digital signal processing design, high speed
digital interfaces, analog circuit design, power management
solutions, wired and wireless communication protocols, display
and storage solutions, imaging and audio/video applications, and
radio frequency (RF) system and antenna design.
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PCB Design: We provide complete printed
circuit board (PCB) design services, incorporating
high layer counts, advanced materials, component miniaturization
technologies, signal integrity and rigid-flex requirements.
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Components Solutions. Our components group is
a product-driven organization focused on designing and
manufacturing complete products for our OEM customers. Our
capabilities include the design and manufacture of
technologically advanced subsystem solutions for the electronics
market. These sub-components include camera modules, power
supplies, antennas, RF modules, passive color super-twisted
nematic (CSTN) and active thin film transistor
(TFT) small and medium form factor display modules
for mobile phones, MP3 players, industrial and commercial
products and digital cameras. By combining innovative design
capabilities with a global manufacturing footprint, we provide
our OEM customers with market-leading component technologies
that are cost-effectively designed and manufactured while
speeding their products time-to-market.
Logistics. We provide global logistics
services and turnkey supply chain solutions to 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. In addition, our SimFlex
simulation software tool allows our customers to simulate,
analyze and evaluate complex supply chain scenarios, critical
operating characteristics and performance metrics, and supply
chain trade-offs to ensure supply chain excellence. We offer
customers flexible,
just-in-time
delivery programs allowing product shipments to be closely
coordinated with our customers inventory requirements.
Increasingly, we ship products directly into customers
distribution channels or directly to the end-user. By joining
these logistics solutions with worldwide manufacturing
operations and total supply chain management capabilities in a
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tightly integrated process, we believe we enable our OEM
customers to significantly reduce their product costs and react
quickly to continuously changing market demand on a worldwide
basis.
After-Sales Services. We provide a range of
after-sales services, including product repair, re-manufacturing
and maintenance at repair depots, logistics and parts
management, returns processing, warehousing, and engineering
change management. These services are provided through a global
network of operations, hubs and centers. We support our
customers by providing software updates and design modifications
that may be necessary to reduce costs or design in alternative
components due to component obsolescence or unavailability.
Manufacturing support involves test engineering support and
manufacturability enhancements. We also assist with product
failure analysis, warranty and repair, and field service
engineering activities.
Additionally, through our Solectron acquisition we have expanded
our after-sales services to include retail technical services.
This service specializes in providing customer-facing technical
support in retail locations around the globe. We provide
point-of-sale assistance in solving technical issues through
troubleshooting and fixing electronics products for end users.
This further improves our customers competitiveness as
this service decreases product return rates, lowers total costs
of service, and improves the overall end user experience beyond
the initial product sale thereby increasing end user retention
for our customers.
STRATEGY
Our strategy is to continue to accelerate our growth and enhance
profitability by using our market-focused expertise and
capabilities and our global economies of scale to offer the most
competitive vertically-integrated global supply chain services
to our customers. To achieve this goal, we continue to enhance
our core EMS manufacturing, procurement and logistics services
with industry-specific expertise in design, engineering and ODM
services through the following:
Market-Focused Approach. We intend to continue
to invest in growing our market-focused expertise and
capabilities to ensure that we can make fast, flexible decisions
in response to changing market conditions. By focusing our
resources on serving specific industries, we are able to better
understand complex market dynamics and anticipate trends that
impact our OEM customers businesses, and we can help
improve their market positioning by effectively adjusting
product plans and roadmaps to deliver low-cost, high quality
products, and meet their time-to-market requirements.
Expand Global Manufacturing Capabilities and
Vertically-Integrated Service Offering. One of our core
strategies is to continue to expand our global manufacturing
capabilities and vertically-integrated services. We actively
pursue acquisitions to expand our global capabilities and
strengthen our vertically-integrated capabilities. Through both
internal development and synergistic acquisitions, we enhance
our competitive position as a leading provider of comprehensive
outsourcing solutions and are able to capture a larger portion
of the supply chain. We will continue to selectively pursue
strategic opportunities that we believe will further our
business objectives and enhance shareholder value.
Expand Our Design and Engineering
Capabilities. We have expanded our design and
engineering resources as part of our strategy to offer services
that help our OEM customers achieve time and cost savings for
their products. We intend to continue to expand our design and
engineering capabilities by increasing our research and
development capabilities, expanding our established internal
design and engineering resources, and by developing, licensing
and acquiring technologies.
Capitalize on Our Industrial Park Concept. Our
industrial parks are self-contained campuses where we co-locate
our manufacturing and logistics operations with certain
strategic suppliers in low-cost regions around the world. These
industrial parks allow us to minimize logistics costs throughout
the supply chain and reduce manufacturing cycle time by reducing
distribution barriers and costs, improving communications,
increasing flexibility, lowering transportation costs and
reducing turnaround times. We intend to continue to capitalize
on these industrial parks as part of our strategy to offer our
customers highly-competitive cost reductions and flexible,
just-in-time
delivery programs.
Streamline Business Processes Through Information
Technologies. We use a sophisticated automated
manufacturing resources planning system and enhanced
business-to-business data interchange capabilities to
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ensure inventory control and optimization. We streamline
business processes by using these information technology tools
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. We continually
enhance our information technology systems to support business
growth, and intend to continue to drive our strategy of
streamlining business processes through the use of information
technologies so that we can continue to offer our customers a
comprehensive solution to improve their communications and
relationships across their supply chain and be more responsive
to market demands.
Focus on Core Activities. As part of our
strategy, we continuously evaluate the strategic and financial
contributions of each of our operations and focus our primary
growth objectives on our core EMS vertically-integrated business
activities. We leverage our existing scale and capabilities to
accelerate revenue growth and enhance profitability, while
narrowing our focus to only those businesses that provide
substantial synergy. We also explore non-traditional
opportunities to continue to expand our vertical technologies.
COMPETITIVE
STRENGTHS
We continue to enhance our business through the development and
broadening of our various product and service offerings. Our
vision is to create a company of limitless scale and repeatable
execution that is creating value that increases our
customers competitiveness. We have concentrated our
strategy on market-focused expertise and capabilities and our
vertically-integrated global supply chain services and we
believe that the following capabilities differentiate us from
our competitors and enable us to better serve our customers:
Significant Scale and Global Integrated
System. We believe that scale is a significant
competitive advantage, as our customers solutions are
increasingly requiring cost structures and capabilities that can
only be achieved through size and global reach. There are cost
advantages that can only be achieved by scale. We are a leader
in global procurement, purchasing approximately $23 billion
of material in our fiscal year ended March 31, 2008. As a
result, we are able to use our worldwide supplier relationships
to achieve advantageous pricing and supply chain flexibility for
our OEM customers.
We have established an extensive, integrated network of design,
manufacturing and logistics facilities in the worlds major
electronics markets to serve the growing outsourcing needs of
both multinational and regional OEMs. Our extensive global
network of manufacturing facilities in over 25 countries with
over 162,000 employees gives us the ability to increase the
competitiveness of our customers by simplifying their global
product development process while also delivering improved
product quality with improved performance and faster time to
market. Operating and executing this complex worldwide solutions
system is a competitive advantage.
Extensive Design and Engineering
Capabilities. We have an industry leading global
design service offering with product design engineers providing
global design services, products and solutions to satisfy a wide
array of customer requirements. We combine our design and
manufacturing services to design, develop and manufacture
components (such as camera modules) and complete products (such
as cellular phones), which are then sold by our OEM customers
under the OEMs brand names. We have greatly expanded our
design engineering resources, which now exceeds 4,000 engineers,
across all of the markets that we serve.
Vertically-Integrated End-to-End Solution. We
offer a comprehensive range of worldwide supply chain services
that simplify the global product development process and provide
meaningful time and cost savings to our OEM customers. Our broad
based vertically-integrated end-to-end services enable us to
cost-effectively design, build, ship and service a complete
packaged product. We believe that our capabilities also help our
customers improve product quality, manufacturability and
performance, and reduce costs. We continue to expand and enhance
our vertically-integrated service offering by adding capacity in
plastics, metals, rigid printed circuit boards, and power
supplies as well as by introducing new vertically-integrated
capabilities in areas such as machining and touch panels.
Industrial Parks; Low-Cost Manufacturing
Services. We have developed self-contained
campuses that co-locate our manufacturing and logistics
operations with our suppliers at a single low-cost location.
These industrial parks enhance our total supply chain
management, while providing a low cost, multi-technology
8
solution for our customers. This approach increases the
competitiveness of our customers by reducing logistical barriers
and costs, improving communications, increasing flexibility,
lowering transportation costs and reducing turnaround times. We
have strategically established our large industrial parks in
Brazil, China, Hungary, India, Malaysia, Mexico and Poland.
In addition, we have other regional manufacturing operations
situated in low-cost regions of the world to provide our
customers with a wide array of manufacturing solutions and the
lowest manufacturing costs. As of March 31, 2008,
approximately 74% of our manufacturing capacity was located in
low-cost locations, such as Brazil, China, Hungary, Malaysia,
Mexico, Poland, Singapore and Ukraine. We believe we are a
global industry leader in low-cost production capabilities.
Customer and End Market Diversification. We
believe that we have created a well diversified and balanced
company. Through our acquisitions and our internal development,
we have diversified our business across multiple end markets,
significantly expanding the available market to us. For example,
through our acquisition of Solectron we added strength in
high-end computing, communications and networking
infrastructure, which complemented our existing strength in
mobile and consumer electronics. Additionally, we have created a
more diversified customer base as evidenced by the reduction of
the concentration of sales to our ten largest customers to 55%
of net sales in fiscal year 2008 from 64% of net sales in fiscal
year 2007. This diversification positions us better to weather
end market, customer or product down turns.
Long-Standing Customer Relationships. We
believe that a cornerstone to our success, and a fundamental
requirement for our sustained growth and profitability, is our
long-standing customer relationships. We believe that our
ability to maintain and grow these customer relationships is due
to our ability to continuously create value that increases our
customers competitiveness. This has been achieved through
our continued development of a broad range of
vertically-integrated service offerings, and our market-focused
approach designed to add innovative thinking and create value
that increases our customers competitiveness. To achieve
our quality goals, we monitor our performance using a number of
quality improvement and measurement techniques. We have also
received numerous service and quality awards that further
validate the success of these programs.
Large Scale Integration Ability. We believe
that one of our competitive advantages is our ability to
effectively integrate large-scale acquisitions into our global
operations. We have the expertise and the resources to
successfully acquire, integrate and rationalize both
acquisitions and OEM customers manufacturing, logistics
and procurement capabilities. These large scale acquisitions and
strategic OEM transactions enable us to improve our
competitiveness and increase our market share on an accelerated
basis. In addition to our recently completed large-scale
integration of Solectron, we have integrated large scale
strategic OEM transactions with Sony-Ericsson, Xerox, Kyocera,
and Nortel.
CUSTOMERS
Our customers include many of the worlds leading
technology companies. We have focused on establishing long-term
relationships with our customers and have been successful in
expanding our relationships to incorporate additional product
lines and services. In fiscal year 2008, our ten largest
customers accounted for approximately 55% of net sales from
continuing operations. Our largest customer during fiscal year
2008 was Sony-Ericsson, which accounted for more than 10% of net
sales from continuing operations. No other customer accounted
for more than 10% of net sales from continuing operations in
fiscal year 2008.
9
The following table lists in alphabetical order a representative
sample of our largest customers in fiscal year 2008 and the
products of those customers for which we provide EMS services:
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Customer
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End Products
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Cisco Systems, Inc.
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Consumer electronics products
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Dell Computer Corporation
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Desktop personal computers and servers
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Eastman Kodak
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Digital cameras and self-service kiosks
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Ericsson Telecom AB
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Business telecommunications systems and GSM infrastructure
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Hewlett-Packard Company
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Inkjet printers and storage devices
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Microsoft Corporation
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Computer peripherals and consumer electronics gaming products
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Motorola, Inc.
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Cellular phones and telecommunications infrastructure
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Nortel Networks Limited
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Optical, wireless and enterprise telecommunications
infrastructure
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Sony-Ericsson
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Cellular phones
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Sun Microsystems, Inc.
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Network computing infrastructure products
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Xerox Corporation
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Office equipment and components
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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. In addition,
OEM customers may reschedule or cancel firm orders based upon
contractual arrangements. Therefore, we do not believe that the
backlog of expected product sales covered by firm purchase
orders is a meaningful measure of future sales.
COMPETITION
The EMS market is extremely competitive and includes many
companies, several of which have achieved substantial market
share. We compete against numerous domestic and foreign EMS
providers, as well as our current and prospective customers, who
evaluate our capabilities in light of their own. We face
particular competition from Asian based competitors, including
Taiwanese ODM suppliers who compete in a variety of our end
markets and have a substantial share of global information
technology hardware production.
We compete with different companies depending on the type of
service we are providing or the geographic area in which an
activity is taking place. We believe that the principal
competitive factors in the EMS market are: quality and range of
services; design and technological capabilities; cost; location
of facilities; and responsiveness and flexibility.
SOCIAL
RESPONSIBILITY
Our corporate social responsibility practices are broad in
scope, and include a focus on disaster relief, medical aid,
education, environmental protection, health and safety and the
support of communities around the world. We intend to continue
to invest in global communities through grant-making, financial
contributions, volunteer work, support programs and donating
resources.
Our commitment to social responsibility also includes our
mission to positively contribute to global communities and the
environment by adhering to the highest ethical standards of
practice with our customers, suppliers, partners, employees,
communities and investors as well as with respect to our
corporate governance policies and procedures, and by providing a
safe and quality work environment for our employees.
10
EMPLOYEES
As of March 31, 2008, our global workforce totaled
approximately 162,000 employees. In certain international
locations, our employees are represented by labor unions and by
work councils. We have never experienced a significant 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 and business prospects. To date, we have not
experienced significant difficulties in attracting or retaining
such personnel.
ENVIRONMENTAL
REGULATION
Our operations are regulated under various federal, state, local
and international laws governing the environment, including laws
governing the discharge of pollutants into the air and water,
the management and disposal of hazardous substances and wastes
and the cleanup of contaminated sites. We have in place
infrastructures to ensure that our operations are in compliance
with all applicable environmental regulations and we do not
believe that costs of compliance with these laws and regulations
will have a material adverse effect on our capital expenditures,
operating results, or competitive position. In addition, we are
responsible for cleanup of contamination at some of our current
and former manufacturing facilities and at some third-party
sites. We engage environmental consulting firms to assist us in
the evaluation of environmental liabilities of our ongoing
operations, historical disposal activities and closed sites in
order to establish appropriate accruals in our financial
statements. We determined 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. While no material exposures have been
identified to date that we are aware of, there can be no
assurance that additional environmental matters will not arise
in the future or that costs will not be incurred with respect to
sites as to which no problem is currently known.
We are also required to comply with an increasing number of
product environmental compliance regulations focused on the
restriction of certain hazardous substances. Our business
requires close collaboration with our customers and suppliers to
mitigate risk of non-compliance. Most recently, we completed the
implementation of our internal conformance program for the
European Unions Directive 2002/95/EC (RoHS)
and to the first phase of the China RoHS directive. We have
developed rigorous risk mitigating compliance programs designed
to meet the needs of our customers as well as the regulations.
These programs vary from collecting compliance data from our
suppliers to full laboratory testing, and we require our supply
chain to comply. Non-compliance could potentially result in
significant costs
and/or
penalties. In addition, the electronics industry is subject to
the European Unions Waste Electrical and Electronic
Equipment (WEEE) directive, which became effective
beginning in 2005. Similar legislation has been or may be
enacted in other jurisdictions, including in the United States,
Canada, Mexico, China and Japan. WEEE requires industry OEMs to
assume responsibility for the collection, recycling and
management of waste electronic products and components. Although
the compliance responsibility rests primarily with OEMs rather
than with EMS companies, OEMs may turn to EMS companies for
assistance in meeting their WEEE obligations.
INTELLECTUAL
PROPERTY
We own or license various United States and foreign patents
related to a variety of technologies. For certain of our
proprietary processes, we rely on trade secret protection. We
also have registered our corporate name and several other
trademarks and service marks that we use in our business in the
United States and other countries throughout the world.
Although we believe that our intellectual property assets and
licenses are sufficient for the operation of our business as we
currently conduct it, we cannot assure you that third parties
will not make infringement claims against us in the future. In
addition, we are increasingly providing design and engineering
services to our customers and designing and making our own
products. As a consequence of these activities, we are required
to address and
11
allocate the ownership and responsibility for intellectual
property in our customer relationships to a greater extent than
in our manufacturing and assembly businesses. If a third party
were to make an assertion regarding the ownership or right to
use intellectual property, we could be required to either enter
into licensing arrangements or to resolve the issue through
litigation. Such license rights may not be available to us on
commercially acceptable terms, if at all, and any such
litigation may not be resolved in our favor. Additionally,
litigation could be lengthy and costly and could materially harm
our financial condition regardless of the outcome. We also could
be required to incur substantial costs to redesign a product or
re-perform design services.
FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS
Refer to Note 13, Segment Reporting, to our
Consolidated Financial Statements included under Item 8,
Financial Statements and Supplementary Data for
financial information about our geographic areas.
ADDITIONAL
INFORMATION
Our Internet address is
http://www.flextronics.com.
We make available through our Internet website the
Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission.
We were incorporated in the Republic of Singapore in May 1990.
Our principal corporate office is located at One Marina
Boulevard, #28-00, Singapore 018989. Our
U.S. corporate headquarters is located at 2090 Fortune
Drive, San Jose, California, 95131.
We
depend on industries that continually produce technologically
advanced products with short life cycles and our business would
be adversely affected if our customers products are not
successful or if our customers lose market share.
We derive our revenues from customers in the following markets:
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Infrastructure, which includes networking and communications
equipment, such as base stations, core routers and switches,
optical and ONT equipment, and connected home products, such as
set-top boxes and DSL/cable modems;
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Mobile communication devices, which includes handsets operating
on a number of different platforms such as GSM, CDMA, TDMA and
WCDMA;
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Computing, which includes products such as desktop, handheld and
notebook computers, electronic games and servers;
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Consumer digital devices, which includes products such as home
entertainment equipment, printers, copiers and cameras;
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Industrial, Semiconductor and White Goods, which includes
products such as home appliances, industrial meters, bar code
readers, self-service kiosks and test equipment;
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Automotive, Marine and Aerospace, which includes products such
as navigation instruments, radar components, and instrument
panel and radio components;
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Medical devices, which includes products such as drug delivery,
diagnostic and telemedicine devices.
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Factors affecting any of these industries in general, or our
customers in particular, could seriously harm us. These factors
include:
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rapid changes in technology, evolving industry standards and
requirements for continuous improvement in products and services
result in short product life cycles;
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12
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demand for our customers products may be seasonal;
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our customers may fail to successfully market their products,
and our customers products may fail to gain widespread
commercial acceptance;
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our customers may experience dramatic market share shifts in
demand which may cause them to exit the business; and
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there may be recessionary periods in our customers markets.
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Our
customers may cancel their orders, change production quantities
or locations, or delay production, and the inherent difficulties
involved in responding to these demands could harm our
business.
As a provider of electronics design and manufacturing services
and components, we must provide increasingly rapid product
turnaround time for our customers. We generally do not obtain
firm, long-term purchase commitments from our customers, and we
often experience reduced lead times in customer orders which may
be less than the lead time we require to procure necessary
components and materials.
Cancellations, reductions or delays by a significant customer or
by a group of customers have harmed, and may continue to harm,
our results of operations by reducing the volumes of products we
manufacture and deliver for these customers, by causing a delay
in the repayment of our expenditures for inventory in
preparation for customer orders and by lowering our asset
utilization resulting in lower gross margins.
The short-term nature of our customers commitments and the
rapid changes in demand for their products reduce our ability to
accurately estimate the future requirements of those customers.
This makes it difficult to schedule production and maximize
utilization of our manufacturing capacity. In that regard, we
must make significant decisions, including determining the
levels of business that we will seek and accept, setting
production schedules, making component procurement commitments,
and allocating personnel and other resources, based on our
estimates of our customers requirements.
On occasion, customers require rapid increases in production or
require that manufacturing of their products be transitioned
from one facility to another to achieve cost or other
objectives. These demands stress our resources and reduce our
margins. We may not have sufficient capacity at any given time
to meet our customers demands, and transfers from one
facility to another can result in inefficiencies and costs due
to excess capacity in one facility and corresponding capacity
constraints at another. In addition, because many of our costs
and operating expenses are relatively fixed, a reduction in
customer demand, or transfer of demand from one facility to
another, harms our gross profit and operating income.
Our
industry is extremely competitive; if we are not able to
continue to provide competitive services, we may lose
business.
We compete with a number of different companies, depending on
the type of service we provide or the location of our
operations. For example, we compete with major global EMS
providers, other smaller EMS companies that have a regional or
product-specific focus, and ODMs with respect to some of the
services that we provide, as well as our current and prospective
customers. Our industry is extremely competitive, many of our
competitors have achieved substantial market share and some may
have lower cost structures or greater design, manufacturing,
financial or other resources than we do. We face particular
competition from Asian based competitors, including Taiwanese
ODM suppliers who compete in a variety of our end markets and
have a substantial share of global information technology
hardware production. If we are unable to provide comparable
manufacturing services and improved products at lower cost than
the other companies in our market, our net sales could decline.
The
majority of our sales come from a small number of customers and
a decline in sales to any of these customers could adversely
affect our business.
Sales to our ten largest customers represent a significant
percentage of our net sales. Our ten largest customers accounted
for approximately 55% and 64% of net sales from continuing
operations in fiscal years 2008 and 2007, respectively. Our
largest customer during fiscal years 2008 and 2007 was
Sony-Ericsson, which accounted for more
13
than 10% of net sales from continuing operations. No other
customer accounted for more than 10% of net sales from
continuing operations in fiscal year 2008 or 2007.
Our principal customers have varied from year to year. These
customers may experience dramatic declines in their market
shares or competitive position, due to economic or other forces,
that may cause them to reduce their purchases from us, or, in
some cases, result in the termination of their relationship with
us. 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.
If we
do not effectively manage changes in our operations, our
business may be harmed; we have taken substantial restructuring
charges in the past and we may need to take material
restructuring charges in the future.
We have experienced growth in our business through a combination
of internal growth and acquisitions, and we expect to make
additional acquisitions in the future. Our global workforce has
more than doubled in size since the beginning of fiscal year
2001. During that time, we have also reduced our workforce at
some locations and closed certain facilities in connection with
our restructuring activities. These changes have placed
considerable strain on 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 expect that we will continue to transition manufacturing to
lower-cost locations and eliminate redundant facilities, and we
may be required to take additional restructuring charges in the
future as a result of these activities. We also intend to
increase our manufacturing capacity in our low-cost regions by
expanding our facilities and adding new equipment. Acquisitions
and expansions involve significant risks, including, but not
limited to, the following:
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we may not be able to attract and retain the management
personnel and skilled employees necessary to support
newly-acquired or expanded operations;
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we may not efficiently and effectively integrate new operations
and information systems, expand our existing operations and
manage geographically dispersed operations;
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we may incur cost overruns;
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we may incur charges related to our expansion activities;
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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
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we may not be able to obtain funds for acquisitions and
expansions on attractive terms, and we may not be able to obtain
loans or operating leases with attractive terms.
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In addition, we expect to incur new fixed operating expenses
associated with our expansion efforts that will increase our
cost of sales, including increases in depreciation expense and
rental expense. If our revenues do not increase sufficiently to
offset these expenses, our operating results could be seriously
harmed. Our transition to low-cost manufacturing regions has
contributed to significant restructuring and other charges that
have resulted from reducing our workforce and capacity at
higher-cost locations. We recognized restructuring charges of
approximately $447.7 million, $151.9 million and
$215.7 million in fiscal years 2008, 2007 and 2006,
respectively. Restructuring costs during fiscal year 2008 were
primarily incurred in connection with our acquisition of
Solectron, and were initiated in order to consolidate and
integrate our global capacity and infrastructure as a result of
the acquisition. Restructuring costs incurred during fiscal
years 2007 and 2006 were primarily associated with the
consolidation and closure of several manufacturing facilities,
and related impairment of certain long-lived assets. We may be
required to take additional charges in the future as a result of
these activities. We cannot assure you as to the timing or
amount of any future restructuring charges. If we are required
to take additional restructuring charges in the future, it could
have a material adverse impact on operating results, financial
position and cash flows.
14
We may
encounter difficulties with acquisitions, which could harm our
business.
We have completed numerous acquisitions of businesses and we
expect to continue to acquire additional businesses in the
future. In particular, on October 1, 2007, we completed our
acquisition of Solectron. We are currently in preliminary
discussions with respect to potential acquisitions and strategic
customer transactions. Any future acquisitions may require
additional equity financing, which could be dilutive to our
existing shareholders, or additional debt financing, which could
increase our leverage and potentially affect our credit ratings.
Any downgrades in our credit ratings associated with an
acquisition could adversely affect our ability to borrow by
resulting in more restrictive borrowing terms. As a result of
the foregoing, we also may not be able to complete acquisitions
or strategic customer transactions in the future to the same
extent as in the past, or at all.
To integrate acquired businesses, we must implement our
management information systems, operating systems and internal
controls, 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, the
integration of acquired businesses may require that we incur
significant restructuring charges.
In addition, acquisitions involve numerous risks and challenges,
including:
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diversion of managements attention from the normal
operation of our business;
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potential loss of key employees and customers of the acquired
companies, which is a particular concern in the acquisition of
companies engaged in product and software design;
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difficulties managing and integrating operations in
geographically dispersed locations;
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the potential for deficiencies in internal controls at acquired
companies;
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increases in our expenses and working capital requirements,
which reduce our return on invested capital;
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lack of experience operating in the geographic market or
industry sector of the acquired business; and
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exposure to unanticipated liabilities of acquired companies.
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These and other factors have harmed, and in the future could
harm, our ability to achieve anticipated levels of profitability
at acquired operations or realize other anticipated benefits of
an acquisition, and could adversely affect our business and
operating results.
Our
components business is dependent on our ability to quickly
launch world-class components products, and our investment in
development, and
start-up and
integration costs necessary to achieve quick launches of
world-class components products may adversely affect our margins
and profitability.
Our components business, which primarily includes camera
modules, power supplies and CSTN and active TFT small and medium
form factor display modules for mobile phones, is part of our
strategy to improve our competitive position and to grow our
future margins, profitability and shareholder returns by
expanding our vertical-integration capabilities. The camera
module, power supply and CSTN and active TFT small and medium
form factor display modules for mobile phones industries have
experienced, and are expected to continue to experience, rapid
technological change. The success of our components business is
contingent on our ability to design and introduce world-class
components that have performance characteristics that are
suitable for a broad market and that offer significant price
and/or
performance advantages over competitive products.
To create these world class components offerings, we must make
substantial investments in the development of our components
capabilities, in resources such as research and development,
technology licensing, test and tooling equipment, facility
expansions and personnel requirements. We may not be able to
achieve or maintain market acceptance for any of our components
offerings in any of our current or target markets. The success
of our components business will also depend upon the level of
market acceptance of our customers end products, which
incorporate our components, and over which we have no control.
In addition, OEMs often require unique configurations or custom
designs which must be developed and integrated in the OEMs
product well before the product is launched by the OEM. Thus,
there is often substantial
15
lead time between the commencement of design efforts for a
customized component and the commencement of volume shipments of
the component to the OEM. As a result, we may make substantial
investments in the development and customization of products for
our customers and no revenue may be generated from these efforts
if our customers do not accept the customized component. Even if
our customers accept the customized component, if our customers
do not purchase anticipated levels of products, we may not
realize any profits.
Our achievement of anticipated levels of profitability in our
components business is also dependent on our ability to achieve
commercially viable production yields and to manufacture
components in commercial quantities to the performance
specifications demanded by our OEM customers.
As a result of these and other risks, we have been, and in the
future may be, unable to achieve anticipated levels of
profitability in our components business. In addition, our
components business has not, and in the future may not, result
in any material revenues or contribute positively to our
earnings per share.
Our
substantial investments and
start-up and
integration costs in our design services business may adversely
affect our margins and profitability.
As part of our strategy to enhance our vertically-integrated
end-to-end service offerings, we have expanded and continue to
expand our design and engineering capabilities. Providing these
services can expose us to different or greater potential risks
than those we face when providing our manufacturing services.
Although we enter into contracts with our design services
customers, we may design and develop products for these
customers prior to receiving a purchase order or other firm
commitment from them. We are required to make substantial
investments in the resources necessary to design and develop
these products, and no revenue may be generated from these
efforts if our customers do not approve the designs in a timely
manner or at all. Even if our customers accept our designs, if
they do not then purchase anticipated levels of products, we may
not realize any profits. Our design activities often require
that we purchase inventory for initial production runs before we
have a purchase commitment from a customer. Even after we have a
contract with a customer with respect to a product, these
contracts may allow the customer to delay or cancel deliveries
and may not obligate the customer to any volume of purchases.
These contracts can generally be terminated on short notice. In
addition, some of the products we design and develop must
satisfy safety and regulatory standards and some must receive
government certifications. If we fail to obtain these approvals
or certifications on a timely basis, we would be unable to sell
these products, which would harm our sales, profitability and
reputation.
Due to the increased risks associated with our design services
offerings, we may not be able to achieve a high enough level of
sales for this business, and the significant investments in
research and development, technology licensing, test and tooling
equipment, patent applications, facility expansion and
recruitment that it requires, to be profitable. The initial
costs of investing in the resources necessary to expand our
design and engineering capabilities, and in particular to
support our design services offerings, have historically
adversely affected our profitability, and may continue to do so
as we continue to make investments in these capabilities.
If our
products or components contain defects, demand for our services
may decline and we may be exposed to product liability and
product warranty liability.
Defects in the products we manufacture or design, whether caused
by a design, engineering, manufacturing or component failure or
deficiencies in our manufacturing processes, could result in
product or component failures, which may damage our business
reputation, and expose us to product liability or product
warranty claims.
Product liability claims may include liability for personal
injury or property damage. Product warranty claims may include
liability to pay for the recall, repair or replacement of a
product or component. Although we generally allocate liability
for these claims in our contracts with our customers, even where
we have allocated liability to our customers, our customers may
not, or may not have the resources to, satisfy claims for costs
or liabilities arising from a defective product or component for
which they have assumed responsibility.
If we design, engineer or manufacture a product or component
that is found to cause any personal injury or property damage or
is otherwise found to be defective, we could spend a significant
amount of money to resolve the claim. In addition, product
liability and product recall insurance coverage are expensive
and may not be available
16
with respect to all of our services offerings on acceptable
terms, in sufficient amounts, or at all. A successful product
liability or product warranty claim in excess of our insurance
coverage or any material claim for which insurance coverage is
denied, limited or is not available could have a material
adverse effect on our business, results of operations and
financial condition.
We may
not meet regulatory quality standards applicable to our
manufacturing and quality processes for medical devices, which
could have an adverse effect on our business, financial
condition or results of operations.
As a medical device manufacturer, we are required to register
with the Food and Drug Administration (FDA) and are
subject to periodic inspection by the FDA for compliance with
the FDAs Quality System Regulation (QSR)
requirements, which require manufacturers of medical devices to
adhere to certain regulations, including testing, quality
control and documentation procedures. Compliance with applicable
regulatory requirements is subject to continual review and is
rigorously monitored through periodic inspections by the FDA. If
any FDA inspection reveals noncompliance to QSR or other FDA
regulations, the FDA may take action against us. FDA actions may
include issuing a letter of inspectional observations on FDA
Form 483, issuing a warning letter, imposing fines,
requiring a recall of the products we manufactured for our
customers, issuing an import detention on products entering the
U.S. from an off shore facility, or shutting down a
manufacturing facility. In the European Community
(EC), we are required to maintain certain
standardized certifications in order to sell our products and
must undergo periodic inspections by notified bodies to obtain
and maintain these certifications. Continued noncompliance to
the EC regulations could stop the flow of products into the EC
from us or from our customers. If any of these actions were to
occur, it would harm our reputation and cause our business to
suffer.
We
conduct operations in a number of countries and are subject to
risks of international operations.
The distances between the Americas, Asia and Europe create a
number of logistical and communications challenges for us. These
challenges include managing operations across multiple time
zones, directing the manufacture and delivery of products across
distances, coordinating procurement of components and raw
materials and their delivery to multiple locations, and
coordinating the activities and decisions of the core management
team, which is based in a number of different countries.
Facilities in several different locations may be involved at
different stages of the production of a single product, leading
to additional logistical difficulties.
Because our manufacturing operations are located in a number of
countries throughout the Americas, Asia and Europe, we are
subject to the risks of changes in economic and political
conditions in those countries, including:
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fluctuations in the value of local currencies;
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labor unrest and difficulties in staffing;
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longer payment cycles;
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cultural differences;
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increases in duties and taxation levied on our products;
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imposition of restrictions on currency conversion or the
transfer of funds;
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limitations on imports or exports of components or assembled
products, or other travel restrictions;
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expropriation of private enterprises; and
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a potential reversal of current favorable policies encouraging
foreign investment or foreign trade by our host countries.
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The attractiveness of our services to 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
countries. In addition, some countries in which we operate, such
as Brazil, Hungary, India, 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
17
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.
Operations in foreign countries also present risks associated
with currency exchange and convertibility, inflation and
repatriation of earnings. In some countries, economic and
monetary conditions and other factors could affect our ability
to convert our cash distributions to U.S. dollars or other
freely convertible currencies, or to move funds from our
accounts in these countries. Furthermore, the central bank of
any of these countries may have the authority to suspend,
restrict or otherwise impose conditions on foreign exchange
transactions or to approve distributions to foreign investors.
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:
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tax incentives have been extended to encourage foreign
investment; or
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income tax rates are low.
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A number of countries in which we are located allow for tax
holidays or provide other tax incentives to attract and retain
business. Our taxes could increase if certain tax holidays or
incentives are not renewed upon expiration, or if tax rates
applicable to us in such jurisdictions are otherwise increased.
For example, on March 16, 2007, the Chinese government
passed a new unified enterprise income tax law which became
effective on January 1, 2008. Among other things, the new
law cancels many income tax incentives previously applicable to
our subsidiaries in China. Under the new law, the tax rates
applicable to the operations of most of our subsidiaries in
China will be increased to 25%. The new law provides a
transition rule which increases the tax rate to 25% over a
5-year
period. The new law also increased the standard withholding rate
on earnings distributions to between 5% and 10% depending on the
resident of the shareholder. The ultimate effect of these and
other changes in Chinese tax laws on our overall tax rate will
be affected by, among other things, our China income, the manner
in which China interprets, implements and applies the new tax
provisions, and by our ability to qualify for any exceptions or
new incentives.
In addition, the Company and its subsidiaries are regularly
subject to tax return audits and examinations by various taxing
jurisdictions in the United States and around the world. For
example, an acquired subsidiary received an assessment pursuant
to a Revenue Agents Report (RAR) from the
Internal Revenue Service (IRS) based on an
examination of its federal income tax returns for fiscal years
2001 and 2002. The RAR is not a final Statutory Notice of
Deficiency, and the acquired subsidiary filed a protest to
certain of the proposed adjustments with the Appeals Office of
the IRS.
In determining the adequacy of our provision for income taxes,
we regularly assess the likelihood of adverse outcomes resulting
from tax examinations. While it is often difficult to predict
the final outcome or the timing of the resolution of a tax
examination, we believe that our reserves for uncertain tax
benefits reflect the outcome of tax positions that is more
likely than not to occur. However, we cannot assure you that the
final determination of any tax examinations will not be
materially different than that which is reflected in our income
tax provisions and accruals. Should additional taxes be assessed
as a result of a current or future examination, there could be a
material adverse effect on our tax provision, operating results,
financial position and cash flows in the period or periods for
which that determination is made.
Intellectual
property infringement claims against our customers or us could
harm our business.
Our design and manufacturing services and components offerings
involve the creation and use of intellectual property rights,
which subject us to the risk of claims of intellectual property
infringement from third parties, as well as claims arising from
the allocation of intellectual property rights among us and our
customers. In addition, our customers may require that we
indemnify them against the risk of intellectual property
infringement. If any claims are brought against us or our
customers for such infringement, whether or not these have
merit, we could be required to expend significant resources in
defense of such claims. In the event of such an infringement
claim, we may be required to spend a significant amount of money
to develop non-infringing alternatives or obtain licenses. We
may not be successful in developing such alternatives or
obtaining such licenses on reasonable terms or at all.
18
Our
goodwill and intangible assets could become
impaired.
We have a substantial amount of goodwill and other intangible
assets attributable to acquisitions. We are required to evaluate
goodwill and other intangibles for impairment whenever changes
in circumstances indicate that the carrying amount may not be
recoverable from estimated future cash flows and, with respect
to goodwill, on at least an annual basis. As a result of our
annual and other periodic evaluations, we may determine that the
intangible asset values need to be written down to their fair
values, which could result in material charges that could be
adverse to our operating results and financial position.
If
OEMs stop or reduce their manufacturing and supply chain
management outsourcing, our business could suffer.
Future growth in our revenues depends on new outsourcing
opportunities in which we assume additional manufacturing and
supply chain management responsibilities from OEMs. Current and
prospective customers continuously evaluate our capabilities
against other providers and the merits of manufacturing products
themselves. To the extent that outsourcing opportunities are not
available, either because OEMs decide to perform these functions
internally or because they use other providers of these
services, our future growth would be limited.
We may
be adversely affected by higher commodity costs and shortages of
required electronic components.
From time to time, we have experienced shortages of some of the
electronic components that we use. These shortages can result
from strong demand for those components or from problems
experienced by suppliers. These unanticipated component
shortages have resulted in curtailed production or delays in
production, which prevented us from making scheduled shipments
to customers in the past and may do so in the future. Our
inability to make scheduled shipments could cause us to
experience a reduction in sales, increase in inventory levels
and costs, and could adversely affect relationships with
existing and prospective customers. Component shortages may also
increase our cost of goods sold because we may be required to
pay higher prices for components in short supply and redesign or
reconfigure products to accommodate substitute components. As a
result, component shortages could adversely affect our operating
results for a particular period due to the resulting revenue
shortfall and increased manufacturing or component costs.
Inflationary and other increases in the costs of these
components have occurred in the past and may recur from time to
time. Our performance depends, in part, on our ability to
incorporate changes in costs into the selling prices for our
products.
In addition, our manufacturing and shipping costs may be
impacted by fluctuations in the cost of oil and gas. Any
fluctuations in the supply or prices for any of these
commodities could have a material adverse affect on our profit
margins and financial condition.
Fluctuations
in foreign currency exchange rates could increase our operating
costs.
Our manufacturing operations and industrial parks are located in
lower cost regions of the world, such as Asia, Eastern Europe
and Mexico; however, most of our purchase and sale transactions
are denominated in United States dollars, Japanese yen or euros.
As a result, we are exposed to fluctuations in the functional
currencies of our fixed cost overhead or our supply base
relative to the currencies in which we conduct transactions.
Currency exchange rates fluctuate on a daily basis as a result
of a number of factors, including changes in a countrys
political and economic policies. Volatility in the functional
and non-functional currencies of our entities and the United
States dollar could seriously harm our business, operating
results and financial condition. The primary impact of currency
exchange fluctuations is on our cash, receivables, and payables
of our operating entities. As part of our currency hedging
strategy, we use financial instruments, primarily forward
purchase and swap contracts, to hedge our United States dollar
and other currency commitments in order to reduce the short-term
impact of foreign currency fluctuations on current assets and
liabilities. If our hedging activities are not successful or if
we change or reduce these hedging activities in the future, we
may experience significant unexpected expenses from fluctuations
in exchange rates.
19
We are also exposed to risks related to the valuation of the
Chinese currency relative to other foreign currencies. The
Chinese currency is the renminbi (RMB). A
significant increase in the value of the RMB could adversely
affect our financial results and cash flows by increasing both
our manufacturing costs and the costs of our local supply base.
We
depend on our executive officers and skilled management
personnel.
Our success depends to a large extent upon the continued
services of our executive officers. Generally our employees are
not bound by employment or non-competition agreements, and we
cannot assure you that we will retain our executive officers and
other key employees. We could be seriously harmed by the loss of
any of our executive officers. 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. In addition, in
connection with expanding our design services offerings, we must
attract and retain experienced design engineers. There is
substantial competition in our industry for highly skilled
employees. Our failure to recruit and retain experienced design
engineers could limit the growth of our design services
offerings, which could adversely affect our business.
Our
failure to comply with environmental laws could adversely affect
our business.
We are subject to various federal, state, local and foreign
environmental laws and regulations, including regulations
governing the use, storage, discharge and disposal of hazardous
substances used in our manufacturing processes. We are also
subject to laws and regulations governing the recyclability of
products, the materials that may be included in products, and
our obligations to dispose of these products after end users
have finished with them. Additionally, we may be exposed to
liability to our customers relating to the materials that may be
included in the components that we procure for our
customers products. Any violation or alleged violation by
us of environmental laws could subject us to significant costs,
fines or other penalties.
We are also required to comply with an increasing number of
product environmental compliance regulations focused on the
restriction of certain hazardous substances. For example, the
electronics industry became subject to the European Unions
Restrictions on Hazardous Substances and Waste Electrical and
Electronic Equipment directives beginning in 2005 and 2006.
Similar legislation has been or may be enacted in other
jurisdictions, including in the United States and China. RoHS
prohibits the use of lead, mercury and certain other specified
substances in electronics products and WEEE requires industry
OEMs to assume responsibility for the collection, recycling and
management of waste electronic products and components. We have
developed rigorous risk mitigating compliance programs designed
to meet the needs of our customers as well as the regulations.
These programs vary from collecting compliance data from our
suppliers to full laboratory testing, and we require our supply
chain to comply. Non-compliance could potentially result in
significant costs
and/or
penalties. In the case of WEEE, the compliance responsibility
rests primarily with OEMS rather than with EMS companies.
However, OEMs may turn to EMS companies for assistance in
meeting their obligations under WEEE.
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 liability. 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. Our failure to comply
with environmental laws and regulations or adequately address
contaminated sites could limit our ability to expand our
facilities or could require us to incur significant expenses,
which would harm our business.
Our
operating results may fluctuate significantly due to a number of
factors, many of which are beyond our control.
Some of the principal factors that contribute to the
fluctuations in our annual and quarterly operating results are:
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changes in demand for our products or services;
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20
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our effectiveness in managing manufacturing processes and costs;
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our increased design services and components offerings may
reduce profitability as we continue to make substantial
investments in these capabilities;
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the mix of the types of manufacturing services we provide, as
high-volume and low-complexity manufacturing services typically
have lower gross margins than lower volume and more complex
services;
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changes in the cost and availability of labor and components,
which often occur in the electronics manufacturing industry and
which affect our margins and our ability to meet delivery
schedules;
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our ability to achieve commercially viable production yields and
manufacture commercial quantities of our components;
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the degree to which we are able to utilize our available
manufacturing capacity;
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our ability to manage the timing of our component purchases so
that components are available when needed for production, while
avoiding the risk of purchasing inventory in excess of immediate
production needs;
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local conditions and events that may affect our production
volumes, such as labor conditions, political instability and
local holidays;
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changes in demand in our customers end markets; and
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adverse changes in general economic or geopolitical conditions.
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Two of our significant end markets are the mobile devices market
and the consumer devices market. These markets exhibit
particular strength toward the end of the calendar year in
connection with the holiday season. As a result, we have
historically experienced stronger revenues in our third fiscal
quarter as compared to our other fiscal quarters. Economic or
other factors leading to diminished orders in the end of the
calendar year could harm our business.
Our
strategic relationships with major customers create
risks.
Over the past several years, we have completed numerous
strategic transactions with OEM customers. Under these
arrangements, we generally acquire inventory, equipment and
other assets from the OEM, and lease or acquire their
manufacturing facilities, while simultaneously entering into
multi-year supply agreements for the production of their
products. We intend to continue to pursue these OEM divestiture
transactions in the future. There is strong competition among
EMS companies for these transactions, and this competition may
increase. These transactions have contributed to a significant
portion of our revenue growth, and if we fail to complete
similar transactions in the future, our revenue growth could be
harmed. The arrangements entered into with divesting OEMs
typically involve many risks, including the following:
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we may need to pay a purchase price to the divesting OEMs that
exceeds the value we ultimately may realize from the future
business of the OEM;
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the integration of the acquired assets and facilities into our
business may be time-consuming and costly, including the
incurrence of restructuring charges;
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we, rather than the divesting OEM, bear the risk of excess
capacity at the facility;
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we may not achieve anticipated cost reductions and efficiencies
at the facility;
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we may be unable to meet the expectations of the OEM as to
volume, product quality, timeliness and cost reductions;
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our supply agreements with the OEMs generally do not require any
minimum volumes of purchase by the OEMs, and the actual volume
of purchases may be less than anticipated; and
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if demand for the OEMs products declines, the OEM may
reduce its volume of purchases, and we may not be able to
sufficiently reduce the expenses of operating the facility or
use the facility to provide services to other OEMs.
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21
As a result of these and other risks, we have been, and in the
future may be, unable to achieve anticipated levels of
profitability under these arrangements. In addition, these
strategic arrangements have not, and in the future may not,
result in any material revenues or contribute positively to our
earnings per share.
The
success of certain of our activities depends on our ability to
protect our intellectual property rights.
We retain certain intellectual property rights to some of the
technologies that we develop as part of our engineering and
design activities in our design and manufacturing services and
components offerings. As the level of our engineering and design
activities increases, the extent to which we rely on rights to
intellectual property incorporated into products is increasing.
The measures we have taken to prevent unauthorized use of our
technology may not be successful. If we are unable to protect
our intellectual property rights, this could reduce or eliminate
the competitive advantages of our proprietary technology, which
would harm our business.
Our
exposure to financially troubled customers may adversely affect
our financial results.
We provide EMS services to companies and industries that have in
the past, and may in the future, experience financial
difficulty. If our customers experience financial difficulty, we
could have difficulty recovering amounts owed to us from these
customers, or demand for our products from these customers could
decline, either of which could adversely affect our financial
position and results of operations.
It may
be difficult for investors to effect services of process within
the United States on us or to enforce civil liabilities under
the federal securities laws of the United States against
us.
We are incorporated in Singapore under the Companies Act,
Chapter 50 of Singapore. Some of our officers reside
outside the United States, and a substantial portion of our
assets are located outside the United States. As a result, it
may not be possible for investors to effect services of process
upon us within the United States. Additionally, judgments
obtained in U.S. courts based on the civil liability
provisions of the U.S. federal securities laws may not be
enforceable against us. Judgments of U.S. courts based on
the civil liability provisions of the federal securities laws of
the United States are not directly enforceable in Singapore
courts, and Singapore courts may not enter judgments in original
actions brought in Singapore courts based solely upon the civil
liability provisions of the federal securities laws of the
United States.
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 cause the market price of our ordinary
shares to decline.
Implementation
of a new information system could disrupt our operations and
cause unanticipated increases in our costs.
The ongoing implementation of new worldwide procurement software
and systems is a technically intensive process, requiring
extensive testing, modifications, customization and project
coordination. In addition, from time to time we implement other
major enterprise software and systems. We may experience
disruptions in our business operations relating to these
implementation efforts as a result of complications with the
software or systems. Such disruptions could result in material
adverse consequences, including loss of information and
unanticipated increases in costs.
Our
debt level may create limitations
We entered into a $1.759 billion term loan facility, dated
as of October 1, 2007, upon completion of the acquisition
of Solectron, to pay the cash portion of the acquisition
consideration, pay acquisition related costs, and to refinance
certain of Solectrons outstanding long-term debt assumed
by the Company. As of March 31, 2008 our
22
borrowings under this facility totaled approximately
$1.7 billion and in total our long-term debt was
approximately $3.4 billion. This increased indebtedness
could limit our flexibility as a result of debt service
requirements and restrictive covenants, and may limit our
ability to access additional capital or execute business
strategy.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our facilities consist of a global network of industrial parks,
regional manufacturing operations, design and engineering and
product introduction centers, providing over 27.0 million
square feet of manufacturing capacity as of March 31, 2008
(excluding facilities we have identified for closure, as
described in Note 9, Restructuring Charges in
the Notes to Consolidated Financial Statements in Item 8,
Financial Statements and Supplementary Data). We own
facilities with approximately 10.5 million square feet in
Asia, 3.9 million square feet in the Americas and
2.7 million square feet in Europe. We lease facilities with
approximately 4.7 million square feet in Asia,
3.6 million square feet in the Americas and
1.6 million square feet in Europe.
Our facilities include large industrial parks, ranging in size
from approximately 300,000 to 5.7 million square feet, in
Brazil, China, Hungary, India, Malaysia, Mexico and Poland. We
also have regional manufacturing operations, generally ranging
in size from under 100,000 to approximately 1.0 million
square feet, in Austria, Brazil, Canada, China, Denmark, France,
Germany, Hungary, India, Indonesia, Ireland, Israel, Italy,
Japan, Malaysia, Mexico, Netherlands, Norway, Poland, Romania,
Singapore, Sweden, Taiwan, Ukraine and the United States. We
also have smaller design and engineering centers and product
introduction centers at a number of locations in the
worlds major electronics markets.
Our facilities are well maintained and suitable for the
operations conducted. The productive capacity of our plants is
adequate for current needs.
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ITEM 3.
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LEGAL
PROCEEDINGS
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We are subject to legal proceedings, claims, and litigation
arising in the ordinary course of business. We defend ourselves
vigorously against any such claims. Although the outcome of
these matters is currently not determinable, management does not
expect that the ultimate costs to resolve these matters will
have a material adverse effect on our consolidated financial
position, results of operations, or cash flows.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
23
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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PRICE
RANGE OF ORDINARY SHARES
Our ordinary shares are quoted on the NASDAQ Global Select
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 year 2007 as
reported on the NASDAQ Global Select Market.
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High
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Low
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Fiscal Year Ended March 31, 2008
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Fourth Quarter
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$
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11.91
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$
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9.26
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Third Quarter
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13.28
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11.19
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Second Quarter
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12.02
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10.80
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First Quarter
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11.72
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10.80
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Fiscal Year Ended March 31, 2007
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Fourth Quarter
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$
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12.16
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$
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10.75
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Third Quarter
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13.19
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11.08
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Second Quarter
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12.97
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9.96
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First Quarter
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12.46
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9.84
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As of May 19, 2008 there were 6,428 holders of record of
our ordinary shares and the closing sales price of our ordinary
shares as reported on the NASDAQ Global Select Market was $10.79
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). The terms of our outstanding
Senior Subordinated Notes restrict our ability to pay cash
dividends. For more information, please see Note 4,
Bank Borrowings and Long-term Debt to our
consolidated financial statements included under Item 8,
Financial Statements and Supplementary Data.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
Information with respect to this item may be found in our
definitive proxy statement to be delivered to shareholders in
connection with our 2008 Annual General Meeting of Shareholders.
Such information is incorporated by reference.
24
STOCK
PRICE PERFORMANCE GRAPH
The following stock price performance graph and accompanying
information is not deemed to be soliciting material
or to be filed with the SEC or subject to
Regulation 14A under the Securities Exchange Act of 1934 or
to the liabilities of Section 18 of the Securities Exchange
Act of 1934, and will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, regardless of any general
incorporation language in any such filing.
The graph below compares the cumulative total shareholder return
on our ordinary shares, the Standard & Poors 500
Stock Index and a peer group comprised of Benchmark Electronics,
Inc., Celestica, Inc., Jabil Circuit, Inc., and Sanmina-SCI
Corporation.
The graph below assumes that $100 was invested in our ordinary
shares, in the Standard & Poors 500 Stock Index
and in the peer group described above on March 31, 2003 and
reflects the annual return through March 31, 2008, assuming
dividend reinvestment.
The comparisons in the graph below are based on historical data
and are not indicative of, or intended to forecast, the possible
future performances of our ordinary shares.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Flextronics International Ltd., The S&P 500 Index
And A Peer Group
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*
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$100 invested on March 31,
2003 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.
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3/03
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3/04
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3/05
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3/06
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3/07
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3/08
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Flextronics International Ltd.
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$
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100.00
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$
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195.99
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$
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138.07
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$
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118.69
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$
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125.46
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$
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107.68
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S&P 500 Index
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100.00
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135.12
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144.16
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161.07
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180.13
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170.98
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Peer Group
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100.00
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177.57
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134.10
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155.49
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92.41
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|
|
55.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECENT
SALES OF UNREGISTERED SECURITIES
None.
25
INCOME
TAXATION UNDER SINGAPORE LAW
Dividends. Singapore does not impose a
withholding tax on dividends. Prior to January 1, 2003,
Singapore applied a full imputation system to all dividends
(other than exempt dividends) paid by a Singapore resident
company. Effective on January 1, 2003, tax on corporate
profits is final and dividends paid by a Singapore resident
company will be tax exempt in the hands of a shareholder,
whether or not the shareholder is a company or an individual and
whether or not the shareholder is a Singapore resident. However,
if the resident company was previously under the imputation
system and has un-utilized dividend franking credits as of
December 31, 2002, there was a
5-year
transition period from January 1, 2003 to December 31,
2007, during which a company remained on the imputation system.
Dividends declared by non-resident companies are not subject to
the imputation system.
Gains on Disposal. 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
gains arising from the disposal of shares are income in nature
and subject to tax, especially if they arise from activities
which the Inland Revenue Authority of Singapore regards as the
carrying on of a trade or business in Singapore (in which case,
the profits on the sale would be taxable as trade profits rather
than capital gains).
Shareholders who apply, or who are required to apply, the
Singapore Financial Reporting Standard 39 Financial
Instruments Recognition and Measurement (FRS
39) for the purposes of Singapore income tax may be
required to recognize gains or losses (not being gains or losses
in the nature of capital) in accordance with the provisions of
FRS 39 (as modified by the applicable provisions of Singapore
income tax law) even though no sale or disposal of shares is
made.
Stamp Duty. There is no stamp duty payable for
holding shares, and no duty is payable on the acquisition of
newly-issued shares. When existing shares are acquired in
Singapore, a stamp duty is payable on the instrument of transfer
of the shares at the rate of two Singapore dollars
(S$) 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. If the instrument of transfer is
executed outside of Singapore, the stamp duty must be paid only
if the instrument of transfer is received in Singapore.
Estate Taxation. The estate duty was recently
abolished for deaths occurring on or after February 15,
2008. For deaths prior to February 15, 2008 the following
rules apply:
If an individual who is not domiciled in Singapore dies on or
after January 1, 2002, no estate tax is payable in
Singapore on any of our shares held by the individual.
If property passing upon the death of an individual domiciled in
Singapore includes our shares, Singapore estate duty is payable
to the extent that the value of the shares aggregated with any
other assets subject to Singapore estate duty exceeds S$600,000.
Unless other exemptions apply to the other assets, for example,
the separate exemption limit for residential properties, any
excess beyond S$600,000 will be taxed at 5% on the first
S$12,000,000 of the individuals chargeable assets and
thereafter at 10%.
An individual shareholder who is a U.S. citizen or resident
(for U.S. estate tax purposes) will have the value of the
shares included in the individuals gross estate for
U.S. estate tax purposes. An individual shareholder
generally will be entitled to a tax credit against the
shareholders 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 shareholders 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.
Tax Treaties Regarding Withholding. There is
no reciprocal income tax treaty between the U.S. and
Singapore regarding withholding taxes on dividends and capital
gains.
26
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
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
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Item 8, Financial Statements and Supplementary
Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
27,558,135
|
|
|
$
|
18,853,688
|
|
|
$
|
15,287,976
|
|
|
$
|
15,730,717
|
|
|
$
|
14,479,262
|
|
Cost of sales
|
|
|
25,972,787
|
|
|
|
17,777,859
|
|
|
|
14,354,461
|
|
|
|
14,720,532
|
|
|
|
13,676,855
|
|
Restructuring charges(2)
|
|
|
408,945
|
|
|
|
146,831
|
|
|
|
185,631
|
|
|
|
78,381
|
|
|
|
474,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,176,403
|
|
|
|
928,998
|
|
|
|
747,884
|
|
|
|
931,804
|
|
|
|
328,339
|
|
Selling, general and administrative expenses
|
|
|
807,029
|
|
|
|
547,538
|
|
|
|
463,946
|
|
|
|
525,607
|
|
|
|
469,229
|
|
Intangible amortization(3)
|
|
|
112,317
|
|
|
|
37,089
|
|
|
|
37,160
|
|
|
|
33,541
|
|
|
|
34,543
|
|
Restructuring charges(2)
|
|
|
38,743
|
|
|
|
5,026
|
|
|
|
30,110
|
|
|
|
16,978
|
|
|
|
54,785
|
|
Other charges (income), net(4)
|
|
|
61,078
|
|
|
|
(77,594
|
)
|
|
|
(17,200
|
)
|
|
|
(13,491
|
)
|
|
|
|
|
Interest and other expense, net
|
|
|
101,302
|
|
|
|
91,986
|
|
|
|
92,951
|
|
|
|
89,996
|
|
|
|
77,241
|
|
Gain on divestiture of operations
|
|
|
(9,733
|
)
|
|
|
|
|
|
|
(23,819
|
)
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,328
|
|
|
|
103,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
65,667
|
|
|
|
324,953
|
|
|
|
164,736
|
|
|
|
262,845
|
|
|
|
(411,368
|
)
|
Provision for (benefit from) income taxes(5)
|
|
|
705,037
|
|
|
|
4,053
|
|
|
|
54,218
|
|
|
|
(68,652
|
)
|
|
|
(64,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss)from continuing operations
|
|
|
(639,370
|
)
|
|
|
320,900
|
|
|
|
110,518
|
|
|
|
331,497
|
|
|
|
(346,410
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
187,738
|
|
|
|
30,644
|
|
|
|
8,374
|
|
|
|
(5,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(639,370
|
)
|
|
$
|
508,638
|
|
|
$
|
141,162
|
|
|
$
|
339,871
|
|
|
$
|
(352,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.89
|
)
|
|
$
|
0.54
|
|
|
$
|
0.18
|
|
|
$
|
0.57
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
|
|
|
$
|
0.31
|
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(0.89
|
)
|
|
$
|
0.85
|
|
|
$
|
0.24
|
|
|
$
|
0.58
|
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
CONSOLIDATED BALANCE SHEET DATA(6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
2,911,922
|
|
|
$
|
1,102,979
|
|
|
$
|
938,632
|
|
|
$
|
906,971
|
|
|
$
|
884,816
|
|
Total assets
|
|
|
19,524,915
|
|
|
|
12,341,374
|
|
|
|
10,958,407
|
|
|
|
11,009,766
|
|
|
|
9,583,937
|
|
Total long-term debt and capital lease obligations, excluding
current portion
|
|
|
3,388,337
|
|
|
|
1,493,805
|
|
|
|
1,489,366
|
|
|
|
1,709,570
|
|
|
|
1,624,261
|
|
Shareholders equity
|
|
|
8,164,444
|
|
|
|
6,176,659
|
|
|
|
5,354,647
|
|
|
|
5,224,048
|
|
|
|
4,367,213
|
|
|
|
|
(1)
|
|
On October 1, 2007, the
Company completed its acquisition of 100% of the outstanding
common stock of Solectron, a provider of value-added electronics
manufacturing and supply chain services to OEMs. The results of
Solectrons operations were included in the Companys
consolidated financial results beginning on the acquisition
date. Refer to Note 12, Business and Asset
Acquisitions and Divestitures to our consolidated
financial statements included under Item 8, Financial
Statements and Supplementary Data for further information.
|
27
|
|
|
(2)
|
|
We recognized restructuring charges
of $447.7 million, $151.9 million,
$215.7 million, $95.4 and $540.3 million (including
$11.5 million attributable to discontinued operations) in
fiscal years 2008, 2007, 2006, 2005, and 2004, respectively,
associated with the consolidation and closure of several
manufacturing facilities. Charges incurred during the 2008
fiscal year were primarily in connection with the acquisition
and integration of Solectron. Refer to Note 9,
Restructuring Charges to our consolidated financial
statements included under Item 8, Financial
Statements and Supplementary Data for further information.
|
|
(3)
|
|
We recognized a charge of
$30.0 million during fiscal year 2008 for the write-off of
certain intangible asset licenses due to technological
obsolescence.
|
|
(4)
|
|
We recognized $79.8 million,
$20.6 million and $29.3 million of net foreign
exchange gains primarily related to the liquidation of certain
international entities in fiscal years 2007, 2006 and 2005,
respectively. We also recognized $7.7 million and
$7.6 million in executive separation costs in fiscal years
2006 and 2005, respectively.
|
We recognized charges of $61.1 million and
$8.2 million in fiscal years 2008 and 2005, respectively,
for the loss on disposition, other-than-temporary impairment and
other related charges of our investments in certain non-publicly
traded companies. In fiscal year 2006, we recognized a net gain
of $4.3 million related to our investments in certain
non-publicly traded companies.
|
|
|
(5)
|
|
We recognized non-cash tax expense
of $661.3 million during fiscal year 2008, as we determined
the recoverability of certain deferred tax assets is no longer
more likely than not. Refer to Note 8, Income
Taxes to our consolidated financial statements included
under Item 8, Financial Statements and Supplementary
Data for further information.
|
|
(6)
|
|
Includes continuing and
discontinued operations for the fiscal years ended
March 31, 2006 and prior.
|
|
|
ITEM 7.
|
MANAGEMENTS
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 and in Item 1A, Risk Factors. In
addition, new risks emerge from time to time and it is not
possible for management to predict all such risk factors or to
assess the impact of such risk factors on our business.
Accordingly, our future results may differ materially from
historical results or from those discussed or implied by these
forward-looking statements. Given these risks and uncertainties,
the reader should not place undue reliance on these
forward-looking statements.
OVERVIEW
We are a leading provider of advanced design and electronics
manufacturing services (EMS) to original equipment
manufacturers (OEMs) of a broad range of products in
the following market segments: infrastructure; mobile
communication devices; computing; consumer digital devices;
industrial, semiconductor and white goods; automotive, marine
and aerospace; and medical devices. We provide a full range of
vertically-integrated global supply chain services through which
we design, build, ship and service a complete packaged product
for our customers. Customers leverage our services to meet their
product requirements throughout the entire product life cycle.
Our vertically-integrated service offerings include: design
services; rigid printed circuit board and flexible circuit
fabrication; systems assembly and manufacturing; logistics;
after-sales services; and multiple component product offerings.
We are one of the worlds largest EMS providers, with
revenues from continuing operations of $27.6 billion in
fiscal year 2008. As of March 31, 2008, our total
manufacturing capacity was approximately 27.0 million
square feet in over 25 countries across four continents. We have
established an extensive network of manufacturing facilities in
the worlds major electronics markets (Asia, the Americas
and Europe) in order to serve the growing outsourcing needs of
both multinational and regional OEMs. In fiscal year 2008, our
net sales from continuing operations in Asia, the Americas and
Europe represented approximately 56%, 28% and 16%, respectively,
of our total net sales from continuing operations, based on the
location of the manufacturing site.
We believe that the combination of our extensive design and
engineering services, significant scale and global presence,
vertically-integrated end-to-end services, advanced supply chain
management, industrial campuses in
28
low-cost geographic areas and operational track record provide
us with a competitive advantage in the market for designing,
manufacturing and servicing electronics products for leading
multinational OEMs. Through these services and facilities, we
simplify the global product development and manufacturing
process and provide meaningful time to market and cost savings
for our OEM customers.
We have actively pursued acquisitions and purchases of
manufacturing facilities, design and engineering resources and
technologies in order to expand our worldwide operations,
broaden our service offerings, diversify and strengthen our
customer relationships, and enhance our competitive position as
a leading provider of comprehensive outsourcing solutions. We
have completed numerous strategic transactions with OEM
customers over the past several years, including with
Sony-Ericsson, Xerox, Kyocera and Nortel. These strategic
transactions have expanded our customer base, provided
end-market diversification, and contributed to a significant
portion of our revenue growth. Under these arrangements, we
generally acquire inventory, equipment and other assets from the
OEM and lease or acquire their manufacturing facilities while
simultaneously entering into multi-year supply agreements for
the production of their products. We will continue to
selectively pursue strategic opportunities that we believe will
further our business objectives and enhance shareholder value.
OEM divestitures and other acquisitions involve numerous risks,
including costs associated with integrating, closing and
consolidating acquired facilities.
On October 1, 2007, we completed the acquisition of 100% of
the outstanding common stock of Solectron in a cash and stock
transaction valued at approximately $3.6 billion, including
estimated transaction costs. We issued approximately
221.8 million shares of our ordinary stock and paid
approximately $1.1 billion in cash in connection with the
acquisition. The acquisition of Solectron broadened our service
offerings, strengthened our capabilities in the high end
computing, communication and networking infrastructure market
segments, increased the scale of our existing operations and
diversified our customer and product mix. Refer to Note 4,
Bank Borrowings and Long-Term Debt and Note 12,
Business and Asset Acquisitions and Divestitures for
further discussion.
On January 26, 2008, we completed the acquisition of 100%
of the common stock of Avail Medical Products, Inc.
(Avail). The acquisition of Avail expands our
capabilities in the medical market segment, including the
design, manufacturing and logistics of disposable medical
devices, hand held diagnostics and drug delivery devices and
imaging, lab and life sciences equipment.
The EMS industry has experienced rapid change and growth over
the past decade. The demand for advanced manufacturing
capabilities and related supply chain management services
continues to escalate as an increasing number of OEMs have
outsourced some or all of their design and manufacturing
requirements. Price pressure on our customers products in
their end markets has led to increased demand for EMS production
capacity in the lower-cost regions of the world, such as China,
India, Malaysia, Mexico, and Eastern Europe, where we have a
significant presence. We have responded by making strategic
decisions to realign our global capacity and infrastructure with
the demands of our customers to optimize the operating
efficiencies that can be provided by our global presence. The
overall impact of these activities is that we have shifted our
manufacturing capacity to locations with higher efficiencies
and, in most instances, lower costs, thereby enhancing our
ability to provide cost-effective manufacturing service in order
for us to retain and expand our existing relationships with
customers and attract new business. As a result, we have
recognized a significant amount of restructuring charges in
connection with the realignment of our global capacity and
infrastructure.
Restructuring costs incurred during fiscal year 2008 were
primarily related to our acquisition of Solectron and consisted
of consolidating and integrating our global capacity and
infrastructure. These activities, which included closing,
consolidating and relocating certain manufacturing and
administrative operations, eliminating redundant assets, and
reducing excess workforce and capacity, encompassed over 25
different manufacturing locations and were intended to optimize
our operational efficiencies post acquisition.
Our operating results are affected by a number of factors,
including the following:
|
|
|
|
|
our customers may not be successful in marketing their products,
their products may not gain widespread commercial acceptance,
and our customers products have short product life cycles;
|
|
|
|
our customers may cancel or delay orders or change production
quantities;
|
29
|
|
|
|
|
integration of acquired businesses and facilities;
|
|
|
|
our operating results vary significantly from period to period
due to the mix of the manufacturing services we are providing,
the number and size of new manufacturing programs, the degree to
which we utilize our manufacturing capacity, seasonal demand,
shortages of components and other factors;
|
|
|
|
our increased design services and components offerings may
reduce our profitability as we are required to make substantial
investments in the resources necessary to design and develop
these products without guarantee of cost recovery and margin
generation;
|
|
|
|
our ability to achieve commercially viable production yields and
to manufacture components in commercial quantities to the
performance specifications demanded by our OEM
customers; and
|
|
|
|
managing growth and changes in our operations.
|
We also are subject to other risks as outlined in Item 1A,
Risk Factors.
As part of our continuous evaluation of the strategic and
financial contributions of each of our operations, we are
focusing our efforts and resources on the reacceleration of
revenue growth in our core vertically-integrated EMS business,
which includes design, manufacturing services, components and
logistics. We have divested certain non-core operations and we
continue to assess further opportunities to maximize shareholder
value with respect to our non-core activities through
divestitures, equity carve-outs, spin-offs and other strategic
transactions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP or GAAP)
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results may
differ from those estimates and assumptions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements. For further discussion
of our significant accounting policies, refer to Note 2,
Summary of Accounting Policies, of the Notes to
Consolidated Financial Statements in Item 8,
Financial Statements and Supplementary Data.
Revenue
Recognition
We recognize manufacturing revenue when we ship goods or the
goods are received by our customer, title and risk of ownership
have passed, the price to the buyer is fixed or determinable and
recoverability is reasonably assured. Generally, there are no
formal customer acceptance requirements or further obligations
related to manufacturing services. If such requirements or
obligations exist, then we recognize the related revenues at the
time when such requirements are completed and the obligations
are fulfilled. We make provisions for estimated sales returns
and other adjustments at the time revenue is recognized based
upon contractual terms and an analysis of historical returns.
These provisions were not material to our consolidated financial
statements for the 2008, 2007 and 2006 fiscal years.
We provide a comprehensive suite of services for our customers
that range from contract design services to original product
design to repair services. We recognize service revenue when the
services have been performed, and the related costs are expensed
as incurred. Our net sales for services from continuing
operations were less than 10% of our total sales from continuing
operations during the 2008, 2007 and 2006 fiscal years, and
accordingly, are included in net sales in the consolidated
statements of operations.
Accounting
for Business and Asset Acquisitions
We have actively pursued business and asset acquisitions, which
are accounted for using the purchase method of accounting in
accordance with SFAS No. 141, Business
Combinations (SFAS 141). The fair
value of the net assets acquired and the results of the acquired
businesses are included in the Consolidated Financial Statements
30
from the acquisition dates forward. We are required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and results of operations during the
reporting period. Estimates are used in accounting for, among
other things, the fair value of acquired net operating assets,
property and equipment, intangible assets and related deferred
tax liabilities, useful lives of plant and equipment and
amortizable lives for acquired intangible assets. Any excess of
the purchase consideration over the identified fair value of the
assets and liabilities acquired is recognized as goodwill.
Additionally, we may be required to recognize liabilities for
anticipated restructuring costs that will be necessary due to
the elimination of excess capacity, redundant assets or
unnecessary functions.
We estimate the preliminary fair value of acquired assets and
liabilities as of the date of acquisition based on information
available at that time. The valuation of these tangible and
identifiable intangible assets and liabilities is subject to
further management review and may change materially between the
preliminary allocation and end of the purchase price allocation
period. Any changes in these estimates may have a material
impact on our consolidated operating results or financial
condition.
Stock-Based
Compensation
We account for stock-based compensation in accordance with the
provisions of SFAS No. 123 (Revised 2004),
Share-Based Payment
(SFAS 123(R)). Under the fair value
recognition provisions of SFAS 123(R), stock-based
compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense ratably
over the requisite service period of the award. Determining the
appropriate fair value model and calculating the fair value of
stock-based awards at the grant date requires judgment,
including estimating stock price volatility and expected option
life. If actual forfeitures differ significantly from our
estimates, adjustments to compensation cost may be required in
future periods.
Restructuring
Charges
We recognize restructuring charges related to our plans to close
or consolidate duplicate manufacturing and administrative
facilities. In connection with these activities, we recognize
restructuring charges for employee termination costs, long-lived
asset impairment and other restructuring-related costs.
The recognition of these restructuring charges require that we
make certain judgments and estimates regarding the nature,
timing and amount of costs associated with the planned exit
activity. To the extent our actual results in exiting these
facilities differ from our estimates and assumptions, we may be
required to revise the estimates of future liabilities,
requiring the recognition of additional restructuring charges or
the reduction of liabilities already recognized. At the end of
each reporting period, we evaluate the remaining accrued
balances to ensure that no excess accruals are retained and the
utilization of the provisions are for their intended purpose in
accordance with developed exit plans.
Refer to Note 9, Restructuring Charges, of the
Notes to Consolidated Financial Statements in Item 8,
Financial Statements and Supplementary Data for
further discussion of our restructuring activities.
Income
Taxes
Our deferred income tax assets represent temporary differences
between the carrying amount and the tax basis of existing assets
and liabilities which will result in deductible amounts in
future years, including net operating loss carryforwards. Based
on estimates, the carrying value of our net deferred tax assets
assumes that it is more likely than not that we will be able to
generate sufficient future taxable income in certain tax
jurisdictions to realize these deferred income tax assets. Our
judgments regarding future profitability may change due to
future market conditions, changes in U.S. or international
tax laws and other factors. If these estimates and related
assumptions change in the future, we may be required to increase
or decrease our valuation allowance against deferred tax assets
previously recognized, resulting in additional or lesser income
tax expense.
We recognized non-cash tax expense of $661.3 million during
the 2008 fiscal year. This expense principally resulted from
managements re-evaluation of previously recorded deferred
tax assets in the United States, which are primarily comprised
of tax loss carry forwards. We believe that the likelihood
certain deferred tax assets will be
31
realized has decreased because we expect future projected
taxable income in the United States will be lower as a result of
increased interest expense resulting from the term loan entered
into as part of the acquisition of Solectron.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) as an interpretation of
SFAS No. 109, Accounting for Income
Taxes (SFAS 109), which clarifies the
accounting for uncertainty in income taxes recognized by
prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and also
provides guidance on de-recognition of tax benefits previously
recognized. We adopted FIN 48 in the first quarter of
fiscal year 2008 and did not recognize any adjustments to the
liability for unrecognized tax benefits as a result of the
implementation of FIN 48. We are regularly subject to tax
return audits and examinations by various taxing jurisdictions
in the United States and around the world, and there can be no
assurance that the final determination of any tax examinations
will not be materially different than that which is reflected in
our income tax provisions and accruals. Should additional taxes
be assessed as a result of a current or future examination,
there could be a material adverse effect on our tax position,
operating results, financial position and cash flows. Refer to
Note 8 Income Taxes of the Notes to
Consolidated Financial Statements in Item 8,
Financial Statements and Supplementary Data for
further discussion of our tax position.
Allowance
for Doubtful Accounts
We perform ongoing credit evaluations of our customers
financial condition and make provisions for doubtful accounts
based on the outcome of those credit evaluations. We evaluate
the collectibility of our accounts receivable based on specific
customer circumstances, current economic trends, historical
experience with collections and the age of past due receivables.
Unanticipated changes in the liquidity or financial position of
our customers may require additional provisions for doubtful
accounts.
Inventory
Valuation
Our inventories are stated at the lower of cost (on a
first-in,
first-out basis) or market value. Our industry is characterized
by rapid technological change, short-term customer commitments
and rapid changes in demand. We make provisions for estimated
excess and obsolete inventory based on our regular reviews of
inventory quantities on hand, and the latest forecasts of
product demand and production requirements from our customers.
If actual market conditions or our customers product
demands are less favorable than those projected, additional
provisions may be required. In addition, unanticipated changes
in the liquidity or financial position of our customers
and/or
changes in economic conditions may require additional provisions
for inventories due to our customers inability to fulfill
their contractual obligations with regard to inventory procured
to fulfill customer demand.
Long-Lived
Assets
We review property and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss is
recognized when the carrying amount of a long-lived asset
exceeds its fair value. Recoverability of property and equipment
is measured by comparing its carrying amount to the projected
discounted cash flows the property and equipment are expected to
generate. If such assets are considered to be impaired, the
impairment loss recognized, if any, is the amount by which the
carrying amount of the property and equipment exceeds its fair
value.
We evaluate goodwill for impairment on an annual basis. We also
evaluate goodwill and other intangibles for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable from its estimated future cash
flows. In fiscal year 2008, we recognized an impairment charge
of approximately $30.0 million due to the write-off of
certain intangible asset licenses due to technological
obsolescence. This charge is included in intangible amortization
in the consolidated statement of operations for the fiscal year
ended March 31, 2008.
Recoverability of goodwill is measured at the reporting unit
level by comparing the reporting units carrying amount,
including goodwill, to the fair value of the reporting unit. If
the carrying amount of the reporting unit exceeds its fair
value, the amount of impairment loss recognized, if any, is
measured using a discounted cash flow analysis. If, at the time
of our annual evaluation, the net asset value (or book
value) of any reporting unit is greater
32
than its fair value, some or all of the related goodwill would
likely be considered to be impaired. Further, to the extent the
carrying value of the Company as a whole is greater than its
market capitalization, all, or a significant portion of our
goodwill may be considered impaired. To date, we have not
recognized any impairment of our goodwill in connection with our
impairment evaluations.
Long-term
Investments
We have certain investments in, and notes receivable from,
non-publicly traded companies, which are included within other
assets in our consolidated balance sheets. Non-majority-owned
investments are accounted for using the equity method when we
have an ownership percentage equal to or greater than 20%, or
have the ability to significantly influence the operating
decisions of the issuer; otherwise the cost method is used. We
monitor these investments for impairment and make appropriate
reductions in carrying values if we determine an impairment
charge is required, based primarily on the financial condition
and near-term prospects of these companies. Our ongoing
consideration of these factors could result in additional
impairment charges in the future, which could adversely affect
our net income. During fiscal year 2008, we recorded charges of
$61.1 million for other-than-temporary impairment of our
investments in certain non-publicly traded companies. Impairment
charges for fiscal years 2007 and 2006 were not material.
RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated,
certain statements of operations data expressed as a percentage
of net sales. The financial information and the discussion below
should be read in conjunction with the consolidated financial
statements and notes thereto included in this document. The data
below, and discussion that follows, represents our results from
continuing operations. Information related to the results of
discontinued operations is provided separately following the
continuing operations discussion.
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Fiscal Year Ended March 31,
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2008
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2007
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2006
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Net sales
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100.0
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%
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|
100.0
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%
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100.0
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%
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Cost of sales
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94.2
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94.3
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93.9
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Restructuring charges
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1.5
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0.8
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1.2
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Gross profit
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4.3
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4.9
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4.9
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Selling, general and administrative expenses
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2.9
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2.9
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3.0
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Intangible amortization
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0.4
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0.2
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0.3
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Restructuring charges
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0.1
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0.2
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Other charges (income), net
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0.2
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|
(0.4
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)
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(0.1
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)
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Interest and other expense, net
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0.4
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0.5
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0.6
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Gain on divestitures of operations
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(0.2
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)
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|
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|
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Income from continuing operations before income taxes
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0.3
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1.7
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1.1
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Provision for income taxes
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2.6
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0.4
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Income (loss) from continuing operations
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(2.3
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)
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1.7
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0.7
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Discontinued operations:
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Income from discontinued operations, net of tax
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1.0
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0.2
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|
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|
|
|
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|
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Net income (loss)
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(2.3
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)%
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2.7
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%
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0.9
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%
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Net
sales
Net sales during fiscal year 2008 totaled $27.6 billion,
representing an increase of $8.7 billion, or 46%, from
$18.9 billion during fiscal year 2007, primarily due to the
acquisition of Solectron and to new program wins from various
existing customers across multiple markets. Sales increased
across all of the markets we serve, including;
33
(i) $4.3 billion in the infrastructure market,
(ii) $2.1 billion in the computing market,
(iii) $1.5 billion in the industrial, medical,
automotive and other markets, (iv) $472.3 million in
the consumer digital market, and (v) $328.2 million in
the mobile communications market. Net sales during fiscal year
2008 increased by $3.9 billion in Asia, $3.6 billion
in the Americas, and $1.2 billion in Europe.
Net sales during fiscal year 2007 totaled $18.9 billion,
representing an increase of $3.6 billion, or 23%, from
$15.3 billion during fiscal year 2006, primarily due to new
program wins from various customers and to a lesser extent, from
various business acquisitions. Sales increased across all of the
markets we serve, including; (i) $1.9 billion in the
mobile communications market, (ii) $529.1 million in
the consumer digital market, (iii) $523.0 million in
the infrastructure market, (iv) $513.1 million in the
industrial, medical, automotive and other markets, and
(v) $80.3 million in the computing market. Net sales
during fiscal year 2007 increased by $3.0 billion and
$817.4 million in Asia and the Americas, respectively,
offset by a decline of $239.9 million in Europe.
Our ten largest customers during fiscal years 2008, 2007 and
2006 accounted for approximately 55%, 64% and 63% of net sales,
respectively, with Sony-Ericsson accounting for greater than 10%
of our net sales during fiscal years 2008 and 2007, and
Sony-Ericsson and Hewlett-Packard each accounting for greater
than 10% of our net sales during fiscal year 2006.
Gross
profit
Gross profit is affected by a number of factors, including the
number and size of new manufacturing programs, product mix,
component costs and availability, product life cycles, unit
volumes, pricing, competition, new product introductions,
capacity utilization and the expansion and consolidation of
manufacturing facilities. Typically, profitability lags revenue
growth in new programs due to product
start-up
costs, lower manufacturing program volumes in the
start-up
phase, operational inefficiencies, and under-absorbed overhead.
Gross margin often improves over time as manufacturing program
volumes increase, as our utilization rates and overhead
absorption improves, and as we increase the level of
vertically-integrated manufacturing services content. As a
result, our gross margin varies from period to period.
Gross profit during fiscal year 2008 increased
$247.4 million to $1.2 billion from
$929.0 million during fiscal year 2007. Gross margin
decreased to 4.3% of net sales in fiscal 2008 as compared with
4.9% in fiscal 2007. The 60 basis point decrease in gross
margin was primarily attributable to a 70 basis point
increase in restructuring charges recognized during fiscal 2008.
The restructuring charges were principally incurred in
connection with the Solectron acquisition and were related to
restructuring activities for operations that were associated
with the company prior to the acquisition of Solectron. The
decrease in gross margin was partially offset by an approximate
10 basis point decrease in cost of sales during fiscal 2008
related to favorable changes in customer and product mix, and
increased operational efficiencies.
Gross profit during fiscal year 2007 increased
$181.1 million to $929.0 million from
$747.9 million during fiscal year 2006. Gross margin
remained at 4.9% of net sales during each of the respective
periods. Gross margin was adversely impacted by 40 basis
points primarily attributable to the divestiture of our Network
Services division in the September 2005 quarter, together with
increases in higher volume, lower margin customer programs, and
higher
start-up and
integration costs associated with multiple new large scale
programs in the current period, offset by a 40 basis point
reduction in restructuring charges.
Restructuring
charges
Restructuring charges during the 2008 fiscal year primarily
related to our acquisition of Solectron. These charges were
related to restructuring activities which included closing,
consolidating and relocating certain manufacturing, design, and
administrative operations, eliminating redundant assets and
reducing excess workforce and capacity, and encompassed over 25
different manufacturing and design locations. The activities
associated with these charges involve multiple actions at each
location and will be completed in multiple steps. These actions
were initiated in an effort to consolidate and integrate our
global capacity and infrastructure so as to optimize our
operational efficiencies post acquisition. We believe that the
potential savings in cost of goods sold achieved
34
through lower depreciation and reduced employee expenses as a
result of the activities associated with these charges will be
offset in part by reduced revenues at the affected facilities.
In addition to the restructuring activities related to the
acquisition of Solectron, in recent years we have also initiated
a series of other restructuring activities, which were intended
to realign our global capacity and infrastructure with demand by
our OEM customers and thereby improve our operational
efficiency. These activities included:
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reducing excess workforce and capacity;
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consolidating and relocating certain manufacturing facilities to
lower-cost regions; and
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consolidating and relocating certain administrative facilities.
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These restructuring costs included employee severance, costs
related to owned and leased facilities and equipment that were
no longer in use and were to be disposed of, and other costs
associated with the exit of certain contractual agreements due
to facility closures. The overall impact of these activities was
that we shifted our manufacturing capacity to locations with
higher efficiencies and, in most instances, lower costs, and we
better utilize our manufacturing capacity. This has enhanced our
ability to provide cost-effective manufacturing service
offerings, which enables us to retain and expand our existing
relationships with customers and attract new business. We may
utilize similar measures in the future to realign our operations
relative to changing customer demand, which may materially
affect our results of operations in the future. We believe that
the potential savings in cost of goods sold achieved through
lower depreciation and reduced employee expenses as a result of
our restructurings will be offset in part by reduced revenues at
the affected facilities.
During fiscal year 2008, we recognized restructuring charges of
approximately $447.7 million. The activities associated
with these charges involve multiple actions at each location,
will be completed in multiple steps and will be substantially
completed within one year of the commitment dates of the
respective activities, except for certain long-term contractual
obligations. We classified approximately $408.9 million of
these charges as a component of cost of sales. The fiscal year
2008 restructuring charge of approximately $447.7 million
is net of approximately $52.9 million of customer
reimbursements earned in accordance with the various agreements
with Nortel. The reimbursement was included as a component of
cost of sales during fiscal year 2008 and is included in other
current assets in the Companys Consolidated Balance Sheet
as of March 31, 2008. The charges recognized by reportable
geographic region, before the Nortel reimbursement, amounted to
$178.9 million, $175.2 million and $146.5 million
for Asia, Europe and the Americas, respectively. Approximately
$202.5 million of these restructuring charges were
non-cash. As of March 31, 2008, accrued severance and
facility closure costs were approximately $249.6 million,
of which approximately $50.0 million was classified as a
long-term obligation.
During fiscal year 2007, we recognized restructuring charges of
approximately $151.9 million associated with the
consolidation and closure of several manufacturing facilities
including the related impairment of certain long-lived assets;
and other charges primarily related to the exit of certain real
estate owned and leased by us in order to reduce our investment
in property, plant and equipment. Approximately
$146.8 million of the charges were classified as a
component of cost of sales. The charges recognized by reportable
geographic region amounted to $59.0 million,
$49.6 million and $43.3 million for the Americas, Asia
and Europe, respectively. As of March 31, 2008, accrued
facility closure costs related to restructuring charges incurred
during fiscal year 2007 were approximately $22.9 million,
of which approximately $11.5 million was classified as a
long-term obligation.
During fiscal year 2006, we recognized restructuring charges of
approximately $215.7 million associated with the
consolidation and closure of several manufacturing facilities,
and related impairment of certain long-lived assets.
Approximately $185.6 million of the restructuring charge
was classified as a component of cost of sales. Restructuring
charges recorded by reportable geographic region amounted to
$164.5 million, $48.0 million and $3.2 million
for Europe, the Americas and Asia, respectively. As of
March 31, 2008, accrued facility closure costs related to
restructuring charges incurred during fiscal year 2006 were
approximately $13.2 million, of which approximately
$4.6 million was classified as a long-term obligation.
Refer to Note 9, Restructuring Charges, of the
Notes to Consolidated Financial Statements in Item 8,
Financial Statements and Supplementary Data for
further discussion of our restructuring activities.
35
Selling,
general and administrative expenses
Our selling, general and administrative expenses, or SG&A,
amounted to $807.0 million, or 2.9% of net sales, during
fiscal year 2008, compared to $547.5 million, or 2.9% of
net sales, during fiscal year 2007. The increase in SG&A
during fiscal year 2008 was primarily the result of our
acquisition of Solectron as well as other business and asset
acquisitions over the past year, continued investments in
resources necessary to support our revenue growth, investments
in certain technologies to enhance our overall design and
engineering competencies and an increase in stock-based
compensation expense.
Our SG&A amounted to $547.5 million, or 2.9% of net
sales, during fiscal year 2007, compared to $463.9 million,
or 3.0% of net sales, during fiscal year 2006. The increase in
SG&A during fiscal year 2007 was primarily attributable to
overall investments in resources necessary to support our
accelerating revenue growth, and approximately
$25.2 million of incremental stock-based compensation
expense from our adoption of SFAS 123(R) during the 2007
fiscal year. The increase in SG&A was partially offset by
the divestiture of our Network Services division in the
September 2005 fiscal quarter. The improvement in SG&A as a
percentage of net sales during fiscal year 2007 was primarily
attributable to higher net sales and the divestiture of our
Network Services division.
Intangible
amortization
Amortization of intangible assets in fiscal year 2008 increased
by $75.2 million to $112.3 million from
$37.1 million in fiscal year 2007. The increase in expense
was principally attributable to the increase in intangibles
arising from the Companys acquisition of Solectron in
fiscal year 2008, the acquisitions of IDW and Nortels
system house operations in Calgary, Canada in fiscal year 2007,
and other smaller businesses that were not individually
significant to our consolidated results, and the amortization of
other acquired licenses. Additionally, amortization expense
during fiscal year 2008 includes approximately
$30.0 million for the write-off of certain intangible asset
licenses due to technological obsolescence. Amortization of
intangible assets in fiscal year 2007 was comparable to 2006.
Other
charges (income), net
During fiscal year 2008, the Company recognized approximately
$61.1 million in other expense related to the
other-than-temporary impairment and related charges on certain
of the Companys investments. Of this amount, approximately
$57.6 million was attributable to the sale of its
investment in Relacom, which was liquidated in January 2008 for
approximately $57.4 million of cash proceeds.
Relacoms expansion geographically into Eastern Europe
and Latin America led Relacom to recognize significant
restructuring charges and other costs and resulted in continued
losses and diminished cash flows, which reduced the fair value
of the investment. Although we believed this degradation in the
fair value of our investment in Relacom was temporary, we
decided to sell our interest in this non core investment to the
majority holder in December 2007 rather than participate in a
new equity round of financing by Relacom to support its need for
additional capital. As a result, we recognized an impairment
loss of approximately $48.5 million in the quarter ended
December 31, 2007 based on the price at which it was sold
on January 7, 2008. Refer to Note 2, Summary of
Accounting Policies of the Notes to Consolidated Financial
Statements included in Item 8, Financial Statements
and Supplementary Data for further discussion.
During fiscal year 2007, we recognized a foreign exchange gain
of approximately $79.8 million from the liquidation of a
certain international entity.
During fiscal year 2006, we recognized a foreign exchange gain
of $20.6 million from the liquidation of certain
international entities and a net gain of $4.3 million
related to our investments in certain non-publicly traded
companies, offset by approximately $7.7 million of charges
related to the retirement of our former Chief Executive Officer.
Interest
and other expense, net
Interest and other expense, net was $101.3 million during
fiscal year 2008 compared to $92.0 million during fiscal
year 2007, an increase of $9.3 million. The increase in
expense was primarily attributable to the $1.7 billion in
36
borrowings under our term loan facility used to finance our
acquisition of Solectron as well as the refinancing of certain
of Solectrons outstanding debt obligations. The increase
in interest expense was partially offset by interest and other
income earned on the $250.0 million face value promissory
note and certain other agreements received in connection with
the divestiture of the Software Development and Solutions
business during the second quarter of fiscal year 2007, and
interest income earned on higher cash balances. Interest and
other expense, net in fiscal year 2007 was comparable to fiscal
year 2006.
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 8, Income Taxes, of the Notes
to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data for
further discussion.
In connection with our acquisition of Solectron, we re-evaluated
previously recorded deferred tax assets in the United States,
which are primarily comprised of tax loss carryforwards. We
believe that the likelihood certain deferred tax assets will be
realized has decreased because we expect future projected
taxable income in the United States will be lower as a result of
increased interest expense resulting from the term loan entered
into as part of the acquisition of Solectron. Accordingly, we
determined that the recoverability of our deferred tax assets is
no longer more likely than not, and thus we recognized tax
expense of approximately $661.3 million during fiscal year
2008. There is no incremental cash expenditure relating to this
increase in tax expense.
The provision for income taxes in fiscal year 2007 includes an
approximate $23.0 million benefit related to the
restructuring and other charges we recognized during the 2007
fiscal year. The provision for income taxes in fiscal year 2006
includes $68.6 million of tax expense associated with the
divestiture of our Network Services division, offset by a
$17.8 million benefit resulting from a reduction in our
previously recorded valuation allowances.
The consolidated effective tax rate for a particular period
varies depending on the amount of earnings from different
jurisdictions, operating loss carryforwards, income tax credits,
changes in previously established valuation allowances for
deferred tax assets based upon our current analysis of the
realizability of these deferred tax assets, as well as certain
tax holidays and incentives granted to our subsidiaries
primarily in China, Hungary and Malaysia.
In evaluating the realizability of deferred tax assets, we
consider our recent history of operating income and losses by
jurisdiction, exclusive of items that we believe are
non-recurring in nature such as restructuring charges. We also
consider the future projected operating income in the relevant
jurisdiction and the effect of any tax planning strategies.
Based on this analysis, we believe that the current valuation
allowance is adequate.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) as an interpretation of
SFAS No. 109, Accounting for Income
Taxes (SFAS 109). We adopted
FIN 48 in the first quarter of fiscal year 2008 and did not
recognize any adjustments to the liability for unrecognized tax
benefits as a result of the implementation of FIN 48. We
are regularly subject to tax return audits and examinations by
various taxing jurisdictions in the United States and around the
world, and there can be no assurance that the final
determination of any tax examinations will not be materially
different than that which is reflected in our income tax
provisions and accruals. Should additional taxes be assessed as
a result of a current or future examination, there could be a
material adverse effect on our tax position, operating results,
financial position and cash flows. Refer to Note 8
Income Taxes of the Notes to Consolidated Financial
Statements in Item 8, Financial Statements and
Supplementary Data for further discussion of our tax
position.
Discontinued
Operations
In a strategic effort to focus on our core vertically-integrated
EMS business, which includes design, manufacturing services,
components and logistics, we completed the sale of our
Semiconductor and Software Development and Solutions businesses
in September 2005 and September 2006, respectively. In
accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets
(SFAS 144), we have reported the
results of operations of these businesses in discontinued
operations within the statements of operations for all periods
presented.
37
The results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
114,305
|
|
|
$
|
278,018
|
|
Cost of sales
|
|
|
72,648
|
|
|
|
172,747
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41,657
|
|
|
|
105,271
|
|
Selling, general and administrative expenses
|
|
|
20,707
|
|
|
|
61,178
|
|
Intangible amortization
|
|
|
5,201
|
|
|
|
16,640
|
|
Interest and other (income) expense, net
|
|
|
(4,112
|
)
|
|
|
5,023
|
|
Gain on divestiture of operations
|
|
|
(181,228
|
)
|
|
|
(43,750
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
201,089
|
|
|
|
66,180
|
|
Provision for income taxes
|
|
|
13,351
|
|
|
|
35,536
|
|
|
|
|
|
|
|
|
|
|
Net income of discontinued operations
|
|
$
|
187,738
|
|
|
$
|
30,644
|
|
|
|
|
|
|
|
|
|
|
Net income for discontinued operations increased
$157.1 million to $187.7 million in fiscal year 2007
as compared with $30.6 million in fiscal year 2006. The
improvement in net income was primarily attributable to a
$181.2 million pre-tax gain on the divestiture of our
Software Development and Solutions business during fiscal year
2007 as compared to a $43.8 million gain on the divestiture
of our Semiconductor business during fiscal year 2006, a
decrease in minority interest expense associated with our
approximately 29% ownership increase in FSS throughout fiscal
years 2006 and 2007, and a reduction in the provision for income
taxes. The reduction in the provision for income taxes was
principally due to lower taxes resulting from the divestiture in
fiscal year 2007 as compared to taxes attributable to the
divestiture of our Semiconductor business in fiscal year 2006.
This improvement in net income from discontinued operations was
partially offset by the divestiture of our Software Development
and Solutions business on September 1, 2006, and the
divestiture of our Semiconductor business during the September
2005 fiscal quarter.
LIQUIDITY
AND CAPITAL RESOURCES CONTINUING AND DISCONTINUED
OPERATIONS
As of March 31, 2008, we had cash and cash equivalents of
$1.7 billion and bank and other borrowings of
$3.4 billion. We also had a $2.0 billion revolving
credit facility, under which we had $161.0 million of
borrowings outstanding as of March 31, 2008. The
$2.0 billion credit facility and other various credit
facilities are subject to compliance with certain financial
covenants. As of March 31, 2008, we were in compliance with
the covenants under our indentures and credit facilities.
Working capital as of March 31, 2008 and 2007 was
approximately $2.9 billion and $1.1 billion,
respectively. As a result of our acquisition of Solectron, our
working capital and other tangible and intangible asset balances
have materially increased as of March 31, 2008. Refer to
Note 12, Business and Asset Acquisitions and
Divestitures of the Notes to the Consolidated Financial
Statements in Item 8, Financial Statements and
Supplementary Data for further details regarding the
Companys preliminary allocation of the purchase price to
the acquired assets and liabilities assumed of Solectron.
Cash provided by operating activities amounted to
$1.0 billion, $276.4 million and $549.4 million
during fiscal years 2008, 2007 and 2006, respectively.
During fiscal year 2008, the following items generated cash from
operating activities either directly or as a non-cash adjustment
to net income:
|
|
|
|
|
non-cash deferred income tax expense of $633.9 million,
which is primarily the result of the Companys
re-evaluation of previously recorded deferred tax assets in the
United States in connection with the acquisition of Solectron,
which are primarily comprised of tax loss carry-forwards;
|
|
|
|
depreciation and amortization of $450.8 million;
|
|
|
|
non-cash charges of $262.1 million, primarily for
restructuring activities and other-than-temporary impairment
charges on certain of the Companys investments;
|
38
|
|
|
|
|
non-cash stock-based compensation expense of $47.6 million;
|
|
|
|
a decrease in inventories of $205.6 million; and
|
|
|
|
an increase in accounts payable and other liabilities of
$450.6 million.
|
During fiscal year 2008, the following items reduced cash from
operating activities either directly or as a non-cash adjustment
to net income:
|
|
|
|
|
a net loss of $639.4 million;
|
|
|
|
non-cash interest and other income, and gains on sale of assets
of $44.9 million;
|
|
|
|
an increase in accounts receivable of
$242.0 million; and
|
|
|
|
an increase in other current and non-current assets of
$82.5 million.
|
The increases in our working capital accounts were due primarily
to increased overall business activity, which was partially
related to our acquisition of Solectron.
During fiscal year 2007, the following items generated cash from
operating activities either directly or as a non-cash adjustment
to net income:
|
|
|
|
|
net income of $508.6 million;
|
|
|
|
depreciation and amortization of $326.8 million;
|
|
|
|
non-cash impairment and other charges of $94.9 million;
|
|
|
|
non-cash stock-based compensation expense of $32.3 million;
|
|
|
|
an increase in accounts payable and other liabilities of
$411.1 million; and
|
|
|
|
a decrease in other current and non-current assets of
$34.6 million.
|
During fiscal year 2007, the following items reduced cash from
operating activities either directly or as a non-cash adjustment
to net income:
|
|
|
|
|
the pre-tax gain associated with the divestiture of our Software
Development and Solutions business in the amount of
$181.2 million;
|
|
|
|
non-cash foreign exchange gain of $79.8 million from the
liquidation of a certain international entity;
|
|
|
|
an increase in inventories of $628.0 million; and
|
|
|
|
an increase in accounts receivable of $199.5 million.
|
The increases in our working capital accounts were due primarily
to increased overall business activity and in anticipation of
continued growth.
During fiscal year 2006, the following items generated cash from
operating activities either directly or as a non-cash adjustment
to net income:
|
|
|
|
|
net income of $141.2 million;
|
|
|
|
depreciation and amortization of $327.1 million;
|
|
|
|
non-cash restructuring charges of $63.7 million;
|
|
|
|
an increase in accounts payable and other accrued liabilities of
$278.8 million; and
|
|
|
|
a decrease in accounts receivable of $172.6 million.
|
39
During fiscal year 2006, the following items reduced cash from
operating activities either directly or as a non-cash adjustment
to net income:
|
|
|
|
|
the pre-tax gain associated with the divestitures of our Network
Services and Semiconductor businesses in the amount of
$67.6 million;
|
|
|
|
an increase in inventories of $221.0 million; and
|
|
|
|
an increase in other current and non-current assets of
$171.5 million.
|
The increases in accounts payable and other accrued liabilities,
and the increase in inventory were due primarily to changes in
our product mix as we increased our activity in certain
telecommunications infrastructure businesses which carried a
lower inventory turnover product profile, as well as increased
overall business activity.
Cash used in investing activities amounted to
$935.4 million, $391.5 million and $428.9 million
during fiscal years 2008, 2007 and 2006, respectively.
Cash used in investing activities during fiscal year 2008
primarily related to the following:
|
|
|
|
|
payments for the acquisition of businesses of
$629.2 million, including $423.5 million associated
with the acquisition of Solectron, net of cash acquired, and
$205.7 for other acquisitions and contingent purchase price
payments relating to certain historical acquisitions;
|
|
|
|
net capital expenditures of $327.5 million for the purchase
of equipment and for the continued expansion of various
low-cost, high-volume manufacturing facilities and industrial
parks, as well as for the continued investment in our printed
circuit board operations and components business; and
|
|
|
|
$47.2 million primarily for miscellaneous investments and
the purchase of licenses.
|
Cash provided by investing activities during fiscal year 2008
primarily related to the following:
|
|
|
|
|
proceeds of $57.4 million from the sale of the
Companys equity investment in Relacom; and
|
|
|
|
proceeds of $11.1 million from the divestiture of certain
international entities.
|
Cash used in investing activities during fiscal year 2007
primarily related to the following:
|
|
|
|
|
net capital expenditures of $569.4 million for the purchase
of equipment and for the continued expansion of various low
cost, high volume manufacturing facilities and industrial parks,
as well as for the continued investment in our printed circuit
board operations and components business;
|
|
|
|
payments for the acquisition of businesses of
$356.4 million, including $215.0 million associated
with our Nortel transaction, $18.1 million for additional
shares purchased in Hughes Software Systems and
$123.3 million for various other acquisitions of
businesses, net of cash acquired, and contingent purchase price
adjustments relating to certain historical acquisitions; and
|
|
|
|
$145.5 million of investments in intangible assets, certain
non-publicly traded technology companies and notes receivables.
|
Cash provided by investing activities during fiscal year 2007
primarily related to the following:
|
|
|
|
|
proceeds of $579.9 million from the divestiture of our
Software Development and Solutions business, net of cash held by
the business of $108.6 million; and
|
|
|
|
proceeds of $100.0 million from the liquidation of
certificates of deposits and acquired available-for-sale
securities.
|
Cash used in investing activities during fiscal year 2006
primarily related to the following:
|
|
|
|
|
net capital expenditures of $251.2 million for the purchase
of equipment and for the continued expansion of various low
cost, high volume manufacturing facilities; and
|
|
|
|
payments for the acquisition of businesses of
$649.2 million, including $269.7 million associated
with our Nortel transaction, $154.3 million for additional
shares purchased in Hughes Software Systems, and
|
40
|
|
|
|
|
$225.2 million for various other acquisitions of businesses
and contingent purchase price adjustments relating to certain
historical acquisitions.
|
Cash provided by investing activities during fiscal year 2006
primarily related to the following:
|
|
|
|
|
$518.5 million in proceeds from the divestitures of our
Network Services and Semiconductor businesses, net of cash held
by the businesses of $33.1 million.
|
Cash provided by financing activities during fiscal year 2008
amounted to $962.1 million, and cash used in financing
activities was $101.0 million and $44.3 million in
fiscal years 2007 and 2006, respectively.
Cash provided by financing activities during fiscal year 2008
primarily related to the following:
|
|
|
|
|
bank borrowings, net of repayment of bank borrowings and capital
lease obligations, amounting to $926.9 million; and
|
|
|
|
$35.9 million of proceeds from the sale of ordinary shares
under employee stock plans.
|
Cash used in financing activities during fiscal year 2007
primarily related to the following:
|
|
|
|
|
net repayment of bank borrowings and capital lease obligations
amounting to $122.1 million.
|
Cash provided by financing activities during fiscal year 2007
primarily related to the following:
|
|
|
|
|
$21.2 million of proceeds from the sale of ordinary shares
under our employee stock plans.
|
Cash used in financing activities during fiscal year 2006
primarily related to the following:
|
|
|
|
|
the repurchase of $97.9 million principal amount of our
6.25% Senior Subordinated Notes due November 2014.
|
Cash provided by financing activities during fiscal year 2006
primarily related to the following:
|
|
|
|
|
proceeds of $50.0 million from the sale of ordinary shares
under our employee stock plans.
|
Liquidity is affected by many factors, some of which are based
on normal ongoing operations of the business and some of which
arise from fluctuations related to global economics and markets.
Cash balances are generated and held in many locations
throughout the world. Local government regulations may restrict
the ability to move cash balances to meet cash needs under
certain circumstances. We do not currently expect such
regulations and restrictions to impact our ability to pay
vendors and conduct operations throughout the global
organization.
On October 1, 2007, we completed the acquisition of 100% of
the outstanding common stock of Solectron through the issuance
of approximately 221.8 million of our ordinary shares, with
a fair value of approximately $2.5 billion, and paying
approximately $1.1 billion in cash. Additionally, in
connection with the acquisition, we entered into a
$1.759 billion term loan facility, dated as of
October 1, 2007, to fund the cash portion of the
consideration, pay acquisition related costs, and to refinance
certain of Solectrons outstanding long-term debt assumed
by the Company. As of March 31, 2008, we have borrowed
$1.734 billion under the facility and there is no further
amount available to the Company under the facility. Refer to the
discussion under Solectron Acquisition Related
Debt in Note 4, Bank Borrowings and
Long-Term Debt of the Notes to Consolidated Financial
Statements for further details.
As a result of our acquisitions, we have approximately
$3.4 billion in total long-term debt outstanding as of
March 31, 2008, an increase of approximately
$1.9 billion from March 31, 2007. Additionally, we
expect to pay between $250.0 million and
$350.0 million in cash during fiscal year 2009 for
aggregate costs relating to restructuring and integration
activities. These payments include estimated amounts that relate
to our estimated restructuring charges for operations that were
associated with the Company prior to its acquisition of
Solectron, and for activities that will be recorded as
liabilities assumed from Solectron. Refer to Note 9,
Restructuring Charges and Note 12
Business and Asset Acquisitions and Divestitures of
the Notes to Consolidated Financial Statements for further
discussion.
Working capital requirements and capital expenditures could
continue to increase in order to support future expansions of
operations, including those related to our recent acquisition of
Solectron. Future liquidity needs will
41
also depend on fluctuations in levels of inventory, accounts
receivable and accounts payable, the timing of capital
expenditures for new equipment, the extent to which we utilize
operating leases for new facilities and equipment, the extent of
cash charges associated with any future restructuring
activities, and the levels of shipments and changes in the
volumes of customer orders.
Historically, we have funded operations from cash and cash
equivalents generated from operations, proceeds from public
offerings of equity and debt securities, bank debt and lease
financings. We also continuously sell a designated pool of trade
receivables to a third-party qualified special purpose entity,
which in turn sells an undivided ownership interest to a
conduit, administered by an unaffiliated financial institution.
In addition to this financial institution, we participate in the
securitization agreement as an investor in the conduit. We also
sell certain trade receivables, which are in addition to the
trade receivables sold in connection with the securitization
agreement discussed above, to certain third-party banking
institutions with limited recourse.
We believe that existing cash balances, together with
anticipated cash flows from operations and borrowings available
under our credit facilities, will be sufficient to fund
operations through at least the next twelve months.
It is possible that future acquisitions may be significant and
may require the payment of cash. We anticipate that we will
enter into debt and equity financings, sales of accounts
receivable and lease transactions to fund acquisitions and
anticipated growth. The sale or issuance of equity or
convertible debt securities could result in dilution to current
shareholders. Further, we may issue debt securities that have
rights and privileges senior to those of holders of ordinary
shares, and the terms of this debt could impose restrictions on
operations and could increase debt service obligations. This
increased indebtedness could limit the Companys
flexibility as a result of debt service requirements and
restrictive covenants, potentially affect our credit ratings,
and may limit the companys ability to access additional
capital or execute its business strategy. Any downgrades in
credit ratings could adversely affect our ability to borrow by
resulting in more restrictive borrowing terms. We continue to
assess our capital structure, and evaluate the merits of
redeploying available cash to reduce existing debt or repurchase
ordinary shares.
CONTRACTUAL
OBLIGATIONS AND COMMITMENTS
On May 10, 2007, we entered into a five-year
$2.0 billion credit facility that expires in May 2012,
which replaced our $1.35 billion credit facility previously
existing at March 31, 2007. As of March 31, 2008,
there was $161.0 million in borrowings outstanding under
the credit facility. The credit facility requires that the
Company maintain a maximum ratio of total indebtedness to EBITDA
(earnings before interest expense, taxes, depreciation and
amortization), and a minimum fixed charge coverage ratio, as
defined. As of March 31, 2008, the Company was in
compliance with the covenants under the credit facility.
The Company and certain of its subsidiaries also have various
uncommitted revolving credit facilities, lines of credit and
other loans in the amount of $754.0 million in the
aggregate under which there were approximately
$10.7 million and $8.1 million of borrowings
outstanding as of March 31, 2008 and 2007, respectively.
As discussed previously, on October 1, 2007, we entered
into a $1.759 billion term loan facility in connection with
the acquisition of Solectron, under which the Company borrowed
$1.734 billion. Of this amount, $500.0 million matures
five years from the date of the facility and the remainder
matures in seven years. Loans under the facility amortize in
quarterly installments in an amount equal to 1% per annum with
the balance due at the end of the fifth or seventh year, as
applicable. The Company may prepay the loans at any time at 100%
of par for any loan with a five year maturity and at 101% of par
for the first year and 100% of par thereafter, for any loan with
a seven year maturity, in each case plus accrued and unpaid
interest and reimbursement of the lenders redeployment
costs. The facility requires the Company maintain a maximum
ratio of total indebtedness to EBITDA, and as of March 31,
2008, the Company was in compliance with the financial covenants
under the facility.
Refer to the discussion in Note 4, Bank Borrowings
and Long-Term Debt of the Notes to Consolidated Financial
Statements for further details of the Companys debt
obligations.
We have purchase obligations that arise in the normal course of
business, primarily consisting of binding purchase orders for
inventory related items and capital expenditures. As of
March 31, 2008, our outstanding debt obligations included:
(i) borrowings outstanding related to our Senior
Subordinated Notes, (ii) borrowings
42
outstanding related to our Convertible Junior Subordinated
Notes, (iii) borrowings outstanding under our Term Loan
Agreement, (iv) amounts drawn under our $2.0 billion
credit facility and various lines of credit, (v) equipment
financed under capital leases and (vi) other term
obligations. Additionally, we have leased certain of our
facilities under operating lease commitments.
Future payments due under our purchase obligations, debt and
related interest obligations and lease contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
Greater Than
|
|
|
Total
|
|
1 Year
|
|
1 - 3 Years
|
|
4 - 5 Years
|
|
5 Years
|
|
|
(In thousands)
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
$
|
1,696,723
|
|
$
|
1,696,723
|
|
$
|
|
|
$
|
|
|
$
|
|
Long-term debt obligations
|
|
|
3,414,560
|
|
|
27,966
|
|
|
736,575
|
|
|
667,426
|
|
|
1,982,593
|
Interest on long-term debt obligations
|
|
|
1,048,721
|
|
|
178,992
|
|
|
354,633
|
|
|
335,266
|
|
|
179,830
|
Total minimum payments under capital lease obligations
|
|
|
2,738
|
|
|
719
|
|
|
852
|
|
|
650
|
|
|
517
|
Operating leases, net of subleases
|
|
|
614,544
|
|
|
123,578
|
|
|
176,362
|
|
|
104,282
|
|
|
210,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
6,777,286
|
|
$
|
2,027,978
|
|
$
|
1,268,422
|
|
$
|
1,107,624
|
|
$
|
2,373,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under our term loan agreement bear interest, at the
Companys option, either at (i) the base rate (the
greater of the agents prime rate or the federal funds rate
plus 0.50%) plus a margin of 1.25%; or (ii) LIBOR plus a
margin of 2.25%. Estimated interest for the term loan facility
is based on the applicable fixed rate plus a margin of 2.25% for
the $747.0 million on which the floating interest payment
has been swapped for fixed interest payments, and is based on
LIBOR plus a margin of 2.25% for the remaining amounts
outstanding. Estimated interest payments for the
$2.0 billion credit facility is based on LIBOR plus the
applicable margin. Refer to the discussion in Note 4,
Bank Borrowings and Long-Term Debt of the Notes to
Consolidated Financial Statements for further details.
We adopted FIN 48 in the first quarter of fiscal year 2008
and did not recognize any adjustments to the liability for
unrecognized tax benefits as a result of the implementation of
FIN 48. We have excluded $275.2 million of FIN 48
liabilities from the contractual obligations table because we
cannot make a reasonably reliable estimate of the periodic cash
settlements with the respective taxing authorities. See
Note 8, Income Taxes of the Notes to
Consolidated Financial Statements for further details.
Our purchase obligations can fluctuate significantly from
period-to-period and can materially impact our future operating
asset and liability balances, and our future working capital
requirements. We intend to use our existing cash balances,
together with anticipated cash flows from operations to fund our
existing and future contractual obligations.
NEW
ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133
(SFAS 161). This statement changes the
disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced
disclosures stating how and why an entity uses derivative
instruments; how derivatives and related hedged items are
accounted for under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133) and its related interpretations;
and how derivative instruments and related hedge items affect an
entitys financial position, financial performance and cash
flows. SFAS 161 is effective in fiscal years beginning
after November 15,
43
2008 and is required to be adopted by us in the first quarter of
fiscal year 2010. We do not expect the adoption of SFAS 161
will have a material impact on our consolidated results of
operations, financial condition and cash flows.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS 160),
which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable
to the parent and to the non-controlling interest, changes in a
parents ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting
requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the non-controlling owners. SFAS 160 is
effective for fiscal years beginning after December 15,
2008, and is required to be adopted by us in the first quarter
of fiscal year 2010. We do not expect that the adoption of the
provisions of SFAS 160 will have a material impact on our
consolidated results of operations, financial condition and cash
flows.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159).
SFAS 159 permits entities to choose to measure certain
financial instruments and certain other items at fair value at
specified election dates. The fair value option may be applied
instrument by instrument with certain exceptions and is applied
generally on an irrevocable basis to the entire instrument.
SFAS 159 is effective in fiscal years beginning after
November 15, 2007 and is required to be adopted by us in
the first quarter of fiscal year 2009. We do not expect that the
adoption of SFAS 159 will have a material impact on our
consolidated results of operations, financial condition and cash
flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value under generally
accepted accounting principles, and expands the requisite
disclosures for fair value measurements. SFAS 157 is
effective in fiscal years beginning after November 15, 2007
for financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a
recurring basis, and should be applied prospectively. The
adoption of the provisions of SFAS 157 related to financial
assets and liabilities, and other assets and liabilities that
are carried at fair value on a recurring basis is not
anticipated to materially impact our consolidated financial
position, results of operations and cash flows. The FASB
provided for a one-year deferral of the provisions of
SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the consolidated
financial statements on a non-recurring basis. We are currently
evaluating the impact of adopting SFAS 157 for
non-financial assets and liabilities that are recognized or
disclosed on a non-recurring basis.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)), which replaces
SFAS No. 141. SFAS 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which are intended to enable
users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for fiscal
years that begin after December 15, 2008, and should be
applied prospectively for all business combinations entered into
after the date of adoption. We are currently evaluating the
impact of adopting SFAS 141(R).
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST
RATE RISK
A portion of our exposure to market risk for changes in interest
rates relates to our investment portfolio, which consists of
highly liquid investments with maturities of three months or
less from original dates of purchase. We do not use derivative
financial instruments in our investment portfolio. We place cash
and cash equivalents with various major financial institutions
and limit the amount of credit exposure to the greater of 20% of
the total investment portfolio or $10.0 million in any
single institution. We protect our invested principal by
limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade
securities and by constantly positioning the portfolio to
respond appropriately to a reduction in credit rating of any
investment issuer, guarantor or depository to levels below the
credit ratings dictated by our investment policy. The portfolio
includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity. Maturities of
short-term
44
investments are timed, whenever possible, to correspond with
debt payments and capital investments. As of March 31,
2008, the outstanding amount in the investment portfolio was
$506.7 million, comprised mainly of money market funds with
an average return of 2.82%. A hypothetical 10% change in
interest rates would not have a material effect on our financial
position, results of operations and cash flows over the next
fiscal year.
We had fixed and variable rate debt outstanding of approximately
$3.4 billion as of March 31, 2008, of which
approximately $1.5 billion related to fixed rate debt
obligations. As of March 31, 2007, the Company had interest
rate swap transactions, which effectively converted
$400.0 million of the $402.1 million outstanding of
its 6.25% Senior Subordinated Notes, due November 2014,
from a fixed to variable interest rate. In November 2007, we
terminated the interest rate swap transactions effectively
converting these notes back to a fixed interest rate. As of
March 31, 2008, fixed rate debt consisted primarily of
$809.4 million of Senior Subordinated Notes with a weighted
average interest rate of 6.41%, $500.0 million of 1% Coupon
Convertible Subordinated Notes, and $195.0 million of Zero
Coupon, Zero Yield, Convertible Junior Subordinated Notes.
Variable rate debt obligations were approximately
$1.9 billion, which primarily consisted of the previously
discussed term loan facility in the amount of
$1.726 billion, and $161.0 million outstanding under
the Companys $2.0 billion credit facility. Interest
on the term loan facility is based at the Companys option
on either (i) the base rate (the greater of the
agents prime rate or the federal funds rate plus 0.50%)
plus a margin of 1.25%; or (ii) LIBOR plus a margin of
2.25%. As discussed further below, the floating interest rate on
$747.0 million of the $1.726 billion outstanding under
the term loan facility has been swapped for fixed interest rates
over approximately the next three years. Interest on the
$2.0 billion credit facility is based at the Companys
option on either (i) the base rate (the greater of the
agents prime rate or the federal funds rate plus 0.50%);
or (ii) LIBOR plus the applicable margin for LIBOR loans
ranging between 0.50% and 1.25%, based on the Companys
credit ratings. Variable rate debt also included demand notes
and certain variable lines of credit. These credit lines are
located throughout the world and are based on a spread over that
countrys inter-bank offering rate.
In December 2007 and January 2008, the Company entered into swap
transactions to effectively convert the floating interest rates
on $747.0 million of the amount outstanding under its term
loan facility to fixed interest rates ranging between
approximately 3.57% and 3.89%. We receive floating interest
payments at rates equal to the three-month LIBOR we pay on the
$747.0 million of the term loan facility that has been
swapped. These swaps expire between October 2010 and January
2011 and are accounted for as cash flow hedges under
SFAS 133.
Our variable rate debt instruments create exposures for us
related to interest rate risk. A hypothetical 10% change in
interest rates would not have a material effect on our financial
position, results of operations and cash flows over the next
fiscal year.
As of March 31, 2008, the approximate fair values of our
6.5% Senior Subordinated Notes, 6.25% Senior
Subordinated Notes, and 1% Convertible Subordinated Notes
were 95.50%, 92.25% and 95.75% of their face values on
March 31, 2008, respectively, based on broker trading
prices.
FOREIGN
CURRENCY EXCHANGE RISK
We transact business in various foreign countries and are,
therefore, subject to risk of foreign currency exchange rate
fluctuations. We have established a foreign currency risk
management policy to manage this risk. To the extent possible,
we manage our foreign currency exposure by evaluating and using
non-financial techniques, such as currency of invoice, leading
and lagging payments and receivables management. In addition, we
borrow in various foreign currencies and enter into short-term
foreign currency forward and swap contracts to hedge only those
currency exposures associated with certain assets and
liabilities, mainly accounts receivable and accounts payable,
and cash flows denominated in non-functional currencies.
We try to maintain a fully hedged position for certain
transaction exposures. These exposures are primarily, but not
limited to, revenues, customer and vendor payments and
inter-company balances in currencies other than the functional
currency unit of the operating entity. The credit risk of our
foreign currency forward and swap contracts is minimized since
all contracts are with large financial institutions. The gains
and losses on forward and swap contracts generally offset the
losses and gains on the assets, liabilities and transactions
hedged. The fair value of currency forward and swap contracts is
reported on the balance sheet. The aggregate notional amount of
outstanding
45
contracts as of March 31, 2008 amounted to
$2.6 billion and the recorded fair value was not material.
The majority of these foreign exchange contracts expire in less
than three months and all expire within one year. They will
settle in Australian dollar, Brazilian real, British pound,
Canadian dollar, China renminbi, Czech koruna, Danish krone,
Euro, Hong Kong dollar, Hungarian forint, Israel shekel, Indian
rupee, Japanese yen, Malaysian ringgit, Mexican peso, Norwegian
krone, Polish zloty, Romanian leu, Singapore dollar, South
African rand, Swedish krona, Taiwanese dollar, and
U.S. dollar.
Based on our overall currency rate exposures as of
March 31, 2008, including derivative financial instruments
and nonfunctional currency-denominated receivables and payables,
a near-term 10% appreciation or depreciation of the
U.S. dollar from its cross-functional rates would not have
a material effect on our financial position, results of
operations and cash flows over the next fiscal year.
46
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Flextronics International Ltd.
Singapore
We have audited the accompanying consolidated balance sheets of
Flextronics International Ltd. and subsidiaries (the
Company) as of March 31, 2008 and 2007, and the
related consolidated statements of operations, comprehensive
income (loss), shareholders equity, and cash flows for
each of the three years in the period ended March 31, 2008.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Flextronics International Ltd. and subsidiaries as of
March 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the three years in the period
ended March 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, effective April 1, 2006, the Company changed
its method of accounting for stock-based compensation in
accordance with guidance provided in Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
March 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated May 23, 2008 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte & Touche LLP
San Jose, California
May 23, 2008
June 23, 2008 as to the caption Relacom AB
included in Note 2.
47
FLEXTRONICS
INTERNATIONAL LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,719,948
|
|
|
$
|
714,525
|
|
Accounts receivable, net of allowance for doubtful accounts of
$16,732 and $17,074 as of March 31, 2008 and 2007,
respectively
|
|
|
3,550,942
|
|
|
|
1,754,705
|
|
Inventories
|
|
|
4,118,550
|
|
|
|
2,562,303
|
|
Deferred income taxes
|
|
|
573
|
|
|
|
11,105
|
|
Other current assets
|
|
|
922,924
|
|
|
|
548,409
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,312,937
|
|
|
|
5,591,047
|
|
Property and equipment, net
|
|
|
2,465,656
|
|
|
|
1,998,706
|
|
Deferred income taxes
|
|
|
32,598
|
|
|
|
669,898
|
|
Goodwill
|
|
|
5,559,351
|
|
|
|
3,076,400
|
|
Other intangible assets, net
|
|
|
317,390
|
|
|
|
187,920
|
|
Other assets
|
|
|
836,983
|
|
|
|
817,403
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,524,915
|
|
|
$
|
12,341,374
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank borrowings, current portion of long-term debt and capital
lease obligations
|
|
$
|
28,591
|
|
|
$
|
8,385
|
|
Accounts payable
|
|
|
5,311,337
|
|
|
|
3,440,845
|
|
Accrued payroll
|
|
|
399,718
|
|
|
|
215,593
|
|
Other current liabilities
|
|
|
1,661,369
|
|
|
|
823,245
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,401,015
|
|
|
|
4,488,068
|
|
Long-term debt and capital lease obligations, net of current
portion
|
|
|
3,388,337
|
|
|
|
1,493,805
|
|
Other liabilities
|
|
|
571,119
|
|
|
|
182,842
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Ordinary shares, no par value; 835,202,669 and
607,544,548 shares issued and outstanding as of
March 31, 2008 and 2007, respectively
|
|
|
8,538,723
|
|
|
|
5,923,799
|
|
Retained earnings (deficit)
|
|
|
(372,170
|
)
|
|
|
267,200
|
|
Accumulated other comprehensive loss
|
|
|
(2,109
|
)
|
|
|
(14,340
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
8,164,444
|
|
|
|
6,176,659
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
19,524,915
|
|
|
$
|
12,341,374
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
FLEXTRONICS
INTERNATIONAL LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
27,558,135
|
|
|
$
|
18,853,688
|
|
|
$
|
15,287,976
|
|
Cost of sales
|
|
|
25,972,787
|
|
|
|
17,777,859
|
|
|
|
14,354,461
|
|
Restructuring charges
|
|
|
408,945
|
|
|
|
146,831
|
|
|
|
185,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,176,403
|
|
|
|
928,998
|
|
|
|
747,884
|
|
Selling, general and administrative expenses
|
|
|
807,029
|
|
|
|
547,538
|
|
|
|
463,946
|
|
Intangible amortization
|
|
|
112,317
|
|
|
|
37,089
|
|
|
|
37,160
|
|
Restructuring charges
|
|
|
38,743
|
|
|
|
5,026
|
|
|
|
30,110
|
|
Other charges (income), net
|
|
|
61,078
|
|
|
|
(77,594
|
)
|
|
|
(17,200
|
)
|
Interest and other expense, net
|
|
|
101,302
|
|
|
|
91,986
|
|
|
|
92,951
|
|
Gain on divestiture of operations
|
|
|
(9,733
|
)
|
|
|
|
|
|
|
(23,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
65,667
|
|
|
|
324,953
|
|
|
|
164,736
|
|
Provision for income taxes
|
|
|
705,037
|
|
|
|
4,053
|
|
|
|
54,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(639,370
|
)
|
|
$
|
320,900
|
|
|
$
|
110,518
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
187,738
|
|
|
|
30,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(639,370
|
)
|
|
$
|
508,638
|
|
|
$
|
141,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.89
|
)
|
|
$
|
0.55
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.89
|
)
|
|
$
|
0.54
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
0.32
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
0.31
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.89
|
)
|
|
$
|
0.86
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.89
|
)
|
|
$
|
0.85
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
720,523
|
|
|
|
588,593
|
|
|
|
573,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
720,523
|
|
|
|
596,851
|
|
|
|
600,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
FLEXTRONICS
INTERNATIONAL LTD.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(639,370
|
)
|
|
$
|
508,638
|
|
|
$
|
141,162
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
24,935
|
|
|
|
(40,081
|
)
|
|
|
(100,472
|
)
|
Unrealized gain (loss) on derivative instruments, and other
income (loss), net of taxes
|
|
|
(12,704
|
)
|
|
|
(1,824
|
)
|
|
|
4,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(627,139
|
)
|
|
$
|
466,733
|
|
|
$
|
45,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
FLEXTRONICS
INTERNATIONAL LTD.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
Retained
|
|
|
Accumulated Other
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Deferred
|
|
|
Shareholders
|
|
|
|
Outstanding
|
|
Amount
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Compensation
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
BALANCE AT MARCH 31, 2005
|
|
|
568,330
|
|
$
|
5,489,764
|
|
|
$
|
(382,600
|
)
|
|
$
|
123,683
|
|
|
$
|
(6,799
|
)
|
|
$
|
5,224,048
|
|
Issuance of ordinary shares for acquisitions
|
|
|
2,526
|
|
|
27,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,907
|
|
Exercise of stock options
|
|
|
5,562
|
|
|
41,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,052
|
|
Shares issued for debt conversion
|
|
|
476
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Ordinary shares issued under Employee Stock Purchase Plan
|
|
|
914
|
|
|
8,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,934
|
|
Issuance of vested shares under share bonus awards
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for board of directors compensation
|
|
|
41
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Net income
|
|
|
|
|
|
|
|
|
|
141,162
|
|
|
|
|
|
|
|
|
|
|
|
141,162
|
|
Deferred stock compensation, net of cancellations
|
|
|
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
582
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,163
|
|
|
|
2,163
|
|
Unrealized loss on investments and derivative instruments, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,354
|
|
|
|
|
|
|
|
4,354
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,472
|
)
|
|
|
|
|
|
|
(100,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2006
|
|
|
578,142
|
|
|
5,572,574
|
|
|
|
(241,438
|
)
|
|
|
27,565
|
|
|
|
(4,054
|
)
|
|
|
5,354,647
|
|
Issuance of ordinary shares for acquisitions
|
|
|
26,212
|
|
|
299,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,608
|
|
Exercise of stock options
|
|
|
2,844
|
|
|
21,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,153
|
|
Issuance of vested shares under share bonus awards
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
508,638
|
|
|
|
|
|
|
|
|
|
|
|
508,638
|
|
Stock-based compensation, net of tax
|
|
|
|
|
|
34,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,518
|
|
Reversal of deferred stock compensation upon adoption of
SFAS 123(R)
|
|
|
|
|
|
(4,054
|
)
|
|
|
|
|
|
|
|
|
|
|
4,054
|
|
|
|
|
|
Unrealized gain on derivative instruments, and other income
(loss), net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,824
|
)
|
|
|
|
|
|
|
(1,824
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,081
|
)
|
|
|
|
|
|
|
(40,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2007
|
|
|
607,545
|
|
|
5,923,799
|
|
|
|
267,200
|
|
|
|
(14,340
|
)
|
|
|
|
|
|
|
6,176,659
|
|
Issuance of ordinary shares for acquisitions
|
|
|
221,802
|
|
|
2,519,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,519,670
|
|
Fair value of vested options assumed for acquisition
|
|
|
|
|
|
11,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,282
|
|
Exercise of stock options
|
|
|
4,291
|
|
|
35,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,911
|
|
Issuance of vested shares under share bonus awards
|
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
(639,370
|
)
|
|
|
|
|
|
|
|
|
|
|
(639,370
|
)
|
Stock-based compensation, net of tax
|
|
|
|
|
|
48,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,061
|
|
Unrealized gain on derivative instruments, and other income
(loss), net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,704
|
)
|
|
|
|
|
|
|
(12,704
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,935
|
|
|
|
|
|
|
|
24,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2008
|
|
|
835,203
|
|
$
|
8,538,723
|
|
|
$
|
(372,170
|
)
|
|
$
|
(2,109
|
)
|
|
$
|
|
|
|
$
|
8,164,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
FLEXTRONICS
INTERNATIONAL LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(639,370
|
)
|
|
$
|
508,638
|
|
|
$
|
141,162
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment charges
|
|
|
712,840
|
|
|
|
421,740
|
|
|
|
390,828
|
|
Gain on sale of equipment
|
|
|
(1,048
|
)
|
|
|
(1,256
|
)
|
|
|
(8,473
|
)
|
Provision for doubtful accounts
|
|
|
1,090
|
|
|
|
11,037
|
|
|
|
606
|
|
Foreign currency gain on liquidation
|
|
|
|
|
|
|
(79,844
|
)
|
|
|
(20,596
|
)
|
Non-cash interest income and other
|
|
|
(34,146
|
)
|
|
|
(26,691
|
)
|
|
|
3,765
|
|
Stock compensation
|
|
|
47,641
|
|
|
|
32,325
|
|
|
|
2,662
|
|
Deferred income taxes
|
|
|
633,850
|
|
|
|
(26,492
|
)
|
|
|
47,953
|
|
Gain on divestitures of operations
|
|
|
(9,733
|
)
|
|
|
(181,228
|
)
|
|
|
(67,569
|
)
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(241,959
|
)
|
|
|
(199,498
|
)
|
|
|
172,638
|
|
Inventories
|
|
|
205,584
|
|
|
|
(628,024
|
)
|
|
|
(220,988
|
)
|
Other assets
|
|
|
(82,506
|
)
|
|
|
34,586
|
|
|
|
(171,460
|
)
|
Accounts payable and other current liabilities
|
|
|
450,590
|
|
|
|
411,083
|
|
|
|
278,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,042,833
|
|
|
|
276,376
|
|
|
|
549,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net of disposition
|
|
|
(327,547
|
)
|
|
|
(569,424
|
)
|
|
|
(251,174
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(629,182
|
)
|
|
|
(356,422
|
)
|
|
|
(649,160
|
)
|
Proceeds from divestitures of operations, net of cash held in
divested operations of $0, $108,624 and $33,064 for fiscal years
2008, 2007 and 2006, respectively
|
|
|
11,138
|
|
|
|
579,850
|
|
|
|
518,505
|
|
Other investments and notes receivable, net
|
|
|
10,220
|
|
|
|
(45,499
|
)
|
|
|
(47,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(935,371
|
)
|
|
|
(391,495
|
)
|
|
|
(428,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from bank borrowings and long-term debt
|
|
|
7,861,739
|
|
|
|
7,470,432
|
|
|
|
3,420,583
|
|
Repayments of bank borrowings and long-term debt
|
|
|
(6,934,869
|
)
|
|
|
(7,592,366
|
)
|
|
|
(3,503,420
|
)
|
Repayment of capital lease obligations and other
|
|
|
(639
|
)
|
|
|
(184
|
)
|
|
|
(11,457
|
)
|
Proceeds from exercise of stock options and Employee Stock
Purchase Plan
|
|
|
35,911
|
|
|
|
21,153
|
|
|
|
49,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
962,142
|
|
|
|
(100,965
|
)
|
|
|
(44,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(64,181
|
)
|
|
|
(12,250
|
)
|
|
|
(2,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,005,423
|
|
|
|
(228,334
|
)
|
|
|
73,601
|
|
Cash and cash equivalents, beginning of year
|
|
|
714,525
|
|
|
|
942,859
|
|
|
|
869,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,719,948
|
|
|
$
|
714,525
|
|
|
$
|
942,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
ORGANIZATION
OF THE COMPANY
|
Flextronics International Ltd. (Flextronics or the
Company) was incorporated in the Republic of
Singapore in May 1990. The Company is a leading provider of
advanced design and electronics manufacturing services
(EMS) to original equipment manufacturers
(OEMs) of a broad range of products in the following
markets: infrastructure; mobile communication devices;
computing; consumer digital devices; industrial, semiconductor
and white goods; automotive, marine and aerospace; and medical
devices. The Companys strategy is to provide customers
with a full range of vertically-integrated global supply chain
services through which the Company designs, builds, ships and
services a complete packaged product for its OEM customers. OEM
customers leverage the Companys services to meet their
product requirements throughout the entire product life cycle.
The Companys service offerings include rigid printed
circuit board and flexible circuit fabrication, systems assembly
and manufacturing (including enclosures, testing services,
materials procurement and inventory management), logistics,
after-sales services (including product repair, re-manufacturing
and maintenance) and multiple component product offerings.
Additionally, the Company provides market-specific design and
engineering services ranging from contract design services
(CDM), where the customer purchases services on a
time and materials basis, to original product design and
manufacturing services, where the customer purchases a product
that was designed, developed and manufactured by the Company
(commonly referred to as original design manufacturing, or
ODM). ODM products are then sold by the
Companys OEM customers under the OEMs brand names.
The Companys CDM and ODM services include user interface
and industrial design, mechanical engineering and tooling
design, electronic system design and printed circuit board
design. The Company also provides after market services such as
logistics, repair and warranty services.
|
|
2.
|
SUMMARY
OF ACCOUNTING POLICIES
|
Basis
of Presentation and Principles of Consolidation
The Companys fiscal fourth quarter and year ends on March
31 of each year. The first and second fiscal quarters end on the
Friday closest to the last day of each respective calendar
quarter. The third fiscal quarter ends on December 31.
Amounts included in the consolidated financial statements are
expressed in U.S. dollars unless otherwise designated.
The accompanying consolidated financial statements include the
accounts of Flextronics and its majority-owned subsidiaries,
after elimination of intercompany accounts and transactions. The
Company consolidates all majority-owned subsidiaries and
investments in entities in which the Company has a controlling
interest. For consolidated majority-owned subsidiaries in which
the Company owns less than 100%, the Company recognizes a
minority interest for the ownership of the minority owners. As
of March 31, 2008 and 2007, minority interest was not
material. The associated minority owners interest in the
income or losses of these companies has not been material to the
Companys results of operations for fiscal years 2008, 2007
and 2006, and has been classified, as applicable, within income
from discontinued operations or as interest and other expense,
net, in the consolidated statements of operations.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP or GAAP)
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Estimates are used in
accounting for, among other things, allowances for doubtful
accounts, inventory write-downs, valuation allowances for
deferred tax assets, uncertain tax positions, useful lives of
property, equipment and intangible assets, asset impairments,
fair values of derivative instruments and the related hedged
items, restructuring charges, contingencies, capital leases,
fair values of assets and liabilities obtained in business
combinations and the fair
53
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
values of options granted under the Companys stock-based
compensation plans. Actual results may differ from previously
estimated amounts, and such differences may be material to the
consolidated financial statements. Estimates and assumptions are
reviewed periodically, and the effects of revisions are
reflected in the period they occur.
Translation
of Foreign Currencies
The financial position and results of operations for certain of
the Companys subsidiaries are measured using a currency
other than the U.S. dollar as their functional currency.
Accordingly, all assets and liabilities for these subsidiaries
are translated into U.S. dollars at the current exchange
rates as of the respective balance sheet date. Revenue and
expense items are translated at the average exchange rates
prevailing during the period. Cumulative gains and losses from
the translation of these subsidiaries financial statements
are reported as a separate component of shareholders
equity. Foreign exchange gains and losses arising from
transactions denominated in a currency other than the functional
currency of the entity involved, and remeasurement adjustments
for foreign operations where the U.S. dollar is the
functional currency, are included in operating results.
Non-functional transaction gains and losses, and remeasurement
adjustments were not material to the Companys consolidated
results of operations for fiscal years 2008, 2007 and 2006 and
have been classified as a component of interest and other
expense, net in the consolidated statement of operations.
The Company realized foreign exchange gains of
$79.8 million and $20.6 million during fiscal years
2007 and 2006, respectively, from the liquidation of certain
international entities. These gains were previously realized
within other comprehensive income, and reclassified to other
charges (income), net, in the consolidated statement of
operations during the period when the international entities
were liquidated.
Revenue
Recognition
The Company recognizes manufacturing revenue when it ships goods
or the goods are received by its customer, title and risk of
ownership have passed, the price to the buyer is fixed or
determinable and recoverability is reasonably assured.
Generally, there are no formal customer acceptance requirements
or further obligations related to manufacturing services. If
such requirements or obligations exist, then the Company
recognizes the related revenues at the time when such
requirements are completed and the obligations are fulfilled.
The Company makes provisions for estimated sales returns and
other adjustments at the time revenue is recognized based upon
contractual terms and an analysis of historical returns. These
provisions were not material to the consolidated financial
statements for the 2008, 2007 and 2006 fiscal years.
The Company provides services for its customers that range from
contract design to original product design to repair services.
The Company recognizes service revenue when the services have
been performed, and the related costs are expensed as incurred.
Net sales for services from continuing operations were less than
10% of the Companys total sales from continuing operations
in the 2008, 2007 and 2006 fiscal years, and accordingly, are
included in net sales in the consolidated statements of
operations.
Allowance
for Doubtful Accounts
The Company performs ongoing credit evaluations of its
customers financial condition and makes provisions for
doubtful accounts based on the outcome of those credit
evaluations. The Company evaluates the collectibility of its
accounts receivable based on specific customer circumstances,
current economic trends, historical experience with collections
and the age of past due receivables. Unanticipated changes in
the liquidity or financial position of the Companys
customers may require additional provisions for doubtful
accounts.
54
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
All highly liquid investments with maturities of three months or
less from original dates of purchase are carried at fair market
value and considered to be cash equivalents. Cash and cash
equivalents consist of cash deposited in checking and money
market accounts.
Cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Cash and bank balances
|
|
$
|
1,213,285
|
|
$
|
557,938
|
Money market funds
|
|
|
506,663
|
|
|
156,587
|
|
|
|
|
|
|
|
|
|
$
|
1,719,948
|
|
$
|
714,525
|
|
|
|
|
|
|
|
Concentration
of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily accounts
receivable, cash and cash equivalents, investments, and
derivative instruments.
The following table summarizes the activity in the
Companys allowance for doubtful accounts relating to
continuing operations during fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
|
|
Balance at
|
|
|
Beginning
|
|
Costs and
|
|
Deductions/
|
|
End of
|
|
|
of Year
|
|
Expenses
|
|
Write-Offs
|
|
Year
|
|
|
(In thousands)
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2006
|
|
$
|
26,641
|
|
$
|
105
|
|
$
|
(8,997
|
)
|
|
$
|
17,749
|
Year ended March 31, 2007
|
|
$
|
17,749
|
|
$
|
12,709
|
|
$
|
(13,384
|
)
|
|
$
|
17,074
|
Year ended March 31, 2008
|
|
$
|
17,074
|
|
$
|
1,326
|
|
$
|
(1,668
|
)
|
|
$
|
16,732
|
In fiscal year 2008, one customer accounted for approximately
16% of net sales. In fiscal year 2007, one customer accounted
for approximately 20% of net sales. In fiscal year 2006, two
customers accounted for approximately 13% and 11% of net sales,
respectively. The Companys ten largest customers accounted
for approximately 55%, 64% and 63% of its net sales, in fiscal
years 2008, 2007, and 2006, respectively. As of March 31,
2008, no single customer accounted for greater than 10% of the
Companys total accounts receivable. As of March 31,
2007, one customer accounted for approximately 13% of total
accounts receivable.
The Company maintains cash and cash equivalents with various
financial institutions that management believes to be of high
credit quality. These financial institutions are located in many
different locations throughout the world. The Companys
cash equivalents are primarily comprised of cash deposited in
checking and money market accounts. The Companys
investment policy limits the amount of credit exposure to 20% of
the total investment portfolio in any single issuer.
The amount subject to credit risk related to derivative
instruments is generally limited to the amount, if any, by which
a counterpartys obligations exceed the obligations of the
Company with that counterparty. To manage counterparty risk, the
Company limits its derivative transactions to those with
recognized financial institutions.
55
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories are stated at the lower of cost (on a
first-in,
first-out basis) or market value. The stated cost is comprised
of direct materials, labor and overhead. The components of
inventories, net of applicable lower of cost or market
write-downs, were as follows:
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
2,435,066
|
|
$
|
1,338,613
|
Work-in-progress
|
|
|
764,860
|
|
|
602,629
|
Finished goods
|
|
|
918,624
|
|
|
621,061
|
|
|
|
|
|
|
|
|
|
$
|
4,118,550
|
|
$
|
2,562,303
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is recognized on a straight-line basis over the
estimated useful lives of the related assets, with the exception
of building leasehold improvements, which are amortized over the
term of the lease, if shorter. Repairs and maintenance costs are
expensed as incurred. Property and equipment related to
continuing operations was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
|
|
|
|
|
|
|
|
|
Life
|
|
As of March 31,
|
|
|
|
(In Years)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(In thousands)
|
|
|
Machinery and equipment
|
|
3-10
|
|
$
|
2,119,590
|
|
|
$
|
1,766,485
|
|
Buildings
|
|
30
|
|
|
1,066,791
|
|
|
|
703,916
|
|
Leasehold improvements
|
|
up to 30
|
|
|
219,053
|
|
|
|
147,590
|
|
Furniture, fixtures, computer equipment and software
|
|
3-7
|
|
|
396,757
|
|
|
|
345,297
|
|
Land
|
|
|
|
|
94,534
|
|
|
|
74,616
|
|
Construction-in-progress
|
|
|
|
|
262,434
|
|
|
|
389,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,159,159
|
|
|
|
3,427,848
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(1,693,503
|
)
|
|
|
(1,429,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
2,465,656
|
|
|
$
|
1,998,706
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense associated with property and
equipment related to continuing operations amounted to
approximately $338.4 million, $280.7 million and
$264.4 million in fiscal years 2008, 2007 and 2006,
respectively. Proceeds from the disposition of property and
equipment were $140.3 million, $167.7 million and
$76.1 million in fiscal years 2008, 2007 and 2006,
respectively, and are presented net with purchases of property
and equipment within cash flows from investing activities in the
consolidated statements of cash flows.
The Company reviews property and equipment for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of property and equipment is measured by
comparing its carrying amount to the projected undiscounted cash
flows the property and equipment are expected to generate. An
impairment loss is recognized when the carrying amount of a
long-lived asset exceeds its fair value. Refer to Note 9,
Restructuring Charges for a discussion of impairment
charges recorded in fiscal years 2008, 2007 and 2006.
56
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Income Taxes
The Company provides for income taxes in accordance with the
asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax
consequences of temporary differences between the carrying
amount and the tax basis of existing assets and liabilities by
applying the applicable statutory tax rate to such differences.
Accounting
for Business and Asset Acquisitions
The Company has actively pursued business and asset
acquisitions, which are accounted for using the purchase method
of accounting in accordance with SFAS No. 141,
Business Combinations (SFAS 141). The
fair value of the net assets acquired and the results of the
acquired businesses are included in the Companys
Consolidated Financial Statements from the acquisition dates
forward. The Company is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and results of operations during the reporting
period. Estimates are used in accounting for, among other
things, the fair value of acquired net operating assets,
property and equipment, intangible assets and related deferred
tax liabilities, useful lives of plant and equipment and
amortizable lives for acquired intangible assets. Any excess of
the purchase consideration over the identified fair value of the
assets and liabilities acquired is recognized as goodwill.
Additionally, the Company may be required to recognize
liabilities for anticipated restructuring costs that will be
necessary due to the elimination of excess capacity, redundant
assets or unnecessary functions.
The Company estimates the preliminary fair value of acquired
assets and liabilities as of the date of acquisition based on
information available at that time. The valuation of these
tangible and identifiable intangible assets and liabilities is
subject to further management review and may change materially
between the preliminary allocation and end of the purchase price
allocation period. Any changes in these estimates may have a
material effect on the Companys consolidated operating
results or financial position.
Goodwill
and Other Intangibles
Goodwill of the Companys reporting units is tested for
impairment each year as of January 31, and whenever events
or changes in circumstances indicate that the carrying amount of
goodwill may not be recoverable. Goodwill is tested for
impairment at the reporting unit level by comparing the
reporting units carrying amount, including goodwill, to
the fair value of the reporting unit. Reporting units represent
components of the Company for which discrete financial
information is available that is regularly reviewed by
management. In fiscal year 2006, the Company identified two
separate reporting units: Software Development and Solutions,
and Electronic Manufacturing Services. In fiscal year 2007, the
Company divested its Software Development and Solutions
business, and retained a single reporting unit: Electronic
Manufacturing Services. If the carrying amount of any reporting
unit exceeds its fair value, an impairment loss is recognized.
The fair value of the reporting unit is measured using a
discounted cash flow analysis. Further, to the extent the
carrying amount of the Company as a whole is greater than its
market capitalization, all, or a significant portion of its
goodwill may be considered impaired. The Company completed the
annual impairment test during its fourth quarter of fiscal year
2008 and determined that no impairment existed as of the date of
the impairment test.
57
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity in the
Companys goodwill account during fiscal years 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of the year
|
|
$
|
3,076,400
|
|
|
$
|
2,676,727
|
|
Additions(1)
|
|
|
2,433,639
|
|
|
|
353,145
|
|
Purchase accounting adjustments and reclassification to other
intangibles(2)
|
|
|
(18,696
|
)
|
|
|
(9,000
|
)
|
Foreign currency translation adjustments
|
|
|
68,008
|
|
|
|
55,528
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the year
|
|
$
|
5,559,351
|
|
|
$
|
3,076,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For fiscal year 2008, additions
include approximately $2.2 billion attributable to the
Companys October 2007 acquisition of Solectron and
$265.9 million attributable to certain acquisitions that
were not individually significant to the Company. For fiscal
year 2007, additions include approximately $207.1 million
attributable to the Companys November 2006 acquisition of
International DisplayWorks, Inc., $94.9 million
attributable to the May 2006 completion of the acquisition of
Nortels manufacturing system house in Calgary, Canada and
$51.1 million attributable to certain acquisitions that
were not individually significant to the Company. Refer to the
discussion of the Companys acquisitions in Note 12,
Business and Asset Acquisitions and Divestitures.
|
|
(2)
|
|
Includes adjustments and
reclassifications resulting from managements review of the
valuation of tangible and identifiable intangible assets and
liabilities acquired through certain business combinations
completed in a period subsequent to the respective acquisition,
based on managements estimates. Reclassifications during
fiscal year 2008 include approximately $13.7 million
attributable to the Companys November 2006 acquisition of
IDW. The remaining amount in fiscal year 2008 and the amount for
fiscal year 2007 were primarily attributable to other purchase
accounting adjustments and divestitures that were not
individually significant to the Company. Refer to the discussion
of the Companys acquisitions in Note 12,
Business and Asset Acquisitions and Divestitures.
|
The Companys acquired intangible assets are subject to
amortization over their estimated useful lives and are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an intangible may not be
recoverable. An impairment loss is recognized when the carrying
amount of an intangible asset exceeds its fair value. During the
twelve-month period ended March 31, 2008, amortization
expense includes approximately $30.0 million for the
write-off of a certain license due to technological
obsolescence. Intangible assets are comprised of
customer-related intangibles, which primarily include
contractual agreements and customer relationships; and licenses
and other intangibles, which is primarily comprised of licenses
and also includes patents and trademarks, and developed
technologies. Customer-related intangibles are amortized on a
straight-line basis generally over a period of up to eight
years, and licenses and other intangibles generally over a
period of up to seven years. No residual value is estimated for
any intangible assets. During fiscal years 2008 and 2007, the
Company added approximately $239.6 million and
$109.5 million of intangible assets, respectively.
Additions during fiscal year 2008 included $191.6 million
attributable to the Companys acquisition of Solectron.
Additions during fiscal years 2008 and 2007 were comprised of
approximately $213.4 million and $61.4 million related
to customer related intangible assets, respectively, and
approximately $26.2 million and $48.1 million related
to acquired licenses and other intangibles, respectively. The
fair value of the Companys intangible assets purchased
through business combinations is principally determined based on
managements estimates of cash flow and recoverability. The
Company is in the process of determining the fair value of its
intangible assets acquired from certain acquisitions. Such
valuations will be completed within one year of purchase.
Accordingly, these amounts represent preliminary
58
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimates, which are subject to change upon finalization of
purchase accounting, and any such change may have a material
effect on the Companys results of operations. The
components of acquired intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
As of March 31, 2007
|
|
|
Gross
|
|
|
|
|
Net
|
|
Gross
|
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
|
Carrying
|
|
|
Amount
|
|
Amortization
|
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
|
Amount
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related intangibles
|
|
$
|
449,623
|
|
$
|
(160,971
|
)
|
|
$
|
288,652
|
|
$
|
211,196
|
|
$
|
(69,000
|
)
|
|
$
|
142,196
|
Licenses and other intangibles
|
|
|
39,797
|
|
|
(11,059
|
)
|
|
|
28,738
|
|
|
74,864
|
|
|
(29,140
|
)
|
|
|
45,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
489,420
|
|
$
|
(172,030
|
)
|
|
$
|
317,390
|
|
$
|
286,060
|
|
$
|
(98,140
|
)
|
|
$
|
187,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible amortization expense recognized from continuing
operations during fiscal years 2008, 2007, and 2006 was
$112.3 million, $37.1 million and $37.2 million,
respectively. As of March 31, 2008, the weighted-average
remaining useful lives of the Companys intangible assets
were approximately 2.4 years and 2.0 years for
customer-related intangibles, and licenses and other
intangibles, respectively. The estimated future annual
amortization expense for acquired intangible assets is as
follows:
|
|
|
|
Fiscal Year Ending March 31,
|
|
Amount
|
|
|
(In thousands)
|
|
2009
|
|
$
|
105,903
|
2010
|
|
|
85,782
|
2011
|
|
|
79,969
|
2012
|
|
|
19,833
|
2013
|
|
|
11,037
|
Thereafter
|
|
|
14,866
|
|
|
|
|
Total amortization expense
|
|
$
|
317,390
|
|
|
|
|
Derivative
Instruments and Hedging Activities
All derivative instruments are recognized on the consolidated
balance sheet at fair value. If the derivative instrument is
designated as a cash flow hedge, effectiveness is measured
quarterly based on a regression of the forward rate on the
derivative instrument against the forward rate for the furthest
time period the hedged item can be recognized and still be
within the documented hedge period. The effective portion of
changes in the fair value of the derivative instrument is
recognized in shareholders equity as a separate component
of accumulated other comprehensive income, and recognized in the
consolidated statement of operations when the hedged item
affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings
immediately. If the derivative instrument is designated as a
fair value hedge, the changes in the fair value of the
derivative instrument and of the hedged item attributable to the
hedged risk are recognized in earnings in the current period.
Other
Assets
The Company has certain investments in, and notes receivable
from, non-publicly traded companies, which are included within
other assets in the Companys consolidated balance sheets.
Non-majority-owned investments are accounted for using the
equity method when the Company has an ownership percentage equal
to or greater than
59
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
20%, or has the ability to significantly influence the operating
decisions of the issuer; otherwise the cost method is used. The
Company monitors these investments for impairment and makes
appropriate reductions in carrying values as required.
As of March 31, 2008 and 2007, the Companys
investments in non-majority owned companies totaled
$177.2 million and $250.5 million, respectively, of
which $15.3 million and $136.1 million, respectively,
were accounted for using the equity method. In January 2008, the
Company liquidated all of its approximately 35% investment in
the common stock of Relacom Holding AB (Relacom),
which was accounted for under the equity method. The Company
decided to sell its interest in Relacom to the majority holder
in December 2007 rather than participate in a new equity round
of financing by Relacom. The Company received approximately
$57.4 million of cash proceeds in connection with the
divestiture of this equity investment and recognized an
impairment loss of approximately $48.5 million in the
quarter ended December 31, 2007 based on the price at which
it was sold on January 7, 2008. The equity in the earnings
or losses of the Companys equity method investments has
not been material to its consolidated results of operations for
fiscal years 2008, 2007 and 2006.
Relacoms financial statements are denominated in Swedish
krona and are prepared in accordance with accounting principles
generally accepted in Sweden. The Company records its equity in
losses of Relacom based on Relacoms actual results, after
translation into U.S. dollars and adjusted for differences
with U.S. GAAP, which are primarily to reverse the
amortization of goodwill recognized in accordance with Swedish
GAAP and not allowed under U.S. GAAP, and to recognize
amortization expense on certain intangible assets that are
attributable to the Companys investment over the
underlying equity in net assets of Relacom. Summarized financial
information of Relacom in accordance with U.S. GAAP and
translated into U.S. dollars as follows.
Relacom
AB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Condensed Consolidated Statements of Operations Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,062,372
|
|
|
$
|
1,030,043
|
|
|
$
|
500,078
|
|
Cost of sales
|
|
|
855,179
|
|
|
|
814,727
|
|
|
|
381,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
207,193
|
|
|
|
215,316
|
|
|
|
118,339
|
|
Selling, general and administrative expenses
|
|
|
181,315
|
|
|
|
183,703
|
|
|
|
110,265
|
|
Intangible amortization
|
|
|
14,583
|
|
|
|
20,750
|
|
|
|
15,500
|
|
Interest and other expense, net
|
|
|
36,297
|
|
|
|
25,009
|
|
|
|
11,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(25,002
|
)
|
|
|
(14,146
|
)
|
|
|
(18,570
|
)
|
Provision for (benefit from) income taxes
|
|
|
1,253
|
|
|
|
(628
|
)
|
|
|
2,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,255
|
)
|
|
$
|
(13,518
|
)
|
|
$
|
(20,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Condensed Consolidated Statements of Cash Flows Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,255
|
)
|
|
$
|
(13,518
|
)
|
|
$
|
(20,964
|
)
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,072
|
|
|
|
34,445
|
|
|
|
22,914
|
|
Changes in operating assets and liabilities
|
|
|
(20,926
|
)
|
|
|
74,631
|
|
|
|
62,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
(22,109
|
)
|
|
|
95,558
|
|
|
|
64,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7,217
|
)
|
|
|
(18,838
|
)
|
|
|
(40,902
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(79,747
|
)
|
|
|
(21,436
|
)
|
|
|
(682,352
|
)
|
Sales (purchases) of investments
|
|
|
22,674
|
|
|
|
(23,911
|
)
|
|
|
(41,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(64,290
|
)
|
|
|
(64,185
|
)
|
|
|
(764,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings and long-term debt
|
|
|
86,607
|
|
|
|
87,402
|
|
|
|
544,968
|
|
Repayment of bank borrowings and long-term debt
|
|
|
|
|
|
|
(142,809
|
)
|
|
|
(30,299
|
)
|
Proceeds from issuance of capital stock
|
|
|
20,814
|
|
|
|
19,871
|
|
|
|
196,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
107,421
|
|
|
|
(35,536
|
)
|
|
|
711,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
3,116
|
|
|
|
1,920
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
24,138
|
|
|
$
|
(2,243
|
)
|
|
$
|
11,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
9,123
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
149,749
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
13,320
|
|
|
|
|
|
Services in progress
|
|
|
|
|
|
|
83,293
|
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
34,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
290,236
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
24,918
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
807,040
|
|
|
|
|
|
Other intangible assets, net
|
|
|
|
|
|
|
128,395
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
68,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
1,319,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings and current portion of long-term debt
|
|
|
|
|
|
|
21,755
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
53,058
|
|
|
|
|
|
Other current liabilities
|
|
|
|
|
|
|
280,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
355,712
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
478,129
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
109,307
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
376,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
|
|
|
$
|
1,319,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In calculating the U.S. GAAP basis for the operating
results of Relacom, the Company reversed approximately
$56.5 million, $60.1 million and $29.4 million of
amortization expense recognized by Relacom for the amortization
of goodwill in fiscal years 2008, 2007 and 2006, respectively,
and recorded approximately $14.6 million,
$20.8 million and $15.5 million of additional
intangible amortization expense during fiscal years, 2008, 2007
and 2006, respectively. Additionally, the Company reversed
approximately $19.0 million of restructuring costs
recognized by Relacom during fiscal year 2007 for the
elimination of excess capacity, redundant assets and unnecessary
functions that were recognized as assumed liabilities in
accordance with U.S. GAAP.
Because of the additional time required to prepare and analyze
the financial statements of Relacom, the Company recorded its
equity in the losses of Relacom on a one-month lag. Accordingly,
the summarized financial results of Relacom presented above are
derived from Relacoms financial information for the period
from March 1,
61
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007 through the date of disposition on January 7, 2008 for
fiscal year 2008, from March 1, 2006 through
February 28, 2007 for fiscal year 2007 and from
August 19, 2005 (inception) through February 28, 2006
for fiscal year 2006. The balance sheet information is as of
February 28, 2007. As the investment was sold during the
2008 fiscal year, no balance sheet has been presented for the
period ending March 31, 2008.
As of March 31, 2008 and 2007, notes receivable from these
non-majority owned investments totaled $388.1 million and
$343.9 million, respectively. The increase in notes
receivable during fiscal year 2008 is attributable to the
accretion of interest income that is payable upon redemption of
the notes.
Other assets also include the Companys investment
participation in its trade receivables securitization program as
discussed further in Note 6, Trade Receivables
Securitization.
Restructuring
Charges
The Company recognizes restructuring charges related to its
plans to close or consolidate duplicate manufacturing and
administrative facilities. In connection with these activities,
the Company records restructuring charges for employee
termination costs, long-lived asset impairment and other
exit-related costs.
The recognition of restructuring charges requires the Company to
make certain judgments and estimates regarding the nature,
timing and amount of costs associated with the planned exit
activity. To the extent the Companys actual results differ
from its estimates and assumptions, the Company may be required
to revise the estimates of future liabilities, requiring the
recognition of additional restructuring charges or the reduction
of liabilities already recognized. Such changes to previously
estimated amounts may be material to the consolidated financial
statements. At the end of each reporting period, the Company
evaluates the remaining accrued balances to ensure that no
excess accruals are retained and the utilization of the
provisions are for their intended purpose in accordance with
developed exit plans.
Stock-Based
Compensation
Equity
Compensation Plans
As of March 31, 2008, the Company grants equity
compensation awards from four plans: the 2001 Equity Incentive
Plan (the 2001 Plan), the 2002 Interim Incentive
Plan (the 2002 Plan), the 2004 Award Plan for New
Employees (the 2004 Plan) and the Solectron
Corporation 2002 Stock Plan, which was assumed by the Company as
a result of its acquisition of Solectron. These plans are
collectively referred to as the Companys equity
compensation plans below.
The 2001 Plan provides for grants of up to 42.0 million
ordinary shares (plus shares available under prior Company plans
and assumed plans consolidated into the 2001 Plan), after
shareholders approved a 10.0 million share increase on
September 27, 2007. The 2001 Plan provides for grants of
incentive and nonqualified stock options and share bonus awards
to employees, officers and non-employee directors, and also
contains an automatic option grant program for non-employee
directors. Options issued under the 2001 Plan generally vest
over four years and generally expire ten years from the date of
grant, except that options granted to non-employee directors
expire five years from the date of grant.
The 2002 Plan provides for grants of up to 20.0 million
ordinary shares. The 2002 Plan provides for grants of
nonqualified stock options and share bonus awards to employees
and officers. Options issued under the 2002 Plan generally vest
over four years and generally expire ten years from the date of
grant.
The 2004 Plan provides for grants of up to 10.0 million
ordinary shares. The 2004 Plan provides for grants of
nonqualified stock options and share bonus awards to new
employees. Options issued under the 2004 Plan generally vest
over four years and generally expire ten years from the date of
grant.
62
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the acquisition of Solectron (see
Note 12), the Company assumed the Solectron corporation
2002 Stock Plan (the SLR Plan), including all
options to purchase Solectron common stock with exercise prices
equal to, or less than, $5.00 per share of Solectron common
stock outstanding under such plan. Each option assumed was
converted into an option to acquire the Companys ordinary
shares at the applicable exchange ratio of 0.345. As a result,
the Company assumed approximately 7.4 million vested and
unvested options with exercise prices ranging between $5.45 and
$14.41 per Flextronics ordinary share. Further, there were
approximately 19.4 million shares available for grant under
the SLR Plan when it was assumed by the Company.
The SLR plan provides for grants of nonqualified stock options
and share bonus awards to new employees and to legacy Solectron
employees who joined the Company in connection with the
acquisition. Options issued under the SLR Plan generally vest
over four years and generally expire ten years from the date of
grant.
The exercise price of options granted under the Companys
equity compensation plans is determined by the Companys
Board of Directors or the Compensation Committee and typically
equals or exceeds the closing price of the Companys
ordinary shares on the date of grant.
The Company grants share bonus awards under its equity
compensation plans. Share bonus awards are rights to acquire a
specified number of ordinary shares for no cash consideration in
exchange for continued service with the Company. Share bonus
awards generally vest in installments over a three- to five-year
period and unvested share bonus awards are forfeited upon
termination of employment. Vesting for certain share bonus
awards is contingent upon both service and performance criteria.
Adoption
of SFAS 123(R)
Prior to April 1, 2006, the Companys equity
compensation plans were accounted for under the recognition and
measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), and related
Interpretations. The Company applied the disclosure only
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation
expense was recorded for stock options granted with exercise
prices greater than or equal to the fair value of the underlying
ordinary shares at the option grant date. Costs of share bonus
awards granted, determined to be the closing price of the
Companys ordinary shares at the date of grant, were
recognized as compensation expense ratably over the respective
vesting period. Unearned compensation associated with these
share bonus awards was $4.1 million as of March 31,
2006 and was included as a component of shareholders
equity in the consolidated balance sheet.
Effective April 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123 (Revised 2004),
Share-Based Payment,
(SFAS 123(R)), requiring the recognition of
expense related to the fair value of the Companys
stock-based compensation awards. The Company elected to use the
modified prospective transition method as permitted by
SFAS 123(R), and therefore has not restated financial
results for prior periods. Under this transition method,
stock-based compensation expense for fiscal years 2008 and 2007
includes compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of March 31,
2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS 123, as adjusted for
estimated forfeitures. Unearned compensation as of
March 31, 2006 included as a component of
shareholders equity in the consolidated balance sheet was
reversed. Stock-based compensation expense for all stock-based
compensation awards granted subsequent to March 31, 2006
was based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123(R). The Company generally
recognizes compensation expense for all stock-based payment
awards on a straight-line basis over the respective requisite
service periods of the awards. For share bonus awards where
vesting is contingent upon both a service and a performance
condition, compensation expense is recognized on a graded
attribute basis over the respective requisite service period of
the award when achievement of the performance condition is
considered probable.
Prior to the adoption of SFAS 123(R), forfeitures were
recognized as they occurred, and compensation previously
recognized was reversed for forfeitures of unvested stock-based
awards. As a result of the Companys
63
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adoption of SFAS 123(R), management now makes an estimate
of expected forfeitures and is recognizing compensation expense
only for those equity awards expected to vest. The cumulative
effect from this change in accounting principle was not material
for fiscal year 2007.
Stock-Based
Compensation Expense
The following table summarizes the Companys stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Cost of sales
|
|
$
|
6,850
|
|
$
|
3,884
|
Selling, general and administrative expenses
|
|
|
40,791
|
|
|
27,884
|
Discontinued operations
|
|
|
|
|
|
2,264
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
47,641
|
|
$
|
34,032
|
|
|
|
|
|
|
|
As required by SFAS 123(R), management made an estimate of
expected forfeitures and is recognizing compensation costs only
for those equity awards expected to vest. When estimating
forfeitures, the Company considers voluntary termination
behavior as well as an analysis of actual option forfeitures.
Total stock-based compensation capitalized as part of inventory
during the fiscal years ended March 31, 2008 and 2007 was
not material.
As of March 31, 2008, the total compensation cost related
to unvested stock options granted to employees under the
Companys equity compensation plans, but not yet
recognized, was approximately $59.8 million, net of
estimated forfeitures of $4.1 million. This cost will be
amortized on a straight-line basis over a weighted-average
period of approximately 2.6 years and will be adjusted for
subsequent changes in estimated forfeitures. As of
March 31, 2008, the total unrecognized compensation cost
related to unvested share bonus awards granted to employees
under the Companys equity compensation plans was
approximately $74.0 million, net of estimated forfeitures
of approximately $3.5 million. This cost will be amortized
generally on a straight-line basis over a weighted-average
period of approximately 3.2 years and will be adjusted for
subsequent changes in estimated forfeitures.
Prior to the adoption of SFAS 123(R), the Company presented
all tax benefits of deductions resulting from the exercise of
stock options as operating cash flows in its statement of cash
flows, when applicable. In accordance with SFAS 123(R), the
cash flows resulting from excess tax benefits (tax benefits
related to the excess of proceeds from employee exercises of
stock options over the stock-based compensation cost recognized
for those options) are classified as financing cash flows.
During fiscal years 2008, 2007 and 2006, the Company did not
recognize any excess tax benefits as a financing cash inflow
related to its equity compensation plans.
Determining
Fair Value
Valuation and Amortization Method The Company
estimates the fair value of stock options granted using the
Black-Scholes option-pricing formula and a single option award
approach. This fair value is then amortized on a straight-line
basis over the requisite service periods of the awards, which is
generally the vesting period. The fair market value of share
bonus awards granted is the closing price of the Companys
ordinary shares on the date of grant and is generally recognized
as compensation expense on a straight-line basis over the
respective vesting period. For share bonus awards where vesting
is contingent upon both a service and a performance condition,
compensation expense is recognized on a graded attribute basis
over the respective requisite service period of the award when
achievement of the performance condition is considered probable.
Expected Term The Companys expected
term used in the Black-Scholes valuation method represents the
period that the Companys stock options are expected to be
outstanding and is determined based on historical
64
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
experience of similar awards, giving consideration to the
contractual terms of the stock options, vesting schedules and
expectations of future employee behavior as influenced by
changes to the terms of its stock options.
Expected Volatility The Companys
expected volatility used in the Black-Scholes valuation method
is derived from a combination of implied volatility related to
publicly traded options to purchase Flextronics ordinary shares
and historical variability in the Companys periodic stock
price.
Expected Dividend The Company has never paid
dividends on its ordinary shares and currently does not intend
to do so, and accordingly, the dividend yield percentage is zero
for all periods.
Risk-Free Interest Rate The Company bases the
risk-free interest rate used in the Black-Scholes valuation
method on the implied yield currently available on
U.S. Treasury constant maturities issued with a term
equivalent to the expected term of the option.
Fair Value The fair value of the
Companys stock options granted to employees for fiscal
years 2008, 2007 and 2006 was estimated using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected term
|
|
|
4.6 years
|
|
|
|
4.7 years
|
|
|
|
4.0 years
|
|
Expected volatility
|
|
|
36.2
|
%
|
|
|
38.0
|
%
|
|
|
38.8
|
%
|
Expected dividends
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
4.2
|
%
|
|
|
4.6
|
%
|
|
|
3.8
|
%
|
Weighted-average fair value
|
|
$
|
4.29
|
|
|
$
|
4.64
|
|
|
$
|
4.17
|
|
Stock-Based
Awards Activity
The following is a summary of option activity for the
Companys equity compensation plans, excluding unvested
share bonus awards (Price reflects the
weighted-average exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
As of March 31, 2007
|
|
As of March 31, 2006
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Outstanding, beginning of fiscal year
|
|
|
51,821,915
|
|
|
$
|
11.63
|
|
|
55,042,556
|
|
|
$
|
12.04
|
|
|
57,578,401
|
|
|
$
|
12.67
|
Granted
|
|
|
5,391,475
|
|
|
|
11.66
|
|
|
10,039,250
|
|
|
|
11.09
|
|
|
11,549,454
|
|
|
|
11.80
|
Assumed in business combination (Note 13)
|
|
|
7,355,133
|
|
|
|
10.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,291,426
|
)
|
|
|
8.39
|
|
|
(2,842,770
|
)
|
|
|
7.44
|
|
|
(5,562,348
|
)
|
|
|
7.38
|
Forfeited
|
|
|
(7,735,684
|
)
|
|
|
12.31
|
|
|
(10,417,121
|
)
|
|
|
14.42
|
|
|
(8,522,951
|
)
|
|
|
18.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of fiscal year
|
|
|
52,541,413
|
|
|
$
|
11.67
|
|
|
51,821,915
|
|
|
$
|
11.63
|
|
|
55,042,556
|
|
|
$
|
12.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of fiscal year
|
|
|
39,931,387
|
|
|
$
|
11.80
|
|
|
35,692,029
|
|
|
$
|
12.12
|
|
|
42,475,818
|
|
|
$
|
12.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options exercised (calculated
as the difference between the exercise price of the underlying
award and the price of the Companys ordinary shares
determined as of the time of option exercise) under the
Companys equity compensation plans was $14.5 million,
$12.8 million and $27.7 million during fiscal years
2008, 2007 and 2006, respectively.
Cash received from option exercises under all equity
compensation plans was $35.9 million, $21.1 million
and $41.0 million for fiscal years 2008, 2007 and 2006,
respectively.
65
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the composition of options
outstanding and exercisable as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Options Exercisable
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Number of
|
|
Contractual
|
|
Average
|
|
Number of
|
|
Average
|
|
|
Shares
|
|
Life
|
|
Exercise
|
|
Shares
|
|
Exercise
|
Range of Exercise Prices
|
|
Outstanding
|
|
(In Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
|
$ 0.42 - $5.88
|
|
|
2,539,042
|
|
|
1.88
|
|
$
|
4.89
|
|
|
2,539,042
|
|
$
|
4.89
|
$ 5.96 - $7.90
|
|
|
7,103,100
|
|
|
4.20
|
|
|
7.84
|
|
|
7,103,100
|
|
|
7.84
|
$ 8.01 - $10.45
|
|
|
7,094,133
|
|
|
7.11
|
|
|
9.96
|
|
|
4,065,791
|
|
|
9.78
|
$10.53 - $11.10
|
|
|
7,331,433
|
|
|
7.28
|
|
|
10.95
|
|
|
4,403,330
|
|
|
10.97
|
$11.23 - $11.53
|
|
|
6,107,366
|
|
|
7.93
|
|
|
11.38
|
|
|
2,954,882
|
|
|
11.44
|
$11.54 - $12.37
|
|
|
5,649,970
|
|
|
7.31
|
|
|
12.14
|
|
|
4,550,844
|
|
|
12.26
|
$12.40 - $13.18
|
|
|
6,125,173
|
|
|
7.53
|
|
|
12.81
|
|
|
3,730,590
|
|
|
12.93
|
$13.25 - $16.57
|
|
|
5,930,489
|
|
|
4.61
|
|
|
15.19
|
|
|
5,923,101
|
|
|
15.20
|
$16.61 - $29.94
|
|
|
4,660,707
|
|
|
4.67
|
|
|
18.74
|
|
|
4,660,707
|
|
|
18.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.42 - $29.94
|
|
|
52,541,413
|
|
|
6.15
|
|
$
|
11.67
|
|
|
39,931,387
|
|
$
|
11.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest
|
|
|
51,945,590
|
|
|
6.12
|
|
$
|
11.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, the aggregate intrinsic value for
options outstanding, vested and expected to vest (which includes
adjustments for expected forfeitures), and exercisable were
$23.5 million each, respectively. The aggregate intrinsic
value is calculated as the difference between the exercise price
of the underlying awards and the quoted price of the
Companys ordinary shares as of March 31, 2008 for the
approximately 11.1 million options that were in-the-money
at March 31, 2008. As of March 31, 2008, the weighted
average remaining contractual life for options exercisable was
5.40 years.
The following table summarizes the Companys share bonus
award activity for fiscal year 2008 (Price reflects
the weighted-average grant-date fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
As of March 31, 2007
|
|
As of March 31, 2006
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Unvested share bonus awards outstanding, beginning of fiscal year
|
|
|
4,332,500
|
|
|
$
|
8.11
|
|
|
646,000
|
|
|
$
|
8.40
|
|
|
995,000
|
|
|
$
|
8.11
|
Granted
|
|
|
6,540,197
|
|
|
|
11.42
|
|
|
4,281,512
|
|
|
|
8.28
|
|
|
76,188
|
|
|
|
10.87
|
Vested
|
|
|
(1,564,733
|
)
|
|
|
6.71
|
|
|
(347,012
|
)
|
|
|
8.90
|
|
|
(333,188
|
)
|
|
|
8.12
|
Forfeited
|
|
|
(441,600
|
)
|
|
|
10.24
|
|
|
(248,000
|
)
|
|
|
10.57
|
|
|
(92,000
|
)
|
|
|
8.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested share bonus awards outstanding, end of fiscal year
|
|
|
8,866,364
|
|
|
$
|
10.70
|
|
|
4,332,500
|
|
|
$
|
8.11
|
|
|
646,000
|
|
|
$
|
8.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 6.5 million unvested share bonus awards granted
under the Companys equity compensation plans during fiscal
year 2008, 1,162,500 were granted to certain key employees
whereby vesting is contingent upon both a service requirement
and the Companys achievement of certain longer-term goals
over periods ranging between three to five years. Management
currently believes that achievement of these longer-term goals
is probable. Compensation expense for share bonus awards with
both a service and performance condition is being recognized on
a graded attribute basis over the respective requisite
contractual or derived service period of the awards.
66
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average closing price of the Companys
ordinary shares on the date of grant of unvested share bonus
awards was $10.82 during fiscal year 2007. The Company granted
1,715,000 unvested share bonus awards to certain key employees
during fiscal year 2007 in exchange for 3,150,000 fully vested
options to purchase the ordinary shares of the Company with a
weighted-average exercise price of $17.08 per ordinary share.
The aggregate fair value of the options surrendered was
approximately $11.8 million, or $3.74 per option, resulting
in additional compensation of approximately $7.8 million,
or $4.52 per share, for the unvested share bonus awards granted
in exchange. The fiscal year 2007 weighted-average grant-date
fair value of $8.28 per unvested share as reflected in the table
above includes only the incremental compensation attributable to
the modified awards. These share bonus awards vest over a period
between three to five years. Further, vesting for 775,000 of
these share bonus awards, and 212,500 of additional share bonus
awards granted during fiscal year 2007, is contingent upon both
a service requirement and the Companys achievement of
certain longer-term goals, which are currently estimated as
probable of being achieved.
The total intrinsic value of shares vested under the
Companys equity compensation plans was $17.7 million,
$3.8 million and $4.2 million during fiscal years
2008, 2007 and 2006, respectively, based on the closing price of
the Companys ordinary shares on the date vested.
Pro-forma
Disclosures
The following table illustrates the effect on net income and net
income per share as if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based
compensation during fiscal year 2006:
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 31, 2006
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Net income, as reported
|
|
$
|
141,162
|
|
Add: Stock-based compensation expense included in
reported net income, net of tax
|
|
|
2,662
|
|
Less: Fair value compensation costs, net of tax
|
|
|
(67,195
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
76,629
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
As reported
|
|
$
|
0.25
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.13
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
As reported
|
|
$
|
0.24
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.13
|
|
|
|
|
|
|
For purposes of this pro forma disclosure, the value of the
options was estimated using a Black-Scholes option-pricing
formula and amortized on a straight-line basis over the
respective requisite service periods of the awards, with
forfeitures recognized as they occurred. Stock-based
compensation also included expense attributable to the
Companys 1997 Employee Stock Purchase Plan (the
Purchase Plan), which was terminated during fiscal
year
67
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006. The fair value of shares issued under the Purchase Plan
for fiscal year 2006 was estimated using the following
weighted-average assumptions:
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
March 31, 2006
|
|
Expected term
|
|
|
0.5 years
|
|
Expected volatility
|
|
|
40.0
|
%
|
Expected dividend
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
On February 7, 2006, the Companys Board of Directors
approved accelerating the vesting of previously unvested options
to purchase the Companys ordinary shares held by current
employees, including executive officers, priced between $12.37
and $12.98. No options held by non-employee directors were
subject to the acceleration. The acceleration was effective as
of February 7, 2006, provided that holders of incentive
stock options (ISOs) within the meaning of
Section 422 of the internal Revenue code of 1986, as
amended, had the opportunity to decline the acceleration of ISO
options in order to prevent changing the status of the ISO
option for federal income tax purposes to a non-qualified stock
option.
The acceleration of these options was done primarily to
eliminate future compensation expense the Company would
otherwise recognize in its consolidated statement of operations
with respect to these options upon the adoption of
SFAS 123(R). In addition, because these options had
exercise prices in excess of the then current market values and
were not fully achieving their original objectives of incentive
compensation and employee retention, management believed that
the acceleration may have a positive effect on employee morale
and retention. The future expense that was eliminated from the
February 2006 accelerations was approximately $35.3 million
(of which approximately $12.8 million was attributable to
executive officers). The amount is reflected in the pro forma
net income for the fiscal year ended March 31, 2006.
Earnings
(Loss) Per Share
SFAS No. 128, Earnings Per Share
(SFAS 128), requires entities to present
both basic and diluted earnings per share. Basic earnings per
share exclude dilution and is computed by dividing net income by
the weighted-average number of ordinary shares outstanding
during the applicable periods.
Diluted earnings per share reflects the potential dilution from
stock options, share bonus awards and convertible securities.
The potential dilution from stock options exercisable into
ordinary share equivalents and share bonus awards was computed
using the treasury stock method based on the average fair market
value of the Companys ordinary shares for the period. The
potential dilution from the conversion spread (excess of
conversion value over face value) of the Subordinated Notes
convertible into ordinary share equivalents was calculated as
the quotient of the conversion spread and the average fair
market value of the Companys ordinary shares for the
period.
68
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reflects the basic weighted-average ordinary
shares outstanding and diluted weighted-average ordinary share
equivalents used to calculate basic and diluted income per share
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
|
(In thousands, except per share amounts)
|
|
Basic earnings (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(639,370
|
)
|
|
$
|
320,900
|
|
$
|
110,518
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding
|
|
|
720,523
|
|
|
|
588,593
|
|
|
573,520
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) from continuing operations per share
|
|
$
|
(0.89
|
)
|
|
$
|
0.55
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(639,370
|
)
|
|
$
|
320,900
|
|
$
|
110,518
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding
|
|
|
720,523
|
|
|
|
588,593
|
|
|
573,520
|
Weighted-average ordinary share equivalents from stock options
and awards(1)
|
|
|
|
|
|
|
6,739
|
|
|
8,358
|
Weighted-average ordinary share equivalents from convertible
notes(2)
|
|
|
|
|
|
|
1,519
|
|
|
18,726
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares and ordinary share equivalents
outstanding
|
|
|
720,523
|
|
|
|
596,851
|
|
|
600,604
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) from continuing operations per share
|
|
$
|
(0.89
|
)
|
|
$
|
0.54
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of the Companys
net loss from continuing operations, ordinary share equivalents
from approximately 5.7 million options and share bonus
awards were excluded from the calculation of diluted earnings
(loss) from continuing operations per share during the
twelve-month period ended March 31, 2008. Additionally,
ordinary share equivalents from stock options to purchase
approximately 39.4 million, 39.5 million and
33.1 million shares during fiscal years 2008, 2007 and
2006, respectively, were excluded from the computation of
diluted earnings per share primarily because the exercise price
of these options was greater than the average market price of
the Companys ordinary shares during the respective periods.
|
|
(2)
|
|
Ordinary share equivalents from the
Zero Coupon Convertible Junior Subordinated Notes of
approximately 18.7 million shares were included as ordinary
share equivalents during fiscal year 2006. Effective
April 1, 2006, the Company determined it has the positive
intent and ability to settle the principal amount of its Zero
Coupon Convertible Junior Subordinated Notes in cash and settle
any conversion spread (excess of conversion value over face
value) in stock. As discussed below in Note 4, Bank
Borrowings and Long-Term Debt, on July 14, 2006,
these Notes were amended to provide for settlement of the
principal amount in cash and the issuance of shares to settle
any conversion spread upon maturity. Accordingly, approximately
18.6 million ordinary share equivalents related to the
principal portion of the Notes are excluded from the computation
of diluted earnings per share, during fiscal years 2008 and
2007. As a result of the Companys reported net loss from
continuing operations, ordinary share equivalents from the
conversion spread of approximately 1.2 million shares were
excluded from the calculation of diluted earnings (loss) from
continuing operations per share during the twelve-month period
ended March 31, 2008. Approximately 1.5 million
ordinary share equivalents from the conversion spread have been
included as common stock equivalents during fiscal year 2007.
|
|
|
|
In addition, as the Company has the
positive intent and ability to settle the principal amount of
its 1% Convertible Subordinated Notes due August 2010 in
cash, approximately 32.2 million ordinary share equivalents
related to the principal portion of the Notes are excluded from
the computation of diluted earnings per share. The Company
intends to settle any conversion spread (excess of the
conversion value over face value) in stock. During fiscal years
2008, 2007 and 2006 the conversion obligation was less than the
principal portion of the Convertible Notes and accordingly, no
additional shares were included as ordinary share equivalents.
|
Recent
Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133
(SFAS 161). This statement changes the
disclosure
69
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures stating
how and why an entity uses derivative instruments; how
derivatives and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133) and its related interpretations;
and how derivative instruments and related hedge items affect an
entitys financial position, financial performance and cash
flows. SFAS 161 is effective in fiscal years beginning
after November 15, 2008 and is required to be adopted by
the Company in the first quarter of fiscal year 2010. The
Company does not expect the adoption of SFAS 161 will have
a material impact on its consolidated results of operations,
financial condition and cash flows.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS 160),
which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable
to the parent and to the non-controlling interest, changes in a
parents ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting
requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the non-controlling owners. SFAS 160 is
effective for fiscal years beginning after December 15,
2008, and is required to be adopted by the Company in the first
quarter of fiscal year 2010. The Company does not expect the
adoption of the provisions of SFAS 160 will have a material
impact on its consolidated results of operations, financial
condition and cash flows.
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159).
SFAS 159 permits entities to choose to measure certain
financial instruments and certain other items at fair value at
specified election dates. The fair value option may be applied
instrument by instrument with certain exceptions and is applied
generally on an irrevocable basis to the entire instrument.
SFAS 159 is effective in fiscal years beginning after
November 15, 2007 and is required to be adopted by us in
the first quarter of fiscal year 2009. The Company does not
expect the adoption of SFAS 159 will have a material impact
on its consolidated results of operations, financial condition
and cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value under generally
accepted accounting principles, and expands the requisite
disclosures for fair value measurements. SFAS 157 is
effective in fiscal years beginning after November 15, 2007
for financial assets and liabilities, as well as for any other
assets and liabilities that are carried at fair value on a
recurring basis, and should be applied prospectively. The
adoption of the provisions of SFAS 157 related to financial
assets and liabilities, and other assets and liabilities that
are carried at fair value on a recurring basis is not
anticipated to materially impact the Companys consolidated
financial position, results of operations and cash flows. The
FASB provided for a one-year deferral of the provisions of
SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the consolidated
financial statements on a non-recurring basis. The Company is
currently evaluating the impact of adopting SFAS 157 for
non-financial assets and liabilities that are recognized or
disclosed on a non-recurring basis.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)), which replaces
SFAS No. 141. SFAS 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which are intended to enable
users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for fiscal
years that begin after December 15, 2008, and should be
applied prospectively for all business combinations entered into
after the date of adoption. The Company is currently evaluating
the impact of adopting SFAS 141(R).
70
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES
|
The following table represents supplemental cash flow
disclosures and non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Net cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
126,975
|
|
$
|
109,729
|
|
$
|
65,052
|
Income taxes
|
|
$
|
59,553
|
|
$
|
34,248
|
|
$
|
25,197
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Fair value of seller notes received from sale of divested
operations
|
|
$
|
|
|
$
|
204,920
|
|
$
|
38,278
|
Issuance of ordinary shares for acquisition of businesses
|
|
$
|
2,519,670
|
|
$
|
299,608
|
|
$
|
27,907
|
Fair value of vested options assumed in acquisition of business
|
|
$
|
11,282
|
|
$
|
|
|
$
|
|
Issuance of ordinary shares upon conversion of debt
|
|
$
|
|
|
$
|
|
|
$
|
5,000
|
|
|
4.
|
BANK
BORROWINGS AND LONG-TERM DEBT
|
Bank borrowings and long-term debt was comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Short term bank borrowings
|
|
$
|
10,766
|
|
|
$
|
8,094
|
|
6.50% senior subordinated notes due May 2013
|
|
|
399,622
|
|
|
|
399,622
|
|
6.25% senior subordinated notes due November 2014
|
|
|
402,090
|
|
|
|
389,119
|
|
1.00% convertible subordinated notes due August 2010
|
|
|
500,000
|
|
|
|
500,000
|
|
0.00% convertible junior subordinated notes due July 2009
|
|
|
195,000
|
|
|
|
195,000
|
|
Term Loan Agreement, including current portion
|
|
|
1,726,456
|
|
|
|
|
|
Outstanding under revolving lines of credit
|
|
|
161,000
|
|
|
|
|
|
Other
|
|
|
19,626
|
|
|
|
8,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,414,560
|
|
|
|
1,500,104
|
|
Current portion
|
|
|
(27,966
|
)
|
|
|
(8,094
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
3,386,594
|
|
|
$
|
1,492,010
|
|
|
|
|
|
|
|
|
|
|
71
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Maturities for the Companys long-term debt are as follows:
|
|
|
|
Fiscal Year Ending March 31,
|
|
Amount
|
|
|
(In thousands)
|
|
2009
|
|
$
|
27,966
|
2010
|
|
|
212,029
|
2011
|
|
|
524,546
|
2012
|
|
|
16,691
|
2013
|
|
|
650,735
|
Thereafter
|
|
|
1,982,593
|
|
|
|
|
Total
|
|
$
|
3,414,560
|
|
|
|
|
Revolving
Credit Facilities and Other Credit Lines
On May 10, 2007, the Company entered into a five-year
$2.0 billion credit facility that expires in May 2012,
which replaced the Companys $1.35 billion credit
facility previously existing at March 31, 2007. As of
March 31, 2008, there was $161.0 million outstanding
under the $2.0 billion credit facility. As of
March 31, 2007, no borrowings were outstanding under the
$1.35 billion credit facility. Borrowings under the
$2.0 billion credit facility bear interest, at the
Companys option, either at (i) the base rate (the
greater of the agents prime rate or the federal funds rate
plus 0.50%); or (ii) LIBOR plus the applicable margin for
LIBOR loans ranging between 0.50% and 1.25%, based on the
Companys credit ratings. The Company is required to pay a
quarterly commitment fee ranging from 0.10% to 0.20% per annum
on the unutilized portion of the credit facility based on the
Companys credit ratings and, if the utilized portion of
the credit facility exceeds 50% of the total commitments, a
quarterly utilization fee of 0.125% on such utilized portion.
The Company is also required to pay letter of credit usage fees
ranging between 0.50% and 1.25% per annum (based on the
Companys credit ratings) on the amount of the daily
average outstanding letters of credit and a fronting fee of
(i) in the case of commercial letters of credit, 0.125% of
the amount available to be drawn under such letters of credit,
and (ii) in the case of standby letters of credit, 0.125%
per annum on the daily average undrawn amount of such letters of
credit.
The $2.0 billion credit facility is unsecured, and contains
customary restrictions on the Companys and its
subsidiaries ability to (i) incur certain debt,
(ii) make certain investments, (iii) make certain
acquisitions of other entities, (iv) incur liens,
(v) dispose of assets, (vi) make non-cash
distributions to shareholders, and (vii) engage in
transactions with affiliates. These covenants are subject to a
number of significant exceptions and limitations. The facility
also requires that the Company maintain a maximum ratio of total
indebtedness to EBITDA (earnings before interest expense, taxes,
depreciation and amortization), and a minimum fixed charge
coverage ratio, as defined, during the term of the credit
facility. Borrowings under the credit facility are guaranteed by
the Company and certain of its subsidiaries. As of
March 31, 2008, the Company was in compliance with the
covenants under the $2.0 billion credit facility.
The Company and certain of its subsidiaries also have various
uncommitted revolving credit facilities, lines of credit and
other loans in the amount of $754.0 million in the
aggregate, under which there were approximately
$10.8 million and $8.1 million of borrowings
outstanding as of March 31, 2008 and 2007, respectively.
These facilities, lines of credit and other loans bear annual
interest at the respective countrys inter bank
offering rate, plus an applicable margin, and generally have
maturities that expire on various dates through fiscal year
2008. The credit facilities are unsecured and the lines of
credit and other loans are primarily secured by accounts
receivable.
6.5% Senior
Subordinated Notes
The Company may redeem its 6.5% Senior Subordinated Notes
that are due May 2013 in whole or in part at redemption prices
of 103.250%, 102.167% and 101.083% of the principal amount
thereof if the redemption occurs
72
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during the respective
12-month
periods beginning on May 15 of the years 2008, 2009 and 2010,
respectively, and at a redemption price of 100% of the principal
amount thereof on and after May 15, 2011, in each case,
plus any accrued and unpaid interest to the redemption date.
The indenture governing the Companys outstanding
6.5% Senior Subordinated Notes contain certain covenants
that, among other things, limit the ability of the Company and
its restricted subsidiaries to (i) incur additional debt,
(ii) issue or sell stock of certain subsidiaries,
(iii) engage in certain asset sales, (iv) make
distributions or pay dividends, (v) purchase or redeem
capital stock, or (vi) engage in transactions with
affiliates. The covenants are subject to a number of significant
exceptions and limitations. As of March 31, 2008, the
Company was in compliance with the covenants under this
indenture.
6.25% Senior
Subordinated Notes
The Company may redeem its 6.25% Senior Subordinated Notes
that are due on November 15, 2014 in whole or in part at
redemption prices of 103.125%, 102.083% and 101.042% of the
principal amount thereof if the redemption occurs during the
respective
12-month
periods beginning on November 15 of the years 2009, 2010 and
2011, respectively, and at a redemption price of 100% of the
principal amount thereof on and after November 15, 2012, in
each case, plus any accrued and unpaid interest to the
redemption date. During fiscal year 2006, the Company
repurchased approximately $97.9 million principal amount of
these Notes. The associated loss was not material to the
Companys consolidated results of operations.
The indenture governing the Companys outstanding
6.25% Senior Subordinated Notes contain certain covenants
that, among other things, limit the ability of the Company and
its restricted subsidiaries to (i) incur additional debt,
(ii) issue or sell stock of certain subsidiaries,
(iii) engage in certain asset sales, (iv) make
distributions or pay dividends, (v) purchase or redeem
capital stock, or (vi) engage in transactions with
affiliates. The covenants are subject to a number of significant
exceptions and limitations. As of March 31, 2008, the
Company was in compliance with the covenants under this
indenture.
|
|
1%
|
Convertible
Subordinated Notes
|
The 1% Convertible Subordinated Notes are due in August
2010 and are convertible at any time prior to maturity into
ordinary shares of the Company at a conversion price of $15.525
(subject to certain adjustments).
Zero
Coupon Convertible Junior Subordinated Notes
On March 2, 2003, the Company entered into a Note Purchase
Agreement with Silver Lake Partners Cayman, L.P., Silver Lake
Investors Cayman, L.P. and Silver Lake Technology Investors
Cayman, L.P. (the Note Holders), affiliates of
Silver Lake Partners, pursuant to which the Company has
outstanding $195.0 million aggregate principal amount of
its Zero Coupon Convertible Junior Subordinated Notes originally
due 2007 to the Note Holders. On July 14, 2006, the Company
entered into a First Amendment to Note Purchase Agreement
(the First Amendment) with the Note
Holders, providing for the amendment of the Note Purchase
Agreement and the Notes to, among other things (i) extend
the maturity date of the Notes to July 31, 2009 and
(ii) define the means by which the Notes and any conversion
spread (excess of conversion value over face amount of
$10.50 per share) will be settled upon maturity. The
Notes may no longer be converted or redeemed prior to maturity,
other than in connection with certain change of control
transactions, and upon maturity will be settled by the payment
of cash equal to the face amount of the Notes and the issuance
of shares to settle any conversion spread of the Notes.
In July 2005, $5.0 million of the Notes were converted into
476,190 ordinary shares of the Company at a conversion price of
$10.50 per share.
73
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Solectron
Acquisition Related Debt
In connection with the Companys acquisition of Solectron,
the Company entered into a $1.759 billion term loan
facility, dated as of October 1, 2007 (the Term Loan
Agreement). The Term Loan Agreement was obtained for the
purposes of consummating the acquisition, to pay the applicable
repurchase or redemption price for Solectrons
8% Senior Subordinated Notes due 2016 (the
8% Notes) and 0.5% Senior Convertible
Notes due 2034 (Convertible Notes) in connection
with the acquisition (the Solectron Notes), and to
pay any related fees and expenses including acquisition-related
costs.
On October 1, 2007, the Company borrowed
$1.109 billion under the Term Loan Agreement to pay the
cash consideration in the acquisition and acquisition-related
fees and expenses. Of this amount, $500.0 million matures
five years from the date of the Term Loan Agreement and the
remainder matures in seven years. The remaining
$650.0 million of the term loan facility was available to
be drawn on up to three occasions and was available for
90 days from closing (the Delayed Draw
Facility). On October 15, 2007, the Company borrowed
$175.0 million under the Delayed Draw Facility to fund its
repurchase and redemption of the 8% Notes as discussed
further below, and $475.0 million remained available under
the Delayed Draw Facility. On December 28, 2007, the Term
Loan Agreement was amended to reduce the remaining amount
available under the Delayed Draw Facility to $450.0 million
and extend its availability until February 29, 2008. On
February 29, 2008, the Company borrowed the remaining
$450.0 million available under the Delayed Draw Facility to
fund its repurchase of the Convertible Notes as discussed
further below. The maturity date of the Delayed Draw Facility
loans is seven years from the date of the Term Loan Agreement.
Loans will amortize in quarterly installments in an amount equal
to 1% per annum with the balance due at the end of the fifth or
seventh year, as applicable. The Company may prepay the loans at
any time at 100% of par for any loan with a five year maturity
and at 101% of par for the first year and 100% of par
thereafter, for any loan with a seven year maturity, in each
case plus accrued and unpaid interest and reimbursement of the
lenders redeployment costs.
Borrowings under the Term Loan Agreement bear interest, at the
Companys option, either at (i) the base rate (the
greater of the agents prime rate or the federal funds rate
plus 0.50%) plus a margin of 1.25%; or (ii) LIBOR plus a
margin of 2.25%. In addition, during the period that the Delayed
Draw Facility was available, the Company was required to pay a
quarterly commitment fee ranging from 0.25% to 0.50% per annum
on the unutilized portion of the Delayed Draw Facility,
depending on the date of determination.
The Term Loan Agreement is unsecured, and contains customary
restrictions on the ability of the Company and its subsidiaries
to, among other things, (i) incur certain debt,
(ii) make certain investments, (iii) make certain
acquisitions of other entities, (iv) incur liens,
(v) dispose of assets, (vi) make non-cash
distributions to shareholders, and (vii) engage in
transactions with affiliates. These covenants are subject to a
number of significant exceptions and limitations. The Term Loan
Agreement also requires that the Company maintain a maximum
ratio of total indebtedness to EBITDA, during the term of the
Term Loan Agreement. Borrowings under the Term Loan Agreement
are guaranteed by the Company and certain of its subsidiaries.
As of March 31, 2008, the Company was in compliance with
the financial covenants under the Term loan Agreement.
On October 31, 2007, $1.5 million of the 8% Notes
were repurchased pursuant to a change in control repurchase
offer as required by the 8% Notes Indenture at a purchase
price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest. Additionally, on October 31,
2007, the remaining $148.5 million of the 8% Notes
were redeemed by the Company pursuant to optional redemption
procedures at a purchase price equal to the make-whole premium
provided for under the 8% Notes Indenture, plus, to the
extent not included in the
make-whole
premium, accrued and unpaid interest. The aggregate amount paid
by the Company for the repurchase and redemption of the
8% Notes was approximately $171.6 million.
On December 14, 2007, $447.4 million of the
Convertible Notes were repurchased pursuant to a change in
control repurchase offer as required by the Convertible Notes
Indentures at a purchase price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest.
74
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2008 the Company had approximately
$1.7 billion of borrowings outstanding under the Term Loan
Agreement, of which the floating interest payments on
$747.0 million has been swapped for fixed interest payments
(see Note 5).
Fair
Values
As of March 31, 2008, the approximate fair values of the
Companys 6.5% Senior Subordinated Notes,
6.25% Senior Subordinated Notes and 1% Convertible
Subordinated Notes were 95.50%, 92.25% and 95.75% of the face
values of the Notes, respectively, based on broker trading
prices.
Interest
Expense
For the fiscal years ended March 31, 2008, 2007 and 2006,
the Company recognized total interest expense of
$185.4 million, $140.6 million and
$113.3 million, respectively, on its debt obligations
outstanding during the period.
Due to their short-term nature, the carrying amount of the
Companys cash and cash equivalents, accounts receivable
and accounts payable approximates fair value. The Companys
cash equivalents are comprised of cash and bank deposits and
money market accounts. The Companys investment policy
limits the amount of credit exposure to 20% of the total
investment portfolio in any single issuer.
The Company is exposed to foreign currency exchange rate risk
inherent in forecasted sales, cost of sales, and assets and
liabilities denominated in non-functional currencies, and
commodity pricing risk inherent in forecasted cost of sales and
related assets and liabilities. The Company has established risk
management programs to protect against reductions in value and
volatility of future cash flows caused by changes in foreign
currency exchange rates and commodity prices. The Company enters
into short-term foreign currency forward and swap contracts to
hedge only those currency exposures associated with certain
assets and liabilities, primarily accounts receivable and
accounts payable, and cash flows denominated in non-functional
currencies. The Company has also entered into short-term
commodity swap contracts to hedge only those commodity price
exposures associated with inventory and accounts payable, and
cash flows attributable to commodity purchases. Gains and losses
on the Companys forward and swap contracts generally
offset losses and gains on the assets, liabilities and
transactions hedged, and accordingly, generally do not subject
the Company to risk of significant accounting losses. The
Company hedges committed exposures and does not engage in
speculative transactions. The credit risk of these forward and
swap contracts is minimized since the contracts are with large
financial institutions.
As of March 31, 2008 and 2007, the fair value of the
Companys short-term foreign currency contracts was not
material. As of March 31, 2008 and 2007, the Company has
included net deferred gains and losses, respectively, in other
comprehensive income relating to changes in fair value of its
foreign currency contracts. These deferred gains and losses were
not material, and the deferred gains as of March 31, 2008
are expected to be recognized in earnings over the next twelve
month period. The gains and losses recognized in earnings due to
hedge ineffectiveness were not material for all fiscal years
presented.
As of March 31, 2007, the Company had interest rate swap
transactions, which effectively converted $400.0 million of
the $402.1 million outstanding of its 6.25% Senior
Subordinated Notes, due November 2014, from a fixed to variable
interest rate. On November 28, 2007, the Company terminated
the interest swap transactions and received an insignificant
amount of cash consideration. The swaps were accounted for as
fair value hedges under SFAS 133. As of March 31,
2007, the Company had recognized $13.0 million in other
current liabilities to reflect the fair value of the interest
rate swaps, with a corresponding decrease to the carrying value
of the 6.25% Senior Subordinated Notes. As a result of the
termination of the interest rate swaps, on
75
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
November 28, 2007, the Company reversed the amount
recognized as a current liability, and increased the carrying
value of its 6.25% Senior Subordinated Notes to the amount
outstanding, or $402.1 million.
In December 2007, the Company entered into interest rate swap
transactions, which effectively converted $500.0 million of
the $1.7 billion outstanding under the Term Loan Agreement
from variable interest rate to fixed rate debt. The swaps expire
on October 1, 2010, and are accounted for as cash flow
hedges under SFAS 133. Under the terms of the swaps, the
Company pays a fixed interest rate of 3.89% and receives a
floating rate equal to
three-month
LIBOR (approximately 2.70% for the period ending July 1,
2008).
In January 2008, the Company entered into interest rate swap
transactions, which effectively converted an additional
$247.0 million of the amount outstanding under the Term
Loan Agreement from variable interest rate to fixed rate debt.
The swaps having notational amounts of $175.0 million and
$72.0 million, expire on January 15, 2011 and
January 1, 2011, respectively, and are accounted for as
cash flow hedges under SFAS 133. Under the terms of the
$175.0 million swap, the Company pays a fixed interest rate
of 3.60% and receives a floating rate equal to three-month LIBOR
(approximately 2.71% for the period ending July 15, 2008).
Under the terms of the $72.0 million swap, the Company pays
a fixed interest rate of 3.57% and receives a floating rate
equal to three-month LIBOR (approximately 2.70% for the period
ending July 1, 2008).
No portion of the swap transactions are considered ineffective
under SFAS 133. As of March 31, 2008, the Company had
recognized $22.8 million in other current liabilities to
reflect the fair value of the interest rate swaps with a
corresponding decrease in other comprehensive income, a
component of shareholders equity in the consolidated
balance sheet.
|
|
6.
|
TRADE
RECEIVABLES SECURITIZATION
|
The Company continuously sells a designated pool of trade
receivables to a third-party qualified special purpose entity,
which in turn sells an undivided ownership interest to a
conduit, administered by an unaffiliated financial institution.
In addition to this financial institution, the Company
participates in the securitization agreement as an investor in
the conduit. The Company continues to service, administer and
collect the receivables on behalf of the special purpose entity.
The Company pays annual facility and commitment fees ranging
from 0.16% to 0.40% (averaging approximately 0.25%) for unused
amounts and an additional program fee of 0.10% on outstanding
amounts. The securitization agreement allows the operating
subsidiaries participating in the securitization program to
receive a cash payment for sold receivables, less a deferred
purchase price receivable. The Companys share of the total
investment varies depending on certain criteria, mainly the
collection performance on the sold receivables.
As of March 31, 2008 and 2007, approximately
$363.7 million and $427.7 million of the
Companys accounts receivable, respectively, had been sold
to the third-party qualified special purpose entity described
above, which represent the face amount of the total outstanding
trade receivables on all designated customer accounts on those
dates. The Company received net cash proceeds of approximately
$274.3 million and $334.0 million from the
unaffiliated financial institutions for the sale of these
receivables as of March 31, 2008 and 2007, respectively.
The Company has a recourse obligation that is limited to the
deferred purchase price receivable, which approximates 5% of the
total sold receivables, and its own investment participation,
the total of which was approximately $89.4 million and
$93.7 million as of March 31, 2008 and 2007,
respectively. The Company also sold accounts receivable to
certain third-party banking institutions with limited recourse,
which management believes is nominal. The outstanding balance of
receivables sold and not yet collected was approximately
$478.4 million and $398.7 million as of March 31,
2008 and 2007, respectively.
In accordance with SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
(SFAS 140), the accounts receivable
balances that were sold were removed from the consolidated
balance sheets and are reflected as cash provided by operating
activities in the consolidated statement of cash flows.
76
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
COMMITMENTS
AND CONTINGENCIES
|
As of March 31, 2008 and 2007, the gross carrying amount
and associated accumulated depreciation of the Companys
property and equipment financed under capital leases was not
material. These capital leases have interest rates ranging from
4.0% to 14.0%. The Company also leases certain of its facilities
under non-cancelable operating leases. The capital and operating
leases expire in various years through 2033 and require the
following minimum lease payments:
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
Fiscal Year Ending March 31,
|
|
Lease
|
|
|
Lease
|
|
|
(In thousands)
|
|
2009
|
|
$
|
719
|
|
|
$
|
123,578
|
2010
|
|
|
462
|
|
|
|
97,930
|
2011
|
|
|
390
|
|
|
|
78,432
|
2012
|
|
|
360
|
|
|
|
57,447
|
2013
|
|
|
290
|
|
|
|
46,835
|
Thereafter
|
|
|
517
|
|
|
|
210,322
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
2,738
|
|
|
$
|
614,544
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Present value of total minimum lease payments
|
|
|
2,368
|
|
|
|
|
Current portion
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense attributable to continuing operations
amounted to $94.2 million, $65.3 million and
$60.9 million in fiscal years 2008, 2007 and 2006,
respectively.
The Company is subject to legal proceedings, claims, and
litigation arising in the ordinary course of business. The
Company defends itself vigorously against any such claims.
Although the outcome of these matters is currently not
determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on
its consolidated financial position, results of operations, or
cash flows.
The domestic (Singapore) and foreign components of
income from continuing operations before income taxes were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(In thousands)
|
|
|
|
Domestic
|
|
$
|
268,294
|
|
|
$
|
223,838
|
|
$
|
99,605
|
Foreign
|
|
|
(202,627
|
)
|
|
|
101,115
|
|
|
65,131
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,667
|
|
|
$
|
324,953
|
|
$
|
164,736
|
|
|
|
|
|
|
|
|
|
|
|
77
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for (benefit from) income taxes from continuing
operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
547
|
|
|
$
|
3,658
|
|
|
$
|
503
|
|
Foreign
|
|
|
65,469
|
|
|
|
38,616
|
|
|
|
31,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,016
|
|
|
|
42,274
|
|
|
|
31,668
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(252
|
)
|
|
|
(13,157
|
)
|
|
|
(409
|
)
|
Foreign
|
|
|
639,273
|
|
|
|
(25,064
|
)
|
|
|
22,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
639,021
|
|
|
|
(38,221
|
)
|
|
|
22,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
705,037
|
|
|
$
|
4,053
|
|
|
$
|
54,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The domestic statutory income tax rate was approximately 18.0%
in fiscal year 2008, and approximately 20% in fiscal years 2007
and 2006. The reconciliation of the income tax expense (benefit)
expected based on domestic statutory income tax rates to the
expense (benefit) for income taxes from continuing operations
included in the consolidated statements of operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Income tax based on domestic statutory rates
|
|
$
|
11,821
|
|
|
$
|
64,992
|
|
|
$
|
32,947
|
|
Effect of tax rate differential
|
|
|
(314,108
|
)
|
|
|
(155,290
|
)
|
|
|
(86,251
|
)
|
Goodwill and other intangibles amortization
|
|
|
12,924
|
|
|
|
7,949
|
|
|
|
6,819
|
|
Change in valuation allowance
|
|
|
986,338
|
|
|
|
73,160
|
|
|
|
120,182
|
|
Other
|
|
|
8,062
|
|
|
|
13,242
|
|
|
|
(19,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
705,037
|
|
|
$
|
4,053
|
|
|
$
|
54,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $986.3 million change in valuation allowance during
fiscal year 2008 includes non-cash tax expense of
$661.3 million, principally resulting from
managements re-evaluation of previously recorded deferred
tax assets in the United States, which are primarily comprised
of tax loss carry forwards. Management believes that the
realizability of certain deferred tax assets is no longer more
likely than not because it expects future projected taxable
income in the United States will be lower as a result of
increased interest expense resulting from the term loan entered
into as part of the acquisition of Solectron. The remaining
change in the valuation allowance during the current period was
primarily for current year operating losses and restructuring
charges, on which the tax benefit is not more likely than not to
be realized.
78
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred income taxes from continuing
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
|
|
|
$
|
(25,528
|
)
|
Intangible assets
|
|
|
|
|
|
|
(18,731
|
)
|
Others
|
|
|
|
|
|
|
(5,405
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
(49,664
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
19,076
|
|
|
|
|
|
Intangible assets
|
|
|
275,625
|
|
|
|
|
|
Deferred compensation
|
|
|
4,803
|
|
|
|
5,064
|
|
Inventory valuation
|
|
|
40,092
|
|
|
|
8,129
|
|
Provision for doubtful accounts
|
|
|
5,616
|
|
|
|
3,122
|
|
Net operating loss and other carryforwards
|
|
|
3,231,735
|
|
|
|
1,642,069
|
|
Others
|
|
|
34,852
|
|
|
|
71,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611,799
|
|
|
|
1,730,285
|
|
Valuation allowances
|
|
|
(3,578,628
|
)
|
|
|
(999,618
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
33,171
|
|
|
|
730,667
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
33,171
|
|
|
$
|
681,003
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax asset is classified as follows:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
573
|
|
|
$
|
11,105
|
|
Long-term
|
|
|
32,598
|
|
|
|
669,898
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,171
|
|
|
$
|
681,003
|
|
|
|
|
|
|
|
|
|
|
The Company has tax loss carryforwards attributable to
continuing operations of approximately $8.2 billion, a
portion of which begin expiring in 2009. Utilization of the tax
loss carryforwards and other deferred tax assets is limited by
the future earnings of the Company in the tax jurisdictions in
which such deferred assets arose. As a result, management is
uncertain as to when or whether these operations will generate
sufficient profit to realize any benefit from the deferred tax
assets. The valuation allowance provides a reserve against
deferred tax assets that are not more likely than not to be
realized by the Company. However, management has determined that
it is more likely than not that the Company will realize certain
of these benefits and, accordingly, has recognized a deferred
tax asset from these benefits. The change in valuation allowance
is net of certain increases and decreases to prior year losses
and other carryforwards that have no current impact on the tax
provision. Approximately $34.0 million of the valuation
allowance relates to income tax benefits arising from the
exercise of stock options, which if realized will be credited
directly to shareholders equity and will not be available
to benefit the income tax provision in any future period.
The amount of deferred tax assets considered realizable,
however, could be reduced or increased in the near-term if
facts, including the amount of taxable income or the mix of
taxable income between subsidiaries, differ from
managements estimates.
79
FLEXTRONICS
INTERNATIONAL LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company does not provide for federal income taxes on the
undistributed earnings of its foreign subsidiaries, as such
earnings are not intended by management to be repatriated in the
foreseeable future. Determination of the amount of the
unrecognized deferred tax liability on these undistributed
earnings is not practicable.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
(FIN 48) on April 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
de-recognition
of tax benefits previously recognized and additional disclosures
for unrecognized tax benefits, interest and penalties. The
evaluation of a tax position in accordance with FIN 48
begins with a determination as to whether it is
more-likely-than-not that a tax position will be sustained upon
examination based on the technical merits of the position. A tax
position that meets the more-likely-than-not recognition
threshold is then measured at the largest amount of benefit that
is greater than 50 percent likely of being realized upon
ultimate settlement for recognition in the financial statements.
The Company did not recognize a change in the liability for
unrecognized tax benefits as a result of the implementation of
FIN 48. A reconciliation of the