Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2013

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                   

 

Commission file number 0-23354

 

FLEXTRONICS INTERNATIONAL LTD.

(Exact name of registrant as specified in its charter)

 

Singapore

 

Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2 Changi South Lane,

 

 

Singapore

 

486123

(Address of registrant’s principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code

(65) 6876-9899

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at January 24, 2014

 

 

 

Ordinary Shares, No Par Value

 

602,407,232

 

 

 



Table of Contents

 

FLEXTRONICS INTERNATIONAL LTD.

 

INDEX

 

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

3

 

 

 

 

Item 1.

Financial Statements

 

3

 

Report of Independent Registered Public Accounting Firm

 

3

 

Condensed Consolidated Balance Sheets (unaudited) — December 31, 2013 and March 31, 2013

 

4

 

Condensed Consolidated Statements of Operations (unaudited) — Three-Month and Nine-Month Periods Ended December 31, 2013 and December 31, 2012

 

5

 

Condensed Consolidated Statements of Comprehensive Income (unaudited) — Three-Month and Nine-Month Periods Ended December 31, 2013 and December 31, 2012

 

6

 

Condensed Consolidated Statements of Cash Flows (unaudited) — Nine-Month Periods Ended December 31, 2013 and December 31, 2012

 

7

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

33

Item 4.

Controls and Procedures

 

33

 

 

 

 

 

PART II. OTHER INFORMATION

 

34

 

 

 

 

Item 1.

Legal Proceedings

 

34

Item 1A.

Risk Factors

 

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

Item 3.

Defaults Upon Senior Securities

 

34

Item 4.

Mine Safety Disclosures

 

34

Item 5.

Other Information

 

34

Item 6.

Exhibits

 

34

Signatures

 

 

35

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of
Flextronics International Ltd.
Singapore

 

We have reviewed the accompanying condensed consolidated balance sheet of Flextronics International Ltd. and subsidiaries (the “Company”) as of December 31, 2013, and the related condensed consolidated statements of operations and of comprehensive income for the three-month and nine-month periods ended December 31, 2013 and December 31, 2012, and the condensed consolidated statements of cash flows for the nine-month periods ended December 31, 2013 and December 31, 2012. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Flextronics International Ltd. and subsidiaries as of March 31, 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 28, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP

 

San Jose, California

 

January 31, 2014

 

3



Table of Contents

 

FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

As of

 

As of

 

 

 

December 31, 2013

 

March 31, 2013

 

 

 

(In thousands,

 

 

 

except share amounts)

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,617,245

 

$

1,587,087

 

Accounts receivable, net of allowance for doubtful accounts of $2,693 and $10,877 as of December 31, 2013 and March 31, 2013, respectively

 

2,551,030

 

2,111,996

 

Inventories

 

3,972,127

 

2,722,500

 

Other current assets

 

1,552,521

 

1,349,818

 

Total current assets

 

9,692,923

 

7,771,401

 

Property and equipment, net

 

2,380,711

 

2,174,588

 

Goodwill and other intangible assets, net

 

381,831

 

343,552

 

Other assets

 

361,572

 

302,014

 

Total assets

 

$

12,817,037

 

$

10,591,555

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank borrowings and current portion of long-term debt

 

$

54,951

 

$

416,654

 

Accounts payable

 

4,968,640

 

3,705,297

 

Accrued payroll

 

385,640

 

351,683

 

Other current liabilities

 

2,655,261

 

1,699,151

 

Total current liabilities

 

8,064,492

 

6,172,785

 

Long-term debt, net of current portion

 

2,000,694

 

1,650,973

 

Other liabilities

 

497,299

 

521,039

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Flextronics International Ltd. shareholders’ equity

 

 

 

 

 

Ordinary shares, no par value; 652,468,175 and 689,159,139 issued, and 602,228,820 and 638,919,784 outstanding as of December 31, 2013 and March 31, 2013, respectively

 

7,709,453

 

8,015,142

 

Treasury shares, at cost; 50,239,355 shares as of December 31, 2013 and March 31, 2013

 

(388,215

)

(388,215

)

Accumulated deficit

 

(4,980,069

)

(5,302,688

)

Accumulated other comprehensive loss

 

(120,422

)

(77,481

)

Total Flextronics International Ltd. shareholders’ equity

 

2,220,747

 

2,246,758

 

Noncontrolling interests

 

33,805

 

 

Total shareholders’ equity

 

2,254,552

 

2,246,758

 

Total liabilities and shareholders’ equity

 

$

12,817,037

 

$

10,591,555

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

December 31, 2013

 

December 31, 2012

 

December 31, 2013

 

December 31, 2012

 

 

 

(In thousands, except per share amounts)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,183,442

 

$

6,123,321

 

$

19,384,673

 

$

18,274,157

 

Cost of sales

 

6,784,823

 

5,778,544

 

18,271,470

 

17,205,251

 

Restructuring charges

 

 

98,315

 

35,126

 

98,315

 

Gross profit

 

398,619

 

246,462

 

1,078,077

 

970,591

 

Selling, general and administrative expenses

 

224,576

 

207,224

 

661,061

 

589,751

 

Intangible amortization

 

5,575

 

6,137

 

21,495

 

21,211

 

Restructuring charges

 

 

4,376

 

5,634

 

4,376

 

Interest and other, net

 

14,743

 

(17,089

)

48,028

 

(16,754

)

Income from continuing operations before income taxes

 

153,725

 

45,814

 

341,859

 

372,007

 

Provision for (benefit from) income taxes

 

8,568

 

(8,782

)

19,240

 

20,189

 

Income from continuing operations

 

145,157

 

54,596

 

322,619

 

351,818

 

Loss from discontinued operations, net of tax

 

 

(7,248

)

 

(25,451

)

Net income

 

$

145,157

 

$

47,348

 

$

322,619

 

$

326,367

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.08

 

$

0.52

 

$

0.53

 

Diluted

 

$

0.23

 

$

0.08

 

$

0.51

 

$

0.52

 

Loss from discontinued operations:

 

 

 

 

 

 

 

 

 

Basic

 

$

 

$

(0.01

)

$

 

$

(0.04

)

Diluted

 

$

 

$

(0.01

)

$

 

$

(0.04

)

Net income:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.07

 

$

0.52

 

$

0.49

 

Diluted

 

$

0.23

 

$

0.07

 

$

0.51

 

$

0.48

 

Weighted-average shares used in computing per share amounts:

 

 

 

 

 

 

 

 

 

Basic

 

606,724

 

658,925

 

614,539

 

666,852

 

Diluted

 

618,677

 

669,488

 

627,399

 

678,610

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

December 31, 2013

 

December 31, 2012

 

December 31, 2013

 

December 31, 2012

 

 

 

(In thousands)

 

 

 

(Unaudited)

 

Net income

 

$

145,157

 

$

47,348

 

$

322,619

 

$

326,367

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of zero tax

 

(13,960

)

(10,603

)

(43,457

)

(21,575

)

Unrealized gain (loss) on derivative instruments and other, net of zero tax

 

1,097

 

(3,088

)

516

 

3,015

 

Comprehensive income

 

$

132,294

 

$

33,657

 

$

279,678

 

$

307,807

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6



Table of Contents

 

FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine-Month Periods Ended

 

 

 

December 31, 2013

 

December 31, 2012

 

 

 

(In thousands)

 

 

 

(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

322,619

 

$

326,367

 

Depreciation, amortization and other impairment charges

 

345,044

 

430,238

 

Changes in working capital and other

 

450,644

 

249,452

 

Net cash provided by operating activities

 

1,118,307

 

1,006,057

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(526,026

)

(377,901

)

Proceeds from the disposition of property and equipment

 

64,873

 

49,819

 

Acquisition of businesses, net of cash acquired

 

(238,031

)

(183,896

)

Proceeds from divestiture of business, net of cash held in divested business

 

4,599

 

22,585

 

Other investing activities, net

 

(12,067

)

(93,633

)

Net cash used in investing activities

 

(706,652

)

(583,026

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from bank borrowings and long-term debt

 

1,003,294

 

171,673

 

Repayments of bank borrowings, long-term debt and capital lease obligations

 

(518,549

)

(290,230

)

Payments for early retirement of long-term debt

 

(544,840

)

 

Payments for repurchase of ordinary shares

 

(362,693

)

(208,208

)

Net proceeds from issuance of ordinary shares

 

21,106

 

14,632

 

Other financing activities, net

 

46,298

 

85,590

 

Net cash used in financing activities

 

(355,384

)

(226,543

)

Effect of exchange rates on cash and cash equivalents

 

(26,113

)

(8,704

)

Net increase in cash and cash equivalents

 

30,158

 

187,784

 

Cash and cash equivalents, beginning of period

 

1,587,087

 

1,518,329

 

Cash and cash equivalents, end of period

 

$

1,617,245

 

$

1,706,113

 

 

 

 

 

 

 

Non-cash investing activity:

 

 

 

 

 

Accounts payable for fixed assets purchases

 

$

57,483

 

$

74,278

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION

 

Organization of the Company

 

Flextronics International Ltd. (“Flextronics” or the “Company”) was incorporated in the Republic of Singapore in May 1990. The Company’s operations have expanded over the years through a combination of organic growth and acquisitions. The Company is a leading global supply chain solutions provider of advanced design, manufacturing and services to original equipment manufacturers (“OEMs”) of a broad range of electronic products serving customers in the following markets: High Reliability Solutions (“HRS”), which is comprised of our medical, automotive, and defense and aerospace businesses; High Velocity Solutions (“HVS”), which includes our mobile devices business, including smart phones, and consumer electronics, including game consoles and wearable electronics, and our high-volume computing business, including various supply chain solutions for notebook personal computing (“PC”), tablets, and printers; Industrial and Emerging Industries (“IEI”), which is comprised of household appliances, semi-cap equipment, kiosks, energy and our emerging industries businesses; and Integrated Network Solutions (“INS”), which includes our telecommunications infrastructure, data networking, connected home, and server and storage businesses. The Company’s strategy is to provide customers with a full range of cost competitive, global supply chain solutions through which the Company can design, build, ship and service a complete packaged product for its OEM customers. OEM customers leverage the Company’s supply chain solutions to meet their product requirements throughout the entire product life cycle.

 

The Company’s service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement,  inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance), supply chain management software solutions and component product offerings like rigid and flexible printed circuit boards and power adapters and chargers.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 2013 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended December 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2014.

 

During the fourth quarter of fiscal 2013, the Company recorded certain purchase accounting adjustments in connection with an acquisition of a business that was consummated in the third quarter of fiscal 2013.  These purchase accounting adjustments resulted in the release of $22.3 million of valuation allowances for deferred tax assets. In accordance with the accounting guidance applicable to business combinations, the Company re-casted the operating results for the quarter ended December 31, 2012 to reflect the release of the valuation allowance for deferred tax assets.

 

The first quarter for fiscal year 2014 and fiscal year 2013 ended on June 28, 2013 and June 29, 2012, respectively. The second quarter for fiscal year 2014 and fiscal year 2013 ended on September 27, 2013 and September 28, 2012, respectively. The Company’s third fiscal quarter ends on December 31, and the fourth fiscal quarter, and year, ends on March 31 of each year.

 

2.  BALANCE SHEET ITEMS

 

Inventories

 

The components of inventories, net of applicable lower of cost or market write-downs, were as follows:

 

8



Table of Contents

 

 

 

As of

 

As of

 

 

 

December 31, 2013

 

March 31, 2013

 

 

 

(In thousands)

 

Raw materials

 

$

2,567,982

 

$

1,683,098

 

Work-in-progress

 

642,064

 

421,706

 

Finished goods

 

762,081

 

617,696

 

 

 

$

3,972,127

 

$

2,722,500

 

 

Goodwill and Other Intangibles

 

The following table summarizes the activity in the Company’s goodwill account during the nine-month period ended December 31, 2013:

 

 

 

Amount

 

 

 

(In thousands)

 

Balance, beginning of the year

 

$

262,005

 

Additions (1)

 

26,384

 

Purchase accounting adjustments (2) 

 

4,034

 

Foreign currency translation adjustments

 

429

 

Balance, end of the period

 

$

292,852

 

 


(1)                                 The goodwill generated from the Company’s business combinations completed during the nine-month period ended December 31, 2013 is primarily related to value placed on the employee workforce, service offerings and capabilities and expected synergies.  The goodwill is not deductible for income tax purposes.  See note 13 to the condensed consolidated financial statements for additional information.

(2)                                 Includes adjustments based on management’s estimates resulting from review and finalization of the valuation of assets and liabilities acquired through certain business combinations completed in a period subsequent to the respective acquisition. These adjustments and acquisitions were not individually, nor in the aggregate, significant to the Company.

 

The components of acquired intangible assets are as follows:

 

 

 

As of December 31, 2013

 

As of March 31, 2013

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

(In thousands)

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related intangibles

 

$

200,920

 

$

(134,612

)

$

66,308

 

$

294,310

 

$

(224,517

)

$

69,793

 

Licenses and other intangibles

 

34,166

 

(11,495

)

22,671

 

21,040

 

(9,286

)

11,754

 

Total

 

$

235,086

 

$

(146,107

)

$

88,979

 

$

315,350

 

$

(233,803

)

$

81,547

 

 

The gross carrying amounts of intangible assets are removed when the recorded amounts have been fully amortized.  During the three-month period ended December 31, 2013, the value of customer-related intangible assets and licenses and other intangible assets increased by $12.9 million and $7.6 million, respectively, as a result of our acquisition of Riwisa AG.  The purchase price allocation is preliminary and is subject to change as the Company continues to evaluate the value of assets and liabilities relating to this acquisition. Refer to note 13 to the condensed consolidated financial statements for further discussion of the Riwisa AG acquisition.  During the nine-month period ended December 31, 2013, certain customer relationship intangibles were fully amortized, offset by the increase in intangible assets in connection with the aforementioned acquisition.  The estimated future annual amortization expense for intangible assets is as follows:

 

9



Table of Contents

 

Fiscal Year Ending March 31,

 

Amount

 

 

 

(In thousands)

 

2014 (1)

 

$

6,951

 

2015

 

25,968

 

2016

 

20,969

 

2017

 

13,661

 

2018

 

8,605

 

Thereafter

 

12,825

 

Total amortization expense

 

$

88,979

 

 


(1)                     Represents estimated amortization for the remaining three-month period ending March 31, 2014.

 

Other Current Liabilities

 

Other current liabilities include customer working capital advances of $934.8 million and $214.1 million as of December 31, 2013 and March 31, 2013, respectively.  These amounts are not interest bearing, do not have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production.

 

3.  SHARE-BASED COMPENSATION

 

The following table summarizes the Company’s share-based compensation expense:

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

December 31, 2013

 

December 31, 2012

 

December 31, 2013

 

December 31, 2012

 

 

 

(In thousands)

 

Cost of sales

 

$

1,800

 

$

1,530

 

$

5,018

 

$

4,045

 

Selling, general and administrative expenses

 

11,311

 

6,986

 

25,399

 

22,663

 

Total stock-based compensation expense

 

$

13,111

 

$

8,516

 

$

30,417

 

$

26,708

 

 

Total unrecognized compensation expense related to share options is $0.9 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 1.2 years. As of December 31, 2013, the number of options outstanding and exercisable was 27.0 million and 26.7 million, respectively, at weighted-average exercise prices of $8.92 and $8.94 per share, respectively.

 

During the nine-month period ended December 31, 2013, the Company granted 8.7 million unvested share bonus awards at an average grant date price of $8.05 per share, under its 2010 Equity Incentive Plan.  Of this amount, approximately 2.3 million represents the target amount of grants made to certain key employees whereby vesting is contingent on certain market conditions.  The number of shares that ultimately will vest range from zero and up to a maximum of 200% based on a measurement of the change in the Company’s share price over a certain specified period against the change in both the Standard and Poor’s (“S&P”) 500 Composite Index and an Extended Electronics Manufacturing Services (“EMS”) Group Index over the same period, and will cliff vest after a period of three years, if such market conditions have been met. The number of shares issued can range from zero to 4.6 million.  The average grant-date fair value of these awards was estimated to be $9.34 per share and was calculated using a Monte Carlo simulation.

 

As of December 31, 2013, approximately 22.7 million unvested share bonus awards were outstanding, of which vesting for a targeted amount of 5.2 million is contingent on meeting certain market conditions.  The number of shares issued can range from zero to 9.9 million based on the achievement levels of the respective market conditions.

 

As of December 31, 2013, total unrecognized compensation expense related to unvested share bonus awards is $96.9 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 2.45 years. Approximately $17.3 million of the total unrecognized compensation cost, net of estimated forfeitures, is related to awards whereby vesting is contingent on meeting certain market conditions.

 

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4.  EARNINGS PER SHARE

 

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 from continuing and discontinued operations per share:

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

December 31, 2013

 

December 31, 2012

 

December 31, 2013

 

December 31, 2012

 

 

 

(In thousands, except per share amounts)

 

Basic earnings from continuing and discontinued operations per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

145,157

 

$

54,596

 

$

322,619

 

$

351,818

 

Loss from discontinued operations

 

 

(7,248

)

 

(25,451

)

Net income

 

$

145,157

 

$

47,348

 

$

322,619

 

$

326,367

 

Shares used in computation:

 

 

 

 

 

 

 

 

 

Weighted-average ordinary shares outstanding

 

606,724

 

658,925

 

614,539

 

666,852

 

 

 

 

 

 

 

 

 

 

 

Basic earnings from continuing operations per share

 

$

0.24

 

$

0.08

 

$

0.52

 

$

0.53

 

Basic loss from discontinued operations per share

 

$

 

$

(0.01

)

$

 

$

(0.04

)

Basic earnings per share

 

$

0.24

 

$

0.07

 

$

0.52

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings from continuing and discontinued operations per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

145,157

 

$

54,596

 

$

322,619

 

$

351,818

 

Loss from discontinued operations

 

 

(7,248

)

 

(25,451

)

Net income

 

$

145,157

 

$

47,348

 

$

322,619

 

$

326,367

 

Shares used in computation:

 

 

 

 

 

 

 

 

 

Weighted-average ordinary shares outstanding

 

606,724

 

658,925

 

614,539

 

666,852

 

 

 

 

 

 

 

 

 

 

 

Weighted-average ordinary share equivalents from stock options and awards (1) (2)

 

11,953

 

10,563

 

12,860

 

11,758

 

Weighted-average ordinary shares and ordinary share equivalents outstanding

 

618,677

 

669,488

 

627,399

 

678,610

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings from continuing operations per share

 

$

0.23

 

$

0.08

 

$

0.51

 

$

0.52

 

Diluted loss from discontinued operations per share

 

$

 

$

(0.01

)

$

 

$

(0.04

)

Diluted earnings per share

 

$

0.23

 

$

0.07

 

$

0.51

 

$

0.48

 

 


(1)         Options to purchase 16.5 million and 19.7 million ordinary shares during the three-month periods ended December 31, 2013 and December 31, 2012, respectively, and 0.2 million and 0.9 million share bonus awards during the three-month periods ended December 31, 2013 and December 31, 2012, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted average ordinary share equivalents.

 

(2)         Options to purchase 16.5 million and 21.0 million ordinary shares during the nine-month periods ended December 31, 2013 and December 31, 2012, respectively, and 0.1 million and 0.5 million share bonus awards during the nine-month periods ended December 31, 2013 and December 31, 2012, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted average ordinary share equivalents.

 

5.  NON-CONTROLLING INTERESTS

 

On December 17, 2013, a previously wholly-owned subsidiary of the Company issued a non-controlling equity interest to a third party investor in exchange for $33.8 million in cash for an ownership interest less than 20% of the outstanding shares in the subsidiary.  The Company continues to own a majority of the subsidiary’s outstanding equity and also controls the subsidiary’s board of directors.  Accordingly, the condensed consolidated financial statements include the financial position and results of operations of this subsidiary as of December 31, 2013 and for the three-month and nine-month periods then ended.

 

The Company has recognized the carrying value of the non-controlling interest as a component of total shareholders’ equity.  The operating results of the subsidiary attributable to the non-controlling interest are immaterial for all of the periods presented and are included in interest and other, net.

 

6.  BANK BORROWINGS AND LONG-TERM DEBT

 

Bank borrowings and long-term debt are as follows:

 

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As of

 

As of

 

 

 

December 31, 2013

 

March 31, 2013

 

 

 

(In thousands)

 

 

 

 

 

 

 

Term Loan, including current portion, due October 2014

 

$

 

$

170,340

 

Term Loan, including current portion, due in installments through October 2016

 

436,641

 

517,500

 

Term Loan, including current portion, due in installments through August 2018

 

600,000

 

 

4.625% Notes due February 2020

 

500,000

 

500,000

 

5.000% Notes due February 2023

 

500,000

 

500,000

 

Asia Term Loans

 

 

375,000

 

Other

 

19,004

 

4,787

 

 

 

2,055,645

 

2,067,627

 

Current portion

 

(54,951

)

(416,654

)

Non-current portion

 

$

2,000,694

 

$

1,650,973

 

 

The weighted average interest rates for the Company’s long-term debt were 3.2% and 3.5% as of December 31, 2013 and March 31, 2013, respectively.

 

On August 30, 2013, the Company entered into a $600 million term loan agreement due August 30, 2018 and used part of the proceeds to repay the outstanding balances of the term loan due October 2014 and the Asia Term Loans in full amounting to $170.3 million and $374.5 million, respectively. The remaining $55.2 million was used to repay part of the term loan due October 2016 and upfront bank fees.

 

Borrowings under the term loan due August 2018 bear interest, at the Company’s option, either at (i) LIBOR plus the applicable margin for LIBOR loans ranging between 1.00% and 2.00%, based on the Company’s credit ratings or (ii) the base rate (the greatest of the agent’s prime rate, the federal funds rate plus 0.50% and LIBOR for a one-month interest period plus 1.00%) plus an applicable margin ranging between 0.00% and 1.00%, based on the Company’s credit rating.

 

The term loan due August 2018 is unsecured, and contains customary restrictions on the Company’s 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 exceptions and limitations. This term loan agreement 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 interest coverage ratio, as defined therein, during its term. As of December 31, 2013, the Company was in compliance with the covenants under this term loan agreement.

 

Repayments of the Company’s long term debt outstanding as of December 31, 2013 are as follows:

 

Fiscal Year Ending March 31,

 

Amount

 

 

 

(In thousands)

 

2014 (1)

 

$

23,190

 

2015

 

44,518

 

2016

 

52,018

 

2017

 

368,351

 

2018

 

15,000

 

Thereafter

 

1,552,568

 

Total

 

$

2,055,645

 

 


(1)                     Represents scheduled repayments for the remaining three-month period ending March 31, 2014.

 

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7.  INTEREST AND OTHER, NET

 

During the three-month and nine-month periods ended December 31, 2013, the Company recognized interest expense of $19.9 million and $60.4 million, respectively, on its debt obligations outstanding during the period. During the three-month and nine-month periods ended December 31, 2012, the Company recognized interest expense of $15.8 million and $47.1 million, respectively.

 

During the three-month and nine-month periods ended December 31, 2013, the Company recognized interest income of $4.7 million and $11.9 million, respectively. During the three-month and nine-month periods ended December 31, 2012, the Company recognized interest income of $3.7 million and $15.4 million, respectively.

 

During the three-month and nine-month periods ended December 31, 2013, the Company recognized gains on foreign exchange transactions of $3.3 million and $11.3 million, respectively. During the three-month and nine-month periods ended December 31, 2012, the Company recognized gains on foreign exchange transactions of $6.3 million and $13.9 million, respectively.

 

The Company had warrants to purchase common shares of a certain supplier, which were exercised and the underlying shares were sold for total proceeds of $67.3 million resulting in a loss of $7.1 million during the nine-month period ended December 31, 2013. The Company recognized a gain of $64.8 million relating to the change in fair value of these same warrants during the nine-month period ended December 31, 2012.

 

8.  FINANCIAL INSTRUMENTS

 

Foreign Currency Contracts

 

The Company enters into forward contracts and foreign currency swap contracts to manage the foreign currency risk associated with monetary accounts and anticipated foreign currency denominated transactions.  The Company hedges committed exposures and does not engage in speculative transactions.  As of December 31, 2013, the aggregate notional amount of the Company’s outstanding foreign currency forward and swap contracts was $4.0 billion as summarized below:

 

 

 

Foreign Currency Amount

 

Notional Contract Value in USD

 

Currency

 

Buy

 

Sell

 

Buy

 

Sell

 

 

 

(In thousands)

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

CNY

 

3,301,000

 

 

$

544,567

 

$

 

EUR

 

7,825

 

58,593

 

10,808

 

80,396

 

HUF

 

11,797,000

 

 

54,998

 

 

ILS

 

5,300

 

 

1,524

 

 

MXN

 

1,633,300

 

 

124,935

 

 

MYR

 

282,880

 

 

85,864

 

 

SGD

 

33,419

 

 

26,368

 

 

Other

 

N/A

 

N/A

 

47,924

 

400

 

 

 

 

 

 

 

896,988

 

80,796

 

Other Forward/Swap Contracts

 

 

 

 

 

 

 

 

 

BRL

 

80,300

 

71,300

 

34,015

 

30,203

 

CAD

 

118,254

 

110,482

 

111,283

 

103,856

 

CNY

 

886,290

 

 

145,631

 

 

EUR

 

446,780

 

603,079

 

615,804

 

830,322

 

GBP

 

32,540

 

56,956

 

53,726

 

93,910

 

HUF

 

17,616,300

 

19,921,600

 

82,127

 

92,875

 

JPY

 

9,193,270

 

6,440,830

 

87,561

 

61,709

 

MXN

 

1,674,690

 

1,108,520

 

128,101

 

84,793

 

MYR

 

233,391

 

51,354

 

70,843

 

15,588

 

SEK

 

248,048

 

407,204

 

38,546

 

63,257

 

SGD

 

38,950

 

9,629

 

30,733

 

7,598

 

Other

 

N/A

 

N/A

 

154,559

 

111,177

 

 

 

 

 

 

 

1,552,929

 

1,495,288

 

 

 

 

 

 

 

 

 

 

 

Total Notional Contract Value in USD

 

 

 

 

 

$

2,449,917

 

$

1,576,084

 

 

Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards.  Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net

 

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in the condensed consolidated statements of operations.  Gains or losses from fair value adjustments for these instruments are designed to offset losses and gains from the Company’s revaluation of monetary assets and liabilities denominated in a non-functional currency. As of December 31, 2013 and March 31, 2013, the Company also has included net deferred gains in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. These deferred gains were not material as of December 31, 2013, and are expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations primarily over the next twelve-month period. The gains and losses recognized in earnings due to hedge ineffectiveness were not material for all fiscal periods presented and are included as a component of interest and other, net in the condensed consolidated statements of operations.

 

The following table presents the fair value of the Company’s derivative instruments located on the condensed consolidated balance sheets utilized for foreign currency risk management purposes:

 

 

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

Balance Sheet
Location

 

December 31,
2013

 

March 31,
2013

 

Balance Sheet
Location

 

December 31,
2013

 

March 31,
2013

 

 

 

(In thousands)

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Other current assets

 

$

9,396

 

$

11,032

 

Other current liabilities

 

$

2,718

 

$

3,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

Other current assets

 

$

8,591

 

$

16,531

 

Other current liabilities

 

$

14,159

 

$

11,291

 

 

The Company has financial instruments subject to master netting arrangements, which provides for the net settlement of all contracts with a single counterparty.  The Company does not offset fair value amounts for assets and liabilities recognized for derivative instruments under these arrangements, and as such, the asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets.  The impact of netting derivative assets and liabilities is not material to the Company’s financial position for any of the periods presented.

 

9.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss by component, net of tax, during the three-month and nine-month periods ended December 31, 2013 are as follows:

 

 

 

Three-Month Period Ended

 

Nine-Month Period Ended

 

 

 

December 31, 2013

 

December 31, 2013

 

 

 

Unrealized gain (loss) on
derivative instruments
and other

 

Foreign currency
translation
adjustments

 

Total

 

Unrealized gain (loss) on
derivative instruments
and other

 

Foreign currency
translation
adjustments

 

Total

 

 

 

(In thousands)

 

Beginning balance

 

$

(19,438

)

$

(88,121

)

$

(107,559

)

$

(18,857

)

$

(58,624

)

$

(77,481

)

Other comprehensive gain (loss) before reclassifications

 

471

 

(13,960

)

(13,489

)

163

 

(43,457

)

(43,294

)

Net losses reclassified from accumulated other comprehensive loss

 

626

 

 

626

 

353

 

 

353

 

Net current-period other comprehensive gain (loss)

 

1,097

 

(13,960

)

(12,863

)

516

 

(43,457

)

(42,941

)

Ending balance

 

$

(18,341

)

$

(102,081

)

$

(120,422

)

$

(18,341

)

$

(102,081

)

$

(120,422

)

 

Substantially all unrealized losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month and nine-month periods ended December 31, 2013, was recognized as a component of cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges.

 

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10.  TRADE RECEIVABLES SECURITIZATION

 

The Company sells trade receivables under two asset-backed securitization programs and under an accounts receivable factoring program.

 

Asset-Backed Securitization Programs

 

The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreement (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” collectively, the “ABS Programs”) to affiliated special purpose entities, which in turn sell 100% of the receivables to unaffiliated financial institutions. These programs allow the operating subsidiaries to receive a cash payment and a deferred purchase price receivable for sold receivables.  The Company maintains a continuing involvement in the receivables sold as a result of the deferred purchase price. The investment limits by the financial institutions are $500.0 million for the Global Program and $300.0 million for the North American Program and require a minimum level of deferred purchase price receivable to be retained by the Company in connection with the sales.

 

Servicing fees recognized during the three-month and nine-month periods ended December 31, 2013 and December 31, 2012 were not material and are included in interest and other, net within the condensed consolidated statements of operations.  As the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value, no servicing assets and liabilities are recognized.

 

As of December 31, 2013, approximately $1.2 billion of accounts receivable had been sold to the special purpose entities under the ABS Programs for which the Company had received net cash proceeds of $633.9 million and deferred purchase price receivables of approximately $528.8 million.  As of March 31, 2013, approximately $1.0 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $556.9 million and deferred purchase price receivables of approximately $412.4 million.  The deferred purchase price receivables are included in other current assets as of December 31, 2013 and March 31, 2013, and were carried at the expected recovery amount of the related receivables.  The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the deferred purchase price receivables received at time of transfer is recognized as a loss on sale of the related receivables and recorded in interest and other, net in the condensed consolidated statements of operations and were immaterial for all periods presented.

 

As of December 31, 2013 and March 31, 2013, the accounts receivable balances that were sold under the ABS Programs were removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company were included as cash provided by operating activities in the condensed consolidated statements of cash flows.

 

For the nine-month periods ended December 31, 2013 and December 31, 2012, cash flows from sales of receivables under the ABS Programs consisted of approximately $3.0 billion and $2.8 billion for transfers of receivables, respectively (of which approximately $0.3 billion and $0.5 billion, respectively, represented new transfers and the remainder proceeds from collections reinvested in revolving-period transfers for both periods).

 

The following table summarizes the activity in the deferred purchase price receivables account:

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

December 31,
2013

 

December 31,
2012

 

December 31,
2013

 

December 31,
2012

 

 

 

(In thousands)

 

Beginning balance

 

$

558,311

 

$

458,085

 

$

412,357

 

$

514,895

 

Transfers of receivables

 

1,066,512

 

953,620

 

2,933,053

 

2,669,102

 

Collections

 

(1,095,993

)

(949,691

)

(2,816,580

)

(2,721,983

)

Ending balance

 

$

528,830

 

$

462,014

 

$

528,830

 

$

462,014

 

 

Trade Accounts Receivable Sale Programs

 

The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected was approximately $517.1 million and $163.6 million as of December 31, 2013 and March 31, 2013, respectively. For the nine-month periods ended December 31, 2013 and December 31, 2012, total accounts receivable sold to certain third party banking institutions was approximately $2.7 billion and $820.7 million, respectively. The loss on sales of accounts receivables sold was not material for the three-month and nine-month periods ended December 31, 2013 and December 31, 2012 and is recorded in interest and other, net in the condensed consolidated statements of operations.  The receivables that were sold were removed from the condensed consolidated balance sheets and were reflected as cash provided by operating activities in the condensed consolidated statements of cash flows.

 

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11.  FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

 

Level 1 - Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

The Company has deferred compensation plans for its officers and certain other employees.  Deferred amounts under the plans are invested in hypothetical investments selected by the participant or the participant’s investment manager.  The Company’s deferred compensation plan assets are for the most part included in other noncurrent assets on the condensed consolidated balance sheets and primarily include investments in equity securities that are valued using active market prices.

 

Level 2 - Applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets) such as cash and cash equivalents and money market funds; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.

 

The Company’s cash equivalents are comprised of bank deposits and money market funds, which are valued using level 2 inputs, such as interest rates and maturity periods. Due to their short-term nature, their carrying amount approximates fair value.

 

The Company’s deferred compensation plan assets also include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources.  These sources price these investments using certain market indices and the performance of these investments in relation to these indices.  As a result, the Company has classified these investments as level 2 in the fair value hierarchy.

 

Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company has accrued for certain contingent consideration in connection with its business acquisitions, which is measured at fair value based on internal models and inputs primarily consisting of revenue and certain operating results targets. Changes to these inputs will result in insignificant increases in the fair value of these contingent considerations, or reducing the fair value to zero. The following table summarizes the activities related to contingent consideration:

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

December 31,
2013

 

December 31,
2012

 

December 31,
2013

 

December 31,
2012

 

 

 

(In thousands)

 

Beginning balance

 

$

16,000

 

$

10,431

 

$

25,000

 

$

1,151

 

Additions to accrual

 

 

15,000

 

 

25,000

 

Payments

 

 

(230

)

 

(625

)

Fair value adjustments

 

(3,700

)

 

(12,700

)

(325

)

Ending balance

 

$

12,300

 

$

25,201

 

$

12,300

 

$

25,201

 

 

The Company values deferred purchase price receivables relating to its asset-backed securitization program based on a discounted cash flow analysis using unobservable inputs (i.e., level 3 inputs), which are primarily risk free interest rates adjusted for the credit quality of the underlying creditor and due to its high credit quality and short term maturity their fair value approximates carrying value.  Significant increases in either of the significant unobservable inputs (credit spread, risk free interest rate) in isolation would result in lower fair value estimates.  Any change in fair value and the interrelationship between these inputs is insignificant.  Refer to

 

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note 10 to the condensed consolidated financial statements for a reconciliation of the change in the deferred purchase price receivable during the three-month and nine-month periods ended December 31, 2013 and December 31, 2012.

 

There were no transfers between levels in the fair value hierarchy during the three-month and nine-month periods ended December 31, 2013 and December 31, 2012.

 

Financial Instruments Measured at Fair Value on a Recurring Basis

 

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis:

 

 

 

Fair Value Measurements as of December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet)

 

$

 

$

882,918

 

$

 

$

882,918

 

Deferred purchase price receivable (Note 10)

 

 

 

528,830

 

528,830

 

Foreign exchange forward contracts (Note 8)

 

 

17,987

 

 

17,987

 

Deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

Mutual funds, money market accounts and equity securities

 

9,372

 

42,645

 

 

52,017

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts (Note 8)

 

$

 

$

(16,877

)

$

 

$

(16,877

)

Contingent consideration in connection with business acquisitions

 

 

 

(12,300

)

(12,300

)

 

 

 

Fair Value Measurements as of March 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet)

 

$

 

$

497,390

 

$

 

$

497,390

 

Deferred purchase price receivable (Note 10)

 

 

 

412,357

 

412,357

 

Foreign exchange forward contracts (Note 8)

 

 

27,563

 

 

27,563

 

Warrants to purchase common shares

 

 

 

74,437

 

74,437

 

Deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

Mutual funds, money market accounts and equity securities

 

6,931

 

40,972

 

 

47,903

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts (Note 8)

 

$

 

$

(15,290

)

$

 

$

(15,290

)

Contingent consideration in connection with business acquisitions

 

 

 

(25,000

)

(25,000

)

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

The Company has certain long-lived assets that are measured at fair value on a nonrecurring basis, and are as follows:

 

 

 

Fair Value Measurements as of December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

18,882

 

$

 

$

18,882

 

 

 

 

Fair Value Measurements as of March 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

11,089

 

$

 

$

11,089

 

Property and equipment

 

 

25,331

 

 

25,331

 

 

Assets held for sale

 

Assets held for sale are recorded at the lesser of the carrying value or fair value, which is based on comparable sales from prevailing market data (level 2 inputs).  During the nine-month period ended December 31, 2013, the Company recognized an

 

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impairment charge of $4.3 million in fair value adjustments and sold $9.1 million of assets held for sale.  The assets held for sale as of December 31, 2013 primarily represent manufacturing facilities that have been closed as part of the Company’s facility consolidations and the related manufacturing assets.

 

Property and equipment

 

Property and equipment includes the carrying value of certain assets that were impaired during the fiscal year ended March 31, 2013 as a result of the Company’s restructuring activities as further discussed in note 12 to the condensed consolidated financial statements.

 

There were no transfers between levels in the fair value hierarchy for these long-lived assets during the three-month and nine-month periods ended December 31, 2013 and December 31, 2012.

 

Other financial instruments

 

The following table presents the Company’s debt not carried at fair value:

 

 

 

As of December 31, 2013

 

As of March 31, 2013

 

 

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Fair Value

 

 

 

Amount

 

Value

 

Amount

 

Value

 

Hierarchy

 

 

 

(In thousands)

 

 

 

Term Loan, including current portion, due October 2014

 

$

 

$

 

$

170,340

 

$

170,496

 

Level 1

 

Term Loan, including current portion, due in installments through October 2016

 

436,641

 

435,824

 

517,500

 

518,794

 

Level 1

 

Term Loan, including current portion, due in installments through August 2018

 

600,000

 

591,000

 

 

 

Level 1

 

4.625% Notes due February 2020

 

500,000

 

502,350

 

500,000

 

507,190

 

Level 1

 

5.000% Notes due February 2023

 

500,000

 

472,250

 

500,000

 

500,000

 

Level 1

 

Asia Term Loans

 

 

 

375,000

 

375,343

 

Level 2

 

Total

 

$

2,036,641

 

$

2,001,424

 

$

2,062,840

 

$

2,071,823

 

 

 

 

The term loans and Notes are valued based on broker trading prices in active markets.

 

The Company’s Asia Term Loans were not traded publicly; however, as the pricing, maturity and other pertinent terms of these loans closely approximated those of the Term Loan Agreements dated October 1, 2007, and October 19, 2011, management estimated the respective trading prices would be approximately the same.

 

12.  RESTRUCTURING CHARGES

 

The Company initiated certain restructuring activities intended to improve its operational efficiencies by reducing excess workforce and capacity during fiscal year 2013. These restructuring activities extended through the first quarter of fiscal 2014. There were no restructuring charges incurred during the three-month period ended December 31, 2013. Restructuring charges are recorded based upon employee termination dates, site closure and consolidation plans.

 

During the nine-month period ended December 31, 2013, the Company recognized restructuring charges of approximately $40.8 million, of which $32.2 million was associated with the terminations of 5,106 identified employees. The identified employee terminations by reportable geographic region amounted to approximately 3,947, 1,105 and 54 for Asia, the Americas and Europe, respectively. The costs associated with these restructuring activities include employee severance, other personnel costs, non-cash impairment charges on equipment no longer in use and to be disposed of, and other exit related costs due to facility closures or rationalizations.  Of the total restructuring charges, $1.9 million were non-cash charges related to the impairment of long-lived assets, and were classified as a component of cost of sales.

 

The components of the restructuring charges by geographic region during the nine-month period ended December 31, 2013 were as follows:

 

 

 

Americas

 

Asia

 

Europe

 

Total

 

 

 

(In thousands)

 

Severance

 

$

11,331

 

$

16,205

 

$

4,631

 

$

32,167

 

Long-lived asset impairment

 

 

1,900

 

 

1,900

 

Other exit costs

 

2,248

 

3,157

 

1,288

 

6,693

 

Total restructuring charges

 

$

13,579

 

$

21,262

 

$

5,919

 

$

40,760

 

 

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The majority of severance costs were classified as a component of cost of sales.

 

During the nine-month period ended December 31, 2013, the Company recognized approximately $6.7 million of other exit costs, which was primarily comprised of $3.8 million related to personnel costs and $2.9 million of contractual obligations that resulted from facility closures. The majority of these costs were classified as a component of cost of sales.

 

The following table summarizes the provisions, respective payments, and remaining accrued balance as of December 31, 2013 for charges incurred in fiscal year 2014 and prior periods:

 

 

 

 

 

Long-Lived

 

Other

 

 

 

 

 

Severance

 

Asset Impairment

 

Exit Costs

 

Total

 

 

 

(In thousands)

 

Balance as of March 31, 2013

 

$

83,689

 

$

 

$

14,211

 

$

97,900

 

Provision for charges incurred in first quarter of fiscal year 2014

 

32,167

 

1,900

 

6,693

 

40,760

 

Cash payments for charges incurred in fiscal year 2014 and 2013

 

(21,523

)

 

(2,872

)

(24,395

)

Cash payments for charges incurred in fiscal year 2010 and prior

 

(236

)

 

(1,164

)

(1,400

)

Non-cash charges incurred in first quarter of fiscal year 2014

 

 

(1,900

)

 

(1,900

)

Balance as of June 28, 2013

 

94,097

 

 

16,868

 

110,965

 

Cash payments for charges incurred in fiscal year 2014 and 2013

 

(40,209

)

 

(4,717

)

(44,926

)

Cash payments for charges incurred in fiscal year 2010 and prior

 

(335

)

 

(277

)

(612

)

Balance as of September 27, 2013

 

53,553

 

 

11,874

 

65,427

 

Cash payments for charges incurred in fiscal year 2014 and 2013

 

(9,312

)

 

(3,178

)

(12,490

)

Cash payments for charges incurred in fiscal year 2010 and prior

 

(153

)

 

(194

)

(347

)

Balance as of December 31, 2013

 

44,088

 

 

8,502

 

52,590

 

Less: current portion (classified as other current liabilities)

 

40,265

 

 

5,563

 

45,828

 

Accrued restructuring costs, net of current portion (classified as other liabilities)

 

$

3,823

 

$

 

$

2,939

 

$

6,762

 

 

13.  BUSINESS AND ASSET ACQUISITIONS

 

On April 16, 2013, the Company completed the acquisition of certain manufacturing operations from Google’s Motorola Mobility LLC.  The Company also entered into a manufacturing and services agreement with Motorola Mobility LLC for mobile devices in conjunction with this acquisition.  This acquisition expanded the Company’s relationship with Google’s Motorola Mobility and its capabilities in the mobile devices market. The results of operations were included in the Company’s condensed consolidated financial results beginning on the date of acquisition.  Revenues were approximately 12.6% of total revenue for the three-month period ended December 31, 2013 and 10.1% of total revenue for the nine-month period ended December 31, 2013.  Income before tax of the acquired operations during the three-month and nine-month periods ended December 31, 2013 was not significant to the condensed consolidated financial results of the Company.  On a pro forma basis, the estimated increase to our previously reported revenue amounts to reflect the acquisition of this business as of the first day of the prior comparative period is $838.4 million and $2.7 billion for the three-month and nine-month periods ended December 31, 2012, respectively, and operating results for the same periods were immaterial.

 

The cash consideration for this acquisition amounted to $178.9 million. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values as of the date of acquisition.  Management is in the process of determining the fair value amounts for certain assets acquired, including the value of identifiable intangible assets and certain liabilities assumed.  The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.

 

The following represents the Company’s preliminary allocation of the total purchase price to the acquired assets and liabilities assumed of Google’s Motorola Mobility LLC as of December 31, 2013.  There were no changes in the fair value of assets acquired and liabilities assumed during the three-month period ended December 31, 2013.

 

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Amount

 

 

 

(In thousands)

 

Current assets:

 

 

 

Inventory

 

$

97,740

 

Other current assets

 

237

 

Total current assets

 

97,977

 

Property and equipment

 

45,198

 

Goodwill

 

2,844

 

Intangible assets — customer relationships

 

2,948

 

Other assets

 

31,457

 

Total assets

 

$

180,424

 

 

 

 

 

Current liabilities:

 

 

 

Other current liabilities

 

$

1,519

 

Total liabilities

 

1,519

 

Total aggregate purchase price

 

$

178,905

 

 

On November 4, 2013 the Company acquired all of the outstanding shares of Riwisa AG, a company registered in Switzerland for total cash consideration of $44.0 million, net of cash acquired amounting to $9.4 million.  This acquisition expanded the Company’s capabilities in the medical devices market, particularly precision plastics. The Company primarily acquired inventory, property and equipment and assumed certain liabilities relating to payables and debt. The results of operations were included in the Company’s condensed consolidated financial results beginning on the date of acquisition.  Pro-forma results of operations for this acquisition have not been presented because the effects of the acquisition were not material to the Company’s financial results.

 

The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values as of the date of acquisition.  Management is in the process of determining the fair value amounts for certain assets acquired, including the value of identifiable intangible assets and certain liabilities assumed.  The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.  The Company recorded $20.5 million as intangible assets and $18.7 million as goodwill based on a preliminary assessment of fair value of assets acquired and liabilities assumed.

 

Further, during the nine-month period ended December 31, 2013, the Company completed two other acquisitions for total cash consideration of $15.1 million.  Neither of these acquisitions was significant to the Company’s consolidated financial position, results of operations and cash flows.  These businesses expanded the Company’s capabilities primarily in manufacturing operations for plastic parts, components and molds.  The Company acquired primarily property and equipment and inventory and recorded goodwill amounting to $4.9 million in connection with these acquisitions.  The results of operations were included in the Company’s condensed consolidated financial results beginning on the date of these acquisitions.  Pro-forma results of operations for these acquisitions have not been presented because the effects of the acquisitions were immaterial to the Company’s financial results.  Additionally, transaction costs related to all acquisitions completed during the periods presented were immaterial to the Company’s financial results.

 

The Company continues to evaluate certain assets and liabilities related to business combinations completed during recent periods. Additional information, which existed as of the acquisition date, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities, as a result of such additional information, may result in a corresponding adjustment to goodwill.

 

14.  COMMITMENTS AND CONTINGENCIES

 

Litigation and other legal matters

 

On December 11, 2013, Xilinx, Inc. (plaintiff) filed a lawsuit in Santa Clara County, California, Superior Court against Flextronics International, Ltd.; Flextronics International USA, Inc.; and Flextronics Corporation (Case No. 113CV257431).  The complaint asserts various claims, including fraud, negligent misrepresentation, breach of contract, and unfair competition, based on specific alleged incidents concerning our purchases and sales of Xilinx products.  The plaintiff seeks an unspecified amount of compensatory, statutory, punitive, and other forms of damages, injunctive relief, and attorneys’ fees and costs.  The plaintiff also seeks a jury trial.  The Company is investigating the allegations and is unable to estimate a range of reasonably possible losses in this matter at this time.

 

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In addition, from time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including tax assessments. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in its condensed consolidated balance sheets would not be material to the financial statements as a whole.

 

15.  SHARE REPURCHASES

 

During the three-month and nine-month periods ended December 31, 2013 the Company repurchased 5.9 million shares at an aggregate purchase price of $44.4 million and 47.1 million shares at an aggregate purchase price of $357.1 million, respectively and retired all these shares.

 

On September 30, 2013, the Singapore Companies Act was amended to increase the share repurchase limit for companies incorporated in Singapore, from 10% to 20% of their shares outstanding as of the most recent shareholder approval date, subject to the requirements under the Singapore Companies Act.

 

16.  DISCONTINUED OPERATIONS

 

During fiscal year 2013, the Company finalized the sale of two non-core businesses.  In accordance with the accounting guidance, these non-core businesses qualified as discontinued operations, and accordingly, the Company reported the results of operations of these businesses in discontinued operations within the condensed consolidated statements of operations for all periods presented as applicable.

 

The results from discontinued operations for the three-month and nine-month periods ended December 31, 2012 were as follows:

 

 

 

Three-Month
Periods Ended

 

Nine-Month
Periods Ended

 

 

 

December 31,
2012

 

December 31,
2012

 

 

 

(In thousands)

 

Net sales

 

$

8,581

 

$

40,593

 

Cost of sales

 

8,487

 

42,793

 

Gross profit (loss)

 

94

 

(2,200

)

Selling, general and administrative expenses

 

3

 

1,930

 

Intangibles amortization

 

 

11,000

 

Interest and other, net

 

7,333

 

11,280

 

Loss before income taxes

 

(7,242

)

(26,410

)

Provision for (benefit from) income taxes

 

6

 

(959

)

Net loss of discontinued operations

 

$

(7,248

)

$

(25,451

)

 

Interest and other, net include the loss on sale of the businesses amounting to $4.7 million.  The Company did not have any discontinued operations during the nine-month period ended December 31, 2013.

 

All assets relating to the discontinued operations were sold as of March 31, 2013.

 

17.  SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

 

Flextronics International Ltd. (“Parent”) has two tranches of Notes of $500 million each outstanding, which mature on February 15, 2020 and February 15, 2023, respectively. These notes are senior unsecured obligations, and are guaranteed, fully and unconditionally, jointly and severally, on an unsecured basis, by certain of the Company’s 100% owned subsidiaries (the “guarantor subsidiaries”). These subsidiary guarantees will terminate upon 1) a sale or other disposition of the guarantor or the sale or disposition of all or substantially all the assets of the guarantor (other than to Flextronics or a subsidiary); 2) such guarantor ceasing to be a guarantor or a borrower under the Company’s Term Loan Agreement and the Revolving Line of Credit; 3) defeasance or discharge of the Notes, as provided in the Notes indenture; or 4) if at any time the notes are rated investment grade.

 

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In lieu of providing separate financial statements for the guarantor subsidiaries, the Company has included the accompanying condensed consolidating financial statements, which are presented using the equity method of accounting. The principal elimination entries relate to investment in subsidiaries and intercompany balances and transactions, including transactions with the Company’s non-guarantor subsidiaries.

 

Condensed Consolidating Balance Sheets as of December 31, 2013

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

604,128

 

$

45,962

 

$

967,155

 

$

 

$

1,617,245

 

Accounts receivable

 

 

899,441

 

1,651,589

 

 

2,551,030

 

Inventories

 

 

1,628,470

 

2,343,657

 

 

3,972,127

 

Inter company receivable

 

4,927,410

 

4,989,090

 

8,757,994

 

(18,674,494

)

 

Other current assets

 

518

 

243,060

 

1,308,943

 

 

1,552,521

 

Total current assets

 

5,532,056

 

7,806,023

 

15,029,338

 

(18,674,494

)

9,692,923

 

Property and equipment, net

 

 

437,412

 

1,943,299

 

 

2,380,711

 

Goodwill and other intangible assets, net

 

850

 

40,144

 

340,837

 

 

381,831

 

Other assets

 

2,595,312

 

104,605

 

4,569,256

 

(6,907,601

)

361,572

 

Investment in subsidiaries

 

3,962,146

 

(549,678

)

17,305,339

 

(20,717,807

)

 

Total assets

 

$

12,090,364

 

$

7,838,506

 

$

39,188,069

 

$

(46,299,902

)

$

12,817,037

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Bank borrowings and current portion of long-term debt

 

$

40,768

 

$

420

 

$

13,763

 

$

 

$

54,951

 

Accounts payable

 

 

1,221,335

 

3,747,305

 

 

4,968,640

 

Accrued payroll

 

 

91,227

 

294,413

 

 

385,640

 

Inter company payable

 

5,239,573

 

7,985,067

 

5,449,854

 

(18,674,494

)

 

Other current liabilities

 

44,065

 

633,231

 

1,977,965

 

 

2,655,261

 

Total current liabilities

 

5,324,406

 

9,931,280

 

11,483,300

 

(18,674,494

)

8,064,492

 

Long term liabilities

 

4,545,211

 

2,067,962

 

2,792,421

 

(6,907,601

)

2,497,993

 

Flextronics International Ltd. shareholders’ equity

 

2,220,747

 

(4,160,736

)

24,912,348

 

(20,751,612

)

2,220,747

 

Noncontrolling interests

 

 

 

 

33,805

 

33,805

 

Total shareholders’ equity

 

2,220,747

 

(4,160,736

)

24,912,348

 

(20,717,807

)

2,254,552

 

Total liabilities and shareholders’ equity

 

$

12,090,364

 

$

7,838,506

 

$

39,188,069

 

$

(46,299,902

)

$

12,817,037

 

 

Condensed Consolidating Balance Sheets as of March 31, 2013

 

 

 

Parent