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Flextronics Announces Third Quarter Results, Takes Nortel Charge
January 28, 2009 | PR NewswireEstimated reading time: 5 minutes
Net sales for the third quarter ended December 31, 2008 were $8.2 billion compared to net sales for the third quarter ended December 31, 2007 of $9.1 billion. Adjusted operating income for the third quarter ended December 31, 2008 was $185.8 million with an adjusted operating margin of 2.3%, compared to adjusted operating income of $300.1 million and an adjusted operating margin of 3.3% one year ago. Adjusted net income for the third quarter ended December 31, 2008 was $126.8 million and adjusted EPS was $0.16, compared to $249.9 million and $0.30, respectively, for the year ago quarter.
Flextronics recorded a non-cash charge in the amount of $5.9 billion in the third quarter ended December 31, 2008, to write-off the entire carrying value of its goodwill. The impairment charge was driven by a significant decrease in the company's valuation compared to the quarter ended September 27, 2008 primarily due to declines in the stock market and adverse macroeconomic conditions that contributed to an overall reduction in demand for the company's offerings. These conditions resulted in a significant decrease in the company's market capitalization and required management to perform an interim goodwill impairment test during the December quarter, which resulted in a determination that all of the company's goodwill was impaired. This non-cash charge does not impact the company's normal business operations, liquidity or availability under its credit facilities.
Additionally, during the quarter the company recognized a distressed customer charge of approximately $145 million associated with the filing for bankruptcy by Nortel. This charge is comprised of $47 million of provisions for pre-bankruptcy accounts receivable and $98 million for the write-down of inventory. The bankruptcy proceedings are in the early stages and management will continue to monitor and re-evaluate the situation and will refine its estimates, if and when better information presents itself. Flextronics has been selected to serve as a member and Chairperson of the Official Committee of Unsecured Creditors in Nortel's U.S. Chapter 11 cases.
On December 30, 2008, Flextronics announced the results of its previously announced cash tender offer for up to $250.0 million in aggregate principal amount of its outstanding 1% convertible subordinated notes due August 1, 2010. The company accepted for purchase approximately $259,999,000 in aggregate principal amount of notes validly tendered and not withdrawn at a purchase price of $870 per $1,000 principal amount, or $226.2 million. As a result of the tender offer, the company recognized a net gain of approximately $28.1 million net of transaction costs and the write-off of related debt issuance costs. As of December 31, 2008 $240.0 million of these notes remain outstanding.
"We continue to be very focused on our liquidity, cash generation, and strengthening our balance sheet. During the quarter, we leveraged our solid cash position to opportunistically retire $260.0 million of debt through the 1% convertible tender offer. We remain focused on optimizing our capital structure in light of our business opportunities," said Paul Read, chief financial officer of Flextronics.
"We are extremely pleased with our working capital improvements during the quarter, especially the reduction of $1.0 billion of inventory. We have generated $658.0 million in free cash flow year-to-date (defined as net cash provided by operating activities, less purchases of property & equipment, net of dispositions), closed the quarter with $3.6 billion of liquidity, and expect to further improve our working capital during this difficult economic environment. We note that the non-cash $5.9 billion goodwill impairment charge does not affect our liquidity, and we completed the quarter well within the limits of our financial covenants," added Read.
"Clearly, we are operating in a difficult economic environment, where demand deterioration has put pressure on our business as reflected in our December quarter results and our fourth quarter guidance," said Mike McNamara, chief executive officer of Flextronics. "Although times are challenging, we have a strong management team that has been tested in the past and is reacting appropriately and efficiently in taking on these challenges. Our execution on the controllable aspects of our business has been outstanding including significant reductions in inventory levels, improved cash cycle days, significant free cash flow generation, and reduced operating expenses. We strongly believe that our competitive strengths including our low-cost industrial park concept, vertically integrated end-to-end solutions, significant scale, customer and end-market diversification and long-standing customer relationships will enhance our competitive position in these uncertain times."
Guidance
The company's guidance reflects the unusually low levels of visibility that many of its customers have in the current environment. For the fourth quarter ending March 31, 2009, revenue is expected to be in the range of $5.5 billion to $6.5 billion and adjusted EPS is expected to be in the range of $0.02 to $0.07 per share.
GAAP earnings per share are expected to be lower than the guidance provided herein by approximately $0.05 per share for quarterly intangible amortization and stock-based compensation expense.
2004 Award Plan for New Employees
Separately and in the ordinary course of business, Flextronics granted 22,500 share bonus awards to new employees on December 5, 2008 from the 2004 Award Plan for New Employees. The share bonus awards vest over three years and unvested awards expire upon termination of employment.
Conference Calls and Web Casts
A conference call hosted by Flextronics's management will be held today at 5:00 p.m. EST/2:00 p.m. PST to discuss the company's financial results for the third quarter ended December 31, 2008.
The conference call will be broadcast via the Internet and may be accessed by logging on to the company's Web site. Additional information in the form of a slide presentation may also be found on the company's site. A replay of the broadcast will remain available on the site afterwards at http://www.flextronics.com.
Minimum requirements to listen to the broadcast are Microsoft Windows Media Player software and at least a 28.8 Kbps bandwidth connection to the Internet.
About Flextronics
Headquartered in Singapore (Singapore Reg. No. 199002645H), Flextronics is a leading EMS provider focused on delivering complete design, engineering and manufacturing services to automotive, computing, consumer digital, industrial, infrastructure, medical and mobile OEMs. Flextronics helps customers design, build, ship, and service electronics products through a network of facilities in 30 countries on four continents. This global presence provides design and engineering solutions that are combined with core electronics manufacturing and logistics services, and vertically integrated with components technologies, to optimize customer operations by lowering costs and reducing time to market. For more information, visit http://www.flextronics.com.