FLEX LTD. - Quarter Report: 2012 September (Form 10-Q)

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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 September 28, 2012

 

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)

 

 

Registrant’s telephone number, including area code

(65) 6890 7188

 

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):

 

 

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

 

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 October 22, 2012
Ordinary Shares, No Par Value		663,220,260

 

 

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FLEXTRONICS INTERNATIONAL LTD.

 

INDEX

 

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Report of Independent Registered Public Accounting Firm	3
	Condensed Consolidated Balance Sheets (unaudited) — September 28, 2012 and March 31, 2012	4
	Condensed Consolidated Statements of Operations (unaudited) — Three-Month and Six-Month Periods Ended September 28, 2012 and September 30, 2011	5
	Condensed Consolidated Statements of Comprehensive Income (unaudited) — Three-Month and Six-Month Periods Ended September 28, 2012 and September 30, 2011	6
	Condensed Consolidated Statements of Cash Flows (unaudited) —Six-Month Periods Ended September 28, 2012 and September 30, 2011	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		30

 

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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 September 28, 2012, the related condensed consolidated statements of operations and of comprehensive income for the three-month and six-month periods ended September 28, 2012 and September 30, 2011, and the condensed consolidated statements of cash flows for the six-month periods ended September 28, 2012 and September 30, 2011. 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, 2012, 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 25, 2012, 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, 2012 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

 

October 26, 2012

 

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FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		As of			As of
		September 28, 2012			March 31, 2012
		(In thousands,
		except share amounts)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,561,569		$	1,518,329
Accounts receivable, net of allowance for doubtful accounts of $15,028 and $39,071 as of September 28, 2012 and March 31, 2012, respectively		2,400,558			2,593,829
Inventories		3,121,534			3,300,791
Current assets of discontinued operations		19,818			21,642
Other current assets		1,337,766			1,099,959
Total current assets		8,441,245			8,534,550
Property and equipment, net		2,179,297			2,076,442
Goodwill and other intangible assets, net		299,934			159,924
Long-term assets of discontinued operations		6,692			41,417
Other assets		262,100			221,471
Total assets		$	11,189,268		$	11,033,804
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank borrowings, current portion of long-term debt and capital lease obligations		$	218,955		$	42,467
Accounts payable		4,208,471			4,294,873
Accrued payroll		379,407			345,337
Current liabilities of discontinued operations		19,521			24,854
Other current liabilities		1,597,969			1,580,654
Total current liabilities		6,424,323			6,288,185
Long-term debt and capital lease obligations, net of current portion		1,876,756			2,157,798
Other liabilities		435,246			303,842
Commitments and contingencies (Note 11)
Shareholders’ equity
Ordinary shares, no par value; 717,364,229 and 733,979,527 issued, and 667,124,874 and 683,740,173 outstanding as of September 28, 2012 and March 31, 2012, respectively		8,187,184			8,292,370
Treasury shares, at cost; 50,239,355 shares as of September 28, 2012 and March 31, 2012		(388,215		)	(388,215		)
Accumulated deficit		(5,300,720		)	(5,579,739		)
Accumulated other comprehensive loss		(45,306		)	(40,437		)
Total shareholders’ equity		2,452,943			2,283,979
Total liabilities and shareholders’ equity		$	11,189,268		$	11,033,804

 

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

 

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FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three-Month Periods Ended						Six-Month Periods Ended
		September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
		(In thousands, except per share amounts)
		(Unaudited)
Net sales		$	6,174,841		$	8,008,428		$	12,150,836		$	15,503,716
Cost of sales		5,808,069			7,635,910			11,426,707			14,730,422
Gross profit		366,772			372,518			724,129			773,294
Selling, general and administrative expenses		192,183			210,378			382,527			422,198
Intangible amortization		7,265			11,459			15,074			23,580
Interest and other expense (income), net		(10,450		)	1,419			335			23,668
Income from continuing operations before income taxes		177,774			149,262			326,193			303,848
Provision for income taxes		17,321			15,313			28,971			32,594
Income from continuing operations		160,453			133,949			297,222			271,254
Loss from discontinued operations, net of tax		(9,906		)	(4,069		)	(18,203		)	(9,399		)
Net income		$	150,547		$	129,880		$	279,019		$	261,855
Earnings per share:
Income from continuing operations:
Basic		$	0.24		$	0.19		$	0.44		$	0.37
Diluted		$	0.24		$	0.18		$	0.44		$	0.36
Loss from discontinued operations:
Basic		$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.01	)
Diluted		$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.01	)
Net income:
Basic		$	0.23		$	0.18		$	0.42		$	0.36
Diluted		$	0.22		$	0.18		$	0.41		$	0.35
Weighted-average shares used in computing per share amounts:
Basic		666,265			722,208			670,816			734,485
Diluted		678,086			731,049			683,171			745,436

 

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

 

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FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three-Month Periods Ended						Six-Month Periods Ended
		September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
		(In thousands)
		(Unaudited)
Net income		$	150,547		$	129,880		$	279,019		$	261,855
Other comprehensive income (loss):
Foreign currency translation adjustments, net of zero tax		21,135			(35,830		)	(10,972		)	(35,757		)
Unrealized gain (loss) on derivative instruments and other, net of zero tax		22,218			(37,347		)	6,103			(44,144		)
Comprehensive income		$	193,900		$	56,703		$	274,150		$	181,954

 

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

 

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FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Six-Month Periods Ended
		September 28, 2012			September 30, 2011
		(In thousands)
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	279,019		$	261,855
Depreciation, amortization and other impairment charges		229,700			237,498
Changes in working capital and other		19,126			(62,473		)
Net cash provided by operating activities		527,845			436,880
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(264,471		)	(260,703		)
Proceeds from the disposition of property and equipment		19,275			23,760
Acquisition of businesses, net of cash acquired		7,834			(21,426		)
Proceeds from divestiture of business, net of cash held in divested business		16,472			—
Other investing activities, net		(58,077		)	2,408
Net cash used in investing activities		(278,967		)	(255,961		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings and long-term debt		160,185			1,616,545
Repayments of bank borrowings, long-term debt and capital lease obligations		(272,211		)	(1,620,748		)
Payments for repurchase of ordinary shares		(134,014		)	(306,057		)
Net proceeds from issuance of ordinary shares		10,636			6,230
Other financing activities, net		31,273			—
Net cash used in financing activities		(204,131		)	(304,030		)
Effect of exchange rates on cash and cash equivalents		(1,507		)	(29,651		)
Net increase (decrease) in cash and cash equivalents		43,240			(152,762		)
Cash and cash equivalents, beginning of period		1,518,329			1,748,471
Cash and cash equivalents, end of period		$	1,561,569		$	1,595,709

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  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 provider of vertically-integrated advanced design, manufacturing and services to original equipment manufacturers (“OEMs”) of a broad range of electronic products 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, consumer electronics, including game consoles, high-volume computing business, including notebook personal computing (“PC”), tablets, printers, and our original design manufacturing (“ODM”) PC business which we exited in fiscal 2012; Industrial and Emerging Industries (“IEI”), which is comprised of our white goods, equipment, and 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, vertically-integrated global supply chain services through which the Company can design, build, ship and service a complete packaged product for its OEM customers. OEM customers leverage the Company’s services to meet their product requirements throughout the entire product life cycle.

 

The Company’s service offerings include rigid and flexible printed circuit board fabrication, systems assembly and manufacturing (including enclosures, testing services, materials procurement and inventory management), logistics, after-sales services (including product repair, warranty services, re-manufacturing and maintenance), supply chain management software solutions and component product offerings. Additionally, the Company provides a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers.

 

2.  SUMMARY OF ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

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, 2012 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 six-month periods ended September 28, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013.

 

The first quarter for fiscal 2013 and fiscal 2012 ended on June 29, 2012 and July 1, 2011, respectively. The second quarter for fiscal 2013 and fiscal 2012 ended on September 28, 2012 and September 30, 2011, 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.

 

The Company recognized a $23.0 million gain as a component of interest and other expense (income), net in the three-month period ended September 28, 2012 for the cumulative fair value adjustment of the Company’s warrants to purchase common shares of a supplier.  These fully-vested warrants, which are derivative instruments, are to be fair valued at each reporting date with gains or losses from changes in fair value recognized in the statements of operations. The gain from changes in fair value recognized in the three-month period ended September 28, 2012 includes an out-of-period adjustment of $12.8 million and the six-month period ended September 28, 2012 includes an out-of-period adjustment of $5.7 million.  Management believes the impact of the error is not material to current or prior fiscal periods.

 

During the second quarter of fiscal 2013, the Company finalized a plan to sell a non-core business. An agreement was entered into on October 15, 2012, and the sale is expected to close in fiscal 2013.

 

During the first quarter of fiscal 2013, the Company finalized the sale of certain assets of its Vista Point Technologies camera modules business, including intellectual property and the China-based manufacturing operations to Tessera Technologies, Inc. (“Tessera Technologies”), and DigitalOptics Corporation, a wholly-owned subsidiary of Tessera Technologies.

 

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In accordance with the accounting guidance, these non-core businesses represent separate asset groups and the divestitures qualify as discontinued operations, and accordingly, the Company has reported the results of operations and financial position of these businesses in discontinued operations within the condensed consolidated statements of operations and the condensed consolidated balance sheets for all periods presented as applicable.

 

For the six-month period ended September 30, 2011, approximately $902.2 million of proceeds from bank borrowings and repayment of bank borrowings, related to certain short-term facilities, were previously reflected on a gross basis in the condensed consolidated statements of cash flows. These amounts should have been reflected on a net basis in “repayment of bank borrowings, long-term debt and capital lease obligations” and have been corrected in the accompanying condensed consolidated statements of cash flows. The correction had no net impact on total cash used in financing activities.  This error had no impact on current year cash flows.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consisted of the following:

 

		As of			As of
		September 28, 2012			March 31, 2012
		(In thousands)
Cash and bank balances		$	1,245,634		$	1,174,423
Money market funds and time deposits		315,935			343,906
		$	1,561,569		$	1,518,329

 

Inventories

 

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

 

		As of			As of
		September 28, 2012			March 31, 2012
		(In thousands)
Raw materials		$	1,955,335		$	1,952,358
Work-in-progress		498,034			537,753
Finished goods		668,165			810,680
		$	3,121,534		$	3,300,791

 

Other Current Assets / Other Assets

 

Other current assets includes approximately $458.1 million and $514.9 million as of September 28, 2012 and March 31, 2012, respectively, for the deferred purchase price receivable from our Global and North American Asset-Backed Securitization programs (see note 8).  Additionally, as of September 28, 2012, $224.3 million was included in other current assets related to customer specific manufacturing assets financed by a third party banking institution on behalf of one of our customers as discussed further in note 10 to the condensed consolidated financial statements.

 

As discussed further under the basis of presentation and principles of consolidation, the Company recognized a $23.0 million gain for the fair value adjustment of the Company’s warrants to purchase common shares of a supplier.  The fair value of the warrants is included in other assets on the condensed consolidated balance sheet as of September 28, 2012.

 

Property and Equipment

 

Depreciation expense associated with property and equipment was approximately $98.3 million and $198.2 million for the three-month and six-month periods ended September 28, 2012, respectively, and $101.7 million and $201.0 million for the three-month and six-month periods ended September 30, 2011, respectively.

 

Goodwill and Other Intangibles

 

The following table summarizes the activity in the Company’s goodwill account during the six-month period ended September 28, 2012:

 

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		Amount
		(In thousands)
Balance, beginning of the year		$	101,670
Acquisitions (1)		68,319
Foreign currency translation adjustments		(379		)
Balance, end of the quarter		$	169,610

 

(1)                  The amount is attributable to certain acquisitions that were not individually, nor in the aggregate, significant to the Company. See note 10 to the condensed consolidated financial statements for additional information.

 

The components of acquired intangible assets are as follows:

 

		As of September 28, 2012									As of March 31, 2012
		Gross						Net			Gross						Net
		Carrying			Accumulated			Carrying			Carrying			Accumulated			Carrying
		Amount			Amortization			Amount			Amount			Amortization			Amount
		(In thousands)
Intangible assets:
Customer-related intangibles		$	243,581		$	(212,307	)	$	31,274		$	243,681		$	(199,238	)	$	44,443
Licenses and other intangibles		110,737			(11,687		)	99,050			22,740			(8,929		)	13,811
Total		$	354,318		$	(223,994	)	$	130,324		$	266,421		$	(208,167	)	$	58,254

 

The gross carrying amounts of intangible assets are removed when the recorded amounts have been fully amortized. During the three-month period ended September 28, 2012, the Company recognized a charge for impairment of customer-related intangible assets with a net carrying amount of $10.0 million, which is included in the results from discontinued operations, in connection with the non-core business expected to be divested during fiscal 2013 based on the carrying value of net assets and the expected sale proceeds.  During the first fiscal quarter of 2013, the value of intangible assets increased by $88.0 million relating to a license agreement for exclusive manufacturing rights and certain manufacturing technologies and processes in connection with an acquisition as more fully described in note 10 to the condensed consolidated financial statements.  Total intangible amortization expense was $8.1 million and $15.9 million during the three-month and six-month periods ended September 28, 2012, respectively, of which $0.8 million was recorded in cost of sales during the quarter ended September 28, 2012 in connection with the aforementioned acquisition.  Total intangible amortization expense was $11.5 million and $23.6 million during the three-month and six-month periods ended September 30, 2011, respectively. The estimated future annual amortization expense for acquired intangible assets is as follows:

 

Fiscal Year Ending March 31,		Total
		(In thousands)
2013 (1)		$	25,793
2014		45,030
2015		48,394
2016		7,809
2017		1,959
Thereafter		1,339
Total amortization expense		$	130,324

 

(1)       Represents estimated amortization for the six-month period ending March 31, 2013.

 

Other Current Liabilities

 

Other current liabilities include customer working capital advances amounting to $210.8 million and $326.6 million and deferred revenue amounting to $231.1 million and $329.6 million as of September 28, 2012 and March 31, 2012, respectively. Additionally, as of September 28, 2012, $197.5 million was included in other current liabilities related to customer specific assets financed by a third party banking institution on behalf of one of our customers as discussed further in note 10 to the condensed consolidated financial statements.

 

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3.  SHARE-BASED COMPENSATION

 

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

 

		Three-Month Periods Ended						Six-Month Periods Ended
		September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
		(In thousands)
Cost of sales		$	1,058		$	2,293		$	2,515		$	4,307
Selling, general and administrative expenses		7,316			11,955			15,677			22,218
Total stock-based compensation expense		$	8,374		$	14,248		$	18,192		$	26,525

 

Total unrecognized compensation expense related to share options is $2.7 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 2.3 years. As of September 28, 2012, the number of options outstanding and exercisable was 37.6 million and 36.4 million, respectively, at weighted-average exercise prices of $7.98 and $8.02 per share, respectively.

 

During the six-month period ended September 28, 2012, the Company granted 8.9 million unvested share bonus awards at an average grant date price of $6.79 per share, under its 2010 Equity Incentive Plan.  Of this amount, approximately 2.2 million represents the target amount of grants made to certain key employees whereby vesting is contingent on a certain market condition.  The number of shares that ultimately will vest are based on a measurement of Flextronics’s total shareholder return against the Standard and Poor’s (“S&P”) 500 Composite Index 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 4.4 million.  The average grant-date fair value of these awards was estimated to be $7.64 per share and was calculated using a Monte Carlo simulation.  As of September 28, 2012, approximately 22.3 million of unvested share bonus awards were outstanding, of which vesting for 4.4 million is contingent on meeting the certain market condition above. The number of shares issued can range from zero to 7.6 million based on the achievement levels of the targeted market condition.

 

As of September 28, 2012, total unrecognized compensation expense related to unvested share bonus awards is $90.2 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 2.9 years. Approximately $11.7 million of the total unrecognized compensation cost, net of estimated forfeitures, is related to awards whereby vesting is contingent on meeting a certain market condition, as discussed above.

 

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						Six-Month Periods Ended
		September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
		(In thousands, except per share amounts)
Basic earnings from continuing and discontinued operations per share:
Income from continuing operations		$	160,453		$	133,949		$	297,222		$	271,254
Loss from discontinued operations		$	(9,906	)	$	(4,069	)	$	(18,203	)	$	(9,399	)
Net income		$	150,547		$	129,880		$	279,019		$	261,855
Shares used in computation:
Weighted-average ordinary shares outstanding		666,265			722,208			670,816			734,485
Basic earnings from continuing operations per share		$	0.24		$	0.19		$	0.44		$	0.37
Basic loss from discontinued operations per share		$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.01	)
Basic earnings per share		$	0.23		$	0.18		$	0.42		$	0.36
Diluted earnings from continuing and discontinued operations per share:
Income from continuing operations		$	160,453		$	133,949		$	297,222		$	271,254
Loss from discontinued operations		$	(9,906	)	$	(4,069	)	$	(18,203	)	$	(9,399	)
Net income		$	150,547		$	129,880		$	279,019		$	261,855
Shares used in computation:
Weighted-average ordinary shares outstanding		666,265			722,208			670,816			734,485
Weighted-average ordinary share equivalents from stock options and awards (1)		11,821			8,841			12,355			10,951
Weighted-average ordinary shares and ordinary share equivalents outstanding		678,086			731,049			683,171			745,436
Diluted earnings from continuing operations per share		$	0.24		$	0.18		$	0.44		$	0.36
Diluted loss from discontinued operations per share		$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.01	)
Diluted earnings per share		$	0.22		$	0.18		$	0.41		$	0.35

 

(1)       Ordinary share equivalents from share options to purchase approximately 20.4 million shares and 27.4 million shares outstanding during the three-month

 

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periods ended September 28, 2012 and September 30, 2011, respectively, and 21.6 million shares and 26.8 million shares outstanding during the six-month periods ended September 28, 2012 and September 30, 2011, 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 Company’s ordinary shares during the respective periods.

 

5. BANK BORROWINGS, LONG-TERM DEBT & CAPITAL LEASE OBLIGATIONS

 

Bank borrowings and long-term debt are as follows:

 

		As of			As of
		September 28, 2012			March 31, 2012
		(In thousands)
Term Loan, including current portion, due in installments through October 2014		$	1,173,425		$	1,179,595
New Term Loan, including current portion, due in installments through October 2016		531,250			487,500
Asia Term Loans		376,000			377,000
Outstanding under revolving line of credit		—			140,000
Other		4,763			4,578
		2,085,438			2,188,673
Current portion		(215,840		)	(39,340		)
Non-current portion		$	1,869,598		$	2,149,333

 

New Term Loan due October 2016

 

On September 28, 2012, the Company increased the limit on its New Term Loan maturing in October 2016 by $50.0 million and borrowed the entire incremental amount.

 

Asia Term Loans

 

As of September 28, 2012, there were $376.0 million in borrowings outstanding under the Company’s Asia term loans, of which $174.0 million will be due in September 2013.  Accordingly, this amount is classified as bank borrowings, current portion of long-term debt and capital leases on the condensed consolidated balance sheet as of September 28, 2012.

 

Revolving Line of Credit

 

During the quarter ended September 28, 2012, the Company repaid all amounts outstanding under its $1.5 billion revolving line of credit facility.

 

6. INTEREST AND OTHER EXPENSE (INCOME), NET

 

During the three-month and six-month periods ended September 28, 2012, the Company recognized interest expense of $15.5 million and $31.3 million, respectively, on its debt obligations outstanding during the period. During the three-month and six-month periods ended September 30, 2011, the Company recognized interest expense of $16.6 million and $32.9 million, respectively.

 

During the three-month and six-month periods ended September 28, 2012, the Company recognized interest income of $4.8 million and $11.8 million, respectively. During the three-month and six-month periods ended September 30, 2011, the Company recognized interest income of $4.7 million and $8.0 million, respectively.

 

During the three-month and six-month periods ended September 28, 2012, the Company recognized gains on foreign exchange transactions of $2.8 million and $7.6 million, respectively.  During the three-month and six-month periods ended September 30, 2011, the Company recognized gains on foreign exchange transactions of $16.1 million and $21.7 million, respectively.

 

During the three-month and six-month periods ended September 28, 2012, the Company recognized a gain of $23.0 million for the fair value adjustment of the Company’s warrants to purchase common shares of a supplier as discussed in note 2.

 

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7.  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 September 28, 2012, the aggregate notional amount of the Company’s outstanding foreign currency forward and swap contracts was $3.2 billion as summarized below:

 

		Foreign Currency Amount				Notional Contract Value in USD
Currency		Buy		Sell		Buy			Sell
		(In thousands)
Cash Flow Hedges
CNY		2,904,030		—		$	460,789		$	—
EUR		20,599		9,729		26,479			12,420
HUF		13,818,000		—		62,350			—
ILS		153,600		—		39,089			—
MXN		1,499,900		—		116,774			—
MYR		386,600		—		125,662			—
SGD		46,700		—		38,026			—
Other		N/A		N/A		63,918			500
						933,087			12,920
Other Forward/Swap Contracts
BRL		34,900		54,200		17,140			26,618
CAD		34,417		44,470		35,095			45,449
CNY		932,472		931,248		148,000			148,000
EUR		388,999		198,361		500,165			254,416
GBP		14,536		34,690		23,443			56,187
HUF		5,394,500		5,502,300		24,341			24,828
JPY		6,412,466		3,371,577		82,528			43,192
MXN		701,555		216,920		54,619			16,888
MYR		187,020		40,250		60,790			13,083
SEK		2,371,420		756,283		360,346			114,776
SGD		31,163		4,385		25,375			3,571
Other		N/A		N/A		111,576			35,227
						1,443,418			782,235
Total Notional Contract Value in USD						$	2,376,505		$	795,155

 

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 expense (income), net 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 September 28, 2012 and March 31, 2012, the Company also has included net deferred gains and losses, respectively, 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 and losses were not material, and the deferred gains as of September 28, 2012 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 expense (income), 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:

 

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		Fair Values of Derivative Instruments
		Asset Derivatives								Liability Derivatives
				Fair Value								Fair Value
		Balance Sheet		September 28,			March 31,			Balance Sheet		September 28,			March 31,
		Location		2012			2012			Location		2012			2012
		(In thousands)
Derivatives designated as hedging instruments
Foreign currency contracts		Other current assets		$	16,631		$	10,075		Other current liabilities		$	1,563		$	1,905
Derivatives not designated as hedging instruments
Foreign currency contracts		Other current assets		$	7,711		$	10,894		Other current liabilities		$	5,367		$	6,200

 

8.  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 sells 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 six-month periods ended September 28, 2012 and September 30, 2011 were not material and are included in interest and other expense (income), 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 September 28, 2012, approximately $1.0 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 $575.6 million and deferred purchase price receivables of approximately $458.1 million.  As of March 31, 2012, approximately $1.1 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $556.8 million and deferred purchase price receivables of approximately $514.9 million.  The deferred purchase price receivables are included in other current assets as of September 28, 2012 and March 31, 2012, 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 expense (income), net in the condensed consolidated statements of operations; such amounts were $1.8 million and $3.5 million for the three-month and six-month periods ended September 28, 2012, respectively, and $3.0 million and $6.3 million for the three-month and six-month periods ended September 30, 2011.

 

As of September 28, 2012 and March 31, 2012, 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 six-month periods ended September 28, 2012 and September 30, 2011, cash flows from sales of receivables under the ABS Programs consisted of approximately $1.9 billion and $2.4 billion for transfers of receivables, respectively (of which approximately $0.3 billion and $0.2 billion, respectively represented new transfers and the remainder proceeds from collections reinvested in revolving-period transfers).

 

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

 

		Three-Month Periods Ended						Six-Month Periods Ended
		September 28, 2012			September 30, 2011			September 28, 2012			September 30, 2011
		(In thousands)
Beginning balance		$	513,907		$	681,348		$	514,895		$	459,994
Transfers of receivables		835,538			1,768,462			1,715,482			2,883,576
Collections		(891,360		)	(1,377,149		)	(1,772,292		)	(2,270,909		)
Ending balance		$	458,085		$	1,072,661		$	458,085		$	1,072,661

 

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 $181.7 million and $110.5 million as of September 28, 2012 and March 31, 2012, respectively. For the six-month periods ended September 28, 2012 and September 30, 2011, total accounts receivable sold to certain third party banking institutions was approximately $622.3 million and $1.0 billion, respectively. The loss on sales of accounts receivables sold was not material for the three and six month periods ended September 28, 2012 and September 30, 2011.  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.

 

9. 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 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.

 

The Company values available for sale investments using level 1 inputs which are active market trading 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); 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.

 

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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, but is insignificant. The interrelationship between these inputs is also insignificant.  Refer to note 8, Trade Receivable Securitization, for a reconciliation of the change in the deferred purchase price receivable during the six-month periods ended September 28, 2012 and September 30, 2011.

 

As discussed in note 2, the Company has warrants to purchase up to 1.35 million shares of the common stock of a certain supplier at a weighted-average price of $7.33 per share.  The warrants expire on May 18, 2018.  The Company values these warrants based on the Black-Scholes option-valuation model using unobservable inputs classified as level 3 in the fair value hierarchy.  For the quarter ended September 28, 2012 the Company used the following assumptions to fair value these warrants:

 

		As of September 28, 2012
Remaining life		5.6 years
Volatility		55%
Dividend yield		0%
Risk-free rate		0.75%

 

The Company recognized $23.0 million for the fair value adjustment of these warrants during the three-month and six-month periods ended September 28, 2012.  There were no other additions or changes in the valuation of these warrants during the above periods.

 

There were no transfers between levels in the fair value hierarchy during the three-month and six-month periods ended September 28, 2012 and September 30, 2011.

 

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:

 

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		Fair Value Measurements as of September 28, 2012
		Level 1			Level 2			Level 3			Total
		(In thousands)
Assets:
Money market funds and time deposits (Note 2)		$	—		$	315,935		$	—		$	315,935
Deferred purchase price receivable (Note 8)		—			—			458,085			458,085
Foreign exchange forward contracts (Note 7)		—			24,342			—			24,342
Available for sale investments		5,056			—			—			5,056
Warrants to purchase common shares (Note 2)		—			—			23,000			23,000
Deferred compensation plan assets:
Mutual funds, money market accounts and equity securities		3,049			54,800			—			57,849
Liabilities:
Foreign exchange forward contracts (Note 7)		$	—		$	(6,930	)	$	—		$	(6,930	)

 

		Fair Value Measurements as of March 31, 2012
		Level 1			Level 2			Level 3			Total
		(In thousands)
Assets:
Money market funds and time deposits (Note 2)		$	—		$	343,906		$	—		$	343,906
Deferred purchase price receivable (Note 8)		—			—			514,895			514,895
Foreign exchange forward contracts (Note 7)		—			20,969			—			20,969
Available for sale investments		5,994			—			—			5,994
Deferred compensation plan assets:
Mutual funds, money market accounts and equity securities		3,411			54,241			—			57,652
Liabilities:
Foreign exchange forward contracts (Note 7)		$	—		$	(8,105	)	$	—		$	(8,105	)

 

Other financial instruments

 

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

 

		As of September 28, 2012						As of March 31, 2012
		Carrying			Fair			Carrying			Fair			Fair Value
		Amount			Value			Amount			Value			Hierarchy
		(In thousands)
Term loan dated October 1, 2007		$	1,173,425		$	1,167,599		$	1,179,595		$	1,171,959		Level 1
Term loan dated October 19, 2011		531,250			530,586			487,500			482,625			Level 1
Asia term loans		376,000			374,133			377,000			374,394			Level 2
Revolving credit facility		—			—			140,000			140,000			Level 2
Total		$	2,080,675		$	2,072,318		$	2,184,095		$	2,168,978

 

Revolving credit facility - The carrying amount, if any, approximates fair value due to the short term nature of the interest rates underlying any borrowings under this facility, though the facility itself is available to the Company on a long term basis.

 

Term loans dated October 1, 2007 and October 19, 2011 - The term loans are valued based on broker trading prices in active markets.

 

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

 

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