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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 June 28, 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) 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):

 

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.

 

 

 

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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) — June 28, 2013 and March 31, 2013	4
	Condensed Consolidated Statements of Operations (unaudited) — Three-Month Periods Ended June 28, 2013 and June 29, 2012	5
	Condensed Consolidated Statements of Comprehensive Income (unaudited) — Three-Month Periods Ended June 28, 2013 and June 29, 2012	6
	Condensed Consolidated Statements of Cash Flows (unaudited) — Three-Month Periods Ended June 28, 2013 and June 29, 2012	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
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 June 28, 2013, and the related condensed consolidated statements of operations, comprehensive income, and cash flows for the three-month periods ended June 28, 2013 and June 29, 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

 

August 1, 2013

 

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FLEXTRONICS INTERNATIONAL LTD.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		As of			As of
		June 28, 2013			March 31, 2013
		(In thousands,
		except share amounts)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,279,574		$	1,587,087
Accounts receivable, net of allowance for doubtful accounts of $6,093 and $10,877 as of June 28, 2013 and March 31, 2013, respectively		2,480,022			2,111,996
Inventories		3,152,397			2,722,500
Other current assets		1,316,475			1,349,818
Total current assets		8,228,468			7,771,401
Property and equipment, net		2,278,266			2,174,588
Goodwill and other intangible assets, net		348,665			343,552
Other assets		313,525			302,014
Total assets		$	11,168,924		$	10,591,555
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank borrowings and current portion of long-term debt		$	409,860		$	416,654
Accounts payable		4,323,873			3,705,297
Accrued payroll		367,591			351,683
Other current liabilities		1,846,402			1,699,151
Total current liabilities		6,947,726			6,172,785
Long-term debt, net of current portion		1,650,536			1,650,973
Other liabilities		482,054			521,039
Commitments and contingencies (Note 12)
Shareholders’ equity
Ordinary shares, no par value; 667,598,410 and 689,159,139 issued, and 617,359,055 and 638,919,784 outstanding as of June 28, 2013 and March 31, 2013, respectively		7,825,378			8,015,142
Treasury shares, at cost; 50,239,355 shares as of June 28, 2013 and March 31, 2013		(388,215		)	(388,215		)
Accumulated deficit		(5,243,431		)	(5,302,688		)
Accumulated other comprehensive loss		(105,124		)	(77,481		)
Total shareholders’ equity		2,088,608			2,246,758
Total liabilities and shareholders’ equity		$	11,168,924		$	10,591,555

 

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
		June 28, 2013			June 29, 2012
		(In thousands, except per share amounts)
		(Unaudited)
Net sales		$	5,791,125		$	5,975,995
Cost of sales		5,444,964			5,618,638
Restructuring charges		35,126			—
Gross profit		311,035			357,357
Selling, general and administrative expenses		217,985			190,344
Intangible amortization		8,202			7,809
Restructuring charges		5,634			—
Interest and other expense, net		19,684			10,785
Income from continuing operations before income taxes		59,530			148,419
Provision for income taxes		273			11,650
Income from continuing operations		59,257			136,769
Loss from discontinued operations, net of tax		—			(8,297		)
Net income		$	59,257		$	128,472
Earnings per share:
Income from continuing operations:
Basic		$	0.09		$	0.20
Diluted		$	0.09		$	0.20
Loss from discontinued operations:
Basic		$	—		$	(0.01	)
Diluted		$	—		$	(0.01	)
Net income:
Basic		$	0.09		$	0.19
Diluted		$	0.09		$	0.19
Weighted-average shares used in computing per share amounts:
Basic		626,120			675,366
Diluted		639,899			688,256

 

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
		June 28, 2013			June 29, 2012
		(In thousands)
		(Unaudited)
Net income		$	59,257		$	128,472
Other comprehensive loss:
Foreign currency translation adjustments, net of zero tax		(17,509		)	(32,107		)
Unrealized loss on derivative instruments and other, net of zero tax		(10,134		)	(16,115		)
Comprehensive income		$	31,614		$	80,250

 

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

 

		Three-Month Periods Ended
		June 28, 2013			June 29, 2012
		(In thousands)
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	59,257		$	128,472
Depreciation, amortization and other impairment charges		119,051			111,684
Changes in working capital and other		20,268			(194,558		)
Net cash provided by operating activities		198,576			45,598
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(144,737		)	(117,395		)
Proceeds from the disposition of property and equipment		3,364			12,808
Acquisition of businesses, net of cash acquired		(187,543		)	18,835
Proceeds from divestiture of business, net of cash held in divested business		—			16,472
Other investing activities, net		30,179			(11,834		)
Net cash used in investing activities		(298,737		)	(81,114		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings and long-term debt		158			110,018
Repayments of bank borrowings, long-term debt and capital lease obligations		(9,151		)	(120,779		)
Payments for repurchase of ordinary shares		(215,210		)	(134,014		)
Net proceeds from issuance of ordinary shares		10,909			5,776
Other financing activities, net		15,652			(38,480		)
Net cash used in financing activities		(197,642		)	(177,479		)
Effect of exchange rates on cash and cash equivalents		(9,710		)	(20,281		)
Net decrease in cash and cash equivalents		(307,513		)	(233,276		)
Cash and cash equivalents, beginning of period		1,587,087			1,518,329
Cash and cash equivalents, end of period		$	1,279,574		$	1,285,053
Non-cash investing activity:
Accounts payable for fixed assets purchases		$	126,231		$	89,634

 

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 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 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, high-volume computing business, including notebook personal computing (“PC”), tablets, and printers; Industrial and Emerging Industries (“IEI”), which is comprised of large household appliances, equipment, 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 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.

 

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 period ended June 28, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2014.

 

The first quarter for fiscal year 2014 and fiscal year 2013 ended on June 28, 2013 and June 29, 2012, respectively.

 

2.   BALANCE SHEET ITEMS

 

Inventories

 

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

 

		As of			As of
		June 28, 2013			March 31, 2013
		(In thousands)
Raw materials		$	1,946,361		$	1,683,098
Work-in-progress		510,900			421,706
Finished goods		695,136			617,696
		$	3,152,397		$	2,722,500

 

Goodwill and Other Intangibles

 

The following table summarizes the activity in the Company’s goodwill account during the three-month period ended June 28, 2013:

 

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		Amount
		(In thousands)
Balance, beginning of the year		$	262,005
Additions (1)		2,256
Purchase accounting adjustments		1,724
Balance, end of the quarter		$	265,985

(1)     The goodwill generated from the Company’s business combinations completed during the three-month period ended June 28, 2013 is not significant, and 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.

 

The components of acquired intangible assets are as follows:

 

		As of June 28, 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		$	298,711		$	(227,037	)	$	71,674		$	294,310		$	(224,517	)	$	69,793
Licenses and other intangibles		21,040			(10,034		)	11,006			21,040			(9,286		)	11,754
Total		$	319,751		$	(237,071	)	$	82,680		$	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 June 28, 2013, the Company acquired customer-related intangibles in connection with an acquisition as further discussed under note 11 to the condensed consolidated financial statements. The estimated future annual amortization expense for acquired intangible assets is as follows:

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

 

3.  SHARE-BASED COMPENSATION

 

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

 

		Three-Month Periods Ended
		June 28, 2013			June 29, 2012
		(In thousands)
Cost of sales		$	1,352		$	1,457
Selling, general and administrative expenses		7,237			8,361
Total stock-based compensation expense		$	8,589		$	9,818

 

Total unrecognized compensation expense related to share options is $1.5 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 1.7 years. As of June 28, 2013, the number of options outstanding

 

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and exercisable was 31.4 million and 30.8 million, respectively, at weighted-average exercise prices of $8.69 and $8.72 per share, respectively.

 

During the three-month period ended June 28, 2013, the Company granted 4.8 million unvested share bonus awards at an average grant date price of $8.34 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 are 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 Systems (“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 June 28, 2013, approximately 20.9 million unvested share bonus awards were outstanding, of which vesting for 5.7 million is contingent on meeting certain market conditions.  The number of shares issued can range from zero to 10.8 million based on the achievement levels of the respective market conditions.

 

As of June 28, 2013, total unrecognized compensation expense related to unvested share bonus awards is $102.5 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 2.57 years. Approximately $22.7 million of the total unrecognized compensation cost, net of estimated forfeitures, is related to awards whereby vesting is contingent on meeting certain market conditions.

 

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
		June 28, 2013			June 29, 2012
		(In thousands, except per share amounts)
Basic earnings from continuing and discontinued operations per share:
Income from continuing operations		$	59,257		$	136,769
Loss from discontinued operations		—			(8,297		)
Net income		$	59,257		$	128,472
Shares used in computation:
Weighted-average ordinary shares outstanding		626,120			675,366
Basic earnings from continuing operations per share		$	0.09		$	0.20
Basic loss from discontinued operations per share		$	—		$	(0.01	)
Basic earnings per share		$	0.09		$	0.19
Diluted earnings from continuing and discontinued operations per share:
Income from continuing operations		$	59,257		$	136,769
Loss from discontinued operations		—			(8,297		)
Net income		$	59,257		$	128,472
Shares used in computation:
Weighted-average ordinary shares outstanding		626,120			675,366
Weighted-average ordinary share equivalents from stock options and awards (1)		13,779			12,890
Weighted-average ordinary shares and ordinary share equivalents outstanding		639,899			688,256
Diluted earnings from continuing operations per share		$	0.09		$	0.20
Diluted loss from discontinued operations per share		$	—		$	(0.01	)
Diluted earnings per share		$	0.09		$	0.19

 

(1)                    Options to purchase ordinary shares of 19.2 million and 23.4 million during the three-month periods ended June 28, 2013 and June 29, 2012, respectively, and share bonus awards of 2.5 million and 6.6 million during the three-month periods ended June 28, 2013 and June 29, 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.

 

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5. INTEREST AND OTHER EXPENSE, NET

 

During the three-month periods ended June 28, 2013 and June 29, 2012, the Company recognized interest expense of $20.2 million and $15.8 million, respectively, on its debt obligations outstanding during the period.  The weighted average interest rates for the Company’s long-term debt were 3.5% and 2.4% for the three month periods ended June 28, 2013 and June 29, 2012, respectively.

 

During the three-month periods ended June 28, 2013 and June 29, 2012, the Company recognized interest income of $3.3 million and $7.0 million, respectively.

 

During each of the three-month periods ended June 28, 2013 and June 29, 2012, the Company recognized gains on foreign exchange transactions of $4.7 million.

 

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 three-month period ended June 28, 2013. Further, the Company recognized a gain related to changes in the fair value of contingent considerations in connection with certain immaterial historical acquisitions.

 

6.  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 June 28, 2013, the aggregate notional amount of the Company’s outstanding foreign currency forward and swap contracts was $4.1 billion as summarized below:

 

		Foreign Currency Amount				Notional Contract Value in USD
Currency		Buy		Sell		Buy			Sell
		(In thousands)
Cash Flow Hedges
CNY		3,257,900		—		$	529,998		$	—
EUR		9,345		11,182		12,154			14,961
HUF		12,438,000		—		54,603			—
ILS		24,400		—		6,707			—
MXN		1,692,900		—		128,531			—
MYR		271,700		—		84,800			—
SGD		40,250		—		31,587			—
Other		N/A		N/A		61,881			—
						910,261			14,961
Other Forward/Swap Contracts
BRL		113,500		73,500		51,874			33,592
CAD		110,256		126,644		105,564			121,281
CNY		1,605,223		4,900		260,725			797
EUR		535,510		612,755		697,845			797,023
GBP		32,857		57,351		50,317			87,728
HUF		14,272,300		15,997,600		62,656			70,230
JPY		8,472,067		5,145,773		86,546			52,538
MXN		1,339,160		844,290		101,674			64,102
MYR		189,515		35,630		59,149			11,120
SEK		581,969		754,807		86,808			112,181
SGD		35,511		10,039		27,867			7,878
Other		N/A		N/A		149,230			66,843
						1,740,255			1,425,313
Total Notional Contract Value in USD						$	2,650,516		$	1,440,274

 

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

 

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expense, 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 June 28, 2013 and March 31, 2013, the Company also has included net deferred losses and gains, 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 losses and gains were not material, and the deferred losses as of June 28, 2013 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, 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		June 28, 2013			March 31, 2013			Balance Sheet Location		June 28, 2013			March 31, 2013
		(In thousands)
Derivatives designated as hedging instruments
Foreign currency contracts		Other current assets		$	5,946		$	11,032		Other current liabilities		$	11,407		$	3,999
Derivatives not designated as hedging instruments
Foreign currency contracts		Other current assets		$	9,261		$	16,531		Other current liabilities		$	14,981		$	11,291

 

As of June 28, 2013, the Company did not have any master netting arrangements.  The asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets.  Accordingly, there are no offsetting amounts that net assets against liabilities.

 

7. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss by component, net of tax, during the three-month period ended June 28, 2013 are as follows:

 

		Unrealized loss on derivative instruments and other			Foreign currency translation adjustments			Total
		(In thousands)
Beginning balance		$	18,857		$	58,624		$	77,481
Other comprehensive loss before reclassifications		6,245			17,509			23,754
Net gains reclassified from accumulated other comprehensive loss		3,889			—			3,889
Net current-period other comprehensive loss		10,134			17,509			27,643
Ending balance		$	28,991		$	76,133		$	105,124

 

Substantially all unrealized losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month period ended June 28, 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.

 

8.  TRADE RECEIVABLES SECURITIZATION

 

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

 

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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 periods ended June 28, 2013 and June 29, 2012 were not material and are included in interest and other expense, 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 June 28, 2013, 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 $591.2 million and deferred purchase price receivables of approximately $420.9 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 June 28, 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 expense, net in the condensed consolidated statements of operations; such amounts were $1.4 million and $1.8 million for the three-month periods ended June 28, 2013 and June 29, 2012, respectively.

 

As of June 28, 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 three-month periods ended June 28, 2013 and June 29, 2012, cash flows from sales of receivables under the ABS Programs consisted of approximately $0.9 billion and $1.0 billion for transfers of receivables, respectively (of which approximately $0.1 billion 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
		June 28, 2013			June 29, 2012
		(In thousands)
Beginning balance		$	412,357		$	514,895
Transfers of receivables		882,918			879,944
Collections		(874,388		)	(880,932		)
Ending balance		$	420,887		$	513,907

 

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 $216.4 million and $163.6 million as of June 28, 2013 and March 31, 2013, respectively. For the three-month periods ended June 28, 2013 and June 29, 2012, total accounts receivable sold to certain third party banking institutions was approximately $268.7 million and $367.8 million, respectively. The loss on sales of accounts receivables sold was not material for the three-month periods ended June 28, 2013 and June 29, 2012 and recorded in interest and other expense, 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.

 

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,

 

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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
		June 28, 2013			June 29, 2012
		(In thousands)
Beginning balance		$	25,000		$	1,151
Additions to accrual		—			5,000
Payments		—			(207		)
Fair value adjustments		(6,000		)	—
Ending balance		$	19,000		$	5,944

 

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 to the condensed consolidated financial statements for a reconciliation of the change in the deferred purchase price receivable during the three-month periods ended June 28, 2013 and June 29, 2012.

 

There were no transfers between levels in the fair value hierarchy during the three-month periods ended June 28, 2013 and June 29, 2012.

 

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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 June 28, 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)		$	—		$	618,278		$	—		$	618,278
Deferred purchase price receivable (Note 8)		—			—			420,887			420,887
Foreign exchange forward contracts (Note 6)		—			15,207			—			15,207
Deferred compensation plan assets:
Mutual funds, money market accounts and equity securities		7,058			41,357			—			48,415
Liabilities:
Foreign exchange forward contracts (Note 6)		$	—		$	(26,388	)	$	—		$	(26,388	)
Contingent consideration in connection with business acquisitions		—			—			(19,000		)	(19,000		)

 

		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 8)		—			—			412,357			412,357
Foreign exchange forward contracts (Note 6)		—			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 6)		$	—		$	(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 June 28, 2013
		Level 1			Level 2			Level 3			Total
		(In thousands)
Assets:
Assets held for sale		$	—		$	28,554		$	—		$	28,554

 

		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 quarter ended June 28, 2013, the Company recognized an additional $1.9 million in fair value adjustments to machinery and equipment previously impaired in its restructuring activities during fiscal year 2013 and classified these assets as held for sale as of June 28, 2013.  The assets held for sale as of June 28, 2013 primarily represent manufacturing facilities that have been closed as part of the Company’s facility consolidations and the related manufacturing assets.

 

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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 10 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 periods ended June 28, 2013 and June 29, 2012.

 

Other financial instruments

 

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

 

		As of June 28, 2013						As of March 31, 2013
		Carrying			Fair			Carrying			Fair			Fair Value
		Amount			Value			Amount			Value			Hierarchy
		(In thousands)
Term loan dated October 1, 2007		$	170,340		$	169,088		$	170,340		$	170,496		Level 1
Term loan dated October 19, 2011		510,625			509,042			517,500			518,794			Level 1
4.625% Notes dated February 20, 2013 (due 2020)		500,000			487,500			500,000			507,190			Level 1
5.000% Notes dated February 20, 2013 (due 2023)		500,000			489,700			500,000			500,000			Level 1
Asia term loans		374,500			371,749			375,000			375,343			Level 2
Total		$	2,055,465		$	2,027,079		$	2,062,840		$	2,071,823

 

The term loans and Notes are valued based on broker trading prices in active markets, except for the Asia term loans.

 

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.

 

10. 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 quarter ended June 28, 2013. Restructuring charges are recorded based upon employee termination dates, site closure and consolidation plans.

 

During the three-month period ended June 28, 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 are 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 three-month period ended June 28, 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

 

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

 

During the three-month period ended June 28, 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.

 

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