Flex Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2020. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Amounts are in U.S. dollars unless stated otherwise.
Business context
Flex provides design, manufacturing, supply-chain and after-sales services across approximately 30 countries. It reports two segments: Flex Agility Solutions (FAS), serving communications, lifestyle and consumer-device markets; and Flex Reliability Solutions (FRS), serving automotive, health and industrial markets. The company reorganized its segments in fiscal 2021 and recast prior-period segment comparisons. The current third quarter had 97 days versus 95 days in the prior-year quarter.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Nine months ended Dec. 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $6.720 billion | $6.461 billion | $17.858 billion | $18.725 billion |
| Gross profit / margin | $479 million / 7.2% | $430 million / 6.7% | $1.177 billion / 6.5% | $972 million / 5.2% |
| Net income | $208 million | $111 million | $373 million | $39 million |
| Diluted EPS | $0.41 | $0.22 | $0.74 | $0.08 |
| Segment income | $311 million | $256 million | $721 million | $691 million |
Quarterly sales increased 4%; nine-month sales fell 5%. Quarterly FAS sales rose 5.6% to $3.834 billion and FRS sales rose 2.0% to $2.886 billion. For nine months, FAS sales declined 9.5% to $10.063 billion, while FRS sales increased 2.4% to $7.795 billion. Ten largest customers represented 36% of quarterly sales and 37% of nine-month sales; no single customer exceeded 10%.
Quarterly FAS segment margin improved to 4.0% from 2.7%; FRS margin declined to 6.2% from 6.6%. Nine-month FAS margin was 3.1% versus 2.7%, and FRS margin was 6.1% versus 6.2%. Company net margin was 3.2% for the quarter and 1.9% for the nine months.
Quarterly interest and other, net expense was $7 million, compared with $50 million; nine-month expense was $58 million, compared with $153 million. Results benefited from equity-method investment earnings, including unrealized gains of $49 million for the quarter and $63.6 million for nine months. These gains were partly offset by investment impairment charges, including $20.1 million in the quarter.
Cash flow, liquidity and debt
- Nine-month net cash used in operating activities was $17 million, versus $1.699 billion used in the prior-year period. Management cited cash outflows associated with lower balances in receivables-sale and factoring programs.
- Capital expenditures, net of asset-sale proceeds, were $236 million. Management’s adjusted free cash flow, a non-GAAP measure, was $542 million versus $538 million; the calculation adds back a $796 million reduction in ABS financing during the period.
- Cash and cash equivalents were $2.611 billion at December 31, 2020, up from $1.923 billion at March 31, 2020. Total debt was approximately $3.812 billion, up from $2.838 billion; cash less total debt implies net debt of approximately $1.201 billion.
- Flex issued $675 million of 3.750% notes due 2026 and $650 million of 4.875% notes due 2030, and repaid a $433 million term loan due 2022. The weighted-average interest rate on long-term debt was 4.0%. Flex reported compliance with debt covenants.
- The company had no borrowings under its $1.75 billion revolving facility at quarter-end. In January 2021 it replaced that facility with a $2.0 billion revolving credit facility due 2026. Management said liquidity was adequate for at least the next 12 months.
- Management-defined net working capital increased to $2.7 billion from $1.4 billion at March 31, primarily because receivables increased as Flex reduced its use of receivables-sale programs.
Changes, outlook and notable items
- Management said COVID-19-related costs exceeded $140 million during the first nine months, including health and safety measures, labor incentives, supply-chain costs and under-absorbed factory costs. These costs declined significantly by the third quarter, but pandemic-related demand and production pressures persisted.
- Flex reported plant closures or restrictions in Brazil and Malaysia amid a renewed COVID-19 wave, and expected semiconductor shortages to continue at least through the end of fiscal 2021. Automotive component constraints were already emerging.
- Management expected revenue to continue improving across end markets but cautioned that consumer-spending-related businesses, including Lifestyle and Consumer Devices, could remain pressured if demand slows. The filing provides no specific numerical earnings or revenue guidance.
- Restructuring charges were $30 million for the quarter and $75 million for nine months, primarily employee severance. Management said actions target non-core corporate activities, cost alignment and focus on end markets where Flex believes it has competitive advantages.
- Flex was pursuing alternatives for NEXTracker, potentially including an IPO, sale, spin-off or other transaction; no outcome was specified.
- Material disclosed uncertainties include possible OFAC penalties following a completed voluntary disclosure concerning potential sanctions noncompliance; disputed foreign tax assessments of approximately $162.5 million and $80 million; and Brazilian tax assessments. Management said it believes it has defenses and did not expect the tax matters to materially adversely affect the company, though outcomes remain uncertain.
- A securities class action was dismissed with prejudice in December 2020; the lead plaintiff appealed in January 2021. Flex said it intends to defend the case. Management noted that losses on legal matters could exceed accrued amounts, but could not estimate a reasonably possible excess loss.
Most important facts for investors to verify
- Whether revenue recovery and margin gains continue, especially in FAS, and whether FRS margins recover from product transitions and ramp costs.
- How semiconductor shortages, factory restrictions and COVID-19-related costs affect production, customer demand, inventory and cash generation.
- Whether operating cash flow improves as receivables financing and working-capital levels stabilize; assess adjusted free cash flow alongside its GAAP reconciliation.
- Debt levels, refinancing terms and liquidity after the January 2021 credit-facility replacement, including the effect of the new facility’s sustainability-linked pricing adjustments.
- Developments in the NEXTracker strategic review, OFAC matter, foreign tax disputes and securities-litigation appeal.