Business context and reporting period
Flex Ltd. filed this unaudited Form 10-Q for the quarter ended December 31, 2021, the third quarter of its fiscal 2022, and the nine months then ended. Flex provides design, manufacturing, supply-chain and related services globally through Flex Agility Solutions (FAS) and Flex Reliability Solutions (FRS). The quarter comprised 91 days, compared with 97 days in the prior-year quarter. Deloitte’s interim review found no material modifications needed for GAAP conformity; this was a review, not an audit.
Financial performance
Amounts are U.S. dollars; financial statement amounts below are in millions unless noted.
| Metric | Three months ended Dec. 31, 2021 | Prior-year quarter | Nine months ended Dec. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Net sales | $6,619 | $6,720 | $19,190 | $17,858 |
| Gross profit / margin | $491 / 7.4% | $479 / 7.2% | $1,428 / 7.4% | $1,177 / 6.5% |
| Operating income / margin | $251 / 3.7% | $240 / 3.7% | $745 / 3.9% | $512 / 2.7% |
| Net income | $227 | $208 | $769 | $373 |
| Diluted EPS | $0.48 | $0.41 | $1.58 | $0.74 |
- Quarterly sales declined about 2%; operating income rose about 5% and net income rose about 9%. Nine-month sales increased about 7%, operating income about 45%, and net income more than doubled.
- Nine-month interest and other was income of $103 million versus expense of $58 million in the prior year, primarily reflecting a $150 million non-cash Brazilian tax-credit gain. Excluding that item, year-to-date earnings comparisons are less favorable than reported net income suggests.
- Quarterly FAS sales fell 7% to $3.581 billion, while segment income rose to $163 million and margin improved to 4.6%. FRS sales grew 5% to $3.038 billion, but segment income fell to $154 million and margin declined to 5.1%. For nine months, FAS sales rose 4% and FRS sales rose 12%; FAS margin improved to 4.3%, while FRS margin declined to 5.4%.
- The company attributed improved gross margins to cost discipline, productivity, business mix and prior restructuring. FRS profitability was pressured by automotive production disruption and freight and logistics costs, particularly in Industrial.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $664 million, versus cash used of $17 million a year earlier. Capital expenditures, net of disposals, were $324 million; reported adjusted free cash flow was $340 million versus $542 million. The prior-year adjusted figure included a $795 million add-back for reduction in asset-backed securitization levels and other items, limiting direct comparability.
- Cash and equivalents were $2.574 billion at December 31, 2021. Total debt was $4.446 billion, including $648 million classified as current; net debt was approximately $1.9 billion. The weighted-average debt interest rate was 3.5%. The $2.0 billion revolving credit facility had no borrowings outstanding, and Flex reported compliance with debt covenants.
- Current assets were $13.213 billion and current liabilities $9.642 billion. Inventory rose to $5.958 billion from $3.895 billion at March 31, 2021. Management said component shortages, buffer-stock needs, higher inventory pricing and logistics constraints drove working-capital pressure; net working capital increased to $3.9 billion from $2.9 billion.
- Cash decreased $63 million over the nine months. Investing cash outflow was $828 million, including $523 million net cash paid for Anord Mardix. Financing cash inflow was $108 million, including borrowings partly offset by $580 million of share repurchases.
- Management stated that cash, expected operating cash flow and available borrowing capacity should be sufficient for operations and commitments for at least the next 12 months, while noting that working-capital pressure may continue.
Material changes, outlook and risks
- Supply-chain disruption, semiconductor and other component shortages, COVID-related workforce constraints, transportation bottlenecks and elevated logistics costs continued to affect operations. Management expected these conditions and related costs to persist in the near future, and said inventory would take additional time to rebalance.
- FAS quarterly weakness reflected a planned project completion in Consumer Devices and component and logistics constraints in CEC. FRS growth was led by Industrial demand, including EV charging, renewables, semiconductor equipment and robotics. Flex noted that automotive and Health Solutions faced specific headwinds.
- Flex completed its Anord Mardix acquisition on December 1, 2021, for total consideration of approximately $539 million. The business expands critical-power offerings and is included in FRS Industrial; its results were immaterial to the reported periods. Purchase-price allocation remained subject to valuation updates.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management’s stated near-term outlook emphasized persistent supply and logistics constraints; full-year results were said not necessarily to be indicated by interim results.
- Significant contingencies include an OFAC voluntary-disclosure matter, for which penalties could be material; Brazilian tax assessments; and a foreign tax assessment of approximately $163.9 million that Flex is contesting. Management said it could not estimate potential losses beyond recorded accruals in certain matters. The securities class action was affirmed dismissed by the appeals court, with the decision effective January 12, 2022.
- On February 1, 2022, after quarter-end, Flex agreed to sell Nextracker preferred units to TPG Rise for $500 million, representing approximately 16.7% ownership at an implied $3.0 billion valuation. The units carry a 5% dividend and include conversion and repurchase provisions. Flex said Nextracker would be reported as a separate segment for the fiscal year ending March 31, 2022.
Important facts for investors to verify
- Assess earnings quality by separating the $150 million non-cash Brazilian tax-credit gain from recurring operating performance and confirming its expected tax-offset use.
- Track inventory, net working capital, customer advances and operating cash conversion as component shortages and logistics constraints continue.
- Review debt maturities and refinancing needs, including the $648 million current debt balance and the one-year euro term loan; confirm ongoing covenant compliance.
- Evaluate whether FRS margin pressure and FAS demand trends persist, and whether management’s expected supply-chain normalization materializes.
- Monitor the resolution and potential financial exposure of the OFAC matter and contested tax assessments, as well as the final Anord Mardix purchase-price allocation.
- Review the Nextracker preferred-unit terms, including dividend, conversion and repurchase rights, and the implications for Flex’s ownership and future reporting.