Flex Ltd. Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended September 25, 2020; comparisons are to the periods ended September 27, 2019. Amounts are in U.S. dollars and millions unless stated otherwise.
Business context
Flex provides design, manufacturing, supply-chain and related services across global end markets. It reorganized reporting into Flex Agility Solutions (FAS), serving communications, lifestyle and consumer-device markets, and Flex Reliability Solutions (FRS), serving automotive, health and industrial markets. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $5.985bn, down 2% year over year | $11.138bn, down 9% |
| Gross profit / margin | $395m / 6.6%, versus $189m / 3.1% | $698m / 6.3%, versus $542m / 4.4% |
| Income (loss) before tax | $153m, versus $(96)m | $221m, versus $(32)m |
| Net income (loss) | $113m; diluted EPS $0.22, versus net loss of $117m and diluted loss per share of $0.23 | $165m; diluted EPS $0.33, versus net loss of $72m and diluted loss per share of $0.14 |
| Operating cash flow | Not presented by quarter in the filing text | $(365)m, versus $(1.648)bn |
| Adjusted free cash flow | Not presented by quarter in the filing text | $252m, versus $301m |
Gross-margin improvement reflected a more favorable business mix and substantially lower restructuring charges and customer-asset impairment charges than in the prior year. Prior-year restructuring charges were $114m for the quarter and $161m for the six months, compared with $35m and $45m, respectively, in fiscal 2021. Adjusted free cash flow is a non-GAAP measure; the company’s calculation adds back the reduction in ABS balances and should not be viewed as a substitute for GAAP operating cash flow.
Segments and material changes
- FAS: Quarterly sales were $3.318bn, down 7%; six-month sales were $6.230bn, down 17%. Segment income was $88m for the quarter and $160m for the half year. Consumer Devices weakness and the strategic reduction of exposure to high-volatility businesses weighed on sales.
- FRS: Quarterly sales were $2.667bn, up 6%; six-month sales were $4.908bn, up 3%. Segment income was $179m for the quarter and $294m for the half year. Health Solutions demand was strong; automotive recovered after first-quarter shutdowns but remained below pre-pandemic levels.
- COVID-19-related costs exceeded $130m in the first half, including health and safety measures, labor incentives, supply-chain costs and under-absorbed overhead. Costs declined significantly in the second quarter as demand improved, but pandemic-related production and demand pressures continued in some markets.
- The company reported $6.0bn cash and equivalents at quarter end: $2.359bn cash and $3.739bn long-term debt plus $63m current debt. Total debt carrying value was $3.802bn, up from $2.838bn at March 31, 2020. The $1.75bn revolving facility had no borrowings outstanding; the company said it was in covenant compliance.
- Cash increased by $436m from fiscal year-end. Operating cash use was attributed in part to reduced balances under receivables-securitization and factoring programs. Net working capital rose to $2.6bn from $1.4bn, chiefly as receivables increased after reducing those programs.
Outlook, risks and contingencies
The filing gives no quantified revenue or earnings guidance. Management expects revenue to continue improving across end markets, but cautions that consumer-spending businesses may remain pressured if demand slows for an extended period. Automotive recovery is expected to take time. Management expects liquidity sources to fund operations and commitments for at least 12 months, while noting that inventory rebalancing and an uncertain operating environment remain challenges.
Flex expects approximately $60m of additional restructuring charges as further actions are approved during the remainder of fiscal 2021. It issued notes due 2026 and 2030, received approximately $1.4bn in proceeds, and repaid the $433m term loan due 2022. No shares were repurchased in the first half; $500m remained authorized for repurchases.
Material uncertainties include possible penalties related to the company’s completed voluntary disclosure to OFAC concerning possible sanctions noncompliance; contested foreign tax assessments, including approximately $145m and $80m asserted by separate tax authorities; Brazilian tax assessments; and shareholder litigation, for which a motion to dismiss was scheduled for hearing in December 2020. Flex states that it intends to contest these matters. It says loss contingencies accrued for individual legal matters were not material, but actual losses could exceed accruals and management could not estimate an excess-loss range for certain matters.
Important facts for investors to verify
- Whether improved margins and profitability persist after accounting for the prior-year restructuring and impairment comparison, and for continuing COVID-19 costs.
- How FAS sales, consumer-device demand, automotive recovery and Health Solutions growth evolve in subsequent quarters.
- Whether operating cash flow improves as receivables, inventory and receivables-financing balances normalize; review the company’s adjusted-free-cash-flow reconciliation.
- Debt maturity profile, interest costs, covenant compliance and the use of proceeds from the 2026 and 2030 note issuances.
- Developments and potential financial exposure in the OFAC, foreign tax, Brazilian tax and shareholder-litigation matters.