Flex Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended June 28, 2019. The comparable period ended June 29, 2018. Unless otherwise noted, amounts are U.S. dollars. Deloitte reviewed the interim financial statements; this was not an audit.
Business context and results
Flex provides design, engineering, manufacturing and supply-chain services. Its segments are High Reliability Solutions (HRS), Industrial and Emerging Industries (IEI), Communications and Enterprise Compute (CEC), and Consumer Technologies Group (CTG).
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $6.176 billion | $6.399 billion |
| Gross profit / margin | $353 million / 5.7% | $378 million / 5.9% |
| Operating income | Not separately presented | Not separately presented |
| Income before tax | $64 million | $142 million |
| Net income | $45 million | $116 million |
| Diluted EPS | $0.09 | $0.22 |
| Cash used in operating activities | $657 million | $943 million |
Revenue declined about 3.5% year over year. By segment, sales increased $191 million in IEI and declined $281 million in CTG, $95 million in CEC and $37 million in HRS. Segment income was $208 million, or 3.4% of sales, compared with $188 million, or 2.9%. IEI’s segment margin improved to 5.8%; CEC’s fell to 1.4%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $1.920 billion at June 28, up from $1.697 billion at March 31, 2019.
- Cash used in operations was $657 million, primarily reflecting working-capital outflows. Investing activities provided $775 million, including $899 million of collections of deferred purchase price from receivables securitizations. Management’s non-GAAP free cash flow measure was $114 million, versus a use of $185 million in the prior-year quarter.
- Total debt carrying value was approximately $3.238 billion, including $276 million classified as current. The company had $1.75 billion available under its revolving credit facility, with no borrowings outstanding, and reported compliance with debt covenants.
- Flex issued $450 million of 4.875% notes due 2029 and entered into a yen-denominated term loan due 2024, swapped to U.S. dollars. Proceeds, together with cash, funded partial repayment of 2020 notes and a 2021 term loan.
- Net working capital was approximately $1.7 billion, or 6.8% of annualized sales, within management’s stated 6%–8% target range. The company said existing cash, expected operating cash flows and available borrowing capacity should fund operations for at least 12 months.
Material changes and unusual items
- Prior-year results included $86.9 million of other income, primarily a $91.8 million gain from deconsolidating Bright Machines. This makes the year-over-year decline in pretax income and net income larger than the underlying sales and segment-income changes alone suggest.
- Q1 FY2020 included $56.2 million of restructuring charges: approximately $30.8 million cash charges, mainly severance, and $25.4 million of non-cash equipment and inventory impairments.
- Flex adopted ASC 842 lease accounting on April 1, 2019, recording $656 million of operating lease right-of-use assets and $690 million of operating lease liabilities at quarter-end. Adoption materially affected the balance sheet but did not materially affect income or cash flow.
- The company disclosed immaterial corrections to previously reported Q1 FY2019 sales and cost of sales, reducing each by $25 million without affecting gross profit, segment income or net income.
Outlook, management commentary and risks
Flex expects additional restructuring and other charges of $145 million to $265 million during fiscal 2020 and expects the activities to be completed in that fiscal year. The actions accelerate reductions in exposure to certain high-volatility products in China and India after demand weakened, primarily for products assembled for one customer in China. The filing provides no broader revenue or earnings guidance.
Management cited geopolitical uncertainty, customer demand and product mix, order cancellations or delays, short product life cycles, component shortages, capacity utilization, labor costs, trade rules and customer financial health as factors that could affect results. The company also noted that a significant portion of cash is held outside Singapore and repatriation could trigger withholding taxes.
Contingencies include a disputed patent-royalty claim for which a material loss is reasonably possible but not estimable; Brazilian tax assessments totaling about $93.6 million; foreign tax assessments of about $94 million; a securities class action the company intends to defend; and a preliminary OFAC voluntary disclosure investigation into possible sanctions noncompliance. Flex said accrued litigation loss contingencies were not material, but certain outcomes or excess losses could affect results or cash flows.
Important facts for investors to verify
- Whether demand weakness tied to geopolitical developments and the China customer persists, and how portfolio reductions affect CTG and future sales.
- Progress, cash costs and realized savings from the planned fiscal 2020 restructuring; the filing estimates $145 million–$265 million of additional charges.
- Underlying cash generation and working-capital trends, including the company’s reliance on receivables sales and deferred purchase-price collections.
- Debt levels, refinancing needs, covenant compliance and the effect of the new long-dated debt and yen loan after currency swaps.
- Developments in the patent-royalty, tax, securities-litigation and OFAC matters, including any changes in estimated exposure.