Flex Ltd. FY2017 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2017; the filing was dated May 16, 2017. Flex is a Singapore-incorporated global provider of product design, engineering, manufacturing, supply-chain and after-market services. Its four segments are Communications & Enterprise Compute (CEC), Consumer Technologies Group (CTG), Industrial & Emerging Industries (IEI), and High Reliability Solutions (HRS).
Key financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $23.863 billion | $24.419 billion | Down 2.3% |
| Gross profit | $1.521 billion | $1.608 billion | Down 5.4% |
| Gross margin | 6.3% | 6.6% | Down 0.3 percentage points |
| Net income | $319.6 million | $444.1 million | Down 28.0% |
| Diluted EPS | $0.59 | $0.79 | Down $0.20 |
| Cash from operations | $1.150 billion | $1.136 billion | Up modestly |
| Free cash flow | $660.4 million | $639.5 million | Up $20.9 million |
FY2017 income before taxes was $370.8 million; income-tax provision was $51.3 million, implying a 13.8% effective tax rate. Segment income, a company-defined measure that excludes several corporate and other items, was $815.2 million, or 3.4% of sales, versus $791.8 million, or 3.2%, in FY2016.
Cash, liquidity and debt
- At March 31, 2017, cash and cash equivalents were $1.831 billion; working capital was $1.883 billion; total assets were $12.593 billion; and shareholders’ equity was $2.678 billion.
- Debt was approximately $3.0 billion, including $2.891 billion of long-term debt excluding current maturities. The $1.5 billion revolving credit facility had no borrowings outstanding. Flex reported compliance with its debt covenants.
- Operating cash flow was $1.150 billion. Net purchases of property and equipment were $489.5 million, producing company-defined free cash flow of $660.4 million. Investing activities used $702.2 million, including $189.1 million for acquisitions; financing activities used $242.1 million, including $349.5 million for share repurchases.
- The cash conversion cycle improved to 24 days from 27 days. Flex reported $1.2 billion of receivables outstanding under its receivables-sale programs and a $506.5 million deferred purchase-price receivable.
- More than half of cash was held by foreign subsidiaries. Approximately $1.2 billion of foreign earnings was considered indefinitely reinvested outside Singapore. Management said existing cash, expected operating cash flows and available borrowing capacity should fund operations for at least 12 months.
Material changes and business trends
- Sales declined mainly due to the closure of a China operation dedicated to Lenovo/Motorola and lower CTG demand, plus weakness in legacy CEC server and storage. CTG sales fell 9% and CEC sales fell 5%.
- IEI sales rose 6% to $4.968 billion and HRS sales rose 6% to $4.149 billion, supported by acquisitions, capital-equipment demand and automotive programs. HRS had the highest segment margin at 8.1%, up from 7.6%; IEI margin rose to 3.6% from 3.4%. CEC margin declined to 2.7% from 3.0%, while CTG margin improved to 2.8% from 2.3%.
- Customer concentration eased: the ten largest customers represented about 43% of sales, down from 46% in FY2016; no single customer exceeded 10% in FY2017.
- For the fourth quarter, sales were $5.863 billion versus $5.773 billion a year earlier; net income was $86.9 million versus $61.3 million. The filing presents these quarterly figures as unaudited.
Outlook, unusual items and principal risks
- Management emphasized shifting the portfolio toward longer-life, higher-margin markets and expanding Sketch-to-Scale design, engineering and supply-chain services. It did not provide specific FY2018 revenue or earnings guidance in the supplied filing text.
- FY2017 included $92.9 million of SunEdison-related charges: a $60.0 million solar-inventory write-down, $16.0 million equipment impairment and $16.9 million of other costs, primarily from negative-margin sales and related expenses. FY2016 had included a $61.0 million SunEdison receivables reserve. SunEdison-related claims remain a possible contingency; Flex said no preference claims had been asserted and it could not estimate a loss range.
- Flex recorded $49.4 million of restructuring charges, primarily employee termination costs, in a plan to rationalize facilities and corporate functions and support the strategic repositioning. The plan was completed by year-end; $23.5 million remained accrued.
- Brazilian subsidiaries faced three sales/import-tax assessments totaling approximately $93 million at March 31, 2017. Flex disputed the assessments; an adverse determination was considered reasonably possible, but the company could not estimate a loss range. A separate approximately $100 million Brazilian tax assessment received a favorable final judgment and was closed.
- Other material risks include short customer order horizons and cancellations, customer and end-market concentration, intense competition and pricing pressure, component shortages, utilization and production-ramp costs, international and currency exposure, cyber and operational disruptions, product quality/liability, tax uncertainty, and environmental and regulatory compliance.
- Flex said adoption of the new revenue-recognition standard, expected in FY2019, would change its EMS recognition model from point-in-time delivery to recognition over time and could materially affect the financial statements. The new lease standard, expected in FY2020, was also expected to materially affect the balance sheet.
Investor items to verify
- Whether sales and margins recover as the company exits legacy programs and expands IEI and HRS, and whether segment-income growth converts into higher GAAP earnings.
- The recoverability of SunEdison-related inventory/receivables and the outcome of any related bankruptcy claims; also monitor the Brazilian tax assessments.
- Debt maturities, interest costs, covenant headroom, and the liquidity effects of receivables sales and foreign cash that may be costly to repatriate.
- Acquisition integration and returns, including the April 2017 AGM Automotive acquisition for approximately $220 million, completed after fiscal year-end.
- Implementation effects of the new revenue and lease accounting standards, and the assumptions behind tax assets, valuation allowances and tax incentives.
Audit and controls: Deloitte issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of March 31, 2017.