Flex Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, three months ended June 26, 2020. The comparable prior-year quarter ended June 28, 2019; this quarter comprised 87 days versus 89 days in the prior period. Flex is a global manufacturing, design, engineering and supply-chain services provider operating in approximately 30 countries. Beginning this quarter, it reported two segments: Flex Agility Solutions (FAS) and Flex Reliability Solutions (FRS). Prior segment data were recast.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $5.153 billion | $6.176 billion | Down 17% |
| Gross profit / margin | $304 million / 5.9% | $353 million / 5.7% | Profit down $49 million; margin up 20 bps |
| Income before tax | $67 million | $64 million | Up $3 million |
| Net income | $52 million | $45 million | Up 15% |
| Diluted EPS | $0.10 | $0.09 | Up $0.01 |
| Operating cash flow | $(629) million | $(657) million | Use of cash in both periods |
| Adjusted free cash flow | $(74) million | $114 million | Down $188 million |
SG&A was $191 million (3.7% of sales), versus $210 million (3.4%). Interest and other, net declined to $30 million from $53 million. The effective tax rate was 23%, compared with 30%.
Segments and material changes
- FAS: Sales of $2.912 billion, down 25% year over year; segment income was $72 million and margin 2.5%, versus $109 million and 2.8%. Lower demand across end markets, Consumer Devices weakness, COVID-related supply constraints and disengagement from high-volatility businesses weighed on results.
- FRS: Sales of $2.241 billion, down 1%; segment income was $115 million and margin 5.1%, versus $130 million and 5.7%. Automotive shutdowns and under-absorption offset growth in Health Solutions and Industrial.
- Reported gross margin improved modestly, primarily because restructuring charges were lower. Segment margins declined in both segments.
- Flex recorded $28 million of “legal and other” costs, compared with $2 million, and $10 million of restructuring charges, compared with $56 million.
Cash, debt and liquidity
- At June 26, 2020, cash and cash equivalents were $1.935 billion; total debt carrying value was approximately $3.585 billion. Current assets were $9.562 billion and current liabilities $6.795 billion.
- Long-term debt rose to $3.423 billion from $2.689 billion, primarily reflecting issuance of $425 million of 3.750% notes due 2026 and $325 million of 4.875% notes due 2030. Net proceeds of approximately $747 million were used for working capital and general corporate purposes. Weighted-average debt interest rate was 3.8%.
- The $1.75 billion revolving credit facility had no borrowings outstanding. Flex said it was in compliance with debt covenants and expected cash, operating cash flows and available borrowing capacity to fund commitments for at least 12 months.
- Operating cash use was attributed mainly to receivables and reducing outstanding asset-backed securitization (ABS) balances. Flex reduced ABS balances by $655 million sequentially; receivables sold for cash under ABS and factoring programs were $0.4 billion at quarter-end versus $1.2 billion at March 31.
- Net working capital increased to approximately $2.5 billion from $1.4 billion, primarily due to higher net receivables and lower accounts payable. Management said it expected inventory to take a few quarters to align with demand.
- Capital expenditures, net of proceeds from property dispositions, were approximately $102 million. No shares were repurchased; $315.2 million remained available under the $500 million authorization.
Outlook, risks and unusual items
- COVID-19 disrupted factories, staffing, suppliers, demand and production. Related costs exceeded $100 million, roughly double the prior quarter, including health and safety measures, labor incentives, supply-chain costs and under-absorption. Management expected these costs to persist in Q2 but be significantly lower as demand improved.
- Management anticipated revenue improvement across end markets, while warning that consumer-spending-related businesses, including Lifestyle and Consumer Devices, could remain pressured if demand weakness continued. No numerical revenue or earnings guidance was provided in the supplied filing text.
- Flex expected approximately $100 million of additional restructuring charges during the rest of FY2021, mostly planned severance, following structural changes intended to remove non-core activity and realign costs.
- Goodwill impairment testing following the reporting-unit reorganization found no impairment as of April 1, 2020. Management cautioned that estimates could change as COVID-19 impacts evolve.
- Potentially significant contingencies include an ongoing OFAC voluntary disclosure investigation, for which penalties could materially adversely affect the company; foreign tax assessments of approximately $94 million and $80 million under active contest; Brazilian tax assessments totaling approximately $71 million; and a securities class action the company intends to defend. Flex said the ultimate outcomes are uncertain; it could not estimate potential losses beyond certain accruals.
- The interim financial statements received an independent accountant’s review, not an audit. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether sales and end-market demand recover as anticipated, particularly in Consumer Devices, Lifestyle and Automotive, and how COVID-related costs evolve.
- Whether working capital, inventory and receivables normalize and operating cash flow turns positive after the ABS balance reduction.
- Debt maturities, covenant compliance, refinancing needs and the availability of liquidity under the revolving facility.
- The timing and total cost of planned restructuring, and whether segment margins recover despite lower volumes.
- Developments in the OFAC investigation, tax assessments and litigation, including any changes to accruals or potential exposure.