Flex Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017; comparisons are with the corresponding periods ended December 31, 2016. Flex provides design, engineering, manufacturing, and supply-chain services across communications and enterprise computing, consumer technologies, industrial and emerging industries, and high-reliability solutions. The interim financial statements received a review, not an audit; Deloitte reported no material modifications needed for U.S. GAAP conformity.
Key financial metrics
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $6.752B, up 10% | $19.030B, up 6% |
| Gross profit / margin | $446M / 6.6%, versus $416M / 6.8% | $1.247B / 6.6%, versus $1.136B / 6.3% |
| Net income | $118M, versus $129M; diluted EPS $0.22 versus $0.24 | $448M, versus $233M; diluted EPS $0.84 versus $0.42 |
| Operating cash flow | Not presented for the quarter | $431M, versus $1.013B |
| Free cash flow (company-defined) | Not presented for the quarter | $42M, versus $628M |
At December 31, 2017, cash and cash equivalents were $1.291B, total debt was approximately $2.945B, and the $1.75B revolving facility had no borrowings. Cash was down $539M from March 31, 2017. Net working capital, using Flex’s stated definition, was $1.8B, up from $1.6B; the company said its ratio to annualized quarterly sales was 6.8%, within its targeted 6%–8% range. The company reported compliance with credit-facility covenants.
Changes and operating performance
- Quarterly sales rose across IEI, CTG, and HRS, partly offset by lower CEC sales. For the nine-month period, IEI, CTG, and HRS growth was partly offset by a $547M CEC sales decline, mainly in telecom and legacy server and storage businesses.
- Quarterly segment margins weakened at CEC (2.5% versus 3.0%) and CTG (1.9% versus 3.2%). Flex attributed CTG pressure to material-management costs, labor inefficiencies, and capacity changes while ramping a strategic customer. IEI margin improved to 4.1%; HRS was 8.2%.
- Nine-month operating cash flow fell substantially, principally reflecting working-capital investment, including increases in receivables and inventory. Net capital expenditures were approximately $389M, and the company cited elevated inventory to support growth and program ramps.
- Nine-month earnings included a $152M non-cash gain from deconsolidating Elementum and a $39M gain on the Wink disposition. These items materially contributed to the increase in reported year-to-date net income; the Elementum gain had no related tax impact.
Outlook, risks, and unusual items
- Flex announced targeted restructuring on January 25, 2018, expecting at least $50M of charges in fiscal Q4 2018, mainly cash employee termination benefits, with activities substantially complete by fiscal year-end. No detailed action plan was finalized.
- Management said existing cash, operating cash flows, and available borrowing capacity should fund operations for at least the next 12 months. The filing gives no numerical revenue or earnings guidance.
- Flex expects adoption of the revenue-recognition standard in fiscal 2019 to change timing for a significant majority of manufacturing-service contracts, generally recognizing revenue earlier. It expects material balance-sheet effects, including lower inventory and higher unbilled receivables.
- Risks cited include customer order cancellations or delays, product acceptance and short product life cycles, component availability, capacity utilization and production yields, customer financial distress, labor costs, acquisition integration, and tax or trade changes. Ten largest customers accounted for 42% of nine-month sales; no customer exceeded 10%.
- Brazilian subsidiaries face six sales and import tax assessments totaling approximately $88M; Flex says it has defenses and expects resolution to take years. In the SunEdison bankruptcy matter, no preference claim had been asserted; Flex cited a maximum reasonably possible loss estimate of approximately $168M and intends to defend any claim. The company said its recorded legal accruals were not material.
- More than half of cash was held outside Singapore. Flex said repatriation could incur withholding taxes and that it intends to keep certain foreign earnings invested abroad. U.S. tax-reform effects on these interim statements were described as immaterial, with analysis continuing.
Important facts for investors to verify
- Whether CTG’s strategic-customer ramp costs and weaker segment margins improve, and whether announced restructuring produces expected savings.
- Working-capital trends, especially receivables and inventory, and whether operating cash flow and free cash flow recover.
- The extent to which reported nine-month earnings depended on the Elementum and Wink gains, and the eventual settlement value of Wink consideration.
- Potential outcomes of the Brazilian tax assessments and any SunEdison-related claims, including exposures beyond recorded accruals.
- The implementation effects of the fiscal 2019 revenue standard and any further financial-statement effects of U.S. tax reform.