Flex Ltd. (formerly Flextronics International Ltd.) — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Figures are in U.S. dollars.
Business context
Flex provides design, manufacturing, supply-chain, logistics and after-market services to OEMs across four reporting groups: High Reliability Solutions (HRS), Consumer Technology Group (CTG), Industrial and Emerging Industries (IEI), and Integrated Network Solutions (INS). It operated more than 100 facilities in approximately 30 countries, with about 150,000 employees. Manufacturing-location sales were 50% in Asia, 34% in the Americas and 16% in Europe. The ten largest customers generated approximately 50% of FY2015 sales; one CTG customer represented about 17%.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $26.148 billion | $26.109 billion |
| Gross profit / gross margin | $1.545 billion / 5.9% | $1.440 billion / 5.5% |
| Income from continuing operations | $600.8 million | $365.6 million |
| Net income | $600.8 million | $365.6 million |
| Diluted EPS | $1.02 | $0.59 |
| Cash from operating activities | $794.0 million | $1.216 billion |
| Free cash flow (company-defined) | $554.3 million | $701.5 million |
| Cash and cash equivalents at year-end | $1.628 billion | $1.594 billion |
| Total debt, including current portion | $2.084 billion | $2.103 billion |
| Working capital | $1.985 billion | $1.744 billion |
SG&A was $844.5 million, or 3.2% of sales, versus $874.8 million, or 3.4%, in FY2014. Net margin was approximately 2.3% (2.3% in FY2014). The company had no borrowings under its $1.5 billion revolving credit facility at year-end and reported covenant compliance. Its current ratio, calculated from reported balance-sheet totals, was approximately 1.29.
Changes versus FY2014
- Sales were nearly flat, up 0.2%. IEI sales rose 17.7% and HRS rose 8.6%; INS declined 5.1% and CTG declined 4.5%. Management cited growth in energy, household/lifestyle, medical and automotive programs, offset by telecom softness and weaker personal-computing demand.
- Gross margin increased 40 basis points, which management attributed to improved cost structure and operating efficiencies following prior restructuring, a richer HRS/IEI mix, and execution on certain programs. FY2015 had no material restructuring charges, compared with $75.3 million in FY2014.
- Operating cash flow fell about $422 million and free cash flow fell about $147 million. Management cited working-capital movements, including a $565.1 million reduction in customer advances received in prior periods. Inventory days rose to 58 from 54 and the cash conversion cycle increased to 27 from 26 days.
- Segment income increased to $751.1 million from $664.5 million. CTG segment income improved substantially, to $218.3 million from $125.2 million; HRS rose to $227.6 million from $221.4 million, while INS and IEI segment income decreased modestly.
Outlook, commentary, risks and unusual items
- Management emphasized shifting the portfolio toward longer-life-cycle, higher-margin HRS and IEI businesses, while continuing investment in design, engineering and innovation. The filing gives no specific revenue or earnings guidance. Management stated that cash, expected operating cash flows and available credit should fund operations for at least the next 12 months.
- FY2015 pretax results included a $55.0 million reversal of a customer contractual obligation recorded in FY2014 after a contract amendment. Other charges/income also included an $11.0 million loss on a Western European facility disposition and gains on investments. FY2015 depreciation was $496.8 million, above the stated normal annual run rate of about $425 million, partly because of accelerated depreciation related to product exits.
- Cash returned to shareholders included $415.9 million of repurchases in FY2015. The current authorization had $238.4 million remaining at year-end. The company had not paid dividends and did not plan to pay them in FY2016.
- Liquidity relies in part on receivables programs: about $1.2 billion of receivables were outstanding as sold at year-end, including a $600.7 million deferred purchase-price receivable. Monitor the availability and terms of these programs.
- Principal risks include customer and end-market concentration, short customer order horizons and cancellations, competition and pricing pressure, component supply constraints, international operations and currency exposure, cybersecurity and intellectual-property claims, product quality and regulatory obligations, tax uncertainty, and debt/covenant or refinancing risk. The 4.625% and 5.000% notes were rated below investment grade by Moody’s and S&P.
- Contingencies included Xilinx litigation, for which management said excess probable or reasonably possible losses were not expected to be material, and Brazilian tax matters. A non-operating Brazilian subsidiary received an approximately $100 million tax assessment; the company disputed it and considered losses remote. The filing said the amount or outcome of another Brazilian assessment could not be reasonably estimated.
- After year-end, Flex announced a definitive agreement to acquire Mirror Controls International for approximately $500 million in cash, expected to close in FY2016 Q2.
Investor facts to verify
- Whether the margin improvement is sustainable after excluding the $55 million contractual-obligation reversal and other unusual gains or losses.
- Customer concentration and exposure to the customer contributing approximately 17% of FY2015 sales, including the effects of ownership transitions and program volumes.
- Working-capital quality, customer advances, inventory aging, and continued dependence on receivables sales and securitization.
- Debt maturity profile, below-investment-grade ratings, covenant headroom and cash availability, including cash held outside Singapore and potential repatriation taxes.
- Potential financial exposure and timing for the Brazilian tax assessments and Xilinx litigation.
- Funding, integration and expected returns for the proposed $500 million MCi acquisition.