Flex Ltd. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended July 2, 2021. Comparatives are for the three months ended June 26, 2020. The current quarter had 93 days versus 87 days in the prior-year quarter, which affects comparability. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Flex provides design, manufacturing, supply-chain and related services across two segments: Flex Agility Solutions (FAS), serving communications, lifestyle and consumer-device markets; and Flex Reliability Solutions (FRS), serving automotive, health and industrial markets. The interim financial statements were reviewed by Deloitte; the review is not an audit.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $6.342 billion | $5.153 billion | Up 21% |
| Gross profit / margin | $471 million / 7.4% | $304 million / 5.9% | Margin up 150 bps |
| Income before taxes | $233 million | $67 million | |
| Net income | $206 million | $52 million | |
| Diluted EPS | $0.41 | $0.10 | |
| Operating cash flow | $334 million | $(629) million | |
| Adjusted free cash flow | $219 million | $(74) million |
FAS sales rose 18% to $3.432 billion and segment income increased to $137 million, with a 4.0% margin versus 2.5%. FRS sales rose 30% to $2.910 billion and segment income increased to $170 million, with a 5.8% margin versus 5.1%. Management attributed growth to demand recovery, customer ramps and expansions, and stronger automotive and industrial activity. Gross-margin improvement reflected stronger demand, better fixed-cost absorption and improved business mix, partly offset by component and logistics pressures.
SG&A was $201 million, or 3.2% of sales, versus $191 million, or 3.7%. Interest and other, net was $22 million versus $31 million. The effective tax rate was 12%, compared with 23%, primarily reflecting a changed jurisdictional income mix and prior-year restructuring charges.
Balance sheet, liquidity and capital allocation
- At July 2, 2021, cash and cash equivalents were $2.693 billion; bank borrowings and current debt were $274 million, and long-term debt was $3.505 billion. Cash less reported debt was approximately $1.1 billion.
- Current assets were $11.729 billion and current liabilities were $8.138 billion. Inventory increased $549 million from March 31, 2021 to $4.444 billion, primarily due to component shortages, logistics constraints and higher inventory pricing.
- Net working capital was $3.0 billion, up from $2.9 billion at fiscal year-end; it was 11.8% of annualized quarterly sales versus 11.5%. Management expects to operate in this range, while warning that working-capital pressure may continue.
- Flex had no borrowings under its $2.0 billion revolving credit facility, due January 2026, and reported compliance with credit-facility and indenture covenants. Management said available liquidity and expected operating cash flows should fund operations for at least the next 12 months.
- Operating cash flow was $334 million and capital expenditures were $118 million. Adjusted free cash flow is a non-GAAP measure; the prior-year comparison was affected by a $657 million reduction in ABS levels and other items.
- Flex repurchased 9.0 million shares for $162 million, at an average $17.97 per share. Approximately $154 million remained under the $500 million authorization.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management expects component shortages and significantly higher logistics costs to persist in the near term, and says it will take additional time to reduce inventory. Automotive sales were constrained by component shortages.
- COVID-19-related plant closures or restrictions continued at certain facilities in Malaysia, Brazil and India. Management described ongoing pandemic waves as a near-term headwind and said the duration and financial impact remain uncertain.
- Flex was evaluating alternatives for its Nextracker business, including a possible IPO, sale or spin-off. It had confidentially submitted a draft Form S-1; any transaction and its timing remained subject to market conditions and SEC review, with no assurance it would proceed.
- Material contingencies include a securities class-action appeal after dismissal with prejudice in the company’s favor; potential OFAC penalties relating to a voluntary disclosure of possible sanctions noncompliance, including possible additional transactions under review; and disputed foreign tax assessments. Management says outcomes are uncertain.
- Following a favorable Brazilian Supreme Court ruling, Flex sought habilitation of approximately $154.8 million of additional PIS/COFINS tax credits. It did not recognize a gain because recovery remained uncertain; the filing said the matter could be resolved as early as Q2 FY2022.
- Flex reported no material changes in contractual obligations or market-risk exposure from fiscal year-end. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether component availability, logistics costs and COVID-related facility restrictions continue to affect shipments, margins and inventory.
- Whether working capital and cash conversion improve, given the inventory increase and management’s stated pressure outlook.
- Progress and final outcome of the Nextracker strategic review, including whether an IPO or other transaction proceeds.
- Developments in the OFAC review, tax disputes and requested Brazilian tax credits, including any resulting cash, earnings or penalty effects.
- Capital allocation after the share repurchases, including remaining authorization, debt levels and liquidity.