Flex Ltd. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020. This is an annual report, not a standalone 2019 fourth-quarter filing. Flex provides design, manufacturing and supply-chain services across healthcare, automotive, industrial, communications, enterprise computing and consumer markets.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $24.21 billion | $26.21 billion |
| Gross profit / margin | $1.34 billion / 5.5% | $1.52 billion / 5.8% |
| Net income | $87.6 million | $93.4 million |
| Diluted EPS | $0.17 | $0.18 |
| Cash used in operating activities | $1.53 billion | $2.97 billion |
| Adjusted free cash flow | $672 million | $3 million |
| Cash and cash equivalents at year-end | $1.92 billion | $1.70 billion |
| Total debt at year-end | $2.84 billion | $3.05 billion |
| Working capital | $1.88 billion | $1.51 billion |
Revenue fell about 8%; gross profit declined 12%, and net income declined about 6%. The effective tax rate was 44.7%, versus 48.7%. Cash-flow comparisons require care: operating cash outflow improved, while $2.6 billion of collections on deferred purchase-price receivables from the securitization programs appeared in investing activities. Adjusted free cash flow is a non-GAAP measure, defined by the company to include those collections and deduct property-and-equipment purchases, with additional adjustments.
Changes and segment results
- Industrial & Emerging Industries (IEI): Revenue increased 18% to $7.28 billion; segment margin rose to 6.4% from 4.4%, supported by energy and home-and-lifestyle demand and improved execution.
- Communications & Enterprise Compute (CEC): Revenue decreased 16% to $6.99 billion; margin fell to 2.0% from 2.6%, reflecting slower 5G deployment, lower demand, Huawei disengagement and disruptions.
- Consumer Technologies Group (CTG): Revenue decreased 24% to $5.20 billion as Flex reduced exposure to higher-volatility, lower-margin business; margin was 1.7% versus 1.8%.
- High Reliability Solutions (HRS): Revenue decreased 2% to $4.74 billion; margin fell to 6.7% from 7.7%, with automotive shutdowns and program-ramp costs partly offset by healthcare demand.
Total segment income increased to $898 million from $872 million, but it excludes significant reconciling items. FY2020 included $216 million of restructuring charges, $106 million of customer-related asset impairments and $92 million of other charges, including approximately $98 million of investment impairments. Flex announced that from FY2021 it expected to report two segments: Flex Agility Solutions Group and Flex Reliability Solutions Group.
Outlook, risks and unusual items
- COVID-19 materially affected operations and demand in the fourth quarter. Flex reported component shortages, facility and production disruptions, automotive shutdowns and approximately $52 million of incremental pandemic-related costs. Management said these pressures continued into FY2021; it could not quantify or forecast the pandemic’s future financial impact.
- Management said liquidity was adequate for at least the next 12 months. Actions included suspending share repurchases in FY2021, deferring noncritical capital spending, reducing discretionary costs and implementing temporary salary cuts. The filing provides no specific revenue or earnings guidance.
- In May 2020, after year-end, Flex issued $750 million principal amount of notes due 2026 and 2030; net proceeds were approximately $740 million for general corporate purposes. The company also reported compliance with debt covenants at March 31, 2020.
- Key risks include customer order cancellations and concentration (the ten largest customers represented 39% of sales), supply-chain constraints, trade restrictions, competition, foreign exchange, and potential further restructuring or asset impairments. No customer exceeded 10% of FY2020 sales.
- Notable contingencies include an ongoing OFAC inquiry into possible sanctions noncompliance, for which potential penalties could not be estimated; a disputed patent-royalty claim with a material loss described as reasonably possible but not quantifiable; a securities class action with a dismissal motion pending; and tax disputes, including approximately $94 million assessed by a foreign tax authority. Flex stated that no SunEdison preference claim had been asserted.
Important facts for investors to verify
- Whether COVID-19 disruptions, costs and customer demand recover or worsen, and how those effects are reflected in subsequent results.
- Whether the improvement in adjusted free cash flow is sustainable, given negative GAAP operating cash flow and the company’s securitization-related cash-flow classifications.
- Whether IEI growth and margin gains can offset continuing pressure in CEC, CTG and automotive, including under the new segment structure.
- The realized costs and savings from restructuring, and any further impairment or inventory charges.
- Developments in the OFAC inquiry, patent-royalty dispute, tax matters and other contingencies; the filing does not quantify potential OFAC penalties or the patent claim’s possible loss range.
- Debt, liquidity and refinancing needs, including use of the May 2020 note proceeds. Flex reported $2.84 billion of debt and $1.92 billion of cash at fiscal year-end.
Assurance: Deloitte issued unqualified opinions on the FY2020 financial statements and internal control over financial reporting. The audit identified goodwill valuation for CTG and CEC and estimates of customer-related variable consideration as critical audit matters.