Flex Ltd. — Form 10-K Summary
Business context and reporting period
Flex provides design, engineering, manufacturing and supply-chain services across four segments: High Reliability Solutions (HRS), Industrial and Emerging Industries (IEI), Communications and Enterprise Compute (CEC), and Consumer Technologies Group (CTG). This 10-K reports fiscal year 2019, ended March 31, 2019; fiscal Q4 ended the same date. The company reported approximately 200,000 employees and operations in about 35 countries. CEO Revathi Advaithi took office February 11, 2019.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $26.211 billion | $25.441 billion |
| Gross profit / margin | $1.518 billion / 5.8% | $1.596 billion / 6.2% |
| Income before taxes | $182 million | $521 million |
| Net income / diluted EPS | $93 million / $0.18 | $429 million / $0.80 |
| Cash and cash equivalents at year-end | $1.697 billion | $1.472 billion |
| Total debt at year-end | $3.055 billion | $2.941 billion |
| Company-defined free cash flow | $3 million | $236 million |
FY2019 segment revenue and segment margins were: HRS $4.829 billion and 7.7%; IEI $6.183 billion and 4.4%; CEC $8.336 billion and 2.6%; CTG $6.863 billion and 1.8%. These segment margins use Flex’s segment-income measure, not consolidated gross margin.
Reported cash used in operating activities was $2.971 billion, while investing activities provided $3.253 billion and financing activities used $30 million. The operating cash figure is materially affected by an accounting change: $3.586 billion of collections on deferred purchase price from receivables securitizations moved from operating to investing cash flows. Flex’s non-GAAP free-cash-flow measure adds those collections and adjusts for capital spending and other items; it should not be confused with operating cash flow. Net capital expenditures were $632 million. GAAP working capital was $1.506 billion; Flex’s separately defined net working capital was about $1.7 billion, or 6.7% of annualized sales.
Material changes versus the prior comparable period
- Revenue rose 3%, led by CEC growth of 8% and IEI growth of 4%; CTG revenue declined 1.5% and HRS increased 1%.
- Gross margin fell 40 basis points. Flex cited $32 million of additional restructuring charges, about $47 million of additional distressed-customer charges, weaker contribution from higher-margin automotive and other businesses, and below-average margins during new-program ramps in India.
- Net income declined 78%. FY2019 included $193 million of investment impairment and disposition charges, partly offset by an $87 million gain on deconsolidating Bright Machines. FY2018 included a $152 million gain from deconsolidating Elementum and a $39 million gain from selling Wink.
- SG&A declined $66 million to $953 million, reflecting cost discipline and benefits from prior restructuring. Interest and other expense increased $60 million to $183 million.
- Restructuring charges totaled $113 million, including $66 million associated primarily with non-cash impairments in the wind-down of NIKE operations in Mexico. Flex also divested its China-based Multek operations for approximately $267 million net proceeds.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management said it expects the CTG portfolio transition to continue in FY2020 and to pressure segment margins until completed. Flex stated that cash, anticipated operating cash flows and available borrowing capacity should fund operations for at least the next 12 months. It continued investing in India capacity and in longer-term HRS and IEI programs. No cash dividends were planned for FY2020.
Key risks include concentrated customer exposure (the ten largest customers generated 43% of FY2019 sales), short order lead times and customer cancellation or transfer risk, component supply constraints, intense competition, and sensitivity to utilization and program ramps. Trade measures were a particular uncertainty: the filing described U.S. tariffs on Chinese goods and possible related effects on costs, margins and demand. Other risks include foreign exchange and interest-rate exposure, international operating and regulatory risks, cybersecurity and privacy, environmental obligations, and possible goodwill or investment impairments. CTG goodwill had a 22% fair-value cushion over carrying value at the January 2019 test; Flex warned that weaker CTG results could lead to future impairment.
Contingencies include a disputed patent-royalty claim relating to products assembled in China, for which Flex said a material loss was reasonably possible but could not estimate a range; Brazilian sales and import tax assessments totaling about $91 million, which Flex contests; and a putative securities class action, which the company intends to defend. Flex also disclosed a preliminary internal investigation following voluntary notice to OFAC of possible sanctions noncompliance at certain non-U.S. operations; potential penalties and costs were not estimable. In the SunEdison bankruptcy matter, the company cited approximately $168 million in inventory and cash transfers as its estimated maximum reasonably possible contingent loss; no preference claims had been asserted.
FY2019 adopted ASC 606 revenue accounting and changed the classification of deferred-purchase-price cash receipts, affecting year-over-year comparability. The auditor issued an unqualified opinion on the financial statements and internal controls. Management reported that material weaknesses identified in the prior year had been remediated by March 31, 2019.
Important facts for investors to verify
- Whether operating cash generation and free cash flow improve, accounting for securitization-related classification and working-capital requirements.
- Progress and costs of the CTG repositioning, and whether India program ramps and investments deliver expected margins and returns.
- Customer credit quality, distressed-customer exposure, and the sustainability of the company’s customer and end-market diversification.
- Resolution or developments in the patent-royalty, Brazilian tax, securities litigation, OFAC and SunEdison matters.
- Debt maturities and refinancing: $633 million of debt was classified as current at year-end, including $500 million of notes due February 2020; review the April 2019 $300 million term loan and covenant compliance.
- Effects of tariffs and other trade restrictions on production locations, customer demand, costs and margins.