UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

Form 10-Q

(Mark One)

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FLEX LTD.

(Exact name of registrant as specified in its charter)

 Registrant’s telephone number, including area code

 

 

 

 

 

 

To the Board of Directors and Shareholders of

Singapore

 

We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd., formerly Flextronics International Ltd., and subsidiaries (the “Company”) as of SeptemberJune 30, 2016,2017, and the related condensed consolidated statements of operations, and of comprehensive income for the three-month and six-month periods ended September 30, 2016 and September 25, 2015 and the condensed consolidated statements of cash flows for the six-monththree-month periods ended SeptemberJune 30, 20162017 and September 25, 2015.July 1, 2016. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Flex Ltd. and subsidiaries as of March 31, 2016,2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 20, 2016,16, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 20162017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1.  ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION

 

Organization of the Company

 

The Company's service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement, inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance) and supply chain management software solutions and component product offerings (including rigid and flexible printed circuit boards and power adapters and chargers).

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 20162017 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periodsperiod ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017.2018.

 

The first quarters for fiscal year 20172018 and fiscal year 20162017 ended on June 30, 2017, which is comprised of 91 days in the period, and July 1, 2016, which is comprised of 92 days in the period, and June 26, 2015, which is comprised of 87 days in the period, respectively. The second quarters for fiscal year 2017 and fiscal year 2016 ended on September 30, 2016 and September 25, 2015, which are comprised of 91 days in both periods, respectively.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-

The Company has certain non-majority-owned equity investments in non-publicly traded companies that are accounted for using the equity method of accounting. The equity method of accounting is used when the Company has the ability to significantly influence the operating decisions of the issuer, or if the Company has an ownershipa voting percentage of a corporation equal to or generally greater than 20% but less than 50%, and for non-majority-owned investments in partnerships when generally greater than 5%. The equity in earnings (losses) of equity method investees are immaterial for all of the periods presented, and are included in interest and other, net in the condensed consolidated statements of operations.

2.  BALANCE SHEET ITEMS

 

Inventories

 

The components of inventories, net of applicable lower of cost or marketand net realizable value write-downs, were as follows:

 

Goodwill and Other Intangible Assets

 

The following table summarizes the activity in the Company’s goodwill account for each of its four segments during the six-monththree-month period ended SeptemberJune 30, 2016:2017:

 

 

The components of acquired intangible assets are as follows:

The gross carrying amounts of intangible assets are removed when fully amortized. During the six-monththree-month period ended SeptemberJune 30, 2016,2017, the total value of intangible assets increased primarily as a result of three acquisitions.the Company's initial estimated value of $108.0 million for customer related intangibles acquired with the AGM acquisition in the HRS segment, which will amortize over a weighted-average estimated useful life of 10 years. The increase was partially offset by $7.5 million for the divestiture of Wink in the CTG segment. The assigned value is subject to change as the Company completes the valuation. The estimated future annual amortization expense for intangible assets is as follows:

Other current assets include approximately $461.5$547.5 million and $501.1$506.5 million as of SeptemberJune 30, 20162017 and March 31, 2016,2017, respectively, for the deferred purchase price receivable from the Company's Global and North American Asset-Backed Securitization programs. See note 810 for additional information.

During the three-month period ended June 30, 2017, the Company sold Wink to an unrelated third-party venture backed company in exchange for contingent consideration fair valued at $59.0 million. This estimated consideration was based on the value of the acquirer as of the most recent third-party funding of which the Company participated. The Company recognized a non-cash gain on sale of $38.7 million, which is recorded in other charges (income), net on the condensed consolidated statement of income. The contingent consideration is expected to be settled in the fourth quarter of fiscal year 2018. As of June 30, 2017 the total investment is $69.0 million and is included in other current assets ison the remaining value of certain assets purchased on behalf of a customer and financed by a third party banking institution in the amounts of $83.9 million and $83.6 million as of September 30, 2016 and March 31, 2016, respectively, the nature of which is more fully discussed in Note 17, "Business and Asset Acquisitions" to the Company's Form 10-K for the year ended March 31, 2016.condensed consolidated balance sheet.

Other current liabilities include customer working capital advances of $223.9$200.9 million and $253.7$231.3 million, customer-related accruals of $511.7$476.2 million and $479.5$501.9 million, and deferred revenue of $302.9$305.2 million and $332.3$280.7 million as of SeptemberJune 30, 20162017 and March 31, 2016,2017, respectively. The customer working capital advances are not interest-bearing, do not have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production. Other current liabilities also include the outstanding balance due to the third party banking institution related to the financed equipment discussed above of $90.6 million and $122.0 million as of September 30, 2016 and March 31, 2016, respectively.

3.  SHARE-BASED COMPENSATION

 

Total unrecognized compensation expense related to share options under the 2010 Plan is not significant.and other immaterial plans was $7.8 million, and will be recognized over a weighted-average remaining vesting period of 1.8 years. As of SeptemberJune 30, 2016,2017, the number of options outstanding and exercisable under the 2010 Plan and other immaterial plans was 0.21.8 million for both, and 0.5 million, respectively, at a weighted-average exercise price of $9.27$3.66 per share and $9.23$6.00 per share, respectively.

 

During the six-monththree-month period ended SeptemberJune 30, 2016,2017, the Company granted 5.94.8 million unvested share bonus awards under the 2010 Plan. Of this amount, approximately 5.04.0 million unvested share bonus awards have an average grant date price of $12.81$16.39 per share.share and vest over four years. Further, approximately 0.70.6 million of these unvested shares represents the target amount of grants made to certain key employees whereby vesting is contingent on certain market conditions. The average grant date fair value of these awards contingent on certain market conditions was estimated to be $17.57 per award and was calculated using a Monte Carlo simulation. The remaining 0.2 millionis still pending; however, the expense for the three-month period ended June 30, 2017 is immaterial as these awards were granted on the last day of unvested share bonus awards under the 2010 Plan have an average grant date price of $12.82 per share and represents the target amount of grants made to certain executive officers whereby vesting is contingent on meeting certain free cash flow targets.quarter. The number of shares under the 2010 Plan, contingent on market conditions that ultimately will vest will range from zero up to a maximum of 1.41.2 million based on a measurement of the percentile rank of the Company’s total shareholder return over a certain specified period against the Standard and Poor’s (“S&P”) 500 Composite Index and will cliff vest after a period of three years, if such market conditions have been met. The number of sharesNo additional share options under the 2010 Plan, contingent on free cash flow targets that ultimately will vest range from zero up to a maximum of 0.4 million of the target payment based on a measurement of cumulative three-year increase of free cash flow from operations ofimmaterial plans were granted by the Company and will cliff vest after aduring the three-month period of three years.ended June 30, 2017.

 

As of SeptemberJune 30, 2016,2017, approximately 15.916.9 million unvested share bonus awards under the 2010 Plan and other immaterial plans were outstanding, of which vesting for a targeted amount of 2.32.1 million is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero to 4.64.2 million based on the achievement levels of the respective conditions. During the six-monththree-month period ended SeptemberJune 30, 2016, 3.52017, 1.4 million shares under the 2010 Plan vested in connection with the share bonus awards with market conditions granted in fiscal year 2014.2015.

 

As of SeptemberJune 30, 2016,2017, total unrecognized compensation expense related to unvested share bonus awards under the 2010 Plan is $159.5and other immaterial plans was approximately $194.7 million, and will be recognized over a weighted-average remaining vesting period of 2.82.9 years. Approximately $26.3 million of the total unrecognized compensation cost, is related to awards under the 2010 Plan whereby vesting is contingent on meeting certain market conditions.

4.  EARNINGS PER SHARE

 

The following table reflects the basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted earnings per share attributable to the shareholders of Flex Ltd.:

 

(1)        As a result of the Company's net loss, ordinary share equivalents from approximately 4.3 million options and share bonus awards were excluded from the calculation of diluted earnings (losses) per share for the three-month period ended September 30, 2016. Options to purchase ordinary shares of 1.70.1 million and 1.11.0 million during the three-month periods ended SeptemberJune 30, 20162017 and September 25, 2015,July 1, 2016, respectively, and share bonus awards of 3.40.1 million and 5.30.8 million for the three-month periodperiods ended SeptemberJune 30, 20162017 and September 25, 2015,July 1, 2016, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents.

7.  INTEREST AND OTHER, NET

 

6.8.  FINANCIAL INSTRUMENTS

 

 

The Company primarily enters into forward contracts and foreign currency swap contracts primarily to manage the foreign currency risk associated with monetary accounts and anticipated foreign currency denominated transactions. The Company hedges committed exposures and does not engage in speculative transactions. As of SeptemberJune 30, 2016,2017, the aggregate notional amount of the Company’s outstanding foreign currency contracts was $4.2$4.8 billion as summarized below:

 

As of SeptemberJune 30, 2016,2017, the fair value of the Company’s short-term foreign currency contracts was not material and is included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the condensed consolidated statements of operations. As of SeptemberJune 30, 20162017 and March 31, 2016,2017, the Company also has included net deferred gains and losses in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges.

These deferred lossesgains were not material$11.2 million as of SeptemberJune 30, 2016,2017, and are expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations primarily over the next twelve-month period. The gains and losses recognized in earnings due to hedge ineffectiveness were not material for all fiscal periods presented and are included as a component of interest and other, net in the condensed consolidated statements of operations.

 

The following table presents the fair value of the Company’s derivative instruments utilized for foreign currency risk management purposes:

The Company has financial instruments subject to master netting arrangements, which provides for the net settlement of all contracts with a single counterparty. The Company does not offset fair value amounts for assets and liabilities recognized for derivative instruments under these arrangements, and as such, the asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets. The impact of netting derivative assets and liabilities is not material to the Company’s financial position for any of the periods presented.

 

7.9.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss by component, net of tax, are as follows:

 

Substantially all unrealized lossesgains relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month and six-month periodsperiod ended September 25, 2015, wasJune 30, 2017 are expected to be recognized as a component of cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges. 

8.10.  TRADE RECEIVABLES SECURITIZATION

 

The Company sells trade receivables under two asset-backed securitization programs and under an accounts receivable factoring program.

 

 

The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreement (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” collectively, the “ABS Programs”) to affiliated special purpose entities, each of which in turn sells 100% of the receivables to unaffiliated financial institutions. These programs allow the operating subsidiaries to receive a cash payment and a deferred purchase price receivable for sold receivables. Following the transfer of the receivables to the special purpose entities, the transferred receivables are isolated from the Company and its affiliates, and upon the sale of the receivables from the special purpose entities to the unaffiliated financial institutions, effective control of the transferred receivables is passed to the unaffiliated financial institutions, which has the right to pledge or sell the receivables. Although the special purpose entities are consolidated by the Company, they are separate corporate entities and their assets are available first to satisfy the claims of their creditors. The investment limits set by the financial institutions are $700.0$850.0 million for the Global Program, of which $600.0$750.0 million is committed and $100.0 million is uncommitted, and $265.0$250.0 million for the North American Program, of which $225.0$210.0 million is committed and $40.0 million is uncommitted. Both programs require a minimum level of deferred purchase price receivable to be retained by the Company in connection with the sales.

 

The Company services, administers and collects the receivables on behalf of the special purpose entities and receives a servicing fee of 0.1% to 0.5% of serviced receivables per annum. Servicing fees recognized during the three-month and six-month periods ended SeptemberJune 30, 20162017 and September 25, 2015July 1, 2016 were not material and are included in interest and other, net within the condensed consolidated statements of operations. As the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value, no servicing assets and liabilities are recognized.

 

As of SeptemberJune 30, 2016,2017, approximately $1.3$1.6 billion of accounts receivable had been sold to the special purpose entities under the ABS Programs for which the Company had received net cash proceeds of approximately $851.0 million$1.0 billion and deferred purchase price receivables of approximately $461.5$547.5 million. As of March 31, 2016,2017, approximately $1.4$1.5 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $880.8 million$1.0 billion and deferred purchase price receivables of approximately $501.1$506.5 million. The portion of the purchase price for the receivables which is not paid by the unaffiliated financial institutions in cash is a deferred purchase price receivable, which is paid to the special purpose entity as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in other current assets as of SeptemberJune 30, 20162017 and March 31, 2016,2017, and were carried at the expected recovery amount of the related receivables. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the deferred purchase price receivables received at time of transfer is recognized as a loss on sale of the related receivables and recorded in interest and other, net in the condensed consolidated statements of operations and were immaterial for all periods presented.

 

As of SeptemberJune 30, 20162017 and March 31, 2016,2017, the accounts receivable balances that were sold under the ABS Programs were removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company were included as cash provided by operating activities in the condensed consolidated statements of cash flows.

 

For the six-monththree-month periods ended SeptemberJune 30, 20162017 and September 25, 2015,July 1, 2016, cash flows from sales of receivables under the ABS Programs consisted of approximately $2.8$1.5 billion and $2.4$1.4 billion, for transfers of receivables, respectively (of which approximately $92.7$67.2 million and $255.3$59.5 million, respectively, represented new transfers and the remainder proceeds from collections reinvested in revolving-period transfers).

 

The following table summarizes the activity in the deferred purchase price receivables account:

 

 

The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected on accounts where the Company has continuing involvement was approximately $362.7$217.4 million and $339.1$225.2 million as of SeptemberJune 30, 20162017 and March 31, 2016,2017, respectively. For the six-monththree-month periods ended SeptemberJune 30, 20162017 and September 25, 2015,July 1, 2016, total accounts receivable sold to certain third party banking institutions was approximately $0.8 billion$229.5 million and $1.2 billion,$453.0 million, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows.

 

9.11.  FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

 

 

The Company has deferred compensation plans for its officers and certain other employees. Amounts deferred under the plans are invested in hypothetical investments selected by the participant or the participant’s investment manager. The Company’s deferred compensation plan assets are for the most part included in other noncurrent assets on the condensed consolidated balance sheets and primarily include investments in equity securities that are valued using active market prices.

 

 

The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.

 

The Company’s cash equivalents are comprised of bank deposits and money market funds, which are valued using level 2 inputs, such as interest rates and maturity periods. Due to their short-term nature, their carrying amount approximates fair value.

 

The Company’s deferred compensation plan assets also include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy.

 

The fair value of the liability was estimated using a simulation-based measurement technique with significant inputs that are not observable in the market and thus represents a level 3 fair value measurement. The significant inputs in the fair value measurement not supported by market activity included the Company's probability assessments of expected future revenue during the earn-out period and associated volatility, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the merger agreement. Significant decreases in expected revenue during the earn-out period, or significant increases in the discount rate or volatility in isolation would result in lower fair value estimates. The interrelationship between these inputs is not considered significant.

The following table summarizes the activities related to contingent consideration:

The Company values deferred purchase price receivables relating to its asset-backed securitization program based on a discounted cash flow analysis using unobservable inputs (i.e., level 3 inputs), which are primarily risk free interest rates adjusted for the credit quality of the underlying creditor. Due to its high credit quality and short term maturity, the fair value approximates carrying value. Significant increases in either of the major unobservable inputs (credit spread, risk free interest rate) in isolation would result in lower fair value estimates, however the impact is not meaningful.material. The interrelationship between these inputs is also insignificant. Refer to note 810 for a reconciliation of the change in the deferred purchase price receivable during the three-month and six-month periods ended SeptemberJune 30, 20162017 and September 25, 2015.July 1, 2016.

 

There were no transfers between levels in the fair value hierarchy during the three-month and six-month periods ended SeptemberJune 30, 20162017 and September 25, 2015.July 1, 2016.

 

 

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis:

 

 

The following table presents the Company’s debtmajor debts not carried at fair value:

 

The term loansCompany values its Euro Term Loans due September 2020 and January 2022 based on the current market rate, and as of June 30, 2017, the carrying amounts approximates fair values.

The Term Loans due November 2021 and June 2022, and the Notes due February 2020, February 2023 and June 2025 are valued based on broker trading prices in active markets. 

10.12. BUSINESS AND ASSET ACQUISITIONS & DIVESTITURES

 

During the six-month period ended September 30, 2016,In April 2017, the Company completed three acquisitions that were not individually, nor in the aggregate, significant to the consolidated financial position, results of operations and cash flows of the Company. Most notably is the Company’sits acquisition of two manufacturing and development facilities from Bose Corporation (“Bose”), a global leader in audio systems. The acquisitionAGM, which expanded the Company’sits capabilities in the audioautomotive market, and is included in the CTG segment. The other acquired businesses strengthen the Company's capabilities in the energy market within the IEIHRS segment. The Company paid a total of $189.3$213.7 million, net of cash acquired, of which $171.6 million, net of $17.8 million of cash acquired is related to the Bose acquisition. The Company acquired primarily $73.6 million of inventory, $66.8 million of property and equipment, recorded goodwill of $52.8 million and intangible assets of $44.9 million substantially related to Bose. The intangibles will amortize over a weighted-average estimated useful life of 7.4 years. In connection with these acquisitions, the Company assumed $57.5 million in other liabilities including additional consideration of $28.0 million payable to Bose by the end of fiscal year 2017. Further, the equity incentive plan of oneacquired.

A summary of the acquirees was assumed as partallocation of the acquisition.total purchase consideration is presented as follows (in thousands):