10-QPeriod: Q2 FY2016

FLEX LTD. Quarterly Report for Q2 Ended Sep 25, 2015

Filed October 26, 2015For Securities:FLEX

Summary

Flextronics International Ltd. (now Flex) reported its financial results for the second quarter and first half of fiscal year 2016, ending September 25, 2015. For the quarter, net sales were $6.3 billion, a slight decrease of 3.2% year-over-year, impacted by lower demand in the Consumer Technology Group (CTG) and Integrated Network Solutions (INS) segments. However, gross profit increased to $396.9 million, and the gross margin improved to 6.3% due to a favorable shift in business mix towards higher-margin segments like High Reliability Solutions (HRS) and Industrial & Emerging Industries (IEI). For the six-month period, net sales were $11.9 billion, down 9.8% from the prior year, with similar drivers of decline in CTG and INS, partially offset by growth in HRS and IEI. Net income for the six-month period was $233.8 million, a decrease from $312.8 million in the same period last year. The company continued to execute its strategy of diversifying into higher-margin, longer-lifecycle businesses. Significant investments were made in acquisitions, notably Mirror Controls International (MCi), to expand capabilities in the automotive sector. The company also demonstrated solid free cash flow generation and continued its share repurchase program.

Financial Highlights

51 data points
Beta

Revenue

$6.32B

6.3% Gross Margin

Net Income

$122.98M

1.9% Net Margin

EPS (Diluted)

$0.22

Total Assets

$12.66B

Cash & Equivalents

$1.67B

Free Cash Flow

$141.67M

Financial Statements
Beta
Revenue$6.32B
Cost of Revenue$5.92B
Gross Profit$396.92M
SG&A Expenses$216.80M
Interest Expense$25.10M
Net Income$122.98M
EPS (Basic)$0.22
EPS (Diluted)$0.22
Shares Outstanding (Basic)563.33M
Shares Outstanding (Diluted)569.65M

Key Highlights

  • 1Net sales for the quarter decreased by 3.2% to $6.3 billion, primarily due to lower demand in CTG and INS segments.
  • 2Gross profit increased by 5.3% to $396.9 million, with gross margin improving to 6.3% from 5.8% year-over-year, driven by a strategic shift towards higher-margin businesses.
  • 3The High Reliability Solutions (HRS) segment showed strong performance, with segment income increasing 45.9% year-over-year, indicating successful diversification.
  • 4Acquisitions played a significant role, with the purchase of Mirror Controls International (MCi) for approximately $555.2 million to bolster the automotive segment.
  • 5Free cash flow for the six-month period was $368.0 million, a substantial increase from $167.9 million in the prior year's comparable period.
  • 6The company repurchased approximately 12.8 million shares for $138.0 million during the quarter as part of its ongoing share repurchase program.
  • 7Goodwill and intangible assets saw a significant increase, primarily due to the MCi acquisition, rising to $981.8 million from $415.2 million at the prior fiscal year-end.

Frequently Asked Questions

The decrease in net sales was primarily attributed to a decline in demand from customers within the Consumer Technology Group (CTG) and Integrated Network Solutions (INS) segments. Specifically, a reduction in demand from a major customer in the mobile business impacted CTG, while broad declines in server, storage, telecom, and networking businesses affected INS.

The improvement in gross margin, from 5.8% to 6.3%, was a result of a strategic shift towards businesses with longer product lifecycles and higher margins, such as the High Reliability Solutions (HRS) and Industrial & Emerging Industries (IEI) segments. Increased profitability in HRS and INS also contributed to the overall margin expansion.

Acquisitions significantly impacted the balance sheet, particularly the increase in goodwill and other intangible assets from $415.2 million to $981.8 million. The acquisition of Mirror Controls International (MCi) for approximately $555.2 million expanded the company's capabilities in the automotive market and contributed to this increase. These acquisitions are part of the company's strategy to diversify into higher-margin segments.

The company generated strong free cash flow of $368.0 million for the six-month period, an increase from the prior year. Operating activities provided $662.0 million in cash, driven by net income and favorable changes in working capital. The company also maintains a substantial cash and cash equivalents balance of approximately $1.7 billion and has access to a $1.5 billion revolving credit facility.