10-QPeriod: Q3 FY2017

FLEX LTD. Quarterly Report for Q3 Ended Dec 31, 2016

Filed January 27, 2017For Securities:FLEX

Summary

Flex Ltd. reported net sales of $6.1 billion for the three months ended December 31, 2016, a decrease of 9.6% compared to the same period in the prior year. This decline was primarily driven by reduced sales in the Communications & Enterprise Compute (CEC) and Consumer Technologies Group (CTG) segments. Despite the revenue decrease, the company's gross profit margin remained relatively stable, improving slightly in the three-month period. The company continues to strategically rebalance its portfolio towards higher-margin businesses and has seen some positive impacts from its 'Sketch-to-Scale' strategy, particularly in the High Reliability Solutions (HRS) segment. Management highlights investments in innovation and design, aiming for long-term growth in outsourcing of advanced manufacturing and design services.

Financial Highlights

49 data points
Beta

Revenue

$6.11B

6.8% Gross Margin

Net Income

$129.47M

2.1% Net Margin

EPS (Diluted)

$0.24

Total Assets

$12.80B

Cash & Equivalents

$1.86B

Free Cash Flow

$494.76M

Financial Statements
Beta
Revenue$6.11B
Cost of Revenue$5.70B
Gross Profit$416.45M
SG&A Expenses$231.55M
Interest Expense$26.60M
Net Income$129.47M
EPS (Basic)$0.24
EPS (Diluted)$0.24
Shares Outstanding (Basic)539.64M
Shares Outstanding (Diluted)545.02M

Key Highlights

  • 1Net sales for the third quarter of fiscal year 2017 (ending December 31, 2016) were $6.1 billion, a decrease of 9.6% year-over-year.
  • 2The decline in net sales was primarily attributed to lower sales in the CEC and CTG segments, with specific mentions of reduced demand from a major smartphone customer and the exit of a China operation.
  • 3Gross profit margin remained stable, showing slight improvement in the three-month period (6.8%) compared to the prior year (6.7%), despite lower sales.
  • 4The company's 'Sketch-to-Scale' strategy is showing positive impacts, particularly in the HRS segment, which saw margin improvement.
  • 5Operating expenses, specifically SG&A, increased year-over-year due to stock-based compensation, acquisition-related costs (NEXTracker), and investments in design and engineering.
  • 6Cash provided by operating activities remained strong at $1.0 billion for the nine months ended December 31, 2016, and free cash flow increased to $627.6 million.
  • 7Flex repurchased $255.9 million of its ordinary shares during the nine-month period, indicating a continued focus on returning capital to shareholders.

Frequently Asked Questions

The decrease in net sales for the three months ended December 31, 2016, primarily stems from lower sales in the Communications & Enterprise Compute (CEC) and Consumer Technologies Group (CTG) segments. Specific factors include reduced demand from a large smartphone customer and the company's strategic exit from a dedicated China operation for them.

Despite the revenue decline, Flex maintained stable gross profit margins. This was achieved through a favorable business mix with a greater concentration of higher-margin businesses, such as the HRS segment, and improved operational efficiencies. The company's 'Sketch-to-Scale' strategy also contributes to higher-value engagements.

The increase in SG&A expenses for the nine-month period ending December 31, 2016, is attributed to higher stock-based compensation, incremental costs associated with the NEXTracker acquisition, and further investments in design and engineering resources to support the company's 'Sketch-to-Scale' initiatives. Restructuring costs related to rationalizing the company's footprint also contributed.

Flex demonstrated strong operating cash flow of $1.0 billion for the nine months ended December 31, 2016. Free cash flow also saw an increase to $627.6 million, reflecting efficient operations. The company's liquidity is supported by a significant cash balance of approximately $1.9 billion and an undrawn $1.5 billion revolving credit facility.