01—Abstract
Summary
Summary of the 10-Q filed August 2, 2018. Cited figures are marked; the original filing is the authoritative source.
Flex Ltd. reported a modest increase in net sales for the first quarter of fiscal year 2019, reaching $6.4 billiona, up 7% year-over-year.
This growth was primarily driven by strong performance in the Consumer Technologies Group (CTG) and High Reliability Solutions (HRS) segments, while the Communications & Enterprise Compute (CEC) segment saw a slight decline. The company's gross profit, however, experienced a decrease in both absolute terms and as a percentage of net sales, mainly due to higher start-up costs and operational inefficiencies associated with new product ramps. A significant event impacting the quarter was the adoption of the new revenue recognition standard (ASC 606), which introduced contract assets and liabilities on the balance sheet and resulted in a slight reduction in reported revenue and gross profit for the period due to certain contract amendments.
Additionally, the company recorded a substantial non-cash gain of $91.8 millionb from the deconsolidation of its investment in AutoLab AI, which boosted other income. Despite the gross profit pressure, the company ended the quarter with a solid cash and cash equivalents balance of approximately $1.3 billion, though it used $672 million in operating activities during the quarter.
02—Key points
Key Highlights
- Net sales increased by 7% to $6.4 billion in Q1 FY2019 compared to Q1 FY2018, driven by CTG and HRS segments.
- Gross profit declined to $378 million (5.9% of net sales) from $407 million (6.8% of net sales) year-over-year, impacted by higher start-up costs and inefficiencies.
- Adoption of ASC 606 revenue recognition standard resulted in the creation of contract assets and liabilities, with a net impact of reducing reported revenue and gross profit slightly due to contract amendments.
- A significant gain of $91.8 million was recognized from the deconsolidation of the AutoLab AI investment, boosting 'Other income, net'.
- Cash used in operating activities was $672 million for the quarter, a notable outflow driven by increases in operating assets and liabilities.
- The company maintained a strong liquidity position with $1.3 billion in cash and cash equivalents as of June 29, 2018.
- Selling, general, and administrative (SG&A) expenses increased slightly due to costs related to an independent audit committee investigation.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-QQ1 FY2019filed August 2, 2018Financial Statements
Q1 FY2019 against Q1 FY2018
| Line item | Q1 FY2019Q1 FY2018 | Change |
|---|---|---|
| Revenue | $6.40B$6.01B | +6.5% |
| Cost of Revenue | $6.02B$5.60B | +7.5% |
| Gross Profit | $377.85M$406.93M | −7.1% |
| SG&A Expenses | $262.88M$250.81M | +4.8% |
| Interest Expense | $33.52M$29.00M | +15.6% |
| Net Income | $116.03M$124.71M | −7.0% |
| EPS (Basic) | $0.22$0.24 | −8.3% |
| EPS (Diluted) | $0.22$0.23 | −4.3% |
| Shares Outstanding (Basic) | 529.38M530.27M | −0.2% |
| Shares Outstanding (Diluted) | 535.45M538.63M | −0.6% |
05—Questions
Frequently Asked Questions
What was the primary driver behind the decrease in gross profit margin?
The decrease in gross profit margin was primarily due to higher start-up costs, operational inefficiencies, and under-absorbed overhead costs associated with new manufacturing ramps. Additionally, a greater proportion of lower-margin consumer products in the business mix contributed to this decline.
How did the adoption of ASC 606 impact the financial statements?
The adoption of ASC 606 led to the creation of 'contract assets' and 'contract liabilities' on the balance sheet. For the reported quarter, it resulted in a net reduction of approximately $102 million in revenue and $4.8 million in gross profit compared to what would have been reported without ASC 606, largely due to amendments made to certain customer contracts which changed revenue recognition timing.
What is the significance of the AutoLab AI deconsolidation?
Flex deconsolidated its investment in AutoLab AI because it no longer held a controlling financial interest after third-party investors increased their stake. This deconsolidation resulted in a significant non-cash gain of $91.8 million being recognized in 'Other income, net' for the quarter, positively impacting net income but without a direct cash flow benefit in the current period.
What is the company's outlook on liquidity and funding?
Flex ended the quarter with $1.3 billion in cash and cash equivalents and a $1.75 billion revolving credit facility with no outstanding borrowings. While the company used significant cash in operations during the quarter, management believes its existing cash, anticipated cash flows from operations, and available credit facilities will be sufficient to fund operations for at least the next twelve months. The company also continues to explore debt and equity financings, and accounts receivable sales for future funding needs.
06—Continue