10-QPeriod: Q1 FY2019

FLEX LTD. Quarterly Report for Q1 Ended Jun 29, 2018

Filed August 2, 2018For Securities:FLEX

Summary

Flex Ltd. reported a modest increase in net sales for the first quarter of fiscal year 2019, reaching $6.4 billion, 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 million 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.

Financial Highlights

50 data points
Beta

Revenue

$6.40B

5.9% Gross Margin

Net Income

$116.03M

1.8% Net Margin

EPS (Diluted)

$0.22

Total Assets

$14.31B

Cash & Equivalents

$1.25B

Free Cash Flow

-$1.12B

Financial Statements
Beta
Revenue$6.40B
Cost of Revenue$6.02B
Gross Profit$377.85M
SG&A Expenses$262.88M
Interest Expense$33.52M
Net Income$116.03M
EPS (Basic)$0.22
EPS (Diluted)$0.22
Shares Outstanding (Basic)529.38M
Shares Outstanding (Diluted)535.45M

Key Highlights

  • 1Net sales increased by 7% to $6.4 billion in Q1 FY2019 compared to Q1 FY2018, driven by CTG and HRS segments.
  • 2Gross 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.
  • 3Adoption 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.
  • 4A significant gain of $91.8 million was recognized from the deconsolidation of the AutoLab AI investment, boosting 'Other income, net'.
  • 5Cash used in operating activities was $672 million for the quarter, a notable outflow driven by increases in operating assets and liabilities.
  • 6The company maintained a strong liquidity position with $1.3 billion in cash and cash equivalents as of June 29, 2018.
  • 7Selling, general, and administrative (SG&A) expenses increased slightly due to costs related to an independent audit committee investigation.

Frequently Asked Questions

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.

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.

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.

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.