01—Abstract
Summary
Summary of the 10-Q filed November 2, 2018. Cited figures are marked; the original filing is the authoritative source.
FLEX LTD. (FLEX) reported its fiscal second quarter 2019 results on November 2, 2018.
The company demonstrated top-line growth, with net sales increasing by 7% to $6.7 billiona for the three months ended September 28, 2018, compared to the same period last year. This growth was broad-based across all segments: Communications & Enterprise Compute (CEC), Consumer Technologies Group (CTG), Industrial and Emerging Industries (IEI), and High Reliability Solutions (HRS). The company also adopted new revenue recognition standards (ASC 606), which impacted reported revenue and gross profit, creating contract assets and liabilities on the balance sheet.
Profitability saw a decline compared to the prior year, with net income decreasing to $86.9 millionb from $205.1 million. This was influenced by various factors including the impact of adopting ASC 606, higher interest expenses, and a significant charge related to the wind-down of NIKE footwear manufacturing operations in Mexico.
Despite these pressures, FLEX is strategically evolving its portfolio towards businesses with longer product lifecycles and higher margins. Investors should note potential goodwill impairment for the CTG segment, which management is currently testing.
02—Key points
Key Highlights
- Net sales increased by 7% to $6.7 billion for the three months ended September 28, 2018, driven by growth across all operating segments.
- Net income for the quarter decreased to $86.9 million from $205.1 million in the prior year period, impacted by various factors including charges related to the wind-down of operations and increased interest expenses.
- The company adopted new revenue recognition standard ASC 606, which resulted in the creation of 'contract assets' and 'contract liabilities' on the balance sheet and had an impact on reported revenue and cost of sales.
- Operating expenses (SG&A) decreased by approximately $46 million year-over-year for the quarter, benefiting from prior restructuring programs and reduced acquisition-related costs.
- FLEX is actively repurchasing shares, with $453.5 million remaining under its authorized repurchase program as of September 28, 2018.
- The company is undergoing a CEO transition, with Michael M. McNamara set to retire effective December 31, 2018.
- Management is in the process of testing for a potential goodwill impairment in the Consumer Technologies Group (CTG) segment due to a significant decline in market capitalization.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2019filed November 2, 2018Financial Statements
Q2 FY2019 against Q2 FY2018
| Line item | Q2 FY2019Q2 FY2018 | Change |
|---|---|---|
| Revenue | $6.66B$6.27B | +6.3% |
| Cost of Revenue | $6.23B$5.88B | +6.1% |
| Gross Profit | $402.30M$393.32M | +2.3% |
| SG&A Expenses | $228.68M$274.15M | −16.6% |
| Interest Expense | $35.14M$29.60M | +18.7% |
| Net Income | $86.89M$205.09M | −57.6% |
| EPS (Basic) | $0.16$0.39 | −59.0% |
| EPS (Diluted) | $0.16$0.38 | −57.9% |
| Shares Outstanding (Basic) | 531.50M531.31M | 0.0% |
| Shares Outstanding (Diluted) | 534.46M536.02M | −0.3% |
05—Questions
Frequently Asked Questions
What is the financial performance of FLEX for the second quarter of fiscal year 2019?
FLEX reported a 7% increase in net sales to $6.7 billion for the three months ended September 28, 2018, compared to the prior year. However, net income decreased to $86.9 million from $205.1 million in the same period last year, impacted by charges, higher interest, and the adoption of new accounting standards.
What is the impact of the new revenue recognition standard (ASC 606)?
The adoption of ASC 606 led to the creation of 'contract assets' and 'contract liabilities' on the balance sheet. It also impacted the timing of revenue and cost of sales recognition, leading to an increase in reported revenue and gross profit compared to what would have been reported without ASC 606, though with a net income impact of $3.6 million for the quarter.
Are there any significant risks or potential impairments the company is facing?
Yes, the company is currently testing for a potential goodwill impairment in its Consumer Technologies Group (CTG) segment due to a significant decline in its market capitalization. Management believes it's probable that the fair value of the CTG reporting unit is lower than its carrying value, and a material impairment charge could be recognized in the future.
What is the company's liquidity and cash flow situation?
As of September 28, 2018, FLEX had $1.4 billion in cash and cash equivalents. The company used $1.7 billion in operating activities during the six months ended September 28, 2018, partly due to increases in working capital. Free cash flow for the period was a use of $245 million. The company believes its current cash, anticipated operating cash flows, and available credit facilities are sufficient to meet its liquidity needs for at least the next twelve months.
06—Continue