10-QPeriod: Q2 FY2019

FLEX LTD. Quarterly Report for Q2 Ended Sep 28, 2018

Filed November 2, 2018For Securities:FLEX

Summary

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 billion 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 million 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.

Financial Highlights

51 data points
Beta

Revenue

$6.66B

6.0% Gross Margin

Net Income

$86.89M

1.3% Net Margin

EPS (Diluted)

$0.16

Total Assets

$14.73B

Cash & Equivalents

$1.38B

Free Cash Flow

-$955.46M

Financial Statements
Beta
Revenue$6.66B
Cost of Revenue$6.23B
Gross Profit$402.30M
SG&A Expenses$228.68M
Interest Expense$35.14M
Net Income$86.89M
EPS (Basic)$0.16
EPS (Diluted)$0.16
Shares Outstanding (Basic)531.50M
Shares Outstanding (Diluted)534.46M

Key Highlights

  • 1Net sales increased by 7% to $6.7 billion for the three months ended September 28, 2018, driven by growth across all operating segments.
  • 2Net 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.
  • 3The 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.
  • 4Operating expenses (SG&A) decreased by approximately $46 million year-over-year for the quarter, benefiting from prior restructuring programs and reduced acquisition-related costs.
  • 5FLEX is actively repurchasing shares, with $453.5 million remaining under its authorized repurchase program as of September 28, 2018.
  • 6The company is undergoing a CEO transition, with Michael M. McNamara set to retire effective December 31, 2018.
  • 7Management 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.

Frequently Asked Questions

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.

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.

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.

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.