10-QPeriod: Q3 FY2020

FLEX LTD. Quarterly Report for Q3 Ended Dec 31, 2019

Filed January 31, 2020For Securities:FLEX

Summary

Flex Ltd. reported its financial results for the fiscal third quarter and the first nine months of fiscal year 2020, ending December 31, 2019. The company experienced a year-over-year decrease in net sales for both the quarter and the nine-month period, primarily driven by reduced demand in its Consumer Technologies Group (CTG) and Communications & Enterprise Compute (CEC) segments. This decline was partially offset by growth in the Industrial and Emerging Industries (IEI) and High Reliability Solutions (HRS) segments, reflecting a strategic shift towards higher-margin, less volatile businesses. Despite the revenue decline, Flex demonstrated improved gross profit margins in the third quarter, attributed to a favorable product mix and better operational execution. However, the nine-month period saw a decrease in gross profit and margin due to ongoing geopolitical uncertainties, restructuring charges, and inventory write-downs. The company is actively managing its portfolio by reducing exposure to high-volatility products and streamlining its cost structure, incurring significant restructuring charges as a result. Management believes these actions are positioning the company for long-term growth in advanced manufacturing and design services.

Financial Highlights

51 data points
Beta

Revenue

$6.46B

6.7% Gross Margin

Net Income

$111.00M

1.7% Net Margin

EPS (Diluted)

$0.22

Total Assets

$14.14B

Cash & Equivalents

$1.79B

Free Cash Flow

-$155.00M

Financial Statements
Beta
Revenue$6.46B
Cost of Revenue$6.02B
Gross Profit$430.00M
SG&A Expenses$218.00M
Interest Expense$35.00M
Net Income$111.00M
EPS (Basic)$0.22
EPS (Diluted)$0.22
Shares Outstanding (Basic)507.00M
Shares Outstanding (Diluted)510.00M

Key Highlights

  • 1Net sales decreased by 7% to $6.5 billion for the third quarter ended December 31, 2019, compared to the prior year, largely due to weakness in CTG and CEC segments, though IEI and HRS segments showed growth.
  • 2Gross profit increased by $73 million to $430 million for the third quarter, with gross margin improving by 160 basis points to 6.7%, driven by favorable product mix and operational efficiencies.
  • 3The company incurred significant restructuring charges of $199 million for the nine-month period ended December 31, 2019, reflecting strategic decisions to reduce exposure to high-volatility products and streamline costs.
  • 4Total segment income remained flat at $256 million for the third quarter, but operating margins varied across segments, with IEI showing strong improvement and HRS and CTG facing margin pressure.
  • 5As of December 31, 2019, cash and cash equivalents stood at $1.8 billion, with total borrowings at $2.8 billion. The company reported a positive adjusted free cash flow of $538 million for the nine-month period.
  • 6The company continues its share repurchase program, with $402 million available under its authorized repurchase plan as of December 31, 2019.
  • 7Adoption of ASC 842 (Leases) effective April 1, 2019, resulted in the recognition of new operating lease right-of-use assets and lease liabilities, materially impacting the balance sheet but not the income statement.

Frequently Asked Questions

The primary drivers of the net sales decrease were reduced demand in the Consumer Technologies Group (CTG) and Communications & Enterprise Compute (CEC) segments. This was due to factors like Flex's strategic reduction of exposure to high-volatility, low-margin customers and products in CTG, and slower 5G rollout and customer disengagement in CEC.

Gross profit improved in the third quarter due to a favorable product mix and better operational execution, leading to a 160 basis point increase in gross margin. However, for the nine-month period, gross profit and margins decreased, impacted by geopolitical uncertainties, significant restructuring charges, and inventory write-downs related to reducing exposure to high-volatility businesses. Segment-level margins also showed mixed performance, with IEI improving but HRS and CTG facing pressure.

Flex is actively executing a portfolio optimization strategy focused on higher-margin, less volatile businesses like IEI and HRS. This includes reducing exposure to high-volatility products in China and India, streamlining its cost structure, and incurring significant restructuring charges to facilitate this transition. The company is also investing in its design and engineering capabilities to align with evolving customer needs.

As of December 31, 2019, Flex had $1.8 billion in cash and cash equivalents and $2.8 billion in borrowings. The company reported a positive adjusted free cash flow of $538 million for the nine-month period. Flex has refinanced some of its debt, including issuing new notes and repaying existing debt, and reported compliance with all debt covenants. Management believes its current cash, expected operating cash flows, and available credit facilities are sufficient to fund operations for at least the next twelve months.