Flex Reports First Quarter Fiscal 2019 Results
SAN JOSE, Calif., July 26, 2018 /PRNewswire/ -- Flex (NASDAQ: FLEX), the Sketch-to-Scale(®) solutions provider that designs and builds Intelligent Products for a Connected World(®), today announced results for its first quarter ended June 29, 2018.
US$ in millions, except earnings per share Three-Month Periods Ended
June 29, 2018 June 30, 2017
------------- -------------
Net sales $6,424 $6,008
GAAP income before income taxes 142 146
Adjusted operating income 188 178
GAAP net income 116 125
Adjusted net income 128 128
GAAP EPS 0.22 0.23
Adjusted EPS 0.24 0.24
An explanation and reconciliation of non-GAAP financial measures to GAAP financial measures is presented in Schedule II attached to this press release.
"This marked the sixth straight quarter of year-over-year revenue growth reflecting a balanced and diversified service offering that enables integrated industry solutions," said Mike McNamara, CEO at Flex.
First Quarter Fiscal 2019 Results of Operations
Net sales for the first quarter ended June 29, 2018 were $6.4 billion, growing 7% year-over-year. We adopted the new revenue recognition standard, ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" starting April 1, 2018. Our net sales for Q1 fiscal year 2019 without the adoption impact were $6.5 billion and within the guidance range of $6.3 to $6.7 billion which also excluded the impact from adoption of the new revenue recognition standard. GAAP income before income taxes was $142 million for the quarter and adjusted operating income was $188 million, above the midpoint of the guidance range of $170 million to $200 million. GAAP net income was $116 million and adjusted net income for the quarter was $128 million. GAAP net income per share was $0.22 for the quarter and adjusted EPS was $0.24 for the quarter.
Balance Sheet and Cash Flow Highlights
Flex ended the quarter with over $1.25 billion of cash on hand and total debt of approximately $2.9 billion. The balance sheet remains well-positioned to support the business over the long-term.
In the first quarter of fiscal year 2019, we adopted the new cash flow accounting standard (ASU 2016-15) which resulted in a reclassification of cash inflows related to the deferred purchase price from securitization transactions from operating activities to investing activities. For the three-month period ended June 29, 2018, Flex's cash from operations was negative $672 million or negative $15 million adjusted for the impact due to cash collections of deferred purchase price of $657 million during the period. Free cash flow was negative $185 million excluding the impact of the new standard as the Company has increased its investments into capital expenditures and net working capital to support its revenue growth.
Second Quarter Fiscal Year 2019 Guidance
For the second quarter ending September 28, 2018, revenue is expected to be in the range of $6.6 to $7.0 billion. Adjusted EPS is expected to be in the range of $0.26 to $0.30 per diluted share. GAAP EPS is expected to be in the range of $0.18 to $0.22 and includes stock-based compensation expense and intangible amortization.
Other Items
The Company has undertaken, and will continue to undertake, measures to improve our internal control over financial reporting to address and remediate the material weaknesses described further in Item 9A "Controls and Procedures" of our fiscal 2018 Form 10-K. Many of our remediation efforts have been implemented already or are in the process of implementation and we will be finalizing our plans over the coming months. Our initiatives are focused on enhancing site level controls, designing and implementing centralized reporting controls and enhancing the quality and frequency of training. While our remediation plan is being executed, we also have engaged and will continue to engage additional resources to support and supplement the Company's existing internal resources. We are working to have the material weaknesses remediated as soon as possible.
Webcast and Conference Call
Flex management team will host a conference call today at 2:00 PM (PT) / 5:00 PM (ET), to review first quarter fiscal 2019 results. A live webcast of the event and slides will be available on the Flex Investor Relations website at http://investors.flex.com. An audio replay and transcript will also be available after the event on the Flex Investor Relations website.
About Flex
Flex Ltd. (Reg. No. 199002645H) is the Sketch-to-Scale(®) solutions provider that designs and builds Intelligent Products for a Connected World(®). With approximately 200,000 professionals across 30 countries, Flex provides innovative design, engineering, manufacturing, real-time supply chain insight and logistics services to companies of all sizes in various industries and end-markets. For more information, visit flex.com or follow us on Twitter @Flexintl. Flex - Live Smarter(®)
Contacts
Investors & Analysts
Kevin Kessel, CFA
(408) 576-7985
kevin.kessel@flex.com
Media & Press
Paul Brunato
(408) 576-7534
paul.brunato@flex.com
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of U.S. securities laws including statements related to future expected revenues and earnings per share and the Company's plan to remediate material weaknesses in the Company's internal control over financial reporting. These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. These risks include: that future revenues and earnings may not be achieved as expected; the challenges of effectively managing our operations, including our ability to control costs and manage changes in our operations; litigation and regulatory investigations and proceedings relating to the previously-disclosed Audit Committee independent investigation; our identification of material weaknesses in our internal control over financial reporting, which could, if not remediated result in a material misstatement in our financial statements; compliance with legal and regulatory requirements; the possibility that benefits of the Company's restructuring actions may not materialize as expected; that the expected revenue and margins from recently launched programs may not be realized; our dependence on a small number of customers; geopolitical risk, including the termination and renegotiation of international trade agreements; that recently proposed changes or future changes in tax laws in certain jurisdictions where we operate could materially impact our tax expense; and the effects that the current macroeconomic environment could have on our business and demand for our products as well as the effects that current credit and market conditions could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations.
Additional information concerning these and other risks is described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our reports on Forms 10-K and 10-Q that we file with the U.S. Securities and Exchange Commission. The forward-looking statements in this press release are based on current expectations and Flex assumes no obligation to update these forward-looking statements. Our share repurchase program does not obligate the Company to repurchase a specific number of shares and may be suspended or terminated at any time without prior notice.
SCHEDULE I
FLEX
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three-Month Periods Ended
June 29, 2018 June 30, 2017
------------- -------------
GAAP:
Net sales (2) $6,423,956 $6,008,272
Cost of sales (2) 6,046,102 5,601,340
Gross profit 377,854 406,932
Selling, general and administrative expenses 262,882 250,811
Intangible amortization 18,517 19,901
Interest and other, net 41,742 26,876
Other income, net (86,924) (36,165)
--------
Income before income taxes 141,637 145,509
Provision for income taxes 25,602 20,799
------
Net income $116,035 $124,710
========
Earnings per share:
GAAP $0.22 $0.23
====
Non-GAAP $0.24 $0.24
=====
Diluted shares used in computing per share amounts 535,454 538,633
See Schedule II for the
reconciliation of GAAP to non-
GAAP financial measures. See the
accompanying notes on Schedule V
attached to this press release.
SCHEDULE II
FLEX
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (1)
(In thousands, except per share amounts)
Three-Month Periods Ended
-------------------------
June 29, 2018 June 30, 2017
------------- -------------
GAAP gross profit $377,854 $406,932
Stock-based compensation expense 5,404 3,319
Distressed customers asset impairments (3) 12,352 -
Restructuring charges 2,310 -
New revenue standard adoption impact (4) 9,291 -
Legal and other (5) 5,581 -
Non-GAAP gross profit $412,792 $410,251
======== ========
GAAP income before income taxes $141,637 $145,509
Intangible amortization 18,517 19,901
Stock-based compensation expense 20,953 21,796
Distressed customers asset impairments (3) 17,364 -
Restructuring charges 8,817 -
New revenue standard adoption impact (4) 9,291 -
Legal and other (5) 16,311 -
Other income, net (6) (86,924) (36,165)
Interest and other, net 41,742 26,876
Non-GAAP operating income $187,708 $177,917
======== ========
GAAP provision for income taxes $25,602 $20,799
Intangible amortization benefit 2,292 1,766
Valuation allowance and tax receivable, net (7) (8,404) -
Tax benefit on restructuring and other (692) -
Non-GAAP provision for income taxes $18,798 $22,565
======= =======
GAAP net income $116,035 $124,710
Intangible amortization 18,517 19,901
Stock-based compensation expense 20,953 21,796
Restructuring charges 8,817 -
Distressed customers asset impairments (3) 17,364 -
New revenue standard adoption impact (4) 9,291 -
Legal and other (5) 16,311 -
Other income, net (6) (86,121) (36,165)
Adjustments for taxes (7) 6,804 (1,766)
Non-GAAP net income $127,971 $128,476
======== ========
Diluted earnings per share:
GAAP $0.22 $0.23
====
Non-GAAP $0.24 $0.24
========
SCHEDULE III
FLEX
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
As of June 29, 2018 As of March 31, 2018
------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $1,254,639 $1,472,424
Accounts receivable, net of allowance for doubtful accounts 2,890,227 2,517,695
Contract assets (2) 323,599 -
Inventories 3,984,571 3,799,829
Other current assets 1,231,773 1,380,466
---------
Total current assets 9,684,809 9,170,414
Property and equipment, net 2,190,080 2,239,506
Goodwill 1,094,776 1,121,170
Other intangible assets, net 390,827 424,433
Other assets 949,196 760,332
Total assets $14,309,688 $13,715,855
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings and current portion of long-term debt $42,903 $43,011
Accounts payable 5,709,079 5,122,303
Accrued payroll 377,461 383,332
Other current liabilities 1,665,432 1,719,418
---------
Total current liabilities 7,794,875 7,268,064
Long-term debt, net of current portion 2,877,089 2,897,631
Other liabilities 528,405 531,587
Total shareholders' equity 3,109,319 3,018,573
Total liabilities and shareholders' equity $14,309,688 $13,715,855
=========== ===========
SCHEDULE IV
FLEX
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three-Month Periods Ended
-------------------------
June 29, 2018 June 30, 2017
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $116,035 $124,710
Depreciation, amortization and other
impairment charges 121,763 131,396
Gain from deconsolidation of a subsidiary
entity (91,025) -
Changes in working capital and other (818,581) (951,862)
-------------------
Net cash used in operating activities (671,808) (695,756)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (172,247) (124,851)
Proceeds from the disposition of property
and equipment 2,336 5,476
Acquisition of businesses, net of cash
acquired - (213,718)
Proceeds from divestiture of businesses, net
of cash held in divested businesses - (616)
Cash collections of deferred purchase price 656,766 834,272
Other investing activities, net (15,218) (18,549)
Net cash provided by investing activities 471,637 482,014
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings and long-term
debt 150,313 -
Repayments of bank borrowings and long-term
debt (150,344) (7,554)
Payments for repurchases of ordinary shares - (73,864)
Net proceeds from issuance of ordinary
shares 45 696
Other financing activities, net - 57,628
-------------------------------
Net cash provided by (used in) financing activities 14 (23,094)
--- -------
Effect of exchange rates on cash and cash equivalents (17,628) (11,642)
------- -------
Net change in cash and cash equivalents (217,785) (248,478)
Cash and cash equivalents, beginning of
period 1,472,424 1,830,675
-------------------
Cash and cash equivalents, end of period $1,254,639 $1,582,197
========================================
Reconciliation of GAAP to Non-GAAP Financial Measures (1)
Net cash used in operating activities $(671,808) $(695,756)
Cash collections of deferred purchase price 656,766 834,272
-------------------
Adjusted net cash provided by (used in) operating activities (15,042) 138,516
Net Capital Expenditures (169,911) (119,375)
Free Cash Flow $(184,953) $19,141
========= =======
SCHEDULE V
FLEX AND SUBSIDIARIES
NOTES TO SCHEDULES I, II, III, & IV
(1) To supplement Flex's
unaudited selected
financial data
presented
consistent with
Generally Accepted
Accounting
Principles
("GAAP"), the
Company discloses
certain non-GAAP
financial measures
that exclude
certain charges,
including non-GAAP
gross profit, non-
GAAP operating
income, non-GAAP
net income and non-
GAAP net income per
diluted share.
These supplemental
measures exclude
restructuring
charges, stock-
based compensation
expense, intangible
amortization, other
discrete events as
applicable and the
related tax
effects. These non-
GAAP measures are
not in accordance
with or an
alternative for
GAAP, and may be
different from non-
GAAP measures used
by other companies.
We believe that
these non-GAAP
measures have
limitations in that
they do not reflect
all of the amounts
associated with
Flex's results of
operations as
determined in
accordance with
GAAP and that these
measures should
only be used to
evaluate Flex's
results of
operations in
conjunction with
the corresponding
GAAP measures. The
presentation of
this additional
information is not
meant to be
considered in
isolation or as a
substitute for the
most directly
comparable GAAP
measures. We
compensate for the
limitations of non-
GAAP financial
measures by relying
upon GAAP results
to gain a complete
picture of the
Company's
performance.
In calculating non-
GAAP financial
measures, we
exclude certain
items to facilitate
a review of the
comparability of
the Company's
operating
performance on a
period-to-period
basis because such
items are not, in
our view, related
to the Company's
ongoing operational
performance. We use
non-GAAP measures
to evaluate the
operating
performance of our
business, for
comparison with
forecasts and
strategic plans,
for calculating
return on
investment, and for
benchmarking
performance
externally against
competitors. In
addition,
management's
incentive
compensation is
determined using
certain non-GAAP
measures. Also,
when evaluating
potential
acquisitions, we
exclude certain of
the items described
below from
consideration of
the target's
performance and
valuation. Since we
find these measures
to be useful, we
believe that
investors benefit
from seeing results
"through the eyes"
of management in
addition to seeing
GAAP results. We
believe that these
non-GAAP measures,
when read in
conjunction with
the Company's GAAP
financials, provide
useful information
to investors by
offering:
-- the ability to make more meaningful
period-to-period comparisons of the
Company's on-going operating results;
-- the ability to better identify trends in
the Company's underlying business and
perform related trend analyses;
-- a better understanding of how management
plans and measures the Company's
underlying business; and
-- an easier way to compare the Company's
operating results against analyst
financial models and operating results
of competitors that supplement their
GAAP results with non-GAAP financial
measures.
The following are
explanations of
each of the
adjustments that we
incorporate into
non-GAAP measures,
as well as the
reasons for
excluding each of
these individual
items in the
reconciliations of
these non-GAAP
financial measures:
Stock-based compensation expense
consists of non-cash charges for the
estimated fair value of stock options
and unvested restricted share unit
awards granted to employees and assumed
in business acquisitions. The Company
believes that the exclusion of these
charges provides for more accurate
comparisons of its operating results to
peer companies due to the varying
available valuation methodologies,
subjective assumptions and the variety
of award types. In addition, the
Company believes it is useful to
investors to understand the specific
impact stock-based compensation
expense has on its operating results.
Intangible amortization consists
primarily of non-cash charges that can
be impacted by, among other things, the
timing and magnitude of acquisitions.
The Company considers its operating
results without these charges when
evaluating its ongoing performance and
forecasting its earnings trends, and
therefore excludes such charges when
presenting non-GAAP financial
measures. The Company believes that the
assessment of its operations excluding
these costs is relevant to its
assessment of internal operations and
comparisons to the performance of its
competitors.
Distressed customers asset impairments
consist primarily of non-cash
impairments of certain inventory on
hand to net realizable value as well as
additional provisions for doubtful
accounts receivable for customers that
are experiencing significant financial
difficulties. These costs are excluded
by the Company's management in
assessing current operating performance
and forecasting its earnings trends and
are therefore excluded by the Company
from its non-GAAP measures.
Legal and other consists primarily of
costs incurred relating to the
independent investigation undertaken by
the Audit Committee of the Company's
Board of Directors completed in June
2018. It also includes certain charges
not directly related to ongoing or core
business results primarily related to
Multek China that was divested in the
second quarter of fiscal year 2019.
These costs are excluded by the
Company's management in assessing
current operating performance and
forecasting its earnings trends and are
therefore excluded by the Company from
its non-GAAP measures.
New revenue standard adoption impact
relates to the amendment of its
existing contracts for certain smaller
customers which removed the
consideration of over-time recognition
under ASC 606. This impact is excluded
by the Company's management in
assessing current operating performance
and is not expected to be recurring and
therefore excluded by the Company from
its non-GAAP measures.
Restructuring charges include severance
for rationalization at existing sites
and corporate functions as well as
asset impairment, lease termination,
and other charges related to the
closures and consolidations of certain
operating sites. These costs may vary
in size based on the Company's
initiatives and are not directly
related to ongoing or core business
results, and do not reflect expected
future operating expenses. These costs
are excluded by the Company's
management in assessing current
operating performance and forecasting
its earnings trends and are therefore
excluded by the Company from its non-
GAAP measures.
Adjustment for taxes relates to the tax
effects of the various adjustments that
we incorporate into non-GAAP measures
in order to provide a more meaningful
measure on non-GAAP net income and
certain adjustments related to non-
recurring settlements of tax
contingencies or other non-recurring
tax charges, when applicable.
Adjustment for operating cash flows and
free cash flow metrics due to recently
issued accounting standards. In Q1
fiscal year 2019, the adoption of the
new cash flow accounting standard
resulted in a reclassification of cash
flows related to the collection of
certain receivables sold through the
Company's asset-backed receivable
securitization program from operating
activities to investing activities. The
Company utilizes net cash flow from its
various A/R sales programs as a low-
cost source to fund operations and as a
critical net working capital management
tool. Cash flow from operations is also
a critical metric that investors use to
evaluate a company's earnings power.
The Company views and manages all
collections under the program similarly
without bifurcation and accordingly
provides the adjustment to reflect cash
flows from operations inclusive of all
collections of receivables sold through
the programs.
In addition, we redefined our free cash
flow metric to be GAAP net cash flows
from operating activities, plus cash
collection of deferred purchase price,
less purchases of property and
equipment net of proceeds from
dispositions to reflect this change and
present cash flows on a consistent
basis for investor transparency. We
believe Free Cash Flow is an important
liquidity metric because it measures,
during a given period, the amount of
cash generated that is available to
repay debt obligations, make
investments, fund acquisitions and for
certain other activities. Since Free
Cash Flow includes investments in
operating assets, we believe this non-
GAAP liquidity measure is useful in
addition to the most directly
comparable GAAP measure - "net cash
flows used in operating activities."
(2) The below table
reflects the three-
months ended June
29, 2018 impact
from ASU 2014-09
"Revenue from
Contracts with
Customers (Topic
606)". For further
detail, please
refer to the Flex
10-Q.
(In thousands)
As Reported Adjustments Balance Without
ASC 606 Adoption
----------------
ASSETS
Contract assets $323,599 $(323,599) $ -
Inventories 3,984,571 321,710 4,306,281
Other current assets 1,231,773 39,184 1,270,957
LIABILITIES AND SHAREHOLDERS' EQUITY
Other current liabilities $1,665,432 $70,317 $1,735,749
Total shareholders' equity 3,109,319 (33,022) 3,076,297
(In thousands)
As Reported Adjustments Balance Without
ASC 606 Adoption
----------------
GAAP:
Net sales $6,423,956 $101,974 $6,525,930
Cost of sales 6,046,102 97,141 6,143,243
Gross profit 377,854 4,833 382,687
Net income $116,035 $4,833 $120,868
========
(3) Distressed customers asset
impairments for the three-month
period ended June 29, 2018 relate to
additional provision for doubtful
accounts receivable, inventory and
other assets for certain customers
experiencing significant financial
difficulties.
(4) During the quarter, the Company
amended certain non-substantive
terms of its existing contracts for
its smaller customers. The
amendments removed the consideration
regarding over-time recognition
under ASC 606. Accordingly, these
customer contracts are now accounted
for consistent with prior accounting
and revenue is recognized upon
shipment of product.
(5) Legal and other during the three-
month period ended June 29, 2018
primarily consists of costs incurred
relating to the independent
investigation undertaken by the
Audit Committee of the Company's
Board of Directors which was
completed in June 2018 and certain
charges of the China based Multek
that was divested in the second
quarter of fiscal year 2019.
(6) During the three-month period ended
June 29, 2018, the company
transferred employees and equipment
along with certain related software
and IP, into AutoLab AI which later
received additional equity funding
from third party investors and
changed the composition of the Board
of directors removing Flex's
control. As such, we deconsolidated
the entity and recognized a gain of
approximately $92 million in other
income, net for the quarter ended
June 29, 2018.
The company sold its Wink business
during first quarter of fiscal year
2018 to an unrelated third-party
venture backed company in exchange
for contingent consideration fair
valued at $59 million and recognized
a gain on sale of $38.7 million,
which is recorded in other income,
net for the quarter ended June 30,
2017.
(7) Adjustment for exchange rate
fluctuation on income tax receivable
position of an operating subsidiary
recognized in a prior period.
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SOURCE Flex
