Flex Reports First Quarter Fiscal 2019 Results

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

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 

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

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.