Flex : Reports Third Quarter Fiscal 2018 Results

(US$ in millions, except EPS)

Three-Month Periods Ended

December 31, 2017

December 31, 2016

Net sales

$                             6,752

$                             6,115

GAAP income before income taxes

141

140

Adjusted operating income

220

223

GAAP net income

118

129

Adjusted net income

164

183

GAAP EPS

0.22

0.24

Adjusted EPS

0.31

0.34

SCHEDULE I

FLEX

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three-Month Periods Ended

December 31, 2017

December 31, 2016

GAAP:

Net sales

$                   6,751,552

$                   6,114,999

Cost of sales

6,305,224

5,698,544

     Gross profit

446,328

416,455

Selling, general and administrative expenses 

247,365

231,551

Intangible amortization

19,588

18,734

Interest and other, net

31,350

22,838

Other charges, net

6,865

3,090

     Income before income taxes

141,160

140,242

Provision for income taxes

22,827

10,773

     Net income

$                     118,333

$                     129,469

Earnings per share:

GAAP

$                          0.22

$                          0.24

Non-GAAP

$                          0.31

$                          0.34

Diluted shares used in computing per share amounts

534,352

545,022

FLEX

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Nine-Month Periods Ended

December 31, 2017

December 31, 2016

GAAP:

Net sales

$                 19,030,244

$                 18,000,337

Cost of sales

17,783,659

16,864,196

     Gross profit

1,246,585

1,136,141

Selling, general and administrative expenses 

772,325

715,040

Intangible amortization

55,865

62,318

Interest and other, net

85,780

71,869

Other charges (income), net

(172,467)

15,007

     Income before income taxes

505,082

271,907

Provision for income taxes

56,953

39,217

     Net income

$                     448,129

$                     232,690

Earnings per share:

GAAP

$                          0.84

$                          0.42

Non-GAAP

$                          0.81

$                          0.88

Diluted shares used in computing per share amounts

535,972

548,372

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

December 31, 2017

December 31, 2016

GAAP gross profit

$                     446,328

$                     416,455

Stock-based compensation expense

5,358

2,437

Contingencies and other ⁽³⁾

-

14,968

Non-GAAP gross profit

$                     451,686

$                     433,860

GAAP income before income taxes

$                     141,160

$                     140,242

Intangible amortization

19,588

18,734

Stock-based compensation expense

20,758

20,781

Contingencies and other ⁽³⁾

-

17,421

Other charges, interest and other, net ⁽⁴⁾

38,215

25,928

Non-GAAP operating income

$                     219,721

$                     223,106

GAAP provision for income taxes

$                       22,827

$                       10,773

Intangible amortization benefit

2,185

1,776

Tax benefit on contingencies and other

-

1,684

Non-GAAP provision for income taxes

$                       25,012

$                       14,233

GAAP net income

$                     118,333

$                     129,469

Intangible amortization

19,588

18,734

Stock-based compensation expense

20,758

20,781

Contingencies and other ⁽³⁾

-

17,421

Other charges, interest and other, net ⁽⁴⁾

7,892

-

Adjustments for taxes

(2,185)

(3,460)

Non-GAAP net income

$                     164,386

$                     182,945

Diluted earnings per share:

GAAP

$                          0.22

$                          0.24

Non-GAAP

$                          0.31

$                          0.34

FLEX

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES ⁽¹⁾

(In thousands, except per share amounts)

Nine-Month Periods Ended

December 31, 2017

December 31, 2016

GAAP gross profit

$                   1,246,585

$                   1,136,141

Stock-based compensation expense

13,662

7,506

Distressed customers asset impairments ⁽²⁾

-

92,915

Contingencies and other ⁽³⁾

18,933

21,792

Non-GAAP gross profit

$                   1,279,180

$                   1,258,354

GAAP income before income taxes

$                     505,082

$                     271,907

Intangible amortization

55,865

62,318

Stock-based compensation expense

63,018

67,311

Distressed customers asset impairments ⁽²⁾

4,753

92,915

Contingencies and other ⁽³⁾

43,933

28,960

Other charges (income), interest and other, net ⁽⁴⁾

(86,687)

86,876

Non-GAAP operating income

$                     585,964

$                     610,287

GAAP provision for income taxes

$                       56,953

$                       39,217

Intangible amortization benefit

6,201

5,451

Tax benefit on contingencies and other

2,738

1,880

Tax benefit on intangible assets

-

638

Non-GAAP provision for income taxes

$                       65,892

$                       47,186

GAAP net income

$                     448,129

$                     232,690

Intangible amortization

55,865

62,318

Stock-based compensation expense

63,018

67,311

Distressed customers asset impairments ⁽²⁾

4,753

92,915

Contingencies and other ⁽³⁾

43,933

28,960

Other charges (income), interest and other, net ⁽⁴⁾

(171,440)

7,388

Adjustments for taxes

(8,939)

(7,969)

Non-GAAP net income

$                     435,319

$                     483,613

Diluted earnings per share:

GAAP 

$                          0.84

$                          0.42

Non-GAAP

$                          0.81

$                          0.88

SCHEDULE III

FLEX

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

As of December 31, 2017

As of March 31, 2017

ASSETS

Current Assets:

Cash and cash equivalents

$                1,291,183

$                1,830,675

Accounts receivable, net of allowance for doubtful accounts

3,100,808

2,192,704

Inventories

3,725,643

3,396,462

Other current assets

965,470

967,935

Total current assets

9,083,104

8,387,776

Property and equipment, net

2,443,050

2,317,026

Goodwill

1,104,770

984,867

Other intangible assets, net

438,552

362,181

Other assets

770,834

541,513

Total assets

$               13,840,310

$               12,593,363

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Bank borrowings and current portion of long-term debt

$                     42,954

$                     61,534

Accounts payable

5,406,512

4,484,908

Accrued payroll

385,985

344,245

Other current liabilities

1,580,618

1,613,940

Total current liabilities

7,416,069

6,504,627

Long-term debt, net of current portion

2,901,720

2,890,609

Other liabilities

542,541

519,851

Total shareholders' equity

2,979,980

2,678,276

Total liabilities and shareholders' equity

$               13,840,310

$               12,593,363

SCHEDULE IV

FLEX

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine-Month Periods Ended

December 31, 2017

December 31, 2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$                 448,129

$                 232,690

Depreciation, amortization and other impairment charges

400,015

466,813

Gain from deconsolidation of a subsidiary entity

(151,574)

-

Changes in working capital and other

(265,552)

313,685

Net cash provided by operating activities

431,018

1,013,188

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(432,897)

(413,596)

Proceeds from the disposition of property and equipment

43,653

28,056

Acquisition of businesses, net of cash acquired

(269,724)

(180,259)

Other investing activities, net

(123,883)

(13,631)

Net cash used in investing activities

(579,430)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from bank borrowings and long-term debt

866,000

205,518

Repayments of bank borrowings and long-term debt

(907,930)

(115,089)

Payments for repurchases of ordinary shares

(180,050)

(259,658)

Net proceeds from issuance of ordinary shares

2,063

11,978

Other financing activities, net

46,482

(47,302)

Net cash used in financing activities

(173,435)

(204,553)

Effect of exchange rates on cash and cash equivalents

(14,224)

20,321

Net increase (decrease) in cash and cash equivalents

(539,492)

249,526

Cash and cash equivalents, beginning of period

1,830,675

1,607,570

Cash and cash equivalents, end of period

$              1,291,183

$              1,857,096

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 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 inventory 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. See additional description related to the specific period charge as applicable below.

Contingencies and other consists primarily of charges in connection with certain legal matters of which loss contingencies are believed to be probable and estimable. It also includes certain targeted site restructuring costs and damages incurred from natural disasters which are not directly related to ongoing or core business results, and do not reflect expected future operating expense. 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 when applicable.

Other charges (income), net consists of various other types of items that are not directly related to ongoing or core business results, such as the gain or loss from certain divestitures and impairment charges associated with non-core investments.  We exclude these items because they are not related to the Company's ongoing operating performance or do not affect core operations.  Excluding these amounts provide investors with a basis to compare Company performance against the performance of other companies without this variability.

(2)

Distressed customers asset impairments for the nine-month period ended December 31, 2017 relate to additional provision for doubtful accounts receivable for a customer experiencing significant financial difficulties.

During the fourth quarter of fiscal year 2016, the Company accepted return of previously shipped inventory from a former customer, SunEdison, Inc. ("SunEdison"), of approximately $90 million. On April 21, 2016, SunEdison filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61 million as of March 31, 2016, associated with its outstanding SunEdison receivables.

During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory on hand as of September 30, 2016, was not fully recoverable and recorded a charge of $60 million to reduce the carrying costs to market in the nine-month period ended December 31, 2016. The Company also recognized a $16 million impairment charge for solar module equipment and $16.9 million primarily related to negative margin sales and other associated solar panel direct costs. The total charge of $92.9 million is included in cost of sales for the nine-month period ended December 31, 2016.

(3)

Contingencies and other during the nine-month period ended December 31, 2017 consists of charges in connection with certain legal matters of which loss contingencies are believed to be probable and estimable. Additionally, the Company incurred various other charges predominantly related to damages incurred from a typhoon that impacted one of its China facilities.  

During fiscal year 2017, the Company initiated a plan to rationalize the current footprint at existing sites including corporate SG&A functions and recognized approximately $17.4 million in the quarter ended December 31, 2016 and $29.0 million was recognized for the nine-month period ending December 31, 2016. The plan was finalized and completed during fiscal year 2017.

(4)

During the second quarter of fiscal year 2018, the Company and other minority shareholders of Elementum amended certain agreements and as a result, the Company concluded it no longer had majority control and accordingly, deconsolidated the entity. As part of the deconsolidation, we recognized a gain of approximately $151.6 million with no related tax impact, which is included in other charges (income), net for the nine-month period ended December 31, 2017.

In addition, 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 charges (income), net for the nine-month ended December 31, 2017. The contingent consideration is expected to be settled in the fourth quarter of fiscal year 2018.

The nine-month period ended December 31, 2016 includes a $7.4 million loss attributable to a non-strategic facility sold during the second quarter of fiscal year 2017.