Flex Reports Fourth Quarter And Fiscal 2018 Results

US$ in millions, except earnings (losses) per share

Three-Month Periods Ended

Twelve-Month Periods Ended

March 31,
2018

March 31,
2017

March 31,
2018

March 31,
2017

Net sales

$            6,411

$            5,863

$          25,441

$          23,863

GAAP income before income taxes

16

99

521

371

Adjusted operating income

200

205

786

815

GAAP net income (loss)

(20)

87

429

320

Adjusted net income

150

156

585

640

GAAP EPS

(0.04)

0.16

0.80

0.59

Adjusted EPS

0.28

0.29

1.09

1.17

SCHEDULE I

FLEX

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three-Month Periods Ended

March 31, 2018

March 31, 2017

GAAP:

Net sales

$                  6,410,887

$                  5,862,597

Cost of sales

6,002,726

5,460,827

Restructuring charges

58,864

16,966

     Gross profit

349,297

384,804

Selling, general and administrative expenses 

247,074

229,467

Restructuring charges

23,846

3,469

Intangible amortization

22,775

19,078

Interest and other, net

37,043

27,663

Other charges, net

2,748

6,186

     Income before income taxes

15,811

98,941

Provision for income taxes

35,406

12,067

     Net income (loss)

$                     (19,595)

$                       86,874

Earnings (losses) per share:

GAAP

$                        (0.04)

$                          0.16

Non-GAAP

$                          0.28

$                          0.29

Basic shares used in computing per share amounts ⁽²⁾

527,809

533,837

Diluted shares used in computing per share amounts ⁽²⁾

527,809

540,782

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.

FLEX

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Twelve-Month Periods Ended

March 31, 2018

March 31, 2017

GAAP:

Net sales

$                 25,441,131

$                 23,862,934

Cost of sales

23,778,404

22,303,231

Restructuring charges

66,845

38,758

     Gross profit

1,595,882

1,520,945

Selling, general and administrative expenses 

1,019,399

937,339

Restructuring charges

23,846

10,637

Intangible amortization

78,640

81,396

Interest and other, net

122,823

99,532

Other charges (income), net

(169,719)

21,193

     Income before income taxes

520,893

370,848

Provision for income taxes

92,359

51,284

     Net income

$                     428,534

$                     319,564

Earnings per share:

GAAP

$                          0.80

$                          0.59

Non-GAAP

$                          1.09

$                          1.17

Diluted shares used in computing per share amounts

536,598

546,220

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

March 31, 2018

March 31, 2017

GAAP gross profit

$                     349,297

$                     384,804

Stock-based compensation expense

5,440

2,517

Restructuring charges

58,864

16,966

Contingencies and other ⁽⁴⁾

15,679

14,769

Non-GAAP gross profit

$                     429,280

$                     419,056

GAAP income before income taxes

$                       15,811

$                       98,941

Intangible amortization

22,775

19,078

Stock-based compensation expense

22,226

14,955

Distressed customers asset impairments ⁽³⁾

1,498

-

Restructuring charges

82,710

20,435

Contingencies and other ⁽⁴⁾

15,679

17,704

Other charges, net

2,748

6,186

Interest and other, net

37,043

27,663

Non-GAAP operating income

$                     200,490

$                     204,962

GAAP provision for income taxes

$                       35,406

$                       12,067

Intangible amortization benefit

2,605

1,725

Valuation allowance and tax receivable, net ⁽⁷⁾

(27,507)

-

Tax benefit on restructuring and other

5,746

1,132

Non-GAAP provision for income taxes

$                       16,250

$                       14,924

GAAP net income (loss)

$                    (19,595)

$                       86,874

Intangible amortization

22,775

19,078

Stock-based compensation expense

22,226

14,955

Restructuring charges

82,710

20,435

Distressed customers asset impairments ⁽³⁾

1,498

-

Contingencies and other ⁽⁴⁾

15,679

17,704

Investment and other, net

5,083

-

Adjustments for taxes ⁽⁷⁾

19,156

(2,857)

Non-GAAP net income

$                     149,532

$                     156,189

Diluted earnings (losses) per share:

GAAP ⁽²⁾

$                        (0.04)

$                          0.16

Non-GAAP ⁽²⁾

$                          0.28

$                          0.29

FLEX

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

(In thousands, except per share amounts)

Twelve-Month Periods Ended

March 31, 2018

March 31, 2017

GAAP gross profit

$                  1,595,882

$                  1,520,945

Stock-based compensation expense

19,102

10,023

Distressed customers asset impairments ⁽³⁾

-

92,915

Restructuring charges

66,845

38,758

Contingencies and other ⁽⁴⁾

26,631

14,769

Non-GAAP gross profit

$                  1,708,460

$                  1,677,410

GAAP income before income taxes

$                     520,893

$                     370,848

Intangible amortization

78,640

81,396

Stock-based compensation expense

85,244

82,266

Distressed customers asset impairments ⁽³⁾

6,251

92,915

Restructuring charges

90,691

49,395

Contingencies and other ⁽⁴⁾

51,631

17,704

Other charges (income), net ^{(5) (6)}

(169,719)

21,193

Interest and other, net

122,823

99,532

Non-GAAP operating income

$                     786,454

$                     815,249

GAAP provision for income taxes

$                       92,359

$                       51,284

Intangible amortization benefit

8,806

7,176

Valuation allowance and tax receivable, net ⁽⁷⁾

(27,507)

-

Tax benefit on restructuring and other

8,484

3,012

Tax benefit on intangible assets

-

638

Non-GAAP provision for income taxes

$                       82,142

$                       62,110

GAAP net income

$                     428,534

$                     319,564

Intangible amortization

78,640

81,396

Stock-based compensation expense

85,244

82,266

Restructuring charges

90,691

49,395

Distressed customers asset impairments ⁽³⁾

6,251

92,915

Contingencies and other ⁽⁴⁾

51,631

17,704

Elementum Deconsolidation ⁽⁵⁾

(151,574)

-

Investment and other, net ⁽⁶⁾

(14,783)

7,388

Adjustments for taxes ⁽⁷⁾

10,217

(10,826)

Non-GAAP net income

$                     584,851

$                     639,802

Diluted earnings per share:

GAAP 

$                          0.80

$                          0.59

Non-GAAP

$                          1.09

$                          1.17

SCHEDULE III

FLEX

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

As of March 31, 2018

As of March 31, 2017

ASSETS

Current Assets:

Cash and cash equivalents

$                1,472,424

$                1,830,675

Accounts receivable, net of allowance for doubtful accounts

2,517,695

2,192,704

Inventories

3,799,829

3,396,462

Other current assets

1,380,466

967,935

Total current assets

9,170,414

8,387,776

Property and equipment, net

2,239,506

2,317,026

Goodwill

1,121,170

984,867

Other intangible assets, net

424,433

362,181

Other assets

760,332

541,513

Total assets

$              13,715,855

$              12,593,363

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Bank borrowings and current portion of long-term debt

$                    43,011

$                    61,534

Accounts payable

5,122,303

4,484,908

Accrued payroll

383,332

344,245

Other current liabilities

1,719,418

1,613,940

Total current liabilities

7,268,064

6,504,627

Long-term debt, net of current portion

2,897,631

2,890,609

Other liabilities

531,587

519,851

Total shareholders' equity

3,018,573

2,678,276

Total liabilities and shareholders' equity

$              13,715,855

$              12,593,363

SCHEDULE IV

FLEX

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Twelve-Month Periods Ended

March 31, 2018

March 31, 2017

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$                428,534

$                319,564

Depreciation, amortization and other impairment charges

555,364

609,660

Gain from deconsolidation of a subsidiary

(151,574)

—

Changes in working capital and other

(78,726)

220,685

Net cash provided by operating activities

753,598

1,149,909

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(561,997)

(525,111)

Proceeds from the disposition of property and equipment

44,780

35,606

Acquisition of businesses, net of cash acquired

(268,377)

(189,084)

Divestiture of business, net of cash held in divested business

(2,949)

36,731

Other investing activities, net

(120,442)

(60,329)

Net cash used in investing activities

(702,187)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from bank borrowings and long-term debt

1,366,000

312,741

Repayments of bank borrowings and long-term debt

(1,420,977)

(141,730)

Payments for repurchases of ordinary shares

(180,050)

(349,532)

Proceeds from issuance of ordinary shares

2,774

12,438

Other financing activities, net

44,468

(76,024)

Net cash used in financing activities

(187,785)

(242,107)

Effect of exchange rates on cash and cash equivalents

(15,079)

17,490

Net change in cash and cash equivalents

(358,251)

223,105

Cash and cash equivalents, beginning of year

1,830,675

1,607,570

Cash and cash equivalents, end of year

$              1,472,424

$              1,830,675

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 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 non-cash impairment of certain assets 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.

Restructuring charges include severance for rationalization at existing sites and corporate SG&A functions as well as asset impairment, lease termination, and other charges relate 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.

Investment and other, 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.

For the twelve-month period ended March 31, 2018, Free Cash Flow was $236 million consisting of GAAP net cash flows from operating activities of approximately $754 million less purchases of property and equipment net of proceeds from dispositions of $518 million. 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 provided by operating activities."

(2)

Basic shares were used in calculating diluted GAAP EPS for the quarter ended March 31, 2018 due to the net loss recognized during the period. Diluted shares for Q4 fiscal 2018 were 535,234 thousand which were used in calculating diluted Non-GAAP EPS for the quarter.

(3)

Distressed customers asset impairments for fiscal year 2018 relate to additional provision for doubtful accounts receivable for certain customers experiencing significant financial difficulties or contract disengagements.

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 twelve-month period ended March 31, 2017. 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 twelve-month period ended March 31, 2017.

(4)

Contingencies and other during fiscal year 2018 consists of charges in connection with certain legal matters of which loss contingencies are believed to be probable and estimable. The Company incurred various other charges predominantly related to damages incurred from a typhoon that impacted one of its China facilities. Additionally, certain asset impairments were recorded during both fiscal year 2017 and 2018.

(5)

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, the Company recognized a gain of approximately $151.6 million with no related tax impact, which is included in other charges (income), net for fiscal year 2018.    

(6)

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 fiscal year 2018.

In addition, the Company recorded $4.1 million and $21.9 million in the three-month and twelve-month periods ended March 31, 2018, respectively, for impairment of certain non-core investments.

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

(7)

Recognition of a non-recurring, non-cash, valuation allowance against deferred tax assets in a foreign operating subsidiary offset by the recognition of an associated income tax receivable for prior years.