Flex Reports Third Quarter Fiscal 2017 Results

SCHEDULE V

FLEX AND SUBSIDIARIES

NOTES TO SCHEDULES I, II, III, & IV

(1)

To supplement Flex's unaudited selected financial data presented on a basis 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 selling, general and administrative expenses, non-GAAP operating income, non-GAAP net income and non-GAAP net income per diluted share.  These supplemental measures exclude stock-based compensation expense, restructuring charges, 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:

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the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results;

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the ability to better identify trends in the Company's underlying business and perform related trend analyses;

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a better understanding of how management plans and measures the Company's underlying business; and

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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.

Restructuring primarily includes severance for rationalization at existing sites and corporate SG&A functions. 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. 

Inventory impairment and other consists primarily of non-cash inventory impairment of certain solar panel inventory on hand to net realizable value. 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. 

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.

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, net consists of various other types of items that are not directly related to ongoing or core business results, such as the non-cash foreign currency impact 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 three-month period ended December 31, 2016, Free Cash Flow was $363 million consisting of GAAP net cash flows from operating activities of $469 million less purchases of property and equipment net of proceeds from dispositions of $106 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)

During the second quarter of fiscal year 2017, the Company began to rationalize the current footprint at existing sites, including corporate SG&A functions, and to continue to shift the talent base in support of our Sketch-to-Scale initiatives.  Approximately $17.4 million was recognized in the quarter ended December 31, 2016 and $29.0 million was recognized for the nine-month period ending December 31, 2016. The Company expects to incur additional charges in support of the initiative in the fourth quarter of fiscal 2017.

(3)

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

The three and nine months ended December 31, 2015 includes $25 million of non-cash foreign currency translation loss attributable to the sale of a non-strategic Western European manufacturing facility and a $22 million impairment of a non-core investment.

(4)

The nine months ended December 31, 2016 includes a $0.6 million benefit for the release of valuation allowance on certain of our deferred tax assets resulting from an immaterial acquisition.

The three and nine months ended December 31, 2015 includes a $39 million benefit for the release of valuation allowances on certain of our deferred tax assets resulting from our acquisition of the NEXTracker business in September 2015.

(5)

On April 21, 2016, SunEdison, Inc. (SunEdison) filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61.0 million as of March 31, 2016, associated with its outstanding SunEdison receivables. As of the end of fiscal 2016, the Company also retained solar panel module inventory and assets associated with our SunEdison production, which we had anticipated on selling.

During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly due to global oversupply and continued de-regulation. The Company determined that certain solar panel inventory on hand as of September 30, 2016 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market in the second quarter of fiscal 2017. The Company also recognized a $16.0 million impairment charge for solar module equipment and $16.9 million of other associated solar panel direct costs incurred during the same period. The total charge of $92.9 million is included in cost of sales for the nine month period ended December 31, 2016.