Flex Reports First Quarter Fiscal 2020 Results

Flex (NASDAQ: FLEX) today announced results for its first quarter ended June 28, 2019.

First Quarter Fiscal 2020 Highlights:

• Net Sales: $6.2 billion, year over year revenue down 3 percent
• GAAP Income Before Income Taxes: $64 million
• Adjusted Operating Income: $208 million
• GAAP Net Income: $45 million
• Adjusted Net Income: $138 million
• GAAP Net Income Per Share: $0.09
• Adjusted EPS: $0.27

An explanation and reconciliation of non-GAAP financial measures to GAAP financial measures is presented in Schedules II and V attached to this press release.

“For the first quarter, I am pleased that we achieved adjusted EPS within guidance range and 11% year-over-year growth in adjusted operating profit with free cash flow of $114 million. We are repositioning our portfolio to reduce exposure to high-volatility, low-margin business, while investing in design-led wins and higher-margin segments,” said Revathi Advaithi, CEO of Flex. “This acceleration of our strategy to reposition our mix and drive profitable growth combined with disciplined execution positions Flex well for the future.”

Financial Highlights

Flex ended the quarter with approximately $1.9 billion of cash on hand and total debt of approximately $3.2 billion.

Cash flow from operations was negative $657 million for the three-month period ended June 28, 2019, primarily due to cash collections of $899 million for certain receivables sold under the Company’s ABS programs reported as investing activities. Adjusted cash flow from operations and free cash flow were $237 million and $114 million, respectively, for the three-month period ended June 28, 2019.

The Company remains committed to using share buy-backs to enhance shareholder returns and repurchased approximately $52 million of ordinary shares during the three-month period ended June 28, 2019.

Second Quarter Fiscal 2020 Guidance

• Revenue: $6.1 billion to $6.5 billion
• GAAP Loss Before Income Taxes: $15 million to $110 million
• Adjusted Operating Income: $220 million to $250 million
• GAAP Loss Per Share: $0.05 to $0.25 which includes $0.07 for stock-based compensation expense and intangible amortization and $0.27 to $0.51 for estimated restructuring and other charges not reflected in adjusted EPS
• Adjusted EPS: $0.29 to $0.33.

As a result of recent geopolitical developments and uncertainties, primarily impacting one customer in China, we have seen a reduction in demand for products assembled for that customer. Due to these circumstances, the Company has decided to accelerate its strategic decision to reduce its exposure to certain high-volatility products in both China and India. The Company also initiated targeted activities to restructure its business to further reduce and streamline its cost structure.

The Company expects to incur additional restructuring and other charges throughout fiscal 2020 currently estimated in the range of $145 million to $265 million. Second quarter GAAP guidance includes the full impact of these charges although the timing of recognition may extend throughout fiscal 2020.

Looking Ahead

The Company is not providing detailed fiscal 2020 guidance but remains comfortable with the prior fiscal 2020 consensus adjusted EPS range that spanned from $1.20 to $1.30. When adjusting for restructuring and other charges of $0.37 to $0.57, stock-based compensation expenses and intangible amortization of $0.28, the Company’s GAAP EPS would range from $0.65 to $0.85 below adjusted EPS.

Webcast and Conference Call

The Flex management team will host a conference call today at 2:00 PM (PT) / 5:00 PM (ET), to review first quarter fiscal 2020 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 globally. With approximately 200,000 employees across 30 countries, Flex provides innovative design, engineering, manufacturing, real-time supply chain insight and logistics services to companies of all sizes across industries and markets. For more information, visit flex.com or follow us on Twitter @Flexintl.

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. 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; 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; the impact of component shortages, including their impact on our revenues; geopolitical risk, including the termination and renegotiation of international trade agreements and trade policies, including the impact of tariffs and related regulatory actions; that recently proposed changes or future changes in tax laws in certain jurisdictions where we operate could materially impact our tax expense; the effects that the current macroeconomic environment could have on our business and demand for our products; and 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.

See the accompanying notes on Schedule V attached to this press release.

See the accompanying notes on Schedule V attached to this press release.

SCHEDULE V

FLEX AND SUBSIDIARIES

NOTES TO SCHEDULES II, III

(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 and gains, 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.

Customer related asset impairments consist primarily of non-cash impairments of certain property and equipment to estimated fair value for customers we are in the process of disengaging as well as additional provisions for doubtful accounts receivable for customers that are experiencing significant financial difficulties. Certain inventory on hand was written down to net realizable value for these customers as well. 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 not directly related to ongoing or core business results such as (1) costs incurred relating to the independent investigation undertaken by the Audit Committee of the Company’s Board of Directors completed in June 2018, and (2) certain charges 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.

Restructuring charges include severance for rationalization at existing sites and corporate SG&A functions as well as asset impairment, and other charges related to the closures and consolidations of certain operating sites and targeted activities to restructure the business. 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.

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 certain 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 provides investors with a basis to compare Company performance against the performance of other companies without this variability.

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. 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. The Company also excludes the impact to operating cash flows related to certain vendor programs that is required for GAAP.

In addition, we define our free cash flow metric to be adjusted operating cash flows described above less purchases of property and equipment net of proceeds from dispositions 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 used in operating activities.” See below for the three-month periods ended June 28, 2019 and June 29, 2018 reconciliation of GAAP to Non-GAAP measures:

(2) Customer related asset impairments for the three-month period ended June 29, 2018 primarily relate to additional provisions for doubtful accounts receivable, and excess and obsolete inventory for certain customers experiencing significant financial difficulties and /or we are disengaging from.

(3) During the first quarter of fiscal year 2020, as a result of recent geopolitical developments and uncertainties, primarily impacting one customer in China, the Company has seen a reduction in demand for products assembled for that customer. Due to these circumstances, the Company has decided to accelerate its strategic decision to reduce its exposure to certain high-volatility products in both China and India. The Company also initiated targeted activities to restructure its business to further reduce and streamline its cost structure. The Company recognized $56.2 million of charges during the first quarter of fiscal year 2020, comprised of approximately $30.8 million of cash charges predominantly for employee severance, and $25.4 million of non-cash charges related to impairment of equipment and inventory.

In addition, during the first quarter of fiscal year 2019, the Company incurred certain restructuring charges primarily related to severance for headcount reductions to rationalize certain existing operating sites and corporate functions.

(4) 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.

(5) During the first quarter of fiscal year 2020, the Company incurred a $4.1 million debt extinguishment cost related to the partial repayment of our Notes due February 2020 and Term Loan due November 2021.

During the first quarter of fiscal year 2019, the Company transferred employees and equipment along with certain related software and IP, into Bright Machines 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.

(6) Primarily related to adjustment for exchange rate fluctuation on income tax receivable position of an operating subsidiary recognized in a prior period and tax effects of the various adjustments that we incorporate into Non-GAAP measures.

(7) During the first quarter of fiscal year 2019, 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.

(8) The Company adopted ASU No. 2016-02, Leases and subsequent updates (collectively, referred to as Accounting Standard Codification 842 or “ASC 842”) on April 1, 2019 using the modified retrospective method on the effective date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard. ASC 842 requires a lessee to recognize a right of use (“ROU”) asset and lease liability. Our ROU assets are $656 million and operating liabilities are $690 million (of which $135 million was current and recorded under other current liabilities and $555 million was non-current) as of June 28, 2019.

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