Flex Ltd 10-Q for FY2023 Q3
Flex Ltd. (FLEX)
10-Q
2023-01-27
For: 2022-12-31
View Original
Added on
April 10, 2026
About this 10-Q
Flex Ltd filed this 10-Q on January 27, 2023, covering the quarter ended December 31, 2022 (FY2023 Q3).
Headline figures
Quarter ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.76B
- up 17.2% from $6.62B a year earlier
- Net income
- $230M
- up 1.3% from net income of $227M a year earlier
- Diluted EPS
- $0.50
- up 4.2% from $0.48 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended December 31, 2022
Or
For the transition period from to
Commission file number 0-23354
(Exact name of registrant as specified in its charter)
| Not Applicable | ||||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
| (Address of registrant’s principal executive offices) | (Zip Code) | |||||||
(65 ) 6876-9899
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s ordinary shares outstanding as of January 20, 2023 was 451,081,016 .
FLEX LTD.
INDEX
| Page | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Flex Ltd., Singapore
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd. and its subsidiaries (the “Company”) as of December 31, 2022, the related condensed consolidated statements of operations, comprehensive income, and redeemable noncontrolling interest and shareholders’ equity for the three-month and nine-month periods ended December 31, 2022 and December 31, 2021, the condensed consolidated statements of cash flows for the nine-month periods ended December 31, 2022 and December 31, 2021, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Flex Ltd. and its subsidiaries as of March 31, 2022 and the related consolidated statements of operations, comprehensive income, redeemable noncontrolling interest and shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 20, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2022 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
The interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
| /s/ DELOITTE & TOUCHE LLP | |||||
| San Jose, California | |||||
| January 27, 2023 | |||||
3
FLEX LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of December 31, 2022 | As of March 31, 2022 | ||||||||||
| (In millions, except share amounts) (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowance of $ | |||||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Bank borrowings and current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued payroll | |||||||||||
| Deferred revenue and customer working capital advances | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Redeemable noncontrolling interest | |||||||||||
| Shareholders’ equity | |||||||||||
Ordinary shares, | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities, redeemable noncontrolling interest, and shareholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In millions, except per share amounts) (Unaudited) | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Intangible amortization | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest and other, net | ( | ||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income attributable to redeemable noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to Flex Ltd. | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share attributable to the shareholders of Flex Ltd.: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares used in computing per share amounts: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In millions) (Unaudited) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Foreign currency translation adjustments, net of | ( | ( | ( | ||||||||||||||||||||
| Unrealized gain (loss) on derivative instruments and other, net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
| Comprehensive income attributable to redeemable noncontrolling interest | |||||||||||||||||||||||
| Comprehensive income attributable to Flex Ltd. | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
| Redeemable Noncontrolling Interest | Ordinary Shares | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2022 | Amount | Shares Outstanding | Amount | Accumulated Deficit | Unrealized Loss on Derivative Instruments and Other | Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive Loss | Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Flex Ltd. ordinary shares at cost | — | ( | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interest | Ordinary Shares | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended December 31, 2022 | Amount | Shares Outstanding | Amount | Accumulated Deficit | Unrealized Loss on Derivative Instruments and Other | Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive Loss | Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Flex Ltd. ordinary shares at cost | — | ( | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Flex Ltd. vested shares under restricted share unit awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
7
| Redeemable Noncontrolling Interest | Ordinary Shares | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2021 | Amount | Shares Outstanding | Amount | Accumulated Deficit | Unrealized Loss on Derivative Instruments and Other | Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive Loss | Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT OCTOBER 1, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Flex Ltd. ordinary shares at cost | — | ( | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Flex Ltd. vested shares under restricted share unit awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interest | Ordinary Shares | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended December 31, 2021 | Amount | Shares Outstanding | Amount | Accumulated Deficit | Unrealized Loss on Derivative Instruments and Other | Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive Loss | Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Flex Ltd. ordinary shares at cost | — | ( | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of Flex Ltd. vested shares under restricted share unit awards | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine-Month Periods Ended | |||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| (In millions) (Unaudited) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Depreciation, amortization and other impairment charges | |||||||||||
| Changes in working capital and other, net | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from the disposition of property and equipment | |||||||||||
| Acquisition of businesses, net of cash acquired | ( | ||||||||||
| Other investing activities, net | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from bank borrowings and long-term debt | |||||||||||
| Repayments of bank borrowings and long-term debt | ( | ( | |||||||||
| Payments for repurchases of ordinary shares | ( | ( | |||||||||
| Other financing activities, net | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Non-cash investing activities: | |||||||||||
| Unpaid purchases of property and equipment | $ | $ | |||||||||
| Right-of-use assets obtained in exchange of operating lease liabilities | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
Organization of the Company
Flex Ltd. ("Flex" or the "Company") is the diversified manufacturing partner of choice that helps market-leading brands design, build and deliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, Flex delivers advanced manufacturing solutions and operates one of the most trusted global supply chains, supporting the entire product lifecycle with fulfillment, after-market, and circular economy solutions for diverse industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. Flex's three
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
◦Communications, Enterprise and Cloud, including data infrastructure, edge infrastructure and communications infrastructure;
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio; and
◦Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
◦Automotive, including next generation mobility, autonomous, connectivity, electrification, and smart technologies;
◦Health Solutions, including medical devices, medical equipment and drug delivery; and
◦Industrial, including capital equipment, industrial devices, and renewables and grid edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. Nextracker's products enable solar panels to follow the sun’s movement across the sky and optimize plant performance.
The Company's service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement, inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance), supply chain management software solutions, and component product offerings (including flexible printed circuit boards and power adapters and chargers).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 2022 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and nine-month periods ended December 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2023. Certain prior period amounts in the condensed consolidated financial statements, as well as in the Notes thereto, have been reclassified to conform to the current presentation.
The Company's third quarters for fiscal years 2023 and 2022 ended on December 31 of each year, which are comprised of 92 and 91 days, respectively. The Company's first three quarters for fiscal years 2023 and 2022 both are comprised of 275 days.
The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. In all cases other than the redeemable noncontrolling interest in Nextracker, the associated noncontrolling owners' interest in the income or losses of these companies is not material to the Company's results of operations for all periods presented, and is classified as a component of Interest and other, net, in the condensed consolidated statements of operations. Noncontrolling interest that is redeemable upon the occurrence of conditions outside of the control of the Company
10
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things: allowances for doubtful accounts; inventory write-downs; valuation allowances for deferred tax assets; uncertain tax positions; valuation and useful lives of long-lived assets including property, equipment, and intangible assets; valuation of goodwill; valuation of investments in privately-held companies; asset impairments; fair values of financial instruments, notes receivable and derivative instruments; restructuring charges; contingencies; warranty provisions; incremental borrowing rates in determining the present value of lease payments; accruals for potential price adjustments arising from customer contracts; fair values of assets obtained and liabilities assumed in business combinations; and the fair values of stock options and restricted share unit awards granted under the Company's stock-based compensation plans. Due to the COVID-19 pandemic and geopolitical conflicts (including the Russian invasion of Ukraine), there has been and will continue to be uncertainty and disruption in the global economy and financial markets. The Company has made estimates and assumptions taking into consideration certain possible impacts due to the COVID-19 pandemic and the Russian invasion of Ukraine. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from previously estimated amounts, and such differences may be material to the condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur.
Recently Adopted Accounting Pronouncements
In December 2022, the FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848", which defers the sunset date of ASC 848 from December 31, 2022 to December 31, 2024. ASC 848 provides relief for companies preparing for the discontinuation of interest rates, such as LIBOR. Entities that apply ASC 848 can continue to do so until December 31, 2024. The Company adopted the guidance during the third quarter of fiscal year 2023 with an immaterial impact on its consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05 "Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments", which requires a lessor to classify a lease with variable lease payments that don’t depend on an index or a rate as an operating lease on the commencement date of the lease if specified criteria are met. The guidance is effective for the Company beginning in the first quarter of fiscal year 2023 with early adoption permitted. The Company adopted the guidance during the first quarter of fiscal year 2023 with an immaterial impact on its condensed consolidated financial statements.
Recently Issued Accounting Pronouncement
In September 2022, the FASB issued ASU 2022-04 "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations", which requires a buyer in a supplier finance program to disclose sufficient information about the program to allow a user of financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance program. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024, except for the amendment on rollforward information which is effective in fiscal year 2025, with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its condensed consolidated financial statements, and intends to adopt the guidance retrospectively when it becomes effective in the first quarter of fiscal year 2024.
11
2. BALANCE SHEET ITEMS
Inventories
The components of inventories, net of applicable lower of cost and net realizable value write-downs, were as follows:
| As of December 31, 2022 | As of March 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-progress | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
Goodwill and Other Intangible Assets
During the nine-month period ended December 31, 2022, there was no material activity in the Company's goodwill account for each of its reportable segments.
The components of acquired intangible assets are as follows:
| As of December 31, 2022 | As of March 31, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer-related intangibles | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Licenses and other intangibles | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
The gross carrying amounts of intangible assets are removed when fully amortized.
The estimated future annual amortization expense for intangible assets is as follows:
| Fiscal Year Ending March 31, | Amount | |||||||
| (In millions) | ||||||||
| 2023 (1) | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total amortization expense | $ | |||||||
____________________________________________________________
Customer Working Capital Advances
Customer working capital advances were $2.2 billion and $1.4 billion, as of December 31, 2022 and March 31, 2022, respectively. The customer working capital advances are not interest-bearing, do not generally have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production or the customer working capital advance agreement is terminated.
Other Current Liabilities
Other current liabilities include customer-related accruals of $275 million and $227 million as of December 31, 2022 and March 31, 2022, respectively.
12
Redeemable Noncontrolling Interest
As a result of the sale by a subsidiary of the Company of redeemable preferred units (“Series A Preferred Units”), representing a 16.67 % interest in the Company's subsidiary, Nextracker LLC ("Nextracker"), to TPG Rise Flash, L.P. ("TPG Rise") on February 1, 2022, the Company recognized approximately $7 million and $19 million of a payable-in-kind dividend due to TPG Rise during the three and nine-month periods ended December 31, 2022, respectively, based on a dividend rate of 5 % per annum.
At TPG Rise’s election, the Company is required to purchase all of the outstanding Series A Preferred Units at their liquidation preference, which shall include all contributed but unreturned capital plus accrued but unpaid dividends, at the earlier of certain change in control events and February 1, 2028. Additionally, if Nextracker has not completed a qualified initial public offering (a "Qualified Public Offering") prior to February 1, 2027, then TPG Rise may cause the Company to purchase all of the outstanding Series A Preferred Units at their fair market value. The Company has determined that a Qualified Public Offering is likely and that the change in control is not probable as of December 31, 2022 and, as such, it is not probable that the noncontrolling interest will become redeemable.
3. REVENUE
Revenue Recognition
The Company provides a comprehensive suite of services for its customers that range from advanced product design to manufacturing and logistics to after-sales services. The first step in its process for revenue recognition is to identify a contract with a customer. A contract is defined as an agreement between two parties that creates enforceable rights and obligations and can be written, verbal, or implied. The Company generally enters into master supply agreements (“MSAs”) with its customers that provide the framework under which business will be conducted. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing formulas, payment terms, etc., and the level of business under those agreements may not be guaranteed. In those instances, the Company bids on a program-by-program basis and typically receives customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order, or any other similar documents such as a statement of work, product addendum, emails or other communications that embody the commitment by the customer.
In determining the appropriate amount of revenue to recognize, the Company applies the following steps: (i) identifies the contracts with the customers; (ii) identifies performance obligations in the contracts; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations per the contracts; and (v) recognizes revenue when (or as) the Company satisfies a performance obligation. Further, the Company assesses whether control of the products or services promised under the contract is transferred to the customer at a point in time (PIT) or over time (OT). The Company is first required to evaluate whether its contracts meet the criteria for OT recognition. The Company has determined that for a portion of its contracts, the Company is manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and intellectual property restrictions) and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. For certain other contracts, the Company’s performance creates and enhances an asset that the customer controls as the Company performs under the contract. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer.
Customer Contracts and Related Obligations
Certain of the Company’s customer agreements include potential price adjustments which may result in variable consideration. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually required to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company estimates the variable consideration related to these price adjustments as part of the total transaction price and recognizes revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. The Company constrains the amount of revenues recognized for these contractual provisions based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. The Company determines the amounts to be recognized based on the amount of potential refunds required by the contract, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices for future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In many instances, the agreement is silent on the settlement
13
mechanism. Any difference between the amount accrued for potential refunds and the actual amount agreed to with the customer is recorded as an increase or decrease in revenue. These potential price adjustments are included as part of other current liabilities on the condensed consolidated balance sheet and disclosed as part of customer-related accruals in note 2.
Performance Obligations
The Company derives its revenues primarily from manufacturing services, and to a lesser extent, from innovative design, engineering, and supply chain services and solutions.
A performance obligation is an implicitly or explicitly promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company considers all activities typically included in its contracts, and identifies those activities representing a promise to transfer goods or services to a customer. These include, but are not limited to, design and engineering services, prototype products, tooling, etc. Each promised good or service with regards to these identified activities is accounted for as a separate performance obligation only if it is distinct - i.e., the customer can benefit from it on its own or together with other resources that are readily available to the customer. Certain activities on the other hand are determined not to constitute a promise to transfer goods or service, and therefore do not represent separate performance obligations for revenue recognition (e.g., procurement of materials and standard workmanship warranty).
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual good or service is not separately identifiable from other promises in the contract and is, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. In the event that more than one performance obligation is identified in a contract, the Company is required to allocate the transaction price between the performance obligations. The allocation would generally be performed on the basis of a relative standalone price for each distinct good or service. This standalone price most often represents the price that the Company would sell similar goods or services separately.
Contract Balances
A contract asset is recognized when the Company has recognized revenue, but not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheets and transferred to receivables when rights to payment become unconditional.
A contract liability is recognized when the Company receives payments in advance of the satisfaction of performance. Contract liabilities, identified as deferred revenue, were $813 million and $704 million as of December 31, 2022 and March 31, 2022, respectively, of which $745 million and $615 million, respectively, is included in deferred revenue and customer working capital advances under current liabilities.
Disaggregation of Revenue
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| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| Timing of Transfer | (In millions) | ||||||||||||||||||||||
| FAS | |||||||||||||||||||||||
| Point in time | $ | $ | $ | $ | |||||||||||||||||||
| Over time | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| FRS | |||||||||||||||||||||||
| Point in time | |||||||||||||||||||||||
| Over time | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Nextracker | |||||||||||||||||||||||
| Point in time | |||||||||||||||||||||||
| Over time | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Intersegment eliminations | |||||||||||||||||||||||
| Point in time | ( | ( | ( | ( | |||||||||||||||||||
| Over time | |||||||||||||||||||||||
| Total | ( | ( | ( | ( | |||||||||||||||||||
| Flex | |||||||||||||||||||||||
| Point in time | |||||||||||||||||||||||
| Over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
4. SHARE-BASED COMPENSATION
The Company's primary plan used for granting equity compensation awards is the 2017 Equity Incentive Plan (the "2017 Plan").
The following table summarizes the Company’s share-based compensation expense:
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Total number of options outstanding and exercisable were immaterial as of December 31, 2022. All options have been fully expensed as of December 31, 2022.
During the nine-month period ended December 31, 2022, the Company granted 7.0 million unvested restricted share unit ("RSU") awards. Of this amount, approximately 4.7 million are plain-vanilla unvested RSU awards that vest over a period of three years , with no performance or market conditions, and with an average grant date price of $16.51 per award. In addition, approximately 0.5 million unvested shares represent the target amount of grants made to certain key employees whereby vesting is contingent on certain performance conditions, and with an average grant date price of $16.68 per award. The number of shares contingent on performance conditions that ultimately will vest will range from zero up to a maximum of approximately 1.0 million based on a measurement of the Company's adjusted earnings per share growth over certain specified periods, and will cliff vest after a period of three years , to the extent such performance conditions have been met. Further, approximately 0.5 million unvested shares represent the target amount of grants made to certain key employees whereby vesting is contingent on certain market conditions. The average grant date fair value of these awards contingent on certain market conditions was estimated to be $23.45 per award and was calculated using a Monte Carlo simulation. The number of shares contingent on market conditions that ultimately will vest will range from zero up to a maximum of approximately 1.0 million based on a measurement of the percentile rank of the Company’s total shareholder return over certain specified periods against the Company's peer companies, and will cliff vest after a period of three years , to the extent such market conditions
15
have been met. Finally, the remaining balance of approximately 1.2 million represents the number of shares issued upon vesting of RSU awards above target levels based on the achievement of certain market conditions.
As of December 31, 2022, approximately 14.6 million unvested RSU awards under all plans were outstanding, of which vesting for a targeted amount of 2.1 million shares is contingent on meeting certain market conditions, and vesting for a targeted amount of 0.9 million shares is contingent on meeting certain performance conditions. The number of shares tied to market conditions that will ultimately be issued can range from zero to 4.2 million based on the achievement levels. The number of shares tied to performance conditions that will ultimately be issued can range from zero to 1.8 million based on the achievement levels. During the nine-month period ended December 31, 2022, 2.4 million shares vested in connection with the awards with market conditions granted in fiscal year 2020.
As of December 31, 2022, total unrecognized compensation expense related to unvested RSU awards under all plans, not including the 2022 Nextracker plan below, was approximately $158 million, and will be recognized over a weighted-average remaining vesting period of 2.0 years.
During the first three quarters of fiscal year 2023, Nextracker granted 11.8 million equity-based compensation awards, which included approximately 5.9 million unit options, 4.5 million RSU awards and 1.4 million performance-based restricted share unit awards (“PSU”) to its employees under the First Amended and Restated 2022 Nextracker LLC Equity Incentive Plan (the “2022 Nextracker Plan”). Vesting for the awards granted under the 2022 Nextracker Plan is contingent upon continued employee service and certain performance conditions, including a liquidity event such as the occurrence of an initial public offering or the sale of Nextracker.
Total unrecognized compensation expense related to unvested awards under the 2022 Nextracker Plan was approximately $55 million, which is expected to be recognized over a weighted-average period of approximately 3 years. No expense was recognized for equity-based compensation awards granted under the 2022 Nextracker Plan for the nine-month period ended December 31, 2022 as there was no occurrence of a liquidity event. Nextracker will record cumulative stock-based compensation expense related to these awards in the period when its liquidity event is completed for the portion of the awards for which the relevant service condition has been satisfied with the remaining expense recognized over the remaining service period.
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5. EARNINGS PER SHARE
The following table reflects basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted earnings per share attributable to the shareholders of Flex:
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| Basic earnings per share attributable to the shareholders of Flex Ltd. | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income attributable to redeemable noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to Flex Ltd. | $ | $ | $ | $ | |||||||||||||||||||
| Shares used in computation: | |||||||||||||||||||||||
| Weighted-average ordinary shares outstanding | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per share attributable to the shareholders of Flex Ltd. | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income attributable to redeemable noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to Flex Ltd. | $ | $ | $ | $ | |||||||||||||||||||
| Shares used in computation: | |||||||||||||||||||||||
| Weighted-average ordinary shares outstanding | |||||||||||||||||||||||
| Weighted-average ordinary share equivalents from RSU awards (1) | |||||||||||||||||||||||
| Weighted-average ordinary shares and ordinary share equivalents outstanding | |||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
____________________________________________________________
(1)An immaterial amount of RSU awards for the three and nine-month periods ended December 31, 2022 and December 31, 2021, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents.
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6. BANK BORROWINGS AND LONG-TERM DEBT
Bank borrowings and long-term debt as of December 31, 2022 and March 31, 2022 are as follows:
| As of December 31, 2022 | As of March 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| $ | $ | ||||||||||
Term Loan due April 2024 - three-month TIBOR plus | |||||||||||
| Euro Term Loans | |||||||||||
| Delayed Draw Term Loan | |||||||||||
| India Facilities | |||||||||||
| Other | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Current portion, net of debt issuance costs | ( | ( | |||||||||
| Non-current portion | $ | $ | |||||||||
The weighted-average interest rate for the Company's long-term debt was 4.5 % and 4.0 % as of December 31, 2022 and March 31, 2022, respectively.
Scheduled repayments of the Company's bank borrowings and long-term debt as of December 31, 2022 are as follows:
| Fiscal Year Ending March 31, | Amount | |||||||
| (In millions) | ||||||||
| 2023 (1) | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
(1)Represents estimated repayments for the remaining fiscal three-month period ending March 31, 2023.
Notes due January 2028
In December 2022, the Company issued $400 million of 6.000 % Notes due 2028 (the “Notes”). The Company received proceeds of approximately $396 million, net of discount, from the issuance which were used, together with cash on hand, for general corporate purposes, which includes redeeming its 2023 notes on December 20, 2022 and for working capital requirements. The Company incurred and capitalized as a direct reduction to the carrying amount of the Notes presented on the balance sheet of approximately $4 million of costs in conjunction with the issuance of the Notes.
Interest on the Notes is payable on January 15 and July 15 of each year, beginning on July 15, 2023. The Notes are senior unsecured obligations of the Company and rank equally with all of the Company's other existing and future senior and unsecured debt obligations.
The indenture governing the Notes contains covenants that, among other things, restrict the ability of the Company and certain of the Company's subsidiaries to create liens; enter into sale-leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's assets to, another person, or permit any other person to consolidate, merge, combine or amalgamate with or into the Company. These covenants are subject to a number of significant
18
limitations and exceptions set forth in the indenture. The indenture also provides for customary events of default, including, but not limited to, cross defaults to certain specified other debt of the Company and its subsidiaries.
In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Notes will become due and payable immediately without further action or notice. If any other event of default under the indenture occurs or is continuing, the trustee or holders of at least 25 % in aggregate principal amount of the then outstanding Notes may declare the entire principle of Notes, together with all accrued and unpaid interest, if any, to be due and payable immediately, but upon certain conditions such declaration and its consequences may be rescinded and annulled by the holders of a majority in principal amount of the Notes. As of December 31, 2022, the Company was in compliance with the covenants in the indenture governing the Notes.
Euro Term Loan due December 2023
In December 2022, the Company borrowed €250 million (approximately $265 million as of December 31, 2022), under a 1-year term-loan agreement. The proceeds of the term loan were used to repay outstanding debt of a €250 million Euro term loan due on December 9, 2022. Borrowings under this term loan bear interest at Euro Interbank Offered Rate (EURIBOR) rate plus 0.7 % per annum, which is payable in full on the last day of each 3-month interest period. The term loan is repayable upon maturity, and the borrowings have been included as bank borrowings and current portion of long-term debt under the condensed consolidated balance sheet.
The 2027 Credit Facility
In July 2022, the Company entered into a new $2.5 billion credit agreement which matures in July 2027 (the "2027 Credit Facility") and consists of a $2.5 billion revolving credit facility with a sub-limit of $360 million available for swing line loans, and a sub-limit of $175 million available for the issuance of letters of credit. The 2027 Credit Facility replaced the previous $2.0 billion revolving credit facility, which was due to mature in January 2026.
Borrowings under the 2027 Credit Facility bear interest, at the Company’s option, either at (i) the Base Rate, which is defined as the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate, plus 0.50 % and (c) the Term Secured Overnight Financing Rate (Term SOFR) rate plus 1.0 %; plus, in the case of each of clauses (a) through (c), an applicable margin ranging from 0.125 % to 0.750 % per annum, based on the Company’s credit ratings or (ii) Term SOFR (or (x) the “Alternative Currency Term Rate”, which is defined as, depending on the applicable currency at issue, either the Euro Interbank Offered Rate, Tokyo Interbank Offer Rate, or such other term rate per annum as designated with respect to such alternative currency or (y) the “Alternative Currency Daily Rate”, which is defined as, in the case of Sterling, the rate per annum equal to Sterling Overnight Index Average, and for any other alternative currency, such other term rate per annum as designated with respect to such alternative currency) plus the applicable margin for Term SOFR rate (or the Alternative Currency Term Rate) loans ranging between 1.125 % and 1.750 % per annum, based on the Company’s credit ratings, plus an adjustment for Term SOFR loans of 0.10 % per annum and an adjustment for Sterling Overnight Index Average loans of 0.0326 % per annum. Interest on the outstanding borrowings is payable, (i) in the case of borrowings at the Base Rate, on the last business day of March, June, September and December of each calendar year and the maturity date, (ii) in the case of borrowings at the Term SOFR rate (or the Alternative Currency Term Rate), on the last day of the applicable interest period selected by the Company, which date shall be no later than the last day of every third month and the maturity date and (iii) in the case of borrowings at the Alternative Currency Daily Rate, on the last day of each calendar month and the maturity date. The Company is required to pay a quarterly commitment fee on the unutilized portion of the revolving credit commitments under the 2027 Credit Facility ranging from 0.125 % to 0.275 % per annum, based on the Company’s credit ratings. The Company is also required to pay letter of credit usage fees ranging from 1.125 % to 1.750 % per annum (based on the Company’s credit ratings) on the amount of the daily average outstanding letters of credit and a fronting fee of 0.125 % per annum on the undrawn and unexpired amount of each letter of credit.
Under the 2027 Credit Facility, the interest rate margins, commitment fee and letter of credit usage fee are subject to upward or downward adjustments if the Company achieves, or fails to achieve, certain specified sustainability targets with respect to workplace safety and greenhouse gas emissions. Such upward or downward sustainability adjustments may be up to 0.05 0.01 % per annum in the case of the commitment fee.
Delayed Draw Term Loan
In September 2022, the Company entered into a $450 million delayed draw term loan agreement. Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. All borrowings under the delayed draw term loan will become due on the date that is 364 days after the initial borrowing. Interest is based on either (a) a Term SOFR-based formula plus a margin of 100.0 basis points to 162.5 basis points, depending on the Company’s credit ratings, or (b) a Base Rate formula plus a margin of 0.0 basis point to 62.5 basis
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points, depending on the Company's credit ratings. On November 30, 2022, the Company borrowed $450 million under the delayed draw term loan. Of this amount, $300 million was repaid in December 2022. As of December 31, 2022, the Company had $150 million in borrowings outstanding under the delayed draw term loan agreement, which amount is due on November 29, 2023.
The Euro term loan, the 2027 Credit Facility, and delayed draw term loan are unsecured, and contain customary restrictions on the ability of the Company and its subsidiaries to (i) incur liens, (ii) dispose of assets and (iii) make certain acquisitions of other entities. The Euro term loan also contains a restriction on the ability of the Company and its subsidiaries to change its line of business. The 2027 Credit Facility and delayed draw term loan also contain a restriction on the ability of the Company and its subsidiaries to engage in transaction with affiliates. These covenants are subject to a number of significant exceptions and limitations. The Euro term loan, the 2027 Credit Facility, and delayed draw term loan agreement also require that the Company maintain a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum interest coverage ratio. As of December 31, 2022, the Company was in compliance with the covenants under the Euro term loan, the 2027 Credit Facility, and delayed draw term loan agreement.
7. INTEREST AND OTHER, NET
Interest and other, net for the three and nine-month periods ended December 31, 2022 and December 31, 2021 are primarily composed of the following:
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Interest expenses on debt obligations | $ | $ | $ | $ | |||||||||||||||||||
| AR sales program related expenses | |||||||||||||||||||||||
| Equity in (earnings) loss on investments | ( | ( | ( | ||||||||||||||||||||
| Brazil tax credit (1) | ( | ( | |||||||||||||||||||||
____________________________________________________________
(1)During the nine-month period ended December 31, 2021, the Company recognized a $150 million gain related to a certain tax credit upon approval of a "Credit Habilitation" request by the relevant Brazil tax authorities.
8. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
The Company enters into short-term and long-term foreign currency derivative contracts, including forward, swap, and options contracts, to hedge only those currency exposures associated with certain assets and liabilities, primarily accounts receivable, accounts payable, debt, and cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and, accordingly, fair value adjustments related to the credit risk of the counterparty financial institutions were not material.
20
As of December 31, 2022, the aggregate notional amount of the Company’s outstanding foreign currency derivative contracts was $11.5 billion as summarized below:
| Foreign Currency Amount | Notional Contract Value in USD | |||||||||||||||||||||||||
| Currency | Buy | Sell | Buy | Sell | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Cash Flow Hedges | ||||||||||||||||||||||||||
| CNY | $ | $ | ||||||||||||||||||||||||
| EUR | ||||||||||||||||||||||||||
| HUF | ||||||||||||||||||||||||||
| ILS | ||||||||||||||||||||||||||
| JPY | ||||||||||||||||||||||||||
| MXN | ||||||||||||||||||||||||||
| MYR | ||||||||||||||||||||||||||
| Other | N/A | N/A | ||||||||||||||||||||||||
| Other Foreign Currency Contracts | ||||||||||||||||||||||||||
| BRL | ||||||||||||||||||||||||||
| CAD | ||||||||||||||||||||||||||
| CNY | ||||||||||||||||||||||||||
| EUR | ||||||||||||||||||||||||||
| GBP | ||||||||||||||||||||||||||
| HUF | ||||||||||||||||||||||||||
| ILS | ||||||||||||||||||||||||||
| INR | ||||||||||||||||||||||||||
| MXN | ||||||||||||||||||||||||||
| MYR | ||||||||||||||||||||||||||
| PLN | ||||||||||||||||||||||||||
| Other | N/A | N/A | ||||||||||||||||||||||||
| Total Notional Contract Value in USD | $ | $ | ||||||||||||||||||||||||
As of December 31, 2022, the fair value of the Company’s short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the condensed consolidated statements of operations. As of December 31, 2022 and March 31, 2022, the Company also has included net deferred gains and losses in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. The deferred loss was $23 million as of December 31, 2022, and is expected to be recognized as a component of cost of sales and net sales in the condensed consolidated statements of operations over the next twelve-month period, except for the USD JPY cross currency swap, the USD HUF cross currency swaps and the USD EUR cross currency swap, which are further discussed below.
The Company entered into a USD JPY cross currency swap in April 2019 to hedge the foreign currency risk on the JPY term loan due April 2024, and the fair value of the cross currency swap was included in current and long-term other liabilities as of December 31, 2022. The Company entered into USD HUF cross currency swaps in December 2021 to hedge the foreign currency risk on the HUF bonds due December 2031, and the fair value of the cross currency swaps was included in current and long-term other liabilities as of December 31, 2022. Additionally, the Company entered into a USD EUR cross currency swap in November 2022 to hedge the foreign currency risk on the EUR term loan due December 2023, and the fair value of the cross currency swap was included in current assets as of December 31, 2022. The changes in fair value of the cross currency swaps are reported in accumulated other comprehensive loss. In addition, corresponding amounts are reclassified out of accumulated
21
other comprehensive loss to interest and other, net to offset the remeasurement of the underlying JPY and EUR loan principal and HUF bond principal, which also impact the same line.
The following table presents the fair value of the Company’s derivative instruments utilized for foreign currency risk management purposes:
| Fair Values of Derivative Instruments | |||||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||
| Balance Sheet Location | December 31, 2022 | March 31, 2022 | Balance Sheet Location | December 31, 2022 | March 31, 2022 | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | $ | Other current liabilities | $ | $ | |||||||||||||||||||||||||||||
| Foreign currency contracts | Other assets | $ | $ | Other liabilities | $ | $ | |||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | $ | Other current liabilities | $ | $ | |||||||||||||||||||||||||||||
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component, net of tax, are as follows:
| Three-Month Periods Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
| Other comprehensive gains (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Net (gains) loss reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Net current-period other comprehensive gains (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
22
| Nine-Month Periods Ended | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Net gains reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||
| Net current-period other comprehensive gains (loss) | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
Substantially all unrealized gains and losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three and nine-month periods ended December 31, 2022 were reclassified out of accumulated other comprehensive loss to interest and other, net and cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges. The tax impacts on the changes in accumulated other comprehensive loss for the three-month periods ended December 31, 2022 and 2021 were $9 million and $1 million tax benefits, respectively. The tax impacts on the changes in accumulated other comprehensive loss for the nine-month periods ended December 31, 2022 and 2021 were immaterial and $1 million tax benefits, respectively.
10. TRADE RECEIVABLES SECURITIZATION
The Company sells trade receivables under two asset-backed securitization programs and an accounts receivable factoring program.
Asset-Backed Securitization Programs
The Company sells designated pools of trade receivables under its asset-backed securitization programs (the “ABS Programs”) to affiliated special purpose entities, each of which may in turn sell a fraction of the receivables to unaffiliated financial institutions, based on the Company's requirements. Under these programs, the entire purchase price of sold receivables is paid in cash. The ABS Programs contain guarantees of payment by the special purpose entities, in amounts equal to approximately the net cash proceeds under the programs, and are collateralized by certain receivables held by the special purpose entities. The accounts receivable balances sold under the ABS Programs are removed from the condensed consolidated balance sheets and the cash proceeds received by the Company are included as cash provided by operating activities in the condensed consolidated statements of cash flows.
During the nine-month periods ended December 31, 2022 and December 31, 2021, no accounts receivable were sold under the ABS Programs.
Trade Accounts Receivable Sale Programs
11. FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
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in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 - Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. There were no balances classified as level 1 in the fair value hierarchy as of December 31, 2022 and March 31, 2022.
Level 2 - Applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets) such as cash and cash equivalents and money market funds; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
The Company’s cash equivalents include bank time deposits and money market funds, which are valued using level 2 inputs, such as interest rates and maturity periods. Due to their short-term nature, their carrying amount approximates fair value.
The Company has deferred compensation plans for its officers and certain other employees. Amounts deferred under the plans are invested in hypothetical investments selected by the participant or the participant's investment manager. The Company's deferred compensation plan assets are included in other noncurrent assets on the consolidated balance sheets and include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy.
Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
There were no transfers between levels in the fair value hierarchy during the nine-month periods ended December 31, 2022 and December 31, 2021.
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Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and March 31, 2022:
| Fair Value Measurements as of December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency contracts (Note 8) | |||||||||||||||||||||||
| Deferred compensation plan assets: | 0 | ||||||||||||||||||||||
| Mutual funds, money market accounts and equity securities | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency contracts (Note 8) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Fair Value Measurements as of March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency contracts (Note 8) | |||||||||||||||||||||||
| Deferred compensation plan assets: | 0 | ||||||||||||||||||||||
| Mutual funds, money market accounts and equity securities | |||||||||||||||||||||||
| Liabilities: | 0 | ||||||||||||||||||||||
| Foreign currency contracts (Note 8) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Other financial instruments
The following table presents the Company’s major debts not carried at fair value:
| As of December 31, 2022 | As of March 31, 2022 | ||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Hierarchy | |||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | Level 1 | |||||||||||||||||||||||||
Term Loan due April 2024 - three-month TIBOR plus | Level 2 | ||||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||||||||
| Euro Term Loans | Level 2 | ||||||||||||||||||||||||||||
| Delayed Draw Term Loan | Level 2 | ||||||||||||||||||||||||||||
| Level 2 | |||||||||||||||||||||||||||||
| India Facilities | Level 2 | ||||||||||||||||||||||||||||
The Notes due June 2025, February 2026, January 2028, June 2029 and May 2030 are valued based on broker trading prices in active markets. HUF Bonds are valued based on the broker trading prices in an inactive market.
The Term Loan due April 2024, Euro Term Loans, Delayed Draw Term Loan, and India Facilities bear interest at floating interest rates, and therefore, as of December 31, 2022, the carrying amounts approximate fair values.
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12. COMMITMENTS AND CONTINGENCIES
Litigation and other legal matters
In connection with the matters described below, the Company has accrued for loss contingencies where it believes that losses are probable and estimable. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, due to various reasons, including, among others, that: (i) the proceedings are in early stages or no claims have been asserted, (ii) specific damages have not been sought in all of these matters, (iii) damages, if asserted, are considered unsupported and/or exaggerated, (iv) there is uncertainty as to the outcome of pending appeals, motions, or settlements, (v) there are significant factual issues to be resolved, and/or (vi) there are novel legal issues or unsettled legal theories presented. Any such excess loss could have a material effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.
In addition, the Company provides design and engineering services to its customers and also designs and makes its own products. As a consequence of these activities, its customers are requiring the Company to take responsibility for intellectual property to a greater extent than in its manufacturing and assembly businesses. Although the Company believes that its intellectual property assets and licenses are sufficient for the operation of its business as it currently conducts it, from time to time third-parties do assert patent infringement claims against the Company or its customers. If and when third-parties make assertions regarding the ownership or right to use intellectual property, the Company could be required to either enter into licensing arrangements or to resolve the issue through litigation. Such license rights might not be available to the Company on commercially acceptable terms, if at all, and any such litigation might not be resolved in the Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. The Company also could be required to incur substantial costs to redesign a product or re-perform design services.
From time to time, the Company enters into intellectual property licenses (e.g., patent licenses and software licenses) with third-parties which obligate the Company to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable the Company's use of third-party technologies. The Company may also decline to enter into licenses for intellectual property that it does not think is useful for or used in its operations, or for which its customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of its business and the location of its business around the world, certain activities the Company performs, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. The Company's licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g., base price) for any royalty amounts owed are audited by licensors and may be challenged. Some of these disagreements may lead to claims and litigation that might not be resolved in the Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome.
One of the Company's Brazilian subsidiaries has received assessments for certain sales and import taxes. There were originally six tax assessments totaling the updated amount of 374 million Brazilian reals (approximately USD $71 million based on the exchange rate as of December 31, 2022). The Company successfully defeated one of the six assessments in September 2019 (totaling approximately 61 million Brazilian reals or USD $12 million). The Company successfully defeated another three of the assessments in September 2022 (totaling approximately 229 million Brazilian reals or USD $43 million), each of which remains subject to appeal. The Company was unsuccessful at the administrative level for one of the assessments and filed an annulment action in federal court in Brasilia, Brazil on March 23, 2020; the updated value of that assessment is 34 million Brazilian reals (approximately USD $6 million). One of the assessments remains in the review process at the administrative level. The Company believes there is no legal basis for any of these assessments and that it has meritorious defenses. The Company will continue to vigorously oppose all of these assessments, as well as any future assessments. The Company does not expect final judicial determination on any of these claims in the near future.
On February 14, 2019, the Company submitted an initial notification of voluntary disclosure to the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC") regarding possible noncompliance with U.S. economic sanctions requirements among certain non-U.S. Flex-affiliated operations. On September 28, 2020, the Company made a submission to OFAC that completed the Company’s voluntary disclosure based on the results of an internal investigation regarding the matter. On June 11, 2021, the Company notified OFAC that it had identified possible additional relevant transactions at one non-U.S. Flex-affiliated operation. The Company submitted an update to OFAC on November 16, 2021 reporting on the results of its review of those transactions. The Company intends to continue to cooperate fully with OFAC in this matter going forward. Nonetheless, it is reasonably possible that the Company could be subject to penalties that could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
A foreign Tax Authority (“Tax Authority”) has assessed a cumulative total of approximately $167 million in taxes owed for multiple Flex legal entities within its jurisdiction for various fiscal years ranging from fiscal year 2010 through fiscal year 2019.
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The assessed amounts related to the denial of certain deductible intercompany payments. The Company disagrees with the Tax Authority’s assessments and is actively contesting the assessments through the administrative and judicial processes.
As the final resolution of the above outstanding tax item remains uncertain, the Company continues to provide for the uncertain tax positions based on the more likely than not standard. While the resolution of the issues may result in tax liabilities, interest and penalties, which may be significantly higher than the amounts accrued for these matters, management currently believes that the resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
In addition to the matters discussed above, from time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in the Company’s consolidated balance sheets, would not be material to the financial statements as a whole.
13. SHARE REPURCHASES
During the three and nine-month periods ended December 31, 2022, the Company repurchased 2.1 million and 17.8 million shares at an aggregate purchase price of $40 million and $293 million, respectively, and retired all of these shares.
Under the Company’s current share repurchase program, the Board of Directors authorized repurchases of its outstanding ordinary shares for up to $1.0 billion in accordance with the share repurchase mandate approved by the Company’s shareholders at the date of the most recent Annual General Meeting held on August 25, 2022. As of December 31, 2022, shares in the aggregate amount of $937 million were available to be repurchased under the current plan.
14. SEGMENT REPORTING
The Company reports its financial performance based on three
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include intangible amortization, stock-based compensation, restructuring charges, legal and other, and interest and other, net. A portion of depreciation is allocated to the respective segments, together with other general corporate research and development and administrative expenses.
27
Selected financial information by segment is in the table below. Historical information for the first three quarters of the fiscal year ended March 31, 2022 have been recast to reflect the new operating and reportable segments in the table below and in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Flex Agility Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Flex Reliability Solutions | |||||||||||||||||||||||
| Nextracker | |||||||||||||||||||||||
| Intersegment eliminations | ( | ( | ( | ( | |||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Segment income and reconciliation of income before income taxes: | |||||||||||||||||||||||
| Flex Agility Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Flex Reliability Solutions | |||||||||||||||||||||||
| Nextracker | |||||||||||||||||||||||
| Corporate and Other | ( | ( | ( | ( | |||||||||||||||||||
| Total segment income | |||||||||||||||||||||||
| Reconciling items: | |||||||||||||||||||||||
| Intangible amortization | |||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||
| Legal and other (1) | |||||||||||||||||||||||
| Interest and other, net | ( | ||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
(1)Legal and other consists of costs not directly related to core business results and may include matters relating to commercial disputes, government regulatory and compliance, intellectual property, antitrust, tax, employment or shareholder issues, product liability claims and other issues on a global basis as well as acquisition related costs and customer related asset impairments (recoveries). During the third quarter of fiscal year 2022, the Company incurred $5 million in acquisition-related costs related to the acquisition of Anord Mardix. During the first half of fiscal year 2023, the Company accrued for certain loss contingencies where losses are considered probable and estimable.
Corporate and other primarily includes corporate service costs that are not included in the chief operating decision maker's ("CODM") assessment of the performance of each of the identified reportable segments.
The Company provides an overall platform of assets and services, which the segments utilize for the benefit of their various customers. The shared assets and services are contained within the Company's global manufacturing and design operations and include manufacturing and design facilities. Most of the underlying manufacturing and design assets are co-mingled in the operating campuses and are compatible to operate across segments and highly interchangeable throughout the platform. Given the highly interchangeable nature of the assets, they are not separately identified by segment nor reported by segment to the Company's CODM.
15. SUBSEQUENT EVENTS
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise specifically stated, references in this report to “Flex,” “the Company,” “we,” “us,” “our” and similar terms mean Flex Ltd. and its subsidiaries.
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission (the "SEC"). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
OVERVIEW
We are the diversified manufacturing partner of choice that helps market-leading brands design, build and deliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, we deliver advanced manufacturing solutions and operate one of the most trusted global supply chains, supporting the entire product lifecycle with fulfillment, after-market, and circular economy solutions for diverse industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. Our three operating and reportable segments are:
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
◦Communications, Enterprise and Cloud, including data infrastructure, edge infrastructure and communications infrastructure;
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio; and
◦Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
◦Automotive, including next generation mobility, autonomous, connectivity, electrification, and smart technologies;
◦Health Solutions, including medical devices, medical equipment and drug delivery; and
◦Industrial, including capital equipment, industrial devices, and renewables and grid edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. Nextracker's products enable solar panels to follow the sun’s movement across the sky and optimize plant performance.
Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product lifecycle.
Over the past few years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Some companies that have historically identified themselves as software providers, Internet service providers or e-commerce retailers have entered the highly competitive and rapidly evolving technology hardware markets, such as mobile devices, home entertainment and wearable devices. This trend has resulted in a significant change in the manufacturing and supply chain solutions requirements of such companies. While the products have become more complex, the supply chain solutions required by such companies have become more customized and demanding, and it has changed the manufacturing and supply chain landscape significantly.
We use a portfolio approach to manage our extensive service offerings. As our customers change the way they go to market, we have the capability to reorganize and rebalance our business portfolio in order to align with our customers' needs and
29
requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customers' supply chain solution needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.
We believe that our continued business transformation to improve our portfolio mix is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services.
Update on the Impact of COVID-19, Component Shortages and Logistical Constraints on our Business
With the second wave of the global pandemic including follow-on variants of COVID-19, there have been renewed disease control measures being taken to limit the spread including movement bans and shelter-in-place orders. Although not materially impacting our results for the first three quarters of fiscal year 2023, with the lockdowns in China in the first half of fiscal year 2023 and recent COVID-19 outbreaks in China, we have experienced temporary plant closures and/or restrictions at certain of our manufacturing facilities in China. We continue to closely monitor the situation in all the locations where we operate. Our priority remains the welfare of our employees. In addition, our end markets continue to be impacted by the global supply chain disruptions. Component shortages and logistical constraints are pervasive across the entire value chain. We expect persistent waves of COVID-19 to remain a headwind into the near future. Component shortages and significantly increased logistic costs are also expected to persist at least in the near future. We continue to carefully monitor potential supply chain disruptions due to ongoing tightness in the overall component environment. Refer to “Risk Factors - The ongoing COVID-19 pandemic has materially and adversely affected our business and results of operations. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material.” and “-- Supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand, could affect our ability to meet customer demand, lead to higher costs, or result in excess or obsolete inventory. We have been and continue to be adversely affected by supply chain issues, including shortages of required electronic components.” as disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources are adequate to fund future commitments. See additional discussion in the Liquidity and Capital Resources section below.
Russian Invasion of Ukraine
We continue to monitor and respond to the escalating conflict in Ukraine and the associated sanctions and other restrictions. As of the date of this report, there is no material impact to our business operations and financial performance in Ukraine. The full impact of the conflict on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflict and its impact on regional and global economic conditions. We will continue to monitor the conflict and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business.
Other Developments
On January 13, 2023, we announced that our subsidiary, Nextracker Inc. ("Nextracker") publicly filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission ("SEC") relating to the proposed initial public offering of Nextracker's Class A common stock. The initial public offering and its timing are subject to market and other conditions and the SEC’s review process, and there can be no assurance that we will proceed with such offering or any alternative transaction. Refer to "Risk Factors - We are pursuing alternatives for our Nextracker business, including a full or partial separation of the business, through an initial public offering of Nextracker or otherwise, which may not be consummated as or when planned or at all, and may not achieve the intended benefits." as disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
On February 1, 2022, one of our subsidiaries sold Series A Preferred Units representing a 16.7% interest in Nextracker to TPG Rise for an aggregate purchase price of $500 million. The sale of the 16.7% interest in Nextracker reflected an implied value for Nextracker as of the date of the sale of $3.0 billion. See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 for further information.
This Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022 does not constitute an offer to sell or a solicitation of an offer to buy securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.
30
Business Overview
We are one of the world's largest providers of global supply chain solutions, with revenues of $22.9 billion for the nine-month period ended December 31, 2022 and $26.0 billion in the fiscal year ended March 31, 2022. We have established an extensive network of manufacturing facilities in the world's major consumer and enterprise markets (Asia, the Americas, and Europe) to serve the growing outsourcing needs of both multinational and regional customers. We design, build, ship, and service consumer and enterprise products for our customers through a network of over 100 facilities in approximately 30 countries across four continents. We also provide intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. The following tables set forth the relative percentages and dollar amounts of net sales by region and by country, and net property and equipment by country, based on the location of our manufacturing sites:
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net sales by region: | |||||||||||||||||||||||||||||||||||||||||||||||
| Americas | $ | 3,455 | 45 | % | $ | 2,681 | 41 | % | $ | 10,182 | 45 | % | $ | 7,865 | 41 | % | |||||||||||||||||||||||||||||||
| Asia | 2,748 | 35 | % | 2,548 | 38 | % | 8,016 | 35 | % | 7,260 | 38 | % | |||||||||||||||||||||||||||||||||||
| Europe | 1,553 | 20 | % | 1,390 | 21 | % | 4,671 | 20 | % | 4,065 | 21 | % | |||||||||||||||||||||||||||||||||||
| $ | 7,756 | $ | 6,619 | $ | 22,869 | $ | 19,190 | ||||||||||||||||||||||||||||||||||||||||
| Net sales by country: | |||||||||||||||||||||||||||||||||||||||||||||||
| China | $ | 1,759 | 23 | % | $ | 1,598 | 24 | % | $ | 5,113 | 22 | % | $ | 4,676 | 24 | % | |||||||||||||||||||||||||||||||
| Mexico | 1,703 | 22 | % | 1,250 | 19 | % | 4,859 | 21 | % | 3,710 | 19 | % | |||||||||||||||||||||||||||||||||||
| U.S. | 1,188 | 15 | % | 849 | 13 | % | 3,651 | 16 | % | 2,571 | 13 | % | |||||||||||||||||||||||||||||||||||
| Malaysia | 650 | 8 | % | 527 | 8 | % | 1,853 | 8 | % | 1,350 | 7 | % | |||||||||||||||||||||||||||||||||||
| Brazil | 548 | 7 | % | 568 | 9 | % | 1,622 | 7 | % | 1,533 | 8 | % | |||||||||||||||||||||||||||||||||||
| Hungary | 327 | 4 | % | 265 | 4 | % | 944 | 4 | % | 912 | 5 | % | |||||||||||||||||||||||||||||||||||
| Other | 1,581 | 21 | % | 1,562 | 23 | % | 4,827 | 22 | % | 4,438 | 24 | % | |||||||||||||||||||||||||||||||||||
| $ | 7,756 | $ | 6,619 | $ | 22,869 | $ | 19,190 | ||||||||||||||||||||||||||||||||||||||||
| As of | As of | ||||||||||||||||||||||
| Property and equipment, net: | December 31, 2022 | March 31, 2022 | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Mexico | $ | 716 | 31 | % | $ | 626 | 29 | % | |||||||||||||||
| U.S. | 367 | 16 | % | 354 | 17 | % | |||||||||||||||||
| China | 336 | 15 | % | 299 | 14 | % | |||||||||||||||||
| Malaysia | 144 | 6 | % | 110 | 5 | % | |||||||||||||||||
| Hungary | 129 | 6 | % | 118 | 6 | % | |||||||||||||||||
| India | 105 | 5 | % | 129 | 6 | % | |||||||||||||||||
| Other | 492 | 21 | % | 489 | 23 | % | |||||||||||||||||
| $ | 2,289 | $ | 2,125 | ||||||||||||||||||||
We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we offer our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings.
Our operating results are affected by a number of factors, including the following:
•the impacts on our business due to component shortages, disruptions in transportation or other supply chain related constraints including as a result of the COVID-19 global pandemic;
•the effects of the COVID-19 global pandemic on our business and results of operations;
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•changes in the macro-economic environment and related changes in consumer demand;
•the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, and other factors;
•the effects on our business when our customers are not successful in marketing their products, or when their products do not gain widespread commercial acceptance;
•our ability to achieve commercially viable production yields and to manufacture components in commercial quantities to the performance specifications demanded by our customers;
•the effects that current credit and market conditions (including as a result of the COVID-19 global pandemic and the ongoing conflict between Russia and Ukraine) could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations;
•the effects on our business due to certain customers' products having short product lifecycles;
•our customers' ability to cancel or delay orders or change production quantities;
•our customers' decisions to choose internal manufacturing instead of outsourcing for their product requirements;
•integration of acquired businesses and facilities;
•increased labor costs due to adverse labor conditions in the markets we operate;
•changes in tax legislation; and
•changes in trade regulations and treaties.
We are also subject to other risks as outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19 and the Russian invasion of Ukraine. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions.
Refer to the accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales (amounts may not sum due to rounding). The financial information and the discussion below should be read together with the condensed consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of sales | 92.4 | 92.6 | 92.5 | 92.5 | |||||||||||||||||||
| Restructuring charges | 0.1 | — | — | 0.1 | |||||||||||||||||||
| Gross profit | 7.5 | 7.4 | 7.5 | 7.4 | |||||||||||||||||||
| Selling, general and administrative expenses | 3.1 | 3.4 | 3.2 | 3.3 | |||||||||||||||||||
| Intangible amortization | 0.3 | 0.3 | 0.3 | 0.2 | |||||||||||||||||||
| Operating income | 4.1 | 3.7 | 4.0 | 3.9 | |||||||||||||||||||
| Interest and other, net | 0.7 | 0.1 | 0.7 | (0.5) | |||||||||||||||||||
| Income before income taxes | 3.4 | 3.6 | 3.3 | 4.4 | |||||||||||||||||||
| Provision for income taxes | 0.3 | 0.2 | 0.4 | 0.4 | |||||||||||||||||||
| Net income | 3.1 | % | 3.4 | % | 2.9 | % | 4.0 | % | |||||||||||||||
| Net income attributable to redeemable noncontrolling interest | 0.1 | — | 0.1 | — | |||||||||||||||||||
| Net income attributable to Flex Ltd. | 3.0 | % | 3.4 | % | 2.8 | % | 4.0 | % | |||||||||||||||
Net sales
The following table sets forth our net sales by segment, and their relative percentages (the sum of the individual percentages may not equal 100% due to rounding):
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||
| Flex Agility Solutions | $ | 4,029 | 52 | % | $ | 3,581 | 54 | % | $ | 12,024 | 53 | % | $ | 10,450 | 54 | % | |||||||||||||||||||||||||||||||
| Flex Reliability Solutions | 3,225 | 42 | % | 2,711 | 41 | % | 9,493 | 42 | % | 7,758 | 40 | % | |||||||||||||||||||||||||||||||||||
| Nextracker | 516 | 7 | % | 338 | 5 | % | 1,384 | 6 | % | 1,018 | 5 | % | |||||||||||||||||||||||||||||||||||
| Intersegment eliminations | (14) | — | % | (11) | — | % | (32) | — | % | (36) | — | % | |||||||||||||||||||||||||||||||||||
| $ | 7,756 | $ | 6,619 | $ | 22,869 | $ | 19,190 | ||||||||||||||||||||||||||||||||||||||||
Net sales during the three-month period ended December 31, 2022 totaled $7.8 billion, representing an increase of approximately $1.1 billion, or 17% from $6.6 billion during the three-month period ended December 31, 2021. Net sales for our FAS segment increased approximately $0.4 billion, or 13% from the three-month period ended December 31, 2021, primarily driven by strong year-over-year growth in our Communications, Enterprise and Cloud ("CEC") business and a low single-digit year-over-year increase in our Lifestyle business due to new program wins, ramps, and clear-to-build improvement. These increases in FAS were offset by a low double-digit year-over-year decrease in our Consumer Devices business due to relatively softer market demand and a planned project completion in the fiscal year ended March 31, 2022. Net sales for our FRS segment increased approximately $0.5 billion, or 19% from the three-month period ended December 31, 2021, primarily driven by a strong year-over-year increases in our Industrial and Automotive businesses and a high single-digit year-over year increase in our Health Solutions business due to strong customer demand and ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition, despite continued supply constraints. Net sales for our Nextracker segment increased approximately $0.2 billion, or 53% from the three-month period ended December 31, 2021, primarily driven by an increase in gigawatts delivered and, to a lesser extent, an increased average selling price. Net sales increased across all regions with a $0.8 billion increase to $3.5 billion in the Americas, a $0.2 billion increase to $2.7 billion in Asia, and a $0.2 billion increase to $1.6 billion in Europe.
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Net sales during the nine-month period ended December 31, 2022 totaled $22.9 billion, representing an increase of approximately $3.7 billion, or 19% from $19.2 billion during the nine-month period ended December 31, 2021. Net sales for our FAS segment increased approximately $1.6 billion, or 15% from the nine-month period ended December 31, 2021, primarily driven by strong growth in our CEC business and a mid single-digit increase in our Lifestyle business during the current year due to new ramps, customer expansion, continued recoveries in consumer spending along with some effect from inflation pass-through while overcoming challenges from supply constraints. These increases in FAS were offset by a high-teen decrease in our Consumer Device business during the current year due to the same factors in the three-month periods discussion above. Net sales for our FRS segment increased approximately $1.7 billion, or 22% from the nine-month period ended December 31, 2021, primarily driven by strong increases in our Industrial and Automotive businesses, and a mid single-digit year-over year increase in our Health Solutions business during the current year due to strong customer demand and ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition and the recovery of inflationary costs, despite continued supply constraints noted above. Net sales for our Nextracker segment increased approximately $0.4 billion, or 36% from the nine-month period ended December 31, 2021, primarily driven by an increase in gigawatts delivered and, to a lesser extent, an increased average selling price which was in part driven by an increase in logistics costs. Net sales increased across all regions with a $2.3 billion increase to $10.2 billion in the Americas, a $0.8 billion increase to $8.0 billion in Asia, and a $0.6 billion increase to $4.7 billion in Europe.
Our ten largest customers during the three and nine-month periods ended December 31, 2022 and December 31, 2021 accounted for approximately 35% of net sales. No customer accounted for more than 10% of net sales during the three and nine-month periods ended December 31, 2022 or December 31, 2021.
Cost of sales
Cost of sales is affected by a number of factors, including the number and size of new manufacturing programs, product mix, labor cost fluctuations by region, component costs and availability and capacity utilization.
Cost of sales during the three-month period ended December 31, 2022 totaled $7.2 billion, representing an increase of approximately $1.0 billion, or 17% from $6.1 billion during the three-month period ended December 31, 2021. The higher cost of sales for the three-month period ended December 31, 2022 was primarily driven by increased consolidated sales of approximately $1.1 billion, representing an increase of 17%. Cost of sales in FAS for the three-month period ended December 31, 2022 increased approximately $0.4 billion, or 13% from the three-month period ended December 31, 2021, which is relatively in line with the overall 13% increase in FAS revenue during the same period, primarily as a result of higher revenue in our CEC and Lifestyle businesses. Cost of sales in FRS for the three-month period ended December 31, 2022 increased approximately $0.5 billion, or 20% from the three-month period ended December 31, 2021, which is primarily attributed to the overall 19% increase in FRS revenue during the same period, primarily as a result of higher revenue in our Industrial and Automotive businesses, combined with operational investments in our Health Solutions and Automotive businesses. Cost of sales in our Nextracker segment for the three-month period ended December 31, 2022 increased approximately $0.1 billion, or 42% from the three-month period ended December 31, 2021, primarily due to the 53% increase in Nextracker revenue during the same period, partially offset by improved recovery on freight and logistics cost increases.
Cost of sales during the nine-month period ended December 31, 2022 totaled $21.2 billion, representing an increase of approximately $3.4 billion, or 19% from $17.8 billion during the nine-month period ended December 31, 2021. The higher cost of sales for the nine-month period ended December 31, 2022 was primarily driven by increased consolidated sales of approximately $3.7 billion, representing an increase of 19%. Cost of sales in FAS for the nine-month period ended December 31, 2022 increased approximately $1.5 billion, or 15% from the nine-month period ended December 31, 2021, which is aligned with the overall 15% increase in FAS revenue during the same period primarily due to the drivers noted in the discussion above for the three-month periods. Cost of sales in FRS for the nine-month period ended December 31, 2022 increased approximately $1.6 billion, or 23% from the nine-month period ended December 31, 2021, which is relatively in line with the overall 22% increase in FRS revenue during the same period, primarily due to the drivers noted in the discussion above for the three-month periods. Cost of sales in our Nextracker segment for the nine-month period ended December 31, 2022 increased approximately $0.3 billion, or 31% from the nine-month period ended December 31, 2021, which is relatively in line with the overall 36% increase in Nextracker revenue during the same period, primarily due to the drivers noted in the discussion above for the three-month periods.
Gross profit
Gross profit is affected by fluctuations in cost of sales elements as outlined above and further by a number of factors, including product life cycles, unit volumes, pricing, competition, new product introductions, and the expansion or consolidation of manufacturing facilities, as well as specific restructuring activities initiated from time to time. The flexible design of our manufacturing processes allows us to manufacture a broad range of products in our facilities and better utilize our manufacturing capacity across our diverse geographic footprint and service customers from all segments. In the cases of new
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programs, profitability normally lags revenue growth due to product start-up costs, lower manufacturing program volumes in the start-up phase, operational inefficiencies, and under-absorbed overhead. Gross margin for these programs often improves over time as manufacturing volumes increase, as our utilization rates and overhead absorption improve, and as we increase the level of manufacturing services content. As a result of these various factors, our gross margin varies from period to period.
Gross profit during the three-month period ended December 31, 2022 increased $0.1 billion to $0.6 billion, or 7.5% of net sales, from $0.5 billion, or 7.4% of net sales, during the three-month period ended December 31, 2021. Gross margin improved 10 basis points during the three-month period ended December 31, 2022 primarily due to the overall strong customer demand across various end markets which allowed for improved fixed cost absorption, despite continued pressure on margin from component shortages, logistics constraints and the pass-through effect of inflationary cost recoveries.
Gross profit during the nine-month period ended December 31, 2022 increased $0.3 billion to $1.7 billion, or 7.5% of net sales, from $1.4 billion, or 7.4% of net sales, during the nine-month period ended December 31, 2021. Gross margin improved 10 basis points during the same period due to the same factors noted above in the three-month periods discussion.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include intangible amortization, stock-based compensation, restructuring charges, legal and other, and interest and other, net. A portion of depreciation is allocated to the respective segments, together with other general corporate research and development and administrative expenses.
The following table sets forth segment income and margins. Segment margins in the table below may not recalculate exactly due to rounding and are calculated based on unrounded numbers.
| Three-Month Periods Ended | Nine-Month Periods Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Segment income: | |||||||||||||||||||||||||||||||||||||||||||||||
| Flex Agility Solutions | $ | 181 | 4.5 | % | $ | 163 | 4.6 | % | $ | 523 | 4.4 | % | $ | 453 | 4.3 | % | |||||||||||||||||||||||||||||||
| Flex Reliability Solutions | 143 | 4.4 | % | 136 | 5.0 | % | 465 | 4.9 | % | 407 | 5.2 | % | |||||||||||||||||||||||||||||||||||
| Nextracker | 60 | 11.7 | % | 18 | 5.5 | % | 133 | 9.6 | % | 68 | 6.7 | % | |||||||||||||||||||||||||||||||||||
FAS segment margin decreased approximately 10 basis points, to 4.5%, for the three-month period ended December 31, 2022, from 4.6% for the three-month period ended December 31, 2021. The margin decrease was driven by elevated costs due to component shortages and logistics constraints combined with certain inflation pass-through recoveries. The FAS segment margin increased approximately 10 basis point, to 4.4% for the nine-month period ended December 31, 2022, from 4.3% for the nine-month period ended December 31, 2021. The increase in FAS segment margin during the nine-month period ended is primarily due to strong execution against new project ramps and product mix, partially offset by elevated costs due to component shortages and logistics constraints and the effect of certain inflation pass-through recoveries.
FRS segment margin decreased approximately 60 basis points, to 4.4% for the three-month period ended December 31, 2022, from 5.0% for the three-month period ended December 31, 2021. The margin decrease in FRS was primarily driven by component shortage related production disruptions, inflationary cost pressures as well as additional near-term operational investments impacting our Automotive and Health Solutions businesses during the three-month period ended December 31, 2022. FRS segment margin decreased approximately 30 basis points, to 4.9% for the nine-month period ended December 31, 2022, from 5.2% for the nine-month period ended December 31, 2021. The decrease in FRS segment margin during the nine-month period ended is due to the same factors noted in the discussion above for the three-month periods.
Nextracker segment margin increased approximately 620 basis points, to 11.7% for the three-month period ended December 31, 2022, from 5.5% for the three-month period ended December 31, 2021. The margin increase was driven by improved pricing and better cost controls and better cost absorption with increased revenue. Nextracker segment margin increased approximately 290 basis points, to 9.6% for the nine-month period ended December 31, 2022, from 6.7% for the nine-month period ended December 31, 2021. The increase in Nextracker segment margin during the nine-month period ended is due to the same factors noted in the discussion above for the three-month periods.
Restructuring charges
During the three and nine-month periods ended December 31, 2022, we recognized approximately $5 million of restructuring charges, primarily related to employee severance. During the three and nine-month periods ended December 31,
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2021, we recognized approximately $2 million and $10 million of restructuring charges, respectively, primarily related to employee severance.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) was approximately $0.2 billion, or 3.1% of net sales, during the three-month period ended December 31, 2022, increasing $18 million from approximately $0.2 billion and improving 30 basis points from 3.4% of net sales, during the three-month period ended December 31, 2021 and SG&A was $0.7 billion, or 3.2% of net sales, during the nine-month period ended December 31, 2022, increasing $91 million from $0.6 billion and improving 10 basis points from 3.3% of net sales, during the nine-month period ended December 31, 2021, which reflects our enhanced cost control efforts to support higher revenue growth while keeping our SG&A expenses relatively flat.
Intangible amortization
Amortization of intangible assets increased to $19 million during the three-month period ended December 31, 2022, from $15 million for the three-month period ended December 31, 2021, and increased to $62 million during the nine-month period ended December 31, 2022, from $45 million for the nine-month period ended December 31, 2021, primarily due to amortization expense related to new intangible assets from the Anord Mardix acquisition completed in December 2021.
Interest and other, net
Interest and other, net was an expense of $59 million during the three-month period ended December 31, 2022 compared to expense of $8 million during the three-month period ended December 31, 2021, primarily due to a lower gain from equity in earnings recognized for certain of our non-core equity method investments, loss from foreign exchange transactions, higher expenses from our accounts receivable sales programs, coupled with higher interest expense compared to the prior year period.
Interest and other, net was an expense of $152 million during the nine-month period ended December 31, 2022 compared to income of $103 million during the nine-month period ended December 31, 2021, due to the absence of the $150 million gain related to a certain tax credit recorded upon approval of a "Credit Habilitation" request by the relevant Brazilian tax authorities in the nine-month period ended December 31, 2021, coupled with the same drivers noted in the discussion above.
Income taxes
Certain of our subsidiaries, at various times, have been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. Refer to note 15, “Income Taxes” of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 for further discussion.
The consolidated effective tax rate was 10% and 13% for the three and nine-month periods ended December 31, 2022, and 7% and 9% for the three and nine-month periods ended December 31, 2021, respectively. The effective tax rate varies from the Singapore statutory rate of 17% as a result of recognition of earnings in different jurisdictions (we generate most of our revenues and profits from operations outside of Singapore), operating loss carryforwards, income tax credits, release of previously established valuation allowances for deferred tax assets, liabilities for uncertain tax positions, as well as the effect of certain tax holidays and incentives granted to our subsidiaries primarily in China, Malaysia, the Netherlands and Israel. The effective tax rates for the three and nine-month periods ended December 31, 2022 were higher than the effective tax rates for the three-month and nine-month periods ended December 31, 2021 due to the changing jurisdictional mix of income and a $17 million release of a previously established valuation allowance on deferred tax assets because of the recognition of a $17 million in net deferred tax liability recorded in connection with the Anord Mardix acquisition during the three-month and nine-month periods ended December 31, 2021.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law, which includes a new corporate minimum tax, a stock repurchase excise tax, numerous green energy credits, other tax provisions, and significantly increased enforcement resources. We are evaluating the effects the IRA will have on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
In response to the recent challenging environment following the COVID-19 pandemic, we continuously evaluate our ability to meet our obligations over the next 12 months and have proactively reset our capital structure during these times to improve maturities and liquidity. As a result, we expect that our current financial condition, including our liquidity sources are adequate to fund current and future commitments. As of December 31, 2022, we had cash and cash equivalents of approximately $2.6 billion and bank and other borrowings of approximately $4.0 billion. As of December 31, 2022, we had a $2.5 billion revolving
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credit facility that is due to mature in July 2027 (the "2027 Credit Facility"), under which we had no borrowings outstanding. We also entered into a $450 million delayed draw term loan credit agreement, under which we had $150 million of borrowings outstanding as of December 31, 2022. Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. We also issued $400 million of 6.000% Notes due January 2028. The proceeds obtained, together with cash on hand, were used for general corporate purposes, which includes redeeming our 2023 notes on December 20, 2022 and for working capital requirements. We also borrowed €250 million (approximately $265 million as of December 31, 2022), under a 1-year term-loan agreement. The proceeds of the term loan were used to repay the outstanding €250 million Euro term loan due on December 9, 2022. Refer to note 6 to the condensed consolidated financial statement for details. As of December 31, 2022, we were in compliance with the covenants under all of our credit facilities and indentures.
Cash provided by operating activities was $0.5 billion during the nine-month period ended December 31, 2022, primarily driven by $0.7 billion of net income for the period plus $0.5 billion of non-cash charges such as depreciation, amortization, and stock-based compensation offset by changes in net working capital as discussed below.
We believe net working capital ("NWC") and net working capital as a percentage of annualized net sales are key metrics that measure our liquidity. Net working capital is calculated as current quarter accounts receivable, net of allowance for doubtful accounts, plus inventories and contract assets, less accounts payable. Net working capital increased $1.5 billion to $5.7 billion as of December 31, 2022, from $4.2 billion as of March 31, 2022. This increase is primarily driven by a $1.3 billion increase in inventories due to strong demand, coupled with continued component shortages and logistics constraints, clear-to build constraints and logistics challenges driving up buffer stock and inventory pricing, and a $0.6 billion increase in net receivables, offset by a $0.4 billion increase in accounts payable due to increased inventory purchases. Our current quarter net working capital as a percentage of annualized net sales for the quarter ended December 31, 2022, increased to 18.2% from 15.4% of annualized net sales for the quarter ended March 31, 2022 due to component shortages, clear-to-build and logistics constraints. We continue to experience component shortages in the supply chain, and although we are actively managing these impacts, we expect continued working capital pressure in the near future. We expect it will take additional time to adequately drive down our inventory levels to align with the current demand environment. We are proactively working with our partners to rebalance safety and buffer stock requirements and we have an established enterprise-wide cross-functional initiative resetting our load planning. Component shortages and significantly increased logistics costs are also expected to persist at least in the near future. We are working diligently with our partners to secure needed parts and fulfill demand. In addition, to the extent possible, we have collaborated with our customers for working capital advances to offset the required investment in inventory. Advances from customers as of December 31, 2022 increased $0.8 billion to $2.2 billion from $1.4 billion as of March 31, 2022.
Cash used in investing activities was $0.4 billion during the nine-month period ended December 31, 2022. This was primarily driven by $0.4 billion of net capital expenditures for property and equipment to continue expanding capabilities and capacity in support of our expanding Automotive, Industrial, CEC, and Lifestyle businesses.
We believe adjusted 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, repurchase company shares and for certain other activities. Our adjusted free cash flow is defined as cash from operations, less net purchases of property and equipment allowing us to present adjusted cash flows on a consistent basis for investor transparency. Our adjusted free cash flow for the nine-month periods ended December 31, 2022 and December 31, 2021 was an inflow of $0.1 billion and an inflow of $0.3 billion, respectively. Adjusted free cash flow is not a measure of liquidity under U.S. GAAP, and may not be defined and calculated by other companies in the same manner. Adjusted free cash flow should not be considered in isolation or as an alternative to net cash provided by operating activities. Adjusted free cash flows reconcile to the most directly comparable GAAP financial measure of cash flows from operations as follows:
| Nine-Month Periods Ended | |||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Net cash provided by operating activities | $ | 500 | $ | 664 | |||||||
| Purchases of property and equipment | (455) | (333) | |||||||||
| Proceeds from the disposition of property and equipment | 20 | 9 | |||||||||
| Adjusted free cash flow | $ | 65 | $ | 340 | |||||||
Cash used by financing activities was $0.5 billion during the nine-month period ended December 31, 2022, which was primarily driven by $0.3 billion of cash paid for the repurchase of our ordinary shares and $0.1 billion of net cash for repayments of bank borrowings and long-term debt.
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Our cash balances are generated and held in numerous locations throughout the world. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the business and some of which arise from fluctuations related to global economics and markets. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances; however, any current restrictions are not material. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout the global organization. We believe that our existing cash balances, together with anticipated cash flows from operations and borrowings available under our credit facilities, will be sufficient to fund our operations through at least the next twelve months. As of December 31, 2022 and March 31, 2022, approximately 29% and 34%, respectively, of our cash and cash equivalents were held by foreign subsidiaries outside of Singapore. Although substantially all of the amounts held outside of Singapore could be repatriated under current laws, a significant amount could be subject to income tax withholdings. We provide for tax liabilities on these amounts for financial statement purposes, except for certain of our foreign earnings that are considered indefinitely reinvested outside of Singapore (approximately $1.6 billion as of March 31, 2022). Repatriation could result in an additional income tax payment; however, for the majority of our foreign entities, our intent is to permanently reinvest these funds outside of Singapore and our current plans do not demonstrate a need to repatriate them to fund our operations in jurisdictions outside of where they are held. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of Singapore and we would meet our liquidity needs through ongoing cash flows, external borrowings, or both.
Future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures for new equipment, the extent to which we utilize operating leases for new facilities and equipment, and the levels of shipments and changes in the volumes of customer orders.
We maintain global paying services agreements with several financial institutions. Under these agreements, the financial institutions act as our paying agents with respect to accounts payable due to our suppliers who elect to participate in the program. The agreements allow our suppliers to sell their receivables to one of the participating financial institutions at the discretion of both parties on terms that are negotiated between the supplier and the respective financial institution. Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers’ decisions to sell their receivables under this program. The cumulative payments due to suppliers participating in the programs amounted to approximately $0.4 billion and $1.1 billion for the three and nine-month periods ended December 31, 2022, respectively, and $0.4 billion and $0.9 billion for the three and nine-month periods ended December 31, 2021, respectively. Pursuant to their agreement with one of the financial institutions, certain suppliers may elect to be paid early at their discretion. We are not always notified when our suppliers sell receivables under these programs. The available capacity under these programs can vary based on the number of investors and/or financial institutions participating in these programs at any point in time.
In addition, we maintain various uncommitted short-term financing facilities including but not limited to a commercial paper program, and a revolving sale and repurchase of subordinated notes established under the securitization facility, under which there were no borrowings outstanding as of December 31, 2022.
Historically, we have funded operations from cash and cash equivalents generated from operations, proceeds from public offerings of equity and debt securities, bank debt and lease financings. We also have the ability to sell a designated pool of trade receivables under asset-backed securitization ("ABS") programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements. We may enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and anticipated growth as needed.
The sale or issuance of equity or convertible debt securities could result in dilution to current shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of ordinary shares, and the terms of this debt could impose restrictions on operations and could increase debt service obligations. This increased indebtedness could limit our flexibility as a result of debt service requirements and restrictive covenants, potentially affect our credit ratings, and may limit our ability to access additional capital or execute our business strategy. Any downgrades in credit ratings could adversely affect our ability to borrow as a result of more restrictive borrowing terms. We continue to assess our capital structure and evaluate the merits of redeploying available cash to reduce existing debt or repurchase ordinary shares.
Under our current share repurchase program, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $1 billion in accordance with the share purchase mandate approved by our shareholders at the date of the most recent Annual General Meeting which was held on August 25, 2022. During the nine-month period ended December 31, 2022, we paid $293 million to repurchase shares under the current and prior repurchase plans at an average price of $16.50 per share. As of December 31, 2022, shares in the aggregate amount of $937 million were available to be repurchased under the current plan.
38
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Information regarding our long-term debt payments, operating lease payments, capital lease payments and other commitments is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on our Form 10-K for the fiscal year ended March 31, 2022.
In July 2022, we entered into a new $2.5 billion credit facility which matures in July 2027, replacing our previous $2.0 billion credit facility, under which we had no borrowings outstanding as of December 31, 2022.
In September 2022, we entered into a $450 million delayed draw term loan credit agreement, under which we had $150 million of borrowings outstanding as of December 31, 2022. Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes.
In December 2022, we issued $400 million of 6.000% Notes due January 2028. The proceeds obtained, together with cash on hand, were used for general corporate purposes, which includes redeeming our 2023 notes on December 20, 2022 and for working capital requirements.
In December 2022, we borrowed €250 million (approximately $265 million as of December 31, 2022) under a 1-year term-loan agreement. The proceeds of the term loan were used to repay the outstanding €250 million Euro term loan due on December 9, 2022.
Other than the changes discussed above, there were no material changes in our contractual obligations and commitments as of December 31, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our exposure to market risks for changes in interest and foreign currency exchange rates for the nine-month period ended December 31, 2022 as compared to the fiscal year ended March 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2022. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have not experienced any material impact to our internal control over financial reporting despite the fact that some of our employees involved in internal control over financial reporting have been working remotely for their health and safety during the COVID-19 pandemic. While the company is in the process of reintegrating personnel back into office settings where feasible, we are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material legal proceedings, see note 12 “Commitments and Contingencies” in the notes to the condensed consolidated financial statements, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results.
40
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our ordinary shares made by us for the period from October 1, 2022 through December 31, 2022:
| Period (2) | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| October 1, 2022 - November 4, 2022 | 1,224,782 | $ | 17.95 | 1,224,782 | $ | 955,039,844 | ||||||||||||||||||||
| November 5, 2022 - December 2, 2022 | 469,051 | $ | 20.25 | 469,051 | $ | 945,540,479 | ||||||||||||||||||||
| December 3, 2022 - December 31, 2022 | 389,489 | $ | 21.82 | 389,489 | $ | 937,040,935 | ||||||||||||||||||||
| Total | 2,083,322 | 2,083,322 | ||||||||||||||||||||||||
(1)During the period from October 1, 2022 through December 31, 2022, all purchases were made pursuant to the programs discussed below in open market transactions. All purchases were made in accordance with Rule 10b-18 under the Securities Exchange Act of 1934.
(2)On August 25, 2022, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $1.0 billion. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of December 31, 2022, shares in the aggregate amount of $937 million were available to be repurchased under the current plan.
41
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
42
ITEM 6. EXHIBITS
EXHIBIT INDEX
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||||||||||||||||||||||
| Indenture, dated as of June 6, 2019, by and between the Company and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee | 8-K | 000-23354 | 6/6/2019 | 4.1 | ||||||||||||||||||||||||||||||||||
Fifth Supplemental Indenture, dated as of December 7, 2022, by and between the Company and U.S. Bank Trust Company, National Association, as trustee | 8-K | 000-23354 | 12/7/2022 | 4.2 | ||||||||||||||||||||||||||||||||||
| Form of 6.000% Global Note due 2028 (included in Exhibit 4.2) | 8-K | 000-23354 | 12/7/2022 | 4.3 | ||||||||||||||||||||||||||||||||||
| Letter in lieu of consent of Deloitte & Touche LLP | X | |||||||||||||||||||||||||||||||||||||
| Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||||||||||||||
| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||||||||||||||
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibit 101) | |||||||||||||||||||||||||||||||||||||
* This exhibit is furnished with this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference into any filing of Flex Ltd. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FLEX LTD. | ||||||||
| (Registrant) | ||||||||
| /s/ REVATHI ADVAITHI | ||||||||
| Revathi Advaithi | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: | January 27, 2023 | |||||||
| /s/ PAUL R. LUNDSTROM | ||||||||
| Paul R. Lundstrom | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: | January 27, 2023 | |||||||
44
Exhibit 15.01
LETTER IN LIEU OF CONSENT OF DELOITTE & TOUCHE LLP
January 27, 2023
To the Board of Directors and Shareholders of Flex Ltd.
2 Changi South Lane
Singapore 486123
We are aware that our report dated January 27, 2023, on our review of the interim financial information of Flex Ltd. and its subsidiaries appearing in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, is incorporated by reference in Registration Statement Nos. 333-248470, 333-220002, and 333-207325 on Form S-8 and Registration Statement No. 333-256716 on Form S-3ASR.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
EXHIBIT 31.01
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Revathi Advaithi, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Flex Ltd.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 27, 2023
| /s/ Revathi Advaithi | |||||
| Revathi Advaithi | |||||
| Chief Executive Officer | |||||
EXHIBIT 31.02
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Paul R. Lundstrom, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Flex Ltd.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 27, 2023
| /s/ Paul R. Lundstrom | |||||
| Paul R. Lundstrom | |||||
| Chief Financial Officer | |||||
EXHIBIT 32.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
We, Revathi Advaithi and Paul R. Lundstrom, Chief Executive Officer and Chief Financial Officer, respectively, of Flex Ltd. (the “Company”), hereby certify, to the best of our knowledge, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
•the Quarterly Report on Form 10-Q of the Company for the period ended December 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to Flex Ltd. and will be retained by it and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: | January 27, 2023 | /s/ Revathi Advaithi | ||||||
| Revathi Advaithi | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: | January 27, 2023 | /s/ Paul R. Lundstrom | ||||||
| Paul R. Lundstrom | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||