Bulletin
Investor Alert

New York Markets Open in:

May 20, 2022, 4:33 p.m. EDT

10-K: FLEX LTD.

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data." In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under Item 1A,"Risk Factors."

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. Beginning in the fourth quarter of fiscal year 2022, as a result of the sale of certain Series A preferred units in Nextracker LLC ("Nextracker LLC" or "Nextracker") to a third party and our continuing evaluation to separate the Nextracker business and consistent with how our chief operating decision maker allocates resources, assesses performance and makes strategic and operational decisions, we report Nextracker as a separate operating and reportable segment. Nextracker was previously included in the Industrial reporting unit within the Flex Reliability Solutions segment. Our three operating and reportable segments are:

Flex Agility Solutions ("FAS"), which is comprised of the following end markets:

Communications, Enterprise and Cloud ("CEC"), 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 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.

Table of Contents

During fiscal year 2021, in order to further support our strategy and build a sustainable organization, and after considering that the economic recovery from the COVID-19 global pandemic will be slower than anticipated, we identified and engaged in certain structural changes. See additional discussion regarding these restructuring actions below under "Results of Operations - Restructuring charges".

We believe that our continued business transformation 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 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 fourth quarter of fiscal year 2022, most recently, with the lockdowns in China, we have also been experiencing 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. COVID-19 related restrictions also contributed to a declining workforce, including at ports and warehouses, as well as creating driver shortages around the world. 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 as we are continuing to see increasing supply constraints and costs. 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."

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 are monitoring and responding 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 April 28, 2021, we announced that we confidentially submitted a draft registration statement on Form S-1 with the 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."

On February 1, 2022, we sold Series A Preferred Units representing a 16.7% interest in Nextracker to TPG Rise Flash, L.P., a Delaware limited partnership, which is managed or advised by TPG Rise Climate, TPG, Inc.'s dedicated renewables and climate investing fund ("TPG Rise"), for an aggregate purchase price of $500 million. The sale of the 16.7% interest in Nextracker reflects 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 Item 8, "Financial Statements and Supplementary Data" for further information.

This Annual Report on Form 10-K 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.

Business Overview

We are one of the world's largest providers of global supply chain solutions, with revenues of $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

Table of Contents

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. As of March 31, 2022, our total manufacturing capacity was approximately 27 million square feet. 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 (amounts may not sum due to rounding):







                                                Fiscal Year Ended March 31,
                                               2022                            2021
                                                       (In millions)
        Net sales by region:
        Americas                $      10,839                 42  %    $  9,672        40  %
        Asia                            9,601                 37  %       9,326        39  %
        Europe                          5,601                 21  %       5,126        21  %
                                $      26,041                          $ 24,124
        Net sales by country:
        China                   $       6,146                 24  %    $  6,147        25  %
        Mexico                          5,059                 19  %       4,413        18  %
        U.S.                            3,690                 14  %       3,648        15  %
        Brazil                          2,022                  8  %       1,554         6  %
        Malaysia                        1,866                  7  %       1,563         6  %
        Hungary                         1,230                  5  %       1,313         5  %
        Other                           6,028                 23  %       5,486        25  %
                                $      26,041                          $ 24,124
                                                          Fiscal Year Ended March 31,
                                                         2022                             2021
                                                                 (In millions)
        Property and equipment, net:
        Mexico                           $         626                   29  %    $   553        26  %
        U.S.                                       354                   17  %        361        17  %
        China                                      299                   14  %        331        16  %
        India                                      129                    6  %        166         8  %
        Hungary                                    118                    6  %        105         5  %
        Malaysia                                   110                    5  %        106         5  %
        Other                                      489                   23  %        475        23  %
                                         $       2,125                            $ 2,097
        


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; Table of Contents

the effects of the COVID-19 global pandemic on our business and results of operations;

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 also are subject to other risks as outlined in Item 1A, "Risk Factors".

Net sales for fiscal year 2022 increased approximately 8%, or $1.9 billion, to $26.0 billion from the prior year. The increase in sales was notable in all three segments. Net sales for our FAS segment increased $0.5 billion, or 4.0%, from the prior year, driven by an increase in our Lifestyle business, and to a lesser extent, an increase in our CEC business. These increases were driven by a lesser impact from COVID-19 production pressure during the current year versus the prior year, coupled with new ramps, customer expansions and continued recoveries in consumer spending, offset to some extent by the scarcity of components and raw material and logistics constraints noted above. The increases noted in FAS during fiscal year 2022 were partially offset by a decrease in our Consumer Devices business primarily due to component shortages and planned contract completions. Net sales for our FRS segment increased $1.1 billion, or 12%, from the prior year, primarily driven by an increase in sales from our Industrial business, as a result of customer ramps and strong demand in EV charging and renewables, semicap, and robotics, coupled with incremental revenue from the Anord Mardix acquisition. In addition, net sales for our Automotive business increased due to new programs during fiscal year 2022 for our next generation mobility portfolio and recovery from the depressed sales from factory shutdowns in the first quarter of fiscal year 2021. The increase in our Automotive business was partially constrained by component shortages and OEM plant shutdowns during fiscal year 2022. Net sales for our Nextracker segment increased $0.3 billion, or 22.0%, from the prior year, primarily driven by additional tracker projects, most notably outside the United States. Our fiscal year 2022 gross profit totaled $1.9 billion, representing an increase of $0.2 billion, or 15%, from the prior year. The increase was primarily driven by overall stronger cost discipline focused on driving further productivity improvements, coupled with continued improvement in the mix of our business, lower restructuring charges in the current fiscal year, benefits from prior restructuring activities and a lower direct and incremental impact from COVID-19, coupled with the stronger demand in multiple end markets compared to the prior year period. Our net income totaled $0.9 billion, representing an increase of $0.3 billion, or 53%, compared to fiscal year 2021, due to the factors explained above along with an approximately $150 million non-cash gain recorded in fiscal year 2022 related to certain tax credits in Brazil (See note 14 to the consolidated financial statements for further information).

Table of Contents

Cash provided by operations increased by approximately $0.9 billion to a cash inflow of $1.0 billion for fiscal year 2022 compared with a cash inflow of $0.1 billion for fiscal year 2021 primarily driven by the $0.3 billion increase in net income and $0.6 billion increase in cash provided by operating assets and liabilities. Our net working capital ("NWC") is calculated as current quarter accounts receivable, net of allowance for doubtful accounts, plus inventories and contract assets, less accounts payable. Our net working capital as a percentage of annualized sales for fiscal year 2022 increased to 15.4% from 11.5% in the prior year as a direct result of elevated inventory levels due to component shortages and logistics constraints.

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 to present adjusted cash flows on a consistent basis for investor transparency. We also excluded the impact to cash flows related to certain vendor programs that is required for U.S. GAAP presentation as well as cash outflows related to repayment of the outstanding balance of our asset-backed securitization ("ABS") programs in fiscal year 2021 as we utilized proceeds from debt issuance to replace funding from the ABS programs for working capital purposes. Our adjusted free cash flow was $0.6 billion and $0.7 billion for fiscal years 2022 and 2021, respectively. Refer to the Liquidity and Capital Resources section for the adjusted free cash flows reconciliation to the most directly comparable GAAP financial measure of cash flows from operations. Cash used in investing activities increased by approximately $0.7 billion to a cash outflow of $1.0 billion for fiscal year 2022, compared with a cash outflow of $0.2 billion for fiscal year 2021, primarily due to $0.5 billion of cash paid for the acquisition of Anord Mardix in December 2021, net of cash acquired. Cash provided by financing activities decreased by approximately $0.5 billion to a cash inflow of $0.3 billion during fiscal year 2022, compared with a cash inflow of $0.7 billion in the prior year, primarily driven by $0.5 billion of additional cash paid for the repurchase of our ordinary shares in the current fiscal year.

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 we expect there 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 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 those estimates and assumptions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For further discussion of our significant accounting policies, refer to note 2 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data."

Revenue Recognition

In determining the appropriate amount of revenue to recognize, we apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price;

Customer Contracts and Related Obligations

Certain of our 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

Table of Contents

on-time delivery, and other periodic pricing resets that may be refundable to customers. We estimate the variable consideration related to these price adjustments as part of the total transaction price and recognize revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. We constrain the amount of revenues recognized for these contractual provisions based on our best estimate of the amount which will not result in a significant reversal of revenue in a future period. We determine the amounts to be recognized based on the amount of potential refunds required by the contract, historical experience and other surrounding facts and circumstances. Refer to note 4 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further details.

Customer Credit Risk

We have an established customer credit policy through which we manage customer credit exposures through credit evaluations, credit limit setting, monitoring, and enforcement of credit limits for new and existing customers. We perform ongoing credit evaluations of our customers' financial condition and make provisions for doubtful accounts based on the outcome of those credit evaluations. We evaluate the collectability of accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the age of past due receivables. To the extent we identify exposures as a result of customer credit issues, we also review other customer related exposures, including but not limited to inventory and related contractual obligations.

Restructuring Charges

We recognize restructuring charges related to our plans to close or consolidate excess manufacturing facilities and rationalize administrative functions and to realign our corporate cost structure. In connection with these activities, we recognize restructuring charges for employee termination costs, long-lived asset impairment and other exit-related costs.

The recognition of these restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned restructuring activity. To the extent our actual results differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. Such changes to previously estimated amounts may be material to the consolidated financial statements. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained, and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.

Refer to note 16 to the consolidated financial statements in Item 8, "Financial . . .

May 20, 2022

COMTEX_407516685/2041/2022-05-20T16:33:21

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2022 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.