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FLEX LTD. - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
Or
 
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  
 
Commission file number 0-23354
 
FLEX LTD.
(Exact name of registrant as specified in its charter)
Singapore
 
Not Applicable
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
2 Changi South Lane,
 
 
Singapore
 
486123
(Address of registrant’s principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code
(65) 6876-9899

FLEXTRONICS INTERNATIONAL LTD.
(Former name, former address and former fiscal year, if changed since last report)
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  No 


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 
 
Accelerated filer 
 
 
 
Non-accelerated filer 
 
Smaller reporting company 
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 


Table of Contents

Class
 
Outstanding at October 24, 2016
Ordinary Shares, No Par Value
 
540,002,824



Table of Contents

FLEX LTD.
 
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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
 
We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd., formerly Flextronics International Ltd., and subsidiaries (the “Company”) as of September 30, 2016, and the related condensed consolidated statements of operations and of comprehensive income for the three-month and six-month periods ended September 30, 2016 and September 25, 2015 and the condensed consolidated statements of cash flows for the six-month periods ended September 30, 2016 and September 25, 2015. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them 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), the consolidated balance sheet of Flex Ltd. and subsidiaries as of March 31, 2016, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 20, 2016, 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, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP
 
San Jose, California
 
October 28, 2016
 


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FLEX LTD.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
As of September 30, 2016
 
As of March 31, 2016
 
(In thousands, except share amounts)
(Unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
1,537,056

 
$
1,607,570

Accounts receivable, net of allowance for doubtful accounts of $63,150 and $64,608 as of September 30, 2016 and March 31, 2016, respectively
2,341,393

 
2,044,757

Inventories
3,562,217

 
3,491,656

Other current assets
1,017,954

 
1,171,143

Total current assets
8,458,620

 
8,315,126

Property and equipment, net
2,335,959

 
2,257,633

Goodwill and other intangible assets, net
1,395,763

 
1,345,820

Other assets
470,792

 
466,402

Total assets
$
12,661,134

 
$
12,384,981

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 

 
 

Bank borrowings and current portion of long-term debt
$
65,969

 
$
65,166

Accounts payable
4,514,566

 
4,248,292

Accrued payroll
410,587

 
353,547

Other current liabilities
1,862,545

 
1,905,200

Total current liabilities
6,853,667

 
6,572,205

Long-term debt, net of current portion
2,678,115

 
2,709,389

Other liabilities
525,044

 
497,857

Commitments and contingencies (Note 11)


 


Shareholders’ equity
 

 
 

Flex Ltd. shareholders’ equity
 

 
 

Ordinary shares, no par value; 590,804,836 and 595,062,966 issued, and 540,565,481 and 544,823,611 outstanding as of September 30, 2016 and March 31, 2016, respectively
6,861,624

 
6,987,214

Treasury stock, at cost; 50,239,355 shares as of September 30, 2016 and March 31, 2016
(388,215
)
 
(388,215
)
Accumulated deficit
(3,788,991
)
 
(3,892,212
)
Accumulated other comprehensive loss
(122,552
)
 
(135,915
)
Total Flex Ltd. shareholders’ equity
2,561,866

 
2,570,872

Noncontrolling interests
42,442

 
34,658

Total shareholders’ equity
2,604,308

 
2,605,530

Total liabilities and shareholders’ equity
$
12,661,134

 
$
12,384,981

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
(In thousands, except per share amounts)
(Unaudited)
Net sales
$
6,008,525

 
$
6,316,762

 
$
11,885,338

 
$
11,883,010

Cost of sales
5,694,834

 
5,919,846

 
11,165,652

 
11,133,753

Gross profit
313,691

 
396,916

 
719,686

 
749,257

Selling, general and administrative expenses
243,943

 
216,796

 
483,489

 
426,181

Intangible amortization
21,986

 
16,127

 
43,584

 
23,798

Interest and other, net
24,632

 
22,035

 
49,031

 
38,540

Other charges, net
8,388

 
1,678

 
11,917

 
1,842

Income before income taxes
14,742

 
140,280

 
131,665

 
258,896

Provision for income taxes
17,250

 
17,303

 
28,444

 
25,069

Net income (loss)
$
(2,508
)
 
$
122,977

 
$
103,221

 
$
233,827

 
 
 
 
 
 
 
 
Earnings (losses) per share
 

 
 

 
 
 
 
Basic
$
0.00

 
$
0.22

 
$
0.19

 
$
0.41

Diluted
$
0.00

 
$
0.22

 
$
0.19

 
$
0.41

Weighted-average shares used in computing per share amounts:
 

 
 

 
 

 
 

Basic
544,055

 
563,333

 
544,353

 
564,417

Diluted
544,055

 
569,655

 
549,934

 
573,288


The accompanying notes are an integral part of these condensed consolidated financial statements.


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015

(In thousands)
(Unaudited)
Net income (loss)
$
(2,508
)
 
$
122,977

 
$
103,221

 
$
233,827

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustments, net of zero tax
4,213

 
(30,267
)
 
14,074

 
(27,484
)
Unrealized gain (loss) on derivative instruments and other, net of zero tax
(2,059
)
 
(5,544
)
 
(711
)
 
7,285

Comprehensive income (loss)
$
(354
)
 
$
87,166

 
$
116,584

 
$
213,628


 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 


 

Net income
$
103,221


$
233,827

Depreciation, amortization and other impairment charges
337,387


230,894

Changes in working capital and other
102,944


197,274

Net cash provided by operating activities
543,552


661,995

CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property and equipment
(305,936
)

(296,401
)
Proceeds from the disposition of property and equipment
26,561


2,383

Acquisition of businesses, net of cash acquired
(189,895
)

(641,913
)
Proceeds from divestiture of businesses, net of cash held in divested businesses
36,073



Other investing activities, net
20,357


(10,516
)
Net cash used in investing activities
(412,840
)

(946,447
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from bank borrowings and long-term debt
75,035


595,553

Repayments of bank borrowings and long-term debt
(110,592
)

(21,090
)
Payments for repurchases of ordinary shares
(184,698
)

(241,978
)
Net proceeds from issuance of ordinary shares
11,344


49,074

Other financing activities, net
(6,836
)

(37,872
)
Net cash provided by (used in) financing activities
(215,747
)

343,687

Effect of exchange rates on cash and cash equivalents
14,521


(19,216
)
Net increase (decrease) in cash and cash equivalents
(70,514
)

40,019

Cash and cash equivalents, beginning of period
1,607,570


1,628,408

Cash and cash equivalents, end of period
$
1,537,056


$
1,668,427







Non-cash investing activity:
 


 

Unpaid purchases of property and equipment
$
67,633


$
99,178

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.  ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
 
Organization of the Company
 
Flex Ltd., formerly Flextronics International Ltd., ("Flex", or the "Company") was incorporated in the Republic of Singapore in May 1990. The Company's operations have expanded over the years through a combination of organic growth and acquisitions. The Company is a globally-recognized leading provider of innovative design, engineering, manufacturing, and supply chain services and solutions that span from sketch to scaletm; from conceptual sketch to full-scale production. The Company designs, builds, ships and services complete packaged consumer electronics and industrial products for original equipment manufacturers ("OEMs"), through its activities in the following segments: High Reliability Solutions ("HRS"), which is comprised of its medical business including consumer health, digital health, disposables, drug delivery, diagnostics, life sciences and imaging equipment; automotive business, including vehicle electronics, connectivity, and clean technologies; and defense and aerospace businesses, focused on commercial aviation, defense and military; Consumer Technologies Group ("CTG"), which includes its mobile devices business, including smart phones; consumer electronics business, including connected living, wearable electronics including digital sport, game consoles, and connectivity devices; and high-volume computing business, including various supply chain solutions for notebook personal computers ("PC"), tablets, and printers; in addition, CTG group is expanding its business relationships to include supply chain optimization for non-electronics products such as shoes and clothing; Industrial and Emerging Industries ("IEI"), which is comprised of semiconductor and capital equipment, office solutions, household industrial and lifestyle, industrial automation and kiosks, energy and metering, and lighting; and Communications & Enterprise Compute ("CEC"), includes radio access base stations, remote radio heads, and small cells for wireless infrastructure; optical, routing, broadcasting, and switching products for the data and video networks; server and storage platforms for both enterprise and cloud-based deployments; next generation storage and security appliance products; and rack level solutions, converged infrastructure and software-defined product solutions. The Company's strategy is to provide customers with a full range of cost competitive, vertically integrated global supply chain solutions through which the Company can design, build, ship and service a complete packaged product for its OEM customers. This enables the Company's OEM customers to leverage the Company's supply chain solutions to meet their product requirements throughout the entire product life cycle.

        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) and supply chain management software solutions and component product offerings (including rigid and 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, 2016 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 presentation have been included. Operating results for the three-month and six-month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017.
 
The first quarters for fiscal year 2017 and fiscal year 2016 ended on July 1, 2016, which is comprised of 92 days in the period, and June 26, 2015, which is comprised of 87 days in the period, respectively. The second quarters for fiscal year 2017 and fiscal year 2016 ended on September 30, 2016 and September 25, 2015, which are comprised of 91 days in both periods, respectively.
 
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-

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owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. Noncontrolling interests are presented as a separate component of total shareholders' equity in the condensed consolidated balance sheets. The associated noncontrolling owners' interests are immaterial for all of the periods presented, and are included in interest and other, net in the condensed consolidated statements of operations.

The Company has certain non-majority-owned equity investments in non-publicly traded companies that are accounted for using the equity method of accounting. The equity method of accounting is used when the Company has the ability to significantly influence the operating decisions of the issuer, or if the Company has an ownership percentage of a corporation equal to or generally greater than 20% but less than 50%, and for non-majority-owned investments in partnerships when generally greater than 5%. The equity in earnings (losses) of equity method investees are immaterial for all of the periods presented, and are included in interest and other, net in the condensed consolidated statements of operations.

Recently Adopted Accounting Pronouncement

In March 2016, the Financial Accounting Standards Board ("FASB") issued new guidance intended to reduce the cost and complexity of the accounting for share-based payments. The new guidance simplifies various aspects of the accounting for share-based payments including income tax effects, withholding requirements and forfeitures. The Company elected to early adopt this new guidance beginning in the first quarter of fiscal year 2017. The guidance eliminates additional paid in capital ("APIC") pools and requires companies to recognize all excess tax benefits and tax deficiencies in the income statement when the awards vest or are settled. It also addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. Prior to adoption, the Company elected to not deduct tax benefits for stock-based compensation awards on its tax returns, and accordingly, did not have any excess tax benefits or tax deficiencies upon adoption. The Company therefore determined that adoption of the new guidance had no impact on the condensed consolidated statement of operations and the condensed consolidated statement of cash flows. Further, the new guidance eliminates the requirement to estimate forfeitures and reduce stock compensation expense during the vesting period. Instead, companies can elect to account for actual forfeitures as they occur and record any previously unrecognized compensation expense for estimated forfeitures up to the period of adoption as a retrospective adjustment to beginning retained earnings. The Company has made the election to account for actual forfeitures as they occur starting in fiscal year 2017. After assessment, it was determined that the cumulative effect adjustment required under the new guidance was immaterial and therefore the Company did not record a retrospective adjustment. The Company finally determined that the adoption of this guidance did not have a significant impact on the consolidated financial position, results of operations and cash flows of the Company.

Recently Issued Accounting Pronouncement

In August 2016, the FASB issued new guidance intended to address specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early application permitted. The Company is currently assessing the impact of this update and the timing of adoption.


2.  BALANCE SHEET ITEMS
 
Inventories
 
The components of inventories, net of applicable lower of cost or market write-downs, were as follows:
 
 
As of September 30, 2016
 
As of March 31, 2016
 
(In thousands)
Raw materials
$
2,443,372

 
$
2,234,512

Work-in-progress
477,896

 
561,282

Finished goods
640,949

 
695,862

 
$
3,562,217

 
$
3,491,656


Goodwill and Other Intangible Assets
 

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The following table summarizes the activity in the Company’s goodwill account for each of its four segments during the six-month period ended September 30, 2016:
 
 
 
HRS
 
CTG
 
IEI
 
CEC
 
Amount
 
(In thousands)
Balance, beginning of the year
 
$
439,336

 
$
68,234

 
$
322,803

 
$
111,693

 
$
942,066

Additions (1)
 

 
39,822

 
16,031

 

 
55,853

Divestitures (2)
 
(1,787
)
 

 
(2,640
)
 

 
(4,427
)
Purchase accounting adjustments (3)
 
794

 

 

 

 
794

Foreign currency translation adjustments
 
(2,592
)
 

 

 

 
(2,592
)
Balance, end of the period
 
$
435,751

 
$
108,056

 
$
336,194

 
$
111,693

 
$
991,694


(1)
The goodwill generated from the Company’s business combinations completed during the six-month period ended September 30, 2016 is primarily related to value placed on the acquired employee workforces, service offerings and capabilities of the acquired businesses. The goodwill is not deductible for income tax purposes. See note 10 for additional information.

(2)
During the six-month period ended September 30, 2016, the Company disposed of two non-strategic businesses within the IEI and HRS segments, and recorded an aggregate reduction of goodwill of $4.4 million accordingly, which is included in the loss on sale in other expense on the condensed consolidated statement of operations.

(3)
Includes adjustments to estimates resulting from the finalization of management's review of the valuation of assets acquired and liabilities assumed through certain business combinations completed in a period subsequent to the respective acquisition. These adjustments were not individually, nor in the aggregate, significant to the Company.
 
The components of acquired intangible assets are as follows:

 
As of September 30, 2016
 
As of March 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Customer-related intangibles
$
261,695

 
$
(89,596
)
 
$
172,099

 
$
223,046

 
$
(66,473
)
 
$
156,573

Licenses and other intangibles
290,020

 
(58,050
)
 
231,970

 
285,053

 
(37,872
)
 
247,181

Total
$
551,715

 
$
(147,646
)
 
$
404,069

 
$
508,099

 
$
(104,345
)
 
$
403,754


The gross carrying amounts of intangible assets are removed when fully amortized. During the six-month period ended September 30, 2016, the total value of intangible assets increased primarily as a result of three acquisitions. The estimated future annual amortization expense for intangible assets is as follows:


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Fiscal Year Ending March 31,
Amount
 
(In thousands)
2017 (1)
$
40,069

2018
68,052

2019
61,398

2020
52,804

2021
48,562

Thereafter
133,184

Total amortization expense
$
404,069

____________________________________________________________
(1)
Represents estimated amortization for the remaining six-month period ending March 31, 2017.
 
Other Current Assets

Other current assets include approximately $461.5 million and $501.1 million as of September 30, 2016 and March 31, 2016, respectively, for the deferred purchase price receivable from the Company's Global and North American Asset-Backed Securitization programs. See note 8 for additional information.

Also included in other current assets is the remaining value of certain assets purchased on behalf of a customer and financed by a third party banking institution in the amounts of $83.9 million and $83.6 million as of September 30, 2016 and March 31, 2016, respectively, the nature of which is more fully discussed in Note 17, "Business and Asset Acquisitions" to the Company's Form 10-K for the year ended March 31, 2016.

Other Current Liabilities

Other current liabilities include customer working capital advances of $223.9 million and $253.7 million, customer-related accruals of $511.7 million and $479.5 million, and deferred revenue of $302.9 million and $332.3 million as of September 30, 2016 and March 31, 2016, respectively. The customer working capital advances are not interest-bearing, do not have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production. Other current liabilities also include the outstanding balance due to the third party banking institution related to the financed equipment discussed above of $90.6 million and $122.0 million as of September 30, 2016 and March 31, 2016, respectively.

3.  SHARE-BASED COMPENSATION
 
The Company's primary plan used for granting equity compensation awards is the 2010 Equity Incentive Plan (the "2010 Plan").

During fiscal year 2016, in conjunction with the acquisition of NEXTracker Inc. ("NEXTracker"), the Company assumed all of the outstanding, unvested share bonus awards and outstanding, unvested options to purchase shares of common stock of NEXTracker, and converted all of these shares into Flex awards. As a result, the Company now offers the 2014 NEXTracker Equity Incentive Plan (the "NEXTracker Plan").

Further, during the first quarter of fiscal year 2017, in conjunction with an immaterial acquisition, the Company assumed all of the outstanding, unvested options to purchase shares of common stock of the acquiree, and converted all of these shares into Flex awards. As a result, the Company now offers an additional equity compensation plan, the BrightBox Technologies 2013 Plan (the "BrightBox Plan").

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The following table summarizes the Company’s share-based compensation expense:

 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
(In thousands)
Cost of sales
$
2,636

 
$
2,015

 
$
5,069

 
$
4,033

Selling, general and administrative expenses
20,097

 
14,185

 
41,461

 
28,293

Total share-based compensation expense
$
22,733

 
$
16,200

 
$
46,530

 
$
32,326


 
The 2010 Equity Incentive Plan

Total unrecognized compensation expense related to share options under the 2010 Plan is not significant. As of September 30, 2016, the number of options outstanding and exercisable under the 2010 Plan was 0.2 million, for both, and at a weighted-average exercise price of $9.27 per share and $9.23 per share, respectively.
 
During the six-month period ended September 30, 2016, the Company granted 5.9 million unvested share bonus awards under the 2010 Plan. Of this amount, approximately 5.0 million unvested share bonus awards have an average grant date price of $12.81 per share. Further, approximately 0.7 million of these unvested shares represents 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 $17.57 per award and was calculated using a Monte Carlo simulation. The remaining 0.2 million of unvested share bonus awards under the 2010 Plan have an average grant date price of $12.82 per share and represents the target amount of grants made to certain executive officers whereby vesting is contingent on meeting certain free cash flow targets. The number of shares under the 2010 Plan, contingent on market conditions that ultimately will vest range from zero up to a maximum of 1.4 million based on a measurement of the percentile rank of the Company’s total shareholder return over a certain specified period against the Standard and Poor’s (“S&P”) 500 Composite Index and will cliff vest after a period of three years, if such market conditions have been met. The number of shares under the 2010 Plan, contingent on free cash flow targets that ultimately will vest range from zero up to a maximum of 0.4 million of the target payment based on a measurement of cumulative three-year increase of free cash flow from operations of the Company, and will cliff vest after a period of three years.
 
As of September 30, 2016, approximately 15.9 million unvested share bonus awards under the 2010 Plan were outstanding, of which vesting for a targeted amount of 2.3 million is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero to 4.6 million based on the achievement levels of the respective conditions. During the six-month period ended September 30, 2016, 3.5 million shares under the 2010 Plan vested in connection with the share bonus awards with market conditions granted in fiscal year 2014.
 
As of September 30, 2016, total unrecognized compensation expense related to unvested share bonus awards under the 2010 Plan is $159.5 million, and will be recognized over a weighted-average remaining vesting period of 2.8 years. Approximately $26.3 million of the total unrecognized compensation cost, is related to awards under the 2010 Plan whereby vesting is contingent on meeting certain market conditions.

The 2014 NEXTracker Equity Incentive Plan

All shares previously granted under the NEXTracker plan are the result of the Company's conversion of all outstanding, unvested shares of NEXTracker into unvested shares of the Company, as part of the acquisition. Therefore, no additional share options or share bonus awards were granted by the Company during the six-month period ended September 30, 2016.

As of September 30, 2016, total unrecognized compensation expense related to share options under the NEXTracker Plan is $11.1 million, and will be recognized over a weighted-average remaining vesting period of 2.3 years. As of September 30, 2016, the number of options outstanding and exercisable was 2.2 million and 0.6 million, respectively, at a weighted-average exercise price of $3.44 per share and $2.72 per share, respectively.


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As of September 30, 2016, approximately 2.3 million unvested share bonus awards were outstanding. The total unrecognized compensation expense related to unvested share bonus awards under the NEXTracker Plan is $12.2 million, and will be recognized over a weighted-average remaining vesting period of 2.0 years.

The BrightBox Technologies 2013 Plan

During the first quarter of fiscal year 2017, the Company granted 0.2 million share options under the BrightBox Plan, at an average grant date fair value price of $11.99 per share, and with a vesting period of three years from the vesting commencement date. All shares granted under the BrightBox plan are the result of the Company's conversion of all outstanding, unvested shares of BrightBox into unvested shares of the Company, as part of the acquisition. No additional grants will be made out of this plan in the future.

As of September 30, 2016, total unrecognized compensation expense related to share options under the BrightBox Plan is $1.6 million, and will be recognized over a weighted-average remaining vesting period of 2.6 years. As of September 30, 2016, the number of options outstanding was 0.2 million, at a weighted-average exercise price of $0.51 per share. No options under this plan were exercisable as of September 30, 2016.

4.  EARNINGS PER SHARE
 
The following table reflects the 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 Ltd.:
 
 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
(In thousands, except per share amounts)
Net income (loss)
$
(2,508
)
 
$
122,977

 
$
103,221

 
$
233,827

Shares used in computation:


 


 
 
 
 
Weighted-average ordinary shares outstanding
544,055

 
563,333

 
544,353

 
564,417

Basic earnings (losses) per share
$
0.00

 
$
0.22

 
$
0.19

 
$
0.41


 
 
 
 
 
 
 
Diluted earnings (losses) per share:
 

 
 

 
 

 
 

Net income (loss)
$
(2,508
)
 
$
122,977

 
$
103,221

 
$
233,827

Shares used in computation:
 

 
 

 
 

 
 

Weighted-average ordinary shares outstanding
544,055

 
563,333

 
544,353

 
564,417

Weighted-average ordinary share equivalents from stock options and awards (1) (2)

 
6,322

 
5,581

 
8,871

Weighted-average ordinary shares and ordinary share equivalents outstanding
544,055

 
569,655

 
549,934

 
573,288

Diluted earnings (losses) per share
$
0.00

 
$
0.22

 
$
0.19

 
$
0.41


____________________________________________________________
(1)         As a result of the Company's net loss, ordinary share equivalents from approximately 4.3 million options and share bonus awards were excluded from the calculation of diluted earnings (losses) per share for the three-month period ended September 30, 2016. Options to purchase ordinary shares of 1.7 million and 1.1 million during the three-month periods ended September 30, 2016 and September 25, 2015, respectively, and share bonus awards of 3.4 million and 5.3 million for the three-month period ended September 30, 2016 and September 25, 2015, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents.

(2)         Options to purchase ordinary shares of 0.9 million and 1.2 million during the six-month periods ended September 30, 2016 and September 25, 2015, respectively, and share bonus awards of 2.9 million for the six-month period ended September 25, 2015 were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents. An immaterial amount of anti-dilutive share bonus awards was excluded for the six-month period ended September 30, 2016.

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5.  INTEREST AND OTHER, NET
 
During the three-month and six-month periods ended September 30, 2016, the Company recognized interest expense of $26.5 million and $53.4 million, respectively, on its debt obligations outstanding during the periods. During the three-month and six-month periods ended September 25, 2015, the Company recognized interest expense of $25.1 million and $45.2 million, respectively.

6.  FINANCIAL INSTRUMENTS
 
Foreign Currency Contracts
 
The Company primarily enters into forward contracts and foreign currency swap contracts to manage the foreign currency risk associated with monetary accounts and anticipated foreign currency denominated transactions. The Company hedges committed exposures and does not engage in speculative transactions. As of September 30, 2016, the aggregate notional amount of the Company’s outstanding foreign currency contracts was $4.2 billion as summarized below:
 
 
 
Foreign Currency Amount
 
Notional Contract Value in USD
Currency
 
Buy
 
Sell
 
Buy

Sell
 
 
(In thousands)
Cash Flow Hedges
 
 

 
 

 
 
 
 

CNY
 
874,000

 

 
$
130,927

 
$

EUR
 
23,090

 
104,160

 
25,842

 
118,953

HUF
 
15,775,600

 

 
57,280

 

ILS
 
112,280

 

 
29,891

 

INR
 
1,282,982

 

 
18,600

 

MXN
 
1,673,000

 

 
85,680

 

MYR
 
153,000

 
7,000

 
36,970

 
1,691

PLN
 
62,840

 

 
16,379

 

Other
 
N/A

 
N/A

 
35,271

 
12,350

 
 
 

 
 

 
436,840

 
132,994

Other Foreign Currency Contracts
 


 


 


 


BRL
 

 
392,000

 

 
120,653

CHF
 
8,960

 
21,150

 
9,210

 
21,739

CNY
 
2,582,317

 

 
386,097

 

DKK
 
167,400

 
157,200

 
25,141

 
23,609

EUR
 
869,642

 
1,150,415

 
973,337

 
1,287,735

GBP
 
32,336

 
58,752

 
42,023

 
76,386

HUF
 
21,422,970

 
19,425,090

 
77,786

 
70,532

ILS
 
58,900

 
91,420

 
15,680

 
24,338

INR
 
2,780,000

 
26,687

 
41,817

 
400

MXN
 
1,808,051

 
637,803

 
93,003

 
32,889

MYR
 
348,477

 
20,200

 
84,204

 
4,881

PLN
 
122,136

 
73,747

 
31,834

 
19,222

SEK
 
225,946

 
298,985

 
26,294

 
34,857

SGD
 
43,274

 
3,620

 
31,775

 
2,658

Other
 
N/A

 
N/A

 
45,748

 
34,906

 
 
 

 
 

 
1,883,949

 
1,754,805


 


 


 


 


Total Notional Contract Value in USD
 
 

 
 

 
$
2,320,789

 
$
1,887,799


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Table of Contents



As of September 30, 2016, the fair value of the Company’s short-term foreign currency contracts was not material and is 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 September 30, 2016 and March 31, 2016, 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. These deferred losses were not material as of September 30, 2016, and are expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations primarily over the next twelve-month period. The gains and losses recognized in earnings due to hedge ineffectiveness were not material for all fiscal periods presented and are included as a component of interest and other, net in the condensed consolidated statements of operations.
 
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
 
September 30,
2016
 
March 31,
2016
 
Balance Sheet
Location
 
September 30,
2016
 
March 31,
2016
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
6,253

 
$
5,510

 
Other current liabilities
 
$
4,456

 
$
2,446

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
5,226

 
$
17,138

 
Other current liabilities
 
$
6,361

 
$
18,645


The Company has financial instruments subject to master netting arrangements, which provides for the net settlement of all contracts with a single counterparty. The Company does not offset fair value amounts for assets and liabilities recognized for derivative instruments under these arrangements, and as such, the asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets. The impact of netting derivative assets and liabilities is not material to the Company’s financial position for any of the periods presented.
 
7.  ACCUMULATED OTHER COMPREHENSIVE LOSS
 
The changes in accumulated other comprehensive loss by component, net of tax, are as follows:
 

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Three-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
Unrealized loss on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
Unrealized gain
(loss) on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
(In thousands)
Beginning balance
$
(40,174
)
 
$
(84,532
)
 
$
(124,706
)
 
$
(55,437
)
 
$
(109,456
)
 
$
(164,893
)
Other comprehensive gain (loss) before reclassifications
(1,169
)
 
4,213

 
3,044

 
(13,818
)
 
(30,267
)
 
(44,085
)
Net (gain) losses reclassified from accumulated other comprehensive loss
(890
)
 

 
(890
)
 
8,274

 

 
8,274

Net current-period other comprehensive gain (loss)
(2,059
)
 
4,213

 
2,154

 
(5,544
)
 
(30,267
)
 
(35,811
)
Ending balance
$
(42,233
)
 
$
(80,319
)
 
$
(122,552
)
 
$
(60,981
)
 
$
(139,723
)
 
$
(200,704
)

 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
Unrealized gain
(loss) on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
Unrealized gain
(loss) on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
(In thousands)
Beginning balance
$
(41,522
)
 
$
(94,393
)
 
$
(135,915
)
 
$
(68,266
)
 
$
(112,239
)
 
$
(180,505
)
Other comprehensive gain (loss) before reclassifications
324

 
14,299

 
14,623

 
(14,419
)
 
(27,636
)
 
(42,055
)
Net (gains) losses reclassified from accumulated other comprehensive loss
(1,035
)
 
(225
)
 
(1,260
)
 
21,704

 
152

 
21,856

Net current-period other comprehensive gain (loss)
(711
)
 
14,074

 
13,363

 
7,285

 
(27,484
)
 
(20,199
)
Ending balance
$
(42,233
)
 
$
(80,319
)
 
$
(122,552
)
 
$
(60,981
)
 
$
(139,723
)
 
$
(200,704
)

Net gains reclassified from accumulated other comprehensive loss during the six-month period ended September 30, 2016 relating to derivative instruments and other includes $1.9 million attributable to the Company’s cash flow hedge instruments which were primarily recognized as a component of cost of sales in the condensed consolidated statement of operations.

Net losses reclassified from accumulated other comprehensive loss during the six-month period ended September 25, 2015 relating to derivative instruments and other includes $20.7 million attributable to the Company’s cash flow hedge instruments which were recognized as a component of cost of sales in the condensed consolidated statement of operations.

Substantially all unrealized losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month and six-month periods ended September 25, 2015, was recognized as a component of 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. 

8.  TRADE RECEIVABLES SECURITIZATION
 
The Company sells trade receivables under two asset-backed securitization programs and under an accounts receivable factoring program.

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Table of Contents

 
Asset-Backed Securitization Programs
 
The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreement (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” collectively, the “ABS Programs”) to affiliated special purpose entities, each of which in turn sells 100% of the receivables to unaffiliated financial institutions. These programs allow the operating subsidiaries to receive a cash payment and a deferred purchase price receivable for sold receivables. Following the transfer of the receivables to the special purpose entities, the transferred receivables are isolated from the Company and its affiliates, and upon the sale of the receivables from the special purpose entities to the unaffiliated financial institutions, effective control of the transferred receivables is passed to the unaffiliated financial institutions, which has the right to pledge or sell the receivables. Although the special purpose entities are consolidated by the Company, they are separate corporate entities and their assets are available first to satisfy the claims of their creditors. The investment limits set by the financial institutions are $700.0 million for the Global Program, of which $600.0 million is committed and $100.0 million is uncommitted, and $265.0 million for the North American Program, of which $225.0 million is committed and $40.0 million is uncommitted. Both programs require a minimum level of deferred purchase price receivable to be retained by the Company in connection with the sales.
 
The Company services, administers and collects the receivables on behalf of the special purpose entities and receives a servicing fee of 0.1% to 0.5% of serviced receivables per annum. Servicing fees recognized during the three-month and six-month periods ended September 30, 2016 and September 25, 2015 were not material and are included in interest and other, net within the condensed consolidated statements of operations. As the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value, no servicing assets and liabilities are recognized.
 
As of September 30, 2016, approximately $1.3 billion of accounts receivable had been sold to the special purpose entities under the ABS Programs for which the Company had received net cash proceeds of approximately $851.0 million and deferred purchase price receivables of approximately $461.5 million. As of March 31, 2016, approximately $1.4 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $880.8 million and deferred purchase price receivables of approximately $501.1 million. The portion of the purchase price for the receivables which is not paid by the unaffiliated financial institutions in cash is a deferred purchase price receivable, which is paid to the special purpose entity as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in other current assets as of September 30, 2016 and March 31, 2016, and were carried at the expected recovery amount of the related receivables. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the deferred purchase price receivables received at time of transfer is recognized as a loss on sale of the related receivables and recorded in interest and other, net in the condensed consolidated statements of operations and were immaterial for all periods presented.
 
As of September 30, 2016 and March 31, 2016, the accounts receivable balances that were sold under the ABS Programs were removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company were included as cash provided by operating activities in the condensed consolidated statements of cash flows.
 
For the six-month periods ended September 30, 2016 and September 25, 2015, cash flows from sales of receivables under the ABS Programs consisted of approximately $2.8 billion and $2.4 billion, for transfers of receivables, respectively (of which approximately $92.7 million and $255.3 million, respectively, represented new transfers and the remainder proceeds from collections reinvested in revolving-period transfers).
 
The following table summarizes the activity in the deferred purchase price receivables account:
 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
(In thousands)
Beginning balance
$
460,334

 
$
516,287

 
$
501,097

 
$
600,672

Transfers of receivables
760,540

 
983,677

 
1,522,724

 
1,750,725

Collections
(759,330
)
 
(962,345
)
 
(1,562,277
)
 
(1,813,778
)
Ending balance
$
461,544

 
$
537,619

 
$
461,544

 
$
537,619

 
Trade Accounts Receivable Sale Programs
 

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Table of Contents

The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected was approximately $362.7 million and $339.1 million as of September 30, 2016 and March 31, 2016, respectively. For the six-month periods ended September 30, 2016 and September 25, 2015, total accounts receivable sold to certain third party banking institutions was approximately $0.8 billion and $1.2 billion, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows.
 
9.  FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market 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.
 
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 for the most part included in other noncurrent assets on the condensed consolidated balance sheets and primarily include investments in equity securities that are valued using active market prices.
 
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 are comprised of bank 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’s deferred compensation plan assets also 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. 

The Company has accrued for contingent consideration in connection with its business acquisitions, which is measured at fair value based on certain internal models and unobservable inputs.

The fair value of the liability was estimated using a simulation-based measurement technique with significant inputs that are not observable in the market and thus represents a level 3 fair value measurement. The significant inputs in the fair value measurement not supported by market activity included the Company's probability assessments of expected future revenue during the earn-out period and associated volatility, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the merger agreement. Significant decreases in expected revenue during the earn-out period, or significant increases in the discount rate or volatility in isolation would result in lower fair value estimates. The interrelationship between these inputs is not considered significant.

The following table summarizes the activities related to contingent consideration:


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Table of Contents

 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30,
2016
 
September 25,
2015
 
September 30,
2016
 
September 25,
2015
 
(In thousands)
Beginning balance
$
75,258

 
$
4,500

 
$
73,423

 
$
4,500

Additions to accrual

 

 

 

Payments
(2,221
)
 

 
(2,221
)
 

Fair value adjustments
2,577

 

 
4,412

 

Ending balance
$
75,614

 
$
4,500

 
$
75,614

 
$
4,500


The Company values deferred purchase price receivables relating to its asset-backed securitization program based on a discounted cash flow analysis using unobservable inputs (i.e., level 3 inputs), which are primarily risk free interest rates adjusted for the credit quality of the underlying creditor. Due to its high credit quality and short term maturity, the fair value approximates carrying value. Significant increases in either of the major unobservable inputs (credit spread, risk free interest rate) in isolation would result in lower fair value estimates, however the impact is not meaningful. The interrelationship between these inputs is also insignificant. Refer to note 8 for a reconciliation of the change in the deferred purchase price receivable during the three-month and six-month periods ended September 30, 2016 and September 25, 2015.
 
There were no transfers between levels in the fair value hierarchy during the three-month and six-month periods ended September 30, 2016 and September 25, 2015.
 
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:
 

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Table of Contents

 
Fair Value Measurements as of September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 

 
 

 
 

 
 

Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet)
$

 
$
1,120,831

 
$

 
$
1,120,831

Deferred purchase price receivable (Note 8)

 

 
461,544

 
461,544

Foreign exchange contracts (Note 6)

 
11,479

 

 
11,479

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
7,497

 
48,124

 

 
55,621

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 6)
$

 
$
(10,817
)
 
$

 
$
(10,817
)
Contingent consideration in connection with business acquisitions

 

 
(75,614
)
 
(75,614
)
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 

 
 

 
 

 
 

Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet)
$

 
$
1,074,132

 
$

 
$
1,074,132

Deferred purchase price receivable (Note 8)

 

 
501,097

 
501,097

Foreign exchange contracts (Note 6)

 
22,648

 

 
22,648

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
9,228

 
40,556

 

 
49,784

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 6)
$

 
$
(21,091
)
 
$

 
$
(21,091
)
Contingent consideration in connection with business acquisitions

 

 
(73,423
)
 
(73,423
)

 
Other financial instruments
 
The following table presents the Company’s debt not carried at fair value:
 

 
As of September 30, 2016

As of March 31, 2016


 
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Fair Value
Hierarchy
 
(In thousands)
Term Loan, including current portion, due in installments through August 2018
$
570,000


$
568,222


$
577,500


$
573,533


Level 1
Term Loan, including current portion, due in installments through March 2019
525,000


520,406


547,500


542,709


Level 1
4.625% Notes due February 2020
500,000


536,250


500,000


524,735


Level 1
5.000% Notes due February 2023
500,000


550,000


500,000


507,500


Level 1
4.750% Notes due June 2025
595,782


639,000


595,589


604,926


Level 1
Total
$
2,690,782


$
2,813,878


$
2,720,589


$
2,753,403


 
 
The term loans and Notes due February 2020, February 2023 and June 2025 are valued based on broker trading prices in active markets. 


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Table of Contents

The Company values its €50 million (approximately $56.1 million as of September 30, 2016), 5-year, unsecured, term-loan due September 30, 2020 based on the current market rate, and as of September 30, 2016, the carrying amount approximates fair value.

10. BUSINESS AND ASSET ACQUISITIONS & DIVESTITURES
 
Business and asset acquisitions

During the six-month period ended September 30, 2016, the Company completed three acquisitions that were not individually, nor in the aggregate, significant to the consolidated financial position, results of operations and cash flows of the Company. Most notably is the Company’s acquisition of two manufacturing and development facilities from Bose Corporation (“Bose”), a global leader in audio systems. The acquisition expanded the Company’s capabilities in the audio market and is included in the CTG segment. The other acquired businesses strengthen the Company's capabilities in the energy market within the IEI segment. The Company paid a total of $189.3 million, net of cash acquired, of which $171.6 million, net of $17.8 million of cash acquired is related to the Bose acquisition. The Company acquired primarily $73.6 million of inventory, $66.8 million of property and equipment, recorded goodwill of $52.8 million and intangible assets of $44.9 million substantially related to Bose. The intangibles will amortize over a weighted-average estimated useful life of 7.4 years. In connection with these acquisitions, the Company assumed $57.5 million in other liabilities including additional consideration of $28.0 million payable to Bose by the end of fiscal year 2017. Further, the equity incentive plan of one of the acquirees was assumed as part of the acquisition.

The results of operations for each of the acquisitions completed in fiscal year 2017, including the Bose acquisition, were included in the Company’s consolidated financial results beginning on the date of each acquisition, and the total amount of net income and revenue of the acquisitions, collectively, were immaterial to the Company's consolidated financial results for the three-month and six-month periods ended September 30, 2016. Pro-forma results of operations for the acquisitions completed in fiscal year 2017 have not been presented because the effects, individually and in the aggregate, were not material to the Company’s consolidated financial results for all periods presented.

The total amount of net income and revenue for the acquisitions completed in fiscal year 2016, collectively, was not material to the Company’s consolidated financial results for the three-month and six-month period ended September 30, 2016. On a pro-forma basis, and assuming the fiscal year 2016 acquisitions occurred on the first day of that fiscal year, or April 1, 2015, the Company's net income would have been estimated to be $130.1 million and $243.1 million for the three-month and six-month periods ended September 25, 2015, respectively. Pro-forma revenue for the acquisitions in fiscal year 2016 has not been presented because the effect, collectively, was not material to the Company’s consolidated revenues for all periods presented.

The Company is in the process of evaluating the fair value of the assets and liabilities related to business combinations completed during fiscal year 2017. Additional information, which existed as of the acquisition date, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the date of acquisition. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill during the respective measurement periods.

Divestitures

During the six-month period ended September 30, 2016, the Company disposed of two non-strategic businesses within the HRS and IEI segments. The Company received $33.0 million of proceeds, net of an immaterial amount of cash held in one of the divested businesses. The property and equipment and various other assets sold, and liabilities transferred were not material to the Company's consolidated financial results. The loss on disposition was not material to the Company’s consolidated financial results, and is included in other charges, net in the condensed consolidated statements of operations for the six-month period ended September 30, 2016.


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Table of Contents

11.  COMMITMENTS AND CONTINGENCIES
 
Litigation and other legal matters

During the third quarter of fiscal year 2014, one of the Company's Brazilian subsidiaries received an assessment for certain sales and import taxes. The tax assessment notice was for nine months of calendar year 2010 for an alleged amount of 52 million Brazilian reals (approximately USD $16 million based on the exchange rate as of September 30, 2016) plus interest. This assessment is in the second stage of the review process at the administrative level. During the fourth quarter of fiscal year 2016, the same Brazilian subsidiary received a further assessment related to the same import taxes of an additional 57 million Brazilian reals (approximately USD $18 million based on the exchange rate as of September 30, 2016) plus interest. This assessment is in the first stage of the review process at the administrative level. The Company plans to continue to vigorously oppose both of these assessments, as well as any future assessments. The Company is unable to determine the likelihood of an unfavorable outcome of these assessments against our Brazilian subsidiary. While the Company believes there is no legal basis for the alleged liabilities, due to the complexities and uncertainty surrounding the administrative-review and judicial processes in Brazil and the nature of the claims, it is unable to reasonably estimate a range of loss for this assessment or any future assessments that are reasonably possible. The Company does not expect final judicial determination on either of these claims for several years.

During fiscal year 2015, one of the Company's non-operating Brazilian subsidiaries received an assessment of approximately USD $100 million related to income and social contribution taxes, interest and penalties. During the first quarter of fiscal year 2017, the Company received a final favorable judgment in the judicial process reversing the assessment and the case is now closed. As the Company had previously determined there was no legal basis for the assessment, no adjustment was required to be recorded during the first quarter of fiscal year 2017.

In addition, 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 condensed consolidated balance sheets, would not be material to the financial statements as a whole.

12.  SHARE REPURCHASES
 
During the three-month and six-month periods ended September 30, 2016, the Company repurchased 6.9 million shares at an aggregate purchase price of $90.0 million, and 14.2 million shares at an aggregate purchase price of $181.0 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 $500 million 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 24, 2016. As of September 30, 2016, shares in the aggregate amount of $450.2 million were available to be repurchased under the current plan.

13.  SEGMENT REPORTING

The Company has four reportable segments: HRS, CTG, IEI, and CEC. These segments are determined based on several factors, including the nature of products and services, the nature of production processes, customer base, delivery channels and similar economic characteristics. Refer to note 1 for a description of the various product categories manufactured under each of these segments.

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 amortization of intangibles, stock-based compensation, restructuring charges, distressed customer charges, other charges (income), net and interest and other, net.

Selected financial information by segment is as follows:


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Table of Contents

 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
(In thousands)
Net sales:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
2,101,922

 
$
2,204,966

 
$
4,297,912

 
$
4,171,528

Consumer Technology Group
1,664,736

 
2,011,089

 
2,978,518

 
3,576,052

Industrial & Emerging Industries
1,242,722

 
1,145,842

 
2,531,737

 
2,275,981

High Reliability Solutions
999,145

 
954,865

 
2,077,171

 
1,859,449

 
$
6,008,525

 
$
6,316,762

 
$
11,885,338

 
$
11,883,010

Segment income and reconciliation of income before tax:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
52,453

 
$
65,758

 
$
114,352

 
$
122,822

Consumer Technology Group
55,314

 
41,170

 
79,948

 
80,013

Industrial & Emerging Industries
37,363

 
32,268

 
87,340

 
61,268

High Reliability Solutions
78,707

 
71,199

 
167,243

 
131,085

Corporate and Other
(26,902
)
 
(14,075
)
 
(61,702
)
 
(39,786
)
   Total segment income
196,935

 
196,320

 
387,181

 
355,402

Reconciling items:


 


 
 
 
 
Intangible amortization
21,986

 
16,127

 
43,584

 
23,798

Stock-based compensation
22,733

 
16,200

 
46,530

 
32,326

Inventory impairment and other (1)
92,915

 

 
92,915

 

Restructuring (2)
11,539

 

 
11,539

 

Other charges, net
8,388

 
1,678

 
11,917

 
1,842

Interest and other, net
24,632

 
22,035

 
49,031

 
38,540

    Income before income taxes
$
14,742

 
$
140,280

 
$
131,665

 
$
258,896

(1)
During the fourth quarter of fiscal year 2016, the Company accepted return of previously shipped inventory from a former customer, SunEdison, Inc. ("SunEdison"), of approximately $90 million. On April 21, 2016, SunEdison filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61.0 million as of March 31, 2016, associated with its outstanding SunEdison receivables.
During the three-month period ended September 30, 2016, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory on hand as of September 30, 2016 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market in the three and six-month periods ended September 30, 2016. The Company also recognized a $16.0 million impairment charge for solar module equipment and $16.9 million primarily related to negative margin sales and other associated solar panel direct costs incurred during the same periods. The total charge of $92.9 million is included in cost of sales for the three and six-month periods ended September 30, 2016 but is excluded from segment results above.
(2)
The Company has initiated a plan to rationalize the current footprint at existing sites including corporate SG&A functions and to continue to shift the talent base in support of its sketch to scaletm initiatives. As part of this plan, approximately $11.5 million was recognized in the quarter ended September 30, 2016. The Company expects to finalize the plan by the end of fiscal year 2017.

Corporate and other primarily includes corporate services costs that are not included in the Chief Operating Decision Maker's ("CODM") assessment of the performance of each of the identified reporting segments.

Property and equipment on a segment basis is not disclosed as it is not separately identified and is not internally reported by segment to the Company's CODM.


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Table of Contents

14.  SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
 
Flex Ltd. (“Parent”) has three tranches of Notes of $500 million, $500 million, and $600 million, respectively, each outstanding, which mature on February 15, 2020, February 15, 2023 and June 15, 2025, respectively. These Notes are senior unsecured obligations, and are guaranteed, fully and unconditionally, jointly and severally, on an unsecured basis, by certain of the Company’s 100% owned subsidiaries (the “guarantor subsidiaries”). These subsidiary guarantees will terminate upon 1) a sale or other disposition of the guarantor or the sale or disposition of all or substantially all the assets of the guarantor (other than to the Parent or a subsidiary); 2) such guarantor ceasing to be a guarantor or a borrower under the Company’s Term Loan Agreement and the Revolving Line of Credit; 3) defeasance or discharge of the Notes, as provided in the Notes indenture; or 4) if at any time the Notes are rated investment grade, provided that each rating agency confirms that the Notes will continue to be rated investment grade after the Note Guaranties are terminated.
 
In lieu of providing separate financial statements for the guarantor subsidiaries, the Company has included the accompanying condensed consolidating financial statements, which are presented using the equity method of accounting. The principal elimination entries relate to investment in subsidiaries and intercompany balances and transactions, including transactions with the Company’s non-guarantor subsidiaries.

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Table of Contents

Condensed Consolidating Balance Sheets as of September 30, 2016
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
ASSETS
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
823,435

 
$
122,531

 
$
591,090

 
$

 
$
1,537,056

Accounts receivable

 
941,596

 
1,399,797

 

 
2,341,393

Inventories

 
1,545,142

 
2,017,075

 

 
3,562,217

Inter company receivable
9,952,291

 
7,457,490

 
14,178,475

 
(31,588,256
)
 

Other current assets
2,947

 
179,553

 
835,454

 

 
1,017,954

Total current assets
10,778,673

 
10,246,312

 
19,021,891

 
(31,588,256
)
 
8,458,620

Property and equipment, net

 
576,336

 
1,759,623

 

 
2,335,959

Goodwill and other intangible assets, net
1,239

 
90,316

 
1,304,208

 

 
1,395,763

Other assets
2,224,133

 
276,072

 
2,001,421

 
(4,030,834
)
 
470,792

Investment in subsidiaries
2,739,759

 
3,274,766

 
17,932,399

 
(23,946,924
)
 

Total assets
$
15,743,804

 
$
14,463,802

 
$
42,019,542

 
$
(59,566,014
)
 
$
12,661,134

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Bank borrowings and current portion of long-term debt
$
58,836

 
$
946

 
$
6,187

 
$

 
$
65,969

Accounts payable

 
1,497,129

 
3,017,437

 

 
4,514,566

Accrued payroll

 
119,846

 
290,741

 

 
410,587

Inter company payable
10,416,283

 
10,238,176

 
10,933,797

 
(31,588,256
)
 

Other current liabilities
21,350

 
796,156

 
1,045,039

 

 
1,862,545

Total current liabilities
10,496,469

 
12,652,253

 
15,293,201

 
(31,588,256
)
 
6,853,667

Long term liabilities
2,685,469

 
2,058,750

 
2,489,774

 
(4,030,834
)
 
3,203,159

Flex Ltd. shareholders’ equity (deficit)
2,561,866

 
(247,201
)
 
24,194,125

 
(23,946,924
)
 
2,561,866

Noncontrolling interests

 

 
42,442

 

 
42,442

Total shareholders’ equity (deficit)
2,561,866

 
(247,201
)
 
24,236,567

 
(23,946,924
)
 
2,604,308

Total liabilities and shareholders’ equity
$
15,743,804

 
$
14,463,802

 
$
42,019,542

 
$
(59,566,014
)
 
$
12,661,134




26

Table of Contents

Condensed Consolidating Balance Sheets as of March 31, 2016
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
ASSETS
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
734,869

 
$
148,201

 
$
724,500

 
$

 
$
1,607,570

Accounts receivable

 
729,331

 
1,315,426

 

 
2,044,757

Inventories

 
1,482,410

 
2,009,246

 

 
3,491,656

Inter company receivable
9,105,728

 
5,568,392

 
12,404,722

 
(27,078,842
)
 

Other current assets
2,951

 
180,842

 
987,350

 

 
1,171,143

Total current assets
9,843,548

 
8,109,176

 
17,441,244

 
(27,078,842
)
 
8,315,126

Property and equipment, net

 
553,072

 
1,704,561

 

 
2,257,633

Goodwill and other intangible assets, net
175

 
60,895

 
1,284,750

 

 
1,345,820

Other assets
2,249,145

 
267,034

 
2,004,437

 
(4,054,214
)
 
466,402

Investment in subsidiaries
2,815,426

 
3,010,111

 
18,175,348

 
(24,000,885
)
 

Total assets
$
14,908,294

 
$
12,000,288

 
$
40,610,340

 
$
(55,133,941
)
 
$
12,384,981

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

 
 

 
 

 
 

Current liabilities:
 

 
 

 
 

 
 

 
 

Bank borrowings and current portion of long-term debt
$
58,836

 
$
946

 
$
5,384

 
$

 
$
65,166

Accounts payable

 
1,401,835

 
2,846,457

 

 
4,248,292

Accrued payroll

 
114,509

 
239,038

 

 
353,547

Inter company payable
9,562,405

 
7,999,335

 
9,517,102

 
(27,078,842
)
 

Other current liabilities
33,008

 
869,470

 
1,002,722

 

 
1,905,200

Total current liabilities
9,654,249

 
10,386,095

 
13,610,703

 
(27,078,842
)
 
6,572,205

Long term liabilities
2,683,173

 
2,063,988

 
2,514,299

 
(4,054,214
)
 
3,207,246

Flex Ltd. shareholders’ equity (deficit)
2,570,872

 
(449,795
)
 
24,450,680

 
(24,000,885
)
 
2,570,872

Noncontrolling interests

 

 
34,658

 

 
34,658

Total shareholders’ equity (deficit)
2,570,872

 
(449,795
)
 
24,485,338

 
(24,000,885
)
 
2,605,530

Total liabilities and shareholders’ equity
$
14,908,294

 
$
12,000,288

 
$
40,610,340

 
$
(55,133,941
)
 
$
12,384,981


 

27

Table of Contents

Condensed Consolidating Statements of Operations for the Three-Month Period Ended September 30, 2016
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net sales
$

 
$
3,991,248

 
$
5,191,500

 
$
(3,174,223
)
 
$
6,008,525

Cost of sales

 
3,686,831

 
5,182,226

 
(3,174,223
)
 
5,694,834

Gross profit

 
304,417

 
9,274

 

 
313,691

Selling, general and administrative expenses

 
75,351

 
168,592

 

 
243,943

Intangible amortization
75

 
717

 
21,194

 

 
21,986

Interest and other, net
125,803

 
243,460

 
(336,243
)
 

 
33,020

Income (loss) from continuing operations before income taxes
(125,878
)
 
(15,111
)
 
155,731

 

 
14,742

Provision for income taxes
11

 
2,476

 
14,763

 

 
17,250

Equity in earnings in subsidiaries
123,381

 
(63,394
)
 
(52,231
)
 
(7,756
)
 

Net income (loss)
$
(2,508
)
 
$
(80,981
)
 
$
88,737

 
$
(7,756
)
 
$
(2,508
)

 
Condensed Consolidating Statements of Operations for the Three-Month Period Ended September 25, 2015
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net sales
$

 
$
4,482,213

 
$
5,514,535

 
$
(3,679,986
)
 
$
6,316,762

Cost of sales

 
4,141,254

 
5,458,578

 
(3,679,986
)
 
5,919,846

Gross profit

 
340,959

 
55,957

 

 
396,916

Selling, general and administrative expenses

 
66,682

 
150,114

 

 
216,796

Intangible amortization
75

 
960

 
15,092

 

 
16,127

Interest and other, net
(131,637
)
 
277,002

 
(121,652
)
 

 
23,713

Income (loss) from continuing operations before income taxes
131,562

 
(3,685
)
 
12,403

 

 
140,280

Provision for (benefit from) income taxes

 
(5,658
)
 
22,961

 

 
17,303

Equity in earnings in subsidiaries
(8,585
)
 
(33,421
)
 
16,794

 
25,212

 

Net income (loss)
$
122,977

 
$
(31,448
)
 
$
6,236

 
$
25,212

 
$
122,977



 Condensed Consolidating Statements of Operations for the Six-Month Period Ended September 30, 2016


28

Table of Contents

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net sales
$

 
$
7,821,600

 
$
9,528,146

 
$
(5,464,408
)
 
$
11,885,338

Cost of sales

 
7,100,113

 
9,529,947

 
(5,464,408
)
 
11,165,652

Gross profit

 
721,487

 
(1,801
)
 

 
719,686

Selling, general and administrative expenses

 
145,321

 
338,168

 

 
483,489

Intangible amortization
150

 
1,434

 
42,000

 

 
43,584

Interest and other, net
(190,588
)
 
659,777

 
(408,241
)
 

 
60,948

Income (loss) from continuing operations before income taxes
190,438

 
(85,045
)
 
26,272

 

 
131,665

Provision for income taxes
11

 
3,070

 
25,363

 

 
28,444

Equity in earnings in subsidiaries
(87,206
)
 
(64,121
)
 
(74,336
)
 
225,663

 

Net income (loss)
$
103,221

 
$
(152,236
)
 
$
(73,427
)
 
$
225,663

 
$
103,221



Condensed Consolidating Statements of Operations for the Six-Month Period Ended September 25, 2015

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net sales
$

 
$
8,528,598

 
$
9,450,050

 
$
(6,095,638
)
 
$
11,883,010

Cost of sales

 
7,785,313

 
9,444,078

 
(6,095,638
)
 
11,133,753

Gross profit

 
743,285

 
5,972

 

 
749,257

Selling, general and administrative expenses

 
130,238

 
295,943

 

 
426,181

Intangible amortization
150

 
1,921

 
21,727

 

 
23,798

Interest and other, net
(397,020
)
 
613,414

 
(176,012
)
 

 
40,382

Income (loss) from continuing operations before income taxes
396,870

 
(2,288
)
 
(135,686
)
 

 
258,896

Provision for income taxes

 
3,441

 
21,628

 

 
25,069

Equity in earnings in subsidiaries
(163,043
)
 
(51,830
)
 
52,755

 
162,118

 

Net income (loss)
$
233,827

 
$
(57,559
)
 
$
(104,559
)
 
$
162,118

 
$
233,827




 

29

Table of Contents

Condensed Consolidating Statements of Comprehensive Income (Loss) for the Three-Month Period Ended September 30, 2016
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net income (loss)
$
(2,508
)

$
(80,981
)

$
88,737


$
(7,756
)

$
(2,508
)
Other comprehensive income:
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments, net of zero tax
4,213

 
(7,528
)
 
(3,368
)
 
10,896

 
4,213

Unrealized gain (loss) on derivative instruments and other, net of zero tax
(2,059
)
 
1,050

 
(2,059
)
 
1,009

 
(2,059
)
Comprehensive income (loss)
$
(354
)
 
$
(87,459
)
 
$
83,310

 
$
4,149

 
$
(354
)

 
Condensed Consolidating Statements of Comprehensive Income (Loss) for the Three-Month Period Ended September 25, 2015
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net income (loss)
$
122,977


$
(31,448
)

$
6,236


$
25,212


$
122,977

Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments, net of zero tax
(30,267
)
 
(33,696
)
 
(30,633
)
 
64,329

 
(30,267
)
Unrealized gain (loss) on derivative instruments and other, net of zero tax
(5,544
)
 
1,160

 
(5,544
)
 
4,384

 
(5,544
)
Comprehensive income (loss)
$
87,166

 
$
(63,984
)
 
$
(29,941
)
 
$
93,925

 
$
87,166


 Condensed Consolidating Statements of Comprehensive Income (Loss) for the Six-Month Period Ended September 30, 2016

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net income (loss)
$
103,221

 
$
(152,236
)
 
$
(73,427
)
 
$
225,663

 
$
103,221

Other comprehensive income (loss):
0

 
 

 
 

 
 

 
 

Foreign currency translation adjustments, net of zero tax
14,074

 
10,181

 
21,395

 
(31,576
)
 
14,074

Unrealized gain (loss) on derivative instruments and other, net of zero tax
(711
)
 
3,500

 
(711
)
 
(2,789
)
 
(711
)
Comprehensive income (loss)
$
116,584

 
$
(138,555
)
 
$
(52,743
)
 
$
191,298

 
$
116,584




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Table of Contents

Condensed Consolidating Statements of Comprehensive Income (Loss) for the Six-Month Period Ended September 25, 2015

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(in thousands)
Net income (loss)
$
233,827

 
$
(57,559
)
 
$
(104,559
)
 
$
162,118

 
$
233,827

Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments, net of zero tax
(27,484
)
 
(57,186
)
 
(51,530
)
 
108,716

 
(27,484
)
Unrealized gain on derivative instruments and other, net of zero tax
7,285

 
5,785

 
7,285

 
(13,070
)
 
7,285

Comprehensive income (loss)
$
213,628

 
$
(108,960
)
 
$
(148,804
)
 
$
257,764

 
$
213,628







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Table of Contents

Condensed Consolidating Statements of Cash Flows for the Six-Month Period Ended September 30, 2016
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Net cash provided by (used in) operating activities
$
157,337

 
$
(390,057
)
 
$
776,305

 
$
(33
)
 
$
543,552

Cash flows from investing activities:
 

 
 

 
 

 
 

 
 

Purchases of property and equipment, net of proceeds from disposal

 
(92,393
)
 
(186,982
)
 

 
(279,375
)
Acquisition of businesses, net of cash acquired

 
(80,339
)
 
(109,556
)
 

 
(189,895
)
Proceeds from divestiture of businesses, net of cash held in divested businesses

 
20,500

 
15,573

 

 
36,073

Investing cash flows to affiliates
(426,040
)
 
(2,041,309
)
 
(669,967
)
 
3,137,316

 

Other investing activities, net
(1,213
)
 
(7,051
)
 
28,621

 

 
20,357

Net cash used in investing activities
(427,253
)
 
(2,200,592
)
 
(922,311
)
 
3,137,316

 
(412,840
)
Cash flows from financing activities:
 

 
 

 
 

 
 

 
 

Proceeds from bank borrowings and long-term debt
74,944

 

 
91

 

 
75,035

Repayments of bank borrowings, long-term debt and capital lease obligations
(105,000
)
 
(3,491
)
 
(2,101
)
 


 
(110,592
)
Payments for repurchases of ordinary shares
(184,698
)
 

 

 

 
(184,698
)
Net proceeds from issuance of ordinary shares
11,344

 

 

 

 
11,344

Financing cash flows from affiliates
539,454

 
2,581,240

 
16,589

 
(3,137,283
)
 

Other financing activities, net
30,000

 
(11,347
)
 
(25,489
)
 

 
(6,836
)
Net cash provided by financing activities
366,044

 
2,566,402

 
(10,910
)
 
(3,137,283
)
 
(215,747
)
Effect of exchange rates on cash and cash equivalents
(7,562
)
 
(1,423
)
 
23,506

 

 
14,521

Net increase (decrease) in cash and cash equivalents
88,566

 
(25,670
)
 
(133,410
)
 

 
(70,514
)
Cash and cash equivalents, beginning of period
734,869

 
148,201

 
724,500

 

 
1,607,570

Cash and cash equivalents, end of period
$
823,435

 
$
122,531

 
$
591,090

 
$

 
$
1,537,056


 

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Table of Contents

Condensed Consolidating Statements of Cash Flows for the Six-Month Period Ended September 25, 2015
 

 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
(In thousands)
Net cash provided by (used in) operating activities
$
389,949

 
$
(248,082
)
 
$
520,128

 
$

 
$
661,995

Cash flows from investing activities:
 

 
 

 
 

 
 

 
 

Purchases of property and equipment, net of proceeds from disposal

 
(88,699
)
 
(205,330
)
 
11

 
(294,018
)
Acquisition and divestiture of businesses, net of cash acquired and cash held in divested business

 
(559,442
)
 
(82,471
)
 

 
(641,913
)
Investing cash flows from (to) affiliates
(1,326,493
)
 
(836,415
)
 
(1,194,368
)
 
3,357,276

 

Other investing activities, net

 
(22,822
)
 
12,306

 

 
(10,516
)
Net cash used in investing activities
(1,326,493
)
 
(1,507,378
)
 
(1,469,863
)
 
3,357,287

 
(946,447
)
Cash flows from financing activities:
 

 
 

 
 

 
 

 
 

Proceeds from bank borrowings and long-term debt
595,309

 
209

 
35

 

 
595,553

Repayments of bank borrowings, long-term debt and capital lease obligations
(17,507
)
 
(1,039
)
 
(2,544
)
 

 
(21,090
)
Payments for repurchases of ordinary shares
(241,978
)
 

 

 

 
(241,978
)
Net proceeds from issuance of ordinary shares
49,074

 

 

 

 
49,074

Financing cash flows from affiliates
435,540

 
1,811,532

 
1,110,215

 
(3,357,287
)
 

Other financing activities, net

 

 
(37,872
)
 

 
(37,872
)
Net cash provided by financing activities
820,438

 
1,810,702

 
1,069,834

 
(3,357,287
)
 
343,687

Effect of exchange rates on cash and cash equivalents
24,766

 
2,955

 
(46,937
)
 

 
(19,216
)
Net decrease (increase) in cash and cash equivalents
(91,340
)
 
58,197

 
73,162

 

 
40,019

Cash and cash equivalents, beginning of period
608,971

 
168,272

 
851,165

 

 
1,628,408

Cash and cash equivalents, end of period
$
517,631

 
$
226,469

 
$
924,327

 
$

 
$
1,668,427



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Table of Contents

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., formerly known as Flextronics International 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. 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 II, Item 1A, “Risk Factors” of this report on Form 10-Q, and 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 year ended March 31, 2016. 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 a globally-recognized, leading provider of innovative design, engineering, manufacturing, and supply chain services and solutions that span from sketch to scaletm; from conceptual sketch to full-scale production. We design, build, ship and service complete packaged consumer electronics and industrial products for original equipment manufacturers ("OEMs"), through our activities in the following segments: High Reliability Solutions ("HRS"), which is comprised of our medical business including consumer health, digital health, disposables, drug delivery, diagnostics, life sciences and imaging equipment; our automotive business, including vehicle electronics, connectivity, and clean technologies; and our defense and aerospace businesses, focused on commercial aviation, defense and military; Consumer Technologies Group ("CTG"), which includes our mobile devices business, including smart phones; our consumer electronics business, including connected living, wearable electronics including digital sport, game consoles, and connectivity devices; and our high-volume computing business, including various supply chain solutions for notebook personal computers ("PC"), tablets, and printers; in addition, our CTG group is expanding its business relationships to include supply chain optimization for non-electronics products such as shoes and clothing; Industrial and Emerging Industries ("IEI"), which is comprised of semiconductor and capital equipment, office solutions, household industrial and lifestyle, industrial automation and kiosks, energy and metering, and lighting; and Communications & Enterprise Compute ("CEC"), which includes radio access base stations, remote radio heads, and small cells for wireless infrastructure; optical, routing, broadcasting, and switching products for the data and video networks; server and storage platforms for both enterprise and cloud-based deployments; next generation storage and security appliance products; and rack level solutions, converged infrastructure and software-defined product solutions.

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 OEM customers. This enables our OEM customers to leverage our supply chain solutions to meet their product requirements throughout the entire product life cycle.

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 OEM customers change the way they go to market, we are able 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 a specific customer's supply chain solutions needs across all of the markets we serve and earn a return on our invested capital above the weighted-average cost of that capital.

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During the past few years, we have made significant efforts to evolve our long-term portfolio towards a higher mix of businesses which possess longer product life cycles and higher segment operating margins such as reflected in our IEI and HRS businesses. During the last two fiscal years we launched several programs broadly across our portfolio of services and in some instances we deployed certain new technologies. Some of these programs have started to yield better results, as demonstrated by our segment operating margin improvement while our sales decreased compared to the prior year. We continue to invest in innovation and we have expanded our design and engineering relationships through our product innovation centers.

We believe that our business transformation has strategically positioned 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, which remain strong.

We are one of the world's largest providers of global supply chain solutions, with revenues of $11.9 billion for the six-month period ended September 30, 2016 and $24.4 billion in fiscal year 2016. The following tables set forth the relative percentages and dollar amounts of net sales and net property and equipment, by country, based on the location of our manufacturing sites:

 
 
Three-Month Periods Ended
 
Six-Month Periods Ended
Net sales:
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
 
(In thousands)
China
 
$
1,959,064

 
32
%
 
$
2,340,475

 
37
%
 
$
3,799,916

 
32
%
 
$
4,176,663

 
35
%
Mexico
 
952,857

 
16
%
 
943,624

 
15
%
 
1,868,202

 
16
%
 
1,850,503

 
16
%
U.S.
 
708,858

 
12
%
 
627,757

 
10
%
 
1,417,268

 
12
%
 
1,270,346

 
11
%
Malaysia
 
539,985

 
9
%
 
566,919

 
9
%
 
1,112,748

 
9
%
 
1,112,289

 
9
%
Brazil
 
417,958

 
7
%
 
498,697

 
8
%
 
789,631

 
7
%
 
982,827

 
8
%
Other
 
1,429,803

 
24
%
 
1,339,290

 
21
%
 
2,897,573

 
24
%
 
2,490,382

 
21
%
 
 
$
6,008,525

 
 

 
$
6,316,762

 
 

 
$
11,885,338

 
 

 
$
11,883,010

 
 


 
 
As of
 
As of
Property and equipment, net:
 
September 30, 2016
 
March 31, 2016
 
 
(In thousands)
China
 
$
765,432

 
33
%
 
$
789,571

 
35
%
Mexico
 
484,418

 
21
%
 
429,989

 
19
%
U.S.
 
302,163

 
13
%
 
330,778

 
15
%
Malaysia
 
190,161

 
8
%
 
159,787

 
7
%
Hungary
 
127,902

 
5
%
 
107,492

 
5
%
Other
 
465,883

 
20
%
 
425,559

 
19
%
 
 
$
2,335,959

 
 

 
$
2,257,633

 
 


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 industrial campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer electronics and industrial products for leading multinational and regional OEMs. Specifically, we have launched multiple product innovation centers ("PIC") focused exclusively on offering 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:
 
changes in the macro-economic environment and related changes in consumer demand;


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Table of Contents

the mix of the manufacturing services we are providing, the number and size of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, shortages of components 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 OEM customers;

the effects on our business due to our customers’ products having short product life cycles;

our customers’ ability to cancel or delay orders or change production quantities;

our customers’ decision to choose internal manufacturing instead of outsourcing for their product requirements;

our exposure to financially troubled customers;

integration of acquired businesses and facilities;

increased labor costs due to adverse labor conditions in the markets we operate; and

changes in tax legislation.
 
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. 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, 2016, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.
 
RESULTS OF OPERATIONS
 
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales. The financial information and the discussion below should be read in conjunction 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 2016 Annual Report on Form 10-K.
 
 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016

September 25, 2015
 
September 30, 2016
 
September 25, 2015
Net sales
100.0
 %

100.0
%
 
100.0
%
 
100.0
%
Cost of sales
94.8


93.7

 
93.9

 
93.7

Gross profit
5.2


6.3

 
6.1

 
6.3

Selling, general and administrative expenses
4.1


3.4

 
4.1

 
3.6

Intangible amortization
0.4


0.3

 
0.4

 
0.2

Interest and other, net
0.4


0.3

 
0.4

 
0.3

Other charges, net
0.1


0.0

 
0.1

 
0.0

Income before income taxes
0.2


2.3

 
1.1

 
2.2

Provision for income taxes
0.3


0.3

 
0.2

 
0.2

Net income (loss)
(0.1
)%

2.0
%
 
0.9
%
 
2.0
%

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Net sales
 
The following table sets forth our net sales by segment and their relative percentages. Historical information has been recast to reflect realignment of customers and/or products between segments to ensure comparability:
 
 
 
Three-Month Periods Ended
 
Six-Month Periods Ended
Segments:
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
 
(In thousands)
Communications & Enterprise Compute
 
$
2,101,922

 
35
%
 
$
2,204,966

 
35
%
 
$
4,297,912

 
36
%
 
$
4,171,528

 
35
%
Consumer Technology Group
 
1,664,736

 
28
%
 
2,011,089

 
32
%
 
2,978,518

 
25
%
 
3,576,052

 
30
%
Industrial & Emerging Industries
 
1,242,722

 
21
%
 
1,145,842

 
18
%
 
2,531,737

 
21
%
 
2,275,981

 
19
%
High Reliability Solutions
 
999,145

 
16
%
 
954,865

 
15
%
 
2,077,171

 
18
%
 
1,859,449

 
16
%
 
 
$
6,008,525

 
 

 
$
6,316,762

 
 

 
$
11,885,338

 
 

 
$
11,883,010

 
 


 
Net sales during the three-month period ended September 30, 2016 totaled $6.0 billion, representing a decrease of approximately $0.3 billion, or 4.9% from $6.3 billion during the three-month period ended September 25, 2015. The overall decline in sales was driven by decreases in two of our segments, with our CTG segment declining $346.4 million, almost entirely due to a decline in demand from our largest smartphone customer Lenovo/Motorola in connection with our exit of a China operation dedicated to them, and a $103.0 million decrease in our CEC segment largely attributable to lower sales within our legacy server and storage business. These decreases were offset by modest increases in our other segments with a $96.9 million increase in our IEI segment driven by contribution from our NEXTracker Inc. ("NEXTracker") acquisition and expansion within our capital equipment business. Also offsetting the declines in CTG and CEC segments was a $44.3 million increase in our HRS segment primarily attributable to successful new program ramps in our automotive and medical businesses. Net sales decreased $290.0 million to $2.9 billion in Asia, while remaining relatively consistent in the Americas and Europe at $2.1 billion and $1.0 billion, respectively.

Net sales during the six-month periods ended September 30, 2016 and September 25, 2015, remained consistent at $11.9 billion. Net sales within our CTG segment decreased by $597.5 million primarily as a result of the decline in demand from our largest smartphone customer Lenovo/Motorola in connection with the exit of the China operation described above, offset by slight increases in each of our other three segments. Net sales increased $213.9 million to $2.2 billion in Europe offset by a decrease of $190.1 million to $5.6 billion in Asia. Sales in the Americas remained relatively consistent at $4.1 billion.

Our ten largest customers, during the three-month and six-month periods ended September 30, 2016, accounted for approximately 42% and 43% of net sales, respectively. No customer accounted for more than 10% of net sales during the three and six-month periods ended September 30, 2016.

Our ten largest customers, during the three-month and six-month periods ended September 25, 2015, accounted for approximately 47% and 46% of net sales, respectively. Lenovo/Motorola accounted for more than 10% of net sales during the three and six-month periods ended September 25, 2015.

Gross profit
 
Gross profit is affected by a number of factors, including the number and size of new manufacturing programs, product mix, component costs and availability, product life cycles, unit volumes, pricing, competition, new product introductions, capacity utilization and the expansion and consolidation of manufacturing facilities. The flexible design of our manufacturing processes allows us to build a broad range of products in our facilities and better utilize our manufacturing capacity. In the cases of new 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.
 

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Gross profit during the three-month period ended September 30, 2016 decreased $83.2 million to $313.7 million, or 5.2% of net sales, from $396.9 million, or 6.3% of net sales, during the three-month period ended September 25, 2015. Gross profit during the six-month period ended September 30, 2016 decreased $29.6 million to $719.7 million, or 6.1% of net sales from $749.3 million, or 6.3% of net sales, during the six-month period ended September 25, 2015. Gross profit for both the three-month and the six-month periods ended September 30, 2016 was negatively impacted by the $92.9 million, or 160 basis points and 70 basis points for the three and six-month periods, respectively, of charges recognized related to the significant decline in prices for solar modules and the slowdown in demand. This negative impact was partially offset by a richer business mix due to a greater concentration of our higher margin HRS business coupled with improved operational efficiencies and improved customer mix in our CTG segment.

Gross margins deteriorated 110 and 20 basis points in the three-month and six-month periods ended September 30, 2016, respectively, compared to that of the three-month and six-month periods ended September 25, 2015, as a result of the various factors described above.

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 amortization of intangibles, stock‑based compensation, restructuring charges, distressed customer charges, other charges (income), net and interest and other, net. A portion of amortization and depreciation is allocated to the respective segment together with other general corporate research and development and administrative expenses.

The following table sets forth segment income and margins. Historical information has been recast to reflect realignment of customers and/or products between segments:

 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
September 30, 2016
 
September 25, 2015
 
(In thousands)
Segment income & margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
52,453

 
2.5
%
 
$
65,758

 
3.0
%
 
$
114,352

 
2.7
%
 
$
122,822

 
2.9
%
Consumer Technology Group
55,314

 
3.3
%
 
41,170

 
2.0
%
 
79,948

 
2.7
%
 
80,013

 
2.2
%
Industrial & Emerging Industries
37,363

 
3.0
%
 
32,268

 
2.8
%
 
87,340

 
3.4
%
 
61,268

 
2.7
%
High Reliability Solutions
78,707

 
7.9
%
 
71,199

 
7.5
%
 
167,243

 
8.1
%
 
131,085

 
7.0
%
Corporate and Other
(26,902
)
 
 
 
(14,075
)
 
 
 
(61,702
)
 
 
 
(39,786
)
 
 
   Total segment income
196,935

 
3.3
%
 
196,320

 
3.1
%
 
387,181

 
3.3
%
 
355,402

 
3.0
%
Reconciling items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible amortization
21,986

 
 
 
16,127

 
 
 
43,584

 
 
 
23,798

 
 
Stock-based compensation
22,733

 
 
 
16,200

 
 
 
46,530

 
 
 
32,326

 
 
Inventory impairment and other (1)
92,915

 
 
 

 
 
 
92,915

 
 
 

 
 
Restructuring (2)
11,539

 
 
 

 
 
 
11,539

 
 
 

 
 
Other charges, net
8,388

 
 
 
1,678

 
 
 
11,917

 
 
 
1,842

 
 
Interest and other, net
24,632

 
 
 
22,035

 
 
 
49,031

 
 
 
38,540

 
 
    Income before income taxes
$
14,742

 
 
 
$
140,280

 
 
 
$
131,665

 
 
 
$
258,896

 
 

(1)
During the fourth quarter of fiscal year 2016, the Company accepted return of previously shipped inventory from a former customer, SunEdison, Inc. ("SunEdison"), of approximately $90 million. On April 21, 2016, SunEdison filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61.0 million as of March 31, 2016, associated with its outstanding SunEdison receivables.

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During the three-month period ended September 30, 2016, prices for solar panel modules declined significantly due to global oversupply and continued deregulation. The Company determined that certain solar panel inventory on hand as of September 30, 2016 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market in the three and six-month periods ended September 30, 2016. The Company also recognized a $16.0 million impairment charge for solar module equipment and $16.9 million primarily related to negative margin sales and other associated solar panel direct costs incurred during the same periods. The total charge of $92.9 million is included in cost of sales for the three and six-month periods ended September 30, 2016 but is excluded from segment results above.
(2)
The Company has initiated a plan to rationalize the current footprint at existing sites including corporate SG&A functions and to continue to shift the talent base in support of our sketch to scaletm initiatives. As part of this plan, approximately $11.5 million was recognized in the quarter ended September 30, 2016. The Company expects to finalize the plan by the end of fiscal year 2017.

CEC segment margin decreased 50 basis points, to 2.5% for the three-month period ended September 30, 2016, from 3.0% during the three-month period ended September 25, 2015 due to lower capacity utilization causing reduced overhead absorption, as well as incurring incremental costs associated with our proactive repositioning of certain programs and actions to better align CEC's operating structure. CEC segment margin decreased 20 basis points, to 2.7% for the six-month period ended September 30, 2016, from 2.9% during the six-month period ended September 25, 2015 as a result of changes in product mix as well as incurring incremental costs associated with our proactive repositioning of certain programs and actions to better align CEC's operating structure.

CTG segment margin increased 130 and 50 basis points, to 3.3% and 2.7%, respectively, for the three-month and six-month periods ended September 30, 2016, from 2.0% and 2.2%, during the three-month and six-month periods ended September 25, 2015, respectively. The increase is primarily driven by portfolio shift within the CTG product mix with a greater concentration of higher margin consumer products where we provide greater levels of design and engineering value-added content, as well as our exiting of lower margin businesses.

IEI segment margin increased 20 and 70 basis points, to 3.0% and 3.4%, respectively, for the three-month and six-month periods ended September 30, 2016, from 2.8% and 2.7% during the three-month and six-month periods ended September 25, 2015, respectively. The increases are primarily due to contribution from our NEXTracker acquisition, partially offset by underperformance primarily driven by our formerly largest IEI customer, SunEdison, declaring bankruptcy in April 2016.

HRS segment margin increased 40 and 110 basis points, to 7.9% and 8.1%, respectively, for the three-month and six-month periods ended September 30, 2016, from 7.5% and 7.0%, during the three-month and six-month periods ended September 25, 2015, respectively. These improvements are primarily the result of new program launches and richer mix with greater value-added business engagements as a result of greater design and engineering solutions as part of our sketch to scaletm offering in our core HRS business, and contribution from our MCi acquisition since the second quarter of fiscal year 2016.

Selling, general and administrative expenses
 
Selling, general and administrative expenses (“SG&A”) was $243.9 million, or 4.1% of net sales, during the three-month period ended September 30, 2016, increasing $27.1 million from $216.8 million, or 3.4% of net sales, during the three-month period ended September 25, 2015. SG&A was $483.5 million, or 4.1% of net sales, during the six-month period ended September 30, 2016, increasing $57.3 million from $426.2 million, or 3.6% of net sales, during the six-month period ended September 25, 2015. The increase in SG&A in dollars and as a percentage of net sales was primarily due to increases in stock-based compensation expense, incremental costs associated with our acquisition of NEXTracker which drives a higher proportional SG&A level and further investments in design and engineering resources by the Company, to support our increased sketch to scaletm initiatives, and to a lesser extent the charges described below.

The Company has initiated a plan to accelerate its ability to support more sketch to scaletm efforts across the company and reposition away from historical legacy programs and structures through rationalizing its current footprint at existing sites and at corporate SG&A functions. The Company estimates that costs associated with its plan will range from $40 million to $60 million in fiscal year 2017, including approximately $11.5 million recognized in the quarter ended September 30, 2016, of which $4.7 million is included in SG&A and $6.8 million is included in cost of sales. The Company expects to finalize the plan by the end of fiscal year 2017.

Intangible amortization

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Amortization of intangible assets increased by $5.9 million during the three-month period ended September 30, 2016 to $22.0 million from $16.1 million for the three-month period ended September 25, 2015, and increased by $19.8 million during the six-month period ended September 30, 2016 to $43.6 million from $23.8 million during the six-month period ended September 25, 2015. The increase is primarily due to incremental amortization expense on intangible assets relating to our acquisitions completed during the second half of fiscal year 2016.

Interest and other, net
 
Interest and other, net was $24.6 million during the three-month period ended September 30, 2016 compared to $22.0 million during the three-month period ended September 25, 2015. The increase in interest and other, net of $2.6 million was primarily due to a decline of $9.1 million of foreign currency gains recognized during the three-month period ended September 30, 2016 primarily related to the Chinese Yuan (CNY). The increase was partially offset by $8.1 million of non-recurring acquisition-related costs incurred during the three-month period ended September 25, 2015.

Interest and other, net was $49.0 million during the six-month period ended September 30, 2016 compared to $38.5 million during the six-month period ended September 25, 2015. The increase in interest and other, net of $10.5 million was primarily as a result of $8.1 million of incremental interest expense mainly from the 4.750% Notes due June 15, 2025 issued during the first quarter of fiscal year 2016, as well as the decline in foreign currency gains recognized, offset by the acquisition-related costs as discussed above.
 
Income taxes
 
Certain of our subsidiaries have, at various times, 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 13, “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, 2016 for further discussion.
 
Our policy is to provide a valuation allowance against deferred tax assets that in our estimation are not more likely than not to be realized.
 
The consolidated effective tax rate was 117.0% and 21.6% for the three-month and six-month periods ended September 30, 2016, respectively, and 12.3% and 9.7% for the three-month and six-month periods ended September 25, 2015, respectively, and varies from the Singapore statutory rate of 17.0% as a result of recognition of earnings in different jurisdictions, 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 and Israel. We generate most of our revenues and profits from operations outside of Singapore. The effective tax rates for the three and six-month periods ended September 30, 2016 are higher than the effective tax rates for the three and six-month periods ended September 25, 2015 primarily due to the charges related to the solar panel inventory impairment and business exit and the rationalization costs incurred during the three-month period ended September 30, 2016 that were in jurisdictions which resulted in minimal tax benefit thereby increasing the company’s effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES
 
As of September 30, 2016, we had cash and cash equivalents of approximately $1.5 billion and bank and other borrowings of approximately $2.7 billion. We have a $1.5 billion revolving credit facility that expires in March 2019, under which there were no borrowings outstanding as of the end of the quarter. As of September 30, 2016, we were in compliance with the covenants under each of our existing credit facilities and indentures.
 
Cash provided by operating activities was $543.6 million during the six-month period ended September 30, 2016. This resulted from $103.2 million of net income for the period plus adjustments for $337.4 million of non-cash charges such as depreciation, amortization, and other impairment charges (which includes the $60.0 million inventory write-down recorded during the three-month period ended September 30, 2016), and $102.9 million from changes in our operating assets and liabilities. These changes were mainly related to an increase in accounts payable due to timing of payments to suppliers, offset by an increase in accounts receivable driven by the increase in sales activity.

For the quarterly periods indicated, certain key liquidity metrics were as follows:


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Three-Month Periods Ended
 
September 30,
2016
 
September 25,
2015
Days in trade accounts receivable
40 days
 
41 days
Days in inventory
58 days
 
54 days
Days in accounts payable
72 days
 
70 days
Cash conversion cycle
26 days
 
25 days

Days in trade accounts receivable was calculated as average accounts receivable, net of allowance for double accounts, for the current and prior quarters, adding back the reduction in accounts receivable resulting from non-cash accounts receivable sales, divided by annualized sales for the current quarter by day. During the three-month period ended September 30, 2016, days in trade accounts receivable decreased by 1 day compared to the three-month period ended September 25, 2015 largely due to an improvement in our collection efforts and timing of invoicing customers during the current period. Non-cash accounts receivable sales or deferred purchase price receivables included for the purposes of the calculation were $461.5 million and $537.6 million for the quarters ended September 30, 2016 and September 25, 2015, respectively. Deferred purchase price receivables are recorded in other current assets in the condensed consolidated balance sheets. For further information regarding deferred purchase price receivables see note 8 to the condensed consolidated financial statements.
 
Days in inventory was calculated as the average inventory for the current and prior quarters divided by annualized cost of sales for the respective quarter by day. Days in inventory increased by 4 days during the three-month period ended September 30, 2016, compared to the three-month period ended September 25, 2015, primarily due to lower sales activities in the current quarter.
 
Days in accounts payable was calculated as the average accounts payable for the current and prior quarters divided by annualized cost of sales for the respective quarter by day. Days in accounts payable increased by 2 days during the three-month period ended September 30, 2016, compared to the three-month period ended September 25, 2015, primarily due to timing of payments, combined with a lower cost of sales attributable to lower sales in the current period compared to the prior year.
 
Our cash conversion cycle was calculated as the sum of days of inventory and days of account receivables outstanding less days payable outstanding. Our cash conversion cycle increased by 1 day during the three-month period ended September 30, 2016, compared to the three-month period ended September 25, 2015, due to the factors for each of the components in the calculation discussed above.
 
Cash used in investing activities amounted to $412.8 million during the six-month period ended September 30, 2016. This resulted primarily from $279.4 million of net capital expenditures for property and equipment to expand capability and capacity in support of our automotive and medical businesses and further investments in both automation and expanding technologies to support our innovation services. In addition, $189.9 million was paid primarily for the acquisition of three businesses, net of cash acquired, including $171.6 million, net of $17.8 million of cash acquired related to the acquisition of the manufacturing facilities from Bose. Offsets in other investing activities include $33.0 million received for the sale of two non-strategic businesses, and $26.8 million of proceeds from the sale of certain assets that were purchased on behalf of a customer and financed by a third party banking institution.

We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments, fund acquisitions, repurchase company shares and for certain other activities. Our free cash flow is calculated as cash from operations less net purchases of property and equipment. Our free cash flows for the six-month period ended September 30, 2016 was $264.2 million compared to $368.0 million for the six-month period ended September 25, 2015. 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. Free cash flow should not be considered in isolation or as an alternative to net cash provided by operating activities. Free cash flows reconcile to the most directly comparable GAAP financial measure of cash flows from operations as follows:
 

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Six-Month Periods Ended
 
September 30, 2016
 
September 25, 2015
 
(In thousands)
Net cash provided by operating activities
$
543,552

 
$
661,995

Purchases of property and equipment
(305,936
)
 
(296,401
)
Proceeds from the disposition of property and equipment
26,561

 
2,383

Free cash flow
$
264,177

 
$
367,977


Cash used in financing activities was $215.7 million during the six-month period ended September 30, 2016, which was primarily for the repurchase of our ordinary shares in the amount of $184.7 million, and $110.6 million for repayment of bank borrowings and long-term debt. These cash outflows were partially offset by $75.0 million of net proceeds from bank borrowings and long-term debt.
 
Our cash balances are 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 September 30, 2016 approximately half of our cash and cash equivalents was held by foreign subsidiaries outside of Singapore. As of March 31, 2016, over half of our cash and cash equivalents was 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 $916.0 million as of March 31, 2016). Repatriation could result in an additional income tax payment, however, 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, the levels of shipments and changes in the volumes of customer orders, and our targeted business and asset acquisitions.
 
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 sell a designated pool of trade receivables under asset-backed securitization programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements.
 
We anticipate that we will enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and growth. 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 $500 million in accordance with the share purchase mandate approved by our shareholders at the date of the most recent Extraordinary General Meeting which was held on August 24, 2016. During the six-month period ended September 30, 2016, we paid $184.7 million to repurchase shares (under the current and prior repurchase plans) at an average price of $12.69 per share. As of September 30, 2016, shares in the aggregate amount of $450.2 million were available to be repurchased under the current plan.
 

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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, 2016. There have been no material changes in our contractual obligations and commitments since March 31, 2016.

OFF-BALANCE SHEET ARRANGEMENTS
 
We sell designated pools of trade receivables to unaffiliated financial institutions under our ABS programs, and in addition to cash, we receive a deferred purchase price receivable for each pool of the receivables sold. Each of these deferred purchase price receivables serves as additional credit support to the financial institutions and is recorded at its estimated fair value. As of September 30, 2016 and March 31, 2016, the fair values of our deferred purchase price receivable were approximately $461.5 million and $501.1 million, respectively. As of September 30, 2016 and March 31, 2016, the outstanding balances on receivables sold for cash were $1.2 billion, respectively, under all our accounts receivable sales programs, which are not included in our condensed consolidated balance sheets. For further information see note 8 to the condensed consolidated financial statements.

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 six-month period ended September 30, 2016 as compared to the fiscal year ended March 31, 2016.
 
ITEM 4. CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2016, the end of the quarterly fiscal period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016 such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file or submit 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 controls over financial reporting that occurred during our second quarter of fiscal year 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
For a description of our material legal proceedings, see note 11 “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 year ended March 31, 2016, 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.
 

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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 July 2, 2016 through September 30, 2016:
Period
 
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
July 2- August 5, 2016 (2)
 
1,423,900

 
$
12.63

 
1,423,900

 
$
133,131,627

August 6 - September 2, 2016 (2) (3)
 
2,789,900

 
$
12.96

 
2,789,900

 
$
486,005,179

September 3 - September 30, 2016 (3)
 
2,730,209

 
$
13.13

 
2,730,209

 
$
450,156,888

Total
 
6,944,009

 
 

 
6,944,009

 
 

____________________________________________________________

(1)
During the period from July 2, 2016 through September 30, 2016, 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 20, 2015, our Board of Directors authorized the repurchase of our outstanding ordinary shares for up to $500 million.  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 July 1, 2016, we had shares in the aggregate amount of $151.1 million were available to be repurchased under this plan, of which 3.1 million shares in the aggregate amount of $40.1 million were repurchased prior to August 24, 2016 (after which authorization under this plan terminated).

(3)
On August 24, 2016, our Board of Directors authorized the repurchase of our outstanding ordinary shares for up to $500 million.  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 September 30, 2016, shares in the aggregate amount of $450.2 million were available to be repurchased under the current plan.


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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable
 
ITEM 5. OTHER INFORMATION
 
None
 
ITEM 6. EXHIBITS
 
Exhibits See Exhibit Index below.


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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/ Michael M. McNamara
 
 
Michael M. McNamara
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date:
October 28, 2016
 
 
 
/s/ Christopher Collier
 
 
Christopher Collier
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
Date:
October 28, 2016
 

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EXHIBIT INDEX


 
 
 
 
 
 
Incorporated by Reference
 
 
 
Filed
Exhibit No.
 
Exhibit
 
Form
 
File No.
 
Filing Date
 
Exhibit No.
 
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
3.01

 
Constitution of Registrant
 
 
 
 
 
 
 
 
 
X
15.01

 
Letter in lieu of consent of Deloitte & Touche LLP.
 
 
 
 
 
 
 
 
 
X
31.01

 
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
31.02

 
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
32.01

 
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
 
 

* 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.

47