FLEX LTD. - Annual Report: 2018 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
Form 10-K
(Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended March 31, 2018 | ||
Or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number 000-23354
FLEX LTD.
(Exact name of registrant as specified in its charter)
Singapore (State or other jurisdiction of incorporation or organization) | Not Applicable (I.R.S. Employer Identification No.) | |
2 Changi South Lane, Singapore (Address of registrant's principal executive offices) | 486123 (Zip Code) | |
Registrant's telephone number, including area code
(65) 6876-9899
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Ordinary Shares, No Par Value | The Nasdaq Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act—NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Emerging growth company o | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of September 29, 2017, the aggregate market value of the Company's ordinary shares held by non-affiliates of the registrant was approximately $8.8 billion based upon the closing sale price as reported on the Nasdaq Global Select Market.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class | Outstanding at June 8, 2018 | |
Ordinary Shares, No Par Value | 528,282,247 | |
DOCUMENTS INCORPORATED BY REFERENCE
Document | Parts into Which Incorporated | |
Proxy Statement to be delivered to shareholders in connection with the Registrant's 2018 Annual General Meeting of Shareholders | Part III | |
TABLE OF CONTENTS
Page | ||
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PART I
FORWARD-LOOKING STATEMENTS
Unless otherwise specifically stated, references in this report to "Flex," "the Company," "we," "us," "our" and similar terms mean Flex Ltd. and its subsidiaries.
Except for historical information contained herein, certain matters included in this annual report on Form 10-K are, or may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words "will," "may," "designed to," "believe," "should," "anticipate," "plan," "expect," "intend," "estimate" and similar expressions identify forward-looking statements, which speak only as of the date of this annual report. These forward-looking statements are contained principally under Item 1, "Business," and under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include those described in Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances.
ITEM 1. BUSINESS
OVERVIEW
We are a globally-recognized, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. We design, build, ship and service complete packaged consumer and enterprise products, from athletic shoes to electronics, for companies of all sizes in various industries and end-markets, through our activities in the following segments:
• | Communications & Enterprise Compute ("CEC"), which includes our telecom business of radio access base stations, remote radio heads, and small cells for wireless infrastructure; our networking business which includes optical, routing, broadcasting, and switching products for the data and video networks; our 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; |
• | Consumer Technologies Group ("CTG"), which includes our consumer-related businesses in connected living, wearables, gaming, augmented and virtual reality, fashion and apparel, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers; |
• | Industrial and Emerging Industries ("IEI"), which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and |
• | High Reliability Solutions ("HRS"), which is comprised of our health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging equipment; our automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies. |
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker (“CODM”). Our 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 20 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for additional information on our operating segments.
We provide our advanced design, manufacturing and supply chain services through a network of over 100 facilities in approximately 35 countries across four continents. We have established this extensive network of design and manufacturing
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facilities in the world's major consumer and enterprise products markets (Asia, the Americas, and Europe) in order to serve the supply chain needs of both multinational and regional companies. Our services provide our customers with a competitive advantage by delivering improved product quality, increased flexibility, leading-edge manufacturability, improved performance, faster time-to-market, and competitive costs. Our customers leverage our services to meet their requirements throughout their products' entire life cycles. For the fiscal year ended March 31, 2018, we had revenue of $25.4 billion and net income of $429 million.
Over the past several years, we have evolved beyond a traditional Electronics Manufacturing Services ("EMS") company, and now consider Flex to be a provider of a full range of Sketch-to-Scaletm services – beyond electronics manufacturing services – including strategic product development planning and design-phase innovation, supported by teams of talented design engineers. Our innovation strategy is focused on three levels: products, systems, and manufacturing technologies and processes.
We believe that the combination of our extensive innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographies provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing, and servicing consumer and enterprise products for leading multinational and regional companies. Through these services and facilities, we offer our customers accelerated design, increased flexibility and responsiveness, improved time to market, supply chain predictability and real-time visibility, which enable them to accelerate product launches, enter new markets, mitigate risks, and expand globally.
We recognized research and development costs primarily related to our design and innovations businesses of $78 million, $66 million, and $61 million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively.
INDUSTRY OVERVIEW
Our expertise is Sketch-to-Scaletm services: design, manufacture, and supply chain services for a broad range of products, from electronics to athletic shoes. Although Flex has evolved beyond traditional EMS, the majority of our customers are electronics original equipment manufacturers ("OEMs"); as such, the closest broad definition of our industry remains the outsourced EMS industry.
EMS has experienced significant change and growth as an increasing number of companies elect to outsource some or all of their design, manufacturing, and after-market services requirements. In recent years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Companies that have historically identified themselves as software providers, internet service providers, or e-commerce retailers are entering the highly competitive and rapidly evolving hardware markets, with products including mobile devices, home entertainment products, and wearable devices. This trend has resulted in significant changes to the hardware manufacturing and supply chain solutions requirements of such companies. Increasingly complex products require highly customized supply chain solutions, in turn resulting in significant changes to the overall manufacturing and supply chain landscape. The growth of the overall industry for calendar year 2017 is estimated to have been around 5%.
We believe the total available market for the EMS industry is poised for continued growth, with current penetration rates estimated to be about 31%. The intensely competitive nature of the electronics industry, the increasing complexity and sophistication of electronics products, and pressure on OEMs to reduce product costs and shorten product life cycles are all factors that encourage OEMs to utilize supply chain service providers as part of their business and manufacturing strategies. Utilizing global manufacturing and service providers allows OEMs to take advantage of the global design, manufacturing and supply chain management expertise of such providers, and enables OEMs to concentrate on product research, development, marketing, and sales. We believe that OEMs realize a number of important benefits through their strategic relationships with EMS providers, including:
• | Improved efficiency and reduced production costs; |
• | Reduced design and development costs and lead time; |
• | Accelerated time-to-market and time-to-volume production; |
• | Reduced capital investment requirements and fixed costs; |
• | Improved inventory management and purchasing power; |
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• | Access to worldwide design, engineering, manufacturing, and after-market service capabilities; and |
• | Ability to focus on core branding and R&D initiatives. |
We believe that growth in the EMS industry will be largely driven by the need for OEMs to respond to rapidly changing markets and technologies, the increasing complexity of supply chains and the continued pressure to be cost competitive. Additionally, we believe that there are significant opportunities for global EMS providers to win additional business from OEMs in markets or industry segments that have yet to substantially utilize such providers.
SERVICE OFFERINGS
We offer a broad range of customizable services to our customers. We believe that Flex has the broadest worldwide end-to-end supply chain solution capabilities in the industry, from concept design resources to aftermarket services. We believe a key competitive advantage is the Flex Platform, which is our system for improving customer competitiveness by providing superior speed, scope, and scale:
• | Speed: Our sophisticated supply chain management tools and expertise allow us to provide customers with access to real-time information that increases visibility throughout the entire product lifecycle, reducing risk while accelerating execution. |
• | Scope: Our end-to-end services, from Sketch-to-Scaletm, include design and innovation services, engineering, logistics, and supply chain management. Our deep industry knowledge and multi-domain expertise accelerates the entire process of producing increasingly complex products for increasingly interconnected industries. |
• | Scale: Our physical infrastructure includes over 100 facilities in approximately 35 countries, staffed by approximately 200,000 employees, providing our customers with truly global scale and strategic geographic distribution capabilities. |
We offer global economies of scale in procurement, manufacturing and after-market services, as well as market-focused expertise and capabilities in design and engineering. As a result of our extensive experience in specific markets, we have developed deep understanding of complex market dynamics, giving us the ability to anticipate trends that impact our customers' businesses. Our expertise can help improve our customers' market positioning by effectively adjusting product plans and roadmaps to efficiently and cost-effectively deliver high quality products that meet their time-to-market requirements.
Our services include all processes necessary to design, build, ship and service complete packaged consumer electronics and industrial and consumer products for our customers. These services include:
Innovation Services. This area of our business has seen increased investment and focus over the past six years. We provide a comprehensive set of services that enable companies, from startups to multinationals, to successfully innovate, create new products and solutions, and gain access to new markets. These services span the entire product introduction and solution lifecycle by providing access to new technologies, accelerating product development from early concepts to final production-ready design, and providing advanced manufacturing and testing for new product introduction and market access to grow our customers' offerings. We launched the Silicon Valley Open Innovation Initiative to create an ecosystem of customers, suppliers and design tool makers to drive new product innovation technologies that improve productivity, cost and time-to-market. As part of this initiative, we founded the Silicon Valley Open Innovation Summit.
In fiscal year 2018, we continued to expand our Innovation Centers worldwide and further enhanced our flagship Customer Innovation Center in Silicon Valley. Our innovation services include:
• | Innovations Labs. Innovation Labs is a design and engineering organization that specializes in supporting customer design and product development services from early concept stages, with the ability to accommodate highly ambiguous requirements. Customers gain access to our design and engineering facilities, technical subject matter expertise, and rapid prototyping resources such as metal and plastic 3D printers and soft tooling capabilities. |
• | Collective Innovation Platform. The Collective Innovation Platform is an ecosystem of qualified technology solutions that helps customers reduce time-to-market and enhance product functionality by leveraging technology building blocks that have been qualified by Flex as part our technology Centers of Excellence. By joining the Flex Collective Innovation Program, technology providers can capitalize on their investments and gain access to our large, global customer base. Program members include technology suppliers, startups, software/application providers, research labs/institutes and universities. |
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• | Lab IX. A startup accelerator program that invests in the next generation of disruptive technologies, giving startups a competitive advantage by providing them the necessary resources and connections to grow their business. By bringing together startups, OEMs and technology partners, we provide Lab IX portfolio companies with access to our global end-to-end supply chain solutions, our wealth of experience in hardware design, our manufacturing services and logistics across a wide range of markets, and additional benefits from our specialized partners. |
• | Centers of Excellence. Centers of Excellence provide strategic technology capabilities developed by Flex in critical solutions areas which are leveraged across multiple industries, for integration into our customers' products. Centers of Excellence include Human Machine Interface, Wireless and Connectivity, Semiconductors, Sensors and Actuators, Power and Battery Management, Smart Software, Flexible Technology, Computing, and Mechanicals and Plastics. |
• | Interconnect Technology Center. The Interconnect Technology Center provides expertise in both rigid and flexible circuits for next generation printed circuits technology, testing methods, and designs. The Center's state-of-the-art labs are specifically designed for printed circuit innovation, with a focus on embedded components, integration and transfer, wearable and stretchable design, thermal management, system integration and simulation. |
• | CloudLabs. The CloudLabs initiative provides cloud infrastructure companies with engineering and design services to optimize rack-level solutions, especially in the case of multi-vendor equipment integration. CloudLabs enables customers to accelerate a spectrum of cloud, converged infrastructure, and datacenter strategies. |
Design and Engineering Services. We offer a comprehensive range of value-added design and engineering services, tailored to the specific markets and needs of our customers. These services can be delivered by one of two primary business models:
• | Contract Design Services, where customers purchase engineering and development services on a time and materials basis; or |
• | Joint Development Manufacturing Services, where our engineering and development teams work jointly with our customers' teams to ensure product development integrity, seamless manufacturing handoffs, and faster time to market. |
Our design and engineering services are provided by our global market-based engineering teams and cover a broad range of technical competencies:
• | System Architecture, User Interface and Industrial Design. We help our customers design and develop innovative and cost-effective products that address the needs of the user and the market. These services include product definition, analysis and optimization of performance and functional requirements, 2-D sketch level drawings, 3-D mock-ups and proofs of concept, interaction and interface models, detailed hard models, and product packaging. |
• | Mechanical Engineering, Technology, Enclosure Systems, Thermal and Tooling Design. We offer detailed mechanical, structural, and thermal design solutions for enclosures that encompass a wide range of plastic, metal and other material technologies. These capabilities and technologies are increasingly important to our customers' product differentiation goals and are increasingly required to be successful in today's competitive marketplace. Additionally, we provide design and development services for prototype and production tooling equipment used in manufacturing. |
• | Electronic System Design. We provide complete electrical and hardware design for products ranging in size from small handheld consumer devices to large, high-speed, carrier-grade, telecommunications equipment, including embedded microprocessors, memory, digital signal processing design, high-speed digital interfaces, analog circuit design, power management solutions, wired and wireless communication protocols, display imaging, audio/video, and radio frequency systems and antenna design. |
• | Reliability and Failure Analysis. We provide comprehensive design for manufacturing, test, and reliability services leveraging robust, internally-developed tools and databases. These services leverage our core manufacturing competencies to help our customers achieve their time-to-revenue goals. |
• | Component Level Development Engineering. We have developed substantial engineering competencies for product development and lifecycle management of various component technologies, such as power solutions, and printed circuit board and interconnection technologies, both rigid and flexible. |
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We are exposed to different or greater potential liabilities from our various design services than those we face in our core assembly and manufacturing services. See "Risk Factors—The success of certain of our activities depends on our ability to protect our intellectual property rights; intellectual property infringement claims against our customers or us could harm our business."
Systems Assembly and Manufacturing. Our assembly and manufacturing operations, which generate the majority of our revenues, include printed circuit board assembly and assembly of systems and subsystems that incorporate printed circuit boards and complex electromechanical components. We often assemble electronics products with our proprietary printed circuit boards and custom electronic enclosures on either a build-to-order or configure-to-order basis. In these operations, we employ just-in-time, ship-to-stock and ship-to-line programs, continuous flow manufacturing, demand flow processes, and statistical process controls. As our customers seek to provide greater functionality in physically smaller products, they increasingly require more sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and our expertise in innovative miniaturization, packaging and interconnect technologies, enables us to offer a variety of advanced manufacturing solutions. We support a wide range of product demand profiles, from low-volume, high-complexity programs, to high-volume production. Continuous focus on lean manufacturing, and a systematic approach to identifying and eliminating waste (non-value-added activities) through continuous improvement based on customer demand allows us to increase our efficiency and flexibility to meet dynamic customer requirements. Our systems assembly and manufacturing expertise includes the following:
• | Enclosures. We offer a comprehensive set of custom electronics enclosures and related products and services. Our services include the design, manufacture and integration of electronics packaging systems, including custom enclosure systems, power and thermal subsystems, interconnect subsystems, cabling, and cases. In addition to standard sheet metal and plastic fabrication services, we assist in the design of electronics packaging systems that protect sensitive electronics and enhance functionality. Our enclosure design services focus on functionality, manufacturability and testing. These services are integrated with our other assembly and manufacturing services to provide our customers with improved overall supply chain management. |
• | Testing Services. We offer computer-aided testing services for assembled printed circuit boards, systems and subsystems. These services significantly improve our ability to deliver high-quality products on a consistent basis. Our test services include management defect analysis, in-circuit testing and functional testing as well as environmental stress tests of board and system assemblies. We also offer design for test, manufacturing, and environmental services to jointly improve customer product design and manufacturing. |
• | Materials Procurement and Inventory Management. Our manufacturing and assembly operations capitalize on our materials inventory management expertise and volume procurement capabilities. As a result, we believe that we are able to achieve highly competitive cost reductions and reduce total manufacturing cycle time for our OEM customers. Materials procurement and management consist of the planning, purchasing, expediting, and warehousing of components and materials used in the manufacturing process. In addition, our strategy includes having third-party suppliers of custom components located in our industrial parks to reduce material and transportation costs, simplify logistics and facilitate inventory management. We also use a sophisticated automated manufacturing resource planning system and enhanced electronic data interchange capabilities to ensure inventory control and optimization. Through our manufacturing resources planning system, we have real-time visibility of material availability and are able to track work in process. We utilize electronic data interchange with our customers and suppliers to implement a variety of supply chain management programs. Electronic data interchange allows customers to share demand and product forecasts, deliver purchase orders and assists suppliers with satisfying just-in-time delivery and supplier-managed inventory requirements. This also enables us to implement vendor-managed inventory solutions to increase flexibility and reduce overall capital allocation in the supply chain. We procure a wide assortment of materials, including electronic components, plastics and metals. There are a number of sources for these materials, including customers for whom we are providing systems assembly and manufacturing services. On some occasions, there have been shortages in certain electronic components, most recently with regard to connectors, capacitors, LCD panels and memory (both DRAM and Flash). However, such shortages have not had a material impact on our operating results for any periods presented. See "Risk Factors—We may be adversely affected by shortages of required electronic components." |
Component businesses. We offer the following components product solutions:
• | Rigid and Flexible Printed Circuit Board ("PCB") Fabrication. Printed circuit boards are composed of laminated materials that provide the interconnection for integrated circuits, passive and other electronic components and thus are at the heart of almost every electrical system. They are formed out of multi-layered epoxy resin and glass cloth systems with very fine traces, spaces, and plated holes (called vias) which interconnect the different layers into an extremely dense circuit network that carries the electrical signals between components. As semiconductor designs |
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become more complex and signal speeds increase, there is an increasing demand for higher density integration on printed circuit boards, requiring higher layer counts, finer lines and spacings, smaller vias (microvias) and base materials with very low electrical loss characteristics. The manufacturing of these complex multilayer interconnect products often requires the use of sophisticated circuit interconnections between layers, and adherence to strict electrical characteristics to maintain consistent transmission speeds and impedances. The global demand for wireless devices and the complexity of wireless products are driving the demand for more flexible printed circuits. Flexible circuit boards facilitate a reduction in the weight of a finished electronic product and allow the designer to use the third dimension in designing new products or product features. Flexible circuits have become a very attractive design alternative for many new and emerging application spaces such as automotive rear light-emitting diode ("LED") lighting, tablet computers, and miniaturized radio frequency identification tags or smart cards. We are an industry leader in high-density interconnect with Every Layer Inter Connect ("ELIC") technology, which is widely used in smart phone designs, and multilayer constructions which are used in advanced routers and switches, telecom equipment, servers, storage, and flexible printed circuit boards and flexible printed circuit board assemblies. Our PCB business (Multek) manufactures printed circuit boards on a low-volume, quick-turn basis, as well as on a high-volume production basis. We provide quick-turn prototype services that allow us to provide small test quantities to meet the needs of customers' product development groups in as quickly as 48 hours. Our extensive range of services enables us to respond to our customers' demands for an accelerated transition from prototype to volume production. Multek offers a one-stop solution from design to manufacturing of PCB, flexible circuits and rigid flex circuits and sub-assemblies. We have printed circuit board and flexible circuit fabrication service capabilities in North America and Asia. Our PCB capabilities are centered in Asia and North America. In March 2018, the Company entered into an agreement with a certain Chinese manufacturing company, to divest its China-based Multek operations. The transaction is expected to close in the second quarter of fiscal year 2019, subject to customary closing conditions, including regulatory approvals. For additional information refer to note 18 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data".
• | Power Supplies. We have a full-service power supply business ("Flex Power") that is a key player in the mobile revolution, with expertise in high efficiency and high density switching power supplies ranging from 1 to 3,000 watts. Our product portfolio includes chargers for smartphones and tablets, adapters for notebooks and gaming, and power supplies for server, storage, and networking markets. We pride ourselves on our ability to service the needs of industry leaders in these markets through valuable technology, design expertise, collaborative development, and efficient execution. Our products are fully compliant with the environmental and Energy Star requirements that drive efficiency specifications in our industry. Customers who engage with Flex Power gain access to compelling innovations and intellectual property in digital control and smart power. |
Logistics. Our Flex Global Services business is a provider of after-market and forward supply chain logistics services. Our comprehensive suite of services is tailored to customers operating in the computing, consumer digital, infrastructure, industrial, mobile and medical markets. Our expansive global infrastructure includes 27 sites and approximately 11,000 employees strategically located throughout the Americas, Europe, and Asia. By leveraging our operational infrastructure, supply chain network, and IT systems, we are able to offer our customers globally consistent logistics solutions. By linking the flow of information from these supply chains, we create supply chain insight for our customers. We provide multiple logistics solutions including supplier-managed inventory, inbound freight management, product postponement, build/configure to order, order fulfillment and distribution, and supply chain network design.
Reverse Logistics and Repair Services. We offer a suite of integrated reverse logistics and repair solutions that use globally consistent processes, which help increase our customers' brand loyalty by improving turnaround times and raising end-customer satisfaction levels. Our objective is to maximize asset value retention for our customers' products throughout their product life cycle while simultaneously minimizing non-value added repair inventory levels and handling in the supply chain. With our suite of end-to-end solutions, we can effectively manage our customers' reverse logistics requirements, while providing critical feedback to their supply chain constituents, delivering continuous improvement and efficiencies for both existing and next generation products. Our reverse logistics and repair solutions include returns management, exchange programs, complex repair, asset recovery, recycling and e-waste management. We provide repair expertise to multiple product lines such as consumer and midrange products, printers, smart phones, consumer medical devices, notebook personal computers, set-top boxes, game consoles and highly complex infrastructure products. With our service parts logistics business, we manage all of the logistics and restocking processes essential to the efficient operation of repair and refurbishment services.
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STRATEGY
We build intelligent products for a connected world. We do this by providing our customers with end-to-end product development services, from innovation, design, and engineering, to manufacturing, logistics, and supply chain solutions. We strive to help create a smarter, more connected world, enabling simpler, richer lives through technology. Our strategy is to enable and scale innovation for our customers, maintain our leadership in our core capabilities, and build extended offerings in high-growth sectors.
Talent. To maintain our competitiveness and world-class capabilities, we focus on hiring and retaining the world's best talent. We empower talented employees to develop global supply chain solutions that transform industries and companies. We have taken steps to attract the best functional and operational leaders and have accelerated efforts to develop the future leaders of the company.
Customer-Focus. We believe that serving aspiring leaders in dynamic industries fosters the development of our core skills and results in superior growth and profitability. Our customers come first, and we have a relentless focus on delivering distinctive products and services in a cost-effective manner with fast time-to-market.
Market Focus. We apply a rigorous approach to managing our portfolio of opportunities by focusing on companies that are leaders in their industry and value our superior capabilities in design, manufacturing, supply chain and aftermarket services. We focus our energy and efforts on high-growth markets where we have distinctive competence and compelling value propositions. Examples include our investments in energy, healthcare, automotive, industrial markets, and a number of enabling components technologies. Our market-focused approach to managing our business increases our customers' competitiveness by leveraging our deep industry expertise, as well as global scale and sensitivity and rapid response to changes in market dynamics.
Global Operations Capabilities. We continue to invest in maintaining the leadership of our world-class manufacturing and services capabilities. We constantly push the state of the art in manufacturing technology, process development and operations management. We believe these skills, IP, and assets contribute to our significant competitive advantage. We continue to capitalize on our industrial park concept, where we co-locate our manufacturing, design, and service resources in low-cost regions, to provide a competitive advantage by minimizing logistics, manufacturing costs, and cycle times while increasing flexibility and responsiveness. Our ability to cost effectively manage such a massive worldwide system is itself a major competitive advantage.
Extended Value Propositions. We continue to extend our distinctiveness in manufacturing into new value propositions that leverage our core capabilities. We opportunistically invest in new capabilities and services to provide our customers with a broader value-added suite of services and solutions to meet their product and market requirements. We continue to develop manufacturing process technologies that reduce cost and improve product performance.
COMPETITIVE STRENGTHS
We continue to enhance our business through the development and expansion of our product and service offerings. We strive to maintain the efficiency and flexibility of our organization, with repeatable execution that adapts to macro-economic changes providing clear value to our customers, while increasing their competitiveness. We have a focused strategy on delivering scale, scope and speed to our customers through world-class operations, innovation and design services, supply chain solutions, and industry and market expertise. We provide real-time supply chain applications that enable improved supply chain visibility, allowing customers to better monitor and mitigate risks. We believe the following capabilities further differentiate us from our competitors and enable us to better serve our customers' requirements:
Significant Scale and Global Integrated System. We believe that scale is a significant competitive advantage, as our customers' solutions increasingly require cost structures and capabilities that can only be achieved through size and global reach. We are a leader in global procurement, purchasing approximately $25.0 billion of materials during our fiscal year ended March 31, 2018. As a result, we are able to use our worldwide supplier relationships to achieve advantageous pricing and supply chain flexibility for our customers.
We have established an extensive, integrated network of design, manufacturing and logistics facilities in the world's major consumer electronics and industrial markets to serve the outsourcing needs of both multinational and regional companies. Our extensive global network of over 100 facilities in approximately 35 countries with approximately 200,000 employees, helps increase our customers' competitiveness by simplifying their global product development processes while delivering improved product quality with improved performance and accelerated time to market.
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End-to-End Solutions. We offer a comprehensive range of worldwide supply chain services that simplify and improve global product development processes, providing meaningful time and cost savings to our customers. Our broad-based, end-to-end services enable us to cost effectively design, build, ship and service a complete packaged product. We believe that our capabilities help our customers improve product quality, manufacturability and performance, while reducing costs. We have expanded and enhanced our service offering by adding capabilities in 3D printing, automation, innovation labs, real-time supply chain software, plastics, machining, and mobile charging, and by introducing new capabilities in areas such as solar equipment, large format stamping, and chargers.
Long-Standing Customer Relationships. We believe that maintaining our long-term relationships with key customers is a critical requirement for maintaining our market position, growth and profitability. We believe that our ability to maintain and grow these customer relationships results from our history and reputation of creating value for our customers while increasing their own competitiveness. We achieve this through our market-focused approach, our broad range of service offerings and solutions, and our deep industry expertise, which allow us to provide innovative solutions to all of the manufacturing and related service needs of our customers. We continue to receive numerous service and quality awards that further validate the strength of our customer relationships.
Extensive Design and Engineering Capabilities. We have an industry-leading global design service offering, with extensive product design engineering resources, that provides design services, product developments, and solutions to satisfy a wide array of customer requirements across all of our key markets. We combine our design and manufacturing services to provide Sketch-to-Scaletm customized solutions that include services from design concept, through product industrialization and product development, including the manufacture of components and complete products (such as smart phones), which are then sold by our customers under their brand names.
Geographic, Customer and End Market Diversification. We believe we have created a well-diversified and balanced company. Our business spans multiple end markets, significantly expanding our total available market. The world is experiencing rapid changes, and macro-economic disruptions have led to demand shifts and realignments. We believe that we are well-positioned through our market diversification to grow faster than the industry average and successfully navigate through difficult economic times. Our broad geographic footprint and experiences with multiple product types and complexity levels create a significant competitive advantage. We continually look for new ways to diversify our offering within each market segment.
Customer and Product Innovation Centers. We have established state-of-the art innovation centers in the Americas, Asia and Europe, with differentiated offerings and specialized services and focus. Some of these offerings include the most advanced 3D plastic printing, 3D metal printing, surface mount technology (SMT), and X-ray and test equipment to support major industries in bringing innovative products to market rapidly. We also have a reliability and failure analysis lab and an automation applications team. Another key feature is our focus on confidentiality and security as we offer dedicated customer-confidential work spaces that provide increased security and restricted access to protect our customers' intellectual property ("IP") and the confidentiality of new products being launched into the marketplace. These innovation centers offer our customers a geographically-focused version of our Sketch-to-Scaletm services, taking their product from concept to volume production and go-to-market in a rapid, cost effective and low risk manner.
Industrial Parks; Low-Cost Manufacturing Services. We have developed self-contained campuses that co-locate our manufacturing and logistics operations with our suppliers in various, low-cost locations. These industrial parks enhance our supply chain management efficiency, while providing a low-cost, multi-technology solution for our customers. This approach increases the competitiveness of our customers by reducing logistical barriers and costs, improving communications, increasing flexibility, lowering transportation costs and reducing turnaround times. We have strategically established our industrial parks in Brazil, China, India, Malaysia, Mexico and Poland.
We have selected manufacturing operations situated in low-cost regions of the world to provide our customers with a wide array of manufacturing solutions and low manufacturing costs. As of March 31, 2018, approximately 80% of our manufacturing capacity was located in low-cost locations, such as Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Romania, and the Ukraine. We believe we are a global industry leader in low-cost production capabilities.
CUSTOMERS
Our customers include many of the world's leading technology companies. We have focused on establishing long-term relationships with our customers and have been successful in expanding our relationships to incorporate additional product lines and services.
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As our business spans multiple end markets, we believe that we are well-positioned through our market diversification to grow faster than the industry average and successfully navigate through difficult economic times. As an example, we serve the following key customers across our diverse business groups: health solutions customers Abbott and Johnson & Johnson and auto customers Ford and Nexteer in our HRS segment; Teradyne, Applied Materials and Xerox in our IEI segment; Cisco, Nokia Solutions and Huawei in our CEC segment; and Lenovo/Motorola, Nike and Bose in our CTG segment. We continually look for new ways to diversify our offering within each market segment.
In fiscal year 2018, our ten largest customers accounted for approximately 41% of net sales. No customer accounted for greater than 10% of the Company's net sales in fiscal year 2018.
BACKLOG
Although we obtain firm purchase orders from our customers, OEM customers typically do not place firm orders for delivery of products more than 30 to 90 days in advance. In addition, OEM customers may reschedule or cancel firm orders depending on contractual arrangements. Therefore, we do not believe that the backlog of expected product sales covered by firm purchase orders is a meaningful measure of future sales.
COMPETITION
Our market is extremely competitive and includes many companies, several of which have achieved substantial market share. We compete against numerous domestic and foreign manufacturing service providers, as well as our current and prospective customers, who evaluate our capabilities in light of their own capabilities and cost structures. We face particular competition from Asian-based competitors, including Taiwanese Original Design Manufacturing ("ODM") suppliers who compete in a variety of our end markets and have a substantial share of global information technology hardware production.
We compete with different companies depending on the type of service we are providing or the geographic area in which an activity takes place. We believe that the principal competitive factors in the manufacturing services market are: quality and range of services; design and technological capabilities; cost; location of facilities; and responsiveness and flexibility. We believe we are extremely competitive with regard to all of these factors.
SOCIAL AND ENVIRONMENTAL RESPONSIBILITY
Our Corporate Social and Environmental Responsibility ("CSER") management system has several elements, including environmental, health and safety compliance, labor and human rights, ethics, governance, and community engagement. Flex's CSER framework is based upon the principles, policies, and standards prescribed by the Responsible Business Alliance (RBA), a worldwide association of electronics companies committed to promoting an industry code of conduct for global electronics supply chains to improve working and environmental, health and safety conditions, as well as other relevant international standards (e.g., ISO 14001, United Nations Guiding Principles on Business and Human Rights). Flex is a founding member of the RBA. Social responsibility is also an area of increasing regulation, with specific regulations such as the California Transparency in Supply Chains Act, the U.S. Federal Acquisition Regulation on Human Trafficking and the U.K. Modern Slavery Act of 2015, all creating new compliance and disclosure obligations for the Company and for our customers. We operate a number of programs, including compliance audits, data collection, training and leadership programs that focus upon driving continuous improvement in social, ethical, and environmental performance throughout all of our global operating units, all in accordance with our Code of Business Conduct and Ethics. We also go beyond compliance by offering a wide range of programs and initiatives to engage both our internal and external stakeholders. At the heart of this endeavor lies our pragmatic goal of positively influencing the lives of people in the communities in which we operate. We intend to continue investing in these global communities through grant-making, financial contributions, volunteer work, direct engagement and donation of resources. All of these activities are the subject of our annual sustainability reporting, done in accordance with the Global Reporting Initiative’s (GRI) standards and as updated semi-annually on the Flex website.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Section 1502, introduced reporting requirements related to the verification of whether we are directly (or indirectly through suppliers of materials) purchasing the following minerals ("Conflict Minerals"): columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassiterite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives, which are limited to tantalum, tin and tungsten; or any other mineral or its derivatives as determined by the Secretary of State associated with financing conflicts in the Democratic Republic of the Congo or an adjoining country. We work directly with suppliers, industry groups, and customers to comply with the reporting
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requirements necessary to comply with this law. See "Risk Factors—Compliance with government regulations regarding the use of 'conflict minerals' may result in increased costs and risks to us." We have filed the required reports on Form SD with the Securities and Exchange Commission (SEC) in accordance with the Dodd-Frank Act. In addition, Flex is a participant in the RBA’s Responsible Minerals Initiative, which is evaluating the supply chain risks of Conflict Minerals and other minerals (e.g., cobalt) and studying how to mitigate those risks.
ENVIRONMENTAL REGULATION
Our operations are regulated under various federal, state, local and international laws governing the environment, including laws governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We have implemented processes and procedures to ensure that our operations are in compliance with all applicable environmental regulations. We do not believe that costs of compliance with these laws and regulations will have a material adverse effect on our capital expenditures, operating results, or competitive position. In addition, we are responsible for cleanup of contamination at some of our current and former manufacturing facilities and at some third-party sites. We engage environmental consulting firms to assist us in the evaluation of environmental liabilities associated with our ongoing operations, historical disposal activities and closed sites in order to establish appropriate accruals in our financial statements. We determine the amount of our accruals for environmental matters by analyzing and estimating the probability of occurrence and the reasonable possibility of incurring costs in light of information currently available. The imposition of more stringent standards or requirements under environmental laws or regulations, the results of future testing and analysis undertaken by us at our operating facilities, or a determination that we are potentially responsible for the release of hazardous substances at other sites could result in expenditures in excess of amounts currently estimated to be required for such matters. Additionally, we could be required to alter our operations in order to comply with any new standards or requirements under environmental laws or regulations. There can be no assurance that additional environmental matters will not arise in the future or that costs will not be incurred with respect to sites as to which no issue is currently known.
We are also required to comply with an increasing number of product environmental compliance regulations focused upon the restriction of certain hazardous substances. For example, the electronics industry is subject to the European Union's ("EU") Restrictions on Hazardous Substances ("RoHS") 2011/65/EU, Waste Electrical and Electronic Equipment ("WEEE") 2012/19/EU directives, the regulation EC 1907/2006 EU Directive REACH ("Registration, Evaluation, Authorization, and Restriction of Chemicals"), and China RoHS entitled, Management Methods for Controlling Pollution for Electronic Information Products ("EIPs"). Similar legislation has been or may be enacted in other jurisdictions, including the United States. Our business requires close collaboration with our customers and suppliers to mitigate risks of non-compliance. We have developed rigorous compliance programs designed to meet the needs and specifications of our customers as well as the regulations. These programs vary from collecting compliance or material data from our Flex controlled or managed suppliers to full laboratory testing, and we include compliance requirements in our standard supplier contracts. Non-compliance could potentially result in significant costs and/or penalties. RoHS and other similar legislation bans or restricts the use of lead, mercury and certain other specified substances in electronics products and WEEE requires EU importers and/or producers to assume responsibility for the collection, recycling and management of waste electronic products and components. In the case of WEEE, although the compliance responsibility rests primarily with the EU importers and/or producers rather than with EMS companies, OEMs may turn to EMS companies for assistance in meeting their WEEE obligations. Flex continues to monitor developments related to product environmental compliance and is working with our customers and other technical organizations to anticipate and minimize any impacts to our operations.
EMPLOYEES
As of March 31, 2018, our global workforce totaled approximately 200,000 employees including our flexible (temporary) workforce. In certain international locations, our employees are represented by labor unions and by work councils. We have never experienced a significant work stoppage or strike, and we believe that our employee relations are good.
Our success depends to a large extent upon the continued services of key managerial and technical employees. The loss of such personnel could seriously harm our business, results of operations and business prospects. To date, we have not experienced significant difficulties in attracting or retaining such personnel.
INTELLECTUAL PROPERTY
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We own or license various United States and foreign patents relating to a variety of technologies. For certain of our proprietary processes, inventions, and works of authorship, we rely on trade secret or copyright protection. We also maintain trademark rights (including registrations) for our corporate name and several other trademarks and service marks that we use in our business in the United States and other countries throughout the world. We have implemented appropriate policies and procedures (including both technological means and training programs for our employees) to identify and protect out intellectual property, as well as that of our customers and suppliers. As of March 31, 2018 and 2017, the carrying value of our intellectual property was not material.
Although we believe that our intellectual property assets and licenses are sufficient for the operation of our business as we currently conduct it, from time to time third parties do assert patent infringement claims against us or our customers. In addition, we provide design and engineering services to our customers and also design and make our own products. As a consequence of these activities, our customers are requiring us to take responsibility for intellectual property to a greater extent than in our manufacturing and assembly businesses. If and when third parties make assertions regarding the ownership or right to use intellectual property, we could be required to either enter into licensing arrangements or to resolve the issue through litigation. Such license rights might not be available to us on commercially acceptable terms, if at all, and any such litigation might not be resolved in our favor. Additionally, litigation could be lengthy and costly and could materially harm our financial condition regardless of the outcome. We also could be required to incur substantial costs to redesign a product or re-perform design services.
From time to time, we enter into intellectual property licenses (e.g., patent licenses and software licenses) with third parties which obligate us to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable our use of third party technologies. We may also decline to enter into licenses for intellectual property that we do not think is useful for or used in our operations, or for which our customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of our business and the location of our business around the world, certain activities we perform, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. Our licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g. base price) for any royalty amounts owed are audited by licensors and may be challenged. Some of these disagreements may lead to claims and litigation that might not be resolved in our favor. Additionally, litigation could be lengthy and costly and could materially harm our financial condition regardless of the outcome.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
Refer to note 20 to our consolidated financial statements included under Item 8 for financial information about our business segments and geographic areas.
ADDITIONAL INFORMATION
Our Internet address is https://www.flex.com. We make available through our Internet website the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We were incorporated in the Republic of Singapore in May 1990. Our principal corporate office is located at 2 Changi South Lane, Singapore 486123. Our U.S. corporate headquarters is located at 6201 America Center Drive, San Jose, CA 95002.
ITEM 1A. RISK FACTORS
We depend on industries that continually produce technologically advanced products with short product life cycles and our business would be adversely affected if our customers' products are not successful or if our customers lose market share.
We derive our revenues from customers in the following business groups:
• | CEC, which includes our telecom business of radio access base stations, remote radio heads, and small cells for wireless infrastructure; our networking business which includes optical, routing, broadcasting, and switching products for the data and video networks; our server and storage platforms for both enterprise and cloud-based deployments; |
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next generation storage and security appliance products; and rack level solutions, converged infrastructure and software-defined product solutions;
• | CTG, which includes our consumer-related businesses in connected living, wearables, gaming, augmented and virtual reality, fashion and apparel, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers; |
• | IEI, which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and |
• | HRS, which is comprised of our health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging equipment; our automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies. |
Factors affecting any of these industries in general or our customers in particular, could adversely impact us. These factors include:
• | rapid changes in technology, evolving industry standards, and requirements for continuous improvement in products and services that result in short product life cycles; |
• | demand for our customers' products may be seasonal; |
• | our customers may fail to successfully market their products, and our customers' products may fail to gain widespread commercial acceptance; |
• | our customers' products may have supply chain issues; |
• | our customers may experience dramatic market share shifts in demand which may cause them to lose market share or exit businesses; and |
• | there may be recessionary periods in our customers' markets. |
Our customers may cancel their orders, change production quantities or locations, or delay production, and our current and potential customers may decide to manufacture some or all of their products internally, which could harm our business.
Cancellations, reductions, or delays by a significant customer or by a group of customers have harmed, and may in the future harm, our results of operations by reducing the volumes of products we manufacture and deliver for these customers, by causing a delay in the repayment of our expenditures for inventory in preparation for customer orders, and by lowering our asset utilization resulting in lower gross margins. Additionally, current and prospective customers continuously evaluate our capabilities against other providers as well as against the merits of manufacturing products themselves. Our business would be adversely affected if customers decide to perform these functions internally or transfer their business to another provider. In addition, we face competition from the manufacturing operations of some of our current and potential customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing. In the past, some of our customers moved a portion of their manufacturing from us in order to more fully utilize their excess internal manufacturing capacity. Any of these developments could cause a decline in our sales, loss of market acceptance of our products or services, decreases of our profits or loss of our market share.
As a provider of design and manufacturing services and components for electronics, we must provide increasingly rapid product turnaround time for our customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we often experience reduced lead times in customer orders which may be less than the lead time we require to procure necessary components and materials.
The short-term nature of our customers' commitments and the rapid changes in demand for their products reduces our ability to accurately estimate the future requirements of our customers. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity. In that regard, we must make significant decisions, including determining the levels of business that we will seek and accept, setting production schedules, making component procurement commitments, and allocating personnel and other resources based on our estimates of our customers' requirements.
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On occasion, customers require rapid increases in production or require that manufacturing of their products be transitioned from one facility to another to reduce costs or achieve other objectives. These demands stress our resources, can cause supply chain management issues, and reduce our margins. We may not have sufficient capacity at any given time to meet our customers' demands, and transfers from one facility to another can result in inefficiencies and costs due to excess capacity in one facility and corresponding capacity constraints at another. Many of our costs and operating expenses are relatively fixed, thus customer order fluctuations, deferrals, and transfers of demand from one facility to another, as described above, have had a material adverse effect on our operating results in the past and we may experience such effects in the future.
Our industry is extremely competitive; if we are not able to continue to provide competitive services, we may lose business.
We compete with a number of different companies, depending on the type of service we provide or the location of our operations. For example, we compete with major global EMS providers, other smaller EMS companies that have a regional or product-specific focus and ODMs with respect to some of the services that we provide. We also compete with our current and prospective customers, who evaluate our capabilities in light of their own capabilities and cost structures. Our industry is extremely competitive, many of our competitors have achieved substantial market share, and some may have lower cost structures or greater design, manufacturing, financial or other resources than we do. We face particular competition from Asian-based competitors, including Taiwanese ODM suppliers who compete in a variety of our end markets and have a substantial share of global information technology hardware production. If we are unable to provide comparable manufacturing services and improved products at lower cost than the other companies in our market, our net sales could decline.
A significant percentage of our sales come from a small number of customers and a decline in sales to any of these customers could adversely affect our business.
Sales to our ten largest customers represent a significant percentage of our net sales. Our ten largest customers accounted for approximately 41%, 43% and 46% of net sales in fiscal years 2018, 2017 and 2016, respectively. No customer accounted for more than 10% of net sales in fiscal year 2018 and 2017. Only Lenovo/Motorola, which is reflected in our CTG segment, accounted for more than 10% of net sales in fiscal year 2016. Our principal customers have varied from year to year. These customers may experience dramatic declines in their market shares or competitive position, due to economic or other forces, that may cause them to reduce their purchases from us or, in some cases, result in the termination of their relationship with us. Significant reductions in sales to any of these customers, or the loss of major customers, would materially harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues and profitability could be harmed. Additionally, mergers, acquisitions, consolidations or other significant transactions involving our key customers generally entail risks to our business. If a significant transaction involving any of our key customers results in the loss of or reduction in purchases by the largest customers, it could have a materially adverse effect on our business, results of operations, financial condition and prospects.
Our components business is dependent on our ability to quickly launch world-class components products, and our investment in the development of our component capabilities, together with the start-up and integration costs necessary to achieve quick launches of world-class components products, may adversely affect our margins and profitability.
Our components business, which includes rigid and flexible printed circuit board fabrication, and power supply manufacturing, is part of our strategy to improve our competitive position and to grow our future margins, profitability and shareholder returns by expanding our capabilities. The success of our components business is dependent on our ability to design and introduce world- class components that have performance characteristics which are suitable for a broad market and that offer significant price and/or performance advantages over competitive products.
To create these world class components offerings, we must continue to make substantial investments in the development of our components capabilities, in resources such as research and development, technology licensing, test and tooling equipment, facility expansions and personnel requirements. We may not be able to achieve or maintain market acceptance for any of our components offerings in any of our current or target markets. The success of our components business will also depend upon the level of market acceptance of our customers' end products, which incorporate our components, and over which we have no control.
In addition, customers often require unique configurations or custom designs, which must be developed and integrated in the customer's product well before the customer launches the product. Thus, there is often substantial lead-time between the commencement of design efforts for a customized component and the commencement of volume shipments of the component to the customer. As a result, we may make substantial investments in the development and customization of products for our customers, and no revenue may be generated from these efforts if our customers do not accept the customized component. Even if our customers accept the customized component, if our customers do not purchase anticipated levels of products, we may not realize any profits.
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Our achievement of anticipated levels of profitability in our components business is also dependent on our ability to achieve efficiencies in our manufacturing as well as to manufacture components in commercial quantities to the performance specifications demanded by our customers. As a result of these and other risks, we have been, and in the future may be, unable to achieve anticipated levels of profitability in our components business.
Our exposure to financially troubled customers or suppliers may adversely affect our financial results.
We provide manufacturing services to companies and industries that have in the past, and may in the future, experience financial difficulty. If some of our customers experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers, or demand for our products from these customers could decline. Additionally, if our suppliers experience financial difficulty we could have difficulty sourcing supplies necessary to fulfill production requirements and meet scheduled shipments. If one or more of our customers were to become insolvent or otherwise were unable to pay for the services provided by us on a timely basis, or at all, our operating results and financial condition could be adversely affected. Such adverse effects could include one or more of the following: an increase in our provision for doubtful accounts, a charge for inventory write-offs, a reduction in revenue, and an increase in our working capital requirements due to higher inventory levels and increases in days our accounts receivable are outstanding. On April 21, 2016, SunEdison, Inc. and certain of its subsidiaries (“SunEdison”) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. For the fiscal year ended March 31, 2016, we recognized a bad debt reserve charge of $61.0 million associated with our outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90 million. During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. We determined that certain solar panel inventory previously designated for SunEdison on hand at the end of the second quarter of fiscal year 2017 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market during fiscal year 2017. In addition, we recognized a $16.0 million impairment charge for solar module equipment and incurred $16.9 million of incremental costs primarily related to negative margin sales and other associated solar panel direct costs. The estimates underlying our recorded provisions, as well as consideration of other potential customer bankruptcy-related contingencies associated with the SunEdison bankruptcy proceedings, are based on the facts currently known to us; no preference claims have been asserted against the Company. SunEdison stated in schedules filed with the Bankruptcy Court that, within the 90 days preceding SunEdison's bankruptcy filing, the Company received approximately $98.6 million of inventory and cash transfers of $69.2 million, which in aggregate represents the Company's estimate of the maximum reasonably possible contingent loss. On April 15, 2018, a subsidiary of the Company together with its subsidiaries and affiliates, entered into a tolling agreement with the trustee of the SunEdison Litigation Trust to toll any applicable statute of limitations or other time-related defense that might exist in regards to any potential claims that either party might be able to assert against the other for a period that will end at the earlier to occur of: (a) 60 days after a party provides written notice of termination; (b) six years from the effective date of April 15, 2018; or (c) such other date as the parties may agree in writing. We believe that we continue to have a number of affirmative and direct defenses to any potential claims for recovery and intend to vigorously defend any such claim, if asserted. An unfavorable resolution of this matter could be material to our results of operations, financial condition, or cash flows.
We may be adversely affected by shortages of required electronic components.
From time to time, we have experienced shortages of some of the electronic components that we use. These shortages can result from strong demand for those components or from problems experienced by suppliers, such as shortages of raw materials. These unanticipated component shortages could result in curtailed production or delays in production, which may prevent us from making scheduled shipments to customers. Our inability to make scheduled shipments could cause us to experience a reduction in sales, increase in inventory levels and costs, and could adversely affect relationships with existing and prospective customers. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. As a result, component shortages could adversely affect our operating results. Our performance depends, in part, on our ability to incorporate changes in component costs into the selling prices for our products.
Our supply chain may also be impacted by other events outside our control, including macro-economic events, political crises or natural or environmental occurrences.
Our margins and profitability may be adversely affected due to substantial investments, start-up and production ramp costs in our design services.
As part of our strategy to enhance our end-to-end service offerings, we continue to expand our design and engineering capabilities. Providing these services can expose us to different or greater potential risks than those we face when providing our manufacturing services.
Although we enter into contracts with our design services customers, we may design and develop products for these customers prior to receiving a purchase order or other firm commitment from them. We are required to make substantial
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investments in the resources necessary to design and develop these products, and no revenue may be generated from these efforts if our customers do not approve the designs in a timely manner or at all. In addition, we may make investments in designing products and not be able to design viable manufacturable products, in which cases we may not be able to recover our investments. Even if we are successful in designing manufacturable products and our customers accept our designs, if our customers do not then purchase anticipated levels of products, we may not realize any profits. Our design activities often require that we purchase inventory for initial production runs before we have a purchase commitment from a customer. Even after we have a contract with a customer with respect to a product, these contracts may allow the customer to delay or cancel deliveries and may not obligate the customer to any particular volume of purchases. These contracts can generally be terminated on short notice. In addition, some of the products we design and develop must satisfy safety and regulatory standards and some must receive government certifications. If we fail to obtain these approvals or certifications on a timely basis, we would be unable to sell these products, which would harm our sales, profitability and reputation.
Our design services offerings require significant investments in research and development, technology licensing, test and tooling equipment, patent applications, facility building and expansion and recruitment. We may not be able to achieve a high enough level of sales for this business to be profitable. The initial costs of investing in the resources necessary to expand our design and engineering capabilities, and in particular to support our design services offerings, have historically adversely affected our profitability, and may continue to do so as we continue to make investments to grow these capabilities.
In addition, we agree to certain product price limitations and cost reduction targets in connection with these services. Inflationary and other increases in the costs of the raw materials and labor required to produce the products have occurred and may recur from time to time. Also, the production ramps for these programs are typically significant and negatively impact our margin in early stages as the manufacturing volumes are lower and result in inefficiencies and unabsorbed manufacturing overhead costs. We may not be able to reduce costs, incorporate changes in costs into the selling prices of our products, or increase operating efficiencies as we ramp production of our products, which would adversely affect our margins and our results of operations.
We conduct operations in a number of countries and are subject to the risks inherent in international operations.
The geographic distances between the Americas, Asia and Europe create a number of logistical and communications challenges for us. These challenges include managing operations across multiple time zones, directing the manufacture and delivery of products across distances, coordinating procurement of components and raw materials and their delivery to multiple locations, and coordinating the activities and decisions of the core management team, which is based in a number of different countries.
Facilities in several different locations may be involved at different stages of the production process of a single product, leading to additional logistical difficulties.
Because our manufacturing operations are located in a number of countries throughout the Americas, Asia and Europe, we are subject to risks of changes in economic and political conditions in those countries, including:
• | fluctuations in the value of local currencies; |
• | labor unrest, difficulties in staffing and geographic labor shortages; |
• | longer payment cycles; |
• | cultural differences; |
• | increases in duties, tariffs, and taxation levied on our products including anti-dumping and countervailing duties; |
• | trade restrcitions and/or potential trade wars; |
• | increased scrutiny by the media and other third parties of labor practices within our industry (including but not limited to working conditions) which may result in allegations of violations, more stringent and burdensome labor laws and regulations and inconsistency in the enforcement and interpretation of such laws and regulations, higher labor costs, and/or loss of revenues if our customers become dissatisfied with our labor practices and diminish or terminate their relationship with us; |
• | imposition of restrictions on currency conversion or the transfer of funds; |
• | limitations on imports or exports of components or assembled products, or other trade sanctions; |
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• | expropriation of private enterprises; |
• | ineffective legal protection of our intellectual property rights in certain countries; |
• | natural disasters; |
• | exposure to infectious disease and epidemics; |
• | inability of international customers and suppliers to obtain financing resulting from tightening of credit in international financial markets; |
• | political unrest; and |
• | a potential reversal of current favorable policies encouraging foreign investment or foreign trade by our host countries. |
The attractiveness of our services to U.S. customers can be affected by changes in U.S. trade policies, such as most favored nation status and trade preferences for some Asian countries.
In addition, some countries in which we operate, such as Brazil, Hungary, India, Mexico, Malaysia and Poland, have experienced periods of slow or negative growth, high inflation, significant currency devaluations or limited availability of foreign exchange. Furthermore, in countries such as China, Brazil, India and Mexico, governmental authorities exercise significant influence over many aspects of the economy, and their actions could have a significant effect on us. We could be seriously harmed by inadequate infrastructure, including lack of adequate power and water supplies, transportation, raw materials and parts in countries in which we operate. In addition, we may encounter labor disruptions and rising labor costs, in particular within the lower-cost regions in which we operate. Any increase in labor costs that we are unable to recover in our pricing to our customers could adversely impact our operating results.
Operations in foreign countries also present risks associated with currency exchange and convertibility, inflation and repatriation of earnings. In some countries, economic and monetary conditions and other factors could affect our ability to convert our cash distributions to U.S. dollars or other freely convertible currencies, or to move funds from our accounts in these countries. Furthermore, the central bank of any of these countries may have the authority to suspend, restrict or otherwise impose conditions on foreign exchange transactions or to approve distributions to foreign investors.
Matters arising out of or relating to our Audit Committee’s independent investigation, including litigation and regulatory investigations and proceedings, may adversely affect our business.
As previously disclosed, the Audit Committee of our Board of Directors, with the assistance of independent outside counsel, undertook an independent investigation relating to the accounting treatment of customer obligations and certain related reserves. The independent outside counsel also notified the San Francisco office of the Securities and Exchange Commission (the “SEC”).
To date, we have incurred significant expenses related to legal, accounting, and other professional services in connection with the Audit Committee’s independent investigation and related matters, and may continue to incur significant additional expenses with regard to these matters and related remediation efforts.
Following our announcement of the Audit Committee’s independent investigation, a putative class action was filed in the Northern District of California against the Company and certain officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, alleging misstatements and/or omissions in certain of the Company’s financial statements, press releases, and SEC filings made during the putative class period of January 26, 2017 through April 26, 2018; and we could also become subject to additional future lawsuits or future regulatory investigations or proceedings relating to the subject matter of the independent investigation. Any existing or future lawsuits and/or any future regulatory investigations or proceedings could be time-consuming, result in significant expense and divert the attention and resources of our management and other key employees, as well as harm our reputation, business, financial condition or results of operations.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in a material misstatement in our financial statements.
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As further described in Item 9A, “Controls and Procedures,” our management and our independent registered public accounting firm have concluded that, as of March 31, 2018, our internal control over financial reporting was not effective due to material weaknesses. We determined that there was insufficient documentation of, and ineffective design of controls over, the accounting for accrued customer obligations related to customer contracts. Factors contributing to this included insufficient training of site and segment operational and accounting personnel, and inadequate monitoring, including contract compliance, to ensure the components of internal control were present and functioning. In addition, the control environment was ineffective in ensuring that executive management’s expectations of adherence to the Company’s policies and standards of conduct were followed at all levels of the Company and in ensuring that any deviations therefrom were identified and corrected in a timely manner. These deficiencies resulted in a reasonable possibility that a material misstatement in our financial statements will not be prevented or detected on a timely basis and aggregated to material weaknesses in our internal control over financial reporting relating to the accounting for customer contractual obligations and aspects of our control environment and monitoring activities. No material misstatements were identified in our financial statements for the years ended March 31, 2018, 2017 and 2016. While management has put additional manual monitoring controls in place and has undertaken, and will continue to undertake steps to improve our internal control over financial reporting to address and remediate the material weaknesses, we cannot conclude at this time that the material weaknesses have been remediated. There can be no assurance that we will be able to successfully remediate the identified material weaknesses, or that we will not identify additional control deficiencies or material weaknesses in the future. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities laws and Nasdaq listing requirements regarding the timely filing of periodic reports, investors may lose confidence in our financial reporting and the price of our ordinary shares may decline.
The success of certain of our activities depends on our ability to protect our intellectual property rights; claims of infringement or misuse of intellectual property and/or breach of license agreement provisions against our customers or us could harm our business.
We retain certain intellectual property rights to some of the technologies that we develop as part of our engineering, design and manufacturing services and components offerings. The measures we have taken to prevent unauthorized use of our technology may not be successful. If we are unable to protect our intellectual property rights, this could reduce or eliminate the competitive advantages of our proprietary technology, which would harm our business.
Our engineering, design and manufacturing services and components offerings involve the creation and use of intellectual property rights, which subject us to the risk of claims of infringement or misuse of intellectual property from third parties and/or breach of our agreements with third parties, as well as claims arising from the allocation of intellectual property risk among us and our customers. From time to time, we enter into intellectual property licenses (e.g., patent licenses and software licenses) with third parties which obligate us to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable our use of third party technologies. We may also decline to enter into licenses for intellectual property that we do not think is useful for or used in our operations, or for which our customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of our business and the location of our business around the world, certain activities we perform, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. Our licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g. base price) for any royalty amounts owed are audited by licensors and may be challenged. Our customers are increasingly requiring us to indemnify them against the risk of intellectual property-related claims and licensors are claiming that activities we perform are covered by licenses to which we are a party. In March 2018, we received an inquiry from a licensor referencing a patent license agreement, and requesting information relating royalties for products that we assemble for a customer in China. If any of these inquiries result in a claim, the Company intends to contest any such claim vigorously. If a claim is asserted and we are unsuccessful in its defense, a material loss is reasonably possible. We cannot predict or estimate an amount or reasonable range of outcomes with respect to the matter.
If any claims of infringement or misuse of intellectual property from third parties and/or breach of our agreements with third parties, as well as claims arising from the allocation of intellectual property risk among us and our customers, are brought against us or our customers, whether or not these have merit, we could be required to expend significant resources in defense of such claims. In the event of such a claim, we may be required to spend a significant amount of money to develop alternatives or obtain licenses or to resolve the issue through litigation. We may not be successful in developing such alternatives or obtaining such licenses on reasonable terms or at all, and any such litigation might not be resolved in our favor, in which cases we may be required to curtail certain of our services and offerings. Additionally, litigation could be lengthy and costly, and could materially harm our financial condition regardless of outcome.
We are subject to risks relating to litigation and regulatory investigations and proceedings, which may have a material adverse effect on our business.
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From time to time, we are involved in various claims, suits, investigations and legal proceedings. Additional legal claims or regulatory matters may arise in the future and could involve matters relating to commercial disputes, government regulatory and compliance, intellectual property, antitrust, tax, employment or shareholder issues, product liability claims and other issues on a global basis. If we receive an adverse judgment in any such matter, we could be required to pay substantial damages and cease certain practices or activities. Regardless of the merits of the claims, litigation and other proceedings may be both time- consuming and disruptive to our business. The defense and ultimate outcome of any lawsuits or other legal proceedings may result in higher operating expenses and a decrease in operating margin, which could have a material adverse effect on our business, financial condition, or results of operations.
A breach of our IT or physical security systems, or violation of data privacy laws, may cause us to incur significant legal and financial exposure.
We rely on our information systems to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers, and other business partners), and to manage or support a variety of critical business processes and activities. We regularly face attempts by others to gain unauthorized access through the Internet or to introduce malicious software to our information systems. We are also a target of malicious attackers who attempt to gain access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems and services or those of our customers or others. We believe such attempts are increasing in number and in technical sophistication. In some instances, we, our customers, and the users of our products and services might be unaware of an incident or its magnitude and effects. We have implemented security systems with the intent of maintaining the physical security of our facilities and inventory and protecting our customers’ and our suppliers’ confidential information. In addition, while we seek to detect and investigate all unauthorized attempts and attacks against our network, products, and services, and to prevent their recurrence where practicable through changes to our internal processes and tools, we are subject to, and at times have suffered from, breach of these security systems which have in the past and may in the future result in unauthorized access to our facilities and/or unauthorized use or theft of the inventory or information we are trying to protect. If unauthorized parties gain physical access to our inventory or if they gain electronic access to our information systems or if such information or inventory is used in an unauthorized manner, misdirected, lost or stolen during transmission or transport, any theft or misuse of such information or inventory could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties including our customers and possible financial obligations for damages related to the theft or misuse of such information or inventory, any of which could have a material adverse effect on our profitability and cash flow. In addition, new data privacy laws and regulations, including the new European Union General Data Protection Regulation (“GDPR”) effective May 2018, pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties.
Our strategic relationships with major customers create risks.
In the past, we have completed numerous strategic transactions with customers. Under these arrangements, we generally acquire inventory, equipment and other assets from the customers, and lease or acquire their manufacturing facilities, while simultaneously entering into multi-year manufacturing and supply agreements for the production of their products. We may pursue these customer divestiture transactions in the future. These arrangements entered into with divesting customers typically involve many risks, including the following:
• | we may need to pay a purchase price to the divesting customers that exceeds the value we ultimately may realize from the future business of the customer; |
• | the integration of the acquired assets and facilities into our business may be time-consuming and costly, including the incurrence of restructuring charges; |
• | we, rather than the divesting customer, bear the risk of excess capacity at the facility; |
• | we may not achieve anticipated cost reductions and efficiencies at the facility; |
• | we may be unable to meet the expectations of the customer as to volume, product quality, timeliness and cost reductions; |
• | our supply agreements with the customers generally do not require any minimum volumes of purchase by the customers, and the actual volume of purchases may be less than anticipated; and |
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• | if demand for the customers' products declines, the customer may reduce its volume of purchases, and we may not be able to sufficiently reduce the expenses of operating the facility or use the facility to provide services to other customers. |
As a result of these and other risks, we have been, and in the future may be, unable to achieve anticipated levels of profitability under these arrangements. In addition, these strategic arrangements have not, and in the future may not, result in any material revenues or contribute positively to our earnings per share.
If our compliance policies are breached, we may incur significant legal and financial exposure.
We have implemented local and global compliance policies to ensure compliance with our legal obligations across our operations. A significant legal risk resulting from our international operations is compliance with the U.S. Foreign Corrupt Practices Act or similar local laws of the countries in which we do business, including the UK Anti-Bribery Act, which prohibits covered companies from making payments to foreign government officials to assist in obtaining or retaining business. Our Code of Business Conduct prohibits corrupt payments on a global basis and precludes us from offering or giving anything of value to a government official for the purpose of obtaining or retaining business, to win a business advantage or to improperly influence a decision regarding Flex. Nevertheless, there can be no assurance that all of our employees and agents will refrain from taking actions in violation of this and our related anti-corruption policies and procedures. Any such violation could have a material adverse effect on our business.
We are subject to the risk of increased income taxes.
We are subject to taxes in numerous jurisdictions. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory rates and changes in tax laws or their interpretation including changes related to tax holidays or tax incentives. The international tax environment continues to change as a result of both coordinated efforts by governments and unilateral measures designed by individual countries, both intended to tackle concerns over perceived international tax avoidance techniques, which could ultimately have an adverse effect on the taxation of international businesses. On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “TCJA”) into law. Effective January 1, 2018, among other changes, the TCJA reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced rates of certain non-U.S. subsidiaries owned by U.S. companies’ historical earnings (a “transition tax”), and establishes new mechanisms to tax such earnings going forward. Similar to other large multinational companies with complex tax structures, the TCJA has wide ranging implications for us. We will continue to analyze the effects of the TCJA on our financial statements and operations. In addition, legislative changes may result from the Organization for Economic Co-operation and Development’s Base Erosion and Profit Shifting Project. Any such changes, if adopted, could adversely impact our effective tax rate.
Our taxes could also increase if certain tax holidays or incentives are not renewed upon expiration, or if tax rates applicable to us in such jurisdictions are otherwise increased. Our continued ability to qualify for specific tax holiday extensions will depend on, among other things, our anticipated investment and expansion in these countries and the manner in which the local governments interpret the requirements for modifications, extensions or new incentives.
In addition, the Company and its subsidiaries are regularly subject to tax return audits and examinations by various taxing jurisdictions around the world. In determining the adequacy of our provision for income taxes, we regularly assess the likelihood of adverse outcomes resulting from tax examinations. While it is often difficult to predict the final outcome or the timing of the resolution of a tax examination, we believe that our reserves for uncertain tax benefits reflect the outcome of tax positions that are more likely than not to occur. However, we cannot assure you that the final determination of any tax examinations will not be materially different than that which is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of a current or future examination, there could be a material adverse effect on our tax provision, operating results, financial position and cash flows in the period or periods for which that determination is made.
If we do not effectively manage changes in our operations, our business may be harmed; we have taken substantial restructuring charges in the past and we may need to take material restructuring charges in the future.
The expansion of our business, as well as business contractions and other changes in our customers' requirements, have in the past, and may in the future, require that we adjust our business and cost structures by incurring restructuring charges. Restructuring activities involve reductions in our workforce at some locations and closure of certain facilities. All of these changes have in the past placed, and may in the future place, considerable strain on our financial and management control systems and resources, including decision support, accounting management, information systems and facilities. If we do not properly manage our financial and management controls, reporting systems and procedures to manage our employees, our business could be harmed.
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In recent years, including during fiscal year 2018, we initiated targeted restructuring activities focused on optimizing the our cost structure in lower growth areas and, more importantly, streamlining certain corporate and segment functions. Restructuring charges are recorded based upon employee termination dates, site closure and consolidation plans generally in conjunction with an overall corporate initiative to drive cost reduction and realign the Company's global footprint.
While we incurred severance, asset impairment charges and other charges as a result of changes in our customer mix on an ongoing basis, such individual actions were not considered material and did not qualify as restructuring charges per accounting principles generally accepted in the United States to be separately disclosed as restructuring charges in fiscal year 2016 and are included in either cost of sales or selling, general and administrative expenses, as appropriate. Our restructuring activities undertaken during fiscal years 2018 and 2017 have been disclosed separately on our statement of operations. We may be required to take additional charges in the future to align our operations and cost structures with global economic conditions, market demands, cost competitiveness, and our geographic footprint as it relates to our customers' production requirements. We may consolidate certain manufacturing facilities or transfer certain of our operations to lower cost geographies. If we are required to take additional restructuring charges in the future, our operating results, financial condition, and cash flows could be adversely impacted. Additionally, there are other potential risks associated with our restructurings that could adversely affect us, such as delays encountered with the finalization and implementation of the restructuring activities, work stoppages, and the failure to achieve targeted cost savings.
Changes in financial accounting standards or policies have affected, and in the future may affect, our reported financial condition or results of operations.
We prepare our financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), the SEC and various bodies formed to interpret and create accounting policies. For example, significant changes to revenue recognition rules have been enacted and will begin to apply to us in fiscal year 2019 per Accounting Standard Update ("ASU") 2014-09 "Revenue from Contracts with Customers (Topic 606)". Changes to accounting rules or challenges to our interpretation or application of the rules by regulators may have a material adverse effect on our reported financial results or on the way we conduct business. Refer to "Recently Issued Accounting Pronouncements" within note 2 of Item 8, Financial Statements and Supplementary Data.
We may encounter difficulties with acquisitions and divestitures, which could harm our business.
We have completed numerous acquisitions of businesses and we may acquire additional businesses in the future. Any future acquisitions may require additional equity financing, which could be dilutive to our existing shareholders, or additional debt financing, which could increase our leverage and potentially affect our credit ratings. Any downgrades in our credit ratings associated with an acquisition could adversely affect our ability to borrow by resulting in more restrictive borrowing terms. As a result of the foregoing, we also may not be able to complete acquisitions or strategic customer transactions in the future to the same extent as in the past, or at all.
To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of this integration may be further complicated by geographic distances. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. In addition, the integration of acquired businesses may require that we incur significant restructuring charges.
In addition, acquisitions involve numerous risks and challenges, including:
• | diversion of management's attention from the normal operation of our business; |
• | potential loss of key employees and customers of the acquired companies; |
• | difficulties managing and integrating operations in geographically dispersed locations; |
• | the potential for deficiencies in internal controls at acquired companies; |
• | increases in our expenses and working capital requirements, which reduce our return on invested capital; |
• | lack of experience operating in the geographic market or industry sector of the acquired business; |
• | cybersecurity and compliance related issues; |
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• | initial dependence on unfamiliar supply chain or relatively small supply chain partners; and |
• | exposure to unanticipated liabilities of acquired companies. |
In addition, divestitures involve significant risks, including without limitation, difficulty finding financially sufficient buyers or selling on acceptable terms in a timely manner, and the agreed-upon terms could be renegotiated due to changes in business or market conditions. Divestitures could adversely affect our profitability and, under certain circumstances, require us to record impairment charges or a loss as a result of the transaction. In addition, completing divestitures requires expenses and management attention and could leave us with certain continuing liabilities.
These and other factors have harmed, and in the future could harm, our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition or divestiture, and could adversely affect our business and operating results.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes for medical devices, which could have an adverse effect on our business, financial condition or results of operations.
As a medical device manufacturer, we have additional compliance requirements. We are required to register with the U.S. Food and Drug Administration ("FDA") and are subject to periodic inspection by the FDA for compliance with the FDA's Quality System Regulation ("QSR") requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring by the FDA. If any FDA inspection reveals noncompliance with QSR or other FDA regulations, and the Company does not address the observation adequately to the satisfaction of the FDA, the FDA may take action against us. FDA actions may include issuing a letter of inspectional observations, issuing a warning letter, imposing fines, bringing an action against the Company and its officers, requiring a recall of the products we manufactured for our customers, refusing requests for clearance or approval of new products or withdrawal of clearance or approval previously granted, issuing an import detention on products entering the U.S. from an offshore facility, or shutting down a manufacturing facility. If any of these actions were to occur, it would harm our reputation and cause our business to suffer.
In the European Union ("EU"), we are required to maintain certain standardized certifications in order to sell our products and must undergo periodic inspections to obtain and maintain these certifications. Continued noncompliance to the EU regulations could stop the flow of products into the EU from us or from our customers. In China, the Safe Food and Drug Administration controls and regulates the manufacture and commerce of healthcare products. We must comply with the regulatory laws applicable to medical device manufactures or our ability to manufacture products in China could be impacted. In Japan, the Pharmaceutical Affairs Laws regulate the manufacture and commerce of healthcare products. These regulations also require that subcontractors manufacturing products intended for sale in Japan register with authorities and submit to regulatory audits. Other Asian countries and Latin America where we operate have similar laws regarding the regulation of medical device manufacturing.
If our products or components contain defects, demand for our services may decline and we may be exposed to product liability and product warranty liability.
Defects in the products we manufacture or design, whether caused by a design, engineering, manufacturing or component failure or deficiencies in our manufacturing processes, could result in product or component failures, which may damage our business reputation and expose us to product liability or product warranty claims.
Product liability claims may include liability for personal injury or property damage. Product warranty claims may include liability to pay for the recall, repair or replacement of a product or component. Although we generally allocate liability for these claims in our contracts with our customers, increasingly we are unsuccessful in allocating such liability, and even where we have allocated liability to our customers, our customers may not have the resources to satisfy claims for costs or liabilities arising from a defective product or component for which they have assumed responsibility.
If we design, engineer or manufacture a product or component that is found to cause any personal injury or property damage or is otherwise found to be defective, we could spend a significant amount of money to resolve the claim. In addition, product liability and product recall insurance coverage are expensive and may not be available for some or all of our services offerings on acceptable terms, in sufficient amounts, or at all. A successful product liability or product warranty claim in excess of our insurance coverage or any material claim for which insurance coverage is denied, limited or is not available could have a material adverse effect on our business, results of operations and financial condition.
Fluctuations in foreign currency exchange rates could increase our operating costs.
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We have manufacturing operations and industrial parks that are located in lower cost regions of the world, such as Asia, Eastern Europe and Mexico. A portion of our purchases and our sale transactions are denominated in currencies other than the United States dollar. As a result, we are exposed to fluctuations in these currencies impacting our fixed cost overhead or our supply base relative to the currencies in which we conduct transactions.
Currency exchange rates fluctuate on a daily basis as a result of a number of factors, including changes in a country's political and economic policies. Volatility in the functional and non-functional currencies of our entities and the United States dollar could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities. As part of our currency hedging strategy, we use financial instruments such as forward exchange, swap contracts, and options to hedge our foreign currency exposure in order to reduce the short-term impact of foreign currency rate fluctuations on our operating results. If our hedging activities are not successful or if we change or reduce these hedging activities in the future, we may experience significant unexpected fluctuations in our operating results as a result of changes in exchange rates.
We are also exposed to risks related to the valuation of the Chinese currency relative to the U.S. dollar. The Chinese currency is the renminbi ("RMB"). A significant increase in the value of the RMB could adversely affect our financial results and cash flows by increasing both our manufacturing costs and the costs of our local supply base.
Our operating results may fluctuate significantly due to seasonal demand.
Two of our significant end markets are the mobile devices market and the consumer devices market. These markets exhibit particular strength generally in the two quarters leading up to the end of the calendar year in connection with the holiday season. As a result, we have historically experienced stronger revenues in our second and third fiscal quarters as compared to our other fiscal quarters. Economic or other factors leading to diminished orders in the end of the calendar year could harm our business.
We depend on our executive officers and skilled management personnel.
Our success depends to a large extent upon the continued services of our executive officers and other key employees. Generally, our employees are not bound by employment or non-competition agreements, and we cannot assure you that we will retain our executive officers and other key employees. We could be seriously harmed by the loss of any of our executive officers or other key employees. We will need to recruit and retain skilled management personnel, and if we are not able to do so, our business could be harmed. In addition, in connection with expanding our design services offerings, we must attract and retain experienced design engineers. There is substantial competition in our industry for highly skilled employees. Our failure to recruit and retain experienced design engineers could limit the growth of our design services offerings, which could adversely affect our business.
Our failure to comply with environmental laws could adversely affect our business.
We are subject to various federal, state, local and foreign environmental laws and regulations, including regulations governing the use, storage, discharge and disposal of hazardous substances used in our manufacturing processes. We are also subject to laws and regulations governing the recyclability of products, the materials that may be included in products, and our obligations to dispose of these products after end users have finished with them. Additionally, we may be exposed to liability to our customers relating to the materials that may be included in the components that we procure for our customers' products. Any violation or alleged violation by us of environmental laws could subject us to significant costs, fines or other penalties.
We are also required to comply with an increasing number of global and local product environmental compliance regulations focused on the restriction of certain hazardous substances. We are subject to the EU directives, including the Restrictions on RoHS, the WEEE as well as the EU's REACH regulation. In addition, new technical classifications of e-Waste being discussed in the Basel Convention technical working group could affect both our customers' abilities and obligations in electronics repair and refurbishment. Also of note is China's Management Methods for Controlling Pollution Caused by EIPs regulation, commonly referred to as "China RoHS", which restricts the importation into and production within China of electrical equipment containing certain hazardous materials. Similar legislation has been or may be enacted in other jurisdictions, including in the United States. RoHS and other similar legislation bans or restricts the use of lead, mercury and certain other specified substances in electronics products and WEEE requires EU importers and/or producers to assume responsibility for the collection, recycling and management of waste electronic products and components. We have developed rigorous risk mitigating compliance programs designed to meet the needs of our customers as well as applicable regulations. These programs may include collecting compliance data from our suppliers, full laboratory testing and public reporting of other environmental metrics such as carbon emissions, electronic waste and water, and we also require our supply chain to comply. Non-compliance could potentially result in significant costs and/or penalties. In the case of WEEE, the compliance responsibility rests primarily with the EU importers and/or producers rather than with EMS companies. However, customers may turn to EMS companies for assistance in meeting their obligations under WEEE.
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In addition, we are responsible for the cleanup of contamination at some of our current and former manufacturing facilities and at some third party sites. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances into the air, ground and/or water, we may be subject to additional liability. Additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. Additionally, we could be required to alter our manufacturing and operations and incur substantial expense in order to comply with environmental regulations. Our failure to comply with environmental laws and regulations or adequately address contaminated sites could limit our ability to expand our facilities or could require us to incur significant expenses, which would harm our business.
Failure to comply with domestic or international employment and related laws could result in the payment of significant damages, which would reduce our net income.
We are subject to a variety of domestic and foreign employment laws, including those related to safety, wages and overtime, discrimination, whistle-blowing, classification of employees and severance payments. Enforcement activity relating to these laws, particularly outside of the United States, can increase as a result of increased media attention due to violations by other companies, changes in law, political and other factors. There can be no assurance that we won't be found to have violated such laws in the future, due to a more aggressive enforcement posture by governmental authorities or for any other reason. Any such violations could lead to the assessment of fines against us by federal, state or foreign regulatory authorities or damages payable to employees, which fines could be substantial and which would reduce our net income.
Our business could be impacted as a result of actions by activist shareholders or others.
We may be subject, from time to time, to legal and business challenges in the operation of our company due to actions instituted by activist shareholders or others. Responding to such actions could be costly and time-consuming, may not align with our business strategies and could divert the attention of our Board of Directors and senior management from the pursuit of our business strategies. Perceived uncertainties as to our future direction as a result of shareholder activism may lead to the perception of a change in the direction of the business or other instability and may make it more difficult to attract and retain qualified personnel and business partners and may affect our relationships with vendors, customers and other third parties.
Our debt level may create limitations.
As of March 31, 2018, our total debt was approximately $2.9 billion. This level of indebtedness could limit our flexibility as a result of debt service requirements and restrictive covenants, and may limit our ability to access additional capital or execute our business strategy.
Changes in our credit rating may make it more expensive for us to raise additional capital or to borrow additional funds. We may also be exposed to interest rate fluctuations on our outstanding borrowings and investments.
Our credit is rated by credit rating agencies. Our 4.625% Notes, our 5.000% Notes and our 4.750% Notes are currently rated BBB- by Standard and Poor's ("S&P") which is considered to be “investment grade” by S&P, rated Baa3 by Moody’s which is considered to be “investment grade” by Moody's, and rated BBB- by Fitch which is considered to be "investment grade" by Fitch. Any decline in our credit rating may make it more expensive for us to raise additional capital in the future on terms that are acceptable to us, if at all, negatively impact the price of our ordinary shares, increase our interest payments under some of our existing debt agreements, and have other negative implications on our business, many of which are beyond our control. In addition, the interest rate payable on some of our credit facilities is subject to adjustment from time to time if our credit ratings change. Thus, any potential future negative change in our credit rating may increase the interest rate payable on these credit facilities.
In addition, we are exposed to interest rate risk under our variable rate terms loans, bilateral facilities and revolving credit facility for indebtedness we have incurred or may incur under such borrowings. The interest rates under these borrowings are based on either (i) a margin over LIBOR or (ii) the base rate (the greatest of the agent's prime rate, the federal funds rate plus 0.50% and LIBOR for a one-month interest period plus 1.00%) plus an applicable margin, in each case depending on our credit rating. Refer to the discussion in note 8, "Bank Borrowings and Long-Term Debt" to the consolidated financial statements for further details of our debt obligations. We are also exposed to interest rate risk on our invested cash balances, our securitization facilities and our factoring activities.
Weak global economic conditions, geopolitical uncertainty and instability in financial markets may adversely affect our business, results of operations, financial condition, and access to capital markets.
Our revenue and gross margin depend significantly on general economic conditions and the demand for products in the markets in which our customers compete. Adverse worldwide economic conditions and geopolitical uncertainty may create
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challenging conditions in the electronics industry. For example, these conditions may be adversely impacted by the pending withdrawal of the United Kingdom from the EU following its referendum on EU membership and the actions that the U.S. has taken or may take with respect to certain treaty and trade relationships with other countries. These conditions may result in reduced consumer and business confidence and spending in many countries, a tightening in the credit markets, a reduced level of liquidity in many financial markets, high volatility in credit, fixed income and equity markets, currency exchange rate fluctuations, and global economic uncertainty. In addition, longer term disruptions in the capital and credit markets could adversely affect our access to liquidity needed for our business. If financial institutions that have extended credit commitments to us are adversely affected by the conditions of the U.S. and international capital markets, they may become unable to fund borrowings under their credit commitments to us, which could have an adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes.
Catastrophic events could have a material adverse effect on our operations and financial results.
Our operations or systems could be disrupted by natural disasters, terrorist activity, public health issues, cyber security incidents, interruptions of service from utilities, transportation or telecommunications providers, or other catastrophic events. Such events could make it difficult or impossible to manufacture or deliver products to our customers, receive production materials from our suppliers, or perform critical functions, which could adversely affect our revenue and require significant recovery time and expenditures to resume operations. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, some of our systems are not fully redundant and we cannot be sure that our plans will fully protect us from all such disruptions.
We maintain a program of insurance coverage for a variety of property, casualty, and other risks. We place our insurance coverage with multiple carriers in numerous jurisdictions. However, one or more of our insurance providers may be unable or unwilling to pay a claim. The types and amounts of insurance we obtain vary depending on availability, cost, and decisions with respect to risk retention. The policies have deductibles and exclusions that result in us retaining a level of self-insurance. Losses not covered by insurance may be large, which could harm our results of operations and financial condition.
Our business could be adversely affected by any delays, or increased costs, resulting from issues that our common carriers are dealing with in transporting our materials, our products, or both.
We rely on a variety of common carriers to transport our materials from our suppliers to us, and to transport our products from us to our customers. Problems suffered by any of these common carriers, whether due to a natural disaster, labor problem, increased energy prices, criminal activity or some other issue, could result in shipping delays, increased costs, or other supply chain disruptions, and could therefore have a material adverse effect on our operations.
We are subject to risks associated with investments.
We invest in private funds and companies for strategic reasons and may not realize a return on our investments. We make investments in private funds and companies to further our strategic objectives, support key business initiatives and develop business relationships with related portfolio companies. Many of the instruments in which we invest are non-marketable at the time of our initial investment. If any of the funds or companies in which we invest fail, we could lose all or part of our investment. If we need to determine that an other-than-temporary decline in the fair value exists for an investment, we would need to write down the investment to its fair value and recognize a loss.
Our business and operations could be adversely impacted by climate change initiatives.
Concern over climate change has led to international legislative and regulatory initiatives directed at limiting carbon dioxide and other greenhouse gas emissions. Proposed and existing efforts to address climate change by reducing greenhouse gas emissions could directly or indirectly affect our costs of energy, materials, manufacturing, distribution, packaging and other operating costs, which could impact our business and financial results.
Our goodwill and identifiable intangible assets could become impaired, which could reduce the value of our assets and reduce our net income in the year in which the write-off occurs.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. We also ascribe value to certain identifiable intangible assets, which consist primarily of customer relationships, developed technology and trade names, among others, as a result of acquisitions. We may incur impairment charges on goodwill or identifiable intangible assets if we determine that the fair values of goodwill or identifiable intangible assets are less than their current carrying values. We evaluate, on a regular basis, whether events or circumstances have occurred that indicate all, or a portion, of the carrying amount of goodwill may no longer be recoverable, in which case an impairment charge to earnings would become necessary.
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Refer to note 2 to the consolidated financial statements and 'critical accounting policies' in "management's discussion and analysis of financial condition and results of operations" for further discussion of the impairment testing of goodwill and identifiable intangible assets.
A decline in general economic conditions or global equity valuations could impact the judgments and assumptions about the fair value of our businesses and we could be required to record impairment charges on our goodwill or other identifiable intangible assets in the future, which could impact our consolidated balance sheet, as well as our consolidated statement of operations. If we are required to recognize an impairment charge in the future, the charge would not impact our consolidated cash flows, liquidity, capital resources, and covenants under our existing credit facilities, asset securitization program, and other outstanding borrowings.
The market price of our ordinary shares is volatile.
The stock market in recent years has experienced significant price and volume fluctuations that have affected the market prices of companies, including technology companies. These fluctuations have often been unrelated to or disproportionately impacted by the operating performance of these companies. The market for our ordinary shares has been and may in the future be subject to similar volatility. Factors such as fluctuations in our operating results, announcements of technological innovations or events affecting other companies in the electronics industry, currency fluctuations, general market fluctuations, and macro-economic conditions may cause the market price of our ordinary shares to decline.
Compliance with government regulations regarding the use of "conflict minerals" may result in increased costs and risks to us.
As part of the Dodd-Frank Act, the SEC has promulgated disclosure requirements regarding the use of certain minerals ("Minerals") that may have originated in the Democratic Republic of the Congo or adjoining countries. In our most recent report on Form SD, we reported that, based on our diligence review, we were unable to determine whether Minerals contained in our products originated in the Democratic Republic of the Congo or adjoining countries or whether the mining or trade of such Minerals directly or indirectly financed or otherwise benefited armed groups in those countries. We expect to undertake further reviews of our supply chain as necessary to comply with the SEC’s requirements. Additionally, customers rely on us to provide critical data regarding the products they purchase and request information on such Minerals. Our materials sourcing is broad-based and multi-tiered, and we may not be able to easily verify the origins of the Minerals used in the products we sell. We have many suppliers and each may provide the required information in a different manner, if at all. Accordingly, because the supply chain is complex, our reputation may suffer if we are unable to sufficiently verify the origins of the Minerals, if any, used in our products. Additionally, customers may demand that the products they purchase be free of any Minerals originating in the specified countries. The implementation of this requirement could affect the sourcing and availability of products we purchase from our suppliers. This may reduce the number of suppliers that may be able to provide products and may affect our ability to obtain products in sufficient quantities to meet customer demand or at competitive prices.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our facilities consist of a global network of industrial parks, regional manufacturing operations, and design, engineering and product introduction centers, providing approximately 28 million square feet of productive capacity as of March 31, 2018.
The composition of the square footage of our facilities, by region, is as follows:
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Americas | Asia | Europe | Total | ||||||||
(in million square feet) | |||||||||||
Manufacturing Square Footage Space | |||||||||||
Manufacturing - Leased | 3.8 | 6.7 | 1.4 | 11.9 | |||||||
Manufacturing - Owned | 5.4 | 7.7 | 3.0 | 16.1 | |||||||
Total | 9.2 | 14.4 | 4.4 | 28.0 | |||||||
Total Square Footage Space | |||||||||||
Manufacturing | 9.2 | 14.4 | 4.4 | 28.0 | |||||||
Non-manufacturing | 10.5 | 8.7 | 5.2 | 24.4 | |||||||
Total | 19.7 | 23.1 | 9.6 | 52.4 | |||||||
Our facilities include large industrial parks, ranging in size from 0.5 million to 5.5 million square feet in Brazil, China, India, Malaysia, Mexico and Poland. We also have regional manufacturing operations, generally ranging in size from under 100,000 to approximately 1.6 million square feet in Austria, Brazil, Canada, China, Czech Republic, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Malaysia, Mexico, The Netherlands, Poland, Romania, Singapore, Switzerland, the Ukraine and the United States. We also have smaller design and engineering centers, innovation centers and product introduction centers at a number of locations in the world's major industrial and electronics markets.
Our facilities are well maintained and suitable for the operations conducted. The productive capacity of our plants is adequate for current needs.
ITEM 3. LEGAL PROCEEDINGS
For a description of our material legal proceedings, see note 13 "Commitments and Contingencies" to the consolidated financial statements included under Item 8, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF ORDINARY SHARES
Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol "FLEX." The following table sets forth the high and low per share sales prices for our ordinary shares since the beginning of fiscal year 2017 as reported on the Nasdaq Global Select Market.
High | Low | ||||||
Fiscal Year Ended March 31, 2018 | |||||||
Fourth Quarter | $ | 19.61 | $ | 16.31 | |||
Third Quarter | 19.09 | 16.75 | |||||
Second Quarter | 17.09 | 15.52 | |||||
First Quarter | 17.62 | 15.15 | |||||
Fiscal Year Ended March 31, 2017 | |||||||
Fourth Quarter | $ | 16.88 | $ | 14.33 | |||
Third Quarter | 14.84 | 13.54 | |||||
Second Quarter | 13.69 | 11.66 | |||||
First Quarter | 13.19 | 11.69 | |||||
As of June 8, 2018 there were 3,090 holders of record of our ordinary shares and the closing sales price of our ordinary shares as reported on the Nasdaq Global Select Market was $14.07 per share.
DIVIDENDS
Since inception, we have not declared or paid any cash dividends on our ordinary shares. We currently do not have plans to pay any dividends in fiscal year 2019.
STOCK PRICE PERFORMANCE GRAPH
The following stock price performance graph and accompanying information is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, regardless of any general incorporation language in any such filing.
The graph below compares the cumulative total shareholder return on our ordinary shares, the Standard & Poor's 500 Stock Index and a peer group comprised of Benchmark Electronics, Inc., Celestica Inc., Jabil Inc., and Sanmina Corporation.
The graph below assumes that $100 was invested in our ordinary shares, in the Standard & Poor's 500 Stock Index and in the peer group described above on March 31, 2013 and reflects the annual return through March 31, 2018, assuming dividend reinvestment.
The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the possible future performances of our ordinary shares.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Flex, the S&P 500 Index, and Peer Group
3/13 | 3/14 | 3/15 | 3/16 | 3/17 | 3/18 | ||||||||||||
Flex Ltd. | 100.00 | 136.69 | 187.57 | 178.40 | 248.52 | 241.57 | |||||||||||
S&P 500 Index | 100.00 | 121.86 | 137.37 | 139.82 | 163.83 | 186.75 | |||||||||||
Peer Group | 100.00 | 116.99 | 144.33 | 130.91 | 198.24 | 169.22 | |||||||||||
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2018
Index Data: Copyright Standard and Poor's, Inc. Used with permission. All rights reserved.
Issuer Purchases of Equity Securities
On August 15, 2017, our Board of Directors authorized repurchases 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 March 31, 2018, shares in the aggregate amount of $410,064,509 were available to be repurchased under the current plan. There were no purchases of our ordinary shares made by us for the period from January 1, 2018 through March 31, 2018.
RECENT SALES OF UNREGISTERED SECURITIES
None.
INCOME TAXATION UNDER SINGAPORE LAW
Dividends. Singapore does not impose a withholding tax on dividends. All dividends are tax exempt to shareholders.
Gains on Disposal. Under current Singapore tax law there is no tax on capital gains, thus any profits from the disposal of shares are not taxable in Singapore unless the gains arising from the disposal of shares are income in nature and subject to tax, especially if they arise from activities which the Inland Revenue Authority of Singapore regards as the carrying on of a trade or business in Singapore (in which case, the profits on the sale would be taxable as trade profits rather than capital gains).
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Shareholders who apply, or who are required to apply, the Singapore Financial Reporting Standard 39 Financial Instruments—Recognition and Measurement ("FRS 39") for the purposes of Singapore income tax may be required to recognize gains or losses (not being gains or losses in the nature of capital) in accordance with the provisions of FRS 39 (as modified by the applicable provisions of Singapore income tax law) even though no sale or disposal of shares is made.
Stamp Duty. There is no stamp duty payable for holding shares, and no duty is payable on the issue of new shares. When existing shares are acquired in Singapore, a stamp duty of 0.2% is payable on the instrument of transfer of the shares at market value. The stamp duty is borne by the purchaser unless there is an agreement to the contrary. If the instrument of transfer is executed outside of Singapore, the stamp duty must be paid only if the instrument of transfer is received in Singapore.
Estate Taxation. The estate duty was abolished for deaths occurring on or after February 15, 2008. For deaths prior to February 15, 2008 the following rules apply:
If an individual who is not domiciled in Singapore dies on or after January 1, 2002, no estate tax is payable in Singapore on any of our shares held by the individual.
If property passing upon the death of an individual domiciled in Singapore includes our shares, Singapore estate duty is payable to the extent that the value of the shares aggregated with any other assets subject to Singapore estate duty exceeds S$600,000. Unless other exemptions apply to the other assets, for example, the separate exemption limit for residential properties, any excess beyond S$600,000 will be taxed at 5% on the first S$12,000,000 of the individual's chargeable assets and thereafter at 10%.
An individual shareholder who is a U.S. citizen or resident (for U.S. estate tax purposes) will have the value of the shares included in the individual's gross estate for U.S. estate tax purposes. An individual shareholder generally will be entitled to a tax credit against the shareholder's U.S. estate tax to the extent the individual shareholder actually pays Singapore estate tax on the value of the shares; however, such tax credit is generally limited to the percentage of the U.S. estate tax attributable to the inclusion of the value of the shares included in the shareholder's gross estate for U.S. estate tax purposes, adjusted further by a pro rata apportionment of available exemptions. Individuals who are domiciled in Singapore should consult their own tax advisors regarding the Singapore estate tax consequences of their investment.
Tax Treaties Regarding Withholding. There is no reciprocal income tax treaty between the U.S. and Singapore regarding withholding taxes on dividends and capital gains.
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ITEM 6. SELECTED FINANCIAL DATA
These historical results are not necessarily indicative of the results to be expected in the future. The following selected consolidated financial data set forth below was derived from our historical audited consolidated financial statements and is qualified by reference to and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data."
Fiscal Year Ended March 31, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(In millions, except per share amounts) | |||||||||||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS DATA: | |||||||||||||||||||
Net sales | $ | 25,441 | $ | 23,863 | $ | 24,419 | $ | 26,148 | $ | 26,109 | |||||||||
Cost of sales | 23,778 | 22,303 | 22,811 | 24,603 | 24,610 | ||||||||||||||
Restructuring charges (3) | 67 | 39 | — | — | 59 | ||||||||||||||
Gross profit | 1,596 | 1,521 | 1,608 | 1,545 | 1,440 | ||||||||||||||
Selling, general and administrative expenses | 1,019 | 937 | 955 | 844 | 875 | ||||||||||||||
Intangible amortization | 79 | 81 | 66 | 32 | 29 | ||||||||||||||
Restructuring charges (3) | 24 | 11 | — | — | 17 | ||||||||||||||
Other charges (income), net (1) | (170 | ) | 21 | 48 | (53 | ) | 57 | ||||||||||||
Interest and other, net | 123 | 100 | 84 | 51 | 62 | ||||||||||||||
Income before income taxes | 521 | 371 | 455 | 671 | 400 | ||||||||||||||
Provision for income taxes | 92 | 51 | 11 | 70 | 35 | ||||||||||||||
Net income | $ | 429 | $ | 320 | $ | 444 | $ | 601 | $ | 365 | |||||||||
Diluted earnings per share: | |||||||||||||||||||
Total | $ | 0.80 | $ | 0.59 | $ | 0.79 | $ | 1.02 | $ | 0.59 | |||||||||
As of March 31, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(In millions) | |||||||||||||||||||
CONSOLIDATED BALANCE SHEET DATA: | |||||||||||||||||||
Working capital (2) | $ | 1,902 | $ | 1,883 | $ | 1,743 | $ | 1,986 | $ | 1,745 | |||||||||
Total assets | 13,716 | 12,593 | 12,385 | 11,653 | 12,485 | ||||||||||||||
Total long-term debt, excluding current portion | 2,898 | 2,891 | 2,709 | 2,026 | 2,056 | ||||||||||||||
Shareholders' equity | 3,019 | 2,678 | 2,606 | 2,396 | 2,202 | ||||||||||||||
_______________________________________________________________________________
(1) | For fiscal years 2018, 2017 and 2016, refer to note 16 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion. |
During fiscal year 2015, an amendment to a customer contract to reimburse a customer for certain performance provisions was executed which included the removal of a $55 million contractual obligation recognized during fiscal year 2014. Accordingly, the Company reversed this charge with a corresponding credit to other charges (income), net in the consolidated statement of operations. Additionally, during fiscal year 2015, the Company recognized a loss of $11 million in connection with the disposition of a manufacturing facility in Western Europe. The Company received $12 million in cash for the sale of $27 million in net assets of the facility. The loss also includes $5 million of estimated transaction costs, partially offset by a gain of $9 million for the release of cumulative foreign currency translation gains triggered by the disposition.
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Other charges, net in the fiscal year 2014 includes $55 million of other charges for the contractual obligation to reimburse a customer for certain performance provisions. Additionally, the Company exercised warrants to purchase common shares of a certain supplier and sold the underlying shares for total proceeds of $67 million resulting in a loss of $7 million.
(2) | Working capital is defined as current assets less current liabilities. |
(3) | The Company initiated restructuring plans during fiscal years 2018, 2017 and 2014. For the restructuring plans initiated during fiscal year 2018 and 2017, please refer to note 15 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-K 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-K with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section and in Item 1A, "Risk Factors." 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, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. We design, build, ship and service complete packaged consumer and enterprise products, from athletic shoes to electronics, for companies of all sizes in various industries and end-markets, through our activities in the following segments:
• | Communications & Enterprise Compute ("CEC"), which includes our telecom business of radio access base stations, remote radio heads, and small cells for wireless infrastructure; our networking business which includes optical, routing, broadcasting, and switching products for the data and video networks; our 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; |
• | Consumer Technologies Group ("CTG"), which includes our consumer-related businesses in connected living, wearables, gaming, augmented and virtual reality, fashion and apparel, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers; |
• | Industrial and Emerging Industries ("IEI"), which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and |
• | High Reliability Solutions ("HRS"), which is comprised of our health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging equipment; our automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies. |
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker (“CODM”). Our 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 20 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for additional information on our operating segments.
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Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product 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 customers change the way they go to market, we have the capability to reorganize and rebalance our business portfolio in order to align with our customers' needs and requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customer's supply chain solutions needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.
During the past several years, we have evolved our long-term portfolio towards a mix of businesses which possess longer product life cycles and higher segment operating margins such as reflected in our IEI and HRS businesses. Since the beginning of fiscal year 2016, we launched several programs broadly across our portfolio of services and in some instances we deployed certain new technologies. We continue to invest in innovation and we have expanded our design and engineering relationships through our product innovation centers.
We believe that our continued business transformation is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services, which remain strong.
We are one of the world's largest providers of global supply chain solutions, with revenues of $25.4 billion in fiscal year 2018. We have established an extensive network of manufacturing facilities in the world's major consumer and enterprise markets (Asia, the Americas, and Europe) to serve the growing outsourcing needs of both multinational and regional customers. We design, build, ship, and service consumer and enterprise products for our customers through a network of over 100 facilities in approximately 35 countries across four continents. As of March 31, 2018, our total manufacturing capacity was approximately 28 million square feet. In fiscal year 2018, our net sales in Asia, the Americas and Europe represented approximately 44%, 39% and 17%, respectively, of our total net sales, based on the location of the manufacturing site. The following tables set forth net sales and net property and equipment, by country, based on the location of our manufacturing sites and the relative percentages:
Fiscal Year Ended March 31, | ||||||||||||||||||||
Net sales: | 2018 | 2017 | 2016 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
China | $ | 7,450 | 29 | % | $ | 7,214 | 30 | % | $ | 8,471 | 35 | % | ||||||||
Mexico | 4,362 | 17 | % | 4,076 | 17 | % | 3,645 | 15 | % | |||||||||||
U.S. | 2,860 | 11 | % | 2,560 | 11 | % | 2,768 | 11 | % | |||||||||||
Brazil | 2,578 | 10 | % | 1,908 | 8 | % | 1,839 | 8 | % | |||||||||||
Malaysia | 2,005 | 8 | % | 2,267 | 10 | % | 2,242 | 9 | % | |||||||||||
Other | 6,186 | 25 | % | 5,838 | 24 | % | 5,454 | 22 | % | |||||||||||
$ | 25,441 | $ | 23,863 | $ | 24,419 | |||||||||||||||
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Fiscal Year Ended March 31, | |||||||||||||
Property and equipment, net: | 2018 | 2017 | |||||||||||
(In millions) | |||||||||||||
Mexico | $ | 587 | 26 | % | $ | 525 | 23 | % | |||||
China | 492 | 22 | % | 720 | 31 | % | |||||||
U.S. | 305 | 14 | % | 291 | 13 | % | |||||||
Malaysia | 153 | 7 | % | 173 | 7 | % | |||||||
Hungary | 150 | 7 | % | 133 | 6 | % | |||||||
Other | 553 | 24 | % | 475 | 21 | % | |||||||
$ | 2,240 | $ | 2,317 | ||||||||||
We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we 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; |
• | the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, 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 customers; |
• | the effects on our business due to certain customers' products having short product life cycles; |
• | our customers' ability to cancel or delay orders or change production quantities; |
• | our customers' decisions to choose internal manufacturing instead of outsourcing for their product requirements; |
• | 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; |
• | changes in tax legislation; and |
• | changes in trade regulations and treaties. |
We also are subject to other risks as outlined in Item 1A, "Risk Factors".
Net sales for fiscal year 2018 increased 7% or $1.6 billion to $25.4 billion from the prior year. The increase was primarily due to a $1.0 billion increase in our IEI segment, as well as $0.6 billion increases in each of our HRS and CTG segments, partially offset by a $0.7 billion decrease in our CEC segment. Our fiscal year 2018 gross profit totaled $1.6 billion, representing an increase of $75 million, or 4.9%, from the prior year, which is primarily due to contribution flow through from the additional $1.6 billion in sales from the prior year, offset by restructuring charges of $67 million included in cost of sales in fiscal year 2018. Our net income totaled $429 million, representing an increase of $109 million, or 34%, compared to fiscal year 2017. The increase in net income during fiscal year 2018 is primarily due to the same factors explained above coupled
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with the recognition of a $152 million gain from the deconsolidation of our subsidiary, Elementum SCM (Cayman) Ltd ("Elementum"), and a $39 million gain from sale of Wink Labs Inc. ("Wink"). Refer to note 6 and note 2 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for details of the deconsolidation of Elementum and the disposition of Wink, respectively.
Cash provided by operations decreased by approximately $0.3 billion to $0.8 billion for fiscal years 2018 compared with $1.1 billion for fiscal year 2017 primarily due to unfavorable changes in operating assets and liabilities. Our average net working capital, defined as accounts receivable, including the deferred purchase price receivables from our asset-backed securitization programs, plus inventory, less accounts payable, as a percentage of annualized sales decreased by 0.5% to 6.4%. Our free cash flow, which we define as cash from operating activities less net purchases of property and equipment, was $236 million for fiscal year 2018 compared to $660 million for fiscal year 2017. The decrease in free cash flow is primarily due to lesser cash flows from operations and higher capital expenditures in fiscal year 2018. Refer to the Liquidity and Capital Resources section for the free cash flows reconciliation to our most directly comparable GAAP financial measure of cash flows from operations. Cash used in investing activities increased by approximately $0.2 billion to $0.9 billion for fiscal year 2018, compared with $0.7 billion for fiscal year 2017, primarily due to an increase in the amount of cash paid for acquired businesses during fiscal year 2018. Cash used in financing activities totaled $188 million during fiscal year 2018, which decreased $54 million from $242 million in the prior year, primarily due to a lower level of repurchases of ordinary shares.
Additionally, in fiscal year 2018, the Company initiated targeted restructuring activities, focused on optimizing our cost structure in lower growth areas and, more importantly, streamlining certain corporate and segment functions. The objective of the plan is to make Flex a faster, more responsive and agile company, better positioned to react to marketplace opportunities. During the year ended March 31, 2018, we recognized $91 million of pre-tax restructuring charges, comprised of $79 million of cash charges predominantly related to severance costs and $12 million of non-cash charges primarily related to asset impairment and other exit charges.
Audit Committee Investigation Completed
As previously disclosed, the Audit Committee of the Company’s Board of Directors (the “Audit Committee”), with the assistance of independent outside counsel, undertook an independent investigation relating to the accounting treatment of customer obligations and certain related reserves. The independent outside counsel also notified the SEC. The Audit Committee has now completed its investigation.
The Company, working with its independent registered public accounting firm, identified and the Audit Committee concurred with such identification, material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements. Notwithstanding the identification of such material weaknesses, management believes that the Company’s financial statements included in this annual report on Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of, and for the periods presented, in conformity with accounting principles generally accepted in the United States of America. The conclusions of management, with which the Audit Committee concurred, concerning the material weaknesses in the Company’s internal control over financial reporting are described further in Item 9A “Controls and Procedures”.
We have undertaken, and will continue to undertake, steps to improve our internal control over financial reporting to address and remediate the material weaknesses. The proposed plan to remediate the material weaknesses is described further in Item 9A “Controls and Procedures”.
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.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For further discussion of our significant accounting policies, refer to note 2 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data."
Revenue Recognition
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We recognize manufacturing revenue when we ship goods or the goods are received by our customer, title and risk of ownership have passed, the price to the buyer is fixed or determinable and recoverability is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed, and the obligations are fulfilled. Some of our customer contracts allow the recovery of certain costs related to manufacturing services that are over and above the prices charged for the related products. Also, certain customer contracts may contain certain commitments and obligations that may result in additional expenses or decrease in revenue. Refer to note 3 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further details.
Customer Credit Risk
We have an established customer credit policy through which we manage customer credit exposures through credit evaluations, credit limit setting, monitoring, and enforcement of credit limits for new and existing customers. We perform ongoing credit evaluations of our customers' financial condition and make provisions for doubtful accounts based on the outcome of those credit evaluations. We evaluate the collectability of accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the age of past due receivables. To the extent we identify exposures as a result of customer credit issues, we also review other customer related exposures, including but not limited to inventory and related contractual obligations.
On April 21, 2016, SunEdison, Inc. (together with certain of its subsidiaries, "SunEdison"), filed a petition for reorganization under bankruptcy law. During the fiscal year ended March 31, 2016, we recognized a bad debt reserve charge of $61 million associated with our outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90 million. During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. We determined that certain solar panel inventory previously designated for SunEdison on hand at the end of the second quarter of fiscal year 2017 was not fully recoverable and recorded a charge of $60 million to reduce the carrying costs to market during fiscal year 2017. In addition, we recognized a $16 million impairment charge for solar module equipment and incurred $17 million of incremental costs primarily related to negative margin sales and other associated solar panel direct costs. The total charge of $93 million is included in cost of sales for fiscal year 2017.
Restructuring Charges
We recognize restructuring charges related to our plans to close or consolidate excess manufacturing facilities and rationalize administrative functions and to realign our corporate cost structure. In connection with these activities, we recognize restructuring charges for employee termination costs, long-lived asset impairment and other exit-related costs.
The recognition of these restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned restructuring activity. To the extent our actual results differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. Such changes to previously estimated amounts may be material to the consolidated financial statements. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.
Refer to note 15 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of our restructuring activities.
Inventory Valuation
Our inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand. We purchase our inventory based on forecasted demand, and we estimate write downs for excess and obsolete inventory based on our regular reviews of inventory quantities on hand, and the latest forecasts of product demand and production requirements from our customers. If actual market conditions or our customers' product demands are less favorable than those projected, additional write downs may be required. In addition, unanticipated changes in the liquidity or financial position of our customers and/or changes in economic conditions may require additional write downs for inventories due to our customers' inability to fulfill their contractual obligations with regards to inventory procured to fulfill customer demand.
Valuation of Private Company Investments
We assess our cost method investments for impairment whenever events or changes in circumstances indicate that the assets may be impaired. The factors we consider in our evaluation of potential impairment of our cost method investments, include, but are not limited to a significant deterioration in the earnings performance or business prospects of the investee, or
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factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operation or working capital deficiencies. The carrying value of certain of our investments are individually material, thus there is the potential for material charges in future periods if we determine that those investments are impaired.
Carrying Value of Long-Lived Assets
We review property and equipment and acquired amortizable intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of these long-lived assets exceeds their fair value. Recoverability of property and equipment and acquired amortizable intangible assets are measured by comparing their carrying amount to the projected cash flows the assets are expected to generate. If such assets are determined to be impaired, the impairment loss recognized, if any, is the amount by which the carrying amount of the property and equipment and acquired amortizable intangible assets exceeds fair value. Our judgments regarding projected cash flows for an extended period of time and the fair value of assets may be impacted by changes in market conditions, general business environment and other factors. To the extent our estimates relating to cash flows and fair value of assets change adversely we may have to recognize additional impairment charges in the future.
Goodwill is tested for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit, which is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis. The Company performed its goodwill impairment assessment on January 1, 2018 and determined that no impairment existed as of the date of the impairment test because the fair value of each reporting unit exceeded its carrying value.
Contingent Liabilities
We may be exposed to certain liabilities relating to our business operations, acquisitions of businesses and assets and other activities. We make provisions for such liabilities when it is probable that the settlement of the liability will result in an outflow of economic resources or the impairment of an asset. We make these assessments based on facts and circumstances that may change in the future resulting in additional expenses.
Refer to note 13 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of our contingent liabilities.
Income Taxes
Our deferred income tax assets represent temporary differences between the carrying amount and the tax basis of existing assets and liabilities, which will result in deductible amounts in future years, including net operating loss carry forwards. Based on estimates, the carrying value of our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize these deferred income tax assets. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. If these estimates and related assumptions change in the future, we may be required to increase or decrease our valuation allowance against deferred tax assets previously recognized, resulting in additional or lesser income tax expense.
We are regularly subject to tax return audits and examinations by various taxing jurisdictions and around the world, and there can be no assurance that the final determination of any tax examinations will not be materially different than that which is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of a current or future examination, there could be a material adverse effect on our tax position, operating results, financial position and cash flows. Refer to note 14 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of our tax position.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales. The financial information and the discussion below should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data." The data below, and discussion that follows, represents our results from operations.
Fiscal Year Ended March 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 93.5 | 93.5 | 93.4 | |||||
Restructuring charges | 0.3 | 0.2 | — | |||||
Gross profit | 6.2 | 6.3 | 6.6 | |||||
Selling, general and administrative expenses | 4.0 | 3.9 | 3.9 | |||||
Intangible amortization | 0.3 | 0.3 | 0.3 | |||||
Restructuring charges | 0.1 | — | — | |||||
Other charges (income), net | (0.7 | ) | 0.1 | 0.2 | ||||
Interest and other, net | 0.5 | 0.4 | 0.3 | |||||
Income before income taxes | 2.0 | 1.6 | 1.9 | |||||
Provision for income taxes | 0.4 | 0.2 | — | |||||
Net Income | 1.6 | % | 1.4 | % | 1.9 | % | ||
Net sales
Net sales during fiscal year 2018 totaled $25.4 billion, representing an increase of $1.5 billion, or 7%, from $23.9 billion during fiscal year 2017. The overall increase in sales was driven by increases in three of our segments offset by a decline in sales in our CEC segment. During fiscal year 2018, the increase in net sales was primarily driven by an increase of $1.3 billion in the Americas and to a lesser extent, $0.2 billion in Asia with Europe remaining relatively consistent in fiscal year 2017.
Net sales during fiscal year 2017 totaled $23.9 billion, representing a decrease of $0.5 billion, or 2%, from $24.4 billion during fiscal year 2016. During fiscal year 2017, net sales decreased $0.8 billion in Asia, while increasing $0.2 billion in the Americas, and $36 million in Europe.
The following table sets forth net sales by segments and their relative percentages. Historical information has been recast to reflect realignment of customers and/or products between segments:
Fiscal Year Ended March 31, | ||||||||||||||||||||
Segments: | 2018 | 2017 | 2016 | |||||||||||||||||
(In millions) | ||||||||||||||||||||
Communications & Enterprise Compute | $ | 7,729 | 30 | % | $ | 8,384 | 35 | % | $ | 8,842 | 36 | % | ||||||||
Consumer Technologies Group | 6,970 | 27 | % | 6,362 | 27 | % | 6,997 | 29 | % | |||||||||||
Industrial & Emerging Industries | 5,972 | 24 | % | 4,968 | 21 | % | 4,681 | 19 | % | |||||||||||
High Reliability Solutions | 4,769 | 19 | % | 4,149 | 17 | % | 3,899 | 16 | % | |||||||||||
$ | 25,441 | $ | 23,863 | $ | 24,419 | |||||||||||||||
Net sales during fiscal year 2018 increased $1.0 billion or 20% in our IEI segment, which was mainly driven by our industrial, home and lifestyle businesses in addition to growth in our solar energy business. Our CTG segment increased $0.6 billion or 10% largely attributable to stronger sale in our connected living and mobile devices businesses, offset by a decrease in gaming. Our HRS segment increased $0.6 billion or 15% from higher sales in our automotive business. These increases were partially offset by a decrease of $0.7 billion or 8% in our CEC segment, largely attributable to lower sales within our telecom and networking businesses, offset by increased sales in our cloud and data center business.
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Net sales during fiscal year 2017 decreased $0.6 billion or 9% in the CTG segment and $0.5 billion or 5% in the CEC segment. The decline in sales for CTG was primarily due to a decline in demand from our largest smartphone customer, Lenovo/Motorola, in connection with our exit of a China operation dedicated to this customer, partially offset by revenues from our Bose acquisition, as well as ramping of a broad mix of customers. The decrease in CEC is largely attributable to lower sales within our legacy server and storage business. These decreases were partially offset by a $287 million or 6% increase in sales from our IEI segment driven by contribution from our NEXTracker Inc. ("NEXTracker") acquisition and expansion within our capital equipment business, and by a $250 million or 6% increase in sales from our HRS segment primarily driven by our automotive business.
Our ten largest customers during fiscal years 2018, 2017 and 2016 accounted for approximately 41%, 43% and 46% of net sales, respectively. We have made substantial efforts toward the diversification of our portfolio which allows us to operate at scale in many different industries, and, as a result, no customer accounted for greater than 10% of net sales in fiscal year 2018 and 2017. During fiscal year 2016, only Lenovo/Motorola, which is reflected in our CTG segment, accounted for greater than 10% of net sales.
Gross profit
Gross profit is affected by a number of factors, including the number, size and complexity 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 including specific restructuring activities from time to time. 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 across our diverse geographic footprint. 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.
Gross profit during fiscal year 2018 increased $75 million to $1.6 billion from $1.5 billion during fiscal year 2017, primarily as a result of the increase in revenue offset by $67 million, or 30 basis points, of restructuring charges incurred during fiscal year 2018. Gross margin decreased 10 basis points, to 6.2% of net sales in fiscal year 2018, from 6.3% of net sales in fiscal year 2017, mainly attributable to the same factors previously described, coupled with elevated levels of investments in ramping new operations for our strategic footwear customer.
Gross profit during fiscal year 2017 decreased $87 million to $1.5 billion from $1.6 billion during fiscal year 2016, primarily as a result of the $93 million, or 40 basis points, of charges recognized related to the significant decline in prices for solar modules and the slowdown in demand as previously discussed under our customer credit risk section, coupled with the restructuring charges incurred during fiscal year 2017, to accelerate our ability to support more Sketch-to-Scaletm efforts across the Company. A portion of this decrease was offset by our strategic evolution and structural mix shift to higher margin end markets in our IEI and HRS segments, while also providing greater levels of innovation, design and engineering services. Gross margin decreased 30 basis points to 6.3% of net sales in fiscal year 2017, from 6.6% of net sales in fiscal year 2016, mainly attributable to the same factors previously described. In addition, we have been ramping several new programs this year along with the continued development of our long-term strategic partnership with a CTG customer which has negatively impacted our margins due to elevated investment costs and under-absorbed overhead.
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, distressed customer charges, contingencies and other, restructuring charges, other charges (income), net and interest and other, net. A portion of 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:
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Fiscal Year Ended March 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Segment income & margin: | ||||||||||||||||||||
Communications & Enterprise Compute | $ | 186 | 2.4 | % | $ | 229 | 2.7 | % | $ | 265 | 3.0 | % | ||||||||
Consumer Technologies Group | 112 | 1.6 | % | 180 | 2.8 | % | 164 | 2.3 | % | |||||||||||
Industrial & Emerging Industries | 235 | 3.9 | % | 180 | 3.6 | % | 157 | 3.4 | % | |||||||||||
High Reliability Solutions | 381 | 8.0 | % | 334 | 8.1 | % | 295 | 7.6 | % | |||||||||||
Corporate and Other | (128 | ) | (108 | ) | (89 | ) | ||||||||||||||
Total segment income | 786 | 3.1 | % | 815 | 3.4 | % | 792 | 3.2 | % | |||||||||||
Reconciling items: | ||||||||||||||||||||
Intangible amortization | 79 | 81 | 66 | |||||||||||||||||
Stock-based compensation | 85 | 82 | 77 | |||||||||||||||||
Distressed customers asset impairments (1) | 6 | 93 | 61 | |||||||||||||||||
Restructuring charges (2) | 91 | 49 | — | |||||||||||||||||
Contingencies and other (3) | 51 | 18 | — | |||||||||||||||||
Other charges (income), net | (170 | ) | 21 | 48 | ||||||||||||||||
Interest and other, net | 123 | 100 | 85 | |||||||||||||||||
Income before income taxes | $ | 521 | $ | 371 | $ | 455 | ||||||||||||||
Corporate and other primarily includes corporate services costs that are not included in the CODM's assessment of the performance of each of the identified reporting segments.
(1) | During fiscal year 2016, we 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, we recognized a bad debt reserve of $61 million as of March 31, 2016, associated with our outstanding SunEdison receivables. |
During fiscal year 2017, prices for solar panel modules declined significantly. We determined that certain solar panel inventory on hand at the end of the fiscal year 2017 was not fully recoverable and recorded a charge of $60 million to reduce the carrying costs to market in fiscal year 2017. We also recognized a $16 million impairment charge for solar module equipment and $17 million primarily related to negative margin sales and other associated direct costs. The total charge of $93 million is included in cost of sales for fiscal year 2017 but is excluded from segment results above.
(2) | The Company initiated restructuring plans in fiscal years 2018 and 2017 and incurred charges primarily for employee terminations costs, as well as other asset impairments. These charges are split between cost of sales and selling, general and administration expenses on the Company's consolidated statement of operations, and are excluded from the measurement of the Company's operating segment's performance. Refer to note 15 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data". |
(3) | During fiscal year 2018, we incurred charges in connection with the matters described in note 13 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data," for certain loss contingencies where we believe that losses are probable and estimable, coupled with various other charges predominately related to damages incurred from a typhoon that impacted one of our China facilities. Additionally, certain assets impairments were recorded during both fiscal years 2018 and 2017. |
CEC segment margin decreased 30 basis points to 2.4% for fiscal year 2018, from 2.7% during fiscal year 2017. The decrease was driven by lower revenues which negatively impacted profitability with under-absorbed overhead and higher investment costs. CEC segment margin decreased 30 basis points to 2.7%, for fiscal year 2017, from 3.0% during fiscal year 2016. The decrease was driven by lower capacity utilization causing reduced overhead absorption, and pricing pressures coupled with incremental costs for proactive repositioning of certain programs and actions to better align CEC's operating structure.
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CTG segment margin decreased 120 basis points to 1.6% for fiscal year 2018, from 2.8% during fiscal year 2017, primarily driven by negatively impacted profits due to a lower contribution, and continued losses from our strategic partnership with a certain customer. CTG segment margin increased 50 basis points to 2.8% for fiscal year 2017, from 2.3% during fiscal year 2016, primarily driven by a portfolio shift within the CTG product mix with a greater concentration of higher margin products where we provide greater levels of design and engineering value-added content, as well as exiting of lower margin businesses and the benefit from a better-than-expected execution on certain products which were going end of life.
IEI segment margin increased 30 basis points to 3.9% for fiscal year 2018, from 3.6% during fiscal year 2017. The improvement reflected strong revenue expansion which has been led by several new customer programs and an improving overall demand across its diverse market that has contributed to overhead absorption benefits. IEI segment margin increased 20 basis points to 3.6% for fiscal year 2017, from 3.4% during fiscal year 2016. This is primarily driven by new program ramps and demand increase in capital equipment and our household, industrial and lifestyle businesses, partially offset by underperformance from the loss of SunEdison, which was formerly our largest IEI customer and relatedly, from sales of solar panel inventory acquired from SunEdison in 2016.
HRS segment margin decreased 10 basis point to 8.0% for fiscal year 2018, from 8.1% during fiscal year 2017. The slight decrease reflects investments in expanding the segment's design and engineering capabilities, coupled with ramping up new customers and programs. HRS segment margin increased 50 basis points to 8.1% for fiscal year 2017, from 7.6% during fiscal year 2016. The 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.
Restructuring charges
During fiscal year 2018, we initiated targeted restructuring activities, focused on optimizing our cost structure in lower growth areas and, more importantly, streamlining certain corporate and segment functions. The objective of the plan is to make Flex a faster, more responsive and agile company, better positioned to react to marketplace opportunities. We recognized $79 million of pre-tax cash charges, predominantly related to employee severance costs, and $12 million of pre-tax non-cash charges for asset impairment and other exit charges. The restructuring charges by geographic region were $64 million in the Americas, $17 million in Asia and $10 million in Europe. We classified $67 million of these charges as a component of cost of sales and $24 million as a component of selling, general and administrative expenses during fiscal year 2018.
During fiscal year 2017, we initiated a restructuring plan to accelerate our ability to support more Sketch-to-Scaletm efforts across the Company and reposition away from historical legacy programs and structures through rationalizing our current footprint at existing sites including certain corporate SG&A functions. We recognized $49 million of pre-tax restructuring charges predominantly for employee termination costs. The restructuring charges by geographic region were $28 million in the Americas, $15 million in Asia and $6 million in Europe. We classified $39 million of these charges as a component of cost of sales and $10 million as a component of selling, general and administrative expenses. There were no material restructuring activities during fiscal years 2016.
Refer to note 15 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of our restructuring activities.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") totaled $1.0 billion or 4.0% of net sales, during fiscal year 2018, compared to $937 million, or 3.9% of net sales, during fiscal year 2017, increasing by $82 million or 9%. This increase in SG&A was due to incremental costs associated with our continued expansion of our design and engineering resources and innovation system but also, due to the recognition of certain contingencies that are probable and estimable of payout. Refer to note 13 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further discussion of litigation and other legal matters, which could impact our results of operations, cash flow or financial condition in future periods. We also incurred incremental costs from our acquisitions in fiscal year 2018.
SG&A totaled $937 million, or 3.9% of net sales, during fiscal year 2017, compared to $955 million, or 3.9% of net sales, during fiscal year 2016, decreasing by $18 million or 2%. The decrease in SG&A in dollars is primarily the result of the nonrecurring $61 million bad debt reserve charge recognized in fiscal year 2016 as previously explained, offset by further investments in design and engineering resources by us to support our increased Sketch-to-Scaletm initiatives in fiscal year 2017. We also incurred incremental costs associated with our targeted acquisitions in fiscal year 2017.
Intangible amortization
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Amortization of intangible assets in fiscal year 2018 decreased by $2 million to $79 million from $81 million in fiscal year 2017, primarily as a result of certain intangible assets being fully amortized during fiscal year 2018.
Amortization of intangible assets in fiscal year 2017 increased by $15 million to $81 million from $66 million in fiscal year 2016, primarily as a result of incremental amortization expense on intangibles assets relating to our acquisitions completed during fiscal year 2017, as well as those completed in the second half of fiscal year 2016.
Other charges (income), net
During fiscal year 2018, we recognized $152 million of gain from the deconsolidation of Elementum, and $39 million of gain from the sale of Wink. Refer to note 6 and note 2 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for details of the deconsolidation of Elementum and the disposition of Wink, respectively. We also recorded $22 million related to the impairment of certain non-core investments during fiscal year 2018. No other components of other charges and income, net incurred during fiscal year 2018 were material.
The fiscal year ended March 31, 2017 includes a $7 million loss attributable to a non-strategic facility sold during the second quarter of fiscal year 2017. No other components of other charges and income, net incurred during fiscal year 2017 were material.
During fiscal year 2016, we recognized other charges of $48 million primarily due to a $27 million loss on the disposition of a non-strategic Western European manufacturing facility which included a non-cash foreign currency translation loss of $25 million, and $22 million from the impairment of a non-core investment.
Interest and other, net
Interest and other, net was $123 million during fiscal year 2018, compared to $100 million during fiscal year 2017. The increase in interest and other, net of $23 million was primarily due to a $15 million increase of interest expense from higher weighted average interest rates and a higher borrowing level.
Interest and other, net was $100 million during fiscal year 2017, compared to $85 million during fiscal year 2016. The increase in interest and other, net of $15 million was primarily due to a $10 million increase of interest expense from the 4.750% Notes due June 15, 2025 and the Term Loan due November 2021, as further discussed in note 8 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data", and an $8 million decrease in foreign exchange gains, offset by $8 million of acquisition-related costs incurred during fiscal year 2016.
Income taxes
The Company works to ensure it accrues and pays the appropriate amount of income taxes according to the laws and regulations of each jurisdiction in which it operates. 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. The consolidated effective tax rates were 17.7%, 13.8% and 2.3% for the fiscal years 2018, 2017 and 2016, respectively. The effective rate varies from the Singapore statutory rate of 17.0% in each year as a result of the following items:
Fiscal Year Ended March 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Income taxes based on domestic statutory rates | 17.0 | % | 17.0 | % | 17.0 | % | ||
Effect of tax rate differential | (46.9 | ) | (23.0 | ) | (13.7 | ) | ||
Change in liability for uncertain tax positions | 4.3 | 0.2 | (3.0 | ) | ||||
Change in valuation allowance | 57.1 | 21.2 | 0.2 | |||||
Recognition of prior year taxes recoverable | (10.3 | ) | — | — | ||||
Other | (3.5 | ) | (1.6 | ) | 1.8 | |||
Provision for income taxes | 17.7 | % | 13.8 | % | 2.3 | % | ||
The variation in our effective tax rate each year is primarily a result of recognition of earnings in foreign jurisdictions which are taxed at rates lower than the Singapore statutory rate including the effect of tax holidays and tax incentives we received primarily for our subsidiaries in China, Malaysia, Costa Rica, Netherlands and Israel of $22 million, $16 million and $7 million in fiscal years 2018, 2017 and 2016, respectively. Additionally, our effective tax rate is impacted by changes in our liabilities for uncertain tax positions of $22 million, $1 million, and ($14) million and changes in our valuation allowances on deferred tax assets of $297 million, $79 million and $1 million in fiscal years 2018, 2017 and 2016, respectively. We generate most of our revenues and profits from operations outside of Singapore.
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We are regularly subject to tax return audits and examinations by various taxing jurisdictions and around the world, and there can be no assurance that the final determination of any tax examinations will not be materially different than that which is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of a current or future examinations, there could be a material adverse effect on our tax position, operating results, financial position and cash flows.
We provide a valuation allowance against deferred tax assets that in our estimation are not more likely than not to be realized. During fiscal year 2018, we released valuation allowances totaling $1 million primarily related to our operations in Taiwan, Mexico and Ireland as these amounts were deemed to be more likely than not to be realized due to the sustained profitability during the past three fiscal years as well as continued forecasted profitability of those subsidiaries. However, these valuation allowance eliminations were offset primarily by current period valuation allowance additions due to increased deferred tax assets as a result of current period losses in legal entities with existing full valuation allowance positions. In addition, due to increased negative evidence during the fiscal year ended March 31, 2018, the Company added a valuation allowance of $365 million for a Brazilian subsidiary which did not previously have a valuation allowance recorded. Lastly, the Company released $705 million of valuation allowance to account for the reduced deferred tax asset as a result of the lower US corporate income tax rate which became effective January 1, 2018.
During fiscal year 2018, the Company recognized an income tax receivable of $54 million for prior period taxes paid by one of its Brazilian subsidiaries which was deemed recoverable during the period.
Impact of the U.S. Tax Reform
On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced rates of certain non-US subsidiaries owned by U.S. companies’ historical earnings (a “transition tax”), and establishes new mechanisms to tax such earnings going forward. Similar to other large multinational companies with complex tax structures, the Act has wide ranging implications for Flex. However, the impact on Flex's financial statements for the twelve-month periods ended March 31, 2018 is immaterial, primarily because the Company has a full valuation allowance on deferred tax assets in the U.S., which results in there being no U.S. deferred tax assets or liabilities recorded on the balance sheet that need to be remeasured at the new 21% rate. Further, the Company expects that the new transition tax will be offset by foreign tax credits or net operating loss carryforwards, and thus will not result in any incremental taxes payable. The Company will continue to analyze the effects of the Act on its financial statements and operations. Any additional impacts from the enactment of the Act will be recorded as they are identified during the measurement period provided for in Staff Bulletin 118.
See note 14, "Income Taxes," to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2018, we had cash and cash equivalents of $1.5 billion and bank and other borrowings of $2.9 billion. We have a $1.75 billion revolving credit facility that is due to mature in June 2022, under which we had no borrowings outstanding as of March 31, 2018.
Our cash balances are held in numerous locations throughout the world. As of March 31, 2018, over half of our cash and cash equivalents were held by foreign subsidiaries outside of Singapore. Although substantially all of the amounts held outside of Singapore could be repatriated, under current laws, a significant amount could be subject to income tax withholdings. We provide for tax liabilities on these amounts for financial statement purposes, except for certain of our foreign earnings that are considered indefinitely reinvested outside of Singapore (approximately $1.6 billion as of March 31, 2018). 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.
Fiscal Year 2018
Cash provided by operating activities was $0.8 billion during fiscal year 2018. This resulted primarily from $429 million of net income for the period plus $478 million of non-cash charges such as depreciation, amortization and stock-based compensation, net of a gain from the deconsolidation of Elementum that are included in the determination of net income. Depreciation expense was $434 million of those non-cash charges which is relatively consistent with our normal annual run rate. These were partially offset by a net change in our operating assets and liabilities of $153 million, driven primarily by a $354 million increase in inventories, a $88 million increase in other current and noncurrent assets, and a $347 million increase
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in accounts receivable, including the change in sales of accounts receivable, offset by a $623 million increase in accounts payable and a $13 million increase in other current and noncurrent liabilities. Net working capital ("NWC"), defined as net accounts receivable, including deferred purchase price receivables, plus inventory less accounts payable decreased by $30 million.
Cash used in investing activities totaled $0.9 billion during fiscal year 2018. This resulted primarily from $214 million paid for the acquisition of AGM Automotive ("AGM") for our HRS segment, net of cash acquired, and $55 million paid for a power module business for our CEC segment, net of cash acquired. Further, we invested $517 million of net capital expenditures for property and equipment to expand capabilities and capacity in support of our automotive, medical, footwear and IEI businesses. In addition, other investing activities includes $73 million of cash of Elementum derecognized as of the date of deconsolidation, and $46 million of payments for non-core investments, net of cash received.
Cash used in financing activities was $188 million during fiscal year 2018. This was primarily the result of repurchases of ordinary shares in the amount of $180 million, and the repayment of $55 million of debt, partially offset by $65 million received from third party investors in fiscal year 2018 in exchange for an additional noncontrolling equity interest in Elementum prior to the deconsolidation described above.
Fiscal Year 2017
Cash provided by operating activities was $1.1 billion during fiscal year 2017. This resulted primarily from $320 million of net income for the period plus $674 million of non-cash charges such as depreciation, amortization, other impairment charges, provision for doubtful accounts and stock-based compensation expense that are included in the determination of net income. Depreciation expense was $432 million of those non-cash charges, which was relatively consistent with our normal annual run rate. We generated $157 million in cash as a result of changes in our operating assets and liabilities, driven primarily by a $268 million increase in accounts payable, offset by a $184 million increase in accounts receivable, including the change in sales of accounts receivable.
Cash used in investing activities was $0.7 billion during fiscal year 2017. This resulted primarily from $490 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. We also paid $189 million for the acquisition of four businesses, net of cash acquired, including $162 million, net of $18 million of cash acquired related to the acquisition of manufacturing facilities from Bose. Further, $60 million was paid for a non-controlling interest in a joint venture with RIB Software AG as our partner. Offsetting this was proceeds from various other investing activities of $64 million, most notably the receipt of $38 million for the sale of two non-strategic businesses.
Cash used in financing activities was $242 million during fiscal year 2017. This was primarily the result of repurchases of ordinary shares in the amount $350 million, and $31 million of cash paid to a third-party banking institution for certain assets that were financed by the third party banking institution on behalf of a customer, which is included in other financing activities, as further discussed in note 2 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data". These cash outflows were partially offset by $171 million of net proceeds from bank borrowings and long-term debt, of which $130 million is the incremental amount borrowed extending the maturity date of one of our loan agreements from August 30, 2018 to November 30, 2021, and $107 million is the amount of proceeds from the €100 million term loan, discussed further in note 8 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data".
Fiscal Year 2016
Cash provided by operating activities was $1.1 billion during fiscal year 2016. This resulted primarily from $444 million of net income for the period plus $625 million of non-cash charges such as depreciation, amortization, other impairment charges, provision for doubtful accounts and stock-based compensation expense that are included in the determination of net income. Depreciation expense was $426 million of those non-cash charges, which was relatively consistent with our normal annual run rate. We generated $67 million in cash as a result of changes in our operating assets and liabilities, driven primarily by a $424 million reduction in accounts receivable, including the change in sales of accounts receivable, due to improved collection efforts and lower business levels, offset by a $365 million reduction in accounts payable.
Cash used in investing activities was $1.4 billion during fiscal year 2016. This resulted primarily from $917 million for the acquisition of eleven businesses completed during fiscal year 2016, including approximately $555 million, net of cash acquired, related to the acquisition of MCi, $241 million, net of cash acquired, related to the acquisition of NEXTracker, and approximately $68 million to acquire an optical transport facility from Alcatel-Lucent. We also paid $511 million in gross capital expenditures for property and equipment to support certain programs, offset by $14 million of proceeds from the sale of certain buildings and machinery and equipment. Other investing activities also includes $45 million paid for the purchase of
45
certain investments, offset by $54 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 included in other investing activities.
Cash provided by financing activities was $250 million during fiscal year 2016, which was primarily the result of net proceeds from bank borrowings and long-term debt of $695 million mainly resulting from our new debt issuance discussed further in note 8 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data", and $61 million from the issuance of our shares for option exercises. These cash inflows were partially offset by $420 million of cash paid for the repurchase of our ordinary shares, and $75.8 million of cash paid to a third party banking institution for certain assets that were financed by the third party banking institution on behalf of a customer, which is included in other financing activities.
Free Cash Flow
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 repurchase company shares, fund acquisitions, make investments, repay debt obligations, and for certain other activities. Our free cash flow, which is calculated as cash provided by operations less net purchases of property and equipment, was $236 million, $660 million and $639 million for fiscal years 2018, 2017 and 2016, respectively.
Free cash flow is not a measure of liquidity under generally accepted accounting principles in the United States, 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:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In millions) | |||||||||||
Net cash provided by operating activities | $ | 754 | $ | 1,150 | $ | 1,136 | |||||
Purchases of property and equipment | (562 | ) | (525 | ) | (511 | ) | |||||
Proceeds from the disposition of property and equipment | 44 | 36 | 14 | ||||||||
Free cash flow | $ | 236 | $ | 660 | $ | 639 | |||||
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. Cash balances are generated and held in many locations throughout the world. 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.
Future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures for new equipment, the extent to which we utilize operating leases for new facilities and equipment, and the levels of shipments and changes in the volumes of customer orders.
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 ("ABS") programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements. During fiscal years 2018, 2017 and 2016, we received approximately $9.4 billion, $8.6 billion and $7.0 billion, respectively from transfers of receivables under our ABS programs, and $1.5 billion, $1.3 billion and $2.3 billion, respectively from other sales of receivables. As of March 31, 2018 and 2017, the outstanding balance on receivables sold for cash was $1.3 billion and $1.2 billion, for each year respectively, under all our accounts receivable sales programs, which are removed from accounts receivable balances in our consolidated balance sheets.
We anticipate that we will enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and anticipated 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
46
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.
Historically we have been successful in refinancing and extending the maturity dates on our term loans and credit facilities. In June 2017, the Company entered into a five-year credit facility consisting of a $1.75 billion revolving credit facility and a $503 million term loan, which is due to mature on June 30, 2022 (the "2022 Credit Facility"). This 2022 Credit Facility replaced the Company's $2.1 billion credit facility, which was due to mature in March 2019. The outstanding principal of the term loan portion of the 2022 Credit Facility is repayable in quarterly installments of approximately $6 million from September 30, 2017 through June 30, 2020 and approximately $13 million from September 30, 2020 through March 31, 2022 with the remainder due upon maturity.
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 Annual General Meeting which was held on August 15, 2017. During fiscal year 2018, we paid $180 million to repurchase shares (under the current and prior repurchase plans) at an average price of $16.63 per share. As of March 31, 2018, shares in the aggregate amount of $410 million were available to be repurchased under the current plan.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Bank borrowings and long-term debt are as follows:
As of March 31, | |||||||
2018 | 2017 | ||||||
(In millions) | |||||||
4.625% Notes due February 2020 | $ | 500 | $ | 500 | |||
Term Loan, including current portion, due in installments through November 2021 | 688 | 700 | |||||
Term Loan, including current portion, due in installments through June 2022 | 484 | 503 | |||||
5.000% Notes due February 2023 | 500 | 500 | |||||
4.750% Notes due June 2025 | 596 | 596 | |||||
Other | 187 | 170 | |||||
Debt issuance costs | (14 | ) | (16 | ) | |||
2,941 | 2,952 | ||||||
Current portion, net of debt issuance costs | (43 | ) | (62 | ) | |||
Non-current portion | $ | 2,898 | $ | 2,891 | |||
Refer to the discussion in note 8 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further details of our debt obligations.
We have purchase obligations that arise in the normal course of business, primarily consisting of binding purchase orders for inventory related items and capital expenditures. Additionally, we have leased certain of our property and equipment under capital lease commitments, and certain of our facilities and equipment under operating lease commitments.
47
Future payments due under our purchase obligations, debt including capital leases and related interest obligations and operating leases are as follows:
Total | Less Than 1 Year | 1 - 3 Years | 4 - 5 Years | Greater Than 5 Years | |||||||||||||||
(In millions) | |||||||||||||||||||
Contractual Obligations: | |||||||||||||||||||
Purchase obligations | $ | 3,478 | $ | 3,478 | $ | — | $ | — | $ | — | |||||||||
Long-term debt and capital lease obligations: | |||||||||||||||||||
Long-term debt | 2,954 | 44 | 659 | 1,652 | 599 | ||||||||||||||
Capital leases | 14 | 5 | 9 | — | — | ||||||||||||||
Interest on long-term debt obligations | 544 | 119 | 219 | 142 | 64 | ||||||||||||||
Operating leases, net of subleases | 562 | 119 | 164 | 101 | 178 | ||||||||||||||
Restructuring costs | 61 | 61 | — | — | — | ||||||||||||||
Total contractual obligations | $ | 7,613 | $ | 3,826 | $ | 1,051 | $ | 1,895 | $ | 841 | |||||||||
We have excluded $228 million of liabilities for unrecognized tax benefits from the contractual obligations table as we cannot make a reasonably reliable estimate of the periodic settlements with the respective taxing authorities. See note 14, "Income Taxes" to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for further details.
Our purchase obligations can fluctuate significantly from period to period and can materially impact our future operating asset and liability balances, and our future working capital requirements. We intend to use our existing cash balances, together with anticipated cash flows from operations to fund our existing and future contractual obligations.
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 March 31, 2018 and 2017, the fair value of our deferred purchase price receivable was approximately $445 million and $507 million, respectively. As of March 31, 2018 and 2017, the outstanding balance on receivables sold for cash was $1.3 billion and $1.2 billion for each period respectively, under all our accounts receivable sales programs, which were removed from accounts receivable balances in our consolidated balance sheets. For further information, see note 11 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data".
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to note 2 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data" for recent accounting pronouncements.
48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
A portion of our exposure to market risk for changes in interest rates relates to our investment portfolio, which consists of highly liquid investments or bank deposits with maturities of three months or less from original dates of purchase and are classified as cash equivalents on our consolidated balance sheet. We do not use derivative financial instruments in our investment portfolio. We place cash and cash equivalents with various major financial institutions and highly rated money market accounts. Our investment policy has strict guidelines focusing on preservation of capital. The portfolio is comprised of various instruments including term deposits with banks, marketable securities and money market accounts. Our cash is principally invested in the U.S. dollar and China RMB serving as a natural hedge of our RMB denominated costs. As of March 31, 2018, the outstanding amount in the investment portfolio was $0.5 billion, the largest components of which were Brazilian real, China renminbi and Indian rupee denominated money market accounts with an average return of 3.86%. A hypothetical 10% change in interest rates would not be expected to have a material effect on our financial position, results of operations and cash flows over the next fiscal year.
We had variable rate debt outstanding of approximately $1.4 billion as of March 31, 2018. Variable rate debt obligations consisted of borrowings under our term loans. Interest on these obligations is discussed in note 8 to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data".
Our variable rate debt instruments create exposures for us related to interest rate risk. Primarily due to the current low interest rates, a hypothetical 10% change in interest rates would not be expected to have a material effect on our financial position, results of operations and cash flows over the next fiscal year.
As of March 31, 2018, the approximate average fair value of our debt outstanding under our term loan facilities that mature in November 2021 and June 2022, and Notes due February 2020, February 2023 and June 2025 was 102.5% of the face value of the debt obligations based on broker trading prices.
FOREIGN CURRENCY EXCHANGE RISK
We transact business in various foreign countries and are, therefore, subject to risk of foreign currency exchange rate fluctuations. We have established a foreign currency risk management policy to manage this risk. To the extent possible, we manage our foreign currency exposure by evaluating and using non-financial techniques, such as currency of invoice, leading and lagging payments and receivables management. In addition, we may borrow in various foreign currencies and enter into short-term foreign currency derivative contracts, including forward, swap, and option contracts to hedge only those currency exposures associated with certain assets and liabilities, mainly accounts receivable and accounts payable, and cash flows denominated in non-functional currencies.
We endeavor to maintain a partial or fully hedged position for certain transaction exposures. These exposures are primarily, but not limited to, revenues, customer and vendor payments and inter-company balances in currencies other than the functional currency unit of the operating entity. The credit risk of our foreign currency derivative contracts is minimized since all contracts are with large financial institutions and accordingly, fair value adjustments related to the credit risk of the counter-party financial institution were not material. The gains and losses on foreign currency derivative contracts generally offset the losses and gains on the assets, liabilities and transactions hedged. The fair value of currency derivative contracts is reported on the balance sheet. The aggregate notional amount of outstanding contracts as of March 31, 2018 amounted to $7.6 billion and the recorded fair values of the associated assets and liabilities were not material. The majority of these foreign exchange contracts expire in less than three months and all expire within one year. They will settle primarily in the Australian dollar, Brazilian real, British pound, China renminbi, Euro, Hungarian forint, Israeli shekel, Malaysian ringgit, Mexican peso, Singapore dollar, Indian rupee, Swiss franc and U.S. dollar.
Based on our overall currency rate exposures as of March 31, 2018, including the derivative financial instruments intended to hedge the nonfunctional currency-denominated monetary assets, liabilities and cash flows, and other factors a 10% appreciation or depreciation of the U.S. dollar from its cross-functional rates would not be expected, in the aggregate, to have a material effect on our financial position, results of operations and cash flows in the near-term.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Flex Ltd.
Singapore
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Flex Ltd. and subsidiaries (the "Company") as of March 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2018 and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Flex Ltd. and subsidiaries as of March 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of March 31, 2018, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 14, 2018 expressed an adverse opinion because of material weaknesses.
Basis of Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedure included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also included assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
June 14, 2018
We have served as the Company’s auditors since 2002.
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FLEX LTD.
CONSOLIDATED BALANCE SHEETS
As of March 31, | |||||||
2018 | 2017 | ||||||
(In thousands, except share amounts) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,472,424 | $ | 1,830,675 | |||
Accounts receivable, net of allowance for doubtful accounts (Note 2) | 2,517,695 | 2,192,704 | |||||
Inventories | 3,799,829 | 3,396,462 | |||||
Other current assets | 1,380,466 | 967,935 | |||||
Total current assets | 9,170,414 | 8,387,776 | |||||
Property and equipment, net | 2,239,506 | 2,317,026 | |||||
Goodwill | 1,121,170 | 984,867 | |||||
Other intangible assets, net | 424,433 | 362,181 | |||||
Other assets | 760,332 | 541,513 | |||||
Total assets | $ | 13,715,855 | $ | 12,593,363 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Bank borrowings and current portion of long-term debt | $ | 43,011 | $ | 61,534 | |||
Accounts payable | 5,122,303 | 4,484,908 | |||||
Accrued payroll | 383,332 | 344,245 | |||||
Other current liabilities | 1,719,418 | 1,613,940 | |||||
Total current liabilities | 7,268,064 | 6,504,627 | |||||
Long-term debt, net of current portion | 2,897,631 | 2,890,609 | |||||
Other liabilities | 531,587 | 519,851 | |||||
Commitments and contingencies (Note 13) | |||||||
Shareholders' equity | |||||||
Flex Ltd. Shareholders' equity | |||||||
Ordinary shares, no par value; 578,317,848 and 581,534,129 issued, and 528,078,493 and 531,294,774 outstanding as of March 31, 2018 and 2017, respectively | 6,636,747 | 6,733,539 | |||||
Treasury stock, at cost; 50,239,355 shares as of March 31, 2018 and 2017, respectively | (388,215 | ) | (388,215 | ) | |||
Accumulated deficit | (3,144,114 | ) | (3,572,648 | ) | |||
Accumulated other comprehensive loss | (85,845 | ) | (128,143 | ) | |||
Total Flex Ltd. shareholders' equity | 3,018,573 | 2,644,533 | |||||
Noncontrolling interests | — | 33,743 | |||||
Total shareholders' equity | 3,018,573 | 2,678,276 | |||||
Total liabilities and shareholders' equity | $ | 13,715,855 | $ | 12,593,363 | |||
The accompanying notes are an integral part of these consolidated financial statements.
51
FLEX LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands, except per share amounts) | |||||||||||
Net sales | $ | 25,441,131 | $ | 23,862,934 | $ | 24,418,885 | |||||
Cost of sales | 23,778,404 | 22,303,231 | 22,810,824 | ||||||||
Restructuring charges | 66,845 | 38,758 | — | ||||||||
Gross profit | 1,595,882 | 1,520,945 | 1,608,061 | ||||||||
Selling, general and administrative expenses | 1,019,399 | 937,339 | 954,890 | ||||||||
Intangible amortization | 78,640 | 81,396 | 65,965 | ||||||||
Restructuring charges | 23,846 | 10,637 | — | ||||||||
Other charges (income), net | (169,719 | ) | 21,193 | 47,738 | |||||||
Interest and other, net | 122,823 | 99,532 | 84,793 | ||||||||
Income before income taxes | 520,893 | 370,848 | 454,675 | ||||||||
Provision for income taxes | 92,359 | 51,284 | 10,594 | ||||||||
Net income | $ | 428,534 | $ | 319,564 | $ | 444,081 | |||||
Earnings per share: | |||||||||||
Basic | $ | 0.81 | $ | 0.59 | $ | 0.80 | |||||
Diluted | $ | 0.80 | $ | 0.59 | $ | 0.79 | |||||
Weighted-average shares used in computing per share amounts: | |||||||||||
Basic | 529,782 | 540,503 | 557,667 | ||||||||
Diluted | 536,598 | 546,220 | 564,869 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
52
FLEX LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Net income | $ | 428,534 | $ | 319,564 | $ | 444,081 | |||||
Other comprehensive income (loss): | |||||||||||
Foreign currency translation adjustments, net of zero tax | 45,618 | (1,324 | ) | 17,846 | |||||||
Unrealized gain (loss) on derivative instruments and other, net of zero tax | (3,320 | ) | 9,096 | 26,744 | |||||||
Comprehensive income | $ | 470,832 | $ | 327,336 | $ | 488,671 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
53
FLEX LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||
Ordinary Shares | Total | |||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Accumulated deficit | Unrealized gain (loss) on derivative instruments and other | Foreign currency translation adjustments | Total accumulated other comprehensive loss | Total Flex Ltd. Shareholders' Equity | Noncontrolling Interests | Shareholders' Equity | ||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
BALANCE AT MARCH 31, 2015 | 563,323 | $ | 6,877,612 | $ | (4,336,293 | ) | $ | (68,266 | ) | $ | (112,239 | ) | $ | (180,505 | ) | $ | 2,360,814 | $ | 35,436 | $ | 2,396,250 | |||||||||||||
Repurchase of Flex Ltd. ordinary shares at cost | (37,314 | ) | (412,819 | ) | — | — | — | — | (412,819 | ) | — | (412,819 | ) | |||||||||||||||||||||
Exercise of stock options | 10,244 | 61,278 | — | — | — | — | 61,278 | 486 | 61,764 | |||||||||||||||||||||||||
Issuance of Flex Ltd. vested shares under share bonus awards | 8,570 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Premium on acquired equity plan | — | 799 | — | — | — | — | 799 | — | 799 | |||||||||||||||||||||||||
Net income | — | — | 444,081 | — | — | — | 444,081 | (6,715 | ) | 437,366 | ||||||||||||||||||||||||
Stock-based compensation, net of tax | — | 72,129 | — | — | — | — | 72,129 | 5,451 | 77,580 | |||||||||||||||||||||||||
Total other comprehensive loss | — | — | — | 26,744 | 17,846 | 44,590 | 44,590 | — | 44,590 | |||||||||||||||||||||||||
BALANCE AT MARCH 31, 2016 | 544,823 | 6,598,999 | (3,892,212 | ) | (41,522 | ) | (94,393 | ) | (135,915 | ) | 2,570,872 | 34,658 | 2,605,530 | |||||||||||||||||||||
Repurchase of Flex Ltd. ordinary shares at cost | (25,125 | ) | (345,782 | ) | — | — | — | — | (345,782 | ) | — | (345,782 | ) | |||||||||||||||||||||
Exercise of stock options | 2,283 | 12,438 | — | — | — | — | 12,438 | 610 | 13,048 | |||||||||||||||||||||||||
Issuance of Flex Ltd. vested shares under share bonus awards | 9,313 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Issuance of subsidiary shares | — | — | — | — | — | — | — | 9,306 | 9,306 | |||||||||||||||||||||||||
Net income | — | — | 319,564 | — | — | — | 319,564 | (8,492 | ) | 311,072 | ||||||||||||||||||||||||
Stock-based compensation, net of tax | — | 79,669 | — | — | — | — | 79,669 | (2,339 | ) | 77,330 | ||||||||||||||||||||||||
Total other comprehensive income | — | — | — | 9,096 | (1,324 | ) | 7,772 | 7,772 | — | 7,772 | ||||||||||||||||||||||||
BALANCE AT MARCH 31, 2017 | 531,294 | 6,345,324 | (3,572,648 | ) | (32,426 | ) | (95,717 | ) | (128,143 | ) | 2,644,533 | 33,743 | 2,678,276 | |||||||||||||||||||||
Repurchase of Flex Ltd. ordinary shares at cost | (10,829 | ) | (180,050 | ) | — | — | — | — | (180,050 | ) | — | (180,050 | ) | |||||||||||||||||||||
Exercise of stock options | 667 | 2,774 | — | — | — | — | 2,774 | 256 | 3,030 | |||||||||||||||||||||||||
Issuance of Flex Ltd. vested shares under share bonus awards | 6,946 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Issuance of subsidiary shares, net | — | — | — | — | — | — | — | 63,363 | 63,363 | |||||||||||||||||||||||||
Net income | — | — | 428,534 | — | — | — | 428,534 | (7,573 | ) | 420,961 | ||||||||||||||||||||||||
Stock-based compensation, net of tax | — | 80,484 | — | — | — | — | 80,484 | 849 | 81,333 | |||||||||||||||||||||||||
Deconsolidation of subsidiary entity | — | — | — | — | — | — | — | (90,638 | ) | (90,638 | ) | |||||||||||||||||||||||
Total other comprehensive income | — | — | — | (3,320 | ) | 45,618 | 42,298 | 42,298 | — | 42,298 | ||||||||||||||||||||||||
BALANCE AT MARCH 31, 2018 | 528,078 | $ | 6,248,532 | $ | (3,144,114 | ) | $ | (35,746 | ) | $ | (50,099 | ) | $ | (85,845 | ) | $ | 3,018,573 | $ | — | $ | 3,018,573 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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FLEX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 428,534 | $ | 319,564 | $ | 444,081 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation, amortization and other impairment charges | 555,364 | 609,660 | 515,367 | ||||||||
Provision for doubtful accounts (Note 2) | 8,225 | (184 | ) | 72,295 | |||||||
Non-cash other loss (income) | (58,223 | ) | 6,858 | 24,521 | |||||||
Stock-based compensation | 81,346 | 77,330 | 77,580 | ||||||||
Gain from deconsolidation of subsidiary entity (Note 6) | (151,574 | ) | — | — | |||||||
Income taxes | 43,187 | (20,041 | ) | (64,346 | ) | ||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
Accounts receivable | (296,910 | ) | (164,239 | ) | 317,946 | ||||||
Inventories | (354,319 | ) | 85,047 | 84,790 | |||||||
Other current and noncurrent assets | (138,184 | ) | 84,949 | (2,704 | ) | ||||||
Accounts payable | 623,148 | 268,686 | (365,051 | ) | |||||||
Other current and noncurrent liabilities | 13,004 | (117,721 | ) | 31,966 | |||||||
Net cash provided by operating activities | 753,598 | 1,149,909 | 1,136,445 | ||||||||
Cash flows from investing activities: | |||||||||||
Purchases of property and equipment | (561,997 | ) | (525,111 | ) | (510,634 | ) | |||||
Proceeds from the disposition of property and equipment | 44,780 | 35,606 | 13,676 | ||||||||
Acquisition of businesses, net of cash acquired | (268,377 | ) | (189,084 | ) | (916,527 | ) | |||||
Divestitures of businesses, net of cash held in divested businesses | (2,949 | ) | 36,731 | 5,740 | |||||||
Other investing activities, net | (120,442 | ) | (60,329 | ) | 11,369 | ||||||
Net cash used in investing activities | (908,985 | ) | (702,187 | ) | (1,396,376 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from bank borrowings and long-term debt | 1,366,000 | 312,741 | 884,702 | ||||||||
Repayments of bank borrowings and long-term debt | (1,420,977 | ) | (141,730 | ) | (190,221 | ) | |||||
Payments for repurchases of ordinary shares | (180,050 | ) | (349,532 | ) | (420,317 | ) | |||||
Proceeds from exercise of stock options | 2,774 | 12,438 | 61,278 | ||||||||
Other financing activities, net | 44,468 | (76,024 | ) | (85,800 | ) | ||||||
Net cash provided by (used in) financing activities | (187,785 | ) | (242,107 | ) | 249,642 | ||||||
Effect of exchange rates on cash | (15,079 | ) | 17,490 | (10,549 | ) | ||||||
Net change in cash and cash equivalents | (358,251 | ) | 223,105 | (20,838 | ) | ||||||
Cash and cash equivalents, beginning of year | 1,830,675 | 1,607,570 | 1,628,408 | ||||||||
Cash and cash equivalents, end of year | $ | 1,472,424 | $ | 1,830,675 | $ | 1,607,570 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
55
FLEX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY
Flex 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, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. The Company designs, builds, ships and services complete packaged consumer and enterprise products, from athletic shoes to electronics, for companies of all sizes in various industries and end-markets, through its activities in the following segments:
• | Communications & Enterprise Compute ("CEC"), which includes telecom business of radio access base stations, remote radio heads, and small cells for wireless infrastructure; networking business which includes 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; |
• | Consumer Technologies Group ("CTG"), which includes consumer-related businesses in connected living, wearables, gaming, augmented and virtual reality, fashion and apparel, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers; |
• | Industrial and Emerging Industries ("IEI"), which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and |
• | High Reliability Solutions ("HRS"), which is comprised of health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging equipment; automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies. |
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).
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. Amounts included in these consolidated financial statements are expressed in U.S. dollars unless otherwise designated. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. As of March 31, 2018, the noncontrolling interest was not material as a result of the deconsolidation of one of our subsidiaries (refer to note 6 for additional information). In prior years, the noncontrolling interest was included on the consolidated balance sheets as a component of total shareholders' equity. The associated noncontrolling owners' interest in the income or losses of these companies is not material to the Company's results of operations for any period presented, and is classified as a component of interest and other, net, in the 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 an investment in common stock or in-substance common stock, and either (a) has the ability to significantly influence the operating decisions of the issuer, or (b) if the Company has a voting percentage of a corporation equal to or generally greater than 20% but less than
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50%, and for non-majority-owned investments in partnerships when greater than 5%. The equity in earnings (losses) of equity method investees are immaterial for all periods presented, and are included in interest and other, net in the consolidated statements of operations.
Use of 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. Estimates are used in accounting for, among other things: allowances for doubtful accounts; inventory write-downs; valuation allowances for deferred tax assets; uncertain tax positions; valuation and useful lives of long-lived assets including property, equipment, intangible assets and goodwill; asset impairments; fair values of financial instruments including investments, notes receivable and derivative instruments; restructuring charges; contingencies; warranty provisions; fair values of assets obtained and liabilities assumed in business combinations and the fair values of stock options and share bonus awards granted under the Company's stock-based compensation plans. Actual results may differ from previously estimated amounts, and such differences may be material to the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur.
Translation of Foreign Currencies
The financial position and results of operations for certain of the Company's subsidiaries are measured using a currency other than the U.S. dollar as their functional currency. Accordingly, all assets and liabilities for these subsidiaries are translated into U.S. dollars at the current exchange rates as of the respective balance sheet dates. Revenue and expense items are translated at the average exchange rates prevailing during the period. Cumulative gains and losses from the translation of these subsidiaries' financial statements are reported as other comprehensive loss, a component of shareholders' equity. Foreign exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, and re-measurement adjustments for foreign operations where the U.S. dollar is the functional currency, are included in operating results. Non-functional currency transaction gains and losses, and re-measurement adjustments were not material to the Company's consolidated results of operations for any of the periods presented, and have been classified as a component of interest and other, net in the consolidated statements of operations.
Revenue Recognition
The Company recognizes manufacturing revenue when it ships goods or the goods are received by its customer, title and risk of ownership have passed, the price to the buyer is fixed or determinable and recoverability is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then the Company recognizes the related revenues at the time when such requirements are completed, and the obligations are fulfilled. Some of the Company's customer contracts allow the recovery of certain costs related to manufacturing services that are over and above the prices charged for the related products. Also, certain customer contracts may contain certain commitments and obligations that may result in additional expenses or decreases in revenue. Refer to note 3 "Revenue Recognition" for further details.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable, cash and cash equivalents, and derivative instruments.
Customer Credit Risk
The Company has an established customer credit policy, through which it manages customer credit exposures through credit evaluations, credit limit setting, monitoring, and enforcement of credit limits for new and existing customers. The Company performs ongoing credit evaluations of its customers' financial condition and makes provisions for doubtful accounts based on the outcome of those credit evaluations. The Company evaluates the collectability of its accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the age of past due receivables. To the extent the Company identifies exposures as a result of credit or customer evaluations, the Company also reviews other customer related exposures, including but not limited to inventory and related contractual obligations.
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On April 21, 2016, SunEdison, Inc. (together with certain of its subsidiaries, "SunEdison"), filed a petition for reorganization under bankruptcy law. During the fiscal year ended March 31, 2016, the Company recognized a bad debt reserve charge of $61.0 million associated with its outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90.0 million. During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory previously designated for SunEdison on hand at the end of the second quarter of fiscal year 2017 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market during fiscal year 2017. In addition, the Company recognized a $16.0 million impairment charge for solar module equipment and incurred $16.9 million of incremental costs primarily related to negative margin sales and other associated solar panel direct costs. The total charge for fiscal year 2017 of $92.9 million is included in cost of sales.
The following table summarizes the activity in the Company's allowance for doubtful accounts during fiscal years 2018, 2017 and 2016:
Balance at Beginning of Year | Charged to Costs and Expenses | Deductions/ Write-Offs | Balance at End of Year | ||||||||||||
(In thousands) | |||||||||||||||
Allowance for doubtful accounts: | |||||||||||||||
Year ended March 31, 2016 | $ | 4,534 | $ | 72,295 | $ | (12,221 | ) | $ | 64,608 | ||||||
Year ended March 31, 2017 | $ | 64,608 | $ | (184 | ) | $ | (7,122 | ) | $ | 57,302 | |||||
Year ended March 31, 2018 | $ | 57,302 | $ | 8,225 | $ | (5,476 | ) | $ | 60,051 | ||||||
For the fiscal year ended March 31, 2016, the Company recognized a bad debt charge of $61.0 million associated with its outstanding SunEdison receivables as explained above, and another charge of $10.5 million relating to a separate distressed customer which was also written-off during the year.
No customer accounted for greater than 10% of the Company's net sales in fiscal years 2018 and 2017. One customer (including net sales from its parent company) within the Company's CTG segment, accounted for approximately 11% of the Company's net sales in fiscal year 2016, and approximately 17% of the Company's total accounts receivable balances in fiscal years 2018 and 2017, respectively. Another customer included in the Company's CEC segment, accounted for approximately 11% of the Company's total accounts receivable balance in fiscal year 2016.
The Company's ten largest customers accounted for approximately 41%, 43% and 46%, of its net sales in fiscal years 2018, 2017 and 2016, respectively.
Derivative Instruments
The amount subject to credit risk related to derivative instruments is generally limited to the amount, if any, by which a counterparty's obligations exceed the obligations of the Company with that counterparty. To manage counterparty risk, the Company limits its derivative transactions to those with recognized financial institutions. See additional discussion of derivatives in note 9.
Cash and Cash Equivalents
The Company maintains cash and cash equivalents with various financial institutions that management believes to be of high credit quality. These financial institutions are located in many different locations throughout the world. The Company's investment portfolio, which consists of short-term bank deposits and money market accounts, is classified as cash equivalents on the consolidated balance sheets.
All highly liquid investments with maturities of three months or less from original dates of purchase are carried at cost, which approximates fair market value, and are considered to be cash equivalents. Cash and cash equivalents consist of cash deposited in checking accounts, money market funds and time deposits.
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Cash and cash equivalents consisted of the following:
As of March 31, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
Cash and bank balances | $ | 1,019,802 | $ | 763,834 | |||
Money market funds and time deposits | 452,622 | 1,066,841 | |||||
$ | 1,472,424 | $ | 1,830,675 | ||||
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value. The stated cost is comprised of direct materials, labor and overhead. The components of inventories, net of applicable lower of cost or net realizable value write-downs, were as follows:
As of March 31, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
Raw materials | $ | 2,760,410 | $ | 2,537,623 | |||
Work-in-progress | 450,569 | 279,493 | |||||
Finished goods | 588,850 | 579,346 | |||||
$ | 3,799,829 | $ | 3,396,462 | ||||
Property and Equipment, Net
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recognized on a straight-line basis over the estimated useful lives of the related assets, with the exception of building leasehold improvements, which are amortized over the term of the lease, if shorter. Repairs and maintenance costs are expensed as incurred. Property and equipment was comprised of the following:
Depreciable Life (In Years) | As of March 31, | ||||||||
2018 | 2017 | ||||||||
(In thousands) | |||||||||
Machinery and equipment | 3 - 10 | $ | 3,004,707 | $ | 3,233,392 | ||||
Buildings | 30 | 1,154,881 | 1,237,739 | ||||||
Leasehold improvements | up to 30 | 414,917 | 395,663 | ||||||
Furniture, fixtures, computer equipment and software | 3 - 7 | 482,248 | 502,223 | ||||||
Land | — | 152,992 | 145,663 | ||||||
Construction-in-progress | — | 287,724 | 212,326 | ||||||
5,497,469 | 5,727,006 | ||||||||
Accumulated depreciation and amortization | (3,257,963 | ) | (3,409,980 | ) | |||||
Property and equipment, net | $ | 2,239,506 | $ | 2,317,026 | |||||
Total depreciation expense associated with property and equipment amounted to approximately $434.4 million, $432.2 million and $425.7 million in fiscal years 2018, 2017 and 2016, respectively. Property and equipment excludes assets held for sale as a result of the Company's agreement with a certain Chinese manufacturing company to sell its China-based Multek operations, as discussed in note 18.
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The Company reviews property and equipment for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is determined by comparing its carrying amount to the lowest level of identifiable projected undiscounted cash flows the property and equipment are expected to generate. An impairment loss is recognized when the carrying amount of property and equipment exceeds its fair value.
Deferred Income Taxes
The Company provides for income taxes in accordance with the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences between the carrying amount and the tax basis of existing assets and liabilities by applying the applicable statutory tax rate to such differences. Additionally, the Company assesses whether each income tax position is "more likely than not" of being sustained on audit, including resolution of related appeals or litigation, if any. For each income tax position that meets the "more likely than not" recognition threshold, the Company would then assess the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with the tax authority.
Accounting for Business and Asset Acquisitions
The Company has actively pursued business and asset acquisitions, which are accounted for using the acquisition method of accounting. The fair value of the net assets acquired and the results of the acquired businesses are included in the Company's consolidated financial statements from the acquisition dates forward. The Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates are used in accounting for, among other things, the fair value of acquired net operating assets, property and equipment, intangible assets and related deferred tax liabilities, useful lives of plant and equipment and amortizable lives for acquired intangible assets. Any excess of the purchase consideration over the fair value of the identified assets and liabilities acquired is recognized as goodwill.
The Company estimates the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information available at that time. Contingent consideration is recorded at fair value as of the date of the acquisition with subsequent adjustments recorded in earnings. Changes to valuation allowances on acquired deferred tax assets are recognized in the provision for, or benefit from, income taxes. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and end of the purchase price allocation period. Any changes in these estimates may have a material effect on the Company's consolidated operating results or financial position.
Goodwill
Goodwill is tested for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit, which is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis. If the recorded value of the assets, including goodwill, and liabilities ("net book value") of any reporting unit exceeds its fair value, an impairment loss may be required to be recognized. Further, to the extent the net book value of the Company as a whole is greater than its fair value in the aggregate, all, or a significant portion of its goodwill may be considered impaired.
The Company has four reporting units, which correspond to its four reportable operating segments: HRS, CTG, IEI and CEC. The Company concluded that there was no change to its reporting units in fiscal year 2018 and performed its goodwill impairment assessment on January 1, 2018. The Company bypassed the qualitative "Step Zero" assessment and performed a quantitative assessment of its goodwill and determined that no impairment existed as of the date of the impairment test because the fair value of each reporting unit exceeded its carrying value.
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The following table summarizes the activity in the Company's goodwill during fiscal years 2018 and 2017 (in thousands):
HRS | CTG | IEI | CEC | Total | |||||||||||||||
Balance, as of March 31, 2016 | 439,336 | 68,234 | 322,803 | 111,693 | 942,066 | ||||||||||||||
Additions (1) | — | 42,989 | 17,544 | 3,309 | 63,842 | ||||||||||||||
Divestitures (2) | (1,787 | ) | — | (2,640 | ) | — | (4,427 | ) | |||||||||||
Purchase accounting adjustments (3) | 794 | — | — | — | 794 | ||||||||||||||
Foreign currency translation adjustments (4) | (17,408 | ) | — | — | — | (17,408 | ) | ||||||||||||
Balance, as of March 31, 2017 | $ | 420,935 | $ | 111,223 | $ | 337,707 | $ | 115,002 | $ | 984,867 | |||||||||
Additions (1) | 75,280 | — | — | 9,744 | 85,024 | ||||||||||||||
Divestitures (2) | — | (3,475 | ) | — | — | (3,475 | ) | ||||||||||||
Purchase accounting adjustments (3) | — | — | — | (14 | ) | (14 | ) | ||||||||||||
Foreign currency translation adjustments (4) | 54,768 | — | — | — | 54,768 | ||||||||||||||
Balance, as of March 31, 2018 | $ | 550,983 | $ | 107,748 | $ | 337,707 | $ | 124,732 | $ | 1,121,170 | |||||||||
_______________________________________________________________________________
(1) | The goodwill generated from the Company's business combinations completed during the fiscal years 2018 and 2017 are primarily related to value placed on the employee workforce, service offerings and capabilities and expected synergies. The goodwill is not deductible for income tax purposes. Refer to the discussion of the Company's business acquisitions in note 18. |
(2) | During the fiscal year ended March 31, 2018, the Company disposed of Wink Labs Inc. ("Wink"), a business within the CTG segment, and recorded an aggregate reduction of goodwill of $3.5 million, which is included in the gain on sale recorded in other charges, net on the consolidated statement of operations. During the fiscal year ended March 31, 2017, 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, which is included in the loss on sale recorded in other charges, net on the consolidated statement of operations. |
(3) | Includes adjustments based on management's estimates resulting from its review and finalization of the valuation of assets and liabilities acquired 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. |
(4) | During the fiscal years ended March 31, 2018 and 2017, the Company recorded $54.8 million and $17.4 million, respectively, of foreign currency translation adjustments primarily related to the goodwill associated with the acquisition of AGM Automotive ("AGM") in fiscal year 2018 and Mirror Controls International ("MCi") in fiscal year 2016, as the U.S. Dollar fluctuated against foreign currencies. |
Other Intangible Assets
The Company's acquired intangible assets are subject to amortization over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset exceeds its fair value. The Company reviewed the carrying value of its intangible assets as of March 31, 2018 and concluded that such amounts continued to be recoverable.
Intangible assets are comprised of customer-related intangible assets that include contractual agreements and customer relationships; and licenses and other intangible assets, that are primarily comprised of licenses and also include patents and trademarks, and developed technologies. Generally, both customer-related intangible assets and licenses and other intangible assets are amortized on a straight-line basis, over a period of up to ten years. No residual value is estimated for any intangible
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assets. The fair value of the Company's intangible assets purchased through business combinations is determined based on management's estimates of cash flow and recoverability. The components of acquired intangible assets are as follows:
As of March 31, 2018 | As of March 31, 2017 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Intangible assets: | |||||||||||||||||||||||
Customer-related intangibles | $ | 306,943 | $ | (79,051 | ) | $ | 227,892 | $ | 260,704 | $ | (105,912 | ) | $ | 154,792 | |||||||||
Licenses and other intangibles | 304,007 | (107,466 | ) | 196,541 | 283,897 | (76,508 | ) | 207,389 | |||||||||||||||
Total | $ | 610,950 | $ | (186,517 | ) | $ | 424,433 | $ | 544,601 | $ | (182,420 | ) | $ | 362,181 | |||||||||
The gross carrying amounts of intangible assets are removed when fully amortized. During fiscal year 2018, the gross carrying amounts of fully amortized intangible assets totaled $38.3 million. During fiscal year 2018, the gross carrying amount of intangible assets increased primarily in connection with the Company's acquisitions during the year. Total intangible asset amortization expense recognized in operations during fiscal years 2018, 2017 and 2016 was $78.6 million, $81.4 million and $66.0 million, respectively. As of March 31, 2018, the weighted-average remaining useful lives of the Company's intangible assets were approximately 7.1 years for customer-related intangibles and approximately 6.1 years for licenses and other intangible assets. The estimated future annual amortization expense for acquired intangible assets is as follows:
Fiscal Year Ending March 31, | Amount | ||
(In thousands) | |||
2019 | $ | 75,319 | |
2020 | 68,981 | ||
2021 | 64,440 | ||
2022 | 55,301 | ||
2023 | 46,762 | ||
Thereafter | 113,630 | ||
Total amortization expense | $ | 424,433 | |
We own or license various United States and foreign patents relating to a variety of technologies. For certain of our proprietary processes, inventions, and works of authorship, we rely on trade secret or copyright protection. We also maintain trademark rights (including registrations) for our corporate name and several other trademarks and service marks that we use in our business in the United States and other countries throughout the world. We have implemented appropriate policies and procedures (including both technological means and training programs for our employees) to identify and protect our intellectual property, as well as that of our customers and suppliers. As of March 31, 2018 and 2017, the carrying value of our intellectual property was not material.
Derivative Instruments and Hedging Activities
All derivative instruments are recognized on the consolidated balance sheets at fair value. If the derivative instrument is designated as a cash flow hedge, effectiveness is tested monthly using a regression analysis of the change in spot currency rates and the change in present value of the spot currency rates. The spot currency rates are discounted to present value using functional currency Inter-bank Offering Rates over the maximum length of the hedge period. The effective portion of changes in the fair value of the derivative instrument (excluding time value) is recognized in shareholders' equity as a separate component of accumulated other comprehensive income (loss), and recognized in the consolidated statements of operations when the hedged item affects earnings. Ineffective and excluded portions of changes in the fair value of cash flow hedges are recognized in earnings immediately. If the derivative instrument is designated as a fair value hedge, the changes in the fair
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value of the derivative instrument and of the hedged item attributable to the hedged risk are recognized in earnings in the current period. Additional information is included in note 9.
Other Current Assets
Other current assets include approximately $445.4 million and $506.5 million as of March 31, 2018 and 2017, respectively for the deferred purchase price receivable from the Company's Global and North American Asset-Backed Securitization programs. See note 11 for additional information. Further, the Company recorded in other current assets, approximately $321.1 million of assets, primarily property and equipment and accounts receivable, classified as held for sale. See note 18 for additional information.
Investments
During the first quarter of fiscal year 2018, the Company sold Wink to an unrelated third-party venture backed company in exchange for consideration fair valued at $59.0 million. This estimated consideration was based on the value of the acquirer as of the most recent third-party funding of which the Company participated. The Company recognized a non-cash gain on sale of $38.7 million, which is recorded in other charges (income), net on the condensed consolidated statement of operations in the year ended March 31, 2018. As of March 31, 2018, the total investment, including working capital advances, of $76.5 million is accounted for as a cost method investment, and is included in other assets on the consolidated balance sheet.
During the second quarter of fiscal year 2018, the Company deconsolidated one of its majority owned subsidiaries, following the amendments of certain agreements that resulted in joint control of the board of directors between the Company and other non-controlling interest holders. As of March 31, 2018, this subsidiary is accounted for as a cost method investment of approximately $124.6 million and is included in other assets on the consolidated balance sheet. See note 6 for additional information on the deconsolidation.
The Company has certain equity investments in, and notes receivable from, non-publicly traded companies which are included within other assets. The equity method of accounting is used for investments in common stock or in-substance common stock when the Company has the ability to significantly influence the operating decisions of the issuer; otherwise the cost method is used. Non-majority-owned investments in corporations are accounted for using the equity method when the Company has a voting percentage 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 Company monitors these investments for impairment indicators and makes appropriate reductions in carrying values as required whenever events or changes in circumstances indicate that the assets may be impaired. The factors the Company considers in its evaluation of potential impairment of its investments, include, but are not limited to a significant deterioration in the earnings performance or business prospects of the investee, or factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operation or working capital deficiencies. Fair values of these investments, when required, are estimated using unobservable inputs, primarily comparable company multiples and discounted cash flow projections.
As of March 31, 2018 and 2017, the Company's equity investments in non-majority owned companies totaled $411.1 million and $200.1 million, respectively. The equity in the earnings or losses of the Company's equity method investments was not material to the consolidated results of operations for any period presented and is included in interest and other, net.
During fiscal year 2017, the Company formed a joint venture with RIB Software AG, a provider of technology for the construction industry. This joint venture will offer a fully integrated enterprise software platform for building and housing projects. The Company contributed $60.0 million for a non-controlling interest in this joint venture. This contribution, net of the Company's equity in losses, which is immaterial, is included in other assets on the consolidated balance sheet. The cash outflows to pay for this investment have been included in cash flows from other investing activities during the fiscal year ended March 31, 2017.
Other Current Liabilities
Other current liabilities include customer working capital advances of $153.6 million and $231.3 million, customer-related accruals of $439.0 million and $501.9 million, and deferred revenue of $329.0 million and $280.7 million as of March 31, 2018 and 2017, 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.
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Restructuring Charges
The Company recognizes restructuring charges related to its plans to close or consolidate excess manufacturing facilities and rationalize administrative functions. In connection with these activities, the Company records restructuring charges for employee termination costs, long-lived asset impairment and other exit-related costs.
The recognition of restructuring charges requires the Company to make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. To the extent the Company's actual results differ from its estimates and assumptions, the Company may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. Such changes to previously estimated amounts may be material to the consolidated financial statements. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed restructuring plans. See note 15 for additional information regarding restructuring charges.
Recently Adopted Accounting Pronouncements
In July 2015, the Financial Accounting standards Board ("FASB") issued Accounting Standard Updates ("ASU") No. 2015-11 "Inventory (Topic 330): Simplifying the Measurement of Inventory", to simplify the measurement of inventory, by requiring that inventory be measured at the lower of cost and net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. The Company adopted the guidance, prospectively, effective April 1, 2017 and it did not have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory", intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted in the first interim period of fiscal year 2018. The Company adopted the guidance, on a modified retrospective basis, effective April 1, 2017 and it did not have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17 "Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control" to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity ("VIE") should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. This guidance requires that the amendments be applied on a retrospective or modified retrospective basis, and it is effective for the Company beginning in the first quarter of fiscal year 2018, with early adoption permitted. The Company adopted the guidance, retrospectively, effective April 1, 2017 and it did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships and simplifying the application of the hedge accounting guidance in current GAAP. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2020.
In January 2017, the FASB issued ASU 2017-04 "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" to simplify the subsequent measurement of goodwill by eliminating step 2 from the goodwill impairment test. This guidance requires that the change be applied on a prospective basis, and it is effective for the Company beginning in the first quarter of fiscal year 2021, with early application permitted. The Company is currently assessing the impact of the new guidance and the timing of adoption.
In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business” to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for Flex
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beginning in the first quarter of fiscal year 2019, with early adoption permitted, and it should be applied on a prospective basis starting on date of adoption. The Company plans to adopt the guidance effective the first quarter of fiscal year 2019.
In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)." The ASU is intended to address specific cash flow issues with the objective of reducing the existing diversity in practice and provide guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classification. However, cash receipts on the deferred purchase price as described in note 11 will be classified as cash flow from investing activities instead of the Company's current presentation as cash flows from operations. The Company intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2019 and retrospectively report cash flows from operating and investing activities for all periods presented. While the Company is still quantifying the impact of adoption of this standard, it does expect the standard to result in a material increase in cash flows from investing activities and corresponding reduction in cash flows from operating activities for all periods presented.
In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)" intended to improve financial reporting on leasing transactions. The new lease guidance will require entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. The guidance will also enhance existing disclosure requirements relating to those leases. The Company intends to adopt the new lease guidance beginning when it becomes effective in the first quarter of fiscal year 2020 using a modified retrospective approach. Upon initial evaluation, the Company believes the new guidance will have a material impact on its consolidated balance sheets when adopted.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This guidance generally requires equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. This guidance also requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted, and the guidance must be applied prospectively to equity investments that exist as of the adoption date. The Company will adopt this guidance on April 1, 2018 when effective. The adoption of this guidance is not expected to have any material impact on the Company's financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" which requires an entity to recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition will include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from costs to obtain or fulfill a contract. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019.
The adoption of the new standard will change the timing of revenue recognition for a portion of Flex’s business. Under the new standard, revenue for certain of Flex's manufacturing services customer contracts will be recognized earlier than under the current accounting rules (where Flex recognizes revenue based on shipping and delivery).
The new guidance allows for two transition methods in application: retrospective to each prior reporting period presented (full retrospective method), or retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company will adopt the standard on April 1, 2018 using the modified retrospective approach. Under this approach, prior financial statements presented will not be restated.
Upon adoption of the standard, the Company estimates an adjustment to its beginning accumulated deficit in the range of $30 million to $70 million as of April 1, 2018. In addition, the Company estimates reduction in finished good and work-in-progress inventories in the range of $300 million to $500 million in aggregate. The Company estimates a corresponding increase to unbilled receivables of approximately $330 million to $550 million. The Company is continuing to assess the impact
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of adopting the new standard on its consolidated financial statements. The Company is also continuing to adjust its accounting policies, operational and financial reporting processes, systems capabilities and relevant internal controls.
3. REVENUE RECOGNITION
The Company recognizes manufacturing revenue when it ships goods or the goods are received by its customer, title and risk of ownership have passed, the price to the buyer is fixed or determinable and recoverability is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then the Company recognizes the related revenues at the time when such requirements are completed, and the obligations are fulfilled. Some of the Company's customer contracts allow the recovery of certain costs related to manufacturing services that are over and above the prices charged for the related products. The Company determines the amount of costs that are recoverable based on agreements with those customers. Also, certain customer contracts contain commitments and obligations that may result in additional expenses or decreases in revenue. The Company accrues for these commitments and obligations based on facts and circumstances including historical practice and contractual terms. Please see additional details in the customer contract section below. The Company also makes provisions for estimated sales returns at the time revenue is recognized based upon contractual terms and an analysis of historical returns and adjustments. Provisions for sales returns were not material to the consolidated financial statements for any of the periods presented.
The Company provides a comprehensive suite of services for its customers that range from advanced product design to manufacturing and logistics to after-sales services. The Company recognizes service revenue when the services have been performed, and the related costs are expensed as incurred. Sales for services were less than 10% of the Company's total sales for all periods presented, and accordingly, are included in net sales in the consolidated statements of operations. The Company recognized research and development costs primarily related to its design and innovations businesses of $78.2 million, $65.6 million, and $61.0 million for the fiscal years ended March 31, 2018, 2017 and 2016, respectively.
Transition to ASC 606
ASU 2014-09 “Revenue Contracts with Customers (Topic 606)” establishes a comprehensive framework for determining the nature, amount, timing and uncertainty of revenues and cash flows arising from a contract with a customer. Upon adoption of the new guidance, effective April 1, 2018 for Flex, the timing of revenue recognition for a portion of the Company’s business will change, resulting in the recognition of revenue for certain of the Company’s manufacturing services customer contracts earlier than under the previous recognition rules. Refer to note 2 for further detail about the impact to the Company upon adoption.
Customer Contracts and Related Obligations
The Company generally enters into master supply agreements (“MSA”) with its customers that provide the framework under which business will be conducted. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing formulas, payment terms, etc. On occasion, the level of business under those agreements is not guaranteed. In those instances, we bid on a program-by-program basis and typically receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order, or any other similar documents such as a statement of work that embody the commitment by the customer.
Certain of the Company’s customer agreements include terms that result in potential price adjustments. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually restricted to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company accrues for these contractual provisions as a reduction of revenues when incurred which generally approximates the same time that revenue for the portion of the arrangement that is not subject to such price adjustments is recognized. The Company determines the amounts to be accrued based on the amount of potential refund required by the contract, where applicable, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices in future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In some instances, the agreement might be silent on the settlement mechanism. Any difference between the amount accrued upon shipment for potential refunds and the actual amount
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agreed to with the customer is recorded as an increase or decrease in revenue. These potential price adjustments are included as part of other current liabilities on the consolidated balance sheet, and disclosed as part of customer related accruals in note 2. Refer to note 2 for further details about other current liabilities.
4. SHARE-BASED COMPENSATION
Equity Compensation Plans
Historically, the Company's primary plan used for granting equity compensation awards was the 2010 Equity Incentive Plan (the "2010 Plan"). Effective August 15, 2017, awards are granted under the Company's 2017 Equity Incentive Plan (the "2017 Plan"), which was approved by the Company's shareholders at the 2017 Annual General Meeting of Shareholders, to replace the 2010 Plan for further grants. For additional discussion about the 2017 Plan, refer to the Company's Proxy Statement, which was filed with the Securities and Exchange Commission on July 5, 2017.
During fiscal year 2016, in conjunction with the acquisition of 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 these shares into Flex awards. As a result, the Company now maintains the 2014 NEXTracker Equity Incentive Plan (the "NEXTracker Plan").
Additionally, during 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 maintains an additional equity compensation plan, the BrightBox Technologies 2013 Plan (the "BrightBox Plan"). The BrightBox Plan is immaterial to the Company for all periods presented.
As a result of the deconsolidation of Elementum during fiscal year 2018, the Company no longer grants equity compensation awards under the 2013 Elementum Plan. Refer to note 6 for additional information on the deconsolidation.
Share-Based Compensation Expense
The following table summarizes the Company's share-based compensation expense for all Equity Incentive Plans:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Cost of sales | $ | 19,102 | $ | 10,023 | $ | 8,986 | |||||
Selling, general and administrative expenses | 66,142 | 72,243 | 68,594 | ||||||||
Total share-based compensation expense | $ | 85,244 | $ | 82,266 | $ | 77,580 | |||||
Cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee exercises of share options over the share-based compensation cost recognized for those options) are classified as operating cash flows. During fiscal years 2018, 2017 and 2016, the Company did not recognize any excess tax benefits as an operating cash inflow.
The 2017 Equity Incentive Plan
As of March 31, 2018, the Company had approximately 22.2 million shares available for grant under the 2017 Plan. Options issued to employees under the 2017 Plan generally vest over four years and expire ten years from the date of grant. Options granted to non-employee directors expire five years from the date of grant.
The exercise price of options granted to employees is determined by the Company's Board of Directors or the Compensation Committee and may not be less than the closing price of the Company's ordinary shares on the date of grant.
As of March 31, 2018, the total unrecognized compensation cost related to unvested share options granted to employees under the 2017 Plan was not significant and will be amortized on a straight-line basis over a weighted-average period of approximately six months.
The Company also grants share bonus awards under its equity compensation plan. Share bonus awards are rights to acquire a specified number of ordinary shares for no cash consideration in exchange for continued service with the Company.
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Share bonus awards generally vest in installments over a three to five-year period and unvested share bonus awards are forfeited upon termination of employment.
Vesting for certain share bonus awards is contingent upon both service and market conditions. Further, vesting for certain share bonus awards granted to certain executive officers is contingent upon meeting certain free cash flow targets.
As of March 31, 2018, the total unrecognized compensation cost related to unvested share bonus awards granted to employees was approximately $134.2 million under the 2017 Plan. These costs will be amortized generally on a straight-line basis over a weighted-average period of approximately 2.5 years. Approximately $14.2 million of the unrecognized compensation cost related to the 2017 Plan is related to share bonus awards granted to certain key employees whereby vesting is contingent on meeting a certain market condition.
Determining Fair Value - Options and share bonus awards
Valuation and Amortization Method—The Company estimates the fair value of share options granted under the 2017 and 2010 Plans using the Black-Scholes valuation method and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair market value of share bonus awards granted, other than those awards with a market condition, is the closing price of the Company's ordinary shares on the date of grant and is generally recognized as compensation expense on a straight-line basis over the respective vesting period.
Expected Term—The Company's expected term used in the Black-Scholes valuation method represents the period that the Company's share options are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the share options, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its share options.
Expected Volatility—The Company's expected volatility used in the Black-Scholes valuation method is derived from a combination of implied volatility related to publicly traded options to purchase Flex ordinary shares and historical variability in the Company's periodic share price.
Expected Dividend—The Company has never paid dividends on its ordinary shares and accordingly the dividend yield percentage is zero for all periods.
Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected term of the option.
There were no options granted under the 2017 and 2010 Plans during fiscal years 2018, 2017 and 2016.
Determining Fair Value - Share bonus awards with service and market conditions
Valuation and Amortization Method—The Company estimates the fair value of share bonus awards granted under the 2017 and 2010 Plans whereby vesting is contingent on meeting certain market conditions using Monte Carlo simulation. This fair value is then amortized on a straight-line basis over the vesting period, which is the service period.
Expected volatility of Flex—Volatility used in a Monte Carlo simulation is derived from the historical volatility of Flex's stock price over a period equal to the service period of the share bonus awards granted. The service period is three years for those share bonus awards granted in fiscal years 2018, 2017 and 2016.
Average peer volatility—Volatility used in a Monte Carlo simulation is derived from the historical volatilities of the Standard and Poor's ("S&P") 500 index for the share bonus awards granted in fiscal years 2018, 2017 and 2016.
Average Peer Correlation—Correlation coefficients were used to model the movement of Flex's stock price relative to the S&P 500 index for the share bonus awards granted in fiscal years 2018, 2017 and 2016.
Expected Dividend and Risk-Free Interest Rate assumptions—Same methodology as discussed above.
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The fair value of the Company's share-bonus awards under the 2017 and 2010 Plans, whereby vesting is contingent on meeting certain market conditions, for fiscal years 2018, 2017 and 2016 was estimated using the following weighted-average assumptions:
Fiscal Year Ended March 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Expected volatility | 25.1 | % | 25.8 | % | 26.0 | % | ||
Average peer volatility | 28.7 | % | 25.1 | % | 23.0 | % | ||
Average peer correlation | 0.6 | 0.6 | 0.6 | |||||
Expected dividends | 0.0 | % | 0.0 | % | 0.0 | % | ||
Risk-free interest rate | 1.5 | % | 0.9 | % | 1.2 | % | ||
Share-Based Awards Activity
The following is a summary of option activity for the Company's 2017 and 2010 Plans ("Price" reflects the weighted-average exercise price):
Fiscal Year Ended March 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||
Outstanding, beginning of fiscal year | 142,327 | $ | 8.97 | 2,369,636 | $ | 8.31 | 15,992,894 | $ | 7.81 | |||||||||||
Granted | — | — | — | — | — | — | ||||||||||||||
Exercised | (125,949 | ) | 8.63 | (1,573,356 | ) | 6.89 | (10,006,774 | ) | 6.10 | |||||||||||
Forfeited | (9,500 | ) | 11.55 | (653,953 | ) | 12.39 | (3,616,484 | ) | 12.23 | |||||||||||
Outstanding, end of fiscal year | 6,878 | $ | 9.78 | 142,327 | $ | 8.97 | 2,369,636 | $ | 8.31 | |||||||||||
Options exercisable, end of fiscal year | 5,751 | $ | 9.52 | 138,950 | $ | 8.93 | 2,359,527 | $ | 8.30 | |||||||||||
The aggregate intrinsic value of options exercised under the Company's 2010 Plan (calculated as the difference between the exercise price of the underlying award and the price of the Company's ordinary shares determined as of the time of option exercise for options exercised in-the-money) was $1.1 million, $9.3 million and $55.3 million during fiscal years 2018, 2017 and 2016, respectively.
Cash received from option exercises under the 2010 Plan was $1.1 million, $10.9 million and $61.1 million for fiscal years 2018, 2017 and 2016, respectively.
As of March 31, 2018 the aggregate intrinsic value for options outstanding, options vested and expected to vest, and options exercisable under the Company's 2017 and 2010 Plans were immaterial. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's ordinary shares as of March 31, 2018 for the immaterial amount of options that were in-the-money at March 31, 2018.
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The following table summarizes the Company's share bonus award activity under the 2017 and 2010 Plans ("Price" reflects the weighted-average grant-date fair value):
Fiscal Year Ended March 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||
Unvested share bonus awards outstanding, beginning of fiscal year | 15,698,582 | $ | 12.44 | 17,000,076 | $ | 10.77 | 18,993,252 | $ | 9.01 | |||||||||||
Granted (1) | 6,155,761 | 16.99 | 8,261,666 | 13.46 | 7,619,722 | 12.23 | ||||||||||||||
Vested (1) | (6,473,562 | ) | 12.17 | (8,606,246 | ) | 9.44 | (8,529,378 | ) | 7.93 | |||||||||||
Forfeited | (1,488,739 | ) | 13.38 | (956,914 | ) | 11.20 | (1,083,520 | ) | 9.67 | |||||||||||
Unvested share bonus awards outstanding, end of fiscal year | 13,892,042 | $ | 14.52 | 15,698,582 | $ | 12.44 | 17,000,076 | $ | 10.77 | |||||||||||
(1) Included in the fiscal years 2018 and 2017 amounts are 0.7 million and 1.7 million of share bonus awards, respectively, representing the number of awards achieved above target levels based on the achievement of certain market conditions, as further described in the table below. These awards were issued and immediately vested in accordance with the terms and conditions of the underlying awards.
Of the 6.2 million unvested share bonus awards granted under the 2017 and 2010 Plans in fiscal year 2018, approximately 4.7 million are plain-vanilla unvested share bonus awards with no performance or market conditions with an average grant date price of $16.57 per share. Further, approximately 0.2 million of these unvested share bonus awards have an average grant date price of $16.34 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. These awards cliff vest after three years and will ultimately pay out over a 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. Further, 0.6 million of these unvested share bonus awards granted in fiscal year 2018 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 $20.25 per award and was calculated using a Monte Carlo simulation. Vesting information for these shares are further detailed in the table below. Finally, the remaining balance of 0.7 million represents the number of awards achieved above target levels, as described in the table above.
Of the 13.9 million unvested share bonus awards outstanding under the 2017 and 2010 Plans as of the fiscal year ended 2018, approximately 2.0 million of unvested share bonus awards represents the target amount of grants made to certain key employees whereby vesting is contingent on meeting certain market conditions summarized as follows:
Targeted number of awards as of March 31, 2018 (in shares) | Range of shares that may be issued (1) | ||||||||||||||
Average grant date fair value (per share) | |||||||||||||||
Assessment dates | |||||||||||||||
Year of grant | Minimum | Maximum | |||||||||||||
Fiscal 2018 | 623,620 | $ | 20.25 | — | 1,247,240 | June 2020 | |||||||||
Fiscal 2017 | 677,523 | $ | 17.57 | — | 1,355,046 | June 2019 | |||||||||
Fiscal 2016 | 648,929 | $ | 14.96 | — | 1,297,858 | June 2018 | |||||||||
Totals | 1,950,072 | — | 3,900,144 | ||||||||||||
(1) Vesting ranges from zero to 200% based on measurement of Flex's total shareholder return against the Standard and Poor's ("S&P") 500 Composite Index.
The Company will recognize share-based compensation expense for awards with market conditions regardless of whether such awards will ultimately vest. During fiscal year 2018, 1.4 million shares vested in connection with the share bonus awards with market conditions granted in fiscal year 2015.
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The total intrinsic value of share bonus awards vested under the Company's 2017 and 2010 Plans was $108.4 million, $109.5 million and $103.2 million during fiscal years 2018, 2017 and 2016, respectively, based on the closing price of the Company's ordinary shares on the date vested.
The 2014 NEXTracker Equity Incentive Plan
All awards 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. During fiscal year 2018, the Company modified the vesting conditions of 0.3 million unvested options and 0.5 million share bonus awards under the NEXTracker Plan contingent on meeting certain performance targets. These options and share bonus awards were then re-granted to vest in installments over a three-year period commencing September 29, 2017. The Company determined that the transaction falls under the accounting for modification of awards, and accordingly adjusted the recognized compensation expense with an immaterial impact on the statement of operations for fiscal year 2018.
Options issued to employees under the NEXTracker Plan generally have a vesting period of two to four years from vesting commencement date and expire ten years from the date of grant.
The exercise price of options granted to employees was determined by the Company based on a conversion rate agreed upon in the purchase agreement of NEXTracker.
As of March 31, 2018, the total unrecognized compensation cost related to unvested share options granted to employees under the NEXTracker Plan was $6.3 million and will be amortized on a straight-line basis over a weighted-average period of approximately 2.1 years.
Share bonus awards issued to employees under the NEXTracker Plan vest in installments over a three to five-year period from vesting commencement date, and unvested share bonus awards are forfeited upon termination of employment. Vesting for certain of these share bonus awards is contingent on meeting certain performance targets over a three-year period commencing September 29, 2017, following the modification of vesting conditions described above.
As of March 31, 2018, the total unrecognized compensation cost related to unvested share bonus awards granted to employees under the NEXTracker Plan was approximately $10.5 million and will be amortized generally on a straight-line basis over a weighted-average period of approximately 2.5 years.
Determining Fair Value
As noted above, the Company re-granted certain shares options under the NEXTracker Plan during fiscal year 2018 after modifying the vesting conditions. The fair value of share options granted under the NEXTracker Plan for fiscal years 2018 and 2016 was estimated using the following weighted-average assumptions:
Fiscal Year Ended March 31, 2018 | Fiscal Year Ended March 31, 2016 | |
Expected term | 6.5 years | 2.9 years |
Expected volatility | 28.8% | 28.8% |
Expected dividends | 0.0% | 0.0% |
Risk-free interest rate | 2.1% | 0.9% |
Weighted-average fair value | $16.29 | $7.76 |
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Share-Based Awards Activity
The following is a summary of option activity for the NEXTracker Plan ("Price" reflects the weighted-average exercise price):
Fiscal Year Ended March 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||
Outstanding, beginning of fiscal year | 1,636,016 | $ | 3.61 | 2,741,854 | $ | 3.44 | — | $ | — | |||||||||||
Granted | 288,386 | 0.54 | — | — | 3,205,806 | 3.28 | ||||||||||||||
Exercised | (510,322 | ) | 3.27 | (709,845 | ) | 2.24 | (237,380 | ) | 0.99 | |||||||||||
Forfeited | (352,820 | ) | 5.69 | (395,993 | ) | 4.64 | (226,572 | ) | 3.75 | |||||||||||
Outstanding, end of fiscal year | 1,061,260 | $ | 3.55 | 1,636,016 | $ | 3.61 | 2,741,854 | $ | 3.44 | |||||||||||
Options exercisable, end of fiscal year | 352,829 | $ | 5.11 | 369,015 | $ | 5.00 | 223,869 | $ | 4.95 | |||||||||||
The aggregate intrinsic value of options exercised under the NEXTracker plan (calculated as the difference between the exercise price of the underlying award and the price of the Company's ordinary shares determined as of the time of option exercise for options exercised in-the-money) was $7.3 million, $8.0 million and 2.3 million as of March 31, 2018, 2017 and 2016, respectively.
Cash received from option exercises under the NEXTracker Plan was $1.7 million, $1.6 million and $0.2 million for fiscal years 2018, 2017 and 2016, respectively.
As of March 31, 2018 the aggregate intrinsic value for options outstanding, options vested and expected to vest, and options exercisable under the Company's NEXTracker Plan, were $13.6 million, $13.6 million, and $4.0 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's ordinary shares as of March 31, 2018 for the approximately 1.1 million options under the NEXTracker Plan that were in-the-money at March 31, 2018.
The following table summarizes the Company's share bonus award activity under the NEXTracker Plan ("Price" reflects the weighted-average grant-date fair value):
Fiscal Year Ended March 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||
Unvested share bonus awards outstanding, beginning of fiscal year | 1,543,437 | $ | 10.23 | 2,309,096 | $ | 10.27 | — | $ | — | |||||||||||
Granted | 524,978 | 16.73 | — | — | 2,393,195 | 10.27 | ||||||||||||||
Vested | (471,831 | ) | 7.63 | (705,738 | ) | 10.19 | (31,925 | ) | 10.27 | |||||||||||
Forfeited | (868,934 | ) | 10.18 | (59,921 | ) | 10.27 | (52,174 | ) | 10.27 | |||||||||||
Unvested share bonus awards outstanding, end of fiscal year | 727,650 | $ | 11.85 | 1,543,437 | $ | 10.23 | 2,309,096 | $ | 10.27 | |||||||||||
The total intrinsic value of share bonus awards vested under the Company's NEXTracker Plan was $8.0 million and $9.6 million, during fiscal year 2018 and 2017, respectively, based on the closing price of the Company's ordinary shares on the date
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vested. The total intrinsic value of share bonus awards vested under the Company's NEXTracker Plan was immaterial during fiscal year 2016.
5. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted-average number of ordinary shares outstanding during the applicable periods.
Diluted earnings per share reflects the potential dilution from stock options and share bonus awards. The potential dilution from stock options exercisable into ordinary share equivalents and share bonus awards was computed using the treasury stock method based on the average fair market value of the Company's ordinary shares for the period.
The following table reflects the basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted income per share:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands, except per share amounts) | |||||||||||
Basic earnings per share: | |||||||||||
Net income | $ | 428,534 | $ | 319,564 | $ | 444,081 | |||||
Shares used in computation: | |||||||||||
Weighted-average ordinary shares outstanding | 529,782 | 540,503 | 557,667 | ||||||||
Basic earnings per share | $ | 0.81 | $ | 0.59 | $ | 0.80 | |||||
Diluted earnings per share: | |||||||||||
Net income | $ | 428,534 | $ | 319,564 | $ | 444,081 | |||||
Shares used in computation: | |||||||||||
Weighted-average ordinary shares outstanding | 529,782 | 540,503 | 557,667 | ||||||||
Weighted-average ordinary share equivalents from stock options and awards (1) | 6,816 | 5,717 | 7,202 | ||||||||
Weighted-average ordinary shares and ordinary share equivalents outstanding | 536,598 | 546,220 | 564,869 | ||||||||
Diluted earnings per share | $ | 0.80 | $ | 0.59 | $ | 0.79 | |||||
_________________________________________________________________________
(1) | An immaterial amount of options to purchase ordinary shares during fiscal year 2018 were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted average ordinary shares equivalents. Options to purchase ordinary shares of 0.5 million and 2.0 million during fiscal years 2017 and 2016, respectively, were excluded from the computation of diluted earnings per share. |
Share bonus awards of less than 0.1 million during fiscal year 2018 and 2017, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted average ordinary shares equivalents. There were no anti-dilutive share bonus awards in fiscal year 2016.
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6. NONCONTROLLING INTEREST AND DECONSOLIDATION OF SUBSIDIARY ENTITY
Starting in fiscal year 2014, the Company had a majority owned subsidiary, Elementum SCM (Cayman) Ltd ("Elementum"), which qualified as a variable interest entity for accounting purposes. The Company owned a majority of Elementum' s outstanding equity (consisting primarily of preferred stock) and as of March 31, 2017, controlled its board of directors, which gave the Company the power to direct the activities of Elementum that most significantly impact its economic performance. Accordingly, the Company recognized the carrying value of the noncontrolling interest as a component of total shareholders' equity, and the consolidated financial statements included the financial position and results of operations of Elementum as of and for the periods ended March 31, 2017 and 2016.
During the second quarter of fiscal year 2018, the Company and other minority shareholders of Elementum amended certain agreements resulting in joint control of the board of directors between the Company and other non-controlling interest holders. As a result, the Company concluded it is no longer the primary beneficiary of Elementum and accordingly, deconsolidated the entity. The Company no longer recognizes the carrying value of the noncontrolling interest as a component of total shareholder’s equity resulting in a reduction of $90.6 million of noncontrolling interest from its consolidated balance sheet upon deconsolidation. Further, the Company derecognized approximately $72.6 million of cash of Elementum as of the date of deconsolidation which is reflected as an outflow from investing activities within other investing activities, net in the consolidated statement of cash flows for the year ended March 31, 2018. There were no other material impacts to the consolidated balance sheet or consolidated cash flows resulting from deconsolidation of the entity. The noncontrolling interest in the operating losses of Elementum prior to deconsolidation is immaterial for all periods presented and is classified as a component of interest and other, net, in the Company's consolidated statements of operations.
The carrying amount of the Company’s variable interest in Elementum was approximately $124.6 million as of March 31, 2018, is accounted for as a cost method investment, and is included in other assets on the consolidated balance sheet. The value of the Company’s variable interest on the date of deconsolidation was based on management’s estimate of the fair value of Elementum at that time. The Company concluded that the market approach was the most appropriate method to determine the fair value of the entity on the date of deconsolidation, given that Elementum raised equity funding from third-party investors around the same period (i.e., level 2 inputs). The Company recognized a gain on deconsolidation of approximately $151.6 million with no related tax impact, which is included in other charges (income), net on the consolidated statement of operations. As the Company is not obligated to fund future losses of Elementum, the carrying amount is the Company’s maximum risk of loss. Pro-forma financials have not been presented because the effects were not material to the Company’s consolidated financial position and results of operation for all periods presented. Elementum remains a related party to the Company after deconsolidation and transactions between the Company and Elementum during the year ended March 31, 2018 were immaterial.
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7. SUPPLEMENTAL CASH FLOW DISCLOSURES
The following table represents supplemental cash flow disclosures and non-cash investing and financing activities:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Net cash paid for: | |||||||||||
Interest | $ | 152,750 | $ | 127,346 | $ | 114,578 | |||||
Income taxes | 91,846 | 86,651 | 105,453 | ||||||||
Non-cash investing and financing activity: | |||||||||||
Unpaid purchases of property and equipment | $ | 128,044 | $ | 84,375 | $ | 93,310 | |||||
Customer-related third party banking institution equipment financing net settlement | — | 90,576 | — | ||||||||
Non-cash investment in Elementum (Note 6) | 132,679 | — | — | ||||||||
Non-cash proceeds from sales of Wink (Note 2) | 59,000 | — | — | ||||||||
8. BANK BORROWINGS AND LONG-TERM DEBT
Bank borrowings and long-term debt are as follows:
As of March 31, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
4.625% Notes due February 2020 | $ | 500,000 | $ | 500,000 | |||
Term Loan, including current portion, due in installments through November 2021 | 687,813 | 700,000 | |||||
Term Loan, including current portion, due in installments through June 2022 | 483,656 | 502,500 | |||||
5.000% Notes due February 2023 | 500,000 | 500,000 | |||||
4.750% Notes due June 2025 | 596,387 | 595,979 | |||||
Other | 186,601 | 169,671 | |||||
Debt issuance costs | (13,815 | ) | (16,007 | ) | |||
2,940,642 | 2,952,143 | ||||||
Current portion, net of debt issuance costs | (43,011 | ) | (61,534 | ) | |||
Non-current portion | $ | 2,897,631 | $ | 2,890,609 | |||
The weighted-average interest rates for the Company's long-term debt were 3.9% and 3.5% as of March 31, 2018 and 2017, respectively.
Repayments of the Company's long-term debt are as follows:
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Fiscal Year Ending March 31, | Amount | ||
(In thousands) | |||
2019 | $ | 44,015 | |
2020 | 542,915 | ||
2021 | 116,423 | ||
2022 | 812,500 | ||
2023 | 839,188 | ||
Thereafter | 599,416 | ||
Total | $ | 2,954,457 | |
Term Loan due November 2021
In August 2013, the Company entered into a $600 million term loan agreement due August 2018. In November 2016, the Company entered into a new arrangement to extend the maturity date of the agreement from August 30, 2018 to November 30, 2021, and borrowed an incremental amount of $130 million under this term loan, thereby increasing the total amount under the term loan to $700 million. This loan is repayable in quarterly installments of $4.1 million, which commenced October 31, 2017 and continue through September 30, 2021, with the remaining amount due at maturity.
Borrowings under this term loan bear interest, at the Company's option, either at (i) LIBOR plus the applicable margin for LIBOR loans ranging between 1.125% and 2.125%, based on the Company's credit ratings or (ii) the base rate (the greatest of the prime rate in effect on each day as published in The Wall Street Journal, the federal funds rate plus 0.5% and LIBOR for a one-month interest period plus 1.00%) plus an applicable margin ranging between 0.125% and 1.125%, based on the Company's credit rating.
This term loan is unsecured, and contains customary restrictions on the ability of the Company and its subsidiaries to (i) incur certain debt, (ii) make certain investments, (iii) make certain acquisitions of other entities, (iv) incur liens, (v) dispose of assets, (vi) make non-cash distributions to shareholders, and (vii) engage in transactions with affiliates. These covenants are subject to a number of exceptions and limitations. This term loan agreement also requires that the Company maintain a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum interest coverage ratio, as defined therein, during its term; provided that the requirement to maintain the minimum interest coverage ratio may be suspended in certain circumstances. As of March 31, 2018, the Company was in compliance with the covenants under this term loan agreement.
Term Loan Agreement due June 2022 and Revolving Line of Credit
In June 2017, the Company entered into a five-year credit facility consisting of a $1.75 billion revolving credit facility and a $502.5 million term loan, which is due to mature on June 30, 2022 (the "2022 Credit Facility"). This 2022 Credit Facility replaced the Company's $2.1 billion credit facility, which was due to mature in March 2019. The outstanding principal of the term loan portion of the 2022 Credit Facility is repayable in quarterly installments of approximately $6.3 million from September 30, 2017 through June 30, 2020 and approximately $12.6 million from September 30, 2020 through March 31, 2022 with the remainder due upon maturity. The Company determined that effectively extending the maturity date of the revolving credit and repaying the term loan due March 2019 qualified as a debt modification and consequently all unamortized debt issuance costs related to the $2.1 billion credit facility are capitalized and will be amortized over the term of the 2022 Credit Facility.
Borrowings under the 2022 Credit Facility bear interest, at the Company’s option, either at (i) the Base Rate, which is defined as the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate, plus 0.50% and (c) the LIBOR (the London Interbank Offered Rate) rate that would be calculated as of each day in respect of a proposed LIBOR loan with a one-month interest period, plus 1.0%; plus, in the case of each of clauses (a) through (c), an applicable margin ranging from 0.125% to 0.875% per annum, based on the Company’s credit ratings (as determined by Standard & Poor’s Financial Services LLC, Moody’s Investors Service, Inc. and Fitch Ratings Inc.) or (ii) LIBOR plus the applicable margin for LIBOR loans ranging between 1.125% and 1.875% per annum, based on the Company’s credit ratings.
The 2022 Credit Facility is unsecured and contains customary restrictions on the ability of the Company and its subsidiaries to (i) incur certain debt, (ii) make certain investments, (iii) make certain acquisitions of other entities, (iv) incur
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liens, (v) dispose of assets, (vi) make non-cash distributions to shareholders, and (vii) engage in transactions with affiliates. These covenants are subject to a number of significant exceptions and limitations. The 2022 Credit Facility also requires that the Company maintain a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum interest coverage ratio during the term of the 2022 Credit Facility. As of March 31, 2018, the Company was in compliance with the covenants under the 2022 Credit Facility agreement.
Notes due February 2020 and February 2023
In February 2013, the Company issued $500.0 million of 4.625% Notes due February 15, 2020 and $500.0 million of 5.000% Notes due February 15, 2023 (collectively the "Notes") in a private offering pursuant to Rule 144A and Regulation S under the Securities Act. In July 2013, the Company exchanged these notes for new notes with substantially similar terms and completed the registration of these notes with the Securities and Exchange Commission. The Company received net proceeds of approximately $990.6 million from the issuance and used those proceeds, together with $9.4 million of cash on hand, to repay $1.0 billion of outstanding borrowings under its previous term loan that was due October 2014.
Interest on the Notes is payable semi-annually, which commenced on August 15, 2013. The Notes are senior unsecured obligations of the Company, rank equally with all of the Company's other existing and future senior and unsecured debt obligations, and up until June 30, 2017 were guaranteed, jointly and severally, fully and unconditionally on an unsecured basis, by certain of the Company's 100% owned subsidiaries (the "guarantor subsidiaries"). The Company replaced its $2.1 billion credit facility, which was due to expire in March 2019 and was guaranteed by the guarantor subsidiaries, with the 2022 Credit Facility, which is not guaranteed by the guarantor subsidiaries. Effective upon the replacement, all guarantor subsidiaries were released from their guarantees under each indenture for the Notes. As a result, the Company will no longer be providing supplemental guarantor and non-guarantor consolidating financial statements.
At any time prior to maturity, the Company may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus an applicable premium accrued and unpaid interest, if any, to the applicable redemption date. Upon the occurrence of a change of control repurchase event (as defined in the Notes indenture), the Company must offer to repurchase the Notes at a repurchase price equal to 101% of the principal amount of the Notes repurchased, plus accrued and unpaid interest, if any, to the applicable repurchase date.
The indenture governing the Notes contains covenants that, among other things, restrict the ability of the Company and certain of the Company's subsidiaries to create liens; enter into sale-leaseback transactions; create, incur, issue, assume or guarantee any funded debt; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's assets to, another person. These covenants are subject to a number of significant limitations and exceptions set forth in the indenture. The indenture also provides for customary events of default, including, but not limited to, cross defaults to certain specified other debt of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Notes will become due and payable immediately without further action or notice. If any other event of default under the indenture occurs or is continuing, the applicable trustee or holders of at least 25% in aggregate principal amount of the then outstanding Notes may declare all of the Notes to be due and payable immediately. As of March 31, 2018, the Company was in compliance with the covenants in the indenture governing the Notes.
Notes due June 2025
In June 2015, the Company issued $600 million of 4.750% Notes ("2025 Notes") due June 15, 2025 in a private offering pursuant to Rule 144A and Regulation S under the Securities Act, at 99.213% of face value, and an effective yield of approximately 4.850%. The Company received net proceeds of approximately $595.3 million from the issuance which was used for general corporate purposes. During January 2016, the Company exchanged these notes for new notes with substantially similar terms and completed the registration of these notes with the Securities and Exchange Commission.
The Company incurred approximately $7.9 million of costs in conjunction with the issuance of the 2025 Notes. The issuance costs were capitalized and presented on the balance sheet as a direct deduction from the carrying amount of the 2025 Notes.
Interest on the 2025 Notes is payable semi-annually, commencing on December 15, 2015. The 2025 Notes are senior unsecured obligations of the Company, rank equally with all of the Company's other existing and future senior and unsecured debt obligations, and up until June 30, 2017 were guaranteed, jointly and severally, fully and unconditionally on an unsecured basis, by each of the Company's 100% owned subsidiaries (the "guarantor subsidiaries"). The Company replaced its $2.1 billion credit facility, which was due to expire in March 2019 and was guaranteed by the guarantor subsidiaries, with the 2022
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Credit Facilities, which is not guaranteed by the guarantor subsidiaries. Effective upon the replacement, all guarantor subsidiaries were released from their guarantees under the indenture for the 2025 Notes. As a result, the Company will no longer be providing supplemental guarantor and non-guarantor consolidating financial statements.
At any time prior to March 15, 2025, the Company may redeem some or all of the 2025 Notes at a redemption price equal to 100% of the principal amount of the 2025 Notes redeemed, plus an applicable premium and accrued and unpaid interest, if any, to the applicable redemption date. Upon the occurrence of a change of control repurchase event (as defined in the 2025 Notes indenture), the Company must offer to repurchase the 2025 Notes at a repurchase price equal to 101% of the principal amount of the 2025 Notes repurchased, plus accrued and unpaid interest, if any, to the applicable repurchase date.
The indenture governing the 2025 Notes contains covenants that, among other things, restrict the ability of the Company and certain of the Company's subsidiaries to create liens; enter into sale-leaseback transactions; create, incur, issue, assume or guarantee any funded debt; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's assets to, another person, or permit any other person to consolidate, merge, combine or amalgamate with or into the Company. These covenants are subject to a number of significant limitations and exceptions set forth in the indenture. The indenture also provides for customary events of default, including, but not limited to, cross defaults to certain specified other debt of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding 2025 Notes will become due and payable immediately without further action or notice. If any other event of default under the agreement occurs or is continuing, the applicable trustee or holders of at least 25% in aggregate principal amount of the then outstanding 2025 Notes may declare all of the 2025 Notes to be due and payable immediately, but upon certain conditions such declaration and its consequences may be rescinded and annulled by the holders of a majority in principal amount of the 2025 Notes. As of March 31, 2018, the Company was in compliance with the covenants in the indenture governing the 2025 Notes.
Other Credit Lines
In January 2017, the Company borrowed €100 million (approximately $123.5 million as of March 31, 2018), under a 5-year, term-loan agreement due January 2, 2022. Borrowings under this term loan bear interest at EURIBOR minus 0.1% plus the applicable margin ranging between 0.40% and 1.35%, based on the Company's credit ratings. The loan is repayable upon maturity.
In October 2015, the Company borrowed €50 million (approximately $61.8 million as of March 31, 2018), under a 5-year, term-loan agreement due September 30, 2020. Borrowings under this term loan bear interest at EURIBOR plus the applicable margin ranging between 0.80% and 2.00%, based on the Company’s credit ratings. The loan is repayable beginning December 30, 2016 in quarterly payments of €312,500 through June 30, 2020 with the remainder due upon maturity.
These term loans are unsecured and are guaranteed by the Company. These term loan agreements contain customary restrictions on the Company's and its subsidiaries' ability to (i) incur certain debt, (ii) make certain investments, (iii) make certain acquisitions of other entities, (iv) incur liens, (v) dispose of assets, (vi) make non-cash distributions to shareholders, and (vii) engage in transactions with affiliates. These covenants are subject to a number of exceptions and limitations. These term loan agreements also require that the Company maintain a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum interest coverage ratio, as defined therein, during their terms. As of March 31, 2018, the Company was in compliance with the covenants under these term loan agreements.
As of March 31, 2018, the Company and certain of its subsidiaries had various uncommitted revolving credit facilities, lines of credit and other credit facilities in the amount of $256.5 million in the aggregate. There were no borrowings outstanding under these facilities as of March 31, 2018 and 2017. These unsecured credit facilities, and lines of credit and other credit facilities bear annual interest at the respective country's inter-bank offering rate, plus an applicable margin, and generally have maturities that expire on various dates in future fiscal years.
9. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
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The Company transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales, and monetary assets and liabilities denominated in non-functional currencies. The Company has established risk management programs to protect against volatility in the value of non-functional currency denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates. The Company tries to maintain a partial or fully hedged position for certain transaction exposures, which are primarily, but not limited to, revenues, customer and vendor payments and inter-company balances in currencies other than the functional currency unit of the operating entity. The Company enters into short-term foreign currency derivatives contracts, including forward, swap, and options contracts to hedge only those currency exposures associated with certain assets and liabilities, primarily accounts receivable and accounts payable, and cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and accordingly, fair value adjustments related to the credit risk of the counterparty financial institution were not material.
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As of March 31, 2018, the aggregate notional amount of the Company's outstanding foreign currency derivative contracts was $7.6 billion as summarized below:
Foreign Currency Amount | Notional Contract Value in USD | ||||||||||||
Currency | Buy | Sell | Buy | Sell | |||||||||
(In thousands) | |||||||||||||
Cash Flow Hedges | |||||||||||||
CNY | 2,472,000 | — | $ | 392,493 | $ | — | |||||||
EUR | 74,696 | 102,508 | 92,292 | 123,347 | |||||||||
HUF | 20,482,360 | — | 80,961 | — | |||||||||
ILS | 104,570 | 17,325 | 29,853 | 4,946 | |||||||||
MXN | 3,820,600 | — | 208,688 | — | |||||||||
MYR | 235,400 | 78,000 | 60,277 | 19,973 | |||||||||
RON | 125,190 | — | 33,224 | — | |||||||||
SGD | 35,250 | — | 26,908 | — | |||||||||
Other | N/A | N/A | 49,734 | 3,225 | |||||||||
974,430 | 151,491 | ||||||||||||
Other Foreign Currency Contracts | |||||||||||||
AUD | 29,887 | 39,839 | 22,925 | 30,834 | |||||||||
BRL | — | 706,000 | — | 211,580 | |||||||||
CAD | 306,196 | 336,629 | 237,601 | 261,216 | |||||||||
CHF | 13,122 | 26,611 | 13,763 | 27,912 | |||||||||
CNY | 2,238,583 | — | 347,121 | — | |||||||||
EUR | 1,190,730 | 1,442,218 | 1,469,945 | 1,780,517 | |||||||||
GBP | 38,445 | 65,222 | 54,179 | 91,794 | |||||||||
HUF | 106,548,846 | 116,231,762 | 421,158 | 459,432 | |||||||||
INR | 4,052,331 | 747,986 | 61,992 | 11,476 | |||||||||
MXN | 2,342,814 | 2,109,080 | 127,969 | 115,202 | |||||||||
MYR | 844,010 | 627,500 | 216,119 | 160,679 | |||||||||
PLN | 99,330 | 54,465 | 29,180 | 16,000 | |||||||||
SEK | 144,590 | 267,169 | 17,492 | 32,172 | |||||||||
SGD | 73,918 | 40,994 | 56,426 | 31,293 | |||||||||
Other | N/A | N/A | 89,386 | 45,739 | |||||||||
3,165,256 | 3,275,846 | ||||||||||||
Total Notional Contract Value in USD | $ | 4,139,686 | $ | 3,427,337 | |||||||||
As of March 31, 2018 and 2017, the fair value of the Company's short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company's exposure to monetary assets and liabilities denominated in non-functional currencies and are not accounted for as hedges under the accounting standards. Accordingly, changes in fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the consolidated statements of operations. As of March 31, 2018 and 2017, the Company also has included net deferred gains and losses, in accumulated other comprehensive loss, a component of shareholders' equity in the consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. Deferred gains totaled $6.6 million as of March 31, 2018, and are expected to be recognized primarily as a component of cost of sales in the consolidated statement of operations over the next twelve-month period. The gains and losses recognized in earnings due to hedge
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ineffectiveness were not material for all fiscal years presented and are included as a component of interest and other, net in the consolidated statements of operations.
The following table presents the fair value of the Company's derivative instruments utilized for foreign currency risk management purposes at March 31, 2018 and 2017:
Fair Values of Derivative Instruments | |||||||||||||||||||
Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Fair Value | Fair Value | ||||||||||||||||||
Balance Sheet Location | March 31, 2018 | March 31, 2017 | Balance Sheet Location | March 31, 2018 | March 31, 2017 | ||||||||||||||
(In thousands) | |||||||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||||
Foreign currency contracts | Other current assets | $ | 19,422 | $ | 11,936 | Other current liabilities | $ | 7,065 | $ | 1,814 | |||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||
Foreign currency contracts | Other current assets | $ | 23,912 | $ | 10,086 | Other current liabilities | $ | 18,246 | $ | 9,928 | |||||||||
The Company has financial instruments subject to master netting arrangements, which provides for the net settlement of all contracts with the counterparty upon maturity. 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 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.
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component, net of tax, during fiscal years ended March 31, 2018, 2017 and 2016 are as follows:
Fiscal Year Ended March 31, 2018 | |||||||||||
Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | |||||||||
(In thousands) | |||||||||||
Beginning balance | $ | (32,426 | ) | $ | (95,717 | ) | $ | (128,143 | ) | ||
Other comprehensive gain before reclassifications | 15,667 | 46,022 | 61,689 | ||||||||
Net gains reclassified from accumulated other comprehensive loss | (18,987 | ) | (404 | ) | (19,391 | ) | |||||
Net current-period other comprehensive gain (loss) | (3,320 | ) | 45,618 | 42,298 | |||||||
Ending balance | $ | (35,746 | ) | $ | (50,099 | ) | $ | (85,845 | ) | ||
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Fiscal Year Ended March 31, 2017 | |||||||||||
Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | |||||||||
(In thousands) | |||||||||||
Beginning balance | $ | (41,522 | ) | $ | (94,393 | ) | $ | (135,915 | ) | ||
Other comprehensive gain (loss) before reclassifications | 6,925 | (1,198 | ) | 5,727 | |||||||
Net (gains) losses reclassified from accumulated other comprehensive loss | 2,171 | (126 | ) | 2,045 | |||||||
Net current-period other comprehensive gain (loss) | 9,096 | (1,324 | ) | 7,772 | |||||||
Ending balance | $ | (32,426 | ) | $ | (95,717 | ) | $ | (128,143 | ) | ||
Fiscal Year Ended March 31, 2016 | |||||||||||
Unrealized loss on derivative instruments and other | Foreign currency translation adjustments | Total | |||||||||
(In thousands) | |||||||||||
Beginning balance | $ | (68,266 | ) | $ | (112,239 | ) | $ | (180,505 | ) | ||
Other comprehensive loss before reclassifications | (2,199 | ) | (3,145 | ) | (5,344 | ) | |||||
Net (gains) losses reclassified from accumulated other comprehensive loss | 28,943 | 20,991 | 49,934 | ||||||||
Net current-period other comprehensive gain | 26,744 | 17,846 | 44,590 | ||||||||
Ending balance | $ | (41,522 | ) | $ | (94,393 | ) | $ | (135,915 | ) | ||
Net gains reclassified from accumulated other comprehensive loss during fiscal year 2018 relating to derivative instruments and other includes $20.8 million attributable to the Company's cash flow hedge instruments which were recognized as a component of cost of sales in the consolidated statement of operations.
Net (gains) losses reclassified from accumulated other comprehensive loss were immaterial during fiscal year 2017.
During fiscal year 2016, the Company recognized a loss of $26.8 million in connection with the disposition of a non-strategic Western European manufacturing facility, which included a $25.3 million cumulative foreign currency translation loss offset by the release of certain immaterial cumulative foreign currency translation gains, which were reclassified from accumulated other comprehensive loss during the period and included in other charges (income), net in consolidated statement of operations.
11. TRADE RECEIVABLES SECURITIZATION
The Company sells trade receivables under two asset-backed securitization programs and an accounts receivable factoring program.
Asset-Backed Securitization Programs
The Company 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
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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 $950.0 million for the Global Program, of which $775.0 million is committed and $175.0 million is uncommitted, and $250.0 million for the North American Program, of which $210.0 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 fiscal years ended March 31, 2018, 2017 and 2016 were not material and are included in interest and other, net within the 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 or liabilities are recognized.
The Company's deferred purchase price receivables relating to its asset-backed securitization program are recorded initially at fair value 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 material. The interrelationship between these inputs is also insignificant.
As of March 31, 2018 and 2017, the accounts receivable balances that were sold under the ABS Programs were removed from the consolidated balance sheets and the net cash proceeds received by the Company during fiscal years ended March 31, 2018, 2017 and 2016 were included as cash provided by operating activities in the consolidated statements of cash flows.
As of March 31, 2018, approximately $1.5 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 $1.1 billion and deferred purchase price receivables of $445.4 million. As of March 31, 2017, approximately $1.5 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $1.0 billion and deferred purchase price receivables of $506.5 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 March 31, 2018 and 2017, 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 consolidated statements of operations. Refer to note 17 for more details.
For the fiscal years ended March 31, 2018, 2017 and 2016, cash flows from sales of receivables under the ABS Programs consisted of approximately $9.4 billion, $8.6 billion and $7.0 billion, respectively, for transfers of receivables, and approximately $3.2 billion, $4.0 billion and $4.2 billion, respectively, for collections on deferred purchase price receivables. The Company corrected previously reported disclosures related to these cash flows from sales of receivable under the ABS Programs by increasing by $2.9 billion and $1.8 billion, and the collections on deferred purchase price receivables by increasing such amounts by $0.7 billion and $0.6 billion for the fiscal years ended March 31, 2017 and 2016, respectively. The Company determined that these revisions are not material. The Company's cash flows from transfer of receivables consist primarily of proceeds from collections reinvested in revolving-period transfers. Cash flows from new transfer were not significant for all periods presented.
Trade Accounts Receivable Sale Programs
The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected on accounts where the Company has continuing involvement was approximately $286.4 million and $225.2 million as of March 31, 2018 and 2017, respectively. For the years ended March 31, 2018, 2017 and 2016, total accounts receivables sold to certain third party banking institutions was approximately $1.5 billion, $1.3 billion and $2.3 billion, respectively. The receivables that were sold were removed from the consolidated balance sheets and were reflected as cash provided by operating activities in the consolidated statements of cash flows.
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12. 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 included in other noncurrent assets on the consolidated balance sheets and 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 as applicable, which is measured at fair value based on certain internal models and unobservable inputs.
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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As of March 31, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
Beginning balance | $ | 22,426 | $ | 73,423 | |||
Additions to accrual | — | — | |||||
Payments and settlements | (17,109 | ) | (44,912 | ) | |||
Fair value adjustments | (5,317 | ) | (6,085 | ) | |||
Ending balance | $ | — | $ | 22,426 | |||
In connection with the acquisition of NEXTracker, Inc. in fiscal year 2016, the Company had an obligation to pay additional cash consideration to the former shareholders contingent upon NEXTracker, Inc.'s achievement of revenue targets during the two years after acquisition (ending on September 30, 2017). During fiscal year 2018, the Company paid $17.1 million of the total contingent consideration following the second year's targets achievement in accordance with the terms of the merger agreement. The payment of the contingent consideration is included in other financing activities, net, in the consolidated statements of cash flows.
There were no transfers between levels in the fair value hierarchy during fiscal years 2018 and 2017.
Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents the Company's assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and 2017:
Fair Value Measurements as of March 31, 2018 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | |||||||||||||||
Assets: | |||||||||||||||
Money market funds and time deposits (Note 2) | $ | — | $ | 452,622 | $ | — | $ | 452,622 | |||||||
Foreign exchange forward contracts (Note 9) | — | 43,334 | — | 43,334 | |||||||||||
Deferred compensation plan assets: | |||||||||||||||
Mutual funds, money market accounts and equity securities | 7,196 | 67,532 | — | 74,728 | |||||||||||
Liabilities: | |||||||||||||||
Foreign exchange forward contracts (Note 9) | $ | — | $ | (25,311 | ) | $ | — | $ | (25,311 | ) | |||||
Fair Value Measurements as of March 31, 2017 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | |||||||||||||||
Assets: | |||||||||||||||
Money market funds and time deposits (Note 2) | $ | — | $ | 1,066,841 | $ | — | $ | 1,066,841 | |||||||
Foreign exchange forward contracts (Note 9) | — | 22,022 | — | 22,022 | |||||||||||
Deferred compensation plan assets: | |||||||||||||||
Mutual funds, money market accounts and equity securities | 7,062 | 52,680 | — | 59,742 | |||||||||||
Liabilities: | |||||||||||||||
Foreign exchange forward contracts (Note 9) | $ | — | $ | (11,742 | ) | $ | — | $ | (11,742 | ) | |||||
Contingent consideration in connection with acquisitions | — | — | (22,426 | ) | (22,426 | ) | |||||||||
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Other financial instruments
The following table presents the Company's liabilities not carried at fair value as of March 31, 2018 and 2017:
As of March 31, 2018 | As of March 31, 2017 | ||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Hierarchy | |||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
4.625% Notes due February 2020 | $ | 500,000 | $ | 513,596 | $ | 500,000 | $ | 526,255 | Level 1 | ||||||||
Term Loan, including current portion, due in installments through November 2021 | 687,813 | 689,966 | 700,000 | 699,566 | Level 1 | ||||||||||||
Term Loan, including current portion, due in installments through June 2022 (1) | 483,656 | 485,470 | 502,500 | 503,756 | Level 1 | ||||||||||||
5.000% Notes due February 2023 | 500,000 | 525,292 | 500,000 | 534,820 | Level 1 | ||||||||||||
4.750% Notes due June 2025 | 596,387 | 627,407 | 595,979 | 633,114 | Level 1 | ||||||||||||
Euro Term Loan due September 2020 | 59,443 | 59,443 | 53,075 | 53,075 | Level 1 | ||||||||||||
Euro Term Loan due January 2022 | 123,518 | 123,518 | 107,357 | 107,357 | Level 1 | ||||||||||||
Total | $ | 2,950,817 | $ | 3,024,692 | $ | 2,958,911 | $ | 3,057,943 | |||||||||
(1) In June 2017, the Company entered into a new agreement that effectively extended the maturity date of the loan from March 31, 2019 to June 30, 2022. Refer to note 8 for further details of the arrangement.
The Term Loans due November 2021 and June 2022, and the Notes due February 2020, February 2023 and June 2025 are valued based on broker trading prices in active markets.
The Company values its Euro Term Loans due September 2020 and January 2022 based on the current market rate, and as of March 31, 2018, the carrying amounts approximate fair values.
13. COMMITMENTS AND CONTINGENCIES
Commitments
As of March 31, 2018 and 2017, the gross carrying amount and associated accumulated depreciation of the Company's property and equipment financed under capital leases, and the related obligations was not material. The Company also leases certain of its facilities and equipment under non-cancelable operating leases. These operating leases expire in various years through 2035 and require the following minimum lease payments:
Fiscal Year Ending March 31, | Operating Lease | ||
(In thousands) | |||
2019 | $ | 119,008 | |
2020 | 97,476 | ||
2021 | 66,713 | ||
2022 | 54,497 | ||
2023 | 46,861 | ||
Thereafter | 178,089 | ||
Total minimum lease payments | $ | 562,644 | |
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Total rent expense amounted to $140.3 million, $124.7 million and $124.2 million in fiscal years 2018, 2017 and 2016, respectively.
Litigation and other legal matters
In connection with the matters described below, the Company has accrued for loss contingencies where it believes that losses are probable and estimable. The Company does not believe that the amounts accrued are material. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, except as discussed below, due to various reasons, including, among others, that: (i) the proceedings are in early stages or no claims has been asserted, (ii) specific damages have not been sought in all of these matters, (iii) damages, if asserted, are considered unsupported and/or exaggerated, (iv) there is uncertainty as to the outcome of pending appeals, motions, or settlements, (v) there are significant factual issues to be resolved, and/or (vi) there are novel legal issues or unsettled legal theories presented. Any such excess loss could have a material adverse effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.
In addition, the Company provides design and engineering services to its customers and also designs and makes its own products. As a consequence of these activities, its customers are requiring the Company to take responsibility for intellectual property to a greater extent than in its manufacturing and assembly businesses. Although the Company believes that its intellectual property assets and licenses are sufficient for the operation of its business as it currently conduct it, from time to time third parties do assert patent infringement claims against the Company or its customers. If and when third parties make assertions regarding the ownership or right to use intellectual property, the Company could be required to either enter into licensing arrangements or to resolve the issue through litigation. Such license rights might not be available to the Company on commercially acceptable terms, if at all, and any such litigation might not be resolved in its favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. The Company also could be required to incur substantial costs to redesign a product or re-perform design services.
From time to time, the Company enters into IP licenses (e.g., patent licenses and software licenses) with third parties which obligate the Company to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable our use of third party technologies. The Company may also decline to enter into licenses for intellectual property that it does not think is useful for or used in its operations, or for which its customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of its business and the location of its business around the world, certain activities the Company performs, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. The Company's licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g. base price) for any royalty amounts owed are audited by licensors and may be challenged. Some of these disagreements, may lead to claims and litigation that might not be resolved in the Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. In March 2018, the Company received an inquiry from a licensor referencing a patent license agreement, and requesting information relating to royalties for products that it assembles for a customer in China. If any of these inquiries result in a claim, the Company intends to contest and defend against any such claim vigorously. If a claim is asserted and the Company is unsuccessful in its defense, a material loss is reasonably possible. The Company cannot predict or estimate an amount or reasonable range of outcomes with respect to the matter.
On May 8, 2018, a putative class action was filed in the Northern District of California against the Company and certain officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, alleging misstatements and/or omissions in certain of the Company’s financial results, press releases and SEC filings made during the putative class period of January 26, 2017 through April 26, 2018. The deadline for applications for appointment as lead plaintiff is July 9, 2018.
On April 21, 2016, SunEdison, Inc. (together with certain of its subsidiaries, "SunEdison") filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During the fiscal year ended March 31, 2016, the Company recognized a bad debt reserve charge of $61.0 million associated with its outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90.0 million. SunEdison stated in schedules filed with the Bankruptcy Court that, within the 90 days preceding SunEdison's bankruptcy filing, the Company received approximately $98.6 million of inventory and cash transfers of $69.2 million, which in aggregate represents the Company's estimate of the maximum reasonably possible contingent loss. On April 15, 2018, a subsidiary of the Company together with its subsidiaries and affiliates, entered into a tolling agreement with the trustee of the SunEdison Litigation Trust to toll any applicable statute of limitations or other time-related defense that might exist in regards to any potential claims that either party might be able to assert against the other for a
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period that will end at the earlier to occur of: (a) 60 days after a party provides written notice of termination; (b) six years from the effective date of April 15, 2018; or (c) such other date as the parties may agree in writing. No preference claims have been asserted against the Company and consideration has been given to the related contingencies based on the facts currently known. The Company has a number of affirmative and direct defenses to any potential claims for recovery and intends to vigorously defend any such claim, if asserted.
One of the Company's Brazilian subsidiaries has received related assessments for certain sales and import taxes. There are six tax assessments totaling 346 million Brazilian reals (approximately USD $104 million based on the exchange rate as of March 31, 2018). The assessments are in various stages of the review process at the administrative level and no tax proceeding has been finalized yet. The Company believes there is no legal basis for these assessments and has meritorious defenses and will continue to vigorously oppose all of these assessments, as well as any future assessments. The Company does not expect final judicial determination on any of these claims for several years.
In addition to the matters discussed above, from time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in the Company’s consolidated balance sheets, would not be material to the financial statements as a whole.
14. INCOME TAXES
The domestic (Singapore) and foreign components of income before income taxes were comprised of the following:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Domestic | $ | 323,522 | $ | 435,709 | $ | 199,283 | |||||
Foreign | 197,371 | (64,861 | ) | 255,392 | |||||||
Total | $ | 520,893 | $ | 370,848 | $ | 454,675 | |||||
The provision for income taxes consisted of the following:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Current: | |||||||||||
Domestic | $ | 2,894 | $ | 1,037 | $ | 56 | |||||
Foreign | 50,889 | 71,773 | 74,706 | ||||||||
53,783 | 72,810 | 74,762 | |||||||||
Deferred: | |||||||||||
Domestic | 422 | 350 | 3,779 | ||||||||
Foreign | 38,154 | (21,876 | ) | (67,947 | ) | ||||||
38,576 | (21,526 | ) | (64,168 | ) | |||||||
Provision for income taxes | $ | 92,359 | $ | 51,284 | $ | 10,594 | |||||
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The domestic statutory income tax rate was approximately 17.0% in fiscal years 2018, 2017 and 2016. The reconciliation of the income tax expense expected based on domestic statutory income tax rates to the expense for income taxes included in the consolidated statements of operations is as follows:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Income taxes based on domestic statutory rates | $ | 88,552 | $ | 63,044 | $ | 77,295 | |||||
Effect of tax rate differential | (244,128 | ) | (85,132 | ) | (62,072 | ) | |||||
Change in liability for uncertain tax positions | 22,180 | 684 | (13,724 | ) | |||||||
Change in valuation allowance | 297,330 | 78,728 | 1,049 | ||||||||
Recognition of prior year taxes recoverable | (53,757 | ) | — | — | |||||||
Other | (17,818 | ) | (6,040 | ) | 8,046 | ||||||
Provision for income taxes | $ | 92,359 | $ | 51,284 | $ | 10,594 | |||||
A number of countries in which the Company is located allow for tax holidays or provide other tax incentives to attract and retain business. In general, these holidays were secured based on the nature, size and location of the Company’s operations. The aggregate dollar effect on the Company’s income resulting from tax holidays and tax incentives to attract and retain business for the fiscal years ended March 31, 2018, 2017 and 2016 was $21.7 million, $15.5 million and $6.6 million, respectively. For the fiscal year ended March 31, 2018, the effect on basic and diluted earnings per share was $0.04 and $0.04 respectively, and the effect on basic and diluted earnings per share were $0.03 and $0.03 during fiscal year 2017, and $0.01 and $0.01 during fiscal year 2016, respectively. Unless extended or otherwise renegotiated, the Company's existing holidays will expire in the fiscal year ending March 31, 2019 through fiscal year 2027.
We provide a valuation allowance against deferred tax assets that in our estimation are not more likely than not to be realized. During fiscal year 2018, 2017, and 2016 we released valuation allowances totaling $1.3 million, $39.6 million and $63.3 million, respectively. For fiscal year 2018, these valuation allowance releases were primarily related to our operations in Ireland, Mexico and Taiwan as these amounts were deemed to be more likely than not to be realized due to the sustained profitability during the past three fiscal years as well as continued forecasted profitability of those subsidiaries. However, these valuation allowance releases were offset primarily by current period valuation allowance additions due to increased deferred tax assets as a result of current period losses in legal entities with existing full valuation allowance positions. For fiscal years 2018, 2017 and 2016, the offsetting amounts totaled $(65.9) million, $103.9 million and $64.3 million, respectively. Included in these offsets for fiscal year 2018, the Company released $705.3 million of valuation allowance to account for the reduced deferred tax asset as a result of the lower US corporate income tax rate which became effective January 1, 2018. In addition, due to changes with respect to the jurisdiction’s tax position during the fiscal year ended March 31, 2018, the Company established a valuation allowance of $364.5 million for a Brazilian subsidiary which did not previously have a valuation allowance recorded.
During fiscal year 2018, the Company recognized an income tax receivable of $53.7 million for prior period taxes paid by one of its Brazilian subsidiaries which was deemed recoverable during the period due to a favorable change in tax law whereby certain incentives are no longer includable in taxable income.
Under its territorial tax system, Singapore generally does not tax foreign sourced income until repatriated to Singapore. The Company has included the effects of Singapore's territorial tax system in the rate differential line above. The tax effect of foreign income not repatriated to Singapore for the fiscal years 2018, 2017 and 2016 were $65.8 million, $67.9 million and $36.6 million, respectively.
Impact of the U.S. Tax Reform
On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced rates of certain non-US subsidiaries owned by U.S. companies’ historical earnings (a “transition tax”), and establishes new mechanisms to tax such earnings going forward. Similar to other large multinational companies with complex tax structures, the Act has wide ranging implications for Flex. However, the impact on Flex's financial statements for
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the twelve-month periods ended March 31, 2018 is immaterial, primarily because the Company has a full valuation allowance on deferred tax assets in the U.S., which results in there being no U.S. deferred tax assets or liabilities recorded on the balance sheet that need to be remeasured at the new 21% rate. Further, the Company expects that the new transition tax will be offset by foreign tax credits or net operating loss carryforwards, and thus will not result in any incremental taxes payable. The Company will continue to analyze the effects of the Act on its financial statements and operations. Any additional impacts from the enactment of the Act will be recorded as they are identified during the measurement period provided for in Staff Bulletin 118.
The components of deferred income taxes are as follows:
As of March 31, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
Deferred tax liabilities: | |||||||
Fixed assets | $ | (33,056 | ) | $ | (40,324 | ) | |
Intangible assets | (80,565 | ) | (76,432 | ) | |||
Others | (12,544 | ) | (20,702 | ) | |||
Total deferred tax liabilities | (126,165 | ) | (137,458 | ) | |||
Deferred tax assets: | |||||||
Fixed assets | 65,155 | 57,869 | |||||
Intangible assets | 11,237 | 3,153 | |||||
Deferred compensation | 13,475 | 19,335 | |||||
Inventory valuation | 6,952 | 8,489 | |||||
Provision for doubtful accounts | 3,073 | 2,911 | |||||
Net operating loss and other carryforwards | 2,133,097 | 2,369,405 | |||||
Others | 236,916 | 266,367 | |||||
Total deferred tax assets | 2,469,905 | 2,727,529 | |||||
Valuation allowances | (2,259,956 | ) | (2,442,105 | ) | |||
Total deferred tax assets, net of valuation allowances | 209,949 | 285,424 | |||||
Net deferred tax asset | $ | 83,784 | $ | 147,966 | |||
The net deferred tax asset is classified as follows: | |||||||
Long-term asset | $ | 165,319 | $ | 223,285 | |||
Long-term liability | (81,535 | ) | (75,319 | ) | |||
Total | $ | 83,784 | $ | 147,966 | |||
Utilization of the Company's deferred tax assets is limited by the future earnings of the Company in the tax jurisdictions in which such deferred assets arose. As a result, management is uncertain as to when or whether these operations will generate sufficient profit to realize any benefit from the deferred tax assets. The valuation allowance provides a reserve against deferred tax assets that are not more likely than not to be realized by the Company. However, management has determined that it is more likely than not that the Company will realize certain of these benefits and, accordingly, has recognized a deferred tax asset from these benefits. The change in valuation allowance is net of certain increases and decreases to prior year losses and other carryforwards that have no current impact on the tax provision.
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The Company has recorded deferred tax assets of approximately $2.2 billion related to tax losses and other carryforwards against which the Company has recorded a valuation allowance for all but $81.3 million of the deferred tax assets. These tax losses and other carryforwards will expire at various dates as follows:
Expiration dates of deferred tax assets related to operating losses and other carryforwards | |||
(In thousands) | |||
2019 - 2024 | $ | 513,828 | |
2025 - 2030 | 614,307 | ||
2031 and post | 178,484 | ||
Indefinite | 852,455 | ||
$ | 2,159,074 | ||
The amount of deferred tax assets considered realizable, however, could be reduced or increased in the near-term if facts, including the amount of taxable income or the mix of taxable income between subsidiaries, differ from management’s estimates.
The Company does not provide for income taxes on approximately $1.6 billion of undistributed earnings of its subsidiaries which are considered to be indefinitely reinvested outside of Singapore as management has plans for the use of such earnings to fund certain activities outside of Singapore. Determination of the amount of the unrecognized deferred tax liability on these undistributed earnings is not practicable. As of March 31, 2018, we have provided for earnings in foreign subsidiaries that are not considered to be indefinitely reinvested and therefore subject to withholding taxes on $23.1 million of undistributed foreign earnings, recording a deferred tax liability of approximately $1.7 million thereon.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Fiscal Year Ended March 31, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
Balance, beginning of fiscal year | $ | 203,323 | $ | 212,326 | |||
Additions based on tax position related to the current year | 24,415 | 29,007 | |||||
Additions for tax positions of prior years | 5,926 | 9,728 | |||||
Reductions for tax positions of prior years | (11,936 | ) | (22,065 | ) | |||
Reductions related to lapse of applicable statute of limitations | (9,029 | ) | (13,390 | ) | |||
Settlements | — | (3,684 | ) | ||||
Impact from foreign exchange rates fluctuation | 14,891 | (8,599 | ) | ||||
Balance, end of fiscal year | $ | 227,590 | $ | 203,323 | |||
The Company’s unrecognized tax benefits are subject to change over the next twelve months primarily as a result of the expiration of certain statutes of limitations and as audits are settled. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by an estimated range of an additional $11 million to $41 million within the next twelve months primarily due to potential settlements of various audits and the expiration of certain statutes of limitations.
The Company and its subsidiaries file federal, state, and local income tax returns in multiple jurisdictions around world. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2007.
Of the $227.6 million of unrecognized tax benefits at March 31, 2018, $210.7 million will affect the annual effective tax rate if the benefits are eventually recognized. The amount that doesn’t impact the ETR relates to positions that would be settled with a tax loss carryforward previously subject to a valuation allowance.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits within the Company’s tax expense. During the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized interest and penalty of
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approximately ($3.3) million and ($1.6) million and $(2.4) million, respectively. The Company had approximately $16.2 million, $12.9 million and $14.6 million accrued for the payment of interest and penalties as of the fiscal years ended March 31, 2018, 2017 and 2016, respectively.
15. RESTRUCTURING CHARGES
Fiscal Year 2018
During fiscal year 2018, the Company initiated targeted restructuring activities focused on optimizing our cost structure in lower growth areas and, more importantly, streamlining certain corporate and segment functions. Restructuring charges are recorded based upon employee termination dates, site closure and consolidation plans generally in conjunction with an overall corporate initiative to drive cost reduction and realign the Company's global footprint. The Company recognized approximately $78.6 million of cash charges predominantly related to related to employee severance costs and $12.1 million of non-cash charges for asset impairment and other exit charges under the above plan. Of these total charges, approximately $66.8 million was recognized in cost of sales. Employee severance costs were associated with the terminations of 6,203 identified employees. The identified employee terminations by reportable geographic region amounted to approximately 5,336, 741 and 126 for the Americas, Asia and Europe, respectively. A majority of the fiscal year 2018 restructuring activities were completed as of March 31, 2018.
Restructuring charges are not included in segment income, as disclosed further in note 20.
The components of the restructuring charges by geographic region incurred in fiscal year 2018 are as follows:
Second Quarter | Fourth Quarter | Total | |||||||||
(In thousands) | |||||||||||
Americas: | |||||||||||
Severance | $ | 6,031 | $ | 36,973 | $ | 43,004 | |||||
Long-Lived Asset Impairment | — | 9,417 | 9,417 | ||||||||
Other Exit Costs | — | 11,835 | 11,835 | ||||||||
Total | 6,031 | 58,225 | 64,256 | ||||||||
Asia: | |||||||||||
Severance | 1,950 | 14,590 | 16,540 | ||||||||
Long-Lived Asset Impairment | — | — | — | ||||||||
Other Exit Costs | — | — | — | ||||||||
Total | 1,950 | 14,590 | 16,540 | ||||||||
Europe: | |||||||||||
Severance | — | 9,895 | 9,895 | ||||||||
Long-Lived Asset Impairment | — | — | — | ||||||||
Other Exit Costs | — | — | — | ||||||||
Total | — | 9,895 | 9,895 | ||||||||
Total | |||||||||||
Severance | 7,981 | 61,458 | 69,439 | ||||||||
Long-Lived Asset Impairment | — | 9,417 | 9,417 | ||||||||
Other Exit Costs | — | 11,835 | 11,835 | ||||||||
Total restructuring charges | $ | 7,981 | $ | 82,710 | $ | 90,691 | |||||
Fiscal Year 2017
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During fiscal year 2017, the Company initiated a restructuring 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 recognized restructuring charges of approximately $49.4 million primarily for employee termination costs under the above plan. Of these total charges, approximately $38.8 million was recognized in cost of sales. Employee severance costs were associated with the terminations of 4,311 identified employees. The identified employee terminations by reportable geographic region amounted to approximately 2,229, 1,988 and 94 for Asia, the Americas and Europe, respectively. All fiscal year 2017 restructuring activities were completed as of March 31, 2017. There were no material restructuring activities during fiscal year 2016.
The components of the restructuring charges by geographic region incurred in fiscal year 2017 were as follows:
Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||
(In thousands) | |||||||||||||||
Americas: | |||||||||||||||
Severance | $ | 10,822 | $ | 6,263 | $ | 7,623 | $ | 24,708 | |||||||
Contractual obligations | — | 489 | 3,353 | 3,842 | |||||||||||
Total | 10,822 | 6,752 | 10,976 | 28,550 | |||||||||||
Asia: | |||||||||||||||
Severance | 263 | 9,701 | 5,110 | 15,074 | |||||||||||
Contractual obligations | — | — | — | — | |||||||||||
Total | 263 | 9,701 | 5,110 | 15,074 | |||||||||||
Europe: | |||||||||||||||
Severance | 454 | 968 | 1,049 | 2,471 | |||||||||||
Contractual obligations | — | — | 3,300 | 3,300 | |||||||||||
Total | 454 | 968 | 4,349 | 5,771 | |||||||||||
Total | |||||||||||||||
Severance | 11,539 | 16,932 | 13,782 | 42,253 | |||||||||||
Contractual obligations | — | 489 | 6,653 | 7,142 | |||||||||||
Total restructuring charges | $ | 11,539 | $ | 17,421 | $ | 20,435 | $ | 49,395 | |||||||
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The following table summarizes the provisions, respective payments, and remaining accrued balance as of March 31, 2018 for charges incurred in fiscal years 2018, 2017 and 2016 and prior periods:
Severance | Long-Lived Asset Impairment | Other Exit Costs | Total | ||||||||||||
Balance as of April 1, 2015 | 13,363 | — | 1,694 | 15,057 | |||||||||||
Cash payments for charges incurred in fiscal year 2016 and prior | (1,458 | ) | — | (359 | ) | (1,817 | ) | ||||||||
Balance as of March 31, 2016 | 11,905 | — | 1,335 | 13,240 | |||||||||||
Provision for charges incurred in fiscal year 2017 | 42,253 | — | 7,142 | 49,395 | |||||||||||
Cash payments for charges incurred in fiscal year 2017 | (25,894 | ) | — | — | (25,894 | ) | |||||||||
Cash payments for charges incurred in fiscal year 2016 and prior | (11,905 | ) | — | (1,335 | ) | (13,240 | ) | ||||||||
Balance as of March 31, 2017 | 16,359 | — | 7,142 | 23,501 | |||||||||||
Provision for charges incurred in fiscal year 2018 | 69,439 | 9,417 | 11,835 | 90,691 | |||||||||||
Cash payments for charges incurred in fiscal year 2017 and prior | (13,237 | ) | — | (3,671 | ) | (16,908 | ) | ||||||||
Cash payments for charges incurred in fiscal year 2018 | (24,555 | ) | — | — | (24,555 | ) | |||||||||
Non-cash charges incurred in fiscal year 2018 | — | (9,417 | ) | (1,968 | ) | (11,385 | ) | ||||||||
Balance as of March 31, 2018 | 48,006 | — | 13,338 | 61,344 | |||||||||||
Less: Current portion (classified as other current liabilities) | 48,006 | — | 13,338 | 61,344 | |||||||||||
Accrued restructuring costs, net of current portion (classified as other liabilities) | $ | — | $ | — | $ | — | $ | — | |||||||
16. OTHER CHARGES (INCOME), NET
The fiscal year ended March 31, 2018 includes a $151.6 million gain from the deconsolidation of Elementum, and a $38.7 million gain from the sale of Wink. See note 6 for additional information on the deconsolidation of Elementum and note 2 for additional information on the sale of Wink. The above gains are partially offset by $21.9 million of impairment recognized during fiscal year 2018 for certain non-core investments. No other components of other charges and income, net incurred during fiscal year 2018 were material.
The fiscal year ended March 31, 2017 includes a $7.4 million loss attributable to a non-strategic facility sold during the second quarter of fiscal year 2017. No other components of other charges and income, net incurred during fiscal year 2017 were material.
During fiscal year 2016, the Company incurred net losses of $47.7 million primarily due to a $26.8 million loss on the disposition of a non-strategic Western European manufacturing facility, which included a non-cash foreign currency translation loss of $25.3 million, and a $21.8 million loss from the impairment of a non-core investment offset by immaterial currency translation gains.
17. INTEREST AND OTHER, NET
For the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized interest income of $18.8 million, $12.1 million and $12.3 million.
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For the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized interest expense of $123.1 million, $108.0 million and $98.0 million, respectively, on its debt obligations outstanding during the period.
For the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized gains on foreign exchange transactions of $15.2 million, $16.5 million and $24.4 million, respectively.
For the fiscal years ended March 31, 2018, 2017 and 2016, the Company recognized $25.0 million, $15.3 million and $11.0 million of expense related to its ABS and AR Sales Programs.
18. BUSINESS AND ASSET ACQUISITIONS & DIVESTITURES
In March 2018, the Company entered into an agreement with a certain Chinese manufacturing company, to divest its China-based Multek operations, for proceeds of approximately $273 million, net of cash. The planned divestiture does not qualify as discontinued operations, but certain Multek assets and liabilities meet the definition of held for sale as of March 31, 2018. Accordingly, approximately $321.1 million of assets, primarily property and equipment and accounts receivable, were classified as held for sale and included in other current assets, and approximately $144.1 million of liabilities, primarily accounts payables, were classified as held for sale and included in other current liabilities as of March 31, 2018 in the consolidated balance sheet. The Company expects to recognize an immaterial gain on the divestiture upon closing which is expected in the second quarter of fiscal year 2019, subject to customary closing conditions, including regulatory approvals.
The business and asset acquisitions described below were accounted for using the purchase method of accounting, and accordingly, the fair value of the net assets acquired and the results of the acquired businesses were included in the Company's consolidated financial statements from the acquisition dates forward. The Company has not finalized the allocation of the consideration for certain of its recently completed acquisitions and completes these allocations in less than one year of the respective acquisition dates.
Fiscal 2018 Business and asset acquisitions
During the fiscal year ended March 31, 2018, the Company completed two acquisitions that were not individually, nor in the aggregate, significant to the consolidated financial position, results of operation and cash flows of the Company.
In April 2017, the Company completed its acquisition of AGM, which expanded its capabilities in the automotive market, and is included within the HRS segment. The Company paid $213.7 million, net of cash acquired.
Additionally, in September 2017, the Company acquired a power modules business, which expanded its capabilities within the CEC segment. The Company paid $54.7 million, net of cash acquired.
A summary of the allocation of the total purchase consideration is presented as follows (in thousands):
Purchase Consideration | Net Tangible Assets Acquired | Purchased Intangible Assets | Goodwill | |||||||||||||
AGM | $ | 213,718 | $ | 56,438 | $ | 82,000 | $ | 75,280 | ||||||||
Power Modules Business | 54,659 | 11,615 | 33,300 | 9,744 | ||||||||||||
The intangibles of AGM comprised solely of customer relationships, will amortize over a weighted-average estimated useful life of 10 years. The intangibles of the power modules business, comprised of $16.0 million of customer relationships and $17.3 million of licenses and other intangibles, will amortize over a weighted-average estimated useful life of 10 years and 8 years, respectively.
The results of operations of the acquisitions were included in the Company’s consolidated financial results beginning on the respective acquisition dates, and the total amount of net income and revenue, collectively, were immaterial to the Company's consolidated financial results for the fiscal year ended March 31, 2018. Pro-forma results of operations for the acquisitions completed in fiscal year 2018 have not been presented because the effects, individually and in aggregate, were not material to the Company’s consolidated financial results for all periods presented.
Fiscal 2017 Business and asset acquisitions
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During the fiscal year ended March 31, 2017, the Company completed four 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 notable 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 communications market and energy market within the CEC and IEI segments, respectively. At the acquisition dates, the Company paid a total of $189.1 million, net of cash acquired, of which $161.7 million, net of $18.0 million of cash acquired is related to the Bose acquisition which is included in cash from investing activities in the consolidated statements of cash flows. The Company acquired primarily $73.1 million of inventory, $60.8 million of property and equipment, and recorded goodwill of $63.8 million and intangible assets of $47.4 million principally related to the Bose acquisition. The intangibles will amortize over a weighted-average estimated useful life of 6.5 years. In connection with these acquisitions, the Company assumed $63.3 million in other liabilities including additional consideration of $28.0 million which was paid in the fourth quarter of fiscal year 2017 and included in other financing activities in the consolidated statements of cash flows. 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 fiscal year ended March 31, 2017. Pro-forma results of operations for the acquisitions completed in fiscal year 2017 were not presented because the effects, individually and in the aggregate, were not material to the Company’s consolidated financial results for all periods presented.
Fiscal 2017 Divestitures
During the fiscal year ended March 31, 2017, the Company disposed of two non-strategic businesses within the HRS and IEI segments. The Company received $30.7 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 was included in other charges, net in the condensed consolidated statements of operations for the fiscal year 2017.
Fiscal 2016 Business acquisitions
Acquisition of Mirror Controls International
In June 2015, the Company completed its acquisition of 100% of the outstanding share capital of MCi, and paid approximately $555.2 million, net of $27.7 million of cash acquired. This acquisition expanded the Company's capabilities in the automotive market, and was included in the HRS segment. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values as of the date of acquisition. The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed was allocated to goodwill.
The intangible assets of $236.8 million is comprised of customer relationships of $75.5 million and licenses and other intangible assets of $161.3 million. Customer relationships and licenses and other intangibles are each amortized over a weighted-average estimated useful life of 10 years. In addition to net working capital, the Company acquired $38.8 million of machinery and equipment and assumed $61.5 million of other liabilities primarily comprised of deferred tax liabilities. The Company incurred $6.6 million in acquisition-related costs related to the acquisition of MCi during fiscal year 2016.
Acquisition of a facility from Alcatel-Lucent
In July 2015, the Company acquired an optical transport facility from Alcatel-Lucent for approximately $67.5 million, which expanded its capabilities in the telecom market and was included in the CEC segment. The Company acquired primarily $55.1 million of inventory and $10.0 million of property and equipment primarily comprised of a building and land, and recorded goodwill and intangible assets for a customer relationship of $3.6 million and $2.1 million, respectively, and assumed $3.3 million in other net liabilities in connection with this acquisition. The customer relationship intangible will amortize over a weighted-average estimated useful life of 5 years.
Acquisition of NEXTracker
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In September 2015, the Company acquired 100% of the outstanding share capital of NEXTracker, a provider of smart solar tracking solutions. The initial cash consideration was approximately $240.8 million, net of $13.2 million of cash acquired, with an additional $81.0 million of estimated potential contingent consideration, for a total purchase consideration of $321.8 million. At the date of the acquisition, the maximum possible contingent consideration under the agreement was $97.2 million based upon the achievement of future revenue performance targets. The Company also acquired NEXTracker’s equity incentive plan. The financial results of NEXTracker were included in the IEI segment. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was based on their estimated fair values as of the date of acquisition. The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed was allocated to goodwill.
The intangible assets of $108.7 million is comprised of customer-related intangibles of $47.3 million and licenses and other intangible assets of $61.4 million. Customer-related intangibles are amortized over a weighted-average estimated useful life of 4 years while licenses and other intangibles are amortized over a weighted-average estimated useful life of 6 years.
Other business acquisitions
Additionally, during fiscal year 2016, the Company completed eight acquisitions that were not individually, nor in the aggregate, significant to the consolidated financial position, results of operations and cash flows of the Company. Four of the acquired businesses expanded the Company’s capabilities in the medical devices market, particularly precision plastics and molding within the HRS segment, two of them strengthened capabilities in the consumer electronics market within the CTG segment, one strengthened the capabilities in the communications market within the CEC segment, and the last one strengthened capabilities in the household industrial and lifestyle market within the IEI segment. The Company paid $53.3 million, net of $3.7 million of cash held by the targets. The Company acquired $14.4 million of property and equipment, assumed liabilities of $17.7 million and recorded goodwill and intangibles of $57.4 million. These intangibles will amortize over a weighted-average estimated useful life of 4 years.
The results of operations for all of the acquisitions completed in fiscal year 2016 were included in the Company’s consolidated financial results beginning on the date of each acquisition. The total amount of net income for all of the acquisitions completed in fiscal year 2016, collectively, was $41.4 million. The total amount of revenue of these acquisitions, collectively, was not material to the Company’s consolidated financial results for the fiscal year 2016.
On a pro-forma basis, and assuming the fiscal year 2016 acquisitions occurred on the first day of the prior period, or April 1, 2014, the Company's net income would have been estimated to be $410.1 million for the fiscal year 2016. The estimated pro-forma net income did not include the $43.0 million tax benefit for the release of the valuation allowance on deferred tax assets primarily relating to the NEXTracker acquisition, recognized in fiscal year 2016, to promote comparability. Pro-forma revenue for the acquisitions in fiscal year 2016 were not presented because the effect, collectively, was not material to the Company’s consolidated revenues for fiscal year 2016.
The Company continues to evaluate certain assets and liabilities related to its acquisition of the power module business completed during fiscal year 2018. 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 acquisition date. Changes to amounts recorded as assets or liabilities, as a result of such additional information, may result in a corresponding adjustment to goodwill.
19. SHARE REPURCHASE PLAN
During fiscal year 2018, the Company repurchased approximately 10.8 million shares for an aggregate purchase value of approximately $180.0 million under two separate repurchase plans as further discussed below.
During the first and second quarters of fiscal year 2018, the Company repurchased the entire remaining amount, or approximately 5.5 million shares for an aggregate purchase value of approximately $90.1 million, under the share repurchase plan that was approved by the Company's Board of Directors on August 24, 2016 and the Company's shareholders at the 2016 Annual General Meeting. The Company 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
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shareholders at the date of the most recent Annual General Meeting held on August 15, 2017. During fiscal year 2018, the Company repurchased approximately 5.3 million shares for an aggregate purchase value of approximately $89.9 million under this plan, and retired all of these shares. As of March 31, 2018, shares in the aggregate amount of $410.1 million were available to be repurchased under the current plan.
20. SEGMENT REPORTING
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker ("CODM"), or a decision making group, in deciding how to allocate resources and in assessing performance. Resource allocation decisions and the Company's performance are assessed by its Chief Executive Officer ("CEO"), with support from his direct staff who oversee certain operations of the business, collectively identified as the CODM or the decision making group.
The Company has four reportable segments: HRS, CTG, IEI, and CEC. These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the CODM. 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, distressed customer charges, contingencies and other, restructuring charges, other charges (income), net and interest and other, net.
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Selected financial information by segment is as follows:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Net sales: | |||||||||||
Communications & Enterprise Compute | $ | 7,729,350 | $ | 8,383,420 | $ | 8,841,642 | |||||
Consumer Technologies Group | 6,969,821 | 6,362,338 | 6,997,526 | ||||||||
Industrial & Emerging Industries | 5,972,496 | 4,967,738 | 4,680,718 | ||||||||
High Reliability Solutions | 4,769,464 | 4,149,438 | 3,898,999 | ||||||||
$ | 25,441,131 | $ | 23,862,934 | $ | 24,418,885 | ||||||
Segment income and reconciliation of income before tax: | |||||||||||
Communications & Enterprise Compute | $ | 186,335 | $ | 229,332 | $ | 265,076 | |||||
Consumer Technologies Group | 111,629 | 179,910 | 163,677 | ||||||||
Industrial & Emerging Industries | 235,422 | 179,749 | 157,588 | ||||||||
High Reliability Solutions | 380,878 | 334,108 | 294,635 | ||||||||
Corporate and Other | (127,810 | ) | (107,850 | ) | (89,219 | ) | |||||
Total income | 786,454 | 815,249 | 791,757 | ||||||||
Reconciling items: | |||||||||||
Intangible amortization | 78,640 | 81,396 | 65,965 | ||||||||
Stock-based compensation | 85,244 | 82,266 | 77,580 | ||||||||
Distressed customers asset impairments (1) | 6,251 | 92,915 | 61,006 | ||||||||
Restructuring charges (2) | 90,691 | 49,395 | — | ||||||||
Contingencies and other (3) | 51,631 | 17,704 | — | ||||||||
Other charges (income), net | (169,719 | ) | 21,193 | 47,738 | |||||||
Interest and other, net | 122,823 | 99,532 | 84,793 | ||||||||
Income before income taxes | $ | 520,893 | $ | 370,848 | $ | 454,675 | |||||
Corporate and other primarily includes corporate services costs that are not included in the CODM's assessment of the performance of each of the identified reporting segments.
(1) | During 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 million as of March 31, 2016, associated with its outstanding SunEdison receivables. |
During fiscal year 2017, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory on hand at the end of the fiscal year 2017 was not fully recoverable and recorded a charge of $60 million to reduce the carrying costs to market in fiscal year 2017. The Company also recognized a $16 million impairment charge for solar module equipment and $17 million primarily related to negative margin sales and other associated direct costs. The total charge of $93 million is included in cost of sales for fiscal year 2017 but is excluded from segment results above.
(2) | The Company initiated restructuring plans in fiscal years 2018 and 2017 and incurred charges primarily for employee terminations costs, as well as other asset impairments. These charges are split between cost of sales and selling, general and administration expenses on the Company's consolidated statement of operations, and are excluded from the measurement of the Company's operating segment's performance. Refer to note 15 for more details about our restructuring charges. |
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(3) | During fiscal year 2018, the Company incurred charges in connection with the matters described in note 13 for certain loss contingencies where it believes that losses are probable and estimable; coupled with various other charges predominately related to damages incurred from a typhoon that impacted one of its China facilities. Additionally, certain assets impairments were recorded during both fiscal years 2018 and 2017. |
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. During fiscal year 2018, 2017 and 2016, depreciation expense included in the segments' measure of operating performance above is as follows:
Fiscal Year Ended March 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
(In thousands) | |||||||||||
Depreciation expense | |||||||||||
Communications & Enterprise Compute | $ | 118,150 | $ | 133,057 | $ | 117,710 | |||||
Consumer Technologies Group | 110,276 | 110,379 | 123,139 | ||||||||
Industrial & Emerging Industries | 75,366 | 70,814 | 72,415 | ||||||||
High Reliability Solutions | 105,065 | 88,604 | 80,935 | ||||||||
Corporate and Other | 25,575 | 29,384 | 31,530 | ||||||||
Total depreciation expense | $ | 434,432 | $ | 432,238 | $ | 425,729 | |||||
Geographic information is as follows:
Fiscal Year Ended March 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales: | ||||||||||||||||||||
Asia | $ | 11,210,793 | 44 | % | $ | 10,962,075 | 46 | % | $ | 11,788,992 | 48 | % | ||||||||
Americas | 9,880,626 | 39 | % | 8,582,849 | 36 | % | 8,347,514 | 34 | % | |||||||||||
Europe | 4,349,712 | 17 | % | 4,318,010 | 18 | % | 4,282,379 | 18 | % | |||||||||||
$ | 25,441,131 | $ | 23,862,934 | $ | 24,418,885 | |||||||||||||||
Revenues are attributable to the country in which the product is manufactured or service is provided.
During fiscal years 2018, 2017 and 2016, net sales generated from Singapore, the principal country of domicile, were approximately $686.9 million, $595.3 million and $519.1 million, respectively.
During fiscal year 2018, China, Mexico, the United States and Brazil accounted for approximately 29%, 17%, 11% and 10% of consolidated net sales, respectively. No other country accounted for more than 10% of net sales in fiscal year 2018.
During fiscal year 2017, China, Mexico, the United States and Malaysia accounted for approximately 30%, 17%, 11% and 10% of consolidated net sales, respectively. No other country accounted for more than 10% of net sales in fiscal year 2017.
During fiscal year 2016, China, Mexico, and the United States accounted for approximately 35%, 15% and 11% of consolidated net sales, respectively. No other country accounted for more than 10% of net sales in fiscal year 2016.
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As of March 31, | |||||||||||||
2018 | 2017 | ||||||||||||
(In thousands) | |||||||||||||
Property and equipment, net: | |||||||||||||
Asia | $ | 747,314 | 33 | % | $ | 960,290 | 41 | % | |||||
Americas | 1,012,188 | 45 | % | 939,888 | 41 | % | |||||||
Europe | 480,004 | 22 | % | 416,848 | 18 | % | |||||||
$ | 2,239,506 | $ | 2,317,026 | ||||||||||
As of March 31, 2018 and 2017, property and equipment, net held in Singapore were approximately $12.6 million and $13.2 million, respectively.
As of March 31, 2018, Mexico, China and the United States accounted for approximately 26%, 22% and 14%, respectively, of property and equipment, net. No other country accounted for more than 10% of property and equipment, net as of March 31, 2018. The decrease in China's property and equipment is primarily driven by assets related to the Company's China-based Multek operations, which were classified as held for sale, as further described in note 18.
As of March 31, 2017, China, Mexico and the United States accounted for approximately 31%, 23% and 13%, respectively, of property and equipment, net. No other country accounted for more than 10% of property and equipment, net as of March 31, 2017.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's third fiscal quarter ends on December 31, and the fourth fiscal quarter and year ends on March 31 of each year. The first fiscal quarters of 2018 and 2017 ended on June 30, 2017 and July 1, 2016, respectively, and the second fiscal quarters of 2018 and 2017, ended on September 29, 2017 and September 30, 2016, respectively.
The following table contains unaudited quarterly financial data for fiscal years 2018 and 2017.
Fiscal Year Ended March 31, 2018 | Fiscal Year Ended March 31, 2017 | ||||||||||||||||||||||||||||||
First | Second | Third | Fourth (2) | First | Second (3) | Third | Fourth | ||||||||||||||||||||||||
Net sales | $ | 6,008,272 | $ | 6,270,420 | $ | 6,751,552 | $ | 6,410,887 | $ | 5,876,813 | $ | 6,008,525 | $ | 6,114,999 | $ | 5,862,597 | |||||||||||||||
Gross profit | 406,932 | 393,325 | 446,328 | 349,297 | 405,995 | 313,691 | 416,455 | 384,804 | |||||||||||||||||||||||
Net income (loss) (1) | 124,710 | 205,086 | 118,333 | (19,595 | ) | 105,729 | (2,508 | ) | 129,469 | 86,874 | |||||||||||||||||||||
Earnings (losses) per share (4): | |||||||||||||||||||||||||||||||
Net income: | |||||||||||||||||||||||||||||||
Basic | $ | 0.24 | $ | 0.39 | $ | 0.22 | $ | (0.04 | ) | $ | 0.19 | $ | 0.00 | $ | 0.24 | $ | 0.16 | ||||||||||||||
Diluted | $ | 0.23 | $ | 0.38 | $ | 0.22 | $ | (0.04 | ) | $ | 0.19 | $ | 0.00 | $ | 0.24 | $ | 0.16 | ||||||||||||||
_______________________________________________________________________________
(1) | Net income for the first quarter of fiscal year 2018 was affected by a $38.7 million gain recognized for the disposition of Wink. Refer to note 2 for additional information. Net income for the second quarter of fiscal year 2018 was affected by $151.6 million non-cash gain as a result of the deconsolidation of our investment in Elementum. Refer to note 6 for further details on the deconsolidation. |
(2) | The Company recorded restructuring charges during the fourth quarter of fiscal year 2018. The Company classified approximately $58.9 million of these charges as a component of cost of sales and approximately $23.8 million of these charges as a component of selling, general and administrative expenses. Refer to note 15 for additional information on these charges. |
(3) | Gross profit and net income for the second quarter of fiscal year 2017 was affected by $92.9 million of SunEdison bankruptcy related charges, as further described in note 2. |
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(4) | Earnings per share are computed independently for each quarter presented; therefore, the sum of the quarterly earnings per share may not equal the total earnings per share amounts for the fiscal year. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures |
The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2018. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, the Company's disclosure controls and procedures were not effective, as a result of the material weaknesses further described below, in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
(b) | Management's Annual Report on Internal Control over Financial Reporting |
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a- 15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting consists of policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) are designed and operated to provide reasonable assurance regarding the reliability of our financial reporting and our process for the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements or prevent or detect instances of fraud. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of March 31, 2018, under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer, an evaluation was conducted of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Management's annual assessment of the effectiveness of our internal control over financial reporting as of March 31, 2018 excluded the internal control over financial reporting of one of our acquisitions that was completed during the year ended March 31, 2018, which constitutes less than 1% of both total assets and net sales of the consolidated financial statements amount as of, and for the fiscal year ended March 31, 2018.
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(c) | Material Weaknesses Identified |
Our management concluded that, as of the end of the period covered in this report, material weaknesses existed in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. These deficiencies resulted in a reasonable possibility that a material misstatement in our financial statements will not be prevented or detected on a timely basis and aggregated to material weaknesses in our internal control over financial reporting relating to the accounting for customer contractual obligations and aspects of our control environment and monitoring activities.
We determined that there was insufficient documentation of, and ineffective design of controls over, the accounting for accrued customer obligations related to customer contracts. Factors contributing to this included insufficient training of site and segment operational and accounting personnel, and inadequate monitoring, including contract compliance, to ensure the components of internal control were present and functioning properly. In addition, the control environment was ineffective in ensuring that executive management’s expectations of adherence to the Company’s policies and standards of conduct were followed at all levels of the Company and in ensuring that any deviations therefrom were identified and corrected in a timely manner.
As a result of these material weaknesses, our management has concluded that we did not maintain effective internal control over financial reporting as of March 31, 2018.
The effectiveness of the Company's internal control over financial reporting as of March 31, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears in this Item under the heading "Report of Independent Registered Public Accounting Firm."
(d) Remediation Efforts to Address Material Weaknesses
Management is committed to the planning and implementation of remediation efforts to address the material weaknesses, as well as to foster continuous improvement in the Company’s internal controls. We have undertaken, and will continue to undertake, steps to improve our internal control over financial reporting to address and remediate the material weaknesses. The remediation efforts and actions to address the deficiencies identified above are summarized below. Some of these remediation efforts have been implemented already or are in the process of implementation, and the details to address the material weaknesses and to enhance our overall financial control environment will be finalized over the coming months. Our initiatives include:
• | Design and implement additional site level controls related to accounting for customer contractual obligations including criteria for effective contract reviews and approvals and documentation to evidence judgements and estimates. |
• | Designing and implementing a centralized Contract Management Office to determine the appropriate accounting and provide evidence of review for each material contract. |
• | Designing and implementing systematic centralized reporting controls that provide enhanced visibility to the accounting for customer contracts, which improve monitoring controls that are designed to prevent or detect material errors and help ensure that proper oversight is being provided related to certain decentralized activities. |
• | Enhancing the quality and frequency of training across all levels to improve awareness of Company policies and knowledge of the expected standards of conduct. |
While this remediation plan is being executed, the Company has also engaged additional external resources to support and supplement the Company’s existing internal resources.
Management believes these measures, when fully implemented and operational, will remediate the control deficiencies we have identified and strengthen our internal control over financial reporting. The material weaknesses in our internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period and management has concluded, through testing, that these controls are operating effectively. We are working to have the material weaknesses remediated as soon as possible. As we continue to evaluate and improve our internal control over financial reporting, we may take additional measures to address control deficiencies or modify or change the proposed remediation measures described above.
(e) Changes in Internal Control Over Financial Reporting
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There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Flex Ltd.
Singapore
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Flex Ltd. and subsidiaries (the "Company") as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 31, 2018, of the Company and our report dated June 14, 2018 expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting of one acquisition completed during the year ended March 31, 2018, which constitutes less than 1% of both assets and net sales of the consolidated financial statements amount as of, and for the fiscal year ended March 31, 2018. Accordingly, our audit did not include the internal control over financial reporting of this acquisition.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting, may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment: There was insufficient documentation of, and ineffective design of controls over, the accounting for accrued customer obligations related to customer contracts. Factors contributing to this included insufficient training of site and segment operational and accounting personnel, and inadequate monitoring, including of contract compliance, to ensure the components of internal control were present and functioning properly. In addition, the control environment was ineffective in ensuring that executive management’s expectations of adherence to the Company’s policies and standards of conduct were followed at all levels of the Company and in ensuring that any deviations therefrom were identified and corrected in a timely manner. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements of the Company as of and for the year ended March 31, 2018 and this report does not affect our report on such financial statements.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
June 14, 2018
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ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2018 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2018 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2018 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2018 Annual General Meeting of Shareholders. Such information is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2018 Annual General Meeting of Shareholders. Such information is incorporated by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Documents filed as part of this annual report on Form 10-K: |
1. Financial Statements. See Item 8, "Financial Statements and Supplementary Data."
2. Financial Statement Schedules. "Schedule II—Valuation and Qualifying Accounts" is included in the financial statements, see Concentration of Credit Risk in Note 2, "Summary of Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data."
3. Exhibits. Reference is made to Item 15(b) below.
(b) Exhibits. The Exhibit Index, which immediately precedes the signature page to this annual report on Form 10-K, is incorporated by reference into this annual report on Form 10-K.
(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY
None
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||
Constitution of the Registrant | 10-Q | 000-23354 | 10/31/2016 | 3.01 | ||||||||
Indenture, dated as of February 20, 2013, by and between the Registrant, the Guarantors party thereto and U.S. Bank National Association, as Trustee, related to the Registrant's 4.625% Notes due 2020 and 5.000% Notes due 2023 | 8-K | 000-23354 | 2/22/2013 | 4.1 | ||||||||
Form of 4.625% Note due 2020 | 8-K | 000-23354 | 2/22/2013 | 4.1 | ||||||||
Form of 5.000% Note due 2023 | 8-K | 000-23354 | 2/22/2013 | 4.1 | ||||||||
First Supplemental Indenture, dated as of March 28, 2013, among the Registrant, the Guarantor party thereto and U.S. Bank National Association, as Trustee, to the Indenture, dated as of February 20, 2013, by and between the Registrant, the Guarantors party thereto and U.S. Bank National Association, as Trustee, related to the Registrant's 4.625% Notes due 2020 and 5.000% Notes due 2023 | 10-K | 000-23354 | 5/28/2013 | 4.11 | ||||||||
Second Supplemental Indenture, dated as of August 25, 2014, among the Registrant, the Guarantor party thereto and U.S. Bank National Association, as Trustee, to the Indenture, dated as of February 20, 2013, by and between the Registrant, the Guarantors party thereto and U.S. Bank National Association, as Trustee, related to the Registrant's 4.625% Notes due 2020 and 5.000% Notes due 2023 | 10-Q | 000-23354 | 10/30/2014 | 4.01 | ||||||||
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Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||
Third Supplemental Indenture, dated as of September 11, 2015, among the Registrant, the Guarantor party thereto and U.S. Bank National Association, as Trustee, related to the Registrant’s 4.625% Notes due 2020 and 5.000% Notes due 2023 | S-4 | 333-207067 | 9/22/2015 | 4.11 | ||||||||
Indenture, dated as of June 8, 2015, by and between the Registrant, the Guarantors party thereto and U.S. Bank National Association, as Trustee | 8-K | 000-23354 | 6/8/2015 | 4.1 | ||||||||
Form of 4.750% Note due 2025 | 8-K | 000-23354 | 6/8/2015 | 4.1 | ||||||||
First Supplemental Indenture, dated as of September 11, 2015, among the Registrant, the Guarantor party thereto and U.S. Bank National Association, as Trustee, related to the Registrant’s 4.750% Notes due 2025 | S-4 | 333-207067 | 9/22/2015 | 4.04 | ||||||||
Credit Agreement, dated as of June 30, 2017, among Flex Ltd. and certain of its subsidiaries, from time to time party thereto, as borrowers, Bank of America, N.A., as Administrative Agent and Swing Line Lender, and the other Lenders party thereto | 8-K | 000-23354 | 6/30/2017 | 10.01 | ||||||||
Term Loan Agreement, dated as of November 30, 2016, among Flex Ltd., as borrower, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Administrative Agent, and the other Lenders party thereto | 8-K | 000-23354 | 12/1/2016 | 10.01 | ||||||||
Amendment No. 1, dated as of July 25, 2017, to Term Loan Agreement, dated as of November 30, 2016, among Flex Ltd., as borrower, The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Administrative Agent, and the other Lenders party thereto | 10-Q | 000-23354 | 10/30/2017 | 10.01 | ||||||||
Form of Indemnification Agreement between the Registrant and its Directors and certain officers† | 10-K | 000-23354 | 5/20/2009 | 10.01 | ||||||||
Form of Indemnification Agreement between Flextronics Corporation and Directors and certain officers of the Registrant† | 10-K | 000-23354 | 5/20/2009 | 10.02 | ||||||||
Flex Ltd. 2010 Equity Incentive Plan† | 8-K | 000-23354 | 7/28/2010 | 10.01 | ||||||||
Form of Share Option Award Agreement under 2010 Equity Incentive Plan† | 10-Q | 000-23354 | 8/5/2010 | 10.02 | ||||||||
Form of Restricted Share Unit Award Agreement under 2010 Equity Incentive Plan† | 10-Q | 000-23354 | 8/5/2010 | 10.03 | ||||||||
Flex Ltd. 2017 Equity Incentive Plan† | DEF 14A | 000-23354 | 7/5/2017 | Annex A | ||||||||
Form of Restricted Share Unit Award Agreement under the 2017 Equity Incentive Plan for time-based vesting awards† | 10-Q | 000-23354 | 10/30/2017 | 10.05 | ||||||||
Form of Restricted Share Unit Award Agreement under the 2017 Equity Incentive Plan for performance-based vesting awards† | 10-Q | 000-23354 | 10/30/2017 | 10.06 | ||||||||
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Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||
Flextronics International USA, Inc. Third Amended and Restated 2005 Senior Management Deferred Compensation Plan† | 10-Q | 000-23354 | 2/6/2009 | 10.02 | ||||||||
Flextronics International USA, Inc. Third Amended and Restated Senior Executive Deferred Compensation Plan† | 10-Q | 000-23354 | 2/6/2009 | 10.01 | ||||||||
Summary of Directors' Compensation† | 10-Q | 000.23354 | 10/30/2017 | 10.02 | ||||||||
Executive Incentive Compensation Recoupment Policy† | 10-Q | 000-23354 | 8/5/2010 | 10.06 | ||||||||
Francois Barbier Offer Letter, dated as of July 1, 2010† | 8-K | 000-23354 | 9/3/2010 | 10.01 | ||||||||
Francois Barbier Relocation Expenses Addendum, dated as of March 5, 2013† | 10-K | 000-23354 | 5/28/2013 | 10.27 | ||||||||
Francois Barbier Confirmation Date Letter, dated as of August 30, 2010† | 8-K | 000-23354 | 9/3/2010 | 10.03 | ||||||||
Scott Offer Offer Letter dated June 14, 2016† | 10-Q | 000-23354 | 8/1/2017 | 10.02 | ||||||||
2010 Flextronics International USA, Inc. Deferred Compensation Plan† | 10-Q | 000-23354 | 11/3/2010 | 10.04 | ||||||||
Form of Amendment to certain senior executive Restricted Share Unit Agreements under the 2010 Equity Incentive Plan† | 10-Q | 000-23354 | 2/4/2013 | 10.02 | ||||||||
Form of Award Agreement under 2010 Deferred Compensation Plan† | 10-Q | 000-23354 | 7/30/2012 | 10.01 | ||||||||
Summary of Compensation Arrangements of Certain Executive Officers of Flex Ltd.† | 10-Q | 000-23354 | 10/30/2017 | 10.03 | ||||||||
Form of Restricted Share Unit Award Agreement under the 2010 Equity Incentive Plan for time-based vesting awards† | 10-Q | 000-23354 | 11/1/2013 | 10.02 | ||||||||
Form of 2010 Deferred Compensation Plan Award Agreement (performance targets, cliff vesting)† | 10-Q | 000-23354 | 8/2/2013 | 10.02 | ||||||||
Form of 2010 Deferred Compensation Plan Award Agreement (non-performance, periodic vesting, continuing Participant)† | 10-Q | 000-23354 | 8/2/2013 | 10.03 | ||||||||
Award Agreement under the 2010 Deferred Compensation Plan† | 10-Q | 000-23354 | 7/28/2014 | 10.01 | ||||||||
Form of Restricted Share Unit Award Agreement under the 2010 Equity Incentive Plan for certain executive fiscal year 2015 performance-based awards† | 10-Q | 000-23354 | 10/30/2014 | 10.01 | ||||||||
Description of Annual Incentive Bonus Plan for Fiscal 2018† | 10-Q | 000-23354 | 8/1/2017 | 10.03 | ||||||||
Description of Performance Long Term Incentive Plan for Fiscal 2018† | 10-Q | 000-23354 | 8/1/2017 | 10.04 | ||||||||
NEXTracker Inc. 2014 Equity Incentive Plan† | S-8 | 333-207325 | 10/7/2015 | 99.01 | ||||||||
Form of Elementum Holding Ltd. Restricted Share Purchase Agreement† | 10-Q | 000-23354 | 10/26/2015 | 10.02 | ||||||||
BrightBox Technologies, Inc. 2013 Stock Incentive Plan† | S-8 | 333-212267 | 6/27/2016 | 99.01 | ||||||||
Subsidiaries of Registrant | X | |||||||||||
Consent of Deloitte & Touche LLP | X | |||||||||||
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Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||
Power of Attorney (included on the signature page to this Form 10-K) | X | |||||||||||
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act | X | |||||||||||
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act | X | |||||||||||
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350* | X | |||||||||||
101.INS | XBRL Instance Document | X | ||||||||||
101.SCH | XBRL Taxonomy Extension Scheme 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 Annual Report on Form 10-K, 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. |
† | Management contract, compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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. | |||
By: | /s/ MICHAEL M. MCNAMARA | ||
Michael M. McNamara Chief Executive Officer | |||
Date: June 14, 2018
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Michael M. McNamara and Christopher E. Collier and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
112
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ MICHAEL M. MCNAMARA | Chief Executive Officer and Director (Principal Executive Officer) | June 14, 2018 | ||
Michael M. McNamara | ||||
/s/ CHRISTOPHER E. COLLIER | Chief Financial Officer (Principal Financial Officer) | June 14, 2018 | ||
Christopher E. Collier | ||||
/s/ DAVID P. BENNETT | Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | June 14, 2018 | ||
David P. Bennett | ||||
/s/ MICHAEL D. CAPELLAS | Chairman of the Board | June 14, 2018 | ||
Michael D. Capellas | ||||
/s/ JENNIFER LI | Director | June 14, 2018 | ||
Jennifer Li | ||||
/s/ MARC A. ONETTO | Director | June 14, 2018 | ||
Marc A. Onetto | ||||
/s/ DANIEL H. SCHULMAN | Director | June 14, 2018 | ||
Daniel H. Schulman | ||||
/s/ WILLY C. SHIH, PH.D. | Director | June 14, 2018 | ||
Willy C. Shih, Ph.D. | ||||
/s/ LAY KOON TAN | Director | June 14, 2018 | ||
Lay Koon Tan | ||||
/s/ WILLIAM D. WATKINS | Director | June 14, 2018 | ||
William D. Watkins | ||||
/s/ LAWRENCE A. ZIMMERMAN | Director | June 14, 2018 | ||
Lawrence A. Zimmerman | ||||
113