FLEX LTD. - Quarter Report: 2023 June (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23354
FLEX LTD.
(Exact name of registrant as specified in its charter)
| Singapore | Not Applicable | |||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
| 2 Changi South Lane, | ||||||||
| Singapore | 486123 | |||||||
| (Address of registrant’s principal executive offices) | (Zip Code) | |||||||
(65) 6876-9899
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Ordinary Shares, No Par Value | FLEX | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s ordinary shares outstanding as of July 21, 2023 was 446,626,960.
FLEX LTD.
INDEX
| Page | ||||||||
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Flex Ltd., Singapore
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd. and its subsidiaries (the “Company”) as of June 30, 2023, the related condensed consolidated statements of operations, comprehensive income, redeemable noncontrolling interest and shareholders’ equity, and cash flows for the three-month periods ended June 30, 2023 and July 1, 2022, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Flex Ltd. and its subsidiaries as of March 31, 2023 and the related consolidated statements of operations, comprehensive income, redeemable noncontrolling interest and shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 19, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2023 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
The interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
| /s/ DELOITTE & TOUCHE LLP | |||||
| San Jose, California | |||||
| July 28, 2023 | |||||
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FLEX LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of June 30, 2023 | As of March 31, 2023 | ||||||||||
| (In millions, except share amounts) (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,660 | $ | 3,294 | |||||||
Accounts receivable, net of allowance of $9 and $8, respectively | 3,764 | 3,739 | |||||||||
| Contract assets | 588 | 541 | |||||||||
| Inventories | 7,526 | 7,530 | |||||||||
| Other current assets | 1,002 | 917 | |||||||||
| Total current assets | 15,540 | 16,021 | |||||||||
| Property and equipment, net | 2,363 | 2,349 | |||||||||
| Operating lease right-of-use assets, net | 624 | 608 | |||||||||
| Goodwill | 1,344 | 1,343 | |||||||||
| Other intangible assets, net | 299 | 316 | |||||||||
| Other assets | 766 | 758 | |||||||||
| Total assets | $ | 20,936 | $ | 21,395 | |||||||
| LIABILITIES, NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Bank borrowings and current portion of long-term debt | $ | 151 | $ | 150 | |||||||
| Accounts payable | 5,890 | 5,930 | |||||||||
| Accrued payroll | 474 | 522 | |||||||||
| Deferred revenue and customer working capital advances | 3,038 | 3,143 | |||||||||
| Other current liabilities | 1,085 | 1,110 | |||||||||
| Total current liabilities | 10,638 | 10,855 | |||||||||
| Long-term debt, net of current portion | 3,444 | 3,691 | |||||||||
| Operating lease liabilities, non-current | 514 | 506 | |||||||||
| Other liabilities | 554 | 637 | |||||||||
| Total liabilities | 15,150 | 15,689 | |||||||||
| Shareholders’ equity | |||||||||||
| Flex Ltd. shareholders’ equity | |||||||||||
Ordinary shares, no par value; 1,500,000,000 authorized, 499,276,711 and 500,362,046 issued, and 449,037,356 and 450,122,691 outstanding as of June 30, 2023 and March 31, 2023, respectively | 6,337 | 6,493 | |||||||||
Treasury stock, at cost; 50,239,355 shares as of June 30, 2023 and March 31, 2023, respectively | (388) | (388) | |||||||||
| Accumulated deficit | (374) | (560) | |||||||||
| Accumulated other comprehensive loss | (169) | (194) | |||||||||
| Total Flex Ltd. shareholders’ equity | 5,406 | 5,351 | |||||||||
| Noncontrolling interest | 380 | 355 | |||||||||
| Total shareholders’ equity | 5,786 | 5,706 | |||||||||
| Total liabilities, noncontrolling interest, and shareholders' equity | $ | 20,936 | $ | 21,395 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions, except per share amounts) (Unaudited) | |||||||||||
| Net sales | $ | 7,336 | $ | 7,347 | |||||||
| Cost of sales | 6,732 | 6,812 | |||||||||
| Restructuring charges | 17 | — | |||||||||
| Gross profit | 587 | 535 | |||||||||
| Selling, general and administrative expenses | 270 | 241 | |||||||||
| Restructuring charges | 6 | — | |||||||||
| Intangible amortization | 20 | 22 | |||||||||
| Operating income | 291 | 272 | |||||||||
| Interest, net | 41 | 49 | |||||||||
| Other charges (income), net | 11 | (9) | |||||||||
| Income before income taxes | 239 | 232 | |||||||||
| Provision for income taxes | 28 | 37 | |||||||||
| Net income | 211 | 195 | |||||||||
| Net income attributable to noncontrolling interest and redeemable noncontrolling interest | 25 | 6 | |||||||||
| Net income attributable to Flex Ltd. | $ | 186 | $ | 189 | |||||||
| Earnings per share attributable to the shareholders of Flex Ltd.: | |||||||||||
| Basic | $ | 0.42 | $ | 0.41 | |||||||
| Diluted | $ | 0.41 | $ | 0.40 | |||||||
| Weighted-average shares used in computing per share amounts: | |||||||||||
| Basic | 447 | 458 | |||||||||
| Diluted | 455 | 468 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions) (Unaudited) | |||||||||||
| Net income | $ | 211 | $ | 195 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | (9) | (71) | |||||||||
| Unrealized gain (loss) on derivative instruments and other | 34 | (1) | |||||||||
| Comprehensive income | $ | 236 | $ | 123 | |||||||
| Comprehensive income attributable to noncontrolling interest and redeemable noncontrolling interest | 25 | 6 | |||||||||
| Comprehensive income attributable to Flex Ltd. | $ | 211 | $ | 117 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY
| Redeemable Noncontrolling Interest | Ordinary Shares | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2023 | Amount | 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 Interest | Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2023 | $ | — | 450 | $ | 6,105 | $ | (560) | $ | (14) | $ | (180) | $ | (194) | $ | 5,351 | $ | 355 | $ | 5,706 | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of Flex Ltd. ordinary shares at cost | — | (9) | (197) | — | — | — | — | (197) | — | (197) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Flex Ltd. vested shares under restricted share unit awards | — | 8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 186 | — | — | — | 186 | 25 | 211 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 41 | — | — | — | — | 41 | — | 41 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 34 | (9) | 25 | 25 | — | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2023 | $ | — | 449 | $ | 5,949 | $ | (374) | $ | 20 | $ | (189) | $ | (169) | $ | 5,406 | $ | 380 | $ | 5,786 | |||||||||||||||||||||||||||||||||||||||||||
| Redeemable Noncontrolling Interest | Ordinary Shares | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended July 1, 2022 | Amount | Shares Outstanding | Amount | Accumulated Deficit | Unrealized Loss on Derivative Instruments and Other | Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive Loss | Total Flex Ltd. Shareholders' Equity | Noncontrolling Interest | Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2022 | $ | 78 | 461 | $ | 5,664 | $ | (1,353) | $ | (66) | $ | (116) | $ | (182) | $ | 4,129 | $ | — | $ | 4,129 | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of Flex Ltd. ordinary shares at cost | — | (11) | (181) | — | — | — | — | (181) | — | (181) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Flex Ltd. vested shares under restricted share unit awards | — | 8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 6 | — | — | 189 | — | — | — | 189 | — | 189 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 26 | — | — | — | — | 26 | — | 26 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | (1) | (71) | (72) | (72) | — | (72) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT JULY 1, 2022 | $ | 84 | 458 | $ | 5,509 | $ | (1,164) | $ | (67) | $ | (187) | $ | (254) | $ | 4,091 | $ | — | $ | 4,091 | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions) (Unaudited) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 211 | $ | 195 | |||||||
| Depreciation, amortization and other impairment charges | 133 | 124 | |||||||||
| Changes in working capital and other, net | (338) | (281) | |||||||||
| Net cash provided by operating activities | 6 | 38 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | (167) | (107) | |||||||||
| Proceeds from the disposition of property and equipment | 11 | 16 | |||||||||
| Other investing activities, net | 1 | 2 | |||||||||
| Net cash used in investing activities | (155) | (89) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from bank borrowings and long-term debt | 2 | — | |||||||||
| Repayments of bank borrowings and long-term debt | (243) | (35) | |||||||||
| Payments for repurchases of ordinary shares | (197) | (181) | |||||||||
| Other financing activities, net | (48) | 6 | |||||||||
| Net cash used in financing activities | (486) | (210) | |||||||||
| Effect of exchange rates on cash and cash equivalents | 1 | (56) | |||||||||
| Net decrease in cash and cash equivalents | (634) | (317) | |||||||||
| Cash and cash equivalents, beginning of period | 3,294 | 2,964 | |||||||||
| Cash and cash equivalents, end of period | $ | 2,660 | $ | 2,647 | |||||||
| Non-cash investing activities: | |||||||||||
| Unpaid purchases of property and equipment | $ | 158 | $ | 172 | |||||||
| Right-of-use assets obtained in exchange of operating lease liabilities | 37 | 22 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
Organization of the Company
Flex Ltd. ("Flex" or the "Company") is the diversified manufacturing partner of choice that helps market-leading brands design, build and deliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, Flex supports the entire product lifecycle with advanced manufacturing solutions and operates one of the most trusted global supply chains. The Company also provides additional value to customers through a broad array of services, including design and engineering, component services, rapid prototyping, fulfillment, and circular economy solutions. Flex supports a diverse set of industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. As of June 30, 2023, Flex's three operating and reportable segments were as follows:
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
◦Communications, Enterprise and Cloud, including data infrastructure, edge infrastructure and communications infrastructure
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio
◦Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
◦Automotive, including next generation mobility, autonomous, connectivity, electrification, and smart technologies
◦Health Solutions, including medical devices, medical equipment and drug delivery
◦Industrial, including capital equipment, industrial devices, and renewables and grid edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. Nextracker's products enable solar panels to follow the sun’s movement across the sky and optimize plant performance.
The Company's service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement, inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance), supply chain management software solutions, and component product offerings (including flexible printed circuit boards and power adapters and chargers). The Company also provides intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 2023 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three-month period ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2024. Certain prior period amounts in the condensed consolidated financial statements, as well as in the Notes thereto, have been reclassified to conform to the current presentation.
The first quarters for fiscal years 2024 and 2023 ended on June 30, 2023, which is comprised of 91 days in the period, and July 1, 2022, which is comprised of 92 days, respectively.
The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. A controlling financial interest may also exist in variable interest entities (“VIEs”), through governance provisions and arrangements to provide services to VIEs.
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The Company is required to consolidate a VIE of which it is the primary beneficiary. To determine if the Company is the primary beneficiary, the Company evaluates whether it has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on an ongoing basis to determine whether it continues to be the primary beneficiary. The condensed consolidated financial statements reflect the assets and liabilities of VIEs that are consolidated. 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 June 30, 2023, we presented noncontrolling interest as permanent equity in the condensed balance sheets, reflecting the equity held by other parties. The amount of consolidated net income attributable to Flex Ltd. and the noncontrolling interest and redeemable noncontrolling interest are presented in the condensed consolidated statements of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used in accounting for, among other things: allowances for doubtful accounts; inventory write-downs; valuation allowances for deferred tax assets; uncertain tax positions; valuation and useful lives of long-lived assets including property, equipment, and intangible assets; valuation of goodwill; valuation of investments in privately-held companies; asset impairments; fair values of financial instruments, notes receivable and derivative instruments; restructuring charges; contingencies; warranty provisions; incremental borrowing rates in determining the present value of lease payments; accruals for potential price adjustments arising from customer contracts; fair values of assets obtained and liabilities assumed in business combinations; and the fair values of stock options and restricted share unit awards granted under the Company's stock-based compensation plans. Due to geopolitical conflicts (including the Russian invasion of Ukraine), there has been and will continue to be uncertainty and disruption in the global economy and financial markets. The Company has made estimates and assumptions taking into consideration certain possible impacts due to the Russian invasion of Ukraine. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from previously estimated amounts, and such differences may be material to the condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur.
Recently Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04 "Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations", which requires a buyer in a supplier finance program to disclose sufficient information about the program to allow a user of financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance program. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024, except for the amendment on rollforward information which is effective in fiscal year 2025, with early adoption permitted. The Company adopted the guidance retrospectively during the first quarter of fiscal year 2024, including a rollforward of changes in those obligations, with immaterial impacts on its condensed consolidated financial statements.
The Company has four supplier finance programs, all of which have substantially similar characteristics, with various financial institutions that act as the paying agent for certain payables of the Company. The Company established these programs through agreements with the financial institutions to enable more efficient payment processing to our suppliers while also providing our suppliers a potential source of liquidity to the extent they choose to sell their receivables to the financial institutions in advance of the due date. Our suppliers’ participation in the programs is voluntary, the Company is not involved in negotiations of the suppliers’ arrangements with the financial institutions to sell their receivables, and our rights and obligations to our suppliers are not impacted by our suppliers’ decisions to sell amounts under these programs. Under these supplier finance programs, the Company pays the financial institutions the stated amount of confirmed invoices from its participating suppliers on the original maturity dates of the invoices. All payment terms are short-term in nature and are not dependent on whether the suppliers participate in the supplier finance programs or if the suppliers elect to receive early payment from the financial institutions. No guarantees are provided by the Company under the supplier finance programs and the Company incurs no costs related to the programs. We have no economic interest in a supplier’s decision to participate in the supplier finance programs.
Obligations under these programs are classified within accounts payable on the condensed consolidated balance sheets, with the associated payments reflected in the operating activities section of the condensed consolidated statement of cash flows. The
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rollforward of the Company's outstanding obligations confirmed as valid under its supplier finance programs for the three-month period ended June 30, 2023 is as follows.
| Three-Month Period Ended | |||||
| June 30, 2023 | |||||
| (In millions) | |||||
| Confirmed obligations outstanding at the beginning of the period | $ | 275 | |||
| Invoices confirmed during the period | 272 | ||||
| Confirmed invoices paid during the period | (279) | ||||
| Foreign currency exchange impact | 3 | ||||
| Confirmed obligations outstanding at the end of the period | $ | 271 | |||
2. BALANCE SHEET ITEMS
Inventories
The components of inventories, net of applicable lower of cost and net realizable value write-downs, were as follows:
| As of June 30, 2023 | As of March 31, 2023 | ||||||||||
| (In millions) | |||||||||||
| Raw materials | $ | 5,990 | $ | 6,140 | |||||||
| Work-in-progress | 756 | 709 | |||||||||
| Finished goods | 780 | 681 | |||||||||
| $ | 7,526 | $ | 7,530 | ||||||||
Goodwill and Other Intangible Assets
During the three-month period ended June 30, 2023, there was no material activity in the Company's goodwill account for each of its reportable segments.
The components of acquired intangible assets are as follows:
| As of June 30, 2023 | As of March 31, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Intangible assets: | |||||||||||||||||||||||||||||||||||
| Customer-related intangibles | $ | 351 | $ | (193) | $ | 158 | $ | 373 | $ | (204) | $ | 169 | |||||||||||||||||||||||
| Licenses and other intangibles | 302 | (161) | 141 | 299 | (152) | 147 | |||||||||||||||||||||||||||||
| Total | $ | 653 | $ | (354) | $ | 299 | $ | 672 | $ | (356) | $ | 316 | |||||||||||||||||||||||
The gross carrying amounts of intangible assets are removed when fully amortized.
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The estimated future annual amortization expense for intangible assets is as follows:
| Fiscal Year Ending March 31, | Amount | |||||||
| (In millions) | ||||||||
| 2024 (1) | $ | 51 | ||||||
| 2025 | 64 | |||||||
| 2026 | 43 | |||||||
| 2027 | 36 | |||||||
| 2028 | 27 | |||||||
| Thereafter | 78 | |||||||
| Total amortization expense | $ | 299 | ||||||
____________________________________________________________
(1)Represents estimated amortization for the remaining fiscal nine-month period ending March 31, 2024.
Customer Working Capital Advances
Customer working capital advances were $2.2 billion and $2.3 billion, as of June 30, 2023 and March 31, 2023, respectively. The customer working capital advances are not interest-bearing, do not generally have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production or the customer working capital advance agreement is terminated.
Other Current Liabilities
Other current liabilities include customer-related accruals of $272 million and $313 million as of June 30, 2023 and March 31, 2023, respectively.
3. REVENUE
Revenue Recognition
The Company provides a comprehensive suite of services for its customers that range from advanced product design to manufacturing and logistics to after-sales services. The first step in its process for revenue recognition is to identify a contract with a customer. A contract is defined as an agreement between two parties that creates enforceable rights and obligations and can be written, verbal, or implied. The Company generally enters into master supply agreements (“MSAs”) with its customers that provide the framework under which business will be conducted. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing formulas, payment terms, etc., and the level of business under those agreements may not be guaranteed. In those instances, the Company bids on a program-by-program basis and typically receives customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order, or any other similar documents such as a statement of work, product addendum, emails or other communications that embody the commitment by the customer.
In determining the appropriate amount of revenue to recognize, the Company applies the following steps: (i) identifies the contracts with the customers; (ii) identifies performance obligations in the contracts; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations per the contracts; and (v) recognizes revenue when (or as) the Company satisfies a performance obligation. Further, the Company assesses whether control of the products or services promised under the contract are transferred to the customer at a point in time (PIT) or over time (OT). The Company is first required to evaluate whether its contracts meet the criteria for OT recognition. The Company has determined that for a portion of its contracts the Company is manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and intellectual property restrictions) and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. For certain other contracts, the Company’s performance creates and enhances an asset that the customer controls as the Company performs under the contract. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer.
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Customer Contracts and Related Obligations
Certain of the Company’s customer agreements include potential price adjustments which may result in variable consideration. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually required to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company estimates the variable consideration related to these price adjustments as part of the total transaction price and recognizes revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. The Company constrains the amount of revenues recognized for these contractual provisions based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. The Company determines the amounts to be recognized based on the amount of potential refunds required by the contract, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices for future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In many instances, the agreement is silent on the settlement mechanism. Any difference between the amount accrued for potential refunds and the actual amount agreed to with the customer is recorded as an increase or decrease in revenue. These potential price adjustments are included as part of other current liabilities on the condensed consolidated balance sheet and disclosed as part of customer-related accruals in note 2.
Performance Obligations
The Company derives its revenues primarily from manufacturing services, and to a lesser extent, from innovative design, engineering, and supply chain services and solutions.
A performance obligation is an implicitly or explicitly promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company considers all activities typically included in its contracts, and identifies those activities representing a promise to transfer goods or services to a customer. These include, but are not limited to, design and engineering services, prototype products, tooling, etc. Each promised good or service with regards to these identified activities is accounted for as a separate performance obligation only if it is distinct - i.e., the customer can benefit from it on its own or together with other resources that are readily available to the customer. Certain activities on the other hand are determined not to constitute a promise to transfer goods or service, and therefore do not represent separate performance obligations for revenue recognition (e.g., procurement of materials and standard workmanship warranty).
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual good or service is not separately identifiable from other promises in the contract and is, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. In the event that more than one performance obligation is identified in a contract, the Company is required to allocate the transaction price between the performance obligations. The allocation would generally be performed on the basis of a relative standalone price for each distinct good or service. This standalone price most often represents the price that the Company would sell similar goods or services separately.
Contract Balances
A contract asset is recognized when the Company has recognized revenue, but not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheets and transferred to receivables when rights to payment become unconditional.
A contract liability is recognized when the Company receives payments in advance of the satisfaction of performance. Contract liabilities, identified as deferred revenue, were $897 million and $885 million as of June 30, 2023 and March 31, 2023, respectively, of which $802 million and $795 million, respectively, is included in deferred revenue and customer working capital advances under current liabilities.
Disaggregation of Revenue
The following table presents the Company’s revenue disaggregated based on timing of transfer, point in time or over time, for the three-month periods ended June 30, 2023 and July 1, 2022, respectively.
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| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| Timing of Transfer | (In millions) | ||||||||||
| FAS | |||||||||||
| Point in time | $ | 3,436 | $ | 3,779 | |||||||
| Over time | 165 | 212 | |||||||||
| Total | 3,601 | 3,991 | |||||||||
| FRS | |||||||||||
| Point in time | 3,132 | 2,790 | |||||||||
| Over time | 159 | 179 | |||||||||
| Total | 3,291 | 2,969 | |||||||||
| Nextracker | |||||||||||
| Point in time | 6 | 23 | |||||||||
| Over time | 474 | 372 | |||||||||
| Total | 480 | 395 | |||||||||
| Intersegment eliminations | |||||||||||
| Point in time | (36) | (8) | |||||||||
| Over time | — | — | |||||||||
| Total | (36) | (8) | |||||||||
| Flex | |||||||||||
| Point in time | 6,538 | 6,584 | |||||||||
| Over time | 798 | 763 | |||||||||
| Total | $ | 7,336 | $ | 7,347 | |||||||
4. SHARE-BASED COMPENSATION
Equity Compensation Plans
Flex historically maintains stock-based compensation plans at a corporate level. The Company's primary plan used for granting equity compensation awards is the Company's 2017 Equity Incentive Plan (the "2017 Plan"). During the fiscal year 2023, Nextracker granted equity compensation awards to Nextracker employees under the 2022 Nextracker Inc. Equity Incentive Plan (the "2022 Nextracker Plan"), which is administered by Nextracker, a majority owned subsidiary of the Company.
Share-Based Compensation Expense
The following table summarizes the Company’s share-based compensation expense for all equity incentive plans:
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions) | |||||||||||
| Cost of sales | $ | 9 | $ | 7 | |||||||
| Selling, general and administrative expenses | 32 | 19 | |||||||||
| Total share-based compensation expense | $ | 41 | $ | 26 | |||||||
Total number of options outstanding and exercisable were immaterial as of June 30, 2023. All options have been fully expensed as of June 30, 2023.
The 2017 Plan
During the three-month period ended June 30, 2023, the Company granted 4.8 million restricted share unit ("RSU") awards. Of this amount, approximately 3.0 million are plain-vanilla unvested RSU awards that vest over a period of three years, with no performance or market conditions, and with an average grant date price of $26.81 per award. In addition, approximately 0.4 million unvested shares represent the target amount of grants made to certain key employees whereby vesting is contingent on certain performance conditions, and with an average grant date price of $26.72 per award. The number of shares contingent on performance conditions that ultimately will vest will range from zero up to a maximum of approximately 0.8 million based
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on a measurement of the Company's adjusted earnings per share growth over certain specified periods, and will cliff vest after a period of three years, to the extent such performance conditions have been met. Further, approximately 0.4 million unvested shares represent the target amount of grants made to certain key employees whereby vesting is contingent on certain market conditions. The average grant date fair value of these awards contingent on certain market conditions was estimated to be $35.64 per award and was calculated using a Monte Carlo simulation. The number of shares contingent on market conditions that ultimately will vest will range from zero up to a maximum of approximately 0.8 million based on a measurement of the percentile rank of the Company’s total shareholder return over certain specified periods against the Company's peer companies, and will cliff vest after a period of three years, to the extent such market conditions have been met. Finally, the remaining balance of approximately 1.2 million represents the number of shares issued upon vesting of RSU awards above target levels based on the achievement of certain market conditions for awards granted in the fiscal year 2021. These awards were issued and immediately vested in accordance with the terms and conditions of the underlying awards.
As of June 30, 2023, approximately 12.6 million unvested RSU awards under the 2017 plan were outstanding, of which vesting for a targeted amount of 1.3 million shares is contingent on meeting certain market conditions, and vesting for a targeted amount of 1.3 million shares is contingent on meeting certain performance conditions. The number of shares tied to market conditions that will ultimately be issued can range from zero to 2.6 million based on the achievement levels. The number of shares tied to performance conditions that will ultimately be issued can range from zero to 2.6 million based on the achievement levels. During the three-month period ended June 30, 2023, 2.3 million shares vested in connection with the awards with market conditions granted in fiscal year 2021.
As of June 30, 2023, total unrecognized compensation expense related to unvested RSU awards under the 2017 Plan, was approximately $237 million, and will be recognized over a weighted-average remaining vesting period of 2.4 years.
The 2022 Nextracker Plan
During the three-month period ended June 30, 2023, Nextracker awarded 1.1 million equity-based compensation awards to its employees under the 2022 Nextracker Plan, which included approximately 0.5 million option awards, 0.5 million RSU ("NRSU") awards and 0.1 million performance-based restricted share unit ("NPSU") awards. Vesting for the awards granted under the 2022 Nextracker Plan is contingent upon continued employee service and certain performance conditions.
As of June 30, 2023, approximately 5.8 million unvested options awards, NRSU awards, and NPSU awards under the 2022 Nextracker Plan were outstanding, of which vesting for a targeted amount of approximately 3.8 million shares is contingent on meeting certain performance conditions.
Total unrecognized compensation expense related to unvested awards under the 2022 Nextracker Plan was approximately $61 million, which is expected to be recognized over a weighted-average period of approximately 2.5 years. Approximately $8 million of expense was recognized for equity-based compensation awards granted under the 2022 Nextracker Plan for the three-month period ended June 30, 2023.
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5. EARNINGS PER SHARE
The following table reflects basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted earnings per share attributable to the shareholders of Flex:
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions, except per share amounts) | |||||||||||
| Basic earnings per share attributable to the shareholders of Flex Ltd. | |||||||||||
| Net income | $ | 211 | $ | 195 | |||||||
| Net income attributable to noncontrolling interest and redeemable noncontrolling interest | 25 | 6 | |||||||||
| Net income attributable to Flex Ltd. | $ | 186 | $ | 189 | |||||||
| Shares used in computation: | |||||||||||
| Weighted-average ordinary shares outstanding | 447 | 458 | |||||||||
| Basic earnings per share | $ | 0.42 | $ | 0.41 | |||||||
| Diluted earnings per share attributable to the shareholders of Flex Ltd. | |||||||||||
| Net income | $ | 211 | $ | 195 | |||||||
| Net income attributable to noncontrolling interest and redeemable noncontrolling interest | 25 | 6 | |||||||||
| Net income attributable to Flex Ltd. | $ | 186 | $ | 189 | |||||||
| Shares used in computation: | |||||||||||
| Weighted-average ordinary shares outstanding | 447 | 458 | |||||||||
| Weighted-average ordinary share equivalents from RSU awards (1) | 8 | 10 | |||||||||
| Weighted-average ordinary shares and ordinary share equivalents outstanding | 455 | 468 | |||||||||
| Diluted earnings per share | $ | 0.41 | $ | 0.40 | |||||||
____________________________________________________________
(1)An immaterial amount of RSU awards and 5.2 million RSU awards for the three-month periods ended June 30, 2023 and July 1, 2022, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents.
6. BANK BORROWINGS AND LONG-TERM DEBT
Bank borrowings and long-term debt as of June 30, 2023 and March 31, 2023 are as follows:
| Maturity Date | As of June 30, 2023 | As of March 31, 2023 | |||||||||||||||
| (In millions) | |||||||||||||||||
4.750% Notes (1) | June 2025 | $ | 597 | $ | 599 | ||||||||||||
3.750% Notes (1) | February 2026 | 685 | 686 | ||||||||||||||
6.000% Notes (1) | January 2028 | 397 | 396 | ||||||||||||||
4.875% Notes (1) | June 2029 | 658 | 658 | ||||||||||||||
4.875% Notes (1) | May 2030 | 684 | 685 | ||||||||||||||
| JPY Term Loan (2) | April 2024 | — | 253 | ||||||||||||||
| Delayed Draw Term Loan | November 2023 | 150 | 150 | ||||||||||||||
| Nextracker Term Loan | February 2028 | 150 | 150 | ||||||||||||||
3.600% HUF Bonds | December 2031 | 294 | 284 | ||||||||||||||
| Other | — | 1 | |||||||||||||||
| Debt issuance costs | (20) | (21) | |||||||||||||||
| 3,595 | 3,841 | ||||||||||||||||
| Current portion, net of debt issuance costs | (151) | (150) | |||||||||||||||
| Non-current portion | $ | 3,444 | $ | 3,691 | |||||||||||||
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(1)The notes are carried at the principal amount of each note, less any unamortized discount or premium and unamortized debt issuance costs. These notes represent the Company’s senior unsecured obligations and hold equal ranking with all other existing and future senior unsecured debt obligations.
(2)During the first quarter of fiscal year 2024, the Company repaid the JPY Term Loan for approximately $241 million. In addition, the Company also settled the associated USD JPY cross currency swap for approximately $60 million.
The weighted-average interest rate for the Company's long-term debt was 4.6% and 4.7% as of June 30, 2023 and March 31, 2023, respectively.
Scheduled repayments of the Company's bank borrowings and long-term debt as of June 30, 2023 are as follows:
| Fiscal Year Ending March 31, | Amount | |||||||
| (In millions) | ||||||||
| 2024 (1) | $ | 151 | ||||||
| 2025 | — | |||||||
| 2026 | 1,282 | |||||||
| 2027 | — | |||||||
| 2028 | 547 | |||||||
| Thereafter | 1,635 | |||||||
| Total | $ | 3,615 | ||||||
(1)Represents estimated repayments for the remaining fiscal nine-month period ending March 31, 2024.
7. INTEREST, NET
Interest and other, net for the three-month periods ended June 30, 2023 and July 1, 2022 are primarily composed of the following:
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions) | |||||||||||
| Interest expenses on debt obligations | $ | 47 | $ | 43 | |||||||
| Interest income | (18) | (4) | |||||||||
| AR sales program related expenses | 12 | 5 | |||||||||
8. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
The Company enters into short-term and long-term foreign currency derivative contracts, including forward, swap, and options contracts, to hedge only those currency exposures associated with certain assets and liabilities, primarily accounts receivable, accounts payable, debt, and cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and, accordingly, fair value adjustments related to the credit risk of the counterparty financial institutions were not material.
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As of June 30, 2023, the aggregate notional amount of the Company’s outstanding foreign currency derivative contracts was $11.3 billion as summarized below:
| Notional Contract Value in USD | |||||||||||
| Currency | Buy | Sell | |||||||||
| Cash Flow Hedges | |||||||||||
| HUF | $ | 446 | $ | — | |||||||
| MXN | 566 | — | |||||||||
| Other | 649 | 37 | |||||||||
| 1,661 | 37 | ||||||||||
| Other Foreign Currency Contracts | |||||||||||
| CNY | 541 | 66 | |||||||||
| EUR | 2,515 | 2,750 | |||||||||
| GBP | 229 | 308 | |||||||||
| HUF | 179 | 144 | |||||||||
| MXN | 636 | 508 | |||||||||
| MYR | 327 | 170 | |||||||||
| Other | 655 | 575 | |||||||||
| 5,082 | 4,521 | ||||||||||
| Total Notional Contract Value in USD | $ | 6,743 | $ | 4,558 | |||||||
As of June 30, 2023, the fair value of the Company’s short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of other charges (income), net in the condensed consolidated statements of operations. As of June 30, 2023 and March 31, 2023, the Company also has included net deferred gains and losses in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. The deferred gain was $27 million as of June 30, 2023, and is expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations over the next twelve-month period, except for the USD HUF cross currency swaps.
The Company entered into USD HUF cross currency swaps in December 2021 to hedge the foreign currency risk on the HUF bonds due December 2031, and the fair value of the cross currency swaps was included in current and long-term other liabilities as of June 30, 2023 and March 31, 2023. The changes in fair value of the USD HUF cross currency swaps are reported in accumulated other comprehensive loss. In addition, corresponding amounts are reclassified out of accumulated other comprehensive loss to other charges (income), net to offset the remeasurement of the underlying HUF bond principal, which also impacts the same line.
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The following table presents the fair value of the Company’s derivative instruments utilized for foreign currency risk management purposes:
| Fair Values of Derivative Instruments | |||||||||||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||
| Balance Sheet Location | June 30, 2023 | March 31, 2023 | Balance Sheet Location | June 30, 2023 | March 31, 2023 | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 60 | $ | 46 | Other current liabilities | $ | 15 | $ | 22 | |||||||||||||||||||||||||
| Foreign currency contracts | Other assets | $ | — | $ | — | Other liabilities | $ | 17 | $ | 88 | |||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | Other current assets | $ | 39 | $ | 26 | Other current liabilities | $ | 47 | $ | 19 | |||||||||||||||||||||||||
The Company has financial instruments subject to master netting arrangements, which provide for the net settlement of all contracts with certain counterparties. The Company does not offset fair value amounts for assets and liabilities recognized for derivative instruments under these arrangements, as such, the asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets. The impact of netting derivative assets and liabilities is not material to the Company’s financial position for any of the periods presented.
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component, net of tax, are as follows:
| Three-Month Periods Ended | |||||||||||||||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivative instruments and other | Foreign currency translation adjustments | Total | Unrealized gain (loss) on derivative instruments and other | Foreign currency translation adjustments | Total | ||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | (14) | $ | (180) | $ | (194) | $ | (66) | $ | (116) | $ | (182) | |||||||||||||||||||||||
| Other comprehensive gains (loss) before reclassifications | 101 | (9) | 92 | (79) | (68) | (147) | |||||||||||||||||||||||||||||
| Net (gains) loss reclassified from accumulated other comprehensive loss | (67) | — | (67) | 78 | (3) | 75 | |||||||||||||||||||||||||||||
| Net current-period other comprehensive gains (loss) | 34 | (9) | 25 | (1) | (71) | (72) | |||||||||||||||||||||||||||||
| Ending balance | $ | 20 | $ | (189) | $ | (169) | $ | (67) | $ | (187) | $ | (254) | |||||||||||||||||||||||
Substantially all unrealized gains and losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month period ended June 30, 2023 were reclassified out of accumulated other comprehensive loss to other charges (income), net and cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges. The tax impacts on the changes in accumulated other comprehensive loss for the three-month periods ended June 30, 2023 and July 1, 2022 were $2 million and $4 million tax benefits, respectively.
10. TRADE RECEIVABLES SECURITIZATION
The Company sells trade receivables under two asset-backed securitization programs and an accounts receivable factoring program.
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Asset-Backed Securitization Programs
The Company historically has engaged in asset-backed securitization programs (the “ABS Programs”), selling trade receivables to affiliated special purpose entities and then to unaffiliated financial institutions. Upon the sale of the receivables from the special purpose entities to the unaffiliated financial institutions, the receivables are derecognized from our consolidated balance sheet as effective control of the transferred receivables is passed to the unaffiliated financial institutions, which have the right to pledge or sell the receivables. Accounts receivable sold under the ABS Programs are included as cash provided by operating activities in the consolidated statement of cash flow. During the three-month periods ended June 30, 2023 and July 1, 2022, no accounts receivable were sold under the ABS Programs.
Trade Accounts Receivable Sale Programs
The Company also sells 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 $0.8 billion and $0.8 billion as of June 30, 2023 and March 31, 2023, respectively. For the three-month periods ended June 30, 2023 and July 1, 2022, total accounts receivable sold to certain third-party banking institutions was approximately $0.8 billion and $0.8 billion, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received was included as cash provided by operating activities in the condensed consolidated statements of cash flows.
11. 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. There were no balances classified as level 1 in the fair value hierarchy as of June 30, 2023 and March 31, 2023.
Level 2 - Applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets) such as cash and cash equivalents and money market funds; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
The Company’s cash equivalents include bank time deposits and money market funds, which are valued using level 2 inputs, such as interest rates and maturity periods. Due to their short-term nature, their carrying amount approximates fair value.
The Company has deferred compensation plans for its officers and certain other employees. Amounts deferred under the plans are invested in hypothetical investments selected by the participant or the participant's investment manager. The Company's deferred compensation plan assets are included in other assets on the consolidated balance sheets and include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy.
Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
There were no transfers between levels in the fair value hierarchy during the three-month periods ended June 30, 2023 and July 1, 2022.
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Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and March 31, 2023:
| Fair Value Measurements as of June 30, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | — | $ | 1,266 | $ | — | $ | 1,266 | |||||||||||||||
| Foreign currency contracts (Note 8) | — | 99 | — | 99 | |||||||||||||||||||
| Deferred compensation plan assets: | 0 | ||||||||||||||||||||||
| Mutual funds, money market accounts and equity securities | — | 40 | — | 40 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency contracts (Note 8) | $ | — | $ | (79) | $ | — | $ | (79) | |||||||||||||||
| Fair Value Measurements as of March 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | — | $ | 2,324 | $ | — | $ | 2,324 | |||||||||||||||
| Foreign currency contracts (Note 8) | — | 72 | — | 72 | |||||||||||||||||||
| Deferred compensation plan assets: | 0 | ||||||||||||||||||||||
| Mutual funds, money market accounts and equity securities | — | 37 | — | 37 | |||||||||||||||||||
| Liabilities: | 0 | ||||||||||||||||||||||
| Foreign currency contracts (Note 8) | $ | — | $ | (129) | $ | — | $ | (129) | |||||||||||||||
Other financial instruments
The following table presents the Company’s major debts not carried at fair value:
| As of June 30, 2023 | As of March 31, 2023 | ||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Hierarchy | |||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| JPY Term Loan due April 2024 | $ | — | $ | — | $ | 253 | $ | 253 | Level 2 | ||||||||||||||||||||
4.750% Notes due June 2025 | 597 | 585 | 599 | 590 | Level 1 | ||||||||||||||||||||||||
3.750% Notes due February 2026 | 685 | 654 | 686 | 657 | Level 1 | ||||||||||||||||||||||||
6.000% Notes due January 2028 | 397 | 404 | 396 | 399 | Level 1 | ||||||||||||||||||||||||
4.875% Notes due June 2029 | 658 | 630 | 658 | 631 | Level 1 | ||||||||||||||||||||||||
4.875% Notes due May 2030 | 684 | 663 | 685 | 661 | Level 1 | ||||||||||||||||||||||||
| Delayed Draw Term Loan due November 2023 | 150 | 150 | 150 | 150 | Level 2 | ||||||||||||||||||||||||
| Nextracker Term Loan due February 2028 | 150 | 146 | 150 | 150 | Level 2 | ||||||||||||||||||||||||
3.600% HUF Bonds due December 2031 | 294 | 215 | 284 | 196 | Level 2 | ||||||||||||||||||||||||
The Notes due June 2025, February 2026, January 2028, June 2029 and May 2030 are valued based on broker trading prices in active markets. HUF Bonds and Nextracker Term Loan due February 2028 are valued based on the broker trading prices in an inactive market.
The Delayed Draw Term Loan due November 2023 bears interest at floating interest rates, and therefore, as of June 30, 2023, the carrying amounts approximate fair values.
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12. COMMITMENTS AND CONTINGENCIES
Litigation and other legal matters
In connection with the matters described below, the Company has accrued for loss contingencies where it believes that losses are probable and estimable. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, due to various reasons, including, among others, that: (i) the proceedings are in early stages or no claims have been asserted, (ii) specific damages have not been sought in all of these matters, (iii) damages, if asserted, are considered unsupported and/or exaggerated, (iv) there is uncertainty as to the outcome of pending appeals, motions, or settlements, (v) there are significant factual issues to be resolved, and/or (vi) there are novel legal issues or unsettled legal theories presented. Any such excess loss could have a material effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.
One of the Company's Brazilian subsidiaries has received assessments for certain sales and import taxes. There were originally six tax assessments totaling the updated amount inclusive of interest and penalties of 419 million Brazilian reals (approximately USD $86 million based on the exchange rate as of June 30, 2023). The Company successfully defeated one of the six assessments in September 2019 (totaling approximately 61 million Brazilian reals or USD $13 million). The Company successfully defeated another three of the assessments in September 2022 (totaling the updated amount inclusive of interest and penalties of approximately 261 million Brazilian reals or USD $54 million), each of which remains subject to appeal. The Company was unsuccessful at the administrative level for one of the assessments and filed an annulment action in federal court in Brasilia, Brazil on March 23, 2020; the updated value of that assessment inclusive of interest and penalties is 41 million Brazilian reals (approximately USD $8 million). One of the assessments remains in the review process at the administrative level. The Company believes there is no legal basis for any of these assessments and that it has meritorious defenses. The Company will continue to vigorously oppose all of these assessments, as well as any future assessments. The Company does not expect final judicial determination on any of these claims in the near future.
On February 14, 2019, the Company submitted an initial notification of voluntary disclosure to the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC") regarding possible noncompliance with U.S. economic sanctions requirements among certain non-U.S. Flex-affiliated operations. On September 28, 2020, the Company made a submission to OFAC that completed the Company’s voluntary disclosure based on the results of an internal investigation regarding the matter. On June 11, 2021, the Company notified OFAC that it had identified possible additional relevant transactions at one non-U.S. Flex-affiliated operation. The Company submitted an update to OFAC on November 16, 2021 reporting on the results of its review of those transactions. The Company intends to continue to cooperate fully with OFAC in this matter going forward. Nonetheless, it is reasonably possible that the Company could be subject to penalties that could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
A foreign Tax Authority (“Tax Authority”) has assessed a cumulative total of approximately $221 million in taxes owed for multiple Flex legal entities within its jurisdiction for various fiscal years ranging from fiscal year 2010 through fiscal year 2020. The assessed amounts related to the denial of certain deductible intercompany payments and taxability of income earned outside such jurisdiction. The Company disagrees with the Tax Authority’s assessments and is actively contesting the assessments through the administrative and judicial processes.
As the final resolution of the above outstanding tax item remains uncertain, the Company continues to provide for the uncertain tax positions based on the more likely than not standard. While the resolution of the issues may result in tax liabilities, interest and penalties, which may be significantly higher than the amounts accrued for these matters, management currently believes that the resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
In addition to the matters discussed above, from time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in the Company’s consolidated balance sheets, would not be material to the financial statements as a whole.
13. SHARE REPURCHASES
During the three-month period ended June 30, 2023, the Company repurchased 8.7 million shares at an aggregate purchase price of $197 million, and retired all of these shares.
Under the Company’s current share repurchase program, the Board of Directors authorized repurchases of its outstanding ordinary shares for up to $1.0 billion in accordance with the share repurchase mandate approved by the Company’s
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shareholders at the date of the most recent Annual General Meeting held on August 25, 2022. As of June 30, 2023, shares in the aggregate amount of $697 million were available to be repurchased under the current plan.
14. SEGMENT REPORTING
The Company reports its financial performance based on three operating and reportable segments, Flex Agility Solutions, Flex Reliability Solutions and Nextracker, and analyzes operating income as the measure of segment profitability. The determination of these segments is based on several factors, including the nature of products and services, the nature of production processes, customer base, delivery channels and similar economic characteristics.
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include intangible amortization, stock-based compensation, restructuring charges, legal and other, and interest, net and other charges (income), net. A portion of depreciation is allocated to the respective segments, together with other general corporate research and development and administrative expenses.
Selected financial information by segment is in the table below.
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions) | |||||||||||
| Net sales: | |||||||||||
| Flex Agility Solutions | $ | 3,601 | $ | 3,991 | |||||||
| Flex Reliability Solutions | 3,291 | 2,969 | |||||||||
| Nextracker | 480 | 395 | |||||||||
| Intersegment eliminations | (36) | (8) | |||||||||
| $ | 7,336 | $ | 7,347 | ||||||||
| Segment income and reconciliation of income before income taxes: | |||||||||||
| Flex Agility Solutions | $ | 146 | $ | 171 | |||||||
| Flex Reliability Solutions | 165 | 147 | |||||||||
| Nextracker | 82 | 30 | |||||||||
| Corporate and Other | (16) | (18) | |||||||||
| Total segment income | 377 | 330 | |||||||||
| Reconciling items: | |||||||||||
| Intangible amortization | 20 | 22 | |||||||||
| Stock-based compensation | 41 | 26 | |||||||||
| Restructuring charges | 23 | — | |||||||||
| Legal and other (1) | 2 | 10 | |||||||||
| Interest, net | 41 | 49 | |||||||||
| Other charges (income), net | 11 | (9) | |||||||||
| Income before income taxes | $ | 239 | $ | 232 | |||||||
(1)Legal and other consists of costs not directly related to core business results and may include matters relating to commercial disputes, government regulatory and compliance, intellectual property, antitrust, tax, employment or shareholder issues, product liability claims and other issues on a global basis as well as acquisition related costs and customer related asset recoveries. During the first quarter of fiscal year 2023, the Company accrued for certain loss contingencies where losses are considered probable and estimable.
Corporate and other primarily includes corporate service costs that are not included in the chief operating decision maker's ("CODM") assessment of the performance of each of the identified reportable segments.
The Company provides an overall platform of assets and services, which the segments utilize for the benefit of their various customers. The shared assets and services are contained within the Company's global manufacturing and design operations and include manufacturing and design facilities. Most of the underlying manufacturing and design assets are co-mingled in the operating campuses and are compatible to operate across segments and highly interchangeable throughout the platform. Given the highly interchangeable nature of the assets, they are not separately identified by segment nor reported by segment to the Company's CODM.
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15. RESTRUCTURING CHARGES
The Company continued to identify certain structural changes to restructure its business throughout the first quarter of fiscal year 2024. During the three-month period ended June 30, 2023, the Company recognized approximately $23 million of restructuring charges, most of which related to employee severance.
The following table summarizes the provisions, respective payments, and remaining accrued balance as of June 30, 2023 for charges incurred during the three-month period ended June 30, 2023:
| Severance | Long-Lived Asset Impairment | Other Exit Costs | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
Balance as of March 31, 2023 | $ | 44 | $ | — | $ | 6 | $ | 50 | |||||||||||||||
Provision for charges incurred during the three-month period ended June 30, 2023 | 20 | 3 | — | 23 | |||||||||||||||||||
Cash payments during the three-month period ended June 30, 2023 | (22) | — | — | (22) | |||||||||||||||||||
Non-cash charges incurred during the three-month period ended June 30, 2023 | — | (3) | (3) | ||||||||||||||||||||
Balance as of June 30, 2023 | 42 | — | 6 | 48 | |||||||||||||||||||
| Less: Current portion (classified as other current liabilities) | 42 | — | 6 | 48 | |||||||||||||||||||
| Accrued restructuring costs, net of current portion (classified as other liabilities) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
16. VARIABLE INTEREST ENTITIES
The Company controls Nextracker Inc. ("Nextracker") through its holding of Class B common stock that does not participate in the earnings of Nextracker. As such, the shareholders of the equity at risk in Nextracker (the Class A common stock shareholders) do not have the power to direct the key activities of Nextracker and consequently Nextracker is a variable interest entity ("VIE"). The Company has the ability to control Nextracker's activities through its control of 61.2% and 61.4% of the voting rights of Nextracker as of June 30, 2023 and March 31, 2023, respectively. The Company also has the ability to receive significant benefits from the VIE (through its ability to convert its investments in Nextracker and Nextracker LLC into Class A common stock of Nextracker or cash) and as such the Company has been determined to be the primary beneficiary of the VIE. As such, the Company continues to consolidate Nextracker and the interests in Nextracker held by third parties are presented as a noncontrolling interest. Evaluation of the VIE model and identification of the primary beneficiary requires significant judgements to be made regarding which entities can control the activities of a VIE, who can receive benefits or absorb losses from the VIE and the significance of those benefits and losses to the VIE.
As of June 30, 2023 and March 31, 2023, noncontrolling interest was $380 million and $355 million, respectively. Net income attributable to noncontrolling interest was $25 million and zero for the three-month periods ended June 30, 2023 and July 1, 2022, respectively. As a result of the Nextracker's February 13, 2023 initial public offering ("IPO"), the noncontrolling interest previously determined to be redeemable prior to the IPO did not exist as of June 30, 2023. Net income attributable to redeemable noncontrolling interest was zero and $6 million for the three-month periods ended June 30, 2023 and July 1, 2022, respectively.
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The carrying amounts and classification of the VIE's external assets and liabilities as of June 30, 2023 and March 31, 2023 are included in the condensed consolidated balance sheets as follows:
| As of June 30, 2023 | As of March 31, 2023 | ||||||||||
| (In millions) (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 355 | $ | 130 | |||||||
| Accounts receivable, net | 223 | 271 | |||||||||
| Contract assets | 320 | 298 | |||||||||
| Inventories | 137 | 138 | |||||||||
| Other current assets | 82 | 35 | |||||||||
| Total current assets | 1,117 | 872 | |||||||||
| Property and equipment, net | 7 | 7 | |||||||||
| Goodwill | 265 | 265 | |||||||||
| Other intangible assets, net | 1 | 1 | |||||||||
| Other assets | 267 | 275 | |||||||||
| Total assets | $ | 1,657 | $ | 1,420 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 293 | $ | 211 | |||||||
| Accrued expenses | 57 | 60 | |||||||||
| Deferred revenue | 251 | 176 | |||||||||
| Other current liabilities | 53 | 49 | |||||||||
| Total current liabilities | 654 | 496 | |||||||||
| Long-term debt | 147 | 147 | |||||||||
| Other liabilities | 277 | 280 | |||||||||
| Total liabilities | $ | 1,078 | $ | 923 | |||||||
17. SUBSEQUENT EVENTS
On July 3, 2023, the Company's subsidiary Nextracker completed a follow-on offering to its IPO, which was completed on February 13, 2023, and issued 15,631,562 shares of Class A common stock and received net proceeds of $551 million. The entire net proceeds were used by Nextracker to acquire 14,025,000 Nextracker LLC common units from Yuma, Inc., the Company’s indirect wholly-owned subsidiary, and 1,606,562 Nextracker LLC common units from TPG Rise Flash, L.P., an affiliate of the global alternative asset management firm TPG. As a result of the repurchase of Nextracker LLC common units by Nextracker, 15,631,562 shares of Nextracker Class B common stock were cancelled. Subsequent to the follow-on offering, Flex owned 74,432,619 shares of Class B common stock, representing 51.5% of the total outstanding shares of Nextracker common stock and, accordingly, still controls Nextracker. The Company received approximately $495 million from the follow-on offering, after distribution of net proceeds to TPG and expenses.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise specifically stated, references in this report to “Flex,” “the Company,” “we,” “us,” “our” and similar terms mean Flex Ltd. and its subsidiaries.
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission (the "SEC"). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
OVERVIEW
We are the diversified manufacturing partner of choice that helps market-leading brands design, build and deliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, we support the entire product lifecycle with advanced manufacturing solutions and operate one of the most trusted global supply chains. We also provide additional value to customers through a broad array of services, including design engineering, component services, rapid prototyping, fulfillment, and circular economy solutions. We support a diverse set of industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. As of June 30, 2023, our three operating and reportable segments were as follows:
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
◦Communications, Enterprise and Cloud, including data infrastructure, edge infrastructure and communications infrastructure
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio
◦Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
◦Automotive, including next generation mobility, autonomous, connectivity, electrification, and smart technologies
◦Health Solutions, including medical devices, medical equipment and drug delivery
◦Industrial, including capital equipment, industrial devices, and renewables and grid edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. Nextracker's products enable solar panels to follow the sun’s movement across the sky and optimize plant performance.
Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product lifecycle.
Over the past few years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Some companies that have historically identified themselves as software providers, Internet service providers or e-commerce retailers have entered the highly competitive and rapidly evolving technology hardware markets, such as mobile devices, home entertainment and wearable devices. This trend has resulted in a significant change in the manufacturing and supply chain solution 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.
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We use a portfolio approach to manage our extensive service offerings. As our customers change the way they go to market, we have the capability to reorganize and rebalance our business portfolio in order to align with our customers' needs and requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customers' supply chain solution needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.
We believe that our continued business transformation is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services.
Update on Component Shortages and Logistical Constraints on our Business
Component shortages and logistical constraints improved as the year progressed, however, we continue to see constraints in large-node semiconductors. We continue to monitor potential supply chain disruptions. Refer to “Risk Factors - “Supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand, have in the past affected, and may in the future, affect our ability to meet customer demand, lead to higher costs, or result in excess or obsolete inventory. We have been and continue to be adversely affected by supply chain issues, including shortages of required electronic components.” as disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources are adequate to fund future commitments. See additional discussion in the Liquidity and Capital Resources section below.
Russian Invasion of Ukraine
We continue to monitor and respond to the escalating conflict in Ukraine and the associated sanctions and other restrictions. As of the date of this report, there is no material impact to our business operations and financial performance in Ukraine. The full impact of the conflict on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflict and its impact on regional and global economic conditions. We will continue to monitor the conflict and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business.
Other Developments
On July 3, 2023, our subsidiary Nextracker Inc. ("Nextracker") completed a follow-on offering to its initial public offering, which was completed on February 13, 2023, and issued 15,631,562 shares of Class A common stock and received net proceeds of $551 million. The entire net proceeds were used by Nextracker to acquire 14,025,000 Nextracker LLC common units from Yuma, Inc., our indirect wholly-owned subsidiary, and 1,606,562 Nextracker LLC common units from TPG Rise Flash, L.P., an affiliate of the global alternative asset management firm TPG. As a result of the repurchase of Nextracker LLC common units by Nextracker, 15,631,562 shares of Nextracker Class B common stock were cancelled. Subsequent to the follow-on offering, we owned 74,432,619 shares of Class B common stock, representing 51.5% of the total outstanding shares of Nextracker common stock and, accordingly, still controls Nextracker. We received approximately $495 million from the follow-on offering, after distribution of net proceeds to TPG and expenses.
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Business Overview
We are one of the world's largest providers of global supply chain solutions, with revenues of $7.3 billion for the three-month period ended June 30, 2023 and $30.3 billion in the fiscal year ended March 31, 2023. We have established an extensive network of manufacturing facilities in the world's major consumer and enterprise markets (Asia, the Americas, and Europe) to serve the growing outsourcing needs of both multinational and regional customers. We design, build, ship, and service consumer and enterprise products for our customers through a network of over 100 facilities in approximately 30 countries across four continents. We also provide intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. The following tables set forth the relative percentages and dollar amounts of net sales by region and by country, and net property and equipment by country, based on the location of our manufacturing sites:
| Three-Month Periods Ended | |||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net sales by region: | |||||||||||||||||||||||
| Americas | $ | 3,482 | 47 | % | $ | 3,315 | 45 | % | |||||||||||||||
| Asia | 2,317 | 32 | % | 2,517 | 34 | % | |||||||||||||||||
| Europe | 1,537 | 21 | % | 1,515 | 21 | % | |||||||||||||||||
| $ | 7,336 | $ | 7,347 | ||||||||||||||||||||
| Net sales by country: | |||||||||||||||||||||||
| Mexico | $ | 1,731 | 24 | % | $ | 1,555 | 21 | % | |||||||||||||||
| China | 1,414 | 19 | % | 1,584 | 22 | % | |||||||||||||||||
| U.S. | 1,325 | 18 | % | 1,216 | 17 | % | |||||||||||||||||
| Malaysia | 546 | 7 | % | 570 | 8 | % | |||||||||||||||||
| Brazil | 402 | 5 | % | 527 | 7 | % | |||||||||||||||||
| Hungary | 351 | 5 | % | 286 | 4 | % | |||||||||||||||||
| Other | 1,567 | 22 | % | 1,609 | 21 | % | |||||||||||||||||
| $ | 7,336 | $ | 7,347 | ||||||||||||||||||||
| As of | As of | ||||||||||||||||||||||
| Property and equipment, net: | June 30, 2023 | March 31, 2023 | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Mexico | $ | 788 | 33 | % | $ | 763 | 32 | % | |||||||||||||||
| U.S. | 361 | 15 | % | 365 | 16 | % | |||||||||||||||||
| China | 336 | 14 | % | 338 | 14 | % | |||||||||||||||||
| Malaysia | 152 | 6 | % | 152 | 6 | % | |||||||||||||||||
| Hungary | 140 | 6 | % | 140 | 6 | % | |||||||||||||||||
| India | 91 | 4 | % | 96 | 4 | % | |||||||||||||||||
| Other | 495 | 22 | % | 495 | 22 | % | |||||||||||||||||
| $ | 2,363 | $ | 2,349 | ||||||||||||||||||||
We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we offer our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings.
Our operating results are affected by a number of factors, including the following:
•global economic conditions, including inflationary pressures, currency volatility, slower growth or recession, higher interest rates, and geopolitical uncertainty (including the ongoing conflict between Russia and Ukraine);
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•the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, and other factors;
•the effects on our business when our customers are not successful in marketing their products, or when their products do not gain widespread commercial acceptance;
•our ability to achieve commercially viable production yields and to manufacture components in commercial quantities to the performance specifications demanded by our customers;
•the effects that current credit and market conditions (including as a result of the ongoing conflict between Russia and Ukraine) could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations;
•the impacts on our business due to component shortages, disruptions in transportation or other supply chain related constraints;
•exposure to infectious disease, epidemics and pandemics on our business operations in geographic locations impacted by the outbreak and on the business operations of our customers and suppliers;
•the effects on our business due to certain customers' products having short product lifecycles;
•our customers' ability to cancel or delay orders or change production quantities;
•our customers' decisions to choose internal manufacturing instead of outsourcing for their product requirements;
•integration of acquired businesses and facilities;
•increased labor costs due to adverse labor conditions in the markets we operate;
•changes in tax legislation; and
•changes in trade regulations and treaties.
We are also subject to other risks as outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the ongoing conflict between Russia and Ukraine, there has been and we expect there will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to the Russian invasion of Ukraine. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions.
Refer to the accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales (amounts may not sum due to rounding). The financial information and the discussion below should be read together with the condensed consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 91.8 | 92.7 | |||||||||
| Restructuring charges | 0.2 | — | |||||||||
| Gross profit | 8.0 | 7.3 | |||||||||
| Selling, general and administrative expenses | 3.7 | 3.3 | |||||||||
| Restructuring charges | 0.1 | — | |||||||||
| Intangible amortization | 0.2 | 0.3 | |||||||||
| Operating income | 4.0 | 3.7 | |||||||||
| Interest, net | 0.6 | 0.6 | |||||||||
| Other charges (income), net | 0.1 | (0.1) | |||||||||
| Income before income taxes | 3.3 | 3.2 | |||||||||
| Provision for income taxes | 0.4 | 0.5 | |||||||||
| Net income | 2.9 | % | 2.7 | % | |||||||
| Net income attributable to noncontrolling interest and redeemable noncontrolling interest | 0.4 | 0.1 | |||||||||
| Net income attributable to Flex Ltd. | 2.5 | % | 2.6 | % | |||||||
Net sales
The following table sets forth our net sales by segment, and their relative percentages (the sum of the individual percentages may not equal 100% due to rounding):
| Three-Month Periods Ended | |||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Flex Agility Solutions | $ | 3,601 | 49 | % | $ | 3,991 | 54 | % | |||||||||||||||
| Flex Reliability Solutions | 3,291 | 45 | % | 2,969 | 41 | % | |||||||||||||||||
| Nextracker | 480 | 7 | % | 395 | 5 | % | |||||||||||||||||
| Intersegment eliminations | (36) | — | % | (8) | — | % | |||||||||||||||||
| $ | 7,336 | $ | 7,347 | ||||||||||||||||||||
Net sales during the three-month period ended June 30, 2023 totaled $7.3 billion, representing a decrease of approximately $11 million, or less than 1% from $7.3 billion during the three-month period ended July 1, 2022. Net sales for our FAS segment decreased approximately $0.4 billion, or 10% from the three-month period ended July 1, 2022, primarily driven by a significant decrease in our Consumer Devices business and a mid-teens decrease in our Lifestyle business due to weakness in consumer end markets. Sales in our Communications, Enterprise and Cloud ("CEC") business were flat due to the effect of easing supply constraints and softer demand in certain markets. Net sales for our FRS segment increased approximately $0.3 billion, or 11% from the three-month period ended July 1, 2022, primarily driven by a mid-teens increase in our Automotive business, a low-teens increase in our Health Solutions business and a high single-digit increase in our Industrial business due to strong customer demand and ramps across various end markets. Net sales for our Nextracker segment increased approximately $0.1 billion, or 21% from the three-month period ended July 1, 2022, primarily driven by an increase in gigawatts delivered. Net sales decreased $0.2 billion to $2.3 billion in Asia, offset by a $0.2 billion increase to $3.5 billion in the Americas, and a $23 million increase to $1.5 billion in Europe.
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Our ten largest customers during the three-month periods ended June 30, 2023 and July 1, 2022 accounted for approximately 34% and 35% of net sales, respectively. No customer accounted for more than 10% of net sales during the three-month periods ended June 30, 2023 or July 1, 2022.
Cost of sales
Cost of sales is affected by a number of factors, including the number and size of new manufacturing programs, product mix, labor cost fluctuations by region, component costs and availability and capacity utilization.
Cost of sales during the three-month period ended June 30, 2023 totaled $6.7 billion, representing a decrease of approximately $0.1 billion, or 1% from $6.8 billion during the three-month period ended July 1, 2022. Lower cost of sales for the three-month period ended June 30, 2023 was primarily driven by a reduction in FAS segment sales, improvement in freight and logistics costs at Nextracker and favorable product mix within our FRS segment partially offset by an increase in FRS segment sales. Cost of sales in FAS for the three-month period ended June 30, 2023 decreased approximately $0.4 billion, or 10% from the three-month period ended July 1, 2022, which is in line with the overall 10% decrease in FAS revenue during the same period. Cost of sales in FRS for the three-month period ended June 30, 2023 increased approximately $0.3 billion, or 11% from the three-month period ended July 1, 2022, which is primarily attributed to the overall 11% increase in FRS revenue during the same period. Cost of sales in our Nextracker segment for the three-month period ended June 30, 2023 increased approximately $17 million, or 5% from the three-month period ended July 1, 2022, primarily due to the 21% increase in Nextracker revenue during the same period, offset by improved profitability resulting from a decline in freight and logistics cost increases and overall better execution on our contracts.
Gross profit
Gross profit is affected by a fluctuation in cost of sales elements as outlined above and further by a number of factors, including product lifecycles, unit volumes, product mix, pricing, competition, new product introductions, and the expansion or consolidation of manufacturing facilities, as well as specific restructuring activities initiated from time to time. The flexible design of our manufacturing processes allows us to manufacture a broad range of products in our facilities and better utilize our manufacturing capacity across our diverse geographic footprint and service customers from all segments. In the case 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 the three-month period ended June 30, 2023 increased $0.1 billion to $0.6 billion, or 8% of net sales, from $0.5 billion, or 7.3% of net sales, during the three-month period ended July 1, 2022. Gross margin improved 70 basis points during the three-month period ended June 30, 2023 primarily due to favorable mix with growth in our higher-margin FRS and Nextracker segments, partially offset by unfavorable mix in our CEC business.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include intangible amortization, stock-based compensation, restructuring charges, legal and other, and interest, net and other charges (income), net. A portion of depreciation is allocated to the respective segments, together with other general corporate research and development and administrative expenses.
The following table sets forth segment income and margins. Segment margins in the table below may not recalculate exactly due to rounding.
| Three-Month Periods Ended | |||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Segment income: | |||||||||||||||||||||||
| Flex Agility Solutions | $ | 146 | 4.1 | % | $ | 171 | 4.3 | % | |||||||||||||||
| Flex Reliability Solutions | 165 | 5.0 | % | 147 | 5.0 | % | |||||||||||||||||
| Nextracker | 82 | 17.2 | % | 30 | 7.6 | % | |||||||||||||||||
FAS segment margin decreased approximately 20 basis points, to 4.1%, for the three-month period ended June 30, 2023, from 4.3% for the three-month period ended July 1, 2022. The margin decrease was attributable to unfavorable mix and ramp costs in CEC.
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FRS segment margin remained relatively flat at 5.0% for the three-month periods ended June 30, 2023 and July 1, 2022. Improving margins in our Health Solutions business due to increased productivity offset by continued project ramps and costs related to lingering semiconductor supply chain disruptions in our Industrial and Automotive businesses.
Nextracker segment margin increased approximately 960 basis points, to 17.2% for the three-month period ended June 30, 2023, from 7.6% for the three-month period ended July 1, 2022. The margin increase was driven by improved pricing, freight savings, and favorable cost absorption with increased revenues.
Restructuring charges
During the three-month period ended June 30, 2023, we recognized approximately $23 million of restructuring charges, primarily related to employee severance.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) was approximately $0.3 billion, or 3.7% of net sales, during the three-month period ended June 30, 2023, increasing $29 million from approximately $0.2 billion, or 3.3% of net sales, during the three-month period ended July 1, 2022. The increase was primarily due to elevated SG&A costs to support higher revenue growth in our Nextracker segment and higher labor costs.
Intangible amortization
Amortization of intangible assets decreased to $20 million during the three-month period ended June 30, 2023, from $22 million for the three-month period ended July 1, 2022, primarily due to certain intangibles now being fully amortized.
Interest, net
Interest, net was an expense of $41 million during the three-month period ended June 30, 2023 compared to an expense of $49 million during the three-month period ended July 1, 2022, primarily due to higher interest income, offset by higher variable interest expense compared to the prior year period.
Other charges (income), net
Other charges (income), net was an expense of $11 million during the three-month period ended June 30, 2023 compared to income of $9 million during the three-month period ended July 1, 2022, primarily due to a higher foreign exchange transaction loss recognized compared to the prior year period.
Income taxes
Certain of our subsidiaries, at various times, have been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. Refer to note 15, “Income Taxes” of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 for further discussion.
The consolidated effective tax rate was 12% and 16% for the three-month periods ended June 30, 2023 and July 1, 2022, respectively. The effective tax rate varies from the Singapore statutory rate of 17% as a result of recognition of earnings in different jurisdictions (we generate most of our revenues and profits from operations outside of Singapore), operating loss carryforwards, income tax credits, release of previously established valuation allowances for deferred tax assets, liabilities for uncertain tax positions, as well as the effect of certain tax holidays and incentives granted to our subsidiaries primarily in China, Malaysia, the Netherlands and Israel. The effective tax rate for the three-month period ended June 30, 2023 is lower than the effective tax rate for the three-month period ended July 1, 2022, due to the changing jurisdictional mix of income and the beneficial foreign exchange impacts on material tax balances for the period ended June 30, 2023.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law, which includes a new corporate minimum tax, a stock repurchase excise tax, numerous green energy credits, other tax provisions, and significantly increased enforcement resources. While detailed regulations on some aspects of the act are still outstanding, we do not anticipate a material impact to our consolidated financial statements from these provisions.
LIQUIDITY AND CAPITAL RESOURCES
In response to the challenging economic environment following the COVID-19 pandemic, we continuously evaluate our ability to meet our obligations over the next 12 months and have proactively reset our capital structure during these times to improve maturities and liquidity. As a result, we expect that our current financial condition, including our liquidity sources are adequate to fund current and future commitments. As of June 30, 2023, we had cash and cash equivalents of approximately $2.7
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billion and bank and other borrowings of approximately $3.6 billion. As of June 30, 2023, we had a $2.5 billion revolving credit facility that is due to mature in July 2027 (the "2027 Credit Facility"), and a $0.5 billion revolving credit facility that is due to mature in February 2028 (the "Nextracker Revolver"), under which we had no borrowings outstanding. As of June 30, 2023, we were in compliance with the covenants under all of our credit facilities and indentures; we also expect to remain in compliance with the covenants in the upcoming 12 months for our credit facilities and indentures.
In fiscal year 2024, we implemented a 10b5-1 bond buyback program, aiming to repurchase certain outstanding bonds issued by us. During the three-month period ended June 30, 2023, we repurchased approximately $2 million of the 4.750% Notes due 2025, resulting in an immaterial gain on our condensed consolidated statement of operations.
Cash provided by operating activities was $6 million during the three-month period ended June 30, 2023, primarily driven by $0.2 billion of net income for the period plus $0.2 billion of non-cash charges such as depreciation, amortization, non-cash lease expense, and stock-based compensation, offset by certain changes in net working capital as discussed below.
We believe net working capital ("NWC") is a key metric that measures our liquidity. Net working capital is calculated as current assets less current liabilities. Net working capital decreased $0.3 billion to $4.9 billion as of June 30, 2023, from $5.2 billion as of March 31, 2023. This decrease is primarily driven by a $0.6 billion decrease in cash due to debt repayments, capital expenditures, and share repurchases, offset by a $0.1 billion increase in other current assets, and a $0.1 billion decrease in deferred revenue and working capital advances.
Cash used in investing activities was $0.2 billion during the three-month period ended June 30, 2023. This was primarily driven by $0.2 billion of net capital expenditures for property and equipment to continue expanding capabilities and capacity in support of our CEC, Automotive, and Industrial businesses.
We believe adjusted free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments, fund acquisitions, repurchase company shares and for certain other activities. Our adjusted free cash flow is defined as cash from operations, less net purchases of property and equipment allowing us to present adjusted cash flows on a consistent basis for investors. Our adjusted free cash flow for the three-month periods ended June 30, 2023 and July 1, 2022 was an outflow of $0.2 billion and an outflow of $0.1 billion, respectively. Adjusted free cash flow is not a measure of liquidity under U.S. GAAP, and may not be defined and calculated by other companies in the same manner. Adjusted free cash flow should not be considered in isolation or as an alternative to net cash provided by operating activities. Adjusted free cash flows reconcile to the most directly comparable GAAP financial measure of cash flows from operations as follows:
| Three-Month Periods Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| (In millions) | |||||||||||
| Net cash provided by operating activities | $ | 6 | $ | 38 | |||||||
| Purchases of property and equipment | (167) | (107) | |||||||||
| Proceeds from the disposition of property and equipment | 11 | 16 | |||||||||
| Adjusted free cash flow | $ | (150) | $ | (53) | |||||||
Cash used by financing activities was $0.5 billion during the three-month period ended June 30, 2023, which was primarily driven by $0.2 billion of cash paid for the repurchase of our ordinary shares and $0.3 billion of net cash for repayments of bank borrowings and long-term debt and an associated cross-currency swap.
Our cash balances are generated and held in numerous locations throughout the world. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the business and some of which arise from fluctuations related to global economics and markets. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances; however, any current restrictions are not material. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout the global organization. We believe that our existing cash balances, together with anticipated cash flows from operations and borrowings available under our credit facilities, will be sufficient to fund our operations through at least the next twelve months. As of June 30, 2023 and March 31, 2023, approximately 37% and 27%, respectively, of our cash and cash equivalents were held by foreign subsidiaries outside of Singapore. Although substantially all of the amounts held outside of Singapore could be repatriated under current laws, a significant amount could be subject to income tax withholdings. We provide for tax liabilities on these amounts for financial statement purposes, except for certain of our foreign earnings that are considered indefinitely reinvested outside of Singapore (approximately $1.9 billion as of March 31, 2023). Repatriation could result in an additional income tax payment; however, for the majority of our foreign entities, our intent is to permanently reinvest these funds outside of Singapore and our current plans do not demonstrate a need to repatriate them to fund our operations in jurisdictions outside of where they are held. Where local
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restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of Singapore and we would meet our liquidity needs through ongoing cash flows, external borrowings, or both.
Future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures for new equipment, the extent to which we utilize operating leases for new facilities and equipment, and the levels of shipments and changes in the volumes of customer orders.
We maintain various uncommitted short-term financing facilities including but not limited to a commercial paper program, and a revolving sale and repurchase of subordinated notes established under the asset-backed securitization ("ABS") programs, under which there were no borrowings outstanding as of June 30, 2023.
Historically, we have funded operations from cash and cash equivalents generated from operations, proceeds from public offerings of equity and debt securities, bank debt and lease financings. We also have the ability to sell a designated pool of trade receivables under ABS programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements. We may enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and anticipated growth as needed.
The sale or issuance of equity or convertible debt securities could result in dilution to current shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of ordinary shares, and the terms of this debt could impose restrictions on operations and could increase debt service obligations. This increased indebtedness could limit our flexibility as a result of debt service requirements and restrictive covenants, potentially affect our credit ratings, and may limit our ability to access additional capital or execute our business strategy. Any downgrades in credit ratings could adversely affect our ability to borrow as a result of more restrictive borrowing terms. We continue to assess our capital structure and evaluate the merits of redeploying available cash to reduce existing debt or repurchase ordinary shares.
Under our current share repurchase program, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $1.0 billion in accordance with the share purchase mandate approved by our shareholders at the date of the most recent Annual General Meeting which was held on August 25, 2022. During the three-month period ended June 30, 2023, we paid $197 million to repurchase shares under the current repurchase plan at an average price of $22.71 per share. As of June 30, 2023, shares in the aggregate amount of $697 million were available to be repurchased under the current plan.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Information regarding our long-term debt payments, operating lease payments, capital lease payments and other commitments is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on our Form 10-K for the fiscal year ended March 31, 2023.
There were no material changes in our contractual obligations and commitments as of June 30, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our exposure to market risks for changes in interest and foreign currency exchange rates for the three-month period ended June 30, 2023 as compared to the fiscal year ended March 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30, 2023. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2023, the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material legal proceedings, see note 12 “Commitments and Contingencies” in the notes to the condensed consolidated financial statements, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our ordinary shares made by us for the period from April 1, 2023 through June 30, 2023:
| Period (2) | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| April 1, 2023 - May 5, 2023 | 4,718,147 | $ | 20.99 | 4,718,147 | $ | 794,016,115 | ||||||||||||||||||||
| May 6, 2023 - June 2, 2023 | 2,335,354 | $ | 23.55 | 2,335,354 | $ | 739,020,101 | ||||||||||||||||||||
| June 3, 2023 - June 30, 2023 | 1,601,576 | $ | 26.54 | 1,601,576 | $ | 696,520,800 | ||||||||||||||||||||
| Total | 8,655,077 | 8,655,077 | ||||||||||||||||||||||||
(1)During the period from April 1, 2023 through June 30, 2023, all purchases were made pursuant to the programs discussed below in open market transactions. All purchases were made in accordance with Rule 10b-18 under the Securities Exchange Act of 1934.
(2)On August 25, 2022, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $1.0 billion. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of June 30, 2023, shares in the aggregate amount of $697 million were available to be repurchased under the current plan.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
During the fiscal quarter ended June 30, 2023, none of the Company's directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement", as those terms are defined in Regulation S-K, Item 408.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||||||||||||||||||||||
| Description of Annual Incentive Bonus Plan for Fiscal Year 2024 | X | |||||||||||||||||||||||||||||||||||||
| Summary of Compensation Arrangements of Certain Executive Officers of Flex Ltd. | X | |||||||||||||||||||||||||||||||||||||
| Form of Restricted Share Unit Award Agreement under the Amended and Restated Flex Ltd. 2017 Equity Incentive Plan for performance-based vesting awards (FY24) | X | |||||||||||||||||||||||||||||||||||||
| Letter in lieu of consent of Deloitte & Touche LLP | X | |||||||||||||||||||||||||||||||||||||
| Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||||||||||||||
| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||||||||||||||||||||||||||||
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibit 101) | |||||||||||||||||||||||||||||||||||||
* This exhibit is furnished with this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference into any filing of Flex Ltd. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FLEX LTD. | ||||||||
| (Registrant) | ||||||||
| /s/ REVATHI ADVAITHI | ||||||||
| Revathi Advaithi | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: | July 28, 2023 | |||||||
| /s/ PAUL R. LUNDSTROM | ||||||||
| Paul R. Lundstrom | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Date: | July 28, 2023 | |||||||
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