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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 2020
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23354
FLEX LTD.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Singapore | | Not Applicable |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | | | | | | | |
| 2 Changi South Lane, | | |
| Singapore | | 486123 |
| (Address of registrant’s principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code
(65) 6876-9899
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 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 October 26, 2020 was 501,157,963.
FLEX LTD.
INDEX
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 September 25, 2020, the related condensed consolidated statements of operations, comprehensive income (loss) and shareholders' equity for the three-month and six-month periods ended September 25, 2020 and September 27, 2019, and the condensed consolidated statements of cash flows for the six-month periods ended September 25, 2020 and September 27, 2019, 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 subsidiaries as of March 31, 2020 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 28, 2020, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding changes in accounting principles. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2020 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 | |
| October 30, 2020 | |
FLEX LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| As of September 25, 2020 | | As of March 31, 2020 |
| (In millions, except share amounts)
(Unaudited) |
| | | |
| | | |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 2,359 | | | $ | 1,923 | |
Accounts receivable, net of allowance of $78 and $96, respectively | 3,804 | | | 2,436 | |
| Contract assets | 181 | | | 282 | |
| Inventories | 3,611 | | | 3,785 | |
| Other current assets | 524 | | | 660 | |
| Total current assets | 10,479 | | | 9,086 | |
| Property and equipment, net | 2,106 | | | 2,216 | |
| Operating lease right-of-use assets, net | 614 | | | 605 | |
| Goodwill | 1,088 | | | 1,065 | |
| Other intangible assets, net | 241 | | | 262 | |
| Other assets | 473 | | | 456 | |
| Total assets | $ | 15,001 | | | $ | 13,690 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Bank borrowings and current portion of long-term debt | $ | 63 | | | $ | 149 | |
| Accounts payable | 5,046 | | | 5,108 | |
| Accrued payroll | 419 | | | 364 | |
| | | |
| Other current liabilities | 1,629 | | | 1,590 | |
| Total current liabilities | 7,157 | | | 7,211 | |
| Long-term debt, net of current portion | 3,739 | | | 2,689 | |
| Operating lease liabilities, non-current | 545 | | | 529 | |
| Other liabilities | 445 | | | 430 | |
| | | |
| Shareholders’ equity | | | |
| | | |
Ordinary shares, no par value; 551,334,253 and 547,665,632 issued, and 501,094,898 and 497,426,277 outstanding, respectively | 6,373 | | | 6,336 | |
Treasury stock, at cost; 50,239,355 shares as of September 25, 2020 and March 31, 2020 | (388) | | | (388) | |
| Accumulated deficit | (2,737) | | | (2,902) | |
| Accumulated other comprehensive loss | (133) | | | (215) | |
| | | |
| | | |
| Total shareholders’ equity | 3,115 | | | 2,831 | |
| Total liabilities and shareholders’ equity | $ | 15,001 | | | $ | 13,690 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| (In millions, except per share amounts)
(Unaudited) |
| Net sales | $ | 5,985 | | | $ | 6,088 | | | $ | 11,138 | | | $ | 12,264 | |
| Cost of sales | 5,566 | | | 5,785 | | | 10,406 | | | 11,561 | |
| Restructuring charges | 24 | | | 114 | | | 34 | | | 161 | |
| Gross profit | 395 | | | 189 | | | 698 | | | 542 | |
| Selling, general and administrative expenses | 193 | | | 205 | | | 384 | | | 415 | |
| Intangible amortization | 16 | | | 16 | | | 31 | | | 33 | |
| Restructuring charges | 11 | | | 14 | | | 11 | | | 23 | |
| Interest and other, net | 22 | | | 50 | | | 51 | | | 103 | |
| | | | | | | |
| Income (loss) before income taxes | 153 | | | (96) | | | 221 | | | (32) | |
| Provision for income taxes | 40 | | | 21 | | | 56 | | | 40 | |
| Net income (loss) | $ | 113 | | | $ | (117) | | | $ | 165 | | | $ | (72) | |
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| | | | | | | |
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.23 | | | $ | (0.23) | | | $ | 0.33 | | | $ | (0.14) | |
| Diluted | $ | 0.22 | | | $ | (0.23) | | | $ | 0.33 | | | $ | (0.14) | |
| Weighted-average shares used in computing per share amounts: | | | | | | | |
| Basic | 501 | | | 513 | | | 499 | | | 513 | |
| Diluted | 504 | | | 513 | | | 503 | | | 513 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| (In millions)
(Unaudited) |
| Net income (loss) | $ | 113 | | | $ | (117) | | | $ | 165 | | | $ | (72) | |
| Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments, net of zero tax | 31 | | | (26) | | | 45 | | | (21) | |
Unrealized gain (loss) on derivative instruments and other, net of zero tax | 7 | | | (12) | | | 37 | | | (17) | |
| Comprehensive income (loss) | $ | 151 | | | $ | (155) | | | $ | 247 | | | $ | (110) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares | | | | Accumulated Other Comprehensive Loss | | Total |
| Three Months Ended September 25, 2020 | | Shares
Outstanding | | Amount | | Accumulated
Deficit | | Unrealized
Gain (Loss) on
Derivative
Instruments
and Other | | Foreign
Currency
Translation
Adjustments | | Total
Accumulated
Other
Comprehensive
Loss | | Shareholders'
Equity |
| | (In millions)
Unaudited |
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| BALANCE AT JUNE 26, 2020 | | 500 | | | $ | 5,961 | | | $ | (2,850) | | | $ | (52) | | | $ | (119) | | | $ | (171) | | | $ | 2,940 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Issuance of Flex Ltd. vested shares under restricted share unit awards | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income | | — | | | — | | | 113 | | | — | | | — | | | — | | | 113 | |
| Stock-based compensation | | — | | | 24 | | | — | | | — | | | — | | | — | | | 24 | |
| | | | | | | | | | | | | | |
| Total other comprehensive income | | — | | | — | | | — | | | 7 | | | 31 | | | 38 | | | 38 | |
| BALANCE AT SEPTEMBER 25, 2020 | | 501 | | | $ | 5,985 | | | $ | (2,737) | | | $ | (45) | | | $ | (88) | | | $ | (133) | | | $ | 3,115 | |
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| | Ordinary Shares | | | | Accumulated Other Comprehensive Loss | | Total |
| Six Months Ended September 25, 2020 | | Shares
Outstanding | | Amount | | Accumulated
Deficit | | Unrealized
Gain (Loss) on
Derivative
Instruments
and Other | | Foreign
Currency
Translation
Adjustments | | Total
Accumulated
Other
Comprehensive
Loss | | Shareholders'
Equity |
| | (In millions)
Unaudited |
| BALANCE AT MARCH 31, 2020 | | 497 | | | $ | 5,948 | | | $ | (2,902) | | | $ | (82) | | | $ | (133) | | | $ | (215) | | | $ | 2,831 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Issuance of Flex Ltd. vested shares under restricted share unit awards | | 4 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net Income | | — | | | — | | | 165 | | | — | | | — | | | — | | | 165 | |
| Stock-based compensation | | — | | | 37 | | | — | | | — | | | — | | | — | | | 37 | |
| | | | | | | | | | | | | | |
| Total other comprehensive income | | — | | | — | | | — | | | 37 | | | 45 | | | 82 | | | 82 | |
| BALANCE AT SEPTEMBER 25, 2020 | | 501 | | | $ | 5,985 | | | $ | (2,737) | | | $ | (45) | | | $ | (88) | | | $ | (133) | | | $ | 3,115 | |
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares | | | | Accumulated Other Comprehensive Loss | | Total |
| Three Months Ended September 27, 2019 | | Shares
Outstanding | | Amount | | Accumulated
Deficit | | Unrealized
Gain (Loss) on
Derivative
Instruments
and Other | | Foreign
Currency
Translation
Adjustments | | Total
Accumulated
Other
Comprehensive
Loss | | Shareholders'
Equity |
| | (In millions)
Unaudited |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
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| BALANCE AT JUNE 28, 2019 | | 514 | | | $ | 6,099 | | | $ | (2,945) | | | $ | (47) | | | $ | (105) | | | $ | (152) | | | $ | 3,002 | |
| Repurchase of Flex Ltd. ordinary shares at cost | | (6) | | | (60) | | | — | | | — | | | — | | | — | | | (60) | |
| | | | | | | | | | | | | | |
| Issuance of Flex Ltd. vested shares under restricted share unit awards | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net loss | | — | | | — | | | (117) | | | — | | | — | | | — | | | (117) | |
| Stock-based compensation | | — | | | 19 | | | — | | | — | | | — | | | — | | | 19 | |
| | | | | | | | | | | | | | |
| Total other comprehensive loss | | — | | | — | | | — | | | (12) | | | (26) | | | (38) | | | (38) | |
| BALANCE AT SEPTEMBER 27, 2019 | | 509 | | | $ | 6,058 | | | $ | (3,062) | | | $ | (59) | | | $ | (131) | | | $ | (190) | | | $ | 2,806 | |
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| | Ordinary Shares | | | | Accumulated Other Comprehensive Loss | | Total |
| Six Months Ended September 27, 2019 | | Shares
Outstanding | | Amount | | Accumulated
Deficit | | Unrealized
Gain (Loss) on
Derivative
Instruments
and Other | | Foreign
Currency
Translation
Adjustments | | Total
Accumulated
Other
Comprehensive
Loss | | Shareholders'
Equity |
| | (In millions)
Unaudited |
| BALANCE AT MARCH 31, 2019 | | 517 | | | $ | 6,136 | | | $ | (3,012) | | | $ | (42) | | | $ | (110) | | | $ | (152) | | | $ | 2,972 | |
| Repurchase of Flex Ltd. ordinary shares at cost | | (11) | | | (112) | | | — | | | — | | | — | | | — | | | (112) | |
| Exercise of stock options | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Flex Ltd. vested shares under restricted share unit awards | | 3 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net loss | | — | | | — | | | (72) | | | — | | | — | | | — | | | (72) | |
| Stock-based compensation | | — | | | 34 | | | — | | | — | | | — | | | — | | | 34 | |
| Cumulative effect on opening equity of adopting accounting standards and other | | — | | | — | | | 22 | | | — | | | — | | | — | | | 22 | |
| Total other comprehensive loss | | — | | | — | | | — | | | (17) | | | (21) | | | (38) | | | (38) | |
| BALANCE AT SEPTEMBER 27, 2019 | | 509 | | | $ | 6,058 | | | $ | (3,062) | | | $ | (59) | | | $ | (131) | | | $ | (190) | | | $ | 2,806 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
FLEX LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 |
| (In millions)
(Unaudited) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income (loss) | $ | 165 | | | $ | (72) | |
| Depreciation, amortization and other impairment charges | 346 | | | 357 | |
| Changes in working capital and other, net | (876) | | | (1,933) | |
| Net cash used in operating activities | (365) | | | (1,648) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (185) | | | (272) | |
| Proceeds from the disposition of property and equipment | 14 | | | 53 | |
| | | |
| | | |
| Cash collections of deferred purchase price | — | | | 1,840 | |
| Other investing activities, net | 13 | | | 23 | |
| Net cash (used in) provided by investing activities | (158) | | | 1,644 | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Proceeds from bank borrowings and long-term debt | 1,943 | | | 780 | |
| Repayments of bank borrowings and long-term debt | (1,005) | | | (864) | |
| | | |
| Payments for repurchases of ordinary shares | — | | | (112) | |
| | | |
| Other financing activities, net | 2 | | | 328 | |
| Net cash provided by financing activities | 940 | | | 132 | |
| Effect of exchange rates on cash and cash equivalents | 19 | | | (9) | |
| Net increase in cash and cash equivalents | 436 | | | 119 | |
| Cash and cash equivalents, beginning of period | 1,923 | | | 1,697 | |
| Cash and cash equivalents, end of period | $ | 2,359 | | | $ | 1,816 | |
| | | |
| Non-cash investing activities: | | | |
| Unpaid purchases of property and equipment | $ | 54 | | | $ | 71 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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") was incorporated in the Republic of Singapore in May 1990. The Company's operations have expanded over the years through a combination of organic growth and acquisitions. The Company is the manufacturing partner of choice that helps a diverse customer base design and build products that improve the world. Through the collective strength of a global workforce across approximately 30 countries and responsible, sustainable operations, the Company delivers technology innovation, supply chain, and manufacturing solutions to diverse industries and end markets. In the first quarter of fiscal year 2021, the Company made certain changes in its organizational structure as part of its strategy to further drive growth and productivity with two focused delivery models. As a result, beginning in the first quarter of fiscal year 2021, the Company reports its financial performance based on two operating and reportable segments:
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
◦Communications, Enterprise and Cloud ("CEC"), including data infrastructure, edge infrastructure and communication infrastructure;
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio; and
◦Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
◦Automotive, including autonomous, connectivity, electrification, and smart technologies;
◦Health Solutions, including medical devices, medical equipment and drug delivery; and
◦Industrial, including capital equipment, industrial devices, renewable and grid edge, and power systems.
The Company's service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement, inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance), supply chain management software solutions, and component product offerings (including flexible printed circuit boards and power adapters and chargers).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 2020 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended September 25, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2021. Beginning in the second quarter of fiscal year 2021, the Company began reporting all dollar amounts in millions. In certain circumstances, this change in rounding resulted in line items being removed within prior year disclosures. 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 2021 and 2020 ended on June 26, 2020, which is comprised of 87 days in the period, and June 28, 2019, which is comprised of 89 days in the period, respectively. The second quarters for fiscal years 2021 and 2020 ended on September 25, 2020 and September 27, 2019, which are comprised of 91 days in both periods.
The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. The associated noncontrolling owners' interest in the income or losses of these companies is not
material to the Company's results of operations for all periods presented, and is classified as a component of interest and other, net, in the condensed consolidated statements of operations.
The changes to the Company’s organizational structure noted above had no impact on the condensed consolidated financial statements. For comparability purposes, segment reporting for prior periods have been restated to conform to the current presentation. Refer to note 14, “Segment Reporting,” for additional information on the changes in operating and reportable segments.
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, including highly liquid investments, notes receivable and derivative instruments; restructuring charges; contingencies; warranty provisions; incremental borrowing rates in determining the present value of lease payments; accruals for potential price adjustments arising from customer contracts; fair values of assets obtained and liabilities assumed in business combinations; and the fair values of stock options and restricted share unit awards granted under the Company's stock-based compensation plans. Due to the COVID-19 pandemic, 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 COVID-19. 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 Pronouncement
In March 2020, the FASB issued ASU 2020-04 "Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which temporarily simplifies the accounting for contract modifications, including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference interest rates. For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. The Company adopted the guidance during the first quarter of fiscal year 2021 with an immaterial impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, and ASU 2019-11, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The Company adopted the guidance during the first quarter of fiscal year 2021 with an immaterial impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In January 2020, the FASB issued ASU 2020-01 "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 — a consensus of the FASB Emerging Issues Task Force", which makes improvements related to the following two topics: (1) accounting for certain equity securities when the equity method of accounting is applied or discontinued, and (2) scope considerations related to forward contracts and purchased options on certain securities. The guidance is effective for the Company beginning in the first quarter of fiscal year 2022 with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its consolidated financial statements, and intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2022.
In December 2019, the FASB issued ASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The guidance is effective for the Company beginning in the first quarter of fiscal year 2022 with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its consolidated financial statements, and intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2022.
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 September 25, 2020 | | As of March 31, 2020 |
| | (In millions) |
| Raw materials | $ | 2,662 | | | $ | 2,836 | |
| Work-in-progress | 433 | | | 373 | |
| Finished goods | 516 | | | 576 | |
| | $ | 3,611 | | | $ | 3,785 | |
Goodwill and Other Intangible Assets
In accordance with accounting guidance on goodwill and other intangible assets, the Company evaluates goodwill for impairment at the reporting unit level annually, and in certain circumstances such as a change in reporting units or whenever there are indications that goodwill might be impaired. As described in note 1, the Company made certain changes in its organizational structure during the first quarter of fiscal year 2021 as part of its strategy to further drive growth and productivity through two separate delivery models that represent reportable segments, FAS and FRS. With these changes, the Company also revised its reporting units. Accordingly, the Company completed an interim test as of April 1, 2020. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit, which typically is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis. These approaches use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy and require management to make various judgmental assumptions about sales, operating margins, growth rates and discount rates which consider the Company's budgets, business plans and economic projections, and are believed to reflect market participant views. Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, market EBITDA comparables and credit ratings. While the Company believes it has made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If the actual results are not consistent with management's estimates and assumptions used to calculate fair value, it could result in material impairments of the Company's goodwill.
Based on the latest assessment of its goodwill as of April 1, 2020, the Company determined that no impairment existed as of the date of the impairment test, because the fair value of each one of its reporting units exceeds its respective carrying value. In addition, goodwill was reallocated among each of the Company's six reporting units based on each reporting unit’s relative fair value as of April 1, 2020. The Company considered whether an interim impairment test should be performed as of September 25, 2020 and concluded that there were no events or changes in circumstances that indicated the carrying amount of goodwill may not be recoverable. It will perform its next annual impairment test on January 1, 2021. The following table summarizes the goodwill allocation as of April 1, 2020 and the activity during the six-month period ended September 25, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FAS | | FRS | | |
| | Communications,
Enterprise
and Cloud | | Lifestyle | | Consumer Devices | | Automotive | | Health Solutions | | Industrial | | Total |
| | (In millions) |
| Balance at April 1, 2020 | $ | 188 | | | $ | 131 | | | $ | 51 | | | $ | 174 | | | $ | 192 | | | $ | 329 | | | $ | 1,065 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments | — | | | — | | | — | | | 21 | | | 2 | | | — | | | 23 | |
| Balance at September 25, 2020 | $ | 188 | | | $ | 131 | | | $ | 51 | | | $ | 195 | | | $ | 194 | | | $ | 329 | | | $ | 1,088 | |
The components of acquired intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 25, 2020 | | As of March 31, 2020 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| | (In millions) |
| Intangible assets: | | | | | | | | | | | |
| Customer-related intangibles | $ | 282 | | | $ | (146) | | | $ | 136 | | | $ | 275 | | | $ | (128) | | | $ | 147 | |
| Licenses and other intangibles | 255 | | | (150) | | | 105 | | | 245 | | | (130) | | | 115 | |
| Total | $ | 537 | | | $ | (296) | | | $ | 241 | | | $ | 520 | | | $ | (258) | | | $ | 262 | |
The gross carrying amounts of intangible assets are removed when fully amortized. The estimated future annual amortization expense for intangible assets is as follows:
| | | | | | | | |
| Fiscal Year Ending March 31, | | Amount |
| | | (In millions) |
| 2021 (1) | | $ | 31 | |
| 2022 | | 53 | |
| 2023 | | 45 | |
| 2024 | | 44 | |
| 2025 | | 39 | |
| Thereafter | | 29 | |
| Total amortization expense | | $ | 241 | |
____________________________________________________________
(1)Represents estimated amortization for the remaining fiscal six-month period ending March 31, 2021.
Other Current Liabilities
Other current liabilities include customer working capital advances of $356.1 million and $264.2 million, customer-related accruals of $203.3 million and $195.1 million, and current operating lease liabilities of $119.0 million and $114.1 million as of September 25, 2020 and March 31, 2020, respectively. The customer working capital advances are not interest-bearing, do not have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production.
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 (“MSA”) with its customers that provide the framework under which business will be conducted. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing formulas, payment terms, etc., 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 product or services promised under the contract is transferred to the customer at a point in time (PIT) or over time (OT). The Company is first required to evaluate whether its contracts meet the criteria for OT recognition. The Company has determined that for a portion of its contracts the Company is manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and IP restrictions) and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of
costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer.
Customer Contracts and Related Obligations
Certain of the Company’s customer agreements include potential price adjustments which may result in variable consideration. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually required to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company estimates the variable consideration related to these price adjustments as part of the total transaction price and recognizes revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. The Company constrains the amount of revenues recognized for these contractual provisions based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. The Company determines the amounts to be recognized based on the amount of potential refunds required by the contract, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices for future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In many instances, the agreement is silent on the settlement mechanism. Any difference between the amount accrued upon shipment 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 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 and is included in other current liabilities on the condensed consolidated balance sheets. Contract liabilities, identified as deferred revenue, were $354.9 million and $361.5 million as of September 25, 2020 and March 31, 2020, respectively.
Disaggregation of Revenue
The following table presents the Company’s revenue disaggregated based on timing of transfer - point in time and over time - for the three and six-month periods ended September 25, 2020 and September 27, 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| Timing of Transfer | (In millions) |
| FAS | | | | | | | |
| Point in time | $ | 2,823 | | | $ | 2,987 | | | $ | 5,269 | | | $ | 5,956 | |
| Over time | 495 | | | 596 | | | 961 | | | 1,535 | |
| Total | 3,318 | | | 3,583 | | | 6,230 | | | 7,491 | |
| FRS | | | | | | | |
| Point in time | 1,779 | | | 1,597 | | | 3,103 | | | 3,050 | |
| Over time | 888 | | | 908 | | | 1,805 | | | 1,723 | |
| Total | 2,667 | | | 2,505 | | | 4,908 | | | 4,773 | |
| Flex | | | | | | | |
| Point in time | 4,602 | | | 4,584 | | | 8,372 | | | 9,006 | |
| Over time | 1,383 | | | 1,504 | | | 2,766 | | | 3,258 | |
| Total | $ | 5,985 | | | $ | 6,088 | | | $ | 11,138 | | | $ | 12,264 | |
4. SHARE-BASED COMPENSATION
The Company's primary plan used for granting equity compensation awards is the 2017 Equity Incentive Plan (the "2017 Plan").
The following table summarizes the Company’s share-based compensation expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| | (In millions) |
| Cost of sales | $ | 6 | | | $ | 4 | | | $ | 10 | | | $ | 7 | |
| Selling, general and administrative expenses | 18 | | | 15 | | | 27 | | | 27 | |
| Total share-based compensation expense | $ | 24 | | | $ | 19 | | | $ | 37 | | | $ | 34 | |
Total unrecognized compensation expense related to share options under all plans as well as the number of options outstanding and exercisable were immaterial as of September 25, 2020.
During the six-month period ended September 25, 2020, the Company granted 10.9 million unvested restricted share unit ("RSU") awards. Of this amount, approximately 9.3 million are plain-vanilla unvested RSU awards that vest over a period of two to four years, with no performance or market conditions, and with an average grant date price of $10.31 per award. Further, approximately 1.6 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 $15.03 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 3.2 million based on a measurement of the percentile rank of the Company’s total shareholder return over a certain specified period against the Standard and Poor’s (“S&P”) 500 Composite Index, and will cliff vest after a period of three years, to the extent such market conditions have been met.
As of September 25, 2020, approximately 20.9 million unvested RSU awards under all plans were outstanding, of which vesting for a targeted amount of 3.8 million awards is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero to 7.6 million based on the achievement levels of the respective conditions. During the six-month period ended September 25, 2020, no shares vested in connection with the awards with market conditions granted in fiscal year 2018.
As of September 25, 2020, total unrecognized compensation expense related to unvested RSU awards under all plans was approximately $182.5 million, and will be recognized over a weighted-average remaining vesting period of 2.3 years.
5. EARNINGS (LOSS) 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 | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| | (In millions, except per share amounts) |
| Basic earnings (loss) per share: | | | | | | | |
| Net income (loss) | $ | 113 | | | $ | (117) | | | $ | 165 | | | $ | (72) | |
| Shares used in computation: | | | | | | | |
| Weighted-average ordinary shares outstanding | 501 | | | 513 | | | 499 | | | 513 | |
| Basic earnings (loss) per share | $ | 0.23 | | | $ | (0.23) | | | $ | 0.33 | | | $ | (0.14) | |
| | | | | | | |
| Diluted earnings (loss) per share: | | | | | | | |
| Net income (loss) | $ | 113 | | | $ | (117) | | | $ | 165 | | | $ | (72) | |
| Shares used in computation: | | | | | | | |
| Weighted-average ordinary shares outstanding | 501 | | | 513 | | | 499 | | | 513 | |
| Weighted-average ordinary share equivalents from stock options and RSU awards (1) (2) (3) | 3 | | | — | | | 4 | | | — | |
| Weighted-average ordinary shares and ordinary share equivalents outstanding | 504 | | | 513 | | | 503 | | | 513 | |
| Diluted earnings (loss) per share | $ | 0.22 | | | $ | (0.23) | | | $ | 0.33 | | | $ | (0.14) | |
____________________________________________________________
(1)An immaterial number of options to purchase ordinary shares were excluded from the computation of diluted earnings per share during the three and six-month periods ended September 25, 2020 and September 27, 2019, respectively, due to their anti-dilutive impact on the weighted-average ordinary share equivalents.
(2)RSU awards of 3.5 million and 3.6 million for the three and six-month periods ended September 25, 2020, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents. RSU awards of 5.9 million and 5.5 million for the three and six-month periods ended September 27, 2019, respectively, were excluded from the computation of diluted earnings per share.
(3)As a result of the Company's net loss, ordinary shares equivalent from stock options and RSU awards of approximately 2.6 million for the three-month period ended September 27, 2019, and 3.3 million for the six-month period ended September 27, 2019, were excluded from the calculation of diluted earnings (loss) 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 September 25, 2020 are as follows:
| | | | | | | | | | | |
| | As of September 25, 2020 | | As of March 31, 2020 |
| (In millions) |
| Term Loan, including current portion, due in installments through June 2022 | — | | | 433 | |
5.000% Notes due February 2023 | 500 | | | 500 | |
Term Loan due April 2024 - three-month Yen LIBOR plus 0.500% | 318 | | | 310 | |
4.750% Notes due June 2025 | 597 | | | 597 | |
3.750% Notes due February 2026 | 696 | | | — | |
4.875% Notes due June 2029 | 661 | | | 662 | |
4.875% Notes due May 2030 | 696 | | | — | |
| India Facilities | 138 | | | 138 | |
| Other | 220 | | | 211 | |
| Debt issuance costs | (24) | | | (13) | |
| 3,802 | | | 2,838 | |
| Current portion, net of debt issuance costs | (63) | | | (149) | |
| Non-current portion | $ | 3,739 | | | $ | 2,689 | |
The weighted-average interest rate for the Company's long-term debt was 4.1% and 4.0% as of September 25, 2020 and March 31, 2020, respectively.
Scheduled repayments of the Company's bank borrowings and long-term debt as of September 25, 2020 are as follows:
| | | | | | | | |
| Fiscal Year Ending March 31, | | Amount |
| | (In millions) |
| 2021 (1) | | $ | 56 | |
| 2022 | | 216 | |
| 2023 | | 531 | |
| 2024 | | 53 | |
| 2025 | | 318 | |
| Thereafter | | 2,652 | |
| Total | | $ | 3,826 | |
(1)Represents estimated repayments for the remaining fiscal six-month period ending March 31, 2021.
Notes due February 2026 and May 2030
In May 2020, the Company issued $425 million aggregate principal amount of 3.750% Notes due February 2026 (the "Existing 2026 Notes"), at 99.617% of face value and $325 million aggregate principal amount of 4.875% Notes due May 2030 (the "Existing 2030 Notes" and, together with the Existing 2026 Notes, the "Existing Notes"), at 99.562% of face value. In August 2020, as a further issuance of the Existing Notes, the Company issued under the same terms (other than the initial interest accrual date and first interest payment date for the additional 2026 Notes, and the initial offering price and the issue date for the additional 2026 and 2030 Notes), an additional $250 million of 3.750% Notes due February 2026 (together with the "Existing 2026 Notes" above, the "2026 Notes"), at 109.294% of face value, and $325 million of 4.875% Notes due May 2030 (together with the "Existing 2030 Notes" above, the "2030 Notes"), at 114.863% of face value. Immediately after the issuance of the additional notes issued in August 2020, the Company has $675 million aggregate principal amount of 3.750% Notes due 2026 outstanding and $650 million aggregate principal amount of 4.875% Notes due 2030 outstanding. The Company received in aggregate, proceeds of approximately $1.4 billion, net of discounts and after premiums, from the issuances, which have been used for working capital and other general corporate purposes, in addition to repaying the term loan due June 2022. The Company incurred and capitalized as a direct reduction to the carrying amount of the Notes presented on the balance sheet approximately $12.8 million of costs in conjunction with the issuance of the Notes.
Interest on the 2026 Notes and the 2030 Notes is payable semi-annually, commencing on August 1, 2020 and November 12, 2020, respectively, except that interest on the additional 2026 Notes is payable commencing February 1, 2021. The Notes are senior unsecured obligations of the Company and rank equally with all of the Company's other existing and future senior and unsecured debt obligations.
The indenture governing the Notes contains covenants that, among other things, restrict the ability of the Company and certain of the Company's subsidiaries to create liens; enter into sale-leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's assets to, another person, or permit any other person to consolidate, merge, combine or amalgamate with or into the Company. These covenants are subject to a number of significant limitations and exceptions set forth in the indenture. The indenture also provides for customary events of default, including, but not limited to, cross defaults to certain specified other debt of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Notes will become due and payable immediately without further action or notice. If any other event of default under the indenture occurs or is continuing, the trustee or holders of at least 25% in aggregate principal amount of the then outstanding 2026 Notes or 2030 Notes may declare all of such series of Notes to be due and payable immediately, but upon certain conditions such declaration and its consequences may be rescinded and annulled by the holders of a majority in principal amount of such series of Notes. As of September 25, 2020, the Company was in compliance with the covenants in the indenture governing the Notes.
7. INTEREST AND OTHER, NET
Interest and other, net for the three and six-month periods ended September 25, 2020 and September 27, 2019 are primarily composed of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| | (In millions) |
| Interest expenses on debt obligations (1) | $ | 38 | | | $ | 38 | | | $ | 71 | | | $ | 79 | |
| ABS and AR sales programs related expenses | 3 | | | 12 | | | 7 | | | 25 | |
| Interest income | (3) | | | (5) | | | (6) | | | (10) | |
| Gain on foreign exchange transactions | (5) | | | (3) | | | (5) | | | (4) | |
(1)Interest expense on debt obligations for the three and six-month periods ended September 27, 2019 include debt extinguishment costs of $2.4 million and $6.5 million, respectively, related to the full repayments of the Notes due February 2020 and the Term Loan due November 2021. There were immaterial debt extinguishment costs incurred during the second quarter of fiscal year 2021 from the repayment of the term loan due June 2022.
8. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
The Company enters into short-term and long-term foreign currency derivatives contracts, including forward, swap, and options contracts to hedge only those currency exposures associated with certain assets and liabilities, primarily accounts receivable and accounts payable, and cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and accordingly, fair value adjustments related to the credit risk of the counterparty financial institution were not material.
As of September 25, 2020, the aggregate notional amount of the Company’s outstanding foreign currency derivative contracts was $8.9 billion as summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Foreign Currency Amount | | Notional Contract Value in USD |
| Currency | | Buy | | Sell | | Buy | | Sell |
| | | (In millions) |
| Cash Flow Hedges | | | | | | | | |
| | | | | | | | |
| CNY | | 1,958 | | | — | | | $ | 288 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| JPY | | 33,525 | | | — | | | 300 | | | — | |
| MXN | | 4,946 | | | — | | | 223 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other | | N/A | | N/A | | 356 | | | 71 | |
| | | | | | | 1,167 | | | 71 | |
| Other Foreign Currency Contracts | | | | | | | | |
| BRL | | — | | | 792 | | | — | | | 143 | |
| | | | | | | | |
| | | | | | | | |
| CNY | | 4,062 | | | 1,316 | | | 591 | | | 193 | |
| EUR | | 1,834 | | | 1,997 | | | 2,144 | | | 2,335 | |
| GBP | | 69 | | | 89 | | | 88 | | | 114 | |
| HUF | | 53,376 | | | 52,554 | | | 170 | | | 168 | |
| ILS | | 354 | | | — | | | 102 | | | — | |
| | | | | | | | |
| | | | | | | | |
| MXN | | 4,550 | | | 2,833 | | | 205 | | | 128 | |
| MYR | | 1,618 | | | 1,290 | | | 390 | | | 311 | |
| | | | | | | | |
| SEK | | 634 | | | 748 | | | 72 | | | 83 | |
| | | | | | | | |
| Other | | N/A | | N/A | | 213 | | | 209 | |
| | | | | | | 3,975 | | | 3,684 | |
| | | | | | | | |
| Total Notional Contract Value in USD | | | | | | $ | 5,142 | | | $ | 3,755 | |
As of September 25, 2020, the fair value of the Company’s short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the condensed consolidated statements of operations. As of September 25, 2020 and March 31, 2020, 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. Deferred gains were $7.6 million as of September 25, 2020, and are expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations primarily over the next twelve-month period, except for the USD JPY cross currency swap, which is further discussed below.
The Company entered into a USD JPY cross currency swap to hedge the foreign currency risk on the JPY term loan due April 2024, and the fair value of the cross currency swap was included in other assets as of September 25, 2020. The changes in fair value of the USD JPY cross currency swap are reported in accumulated other comprehensive loss, with the impact of the excluded component reported in interest and other, net. In addition, a corresponding amount is reclassified out of accumulated other comprehensive loss to interest and other, net to offset the remeasurement of the underlying JPY loan principal which also impacts the same line.
The following table presents the fair value of the Company’s derivative instruments utilized for foreign currency risk management purposes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Values of Derivative Instruments |
| | Asset Derivatives | | Liability Derivatives |
| | | | Fair Value | | | | Fair Value |
| | Balance Sheet
Location | | September 25,
2020 | | March 31,
2020 | | Balance Sheet
Location | | September 25,
2020 | | March 31,
2020 |
| | (In millions) |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Foreign currency contracts | Other current assets | | $ | 22 | | | $ | 7 | | | Other current liabilities | | $ | 13 | | | $ | 47 | |
| Foreign currency contracts | Other assets | | $ | 19 | | | $ | 14 | | | Other liabilities | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Foreign currency contracts | Other current assets | | $ | 26 | | | $ | 83 | | | Other current liabilities | | $ | 21 | | | $ | 103 | |
The Company has financial instruments subject to master netting arrangements, which provide for the net settlement of all contracts with a single counterparty. The Company does not offset fair value amounts for assets and liabilities recognized for derivative instruments under these arrangements, and as such, the asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets. The impact of netting derivative assets and liabilities is not material to the Company’s financial position for any of the periods presented.
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component, net of tax, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended |
| September 25, 2020 | | September 27, 2019 |
| | Unrealized
loss on derivative
instruments and
other | | Foreign currency
translation
adjustments | | Total | | Unrealized
loss on derivative
instruments and
other | | Foreign currency
translation
adjustments | | Total |
| (In millions) |
| Beginning balance | $ | (52) | | | $ | (119) | | | $ | (171) | | | $ | (47) | | | $ | (105) | | | $ | (152) | |
| Other comprehensive gain (loss) before reclassifications | 11 | | | 31 | | | 42 | | | (3) | | | (26) | | | (29) | |
| Net losses reclassified from accumulated other comprehensive loss | (4) | | | — | | | (4) | | | (9) | | | — | | | (9) | |
| Net current-period other comprehensive gain (loss) | 7 | | | 31 | | | 38 | | | (12) | | | (26) | | | (38) | |
| Ending balance | $ | (45) | | | $ | (88) | | | $ | (133) | | | $ | (59) | | | $ | (131) | | | $ | (190) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six-Month Periods Ended |
| September 25, 2020 | | September 27, 2019 |
| Unrealized
loss on derivative
instruments and
other | | Foreign currency
translation
adjustments | | Total | | Unrealized
loss on derivative
instruments and
other | | Foreign currency
translation
adjustments | | Total |
| (In millions) |
| Beginning balance | $ | (82) | | | $ | (133) | | | $ | (215) | | | $ | (42) | | | $ | (110) | | | $ | (152) | |
| Other comprehensive gain (loss) before reclassifications | 30 | | | 45 | | | 75 | | | (9) | | | (21) | | | (30) | |
| Net (gains) losses reclassified from accumulated other comprehensive loss | 7 | | | — | | | 7 | | | (8) | | | — | | | (8) | |
| Net current-period other comprehensive gain (loss) | 37 | | | 45 | | | 82 | | | (17) | | | (21) | | | (38) | |
| Ending balance | $ | (45) | | | $ | (88) | | | $ | (133) | | | $ | (59) | | | $ | (131) | | | $ | (190) | |
Substantially all unrealized losses and gains relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three and six-month periods ended September 25, 2020, respectively, were recognized as a component of cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges.
10. TRADE RECEIVABLES SECURITIZATION
The Company sells trade receivables under two asset-backed securitization programs and an accounts receivable factoring program.
Asset-Backed Securitization Programs
The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreement (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” and together with the Global Program, the “ABS Programs”) to affiliated special purpose entities, each of which in turn sells the receivables to unaffiliated financial institutions. Under these programs, the entire purchase price of sold receivables are paid in cash. The ABS Programs contain guarantees of payment by the special purpose entities, in amounts equal to approximately the net cash proceeds under the programs, and are collateralized by certain receivables held by the special purpose entities. The fair value of the guarantee obligation was immaterial as of September 25, 2020 and March 31, 2020, respectively. The accounts receivable balances sold under the ABS Programs were removed from the condensed consolidated balance sheets and the cash proceeds received by the Company were included as cash provided by operating activities in the condensed consolidated statements of cash flows.
Following the transfer of the receivables to the special purpose entities, the transferred receivables are legally isolated from the Company and its affiliates, and upon the sale of the receivables from the special purpose entities to the unaffiliated financial institutions, effective control of the transferred receivables is passed to the unaffiliated financial institutions, which have the right to pledge or sell the receivables. Although the special purpose entities are consolidated by the Company, they are separate corporate entities and their assets are available first to satisfy the claims of their creditors. The investment limits set by the financial institutions are $790 million for the Global Program, of which $615 million is committed and $175 million is uncommitted, and $285 million for the North American Program, of which $210 million is committed and $75 million is uncommitted.
The Company services, administers and collects the receivables on behalf of the special purpose entities and receives a servicing fee of 0.1% to 0.5% of serviced receivables per annum. Servicing fees recognized during the three and six-month periods ended September 25, 2020 and September 27, 2019 were not material and are included in interest and other, net within the condensed consolidated statements of operations. As the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value, no servicing assets or liabilities are recognized.
As of September 25, 2020 and March 31, 2020, approximately $11.2 million and $0.8 billion, respectively, of accounts receivable had been sold to the special purpose entities under the ABS Programs for which the Company had received net cash proceeds for the same amount.
For the six-month periods ended September 25, 2020 and September 27, 2019, cash flows from sales of receivables under the ABS Programs consisted of approximately $4.3 billion and $3.2 billion, respectively, for transfers of receivables. The six-
month period ended September 27, 2019 also included approximately $1.8 billion for collections on deferred purchase price receivables (effective November 2019, the Company no longer holds a deferred purchase price receivables balance). The Company's cash flows from transfers of receivables consist primarily of proceeds from collections reinvested in revolving-period transfers. Cash flows from new transfers were not significant for all periods presented.
Trade Accounts Receivable Sale Programs
The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected on accounts where the Company has continuing involvement was approximately $0.1 billion and $0.4 billion as of September 25, 2020 and March 31, 2020, respectively. For the six-month periods ended September 25, 2020 and September 27, 2019, total accounts receivable sold to certain third-party banking institutions was approximately $0.5 billion and $0.9 billion, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received were 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.
The Company has deferred compensation plans for its officers and certain other employees. Amounts deferred under the plans are invested in hypothetical investments selected by the participant or the participant’s investment manager. The Company’s deferred compensation plan assets are included in other noncurrent assets on the condensed consolidated balance sheets and include investments in equity securities that are valued using active market prices. There were no investments classified as level 1 in the fair value hierarchy as of September 25, 2020 and March 31, 2020.
Level 2 - Applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets) such as cash and cash equivalents and money market funds; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
The Company’s cash equivalents are comprised of bank 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’s deferred compensation plan assets also include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy.
Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company has accrued for contingent consideration in connection with its business acquisitions as applicable, which is measured at fair value based on certain internal models and unobservable inputs. There were no contingent consideration liabilities outstanding as of September 25, 2020 and March 31, 2020.
There were no transfers between levels in the fair value hierarchy during the six-month periods ended September 25, 2020 and September 27, 2019.
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 September 25, 2020 and March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of September 25, 2020 |
| | 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) | $ | — | | | $ | 972 | | | $ | — | | | $ | 972 | |
| | | | | | | |
| Foreign currency contracts (Note 8) | — | | | 67 | | | — | | | 67 | |
| | | | | | | |
| Deferred compensation plan assets: | | | | | | | 0 |
| Mutual funds, money market accounts and equity securities | — | | | 49 | | | — | | | 49 | |
| Liabilities: | | | | | | | |
| Foreign currency contracts (Note 8) | $ | — | | | $ | (34) | | | $ | — | | | $ | (34) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | Fair Value Measurements as of March 31, 2020 |
| | 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) | $ | — | | | $ | 404 | | | $ | — | | | $ | 404 | |
| | | | | | | |
| Foreign currency contracts (Note 8) | — | | | 104 | | | — | | | 104 | |
| Deferred compensation plan assets: | | | | | | | 0 |
| Mutual funds, money market accounts and equity securities | — | | | 49 | | | — | | | 49 | |
| Liabilities: | | | | | | | 0 |
| Foreign currency contracts (Note 8) | $ | — | | | $ | (149) | | | $ | — | | | $ | (149) | |
| | | | | | | |
Other financial instruments
The following table presents the Company’s major debts not carried at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 25, 2020 | | As of March 31, 2020 | | |
| | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value | | Fair Value
Hierarchy |
| | (In millions) | | |
| Term Loan, including current portion, due in installments through June 2022 | $ | — | | | $ | — | | | $ | 433 | | | $ | 414 | | | Level 1 |
5.000% Notes due February 2023 | 500 | | | 545 | | | 500 | | | 500 | | | Level 1 |
Term Loan due April 2024 - three-month Yen LIBOR plus 0.500% | 318 | | | 318 | | | 310 | | | 310 | | | Level 2 |
4.750% Notes due June 2025 | 597 | | | 675 | | | 597 | | | 613 | | | Level 1 |
3.750% Notes due February 2026 | 696 | | | 760 | | | — | | | — | | | Level 1 |
4.875% Notes due June 2029 | 661 | | | 760 | | | 662 | | | 628 | | | Level 1 |
4.875% Notes due May 2030 | 696 | | | 795 | | | — | | | — | | | Level 1 |
| Euro Term Loans | 167 | | | 167 | | | 208 | | | 208 | | | Level 2 |
| India Facilities | 138 | | | 138 | | | 138 | | | 138 | | | Level 2 |
The Term Loan due June 2022, and the Notes due February 2023, June 2025, February 2026, June 2029 and May 2030 are valued based on broker trading prices in active markets.
The Company values its Term Loan due April 2024, India Facilities, and Euro Term Loans due March 2021 and January 2022 based on the current market rate, and as of September 25, 2020, the carrying amounts approximate fair values.
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. The amounts accrued for any individual matter are not material. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, 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 adverse effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.
In addition, the Company provides design and engineering services to its customers and also designs and makes its own products. As a consequence of these activities, its customers are requiring the Company to take responsibility for intellectual property to a greater extent than in its manufacturing and assembly businesses. Although the Company believes that its intellectual property assets and licenses are sufficient for the operation of its business as it currently conducts it, from time to time third-parties do assert patent infringement claims against the Company or its customers. If and when third-parties make assertions regarding the ownership or right to use intellectual property, the Company could be required to either enter into licensing arrangements or to resolve the issue through litigation. Such license rights might not be available to the Company on commercially acceptable terms, if at all, and any such litigation might not be resolved in its favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. The Company also could be required to incur substantial costs to redesign a product or re-perform design services.
From time to time, the Company enters into IP licenses (e.g., patent licenses and software licenses) with third-parties which obligate the Company to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable the Company's use of third-party technologies. The Company may also decline to enter into licenses for intellectual property that it does not think is useful for or used in its operations, or for which its customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of its business and the location of its business around the world, certain activities the Company performs, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. The Company's licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g., base price) for any royalty amounts owed are audited by licensors and may be challenged. Some of these disagreements, may lead to claims and litigation that might not be resolved in the Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. In March 2018, the Company received an inquiry from a licensor referencing its patent license agreement with the Company, and requesting information relating to royalties for products that the Company assembles for a customer in China. The Company and licensor agreed to an immaterial settlement.
On May 8, 2018, a putative class action was filed in the Northern District of California against the Company and certain officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, alleging misstatements and/or omissions in certain of the Company’s financial results, press releases and SEC filings made during the putative class period of January 26, 2017 through April 26, 2018. On October 1, 2018, the Court appointed lead plaintiff and lead plaintiff’s counsel in the case. On November 28, 2018, lead plaintiff filed an amended complaint alleging misstatements and/or omissions in certain of the Company’s SEC filings, press releases, earnings calls, and analyst and investor conferences and expanding the putative class period through October 25, 2018. On April 3, 2019, the Court vacated its prior order appointing lead plaintiff and lead plaintiff’s counsel and reopened the lead plaintiff appointment process. On September 26, 2019, the Court appointed a new lead plaintiff and lead plaintiff’s counsel in the case. On November 8, 2019, lead plaintiff filed a further amended complaint. On December 4, 2019, defendants filed a motion to dismiss the amended complaint. On May 29, 2020, the Court granted defendants’ motion to dismiss without prejudice and gave lead plaintiff 30 days to amend. On June 29, 2020, lead plaintiff filed a further amended complaint. On July 27, 2020, defendants filed a motion to dismiss the amended complaint. The motion has been fully briefed and defendants’ motion to dismiss is set for hearing on December 3, 2020. The Company believes that the claims are without merit and intends to vigorously defend this case.
On April 21, 2016, SunEdison, Inc. (together with certain of its subsidiaries, "SunEdison") filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During the fiscal year ended March 31, 2016, the Company recognized a bad debt reserve charge of $61.0 million associated with its outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90.0 million. SunEdison stated in schedules filed with the Bankruptcy Court that, within the 90 days preceding SunEdison's bankruptcy filing, the Company received approximately $98.6 million of inventory and cash transfers of $69.2 million, which in aggregate represents the Company's estimate of the maximum reasonably possible contingent loss. On April 15, 2018, a subsidiary of the Company together with its subsidiaries and affiliates, entered into a tolling agreement with the trustee of the SunEdison Litigation Trust to toll any applicable statute of limitations or other time-related defense that might exist in regards to any potential claims that either party might be able to assert against the other for a
period that will end at the earlier to occur of: (a) 60 days after a party provides written notice of termination; (b) six years from the effective date of April 15, 2018; or (c) such other date as the parties may agree in writing. No preference claims have been asserted against the Company and consideration has been given to the related contingencies based on the facts currently known. The Company has a number of affirmative and direct defenses to any potential claims for recovery and intends to vigorously defend any such claim, if asserted.
One of the Company's Brazilian subsidiaries has received assessments for certain sales and import taxes. There were originally six tax assessments totaling 373.7 million Brazilian reals (approximately USD $67.3 million based on the exchange rate as of September 25, 2020). Four of the assessments are in various stages of the review process at the administrative level; the Company successfully defeated one of the six assessments in September 2019 (totaling approximately 60.5 million Brazilian reals or USD $10.9 million); that assessment remains subject to appeal and no tax proceeding has been finalized yet. The Company was unsuccessful at the administrative level for one of the assessments and filed an annulment action in federal court in Sao Paolo, Brazil on March 23, 2020; the value of that assessment is 33.9 million Brazilian reals (approximately USD $6.1 million). 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 for several years.
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. 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 $145.4 million in taxes owed for multiple Flex legal entities within its jurisdiction for various fiscal years ranging from fiscal year 2010 through fiscal year 2018. The assessed amounts related to the denial of certain deductible intercompany payments. The Company disagrees with the Tax Authority’s assessments and is actively contesting the assessments through the administrative and judicial processes.
A different foreign Tax Authority has issued a letter against one of the Company’s legal entities asserting that the entity did not meet the qualification criteria for tax holiday status for the periods fiscal year 2006 through fiscal year 2013. The asserted additional tax and penalty is approximately $80 million. The Company disagrees with the Tax Authority’s assertion and is actively contesting through administrative processes and will defend through judicial processes if necessary.
As the final resolutions of the above items remain 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 six-month period ended September 25, 2020, the Company made no repurchases of shares.
Under the Company’s current share repurchase program, the Board of Directors authorized repurchases of its outstanding ordinary shares for up to $500 million in accordance with the share repurchase mandate approved by the Company’s shareholders at the date of Annual General Meeting held on August 7, 2020. As of September 25, 2020, shares in the aggregate amount of $500 million were available to be repurchased under the current plan.
14. SEGMENT REPORTING
In March 2020, the Company announced a change in organizational structure as part of its strategy to further drive efficiency and productivity with two focused delivery models. The Company’s chief operating decision maker ("CODM") changed from the CEO and certain direct staff who oversee operations of the business, to the CEO herself. As a result, beginning in fiscal year 2021, the Company now reports its financial performance based on two operating and reportable
segments, Flex Agility Solutions (“FAS”) and Flex Reliability Solutions (“FRS”) and analyzes operating income as the measure of segment profitability.
The FAS segment is optimized for speed to market at any volume based on a highly flexible supply and manufacturing system. The Company realigned the majority of the customers under the former Communications & Enterprise Compute ("CEC") and Consumer Technologies Group ("CTG") segments under the new FAS segment. Certain customers that were in the former Industrial and Emerging Industries ("IEI") segment that meet the above delivery model were also consolidated into the FAS segment. FAS is now comprised of the following end markets that represent reportable units:
•Communications, Enterprise and Cloud ("CEC"), including data infrastructure, edge infrastructure and communication infrastructure;
•Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio; and
•Consumer Devices, including mobile and high velocity consumer devices.
The FRS segment is optimized for longer product lifecycles requiring complex ramps at any volume with specialized production models and critical environments. The Company consolidated the majority of its customers under the former High Reliability Solutions ("HRS") and IEI segments into the new FRS segment. FRS is now comprised of the following end markets that represent reportable units:
•Automotive, including autonomous, connectivity, electrification, and smart technologies;
•Health Solutions, including medical devices, medical equipment and drug delivery; and
•Industrial, including capital equipment, industrial devices, renewable and grid edge, and power systems.
The determination of the FAS and FRS 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 amortization of intangibles, stock-based compensation, customer related asset impairment charges, restructuring charges, legal and other, interest and other, net. A portion of depreciation is allocated to the respective segment, together with other general corporate research and development and administrative expenses.
Selected financial information by segment is in the table below. Fiscal year 2020 historical information has been recast to reflect the new operating and reportable segments in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| | (In millions) |
| Net sales: | | | | | | | |
| Flex Agility Solutions | $ | 3,318 | | | $ | 3,583 | | | $ | 6,230 | | | $ | 7,491 | |
| Flex Reliability Solutions | 2,667 | | | 2,505 | | | 4,908 | | | 4,773 | |
| $ | 5,985 | | | $ | 6,088 | | | $ | 11,138 | | | $ | 12,264 | |
| Segment income and reconciliation of income before tax: | | | | | | | |
| Flex Agility Solutions | $ | 88 | | | $ | 94 | | | $ | 160 | | | $ | 203 | |
| Flex Reliability Solutions | 179 | | | 159 | | | 294 | | | 289 | |
| Corporate and Other | (20) | | | (26) | | | (44) | | | (57) | |
| Total segment income | 247 | | | 227 | | | 410 | | | 435 | |
| Reconciling items: | | | | | | | |
| Intangible amortization | 16 | | | 16 | | | 31 | | | 33 | |
| Stock-based compensation | 24 | | | 19 | | | 37 | | | 34 | |
| Customer related asset impairments (recoveries) (1) | (3) | | | 91 | | | (3) | | | 91 | |
| Restructuring charges (Note 15) | 35 | | | 128 | | | 45 | | | 185 | |
| | | | | | | |
| | | | | | | |
| Legal and other (2) | — | | | 19 | | | 28 | | | 21 | |
| Interest and other, net | 22 | | | 50 | | | 51 | | | 103 | |
| | | | | | | |
| Income before income taxes | $ | 153 | | | $ | (96) | | | $ | 221 | | | $ | (32) | |
(1)Customer related asset impairments for the three-month and six-month periods ended September 25, 2020 were not material and for the three-month and six-month periods ended September 27, 2019 primarily relate to additional provision for doubtful accounts receivable, and reserves for excess and obsolete inventory for certain customers experiencing financial difficulties and/or related to inventory that will not be recovered due to significant reductions in future customer demand as the Company reduced its exposure to certain higher volatility businesses.
(2)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. During the first quarter of fiscal year 2021, the Company accrued for certain loss contingencies where losses are considered probable and estimable.
Legal and other during the three-month and six-month periods ended September 27, 2019 primarily consists of direct and incremental costs associated with certain wind-down activities related to the disengagement of a certain customer primarily in China and India.
Corporate and other primarily includes corporate services costs that are not included in the CODM's assessment of the performance of each of the identified reporting segments.
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 on the operating campuses and are compatible across segments and highly interchangeable throughout the platform. Given the highly interchangeable nature of the assets, they are not separately identified by segments nor reported by segment to the Company's CODM.
15. RESTRUCTURING CHARGES
In order to support the Company’s strategy and build a sustainable organization, and after considering that the economic recovery from the pandemic will be slower than anticipated, the Company has identified and is engaging in certain structural changes. These restructuring actions will eliminate non-core activities primarily within the Company’s corporate function, align the Company’s cost structure with its reorganizing and optimizing of its operations model along its two reporting segments, and further sharpen its focus to winning business in end markets where it has competitive advantages and deep domain expertise.
During the three-month and six-month periods ended September 25, 2020, the Company recognized approximately $35.4 million and $45.1 million of restructuring charges, respectively, most of which related to employee severance.
During the first half of fiscal year 2020 in connection with geopolitical developments and uncertainties at the time, primarily impacting one customer in China, the Company experienced a reduction in demand for products assembled for that customer. As a result, the Company accelerated its strategic decision to reduce its exposure to certain high-volatility products in both China and India. The Company also initiated targeted activities to restructure its business to further reduce and streamline its cost structure. During the three-month and six-month periods ended September 27, 2019, the Company recognized $128.3 million and $184.5 million of restructuring charges, respectively. The Company incurred cash charges of approximately $97.0 million and $127.8 million, respectively, that were predominantly for employee severance, and non-cash charges of $31.3 million and $56.7 million, respectively, primarily related to asset impairments during the three and six-month periods ended September 27, 2019.
The following table summarizes the provisions, respective payments, and remaining accrued balance as of September 25, 2020 for charges incurred during the six-month period ended September 25, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Severance | | Long-Lived
Asset
Impairment | | Other
Exit Costs | | Total |
| (In millions) |
| Balance as of March 31, 2020 | $ | 20 | | | $ | — | | | $ | 4 | | | $ | 24 | |
| Provision for charges incurred during the six-month period ended September 25, 2020 | 42 | | | 3 | | | — | | | 45 | |
| Cash payments for charges incurred in the fiscal year 2020 and prior | (13) | | | — | | | (1) | | | (14) | |
| Cash payments for charges incurred during the six-month period ended September 25, 2020 | (20) | | | — | | | (1) | | | (21) | |
| Non-cash charges incurred during the six-month period ended September 25, 2020 | — | | | (3) | | | 1 | | | (2) | |
| | | | | | | |
| Balance as of September 25, 2020 | 29 | | | — | | | 3 | | | 32 | |
| Less: Current portion (classified as other current liabilities) | 29 | | | — | | | 3 | | | 32 | |
| Accrued restructuring costs, net of current portion (classified as other liabilities) | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this report on Form 10-Q, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020. 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 manufacturing partner of choice that helps a diverse customer base design and build products that improve the world. Through the collective strength of a global workforce across approximately 30 countries and responsible, sustainable operations, the Company delivers technology innovation, supply chain, and manufacturing solutions to diverse industries and end markets. In the first quarter of fiscal year 2021, the Company made certain changes in its organization structure as part of its strategy to further drive efficiency and productivity with two focused delivery models. As a result, the Company now reports its financial performance based on two reportable segments:
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
◦Communications, Enterprise and Cloud ("CEC"), including data infrastructure, edge infrastructure and communication infrastructure;
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio; and
◦Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
◦Automotive, including autonomous, connectivity, electrification, and smart technologies;
◦Health Solutions, including medical devices, medical equipment and drug delivery; and
◦Industrial, including capital equipment, industrial devices, renewable and grid edge, and power systems.
Refer to "note 14 - Segment Reporting,” to the condensed consolidated financial statements for additional information on the changes in operating and reportable segments.
Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product life cycle.
Over the past few years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Some companies that have historically identified themselves as software providers, Internet service providers or e-commerce retailers have entered the highly competitive and rapidly evolving technology hardware markets, such as mobile devices, home entertainment and wearable devices. This trend has resulted in a significant change in the manufacturing and supply chain solutions requirements of such companies. While the products have become more complex, the supply chain solutions required by such companies have become more customized and demanding, and it has changed the manufacturing and supply chain landscape significantly.
We use a portfolio approach to manage our extensive service offerings. As our customers change the way they go to market, we have the capability to reorganize and rebalance our business portfolio in order to align with our customers' needs and requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customer's supply chain solutions needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.
During the first half of fiscal year 2020 in connection with geopolitical developments and uncertainties at the time, primarily impacting one customer in China, we experienced a reduction in demand for products assembled for that customer. As a result, we accelerated our strategic decision to reduce our exposure to certain high-volatility products in both China and India. We also initiated targeted activities to restructure our business to further reduce and streamline our cost structure. During the first half of fiscal year 2021, in order to support the Company’s strategy and build a sustainable organization, and after considering that the economic recovery from the pandemic will be slower than anticipated, the Company has identified and is engaging in certain structural changes.
We believe that our continued business transformation is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services.
Update on the Impact of COVID-19 on our Business
As anticipated, our results were negatively impacted by COVID-19 disruptions to our factories, workforce, and suppliers most notably in our first quarter as the impact from the pandemic extended throughout the entire quarter. Total COVID-19 related costs incurred over the first half of the fiscal year 2021 were over $130 million and were primarily comprised of enhanced health and safety protocols, incremental labor incentives, incremental supply chain costs and forced under-absorption
of idle and underutilized labor and overhead costs. As we expected, these incremental costs persisted in our second quarter, but declined significantly from the June quarter as demand improved.
While both the FAS and FRS segments experienced sequential growth, COVID-19 related demand and production pressures remain in certain end markets that we serve. Net sales declined $0.1 billion and $1.1 billion during the three-month and six-month periods ended September 25, 2020 versus the prior year periods, primarily due to declines noted in the FAS segment. Included in the FRS segment, our Health Solutions business performed well during the first half of the fiscal year driven by the increased demand for critical care products and diagnostics and patient monitoring programs. Our factories were productive for the entire second quarter resulting in second quarter sales recovering specifically for the automotive businesses that were shut down during the majority of the first quarter. However, this business is still operating at a revenue run rate that is below pre-pandemic levels which we expect to continue in the near term. In addition, while we anticipate revenue will continue to improve across our end markets, we believe that our businesses tied to consumer spending, such as Lifestyle and Consumer Devices, will continue to be impacted if there is a prolonged demand slowdown. Refer to “Risk Factors - The COVID-19 pandemic has materially and adversely affected our business and results of operations. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material,” as disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.
As part of our continuous response to the outbreak, we maintained salary cuts, furloughs and other programs to cut costs that were initiated at the beginning of our first quarter through the second quarter. This also included aggressively reducing discretionary corporate spend. Employees that have been operating on a work-from-home basis are continuing to do so. While there still remains an elevated degree of uncertainty, we have removed specific austerity measures involving employee compensation. Further, to continue to support our strategy and build a sustainable organization, and after considering that the economic recovery will be slower than anticipated, we have identified and are continuing to engage in certain structural changes. See additional discussion regarding these restructuring actions below under "Restructuring charges".
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.
Business Overview
We are one of the world's largest providers of global supply chain solutions, with revenues of $11.1 billion for the six-month period ended September 25, 2020 and $24.2 billion in fiscal year 2020. The following tables set forth the relative percentages and dollar amounts of net sales by region and by country, and net property and equipment by country, based on the location of our manufacturing sites (amounts may not sum due to rounding):
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| | Three-Month Periods Ended | | Six-Month Periods Ended |
| September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| | (In millions) |
| Net sales by region: | | | | | | | | | | | | | | | |
| Americas | $ | 2,453 | | | 41 | % | | $ | 2,572 | | | 42 | % | | $ | 4,557 | | | 41 | % | | $ | 5,031 | | | 41 | % |
| Asia | 2,277 | | | 38 | % | | 2,368 | | | 39 | % | | 4,290 | | | 39 | % | | 4,947 | | | 40 | % |
| Europe | 1,255 | | | 21 | % | | 1,148 | | | 19 | % | | 2,291 | | | 20 | % | | 2,286 | | | 19 | % |
| $ | 5,985 | | | | | $ | 6,088 | | | | | $ | 11,138 | | | | | $ | 12,264 | | | |
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| Net sales by country: | | | | | | | | | | | | | | | |
| China | $ | 1,493 | | | 25 | % | | $ | 1,446 | | | 24 | % | | $ | 2,910 | | | 26 | % | | $ | 2,897 | | | 24 | % |
| Mexico | 1,153 | | | 19 | % | | 1,158 | | | 19 | % | | 2,060 | | | 18 | % | | 2,237 | | | 18 | % |
| U.S. | 895 | | | 15 | % | | 907 | | | 15 | % | | 1,764 | | | 16 | % | | 1,711 | | | 14 | % |
| Malaysia | 433 | | | 7 | % | | 408 | | | 7 | % | | 732 | | | 7 | % | | 834 | | | 7 | % |
| Brazil | 389 | | | 6 | % | | 489 | | | 8 | % | | 711 | | | 6 | % | | 1,044 | | | 9 | % |
| Hungary | 307 | | | 5 | % | | 321 | | | 5 | % | | 557 | | | 5 | % | | 642 | | | 5 | % |
| Israel | 189 | | | 3 | % | | 186 | | | 3 | % | | 376 | | | 3 | % | | 370 | | | 3 | % |
| Other | 1,126 | | | 20 | % | | 1,173 | | | 19 | % | | 2,028 | | | 19 | % | | 2,529 | | | 20 | % |
| | $ | 5,985 | | | | | $ | 6,088 | | | | | $ | 11,138 | | | | | $ | 12,264 | | | |
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| | As of | | As of |
| Property and equipment, net: | September 25, 2020 | | March 31, 2020 |
| | (In millions) |
| Mexico | $ | 536 | | | 25 | % | | $ | 555 | | | 25 | % |
| U.S. | 365 | | | 17 | % | | 378 | | | 17 | % |
| China | 346 | | | 16 | % | | 396 | | | 18 | % |
| India | 185 | | | 9 | % | | 207 | | | 9 | % |
| Malaysia | 105 | | | 5 | % | | 111 | | | 5 | % |
| Hungary | 101 | | | 5 | % | | 100 | | | 4 | % |
| Other | 468 | | | 23 | % | | 469 | | | 22 | % |
| | $ | 2,106 | | | | | $ | 2,216 | | | |
We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we offer our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings.
Our operating results are affected by a number of factors, including the following:
•the impacts on our business due to component shortages or other supply chain related constraints including as a result of the COVID-19 pandemic;
•the effects of the COVID-19 pandemic on our business and results of operations;
•changes in the macro-economic environment and related changes in consumer demand;
•the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, shortages of components and other factors;
•the effects on our business when our customers are not successful in marketing their products, or when their products do not gain widespread commercial acceptance;
•our ability to achieve commercially viable production yields and to manufacture components in commercial quantities to the performance specifications demanded by our customers;
•the effects that current credit and market conditions (including as a result of the COVID-19 pandemic) could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations;
•the effects on our business due to certain customers’ products having short product life cycles;
•our customers’ ability to cancel or delay orders or change production quantities;
•our customers’ decisions to choose internal manufacturing instead of outsourcing for their product requirements;
•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, 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19. 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, 2020, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales (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, 2020. As previously disclosed, we made certain changes in our organization structure. As a result of these changes, we revised our reportable segments as further discussed in note 14 to the condensed consolidated financial statements. There was no change to our condensed consolidated financial statements. For comparability purposes, segment reporting for the prior period has been recast to conform to the current presentation.
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| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | 93.0 | | | 95.0 | | | 93.4 | | | 94.3 | |
| Restructuring charges | 0.4 | | | 1.9 | | | 0.3 | | | 1.3 | |
| Gross profit | 6.6 | | | 3.1 | | | 6.3 | | | 4.4 | |
| Selling, general and administrative expenses | 3.2 | | | 3.4 | | | 3.4 | | | 3.4 | |
| Intangible amortization | 0.3 | | | 0.3 | | | 0.3 | | | 0.3 | |
| Restructuring charges | 0.2 | | | 0.2 | | | 0.1 | | | 0.2 | |
| Interest and other, net | 0.4 | | | 0.8 | | | 0.5 | | | 0.8 | |
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| Income (loss) before income taxes | 2.6 | | | (1.6) | | | 2.0 | | | (0.3) | |
| Provision for income taxes | 0.7 | | | 0.3 | | | 0.5 | | | 0.3 | |
| Net income (loss) | 1.9 | % | | (1.9) | % | | 1.5 | % | | (0.6) | % |
Net sales
The following table sets forth our net sales by segment, and their relative percentages (amounts may not sum due to rounding):
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| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| (In millions) |
| Net sales: | | | | | | | | | | | | | | | |
| Flex Agility Solutions | $ | 3,318 | | | 55 | % | | $ | 3,583 | | | 59 | % | | $ | 6,230 | | | 56 | % | | $ | 7,491 | | | 61 | % |
| Flex Reliability Solutions | 2,667 | | | 45 | % | | 2,505 | | | 41 | % | | 4,908 | | | 44 | % | | 4,773 | | | 39 | % |
| $ | 5,985 | | | | | $ | 6,088 | | | | | $ | 11,138 | | | | | $ | 12,264 | | | |
Net sales during the three-month period ended September 25, 2020 totaled $6.0 billion, representing a decrease of approximately $0.1 billion, or 2% from $6.1 billion during the three-month period ended September 27, 2019. Net sales for our FAS segment decreased $265 million, or 7%, primarily driven by a decrease of approximately 30% in revenue from our Consumer Devices business resulting from lower demand due to the impact of COVID-19, and our continued strategic shift away from high volatility, short cycle businesses that we initiated in the prior year. The majority of COVID-19 related supplier constraints noted in the first quarter were abated in the second quarter of fiscal year 2021. Net sales for our FRS segment increased $162 million, or 6%, primarily due to an increase of over 30% in sales in our Health Solution business as a result of increased demand for critical care products and diagnostics and patient monitoring programs. Net sales decreased $119 million to $2.5 billion in the Americas, $91 million to $2.3 billion in Asia, partially offset by an increase of $107 million to $1.3 billion in Europe.
Net sales during the six-month period ended September 25, 2020 totaled $11.1 billion, representing a decrease of approximately $1.1 billion, or 9% from $12.3 billion during the six-month period ended September 27, 2019. The decrease in net sales was most notable in our FAS segment, down $1.3 billion, or 17%, from the prior year, mainly due to a drop of approximately 50% in our Consumer Devices business led by the same factors described above. Offsetting a portion of the overall decline in revenue was an increase in revenues from the FRS segment of $135 million, or 3%, driven primarily by an increase of 25% in sales from our Health Solutions business, as noted above, and an increase of 10% in our Industrial business led by strong demand. These increases in our FRS segment were offset by a drop of approximately 30% in our Automotive business due to the factory shutdowns in the first quarter of fiscal year 2021. Net sales decreased $657 million to $4.3 billion in Asia, $474 million to $4.6 billion in the Americas, partially offset by a modest increase of $5 million to $2.3 billion in Europe.
Our ten largest customers, during the three and six-month periods ended September 25, 2020 and September 27, 2019, accounted for approximately 39% and 38% of net sales, respectively. Our ten largest customers, during the three and six-month periods ended September 27, 2019, accounted for approximately 39% of net sales for each of the periods. No customer accounted for more than 10% of net sales during the three and six-month periods ended September 25, 2020 or September 27, 2019.
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 September 25, 2020 totaled $5.6 billion, representing a decrease of approximately $0.2 billion, or 4% from $5.8 billion during the three-month period ended September 27, 2019. The decrease in cost of sales for the three-month period is more notable in our FAS segment. Cost of sales in FAS for the three-month period ended September 25, 2020 declined 7%, or $249 million from the three-month period ended September 27, 2019, which is in line with the overall 7% decrease in FAS revenue during the same period primarily as a result of COVID-19 impacting our Consumer Devices businesses, coupled with our targeted disengagement of high volatility, short cycle businesses initiated in the prior year. This was partially offset by the $145 million or 6% increase of cost of sales in FRS, from the second quarter of fiscal year 2020 in line with the overall 6% increase in FRS revenue during the same period, as our Health Solutions businesses continued to ramp as discussed above. Cost of sales was also higher in the prior year due to $88 million of customer assets impairment charges for customers that were experiencing financial difficulties as well as the write-down of inventory not recoverable due to significant reductions in future customer demand as we reduced our exposure to certain higher volatility businesses.
Cost of sales during the six-month period ended September 25, 2020 totaled $10.4 billion, representing a decrease of approximately $1.2 billion, or 10% from $11.6 billion during the six-month period ended September 27, 2019. Cost of sales in FAS for the six-month period ended September 25, 2020 decreased $1.2 billion or 17% from the six-month period ended September 27, 2019. Offsetting the decrease in cost of sales in FAS is an increase of $0.2 billion, or 4%, related to the FRS segment during the six-month period ended September 25, 2020. These fluctuations are consistent with the associated changes in net sales noted above. Cost of sales was also higher in the prior year due to $88 million of customer assets impairment charges and write-down of inventory, as discussed in the three-months period above.
Gross profit
Gross profit is affected by a fluctuations in costs of sales elements as outlined above and further by product life cycles, unit volumes, pricing, competition, new product introductions, and the expansion or consolidation of manufacturing facilities, as well as specific restructuring activities initiated from time to time. The flexible design of our manufacturing processes allows us to manufacture a broad range of products in our facilities and better utilize our manufacturing capacity across our diverse geographic footprint and service customers from all segments. In the cases of new 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 September 25, 2020 increased $206 million to $395 million, or 6.6% of net sales, from $189 million, or 3.1% of net sales, during the three-month period ended September 27, 2019. Gross margin improved 350 basis points during the same period. The increase in gross profit and gross margin resulted primarily from a higher mix of more profitable business in fiscal year 2021 versus the prior year. As noted above, the relative percentage of revenue from our FRS segment increased to 45% from 41%. FRS carries a higher gross profit percentage than FAS. Gross profit also was impacted by lower restructuring costs, $24 million in the three-month period ended September 25, 2020, versus $114 million in the three-month period ended September 27, 2019, a decline of $90 million which is primarily due to charges taken in fiscal year 2020 due to geopolitical challenges and uncertainties which impacted certain of our customers. Finally, gross profit increased due to the $88 million of customer assets impairment charges recorded in the prior year for customers that were experiencing financial difficulties coupled with the write-down of inventory not recoverable due to the significant reductions in future customer demand as we reduced our exposure to certain higher volatility businesses.
Gross profit during the six-month period ended September 25, 2020 increased $156 million to $698 million, or 6.3% of net sales, from $542 million, or 4.4% of net sales, during the six-month period ended September 27, 2019. Gross margin improved 190 basis points during the same period. The increase in gross profit and gross margin during the six-month period ended September 25, 2020 primarily resulted from the same factors impacting the three-month period as described above relating to the higher restructuring and customer assets impairment charges incurred in fiscal year 2020, which was partially offset by the decline in revenue and gross profit in our Consumer Devices and Automotive end markets reflecting COVID-19 demand and production pressures during the first half of fiscal year 2021.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include amortization of intangibles, stock-based compensation, customer related asset impairment charges, restructuring charges, legal and other, interest and other, net. A portion of depreciation is allocated to the respective segment, together with other general corporate research and development and administrative expenses.
The following table sets forth segment income and margins (amounts may not sum due to rounding):
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| | Three-Month Periods Ended | | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 | | September 25, 2020 | | September 27, 2019 |
| | (In millions) |
| Segment income: | | | | | | | | | | | | | | | |
| Flex Agility Solutions | $ | 88 | | | 2.7 | % | | $ | 94 | | | 2.6 | % | | $ | 160 | | | 2.6 | % | | $ | 203 | | | 2.7 | % |
| Flex Reliability Solutions | 179 | | | 6.7 | % | | 159 | | | 6.3 | % | | 294 | | | 6.0 | % | | 289 | | | 6.1 | % |
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FAS segment margin increased 10 basis points, to 2.7% for the three-month period ended September 25, 2020, from 2.6% for the three-month period ended September 27, 2019. The margin increase was driven by additional flow through revenue from new programs in our CEC business and recovered demand in our Lifestyle end market, coupled with the austerity measures taken by the Company in response to the outbreak, partially offset with direct COVID-19 related expenses in the current quarter and decline in Consumer Devices that experienced some headwinds due to less favorable mix and continued pruning to align with our forward strategy. The FAS segment margin decreased 10 basis points, to 2.6% for the six-month period ended September 25, 2020, from 2.7% for the six-month period ended September 27, 2019. The decrease in FAS segment margin during the six-month period is primarily the result of elevated under-absorption and supply chain constraints specifically in our Consumer Devices end market throughout the first quarter and to a lesser extent, the second quarter of fiscal year 2021.
FRS segment margin increased 40 basis points, to 6.7% for the three-month period ended September 25, 2020, from 6.3% for the three-month period ended September 27, 2019. The margin improvement was driven by favorable mix impacting our Industrial and Health Solutions end markets, coupled with the austerity measures taken by the Company in response to the COVID-19 outbreak which more than offset the related direct COVID-19 expenses as well as ramp costs for certain new programs in the Health Solutions businesses. FRS segment margin decreased 10 basis points, to 6.0% for the six-month period ended September 25, 2020, from 6.1% for the six-month period ended September 27, 2019. The decrease in FRS segment margin during the six-month period is primarily the results of plant shutdowns during most of our first quarter of fiscal year 2021, which affected the entire automotive ecosystem across all regions, coupled with under-absorption and efficiency impacts. Even though Automotive saw a strong rebound through our second quarter of fiscal year 2021, we are running at a reduced run rate and expect that it will take some time to return to pre-COVID levels.
As a result of the organizational structure changes, as previously disclosed, we revised our reportable segments as further discussed in note 14 to the condensed consolidated financial statements. Selected unaudited quarterly financial information for fiscal year 2020 in the table below have been recast reflecting the new reportable segments (amounts may not sum due to rounding).
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| Three-Month Periods Ended | | Fiscal Year Ended |
| June 28, 2019 | | September 27, 2019 | | December 31, 2019 | | March 31, 2020 | | March 31, 2020 |
| (In millions) |
| (Unaudited) |
| Net sales: | | | | | | | | | | | | | | | | | | | |
| Flex Agility Solutions | $ | 3,908 | | | 63 | % | | $ | 3,583 | | | 59 | % | | $ | 3,631 | | | 56 | % | | $ | 2,931 | | | 53 | % | | $ | 14,053 | | | 58 | % |
| Flex Reliability Solutions | 2,268 | | | 37 | % | | 2,505 | | | 41 | % | | 2,830 | | | 44 | % | | 2,554 | | | 47 | % | | 10,157 | | | 42 | % |
| $ | 6,176 | | | | | $ | 6,088 | | | | | $ | 6,461 | | | | | $ | 5,484 | | | | | $ | 24,210 | | | |
| Segment income: | | | | | | | | | | | | | | | | | | | |
| Flex Agility Solutions | $ | 109 | | | 2.8 | % | | $ | 94 | | | 2.6 | % | | $ | 98 | | | 2.7 | % | | $ | 68 | | | 2.3 | % | | $ | 369 | | | 2.6 | % |
| Flex Reliability Solutions | 130 | | | 5.7 | % | | 159 | | | 6.3 | % | | 186 | | | 6.6 | % | | 167 | | | 6.5 | % | | 642 | | | 6.3 | % |
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During fiscal year 2020, depreciation expense included in the segments' measure of operating performance above is as follows (amounts may not sum due to rounding).
| | | | | | | | |
| | Fiscal Year Ended |
| | March 31, 2020 |
| | (In millions) |
| | (Unaudited) |
| Depreciation expense: | | |
| Flex Agility Solutions | | $ | 218 | |
| Flex Reliability Solutions | | 173 | |
| Corporate and Other | | 32 | |
| Total depreciation expense | | $ | 422 | |
Property and equipment on a segment basis is not disclosed as it is not separately identified and is not internally reported by segment to the Company's CODM.
Restructuring charges
In order to support our strategy and build a sustainable organization, and after considering that the economic recovery from the pandemic will be slower than anticipated, we have identified and are engaging in certain structural changes. These restructuring actions will eliminate non-core activities primarily within our corporate function, align our cost structure with our reorganizing and optimizing of our operations model along our two reporting segments, and further sharpen our focus to winning business in end markets where we have competitive advantages and deep domain expertise. During the three and six-month periods ended September 25, 2020, we recognized approximately $35 million and $45 million, respectively, of restructuring charges, primarily cash charges related to employee severance. We expect to recognize approximately $60 million of additional charges as additional activities are approved over the remaining fiscal year 2021 period.
During the first half of fiscal year 2020 in connection with the recent geopolitical developments and uncertainties, primarily impacting one customer in China, we experienced a reduction in demand for products assembled for that customer. As a result, we accelerated our strategic decision to reduce our exposure to certain high-volatility products in both China and India. We also initiated targeted activities to restructure our business to further reduce and streamline our cost structure. During the three and six-month periods ended September 27, 2019, we recognized $128 million and $185 million of restructuring charges. We incurred cash charges of approximately $97 million and $128 million, respectively, that were predominantly for employee severance, and non-cash charges of $31 million and $57 million, respectively, primarily related to asset impairments.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) was $193 million, or 3.2% of net sales, during the three-month period ended September 25, 2020, decreasing $12 million from $205 million, or 3.4% of net sales, during the three-month period ended September 27, 2019. SG&A was $384 million, or 3.4% of net sales, during the six-month period ended
September 25, 2020, decreasing $31 million from $415 million, or 3.4% of net sales, during the six-month period ended September 27, 2019. The decrease reflects strong cost discipline practiced across the enterprise as well as the benefits from our distinct actions taken to temporarily reduce compensation costs across our employee base and aggressively reduce our discretionary spend levels. In addition, it reflects a refined cost structure benefiting from prior restructuring initiatives.
Intangible amortization
Amortization of intangible assets remains consistent at $16 million during the three-month periods ended September 25, 2020 and September 27, 2019. During the six-month period ended September 25, 2020, amortization of intangible assets marginally declined to $31 million, from $33 million for the six-month period ended September 27, 2019, primarily due to certain intangibles now being fully amortized.
Interest and other, net
Interest and other, net was $22 million during the three-month period ended September 25, 2020 compared to $50 million during the three-month period ended September 27, 2019, driven by an increase of $12 million gain from higher equity in earnings recognized for certain of our non-core equity method investments in fiscal year 2021, coupled with approximately $9 million of lower expenses from our asset-backed securitization programs as we reduced outstanding balances for these programs.
Interest and other, net was $51 million during the six-month period ended September 25, 2020 compared to $103 million during the six-month period ended September 27, 2019. Consistent with the factors above, the increase is primarily driven by $21 million of gains from higher equity in earnings recognized for certain of our non-core equity method investments in fiscal year 2021, in addition to approximately $17 million of lower expenses from our asset-backed securitization programs as we reduced outstanding balances for these programs.
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 14, “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, 2020 for further discussion.
The consolidated effective tax rate was 26% and 25% for the three-month and six-month periods ended September 25, 2020 and (22)% and (128)% for the three-month and six-month periods ended September 27, 2019, respectively. The effective 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, Costa Rica, India, the Netherlands and Israel. The effective tax rate for the three-month and six-month periods ended September 25, 2020 is higher than the effective tax rate for the three-month and six-month periods ended September 27, 2019, primarily due to the changing jurisdictional mix of income, and the Company's recognition of approximately $308 million in restructuring charges, impairment of non-core investment, and customer related asset impairments with minimal associated tax benefit which resulted in tax expense recorded on a U.S. GAAP loss for the six-month period ended September 27, 2019.
LIQUIDITY AND CAPITAL RESOURCES
In response to the recent challenging environment following the COVID-19 pandemic, we continuously evaluate our ability to meet our obligations over the next 12 months and have proactively reset our capital structure during these times to improve maturities and liquidity. As a result, we expect that our current financial condition, including our liquidity sources are adequate to fund current and future commitments. As of September 25, 2020, we had cash and cash equivalents of approximately $2.4 billion and bank and other borrowings of approximately $3.8 billion. We have a $1.75 billion revolving credit facility that expires in June 2022, under which there were no borrowings outstanding as of the end of the quarter. We also issued $675 million of 3.750% Notes due February 2026 and $650 million of 4.875% Notes due May 2030 and repaid $433 million for the term loan due June 2022. Refer to note 6 to the condensed consolidated financial statement for details. As of September 25, 2020, we were in compliance with the covenants under all of our credit facilities and indentures.
Cash used in operating activities was $365 million during the six-month period ended September 25, 2020, primarily driven by cash outflows related to accounts receivables as we reduced our outstanding balances on our ABS and AR factoring programs, and used proceeds from our debt funding in accordance with our revised capital strategy. These were offset by $165 million of net income for the period plus $362 million of non-cash charges such as depreciation, amortization, restructuring and impairment charges, and stock-based compensation.
We believe net working capital and net working capital as a percentage of annualized net sales are key metrics that measure our liquidity. Net working capital is calculated as current quarter accounts receivable, net of allowance for doubtful accounts, plus inventories and contract assets, less accounts payable and certain other current liabilities related to vendor financing programs. Net working capital increased $1.2 billion as of September 25, 2020, from $1.4 billion as of March 31, 2020. This increase is primarily driven by a $1.4 billion increase in net receivables as we reduced our outstanding balances on our ABS and AR factoring programs as discussed above, partially offset by a $0.2 billion decrease in inventories. Our current quarter net working capital as a percentage of annualized net sales for the quarter ended September 25, 2020, increased to 10.6% from 6.3% of annualized net sales for the quarter ended March 31, 2020 as a direct result of reducing the outstanding balance of our ABS and AR factoring programs. The Company expects to operate in this range going forward. Though we have mitigated most of the initial supplier constraints and component shortages that we had encountered in the first quarter of fiscal year 2021, we continue to operate in an unusual and dynamic environment with respect to virus-related production limitations and fluctuating demand. We expect it will take additional time to adequately drive down our inventory levels to align with the current demand environment. We are actively working with our partners to rebalance safety and buffer stock requirements and we have an established enterprise-wide cross-functional initiative resetting our load planning.
Cash used in investing activities was $158 million during the six-month period ended September 25, 2020. This was primarily driven by $171 million of net capital expenditures for property and equipment to continue expanding capabilities and capacity in support of our expanding Health Solutions 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, plus cash collections of deferred purchase price receivables, less net purchases of property and equipment to present adjusted cash flows on a consistent basis for investor transparency (refer to Part II, Item 8, note 11 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, for discussion of the amendment of the ABS Programs). We also excluded the impact to cash flows related to certain vendor programs that is required for US GAAP presentation. During the first half of fiscal year 2021, we proactively and strategically utilized the proceeds of our debt issuances during the fiscal year to reduce the outstanding balance of our ABS programs. We reduced the balance on this short-term financing product by $786 million as of September 25, 2020, from $798 million as of March 31, 2020, which has the accounting effect of reducing our cash flow from operations. As this decrease in cash flow reflects the change of our capital strategy, we have added this back for our adjusted free cash flow calculation. Our adjusted free cash flows for the six-month period ended September 25, 2020 was an inflow of $252 million compared to an inflow of $301 million for the six-month period ended September 27, 2019. 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:
| | | | | | | | | | | |
| | Six-Month Periods Ended |
| | September 25, 2020 | | September 27, 2019 |
| | (In millions) |
| Net cash used in operating activities | $ | (365) | | | $ | (1,648) | |
| Reduction in ABS levels | 786 | | | — | |
| Cash collection of deferred purchase price and other | 2 | | | 2,167 | |
| Purchases of property and equipment | (185) | | | (271) | |
| Proceeds from the disposition of property and equipment | 14 | | | 53 | |
| Adjusted free cash flow | $ | 252 | | | $ | 301 | |
Cash provided by financing activities was $940 million during the six-month period ended September 25, 2020, which was primarily driven by $1.4 billion of proceeds received in aggregate, and net of discounts and after premiums, following the issuance of the 2026 Notes and the 2030 Notes, partially offset by $433 million cash paid for the repayment of the term loan due June 2022. For further information, see note 6 to the condensed consolidated financial statements.
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 September 25, 2020, and March 31, 2020, over half of our cash and cash equivalents were held by foreign subsidiaries outside of Singapore. Although
substantially all of the amounts held outside of Singapore could be repatriated under current laws, a significant amount could be subject to income tax withholdings. We provide for tax liabilities on these amounts for financial statement purposes, except for certain of our foreign earnings that are considered indefinitely reinvested outside of Singapore (approximately $1.4 billion as of March 31, 2020). Repatriation could result in an additional income tax payment; however, for the majority of our foreign entities, our intent is to permanently reinvest these funds outside of Singapore and our current plans do not demonstrate a need to repatriate them to fund our operations in jurisdictions outside of where they are held. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of Singapore and we would meet our liquidity needs through ongoing cash flows, external borrowings, or both.
Future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures for new equipment, the extent to which we utilize operating leases for new facilities and equipment, and the levels of shipments and changes in the volumes of customer orders.
We maintain global paying services agreements with several financial institutions. Under these agreements, the financial institutions act as our paying agents with respect to accounts payable due to our suppliers who elect to participate in the program. The agreements allow our suppliers to sell their receivables to one of the participating financial institutions at the discretion of both parties on terms that are negotiated between the supplier and the respective financial institution. Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers’ decisions to sell their receivables under this program. The cumulative payments due to suppliers participating in the programs amounted to approximately $0.2 billion and $0.5 billion for the three and six-month periods ended September 25, 2020, respectively, and approximately $0.2 billion and $0.3 billion for the three and six-month periods ended September 27, 2019, respectively. Pursuant to their agreement with one of the financial institutions, certain suppliers may elect to be paid early at their discretion. We are not always notified when our suppliers sell receivables under these programs. The available capacity under these programs can vary based on the number of investors and/or financial institutions participating in these programs at any point in time.
In addition, we maintain various uncommitted short-term financing facilities including but not limited to commercial paper program, and revolving sale and repurchase of subordinated note established under the securitization facility, under which there were no borrowings outstanding as of September 25, 2020.
Historically, we have funded operations from cash and cash equivalents generated from operations, proceeds from public offerings of equity and debt securities, bank debt and lease financings. We also sell a designated pool of trade receivables under asset-backed securitization ("ABS") programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements. 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 $500 million in accordance with the share purchase mandate approved by our shareholders at the date of the most recent Annual General Meeting which was held on August 7, 2020. During the six-month period ended September 25, 2020, there were no purchases of our ordinary shares made by us. As of September 25, 2020, shares in the aggregate amount of $500 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, 2020.
During the first half of fiscal year 2021, we issued $675 million of 3.750% Notes due February 2026 and $650 million of 4.875% Notes due May 2030 and repaid $433 million for the term loan due June 2022.
Other than the changes discussed above, there were no material changes in our contractual obligations and commitments since March 31, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 25, 2020, and March 31, 2020, the outstanding balance on receivables sold for cash was $0.2 billion and $1.2 billion, respectively, under our asset-backed securitization programs and accounts receivable factoring program, which were removed from accounts receivable balances in our condensed consolidated balance sheets. For further information, see note 10 to the condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our exposure to market risks for changes in interest and foreign currency exchange rates for the six-month period ended September 25, 2020 as compared to the fiscal year ended March 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 25, 2020. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of September 25, 2020, the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended September 25, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2020, 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On August 7, 2020, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $500 million. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of September 25, 2020, shares in the aggregate amount of $500 million were available to be repurchased under the current plan. There were no purchases of our ordinary shares made by us for the period from June 27, 2020 through September 25, 2020. Share repurchases, if any, will be made in the open market and in compliance with SEC Rule 10b-18. The timing and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable legal requirements. The share repurchase program does not obligate the Company to repurchase any specific number of shares and may be suspended or terminated at any time without prior notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
EXHIBIT INDEX
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | | | | |
| Exhibit No. | | Exhibit | | Form | | File No. | | Filing Date | | Exhibit No. | | Filed Herewith |
| | | | | | | | | | | | |
| | Indenture, dated as of June 6, 2019, by and between the Company and U.S. Bank National Association, as trustee | | 8-K | | 000-23354 | | 6/6/2019 | | 4.1 | | |
| | Third Supplemental Indenture, dated as of May 12, 2020, by and between the Company and U.S. Bank National Association, as trustee | | 8-K | | 000-23354 | | 5/12/2020 | | 4.2 | | |
| | Fourth Supplemental Indenture, dated as of August 17, 2020, by and between the Company and U.S. Bank National Association, as trustee | | 8-K | | 000-23354 | | 8/17/2020 | | 4.3 | | |
| | Form of 3.750% Global Note due 2026 (included in Exhibit 4.3) | | | | | | | | | | |
| | Form of 4.875% Global Note due 2030 (included in Exhibit 4.3) | | | | | | | | | | |
| | Amended and Restated Flex Ltd. 2017 Equity Incentive Plan | | DEF 14A | | 000-23354 | | 6/26/2020 | | | | Annex A |
| | Paul R. Lundstrom Offer Letter, dated August 5, 2020 | | | | | | | | | | X |
| | Executive Transition Agreement, dated August 5, 2020 between Flex Ltd. and Christopher Collier | | | | | | | | | | X |
| | Description of Incentive Bonus Plan for Second Half of Fiscal 2021 | | | | | | | | | | 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 Exhibits 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.
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: | October 30, 2020 | |
| | /s/ PAUL R. LUNDSTROM |
| | Paul R. Lundstrom |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| Date: | October 30, 2020 | |
