FLEX LTD. 
Unless otherwise specifically stated, references in this report to "Flex," "the Company," "we," "us," "our" and similar terms meanFlex 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 theSecurities and Exchange Commission . These 25 -------------------------------------------------------------------------------- Table of Contents 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 endedMarch 31, 2021 . 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, we deliver technology innovation, supply
chain, and manufacturing solutions to diverse industries and end markets. The
Company 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 communications infrastructure;
•Lifestyle, including appliances, consumer packaging, floorcare, micro mobility
and audio; and
•Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end
markets:
•Automotive, including autonomous, connectivity, electrification, and smart
technologies;
•Health Solutions, including medical devices, medical equipment and drug
delivery; and
•Industrial, including capital equipment, industrial devices, renewable
including our Nextracker business, grid edge, and power systems.
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.
We believe that our continued business transformation is strategically
positioning us to take advantage of the long-term, future growth prospects for
outsourcing of advanced manufacturing capabilities, design and engineering
services and after-market services.
Update on the Impact of COVID-19 on our Business
With the second wave of the pandemic including follow-on variants of COVID-19,
we continue to experience plant closures and/or restrictions at certain
manufacturing facilities in Malaysia . There have been renewed disease control
measures being taken to limit the spread including movement bans and
shelter-in-place orders. We continue to closely monitor the situation in all the
locations where we operate. Our priority remains the welfare of our employees.
In addition, our end markets continue to be impacted by the global supply chain
disruptions. Component shortages and logistical constraints are pervasive across
the entire value chain. COVID-19 related restrictions also contributed to a
declining workforce, including at ports and warehouses, as well as creating
driver shortages around the world. We expect persistent waves of COVID-19 to
remain a headwind into the
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near future. Component shortages and significantly increased logistic costs are
also expected to persist at least in the near future as we are continuing to see
increasing supply constraints and costs. Refer to "Risk Factors - The ongoing
COVID-19 pandemic has materially and adversely affected our business and results
of operations. The duration and extent to which it will continue to adversely
impact our business and results of operations remains uncertain and could be
material." as disclosed in Part II, "Item 1A. Risk Factors."
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.
Other Developments
We are continuing to evaluate alternatives for our Nextracker business. We are
considering options that may include, among others, a full or partial separation
of the business through an initial public offering, sale, spin-off, or other
transaction. On April 28, 2021 , we announced that we confidentially submitted a
draft registration statement on Form S-1 with the U.S. Securities and Exchange
Commission relating to the proposed initial public offering of Nextracker's
Class A common stock. The initial public offering and its timing are subject to
market and other conditions and the SEC's review process, and there can be no
assurance that we will proceed with such offering or any alternative
transaction. Refer to "Risk Factors - We are pursuing alternatives for our
Nextracker business, including a full or partial separation of the business,
through an initial public offering of Nextracker or otherwise, which may not be
consummated as or when planned or at all, and may not achieve the intended
benefits." in our Annual Report on Form 10-K for the fiscal year ended March 31,
2021 .
This Quarterly Report on Form 10-Q for the second quarter ended October 1, 2021
does not constitute an offer to sell or a solicitation of an offer to buy
securities, and shall not constitute an offer, solicitation or sale in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of that jurisdiction.
Subsequent Events
In October 2021 , we announced that we have entered into a definitive agreement
to acquire 100% of the voting shares of Anord Mardix, a global leader in
critical power solutions for $540 million in an all-cash transaction. The
acquisition will add to our portfolio of Power products and expand our offering
in the data center market and is expected to close in the third quarter of
fiscal year 2022, subject to customary closing conditions, including regulatory
approval. For reporting purposes, Anord Mardix will be included in the
Industrial business unit within our FRS segment.
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Business Overview
We are one of the world's largest providers of global supply chain solutions,
with revenues of $12.6 billion for the six-month period ended October 1, 2021
and $24.1 billion in fiscal year 2021. We have established an extensive network
of manufacturing facilities in the world's major consumer and enterprise markets
(Asia , the Americas , and Europe ) to serve the growing outsourcing needs of both
multinational and regional customers. We design, build, ship, and service
consumer and enterprise products for our customers through a network of over 100
facilities in approximately 30 countries across four continents. 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):
Three-Month Periods Ended Six-Month Periods Ended
October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020
(In millions)
Net sales by region:
Americas $ 2,605 42 % $ 2,453 41 % $ 5,184 41 % $ 4,557 41 %
Asia 2,347 38 % 2,277 38 % 4,712 37 % 4,290 39 %
Europe 1,277 20 % 1,255 21 % 2,675 22 % 2,291 20 %
$ 6,229 $ 5,985 $ 12,571 $ 11,138
Net sales by country:
China $ 1,547 25 % $ 1,493 25 % $ 3,078 24 % $ 2,910 26 %
Mexico 1,240 20 % 1,153 19 % 2,460 20 % 2,060 18 %
U.S. 846 14 % 895 15 % 1,722 14 % 1,764 16 %
Brazil 502 8 % 389 6 % 966 8 % 711 6 %
Malaysia 412 7 % 433 7 % 823 7 % 732 7 %
Hungary 295 5 % 307 5 % 647 5 % 557 5 %
Other 1,387 21 % 1,315 23 % 2,875 22 % 2,404 22 %
$ 6,229 $ 5,985 $ 12,571 $ 11,138
As of As of
Property and equipment, net: October 1, 2021 March 31, 2021 (In millions) Mexico $ 574 27 % $ 553 26 % U.S. 362 17 % 361 17 % China 316 15 % 331 16 % India 144 7 % 166 8 % Hungary 112 5 % 105 5 % Malaysia 108 5 % 106 5 % Other 484 24 % 475 23 %$ 2,100 $ 2,097 We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we offer our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings. Our operating results are affected by a number of factors, including the following:
•the impacts on our business due to component shortages, disruptions in transportation or other supply chain related constraints including as a result of the COVID-19 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;
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•the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, and other factors;
•the effects on our business when our customers are not successful in marketing their products, or when their products do not gain widespread commercial acceptance;
•our ability to achieve commercially viable production yields and to manufacture components in commercial quantities to the performance specifications demanded by our customers; •the effects that current credit and market conditions (including as a result of the 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 endedMarch 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 endedMarch 31, 2021 , 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 endedMarch 31, 2021 . 29
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Three-Month Periods Ended Six-Month Periods Ended
October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 92.4 93.0 92.5 93.4
Restructuring charges 0.1 0.4 0.1 0.3
Gross profit 7.5 6.6 7.4 6.3
Selling, general and administrative expenses 3.4 3.2 3.3 3.4
Restructuring charges 0.0 0.2 0.0 0.1
Intangible amortization 0.3 0.3 0.2 0.3
Operating income 3.8 2.9 3.9 2.5
Interest and other, net (2.2) 0.4 (0.9) 0.5
Income before income taxes 6.0 2.5 4.8 2.0
Provision for income taxes 0.6 0.7 0.5 0.5
Net income 5.4 % 1.8 % 4.3 % 1.5 %
Net sales
The following table sets forth our net sales by segment, and their relative
percentages:
Three-Month Periods Ended Six-Month Periods Ended
October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020
(In millions)
Net sales:
Flex Agility Solutions $ 3,437 55 % $ 3,318 55 % $ 6,869 55 % $ 6,230 56 %
Flex Reliability Solutions 2,792 45 % 2,667 45 % 5,702 45 % 4,908 44 %
$ 6,229 $ 5,985 $ 12,571 $ 11,138
Net sales during the three-month period ended October 1, 2021 totaled $6.2
billion , representing an increase of approximately $0.2 billion , or 4% from $6.0
billion during the three-month period ended September 25, 2020 . Net sales for
our FAS segment increased $0.1 billion , or 4% from the three-month period ended
September 25, 2020 , primarily driven by an increase in our Lifestyle business
due to strong demand, particularly with new product ramps and new customers.
Offsetting the increase to some extent were impacts from COVID-19 outlined above
and specifically related to scarcity of component and raw materials and
logistics constraints. Net sales for our FRS segment increased approximately
$0.1 billion , or 5% from the three-month period ended September 25, 2020 ,
primarily driven by our Industrial business led by customer ramps and strong
demand in key areas including electric vehicles (EV) charging and renewables,
semicap, and robotics. The increases noted in FRS during the three-month period
ended October 1, 2021 were partially offset by a decrease in our Health
Solutions business primarily due to lower COVID-19 related demand compared to
prior year period coupled with component shortages as well as clear-to-build
constraints. Net sales increased across all regions with a $0.2 billion increase
to $2.6 billion in the Americas , a $0.1 billion increase to $2.3 billion in Asia
and a modest $22 million increase to $1.3 billion in Europe .
Net sales during the six-month period ended October 1, 2021 totaled $12.6
billion , representing an increase of approximately $1.4 billion , or 13% from
$11.1 billion during the six-month period ended September 25, 2020 . Net sales
for our FAS segment increased $0.6 billion , or 10% from the six-month period
ended September 25, 2020 , primarily driven by an increase in our Lifestyle
business and to a lesser extent increase in our Consumer Devices business. These
increases were driven by a lesser impact from COVID-19 production pressure
during the current year, coupled with new ramps, customer expansions and
continued recoveries in consumer spending, offset to some extent by the scarcity
of components and raw material and logistics constraints noted above. Net sales
for our FRS segment increased approximately $0.8 billion , or 16% from the
six-month period ended September 25, 2020 , primarily due to an increase in our
Industrial business, as a result of customer ramps and strong demand in EV
charging and renewables, semicap, and robotics. In addition, net sale for our
Automotive business increased due to depressed automotive sales from factory
shutdowns in the first quarter of fiscal year 2021. The increase in our
Automotive business was partially constrained by component shortages and OEM
plant shutdowns during the six-month period ended October 1, 2021 . Net sales
increased across all regions with a $0.6 billion increase to $5.2 billion in the
Americas , a $0.4 billion increase to $4.7 billion in Asia , and a $0.4 billion
increase to $2.7 billion in Europe .
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Our ten largest customers during the three and six-month periods ended
October 1, 2021 accounted for approximately 36% and 35% of net sales,
respectively. Our ten largest customers, during the three and six-month periods
ended September 25, 2020 , accounted for approximately 39% and 38% of net sales,
respectively. No customer accounted for more than 10% of net sales during the
three and six-month periods ended October 1, 2021 or September 25, 2020 .
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 October 1, 2021 totaled $5.8
billion , representing an increase of approximately $0.2 billion , or 3% from $5.6
billion during the three-month period ended September 25, 2020 . The increase in
cost of sales for the three-month period ended October 1, 2021 was primarily
driven by the increased consolidated sales of over $0.2 billion . Cost of sales
in FAS for the three-month period ended October 1, 2021 increased approximately
2%, or $50 million from the three-month period ended September 25, 2020 , which
is slightly lower than the overall 4% increase in FAS revenue during the same
period primarily as a result of higher revenue in our Lifestyle and Consumer
Devices businesses coupled with better fixed cost absorption, disciplined cost
management as well as our continued push for new business wins and renewals at
accretive margins. Cost of sales in FRS for the three-month period ended
October 1, 2021 increased 6%, or $0.1 billion from the three-month period ended
September 25, 2020 , which is slightly higher than the overall 5% increase in FRS
revenue during the same period primarily due to material constraints causing
numerous production disruptions impacting our automotive business and continued
increases in freight and logistics costs impacting our industrial businesses
despite stronger demand and lesser COVID-19 pressures during the first half of
fiscal year 2022, as discussed above.
Cost of sales during the six-month period ended October 1, 2021 totaled $11.6
billion , representing an increase of approximately $1.2 billion , or 12% from
$10.4 billion during the six-month period ended September 25, 2020 . The increase
in cost of sales for the six-month period ended October 1, 2021 was primarily
driven by the increased consolidated sales of over $1.4 billion during the same
period. Cost of sales in FAS for the six-month period ended October 1, 2021
increased approximately 8%, or $0.5 billion from the six-month period ended
September 25, 2020 , which is lower than the overall 10% increase in FAS revenue
during the same period primarily due to the same reasons as discussed above in
the three-month period ended comparison. Cost of sales in FRS for the six-month
period ended October 1, 2021 increased 17%, or $0.7 billion from the six-month
period ended September 25, 2020 , which is slightly higher than the overall 16%
increase in FRS revenue during the same period due to the same reasons as
discussed above in the three-month period ended comparison.
Gross profit
Gross profit is affected by a fluctuation in cost of sales elements as outlined
above and further by a number of factors, including product 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 both 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 October 1, 2021 increased $0.1
billion to $0.5 billion , or 7.5% of net sales, from $0.4 billion , or 6.6% of net
sales, during the three-month period ended September 25, 2020 . Gross margin
improved 90 basis points during the same period despite certain COVID-19
disruptions, industry-wide component shortages and cost pressures on logistics
in the three-month period ended October 1, 2021 . The increase in gross profit
and gross margin during the current period resulted primarily from the overall
stronger demand in our FAS segment which allowed for improved fixed cost
absorption, coupled with continued improvement in the mix of our business,
benefits from prior restructuring activities and a lower direct and incremental
unfavorable impact from COVID-19 compared to the prior year period.
Gross profit during the six-month period ended October 1, 2021 increased $0.2
billion to $0.9 billion , or 7.4% of net sales, from $0.7 billion , or 6.3% of net
sales, during the six-month period ended September 25, 2020 . Gross margin
improved 110 basis points during the same period due to the same factors noted
above in the three-month periods discussion.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating
contribution, or segment income. Segment income is defined as net sales less
cost of sales, and segment selling, general and administrative expenses, and
does not include intangible amortization, stock-based compensation,
restructuring charges, and legal and other. A portion of depreciation is
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Table of Contents allocated to the respective segments, together with other general corporate research and development and administrative expenses. The following table sets forth segment income and margins:
Three-Month Periods Ended Six-Month Periods Ended
October 1, 2021 September 25, 2020 October 1, 2021 September 25, 2020
(In millions)
Segment income:
Flex Agility Solutions $ 153 4.4 % $ 88 2.7 % $ 290 4.2 % $ 160 2.6 %
Flex Reliability Solutions 151 5.4 % 179 6.7 % 321 5.6 % 294 6.0 %
FAS segment margin increased 170 basis points, to 4.4% for the three-month
period ended October 1, 2021 , from 2.7% for the three-month period ended
September 25, 2020 . The margin increase was driven by an increase in demand
notably in our Lifestyle and Consumer Devices end markets due to new business
wins and renewals at accretive margins, strong demand recovery from COVID-19,
disciplined cost management and improved efficiencies as noted above, partially
offset by the elevated costs due to component shortages and logistics
constraints we faced during the three-month period ended October 1, 2021 . The
FAS segment margin increased 160 basis points, to 4.2% for the six-month period
ended October 1, 2021 , from 2.6% for the six-month period ended September 25,
2020 . The increase in FAS segment margin during the six-month period is due to
the same factors noted in the discussion above for the three-month period.
FRS segment margin decreased 130 basis points, to 5.4% for the three-month
period ended October 1, 2021 , from 6.7% for the three-month period ended
September 25, 2020 . The margin decrease in FRS was primarily driven by
production disruptions in our Automotive business, as well as continued freight
and logistics cost headwinds impacting our Industrial business during the
three-month period ended October 1, 2021 . FRS segment margin decreased 40 basis
points, to 5.6% for the six-month period ended October 1, 2021 , from 6.0% for
the six-month period ended September 25, 2020 . The decrease in FRS segment
margin during the six-month period is due to the same factors noted in the
discussion above for the three-month period.
Restructuring charges
During the three and six-month periods ended October 1, 2021 , we recognized
approximately $9 million of restructuring charges, primarily cash charges
related to employee severance. 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.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") was $0.2 billion , or 3.4%
of net sales, during the three-month period ended October 1, 2021 , increasing
$20 million from $0.2 billion , or 3.2% of net sales, during the three-month
period ended September 25, 2020 . SG&A was $0.4 billion , or 3.3% of net sales,
during the six-month period ended October 1, 2021 , increasing $30 million from
$0.4 billion , or 3.4% of net sales, during the six-month period ended
September 25, 2020 , which reflects our enhanced cost control efforts to support
higher revenue growth while keeping our SG&A expenses relatively flat.
Intangible amortization
Amortization of intangible assets marginally declined to $15 million during the
three-month period ended October 1, 2021 , from $16 million for the three-month
period ended September 25, 2020 , and declined to $30 million during the
six-month period ended October 1, 2021 , from $31 million for the six-month
period ended September 25, 2020 , primarily due to certain intangibles now being
fully amortized.
Interest and other, net
Interest and other, net was income of $134 million during the three-month period
ended October 1, 2021 compared to an expense of $22 million during the
three-month period ended September 25, 2020 , primarily driven by a $149 million
gain related to a certain tax credit recorded upon approval of a "Credit
Habilitation" request by the relevant Brazil tax authorities. This is a non-cash
gain which will be used to offset certain current and future tax obligations.
Refer to note 11 to the condensed consolidated financial statements for further
detail.
Interest and other, net was income of $111 million during the six-month period
ended October 1, 2021 compared to an expense of $51 million during the six-month
period ended September 25, 2020 , due to the same driver noted above.
Income taxes
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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, 2021 for further discussion.
The consolidated effective tax rate was 9% and 10% for the three and six-month
periods ended October 1, 2021 , and 26% and 25% for the three and six-month
periods ended September 25, 2020 , 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 , the Netherlands and Israel . The effective tax rate
for the three and six-month periods ended October 1, 2021 is lower than the
effective tax rate for the three-month and six-month periods ended September 25,
2020 , primarily due to a changing jurisdictional mix of incomes, restructuring
charges for the three-month and six-month periods ended September 25, 2020 which
resulted in minimal tax benefit, and the significant Brazilian indirect tax
credits recorded this period (as discussed above in note 11 to the condensed
consolidated financial statements) which resulted in immaterial additional
income tax cost.
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 October 1, 2021 , we had cash and cash
equivalents of approximately $2.5 billion and bank and other borrowings of
approximately $3.8 billion . We have a $2.0 billion revolving credit facility
that is due to mature in January 2026 (the "2026 Credit Facility"), under which
we had no borrowings outstanding as of October 1, 2021 . As of October 1, 2021 ,
we were in compliance with the covenants under all of our credit facilities and
indentures.
Cash provided by operating activities was $0.5 billion during the six-month
period ended October 1, 2021 , primarily driven by $0.5 billion of net income for
the period plus $0.3 billion of non-cash charges such as depreciation,
amortization, restructuring and impairment charges, and stock-based compensation
offset by changes in net working capital as discussed below.
We believe net working capital ("NWC") 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. Net working capital increased $0.3 billion to $3.2 billion as of
October 1, 2021 , from $2.9 billion as of March 31, 2021 . This increase is
primarily driven by a $1.3 billion increase in inventories due to component
shortages and logistics constraints driving up buffer stock and inventory
pricing, partially offset by a $0.5 billion decrease in net receivables and a
$0.6 billion increase in accounts payable. Our current quarter net working
capital as a percentage of annualized net sales for the quarter ended October 1,
2021 , increased to 13.0% from 11.5% of annualized net sales for the quarter
ended March 31, 2021 due to component shortages and logistics constraints. We
continue to see component shortages in the supply chain and logistical
constraints, and although we are actively managing these impacts, we expect
continued working capital pressure in the near future. We expect it will take
additional time to adequately drive down our inventory levels to align with the
current demand environment. We are proactively 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. In
addition, we are pursuing alternative resources using inclusive hybrid solutions
to minimize transit times and implementing operational efficiencies. Component
shortages and significantly increased logistic costs are also expected to
persist at least in the near future as we are continuing to see increasing
supply constraints and costs. We are working diligently with our partners to
secure needed parts and fulfill demand.
Cash used in investing activities was $0.2 billion during the six-month period
ended October 1, 2021 . This was primarily driven by $0.2 billion of net capital
expenditures for property and equipment to continue expanding capabilities and
capacity in support of our expanding Health Solutions , Automotive, and
Industrial businesses.
We believe adjusted free cash flow is an important liquidity metric because it
measures, during a given period, the amount of cash generated that is available
to repay debt obligations, make investments, fund acquisitions, repurchase
company shares and for certain other activities. Our adjusted free cash flow is
defined as cash from operations, less net purchases of property and equipment to
present adjusted cash flows on a consistent basis for investor transparency.
During fiscal year 2021, we proactively and strategically reduced the
outstanding balance of our ABS programs. As this decrease in cash flow reflected
the change of our capital strategy, we added this back for our adjusted free
cash flow calculation and also excluded the impact to cash flows related to
certain vendor programs that is required for US GAAP presentation for fiscal
year 2021. Refer to Item 7,
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Adjusted Free Cash Flow subsection) of our Annual Report on our
Form 10-K for the fiscal year ended March 31, 2021 for further discussion. Our
adjusted free cash flows for the six-month period ended October 1, 2021 and
September 25, 2020 is relatively consistent and remains an inflow of $0.3
billion . 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
October 1 ,
2021
(In millions)
Net cash used in operating activities $ 514 $ (365)
Reduction in ABS levels and other - 788
Purchases of property and equipment (210) (185)
Proceeds from the disposition of property and equipment 5 14
Adjusted free cash flow $ 309 $ 252
Cash used in financing activities was $0.5 billion during the six-month period
ended October 1, 2021 , which was primarily driven by $0.5 billion of cash paid
for the repurchase of our ordinary shares.
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
October 1, 2021 , and March 31, 2021 , approximately 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
$1.5 billion as of March 31, 2021 ). 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
$0.3 billion and $0.6 billion for the three and six-month periods ended
October 1, 2021 , respectively, and $0.2 billion and $0.5 billion for the three
and six-month periods ended September 25, 2020 , 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 October 1, 2021 .
Historically, we have funded operations from cash and cash equivalents generated
from operations, proceeds from public offerings of equity and debt securities,
bank debt and lease financings. We also have the ability to sell a designated
pool of trade
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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 $1 billion in
accordance with the share purchase mandate approved by our shareholders at the
date of the most recent Annual General Meeting which was held on August 4,
2021 . During the six-month period ended October 1, 2021 , we paid $0.5 billion to
repurchase shares under the current and prior repurchase plans at an average
price of $18.14 per share. As of October 1, 2021 , shares in the aggregate amount
of $0.7 billion 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, 2021 .
There were no material changes in our contractual obligations and commitments as
of October 1, 2021 .
OFF-BALANCE SHEET ARRANGEMENTS
As of October 1, 2021 , and March 31, 2021 , the outstanding balance on
receivables sold for cash was $0.3 billion and $0.2 billion , respectively, under
our accounts receivable factoring program, which were removed from accounts
receivable balances in our condensed consolidated balance sheets. There were no
outstanding balance of receivables sold under our ABS programs as of each of the
periods presented. For further information, see note 9 to the condensed
consolidated financial statements.
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