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 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 as well as the risks and uncertainties disclosed in our press release datedFebruary 2, 2022 regarding our recent sale of preferred units in ourNextracker business which press release was filed on Form 8-K, datedFebruary 2, 2022 . 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.
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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,
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 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 .
On February 1, 2022 , affiliates of ours entered into a purchase agreement (the
"Purchase Agreement") with TPG Rise Flash, L.P. , a Delaware limited partnership,
which is managed or advised by TPG Rise Climate, TPG, Inc.'s dedicated
renewables and climate investing fund ("TPG Rise"), for the sale of 500,000
Series A Preferred Units (the "Preferred Units") in Nextracker LLC for an
aggregate purchase price of $500 million (the "Preferred Sale"). TPG Rise's
investment in approximately 16.7% of Nextracker LLC reflects an implied value
for Nextracker LLC as of the date of the investment of $3.0 billion . See Note 16
to the condensed consolidated financial statements for further information.
This Quarterly Report on Form 10-Q for the third quarter ended December 31, 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.
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Business Overview
We are one of the world's largest providers of global supply chain solutions,
with revenues of $19.2 billion for the nine-month period ended December 31, 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 Nine-Month Periods Ended
December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
(In millions)
Net sales by region:
Americas $ 2,681 41 % $ 2,562 38 % $ 7,865 41 % $ 7,119 40 %
Asia 2,548 38 % 2,695 40 % 7,260 38 % 6,985 39 %
Europe 1,390 21 % 1,463 22 % 4,065 21 % 3,754 21 %
$ 6,619 $ 6,720 $ 19,190 $ 17,858
Net sales by country:
China $ 1,598 24 % $ 1,721 26 % $ 4,676 24 % $ 4,631 26 %
Mexico 1,250 19 % 1,177 18 % 3,710 19 % 3,237 18 %
U.S. 849 13 % 964 14 % 2,571 13 % 2,728 15 %
Brazil 568 9 % 405 6 % 1,533 8 % 1,116 6 %
Malaysia 527 8 % 459 7 % 1,350 7 % 1,191 7 %
Hungary 265 4 % 385 6 % 912 5 % 942 5 %
Other 1,562 23 % 1,609 23 % 4,438 24 % 4,013 23 %
$ 6,619 $ 6,720 $ 19,190 $ 17,858
As of As of
Property and equipment, net: December 31, 2021 March 31, 2021 (In millions) Mexico $ 593 28 % $ 553 26 % U.S. 361 17 % 361 17 % China 302 14 % 331 16 % India 136 6 % 166 8 % Hungary 114 5 % 105 5 % Malaysia 110 5 % 106 5 % Other 496 25 % 475 23 % $ 2,112$ 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;
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•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, 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 . 32
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Three-Month Periods Ended Nine-Month Periods Ended
December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 92.6 92.8 92.6 93.5
Gross profit 7.4 7.2 7.4 6.5
Selling, general and administrative expenses 3.4 3.3 3.3 3.5
Intangible amortization 0.3 0.2 0.2 0.3
Operating income 3.7 3.7 3.9 2.7
Interest and other, net 0.1 0.1 (0.5) 0.3
Income before income taxes 3.6 3.6 4.4 2.4
Provision for income taxes 0.2 0.4 0.4 0.5
Net income 3.4 % 3.2 % 4.0 % 1.9 %
Net sales
The following table sets forth our net sales by segment, and their relative
percentages:
Three-Month Periods Ended Nine-Month Periods Ended
December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
(In millions)
Net sales:
Flex Agility Solutions $ 3,581 54 % $ 3,834 57 % $ 10,450 54 % $ 10,063 56 %
Flex Reliability Solutions 3,038 46 % 2,886 43 % 8,740 46 % 7,795 44 %
$ 6,619 $ 6,720 $ 19,190 $ 17,858
Net sales during the three-month period ended December 31, 2021 totaled $6.6
billion , representing a decrease of approximately $0.1 billion , or 2% from $6.7
billion during the three-month period ended December 31, 2020 . Net sales for our
FAS segment decreased approximately $0.3 billion , or 7% from the three-month
period ended December 31, 2020 , primarily driven by a 23% year-over-year
decrease in our Consumer Devices, due to a planned project completion, and a
mid-single-digit decline in our CEC businesses due to impacts from COVID-19
outlined above and specifically related to scarcity of component and raw
materials and logistics constraints. This was partially offset by low-single
digit growth in our Lifestyle business. Net sales for our FRS segment increased
approximately $0.2 billion , or 5% from the three-month period ended December 31,
2020 , primarily driven by mid-teens year-over-year growth in our Industrial
business led by customer ramps and strong demand in key areas including electric
vehicles (EV) charging and renewables, semicap, and robotics. This growth was
tempered by a mid-single digit decline in our Automotive business due to impacts
from COVID-19 outlined above and specifically related to scarcity of component
constraints, and a low-single digit decline in Health Solutions due to a higher
comparable that benefited from strong COVID-19 related business. Net sales
decreased $0.1 billion , down to $2.5 billion in Asia , and $0.1 billion down to
$1.4 billion in Europe , offset by a $0.1 billion increase to $2.7 billion in the
Americas .
Net sales during the nine-month period ended December 31, 2021 totaled $19.2
billion , representing an increase of approximately $1.3 billion , or 7% from
$17.9 billion during the nine-month period ended December 31, 2020 . Net sales
for our FAS segment increased $0.4 billion , or 4% from the nine-month period
ended December 31, 2020 , primarily driven by an increase in our Lifestyle
business and to a lesser extent an increase in our Consumer Devices business.
These increases were driven by a lesser impact from COVID-19 production pressure
during the current year versus the prior 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. The increases noted in FAS during the nine-month period ended
December 31, 2021 were partially offset by a decrease in our CEC business
primarily due to component shortages. Net sales for our FRS segment increased
approximately $0.9 billion , or 12% from the nine-month period ended December 31,
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 sales 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 nine-month period ended
December 31, 2021 . Net sales increased across all regions with a $0.7 billion
increase to $7.9 billion in the Americas , a $0.3 billion increase to $7.3
billion in Asia , and a $0.3 billion increase to $4.1 billion in Europe .
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Our ten largest customers during the three and nine-month periods ended
December 31, 2021 accounted for approximately 35% of net sales. Our ten largest
customers, during the three and nine-month periods ended December 31, 2020 ,
accounted for approximately 36% and 37% of net sales, respectively. No customer
accounted for more than 10% of net sales during the three and nine-month periods
ended December 31, 2021 or December 31, 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 December 31, 2021 totaled $6.1
billion , representing a decrease of approximately $0.1 billion , or 1% from $6.2
billion during the three-month period ended December 31, 2020 . The lower cost of
sales for the three-month period ended December 31, 2021 was primarily driven by
decreased consolidated sales of $0.1 billion . Cost of sales in FAS for the
three-month period ended December 31, 2021 decreased approximately 7%, or $0.3
billion from the three-month period ended December 31, 2020 , which is aligned
with the overall 7% decrease in FAS revenue during the same period primarily as
a result of lower revenue in our Consumer Devices and CEC businesses. Cost of
sales in FRS for the three-month period ended December 31, 2021 increased 7%, or
$0.2 billion from the three-month period ended December 31, 2020 , which is
slightly higher than the overall 5% increase in FRS revenue during the same
period primarily due to continued increases in freight and logistics costs
impacting our Industrial business.
Cost of sales during the nine-month period ended December 31, 2021 totaled $17.8
billion , representing an increase of approximately $1.1 billion , or 6% from
$16.7 billion during the nine-month period ended December 31, 2020 . The increase
in cost of sales for the nine-month period ended December 31, 2021 was primarily
driven by the increased consolidated sales of $1.3 billion during the same
period.
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 December 31, 2021 remained
relatively flat at $0.5 billion , or 7.4% of net sales, and $0.5 billion , or 7.2%
of net sales, during the three-month period ended December 31, 2020 . Gross
margin improved 20 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 December 31, 2021 . The increase in gross margin
during the current period resulted primarily from the overall stronger cost
discipline focused on driving further productivity improvements, coupled with
continued improvement in the mix of our business, benefits from prior
restructuring activities and a lower direct and incremental impact from COVID-19
compared to the prior year period.
Gross profit during the nine-month period ended December 31, 2021 increased $0.2
billion to $1.4 billion , or 7.4% of net sales, from $1.2 billion , or 6.5% of net
sales, during the nine-month period ended December 31, 2020 . Gross margin
improved 90 basis points during the same period due to the same factors noted
above in the three-month periods discussion coupled with stronger demand in our
Automotive business.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating
contribution, or segment income. Segment income is defined as net sales less
cost of sales, and segment selling, general and administrative expenses, and
does not include intangible amortization, stock-based compensation,
restructuring charges, 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 Nine-Month Periods Ended
December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
(In millions)
Segment income:
Flex Agility Solutions $ 163 4.6 % $ 153 4.0 % $ 453 4.3 % $ 313 3.1 %
Flex Reliability Solutions 154 5.1 % 178 6.2 % 475 5.4 % 472 6.1 %
FAS segment margin increased 60 basis points, to 4.6% for the three-month period
ended December 31, 2021 , from 4.0% for the three-month period ended December 31,
2020 and 120 basis points, to 4.3% for the nine-month period ended December 31,
2021 , from 3.1% for the nine-month period ended December 31, 2020 . The margin
increase was driven by disciplined cost management and improved efficiencies as
noted above, partially offset by the elevated costs due to component shortages
and logistics constraints across all of our end markets.
FRS segment margin decreased 110 basis points, to 5.1% for the three-month
period ended December 31, 2021 , from 6.2% for the three-month period ended
December 31, 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 December 31, 2021 . FRS segment margin decreased 70
basis points, to 5.4% for the nine-month period ended December 31, 2021 , from
6.1% for the nine-month period ended December 31, 2020 . The decrease in FRS
segment margin during the nine-month period is primarily due to the continued
freight and logistics constraints impacting our Industrial business.
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 December 31, 2021 , increasing
$2 million from $0.2 billion , or 3.3% of net sales, during the three-month
period ended December 31, 2020 . SG&A was $0.6 billion , or 3.3% of net sales,
during the nine-month period ended December 31, 2021 , increasing $20 million
from $0.6 billion , or 3.5% of net sales, during the nine-month period ended
December 31, 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 December 31, 2021 , from $16 million for the three-month
period ended December 31, 2020 , and declined to $45 million during the
nine-month period ended December 31, 2021 , from $47 million for the nine-month
period ended December 31, 2020 , primarily due to certain intangibles now being
fully amortized offset by one month of amortization expense related to new
intangible assets from the Anord Mardix acquisition in December 2021 .
Interest and other, net
Interest and other, net remained relatively flat and was an expense of $8
million and $7 million during the three-month period ended December 31, 2021 and
the three-month period ended December 31, 2020 , respectively.
Interest and other, net was income of $103 million during the nine-month period
ended December 31, 2021 compared to an expense of $58 million during the
nine-month period ended December 31, 2020 , primarily driven by a $150 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 13 to the condensed consolidated financial statements for further
detail.
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, 2021 for further discussion.
The consolidated effective tax rate was 7% and 9% for the three and nine-month
periods ended December 31, 2021 , and 11% and 18% for the three and nine-month
periods ended December 31, 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
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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 nine-month periods ended
December 31, 2021 is lower than the effective tax rate for the three-month and
nine-month periods ended December 31, 2020 , primarily due to a $16.8 million
release of a previously established valuation allowance on deferred tax assets
because of the recognition of $16.8 million in net deferred tax liability
recorded in connection with the Anord Mardix acquisition.
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 December 31, 2021 , we had cash and
cash equivalents of approximately $2.6 billion and bank and other borrowings of
approximately $4.4 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 December 31, 2021 . During the three-month
period ended December 31, 2021 , we also issued HUF 100 billion of 3.6% bonds due
December 2031 (approximately $306 million , as of December 31, 2021 ) and borrowed
€350 million under a one-year term loan (approximately $397 million as of
December 31, 2021 ) at an interest rate of (0.18)% per annum. The proceeds of the
new debt will be used to refinance certain other outstanding debt and for other
general corporate purposes. Refer to note 6 to the condensed consolidated
financial statement for details. As of December 31, 2021 , we were in compliance
with the covenants under all of our credit facilities and indentures.
Cash provided by operating activities was $0.7 billion during the nine-month
period ended December 31, 2021 , primarily driven by $0.8 billion of net income
for the period plus $0.4 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 $1.0 billion to $3.9 billion as of
December 31, 2021 , from $2.9 billion as of March 31, 2021 . This increase is
primarily driven by a $2.0 billion increase in inventories due to component
shortages, clear-to build constraints and logistics challenges driving up buffer
stock and inventory pricing, partially offset by a $0.6 billion decrease in net
receivables and a $0.7 billion increase in accounts payable. Our current quarter
net working capital as a percentage of annualized net sales for the quarter
ended December 31, 2021 , increased to 14.5% 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. In addition, to the extent possible, we
have collaborated with our customers for working capital advances to offset the
required investment in inventory. Advances from customers as of December 31,
2021 increased $0.5 billion from $0.5 billion as of March 31, 2021 .
Cash used in investing activities was $0.8 billion during the nine-month period
ended December 31, 2021 . This was primarily driven by $0.5 billion of cash paid
for the acquisition of Anord Mardix in December 2021 , net of cash acquired, and
$0.3 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, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (Adjusted Free Cash Flow
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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
nine-month period ended December 31, 2021 and December 31, 2020 was an inflow of
$0.3 billion and $0.5 billion , respectively. Adjusted free cash flow is not a
measure of liquidity under U.S. GAAP, and may not be defined and calculated by
other companies in the same manner. Adjusted free cash flow should not be
considered in isolation or as an alternative to net cash provided by operating
activities. Adjusted free cash flows reconcile to the most directly comparable
GAAP financial measure of cash flows from operations as follows:
Nine-Month Periods Ended
December 31 ,
2021
(In millions)
Net cash provided by (used in) operating activities $ 664 $ (17)
Reduction in ABS levels and other - 795
Purchases of property and equipment (333) (261)
Proceeds from the disposition of property and equipment 9 25
Adjusted free cash flow $ 340 $ 542
Cash provided by financing activities was $0.1 billion during the nine-month
period ended December 31, 2021 , which was primarily driven by additional debt
and bank borrowings of $0.7 billion (as discussed above and in note 6 to the
condensed consolidated financial statements), offset by $0.6 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
December 31, 2021 , and March 31, 2021 , less than 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
$0.4 billion and $0.9 billion for the three and nine-month periods ended
December 31, 2021 , respectively, and $0.3 billion and $0.7 billion for the three
and nine-month periods ended December 31, 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 a commercial paper program, and a revolving sale
and repurchase of subordinated notes established under the securitization
facility, under which there were no borrowings outstanding as of December 31,
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 nine-month period ended December 31, 2021 , we paid $0.6 billion
to repurchase shares under the current and prior repurchase plans at an average
price of $18.14 per share. As of December 31, 2021 , shares in the aggregate
amount of $0.6 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 .
During fiscal year 2022, we issued 3.6% HUF 100 billion bonds (approximately
$306.3 million as of December 31, 2021 ) due December 2031 , which was then
swapped to U.S. dollars and we borrowed €350 million term loan (approximately
$397 million as of December 31, 2021 ) due December 2022 with a (0.18)% interest
rate.
Other than the changes discussed above, there were no material changes in our
contractual obligations and commitments as of December 31, 2021 .
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2021 , and March 31, 2021 , the outstanding balance on
receivables sold for cash was $0.4 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 10 to the condensed
consolidated financial statements.
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