8. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
The Company enters into forward contractsshort-term and long-term foreign currency derivative contracts, including forward, swap, and options contracts, primarily to manage the foreignhedge only those currency riskexposures associated with monetarycertain assets and liabilities, primarily accounts receivable, accounts payable, debt, and anticipated foreign currencycash flows denominated transactions.in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and, accordingly, fair value adjustments related to the credit risk of the counterparty financial institutions were not material.
As of December 31, 2017,September 30, 2022, the aggregate notional amount of the Company’s outstanding foreign currency derivative contracts was $8.2$12.8 billion as summarized below:
| | | Foreign Currency Amount | | Notional Contract Value in USD | | | Foreign Currency Amount | | Notional Contract Value in USD |
Currency | Buy | | Sell | | Buy |
| Sell | Currency | | Buy | | Sell | | Buy | | Sell |
| (In thousands) | | | (In millions) |
Cash Flow Hedges | |
| | |
| | | | |
| Cash Flow Hedges | | | | | | |
| CNY | 1,724,000 |
| | — |
| | $ | 262,937 |
| | $ | — |
| CNY | | 2,414 | | | — | | | $ | 333 | | | $ | — | |
EUR | 53,756 |
| | 109,351 |
| | 63,973 |
| | 128,767 |
| |
| HUF | 19,654,800 |
| | — |
| | 75,314 |
| | — |
| HUF | | 135,400 | | | — | | | 394 | | | — | |
ILS | 73,700 |
| | — |
| | 21,233 |
| | — |
| |
INR | 1,392,540 |
| | — |
| | 21,200 |
| | — |
| |
| JPY | | JPY | | 33,525 | | | — | | | 300 | | | — | |
MXN | 3,072,680 |
| | — |
| | 154,955 |
| | — |
| MXN | | 6,949 | | | — | | | 342 | | | — | |
MYR | 173,000 |
| | 39,500 |
| | 42,318 |
| | 9,662 |
| MYR | | 450 | | | 146 | | | 98 | | | 32 | |
PLN | 87,890 |
| | — |
| | 24,963 |
| | — |
| |
RON | 117,780 |
| | — |
| | 30,124 |
| | — |
| |
SGD | 29,900 |
| | — |
| | 22,335 |
| | — |
| |
| Other | N/A |
| | N/A |
| | 12,567 |
| | 5,017 |
| Other | | N/A | | N/A | | 223 | | | 76 | |
| |
| | |
| | 731,919 |
| | 143,446 |
| | | | | | | 1,690 | | | 108 | |
Other Foreign Currency Contracts |
|
| |
|
| |
|
| |
|
| Other Foreign Currency Contracts | |
BRL | — |
| | 871,000 |
| | — |
| | 263,229 |
| BRL | | 77 | | | 903 | | | 14 | | | 168 | |
CAD | 267,328 |
| | 289,019 |
| | 211,126 |
| | 228,257 |
| CAD | | 138 | | | 80 | | | 101 | | | 58 | |
CHF | 16,327 |
| | 28,889 |
| | 16,527 |
| | 29,245 |
| |
| CNY | 2,832,338 |
| | — |
| | 427,268 |
| | — |
| CNY | | 10,181 | | | 5,876 | | | 1,455 | | | 855 | |
EUR | 1,958,706 |
| | 2,306,257 |
| | 2,329,926 |
| | 2,744,141 |
| EUR | | 2,985 | | | 2,790 | | | 2,919 | | | 2,710 | |
GBP | 35,355 |
| | 63,776 |
| | 47,390 |
| | 85,505 |
| GBP | | 187 | | | 221 | | | 203 | | | 239 | |
HUF | 18,783,285 |
| | 22,480,502 |
| | 71,975 |
| | 86,142 |
| HUF | | 89,596 | | | 81,561 | | | 208 | | | 189 | |
ILS | | ILS | | 430 | | | 119 | | | 122 | | | 34 | |
INR | 6,222,378 |
| | 1,252,331 |
| | 96,829 |
| | 19,200 |
| INR | | 17,141 | | | — | | | 208 | | | — | |
| MXN | 2,254,587 |
| | 1,374,623 |
| | 113,699 |
| | 69,322 |
| MXN | | 8,927 | | | 6,707 | | | 439 | | | 330 | |
MYR | 456,260 |
| | 247,030 |
| | 111,607 |
| | 60,427 |
| MYR | | 1,302 | | | 339 | | | 283 | | | 74 | |
RON | 88,521 |
| | 81,054 |
| | 22,641 |
| | 20,731 |
| |
| SGD | 78,855 |
| | 48,690 |
| | 58,904 |
| | 36,371 |
| SGD | | 102 | | | 55 | | | 71 | | | 38 | |
Other | N/A |
| | N/A |
| | 114,386 |
| | 81,631 |
| Other | | N/A | | N/A | | 160 | | | 153 | |
| |
| | |
| | 3,622,278 |
| | 3,724,201 |
| | | | | | | 6,183 | | | 4,848 | |
|
|
| |
|
| |
|
| |
|
| |
Total Notional Contract Value in USD | |
| | |
| | $ | 4,354,197 |
| | $ | 3,867,647 |
| Total Notional Contract Value in USD | | | | | | $ | 7,873 | | | $ | 4,956 | |
As of December 31, 2017,September 30, 2022, 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 December 31, 2017September 30, 2022 and March 31, 2017,2022, 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. These deferred losses were $7.2Deferred loss was $53 million as of December 31, 2017,September 30, 2022, and areis 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. period, except for the USD JPY cross currency swap and the USD HUF cross currency swaps, which are further discussed below.
The gains and losses recognizedCompany entered into a USD JPY cross currency swap in earnings dueApril 2019 to hedge ineffectiveness were not material for all fiscal periods presentedthe foreign currency risk on the JPY term loan due April 2024, and the fair value of the cross currency swap was included in current and long-term other liabilities as of September 30, 2022. Additionally, the Company entered into USD HUF cross currency swaps in December 2021 to hedge the foreign currency risk on the HUF bonds due December 2031, and the fair value of the cross currency swaps was included in current and long-term other liabilities as of September 30, 2022. The changes in fair value of both the USD JPY cross currency swap and the USD HUF cross currency swaps are included as a componentreported in accumulated other comprehensive loss. In addition, corresponding amounts are reclassified out of accumulated other comprehensive loss to interest and other, net into offset the condensed consolidated statementsremeasurement of operations.
the underlying JPY loan principal and HUF bond principal, which also impact 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 | | Fair Values of Derivative Instruments |
| Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
| | | Fair Value | | | | Fair Value | | | | Fair Value | | | | Fair Value |
| Balance Sheet Location | | December 31, 2017 | | March 31, 2017 | | Balance Sheet Location | | December 31, 2017 | | March 31, 2017 | | Balance Sheet Location | | September 30, 2022 | | March 31, 2022 | | Balance Sheet Location | | September 30, 2022 | | March 31, 2022 |
| (In thousands) | | (In millions) |
Derivatives designated as hedging instruments | | | |
| | |
| | | | |
| | |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
Foreign currency contracts | Other current assets | | $ | 6,627 |
| | $ | 11,936 |
| | Other current liabilities | | $ | 15,057 |
| | $ | 1,814 |
| Foreign currency contracts | Other current assets | | $ | 15 | | | $ | 22 | | | Other current liabilities | | $ | 72 | | | $ | 35 | |
Foreign currency contracts | | Foreign currency contracts | Other assets | | $ | — | | | $ | — | | | Other liabilities | | $ | 152 | | | $ | 61 | |
| | | | | | | | | |
Derivatives not designated as hedging instruments | | | |
| | |
| | | | |
| | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
Foreign currency contracts | Other current assets | | $ | 14,376 |
| | $ | 10,086 |
| | Other current liabilities | | $ | 10,273 |
| | $ | 9,928 |
| Foreign currency contracts | Other current assets | | $ | 96 | | | $ | 21 | | | Other current liabilities | | $ | 171 | | | $ | 26 | |
The Company has financial instruments subject to master netting arrangements, which providesprovide 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 30, 2022 | | October 1, 2021 |
| 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 | $ | (67) | | | $ | (187) | | | $ | (254) | | | $ | (39) | | | $ | (72) | | | $ | (111) | |
Other comprehensive loss before reclassifications | (70) | | | (92) | | | (162) | | | (5) | | | (16) | | | (21) | |
Net (gains) losses reclassified from accumulated other comprehensive loss | 64 | | | — | | | 64 | | | (5) | | | — | | | (5) | |
Net current-period other comprehensive loss | (6) | | | (92) | | | (98) | | | (10) | | | (16) | | | (26) | |
Ending balance | $ | (73) | | | $ | (279) | | | $ | (352) | | | $ | (49) | | | $ | (88) | | | $ | (137) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 |
| 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 thousands) |
Beginning balance | $ | (48,470 | ) | | $ | (75,403 | ) | | $ | (123,873 | ) | | $ | (42,233 | ) | | $ | (80,319 | ) | | $ | (122,552 | ) |
Other comprehensive gain (loss) before reclassifications | (4,643 | ) | | 7,248 |
| | 2,605 |
| | (1,354 | ) | | (33,770 | ) | | (35,124 | ) |
Net (gains) losses reclassified from accumulated other comprehensive loss | (74 | ) | | 244 |
| | 170 |
| | 1,153 |
| | (2,642 | ) | | (1,489 | ) |
Net current-period other comprehensive gain (loss) | (4,717 | ) | | 7,492 |
| | 2,775 |
| | (201 | ) | | (36,412 | ) | | (36,613 | ) |
Ending balance | $ | (53,187 | ) | | $ | (67,911 | ) | | $ | (121,098 | ) | | $ | (42,434 | ) | | $ | (116,731 | ) | | $ | (159,165 | ) |
| | | Nine-Month Periods Ended | | Six-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 | | September 30, 2022 | | October 1, 2021 |
| Unrealized loss on derivative instruments and other | | Foreign currency translation adjustments | | Total | | Unrealized loss on derivative instruments and other | | Foreign currency translation adjustments | | Total | | 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 thousands) | | (In millions) |
Beginning balance | $ | (32,426 | ) | | $ | (95,717 | ) | | $ | (128,143 | ) | | $ | (41,522 | ) | | $ | (94,393 | ) | | $ | (135,915 | ) | Beginning balance | $ | (66) | | | $ | (116) | | | $ | (182) | | | $ | (42) | | | $ | (77) | | | $ | (119) | |
Other comprehensive gain (loss) before reclassifications | (5,488 | ) | | 27,562 |
| | 22,074 |
| | (1,031 | ) | | (19,471 | ) | | (20,502 | ) | Other comprehensive gain (loss) before reclassifications | (149) | | | (163) | | | (312) | | | 7 | | | (10) | | | (3) | |
Net (gains) losses reclassified from accumulated other comprehensive loss | (15,273 | ) | | 244 |
| | (15,029 | ) | | 119 |
| | (2,867 | ) | | (2,748 | ) | Net (gains) losses reclassified from accumulated other comprehensive loss | 142 | | | — | | | 142 | | | (14) | | | (1) | | | (15) | |
Net current-period other comprehensive gain (loss) | (20,761 | ) | | 27,806 |
| | 7,045 |
| | (912 | ) | | (22,338 | ) | | (23,250 | ) | |
Net current-period other comprehensive loss | | Net current-period other comprehensive loss | (7) | | | (163) | | | (170) | | | (7) | | | (11) | | | (18) | |
Ending balance | $ | (53,187 | ) | | $ | (67,911 | ) | | $ | (121,098 | ) | | $ | (42,434 | ) | | $ | (116,731 | ) | | $ | (159,165 | ) | Ending balance | $ | (73) | | | $ | (279) | | | $ | (352) | | | $ | (49) | | | $ | (88) | | | $ | (137) | |
Substantially all unrealized gainslosses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-monththree and nine-monthsix-month periods ended December 31, 2017September 30, 2022 were recognized as a componentreclassified out of accumulated other comprehensive loss to interest and other, net and cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges.
10. TRADE RECEIVABLES SECURITIZATION
The Company sells trade receivables under two asset-backed securitization programs and under an accounts receivable factoring program.
Asset-Backed Securitization Programs
The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreementasset-backed securitization programs (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” collectively, the “ABS Programs”) to affiliated special purpose entities, each of which may in turn sells 100%sell a fraction of the receivables to unaffiliated financial institutions. Theseinstitutions, based on the Company's requirements. Under these programs, allow the operating subsidiaries to receive a cash payment and a deferredentire purchase price receivable forof sold receivables. Following the transferreceivables is paid in cash. The ABS Programs contain guarantees of the receivables topayment by the special purpose entities, in amounts equal to approximately the transferrednet cash proceeds under the programs, and are collateralized by certain receivables are isolated from the Company and its affiliates, and upon the sale of the receivables fromheld by the special purpose entities to the unaffiliated financial institutions, effective control of the transferred receivables is passed to the unaffiliated financial institutions, which has the right to pledge or sell the receivables. Although the special purpose entities are consolidated by the Company, they are separate corporate entities and their assets are available first to satisfy the claims of their creditors.entities. The investment limits set by the financial institutions are $950.0 million for the Global Program, of which $775.0 million is committed and $175.0 million is uncommitted, and $250.0 million for the North American Program, of which $210.0 million is committed and $40.0 million is uncommitted. Both programs require a minimum level of deferred purchase price receivable to be retained by the Company in connection with the sales.
The Company services, administers and collects the receivables on behalf of the special purpose entities and receives a servicing fee of 0.1% to 0.5% of serviced receivables per annum. Servicing fees recognized during the three-month and nine-month periods ended December 31, 2017 and December 31, 2016 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 and liabilities are recognized.
As of December 31, 2017, approximately $1.5 billion of accounts receivable had been sold to the special purpose entities under the ABS Programs for which the Company had received net cash proceeds of approximately $1.1 billion and deferred purchase price receivables of approximately $420.6 million. As of March 31, 2017, approximately $1.5 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $1.0 billion and deferred purchase price receivables of approximately $506.5 million. The portion of the purchase price for the receivables which is not paid by the unaffiliated financial institutions in cash is a deferred purchase price receivable, which is paid to the
special purpose entity as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in other current assets as of December 31, 2017 and March 31, 2017, and were carried at the expected recovery amount of the related receivables. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the deferred purchase price receivables received at time of transfer is recognized as a loss on sale of the related receivables and recorded in interest and other, net in the condensed consolidated statements of operations and were immaterial for all periods presented.
The Company's deferred purchase price receivables relating to its asset-backed securitization program are recorded initially at fair value based on a discounted cash flow analysis using unobservable inputs (i.e., level 3 inputs), which are primarily risk free interest rates adjusted for the credit quality of the underlying creditor. Due to its high credit quality and short term maturity, the fair value approximates carrying value. Significant increases in either of the major unobservable inputs (credit spread, risk free interest rate) in isolation would result in lower fair value estimates, however the impact is not material. The interrelationship between these inputs is also insignificant.
As of December 31, 2017 and March 31, 2017, the accounts receivable balances that were sold under the ABS Programs wereare removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company wereare included as cash provided by operating activities in the condensed consolidated statements of cash flows.
ForDuring the nine-monthsix-month periods ended December 31, 2017September 30, 2022 and December 31, 2016, cash flows from sales of receivablesOctober 1, 2021, no accounts receivable were sold under the ABS Programs consisted of approximately $4.6 billion and $4.2 billion, for transfers of receivables, respectively (of which approximately $290.4 million and $315.1 million, respectively, represented new transfers and the remainder proceeds from collections reinvested in revolving-period transfers).
Programs.
Trade Accounts Receivable Sale Programs
The Company also soldsells 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 $233.3 million$0.8 billion and $225.2 million$0.6 billion as of December 31, 2017September 30, 2022 and March 31, 2017,2022, respectively. For the nine-monthsix-month periods ended December 31, 2017September 30, 2022 and December 31, 2016,October 1, 2021, total accounts receivable sold to certain third partythird-party banking institutions was approximately $1.0$1.7 billion and $0.6 billion, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflectedwas included as cash provided by operating activities in the condensed consolidated statements of cash flows.
11. FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value establishes a fair value hierarchy based on the level of independent, objective evidence
surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 - Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. There were no balances classified as level 1 in the fair value hierarchy as of September 30, 2022 and March 31, 2022.
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 for the most part included in other noncurrent assets on the condensed consolidated balance sheets and primarily include investments in equity securities that are valued using active market prices.
Level 2 - Applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets) such as cash and cash equivalents and money market funds; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
The Company’s cash equivalents are comprised of bank 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’sCompany 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 alsoare included in other noncurrent assets on the consolidated balance sheets and include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy.
Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company has accrued for contingent consideration in connection with its business acquisitions as applicable, which is measured at fair value based on certain internal models and unobservable inputs.
The significant inputs in the fair value measurement not supported by market activity included the Company's probability assessments of expected future revenue during the earn-out period and associated volatility, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the merger agreement. Significant decreases in expected revenue during the earn-out period, or significant increases in the discount rate or volatility in isolation would result in lower fair value estimates. The interrelationship between these inputs is not considered significant.
The following table summarizes the activities related to There were no contingent consideration payable for historic acquisitions:
|
| | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Nine-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
| (In thousands) |
Beginning balance | $ | 17,342 |
| | $ | 75,614 |
| | $ | 22,426 |
| | $ | 73,423 |
|
Payments | (17,109 | ) | | (40,555 | ) | | (17,109 | ) | | (42,776 | ) |
Fair value adjustments | 767 |
| | (6,997 | ) | | (4,317 | ) | | (2,585 | ) |
Ending balance | $ | 1,000 |
| | $ | 28,062 |
| | $ | 1,000 |
| | $ | 28,062 |
|
In connection with the acquisitionliabilities outstanding as of NEXTracker, Inc. in fiscal year 2016, the Company had an obligation to pay additional cash consideration to the former shareholders contingent upon NEXTracker, Inc.'s achievement of revenue targets during the two years after acquisition (ending on September 30, 2017). During the nine-month period ended December2022 and March 31, 2017, the Company paid $17.1 million of the total contingent consideration following the second year's targets achievement in accordance with the terms of the merger agreement. The payment of the contingent consideration is included in other financing activities, net, in the condensed consolidated statements of cash flows.
2022.
There were no transfers between levels in the fair value hierarchy during the nine-monthsix-month periods ended December 31, 2017September 30, 2022 and December 31, 2016.October 1, 2021.
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:basis as of September 30, 2022 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Assets: | | | | | | | |
Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | — | | | $ | 1,509 | | | $ | — | | | $ | 1,509 | |
| | | | | | | |
Foreign currency contracts (Note 8) | — | | | 111 | | | — | | | 111 | |
| | | | | | | |
Deferred compensation plan assets: | | | | | | | 0 |
Mutual funds, money market accounts and equity securities | — | | | 36 | | | — | | | 36 | |
Liabilities: | | | | | | | |
Foreign currency contracts (Note 8) | $ | — | | | $ | (395) | | | $ | — | | | $ | (395) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Fair Value Measurements as of March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Assets: | | | | | | | |
Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | — | | | $ | 2,285 | | | $ | — | | | $ | 2,285 | |
| | | | | | | |
Foreign currency contracts (Note 8) | — | | | 43 | | | — | | | 43 | |
Deferred compensation plan assets: | | | | | | | 0 |
Mutual funds, money market accounts and equity securities | — | | | 39 | | | — | | | 39 | |
Liabilities: | | | | | | | 0 |
Foreign currency contracts (Note 8) | $ | — | | | $ | (122) | | | $ | — | | | $ | (122) | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Assets: | |
| | |
| | |
| | |
|
Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | — |
| | $ | 424,744 |
| | $ | — |
| | $ | 424,744 |
|
Foreign exchange contracts (Note 8) | — |
| | 21,003 |
| | — |
| | 21,003 |
|
Deferred compensation plan assets: | |
| | |
| | |
| | 0 |
|
Mutual funds, money market accounts and equity securities | 7,212 |
| | 67,503 |
| | — |
| | 74,715 |
|
Liabilities: | |
| | |
| | |
| | 0 |
|
Foreign exchange contracts (Note 8) | $ | — |
| | $ | (25,330 | ) | | $ | — |
| | $ | (25,330 | ) |
Contingent consideration in connection with business acquisitions | — |
| | — |
| | (1,000 | ) | | (1,000 | ) |
| | | | | | | |
| Fair Value Measurements as of March 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Assets: | |
| | |
| | |
| | |
|
Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet) | $ | — |
| | $ | 1,066,841 |
| | $ | — |
| | $ | 1,066,841 |
|
Foreign exchange contracts (Note 8) | — |
| | 22,022 |
| | — |
| | 22,022 |
|
Deferred compensation plan assets: | |
| | |
| | |
| | 0 |
|
Mutual funds, money market accounts and equity securities | 7,062 |
| | 52,680 |
| | — |
| | 59,742 |
|
Liabilities: | |
| | |
| | |
| | 0 |
|
Foreign exchange contracts (Note 8) | $ | — |
| | $ | (11,742 | ) | | $ | — |
| | $ | (11,742 | ) |
Contingent consideration in connection with business acquisitions | — |
| | — |
| | (22,426 | ) | | (22,426 | ) |
Other financial instruments
The following table presents the Company’s major debts not carried at fair value:
|
| | | | | | | | | | | | | | | | | |
| As of December 31, 2017 |
| As of March 31, 2017 |
|
|
| Carrying Amount |
| Fair Value |
| Carrying Amount |
| Fair Value |
| Fair Value Hierarchy |
| (In thousands) |
4.625% Notes due February 2020 | $ | 500,000 |
|
| $ | 516,925 |
|
| $ | 500,000 |
| | $ | 526,255 |
|
| Level 1 |
Term Loan, including current portion, due in installments through November 2021 | 691,875 |
|
| 693,605 |
|
| 700,000 |
| | 699,566 |
|
| Level 1 |
Term Loan, including current portion, due in installments through June 2022 (1) | 489,938 |
| | 491,163 |
| | 502,500 |
| | 503,756 |
| | Level 1 |
5.000% Notes due February 2023 | 500,000 |
|
| 536,515 |
|
| 500,000 |
| | 534,820 |
|
| Level 1 |
4.750% Notes due June 2025 | 596,282 |
|
| 643,440 |
|
| 595,979 |
| | 633,114 |
|
| Level 1 |
Euro Term Loan due September 2020 | 58,021 |
| | 58,021 |
| | 53,075 |
| | 53,075 |
| | Level 1 |
Euro Term Loan due January 2022 | 119,786 |
| | 119,786 |
| | 107,357 |
| | 107,357 |
| | Level 1 |
Total | $ | 2,955,902 |
|
| $ | 3,059,455 |
|
| $ | 2,958,911 |
|
| $ | 3,057,943 |
|
| |
(1) On June 30, 2017, the Company entered into a new agreement that effectively extended the maturity date of the loan from March 31, 2019 to June 30, 2022. Refer to note 6 for further details of the arrangement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 | | As of March 31, 2022 | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Fair Value Hierarchy |
| (In millions) | | |
5.000% Notes due February 2023 | $ | 500 | | | $ | 501 | | | $ | 500 | | | $ | 511 | | | Level 1 |
Term Loan due April 2024 - three-month TIBOR plus 0.446% | 232 | | | 232 | | | 273 | | | 273 | | | Level 2 |
4.750% Notes due June 2025 | 598 | | | 588 | | | 598 | | | 615 | | | Level 1 |
3.750% Notes due February 2026 | 688 | | | 643 | | | 690 | | | 690 | | | Level 1 |
4.875% Notes due June 2029 | 659 | | | 602 | | | 659 | | | 687 | | | Level 1 |
4.875% Notes due May 2030 | 688 | | | 630 | | | 690 | | | 713 | | | Level 1 |
Euro Term Loans | 337 | | | 337 | | | 389 | | | 389 | | | Level 2 |
3.600% HUF Bonds due December 2031 | 232 | | | 232 | | | 301 | | | 301 | | | Level 2 |
India Facilities | 79 | | | 79 | | | 84 | | | 84 | | | Level 2 |
The Company values its Euro Term Loans due September 2020 and January 2022 based on the current market rate, and as of December 31, 2017, the carrying amounts approximate fair values.
The Term Loans due November 2021 and June 2022, and the Notes due February 2020,2023, June 2025, February 20232026, June 2029 and June 2025May 2030 are valued based on broker trading prices in active markets.
12. BUSINESS AND ASSET ACQUISITIONS & DIVESTITURES
Business and asset acquisitions
During the nine-month period ended December 31, 2017, the Company completed two acquisitions that were not individually, nor in the aggregate, significant to the consolidated financial position, results of operation and cash flows of the Company.
In April 2017, the Company completed its acquisition of AGM, which expanded its capabilities in the automotive market, and is included within the HRS segment. The Company paid $213.7 million, net of cash acquired.
Additionally, in September 2017,values its Term Loan due April 2024, India Facilities, Euro Term Loans, and HUF Bonds based on the Company acquired a certain power modules business from Ericsson,current market rate, and expanded its capabilities within the CEC segment. The Company paid $56.0 million, net of cash acquired.
A summary of the allocation of the total purchase consideration is presented as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Purchase Consideration | | Net Tangible Assets Acquired | | Purchased Intangible Assets | | Goodwill |
AGM | $ | 213,718 |
| | $ | 56,438 |
| | $ | 82,000 |
| | $ | 75,280 |
|
Power Modules Business | 56,006 |
| | 12,332 |
| | 34,500 |
| | 9,174 |
|
The Company is in the process of finalizing its valuation of the fair value of the assets and liabilities acquired. Additional information, which existed as of September 30, 2022, the acquisition date, may become known to the Company during the remaindercarrying amounts approximate fair values.
The results of operations of the acquisitions were included in the Company’s condensed consolidated financial results beginning on the date of acquisition, and the total amount of net income and revenue, collectively, were immaterial to the Company's condensed consolidated financial results for the three-month and nine-month periods ended December 31, 2017. Pro-forma results of operations have not been presented because the effects were not material to the Company’s condensed consolidated financial results for all periods presented.
13.12. 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 Company does not believe that the amounts accrued are material. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, except as discussed below, due to various reasons, including, among others, that: (i) the proceedings are in early stages or no claims hashave 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.
On April 21, 2016, SunEdison, Inc. (together with certainIn 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 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 loss. No preferencebusiness as it currently conducts it, from time to time third-parties do assert patent infringement claims have been asserted against the Company or its customers. If and consideration has been givenwhen 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 related contingencies basedCompany on commercially acceptable terms, if at all, and any such litigation might not be resolved in the facts currently known.Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. The Company hasalso could be required to incur substantial costs to redesign a numberproduct or re-perform design services.
From time to time, the Company enters into intellectual property 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 affirmativethird-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 direct defensesvaried 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 potentialroyalty amounts owed are audited by licensors and may be challenged. Some of these disagreements may lead to claims for recovery and intends to vigorously defend any such claim, if asserted.
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.
One of the Company's Brazilian subsidiaries has received related assessments for certain sales and import taxes. There arewere originally six tax assessments totaling 291the updated amount of 374 million Brazilian reals (approximately USD $88$70 million based on the exchange rate as of December 31, 2017)September 30, 2022). The Company successfully defeated one of the six assessments are in various stagesSeptember 2019 (totaling approximately 61 million Brazilian reals or USD $11 million). The Company successfully defeated another three of the assessments in September 2022 (totaling approximately 229 million Brazilian reals or USD $43 million), each of which remains subject to appeal. The Company was unsuccessful at the administrative level for one of the assessments and filed an annulment action in federal court in Brasilia, Brazil on March 23, 2020; the updated value of that assessment is 34 million Brazilian reals (approximately USD $6 million). One of the assessments remains in the review process at the administrative level. The Company believes there is no legal basis for any of these assessments and that it has meritorious defenses and plans todefenses. 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 severalin the next four 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. On June 11, 2021, the Company notified OFAC that it had identified possible additional relevant transactions at one non-U.S. Flex-affiliated operation. The Company submitted an update to OFAC on November 16, 2021 reporting on the results of its review of those transactions. The Company intends to continue to cooperate fully with OFAC in this matter going forward. Nonetheless, it is reasonably possible that the Company could be subject to penalties that could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
A foreign Tax Authority (“Tax Authority”) has assessed a cumulative total of approximately $167 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.
As the final resolution of the above outstanding tax item remains uncertain, the Company continues to provide for the uncertain tax positions based on the more likely than not standard. While the resolution of the issues may result in tax liabilities, interest and penalties, which may be significantly higher than the amounts accrued for these matters, management currently believes that the resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
In addition to the matters discussed above, from time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in the Company’s consolidated balance sheets, would not be material to the financial statements as a whole.
14.13. SHARE REPURCHASES
During the three-monththree and nine-monthsix-month periods ended December 31, 2017,September 30, 2022, the Company repurchased 2.04.4 million and 15.7 million shares at an aggregate purchase price of $35.0$72 million and 10.8 million shares at an aggregate purchase price of $180.0$253 million, respectively, and retired all of these shares.
Under the Company’s current share repurchase program, the Board of Directors authorized repurchases of its outstanding ordinary shares for up to $500 million$1.0 billion in accordance with the share repurchase mandate approved by the Company’s shareholders at the date of the most recent Annual General Meeting held on August 15, 2017.25, 2022. As of December 31, 2017,September 30, 2022, shares in the aggregate amount of $410.1$977 million were available to be repurchased under the current plan.
15.14. SEGMENT REPORTING
The Company has fourreports its financial performance based on three operating and reportable segments: HRS, CTG, IEI,segments, Flex Agility Solutions, Flex Reliability Solutions and CEC. TheseNextracker, and analyzes operating income as the measure of segment profitability. The determination of these segments are determinedis based on several factors, including the nature of products and services, the nature of production processes, customer base, delivery channels and similar economic characteristics. Refer to note 1 for a description of the various product categories manufactured under each of these segments.
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include intangible amortization, of intangibles, stock-based compensation, restructuring charges, and legal and other. A portion of depreciation is allocated to the respective segments, together with other charges (income), netgeneral corporate research and interestdevelopment and other, net.administrative expenses.
Selected financial information by segment is in the table below (amounts may not sum due to rounding). Historical information for the first and second quarters of the fiscal year ended March 31, 2022 have been recast to reflect the new operating and reportable segments in the table below and in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 30, 2022 | | October 1, 2021 | | September 30, 2022 | | October 1, 2021 |
| (In millions) |
Net sales: | | | | | | | |
Flex Agility Solutions | $ | 4,004 | | | $ | 3,437 | | | $ | 7,995 | | | $ | 6,869 | |
Flex Reliability Solutions | 3,299 | | | 2,465 | | | 6,268 | | | 5,047 | |
Nextracker | 473 | | | 339 | | | 868 | | | 680 | |
Intersegment eliminations | (10) | | | (12) | | | (18) | | | (25) | |
| $ | 7,766 | | | $ | 6,229 | | | $ | 15,113 | | | $ | 12,571 | |
Segment income and reconciliation of operating income: | | | | | | | |
Flex Agility Solutions | $ | 170 | | | $ | 153 | | | $ | 342 | | | $ | 290 | |
Flex Reliability Solutions | 175 | | | 126 | | | 322 | | | 271 | |
Nextracker | 43 | | | 25 | | | 73 | | | 50 | |
Corporate and Other | (13) | | | (18) | | | (31) | | | (35) | |
Total segment income | 375 | | | 286 | | | 706 | | | 576 | |
Reconciling items: | | | | | | | |
Intangible amortization | 21 | | | 15 | | | 43 | | | 30 | |
Stock-based compensation | 27 | | | 24 | | | 53 | | | 44 | |
| | | | | | | |
Restructuring charges | — | | | 9 | | | — | | | 9 | |
| | | | | | | |
Legal and other (1) | 2 | | | 1 | | | 12 | | | — | |
| | | | | | | |
Operating income | $ | 325 | | | $ | 237 | | | $ | 597 | | | $ | 493 | |
(1)Legal and other consists of costs not directly related to core business results and may include matters relating to commercial disputes, government regulatory and compliance, intellectual property, antitrust, tax, employment or shareholder issues, product liability claims and other issues on a global basis as follows:
|
| | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Nine-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
| (In thousands) |
Net sales: | | | | | | | |
Communications & Enterprise Compute | $ | 1,979,045 |
| | $ | 2,102,321 |
| | $ | 5,853,435 |
| | $ | 6,400,233 |
|
Consumer Technologies Group | 2,056,801 |
| | 1,848,970 |
| | 5,323,913 |
| | 4,827,488 |
|
Industrial & Emerging Industries | 1,491,063 |
| | 1,140,366 |
| | 4,336,201 |
| | 3,672,103 |
|
High Reliability Solutions | 1,224,643 |
| | 1,023,342 |
| | 3,516,695 |
| | 3,100,513 |
|
| $ | 6,751,552 |
| | $ | 6,114,999 |
| | $ | 19,030,244 |
| | $ | 18,000,337 |
|
Segment income and reconciliation of income before tax: | | | | | | | |
Communications & Enterprise Compute | $ | 50,206 |
| | $ | 62,109 |
| | $ | 141,541 |
| | $ | 176,460 |
|
Consumer Technologies Group | 38,768 |
| | 59,282 |
| | 87,494 |
| | 139,230 |
|
Industrial & Emerging Industries | 61,328 |
| | 39,681 |
| | 167,650 |
| | 127,020 |
|
High Reliability Solutions | 100,976 |
| | 82,729 |
| | 283,552 |
| | 249,972 |
|
Corporate and Other | (31,557 | ) | | (20,695 | ) | | (94,273 | ) | | (82,395 | ) |
Total segment income | 219,721 |
| | 223,106 |
| | 585,964 |
| | 610,287 |
|
Reconciling items: |
|
| |
|
| | | | |
Intangible amortization | 19,588 |
| | 18,734 |
| | 55,865 |
| | 62,318 |
|
Stock-based compensation | 20,758 |
| | 20,781 |
| | 63,018 |
| | 67,311 |
|
Distressed customers asset impairments (1) | — |
| | — |
| | 4,753 |
| | 92,915 |
|
Contingencies and other (2) | — |
| | 17,421 |
| | 43,933 |
| | 28,960 |
|
Other charges (income), net | 6,865 |
| | 3,090 |
| | (172,467 | ) | | 15,007 |
|
Interest and other, net | 31,350 |
| | 22,838 |
| | 85,780 |
| | 71,869 |
|
Income before income taxes | $ | 141,160 |
| | $ | 140,242 |
| | $ | 505,082 |
| | $ | 271,907 |
|
(1)well as acquisition related costs and customer related asset impairments (recoveries). During the fourth quarterfirst half of fiscal year 2016,2023, the Company accepted return of previously shipped inventory from a former customer, SunEdison, of approximately $90 million. On April 21, 2016, SunEdison filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61 million as of March 31, 2016, associated with its outstanding SunEdison receivables.
During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory on hand at the end of the second quarter of fiscal year 2017 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market in the nine-month period ended December 31, 2016. The Company also recognized a $16.0 million impairment charge for solar module equipment and $16.9 million primarily related to negative margin sales and other associated direct costs. The total charge of $92.9 million is included in cost of sales for the nine-month period ended December 31, 2016 but is excluded from segment results above.
(2) During the second quarter of fiscal year 2018, the Company incurred charges in connection with the matters described in note 13,accrued for certain loss contingencies where it believes that losses are considered probable and estimable. Additionally, the Company incurred various other charges predominately related to damages incurred from a typhoon that impacted one of its China facilities.
During fiscal year 2017, the Company initiated a plan to rationalize the current footprint at existing sites including corporate SG&A functions and to continue to shift the talent base in support of its Sketch-to-Scaletminitiatives. As part of this plan, approximately $17.4 million and $29.0 million was recognized during the three and nine-month periods ended December 31, 2016, respectively. The plan was finalized and completed during fiscal year 2017.
Corporate and other primarily includes corporate servicesservice costs that are not included in the Chief Operating Decision Maker'schief operating decision maker's ("CODM") assessment of the performance of each of the identified reportingreportable segments.
PropertyThe Company provides an overall platform of assets and equipment on a segment basis is not disclosed as it isservices, which the segments utilize for the benefit of their various customers. The shared assets and services are contained within the Company's global manufacturing and design operations and include manufacturing and design facilities. Most of the underlying manufacturing and design assets are co-mingled in the operating campuses and are compatible to operate across segments and highly interchangeable throughout the platform. Given the highly interchangeable nature of the assets, they are not separately identified and is not internallyby segment nor reported by segment to the Company's CODM.
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.Commission (the "SEC"). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part 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, 2017.2022. 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 a globally-recognized, providerthe diversified manufacturing partner of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. Wechoice that helps market-leading brands design, build ship and service complete packaged consumerdeliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, we deliver advanced manufacturing solutions and industrial products, from athletic shoes to electronics, for companiesoperate one of all sizes in various industriesthe most trusted global supply chains, supporting the entire product lifecycle with fulfillment, after-market, and end-markets, through our activities in the following segments:
Communications & Enterprise Compute ("CEC"), which includes our telecom business of radio access base stations, remote radio heads, and small cells for wireless infrastructure; our networking business which includes optical, routing, broadcasting, and switching products for the data and video networks; our server and storage platforms for both enterprise and cloud-based deployments; next generation storage and security appliance products; and rack level solutions, converged infrastructure and software-defined product solutions;
Consumer Technologies Group ("CTG"), which includes our consumer-related businesses in connected living, wearables, gaming, augmented and virtual reality, fashion, and mobile devices; and including various supply chaincircular economy solutions for notebook personal computersdiverse industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. Our three operating and reportable segments are:
•Flex Agility Solutions ("PC"), tablets, and printers; in addition, CTG is expanding its business relationships to include supply chain optimization for non-electronics products such as footwear and clothing;
Industrial and Emerging Industries ("IEI"FAS"), which is comprised of energythe following end markets:
◦Communications, Enterprise and metering, semiconductorCloud, including data infrastructure, edge infrastructure and capital equipment, office solutions, industrial, homecommunications infrastructure;
◦Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and lifestyle, industrial automationaudio; and kiosks,
◦Consumer Devices, including mobile and lighting; andhigh velocity consumer devices.
High•Flex Reliability Solutions ("HRS"FRS"), which is comprised of ourthe following end markets:
◦Automotive, including next generation mobility, autonomous, connectivity, electrification, and smart technologies;
◦Health Solutions, including medical business,devices, medical equipment and drug delivery; and
◦Industrial, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciencescapital equipment, industrial devices, and imaging equipment; our automotive business, including vehicle electrification, connectivity, autonomous vehicles,renewables and clean technologies.grid edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. Nextracker's products enable solar panels to follow the sun’s movement across the sky and optimize plant performance.
Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product life cycle.
lifecycle.
Over the past few years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Some companies that have historically identified themselves as software providers, Internet service providers or e-commerce retailers have entered the highly competitive and rapidly evolving technology hardware markets, such as mobile devices, home entertainment and wearable devices. This trend has resulted in a significant change in the manufacturing and supply chain 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 are ablehave 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'scustomers' supply chain solutionssolution needs across all of the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.
During the past few years, we have made significant efforts to evolve our long-term portfolio towards a higher mix of businesses which possess longer product life cycles and higher segment operating margins such as reflected in our IEI and HRS businesses. Since the beginning of fiscal year 2016, we launched several programs broadly across our portfolio of services and in some instances we deployed certain new technologies. We continue to invest in innovation and we have expanded our design and engineering relationships through our product innovation centers.
We believe that our continued business transformation to improve our portfolio mix 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,services.
Update on the Impact of COVID-19, Component Shortages and Logistical Constraints on our Business
With the second wave of the global 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. Although not materially impacting our results for the first half of fiscal year 2023, with the lockdowns in China, we experienced temporary plant closures and/or restrictions at certain of our manufacturing facilities in China.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. 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. We continue to carefully monitor potential supply chain disruptions due to ongoing tightness in the overall component environment. 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 remain strong.it will continue to adversely impact our business and results of operations remains uncertain and could be material.” and “-- Supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand, could affect our ability to meet customer demand, lead to higher costs, or result in excess or obsolete inventory. We have been and continue to be adversely affected by supply chain issues, including shortages of required electronic components.”as disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources are adequate to fund future commitments. See additional discussion in the Liquidity and Capital Resources section below.
Russian Invasion of Ukraine
We continue to monitor and respond to the escalating conflict in Ukraine and the associated sanctions and other restrictions. As of the date of this report, there is no material impact to our business operations and financial performance in Ukraine. The full impact of the conflict on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflict and its impact on regional and global economic conditions. We will continue to monitor the conflict and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business.
Other Developments
On April 28, 2021, we announced that we confidentially submitted a draft registration statement on Form S-1 with the SEC 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." as disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
On February 1, 2022, one of our subsidiaries sold Series A Preferred Units representing a 16.7% interest in Nextracker to TPG Rise for an aggregate purchase price of $500 million. The sale of the 16.7% interest in Nextracker reflects an implied value for Nextracker as of the date of the sale of $3.0 billion. See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 for further information.
This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2022 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.
BusinessOverview
We are one of the world's largest providers of global supply chain solutions, with revenues of $19.0$15.1 billion for the nine-monthsix-month period ended December 31, 2017September 30, 2022 and $23.9$26.0 billion in the fiscal year 2017.ended March 31, 2022. We have established an extensive network of manufacturing facilities in the world's major consumer and enterprise markets (Asia, the Americas, and Europe) to serve the growing outsourcing needs of both multinational and regional customers. We design, build, ship, and service consumer and enterprise products for our customers through a network of over 100 facilities in approximately 30 countries across four continents. We also provide intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. The following tables set forth the relative percentages and dollar amounts of net sales by region and by country, and net property and equipment by country, based on the location of our manufacturing sites:sites (amounts may not sum due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 30, 2022 | | October 1, 2021 | | September 30, 2022 | | October 1, 2021 |
| (In millions) |
Net sales by region: | | | | | | | | | | | | | | | |
Americas | $ | 3,459 | | | 45 | % | | $ | 2,605 | | | 42 | % | | $ | 6,774 | | | 45 | % | | $ | 5,184 | | | 41 | % |
Asia | 2,751 | | | 35 | % | | 2,347 | | | 38 | % | | 5,268 | | | 35 | % | | 4,712 | | | 37 | % |
Europe | 1,556 | | | 20 | % | | 1,277 | | | 20 | % | | 3,071 | | | 20 | % | | 2,675 | | | 22 | % |
| $ | 7,766 | | | | | $ | 6,229 | | | | | $ | 15,113 | | | | | $ | 12,571 | | | |
| | | | | | | | | | | | | | | |
Net sales by country: | | | | | | | | | | | | | | | |
China | $ | 1,770 | | | 23 | % | | $ | 1,547 | | | 25 | % | | $ | 3,354 | | | 22 | % | | $ | 3,078 | | | 24 | % |
Mexico | 1,601 | | | 21 | % | | 1,240 | | | 20 | % | | 3,156 | | | 21 | % | | 2,460 | | | 20 | % |
U.S. | 1,294 | | | 17 | % | | 846 | | | 14 | % | | 2,511 | | | 17 | % | | 1,722 | | | 14 | % |
Malaysia | 633 | | | 8 | % | | 412 | | | 7 | % | | 1,204 | | | 8 | % | | 823 | | | 7 | % |
Brazil | 547 | | | 7 | % | | 502 | | | 8 | % | | 1,074 | | | 7 | % | | 966 | | | 8 | % |
Hungary | 330 | | | 4 | % | | 295 | | | 5 | % | | 616 | | | 4 | % | | 647 | | | 5 | % |
Other | 1,591 | | | 20 | % | | 1,387 | | | 21 | % | | 3,198 | | | 21 | % | | 2,875 | | | 22 | % |
| $ | 7,766 | | | | | $ | 6,229 | | | | | $ | 15,113 | | | | | $ | 12,571 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Nine-Month Periods Ended |
Net sales: | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
| (In millions) |
China | $ | 1,996 |
| | 30 | % | | $ | 1,823 |
| | 30 | % | | $ | 5,493 |
| | 29 | % | | $ | 5,623 |
| | 31 | % |
Mexico | 1,183 |
| | 17 | % | | 1,129 |
| | 17 | % | | 3,302 |
| | 17 | % | | 2,998 |
| | 17 | % |
Brazil | 729 |
| | 11 | % | | 536 |
| | 9 | % | | 1,969 |
| | 10 | % | | 1,326 |
| | 7 | % |
U.S. | 723 |
| | 11 | % | | 589 |
| | 10 | % | | 2,157 |
| | 12 | % | | 2,006 |
| | 11 | % |
Malaysia | 507 |
| | 7 | % | | 585 |
| | 10 | % | | 1,527 |
| | 8 | % | | 1,698 |
| | 10 | % |
Other | 1,614 |
| | 24 | % | | 1,453 |
| | 24 | % | | 4,582 |
| | 24 | % | | 4,349 |
| | 24 | % |
| $ | 6,752 |
| | |
| | $ | 6,115 |
| | |
| | $ | 19,030 |
| | |
| | $ | 18,000 |
| | |
|
| | | As of | | As of | | As of | | As of |
Property and equipment, net: | December 31, 2017 | | March 31, 2017 | Property and equipment, net: | September 30, 2022 | | March 31, 2022 |
| (In millions) | | (In millions) |
China | $ | 713 |
| | 29 | % | | $ | 720 |
| | 31 | % | |
Mexico | 599 |
| | 25 | % | | 525 |
| | 23 | % | Mexico | $ | 672 | | | 31 | % | | $ | 626 | | | 29 | % |
U.S. | 307 |
| | 13 | % | | 291 |
| | 13 | % | U.S. | 371 | | | 17 | % | | 354 | | | 17 | % |
China | | China | 323 | | | 15 | % | | 299 | | | 14 | % |
Malaysia | 154 |
| | 6 | % | | 173 |
| | 7 | % | Malaysia | 137 | | | 6 | % | | 110 | | | 5 | % |
Hungary | 147 |
| | 6 | % | | 133 |
| | 6 | % | Hungary | 113 | | | 5 | % | | 118 | | | 6 | % |
India | | India | 112 | | | 5 | % | | 129 | | | 6 | % |
Other | 523 |
| | 21 | % | | 475 |
| | 20 | % | Other | 473 | | | 21 | % | | 489 | | | 23 | % |
| $ | 2,443 |
| | |
| | $ | 2,317 |
| | |
| | $ | 2,201 | | | | | $ | 2,125 | | | |
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 industrialmanufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer electronics and industrialenterprise products for leading multinational and regional customers. Specifically, we have launched multiple product innovation centers ("PIC") focused exclusively on offeringoffer 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 global pandemic;
•the effects of the COVID-19 global 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 sizecomplexity 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 global pandemic and the ongoing conflict between Russia and Ukraine) could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations;
•the effects on our business due to our customers’certain customers' products having short product life cycles;lifecycles;
•our customers’customers' ability to cancel or delay orders or change production quantities;
•our customers’ decisioncustomers' decisions to choose internal manufacturing instead of outsourcing for their product requirements;
our exposure to financially troubled customers;
•integration of acquired businesses and facilities;
•increased labor costs due to adverse labor conditions in the markets we operate;
•changes in tax legislation; and
•changes in trade regulations and treaties.
We 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, 2022.
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 and the ongoing conflict between Russia and Ukraine, 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 and the Russian invasion of Ukraine. These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions.
Refer to the accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017,2022, 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.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 2017 Annual Report on Form 10-K.10-K for the fiscal year ended March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 30, 2022 | | October 1, 2021 | | September 30, 2022 | | October 1, 2021 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 92.4 | | | 92.4 | | | 92.5 | | | 92.5 | |
Restructuring charges | — | | | 0.1 | | | — | | | 0.1 | |
Gross profit | 7.6 | | | 7.5 | | | 7.5 | | | 7.4 | |
Selling, general and administrative expenses | 3.2 | | | 3.4 | | | 3.2 | | | 3.3 | |
| | | | | | | |
Intangible amortization | 0.2 | | | 0.3 | | | 0.3 | | | 0.2 | |
Operating income | 4.2 | | | 3.8 | | | 4.0 | | | 3.9 | |
Interest and other, net | 0.7 | | | (2.2) | | | 0.7 | | | (0.9) | |
| | | | | | | |
Income before income taxes | 3.5 | | | 6.0 | | | 3.3 | | | 4.8 | |
Provision for income taxes | 0.4 | | | 0.6 | | | 0.4 | | | 0.5 | |
Net income | 3.1 | % | | 5.4 | % | | 2.9 | % | | 4.3 | % |
Net income attributable to redeemable noncontrolling interest | 0.1 | | | — | | | 0.1 | | | — | |
Net income attributable to Flex Ltd. | 3.0 | % | | 5.4 | % | | 2.8 | % | | 4.3 | % |
|
| | | | | | | | | | | |
| Three-Month Periods Ended | | Nine-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 93.4 |
| | 93.2 |
| | 93.4 |
| | 93.7 |
|
Gross profit | 6.6 |
| | 6.8 |
| | 6.6 |
| | 6.3 |
|
Selling, general and administrative expenses | 3.7 |
| | 3.8 |
| | 4.1 |
| | 4.0 |
|
Intangible amortization | 0.3 |
| | 0.3 |
| | 0.3 |
| | 0.3 |
|
Interest and other, net | 0.5 |
| | 0.4 |
| | 0.5 |
| | 0.4 |
|
Other charges (income), net | 0.1 |
| | 0.1 |
| | (0.9 | ) | | 0.1 |
|
Income before income taxes | 2.0 |
| | 2.2 |
| | 2.6 |
| | 1.5 |
|
Provision for income taxes | 0.3 |
| | 0.2 |
| | 0.3 |
| | 0.2 |
|
Net income | 1.7 | % | | 2.0 | % | | 2.3 | % | | 1.3 | % |
Net sales
The following table sets forth our net sales by segment, and their relative percentages. Historical information has been recast to reflect realignment of customers and/or products between segments to ensure comparability:percentages:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Nine-Month Periods Ended |
Segments: | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
| (In millions) |
Communications & Enterprise Compute | $ | 1,979 |
| | 29 | % | | $ | 2,102 |
| | 34 | % | | $ | 5,853 |
| | 31 | % | | $ | 6,400 |
| | 36 | % |
Consumer Technologies Group | 2,057 |
| | 30 | % | | 1,849 |
| | 30 | % | | 5,324 |
| | 28 | % | | 4,827 |
| | 27 | % |
Industrial & Emerging Industries | 1,491 |
| | 22 | % | | 1,140 |
| | 19 | % | | 4,336 |
| | 23 | % | | 3,672 |
| | 20 | % |
High Reliability Solutions | 1,225 |
| | 19 | % | | 1,023 |
| | 17 | % | | 3,517 |
| | 18 | % | | 3,101 |
| | 17 | % |
| $ | 6,752 |
| | |
| | $ | 6,114 |
| | |
| | $ | 19,030 |
| | |
| | $ | 18,000 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 30, 2022 | | October 1, 2021 | | September 30, 2022 | | October 1, 2021 |
| (In millions) |
Net sales: | | | | | | | | | | | | | | | |
Flex Agility Solutions | $ | 4,004 | | | 52 | % | | $ | 3,437 | | | 55 | % | | $ | 7,995 | | | 53 | % | | $ | 6,869 | | | 55 | % |
Flex Reliability Solutions | 3,299 | | | 42 | % | | 2,465 | | | 40 | % | | 6,268 | | | 41 | % | | 5,047 | | | 40 | % |
Nextracker | 473 | | | 6 | % | | 339 | | | 5 | % | | 868 | | | 6 | % | | 680 | | | 5 | % |
Intersegment eliminations | (10) | | | — | % | | (12) | | | — | % | | (18) | | | — | % | | (25) | | | — | % |
| $ | 7,766 | | | | | $ | 6,229 | | | | | $ | 15,113 | | | | | $ | 12,571 | | | |
Net sales during the three-month period ended December 31, 2017September 30, 2022 totaled $6.8$7.8 billion, representing an increase of approximately $0.7$1.5 billion, or 10%25% from $6.1$6.2 billion during the three-month period ended December 31, 2016. The overallOctober 1, 2021. Net sales for our FAS segment increased approximately $0.6 billion, or 16% from the three-month period ended October 1, 2021, primarily driven by strong year-over-year growth in our Communications, Enterprise and Cloud (CEC) business and a low single-digit year-over-year increase in sales was driven byour Lifestyle business due to new program wins, ramps, and clear-to-build improvement. These increases in three of our segmentsFAS were offset by a decline in saleshigh-teen year-over-year decrease in our CEC segment. Our IEIConsumer Devices business due to relatively softer market demand and a planned project completion in the fiscal year ended March 31, 2022. Net sales for our FRS segment increased $351 million, mainlyapproximately $0.8 billion, or 34% from the three-month period ended October 1, 2021, primarily driven by our industrial, home and lifestyle business in addition to growtha strong year-over-year increase in our solar energy business. Our CTGIndustrial and Automotive businesses and a low-teen year-over year increase in our Health Solutions business due to strong customer demand and ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition, despite continued supply constraints. Net sales for our Nextracker segment increased $208 million,approximately $0.1 billion, or 40% from the three-month period ended October 1, 2021, primarily because of stronger salesdriven by an increase in our connected livinggigawatts delivered and mobile devices businesses, offset byto a decrease in gaming. Our HRS segmentlesser extent, an increased $201 million from higher sales in our automotive business. Sales in our CEC segment declined $123 million, largely attributable to lower sales within our telecom
and networking businesses, offset by increased sales in our cloud and data center business.average selling price. Net sales increased $395 millionacross all regions with a $0.9 billion increase to $2.7$3.5 billion in the Americas, increased $193 milliona $0.4 billion increase to $3.0$2.8 billion in Asia, and increased $48 milliona $0.3 billion increase to $1.1$1.6 billion in EuropeEurope.
Net sales during the nine-monthsix-month period ended December 31, 2017September 30, 2022 totaled $19.0$15.1 billion, representing an increase of approximately $1.0$2.5 billion, or 6%20% from $18.0$12.6 billion during the nine-monthsix-month period ended December 31, 2016. The overallOctober 1, 2021. Net sales for our FAS segment increased approximately $1.1 billion, or 16% from the six-month period ended October 1, 2021, primarily driven by strong growth in our CEC business and a mid single-digit increase in net salesour Lifestyle business during the nine-month period ended December 31, 2017, was drivencurrent year due to new ramps, customer expansion, continued recoveries in consumer spending along with some effect from inflation pass-through while overcoming challenges from supply constraints. These increases in FAS were offset by increases of $664 milliona high-teen decrease in our IEI segment, $496 million in our CTG segment, and $416 million in our HRS segmentConsumer Device business during the current year due to the same drivers as describedfactors in the three-month periods discussion above. TheseNet sales for our FRS segment increased approximately $1.2 billion, or 24% from the six-month period ended October 1, 2021, primarily driven by strong increases were offset by a decrease of $547 million in our CEC segment asIndustrial and Automotive businesses, and a result of lower sales within our telecom and legacy server and storage businesses, offset by increased salesmid single-digit year-over year increase in our cloudHealth Solutions business during the current year due to strong customer demand and data center business.ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition and the recovery of inflationary costs, despite continued supply constraints noted above. Net sales for our Nextracker segment increased approximately $0.2 billion, or 28% from the six-month period ended October 1, 2021, primarily driven by an increase in gigawatts delivered and to a lesser extent, an increased average selling price which was in part driven by an increase in logistics costs. Net sales increased $1.1across all regions with a $1.6 billion increase to $7.5$6.8 billion in the Americas, offset by decreases of $83 milliona $0.6 billion increase to $8.3$5.3 billion in Asia, and $29 milliona $0.4 billion increase to $3.2$3.1 billion in Europe.
Our ten largest customers during the three and nine-monthsix-month periods ended December 31, 2017September 30, 2022 accounted for approximately 43%35% of net sales. Our ten largest customers during the three and 42%six-month periods ended October 1, 2021 accounted for approximately 36% and 35% of net sales, respectively. No customer accounted for more than 10% of net sales during the three and nine-monthsix-month periods ended December 31, 2017.September 30, 2022 or October 1, 2021.
Cost of sales
Our ten largest customers, during the three and nine-month periods ended December 31, 2016 accounted for approximately 46% and 43%Cost of net sales respectively. No customer accounted for more than 10% of net sales during the three and nine-month periods ended December 31, 2016.
Gross profit
Gross profit 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 30, 2022 totaled $7.2 billion, representing an increase of approximately $1.4 billion, or 25% from $5.8 billion during the three-month period ended October 1, 2021. The higher cost of sales for the three-month period ended September 30, 2022 was primarily driven by increased consolidated sales of $1.5 billion or 25%. Cost of sales in FAS for the three-month period ended September 30, 2022 increased approximately $0.5 billion, or 17% from the three-month period ended October 1, 2021, which is relatively in line with the overall 16% increase in FAS revenue during the same period primarily as a result of higher revenue in our CEC and Lifestyle businesses. Cost of sales in FRS for the three-month period ended September 30, 2022 increased approximately $0.8 billion, or 34% from the three-month period ended October 1, 2021, which is in line with the overall 34% increase in FRS revenue during the same period, primarily as a result of higher revenue in our Industrial and Automotive businesses. Cost of sales in our Nextracker segment for the three-month period ended September 30, 2022 increased approximately $0.1 billion, or 36% from the three-month period ended October 1, 2021, primarily due to the 40% increase in Nextracker revenue during the same period partially offset by improved recovery on freight and logistics cost increases.
Cost of sales during the six-month period ended September 30, 2022 totaled $14.0 billion, representing an increase of approximately $2.4 billion, or 20% from $11.6 billion during the six-month period ended October 1, 2021. The higher cost of sales for the six-month period ended September 30, 2022 was primarily driven by increased consolidated sales of $2.5 billion or 20%. Cost of sales in FAS for the six-month period ended September 30, 2022 increased approximately $1.1 billion, or 16% from the six-month period ended October 1, 2021, which is aligned with the overall 16% increase in FAS revenue during the same period primarily due to the drivers noted in the discussion above for the three-month period. Cost of sales in FRS for the six-month period ended September 30, 2022 increased approximately $1.1 billion, or 25% from the six-month period ended October 1, 2021, which is relatively in line with the overall 24% increase in FRS revenue during the same period, primarily due to the drivers noted in the discussion above for the three-month period. Cost of sales in our Nextracker segment for the six-month period ended September 30, 2022 increased approximately $0.2 billion, or 25% from the six-month period ended October 1, 2021, primarily driven by the same factors noted above in the three-month periods discussion.
Gross profit
Gross profit is affected by fluctuations 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, capacity utilization and the expansion or consolidation of manufacturing facilities, includingas well as specific restructuring activities initiated from time to time. The flexible design of our manufacturing processes allows us to buildmanufacture a broad range of products in our facilities and better utilize our manufacturing capacity across our diverse geographic footprint.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 December 31, 2017September 30, 2022 increased $30 million$0.1 billion to $446 million,$0.6 billion, or 6.6%7.6% of net sales, from $416 million,$0.5 billion, or 6.8%7.5% of net sales, during the three-month period ended December 31, 2016October 1, 2021. Gross margin improved 10 basis points during the three-month period ended September 30, 2022 primarily due to flow throughthe overall strong customer demand across various end markets which allowed for improved fixed cost absorption and benefits from higher sales across threeprior restructuring activities, despite continued pressure on margin from component shortages, logistics constraints and the pass-through effect of our four segments as discussed above. The gross profit percentage decline of 20 basis points from the prior year quarter was driven primarily by lower gross profit generation by our CTG segment as it realized greater levels of costs associated with ramping a strategic customer as further explained below. inflationary cost recoveries.
Gross profit during the nine-monthsix-month period ended December 31, 2017September 30, 2022 increased $0.1$0.2 billion to $1.2$1.1 billion, or 6.6%7.5% of net sales, from $1.1$0.9 billion, or 6.3%7.4% of net sales, during the nine-monthsix-month period ended December 31, 2016. The increase in gross profit forOctober 1, 2021. Gross margin improved 10 basis points during the nine-monthsame period ended December 31, 2017 is primarily due to contribution flow through from the additional $1.0 billionsame factors noted above in sales from the prior year to date period. In addition, the prior year to date period gross profit included $93 million of charges related to the significant decline in prices for solar modules and slowdown in demand. This was partially offset by an elevated level of costs associated with ramping a strategic customer in our CTG segment as further explained below.
three-month periods discussion.
Segment Income
income
An operating segment’ssegment'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, of intangibles, stock-based compensation, restructuring charges, other charges (income), net and interestlegal and other, net.other. A portion of depreciation is allocated to the respective segmentsegments, together with other general corporate research and development and administrative expenses.
The following table sets forth segment income and margins. Historical information has been recast to reflect realignment of customers and/or products between segments:
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| Three-Month Periods Ended | | Nine-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
| (In millions) |
Segment income & margin: | | | | | | | | | | | | | | | |
Communications & Enterprise Compute | $ | 50 |
| | 2.5 | % | | $ | 62 |
| | 3.0 | % | | $ | 142 |
| | 2.4 | % | | $ | 176 |
| | 2.8 | % |
Consumer Technologies Group | 39 |
| | 1.9 | % | | 59 |
| | 3.2 | % | | 87 |
| | 1.6 | % | | 139 |
| | 2.9 | % |
Industrial & Emerging Industries | 61 |
| | 4.1 | % | | 40 |
| | 3.5 | % | | 168 |
| | 3.9 | % | | 127 |
| | 3.5 | % |
High Reliability Solutions | 101 |
| | 8.2 | % | | 83 |
| | 8.1 | % | | 283 |
| | 8.1 | % | | 250 |
| | 8.1 | % |
Corporate and Other | (32 | ) | | | | (21 | ) | | | | (94 | ) | | | | (82 | ) | | |
Total segment income | 219 |
| | 3.3 | % | | 223 |
| | 3.6 | % | | 586 |
| | 3.1 | % | | 610 |
| | 3.4 | % |
Reconciling items: | | | | | | | | | | | | | | | |
Intangible amortization | 19 |
| | | | 19 |
| | | | 56 |
| | | | 62 |
| | |
Stock-based compensation | 21 |
| | | | 21 |
| | | | 63 |
| | | | 67 |
| | |
Distressed customers asset impairments (1) | — |
| | | | — |
| | | | 5 |
| | | | 93 |
| | |
Contingencies and other (2) | — |
| | | | 17 |
| | | | 44 |
| | | | 29 |
| | |
Other charges (income), net | 7 |
| | | | 3 |
| | | | (173 | ) | | | | 15 |
| | |
Interest and other, net | 31 |
| | | | 23 |
| | | | 86 |
| | | | 72 |
| | |
Income before income taxes | $ | 141 |
| | | | $ | 140 |
| | | | $ | 505 |
| | | | $ | 272 |
| | |
(1) During the fourth quarter of fiscal year 2016, the Company accepted return of previously shipped inventory from a former customer, SunEdison, Inc. ("SunEdison"), of approximately $90 million. On April 21, 2016, SunEdison filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61 million as of March 31, 2016, associated with its outstanding SunEdison receivables.
During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory on hand at the end of the second quarter of fiscal year 2017 was not fully recoverable and recorded a charge of $60 million to reduce the carrying costs to marketSegment margins in the nine-month period ended December 31, 2016. The Company also recognized a $16 million impairment charge for solar module equipmenttable below may not recalculate exactly due to rounding and $17 million primarily related to negative margin sales and other associated direct costs. The total charge of $93 million is included in cost of sales for the nine-month period ended December 31, 2016 but is excluded from segment results above.are calculated based on unrounded numbers.
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| Three-Month Periods Ended | | Six-Month Periods Ended |
| September 30, 2022 | | October 1, 2021 | | September 30, 2022 | | October 1, 2021 |
| (In millions) |
Segment income: | | | | | | | | | | | | | | | |
Flex Agility Solutions | $ | 170 | | | 4.3 | % | | $ | 153 | | | 4.5 | % | | $ | 342 | | | 4.3 | % | | $ | 290 | | | 4.2 | % |
Flex Reliability Solutions | 175 | | | 5.3 | % | | 126 | | | 5.1 | % | | 322 | | | 5.1 | % | | 271 | | | 5.4 | % |
Nextracker | 43 | | | 9.1 | % | | 25 | | | 7.4 | % | | 73 | | | 8.4 | % | | 50 | | | 7.4 | % |
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(2) During the second quarter of fiscal year 2018, the Company incurred charges in connection with the matters described in note 13 to the condensed consolidated financial statements for certain loss contingencies where it believes that losses are probable and estimable. Additionally, the Company incurred various other charges predominately related to damages incurred from a typhoon that impacted one of our China facilities.
During fiscal year 2017, the Company initiated a plan to rationalize the current footprint at existing sites including corporate SG&A functions and to continue to shift the talent base in support of its Sketch-to-Scaletm initiatives. As part of this plan, approximately $29 million was recognized in the nine-month period ended December 31, 2016. The plan was finalized and completed during fiscal year 2017.
CECFAS segment margin decreased 50approximately 20 basis points, to 2.5%4.3%, for the three-month period ended December 31, 2017,September 30, 2022, from 3.0%4.5% for the three-month period ended October 1, 2021. The margin decrease was driven by elevated costs due to component shortages and logistics constraints combined with certain inflation pass-through recoveries. The FAS segment margin increased approximately 10 basis point, to 4.3% for the six-month period ended September 30, 2022, from 4.2% for the six-month period ended October 1, 2021. The increase in FAS segment margin during the six-month period is primarily due to strong execution against new project ramps and product mix, partially offset by elevated costs due to component shortages and logistics constraints and the effect of certain inflation pass-through recoveries.
FRS segment margin increased approximately 20 basis points, to 5.3% for the three-month period ended September 30, 2022, from 5.1% for the three-month period ended October 1, 2021. The margin increase in FRS was primarily driven by higher margin from the Anord Mardix acquisition in our Industrial business, coupled with logistics constraints, partially offset by production disruptions in our Automotive and Health Solutions businesses during the three-month period ended December 31, 2016. CECSeptember 30, 2022. FRS segment margin decreased 40approximately 30 basis points, to 2.4%5.1% for the nine-monthsix-month period ended December 31, 2017,September 30, 2022, from 2.8%5.4% for the nine-monthsix-month period ended December 31, 2016.October 1, 2021. The decreasesdecrease in CEC's margins for both the three and nine-month periods ended December 31, 2017 were due to lower capacity utilization causing reduced overhead absorption, coupled with modest increased investments to expand its converged enterprise and cloud data center engineering capabilities.
CTGFRS segment margin decreased 130during the six-month period was primarily driven by component shortage related production disruptions, as well as inflationary cost pressures impacting our Health Solutions and Automotive businesses.
Nextracker segment margin increased approximately 170 basis pointpoints, to 1.9%9.1% for the three-month period ended December 31, 2017,September 30, 2022, from 3.2% during the three-month period ended December 31, 2016. CTG segment margin decreased 130 basis points, to 1.6% for the nine-month period ended December 31, 2017 from 2.9% for the nine-month period ended December 31, 2016. The decreases in CTG's margins for both the three and nine-month periods ended December 31, 2017 reflected the negative impacts from the elevated levels of costs associated with material management, labor inefficiencies and capacity refinements as we ramp up production with a strategic customer.
IEI segment margin increased 60 basis points, to 4.1%7.4% for the three-month period ended December 31, 2017, from 3.5% during the three-month period ended December 31, 2016. IEIOctober 1, 2021. The margin increase was driven by improved pricing and better cost controls and better cost absorption with increased revenue. Nextracker segment margin increased 40approximately 100 basis points, to 3.9%8.4% for the nine-monthsix-month period ended December 31, 2017,September 30, 2022, from 3.5%7.4% for the nine-monthsix-month period ended December 31, 2016.October 1, 2021. The increasesincrease in IEI's margins for bothNextracker segment margin during the three and nine-month periods ended December 31, 2017 are primarilysix-month period is due to revenue increases resultingthe same factors noted in improved absorption of costs as a result of ramping multiple new programs in our industrial, home and lifestyle and energy businesses. This was partially offset by high levels of start-up costs on several new customer programs as we prepositioned resources in advance of the significant underlying ramps, as well as an impact from the underlying mix of business.
HRS segment margin increased 10 basis points, to 8.2%discussion above for the three-month period ended December 31, 2017, from 8.1% during the three-month period ended December 31, 2016 primarily as a result of new customers and programs ramp up coupled with solid operational management. HRS segment margin remained consistent at 8.1% for the nine-month periods ended December 31, 2017 and December 31, 2016.period.
Restructuring charges
On January 25, 2018, the Company announced a plan to initiate targeted restructuring activities focused on optimizing the cost base in lower growth areas and more importantly, streamlining certain corporate and segment functions. The objective of the plan is to make Flex a faster, more responsive and agile company better positioned to react to marketplace opportunities. While a detailed action plan has not been finalized, the Company expects to incur a minimum charge of $50 million during the fourth quarter of fiscal year 2018 and will substantially complete all the associated activities by the end of this fiscal year. The estimated costs are primarily related to one-time employee termination benefits and will be settled in cash.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) was $247 million,approximately $0.2 billion, or 3.7%3.2% of net sales, during the three-month period ended December 31, 2017,September 30, 2022, increasing $16$32 million from $232 million, or 3.8%approximately $0.2 billion and improving 20 basis
points from 3.4% of net sales, during the three-month period ended December 31, 2016. This increase was primarily due to incremental costs associated with our continued expansion of our design and engineering resources and innovation system to support our increased Sketch-to-Scaletm initiatives.October 1, 2021. SG&A was $772 million,$0.5 billion, or 4.1%3.2% of net sales, during the nine-monthsix-month period ended December 31, 2017,September 30, 2022, increasing $57$72 million from $715 million, or 4.0%$0.4 billion and improving 10 basis points from 3.3% of net sales, during the nine-monthsix-month period ended December 31, 2016. This increase inOctober 1, 2021, which reflects our enhanced cost control efforts to support higher revenue growth while keeping our SG&A was also due to incremental costs associated with our continued expansion of our design and engineering resources and innovation system but also due to the recognition of certain contingencies that are probable and estimable of payout combined with incremental costs from our acquisitions.expenses relatively flat.
Intangible amortization
Amortization of intangible assets increased $1to $21 million during the three-month period ended December 31, 2017 to $20 million,September 30, 2022, from $19$15 million for the three-month period ended December 31, 2016 dueOctober 1, 2021, and increased to incremental amortization expense on intangible assets related to our acquisitions completed during fiscal year 2018. Amortization of intangible assets decreased by $6$43 million during the nine-monthsix-month period ended December 31, 2017 to $56September 30, 2022, from $30 million from $62 million duringfor the nine-monthsix-month period ended December 31, 2016,October 1, 2021, primarily due to certain intangibles being fully amortized.amortization expense related to new intangible assets from the Anord Mardix acquisition completed in December 2021.
Interest and other, net
Interest and other, net was $31an expense of $53 million during the three-month period ended December 31, 2017September 30, 2022 compared to $23income of $134 million during the three-month period ended December 31, 2016, and $86 million duringOctober 1, 2021, primarily due to the nine-monthabsence in the three-month period ended December 31, 2017September 30, 2022 of the $149 million gain related to a certain tax credit recorded upon approval of a "Credit Habilitation" request by the relevant Brazilian tax authorities in the three-month period ended October 1, 2021 and losses from equity in earnings recognized for certain of our non-core equity method investments, coupled with higher interest expense compared to $72 million during the nine-month period ended December 31, 2016. The increase in interestprior year period.
Interest and other, net was primarily a resultan expense of higher interest expense$93 million during the six-month period ended September 30, 2022 compared to income of $111 million during the six-month period ended October 1, 2021, due to higher interest rates and a higher average borrowing level.the same drivers noted in the discussion above.
Other charges (income), net
Other charges (income), net was $172 million of income during the nine-month period ended December 31, 2017 compared to $15 million of expense during the nine-month period ended December 31, 2016. The increase is primarily due to a $152 million non-cash gain as a result of the deconsolidation of our investment in Elementum, coupled with a $39 million gain recognized for the disposition of Wink during the first quarter of fiscal year 2018. Refer to note 5 and note 2 of the condensed consolidated financial statements for details of the deconsolidation and the disposition of Wink, respectively.
Income taxes
Certain of our subsidiaries, have, 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 13,15, “Income Taxes” of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 20172022 for further discussion.
Our policy is to provide a valuation allowance against deferred tax assets that in our estimation are not more likely than not to be realized.
The consolidated effective tax rate was 16.2%13% and 11.3%14% for the three and nine-monthsix-month periods ended December 31, 2017,September 30, 2022, and 7.7%9% and 14.4%10% for the three and nine-monthsix-month periods ended December 31, 2016.October 1, 2021, respectively. The effective rate varies from the Singapore statutory rate of 17.0%17% as a result of recognition of earnings in different jurisdictions (we generate most of our revenues and profits from operations outside of Singapore), operating loss carryforwards, income tax credits, release of previously established valuation allowances for deferred tax assets, liabilities for uncertain tax positions, as well as the effect of certain tax holidays and incentives granted to our subsidiaries primarily in China, Malaysia, the Netherlands and Israel. The effective tax rate for the three-month periodthree and six-month periods ended December 31, 2017 isSeptember 30, 2022 were higher than the effective tax raterates for the three-month and six-month periods ended December 31, 2016, due to a larger decrease in liabilities for uncertain tax positions (primarily lapses and FX) during the three-month period ended December 31, 2016. The effective tax rate for the nine-month period ended December 31, 2017 is lower than the nine-month period ended December 31, 2016 primarilyOctober 1, 2021 due to the $151.6 million Elementum deconsolidation gain recognized during the quarter ended September 29, 2017 with no relatedchanging jurisdictional mix of income and there were significant Brazilian indirect tax impact.
Impact of the U.S. Tax Reform
On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act (a) reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced rates on historical earnings (a “transition tax”) of certain non-US subsidiaries owned by U.S. companies and establishes new mechanisms to tax such earnings going forward. Similar to other large multinational companies with complex tax structures, the Act has wide ranging implications for Flex. However, the impact on Flex's financial statementscredits recorded for the three and nine-monthsix-month periods ended December 31, 2017 is immaterial, primarily becauseOctober 1, 2021 with minimal tax impact.
On August 16, 2022, the Company hasInflation Reduction Act of 2022 (“IRA”) was enacted into law, which includes a full valuation allowancenew corporate minimum tax, a stock repurchase excise tax, numerous green energy credits, other tax provisions, and significantly increased enforcement resources. We are evaluating the effect the IRA will have on deferred tax assets in the U.S., which results in there being no U.S. deferred tax assets or liabilities recorded on the balance sheet that need to be remeasured at the new 21% rate. Further, the Company expects that the new transition tax will be offset by U.S tax attributes such as net operating loss carryforwards, and thus will not result in any incremental taxes payable. The Company will continue to analyze the effects of the Act on itsour consolidated financial statements and operations. Any additional impacts from the enactment of the Act will be recorded as they are identified during the measurement period as provided for in Staff Accounting Bulletin 118..
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, 2017,September 30, 2022, we had cash and cash equivalents of approximately $1.3$2.5 billion and bank and other borrowings of approximately $2.9$4.0 billion. We haveAs of September 30, 2022, we had a $1.75$2.5 billion revolving credit facility that expiresis due to mature in June 2022,July 2027 (the "2027 Credit Facility"), under which there werewe had no borrowings outstanding. We also entered into a $450 million delayed draw term loan credit agreement, under which we had no borrowings outstanding as of September 30, 2022. Borrowings under the enddelayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. Refer to note 6 to the quarter.condensed consolidated financial statement for details on the 2027 Credit Facility and the delayed draw term loan. As of December 31, 2017,September 30, 2022, we were in compliance with the covenants under eachall of our existing credit facilities and indentures.
Cash provided by operating activities was $431 million$0.1 billion during the nine-monthsix-month period ended December 31, 2017. This resulted from $448 millionSeptember 30, 2022, primarily driven by $0.4 billion of net income for the period plus adjustments for $430 million, net,$0.3 billion of non-cash charges such as depreciation, amortization, and stock-based compensation. These were partiallycompensation offset by a $152 million gain from the deconsolidation of Elementum, and a $39 million gain on sale of Wink, which are both includedchanges in the determination of net income. The foregoing was further offset by a $256 million net increase in our operating assets and liabilities driven primarily by significant increases in accounts receivable and inventory not fully offset by the increase in accounts payable all reflecting our increased level of operations.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 the Company’sour 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 $230 million$1.2 billion to $1.8$5.4 billion as of December 31, 2017,September 30, 2022, from $1.6$4.2 billion as of March 31, 2017.2022. This increase is primarily driven by a $329 million$1.1 billion increase in ourinventories due to strong demand, coupled with continued component shortages and logistics constraints, clear-to build constraints and logistics challenges driving up buffer stock and inventory levels from March 31, 2017, as we are carrying elevated levels to support our revenue growthpricing, and positioning for multiple large ramps. Despite thea $0.6 billion increase in net working capital position from March 31, 2017,receivables, offset by a $0.6 billion increase in accounts payable due to increased inventory purchases. Our current quarter net working capital as a percentage of annualized net sales for the quarter then ended remained relatively consistent at 6.8% as comparedSeptember 30, 2022, increased to 6.9%17.4% from 15.4% of annualized net sales for the quarter ended DecemberMarch 31, 2017. The Company generally operates2022 due to component shortages, clear-to-build and logistics constraints. We continue to experience component shortages in a netthe supply chain, and although we are actively managing these impacts, we expect continued working capital targeted range between 6%-8% of annualized revenuepressure 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. Component shortages and significantly increased logistic costs are also expected to persist at least in the near future. 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 the quarter. Net working capital position was calculatedadvances to offset the required investment in inventory. Advances from customers as current quarter accounts receivable, net of allowance for doubtful accounts, adding back the reduction in accounts receivable resultingSeptember 30, 2022 increased $0.6 billion to $2.0 billion from non-cash accounts receivable sales, plus inventories, less accounts payable.
$1.4 billion as of March 31, 2022.
Cash used in investing activities amounted to $783 millionwas $0.3 billion during the nine-monthsix-month period ended December 31, 2017. During the nine-month period ended December 31, 2017, we paid $214 million for the acquisition of AGM, net of cash acquired, and we also paid $56 million for a power module business, net of cash acquired. Further, we invested $389 millionSeptember 30, 2022. This was primarily driven by $0.3 billion of net capital expenditures for property and equipment to expandcontinue expanding capabilities and capacity in support of our automotive, medical, footwearexpanding Automotive, Industrial, Health Solutions, and IEILifestyle businesses. In addition, other investing activities includes $73 million of cash outflow resulting from the deconsolidation of Elementum, and $47 million of payments for investments, net of cash received, in non-core 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 calculateddefined as cash from operations, less net purchases of property and equipment.equipment allowing us to present adjusted cash flows on a consistent basis for investor transparency. Our adjusted free cash flowsflow for the nine-monthsix-month period ended December 31, 2017September 30, 2022 and October 1, 2021 was $42 million compared to $628 million for the nine-month period ended December 31, 2016. Freean outflow of $0.1 billion and an inflow of $0.3 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. FreeAdjusted free cash flow should not be considered in isolation or as an alternative to net cash provided by operating activities. FreeAdjusted free cash flows reconcile to the most directly comparable GAAP financial measure of cash flows from operations as follows:
| | | Nine-Month Periods Ended | | Six-Month Periods Ended |
| December 31, 2017 | | December 31, 2016 | | September 30, 2022 | | October 1, 2021 |
| (In millions) | | (In millions) |
Net cash provided by operating activities | $ | 431 |
| | $ | 1,013 |
| Net cash provided by operating activities | $ | 141 | | | $ | 514 | |
| Purchases of property and equipment | (433 | ) | | (413 | ) | Purchases of property and equipment | (296) | | | (210) | |
Proceeds from the disposition of property and equipment | 44 |
| | 28 |
| Proceeds from the disposition of property and equipment | 18 | | | 5 | |
Free cash flow | $ | 42 |
| | $ | 628 |
| |
Adjusted free cash flow | | Adjusted free cash flow | $ | (137) | | | $ | 309 | |
Cash used inby financing activities was $173 million$0.3 billion during the nine-monthsix-month period ended December 31, 2017,September 30, 2022, which was primarily driven by $0.3 billion of cash paid for the repurchase of our ordinary shares in the amount of $180 million and for repayments of debts of $42 million, offset by $65 million received from third party investors during fiscal year 2018, in exchange for an additional noncontrolling equity interest in Elementum prior to the deconsolidation described above.
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, 2017September 30, 2022 and March 31, 2017, over half2022, approximately 30% and 34%, respectively, of our cash and cash equivalents waswere 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 $1.2$1.6 billion as of March 31, 2017)2022). Repatriation could result in an additional income tax payment,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,orders.
We maintain global paying services agreements with several financial institutions. Under these agreements, the financial institutions act as our targeted investments,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 targeted businesssuppliers, including the amounts due and asset acquisitions.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 $0.8 billion for the three and six-month periods ended September 30, 2022, respectively, and $0.3 billion and $0.6 billion for the three and six-month periods ended October 1, 2021, 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 September 30, 2022.
Historically, we have funded operations from cash and cash equivalents generated from operations, proceeds from public offerings of equity and debt securities, bank debt and lease financings. We also have the ability to sell a designated pool of trade receivables under 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 anticipate that we willmay enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and growth. 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$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 15, 2017.25, 2022. During the nine-monthsix-month period ended December 31, 2017,September 30, 2022, we paid $180$253 million to repurchase shares under the current and prior repurchase plans at an average price of $16.63$16.15 per share. As of December 31, 2017,September 30, 2022, shares in the aggregate amount of $410$977 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, 2017. There have been2022.
In July 2022, we entered into a new $2.5 billion credit facility which matures in July 2027, replacing our previous $2.0 billion credit facility, under which we had no borrowings outstanding as of September 30, 2022.
In September 2022, we entered into a $450 million delayed draw term loan credit agreement, under which we had no borrowings outstanding September 30, 2022. Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes.
Other than the changes discussed above, there were no material changes in our contractual obligations and commitments since March 31, 2017 except for the following changes to our debt obligations.
On June 30, 2017, we extended the maturity dateas of one of our term loan agreements from March 31, 2019 to JuneSeptember 30, 2022. Refer to note 6 to the condensed consolidated financial statements for additional details on this term loan.
Future payments due under our long-term debt changed from those described in the Contractual Obligations and Commitments table contained within our Annual Report on our Form 10-K for the fiscal year ended March 31, 2017, and accordingly have been updated as follows: |
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| Total | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | Great Than 5 Years |
| (In thousands) |
Long-term Debt Obligations: | | | | | | | | | |
Long-term debt | $ | 2,968,150 |
| | $ | 37,730 |
| | $ | 585,434 |
| | $ | 905,870 |
| | $ | 1,439,116 |
|
OFF-BALANCE SHEET ARRANGEMENTS
We sell designated pools of trade receivables to unaffiliated financial institutions under our ABS programs, and in addition to cash, we receive a deferred purchase price receivable for each pool of the receivables sold. Each of these deferred purchase price receivables serves as additional credit support to the financial institutions and is recorded at its estimated fair value. As of December 31, 2017 and March 31, 2017, the fair values of our deferred purchase price receivable were approximately $421 million and $507 million, respectively. As of December 31, 2017 and March 31, 2017, the outstanding balance on receivables sold for cash was $1.4 billion and $1.2 billion under all our accounts receivable sales programs, which are not included 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 nine-monthsix-month period ended December 31, 2017September 30, 2022 as compared to the fiscal year ended March 31, 2017.2022.
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 December 31, 2017.September 30, 2022. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017,September 30, 2022, 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 controlscontrol over financial reporting that occurred during our third quarter of fiscal year 2018ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
We have not experienced any material impact to our internal control over financial reporting despite the fact that some of our employees involved in internal control over financial reporting are working remotely for their health and safety during the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material legal proceedings, see note 1312 “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, 2017,2022, 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
The following table provides information regarding purchases of our ordinary shares made by us for the period from July 2, 2022 through September 30, 20172022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
July 2, 2022 - August 5, 2022 (2) | | 2,357,350 | | | $ | 15.26 | | | 2,357,350 | | | $ | 278,483,009 | |
August 6, 2022 - September 2, 2022 (2) (3) | | 1,040,367 | | | $ | 18.26 | | | 1,040,367 | | | $ | 994,001,735 | |
September 3, 2022 - September 30, 2022 (3) | | 952,574 | | | $ | 17.82 | | | 952,574 | | | $ | 977,024,014 | |
Total | | 4,350,291 | | | | | 4,350,291 | | | |
(1)During the period from July 2, 2022 through December 31, 2017:September 30, 2022, all purchases were made pursuant to the programs discussed below in open market transactions. All purchases were made in accordance with Rule 10b-18 under the Securities Exchange Act of 1934.
(2)On August 4, 2021, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $1.0 billion. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of July 1, 2022, we had shares in the aggregate amount of $314 million available to be repurchased under this plan, of which 3.1 million shares in the aggregate amount of $49 million were repurchased as of August 25, 2022 (after which authorization under this plan terminated).
(3)On August 25, 2022, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $1.0 billion. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of September 30, 2022, shares in the aggregate amount of $977 million were available to be repurchased under the current plan.
|
| | | | | | | | | | | | | |
Period (2) | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
September 30, 2017 - November 3, 2017 | 576,262 |
| | $ | 17.08 |
| | 576,262 |
| | $ | 435,264,194 |
|
November 4, 2017 - December 1, 2017 | — |
| | $ | — |
| | — |
| | $ | 435,264,194 |
|
December 2, 2017 - December 31, 2017 | 1,394,867 |
| | $ | 18.07 |
| | 1,394,867 |
| | $ | 410,064,509 |
|
Total | 1,971,129 |
| | |
| | 1,971,129 |
| | |
|
| |
(1) | During the period from September 30, 2017 through December 31, 2017, all purchases were made in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. |
| |
(2) | On August 15, 2017, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $500 million. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of December 31, 2017, shares in the aggregate amount of $410.1 million were available to be repurchased under the current plan. |
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 |
| | | | | | | | | | | | |
| | Credit Agreement, dated as of July 19, 2022, among Flex Ltd. and certain of its subsidiaries from time to time party thereto, as borrowers, Bank of America, N.A., as Administrative Agent, an L/C Issuer and a Swing Line Lender, and the other L/C Issuers, Swing Line Lenders and Lenders party thereto | | 8-K | | 000-23354 | | 07/22/2022 | | 10.01 | | |
| | Form of Restricted Share Unit Award Agreement under the Flex Ltd. Amended and Restated 2017 Equity Incentive Plan for Non-Employee Directors | | | | | | | | | | X |
| | | | | | | | | | | | |
| | Letter in lieu of consent of Deloitte & Touche LLP | | | | | | | | | | X |
| | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | | | | | | | | | | X |
101.INS | | XBRL Instance Document | | | | | | | | | | X |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibit 101) | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | | | | Incorporated by Reference | | | | Filed |
Exhibit No. | | Exhibit | | Form | | File No. | | Filing Date | | Exhibit No. | | Herewith |
| | | | | | | | | | | | |
| | 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 |
* 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/ Michael M. McNamaraREVATHI ADVAITHI |
| | Michael M. McNamaraRevathi Advaithi |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: | January 26, 2018October 28, 2022 | |
| | /s/ Christopher CollierPAUL R. LUNDSTROM |
| | Christopher CollierPaul R. Lundstrom |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
Date: | January 26, 2018October 28, 2022 | |