UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FLEX LTD.

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

 

1.  ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION

Organization of the Company

The Company's service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement, inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance) and, supply chain management software solutions, and component product offerings (including flexible printed circuit boards and power adapters and chargers).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and in accordance with the requirements of Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended March 31, 20192020 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month periods ended June 28, 201926, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.2021. 

The first quarters for fiscal years 20202021 and 20192020 ended on June 26, 2020, which is comprised of 87 days in the period, and June 28, 2019, which is comprised of 89 days in the period, and June 29, 2018, which is comprised of 90 days in the period, respectively.

The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. The associated noncontrolling owners' interest in the income or losses of these

As previously disclosed,The changes to the Company has made certain immaterial corrections to net sales previously reported for the first quarter of fiscal year 2019 primarily to reflect revenue from certain contracts with customers on a net basis. As a result, net sales and cost of sales in the accompanying Condensed Consolidated Statement of Operations for the three-month period ended June 29, 2018 are $25 million lower than previously reported for the first quarter of fiscal year 2019. These correctionsCompany’s organizational structure noted above had no impact on gross profit, segment income or net income for the period presented. Amounts presented for the first quarter of fiscal year 2019 related to the disaggregation of revenue in the CTGcondensed consolidated financial statements. For comparability purposes, segment in Note 4, and CTG segment net sales and total net sales in Note 16,reporting for prior periods have also been restated accordingly. The Company evaluated these corrections, considering both qualitative and quantitative factors, and concluded they are immaterialto conform to the previously issued financial statements.current

In February 2016,presentation. Refer to note 14, “Segments Reporting,” for additional information on the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases,changes in operating and subsequent updates (collectively, referred to as Accounting Standard Codification 842 or “ASC 842”). ASC 842 requires a lessee to recognize a rightreportable segments.

Use of use (“ROU”) asset and lease liability. Leases will be classified as finance or operating, with classification affecting the recognition of expense and presentation in the income statement.Estimates

The Company adopted ASC 842 on April 1, 2019 usingpreparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the modified retrospective method onreported amounts of assets and liabilities, the effective date. As a result,disclosure of contingent assets and liabilities at the Company was not required to adjust its comparative period financial information for effectsdate of the standard or makefinancial statements, and the new required lease disclosures for periods before our adoption date. The Company has elected to adoptreported amounts of revenues and expenses during the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) thereporting period. Estimates are used in accounting for, initial direct costs that were previously capitalized. In addition, the Company has elected the short term lease recognitionamong other things: allowances for doubtful accounts; inventory write-downs; valuation allowances for deferred tax assets; uncertain tax positions; valuation and measurement exemption for all classesuseful lives of long-lived assets which allows the Company to not recognize ROUincluding property, equipment, intangible assets and lease liabilities for leases with a lease termgoodwill; valuation of 12 months or lessinvestments in privately held companies; asset impairments; fair values of financial instruments including highly liquid investments, notes receivable and with no purchase option the Company is reasonably certain of exercising. The Company has also elected the practical expedient to account for the lease and nonlease components as a single lease component, for all classes of underlying assets. Therefore, the lease payments used to measure the lease liability include all of the fixed considerations in the contract. Lease payments included in the measurement of the lease liability comprise the following: fixed payments (including in-substance fixed payments), and variable payments that depend on an index or rate (initially measured using the index or rate at the lease commencement date).As the Company cannot determine the interest rate implicit in the lease for its leases, as such the Company uses its estimate of thederivative instruments; restructuring charges; contingencies; warranty provisions; incremental borrowing rate as of the commencement date in determining the present value of lease payments. The Company’s estimated incremental borrowing rate ispayments; accruals for potential price adjustments arising from customer contracts; fair values of assets obtained and liabilities assumed in business combinations; and the ratefair values of interest it would have to pay on a collateralized basis to borrow an amount equalstock options and restricted share unit awards granted under the Company's stock-based compensation plans. Due to the lease payments under similar terms.COVID-19 pandemic, there has been and will continue to be uncertainty and disruption in the global economy and financial markets. The lease term for all of the Company’s leases includes the noncancellable period of the lease plus anyCompany has made estimates and assumptions taking into consideration certain possible impacts due to COVID-19. These estimates may change, as new events occur, and additional periods covered by either an option to extend (or not to terminate) the lease that the Companyinformation is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

In October 2018,March 2020, the FASB issued ASU 2018-16 “Derivatives and Hedging (Topic 815): Inclusion2020-04 "Facilitation of the Secured Overnight FinancingEffects of Reference Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest RateReform on Financial Reporting", which temporarily simplifies the accounting for Hedge Accounting Purposes”contract modifications, including hedging relationships, due to expand the lists of eligible benchmark interesttransition from LIBOR and other interbank offered rates to include OIS based on SOFRalternative reference interest rates. For example, entities can elect not to facilitateremeasure the marketplace transition from LIBOR.contracts at the modification date or reassess a previous accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. The Company adopted the guidance during the first quarter of fiscal year 20202021 with an immaterial impact on the Company'sits consolidated financial position, results of operations and cash flows.statements.

In August 2018,June 2016, the FASB issued ASU 2018-13, "Fair Value2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement (Topic 820): Disclosure Framework-Changesof Credit Losses on Financial Instruments” and also issued subsequent amendments to the Disclosure Requirements for Fair Value Measurement”,initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, and ASU 2019-11, which amends ASC 820replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to add, remove, and modify fair value measurement disclosure requirements.be presented at the net amount expected to be collected. The Company adopted the guidance during the first quarter of fiscal year 2020 with an immaterial impact on the Company's financial position, results of operations and cash flows.

Recently Issued Accounting Pronouncements

In November 2018,January 2020, the FASB issued ASU 2018-19 “Codification Improvements2020-01 "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 — a consensus of the FASB Emerging Issues Task Force", which makes improvements related to Topic 326: Financial Instruments - Credit Losses”the following two topics: (1) accounting for certain equity securities when the equity method of accounting is applied or discontinued, and (2) scope considerations related to introduce an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets.forward contracts and purchased options on certain securities. The guidance is effective for the Company beginning in the first quarter of fiscal year 2021 with early adoption permitted. The Company is currently assessing and expects the new guidance will have an immaterial impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2021.

In August 2018,December 2019, the FASB issued ASU 2018-15 "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)2019-12 "Income Taxes (Topic 740): Customer’sSimplifying the Accounting for Implementation Costs IncurredIncome Taxes", which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a Cloud Computing Arrangement That Is a Service Contract” to provide guidance on a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor, i.e., a service contract. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, as well as requires additional quantitative and qualitative disclosures.consolidated group. The guidance is effective for the Company beginning in the first quarter of fiscal year 20212022 with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its consolidated financial statements, and intends to early adopt the guidance duringwhen it becomes effective in the first quarter of fiscal year 2020, and does not expect a material impact to its condensed consolidated financial statements.

The components of inventories, net of applicable lower of cost and net realizable value write-downs, were as follows: 

Based on the latest assessment of its goodwill as of April 1, 2020, the Company determined that no impairment existed as of the date of the impairment test, because the fair value of each one of its reporting units exceeds its respective carrying value. In addition, goodwill was reallocated among each of the Company's six reporting units based on each reporting unit’s relative fair value as of April 1, 2020. The following table summarizes the activity ingoodwill allocation as of April 1, 2020 and the Company’s goodwill account for each of its four reporting units (which align to the Company's reportable segments)activity during the three-month period ended June 28, 2019:26, 2020: 

The components of acquired intangible assets are as follows:

The gross carrying amounts of intangible assets are removed when fully amortized. The estimated future annual amortization expense for intangible assets is as follows:

Other Current Liabilities

Other current liabilities include customer working capital advances of $264.5$325.7 million and $266.3$264.2 million, and customer-related accruals of $253.4$231.3 million and $260.1 million, and deferred revenue of $329.8 million and $271.8$195.1 million, as of June 28, 201926, 2020 and March 31, 2019,2020, respectively. The customer working capital advances are not interest-bearing, do not have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production. Following the adoption of ASC 842, currentCurrent operating lease liabilities were $135.2$116.1 million and $114.1 million as of June 28, 2019.26, 2020 and March 31, 2020.

Revenue Recognition

The Company provides a comprehensive suite of services for its customers that range from advanced product design to manufacturing and logistics to after-sales services. The first step in its process for revenue recognition is to identify a contract with a customer. A contract is defined as an agreement between two parties that creates enforceable rights and obligations and can be written, verbal, or implied. The Company generally enters into master supply agreements (“MSA”) with its customers that provide the framework under which business will be conducted. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing formulas, payment terms, etc., and the level of business under those agreements may not be guaranteed. In those instances, the Company bids on a program-by-program basis and typically receives customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order, or any other similar documents such as a statement of work, product addenda,addendum, emails or other communications that embody the commitment by the customer.

In determining the appropriate amount of revenue to recognize, the Company applies the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. Further, the Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (PIT) or over time (OT). The Company is first required to evaluate whether its contracts meet the criteria for OT recognition. The Company has determined that for a portion

Customer Contracts and Related Obligations

Certain of the Company’s customer agreements include potential price adjustments which may result in variable consideration. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually required to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company estimates the variable consideration related to these price adjustments as part of the total transaction price and recognizes revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. The Company constrains the amount of revenues recognized for these contractual provisions based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. The Company determines the amounts to be recognized based on the amount of potential refunds required by the contract, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices for future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In many instances, the agreement is silent on the settlement mechanism. Any difference between the amount accrued upon shipment for potential refunds and the actual amount agreed to with the customer is recorded as an increase or decrease in revenue. These potential price adjustments are included as part of other current liabilities on the consolidated balance sheet and disclosed as part of customer relatedcustomer-related accruals in note 2.

Performance Obligations

The Company derives its revenues primarily from manufacturing services, and to a lesser extent, from innovative design, engineering, and supply chain services and solutions.

A performance obligation is an implicitly or explicitly promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company considers all activities typically included in its contracts, and identifies those activities representing a promise to transfer goods or services to a customer. These include, but are not limited to, design and engineering services, prototype products, tooling, etc. Each promised good or service with regards to these identified activities is accounted for as a separate performance obligation only if it is distinct - i.e., the customer can benefit from it on its own or together with other resources that are readily available to the customer. Certain activities on the other hand are determined not to constitute a promise to

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual good or service is not separately identifiable from other promises in the contract and is, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. In the event that more than one performance obligation is identified in a contract, the Company is required to allocate the transaction price between the performance obligations. The allocation would generally be performed on the basis of a relative standalone price for each distinct good or service. This standalone price most often represents the price that the Company would sell similar goods or services separately.

Contract Balances

A contract asset is recognized when the Company has recognized revenue, but not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheets and transferred to receivables when rights to payment become unconditional.

A contract liability is recognized when the Company receives payments in advance of the satisfaction of performance and is included in other current liabilities on the condensed consolidated balance sheets. Contract liabilities, identified as deferred revenue, were $329.8$362.1 million and $271.8$361.5 million as of June 28, 201926, 2020 and March 31, 2019,2020, respectively.

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated based on timing of transfer - point in time and over time - for the three-month periods ended June 28, 201926, 2020 and June 29, 201828, 2019 (in thousands), respectively.

The Company's primary plan used for granting equity compensation awards is the 2017 Equity Incentive Plan (the "2017 Plan").

The following table summarizes the Company’s share-based compensation expense:

Total unrecognized compensation expense related to share options under all plans was $1.5 million and will be recognized over a weighted-average remaining vesting period of 1.7 years. As of June 28, 2019,as well as the number of options outstanding and exercisable under all plans was 0.7 million and 0.5 million, respectively, at a weighted-average exercise pricewere immaterial as of $4.38 per share and $5.36 per share, respectively. June 26, 2020.

As of June 28, 2019,26, 2020, approximately 18.922.5 million unvested RSU awards under all plans were outstanding, of which vesting for a targeted amount of 3.54.5 million awards is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero0 to 7.09.0 million based on the achievement levels of the respective conditions. During the three-month period ended June 28, 2019, noNo shares vestedare expected to vest in connection with the awards with market conditions granted in fiscal year 2017. 2018.

As of June 28, 2019,26, 2020, total unrecognized compensation expense related to unvested RSU awards under all plans was approximately $181.3$203.3 million, and will be recognized over a weighted-average remaining vesting period of 2.82.4 years.

The following table reflects basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted earnings per share attributable to the shareholders of Flex Ltd.:Flex: