Document
Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2018
 
Or
 
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  
 
Commission file number 0-23354
 
FLEX LTD.
(Exact name of registrant as specified in its charter)
Singapore
 
Not Applicable
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
2 Changi South Lane,
 
 
Singapore
 
486123
(Address of registrant’s principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code
(65) 6876-9899
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

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

 
Smaller reporting company o
Emerging growth company o
 
 
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 


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Class
 
Outstanding at October 25, 2018
Ordinary Shares, No Par Value
 
526,586,420



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FLEX LTD.
 
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of Flex Ltd.
Singapore

Results of Review of Interim Financial Information
 
We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd. and subsidiaries (the “Company”) as of September 28, 2018 and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended September 28, 2018 and September 29, 2017, the related condensed consolidated statements of cash flows for the six-month periods ended September 28, 2018 and September 29, 2017, and the related notes. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Flex Ltd. and subsidiaries as of March 31, 2018 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated June 14, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2018 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

The interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ DELOITTE & TOUCHE LLP
 
San Jose, California
 
November 2, 2018
 


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FLEX LTD.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
As of September 28, 2018
 
As of March 31, 2018
 
(In thousands, except share amounts)
(Unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
1,377,720

 
$
1,472,424

Accounts receivable, net of allowance for doubtful accounts of $62,650 and $60,051 as of September 28, 2018 and March 31, 2018, respectively
2,859,409

 
2,517,695

Contract assets
418,158

 

Inventories
4,442,855

 
3,799,829

Other current assets
935,030

 
1,380,466

Total current assets
10,033,172

 
9,170,414

Property and equipment, net
2,277,885

 
2,239,506

Goodwill
1,082,523

 
1,121,170

Other intangible assets, net
375,407

 
424,433

Other assets
957,217

 
760,332

Total assets
$
14,726,204

 
$
13,715,855

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 

 
 

Bank borrowings and current portion of long-term debt
$
55,640

 
$
43,011

Accounts payable
6,236,018

 
5,122,303

Accrued payroll
406,368

 
383,332

Other current liabilities
1,456,519

 
1,719,418

Total current liabilities
8,154,545

 
7,268,064

Long-term debt, net of current portion
2,869,551

 
2,897,631

Other liabilities
532,561

 
531,587

Shareholders’ equity
 

 
 

Ordinary shares, no par value; 579,126,478 and 578,317,848 issued, and 528,887,123 and 528,078,493 outstanding as of September 28, 2018 and March 31, 2018, respectively
6,616,635

 
6,636,747

Treasury stock, at cost; 50,239,355 shares as of September 28, 2018 and March 31, 2018
(388,215
)
 
(388,215
)
Accumulated deficit
(2,902,492
)
 
(3,144,114
)
Accumulated other comprehensive loss
(156,381
)
 
(85,845
)
Total shareholders’ equity
3,169,547

 
3,018,573

Total liabilities and shareholders’ equity
$
14,726,204

 
$
13,715,855


The accompanying notes are an integral part of these condensed consolidated financial statements.


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 

 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018

September 29, 2017

(In thousands, except per share amounts)
(Unaudited)
Net sales
$
6,710,604

 
$
6,270,420

 
$
13,134,560

 
$
12,278,692

Cost of sales
6,308,303

 
5,877,095

 
12,354,405

 
11,478,435

Gross profit
402,301

 
393,325

 
780,155

 
800,257

Selling, general and administrative expenses
227,683

 
274,149

 
490,565

 
524,960

Intangible amortization
18,234

 
16,376

 
36,751

 
36,277

Interest and other, net
41,060

 
27,554

 
82,802

 
54,430

Other charges (income), net
6,530

 
(143,167
)
 
(80,394
)
 
(179,332
)
Income before income taxes
108,794

 
218,413

 
250,431

 
363,922

Provision for income taxes
21,909

 
13,327

 
47,511

 
34,126

Net income
$
86,885

 
$
205,086

 
$
202,920

 
$
329,796


 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.16

 
$
0.39

 
$
0.38

 
$
0.62

Diluted
$
0.16

 
$
0.38

 
$
0.38

 
$
0.61

Weighted-average shares used in computing per share amounts:
 

 
 

 
 

 
 

Basic
531,503

 
531,313

 
530,426

 
530,790

Diluted
534,458

 
536,019

 
535,027

 
536,311


The accompanying notes are an integral part of these condensed consolidated financial statements.


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 

 
Three-Month Periods Ended

Six-Month Periods Ended
 
September 28, 2018

September 29, 2017

September 28, 2018

September 29, 2017

(In thousands)
(Unaudited)
Net income
$
86,885


$
205,086


$
202,920


$
329,796

Other comprehensive income (loss):
 


 


 


 

Foreign currency translation adjustments, net of zero tax
(6,622
)

9,478


(50,708
)

20,314

Unrealized gain (loss) on derivative instruments and other, net of zero tax
21,075


(13,875
)

(19,828
)

(16,044
)
Comprehensive income
$
101,338


$
200,689


$
132,384


$
334,066


The accompanying notes are an integral part of these condensed consolidated financial statements.


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six-Month Periods Ended
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 


 

Net income
$
202,920


$
329,796

Depreciation, amortization and other impairment charges
269,062


264,718

Gain from deconsolidation of AutoLab
(86,614
)
 

Gain from deconsolidation of Elementum

 
(151,574
)
Changes in working capital and other
(2,092,964
)

(2,614,917
)
Net cash used in operating activities
(1,707,596
)

(2,171,977
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property and equipment
(363,373
)

(264,030
)
Proceeds from the disposition of property and equipment
12,973


36,123

Acquisition of businesses, net of cash acquired


(273,167
)
Proceeds from divestiture of businesses, net of cash held in divested businesses
264,438


(2,949
)
Cash collections of deferred purchase price
1,812,945

 
2,452,782

Other investing activities, net
(24,411
)

(114,063
)
Net cash provided by investing activities
1,702,572


1,834,696

CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from bank borrowings and long-term debt
650,023



Repayments of bank borrowings and long-term debt
(652,600
)

(26,483
)
Payments for repurchases of ordinary shares
(59,980
)

(145,005
)
Net proceeds from issuance of ordinary shares
131


1,211

Other financing activities, net


60,591

Net cash used in financing activities
(62,426
)

(109,686
)
Effect of exchange rates on cash and cash equivalents
(27,254
)

(14,206
)
Net decrease in cash and cash equivalents
(94,704
)

(461,173
)
Cash and cash equivalents, beginning of period
1,472,424


1,830,675

Cash and cash equivalents, end of period
$
1,377,720


$
1,369,502







Non-cash investing activities:
 


 

Unpaid purchases of property and equipment
$
182,901


$
125,187

Non-cash investment in Elementum
$


$
132,679

Non-cash proceeds from sale of Wink
$

 
$
59,000

Non-cash investment in AutoLab (Note 2)
$
127,641


$

Leased Asset to AutoLab (Note 2)
$
76,531

 
$

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.  ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
Organization of the Company
Flex Ltd. ("Flex" or the "Company") was incorporated in the Republic of Singapore in May 1990. The Company's operations have expanded over the years through a combination of organic growth and acquisitions. The Company is a globally-recognized, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. The Company designs, builds, ships and services complete packaged consumer and enterprise products, for companies of all sizes in various industries and end-markets, through its activities in the following segments:
Communications & Enterprise Compute ("CEC"), which includes telecom business of radio access base stations, remote radio heads, and small cells for wireless infrastructure; networking business which includes optical, routing, broadcasting, and switching products for the data and video networks; 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 consumer-related businesses in connected living, wearables, gaming, augmented and virtual reality, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers;
Industrial and Emerging Industries ("IEI"), which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and
High Reliability Solutions ("HRS"), which is comprised of health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging equipment; automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies.
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, 2018 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended September 28, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019
The first quarters for fiscal years 2019 and 2018 ended on June 29, 2018, which is comprised of 90 days in the period, and June 30, 2017, which is comprised of 91 days in the period, respectively. The second quarters for fiscal years 2019 and 2018 ended on September 28, 2018 and September 29, 2017, which are comprised of 91 days in both periods.


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The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. The associated noncontrolling owners' interest in the income or losses of these companies is not material to the Company's results of operations for all periods presented, and is classified as a component of interest and other, net, in the condensed consolidated statements of operations.
Recently Adopted Accounting Pronouncement
In January 2017, the FASB issued Accounting Standard Update (ASU) No. 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business” to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the guidance on a prospective basis during the first quarter of fiscal year 2019, which did not have a material impact to its financial position as there were no acquisitions during the period.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)." The ASU is intended to address specific cash flow issues with the objective of reducing the existing diversity in practice and provide guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classification. However, cash receipts on the deferred purchase price from the Company's asset-backed securitization programs described in note 10 will be classified as cash flows from investing activities instead of the Company's former presentation as cash flows from operations. The Company adopted the guidance during the first quarter of fiscal year 2019 using a monthly approach to track cash flows on deferred purchase price and retrospectively adjusted cash flows from operating and investing activities for fiscal year 2018. Commencing with the quarter ending September 28, 2018, the Company changed to a method based on daily activity and retrospectively adjusted cash flows from operating and investing activities for the six-month period ended September 29, 2017. The Company recorded $1.8 billion of cash receipts on the deferred purchase price from the Company's asset-backed securitization programs for the six-month period ended September 28, 2018 and reclassified $2.5 billion of cash receipts on the deferred purchase price for the six-month period ended September 29, 2017, from cash flows from operating activities to cash flows from investing activities.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This guidance generally requires equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. This guidance also requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The Company adopted this guidance on April 1, 2018 with an insignificant impact on the Company's financial position, results of operations or cash flows.
In February 2018, the FASB issued ASU 2018-03 "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This standard comes as an addition to ASU 2016-01 which the Company adopted in the first quarter of fiscal year 2019. This update includes amendments to clarify certain aspects of the guidance issued in Update 2016-01. The Company adopted this guidance during the second quarter of fiscal year 2019 with an immaterial impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" (also referred to as Accounting Standard Codification 606 ("ASC 606")) which requires an entity to recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply 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 entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from costs to obtain or fulfill a contract.
The Company adopted the standard on April 1, 2018 using the modified retrospective approach by applying the guidance to all open contracts at the adoption date and has implemented revised accounting policies, new operational and financial reporting processes, enhanced systems capabilities and relevant internal controls.
As part of adopting ASC 606, revenue for certain customer contracts where the Company is manufacturing products for which there is no alternative use and the Company has an enforceable right to payment including a reasonable profit for work-

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in-progress inventory will be recognized over time (i.e., as we manufacture the product) instead of upon shipment of products. In addition to the following disclosures, note 3 provides further disclosures required by the new standard.
The cumulative effect of change made to our April 1, 2018 consolidated balance sheet for the adoption of ASC 606 was as follows:
Condensed Consolidated Balance Sheet
 
 
 
 
Impact of Adopting ASC 606
(In thousands)
(Unaudited)
Balance at March 31, 2018
Adjustments
Balance at April 1, 2018
 
 
 
 
ASSETS
 
 
 
Contract assets

412,787

412,787

Inventories
3,799,829

(409,252
)
3,390,577

Other current assets
1,380,466

(51,479
)
1,328,987

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Other current liabilities
1,719,418

(87,897
)
1,631,521

Other liabilities
531,587

2,098

533,685

 
 
 
 
Accumulated deficit
(3,144,114
)
(37,855
)
(3,181,969
)

The adoption of ASC 606 resulted in the establishment of contract asset and contract liability balance sheet accounts and in the reclassification to these new accounts from certain asset and liability accounts, primarily inventories. The increase in accumulated deficit in the table above reflects $37.9 million of net adjustments to the balance sheet as of April 1, 2018, resulting from the adoption of ASC 606 primarily related to certain customer contracts requiring an over-time method of revenue recognition. The declines in inventories and other current asset reflect reclassifications to contract assets due to the earlier recognition of certain costs of products sold for over-time contracts. The decline in other current liabilities is primarily due to the reclassification of payments from customers in advance of work performed to contract assets to reflect the net position of the related over-time contracts.
The following tables summarize the impacts of ASC 606 adoption on the Company’s condensed consolidated balance sheets and condensed consolidated statements of operations:
Condensed Consolidated Balance Sheet
 
 
 
As of September 28, 2018
 
 
 
 
Impact of Adopting ASC 606
(In thousands)
(Unaudited)
As Reported
Adjustments
Balance without ASC 606 Adoption
ASSETS
 
 
 
Contract assets
418,158

(418,158
)

Inventories
4,442,855

415,623

4,858,478

Other current assets
935,030

8,059

943,089

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Other current liabilities
1,456,519

34,327

1,490,846

 
 
 
 
Accumulated deficit
(2,902,492
)
(38,520
)
(2,941,012
)

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Condensed Consolidated Statement of Operations
 
 
 
 
 
 
 
 
Impact of Adopting ASC 606
 
Three-months ended September 28, 2018
 
Six-months ended September 28, 2018
(In thousands, except per share amounts)
(Unaudited)
As Reported
Adjustments
Balance without ASC 606 Adoption
 
As Reported
Adjustments
Balance without ASC 606 Adoption
 
 
 
 
 
 
 
 
Net sales
$
6,710,604

$
(115,533
)
$
6,595,071

 
$
13,134,560

$
(27,237
)
$
13,107,323

Cost of sales
6,308,303

(111,917
)
6,196,386

 
12,354,405

(26,573
)
12,327,832

Gross profit
402,301

(3,616
)
398,685

 
780,155

(664
)
779,491

Net income
$
86,885

$
(3,616
)
$
83,269

 
$
202,920

$
(664
)
$
202,256

To align contractual terms across the vast majority of customers to allow the Company to efficiently and accurately manage its contracts, in the first quarter of fiscal year 2019, the Company waived certain contractual rights to bill profit for work in progress in the event of a contract termination which is expected to be infrequent. These modifications resulted in revenue from these customers being recognized upon shipment of products, rather than over time (i.e., as we manufacture products) as further explained in note 3. The result of the amendments for the six-month period ended September 28, 2018, was to reduce revenue and gross profit by approximately $132.7 million and $9.3 million, respectively, compared to amounts that would have been reported both (i) under ASC 606 had we not amended the contracts, and (ii) had we not adopted ASC 606.
For the three-month period ended September 28, 2018 the as reported revenue was approximately $115.5 million higher, and the gross profit $3.6 million higher, than they would have been without ASC 606 adoption primarily due to additional inventory build up as of September 28, 2018 for those customer contracts that meet the criteria for over-time recognition (see note 3) partially offset by a decline in the aggregate average gross profit margin for those customers due to the increasing mix of lower margin customers included in the CTG segment.
For the six-month period ended September 28, 2018 the as reported revenue was approximately $27.2 million higher and the gross profit approximately $0.7 million higher than it would have been without ASC 606 adoption. Additional revenue of $160.0 million was reported under ASC 606 due to the accelerated timing of recognition of revenue for contracts which meet the criteria for over-time recognition (see note 3). Approximately $10.0 million of additional gross profit was recognized on the customers qualifying for accelerated revenue recognition. These increases were offset by reductions of $132.7 million of revenue and $9.3 million of gross profit respectively as a result of the waiver of contracts noted above. There was no material tax impact for the three and six-month periods ended September 28, 2018 from adopting ASC 606.
The Company applies the following practical expedients:
The Company elected to not disclose information about remaining performance obligations as its performance obligations generally have an expected duration of one year or less.
In accordance with ASC 606-10-25-18B the Company will account for certain shipping and handling as activities to fulfill the promise to transfer the good, instead of a promised service to its customer.
In accordance with ASC 606-10-32-18 the Company elected to not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15 "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in 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. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company is still evaluating the impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2020.

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In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”, which amends ASC 820 to add, remove, and modify fair value measurement disclosure requirements. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company 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 2020.
In June 2018, the FASB issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting" with the objective of simplifying several aspects of the accounting for nonemployee share-based payment transactions in current GAAP. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company 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 2020.
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships and simplifying the application of the hedge accounting guidance in current GAAP. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company 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 2020.
In January 2017, the FASB issued ASU 2017-04 "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" to simplify the subsequent measurement of goodwill by eliminating step 2 from the goodwill impairment test. This guidance requires that the change be applied on a prospective basis, and it is effective for the Company beginning in the first quarter of fiscal year 2021, with early application permitted. The Company is currently assessing the impact of the new guidance and the timing of adoption.
In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)" intended to improve financial reporting on leasing transactions. The new lease guidance will require entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. The guidance will also enhance existing disclosure requirements relating to those leases. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements", which provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASC 842. Specifically, under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods presented when transitioning to ASC 842 and (2) lessors may elect not to separate lease and nonlease components when certain conditions are met. Also in July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases", which clarifies how to apply certain aspects of the new leases standard, ASC 842. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. The amendments have the same effective date and transition requirements as the new leases standard. The Company intends to adopt the new lease guidance when it becomes effective in the first quarter of fiscal year 2020 using a modified retrospective approach. The Company believes the new guidance will have a material impact on its consolidated balance sheets upon adoption.
2.  BALANCE SHEET ITEMS
 
Inventories
 
The components of inventories, net of applicable lower of cost and net realizable value write-downs, were as follows: 
 
As of September 28, 2018
 
As of March 31, 2018
 
(In thousands)
Raw materials
$
3,512,523

 
$
2,760,410

Work-in-progress
407,998

 
450,569

Finished goods
522,334

 
588,850

 
$
4,442,855

 
$
3,799,829


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Due to the adoption of ASC 606, amounts that would have been reported as inventory under prior guidance are now included in contract assets or liabilities, depending on the net position of the contract, as disclosed in note 1. As a result of this accounting change, work-in-progress and finished goods as of September 28, 2018 are $415.6 million less than they would have been, had we not adopted ASC 606. The comparative information as of March 31, 2018, has not been restated and continues to be reported under the accounting standards in effect at that time.

Goodwill and Other Intangible Assets
 
The following table summarizes the activity in the Company’s goodwill account for each of its four segments during the six-month period ended September 28, 2018
 
HRS
 
CTG
 
IEI
 
CEC
 
Amount
 
(In thousands)
Balance, beginning of the year
$
550,983

 
$
107,748

 
$
337,707

 
$
124,732

 
$
1,121,170

Divestitures (1)
(4,006
)
 
(4,412
)
 
(4,120
)
 
(6,391
)
 
(18,929
)
Foreign currency translation adjustments (2)
(19,718
)
 

 

 

 
(19,718
)
Balance, end of the period
$
527,259

 
$
103,336

 
$
333,587

 
$
118,341

 
$
1,082,523


(1)
During the six-month period ended September 28, 2018, the Company divested its China-based Multek operations, and as a result, recorded an aggregate reduction of goodwill of $18.9 million, which is included in the loss on sale recorded in other charges (income), net on the condensed consolidated statement of operation. See note 12 for additional information.
(2)
During the six-month period ended September 28, 2018, the Company recorded $19.7 million of foreign currency translation adjustments primarily related to the goodwill associated with the acquisition of Mirror Controls International ("MCi") and AGM Automotive ("AGM"), as the U.S. Dollar fluctuated against foreign currencies.
 
In accordance with accounting guidance on goodwill and other intangible assets, the Company evaluates goodwill for impairment at the reporting unit level annually, and whenever circumstances occur indicating that goodwill might be impaired. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of each of the Company's reporting units with the reporting unit's carrying amount, including goodwill. The Company generally determines the fair value of its reporting units based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis. If the carrying amount of a reporting unit exceeds the reporting unit's fair value using these approaches, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the Company's reporting unit's goodwill with the carrying amount of that goodwill.

During October 2018, the Company's market capitalization declined significantly. The Company believes the significant drop in market value constitutes a “triggering event” in accordance with the applicable accounting literature, and accordingly commenced an interim impairment test. The Company is in the process of completing the first step of the test, and based on preliminary results believes that it is probable that the fair value of the CTG reporting unit is lower than its carrying value. The Company is in the process of finalizing the long-term financial projections necessary to complete the first step of the goodwill impairment test. If it is determined that the goodwill of any of the reporting units is in fact impaired, the Company will then proceed to the second step of the impairment test in which it will measure the fair value of such reporting unit’s identified tangible and intangible assets and liabilities in order to determine the implied fair value of its goodwill and any resulting goodwill impairment.

As of the date of the filing of this Form 10-Q, the Company has not finalized its impairment analysis due to the limited time period from the first indication of potential impairment to the date of this filing and the complexities involved in developing long-term cash flow forecasts and in estimating the fair value of each reporting unit’s assets and liabilities. Accounting guidance provides that in circumstances in which step two of the impairment analysis has not been completed, a company should recognize an estimated impairment charge to the extent that it determines that it is probable that an impairment loss has occurred and such impairment loss can be reasonably estimated. As of the date of the filing of this Form 10-Q, such impairment loss is not reasonably estimable and thus no impairment charge has been recognized by the Company. The Company will complete its impairment analysis during the quarter ending December 31, 2018, which may result in a material impairment of its recorded goodwill.

The components of acquired intangible assets are as follows:

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As of September 28, 2018
 
As of March 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Customer-related intangibles
$
303,361

 
$
(98,112
)
 
$
205,249

 
$
306,943

 
$
(79,051
)
 
$
227,892

Licenses and other intangibles
287,024

 
(116,866
)
 
170,158

 
304,007

 
(107,466
)
 
196,541

Total
$
590,385

 
$
(214,978
)
 
$
375,407

 
$
610,950

 
$
(186,517
)
 
$
424,433


The gross carrying amounts of intangible assets are removed when fully amortized. The estimated future annual amortization expense for intangible assets is as follows:
Fiscal Year Ending March 31,
Amount
 
(In thousands)
2019 (1)
$
35,987

2020
66,906

2021
62,515

2022
53,678

2023
45,421

Thereafter
110,900

Total amortization expense
$
375,407

____________________________________________________________
(1)
Represents estimated amortization for the remaining six-month period ending March 31, 2019.
 
Other Current Assets

Other current assets include approximately $304.3 million and $445.4 million as of September 28, 2018 and March 31, 2018, respectively, for the deferred purchase price receivable from the Company's Asset-Backed Securitization programs. See note 10 for additional information. Assets held for sale related to the China-based Multek operations previously recorded in other current assets have been removed from the condensed consolidated balance sheet as of September 28, 2018, following the execution of the divestiture. See note 12 for additional information.

Investments

The Company has an investment portfolio that consists of strategic investments in privately held companies, and certain venture capital funds which are included within other assets. These privately held companies range from startups to more mature companies with established revenue streams and business models. The primary purpose of these investments is to create an ecosystem of partnerships with customers developing emerging technologies aligned to the Company's corporate strategy with bringing in future opportunities for exclusive manufacturing.
Non-majority-owned investments in entities are accounted for using the equity method when the Company has an investment in common stock or in-substance common stock, and either (a) has the ability to significantly influence the operating decisions of the issuer, or (b) if the Company has a voting percentage equal to or generally greater than 20% but less than 50%, and for non-majority-owned investments in partnerships when generally greater than 5%. The equity in earnings (losses) of equity method investees are immaterial for all periods presented, and are included in interest and other, net in the condensed consolidated statements of operations. Cost method is used for investments which the Company does not have the ability to significantly influence the operating decisions of the investee.
The Company monitors these investments for impairment indicators and makes appropriate reductions in carrying values as required whenever events or changes in circumstances indicate that the assets may be impaired. The factors the Company considers in its evaluation of potential impairment of its investments include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee, or factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operation or working capital deficiencies. Fair values of these investments, when required, are estimated using unobservable inputs, primarily comparable company multiples and

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discounted cash flow projections. For investments accounted for under cost method that do not have readily determinable fair values, the Company has elected, per ASU 2016-01, to measure them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
AutoLab AI (now known as Bright Machines)
During the first quarter of fiscal year 2019, the Company transferred existing employees and equipment with a net book value of approximately $40 million along with certain related software and Intellectual Property ("IP"), into the newly created AutoLab AI (“AutoLab”), in exchange for shares of preferred stock and a controlling financial interest in AutoLab. AutoLab is a privately held software-as-a service (SaaS) and hardware company focused on developing and deploying an automation solution worldwide. The Company has concluded that AutoLab does not qualify as a variable interest entity for purposes of evaluating whether it has a controlling financial interest.
Subsequent to the initial formation and prior to June 29, 2018, AutoLab received equity funding from third party investors and expanded the board of directors, resulting in dilution of the Company's voting interest below 50%. As a result, the Company concluded it no longer holds a controlling financial interest in AutoLab and accordingly, deconsolidated the entity.
The fair value of the Company’s non-controlling interest in AutoLab upon deconsolidation was approximately $127.6 million as of the date of deconsolidation. The Company accounts for its investment in AutoLab under the equity method, with the carrying amount included in other assets on the condensed consolidated balance sheet. The value of the Company’s interest on the date of deconsolidation was based on management’s estimate of the fair value of AutoLab at that time. Management relied on a multi-stage process which involved calculating the enterprise and equity value of AutoLab, then allocating the equity value of the entity to the Company’s securities. The enterprise value of AutoLab was estimated based on the value implied by the equity funding AutoLab received from third parties in the same period (i.e., level 2 inputs). The Company recognized a gain on deconsolidation of approximately $87.3 million with no material tax impact, which is included in other charges (income), net on the condensed consolidated statement of operations.
In addition, during the first quarter of fiscal year 2019, the Company leased approximately $76.5 million of fixed assets to AutoLab under a five-year lease term based on an interest rate of 4.20% per year. The leases were concluded to be sales-type leases and as such, the Company derecognized the associated assets from property and equipment, net and recorded a total net investment in the lease of $88.2 million in other current assets and other assets, based on the present value of lease receivables. The Company recorded an immaterial gain related to this leasing transaction, which is included in cost of sales on the condensed consolidated statement of operations.
Pro-forma financials have not been presented because the effects were not material to the Company’s condensed consolidated financial position and results of operation for all periods presented. AutoLab became a related party to the Company starting on the date of deconsolidation. The Company has engaged AutoLab as a strategic partner to develop and deploy automation solutions for Flex and has entered into a 5-year subscription agreement. Subscription fees under the AutoLab agreement were immaterial for the six-month period ended September 28, 2018.
As of September 28, 2018, and March 31, 2018, the Company's investments in non-majority owned companies totaled $557.2 million and $411.1 million, respectively. The equity in the earnings or losses of the Company's equity method investments, including AutoLab, was not material to the consolidated results of operations for any period presented and is included in interest and other, net.
Other Current Liabilities
Other current liabilities include customer working capital advances of $226.5 million and $153.6 million, customer-related accruals of $369.8 million and $439.0 million, and deferred revenue of $247.1 million and $329.0 million as of September 28, 2018 and March 31, 2018, 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. Liabilities held for sale related to the China-based Multek operations previously recorded in other current liabilities have been removed from the condensed consolidated balance sheet as of September 28, 2018, following the execution of the divestiture. See note 12 for additional information.
3.  REVENUE
 
Revenue Recognition
The Company provides a comprehensive suite of services for its customers that range from advanced product design to manufacturing and logistics to after-sales services. The first step in its process for revenue recognition is to identify a contract

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with a customer. A contract is defined as an agreement between two parties that create 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, we bid on a program-by-program basis and typically receive 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, 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 of its contracts the Company is manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and IP restrictions) and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer.
Customer Contracts and Related Obligations
Certain of the Company’s customer agreements include potential price adjustments which may result in variable consideration. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually required to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company estimates the variable consideration related to these price adjustments as part of the total transaction price and recognizes revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. The Company constrains the amount of revenues recognized for these contractual provisions based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. The Company determines the amounts to be recognized based on the amount of potential refund required by the contract, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices for future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In many instances, the agreement is silent on the settlement mechanism. Any difference between the amount accrued upon shipment for potential refunds and the actual amount agreed to with the customer is recorded as an increase or decrease in revenue. These potential price adjustments are included as part of other current liabilities on the consolidated balance sheet and disclosed as part of customer related accruals in note 2.
Performance Obligations
The Company derives its revenues primarily from manufacturing services, and to a lesser extent, from innovative design, engineering, and supply chain services and solutions.
A performance obligation is an implicitly or explicitly promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company considers all activities typically included in its contracts, and identifies those activities representing a promise to transfer goods or services to a customer. These include, but are not limited to, design and engineering services, prototype products, tooling, etc. Each promised good or service with regards to these identified activities is accounted for as a separate performance obligation only if it is distinct - i.e., the customer can benefit from it on its own or together with other resources that are readily available to the customer. Certain activities on the other hand are determined not to constitute a promise to transfer goods or service, and therefore do not represent separate performance obligations for revenue recognition (e.g., procurement of materials and standard workmanship warranty).
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual good or service is not separately identifiable from other promises in the contract and is, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed

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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 Flex 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 sheet and transferred to receivables when rights to payment become unconditional. The following table summarizes the activity in the Company's contract assets during the six-month period ended September 28, 2018 (in thousands):
 
Contract Assets
Beginning balance, April 1, 2018
$

Cumulative effect adjustment at April 1, 2018
412,787

Revenue recognized
3,566,140

Amounts collected or invoiced
(3,560,769
)
Ending balance, September 28, 2018
$
418,158

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 were $247.1 million and $265.3 million as of September 28, 2018 and April 1, 2018, respectively.
Disaggregation of Revenue
The following table presents the Company’s revenue disaggregated based on timing of transfer - point in time and overtime - for the three-month and six-month periods ended September 28, 2018 (in thousands), respectively:
Three-month Period Ended September 28, 2018
 
HRS
 
CTG
 
IEI
 
CEC
 
Total
Timing of Transfer
 
 
 
 
 
 
 
 
 
Point in time
$
893,141

 
$
1,203,696

 
$
1,089,319

 
$
1,519,041

 
$
4,705,197

Over time
314,830

 
592,187

 
476,634

 
621,756

 
2,005,407

Total segment
$
1,207,971

 
$
1,795,883

 
$
1,565,953

 
$
2,140,797

 
$
6,710,604

Six-month Period Ended September 28, 2018

HRS

CTG

IEI

CEC

Total
Timing of Transfer














Point in time
$
1,898,321


$
2,504,333


$
2,153,218


$
3,012,548


$
9,568,420

Over time
525,075


1,099,484


859,046


1,082,535


3,566,140

Total segment
$
2,423,396


$
3,603,817


$
3,012,264


$
4,095,083


$
13,134,560


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

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The following table summarizes the Company’s share-based compensation expense:
 
Three-Month Periods Ended

Six-Month Periods Ended
 
September 28, 2018

September 29, 2017

September 28, 2018

September 29, 2017
 
(In thousands)
Cost of sales
$
4,767


$
4,985


$
10,171


$
8,304

Selling, general and administrative expenses
14,314


15,479


29,863


33,956

Total share-based compensation expense
$
19,081


$
20,464


$
40,034


$
42,260


Total unrecognized compensation expense related to share options under all plans was $4.3 million and will be recognized over a weighted-average remaining vesting period of 1.9 years. As of September 28, 2018, the number of options outstanding and exercisable under all plans was 1.1 million and 0.6 million, respectively, at a weighted-average exercise price of $3.40 per share and $4.02 per share, respectively. 
During the six-month period ended September 28, 2018, the Company granted 5.5 million unvested restricted share unit awards. Of this amount, approximately 4.2 million are plain-vanilla unvested restricted share unit awards with no performance or market conditions with an average grant date price of $14.02 per award and will vest over four years. Further, approximately 1.3 million unvested shares represent the target amount of grants made to certain key employees whereby vesting is contingent on certain market conditions. The average grant date fair value of these awards contingent on certain market conditions was estimated to be $14.00 per award and was calculated using a Monte Carlo simulation. The number of shares contingent on market conditions that ultimately will vest will range from zero up to a maximum of 2.6 million based on a measurement of the percentile rank of the Company’s total shareholder return over a certain specified period against the Standard and Poor’s (“S&P”) 500 Composite Index and will cliff vest after a period of three years, if such market conditions have been met.  
As of September 28, 2018, approximately 14.1 million unvested restricted share unit awards under all plans were outstanding, of which vesting for a targeted amount of 2.6 million is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero to 5.2 million based on the achievement levels of the respective conditions. During the six-month period ended September 28, 2018, 0.6 million shares vested in connection with the restricted share unit awards with market conditions granted in fiscal year 2016. 
As of September 28, 2018, total unrecognized compensation expense related to unvested restricted share unit awards under all plans was approximately $168.6 million, and will be recognized over a weighted-average remaining vesting period of 2.7 years.

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5.  EARNINGS PER SHARE 
The following table reflects basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted earnings per share attributable to the shareholders of Flex Ltd.
 
Three-Month Periods Ended

Six-Month Periods Ended
 
September 28, 2018

September 29, 2017

September 28, 2018

September 29, 2017
 
(In thousands, except per share amounts)
Basic earnings per share:











Net income
$
86,885


$
205,086


$
202,920


$
329,796

Shares used in computation:






 


 

Weighted-average ordinary shares outstanding
531,503


531,313


530,426


530,790

Basic earnings per share
0.16


0.39


0.38


0.62













Diluted earnings per share:
 


 


 


 

Net income
$
86,885


$
205,086


$
202,920


$
329,796

Shares used in computation:
 


 


 


 

Weighted-average ordinary shares outstanding
531,503


531,313


530,426


530,790

Weighted-average ordinary share equivalents from stock options and awards (1) (2)
2,955


4,706


4,601


5,521

Weighted-average ordinary shares and ordinary share equivalents outstanding
534,458


536,019


535,027


536,311

Diluted earnings per share
0.16


0.38


0.38


0.61

____________________________________________________________
(1)
An immaterial amount of options to purchase ordinary shares were excluded from the computation of diluted earnings per share during the three-month and six-month periods ended September 28, 2018 and September 29, 2017, respectively, due to their anti-dilutive impact on the weighted-average ordinary share equivalents.
(2)
Restricted share unit awards of 3.1 million for the three-month and six-month periods ended September 28, 2018 were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents. An immaterial amount of anti-dilutive restricted share unit awards was excluded for the three-month and six-month periods ended September 29, 2017.
6.  INTEREST AND OTHER, NET
 
During the three and six-month periods ended September 28, 2018, the Company recognized interest expense of $35.1 million and $68.7 million, respectively, on its debt obligations outstanding during the periods. During the three and six-month periods ended September 29, 2017, the Company recognized interest expense of $29.6 million and $58.6 million, respectively, on its debt obligations outstanding during the periods.
7.  OTHER CHARGES (INCOME), NET 
During the six-month period ended September 28, 2018, the Company recognized other income of $80.4 million, primarily driven by a $87.3 million gain on the deconsolidation of AutoLab. Refer to note 2 for further details of the deconsolidation.
During the six-month period ended September 29, 2017, the Company deconsolidated Elementum SCM (Cayman) Ltd and recognized a gain on deconsolidation of approximately $151.6 million with no related tax impact, which is included in other charges (income), net on the condensed consolidated statement of operations.

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8.  FINANCIAL INSTRUMENTS
 
Foreign Currency Contracts
The Company enters into short-term foreign currency derivatives contracts, including forward, swap, and options contracts to hedge only those currency exposures associated with certain assets and liabilities, primarily accounts receivable and accounts payable, and cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and accordingly, fair value adjustments related to the credit risk of the counterparty financial institution were not material.
As of September 28, 2018, the aggregate notional amount of the Company’s outstanding foreign currency derivative contracts was $8.3 billion as summarized below: 
 
Foreign Currency Amount
 
Notional Contract Value in USD
Currency
Buy
 
Sell
 
Buy

Sell
 
(In thousands)
Cash Flow Hedges
 

 
 

 
 
 
 

CNY
2,258,000

 

 
$
328,494

 
$

EUR
74,296

 
38,747

 
87,302

 
45,635

HUF
27,835,000

 

 
101,026

 

ILS
179,000

 
5,250

 
49,890

 
1,463

MXN
4,590,000

 

 
242,508

 

MYR
405,700

 
45,000

 
98,135

 
10,885

RON
180,700

 

 
45,570

 

SGD
47,500

 

 
34,799

 

Other
N/A

 
N/A

 
37,295

 
5,436

 
 

 
 

 
1,025,019

 
63,419

Other Foreign Currency Contracts


 


 


 


CAD
394,519

 
416,218

 
304,213

 
320,945

CNY
1,552,000

 

 
226,025

 

EUR
1,722,006

 
1,884,924

 
2,023,008

 
2,214,953

GBP
36,557

 
64,161

 
48,180

 
84,499

HUF
89,504,773

 
97,417,006

 
324,854

 
353,571

ILS
224,300

 

 
62,516

 

INR
5,735,497

 
8,205,341

 
79,226

 
113,127

MXN
2,611,896

 
2,050,476

 
137,997

 
108,335

MYR
643,720

 
341,430

 
155,710

 
82,589

SEK
467,158

 
546,573

 
52,141

 
62,010

SGD
88,850

 
49,740

 
65,092

 
36,440

Other
N/A

 
N/A

 
89,580

 
256,393

 
 

 
 

 
3,568,542

 
3,632,862




 


 


 


Total Notional Contract Value in USD
 

 
 

 
$
4,593,561

 
$
3,696,281

As of September 28, 2018, the fair value of the Company’s short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the condensed consolidated statements of operations. As of September 28, 2018, and March 31, 2018, the Company also has included net

21

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deferred gains and losses in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. Deferred losses were $11.8 million as of September 28, 2018, and are expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations primarily over the next twelve-month period. The gains and losses recognized in earnings due to hedge ineffectiveness were not material for all fiscal periods presented and are included as a component of interest and other, net in the condensed consolidated statements of operations. 
The following table presents the fair value of the Company’s derivative instruments utilized for foreign currency risk management purposes:
 
Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value
 
 
 
Fair Value
 
Balance Sheet
Location
 
September 28,
2018
 
March 31,
2018
 
Balance Sheet
Location
 
September 28,
2018
 
March 31,
2018
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
10,317

 
$
19,422

 
Other current liabilities
 
$
24,621

 
$
7,065

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
9,970

 
$
23,912

 
Other current liabilities
 
$
8,259

 
$
18,246

The Company has financial instruments subject to master netting arrangements, which provides 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 28, 2018

September 29, 2017
 
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
$
(76,649
)

$
(94,185
)

$
(170,834
)

$
(34,595
)

$
(84,881
)

$
(119,476
)
Other comprehensive gain (loss) before reclassifications
945


(6,622
)

(5,677
)

(3,865
)

9,478


5,613

Net (gains) losses reclassified from accumulated other comprehensive loss
20,130




20,130


(10,010
)



(10,010
)
Net current-period other comprehensive gain (loss)
21,075


(6,622
)

14,453


(13,875
)

9,478


(4,397
)
Ending balance
$
(55,574
)

$
(100,807
)

$
(156,381
)

$
(48,470
)

$
(75,403
)

$
(123,873
)


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Table of Contents


Six-Month Periods Ended

September 28, 2018

September 29, 2017

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
$
(35,746
)


$
(50,099
)

$
(85,845
)

$
(32,426
)

$
(95,717
)

$
(128,143
)
Other comprehensive gain (loss) before reclassifications
(40,714
)


(50,708
)

(91,422
)

(845
)

20,314


19,469

Net (gains) losses reclassified from accumulated other comprehensive loss
20,886




20,886


(15,199
)



(15,199
)
Net current-period other comprehensive gain (loss)
(19,828
)


(50,708
)

(70,536
)

(16,044
)

20,314


4,270

Ending balance
$
(55,574
)


$
(100,807
)

$
(156,381
)

$
(48,470
)

$
(75,403
)

$
(123,873
)

Substantially all unrealized losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three and six-month periods ended September 28, 2018 were recognized as a component of cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges. 
10.  TRADE RECEIVABLES SECURITIZATION
The Company sells trade receivables under two asset-backed securitization programs and an accounts receivable factoring program. 
Asset-Backed Securitization Programs 
The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreement (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” collectively, the “ABS Programs”) to affiliated special purpose entities, each of which in turn sells 100% of the receivables to unaffiliated financial institutions. These programs allow the operating subsidiaries to receive a cash payment and a deferred purchase price receivable for sold receivables. 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, which are included in other current assets as of September 28, 2018 and March 31, 2018, 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.
Following the transfer of the receivables to the special purpose entities, the transferred receivables are isolated from the Company and its affiliates, and upon the sale of the receivables from the special purpose entities to the unaffiliated financial institutions, effective control of the transferred receivables is passed to the unaffiliated financial institutions, which 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. 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.

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Table of Contents

 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 six-month periods ended September 28, 2018, and September 29, 2017 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.
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 September 28, 2018, and March 31, 2018, the accounts receivable balances that were sold under the ABS Programs were removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company during the six-month periods ended September 28, 2018 and September 29, 2017 were included as cash provided by operating activities in the condensed consolidated statements of cash flows. We recognize these proceeds net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivable. We recognize the collection of the deferred purchase price in net cash provided by investing activities in the condensed consolidated statements of cash flows as cash collections of deferred purchase price.
As of September 28, 2018, approximately $1.3 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 $1.0 billion and deferred purchase price receivables of $304.3 million. As of March 31, 2018, 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 $1.1 billion and deferred purchase price receivables of $445.4 million. The deferred purchase price balances as of September 28, 2018 and March 31, 2018, also represent the non-cash beneficial interest obtained in exchange for securitized receivables.
 For the six-month periods ended September 28, 2018 and September 29, 2017, cash flows from sales of receivables under the ABS Programs consisted of approximately $3.7 billion and $4.0 billion, respectively, for transfers of receivables, and approximately $1.8 billion and $2.5 billion, respectively, for collection on deferred purchase price receivables. The Company's cash flows from transfer of receivables consist primarily of proceeds from collections reinvested in revolving-period transfers. Cash flows from new transfers were not significant for all periods presented. 
Trade Accounts Receivable Sale Program
 
The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected on accounts where the Company has continuing involvement was approximately $463.2 million and $286.4 million as of September 28, 2018 and March 31, 2018, respectively. For the six-month periods ended September 28, 2018 and September 29, 2017, total accounts receivable sold to certain third-party banking institutions was approximately $1.4 billion and $0.6 billion, respectively, primarily due to certain customers transferring from the ABS Programs to the Trade Account Receivable Sale Program. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows. 
11.  FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows: 
Level 1 - Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. 
The Company has deferred compensation plans for its officers and certain other employees. Amounts deferred under the plans are invested in hypothetical investments selected by the participant or the participant’s investment manager. The Company’s deferred compensation plan assets are 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. 

24

Table of Contents

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 deposits and money market funds, which are valued using level 2 inputs, such as interest rates and maturity periods. Due to their short-term nature, their carrying amount approximates fair value. 
The Company’s deferred compensation plan assets also include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy. 
Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. 
The Company has accrued for contingent consideration in connection with its business acquisitions as applicable, which is measured at fair value based on certain internal models and unobservable inputs. All contingent considerations have been paid as of March 31, 2018.
There were no transfers between levels in the fair value hierarchy during the six-month periods ended September 28, 2018 and September 29, 2017
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: 
 
Fair Value Measurements as of September 28, 2018
 
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)
$

 
$
451,551

 
$

 
$
451,551

Foreign exchange contracts (Note 8)

 
20,287

 

 
20,287

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
6,267

 
76,021

 

 
82,288

Liabilities:
 

 
 

 
 

 
0.003

Foreign exchange contracts (Note 8)
$

 
$
(32,880
)
 
$

 
$
(32,880
)
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of March 31, 2018
 
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)
$

 
$
452,622

 
$

 
$
452,622

Foreign exchange contracts (Note 8)

 
43,334

 

 
43,334

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
7,196

 
67,532

 

 
74,728

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 8)
$

 
$
(25,311
)
 
$

 
$
(25,311
)
Other financial instruments 

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Table of Contents

The following table presents the Company’s major debts not carried at fair value: 
 
As of September 28, 2018

As of March 31, 2018


 
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Fair Value
Hierarchy
 
(In thousands)
4.625% Notes due February 2020
$
500,000


$
507,031


$
500,000

 
$
513,596


Level 1
Term Loan, including current portion, due in installments through November 2021
679,688


683,086


687,813

 
689,966


Level 1
Term Loan, including current portion, due in installments through June 2022
471,094

 
473,449

 
483,656

 
485,470

 
Level 1
5.000% Notes due February 2023
500,000


513,830


500,000

 
525,292


Level 1
4.750% Notes due June 2025
596,599


605,146


596,387

 
627,407


Level 1
Euro Term Loan due September 2020
55,804

 
55,804

 
59,443

 
59,443

 
Level 1
Euro Term Loan due January 2022
117,481

 
117,481

 
123,518

 
123,518

 
Level 1
Total
$
2,920,666


$
2,955,827


$
2,950,817


$
3,024,692


 
The Company values its Euro Term Loans due September 2020 and January 2022 based on the current market rate, and as of September 28, 2018, the carrying amounts approximate fair values.
The Term Loans due November 2021 and June 2022, and the Notes due February 2020, February 2023 and June 2025 are valued based on broker trading prices in active markets. 
12. BUSINESS AND ASSET DIVESTITURES
During the three-month period ended September 28, 2018, the Company divested its China-based Multek operations, for proceeds of approximately $264.4 million, net of cash. The Company transferred approximately $231.4 million of net assets, primarily property and equipment, accounts receivable, and accounts payable. Further, the Company incurred various selling transaction costs as part of this divestiture and allocated approximately $19.0 million of goodwill to the divested business. This transaction resulted in the recognition of an immaterial loss which is included in other charges (income), net in the condensed consolidated statements of operations as of September 28, 2018.
Pro-forma results of operations for this divestiture have not been presented because the effect was not material to the Company's consolidated financial results for all periods presented.
13.  COMMITMENTS AND CONTINGENCIES
 
Litigation and other legal matters
In connection with the matters described below, the Company has accrued for loss contingencies where it believes that losses are probable and estimable. The amounts accrued are not material. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, except as discussed below, due to various reasons, including, among others, that: (i) the proceedings are in early stages or no claims has been asserted, (ii) specific damages have not been sought in all of these matters, (iii) damages, if asserted, are considered unsupported and/or exaggerated, (iv) there is uncertainty as to the outcome of pending appeals, motions, or settlements, (v) there are significant factual issues to be resolved, and/or (vi) there are novel legal issues or unsettled legal theories presented. Any such excess loss could have a material adverse effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.
In addition, the Company provides design and engineering services to its customers and also designs and makes its own products. As a consequence of these activities, its customers are requiring the Company to take responsibility for intellectual property to a greater extent than in its manufacturing and assembly businesses. Although the Company believes that its intellectual property assets and licenses are sufficient for the operation of its business as it currently conducts it, from time to time third parties do assert patent infringement claims against the Company or its customers. If and when third parties make assertions regarding the ownership or right to use intellectual property, the Company could be required to either enter into licensing arrangements or to resolve the issue through litigation. Such license rights might not be available to the Company on commercially acceptable terms, if at all, and any such litigation might not be resolved in its favor. Additionally, litigation could

26

Table of Contents

be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. The Company also could be required to incur substantial costs to redesign a product or re-perform design services.
From time to time, the Company enters into IP licenses (e.g., patent licenses and software licenses) with third parties which obligate the Company to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable our use of third party technologies. The Company may also decline to enter into licenses for intellectual property that it does not think is useful for or used in its operations, or for which its customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of its business and the location of its business around the world, certain activities the Company performs, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. The Company's licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g. base price) for any royalty amounts owed are audited by licensors and may be challenged. Some of these disagreements may lead to claims and litigation that might not be resolved in the Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. In March 2018, the Company received an inquiry from a licensor referencing a patent license agreement, and requesting information relating to royalties for products that it assembles for a customer in China. If any of these inquiries result in a claim, the Company intends to contest and defend against any such claim vigorously. If a claim is asserted and the Company is unsuccessful in its defense, a material loss is reasonably possible. The Company cannot predict or estimate an amount or reasonable range of outcomes with respect to the matter.
On May 8, 2018, a putative class action was filed in the Northern District of California against the Company and certain officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, alleging misstatements and/or omissions in certain of the Company’s financial results, press releases and SEC filings made during the putative class period of January 26, 2017 through April 26, 2018. On October 1, 2018, the Court appointed lead plaintiff and lead plaintiff’s counsel in the case. On October 15, 2018, the Court issued an order providing that lead plaintiff shall file an amended complaint by November 30, 2018 and that defendants shall respond to the amended complaint by January 10, 2019, and setting the hearing on defendants’ motion to dismiss for March 21, 2019. The Court also set a case management conference for December 12, 2018. The Company believes that the claims are without merit and intends to vigorously defend this case.
On April 21, 2016, SunEdison, Inc. (together with certain of its subsidiaries, "SunEdison") filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During the fiscal year ended March 31, 2016, the Company recognized a bad debt reserve charge of $61.0 million associated with its outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90.0 million. SunEdison stated in schedules filed with the Bankruptcy Court that, within the 90 days preceding SunEdison's bankruptcy filing, the Company received approximately $98.6 million of inventory and cash transfers of $69.2 million, which in aggregate represents the Company's estimate of the maximum reasonably possible contingent loss. On April 15, 2018, a subsidiary of the Company together with its subsidiaries and affiliates, entered into a tolling agreement with the trustee of the SunEdison Litigation Trust to toll any applicable statute of limitations or other time-related defense that might exist in regards to any potential claims that either party might be able to assert against the other for a period that will end at the earlier to occur of: (a) 60 days after a party provides written notice of termination; (b) six years from the effective date of April 15, 2018; or (c) such other date as the parties may agree in writing. No preference claims have been asserted against the Company and consideration has been given to the related contingencies based on the facts currently known. The Company has a number of affirmative and direct defenses to any potential claims for recovery and intends to vigorously defend any such claim, if asserted.
One of the Company's Brazilian subsidiaries has received related assessments for certain sales and import taxes. There are six tax assessments totaling 346 million Brazilian reals (approximately USD $85.24 million based on the exchange rate as of September 28, 2018). The assessments are in various stages of the review process at the administrative level and no tax proceeding has been finalized yet. The Company believes there is no legal basis for these assessments and has meritorious defenses and will continue to vigorously oppose all of these assessments, as well as any future assessments. The Company does not expect final judicial determination on any of these claims for several years.
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.  SHARE REPURCHASES 

27

Table of Contents

During the three-month and six-month periods ended September 28, 2018, the Company repurchased 4.4 million shares at an aggregate purchase price of $60.0 million, 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 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 16, 2018. As of September 28, 2018, shares in the aggregate amount of $453.5 million were available to be repurchased under the current plan.
15.  SEGMENT REPORTING
The Company has four reportable segments: HRS, CTG, IEI, and CEC. These segments are determined 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 amortization of intangibles, stock-based compensation, customer related asset impairments charges, the new revenue standard adoption impact, contingencies and other, other charges (income), net and interest and other, net.

28

Table of Contents

Selected financial information by segment is in the table below. For the six-month period ended September 28, 2018, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings, as further described in note 1 to the condensed consolidated financial statements. The comparative information for the three and six-month periods ended September 29, 2017 has not been restated and continues to be reported under the accounting standards in effect at the time:
 
Three-Month Periods Ended
 
Six-Month Periods Ended
 
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In thousands)
Net sales:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
2,140,797

 
$
1,901,057

 
$
4,095,083

 
$
3,874,390

Consumer Technologies Group
1,795,883

 
1,755,143

 
3,603,817

 
3,267,112

Industrial & Emerging Industries
1,565,953

 
1,454,539

 
3,012,264

 
2,845,138

High Reliability Solutions
1,207,971

 
1,159,681

 
2,423,396

 
2,292,052

 
$
6,710,604

 
$
6,270,420

 
$
13,134,560

 
$
12,278,692

Segment income and reconciliation of income before tax:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
62,855

 
$
42,733

 
$
108,873

 
$
91,335

Consumer Technologies Group
31,212

 
30,722

 
57,769

 
48,726

Industrial & Emerging Industries
65,857

 
50,945

 
117,218

 
106,322

High Reliability Solutions
89,589

 
92,364

 
183,123

 
182,576

Corporate and Other
(25,983
)
 
(28,438
)
 
(55,745
)
 
(62,716
)
   Total segment income
223,530

 
188,326

 
411,238

 
366,243

Reconciling items:
 
 
 
 
 
 
 
Intangible amortization
18,234

 
16,376

 
36,751

 
36,277

Stock-based compensation
19,081

 
20,464

 
40,034

 
42,260

Customer related asset impairments (1)
30,100

 
4,753

 
47,464

 
4,753

New revenue standard adoption impact (Note 1 & Note 3)

 

 
9,291

 

Contingencies and other (2)
(269
)
 
43,933

 
24,859

 
43,933

Other charges (income), net (Note 7)
6,530

 
(143,167
)
 
(80,394
)
 
(179,332
)
Interest and other, net
41,060

 
27,554

 
82,802

 
54,430

    Income before income taxes
$
108,794

 
$
218,413

 
$
250,431

 
$
363,922

(1)
Customer related asset impairments for the three and six-month periods ended September 28, 2018 relate to additional provision for doubtful accounts receivable, inventory and impairment of other assets for certain customers experiencing significant financial difficulties as well as $30 million of exit costs primarily related to our estimated impairment of fixed assets considered not recoverable in conjunction with the wind-down of our NIKE footwear manufacturing operations in Mexico.
(2)
Contingencies and other during the three and six-month periods ended September 28, 2018 primarily consists of costs incurred relating to the independent investigation undertaken by the Audit Committee of the Company’s Board of Directors which was completed in June 2018, along with certain restructuring charges incurred during our first quarter of fiscal year 2019 offset by certain immaterial reversals in the second quarter of fiscal year 2019.
During the three and six-month periods ended September 29, 2017, the Company incurred charges in connection with certain legal matters, for loss contingencies where it believed that losses were probable and estimable. Additionally, the Company incurred various other charges predominately related to damages incurred from a typhoon that impacted a China facility, along with certain restructuring charges primarily related to severance for rationalization at existing sites and corporate functions.
Corporate and other primarily includes corporate services costs that are not included in the Chief Operating Decision Maker's ("CODM") assessment of the performance of each of the identified reporting segments.
Property and equipment on a segment basis is not disclosed as it is not separately identified and is not internally reported by segment to the Company's CODM.

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16.  BANK BORROWINGS AND LONG TERM DEBT

Term Loan Facility due September 2023 

In July 2018, the Company entered into a $200 million term loan facility (the "Facility"). The Facility will be used to fund capital expenditure to support our expansion plan for India. The availability period during which drawdown can be made will be from the date of the agreement to and including June 30, 2019. The maximum maturity of each drawdown will be 5 years from the funded Capex shipment date. As a result, the longest maturity date of any future drawdown under the Facility will be June 30, 2024. Borrowings under this term loan bear interest at LIBOR plus a margin of 1.15%. The Facility is unsecured, guaranteed by the Company, and contains customary restrictions on the ability of the Company and its subsidiaries to (i) incur certain debt, (ii) make certain investments, (iii) make certain acquisitions of other entities, (iv) incur liens, (v) dispose of assets, (vi) make non-cash distributions to shareholders, and (vii) engage in transactions with affiliates. These covenants are subject to certain exceptions and limitations. This Facility agreement also requires that the Company maintain a maximum ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation and amortization), and a minimum interest coverage ratio, as defined therein, during its term. As of September 28, 2018, the Company was in compliance with the covenants under this term loan agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Unless otherwise specifically stated, references in this report to “Flex,” “the Company,” “we,” “us,” “our” and similar terms mean Flex Ltd., and its subsidiaries.
 
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part II, Item 1A, “Risk Factors” of this report on Form 10-Q, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended March 31, 2018. 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, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. We design, build, ship and service complete packaged consumer and enterprise products, for companies of all sizes in various industries 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, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers;
Industrial and Emerging Industries ("IEI"), which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and
High Reliability Solutions ("HRS"), which is comprised of our health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging

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equipment; our automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies.
Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product life cycle.
Over the past few years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Some companies that have historically identified themselves as software providers, Internet service providers or e-commerce retailers have entered the highly competitive and rapidly evolving technology hardware markets, such as mobile devices, home entertainment and wearable devices. This trend has resulted in a significant change in the manufacturing and supply chain solutions requirements of such companies. While the products have become more complex, the supply chain solutions required by such companies have become more customized and demanding, and it has changed the manufacturing and supply chain landscape significantly.
We use a portfolio approach to manage our extensive service offerings. As our customers change the way they go to market, we have the capability to reorganize and rebalance our business portfolio in order to align with our customers' needs and requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customer's supply chain solutions needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.
During the past several years, we have evolved our long-term portfolio towards a 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 have launched several programs broadly across our portfolio of services and in some instances, we have 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 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, which remain strong.
We are one of the world's largest providers of global supply chain solutions, with revenues of $13.1 billion for the six-month period ended September 28, 2018 and $25.4 billion in fiscal year 2018. On April 1, 2018, the Company adopted the new revenue standard and as a result we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings, as further described in note 1 to the condensed consolidated financial statements. The comparative information has not been restated and continues to be reported under the accounting standards in effect at the time. The following tables set forth the relative percentages and dollar amounts of net sales and net property and equipment, by country, based on the location of our manufacturing sites:
 

Three-Month Periods Ended

Six-Month Periods Ended
Net sales:

September 28, 2018

September 29, 2017

September 28, 2018

September 29, 2017
 

(In millions)
China

$
1,730


26
%

$
1,752


28
%

$
3,400


26
%

$
3,497


28
%
Mexico

1,197


18
%

1,079


17
%

2,320


18
%

2,119


17
%
U.S.

782


12
%

740


12
%

1,288


10
%

1,435


12
%
Malaysia

561


8
%

515


8
%

1,038


8
%

1,020


8
%
Brazil

533


8
%

642


10
%

1,120


9
%

1,240


10
%
India

440


7
%

146


2
%

908


7
%

256


2
%
Other

1,468


22
%

1,396


22
%

3,061


23
%

2,712


22
%
 

$
6,711


 


$
6,270


 


$
13,135


 


$
12,279


 



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As of
 
As of
Property and equipment, net:
September 28, 2018
 
March 31, 2018
 
(In millions)
China
$
524

 
23
%
 
$
492

 
22
%
Mexico
519

 
23
%
 
587

 
26
%
U.S.
325

 
14
%
 
305

 
14
%
India
167

 
7
%
 
78

 
3
%
Malaysia
147

 
6
%
 
153

 
7
%
Hungary
138

 
6
%
 
150

 
7
%
Other
458

 
20
%
 
475

 
21
%
 
$
2,278

 
 

 
$
2,240

 
 

We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we have launched multiple product innovation centers ("PIC") focused exclusively on offering 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:
 
changes in the macro-economic environment and related changes in consumer demand;

the mix of the manufacturing services we are providing, the number and size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, shortages of components and other factors;

the effects on our business when our customers are not successful in marketing their products, or when their products do not gain widespread commercial acceptance;

our ability to achieve commercially viable production yields and to manufacture components in commercial quantities to the performance specifications demanded by our customers;

the effects on our business due to our customers’ products having short product life cycles;

our customers’ ability to cancel or delay orders or change production quantities;

our customers’ decision 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;

the impacts on our business due to capacity constraints in certain location;

the impacts on our business due to component shortages;

changes in tax legislation; and

changes in trade regulations and treaties.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

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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. 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, 2018, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There were no changes to our accounting policies other than the adoption of ASC 606, as discussed below. In addition, due to the recent stock price decline, we believe the significant drop in market value constitutes a "triggering event" in accordance with the applicable accounting literature, and accordingly commenced an interim impairment test as noted below.
Revenue Recognition
In determining the appropriate amount of revenue to recognize, we apply 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) we satisfy a performance obligation. Further, we assess 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). We are first required to evaluate whether our contracts meet the criteria for OT recognition. We have determined that for a portion of our contracts, we are manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and IP restrictions) and we have an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, we recognize revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer. Refer to notes 1 and 3 to the condensed consolidated financial statements for further details.
Carrying Value of Long-Lived Assets
Goodwill is tested for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit, which typically is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis. Due to the recent decline in the Company's market capitalization, we believe this constitutes a "triggering event" in accordance with the applicable accounting literature and accordingly commenced an interim impairment test. We are in the process of completing the first step of the goodwill impairment test which includes comparing the fair value of a reporting unit with its carrying amount, including goodwill. Based on preliminary results, the Company believes that it is probable that the fair value of the CTG reporting unit is lower than its carrying value. The carrying value of CTG's goodwill as of September 28, 2018 is $103 million. The Company is in the process of finalizing the long-term financial projections necessary to complete the first step of the goodwill impairment test. If it is determined that the goodwill of any of the reporting units is in fact impaired, the Company will then proceed to the second step of the impairment test in which it will measure the fair value of such reporting unit’s identified tangible and intangible assets and liabilities in order to determine the implied fair value of its goodwill and any resulting goodwill impairment. Refer to note 2 to the condensed consolidated financial statements for further details.
RESULTS OF OPERATIONS 
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales. 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 2018 Annual Report on Form 10-K.

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Table of Contents

 
Three-Month Periods Ended

Six-Month Periods Ended
 
September 28, 2018

September 29, 2017

September 28, 2018

September 29, 2017
Net sales
100.0
%

100.0
 %

100.0
 %

100.0
 %
Cost of sales
94.0


93.7


94.1


93.5

Gross profit
6.0


6.3


5.9


6.5

Selling, general and administrative expenses
3.4


4.4


3.7


4.3

Intangible amortization
0.3


0.3


0.3


0.3

Interest and other, net
0.6


0.4


0.6


0.4

Other charges (income), net
0.1


(2.3
)

(0.6
)

(1.5
)
Income before income taxes
1.6


3.5


1.9


3.0

Provision for income taxes
0.3


0.2


0.4


0.3

Net income
1.3
%

3.3
 %

1.5
 %

2.7
 %
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: 

 
Three-Month Periods Ended
 
Six-Month Periods Ended
Segments:
September 28, 2018
 
September 29, 2017
 
September 28, 2018
 
September 29, 2017
 
(In millions)
 
 
Communications & Enterprise Compute