FLEX LTD. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
Unless otherwise specified, references in this report to “Flex”, “the company”, “we”, “us”, “our” and similar terms mean
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expects," "anticipates," "believes," "intends," "plans" and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with theSecurities and Exchange Commission (the "SEC"). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part I, Item 1A, "Risk Factors" and in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
OVERVIEW
We are the diversified manufacturing partner of choice that helps market-leading brands design, build and deliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, we deliver advanced manufacturing solutions and operate one of the most trusted global supply chains, supporting the entire product lifecycle with fulfillment, after-market, and circular economy solutions for diverse industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. Our three operating and reportable segments are:
• Flex Agility Solutions (“FAS”), which includes the following end markets:
• Communications, Enterprise and Cloud, including data infrastructure, edge infrastructure and communications infrastructure;
•Lifestyle, including appliances, consumer packaging, floor care, micro-mobility and audio; and
•Consumer devices, including mobile and high-speed consumer devices.
• Flex Reliability Solutions (“FRS”), which includes the following end markets:
• Automotive, including next-generation mobility, autonomy, connectivity, electrification and smart technologies;
• Healthcare solutions, including medical devices, medical equipment and drug delivery; and
•Industrial, including capital goods, industrial appliances, renewables and network edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world.Nextracker's products enable solar panels to follow the sun's movement across the sky and optimize plant performance.
Our strategy is to provide customers with a full range of competitive, vertically integrated global supply chain solutions through which we can design, build, ship and service a complete product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the 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
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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 customers' supply chain solution needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital. We believe that our continued business transformation to improve our portfolio mix is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services.
Update on the impact of COVID-19, component shortages and logistical constraints on our business
With the second wave of the global pandemic including follow-on variants of COVID-19, there have been renewed disease control measures being taken to limit the spread including movement bans and shelter-in-place orders. Although not materially impacting our results for the first half of fiscal year 2023, with the lockdowns inChina , we experienced temporary plant closures and/or restrictions at certain of our manufacturing facilities inChina . We continue to closely monitor the situation in all the locations where we operate. Our priority remains the welfare of our employees. In addition, our end markets continue to be impacted by the global supply chain disruptions. Component shortages and logistical constraints are pervasive across the entire value chain. We expect persistent waves of COVID-19 to remain a headwind into the near future. Component shortages and significantly increased logistic costs are also expected to persist at least in the near future. We continue to carefully monitor potential supply chain disruptions due to ongoing tightness in the overall component environment. Refer to "Risk Factors - The ongoing COVID-19 pandemic has materially and adversely affected our business and results of operations. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material." and "-- Supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand, could affect our ability to meet customer demand, lead to higher costs, or result in excess or obsolete inventory. We have been and continue to be adversely affected by supply chain issues, including shortages of required electronic components." as disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 .
We continually assess our capital structure in response to the current environment and expect our current financial position, including our sources of liquidity, to be adequate to fund our future liabilities. See additional discussion in the Liquidity and Capital Resources section below.
Russian invasion of
We continue to monitor and respond to the escalating conflict inUkraine and the associated sanctions and other restrictions. As of the date of this report, there is no material impact to our business operations and financial performance inUkraine . The full impact of the conflict on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflict and its impact on regional and global economic conditions. We will continue to monitor the conflict and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business.
Other developments
OnApril 28, 2021 , we announced that we confidentially submitted a draft registration statement on Form S-1 with theSEC relating to the proposed initial public offering ofNextracker's Class A common stock. The initial public offering and its timing are subject to market and other conditions and theSEC's review process, and there can be no assurance that we will proceed with such offering or any alternative transaction. Refer to "Risk Factors - We are pursuing alternatives for ourNextracker business, including a full or partial separation of the business, through an initial public offering ofNextracker or otherwise, which may not be consummated as or when planned or at all, and may not achieve the intended benefits." as disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . OnFebruary 1, 2022 , one of our subsidiaries sold Series A Preferred Units representing a 16.7% interest inNextracker to TPG Rise for an aggregate purchase price of$500 million . The sale of the 16.7% interest inNextracker reflects an implied value forNextracker as of the date of the sale of$3.0 billion . See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 for further information. This Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2022 does not constitute an offer to sell or a solicitation of an offer to buy securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction. 28
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Company Overview
We are one of the world's largest providers of global supply chain solutions, with revenues of$15.1 billion for the six-month period endedSeptember 30, 2022 and$26.0 billion in the fiscal year endedMarch 31, 2022 . We have established an extensive network of manufacturing facilities in the world's major consumer and enterprise markets (Asia , theAmericas , andEurope ) to serve the growing outsourcing needs of both multinational and regional customers. We design, build, ship, and service consumer and enterprise products for our customers through a network of over 100 facilities in approximately 30 countries across four continents. We also provide intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. The following tables set forth the relative percentages and dollar amounts of net sales by region and by country, and net property and equipment by country, based on the location of our manufacturing sites (amounts may not sum due to rounding): Three-Month Periods Ended Six-Month Periods Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (In millions) Net sales by region: Americas$ 3,459 45 %$ 2,605 42 %$ 6,774 45 %$ 5,184 41 % Asia 2,751 35 % 2,347 38 % 5,268 35 % 4,712 37 % Europe 1,556 20 % 1,277 20 % 3,071 20 % 2,675 22 %$ 7,766 $ 6,229 $ 15,113 $ 12,571 Net sales by country: China$ 1,770 23 %$ 1,547 25 %$ 3,354 22 %$ 3,078 24 % Mexico 1,601 21 % 1,240 20 % 3,156 21 % 2,460 20 % U.S. 1,294 17 % 846 14 % 2,511 17 % 1,722 14 % Malaysia 633 8 % 412 7 % 1,204 8 % 823 7 % Brazil 547 7 % 502 8 % 1,074 7 % 966 8 % Hungary 330 4 % 295 5 % 616 4 % 647 5 % Other 1,591 20 % 1,387 21 % 3,198 21 % 2,875 22 %$ 7,766 $ 6,229 $ 15,113 $ 12,571 As of As of
Property and equipment, net:September 30, 2022
March 31, 2022 (In millions) Mexico $ 672 31 % $ 626 29 % U.S. 371 17 % 354 17 % China 323 15 % 299 14 % Malaysia 137 6 % 110 5 % Hungary 113 5 % 118 6 % India 112 5 % 129 6 % Other 473 21 % 489 23 % $ 2,201$ 2,125 We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we offer our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings.
Our results of operations are influenced by a number of factors, including the following:
•impacts on our business due to component shortages, transportation disruptions or other supply chain constraints, including as a result of the global COVID-19 pandemic;
•the effects of the global COVID-19 pandemic on our business and results of operations;
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•the evolution of the macro-economic environment and the correlative evolution of consumer demand;
•the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, and other factors;
• the effects on our business when our customers fail to market their products or when their products do not achieve wide commercial acceptance;
•our ability to achieve commercially viable production yields and to manufacture components in commercial quantities to the performance specifications demanded by our customers; •the effects that current credit and market conditions (including as a result of the COVID-19 global pandemic and the ongoing conflict betweenRussia andUkraine ) could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations;
•the effects on our business of certain customers’ products having short life cycles;
•the possibility for our customers to cancel or delay orders or modify production quantities;
•the decision of our customers to choose in-house manufacturing rather than outsourcing for their product needs;
•the integration of acquired activities and facilities;
•increased labor costs due to unfavorable working conditions in the markets in which we operate;
•changes in tax legislation; and
•changes in regulations and commercial treaties.
We are also subject to other risks as discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("U.S. GAAP" or "GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic and the ongoing conflict betweenRussia andUkraine , there has been and will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19 and the Russian invasion ofUkraine . These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions. Refer to the accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 , where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. 30 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales (amounts may not sum due to rounding). The financial information and the discussion below should be read together with the condensed consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . Three-Month Periods Ended Six-Month Periods Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 92.4 92.4 92.5 92.5 Restructuring charges - 0.1 - 0.1 Gross profit 7.6 7.5 7.5 7.4 Selling, general and administrative expenses 3.2 3.4 3.2
3.3
Intangible amortization 0.2 0.3 0.3 0.2 Operating income 4.2 3.8 4.0 3.9 Interest and other, net 0.7 (2.2) 0.7
(0.9)
Income before income taxes 3.5 6.0 3.3
4.8
Provision for income taxes 0.4 0.6 0.4 0.5 Net income 3.1 % 5.4 % 2.9 % 4.3 % Net income attributable to redeemable noncontrolling interest 0.1 - 0.1
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Net income attributable to Flex Ltd. 3.0 % 5.4 % 2.8 % 4.3 %
Net sales
The following table sets forth our net sales by segment, and their relative
percentages:
Three-Month Periods Ended Six-Month Periods Ended
September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021
(In millions)
Net sales:
Flex Agility Solutions $ 4,004 52 % $ 3,437 55 % $ 7,995 53 % $ 6,869 55 %
Flex Reliability Solutions 3,299 42 % 2,465 40 % 6,268 41 % 5,047 40 %
Nextracker 473 6 % 339 5 % 868 6 % 680 5 %
Intersegment eliminations (10) - % (12) - % (18) - % (25) - %
$ 7,766 $ 6,229 $ 15,113 $ 12,571
Net sales during the three-month period ended September 30, 2022 totaled $7.8
billion , representing an increase of approximately $1.5 billion , or 25% from
$6.2 billion during the three-month period ended October 1, 2021 . Net sales for
our FAS segment increased approximately $0.6 billion , or 16% from the
three-month period ended October 1, 2021 , primarily driven by strong
year-over-year growth in our Communications, Enterprise and Cloud (CEC) business
and a low single-digit year-over-year increase in our Lifestyle business due to
new program wins, ramps, and clear-to-build improvement. These increases in FAS
were offset by a high-teen year-over-year decrease in our Consumer Devices
business due to relatively softer market demand and a planned project completion
in the fiscal year ended March 31, 2022 . Net sales for our FRS segment increased
approximately $0.8 billion , or 34% from the three-month period ended October 1,
2021 , primarily driven by a strong year-over-year increase in our Industrial and
Automotive businesses and a low-teen year-over year increase in our Health
Solutions business due to strong customer demand and ramps across various end
markets coupled with incremental revenues from our Anord Mardix acquisition,
despite continued supply constraints. Net sales for our Nextracker segment
increased approximately $0.1 billion , or 40% from the three-month period ended
October 1, 2021 , primarily driven by an increase in gigawatts delivered and to a
lesser extent, an increased average selling price. Net sales increased across
all regions with a $0.9 billion increase to $3.5 billion in the Americas , a $0.4
billion increase to $2.8 billion in Asia , and a $0.3 billion increase to $1.6
billion in Europe .
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-------------------------------------------------------------------------------- Net sales during the six-month period endedSeptember 30, 2022 totaled$15.1 billion , representing an increase of approximately$2.5 billion , or 20% from$12.6 billion during the six-month period endedOctober 1, 2021 . Net sales for our FAS segment increased approximately$1.1 billion , or 16% from the six-month period endedOctober 1, 2021 , primarily driven by strong growth in our CEC business and a mid single-digit increase in our Lifestyle business during the current year due to new ramps, customer expansion, continued recoveries in consumer spending along with some effect from inflation pass-through while overcoming challenges from supply constraints. These increases in FAS were offset by a high-teen decrease in our Consumer Device business during the current year due to the same factors in the three-month periods discussion above. Net sales for our FRS segment increased approximately$1.2 billion , or 24% from the six-month period endedOctober 1, 2021 , primarily driven by strong increases in our Industrial and Automotive businesses, and a mid single-digit year-over year increase in ourHealth Solutions business during the current year due to strong customer demand and ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition and the recovery of inflationary costs, despite continued supply constraints noted above. Net sales for ourNextracker segment increased approximately$0.2 billion , or 28% from the six-month period endedOctober 1, 2021 , primarily driven by an increase in gigawatts delivered and to a lesser extent, an increased average selling price which was in part driven by an increase in logistics costs. Net sales increased across all regions with a$1.6 billion increase to$6.8 billion in theAmericas , a$0.6 billion increase to$5.3 billion inAsia , and a$0.4 billion increase to$3.1 billion inEurope . Our ten largest customers during the three and six-month periods endedSeptember 30, 2022 accounted for approximately 35% of net sales. Our ten largest customers during the three and six-month periods endedOctober 1, 2021 accounted for approximately 36% and 35% of net sales, respectively. No customer accounted for more than 10% of net sales during the three and six-month periods endedSeptember 30, 2022 orOctober 1, 2021 .
Cost of sales
Cost of sales is affected by a number of factors, including the number and size of new manufacturing programs, product mix, labor cost fluctuations by region, component costs and availability and capacity utilization. Cost of sales during the three-month period endedSeptember 30, 2022 totaled$7.2 billion , representing an increase of approximately$1.4 billion , or 25% from$5.8 billion during the three-month period endedOctober 1, 2021 . The higher cost of sales for the three-month period endedSeptember 30, 2022 was primarily driven by increased consolidated sales of$1.5 billion or 25%. Cost of sales in FAS for the three-month period endedSeptember 30, 2022 increased approximately$0.5 billion , or 17% from the three-month period endedOctober 1, 2021 , which is relatively in line with the overall 16% increase in FAS revenue during the same period primarily as a result of higher revenue in our CEC and Lifestyle businesses. Cost of sales in FRS for the three-month period endedSeptember 30, 2022 increased approximately$0.8 billion , or 34% from the three-month period endedOctober 1, 2021 , which is in line with the overall 34% increase in FRS revenue during the same period, primarily as a result of higher revenue in our Industrial and Automotive businesses. Cost of sales in ourNextracker segment for the three-month period endedSeptember 30, 2022 increased approximately$0.1 billion , or 36% from the three-month period endedOctober 1, 2021 , primarily due to the 40% increase inNextracker revenue during the same period partially offset by improved recovery on freight and logistics cost increases. Cost of sales during the six-month period endedSeptember 30, 2022 totaled$14.0 billion , representing an increase of approximately$2.4 billion , or 20% from$11.6 billion during the six-month period endedOctober 1, 2021 . The higher cost of sales for the six-month period endedSeptember 30, 2022 was primarily driven by increased consolidated sales of$2.5 billion or 20%. Cost of sales in FAS for the six-month period endedSeptember 30, 2022 increased approximately$1.1 billion , or 16% from the six-month period endedOctober 1, 2021 , which is aligned with the overall 16% increase in FAS revenue during the same period primarily due to the drivers noted in the discussion above for the three-month period. Cost of sales in FRS for the six-month period endedSeptember 30, 2022 increased approximately$1.1 billion , or 25% from the six-month period endedOctober 1, 2021 , which is relatively in line with the overall 24% increase in FRS revenue during the same period, primarily due to the drivers noted in the discussion above for the three-month period. Cost of sales in ourNextracker segment for the six-month period endedSeptember 30, 2022 increased approximately$0.2 billion , or 25% from the six-month period endedOctober 1, 2021 , primarily driven by the same factors noted above in the three-month periods discussion.
Gross profit
Gross profit is affected by fluctuations in cost of sales elements as outlined
above and further by a number of factors, including product life cycles, unit
volumes, pricing, competition, new product introductions, and the expansion or
consolidation of manufacturing facilities, as well as specific restructuring
activities initiated from time to time. The flexible design of our manufacturing
processes allows us to manufacture a broad range of products in our facilities
and better utilize our manufacturing capacity across our diverse geographic
footprint and service customers from all segments. In the cases of new programs,
profitability normally lags revenue growth due to product start-up costs, lower
manufacturing program volumes in the start-up phase, operational inefficiencies,
and under-absorbed overhead. Gross margin for these programs often improves
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over time as manufacturing volumes increase, our utilization rates and overhead absorption improve, and we increase the content level of manufacturing services. Due to these various factors, our gross margin varies from period to period.
Gross profit during the three-month period endedSeptember 30, 2022 increased$0.1 billion to$0.6 billion , or 7.6% of net sales, from$0.5 billion , or 7.5% of net sales, during the three-month period endedOctober 1, 2021 . Gross margin improved 10 basis points during the three-month period endedSeptember 30, 2022 primarily due to the overall strong customer demand across various end markets which allowed for improved fixed cost absorption and benefits from prior restructuring activities, despite continued pressure on margin from component shortages, logistics constraints and the pass-through effect of inflationary cost recoveries. Gross profit during the six-month period endedSeptember 30, 2022 increased$0.2 billion to$1.1 billion , or 7.5% of net sales, from$0.9 billion , or 7.4% of net sales, during the six-month period endedOctober 1, 2021 . Gross margin improved 10 basis points during the same period due to the same factors noted above in the three-month periods discussion.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating
contribution, or segment income. Segment income is defined as net sales less
cost of sales, and segment selling, general and administrative expenses, and
does not include intangible amortization, stock-based compensation,
restructuring charges, and legal and other. A portion of depreciation is
allocated to the respective segments, together with other general corporate
research and development and administrative expenses.
The following table sets forth segment income and margins. Segment margins in
the table below may not recalculate exactly due to rounding and are calculated
based on unrounded numbers.
Three-Month Periods Ended Six-Month Periods Ended
September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021
(In millions)
Segment income:
Flex Agility Solutions $ 170 4.3 % $ 153 4.5 % $ 342 4.3 % $ 290 4.2 %
Flex Reliability Solutions 175 5.3 % 126 5.1 % 322 5.1 % 271 5.4 %
Nextracker 43 9.1 % 25 7.4 % 73 8.4 % 50 7.4 %
FAS segment margin decreased approximately 20 basis points, to 4.3%, for the
three-month period ended September 30, 2022 , from 4.5% for the three-month
period ended October 1, 2021 . The margin decrease was driven by elevated costs
due to component shortages and logistics constraints combined with certain
inflation pass-through recoveries. The FAS segment margin increased
approximately 10 basis point, to 4.3% for the six-month period ended
September 30, 2022 , from 4.2% for the six-month period ended October 1, 2021 .
The increase in FAS segment margin during the six-month period is primarily due
to strong execution against new project ramps and product mix, partially offset
by elevated costs due to component shortages and logistics constraints and the
effect of certain inflation pass-through recoveries.
FRS segment margin increased approximately 20 basis points, to 5.3% for the
three-month period ended September 30, 2022 , from 5.1% for the three-month
period ended October 1, 2021 . The margin increase in FRS was primarily driven by
higher margin from the Anord Mardix acquisition in our Industrial business,
coupled with logistics constraints, partially offset by production disruptions
in our Automotive and Health Solutions businesses during the three-month period
ended September 30, 2022 . FRS segment margin decreased approximately 30 basis
points, to 5.1% for the six-month period ended September 30, 2022 , from 5.4% for
the six-month period ended October 1, 2021 . The decrease in FRS segment margin
during the six-month period was primarily driven by component shortage related
production disruptions, as well as inflationary cost pressures impacting our
Health Solutions and Automotive businesses.
Nextracker segment margin increased approximately 170 basis points, to 9.1% for
the three-month period ended September 30, 2022 , from 7.4% for the three-month
period ended October 1, 2021 . The margin increase was driven by improved pricing
and better cost controls and better cost absorption with increased revenue.
Nextracker segment margin increased approximately 100 basis points, to 8.4% for
the six-month period ended September 30, 2022 , from 7.4% for the six-month
period ended October 1, 2021 . The increase in Nextracker segment margin during
the six-month period is due to the same factors noted in the discussion above
for the three-month period.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") was approximately $0.2
billion , or 3.2% of net sales, during the three-month period ended September 30,
2022 , increasing $32 million from approximately $0.2 billion and improving 20
basis
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-------------------------------------------------------------------------------- points from 3.4% of net sales, during the three-month period endedOctober 1, 2021 . SG&A was$0.5 billion , or 3.2% of net sales, during the six-month period endedSeptember 30, 2022 , increasing$72 million from$0.4 billion and improving 10 basis points from 3.3% of net sales, during the six-month period endedOctober 1, 2021 , which reflects our enhanced cost control efforts to support higher revenue growth while keeping our SG&A expenses relatively flat.
Intangible amortization
Amortization of intangible assets increased to$21 million during the three-month period endedSeptember 30, 2022 , from$15 million for the three-month period endedOctober 1, 2021 , and increased to$43 million during the six-month period endedSeptember 30, 2022 , from$30 million for the six-month period endedOctober 1, 2021 , primarily due to amortization expense related to new intangible assets from the Anord Mardix acquisition completed inDecember 2021 . Interest and other, net Interest and other, net was an expense of$53 million during the three-month period endedSeptember 30, 2022 compared to income of$134 million during the three-month period endedOctober 1, 2021 , primarily due to the absence in the three-month period endedSeptember 30, 2022 of the$149 million gain related to a certain tax credit recorded upon approval of a "Credit Habilitation" request by the relevant Brazilian tax authorities in the three-month period endedOctober 1, 2021 and losses from equity in earnings recognized for certain of our non-core equity method investments, coupled with higher interest expense compared to the prior year period. Interest and other, net was an expense of$93 million during the six-month period endedSeptember 30, 2022 compared to income of$111 million during the six-month period endedOctober 1, 2021 , due to the same drivers noted in the discussion above. Income taxes Certain of our subsidiaries, at various times, have been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. Refer to note 15, "Income Taxes" of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 for further discussion. The consolidated effective tax rate was 13% and 14% for the three and six-month periods endedSeptember 30, 2022 , and 9% and 10% for the three and six-month periods endedOctober 1, 2021 , respectively. The effective rate varies from theSingapore statutory rate of 17% as a result of recognition of earnings in different jurisdictions (we generate most of our revenues and profits from operations outside ofSingapore ), operating loss carryforwards, income tax credits, release of previously established valuation allowances for deferred tax assets, liabilities for uncertain tax positions, as well as the effect of certain tax holidays and incentives granted to our subsidiaries primarily inChina ,Malaysia ,the Netherlands andIsrael . The effective tax rate for the three and six-month periods endedSeptember 30, 2022 were higher than the effective tax rates for the three-month and six-month periods endedOctober 1, 2021 due to the changing jurisdictional mix of income and there were significant Brazilian indirect tax credits recorded for the three and six-month periods endedOctober 1, 2021 with minimal tax impact. OnAugust 16, 2022 , the Inflation Reduction Act of 2022 ("IRA") was enacted into law, which includes a new corporate minimum tax, a stock repurchase excise tax, numerous green energy credits, other tax provisions, and significantly increased enforcement resources. We are evaluating the effect the IRA will have on our consolidated financial statements.
CASH AND CAPITAL RESOURCES
In response to the recent challenging environment following the COVID-19 pandemic, we continuously evaluate our ability to meet our obligations over the next 12 months and have proactively reset our capital structure during these times to improve maturities and liquidity. As a result, we expect that our current financial condition, including our liquidity sources are adequate to fund current and future commitments. As ofSeptember 30, 2022 , we had cash and cash equivalents of approximately$2.5 billion and bank and other borrowings of approximately$4.0 billion . As ofSeptember 30, 2022 , we had a$2.5 billion revolving credit facility that is due to mature inJuly 2027 (the "2027 Credit Facility"), under which we had no borrowings outstanding. We also entered into a$450 million delayed draw term loan credit agreement, under which we had no borrowings outstanding as ofSeptember 30, 2022 . Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. Refer to note 6 to the condensed consolidated financial statement for details on the 2027 Credit Facility and the delayed draw term loan. As ofSeptember 30, 2022 , we were in compliance with the covenants under all of our credit facilities and indentures. 34
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Cash flows generated by operating activities were
We believe net working capital ("NWC") and net working capital as a percentage
of annualized net sales are key metrics that measure our liquidity. Net working
capital is calculated as current quarter accounts receivable, net of allowance
for doubtful accounts, plus inventories and contract assets, less accounts
payable. Net working capital increased $1.2 billion to $5.4 billion as of
September 30, 2022 , from $4.2 billion as of March 31, 2022 . This increase is
primarily driven by a $1.1 billion increase in inventories due to strong demand,
coupled with continued component shortages and logistics constraints, clear-to
build constraints and logistics challenges driving up buffer stock and inventory
pricing, and a $0.6 billion increase in net receivables, offset by a $0.6
billion increase in accounts payable due to increased inventory purchases. Our
current quarter net working capital as a percentage of annualized net sales for
the quarter ended September 30, 2022 , increased to 17.4% from 15.4% of
annualized net sales for the quarter ended March 31, 2022 due to component
shortages, clear-to-build and logistics constraints. We continue to experience
component shortages in the supply chain, and although we are actively managing
these impacts, we expect continued working capital pressure in the near future.
We expect it will take additional time to adequately drive down our inventory
levels to align with the current demand environment. We are proactively working
with our partners to rebalance safety and buffer stock requirements and we have
an established enterprise-wide cross-functional initiative resetting our load
planning. Component shortages and significantly increased logistic costs are
also expected to persist at least in the near future. We are working diligently
with our partners to secure needed parts and fulfill demand. In addition, to the
extent possible, we have collaborated with our customers for working capital
advances to offset the required investment in inventory. Advances from customers
as of September 30, 2022 increased $0.6 billion to $2.0 billion from $1.4
billion as of March 31, 2022 .
Cash used in investing activities was $0.3 billion during the six-month period
ended September 30, 2022 . This was primarily driven by $0.3 billion of net
capital expenditures for property and equipment to continue expanding
capabilities and capacity in support of our expanding Automotive, Industrial,
Health Solutions , and Lifestyle businesses.
We believe adjusted free cash flow is an important liquidity metric because it
measures, during a given period, the amount of cash generated that is available
to repay debt obligations, make investments, fund acquisitions, repurchase
company shares and for certain other activities. Our adjusted free cash flow is
defined as cash from operations, less net purchases of property and equipment
allowing us to present adjusted cash flows on a consistent basis for investor
transparency. Our adjusted free cash flow for the six-month period ended
September 30, 2022 and October 1, 2021 was an outflow of $0.1 billion and an
inflow of $0.3 billion , respectively. Adjusted free cash flow is not a measure
of liquidity under U.S. GAAP, and may not be defined and calculated by other
companies in the same manner. Adjusted free cash flow should not be considered
in isolation or as an alternative to net cash provided by operating
activities. Adjusted free cash flows reconcile to the most directly comparable
GAAP financial measure of cash flows from operations as follows:
Six-Month Periods Ended
September 30, 2022 October 1, 2021
(In millions)
Net cash provided by operating activities $ 141 $ 514
Purchases of property and equipment (296) (210)
Proceeds from the disposition of property and equipment 18 5
Adjusted free cash flow $ (137) $ 309
Cash used by financing activities was $0.3 billion during the six-month period
ended September 30, 2022 , which was primarily driven by $0.3 billion of cash
paid for the repurchase of our ordinary shares.
Our cash balances are generated and held in numerous locations throughout the
world. Liquidity is affected by many factors, some of which are based on normal
ongoing operations of the business and some of which arise from fluctuations
related to global economics and markets. Local government regulations may
restrict our ability to move cash balances to meet cash needs under certain
circumstances; however, any current restrictions are not material. We do not
currently expect such regulations and restrictions to impact our ability to pay
vendors and conduct operations throughout the global organization. We believe
that our existing cash balances, together with anticipated cash flows from
operations and borrowings available under our credit facilities, will be
sufficient to fund our operations through at least the next twelve months. As of
September 30, 2022 and March 31, 2022 , approximately 30% and 34%, respectively,
of our cash and cash equivalents were held by foreign subsidiaries outside of
Singapore . Although substantially all of the amounts held outside of Singapore
could be repatriated under current laws, a significant amount could be subject
to income tax withholdings. We provide for tax liabilities on these amounts for
financial statement purposes, except for certain of our foreign earnings that
are considered indefinitely reinvested outside of
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Singapore (approximately $1.6 billion as of March 31, 2022 ). Repatriation could
result in an additional income tax payment; however, for the majority of our
foreign entities, our intent is to permanently reinvest these funds outside of
Singapore and our current plans do not demonstrate a need to repatriate them to
fund our operations in jurisdictions outside of where they are held. Where local
restrictions prevent an efficient intercompany transfer of funds, our intent is
that cash balances would remain outside of Singapore and we would meet our
liquidity needs through ongoing cash flows, external borrowings, or both.
Future liquidity needs will depend on fluctuations in levels of inventory,
accounts receivable and accounts payable, the timing of capital expenditures for
new equipment, the extent to which we utilize operating leases for new
facilities and equipment, and the levels of shipments and changes in the volumes
of customer orders.
We maintain global paying services agreements with several financial
institutions. Under these agreements, the financial institutions act as our
paying agents with respect to accounts payable due to our suppliers who elect to
participate in the program. The agreements allow our suppliers to sell their
receivables to one of the participating financial institutions at the discretion
of both parties on terms that are negotiated between the supplier and the
respective financial institution. Our obligations to our suppliers, including
the amounts due and scheduled payment dates, are not impacted by our suppliers'
decisions to sell their receivables under this program. The cumulative payments
due to suppliers participating in the programs amounted to approximately
$0.4 billion and $0.8 billion for the three and six-month periods ended
September 30, 2022 , respectively, and $0.3 billion and $0.6 billion for the
three and six-month periods ended October 1, 2021 , respectively. Pursuant to
their agreement with one of the financial institutions, certain suppliers may
elect to be paid early at their discretion. We are not always notified when our
suppliers sell receivables under these programs. The available capacity under
these programs can vary based on the number of investors and/or financial
institutions participating in these programs at any point in time.
In addition, we maintain various uncommitted short-term financing facilities
including but not limited to a commercial paper program, and a revolving sale
and repurchase of subordinated notes established under the securitization
facility, under which there were no borrowings outstanding as of September 30,
2022 .
Historically, we have funded operations from cash and cash equivalents generated
from operations, proceeds from public offerings of equity and debt securities,
bank debt and lease financings. We also have the ability to sell a designated
pool of trade receivables under asset-backed securitization ("ABS") programs and
sell certain trade receivables, which are in addition to the trade receivables
sold in connection with these securitization agreements. We may enter into debt
and equity financings, sales of accounts receivable and lease transactions to
fund acquisitions and anticipated growth as needed.
The sale or issuance of equity or convertible debt securities could result in
dilution to current shareholders. Further, we may issue debt securities that
have rights and privileges senior to those of holders of ordinary shares, and
the terms of this debt could impose restrictions on operations and could
increase debt service obligations. This increased indebtedness could limit our
flexibility as a result of debt service requirements and restrictive covenants,
potentially affect our credit ratings, and may limit our ability to access
additional capital or execute our business strategy. Any downgrades in credit
ratings could adversely affect our ability to borrow as a result of more
restrictive borrowing terms. We continue to assess our capital structure and
evaluate the merits of redeploying available cash to reduce existing debt or
repurchase ordinary shares.
Under our current share repurchase program, our Board of Directors authorized
repurchases of our outstanding ordinary shares for up to $1 billion in
accordance with the share purchase mandate approved by our shareholders at the
date of the most recent Annual General Meeting which was held on August 25,
2022 . During the six-month period ended September 30, 2022 , we paid $253 million
to repurchase shares under the current and prior repurchase plans at an average
price of $16.15 per share. As of September 30, 2022 , shares in the aggregate
amount of $977 million were available to be repurchased under the current plan.
OBLIGATIONS AND CONTRACTUAL COMMITMENTS
Information regarding our long-term debt payments, operating lease payments, capital lease payments and other commitments is provided in Section 7, “Management’s Discussion and Analysis of Financial Condition and Results of operations” of our annual report on our Form 10-K for the fiscal year ended
InJuly 2022 , we entered into a new$2.5 billion credit facility which matures inJuly 2027 , replacing our previous$2.0 billion credit facility, under which we had no borrowings outstanding as ofSeptember 30, 2022 . InSeptember 2022 , we entered into a$450 million delayed draw term loan credit agreement, under which we had no borrowings outstandingSeptember 30, 2022 . Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. 36
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Other than the changes mentioned above, there have been no material changes to our contractual obligations and commitments as of
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