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EX-32.01 - EXHIBIT 32.01 - FLEX LTD.flex-exx3201x123117.htm
EX-31.02 - EXHIBIT 31.02 - FLEX LTD.flex-exx3102x123117.htm
EX-31.01 - EXHIBIT 31.01 - FLEX LTD.flex-exx3101x123117.htm
EX-15.01 - EXHIBIT 15.01 - FLEX LTD.flex-exx1501x123117.htm


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 December 31, 2017
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
(Do not check if a smaller reporting company)
 
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. 



Class
 
Outstanding at January 24, 2018
Ordinary Shares, No Par Value
 
527,665,321




FLEX LTD.
 
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


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
 
We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd. and subsidiaries (the “Company”) as of December 31, 2017, the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended December 31, 2017 and December 31, 2016, and the related condensed consolidated statements of cash flows for the nine-month periods ended December 31, 2017 and December 31, 2016. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them 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), the consolidated balance sheet of Flex Ltd. and subsidiaries as of March 31, 2017, 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 May 16, 2017, 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, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP
 
San Jose, California
 
January 26, 2018
 


4


FLEX LTD.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
As of December 31, 2017
 
As of March 31, 2017
 
(In thousands, except share amounts)
(Unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
1,291,183

 
$
1,830,675

Accounts receivable, net of allowance for doubtful accounts of $60,113 and $57,302 as of December 31, 2017 and March 31, 2017, respectively
3,100,808

 
2,192,704

Inventories
3,725,643

 
3,396,462

Other current assets
965,470

 
967,935

Total current assets
9,083,104

 
8,387,776

Property and equipment, net
2,443,050

 
2,317,026

Goodwill
1,104,770

 
984,867

Other intangible assets, net
438,552

 
362,181

Other assets
770,834

 
541,513

Total assets
$
13,840,310

 
$
12,593,363

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 

 
 

Bank borrowings and current portion of long-term debt
$
42,954

 
$
61,534

Accounts payable
5,406,512

 
4,484,908

Accrued payroll
385,985

 
344,245

Other current liabilities
1,580,618

 
1,613,940

Total current liabilities
7,416,069

 
6,504,627

Long-term debt, net of current portion
2,901,720

 
2,890,609

Other liabilities
542,541

 
519,851

Shareholders’ equity
 

 
 

Flex Ltd. shareholders’ equity
 

 
 

Ordinary shares, no par value; 577,829,371 and 581,534,129 issued, and 527,590,016 and 531,294,774 outstanding as of December 31, 2017 and March 31, 2017, respectively
6,613,812

 
6,733,539

Treasury stock, at cost; 50,239,355 shares as of December 31, 2017 and March 31, 2017
(388,215
)
 
(388,215
)
Accumulated deficit
(3,124,519
)
 
(3,572,648
)
Accumulated other comprehensive loss
(121,098
)
 
(128,143
)
Total Flex Ltd. shareholders’ equity
2,979,980

 
2,644,533

Noncontrolling interests

 
33,743

Total shareholders’ equity
2,979,980

 
2,678,276

Total liabilities and shareholders’ equity
$
13,840,310

 
$
12,593,363

 

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


5


FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three-Month Periods Ended
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
 
(In thousands, except per share amounts)
(Unaudited)
Net sales
$
6,751,552

 
$
6,114,999

 
$
19,030,244

 
$
18,000,337

Cost of sales
6,305,224

 
5,698,544

 
17,783,659

 
16,864,196

Gross profit
446,328

 
416,455

 
1,246,585

 
1,136,141

Selling, general and administrative expenses
247,365

 
231,551

 
772,325

 
715,040

Intangible amortization
19,588

 
18,734

 
55,865

 
62,318

Interest and other, net
31,350

 
22,838

 
85,780

 
71,869

Other charges (income), net
6,865

 
3,090

 
(172,467
)
 
15,007

Income before income taxes
141,160

 
140,242

 
505,082

 
271,907

Provision for income taxes
22,827

 
10,773

 
56,953

 
39,217

Net income
$
118,333

 
$
129,469

 
$
448,129

 
$
232,690

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
$
0.22

 
$
0.24

 
$
0.85

 
$
0.43

Diluted
$
0.22

 
$
0.24

 
$
0.84

 
$
0.42

Weighted-average shares used in computing per share amounts:
 

 
 

 
 

 
 

Basic
528,405

 
539,638

 
529,984

 
542,780

Diluted
534,352

 
545,022

 
535,972

 
548,372

    

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


6



FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three-Month Periods Ended
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016

(In thousands)
(Unaudited)
Net income
$
118,333

 
$
129,469

 
$
448,129

 
$
232,690

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustments, net of zero tax
7,492

 
(36,412
)
 
27,806

 
(22,338
)
Unrealized loss on derivative instruments and other, net of zero tax
(4,717
)
 
(201
)
 
(20,761
)
 
(912
)
Comprehensive income
$
121,108

 
$
92,856

 
$
455,174

 
$
209,440


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


7


FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 


 

Net income
$
448,129


$
232,690

Depreciation, amortization and other impairment charges
400,015


466,813

Gain from deconsolidation of a subsidiary entity
(151,574
)
 

Changes in working capital and other
(265,552
)

313,685

Net cash provided by operating activities
431,018


1,013,188

CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property and equipment
(432,897
)

(413,596
)
Proceeds from the disposition of property and equipment
43,653


28,056

Acquisition of businesses, net of cash acquired
(269,724
)

(180,259
)
Other investing activities, net
(123,883
)

(13,631
)
Net cash used in investing activities
(782,851
)

(579,430
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from bank borrowings and long-term debt
866,000


205,518

Repayments of bank borrowings and long-term debt
(907,930
)

(115,089
)
Payments for repurchases of ordinary shares
(180,050
)

(259,658
)
Net proceeds from issuance of ordinary shares
2,063


11,978

Other financing activities, net
46,482


(47,302
)
Net cash used in financing activities
(173,435
)

(204,553
)
Effect of exchange rates on cash and cash equivalents
(14,224
)

20,321

Net increase (decrease) in cash and cash equivalents
(539,492
)

249,526

Cash and cash equivalents, beginning of period
1,830,675


1,607,570

Cash and cash equivalents, end of period
$
1,291,183


$
1,857,096







Non-cash investing activities:
 


 

Unpaid purchases of property and equipment
$
87,772


$
70,092

Customer-related third party banking institution financing net settlement
$

 
$
90,576

Non-cash investment in Elementum (Note 5)
$
132,679


$

Non-cash proceeds from sale of Wink (Note 2)
$
59,000

 
$

 

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


8


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 industrial products, from athletic shoes to electronics, 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, fashion, and mobile devices; and including various supply chain solutions for notebook personal computers ("PC"), tablets, and printers; in addition, CTG is expanding its business relationships to include supply chain optimization for non-electronics products such as footwear and clothing;
Industrial and Emerging Industries ("IEI"), which is comprised of energy and metering, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation and kiosks, and lighting; and
High Reliability Solutions ("HRS"), which is comprised of medical 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 rigid and 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, 2017 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 nine-month periods ended December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018.
 
The first quarters for fiscal year 2018 and fiscal year 2017 ended on June 30, 2017, which is comprised of 91 days in the period, and July 1, 2016, which is comprised of 92 days in the period, respectively. The second quarters for fiscal year 2018 and fiscal year 2017 ended on September 29, 2017 and September 30, 2016, which are comprised of 91 days in both periods. The Company's third quarters end on December 31 of each year, which are comprised of 93 days and 92 days for fiscal years 2018 and 2017, respectively.
 

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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. Noncontrolling interests are immaterial for all of the periods presented, and are included in interest and other, net in the condensed consolidated statements of operations.

The Company has certain non-majority-owned equity investments in non-publicly traded companies that are accounted for using the equity method of accounting. The equity method of accounting is used when the Company has the ability to significantly influence the operating decisions of the issuer, or if the Company has a voting percentage of a corporation 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.

Recently Adopted Accounting Pronouncement

In July 2015, the FASB issued new guidance to simplify the measurement of inventory, by requiring that inventory be measured at the lower of cost and net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. The Company adopted the guidance effective April 1, 2017 and it did not have a material impact on its condensed consolidated financial statements.

In October 2016, the FASB issued new guidance intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted in the first interim period of fiscal year 2018. The Company adopted the guidance effective April 1, 2017 and it did not have a material impact on its condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2017, the FASB issued new guidance 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 August 2016, the FASB issued Accounting Standard Update (ASU) No. 2016-15, "Statement of Cash Flows (Topic 2030): Classification of Certain Cash Receipts and Cash Payments." The standard 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 as described in Note 10 will be classified as cash flow from investing activities instead of the Company's current presentation as cash flows from operations. The Company intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2019 and retrospectively report cash flows from operating and investing activities for all periods presented. While the Company is still quantifying the impact of adoption of this standard, it does expect the standard to result in a material increase in cash flows from investing activities and corresponding reduction in cash flows from operating activities for all periods presented.

In February 2016, the FASB issued new guidance 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. 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. Upon initial evaluation, the Company believes the new guidance will have a material impact on its consolidated balance sheets when adopted.

In May 2014, the FASB issued new guidance 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 will include qualitative and quantitative information about contracts with customers, significant judgments and

10


changes in judgments, and assets recognized from costs to obtain or fulfill a contract. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019.

The Company is in the process of implementation activities in accordance with the planned effective date. These activities are focused on the review of significant customer contracts, identification and development of additional systems capabilities to enable the Company to make reasonable estimates of revenue as products are manufactured, and the design and implementation of relevant internal controls. The Company has determined that the new standard will change the timing of revenue recognition for a significant portion of its business. Under the new standard, revenue for a significant majority of the manufacturing services customer contracts will be recognized earlier than under the current accounting rules (where Flex recognizes revenue based on shipping and delivery). This change will also have material impacts to the Company’s balance sheet, primarily related to a reduction in finished goods and work-in-process inventories and an increase in unbilled receivables.

The new guidance allows for two transition methods in application - (i) retrospective to each prior reporting period presented, or (ii) prospective with the cumulative effect of adoption recognized on April 1, 2018, the first day of the Company's fiscal year 2019 (also known as the modified retrospective approach). The Company will adopt the standard using the modified retrospective approach, which will result in an adjustment to accumulated deficit for the cumulative effect of applying this guidance to contracts in process as of the adoption date. Under this approach, prior financial statements presented will not be restated. This guidance requires additional disclosures of the amount by which each financial statement line item affected in the current reporting period during fiscal year 2019 as compared to the guidance that was in effect before the change, and an explanation of the reasons for the significant changes.

    
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 December 31, 2017
 
As of March 31, 2017
 
(In thousands)
Raw materials
$
2,590,065

 
$
2,537,623

Work-in-progress
446,469

 
279,493

Finished goods
689,109

 
579,346

 
$
3,725,643

 
$
3,396,462


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 nine-month period ended December 31, 2017:
 
 
HRS
 
CTG
 
IEI
 
CEC
 
Amount
 
(In thousands)
Balance, beginning of the year
$
420,935

 
$
111,223

 
$
337,707

 
$
115,002

 
$
984,867

Additions (1)
75,280

 

 

 
9,174

 
84,454

Divestitures (2)

 
(3,475
)
 

 

 
(3,475
)
Purchase accounting adjustments

 

 

 
(14
)
 
(14
)
Foreign currency translation adjustments (3)
38,938

 

 

 

 
38,938

Balance, end of the period
$
535,153

 
$
107,748

 
$
337,707

 
$
124,162

 
$
1,104,770


(1)
The goodwill generated from the Company’s acquisition of AGM Automotive ("AGM") in the HRS segment and the Company's acquisition of a Power Modules business in the CEC segment, completed during the nine-month period ended December 31, 2017, are primarily related to value placed on the acquired employee workforces, service offerings and capabilities of the acquired businesses. The goodwill is not deductible for income tax purposes. See note 12 for additional information.

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(2)
During the nine-month period ended December 31, 2017, the Company disposed of Wink Labs Inc. ("Wink"), a business within the CTG segment, and recorded an aggregate reduction of goodwill of $3.5 million accordingly, which is included as an offset to the gain on sale recorded in other charges (income), net on the condensed consolidated statement of operations.

(3)
During the nine-month period ended December 31, 2017, the Company recorded $38.9 million of foreign currency translation adjustments primarily related to the goodwill associated with the acquisition of Mirror Controls International ("MCi") and AGM, as the U.S. Dollar fluctuated against foreign currencies.
 
The components of acquired intangible assets are as follows:

 
As of December 31, 2017
 
As of March 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Customer-related intangibles
$
369,356

 
$
(135,411
)
 
$
233,945

 
$
260,704

 
$
(105,912
)
 
$
154,792

Licenses and other intangibles
302,522

 
(97,915
)
 
204,607

 
283,897

 
(76,508
)
 
207,389

Total
$
671,878

 
$
(233,326
)
 
$
438,552

 
$
544,601

 
$
(182,420
)
 
$
362,181


The gross carrying amounts of intangible assets are removed when fully amortized. During the nine-month period ended December 31, 2017, the total value of intangible assets increased primarily as a result of the Company's estimated value of $82.0 million for customer related intangibles acquired with the AGM acquisition in the HRS segment, which will amortize over a weighted-average estimated useful life of 10 years, and $34.5 million for customer-related and licenses and other intangibles acquired with the power modules acquisition in the CEC segment, which will amortize over a weighted-average estimated useful life of 9 years. The increase was partially offset by $7.5 million for the divestiture of Wink in the CTG segment. The assigned value is subject to change as the Company completes the valuation. The estimated future annual amortization expense for intangible assets is as follows:
Fiscal Year Ending March 31,
Amount
 
(In thousands)
2018 (1)
$
19,933

2019
74,510

2020
68,272

2021
63,839

2022
54,754

Thereafter
157,244

Total amortization expense
$
438,552

____________________________________________________________
(1)
Represents estimated amortization for the remaining three-month period ending March 31, 2018.
 
Other Current Assets

Other current assets include approximately $420.6 million and $506.5 million as of December 31, 2017 and March 31, 2017, respectively, for the deferred purchase price receivable from the Company's Global and North American Asset-Backed Securitization programs. See note 10 for additional information.

Other Assets

During the first quarter of fiscal year 2018, the Company sold Wink to an unrelated third-party venture backed company in exchange for contingent consideration fair valued at $59.0 million. This estimated consideration was based on the value of the acquirer as of the most recent third-party funding of which the Company participated. The Company recognized a non-cash

12


gain on sale of $38.7 million, which is recorded in other charges (income), net on the condensed consolidated statement of operations in the nine-month period ended December 31, 2017. The contingent consideration is expected to be settled in the fourth quarter of fiscal year 2018, based on a remeasured fair value on the settlement date. As of December 31, 2017, the total investment, including working capital advances, of $76.5 million is accounted for as a cost method investment, and is included in other assets on the condensed consolidated balance sheet.

During the second quarter of fiscal year 2018, the Company deconsolidated one of its majority owned subsidiaries, following the amendments of certain agreements that resulted in joint control of the board of directors between the Company and other non-controlling interest holders. As of December 31, 2017, this subsidiary is accounted for as a cost method investment of approximately $129.7 million and is included in other assets on the condensed consolidated balance sheet. See note 5 for additional information on the deconsolidation.

Other Current Liabilities

Other current liabilities include customer working capital advances of $171.3 million and $231.3 million, customer-related accruals of $441.0 million and $501.9 million, and deferred revenue of $344.0 million and $280.7 million as of December 31, 2017 and March 31, 2017, 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.

3.  SHARE-BASED COMPENSATION
 
Historically, the Company's primary plan used for granting equity compensation awards was the 2010 Equity Incentive Plan (the "2010 Plan"). Effective August 15, 2017, awards are granted under the Company's 2017 Equity Incentive Plan (the "2017 Plan"), which was approved by the Company's shareholders at the 2017 Annual General Meeting of Shareholders. For further discussion on this 2017 Plan, refer to the Company's Proxy Statement, which was filed with the Securities and Exchange Commission on July 5, 2017.

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

 
Three-Month Periods Ended
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Cost of sales
$
5,358

 
$
2,437

 
$
13,662

 
$
7,506

Selling, general and administrative expenses
15,400

 
18,344

 
49,356

 
59,805

Total share-based compensation expense
$
20,758

 
$
20,781

 
$
63,018

 
$
67,311

 
Total unrecognized compensation expense related to share options under all plans was $8.9 million, and will be recognized over a weighted-average remaining vesting period of 2.2 years. As of December 31, 2017, the number of options outstanding and exercisable under all plans was 1.4 million and 0.5 million, respectively, at a weighted-average exercise price of $3.39 per share and $4.71 per share, respectively.
 
During the nine-month period ended December 31, 2017, the Company granted 6.0 million unvested share bonus awards. Of this amount, approximately 4.3 million unvested share bonus awards have an average grant date price of $16.45 per share and vest over four years. Further, approximately 0.6 million of these unvested shares represents 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 $20.25 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 1.2 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. Also, an immaterial amount of options and share bonus awards were granted by the Company during the nine-month period ended December 31, 2017 under an immaterial plan.
 
As of December 31, 2017, approximately 15.5 million unvested share bonus awards under all plans were outstanding, of which vesting for a targeted amount of 2.0 million is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero to 4.0 million based on the achievement levels of the respective conditions. During the nine-month period ended December 31, 2017, 1.4 million shares vested in connection with the share bonus awards with market conditions granted in fiscal year 2015.

13


 
As of December 31, 2017, total unrecognized compensation expense related to unvested share bonus awards under all plans was approximately $162.8 million, and will be recognized over a weighted-average remaining vesting period of 2.6 years.

4.  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
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
 
(In thousands, except per share amounts)
Net income
$
118,333

 
$
129,469

 
$
448,129

 
$
232,690

Shares used in computation:


 


 
 
 
 
Weighted-average ordinary shares outstanding
528,405

 
539,638

 
529,984

 
542,780

Basic earnings per share
$
0.22

 
$
0.24

 
$
0.85

 
$
0.43


 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 

 
 

 
 

Net income
$
118,333

 
$
129,469

 
$
448,129

 
$
232,690

Shares used in computation:
 

 
 

 
 

 
 

Weighted-average ordinary shares outstanding
528,405

 
539,638

 
529,984

 
542,780

Weighted-average ordinary share equivalents from stock options and awards (1) (2)
5,947

 
5,384

 
5,988

 
5,592

Weighted-average ordinary shares and ordinary share equivalents outstanding
534,352

 
545,022

 
535,972

 
548,372

Diluted earnings per share
$
0.22

 
$
0.24

 
$
0.84

 
$
0.42


____________________________________________________________
(1)         An immaterial amount of options and share bonus awards was excluded from the computation of diluted earnings per share during the three-month period ended December 31, 2017, due to their anti-dilutive impact on the weighted-average ordinary share equivalents. Options to purchase ordinary shares of 0.5 million and an immaterial amount of anti-dilutive share bonus awards was excluded for the three-month period ended December 31, 2016.

(2)         An immaterial amount of options and share bonus awards was excluded from the computation of diluted earnings per share during the nine-month period ended December 31, 2017, due to their anti-dilutive impact on the weighted-average ordinary share equivalents. Options to purchase ordinary shares of 0.7 million and an immaterial amount of anti-dilutive share bonus awards was excluded for the nine-month period ended December 31, 2016.

5. DECONSOLIDATION OF SUBSIDIARY ENTITY
The Company has a majority owned subsidiary, Elementum SCM (Cayman) Ltd ("Elementum"), which qualifies as a variable interest entity for accounting purposes. The Company owns a majority of Elementum’s outstanding equity (consisting primarily of preferred stock) and as of March 31, 2017, controlled its board of directors, which gave the Company the power to direct the activities of Elementum that most significantly impact its economic performance. Accordingly, the Company recognized the carrying value of the noncontrolling interest as a component of total shareholders' equity, and the consolidated financial statements include the financial position and results of operations of Elementum as of and for the period ended March 31, 2017.

During the second quarter of fiscal year 2018, the Company and other minority shareholders of Elementum amended certain agreements resulting in joint control of the board of directors between the Company and other non-controlling interest holders. As a result, the Company concluded it is no longer the primary beneficiary of Elementum and accordingly, deconsolidated the entity. The Company no longer recognizes the carrying value of the noncontrolling interest as a component of total shareholder’s equity resulting in a reduction of $90.6 million of noncontrolling interest from its condensed consolidated balance sheet upon deconsolidation, which was treated as a non-cash financing activity in the condensed consolidated statement of cash flows for the nine-month period ended December 31, 2017. Further, the Company derecognized approximately $72.6

14


million of cash of Elementum as of the date of deconsolidation which is reflected as an outflow from investing activities within other investing activities, net in the condensed consolidated statement of cash flows for the nine-month period ended December 31, 2017. There were no other material impacts to the condensed consolidated balance sheet or condensed consolidated cash flows resulting from deconsolidation of the entity. The noncontrolling interest in the operating losses of Elementum prior to deconsolidation is immaterial for all periods presented and is classified as a component of interest and other, net, in the Company's condensed consolidated statements of operations.

The carrying amount of the Company’s variable interest in Elementum was approximately $129.7 million as of December 31, 2017, is accounted for as a cost method investment, and is included in other assets on the condensed consolidated balance sheet. The value of the Company’s variable interest on the date of deconsolidation was based on management’s estimate of the fair value of Elementum at that time. The Company concluded that the market approach was the most appropriate method to determine the fair value of the entity on the date of deconsolidation, given that Elementum raised equity funding from third-party investors around the same period. The Company 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. As the Company is not obligated to fund future losses of Elementum, the carrying amount is the Company’s maximum risk of loss. 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. Elementum remains a related party to the Company after deconsolidation and transactions between the Company and Elementum during the three-month period ended December 31, 2017 are immaterial.

6.  BANK BORROWINGS AND LONG TERM DEBT

Bank borrowings and long-term debt are as follows:

 
As of December 31, 2017
 
As of March 31, 2017
 
(In thousands)
4.625% Notes due February 2020
$
500,000

 
$
500,000

Term Loan, including current portion, due in installments through November 2021
691,875

 
700,000

Term Loan, including current portion, due in installments through June 2022
489,938

 
502,500

5.000% Notes due February 2023
500,000

 
500,000

4.75% Notes due June 2025
596,282


595,979

Other
181,175


169,671

Debt issuance costs
(14,596
)

(16,007
)
Total
$
2,944,674


$
2,952,143


The weighted-average interest rates for the Company’s long-term debt were 3.7% and 3.5% as of December 31, 2017 and March 31, 2017, respectively.

On June 30, 2017, the Company entered into a five-year credit facility consisting of a $1.75 billion revolving credit facility and a $502.5 million term loan, which is due to mature on June 30, 2022 (the "2022 Credit Facility"). This 2022 Credit Facility replaced the Company's $2.1 billion credit facility, which was due to mature in March 2019. The outstanding principal of the term loan portion of the 2022 Credit Facility is repayable in quarterly installments of approximately $6.3 million from September 30, 2017 through June 30, 2020 and approximately $12.6 million from September 30, 2020 through March 31, 2022 with the remainder due upon maturity. The Company determined that effectively extending the maturity date of the revolving credit and repaying the term loan due March 2019 qualified as a debt modification and consequently all unamortized debt issuance costs related to the $2.1 billion credit facility are capitalized and will be amortized over the term of the 2022 Credit Facility.

Borrowings under the 2022 Credit Facility bear interest, at the Company’s option, either at (i) the Base Rate, which is defined as the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate, plus 0.50% and (c) the LIBOR (the London Interbank Offered Rate) rate that would be calculated as of each day in respect of a proposed LIBOR loan with a one-month interest period, plus 1.0%; plus, in the case of each of clauses (a) through (c), an applicable margin ranging from 0.125% to 0.875% per annum, based on the Company’s credit ratings (as determined by Standard & Poor’s Financial Services LLC, Moody’s Investors Service, Inc. and Fitch Ratings Inc.) or (ii) LIBOR plus the applicable margin for LIBOR loans ranging between 1.125% and 1.875% per annum, based on the Company’s credit ratings.

15



The 2022 Credit Facility is unsecured, 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 a number of significant exceptions and limitations. The 2022 Credit Facility 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 during the term of the 2022 Credit Facility. As of December 31, 2017, the Company was in compliance with the covenants under the 2022 Credit Facility agreement.

The Company has three tranches of Notes, the 4.625% Notes due 2020, the 5.000% Notes due 2023 and the 4.75% Notes due 2025. These Notes are senior unsecured obligations, and prior to June 30, 2017, were guaranteed, fully and unconditionally, jointly and severally, on an unsecured basis, by certain of the Company's 100% owned subsidiaries (the "guarantor subsidiaries"). Upon the termination of the $2.1 billion credit facility, all guarantor subsidiaries were released from their guarantees under each indenture for each Note. As a result, the Company will no longer be providing supplemental guarantor and non-guarantor condensed consolidating financial statements.

Repayment of the Company’s long term debt outstanding as of December 31, 2017 is as follows:
Fiscal Year Ending March 31,
Amount
 
(In thousands)
2018 (1)
$
10,739

2019
42,934

2020
542,872

2021
115,247

2022
809,103

Thereafter
1,438,375

Total
$
2,959,270

_________________________________________________________
(1)
Represents scheduled repayment for the remaining three-month period ending March 31, 2018.

7.  INTEREST AND OTHER, NET
 
During the three-month and nine-month periods ended December 31, 2017, the Company recognized interest expense of $32.1 million and $90.7 million, respectively, on its debt obligations outstanding during the periods. During the three-month and nine-month periods ended December 31, 2016, the Company recognized interest expense of $26.6 million and $79.9 million, respectively.


16


8.  FINANCIAL INSTRUMENTS
 
Foreign Currency Contracts
 
The Company enters into forward contracts and foreign currency swap contracts primarily to manage the foreign currency risk associated with monetary accounts and anticipated foreign currency denominated transactions. The Company hedges committed exposures and does not engage in speculative transactions. As of December 31, 2017, the aggregate notional amount of the Company’s outstanding foreign currency contracts was $8.2 billion as summarized below:
 
 
Foreign Currency Amount
 
Notional Contract Value in USD
Currency
Buy
 
Sell
 
Buy

Sell
 
(In thousands)
Cash Flow Hedges
 

 
 

 
 
 
 

CNY
1,724,000

 

 
$
262,937

 
$

EUR
53,756

 
109,351

 
63,973

 
128,767

HUF
19,654,800

 

 
75,314

 

ILS
73,700

 

 
21,233

 

INR
1,392,540

 

 
21,200

 

MXN
3,072,680

 

 
154,955

 

MYR
173,000

 
39,500

 
42,318

 
9,662

PLN
87,890

 

 
24,963

 

RON
117,780

 

 
30,124

 

SGD
29,900

 

 
22,335

 

Other
N/A

 
N/A

 
12,567

 
5,017

 
 

 
 

 
731,919

 
143,446

Other Foreign Currency Contracts


 


 


 


BRL

 
871,000

 

 
263,229

CAD
267,328

 
289,019

 
211,126

 
228,257

CHF
16,327

 
28,889

 
16,527

 
29,245

CNY
2,832,338

 

 
427,268

 

EUR
1,958,706

 
2,306,257

 
2,329,926

 
2,744,141

GBP
35,355

 
63,776

 
47,390

 
85,505

HUF
18,783,285

 
22,480,502

 
71,975

 
86,142

INR
6,222,378

 
1,252,331

 
96,829

 
19,200

MXN
2,254,587

 
1,374,623

 
113,699

 
69,322

MYR
456,260

 
247,030

 
111,607

 
60,427

RON
88,521

 
81,054

 
22,641

 
20,731

SGD
78,855

 
48,690

 
58,904

 
36,371

Other
N/A

 
N/A

 
114,386

 
81,631

 
 

 
 

 
3,622,278

 
3,724,201




 


 


 


Total Notional Contract Value in USD
 

 
 

 
$
4,354,197

 
$
3,867,647


As of December 31, 2017, the fair value of the Company’s short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the condensed consolidated statements of operations. As of December 31, 2017 and March 31, 2017, the Company also has included net deferred gains and losses in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed

17


consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. These deferred losses were $7.2 million as of December 31, 2017, 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
 
December 31,
2017
 
March 31,
2017
 
Balance Sheet
Location
 
December 31,
2017
 
March 31,
2017
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
6,627

 
$
11,936

 
Other current liabilities
 
$
15,057

 
$
1,814

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
14,376

 
$
10,086

 
Other current liabilities
 
$
10,273

 
$
9,928


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
 
December 31, 2017
 
December 31, 2016
 
Unrealized loss on 
derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
Unrealized loss on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
(In thousands)
Beginning balance
$
(48,470
)
 
$
(75,403
)
 
$
(123,873
)
 
$
(42,233
)
 
$
(80,319
)
 
$
(122,552
)
Other comprehensive gain (loss) before reclassifications
(4,643
)
 
7,248

 
2,605

 
(1,354
)
 
(33,770
)
 
(35,124
)
Net (gains) losses reclassified from accumulated other comprehensive loss
(74
)
 
244

 
170

 
1,153

 
(2,642
)
 
(1,489
)
Net current-period other comprehensive gain (loss)
(4,717
)
 
7,492

 
2,775

 
(201
)
 
(36,412
)
 
(36,613
)
Ending balance
$
(53,187
)
 
$
(67,911
)
 
$
(121,098
)
 
$
(42,434
)
 
$
(116,731
)
 
$
(159,165
)

18


 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
Unrealized loss on 
derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
Unrealized loss on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
(In thousands)
Beginning balance
$
(32,426
)
 
$
(95,717
)
 
$
(128,143
)
 
$
(41,522
)
 
$
(94,393
)
 
$
(135,915
)
Other comprehensive gain (loss) before reclassifications
(5,488
)
 
27,562

 
22,074

 
(1,031
)
 
(19,471
)
 
(20,502
)
Net (gains) losses reclassified from accumulated other comprehensive loss
(15,273
)
 
244

 
(15,029
)
 
119

 
(2,867
)
 
(2,748
)
Net current-period other comprehensive gain (loss)
(20,761
)
 
27,806

 
7,045

 
(912
)
 
(22,338
)
 
(23,250
)
Ending balance
$
(53,187
)
 
$
(67,911
)
 
$
(121,098
)
 
$
(42,434
)
 
$
(116,731
)
 
$
(159,165
)

Substantially all unrealized gains relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month and nine-month periods ended December 31, 2017 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 under an accounts receivable factoring program.
 
Asset-Backed Securitization Programs
 
The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization 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. 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.
 
The Company services, administers and collects the receivables on behalf of the special purpose entities and receives a servicing fee of 0.1% to 0.5% of serviced receivables per annum. Servicing fees recognized during the three-month and nine-month periods ended December 31, 2017 and December 31, 2016 were not material and are included in interest and other, net within the condensed consolidated statements of operations. As the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value, no servicing assets and liabilities are recognized.
 
As of December 31, 2017, approximately $1.5 billion of accounts receivable had been sold to the special purpose entities under the ABS Programs for which the Company had received net cash proceeds of approximately $1.1 billion and deferred purchase price receivables of approximately $420.6 million. As of March 31, 2017, approximately $1.5 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $1.0 billion and deferred purchase price receivables of approximately $506.5 million. The portion of the purchase price for the receivables which is not paid by the unaffiliated financial institutions in cash is a deferred purchase price receivable, which is paid to the

19


special purpose entity as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in other current assets as of December 31, 2017 and March 31, 2017, and were carried at the expected recovery amount of the related receivables. The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the deferred purchase price receivables received at time of transfer is recognized as a loss on sale of the related receivables and recorded in interest and other, net in the condensed consolidated statements of operations and were immaterial for all periods presented.

The Company's deferred purchase price receivables relating to its asset-backed securitization program are recorded initially at fair value based on a discounted cash flow analysis using unobservable inputs (i.e., level 3 inputs), which are primarily risk free interest rates adjusted for the credit quality of the underlying creditor. Due to its high credit quality and short term maturity, the fair value approximates carrying value. Significant increases in either of the major unobservable inputs (credit spread, risk free interest rate) in isolation would result in lower fair value estimates, however the impact is not material. The interrelationship between these inputs is also insignificant.
 
As of December 31, 2017 and March 31, 2017, the accounts receivable balances that were sold under the ABS Programs were removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company were included as cash provided by operating activities in the condensed consolidated statements of cash flows.
 
For the nine-month periods ended December 31, 2017 and December 31, 2016, cash flows from sales of receivables under the ABS Programs consisted of approximately $4.6 billion and $4.2 billion, for transfers of receivables, respectively (of which approximately $290.4 million and $315.1 million, respectively, represented new transfers and the remainder proceeds from collections reinvested in revolving-period transfers).
 
Trade Accounts Receivable Sale Programs
 
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 $233.3 million and $225.2 million as of December 31, 2017 and March 31, 2017, respectively. For the nine-month periods ended December 31, 2017 and December 31, 2016, total accounts receivable sold to certain third party banking institutions was approximately $1.0 billion, respectively. 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.
 
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.

20


 
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.

The significant inputs in the fair value measurement not supported by market activity included the Company's probability assessments of expected future revenue during the earn-out period and associated volatility, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the merger agreement. Significant decreases in expected revenue during the earn-out period, or significant increases in the discount rate or volatility in isolation would result in lower fair value estimates. The interrelationship between these inputs is not considered significant.

The following table summarizes the activities related to contingent consideration payable for historic acquisitions:

 
Three-Month Periods Ended
 
Nine-Month Periods Ended
 
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
 
(In thousands)
Beginning balance
$
17,342

 
$
75,614

 
$
22,426

 
$
73,423

Payments
(17,109
)
 
(40,555
)
 
(17,109
)
 
(42,776
)
Fair value adjustments
767

 
(6,997
)
 
(4,317
)
 
(2,585
)
Ending balance
$
1,000

 
$
28,062

 
$
1,000

 
$
28,062


In connection with the acquisition of NEXTracker, Inc. in fiscal year 2016, the Company had an obligation to pay additional cash consideration to the former shareholders contingent upon NEXTracker, Inc.'s achievement of revenue targets during the two years after acquisition (ending on September 30, 2017). During the nine-month period ended December 31, 2017, the Company paid $17.1 million of the total contingent consideration following the second year's targets achievement in accordance with the terms of the merger agreement. The payment of the contingent consideration is included in other financing activities, net, in the condensed consolidated statements of cash flows.

There were no transfers between levels in the fair value hierarchy during the nine-month periods ended December 31, 2017 and December 31, 2016.
 

21


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 December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 

 
 

 
 

 
 

Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet)
$

 
$
424,744

 
$

 
$
424,744

Foreign exchange contracts (Note 8)

 
21,003

 

 
21,003

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
7,212

 
67,503

 

 
74,715

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 8)
$

 
$
(25,330
)
 
$

 
$
(25,330
)
Contingent consideration in connection with business acquisitions

 

 
(1,000
)
 
(1,000
)
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 

 
 

 
 

 
 

Money market funds and time deposits (included in cash and cash equivalents of the condensed consolidated balance sheet)
$

 
$
1,066,841

 
$

 
$
1,066,841

Foreign exchange contracts (Note 8)

 
22,022

 

 
22,022

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
7,062

 
52,680

 

 
59,742

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 8)
$

 
$
(11,742
)
 
$

 
$
(11,742
)
Contingent consideration in connection with business acquisitions

 

 
(22,426
)
 
(22,426
)

Other financial instruments
 
The following table presents the Company’s major debts not carried at fair value:
 
 
As of December 31, 2017

As of March 31, 2017


 
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

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


$
516,925


$
500,000

 
$
526,255


Level 1
Term Loan, including current portion, due in installments through November 2021
691,875


693,605


700,000

 
699,566


Level 1
Term Loan, including current portion, due in installments through June 2022 (1)
489,938

 
491,163

 
502,500

 
503,756

 
Level 1
5.000% Notes due February 2023
500,000


536,515


500,000

 
534,820


Level 1
4.750% Notes due June 2025
596,282


643,440


595,979

 
633,114


Level 1
Euro Term Loan due September 2020
58,021

 
58,021

 
53,075

 
53,075

 
Level 1
Euro Term Loan due January 2022
119,786

 
119,786

 
107,357

 
107,357

 
Level 1
Total
$
2,955,902


$
3,059,455


$
2,958,911


$
3,057,943


 

(1) On June 30, 2017, the Company entered into a new agreement that effectively extended the maturity date of the loan from March 31, 2019 to June 30, 2022. Refer to note 6 for further details of the arrangement.

22



The Company values its Euro Term Loans due September 2020 and January 2022 based on the current market rate, and as of December 31, 2017, the carrying amounts approximate fair values.

The Term Loans due November 2021 and June 2022, and the Notes due February 2020, February 2023 and June 2025 are valued based on broker trading prices in active markets. 

12. BUSINESS AND ASSET ACQUISITIONS & DIVESTITURES
 
Business and asset acquisitions

During the nine-month period ended December 31, 2017, the Company completed two acquisitions that were not individually, nor in the aggregate, significant to the consolidated financial position, results of operation and cash flows of the Company.

In April 2017, the Company completed its acquisition of AGM, which expanded its capabilities in the automotive market, and is included within the HRS segment. The Company paid $213.7 million, net of cash acquired.

Additionally, in September 2017, the Company acquired a certain power modules business from Ericsson, and expanded its capabilities within the CEC segment. The Company paid $56.0 million, net of cash acquired.

A summary of the allocation of the total purchase consideration is presented as follows (in thousands):
 
Purchase Consideration
 
Net Tangible Assets Acquired
 
Purchased Intangible Assets
 
Goodwill
AGM
$
213,718

 
$
56,438

 
$
82,000

 
$
75,280

Power Modules Business
56,006

 
12,332

 
34,500

 
9,174



The Company is in the process of finalizing its valuation of the fair value of the assets and liabilities acquired. Additional information, which existed as of the acquisition date, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the date of acquisition. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill during the respective measurement periods.

The results of operations of the acquisitions were included in the Company’s condensed consolidated financial results beginning on the date of acquisition, and the total amount of net income and revenue, collectively, were immaterial to the Company's condensed consolidated financial results for the three-month and nine-month periods ended December 31, 2017. Pro-forma results of operations have not been presented because the effects were not material to the Company’s condensed consolidated financial results for all periods presented.

13.  COMMITMENTS AND CONTINGENCIES
 
Litigation and other legal matters

In connection with the matters described below, the Company has accrued for loss contingencies where it believes that losses are probable and estimable. The Company does not believe that the amounts accrued are material. Although it is reasonably possible that actual losses could be in excess of the Company’s accrual, the Company is unable to estimate a reasonably possible loss or range of loss in excess of its accrual, except as discussed below, due to various reasons, including, among others, that: (i) the proceedings are in early stages or no claims 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 could have a material adverse effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.

On April 21, 2016, SunEdison, Inc. (together with 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

23


the 90 days preceding SunEdison's bankruptcy filing, the Company received approximately $98.6 million of inventory and cash transfers of $69.2 million, which in aggregate represents the Company's estimate of the maximum reasonably possible loss. No 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 291 million Brazilian reals (approximately USD $88 million based on the exchange rate as of December 31, 2017). The assessments are in various stages of the review process at the administrative level. The Company has meritorious defenses and plans to 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
 
During the three-month and nine-month periods ended December 31, 2017, the Company repurchased 2.0 million shares at an aggregate purchase price of $35.0 million, and 10.8 million shares at an aggregate purchase price of $180.0 million, respectively, and retired all of these shares.
 
Under the Company’s current share repurchase program, the Board of Directors authorized repurchases of its outstanding ordinary shares for up to $500 million in accordance with the share repurchase mandate approved by the Company’s shareholders at the date of the most recent Annual General Meeting held on August 15, 2017. As of December 31, 2017, shares in the aggregate amount of $410.1 million were available to be repurchased under the current plan.


24


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, restructuring charges, other charges (income), net and interest and other, net.

Selected financial information by segment is as follows:

 
Three-Month Periods Ended
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
 
(In thousands)
Net sales:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
1,979,045

 
$
2,102,321

 
$
5,853,435

 
$
6,400,233

Consumer Technologies Group
2,056,801

 
1,848,970

 
5,323,913

 
4,827,488

Industrial & Emerging Industries
1,491,063

 
1,140,366

 
4,336,201

 
3,672,103

High Reliability Solutions
1,224,643

 
1,023,342

 
3,516,695

 
3,100,513

 
$
6,751,552

 
$
6,114,999

 
$
19,030,244

 
$
18,000,337

Segment income and reconciliation of income before tax:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
50,206

 
$
62,109

 
$
141,541

 
$
176,460

Consumer Technologies Group
38,768

 
59,282

 
87,494

 
139,230

Industrial & Emerging Industries
61,328

 
39,681

 
167,650

 
127,020

High Reliability Solutions
100,976

 
82,729

 
283,552

 
249,972

Corporate and Other
(31,557
)
 
(20,695
)
 
(94,273
)
 
(82,395
)
   Total segment income
219,721

 
223,106

 
585,964

 
610,287

Reconciling items:


 


 
 
 
 
Intangible amortization
19,588

 
18,734

 
55,865

 
62,318

Stock-based compensation
20,758

 
20,781

 
63,018

 
67,311

Distressed customers asset impairments (1)

 

 
4,753

 
92,915

Contingencies and other (2)

 
17,421

 
43,933

 
28,960

Other charges (income), net
6,865

 
3,090

 
(172,467
)
 
15,007

Interest and other, net
31,350

 
22,838

 
85,780

 
71,869

    Income before income taxes
$
141,160

 
$
140,242

 
$
505,082

 
$
271,907


(1) During the fourth quarter of fiscal year 2016, the Company accepted return of previously shipped inventory from a former customer, SunEdison, of approximately $90 million. On April 21, 2016, SunEdison filed a petition for reorganization under bankruptcy law, and as a result, the Company recognized a bad debt reserve of $61 million as of March 31, 2016, associated with its outstanding SunEdison receivables.

During the second quarter of fiscal year 2017, prices for solar panel modules declined significantly. The Company determined that certain solar panel inventory on hand at the end of the second quarter of fiscal year 2017 was not fully recoverable and recorded a charge of $60.0 million to reduce the carrying costs to market in the nine-month period ended December 31, 2016. The Company also recognized a $16.0 million impairment charge for solar module equipment and $16.9 million primarily related to negative margin sales and other associated direct costs. The total charge of $92.9 million is included in cost of sales for the nine-month period ended December 31, 2016 but is excluded from segment results above.


25



(2) During the second quarter of fiscal year 2018, the Company incurred charges in connection with the matters described in note 13, for certain loss contingencies where it believes that losses are probable and estimable. Additionally, the Company incurred various other charges predominately related to damages incurred from a typhoon that impacted one of its China facilities.

During fiscal year 2017, the Company initiated a plan to rationalize the current footprint at existing sites including corporate SG&A functions and to continue to shift the talent base in support of its Sketch-to-Scaletm initiatives. As part of this plan, approximately $17.4 million and $29.0 million was recognized during the three and nine-month periods ended December 31, 2016, respectively. The plan was finalized and completed during fiscal year 2017.

Corporate and other primarily includes corporate 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.

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, 2017. 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 industrial products, from athletic shoes to electronics, 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, fashion, and mobile devices; and including various supply chain solutions for notebook personal computers ("PC"), tablets, and printers; in addition, CTG is expanding its business relationships to include supply chain optimization for non-electronics products such as footwear and clothing;
Industrial and Emerging Industries ("IEI"), which is comprised of energy and metering, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation and kiosks, and lighting; and

26


High Reliability Solutions ("HRS"), which is comprised of our medical business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging 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 are able 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 of the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.

During the past few years, we have made significant efforts to evolve our long-term portfolio towards a higher mix of businesses which possess longer product life cycles and higher segment operating margins such as reflected in our IEI and HRS businesses. Since the beginning of fiscal year 2016, we launched several programs broadly across our portfolio of services and in some instances we deployed certain new technologies. We continue to invest in innovation and we have expanded our design and engineering relationships through our product innovation centers.

We believe that our continued business transformation 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 $19.0 billion for the nine-month period ended December 31, 2017 and $23.9 billion in fiscal year 2017. 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
 
Nine-Month Periods Ended
Net sales:
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
 
(In millions)
China
$
1,996

 
30
%
 
$
1,823

 
30
%
 
$
5,493

 
29
%
 
$
5,623

 
31
%
Mexico
1,183

 
17
%
 
1,129

 
17
%
 
3,302

 
17
%
 
2,998

 
17
%
Brazil
729

 
11
%
 
536

 
9
%
 
1,969

 
10
%
 
1,326

 
7
%
U.S.
723

 
11
%
 
589

 
10
%
 
2,157

 
12
%
 
2,006

 
11
%
Malaysia
507

 
7
%
 
585

 
10
%
 
1,527

 
8
%
 
1,698

 
10
%
Other
1,614

 
24
%
 
1,453

 
24
%
 
4,582

 
24
%
 
4,349

 
24
%
 
$
6,752

 
 

 
$
6,115

 
 

 
$
19,030

 
 

 
$
18,000

 
 



27


 
As of
 
As of
Property and equipment, net:
December 31, 2017
 
March 31, 2017
 
(In millions)
China
$
713

 
29
%
 
$
720

 
31
%
Mexico
599

 
25
%
 
525

 
23
%
U.S.
307

 
13
%
 
291

 
13
%
Malaysia
154

 
6
%
 
173

 
7
%
Hungary
147

 
6
%
 
133

 
6
%
Other
523

 
21
%
 
475

 
20
%
 
$
2,443

 
 

 
$
2,317

 
 


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 industrial campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer electronics and industrial 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 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;

changes in tax legislation; and

changes in trade regulations and treaties.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
 

28


Refer to the accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements.
 
RESULTS OF OPERATIONS
 
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales. The financial information and the discussion below should be read together with the condensed consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2017 Annual Report on Form 10-K.
 
 
Three-Month Periods Ended
 
Nine-Month Periods Ended
 
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
Net sales
100.0
%
 
100.0
%
 
100.0
 %
 
100.0
%
Cost of sales
93.4

 
93.2

 
93.4

 
93.7

Gross profit
6.6

 
6.8

 
6.6

 
6.3

Selling, general and administrative expenses
3.7

 
3.8

 
4.1

 
4.0

Intangible amortization
0.3

 
0.3

 
0.3

 
0.3

Interest and other, net
0.5

 
0.4

 
0.5

 
0.4

Other charges (income), net
0.1

 
0.1

 
(0.9
)
 
0.1

Income before income taxes
2.0

 
2.2

 
2.6

 
1.5

Provision for income taxes
0.3

 
0.2

 
0.3

 
0.2

Net income
1.7
%
 
2.0
%
 
2.3
 %
 
1.3
%

Net sales
 
The following table sets forth our net sales by segment and their relative percentages. Historical information has been recast to reflect realignment of customers and/or products between segments to ensure comparability:
 
 
Three-Month Periods Ended
 
Nine-Month Periods Ended
Segments:
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
 
(In millions)
Communications & Enterprise Compute
$
1,979

 
29
%
 
$
2,102

 
34
%
 
$
5,853

 
31
%
 
$
6,400

 
36
%
Consumer Technologies Group
2,057

 
30
%
 
1,849

 
30
%
 
5,324

 
28
%
 
4,827

 
27
%
Industrial & Emerging Industries
1,491

 
22
%
 
1,140

 
19
%
 
4,336

 
23
%
 
3,672

 
20
%
High Reliability Solutions
1,225

 
19
%
 
1,023

 
17
%
 
3,517

 
18
%
 
3,101

 
17
%
 
$
6,752

 
 

 
$
6,114

 
 

 
$
19,030

 
 

 
$
18,000

 
 

 
Net sales during the three-month period ended December 31, 2017 totaled $6.8 billion, representing an increase of approximately $0.7 billion, or 10% from $6.1 billion during the three-month period ended December 31, 2016. The overall increase in sales was driven by increases in three of our segments offset by a decline in sales in our CEC segment. Our IEI segment increased $351 million, mainly driven by our industrial, home and lifestyle business in addition to growth in our solar energy business. Our CTG segment increased $208 million, primarily because of stronger sales in our connected living and mobile devices businesses, offset by a decrease in gaming. Our HRS segment increased $201 million from higher sales in our automotive business. Sales in our CEC segment declined $123 million, largely attributable to lower sales within our telecom

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and networking businesses, offset by increased sales in our cloud and data center business. Net sales increased $395 million to $2.7 billion in the Americas, increased $193 million to $3.0 billion in Asia, and increased $48 million to $1.1 billion in Europe

Net sales during the nine-month period ended December 31, 2017 totaled $19.0 billion, representing an increase of approximately $1.0 billion, or 6% from $18.0 billion during the nine-month period ended December 31, 2016. The overall increase in net sales during the nine-month period ended December 31, 2017, was driven by increases of $664 million in our IEI segment, $496 million in our CTG segment, and $416 million in our HRS segment due to the same drivers as described above. These increases were offset by a decrease of $547 million in our CEC segment as a result of lower sales within our telecom and legacy server and storage businesses, offset by increased sales in our cloud and data center business. Net sales increased $1.1 billion to $7.5 billion in the Americas, offset by decreases of $83 million to $8.3 billion in Asia and $29 million to $3.2 billion in Europe.

Our ten largest customers, during the three and nine-month periods ended December 31, 2017 accounted for approximately 43% and 42% of net sales, respectively. No customer accounted for more than 10% of net sales during the three and nine-month periods ended December 31, 2017.

Our ten largest customers, during the three and nine-month periods ended December 31, 2016 accounted for approximately 46%