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ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION (Policies)
 3 Months Ended
Jun. 29, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization of the Company and Basis of Presentation
Organization of the Company
 
Flex Ltd. ("Flex" or the "Company") was incorporated in the Republic of Singapore in May 1990. The Company's operations have expanded over the years through a combination of organic growth and acquisitions. The Company is a globally-recognized, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. The Company designs, builds, ships and services complete packaged consumer and enterprise products, 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 apparel, and mobile devices; and including various supply chain solutions for notebook personal computers, tablets, and printers;
•
Industrial and Emerging Industries ("IEI"), which is comprised of energy including advanced metering infrastructure, energy storage, smart lighting, electric vehicle infrastructure, smart solar energy, semiconductor and capital equipment, office solutions, industrial, home and lifestyle, industrial automation, and kiosks; and
•
High Reliability Solutions ("HRS"), which is comprised of health solutions business, including consumer health, digital health, disposables, precision plastics, drug delivery, diagnostics, life sciences and imaging equipment; automotive business, including vehicle electrification, connectivity, autonomous vehicles, and clean technologies.

The Company's service offerings include a comprehensive range of value-added design and engineering services that are tailored to the various markets and needs of its customers. Other focused service offerings relate to manufacturing (including enclosures, metals, plastic injection molding, precision plastics, machining, and mechanicals), system integration and assembly and test services, materials procurement, inventory management, logistics and after-sales services (including product repair, warranty services, re-manufacturing and maintenance) and supply chain management software solutions and component product offerings (including 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, 2018 contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended June 29, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019.
 
The first quarters for fiscal year 2019 and fiscal year 2018 ended on June 29, 2018, which is comprised of 90 days in the period, and June 30, 2017, which is comprised of 91 days in the period, respectively.

The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. The associated noncontrolling owners' interest in the income or losses of these companies is not material to the Company's results of operations for all periods presented, and is classified as a component of interest and other, net, in the condensed consolidated statements of operations.
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 an investment in common stock or in-substance common stock, and either (a) has the ability to significantly influence the operating decisions of the issuer, or (b) if the Company has a voting percentage of a corporation equal to or generally greater than 20% but less than 50%, and for non-majority-owned investments in partnerships when 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 and Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncement

In January 2017, the FASB issued Accounting Standard Update (ASU) No. 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business” to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the guidance on a prospective basis during the first quarter of fiscal year 2019, which did not have a material impact to its financial position as there were no acquisitions during the period.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 2030): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)." The ASU is intended to address specific cash flow issues with the objective of reducing the existing diversity in practice and provide guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classification. However, cash receipts on the deferred purchase price from the Company's asset-backed securitization programs described in note 10 will be classified as cash flows from investing activities instead of the Company's former presentation as cash flows from operations. The Company adopted the guidance during the first quarter of fiscal year 2019 and retrospectively adjusted cash flows from operating and investing activities for three-month period ended June 30, 2017. Upon adoption of the standard, the Company recorded $0.7 billion of cash receipts on the deferred purchase price from the Company's asset-backed securitization programs for the three-month period ended June 29, 2018 and reclassified $0.8 billion of cash receipts on the deferred purchase price for the three-month period ended June 30, 2017, from cash flows from operating activities to cash flows from investing activities and the Company’s condensed consolidated statement of cash flows for the three-months ended June 30, 2017 has been restated to reflect this adjustment.
The Company adopted this new guidance using a method which allocates cash flows between operating and investing activities based on monthly receivables sales and collection data.  Commencing with the quarter ending September 28, 2018, the Company will change to a method based on daily activity, and will apply this new method retrospectively.  Management expects this change to result in a decrease in cash flows from operating activities and a corresponding increase in cash flows from investing activities, and that the amount of such change could be material, though no amounts have yet been quantified for any period presented.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This guidance generally requires equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. This guidance also requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The Company adopted this guidance on April 1, 2018 with an insignificant impact on the Company's financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" (also referred to as Accounting Standard Codification 606 ("ASC 606")) which requires an entity to recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from costs to obtain or fulfill a contract.
The Company adopted the standard on April 1, 2018 using the modified retrospective approach by applying the guidance to all open contracts at the adoption date and has implemented revised accounting policies, new operational and financial reporting processes, enhanced systems capabilities and relevant internal controls.
As part of adopting ASC 606, revenue for certain customer contracts where the Company is manufacturing products for which there is no alternative use and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory will be recognized over time (i.e. as we manufacture the product) instead of upon shipment of products. In addition to the following disclosures, note 3 provides further disclosures required by the new standard.
The cumulative effect of change made to our April 1, 2018 consolidated balance sheet for the adoption of ASC 606 was as follows:

Condensed Consolidated Balance Sheet
 
 
 
 
Impact of Adopting ASC 606
(In thousands)
(Unaudited)
Balance at March 31, 2018
Adjustments
Balance at April 1, 2018
 
 
 
 
ASSETS
 
 
 
Contract assets
—

412,787

412,787

Inventories
3,799,829

(409,252
)
3,390,577

Other current assets
1,380,466

(51,479
)
1,328,987

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

(87,897
)
1,631,521

Other liabilities
531,587

2,098

533,685

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

The adoption of ASC 606 resulted in the establishment of contract asset and contract liability balance sheet accounts and in the reclassification to these new accounts from certain asset and liability accounts, primarily inventories. The increase in accumulated deficit in the table above reflects $37.9 million of net adjustments to the balance sheet as of April 1, 2018, resulting from the adoption of ASC 606 primarily related to certain customer contracts requiring an over-time method of revenue recognition. The declines in inventories and other current asset reflect reclassifications to contract assets due to the earlier recognition of certain costs of products sold for over-time contracts. The decline in other current liabilities is primarily due to the reclassification of payments from customers in advance of work performed to contract assets to reflect the net position of the related over-time contracts.
The following tables summarize the impacts of ASC 606 adoption on the Company’s condensed consolidated balance sheets and condensed consolidated statements of operations:

Condensed Consolidated Balance Sheet
 
 
 
As of June 29, 2018
 
 
 
 
Impact of Adopting ASC 606
(In thousands)
(Unaudited)
As Reported
Adjustments
Balance without ASC 606 Adoption
ASSETS
 
 
 
Contract assets
323,599

(323,599
)
—

Inventories
3,984,571

321,710

4,306,281

Other current assets
1,231,773

39,184

1,270,957

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Other current liabilities
1,665,432

70,317

1,735,749

 


 


Accumulated deficit
(2,989,377
)
(33,022
)
(3,022,399
)

Condensed Consolidated Statement of Operations
 
 
 
Three-months ended June 29, 2018
 
 
 
 
Impact of Adopting ASC 606
(In thousands)
(Unaudited)
As Reported
Adjustments
Balance without ASC 606 Adoption
Net sales
$
6,423,956

$
101,974

$
6,525,930

Cost of sales
6,046,102

97,141

6,143,243

Gross profit
377,854

4,833

382,687

Net income
$
116,035

$
4,833

$
120,868



The as reported revenue and gross profit for the period ended June 29, 2018 were approximately $102.0 million, and $4.8 million less than they would have been without ASC 606 adoption primarily due to certain contract amendments for a portion of the Company's customers executed in the quarter. To align contractual terms across the vast majority of customers to allow the Company to efficiently and accurately manage its contracts, the Company waived certain contractual rights to bill profit for work in progress in the event of a contract termination which is expected to be infrequent. These modifications will result in revenue from these customers being recognized upon shipment of products, rather than over time (i.e. as we manufacture products) as further explained in note 3. The result of the amendments was to reduce revenue and gross profit by approximately $132.7 million and $9.3 million, respectively, compared to amounts that would have been reported both (i) under ASC 606 had we not amended the contracts, and (ii) had we not adopted ASC 606. Offsetting the impact of the one-time contract amendments noted above was approximately $30.7 million of additional revenue and $4.5 million of gross profit recognized in the "as reported" amounts due to the accelerated timing of recognition of revenue for contracts which meet the criteria for over-time recognition (see note 3). There was no material tax impact for the three months period ended June 29, 2018 from adopting ASC 606.
The Company applies the following practical expedients:
•
The Company elected to not disclose information about remaining performance obligations as its performance obligations generally have an expected durations of one year or less.
•
In accordance with ASC 606-10-25-18B the Company will account for certain shipping and handling as activities to fulfill the promise to transfer the good, instead of a promised service to its customer.
•
In accordance with ASC 606-10-32-18 the Company elected to not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.
Recently Issued Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting" with the objective of simplifying several aspects of the accounting for nonemployee share-based payment transactions in current GAAP. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2020.
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships and simplifying the application of the hedge accounting guidance in current GAAP. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020 with early adoption permitted. The Company expects the new guidance will have an immaterial impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2020.
In February 2018, the FASB issued ASU 2018-03 "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This standard comes as an addition to ASU 2016-01which the Company adopted in the first quarter of fiscal year 2019. This update includes amendments to clarify certain aspects of the guidance issued in Update 2016-01. The Company will adopt the guidance during the second quarter of fiscal year 2019, and expects it will have an immaterial impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" to simplify the subsequent measurement of goodwill by eliminating step 2 from the goodwill impairment test. This guidance requires that the change be applied on a prospective basis, and it is effective for the Company beginning in the first quarter of fiscal year 2021, with early application permitted. The Company is currently assessing the impact of the new guidance and the timing of adoption.
In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)" intended to improve financial reporting on leasing transactions. The new lease guidance will require entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. The guidance will also enhance existing disclosure requirements relating to those leases. The Company intends to adopt the new lease guidance when it becomes effective in the first quarter of fiscal year 2020 using a modified retrospective approach. The Company believes the new guidance will have a material impact on its consolidated balance sheets upon adoption.