Document
Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
(Mark One)
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2018
 
Or
 
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  
 
Commission file number 0-23354
 
FLEX LTD.
(Exact name of registrant as specified in its charter)
Singapore
 
Not Applicable
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
2 Changi South Lane,
 
 
Singapore
 
486123
(Address of registrant’s principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code
(65) 6876-9899
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
 
Indicate by check mark whether the registrant has submitted electronically 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. 


Table of Contents

Class
 
Outstanding at July 25, 2018
Ordinary Shares, No Par Value
 
532,762,042



Table of Contents

FLEX LTD.
 
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of Flex Ltd.
Singapore
 
We have reviewed the accompanying condensed consolidated balance sheet of Flex Ltd. and subsidiaries (the “Company”) as of June 29, 2018 and the related condensed consolidated statements of operations, comprehensive income, and cash flows for the three-month periods ended June 29, 2018 and June 30, 2017. 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, 2018 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated June 14, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2018 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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


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FLEX LTD.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
As of June 29, 2018
 
As of March 31, 2018
 
(In thousands, except share amounts)
(Unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
1,254,639

 
$
1,472,424

Accounts receivable, net of allowance for doubtful accounts of $62,141 and $60,051 as of June 29, 2018 and March 31, 2018, respectively
2,890,227

 
2,517,695

Contract assets
323,599

 

Inventories
3,984,571

 
3,799,829

Other current assets
1,231,773

 
1,380,466

Total current assets
9,684,809

 
9,170,414

Property and equipment, net
2,190,080

 
2,239,506

Goodwill
1,094,776

 
1,121,170

Other intangible assets, net
390,827

 
424,433

Other assets
949,196

 
760,332

Total assets
$
14,309,688

 
$
13,715,855

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 

 
 

Bank borrowings and current portion of long-term debt
$
42,903

 
$
43,011

Accounts payable
5,709,079

 
5,122,303

Accrued payroll
377,461

 
383,332

Other current liabilities
1,665,432

 
1,719,418

Total current liabilities
7,794,875

 
7,268,064

Long-term debt, net of current portion
2,877,089

 
2,897,631

Other liabilities
528,405

 
531,587

Shareholders’ equity
 

 
 

Flex Ltd. shareholders’ equity
 

 
 

Ordinary shares, no par value; 582,975,757 and 578,317,848 issued, and 532,736,402 and 528,078,493 outstanding as of June 29, 2018 and March 31, 2018, respectively
6,657,745

 
6,636,747

Treasury stock, at cost; 50,239,355 shares as of June 29, 2018 and March 31, 2018
(388,215
)
 
(388,215
)
Accumulated deficit
(2,989,377
)
 
(3,144,114
)
Accumulated other comprehensive loss
(170,834
)
 
(85,845
)
Total shareholders’ equity
3,109,319

 
3,018,573

Total liabilities and shareholders’ equity
$
14,309,688

 
$
13,715,855

 

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


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In thousands, except per share amounts)
(Unaudited)
Net sales
$
6,423,956

 
$
6,008,272

Cost of sales
6,046,102

 
5,601,340

Gross profit
377,854

 
406,932

Selling, general and administrative expenses
262,882

 
250,811

Intangible amortization
18,517

 
19,901

Interest and other, net
41,742

 
26,876

Other income, net
(86,924
)
 
(36,165
)
Income before income taxes
141,637

 
145,509

Provision for income taxes
25,602

 
20,799

Net income
$
116,035

 
$
124,710

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.22

 
$
0.24

Diluted
$
0.22

 
$
0.23

Weighted-average shares used in computing per share amounts:
 

 
 

Basic
529,380

 
530,268

Diluted
535,454

 
538,633

    

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


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017

(In thousands)
(Unaudited)
Net income
$
116,035

 
$
124,710

Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustments, net of zero tax
(44,086
)
 
10,836

Unrealized loss on derivative instruments and other, net of zero tax
(40,903
)
 
(2,169
)
Comprehensive income
$
31,046

 
$
133,377


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


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FLEX LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 


 

Net income
$
116,035


$
124,710

Depreciation, amortization and other impairment charges
121,763


131,396

Gain from deconsolidation of a subsidiary entity
(91,025
)
 

Changes in working capital and other
(818,581
)

(951,862
)
Net cash used in operating activities
(671,808
)

(695,756
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Purchases of property and equipment
(172,247
)

(124,851
)
Proceeds from the disposition of property and equipment
2,336


5,476

Acquisition of businesses, net of cash acquired


(213,718
)
Proceeds from divestiture of businesses, net of cash held in divested businesses


(616
)
Cash collections of deferred purchase price
656,766

 
834,272

Other investing activities, net
(15,218
)

(18,549
)
Net cash provided by investing activities
471,637


482,014

CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Proceeds from bank borrowings and long-term debt
150,313



Repayments of bank borrowings and long-term debt
(150,344
)

(7,554
)
Payments for repurchases of ordinary shares


(73,864
)
Net proceeds from issuance of ordinary shares
45


696

Other financing activities, net


57,628

Net cash provided by (used in) financing activities
14


(23,094
)
Effect of exchange rates on cash and cash equivalents
(17,628
)

(11,642
)
Net decrease in cash and cash equivalents
(217,785
)

(248,478
)
Cash and cash equivalents, beginning of period
1,472,424


1,830,675

Cash and cash equivalents, end of period
$
1,254,639


$
1,582,197







Non-cash investing activities:
 


 

Unpaid purchases of property and equipment
$
148,535


$
84,472

Non-cash proceeds from sale of Wink
$

 
$
59,000

Non-cash investment in AutoLab (Note 2)
$
132,052


$

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

 
$

 

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


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.  ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
 
Organization of the Company
 
Flex Ltd. ("Flex" or the "Company") was incorporated in the Republic of Singapore in May 1990. The Company's operations have expanded over the years through a combination of organic growth and acquisitions. The Company is a globally-recognized, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. The Company designs, builds, ships and services complete packaged consumer and enterprise products, 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.


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The accompanying unaudited condensed consolidated financial statements include the accounts of Flex and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions. The Company consolidates its majority-owned subsidiaries and investments in entities in which the Company has a controlling interest. For the consolidated majority-owned subsidiaries in which the Company owns less than 100%, the Company recognizes a noncontrolling interest for the ownership of the noncontrolling owners. The associated noncontrolling owners' interest in the income or losses of these companies is not material to the Company's results of operations for all periods presented, and is classified as a component of interest and other, net, in the condensed consolidated statements of operations.
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 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

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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:


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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

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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.

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 June 29, 2018
 
As of March 31, 2018
 
(In thousands)
Raw materials
$
3,096,814

 
$
2,760,410

Work-in-progress
403,625

 
450,569

Finished goods
484,132

 
588,850

 
$
3,984,571

 
$
3,799,829

Due to the adoption of ASC 606, amounts that would have been reported as inventory under prior guidance are now included in contract assets or liabilities, depending on the net position of the contract, as disclosed in note 1. As a result of this accounting change, inventories as of June 29, 2018 are $321.7 million less than they would have been, had we not adopted ASC 606. The comparative information as of March 31, 2018, has not been restated and continues to be reported under the accounting standards in effect at that time.

Goodwill and Other Intangible Assets
 
The following table summarizes the activity in the Company’s goodwill account for each of its four segments during the three-month period ended June 29, 2018:
 

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HRS
 
CTG
 
IEI
 
CEC
 
Amount
 
(In thousands)
Balance, beginning of the year
$
550,983

 
$
107,748

 
$
337,707

 
$
124,732

 
$
1,121,170

Foreign currency translation adjustments (1)
(26,394
)
 

 

 

 
(26,394
)
Balance, end of the period
$
524,589

 
$
107,748

 
$
337,707

 
$
124,732

 
$
1,094,776


(1)
During the three-month period ended June 29, 2018, the Company recorded $26.4 million of foreign currency translation adjustments primarily related to the goodwill associated with the acquisition of Mirror Controls International ("MCi") and AGM Automotive ("AGM"), as the U.S. Dollar fluctuated against foreign currencies.
 
The components of acquired intangible assets are as follows:

 
As of June 29, 2018
 
As of March 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Customer-related intangibles
$
303,790

 
$
(88,667
)
 
$
215,123

 
$
306,943

 
$
(79,051
)
 
$
227,892

Licenses and other intangibles
286,177

 
(110,473
)
 
175,704

 
304,007

 
(107,466
)
 
196,541

Total
$
589,967

 
$
(199,140
)
 
$
390,827

 
$
610,950

 
$
(186,517
)
 
$
424,433


The gross carrying amounts of intangible assets are removed when fully amortized. The estimated future annual amortization expense for intangible assets is as follows:
Fiscal Year Ending March 31,
Amount
 
(In thousands)
2019 (1)
$
54,200

2020
66,514

2021
62,135

2022
53,323

2023
45,089

Thereafter
109,566

Total amortization expense
$
390,827

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

Other current assets include approximately $287.7 million and $445.4 million as of June 29, 2018 and March 31, 2018, respectively, for the deferred purchase price receivable from the Company's Asset-Backed Securitization programs. See note 10 for additional information. Further, the Company recorded approximately $341.5 million and $321.1 million, as of June 29, 2018 and March 31, 2018, respectively, of asset held for sale primarily consisting of property and equipment and accounts receivable, in other current assets. See note 12 for additional information.

Other Assets

The Company has certain equity investments in, and notes receivable from, non-publicly traded companies which are included within other assets. The equity method of accounting is used for investments in common stock or in-substance common stock when the Company has the ability to significantly influence the operating decisions of the investee; otherwise the cost method is used. Non-majority-owned investments in entities are accounted for using the equity method when the Company has a voting percentage equal to or generally greater than 20% but less than 50%, and for non-majority-owned investments in partnerships when generally greater than 5%. The Company monitors these investments for impairment

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indicators and makes appropriate reductions in carrying values as required whenever events or changes in circumstances indicate that the assets may be impaired. The factors the Company considers in its evaluation of potential impairment of its investments include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee, or factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operation or working capital deficiencies. Fair values of these investments, when required, are estimated using unobservable inputs, primarily comparable company multiples and discounted cash flow projections. For investments accounted for under cost method that do not have readily determinable fair values, the Company has elected, per ASU 2016-01, to measure them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
AutoLab AI
During the first quarter of fiscal year 2019, the Company transferred existing employees and equipment with a net book value of approximately $40 million along with certain related software and Intellectual Property ("IP"), into the newly created AutoLab AI (“AutoLab”), in exchange for shares of preferred stock and a controlling financial interest in AutoLab. AutoLab is a privately held software-as-a service (SaaS) and hardware company focused on developing and deploying an automation solution worldwide. The Company has concluded that AutoLab does not qualify as a variable interest entity for purposes of evaluating whether it has a controlling financial interest.
Subsequent to the initial formation and prior to June 29, 2018, AutoLab received equity funding from third party investors and expanded the board of directors, resulting in dilution of the Company's voting interest below 50%. As a result, the Company concluded it no longer holds a controlling financial interest in AutoLab and accordingly, deconsolidated the entity.
The fair value of the Company’s non-controlling interest in AutoLab upon deconsolidation was approximately $132.1 million as of the date of deconsolidation. The Company accounts for its investment in AutoLab under the equity method, with the carrying amount included in other assets on the condensed consolidated balance sheet. The value of the Company’s interest on the date of deconsolidation was based on management’s estimate of the fair value of AutoLab at that time. Management relied on a multi-stage process which involved calculating the enterprise and equity value of AutoLab, then allocating the equity value of the entity to the Company’s securities. The enterprise value of AutoLab was estimated based on the value implied by the equity funding AutoLab received from third parties in the same period (i.e.: level 2 inputs). The Company recognized a gain on deconsolidation of approximately $91.8 million with no material tax impact, which is included in other income, net on the condensed consolidated statement of operations.
In addition, during the first quarter of fiscal year 2019, the Company leased approximately $76.5 million of fixed assets to AutoLab under a five-year lease term based on an interest rate of 0.35% per month. The leases were concluded to be sales-type leases and as such, the Company derecognized the associated assets from property and equipment, net and recorded a total net investment in the lease of $88.2 million in other current assets and non-current assets, based on the present value of lease receivables. The Company recorded an immaterial gain related to this leasing transaction, which is included in cost of sales on the condensed consolidated statement of operations.
Pro-forma financials have not been presented because the effects were not material to the Company’s condensed consolidated financial position and results of operation for all periods presented. AutoLab became a related party to the Company starting on the date of deconsolidation. The Company has engaged AutoLab as a strategic partner to develop and deploy automation solution for Flex and has entered into a 5-year subscription agreement. Subscription fees under the AutoLab agreement were immaterial for the three-month period ended June 29, 2018.
As of June 29, 2018 and March 31, 2018, the Company's investments in non-majority owned companies totaled $554.3 million and $411.1 million, respectively. The equity in the earnings or losses of the Company's equity method investments, including AutoLab, was not material to the consolidated results of operations for any period presented and is included in interest and other, net.

Other Current Liabilities

Other current liabilities include customer working capital advances of $174.0 million and $153.6 million, customer-related accruals of $414.6 million and $439.0 million, and deferred revenue of $270.6 million and $329.0 million as of June 29, 2018 and March 31, 2018, respectively. The customer working capital advances are not interest-bearing, do not have fixed repayment dates and are generally reduced as the underlying working capital is consumed in production.


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3.  REVENUE
 
Revenue Recognition
The Company provides a comprehensive suite of services for its customers that range from advanced product design to manufacturing and logistics to after-sales services. The first step in its process for revenue recognition is to identify a contract with a customer. A contract is defined as an agreement between two parties that create enforceable rights and obligations and can be written, verbal, or implied. The Company generally enters into master supply agreements (“MSA”) with its customers that provide the framework under which business will be conducted. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing formulas, payment terms, etc, and the level of business under those agreements may not be guaranteed. In those instances, we bid on a program-by-program basis and typically receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order, or any other similar documents such as a statement of work, product addenda, emails or other communications that embody the commitment by the customer.
In determining the appropriate amount of revenue to recognize, the Company applies the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. Further, the Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (PIT) or over time (OT). The Company is first required to evaluate whether its contracts meet the criteria for OT recognition. The Company has determined that for a portion of its contracts the Company is manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and IP restrictions) and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer.
Customer Contracts and Related Obligations
Certain of the Company’s customer agreements include potential price adjustments which may result in variable consideration. These price adjustments include, but are not limited to, sharing of cost savings, committed price reductions, material margins earned over the period that are contractually required to be paid to the customers, rebates, refunds tied to performance metrics such as on-time delivery, and other periodic pricing resets that may be refundable to customers. The Company estimates the variable consideration related to these price adjustments as part of the total transaction price and recognizes revenue in accordance with the pattern applicable to the performance obligation, subject to a constraint. The Company constrains the amount of revenues recognized for these contractual provisions based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. The Company determines the amounts to be recognized based on the amount of potential refund required by the contract, historical experience and other surrounding facts and circumstances. Often these obligations are settled with the customer in a period after shipment through various methods which include reduction of prices for future purchases, issuance of a payment to the customer, or issuance of a credit note applied against the customer’s accounts receivable balance. In many instances, the agreement is silent on the settlement mechanism. Any difference between the amount accrued upon shipment for potential refunds and the actual amount agreed to with the customer is recorded as an increase or decrease in revenue. These potential price adjustments are included as part of other current liabilities on the consolidated balance sheet and disclosed as part of customer related accruals in note 2.
Performance Obligations
The Company derives its revenues primarily from manufacturing services, and to a lesser extent, from innovative design, engineering, and supply chain services and solutions.
A performance obligation is an implicitly or explicitly promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company considers all activities typically included in its contracts, and identifies those activities representing a promise to transfer goods or services to a customer. These include, but are not limited to, design and engineering services, prototype products, tooling etc. Each promised good or service with regards to these identified activities is accounted for as a separate performance obligation only if it is distinct - i.e., the customer can benefit from it on its own or together with other resources that are readily available to the customer. Certain activities on the other hand are determined not to constitute a promise to

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transfer goods or service, and therefore do not represent separate performance obligations for revenue recognition (e.g.: procurement of materials and standard workmanship warranty).
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual good or service is not separately identifiable from other promises in the contract and is, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. In the event that more than one performance obligation is identified in a contract, the Company is required to allocate the transaction price between the performance obligations. The allocation would generally be performed on the basis of a relative standalone price for each distinct good or service. This standalone price most often represents the price that Flex would sell similar goods or services separately.
Contract Balances
A contract asset is recognized when the Company has recognized revenue, but not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheet and transferred to receivables when rights to payment become unconditional. The following table summarizes the activity in the Company's contract assets during the three-month period ended June 29, 2018 (in thousands):
 
Contract Assets
Beginning balance, April 1, 2018
$

Cumulative effect adjustment at April 1, 2018
412,787

Revenue recognized
1,560,734

Amounts collected or invoiced
(1,649,922
)
Ending balance, June 29, 2018
$
323,599

A contract liability is recognized when the Company receives payments in advance of the satisfaction of performance and are included in other current liabilities on the condensed consolidated balance sheets. Contract liabilities were $270.6 million and $265.3 million as of June 29, 2018 and April 1, 2018, respectively.
Disaggregation of Revenue
The following table presents the Company’s revenue disaggregated based on timing of transfer - point in time and overtime - for the three-month period ended June 29, 2018 (in thousands):
 
HRS
 
CTG
 
IEI
 
CEC
 
Total
Timing of Transfer
 
 
 
 
 
 
 
 
 
Point in time
$
1,005,180

 
$
1,300,637

 
$
1,063,898

 
$
1,493,507

 
$
4,863,222

Over time
210,245

 
507,297

 
382,413

 
460,779

 
1,560,734

Total segment
$
1,215,425

 
$
1,807,934

 
$
1,446,311

 
$
1,954,286

 
$
6,423,956


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


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

 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In thousands)
Cost of sales
$
5,404

 
$
3,319

Selling, general and administrative expenses
15,549

 
18,477

Total share-based compensation expense
$
20,953

 
$
21,796

 
Total unrecognized compensation expense related to share options under all plans was $5.7 million, and will be recognized over a weighted-average remaining vesting period of 1.9 years. As of June 29, 2018, the number of options outstanding and exercisable under all plans was 1.1 million and 0.5 million, respectively, at a weighted-average exercise price of $3.38 per share and $4.83 per share, respectively.
 
During the three-month period ended June 29, 2018, the Company granted 5.1 million unvested restricted share unit awards. Of this amount, approximately 3.9 million are plain-vanilla unvested restricted share unit awards with no performance or market conditions with an average grant date price of $14.05 per share and will vest over four years. Further, approximately 1.2 million unvested shares represent the target amount of grants made to certain key employees whereby vesting is contingent on certain market conditions. The expense for these awards contingent on certain market conditions is immaterial for the three-month period ended June 29, 2018 as the awards were granted close to the quarter end. The number of shares contingent on market conditions that ultimately will vest will range from zero up to a maximum of 2.4 million based on a measurement of the percentile rank of the Company’s total shareholder return over a certain specified period against the Standard and Poor’s (“S&P”) 500 Composite Index and will cliff vest after a period of three years, if such market conditions have been met. 
 
As of June 29, 2018, approximately 14.9 million unvested restricted share unit awards under all plans were outstanding, of which vesting for a targeted amount of 2.6 million is contingent primarily on meeting certain market conditions. The number of shares that will ultimately be issued can range from zero to 5.2 million based on the achievement levels of the respective conditions. During the three-month period ended June 29, 2018, 0.6 million shares vested in connection with the restricted share unit awards with market conditions granted in fiscal year 2016.
 
As of June 29, 2018, total unrecognized compensation expense related to unvested restricted share unit awards under all plans was approximately $194.5 million, and will be recognized over a weighted-average remaining vesting period of 2.8 years.

5.  EARNINGS PER SHARE
 
The following table reflects basic weighted-average ordinary shares outstanding and diluted weighted-average ordinary share equivalents used to calculate basic and diluted earnings per share attributable to the shareholders of Flex Ltd.:
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In thousands, except per share amounts)
Net income
$
116,035

 
$
124,710

Shares used in computation:


 


Weighted-average ordinary shares outstanding
529,380

 
530,268

Basic earnings per share
$
0.22

 
$
0.24


 
 
 
Diluted earnings per share:
 

 
 

Net income
$
116,035

 
$
124,710

Shares used in computation:
 

 
 

Weighted-average ordinary shares outstanding
529,380

 
530,268

Weighted-average ordinary share equivalents from stock options and awards (1) (2)
6,074

 
8,365

Weighted-average ordinary shares and ordinary share equivalents outstanding
535,454

 
538,633

Diluted earnings per share
$
0.22

 
$
0.23


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____________________________________________________________
(1)    An immaterial amount of options to purchase ordinary shares were excluded from the computation of diluted earnings per share during the three-month periods ended June 29, 2018, and June 30, 2017 due to their anti-dilutive impact on the weighted-average ordinary share equivalents.
(2)    Restricted share unit awards of 3.3 million and 0.1 million for the three-month periods ended June 29, 2018 and June 30, 2017, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive impact on the weighted-average ordinary share equivalents.

6.  INTEREST AND OTHER, NET
 
During the three-month periods ended June 29, 2018 and June 30, 2017, the Company recognized interest expense of $33.5 million and $29.0 million, respectively, on its debt obligations outstanding during the periods.

7.  OTHER INCOME, NET
 
During the three-month period ended June 29, 2018, the Company recognized other income of $86.9 million, primarily driven by a $91.8 million gain on the deconsolidation of AutoLab. Refer to note 2 for further details of the deconsolidation.
During the three-month period ended June 30, 2017, the Company sold Wink to an unrelated third-party venture backed company in exchange for contingent consideration. The Company recognized a non-cash gain on sale of $38.7 million, which was recorded in other income, net on the condensed consolidated statement of operations during the period.

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8.  FINANCIAL INSTRUMENTS
 
Foreign Currency Contracts
 
The Company enters into short-term foreign currency derivatives contracts, including forward, swap, and options contracts to hedge only those currency exposures associated with certain assets and liabilities, primarily accounts receivable and accounts payable, and cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the assets, liabilities and transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these derivative contracts is minimized since the contracts are with large financial institutions and accordingly, fair value adjustments related to the credit risk of the counterparty financial institution were not material.

As of June 29, 2018, the aggregate notional amount of the Company’s outstanding foreign currency derivative contracts was $8.0 billion as summarized below:
 
 
Foreign Currency Amount
 
Notional Contract Value in USD
Currency
Buy
 
Sell
 
Buy

Sell
 
(In thousands)
Cash Flow Hedges
 

 
 

 
 
 
 

CNY
2,861,000

 

 
$
433,268

 
$

EUR
69,596

 
71,597

 
81,596

 
83,601

HUF
26,081,080

 

 
92,453

 

ILS
180,070

 
10,500

 
49,447

 
2,883

MXN
4,842,800

 

 
241,956

 

MYR
396,800

 
39,000

 
98,876

 
9,718

RON
163,150

 

 
40,664

 

SGD
45,950

 

 
33,688

 

Other
N/A

 
N/A

 
44,590

 
7,994

 
 

 
 

 
1,116,538

 
104,196

Other Foreign Currency Contracts


 


 


 


BRL

 
596,000

 

 
155,172

CAD
378,908

 
389,644

 
285,129

 
293,208

CNY
2,879,061

 
1,365,680

 
438,131

 
206,927

EUR
1,657,947

 
1,855,760

 
1,923,257

 
2,153,525

GBP
35,446

 
63,881

 
46,615

 
84,113

HUF
29,643,799

 
31,298,908

 
105,083

 
110,950

INR
3,767,477

 
1,353,258

 
55,634

 
19,751

MXN
2,403,304

 
2,017,270

 
120,074

 
100,787

MYR
541,260

 
287,330

 
134,873

 
71,598

SGD
86,283

 
48,930

 
63,257

 
35,872

Other
N/A

 
N/A

 
182,696

 
151,951

 
 

 
 

 
3,354,749

 
3,383,854




 


 


 


Total Notional Contract Value in USD
 

 
 

 
$
4,471,287

 
$
3,488,050


As of June 29, 2018, the fair value of the Company’s short-term foreign currency contracts was included in other current assets or other current liabilities, as applicable, in the condensed consolidated balance sheets. Certain of these contracts are designed to economically hedge the Company’s exposure to monetary assets and liabilities denominated in a non-functional currency and are not accounted for as hedges under the accounting standards. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change as a component of interest and other, net in the condensed

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consolidated statements of operations. As of June 29, 2018, and March 31, 2018, the Company also has included net deferred gains and losses in accumulated other comprehensive loss, a component of shareholders’ equity in the condensed consolidated balance sheets, relating to changes in fair value of its foreign currency contracts that are accounted for as cash flow hedges. Deferred losses were $33.3 million as of June 29, 2018, and are expected to be recognized primarily as a component of cost of sales in the condensed consolidated statements of operations primarily over the next twelve-month period. The gains and losses recognized in earnings due to hedge ineffectiveness were not material for all fiscal periods presented and are included as a component of interest and other, net in the condensed consolidated statements of operations.
 
The following table presents the fair value of the Company’s derivative instruments utilized for foreign currency risk management purposes:

 
Fair Values of Derivative Instruments
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value
 
 
 
Fair Value
 
Balance Sheet
Location
 
June 29,
2018
 
March 31,
2018
 
Balance Sheet
Location
 
June 29,
2018
 
March 31,
2018
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
3,539

 
$
19,422

 
Other current liabilities
 
$
37,996

 
$
7,065

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 

 
 

 
 
 
 

 
 

Foreign currency contracts
Other current assets
 
$
12,110

 
$
23,912

 
Other current liabilities
 
$
20,252

 
$
18,246


The Company has financial instruments subject to master netting arrangements, which provides for the net settlement of all contracts with a single counterparty. The Company does not offset fair value amounts for assets and liabilities recognized for derivative instruments under these arrangements, and as such, the asset and liability balances presented in the table above reflect the gross amounts of derivatives in the condensed consolidated balance sheets. The impact of netting derivative assets and liabilities is not material to the Company’s financial position for any of the periods presented.
 
9.  ACCUMULATED OTHER COMPREHENSIVE LOSS
 
The changes in accumulated other comprehensive loss by component, net of tax, are as follows:
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
Unrealized loss on 
derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
Unrealized loss on derivative
instruments and
other
 
Foreign currency
translation
adjustments
 
Total
 
(In thousands)
Beginning balance
$
(35,746
)
 
$
(50,099
)
 
$
(85,845
)
 
$
(32,426
)
 
$
(95,717
)
 
$
(128,143
)
Other comprehensive gain (loss) before reclassifications
(41,659
)
 
(44,086
)
 
(85,745
)
 
3,020

 
10,836

 
13,856

Net (gains) losses reclassified from accumulated other comprehensive loss
756

 

 
756

 
(5,189
)
 

 
(5,189
)
Net current-period other comprehensive gain (loss)
(40,903
)
 
(44,086
)
 
(84,989
)
 
(2,169
)
 
10,836

 
8,667

Ending balance
$
(76,649
)
 
$
(94,185
)
 
$
(170,834
)
 
$
(34,595
)
 
$
(84,881
)
 
$
(119,476
)

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Substantially all unrealized losses relating to derivative instruments and other, reclassified from accumulated other comprehensive loss for the three-month period ended June 29, 2018 were recognized as a component of cost of sales in the condensed consolidated statement of operations, which primarily relate to the Company’s foreign currency contracts accounted for as cash flow hedges. 

10.  TRADE RECEIVABLES SECURITIZATION
 
The Company sells trade receivables under two asset-backed securitization programs and an accounts receivable factoring program.
 
Asset-Backed Securitization Programs
 
The Company continuously sells designated pools of trade receivables under its Global Asset-Backed Securitization Agreement (the “Global Program”) and its North American Asset-Backed Securitization Agreement (the “North American Program,” collectively, the “ABS Programs”) to affiliated special purpose entities, each of which in turn sells 100% of the receivables to unaffiliated financial institutions. These programs allow the operating subsidiaries to receive a cash payment and a deferred purchase price receivable for sold receivables. The portion of the purchase price for the receivables which is not paid by the unaffiliated financial institutions in cash is a deferred purchase price receivable, which is paid to the special purpose entity as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in other current assets as of June 29, 2018 and March 31, 2018, 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.
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 periods ended June 29, 2018, and June 30, 2017 were not material and are included in interest and other, net within the condensed consolidated statements of operations. As the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value, no servicing assets and liabilities are recognized.
The Company's deferred purchase price receivables relating to its asset-backed securitization program are recorded initially at fair value based on a discounted cash flow analysis using unobservable inputs (i.e., level 3 inputs), which are primarily risk-free interest rates adjusted for the credit quality of the underlying creditor. Due to its high credit quality and short-term maturity, the fair value approximates carrying value. Significant increases in either of the major unobservable inputs (credit spread, risk free interest rate) in isolation would result in lower fair value estimates, however the impact is not material. The interrelationship between these inputs is also insignificant.
As of June 29, 2018 and March 31, 2018, the accounts receivable balances that were sold under the ABS Programs were removed from the condensed consolidated balance sheets and the net cash proceeds received by the Company during the three-month periods ended June 29, 2018 and June 30, 2017 were included as cash provided by operating activities in the condensed consolidated statements of cash flows. We recognize these proceeds net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivable. We recognize the collection of the deferred purchase price in net cash provided by investing activities in the condensed consolidated statements of cash flows as cash collections of deferred purchase price.
As of June 29, 2018, approximately $1.2 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 $0.9 billion and deferred purchase

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price receivables of $287.7 million. As of March 31, 2018, approximately $1.5 billion of accounts receivable had been sold to the special purpose entities for which the Company had received net cash proceeds of $1.1 billion and deferred purchase price receivables of $445.4 million. The deferred purchase price balances as of June 29, 2018 and March 31, 2018, also represent the non-cash beneficial interest obtained in exchange for securitized receivables.
 For the three-month periods ended June 29, 2018 and June 30, 2017, cash flows from sales of receivables under the ABS Programs consisted of approximately $2.1 billion and $2.4 billion, respectively, for transfers of receivables, and approximately $0.7 billion and $0.8 billion, respectively, for collection on deferred purchase price receivables. The Company's cash flows from transfer of receivables consist primarily of proceeds from collections reinvested in revolving-period transfers. Cash flows from new transfers were not significant for all periods presented. 
Trade Accounts Receivable Sale Program
 
The Company also sold accounts receivables to certain third-party banking institutions. The outstanding balance of receivables sold and not yet collected on accounts where the Company has continuing involvement was approximately $469.8 million and $286.4 million as of June 29, 2018 and March 31, 2018, respectively. For the three-month periods ended June 29, 2018 and June 30, 2017, total accounts receivable sold to certain third-party banking institutions was approximately $610.1 million and $229.5 million, respectively, primarily due to certain customers transferring from the ABS Programs to the Trade Account Receivable Sale Program. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows.
 
11.  FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
 
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
 
Level 1 - Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
The Company has deferred compensation plans for its officers and certain other employees. Amounts deferred under the plans are invested in hypothetical investments selected by the participant or the participant’s investment manager. The Company’s deferred compensation plan assets are    for the most part included in other noncurrent assets on the condensed consolidated balance sheets and primarily include investments in equity securities that are valued using active market prices.
 
Level 2 - Applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets) such as cash and cash equivalents and money market funds; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
The Company values foreign exchange forward contracts using level 2 observable inputs which primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
 
The Company’s cash equivalents are comprised of bank deposits and money market funds, which are valued using level 2 inputs, such as interest rates and maturity periods. Due to their short-term nature, their carrying amount approximates fair value.
 
The Company’s deferred compensation plan assets also include money market funds, mutual funds, corporate and government bonds and certain convertible securities that are valued using prices obtained from various pricing sources. These sources price these investments using certain market indices and the performance of these investments in relation to these indices. As a result, the Company has classified these investments as level 2 in the fair value hierarchy.
 
Level 3 - Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. 

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The Company has accrued for contingent consideration in connection with its business acquisitions as applicable, which is measured at fair value based on certain internal models and unobservable inputs. All contingent considerations have been paid as of March 31, 2018.

There were no transfers between levels in the fair value hierarchy during the three-month periods ended June 29, 2018 and June 30, 2017.
 
Financial Instruments Measured at Fair Value on a Recurring Basis
 
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements as of June 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 

 
 

 
 

 
 

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

 
$
464,671

 
$

 
$
464,671

Foreign exchange contracts (Note 8)

 
15,649

 

 
15,649

Deferred compensation plan assets:
 

 
 

 
 

 
0

Mutual funds, money market accounts and equity securities
7,210

 
69,038

 

 
76,248

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 8)
$

 
$
(58,248
)
 
$

 
$
(58,248
)
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 

 
 

 
 

 
 

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

 
$
452,622

 
$

 
$
452,622

Foreign exchange contracts (Note 8)

 
43,334

 

 
43,334

Deferred compensation plan assets:
 

 
 

 
 

 
0

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

 
67,532

 

 
74,728

Liabilities:
 

 
 

 
 

 
0

Foreign exchange contracts (Note 8)
$

 
$
(25,311
)
 
$

 
$
(25,311
)

Other financial instruments
 
The following table presents the Company’s major debts not carried at fair value:
 

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As of June 29, 2018

As of March 31, 2018


 
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

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


$
499,950


$
500,000

 
$
513,596


Level 1
Term Loan, including current portion, due in installments through November 2021
683,750


686,314


687,813

 
689,966


Level 1
Term Loan, including current portion, due in installments through June 2022
477,375

 
477,375

 
483,656

 
485,470

 
Level 1
5.000% Notes due February 2023
500,000


499,950


500,000

 
525,292


Level 1
4.750% Notes due June 2025
596,492


599,940


596,387

 
627,407


Level 1
Euro Term Loan due September 2020
55,797

 
55,797

 
59,443

 
59,443

 
Level 1
Euro Term Loan due January 2022
115,942

 
115,942

 
123,518

 
123,518

 
Level 1
Total
$
2,929,356


$
2,935,268


$
2,950,817


$
3,024,692


 

The Company values its Euro Term Loans due September 2020 and January 2022 based on the current market rate, and as of June 29, 2018, the carrying amounts approximate fair values.

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

12. BUSINESS AND ASSET DIVESTITURES
 
In March 2018, the Company entered into an agreement with a certain Chinese manufacturing company, to divest its China-based Multek operations, for proceeds of approximately $273 million, net of cash. The planned divestiture does not qualify as discontinued operations, but certain Multek assets and liabilities meet the definition of held for sale as of June 29, 2018 and March 31, 2018. Accordingly, approximately $341.5 million of assets, primarily property and equipment and accounts receivable, were classified as held for sale and included in other current assets, and approximately $131.1 million of liabilities, primarily accounts payables, were classified as held for sale and included in other current liabilities as of June 29, 2018 in the consolidated balance sheet.

The sale transaction closed in July 2016, and the Company expects to recognize an immaterial gain or loss on the divestiture, in the second quarter of fiscal year 2019, depending on the net working capital levels.

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 loss could have a material adverse effect on the Company’s results of operations or cash flows for a particular period or on the Company’s financial condition.

In addition, the Company provides design and engineering services to its customers and also designs and makes its own products. As a consequence of these activities, its customers are requiring the Company to take responsibility for intellectual property to a greater extent than in its manufacturing and assembly businesses. Although the Company believes that its intellectual property assets and licenses are sufficient for the operation of its business as it currently conduct it, from time to time third parties do assert patent infringement claims against the Company or its customers. If and when third parties make assertions regarding the ownership or right to use intellectual property, the Company could be required to either enter into licensing arrangements or to resolve the issue through litigation. Such license rights might not be available to the Company on commercially acceptable terms, if at all, and any such litigation might not be resolved in its favor. Additionally, litigation could

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be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. The Company also could be required to incur substantial costs to redesign a product or re-perform design services.

From time to time, the Company enters into IP licenses (e.g., patent licenses and software licenses) with third parties which obligate the Company to report covered behavior to the licensor and pay license fees to the licensor for certain activities or products, or that enable our use of third party technologies. The Company may also decline to enter into licenses for intellectual property that it does not think is useful for or used in its operations, or for which its customers or suppliers have licenses or have assumed responsibility. Given the diverse and varied nature of its business and the location of its business around the world, certain activities the Company performs, such as providing assembly services in China and India, may fall outside the scope of those licenses or may not be subject to the applicable intellectual property rights. The Company's licensors may disagree and claim royalties are owed for such activities. In addition, the basis (e.g. base price) for any royalty amounts owed are audited by licensors and may be challenged. Some of these disagreements may lead to claims and litigation that might not be resolved in the Company's favor. Additionally, litigation could be lengthy and costly and could materially harm the Company's financial condition regardless of the outcome. In March 2018, the Company received an inquiry from a licensor referencing a patent license agreement, and requesting information relating to royalties for products that it assembles for a customer in China. If any of these inquiries result in a claim, the Company intends to contest and defend against any such claim vigorously. If a claim is asserted and the Company is unsuccessful in its defense, a material loss is reasonably possible. The Company cannot predict or estimate an amount or reasonable range of outcomes with respect to the matter.

On May 8, 2018, a putative class action was filed in the Northern District of California against the Company and certain officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, alleging misstatements and/or omissions in certain of the Company’s financial results, press releases and SEC filings made during the putative class period of January 26, 2017 through April 26, 2018. The deadline for applications for appointment as lead plaintiff was July 9, 2018. There are two pending motions for appointment as lead plaintiff, which are scheduled to be heard by the Court on October 11, 2018. The Court has extended the time for Defendants to respond to the complaint until after a lead plaintiff is appointed and an amended complaint is filed by the lead plaintiff.

On April 21, 2016, SunEdison, Inc. (together with certain of its subsidiaries, "SunEdison") filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During the fiscal year ended March 31, 2016, the Company recognized a bad debt reserve charge of $61.0 million associated with its outstanding SunEdison receivables and accepted return of previously shipped inventory of approximately $90.0 million. SunEdison stated in schedules filed with the Bankruptcy Court that, within the 90 days preceding SunEdison's bankruptcy filing, the Company received approximately $98.6 million of inventory and cash transfers of $69.2 million, which in aggregate represents the Company's estimate of the maximum reasonably possible contingent loss. On April 15, 2018, a subsidiary of the Company together with its subsidiaries and affiliates, entered into a tolling agreement with the trustee of the SunEdison Litigation Trust to toll any applicable statute of limitations or other time-related defense that might exist in regards to any potential claims that either party might be able to assert against the other for a period that will end at the earlier to occur of: (a) 60 days after a party provides written notice of termination; (b) six years from the effective date of April 15, 2018; or (c) such other date as the parties may agree in writing. No preference claims have been asserted against the Company and consideration has been given to the related contingencies based on the facts currently known. The Company has a number of affirmative and direct defenses to any potential claims for recovery and intends to vigorously defend any such claim, if asserted.

One of the Company's Brazilian subsidiaries has received related assessments for certain sales and import taxes. There are six tax assessments totaling 346 million Brazilian reals (approximately USD $90 million based on the exchange rate as of June 29, 2018). The assessments are in various stages of the review process at the administrative level and no tax proceeding has been finalized yet. The Company believes there is no legal basis for these assessments and has meritorious defenses and will continue to vigorously oppose all of these assessments, as well as any future assessments. The Company does not expect final judicial determination on any of these claims for several years.

In addition to the matters discussed above, from time to time, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses that are probable or reasonably possible of being incurred as a result of these matters, which are in excess of amounts already accrued in the Company’s consolidated balance sheets, would not be material to the financial statements as a whole.

14.  SHARE REPURCHASES
 
During the three-month period ended June 29, 2018, the Company made no repurchases of shares.
 

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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 June 29, 2018, shares in the aggregate amount of $410.1 million were available to be repurchased under the current plan.

15.  SEGMENT REPORTING

The Company has four reportable segments: HRS, CTG, IEI, and CEC. These segments are determined based on several factors, including the nature of products and services, the nature of production processes, customer base, delivery channels and similar economic characteristics. Refer to note 1 for a description of the various product categories manufactured under each of these segments.

An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include amortization of intangibles, stock-based compensation, distressed customer charges, legal and other, the new revenue standard adoption impact, restructuring charges, other income, net and interest and other, net.

Selected financial information by segment is in the table below. For the three-month period ended June 29, 2018, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings, as further described in note 1 to the condensed consolidated financial statements. The comparative information for the three-month period ended June 30, 2017 has not been restated and continues to be reported under the accounting standards in effect at the time:

 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In thousands)
Net sales:
 
 
 
Communications & Enterprise Compute
$
1,954,286

 
$
1,973,333

Consumer Technologies Group
1,807,934

 
1,511,969

Industrial & Emerging Industries
1,446,311

 
1,390,599

High Reliability Solutions
1,215,425

 
1,132,371

 
$
6,423,956

 
$
6,008,272

Segment income and reconciliation of income before tax:
 
 
 
Communications & Enterprise Compute
$
46,017

 
$
48,603

Consumer Technologies Group
26,557

 
18,004

Industrial & Emerging Industries
51,361

 
55,376

High Reliability Solutions
93,534

 
90,212

Corporate and Other
(29,761
)
 
(34,278
)
   Total segment income
187,708

 
177,917

Reconciling items:


 


Intangible amortization
18,517

 
19,901

Stock-based compensation
20,953

 
21,796

Distressed customers asset impairments (1)
17,364

 

Restructuring charges
8,817

 

New revenue standard adoption impact (Note 1 & Note 3)
9,291

 

Legal and other (2)
16,311

 

Other income, net (Note 7)
(86,924
)
 
(36,165
)
Interest and other, net
41,742

 
26,876

    Income before income taxes
$
141,637

 
$
145,509

1.
Distressed customers asset impairments for the three-month period ended June 29, 2018 relate to additional provision for doubtful accounts receivable, inventory and other assets for certain customers experiencing significant financial difficulties.

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2.
Legal and other during the three-month period ended June 29, 2018 primarily consists of costs incurred relating to the independent investigation undertaken by the Audit Committee of the Company’s Board of Directors which was completed in June 2018 and certain charges of the China based Multek operation that was divested in the second quarter of fiscal year 2019.

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, 2018. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
 
OVERVIEW
 
We are a globally-recognized, provider of Sketch-to-Scaletm services - innovative design, engineering, manufacturing, and supply chain services and solutions - from conceptual sketch to full-scale production. We design, build, ship and service complete packaged consumer and enterprise products, 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 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 our health solutions 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

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our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product life cycle.

Over the past few years, we have seen an increased level of diversification by many companies, primarily in the technology sector. Some companies that have historically identified themselves as software providers, Internet service providers or e-commerce retailers have entered the highly competitive and rapidly evolving technology hardware markets, such as mobile devices, home entertainment and wearable devices. This trend has resulted in a significant change in the manufacturing and supply chain solutions requirements of such companies. While the products have become more complex, the supply chain solutions required by such companies have become more customized and demanding, and it has changed the manufacturing and supply chain landscape significantly.

We use a portfolio approach to manage our extensive service offerings. As our customers change the way they go to market, we have the capability to reorganize and rebalance our business portfolio in order to align with our customers' needs and requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customer's supply chain solutions needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital.

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

We believe that our continued business transformation is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services, which remain strong.
 
We are one of the world's largest providers of global supply chain solutions, with revenues of $6.4 billion for the three-month period ended June 29, 2018 and $25.4 billion in fiscal year 2018. On April 1, 2018, the Company adopted the new revenue standard and as a result we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings, as further described in note 1 to the condensed consolidated financial statements. The comparative information has not been restated and continues to be reported under the accounting standards in effect at the time. The following tables set forth the relative percentages and dollar amounts of net sales and net property and equipment, by country, based on the location of our manufacturing sites:

 
Three-Month Periods Ended
Net sales:
June 29, 2018
 
June 30, 2017
 
(In millions)
China
$
1,669

 
26
%
 
$
1,745

 
29
%
Mexico
1,123

 
17
%
 
1,040

 
17
%
U.S.
635

 
10
%
 
694

 
12
%
Brazil
587

 
9
%
 
598

 
10
%
Malaysia
477

 
7
%
 
505

 
8
%
India
468

 
7
%
 
110

 
2
%
Other
1,467

 
24
%
 
1,316

 
22
%
 
$
6,424

 
 

 
$
6,008

 
 



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As of
 
As of
Property and equipment, net:
June 29, 2018
 
March 31, 2018
 
(In millions)
Mexico
$
547

 
25
%
 
$
587

 
26
%
China
475

 
22
%
 
492

 
22
%
U.S.
308

 
14
%
 
305

 
14
%
Malaysia
150

 
7
%
 
153

 
7
%
Hungary
133

 
6
%
 
150

 
7
%
India
120

 
5
%
 
78

 
3
%
Other
456

 
21
%
 
475

 
21
%
 
$
2,190

 
 

 
$
2,240

 
 


We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we have launched multiple product innovation centers ("PIC") focused exclusively on offering our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings.
 
Our operating results are affected by a number of factors, including the following:
 
changes in the macro-economic environment and related changes in consumer demand;

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

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

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

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

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

our customers’ decision to choose internal manufacturing instead of outsourcing for their product requirements;

our exposure to financially troubled customers;

integration of acquired businesses and facilities;

increased labor costs due to adverse labor conditions in the markets we operate;

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

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of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
 
Refer to the accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018, where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There were no changes to our accounting policies other than the adoption of ASC 606 as follows.

Revenue Recognition

In determining the appropriate amount of revenue to recognize, we apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) we satisfy a performance obligation. Further, we assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (PIT) or over time (OT). We are first required to evaluate whether our contracts meet the criteria for OT recognition. We have determined that for a portion of our contracts, we are manufacturing products for which there is no alternative use (due to the unique nature of the customer-specific product and IP restrictions) and we have an enforceable right to payment including a reasonable profit for work-in-progress inventory with respect to these contracts. As a result, revenue is recognized under these contracts OT based on the cost-to-cost method as it best depicts the transfer of control to the customer measured based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, we recognize revenue when it has transferred control of the related manufactured products which generally occurs upon delivery and passage of title to the customer. Refer to notes 1 and 3 to the condensed consolidated financial statements for further details.
 
RESULTS OF OPERATIONS
 
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales. The financial information and the discussion below should be read together with the condensed consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Annual Report on Form 10-K.
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
Net sales
100.0
 %
 
100.0
 %
Cost of sales
94.1

 
93.2

Gross profit
5.9

 
6.8

Selling, general and administrative expenses
4.1

 
4.2

Intangible amortization
0.3

 
0.3

Interest and other, net
0.6

 
0.4

Other income, net
(1.4
)
 
(0.6
)
Income before income taxes
2.3

 
2.5

Provision for income taxes
0.4

 
0.3

Net income
1.9
 %
 
2.2
 %


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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
Segments:
June 29, 2018
 
June 30, 2017
 
(In millions)
Communications & Enterprise Compute
$
1,954

 
30
%
 
$
1,973

 
33
%
Consumer Technologies Group
1,808

 
28
%
 
1,512

 
25
%
Industrial & Emerging Industries
1,446

 
23
%
 
1,391

 
23
%
High Reliability Solutions
1,215

 
19
%
 
1,132

 
19
%
 
$
6,423

 
 

 
$
6,008

 
 

 
Net sales during the three-month period ended June 29, 2018 totaled $6.4 billion, representing an increase of approximately $0.4 billion, or 7% from $6.0 billion during the three-month period ended June 30, 2017. The overall increase in sales was driven by increases in three of our segments offset by a slight decline in sales in our CEC segment. Our CTG segment increased $296 million, primarily because of stronger sales in consumer products from high growth emerging markets such as India, offset by a decrease in our connected living business. Our HRS segment increased $83 million from higher sales in our automotive and medical businesses. Our IEI segment increased $56 million, mainly driven by our industrial, home and lifestyle business, offset by decreases in our solar energy and capital equipment businesses. Sales in our CEC segment remained flat only declining $19 million or approximately 1%, primarily due to lower sales within our traditional telecom and networking businesses offset by increased sales in our cloud and data center business. Net sales increased across all our regions with increases of $251 million to $2.9 billion in Asia, $158 million to $1.2 billion in Europe, and $7 million to $2.4 billion in the Americas.

Our ten largest customers, during the three-month periods ended June 29, 2018 and June 30, 2017, accounted for approximately 44% and 43% of net sales, respectively. No customer accounted for more than 10% of net sales during the three-month periods ended June 29, 2018 and June 30, 2017

Gross profit
 
Gross profit is affected by a number of factors, including the number and size of new manufacturing programs, product mix, component costs and availability, product life cycles, unit volumes, pricing, competition, new product introductions, capacity utilization and the expansion or consolidation of manufacturing facilities including specific restructuring activities from time to time. The flexible design of our manufacturing processes allows us to build a broad range of products in our facilities and better utilize our manufacturing capacity across our diverse geographic footprint. In the cases of new programs, profitability normally lags revenue growth due to product start-up costs, lower manufacturing program volumes in the start-up phase, operational inefficiencies, and under-absorbed overhead. Gross margin for these programs often improves over time as manufacturing volumes increase, as our utilization rates and overhead absorption improve, and as we increase the level of manufacturing services content. As a result of these various factors, our gross margin varies from period to period.
 
Gross profit during the three-month period ended June 29, 2018 decreased $29 million to $378 million, or 5.9% of net sales, from $407 million, or 6.8% of net sales, during the three-month period ended June 30, 2017. Gross margin declined 90 basis points during the same period. These declines in both gross profit and gross margin are primarily due to higher levels of start-up costs, operational inefficiencies and under-absorbed overhead costs for new ramps during the period along with a greater portion of lower margin consumer products in the mix of business for the current quarter.

Segment Income

An operating segment’s performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include amortization of intangibles, stock-based compensation, distressed customer charges, legal and other, the new revenue standard adoption impact, restructuring charges, other income, net and interest and other, net. A portion of depreciation is allocated to the respective segment together with other general corporate research and development and administrative expenses.


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The following table sets forth segment income and margins. Historical information has been recast to reflect realignment of customers and/or products between segments:

 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In millions)
Segment income & margin:
 
 
 
 
 
 
 
Communications & Enterprise Compute
$
46

 
2.4
%
 
$
49

 
2.5
%
Consumer Technologies Group
27

 
1.5
%
 
18

 
1.2
%
Industrial & Emerging Industries
51

 
3.6
%
 
55

 
4.0
%
High Reliability Solutions
94

 
7.7
%
 
90

 
8.0
%
Corporate and Other
(30
)
 
 
 
(34
)
 
 
   Total segment income
188

 
2.9
%
 
178

 
3.0
%
Reconciling items:
 
 
 
 
 
 
 
Intangible amortization
19

 
 
 
20

 
 
Stock-based compensation
21

 
 
 
22

 
 
Distressed customers asset impairments (1)
17

 
 
 

 
 
Restructuring charges
9

 
 
 

 
 
New revenue standard adoption impact (Note 1 & Note 3)
9

 
 
 

 
 
Legal and other (2)
16

 
 
 

 
 
Other income, net (Note 7)
(87
)
 
 
 
(36
)
 
 
Interest and other, net
42

 
 
 
27

 
 
    Income before income taxes
$
142

 
 
 
$
146

 
 
1.
Distressed customers asset impairments for the three-month period ended June 29, 2018 relate to additional provision for doubtful accounts receivable, inventory and other assets for certain customers experiencing significant financial difficulties.
2.
Legal and other during the three-month period ended June 29, 2018 primarily consists of costs incurred relating to the independent investigation undertaken by the Audit Committee of the Company’s Board of Directors which was completed in June 2018 and certain charges of the China based Multek operation that was divested in the second quarter of fiscal year 2019.

CEC segment margin decreased 10 basis points, to 2.4% for the three-month period ended June 29, 2018, from 2.5% during the three-month period ended June 30, 2017. The decrease in CEC's margin during the period is due to lower capacity utilization causing reduced overhead absorption, coupled with modest increased investments to expand its cloud data center engineering capabilities.

CTG segment margin increased 30 basis points to 1.5% for the three-month period ended June 29, 2018, from 1.2% during the three-month period ended June 30, 2017. The increase in CTG's margins during the period, primarily reflected lesser losses from our strategic partnership with a certain customer compared to the three-month period ended June 30, 2017.

IEI segment margin decreased 40 basis points, to 3.6% for the three-month period ended June 29, 2018, from 4.0% during the three-month period ended June 30, 2017. The decrease in IEI's margin during the period is primarily due to pressure from demand softness for new customers in our industrial home and lifestyle business and reduced demand in our semiconductor capital equipment business. In addition, we saw declines in our Energy business due to a temporary impact from reduced shipments of our Nextracker solar tracking solutions and certain other customer declines.

HRS segment margin decreased 30 basis points, to 7.7% for the three-month period ended June 29, 2018, from 8.0% during the three-month period ended June 30, 2017 primarily as a result of ramping up of several new customers and programs, coupled with our continuous investment to expand our design and engineering capabilities focused on autonomous vehicle and connectivity platforms.

Selling, general and administrative expenses
 

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Selling, general and administrative expenses (“SG&A”) was $263 million, or 4.1% of net sales, during the three-month period ended June 29, 2018, increasing $12 million from $251 million, or 4.2% of net sales, during the three-month period ended June 30, 2017. This increase was primarily due to incremental costs of $9 million incurred relating to the independent investigation undertaken by the Audit Committee of the Company’s Board of Directors, and to a lesser extent, for an immaterial amount of additional restructuring charges incurred during the three-month period ended June 29, 2018.

Intangible amortization
 
Amortization of intangible assets marginally declined during the three-month period ended June 29, 2018 to $19 million, from $20 million for the three-month period ended June 30, 2017 primarily due to certain intangibles now being fully amortized.

Interest and other, net
 
Interest and other, net was $42 million during the three-month period ended June 29, 2018 compared to $27 million during the three-month period ended June 30, 2017. The increase in interest and other, net was primarily a result of higher interest expense due to higher interest rates and a higher average borrowing level, coupled with increases in foreign exchange losses.

Other income, net
 
Other income, net was $87 million of income during the three-month period ended June 29, 2018 compared to $36 million of income during the three-month period ended June 30, 2017. The increase is primarily due to a $92 million non-cash gain as a result of the deconsolidation of AutoLab AI (“AutoLab”), as further described in note 2 of the condensed consolidated financial statements.

Income taxes
 
Certain of our subsidiaries have, at various times, been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. Refer to note 14, “Income Taxes” of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 for further discussion.
 
Our policy is to provide a valuation allowance against deferred tax assets that in our estimation are not more likely than not to be realized.
 
The consolidated effective tax rate was 18.1% and 14.3% for the three-month periods ended June 29, 2018 and June 30, 2017, respectively. The effective rate varies from the Singapore statutory rate of 17.0% as a result of recognition of earnings in different jurisdictions (we generate most of our revenues and profits from operations outside of Singapore), operating loss carryforwards, income tax credits, release of previously established valuation allowances for deferred tax assets, liabilities for uncertain tax positions, as well as the effect of certain tax holidays and incentives granted to our subsidiaries primarily in China, Malaysia, Costa Rica, the Netherlands and Israel. The effective tax rate for the three-month period ended June 29, 2018 is higher than the effective tax rate for the three-month period ended June 30, 2017, due to a changing jurisdictional mix of income and increased unfavorable foreign exchange rate impacts on tax-related balances during the three-month period ended June 29, 2018.

LIQUIDITY AND CAPITAL RESOURCES
 
As of June 29, 2018, we had cash and cash equivalents of approximately $1.3 billion and bank and other borrowings of approximately $2.9 billion. We have a $1.75 billion revolving credit facility that expires in June 2022, under which there were no borrowings outstanding as of the end of the quarter. As of June 29, 2018, we were in compliance with the covenants under each of our existing credit facilities and indentures.
 
Cash used in operating activities was $672 million during the three-month period ended June 29, 2018. This resulted from a $842 million net increase in our operating assets and liabilities driven primarily by a significant increase in accounts receivable netted by the new requirement to present inflows from deferred purchase price as cash flows from investing activities, as further described below, coupled with an increase in inventory, all of which were not fully offset by the increase in accounts payable, reflecting our increased level of operations. This was partially offset by $116 million of net income for the period plus $146 million of non-cash charges such as depreciation, amortization, and stock-based compensation, net of a $92 million gain from the deconsolidation of AutoLab, which is included in the determination of net income.

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 We believe net working capital and net working capital as a percentage of annualized net sales are key metrics that measure the Company’s liquidity. Net working capital position was calculated as current quarter accounts receivable, net of allowance for doubtful accounts, adding back the reduction in accounts receivable resulting from non-cash accounts receivable sales, plus inventories, less accounts payable as of March 31, 2018. As part of the adoption of ASC 606 as further described in note 1 to the condensed consolidated financial statements, we expanded net working capital to include contract asset on a going forward basis. Net working capital increased $136 million to $1.7 billion as of June 29, 2018, from $1.6 billion as of March 31, 2018. This increase is primarily driven by (i) a $185 million increase in our inventory levels from March 31, 2018, as we are carrying elevated levels to support our revenue growth and positioning for multiple large ramps, (ii) an increase of $324 million in contract assets upon adoption of ASC 606, (iii) a $215 million increase in accounts receivable adding back reduction from non-cash accounts receivable sales, offset by approximately $588 million increase in accounts payable. Despite the increase in net working capital position from March 31, 2018, current quarter net working capital as a percentage of annualized net sales for the quarter then ended remained relatively consistent at 6.9% as compared to 7.0% of annualized net sales for the quarter ended June 30, 2017. The Company generally operates in a net working capital targeted range between 6%-8% of annualized revenue for the quarter.

Cash provided by investing activities was $472 million during the three-month period ended June 29, 2018. This was primarily driven by the impact of our adoption of ASU 2016-15 during the current fiscal year, which requires us to classify cash collections on deferred purchase price that were previously classified as operating cash inflows as cash flows from investing activities. Refer to note 1 to the condensed consolidated financial statements for further description of the ASU. During the three-month period ended June 29, 2018, we also invested $170 million of net capital expenditures for property and equipment to expand capabilities and capacity in support of our automotive, medical, footwear and IEI businesses. In addition, other investing activities includes $132 million of non-cash outflow representing our investment in AutoLab following the deconsolidation.

We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments, fund acquisitions, repurchase company shares and for certain other activities. Upon adoption of ASU 2016-15 in the current quarter, our free cash flow is redefined as cash from operations, plus cash collections of deferred purchase price, less net purchases of property and equipment to present cash flows on a consistent basis for investor transparency. Our free cash flows for the three-month period ended June 29, 2018 was a use of $185 million compared to an inflow of $19 million for the three-month period ended June 30, 2017. Free cash flow is not a measure of liquidity under U.S. GAAP, and may not be defined and calculated by other companies in the same manner. Free cash flow should not be considered in isolation or as an alternative to net cash provided by operating activities. Free cash flows reconcile to the most directly comparable GAAP financial measure of cash flows from operations as follows:
 
 
Three-Month Periods Ended
 
June 29, 2018
 
June 30, 2017
 
(In millions)
Net cash provided by operating activities
$
(672
)
 
$
(696
)
Cash collection of deferred purchase price
657

 
834

Purchases of property and equipment
(172
)
 
(125
)
Proceeds from the disposition of property and equipment
2

 
6

Free cash flow
$
(185
)
 
$
19


Cash used in financing activities was immaterial during the three-month period ended June 29, 2018.

Our cash balances are held in numerous locations throughout the world. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the business and some of which arise from fluctuations related to global economics and markets. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances; however, any current restrictions are not material. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout the global organization. We believe that our existing cash balances, together with anticipated cash flows from operations and borrowings available under our credit facilities, will be sufficient to fund our operations through at least the next twelve months. As of June 29, 2018, and March 31, 2018, over half of our cash and cash equivalents was held by foreign subsidiaries outside of Singapore. Although substantially all of the amounts held outside of Singapore could be repatriated under current laws, a significant amount could be subject to income tax withholdings. We provide for tax liabilities on these amounts for financial statement purposes, except for certain of

35

Table of Contents

our foreign earnings that are considered indefinitely reinvested outside of Singapore (approximately $1.6 billion as of March 31, 2018). Repatriation could result in an additional income tax payment, however, our intent is to permanently reinvest these funds outside of Singapore and our current plans do not demonstrate a need to repatriate them to fund our operations in jurisdictions outside of where they are held. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of Singapore and we would meet our liquidity needs through ongoing cash flows, external borrowings, or both.
 
Future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures for new equipment, the extent to which we utilize operating leases for new facilities and equipment, the levels of shipments and changes in the volumes of customer orders, our targeted investments, and our targeted business and asset acquisitions.
 
Historically, we have funded operations from cash and cash equivalents generated from operations, proceeds from public offerings of equity and debt securities, bank debt and lease financings. We also sell a designated pool of trade receivables under asset-backed securitization programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements.
 
We anticipate that we will enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and growth. The sale or issuance of equity or convertible debt securities could result in dilution to current shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of ordinary shares, and the terms of this debt could impose restrictions on operations and could increase debt service obligations. This increased indebtedness could limit our flexibility as a result of debt service requirements and restrictive covenants, potentially affect our credit ratings, and may limit our ability to access additional capital or execute our business strategy. Any downgrades in credit ratings could adversely affect our ability to borrow as a result of more restrictive borrowing terms. We continue to assess our capital structure and evaluate the merits of redeploying available cash to reduce existing debt or repurchase ordinary shares.
 
Under our current share repurchase program, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $500 million in accordance with the share purchase mandate approved by our shareholders at the date of the most recent Annual General Meeting which was held on August 15, 2017. During the three-month period ended June 29, 2018, the Company made no repurchases of shares. As of June 29, 2018, shares in the aggregate amount of $410 million were available to be repurchased under the current plan.
 
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
Information regarding our long-term debt payments, operating lease payments, capital lease payments and other commitments is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on our Form 10-K for the fiscal year ended March 31, 2018. There have been no material changes in our contractual obligations and commitments since March 31, 2018 except for the following changes to our debt obligations.

OFF-BALANCE SHEET ARRANGEMENTS

We sell designated pools of trade receivables to unaffiliated financial institutions under our ABS programs, and in addition to cash, we receive a deferred purchase price receivable for each pool of the receivables sold. Each of these deferred purchase price receivables serves as additional credit support to the financial institutions and is recorded at its estimated fair value. As of June 29, 2018, and March 31, 2018, the fair values of our deferred purchase price receivable were approximately $288 million and $445 million, respectively. As of June 29, 2018, and March 31, 2018, the outstanding balance on receivables sold for cash was $1.4 billion and $1.3 billion under all our accounts receivable sales programs, which are not included in our condensed consolidated balance sheets. For further information, see note 10 to the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There were no material changes in our exposure to market risks for changes in interest and foreign currency exchange rates for the three-month period ended June 29, 2018 as compared to the fiscal year ended March 31, 2018.
 

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Table of Contents

ITEM 4. CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 29, 2018. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of June 29, 2018, the Company's disclosure controls and procedures were not effective, as a result of the material weaknesses described in Part II, “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the year ended March 31, 2018, in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Additional Analysis, Procedures and Remediation Efforts

We have undertaken, and will continue to undertake, steps to improve our internal control over financial reporting to address and remediate the material weaknesses identified by management and described in greater detail in Part II, “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the year ended March 31, 2018. Our remediation initiatives include:
Designing and implementing additional site level controls related to accounting for customer contractual obligations including criteria for effective contract reviews and approvals and documentation to evidence judgments and estimates.
Designing and implementing a centralized Contract Management Office to determine the appropriate accounting and provide evidence of review for each material contract.
Designing and implementing systematic centralized reporting controls that provide enhanced visibility to the accounting for customer contracts, which improve monitoring controls that are designed to prevent or detect material errors and help ensure that proper oversight is being provided related to certain decentralized activities.
Enhancing the quality and frequency of training across all levels to improve awareness of Company policies and knowledge of the expected standards of conduct.
While these remediation plans are being executed, the Company has also engaged and will continue to engage additional external resources to support and supplement the Company’s existing internal resources. Many of our remediation efforts have been implemented or are in the process of implementation, and we will be finalizing our plans over the coming months. Although we intend to complete the remediation process with respect to these material weaknesses as quickly as possible, we cannot at this time estimate how long full remediation will take. The actions that we are taking to remediate these material weaknesses are subject to ongoing review by management, as well as Audit Committee oversight.
The material weaknesses in our internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period and management has concluded, through testing, that these controls are operating effectively. We are working to have the material weaknesses remediated as soon as possible. As we continue to evaluate and improve our internal control over financial reporting, we may take additional measures to address control deficiencies in the areas affected by the material weaknesses or modify or change the proposed remediation measures described above and in our Annual Report on Form 10-K for the year ended March 31, 2018. Accordingly, until these weaknesses are remediated, we plan to perform additional analysis and other procedures to ensure that our condensed consolidated financial statements are prepared in accordance with GAAP.
(c) Changes in Internal Control Over Financial Reporting
 Other than the material weaknesses remediation efforts that we have undertaken to date, there were no changes in our internal control over financial reporting that occurred during our first quarter of fiscal year 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

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Table of Contents

PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
For a description of our material legal proceedings, see note 13 “Commitments and Contingencies” in the notes to the condensed consolidated financial statements, which is incorporated herein by reference. 

ITEM 1A. RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2018, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results.
 

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Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Issuer Purchases of Equity Securities
 
On August 15, 2017, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to $500 million. This is in accordance with the share purchase mandate whereby our shareholders approved a repurchase limit of 20% of our issued ordinary shares outstanding at the Annual General Meeting held on the same date as the Board authorization. As of June 29, 2018, shares in the aggregate amount of $410,064,509 were available to be repurchased under the current plan. There were no purchases of our ordinary shares made by us for the period from April 1, 2018 through June 29, 2018.

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Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable
 
ITEM 5. OTHER INFORMATION
 
None
 

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Table of Contents

ITEM 6. EXHIBITS
 
EXHIBIT INDEX

 
 
 
 
 
 
Incorporated by Reference
 
 
 
Filed
Exhibit No.
 
Exhibit
 
Form
 
File No.
 
Filing Date
 
Exhibit No.
 
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Description of Annual Incentive Bonus Plan for Fiscal 2019.
 
 
 
 
 
 
 
 
 
X
 
Letter in lieu of consent of Deloitte & Touche LLP.
 
 
 
 
 
 
 
 
 
X
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
 
 
 
 
 
 
 
 
X
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
X
 
 

* This exhibit is furnished with this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission, and is not incorporated by reference into any filing of Flex Ltd. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FLEX LTD.
 
 
(Registrant)
 
 
 
 
 
 
 
 
/s/ Michael M. McNamara
 
 
Michael M. McNamara
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date:
August 2, 2018
 
 
 
/s/ Christopher Collier
 
 
Christopher Collier
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
Date:
August 2, 2018
 

42