Unless otherwise specifically stated, references in this report to "Flex," "the
Company," "we," "us," "our" and similar terms mean
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expects," "anticipates," "believes," "intends," "plans" and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with theSecurities and Exchange Commission (the "SEC"). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in this section, as well as any risks and uncertainties discussed in Part I, Item 1A, "Risk Factors" and in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements.
OVERVIEW
We are the diversified manufacturing partner of choice that helps market-leading brands design, build and deliver innovative products that improve the world. Through the collective strength of a global workforce across approximately 30 countries with responsible, sustainable operations, we deliver advanced manufacturing solutions and operate one of the most trusted global supply chains, supporting the entire product lifecycle with fulfillment, after-market, and circular economy solutions for diverse industries including cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy. Our three operating and reportable segments are:
•Flex Agility Solutions ("FAS"), which is comprised of the following end markets:
•Communications, Enterprise and Cloud, including data infrastructure, edge infrastructure and communications infrastructure;
•Lifestyle, including appliances, consumer packaging, floorcare, micro mobility and audio; and
•Consumer Devices, including mobile and high velocity consumer devices.
•Flex Reliability Solutions ("FRS"), which is comprised of the following end markets:
•Automotive, including next generation mobility, autonomous, connectivity, electrification, and smart technologies;
•Health Solutions, including medical devices, medical equipment and drug delivery; and
•Industrial, including capital equipment, industrial devices, and renewables and grid edge.
•Nextracker, the leading provider of intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world.Nextracker's products enable solar panels to follow the sun's movement across the sky and optimize plant performance.
Our strategy is to provide customers with a full range of cost competitive, vertically-integrated global supply chain solutions through which we can design, build, ship and service a complete packaged product for our customers. This enables our customers to leverage our supply chain solutions to meet their product requirements throughout the entire product lifecycle.
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 29
--------------------------------------------------------------------------------
Table of Contents
requirements in an effort to optimize operating results. The objective of our business model is to allow us to be flexible and redeploy and reposition our assets and resources as necessary to meet specific customers' supply chain solution needs across all the markets we serve and earn a return on our invested capital above the weighted average cost of that capital. We believe that our continued business transformation to improve our portfolio mix is strategically positioning us to take advantage of the long-term, future growth prospects for outsourcing of advanced manufacturing capabilities, design and engineering services and after-market services.
Update on the Impact of COVID-19, Component Shortages and Logistical Constraints on our Business
With the second wave of the global pandemic including follow-on variants of COVID-19, there have been renewed disease control measures being taken to limit the spread including movement bans and shelter-in-place orders. Although not materially impacting our results for the first three quarters of fiscal year 2023, with the lockdowns inChina in the first half of fiscal year 2023 and recent COVID-19 outbreaks inChina , we have experienced temporary plant closures and/or restrictions at certain of our manufacturing facilities inChina . We continue to closely monitor the situation in all the locations where we operate. Our priority remains the welfare of our employees. In addition, our end markets continue to be impacted by the global supply chain disruptions. Component shortages and logistical constraints are pervasive across the entire value chain. We expect persistent waves of COVID-19 to remain a headwind into the near future. Component shortages and significantly increased logistic costs are also expected to persist at least in the near future. We continue to carefully monitor potential supply chain disruptions due to ongoing tightness in the overall component environment. Refer to "Risk Factors - The ongoing COVID-19 pandemic has materially and adversely affected our business and results of operations. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material." and "-- Supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand, could affect our ability to meet customer demand, lead to higher costs, or result in excess or obsolete inventory. We have been and continue to be adversely affected by supply chain issues, including shortages of required electronic components." as disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 .
We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources are adequate to fund future commitments. See additional discussion in the Liquidity and Capital Resources section below.
Russian Invasion of
We continue to monitor and respond to the escalating conflict inUkraine and the associated sanctions and other restrictions. As of the date of this report, there is no material impact to our business operations and financial performance inUkraine . The full impact of the conflict on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflict and its impact on regional and global economic conditions. We will continue to monitor the conflict and assess the related restrictions and other effects and pursue prudent decisions for our team members, customers, and business.
Other Developments
OnJanuary 13, 2023 , we announced that our subsidiary,Nextracker Inc. ("Nextracker") publicly filed a registration statement on Form S-1 with theU.S. Securities and Exchange Commission ("SEC") relating to the proposed initial public offering ofNextracker's Class A common stock. The initial public offering and its timing are subject to market and other conditions and theSEC's review process, and there can be no assurance that we will proceed with such offering or any alternative transaction. Refer to "Risk Factors - We are pursuing alternatives for ourNextracker business, including a full or partial separation of the business, through an initial public offering ofNextracker or otherwise, which may not be consummated as or when planned or at all, and may not achieve the intended benefits." as disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . OnFebruary 1, 2022 , one of our subsidiaries sold Series A Preferred Units representing a 16.7% interest inNextracker to TPG Rise for an aggregate purchase price of$500 million . The sale of the 16.7% interest inNextracker reflected an implied value forNextracker as of the date of the sale of$3.0 billion . See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 for further information. This Quarterly Report on Form 10-Q for the fiscal quarter endedDecember 31, 2022 does not constitute an offer to sell or a solicitation of an offer to buy securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction. 30
--------------------------------------------------------------------------------
Table of Contents
Business Overview
We are one of the world's largest providers of global supply chain solutions, with revenues of$22.9 billion for the nine-month period endedDecember 31, 2022 and$26.0 billion in the fiscal year endedMarch 31, 2022 . We have established an extensive network of manufacturing facilities in the world's major consumer and enterprise markets (Asia , theAmericas , andEurope ) to serve the growing outsourcing needs of both multinational and regional customers. We design, build, ship, and service consumer and enterprise products for our customers through a network of over 100 facilities in approximately 30 countries across four continents. We also provide intelligent, integrated solar tracker and software solutions used in utility-scale and ground-mounted distributed generation solar projects around the world. The following tables set forth the relative percentages and dollar amounts of net sales by region and by country, and net property and equipment by country, based on the location of our manufacturing sites: Three-Month Periods Ended Nine-Month Periods Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In millions) Net sales by region: Americas$ 3,455 45 %$ 2,681 41 %$ 10,182 45 %$ 7,865 41 % Asia 2,748 35 % 2,548 38 % 8,016 35 % 7,260 38 % Europe 1,553 20 % 1,390 21 % 4,671 20 % 4,065 21 %$ 7,756 $ 6,619 $ 22,869 $ 19,190 Net sales by country: China$ 1,759 23 %$ 1,598 24 %$ 5,113 22 %$ 4,676 24 % Mexico 1,703 22 % 1,250 19 % 4,859 21 % 3,710 19 % U.S. 1,188 15 % 849 13 % 3,651 16 % 2,571 13 % Malaysia 650 8 % 527 8 % 1,853 8 % 1,350 7 % Brazil 548 7 % 568 9 % 1,622 7 % 1,533 8 % Hungary 327 4 % 265 4 % 944 4 % 912 5 % Other 1,581 21 % 1,562 23 % 4,827 22 % 4,438 24 %$ 7,756 $ 6,619 $ 22,869 $ 19,190 As of As of
Property and equipment, net:December 31, 2022
March 31, 2022 (In millions) Mexico $ 716 31 % $ 626 29 % U.S. 367 16 % 354 17 % China 336 15 % 299 14 % Malaysia 144 6 % 110 5 % Hungary 129 6 % 118 6 % India 105 5 % 129 6 % Other 492 21 % 489 23 % $ 2,289$ 2,125 We believe that the combination of our extensive open innovation platform solutions, design and engineering services, advanced supply chain management solutions and services, significant scale and global presence, and manufacturing campuses in low-cost geographic areas provide us with a competitive advantage and strong differentiation in the market for designing, manufacturing and servicing consumer and enterprise products for leading multinational and regional customers. Specifically, we offer our customers the ability to simplify their global product development, manufacturing process, and after sales services, and enable them to meaningfully accelerate their time to market and cost savings.
Our operating results are affected by a number of factors, including the following:
•the impacts on our business due to component shortages, disruptions in transportation or other supply chain related constraints including as a result of the COVID-19 global pandemic;
•the effects of the COVID-19 global pandemic on our business and results of operations;
31
--------------------------------------------------------------------------------
Table of Contents
•changes in the macro-economic environment and related changes in consumer demand;
•the mix of the manufacturing services we are providing, the number, size, and complexity of new manufacturing programs, the degree to which we utilize our manufacturing capacity, seasonal demand, and other factors;
•the effects on our business when our customers 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 that current credit and market conditions (including as a result of the COVID-19 global pandemic and the ongoing conflict betweenRussia andUkraine ) could have on the liquidity and financial condition of our customers and suppliers, including any impact on their ability to meet their contractual obligations;
•the effects on our business due to certain customers' products having short product lifecycles;
•our customers' ability to cancel or delay orders or change production quantities;
•our customers' decisions to choose internal manufacturing instead of outsourcing for their product requirements;
•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.
We are also subject to other risks as outlined in Part I, Item 1A of our Annual
Report on Form 10-K for the fiscal year ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("U.S. GAAP" or "GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the COVID-19 pandemic and the ongoing conflict betweenRussia andUkraine , there has been and will continue to be uncertainty and disruption in the global economy and financial markets. We have made estimates and assumptions taking into consideration certain possible impacts due to COVID-19 and the Russian invasion ofUkraine . These estimates may change, as new events occur, and additional information is obtained. Actual results may differ from those estimates and assumptions. Refer to the accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 , where we discuss our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. 32 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net sales (amounts may not sum due to rounding). The financial information and the discussion below should be read together with the condensed consolidated financial statements and notes thereto included in this document. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . Three-Month Periods Ended Nine-Month Periods Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 92.4 92.6 92.5 92.5 Restructuring charges 0.1 - - 0.1 Gross profit 7.5 7.4 7.5 7.4 Selling, general and administrative expenses 3.1 3.4 3.2 3.3 Intangible amortization 0.3 0.3 0.3 0.2 Operating income 4.1 3.7 4.0 3.9 Interest and other, net 0.7 0.1 0.7 (0.5) Income before income taxes 3.4 3.6 3.3 4.4 Provision for income taxes 0.3 0.2 0.4 0.4 Net income 3.1 % 3.4 % 2.9 % 4.0 % Net income attributable to redeemable noncontrolling interest 0.1 - 0.1
-
Net income attributable to Flex Ltd. 3.0 % 3.4 % 2.8 % 4.0 % Net sales The following table sets forth our net sales by segment, and their relative percentages (the sum of the individual percentages may not equal 100% due to rounding): Three-Month Periods Ended Nine-Month Periods Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In millions) Net sales: Flex Agility Solutions$ 4,029 52 %$ 3,581 54 %$ 12,024 53 %$ 10,450 54 % Flex Reliability Solutions 3,225 42 % 2,711 41 % 9,493 42 % 7,758 40 % Nextracker 516 7 % 338 5 % 1,384 6 % 1,018 5 % Intersegment eliminations (14) - % (11) - % (32) - % (36) - %$ 7,756 $ 6,619 $ 22,869 $ 19,190 Net sales during the three-month period endedDecember 31, 2022 totaled$7.8 billion , representing an increase of approximately$1.1 billion , or 17% from$6.6 billion during the three-month period endedDecember 31, 2021 . Net sales for our FAS segment increased approximately$0.4 billion , or 13% from the three-month period endedDecember 31, 2021 , primarily driven by strong year-over-year growth in our Communications, Enterprise and Cloud ("CEC") business and a low single-digit year-over-year increase in our Lifestyle business due to new program wins, ramps, and clear-to-build improvement. These increases in FAS were offset by a low double-digit year-over-year decrease in our Consumer Devices business due to relatively softer market demand and a planned project completion in the fiscal year endedMarch 31, 2022 . Net sales for our FRS segment increased approximately$0.5 billion , or 19% from the three-month period endedDecember 31, 2021 , primarily driven by a strong year-over-year increases in our Industrial and Automotive businesses and a high single-digit year-over year increase in ourHealth Solutions business due to strong customer demand and ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition, despite continued supply constraints. Net sales for ourNextracker segment increased approximately$0.2 billion , or 53% from the three-month period endedDecember 31, 2021 , primarily driven by an increase in gigawatts delivered and, to a lesser extent, an increased average selling price. Net sales increased across all regions with a$0.8 billion increase to$3.5 billion in theAmericas , a$0.2 billion increase to$2.7 billion inAsia , and a$0.2 billion increase to$1.6 billion inEurope . 33 -------------------------------------------------------------------------------- Net sales during the nine-month period endedDecember 31, 2022 totaled$22.9 billion , representing an increase of approximately$3.7 billion , or 19% from$19.2 billion during the nine-month period endedDecember 31, 2021 . Net sales for our FAS segment increased approximately$1.6 billion , or 15% from the nine-month period endedDecember 31, 2021 , primarily driven by strong growth in our CEC business and a mid single-digit increase in our Lifestyle business during the current year due to new ramps, customer expansion, continued recoveries in consumer spending along with some effect from inflation pass-through while overcoming challenges from supply constraints. These increases in FAS were offset by a high-teen decrease in our Consumer Device business during the current year due to the same factors in the three-month periods discussion above. Net sales for our FRS segment increased approximately$1.7 billion , or 22% from the nine-month period endedDecember 31, 2021 , primarily driven by strong increases in our Industrial and Automotive businesses, and a mid single-digit year-over year increase in ourHealth Solutions business during the current year due to strong customer demand and ramps across various end markets coupled with incremental revenues from our Anord Mardix acquisition and the recovery of inflationary costs, despite continued supply constraints noted above. Net sales for ourNextracker segment increased approximately$0.4 billion , or 36% from the nine-month period endedDecember 31, 2021 , primarily driven by an increase in gigawatts delivered and, to a lesser extent, an increased average selling price which was in part driven by an increase in logistics costs. Net sales increased across all regions with a$2.3 billion increase to$10.2 billion in theAmericas , a$0.8 billion increase to$8.0 billion inAsia , and a$0.6 billion increase to$4.7 billion inEurope . Our ten largest customers during the three and nine-month periods endedDecember 31, 2022 andDecember 31, 2021 accounted for approximately 35% of net sales. No customer accounted for more than 10% of net sales during the three and nine-month periods endedDecember 31, 2022 orDecember 31, 2021 .
Cost of sales
Cost of sales is affected by a number of factors, including the number and size of new manufacturing programs, product mix, labor cost fluctuations by region, component costs and availability and capacity utilization. Cost of sales during the three-month period endedDecember 31, 2022 totaled$7.2 billion , representing an increase of approximately$1.0 billion , or 17% from$6.1 billion during the three-month period endedDecember 31, 2021 . The higher cost of sales for the three-month period endedDecember 31, 2022 was primarily driven by increased consolidated sales of approximately$1.1 billion , representing an increase of 17%. Cost of sales in FAS for the three-month period endedDecember 31, 2022 increased approximately$0.4 billion , or 13% from the three-month period endedDecember 31, 2021 , which is relatively in line with the overall 13% increase in FAS revenue during the same period, primarily as a result of higher revenue in our CEC and Lifestyle businesses. Cost of sales in FRS for the three-month period endedDecember 31, 2022 increased approximately$0.5 billion , or 20% from the three-month period endedDecember 31, 2021 , which is primarily attributed to the overall 19% increase in FRS revenue during the same period, primarily as a result of higher revenue in our Industrial and Automotive businesses, combined with operational investments in ourHealth Solutions and Automotive businesses. Cost of sales in ourNextracker segment for the three-month period endedDecember 31, 2022 increased approximately$0.1 billion , or 42% from the three-month period endedDecember 31, 2021 , primarily due to the 53% increase inNextracker revenue during the same period, partially offset by improved recovery on freight and logistics cost increases. Cost of sales during the nine-month period endedDecember 31, 2022 totaled$21.2 billion , representing an increase of approximately$3.4 billion , or 19% from$17.8 billion during the nine-month period endedDecember 31, 2021 . The higher cost of sales for the nine-month period endedDecember 31, 2022 was primarily driven by increased consolidated sales of approximately$3.7 billion , representing an increase of 19%. Cost of sales in FAS for the nine-month period endedDecember 31, 2022 increased approximately$1.5 billion , or 15% from the nine-month period endedDecember 31, 2021 , which is aligned with the overall 15% increase in FAS revenue during the same period primarily due to the drivers noted in the discussion above for the three-month periods. Cost of sales in FRS for the nine-month period endedDecember 31, 2022 increased approximately$1.6 billion , or 23% from the nine-month period endedDecember 31, 2021 , which is relatively in line with the overall 22% increase in FRS revenue during the same period, primarily due to the drivers noted in the discussion above for the three-month periods. Cost of sales in ourNextracker segment for the nine-month period endedDecember 31, 2022 increased approximately$0.3 billion , or 31% from the nine-month period endedDecember 31, 2021 , which is relatively in line with the overall 36% increase inNextracker revenue during the same period, primarily due to the drivers noted in the discussion above for the three-month periods.
Gross profit
Gross profit is affected by fluctuations in cost of sales elements as outlined above and further by a number of factors, including product life cycles, unit volumes, pricing, competition, new product introductions, and the expansion or consolidation of manufacturing facilities, as well as specific restructuring activities initiated from time to time. The flexible design of our manufacturing processes allows us to manufacture a broad range of products in our facilities and better utilize our manufacturing capacity across our diverse geographic footprint and service customers from all segments. In the cases of new 34 -------------------------------------------------------------------------------- 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 endedDecember 31, 2022 increased$0.1 billion to$0.6 billion , or 7.5% of net sales, from$0.5 billion , or 7.4% of net sales, during the three-month period endedDecember 31, 2021 . Gross margin improved 10 basis points during the three-month period endedDecember 31, 2022 primarily due to the overall strong customer demand across various end markets which allowed for improved fixed cost absorption, despite continued pressure on margin from component shortages, logistics constraints and the pass-through effect of inflationary cost recoveries. Gross profit during the nine-month period endedDecember 31, 2022 increased$0.3 billion to$1.7 billion , or 7.5% of net sales, from$1.4 billion , or 7.4% of net sales, during the nine-month period endedDecember 31, 2021 . Gross margin improved 10 basis points during the same period due to the same factors noted above in the three-month periods discussion.
Segment income
An operating segment's performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net sales less cost of sales, and segment selling, general and administrative expenses, and does not include intangible amortization, stock-based compensation, restructuring charges, legal and other, and interest and other, net. A portion of depreciation is allocated to the respective segments, together with other general corporate research and development and administrative expenses. The following table sets forth segment income and margins. Segment margins in the table below may not recalculate exactly due to rounding and are calculated based on unrounded numbers. Three-Month Periods Ended Nine-Month Periods Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In millions) Segment income: Flex Agility Solutions$ 181 4.5 %$ 163 4.6 %$ 523 4.4 %$ 453 4.3 % Flex Reliability Solutions 143 4.4 % 136 5.0 % 465 4.9 % 407 5.2 % Nextracker 60 11.7 % 18 5.5 % 133 9.6 % 68 6.7 % FAS segment margin decreased approximately 10 basis points, to 4.5%, for the three-month period endedDecember 31, 2022 , from 4.6% for the three-month period endedDecember 31, 2021 . The margin decrease was driven by elevated costs due to component shortages and logistics constraints combined with certain inflation pass-through recoveries. The FAS segment margin increased approximately 10 basis point, to 4.4% for the nine-month period endedDecember 31, 2022 , from 4.3% for the nine-month period endedDecember 31, 2021 . The increase in FAS segment margin during the nine-month period ended is primarily due to strong execution against new project ramps and product mix, partially offset by elevated costs due to component shortages and logistics constraints and the effect of certain inflation pass-through recoveries. FRS segment margin decreased approximately 60 basis points, to 4.4% for the three-month period endedDecember 31, 2022 , from 5.0% for the three-month period endedDecember 31, 2021 . The margin decrease in FRS was primarily driven by component shortage related production disruptions, inflationary cost pressures as well as additional near-term operational investments impacting our Automotive andHealth Solutions businesses during the three-month period endedDecember 31, 2022 . FRS segment margin decreased approximately 30 basis points, to 4.9% for the nine-month period endedDecember 31, 2022 , from 5.2% for the nine-month period endedDecember 31, 2021 . The decrease in FRS segment margin during the nine-month period ended is due to the same factors noted in the discussion above for the three-month periods.Nextracker segment margin increased approximately 620 basis points, to 11.7% for the three-month period endedDecember 31, 2022 , from 5.5% for the three-month period endedDecember 31, 2021 . The margin increase was driven by improved pricing and better cost controls and better cost absorption with increased revenue.Nextracker segment margin increased approximately 290 basis points, to 9.6% for the nine-month period endedDecember 31, 2022 , from 6.7% for the nine-month period endedDecember 31, 2021 . The increase inNextracker segment margin during the nine-month period ended is due to the same factors noted in the discussion above for the three-month periods.
Restructuring charges
During the three and nine-month periods endedDecember 31, 2022 , we recognized approximately$5 million of restructuring charges, primarily related to employee severance. During the three and nine-month periods endedDecember 31 , 35 --------------------------------------------------------------------------------
2021, we recognized approximately
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") was approximately$0.2 billion , or 3.1% of net sales, during the three-month period endedDecember 31, 2022 , increasing$18 million from approximately$0.2 billion and improving 30 basis points from 3.4% of net sales, during the three-month period endedDecember 31, 2021 and SG&A was$0.7 billion , or 3.2% of net sales, during the nine-month period endedDecember 31, 2022 , increasing$91 million from$0.6 billion and improving 10 basis points from 3.3% of net sales, during the nine-month period endedDecember 31, 2021 , which reflects our enhanced cost control efforts to support higher revenue growth while keeping our SG&A expenses relatively flat. Intangible amortization Amortization of intangible assets increased to$19 million during the three-month period endedDecember 31, 2022 , from$15 million for the three-month period endedDecember 31, 2021 , and increased to$62 million during the nine-month period endedDecember 31, 2022 , from$45 million for the nine-month period endedDecember 31, 2021 , primarily due to amortization expense related to new intangible assets from the Anord Mardix acquisition completed inDecember 2021 . Interest and other, net Interest and other, net was an expense of$59 million during the three-month period endedDecember 31, 2022 compared to expense of$8 million during the three-month period endedDecember 31, 2021 , primarily due to a lower gain from equity in earnings recognized for certain of our non-core equity method investments, loss from foreign exchange transactions, higher expenses from our accounts receivable sales programs, coupled with higher interest expense compared to the prior year period. Interest and other, net was an expense of$152 million during the nine-month period endedDecember 31, 2022 compared to income of$103 million during the nine-month period endedDecember 31, 2021 , due to the absence of the$150 million gain related to a certain tax credit recorded upon approval of a "Credit Habilitation" request by the relevant Brazilian tax authorities in the nine-month period endedDecember 31, 2021 , coupled with the same drivers noted in the discussion above. Income taxes Certain of our subsidiaries, at various times, have been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. Refer to note 15, "Income Taxes" of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 for further discussion. The consolidated effective tax rate was 10% and 13% for the three and nine-month periods endedDecember 31, 2022 , and 7% and 9% for the three and nine-month periods endedDecember 31, 2021 , respectively. The effective tax rate varies from theSingapore statutory rate of 17% as a result of recognition of earnings in different jurisdictions (we generate most of our revenues and profits from operations outside ofSingapore ), operating loss carryforwards, income tax credits, release of previously established valuation allowances for deferred tax assets, liabilities for uncertain tax positions, as well as the effect of certain tax holidays and incentives granted to our subsidiaries primarily inChina ,Malaysia ,the Netherlands andIsrael . The effective tax rates for the three and nine-month periods endedDecember 31, 2022 were higher than the effective tax rates for the three-month and nine-month periods endedDecember 31, 2021 due to the changing jurisdictional mix of income and a$17 million release of a previously established valuation allowance on deferred tax assets because of the recognition of a$17 million in net deferred tax liability recorded in connection with the Anord Mardix acquisition during the three-month and nine-month periods endedDecember 31, 2021 . OnAugust 16, 2022 , the Inflation Reduction Act of 2022 ("IRA") was enacted into law, which includes a new corporate minimum tax, a stock repurchase excise tax, numerous green energy credits, other tax provisions, and significantly increased enforcement resources. We are evaluating the effects the IRA will have on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
In response to the recent challenging environment following the COVID-19 pandemic, we continuously evaluate our ability to meet our obligations over the next 12 months and have proactively reset our capital structure during these times to improve maturities and liquidity. As a result, we expect that our current financial condition, including our liquidity sources are adequate to fund current and future commitments. As ofDecember 31, 2022 , we had cash and cash equivalents of approximately$2.6 billion and bank and other borrowings of approximately$4.0 billion . As ofDecember 31, 2022 , we had a$2.5 billion revolving 36 -------------------------------------------------------------------------------- credit facility that is due to mature inJuly 2027 (the "2027 Credit Facility"), under which we had no borrowings outstanding. We also entered into a$450 million delayed draw term loan credit agreement, under which we had$150 million of borrowings outstanding as ofDecember 31, 2022 . Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. We also issued$400 million of 6.000% Notes dueJanuary 2028 . The proceeds obtained, together with cash on hand, were used for general corporate purposes, which includes redeeming our 2023 notes onDecember 20, 2022 and for working capital requirements. We also borrowed €250 million (approximately$265 million as ofDecember 31, 2022 ), under a 1-year term-loan agreement. The proceeds of the term loan were used to repay the outstanding €250 million Euro term loan due onDecember 9, 2022 . Refer to note 6 to the condensed consolidated financial statement for details. As ofDecember 31, 2022 , we were in compliance with the covenants under all of our credit facilities and indentures. Cash provided by operating activities was$0.5 billion during the nine-month period endedDecember 31, 2022 , primarily driven by$0.7 billion of net income for the period plus$0.5 billion of non-cash charges such as depreciation, amortization, and stock-based compensation offset by changes in net working capital as discussed below. We believe net working capital ("NWC") and net working capital as a percentage of annualized net sales are key metrics that measure our liquidity. Net working capital is calculated as current quarter accounts receivable, net of allowance for doubtful accounts, plus inventories and contract assets, less accounts payable. Net working capital increased$1.5 billion to$5.7 billion as ofDecember 31, 2022 , from$4.2 billion as ofMarch 31, 2022 . This increase is primarily driven by a$1.3 billion increase in inventories due to strong demand, coupled with continued component shortages and logistics constraints, clear-to build constraints and logistics challenges driving up buffer stock and inventory pricing, and a$0.6 billion increase in net receivables, offset by a$0.4 billion increase in accounts payable due to increased inventory purchases. Our current quarter net working capital as a percentage of annualized net sales for the quarter endedDecember 31, 2022 , increased to 18.2% from 15.4% of annualized net sales for the quarter endedMarch 31, 2022 due to component shortages, clear-to-build and logistics constraints. We continue to experience component shortages in the supply chain, and although we are actively managing these impacts, we expect continued working capital pressure in the near future. We expect it will take additional time to adequately drive down our inventory levels to align with the current demand environment. We are proactively working with our partners to rebalance safety and buffer stock requirements and we have an established enterprise-wide cross-functional initiative resetting our load planning. Component shortages and significantly increased logistics costs are also expected to persist at least in the near future. We are working diligently with our partners to secure needed parts and fulfill demand. In addition, to the extent possible, we have collaborated with our customers for working capital advances to offset the required investment in inventory. Advances from customers as ofDecember 31, 2022 increased$0.8 billion to$2.2 billion from$1.4 billion as ofMarch 31, 2022 . Cash used in investing activities was$0.4 billion during the nine-month period endedDecember 31, 2022 . This was primarily driven by$0.4 billion of net capital expenditures for property and equipment to continue expanding capabilities and capacity in support of our expanding Automotive, Industrial, CEC, and Lifestyle businesses. We believe adjusted free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments, fund acquisitions, repurchase company shares and for certain other activities. Our adjusted free cash flow is defined as cash from operations, less net purchases of property and equipment allowing us to present adjusted cash flows on a consistent basis for investor transparency. Our adjusted free cash flow for the nine-month periods endedDecember 31, 2022 andDecember 31, 2021 was an inflow of$0.1 billion and an inflow of$0.3 billion , respectively. Adjusted free cash flow is not a measure of liquidity underU.S. GAAP, and may not be defined and calculated by other companies in the same manner. Adjusted free cash flow should not be considered in isolation or as an alternative to net cash provided by operating activities. Adjusted free cash flows reconcile to the most directly comparable GAAP financial measure of cash flows from operations as follows:
Nine-Month Periods Ended
December 31 ,
2022
(In millions) Net cash provided by operating activities $ 500 $ 664 Purchases of property and equipment (455) (333) Proceeds from the disposition of property and equipment 20 9 Adjusted free cash flow $ 65 $ 340 Cash used by financing activities was$0.5 billion during the nine-month period endedDecember 31, 2022 , which was primarily driven by$0.3 billion of cash paid for the repurchase of our ordinary shares and$0.1 billion of net cash for repayments of bank borrowings and long-term debt. 37 -------------------------------------------------------------------------------- Our cash balances are generated and held in numerous locations throughout the world. Liquidity is affected by many factors, some of which are based on normal ongoing operations of the business and some of which arise from fluctuations related to global economics and markets. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances; however, any current restrictions are not material. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout the global organization. We believe that our existing cash balances, together with anticipated cash flows from operations and borrowings available under our credit facilities, will be sufficient to fund our operations through at least the next twelve months. As ofDecember 31, 2022 andMarch 31, 2022 , approximately 29% and 34%, respectively, of our cash and cash equivalents were held by foreign subsidiaries outside ofSingapore . Although substantially all of the amounts held outside ofSingapore could be repatriated under current laws, a significant amount could be subject to income tax withholdings. We provide for tax liabilities on these amounts for financial statement purposes, except for certain of our foreign earnings that are considered indefinitely reinvested outside ofSingapore (approximately$1.6 billion as ofMarch 31, 2022 ). Repatriation could result in an additional income tax payment; however, for the majority of our foreign entities, our intent is to permanently reinvest these funds outside ofSingapore 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 ofSingapore and we would meet our liquidity needs through ongoing cash flows, external borrowings, or both. Future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable, the timing of capital expenditures for new equipment, the extent to which we utilize operating leases for new facilities and equipment, and the levels of shipments and changes in the volumes of customer orders. We maintain global paying services agreements with several financial institutions. Under these agreements, the financial institutions act as our paying agents with respect to accounts payable due to our suppliers who elect to participate in the program. The agreements allow our suppliers to sell their receivables to one of the participating financial institutions at the discretion of both parties on terms that are negotiated between the supplier and the respective financial institution. Our obligations to our suppliers, including the amounts due and scheduled payment dates, are not impacted by our suppliers' decisions to sell their receivables under this program. The cumulative payments due to suppliers participating in the programs amounted to approximately$0.4 billion and$1.1 billion for the three and nine-month periods endedDecember 31, 2022 , respectively, and$0.4 billion and$0.9 billion for the three and nine-month periods endedDecember 31, 2021 , respectively. Pursuant to their agreement with one of the financial institutions, certain suppliers may elect to be paid early at their discretion. We are not always notified when our suppliers sell receivables under these programs. The available capacity under these programs can vary based on the number of investors and/or financial institutions participating in these programs at any point in time. In addition, we maintain various uncommitted short-term financing facilities including but not limited to a commercial paper program, and a revolving sale and repurchase of subordinated notes established under the securitization facility, under which there were no borrowings outstanding as ofDecember 31, 2022 . Historically, we have funded operations from cash and cash equivalents generated from operations, proceeds from public offerings of equity and debt securities, bank debt and lease financings. We also have the ability to sell a designated pool of trade receivables under asset-backed securitization ("ABS") programs and sell certain trade receivables, which are in addition to the trade receivables sold in connection with these securitization agreements. We may enter into debt and equity financings, sales of accounts receivable and lease transactions to fund acquisitions and anticipated growth as needed. The sale or issuance of equity or convertible debt securities could result in dilution to current shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of ordinary shares, and the terms of this debt could impose restrictions on operations and could increase debt service obligations. This increased indebtedness could limit our flexibility as a result of debt service requirements and restrictive covenants, potentially affect our credit ratings, and may limit our ability to access additional capital or execute our business strategy. Any downgrades in credit ratings could adversely affect our ability to borrow as a result of more restrictive borrowing terms. We continue to assess our capital structure and evaluate the merits of redeploying available cash to reduce existing debt or repurchase ordinary shares. Under our current share repurchase program, our Board of Directors authorized repurchases of our outstanding ordinary shares for up to$1 billion in accordance with the share purchase mandate approved by our shareholders at the date of the most recent Annual General Meeting which was held onAugust 25, 2022 . During the nine-month period endedDecember 31, 2022 , we paid$293 million to repurchase shares under the current and prior repurchase plans at an average price of$16.50 per share. As ofDecember 31, 2022 , shares in the aggregate amount of$937 million were available to be repurchased under the current plan. 38 --------------------------------------------------------------------------------
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
InJuly 2022 , we entered into a new$2.5 billion credit facility which matures inJuly 2027 , replacing our previous$2.0 billion credit facility, under which we had no borrowings outstanding as ofDecember 31, 2022 . InSeptember 2022 , we entered into a$450 million delayed draw term loan credit agreement, under which we had$150 million of borrowings outstanding as ofDecember 31, 2022 . Borrowings under the delayed draw term loan may be used for working capital, capital expenditures, refinancing of current debt, and other general corporate purposes. InDecember 2022 , we issued$400 million of 6.000% Notes dueJanuary 2028 . The proceeds obtained, together with cash on hand, were used for general corporate purposes, which includes redeeming our 2023 notes onDecember 20, 2022 and for working capital requirements. InDecember 2022 , we borrowed €250 million (approximately$265 million as ofDecember 31, 2022 ) under a 1-year term-loan agreement. The proceeds of the term loan were used to repay the outstanding €250 million Euro term loan due onDecember 9, 2022 .
Other than the changes discussed above, there were no material changes in our
contractual obligations and commitments as of
© Edgar Online, source