Flex Ltd. FLEX reported second-quarter fiscal 2021 adjusted earnings of 36 cents per share that beat the Zacks Consensus Estimate by 28.57%. However, the figure increased 16.1% year over year.
Revenues declined 1.7% year over year to $5.99 billion but beat the consensus mark by 7.9%. The year-over-year decline was primarily due to lower demand at end-markets stemming from COVID-19 disruptions.
After a massive disruption due to coronavirus outbreak, automotive sector has started to recover, and this bodes well for Flex in the long term. Flex is expanding its business in the automotive sector especially in the field of autonomous cars and electrification. In the near term, revenues from the sector are anticipated to be under pressure as full recovery looks to be a time-consuming affair.
Beginning fiscal first quarter, the company started reporting in two segments - Flex Agility Solutions Group and Flex Reliability Solutions Group.
Flex Ltd. Price, Consensus and EPS Surprise
Flex Ltd. price-consensus-eps-surprise-chart | Flex Ltd. Quote
Flex Agility Solutions Group comprises Communications & Enterprise Compute or CEC, Lifestyle and Consumer Devices businesses. Revenues declined 7.4% year over year to $3.32 billion.
Within the segment, CEC and Lifestyle divisions reported low single-digit revenue growth. However, consumer devices continue to bear the brunt of weak macroeconomic conditions in the emerging economies.
Lifestyle division benefited high end audio solutions, from improved demand for high-end durable products across several categories (floor care, high end audio solution and small appliances), while CEC unit reflected growth in networking and compute equipment to support the increased workload from work-and-learn from home.
Flex Reliability Solutions Group comprises Health Solutions, Automotive and Industrial businesses. Revenues increased 6.5% year over year to $2.67 billion.
In automotive, all the sites were operational in the quarter under review and was the driving factor behind increases in the segment’s revenues.
Also, Flex’s Health Solutions business continued to benefit from higher demand for critical care equipment like ventilators, fusion pumps, patient monitors and ICU beds. The company also saw consistent strength in industrial end-market such as power products.
Non-GAAP gross margin expanded 30 basis points (bps) on a year-over-year basis and came in at 7.1% in the reported quarter.
Non-GAAP selling, general & administrative (SG&A) expenses, as a percentage of revenues, declined 10 bps year over year to 3%.
Non-GAAP operating margin expanded 40 bps on a year-over-year basis to 4.1% benefiting from cost containment efforts.
Flex Agility Solutions Group operating margin was 2.7%. Flex Reliability Solutions Group operating margin was 6.7%
Balance Sheet & Cash Flow
As of Sep 25, 2020, cash & cash equivalents were $2.36 billion, up from $1.94 billion as of Jun 26, 2020.
Long-term debt (including current portion) was $3.8 billion as of Sep 25, up from $3.59 billion as of Jun 26.
Net cash provided by operating activities was $265 million during the reported quarter compared with $992 million used in operations in the year-ago quarter and $629 million used in operations in the previous quarter.
Adjusted free cash flow was $326 million in the reported quarter compared with free cash flow of $187 million in the year-ago quarter and $74 million of free cash outflow in the previous quarter.
For third-quarter fiscal 2021, Flex expects revenues between $6 billion and $6.4 billion. The Zacks Consensus Estimate for revenues is currently pegged at $6 billion, which indicates a decline of 7.2% from the figure reported in the year-ago quarter.
Adjusted operating income is expected between $235 million and $275 million.
Adjusted earnings are expected in the range of 34-40 cents per share. The consensus mark for earnings is currently pegged at 32 cents per share, which suggests a decline of 15.8% from the figure reported in the year-ago quarter.
For the fiscal third quarter, on a sequential basis, Flex Agility solutions is expected to report revenue growth of low to high single digits driven by continued strength in Lifestyle and CEC units along with expectation of recovery in the emerging markets to benefit Consumer Devices’ revenues.
Sequentially, Flex Reliability Solutions’ is projected to report revenue growth of low to mid single digits based on a recovering automotive sector along continued strength in industrial end-market such as power products. Both the divisions are anticipated to report revenue growth in low to mid-single digits on a sequential basis.
However, Health Solutions’ division is likely to witness slow down in demand for critical care products like ventilators while demand for products for elective procedures has not started to gather steam. Health Solutions are anticipated witness revenue decline in low to mid-single digits in the fiscal third quarter on a sequential basis.
Zacks Rank & Stocks to Consider
Currently, Flex has a Zacks Rank #2 (Buy).
Some better-ranked stocks in the broader technology sector are Qorvo QRVO, Skyworks SWKS and Everbridge EVBG. While Qorvo sports a Zacks Rank #1 (Strong Buy), Skyworks and Everbridge carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.
Skyworks is set to release quarterly results on Nov 2, while Qorvo and Everbridge is scheduled to report earnings on Nov 4 and Nov 5, respectively.
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