Executive Summary / Key Takeaways

• Flex has successfully executed a strategic transformation, shifting its portfolio towards higher-value markets like data centers, automotive, and health solutions, resulting in record adjusted operating margins and EPS.
• The company's differentiated "EMS + Products + Services" strategy, particularly its unique "grid-to-chip" power and IT integration offering for data centers, is fueling significant growth in this accretive market.
• Despite a dynamic macroeconomic environment and revenue headwinds in certain segments, Flex's focus on operational efficiency, mix improvement, and strong execution has driven robust profitability and cash flow generation.
• Flex is positioned as a key beneficiary of regionalization trends, leveraging its extensive global footprint, especially in North America, to help customers build supply chain resiliency amidst geopolitical and tariff uncertainties.
• Management expects continued margin expansion, guiding for a 6%+ adjusted operating margin in fiscal year 2026, a year ahead of schedule, alongside strong free cash flow generation and double-digit adjusted EPS growth.

A Foundation Built for Complexity

Flex Ltd. stands as a global leader in design, engineering, manufacturing, and supply chain solutions, operating a vast network across approximately 30 countries. Founded in Singapore in 1990, the company has evolved significantly from its origins, strategically adapting its business model to navigate the increasing complexity of global manufacturing and supply chains. This transformation accelerated around 2020 with the "Flex Forward" strategy, a deliberate effort to optimize its portfolio and enhance operational efficiency. A key outcome of this strategy was the spin-off of Nextracker (NTRI) in fiscal year 2024, allowing Flex to sharpen its focus on core, higher-value manufacturing and services.

The company's current strategic phase, the "EMS + Products + Services" approach, builds upon this foundation. It emphasizes strengthening core manufacturing capabilities while expanding offerings in proprietary products and value-added services. This hybrid model aims to provide greater vertical integration and customization at scale, addressing the intricate needs of customers across diverse and technologically advanced industries. Flex's extensive global footprint, including self-contained industrial parks in cost-efficient locations, serves as a critical asset, enabling regionalized production, minimizing logistics costs, and enhancing supply chain resiliency – capabilities increasingly vital in today's volatile geopolitical climate.

In the competitive landscape, Flex operates among major global EMS providers like Jabil (JBL), Sanmina (SANM), Celestica (CLS), and Plexus (PLXS), as well as smaller regional players and even its own customers who evaluate internal manufacturing capabilities. While competitors like JBL and CLS may exhibit slightly higher margins or ROIC in certain periods, Flex differentiates itself through its unique combination of end-to-end services, deep vertical expertise, and a growing portfolio of proprietary technology, particularly in high-growth areas. The company's ability to leverage technology across industries, such as applying data center power and compute expertise to automotive applications, provides a distinct competitive advantage.

Technological Differentiation Driving Value

A cornerstone of Flex's strategy and competitive positioning is its investment in differentiated technology and advanced manufacturing capabilities. This is particularly evident in the data center sector, where the rise of AI is driving unprecedented demand for compute and power solutions. Flex positions itself uniquely by offering a comprehensive portfolio that spans from the grid to the chip. This includes advanced IT integration services for fully integrated racks, combined with a robust power products portfolio.

Flex's embedded power capabilities, enhanced by partnerships and acquisitions like Musashi Energy solutions for capacitive energy storage (CES) and JetCool for direct-to-chip liquid cooling, address the critical need for high-density power and heat management within server racks. The CES technology, for instance, is designed to mitigate massive power spikes from AI clusters, a tangible benefit for data center operators. JetCool's patented microconvective cooling technology is capable of cooling over 3,000W and offers turn-key liquid cooling systems, directly addressing the heat challenges of advanced AI server specs. On the critical power side, the acquisition of Crown Technical Systems enhances capabilities in medium voltage switchgear and modular power pods, crucial for data center facilities and grid modernization. This "grid-to-chip" power offering, combined with IT integration, makes Flex the only provider capable of offering such a vertically integrated solution, a significant differentiator in the AI-centric data center ecosystem.

Beyond data centers, Flex leverages its technological expertise in automotive, offering advanced compute platforms and power electronics. As the industry transitions towards EVs and hybrids, these vehicles require additional power systems compared to traditional internal combustion engines, presenting content gain opportunities for Flex. The company's partnership with Torc and NVIDIA (NVDA) to develop a scalable physical AI compute system for autonomous trucks further highlights its role in cutting-edge automotive technology. In healthcare, Flex's capabilities in FDA-regulated medical technology design and advanced manufacturing support increasingly complex devices with shrinking form factors, including recent wins in drug delivery technologies like GLP-1 injectors. Strategic collaborations, such as with MIT on AI and automation in manufacturing, and recognition like the Ford (F) Sustainability Supplier of the Year award, underscore Flex's commitment to innovation and responsible operations. Despite lacking proprietary, quantifiable technology differentiators, Flex's ability to integrate complex systems and apply expertise across diverse high-value markets provides a strong competitive edge.

Performance Reflecting Strategic Execution

Flex's financial performance over the past year reflects the impact of its strategic transformation and operational focus amidst a challenging macro backdrop. For the fiscal year ended March 31, 2025, net sales decreased by 2% to $25.8 billion, primarily due to softness in certain end markets within the FRS segment. However, the FAS segment saw a 1% increase in net sales, driven by strength in the CEC business, particularly cloud, which benefited from a $1 billion increase in customer buy-sell activity (excluded from reported net sales but contributing to gross profit). The Consumer Devices business also saw a notable 15% increase.

Despite the slight top-line contraction, Flex achieved significant profitability improvements. Gross profit increased by 16% to $2.2 billion, with the gross profit margin expanding to 8.4% from 7.1% in the prior year. This margin expansion was primarily driven by improved product mix, operational efficiencies, and lower restructuring charges. Adjusted operating income reached a record $1.5 billion, resulting in a record adjusted operating margin of 5.7% for the full year. Both the FAS and FRS segments contributed to margin expansion, with FAS margin increasing 130 basis points to 6.1% and FRS margin increasing 50 basis points to 5.8%, reflecting strong execution and favorable mix.

Net income from continuing operations was $838 million, a 4% decrease from the prior year, largely influenced by a non-recurring tax benefit in fiscal year 2024 related to the release of a deferred tax asset valuation allowance. Adjusted EPS reached a record $2.65, marking the fifth consecutive year of double-digit adjusted EPS growth.

Cash flow generation was particularly strong, with cash provided by operating activities increasing by $0.2 billion in fiscal 2025. Adjusted free cash flow reached a record $1.1 billion, exceeding the company's 80%+ conversion target for the second consecutive year. This strong cash generation supported significant capital allocation, including $1.3 billion in share repurchases during the year. Working capital management also improved, with inventory days, net of working capital advances, reaching a normalized level of approximately 56 days.

Outlook and Future Trajectory

Looking ahead to fiscal year 2026, Flex's guidance reflects confidence in its strategic direction and operational capabilities, even while acknowledging ongoing macroeconomic uncertainty. Management expects revenue to be between $25 billion and $26.8 billion, indicating a relatively stable top line at the midpoint compared to FY25. However, the outlook for profitability is notably strong. Flex is guiding for an adjusted operating margin between 6% and 6.1%, signaling that the company anticipates reaching its fiscal year 2027 target of 6%+ margins a full year ahead of schedule. Adjusted EPS is projected to be between $2.81 and $3.01 per share, continuing the trend of double-digit growth.

This optimistic profitability outlook is underpinned by the expected continuation of favorable mix shifts, particularly the sustained strength and accretive margins from the data center business. While the FY26 outlook for the FRS segment is flat at the midpoint (strength in data center power offsetting softness in automotive, core industrial, and renewables), the FAS segment is expected to be flat to slightly up, driven by cloud demand and networking share gains, tempered by softer enterprise IT and consumer devices. Management is taking a conservative approach to the revenue range due to market variables but expresses confidence in navigating the environment from a profitability standpoint, relying on mix improvement and operational efficiency. The company also expects to maintain its target of generating strong free cash flow with an 80%+ conversion rate.

Key assumptions include the continued build-out of AI infrastructure driving demand for data center solutions, although the pace and specific technology mix (GPU vs. ASIC) could introduce variability. The trend towards regionalization is expected to continue benefiting Flex, leveraging its North American footprint, although potential tariff impacts could affect cash flow timing if there is a lag in cost recovery. While core industrial and medical equipment markets are expected to stabilize, the timing of a full recovery remains uncertain. The automotive market faces near-term softness, but Flex's powertrain-agnostic revenue and content gains in EV/hybrid are expected to support performance.

Risks and Competitive Dynamics

Despite the positive outlook, Flex faces several pertinent risks. The dynamic global macroeconomic environment, including inflationary pressures, potential recessionary impacts, and high interest rates, could dampen customer demand across various segments. Geopolitical uncertainties, including ongoing conflicts and trade tensions, pose risks to supply chains, logistics, and operational stability. While Flex has demonstrated an ability to manage tariffs as a pass-through cost, potential lags in recovery or significant increases could impact cash flow timing and potentially operating margins if not fully offset.

Customer concentration, although diversified with no single customer exceeding 10% of net sales in FY25, remains a factor, as significant reductions in sales to any large customer could harm results. Competition in the EMS market is intense, with rivals like JBL, SANM, CLS, and PLXS vying for market share. While Flex's technology and end-to-end capabilities offer differentiation, competitors also invest in advanced manufacturing and target high-growth areas like AI and automotive. JBL's scale and focus on cost efficiency, CLS's strength in AI integration, SANM's niche in medical devices, and PLXS's customization expertise all present competitive pressures. Flex's ability to sustain margin expansion will depend on its continued success in driving mix improvement, operational efficiencies, and capitalizing on its unique technological portfolio faster and more effectively than rivals.

Operational risks include managing complex program ramps, potential component shortages (though largely subsided recently), manufacturing interruptions, and the ability to accurately forecast customer demand. The integration of acquired businesses also carries risks, including achieving anticipated synergies and managing potential liabilities. Compliance risks, including evolving data privacy laws and potential breaches of IT security, could result in significant legal and financial exposure.

Conclusion

Flex has demonstrably transformed its business, strategically shifting towards higher-value, high-growth end markets and enhancing its capabilities through a potent combination of advanced manufacturing, proprietary products, and value-added services. This "EMS + Products + Services" strategy, particularly its unique positioning in the AI-driven data center market with a "grid-to-chip" power and IT integration offering, is yielding tangible results in the form of record operating margins and adjusted EPS. The company's operational discipline, focus on efficiency, and ability to navigate complex global dynamics, including regionalization trends and tariff uncertainties, underscore its resilience. While macroeconomic headwinds and competitive pressures persist, Flex's clear strategic roadmap, technological differentiation, strong cash flow generation, and proactive capital allocation position it favorably. The guidance for a 6%+ adjusted operating margin in FY26 signals management's confidence in the sustainability of this improved profitability profile, suggesting that Flex is well-equipped to continue creating value for shareholders by capitalizing on secular growth drivers and solidifying its competitive standing.