Flex Ltd. (FLEX) CEO Revathi Advaithi on Q4 2021 Results - Earnings Call Transcript

Flex Ltd. (NASDAQ:FLEX) Q4 2021 Results Conference Call May 5, 2021 11:00 AM ET

Company Participants

David Rubin - Vice President of Investor Relations

Revathi Advaithi - Chief Executive Officer

Paul Lundstrom - Chief Financial Officer

Conference Call Participants

Shannon Cross - Cross Research

Paul Coster - JPMorgan Chase

Steven Fox - Fox Advisors

Ruplu Bhattacharya - Bank of America

James Suva - Citigroup

Matthew Sheerin - Stifel Nicolaus

Mark Delaney - Goldman Sachs

Christian Schwab - Craig-Hallum Capital

Operator

Good afternoon and welcome to the Flex Fourth Quarter Fiscal Year 2021 Earnings Conference Call. Today’s call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session.

At this time, for opening remarks, I would like to turn the call over to Mr. David Rubin, Flex’ Vice President of Investor Relations. Sir, you may begin.

David Rubin

Thank you, Denise. Good morning and welcome to Flex’s Fourth Quarter Fiscal 2021 Earnings Conference Call. With me today is our Chief Executive Officer, Revathi Advaithi; and our Chief Financial Officer, Paul Lundstrom. Both will give brief remarks, followed by Q&A.

This call is being webcast and recorded, and if you have not already received in slides for today’s presentation are available on the Investor Relations section of our flex.com website.

As a reminder, today’s call contains Forward-Looking Statements, which are based on our current expectations and assumptions, and are subject to risks and uncertainties, so actual events and results could differ materially. Also, such information is subject to change, and we undertake no obligation to update these forward-looking statements, for a full discussion of the risks and uncertainties, please see our most recent filings with the SEC.

This call references non-GAAP financial measures for the current period. The GAAP reconciliations can be found in the appendix slides of today’s presentation as well as on the Investor Relations section of our website.

Lastly, a word on our NEXTracker business, on April 28^th, we announced that we confidentially submitted a draft registration statement on Form S-1 with U.S. Securities and Exchange Commission relating to the proposed initial public offering of its Class A common stock.

The initial public offering its timing that are subject to market and other conditions, and the SEC’s review process. We made this announcement in accordance with Rile 135 under the Securities Act, following SEC regulations, we will not make any further statements or answer additional questions on the NEXTracker filing at this time.

With that, I would like to turn the call over to our CEO. Revathi.

Revathi Advaithi

Thank you, David. Good morning and thank you for joining us today for our Q4 earnings call. I hope you, your families are all safe and healthy. Before we discuss our results, I want to start by thanking our Flex colleagues for their incredible dedication and contributions in getting us to a very unusual year. So, let’s talk about business.

Throughout our last fiscal year, Flex proves that that it was able to deal with a global health and humanitarian crisis. We continue to adapt and improve first and ramping our health and safety levels to protect workers, enabling work-from-home orders, and most recently, deal with the global component shortages and logistical disruptions.

Flex’s people, processes and systems have proven to be very resilient and the entire Flex team has done an amazing job at overcoming these unusual obstacles and supporting our customers. Our procurement and supply chain teams especially have made a truly Herculean effort to track down every component and every shipping container to keep our factories running and supporting our customers.

Now let’s turn to Slide 3 to review some of our key financial highlights from the quarter. Our revenue was $6.3 billion, down 6.8% sequentially better than typical seasonality and up 14% year-over-year.

Our adjusted operating margin came in at a record 4.9%. This figure includes the absorption of costs related to the challenging components supply and logistics environment. Our adjusted EPS was $0.49, up from $0.28 in Q4 of last year. This is the third quarter in a row of record EPS. Our adjusted free cash flow came in 135 million.

Now for our fiscal 2021 results, please turn to Slide 4. Our full-year revenue was 24.1 billion, essentially flat year-over-year despite all the challenges this year. We achieved a record full-year adjusted operating margin of 4.3% a 60 basis point improvement year-over-year. Our adjusted EPS for the year was $1.57 a 28% year-over-year improvement. And through this year, we generated adjusted free cash flow 677 million.

Now moving on to the next slide. A year-ago, we laid out our strategy for a multiyear transformation. Over that time we have overcome significant challenges. While it is still too early to sound all clear, particularly regarding the global component constrained situation and continued pandemic. We think these are transitory challenges. And there is much to be excited about the future.

We made tremendous progress in our long-term strategy, redefining our end market focus, continuing to improve our mix, improving our operational execution and cultivating an inclusive high performing culture. Through all of this we delivered record results, improve their quality of earnings, and strengthened our cash position.

Redefining our markets focus, particularly since we have large end markets has helped us focus even in areas where our combined capability of technology, commercial excellence and operational execution gets rewarded by customers. As we said before, we will combine this with continued investment in certain technologies and products using the strength of our balance sheet.

This combination allows us to specialize and expand in targeted sub markets that have significant long-term secular drivers. The leverage and scale of this combination along with the Flex delivery model creates lasting competitive advantage that will only strengthen overtime.

We are seeing the early fruits from the strategic shift. Our work has already led to successes manifesting in both program expansions with current customers, as well as wins with new customers. These successes continue to strengthen customer trust and expand our experience and portfolio of offerings, creating a virtuous cycle.

Now a little bit detail on our segments. In our Health Solutions business, we talked about focusing on medical equipment, devices and next generation drug delivery. Earlier this year, customers came to us with a challenging and dire request.

We quickly ramped multiple ventilator programs and one of the fastest large scale medical device ramps in history. While this was a temporary project, it demonstrated our versatility and ability to operate at scale and speed. When global supply chains were in chaos our customers needed us and lives were at stake we delivered, and our improved model allowed us to do so in a fiscally responsible way.

I would also point to our global leadership and chronic care related medical devices where we have executed on multi-year truly paradigm shifting medical device manufacturing program. This success shows the market we can manufacture highly complex essential products at scale. I am very proud to say our previous success has led to significant new long-term program wins in the chronic care related space that we have begun to ramp.

Now, automotive is a sector that is going through significant transformation, the steady shift to electrification and the inevitable move towards autonomy means increased complexity and new modes for value creation.

We are focused on where the market is going with our emphasis on our economies, connectivity, electrification and smart systems. What we refer to as our ECES focus, and that has paid off with wins this year in all four of these business pillars. This quarter alone, we ran several new programs and auto connectivity.

In fact, strong execution by our automotive team supported by our exceptional supply chain and logistics teams delivered above market results in both our Q4 and the calendar year, based on the IHS data. In automotive we highly value our long-term customer partnerships, and look forward to deepening these relationships as we enable their technology transformations.

We are also broadening our partnerships with new industrial players because of our leading edge capabilities. One recent example of this was the announcement of our partnership with inceptual supplying their LC autonomous driving controller for trucks scheduled for production by the end of 2021.

You may also recall our collaboration with LIDAR Tech focused on supporting that automotive front LIDAR solution and open sensing platform, as well as our collaboration with EV manufacturer, Neo. The latter resulted in an innovation partner pace award in 2019.

Actually on that note, I also want to offer a big congratulations to the automotive team as they were recently named a finalist for this year’s pace award for not just one, but two product innovations, one in the electrical vehicle space and another in the autonomous driving space.

In our industrial business, we focused on industrial devices on capital equipment, power systems, renewables, and grid edge. We continue to increase our business in these sub segments, but our focus on specific areas has led to wins the new verticals, such as next generation robotics that we are ramping this year.

In our Agility segment you will recall we previously discussed our two pronged strategy for driving productivity and cost discipline as well as wins in key growth markets that long-term secular drivers, such as 5G cloud and increasingly complex consumer durable products where we think FLEX can provide differentiated value to our customers.

The teams have made exceptional progress on all of these goals. And as you can see it in our results, as evidenced in the growth in Lifestyle and CC, as well as the very strong margin improvement from the entire segment, I’m very proud of the Agility teams work here.

So the key takeaway here is that that our strategy of having defined and focused end market segments is working. While our end markets are large we have picked the sub segments, we want to win in and are investing to improve our share in those areas.

Our eyes on the demand environment to which looks positive in both the near-term and the longer term, there are some near-term challenges, but we are experts at navigating uncertainty and we will control the things we can. The teams are all executing very well. And this was another strong quarter showing the potential of our company as we continue down our transformative path.

Now turning to the next slide. I want to cover one more thing before I turn the call over to Paul, last quarter, I mentioned, I would talked more about our ongoing ESG efforts. I want to point out our ESG focus is certainly nothing new for Flex.

We have been at this for nearly 20-years. These years of effort and accomplishments are reflected in our improved performance and our Dow Jones Sustainability Index scores, and being included in the SMP Sustainability Year Book for the second year in a row.

What we have done moving forward is to set out even more ambitious goals across all aspects of ESG for 2030, building on a broad foundation that we have set. In the spirit of consistently raising the bar, Flex was recently accepted into the very rigorous science-based targets initiative. We are excited to join this ambitious global effort to drive meaningful reductions in greenhouse gas emissions across the value chain.

I encourage you all to visit flex.com to see our 2030 environmental, social and governance goals and looks for our new Sustainability Report in June to see the details of our full sustainability efforts and results as well as our upcoming 10-K and proxy statement, for the additional progress and commitments to human capital management, and of course, inclusion and diversity.

With that, I will turn the call over to Paul, who will walk you through our results in more detail, and then I will share some closing remarks. Paul.

Paul Lundstrom

Okay. Thank you, Revathi and good morning, everyone. I’m on Slide 8. Flex revenue was 6.3 billion in the quarter, which was up 14% year-over-year and down 7% sequentially, better than our typical Q3 to Q4 seasonality.

Adjusted operating income was up 50% year-on-year to 310 million, with 110 basis points of margin expansion. Profit growth was bolstered by improved year-over-year volume, better mix and continued productivity gains.

We did have some headwinds in the quarter, namely, the continued cost pressure from COVID-19 as well as some incremental costs associated with ongoing challenges in the supply chain. As a result, our adjusted net income was 248 million with adjusted earnings per share of $0.49. Year-on-year, those were up 73% and 75% respectively.

Reconciling to GAAP. Fourth quarter GAAP net income of 240 million was eight million lower than our adjusted net income due to$ 18 million of stock-based compensation and 13 million in net intangible amortization, partially offset by a net credit in restructuring and other costs.

Restructuring charges were $26 million. However, we had a gain from a facility exit and a favorable adjustment on the tax line, which more than offset restructuring costs in the quarter. Global restructuring costs for the year were 101 million, but again, as I mentioned with some nice offsets from other items.

On Slide 9. Our fourth quarter adjusted gross profit was 505 million, up 113 million year-over-year. Strong discipline in operating performance drove one full percentage point of adjusted gross margin expansion, to a record 8.1% in the quarter.

In total, adjusted SG&A spending came in at 195 million, up 10 million from a year-ago, but at 3.1% of sales, down year-on-year and inside our targeted range of 3% to 3.2%. So, for the quarter, adjusted operating income of 310 million led to a record 4.9% adjusted op margin rate.

Turning to Slide 10, we saw top-line strength in both reliability and Agility in the quarter, with year-on-year growth in both and with a typical, seasonal Q3 to Q4 contraction, better than we anticipated.

Flex reliability revenue was 2.8 billion in the quarter, down 2% sequentially, and up 11% compared to a year-ago. Q4 performance for all three business units within reliability were up. Automotive revenue was up 20% year-on-year with strong execution against the industry’s continued global recovery as well as several new program ramps.

This was the strongest top line quarter in three years for the automotive business and a pleasant surprise given the global parts of shortages the industry continues to struggle with. Credit to the Flex supply chain organization for very solid execution through a difficult period.

Health Solutions revenue was up 25% year-over-year this quarter. Critical Care continues to operate at heightened levels due to persistent COVID challenges. However, we also saw the beginnings of a return to normalcy in areas such as elective procedures. We continue to progress with our ramps in chronic care related products, and the long-term outlook remains strong.

Lastly, industry return to growth this quarter with revenue up low single-digits compared to prior year. Core industrial improvements remained steady and our prior customer specific headwind and power is behind us. Renewable was down on the quarter was difficult year-on-year comps related to ITC Safe Harbor.

Turning to profitability, Flex reliability solutions generated $190 million of adjusted operating profit and a 6.7% adjusted operating margin, which was up 20 basis points year-on-year due to tailwind from continued improvements in productivity and mix, but tempered slightly by new product lamps in Health Solutions.

Moving to Agility, both revenue and profit were up sharply from the prior year with sales growth across all three business units. Segment revenue of 3.4 billion was up 17% year-over-year, and down just 10% quarter-over-quarter. CEC was up 11% year-over-year led by continued strength in cloud infrastructure, 5G rollouts, and enterprise IT spending showing improvement as well.

Lifestyle was up 22% year-over-year with the new business ramps and continued demand strength for high end durable goods with premium brands and audio for care and appliance and markets. Lastly, consumer devices benefited from continued recovery in consumer spending and grew 24% year-over-year albeit on an easier compare.

Turning to profitability, the Agility segment generated $136 million of adjusted operating profit and a 4% adjusted operating margin for the second consecutive quarter. This margin expansion was driven by new business wins at accretive margins, tailwind from productivity programs, and continued cost management from our Agility operating model.

Turning to Slide 11, we wanted to look back on 2021 and share with you some supplemental business unit disclosure. So for the year, total Flex revenue ended flat in-spite of the many challenges. You can also see that our segment mix continues to shift towards our higher margin reliability segment.

Our reliability segment revenue grew around 5% year-on-year, driven by strong growth in Health Solutions, which grew 25% year-on-year to 2.5 billion based on strong critical care demand. Our rapid ventilator project ramps earlier in the year, as well as continued growth in chronic care. Automotive revenue was down 7% year-on-year to 2.5 billion with substantial disruptions from the industry’s production shutdowns in the June quarter of last year.

Lastly, industrial revenue grew 3% year-on-year to 5.6 billion. That industrial number I will add includes about 1.2 billion in revenue for the NEXTracker business at around a 15% EBITDA margin. NEXTracker grew about 2% last year on a tough comp from ITC Safe Harbor. This will be the full extent of our commentary on NEXTracker for now.

For Agility due in part to COVID related impacts in the first half of the fiscal year, our Agility segment revenue declined 4% year-over-year to 13.5 billion, but returned to revenue growth and margin expansion in the second half. For the year, a 25% decline in consumer devices was driven by a combination of strategic disengagements we have discussed before, as well as the COVID impact.

This was partially offset by growth in CEC and Lifestyle. CEC revenue grew 2% year-over-year driven by cloud and infrastructure spending, Lifestyle was up 5% year-over-year due to strong bookings with new customers and continued market strength, driven by work, learn and live from home trends.

Turning to Slide 12, for the quarter adjusted free cash flow of 135 million was up slightly compared to the prior year. All things considered, adjusted free cash flow for the year was strong at 677 million.

If you recall, we spoke before about targeting 80% or greater free cash flow conversion on an adjusted basis. For the 2021 year, we finished at 85% and adjusted free cash flow to GAAP net income was 110%.

So all things considered, I would say, strong conversion and high quality of earnings for the year, particularly given the component shortages we are seeing in the industry. Looking ahead to 2022, although I will say it is a little early to call, we expect adjusted free cash flow on a dollar basis to be roughly in-line with 2021.

Back to Q4, we closed Q4 with inventory of 3.9 billion, which was up 5% sequentially and 3% year-over-year resulting inventory turns of 6.1 times down from 6.8 turns last quarter. But up from five and a half a year-ago, we continue to see component shortages in the supply chain.

And although it was manageable in Q4, we do expect continued working capital pressure over at least the next couple of quarters. Our net CapEx for the quarter totaled 31 million, which was light in the quarter due to cash inflow from a building sale as part of a facility exit. Proceeds from that sale were about $60 million and drove the gain I mentioned just a couple minutes ago.

For the year CapEx was lower than usual driven by some delays created by COVID-19 and also the natural ebb and flow of large projects. But looking forward to our fiscal year 2022, we have a number of high priority investments lined up for the business and do expect to grow CapEx this upcoming year.

CapEx of roughly 2% of sales is a reasonable expectation. And as we have said before, we remain committed to responsibly invest in our strategic growth plans by increasing our technology and capabilities in the higher value end markets as Revathi as outlined.

One last comment on cash, share repurchase remains important consideration in our capital allocation strategy, and we did step up our buyback program in the back half of the year. Our spending was 146 million in the quarter, which bought back 8.1 million shares.

Onto guidance, on Slide 13. We see two notable potential headwinds moving forward, namely, component shortages and persistent waves of COVID-19. That said, all our fundamental demand indicators remained strong. So, we will continue to monitor the risks and adjust as necessary, as you have seen us do before.

Starting with Flex Agility Solutions, we expect fiscal Q1 to be up low to high teens year-over-year on continued improvements, but also against an easier comp. Lifestyle is expected to grow 30% to 40% year-over-year in Q1. CEC should be up low to mid single-digits year-over-year for the quarter, with continued cloud and 5G demand, along with improved enterprise IT spending.

Lastly, Consumer Devices is expected to be up 25% to 35% year-over-year in Q1 on easy compare. We expect Consumer Devices to be one of those end markets, most sensitive to industry component constraints.

Turning to our Flex Reliability Solutions segment, we expect revenue to be up 15% to 25% year-over-year. First quarter automotive revenue will nearly double year-over-year as this comps against last year’s global auto production shutdowns.

Health Solutions will be flat to up mid single-digits year-over-year against a very difficult comp, reflecting continued strong demand. Lastly, our industrial business will be up mid to high single-digits year-over-year from steady improvements, and an easier compare.

Onto Slide 14. Overall, we expect Flex Q1 revenue to be in the range of 5.9 billion to 6.3 billion. Our adjusted operating income is expected to be in a range of 240 million to 280 million, interest in other should be roughly 40 million, and we expect our tax rate in a quarter to remain at the higher end of our 10% to 15% guidance range.

Adjusted EPS guidance is in the range of $0.34 to $0.40 per share, based on weighted-average shares outstanding of about 507 million. Our adjusted EPS guidance, excludes the impact of stock-based compensation expense and net intangible amortization. As a result, we expect GAAP earnings per share in a range of $0.26 to $0.32 per share.

With that, let me turn it back over to Revathi.

Revathi Advaithi

Thank you, Paul. So now turning to Slide 15. We would like to give some guidance for fiscal 2022. Please know, we are doing this with some uncertainty in the market due to component constraints and some countries still battling COVID. Based our current visibility, we believe these uncertainties are baked into our guidance.

Our fiscal 2022 revenue will be somewhere between 25 billion and 26 billion at around a 4.4% to 4.6% adjusted operating margin and full-year adjusted EPS will be in the [$1.60 to $1.75] (Ph) per share. The GAAP EPS in a range of [$1.30 to $1.45] (Ph) per share.

At our Investor Day just a year-ago, we gave our long-term financial framework also on this Slide. Even with COVID and the portfolio shifts we are making, we believe our performance this year and our guidance keeps us on track to reiterate our targets.

Of course, these targets assume no further investments using our strong balance sheet, beyond what we were planning at that time. So, summarizing all this and the last Slide, I have to say, I’m proud that we have validated and executed our strategy.

Well, in a difficult year, our results clearly demonstrate the path we are taking is correct. We will continue to execute with discipline, invest to maximize value and deliver profitable growth. So, on behalf of the entire leadership team, I want to thank our customers for your trust and partnership, and our shareholders for your continued support.

With that, we will start our Q&A.

Question-and-Answer Session

[Operator instructions] Your first question comes from Shannon Cross with Cross Research. Your line is open.

Q - Shannon Cross

Thank you very much. I had a question on IT spend just the hospice BTW call. And in talking to some of the other OEMs It seems as if datacenter should start to improve in second half and obviously, you have got some 5G benefit in there as well. How are you thinking about where we are enterprises are at and the opportunity for spend?

And then my second question is, with regard to stimulus, how should we think about the opportunity for stimulus to run through your model as we look to 2022 and beyond given all of the dollars that that will be out there fairly soon? Thank you.

Paul Lundstrom

Yes, sure. So thanks, Shannon. And I think, good morning. So, first on our enterprise spending, as yours point out, CEC was up 11% in the quarter, so that was nice to see. I will say that a large portion of that growth came more from the comps side and from cloud.

Enterprise spending was up, which is great, but up mid single digit, you kind of look at it - I would kind of joke the quarterback about, CFOs not wanting to spend a whole lot on enterprise with everybody still working from home. But I guess our more macro view would be that we will pick up as we move forward over the next several quarters.

And so I would say I’m bullish on the space, I will be at maybe only seeing, green shoots now at that, that mid single digit up, as I just mentioned. In terms of stimulus spending, look, the rising tide lifts all boats, and we are certainly hopeful that we will see some of that, but I don’t see a direct correlation at this point in time.

Shannon Cross

Okay thank you.

Operator

Your next question comes from Paul Coster with JPMorgan Chase. Your line is open.

Paul Coster

Yes, thank you for taking my question. I think people are curious as to the kind of role you believe you will play in the auto vertical moving forward, Revathi. Is it that you will sort of be a subcomponent an EMF company to the to the sort of, deep inside the supply chain, or do you actually expect to be an OEM as a direct OEM supplier moving forward?

Revathi Advaithi

Yes, thanks, Paul. The weird answer that if you think about our auto business, even today, Paul, I would say a part of our auto business does kind of pure contract manufacturing a part of our auto business does join design and manufacturing, which is a pretty important part of our offering. And then part of our auto business does our own design as you can, as you hear from the pace awards that we are winning, and last year and this year.

So, I would say we already quite a mix in terms of the automotive business itself, and how I see there is change going on in the auto space, as you are all aware in terms of all the tiers of manufacturing with increased electronics content, both in electric vehicles and autonomous, it gives us the opportunity to play a more significant role in our own designs and join design.

And so we think that we will continue to move up the value chain in the auto sector, particularly ramping up our presence in the EV space. We already have a very strong presence in the autonomous space, and we will do that by being more of a component player, to the automakers directly. But we will continue to support them in any EMS projects that we already do. So it will be a mix, but it will be trending towards more of a EV, autonomous, more our own product technology focus.

Paul Coster

Great and if you were to sort of look at the pipeline opportunity there, is it really with traditional OEMs or with the new you know, there is been a proliferation of new logos recently?

Revathi Advaithi

Well, it is definitely with both Paul because it is hard to, you know, be in the auto space and not do what some of the newer players that you are hearing and seeing, we just recently also announced a win with one of the newer players.

So you have definitely seen a mix of both. You know, one of our Pace award winners, our nominees this year is for a project that we are doing in China with more of a newer automotive player. So it is a mix. We think it is important to participate in the traditional and in the new space.

Paul Coster

Thank you so much.

Revathi Advaithi

Thanks, Paul.

Operator

Your next question comes from Steven Fox with Fox Advisors. Your line is open.

Steven Fox

Thanks. Good morning. And thanks for all the color with the guidance. Two questions if I could. First of all, just big picture Revathi, you and Paul both used the words quality of earnings a couple of times during your prepared remarks. And obviously there is things you can point to for this year, as you think about maybe improving quality of earnings next year, what would sort of be the input focus there and what would, what would you say we would look at as key metrics to saying that there is a higher quality of earnings in fiscal 2022 and maybe I will stop there and then I will ask my follow-up.

Paul Lundstrom

Maybe I will take a stab at that one and maybe just a broad, broad indictment on the industry over the last decade. And I think you know, people would sort of talked about, you know, EBBS as earnings before bad stuff.

And I don’t love all the adjustments that I think the industry is sort of, you know, tossed into the P&L and you know the economic reality is whether it is non-GAAP earnings or GAAP earnings, eventually all those adjustments ripple through cash. And, you know, it has an economic effect on the company.

And so we are going to push really hard to be extremely sensitive to that. And print, you know, high quality earnings quarter after quarter after quarter. And, you know, you saw it over the last couple of quarters with restructuring costs, you know, fortunately offset by some one-time gains.

Maybe a comment on, on the restructuring outlook, you heard us give guidance here for 2022. We didn’t make any comments on restructuring. You know, what we are non-GAAPing out is stock comp and intangibles.

Our hope would be that as restructuring projects arise, perhaps there is you know, one time offsets. So it doesn’t sort of muddy the waters so much, that said, we are going to continue to focus on this multi-year margin expansion journey that we are on here. And that includes some investments in restructuring. So as you talked about, as the opportunities arise for high return restructuring, we are certainly not going to hesitate.

Steven Fox

Great. And then just as a follow-up, can you sort of talk to the Q1 guidance, it is flat to down, off of what was a very big beat in the Q4 and pretty broad set of good demand drivers. Why wouldn’t it be growing quarter-over-quarter? Thanks.

Paul Lundstrom

Yes. So sequentially, we are off a little bit, as you pointed out. I would say Q4 was particularly strong. I think you had some pent-up demand in there and really, really strong Q4. And one of the benefits that we saw in Q4 was favorable mix.

You saw that, you certainly saw that, within the Agility segment, excuse me, with some really nice mix within that business unit and strong, strong margin growth. As we moved from Q4 to Q1, look, there is, mix is kind of going to go the other way. And I would say the combination of some adverse mix just as you look at the mid-point of our guidance, Steven.

The Reliability businesses down about 5% and Agility businesses flattish. And so, that gives us a little bit of mix headwind. I will also say, we do have some headwinds, profit headwinds moving from Q4 to Q1 from all the challenges that we are seeing in the supply chain.

Component shortages are requiring us to spend incremental dollars that ripple through profit unfortunately for things like expediting fees and freight logistics costs and all the inefficiencies that stops and starts. So, we are seeing a little bit of additional cost pressure as we move into Q1 versus Q4 quarter.

Revathi Advaithi

That is most important takeaway there, Stephen is that, seasonality always drive kind of a 1% down for us quarter-over-quarter, right. And I think it is a prudent outlook, based on just including shortages and managing COVID in certain countries. But, year-over-year is still a very, very strong performance, even though it is on easier comps. We think that, it is an outlook on seasonality and shortages into account for the guidance.

Paul Lundstrom

Great. That is all very helpful. Thank you.

Operator

Your next question comes from Ruplu Bhattacharya with Bank of America. Your mind is open.

Ruplu Bhattacharya

I have got two questions as well. Just to follow up on the prior question on margins. So, I mean, between the third quarter and the fourth quarter, you had a revenue headwind of about $450 million sequentially. And yet you had very strong performance. Paul, is the 60 bips sequential of margin declined in fiscal 1Q was that related all to mix. And I look at the flu year, I think you are guiding 4.5% operating margin for the flood year fiscal 2022. Should we then think of fiscal 1Q as a tough operating margin and then sequential improvements for the rest of the year?

Paul Lundstrom

Yes, sure. I appreciate the question, Ruplu. So first on Q4. Q4 very strong quarter, I think everything was firing on all cylinders here in the fourth quarter. Mix was a benefit. I think we really put the squeeze on spending to make sure we had a strong finish to the year, and we got that benefit.

I guess my comment on Q1 would be, we certainly have mix headwind going from Q4 to Q1, as I had mentioned to Steven. We do have some incremental costs associated with pressure from component shortages, some of the things that, I would mentioned before freight and logistics, inefficiencies from turning lines on and turning lines off, all that sort of ripples into the P&L and gives us some pressure.

What I will say on Q1 is, at the midpoint of our guidance, we are at 4.3% margins, which would be the strongest Q1 in the history of the company. So, we are quite pleased with the outlook. In terms of the remainder of the year, you are right at the midpoint of our full-year guidance, our profit would be, 4.5% or so and I think, Revathi had said, we are doing our best to be prudent, there is still a lot of global uncertainty, COVID is popping up, unfortunately, all over the place in important countries like India, we are where we have operations.

And so there is the potential for disruption there. And we are certainly not out of the woods when it comes to these component shortages. And although I think a lot of it is timing, we do have some pressure that we just have to we have to watch.

Revathi Advaithi

And Ruplu the way to think about this was six very distinct and segments is that, I think sequential change does change significantly with mix, right, because each segment behaves differently in terms of a quarter-over-quarter shifts. So, I think, like Paul said, mix shifts do play into that. But again, it is a strong guide, it will be, record margins for us, for Q1. And then, of course, some prudent thinking in terms of shortages and managing that type of cost pressures associated with it.

Ruplu Bhattacharya

Okay, thanks for all the details on that. And then Revathi maybe as a follow up to what you just said about the six segments. What are your thoughts about investments in fiscal 2022 in those segments. If I look at the numbers you gave for NEXTracker, it looks like the business in the industrial segment - next record is actually going growing faster at about 3.2% from last year. So I mean, but you also have other in the Agility segment, you have had Lifestyles, which grew 4.5%. So, just your thoughts on that business mix between Agility and Reliability for fiscal 2022. Any preferences for which segment you want to invest in? Thank you.

Revathi Advaithi

Yes, Ruplu, I will just start by saying that, we want to, and I have said this before, in prior conversations, as well, we want every segment, because their end markets are pretty large is defined the right mix of customers within that segment, which drives continued year-over-year and long-term improvement in their performance. That is how we want to think about every individual segment within our business. So, we want each segment to hold their own in terms of their performance.

In terms of investments. We are super proud of how the Agility team has executed change their mix and delivered in execution with our new Agility model and proven profitability for that business. Our large CapEx investments, and any new M&A that we do is being considered more in the Reliability segment, because that is the nature of the business.

If you think about core industrial and the power side, we expect to add investments there. Automotive definitely with our focus on improving our content on electric vehicle, more product R&D investments, CapEx investments, and any new M&A investments will be there.

And also on Health Solutions, right very robust growth, a lot of large program and we are continuing to look to add new investment to that space. So, that is how we expect our investment profiles to be more headed towards the reliability side, but with strong support to grow Agility and improve their overall margin performance.

Ruplu Bhattacharya

Thanks for all the details.

Operator

Your next question comes from Jim Suva with Citigroup Investments. Your line is open.

James Suva

Thank you very much. And great results and outlook. My question is more on the full-year outlook. We are in a world of COVID, we are in a world of semiconductor shortages and increased shipping costs and uncertainty, and it sounds like you prudently put them into your outlook. But the bigger question I have is what is the kind of real catalyst or rationale or reason you want to give a full-year outlook when some companies aren’t even giving one quarter outlook is that you have got the commitments or the visibility, or you think consensus is miss-modeling the improvements. I’m just kind of curious about why you, give a full-year outlook.

Revathi Advaithi

Yes. Jim, first thanks for your comments on performance and outlook. I’d say in terms of why we are giving outlook. I have been at this only for two years. First year was all about kind of, you know, all the trade issues with China, even then we kind of gave an EPS range as an outlook. Last year, you know, we didn’t because of COVID.

We think that it is important to give an indication of how we see the year. And we think it is the practice for businesses to, good businesses to be able to do that. So we want to benchmark ourselves to the best of the best in the industry. And that drives, you know, some of the prudent outlook. But we think that it is a range that we can defend and hold.

And, so while COVID is still out there while component shortages is still out there, we think that you know, we have enough visibility to take those into account as we provide the outlook. So, and Jim, as you know, it is been a mixed bag in terms of people who are giving an outlook and people who aren’t. So we wanted to lean towards providing some outlook to our full-year performance. And we think we have enough visibility on this.

James Suva

And then my quick follow-up is on the outlook, the four quarters as we progress anything that we should be mindful of that deviates from typical normal seasonality. Cause it seems like it is been a while since we have been in a world of normalcy.

Paul Lundstrom

Yes. I think the biggest thing is just where we are going to be lapping some very unusual comps here in Q1, as you guys are all well aware, you know, we will still have some unusual comps going into Q2. And as you look ahead to Q3, Q4, it does normalize, you know.

Perhaps you have a little bit of back half pent up demand impact in that I think Q3 and Q4 of 2021 were particularly strong and you know comps tend to get a little bit harder, but we are expecting things to normalize and you know, Jim, frankly we are pretty upbeat.

Revathi Advaithi

So I would say nothing unusual it has turned to normal comps.

James Suva

Thank you and congratulations to you and your full teams.

Operator

Your next question comes from Matt Sheerin with Stifel, your line is open.

Matthew Sheerin

Yes. Thank you. Good morning. First question just regarding the strengths that you have been talking about in the cloud segment of the business for the last two or three quarters. Could you talk about the growth rates specifically, in customer concentration, we are seeing your peers also talk about the strength there. So just broadly speaking, are you seeing some market share shifts from the traditional ODMs in Asia for instance. And is there anything that you bring to the party that gives you an edge in terms of continued market share gains?

Revathi Advaithi

Yes. What I would say in terms of you know, overall growth in cloud, it is a large enough space Matt that is important to be focused on the customers that we think we can provide value to and actually grow and grow profitably.

I think that is really important in the cloud space. So our look as not to win from ODMs coming from Asia, I don’t think that is a place where they want to compete in. We are really focused on winning with a few key customers where we think that the margin and balance sheet supports the kind of hurdle rates we are looking for, and that is the most important thing.

And then of course in cloud in general, all the right trends are there, right. A lot of uses data center growth, all of that supports the demand and the growth we are seeing. But it is a large space. We believe that, we have to pick where we want to win and that is what we are driving to. So, we have new customer wins, but we are very focused on a sub-segment of that overall market.

Matthew Sheerin

Okay. Thank you for that. And Paul, a question regarding your free cash flow projections for next year, which is basically flattish, which seems fairly impressive given the fact that, you have got pretty strong revenue growth and you were saying that, the working capital requirements also go up here given the supply constraints that we are seeing. So, could you walk us through that?

Paul Lundstrom

Sure. So, I appreciate the compliment by the way. We are going to have to scratch and claw to make that happen. But, what I said was, cash flow on a dollar basis essentially in-line with 2021. And so, if you just do the math, at the mid-point of our guidance here for 2022 that would put us at about 80% conversion.

And to your point, Matt, the pressure we are seeing in supply chain right now is, it is certainly there. I have kind of talked about some of the P&L headwind we are going to have. What I didn’t quantify for everyone was the working capital impact that we will likely see in at least Q1 and Q2 from an inventory standpoint.

And the challenge for us right now is that, we are required to carry some buffer stock, some of that contractual, some of it not. And certainly for things like the automotive industry, where you really don’t want to be the bad guy shutting down a line, you need to make sure that, that you can deliver on time when they need hardware.

And so, the challenge for us is that, that has put a little bit pressure on, on working capital. And look, we stand by the 680 or so that we telegraph for 2022, and we are going to scratch and quad to make that happen.

Revathi Advaithi

And Matt, I would just pointed to our balance sheet is in the strongest position ever, have a fantastic cash balance. We will have inventory pressure. I think that will be our big focus that we will continue to watch through the year. But we think that we have-to-have a right blend of carrying the inventory and delivering to our customers, but also delivering our overall free cash flow. So I think we got a good mix of things to work on there.

Matthew Sheerin

Thank you for that. Are you seeing customers, are you asking customers kind of deposits against for that inventory?

Paul Lundstrom

Oh, absolutely. Absolutely. To the extent we can minimize our cash flow impact with advances or prepay, heck yes. Unfortunately not everyone is willing to write checks. So, we take it where we can get it. But unfortunately, it is not a one-for-one.

Revathi Advaithi

Nut Matt this is like everything else we talked about, but it is in the pandemic or managing shortages. You know our focuses on doing everything with discipline, right. Even the shortage situation, how we bring in inventory, who pays for it, all of that is managed with very good discipline, coordinated by thousands of employees across the world. And so, based on that, we think that, our cash flow guidance is still holds, but lots of things to work on.

Matthew Sheerin

Okay, great. Thanks so much.

Operator

The next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Mark Delaney

Yes. Thank you very much for taking the questions. A number of companies are talking about trying to be agile in doing procurement, given how tight the global supply chain is. And I’m curious if Flex, perhaps been able to take any market share because of that, you are given all of the expertise and focus on managing through some of these difficulties, either in the short-term, were able to maybe take some market share or perhaps at least get some new engagement underway that could lead to market share a longer term?

Revathi Advaithi

Yes, Mark. Absolutely. And I’m in a lot of calls with, CEO, customers, our teams are doing a lot our supply chain teams in terms of not only providing second source re-qualifying sources or finding inventory in the system.

So, you can just see that from our performance, right to see our Q4 performance, compared to kind of most people in the industry. And we have navigated the shortage situation extremely well, both on revenue and in terms of margin.

So, I would say, in words, is getting kudos all over for our supply chain effort, and being able to really kind of move every stone and in keeping our customers running the best we can under the situation.

And then, I would say kind of moving forward, as inventory dries up in the system in those things become harder, which is part of what we are saying about moving forward, but absolutely agile, I would say lots of customers and suppliers would say that flex is just shown world class, procurement supply chain capability and navigating this.

Mark Delaney

That is very helpful. Thank you. And my second question was related to margins and being disciplined on pricing and getting paid for value. That has been a big focus of this management team. And clearly, we are seeing that in the results. Recognize you are going to systems tremendous cost pressure with the supply chain environment, you are dealing with around components and shipping. I’m wondering if there is any areas where perhaps pricing is abnormally strong. I don’t know if it is potentially, Flex would be able to get unusually high pricing. Maybe given how tight supply chains are for physical goods more, more holistically and do we need to be thoughtful about this margin improvement we have been seen moderated a bit at some point in the future of this global supply, demand starts to ease? Thanks.

Revathi Advaithi

I would say now at the end of the day mark, in all these kind of pricing pressures, or kind of you know changing cost pressures in the value chain, it all ends up being like, who ends up paying for this right.

And there is been enough conversation on this, to know that you have to be able to pass on these prices, you have to be disciplined about that. And so those are important rights. And I would say we are navigating that really, really well.

And I think it is important to think about, like just the Flex Core margin, even weights, factory shutdowns, and do the shortages or do the COVID outbreaks and all that, we expect that the Core Flex operating margins, for the year will still have a four handle and so.

So continued margin improvement, even with these changes, but then you have to add to that, that we expect that our productivity efficiency continues to improve also through the upcoming year and the future. So, we have a pretty strong pipeline, how far we continue to keep our margin rates up and keep that moving in the right direction. We are bullish about that.

Mark Delaney

Thank you.

Operator

Your last question comes from Christian Schwab with Craig-Hallum Capital. Your line is open.

Christian Schwab

Thanks for squeezing me in, I just had one more question just on your ability to give guidance for the year given all the challenges that everybody is aware of that is going on in the world. Is this, should we be thinking about this as kind of a proof point of management’s plan. You know, a couple of years ago to become a preferred supply chain partner and prune the portfolio of highly volatile businesses and focus the programs on more predictable, more important products to the end customer, and that’s kind of leading to backlog and pipeline of work that gives you such a high conviction level to go out that far. Is that fair or am I thinking about that wrong?

Revathi Advaithi

No, Christian, I think it is totally fair. You know, you are, you have definitely summarized all our key points really well in terms of how we are thinking about it. Our view is that we have good visibility for our end segments.

We are reducing the volatility within these segments, and we also believe that it is important that good businesses, you know, give guidance. And so, you know, putting all that together, we feel more and more comfortable in providing a longer term outlook.

That being said, you will see our guidance is prudent, you know and so it does bring into question things like shortages and things like that, right. So our pipeline is extremely strong. We are not seeing any cancellations or anything like that. We see demand signals are pretty strong.

We have a lot of new program ramps going on with kind of regionalization. So we think that it is the right thing to do in terms of how we signal about the strength of our business. And we feel we have the visibility to do it, and you summarized it very elegantly.

Christian Schwab

Great. I don’t have any other questions. Congrats on a great quarter and a very good outlook.

Revathi Advaithi

Great. Thanks Christian.

Operator

I would now like to turn the call back over to Revathi Advaithi for closing remarks.

Revathi Advaithi

Yes. Thank you all for joining us. So I’m super excited and confident about the future for FLEX. And then of course I wish all of you remain safe and good health, and w will speak to you in the next quarter. Thank you.

Operator

This concludes today’s conference call. You may now disconnect. Good bye.