Flex Q2 FY2027: sales up 25% to $8.49B; $110M of spin-off and deal costs held GAAP EPS to $0.70

Flex builds products for other companies (networking gear, medical devices, car electronics) and increasingly designs and sells its own power and cooling equipment for data centers. In its second quarter of fiscal 2027 (the three months to September 25, 2026), net sales rose 25% to $8.49 billion, from $6.80 billion a year earlier. GAAP net income rose 32% to $263 million, and diluted earnings per share (EPS) rose 35% to $0.70. Flex's own adjusted EPS, which leaves out several costs listed below, rose 49% to a record $1.18. The biggest item between those two EPS figures was $110 million of "legal and other" costs, mostly for the planned spin-off of its data-center unit. Management raised its full-year outlook for the second quarter in a row.

This analysis is written from the earnings release (8-K Exhibit 99.1, filed October 28, 2026). The full 10-Q is not filed yet, so the release has no segment sales or margins and no management commentary on what drove each business. Those will come with the 10-Q.

Key metrics (quarter ended September 25, 2026)

Gross margin is sales minus the direct cost of making the products (here including restructuring charges booked in cost of sales), divided by sales. Free cash flow is operating cash flow minus spending on plants and equipment. For the first half, sales rose 22.7% to $16.42 billion, GAAP EPS rose to $1.47 from $1.03, and adjusted EPS rose to $2.18 from $1.51.

Where the extra profit came from

Gross profit rose 32% to $812 million on 25% more sales, so each dollar of sales kept a little more: gross margin rose from 9.0% to 9.6%. That is the operating improvement in the quarter. Selling, general and administrative expenses (SG&A, the overhead of running the company) rose much faster, by 43% to $371 million. The release does not split SG&A, but it does say Flex spent about $91 million in the quarter on the planned spin-off and $19 million on acquisition costs. Together those two items roughly match the $111 million rise in SG&A, if they sit mostly in SG&A as the first-quarter spin-off costs did. Amortization of acquired intangible assets (customer contracts, technology and the like, written down over time) also rose to $27 million from $16 million, mostly because of the acquisitions.

Below operating income, two things worked against shareholders. Interest expense rose 33% to $69 million, as long-term debt grew to $5.21 billion from $3.75 billion at March 31 to pay for acquisitions. And the effective tax rate (tax as a share of pretax profit) rose to 28.9% from 24.0%. At last year's rate, net income would have been about $281 million, or roughly $0.75 a share.

Without segment figures we cannot say how much of the growth came from Cloud and Power Infrastructure (CPI), the data-center power and cooling unit to be spun off, versus the two older businesses. The full-year guidance table gives one clue. Flex now expects CPI sales to grow 75–85% this fiscal year and its adjusted operating margin to be 11.5–11.7%, against 8–11% growth and a 5.9–6.1% margin for the rest of the company (Regulated Manufacturing Solutions plus Integrated Technology Solutions).

Takeaway: Flex's business earned more this quarter than GAAP shows. Pretax profit before restructuring, spin-off and deal costs, and small one-off items rose about 50%, while GAAP pretax profit rose 41% and GAAP EPS 35%. But the adjusted EPS of $1.18 also leaves out $43 million of stock-based pay and $27 million of amortization, which recur every quarter. The realistic picture of the business sits between the $0.70 and the $1.18. The guidance raise points to the data-center unit as the main driver.

What the headline numbers hide

• The spin-off is getting more expensive. "Legal and other" costs were $110 million this quarter versus $9 million a year ago: about $91 million for the CPI spin-off and $19 million of acquisition costs. Spin-off costs were $53 million in the first quarter, so they are rising, not tapering. Free cash flow took a $61 million hit from separation costs in the quarter. These costs are one-off in the sense that they stop after the separation, but they will continue until then.
• GAAP vs adjusted. Adjusted operating income ($607 million) adds back intangible amortization ($27 million), stock-based compensation ($43 million), restructuring ($13 million) and legal and other ($110 million) to GAAP operating income ($414 million). The first two are normal, recurring costs of running a company that buys businesses and pays staff partly in shares. Adjusted EPS is a generous measure for that reason.
• One-offs in the year-ago quarter. Last year's second quarter carried $51 million of restructuring and impairment charges, including $41 million after the August 2025 missile strike on Flex's plant in Mukachevo, Ukraine, plus $8 million of losses on a venture fund. Those make the year-ago base lower and this year's GAAP growth look higher. This year's spin-off costs are larger than last year's one-offs, so on balance GAAP still understates growth.
• Cash conversion is fine for the quarter, weaker for the half. Operating cash flow of $501 million was 1.9 times net income. For the first half it was $777 million, down from $852 million, because working capital (inventory and receivables minus what Flex owes suppliers) absorbed $67 million versus releasing $163 million a year ago. Capital spending nearly doubled to $477 million for the half, so free cash flow fell to $302 million from $573 million.
• The balance sheet is growing faster than sales. Since March 31, inventory rose 25% to $7.32 billion, receivables 23% to $5.78 billion and contract assets 36% to $1.44 billion. Some of that is acquired, which the release does not separate. Accounts payable (money owed to suppliers) rose 21% to $9.71 billion, covering much of it.
• Buybacks did little of the EPS work. Flex repurchased no shares in the first half, against $544 million in the same half last year. The diluted share count was 1.6% lower than a year ago because of last year's buybacks, which explains only about 2 points of the 35% EPS growth. Third-quarter guidance assumes about 375 million shares.
• A small one-off gain in the half. Flex booked $48 million of gains from selling a subsidiary in the first half ($2 million of it this quarter), which helped first-half GAAP EPS but barely touched the second quarter.

On balance the quarter is understated: spin-off and acquisition costs of $110 million and a higher tax rate pulled GAAP EPS growth (+35%) below the roughly 50% rise in pretax profit before those items.

Did last time's read hold up?

Our fiscal 2026 report said to watch three things: whether CPI's margin recovers toward 10%, how much the EPP and EPC Power deals add to debt and share count, and how large spin-off costs become. On margin, the release has no quarterly segment data, but management now guides CPI to an 11.5–11.7% adjusted operating margin for the year, above the 9.2% segment margin of fiscal 2026 (the two measures are not defined identically). On debt, long-term debt is up $1.46 billion since March and that is before the larger EPC Power deal (closed after quarter-end, per the guidance footnote) reaches the balance sheet. On spin-off costs, the answer is "larger": $144 million in the first half, against $53 million of total "legal and other" costs in all of fiscal 2026.

Outlook

Management's guidance for the third quarter of fiscal 2027 (to December 2026): net sales of $8.87–9.17 billion (28% growth at the midpoint), adjusted operating income of $685–715 million, and adjusted EPS of $1.19–1.25 (40% growth at the midpoint), with about $120 million of interest and other costs, a 21% adjusted tax rate and about 375 million shares.

For the full fiscal year, guidance was raised to sales of $34.9–35.9 billion (from $33.7–35.2 billion), an adjusted operating margin of 7.6–7.8% (from 7.0–7.2%), and adjusted EPS of $4.84–5.16 (from $4.42–4.74). This includes acquisitions closed after September 25 and assumes no spin-off during the year.

Our read: the midpoints imply a heavy fourth quarter. Full-year sales of $35.4 billion, minus $16.42 billion in the first half and $9.02 billion at the third-quarter midpoint, leaves about $10.0 billion for the fourth quarter. The same arithmetic on adjusted EPS leaves about $1.60, against $1.18 this quarter. Much of that step-up depends on EPC Power contributing in its first full quarter and on data-center demand holding. Guided "interest and other" costs of about $120 million for the third quarter, against about $50 million this quarter (interest expense minus interest and other income), show how much debt the deals add. The things to watch in the 10-Q and the next release: CPI's actual segment margin, how much of sales growth is acquired versus organic, and whether spin-off costs keep rising ahead of the separation of the unit Flex says will be named Axiom.