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Flextronics International Limited (NASDAQ:FLEX)

F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

January 27, 2010, 5:00 pm ET

Executives

Warren Ligan – SVP, IR & Treasury

Paul Read – CFO

Mike McNamara – CEO

Analysts

William Stein – Credit Suisse

Jim Suva – Citigroup

Sherri Scribner – Deutsche Bank

Amit Daryanani – RBC

Brian White – Ticonderoga Securities

Alex Blanton – Ingalls & Snyder

Lou Miscioscia – Brigantine

Shawn Harrison – Longbow

Alberto Mann – Thomas Weisel Partners

Steven Fox – CLSA

Amitabh Passi – UBS

Frank Jarman – Goldman Sachs

Jake Kemeny – Morgan Stanley

Operator

Good afternoon and welcome to the Flextronics International third quarter fiscal year 2010 earnings call. (Operator instructions) After the speakers' remarks, there will be a question-and-answer session.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Warren Ligan, Flextronics' Senior Vice President, Investor Relations and Treasury. Sir, you may begin.

Warren Ligan

Thank you, operator, and good afternoon, everyone. Welcome to Flextronics' conference call to discuss our results of our fiscal 2010 third quarter ended December 31st, 2009. On the call today is our Chief Executive Officer, Mike McNamara and our Chief Financial Officer, Paul Read.

The presentation that corresponds to our comments today is posted on the Investors section of our website under Calls and Presentations. We will refer to each slide number as we move through the presentation.

During the call today, Paul will first review our financial results and Mike will comment on the business environment and demand trends for our company. Mike will conclude with guidance for the fourth quarter ending March 31st, 2010. And following that, we will take your questions.

Please turn to slide two. This presentation contains forward-looking statements within the meaning of U.S. securities laws, including statements related to revenue and earnings guidance; our expectations about our future operating margins and return on invested capital; expected revenue growth in our market segments; expected improvements in profitability of our components business units; our expectations about the availability of components for our products; the expected changes and savings associated with our restructuring activities; and our expectations regarding end market demand for our products and our business in the current economic environment.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements; are based on our current expectation; and we assume no obligation to update them. Information about these risks are noted in the earnings press release, on slide 13 of this presentation, and in the Risk Factors and MD&A sections of our latest annual and quarterly reports filed with the SEC, as well as in our other SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements.

Throughout this conference call today, we will reference both GAAP and non-GAAP financial measures. Please refer to the schedules to the earnings press release, on slide 5 of the presentation, and the GAAP versus non-GAAP reconciliation in the Investors section of our website, which contain the reconciliation to the most directly comparable GAAP measures.

I will now turn the call over to Paul.

Paul Read

Thanks, Warren, and welcome to our call. Today, we will recap and summarize the financial performance for the third quarter and Mike will provide an overview of our business, highlight important segment and customer trends and provide fourth quarter guidance.

Please turn to slide three. Third quarter revenue was $6.6 billion, which represented a 12% or $724 million sequential increase from $5.8 billion in our September quarter and an increase of more than $350 million above the midpoint of our $6 billion to $6.4 billion guidance range. Adjusted earnings per diluted share was $0.17, which represented a 31% sequential increase from $0.13 in our September quarter and also exceeded the midpoint of our $0.14 to $0.16 guidance range by $0.02.

Adjusted operating profit of $189 million increased 27% sequentially and our adjusted operating margin expanded 30 basis points sequentially to 2.9%. This marks a 200-basis point improvement in our operating margin over the past nine months. Our continued operating margin improvement reflects the improving operational efficiency of the company as a result of our previously announced restructuring activities, together with the growth in all of our business segments.

The adjusted tax expense for the third quarter was $14.2 million, reflected an adjusted tax rate of 9.3%. While the December quarter rate was a bit lower than our guidance range of 10% to 15%, we expect that our adjusted tax rate will remain in this 10% to 15% for the remainder of the fiscal 2010. Finally, our adjusted net income for the third quarter was $138 million, increasing 33% sequentially from $104 million in our second quarter.

Please turn to slide four. Despite having a heavier consumer mix due to seasonality, our adjusted gross margin expansion continued during the December quarter with adjusted gross margin rising 10 basis points sequentially. We have improved our gross margin for three straight quarters due to increasing revenues and the significant improvements in our cost structure, driven by our almost restructuring activity.

Our components businesses remained below normalized profitability levels during the December quarter. We continue to focus management efforts on improving our components businesses and we are confident about their margin improvement. Adjusted SG&A expense, which includes R&D costs, totaled $170 million in the quarter. We have reduced our quarterly adjusted SG&A spend by 20% or $42 million on a year-over-year basis. As a percentage of revenue, adjusted SG&A was reduced to 2.6% and our operating expenses remain under strict control.

The combined effects of our adjusted gross margin expansion and adjusted SG&A expense management lead to a sequential improvement of 30 basis points in adjusted operating margin, which is tracking to our targeted near-term operating level expectation.

On a year-over-year basis, despite revenues being 20% lower, our adjusted earnings per share has increased 6%, reflecting the improved efficiency of our business model. We expect that our strong operational cost control, improving contribution from our verticals, and leverage and increased volumes will provide further opportunities to continue to drive margin expansion and increased earnings into fiscal 2011.

Please turn to slide five. During the quarter, we recognized $9.8 million of restructuring charges. To date, we have recognized $238 million of the expected $250 million in restructuring charges. We do not see any significant changes to our original plans and expect to recognize the remaining charges next quarter. We are now realizing annual savings in the $230 million to $260 million range that we have originally projected.

In November 2009, we reached a settlement agreement with Nortel, primarily related to pre-bankruptcy petition claim. As a result, we revised our estimates related to the recovery of Nortel claim, which resulted in a $2.3 million reduction to the original charge. These P&L adjustments did not impact our pro forma results for the quarter. We are satisfied with the settlement outcome and believe no further material risk exist relating to our Nortel exposure.

Lastly, the company recognized after-tax intangible amortization and stock-based compensation of approximately $20 million and $14 million respectively compared to $21 million and $13 million respectively in the prior quarter. After reflecting these items, GAAP net income was $92.9 million compared to the GAAP net income of $19.7 million in the prior quarter. GAAP EPS for the December quarter was $0.11 compared to $0.02 in the prior quarter.

Please turn to slide six. Flextronics' industry-leading working capital management took another positive step forward with a further improvement in the cash conversion cycle to 11 days, a four-day sequential reduction and an eight-day decline over the past two quarters. We have worked very hard to continue to reduce our cash conversion cycle and by getting it down to 11 days this quarter; we have reached one of the lowest levels in our company's history. Notably, we cut our cash conversion cycle in half since acquiring Solectron and its higher mix program.

The main catalyst in our four-day improvement in our cash conversion cycle was our inventory management. We improved our inventory days to 40, decreasing them sequentially by four days as inventory rose only 3% or less than $100 million despite sales growing $724 million or $12 quarter-over-quarter. Our inventory turns increased to 9.1 turns, which is our highest level since December 2005. This tightening of our inventory management has helped fuel our cash generation over the last several quarters.

Flextronics' asset management continues to improve and coupled with our improving margins, has driven big improvements in our return on invested capital. For the quarter, ROIC improved another 790 basis points sequentially to 30.1%. It's worth noting that our ROIC has more than doubled over the past two quarters and currently tracks well in excess of our cost of capital.

Please turn to slide seven. Flextronics generated $331 million in cash flow from operations during the quarter, marking the sixth consecutive quarter the company has generated positive operating cash flow. Our cash flow from operations also reflects the absorption of approximately $24 million of cash restructuring related payment. This generated around $750 million in cash from operations over the past three quarters.

Net capital expenditures for the quarter were $40 million and total depreciation and amortization amounted to $117 million. Our modest capital spending during the quarter combined with strong operating cash generation resulted in $291 million of free cash flow generation in the quarter. Our industry-leading working capital management combined with our stringent focus on capital expenditures and other discretionary spend has resulted in the generation of over $600 million of free cash flow for the past three quarters.

As reflected in the $7 million of cash payments required – recorded during the quarter, we made a couple of small niche acquisitions. The first was SloMedical, which closed on December 15th and helped bolster our European disposable medical capabilities and customer base. We also made a small automotive acquisition during the quarter that will expand Flextronics' emission-friendly and fuel-reduction [ph] products which are used in traditional hybrid and electric car vehicles and also enhanced our automotive ODM offering.

Please turn to slide eight. We ended the quarter with a record $2.2 billion in cash, up $275 million versus the prior quarter. Total debt remained stable at $2.6 billion at quarter-end. Since our deleveraging assets began in 2008, we have reduced the consolidated debt level of the company by 30% or $1.1 billion. Also during the quarter, we were very pleased that Moody's raised our outlook to stable from negative and also reaffirmed our Ba1.

Net debt, which is total debt less total cash, also reached one of the lowest levels in the company's history at $309 million for the quarter, down meaningfully from $587 million in the prior quarter. Our net debt has decreased by approximately $1 billion from one year ago. Our ability to generate cash and delever our balance sheet during difficult economic times, while also increasing our cash balance is very important. We also closed the period with no borrowings under our $2 billion revolving credit facility.

The graph at the bottom of this slide shows our significant debt maturity by calendar year. The $240 million, 1% convertible notes will mature in August 2010. No additional significant balances of debt are due until calendar year 2012. Based on our existing cash balances along with our anticipated positive cash flow from operations and the additional liquidity available under our revolving credit facility, we remain very comfortable that we have sufficient liquidity to meet our projected needs.

Overall, I feel that this was a strong quarter with numerous positives to build further on. In particular, I'm pleased with our revenue growth, margin expansion, and cash generation.

Thank you, ladies and gentlemen. I now turn the call over to our CEO, Mike McNamara.

Mike McNamara

Thanks, Paul. Today, I will update you on the business environment as it relates to our market segments and business units. I'll focus on recent demand trends and also cover a few third quarter highlights. I will conclude with some takeaways and our financial guidance for the fourth quarter ending March.

Let's start with our results and outlook for each of our market segments and business units. Please turn to slide nine. Our largest single segment infrastructure grew 7% sequentially of what we believe was a bottom in the September quarter. Infrastructure sales came in at $1.75 billion, representing 27% of revenue. The growth of the segment was driven by new customer wins and a general strengthening of the economy.

With regard to Nortel, we are encouraged with the outcome of its asset sales. Two key strategic Flextronics accounts have taken over a large part of Nortel's business with its CDMA wireless business going to Ericsson and its enterprise solution business going to Avaya.

In addition, we view the recent sale of the optical business to Ciena as a positive. We are developing a strong working relationship with Ciena and will provide excellent service to them as the product lines transition. We also anticipate new opportunities with Ciena in the future.

In general, we believe the complex nature of Nortel's products combined with our infrastructure expertise and cost competitiveness positions us very well to retain and support our customers and growing these programs.

Our outlook for infrastructure for Q4 is encouraging. We see solid single-digit sequential revenue growth in the quarter that typically experiences seasonal weakness. The growth is fairly well distributed among a variety of customer accounts including emerging infrastructure OEMs outside of our top three infrastructure accounts.

In our computing segment, we achieved $1.3 billion or 20% of sales. This segment was up 20% sequentially as our notebook production continued to gain momentum and achieved a $1.5 billion run rate in the quarter. Going forward, when we discuss our ODM computing business, we will be referring to not only notebooks, but also our netbook and desktop businesses.

For the March quarter, we now expect to encounter some slight seasonality that we weren’t previously anticipating. However, we remain encouraged by the breadth of design wins we've been receiving and we continue to expect significant growth in our ODM computing businesses in fiscal 2011. Especially, in our September quarter when new designs get launched to the market in time for back-to-school selling season.

During the quarter, our computing segment also announced a significant expansion in our EMS relationship with Lenovo, which will bolster our European computing business adding Lenovo's commercial desktop, servers, and workstations to our current stable of computing products.

Additionally, we are proud to announce that Lenovo's new 21.5-inch all-in-one desktop system called the A300 won the Best of CES award. This product was Flextronics' co-design and developed and we will be manufacturing the A300 for Lenovo from our Wuzhong facility. The A300 also happens to be the slimmest all-in-one in the industry today and is a testament to the quality, capability and partnership cooperation between our design and engineering staff.

Our high-mix, low-volume segments saw modest sequential growth during the quarter, rising 4.4%. However, this comes from the back of their 17% sequential growth from the September quarter. In total, industrial, automotive, medical and other comprises 18% of total sales, down slightly from 19% last quarter. This group continues to be a solid contributor to the company's profit.

Breaking this category down, the medical segment grew modestly on a sequential basis in Q3 as improvement in diabetes related products and new product ramps were offset with some softness in our disposable areas due to customer-specific issues. However, we expect an improvement in our diabetes portfolio and other new business wins to drive high-single digit sequential growth in our upcoming March quarter. We continue to see more large health care OEMs looking to outsource more and our focused medical investments over the last – past four years, as well as our recent acquisition of

SloMedical in Eastern Europe position us well to capitalize on this trend.

Our industrial segment grew 3% sequentially and is forecast at a buck [ph] normal seasonality and expand similarly in our March quarter. We secure multiple new program wins with this quarter totaling $250 million across a diversified base of smaller customers.

To further illustrate how diverse our industrial customer base is; recall that 94% of our industrial customers account for $75 million or less in annual sales for Flextronics. Areas of strength within industrial continue to be capital equipment, which has experienced a rebound and green energy such as smart grid and solar module, as well as automation products.

Our automotive business saw a healthy pickup during the December quarter, rising by low-double digit. The overall quarter and demand environment improved. We expect further near-term revenue growth for automotive, driven by new wins for interior lighting and roof modules, as well as in-car connectivity solutions. We also continue to selectively invest in automotive as other competitors are exiting the market.

During the quarter, we made a small niche acquisition that will expand our automotive product offering and ODM capabilities. Our automotive business remains heavily focused on European premium automotive OEMs.

Now, let me turn my attention to the mobile segment. Mobile sales rose 29% sequentially to $1.4 billion or 22% of revenue. The sharp increase was largely driven by continued growth with a key Smartphone customer, as well as other mobile phone launches with strategic customers in Japan and China. Revenue erosion from Sony Ericsson has moderated and that customer now accounts for less than 2% of our total sales. Customer diversification efforts will continue to strengthen the segment.

Consumer digital rose just over 2% on a sequential basis in December on the back of a 34% seasonal sequential increase last quarter. The segment ended at $886 million or 13% of total sales. The continued growth in this segment was primarily driven by the successful ramp of our major LCD TV program with LG in Mexico, as well as the new printer ramps for HP in China. Also, we've had a significant – we also had a successful launch of our mechanicals program for a Tier 1 LCD TV OEM in Eastern Europe during the quarter.

This is a good time for me to briefly address the issues of supply chain shortages, not just for mobile and consumer, but for all of our segments. This is a topic that many investors have been asking about recently. Overall, Q3 was another quarter where supply chain shortages existed. In general, our team did an excellent job of mitigating the risk of these shortages to our customers in Flextronics. Nevertheless, there were shortages that cannot be avoided, but they still had an immaterial impact on our business.

The shortages did not seem to be overly concentrated in any one area, but rather are more dependent on the overall capacity of the components industry. The components we found the most challenging in the quarter including various custom components, LCD panels and memory.

I would now like to offer a – I'd like to spend a few minutes discussing our business units and vertical offerings. Our components business are primarily – are comprised primarily of Multek Displays and FlexPower. Our components business began to display signs of a rebound in the second quarter from a sales growth perspective, which continued into the third quarter.

We continue to add new customers and win business with existing customers and our pipeline of new business opportunities has gained further momentum.

This is particularly evident in our FlexPower business unit, which saw sales rise by more than 20% on a sequential basis. More importantly, profitability within this unit also improved on a sequential basis. FlexPower has a diverse customer base including many Tier 1 global OEMs which provide the strong foundation for us to continue to build from.

Excluding FlexPower, however, the rest of our components, which mainly incorporates PCBs, flex circuits, camera modules and LCD displays is not yet reaching its target profit levels and there remains an excellent opportunity for margin expansion as a result. Strong order growth and design wins for overall components group in Q3 are continuing into Q4 and we expect to introduce new products in the coming year and ramp significant new programs that will drive material growth on a year-over-year basis.

We continue to expect the components business to grow well in excess of 20% in fiscal 2011. At the same time, these businesses will continue to receive immense focus to unlock their profit potential.

Our services businesses focus on logistics, repair service, and service part logistics. During the third quarter, we experienced an increase in both revenue and profitability across all of our major service offerings and especially from our service part logistics business. Our momentum in services is strong and we see continued upside in this part of the business as customers continue to outsource this part of the supply chain and the economy improves.

Our retail segment of services business provides competitive and flexible field services for customer operation such as Verizon that we mentioned in the past. And we have added new relationships and other major customers recently. We continue to be very confident about our ability and our capabilities across all of the services businesses and are focused on continuing to expand.

Please turn to slide 10. This slide depicts our success in expanding our relationships with targeted top-tier OEMs across the various markets we serve. Our top 10 customers now account for 49% of sales versus 48% a year ago and HP is our only 10% customer. Sales to our top three customers, HP, RIM, and Cisco account for 29% of total sales.

Sales to two of our largest historical customers, Sony Ericsson and Nortel have been under severe pressure over the last year, but we no longer see either having a material negative impact on our business. Combined, these two amount to less than 4% of sales.

Please turn to slide 11. In summary, our third quarter was another step in the right direction and we are feeling confident about our March quarter outlook as well. So in looking at the business overall, our key takeaways for the quarter are as follows.

First, sequentially, we grew sales over $700 million or 12% and saw even better leverage on the bottom line with adjusted EPS increasing 31% to $0.17 a share, which was above the high end of our guidance range. As a result of our efforts to optimize our business mix and take significant actions to reduce cost, we achieved higher adjusted EPS this quarter than a year ago on 20% less revenue.

Both our adjusted growth and adjusted operating margin expanded during the quarter with our adjusted operating margins almost coming in at the near-term target of 3%. We continue to improve our operating efficiency and actually achieved a 2% increase in our operating earnings for the December quarter despite $1.6 billion less in revenue versus a year ago.

We continue to see additional margin expansion opportunities ahead and in particular, in our components businesses. Moreover, we remain comfortable with a 3.5% adjusted operating margin target we outlined back in November at our New York Investor Day.

Third, we took our inventory turns above 9.0 for the first time ever since acquiring Solectron and our operating groups continue to demonstrate excellent working capital management with our cash conversion cycle of 11 days.

Both from a debt reduction and free cash flow perspective, we remain in great shape. We have reduced net debt by $1 billion year-on-year to $309 million, one of the lowest levels in the company's history. Free cash generation over the past four quarters has exceeded $800 million or a free cash flow yield of approximately 15%. And we closed out our December quarter with a record cash balance of $2.2 billion.

And lastly, ROIC increased by 790 basis points sequentially to 30.1%, well above our cost of capital and the highest in recent history. We have more than doubled our ROIC over the last two quarters, benefitting from both our improved profitability and our world-class asset management.

Now, turning to our guidance in slide 12. We continue to see signs of a healthy economy, which has happened to offset some of the normal seasonality we see in the March quarter. As a result, we expect our March quarter revenue to be between $5.8 billion and $6.2 billion, which is down sequentially 8% at the midpoint and adjusted, the EPS to be in a range of $0.13 to $0.16. Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.07 for intangible amortization expense, stock-based compensation expense, non-cash interest expense, and estimated restructuring charges.

I want to take this opportunity to thank all our employees around the world for their hard work and dedication during the December quarter and for continuing to work together as a team to ensure that Flextronics is well positioned to finish fiscal 2010 on a strong footing so that we can enter fiscal 2011 ready to capitalize on the growth and various opportunities in front of us.

Lastly, please save the date May 25th when we will be hosting our Annual Investor Day in New York at the Western in Times Square. We look forward to seeing many of you there and will be sending out more details, as well as post them to our website as we get close to the date.

I now like to open the call for questions, operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from William Stein. Please state your company.

William Stein – Credit Suisse

Thanks. From Credit Suisse. I'm wondering if you can comment on the capital structure plans. The company seems to be accumulated quite a bit of cash here. Can you tell us what you think the right cash level is to run the business and whether there is a chance of taking out any of the higher coupon debt?

Paul Read

Well – yes, we are very pleased with the cash generation of course and especially having delevered the balance sheet by more than $1 billion over the last 12 months. We do have ahead of us, as you know, in August the 1% convert $240 million that we need to deal with. That's one thing for sure. We are also looking at the ABS programs, the – our sales programs that the accounting treatment as it comes on balance sheet April 1. So we are going to manage our way through that.

Our biggest area of focus is actually supporting the business now through this calendar year and beyond. There is great opportunities for growth that we see, evidenced by for example in the Q4, our CapEx will probably be two times what it was in the December quarter. There is also a need, of course, for working capital as we grow the business double digits about next year. So that's our prime focus. We are, of course, always looking at the capital structure in terms of debt and equity opportunities and we continue to do that, but nothing specific at this stage.

William Stein – Credit Suisse

And then just a follow-up, can you talk a bit about margin performance at each of – what I think of as core EMS components and then services? I would imagine at least in the components area I think you noted that some of these areas were running below the proper utilization. Can you give us a sense for the degree to which the three of those categories vary from a gross margin perspective?

Paul Read

Yes, we don't really get into the split as you know. Needless to say, there is a great deal of opportunity in the components area. We saw some progress in the December quarter, both revenue and margin, which is healthy and very encouraging and as we look out and the plans that we have in place, we certainly see that group contributing very well to the overall company performance in terms of margin expansion over this coming year. But I don't really want to get into the details of each group. I don't think that's appropriate.

William Stein – Credit Suisse

Okay. Thank you.

Paul Read

Thanks.

Operator

Our next question will come from Jim Suva. Please state your company.

Jim Suva – Citigroup

Thanks. It's Jim Suva from Citigroup. A quick question. Can you talk a little bit more about seasonality? It's been a long time since we've had a normal environment or normal economy and since that time, you've also layered on a lot of new business wins such as with the Smartphones, as well as more notably with even the notebook and netbook computing. So can you talk to us kind of about all the quarters of the year, the seasonality and kind of what we should expect from a normal environment of seasonality?

Paul Read

Yes, Jim. This is Mike. So if you go back in our history and look at the – what I would call the pre-recession typical seasonality in the March quarter was probably around 15%. And that's what we always viewed as a very normal level, it's what we geared for and what we expected and almost always we saw the margins – the gross margins deteriorate a little bit in the December quarter and then improve a little bit in the March quarter, but the revenue go down about 15%.

So since then, we've layered on a more diversified portfolio of businesses. We've reduced our dependence on consumer businesses, largely the Solectron acquisition added a lot more stable businesses to the March quarter. And I think the level that you are seeing today, which is pretty close to 8%, is probably what we would consider to be our new more normalized level. So I think it's part of that diversification effort over the years. I think you will see less fluctuations as a result, but I think 8% is about where you should be thinking about.

Jim Suva – Citigroup

And then the other quarters?

Mike McNamara

Well, the other quarters, we always see growth in June quarter. That's typically I think probably about 5% or 6%, I don't have those numbers in front of me. We always see September top up a little bit and then we always get a pretty good pop in December.

So I think – the same thing holds. I don't know the historical numbers for December as an average of how that would improve. So we would have to get back to you on what those numbers look like. But we did study March pretty heavily and we think this is a pretty normal trend going forward.

Jim Suva – Citigroup

Okay, yes, maybe –

Mike McNamara

We may see some less seasonality on the upside of the December quarter going forward for the same reason.

Jim Suva – Citigroup

Yes. Maybe for your Investor Day because your company has clearly evolved into a quite a little bit more later on businesses and things like that through the seasonality. I think people will appreciate. And then there is a housekeeping item following up, inventory, you've done a great job of managing for the past several quarters, but increased this quarter and your sales outlook is going down for the March quarter. Can you help us connect that or bridge that?

Paul Read

Yes, certainly, Jim. It's a – we have some supply constraints for us and so we think that we'll have $50 million to $100 million on the table as a result of the shortages. Same comment we had back in September. That also – obviously, the effect of that is to hold a little bit more inventory than we planned and that also just supports the March – and it's all mix dependent and program dependent, but it also supports March being stronger than it's typically been in the past.

Jim Suva – Citigroup

Great. Thank you very much, gentlemen.

Paul Read

Thanks.

Operator

Our next question will come from Shawn Harrison from Needham & Company. Your line is open. Shawn Harrison, please check your mute feature. It appears we don't have Shawn on the line anymore. And we are going to go ahead and move on to the next question. And our next question is going to come from Sherri Scribner from Deutsche Bank. Your line is open.

Sherri Scribner – Deutsche Bank

Hi, thank you. I wanted to follow up on Jim's question about normal seasonality and I guess I was struck by the comment that you saw normal seasonality now being down about 8%. So I'm trying to understand what does that mean about the new deals that you've won, the new programs that you've won and the improvements in the economy. Does that suggest that we've already seen the benefit of those in the December quarter and we won't see those in the March quarter or is there also some benefit from those things that we are seeing in the March quarter?

Mike McNamara

Yes, I – I'm not sure how the new program wins meshed in with the seasonality. If I can ask some more on the seasonality that we are going to see, we are going see just a slight downside in computing because it's a reasonably strong and growing business.

So we will see very significant downside in the consumer digital, which is very, very typical. I mean, that's up to order of – an amount of – maybe even close to 30%. And we will see a pretty significant downside in mobile as well, which will be somewhere in the neighborhood of 20%. So we will see increases alternatively and industrial and medical and infrastructure, several of our components businesses, for example, will see increases.

So we are still seeing a blend of the two, but no matter what, we are going to take a probably a $400 million, $500 million hit just from consumer digital and mobile where the rest will be up a little bit.

Sherri Scribner – Deutsche Bank

Okay. I guess the comment almost seem to suggest that things are not necessarily improving if you are just going to see normal seasonality. I guess that's what the question was trying to get at. You know what I'm saying?

Mike McNamara

Yes. I mean, maybe things were improving enough that would wipe out the normal seasonality.

Sherri Scribner – Deutsche Bank

Okay.

Mike McNamara

I mean, that's certainly possible, but I guess we see – we actually see a pretty significant – we are normally down 15%, keep in mind.

Sherri Scribner – Deutsche Bank

Sure, sure.

Mike McNamara

We go down 8%, we actually that's a pretty good improvement and this certainly is creating a more stable company which we like and utilizes our system a lot better when it doesn't come down 15%. So we are actually pleased with 8%, but no matter what, we are going to see significant slowdowns every down in the consumer business and the mobile business. I don't know how to get away from that and sometimes those are big enough businesses that you can't completely overcome it with growth.

And keep in mind, normal seasonality even in the infrastructure business is typical. We typically see things like enterprise servers and that down in the first quarter. There is actually other seasonality; automotive sometimes has some seasonality down. I mean, there is actually quite a bit of other seasonality that's not just in the consumer, mobile spaces. So I don't think it's a representation of our – the booking of the programs.

If you remember, in the November Analyst Day we actually thought virtually one of our major business units and segments would grow more than double digits this coming year. We still anticipate that going forward. So we are still pretty bullish about our pipeline and bringing it back. And we actually like on down 8% instead of 15%.

Sherri Scribner – Deutsche Bank

Okay. And then in terms of the notebook business, you commented that that would be down this quarter and that was not what you had expected. Can you give us a little more color on why that's happening? It seems like notebooks generally have been pretty strong.

Mike McNamara

Yes, they've been strong and who knows how this quarter will end up, but I think the last time we talked to the analysts we indicated that we didn’t anticipate a seasonal slowdown. We actually thought we would have enough to motor through it. As we look at the portfolio and what's happening and again, our portfolio is going to be more product-specific and as opposed to really float exactly with seasonality because we don't have enough diversification in our wins yet to really represent the entire world.

But what we are seeing is we have a very high volume consumer notebook and quite frankly, it has experienced some seasonality. So maybe we were expecting some offset of that, maybe we were being too bullish, but effectively down very much. We actually anticipate a down to like the mid-single digits. So it's almost – it’s actually almost a rounding error to tell you the truth.

Where we will see the computing kick up again, these things are on cycles as you know and again it kind of depends on the cycles that we've done. So what we will expect to see that is our business is reasonably flat. And then in the September quarter, you will see a sharp jump up as some of the new programs that we've won and talked about will kick in. So that's kind of the next major thrust to the notebooks, is really in the September quarter where we will see those September and December start moving up pretty substantially.

Sherri Scribner – Deutsche Bank

Okay, great. Thank you.

Mike McNamara

You are welcome.

Operator

Your next question will come from Amit Daryanani from RBC. Your line is open.

Amit Daryanani – RBC

Yes, thanks a lot. Good afternoon, guys. Just a question on your OpEx line. You guys have done a pretty good job maintaining around this $170 million bandwidth for a few quarters. I'm sure it's – sales are to grow next year and I think you guys talked about a double-digit growth in fiscal '11. How should we think about that OpEx number because I imagine you've constrained a lot of the cost this year?

Paul Read

Yes. We have done a real great job reducing it, as you said. And there is a lot of leverage therefore in that as the revenues grow. We still think that we can stay in the range of $170 million to $180 million next fiscal year per quarter. I don't think that's unachievable at all and that's what we are planning for. So that's what you ought to be thinking about.

Amit Daryanani – RBC

Got it. And I may have just missed this, but I know you guys talked about components shortages in the LCD memory side. I imagine that's a little bit more PC-centric issue. But broadly, do you guys think you left any revenues on the table exiting December quarter because of component shortages?

Paul Read

Yes, except that we thought it was between $50 million and $100 million that was left on the table. Very similar to what happened in September.

Amit Daryanani – RBC

And then I guess, Paul, do you expect to pick that up in the March quarter or do you think that's going to be an issue for a few more quarters?

Paul Read

No, I think different than September where September did roll over. I think December doesn't. There is a lot of consumer products that didn’t hit the shelf. So I think you would have to assume most of that hasn't rolled over.

Mike McNamara

We are also anticipating that the March quarter may also have shortages. So we are not sure we are out of the difficult times in terms of catch-up with those shortages. There are still a lot of constraints in the marketplace. So we just may end up rolling that $50 million to $100 million over again in March.

Amit Daryanani – RBC

Got it. Thank you.

Operator

Your next question will come from Brian White. Your line is open.

Brian White – Ticonderoga Securities

Yes. When we look at the components business, what do you think the EPS drag is right now per quarter on that business if it was running at a very normalized operating margin?

Paul Read

Yes. It's a bundle like I said of our PCBs and camera modules and power supplies and many other pieces. It's certainly recovering. It was losing money last year, so now it's kind of breaking even. But there is a lot of new program ramps and investments that are still going on in that business that will bear fruit for us the back-end of the year. So it has a long way to go to contribute for sure. And that's kind of as specific as we want to be, but it’s – it made improvement in December in both revenue and profit, but it’s still kind of around breakeven.

Brian White – Ticonderoga Securities

And what are we talking in terms of revenue size right now for that business?

Paul Read

It’s growing rapidly, but it's probably running around $2 billion.

Brian White – Ticonderoga Securities

Okay. And the – $2 billion? And operating margin is obviously well above the EMS side of the business.

Paul Read

It should be, yes. Given the investment cycle and R&D that we spend, obviously it will be much higher than the normal corporate average.

Brian White – Ticonderoga Securities

In the infrastructure market in the March quarter, it sounds like it's going to grow a tad. Where are you seeing the most strength if you look at storage or enterprise networking servers, where are you seeing the most strength in the infrastructure of the March quarter?

Mike McNamara

Well, it's – it's actually reasonably broad based, but probably the greatest strength that we are seeing is actually upside the new customer wins, probably more than anything else. So not necessarily just – while we expect to see a little bit of a strengthening kind of across the board, what's driving that more than anything else is going to be new customer wins.

Brian White – Ticonderoga Securities

Okay. And is there any one market you are seeing more – within the infrastructure, seeing more wins than others?

Mike McNamara

Well, we are seeing more coming out of the Chinese competitors probably more so than the more traditional telecom, datacom guys. But alternatively, they are all reasonably strong in our portfolio. So – but more than anything else, it is the new wins.

Brian White – Ticonderoga Securities

And if you didn’t have new wins in the March quarter, do you think infrastructure would still go up?

Mike McNamara

Probably not. I mean, I don't know exactly what that number is, but it might more likely go flat.

Brian White – Ticonderoga Securities

Go flat? Okay. Thank you.

Operator

Our next question will come from Alex Blanton from Ingalls & Snyder. Your line is open.

Alex Blanton – Ingalls & Snyder

Hi, good afternoon. I'd like to just talk about the gross margin for a minute if we can. You had a very nice margin improvement on the operating line, 32 basis points quarter-over-quarter, but it was only 9 basis points from the gross margin side of it and the incremental gross margin was only about 6.2% – 6.2% of the sales gain. And that's striking me as being wrong.

Now, you said there was a mix shift toward the lower margin phones and so forth in the quarter, which could explain that, but can we look in this year for a bigger incremental improvement? Some of your competitors have talked about things like 15% incremental margins on higher sales and so on and so. What about Flextronics in – for – to plug into our model for fiscal 2010, which we are kind of doing on our own since you haven't given any guidance – for 2011 I should say?

Paul Read

Yes, (inaudible) – we've said all along, the contribution margin has a very wide range for us given the diversity of our business, anywhere between 5% and 15% as we have always said. And you are right, this quarter it's come in around 5% to 6%.

Alex Blanton – Ingalls & Snyder

Yes.

Paul Read

So you would – you kind of expect that in the December quarter because of the seasonality of those products, the mobile phones and the computing side and consumer products. I think that – so as you predict out the quarters, you have take that into account, the range of the 5% to the 15% and – we've actually seen and if you go back at some history, you've seen our December quarter gross margins go down when prior Solectron we were heavily seasonally in consumer products. So actually for it to go up we were quite pleased.

Alex Blanton – Ingalls & Snyder

Okay.

Paul Read

It's obviously some other things that we are doing, growing the restructuring helped us a little bit and obviously some improvements in components helped a bit. But for it to go up in the December quarter, we were pleased with compared to the prior years, but it’s kind of the low end to the 5% to 15%, it’s something you can expect in the December quarter of every year I think.

Alex Blanton – Ingalls & Snyder

Okay. So it could be as high as 15% in some quarters?

Paul Read

This 15% on some of our product lines that – what you do – what you have to do is kind of weighted average the revenue side. So while some of our components businesses might have a 15% contribution, the overall company wouldn't have a 15% because the effective – not much revenue they have. So you – it’s a pretty complex model, I know and I appreciate the difficulty in trying to put it together. We have difficulty ourselves.

Alex Blanton – Ingalls & Snyder

Okay.

Paul Read

It does range from 5% to 15% with different product categories.

Alex Blanton – Ingalls & Snyder

Okay. Now, I'd like to ask you the question about your competitive standing vis-à-vis Hon Hai or Foxconn which announced a day or two ago that their process would be well below what they had expected in the quarter, which is just a reverse of what all the North American EMS companies are reporting for the fourth quarter. So for once, they are not doing as well, at least on the profit side as the North American companies.

Now, do you have an opinion as to why that is? I mean, they blamed it on intense competition, but given the fact that the North American companies are reporting margins above expectations, it would not seem that the competition is coming from – I mean, there is sort of a disconnect there, that's what I'm saying.

Mike McNamara

Well, I think the real focus of the product categories that they were talking about, I think, was that – was their FIH business and it's just a very, very competitive business. So that's a –

Alex Blanton – Ingalls & Snyder

FIH?

Mike McNamara

Yes, Foxconn Holdings I think was the business group that announced that. So there is really a couple of different public entities within Foxconn. There is the product suite –

Alex Blanton – Ingalls & Snyder

Okay.

Mike McNamara

And then there is the kind of a cell phone group. And the cell phone group is just a very competitive, lower-margin business and that business does not compete very much with – competes with us of course, but it doesn't really compete with Celestica and Sanmina and others.

Alex Blanton – Ingalls & Snyder

Right.

Mike McNamara

So they are – it’s kind of a different product category. Yes, they actually look at each one of the different product suite – each one of the different products to figure out who the competition is. A large part of their competition is their own pricing model I think. So I think they established very aggressive standards for what the pricing should be and I think that's just the way they have chosen to compete.

So I – but I mean, outside of that, I don't have any other comment. But I don't think it would affect any of the profit increases associated with companies like Celestica or Sanmina or even Flextronics which has a more balanced portfolio. So we will compete sometimes in those areas. Alternatively, we have such a diversified piece of business that we can actually grow our consumer and mobile business and still real margins, as evidenced by the December quarter.

Alex Blanton – Ingalls & Snyder

Right.

Mike McNamara

We are probably up $400 million in just the computing and consumer, very competitive margins, yet we still expanded the overall margins of the entire company because we have a broadly diversified portfolio.

Alex Blanton – Ingalls & Snyder

Yes.

Mike McNamara

So I think they are kind of stuck in that super-competitive low-margin business.

Alex Blanton – Ingalls & Snyder

Okay, thank you.

Mike McNamara

Yes.

Operator

Our next question will come from Lou Miscioscia from Brigantine. Your line is open.

Lou Miscioscia – Brigantine

Okay, thank you. My question is on cash flow. Obviously, great cash flow performance over the last four quarters plus. What about just looking out going forward? You've already talked about cash usage, but I'm just wondering what you think free cash flow might be and also I guess throw out what you think CapEx might be over the next four quarters?

Paul Read

Yes, we – like I alluded to earlier, March is – obviously, three great quarters, over $600 million of free cash flow. We look for the March quarter now that needs some cash investment that – particularly CapEx is probably going to be 2x what it was in December. So I think it would be roughly about $70 million, $80 million. And then typically, in the past we've spent depreciation levels of $400 million a year and this year would be about $200 million like we said, finishing in March. I think fiscal '11 will probably stand $300 million. So those are kind of the numbers you should be looking at.

Lou Miscioscia – Brigantine

Okay. And then how about just a possible fourth quarter free cash flow number?

Paul Read

Yes, we don't have, Lou, to disclose at this stage. We are still working this year and this quarter. But it's obviously cash positive.

Lou Miscioscia – Brigantine

Sure. So it sounds that actually – probably would swing more obviously with the investment that you are doing with swing year-to-year as opposed to just a normalized run rate it seems.

Paul Read

Yes. Yes, we see sales growth this year, fiscal '11. So we need to support that and both from a CapEx standpoint and a working capital standpoint. So that's where our focus is – as well as M&A activities as always.

Lou Miscioscia – Brigantine

Fair enough. Just one clarification. You said that you had a $2 billion component run rate. And I think you said that that was running at a loss, but in the December quarter got up to breakeven. So that breakeven, obviously you are looking to get that back to material levels of profitability?

Paul Read

Yes, correct. Yes.

Lou Miscioscia – Brigantine

And any kind of time frame or visibility that – on that? I mean, obviously that swing could be obviously quite material for aiding earnings.

Paul Read

Yes, it is. It's one of the keys we have here to really unlock some expansion for us. It's – and it’s not just one business, we have multiple businesses and that will – they are all at different stages of maturity, some real new pieces, some very matured pieces and some that are kind of in the middle. So we just got multiple programs going.

One of the things that – for sure is that we get a lot of new wins in these areas that are requiring investment and so we are kind of in the investment cycle in some of those right now. I would say the back-end of the fiscal year, the December and March quarters will see real returns on those businesses. But we feel very encouraged about the growth of those businesses and the opportunities to fix the margin of those businesses. Just we are – we have been working on this for some time and I think the rest of the fiscal year will be – or should bear the fruit.

Lou Miscioscia – Brigantine

Okay, great. That would be wonderful to see. Good luck.

Paul Read

Okay, great. Thanks.

Operator

Our next question will come from Shawn Harrison from Longbow. Your line is open.

Shawn Harrison – Longbow

Hi, good afternoon. Just a follow-up on some of the end markets maybe you are seeing better strength and/or maybe weakness. There was a number of, I guess, stats around the Analyst Day in terms of potential growth expectations across a variety of end markets. So if you could speak to, I mean, which end markets based upon what you are seeing so far in the March quarter that could be a little bit better than that or a maybe little bit worse? It sounds like infrastructure maybe a little bit ahead of that, but computing could be a little bit behind the growth forecast you threw out there?

Mike McNamara

So we put a forecast for FY '11 and no, I think computing will certainly achieve their objectives for the year that we talked about in the November Analyst Day. Infrastructure may be a little bit ahead. We talked a little bit about in the Analyst Day about – that's the only segment that we have that was not in double-digit growth. So we obviously are working hard to put that into double-digit growth. So I won't say they are ahead or behind because it's too early to tell. But I would say largely the numbers that we put out there in the Analyst Day where we had industrial, medical, mobile and consumer, Multek and services all growing 10% to 20% are probably still intact.

And the real high growth areas that we thought we were going to grow more than 20% were like computing and some of the components, both power and optomechatronics where we actually thought they would grow more than 20%. And we are pretty sure those are intact. So I think the whole premise laid out in November is largely intact. We continue to see a reasonably broad breadth of strength across multiple market segments and hopefully infrastructure can get over 10% as well.

Shawn Harrison – Longbow

Okay. And then two brief follow-ups. Just the tax rate for fiscal '11, should we expect that to be kind of within a similar range as experienced in this upcoming March quarter? And then with restructuring benefit, it sounds like all the benefits were in the December quarter and there won't be any incremental benefits in the March quarter.

Paul Read

So on the tax rate, we still think it's between 10% and 15%. We hit the low end in December, but you should assume 10% to 15% for fiscal '11. For sure, restructuring – we saw a little bit of restructuring – something like $5 million to $10 million benefit and that will come through in March and we are pretty much done with that.

Shawn Harrison – Longbow

All right. Thank you very much.

Operator

Our next question will come from Matt Sheerin from Thomas Weisel Partners. Your line is open.

Alberto Mann – Thomas Weisel Partners

Hi, this is actually Alberto Mann calling in for Matt. I just wanted to go to – talk a little bit more about the component business and the PCB business, Multek in particular. Can you talk about how much of that business is tied to handsets and whether that's mostly mid-range or high-end Smartphones? And then also, if you have seen any cross-selling opportunities with some of the Solectron customers on the high end of that business?

Mike McNamara

Yes. So to answer your question, first on the high-end cross-selling, I mean that's an activity that we've gone through for quite some time over the last six weeks and – or six months – six quarters, sorry. And that has bared a lot of fruit and – but largely, there is no real step change to – as the result of the Solectron acquisition. I mean, those are incremental little pieces that we've put together over the last six quarters like I mentioned. I don't think there is any new data there.

On the mobile front, for sure we are starting to do a lot of transition into Smartphones and we've – I don't know how many different deals we've booked, but a significant amount of them and many of those are starting to ramp. One of the – and it's probably close to 40% of our overall business, relates to phones. So this has been a little bit of a depressed area and we've got one more quarter where it’s probably going to be depressed in the March quarter just because the overall mobile business is down.

We are actually investing in capacity to transition this into different kinds of capacity which is necessary for Smartphones. It's more of rebalancing the printed circuit board factories and those changes are going on as we speak. The progress to book new customers is – has been very successful and as a result, we look for pretty strong growth once we get past March here. We would actually expect a very strong growth from the June quarter on out, may be even continue this growth for the next four quarters.

So yes – so the answer is yes, we are in process of making that transition. We are seeing a lot of strength in new orders and we are in process of rebalancing some of the capacity to prepare for it. And then we'll look forward to a kind of a turnaround study in the June quarter.

Alberto Mann – Thomas Weisel Partners

And just a quick follow-up, are you seeing most of that growth in the Smartphone area in rigid boards or in flexible printed circuit boards or both?

Mike McNamara

We are probably most in terms of dollars in rigid and probably in percentage growth, we'll probably see more growth in flex circuits.

Alberto Mann – Thomas Weisel Partners

Okay, got you. All right, thank you.

Operator

Our next question will come from Steven Fox from CLSA. Your line is open.

Steven Fox – CLSA

Hi, good afternoon. Just going back to notebook and desktop ramping and off of the $1.5 billion run rate you talked about in December, where do you think you are going to be a year from now and can you sort of just update us on how that would flow through between notebooks and desktops, what type of mix it would look like roughly?

Mike McNamara

Yes. So if we go forward, the notebooks for sure is the dominant player. So maybe there is a two-and-a-half to everyone desktop or maybe it's even a little bit more like two-to-one ratio of notebooks to desktops. And we would expect to be roughly doubling the business next year relative to this year, which is kind of our plan. We had a near-term objective of trying to hit, get up to $1.5 billion run rate by the end of the year, we accomplished that. Our objective next year is to double our business. We have capacity in place to – or in process of going in. We think we have the bookings that we need, most of which will start ticking in more into the September quarter. And so we are – our target for this next year is to approximately double that business.

Paul Read

And Mike, just to be clear, the doubling is notebooks plus desktops run rate doubling.

Mike McNamara

Yes, that's what I did in my prepared remarks. I just said when we talk about notebooks, we really need to talk more broadly because sometimes they are netbooks, sometimes they are – the number we booked notebooks, netbooks, and desktops. And sometimes it gets – so it’s really that ODM initiative that we are trying to build and double as a business.

Steven Fox – CLSA

Got it.

Mike McNamara

Whether it's notebooks doesn't matter as much, but we are actually trying to build a little bit of diversification into the business. And the desktops is – one thing to note is, the desktops that we are focusing on are the all-in ones because as a growth category within desktops, all-in ones are actually a very, very nice growth category even while desktops maybe substantially flat.

Steven Fox – CLSA

Great. Thank you.

Mike McNamara

Welcome.

Operator

Our next question will come from Amitabh Passi from UBS. Your line is open.

Amitabh Passi – UBS

Thank you. Paul, my first question for you is how do we think about a normalized level for your cash conversion cycle? I mean, it's down at 11 days. Is that a sustainable level over the next four quarters or should we expect that they are into [ph] back up?

Paul Read

I would expect that the March quarter would be very similar and then I think that absent of the accounting change of the ABS sales programs coming on balance sheet from April 1, we would have – without that, would run this business 11 days to 15 days next year. So that's something we are working through with the programs, with the banks and we need to mitigate that.

Amitabh Passi – UBS

Okay. And then Mike, just for yourself, when you talked about the notebook business potentially doubling over the next fiscal year, can you just remind us again where you think operating margins potentially go? I think you talked about a 2%, 2.5% level once you get to $4 billion to $5 billion. So assuming we are kind of at the $3 billion, $3.5 billion level next year, just any guidance potentially [ph] in terms of where you think margins might be?

Mike McNamara

Yes. So I think there is almost a linear transition to the 2.5 points once we hit the $5 billion.

Amitabh Passi – UBS

Okay.

Mike McNamara

So last year we really didn’t make any money. We are kind of crossing – we will transition as we get through this next year in FY '11, midway through the next year as all the new programs kick in, we'll certainly be making money and then we would expect it to move up to 2.5% once we hit the $5 billion, which we certainly hope to be somewhere in the FY '12 area. So we are almost thinking it's somewhat of a linear movement from zero today, call it to 2.5% in two years.

Amitabh Passi – UBS

And just one final question. How do you think about the competitive landscape, particularly as you continue to grow your computing business and – I mean, I assume today, your business is relatively small compared to the largest ODMs, but once you get into the $5 billion, $8 billion, $10 billion, I mean any concerns around what happens to the pricing environment and how do you sort of avoid getting into sort of very aggressive and competitive pricing?

Mike McNamara

Well, some of the big guys now are running at 3.5%. If you look at (inaudible) results, they are actually running up around 3.5% operating profit. So you could argue as you get bigger, the opportunities to make more money may even be there.

Our way of looking at that is we have a lot of other businesses. If we get up to $5 billion and we don't like the competitiveness of the deal, we can stay at $5 billion. We can certainly leverage the rest of our 2.5 – or $25 billion of spend or $25 billion of business. So I think we have a lot more flexibility than some of those other guys that tend to have 80% or 90% of their business in – just in those – in PCs.

We have a lot of verticals that we can put to play; we have a lot of services that we can put to play. The place we are trying to really go with our business is to really focus on innovation and compete on innovation and some of the component technologies we have allow us some very interesting innovation opportunities. It's – and as – just a good example is Lenovo product which is a really slick product – you guys should see it. And you actually have to use it to really appreciate it, but it’s a very slick product, very good looking.

And we are just trying to compete on innovation and – so we feel we have enough tools by which to compete. We are being quite successful with the OEMs and – but alternatively, we are not forced into taking bad deals because we have a lot of other business where we have a very, very diversified portfolio.

Amitabh Passi – UBS

Sorry, one final for me. When you talk about your components business the $2 billion business with margins being much higher, pretty downturn, are we talking about margins sort of in the high-single digit, double-digit range, it was that – the kind of certain level you are at before we went into the downturn?

Mike McNamara

Yes. It's – it’s hard to generalize because – for example, when we went into the downturn, we were just building a power business. So for example, when we went into the power business – or when we into the downturn, the power was probably only a $400 million business and was building up from much lower levels. And this FY '11, we expect power to be an $800 million business. So it's not really fair to generalize because power was building. So it underachieved to profitability where alternatively, we had things like Multek in the printed circuit board side which was overachieving EMS average. So it was difficult to – it's difficult to generalize before the downturn because we had building businesses.

Now, we can kind of generalize a little bit better because our businesses and the investments we've made over the last – really two, three years are starting to mature. And our power business is running at healthy – healthy revenue level, so we expect it to make money and we have enough bookings in place to have pretty fairly good utilization levels with each one of these businesses.

So going forward, it’s probably a more appropriate thing, but prior to the downturn, it was all over the map. We had some businesses well above EMS averages and we had some businesses that were well below zero.

Amitabh Passi – UBS

Thank you.

Mike McNamara

So we kind of look at this coming year as the year that we really harvest the investment that we've seen.

Amitabh Passi – UBS

Got it, thank you.

Operator

Our next question will come from Frank Jarman from Goldman Sachs. Your line is open.

Frank Jarman – Goldman Sachs

Thanks, guys. Just the question with regards to your credit ratings. You've come out of the downturn with fairly favorable credit metrics, overall liquidity is good. Do you think that investment grade is attainable and do you see that as an objective for you? Thanks.

Paul Read

Frank, I think anything is attainable. We are very comfortable where we are at. We are pleased at Moody's taking away the negative watch. That was a short-term objective of ours. We worked closely with them as you know, same with S&P. So it's not necessarily our priority right now to focus on investment grade. I think that we enjoy a lot with the rating that we have in terms of pricing and covenants, et cetera, which we are pretty comfortable with and the debt level. So I don't think that we are targeting any near-term strategy to get to investment grade at this stage.

Frank Jarman – Goldman Sachs

Okay, thanks. And you've talked a lot about some of the plans with regards to utilizing cash over the next six to 12 months, but you haven't mentioned share repurchase activity I think. Could you talk a little bit about your interest in that? Thank you.

Paul Read

Yes, certainly. It's certainly – it's always been on the list. We did something back in August '08 as you remember. But it's not a priority right now. Our priority is growing the business and investing in the business, whether it's organically or M&A related. So it’s something that we – it’s certainly – something we don't forget about, but it's not a priority at this stage.

Frank Jarman – Goldman Sachs

Okay, great. Thanks very much guys.

Mike McNamara

So maybe we can take one more question.

Operator

Our last question will come from Jake Kemeny from Morgan Stanley. Your line is open.

Jake Kemeny – Morgan Stanley

Hi. Paul, could you just remind us where you currently stand with your restricted payments, basket capacity either for repurchasing bonds or equity? And if you can just touch on kind of – what is the most restricted right now? Is it the covenants and the bonds or in the term loan?

Paul Read

Yes, we went through that tender and consent process, as you know, over the senior subs back in the last year. So we fixed the restricted payment basket. We got a one-time basket of $250 million, which is in place and we also now have the basket builder, which is currently running probably around about $200 million. So we have $400 million to $500 million of – in the basket availability for share repurchase at this stage and that's kind of the only restriction that we have in that regard.

Jake Kemeny – Morgan Stanley

So are you kind of happy with that covenant and your ability with respect to flexibility and buying back shares or – ?

Paul Read

Yes, absolutely, because under Singapore law, we are only allowed 10% on an annual basis. So that's only going to get to some $400 million or so, $500 million or so. It's a – it’s certainly – if we were to pull the trigger on it, we would have more than [ph] enough allowance in that covenant to do what we needed to do.

Jake Kemeny – Morgan Stanley

Okay. So you don't see those bonds as inhibiting your flexibility and you've already gotten the amendment that you are looking for?

Paul Read

Right, not now. They used to be a consideration, but not anymore.

Jake Kemeny – Morgan Stanley

Okay, thank you.

Paul Read

Thanks.

Mike McNamara

Thanks, everyone. We appreciate you joining us today and we look forward to seeing you in May at our Investor Meeting. Thank you. Bye-bye.

Operator

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.

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Source: Flextronics International Limited F3Q10 (Qtr End 12/31/09) Earnings Call Transcript
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