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Executives

Mike McNamara - Chief Executive Officer

Paul Read - Chief Financial Officer

Kevin Kessel - Vice President of Investor Relations

Analysts

Shawn Harrison - Longbow Research

Chelsea Shi - UBS

Brian Alexander - Raymond James

Sherri Scribner - Deutsche Bank

Osten Bernardez - Cross Research

Craig Hettenbach - Goldman Sachs

Matt Sheerin - Stifel, Nicolaus

Amit Daryanani - RBC Capital Markets

Wamsi Mohan - Bank of America Merrill Lynch

Samuel Meehan - Citi

Flextronics International Ltd. (FLEX) F4Q2012 Earnings Call May 1, 2012 5:00 PM ET

Operator

Good afternoon and welcome to the Flextronics International fourth quarter fiscal year 2012 earnings conference call. Today’s call is being recorded and all lines have been placed on mute to prevent background noise. 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. Kevin Kessel, Flextronics Vice President of Investor Relations. Sir, you may begin.

Kevin Kessel

Thank you Gina and good afternoon everyone. We appreciate you joining Flextronics’ conference call to discuss the results of our fiscal 2012 fourth quarter and year end March 30, 2012.

Joining me 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 the Flextronics website under Conference Calls and Presentations and can also be accessed from a link on our homepage.

The agenda for today’s call begins with Paul Read reviewing the financial highlights from the fourth quarter and year-end fiscal 2012, followed by Mike McNamara, who will discuss our business environment as well as our business strategically. He will conclude with our guidance for the first quarter of fiscal 2013 ending in June. Following that, we will take your questions.

Please turn to slide two for a review of the risks and non-GAAP disclosures. Slide two; our call today and our slide presentation contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those, set forth in this presentation.

Such information is subject to change and we undertake no duty or obligation to revise, update or inform you of any changes to forward-looking statements. For a discussion of the risks and uncertainties, you should review our filings with the Securities and Exchange Commission, specifically our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K, and any amendments thereto.

This call and presentation references both GAAP and non-GAAP financial measures that exclude certain amounts that are included in the most directly comparable measures under GAAP, including stock based compensation, intangible amortization, net of tax effects, and settlements of tax contingencies. Non-GAAP financial measures may also be a supplemental measure of financial performance. Please refer to the Investor section of our website, which contains the reconciliation to the most directly comparable GAAP measures.

Also, as previously announced on March 2, 2012, we are divesting certain assets of Flextronics’ Vista Point Technologies camera module business, including intellectual property and it’s China-based manufacturing operations and as a result, current and historical operating results for this business have been recapped as discontinued operations and are not included in the measures of performance discussed today. Please refer to the Investor section of our website for a detailed reconciliation.

I will now turn the call over to our Chef Financial Office, Paul Read. Paul.

Paul Read

Thank you Kevin. Please turn to slide three. We generated $6.4 billion in revenue for our fiscal 2012 fourth quarter ending March 31, 2011, which was almost at the midpoint of our guidance range of $6.3 billion to $6.6 billion. Revenue declined $407 million or 6% year-over-year, driven entirely by a decline in our high velocity social business.

Our fourth quarter adjusted operating income was $190 million; up 1% year-over-year and our GAAP operating income was $180 million, up 3% year-over-year. Adjusted net income for the third quarter was $197 million, up 22% from last year and our GAAP net income for the third quarter was $173 million, up 28% year-over-year.

We reported adjusted earnings per diluted share for the March quarter of $0.28, which was up 33% year-over-year and was above our adjusted EPS guidance of $0.22 to $0.24. Our GAAP EPS for the fourth quarter was $0.25, up 47% year-over-year. Both adjusted and GAAP EPS for the fourth quarter were new records for the company.

Our diluted weighted average shares outstanding or WASO for the quarter was $699 million. This was a reduction of 10% or 77 million shares compared with the 776 million shares reported a year ago and is a result of our share buyback programs. During the quarter we repurchased approximately 15 million shares for $94 million with an average cost of $6.35.

Please turn to slide four. Our integrated network solutions business grew 45% of our sales during the quarter, up sequentially from 37% last quarter. Revenue was $2.85 billion in the quarter, reflecting 13% year-over-year growth and up 3% sequentially. This quarterly revenue performance was in line with our expectations for a low single digit growth, as we saw strength in new outsourcing wins and new product wins offsetting typical March quarter seasonality.

Industrial and emerging industries comprised 14% of total sales, up from 13% last quarter. Sales were at $929 million, reflecting a decline of 6% year-over-year and 4% sequentially. We calculated below our expectations of stated revenue, partly as a result of weakness in our solar portfolio. As anticipated, our capital equipment business improved significantly in the quarter and we are currently forecasting further growth next quarter.

We continue to see strong levels of activity with customers across our industrial and emerging industries group and booked over $250 million in new wins during the quarter. For fiscal 2012 we had roughly $1.3 billion in bookings, which is consistent with last years record bookings level of $1.3 million.

Our high reliability solutions group is comprised of our medical, automotive and defense and aerospace businesses. It the fourth quarter the group comprised 10% of total sales, up from last quarter’s 8%. Quarterly revenue totaled $648 million, growing 9% sequentially and 27% year-over-year, marking another quarterly revenue record.

Overall sales in this group were above our expectations, both our medical and automotive segments experienced healthy sequential and year-over-year growth, with our automotive segment displaying the greatest percentage growth.

Our medical business saw healthy sequential single digit growth and increased roughly 22% year-over-year, driven by strength in door delivery in medical equipment. During the fourth quarter we booked roughly $90 million in new programs, which brings our year-to-date bookings to $350 million. In addition, our sales pipeline is holding strong at over $1 billion across the various areas of the medical industry we serve.

Our automotive business continues to be the strong performer for us. Revenue rose approximately 17% on a sequential basis and 32% year-over-year. For full year fiscal 2012 we saw our automotive sales reach approximately $1 billion for the first time ever, reflecting 31% growth compared with the full year of fiscal 2011. We continue to see signs of improving automotive production. In addition, we continue to broadly penetrate tier 1 and tier 2 OEMs and our win rate remains strong in areas like in-car connectivity and power electronics.

Lastly, we expect our high reliability group and we see additional random building out the aerospace and defense offering within fiscal 2013 now that we have closed the Stellar acquisition in April.

Our high-velocity solutions comprised 31% of total sales, down from 42% last quarter and revenue declined to $1.96 billion from $3.15 billion last quarter. This business group includes our mobile phones, consumer electronics, including game consoles and printers and high velocity EMS computing business. As expected, this business group experienced the largest decline in the quarter, roughly 38% sequentially and 29% year-over-year. This decline reflects our focus to rebalance our portfolio and also incorporates the typical mass quarter impacted consumer seasonality.

Our mobile and consumer businesses saw a significant double-digit decline on a sequential basis. Significant weakness from our largest mobile customers combined with unfavorable seasonality natively affecting a handful of our customers in consumer electronics, which drove the majority of the decline.

Please turn to slide five. Adjusted gross margin was 5.7%, up 50 basis points from the prior quarter. Adjusted operating income saw $190 million and adjusted operating margin was 3%. The increase in both gross and operating margin was primarily due to the full exit from the ODM PC and a reduction in the related charges.

Our adjusted EBITDA was $321 million in the fourth quarter, up $67 million from the prior quarter. This contributed to our adjusted EBITDA margin increase of 150 basis points, to 5%.

Our adjusted EPS from continuing operations of $0.28 was up 56% from the $0.18 reported last quarter. We will discuss the impact of the Vista Point Technology divesture and discontinued operations in further detail in the next section.

Please turn to slide six. Adjusted interest amount decreased $23.1 million from the prior quarter, resulting in the company-generated income of approximately $15.3 million this quarter. A major contributor to the decrease of $23.1 million was the realization of $19 million in foreign currency translation gains, resulting from the liquidation of certain foreign entities this quarter.

Our net interest expense amounted to approximately $12 million for the quarter and similar to the last several quarters. We also realized strong foreign currency gains due primarily to primarily to certain strategic RMB positions, however to a lesser degree this quarter. We do not anticipate continuing to achieve this level of earning from favorable foreign currency, as such we would model a range of $15 million to $20 million for net interest and other expense next quarter and going forward.

Additionally during the fourth quarter of fiscal 2012 the company identified and booked a one time non-cash adjustment related to certain U.S. GAAP reporting adjustments, primarily impacting cost of goods sold and isolated at one of our foreign sites that originated in prior interim and annual periods. As a result of recording these out of period adjustments in the fourth quarter, net income for the quarter and year ended March 31, 2012 was reduced by $21.5 million and $24.9 million, respectively.

The adjusted tax expense for the fourth quarter was approximately $8 million, reflecting an adjusted tax rate of 3.08%, which was more favorable than our outlook for the quarter of 10%. The favorable tax rate was primarily due to a shift in a mix of taxable income during the quarter. For our upcoming quarter we believe modeling an 8% to 10% tax rate as appropriate and is what our guidance is based on.

Turning to the reconditions between the GAAP and adjusted EPS, stock based compensation amounted to $9.9 million in the quarter declining by $2.1 million and represented a $0.01 EPS impact. Intangible amortization net of tax was $13.8 million in the quarter and represented a $0.02 EPS impact.

As a result of the companies decision to divest its VPT business, it’s current and historical operating results of this business have been recast as discontinued operations, resulting in a net loss impact of $16.7 million, which equates to a $0.02 EPS impact for the quarter. Please refer to the Investor section of our website for detailed reconciliations.

Please turn to slide seven. Inventory declined by 8% sequentially or $277 million to $3.3 billion. This decline was in line with our quarterly revenue decline; however, our inventory turns decreased to seven turns from 7.6, which equates to an increase in inventory days of four days. Our inventory turn metric was negatively impacted as a result of the elimination of the high velocity ODM PC business, which had carried inventory turns in excess of 30 turns.

Our cash cycle expanded 16 to 28 days sequentially, driven entirely by the increase in inventory days. Our DPO increased one day to 70 days and offsetting DPO was a three-day expansion of our DSO to 46 days. We expect to manage our cash conversion cycle in a 25 to 30 day range going forward.

Now turning to the networking capital chart on the top right of the slide, overall our networking capital as a percentage of sales increased 3.4% from 6.3%. Going forward we expect it to be in the range of 6% to 8% as our business adjusts to the new 70/30 mix of non-high velocity, high velocity business. Our ROIC for the quarter remained healthy at 22% and remain stable compared to 22.9% last quarter. That remains well above our 8.5% weighted average cost to capital.

Please turn to slide eight. Cash flow from operations was a positive $139 million during the quarter and generated over $800 million for the fiscal year. Our net capital expenditures amounted to only $58 million for the March quarter as we continued to realize benefits from repositioning our PC ODM as I discussed last quarter. As a result we generated free cash flow of over $8 million for the quarter and $416 million to fiscal 2012.

This marks our fifth consecutive year that we generated in excess of $400 million in free cash flow generation. Over this same period we have now generated greater than $1 billion in free cash flow.

During the quarter we also spent $94 million repurchasing our stock and spend $510 million in fiscal 2012, constituting $94 million in stock that we repurchased this quarter and $114 million in cash as a result of a timely difference in trade settlements in the prior quarter.

Please turn to slide nine. We ended the quarter with $1.5 billion in cash and $28 million versus prior quarter. Total debt remained constant to $2.2 billion. Our net debt increased by $25 million to $682 million, while our debt to EBITDA level remained at a very healthy $1.9 times.

That concludes my comments. I will now turn the call over to our CEO, Mike McNamara.

Mike McNamara

Thank you Paul. Today I plan to cover the growth and transformation of our business groups from a more strategic level. Paul’s already covered the quarterly and year-over-revenue performance for each of the business groups. So my focus will instead be on the full fiscal year trends in order to help find the transformation we are currently driving within our business.

The NOI (ph) transformational activates undertaken in fiscal 2012, our catalyst to our achievement of our targeted financial results and metrics drive to increase shareholder value. I will include in my remarks today with guidance for the June quarter and some key takeaways for our businesses.

Please turn to slide 10. First I’d like to focus on the three business groups that comprise of non-HVS business, mainly Integrated Network Solutions or INS, Industrial & Emerging Industries or IEI and High Reliability Solutions or HRS. All three of these grew nicely in fiscal 2012 as a bundled generated over $14 billion in revenue growth versus the prior year. In addition, they have achieved strong compounded annual growth rates over the past couple of the fiscal years.

Our largest business INS has generated 7.5% compounded annual growth rate over the last two years and added just over $1.5 billion of revenue in that period. IEI, despite having a challenging fiscal 2012 due to the downturn in capital equipment, but achieved a 15% compounded annual growth over the same period and added nearly $1 billion in revenue.

Finally HRS has posted a tremendous 32% compounded annual growth rate since fiscal 2010 and added just over $1 billion of revenue driven by strong and balanced growth in both medical and automotive. The successes resulted in close to doubling the size of our HR business since fiscal 2010.

Growth in all three of these businesses have been fueled predominately by new outsourcing wins. Moving forward we expect to continue growth in all three of these businesses, as new business bookings in fiscal 2012 remain strong across all of them.

While not all these wins will ramp to a full run rate in fiscal 2013 as some of the programs have elongated ramp cycles, in aggregate we expect these wins to provide a meaningful contribution in growth in our non-HVS businesses in fiscal 2013.

In the bottom right chart we showed revenue trend for our high velocity solutions or HVS business, which had clearly demonstrated the results of our active portfolio management focused on increasing the percentage of non-HVS business. The HVS business group did not grow in fiscal 2012, predominantly from our planned exit of ODM PC.

In terms of our non-HVS mix of businesses, as previously disclosed, we have been targeting to increase it to 70% of our overall business. Our activities to achieve this are very active and we expect to achieve this target in fiscal 2013, beginning with our upcoming June quarter.

Typically our HVS business would rise in June due to seasonality. However this June quarter we will be reducing our HVS exposure, while due to reduction on a sequential basis of 15% to 25%. We expect the transition will be completed this June quarter and therefore June should mark a bottom in revenue for the HVS business.

At the same time we believe this will position us to achieve our targeted 70% to 30% mix for the entire fiscal 2013. This is encouraging development as this new portfolio mix of businesses provide investors a significantly more attractive margin profile and stronger free cash flow generation. As a consequence customer diversification has continued to improve.

During the March quarter no customer accounted for 10% or greater of our revenue. It’s the first time since June 2009 that we had no customers in excess of 10%. We also expected churn to continue as we are not anticipating having any 10% or greater customers during 2013. Additionally, our top 10 customers totaled 51% of our revenue, the lowest level in almost two years. We anticipate our top 10 customers concentrating to continue trending lower throughout fiscal 2013.

It is our objective to provide our investors with a more stable, predicable and more diversified portfolio with longer product life cycles that will generate increasingly amounts of free cash flow. As discussed, below volume high mix were a complex part of our portfolio targeted at 70% of the portfolio this quarter. We expect this transaction to position us into what we believe will be an optimally balanced portfolio along the product lifecycles more suitable businesses that have higher operating margins.

Next I’d like to provide an update with regards to the operation performance of our component business, which now comprise of only multi conflict power, given our announced divestiture of Vista Point Technology. Flextronics power experienced normally seasonal declines in the March quarter as expected and the business generated a modest operating profit as a result of some of our restructuring actions.

Bookings remain very strong and annual revenue growth in fiscal 2013 is expected to be significant. We are very encouraged by the development of the business and expect a huge operating profit expansion for power in fiscal 2013. As previously announced, we have some residual restructuring actions related to one remaining factory enclosure that will occur over Q1 and Q2, which is expected to be the last restructuring action related to this business.

Multek had a greater seasonal decline than anticipated as revenue declined mid to high single digits sequentially. Operating profit was slightly below breakeven. Next quarter we expect to see strong sequential growth from Multek. Over the last year we’ve invested over $100 million in state of the art equipment, targeted at the Smartphone and Tablet market. We expect to see equipment to be fully utilized and well diversified by the second half of fiscal 2013.

Now turning to our guidance on slide 11. For our first quarter revenue is expected to be in the range of $5.9 billion to $6.3 billion. Our June quarter revenue guidance reflects a sequential decline, which is not typical for our business. Our guidance calls for sales decline of 8% to flat or down 4% as on this point.

Partially offsetting this EPS decline in our June quarter is continued growth in our non-HVS businesses. We are currently forecasting industrial and emerging industries to growth in the high single digits, sequentially higher liabilities to grow in the low single digits and integrated network solutions to remain flat.

Our adjusted EPS guidance of $0.20 to $0.24 is based on the estimated weighted average shares outstanding of $695 million. Quarterly GAAP earnings per diluted shares is expected to be lower than the adjusted EPS guidance I just provided by approximately $0.04 for intangible amortization expense and stock based compensation expense.

To conclude, I’d like to briefly touch on some key takeaways for fiscal 2012. Please turn to slide 12. Fiscal 2012 was a transformational year and one in which we took further steps to achieve a more diversified portfolio. We are approaching the conclusion of a multi year portfolio evolution. This evolution has positive applications for our margin expansion and pre cash flow generation that are my key takeaways.

Number one, optimal portfolio position expected to be a key in fiscal 2013. Our accelerated reduction in the HVS exposure will create a bottom price revenue in the June quarter and new outsourcing ones will help drive above seasonal performance in our overall business for our second, third and fourth quarters of fiscal 2013. This rapidly improving business mix will provide us with a more stable, more predictable and diversified portfolio with longer product life cycles.

Number two, our significant portfolio shift will lead to margin expansions. We increased our non-HVS mix of business around 42% in fiscal 2007 to 60% in fiscal 2012. We are targeting fiscal 2013 non-HVS business to grow to 70% of our total mix. From a revenue standpoint, our non-HVS sales more than doubled to $17.7 billion in fiscal 2012 from $7.9 billion in fiscal 2007. We expect to achieve growth ahead for fiscal 2013. In addition, we expect continuous improvement in our operating margin throughout fiscal 2013.

Number three, strong free cash flow generation. We generated $416 million in free cash flow during fiscal 2012, which equates to a current free cash flow yield of 9%. We invested our free cash flow for buying 82 million shares in fiscal 2012 and reduce our weighted average shares outstanding by 10%. Over the past 12 months we’ve bought back 18% of our total company’s weighted average shares outstanding. We believe that our portfolio that we’re seeing and resulting margin expansion will generate increasing amounts of free cash flow.

That concludes my comments and I’d like to open up the call for Q&A. Operator, can you please poll for questions.

Question-and-Answer Session

Operator

Of course; our first question comes from Shawn Harrison of Longbow Research. Sir, your line is open.

Shawn Harrison - Longbow Research

Hi. I guess, good afternoon. Why don’t you just talk about the revenue reduction within HVS? Is that you walking away from your largest handset customer? One of your peers had a very fine discussion about their relationship with them. Just maybe if you could give us any more granularity in terms of where your handset exposure will go after the June quarter here?

Mike McNamara

Yes, I think it’s – that’s kind of a difficult question Shawn. I think there’s a very significant portfolio transition going on with our largest handset customer as , some on research in the volume cases and I would also say some uncertain in terms of operating strategy as to which regions the customer will end up building their product in.

With really no product in four continents, we have a very, very complex set up with them. It’s in fact what makes it very, very difficult to execute and be able to – given the product portfolio, given the changes in the portfolio on a continuous basis, some of the product launch cycles, it makes it unbelievably complicated to make money with a customer where we are spread out over four different continents.

I think it’s likely that the customer will have different demand levels and it’s likely that they’ll consolidate their revenue into a much less complex region of the world, probably more notably China, where we have not built in funds to date.

So I think the answer to your question, it’s really difficult to tell; the product is in transition, the customer I think is a little bit in transition, where they are going to build is in transition, but be rest assured, our ability to make money with this customer, be it spread across four continents when the demand is difficult is a problem for our company and one which we have to move away from and our customer I think has to create different solutions as a result.

So I think it’s hard to tell, but we are anticipating that being able, not building on four different continents and it’s going to be a smaller base of business and more concentrated, but we don’t know exactly what that looks like yet, but one way or another as we’ve said on the calls in the past, it’s our objective to reduce our exposure and we are actively working to do that and I think the customers portfolio will naturally create a situation where that will happen.

Shawn Harrison - Longbow Research

I guess as a follow-up, given that you do produce in four continents and it may be moving away from that, how should we look at those assets being redeployed? What is the, I guess restructuring charges, anything, any color on that would be helpful.

Mike McNamara

Yes, we think it probably won’t be very much, but we have some restructuring in the forecast that we’ve already given you for this next quarter. We anticipated maybe a $10 million to $20 million. We’ve taken a very, very conservative position on this as we’ve – we kind of view this as a potential problem.

One of the things that we did is we took all the assets that are more unique to cell phone, and we depreciated them over three years instead of our normal depreciation cycles of seven, so that’s been occurring over the last several years, last three or four years. So we decided long ago to take a conservative position, so it doesn’t leave us very exposed.

Our ability to reuse the S&P assets is immediate and our ability to reuse the building and such is also very, very strong, so those don’t go to waste in any way. So I would actually call it a kind of a one to two week quarter, transition period, probably most of it in the June quarter and I would also expect the charges to be no more than $10 million or $20 million, but a lot of those are actually already in the numbers that we’ve given you.

Shawn Harrison - Longbow Research

Okay, very helpful. I guess, does this mean that you believe you can now do a 3.5% EBIT margin on a lower sales number, given the change in mix?

Mike McNamara

That’s a good question and the answer is yes, we do.

Shawn Harrison - Longbow Research

Okay. Any hazard against what the new number would be?

Paul Read

Shawn, it’s obviously going to be less than $7 billion, significantly less. It’s something that we’ll lay out to you at the Investor Day at the end of the month, give you some more color on that, because there’s clearly a large shift here in the mix, a more aggressive shift, so we are encouraged that we’ll be able to hit that number with lower revenues.

Shawn Harrison - Longbow Research

All right. Perfectly understandable and thanks for the clarifications.

Paul Read

Thanks Shawn.

Operator

The next question comes from Amitabh Passi with UBS. Your line is open.

Chelsea Shi – UBS

Hi, thank you. This is actually Chelsea Shi on behalf of Amitabh Passi. So just very quickly for the operating margin. Hello, hey?

Mike McNamara

Yes, we are listening. Go ahead.

Chelsea Shi – UBS

So for the operating margin, just want to make sure we calculated correctly for the June quarter and the mid point of the guidance, it should be something close to three or slightly below if you don’t consider the restructuring. Is that about the right range to think about it?

Paul Read

It should come out around 3 to 3.1.

Chelsea Shi – UBS

Oh okay, okay, much better. So just wondering, since we see by segment, the velocity is going down and all the other segments pretty much stay at stable growth. So just wondering why the margin won’t expense; whether to – like just trying to figure out the mix here and what is kind of dragging, still dragging the margins.

Mike McNamara

Yes, that’s a good question. I think it’s predominantly the level of revenue, which is at the mid point at around about 6.1, which is down from where we are here in Q4, almost 6.4, so there’s some under absorption there of the revenue, which is – and also Mike just talked about some small restructuring charges here with the mix shift and the revenue adjustments. So I think that’s predominantly what is enabling the margins to stay flat or even grow a little.

Chelsea Shi – UBS

Okay, got it, got it, it’s helpful. So just a very quick follow-on; for the free cash flow, for the whole year it looks very robust, very solid cash flow, but for the next quarter, it’s kind of light for comparing to the previous quarter, so just wondering going forward with your outlook in terms of using the working capital and management, the working capital and taking care of the free cash flow.

Mike McNamara

Yes, we are very strong with free cash flow. You’ve seen that over $3 billion over the last five years, so almost $400 million a year. I’ve always said that the free cash flow will grow with our earnings growth and so you should expect to have more free cash flow next year.

Working capital is running at 6% to 8% of sales. So that’s how predominantly we’ll deploy some cash and then we have M&A opportunities, we’ve been doing share buybacks etcetera, so I still think that fiscal ’13 free cash flow will be much stronger than fiscal ’12.

Chelsea Shi – UBS

Okay, cool, cool. So just to confirm, like the six to seven working capital is pretty much the normalized range, right?

Mike McNamara

Yes, yes, six to eight is the range.

Chelsea Shi – UBS

Okay, got it. All right, Thank you.

Mike McNamara

Thank you.

Operator

Our next question comes from Brian Alexander with Raymond James. Your line is open.

Brian Alexander - Raymond James

So your guiding through the 3.1% operating margin through June, which includes I guess you said $10 million to $20 million in charges, which is about 25 basis points. So adjusting for that you’re on 3.3. And given your comments about immediately redeploying capacity in HVS, should we expect to see operating margins at 3.3% or better on a consolidated basis in the September quarter and beyond or there are other things we should think about.

Mike McNamara

Yes, that’s a tight buy in. Lets continue to increase these operating margins throughout the year. Getting by June, we’ll have a much cleaner September with some higher revenues like Mike discussed, that we expect above average seasonal growth in revenues across the business and we’ll come with that, there’s obviously a lot more margins. So we should expect to accrete up through that range in September and beyond.

Brian Alexander - Raymond James

Okay, and then with just more clarity on the composition of the charges that your taking, the $10 million to $20 million, what’s embedded in that and then I just have one follow-up.

Mike McNamara

Well, it’s predominantly severance for example, which is usually pretty quick and with a lot of people in low cost regions, so we are able to minimize the cost of that. And then just some under absorption as we go through this, is very normal for that. It’s a very quick change, very much like the ODN PC exit. It was very swift and it was somewhat of a soft landing when it came to absorbing the capacity. We redeployed the S&P equipment very quickly. We have demand for this S&P equipment and we are in the process of redeploying that, so I think it will just be a short timeframe before we get beyond this.

Brian Alexander - Raymond James

Are the margins in the other three segments meeting your expectations or really the drag on overall margins is coming strictly from HVS at this point?

Mike McNamara

Yes, pretty much. The others are there about, so they got it to where it should be. Obviously components is still hovering around breakeven, so the back end of the year, when they turn around, we should enjoy some of the upside from that as well, but the majority of the business, the other three large business groups are operating close to optimum levels.

Brian Alexander - Raymond James

And the last one, besides RIM, what else has driven you HVS revenue down to what looks like a $1.5 billion that your guiding for the June quarter from what was $3 billion in the December quarter and that’s taken out the ODM revenue that you had at that time. So you basically cut that business in half. I don’t think RIM was quite that large, so what other sub-segments – I know you don’t want to name customers, but what other sub-segments are you de-emphasizing and that’s all I’ve got, thanks.

Mike McNamara

Yes, I would say in general, we just view the June quarter. It’s just this is our quarter for a number of the different other consumer companies that we are working on, so they are not going to really drive in any incremental consumption to the products and it’s just a little soft. So I’d say it’s predominantly a large cell phone customer and then secondarily it’s general softness across the board of those that remain.

Brian Alexander - Raymond James

Okay, thanks a lot.

Mike McNamara

Welcome.

Operator

Our next question comes from Sherri Scribner from Deutsche Bank. Your line is open.

Sherri Scribner - Deutsche Bank

Hi thanks. I wanted to follow-up on the HVS segment. I think Mike you said that would bottom in the June quarter and then go up from there. I’m just trying to understand, what’s driving the upside as we move through the year to revenue and I guess just trying to think about it, how do you prevent that segment from growing too much and essentially becoming big again.

Mike McNamara

We’ll we’re going to try to – we’ve talked a lot about portfolio management over the course of the, I think almost the last two years almost. One of the things that we are trying to do is to meter our growth in that segment and in this business, the resulting margin that you end up with is really a result of what the mix is, what the different segment mix is and so like we talked about it often, as we are trying to get between 0.5% operating profit, we think we can probably get there with a lower, well we know we can get there with a lower revenue level.

We can probably get there pretty soon, because the adjustment in terms of the portfolio is happening more quickly and we just have to, check our objectives to go manage that business to a higher operating margin and with the objective of generating more free cash flow.

So as far as what – over added bottoms and it comes back up, we still have quite a bit of seasonality in some of the remaining consumer businesses that are locked. So there still will be some seasonality that occurs every single year as we get close to the Christmas season and some of our customers have seasonal up-ticks that are significant around that period, so we still have some things and the other thing is we’re a kind of consumer business that are more attractive.

So we are very, very focused at trying to be in consumer business that may be a little bit more lower volume, but a little higher operating profit and we have some nice bookings which we’ll see come in towards the end of the year as well.

So I think its just a question of discipline Sherri, about trying to maintain our range around 70/30 and then push real hard to get that 70% number growing as fast as we possibly can, while maintaining those margins.

Sherri Scribner - Deutsche Bank

Okay so we do expect that business as we move forward to growth in line the company or grow a bit slower or what would you expect?

Mike McNamara

Yes, I would anticipate it pretty much grows inline with the company. I think it will be – again, I think the way to think about it is if we had our objectives matched, we would try to keep it pretty close to 70/30. I think that’s the right balance, but we don’t think we need to go to 25/75 for example and it doesn’t mean we can dial in exactly and of course if some business come along that has a very significant return on capital with a little bit better margin, even though its in the consumer segment we might take a little bit more, but we think the right number and the right optimum portfolio is 70/30 and we have committed internally to go manage to that.

Sherri Scribner - Deutsche Bank

Okay and then just one quick follow up Paul for you. I think just circling back to some of the other comments that you had, I think you said there was a one time non-cash item and cost of goods solid, which is about a $0.03 impact. Would you – I just want to make sure I understand that correct. Your EPS would have been $0.03 higher without that non-cash adjustment and what was that for?

Paul Read

Yes, it could have been Sherri. It was a one off adjustment that we had to make. One of our sites, foreign sites was an isolated incident for us. Some U.S. GAAP reporting discrepancies that we had. It was spanning two quarters and both individually or in the aggregate it wasn’t material to any historical quarter and all the details we have provided in our filings.

But absent of that, for sure we could have had some upside. We thought we had a pretty good quarter going and we have some favorable impacts with some mix of some our businesses that will come in through capital equipment for example. We are stronger this quarter and that’s usually very profitable for us, so we are enjoying that. And we had some push out of some client restructuring as well that was going to go from Q4 to Q1, so that helps us well so.

Yes, there could have been some upside, but at the end of the day we are managing this business as we go along and we have to absorb some of these things sometimes.

Sherri Scribner - Deutsche Bank

Okay, great. Thank you.

Operator

The next question comes from Osten Bernardez from Cross Research. Your line is open.

Osten Bernardez - Cross Research

Hi, yes. Thanks for taking the call. Could you describe for me how effective you were in terms of your sales generation related to the $70 million or so of working capital that you picked up in the December quarter within INS?

Mike McNamara

I think I know what that is. That was the INS business, that was the divesture of a couple of facilities. We paid up roughly $70 million as you said in working capital. That translated to revenues in Q4 for us and beyond which we discussed on the last call and revenues with a run-rate of $500 million to $800 million of revenue we picked up. So that was executed and included in the Q4.

Osten Bernardez - Cross Research

Okay, and when I think of it, you were expected solid books to help support growth within INS and from speaking again for the March quarter and I guess my main question is sort of net of bookings, how would you describe how your business did from an industry stand point. Did you suffer any setbacks related to inventory corrections at all?

Mike McNamara

Well may be a little bit. We don’t view that segment as being particularly robust. Our quarter-on-quarter growth rate from Q3 to Q4 in that area was $0.03. If you look at it from Q4 to Q1, it’s roughly flat. So we don’t see a big pickup in that area, we consider it to be pretty stable if we look across our customer base and the only way to, really the way to drive that business forward is to have increasing amounts of new customer wins and that’s where we are focused on. But I think the underlying business tends to be pretty flat from what we can see from across all broad sections of our customer base.

Osten Bernardez - Cross Research

All right, I appreciate that color. And my last question for now is, after selling the assets associated with the BBT business, what is some of your longer term outlook for the remaining components bundle as a whole from the revenue growth and long term profitability standpoint in terms of the timing of reaching targets.

Mike McNamara

Yes, we are anticipating those groups to have probably substantial over 10% growth rate going forward. As we mentioned, we actually did some investments into Multek this year is one of the pressures on operating margins to start with.

We have a lot of that booked right now. In fact we have a significant amount of that booked and actually expect to be potentially at capacity by the second half of this year and that tends to be a significant amount of incremental revenue, close to a $100 million that would come online, at what would be better than pretty nice operating profit levels.

In that power area, again we have very, very strong bookings. We’ve been continuing to restructure that business to get into position where it can achieve its top margin potential. We actually think we may be there by the time we hit the December quarter. Our restructuring activities will be done in Q2. We actually don’t think we have anything left. In fact our underlined profitability in that business today is actually pretty strong once you separate out those charges.

So we absorb those into our income statements right now and those charges we anticipate being done by Q2 and as results we have a pretty good confidence to the underlying profitability actually, it’s pretty good right now. We actually expect very significant revenue growth and we expect to be able to hit very nice operating profit levels, consistent with that business.

Osten Bernardez - Cross Research

Thank you.

Operator

Our next question is from Craig Hettenbach from Goldman Sachs. Your line is open.

Craig Hettenbach - Goldman Sachs

Great, thanks so much. Mike, I just wanted to follow up on the comments of the growth in HVS, being in line with the company on a longer term basis. I would think with the other markets that are still more under penetrated, do you see more robust growth there. So just trying to get a sense of what segments within HVS are under-penetrated or that you could see better growth to get you this growth that business in line with the corporate average.

Mike McNamara

Well like I said, we do actually expect to grow it in line with the corporate average. I think that’s probably the more likely scenario and there is a lot of different ways to penetrate HVS.

So if I think about those segments, we still have ways to penetrate it. In power products we have way to penetrate it, in services products we have ways to penetrate it, in terms of just the assembly business itself, so we actually have lots of different ways to go after that business. There are certain regions of the world for HVS where we have a very attractive profile. So we have the broadest footprints worldwide and very often the building cheap in China is one solution, but being able to distribute it, both products all around the world becomes more attractive as we go forward.

So there is still a lot of ways to penetrate it. We are actually not too worried about the ability to grow it. What we are kind of more interested in doing is making sure that we balance the services portfolio that we have, which means power PCBs, mechanicals services and the world wide apps.

Balancing that, the use of all those assets in HVS, along with making sure that we keep it as a balance part of our overall portfolio. So it’s kind of – in kind of summary it’s a balance of the different services and different service offerings that we have and different product technologies, along with being able to balance the total amount that is within the overall flex portfolio.

Craig Hettenbach - Goldman Sachs

Okay and if I could just follow up with a question for Paul, when you net out some of the restructuring charges for the next quarter, can you just talk about on a gross margin, maybe on a go forward basis as the portfolio evolves, just the puts and takes of what can drive your gross margins as you go forward.

Paul Read

Yes, most of the effects will be gross margin related. We’d expect gross margin to grow 6% in the other quarters over the year, which will obviously drop to the operating margin line as we keep the SG&A in that 180 to 190 range, which we fell comfortable about. So that’s how it should play out for us, and it should play out with less revenue to get to that, than I’d originally indicated it was $7 billion level, but the mix is pretty swift here and its pretty positive from the margin side.

Craig Hettenbach - Goldman Sachs

Got it, thank you.

Paul Read

Thanks.

Operator

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

Matt Sheerin - Stifel, Nicolaus

Yes, thanks. Sorry, but I want to go back to deal issue with your large smartphone customer, a couple of questions. One, you talked about the restructuring charges, does that mean that you are just lowering your cost structure in the four areas that you build products for them to adjust to the lower demand or you’re actually walking away from programs deliberately and will you be building product for that customer in fewer than of those four facilities or you’re actually walking away from some of those.

Mike McNamara

Well, I don’t know if I would determine walking away. I think the overall demand is at different levels. We have strategy of the way to build that demand that evolve and changes. A lot of the uncertainty is a result of those, a lot of different management all the way through the operating levels at RIM and they will make their decision where they want to build.

It’s imposable to imagine that you want to keep four different continents building this production. So it will change, whether we like it of not. The demand patters, the demand volumes will be different whether we like it or not and we are continuously struggled with this business to try to get any kind of predictability. The difficulty we have is because we have a short product life cycle and the uncertainty of some of the market success and in which region they have that market success, it makes it very, very difficult to be able to execute.

So as the demand goes down now we are absolutely taking out permanent capacity if you will. I mean you can always put it back in, but we are just not going to need it. But their demand patterns and their strategies are continuing to unfolded as they think too how to want to go run their business and they do have a new management that’s going to make different decisions and we will just have to wait for the outcome of that.

Matt Sheerin - Stifel, Nicolaus

And will you entertain any program opportunities in China to build handsets there or is that not in your plan?

Mike McNamara

Well its probably not needed for us. I should say its probably not needed for that customer. They have a couple of qualified sources already in China that they have been working with. We put up our big Asia operations in Malaysia, because that was the objective, to go with our customer. We were the first to go in Asia with them and if they change and want to go China, then they already have a couple of suppliers in there, so that will reduce the demand coming our way.

We will continue to work with the customer. We still have a lot of repair activities, we have product completion center activities, we have under circuit boards we have power products. We do a lot of flex circuits with our company. If the assembly changes, we’ll certainly engage with them in a pretty significant way, but may be there will be a different portfolio with different product technologies and in different locations.

Matt Sheerin - Stifel, Nicolaus

Okay and then just a quick question on the component business. You talked about sort of hovering around breakeven, sounds like Meltek is moving in the right direction in terms of revenue opportunities. Are you still targeting the 3%, 4% operating margin number for that business, which I think would be easier to get to given that you’ve divested the divesture point. But do you a have a timeframe for that now?

Paul Read

Yes, that is the second half this year we’d expect that level of performance with those two business groups combined. Like Mike said, underlying there’s some strong profitability there.

Today in power, we have some, as we said earlier, some planned restructuring that we’ll finish up here in the September quarter. Meltek’s got a great book of business that invested over $100 million in the last 12 months in equipment and hit capacity capabilities. So we are starting to see all that come online as well for the second half. So the second half looks pretty promising for us.

Matt Sheerin - Stifel, Nicolaus

Are you still looking at that 3% to 4% number or is that just...

Paul Read

Yes, no its still 4%, it’s the target and that’s not even getting them to industry standard performance levels.

Matt Sheerin - Stifel, Nicolaus

Okay, thanks.

Operator

Our next question is from Amit Daryanani with RBC Capital Markets. Your line is open.

Amit Daryanani - RBC Capital Markets

Good afternoon guys. Just a couple of questions. First on the HVS side, it looks like we’ll be about 26% revenues in the June quarter for you. I’m just trying to reconcile, how do you get to a 70/30 split by year end when you say that business will grow inline with corporate averages. I would imagine that to grown substantially faster than corporate averages and be a drag on margin in that case to get to the 70/30 split for fiscal ‘13. Could you just talk about that a little bit?

Mike McNamara

So first of all, we can’t dial-in 70/30. I mean sometimes the customer is going to call us up one month and go, oh I need another $100 million, and he might call us in one of the other seven months and ago, I need a $100 million less, so we can’t dial-in 7-30. So if it swings to 26 or goes up to 34, I mean we call that pretty much in the ballpark of the portfolio mix we are trying to maintain. So I just want to set that expectation first, that’s in the range of the 70/30.

Now the reason that you hit 26 and I don’t know if that’s the number, but I’m going to take your number. Is in the June quarter what we said is you have pretty low seasonality, not only with some of the big cell phone customer, but we actually have lower than normal demand from the rest of our consumers businesses.

Now we’d expect that to kick right up the minute September happened. So I mean September quarter ends up – we have to start filling the channels for customers and other things. So we are going to expect that that moves up pretty substantially in September and in my prepared remarks one of the things that I said is, we actually expect Q2, Q3, Q4, all that have higher than seasonal growth rates across the entire business.

Part of that is the very, very low June quarter that creates a base that will outperform on relative to normal seasonality. Part of that will be HVS and part of it will be with non-HVS. But I kind of foresee that it’s going to float around 30/70. We can’t dial that in directly. When a customer orders something, we have to go build it and…

Amit Daryanani - RBC Capital Markets

That’s a fair point. And then just with this smartphone customer, are you guys comfortable that this is a bottom in June. Could there be a second level of disengagement as well? It is my understanding that the customer that you are looking to reduce their supply chain period and do you think this encompass to the extent of what they will do with Flextronics.

Mike McNamara

Yes, we do.

Amit Daryanani - RBC Capital Markets

All right. And in the camera module, I think you talked about some key impacted net income from the sale of some of the assets. Did you say a material revenue ahead as well with that. Could you just give us that number?

Mike McNamara

No, it was an immaterial revenue, not worth calling out, so it was more on the cost of the sales that was called out.

Amit Daryanani - RBC Capital Markets

Got it and just finally from me on the industrial segment, I think you talked about $1.3 billion in booking in fiscal ’12, which is a fairly strong number. Could you just tell me, what’s the timeline for these ramps that translate to revenues that hit your P&L?

Paul Read

Each part is a little bit different, but in the industrial group it typically takes six to nine months to really ramp up to the postproduction, sometimes 12 months, but normally six to nine months.

Amit Daryanani - RBC Capital Markets

All right, thanks a lot guys.

Paul Read

Thanks.

Operator

Our next question comes from Wamsi Mohan of Bank of America Merrill Lynch. Your line is open.

Wamsi Mohan - Bank of America Merrill Lynch

Yes, thank you. First, I have a quick clarification on a prior question. So does the guidance that you gave for the next quarter, does it include the $10 million to $20 million charge that you alluded to on an non-GAAP basis and all those charges flowing through next quarter.

Paul Read

Well its $10 million to $20 million over the next two quarters and it is included in our guidance, yes.

Wamsi Mohan - Bank of America Merrill Lynch

Okay, thanks Paul, and on the four sites you mentioned Mike, what percent of revenue of those sites that this largest handset customer account for and you can redeploy the PCB assets, but do you think you need to close of consolidate any of these sites?

Mike McNamara

No, they are all running in existing operations. So it will just create some space for a while and then the next things we’ll book in will just go into the spaces. So no, we won’t have to close any operations; we don’t have any standalone operations. So we will keep them all open and it gets redeployed pretty quickly.

Wamsi Mohan - Bank of America Merrill Lynch

Okay and can you talk about the magnitude of the charges that you are speaking about in the power business. It sounds like both Paul and you mentioned very healthy margins ex the restructuring charges. I’m just wondering, I mean, if you ex’d out the restructuring, how much below Multek 0x08 graphic

or is it actually even perhaps even in line with Multek at this point.

Mike McNamara

You are talking about power.

Wamsi Mohan - Bank of America Merrill Lynch

Yes.

Mike McNamara

Yes, power is probably even ahead of Multek in terms of hitting its operating profit targets and it has probably $10 million roughly in Q1 and Q2 that we’ll see as a charge.

Wamsi Mohan - Bank of America Merrill Lynch

Okay, thank you.

Operator

Our final question comes from Jim Suva with Citi. Your line is open.

Samuel Meehan - Citi

Good afternoon, this is Samuel Meehan of behalf of Jim Suva. I just wanted to ask a quick question following the Stellar Mega electronics tuck-in. Should we expect similar deals with upward margin opportunity comps that tuck in these smaller acquisitions going forward and just some details on Flex’s thoughts on their M&A strategy going forward.

Mike McNamara

Yes, if we can pick up different pieces of business that have unique technologies that we can leverage and sale and create synergies with the revenue and the customer access that we have, is we’ll continue to do those kinds of acquisitions. The focus on those acquisitions will be those that drive our margins higher, so we’ll focus our investments predominantly in the higher margin, non-HVS kind of businesses, and so you should expect that we’ll do more of that as we go forward.

One thing that we have that Paul mentioned is that pretty good pre-cash flow was generated, $3 billion over the last five years, which was a great way to go and redeploy some of that. If we can move our margin profile and create these some logistic deals, then we’ll for sure be on the look out for them.

Samuel Meehan – Citi

My understanding is that with the Stellar there will be not be any manufacturing realignments is that correct?

Mike McNamara

No manufacturing realignment, no. But we’ll continue to operate the facility as is. It’s in Southern California; it’s a great place for a lot of the aerospace and defense, so it’s actually give us nice beach head in to a strong area for that product category and we are actually looking forward to keeping it open.

Samuel Meehan – Citi

Great, thank you.

Kevin Kessel

Okay, thank you everybody for joining us today on our call. You will be able to access a replay of this call and obtain a transcript on the Investors section of the Flextronics website.

And also as a reminder, we’ll be hosting our Annual Investor and Analyst Day in New York City on May 31, at the end of this month. Details and registration are available on our website at flextronics.com/2012analystday. This concludes our call.

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