FLEX

Flextronics International Ltd. (FLEX)

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Flextronics International (FLEX)

Q3 2013 Earnings Call

January 24, 2013 5:00 pm ET

Executives

Kevin Kessel - Vice President of Investor Relations

Paul Read - Chief Financial Officer

Michael M. McNamara - Chief Executive Officer and Director

Analysts

Sherri Scribner - Deutsche Bank AG, Research Division

Shawn M. Harrison - Longbow Research LLC

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Chelsea Shi - UBS Investment Bank, Research Division

Jim Suva - Citigroup Inc, Research Division

Osten Bernardez - Cross Research LLC

Ruplu Bhattacharya

Presentation

Operator

Good afternoon, and welcome to the Flextronics International third quarter fiscal year 2013 earnings conference call. This call is being recorded. [Operator Instructions] 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.

Kevin Kessel

Thanks, Gabrielle, and thanks for joining Flextronics' conference call to discuss the results of our fiscal 2013 third quarter ended December 31, 2012. We have published slides for today's discussion that can be found on the Investor section of our website. With me today on our call is our Chief Financial Officer, Paul Read; and our Chief Executive Officer, Mike McNamara. Today's call is being webcast live and recorded. This call contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties and actual results could differ materially. Such information is subject to change and we undertake no obligation to update you of any changes to these forward-looking statements. For a discussion of the risks and uncertainties, you can review our filings with the Securities and Exchange Commission, specifically our most recent annual and quarterly reports on Form 10-K and 10-Q and our current reports on Form 8-K. This call references non-GAAP financial measures. You can find them on the Investor Relations section of our website, along with the required reconciliation to most comparable GAAP financial measures.

I will now turn the call over to our Chief Financial Officer, Paul Read. Paul?

Paul Read

Thank you, Kevin, and good afternoon. Please turn to Slide 3. We generated $6.1 billion in revenue for our fiscal 2013 third quarter ending December 31, 2012, which was above the midpoint of our guidance range of $5.8 billion to $6.2 billion. Revenue declined $1.35 billion or 18% year-over-year, reflecting the $1.1 billion reduction in revenues from the combined actions associated with winding down our assembly business with RIM and exiting the prior year December quarter of our ODM personal computer business.

Our third quarter adjusted operating income was $146 million, declining 5% year-over-year and our GAAP operating income was $35 million, declining 75% year-over-year, reflecting the impacts from $103 million restructuring charge taken during the quarter, that I will expand on shortly.

Adjusted net income for the third quarter was $148 million and included a net gain on our investments of approximately $26 million net of tax or $0.04 a share benefit, which is similar to last quarter and is primarily the result of the fair value adjustment related to our work day warrant.

Adjusted earnings per diluted share for the third quarter was up 22% year-over-year, at $0.22, which included the $0.04 investment gain. Our adjusted EPS guidance was $0.18 to $0.22 for the third quarter and excluded any fair value adjustments related to the investment. Our GAAP EPS for the third quarter was $0.05, which is down 67% year-over-year and, again, reflects the impacts of the restructuring actions taken, which impacted our results by $0.15. Excluding this, our GAAP EPS for the third quarter was $0.20, which is up 33% year-over-year.

Our diluted weighted average shares outstanding, or WASO, for the quarter was 669 million shares. This was a reduction of 52 million shares or 7% from the 721 million shares reported a year ago, reflecting the results of our share buyback program. In September, our Board of Directors issued a new authorization permitting the repurchase of the maximum limit of 10% of our outstanding shares. During the quarter, we repurchased 12.6 million shares for $74 million, which is approximately 2% of our outstanding shares.

Please turn to Slide 4. Our integrated network solutions, or INS business group, totaled 45% of our sales during the quarter. Revenue was $2.7 billion in the quarter, which was up 1% on a sequential basis. It reflected a slight decline of 2% year-over-year. This quarterly revenue performance was better than our expectations of a mid-single-digit revenue decline. The December increase was primarily driven by better-than-expected growth in our service storage businesses, which grew mid-single digits, primarily due to increased demand for products supporting the data center and cloud computing. The remainder of the business was generally flat to slightly down as we continue to see weakness in telecom and networking.

Industrial & Emerging Industries, or IEI, amounted to $937 million and comprised 15% of total sales. Revenue declined 6% on a sequential basis, which was in line with our expectations of a mid-single-digit revenue outlook. Our service offering with IEI is both diverse and extensive as we provide customer solutions using a global system of over 50 locations and multiple design centers. Recall that this offering operates in a very fragmented space as evidenced by the over 300 customers we serve. Though we have some new programs ramping out our appliances segment, many of the subsegments we serve displayed flat- to mid-single-digit sequential revenue decline.

Our High Reliability Solutions Group is comprised of our medical, automotive and defense & aerospace businesses, and rose 21% year-over-year and increased 9% sequentially. The group comprised 12% of our total sales with quarterly revenue totaling $714 million, which established an all-time quarterly high for this group. It also marked the 12th consecutive quarter of double-digit year-over-year revenue growth for HRS. This performance was better than our December quarter stable revenue expectations, driven by continued strength in our automotive business, which benefited from the closing of the Saturn Electronics acquisition in December. Saturn further expands our capabilities and services for our automotive customers by providing us with leading wiring and high precision engineering solenoid solutions. Year-over-year, our automotive business has grown over 20% on the strength of new programs.

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