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Flextronics International Ltd. (FLEX)

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Flextronics International Ltd. (FLEX)

F3Q2011 Earnings Call Transcript

January 20, 2011 5:00 pm ET

Executives

Kevin Kessel – VP, IR

Paul Read – CFO

Mike McNamara – CEO

Analysts

Shawn Harrison – Longbow Research

Jim Suva – Citi

Steven O'Brien – J.P. Morgan

Amitabh Passi – UBS

Sherri Scribner – Deutsche Bank

Brian White – Ticonderoga

Brian Alexander – Raymond James

Steven Fox – CLSA

William Stein – Credit Suisse

Lou Miscioscia – Collins Stewart

Alex Blanton – Clear Harbor Asset Management

Presentation

Operator

Good afternoon, and welcome to the Flextronics International third quarter fiscal year 2011 earnings conference call. Today’s call is being recorded, and all lines have been placed on mute to prevent any 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, Vice President of Investor Relations. Sir, you may begin.

Kevin Kessel

Thank you, Victor. And welcome to Flextronics’ conference call to discuss the results of our fiscal 2011 third quarter ended December 31, 2010. Joining me on the call today is Chief Executive Officer, Mike McNamara, and Chief Financial Officer, Paul Read. The presentation that corresponds to our comments today is posted on the Investors section of our website under the Conference Calls and Presentations link, and it can also be accessed directly from our home page.

Our agenda for today’s call will begin with Paul Read reviewing the financial highlights from the third quarter of fiscal 2011, and Mike McNamara will follow up with some insights on our current business trends and conclude with our guidance for the fourth quarter of fiscal 2011 ending March. Following that, we will take your questions.

Please turn to slide two where I’ll cover the risks and non-GAAP disclosures. This presentation contains forward-looking statements within the meaning of the US securities laws, including statements related to revenue and earnings guidance, business prospects of our market segments, expected benefits from new business wins, and expected improvements in profitability of our components business units.

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 expectations, and we assume no obligation to update them. Information about these risks is noted in the earnings press release on slide 12 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 SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements.

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

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

Paul Read

Thank you, Kevin. And welcome everyone to our call. The third quarter was another solid quarter for Flextronics with revenue exceeding the high end of our guidance range of $7.5 billion to $7.7 billion by $133 million, which represented – which resulted in 6% sequential increase.

We continue to see broad-based year-over-year growth across all our market segments and almost all segments saw healthy sequential growth for the third consecutive quarter. Our growth continues to be principally driven by new outsourcing programs with both new and existing customers, market share gains, and the extension of favorable seasonal trends expressed by our mobile and consumer digital segments during our September quarter.

Adjusted operating income was $232 million, up $19 million or $0.09 sequentially and 23% above the $189 million of a year ago. GAAP operating income was $219 million, up $20 million or 10% versus the prior quarter and 31% above the year-ago level of $167 million. Adjusted net income for the third quarter was a $193 million, increasing 8% sequentially from our second quarter and 40% from $138 million a year ago.

Our GAAP net income for the quarter reflected a $35 million benefit from the favorable settlement of certain tax litigation and also include the impact of intangible amortization and stock compensation expense. Our GAAP net income was $198 million, expanding 38% from last quarter’s all-time record result and more than double the $93 million from a year ago.

We reported adjusted earnings per diluted share for the December quarter of $0.25, which was at the high end of our EPS guidance of $0.23 to $0.25 and grew 9% sequentially from $0.23 last quarter and close to 50% from the $0.17 of a year ago. It’s also noteworthy that our GAAP EPS was $0.26, marking a new record for the company and eclipsing the $0.18 we delivered last quarter by a wide margin.

Please turn to slide four. Adjusted SG&A expense totaled $204 million in the quarter, up $16 million sequentially and $34 million year-over-year on revenue increases of $411 million and $1.3 billion respectively. Adjusted SG&A dollars trended slightly above our targeted range of $190 million to $200 million to increase discretionary investments, design and engineering resources, as well as other general infrastructure costs necessary to support our anticipated future growth.

As a result, our SG&A as a percentage of revenue rose slightly to 2.6% from 2.5% last quarter and was in line with a year ago. Despite our SG&A percentage of sales ticking up slightly this quarter, we still remain confident that we can further leverage SG&A in fiscal 2012 as we grow our revenues.

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