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Flextronics International Ltd. (FLEX)

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Flextronics (FLEX)

F3Q12 Earnings Call

January 19, 2012 5:00 p.m. ET

Executives

Kevin Kessel – VP, IR

Paul Read – CFO

Mike McNamara – CEO

Analysts

Sherri Scribner - Deutsche Bank

Shawn Harrison – Longbow Research

Brian Alexander – Raymond James

Amitabh Passi – UBS

Sean Hannan – Needham & Company

Louis Miscioscia – Collins Stewart

Steve O'Brien – JP Morgan

Jim Suva – Citi

Amit Daryanani – RBC Capital Markets

Brian White – Ticonderoga

Craig Hettenbach – Goldman Sachs

Presentation

Operator

Good afternoon, and welcome to the Flextronics International Third Quarter Fiscal Year 2012 Earnings Conference Call.

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, operator. We appreciate you joining the Flextronics’ conference call to discuss the results of our fiscal 2012 third quarter ended December 31, 2011.

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 our website under the “Conference Calls and Presentations” link, and it can also be accessed from a link directly on our homepage.

The agenda for today’s call begins with Paul Read reviewing the financial highlights from the third quarter of fiscal 2012, followed by Mike McNamara, who will discuss the current business environment and trends within our individual business groups. He will also conclude with our guidance for the fourth quarter of fiscal 2012 ending in March. Following that, we will take your questions.

Please turn to slide two for a review of the risks and non-GAAP disclosures. 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 through 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 reference 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.

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

Paul Read

Thank you Kevin. Please turn to slide three. We generated $7.5 billion in revenue for our fiscal 2012 third quarter ending December 31, 2011, which was at the midpoint of our guidance range of $7.3 billion to $7.7 billion. Revenue declined $551 million, off 7% sequentially, driven entirely by the exit of the ODM PC business in the quarter.

Our third quarter adjusted operating income was $150 million, down 15% sequentially and our GAAP operating income was $138 million, down 14% sequentially. Our operating performance was significantly impacted by the cost of exiting our ODM PC business, which I will address shortly.

Adjusted net income for the third quarter was $128 million, down 19% from last quarter and our GAAP net income for the third quarter was $102 million, down 22% sequentially. We reported adjusted earnings per diluted share of $0.18, which was at the low end of the adjusted EPS guidance of $0.18 to $0.22 and down 18% sequentially. Our GAAP EPS for the third quarter was $0.14.

Our diluted weighted average shares outstanding, or WASO, for the quarter was 721 million. This was a reduction of 7%, or 56 million shares compared with the 777 million shares reported a year ago, which was driven by our share buybacks.

During the quarter we repurchased approximately 19 million shares for $110 million at an average cost of $5.88. Due to the timing of the repurchases during the quarter, we only realized the reduction in our diluted WASO of approximately 3 million shares. We will see the remainder of the reduction in our upcoming March quarter.

Please turn to slide four. During our third quarter, we completely exited the ODM PC business. This business generated $187 million in revenue and accounted for a $70 million adjusted operating loss, which was greater than we had projected for the quarter.

This loss reflects some incremental costs related to the wind down, such as final severance costs, additional supply chain termination costs, excess lease costs, and other final asset impairments. While the ultimate costs were higher than the $50 million we originally anticipated, we were pleased with the speed and efficiency that we were able to disengage from this multi-billion dollar business.

We expect no further impairment charges or exit costs associated with our disengagement, and we have successfully redeployed the associated machining equipment back into our operations, which is saving us an estimated $50 million in capital expenditures.

As you can see from this slide, excluded in the negative impact of the ODM PC business, our adjusted operating margin would have been 3%, and our adjusted earnings per share for the quarter would have been $0.27.

Please turn to slide five. December quarterly revenue declined sequentially by $551 million. This decline was entirely due to the exit of the ODM PC business. Our top ten customers accounted for 56% of our quarterly revenues, and RIM was our only customer greater than 10%. Adjusted operating income totaled $150 million, and adjusted operating margin was 2%. As discussed in the previous slide, our operating earnings performance was significantly burdened by the losses associated with our ODM PC exit.

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