Flextronics International Q4 2010 Earnings Call Transcript

Flextronics International Q4 2010 Earnings Call Transcript
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Flextronics International (FLEX)

Q4 2010 Earnings Call

April 27, 2010 5:00 pm ET

Executives

Michael McNamara - Chief Executive Officer and Director

Paul Read - Chief Financial Officer

Warren Ligan - Senior Vice President of Investor Relations

Analysts

Louis Miscioscia - Collins Stewart LLC

Amit Daryanani - RBC Capital Markets Corporation

Alexander Blanton - Ingalls & Snyder

Sherri Scribner - Deutsche Bank AG

Jim Suva - Citigroup Inc

Amitabh Passi - UBS Investment Bank

William Stein - Crédit Suisse First Boston, Inc.

Sean Hannan - Needham & Company, LLC

Shawn Harrison - Longbow Research LLC

Brian Alexander - Raymond James & Associates

Steven Fox - Calyon Securities (USA)

Wamsi Mohan - BofA Merrill Lynch

Presentation

Operator

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Good afternoon, and welcome to the Flextronics International Fourth Quarter Fiscal Year 2010 Earnings Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I'd 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. And welcome to Flextronics conference call to discuss our results for our fiscal 2010 fourth quarter ended March 31, 2010. 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 first quarter of fiscal 2011 ending July 2, 2010, and following that, we will take your questions. Please turn to Slide 2.

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 our 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 is noted in our 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, we will reference both GAAP and non-GAAP financial measures. Please refer to the schedules to the earning 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 everybody on the call. Today, we'll summarize and highlight our financial performance for the fourth quarter, and Mike will provide additional business insights, cover important segment and business unit trends and provide guidance for our fiscal 2011 first quarter.

Please turn to Slide 3. Fourth quarter revenue came in at $5.94 billion, which was within our guidance range of $5.8 billion to $6.2 billion and represented a 9% sequential decline, which is better than our normal historical March quarter seasonality of an approximate 15% sequential decline. Increased component supply constraints across various component sides broadly impacted our sales for the March quarter more than we had originally anticipated.

Adjusted earnings per diluted share for the March quarter was $0.16, which is at the high end of our EPS guidance of $0.13 to $0.16. The adjusted tax expense for the third quarter was $6.8 million reflected on an adjusted tax rate of approximately 5%, which is below our stated guidance range of 10% to 15% due to year-end true-up adjustments for estimates made in the previous quarters. Going forward, we still feel 10% to 15% is a good range to use for modeling our results. Finishing up on the income statement, our adjusted net income for the fourth quarter was $130 million, increasing 6% from the third quarter.

Let me now briefly highlight some year-over-year changes. We saw sales increase to 6% from a year ago. Meanwhile, adjusted gross profit rose 46% due to cost rationalization activities and better utilization. Adjusted SG&A, which includes R&D, declined 7% versus March of a year ago, and our adjusted operating profit more than tripled. Interest and other expense came down meaningfully as a result of our debt repayment activities. Lastly, adjusted net income was up sixfold year-over-year, which resulted in more than fivefold increase to our adjusted EPS. Please turn to Slide 4.

Adjusted gross margin expanded for the fourth consecutive quarter, rising 30 basis points sequentially to 5.8% as our overall mix improved, with an increased percentage of our sales coming from our Infrastructure, Industrial and Medical businesses, and less from our Consumer and Mobile businesses. Our Components businesses remained below normalized profitability levels during the March quarter. We expect increased adjusted operating profit contribution from our Component businesses as revenue and product yield improved during the year, and operating margin starts to normalize towards the 5% range.

Adjusted SG&A expense totaled $172 million in the quarter, roughly flat on a sequential basis and down $13 million year-over-year. It's interesting to note that we were able to achieve this year-over-year adjusted SG&A reduction despite sales being more than $350 million higher, which illustrates the impact of our successful restructuring actions and cost containment efforts. At the same time, we've continued to invest in our business as our R&D expenses have remained stable year-over-year.

Our adjusted operating profit trend shows the improvements made over the last year to cost cutting and revenue expansion as the overall economic environment improved. Adjusted operating profit of $170 million decreased 10% sequentially, but increased 236% or $119 million year-over-year. Our adjusted operating margin held firm at 2.9% on a sequential basis and reflected a 200 basis points of improvement versus a year ago. As we enter fiscal 2011, we remain confident and committed to continuous improvement in our adjusted operating margin towards our targeted range of 3.5%.

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