Flextronics Swings to a Loss

Updated from 4:27 p.m. EDT

Flextronics ( FLEX) swung to a fiscal second-quarter loss from a profit a year ago as divestitures contributed to a 6% drop in sales.

The company on Tuesday also projected results for the next two quarters short of analysts' expectations, noting broad-based softness among customers. After that, company executives said they expect "good growth" to resume in the March quarter and accelerate through calendar 2006.

But investors focused on the disappointing shorter-term outlook and latest results, punishing the stock with a drop of $1.59, or 13.4%, to $10.51 in recent after-hours trading. Shares closed the regular session up 7 cents, or 0.6%, at $12.10.

The contract electronics manufacturer posted a loss of $2.4 million, or break-even on a per-share basis, in the quarter, compared with net income of $92.6 million, or 16 cents a share, a year ago. Restructuring charges totaled $50.3 million in the latest quarter, compared with $33.5 million a year ago.

Excluding those and other items, Flextronics earned 17 cents a share in the second quarter, flat from a year ago. That was 2 cents under analysts' estimates of 19 cents a share gathered by Thomson First Call and a penny short of the company's guidance.

Sales were $3.88 billion in the latest quarter, down from $4.14 billion a year ago. Analysts had been forecasting second-quarter sales of $4.11 billion, which was toward the higher end of the company's guided range of $3.8 billion to $4.2 billion.

"Our year-over-year revenue comparisons are adversely impacted by the divestitures of our network services and semiconductor divisions along with the impact from two European OEM customers divesting their cell-phone businesses during the past year," CEO Michael Marks said in a statement.

"We expect the December 2005 quarter revenue comparison to be the last quarter adversely impacted by these customer actions," he said. After that, Flextronics expects new programs involving its purchase from Nortel Networks ( NT) and client Kyocera should help growth to start kicking in again, Marks said in a postclose conference call.

"Growth is going to accelerate through calendar 2006 as these new programs go on," he said.

Excluding sales from the two divisions divested by Flextronics, revenue fell 4.4% in the second quarter. The decision by two customers -- Siemens ( SI) and Alcatel ( ALA) -- to divest their cell phone businesses to Asian suppliers in the past quarter contributed to a $250 million decline in sales during the quarter, Flextronics said.

For the December-ending fiscal third quarter, Flextronics expects to earn 18 cents to 20 cents a share excluding charges on sales of $4 billion to $4.2 billion. That would be flat to up 5% year over year on the top and bottom line, when excluding the divested businesses from year-ago results.

Analysts were expecting 25 cents a share on $4.56 billion for the fourth quarter.

For the March quarter, Flextronics expects earnings of 16 cents a share to 18 cents a share on revenue of $3.6 billion to $3.8 billion. That represents year-over-year growth of 6% to 12% on the top line and 6% to 19% on the bottom line when excluding the divested businesses from a year ago.

Analysts were forecasting 22 cents a share on $4.41 billion for the quarter.

One analyst on a call noted that the guidance means the company now expects $1 billion less in sales for the fiscal year than it forecast three months ago.

Flextronics executives said about $550 million to $600 million of that decline comes from divestitures, with $79 million of it hitting the company in the second quarter.

But executives also said they noticed a broad-based reduction in demand from customers in July and August, although they're not aware of any deals they have lost to competitors. "We just think there's some general softness out there," said COO Michael McNamara, who becomes CEO in January.

There is also evidence that some Flextronics customers are not doing as well in the marketplace, he added.

But given how broad-based the decline in demand has been, executives said they can't help but think it must be partially related to the economy. They pointed to the latest news just hours earlier of the Conference Board's consumer confidence index falling in October to a two-year low.

Still, in one prickly exchange, one analyst asked what management will do in the near-term to correct a cultural issue of incorrectly forecast results and whether bonus compensation would be affected. The company said that revenue did fall within its guided range.

McNamara further responded that cash flash was "way above" the company's forecast and that management has traded salaries in the past for stock options that are out of the money. He concluded by calling the question "inappropriate."

Flextronics generated $327 million in free cash flow -- cash flow from operations less capital expenditures -- during the quarter, which closely approximated the $339 million used for fund acquisitions during the quarter.

The divestitures of the two divisions generated $519 million, which closely approximated the $197 million reduction in debt and $320 million increase in cash in the quarter.

Flextronics also touted improvements in margins, with gross margin up 30 basis points from a year ago to 6.8% and operating margin up year-over-year for the eighth consecutive quarter to 3.4%.

But in future quarters operating margin will suffer a hit of 35 basis points as a result of the company's divestitures.

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