Flex Ltd (FLEX) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to the Flextronics International fourth-quarter fiscal year 2012 earnings conference call.

Today's call is being recorded, and all lines have been placed on mute to prevent 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, Flextronics' Vice President, Investor Relations.

Sir, you may begin.

Thank you, Gina, and good afternoon, everyone.

We appreciate you joining Flextronics' conference call to discuss the results of our fiscal 2012 fourth quarter and year-end March 30, 2012.

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 Investor section of the Flextronics website under Conference Calls and Presentations, and can also be accessed from a link on our home page.

The agenda for today's call begins with Paul Read reviewing the financial highlights from the fourth quarter and year-end fiscal 2012, followed by Mike McNamara, who will discuss our business environment as well as our business strategically.

He will conclude with our guidance for the first quarter of fiscal 2013, ending in June.

Following that, we will take your questions.

Please turn to Slide 2 for a review of the risks and non-GAAP disclosures.

Slide 2 -- 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 to 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 references 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 settlement 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 a reconciliation to the most comparable GAAP measures.

Also, as previously announced on March 2, 2012, we are divesting certain assets of Flextronics' Vista Point Technologies camera module business, including intellectual property and its China based manufacturing operations.

And as a result, current and historical operating results for this business have been recast as Discontinued Operations and are not included in the measures of performance discussed today.

Please refer to the Investor section of our website for a detailed reconciliation.

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

Paul?

Thank you, Kevin.

Please turn to Slide 3.

We generated $6.4 billion in revenue for our fiscal 2012 fourth quarter ending March 31, 2012, which was almost at the midpoint of our guidance range of $6.3 billion to $6.6 billion.

Revenue declined $407 million, or 6% year over year, driven by entirely by a decline in our High Velocity Solutions business.

Our fourth-quarter adjusted operating income was $190 million, up 1% year over year; and our GAAP operating income was $180 million, up 3% year over year.

Adjusted net income for the fourth quarter was $197 million, up 22% from last year; and our GAAP net income for the fourth quarter was $173 million, up 28% year over year.

We reported adjusted earnings per diluted share for the March quarter of $0.28, which was up 33% year over year, and was above our adjusted EPS guidance of $0.22 to $0.24.

Our GAAP EPS for the fourth quarter was $0.25, up 47% year over year.

Both adjusted and GAAP EPS for the fourth quarter were new records for the Company.

Our diluted weighted average shares outstanding, or WASO, for the quarter was 699 million.

This was a reduction of 10%, or 77 million shares, compared with 776 million shares reported a year ago, and is a result of our share buyback programs.

During the quarter, we repurchased approximately 15 million shares for $94 million, with an average cost of $6.35.

Please turn to Slide 4.

Our Integrated Network Solutions group totaled 45% of our sales during the quarter, up sequentially from 37% last quarter.

Revenue was $2.85 billion in the quarter, reflecting 13% year-over-year growth, and up 3% sequentially.

This quarterly revenue performance was in line with our expectations for a low-single-digit growth, as we saw strength in new outsourcing wins and new product ramps offsetting typical March quarter seasonality.

Industrial & Emerging Industries comprised 14% of total sales, up from 13% last quarter.

Sales were $929 million, reflecting a decline of 6% year over year and 4% sequentially.

We tracked slightly below our expectations of stable revenue, primarily as a result of weakness in our solar portfolio.

As anticipated, our Capital Equipment business improved significantly in the quarter, and we are currently forecasting further growth next quarter.

We continued to see strong levels of activity with customers across our Industrial & Emerging Industries group, and booked over $250 million in new wins during the quarter.

For fiscal 2012, we had roughly $1.3 billion in bookings, which is consistent with last year's record bookings level of $1.3 billion.

Our High Reliability Solutions group is comprised of our medical, automotive, and defense and aerospace businesses.

In the fourth quarter, the group comprised 10% of total sales, up from last quarter's 8%.

Quarterly revenue totaled $648 million, growing 9% sequentially and 27% year over year, marking another quarterly revenue record.

Overall sales in this group were above our expectations.

Both our medical and automotive segments experienced very healthy sequential and year-over-year growth, with our automotive segment displaying the greatest percentage growth.

Our medical business saw healthy sequential single-digit growth and increased roughly 22% year over year, driven by strength in drug delivery and medical equipment.

During the fourth quarter, we booked roughly $90 million in new programs, which brings our year-to-date bookings to $360 million.

In addition, our sales pipeline is holding strong at over $1 billion across the various areas of the medical industry that we serve.

Our automotive business continues to be a strong performer for us.

Revenue rose approximately 17% on a sequential basis and 32% year over year.

For full-year fiscal 2012, we saw automotive sales reach approximately $1 billion for the first time ever, reflecting 31% growth compared with the full year of fiscal 2011.

We continue to see signs of improving automotive production.

In addition, we continue to broadly penetrate Tier 1 and Tier 2 OEMs, and our win rate remains strong in areas like in-car connectivity and power electronics.

Lastly, we expect that our High Reliability group, we will see additional [momentum] building in our aerospace and defense offering during fiscal 2013, now that we have closed the [stellar acquisition in April].

Our High Velocity Solutions comprised 31% of total sales, down from 42% last quarter, and revenue declined to $1.96 billion from $3.15 billion last quarter.

This business group includes our mobile phones, consumer electronics, including game consoles and printers, our High Velocity EMS computing business.

As expected, this business group experienced the largest decline in the quarter, dropping 38% sequentially and 29% year over year.

This decline reflects our focus to rebalance our portfolio, and also incorporates the typical March quarter impact of consumer seasonality.

Our mobile and consumer businesses saw significant double-digit decline on a sequential basis.

Significant weakness from our largest mobile customer, combined with unfavorable seasonality, negatively affecting a handful of our customers in the consumer electronics drove the majority of the decline.

Please turn to Slide 5.

Adjusted gross margin was 5.7%, up 50 basis points from the prior quarter.

Adjusted operating income totaled $190 million, and adjusted operating margin was 3%.

The increase in both gross and operating margin was primarily due to the full exit from the ODM PC and a reduction in related charges.

Our adjusted EBITDA was $321 million in the fourth quarter, up $67 million from the prior quarter.

This contributed to our adjusted EBITDA margin increase of 150 basis points, to 5%.

Our adjusted EPS from Continuing Operations of $0.28 was up 56% from the $0.18 we reported last quarter.

We will discuss the impact of the Vista Point Technologies divestiture and Discontinued Operations in further detail in the next section.

Please turn to Slide 6.

Adjusted Interest and Other decreased $23.1 million from the prior quarter, resulting in the Company generating income of approximately $15.3 million this quarter.

A major contributor to the decrease of $23.1 million was the realization of $19 million in foreign currency translation gains, resulting from the liquidation of certain foreign entities this quarter.

Our net interest expense amounted to approximately $12 million for the quarter, and similar to the last several quarters.

We also realized strong foreign currency gains, due primarily to certain strategic RMB positions; however, to a lesser degree this quarter.

We do not anticipate continuing to achieve this level of earnings from favorable foreign currency.

As such, we would model a range of $15 million to $20 million of net interest and other expense next quarter and going forward.

Additionally, during the fourth quarter of fiscal 2012, the Company identified and booked a one-time, non-cash adjustment related to certain US GAAP reporting adjustments, primarily impacting cost of goods sold and isolated at one of our foreign sites that originated in prior interim and annual periods.

As a result of recording these out-of-period adjustments in the fourth quarter net income for the quarter and year ended March 31, 2012 was] reduced by $21.5 million and $24.9 million, respectively.

The adjusted tax expense for the fourth quarter was approximately $8 million, reflecting an adjusted tax rate of 3.8%, which was more favorable than our outlook for the quarter of 10%.

The favorable tax rate was primarily due to a shift in the mix of taxable income during the quarter.

For our upcoming quarter, we believe modeling an 8% to 10% tax rate is appropriate and is what our guidance is based on.

Turning to the reconciliation between GAAP and adjusted EPS -- stock-based compensation amounted to $9.9 million in the quarter, declining by $2.1 million and represented a $0.01 EPS impact.

Intangible amortization, net of tax, was $13.8 million in the quarter and represented a $0.02 EPS impact.

As a result of the Company's decision to divest its VPT business, current and historical operating results for this business are being recast in Discontinued Operations, resulting in a net loss impact of $16.7 million, which equates to a $0.02 EPS impact for the quarter.

Please refer to the Investor section of our website for detailed reconciliations.

Please turn to Slide 7.

Inventory declined by 8% sequentially, or $277 million, to $3.3 billion.

This decline was in line with our quarterly revenue decline.

However, our inventory turns decreased to 7 turns from 7.6, which equates to an increase in inventory days of four days.

Our inventory turns metric was negatively impacted as a result of the elimination of the High Velocity ODM PC business, which had carried inventory turns in excess of 30 turns.

Our cash cycle expanded 6 days to 28 days, sequentially driven entirely by the increase in inventory days.

Our DPO increased one day to seventy, and offsetting DPO was a three-day expansion of our DSO to 46 days.

We expect to manage our cash conversion cycle in the 25- to 30-day range, going forward.

Now turning to the net working capital chart, the top right of this slide.

Overall, our net working capital as a percentage of sales increased to 8.4% from 6.3%.

Going forward, we expect to be in the range of 6% to 8%, as our business adjusts to the 70/30 mix of non-High Velocity to High Velocity business.

Our ROIC for the quarter remained healthy at 23% and remains stable compared to 22.9% last quarter, and remains well above our 8.5% weighted average cost of capital.

Please turn to Slide 8.

The cash flow from operations was a positive $139 million during the quarter, and generated over $800 million for the fiscal year.

Our net capital expenditures amounted to only $58 million for the March quarter, as we continued to realize benefits from repositioning our ODM PC assets, as discussed last quarter.

As a result, we generated free cash flow of over $80 million for the quarter and $416 million for fiscal 2012.

This marks our fifth consecutive year that we generated in excess of $400 million in free cash flow generation.

Over this same period, we have now generated greater than $3 billion in free cash flow.

During the quarter, we also spent $94 million repurchasing our stock and spent $510 million in fiscal 2012.

The difference between the $94 million in stock we repurchased this quarter and $114 million in cash spend was a result of the timing difference in trade settlement from the prior quarter.

Please turn to Slide 9.

We ended the quarter with $1.5 billion in cash and $28 million versus the prior quarter.

Total debt remained constant at $2.2 billion.

Our net debt increased by $29 million to $682 million, while our debt to EBITDA level remained at a very healthy 1.9 times.

That concludes my comments.

I will now turn the call over to our CEO, Mike McNamara.

Thank you, Paul.

Today I plan to cover the growth and transformation of our business groups from a more strategic level.

Paul has already covered the quarterly and year-over-year revenue performance for each of the business groups, so my focus will instead be on the full fiscal year trends, in order to help frame the transformation we are currently driving within our business.

The underlying transformational activities undertaken in fiscal 2012 are catalysts to our achievement of our targeted financial results and an effort to drive increased shareholder value.

I will conclude my remarks today with guidance for the June quarter and some key takeaways for our business.

Please turn to Slide 10.

First, I would like to focus on the three business groups that comprise our non-HVS business -- namely, Integrated Network Solutions, or INS; Industrial & Emerging Industries, or IEI; and High Reliability Solutions, or HRS.

All three of these businesses grew nicely in fiscal 2012, and as a bundle generated over $1.4 billion in revenue growth versus the prior year.

In addition, they have achieved strong compounded annual growth rates over the past couple of fiscal years.

Our largest business, INS, has generated 7.5% compounded annual growth rate over the last two years, and added just over $1.5 billion of revenue in that period.

IEI, despite having a challenging fiscal 2012 due to the downturn in capital equipment, has achieved a 15% compounded annual growth over that same period, and added nearly $1 billion in revenue.

Finally, HRS has posted a tremendous 32% compounded annual growth rate since fiscal 2010, and added just over $1 billion of revenue, driven by strong and balanced growth in both medical and automotive.

The successes resulted in close to a doubling the size of our HR business since fiscal 2010.

Growth in all three of these businesses has been fueled predominantly by new outsourcing wins.

Moving forward, we expect continued growth in all three of these businesses, as new business bookings in fiscal 2012 remain strong across all of them.

While not all these wins will ramp to a full run rate in fiscal 2013, some programs have elongated ramp cycles, in aggregate, we expect these wins to provide a meaningful contribution to growth in our non-HVS businesses in fiscal 2013.

In the bottom right chart, we show the revenue trend for our High Velocity Solutions, or HVS business.

This trend clearly demonstrates the results of our active portfolio management, focused on increasing the percentage of non-HVS business.

The HVS business did not grow in fiscal 2012, primarily because of our planned exit of ODM PC.

In terms of our non-HVS mix of businesses, as previously disclosed, we have been targeting to increase it to 70% of our overall business.

Our activities to achieve this are very active, and we expect to achieve this target in fiscal 2013, beginning with our upcoming June quarter.

Typically, our HVS business would rise in June, due to seasonality.

However, this June quarter we will be reducing our HVS exposure, will lead to a reduction on a sequential basis of 15% to 25%.

We expect the transition will be completed this June quarter, and therefore, June should mark a bottom in revenue for the HVS business.

At the same time, we believe this will position us to achieve our targeted 70% to 30% mix for the entire fiscal 2013.

This is an encouraging development, as this new portfolio mix of businesses provide investors a significantly more attractive margin profile and stronger free cash flow generation.

As a consequence, customer diversification has continued to improve.

During the March quarter, no customer accounted for 10% or greater of our revenue.

This is the first time since June 2009 that we have had no customers in excess of 10%.

We also expect this trend to continue, as we are not anticipating having any 10% or greater customers during 2013.

Additionally, our top 10 customers totaled 51% of our revenue, the lowest level in almost two years.

We anticipate our top 10 customer concentration to continue trending lower throughout fiscal 2013.

It is our objective to provide our investors with a more stable, predictable and more diversified portfolio, with longer product life cycles that will generate increasingly amounts of free cash flow.

As discussed, the low volume, high mix, more complex part of our portfolio is targeted at 70% of the portfolio this quarter.

We expect this transition to position us into what we believe will be an optimally balanced portfolio of longer product life cycle, more suitable businesses that have higher operating margins.

Next, I would like to provide an update with regards to the operational performance of our component businesses, which now comprise only Multek and FlexPower, given our announced divestiture of Vista Point Technologies.

Flextronics FlexPower experienced a normal seasonal decline in the March quarter, as expected, and the business generated a modest operating profit as a result of some of our prior restructuring actions.

Bookings remained very strong, and annual revenue growth in fiscal 2013 is expected to be significant.

We are very encouraged by the development of this business, and expect continued operating profit expansion for Power in fiscal 2013.

As previously announced, we have some residual restructuring actions related to one remaining factory closure that will occur over Q1 and Q2.

This is expected to be the last restructuring action related to this business.

Multek had a greater seasonal decline than anticipated, as revenue declined mid to high single digits, sequentially.

Operating profit was slightly below breakeven.

Next quarter, we expect to see strong sequential growth for Multek.

Over the last year, we have invested over $100 million in state-of-the-art equipment targeted at the smartphone and tablet markets.

We expect the equipment to be fully utilized and well-diversified by the second half of fiscal 2013.

Now, turning to our guidance on Slide 11.

While our first-quarter revenue is expected to be in the range of $5.9 billion to $6.3 billion, our June quarter revenue guidance reflects a sequential decline, which is not typical for our business.

Our guidance calls for a sales decline of 8% to flat, or down 4% at the midpoint.

Partially offsetting this HVS decline in our June quarter is continued growth in our non-HVS businesses.

We are currently forecasting Industrial & Emerging Industries to grow in the high single digits sequentially; High Reliability to grow in the low single digits; and Integrated Network Solutions to remain flat.

Our adjusted EPS guidance of $0.20 to $0.24 is based on the estimated weighted average shares outstanding of 695 million.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted EPS guidance I just provided by approximately $0.04, for intangible amortization expense and stock-based compensation expense.

To conclude, I would like to briefly touch on some key takeaways for fiscal 2012.

Please turn to Slide 12.

Fiscal 2012 was a transformational year, and one in which we took further steps to achieve a more diversified portfolio.

We are approaching the conclusion of a multiyear portfolio evolution.

This evolution has positive implications for our margin expansion and free cash flow generation.

My three key takeaways -- number one, optimal portfolio position expected to be achieved in fiscal 2013.

Our accelerated reduction in the HVS exposure will create a bottom for HVS revenue in the June quarter, and new outsourcing wins will help drive above-seasonal performance in our overall business for our second, third, and fourth quarters of fiscal 2013.

This rapidly improving business mix will provide us with a more stable, more predictable, and diversified portfolio, with longer product life cycles.

Number two -- our significant portfolio shift will lead to margin expansion.

We increased our non-HVS mix of business from 42% in fiscal 2007 to 60% in fiscal 2012.

We are targeting fiscal 2013 non-HVS business to grow to 70% of our total mix.

From a revenue standpoint, our non-HVS sales have more than doubled to $17.7 billion in fiscal 2012, from $7.9 billion in fiscal 2007.

We expect continued growth ahead for fiscal 2013.

In addition, we expect continuous improvement in our operating margin throughout fiscal 2013.

Number three -- strong free cash flow generation.

We generated $416 million in free cash flow during fiscal 2012, which equates to a current free cash flow yield of 9%.

We invested our free cash flow towards buying 82 million shares in fiscal 2012, and reduced our weighted average shares outstanding by 10%.

Over the past 21 months, we have bought back 18% of our total Company's weighted average shares outstanding.

We believe that our portfolio evolution and resulting margin expansion will generate increasing amounts of free cash flow.

That concludes my comments.

I would now like to open up the call for Q&A.

So, Operator, can you please poll for the questions?

Shawn Harrison, Longbow.

Wanted to just talk about the revenue reduction within HVS -- is that you walking away from your largest handset customer?

One of your peers had a very frank discussion about their relationship with them.

Just -- maybe if you could give us any more granularity, in terms of where your handset exposure will go after the June quarter here.

That is kind of a difficult question, Sean.

I think there is a very significant portfolio transition going on with our largest handset customer, as you know.

Some uncertain volume cases, and I would also say some uncertain, in terms of operating strategy, as to which regions the customer will end up building their product in.

We currently build product in four continents.

We have a very, very complex setup with them.

It's -- in fact, what makes it very, very difficult to execute and be able to -- given the product portfolio, given the changes in the portfolio on a continuous basis, some of the product launch cycles, it makes it unbelievably complicated to make money with a customer that -- where we are spread out over four different continents.

I think it's likely that the customer will have different demand levels, and it's likely that they will consolidate their revenue into a much less complex region of the world, probably more notably China, where we are not building phones to date.

So, I think the answer to your question, it's really difficult to tell.

The product is in transition.

The customer, I think, is a little bit in transition.

Where they are going to build is in transition.

But rest assured, our ability to make money with this customer -- [be it] spread across four continents when the demand is difficult, is a problem for our Company, and one which we have to -- we have to move away from, and our customer, I think, has to create different solutions as a result.

So, I think it's hard to tell, but we are anticipating not being able -- not building on four different continents.

And it's going to be a smaller base of business and more concentrated, but we don't know exactly what that looks like yet.

But one way or another, as we have stated on the calls in the past, it's our objective to reduce our exposure.

And we are actively working to do that, and I think the customer's portfolio naturally creates a situation where that will happen.

I guess as a follow-up, given that you do produce on four continents and it may be moving away from that, how should we look at those assets being redeployed?

What is the risk for restructuring charges?

Anything -- any color on that would be helpful.

We think it probably won't be very much.

We have some restructuring in the forecast that we have already given you for this next quarter.

We anticipate it -- maybe it's $10 million to $20 million.

We have taken a very, very conservative position on this, as we have -- we kind of viewed this as a potential problem.

One of the things that we did is we took all the assets that are more unique to cell phones and we depreciated them over three years instead of our normal depreciation cycle of seven.

So, that has been occurring over the last several years, last three or four years.

So, we decided long ago to take a conservative position, so it doesn't leave us very exposed.

Our ability to reuse the S&T assets is immediate, and our ability to reuse the buildings and such is also very, very strong.

So, those won't go to waste in any way.

So, I would actually call it a kind of a one- to two-quarter transition period, probably most of it in the June quarter.

And I would also expect the charges to be no more than $10 million or $20 million.

But a lot of those are actually already in the numbers that we have given you.

Okay.

Very helpful.

Does this mean that you believe you can now do a 3.5% EBIT margin on a lower sales number, given the change in mix?

That is a good question, and the answer is yes, we do.

Okay.

Hazard a guess on what the new number would be?

It's obviously going to be less than $7 billion, significantly less.

It's something that we will lay out for you at the Investor Day at the end of the month, give you some more color on that, because it's clearly a large shift here in the mix, more aggressive shift.

So, we are encouraged that we will be able to hit that number with lower revenues.

Perfectly understandable.

And thanks for the clarifications.

Amitabh Passi, UBS.

This is actually [Chelsea Chi] on behalf of Amitabh Passi.

Just very quickly, for the operating margin -- just wanted to make sure we calculated correctly for the June quarter.

At the midpoint of the guidance, it should be something close to 3% or slightly below, if you don't consider the restructuring.

Is that about the right range to think about it?

It should come out around 3% to 3.1%.

Oh, okay.

Okay.

Much better.

So, just wondering, since we see by segment the High Velocity is going down and all the other segments pretty much stay stable or growth -- so, just wondering why the margin won't expand further to -- like -- it's just trying to figure out the mix here and what is kind of dragging -- still dragging the margins.

It's a good question.

I think it's predominantly the level of revenue, which is at the midpoint around about 6.1B, which is down from where we are here in Q4, at almost 6.4B.

So, there is some underabsorption there of the revenue, which is -- and also Mike just talked about some small restructuring charges here with the mix shift and the revenue adjustments.

So, I think that is predominantly what is enabling the margins to stay flat or even grow a little.

Okay, got it.

It's helpful.

So, just a very quick follow-up.

For the free cash flow for the whole year, it looks very robust, very solid cash flow.

But for the last quarter, it's kind of light for -- comparing to the previous quarter.

So, just wondering, going forward, what is your outlook in terms of using the working capital and management, the working capital and taking care of the free cash flow?

Yes, we had very strong free cash flow.

You have seen there over $3 billion in the last five years, over $400 million a year.

I have always said that the free cash flow will grow with our earnings growth.

And so, you should expect to have more free cash flow next year.

Working capital is running at 6% to 8% of sales, so that is how predominantly we deploy some cash.

And then, we have M&A opportunities, we have been doing share buybacks, et cetera, so I still think that fiscal '13 free cash flow will be a lot stronger than fiscal '12.

Okay.

Cool, cool.

So, just to confirm, like 6% to 7% working capital is pretty much the normalized range, right?

Yes, yes, 6% to 8% is the range.

Okay, got it.

All right.

Thank you.

Brian Alexander, Raymond James.

So, you are guiding 3% to 3.1% operating margins for June, which includes, you said, $10 million to $20 million in charges, which is about 25 basis points.

So, adjusting for that, you are around 3.3%.

And given your comments about immediately redeploying capacity in HVS, should we expect to see operating margins at 3.3% or better on a consolidated basis in the September quarter and beyond?

Or are there other things we should think about?

Yes, that is the time, Brian, is to continue to increase these operating margins throughout the year.

Getting by June, we will have a much cleaner September with some higher revenues -- like Mike discussed, that we expect above-average seasonal growth in revenues across the business.

And what will come with that is obviously a lot more margin.

So, we should expect to accrete up through that range in September and beyond.

Okay.

And then, just more clarity on the composition of the charges that you are taking, the $10 million to $20 million, what is embedded in that?

And then, I just have one follow-up.

Well, it's predominantly severance, for example, which is usually pretty quick, with a lot of people in low-cost regions.

So, we are able to minimize the cost of that.

And then, just some underabsorption as we go through this, is very normal for that.

It's a very quick change, very much like the ODM PC exit was very swift.

It was -- and it was somewhat of a soft landing when it came to absorbing the capacity.

We redeployed the S&T equipment very quickly.

We have demand for this S&T equipment, and we are in the process of redeploying that.

So, I just think it will just be a short time frame before we get beyond this.

Are the margins in the other three segments meeting your expectations?

So, really, the drag on overall margins is coming strictly from HVS at this point?

Yes, pretty much.

The others, thereabouts, with regards to where they should be.

Obviously, Components is still hovering around breakeven.

So, the back end of the year when they turn around, we should enjoy some of the upside from that, as well.

But the majority of the business, the other three large business groups, are operating close to optimum levels.

And the last one -- besides RIM, what else has driven your HVS revenue down to what looks like $1.5 billion that you are guiding for the June quarter, from what was $3 billion in the December quarter?

And that has taken out the ODM revenue that you had at that time.

So, you basic basically cut that business in half.

I don't think RIM was quite that large.

So, what other subsegments -- I know you don't want to name customers, what other subsegments are you deemphasizing?

And that is all I have.

Thanks.

I would say in general, we just view June quarter -- is just a soft quarter for a number of the different other consumer companies that we are working with.

So, there is no -- there is nothing really driving any incremental consumption of their products.

It's just a little soft.

So, I would say it's predominantly our large cell phone customer, and then, secondarily, it's general softness across the board of those that remain.

Okay, all right.

Thanks a lot.

Sherri Scribner, Deutsche Bank.

I wanted to follow up on the HVS segment.

I think, Mike, you said that would bottom in the June quarter and then go up from there.

I'm just trying to understand what is driving the upside, as we move through the year to revenue.

And just trying to think about it -- how do you prevent that segment from growing too much and essentially becoming big again?

Well, we are going to try to -- we have talked a lot about portfolio management over the course of the, I think, almost last two years almost.

One of the things that we are trying to do is to meter our growth in that segment, and (audio problem).

[So as far as what -- as it bottoms and it comes back up, we still have quite a bit of seasonality in some of the remaining consumer businesses that are left.] So, there still will be some seasonality that occurs every single year, as we get closer to Christmas season, and some of our customers have seasonal upticks that are significant around that period.

So, we will still have some things.

And the other thing is, we are booking other kinds of consumer business that are more attractive.

So, we are very, very focused at trying to bring in consumer businesses that maybe a little bit more lower volume, but a little bit higher operating profit.

And we have some nice bookings, which we will see come in towards the end of the year as well.

So, I think it's just a question of discipline, Sherri, about trying to maintain our range around 70%/30%, and then pushing real hard to get that 70% number growing as fast as we possibly can, while maintaining those margins.

Okay.

So, would you expect that business, as we move forward, to grow in line with the Company, or grow a bit slower?

Or what would you expect?

Yes, I would anticipate that it pretty much grows in line with the Company.

I think it will be -- again, I think the way to think about it is, if we had our objectives matched, we would try to keep it pretty close to 70%/30%.

We think that is the right balance.

So, we don't think we need to go to 25%/75%, for example.

And it doesn't mean we can dial it in exactly.

And of course, if some business comes along that has very significant return on capital, with little bit better margins, even though it's in the consumer segment, we might take a little bit more.

But we think the right number and the right optimum portfolio is a 70%/30%, and that is -- we have a commitment internally to go manage to that.

Okay.

And then, one quick follow-up, Paul, for you.

I think just circling back to some of the other comments that you had, I think you said there was a one-time, non-cash item in cost of goods sold, which was about a $0.03 impact.

Would your -- I just want to make sure I understand that correctly.

Would your EPS -- would have been $0.03 higher without that non-cash adjustment?

And what was that for?

Yes, it could have been, Sherri.

It was a one-off adjustment that we had to make.

One of our sites, foreign sites, it was an isolated incident for us, discrepancy that we had.

It was spanning a few quarters, and both individually or in the aggregate, it wasn't material to any historical quarter, and all the details we provided in our filings.

But absent of that, for sure we could have had some upside.

We thought we had a pretty good quarter going, and we had some favorable impacts with some mix of some of our businesses that were coming through.

Capital equipment, for example, was stronger this quarter, that is usually very profitable for us.

So, we were enjoying that.

And we had some pushout of some planned restructuring, as well, that was going to go from Q4 to Q1.

So, that helped as well.

There could have been some upside, but the end of the day, we are managing this business as we go along.

And we have to absorb some of these things sometimes.

Okay, great.

Thank you.

[Austin Bernita, Crest] Research.

Could you describe for me how effective you were in terms of your sales generation related to the $70 million or so in working capital you picked up in the December quarter for your -- within INS?

Can you --

I think I know what that is.

That was the INS business, there was a divestiture of a couple of facilities.

We paid up roughly $70 million, as you said, in working capital.

That translated to revenues in the Q4 for us and beyond, which we discussed on the last call.

And revenues in the run rate of $500 million to $800 million of revenues that we picked up.

So, yes, that was, executed and included in the Q4.

Okay.

And so, when I think of -- you were expecting sort of solid bookings to help support growth within INS -- I'm speaking again for the March quarter.

And my main question is -- net of bookings, how would you describe how your business did, from an industry standpoint?

Did you suffer any setbacks related to inventory corrections at all?

Well, maybe a little bit.

We don't view that segment as being particularly robust.

Our quarter-on-quarter growth rate from Q3 to Q4 in that area was 3%.

If we look at it from Q4 to Q1, it's roughly flat.

So, we don't see a big pickup in that area; we consider it to be pretty stable, if we look across our customer base.

And the only way that -- really, the way to drive that business forward is to have increasing amounts of new customer wins, and that is where we are focused on.

But I think the underlying business tends to be pretty flat from what we can see, from across our broad section of our customer base.

All right.

Appreciate that color.

And my last question for now is -- after selling the assets associated with the VPT business, what is your longer-term outlook for the remaining Components bundle, as a whole, from a revenue growth and long-term profitability standpoint, in terms of the timing of reaching targets?

Yes, so, we would expect -- we are anticipating both those groups to have probably substantially over 10% growth rates, going forward.

As we mentioned, we actually did some investment into Multek this year, was one of the pressures on operating margin to start with.

We have a lot of that booked right now.

In fact, we have a significant amount of that booked, and actually expect to be potentially at capacity by the second half of this year, and that tends to be a significant amount of incremental revenue; close to $100 million that would come online, at what would be better than -- pretty nice operating profit levels.

In the Power area -- again, we have very, very strong bookings.

We have been continuing to restructure that business to get it in position where it can achieve its optimum margin potential.

We actually think we may be there -- by the time we hit the December quarter, our restructuring activities will be done Q2.

We actually don't think we have anything left.

In fact, our underlying profitability in that business today is actually pretty strong, once you separate out those charges.

So, we absorb those into our income statements right now.

And those charges we anticipate being done by Q2.

And as a result, we have a pretty good confidence, because the underlying profitability is actually -- is pretty good right now.

We actually expect very significant revenue growth, and we expect to be able to hit very nice operating profit levels, consistent with that business.

Thank you.

Craig Hettenbach, Goldman Sachs.

Mike, just wanted to follow up on the comments of the growth in HVS being in line with the Company on a longer-term basis.

I would think with the other markets that are still more underpenetrated, you would see more robust growth there.

So, just trying to get a sense of what segments within HVS are underpenetrated, or that you could see better growth to get you to grow that business in line with the corporate average.

Well, I kind of said we do actually expect to grow it in line with the corporate average.

I think that is probably the more likely scenario.

And there is a lot of different ways to penetrate HVS.

So, if I think about those segments, we still have ways to penetrate it in Power products, we have ways to penetrate it in services products, we have ways to penetrate it in terms of just the assembly business itself.

So, we actually have lots of different ways to go after that business.

There are certain regions of the world for HVS that are very -- where we have a very attractive profile.

So, we have the broadest footprint worldwide, and very often the building cheap in China is one solution.

But being able to distribute and build product all around the world becomes more attractive as we go forward.

So, there are still a lot of ways to penetrate it.

We are actually not too worried about the ability to grow it.

What we are kind of more interested in doing is making sure that we balance the services portfolio that we have, which means Power, PCBS, mechanicals, services, and the worldwide ops -- balancing that use -- the use of all those assets in HVS, along with making sure that we keep it as a balanced part of our overall portfolio.

So, it's kind of -- in summary, it's a balance of the different services and different service offerings that we have in different product technologies, along with being able to balance the total amount of it within the overall Flex portfolio.

Okay.

And if I could just follow-up with a question for Paul -- when you net out some of the restructuring charges for next quarter, can you just talk about, on a gross margin, maybe on a go-forward basis as the portfolio evolves, just the puts and takes of what can drive your gross margins as you go forward?

Most of the effects will be gross margin related.

We would expect gross margins above 6% in the outer quarters here of the year, which will obviously drop to the operating margin line as we keep the SG&A in that $180 million to $190 million range, which we feel comfortable about.

So, that is how it should play out for us, and should play out with less revenue to get to that than I had originally indicated, over $7 billion level.

But the mix shift is pretty swift here, and it's pretty positive for the margin side.

Got it.

Thank you.

Matt Sheerin, Stifel Nicolaus.

Sorry, but I want to go back to that [BO] issue with your large smartphone customer -- a couple of questions -- one, you talked about the restructuring charges.

Does that mean that you are just lowering your cost structure in the four areas that you build product for them, to adjust to the lower demand?

Or are you actually walking away from programs deliberately?

And will you be building product for that customer in fewer than of those four facilities?

Are you actually walking away from some of those?

Well, I don't know if I would use the term walking away.

I think the overall demand is at different levels.

The strategy of where to build that demand then evolves and changes.

A lot of the uncertainty is a result of -- there is a lot of different management all the way through the operating levels at RIM.

And they will make their decision of where they want to build.

It's impossible to imagine that you want to keep four sites, four different continents building this production; so it will change, whether we like it or not.

The demand patterns -- the demand volumes will be different, whether we like it or not.

And we have continuously struggled with this business, to try to get any kind of predictability.

The difficulty we have is because of the short product life cycles and the uncertainty of some after the market success and in which region they have that market success, it makes us very, very difficult to be able to execute.

So, as the demand goes down now, we are absolutely taking out permanent capacity, if you will.

You can always put it back in, but we are just not going to need it.

So -- but it's -- their demand patterns and their strategies are continuing to unfold as they think through how they want to go run their business.

And they do have new management that is going to make different decisions, and we will just have to wait the outcome of that.

And will you entertain any program opportunities in China to build handsets there?

Or is that not in your plan?

Well, it's probably not needed for us.

And I should say, it's probably not needed for that customer.

They have two qualified -- they have a couple qualified sources already in China that they have been working with.

We put up our big Asia operations in Malaysia, because that was the objective a year ago with our customer.

We were the first to go into Asia with them.

And if they change and want to go to China, then it's -- they already have a couple suppliers in there.

So, that will reduce the demand coming our way.

We will continue to work with the customer.

We still have a lot of repair activities.

We have project completion center activities.

We have [project] circuit boards.

We have Power products.

We do a lot of Flex circuits with that Company.

If their assembly changes, we will still be engaged with them in a pretty significant way, but maybe it will be a different portfolio with different product technologies and in different locations.

Okay.

And then, just a quick question on the Component business -- you talked about sort of hovering around breakeven, it sounds like Multek is moving in the right direction in terms of revenue opportunities.

Are you still targeting the 3%, 4% operating margin number for that business, which I think would be easier to get to, given that you have divested the Vista Point?

But do you have a time frame for that now?

Yes, Matt, it's -- the second half of this year, we would expect that level of performance, with those two business groups combined.

Like Mike said, underlying there is strong profitability there.

Today in Power, we have some, as we said earlier, some planned restructuring we finished up here in the September quarter.

Multek has a great book of business that -- invested over $100 million in the last 12 months in equipment, capacity, and capability.

So, we stand to see all that come online, as well, for the second half.

So, yes, the second half looks pretty promising for us.

You are still looking at that 3% to 4% number?

Or is that just --

Yes, still 4% is the target.

That is not even getting them to industry standard performance levels.

Okay, thanks.

Amit Daryanani, RBC Capital Markets.

Just a couple questions -- first, on the [ATR] side, it looks like it will be about 26% of revenues in the June quarter for you.

I'm just trying to reconcile, how do you get to a 70%/30% split by year-end, when you say that business will grow in line with corporate averages?

I would imagine it has to grow substantially faster than corporate averages and be a drag on margin in that case, to get to the 70%/30% split for fiscal '13.

Could you just talk about that a little bit?

So, first of all, we can't dial in 70%/30%.

Sometimes the customer is going to call us up one month and say -- I need another $100 million, and he might call up to another one of the segments and say -- I need $100 million less.

So, we can't dial in 70%/30%.

If it swings to 26% or goes up to 34%, we would call that pretty much in the ballpark of the portfolio mix we are trying to maintain.

So, I just want to set that expectation first.

That is in the range of a 70%/30%.

The reason that you are hitting 26% -- and I don't know if that is the number, but I'm going to take your number, is in the June quarter what we have said is, you have pretty low seasonality, not only with the big cell phone customer, but we actually have lower than normal demand from the rest of our consumer businesses.

Now, we would expect that to kick right up the minute September happens.

So, September quarter ends up -- you have to start filling the channels for Christmas and other things.

So, we are going to expect that that moves up pretty substantially in September.

And in my prepared remarks, one of the things that I said is -- we actually expect Q2, Q3, Q4 all to have higher than seasonal growth rates across the entire business.

Part of that is the very, very low June quarter that creates a base that will outperform on relative to normal seasonality.

Part of that will be the HVS, and part it will be the non-HVS.

But I kind of consider that it's going to float around 30%/70%.

We can't dial that in directly.

When our customer orders something, we have to go build it.

And --

No, no, that is a fair point.

And then, with the smartphone customer, are you guys comfortable that this is the bottom in June?

Could there be a second level of disengagement, as well?

Because my understanding is that the customer that you are looking to reduce their supply chain, period.

Do you think encompasses the extent of what they will do with Flextronics?

Yes, we do.

All right.

And then, the camera module, I think you talked about $17 million impact in net income from the sale of some of the assets.

Was there a material revenue hit, as well, with that?

Could you give us that number?

No, it was an immaterial revenue, not worth calling out.

So, it was more on the cost of the sale that was called out.

Got it.

And just finally from me, on the Industrial segment, I think you talked about $1.3 billion in bookings in fiscal '12, which is a fairly strong number.

Could you just tell us -- what is a time line, typically, for these ramps to translate into revenues that hit your P&L?

Each product is a little bit different.

But the Industrial group, it typically takes six to nine months to really ramp up to full production, sometimes 12 months.

Normally six to nine months.

Fair enough.

Thanks a lot, guys.

Wamsi Mohan, Bank of America Merrill Lynch.

First, I have a quick clarification on the prior question -- so, does the guidance that you gave for next quarter, does it include the $10 million to $20 million charge that you alluded to on a non-GAAP basis?

And are all those charges flowing through next quarter?

Well, it's $10 million to $20 million over the next two quarters, and it is included in our guidance, yes.

Okay.

Thanks, Paul.

And of the four sites you mentioned, Mike, what percent of revenue of those sites did this largest handset customer account for?

You could redeploy the PCBSs, but do you think you need to close or consolidate any of these sites?

No.

No, they are all running in existing operations, so we will just -- it will just create some space for a while.

And then, the next things we book in will just go into those spaces.

So, no, we won't have to close any operations.

We don't have any standalone operations.

So, we will keep them all open, and it gets redeployed pretty quickly.

Okay.

And can you talk about the magnitude of the charges that you are speaking about in the Power business?

It sounds like -- both Paul and you mentioned very healthy margins, ex the restructuring charges.

I'm just wondering, is that -- if you exed out the restructuring, how much below Multek -- or is actually even perhaps in line with Multek at this point?

You are talking about Power?

Yes.

Yes, Power is probably even ahead of Multek, in terms of hitting its operating profit targets.

And it has probably $10 million, roughly, in Q1 and Q2 that we will see as a charge.

Okay.

Thank you.

Jim Suva, Citi.

This is Samuel Meehan on behalf of Jim Suva.

[I do want to] ask a quick question -- following the [Stellar Mega Electronic] tuck-in, should we expect similar deals with the operating margin opportunity comes to tuck in these smaller acquisitions going forward?

And just some details on Flex's thoughts on their M&A strategy, going forward.

Yes, if we can pick up different pieces of businesses that have unique technologies that we can leverage in scale and create synergies with the revenue and the customer access that we have, is we will continue to do those kind of acquisitions.

The focus of those acquisitions will be those that drive our margins higher.

So, we will focus our investments predominantly in the higher-margin, non-HVS kind of businesses.

So, you should expect that we will do more of that as we go forward.

One of the things that we have that Paul mentioned is pretty good free cash flow.

We have generated $3 billion over the last five years.

This is a great way to go and redeploy some of that; if we can move our margin profile and create these synergistic deals, then we will for sure be on the lookout for them.

My understanding is with Stellar, there will not be any manufacturing realignment.

Is that correct?

No manufacturing realignment?

No.

We will continue to operate the facility as is.

It's in Southern California.

It's a great place for a lot of the aerospace and defense.

So, it actually gives us a nice beachhead into a strong area for that product category, and we are actually looking forward to keeping it open.

Great.

Thank you.

Okay.

Thank you, everybody, for joining us today on our call.

You will be able to access a replay of this call and obtain a transcript on the Investor section of the Flextronics website.

And also, as a reminder, we will be hosting our annual Investor and Analyst Day in New York City on May 31, at the end of this month.

Details and registration are available on our website, at flextronics.com/2012analystday.

This concludes our call.