Reaches annualized cost-cutting savings of $230 to $260 million. Notebooks generates $1.3 billion but market has limited sequential growth while $2+ billion run rate target is pushed out. Mobile improves 29%, computing 21%
With the worst of the recession behind us, many EMS providers caught in this last recession are benefiting from a recovering tech hardware environment in addition to a (slow) return to growth, with hopefully less EMS industry debt, in the outsourced electronics manufacturing model.
Some on Wall Street believe a leaner Flextronics now has the size and program diversity to be a key beneficiary from this rising tide. Recent F3Q results of $6.6 billion in revenues and non-GAAP EPS of $0.17, above Flextronics’ management prior guidance of $6 billion to $6.4 billion and EPS of $0.14 to $0.16, points to a steady foundation for the EMS provider to build on.
Flextronics’ F3Q, adjusted non-GAAP EPS result of $0.17 excludes $3.9 million in non-cash interest expense, $21.4 million in amortization of intangibles, $2.3 million in reduced distressed customer charges, $9.8 million in restructuring, and $14.1 million in stock-based compensation.
For the recent quarter, robust seasonal strength is seen in the mobile and computing sectors (further aided by new programs ramps) in addition to new program momentum in Flextronics’ infrastructure market segment.
Gross margins (including options) of 5.4% was slightly below some estimates on Wall Street (~5.5% forecast) but up 10bps from 5.3% in the prior quarter. Excluding options, gross martin was 5.5%.
Adjusted operating expenses including options were $182 million (vs. $176 million for F2Q).
Operating margin of 2.7% (including options) was up 40 basis points from September and above the 2.5% estimate by some on Wall Street. Excluding $14 million in options, adjusted operating margin was 2.9%.
Revenue breakdown by segment
Mobile improved 29% sequentially on seasonal demand.
Computing improved 21% from September, and notebooks generated $1.3 billion during the quarter. It is believed the Flextronics business model will be able to absorb impacts in ‘out’ quarters based on rampoing lower-margin notebook business.
Infrastructure improved 7% from F2Q, which Flextronics management believes was a bottom for the segment.
Consumer digital improved 2% from September while the combined industrial / auto / medical electronics segment improved 4%.
Flextronics revenue breakdown by end market
Customer commentary
Top ten customers represented 49% of total revenues, vs. 48% a year ago.
Sony-Ericsson and Nortel were ~4% of total revenues (vs. 13% in F3Q08).
HP was the only customers over 10% of revenues, and HP, RIM and Cisco comprised 29% of total sales.
Restructuring and related charges
Restructuring efforts were essentially completed in F3Q as Flextronics incurred an additional $10 million in restructuring under the $250 million ($150 million in cash) plan. Total charges incurred to date total $238 million, and remaining charges are expected in March.
During the recent conference call, Company management commented it has generally reached the targeted $230 to $260 million in annualized savings, and slight incremental benefits are expected from further cost-cutting actions in F4Q.
Business outlook
Flextroincs provided solid F3Q10 guidance for $5.8 billion to $6.2 billion in revenues and $0.13 to %0.16 (excluding ~$0.07 in GAAP charges that include restructuring; amortization, non-cash interest expense, and stock-based compensation).
Looking forward, the company’s notebook business is no longer expected to grow sequentially (or be in the $1.5 billion to $2.0 billion range) in March 2010 as the diversity of programs remains limited (and more subject to demand dynamics which are not as favorable for the specific mix).
On the positive side for notebooks, this lower level of (lower-margin) business should help recent margin improvement trends continue in the next one to two quarters according to investment bank Needham & Co.
Meanwhile, by September 2010, Flextronics management does believe a $2+ billion run rate for notebooks is very achievable (based on recent wins with companies such as HP, Dell and Lenovo).
Flextronics management also expects the component shortages (i.e., LCD panels and memory) seen in December to continue into the March quarter.
Balance sheet bullets
- Flextroincs exited F3Q with $2.2 billion in cash, up from F2Q levels of $2.0 billion
- Reported cash from operations was $331 million, vs. $312 million in F2Q
- Depreciation and amortization expense was $117 million, up slightly from $114 million in F2Q
- Capital expenditures was $40 million vs. $42 million in F2Q
- Resulting free cash flow was $291 million in December, vs. $270 million in the prior quarter
- Cash conversion as reported decreased to 11 days from 15 in F2Q
- Inventories of $2.8 billion were up marginally from $2.7 billion in F2Q. As reported inventory turns were 9.1x, up from 8.2x in F2Q
- Net debt stood at $309 million (or $0.37 per share), down from $587 million from the previous quarter as Flextronics continued to pay down debt during the quarter (and paid down ~$1 billion since F3Q09)
- At the close of F3Q, tangible book value for Flextronics stood at $1.98, up from $1.86 in September
- ROIC was 30.1% in December, up from 22.2% in the prior quarter
Source: Needham & Co., VentureOutsource.com, January 2010
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