Flextronics announces record Q3 results – margin increase

- Net Sales Exceed $4.15 Billion; Profit Margins Increase- Cash Conversion Cycle Improves to 14 Days- Guidance Increased Flextronics (Nasdaq: FLEX) yesterday announced results for the quarter ended December 31, 2003, as follows: Net sales in the quarter reached a record of $4.15 billion, which represents a sequential increase of $649.1 million, or 18.5% over the September quarter, and a year-over-year increase of $300.8 million, or 7.8% over the December 2002 quarter.Proforma net income was $93.9 million, or $0.17 per diluted share for the quarter, which represents a sequential increase of $46.4 million, or 97.6% over the September quarter, and a year-over-year increase of $27.8 million, or 41.9% over the December 2002 quarter. Including after-tax amortization expense of $8.6 million, previously announced restructuring costs of $49.5 million, and litigation settlement costs of $14.4 million, net income in the December quarter of 2003 was $21.4 million on a GAAP basis, or $0.04 per diluted share, as compared to a net loss of $6.5 million, or a $0.01 loss per share in the December quarter of 2002.The quarterly results reflect a number of financial milestones, including record inventory turns of 13 times, a cash conversion cycle of 14 days and selling, general and administrative ("SG&A") expense of 2.9% of sales. In addition, proforma cash flow from operations was $356 million, which excludes approximately $68 million of payments for restructuring and other charges."As we begin to realize the earnings leverage imbedded in our business, our financial results will continue to improve. For instance, during the December 2003 quarter, year-over-year revenues increased 8%, while proforma net income increased 42%. The improved operating results are what we expected to begin to see as we emerge from the technology downturn. While we are pleased that our margins, overall profitability, return on invested tangible capital, and many other financial metrics have improved this quarter, we continue to be completely focused on driving additional improvements in our operating performance. As demand trends further improve, we expect utilization rates will improve, pricing will increase, our higher value- add supply chain services will grow, as will our ODM services. All of this, combined with further operating leverage, should result in increasing margins," said Michael E. Marks, Chief Executive Officer of Flextronics.Addressing the business outlook, Marks added, "Clearly, business conditions have improved and we executed well this quarter, which resulted in Flextronics achieving many financial milestones that we will continue to build on next year. We believe that next year should show improvement in several areas. Major restructurings in the industry should be nearly completed, excess equipment capacity should be substantially reduced, and demand should continue to improve. With the expected increase in profits from most of our business units, we are increasingly confident that Flextronics is nicely positioned for growth in revenue, margins and profits."Marks concluded, "Last week's announcement regarding our discussions with Nortel Networks has the potential to be a major transformational event for Flextronics in many ways. As currently being discussed, it has the potential to be the largest program award in the history of the EMS industry, with revenues exceeding $2 billion per year for Flextronics. Not only would this program use all of our end-to-end supply chain services, it would also have a major and immediate impact on diversifying our product mix and would make Flextronics the undisputed leading EMS provider of high-end telecom infrastructure products."The Company provided guidance that excludes the Nortel discussions, as it does not forecast the contribution of new programs until definitive agreements are in place. The Company has increased its expectations for the March 2004 quarter by 10% for sales and 20% for proforma earnings per share, to a range of $3.4 to $3.6 billion and $0.09 to $0.11, respectively. In addition, the Company indicated that both revenues and proforma earnings per share for the June, September, and December 2004 quarters are expected to exceed the existing First Call consensus estimates by approximately 10%. GAAP earnings are expected to be lower than proforma earnings by approximately $0.02 per diluted share reflecting quarterly amortization expense, as well as the completion of previously announced restructuring plans, which are expected to result in a charge in the March 2004 quarter of approximately $35 million, or approximately $0.06 per diluted share.A conference call hosted by Flextronics' management was held yesterday at 1:30 p.m. PST to discuss the Company's financial results and its outlook. This call will be broadcast via the Internet and may be accessed by logging on to the Company's website at www.flextronics.com. Additional information in the form of a slide presentation and CEO's Letter to Shareholders that summarizes and discusses the quarterly results may also be found on the site. A replay of the broadcast will remain available on the Company's website.