Q3 2010 Flextronics Earnings Conference Call on …...2010/01/27 · Jan. 27. 2010 / 10:00PM, FLEX - Q3 2010 Flextronics Earnings Conference Call Adjusted SG&A expense, which includes

F I N A L T R A N S C R I P T

FLEX - Q3 2010 Flextronics Earnings Conference Call

Event Date/Time: Jan. 27. 2010 / 10:00PM GMT

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C O R P O R A T E P A R T I C I P A N T S

Warren LiganFlextronics - SVP, IR & Treasury

Paul ReadFlextronics - CFO

Mike McNamaraFlextronics - CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

William SteinCredit Suisse - Analyst

Jim SuvaCitigroup - Analyst

Sherri ScribnerDeutsche Bank - Analyst

Amit DaryananiRBC Capital Markets - Analyst

Brian WhiteTiconderoga Securities - Analyst

Alex BlantonIngalls & Snyder, LLC - Analyst

Louis MisciosciaBrigantine Advisors - Analyst

Shawn HarrisonLongbow Research - Analyst

Alberto MannThomas Weisel Partners - Analyst

Steven FoxCalyon Securities Inc. - Analyst

Amitabh PassiUBS - Analyst

Frank JarmanGoldman Sachs - Analyst

Jake KemenyMorgan Stanley - Analyst

P R E S E N T A T I O N

Operator

Good afternoon. Welcome to the Flextronics International third quarter fiscal year 2010 earnings conference call. Today's callbeing recorded. After the speakers remarks, there will be a question-and-answer session. At this time for opening remarks andintroductions, I would like to turn the call over to Mr. Warren Ligan, Flextronics' Senior Vice President, Investor Relations andTreasury. Sir, you may begin.

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Jan. 27. 2010 / 10:00PM, FLEX - Q3 2010 Flextronics Earnings Conference Call


Warren Ligan - Flextronics - SVP, IR & Treasury

Thank you, operator, and good afternoon, everyone. Welcome to Flextronics's conference call to discuss our results of our fiscal2010 third quarter ended December 31st, 2009. On the call today is our Chief Executive Officer, Mike McNamara and ChiefFinancial Officer, Paul Read. The presentation that corresponds to our comments today is posted on the Investor Relationssection 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 trendsfor our company. Mike will conclude with guidance ending March 31st, 2010, and following that, we will take your questions.

Please turn to slide two. This presentation contains forward-looking statements within the meaning of US securities laws,including statements related to revenue and earnings guidance, our expectation about our future operating margins and returnon invested capital, expected revenue growth in our market segment, expected improvements and profitability of our componentbusiness units, our expectations about the availability of components for our products. The expected changes and savingsassociated with our restructuring activities, and our expectations regarding end-market demand. These forward-lookingstatements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by thesestatements are based on our current expectation, and we assume no obligation to update them. Information about these risksare noted in the earnings press release on slide 13 of this presentation, and in the risk factors and MD&A sections of our latestannual and quarterly reports filed with the SEC, as well as in our other SEC filings.

Investors are cautioned not to place undue rely angst on these forward-looking statements. Throughout this conference calltoday we will reference both GAAP and non-GAAP financial measures. Please refer to the schedules to the earnings press releaseon slide five of the presentation, and the GAAP versus non-GAAP reconciliation of the investor section of our website, whichcontain the reconciliation to the most directly comparable GAAP measures. I will now turn the call over to Paul.

Paul Read - Flextronics - CFO

Thanks, Warren, and welcome to our call. Today we will recap and summarize our financial performance for the third quarter,and Mike will provide an overview of our business, highlight important segment and customer trends and provide fourth quarterguidance. Please turn to slide three Third quarter revenue was $6.6 billion which represented a 12% or $724 million sequentialincrease from $5.8 billion in our September quarter, and an increase of more than $350 million above the midpoint of our $6billion to $6.4 billion guidance range. Adjusted earnings per diluted share was $0.17, which represented a 31% sequentialincrease from $0.13 in our September quarter, and also exceeded the midpoint of our $0.14 to $0.16 guidance range by $0.02.

Adjusted operating profit of $189 million increased 27% sequentially, and our adjusted operating margin expanded 30 basispoint sequentially to 2.9%. This marks a 200 basis point improvement in our operating margin over the past nine months. Ourcontinued margin improvement reflects the operational efficiency of the Company as a result of our previously announcedrestructuring activities together with the growth in all of our business segments. The adjusted tax expense for the third quarterwas $14.2 million, reflecting an adjusted tax rate of 9.3%. Although the December quarter rate was a bit lower than our guidancerange of 10% to 15%, we expect our adjusted tax rate will remain in the 10% to 15% range for the remainder of the fiscal 2010.Finally, our adjusted net income for the third quarter was $138 million, increasing 33% sequentially from $104 million in oursecond quarter.

Please turn to slide four. Despite having a heavier consumer mix due to seasonality, our adjusted gross margin expansioncontinued during the December quarter, with adjusted gross margin rising 10 basis points sequentially. We have improved ourgross margin for three straight quarters due to increasing revenues and the significant improvements in our cost structuredriven by our almost completed restructuring activity. Our component businesses remained above normalized profitabilitylevels during the December quarter. We continue to focus management efforts on improving our components businesses andwe are confident about their margin improvement.

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Adjusted SG&A expense, which includes R&D costs, totalled $170 million in the quarter. We have reduced our quarterly spendby 20% or $42 million on a year-over-year basis. As a percentage of revenue, adjusted SG&A was reduced 2.6% and our operatingexpenses remained under strict control. Combine the effects of our adjusted gross margin expansion and our adjusted SG&Aexpense management lead to a sequential improvement of 30 basis points in adjusted operating margin, which is tracking toour targeted near term operating level expectation. On a year-over-year basis, despite revenues being 20% lower, our adjustedearnings per share has increased 6%, reflecting the improved efficiency of our business model. We expect our strong operationalcost control, improving contribution from our verticals and leveraging increased volumes will continue to drive margin expansionand increased earnings in to fiscal 2011.

Please turn to slide five. During the quarter, we recognize $9.8 million of restructuring charges. To date, we have recognized$238 million of the expected $250 million in restructuring charges. We do not see any significant changes to our original plans,and expect to recognize the remaining charges next quarter. We are now realizing annual savings in the $230 million to $260million range that we had originally projected. In November 2009, we reached a settlement agreement with Nortel primarilyrelated to prebankruptcy petition claims. As a result, we revised our estimates related to the recovery of Nortel claims, whichresulted in a $2.3 million reduction to the original charge. These P&L adjustments did not impact our pro forma results for thequarter. We're satisfied with the settlement outcome and believe no further material risk existed related to our Nortel exposure.Lastly, the Company realized after-tax, and stock-based compensation of approximately $20 million and $14 million respectively,compared to $21 million and $13 million respectively in the prior quarter. After reflecting these items, GAAP net income was$92.9 million compared to the GAAP net income of $19.7 million in the prior quarter. GAAP EPS for the December quarter was$0.11 compared to $0.02 in the first quarter.

Please turn to slide six. Flextronics industry leading working capital management took another positive step forward with afurther improvement in the cash conversion cycle to 11 days, a 4-day sequential reduction and an 8-day decline over the pasttwo quarters. We have worked very hard to continue to reduce our cash conversion cycle, and by getting it down to 11 daysthis quarter, we have reached one of the lowest levels in our Company's history. Notably we have cut our cash conversion cyclein half since the (inaudible) program. The main catalyst in our four-day improvement in the cash conversion cycle was ourinventory management. We improved our inventory days to 40, decreasing that sequentially by four days, and inventory roseonly 3% or less, or less than $100 million despite sales growing $724 million, or 12% quarter-over-quarter. Our inventory turnsincreased to 9.1 turns, which is our highest level since December 2005. This tightening of our inventory management has helpedfuel our cash generation over the last several quarters. Asset management continues to improve and coupled with our improvingmargin has driven big improvements in our return on invested capital. For the quarter, ROIC improved another 790 basis pointssequentially to 30.1%. It's worth noting that our ROIC has doubled over the past two quarters, and currently tracks well in excessof our cost of capital.

Please turn to slide seven. Flextronics generated $331 million in cash flow from operations during the quarter, marking the sixthconsecutive quarter the Company has generated positive operating cash flow. Our cash flow from operations also reflects theabsorption of $24 million of cash restructuring related payments. We have generated around $750 million are in cash fromoperations over the last three quarters. Net capital expenditures were $40 million, and total depreciation and amortizationamounted to $117 million. Our modest capital spending during the quarter combined with strong operating cash generationresulted in $291 million of free cash flow generation in the quarter. Our industry-leading working capital management, combinedwith our stringent focus on capital expenditures, and other discretionary spend has resulted in the generation of over $600million of free cash flow over the past three quarters. As reflected in the $7 million of cash payments recorded during the quarter,we made a couple of small niche acquisitions. The first was Slow Medical, which closed on December 15 and helps bolster ourEuropean disposable medical capability in customer days. We also made a small automotive acquisition during the quarter,that will expand Flextronics emission friendly and (inaudible) reduction products, which are used in traditional hybrid andelectric car vehicles, and also enhanced our automotive ODM offering.

Please turn to slide eight. We ended the quarter with a record $2.2 billion in cash, up $275 million versus the prior quarter. Totaldebt remains favorable at $2.6 billion at quarter end. Since our de-leveraging efforts begin in June 2008, we have reducedconsolidated debt level of the Company by 30% to $1.1 billion. Also during the quarter, we were very pleased that Moody's

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raised our outlook to stable from negative and also reaffirmed our BA1 rating. Net debt, which is total debt less total cash alsoreached one of the lowest levels in the Company's history at $309 million for the quarter, down meaningfully from $587 millionin the prior quarter. Our net debt has decreased by approximately $1 billion from one year ago. Our ability to generate cashand delever our balance sheet during difficult economic times while also increasing our cash balance is very important. We alsoclosed the period with no borrowing under our $2 billion revolving credit facilities. The graph at the bottom of the slide showsour significant debt maturities by calendar year. The $240 million, 1% convertible notes will mature in August of 2010. Noadditional balances of debt are due until calendar year 2012. Based on our cash balances along with our cash flow from operations,and the additional liquidity available under our revolving credit facility, we remain very comfortable that we have sufficientliquidity to meet our projected needs.

Overall I feel this was a strong quarter with numerous positives to build further on. I'm pleased with our revenue growth, marginexpansion and cash generation. Thank you, Ladies and Gentlemen, and I'll now turn the call over to our CEO, Mike McNamara.

Mike McNamara - Flextronics - CEO

Thanks, Paul. Today, I will update you on the business environment as related to our market segment and business units. I'llfocus on recent demand trends and also cover a few third quarter highlights. I'll conclude with some takeaways and our financialguidance for the fourth quarter, ending March.

Let's start with our results and outlook for each of our market segments and business units. Please turn to slide nine. Our largestsingle segment, infrastructure, grew 7% sequentially of what we believed was a bottom in the September quarter. Infrastructuresales came in at $1.75 billion, representing 27% of revenue. The growth of the segment was driven by new customer wins anda general strengthening of the economy. With regard to Nortel, we are encouraged with the outcome of the asset sales, twokey strategic Flextronics accounts have taken over a large part of Nortel's business, with its CDMA wireless business going toEriccson and its enterprise solution business going to [Ivia]. In addition, we view the recent sales of the optical business to[Sienna] as a positive. We have developing a strong working relationship with [Sienna] and will provide excellence service tothem as the products transition. We also anticipate new opportunities for [Sienna] in the future. In general, we believe thecomplex nature of Nortel's products combined with our infrastructure expertise and cost competitiveness, positions us verywell to retain and support our customers in growing these programs. Our outlook for infrastructure for Q4 is encouraging, wesee solid single digit sequential growth in the quarter that typically experiences seasonal weakness, the growth is fairly welldistributed among a variety of commercial accounts, including emerging infrastructure OEMs outside of our top threeinfrastructure accounts.

In our computing segment, we achieved $1.3 billion or 20% of sales. This segment was up 20% sequentially as our notebookproduction continued to gain momentum and achieved a $1.5 billion run rate in the quarter. Going forward, when we discussour OEM computing business, we'll be referring to notebooks and (inaudible). For the March quarter, we now expect to encounterslight seasonality that we weren't currently anticipating. However, we remain encouraged by the breadth of design wins wehave been receiving. And we continue to expect significant growth in our ODM computing businesses in fiscal 2011, especiallyin our September quarter when new designs get launched for the market. During the quarter, our computing segment alsoannounced a significant expansion in our EMS relationship with [Lenova], which will bolster our European computing businessby adding commercial desktops, servers and workstations to our current stable of computing products. Additionally we areproud to announce that [Lenova]'s new 21.5 inch new all-in-one desktop system called the 8300 won a best of CES award. Thisproduct was co-developed and we will manufacturing the 8300 for [Lenova] from our (inaudible) facility. The 8300 also happensto be the slimmest all-in-one in the industry today, and a testament to the quality, capability and partnership operation betweenour design and engineering staffs.

Our high-mix, low-volume segments, saw modest sequential growth during the quarter, rising 4.4%. However, this comes onthe back of their 17% sequential growth from the September quarter. In total industrial, automotive, medical and other comprises18% of total sales, down slightly from 19% last quarter. This group continues to be a solid contributor to the Company's profits.

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Breaking this category down, the medical segment grew modestly on a sequential basis in Q3 as improvement in diabetesrelated products and new product ramps were offset with some softness in our disposable areas due to customer specific issues.However, we expect the improvement in our diabetes portfolio and other new business wins to drive high single-digit sequentialgrowth in our upcoming March quarter. We continue to see more large, healthcare OEMs looking to outsource more in ourfocused medical investments over the past four years, as well as our recent acquisition of Slow Medical in Western Europeposition us well to capitalize on this trend.

Our industrial segment grew 3% sequentially, and is for casted above normal seasonality and expanded similarly in our Marchquarter. We secured multiple new program wins with the quarter totaling $200 million to $250 million across a diversified baseof smaller customers. To further illustrate how diverse our industrial customer base is, recall that 94% of our industrial customersaccount for $75 million or less in annual sales to Flextronics. Areas of strength within industrial continue to be capital equipment,which has experienced a rebound, and green energy such as smart grid and solar modules, as well as automation products.

Our automotive business saw a healthy pickup in the December quarter, rising by low double digits sequentially. The overallorder and demand environment improved. We expect further near-term revenue growth for automotive driven by new winsfor interior lighting and roof modules, as well as in car connectivity solutions. We also continue to selectively invest in automotiveas other competitors are exiting the market. During the quarter, we made a small niche acquisition that will expand ourautomotive product offering and OEM capabilities. Our automotive business remains heavily focused on European premiumautomotive OEMs.

Now let me turn my attention to the mobile segment. Mobile sales rose 29% sequentially to $1.4 billion or 22% of revenue. Thesharp increase was largely driven by continued growth with the key smart phone customer as well as other mobile phonelaunches with strategic customers in Japan and China. Revenue erosion from Sony Ericsson has moderated and this customernow accounts for less than 2% of our total sales. Customer diversification efforts will continue to strengthen the segment.

Consuming digital rose just over 2% on a sequential basis in December on the back of a 34% seasonal sequential increase lastquarter. The segment ended at $886 million or 13% of total sales. The continued growth in this segment was primarily drivenby the successful ramp of a major LCD TV program with LG in Mexico, as well as a new printer ramps for HP in China. Also wehave had a successful launch of our mechanicals program toward tier-1 LCD TV OEM in Eastern Europe during the quarter.

This is a good time for me to briefly address the issues of supply chain shortages. not just for mobile and consumer, but for allof our segments. This is a topic many investors have been asking about recently. Overall, Q3 was another quarter where supplychain shortages existed.. In general, our team did an excellent job of mitigating the risk of these shortages to our customers inFlextronics, nevertheless there were shortages that could not be avoided, but they still had an immaterial impact on our business.The shortages did not seem to be overly concentrated in any one area, but rather are more dependent on the overall capacityof the components industry. The components we found the most challenging in the quarter, including various customercomponents, LCD panels and memory.

I would now like to spending a few minutes discussing our business units and vertical offerings. Our component businesses arecomprised primarily of mull tech vista point inflex power. Our components business began to display signs of a rebound in thesecond quarter from a sales growth perspective, which continued into the third quarter. We continued to add new customersand win businesses with existing customers, and our pipeline of new business opportunities has gained further momentum.This is particularly evident in our flex power business unit, which saw sales rise by over than 20% on a sequential basis. Moreimportantly, profitability on this unit also improved on a sequential basis. Flex power has a diverse customer base, includingmany tier-1 global OEMs, which provides a strong foundation for us to continue to build from.

Excluding flex power, however, the rest of our components business which mainly incorporates PCBs, flex servers, cameramodules and LCD displays is not yet reaching its target profit levels and remains an excellent opportunity for margin expansionas a result. Strong order growth and design wins for our overall components growth in Q3 are continuing in to Q4 and we expectto introduce new products in the coming year and ramp significant new programs that will drive material growth on a

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year-over-year basis. We continue to expect our component business to grow well in excess of 20% in fiscal 2011. At the sametime these businesses will continue to receive immense focus to unlock their profit potential.

Our services business focused on logistics repair service and service part logistics, during the third quarter we experienced anincrease in both revenue and profitability across all of our major service offerings, and especially from our service parts logisticsbusiness. Our momentum in services is strong, and we see continued upside in this part of the business as customers continueto outsource this part of the supply chain and the economy improves. Our retail technical services business provides competitiveand flexible field services for customer operations, such as Verizons that we mentioned in the past, and we have added newrelationships and other major customers recently. We continue to be very confident of our ability and our capabilities acrossall of the services businesses, and are focused on continuing to expand them.

Please turn to slide ten. This slide depicts our success in expanding our relationships with targeted top tier OEMs across thevarious markets we serve. Our top 10 customers now account for 49% of sales versus 48% a year ago, and HP is our only 10%customer. Sales to our top 3 customers, HP, RIM and Cisco, accounted for 29% of total sales. Sales to two of our largest historicalcustomers, Sony Ericsson and Nortel have been under severe pressure over the last year, but we no longer see either as havinga materially negative impact on our business with combined these two amounts less than 4% of sales.

Please turn to slide 11. In summary, our third quarter was another step in the right direction, and we are feeling confident aboutour March quarter outlook as well. So, in looking at the business overall, our key takeaways for the quarter are as follows. First,sequentially, we grew sales over $700 million, or 12%, and saw even better leverage on the bottom line, with adjusted EPSincreasing 31% to $0.17 a share, which was above the high end of our guidance range. As a result of our efforts to optimize ourbusiness mix and to take significant actions to reduce costs, we achieve higher adjusted EPS this quarter than a year ago on20% less revenue. Both our adjusted gross and adjusted operating margin expanded during the quarter, with our adjustedoperating margin almost coming in at a near-term target at 3%. We continue to improve our operating efficiency and actuallyachieved a 2% increase in our operating earnings for our December quarter, despite $1.6 billion less in revenue versus a yearago. We continue to see additional margin expansion opportunities ahead, and in particular in our components businesses.Moreover, we remain comfortable with the 3.5% adjusted operating tar get we outlined back in November at our New Yorkinvestor day.

Third, we turned our inventory turns above 9.0 for the first time ever, since acquiring Solectron, and our operating groupcontinued to demonstrate excellent working capital management with our cash conversion cycle of 11 days. Fourth, from adebt reduction and free cash flow perspective, we remain in great shape. We have reduced net debt by $1 billion year on yearto $309 million of the lowest levels in the Company's history. Free cash generation over the past four quarters has exceeded$800 million or a free cash flow yield of approximately 15%, and we closed our December quarter with a record cash balanceof $2.2 billion. And lastly, ROIC increased by 790 basis points sequentially with to 30.1% well above our cost of capital and thehighest in recent history. We have more than doubled our ROIC over the last two quarters benefiting from both our improvedprofitability and our world-class asset management.

Now turning to our guidance on slide 12, we continue to see signs of a healthier economy, which is helping to offset some ofthe normal seasonality we see in the March quarter. As a result, we expect our March quarter revenues to be between $5.8 and$6.2 billion, which is down sequentially 8% at the midpoint, and adjusted EPS to be in the range of $0.13 to $0.16. QuarterlyGAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.07 forintangible amortization expense, stock-based composition expense, non-cash interest expense, and estimated restructuringcharges.

I want to take this opportunity to thank all of our employees around the world for their hard work and dedication during theDecember quarter, and for continuing to work as a team to ensure that Flextronics is well positioned to finish fiscal 2010 on astrong footing so we can enter fiscal 2011 ready to capitalize on the growth and various opportunities in front of us. Lastly,please save the date May 25th, when we will be hosting our annual investor day in New York at the Westin in Times Square. We

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look forward to seeing many of you there and will be sending out more details as well as posting them to our website as weget closer to the date. I would now like to open the call for questions, Operator?

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you. (Operator instructions). And it should just take one moment for our first question, please. Our first question willcome from William Stein. Please state your company.

William Stein - Credit Suisse - Analyst

Thanks from Credit Swiss. I'm wondering if you can comment on the capital structure plan of the Company. It seems like youhave accumulated quite a bit of cash here. Can you tell us what you think the right cash level is to run the business and whetherthere is a chance of taking out any of the higher coupon debt?


Yes, we're very pleased with the cash generation, of course, and especially having delivered the balance sheet by more than abillion dollars in the last 12 months. We do have ahead of us in August, as you know, the 1% converts, $240 million, that weneed to deal with. That's one thing for sure. We're also looking at the ABS programs that sales program, the accounting treatmentas it comes on balance sheet April 1, so we're going to manage our way through that. Our biggest area of focus is actuallysupporting think business now through this calendar year and beyond. There's great opportunities of growth that we see,evidenced by for example in the Q4, our cap ex will probably be two times what it was in the December quarter. There's also aneed, of course, for working capital as we grow the business double digits plus next year. So that's our prime focus. We have,of course are always looking at the capital structure in terms of debt and equity opportunities, and we continue to do that, butnothing specific at this stage.


And then just to follow up, can you talk a bit about the margin performance at each of what I think as core EMS components,and then the services -- I would imagine at least in the components area -- I think you noted that in some of these areas you arerunning, below the proper utilization. Can you give us a sense as to -- the degree to which the three of those categories varyfrom a gross margin perspective?


Yes, we don't really get in to the split as you know. Needless to say there's a great deal of opportunity in the components area.We saw some progress in the December quarter, which is healthy and very encouraging, and as we look out at the plans thatwe have in place, we certainly see that group contributing we very well to overall company performance in terms of marginexpansion over this coming year, but I don't really want to get in to the details of each group. I don't think that's appropriate.


Okay. Thank you.

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Thanks Will.

Operator

Our next question will come from Jim Suva. Please state your company.

Jim Suva - Citigroup - Analyst

Thanks, it's Jim Suva from Citigroup. A question, can you talk a little bit more about seasonality? Its been a long time we've hada normal environment or a normal economy and since that time, you have also layered on a lot of new business wins, such as-- with the smart phones as well as more notably with even the notebook and net book computing. So can you talk to us kindof about all of the quarters of the year, the seasonality, and kind of what we should expect from a normal environment ofseasonality?


Yes, Jim, this is Mike. So if you go back in our history and look at the -- what I would call the prerecession -- typical seasonalityin the March quarter, it was probably around 15%, and that's what we always view as a very normal level, so what we gearedfor, and what we expected, and almost always we saw the margins -- the gross margins deteriorate a little bit in the Decemberquarter, and then improve a little bit in the March quarter, but the revenue would go down about 15%. Since then we havelayered on a more diversified portfolio of businesses.

We have reduced our dependence on consumer businesses. The acquisition added a lot more stable businesses through theMarch quarter, and I think the level that you are seeing today, which is pretty close to 8% is probably what we would considerto be our new more normalized level. So I think as part of that diversification effort over the years, I think you will see lessfluctuations as a result, but I think 8% is about where you should be thinking about.


And then the other quarters?


Well, the other quarters -- the -- we always see growth in June quarter. That's typically, I think probably about 5% or 6%. I don'thave those numbers in front of me. We always see September pop up a little bit and then we always get in a pretty good popin December, so I think, the same thing holds -- I don't know the historical numbers for December as an average of how thatwould improvement, so we would have to get back to you on what those numbers look like. But we did study March prettyheavily, and we think this is a pretty normal trend going forward. (Overlapping speakers ) Less seasonality in the Decemberquarter going forward.


Maybe for your investor day, because your Company has the clearly involved in to quite a little bit more layer on businesses,and things like that. So the seasonality I think people will appreciate. And then just a quick housekeeping item following up.

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Inventory, you have done a great job at managing for the, past several quarters, but it increased this quarter and your sales isgoing down. Can you help us connect that or bridge that?


Yes, certainly, Jim. it's -- we have some supply constraints, of course, so we think that -- we left $50 million to $100 million ofrevenue on the table as the result of a shortages. Same comment we had back in September. That -- obviously the effect of thatis to hold a bit more inventory than we planned. It also supports, March being stronger than it has typically been in the past.


Great. Thank you very much, gentlemen.


Thanks.

Operator

Our next question will come from Shawn Harrison from Needham Company. Your line is open. Shawn Harrison, please checkyour mute feature. It appears we don't have Shawn on the line anymore. I'm going to go ahead and move on to the next question.And our next question is going to come from Sherri Scribner from Deutsche Bank. Your line is open.

Sherri Scribner - Deutsche Bank - Analyst

Thank you. I wanted to follow up on Jim's question about normal seasonality, and I guess I was struck by the comment that yousaw normal seasonality now being down about 8%. So I'm trying to understand what does that mean about the new deals thatyou have won, the new programs that you have won, and the improvements in the economy? Does that suggest that we havealready seen the benefit of those in the December quarter? And we won't see those in the March quarter, or is there also somebenefit from those things that we're seeing in the March quarter?


Yes, I'm not sure how the new program wins meshed in with the seasonality. If I can add some more on the seasonality that weare going to see, we are going to see, just a slight down side in computing because it's a reasonably strong and growing business.But we'll see very significant down side in the consumer digital, which is very, very typical. Up to the order of maybe close to30%, and we'll see a pretty significant down side in mobile as well, which will be somewhere in the neighborhood of 20%.

So we will see increases alternatively in industrial and medical, and infrastructure. Several of our components businesses, forexample, we'll see increases. So we're still seeing a blend of the two, but no matter what, we are going to take a -- probably a$400 million or $500 million hit just from consumer digital mobile, where the rest would be up a bit.


I guess the comment would almost seem to suggest that things were not necessarily improving? I guess that is what the questionis go trying to get at. Do you know what I'm saying?

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Yes. I mean maybe if things were improving enough, it would wipe out the normal seasonality.


Okay.


That's certainly possible, but I guess we actually see a pretty significant -- we're normally down 15% keep in mind.


Sure. Sure.


We get down 8% we actually think that's a pretty good improvement. Its certainly is creating a more stable company and utilizesour system a lot better. So we're actually pleased with 8%, but no matter what, we're going to see significant slowdowns everyyear in the consumer business and in the mobile business. I don't know how to get away from that, and sometimes those arebig enough businesses that you can't completely overcome it with growth. And keep in mind, normal seasonality even in theinfrastructure business is typical. We typically see things like enterprise service and things like that down in the first quarter.There actually is other seasonality. Automotive sometimes has some seasonality down.

There is actually quite a bit of other seasonality that is not just in the consumer mobile spaces. So I don't think it's a representationof our -- the booking of the programs. If you remember in the November analyst day we actually thought virtually every oneof our major business units and segments would grow more than double digits this coming year. We still anticipate that goingforward. So we're still pretty bullish about our pipeline and bringing it back, and we actually like going down 8% instead of15%.


Okay. And then in term of the notebook business, you commented that would be down this quarter, and that was not whatyou had expected. Can you give us a little more color on what y that is happening? It seems like notebooks generally have beenpretty strong.


Yes, they have been strong, and who knows how this quarter will end up, but I think last time we talked with the analysts weindicated that we didn't anticipate a seasonal slowdown. We thought we would have enough to motor through it. And again,our portfolio is going to be more product specific, and -- as opposed to really flow exactly with seasonality, because we don'thave enough diversification on our wins yet.

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Sure.


To really represent the entire world, but what we're seeing is we have a very high volume consumer notebook and quite franklyit is experiencing some seasonality. Maybe we were expecting some offset of that, maybe we were being too bullish, but it isnot going to be down very much. We actually anticipate down to like the mid-single digits. It's actually almost a rounding errorto tell you the truth. Where we will see the computing kick up again, these things are on cycles are you and again it kind ofdepends on the cycles that we've done, so what we'll expect to see that s that our business is reasonably flat, and then in theSeptember quarter, you'll see a sharp jump up as some of the new programs we have won and talked about will kick in. So that'skind of the next major thrust to the notebooks is really in the September quarter, where we'll see September start moving upsubstantially.


Okay. Great. Thank you.


You're welcome.

Operator

Our next question will come from Amit Daryanani from RBC. Your line is open.

Amit Daryanani - RBC Capital Markets - Analyst

Yep. Thanks a lot. Good afternoon, guys. Just a question on your OpEx line, you have done a pretty good job maintaining itaround this $170 million bandwidth with three quarters, I'm just curious, as sales start to grow next year and I think you guystalked about double digit growth in fiscal 2011, how should we think about that OpEx number? Because I imagine you haveconstrained a lot of the costs this year.


Yes, we're -- we have done a real great job reducing it as you have said, and, there's a lot of leverage therefore in that as therevenues grow. We still think we can stay in the range of 170, 180 next fiscal year, per quarter, I don't think that's unachievableat all, and that's what we are planning for, so that's what we ought to be thinking about.


Got it. I may have missed this, but I know you talked about component shortages on the LCD memory side, I imagine that is alittle bit more PC centric issues, but broadly do you guys think you left any revenues on the table in the December quarterbecause of component shortages?

11







Yes, I said it was between $50 million and $100 million that was left on the table. Very similar to what happened in September.


And I guess, Paul, do you expect to pick that up in the March quarter? Or do you think that's going to be an issue for a few morequarters?


No, I think different than September, where September did rollover. I think December -- there were a lot of consumer productsthat didn't hit the shelves. So, I think you'd have to assume most of that doesn't roll over.


We're also anticipating that the March quarter may also have shortages. So we're not sure we're out of the difficult times interms of catching up with those shortages. There is still a lot of constraints in the marketplace, so, we just may end up rollingthat $50 million to $100 million over again in March.


Got it. Thank you.

Operator

Our next question will come from Brian White. Your line is open.

Brian White - Ticonderoga Securities - Analyst

Yes, when we look at the components business, what do you think the EPS drag is right now per quarter on that business if itwas running at a very normalized operating margin?


Yes, it's a bundle like Mike said of our PCBs and camera modules and power supplies and many other pieces. It's certainlyrecovering, it is losing money last year, so now it is kind of breaking even, but there's a lot of new program ramps and investmentsthat are still going on in that business that will bear fruit for us in the back half of the year, so it has a long way to go to contributefor sure and that's kind of as specific as we want to be. But it's made improvement in December in both revenue and profit, butit's still kind of around break even.


And what are we talking in terms of revenue size right now for that business?

12







It's growing rapidly, but it's probably running around $2 billion.


Okay. And -- $2 billion. And operating margin is obviously well above the MS side of the business?


It should be, yes. Given the investment cycle and R&D that we spend, obviously it will be much higher than the normal corporateaverage.


In the infrastructure market in the March quarter, it sounds like it is going to grow a tad, where are you seeing the most strengthif you look at storage or enterprise networking servers, where are you seeing the most strength in the infrastructure in the Marchquarter?


Well, it's actually reasonably broad based, but, probably the greatest thing that we're seeing is upside of new customer winsprobably more than anything else. So not necessarily just -- well, we expect to see a little bit of a strengthening, kind of acrossthe board. What is driving it more than anything else is going to be new customer wins.


Is there any one market where you are seeing more within the infrastructure seeing more wins than others?


We're seeing more coming out of the Chinese competitors than the more traditional guys, but alternatively, they are all reasonablystrong in our portfolio, so -- but more than anything else it's the new wins.


And if you didn't have new wins in the March quarter, do you think infrastructure would still go up?


Probably not. I don't know what exactly what number is, but it might more likely go flat.


Go flat. Okay. Thank you.

13






Operator

Our next question will come from Alex Blanton from Ingalls & Snyder. Your line is open.

Alex Blanton - Ingalls & Snyder, LLC - Analyst

Hi, good afternoon. I would like to just talk about the gross margin for a minute, if we can. You had a very nice margin improvementon the operating line, 32 basis points quarter-over-quarter, but it was only 9 basis points from the gross margin side of it, andthe incremental gross margin was only about 6.2%, 6.2% of the sales gain. And that strikes me as being low. Now you said therewas a mix shift towards the lower margin phones and so forth in the quarter, which could explain that, but can we look in thisyear for a bigger incremental improvement? Some things your competitors have talked about, things like 15% incrementalmargins on higher sales and so on, so -- what about Flextronics in -- for -- to plug in to our models for fiscal 2010, which we'rekind of doing on our own here since you haven't given any guidance -- for 2011, I should say.


Yes. As Alex said, we have said all along that the contribution margin has a very wide range for us, anywhere between 5% and15%, as we have always said, and you are right, this quarter, it's coming around 5%, 6%.


Yes.


So, you would kind of expect that in the December quarter because of the seasonality of those products, the mobile phonesand the computing side of the consumer products. So as you predict out, the quarters, you have to take in to account the rangeof the 5% to the 15%, and we have actually seen -- you go back to history, you have seen our December gross margins go down,when (inaudible) heavily seasoned in consumer products. So actually for it to go up, we were quite pleased. It's obviously someof the things that we are doing, the restructuring helped a bit, and also some components helped a bit. But for it to go up inthe December quarter, we were pleased with compared to the prior years, but it is kind of the low end of the 5% to 15% issomething you can expect in the December quarter of every year, I think.


Okay. So it could be as high as 15% in some quarters?


It's 15% on some of our product lines that -- what you have to do is kind of weighted average the revenue side, so while someof our components businesses might have a 15% contribution, the overall company, you wouldn't have a 15% because of theeffect of how much revenue they have. So it's a pretty complex model, and I appreciate the difficulty in trying to put it together.We have difficulty ourselves, but it does range from 5% to 15% with different product categories.

14







Okay. Now I would like to ask you a question about your competitive standing, vis-a-vis Fox con, which announced a day ortwo ago that profits would be well below what they had expected in the quarter, which is just the reverse of what all of theNorth American EMS companies are reporting for the fourth quarter. So for once they are not doing as well, at least on the profitside as the North American companies. Now do you have a opinion on why that is? They blamed it on intense competition. Butgiven the fact that the North American companies are reporting margins above expectations, it would not seem the competitionis coming from -- I mean, there's sort of a disconnect there, is what I'm saying.


Well, I think the real focus of the product categories that they were talking about I think was that FIH business, and it's just avery, very competitive business, so that's --


FIH?


Yes, Fox -- Fox con holdings, I think was the business group that announced that. There are different public entities within foxcon, (Overlapping Speakers) then there's the cell phone group. The cell phone group is just a very competitive, lower marginbusiness and that business does not compete very much -- competes with us, of course, but doesn't compete with others.


Right.


So there's -- it's kind of a different product category. You have to look at each one of the different products to figure out whothe competition is, and a large part of that competition is their own pricing model, I think. So I think they establish very aggressivestandards for what the pricing should be, and I think that's just the way they have chosen to compete, so I -- but -- outside ofthat I don't have any other comment, but I don't think it would affect any of the profit increases associated with companies like-- or even Flextronics which has a more balanced portfolio.


Yes.


So we'll compete sometimes in those areas. Alternatively we have such a diverse piece of business that we can grow our consumerand mobile businesses, and so will margins as evidenced by the December quarter.

15







Right.


We're probably up $400 million just in computing and consumer, yet we have still expanded the overall margins of the entirecompany because we have a broadly diversified portfolio.


Yes.


So I think they are kind of stuck in that -- in that -- supper competitive, low-margin business.


Okay. Thank you.


Yes.

Operator

Our next question will come from Louis Miscioscia from Brigantine. Your line is open.

Louis Miscioscia - Brigantine Advisors - Analyst

Okay. Thank you. My question is on cash flow. Obviously, great cash flow performance over the last four quarters plus, whatabout just looking outgoing forward. You already talked about cash usage, but I was wondering what you think free cash flowmight be and what CapEx might be over the next four quarters.


Yes, like I alluded to earlier, March is -- we -- three great quarters with over $600 million of free cash flow. We look at a Marchquarter now that needs some cash investment that, CapEx is probably going to be 2X what it was in December, so roughly $70million, $80 million. And then, typically as -- even in the past we have seen depreciation levels, to $400 million, a year, and thisyear would be about $200 million, like we said finishing in March. I think for fiscal 2011 we'll probably spend $300 million. Sothose are kind of the numbers you should be looking at.


Okay. And then how about just a possible four-quarter free cash flow number?

16







Yes, we don't have that, Lou, to disclose at this stage. We're still working this year, and this quarter. But its obviously cash positive,it's just -- there's a lot of (inaudible).


Sure. So it sounds that it actually probably would swing nor with the investments that you are doing would swing year to year,as opposed to just a normalized run rate it seems?


Yes, we see great sales this year, fiscal 2011, so we need to support that both from a cap ex standpoint and a working capitalstandpoint. So that's where our focus is, as well as M&A, activity as always.


Okay. Fair enough. Just one clarification, you said that you had a $2 billion component run rate, and I think you said that thatwas running at a loss, but in the December quarter got up to break even, so that break even, obviously you are looking to getback that back to material levels of profitability.


Yes, that's correct. Yes.


And any kind of time frame or visibility that -- obviously that swing could be -- obviously quite material for, aiding earnings.


Yes, it is -- it's one of the keys we have here to really unlock some expansion for us. It's -- and it's not just one business. We havemultiple businesses in there that are all at different stages of maturity. Some real new pieces, some very mature pieces, andsome that are kind of in the middle, so we have just got multiple programs going. One of the things that, for sure, is that wehave a lot of new wins in this area that are requires investment, so we're kind of in the investment cycle in some of those rightnow. I would say the back end of the fiscal year, December, March quarters, we'll see real returns on those businesses, but wereal very encouraged about, the growth of those businesses, and the opportunities to mix the margins of those businesses. It'sjust -- we have been working on this for sometime, and I think the rest of the fiscal year will be -- we should bear the fruit.


Okay. Great. That would be wonderful to see. Good luck.


That would be great. Thanks.

17






Operator

Our next question will come from Shawn Harrison from Longbow, your line is open.

Shawn Harrison - Longbow Research - Analyst

Hi, good afternoon. Just a follow-up on some of the end markets maybe you are seeing better strength or weakness, there werea number of, I guess stats from the analyst day in terms of potential growth expectations across a variety of end markets. If youcould speak to maybe which end markets, based on what you are seeing so far in the March quarter, that could be a little bitbetter than that, or maybe a little bit worse? Sounds like infrastructure may be a little bit ahead of that, but computing couldbe a little bit behind the growth forecast you through out there?


So we through out a forecast for FY 2011 and I think computing will certainly achieve their objectives for the year that we talkedabout in the November analyst day. Infrastructure may be a little bit ahead. We talked a little bit in the analyst day that that wasthe only segment that we had that was non-double-digit growth. So we obviously are working hard to put that in to double-digitgrowth, so I wouldn't say they are ahead or behind, because it's too early to tell. But I would say largely the numbers that weput out there on the analysts day, where we had industrial, medical, mobile, consumer, mull tech, and services all growing 10%to 20% are probably still intact, and the real high growth areas that we felt were going to grow more than 20% were likecomputing and some of the components both power and optometronics where they actually thought they would grow morethan 20%. And we're pretty sure those are intact. So I think the whole premise laid out in November is largely intact. We continueto see a reasonably broad breadth of strength across multiple market segments, and hopefully infrastructure can get over the10% as well.


Okay. And then two brief follow-ups, just the tax rate for fiscal 2011, should we expect that to be kind of within a similar rangehas experienced in this upcoming March quarter, and then with restructuring benefits, it sounds like all of the benefits were inthe December quarter and there won't be any incremental benefits in the March quarter?


On the tax rate, we still think it's between 10% and 15%, we hit the low end in December, but you should assume 10% to 15%fiscal 2011. For sure restructuring, we saw a little bit of restructuring. Something like $5 million to $10 million, and that will comethrough in March, and then we're pretty much done with that.


All right. Thank you very much.

Operator

Our next question will come from Mark Sheerin from Thomas Weisel Partners.

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Alberto Mann - Thomas Weisel Partners - Analyst

Is Alberto [Mann] calling in for Matt. I wanted to talk more about the component business and the PCB business, mull tech inparticular. Can you talk about how much of that business is tied to handsets and whether that is mostly mid-range or smartphones and also if you have seen any cross selling opportunities of some of the selectron customers on the high end of thatbusiness?


Yes, so -- to answer your question first on the high end cross selling, I mean that's an activity we have gone through for quitesometime over the last six weeks, or six months -- six quarters. Sorry. And that has bared a lot of fruit, but largely there is no realstep change to -- as a result of the Selectron acquisition. Those are incremental little pieces that we have put together over thelast six quarters like I mentioned. So I don't think there's any new data there.

On the mobile front, for sure we're starting to do a lot of transition in to smart phones, and I don't know how many differentdeals we have booked, but a significant amount of them, and many of those are starting to ramp. One of the slow -- and it'sprobably close to 40% of our overall business relates to phones, so this has been a little bit of a depressed area, and we havegot one more quarter where it is probably going to be depress inside the March quarter just because the overall mobile businessis down. We're actually investing in capacity to transition us in to different kinds of capacity which is necessary for smart phones.It's more of rebalancing the printed circuit board factories, and those changes are going on as we speak. The progress to booknew customers is -- has been very successful, and as a result we'll look for a pretty strong growth, once we get past March here.We would actually expect very strong growth from the June quarter on out. Maybe even continuous growth for the next fourquarters. So, yes, so the answer is yes, we're in the process of making that transition. And we are in the process of rebalancingsome of the capacity to prepare for it. And then we'll look forward to kind of a turn around study in the June quarter.


Just a quick follow up. Are you seeing most of that growth in the smart phone area in rigid boards or flexible printed circuitboards or both?


Probably most in terms of dollars in rigid, and probably in percentage growth, we'll probably see more growth in flex circuits.


Got you.. All right. Thank you.

Operator

Our next question will come from Steven Fox from CLSA, your line is open.

Steven Fox - Calyon Securities Inc. - Analyst

Hi, good afternoon, just going back to notebook and desktop ramp again. Off of the $1.5 billion run rate you talked about inDecember, where do you think you are going to be a year from now? And can you update us on how they that would flowthrough between notebooks and desktops? What kind of mix it would look like roughly?

19







Yes, as we go forward the notebooks is for sure the dominant player. Maybe it's even a little bit -- more like a two to one ratioof notebooks to desktops, and, we would expect to be roughly doubling the business next year relative to this year, which haskind of been our plan, we had a near-term objective of trying to hit -- get up to $1.5 billion run rate by the end of the year. Weaccomplished that, our objective next year is to double our business, we have capacity in place to -- we're in the process ofgoing in. We think we have the bookings that we need, most of which will start kicking in -- more in to the December quarter.And so we -- we're -- we're -- our target for this next year is to approximately double that business.


Just to be clear, the doubling is notebooks plus desktops?


Yes, that's what I did in my prepared remarks. I just said when we talk about notebooks, we really need to talk more broadlybecause sometimes they are notebooks and sometimes they're netbooks. We booked notebooks, Netbooks and desktops. It'sreally that ODM initiative that we're trying to build and double as a business.


Got it.


It doesn't matter as much, we're actually trying to build a little diversification into the business. And the desk tops is -- one thingto note the desk tops we're focusing on are the all in ones, because as a growth category within desktops all in ones are a verynice growth category, even while desktops may be substantially flat.


Great. Thank you.


You're welcome.

Operator

Our next question will come from Amitabh Passi with UBS. Your line is open.

Amitabh Passi - UBS - Analyst

Thank you. Paul, my first question for you is, how do we think a normalized level for your cash conversion cycle? I mean it'sdown at 11 days. Is that a sustainable level over the next four quarters, or should we expect it to inch back up?

20







I would expect the March quarter would be very similar, and I think absent of the accounting change of the ABS sales programscoming on balance sheet from April 1, we would have -- without that -- would have run this business 11 to 15 days next year.So that's something we're working through with the programs of banks and -- we can mitigate that.


Okay. And then, Mike, just for yourself when you talked about the notebook business potentially doubling over the next fiscalyear, can you remind us again where you think operating margins would go. I think you talked about a $2, $2.5 billion level.Just any guidance in terms of where you think margins might be?


Yes, so I think there's almost a linear transition to the 2.5 points once we hit the $5 billion, so last year we really didn't make anymoney. We're kind of crossing -- we'll transition as we get through this next year, FY 2011 is when all of the new programs kickin, we'll certainly be making money, and then we would expect it to move up to 2.5% once we hit the $5 billion, which -- wecertainly hope to be somewhere in the FY 2012 area. So we almost think it's somewhat of a linear movement from -- from zerotoday, call it, to 2.5% in two years.


And just one final question, how do you think about the competitive landscape, particularly as you continue to grow yourcomputing business, and -- I mean, I assume today your business is relatively small compared to the largest OEMS, but onceyou get in to the $5 billion, $8 billion, $10 billion range, any concern around what happens to the pricing environment and howdo you avoid getting in to sort very aggressive and competitive pricing?


Well, some of the big guys now are running 3.5%. If you look at (inaudible) results they are actually running around 3.5%operating profits. You can argue as you get bigger the opportunities to make money may even be there. Our way of looking atthat is, is we have a lot of other businesses. If we get up to $5 billion and we don't like the competitiveness of the deal, we canstay at $5 billion. We can leverage the rest of your 2.5 -- or $25 billion of spend -- or $25 billion of business. So I think we havea lot more flexibility of some of those other guys that tend to have 80% or 90% of their business just in -- in PCs. We have a lotof verticals and services that we can put to play.

The place we're trying to really go with our business is to really focus on innovation and compete on innovation and some ofthe component technologies we have allow us some very interesting innovation opportunities, and, just as a good example isthat [Lenova] product which is a really slick products for you guys -- you should see it. And you actually have to use it to reallyappreciate it, but it's a very slick product, very, very good looking, and we're just trying to compete on innovation, so we feelwe have enough tools which to compete. We'll being quite successful with the OEMs, and -- but alternatively we're not forcedin to take bad deals because we have a lot of other business where we have a very, very diversified portfolio.


When you talk about your components business, the $2 billion business with margins being much higher predownturn, are wetalking about margins sort of from the high single-digit, low double-digit sort of range?

21







Yes, it's hard to generalize because -- for example, when we went in to the downturn, we were just building a power business,so for example, when we went in to the power business -- or when we went in to the downturn, the power was probably only-- a $400 million business, and was building up from much lower levels, and this FY 2011 we expect power to be an $800 billionbusiness. So it's not fair to generalize, because power was building, so it underachieved profitability, where alternatively wehad things like mull tech and the print circuit board side which was overacheiving EMS average, so it was difficult to -- it's difficultto generalize before the downturn because we had building businesses. Now we can kind of generalize a little bit better becauseof businesses and the investments we made over the last, really, two or three years are starting to mature, and, our powerbusiness is running at healthy -- healthy revenue level, so we expect it to make money, and we have enough bookings in placeto have pretty -- fairly good utilization levels with each one of these businesses, so going forward it is probably a more appropriatething. But prior to the downturn, it was all over the map. We had some businesses that were well below zero.


Thank you.


We kind of look at this coming year as the year we really harvest the investments that we have seen.


Got it. Thank you.


You're welcome.

Operator

Our next question will come from Frank Jarman from Goldman Sachs. Your line is open.

Frank Jarman - Goldman Sachs - Analyst

Thanks, guys, just a question with regards to your credit ratings, you have come out of the downturn with fairly favorable creditmetrics, overall liquidity is good, do you think that investment grade is attainable and do you see that as an objective for you?Thanks?


Hi, Frank. I think anything is obtainable. We're very comfortable with where we're at. We're very pleased that Moody has takenaway the negative watch. That was a short term objective of ours. We have worked closely with them and the same with S&P.So it's not necessarily our priority right now to focus on investment grade. I think that we have enjoy a lot with the rating wehave in terms of pricing, and covenants, et cetera, which we're pretty comfortable with, and the debt level. So I don't think we'retargeting any near term strategy to get to investment grade at this stage.

22







Okay. Thanks. And you have talked a lot about some of the plans with regards to utilizing cash over the next six to 12 months,but you haven't mentioned share repurchase activity, I think, could you talk a little bit about your interest in that? Thank you.


Yes, certainly. It's certainly always been on the list. We did something back in August '08, as you remember. But it's not ourpriority right now. Our priority is growing the business and investing in the business, whether it's organically or M&A related,so, it's something that we -- is certainly -- something we don't forget about, but it's not a priority at this stage.


Okay. Great. Thanks very much, guys.


Maybe we can take one more question.

Operator

Our next question will come from Jake Kemeny from Morgan Stanley. Your line is open.

Jake Kemeny - Morgan Stanley - Analyst

Hi, Paul, could you just remind us where you currently stand with your restricted payments, basket capacity either for repurchasingbonds or equity? And if you could just touch on, kind of what is the most restrictive right now? Is it the covenants in the bondsor the term loan?


Yes, we went through that content process, as you know the senior subs back in the last year, so we fixed the restrictive payment,we got a onetime basket of $250 million which is in place, and we also have the basket builder, which can currently runningprobably around $200 million. So we have $400 to $500 million in the basket availability for share repurchase at this stage. Andthat's kind of the only restriction that we have in that regard.


So are you kind of happy with that covenant? And your ability with respect to flexibility and buying back shares or --


Absolutely. Just under Singapore law, we're only allowed 10% on an annual basis, so that's only going to get you some $400million or so, $500 million. So it's -- certainly if we were to pull the trigger on it, we would have more than enough allowancein that covenant to do what we need to do.

23







Okay. So you don't see those bonds as inhibiting your flexibility and you have already gotten the amendment that you arelooking for?


Right. Not now. There used to be a consideration but not anymore.


Okay. Thank you.


Thanks. Thanks, everyone. We appreciate you joining us today and we look forward to seeing you in May at our investor meeting.Thank you. Bye-bye.

Operator

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.

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24






Cover PageCorporate ParticipantsWarren Ligan (3 Turns)Paul Read (28 Turns)Mike McNamara (33 Turns)

Conference Call ParticipantsWilliam Stein (3 Turns)Jim Suva (4 Turns)Sherri Scribner (7 Turns)Amit Daryanani (4 Turns)Brian White (7 Turns)Alex Blanton (10 Turns)Louis Miscioscia (6 Turns)Shawn Harrison (3 Turns)Alberto Mann (3 Turns)Steven Fox (4 Turns)Amitabh Passi (6 Turns)Frank Jarman (3 Turns)Jake Kemeny (4 Turns)

PRESENTATION1. Operator2. Warren Ligan3. Paul Read4. Mike McNamara

QUESTIONS AND ANSWERS1. Operator2. William Stein3. Paul Read4. William Stein5. Paul Read6. William Stein7. Paul Read8. Operator9. Jim Suva10. Mike McNamara11. Jim Suva12. Mike McNamara13. Jim Suva14. Paul Read15. Jim Suva16. Paul Read17. Operator18. Sherri Scribner19. Mike McNamara20. Sherri Scribner21. Mike McNamara22. Sherri Scribner23. Mike McNamara24. Sherri Scribner25. Mike McNamara26. Sherri Scribner27. Mike McNamara28. Sherri Scribner29. Mike McNamara30. Sherri Scribner31. Mike McNamara32. Operator33. Amit Daryanani34. Paul Read35. Amit Daryanani36. Paul Read37. Amit Daryanani38. Paul Read39. Mike McNamara40. Amit Daryanani41. Operator42. Brian White43. Paul Read44. Brian White45. P

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Q3 2010 Flextronics Earnings Conference Call on …...2010/01/27 · Jan. 27. 2010 / 10:00PM, FLEX - Q3 2010 Flextronics Earnings Conference Call Adjusted SG&A expense, which includes