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Tickers in this Article: FLEX, JBL
Flextronics International Ltd. (FLEX) reported fourth quarter 2012 earnings of 27 cents per share (including stock-based compensation but excluding intangible amortization and tax adjustment), beating the Zacks Consensus Estimate by 6 cents. Earnings surged 42.0% from the year-ago quarter due to higher operating income and aggressive share buyback. Quarter Details

Total revenue in the reported quarter decreased 6.0% on a year-over-year basis to $6.38 billion and missed the Zacks Consensus Estimate of $6.63 billion. However, revenues exceeded the lower end of management's guidance of $6.3 billion-$6.6 billion.

The year-over-year decline was primarily attributed to the company's exit from the original design manufacturer (ODM) PC business. As a result, High Velocity Solutions (31% of the total revenue) decreased 29.0% year over year to $1.95 billion. Industrial and Emerging solutions (14% of revenues) decreased 6.0% year over year to $991.0 million.

The significant decline was partially offset by strong growth in the Integrated Network Solutions (45% of the total revenue) and High Reliability Solutions (10% of the total revenue). Integrated Network Solutions reported revenues of $2.85 billion, up 13.0% year over year. High Reliability Solutions posted a staggering revenue growth of 27.0% year over year to reach $648.0 million in the quarter.

Gross profit for the quarter was down 4.4% from the year-ago level of $362.8 million. Gross profit margin expanded 10 basis points (bps) year over year to 5.7%. Selling, general & administrative (SG&A) decreased 10.2% year over year to $183.2 million.

Operating income improved 2.4% year over year to $179.6 million. Operating margin was 2.8% in the quarter versus 2.6% in the year-ago quarter, primarily due to lower SG&A. Net Income increased 25.9% year over year to $187.2 million. Net margin was 2.9% in the quarter versus 2.2% reported in the prior-year quarter.

Flextronics exited the quarter with cash and cash equivalents of $1.52 billion compared with $1.55 billion at the end of the previous quarter. Total debt was $2.20 billion, while net debt (debt less cash) came in at $682 million versus $653 million in the previous quarter.

Cash flow from operations was $138.7 million during the quarter. Capital expenditures were $58 million in the quarter. Flextronics generated free cash flow of over $8 million in the quarter. During the quarter, Flextronics repurchased 15 million shares for $94.0 million.

Outlook

For the forthcoming quarter, management expects earnings per share in the range of 20 cents to 24 cents. Currently, the Zacks Consensus Estimate is pegged at 22 cents. Total revenue is expected in the range of $5.9 billion to $6.3 billion.

For the first quarter of 2013, Flextronics forecasts stable revenue for Integrated Network Solutions business segment. Industrial and Emerging solutions segment is expected to grow at a high single-digit rate, while High Reliability Solutions segment is forecasted to grow at a low single-digit rate. High Velocity Solutions are expected to decline 15.0% to 25.0% for the forthcoming quarter.

Our Recommendation

We believe that Flextronics will face significant headwinds over the next couple of quarters due to macroeconomic concerns, weak end-market demand and continuing supply chain related problems. Increasing competition from Jabil Circuit Inc. (JBL) remains a concern. Moreover, the portfolio realignment is also expected to hurt Flextronics top-line growth in the near term.

However, we believe that demand is stabilizing in the traditional sectors (consumer electronics, computing, networking and communications) and the company is experiencing strong demand from the emerging markets (automotive, medical, industrial). This is primarily reflected from the higher number of new bookings (approximately $250.0 million) during the quarter. Further, the portfolio realignment will likely boost profitability over the long term.

We have a Neutral recommendation on Flextronics over the long term. Currently, Flextronics has a Zacks #3 Rank, which implies a short-term Hold rating (for the next 1-3 months).

 
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