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Flextronics International Ltd. (FLEX - Snapshot Report) reported second quarter fiscal 2014 earnings of 20 cents per share, which beat the Zacks Consensus Estimate by a penny.

Revenues

Revenues increased 3.8% from the year-ago quarter to $6.41 billion, beating the Zacks Consensus Estimate of $6.29 billion. Revenues slivered past management’s guided range of $6.1 billion to $6.4 billion.

Year-over-year revenue growth was driven by growth in two of the largest business groups, including double-digit growth in both HRS and HVS business groups, which helped to offset the decline in the revenue growth of other business.

The Integrated Network solutions segment, the largest revenue contributor (44.0% of revenues) in the quarter, declined 4.7% from the year-ago quarter to $2.71 billion. High velocity solutions (33.0% of revenues) segment revenues increased 14.0% on a year-over-year basis to $2.01 billion.

Revenues from the Industrial and Emerging Industries (15.0% of revenues) declined 3.7% year over year to $940.0 million. High Reliability Solutions revenues (12.0% of revenues) improved 19.5% from the year-ago quarter to $785.0 million.

Margins

Gross margins declined from 5.9% in the year ago quarter to 5.7%. The decline can be mainly attributed to the change in product mix.

Selling, general & administrative (SG&A) expense as a percentage of revenues increased 30 basis points (bps) from the year-ago quarter to 3.4%. As a result, operating margin contracted 50 bps to 2.3% in the second quarter. 

Net income as a percentage of revenues was 2.0% compared with 2.7% in the year-ago quarter. Adjusted net income per share was 20 cents, which remained flat compared with the year-ago quarter.

Balance Sheet

Flextronics exited the quarter with cash and cash equivalents of $1.13 billion compared with $1.28 billion at the end of the previous quarter. Total debt was $2.01 billion versus $2.06 billion in the previous quarter.

Guidance

For the third quarter of fiscal 2014, revenues are expected to be in the range of $6.5 billion to $6.9 billion and adjusted earnings in the range of 21 to 25 cents per share.  

Adjusted operating income is expected to be in a range of $160.0 million to $190.0 million, which is 10% higher at the midpoint than $159 million reported this past quarter.

Recommendation

Flextronics reported a decent second quarter result, with earnings beating the Zacks Consensus Estimate. Flextronics has undertaken a number of new initiatives to gain a competitive edge, which includes divestiture of non-core assets and deployment of new technologies.

In this regard, we also believe that strategic acquisitions and strong new bookings will also drive top-line growth over the long term. However, macroeconomic concerns and weak end-market demands are major headwinds in the near term.

Moreover, the portfolio realignment is also expected to hurt Flextronics’ top-line growth in the near term. Further, increasing competition from Jabil Circuit Inc. (JBL - Analyst Report), Celestical Inc. (CLS - Snapshot Report) and Plexus Corp (PLXS - Analyst Report) remains a concern going forward.

Currently Flextronics has a Zacks Rank #4 (Sell).

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