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Flextronics International Ltd.’s (FLEX - Snapshot Report) first quarter 2012 earnings per share of 19 cents jumped 11.8% year over year, but missed the Zacks Consensus Estimate by a penny.

Moreover, the EPS lagged the company’s guidance range of 20-23 cents.

Revenues

The quarter’s total revenue jumped 15% on a year-over-year basis to $7.5 billion. Revenues not only managed to surpass the Zacks Consensus Estimate of $7.30 billion, but also settled at the higher end of management’s guided range of $7.1 billion-$7.6 billion.

Double-digit growth across all business segments boosted the quarter’s revenues.

Specifically, Integrated Network Solutions (37% of the revenues) increased 11.0% year over year to $2.77 billion. Despite the increase, the segment experienced delays in new program ramps and some unexpected softness in customer orders.

Industrial and Emerging Industries (15% of the revenues) increased 13.0% year over year to $1.15 billion. This segment witnessed broad-based growth during the quarter led by clean techs and semiconductor capital equipment in addition to new wins in several other areas. Flextronics’ Industrial segment won a new program worth $400 million during the quarter.

High Reliability Solutions (7% of the revenues) increased 35.0% year over year to $567.0 million. This segment comprises the medical, automotive aerospace and defense businesses. The segment witnessed growth across all the divisions.

High Velocity Solutions (41% of the revenues) increased 16.0% year over year to $3.06 billion. This segment includes mobile, smartphones, consumer electronics, game consoles and printers and a high velocity computing, including the PC original design manufacturer (ODM) business. Though the segment posted growth across all divisions, the mobile and consumer business declined both sequentially and on a year-over-year basis. Weakness from the largest mobile customers combined with softness in demand among Japanese mobile customers and seasonality in the games console market brought about the decline in this particular quarter.

Margins

Gross profit margin decreased by 30 basis points (bps) year over year to 5.3%. Operating income increased 5.3% year over year to $184.3 million. Operating margin was 2.4% for the quarter versus 2.7% in the year-ago quarter. Margins were negatively impacted by the losses from the ODM business.

Interest and other expenses increased by 14.6 million from the prior quarter to $22.2 million. Lower foreign exchange gains and higher other non-operating expenses led the sequential increase. The operating tax rate was 10.0%, down from 10.6% in the last quarter.

For the quarter, return on invested capital (ROIC) increased to 26.5% from 24.7% in the year-ago quarter.

Balance Sheet

Flextronics exited the quarter with cash and cash equivalents of $1.56 billion, compared with $1.75 billion at the end of the previous quarter. At quarter end, the cash conversion cycle decreased modestly to 19 days from 20 days in the previous quarter. Inventory increased to $3.74 billion and inventory turns increased to 7.8 x from previous quarter’s 7.3x.

Total debt decreased marginally from the prior quarter and was $2.14 billion. Net debt (debt less cash) came in at $656 million versus $472 million in the previous quarter. The debt to EBITDA ratio was 1.8x at quarter end. In the quarter, net cash from operating activities was $136.0 million and free cash flow was $124.0 million.

During the quarter, Flextronics repurchased 29 million shares for $200.0 million, using the amount authorized under the third $200 million share buyback program.

Outlook

For the forthcoming quarter, management expects earnings per share between 21 cents and 23 cents.  The Zacks Consensus Estimate is pegged at 23 cents. GAAP earnings per share are expected to be lower by approximately 4 cents per diluted share, due to the quarterly intangible amortization and stock-based compensation expense.

Total revenue is expected to be in the range of $7.6 billion to $8.0 billion. The Zacks Consensus Estimate projects Flextronics to earn $7.9 billion in revenues in the forthcoming quarter.

Conclusion

Flextronics believes problems related to component supply shortages will gradually ease out in 2012, which is expected to emerge as a profitable year. Further growth is expected from traditional sectors (consumer electronics, computing, networking, communications), and from new areas (automotive, medical, industrial).

Flextronics continues to face tough competition from Celestica Inc. (CLS - Snapshot Report) and Jabil Circuit Inc. (JBL - Analyst Report). However, a robust product portfolio, new program wins, huge client base and increasing focus on emerging clean technology will drive growth for the forthcoming quarters.

We have a Neutral recommendation on Flextronics in 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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