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Flextronics International Ltd. (FLEX - Snapshot Report) reported fourth quarter earnings of 12 cents per share that matched the Zacks Consensus Estimate but declined from 22 cents reported in the year-ago quarter.

Revenues

Revenues declined 17.0% from the year-ago quarter to $5.30 billion, slightly short of the Zacks Consensus Estimate of $5.45 billion. The year-over-year decline in revenues was due to the winding down of the assembly business with Research In Motion (BBRY - Analyst Report). Revenues were in line with the higher end of management’s guided range of $5.0 billion to $5.3 billion.

The Integrated Network solutions segment, which was the largest revenue contributor (47.0% of revenues) in the quarter, declined 12% from the year-ago quarter to $2.47 billion; primarily due to a weak demand trend in the telecom and networking sector and normal seasonality.

High velocity solutions (22.0% of revenues) segment revenues declined a massive 41.0% from the year-ago quarter to $1.16 billion, reflecting the winding down of the assembly business with RIM, weak demand trends in computing, consumer and mobile communications and normal seasonality.

Revenues from the Industrial and Emerging Industries (17.0% of revenues) declined 4.0% year over year to $895.0 million. High Reliability Solutions revenues (14.0% of revenues) improved 20.0% from the year-ago quarter to $776.0 million, primarily attributable to continued strong performance of the automotive business.

Margins

Gross margins improved 30 basis points (“bps”) on a year-over-year basis to 5.6%, reflecting business transition to the low-volume high-margin revenue model.

Selling, general & administrative (SG&A) expense increased 80 bps to 4.1% from 3.3% in the year-ago quarter. As a result, operating margin contracted 70 bps to 1.8% in the fourth quarter.  

Net income as a percentage of revenues was 1.5% compared with 2.5% in the year-ago quarter.

Balance Sheet

Flextronics exited the quarter with cash and cash equivalents of $1.59 billion compared with $1.71 billion at the end of the previous quarter. Total debt was $2.07 billion versus $2.09 billion in the previous quarter.

Guidance

For the first quarter, management expects adjusted earnings in the range of 12 cents to 16 cents per share. Total revenue is expected in the range of $5.3 billion to $5.6 billion.

Flextronics forecasts Integrated Network solutions and High Reliability Solutions revenues to remain flat sequentially.  Industrial and Emerging Industries are expected to grow at a low single-digit growth rate as new program ramps up in first quarter.

High Velocity Solutions is also expected to rise in low double-digits due to partial quarter contribution from the acquisition of Google’s (GOOG) Motorola manufacturing unit in Brazil and Tianjin China.

Recommendation

Flextronics has undertaken a number of new initiatives to enhance its competitive edge, which includes divestiture of non-core assets and deployment of new technologies. New programs are expected to boost production volumes by early fiscal 2014, although profitability is expected to remain weak due to continuing investments.

In this regard, we 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 concerns 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) and Plexus Corp (PLXS - Analyst Report) remains a concern going forward.

Currently Flextronics has a Zacks Rank #3 (Hold).

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