Flextronics International Ltd.(FLEX) reported fourth quarter 2011 earnings per share of 19 cents (including stock-based compensation but excluding intangible amortization and restructuring charges), missing the Zacks Consensus Estimate of 20 cents.
Earnings improved 35.7% from the prior-year quarter, but were below the guidance range of 21 cents to 23 cents.
For fiscal year 2011, Flextronics had earned 80 cents per share, up 73.9% from the year-ago quarter but again short of the Zacks Consensus Estimate of 81 cents per share .
During the quarter, total revenue increased 15.0% year over year to $6.86 billion, missing the Zacks Consensus Estimate of $7.30 billion and the guided range of $7.1 billion to $7.5 billion. Despite the miss, revenues were up across all segments.
For fiscal 2011, total revenue increased 19.0% year over year to $28.68 billion, which was driven by strong organic growth and double-digit growth in all market segments. However, revenues failed to beat the Zacks Consensus Estimate of $29.14 billion.
Segment-wise, Infrastructure (27% of the total revenue) increased 6.0% year over year to $1.86 billion. Despite the increase, the segment experienced delays in new program ramps and some unexpected softness in customer orders. For fiscal 2011, infrastructure grew 11.0% in incremental sales.
Industrial, Automotive, Medical and other (23% of the total revenue) increased 25.0% year over year to $1.53 billion. This segment witnessed solid single-digit sequential growth, driven by strength in office equipment, semi-cap equipment, smart meters and clean tech. Flextronics’ Industrial segment won a new program worth $300 million in the quarter.
Moreover, a strong demand for medical equipment and new product brands in the Medical segment lifted quarterly results. Management expects single-digit revenue growth from medical in the next quarter and is hopeful of another strong year of growth in fiscal 2012.
Mobile revenues (21% of the total revenue) increased 24.0% year over year to $1.44 billion. However, on a sequential basis, revenue dropped 15.0% due to normal seasonality.
For the first quarter of 2012, management expects lower revenue in the Mobile segment due to reductions in demand from Japanese-based mobile phone customers. However, revenues will benefit from market share gains at smartphone customers outside ofResearch In Motion Ltd. (RIMM). Management expects the net impact to be about a 10% sequential decline.
Computing (17% of the total revenue) increased 1% year over year to $1.19 billion, driven by new program wins that were partially offset by server declines. Consumer digital (12% of the total revenue) climbed 35.0% year over year to $0.84 billion.
Gross profit margin decreased by 10 basis points (bps) year over year to 5.6%. Operating income increased 28.4% year over year to $176.3 million. Operating margin remained flat year over year at 2.6%.
Interest and other expenses decreased by 16.5 million from the prior quarter to $7.6 million. Operating tax rate was 10.6%, up from 7.5% in the last quarter.
For the quarter, return on invested capital (ROIC) decreased to 25.0% from 28.8% reported in the year-ago quarter.
Balance Sheet
Flextronics exited the quarter with cash and cash equivalents of $1.75 billion, compared with $1.60 billion at the end of the previous quarter. At quarter end, the cash conversion cycle increased to 20 days from 14 days in the previous quarter. Inventory increased marginally to $3.6 billion and inventory turns decreased to 7.3x from 8.3x.
Total debt decreased marginally from the prior quarter and was $2.22 billion at the end of March 2011. Net debt (debt less cash) came in at $472 million versus $633 million in the previous quarter. Debt to EBITDA ratio was 1.8x at quarter end. In the quarter, net cash from operating activities was $274.5 million and free cash flow was $208.0 million.
During the year, Flextronics repurchased 65 million shares for $400.0 million at an average cost of $6.12 per share.
Outlook
For the forthcoming quarter, management expects earnings per share between 20 cents and 23 cents. The Zacks Consensus Estimate is pegged at 20 cents. GAAP earnings per share are expected to be lower by approximately 3 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 $7.1 billion to $7.6 billion.
Conclusion
Flextronics believes problems related to component supply shortages will gradually ease out in 2012, which is expected to emerge as a profitable year.
Flextronics continues to face tough competition from Celestica Inc. (CLS) and Jabil Circuit Inc. (JBL). However, a robust product portfolio, new program wins, huge client base and increasing focus on emerging clean technology will drive shares in the long term.
Thus we have a Neutral recommendation on Flextronics in the long term.
Currently, Flextronics has a Zacks #4 Rank, which implies a short-term ‘Sell’ rating (for the next 1-3 months).
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