Jabil Beats 3Q Earnings, Misses Rev

Zacks

Jabil Circuit Inc. (JBL) reported mixed third-quarter 2013 results. Although earnings of 48 cents per share beat the Zacks Consensus Estimate by a couple of cents, revenues marginally lagged the consensus mark.

Revenues

Revenues increased 5.1% from the year-ago quarter to $4.47 billion. Revenues were within management’s guided range of $4.3 billion to 4.5 billion. On a sequential basis, revenues inched up 1.1% in the quarter.

The year-over-year growth was primarily driven by strong performance from the High Velocity and Enterprise & Infrastructure segments, which fully offset a weak performance from the Diversified Manufacturing segment.

Diversified Manufacturing revenues (40.0% of revenues) decreased 4.0% year over year to $1.8 billion. The decline was primarily due to lower volume of sales in the Instrumentation and Clean Tech sectors. Revenues declined 13.0% on a sequential basis.

Enterprise & Infrastructure revenues (31.0% of revenues) were up 4.0% year over year but remained flat sequentially at $1.4 billion. High Velocity (29% of revenues) jumped 23.0% year over year to $1.3 billion (much higher than 13% year over year growth expected earlier). Revenues jumped 31.6% on a sequential basis.

Operating Results

Gross margin contracted 30 basis points (“bps”) from the year-ago quarter to 7.4%, primarily due to unfavorable product mix. Gross margin expanded 10 bps on a sequential basis.

Operating expenses as percentage of revenues declined 20 bps from the year-ago quarter to 3.8%. Sequentially, operating expenses declined 10 bps in the quarter.

Despite the year-over-year decline in operating expenses as percentage of revenues, operating margin (including stock-based compensation) contracted 40 bps from the year-ago quarter to 3.6%. Operating income expanded 10 bps sequentially.

Net income margin (net income includes stock-based compensation) declined 50 bps from the year-ago quarter to 2.2%. Sequentially, net income margin expanded 10 bps in the quarter.

Earnings per share decreased 11.5% year over year to 48 cents. However, on a sequential basis, earnings per shares increased 6.7%.

Balance Sheet & Cash Flow

Exiting the third quarter of 2013, cash and cash equivalents were $1.35 billion, up from $1.06 billion in the previous quarter. Total debt, as of May 31, was $1.66 billion compared with $1.76 billion as of Feb 28, 2013.

Cash flow from operations was $504.0 million compared with $154.0 million in the previous quarter. Capital expenditure was $81.5 million compared with $197.0 million in the previous quarter.

Non-GAAP return on invested capital was 21.8% in the third quarter compared with 24.0% in the comparable year-ago quarter.

Restructuring Details

Jabil has undertaken a restructuring initiative, which is targeted at realigning its manufacturing capacity and cost base as per current market conditions and geographic needs. The realignment is expected to result in $188.0 million charges of which $28.0 million were recorded in the third quarter.

Jabil forecasts that approximately $60.0 to $70.0 million of these charges will be recorded in the fourth quarter. The remaining portion will be incurred during 2014 and 2015. The realignment is estimated to save $30.0 to $40.0 million in fiscal 2014 and $65.0 million in fiscal 2015.

Guidance

Jabil expects net revenue to increase approximately 5.0% from the year-ago quarter to the range of $4.45 billion to $4.65 billion for the fourth quarter of 2013. Revenues from Diversified Manufacturing and Enterprise and Infrastructure are expected to be at par with the year-ago period while High Velocity revenues are forecast to increase 15.0% on a year-over-year basis for the fourth quarter.

Jabil projects operating income in the $165.0 million to $185.0 million range for the fourth quarter of 2013. Operating margin is expected in the range of 3.7% to 4.0%. The company expects the Enterprise and Infrastructure segment to report an operating margin of 3.0% in the upcoming quarter.

Jabil expects non-GAAP earnings to be between 50 cents and 58 cents per share for the fourth quarter. Jabil expects cash flow from operations to be more than $1.0 billion for fiscal 2013. Capital expenditures are still expected to be around $700.0 million for 2013.

Jabil expects to earn $2.77 in fiscal 2014, driven by strong growth from the Nypro acquisition (16 to 22 cents), restructuring benefits (11 to 15 cents) and organic growth (11 to 31 cents) based on market share gains, new business wins, successful program launches and reasonable improvements to end-market demand.

Recommendation

We believe that Jabil will continue to face macroeconomic headwinds in the near term. The company continues to invest in the diversified manufacturing segment, which will increase its capital expenditure. Nonetheless, Jabil’s increasing association with Apple (AAPL) is expected to boost its growth prospects going forward.

Additionally estimated strong growth from the Nypro acquisition, restructuring benefits and new customer wins will help Jabil to compete with Flextronics (FLEX) and Benchmark Electronics (BHE) going forward.

Currently, Jabil Circuit has a Zacks Rank #3 (Hold).

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