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Jabil Circuit Inc. (JBL - Analyst Report) reported first-quarter of fiscal 2014 earnings of 51 cents per share, which decreased 16.4% from the year-ago quarter. Shares dropped approximately 15.0% in after-hours trading due to weak second-quarter guidance.

However, excluding reversal of stock-based compensation worth $40.0 million, earnings of 63 cents per share surpassed the Zacks Consensus Estimate by 16 cents.

Revenues

Revenues decreased 0.6% from the year-ago quarter to $4.61 billion, toward the high-end of management’s guided range of $4.35 billion to $4.65 billion. Revenues were slightly better than the Zacks Consensus Estimate.

Diversified Manufacturing revenues (50.0% of revenues) increased 5.0% year over year to $2.3 billion. The strong year-over-year growth was driven by better performance from Nypro.

Enterprise & Infrastructure revenues (29.0% of revenues) were down 6.0% year over year $1.3 billion. High Velocity (21.0% of revenues) decreased 5.0% year over year to $1.0 billion (lower than 25.0% year-over-year growth expected earlier), due to lower handset volumes.

Operating Details

Gross margin increased 40 basis points (bps) on a year-over-year basis to 8.0%, primarily due to favorable product mix.

Operating expenses as a percentage of revenues decreased 20 bps from the year-ago quarter to 3.6%. Selling, general and administrative expense as a percentage of revenues decreased 30 bps on a year-over-year basis.

As a result, operating margin (excluding stock-based compensation reversal) expanded 70 bps from the year-ago quarter to 4.4%.

Net income margin (excluding stock-based compensation reversal) increased 40 bps on a year-over-year basis to 2.8%.

Balance Sheet & Cash Flow

Exiting the first quarter of 2014, cash and cash equivalents were $769.2 million, down from $1.01 billion in the previous quarter. Total debt, as of Nov 30, 2013, was $1.80 billion compared with $1.91 billion as of Aug 31, 2013.

Cash flow from operations was $117.7 million compared with $404.0 million in the previous quarter. Capital expenditure was $203.0 million compared with $280.0 million in the previous quarter.

Restructuring Details

Jabil’s disengagement from BlackBerry (BBRY - Analyst Report) is expected to result in restructuring charge of approximately $35.0 million to $85.0 million. The company recorded approximately $15.0 million of these charges in the first quarter. Jabil also incurred $6.0 million related to its manufacturing capacity alignment program.  
Divestiture Details

Jabil also announced that the company is selling after-market business to iQor Holdings for $725.0 million. The divestiture anticipated to close in the third quarter of fiscal 2014, will allow Jabil to focus more on its core manufacturing business.

Guidance

Jabil expects net revenue to be in the range of $3.5 billion to $3.7 billion for the second quarter of fiscal 2014, down 17.0% from second-quarter 2013.

Revenues from Diversified Manufacturing are expected to decrease 25.0% year over year, while Enterprise and Infrastructure are expected to be at par with the year-ago period. High Velocity revenues are forecasted to decrease 25.0% on a year-over-year basis for the second quarter.

Jabil projects operating income in the $40.0 million to $80.0 million range for the second quarter of 2014. The company expects non-GAAP earnings to be between 5 cents and 15 cents per share for the second quarter. Currently, the Zacks Consensus Estimate is pegged at 42 cents.

Management expects free cash flow to be around $400.0 million to $500.0 million for 2014. Jabil also announced a new share buyback program worth $200.0 million to be completed over the next 12 months.

Recommendation

We believe that a weak second-quarter revenue guidance and lowered earnings outlook will remain an overhang on the stock in the near term. The disengagement from BlackBerry is expected to negatively impact top line and margins over the next couple of quarters.

Jabil’s increasing association with Apple (AAPL - Analyst Report) 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 the likes of Flextronics (FLEX - Snapshot Report), going forward.

Nonetheless, we believe that Jabil will continue to face macroeconomic headwinds in the near term. Moreover, the company continues to invest in the diversified manufacturing segment, which will increase its capital expenditure. The asset-reallocation in the segment is also expected to increase uncertainty in the near term.

Currently, Jabil Circuit has a Zacks Rank #4 (Sell).

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