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Jabil Circuit Inc. (JBL - Analyst Report) reported second-quarter of fiscal 2014 earnings from continuing operations (including share based compensation but excluding all one-time items) of 3 cents per share, which managed to beat the Zacks Consensus Estimate by a penny. However, earnings declined 92.2% on a year over year basis.

Revenues

Revenues decreased 14.1% from the year-ago quarter to $3.58 billion and were slightly below the mid-point of management’s guided range of $3.5 billion to $3.7 billion. Revenues also missed the Zacks Consensus Estimate of $3.75 billion.

Diversified Manufacturing revenues (44.7% of revenues) declined 16.0% year over year to $1.6 billion. This decline was primarily on account of low end-market demand.

Enterprise & Infrastructure revenues (33.5% of revenues) were down 9.0% year over year to $1.2 billion. This decline can be primarily attributed to the lack of enterprise spending seen late in the quarter.

High Velocity (21.8% of revenues) decreased 18.0% year over year to $0.78 billion due to the Blackberry disengagement.

Operating Details

Gross margin declined 90 basis points (bps) on a year-over-year basis to 6.0%, primarily due to an unfavorable product mix.

Operating expenses as a percentage of revenues increased 110 bps from the year-ago quarter to 4.8%. Selling, general and administrative expense as a percentage of revenues increased 110 bps on a year-over-year basis while Research and Development expense as a percentage of revenues remained flat on a year over year basis.

As a result, operating income (including stock based compensation but excluding all one time items) declined to $45.7 million from $1.35 billion in the year-ago quarter.

Net income (including stock based compensation but excluding all one time items) declined to $6.1 million from $77.9 million in the year ago quarter

Balance Sheet & Cash Flow

Exiting the second quarter of fiscal 2014, cash and cash equivalents were $675.0 million, down from $769.2 million in the previous quarter. Debt levels were consistent in the reported quarter at $2.2 billion.

Cash flow from operations was $70.0 million compared with $117.7 million in the previous quarter. Capital expenditure was $76.0 million compared with $203.0 million in the previous quarter.

Restructuring Details

Jabil’s disengagement from BlackBerry (BBRY - Analyst Report) is expected to result in a restructuring charge of approximately $35.0 million to $85.0 million. The company recorded approximately $28.0 million of these charges in the second quarter. Jabil also spent $8.0 million related to its manufacturing capacity alignment program.  

Guidance

Jabil expects net revenue to be in the range of $3.5 billion to $3.7 billion for the third quarter of fiscal 2014, down 14.0% from third-quarter fiscal 2013. The management guidance range happened to be below the Zacks Consensus Estimate of $3.8 billion.

Revenues from Diversified Manufacturing are expected to remain flat year over year, while Enterprise and Infrastructure are expected to decline 5.0% on a year-over- year basis. High Velocity revenues are likely to decrease 40.0% on a year-over-year basis for the third quarter.

Jabil projects operating income in the $20.0 million to $60.0 million range for the third quarter of fiscal 2014. The company expects to report loss of 20 cents or break-even for the third quarter. Currently, the Zacks Consensus Estimate is pegged at earnings of 12 cents.

Management expects total restructuring charges to be between $15.0 million to $35.0 million in the third quarter. Free cash flow is expected to be around $150.0 million to $250.0 million for 2014.

Our Take

We believe that the disengagement from BlackBerry is expected to negatively impact the top line and margins over the next couple of quarters. Moreover, we believe that the weak guidance will act as an overhang on the stock going forward.

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 #5 (Strong Sell).

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