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Jabil Misses in 3Q; Outlook Dismal

JBL

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Jabil Circuit Inc. (JBL - Analyst Report) reported third quarter 2012 earnings of 64 cents (excluding stock based compensation and other one-time items), up 10.3% on a year-over-year basis. Jabil reported earnings of 54 cents per share (including stock based compensation but excluding one time items), which missed the Zacks Consensus Estimate by a couple of cents.

Quarter Details

Revenue increased marginally on a year-over-year basis to $4.25 billion. Although this was within management’s guided range of $4.2 billion to $4.4 billion, revenue fell slightly short of the Zacks Consensus Estimate of $4.29 billion. This downside was primarily attributed to sluggish end-market sales, particularly in the high-velocity segment. The company also suffered from the weakness in the solar industry.

Diversified manufacturing revenue (44.0% of the total revenue) increased 22.0% year over year to $1.9 billion (missed the outlook of 25.0% growth). Enterprise and Infrastructure revenue (31.0% of the total revenue) was down 4.0% year over year to $1.3 billion (better than the 8.0% revenue decline forecast). High velocity sales (27.0% of the total revenue) decreased 20.0% year over year to $1.1 billion (worse than the 14.0% revenue decline guidance).

Gross profit was $329.3 million, up 3.4% year over year while gross margin increased 20 basis points year over year to 7.7%. This was primarily driven by a favorable product mix.

Operating expenses increased 5.4% year over year to $169.3 million. Research and development (R&D) expense in the quarter declined slightly to $6.5 million (better than the management guidance of $7.0 million), while selling, general and administrative (SG&A) expense increased 5.6% to $162.7 million.

EBITDA (includes operating income, amortization of intangibles, depreciation expense, distressed customer charge and stock based compensation) upped 8.0% year over year to $275.0 million. EBITDA margin expanded 50 bps to reach 6.5% in the quarter, the highest since the fourth quarter of 2005.

Operating income (excluding stock based compensation) increased 7.0% year over year to $190.3 million and was within management’s guided range of $185.0 million to $205.0 million. Operating results were negatively affected by a one-time charge of $10.1 million (distressed customer charge associated with the solar industry) in the third quarter of 2012.

Including stock-based compensation, operating income increased 7.9% year over year to $170.2 million in the reported quarter. Operating margin was 4.0% compared with 3.7% in the year-earlier quarter.

Interest & other expenses increased 6.2% year over year to $27.6 million, approximately in line with management’s guidance.

Net income (excluding stock-based compensation and one-time items) increased 4.1% year over year to $134.4 million. Net income (including stock based compensation but excluding one time items) increased 4.4% year over year to $114.6 million. Net margin expanded 10 bps year over year to 2.7%.

Exiting the third quarter of 2012, cash and cash equivalents were $742.1 million, up from $707.4 million in the prior quarter. Jabil’s debt level increased in the third quarter. Total debt, as of May 31, 2012, was $1.43 billion compared with $1.39 billion at the end of last quarter.

The company’s net cash balance (cash less debt including the current portion) was a deficit of $686.7 million or $3.28 per share in the third quarter of 2012 compared with $686.7 million or $3.24 per share in the second quarter of 2012.

Cash from operating activities was $186.3 million as compared with cash outflow of $109.3 million in the previous quarter. The sales cycle was 11 days while annualized inventory turns were 7 in the quarter. Capital expenditures were $111.3 million while core return on invested capital was 24.0% in the reported quarter. During the quarter, Jabil repurchased 1.5 million shares for approximately $30.0 million.

Guidance

Jabil expects net revenue in the range of $4.1 billion to $4.35 billion for the fourth quarter of 2012 (lower end projected to decrease 4.6%, while upper end to increase 1.6% on a year-over-year basis).

Diversified Manufacturing is expected to grow 17.0% year over year, Enterprise and Infrastructure is anticipated to decline 5.0% year over year, while High Velocity is forecast to decline 22.0% on a year-over-year basis for the fourth quarter.

Jabil projects operating income (excluding stock-based compensation) in the $170.0 million to $200.0 million range (lower end projected to decrease 9.1%, while upper end to increase 6.8% on a year-over-year basis) for the fourth quarter of 2012. Operating margin is expected to be in the range of 4.1% to 4.6% (operating margin expanded 30 bps to 4.4% in the fourth quarter of 2011).

The company expects R&D expense of $7.0 million and interest expense of $29.0 million for the fourth quarter of 2012.

Jabil expects non-GAAP earnings (excluding stock based compensation) to be between 54 cents and 66 cents per share (lower end projected to decrease 14.8%, while upper end to increase 6.5% on a year-over-year basis) for the fourth quarter.

For the second half of fiscal 2012, capital expenditures are expected to be $320.0 million. Jabil is expanding rapidly particularly in the specialized services sector, with capacity doubling at Wuxi, China. The company is set to put up a new factory in Chengdu, China. Jabil expects to complete the first phase of this expansion by the end of first quarter of fiscal 2013.

Recommendation

We believe that Jabil is well positioned to grow over the long term, driven by increasing exposure to non-traditional and emerging sectors such as industrial, renewable energy, clean tech and medical, aided by improving technology spending. Moreover, increasing production capacity in the low-cost regions of China will boost profitability going forward. Further, Jabil’s lean cost structure will also drive operating profit going forward.

Nevertheless, we are disappointed with Jabil’s fourth quarter outlook. The company is suffering from the declining sales of one of its largest mobile customer Research In Motion in the high velocity segment, which will continue to hurt in the near term. We believe that Jabil shares will continue to remain range bound over the near term particularly due to lackluster macro environment, slowing enterprise spending, sluggish end market sales and increasing expenditure related to capacity expansion.

Thus, we remain Neutral over the long term (6-12 months). Currently, Jabil has a Zacks #4 Rank, which implies a Sell rating in the near term.

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