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Jabil Circuit Inc. (JBL - Analyst Report) reported fourth quarter 2012 earnings of 44 cents (including stock- based compensation of $21.3 million), which missed the Zacks Consensus Estimate by 6 cents. This miss was primarily due to higher operating expenses in the quarter.

Quarter Details

Revenue increased 1.4% year over year to $4.34 billion. This was within management’s guided range of $4.1 billion to $4.35 billion, and was well ahead of the Zacks Consensus Estimate of $4.22 billion.

The better-than-expected result was attributable to a strong performance from the Diversified Manufacturing segment, which fully offset a weak performance from Enterprise & Infrastructure and High Velocity segments.

Diversified Manufacturing revenue (45.0% of the total revenue) jumped 14.0% year over year to $1.9 billion (missing the outlook of 17.0% growth). The growth was driven by continued strength in specialized services, and growth in instrumentation and healthcare, which fully offset weakening demand in defense & aerospace, and industrial & clean tech.

Enterprise & Infrastructure revenue (30.0% of the total revenue) was down 5.0% year over year to $1.3 billion (in line with the management guidance).

High Velocity sales (27.0% of the total revenue) decreased 14.0% year over year to $1.1 billion (narrower than the 22.0% revenue decline guidance), primarily attributed to continued weakness in handset volumes.

Gross profit declined 3.5% year over year to $317.5 million, while gross margin contracted 40 basis points (“bps”) year over year to 7.3%.

Operating expenses increased 7.2% year over year to $169.9 million. Research and development (R&D) expense in the quarter jumped 9.3% year over year to $6.5 million (slightly lower than the management guidance of $7.0 million), while selling, general and administrative (SG&A) expense increased 7.1% to $163.0 million.

Higher operating expenses had a negative impact on profitability in the quarter. Operating income (including stock-based compensation of $21.6 million) decreased 13.5% year over year to $147.7 million. Operating margin was 3.4% compared with 4.0% in the year-earlier quarter.

Net income (excluding stock-based compensation and one-time items) was $113.3 million or 39 cents compared with $136.3 million or 52 cents in the year-ago quarter.

Exiting the fourth quarter of 2012, cash and cash equivalents were $1.22 billion, up from $742.1 million in the prior quarter. Jabil’s debt level increased in the fourth quarter. Total debt, as of August 31, 2012, was $1.67 billion compared with $1.43 billion at the end of last quarter.

Guidance

Jabil expects net revenue in the range of $4.3 billion to $4.5 billion for the first quarter of 2013. Diversified Manufacturing is expected to grow 12.0% year over year, Enterprise and Infrastructure is anticipated to jump 14.0% year over year, while High Velocity is forecast to decline 24.0% on a year-over-year basis for the first quarter.

Jabil projects operating income in the $170.0 million to $200.0 million range for the first quarter of 2013. Operating margin is expected to be in the range of 4.0% to 4.4%. The company expects R&D expense of $7.0 million and SG&A expense to be 3.3% of revenue in the first quarter of 2013. Jabil expects non-GAAP earnings to be between 51 cents and 62 cents per share for the first quarter.

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 will boost profitability going forward.

However, increasing expenses remain a concern. The company is suffering from the declining sales of one of its largest mobile customer Research In Motion , which will continue to hurt going forward.

Thus, we remain Neutral over the long term (6-12 months). Currently, Jabil has a Zacks #2 Rank, which implies a Buy rating in the near term.

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