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Shares of Jabil Circuit Inc. (JBL - Analyst Report) surged 5.6% ($1.03) after the electronic manufacturing services provider reported first quarter 2013 earnings of 53 cents (including stock- based compensation of $21.3 million), which beat the Zacks Consensus Estimate by 6 cents.

Revenue Details

Revenue jumped 7.2% year over year to $4.64 billion. This was slightly better than management’s guided range of $4.3 billion to $4.5 billion as well as the Zacks Consensus Estimate of $4.42 billion.

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

Diversified Manufacturing revenue (47.0% of the total revenue) jumped 20.0% year over year to $2.2 billion (much better than the management outlook of 12.0% growth). The growth was driven by continued strength in specialized services, which fully offset weakening demand in instrumentation, clean tech, solar & wind related products.

Enterprise & Infrastructure revenue (30.0% of the total revenue) was up 17.0% year over year to $1.4 billion (much better than the management’s outlook of 14.0%).

High Velocity sales (23.0% of the total revenue) decreased 20.0% year over year to $1.0 billion (slightly narrower than the forecasted 23.0% revenue decline), primarily due to continued weakness in handset volumes.

Operating Details

Gross profit increased 3.1% year over year to $350.6 million, reflecting better-than-expected revenue growth in the quarter. Gross margin contracted 30 basis points (“bps”) year over year to 7.6%, primarily due to unfavorable product mix.

Operating expenses increased 7.8% year over year to $176.9 million. Research and development (R&D) expense in the quarter jumped 15.8% year over year to $7.3 million (slightly higher than the management guidance of $7.0 million), while selling, general and administrative (SG&A) expense increased 7.5% to $169.6 million. SG&A as a percentage of revenue was 3.7%, 40 bps higher than management guidance.

Higher operating expenses had a negative impact on profitability in the quarter. Operating income (including stock-based compensation of $18.8 million) decreased 1.2% year over year to $173.7 million. Operating margin contracted 40 bps to 3.7% in the reported quarter.

Net income (excluding stock-based compensation and one-time items) was $127.8 million or 61 cents compared with $136.2 million or 65 cents in the year-ago quarter.

Balance Sheet & Cash Flow details

Exiting the first quarter of 2013, cash and cash equivalents were $1.03 billion, down from $1.22 billion in the prior quarter. Total debt, as of November 30, 2012, remained flat sequentially at $1.67 billion.

Cash flow from operations was $152.0 million compared with $115.0 million in the year-ago quarter. Capital expenditure was $165.0 million in the quarter.

Jabil repurchased approximately 7.3 million shares at an average price of $17.58, totaling $129.0 million in the quarter. GAAP return on invested capital was 21% in the first quarter compared with 26% in the comparable year ago quarter.

Guidance

Jabil expects net revenue in the range of $4.3 billion to $4.5 billion for the second quarter of 2013 (approximately 4.0% year-over-year). Diversified Manufacturing is expected to grow 7.0% year over year, Enterprise and Infrastructure is anticipated to jump 15.0% year over year, while High Velocity is forecast to decline 13.0% on a year-over-year basis for the second quarter.

Jabil projects operating income in the $165.0 million to $185.0 million range for the second quarter of 2013. Operating margin is expected to be in the range of 3.8% to 4.1%. The company expects R&D expense of $7.0 million and SG&A expense to be 3.3% of revenue for the second quarter of 2013. Jabil expects non-GAAP earnings to be between 50 cents and 58 cents per share for the second quarter.

Capital expenditure is expected to be $200.0 million for the second quarter.

Our Take

Although Jabil’s top-line and bottom-line figures comfortably surpassed the Zacks Consensus marks, the margin growth was not satisfactory. Sluggish macro-economic environment, higher mix of low margin products and continued increase in operating expenses continued to hurt profitability in the reported quarter.

We believe that Jabil will continue to face these headwinds in the near term. The company continues to invest in the diversified manufacturing segment, which will increase its capital expenditure. However, Jabil’s increasing exposure to Apple (AAPL - Analyst Report) and the upcoming Blackberry 10 launch from Research In Motion , boosts its growth prospects for fiscal 2013.

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 over the long term.

Thus, we remain Neutral over the long term (6-12 months). Currently, Jabil has a Zacks #3 Rank (Hold).

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