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Jabil Circuit Inc. (JBL - Analyst Report) reported disappointing second-quarter 2013 results with both the top and bottom line lagging the Zacks Consensus Estimate. Jabil reported earnings (including stock-based compensation and related charges) of 45 cents per share, a penny shy of the Zacks Consensus Estimate.

Moreover, on a non-GAAP basis, Jabil reported earnings of 53 cents per share, which was down 8.6% from the year-ago quarter.

Revenues

Though revenues for the quarter increased 4.2% from the year-ago quarter to $4.42 billion, it marginally missed the Zacks Consensus of $4.43 billion. Revenues were within management’s guided range of $4.3 billion to 4.5 billion.

The year-over-year increase in revenues was primarily driven by 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 11% year over year to $2.07 billion (better than management’s outlook of 7% growth). The growth was driven by continued strength in Specialized Services, which fully offset weak performance from the Industrial & Clean Tech and Instrumentation sector.

Enterprise & Infrastructure revenue (31% of the total revenue) was up 12% year over year to $1.36 billion (management expected the sector to increase by 15.0%). High Velocity segment revenue (22% of the total revenue) decreased 15% year over year to $988 million (revenue decline was higher than the forecasted 13% year over year), primarily due to continued weakness in handset volumes.

Operating Results

Gross profit inched up 0.7% year over year to $324.5 million. Gross margin contracted 30 basis points (“bps”) year over year to 7.3%, primarily due to unfavorable product mix.

Operating expenses increased 2.1% year over year to $175.5 million, primarily due to higher research and development (R&D) expenses (up 22.2% year over year to $7.7 million) and selling, general and administrative (SG&A) expenses (up 2.2% year over year to $164.4 million).

Jabil’s non-GAAP operating income decreased 3.4% year over year to $170.2 million, primarily due to a cost of $5 million associated with Nypro acquisition. Operating margin was 3.9% versus 4.2% in the year ago quarter. Including stock-based compensation and related charges of $17.7 million, operating income came in at $152.5 million.

Jabil’s non-GAAP net income was $109.3 million or 53 cents compared with $123.2 million or 58 cents in the year-ago quarter. Including stock-based compensation, net income came in at $91.8 million or 45 cents per share.

Balance Sheet & Cash Flow

Exiting the second quarter of 2013, cash and cash equivalents were $1.06 billion, up from $1.03 billion in the previous quarter. Total debt, as of Feb 28, 2013, was $1.76 billion.

Cash flow from operations was $154 million compared with $152 million in the year-ago quarter. Capital expenditure was $197.0 million in the quarter. Non-GAAP return on invested capital was 19.9% in the second quarter compared with 24.6% in the comparable year-ago quarter.

Guidance

Jabil expects net revenue in the range of $4.3 billion to $4.5 billion for the third quarter of 2013. Revenues from Diversified Manufacturing and Enterprise and Infrastructure are expected to be at par with the year-ago period while High Velocity revenues are forecasted to increase 13.0% on a year-over-year basis for the third quarter.

However, management expects Diversified Manufacturing segment to decline 10% sequentially due to multiple product transitions and volatile macroeconomic concerns. High Velocity is expected to increase primarily due to ramp up of new handset programs.  

Jabil projects operating income in the $165.0 million to $185.0 million range for the third quarter of 2013. Operating margin is expected in the range of 3.8% to 4.1%. Jabil expects non-GAAP earnings to be between 50 cents and 58 cents per share for the third quarter.

Recommendation

We believe that Jabil will continue to face macroeconomic headwinds in the near term. The company continues to invest in the diversified manufacturing segment, which will increase its capital expenditure. Nonetheless, the company’s association with Apple (AAPL - Analyst Report) is expected to boost it growth prospects going forward.

The company’s recent acquisition and the expansions in China are expected to hurt margins in the near term. Moreover, the company provided a tepid guidance for the forthcoming quarter. Additionally, competition from Flextronics (FLEX - Snapshot Report) and Benchmark Electronics (BHE - Snapshot Report) are the other near-term headwinds. 

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

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