(JBL) Jabil Circuit Reports Mixed Third Quarter

Jabil Circuit Inc. (JBL) reported third quarter 2011 earnings of 49 cents per share, which missed the Zacks Consensus Estimate by a penny.

However, earnings per share (EPS) increased 75.0% year over year from 28 cents (including stock-based compensation but excluding amortization) reported in the prior-year quarter.

The strong results were driven by solid revenue growth in the quarter (up 22.2% year over year to $4.23 billion).

Operating Performance

Net income surged 83.4% year over year to $109.9 million. Net margin was 2.6% in the quarter compared with 1.7% in the year-ago period.

The solid bottom-line growth was driven by operating margin expansion in the quarter. Operating income shot up 51.1% year over year to $157.7 million in the first quarter. Operating margin was 3.7% compared with 3.0% in the year-earlier quarter.

Segment wise, Diversified manufacturing margin was 6.2% in the quarter. Core operating margin for the Enterprise and Infrastructure segment was 3.9%. High velocity posted a margin of 2.0% in the quarter.

The strong growth in operating margin fully offset a slight decline in gross margin. Although gross profit increased 21.5% year over year from $318.4 million in the quarter, gross margin stood at 7.5% in the quarter, down from 7.6% in the prior-year quarter.

The strong growth in operating margin was primarily driven by modest increases in selling, general and administrative expense (SG&A) and research and development expense (R&D), which were outpaced by strong revenue growth in the quarter.

SG&A expense increased 1.8% year over year to $154.1 million, while R&D was up 3.0% year over year to $6.5 million in the third quarter.

Revenue

Revenue surpassed management’s guided range of $4.1 billion to $4.2 billion in the third quarter. Higher quarterly revenues were attributable to market share gains, new customer wins and strong growth from emerging markets. The year-over-year growth was driven by strong results across all its segments.

Diversified manufacturing segment revenue (36.0% of the total revenue) increased 44.0% year over year to $1.5 billion. Enterprise and Infrastructure segment revenue (33.0% of the total revenue) was $1.4 billion, up 15.5% year over year. High velocity segment (31.0% of the total revenue) achieved a year-over-year growth of 10.0%, with revenue increasing to $1.3 billion.

Balance Sheet & Cash Flow

Exiting the third quarter, cash and cash equivalents were $911.1 million, up from $902.3 million in the prior quarter.

Jabil significantly reduced its debt level in the third quarter. Total debt, as of May 31, 2011, was $1.19 billion compared with $1.24 billion as of February 28, 2011.

The company’s net cash balance (cash less debt including current portion) was a deficit of $276.5 million or $1.24 per share in the third quarter of 2011 compared with $335.7 million or $1.52 per share in the second quarter of 2011, which reflects solid improvement.

Cash flow from operations was $156.8 million in the quarter. The sales cycle was 16 days while annualized inventory turns were 7 in the quarter. Capital expenditures were $113.6 million, while depreciation was $77.3 million. Core return on invested capital was 28.5% in the third quarter.

Guidance

Jabil expects net revenue in the range of $4.1 billion to $4.3 billion for the fourth quarter of 2011. Diversified Manufacturing is expected to grow 7.0% sequentially, Enterprise and Infrastructure is anticipated to increase 3.0% sequentially, while High Velocity is forecasted to decline 13.0% on a sequential basis in the fourth quarter.

Jabil forecasts operating income for the fourth quarter (excluding stock-based compensation) in the $165.0 million to $185.0 million range (4.0% to 4.3% of the total revenue).

Jabil expects non-GAAP earnings per share to be between 52 cents and 60 cents for the fourth quarter. The Zacks Consensus Estimate is currently pegged at 48 cents (Zacks Consensus Estimate includes stock-based compensation).

Jabil expects to achieve revenues of $16.4 billion for fiscal 2011 (up approximately 22.3% year over year) and $20 billion by 2013.

Recommendation

Jabil provided a robust fourth quarter outlook, anticipating strong top-line growth for fiscal 2011 on the back of a mix shift toward high-margin diversified manufacturing systems. We believe Jabil remains well positioned to grow from the increasing adoption of clean technology and alternative energy. Moreover, a lean cost structure, increasing cash flow generation capabilities and an improving balance sheet are positives for the stock.

However, the company faces strong competition from Flextronics Inc. (FLEX) and Sanmina-SCI Corp. (SANM), which may hurt its profitability going forward.

We maintain an Outperform rating on Jabil over the long term (6–12 months). Currently, Jabil has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

FLEXTRONIC INTL (FLEX): Free Stock Analysis Report

JABIL CIRCUIT (JBL): Free Stock Analysis Report

SANMINA-SCI CP (SANM): Free Stock Analysis Report

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