Jabil Q3 Loss Narrower-than-Expected; 2015 Outlook Positive - Analyst Blog

Jabil Circuit Inc. JBL reported third-quarter fiscal 2014 loss from continuing operations (including share-based compensation but excluding all one-time items) of 13 cents per share, narrower than the Zacks Consensus Estimate of 15 cents loss.

Jabil had reported earnings of 40 cents per share in the year-ago quarter. The third-quarter loss was primarily attributed to year-over-year decline in revenues.

Revenues

Revenues decreased 9.8% from the year-ago quarter to $3.79 billion and were slightly above the higher-end of management's guided range of $3.5 to $3.7 billion. Revenues also beat the Zacks Consensus Estimate of $3.62 billion.

Diversified Manufacturing revenues (43.0% of revenues) increased 6.0% year over year to $1.6 billion, much better than management's guidance of flat growth. The revenue growth was driven by strong performance from Nypro industrial and instrumentation business.

Enterprise & Infrastructure revenues (35.0% of revenues) were down 3.0% year over year to $1.3 billion. The decline was narrower than management's expectations of 5.0% year-over-year decline. This decline can be primarily attributed to the lack of enterprise spending in the quarter.

High Velocity revenues (22.0% of revenues) decreased 35.0% year over year to $0.9 billion, slightly narrower than management's guidance of 40.0% decline. The decline was primarily due to the Blackberry BBRY disengagement.

Operating Details

Gross margin contracted 140 basis points (bps) on a year-over-year basis to 5.7%, primarily due to an unfavorable product mix.

Operating expenses as a percentage of revenues increased 150 bps from the year-ago quarter to 5.2%. Selling, general and administrative expense as a percentage of revenues increased 150 bps on a year-over-year basis. Research and development expense as a percentage of revenues remained flat year over year.

As a result, operating income (including stock-based compensation but excluding all one-time items) declined to $30.8 million from $144.1 million in the year-ago quarter.

Operating income (excluding stock-based compensation and all one-time items) of $45.3 million declined from $158.6 million in the year-ago quarter, slightly higher than the mid-point of management's guided range of $20.0 to $60.0 million.

Net loss (excluding stock-based compensation and all one-time items) was $11.3 million or 6 cents per share compared with net income of $98.2 million or 47 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the third quarter of fiscal 2014, cash and cash equivalents were $1.32 billion, up from $675.0 million at the end of the previous quarter. Total debt declined to $1.74 billion from $2.20 billion at the end of the previous quarter.

Cash flow from operations was $275.0 million compared with $70.0 million in the previous quarter. During the third quarter, Jabil repurchased approximately 3.6 million shares at a total cost of approximately $65.0 million. The company has approximately $70.0 million available under its $200.0 million repurchase authorization.

Restructuring Details

Jabil's disengagement from BlackBerry is expected to result in a restructuring charge of approximately $42.0 to $70.0 million. At the end of the third quarter, restructuring charges (Blackberry disengagement and capacity alignment plan) were $44.0 million.

Jabil expects benefits from restructuring to be approximately $40.0 million for 2014 and $65.0 million for 2015 (cash charges $59.0 million).  

Guidance

Jabil expects net revenue to be in the range of $3.7 to $3.9 billion for the fourth quarter of fiscal 2014, down 15.0% from fourth-quarter fiscal 2013. The lower-end of  management's guidance range is on par with the Zacks Consensus Estimate.

On a year-over-year basis, revenues from Diversified Manufacturing are expected to decline 6.0%, while Enterprise and Infrastructure revenues are expected to decline 7.0%. High Velocity revenues are likely to decrease 38.0% on a year-over-year basis for the fourth quarter.

Jabil projects operating income in the $40.0 to $80.0 million range for the fourth quarter of fiscal 2014. The company expects to report loss of 10 cents or earnings of 10 cents for the fourth quarter. Currently, the Zacks Consensus Estimate is pegged at a loss of a penny.

Jabil forecasts capital expenditure to be approximately $350.0 million for fiscal 2014.

Management forecasts fiscal 2015 earnings to be in the range of $1.65 to $1.95 per share, driven by improving business trends and new bookings.

Our Take

We believe that the disengagement from BlackBerry will negatively impact the top line and margins over the next couple of quarters. However, Jabil's positive 2015 guidance will drive the stock price in the near term.

Jabil's increasing association with Apple AAPL is expected to boost its growth prospects. Additionally, estimated strong growth from the Nypro acquisition, restructuring benefits and customer wins will help Jabil to compete with the likes of Flextronics FLEX in 2014 and 2015.

Nonetheless, we believe that Jabil will continue to face macroeconomic headwinds, which is a major roadblock for achieving the 2015 target. Moreover, the company continues to invest in the Diversified Manufacturing segment, which will increase its capital expenditure. The asset-reallocation in the segment is also expected to increase the near-term uncertainty.

Currently, Jabil Circuit has a Zacks Rank #3 (Hold).