Shares of electronic parts manufacturer, Jabil Circuit Inc. (JBL) surged $1.93 (10.20%) to $20.86 in after-hours trading, following the release of the company’s second quarter 2011 results.
Jabil reported pro forma earnings of 45 cents per share, beating the Zacks Consensus Estimate by a penny. Pro forma earnings include stock-based compensation expenses but exclude one-time charges of 20 cents.
Earnings (excluding stock-based compensation and one-time charges) were 54 cents per share, up 86.0% year over year from 29 cents reported in the prior-year quarter. This was better than management’s guided range of 49 cents to 53 cents. Earnings on a GAAP basis were 25 cents, up 78.9% year over year from 14 cents reported in the year-earlier quarter.
The strong results were driven by solid top-line growth in the quarter and expanding operating margins based on lower cost of operations.
Revenue
Revenue increased to $3.92 billion from $3.00 billion reported in the year-ago quarter, up 30.8% year over year. The quarter’s revenue surpassed the Zacks Consensus Estimate of $3.91 billion and was within management’s guided range of $3.85 billion to $3.95 billion.
Jabil achieved strong growth in the quarter based on 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 (35.0% of total revenue) increased 47.0% year over year to $1.4 billion. Enterprise and Infrastructure segment revenue (32.0% of total revenue) was $1.2 billion, up 19.0% year over year. High velocity segment revenue (33.0% of total revenue) achieved a year-over-year growth of 19.0%, with revenue increasing to $1.3 billion.
Operating Performance
Gross profit in the quarter was $296.4 million, up 33.1% year over year from $222.7 million in the year-ago quarter. Gross margin was 7.5% in the quarter versus 7.4% in the prior-year quarter. Cost of revenue increased 30.5% year over year in the quarter.
Operating income on a pro forma basis was $148.1 million, which soared 114.3% year over year to $69.1 million in the prior-year quarter. Operating margin was 3.8% compared with 2.3% in the year-earlier quarter. Segment wise, Diversified manufacturing margin was 6.1% in the quarter. Core operating margin for the Enterprise and Infrastructure segment was 4.1%. High velocity posted a margin of 2.0% in the quarter.
The strong growth in operating margin was primarily driven by lower selling, general and administrative expense (SG&A) and research and development expense (R&D) in the quarter.
SG&A expense fell 3.0% year over year to $141.8 million, while R&D declined 12.0% year over year to $146.3 million in the second quarter.
Net income on pro forma basis was $98.8 million, up 166.2% year over year. Net margin was 2.5% in the quarter compared with 1.2% in the year-ago period.
Balance Sheet & Cash Flow
Exiting the second quarter, cash and cash equivalents were $902.3 million, up from $630.2 million in the prior quarter.
Jabil significantly reduced its debt level in the second quarter. Long-term debt (including current portion), as of February 28, 2011, was $1.24 billion compared with $1.30 billion as of November 30, 2010.
The company’s net cash balance (cash less debt including current portion) was a deficit of $335.7 million or $1.52 per share in the second quarter of 2011 compared with $668.2 million or $3.07 per share in the first quarter of 2011, reflecting solid improvement.
Cash flow from operations was $450.3 million in the quarter. The sales cycle was 11 days while annualized inventory turns were 7 in the quarter. Capital expenditures were $106.1 million, while depreciation was $71.3 million. Core return on invested capital was 26.0% in the second quarter.
Acquisition
During the second quarter of 2011, Jabil acquired three of its previously divested units in France and Italy. These units were sold off in July 2010 to an unrelated third party.
Jabil announced that it will establish viable operations at the sites following multiple breaches by the purchaser of those facilities, including their diversion of funds that were specifically designated as working capital.
Jabil is in the process of developing a long-term business plan for these sites and expects related revenues to represent approximately 1.5% of the overall quarterly revenue guidance in the third quarter.
Guidance
Jabil expects net revenue to be in the range of $4.1 billion to $4.2 billion for the third quarter of 2011. Diversified Manufacturing is expected to grow 6.0% sequentially, Enterprise and Infrastructure is anticipated to increase 8.0% sequentially, while High Velocity is forecasted to grow 3.0% on a sequential basis in the third quarter.
Jabil expects the Diversified Manufacturing segment to exceed the long-term growth target of 20.0% to 30.0%. Increasing contribution from storage and telecommunications is expected to boost Enterprise and Infrastructure revenue growth over the long term.
Jabil expects to achieve revenues of $16.4 billion for fiscal 2011 (up approximately 22.3% year over year). Management expects revenue in excess of $20 billion by 2013.
Operating income (excluding stock-based compensation) is expected to be in the range of $175.0 million to $185.0 million (4.3% to 4.4% of the total revenue).
Jabil expects non-GAAP earnings per share to be in the range of 55 cents to 59 cents for the third quarter. Stock-based compensation is estimated to be $20.0 million in the quarter. The Zacks Consensus Estimate is currently pegged at 46 cents (Zacks Consensus Estimate includes stock-based compensation).
GAAP earnings per share are expected to be in the range of 44 cents to 48 cents per diluted share for third quarter of fiscal 2011. However, these forecasts exclude the impact of potential supply chain disruption due to the crisis in Japan.
Jabil reported that it was too early to assess the impact on supplies from the Japan earthquake and ensuing Tsunami, but the company did not rule out potential near-term disruptions.
Recommendation
Jabil is expected to benefit from the strong first half 2011 results. The company provided strong third quarter outlook despite fears that supply chain disruptions after the Japan earthquake can hurt its margins in the near term.
We believe recent customer wins, improving market share, strong growth from emerging markets, stringent cost-control policies and expanding free cash flow will drive Jabil’s growth over the long term.
However, successful restructuring of the acquired units in France and Italy remains a headwind for Jabil in the near term. Further, 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 #2 Rank, which implies a Buy rating on a short-term basis.
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