JABIL INC quarterly report, Q3 FY2019

Jabil Inc. 2019 Q3 Form 10-Q Summary

Business Context and Reporting Period

Jabil provides global electronics design, production, supply-chain and product-management services through two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The filing covers the three and nine months ended May 31, 2019, with comparisons to the corresponding 2018 periods. Jabil operated in 29 countries, and foreign-source revenue represented 86.5% of quarterly revenue and 89.2% of year-to-date revenue.

Financial Performance and Position

Metric	Q3 FY2019	Q3 FY2018	9M FY2019	9M FY2018
Net revenue	$6.136 billion	$5.437 billion	$18.709 billion	$16.324 billion
Gross profit	$443.8 million	$398.2 million	$1.418 billion	$1.265 billion
Gross margin	7.2%	7.3%	7.6%	7.7%
Operating income	$140.9 million	$113.0 million	$511.6 million	$388.3 million
Net income attributable to Jabil	$43.5 million	$42.5 million	$234.4 million	$143.6 million
Diluted EPS	$0.28	$0.25	$1.47	$0.81

Quarterly revenue increased 12.9%; nine-month revenue increased 14.6%.
EMS revenue increased 26% year over year in the quarter and 27% year to date. DMS revenue declined 6% in the quarter and was essentially flat year to date.
Quarterly operating income increased 24.7%, while nine-month operating income increased 31.8%. Quarterly net income attributable to Jabil increased 2.2%; the nine-month increase was 63.3%.
Quarterly core operating income was $185.8 million versus $150.1 million, and diluted core EPS was $0.57 versus $0.46. Nine-month core operating income was $630.5 million versus $555.9 million, while core EPS was $2.11 versus $1.92.
Cash and cash equivalents were $694.1 million at May 31, 2019, compared with $1.258 billion at August 31, 2018. Total assets were $12.609 billion and total equity was $1.867 billion.
Total debt was $2.932 billion, including $454.8 million classified as current. Jabil reported $2.0 billion of unused revolving-credit capacity and was in compliance with debt covenants.
Nine-month operating cash flow was $112.7 million, compared with cash usage of $1.376 billion in the prior-year period. Capital expenditures were $789.2 million, and investing cash flow was negative $704.1 million.
Jabil repurchased $350.3 million of common stock during the nine months and paid $39.7 million in dividends. The authorized $350 million repurchase program had been fully utilized by May 31, 2019.

Material Changes Versus the Prior Comparable Period

Growth was led by EMS, including cloud, industrial and energy, networking and telecommunications, and print and retail customers. Computing, storage and capital equipment remained weak.
DMS performance was pressured by a 15% quarterly decline in mobility revenue, attributed to weaker end-user demand; healthcare revenue increased.
Gross margin declined modestly because of lower EMS profitability, capital-equipment weakness and ramp costs for new business, partly offset by improved DMS profitability.
Interest expense increased to $50.5 million in the quarter and $139.3 million year to date, driven by higher borrowings, higher rates, new-business ramps and the timing of share repurchases.
The effective tax rate was 47.0% in the quarter versus 40.0% and 32.4% year to date versus 45.6%. The year-to-date comparison benefited from the prior-year Tax Act expense and included a $13.3 million Tax Act benefit in fiscal 2019.
Jabil adopted the new revenue standard on September 1, 2018 using the modified retrospective method, recording a $42.6 million after-tax cumulative adjustment. Most qualifying manufacturing contracts are now recognized over time, creating $899.5 million of contract assets and $544.8 million of contract liabilities at May 31, 2019.
The company acquired certain Johnson & Johnson Medical Devices assets in two closings for preliminary consideration of approximately $153.2 million. Final closings were expected in fiscal 2020, and purchase accounting remained subject to adjustment.
Restructuring charges declined to $9.3 million in the quarter and $16.2 million year to date, compared with $12.6 million and $29.5 million, respectively. The $195 million 2017 restructuring plan was substantially complete.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management stated that available liquidity, including cash, revolving facilities, receivables programs, operating cash flow and capital-market access, was expected to fund capital expenditures, dividends, share repurchases, potential acquisitions and working-capital needs for the next 12 months.
Fiscal 2019 net capital expenditures were expected to be approximately $800 million.
Management expected weakness in computing, storage and capital equipment to continue into the second half of calendar 2020 and mobility weakness to persist through the balance of fiscal 2019.
Accounts-receivable programs provided substantial liquidity: up to $55.1 million remained under asset-backed securitization programs and up to $1.3 billion under trade receivable sale programs at May 31, 2019. These facilities carry covenant, counterparty and renewal risks.
Revenue concentration is significant: the five largest customers represented approximately 43% of nine-month revenue, and 82 customers represented approximately 90%. Certain components are available from only one source.
Other risks include international operations, foreign-exchange exposure, customer and supplier financial distress, variable customer demand, technology and competitive pressures, acquisition execution, and dependence on major customers.
Jabil reported ordinary-course litigation that it did not expect to be material. IRS audits for fiscal years 2009 through 2014 were effectively settled on May 8, 2019 without a material financial impact or additional recorded tax liability.
The company expected the new lease standard, effective in fiscal 2020, to materially increase reported assets and liabilities, primarily through recognition of right-of-use assets and operating lease liabilities.

Important Facts for Investors to Verify

Confirm the sustainability of EMS-led revenue growth and the timing of recovery in weak computing, capital-equipment and mobility markets.
Reconcile GAAP results with core measures, particularly the impact of acquisition, restructuring, stock compensation, amortization and other excluded items.
Monitor cash conversion, contract assets, accounts receivable, inventory, receivables sales and securitization dependence as working-capital needs increase.
Review debt maturities, variable-rate exposure, covenant compliance and the effect of higher interest expense on earnings and liquidity.
Assess customer concentration, single-source component exposure and the financial condition of major customers and suppliers.
Track the JJMD acquisition, final closings, purchase-price adjustments, integration costs and expected profitability.
Evaluate the effects of revenue-recognition adoption and the forthcoming lease standard on comparability, reported margins, assets and liabilities.