JABIL INC quarterly report, Q3 FY2018

Jabil Inc. 2018 Q3 SEC Filing Summary

Business context and reporting period

Jabil provides global electronics manufacturing, design, supply-chain and product-management services through two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The Form 10-Q covers the three and nine months ended May 31, 2018, within the fiscal year ending August 31, 2018. The financial statements are unaudited and prepared under U.S. GAAP.

Jabil operated in 29 countries. Foreign-source revenue represented 91.2% of quarterly revenue and 91.8% of nine-month revenue. EMS represented 58% of quarterly revenue and 54% of nine-month revenue; DMS represented 42% and 46%, respectively.

Financial performance and key metrics

Metric	Three months ended May 31, 2018	Year-over-year change	Nine months ended May 31, 2018	Year-over-year change
Net revenue	$5.437 billion	21.1%	$16.324 billion	16.3%
Gross profit	$398.2 million	22.0%	$1.265 billion	12.9%
Gross margin	7.3%	Flat	7.7%	Down from 8.0%
Operating income	$113.0 million	Up from $43.4 million	$388.3 million	32.9%
Operating margin	2.1%	Up from 1.0%	2.4%	Up from 2.1%
Net income attributable to Jabil	$42.5 million	Compared with $(25.3) million	$143.6 million	72.2%
Diluted EPS	$0.25	Compared with $(0.14)	$0.81	Compared with $0.45
Core earnings, non-GAAP	$79.6 million	Compared with $57.1 million	$340.3 million	Compared with $275.5 million
Core diluted EPS, non-GAAP	$0.46	Compared with $0.31	$1.92	Compared with $1.48

Quarterly revenue growth was driven primarily by a 36% increase in DMS revenue, including higher mobility demand, healthcare business and consumer-related activity, and a 12% increase in EMS revenue. Nine-month DMS revenue increased 27%, while EMS revenue increased 8%.

For the nine months, net cash provided by operating activities was $194.9 million, compared with $533.0 million in the prior-year period. Cash used in investing activities was $684.8 million, including $819.2 million of capital expenditures and $109.7 million for acquisitions and intangible assets. Cash used in financing activities was $7.2 million, including $316.4 million of share repurchases and $44.3 million of dividends. Cash declined from $1.190 billion at August 31, 2017 to $677.5 million at May 31, 2018.

Balance sheet, debt and liquidity

Total assets were $11.176 billion and total equity was $2.186 billion at May 31, 2018.
Net inventory was $3.344 billion, up from $2.942 billion at August 31, 2017, reflecting increased demand and advance purchases in anticipation of component shortages.
Total notes payable, long-term debt and capital lease obligations were $2.449 billion, including $273.5 million classified as current.
Jabil issued $500 million of 3.950% senior notes due 2028 and redeemed its $400 million of 8.250% senior notes due 2018. It also had $247.0 million outstanding under revolving credit facilities and $487.0 million under term loans.
Available unused revolving credit capacity was approximately $1.9 billion. Jabil stated that cash, borrowing capacity, receivables programs, operating cash flow and capital-market access should be adequate for the next 12 months.
Jabil was in compliance with its debt and securitization covenants as of May 31, 2018.
Accounts receivable programs provided additional liquidity, including $353.8 million of available capacity under trade receivable sale programs. The asset-backed securitization programs had approximately $0.1 million of available liquidity at quarter-end.

Material changes versus the prior comparable period

Revenue, operating income and attributable net income improved substantially, with the prior-year quarter affected by a distressed customer charge and an impairment on available-for-sale securities.
Gross margin was unchanged in the quarter but declined for the nine-month period because of higher materials costs in mobility and packaging and a distressed-customer charge.
Operating cash flow declined by $338.2 million year over year, primarily because of increased accounts receivable, inventory and prepaid assets.
Restructuring charges declined to $12.6 million in the quarter and $29.5 million for the nine months, from $32.7 million and $113.5 million, respectively, in the prior-year periods.
Stock-based compensation increased to $82.8 million for the nine months, compared with $33.4 million, primarily because of modified performance awards and a one-time cash-settled award.
Jabil completed the approximately $95.9 million acquisition of True-Tech Corporation on September 1, 2017, adding aerospace, semiconductor and medical machined-component capabilities.
The company repurchased 11.5 million shares for approximately $316.2 million through May 31, 2018. In June 2018, the board authorized an additional $350 million repurchase program.

Guidance, outlook, commentary and unusual items

Jabil expected approximately $700 million of net fiscal 2018 capital expenditures, excluding acquisitions, primarily to support EMS and DMS operations.
The 2017 Restructuring Plan was expected to cost approximately $195 million in total; $180.2 million had been incurred through May 31, 2018. Remaining costs were expected through the first half of fiscal 2019, with anticipated annualized savings of $70 million to $90 million beginning in fiscal 2019.
Hurricane Maria damaged the Cayey, Puerto Rico operations. Business interruption and impairment costs, net of insurance proceeds, were $(0.6) million in the quarter and $10.7 million for the nine months. Additional fourth-quarter costs were possible, although management expected most costs to be offset by insurance.
The Tax Cuts and Jobs Act resulted in a provisional $30.9 million tax expense, principally for mandatory deemed repatriation tax and U.S. deferred-tax remeasurement. Jabil had not completed its accounting for the Tax Act, and the final impact could differ materially from the estimate.
Jabil expected to continue regular quarterly dividends at amounts similar to prior declarations, but future dividends remained subject to board approval.
Revenue recognition, financial-instrument, lease and credit-loss accounting standards were scheduled for adoption in future fiscal years. The financial impact of the new revenue standard could not yet be reasonably estimated.
Key risks include customer concentration, dependence on single-source components, international operations and currency exposure, customer demand variability, materials constraints, competition, technological change, acquisition profitability and restructuring execution. The five largest customers accounted for approximately 50% of nine-month revenue.
The IRS had proposed adjustments primarily involving intercompany transactions for fiscal years 2009–2014. Potential tax payments described in the filing were approximately $28.6 million and $5.3 million for the two examination periods, excluding proposed interest and penalties. Jabil disputed the adjustments.

Important facts for investors to verify

Whether DMS mobility growth and customer demand remain sustainable, given the segment’s contribution to the revenue increase.
Whether inventory growth and component shortages create future excess or obsolete inventory charges or working-capital pressure.
Actual fiscal 2018 capital expenditures versus the approximately $700 million expectation and resulting free-cash-flow performance.
Progress, remaining cost and realized savings under the 2017 Restructuring Plan.
Final accounting for the Tax Act, including deemed repatriation tax, deferred taxes, GILTI and the indefinite reinvestment assertion.
Renewal or replacement of receivables programs nearing expiration, particularly the foreign securitization program expiring September 28, 2018 and certain uncommitted programs expiring in 2018.
Final insurance recoveries and any additional costs related to the Puerto Rico hurricane damage.
Customer concentration, supplier concentration and the effect of foreign-exchange movements on margins and accumulated other comprehensive income.