Jabil Circuit, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended February 28, 2017; comparative periods ended February 29, 2016. The filing was signed April 5, 2017. Jabil provides global electronics manufacturing, design and product-management services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments, operating in 28 countries.
Financial Results and Position
| Metric | Three months ended Feb. 28, 2017 | Three months ended Feb. 29, 2016 | Six months ended Feb. 28, 2017 | Six months ended Feb. 29, 2016 |
|---|---|---|---|---|
| Net revenue | $4.446 billion | $4.404 billion | $9.551 billion | $9.612 billion |
| Gross profit | $361.9 million | $399.4 million | $793.4 million | $883.0 million |
| Gross margin | 8.1% | 9.1% | 8.3% | 9.2% |
| Operating income | $83.2 million | $154.9 million | $248.8 million | $369.4 million |
| Net income attributable to Jabil | $20.7 million | $78.9 million | $108.7 million | $210.8 million |
| Diluted EPS | $0.11 | $0.41 | $0.58 | $1.09 |
| Core operating income | $152.2 million | $186.3 million | $361.7 million | $434.8 million |
| Core diluted EPS | $0.48 | $0.57 | $1.17 | $1.42 |
Cash flow and liquidity: Six-month operating cash flow was $346.2 million, compared with $72.7 million in the prior-year period. Investing cash flow was negative $308.3 million, including $320.7 million of capital expenditures. Financing cash flow was negative $201.4 million, including $151.5 million for share repurchases and $30.9 million of dividends. Cash and cash equivalents were $755.1 million at February 28, 2017, down from $912.1 million at August 31, 2016.
Balance sheet and debt: Total assets were $10.015 billion and total liabilities were $7.588 billion. Total notes payable, long-term debt and capital lease obligations were $2.103 billion, including $47.3 million due within one year. The debt portfolio included $1.590 billion of senior notes due from 2018 through 2023 and $484.8 million of borrowings under loans. Jabil stated that it was in compliance with all debt and securitization covenants.
Working capital: Accounts receivable were $1.434 billion and inventories were $2.498 billion at quarter-end. The sales cycle increased to 11 days from 1 day in the prior sequential quarter, driven by higher days in accounts receivable and inventory and slightly lower days in accounts payable. Management attributed higher inventory days partly to reduced DMS mobility production and preparation for expected third-quarter revenue.
Segments and concentration: EMS generated $2.683 billion of quarterly revenue and $98.1 million of segment income. DMS generated $1.763 billion of revenue and $54.1 million of segment income. For the six-month period, the five largest customers represented approximately 48% of net revenue, and 76 customers represented approximately 90%. Foreign-source revenue represented 91.7% of six-month revenue.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 1%, while six-month revenue decreased approximately 1%.
- Quarterly gross profit decreased 9.4% and six-month gross profit decreased 10.1%; gross margin declined 100 basis points in both comparisons.
- Quarterly operating income decreased approximately 46%, and six-month operating income decreased approximately 33%.
- Quarterly net income attributable to Jabil decreased approximately 74%, and six-month net income decreased approximately 48%.
- Core operating income declined 18.3% for the quarter and 16.8% for the six months. Core earnings declined 18.8% and 20.4%, respectively.
- DMS mobility revenue declined 6% in the quarter and 9% for the six months because of weakened end-user demand. Growth in consumer lifestyles and wearable technologies and healthcare partly offset the decline.
- EMS revenue increased 1% in the quarter and was relatively unchanged for the six months, reflecting mixed performance across industries.
- Restructuring charges increased materially to $44.9 million in the quarter and $80.8 million for the six months, compared with $2.5 million and $3.9 million, respectively, in the prior-year periods.
- Six-month operating cash flow improved by $273.5 million, primarily because of working-capital movements and higher non-cash depreciation and amortization. However, cash declined because of capital expenditures, debt-related activity, share repurchases and dividends.
Guidance, Outlook, Risks and Unusual Items
Restructuring: Under the 2017 Restructuring Plan, Jabil expects approximately $195.0 million of pretax costs during fiscal 2017 and 2018, including $55.0 million to $75.0 million of severance, $110.0 million to $130.0 million of asset write-offs and approximately $10.0 million of contract termination and other costs. The company expects annualized savings of $70.0 million to $90.0 million beginning in fiscal 2019. A portion of the savings had begun in the second quarter, but offsets remained under evaluation.
Capital spending and liquidity outlook: Management expects capital expenditures of $500.0 million to $600.0 million during the next 12 months and believes available cash, borrowing capacity, receivables programs and operating cash flow will be adequate for capital expenditures, dividends, debt repayments, acquisitions and working capital. The $400.0 million of 8.250% senior notes mature March 15, 2018; management expected to use cash and borrowing capacity and anticipated entering into new financing to refinance the notes.
Receivables programs: The foreign asset-backed securitization facility was increased from $275.0 million to $400.0 million effective February 13, 2017. The North American facility, with capacity of $200.0 million, is scheduled to expire October 20, 2017; the foreign facility is scheduled to expire May 1, 2018. Renewal is not assured. Uncommitted receivables-sale programs also may not provide funding when needed.
Tax contingency: The IRS proposed adjustments primarily concerning U.S. taxation of intercompany transactions for fiscal years 2009 through 2011. If the IRS prevails, estimated tax due would be approximately $28.6 million after available tax-loss carryforwards, plus potential interest and penalties. Jabil disputes the proposed adjustments. The company also reported $96.1 million of income-tax liabilities for uncertain tax positions, for which payment timing and ultimate amounts cannot be reasonably estimated.
Principal risks: Customer concentration, potential customer production changes or relationship losses, component availability, demand volatility and seasonality, international operations and foreign-exchange exposure, restructuring execution, industry and economic conditions, acquisition or disposition integration, and access to debt or receivables financing. A 10% hypothetical currency or variable-interest-rate change was not expected to have a material effect based on exposures at quarter-end.
Controls: Management concluded that disclosure controls and procedures were effective as of February 28, 2017 and identified no material changes to internal control over financial reporting.
Investor Verification Items
- Verify the pace and cash cost of the 2017 Restructuring Plan, including whether the projected $70 million to $90 million of annual savings is realized and whether offsets emerge.
- Monitor DMS mobility demand, inventory levels and the 11-day sales cycle for signs of additional working-capital pressure.
- Assess refinancing plans and liquidity coverage for the $400 million senior notes maturing in March 2018.
- Review the renewal or replacement of the asset-backed securitization and uncommitted receivables-sale programs.
- Evaluate customer concentration and the effect of demand changes among major customers and end markets.
- Track the IRS examination, uncertain tax positions, potential interest and penalties, and any similar claims for later years.
- Reconcile GAAP earnings with core earnings, particularly the impact of restructuring, asset write-offs, amortization and stock-based compensation.