Jabil Circuit, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended February 29, 2016, compared with February 28, 2015; balance sheet dates are February 29, 2016 and August 31, 2015. Jabil provides global electronics design, manufacturing and product-management services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments, operating in 28 countries.
Financial results and key metrics
| Metric | Three months ended Feb. 29, 2016 | Year-over-year change | Six months ended Feb. 29, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $4.404 billion | +2.2% | $9.612 billion | +8.5% |
| Gross profit | $399.4 million | +8.6% | $883.0 million | +17.6% |
| Gross margin | 9.1% | Up from 8.5% | 9.2% | Up from 8.5% |
| Operating income | $154.9 million | +24.1% | $369.4 million | +37.0% |
| Net income attributable to Jabil | $78.9 million | +51.9% | $210.8 million | +69.9% |
| Diluted EPS | $0.41 | Up from $0.27 | $1.09 | Up from $0.63 |
| Core operating income | $186.3 million | +12.3% | $434.8 million | +25.5% |
| Core diluted EPS | $0.57 | Up from $0.50 | $1.42 | Up from $1.06 |
EMS revenue increased 1% in the quarter and 2% year to date, supported primarily by telecommunications programs. DMS revenue increased 4% in the quarter and 17% year to date, led by mobility, healthcare, packaging, consumer lifestyles and wearable technologies. Foreign-source revenue represented 90.3% of quarterly revenue and 91.3% of year-to-date revenue.
Selling, general and administrative expense increased to $224.9 million in the quarter and $476.5 million year to date, primarily because of higher compensation and headcount. Interest expense rose to $34.3 million in the quarter and $67.3 million year to date, reflecting the Term Loan Facility. The effective tax rate was 35.1% for the quarter and 30.5% year to date, compared with 37.9% and 36.4%, respectively, in the prior-year periods.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $883.2 million at February 29, 2016, compared with $914.0 million at August 31, 2015.
- Six-month operating cash flow was $72.4 million, down from $525.4 million, principally because accounts payable, accrued expenses and other liabilities declined by $727.7 million.
- Investing cash outflow was $689.3 million, including $456.0 million of capital expenditures, $206.7 million for acquisitions and $28.5 million for notes receivable.
- Financing cash flow was $590.9 million, reflecting $3.4 billion of borrowings and $2.7 billion of repayments, plus $54.6 million of share repurchases and $31.8 million of dividends.
- Total debt, including capital lease obligations, was $2.350 billion, compared with $1.670 billion at August 31, 2015. Current maturities were $538.3 million and long-term debt was $1.811 billion.
- Debt included $500.0 million drawn under the Term Loan Facility, $312.0 million of 7.750% senior notes due July 15, 2016, and $1.3 billion of additional senior notes due 2018, 2020 and 2022.
- Management stated that cash and available credit should fund operations, planned capital expenditures, dividends, acquisitions and working capital for the next 12 months. Planned capital expenditures over the next 12 months were $700 million to $900 million.
- Approximately $635.6 million of cash held by foreign subsidiaries could not be repatriated to the United States without potential tax consequences.
Material changes and unusual items
- The 2013 restructuring plan generated $2.5 million of charges in the quarter and $3.9 million year to date, down materially from $20.6 million and $34.1 million in the comparable periods. Cumulative charges reached $154.4 million, with approximately $24.6 million of additional costs still contemplated, subject to final decisions and employee consultations.
- Management expects the completed restructuring plan to produce approximately $76.8 million of annualized avoided costs, or approximately $65.0 million after expected offsets.
- Jabil completed three acquisitions during the six months, including Hanson for approximately $139.2 million in cash plus assumed liabilities and two additional acquisitions for an aggregate $72.3 million. Preliminary purchase-price allocations included goodwill and intangible assets and remain subject to measurement-period adjustments.
- The former Aftermarket Services business remains classified as discontinued operations. It produced no discontinued-operation revenue or loss in fiscal 2016, compared with a $5.5 million after-tax loss in the second quarter of fiscal 2015 and a $6.3 million loss year to date.
- Jabil sold $3.8 billion of receivables through asset-backed securitization programs during the six months and received $3.4 billion in cash proceeds. It sold an additional $2.3 billion under uncommitted receivable-sale programs. These programs are an important component of liquidity.
- Jabil repurchased 2.8 million shares for approximately $54.5 million during the first quarter of fiscal 2016, using the remaining amount under its $100 million authorization. The quarterly dividend remained $0.08 per share.
Outlook, management commentary and risks
Management reported less-than-anticipated product demand in the DMS mobility business during the quarter, which reduced production and is expected to affect at least the following quarter. Inventory days increased to 51 days, while the sales cycle increased to 13 days. The filing does not provide a clear quantitative earnings or revenue forecast.
- Major risks include dependence on a limited number of customers: the five largest customers represented approximately 53% of six-month revenue, and 78 customers represented approximately 90%.
- Demand volatility, short customer commitments, seasonality, excess capacity and pricing pressure could reduce margins and create inventory, equipment or lease write-offs.
- Almost all products require one or more single-source components, creating supply-chain, cost and production risks.
- International operations generate most revenue and expose Jabil to currency, political, regulatory, tax, labor and repatriation risks. Jabil uses foreign-exchange derivatives and reported that a hypothetical 10% currency movement would not materially affect the financial statements.
- The IRS has proposed approximately $34.6 million of additional tax for fiscal years 2009–2011, excluding proposed interest and penalties. Jabil disputes the proposed adjustments; an unfavorable outcome, particularly for later years, could be material.
- The $312.0 million 7.750% senior notes mature in July 2016. Management expected to refinance them, supported by $200 million of treasury rate locks for an anticipated debt issuance.
- Receivable-sale facilities are subject to expiration, renewal and, for uncommitted programs, potential termination or unavailable funding. Jabil was in compliance with applicable debt and securitization covenants at February 29, 2016.
- Ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Investor verification items
- Verify the pace and profitability of DMS mobility demand recovery and the expected effect on the next quarter.
- Reconcile operating cash flow with earnings, especially the decline in payables and accrued liabilities and the company’s use of receivable-sale programs.
- Confirm refinancing or repayment of the July 2016 senior-note maturity and the resulting interest cost.
- Monitor planned capital expenditures of $700 million to $900 million and their effect on leverage, liquidity and returns.
- Assess customer concentration, single-source component exposure and potential inventory or capacity charges.
- Track completion, cash cost and savings realization under the 2013 restructuring plan.
- Review final purchase-price allocations and integration performance for the fiscal 2016 acquisitions.
- Follow the IRS examination, tax incentives, receivable-sale facility renewals and any changes in debt covenants or credit ratings.