Jabil Circuit, Inc. 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended August 31, 2012. Jabil is a global electronic manufacturing services provider offering design, production, supply-chain, systems assembly, direct fulfillment, and aftermarket services across aerospace, automotive, computing, consumer, healthcare, industrial, networking, telecommunications, and other markets. Operations are managed through Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS).
Jabil operated in 29 countries and employed approximately 141,000 people. International operations generated 85.6% of fiscal 2012 net revenue. The filing is issued under the registrant name Jabil Circuit, Inc.
Financial performance and key metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net revenue | $17.152 billion | $16.519 billion | +3.8% |
| Gross profit | $1.309 billion | $1.255 billion | +4.3% |
| Gross margin | 7.6% | 7.6% | Flat |
| Operating income | $621.9 million | $578.7 million | +7.5% |
| Operating margin | 3.6% | 3.5% | +10 basis points |
| Net income attributable to Jabil | $394.7 million | $381.1 million | +3.6% |
| Diluted EPS | $1.87 | $1.73 | +8.1% |
| Operating cash flow | $634.2 million | $828.0 million | -23.6% |
| Capital expenditures | $497.7 million | $459.0 million | +8.4% |
Net income margin attributable to Jabil was approximately 2.3%, versus 2.3% in fiscal 2011. SG&A rose to $644.5 million, or 3.7% of revenue, from $590.6 million, or 3.6%, largely because of increased headcount and acquisition-related costs. R&D expense was $25.8 million, or 0.2% of revenue.
Fiscal fourth-quarter revenue was $4.338 billion, gross profit was $317.5 million, operating income was $144.3 million, net income attributable to Jabil was $82.8 million, and diluted EPS was $0.39. Fourth-quarter gross margin was 7.3% and operating margin was 3.3%.
Segment revenue was $7.477 billion for DMS, $5.080 billion for E&I, and $4.595 billion for HVS. Segment income was $455.6 million, $105.6 million, and $175.0 million, respectively. DMS increased to 44% of revenue from 36%, while E&I declined to 29% from 32% and HVS declined to 27% from 32%.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $1.217 billion at August 31, 2012, compared with $888.6 million a year earlier.
- Working capital was $1.780 billion, compared with $1.226 billion at August 31, 2011.
- Total notes payable and long-term debt was $1.676 billion, up from $1.187 billion. Debt included $500 million of 4.700% senior notes due 2022, issued in the fourth quarter, in addition to senior notes due 2016, 2018, and 2020.
- Jabil had $1.3 billion of available liquidity under its revolving credit facilities and up to $184.3 million of available liquidity under trade receivables securitization and sale programs.
- Operating cash flow was reduced by a $141.6 million increase in prepaid expenses and other current assets and a $53.3 million increase in inventories, partly related to new program transitions.
- Investing cash outflows included $497.7 million of capital expenditures and $125.1 million of net cash paid for the Telmar acquisition.
- Jabil paid $65.2 million in dividends and repurchased 3.2 million shares for approximately $71.0 million during fiscal 2012. Quarterly dividends increased to $0.08 per share from $0.07 in fiscal 2011.
- The company estimated fiscal 2013 capital expenditures of $400 million to $500 million and stated that available resources should fund expected capital expenditures, dividends, repurchases, working capital, and operations for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by DMS, including a 48% increase in specialized services revenue, while E&I revenue fell 2% and HVS revenue fell 14% because of weaker end-market demand in certain customer programs.
- Operating income improved despite higher SG&A. Fiscal 2012 had no restructuring, receivables settlement, or subsidiary-disposal charges, compared with such charges in fiscal 2011.
- Core operating income increased 2.9% to $736.2 million, but non-GAAP core earnings decreased 1.8% to $507.1 million. Core measures exclude items such as stock compensation, amortization, distressed customer charges, and other specified items.
- Interest expense increased to $106.1 million from $97.7 million, primarily because of higher borrowings. The effective tax rate increased to 22.2% from 20.4%, reflecting tax incentive expirations and changes in jurisdictional earnings mix.
- Jabil acquired Telmar Network Technology for approximately $128.9 million in cash. The acquisition added $60.9 million of goodwill and $49.9 million of definite-lived intangible assets and was assigned to DMS.
- Backlog increased to approximately $5.1 billion from $4.3 billion, although management cautioned that customers may cancel or reschedule orders and that backlog is not a reliable indicator of future revenue.
Guidance, outlook, commentary, risks, and unusual items
Management expected foreign-source revenue to decrease slightly over the following 12 months and planned capital expenditures of $400 million to $500 million. Management continued to emphasize cost control, capacity utilization, inventory management, DMS growth, global production, design and aftermarket services, and selective acquisitions.
- Customer concentration is significant: the five largest customers generated approximately 48% of fiscal 2012 revenue; Apple represented 13%, Cisco 10%, and Research in Motion 10%.
- Customer commitments are generally short term, often no more than one quarter. Cancellations, rescheduling, sourcing changes, or customer insolvency could reduce revenue and leave excess capacity or obsolete inventory.
- Nearly all manufactured products require one or more single-source components. Component shortages, price increases, supplier failures, or natural disasters could disrupt production and compress margins.
- International exposure creates risks from currency movements, labor costs and disruptions, geopolitical events, taxes, regulation, infrastructure, trade restrictions, and limits on repatriating foreign cash. Approximately $476 million of foreign subsidiary cash could not be repatriated without potential tax consequences.
- Debt was rated BBB- by Fitch, Ba1 by Moody’s, and BB+ by Standard & Poor’s. Moody’s and S&P considered the debt below investment grade. A downgrade could increase borrowing costs and restrict financing access.
- The IRS had proposed adjustments for fiscal years 2003–2005 that could require approximately $69.3 million of additional tax before tax attributes, plus interest and penalties. Jabil disputed the adjustments and stated that the ultimate resolution remained uncertain.
- Jabil recorded a $16.0 million distressed-customer charge in its non-GAAP reconciliation for fiscal 2012. It also recorded $5.6 million of pretax losses on receivables securitization sales and carried an $11.4 million warranty liability at year-end.
- No goodwill or indefinite-lived intangible impairment was identified in the fiscal 2012 annual testing. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- Management and Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The controls assessment excluded Telmar, which represented less than 3% of consolidated assets and approximately 1% of fiscal 2012 revenue.
Important facts for investors to verify
- Whether DMS growth and the shift away from E&I and HVS can continue without increasing customer concentration or reducing margins.
- The sustainability of operating cash flow after elevated capital expenditures, inventory investment, and receivables securitization activity.
- Debt maturities, credit-rating sensitivity, covenant compliance, and the refinancing risk associated with receivables programs expiring in 2014 and 2015.
- The financial effect of expiring tax incentives and the outcome of the IRS transfer-pricing and intangible-property examination.
- Customer concentration, particularly Apple, Cisco, and Research in Motion, and the extent to which customer orders are cancellable or reschedulable.
- The integration and profitability of Telmar and the potential costs or returns from future acquisitions and restructuring.
- Exposure to single-source components, international labor and currency risks, and manufacturing disruptions from natural disasters or geopolitical events.