Jabil Circuit, Inc. 10-Q Summary
Business context and reporting period
Jabil Circuit, Inc. provides global electronics design, manufacturing, supply-chain and aftermarket services across diversified manufacturing, enterprise and infrastructure, and high-velocity systems markets. This unaudited Form 10-Q covers the three months ended November 30, 2011, the first quarter of fiscal 2012. The company operated in 25 countries, and 86.7% of revenue was generated outside the United States.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net revenue | $4.327 billion | $4.082 billion | +6.0% |
| Gross profit | $340.0 million | $310.6 million | +9.5% |
| Gross margin | 7.9% | 7.6% | +30 basis points |
| Operating income | $170.8 million | $156.0 million | +9.5% |
| Operating margin | 3.9% | 3.8% | +10 basis points |
| Net income attributable to Jabil | $112.9 million | $106.7 million | +5.8% |
| Diluted EPS | $0.54 | $0.49 | +10.2% |
| Core operating income | $194.6 million | $181.9 million | +7.0% |
| Core earnings | $136.2 million | $132.1 million | +3.1% |
| Cash dividends declared per share | $0.08 | $0.07 | +14.3% |
Net income margin attributable to Jabil was approximately 2.6% in both periods. The effective tax rate was 20.5%, compared with 20.4% in the prior-year quarter. Interest expense increased to $25.5 million from $22.2 million, primarily because of the 5.625% senior notes and higher rates on credit-facility borrowings.
Net cash provided by operating activities was $114.6 million, compared with cash used of $82.7 million in the prior-year quarter. Capital expenditures were $103.2 million, producing net investing cash outflow of $94.6 million. Financing cash outflow was $32.5 million after approximately $2.4 billion of borrowings and $2.4 billion of repayments, primarily revolving credit-facility activity. Cash and cash equivalents declined to $861.9 million from $888.6 million at August 31, 2011.
At November 30, 2011, total debt was $1.196 billion, including $1.112 billion classified as long term, and total liabilities were $5.284 billion. Current assets were $5.317 billion against current liabilities of $3.999 billion. Inventory increased to $2.385 billion from $2.227 billion at fiscal year-end, principally to support new program transitions and higher revenue.
Material changes versus the prior comparable period
- Diversified Manufacturing Services revenue increased to $1.811 billion from $1.395 billion, while Enterprise and Infrastructure revenue increased modestly to $1.208 billion from $1.164 billion.
- High Velocity Systems revenue declined to $1.308 billion from $1.523 billion, reflecting reduced mobility-handset and television-display exposure, partly offset by printer program wins.
- DMS represented 42% of revenue versus 34% previously; HVS represented 30% versus 38%.
- Growth in higher-margin DMS activities, new customer programs, improved capacity utilization and cost controls supported margin expansion.
- Other expense was $2.7 million versus other income of $0.2 million, primarily due to losses on receivables sold through asset-backed securitization programs.
- Operating cash flow improved substantially, although inventory and prepaid assets increased materially.
- Weighted-average basic shares declined to 205.4 million from 214.4 million, supporting EPS growth. The company withheld or repurchased 1.6 million shares for employee tax obligations; a separate $100 million share-repurchase authorization was approved but no purchases were made under that public program during the quarter.
Guidance, outlook, risks and unusual items
- Management expected capital expenditures of $300 million to $400 million during the following 12 months for machinery, new DMS process technology, information technology, maintenance and a new greenfield facility.
- Management believed available cash, operating cash flow, borrowings and receivables programs were adequate for expected capital expenditures, dividends, working capital and the authorized $100 million share repurchase over the next 12 months.
- Management expected foreign revenue to decline slightly from current levels over the next 12 months and expected regular quarterly dividends to continue at amounts similar to historical declarations, subject to board approval.
- Thailand flooding did not materially affect first-quarter revenue; management expected an insignificant negative revenue effect in the second quarter but could not determine the effect in later periods.
- On December 1, 2011, after the balance-sheet date, Jabil acquired Telmar Network Technology for approximately $128.5 million in cash. The final purchase price remained subject to adjustment, and the filing did not provide a completed purchase-price allocation.
- Receivables programs were an important liquidity source. During the quarter, the company sold $2.1 billion of eligible receivables through asset-backed programs and received $1.6 billion in cash proceeds; the deferred purchase-price receivable was approximately $497.9 million at quarter-end.
- The foreign asset-backed securitization program, with up to $200 million of availability, was scheduled to expire in May 2012. Uncommitted receivables programs could be canceled by participating banks, creating refinancing and liquidity risk.
- The IRS proposed approximately $69.3 million of additional tax for fiscal years 2003 through 2005, before potential tax attributes, plus interest and penalties. Jabil contested the matter and had not recorded significant additional liabilities related to the proposal; later-year exposure could be materially higher but was not estimable.
- Principal risks include customer concentration, component shortages and single-source suppliers, seasonal demand, international and foreign-exchange exposure, macroeconomic weakness, acquisition integration, inventory obsolescence, credit-market availability, regulatory and environmental compliance, cybersecurity and product-liability claims. The five largest customers represented approximately 49% of revenue.
- Management concluded that disclosure controls were effective and identified no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and margin improvement continue after the seasonal holiday quarter and as HVS revenue remains under pressure.
- Inventory levels, receivables-program dependence and the company’s ability to convert earnings into sustainable operating cash flow.
- Renewal or replacement of the foreign asset-backed securitization program before its May 2012 expiration and continued availability of uncommitted receivables programs.
- The final accounting, purchase-price allocation, contribution and integration performance of the Telmar acquisition.
- The outcome and potential later-year implications of the IRS tax examination, including interest and penalties.
- Customer concentration, component availability and the financial condition of major customers and suppliers.
- Compliance with debt and securitization covenants, credit ratings and the effect of interest-rate or currency movements on future results.