Jabil Circuit, Inc. — Fiscal 2011 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended May 31, 2011; balance-sheet comparison is May 31, 2011 versus August 31, 2010. The filing was signed June 30, 2011. Jabil provides global electronics design, manufacturing and product-management services through its DMS, E&I and HVS segments and operates in 24 countries.
Financial results and key metrics
| Metric | Q3 FY2011 | Q3 FY2010 | 9M FY2011 | 9M FY2010 |
|---|---|---|---|---|
| Net revenue | $4.228 billion | $3.456 billion | $12.239 billion | $9.548 billion |
| Gross profit | $318.4 million | $262.1 million | $925.4 million | $716.6 million |
| Gross margin | 7.5% | 7.6% | 7.6% | 7.5% |
| Operating income | $152.5 million | $96.5 million | $413.2 million | $224.6 million |
| Operating margin | 3.6% | 2.8% | 3.4% | 2.4% |
| Net income attributable to Jabil | $104.7 million | $52.0 million | $266.8 million | $110.1 million |
| Diluted EPS | $0.47 | $0.24 | $1.21 | $0.51 |
- Q3 revenue increased 22.3%; nine-month revenue increased 28.2%.
- Q3 operating income increased 58.0%; nine-month operating income increased 84.0%.
- Q3 diluted EPS nearly doubled, while nine-month diluted EPS increased 137.3%.
- Effective tax rates were 17.6% for Q3 and 21.4% for nine months, versus 31.3% and 32.1%, respectively, in the comparable prior periods.
- Management’s non-U.S. GAAP core operating income was $177.8 million in Q3 and $528.0 million for nine months; core diluted EPS was $0.58 and $1.72, respectively.
Liquidity, cash flow, debt and capital allocation
- Cash and cash equivalents were $911.1 million at May 31, 2011, up from $744.3 million at August 31, 2010. Total assets were $6.956 billion and total equity was $1.949 billion.
- Nine-month operating cash flow was $524.4 million, compared with $142.2 million in the prior-year period. Investing cash flow was $(298.0) million, including $321.0 million of capital expenditures. Financing cash flow was $(59.9) million.
- Total notes payable and long-term debt was $1.188 billion, broadly unchanged from $1.186 billion at August 31, 2010. Debt included $400 million of 5.625% senior notes due 2020, $303.1 million of 7.750% notes due 2016, and $397.4 million of 8.250% notes due 2018.
- The amended revolving credit facility provides $1.0 billion of commitments, with potential increases to $1.3 billion, and expires December 7, 2015. Jabil stated that it was in compliance with applicable debt and securitization covenants.
- Jabil declared quarterly dividends of $0.07 per share, or $0.21 per share for the first nine months. Management expected to continue dividends at a similar level, subject to Board approval.
- Management expected fiscal 2012-month capital expenditures of approximately $300 million to $400 million and believed available cash, operating cash flow, credit facilities and receivables programs were adequate for anticipated needs.
Material changes versus the prior comparable period
- Growth was driven primarily by higher demand from existing customers and new program wins. DMS revenue increased to $1.533 billion from $1.064 billion in Q3, while E&I revenue rose to $1.383 billion from $1.197 billion and HVS revenue rose to $1.312 billion from $1.194 billion.
- DMS represented 36% of Q3 revenue versus 32% previously, while HVS declined to 31% from 34% and E&I declined to 33% from 34%. DMS generally carries higher margins.
- Operating leverage improved: SG&A declined to 3.6% of revenue from 4.4%, and amortization declined as certain intangible assets became fully amortized.
- Restructuring charges were absent in Q3 and totaled only $0.6 million for nine months, compared with $5.7 million in the prior-year nine-month period. The substantially completed 2009 restructuring plan was expected to generate annualized savings of approximately $55.6 million.
- Interest expense increased to $25.1 million in Q3 and $73.1 million for nine months, primarily due to the new 5.625% senior notes and refinancing of the prior credit facility.
- Jabil acquired former French and Italian operations, adding approximately 1,500 employees. The transaction followed a prior disposal and generated $13.6 million of receivable-settlement and related charges and $23.9 million of losses on subsidiary disposals during the first nine months.
- Receivables securitization arrangements were amended, causing certain transfers to be accounted for as sales rather than secured borrowings. Deferred purchase-price receivables totaled approximately $374.0 million at May 31, 2011.
Guidance, outlook, risks and unusual items
- Management cited continued market stabilization, stronger customer demand and improved capacity utilization, but provided no specific revenue or earnings guidance in the supplied filing text.
- Foreign-source revenue was 85.8% of Q3 revenue and 85.7% for nine months; management expected this proportion to increase slightly over the next 12 months.
- The business is highly concentrated: the five largest customers represented approximately 48% of nine-month revenue and 48 customers represented approximately 90%.
- Key operating risks include customer order volatility and seasonality, component shortages and price increases, excess or obsolete inventory, international operations, foreign-exchange exposure, competition, labor and regulatory risks, and supply-chain effects from the Japan earthquake and tsunami.
- Receivables programs scheduled to expire included the $300 million asset-backed facility in November 2011, the $175 million uncommitted sale program in August 2011 and the $200 million foreign asset-backed facility in May 2012. Renewal was not assured.
- The IRS had proposed approximately $69.3 million of additional tax for fiscal years 2003–2005, before tax attributes, plus potential interest and penalties. Jabil disputed the matter and had not recorded significant additional liabilities; later-year exposure was not practicable to estimate.
- Jabil anticipated up to $3.6 million to $4.2 million of fiscal 2011 pension contributions. Warranty liabilities were $13.7 million at May 31, 2011.
- Management reported effective disclosure controls and no material change in internal control over financial reporting, while noting ongoing control improvements and that the acquired Competence Sites were excluded from the control evaluation.
Investor verification items
- Verify the sustainability of revenue growth and whether DMS mix and capacity utilization continue to support margins.
- Review customer concentration, order visibility, seasonal demand and exposure to customer insourcing or volume reductions.
- Assess liquidity after receivables-program expirations, deferred purchase-price receivables and expected capital expenditures.
- Reconcile reported cash flow with working-capital movements, particularly inventory growth and receivables-sale accounting.
- Monitor debt ratings, variable-rate borrowings, covenant headroom and refinancing requirements.
- Follow the IRS tax dispute, potential interest and penalties, and the effect of expiring international tax incentives.
- Evaluate the integration and profitability of the reacquired French and Italian operations and any additional restructuring or impairment charges.