Jabil Inc. 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Jabil is a global provider of electronics design, manufacturing, supply-chain and product-management services. The filing covers the fiscal quarter and nine months ended May 31, 2021. Operations are reported through Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS), across 31 countries. International operations generated 82.7% of quarterly revenue and 83.6% of nine-month revenue.
COVID-19 continued to affect operations, suppliers and customers, particularly through material shortages, transportation constraints and operating restrictions. Management stated that the company continued to operate, but incurred additional pandemic-related costs.
Financial Performance and Key Metrics
| Metric | Three Months Ended May 31, 2021 | Three Months Ended May 31, 2020 | Nine Months Ended May 31, 2021 | Nine Months Ended May 31, 2020 |
|---|---|---|---|---|
| Net revenue | $7.215 billion | $6.336 billion | $21.876 billion | $19.966 billion |
| Gross profit | $567.8 million | $456.1 million | $1.772 billion | $1.440 billion |
| Gross margin | 7.9% | 7.2% | 8.1% | 7.2% |
| Operating income | $239.8 million | $59.4 million | $790.1 million | $302.8 million |
| Net income attributable to Jabil | $169.5 million | $(51.0) million | $521.6 million | $(13.8) million |
| Diluted EPS | $1.12 | $(0.34) | $3.41 | $(0.09) |
| Core operating income | $276.9 million | $172.1 million | $926.4 million | $608.8 million |
| Diluted core EPS | $1.30 | $0.37 | $4.17 | $1.93 |
- Quarterly revenue increased 13.9%; nine-month revenue increased 9.6%.
- Quarterly DMS revenue increased 21% and EMS revenue increased 8%. Nine-month DMS revenue increased 19%, while EMS revenue was relatively consistent.
- Gross margin improved primarily because of product mix, improved profitability and lower COVID-related incremental and idle labor costs. The company reported reductions in those costs of $44.3 million for the quarter and $72.1 million for the nine-month period.
- Quarterly and nine-month operating income benefited materially from lower restructuring charges. Restructuring charges were $0.7 million and $5.7 million, compared with $69.2 million and $144.0 million in the comparable periods.
- Interest expense declined to $33.8 million for the quarter and $97.2 million for nine months, compared with $41.9 million and $133.0 million, respectively.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash provided by operating activities was $670.9 million for the nine months, compared with $570.7 million in the prior-year period.
- Adjusted free cash flow, a non-GAAP measure, was $79.5 million versus $15.5 million.
- Capital expenditures were $878.0 million, partially offset by $286.7 million of proceeds from property, plant and equipment sales. Management expected fiscal 2021 net capital expenditures of approximately $800 million.
- Cash and cash equivalents were $1.241 billion at May 31, 2021, down from $1.394 billion at August 31, 2020.
- Total notes payable and long-term debt was $2.927 billion, up from $2.728 billion. The increase primarily reflected issuance of $500 million of 1.700% senior notes due 2026.
- The company had $3.8 billion of unused revolving-credit capacity and up to $1.8 billion of commercial-paper capacity. It was in compliance with debt and asset-backed securitization covenants.
- Accounts receivable were $3.228 billion and inventories were $3.979 billion at May 31, 2021. Inventory increased from $3.132 billion at August 31, 2020, principally to support expected fourth-quarter sales.
- Management believed available cash, operating cash flow, revolving facilities, receivable-sale programs and capital-market access were adequate for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Profitability improved sharply, with the company moving from a quarterly net loss of $51.0 million to net income of $169.5 million and from a nine-month net loss of $13.8 million to net income of $521.6 million.
- Restructuring, severance and related charges declined substantially. The $85 million 2020 Restructuring Plan was substantially complete as of May 31, 2021.
- DMS became a larger contributor to revenue, representing 50% of quarterly revenue and 52% of nine-month revenue, compared with 47% and 48% in the prior-year periods.
- The company issued $500 million of 1.700% senior notes due 2026 and amended its credit agreement. The three-year revolving facility increased from $700 million to $1.2 billion, and facility maturities were extended.
- Jabil repurchased $261.8 million of common stock during the nine months. As of May 31, 2021, $124.4 million remained available under the $600 million repurchase authorization, which expires at the end of fiscal 2021.
- On October 26, 2020, Jabil acquired additional Johnson & Johnson Medical Devices assets for approximately $18.9 million in cash. Purchase accounting remained preliminary.
- The foreign asset-backed securitization program was terminated on June 28, 2021, after the reporting date. Jabil paid approximately $167 million and expected to collect on the repurchased receivables during fiscal fourth quarter 2021.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2021 net capital expenditures of approximately $800 million and expected regular quarterly dividends to continue at amounts similar to prior declarations, subject to Board approval.
- Management cited continued demand growth, particularly in DMS, but highlighted supply-chain constraints, component availability, logistics challenges and COVID-19-related disruptions.
- The five largest customers represented approximately 47% of nine-month revenue, and 79 customers represented approximately 90%, creating significant customer-concentration risk.
- Key risks include dependence on major customers and suppliers, single-source components, international operations, foreign-currency exposure, customer financial difficulties, debt and covenant risk, acquisitions, restructuring, cybersecurity, product defects, intellectual property, regulatory matters, natural disasters, climate change and the continuing effects of COVID-19.
- Jabil was party to lawsuits in the ordinary course of business and did not believe they would have a material adverse effect. The filing text does not identify a material pending legal contingency.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue and margin growth, particularly in DMS, persists after normalization of COVID-related comparisons and supply-chain conditions.
- The effect of elevated inventory and accounts receivable balances on future cash conversion and working capital.
- Execution of the approximately $800 million fiscal 2021 capital-expenditure plan and the company’s ability to maintain positive free cash flow.
- Debt maturities, refinancing needs, covenant compliance and the impact of the new 1.700% senior notes.
- The financial and liquidity effects of terminating the foreign asset-backed securitization program and collecting the repurchased receivables.
- Customer concentration, single-source component dependencies and the impact of continued shortages or transportation disruptions.
- Completion of purchase-accounting measurements for the Johnson & Johnson Medical Devices asset acquisition.
- The filing’s non-GAAP core earnings and adjusted free cash flow reconciliations, including excluded restructuring, stock compensation and other items.