Jabil Inc. Form 10-Q Summary
Business context and reporting period
Jabil is a global provider of electronics design, manufacturing, supply-chain and product-management services operating through two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). This unaudited Form 10-Q covers the quarter and nine months ended May 31, 2022, compared with the corresponding periods ended May 31, 2021. Jabil operates in more than 30 countries, and foreign-source revenue represented 82.6% of quarterly revenue and 83.7% of nine-month revenue.
Financial performance and liquidity
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Net revenue | $8.328 billion | $7.215 billion | $24.448 billion | $21.876 billion |
| Gross profit | $619 million | $568 million | $1.903 billion | $1.772 billion |
| Gross margin | 7.4% | 7.9% | 7.8% | 8.1% |
| Operating income | $321 million | $240 million | $984 million | $790 million |
| Net income attributable to Jabil | $218 million | $169 million | $681 million | $521 million |
| Diluted EPS | $1.52 | $1.12 | $4.67 | $3.41 |
| Operating cash flow | Not separately provided | Not separately provided | $745 million | $671 million |
| Adjusted free cash flow | Not separately provided | Not separately provided | $147 million | $80 million |
Quarterly revenue increased 15.4%, while nine-month revenue increased 11.8%. Operating income rose 33.8% in the quarter and 24.6% for the nine-month period. Net income attributable to Jabil increased 29.0% in the quarter and 30.7% year to date. The diluted share count declined to 143.3 million in the quarter from 152.0 million, reflecting share repurchases.
EMS quarterly revenue increased 23% and DMS revenue increased 7%. EMS represented 54% of quarterly revenue, compared with 50% in the prior-year quarter. Segment income increased to $352 million from $277 million in the quarter and to $1.096 billion from $927 million for the nine-month period.
Cash and cash equivalents were $1.070 billion at May 31, 2022, down from $1.567 billion at August 31, 2021. Net cash provided by operating activities was $745 million. Capital expenditures were $1.068 billion, partially offset by $470 million of proceeds and advances from asset sales. Net cash used in financing activities was $639 million, primarily reflecting debt payments, $475 million of share repurchases, dividends and employee-related treasury stock purchases.
Total debt was $2.875 billion at May 31, 2022, compared with $2.878 billion at August 31, 2021. Jabil had $3.8 billion of unused revolving-credit capacity, commercial paper capacity of up to $3.2 billion, and up to $905 million of available liquidity under trade receivables sale programs. The company reported compliance with its debt and securitization covenants.
Material changes versus the prior comparable period
- Revenue growth was led by EMS, particularly 5G, wireless and cloud; networking and storage; digital print and retail; and industrial and capital equipment.
- Gross margin declined by 50 basis points in the quarter and 30 basis points for the nine-month period, primarily because of product mix.
- Selling, general and administrative expense declined by $23 million in the quarter and $44 million year to date, primarily due to lower salary-related costs and lower stock-based compensation.
- Amortization of intangibles declined by $4 million in the quarter and $11 million year to date, primarily due to reduced amortization associated with the Nypro trade name.
- Interest expense increased by $5 million in the quarter and $8 million year to date because of higher interest rates, higher credit-facility and commercial-paper borrowings, and higher senior-note balances.
- Inventory increased to $5.981 billion from $4.414 billion at August 31, 2021, primarily due to higher raw-material balances caused by supply-chain constraints. Days in inventory increased to 85 from 68 in the prior-year quarter.
- Jabil issued $500 million of 4.250% senior notes due 2027 and used the proceeds to redeem its 4.700% senior notes due 2022. The refinancing generated a $4 million debt-extinguishment loss.
- The company repurchased 8.6 million shares for $517 million under its $1.0 billion authorization; $483 million remained available at May 31, 2022.
Guidance, outlook, commentary and risks
Management stated that available liquidity, including cash, operating cash flow, borrowing capacity, receivables-sale programs and capital-market access, is expected to fund working capital, capital expenditures, dividends, share repurchases and potential acquisitions for the next 12 months and beyond. Fiscal 2022 net capital expenditures were expected to be approximately $850 million. Management expected regular quarterly dividends to continue at amounts similar to past declarations, subject to board approval and economic conditions.
COVID-19 continued to affect operations, suppliers and customers through operating restrictions, additional costs, materials shortages and transportation challenges. Management also identified risks related to customer concentration, dependence on critical or single-source components, international operations, China exposure, tariffs and trade disputes, foreign-exchange movements, labor availability and costs, geopolitical instability including the invasion of Ukraine, cybersecurity, regulatory compliance, product defects, intellectual property, natural disasters, inflation and financial-market volatility.
The five largest customers accounted for approximately 45% of nine-month revenue, and 79 customers accounted for approximately 90%. Jabil sold $6.5 billion of trade receivables under uncommitted sale programs during the nine-month period and had no available liquidity under its $600 million global asset-backed securitization program at May 31, 2022. The company stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Management concluded that disclosure controls and procedures were effective as of May 31, 2022 and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and improved operating income can be sustained while gross-margin pressure from product mix and supply-chain costs continues.
- The effect of elevated inventories, raw-material commitments and supply-chain constraints on cash conversion and potential obsolescence.
- Customer concentration and the financial condition, demand patterns and production plans of the largest customers.
- Availability and continued use of receivables-sale programs, including the absence of liquidity under the global asset-backed securitization program.
- Debt maturities, interest-rate exposure, covenant compliance and the impact of refinancing the 2022 notes with 2027 green bonds.
- Execution of the planned approximately $850 million in fiscal 2022 capital expenditures and the resulting free-cash-flow profile.
- Progress of share repurchases and the balance between repurchases, dividends, capital investment and debt reduction.
- Potential impacts from COVID-19, China operations, tariffs, geopolitical events, labor availability, foreign exchange and other international operating risks.