Jabil Inc. (formerly Jabil Circuit, Inc.) — Fiscal 2013 Third-Quarter Form 10-Q
Business context and reporting period
The filing covers the three and nine months ended May 31, 2013. Jabil provides global electronics design, manufacturing, supply-chain, and product-management services through Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS). Operations span 30 countries, with approximately 85% of revenue sourced internationally.
Financial performance and position
| Metric | Three months ended May 31, 2013 | Three months ended May 31, 2012 | Nine months ended May 31, 2013 | Nine months ended May 31, 2012 |
|---|---|---|---|---|
| Net revenue | $4.468 billion | $4.251 billion | $13.522 billion | $12.814 billion |
| Gross profit | $332.5 million | $329.3 million | $1.008 billion | $991.5 million |
| Gross margin | 7.4% | 7.8% | 7.5% | 7.7% |
| Operating income | $103.7 million | $156.6 million | $423.1 million | $477.7 million |
| Operating margin | 2.3% | 3.7% | 3.1% | 3.7% |
| Net income attributable to Jabil | $50.1 million | $101.3 million | $244.5 million | $311.9 million |
| Diluted EPS | $0.24 | $0.48 | $1.18 | $1.47 |
- Operating cash flow was $809.7 million for the nine months, compared with $191.5 million in the prior-year period.
- Capital expenditures were $453.0 million, versus $291.8 million, primarily for DMS machinery, new business, maintenance, and information technology.
- Cash and cash equivalents totaled $1.352 billion at May 31, 2013, up from $1.217 billion at August 31, 2012. Approximately $902.5 million held by foreign subsidiaries could not be repatriated to the United States without potential tax consequences.
- Total debt was $1.661 billion, compared with $1.676 billion at August 31, 2012. Current debt installments were $9.5 million. The company reported compliance with its credit-facility and securitization covenants.
- Quarterly and year-to-date dividends declared were $0.08 and $0.24 per share, respectively. The company repurchased approximately $129.3 million of common stock during the nine months.
Material changes versus the prior comparable period
- Revenue increased 5.1% in the quarter and 5.5% year to date. Quarterly growth was led by HVS, up 23%, and E&I, up 4%, partly offset by a 4% decline in DMS. Year-to-date growth was led by E&I, up 11%, and DMS, up 9%, partly offset by a 5% decline in HVS.
- Profitability declined despite higher revenue. Operating income fell 33.8% in the quarter and 11.4% year to date; net income attributable to Jabil fell 50.6% and 21.6%, respectively.
- Results included $28.4 million of restructuring charges and a $25.6 million impairment of notes receivable related to a former customer. These items were absent in the prior-year period.
- Interest expense increased to $30.7 million for the quarter and $89.5 million year to date, from $26.5 million and $78.3 million, respectively, primarily due to the 4.700% senior notes issued in fiscal 2012.
- The effective tax rate increased to 31.0% for the quarter and 26.3% year to date, compared with 21.2% and 20.5%, respectively, in the prior-year periods.
- Non-GAAP core operating income declined 7.1% for the quarter and 3.8% year to date; core earnings declined 14.0% and 10.4%, respectively.
Guidance, outlook, commentary, risks, and unusual items
- Under the 2013 Restructuring Plan, management expects approximately $188 million of pretax restructuring and related costs over fiscal 2013–2015, including approximately $140 million of cash costs, and anticipates annualized savings of approximately $65 million. Timing and final amounts remain subject to change.
- The company expects to begin realizing a portion of restructuring savings in the fourth quarter of fiscal 2013, while noting that offsets and implementation details remain under evaluation.
- Expected capital expenditures for the next 12 months were $500 million to $700 million, principally for DMS expansion, China capacity, Taiwan research and development, maintenance, and information technology.
- Management believed available cash, operating cash flow, credit facilities, and receivables programs were adequate for the next 12 months. The company completed the $665 million cash acquisition of Nypro on July 1, 2013; the final purchase price remained subject to working-capital, debt, and cash adjustments.
- Receivables-financing programs are important liquidity sources. The $200 million committed receivables-sale program expires November 30, 2013, and the $150 million uncommitted program expires November 28, 2013. Uncommitted facilities may not provide funding when needed.
- Key risks include customer concentration, short customer commitments, component shortages and single-source suppliers, international and foreign-exchange exposure, seasonality, margin pressure, restructuring execution, acquisition integration, customer credit risk, debt and refinancing risk, and dependence on receivables-sale programs.
- The five largest customers represented approximately 53% of nine-month revenue, and 55 customers represented approximately 90%. Legal proceedings were described as ordinary-course matters not expected to be material. An IRS examination for 2003–2008 remained unresolved, although management did not expect a material effect.
Important facts for investors to verify
- Whether restructuring costs remain near the estimated $188 million and whether the anticipated $65 million of annual savings are achieved.
- The financial and operational integration of Nypro, including purchase-price adjustments, incremental debt or cash usage, and acquired profitability.
- Renewal or replacement of receivables-financing facilities expiring in November 2013 and the company’s reliance on uncommitted funding.
- Customer concentration, program losses, demand declines in HVS and portions of DMS, and potential inventory or receivable write-downs.
- Liquidity after the Nypro acquisition, planned capital expenditures, dividends, share repurchases, and any future borrowing.
- Progress on the IRS tax examination, foreign tax incentives, and the potential effect of tax-law or jurisdictional changes.