Jabil Circuit, Inc. — Fiscal 2011 Second-Quarter Form 10-Q
Reporting period: Three and six months ended February 28, 2011; filed April 8, 2011. Jabil provides worldwide electronics design, manufacturing and product-management services through its Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS) segments. The financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Three months ended February 28, 2011 | Prior comparable period | Six months ended February 28, 2011 | Prior comparable period |
|---|---|---|---|---|
| Net revenue | $3.929 billion | $3.005 billion | $8.011 billion | $6.093 billion |
| Gross profit | $296.4 million | $222.7 million | $607.0 million | $454.5 million |
| Gross margin | 7.5% | 7.4% | 7.6% | 7.5% |
| Operating income | $104.6 million | $61.8 million | $260.6 million | $128.0 million |
| Operating margin | 2.7% | 2.1% | 3.3% | 2.1% |
| Net income attributable to Jabil | $55.4 million | $29.8 million | $162.1 million | $58.1 million |
| Diluted EPS | $0.25 | $0.14 | $0.74 | $0.27 |
| Core earnings, non-GAAP | $118.8 million | $63.3 million | $250.9 million | $131.5 million |
Six-month operating cash flow was $367.6 million, compared with $104.8 million in the prior year. Investing cash outflow was $221.0 million, including $207.3 million of capital expenditures. Financing cash flow was $9.7 million, after $3.1 billion of borrowings and $3.1 billion of repayments. Cash increased to $902.3 million from $744.3 million at August 31, 2010.
At February 28, 2011, total debt was $1.238 billion, including $1.100 billion classified as long-term. The company issued $400.0 million of 5.625% senior notes due 2020 and amended its revolving credit facility to $1.0 billion, with potential increases to $1.3 billion. Management stated that the company was in compliance with debt and securitization covenants.
Working-capital indicators improved in the quarter: sales cycle was 11 days, days sales outstanding were 24 days, inventory days were 53, and accounts-payable days were 66. Inventory was $2.160 billion, up from $2.094 billion at August 31, 2010.
Material changes versus the prior comparable period
- Second-quarter revenue increased 30.8%; six-month revenue increased 31.5%, primarily from higher demand from existing customers and new program wins.
- Six-month operating income more than doubled, while operating margin expanded from 2.1% to 3.3%. Management attributed the improvement to higher capacity utilization, cost control, productivity gains, and increased DMS activity.
- Core operating income increased 76.2% in the quarter and 73.3% year to date; core earnings increased 87.7% and 90.7%, respectively.
- DMS represented 35% of quarterly and year-to-date revenue, compared with 31% in the prior-year periods. E&I represented 32% and 30%, while HVS represented 33% and 35%, respectively.
- SG&A declined as a percentage of revenue to 3.6% in the quarter from 4.9%, although six-month SG&A increased to $284.3 million from $277.8 million.
- Foreign-source revenue increased to 84.9% of quarterly revenue and 85.7% of year-to-date revenue, increasing the company’s exposure to currency, geopolitical, supply-chain and international operating risks.
- Jabil acquired the previously divested France and Italy operations on February 21, 2011 for approximately $0.5 million and mutual conditional releases, adding approximately 1,500 employees. The preliminary purchase-price allocation included $20.3 million of goodwill.
Guidance, outlook, unusual items and risks
- Management expects capital expenditures of approximately $375 million to $425 million over the next 12 months and believes available cash, borrowing capacity, receivables programs and operating cash flow will be adequate for anticipated needs.
- Management expects quarterly dividends of an amount similar to prior declarations, but future dividends remain discretionary. The declared dividend was $0.07 per common share for each quarter presented.
- Unusual second-quarter charges included $13.6 million for settlement of receivables and related charges and $23.9 million for losses on disposal of subsidiaries. The latter included an $18.5 million write-off of a working-capital loan and a $5.4 million write-off of a receivable related to the prior purchaser of the France and Italy operations.
- The 2009 restructuring plan was substantially complete and had fully realized estimated annualized savings of approximately $55.6 million. Remaining restructuring liabilities were not material relative to the company’s scale.
- The IRS has proposed approximately $69.3 million of additional tax for fiscal years 2003 through 2005, before potential tax attributes, plus interest and penalties. Jabil disputes the proposed adjustments and recorded no significant additional liability for the matter during the period; later-year exposure is not practicable to estimate.
- Receivables securitization and sale programs provide important liquidity. Several programs expire or require renewal during 2011, including the $100 million foreign securitization program in May, the $200 million sale program in May, and the $300 million asset-backed program in November.
- Management identified the Japan earthquake and tsunami as a potential source of facility disruption, component shortages, increased shipping costs and customer or supplier effects.
- Key continuing risks include customer concentration, short-term and uncertain production commitments, component availability and pricing, inventory obsolescence, international operations, currency and interest-rate exposure, acquisition integration, competition, natural disasters, and potential margin pressure.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified. The acquired France and Italy operations were excluded from the scope of the internal-control evaluation as of February 28, 2011.
Investor verification checklist
- Verify the sustainability of the revenue growth and margin improvement, particularly the contribution from DMS and new customer programs.
- Reconcile GAAP earnings with management’s non-GAAP core earnings and assess the recurrence of stock compensation, acquisition-related charges, disposal losses and other excluded items.
- Review customer concentration: the five largest customers generated approximately 47% of six-month revenue and the top 49 generated approximately 90%.
- Monitor inventory growth, component availability, customer order visibility and the effect of Japan-related supply-chain disruptions.
- Confirm renewal or replacement of receivables securitization and sale programs and continued compliance with related covenants.
- Assess debt-service costs, floating-rate exposure, credit ratings and the company’s ability to fund planned capital expenditures.
- Track the IRS dispute, uncertain tax positions, and the integration and profitability of the reacquired France and Italy operations.