Jabil Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Three and six months ended February 28, 2021, compared with the corresponding periods ended February 29, 2020. The filing was signed April 2, 2021. Jabil provides global electronics design, manufacturing, supply-chain and product-management services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments, operating in 31 countries.
Financial Performance and Position
| Metric | Three months ended Feb. 28, 2021 | Three months ended Feb. 29, 2020 | Six months ended Feb. 28, 2021 | Six months ended Feb. 29, 2020 |
|---|---|---|---|---|
| Net revenue | $6.829 billion | $6.125 billion | $14.661 billion | $13.631 billion |
| Gross profit | $569.9 million | $430.1 million | $1.204 billion | $984.0 million |
| Gross margin | 8.3% | 7.0% | 8.2% | 7.2% |
| Operating income | $236.4 million | $90.6 million | $550.3 million | $243.4 million |
| Operating margin | 3.5% | 1.5% | 3.8% | 1.8% |
| Net income attributable to Jabil | $151.7 million | $(3.3) million | $352.1 million | $37.1 million |
| Diluted EPS | $0.99 | $(0.02) | $2.30 | $0.24 |
- Revenue growth: Revenue increased 11.5% year over year in the quarter and 7.6% for the six-month period. DMS revenue increased 26% in the quarter and 19% year to date, while EMS revenue declined 1% and 3%, respectively.
- Segment mix: DMS represented 53% of quarterly revenue and 54% of six-month revenue, compared with 47% and 49% in the prior-year periods. DMS segment income increased to $186.5 million from $86.9 million in the quarter; EMS segment income increased to $98.1 million from $72.5 million.
- Profitability: Management attributed the margin improvement primarily to product mix, improved profitability across businesses, and lower incremental and idle labor costs associated with COVID-19 restrictions.
- Core results: Non-GAAP diluted core EPS was $1.27 for the quarter and $2.87 for the six-month period, compared with $0.50 and $1.55, respectively. Core operating income was $284.6 million for the quarter and $649.5 million year to date.
- Cash flow: Operating cash flow was $85.9 million for the six months, compared with $84.2 million in the prior year. Investing cash flow was $(447.2) million, primarily reflecting $661.2 million of capital expenditures, partly offset by $266.7 million of proceeds from property sales. Adjusted free cash flow was $(308.5) million, compared with $(328.0) million.
- Liquidity: Cash and cash equivalents were $838.1 million at February 28, 2021, down from $1.394 billion at August 31, 2020. Current assets were $9.144 billion and current liabilities were $8.842 billion.
- Debt: Notes payable and long-term debt totaled $2.730 billion, including $50.2 million of current installments. Jabil reported $3.8 billion of unused revolving credit capacity, up to $1.8 billion of commercial paper capacity, up to $53.3 million of available asset-backed securitization liquidity, and up to $2.0 billion under trade receivable sale programs. The company was in compliance with its debt covenants.
- Capital allocation: Jabil repurchased $132.0 million of common stock during the six months and paid $25.9 million of dividends. As of February 28, 2021, $254.1 million remained available under the $600.0 million repurchase authorization, which expires at the end of fiscal 2021.
Material Changes Versus the Prior Comparable Period
- Quarterly net income attributable to Jabil improved from a $3.3 million loss to $151.7 million of income; six-month income increased from $37.1 million to $352.1 million.
- Restructuring charges declined to $6.6 million from $29.6 million in the quarter and to $4.9 million from $74.9 million for the six-month period. The $85.0 million 2020 Restructuring Plan was substantially complete at February 28, 2021.
- Interest expense declined by $15.2 million in the quarter and $27.7 million year to date, primarily because of lower interest rates and lower borrowings under credit facilities and commercial paper.
- The prior-year six-month period included a $12.2 million securities impairment charge and a $15.0 million distressed-customer charge; neither recurred in the current period.
- Accounts receivable increased to $3.063 billion and inventory increased to $3.559 billion from $2.848 billion and $3.132 billion, respectively, at August 31, 2020. Management said inventory was increased to support expected third-quarter sales.
- Jabil completed the fourth closing of its Johnson & Johnson Medical Devices Companies asset acquisition on October 26, 2020, for preliminary cash consideration of approximately $18.4 million. Purchase accounting remains subject to measurement-period adjustments.
Outlook, Commentary, Risks and Unusual Items
- Management expects fiscal 2021 net capital expenditures of approximately $800 million. The filing states that liquidity is expected to be adequate for the next 12 months, including capital expenditures, dividends, repurchases, acquisitions and working-capital needs.
- Management expects to continue declaring quarterly dividends at amounts similar to past declarations, but dividends remain discretionary and subject to Board approval.
- COVID-19 continued to cause operating restrictions, additional direct costs, supply-chain constraints, material shortages and transportation challenges across Asia, Europe and the Americas.
- Customer concentration remains significant: the five largest customers represented approximately 49% of six-month revenue, while 75 customers represented approximately 90%. Approximately 84.1% of six-month revenue was from foreign operations.
- Other key risks include rapid changes in customer demand, dependence on critical single-source components, international operations and currency exposure, customer or supplier financial distress, acquisition execution, restructuring, cybersecurity and information systems, product defects, intellectual property, debt and covenant exposure, tax matters, natural disasters and climate or other global events.
- The company sells receivables through trade-receivable and asset-backed securitization programs. Such programs provide liquidity but involve counterparty, covenant, collateral and renewal risks; certain programs expire in 2021.
- Jabil was party to ordinary-course lawsuits and did not expect them, individually or in aggregate, to have a material adverse effect. Management concluded that disclosure controls were effective and identified no material change in internal control over financial reporting.
Investor Verification Priorities
- Verify whether DMS growth and improved product mix are sustainable and whether the EMS decline related to the cloud-business transition persists.
- Track conversion of earnings into operating cash flow, particularly the effects of higher receivables, inventory and capital expenditures.
- Assess the sustainability of the planned approximately $800 million fiscal 2021 capital-expenditure program and its effect on free cash flow.
- Review upcoming debt, asset-backed securitization and receivable-sale program expirations, available liquidity and covenant compliance.
- Monitor COVID-19 effects, component availability, transportation constraints and related incremental costs.
- Evaluate customer concentration, single-source supplier dependence and the effect of customer demand changes on revenue and margins.
- Review the final purchase accounting for the Johnson & Johnson Medical Devices acquisition and any resulting adjustments.