JABIL INC annual report, FY2018

Business Context and Reporting Period

Jabil Inc. is a global electronics design, manufacturing and product-management services provider. Its two reportable segments are Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The filing is a Form 10-K for the fiscal year ended August 31, 2018; the fourth-quarter period ended August 31, 2018 is also presented.

Fiscal 2018 revenue mix: EMS 56%; DMS 44%.
Approximately 91.7% of revenue was generated from international operations.
Apple represented 28% of fiscal 2018 revenue; the five largest customers represented approximately 48%.
Fiscal fourth-quarter revenue was $5.772 billion, including $442.1 million of gross profit and $153.9 million of operating income.

Financial Results and Key Metrics

Metric	Fiscal 2018	Fiscal 2017	Change
Net revenue	$22.095 billion	$19.063 billion	+15.9%
Gross profit	$1.707 billion	$1.546 billion	+10.4%
Gross margin	7.7%	8.1%	Down 40 bps
Operating income	$542.2 million	$410.2 million	+32.2%
Operating margin	2.5%	2.2%	Improved
Net income attributable to Jabil	$86.3 million	$129.1 million	Down 33.1%
Diluted EPS	$0.49	$0.69	Down $0.20
Operating cash flow	$933.9 million	$1.257 billion	Down $322.8 million
Capital expenditures	$1.037 billion	$716.5 million	+44.7%

Fiscal 2018 operating performance benefited from higher production volumes and capacity utilization, while profitability was pressured by constrained component availability, higher direct labor costs, distressed-customer charges and increased stock-based compensation. The effective tax rate rose to 76.6% from 50.4%, primarily because of a $142.3 million provisional tax expense related to the Tax Cuts and Jobs Act.

Fiscal 2018 core operating income was $768.1 million versus $667.0 million in fiscal 2017.
Fiscal 2018 core earnings were $458.5 million, or $2.62 diluted core EPS, versus $392.7 million, or $2.11, in fiscal 2017.
Fourth-quarter net loss attributable to Jabil was $57.3 million, or $(0.34) diluted EPS, compared with fourth-quarter fiscal 2017 net income of $45.7 million, or $0.25 diluted EPS.
Fourth-quarter results included $111.4 million of Tax Act-related expense and an $18.0 million distressed-customer charge.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents were $1.258 billion at August 31, 2018, up from $1.190 billion.
Working capital was $319.1 million, compared with negative working capital of $243.9 million in fiscal 2017.
Total notes payable and long-term debt were $2.519 billion, up from $2.050 billion. Debt included $494.2 million of 3.950% senior notes due 2028 and $830.3 million of borrowings under term loans.
The company reported $2.3 billion of available unused borrowing capacity under revolving credit facilities and compliance with debt covenants.
Asset-backed securitization and receivables-sale programs provided up to $622.1 million of available liquidity at year-end, although portions were uncommitted and subject to lender participation.
Operating cash flow was $933.9 million versus $1.037 billion of capital expenditures, before acquisitions and other investing activity.
Jabil paid $57.8 million of dividends and repurchased $450.0 million of common stock during fiscal 2018. A further $350.0 million remained authorized for repurchases through August 31, 2019.
Management stated that available liquidity sources were adequate for expected capital expenditures, dividends, repurchases, acquisitions and working-capital requirements for the next 12 months.

Material Changes Versus the Prior Comparable Period

Revenue increased 15.9%; DMS revenue rose 23% and EMS revenue rose 11%. DMS increased to 44% of revenue from 42%, continuing the shift toward the higher-margin segment.
Gross margin declined from 8.1% to 7.7% because of component constraints, labor inflation and charges associated with distressed customers.
Operating income increased despite higher selling, general and administrative expense, including $98.5 million of stock-based compensation versus $48.5 million in fiscal 2017.
Restructuring charges declined to $36.9 million from $160.4 million. The 2017 Restructuring Plan had incurred $186.4 million through year-end, with approximately $195.0 million expected in total costs and approximately $90.0 million of expected annualized savings beginning in fiscal 2019.
Operating cash flow declined as accounts receivable and inventories increased. Inventory rose to $3.458 billion from $2.942 billion, primarily to support expected first-quarter fiscal 2019 demand.
Debt increased primarily because of the $500 million 3.950% senior-notes issuance and borrowings under the 2018 Term Loan Facility, partly offset by redemption of the $400 million 8.250% senior notes.
Shares outstanding declined to approximately 164.6 million from 177.7 million, reflecting share repurchases.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management expected fiscal 2019 net capital expenditures of approximately $800 million.
Management expected restructuring-plan savings of approximately $90 million annually beginning in fiscal 2019.
Jabil submitted a binding offer in July 2018 to form a strategic collaboration with Johnson & Johnson Medical Devices Companies. North American sites had been accepted, while sites in Switzerland and Germany remained subject to consultation, regulatory clearance and customary closing conditions; completion was expected during fiscal 2019 or 2020.
Beginning September 1, 2018, the company adopted the new revenue-recognition standard. It expected to recognize revenue over time for most contracts and record a cumulative increase to opening retained earnings of approximately $30 million to $60 million, net of tax. The filing states that the assessment was to be finalized in the first quarter of fiscal 2019.
Hurricane Maria damage to the Cayey, Puerto Rico operations resulted in $11.3 million of fiscal 2018 business-interruption and impairment expenses, net of $24.9 million of insurance proceeds.
Key risks include customer concentration, order cancellations and rescheduling, component shortages, pricing pressure, international and China exposure, currency fluctuations, higher labor and energy costs, acquisitions and restructuring execution, cybersecurity, environmental and regulatory compliance, product defects and tax uncertainty.
The IRS has proposed adjustments concerning intercompany transactions for fiscal years 2009–2014. Management believes resolution will not materially affect the company, but an unfavorable outcome could result in additional tax, interest and penalties.
Approximately $2.4 billion of foreign earnings remained indefinitely reinvested without a practicable estimate of the related unrecognized deferred tax liability.
The company’s financial statements received an unqualified audit opinion, and management and Ernst & Young concluded that internal control over financial reporting was effective as of August 31, 2018.

Most Important Facts for Investors to Verify

Whether the unusually high fiscal 2018 tax rate and fourth-quarter loss normalize after provisional Tax Act accounting is finalized.
Whether the shift toward DMS produces sustained margin improvement despite component, labor and customer-credit pressures.
Whether increased inventory and receivables convert into cash without material write-downs or collection losses.
The availability and stability of receivables-sale and securitization liquidity, particularly because several programs are uncommitted.
The timing, final terms, regulatory approvals and expected financial contribution of the Johnson & Johnson medical-device collaboration.
Completion costs and realized savings from the 2017 Restructuring Plan.
Debt maturities, variable-rate exposure and compliance with leverage and interest-coverage covenants.
Customer concentration, especially Apple’s 28% revenue contribution and the approximately 48% contribution from the five largest customers.
The final accounting impact of the new revenue-recognition standard and related cash-flow presentation changes.