Jabil Circuit, Inc. — Fiscal 2013 First-Quarter 10-Q
Reporting period: Three months ended November 30, 2012; filed January 8, 2013. The filing covers Jabil’s global electronics design, manufacturing and product-management services across Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS). Operations spanned 29 countries, with 86.4% of revenue generated from foreign sources.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenue | $4.637 billion | $4.327 billion | Up 7.2% |
| Gross profit | $350.6 million | $340.0 million | Up 3.1% |
| Gross margin | 7.6% | 7.9% | Down 30 bps |
| Operating income | $170.3 million | $170.8 million | Down 0.3% |
| Operating margin | 3.6% | 3.9% | Down 30 bps |
| Net income attributable to Jabil | $105.8 million | $112.9 million | Down 6.2% |
| Diluted EPS | $0.51 | $0.54 | Down 5.6% |
| Core earnings, non-GAAP | $127.8 million | $136.2 million | Down 6.2% |
| Core diluted EPS, non-GAAP | $0.61 | $0.65 | Down 6.2% |
Cash flow and liquidity: Operating cash flow was $151.9 million, compared with $114.6 million in the prior-year quarter. Capital expenditures were $166.5 million, resulting in negative operating cash flow after capital expenditures of approximately $14.6 million. Cash used in financing was $174.6 million, including $129.3 million of share repurchases and $18.6 million of dividends. Cash and cash equivalents declined to $1.030 billion from $1.217 billion at August 31, 2012.
Balance sheet and debt: Total assets were $8.186 billion and total liabilities were $6.109 billion at November 30, 2012. Total notes payable and long-term debt was $1.666 billion, including senior notes due 2016, 2018, 2020 and 2022. The company reported no borrowings under its credit facilities at quarter-end and stated that it was in compliance with applicable covenants. Approximately $568.4 million of cash held by foreign subsidiaries could not be repatriated to the United States without potential income tax consequences.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7.2%, led by DMS revenue growth of approximately 20% and E&I growth of approximately 17%.
- HVS revenue declined approximately 20%, primarily because of lower mobility handset and printer volumes.
- Gross profit increased in dollars but gross margin declined from 7.9% to 7.6%.
- Operating income was essentially flat despite higher revenue; selling, general and administrative expense increased to $169.6 million from $157.8 million.
- Interest expense increased to $29.6 million from $25.5 million, primarily following the issuance of the 4.700% senior notes in fiscal 2012.
- The effective tax rate increased to 24.4% from 20.5%, mainly because of changes in the geographic mix of earnings and the expiration of Hungarian and most Chinese tax incentives.
- Accounts receivable increased to $1.430 billion and inventory increased to $2.466 billion from $1.125 billion and $2.269 billion, respectively, at August 31, 2012.
- The company repurchased 7.343 million shares under publicly announced programs for approximately $129.3 million. The board also authorized an additional $100 million repurchase program, which was fully utilized during the quarter.
Guidance, Outlook, Commentary and Risks
- Management expected capital expenditures of approximately $400 million to $500 million during the next 12 months, principally to support DMS growth, equipment maintenance and information-technology upgrades.
- Management believed available cash, operating cash flow, revolving facilities and receivables-sale programs would fund expected capital expenditures, dividends and working-capital needs for the next 12 months.
- Management expected foreign-source revenue to decrease slightly from current levels over the following 12 months and expected to continue declaring quarterly dividends of an amount similar to past declarations, subject to board approval.
- Seasonality may produce stronger first-fiscal-quarter revenue because of holiday demand for consumer products. The company cautioned that quarterly results may not indicate full-year performance.
- Liquidity depends partly on receivables securitization and sale programs. A $200 million committed receivables-sale facility was scheduled to expire May 28, 2013; a $150 million uncommitted facility was scheduled to expire November 28, 2013. Uncommitted facilities may not provide funding when needed.
- The IRS had proposed approximately $69.3 million of additional tax for fiscal years 2003 through 2005, before potential tax-attribute offsets, plus interest and penalties. The company was contesting the matter and stated that an unfavorable resolution, including similar claims for later years, could be material.
- Important operating risks include customer concentration, component availability and single-source suppliers, short customer production commitments, inventory obsolescence, international and foreign-currency exposure, economic weakness, tax-incentive expirations, acquisition and restructuring execution, regulatory compliance, product liability and intellectual-property claims.
- The five largest customers represented approximately 51% of quarterly revenue, and 56 customers represented approximately 90%.
- Disclosure controls and procedures were reported effective. The internal-control evaluation excluded Telmar acquired operations, which represented less than 3% of consolidated assets and less than 1% of quarterly consolidated revenue.
Investor Verification Checklist
- Verify whether DMS and E&I growth offset continued weakness in HVS and whether customer and end-market concentration changed.
- Track gross-margin performance, pricing pressure, capacity utilization and the effect of higher SG&A and interest expense.
- Assess working-capital conversion, particularly the increases in accounts receivable and inventory and the reliance on receivables-sale programs.
- Confirm the timing and funding of the planned $400 million to $500 million of capital expenditures.
- Review debt maturities, credit-facility availability, covenant compliance and refinancing requirements.
- Monitor renewal or replacement of receivables-sale facilities and the potential liquidity impact if uncommitted programs are unavailable.
- Follow the IRS tax examination, uncertain tax positions and the expiration of foreign tax incentives.
- Evaluate the sustainability of share repurchases and dividends relative to free cash flow and debt obligations.