Jabil Circuit, Inc. — Fiscal 2017 First-Quarter Form 10-Q
Reporting period: Three months ended November 30, 2016; filed January 9, 2017. The filing identifies the registrant as Jabil Circuit, Inc. Results are unaudited and not necessarily indicative of the full fiscal year.
Business Context
Jabil provides global electronics design, manufacturing, supply-chain and product-management services through two reportable segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). It operated in 28 countries, and foreign-source revenue represented 92.3% of total revenue. The five largest customers accounted for approximately 51% of revenue.
Financial Highlights
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenue | $5.105 billion | $5.208 billion | Down 2.0% |
| Gross profit | $431.5 million | $483.5 million | Down 10.8% |
| Gross margin | 8.5% | 9.3% | Down 0.8 percentage points |
| Operating income | $165.6 million | $214.5 million | Down 22.8% |
| Operating margin | 3.2% | 4.1% | Down 0.9 percentage points |
| Net income attributable to Jabil | $88.0 million | $131.9 million | Down 33.3% |
| Diluted EPS | $0.47 | $0.68 | Down $0.21 |
| Operating cash flow | $151.9 million | $145.5 million | Up $6.4 million |
- EMS revenue was $2.703 billion, down 1%; DMS revenue was $2.402 billion, down 3%.
- DMS mobility revenue declined 10% because of weaker end-user product demand, partly offset by new business in consumer and wearable technologies and healthcare.
- Core operating income, a non-U.S. GAAP measure, was $209.5 million, down 15.7%; core diluted EPS was $0.69 versus $0.85.
- Cash and cash equivalents were $747.4 million at November 30, 2016, down from $912.1 million at August 31, 2016.
- Total debt, including capital leases, was $2.111 billion; current maturities were $43.2 million. The company reported compliance with all debt and securitization covenants.
- Capital expenditures were $163.9 million, compared with $252.1 million in the prior-year quarter.
- The company repurchased 5.3 million shares for approximately $114.1 million and declared a quarterly dividend of $0.08 per share.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but profitability fell more sharply because lower DMS mobility revenue was not matched by reductions in certain fixed costs.
- Gross margin decreased from 9.3% to 8.5%, while operating margin decreased from 4.1% to 3.2%.
- SG&A declined to $214.1 million from $251.5 million, primarily reflecting a $21.0 million reversal of stock-based compensation expense following reduced expectations for vesting of certain performance awards.
- Restructuring charges increased substantially to $35.9 million from $1.4 million. Q1 FY2017 included $34.1 million under the new 2017 Restructuring Plan and $1.8 million under the 2013 plan.
- The effective tax rate increased to 33.6% from 27.4%, primarily because of a lower proportion of income in low-tax jurisdictions and increased losses in jurisdictions with valuation allowances.
- Cash flow from investing improved because prior-year cash flows included $67.3 million of acquisition spending and $27.5 million of notes receivable issuance. Financing cash flow changed from a $414.1 million inflow to a $148.5 million outflow, primarily due to share repurchases and debt repayment activity.
Liquidity, Outlook, Risks and Unusual Items
- Management expects fiscal 2017 and 2018 restructuring costs of approximately $195 million under the 2017 plan. The plan is expected to produce annualized cost savings of $70 million to $90 million, with a portion expected to begin in Q2 FY2017. Remaining charges and timing are subject to operational decisions and employee consultations.
- The company expects capital expenditures of $500 million to $600 million during the next 12 months and believes cash, borrowing capacity, receivables programs and operating cash flow will be adequate for anticipated requirements.
- Receivables-sale and securitization programs are important liquidity sources. Available limits include $200 million under the North American program, $275 million under the foreign program and $900 million across three uncommitted receivables-sale programs. These facilities may not be renewed or funded in the future.
- Approximately $589.7 million of foreign-subsidiary cash could not be repatriated to the United States without potential tax consequences.
- The IRS has proposed adjustments for fiscal years 2009–2011 that could require approximately $28.6 million of tax payment after available tax-loss carryforwards, plus interest and penalties. Jabil contests the matter, and an unfavorable resolution or similar claims for later years could be material.
- Key risks include customer concentration, component availability, seasonal demand, international operations and currency exposure, customer production changes, industry cyclicality, restructuring execution, acquisitions and competitive conditions.
- The filing reports no material litigation impact, no debt covenant defaults and no significant subsequent events through the filing date.
Investor Verification Checklist
- Verify whether the 2017 Restructuring Plan achieves the projected $70 million–$90 million annualized savings and whether additional costs approach the $195 million estimate.
- Monitor DMS mobility demand, customer concentration and the effect of fixed-cost absorption on gross margin.
- Assess liquidity after planned $500 million–$600 million capital expenditures, dividends, repurchases and debt maturities.
- Review renewal and funding risk for the receivables securitization and sale programs, including the deferred purchase price receivable of $765.6 million.
- Track the IRS tax dispute, potential interest and penalties, and possible implications for later audit years.
- Reconcile non-GAAP core earnings with U.S. GAAP results, particularly restructuring charges and the unusual stock-based compensation reversal.