Jabil Circuit, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Business context and reporting period
Jabil provides global electronics design, production and product-management services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments. The filing covers the three and nine months ended May 31, 2016, compared with the corresponding 2015 periods. Jabil operated in 28 countries, and foreign-source revenue represented 90.4% of quarterly revenue and 91.0% of nine-month revenue.
Financial performance and liquidity
| Metric | Three months ended May 31, 2016 | Year-over-year change | Nine months ended May 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $4.311 billion | Down 1.1% | $13.922 billion | Up 5.3% |
| Gross profit | $321.1 million; 7.4% margin | Down from 8.6% | $1.204 billion; 8.6% margin | Up from 8.5% |
| Operating income | $59.6 million; 1.4% margin | Down from 3.1% | $429.0 million; 3.0% margin | Up from 3.1% |
| Net income attributable to Jabil | $5.2 million | Down from $72.2 million | $216.0 million | Up from $196.3 million |
| Diluted EPS | $0.03 | Down from $0.37 | $1.12 | Up from $1.00 |
| Core earnings, non-GAAP | $32.0 million; $0.17 diluted EPS | Down from $96.5 million | $306.2 million; $1.59 diluted EPS | Up from $303.0 million |
Quarterly revenue declined primarily because DMS revenue fell 9% amid lower-than-anticipated mobility demand. EMS revenue increased 4%, supported by telecommunications business with existing customers. For the nine-month period, EMS revenue increased 3% and DMS revenue increased 9%.
Operating pressure in the quarter reflected lower DMS volume against relatively fixed costs, higher selling, general and administrative expenses, increased amortization from acquisitions, and $4.5 million of restructuring charges. Interest expense increased to $35.2 million for the quarter and $102.5 million for the nine-month period, principally because of the Term Loan Facility.
Operating cash flow was $487.9 million for the nine months, down from $882.9 million in the prior-year period. Investing cash flow was negative $890.4 million, including $668.5 million of capital expenditures and $206.0 million for acquisitions. Financing cash flow was positive $376.0 million, primarily reflecting net debt borrowings. Cash and cash equivalents were $887.0 million at May 31, 2016, compared with $914.0 million at August 31, 2015.
Total notes payable, long-term debt and capital lease obligations were $2.151 billion at May 31, 2016, compared with $1.670 billion at August 31, 2015. Current maturities were $359.9 million. Jabil reported compliance with applicable credit facility, senior-note and asset-backed securitization covenants.
Material changes versus the prior comparable period
- Quarterly DMS revenue fell 9%, while EMS revenue rose 4%; the quarterly revenue mix shifted to 66% EMS and 34% DMS from 63% and 37%, respectively.
- Quarterly gross margin contracted 120 basis points to 7.4%, and operating margin declined 170 basis points to 1.4%.
- Quarterly net income attributable to Jabil declined approximately 93%, driven mainly by lower DMS volume, fixed-cost absorption, higher operating expenses, increased interest expense and a 75.9% effective tax rate.
- Nine-month revenue increased 5.3%, gross profit increased 6.9%, operating income increased 5.9%, and net income attributable to Jabil increased 10.0%.
- Debt increased by approximately $480.5 million, primarily reflecting the $500 million Term Loan Facility entered into in fiscal 2016.
- Jabil completed acquisitions including Hanson, Inala Technologies and the Shemer Companies. The acquisitions added goodwill and intangible assets and increased amortization expense.
- Jabil repurchased approximately 2.8 million shares for about $54.5 million during the first quarter of fiscal 2016. In June 2016, the board authorized up to $400 million of additional repurchases through August 31, 2017.
Guidance, outlook, commentary, risks and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $500 million to $800 million, excluding acquisitions, primarily for capacity, infrastructure, EMS support and DMS investments.
- Management stated that cash, available credit, receivables-financing programs and operating cash flow were expected to fund capital expenditures, dividends, potential acquisitions and working-capital needs for the next 12 months.
- The $312 million of 7.750% senior notes matured July 15, 2016. Jabil had entered into an agreement for a $300 million private placement of 4.900% senior notes maturing July 14, 2023, with proceeds expected to repay the maturing notes; the filing describes the transaction as anticipated, not completed.
- The 2013 restructuring plan had generated $158.9 million of cumulative charges through May 31, 2016. Jabil expected total plan charges of approximately $179.0 million through fiscal 2017 and annualized gross savings of approximately $76.8 million, or approximately $65.0 million after expected offsets.
- Jabil’s five largest customers represented approximately 51% of nine-month revenue, creating material customer-concentration risk. The filing states that weaker mobility demand affected the second and third quarters and was expected to affect at least the following quarter.
- Jabil relies on receivables securitization and sale programs for liquidity. Certain facilities were uncommitted or approaching expiration, and the company cautioned that future funding under those programs was not assured.
- The IRS proposed adjustments primarily involving intercompany transactions for fiscal years 2009 through 2011. If the IRS prevails, the estimated tax payment would be approximately $34.6 million before potential interest and penalties; management disputed the adjustments.
- Other principal risks include international operations and currency exposure, component availability and single-source suppliers, customer order volatility, acquisition integration, restructuring execution, debt and interest-rate exposure, regulatory compliance, product liability, intellectual-property claims and disruptions from natural disasters or cyber incidents.
Most important facts for investors to verify
- Whether the anticipated $300 million senior-note issuance closed and whether the 7.750% notes were repaid at maturity.
- Subsequent quarterly DMS mobility demand, customer orders, capacity utilization and the effect on gross margin and fixed-cost absorption.
- Actual capital expenditures versus the $500 million–$800 million outlook and the resulting free-cash-flow profile.
- Availability, renewal and utilization of receivables-financing programs and compliance with debt covenants.
- Progress and realized savings from the 2013 restructuring plan, including remaining cash obligations.
- Integration, profitability and potential impairment exposure related to the Hanson, Inala and Shemer acquisitions.
- Resolution of the IRS tax dispute and any similar exposure for later years.