Jabil Circuit, Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter ended February 28, 2015; six-month year-to-date period ended February 28, 2015. The filing covers Jabil Circuit, Inc. and subsidiaries and presents unaudited U.S. GAAP interim results. The company provides global electronics design, manufacturing, supply-chain and product-management services through its EMS and DMS segments and operated in 24 countries.
Financial Results and Key Metrics
| Metric | Three months ended Feb. 28, 2015 | Three months ended Feb. 28, 2014 | Six months ended Feb. 28, 2015 | Six months ended Feb. 28, 2014 |
|---|---|---|---|---|
| Net revenue | $4.309 billion | $3.577 billion | $8.860 billion | $7.920 billion |
| Gross profit | $367.8 million | $213.2 million | $750.8 million | $547.4 million |
| Gross margin | 8.5% | 6.0% | 8.5% | 7.0% |
| Operating income | $124.9 million | $3.6 million | $269.6 million | $159.0 million |
| Net income attributable to Jabil | $52.0 million | $(38.7) million | $124.1 million | $79.3 million |
| Diluted EPS | $0.27 | $(0.19) | $0.63 | $0.38 |
| Core operating income | $166.0 million | $60.4 million | $346.6 million | $220.6 million |
| Core diluted EPS | $0.50 | $0.10 | $1.06 | $0.53 |
Cash flow and liquidity: Year-to-date operating cash flow was $525.4 million, compared with $134.6 million in the prior-year period. Capital expenditures were $468.2 million, resulting in investing cash use of $460.9 million. Financing cash use was $75.4 million. Cash and cash equivalents were $966.4 million at February 28, 2015, down from $1.000 billion at August 31, 2014.
Balance sheet and debt: Total assets were $8.578 billion and total equity was $2.264 billion. Total notes payable, long-term debt and capital lease obligations were $1.674 billion, including senior notes due 2016, 2018, 2020 and 2022. Current debt obligations were $11.3 million. The company stated that it was in compliance with applicable credit facility and securitization covenants.
Working capital: Inventories increased to $2.105 billion from $2.008 billion at fiscal year-end, principally to support expected EMS sales. Accounts receivable were $1.269 billion and accounts payable were $3.088 billion. The quarterly sales cycle was four days, with 27 days in accounts receivable, 48 days in inventory and 71 days in accounts payable.
Shareholder returns: The quarterly dividend remained $0.08 per share. During the six months, the company repurchased approximately 2.0 million shares for $40.0 million and paid $32.1 million in dividends.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 20.5%; year-to-date revenue increased 11.9%.
- DMS quarterly revenue increased 52.3% and year-to-date revenue increased 34.2%, primarily due to stronger mobility demand. EMS quarterly revenue increased 6.2%, while year-to-date EMS revenue was relatively flat.
- Gross margin expanded to 8.5% from 6.0% for the quarter and to 8.5% from 7.0% year to date, driven by DMS customer growth, cost control and productivity improvements.
- Quarterly operating income increased substantially from $3.6 million to $124.9 million. Year-to-date operating income increased 69.5%.
- Quarterly net income attributable to Jabil improved from a $38.7 million loss to $52.0 million of income. Year-to-date earnings increased from $79.3 million to $124.1 million.
- Restructuring charges declined to $20.4 million from $32.2 million in the quarter but increased year to date to $32.6 million from $53.2 million? The filing reports $32.6 million in 2015 versus $53.2 million in 2014; the year-to-date charge therefore decreased.
- Foreign revenue represented 86.7% of quarterly revenue and 87.5% year to date, up from 83.3% and 84.6%, respectively.
- Aftermarket Services was fully classified as discontinued operations following completion of the Malaysian transaction on December 31, 2014. Discontinued operations reduced quarterly earnings by $5.5 million and year-to-date earnings by $6.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected capital expenditures of approximately $650 million to $750 million over the next 12 months, primarily for Asian expansion, infrastructure and DMS investments in mobility, healthcare, packaging, lifestyles and wearables.
- Management expected available cash, operating cash flow, revolving credit facilities, receivables securitization capacity and receivables-sale programs to fund anticipated capital expenditures, dividends, acquisitions and working capital needs for the next 12 months.
- The 2013 restructuring plan had incurred $150.0 million through February 28, 2015, with approximately $29.0 million of additional charges expected to reach the stated $179.0 million plan estimate. The filing projected approximately $65.0 million of annualized net cost savings after offsets; approximately $38.6 million of accrued restructuring liabilities were expected to be paid over the next 12 months.
- The foreign asset-backed securitization program, with capacity of up to $175.0 million, was scheduled to expire May 15, 2015. Additional uncommitted receivables-sale facilities were scheduled to expire or require renewal during 2015. Funding under uncommitted programs is not assured.
- The company had $771.0 million of cash held by foreign subsidiaries that it estimated could not be repatriated to the United States without potential tax consequences.
- Customer concentration is material: the five largest customers represented approximately 51% of year-to-date revenue, while 74 customers represented approximately 90%. The filing identifies Apple, Cisco, Ericsson, GE, HP, Ingenico, NetApp, Sony Mobile, Valeo and Zebra among the largest customers.
- Almost all manufactured products require one or more single-source components, creating supply and production risks. Customer demand, product cycles, seasonality, pricing pressure, inventory obsolescence and capacity utilization may cause significant earnings volatility.
- International operations, foreign currency movements, tax changes, labor and regulatory issues, cybersecurity, natural disasters, product liability and intellectual-property claims are identified as material risks. The company uses foreign-exchange derivatives; management stated that a hypothetical 10% currency or variable-interest-rate change would not have a material immediate effect.
- The company completed an immaterial acquisition for approximately $12.0 million in cash during the quarter. No significant subsequent events were reported through the filing date.
Important Facts for Investors to Verify
- Reconcile GAAP results with management’s core operating income and core earnings, noting the substantial exclusions for restructuring, stock compensation, amortization and discontinued operations.
- Assess whether DMS mobility growth and improved gross margins are sustainable and whether EMS performance remains affected by the BlackBerry disengagement.
- Monitor inventory growth, receivables, customer commitments and the impact of receivables securitization on operating cash flow and liquidity.
- Verify renewal or replacement of the foreign securitization facility and other 2015 receivables-sale facilities.
- Track remaining restructuring charges, cash payments and whether projected net annual savings are achieved.
- Evaluate exposure to the five largest customers, single-source components, foreign operations and currency movements.
- Consider debt maturities, predominantly fixed interest obligations, below-investment-grade Moody’s ratings and the company’s ability to fund planned capital expenditures.
- Confirm the company’s stated effective disclosure controls and absence of material changes in internal control over financial reporting.