Business Context and Reporting Period
Jabil Circuit, Inc. is a global electronic manufacturing services and solutions provider serving aerospace, automotive, computing, defense, healthcare, industrial, networking, telecommunications, consumer and other industries. The filing covers the fiscal year ended August 31, 2014; the fourth quarter ended August 31, 2014 is also highlighted. Jabil operated through Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS), with a planned shift to EMS and DMS reporting beginning September 1, 2014.
- Approximately 142,000 employees and operations in 24 countries.
- Fiscal 2014 revenue mix: DMS 44%, E&I 34%, and HVS 22%.
- Apple represented 18% of fiscal 2014 revenue; the five largest customers represented approximately 45%.
Financial Metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net revenue | $15.762 billion | $17.249 billion | Down 8.6% |
| Gross profit | $1.026 billion | $1.212 billion | Down 15.4% |
| Gross margin | 6.5% | 7.0% | Down 50 basis points |
| Operating income | $204.1 million | $452.4 million | Down 54.9% |
| Operating margin | 1.2% | 2.6% | Down 140 basis points |
| Net income attributable to Jabil | $241.3 million | $371.5 million | Down 35.1% |
| Basic and diluted EPS | $1.19 | $1.83 basic; $1.79 diluted | Down materially |
| Operating cash flow | $498.9 million | $1.214 billion | Down 58.9% |
| Capital expenditures | $624.1 million | $736.9 million | Down 15.3% |
Reported fiscal 2014 net income benefited from $243.9 million of discontinued operations, including a $223.3 million after-tax gain on the sale of the Aftermarket Services business. Continuing operations produced a net loss of $1.6 million, or $(0.01) per diluted share.
Core operating income, a non-U.S. GAAP measure, was $345.4 million versus $642.1 million in fiscal 2013. Core earnings were $108.1 million versus $397.8 million. These measures exclude, among other items, restructuring, amortization, stock-based compensation, distressed customer charges and discontinued operations.
Fourth-quarter fiscal 2014 results included revenue of $4.056 billion, gross profit of $262.3 million, operating income of $46.6 million, and a net loss attributable to Jabil of $26.2 million, or $(0.13) per diluted share. Fourth-quarter results included a $6.2 million after-tax loss related to the sale of discontinued operations.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $1.000 billion at August 31, 2014.
- Working capital was $1.038 billion; total assets were $8.480 billion.
- Total notes payable, long-term debt and capital lease obligations were $1.683 billion, including $1.607 billion of senior notes principal and approximately $70.8 million of foreign subsidiary and other debt obligations.
- Debt maturities include approximately $319.2 million in fiscal 2016, $399.8 million in fiscal 2018, and $925.0 million thereafter.
- The amended revolving credit facility provides initial capacity of $1.5 billion, potentially expandable to $2.0 billion, and terminates in July 2019.
- Management reported approximately $1.8 billion of available liquidity under revolving credit facilities and up to $275.1 million under receivables securitization and uncommitted sale programs.
- Jabil was in compliance with applicable credit facility and securitization covenants at year-end.
- Foreign subsidiaries held approximately $808.8 million of cash that could not be repatriated without potential tax consequences.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of the disengagement from BlackBerry, lower existing-customer revenue, weaker mobility handset demand, and reduced enterprise and infrastructure spending.
- HVS revenue declined 24%, E&I revenue declined 4%, and DMS revenue declined 2% year over year.
- Gross margin contracted because revenue from existing customers declined faster than relatively fixed manufacturing costs.
- SG&A increased to $675.7 million from $614.3 million, primarily due to Nypro-related costs and strategic development investment, partly offset by a $45.8 million reversal of stock-based compensation expense.
- Amortization of intangibles increased to $23.9 million from $11.0 million, principally due to Nypro acquisition-related intangible assets.
- Interest expense increased to $128.1 million from $121.0 million, mainly because of increased credit facility borrowings.
- The effective tax rate rose to 102.2% from 2.3%, reflecting lower income in low-tax jurisdictions, limited related tax benefit, and other tax valuation and reform effects.
- Jabil completed the sale of its AMS business on April 1, 2014 for stated consideration of $725.0 million, subject to adjustments and pending regulatory approval for Malaysian operations. The transaction generated $675.0 million of cash consideration and preferred stock with a $50.0 million liquidation preference.
- Fiscal 2014 restructuring and related charges totaled $85.4 million. The 2014 plan related principally to the BlackBerry disengagement and was substantially complete at year-end.
- Backlog declined to approximately $4.3 billion from $4.6 billion, although management cautioned that customer cancellations and rescheduling reduce its predictive value.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2015 capital expenditures of approximately $350 million to $450 million, principally for maintenance, information technology upgrades and DMS growth.
- Management stated that cash, operating cash flow, available borrowings, receivables programs and sale proceeds were expected to fund capital expenditures, dividends, potential acquisitions and working capital needs for the next 12 months.
- The 2013 restructuring plan was expected to generate approximately $65 million of annualized net cost savings after offsets, with additional charges and cash expenditures expected primarily through fiscal 2015.
- Management expected foreign-source revenue to increase over the following 12 months.
- Key risks include customer concentration, especially Apple and other large customers; limited long-term production commitments; product demand volatility and seasonality; component shortages and price increases; excess or obsolete inventory; international, currency, tax and geopolitical exposure; restructuring execution; acquisition and divestiture integration; cybersecurity and information-system disruptions; intellectual property and product liability claims; environmental and regulatory compliance; and refinancing or credit-rating risk.
- Moody’s rated the senior notes below investment grade at Ba1, while Fitch and Standard & Poor’s rated them BBB-. A downgrade could increase borrowing costs and restrict liquidity.
- Jabil used forward contracts to manage currency exposure; management stated that a hypothetical 10% currency-rate change would not have a material effect on the consolidated financial statements.
- The company reported no material adverse legal proceedings, no material unresolved SEC staff comments, and unqualified audit opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $223.3 million after-tax AMS sale gain and other discontinued-operation effects.
- Reconcile GAAP earnings with core earnings and assess whether restructuring and distressed-customer costs recur.
- Review the impact of the BlackBerry disengagement, HVS contraction and customer concentration on fiscal 2015 utilization and margins.
- Confirm the timing and funding of debt maturities, receivables-program renewals and the availability of uncommitted liquidity facilities.
- Assess whether the 2013 restructuring plan achieves its targeted savings without impairing customer service or creating additional charges.
- Monitor inventory, receivables and accounts-payable trends, particularly given the decline in operating cash flow and the use of receivables-sale programs.
- Evaluate the sustainability of quarterly dividends and share repurchases following $260.3 million of fiscal 2014 share repurchases and $68.2 million of dividends paid.
- Review tax exposures, valuation allowances, unrecognized tax benefits and the potential tax cost of repatriating foreign cash.