Jabil Circuit, Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2014. The filing was signed April 7, 2014. Jabil provides global electronics design, manufacturing and supply-chain services through Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS).
Financial performance and position
| Metric | Three months ended Feb. 28, 2014 | Prior-year period | Six months ended Feb. 28, 2014 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $3.577 billion | $4.166 billion | $7.918 billion | $8.536 billion |
| Gross profit / margin | $213.2 million / 6.0% | $288.5 million / 7.0% | $546.7 million / 7.0% | $599.4 million / 7.0% |
| Operating income | $3.6 million | $133.0 million | $158.6 million | $286.0 million |
| Net income attributable to Jabil | $(38.7) million | $88.5 million | $79.3 million | $194.4 million |
| Diluted EPS | $(0.19) | $0.43 | $0.38 | $0.94 |
| Core operating income | $60.4 million | $151.5 million | $220.1 million | $323.5 million |
| Core diluted EPS | $0.10 | $0.45 | $0.53 | $0.98 |
- Second-quarter revenue declined 14.1%; six-month revenue declined 7.2%. Management attributed the decline principally to lower mobility handset production following the termination of the BlackBerry relationship, weaker specialized-services demand, and reduced enterprise and infrastructure spending.
- Second-quarter gross margin fell to 6.0% from 7.0%, as revenue declined faster than certain fixed costs. SG&A increased to $164.5 million, or 4.6% of revenue, partly because of the Nypro acquisition.
- Second-quarter operating income was reduced by $32.2 million of restructuring and related charges, $6.2 million of intangible amortization, a $3.7 million distressed-customer charge, and $14.7 million of stock-based compensation expense.
- Cash flow from operations for the six months was $134.6 million, down from $305.7 million. Capital expenditures were $286.3 million, producing $273.4 million of investing cash outflow. Financing cash outflow was $198.9 million, including $64.1 million of share repurchases and $35.8 million of dividends.
- Cash and cash equivalents were $675.1 million at February 28, 2014, compared with $1.011 billion at August 31, 2013. Current assets were $4.963 billion and current liabilities were $3.915 billion.
- Total debt, including capital lease obligations, was $1.836 billion, including $160.8 million classified as current. The company reported compliance with applicable credit-facility and securitization covenants.
- Inventory declined to $1.822 billion from $2.119 billion at August 31, 2013. Operating indicators for the quarter included seven-day sales cycle, seven annualized inventory turns, 24 days of receivables, 49 days of inventory, and 66 days of payables.
- Foreign-source revenue represented 83.3% of quarterly revenue and 84.6% of six-month revenue. The five largest customers represented approximately 46% of six-month revenue.
Material changes versus the prior comparable period
- Profitability deteriorated materially: quarterly operating income fell 97.3% and the company reported a quarterly net loss versus net income in the prior-year quarter. Six-month operating income declined 44.5% and attributable net income declined 59.2%.
- HVS revenue declined 18% in the quarter and 11% for six months, primarily because of lower mobility handset volumes associated with BlackBerry. DMS revenue declined 16% in the quarter and 5% for six months, while E&I revenue declined 9% and 7%, respectively.
- Jabil completed the $679.5 million acquisition of Nypro in July 2013. Nypro contributed approximately 8.1% of consolidated quarterly revenue and 7.6% of six-month revenue after acquisition; acquired intangible amortization increased year over year.
- The company recorded $53.2 million of restructuring and related charges in the first six months, versus none in the prior-year period. The 2014 plan addresses the BlackBerry disengagement; the 2013 plan addresses capacity and workforce realignment.
- Stock-based compensation included a $38.4 million reversal in the first quarter because of lower expected vesting of certain restricted awards, contributing to negative stock-based compensation expense for the six-month period.
- On April 1, 2014, after the balance-sheet date, Jabil completed the sale of substantially all of its Aftermarket Services business to iQor. Consideration was described as $675.0 million in cash plus $50.0 million of iQor preferred stock, subject to purchase-price adjustments. The Malaysian operations remained pending regulatory approval, with $20.0 million held in escrow.
Guidance, outlook, risks and unusual items
- Jabil expects approximately $45 million to $85 million of additional 2014 restructuring and related costs under the 2014 plan. The plan is expected to produce annualized net savings of $10 million to $25 million after considering lost BlackBerry revenue.
- The 2013 restructuring plan is expected to involve approximately $179 million of pre-tax costs over fiscal years 2013 through 2015, with approximately $91.2 million recognized through February 28, 2014. Expected annual savings are approximately $65 million after offsets.
- Management expects capital expenditures of approximately $300 million to $350 million during the next 12 months, principally for equipment, information-technology infrastructure, maintenance, and DMS growth.
- Management believes cash, operating cash flow, debt facilities, receivables programs and proceeds from the AMS sale will fund expected capital expenditures, dividends and working-capital needs for the next 12 months. However, several receivables facilities expire or require renewal during 2014 and 2015, and uncommitted programs may not provide funding when requested.
- Receivables programs provided substantial liquidity: approximately $4.2 billion of eligible receivables were sold through asset-backed securitization programs during the six months, with $3.8 billion of cash proceeds. The deferred purchase-price receivable was approximately $420 million at February 28, 2014.
- Principal risks include customer concentration and order volatility, termination or reduction of major customer relationships, component availability and single-source suppliers, international and foreign-currency exposure, restructuring execution, integration of Nypro, acquisition and divestiture liabilities, debt and refinancing risk, and seasonal demand.
- The company faces below-investment-grade ratings from Moody’s and investment-grade ratings from Fitch and Standard & Poor’s, as described in the filing. A downgrade could increase borrowing costs and restrict financing flexibility.
- Jabil disclosed no material adverse effect from ordinary-course litigation and no defaults upon senior securities. Disclosure controls were considered effective; the control assessment excluded Nypro’s internal controls under applicable SEC acquisition guidance.
Important facts for investors to verify
- Whether revenue and margins stabilize after the BlackBerry disengagement and whether the restructuring plans achieve the projected savings without disrupting customer service.
- The final cash proceeds, escrow release, purchase-price adjustments, tax effects and remaining liabilities related to the AMS divestiture.
- Nypro’s ongoing revenue contribution, integration costs, goodwill and intangible-asset valuation, and potential impairment exposure.
- Availability, renewal and pricing of the asset-backed securitization and trade-receivable sale facilities, particularly those expiring in 2014 and 2015.
- Cash conversion, inventory levels, working-capital requirements and the ability to fund planned capital expenditures while maintaining dividends and share repurchases.
- Customer concentration, especially the effects of demand changes at major customers and across mobility, consumer, enterprise and infrastructure markets.
- Debt maturities, variable-rate exposure, covenant compliance and the potential impact of credit-rating changes.