Business Context and Reporting Period
Jabil Circuit, Inc. is a global electronic manufacturing services provider serving aerospace, automotive, computing, consumer, defense, industrial, medical, networking, telecommunications and other industries. Operations are organized into Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS). The filing covers the fiscal year ended August 31, 2011; fourth-quarter data are also provided for the three months ended August 31, 2011.
- Approximately 121,000 employees and operations in 25 countries.
- 86.0% of fiscal 2011 net revenue was generated internationally.
- Five largest customers represented approximately 47% of net revenue; 52 customers represented approximately 90%.
- Backlog was approximately $4.3 billion at August 31, 2011, versus $3.9 billion a year earlier, although customers may cancel or reschedule orders.
Financial Results and Key Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net revenue | $16.519 billion | $13.409 billion | +23.2% |
| Gross profit | $1.255 billion | $1.004 billion | +24.9% |
| Gross margin | 7.6% | 7.5% | +0.1 percentage point |
| Operating income | $578.7 million | $327.6 million | +76.7% |
| Operating margin | 3.5% | 2.4% | +1.1 percentage points |
| Net income attributable to Jabil | $381.1 million | $168.8 million | +125.7% |
| Net margin | 2.3% | 1.3% | +1.0 percentage point |
| Diluted EPS | $1.73 | $0.78 | +121.8% |
| Operating cash flow | $828.0 million | $427.4 million | +93.7% |
Fiscal 2011 revenue growth was attributed primarily to higher activity from existing customers and new program wins. DMS revenue increased to 36% of total revenue from 32%, while HVS declined to 32% from 36%; E&I remained at 32%. Segment income increased to $715.2 million from $490.9 million, and management’s non-GAAP core earnings increased to $516.3 million from $330.4 million.
Fourth-quarter fiscal 2011 revenue was $4.280 billion, gross profit was $329.2 million, operating income was $165.6 million, net income attributable to Jabil was $114.3 million, and diluted EPS was $0.52. Fourth-quarter gross margin was 7.7% and operating margin was 3.9%.
- Cash and cash equivalents: $888.6 million at August 31, 2011, compared with $744.3 million a year earlier.
- Working capital: $1.245 billion, compared with $1.049 billion.
- Total assets: $7.058 billion; stockholders’ equity attributable to Jabil: $1.867 billion.
- Capital expenditures: $459.0 million, primarily for equipment, new process technology and information technology infrastructure.
- Net cash used in investing activities: $426.3 million; net cash used in financing activities: $267.7 million.
- Inventory was $2.227 billion, and days in inventory were 51 at year-end. The fourth-quarter annualized inventory turns were seven.
Debt, Liquidity and Capital Allocation
- Total notes payable and long-term debt was $1.187 billion, including $400.0 million of 5.625% senior notes due 2020, approximately $397.5 million of 8.250% senior notes due 2018, and approximately $303.5 million of 7.750% senior notes due 2016.
- Current maturities were $74.2 million. The company had $1.0 billion of available liquidity under revolving credit facilities and up to $353.6 million under receivables securitization and uncommitted receivables-sale programs.
- The company was in compliance with applicable credit-facility and securitization covenants at year-end.
- Fiscal 2011 financing cash use included $200.2 million for share repurchases and $60.4 million for dividends.
- Jabil repurchased 11.5 million shares for approximately $200.2 million in the fourth quarter. Quarterly dividends remained $0.07 per share, or $0.28 annually.
Material Changes Versus the Prior Comparable Period
- Revenue increased 23.2%, driven by customer growth and program wins, while improved capacity utilization, cost control and a higher-margin DMS mix lifted gross and operating margins.
- SG&A was essentially flat in dollars but declined to 3.6% of revenue from 4.4%; R&D declined to $25.0 million from $28.1 million.
- Interest expense increased to $97.7 million from $79.2 million, principally because of the 5.625% senior notes issued in the first quarter and refinancing of the credit facility.
- The effective tax rate declined to 20.4% from 30.9%, reflecting earnings mix, foreign tax incentives and other jurisdictional factors.
- Operating cash flow nearly doubled, although inventory increased $133.2 million to support higher revenue and new program ramps.
- Fiscal 2011 included $13.6 million of settlement-of-receivables and related charges and $23.9 million of losses on disposal of subsidiaries, mainly associated with the reacquisition and restructuring of former French and Italian operations.
- Jabil completed the acquisition of F-I Holding Company and its Competence Sites for approximately $0.5 million in cash plus conditional releases, assuming assets of $131.4 million and liabilities of $108.6 million. The acquired operations added approximately 1,500 employees and generated approximately 1% of fiscal 2011 revenue after acquisition.
- The company adopted new financial-asset transfer guidance, resulting in changes to the accounting and presentation of receivables securitization programs.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2012 capital expenditures of $300 million to $400 million for new business, DMS process technology, maintenance, information technology and a new greenfield facility.
- Management believed available cash, operating cash flow, revolving facilities and receivables programs would fund expected capital expenditures, dividends, working capital and the planned Telmar Network Technology acquisition for the next 12 months.
- Jabil announced an agreement to acquire Telmar Network Technology, a reverse-logistics and repair-services provider; closing was subject to regulatory clearance and customary conditions and was expected in the first half of fiscal 2012.
- Key risks include customer concentration, short-term and cancellable production commitments, component shortages and pricing increases, volatile end-market demand, international operating and currency risks, competitive pricing pressure, acquisitions and restructuring execution, product liability and intellectual-property claims, environmental compliance, and natural disasters.
- Receivables-sale and securitization programs are important liquidity sources. The $200 million foreign asset-backed program was scheduled to expire in May 2012, while uncommitted programs could be cancelled with 30 days’ notice and may not be available when needed.
- The IRS had proposed approximately $69.3 million of additional tax for fiscal years 2003–2005, before subsequent tax attributes, plus potential interest and penalties. Jabil disputed the proposed adjustments; management stated that an unfavorable outcome, particularly if extended to later years, could materially affect results.
- Credit ratings were below investment grade at Moody’s and Standard & Poor’s, and a downgrade could increase borrowing costs and reduce financing flexibility.
- Management and Ernst & Young issued unqualified opinions on internal control over financial reporting, but the assessment excluded the recently acquired Competence Sites, representing approximately 2% of total assets and 1% of fiscal 2011 revenue.
Important Facts for Investors to Verify
- Whether revenue growth and margin improvement persist after the fiscal 2011 recovery and new-program ramps.
- Customer concentration, especially Cisco and Research in Motion, each representing 13% and 15% of fiscal 2011 revenue, respectively.
- Inventory levels, receivables-sale accounting, deferred purchase price receivables and the sustainability of reported operating cash flow.
- Availability and renewal terms of securitization and uncommitted receivables-sale programs.
- Debt maturities, interest-rate exposure, credit ratings and compliance with leverage and interest-coverage covenants.
- Execution and profitability of the Telmar acquisition, the Competence Sites integration and any future restructuring.
- Resolution of the IRS tax dispute and the potential expiration or loss of foreign tax incentives.
- Exposure to component shortages, currency movements, international labor and regulatory issues, product claims and environmental liabilities.