JABIL INC quarterly report, Q2 FY2019

Jabil Inc. 10-Q Summary

Business Context and Reporting Period

Jabil provides global electronics design, production and product-management services through two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The filing covers the three and six months ended February 28, 2019, Jabil’s fiscal second quarter and first half of fiscal 2019. Operations were conducted in 29 countries, with 88.2% of quarterly revenue and 90.6% of year-to-date revenue generated from foreign sources.

Key Financial Metrics

Metric	Three Months Ended Feb. 28, 2019	Prior Year	Six Months Ended Feb. 28, 2019	Prior Year
Net revenue	$6.067 billion	$5.301 billion	$12.573 billion	$10.887 billion
Gross profit	$454.9 million	$397.1 million	$974.5 million	$866.4 million
Gross margin	7.5%	7.5%	7.8%	8.0%
Operating income	$154.0 million	$129.5 million	$370.7 million	$275.3 million
Net income attributable to Jabil	$67.4 million	$37.3 million	$191.0 million	$101.1 million
Diluted EPS	$0.43	$0.21	$1.19	$0.57

Quarterly operating margin was approximately 2.5%, compared with 2.4% in the prior-year quarter. Six-month operating margin was approximately 2.9%, compared with 2.5% in the prior-year period. Quarterly net margin attributable to Jabil was approximately 1.1%; six-month net margin was approximately 1.5%.

Quarterly revenue increased 14.4%; six-month revenue increased 15.5%.
EMS revenue rose 33% in the quarter and 27% year to date, driven primarily by cloud, networking and telecommunications, industrial and energy, and print and retail customers.
DMS revenue declined 7% in the quarter, primarily because of weaker mobility demand, but increased 2% year to date.
Quarterly segment income was $191.1 million versus $178.6 million; six-month segment income was $444.7 million versus $405.8 million.
Core diluted EPS was $0.64 for the quarter and $1.54 year to date, compared with $0.66 and $1.46, respectively, in the prior-year periods.

Cash Flow, Liquidity and Capital Structure

Six-month operating cash flow was $107.8 million, compared with cash used of $864.0 million in the prior-year period.
Investing cash flow was negative $389.6 million, including $537.1 million of capital expenditures and $80.8 million for the initial Johnson & Johnson Medical Devices Companies asset acquisition.
Financing cash flow was negative $239.1 million, including $350.3 million of share repurchases and $27.4 million of dividends.
Cash and cash equivalents declined to $749.1 million from $1.258 billion at August 31, 2018.
Total debt was $2.658 billion, including $175.2 million classified as current. Jabil had approximately $2.2 billion of unused revolving-credit capacity and remained compliant with debt covenants.
Asset-backed securitization programs provided up to $60.2 million of available liquidity, while trade-receivable sale programs provided up to $527.2 million.
Accounts receivable were $2.544 billion, contract assets were $832.9 million, and inventory was $3.248 billion at February 28, 2019.
Management stated that available liquidity sources were adequate for expected capital expenditures, dividends, repurchases, acquisitions and working-capital needs for the next 12 months.

Material Changes Versus the Prior Comparable Period

Revenue and GAAP earnings increased substantially, aided by EMS growth, lower tax expense and a reduction in certain prior-year unusual charges.
The effective tax rate declined to 33.0% from 56.5% for the quarter and to 27.9% from 47.6% for the six months. The prior-year period included significant Tax Cuts and Jobs Act charges; the current six-month period included a $13.3 million Tax Act benefit recorded in the first quarter.
Interest expense increased by $8.4 million in the quarter and $14.8 million year to date because of additional borrowings and higher interest rates.
Restructuring charges decreased to $0.8 million in the quarter and $6.8 million year to date, compared with $5.4 million and $16.8 million, respectively.
Acquisition and integration charges related to the Johnson & Johnson collaboration totaled $12.8 million in the quarter and $21.7 million year to date.
Jabil adopted the new revenue-recognition standard on September 1, 2018. The adoption produced a $42.6 million after-tax cumulative-effect increase to retained earnings and created $832.9 million of contract assets at quarter end. Management states that the new model caused earlier revenue recognition for most over-time contracts.
The company repurchased 13.9 million shares for $350.0 million, using the full authorization under the 2018 share-repurchase program. Shares outstanding declined to 152.9 million from 164.6 million at August 31, 2018.
Jabil completed the initial $80.8 million acquisition of certain Johnson & Johnson Medical Devices Companies assets on February 25, 2019. Two additional closings are expected in the second half of fiscal 2019 and fiscal 2020, subject to customary conditions.

Guidance, Outlook, Commentary and Risks

Management expected fiscal 2019 net capital expenditures of approximately $800 million, supporting new markets and ongoing EMS and DMS investments.
The 2017 restructuring plan was expected to require approximately $195 million of total costs; $187.1 million had been incurred by February 28, 2019. Upon completion, management expects approximately $90 million of annualized cost savings beginning in fiscal 2019.
Management expected mobility demand to remain weak for the balance of fiscal 2019 and expected capital-equipment revenue weakness to recover in fiscal 2020.
Management expects to continue regular quarterly dividends at amounts similar to past declarations, but future dividends remain discretionary.
Key risks include customer concentration, variable customer demand, dependence on certain suppliers and single-source components, international operations and foreign-exchange exposure, financially troubled customers or suppliers, competitive and technology pressures, acquisition execution, leverage and interest-rate exposure.
The five largest customers represented approximately 46% of six-month revenue. Jabil’s use of receivable-sale and securitization programs creates reliance on financing availability and compliance with related covenants.
The IRS has proposed approximately $33.9 million of additional tax payments for fiscal years 2009-2014, excluding potential interest and penalties. Jabil disputes the proposed adjustments and believes the matter will not have a material adverse effect, although resolution remains uncertain.
Ordinary-course lawsuits were not expected by management to have a material adverse effect. The filing states that disclosure controls were effective and that no material changes to internal control over financial reporting were identified.

Investor Verification Priorities

Verify whether EMS growth, DMS mobility weakness and capital-equipment recovery develop as management described.
Assess the cash-conversion impact of contract assets, receivables, inventory and continued receivable sales.
Monitor debt levels, interest expense, covenant compliance and the availability of revolving and receivable-based liquidity.
Evaluate the completion, valuation, integration and profitability of the Johnson & Johnson medical-device asset transaction and subsequent closings.
Reconcile GAAP results with core results, particularly acquisition charges, restructuring costs, stock compensation and tax-related items.
Track the remaining restructuring costs and whether the projected $90 million annualized savings are realized.
Review customer concentration, supplier dependencies, foreign-exchange exposures and the unresolved IRS tax matters.