Jabil Inc. 2019 Form 10-K Summary
Business context and reporting period
Jabil provides global electronics design, manufacturing and product-management services through two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). Operations span approximately 30 countries, with major facilities in Asia, the Americas and Europe. The filing covers the fiscal year ended August 31, 2019; fourth-quarter results refer to the three months ended August 31, 2019.
- Fiscal 2019 revenue mix: EMS 61%; DMS 39%.
- Approximately 87.7% of revenue was foreign-sourced.
- The five largest customers represented approximately 42% of revenue; Apple represented 22%, compared with 28% in fiscal 2018.
Financial performance and key metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $25.282 billion | $22.095 billion | +14.4% |
| Gross profit | $1.913 billion | $1.707 billion | +12.1% |
| Gross margin | 7.6% | 7.7% | Down 0.1 percentage point |
| Operating income | $701.4 million | $542.2 million | +29.4% |
| Operating margin | 2.8% | 2.5% | Improved |
| Net income attributable to Jabil | $287.1 million | $86.3 million | +232.7% |
| Diluted EPS | $1.81 | $0.49 | +269% |
| Operating cash flow | $1.193 billion | $(1.105) billion | Improved by $2.299 billion |
| Capital expenditures | $1.005 billion | $1.037 billion | Down 3.0% |
FY2019 attributable net margin was approximately 1.1%. Core operating income, a non-GAAP measure, was $876.6 million versus $768.1 million in FY2018; core diluted EPS was $2.98 versus $2.62.
Fourth-quarter FY2019 revenue was $6.573 billion, gross profit was $495.1 million, operating income was $189.7 million, net income attributable to Jabil was $52.7 million, and diluted EPS was $0.34. Fourth-quarter revenue increased approximately 13.9% from the comparable FY2018 quarter, while operating income increased approximately 23.3%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.163 billion at August 31, 2019, compared with $1.258 billion a year earlier. A significant portion was held by foreign subsidiaries.
- Working capital was negative $187.0 million, compared with positive $319.1 million in FY2018, primarily reflecting the company’s operating model and changes from revenue recognition and securitization programs.
- Total notes payable and long-term debt was $2.496 billion, including $375.2 million classified as current. Debt declined modestly from $2.519 billion at August 31, 2018.
- The company reported approximately $2.6 billion of unused revolving-credit capacity and had no commercial paper outstanding. It also had up to $27.8 million available under asset-backed securitization programs and up to $1.5 billion under trade-receivables sale programs.
- FY2019 cash uses included $350.3 million for share repurchases and $52.0 million for dividends. In September 2019, the board authorized an additional $600 million repurchase program; $30.8 million had been used through October 14, 2019.
Material changes versus the prior comparable period
- EMS revenue increased 26%, driven principally by cloud, industrial and energy, networking and telecommunications, and print and retail businesses. Computing and storage and capital equipment remained weak.
- DMS revenue was broadly unchanged: healthcare and packaging growth offset lower mobility demand.
- Gross margin was broadly stable as stronger DMS profitability offset EMS pressure from capital-equipment weakness and new-business ramp costs.
- SG&A increased $60.6 million, including higher personnel costs and $44.6 million of additional acquisition and integration charges related to the Johnson & Johnson Medical Devices Companies (JJMD) collaboration.
- Restructuring charges declined to $25.9 million from $36.9 million. The prior 2017 restructuring plan was completed by August 31, 2019.
- Interest expense increased to $188.7 million from $149.0 million because of additional borrowings and higher rates.
- The effective tax rate decreased to 35.8% from 76.6%, largely because FY2018 included a $142.3 million Tax Act expense; FY2019 included Tax Act adjustments and a $17.5 million valuation-allowance benefit.
- Jabil adopted the new revenue standard effective September 1, 2018. Most qualifying manufacturing contracts are now recognized over time, producing a $42.6 million after-tax transition adjustment and materially changing contract assets, contract liabilities and reported working capital.
Guidance, outlook, commentary and unusual items
- Management expected approximately $800 million of net capital expenditures in FY2020, supporting maintenance, new markets and both operating segments.
- On September 20, 2019, the board approved a 2020 restructuring plan focused particularly on the mobility footprint in China. The company expected approximately $85 million of pre-tax charges, primarily in FY2020, with expected cash expenditures of approximately $30 million to $40 million over FY2020 and FY2021. Amounts and timing remained subject to employee consultation and could change.
- Jabil completed initial JJMD asset-acquisition closings in February and April 2019 for approximately $153.2 million in cash. A third closing occurred on September 30, 2019 for $117.1 million, primarily for inventory and employee liabilities. Purchase-price allocations remained subject to adjustment.
- The company reclassified a $72.5 million Nypro trade name from indefinite-lived to finite-lived and will amortize it over four years as part of a healthcare rebranding initiative.
- FY2019 included a $29.6 million loss from restructuring iQor preferred securities, $52.7 million of JJMD acquisition and integration charges, and $6.2 million of distressed-customer charges. The company also recognized a $2.9 million net insurance benefit related to Hurricane Maria business interruption and impairment costs.
- Management stated that available cash, operating cash flow, credit facilities, receivables programs and capital-market access should be adequate for the next 12 months to fund operations, capital expenditures, dividends, repurchases and potential acquisitions.
Principal risks and contingencies
- Customer concentration, limited long-term production commitments, order cancellations and end-market volatility could reduce utilization, revenue and margins.
- Apple and the five largest customers remain significant revenue exposures; customer financial distress could also affect receivables, inventory and securitization programs.
- International operations, particularly in China, expose Jabil to tariffs, trade restrictions, political and regulatory changes, labor availability, currency movements and repatriation constraints.
- Component shortages, single-source suppliers, material-price increases and inventory obsolescence could disrupt production and reduce profitability.
- Variable-rate debt, LIBOR transition risk and credit-rating changes could increase interest expense or restrict financing access.
- Debt, receivables-securitization and credit facilities contain financial and nonfinancial covenants. The company reported compliance with those covenants at August 31, 2019.
- The company is subject to environmental, product-liability, medical-device, intellectual-property, cybersecurity and tax risks. Ordinary-course litigation was not expected to have a material adverse effect.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting, but the FY2019 internal-control assessment excluded JJMD operations, which represented 1.8% of consolidated assets and 1.3% of revenue.
Facts investors should verify
- Whether EMS growth and the recovery of weak computing, storage and capital-equipment demand offset expected mobility-related restructuring and China exposure.
- The final cost, timing and cash impact of the 2020 Restructuring Plan.
- The final purchase-price allocation, operating contribution and integration costs associated with all JJMD closings.
- Cash conversion after the adoption of revenue-recognition rules, including the sustainability of contract assets, receivables sales and operating cash flow.
- Debt maturities, refinancing requirements and the availability of revolving, securitization and receivables-sale liquidity.
- Customer concentration, inventory reserves and exposure to component shortages, tariffs and geopolitical disruption.