JABIL INC quarterly report, Q1 FY2019

Business Context and Reporting Period

Jabil Inc. is a global provider of electronics manufacturing, design, production and product-management services operating through Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The unaudited Form 10-Q covers the three months ended November 30, 2018, the first quarter of fiscal 2019, compared with the three months ended November 30, 2017.

Jabil operated in 29 countries, and 92.7% of revenue was generated from foreign sources. EMS represented 54% of revenue and DMS represented 46%.

Key Financial Metrics

Metric	Q1 FY2019	Q1 FY2018	Change
Net revenue	$6.506 billion	$5.586 billion	16.5% increase
Gross profit	$519.7 million	$469.3 million	10.7% increase
Gross margin	8.0%	8.4%	Down 40 basis points
Operating income	$216.7 million	$145.8 million	48.7% increase
Operating margin	3.3%	2.6%	Improved
Net income attributable to Jabil	$123.6 million	$63.8 million	93.7% increase
Diluted EPS	$0.76	$0.35	117.1% increase
Effective tax rate	24.8%	40.5%	Down 15.7 percentage points

Core operating income increased to $253.7 million from $227.2 million, while non-GAAP core diluted EPS increased to $0.90 from $0.80. Core measures exclude items including amortization, stock-based compensation, restructuring, acquisition and integration charges, and Hurricane Maria-related business interruption and impairment items.

Segment Performance

EMS revenue: $3.503 billion, up 22%, driven primarily by networking and telecommunications, industrial and energy, computing and storage, and printing.
DMS revenue: $3.003 billion, up 10%, supported by mobility and healthcare customers.
Segment income: EMS declined to $84.1 million from $85.7 million, while DMS increased to $169.6 million from $141.5 million.

Cash Flow, Liquidity and Debt

Operating cash flow was a use of $91.7 million, compared with a use of $649.6 million in the prior-year quarter. The current-period use primarily reflected increases in contract assets and accounts receivable, partially offset by higher accounts payable, accrued expenses and lower inventories.
Capital expenditures were $231.5 million, compared with $218.6 million in the prior-year quarter. Management expected fiscal 2019 net capital expenditures of approximately $800 million.
Cash and cash equivalents were $804.4 million at November 30, 2018, down from $1.258 billion at August 31, 2018.
Total notes payable and long-term debt were $2.513 billion, including $25.2 million of current installments. The company had $2.3 billion of available unused revolving-credit capacity.
Jabil reported compliance with its debt and receivables-securitization covenants.
Asset-backed securitization programs provided up to $83.4 million of available liquidity, and trade-receivable sale programs provided up to $322.1 million.
Jabil repurchased $204.6 million of common stock, or approximately 7.9 million shares, during the quarter and had $145.5 million remaining under its $350 million authorization. It declared a quarterly dividend of $0.08 per share.

Material Changes Versus the Prior Comparable Period

Revenue grew 16.5%, with stronger performance in both reporting segments, particularly EMS.
Operating income and net income increased substantially despite lower gross margin. Gross-margin pressure reflected higher costs in capital equipment and ramp costs for new EMS business.
SG&A declined by $15.0 million, primarily because the prior-year quarter included $32.4 million of additional stock-based compensation related to modified performance awards and a one-time cash-settled award. Current-period SG&A included $8.9 million of acquisition and integration charges.
Restructuring charges declined to $6.0 million from $11.4 million. The 2017 Restructuring Plan had incurred $188.4 million cumulatively by November 30, 2018, against an expected total of approximately $195 million.
Interest expense increased to $42.7 million from $36.2 million because of additional borrowings and higher interest rates.
The effective tax rate benefited from a $13.3 million income-tax benefit related primarily to adjustments to the Tax Act transition-tax estimate.
Cash flow presentation and balance-sheet classifications were affected by adoption of new accounting standards, including ASC Topic 606 revenue recognition. The adoption created $761.4 million of contract assets and $709.3 million of contract liabilities at November 30, 2018, and increased retained earnings by $42.6 million at September 1, 2018.
Under ASC Topic 606, revenue for the majority of manufacturing contracts is recognized over time. Reported Q1 FY2019 revenue was $6.506 billion versus $6.244 billion on a basis excluding adoption effects; reported net income was $124.1 million versus $88.6 million on that basis.

Guidance, Outlook, Risks and Unusual Items

Management stated that available cash, borrowing capacity, receivables-sale programs, operating cash flow and capital-market access should be adequate for the next 12 months, including capital expenditures, dividends, repurchases, potential acquisitions and working-capital needs.
The restructuring plan is expected to produce approximately $90 million of annualized cost savings beginning in fiscal 2019. Remaining restructuring costs were expected through the first half of fiscal 2019.
On December 12, 2018, after the quarter-end, Jabil’s binding offer to form a strategic collaboration with Johnson & Johnson Medical Devices Companies was accepted. The transaction remained subject to regulatory clearance and customary closing conditions, with completion expected during fiscal 2019 and 2020.
Results may be seasonal because consumer-related DMS production can be stronger in the first fiscal quarter. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Customer concentration is material: the five largest customers represented approximately 48% of revenue, and 75 customers represented approximately 90%.
Jabil relies on certain single-source components and faces risks from customer demand volatility, international operations, foreign-currency movements, competition, supplier or customer financial distress, technological change and acquisition execution.
Jabil recorded a net $2.9 million benefit from Hurricane Maria-related business interruption and impairment items in the quarter, compared with a $7.4 million net charge in the prior-year quarter, after insurance proceeds.
The IRS has proposed additional tax payments of approximately $28.6 million for fiscal years 2009–2011 and $5.3 million for fiscal years 2012–2014, excluding potential interest and penalties. Jabil disputes the proposed assessments and believes resolution will not materially affect its financial position, results or cash flows, although no assurance is provided.
Forward foreign-exchange hedge notional amounts were $451.3 million for designated hedges and $3.8 billion for other transactional hedges at November 30, 2018. The company also had interest-rate swaps covering portions of its variable-rate debt.

Most Important Facts to Verify

Whether revenue growth and margin performance continue after isolating the timing effects of ASC Topic 606 adoption.
Progress toward the approximately $90 million of annualized restructuring savings and the remaining restructuring cash costs.
Working-capital conversion, particularly contract assets, accounts receivable, inventory levels and reliance on receivables-sale programs.
Execution of the approximately $800 million fiscal 2019 capital-expenditure plan and its effect on free cash flow.
Debt maturities, interest-rate exposure, covenant compliance and continued availability of revolving-credit and securitization facilities.
Customer concentration, demand trends in mobility, networking and telecommunications, and exposure to single-source components.
Regulatory approval, timing, funding and expected returns from the Johnson & Johnson medical-device collaboration.
Final resolution of the IRS examinations and any further changes to the Tax Act-related tax estimates.