Jabil Inc. Fiscal 2018 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Jabil provides global electronics manufacturing, design, supply-chain 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, 2018, with comparisons to February 28, 2017. Jabil operated in 29 countries, and foreign-source revenue represented 91.9% of quarterly revenue and 92.1% of year-to-date revenue.
Key Financial Metrics
| Metric | Q2 FY2018 | Q2 FY2017 | Six Months FY2018 | Six Months FY2017 |
|---|---|---|---|---|
| Net revenue | $5.301 billion | $4.446 billion | $10.887 billion | $9.551 billion |
| Gross profit | $397.1 million | $361.9 million | $866.4 million | $793.4 million |
| Gross margin | 7.5% | 8.1% | 8.0% | 8.3% |
| Operating income | $129.5 million | $83.2 million | $275.3 million | $248.8 million |
| Net income attributable to Jabil | $37.3 million | $20.7 million | $101.1 million | $108.7 million |
| Diluted EPS | $0.21 | $0.11 | $0.57 | $0.58 |
| Core diluted EPS, non-GAAP | $0.66 | $0.48 | $1.46 | $1.17 |
Quarterly revenue increased 19.2%, while six-month revenue increased 14.0%. Quarterly operating income increased 55.7%; six-month operating income increased 10.6%. GAAP net income attributable to Jabil increased 80.5% in the quarter but declined 7.0% year to date. Quarterly operating margin was 2.4% versus 1.8% in the prior-year quarter; year-to-date operating margin was 2.5% in both periods.
- DMS revenue increased 38% in the quarter and 24% year to date, driven principally by mobility demand and additional healthcare business.
- EMS revenue increased 7% in the quarter and 6% year to date.
- Segment income increased to $178.6 million in the quarter from $152.2 million and to $405.8 million year to date from $361.7 million.
- Quarterly results included a $14.7 million distressed-customer charge, $4.0 million of Puerto Rico hurricane-related business interruption and impairment charges, and $5.4 million of restructuring charges.
Cash Flow, Liquidity and Capital Structure
| Metric | Six Months FY2018 | Six Months FY2017 |
|---|---|---|
| Cash flow from operations | $298.2 million | $346.2 million |
| Capital expenditures | $544.4 million | $320.7 million |
| Net cash used in investing | $406.3 million | $308.3 million |
| Net cash used in financing | $140.9 million | $201.4 million |
| Ending cash and equivalents | $940.8 million | $755.1 million |
Cash declined $249.1 million during the first six months, primarily because capital expenditures and working-capital investment exceeded operating cash flow. Inventories rose to $3.388 billion from $2.942 billion at August 31, 2017, supporting anticipated third-quarter sales and increased demand. Accounts receivable rose to $1.550 billion.
Total notes payable, long-term debt and capital lease obligations were $2.209 billion at February 28, 2018, compared with $2.078 billion at August 31, 2017. Jabil issued $500 million of 3.950% senior notes due 2028 and redeemed $400 million of 8.250% senior notes due 2018. The company reported $2.2 billion of unused revolving-credit capacity, up to $26.1 million of available liquidity under asset-backed securitization programs and up to $256.5 million under trade-receivable sale programs. Jabil was in compliance with its debt and securitization covenants.
Fiscal 2018 net capital expenditures were expected to be approximately $700 million. Management stated that cash, operating cash flow, borrowing capacity, receivable programs and capital-market access should fund the next 12 months of capital expenditures, dividends, repurchases, acquisitions and working-capital needs.
Material Changes, Outlook and Unusual Items
- The 2017 Restructuring Plan had incurred $168.6 million of an expected approximately $195.0 million of total costs by February 28, 2018. Remaining costs were expected during the rest of fiscal 2018, with anticipated annualized savings of $70 million to $90 million beginning in fiscal 2019.
- The Tax Cuts and Jobs Act resulted in a provisional $30.9 million tax expense, primarily from mandatory deemed repatriation tax and remeasurement of U.S. deferred tax attributes. Jabil had not completed its accounting for the Tax Act, and the final impact could differ materially from the provisional estimate.
- Hurricane Maria damaged the Cayey, Puerto Rico operations. Six-month charges were $11.4 million net of $16.4 million of insurance proceeds; additional third-quarter costs were possible, although management expected most costs ultimately to be covered by insurance.
- Jabil acquired True-Tech Corporation on September 1, 2017 for approximately $95.9 million in cash, adding aerospace, semiconductor and medical machined-component capabilities.
- Management expected to continue quarterly dividends at an amount similar to historical declarations, subject to board approval. The $450 million share-repurchase authorization had $225 million remaining at February 28, 2018.
- Jabil expected to adopt the new revenue-recognition standard in fiscal 2019 using the modified-retrospective method. The filing states that the financial impact could not yet be reasonably estimated.
Principal Risks and Contingencies
- Revenue concentration is significant: the five largest customers represented approximately 51% of first-half revenue, and 74 customers represented approximately 90%.
- Almost all manufactured products require one or more components available from a single source.
- Jabil is exposed to foreign-currency, interest-rate, international-operating, customer-demand and seasonal risks; derivatives are used to manage portions of these exposures.
- The company is subject to IRS disputes involving fiscal years 2009–2014. Potential assessed tax payments described in the filing total approximately $33.9 million before possible interest and penalties, and future audits could raise similar issues. Management believed the ultimate resolution would not have a material adverse effect, but no assurance was provided.
- Ordinary-course lawsuits were not expected to have a material adverse effect, according to management.
Investor Verification Checklist
- Verify the sustainability of DMS and mobility-driven growth and the effect of customer concentration on future revenue.
- Reconcile GAAP earnings with core earnings, particularly the distressed-customer, restructuring, hurricane, stock-compensation and Tax Act adjustments.
- Monitor inventory growth, working-capital conversion and operating cash flow relative to planned capital expenditures.
- Confirm completion costs and timing of the 2017 Restructuring Plan and whether the projected $70 million to $90 million savings materialize in fiscal 2019.
- Track the final Tax Act accounting, potential withholding-tax effects from changes in the indefinite-reinvestment assertion and the IRS examinations.
- Confirm renewal or replacement of the foreign asset-backed securitization program expiring May 7, 2018 and the availability of receivables-based liquidity.