Jabil Circuit, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
Jabil Circuit, Inc. provides global electronics manufacturing, design, engineering, supply-chain and product-management services across automotive, computing, telecommunications, mobility, healthcare, industrial, defense, consumer and other industries. The company reports two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS).
The filing covers the fiscal year ended August 31, 2016. The filing also reports fourth-quarter results for the three months ended August 31, 2016. Operations spanned 28 countries, with approximately 138,000 employees and 39.9 million square feet of facilities.
Key financial metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net revenue | $18.353 billion | $17.899 billion | Up 2.5% |
| Gross profit | $1.528 billion | $1.503 billion | Up 1.6% |
| Gross margin | 8.3% | 8.4% | Down 0.1 percentage point |
| Operating income | $522.8 million | $555.4 million | Down 5.9% |
| Operating margin | 2.8% | 3.1% | Down 0.3 percentage point |
| Net income attributable to Jabil | $254.1 million | $284.0 million | Down 10.5% |
| Diluted EPS | $1.32 | $1.45 | Down 9.0% |
| Operating cash flow | $916.2 million | $1.241 billion | Down $324.3 million |
| Capital expenditures | $924.2 million | $963.1 million | Down 4.0% |
EMS generated $11.029 billion of revenue, or approximately 60% of total revenue; DMS generated $7.324 billion, or approximately 40%. Segment income was $373.7 million for EMS and $256.6 million for DMS. Core operating income, a non-U.S. GAAP measure, was $630.3 million versus $670.0 million in fiscal 2015; core earnings were $359.1 million versus $406.2 million.
At August 31, 2016, cash and cash equivalents were $912.1 million, working capital was $280.3 million, total assets were $10.323 billion and total equity was $2.457 billion. Inventory was $2.457 billion, and days in inventory increased to 54 from 52 at the prior quarter-end and 52 at August 31, 2015.
Total debt, including current maturities and capital lease obligations, was $2.120 billion, compared with $1.659 billion at August 31, 2015. Jabil had approximately $1.9 billion of available liquidity under revolving credit facilities and up to $289.9 million under trade receivable securitization and uncommitted sale programs. The company was in compliance with applicable debt and securitization covenants.
Fourth-quarter fiscal 2016 results
| Metric | Q4 FY2016 | Q4 FY2015 |
|---|---|---|
| Net revenue | $4.431 billion | $4.681 billion |
| Gross profit | $323.6 million | $376.6 million |
| Operating income | $93.8 million | $150.4 million |
| Net income attributable to Jabil | $38.1 million | $87.7 million |
| Diluted EPS | $0.20 | $0.45 |
Material changes versus the prior comparable period
- Revenue increased primarily from stronger mobility demand in the first half of fiscal 2016 and new telecommunications business. DMS revenue increased 3% and EMS revenue increased 2%.
- Lower-than-anticipated DMS product demand, particularly in mobility, affected the second, third and fourth quarters and contributed to lower operating income and earnings.
- Gross profit was broadly stable in dollars, but gross margin declined slightly. Higher SG&A, amortization and interest expense pressured operating and net margins.
- SG&A increased to $924.4 million from $862.6 million, primarily because of higher salaries, related expenses and headcount. Amortization increased to $37.1 million from $24.4 million following acquisitions.
- Restructuring charges declined to $11.4 million from $33.1 million. The 2013 restructuring plan had generated approximately $161.9 million of cumulative charges by year-end, with approximately $17.5 million of accrued liabilities expected to be paid within twelve months.
- Jabil completed three fiscal 2016 acquisitions, including Hanson, Inala Technologies and the Shemer companies, for aggregate cash consideration described in the filing as approximately $211.5 million, excluding assumed liabilities and subsequent Hanson real-estate consideration.
- Fiscal 2016 operating cash flow declined because of lower earnings and working-capital timing, including a $194.3 million increase in prepaid expenses and other current assets and an $86.1 million decrease in accounts payable, accrued expenses and other liabilities.
- The company issued $300 million of 4.9% senior unsecured notes due 2023 and used the proceeds to repay $312 million of 7.75% senior notes due July 2016. It also borrowed $500 million under the Term Loan Facility.
- Jabil repurchased 7.7 million shares for $148.3 million during fiscal 2016 and paid $62.4 million of dividends. In the fourth quarter, it repurchased approximately 4.9 million shares for $93.7 million.
Guidance, outlook, commentary, risks and unusual items
- Management expected fiscal 2017 capital expenditures of approximately $500 million to $600 million, principally for ongoing EMS and DMS business. Management believed available cash, borrowing capacity, receivable programs and operating cash flow would fund expected capital expenditures, dividends, acquisitions and working capital for the next twelve months.
- Management expected quarterly dividends to continue at an amount similar to past declarations, but dividends remain discretionary and subject to board approval.
- On September 15, 2016, the board approved the 2017 Restructuring Plan. Jabil expected approximately $195 million of pretax restructuring and related costs over fiscal 2017 and 2018, with estimated net cash expenditures of approximately $50 million. Final timing and cost categories remained subject to employee consultations and local requirements.
- Customer concentration is significant: Apple represented 24% of fiscal 2016 revenue, the five largest customers represented approximately 49%, and 85 customers represented approximately 90%. Most customers do not provide firm production schedules beyond one quarter.
- International exposure is substantial, with 90.7% of fiscal 2016 revenue from international operations. Principal risks include currency movements, political and regulatory changes, taxes, labor costs, trade restrictions and disruptions to international logistics.
- Additional risks include reduced customer demand, customer insourcing or termination, pricing pressure, excess or obsolete inventory, single-source components, capacity underutilization, acquisitions, restructuring execution, cybersecurity, product liability, intellectual-property claims, environmental compliance and natural disasters.
- The IRS had proposed adjustments relating primarily to intercompany transactions for fiscal years 2009 through 2011. Jabil estimated potential tax due at approximately $28.6 million before proposed interest and penalties, disagreed with the adjustments and intended to contest them.
- Goodwill and indefinite-lived intangible-asset impairment testing in fiscal 2016 identified no impairment. The filing states that Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether the planned 2017 restructuring achieves the expected cost savings and whether actual charges exceed the approximately $195 million estimate.
- Trends in DMS and mobility demand, quarterly revenue volatility, capacity utilization and gross-margin recovery.
- Customer concentration, especially Apple’s 24% revenue contribution and the durability of major customer programs.
- Debt maturities, interest costs, credit ratings, covenant compliance and the availability or renewal of receivable securitization and sale programs.
- Whether operating cash flow remains sufficient after capital expenditures, acquisitions, dividends and share repurchases.
- Inventory levels, inventory turns, obsolescence reserves and exposure to component shortages or customer cancellations.
- The outcome of the IRS examination and any effects from tax incentives, foreign earnings repatriation or changes in international tax rules.