Jabil Circuit, Inc. — Fiscal 2015 First Quarter Form 10-Q
Business context and reporting period
Jabil provides global electronics design, manufacturing and product-management services across the Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments. The filing covers the three months ended November 30, 2014, compared with the three months ended November 30, 2013. Operations spanned 24 countries, and 88.3% of revenue was generated internationally.
Beginning September 1, 2014, Jabil changed its reportable segments from DMS, Enterprise & Infrastructure and High Velocity Systems to EMS and DMS; prior-period segment information was restated. The Aftermarket Services business was classified as discontinued operations following its sale to iQor, with the Malaysian operations sold on December 31, 2014.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net revenue | $4.550 billion | $4.343 billion | 4.8% increase |
| Gross profit | $383.0 million | $334.3 million | 14.6% increase |
| Gross margin | 8.4% | 7.7% | 70 basis-point increase |
| Operating income | $144.8 million | $155.4 million | 6.9% decrease |
| Operating margin | 3.2% | 3.6% | 40 basis-point decrease |
| Income from continuing operations | $73.1 million | $102.0 million | 28.3% decrease |
| Net income attributable to Jabil | $72.2 million | $117.9 million | 38.8% decrease |
| Diluted EPS | $0.37 | $0.57 | Decrease of $0.20 |
| Core operating income | $180.6 million | $160.1 million | 12.8% increase |
| Core diluted EPS | $0.55 | $0.43 | Increase of $0.12 |
DMS revenue increased 21.4% to $1.917 billion, primarily from stronger mobility demand. EMS revenue declined 4.7% to $2.634 billion, principally because of reduced handset sales following the disengagement from BlackBerry. The five largest customers represented approximately 51% of revenue, and 71 customers represented approximately 90%.
SG&A increased to $214.4 million from $142.5 million. The prior-year period benefited from a $38.4 million reversal of stock-based compensation expense, while the current period included $18.0 million of stock-based compensation expense and higher headcount-related costs. Restructuring charges were $12.3 million versus $21.0 million, and interest expense declined to $31.8 million from $33.3 million.
The effective tax rate increased to 35.2% from 16.2%, primarily because the prior-year period included favorable effects from a stock-compensation reversal and a partial U.S. deferred-tax valuation allowance release. Discontinued operations contributed a net loss of $0.8 million in Q1 FY2015, including a $1.6 million loss on sale, versus $16.1 million of income in the prior-year period.
Cash flow, liquidity and debt
- Operating cash flow was $189.1 million, compared with $117.7 million in the prior-year quarter.
- Capital expenditures were $197.7 million, resulting in $190.3 million of net investing cash outflow.
- Financing cash outflow was $66.7 million, including $40.0 million for repurchases of 2.0 million shares and $16.6 million of dividends.
- Cash and cash equivalents were $921.5 million at November 30, 2014, down from $1.000 billion at August 31, 2014. Approximately $709.5 million of foreign-subsidiary cash could not be repatriated without potential tax consequences.
- Total notes payable, long-term debt and capital lease obligations were $1.678 billion, including senior notes due 2016, 2018, 2020 and 2022. Current debt maturities were $11.5 million.
- Jabil stated that it was in compliance with covenants under its credit facility and receivables programs. The company had up to $1.5 billion of borrowing capacity under its amended and restated credit facility, subject to applicable conditions.
- Receivables programs supplied substantial working-capital liquidity: approximately $1.9 billion of eligible receivables were sold during the quarter under asset-backed securitization programs, generating $1.4 billion of cash proceeds; approximately $0.6 billion was sold under other receivables programs.
Material changes versus the prior comparable period
- Revenue growth and improved productivity increased gross profit and gross margin, led by DMS and mobility-related demand.
- Reported operating income and GAAP earnings declined because of higher SG&A, the absence of the prior-year stock-compensation reversal, a higher tax rate and the loss of discontinued-operations income.
- Core operating income and core earnings increased because the company excludes restructuring, stock compensation, amortization and discontinued-operations effects from those non-GAAP measures.
- EMS revenue mix declined from approximately 64% to 58% of revenue, while DMS increased from approximately 36% to 42%.
- Accounts receivable increased to $1.585 billion from $1.209 billion and inventories increased to $2.099 billion from $2.008 billion at August 31, 2014, reflecting higher sales levels and support for expected fiscal 2015 activity.
- Accumulated other comprehensive income declined to $49.7 million from $87.0 million, primarily due to a $34.7 million after-tax foreign-currency translation loss.
Guidance, outlook, commentary and unusual items
Management expected capital expenditures of approximately $650 million to $750 million during the following 12 months, principally for Asian expansion, infrastructure and DMS investments in mobility, healthcare, packaging, lifestyles and wearables. Management believed available cash, operating cash flow, borrowing capacity and receivables programs would fund expected capital expenditures, dividends, potential acquisitions and working-capital requirements for the next 12 months.
The 2013 restructuring plan had recognized $129.4 million of charges through November 30, 2014, against an expected total of approximately $179.0 million. Remaining cash expenditures, excluding asset write-offs, were estimated at $131 million to $151 million, and annualized cost savings were expected to be approximately $65 million after offsets. Approximately $34.3 million of related accrued liabilities were expected to be paid over the next 12 months. The completed 2014 restructuring plan was not expected to generate additional charges.
Jabil expected regular quarterly dividends to continue at an amount similar to past declarations, but future dividends remained discretionary. The $100 million share-repurchase authorization was exhausted during the quarter.
Key risks include customer concentration, short-term and volatile customer commitments, seasonal DMS demand, component availability and single-source suppliers, international and foreign-exchange exposure, receivables-program renewal or funding risk, restructuring execution, product-quality and regulatory liabilities, cybersecurity and information-system disruptions, tax-rate changes, credit-rating downgrades and the company’s substantial capital-expenditure program. The company reported no material adverse effect from ordinary-course litigation and no significant subsequent events through the filing date.
The company adopted no immediate revenue-recognition change; the new FASB revenue standard was expected to become effective for Jabil in fiscal 2018, with the transition method and financial impact still under evaluation.
Important facts for investors to verify
- Whether DMS growth, particularly mobility demand, offsets continued EMS pressure and customer disengagement effects.
- The sustainability of the gross-margin improvement after seasonal holiday demand and as restructuring costs and savings develop.
- The reconciliation of GAAP earnings to core earnings, especially the effects of stock compensation, restructuring, tax items and discontinued operations.
- Capital-expenditure execution, inventory growth and operating-cash-flow conversion as the planned $650 million to $750 million investment program proceeds.
- Renewal and availability of the foreign asset-backed securitization program and other uncommitted receivables facilities expiring during 2015.
- Customer concentration and exposure to order reductions, product transitions, pricing pressure and customer credit deterioration.
- Remaining restructuring charges, cash payments and whether the projected approximately $65 million of annualized savings are realized.
- Tax incentives, foreign cash repatriation constraints, currency movements and the company’s below-investment-grade Moody’s rating.