Jabil Inc. Form 10-Q Summary
Business Context and Reporting Period
Jabil provides electronics design, production and product-management services through two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). Operations span more than 30 countries, with 84.0% of quarterly revenue and 85.0% of six-month revenue generated from foreign operations.
The filing covers the three and six months ended February 28, 2023, Jabil’s fiscal second quarter of 2023. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Three Months Ended February 28, 2023 | Year-Over-Year Change | Six Months Ended February 28, 2023 | Year-Over-Year Change |
|---|---|---|---|---|
| Net revenue | $8.134 billion | 7.7% | $17.769 billion | 10.2% |
| Gross profit | $661 million | 8.5% | $1.404 billion | 9.3% |
| Gross margin | 8.1% | Flat | 7.9% | Down from 8.0% |
| Operating income | $359 million | 14.7% | $721 million | 8.7% |
| Operating margin | 4.4% | Up from 4.1% | 4.1% | Down from 4.1% marginally |
| Net income attributable to Jabil | $207 million | Down 6.8% | $430 million | Down 7.1% |
| Diluted EPS | $1.52 | Up from $1.51 | $3.14 | Down from $3.15 |
Quarterly net income declined despite higher revenue and operating income, primarily reflecting higher interest expense, other expense and the effective tax rate. The quarterly effective tax rate was 27.6%, compared with 21.7% in the prior-year period; the six-month rate was 26.6%, compared with 22.8%.
- EMS revenue increased 7% for the quarter and 13% for the six-month period. EMS segment income increased to $205 million for the quarter and $403 million for six months.
- DMS revenue increased 8% for the quarter and 8% for six months. DMS segment income was $186 million for the quarter and $449 million for six months.
- Quarterly diluted core EPS was $1.88 versus $1.68; six-month diluted core EPS was $4.19 versus $3.60. Core measures exclude items such as amortization, stock-based compensation, restructuring and certain benefit costs.
- Net cash provided by operating activities was $580 million for the six months, versus $200 million in the prior-year period.
- Adjusted free cash flow was $112 million, compared with negative $74 million in the prior-year period, after capital expenditures and customer-related proceeds from PP&E sales.
- Capital expenditures were $637 million, partially offset by $169 million of proceeds and advances from PP&E sales.
- Cash and cash equivalents were $1.200 billion at February 28, 2023, down from $1.478 billion at August 31, 2022.
- Total debt was $2.900 billion, including $323 million classified as current. Cash therefore covered approximately 41% of reported debt.
- Available unused borrowing capacity under revolving credit facilities was $3.8 billion. The commercial paper program provided borrowing capacity of up to $3.2 billion.
Material Changes Versus Prior Comparable Period
- Revenue growth was broad-based, led by EMS, industrial and capital equipment, digital print and retail, networking and storage, automotive and transportation, and healthcare and packaging.
- Connected devices revenue declined in both the quarter and six-month period; quarterly 5G, wireless and cloud revenue also declined slightly.
- Interest expense increased by $39 million for the quarter and $67 million for six months, primarily because of higher rates on commercial paper and credit facilities.
- Other expense increased by $21 million for the quarter and $35 million for six months, mainly due to higher securitization and receivable-sale program fees and higher interest rates.
- Six-month restructuring, severance and related charges were $45 million, primarily associated with headcount reductions; no such expense was recorded in the comparable prior-year period. The restructuring liability was $34 million at quarter-end.
- Inventory increased to $6.519 billion from $6.128 billion at August 31, 2022, primarily because of higher raw-material balances related to supply-chain constraints, particularly in automotive.
- The sales cycle increased to 50 days from 35 days in the prior-year quarter, driven chiefly by higher inventory days of 93 versus 86. Accounts payable days declined to 84 from 89.
- Share repurchases reduced outstanding shares. Jabil repurchased 4.3 million shares for $288 million during the six months and had $975 million remaining under its current $1.0 billion authorization.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $875 million of net capital expenditures for fiscal 2023.
- Management expects approximately $800 million of cloud-business components to transition from a purchase-and-resale model to a customer-controlled consignment model during fiscal 2023. The transition is expected to increase reported gross margins and reduce cash used in that business, while lowering reported revenue for the affected components.
- Management expects to continue declaring quarterly dividends at amounts similar to historical declarations, although future dividends remain discretionary.
- Jabil reported continuing COVID-19-related operating effects, including restrictions in Asia, supplier material shortages and transportation challenges.
- Key risks include customer concentration, component shortages and single-source suppliers, rapid changes in customer demand, international operations and foreign currency exposure, rising energy and financing costs, manufacturing and technology competition, restructuring execution, cybersecurity, regulatory compliance, product defects, intellectual property matters, natural disasters and climate-related events.
- The five largest customers represented approximately 44% of six-month revenue; 79 customers represented approximately 90%.
- Jabil sold $6.5 billion of receivables under trade receivable sale programs during the six months and had up to $1.3 billion of available liquidity under those programs. The global asset-backed securitization program had no available liquidity at February 28, 2023.
- The company amended its credit agreement to update benchmark-rate provisions, revise sustainability-linked interest adjustments and extend revolving facility maturities to January 2025 and January 2027. Jabil was in compliance with its debt and securitization covenants.
- New accounting guidance adopted during the period had no material impact. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Investor Verification Priorities
- Verify whether revenue growth, particularly in EMS and automotive-related businesses, remains durable after supply-chain conditions normalize.
- Monitor inventory levels, the 50-day sales cycle and automotive component constraints for potential working-capital or obsolescence pressure.
- Assess the effect of higher interest rates, receivable-sale fees and the July 2023 maturity of the $300 million senior notes on future earnings and liquidity.
- Track execution of the $800 million cloud consignment transition and its effects on revenue comparability, gross margin and cash flow.
- Evaluate customer concentration and the financial condition of major customers, given the significant revenue dependence on a limited customer base.
- Reconcile GAAP earnings with management’s core earnings measures, particularly the effects of restructuring, stock-based compensation, amortization and tax-rate adjustments.