Jabil Inc. Form 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 quarter and six months ended February 29, 2020, compared with the periods ended February 28, 2019. Jabil operated in 31 countries, with 82.6% of quarterly and 82.2% of year-to-date revenue generated from international operations.
Financial Results and Key Metrics
| Metric | Q2 FY2020 | Q2 FY2019 | Six Months FY2020 | Six Months FY2019 |
|---|---|---|---|---|
| Net revenue | $6.125 billion | $6.067 billion | $13.631 billion | $12.573 billion |
| Gross profit | $430.1 million | $454.9 million | $984.0 million | $974.5 million |
| Gross margin | 7.0% | 7.5% | 7.2% | 7.8% |
| Operating income | $90.6 million | $154.0 million | $243.4 million | $370.7 million |
| Net income attributable to Jabil | $(3.3) million | $67.4 million | $37.1 million | $191.0 million |
| Diluted EPS | $(0.02) | $0.43 | $0.24 | $1.19 |
| Core diluted EPS | $0.50 | $0.64 | $1.55 | $1.54 |
Quarterly revenue increased 1.0%, while year-to-date revenue increased 8.4%. EMS represented 63% of quarterly revenue and 61% of year-to-date revenue; DMS represented 37% and 39%, respectively. Quarterly segment income was $159.4 million, compared with $191.1 million in the prior-year quarter. Year-to-date segment income was $436.8 million, compared with $444.7 million.
As of February 29, 2020, cash and cash equivalents were $696.7 million, down from $1.163 billion at August 31, 2019. Accounts receivable were $2.314 billion, contract assets were $1.058 billion and inventories were $3.340 billion. Total debt was $2.724 billion, including $637.8 million classified as current. Available unused revolving credit capacity was approximately $3.1 billion, and available liquidity under asset-backed securitization programs was up to $76.3 million. Jabil was in compliance with its debt and securitization covenants.
Six-month operating cash flow was $84.2 million, compared with $107.8 million in the prior-year period. Investing cash flow was $(555.3) million, including $448.8 million of capital expenditures and $141.2 million for business and intangible-asset acquisitions. Financing cash flow was $14.3 million. Adjusted free cash flow was $(328.0) million, compared with $(187.6) million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Quarterly gross profit declined $24.7 million and gross margin fell 50 basis points, primarily because of $46.7 million of incremental and idle labor costs associated largely with COVID-19-related restrictions.
- Quarterly operating income declined 41%, and Jabil reported a net loss attributable to the company versus prior-year profit. Results included $29.6 million of restructuring charges, $13.6 million of additional intangible amortization and a $12.2 million non-cash securities impairment.
- Year-to-date operating income declined 34%, and attributable net income declined 81%. Year-to-date results included $74.9 million of restructuring charges, a $15.0 million distressed-customer charge, $23.9 million of acquisition and integration charges, and the $12.2 million securities impairment.
- COVID-19 reduced factory utilization and constrained labor and supplies, particularly in China. Jabil incurred approximately $53.0 million of direct COVID-19-related costs during the quarter, including approximately $46.7 million in incremental and idle labor costs and $6.3 million in selling, general and administrative costs.
- Working-capital indicators deteriorated sequentially: the sales cycle increased to 30 days from 23 days, inventory days increased to 70 from 57, and annualized inventory turns declined to five from six.
- Jabil issued $500 million of 3.600% senior notes due 2030 and entered into a new credit agreement providing a $2.7 billion revolving facility and a $300 million term loan facility. The company also had $237.7 million outstanding under its commercial paper program.
- Jabil adopted the new lease standard, recording $373.4 million of operating lease right-of-use assets and $411.9 million of operating lease liabilities at February 29, 2020. Total lease liabilities, including finance leases, were $575.6 million.
Guidance, Outlook, Commentary and Risks
Management stated that COVID-19 was expected to negatively affect operations during the next fiscal quarter and likely beyond. The duration and extent of the pandemic were not determinable, and management warned of potential additional facility closures, lower capacity utilization, supply shortages, transportation disruptions, lost revenue and unpredictable changes in customer demand.
The 2020 Restructuring Plan targets global capacity and organizational realignment, particularly within the mobility footprint in China. Jabil expected approximately $85.0 million of pre-tax restructuring and related costs, cash expenditures of approximately $30.0 million to $40.0 million over fiscal 2020 and 2021, approximately $25.0 million of fiscal 2020 cost savings, and annualized savings of approximately $40.0 million beginning in fiscal 2021. Actual timing and amounts remained subject to employee consultation and local requirements.
Management stated that liquidity sources were expected to fund capital expenditures, dividends, share repurchases, potential acquisitions and working-capital needs for the next 12 months. However, capital expenditures for fiscal 2020 were not estimable because of COVID-19. The company expected to renew certain receivables-sale programs and refinance its $399.3 million of 5.625% senior notes maturing December 15, 2020, but noted that pandemic-related market conditions could increase refinancing costs or create challenges.
Other significant risks include customer concentration, reliance on critical single-source components, international operations and foreign exchange exposure, acquisition execution, restructuring activities, technology and product-ramp risks, and adverse political, tax or economic developments. The five largest customers represented approximately 47% of six-month revenue, and 72 customers represented approximately 90%.
Important Facts for Investors to Verify
- Whether COVID-19-related factory disruptions, supply-chain constraints and customer-demand changes produced additional costs or revenue losses after February 29, 2020.
- The timing and final cost of the 2020 Restructuring Plan and whether the projected fiscal 2021 savings are achieved.
- Jabil’s ability to refinance the December 2020 senior-note maturity and renew receivables-sale programs amid changing credit-market conditions.
- Working-capital trends, particularly inventory levels, contract assets, cash conversion and liquidity following the sharp decline in cash.
- The final purchase-accounting adjustments and profitability contribution from the Johnson & Johnson Medical Devices asset acquisitions.
- Customer concentration, critical-component availability and any changes in demand within mobility, cloud, networking, healthcare and other major end markets.
- Subsequent-event disclosures and updated full-year guidance, which are not clearly provided in the filing text beyond management’s qualitative COVID-19 commentary.