Jabil Inc. Fiscal 2020 First-Quarter 10-Q Summary
Business Context and Reporting Period
Jabil provides electronics manufacturing and product-management services globally through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments. The report covers the three months ended November 30, 2019, the first quarter of fiscal 2020. Jabil operated in 30 countries, and 81.8% of revenue came from foreign operations. The five largest customers represented approximately 49% of revenue.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenue | $7.506 billion | $6.506 billion | +15.4% |
| Gross profit | $553.8 million | $519.7 million | +6.6% |
| Gross margin | 7.4% | 8.0% | Down 60 basis points |
| Operating income | $152.8 million | $216.7 million | -29.5% |
| Operating margin | 2.0% | 3.3% | Down approximately 130 basis points |
| Net income attributable to Jabil | $40.4 million | $123.6 million | -67.3% |
| Diluted EPS | $0.26 | $0.76 | Down $0.50 |
| Core diluted EPS | $1.05 | $0.90 | +16.7% |
| Cash flow from operations | $20.9 million | $(91.7) million | Improved |
| Adjusted free cash flow | $(186.2) million | $(216.1) million | Improved |
EMS revenue increased 26%, led primarily by cloud, print and retail, and automotive and transportation customers. DMS revenue increased 3%, with healthcare and packaging growth partly offset by lower mobility and edge-device demand. Segment income increased to $277.3 million from $253.7 million.
As of November 30, 2019, cash and cash equivalents were $719.8 million, down from $1.163 billion at August 31, 2019. Total debt was $2.491 billion, including $375.2 million of current maturities. Jabil reported $2.6 billion of unused revolving-credit capacity and up to $1.4 billion of available liquidity under trade receivable sale programs. Management stated that liquidity was adequate for the next 12 months.
Total assets were $14.445 billion and total liabilities were $12.596 billion. The company adopted the new lease standard, recording $405.9 million of operating lease right-of-use assets and $436.6 million of operating lease liabilities at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue grew strongly, but gross margin declined because of product mix and continued weakness in the capital-equipment business.
- Operating income fell despite higher revenue, primarily because of increased restructuring, acquisition and integration, amortization, stock-based compensation, and distressed-customer charges.
- Restructuring charges increased to $45.3 million from $6.0 million, including costs under the 2020 Restructuring Plan.
- Amortization of intangibles increased to $16.1 million from $7.6 million, primarily due to accelerated amortization of the rebranded Nypro trade name.
- SG&A increased by $50.8 million, including higher salaries and support costs, acquisition-related costs, and stock-based compensation.
- The effective tax rate increased to 60.3% from 24.8%, reflecting the prior-year $13.3 million Tax Act benefit and limited tax benefits from current restructuring charges.
- Cash flow from operations improved to $20.9 million, but working-capital investment remained significant: accounts receivable increased $850.9 million, inventories increased $319.2 million, and contract assets increased $148.6 million from August 31, 2019.
Guidance, Outlook, Risks, and Unusual Items
- The 2020 Restructuring Plan involves headcount reductions and capacity realignment, particularly in the China mobility footprint. Jabil expects approximately $85 million of pre-tax charges, $30 million to $40 million of cash expenditures over fiscal 2020 and 2021, approximately $25 million of fiscal 2020 savings, and approximately $40 million of annualized savings beginning in fiscal 2021.
- Jabil expects approximately $800 million of net capital expenditures in fiscal 2020.
- Management expects to continue declaring quarterly dividends at amounts similar to prior periods, subject to board approval. The board authorized a $600 million, two-year share-repurchase program; $96.4 million had been used and $503.6 million remained available at November 30, 2019.
- Management expects weakness in the computing, storage and capital-equipment businesses to continue into the second half of calendar 2020.
- Jabil completed the third closing of its Johnson & Johnson Medical Devices Companies asset acquisition for approximately $106.9 million in cash. Purchase accounting remains preliminary, including $55.7 million of goodwill and assumed pension obligations of $58.8 million.
- Jabil recorded a $15.0 million distressed-customer charge related primarily to renewable-energy customers.
- Key risks include customer concentration, changes in customer demand, dependence on critical suppliers and single-source components, international operations and currency exposure, technology and product ramps, restructuring execution, acquisition profitability, competitive pressures, tax changes, and political or economic conditions.
- The company was in compliance with its debt and receivable-securitization covenants and stated that ordinary-course litigation was not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether revenue growth, particularly in cloud and EMS, continues to offset weakness in mobility, computing, storage and capital equipment.
- Whether the 2020 Restructuring Plan achieves the stated cost savings and remains within the projected $85 million charge estimate.
- Working-capital requirements, receivable collections, inventory levels, and continued reliance on receivable-sale and securitization programs.
- The timing and funding of the $800 million fiscal 2020 capital-expenditure plan alongside dividends, repurchases and debt maturities.
- The effect of the elevated effective tax rate and any future tax benefits or valuation allowances.
- The final purchase accounting and operating contribution of the JJMD acquisitions.
- Customer concentration and exposure to major customers, international markets, foreign exchange movements, and single-source suppliers.