Business Context and Reporting Period
Jabil Inc. is a global manufacturing services provider operating through Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The unaudited Form 10-Q covers the three months ended November 30, 2017, the first quarter of fiscal 2018, compared with the three months ended November 30, 2016.
- Operations covered 29 countries; 92.3% of revenue was generated from foreign operations.
- EMS represented 51% of revenue and DMS 49%. The five largest customers accounted for approximately 51% of revenue.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net revenue | $5.586 billion | $5.105 billion | +9.4% |
| Gross profit | $469.3 million | $431.5 million | +8.8% |
| Gross margin | 8.4% | 8.5% | Down 10 bps |
| Operating income | $145.8 million | $165.6 million | Down 12.0% |
| Operating margin | 2.6% | 3.2% | Down 60 bps |
| Net income attributable to Jabil | $63.8 million | $88.0 million | Down 27.5% |
| Diluted EPS | $0.35 | $0.47 | Down $0.12 |
| Core operating income | $227.2 million | $209.5 million | +8.4% |
| Core diluted EPS | $0.80 | $0.69 | +15.9% |
DMS revenue increased 13%, primarily from higher mobility demand, while EMS revenue increased 6%. Segment income increased to $227.2 million from $209.5 million, reflecting stronger segment performance despite higher excluded costs and charges.
- SG&A increased to $293.1 million from $214.1 million, largely because of higher stock-based compensation, including a $24.9 million charge from modified performance-based awards and a one-time cash-settled award.
- Interest expense increased to $36.2 million from $32.8 million due to additional borrowings and higher interest rates.
- The effective tax rate increased to 40.5% from 33.6%, primarily due to losses in jurisdictions with valuation allowances and higher stock-based compensation.
- Cash dividends declared remained $0.08 per share.
Cash Flow, Liquidity, Debt and Balance Sheet
| Metric | November 30, 2017 | August 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $746.3 million | $1.190 billion |
| Total assets | $11.520 billion | $11.096 billion |
| Inventories | $3.283 billion | $2.942 billion |
| Total debt and capital lease obligations | $2.120 billion | $2.078 billion |
| Total equity | $2.345 billion | $2.368 billion |
- Operating cash flow was negative $53.6 million, compared with positive $151.9 million in the prior-year quarter, primarily because of increases in inventories, prepaid assets and accounts receivable.
- Investing cash flow was negative $295.2 million, including $218.6 million of capital expenditures and $95.9 million for the True-Tech acquisition.
- Financing cash flow was negative $90.8 million, including $93.3 million of share repurchases and $16.2 million of dividends, partially offset by debt borrowings.
- Cash decreased by $443.7 million during the quarter.
- The company reported $2.2 billion of available unused revolving-credit capacity and stated that liquidity sources should be adequate for the next 12 months.
- The $400 million 8.250% senior notes mature March 15, 2018. Management expected to use cash and available borrowing capacity and anticipated entering into a new borrowing agreement to repay them.
- Approximately $597 million of cash held by foreign subsidiaries could not be repatriated without potential tax consequences as of November 30, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue grew 9.4%, driven by higher DMS mobility demand and growth across selected EMS end markets.
- GAAP profitability declined despite revenue growth: operating income fell 12.0% and net income attributable to Jabil fell 27.5%.
- Core operating income and core diluted EPS increased, mainly because the prior-year period included a stock-based compensation reversal while the current period included significant stock-based compensation charges.
- Restructuring charges declined to $11.4 million from $35.9 million. The company has incurred $164.6 million of approximately $195.0 million expected under the 2017 Restructuring Plan.
- Inventory increased $341.1 million from fiscal year-end, supporting expected second-quarter sales and increased demand.
- Jabil completed the $95.9 million acquisition of True-Tech Corporation on September 1, 2017, adding aerospace, semiconductor and medical machined-component capabilities.
- The company amended and restated its senior unsecured credit agreement, providing an initial $1.8 billion revolving facility and a $500 million term loan facility, both generally maturing in November 2022.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2018 net capital expenditures were expected to be approximately $700 million, excluding acquisitions.
- The restructuring plan is expected to generate annualized savings of $70 million to $90 million beginning in fiscal 2019, although additional restructuring costs were expected during the remainder of fiscal 2018.
- Hurricane Maria damaged the Cayey, Puerto Rico operation. Jabil recognized $7.4 million of net business interruption and impairment expenses after $10.3 million of insurance proceeds and could incur additional second-quarter costs, which management expected to be largely offset by insurance.
- U.S. tax reform could materially affect income taxes through deemed repatriation of foreign earnings and changes to deductions; the filing stated that the impact was still being assessed.
- The IRS proposed adjustments related primarily to intercompany transactions for fiscal years 2009–2014. Potential tax payments identified were approximately $33.9 million before possible interest and penalties. Jabil disagreed and intended to contest the matters.
- Key risks include customer concentration, reliance on single-source components, international operations and currency exposure, fluctuating customer demand, competitive and technology pressures, acquisition execution, and covenant or refinancing risk.
- Jabil used foreign-exchange and interest-rate derivatives to manage market risks. The filing reported no material change in primary market-risk exposures.
- Future revenue recognition, financial instruments, lease and credit-loss accounting standards may materially affect future reporting; the impact of the new revenue standard could not yet be reasonably estimated.
Important Facts for Investors to Verify
- Whether the planned refinancing or repayment of the March 2018 senior notes occurs on acceptable terms.
- Whether working-capital investment, particularly inventory and receivables, converts into operating cash flow in subsequent quarters.
- Progress toward completing the restructuring plan and achieving the projected $70 million to $90 million of annual savings.
- The ultimate insurance recovery and operational impact from the Puerto Rico hurricane damage.
- The final effect of U.S. tax reform and the ongoing IRS examinations, including interest and penalties.
- Customer demand and concentration trends, especially in mobility and other major end markets.
- The integration and profitability contribution of True-Tech and other acquisitions.
- The effect of customer and supplier concentration, foreign currency movements and single-source component availability on margins and liquidity.