Jabil Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Business Context and Reporting Period
Jabil provides global electronics design, manufacturing and product-management services through two reportable segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The filing covers the three and nine months ended May 31, 2017, compared with the corresponding periods of 2016. Jabil operated in 28 countries, and foreign-source revenue represented 90.6% of quarterly revenue and 91.3% of nine-month revenue.
Financial Performance and Position
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Net revenue | $4.490 billion | $4.311 billion | $14.040 billion | $13.922 billion |
| Gross profit | $326.4 million | $321.1 million | $1.120 billion | $1.204 billion |
| Gross margin | 7.3% | 7.4% | 8.0% | 8.6% |
| Operating income | $43.4 million | $59.6 million | $292.2 million | $429.0 million |
| Net income attributable to Jabil | $(25.3) million | $5.2 million | $83.4 million | $216.0 million |
| Diluted EPS | $(0.14) | $0.03 | $0.45 | $1.12 |
| Core operating income | $113.8 million | $87.2 million | $475.5 million | $522.0 million |
| Core diluted EPS | $0.31 | $0.17 | $1.48 | $1.59 |
Quarterly revenue increased 4.1%, driven by 14% DMS growth, while EMS revenue declined 1%. Nine-month revenue was broadly stable; DMS increased 3% and EMS was approximately unchanged. Quarterly operating margin was 1.0% versus 1.4% in the prior-year period, and nine-month operating margin was 2.1% versus 3.0%.
At May 31, 2017, cash and cash equivalents were $743.9 million, compared with $912.1 million at August 31, 2016. Total debt, including capital lease obligations, was $2.184 billion, versus $2.120 billion at fiscal year-end; current maturities increased to $539.0 million from $45.8 million. Total equity was $2.343 billion, compared with $2.457 billion.
For the nine months, operating cash flow was $533.0 million, investing cash flow was $(477.3) million and financing cash flow was $(222.9) million. Capital expenditures were $482.7 million, and cash paid for acquisitions was $36.6 million. Cash decreased by $168.1 million during the period.
Material Changes Versus the Prior Comparable Period
- Revenue increased in the quarter but was nearly flat year to date. DMS benefited from mobility, consumer lifestyles and wearable technologies, and healthcare; mobility demand was weaker on a nine-month basis.
- Quarterly net income attributable to Jabil declined to a loss, primarily reflecting higher restructuring charges, a $11.5 million other-than-temporary impairment on available-for-sale securities, distressed customer charges of $10.2 million and tax expense despite a pretax loss.
- Nine-month gross profit declined $84.2 million and gross margin fell 60 basis points, primarily because mobility revenue declined faster than related fixed costs.
- Restructuring charges increased to $32.7 million in the quarter and $113.5 million year to date, compared with $4.5 million and $8.3 million, respectively. Core operating income and core earnings improved in the quarter but declined year to date.
- Jabil repurchased approximately 9.9 million shares for $237.1 million during the nine months. The company declared quarterly dividends of $0.08 per share.
- Inventory increased to $2.707 billion from $2.457 billion at August 31, 2016. Days in inventory increased to 59 from 55 days sequentially, reflecting expected fourth-quarter sales levels.
Guidance, Outlook, Risks and Unusual Items
- Under the 2017 restructuring plan, Jabil expects approximately $195 million of pretax costs during fiscal 2017 and 2018; $108.9 million had been recognized through May 31, 2017. The plan is expected to generate annualized savings of $70 million to $90 million by fiscal 2019, with $20 million to $30 million expected in fiscal 2017.
- Jabil expects capital expenditures of $500 million to $600 million during the next 12 months and believes available cash, borrowings, receivables programs and operating cash flow will fund planned needs, dividends, acquisitions, debt repayments and working capital.
- The $400 million 8.250% senior notes mature March 15, 2018. Management expects to enter into a new borrowing agreement to refinance them and believes available liquidity is adequate for repayment.
- Receivables-financing facilities are material to liquidity. The $200 million North American asset-backed program is scheduled to expire October 20, 2017, and the $400 million foreign program is scheduled to expire May 1, 2018. Renewal is not assured, and certain uncommitted receivables-sale programs may not provide funding when requested.
- Five largest customers represented approximately 46% of nine-month revenue, and 79 customers represented approximately 90%. Almost all products require one or more single-source components.
- Key risks include customer concentration and potential program termination, component availability, seasonal demand, international operations and currency movements, restructuring execution, acquisitions and dispositions, and changing end-market conditions.
- The IRS has proposed adjustments primarily related to intercompany transactions. Potential tax payments identified in the filing are approximately $28.6 million for fiscal 2009–2011 and $5.3 million for fiscal 2012–2014, excluding certain interest and penalties. Jabil disputes the proposed adjustments.
- Management concluded that disclosure controls were effective as of May 31, 2017 and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether DMS growth and mobility demand improve sufficiently to restore nine-month margins.
- The timing and cash cost of the 2017 restructuring plan, including whether projected savings are achieved.
- Refinancing plans for the $400 million senior notes due in March 2018 and the company’s future borrowing costs.
- Renewal or replacement of receivables-securitization and sale programs before their scheduled expirations.
- Inventory normalization, working-capital requirements and conversion of operating cash flow.
- Resolution and potential financial impact of the IRS tax disputes.
- Customer concentration, single-source component exposure and the effect of seasonal or weaker end-market demand.