Jabil Circuit, Inc. — Fiscal 2014 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended May 31, 2014, compared with the corresponding periods ended May 31, 2013. The filing was signed June 30, 2014. Jabil provides global electronics design, manufacturing and supply-chain services through its Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I), and High Velocity Systems (HVS) segments.
Financial performance and position
| Metric | Three months ended May 31, 2014 | Three months ended May 31, 2013 | Nine months ended May 31, 2014 | Nine months ended May 31, 2013 |
|---|---|---|---|---|
| Net revenue | $3.786 billion | $4.196 billion | $11.706 billion | $12.736 billion |
| Gross profit | $216.0 million | $297.6 million | $763.4 million | $898.3 million |
| Gross margin | 5.7% | 7.1% | 6.6% | 7.1% |
| Operating income (loss) | $(1.6) million | $93.1 million | $157.4 million | $379.9 million |
| Net income attributable to Jabil | $188.3 million | $50.1 million | $267.5 million | $244.5 million |
| Diluted EPS | $0.93 | $0.24 | $1.30 | $1.18 |
| Core operating income | $45.3 million | $158.6 million | $265.9 million | $482.8 million |
| Core diluted EPS | $(0.06) | $0.47 | $0.48 | $1.46 |
Cash flow and liquidity: Nine-month operating cash flow was $409.4 million, down from $809.7 million. Investing activities provided $270.8 million, primarily because of $544.5 million of net proceeds from the AMS sale and $141.1 million from asset sales, partly offset by $414.7 million of capital expenditures. Financing activities used $374.5 million, including $129.1 million of share repurchases and $52.2 million of dividends. Cash increased $310.9 million to $1.322 billion at May 31, 2014.
Balance sheet and debt: Total assets were $8.221 billion and total equity was $2.430 billion at May 31, 2014. Total notes payable, long-term debt and capital lease obligations were $1.742 billion, including $69.9 million current. The filing states that Jabil was in compliance with applicable debt and securitization covenants.
Working capital: Inventory was $1.861 billion, accounts receivable was $998.4 million and accounts payable was $2.698 billion. Quarterly sales cycle was three days, with 24 days of accounts receivable, 47 days of inventory and 68 days of accounts payable.
Dividends and repurchases: The quarterly dividend remained $0.08 per share. Jabil repurchased approximately 7.3 million shares for $129.1 million during the first nine months and had approximately $71.1 million remaining under the authorized program at May 31, 2014.
Material changes versus the prior comparable period
- Third-quarter revenue declined 9.8%; nine-month revenue declined 8.1%.
- HVS revenue declined 35% in the quarter and 21% year to date, principally because of reduced mobility handset production following Jabil’s disengagement from BlackBerry.
- E&I revenue declined 3% in the quarter and 6% year to date, reflecting weaker enterprise and infrastructure spending, partly offset by telecom strength.
- DMS revenue increased 6% in the quarter but declined 2% year to date. The quarterly increase benefited from Nypro-related customer revenue and industrial and instrumentation activity.
- Gross margin decreased 140 basis points in the quarter and 50 basis points year to date as revenue declined faster than certain fixed costs.
- SG&A increased to 5.0% of revenue from 3.5% in the quarter, primarily because of Nypro’s relatively higher SG&A profile. Amortization also increased because of Nypro-acquired intangible assets.
- Continuing operations generated a third-quarter net loss of $52.9 million, compared with income of $39.2 million. Consolidated net income benefited from a $238.5 million after-tax gain on the AMS disposal.
- Core operating income declined 71.4% in the quarter and 44.9% year to date; core earnings were a third-quarter loss of $11.3 million versus earnings of $98.2 million in the prior-year quarter.
Dispositions, acquisitions and unusual items
- On April 1, 2014, Jabil completed the sale of its Aftermarket Services business to iQor for stated consideration of $725.0 million, consisting of $675.0 million cash and $50.0 million liquidation preference of iQor preferred stock. The final purchase price was subject to a $90.5 million adjustment and future reconciliation.
- The Malaysian AMS operations remained held for sale pending regulatory approvals, with $20.0 million held in escrow. AMS was reported as discontinued operations.
- The AMS transaction produced a $238.5 million after-tax gain in the quarter and a $229.5 million gain for the nine months. AMS also contributed $2.7 million of after-tax operating income in the quarter and $21.5 million year to date.
- Jabil completed the $679.5 million Nypro acquisition on July 1, 2013. Nypro represented 8.0% of consolidated revenue in the quarter and 7.7% year to date; acquired operations were excluded from the scope of the quarter-end internal-control evaluation.
- Restructuring charges totaled $12.4 million in the quarter and $65.7 million year to date. The 2014 plan, related primarily to the BlackBerry disengagement, is expected to generate total fiscal 2014 charges of $42.3 million to $70.0 million and annualized net savings of $10.0 million to $25.0 million.
- The 2013 restructuring plan had incurred $103.8 million through May 31, 2014, with approximately $179.0 million expected over fiscal years 2013 through 2015 and approximately $65.0 million of expected annual net savings after offsets.
- The nine-month results included an approximately $18.0 million out-of-period tax adjustment that increased continuing-operations income. Management concluded that it was not material to the affected quarterly or annual periods.
Outlook, risks and contingencies
- Management expects capital expenditures of approximately $300 million to $350 million over the next 12 months, principally for maintenance, information technology and DMS growth.
- Management believes available cash, operating cash flow, revolving facilities and receivables programs will fund expected capital expenditures, dividends, working capital and potential acquisitions for the next 12 months.
- Approximately $971.4 million of foreign subsidiary cash could not be repatriated without potential tax consequences. Jabil intended to repatriate approximately $240.0 million of Nypro pre-acquisition foreign earnings and recorded a $58.6 million deferred tax liability.
- Liquidity depends partly on receivables securitization and sale programs. The North American $200 million program was scheduled to expire October 21, 2014; other facilities were scheduled to expire between August and November 2014 and May 2015. Renewal or funding under uncommitted programs was not assured.
- Key risks include customer concentration, volatile demand and seasonality, the BlackBerry disengagement, fixed manufacturing costs, component availability and single-source suppliers, international operations and currency exposure, acquisition and integration execution, restructuring execution, credit-market access, debt service and tax changes.
- The five largest customers represented approximately 45% of nine-month revenue, while 67 customers represented approximately 90%. Foreign-source revenue was 83.7% of quarterly revenue and 84.3% year to date.
- Jabil reported no material adverse effect from ordinary-course litigation and no defaults upon senior securities. Management concluded that disclosure controls were effective as of May 31, 2014.
Investor verification checklist
- Verify the sustainability of core profitability after the AMS gain, restructuring charges, tax adjustment and other excluded items.
- Track HVS and BlackBerry-related volume declines, restructuring execution, expected savings and remaining cash obligations.
- Assess DMS growth and Nypro integration, including acquired intangible amortization, goodwill and internal-control integration.
- Review customer concentration, especially exposure to large technology and consumer customers and short-term production commitments.
- Confirm renewal and availability of receivables securitization, factoring and sale facilities before relying on reported liquidity.
- Evaluate debt maturities, interest expense, credit ratings and the effect of variable-rate borrowings.
- Reconcile cash generation with the $300 million to $350 million capital-expenditure outlook, dividends and share repurchases.
- Review the remaining Malaysian AMS closing conditions, escrow funds, purchase-price reconciliation and continuing obligations, including the covenant not to compete.