Jabil Circuit, Inc. — Fiscal 2015 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2015; filed June 22, 2015. The filing presents continuing operations in two segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The Aftermarket Services business was reported as discontinued operations following its divestiture.
Business Context and Key Metrics
| Metric | Three months ended May 31, 2015 | Year-over-year change | Nine months ended May 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $4.36 billion | +15.1% | $13.22 billion | +12.9% |
| Gross profit | $375.8 million | +74.0% | $1.13 billion | +47.6% |
| Gross margin | 8.6% | Up from 5.7% | 8.5% | Up from 6.6% |
| Operating income | $135.4 million | From a $1.6 million loss | $405.0 million | +157.2% |
| Net income attributable to Jabil | $72.2 million | Down from $188.3 million | $196.3 million | Down from $267.5 million |
| Diluted EPS | $0.37 | Down from $0.93 | $1.00 | Down from $1.30 |
DMS revenue increased 41.3% in the quarter and 36.3% year to date, primarily from stronger mobility demand. EMS revenue increased 3.8% in the quarter and was relatively flat year to date. Foreign-source revenue represented 86.6% of quarterly revenue and 87.1% of year-to-date revenue.
Quarterly core operating income, a non-U.S. GAAP measure, was $160.5 million versus $45.3 million in the prior-year quarter. Core earnings were $96.5 million, or $0.49 diluted per share, compared with a core loss of $11.3 million, or $0.06 per share.
Cash Flow, Liquidity, Debt and Balance Sheet
- Operating cash flow for the nine months was $882.9 million, compared with $409.4 million in the prior-year period.
- Investing cash flow was an outflow of $797.3 million, including $735.5 million of capital expenditures and $78.0 million for acquisitions.
- Financing cash flow was an outflow of $95.1 million, including $40.0 million of share repurchases and $47.6 million of dividends paid.
- Cash and cash equivalents were $962.8 million at May 31, 2015, down from $1.00 billion at August 31, 2014. Approximately $726.8 million held by foreign subsidiaries could not be repatriated without potential tax consequences.
- Total notes payable, long-term debt and capital lease obligations were $1.67 billion; current installments were $11.4 million. The principal senior notes mature from 2016 through 2022.
- Jabil reported compliance with covenants under its amended credit facility and receivables securitization programs. The company had the ability to borrow up to $1.5 billion under its amended credit facility, subject to applicable conditions.
- Working-capital metrics at quarter-end included 25 days of accounts receivable, 51 days of inventory, 75 days of accounts payable and a one-day sales cycle.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by DMS mobility programs, while EMS growth was more modest and reflected the prior disengagement from BlackBerry-related mobility handset activity.
- Gross margin expanded substantially because of higher DMS revenue, cost control and productivity improvements.
- Operating results improved despite higher selling, general and administrative costs and higher stock-based compensation. The prior-year period benefited from a $38.4 million reversal of stock-based compensation expense.
- Quarterly net income and EPS declined because the prior-year quarter included a $238.5 million after-tax gain on the sale of discontinued operations. The current quarter included only $1.7 million of after-tax gain from discontinued operations.
- Year-to-date results also included substantially less discontinued-operations income: a $6.1 million loss in 2015 versus $251.1 million of income in 2014.
- Inventory increased to $2.26 billion from $2.01 billion at August 31, 2014, primarily to support expected fourth-quarter revenue levels.
- Capital expenditures increased materially from $414.7 million to $735.5 million year to date, principally for DMS expansion, equipment and infrastructure.
- Jabil completed four acquisitions during the nine months for approximately $88.1 million in cash; preliminary acquired goodwill was $28.7 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected capital expenditures of approximately $800 million to $900 million over the following 12 months, primarily for Asian expansion, infrastructure and DMS investments.
- Management believed available cash, operating cash flow, revolving facilities and receivables programs would fund anticipated capital expenditures, dividends, acquisitions and working-capital needs for the next 12 months.
- The 2013 restructuring plan was expected to generate approximately $76.8 million of annualized gross cost savings, or approximately $65.0 million after anticipated offsets. Total estimated restructuring costs were approximately $179.0 million, of which $149.2 million had been recognized through May 31, 2015.
- Approximately $33.2 million of restructuring liabilities were expected to be paid over the following 12 months.
- The IRS proposed adjustments primarily involving intercompany transactions for fiscal years 2009 through 2011. If the IRS ultimately prevails, estimated tax due would be approximately $34.6 million before potential interest and penalties. Management intended to contest the matter.
- Key risks include customer concentration, volatile customer demand, component availability, inventory obsolescence, international operations and currency movements, dependence on receivables financing, acquisition and restructuring execution, debt and refinancing risk, tax disputes, product quality and regulatory exposure, and cybersecurity or business disruption.
- The five largest customers represented approximately 51% of nine-month revenue, and 79 customers represented approximately 90%.
- Three uncommitted receivables sale programs had capacities of $450 million, $150 million and $100 million, with certain facilities scheduled to expire in August or November 2015 unless extended. Funding under these programs was not guaranteed.
- Jabil used forward foreign-exchange contracts for hedging and reported that a hypothetical 10% currency-rate change would not have a material effect on the financial statements as of May 31, 2015.
Important Facts for Investors to Verify
- Verify the sustainability of DMS mobility-driven growth and the extent to which recent revenue growth depends on a limited number of customers.
- Reconcile GAAP earnings with core earnings, including stock-based compensation, restructuring, amortization, acquisitions and discontinued operations.
- Assess whether elevated inventory and capital expenditures convert into expected fourth-quarter and longer-term revenue and cash flow.
- Review debt maturities, credit-facility availability, covenant compliance and reliance on receivables securitization and uncommitted sale programs.
- Monitor the IRS tax dispute, potential interest and penalties, and any similar claims for later years.
- Evaluate execution of the 2013 restructuring plan, remaining cash costs and whether projected savings are realized without impairing customer service.
- Confirm acquisition accounting, preliminary goodwill and intangible-asset valuations as measurement periods are completed.
- Note that management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.