Jabil Inc. Form 10-Q Summary
Business Context and Reporting Period
Jabil provides worldwide electronics manufacturing, design, supply-chain and product-management services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments. The filing covers the three and nine months ended May 31, 2020, Jabil’s fiscal third quarter, with comparisons to the periods ended May 31, 2019. The results reflect significant operating disruption from the COVID-19 pandemic.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Net revenue | $6.336 billion | $6.136 billion | $19.966 billion | $18.709 billion |
| Revenue growth | 3.3% | — | 6.7% | — |
| Gross profit | $456.1 million | $443.8 million | $1.440 billion | $1.418 billion |
| Gross margin | 7.2% | 7.2% | 7.2% | 7.6% |
| Operating income | $59.4 million | $140.9 million | $302.8 million | $511.6 million |
| Operating margin | 0.9% | 2.3% | 1.5% | 2.7% |
| Net income attributable to Jabil | $(51.0) million | $43.5 million | $(13.8) million | $234.4 million |
| Diluted EPS | $(0.34) | $0.28 | $(0.09) | $1.47 |
Q3 revenue growth was driven by a 13% increase in DMS revenue, partially offset by a 2% decline in EMS revenue. DMS represented 38% of quarterly revenue versus 35% in the prior-year quarter. The five largest customers represented approximately 47% of nine-month revenue, and 72 customers represented approximately 90%.
At May 31, 2020, cash and cash equivalents were $763.3 million, compared with $1.163 billion at August 31, 2019. Accounts receivable were $2.580 billion and inventories were $3.284 billion. Total notes payable and long-term debt were $2.487 billion, including $399.7 million due within one year; reported debt less current installments was $2.088 billion. Debt less cash was approximately $1.724 billion before considering lease liabilities. The company reported $3.7 billion of unused revolving-credit capacity and $136.6 million of available liquidity under asset-backed securitization programs.
For the nine months, operating cash flow was $570.7 million versus $112.7 million in the prior-year period. Investing cash flow was $(679.5) million, primarily reflecting $648.9 million of capital expenditures and $145.6 million of acquisition and intangible-asset payments. Financing cash flow was $(259.6) million, including $189.5 million of share repurchases and $38.4 million of dividends. Adjusted free cash flow was $15.5 million versus $(412.1) million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Operating income declined 58% in the quarter and 41% for the nine-month period, despite higher revenue.
- Jabil recorded a quarterly net loss attributable to shareholders, compared with prior-year profit. The nine-month period also shifted to a net loss.
- COVID-19-related direct costs were approximately $67.4 million in Q3 and $120.4 million for the nine months, including incremental and idle labor, reduced factory utilization and personal protective equipment.
- Quarterly restructuring, severance and related charges increased to $69.2 million from $9.3 million; nine-month charges increased to $144.0 million from $16.2 million.
- The effective tax rate increased to 465.0% in Q3 and 108.3% for the nine months, primarily because of lower pretax income, restructuring charges with limited tax benefit and a $21.2 million expense from remeasurement of deferred tax assets related to an extended non-U.S. tax incentive.
- Jabil issued $500 million of 3.600% senior notes due 2030 and used the proceeds to repay term-loan indebtedness. It also established a new $425 million 364-day revolving credit agreement; no draws were outstanding at quarter-end.
- Operating lease right-of-use assets and operating lease liabilities were recognized following adoption of the new lease standard, with $377.5 million of operating lease right-of-use assets and $414.2 million of operating lease liabilities at May 31, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expects COVID-19 to continue adversely affecting operations, customers, suppliers, logistics and financial results in the next fiscal quarter and likely beyond. The duration and ultimate impact were not determinable.
- The 2020 Restructuring Plan targets approximately $85 million of pretax restructuring and related costs in fiscal 2020, with expected cash expenditures of approximately $30 million to $40 million over fiscal 2020 and 2021. Expected annualized savings are approximately $40 million to $50 million beginning in fiscal 2021; management expected approximately $25 million of savings during fiscal 2020.
- Jabil anticipated fiscal 2020 net capital expenditures of approximately $800 million.
- Management believed liquidity sources were adequate for the next 12 months, but noted refinancing and renewal risks related to the $400 million 5.625% senior notes maturing December 15, 2020 and certain receivables-sale programs expiring or subject to termination during calendar 2020.
- Additional unusual items included $4.6 million of business interruption and impairment charges related to a flood at the Huangpu, China facility, $12.2 million of securities impairment for the nine-month period, and increased amortization associated with the Nypro trade-name rebranding.
- Management continued to expect regular quarterly dividends, subject to board approval and business conditions. As of May 31, 2020, $411.1 million remained available under the $600 million share-repurchase authorization.
- Other principal risks include customer concentration, dependence on critical single-source components, international operations and currency exposure, acquisition execution, restructuring, supply-chain disruptions and demand volatility.
Important Facts for Investors to Verify
- Whether COVID-19-related costs, capacity constraints and supply-chain interruptions persist or materially worsen.
- The timing and cost of the 2020 Restructuring Plan and whether the projected savings are achieved.
- Jabil’s ability to refinance the December 2020 senior-note maturity and renew expiring receivables-sale programs on acceptable terms.
- Working-capital trends, particularly the increase in inventory and contract assets and the resulting cash requirements.
- Customer concentration and changes in EMS and DMS demand, product mix and segment profitability.
- The sustainability of operating cash flow and adjusted free cash flow after capital expenditures, dividends and repurchases.
- The final valuation and accounting measurements associated with the third closing of the JJMD asset acquisition.