Jabil Inc. 2017 Form 10-K Summary
Business context and reporting period
Jabil provides global electronics manufacturing, design, supply-chain and product-management services across automotive, computing, consumer, healthcare, industrial, mobility, networking, telecommunications and other markets. The filing covers the fiscal year ended August 31, 2017, including fourth-quarter results. Reportable segments were Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS).
- Fiscal 2017 revenue mix: EMS 58%; DMS 42%, compared with 60% and 40%, respectively, in fiscal 2016.
- Approximately 91.4% of revenue was derived from international operations.
- Apple represented approximately 24% of revenue; the five largest customers represented approximately 47%.
Key financial metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net revenue | $19.063 billion | $18.353 billion | Up 3.9% |
| Gross profit | $1.546 billion | $1.528 billion | Up 1.2% |
| Gross margin | 8.1% | 8.3% | Down 0.2 percentage points |
| Operating income | $410.2 million | $522.8 million | Down 21.5% |
| Operating margin | 2.1% | 2.8% | Down 0.7 percentage points |
| Net income attributable to Jabil | $129.1 million | $254.1 million | Down 49.2% |
| Diluted EPS | $0.69 | $1.32 | Down $0.63 |
| Cash flow from operations | $1.257 billion | $916.2 million | Up $340.4 million |
Fourth-quarter fiscal 2017 revenue was $5.023 billion, gross profit was $425.8 million, operating income was $118.1 million and net income attributable to Jabil was $45.7 million. Fourth-quarter diluted EPS was $0.25.
- EMS revenue was $11.078 billion, up from $11.029 billion; EMS segment income increased to $436.1 million from $373.7 million.
- DMS revenue was $7.985 billion, up from $7.324 billion; DMS segment income declined to $230.9 million from $256.6 million.
- Core operating income, a non-U.S. GAAP measure, was $667.0 million, compared with $630.3 million. Core diluted EPS was $2.11, compared with $1.86.
- Year-end cash and cash equivalents were $1.190 billion. Inventories increased to $2.942 billion from $2.457 billion, while accounts receivable were $1.397 billion.
- Total debt, including current and long-term obligations and capital leases, was $2.078 billion; $445.5 million was classified as current. Available unused revolving credit capacity was approximately $1.9 billion.
- Working capital was negative $243.9 million, compared with positive $280.3 million in fiscal 2016, largely reflecting higher accounts payable and accrued liabilities.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by DMS, including new business in consumer lifestyles and wearable technologies, healthcare and mobility. EMS revenue was broadly stable.
- Profitability deteriorated despite higher revenue. Gross margin narrowed, while operating income was reduced by substantially higher restructuring charges and other unusual items.
- Fiscal 2017 restructuring and related charges were $160.4 million versus $11.4 million in fiscal 2016, including $94.3 million of asset write-offs and $56.8 million of severance and benefits.
- SG&A declined to $907.7 million from $924.4 million, partly due to a $21.0 million reversal of stock-based compensation expense related to reduced expected vesting of performance awards.
- Other expense increased to $28.4 million from $8.4 million, including an $11.5 million other-than-temporary impairment on available-for-sale securities and higher securitization fees.
- The effective tax rate increased to 50.4% from 34.1%, although fiscal 2017 included a $27.5 million benefit from the release of certain non-U.S. deferred-tax valuation allowances.
- Operating cash flow improved materially, but investing cash use declined to $579.5 million from $1.180 billion because capital expenditures and acquisition spending were lower. Capital expenditures were $716.5 million, compared with $924.2 million.
- Financing activities used $404.5 million, primarily for debt repayments, share repurchases and dividends. Fiscal 2017 share repurchases totaled approximately $306.4 million, compared with $148.3 million.
Guidance, outlook, commentary, risks and unusual items
- The 2017 Restructuring Plan is expected to generate total charges of approximately $195.0 million; $154.2 million had been incurred by August 31, 2017. Management expects the remaining charges in fiscal 2018 and annualized savings of $70 million to $90 million beginning in fiscal 2019. Fiscal 2017 savings were approximately $25 million.
- Management expected net capital expenditures of approximately $700 million during the next 12 months, excluding acquisitions, primarily supporting EMS and DMS operations.
- Management stated that cash, operating cash flow, available credit, receivables programs and capital-market access were expected to fund working capital, capital expenditures, dividends, repurchases and potential acquisitions for the next 12 months.
- After year-end, a September 2017 hurricane caused significant damage to the Cayey, Puerto Rico operation. Jabil anticipated asset impairments and business-interruption costs in the first half of fiscal 2018, with most costs expected to be offset by insurance; the final impact was not clear in the filing.
- The company completed the $31.4 million Lewis Engineering acquisition during fiscal 2017 and acquired True-Tech Corporation for $95.9 million on September 1, 2017, after the reporting date.
- Jabil faced significant customer concentration, limited long-term customer commitments, product-demand volatility, pricing pressure, capacity-utilization risk, component shortages, international operating and currency risks, cybersecurity and information-system risks, regulatory and environmental exposure, acquisition-integration risk, and restructuring execution risk.
- IRS examinations for fiscal years 2009–2011 and 2012–2014 produced proposed adjustments primarily involving intercompany transactions. Potential tax payments cited were approximately $28.6 million and $5.3 million, respectively, before additional interest and penalties. Management disputed the adjustments and did not expect a material adverse effect, but the final resolution remained uncertain.
- The company had $100.9 million of recorded liabilities for uncertain tax positions, excluding these amounts from contractual-obligation timing because payment timing and ultimate amounts could not be reasonably estimated.
- Management and Ernst & Young reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions.
Important facts for investors to verify
- Whether the restructuring plan achieves the targeted $70 million to $90 million of annual savings and how much additional fiscal 2018 cash cost remains.
- The ultimate insurance recoveries, impairments and operating disruption from the Puerto Rico hurricane.
- Liquidity available after the March 15, 2018 maturity of the $399.5 million 8.250% Senior Notes and the status of refinancing plans.
- Customer concentration and exposure to Apple, including the effect of order changes, cancellations or sourcing decisions.
- Inventory growth, reserve adequacy and working-capital requirements as demand changes, particularly in mobility and consumer-related businesses.
- Final IRS and other tax-audit outcomes, including potential interest and penalties.
- Cash repatriation constraints: approximately $841.1 million of foreign-subsidiary cash could not be repatriated without potential tax consequences, and the company recorded an $86.2 million deferred tax liability for intended repatriations.
- The effect of the new revenue-recognition standard, expected to be adopted in fiscal 2019, including the shift for certain contracts from point-in-time to over-time recognition and the treatment of fulfillment costs.