Jabil Circuit, Inc. — Fiscal 2016 First-Quarter 10-Q Summary
Business context and reporting period
Jabil provides worldwide electronics manufacturing, design and product-management services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments. The filing covers the three months ended November 30, 2015, compared with the three months ended November 30, 2014. Jabil operated in 28 countries, and 92.1% of quarterly revenue was from foreign operations.
Financial performance and key metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net revenue | $5.208 billion | $4.550 billion | +14.5% |
| Gross profit | $483.5 million | $383.0 million | +26.3% |
| Gross margin | 9.3% | 8.4% | +0.9 percentage points |
| Operating income | $214.5 million | $144.8 million | +48.2% |
| Operating margin | 4.1% | 3.2% | +0.9 percentage points |
| Net income attributable to Jabil | $131.9 million | $72.2 million | +82.8% |
| Diluted EPS | $0.68 | $0.37 | +$0.31 |
| Core operating income | $248.5 million | $180.6 million | +37.6% |
| Core diluted EPS | $0.85 | $0.55 | +$0.30 |
EMS revenue increased 3% to $2.724 billion, while DMS revenue increased 30% to $2.484 billion. Management attributed DMS growth primarily to stronger mobility demand, new business and growth in consumer lifestyles and wearable technologies. The five largest customers represented approximately 55% of revenue.
Income from continuing operations before tax was $181.8 million, compared with $112.9 million. The effective tax rate declined to 27.4% from 35.2%, principally because of increased income in lower-tax jurisdictions. Cash dividends declared remained $0.08 per common share.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $1.130 billion at November 30, 2015, up from $914.0 million at August 31, 2015.
- Operating cash flow was $145.2 million, down from $189.1 million year over year, primarily reflecting higher accounts receivable and prepaid assets.
- Investing cash flow was negative $344.1 million, including $252.1 million of capital expenditures, $67.3 million for acquisitions and $27.5 million for a note receivable.
- Financing cash flow was positive $414.4 million, reflecting approximately $2.0 billion of borrowings and $1.5 billion of debt repayments, as well as $54.6 million of share repurchases and $16.5 million of dividends paid.
- Total notes payable, long-term debt and capital lease obligations were $2.167 billion, compared with $1.670 billion at August 31, 2015. The increase primarily reflected the $500.0 million term-loan borrowing in September 2015.
- Approximately $348.3 million of debt and capital lease obligations were classified as current. The $312.0 million principal amount of 7.750% senior notes is due in 2016.
- Jabil had a $1.5 billion revolving credit facility, potentially expandable to $2.0 billion, and a $500.0 million term-loan facility. Management stated that the company was in compliance with applicable covenants.
- Approximately $896.1 million of cash held by foreign subsidiaries could not be repatriated to the United States without potential tax consequences.
- Jabil sold $1.4 billion of trade receivables under uncommitted sale programs during the quarter and received $1.4 billion in proceeds. Asset-backed securitization programs provided maximum availability of $200 million in North America and $175 million internationally.
Material changes versus the prior comparable period
- Revenue growth was driven disproportionately by DMS, particularly mobility and consumer-related businesses; EMS growth was modest.
- Gross margin expanded from 8.4% to 9.3%, which management attributed to customer mix, cost control and improved productivity.
- Operating income benefited from lower restructuring charges, which declined to $1.4 million from $13.5 million.
- Stock-based compensation increased to $24.8 million from $18.0 million, and amortization of intangibles increased to $7.8 million from $5.6 million due to recent acquisitions.
- Two acquisitions were completed during the quarter for aggregate cash consideration of approximately $72.8 million. Preliminary purchase accounting included $21.4 million of goodwill and $28.5 million of intangible assets.
- Jabil entered into an agreement to acquire certain Hanson assets for an expected purchase price of $172.5 million plus assumed debt, subject to regulatory clearance and customary closing conditions.
- Jabil repurchased 2.8 million shares for approximately $54.5 million, exhausting the remaining amount under its $100 million authorization.
- The company early adopted new deferred-tax presentation guidance prospectively, reclassifying deferred tax assets and liabilities as noncurrent.
Guidance, outlook, commentary, risks and unusual items
- Management expected capital expenditures of $800 million to $1.0 billion over the next 12 months, principally for capacity, infrastructure and DMS investments.
- Management expected available cash, operating cash flow, credit facilities and receivables programs to fund capital expenditures, dividends, acquisitions and working-capital needs for the next 12 months, including repayment of the 7.750% senior notes.
- The 2013 restructuring plan had generated $151.9 million of cumulative charges through November 30, 2015. Approximately $21.0 million of related accrued liabilities was expected to be paid over the following 12 months. Expected annualized gross savings were approximately $76.8 million, or approximately $65.0 million after offsets.
- Results may be seasonally stronger in the first fiscal quarter because of holiday demand for consumer products in DMS; quarterly results should not be viewed as necessarily indicative of full-year performance.
- Key risks include customer concentration, short-term and changeable customer production commitments, component shortages and single-source suppliers, international and foreign-exchange exposure, execution and integration risks from acquisitions, restructuring execution, competition and pricing pressure, and dependence on receivables-sale programs for liquidity.
- The IRS proposed adjustments primarily involving intercompany transactions for fiscal years 2009–2011. If the IRS prevails, estimated additional income tax would be approximately $34.6 million before proposed interest and penalties; management intends to contest the matter.
- Ordinary-course litigation was not expected by management to have a material adverse effect, and no significant subsequent events were reported through the filing date.
- Disclosure controls and procedures were evaluated as effective, with no material changes identified in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether DMS mobility and consumer-related growth is sustainable and how much reflects new programs, acquisitions or seasonal demand.
- Customer concentration and exposure to the largest customers, including the impact of order reductions, pricing pressure or sourcing changes.
- Execution of the $800 million–$1.0 billion capital-spending plan and the resulting effect on free cash flow and leverage.
- Funding and refinancing plans for the $312 million senior-note maturity due in 2016.
- Availability and renewal risk for asset-backed securitization and uncommitted receivables-sale programs.
- Integration, valuation and profitability of the two completed acquisitions and the proposed Hanson transaction.
- Progress, cash costs and realized savings under the 2013 restructuring plan.
- Potential exposure from the IRS tax dispute, foreign cash repatriation restrictions and expiration of tax incentives.