Jabil Circuit, Inc. — Fiscal 2014 First-Quarter 10-Q Summary
Business context and reporting period
Jabil provides global electronics design, manufacturing and product-management services through its Diversified Manufacturing Services (DMS), Enterprise and Infrastructure (E&I), and High Velocity Systems (HVS) segments. The filing covers the three months ended November 30, 2013, compared primarily with the three months ended November 30, 2012. The statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net revenue | $4.611 billion | $4.637 billion |
| Gross profit | $368.8 million | $350.6 million |
| Gross margin | 8.0% | 7.6% |
| Operating income | $172.7 million | $170.3 million |
| Operating margin | 3.7% | 3.6% |
| Net income attributable to Jabil | $117.9 million | $105.8 million |
| Diluted EPS | $0.57 | $0.51 |
| Operating cash flow | $117.7 million | $151.9 million |
| Capital expenditures | $203.0 million | $166.5 million |
At November 30, 2013, cash and cash equivalents were $769.2 million, total assets were $9.03 billion, and total debt, including capital lease obligations, was $1.795 billion. Current debt installments were $117.2 million, with $1.678 billion classified as long-term. Total equity was $2.418 billion. Net cash decreased by $242.2 million during the quarter to $769.2 million.
Revenue was approximately 84.5% foreign-sourced. The five largest customers represented approximately 48% of revenue, and 69 customers represented approximately 90% of revenue. Segment revenue was DMS $2.282 billion, E&I $1.337 billion and HVS $993 million.
Material changes versus the prior comparable period
- Revenue declined modestly by approximately 0.6%, with DMS revenue increasing 5%, offset by a 6% decline in E&I and a 5% decline in HVS.
- Gross profit increased approximately 5.2%, and gross margin expanded by 40 basis points, primarily due to a greater contribution from higher-margin DMS business.
- GAAP net income attributable to Jabil increased approximately 11.4%, while diluted EPS increased from $0.51 to $0.57.
- Core operating income declined 8.0% to $177.1 million, and non-GAAP core earnings declined 17.5% to $105.4 million. The filing’s reconciliation reflects a $39.0 million reversal of stock-based compensation expense in the current quarter, partially offset by restructuring, amortization and acquisition-related items.
- Operating cash flow declined approximately 22.5%, despite a $137.4 million reduction in inventories, primarily because accounts receivable increased $146.6 million and accounts payable and accrued expenses decreased $73.7 million.
- Capital expenditures increased to $203.0 million, principally for DMS machinery and equipment, maintenance and information-technology infrastructure.
- Jabil completed the $679.5 million Nypro acquisition in July 2013. Nypro contributed approximately 6.7% of consolidated revenue for the quarter and represented 14.4% of consolidated assets at November 30, 2013.
Guidance, outlook, unusual items and risks
- Management expects fiscal 2014 capital expenditures of approximately $100 million to $200 million, principally for maintenance, information technology and DMS growth.
- The 2014 restructuring plan, primarily related to the termination of the BlackBerry business relationship, generated $14.6 million of charges in the quarter. Jabil expects total fiscal 2014 charges of approximately $35 million to $85 million and anticipates annualized net savings of $10 million to $25 million after lost BlackBerry revenue.
- The continuing 2013 restructuring plan generated $6.7 million of quarterly charges. Total expected charges under that plan are approximately $188 million through fiscal 2015, with expected annual net savings of approximately $75 million after offsets.
- Jabil was in discussions with BlackBerry regarding termination of the relationship and had not established a reserve because a loss was not considered probable. The filing warns that reduced business and related costs could materially adversely affect results.
- On December 17, 2013, Jabil announced an agreement to sell its Aftermarket Services business to iQor for $725 million, consisting of $675 million in cash and $50 million of iQor preferred stock. The transaction remained subject to regulatory approvals, third-party consents and other closing conditions and was expected to close in fiscal third quarter 2014.
- Liquidity depends partly on receivable securitization and sale programs. The North American $200 million program expires October 21, 2014, and the foreign $200 million program expires May 15, 2015. Several other receivable-sale facilities expire in late 2014 or 2015, and uncommitted facilities may not provide funding when requested.
- Principal risks include customer concentration, BlackBerry disengagement, seasonal and volatile demand, component availability and single-source suppliers, international operations and foreign exchange, restructuring execution, Nypro integration, debt and refinancing requirements, and global economic conditions.
- Management concluded that disclosure controls were effective and identified no material changes to internal control over financial reporting. The assessment excluded Nypro’s internal controls under the SEC’s first-year acquisition guidance.
Important facts for investors to verify
- Whether BlackBerry-related revenue reductions and restructuring cash costs remain within management’s estimates.
- Whether the stated restructuring savings are achieved without disrupting customer service, capacity utilization or labor relations.
- The final terms, timing, proceeds and accounting treatment of the proposed AMS divestiture.
- Nypro’s post-acquisition revenue, margins, integration costs, goodwill and intangible-asset valuation.
- The sustainability of operating cash flow after increased capital expenditures and working-capital movements.
- Renewal or replacement of receivable securitization and sale facilities before their scheduled expirations.
- Debt service capacity, credit ratings, covenant compliance and exposure to variable interest rates.
- The effect of customer concentration, especially the five largest customers representing approximately 48% of revenue.