Jabil Circuit, Inc. — Fiscal 2013 Second-Quarter Form 10-Q
Business Context and Reporting Period
Jabil provides global electronics design, manufacturing and product-management services across the Diversified Manufacturing Services (DMS), Enterprise & Infrastructure (E&I) and High Velocity Systems (HVS) segments. The filing covers the three and six months ended February 28, 2013, compared with the corresponding periods ended February 29, 2012. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Three months ended Feb. 28, 2013 | Year-over-year change | Six months ended Feb. 28, 2013 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $4.417 billion | +4.3% | $9.054 billion | +5.7% |
| Gross profit | $324.5 million | +0.7% | $675.1 million | +2.0% |
| Gross margin | 7.3% | Down from 7.6% | 7.5% | Down from 7.7% |
| Operating income | $149.0 million | Down from $150.2 million | $319.3 million | Down from $321.1 million |
| Net income attributable to Jabil | $88.5 million | Down from $97.7 million | $194.4 million | Down from $210.6 million |
| Diluted EPS | $0.43 | Down from $0.46 | $0.94 | Down from $1.00 |
| Operating cash flow | Not separately provided | — | $305.7 million | Up from $5.2 million |
- Operating margin was 3.4% for the quarter and 3.5% for the six-month period, versus 3.5% and 3.8%, respectively, in the prior-year periods.
- The effective tax rate increased to 25.8% for the quarter and 25.0% for the six months, compared with 19.6% and 20.1%, respectively, primarily because of changes in tax-jurisdiction mix and expiration of certain tax incentives.
- At February 28, 2013, cash and cash equivalents were $1.062 billion, down from $1.217 billion at August 31, 2012. Total assets were $8.248 billion and total equity was $2.178 billion.
- Inventory was $2.497 billion, up from $2.269 billion at August 31, 2012. Accounts receivable were $1.300 billion, up from $1.125 billion.
- Total notes payable and long-term debt were $1.763 billion, compared with $1.676 billion at August 31, 2012. Current debt installments increased to $109.6 million from $18.0 million.
- Six-month investing cash outflow was $370.8 million, including $371.5 million of capital expenditures, principally for DMS machinery and equipment, capacity expansion and information technology.
- Six-month financing cash outflow was $85.7 million after $2.178 billion of borrowings, $2.091 billion of repayments, $129.3 million of share repurchases and $34.7 million of dividends paid.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by DMS and E&I, partially offset by weakness in HVS. Quarterly DMS revenue increased 11% and E&I revenue increased 12%, while HVS revenue declined 15%. For six months, DMS and E&I increased 16% and 15%, respectively, while HVS declined 18%.
- HVS weakness primarily reflected lower mobility handset, display and printer volumes. DMS also experienced weakness in smart-grid, solar and wind-related products.
- Gross profit increased in dollars but margins declined modestly, while operating income and net income decreased because growth did not fully offset higher expenses, interest expense and taxes.
- Interest expense increased to $29.2 million for the quarter and $58.8 million for six months, primarily due to the 4.700% senior notes issued in fiscal 2012.
- Core operating income, excluding amortization and stock-based compensation, declined 3.4% for the quarter and 2.2% for six months. Core earnings declined 11.2% and 8.6%, respectively.
- Operating cash flow improved substantially, but working capital absorbed cash through a $222.6 million inventory increase and a $172.2 million accounts receivable increase. The improvement also reflected a $288.0 million increase in accounts payable and accrued expenses.
- The company repurchased approximately 7.34 million shares for $129.3 million during the six months, contributing to lower weighted-average shares outstanding.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected fiscal 2013 capital expenditures of $500 million to $700 million, principally for DMS growth, China capacity expansion, Taiwan research and development expansion, maintenance and information technology.
- Management expected liquidity to be adequate for the next 12 months through cash, operating cash flow, credit facilities and receivables programs. It also expected quarterly dividends to continue at amounts similar to prior declarations, subject to board approval.
- Jabil agreed to acquire Nypro for an expected purchase price of $665 million, subject to regulatory and other closing conditions. Closing was expected during fiscal fourth quarter but could be delayed because of uncertain antitrust-clearance timing. Funding was expected from existing cash and credit facilities.
- Approximately $718.4 million of foreign-subsidiary cash could not be repatriated to the United States without potential tax consequences.
- Receivables financing is material to liquidity. Asset-backed programs provided maximum availability of $300 million in North America and $200 million internationally; a $200 million committed receivables-sale facility was scheduled to expire May 28, 2013, with other programs expiring in November 2013 and June 2015.
- Customer concentration is significant: the five largest customers represented approximately 53% of six-month revenue and 55 customers represented approximately 90%. Foreign-source revenue represented 86.1% of six-month revenue.
- Key risks include customer demand volatility, seasonality, HVS consumer exposure, component shortages and single-source suppliers, inventory obsolescence, international and currency risks, acquisition integration, leverage, refinancing and credit-market risk, regulatory and tax matters, and product liability or intellectual-property claims.
- The IRS has proposed approximately $69.3 million of additional tax for fiscal 2003–2005 before subsequent tax attributes, plus potential interest and penalties. Management is contesting the matter and believes the resolution will not materially affect the company, although an unfavorable outcome or similar claims for later years could be material.
- Jabil reported no material adverse effect from ordinary-course litigation, no defaults upon senior securities, effective disclosure controls, and no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether DMS and E&I growth can offset continued HVS weakness and whether gross and operating margins stabilize.
- The timing, regulatory approval, funding and integration consequences of the proposed $665 million Nypro acquisition.
- Inventory and receivables growth, cash conversion and the extent to which operating cash flow depends on receivables sales and increased payables.
- Debt maturities, variable-rate exposure, covenant compliance and renewal of receivables-financing programs.
- The outcome and potential later-year implications of the IRS tax examination and the expiration of foreign tax incentives.
- Customer concentration, component availability, seasonality and exposure to international markets and currency fluctuations.