Jabil Inc. Fiscal 2023 First Quarter Summary
Business context and reporting period
Jabil provides global electronics design, manufacturing and supply-chain services through its Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS) segments. This Form 10-Q covers the three months ended November 30, 2022, compared primarily with the three months ended November 30, 2021. The filing was issued January 6, 2023.
- EMS represented $4.546 billion of revenue, or 47% of total revenue; DMS represented $5.089 billion, or 53%.
- Approximately 85.7% of revenue was sourced internationally.
- The five largest customers contributed approximately 47% of revenue, and 75 customers contributed approximately 90%.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net revenue | $9.635 billion | $8.567 billion | 12.5% increase |
| Gross profit | $743 million | $675 million | 10.1% increase |
| Gross margin | 7.7% | 7.9% | 20 basis-point decline |
| Operating income | $362 million | $350 million | 3.4% increase |
| Net income attributable to Jabil | $223 million | $241 million | 7.5% decrease |
| Diluted EPS | $1.61 | $1.63 | Decrease |
| Operating cash flow | $166 million | $(46) million | $212 million improvement |
| Adjusted free cash flow | $2 million | $(119) million | $121 million improvement |
Net income margin was approximately 2.3% versus 2.8% in the prior-year quarter. The decline in earnings reflected $45 million of restructuring, severance and related charges, higher interest expense, higher other expense and a higher effective tax rate. Diluted weighted-average shares declined to 138.0 million from 147.7 million, partly supporting per-share results.
- Cash and cash equivalents were $1.217 billion, down from $1.478 billion at August 31, 2022.
- Total debt was $2.876 billion, including $300 million of notes due July 2023. Jabil reported compliance with all debt covenants.
- The company reported $3.8 billion of unused revolving-credit capacity and up to $3.2 billion of commercial-paper capacity.
- The global asset-backed securitization program had no available liquidity at November 30, 2022. Trade receivable sale programs provided up to approximately $1.1 billion of available liquidity.
- Inventory increased to $6.429 billion from $6.128 billion, primarily because of higher raw-material balances associated with supply-chain constraints.
Material changes versus the prior comparable period
- Revenue growth was led by an 18% increase in EMS revenue and an 8% increase in DMS revenue. EMS growth was attributed mainly to 5G, wireless and cloud, digital print and retail, networking and storage, and industrial and capital equipment activities.
- Gross margin declined because of product mix.
- Restructuring charges increased from zero to $45 million, primarily for headcount reductions intended to optimize business activities. The related restructuring liability was $54 million, with most severance expected to be paid during fiscal 2023.
- Interest expense rose to $61 million from $33 million, primarily because of higher rates on credit facilities and commercial paper.
- Other expense increased to $15 million from $1 million, primarily because of higher interest rates and increased fees associated with receivables-sale programs.
- Capital expenditures were $314 million, partly offset by $150 million of proceeds and advances from sales of property, plant and equipment.
- Jabil repurchased $161 million of common stock during the quarter. The company had $102 million remaining under its prior $1.0 billion authorization and a new $1.0 billion authorization approved in September 2022.
Guidance, outlook, risks and unusual items
- Management anticipated approximately $875 million of net capital expenditures for fiscal 2023.
- Management expected an additional $300 million of cloud-business components to shift from purchase-and-resale to customer-controlled consignment during fiscal 2023, for a total expected transition of $800 million. The shift is expected to increase reported gross margins and reduce cash used in that business.
- Management expected to continue paying regular quarterly dividends at an amount similar to past declarations, although future dividends remain discretionary.
- COVID-19-related restrictions, supply-chain constraints, component availability and transportation challenges continued to affect operations and customers.
- Key risks include customer concentration, dependence on certain suppliers and single-source components, demand volatility, international operations and currency fluctuations, energy and transportation costs, cybersecurity and information systems, manufacturing or design defects, restructuring execution, debt and interest-rate exposure, tax matters, acquisitions and broader economic or geopolitical events.
- Jabil sells receivables without recourse through several programs. It sold $3.528 billion under trade-receivable programs and $1.066 billion through asset-backed securitization during the quarter; related pre-tax losses totaled $18 million. These programs are an important source of operating liquidity.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material change to internal control over financial reporting was identified.
Facts investors should verify
- Whether revenue growth and the expected cloud consignment transition improve sustainable margins rather than primarily changing revenue presentation.
- The pace of inventory normalization and the effect of supply-chain constraints on working capital and cash conversion.
- Liquidity available after the July 2023 $300 million senior-note maturity, including reliance on receivables-sale programs and commercial paper.
- The recurring versus nonrecurring nature of the $45 million restructuring charge and associated severance payments.
- Exposure to the five largest customers, single-source suppliers and changes in customer demand across EMS and DMS end markets.
- The effect of higher interest rates, foreign-exchange movements and receivable-sale fees on future earnings and cash flow.