Fitch Affirms Jabil Circuit's Ratings at 'BBB-'; Outlook Stable
NEW YORK -- June 25, 2013
Fitch Ratings has affirmed Jabil Circuit, Inc.'s (Jabil) Issuer Default Rating
(IDR) at 'BBB-'. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--Fitch believes that long-term secular shifts in the Electronics
Manufacturing Services (EMS) sector will gradually lead to greater stability
and profitability of leading market participants. Leading EMS providers such
as Jabil are increasingly strategic to the business operations and strategy of
their customers given their role in product design consultation, component
sourcing, manufacturing and fulfillment logistics. In addition, after-market
services (AMS), such as product repair, are becoming a larger part of the
overall customer engagement.
--Jabil's global scale combined with its history of best-in-class execution
and full suite of service offerings provides a significant competitive
advantage versus smaller competitors.
--Jabil continues to focus on under-penetrated, rapidly growing areas like the
industrial, medical, and defense and aerospace verticals. Customer engagements
in these sectors tend to be much deeper with longer product life-cycles and
increased opportunity for cross-selling services. Jabil expects to close on
its acquisition of Nypro Inc. (Nypro) in July 2013 which is expected to
significantly enhance Jabil's position in the medical market.
--Jabil's customer concentration issue remains significant. The company has
experienced significant growth in recent years principally with its
specialized services segment. Much of this growth is driven by one large
customer. The company's investment in working capital and capital expenditures
to support recent growth has been significant. Fitch believes that Jabil has
taken steps to mitigate some of the risks associated with its customer
concentration issues, having learned from prior customer engagements.
Nonetheless this is an inherent risk in the industry and fairly pronounced
with Jabil. The top three customers for Jabil in fiscal 2012, all of whom
represented greater than 10% of revenue, were Apple, RIM and Cisco.
--Fitch expects leverage (total debt / operating EBITDA) to remain near 2x
with adjusted leverage (adjusted for off-balance-sheet accounts receivable
securitization and operating leases) to be approximately 3x. Fitch also
expects the company to fund share repurchases principally through free cash
flow generation. Fitch estimates leverage at 1.6x and adjusted leverage at
2.5x as of May 2013.
Fitch does not expect Jabil's pending acquisition of Nypro for $665 million to
have any near-term impact on the rating. Jabil has stated it expects to fund
the acquisition through a combination of existing cash balances and borrowings
under its credit facility. Fitch expects any resulting increase in leverage to
be modest and temporary. Longer term, this business could materially increase
stability and profitability in the business model, which would have a positive
impact on the credit. As with any sizeable acquisition in this space there is
also significant execution risk during the integration of Nypro. Fitch
believes this risk is at least partially mitigated by Jabil's strong record of
execution and prior successful acquisitions. In addition, Nypro is expected to
largely keep its operations intact while absorbing Jabil's smaller healthcare
Nypro is a manufacturer of precision plastic products for the healthcare,
packaging and consumer electronics industries. This acquisition complements
Jabil's 2007 acquisition of Taiwan Green Point which forms the base of its
Diversified Manufacturing Services (DMS) segment. This business in general has
higher margin than Jabil's traditional electronics manufacturing business. In
addition, Nypro's mix of business generally has longer product cycles than
Jabil's existing DMS business, which should help moderate volatility in the
business model. Nypro's position in the healthcare market has been a
significant focus for expansion for Jabil in recent years and represents a
significant growth opportunity for the combined company over time.
Rating strengths include the following:
--Strong management team with a track record of delivering best-in-class
execution with a disciplined approach to growing the business;
--Advantages in scale as one of the largest of the tier 1 EMS vendors with a
balanced global manufacturing footprint, including a strong mix of facilities
in low-cost regions;
--Favorable industry trends toward increased manufacturing outsourcing,
particularly in the emerging industrial, medical, and clean tech space where
Jabil has a leading position;
--Strategic positioning in increasingly complex EMS product offerings
including product design, engineering, and product lifecycle management which
enhance the value of EMS partnerships for customers;
--Vertically integrated operations which typically drive higher margins in
periods of growth.
Rating concerns include the following:
--The potential for Jabil to pursue further vertical integration capabilities
which could lead to additional debt-financed acquisitions or execution risk in
an industry with minimal room for execution missteps due to the relatively low
profit margin inherent in the business model;
--An intensely competitive environment which pressures profitability across
--Significant customer concentration risk with Jabil's top five customers
accounting for 48% of revenue in fiscal 2012.
Liquidity as of May 31, 2013 was solid consisting primarily of $1.35 billion
in cash and a fully available $1.3 billion senior unsecured revolving credit
facility expiring in March 2017. Jabil also utilizes two accounts receivable
securitization facilities for additional liquidity purposes, both of which are
located off balance sheet: a $200 million committed foreign receivables
facility and a $300 million committed North American receivables
securitization facility, expiring in May 15, 2015 and October 2014,
Total debt as of May 31, 2013 was $1.7 billion and consisted primarily of:
--$312 million in 7.75% senior unsecured notes due July 2016;
--$400 million in 8.25% senior unsecured notes due March 2018;
--$400 million in 5.625% senior unsecured notes due December 2020;
--$500 million in 4.7% senior unsecured notes due July 2022.
Jabil also had approximately $331 million outstanding under its
off-balance-sheet European and North American receivables securitization
facilities and additional amounts under its accounts receivable sales
facilities as of May 31, 2013, which are included in Fitch's adjusted debt
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Secular shifts or a large customer loss resulting in margin compression with
limited visibility as to the potential to return profit margins to historical
Positive: Upside movement in the ratings is limited given Jabil's thin
operating margin profile and capital-intensive business model coupled with
significant cyclical demand exposure. Greater diversification of the business
into markets with significantly lower cyclicality could potentially create an
opportunity for positive rating action.
Fitch has affirmed Jabil's ratings as follows:
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology', dated Aug. 8, 2012;
--'Evaluating Corporate Governance', dated Dec. 12, 2012;
--'Rating Technology Companies', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Rating Technology Companies
Corporate Rating Methodology
Evaluating Corporate Governance
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Jason Paraschac, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Jamie Rizzo, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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