Fitch: Jabil Circuit's Ratings Unaffected by Recent Events & Share
NEW YORK -- December 18, 2013
Fitch Ratings has stated that it does not expect Jabil Circuit, Inc.'s (Jabil)
ratings to be impacted by the company's recent announcement of a $200 million
share repurchase program, significantly reduced guidance for fiscal 2014 and
business divestiture. Fitch had previously affirmed Jabil's Issuer Default
Rating (IDR) at 'BBB-' with a Stable Outlook in June 2013.
Jabil's ratings already incorporate expectations for significant occasional
volatility in the business, mitigated in part by counter cyclical working
capital cash flows. Further, Jabil has more than adequate existing cash to
support the $200 million share repurchase program in addition to expectations
for solid free cash flow generation through the remainder of fiscal 2014.
On Dec. 17, Jabil announced several developments which are material to the
Jabil announced that it has achieved greater clarity on the timing and
restructuring charges related to the cessation of manufacturing services for
one of its largest customers, Blackberry Limited. Jabil expects most of its
current programs to end in January and Fitch estimates cash restructuring
charges to total near $40 million. More importantly, Jabil does not expect to
incur material charges related to working capital associated with these
programs. The decision to end its relationship with Blackberry was made in
September and the associated loss of revenue was already reflected in current
Fitch believes resolution of the timing and clarity on the associated charges
limits the risk of potential additional downside to the disengagement.
Jabil announced an agreement to sell its after-market services business to
iQor Holdings for approximately $725 million (including a $50 million note).
Jabil expects to receive net proceeds (after-tax and fees) in excess of $600
million. Fitch estimates that this business contributed approximately $100
million in annual EBITDA, or roughly 10% of total EBITDA. The company has not
identified specific uses for the proceeds from the sale but Fitch would expect
a majority of the cash to be either used to support future growth or returned
Fitch views the divestiture as neutral to the credit as this had not developed
into a core service offering of the company. While Fitch believed the
after-market services business increased the level of customer engagement and
therefore the stickiness of the related engagements, Fitch believes this
benefit was limited to a only few customers.
Jabil announced that it expects revenue and earnings for the next fiscal
quarter (end January 2014) to be significantly below expectations due to
volatility associated with a single large customer which could persist for the
remainder of the fiscal year. As a result of the revenue reduction, margins
will also decline modestly with lower utilization. Fitch estimates EBITDA
margins were roughly 5.9% over the LTM which Fitch expects will decline
roughly 30 to 40 basis points for the full fiscal year. Fitch does not expect
Jabil to disengage in any way from this customer going forward. Rather, this
is simply a function of the highly volatile business Jabil is engaged in with
significant customer concentration. Fitch does believe Jabil will look for
ways to reduce the associated volatility in the future as management has been
keen on minimizing business risk in these types of engagements.
Fitch believes that the volatility Jabil is experiencing, on top of the recent
decision to end its relationship with Blackberry is a significant but
temporary hit to what had been very strong financial performance at the
company. Jabil in recent years has been trying to diversify the business into
less volatile areas with longer contractual customer engagements, most notably
with its acquisition of Nypro earlier in 2013. Fitch believes that the road
forward for Jabil will eventually have reduced volatility. In the meantime,
management has shown an ability and willingness to deal rationally with its
core business; willing to accept significant customer concentration for
acceptable margins that compensate for this level of potential volatility.
Management had previously taken steps to reduce some risk with the customer
program primarily responsible for the volatility going forward as the customer
co-invested in a very substantial capital expenditure program over the past
few years. Similarly, Fitch believes the disengagement from Blackberry shows
management's proactive approach to risk mitigation as the real danger in that
program was the level of working capital investment required from Jabil.
Pro forma for the divestiture of AMS, the disengagement from Blackberry and
reduced revenue forecast from the aforementioned customer, Fitch still expects
EBITDA to range above $850 million in fiscal 2014. At the low end, this would
equate with leverage of approximately 2x or [3x when adjusted for off-balance
sheet debt]. These levels are on target with normal expectations for the
rating which typically have higher thresholds for temporary disruptions to the
business or small strategic acquisitions. Because metrics remains reasonable
and liquidity is solid, Fitch does not view the share repurchase program as
having a material negative impact on the credit. The company does expect to
generate free cash flow before dividends of $400 million to $500 million in
fiscal 2014 which further supports the rating in conjunction with the share
Going forward, Fitch would be concerned if share repurchase activity increased
to an extent that caused leverage to increase (either directly or through
future funding of working capital needs) beyond levels expected for the
rating. Fitch notes that periods of volatility in the business leading to
significantly lowered equity valuation can increase event risk associated with
the credit. If Fitch believed that event risk had increased materially, it is
possible the rating outlook could be reduced to Negative.
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 logistics 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 November 30, 2013 was solid consisting primarily of $769
million in cash and approximately $1.2 billion available under a $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 $200 million committed
North American receivables securitization facility, expiring in May 15, 2015
and October 2014, respectively.
Total debt as of November 30, 2013 was $1.8 billion and consisted primarily
--Approximately $100 million borrowed under the $1.3 billion revolving credit
facility expiring March 2017;
--$307 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 November 30, 2013, which are included in Fitch's adjusted
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 rates Jabil as follows:
--Long-term IDR 'BBB-';
--Senior unsecured debt 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology', dated Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
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Fitch Ratings, Inc.
Jason Paraschac, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Jamie Rizzo, CFA
Brian Bertsch, New York, +1 212-908-0549
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