Fitch Affirms Jabil Circuit's IDR at 'BBB-'; Outlook Stable
CHICAGO -- May 23, 2014
Fitch Ratings has affirmed the ratings for Jabil Circuit, Inc. (Jabil),
including the long-term Issuer Default Rating (IDR) of 'BBB-'. The Rating
Outlook is Stable. A full list of ratings follows at the end of this press
The rating actions affect approximately $3 billion of debt, including the
company's $1.3 billion revolving credit facility (RCF).
The ratings and Stable Outlook reflect Fitch's expectations that Jabil's
operating performance will begin improving in fiscal 2015 from the resumption
of revenue growth and profit margin expansion, following a challenging fiscal
2014 (ended Aug. 31). Fitch expects new mobile device design wins and product
ramps in nontraditional markets to drive low- to mid-single digit revenue
growth in fiscal 2015.
Fitch believes Jabil will be challenged to organically replace more than $3
billion of lower revenues in fiscal 2014, stemming from the sale of the After
Market Service (AMS) business, disengaging from Blackberry Ltd. (Blackberry),
meaningfully lower than expected mobile device shipments and slower than
anticipated new product ramps in nontraditional end markets.
The resumption of revenue growth, operating leverage and cost savings from
restructuring should drive operating EBITDA margin to 6.0%-6.5% in fiscal
2015, after achieving a trough in the mid-5% range in fiscal 2014. The
company's restructuring actions, including those associated with winding down
operations with Blackberry Ltd. (Blackberry), are expected to be completed in
Nonetheless, Fitch expects free cash flow (FCF), (calculated after dividends)
usage could be more than $100 million in fiscal 2014 but should turn positive
in fiscal 2015-2016, driven by higher revenues and profitability. Lower
capital spending from current excess capacity also supports intermediate-term
annual FCF. Over the longer term, Fitch anticipates annual FCF will remain
volatile, driven by uneven capital spending, but gradually trend higher from
Customer concentration remains a key concern, given the company's top five
customers represented 46% of revenues for the six months ended Feb. 28, 2014.
However, over the longer term, Fitch believes further product and end market
diversification, particularly a growing mix of higher margin precision plastic
products from the acquisition of Nypro Inc. (Nypro), will lengthen average
product life cycles and result in greater visibility.
In addition to greater capabilities in the manufacture of precision plastic
products, Nypro strengthens Jabil's participation in healthcare, packaging and
consumer electronics industries. Nypro positions Jabil as the leader in the
healthcare space, and Fitch believes this end market will provide significant
growth opportunities over the longer term.
The ratings and Outlook incorporate Fitch's expectations that annual FCF could
be used for acquisitions or modest share repurchases. Fitch believes
acquisitions are likely to be relatively small and focused on nontraditional
end markets. The company has approximately $135 million remaining under the
$200 million share repurchase program authorized by the board of directors in
Credit protection measures will strengthen from higher profitability and
remain solid for the rating. Fitch expects total leverage (total debt to
operating EBITDA) will remain below 2.5 times (x), with total adjusted
leverage (total debt adjusted for rent expense to operating EBITDAR) below
3.0x. Fitch anticipates interest coverage (operating EBITDA to gross interest
expense) will range from 5x-10x, with funds from operations (FFO) interest
coverage of more than 5x. For the latest 12 months (LTM) ended Feb. 28, 2014,
total leverage was 1.8x and interest coverage was 8.1x.
The ratings are supported by:
--Jabil's scale advantages 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. Jabil's full suite of increasingly complex EMS
product offerings including product design, engineering, and product lifecycle
management, which enhance the value of EMS partnerships for customers;
--Favorable industry trends toward increased outsourcing of product design
consultation, component sourcing, manufacturing, and fulfillment logistics;
--Jabil's focus on underpenetrated, rapidly growing areas like the industrial,
medical, and defense and aerospace verticals. Jabil has a leading position in
the emerging industrial, medical, and clean tech space. Customer engagements
in these sectors tend to be much deeper with longer product life-cycles and
increased opportunity for cross-selling services;
Rating concerns include:
--Significant customer concentration risk with Jabil's top five customers
accounting for 46% of revenue for the six months ended Feb. 28, 2014;
--Minimal room for execution missteps, due to the relatively low profit margin
inherent in the EMS business model;
--Volatile FCF due to substantial working capital and capital expenditure
Future developments that may, individually or collectively, lead to negative
rating action include:
--Sustained total leverage exceeds 2.5x, likely due to margin compression
following loss of significant customer(s) or secular shifts. The current
ratings incorporate expectations for short-term margin volatility but also
assume visibility with respect to profit margins recovering to historical
levels in the near term.
--Lack of further end markets diversification over the longer-term, leaving
the company susceptible to significant operational shortfalls from lower than
expected volumes for a limited number of products;
--Inability to generate positive annual FCF through the cycle.
Positive rating actions are unlikely in the near term given Jabil's thin
operating margin profile and inconsistent annual FCF. Fitch believes a
positive rating action would require structurally lower leverage through the
cycle (total adjusted leverage near 2.5x) and annual FCF approaching $250
Pro forma for $600 million of net cash proceeds from the AMS sale on April 1,
2014, liquidity as of Feb 28, 2014 was solid. It consisted of: $1.3 billion of
cash ($419 million located overseas and subject to taxes on repatriation) and
$1.2 billion available under a $1.3 billion senior unsecured RCF expiring
Jabil also utilizes two accounts receivable securitization facilities for
additional liquidity purposes, both of which are located off balance sheet: a
$200 million committed European receivables facility and a $200 million
committed North American receivables securitization facility expiring in May
15, 2015 and Oct. 21, 2014, respectively.
Total debt as of Feb. 28, 2014 was $1.8 billion and consisted of:
--$146 million of borrowings under the RCF;
--$308 million in 7.75% senior unsecured notes due July 2016;
--$398 million in 8.25% senior unsecured notes due March 2018;
--$400 million in 5.625% senior unsecured notes due Dec. 2020;
--$500 million in 4.7% senior unsecured notes due July 2022.
Jabil also had approximately $351 million outstanding under its off-balance
sheet European and North American receivables securitization facilities and
$43 million under other off-balance sheet accounts receivable sales facilities
as of the quarter ended February 28, 2014, which are included in Fitch's
adjusted debt calculation.
Fitch affirms Jabil's ratings as follows:
--Long-term IDR at 'BBB-';
--Senior unsecured RCF at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Fitch Ratings, Inc.
70 West Madison
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John M. Witt, CFA
Brian Bertsch, New York, +1 212-908-0549
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