Jabil Circuit Q4 Conference Call
A Fool Conference Call Synopsis*
By Gregory Markus (TMF Boring)
ANN ARBOR, Mich. (Oct. 6, 1998) /FOOLWIRE/ -- Jabil Circuit Inc. (NYSE: JBL) today reported earnings for the fourth fiscal quarter and the 1998 fiscal year ended August 31, 1998. Jabil is an electronic manufacturer of circuit board assemblies for international original equipment manufacturers in the data communications, personal computer, computer peripheral and automotive markets. Jabil offers circuit design, board design from schematic, prototype assembly, volume board assembly and system assembly services from automated manufacturing facilities in Florida, Michigan, California, Idaho, Scotland, Italy, Malaysia and Mexico.
Fiscal Fourth Quarter
Revenue increased 4% to $317.6 million compared to $305.2 million for the same period of fiscal 1997. Pro forma net income, which excludes the one-time, non recurring charge for the Hewlett-Packard (NYSE: HWP) acquisition, was $13.4 million or $0.35 per share for the fourth quarter of 1998, compared with net income of $18.0 million, or $0.47 per share for the same period of fiscal 1997.
During the quarter, Jabil completed the acquisition of Hewlett-Packard's LaserJet manufacturing operations for $80 million and recorded a one-time acquisition-related charge of $24.4 million, consisting of $10.1 million in write-offs for in-process research and development, $10 million for workforce-related expenses, and $4.3 million in other expenses. This resulted in an after-tax charge of $0.39 per share.
Jabil's actual net income for the fourth quarter, including the above-mentioned charge, was a loss of $1.8 million or a loss of $0.05 per share, compared to $18.0 million or $0.47 per share for the same period of fiscal 1997.
Fiscal Year 1998
Fiscal year revenues increased 31% to $1.28 billion, compared to $978.1 million in fiscal 1997. Pro forma net income was $69.8 million or $1.81 per share, compared with net income of $52.5 million or $1.37 per share for fiscal 1997, increases of 33% and 32% respectively.
Fiscal year gross profit increased 43% to $161.7 million compared to $120.9 million for fiscal year 1997. Pro forma operating income for fiscal year 1998 increased 29% to $105.9 million, compared to $81.9 million for fiscal year 1997.
Actual net income for fiscal year 1998 increased to $54.7 million or $1.42 per share (diluted), compared to $52.5 million or $1.37 per share (diluted) for fiscal year 1997, an increase of 4%.
Jabil Circuit President Thomas A. Sansone said, "We are pleased to report record fiscal 1998 results that were above our expectations and continue on track to our key financial goals. These results are a gratifying accomplishment in light of the simultaneous integration of our first major acquisition and the overall turmoil in the global marketplace."
Income Statement: Sequential Trend Highlights
Revenues in the fourth fiscal quarter increased by 3% over third-quarter revenues.
Gross margin decreased to 11.5% of revenue, reflecting initial operations of the H-P acquisition, lower utilization in Scotland, and start up costs in California. Gross margin was somewhat better than anticipated due to firming production levels in the latter portion of the summer and lower than anticipated startup costs in the acquired H-P operations.
Sales, general, and administrative expense (SG&A) increased $2.2 million to $15.1 million, or 4.8% of revenue. This increase reflects administrative resources for the former H-P sites, additional information technology resources and expansion of corporate staff. Research and development expense (R&D) decreased by $137,000 to $928,000, or 0.3% of revenue.
Pro forma operating income, excluding acquisition related charges, decreased to $20.5 million, or 6.4% of revenue.
Interest expense decreased by $167,000, to $555,000, or 0.2% of revenue. Income taxes were 33.0% of income. (Normalized tax rate is 35.0%).
Pro forma net income after taxes was $13.4 million, or 4.2% of revenue, as compared to 5.6% in the prior sequential quarter. Pro forma earnings per share for the period were $0.35 on an average 38,447,000 shares during the period, fully diluted.
Balance Sheet: Sequential Trend Highlights
Cash flow from operations was approximately $15 million for the fourth quarter. During the quarter, Jabil increased its existing credit facility from $100 million to $225 million and funded the H-P acquisition.
The H-P acquisition was funded by cash of $40 million and $40 million of the company's credit facility. Significant balance sheet items included approximately $37 million for inventory and approximately $25 million for machinery and equipment and $7 million for intangible assets. Management anticipates that working capital associated with this acquisition will be consistent with Jabil's overall corporate goals -- that is, days sales outstanding (DSO) below 40 days and inventory turns of 10 or better.
Cash balances were $23 million at the end of Q4, as compared to $43 million at the end of Q3. The decrease was due to cash used to purchase the H-P operations, offset by cash generated by operations.
Accounts receivable increased by $2 million sequentially to $126 million. Calculated days sales outstanding (DSO) was 36 days, consistent with Q3.
Inventories increased by $39 million sequentially, to $123 million, primarily attributable to the inventory for the H-P operation (noted above). Inventory turns were 9, as compared to 12 in Q3, predominantly due to the acquired H-P inventory. Jabil anticipates that inventory turns will return to the overall goal of 10 in the next quarter.
Fixed assets increased by $39 million to $225 million reflecting $25 million in capital expenditures relating to the H-P acquisition and $24 million of other capital expenditures, offset by $10 million in depreciation. Depreciation for fiscal year 1998 was $33.5 million.
Long-term debt increased by $40 million to $90 million. The debt-to-capitalization ratio is 27%, with total liabilities-to-equity ratio at quarter's end of 1.1 to 1.
Average return on assets for the fourth fiscal quarter was 11%, with an average return on equity of 21.7%, excluding the effects of acquisition-related charges. Average return on assets for the fiscal year was 15%, with an average return on equity of 32.7%, excluding the effects of acquisition-related charges.
Comments on Q4 Results
Fourth-quarter revenue and operating earnings were higher than anticipated, reflecting a mid-summer rebound in production for both the communications and peripherals sectors.
The communications segment grew slightly sequentially as a result of increased production levels for most communications customers offset by cutbacks in production of one large product line in Scotland. The peripherals segment grew 46% over the preceding quarter as initial production for H-P LaserJet products commenced, offsetting continued softness in data storage products.
The PC segment remained flat sequentially as increased production levels for desktop business PCs offset end-of-production for some other desktop PCs and notebook products. The automotive segment declined 27% sequentially reflecting typical seasonal levels of production associated with auto model changeover, along with moderate impact from the General Motors (NYSE: GM) strike in the summer. The consumer segment declined 58% due to the end-of-life of an unsuccessful set-top box product.
New Factory Sites
Guadalajara. The Guadalajara work force has expanded to more than 800 employees, with plans for additional business units throughout FY99. This new location was profitable in Q4, and Jabil is already considering a significant expansion there as the plant approaches its first anniversary.
Boise, Idaho and Bergamo, Italy. Both acquired sites resumed operation with minimal disruption after the close on August 3. The acceptance rates among the former H-P employees was over 90%, and laser printer business unit volumes continue at levels consistent with prior expectations. Jabil is promoting its culture and business practices at these sites. Jabil has identified a site for construction of its own facility at Boise and plans to move from the leased H-P site to the new site by the end of FY99. Plans to utilize these sites for additional customers are under active development.
California. This greenfield project in San Jose continues on track with plans for relocating the current San Jose prototype and research and development operations in the new facility in the next several months. This site will concentrate on serving mid-volume turnkey manufacturing requirements for current and new customers and will help serve as a platform for product transition to multinational production in high volume plant sites. Jabil anticipates production for existing customers in Q2. Start-up costs associated with this new plant are expected to total approximately $0.02 per share in Q1 and approximately $0.01 in Q4. The site is anticipated to contribute to operating income in Q3.
Overall business levels are positioned to expand above targeted levels for FY99. Near-term production levels have recovered from the inventory correction of the spring and summer, while the long-term outlook benefits from the increased use of outsourcing in the industry and an increasing share for Jabil from customers. The overall level of new business development activity continues to be extremely active, with a noticeable interest from OEMs having strong traditions of vertical integration.
Near-term revenue and operating profits are expected to rebound more sharply in Q1 than previously anticipated, with revenue now expected to increase by 42%, reflecting the first full quarter of contribution from the former H-P facilities and growth in all business segments. Production levels in communications, peripherals, and computer segments are anticipated to rebound briskly in the fiscal first quarter and equal or exceed targeted growth rates on a sequential quarterly basis throughout the remainder of the fiscal year.
The communications segment is expected to account for slightly more than 40% of Jabil's total revenues in FY99 as revenue growth meets or exceeds 30% on an annual basis. Jabil announced that it had begun a significant new manufacturing relationship with Nortel Networks, formerly Bay Networks. (This is the unnamed new communications customer mentioned in the last quarterly conference call.) Nortel Networks is currently in the process of consolidating from approximately ten current suppliers and has chosen Jabil as one of its few global contract manufacturers. Current plans call for modest production in Q1, with increasingly significant levels of production in Q2 through Q4. Management anticipates that Nortel Networks may account for at least 10% of Jabil revenues by the end of FY99.
The peripherals segment is expected to grow sharply in Q1 as full production at the H-P printer sites is realized. Revenues in Q2 is anticipated to be above targeted rates in printers and storage products. Visibility beyond Q2 is more limited, but management estimates revenues to be sequentially flat in the seasonally slow spring and summer quarters. It is anticipated that the peripherals sector will account for approximately one-third of Jabil's revenues in FY99.
The PC segment is expected to grow above targeted rates in Q1 as production for desktop assemblies expands to a broader base of assemblies and multiple sites. Growth at targeted rates is projected for the balance of FY99. Design efforts continue for Jabil's new notebook PC customer, and management anticipates significant production levels of mother-board and docking station products in Q3. These products have the potential to become a 10% customer, although design revisions and multi-plant product launches are likely to defer that potential until Q1 of fiscal 2000. Management projects that the PC segment will account for approximately 14% of total revenues in FY99.
The automotive segment is expected to grow sharply in Q1, reflecting increases from seasonally slow levels in the summer. Production is expected to be sequentially flat in Q2. This segment looks to account for 7% of FY99 revenues.
The consumer products segment is expected to grow above targeted rates as production for appliance assembly increases at multiple sites but is expected to account for less than 3% of FY99 revenues.
As noted previously, management expects that changes resulting from product mix (principally the acquisition of the H-P operations) will cause gross margins to normalize at approximately 11% in FY99. Gross margins in Q1 are expected to be 0.3 to 0.4 percentage points below that targeted level due to startup costs associated with Jabil's new site in California and are expected to increase to 10.8% to 11% in the balance of FY99 as a result of increasing production for new customers, new products, and the absorption of the startup costs for California.
Operating income is expected to increase in Q1 by approximately 39% sequentially and by 9% sequentially in Q2. Management's current outlook for operating income growth for FY99 is near 31%, or slightly above the company's long-term goal of 30% annual growth.
SG&A expense is anticipated to decline to 4.2% of sales in Q1, somewhat above the targeted goal of 3.5%. SG&A expense as a percent of sales is anticipated to approach the long-term goal over the course of the fiscal year as revenue expands.
Interest costs are anticipated to increase to 0.5% of revenues in Q1, reflecting financing of the acquisition of the H-P laser-printer operations.
The tax rate is expected to increase to 35% in Q1.
In response to a question, management indicated that an EPS forecast in the area of $2.15 for FY99 is consistent with the company's guidance.
Capital expense in FY99 is projected to be around $80 million with depreciation of $51 million.
Responses to Questions
Capital controls in Malaysia do not really affect Jabil's operation there. Malaysia continues to be a low-cost production location that serves customers in that region and elsewhere.
Customers accounting for 10% or more of revenues in FY98 were: Cisco Systems (Nasdaq: CSCO), 21%; 3Com (Nasdaq: COMS), 18%; and Hewlett-Packard, 11%. By segment, communications accounted for 52% of revenues in FY98; computers, 16%; peripherals, 19%; automotive, 8%; consumer products, 4%, and miscellaneous, 2%.
By region, Asia accounted for approximately $150 million in revenues in FY98; Europe, $225 million; and North America the balance -- around $900 million.
"Box-build" (i.e., assembling a completed system) accounts for approximately one-third of Jabil's revenues. With the H-P operations acquisition, box-build will account for a smaller percentage of total revenues, even though box-build revenues are expected to increase in absolute terms. In FY99, systems assembly revenues are projected to be around $450 million to $480 million, as compared with around $400 million for FY98.
Jabil is not experiencing any unusual pricing pressures or margin squeeze; projected changes in margins are attributable to changes in product mix. The industrywide slump earlier in the year was probably attributable mostly to customer uncertainty in light of financial turmoil in some regions of the world, which prompted customers to draw down inventory. That inventory drawdown has run its course and underlying demand is once again driving the industry. For Jabil, that favorable industrywide development is supplemented by the company gaining a number of significant new customers and gaining market share.
Industry analysts estimate that only 14% of the world's electronics manufacturing capacity is held by contract manufacturers, with 86% held by traditionally vertically-integrated OEMs. Many of the latter are now actively considering outsourcing -- in the telecommunications equipment industry, to cite one prominent example. This could result in a very positive long-term trend for contract manufacturers such as Jabil. Telecommunications equipment represents perhaps a $3.4 billion market as soon as two years from now for contract electronics manufacturers.