|[May 23, 2014]
Fitch Affirms Jabil Circuit's IDR at 'BBB-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the ratings for Jabil Circuit (News - Alert), 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 release.
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 fiscal 2014.
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 increased diversification.
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
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 December 2013.
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 ore 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
--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
Rating concerns include:
--Significant customer concentration risk with Jabil's top five
customers accounting for 46% of revenue for the six months ended Feb.
--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
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
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 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 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
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