TEXT-Fitch affirms Jabil Circuit ratings
June 27 - Fitch Ratings has affirmed Jabil Circuit, Inc.'s (Jabil) long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB-'. The Rating Outlook is Stable. 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 the industry; --Significant customer concentration risk with Jabil's top five customers accounting for approximately 48% of revenue as of May 2012. The affirmation and Stable Outlook reflect the following considerations: --While outsourcing growth is maturing in areas like high velocity consumer, networking, and computing, Fitch expects Jabil to continue to focus on under-penetrated, rapidly growing areas like the industrial, medical, and clean tech space. This space's deeper customer engagements, longer product life-cycles, and increased opportunity for cross-selling may offer reduced revenue volatility, higher margins, and meaningful growth opportunities. --After Market Services (AMS) continues to be a growth focus for Jabil. The highly fragmented competitive landscape with multiple market niches is likely to be an area for continued acquisitions and could provide revenue growth and margin expansion opportunities as well as increased diversification. --Fitch believes 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, fulfillment logistics, and AMS. When coupled with Jabil's global scale which allows it to position its services in low-cost or otherwise strategic geographies, Jabil maintains a significant competitive advantage versus smaller competitors. --Management recently lowered its revenue growth target to 3% from 5% for fiscal 2012 due to slowdowns in end market demand. Fitch expects revenues to perform in line with these expectations as the fast growing diversified manufacturing services (DMS) segment becomes a greater portion of company revenue somewhat offsetting uncertain macroeconomic headwinds. Fitch expects revenues to grow in the mid-single digits over the next three years fueled by an increasing proportion of the expanding DMS segment revenues and positive outsourcing trends. --Fitch expects EBITDA margins to increase from 6.2% in the LTM to roughly 6.5% over the next two years given upside from increased activity in higher margin DMS segment, increased demand for Jabil's vertical integration capabilities, and modest operating leverage. Conversely, Jabil's exposure to customers like Apple, RIM, and Cisco (each greater than 10% of revenues) highlights concentration risks, whereby customer disengagements and resulting capacity underutilization can create significant negative operating leverage. --Free cash flow is expected to be roughly flat in fiscal 2012, increasing in fiscal 2013 as revenues grow and margins expand offsetting increased working capital investment. Management has guided to roughly $500 million in capital expenditures given expansion into new programs. Fitch expects fiscal 2013 free cash flow to be roughly $300 million. --Uses of cash flow and excess cash will principally go to fund organic growth and working capital needs. Fitch does not expect Jabil to further reduce debt beyond current levels. The potential for acquisitions remains although Fitch believes the company is more likely to continue making smaller strategic acquisitions which target specific products or technologies, similar to the recent Telmar deal (aftermarket services; $145 million in revenue). Fitch does not expect any substantial acquisition activity that would result in a material leverage event. --Jabil increased its dividend to $0.08 from $0.07 per share in October 2011 and has roughly $29 million in remaining share buyback authorization. Fitch believes Jabil has sufficient financial capacity to fund continued share repurchases and dividends with excess cash on the balance sheet, and that this should not lead to incremental leverage. --Fitch expects leverage (total debt to total operating EBITDA) to remain below 2.0 times (x) going forward and under 3x when adjusted for off-balance sheet accounts receivable securitization and operating leases. On a cash flow basis, Fitch expects Jabil to produce funds from operations less capital expense and dividends at least equal to 25% of total debt outstanding. Interest coverage (EBITDA to total interest expense) is expected to exceed 10x in fiscal 2013. Fitch estimates current leverage at 1.3x (2.2x on an adjusted basis) and interest coverage at 9.7x. Liquidity as of May 31, 2012 was solid consisting primarily of $742 million in cash and $1.1 billion available in the recently upsized $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, respectively. Total debt as of May 31, 2011 was $1.4 billion and consisted primarily of: --$400 million in 8.25% senior unsecured notes due March 2018; --$400 million in 5.625% senior unsecured notes due December 2020; --$312 million in 7.75% senior unsecured notes due July 2016; and --$280 million outstanding under revolving credit facilities. Jabil also had approximately $316 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, 2012, which are included in Fitch's adjusted debt calculation. Fitch has affirmed Jabil's ratings as follows: --Long-term IDR at 'BBB-'; --Senior unsecured debt at 'BBB-'.
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