TEXT-Fitch rates Jabil Circuit notes 'BBB-'
July 31 - Fitch Ratings has assigned a 'BBB-' rating to Jabil Circuit, Inc.'s (Jabil) proposed issuance of $500 million in 10-year senior unsecured notes. Fitch expects the proceeds from this offering to be used for general corporate purposes as well as to reduce amounts outstanding under the company's revolving credit facility. Fitch believes that the incremental debt resulting from this issuance is already incorporated into the rating given the company's current low leverage relative to its rating. Fitch estimates leverage (total debt to total EBITDA) currently at 1.3x (2.2x when adjusted for off-balance sheet accounts receivable borrowings and operating leases) and expects leverage to remain at or below 2x pro forma for the debt offering (2.5x on an adjusted basis). Fitch upgraded Jabil's Issuer Default Rating (IDR) to 'BBB-' from 'BB+' in 2010 based on the following factors: --Fitch believed in 2010 that the electronics manufacturing services (EMS) sector had reached a significant inflection point in the evolution of the industry that would lead to greater stability and profitability of leading market participants. 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 and fulfillment logistics. In addition, after-market services (AMS), such as product repair, are becoming a larger part of the overall customer engagement. --Jabil's global scale combined with its history of best in class execution and full suite of service offerings provides a significant competitive advantage versus smaller competitors. --Jabil continues to focus on under-penetrated, rapidly growing areas like the industrial, medical, and defense and aerospace verticals. Customer engagements in these sectors tend to be much deeper with longer product life-cycles and increased opportunity for cross-selling services. --Fitch expected these trends to lead to greater stability in customer engagements and profitability. Whereas the industry had been susceptible to irrational pricing from competitors with excess manufacturing capacity, deeper customer engagements lessen the risk of losing a program over manufacturing costs. In addition, as revenue contribution from higher margin service offerings grows more meaningful, it should provide upside to EBITDA margins. These trends have clearly favored Jabil over the past two years. Jabil's customer engagements in non-traditional sectors now represent roughly half the company's revenue base, up significantly from 2009. The company has significantly outgrown its peers over that time frame, both in revenue and EBITDA margin expansion. Since calendar 2009 through the LTM end March 2012 (pro rata for Jabil's February/May quarters end), revenue has increased 49% (vs. 22% for its North American peers) and margin has increased 160 bps to 6.2% (versus a 34 bps increase for its peers to 4.3%). However, high capital expenditure requirements to support that growth (roughly 3% of revenue) have led to negative free cash flow of approximately $200 million during that period. Of note, cash flow from operations has been positive in all but two of the last 10 quarters as the company's higher EBITDA margins and greater working capital efficiency have reduced the traditional cash flow volatility from changes in working capital inherent in the business model. 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 10 customers accounting for 68% of revenue including the top five customers which alone account for 48% of revenue as of May 2012. 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, 2012 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; --$290 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 currently rates Jabil's IDR and senior unsecured debt 'BBB-'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research --'Corporate Rating Methodology' (Aug. 12, 2011); --'Rating Global Technology Companies Sector Credit Factors' (Sept. 20, 2010); --'Evaluating Corporate Governance' (Dec. 6, 2010). Applicable Criteria and Related Research: Corporate Rating Methodology Rating Global Technology Companies - Specific Rating Factors Evaluating Corporate Governance
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