TEXT-S&P raises Jabil Circuit ratings to 'BBB-' from 'BB+'
Overview -- We are raising our corporate credit and senior unsecured issue ratings on U.S. electronic manufacturing services (EMS) provider Jabil Circuit to 'BBB-' from 'BB+', reflecting its improved business risk profile. -- We are withdrawing our recovery ratings on all outstanding senior unsecured debt, reflecting our ratings criteria for investment-grade issuers. -- The stable outlook reflects our expectation that Jabil will sustain consistent profitability, with adjusted leverage below 2x over the intermediate term, and moderate financial policies. Rating Action On Dec. 10, 2012, Standard & Poor's Rating Services raised its corporate credit and senior unsecured issue ratings on St. Petersburg, Fla.-based Jabil Circuit Inc. to 'BBB-' from 'BB+'. We also withdrew our recovery ratings on all outstanding senior unsecured debt. The outlook is stable. Rationale The rating action reflects our revision of Jabil's business risk profile to "satisfactory" from "fair". We believe double-digit growth in Jabil's higher-margin diversified manufacturing segment is sustainable, and will support consistent operating earnings and an "intermediate" financial profile despite highly competitive and potentially volatile industry conditions. The current rating incorporates our assumption that Jabil will sustain mid-single digit total annual revenue growth with adjusted EBITDA margins in the 6%-7% range. We also expect the company to maintain its moderate financial policies, with adjusted leverage at or below 2x over the intermediate term, modest dividends, and share repurchases primarily funded from discretionary cash flow. With annual revenues in excess of $17 billion, Jabil is a global EMS provider with customers in a wide range of industries, including networking and telecom, computing and storage, mobile phone and digital consumer products, and industrial and medical equipment. The company's satisfactory business risk position reflects Jabil's focus on diversified end markets with above-average margins, a good market position in its targeted segments, and consistent profitability. Growth in the global EMS industry slowed to the low-single-digit level as of June 30, 2012 (the most recent data from International Data Corp.), reflecting weakness in computer products (excluding tablets), which represent about a third of the EMS market, and a challenging macroeconomic environment. However, Standard & Poor's believes Jabil's revenue growth will remain higher than that of many of its peers in the near-to-medium term because of the company's pursuit of secular outsourcing growth trends in industrial, clean tech, and health care and life science end markets, and the expansion of its capabilities in the materials technology group. Weaker growth in enterprise products and high-velocity mobile handset volume declines are expected to partly offset total revenue growth. Adjusted EBITDA margins were 6.3% for fiscal 2012, about flat with the prior year. Jabil experienced some margin degradation in the August 2012 quarter, largely due to costs associated with a large new contract in its Specialized Services segment. However, we expect the company to sustain industry-leading, mid-6% adjusted EBITDA margins over the near-to-intermediate term, supported by an ongoing revenue mix shift to higher margin products. However, we expect operating margin improvement will remain tempered by Jabil's low-margin, high-velocity, consumer-related business, which still composes about one-quarter of the company's revenue base. Jabil's intermediate financial risk reflects consistent profitability and moderate financial policy, which provides important support for potential industry volatility and relative capital intensity. Our assessment of the company's management and governance is "satisfactory." Adjusted leverage as of August 2012 was 2.3x, which is above our longer-term expectation for the rating. However, current leverage reflects $500 million of debt issued in July 2012, with a corresponding increase in fiscal year-end cash levels. We expect the company to use cash balances and cash flow primarily to invest in growth opportunities, with EBITDA growth driving adjusted leverage below 2x over the next 12 to 24 months. The current rating and outlook do not incorporate any material debt-funded acquisition activity. Liquidity Jabil has "adequate" liquidity, with sources of cash likely to exceed uses for the next 12 to 24 months. Sources include cash and short-term investment balances of $1.2 billion as of Aug. 31, 2012, and a $1.3 billion revolving credit facility. We expect Jabil's sources of liquidity over the next 12 months to exceed its uses by more than 1.2x. Jabil's annual free operating cash flow (FOCF) is typically positive during periods of moderate revenue growth and during downturns. However, during periods of stronger revenue growth, working capital usage historically results in moderately negative FOCF. Other factors in our liquidity assessment include: -- We expect uses to include capital expenditures of about $500 million over the next 12 months. -- We expect about $200 million in annual returns to shareholders over the next two years. -- The company has full access to a $1.3 billion revolving credit facility expiring in December 2017, with ample covenant headroom. -- No near-term debt maturities; the closest material maturity is in 2016 when the $312 million of 7.75% senior notes mature. -- We expect potential near-term acquisitions to be moderate in size, and funded predominantly from current cash balances. Outlook The stable outlook reflects our expectation that Jabil's focus on and earnings mix from higher-margin, diversified manufacturing business will enable the company to sustain moderate revenue growth, consistent profitability, and its intermediate financial risk profile. The potential for upgrade is constrained by highly competitive, potentially volatile industry conditions and relatively modest discretionary cash flow and return on capital. Alternatively, if the company pursues a more aggressive financial policy (via acquisitions or share buybacks), or a pronounced industry contraction leads to a reduction in EBITDA, such that leverage exceeds the mid 2x level on a sustained basis, we could lower the rating. Related Criteria And Research -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 Ratings List Upgraded; Outlook Revised To From Jabil Circuit Inc. Corporate Credit Rating BBB-/Stable/-- BB+/Positive/-- Upgraded; Recovery Ratings Withdrawn To From Jabil Circuit Inc. Senior Unsecured BBB- BB+ Recovery Rating NR 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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