TEXT-S&P raises Jabil Circuit ratings to 'BBB-' from 'BB+'

Mon Dec 10, 2012 1:39pm EST

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.