TEXT - Fitch comments on Jabil acquisition of Nypro
Feb 4 - Fitch Ratings does not expect Jabil Circuit, Inc.'s (Jabil) ratings to be impacted by the company's planned acquisition of Nypro Inc. (Nypro) for $665 million. Jabil has stated it expects to fund the acquisition through a combination of existing cash balances and borrowings under its credit facility. As of Nov. 30, 2012, Jabil had $1 billion in cash (only a portion of which is available to the company) and a fully available $1.3 billion senior unsecured credit facility expiring March 2017. Fitch estimates that if Jabil were to fund the entire acquisition with debt, pro forma leverage (total debt to operating EBITDA) would increase from 1.6x to approximately 2.0x (or approximately 2.8x when adjusted for off-balance sheet accounts receivable borrowings and operating leases). Jabil's management commented that it expects a majority of the funding to be from existing cash which includes proceeds from a $500 million unsecured note issuance in July 2012 which should result in pro forma leverage remaining comfortably below 2x. Fitch has previously stated that Jabil's ratings incorporate the expectation that leverage will remain at or below 2x (2.5x on an adjusted basis) on a long-term basis. Nypro is a manufacturer of precision plastic products for the healthcare, packaging and consumer electronics industries. This acquisition complements Jabil's 2007 acquisition of Taiwan Greenpoint which forms the base of its Diversified Manufacturing Services (DMS) segment. This business in general has higher margin than Jabil's traditional electronics manufacturing business. In addition, Nypro's mix of business generally has longer product cycles than Jabil's existing DMS business which should help moderate volatility in the business model. Nypro's position in the healthcare market has been a significant focus for expansion for Jabil in recent years and represents a significant growth opportunity for the combined company over time. 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 48% of revenue in fiscal 2012. Liquidity as of Nov. 30, 2012 was solid consisting primarily of $1.0 billion in cash and fully available 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 Nov. 30, 2012 was $1.7 billion and consisted primarily of: --$312 million in 7.75% senior unsecured notes due July 2016; --$400 million in 8.25% senior unsecured notes due March 2018; --$400 million in 5.625% senior unsecured notes due December 2020; and --$500 million in 4.7% senior unsecured notes due July 2022. Jabil also had approximately $280 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 November 30, 2012, which are included in Fitch's adjusted debt calculation. Fitch currently rates Jabil's Issuer Default Rating (IDR) and senior unsecured debt at 'BBB-'. The rating Outlook is Stable.