-- 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.
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.
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
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.
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.
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
Upgraded; Outlook Revised
Jabil Circuit Inc.
Corporate Credit Rating BBB-/Stable/-- BB+/Positive/--
Upgraded; Recovery Ratings Withdrawn
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
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