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Fitch Affirms Jabil Circuit's Ratings at 'BBB-'; Outlook Stable
June 25, 2013 / 8:32 PM / 4 years ago

Fitch Affirms Jabil Circuit's Ratings at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, June 25 (Fitch) Fitch Ratings has affirmed Jabil Circuit, Inc.'s (Jabil) Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. KEY RATING DRIVERS: --Fitch believes that long-term secular shifts in the Electronics Manufacturing Services (EMS) sector will gradually 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. Jabil expects to close on its acquisition of Nypro Inc. (Nypro) in July 2013 which is expected to significantly enhance Jabil's position in the medical market. --Jabil's customer concentration issue remains significant. The company has experienced significant growth in recent years principally with its specialized services segment. Much of this growth is driven by one large customer. The company's investment in working capital and capital expenditures to support recent growth has been significant. Fitch believes that Jabil has taken steps to mitigate some of the risks associated with its customer concentration issues, having learned from prior customer engagements. Nonetheless this is an inherent risk in the industry and fairly pronounced with Jabil. The top three customers for Jabil in fiscal 2012, all of whom represented greater than 10% of revenue, were Apple, RIM and Cisco. --Fitch expects leverage (total debt / operating EBITDA) to remain near 2x with adjusted leverage (adjusted for off-balance-sheet accounts receivable securitization and operating leases) to be approximately 3x. Fitch also expects the company to fund share repurchases principally through free cash flow generation. Fitch estimates leverage at 1.6x and adjusted leverage at 2.5x as of May 2013. Fitch does not expect Jabil's pending acquisition of Nypro for $665 million to have any near-term impact on the rating. Jabil has stated it expects to fund the acquisition through a combination of existing cash balances and borrowings under its credit facility. Fitch expects any resulting increase in leverage to be modest and temporary. Longer term, this business could materially increase stability and profitability in the business model, which would have a positive impact on the credit. As with any sizeable acquisition in this space there is also significant execution risk during the integration of Nypro. Fitch believes this risk is at least partially mitigated by Jabil's strong record of execution and prior successful acquisitions. In addition, Nypro is expected to largely keep its operations intact while absorbing Jabil's smaller healthcare business. 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 Green Point 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 May 31, 2013 was solid consisting primarily of $1.35 billion in cash and a fully available $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, 2013 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; --$500 million in 4.7% senior unsecured notes due July 2022. Jabil also had approximately $331 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, 2013, which are included in Fitch's adjusted debt calculation. RATING SENSITIVITY: Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Secular shifts or a large customer loss resulting in margin compression with limited visibility as to the potential to return profit margins to historical levels. Positive: Upside movement in the ratings is limited given Jabil's thin operating margin profile and capital-intensive business model coupled with significant cyclical demand exposure. Greater diversification of the business into markets with significantly lower cyclicality could potentially create an opportunity for positive rating action. Fitch has affirmed Jabil's ratings as follows: --Long-term IDR at 'BBB-'; --Senior unsecured debt at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Jason Paraschac, CFA Senior Director +1-212-908-0746 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Jamie Rizzo, CFA Managing Director +1-212-908-0548 Committee Chairperson Glen Grabelsky Managing Director +1-212-908-0577 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research --'Corporate Rating Methodology', dated Aug. 8, 2012; --'Evaluating Corporate Governance', dated Dec. 12, 2012; --'Rating Technology Companies', dated Aug. 9, 2012. Applicable Criteria and Related Research: Rating Technology Companies here Corporate Rating Methodology here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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