Jabil Circuit, Inc. (
JBL)
Q3 2009 Earnings Call Transcript
June 23, 2009 4:30 p.m. ET
Executives
Beth A. Walters - Vice President, Communications & Investor Relations
Timothy L. Main - President & Chief Executive Officer
Forbes I.J. Alexander - Chief Financial Officer
Analysts
Amit Daryanani - RBC Capital Markets
Steven Fox - CLSA
Sherri Scribner - Deutsche Bank
Shawn Harrison - Longbow Research
Jim Suva - Citigroup
William Stein - Credit Suisse
Alexander Blanton - Ingalls & Snyder
Sean Hannan - Needham & Company
Brian Alexander - Raymond James
Presentation
Operator
Good afternoon. My name is Kamika (ph) and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil third quarter fiscal year 2009 earnings call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answers session. If you’d like to ask a question during this time simply press * then the 1 on your telephone keypad. If you’d like to withdraw your question press the pound key. Thank you, Ms. Walters, you may now begin.
Beth A. Walters – Vice president Communications & Investor relations
Thank you. Welcome to our third quarter fiscal 2009 call. On the call with me today are President and CEO Timothy Main and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website in the investor section, along with today’s press release and a slideshow presentation on the third quarter. You can follow our presentation with the slides that are posted on the website and begin with slide one now, our forward-looking statements. During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected fourth quarter of fiscal 2009 net revenue and earnings results; our long-term outlook for our company and improvements in our operational efficiency and financial performance. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2008, on subsequent reports on Form 10-Q and Form 8-K, and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Please turn now to slides two and three for a discussion on the results for our third quarter of 2009. On revenues of $2.6 billion, our GAAP operating income was a loss of $7.8 million. This compares to $63.1 million GAAP operating income on revenues of $3 billion for the same period in the prior year. Core operating income excluding amortization of intangibles, stock-based compensation, and restructuring charges for the quarter, was $29 million, or 1.1% of revenue, as compared to $85.3 million, or 2.8% for the same period in the prior year. Core earnings per diluted share were $0.04, as compared to $0.26 for the same period in the prior year. Please refer to slides four and five for a discussion of revenue by division and sector for the third fiscal quarter. The EMS division revenue represented approximately 58% or $1.5 billion, a sequential decline of 10% as compared to the second quarter of fiscal 2009. Core operating income for the division in the quarter was 1% of revenue.
Sector results; automotive declined 10% sequentially and represented 3% of revenue in the quarter; computing and storage decreased 17% from the second quarter and represented 11% of revenue; industrial, instrumentation and medical sector decreased 5% from the prior quarter as a result of general market declines being somewhat offset by growth in Smart Meter related productions. This sector represented 20% of revenue. Networking sector levels of production decreased by 14% from the previous quarter and represented 16% of overall revenues for the quarter. Declines in this sector were principally related to wireless network products unassociated with traditional enterprise markets. Telecommunications sector decreased 1% sequentially and represented 6% of the quarter’s revenue.
The consumer division represented approximately 35% of revenues, or $900 million in the third fiscal quarter, a sequential decrease of 12%. Core operating income for the division in the quarter was 0.5% of revenues. Sequential performance displays decreased by 27% from the second quarter and represented 4% of revenue, reflecting our continuing effort to rationalize the economic performance of this sector and continuing weak demand across our European customer base. Mobility sector decreased by 12% from the prior quarter and represented 21% of revenue in the quarter. Peripherals sector decreased by 8% in the second fiscal quarter and represented 11% of revenue. Our after-market services division represented approximately 7% of overall company revenue in the third fiscal quarter. This was growth of 11% from the prior quarter and core operating income for the division was 10% of revenue in the quarter. In the third fiscal quarter, two customers accounted for more than 10% of revenues, while our top 10 customers in the quarter accounted for approximately 59% of revenue.
Selling, general and administrative expenses increased by $6 million to $112 million for the quarter. Second quarter expenses were lower as a result of one-time expense reductions in areas such as recovery of legal fees and bonus as the full impact of the macroeconomic conditions on the fiscal years operating performance was revised. Ongoing expenses are forecast to remain at approximately third quarter levels. Research and development costs were $7.2 million for the quarter. During the quarter, we also recorded through core operating income a charge associated with Visteon bankruptcy filings. Discussions with Visteon are ongoing so you should note that we are unable to answer questions relating to our relationship and ongoing discussions at this time. Stock-based compensation was $13 million in the quarter. Net interest expense for the quarter was $19 million, consistent with the previous quarter. The tax rate on net core operating income in the quarter was 20%.
I’ll now turn the call over to Forbes Alexander.
Forbes I.J. Alexander – Chief Financial Officer
Thank you, Beth. Good evening. I would now like to ask you to turn to slides 6, 7, and 8 where I’ll review our balance sheet and some of our ratios. The company’s sales cycle in the quarter increased by two days to 22 days. Day sales outstanding increased by four days to 40 days as a result of $114 million less receivables that off-balance sheet accounts receivable securitization program. Accounts payable days improved by two days to 64 and inventory balances declined by $146 million, while days in inventory were consistent with the prior quarter at 46 days. Inventory turns remain at eight. Cash flow generated from operations was $78 million in the third fiscal quarter; this after a decrease in our AR securitization usage of $94 million. Year-to-date, we have generated $387 million from operations. Our return on invested capital in the quarter was 6%.
Cash and cash equivalents were consistent with the previous quarter with cash balances being $769 million after reducing debt and AR securitization levels by $136 million during the quarter. No sums were outstanding on our $800 million revolving credit facility. Our capital expenditures during the quarter were approximately $50 million. This level of expenditure primarily reflects continued investment, IT infrastructure, and maintenance capital investment. Depreciation for the quarter was approximately $65 million and core EBITDA was approximately $94 million, or 3.6% of revenue. We remain pleased with the manner in which we executed to our quarter’s working capital and operational plans. In a difficult economic and end-market environment, we continue to manage working capital levels and we are pleased to have generated $387 million of cash flow from operations in the year-to-date. While cash balances have remained consistent with those of the beginning of year balances of $770 million, while at the same time reducing our debt levels by $278 million. With our continued focus on working capital management, we have the opportunity to generate $500 million of cash flow from operations in this fiscal year.
Now I would like to give you a quick update on our restructuring activity. During the third fiscal quarter, we recorded charges of $16 million associated with our previously announced plans, while cash payments associated with these plans were $10 million in the quarter. Through the third fiscal quarter, we’ve recorded charges of approximately $49 million and cash payments associated with this plan of $17 million. Discussions with our employees and their representatives continue and we are complying with all statutory and consultation periods required of us. As a result, we currently estimate charges of $7 million and cash payments totaling approximately $15 million will occur in the fourth fiscal quarter. In summary, we are pleased with the way in which we executed in our quarter. I would like to take a moment to talk about our year-over-year operating margin decline from 2.8% to 1.1%, while revenues have fallen 15% or some $500 million over the same time period, as I believe that it’s important to understand the various elements of this margin decline and how these will translate to operating income margin expansion when we see a return to revenue growth.
Of the 1.7% decline, 50 basis points were attributable to our SG&A cost base; the balance attributable to the distressed automotive customer charge, changes in foreign exchange, and most importantly fixed cost absorption. An important point here is that the value-added portion of our revenue stream has been relatively consistent throughout this period, reflective of a rational pricing environment. SG&A expenses have been relatively fixed over the last year. I would expect this to be the case as we see revenues recover. Along with the absorption of fixed manufacturing costs, such as buildings, depreciation, information technology infrastructure, engineering and procurement activity, and a reduction in our overall cost base of $55 million annually occurring as a result of our restructuring activity.
