Fitch Rates Jabil’s New Senior Unsecured Notes ‘BBB-‘, Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned a ‘BBB-‘ rating to Jabil Circuit, Inc.’s (Jabil, NYSE:JBL) announced private placement of $300 million of senior unsecured notes due June 2023. Net offering proceeds are to be used to repay Jabil’s $312 million of existing 7.75% senior notes due July 2016.
KEY RATING DRIVERS
Substantial Scale and Scope: Jabil is the third-largest electronic manufacturing services (EMS) provider with a balanced global manufacturing footprint and full suite of increasingly complex EMS product offerings, including design, engineering, and product lifecycle management. Fitch believes Jabil’s scale and scope create high barriers to entry and are key factors driving a blue chip customer base spanning a variety of industries.
Growing Non-Technology Segments: Fitch expects growing non-technology businesses such as healthcare and packaging will help diversify Jabil’s exposure to mobility and support mid-single-digit revenue growth through the cycle. Nonetheless, mobility remains a core focus for Jabil and a significant volume and revenue contributor, and will continue to comprise a material portion of the business, alongside growing non-technology segments.
Customer Concentration: Like most EMS companies, Jabil derives a significant portion of its revenue from a small number of customers (FY2015 top five accounted for 50%). Its largest customer (Apple, Inc.) makes up 24% of total revenue, which can increase performance volatility. Fitch views Jabil’s number of customers contributing to at least 10% of annual revenue over time as a positive trend. Customer concentration risk is partially offset by the multitude of products and programs per customer and an increasing mix of revenue from non-technology customers.
Increasing Margins: Fitch expects Jabil’s diversified manufacturing segment (DMS) to outgrow its EMS (assuming no material disengagements) over the intermediate term. DMS typically operates at a higher margin than EMS, implying that faster growth in DMS should drive a gradual increase in overall company margin. Fitch expects Jabil’s mid-cycle EBITDA margin average in the mid- to high-single digits over the rating horizon.
Modest Leverage: Fitch expects credit protection measures will remain solid and provide Jabil headroom for short-term operational shortfalls and incremental debt issuance. We expect total leverage (total debt-to-operating EBITDA) to remain below 2.5x longer-term, versus 1.8x for the LTM period ended Feb. 29, 2016. Total leverage adjusted for rent expense and off-balance-sheet accounts receivable sales was a Fitch-estimated 2.2x for LTM ended Feb. 29, 2016.
Fitch’s key assumptions within the rating case for Jabil include:
–Revenue mix slowly shifts towards the higher-margin DMS segment. EMS revenue growth will continue to approximate GDP-like levels
–Capital expenditures decline to about $800 million FY2016 (from $963 million in FY2015) and normalize around 3% of revenue as expansion investment winds down;
–Jabil will continue paying dividends of approximately $60 million-$70 million per year; the ratings assume the company authorizes a new share repurchase program and continues to repurchase shares commensurate with historical levels for anti-dilution purposes.
Negative Rating Action: Expectations Jabil to see sustained total leverage above 3x, potentially due to margin compression following a material disengagement(s); the inability to generate positive annual free cash flow through the cycle.
Positive Rating Action: Positive action would likely result from further diversification into markets with lower cyclicality, increased customer diversity and Fitch’s expectations for structurally lower leverage through the cycle (total leverage near 2.5x).
Fitch believes liquidity as of Feb. 29, 2016 was solid based on $883 million in cash ($636 million located overseas and subject to taxes on repatriation), $1.31 billion of availability under Jabil’s $1.5 billion senior unsecured revolving credit facility (RCF) expiring July 2019, and Fitch’s expectations for mid-cycle FCF exceeding $500 million annually after FY2016. Jabil also uses two accounts receivable securitization facilities for additional liquidity purposes, both of which are located off balance sheet: a $175 million committed European receivables facility and a $200 million committed North American receivables securitization which are set to expire on May 1, 2018 and Oct. 20, 2017, respectively.
Total funded debt as of Feb. 29, 2016 pro forma for the new $300 million senior notes issuance and subsequent refinancing is $2.3 billion and consists of:
–$28.7 million of capital leases;
–$1,500 million senior unsecured RCF due 2020 ($190 million drawn);
–$519 million in term loans due July 2020;
–$400 million 8.250% senior unsecured notes due March 2018;
–$400 million 5.625% senior unsecured notes due December 2020;
–$500 million 4.700% senior unsecured notes due September 2022;
–$300 million 4.9% senior unsecured notes due June 2023.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
Jabil Circuit, Inc.
–Senior unsecured notes ‘BBB-‘.
Fitch currently rates Jabil as follows:
Jabil Circuit, Inc.
–Long-term IDR at ‘BBB-‘;
–Senior unsecured revolver at ‘BBB-‘;
–Senior unsecured notes` at ‘BBB-‘.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: June 18, 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Matt Hankin, CFA
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Alyssa Castelli, +1 212-908-0540