April 5, 2012 / 5:17 PM / 6 years ago

TEXT-S&P rates Jabil Circuit

Overview	
     -- U.S. electronic manufacturing services provider Jabil Circuit   
  has a new $1.3 billion senior unsecured revolver.	
     -- We are assigning a 'BB+' issue-level rating with a '3' recovery rating 	
to the revolver.	
     -- We are also affirming our 'BB+' corporate credit rating on the company.	
     -- The positive rating outlook reflects the potential for an upgrade if 	
Jabil can sustain leverage at current levels for the current fiscal year, 	
while maintaining adequate liquidity and moderate financial policies.	
	
Rating Action	
On April 5, 2012, Standard & Poor's Rating Services assigned its 'BB+'
issue-level credit rating to St. Petersburg, Fla.-based electronic manufacturing
services (EMS) provider Jabil Circuit Inc.'s new $1.3 billion senior unsecured
revolving credit facility. At the same time, we assigned the senior unsecured
debt a '3' recovery rating, indicating a meaningful (50% to 70%) recovery
expectation in the event of a payment default.	
	
We also affirmed our existing ratings on the company, including the 'BB+' 	
corporate credit rating.	
	
Rationale	
The rating on Jabil reflects the company's diversified end markets, consistent 	
profitability despite difficult market conditions, increasing market share, and
improved financial profile. We expect the company to continue to pursue its
moderate financial policies, by maintaining leverage that is low for the rating,
modest dividends, and annual share repurchases at or below discretionary cash
flows.	
	
With annual revenues in excess of $16 billion, Jabil provides EMS to 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 "fair" business risk profile reflects its position as 	
the third-largest global EMS provider and its improving product portfolio, 	
partly offset by highly competitive and potentially volatile industry 	
conditions and frequent restructurings to address competitive conditions.	
	
Following a revenue trough in the May 2009 quarter, business activity and 	
revenues rebounded strongly in subsequent quarters. Revenues were $4.2 billion 	
for the February 2012 quarter, up 8% year over year but down 2% sequentially. 	
Sequential sales declines were due to lower mobile handset volumes in the High 	
Velocity Segment (HVS), partly tempered by strength in the Diversified 	
Manufacturing Services' (DMS) Material Technology Group and modest sequential 	
improvement in the Enterprise and Infrastructure segment (E&I).	
	
Standard & Poor's believes Jabil's revenue growth will remain higher than many 	
of its peers in the near-to-medium term because of the company's pursuit of 	
secular outsourcing trends in industrial, clean tech, and health care and life 	
science end markets. Weaker growth in mobility products is likely to partly 	
offset total revenue growth. Adjusted EBITDA margins were 6.2% for the 	
February 2012 quarter, flat year over year. We expect the company to sustain 	
current margin levels over the near term due to near-term revenue growth and 	
an ongoing revenue mix shift to higher margin products. However, we forecast 	
the company's operating margin improvement will remain tempered by its 	
low-margin, high-volume, consumer-related business, which still composes about 	
one-quarter of the company's revenue base.  	
	
Jabil's "intermediate" financial risk reflects recent improvements in its 	
leverage and balance-sheet strength. As of Feb. 29, 2012, the company had 	
total adjusted debt of $1.9 billion, including our adjustments for operating 	
leases, pensions, and securitizations. Last-12-month leverage of 1.7x as of 	
the February 2012 quarter is strong for the rating and was flat year over 	
year. Despite a relatively short track record operating at somewhat under 2.0x 	
leverage, we expect Jabil to maintain current leverage levels over the near 	
term, which provides some capacity to accommodate industry cyclicality. The 	
current rating and outlook do not incorporate any material debt-funded 	
acquisition activity.	
	
Jabil's annual free operating cash flow (FOCF) has traditionally been positive 	
and benefits from countercyclical working capital contraction during revenue 	
downturns. However, during periods of strong revenue growth, working capital 	
usage reduces the company's FOCF. Reported last-12-month discretionary cash 	
flows for the period ended February 2012 were moderately negative, reflecting 	
what we believe to be temporarily increased working capital usage and also 	
higher capital expenditures supporting the company's new programs in DMS' 	
Material Technology Group.	
	
Liquidity	
Jabil has "adequate" liquidity, with sources of cash likely to exceed uses for 	
the next 12 to 24 months. Cash sources include cash and short-term investment 	
balances of $707 million as of Feb. 29, 2012, and a $1.0 billion revolving 	
credit facility (subsequently increased to $1.3 billion). We expect Jabil's 	
sources of liquidity over the next 12 months to exceed its uses by 1.2x. We 	
expect net sources of cash to be positive, even with a 15% to 20% drop in 	
EBITDA from February 2012 last-12-month levels. 	
	
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 $60 million in annual dividends and about $150 million to 	
$200 million in annual share repurchases.	
     -- The company has full access to a $1.3 billion revolving credit 	
facility expiring in December 2017, with adequate covenant headroom.	
     -- No near-term debt maturities; the closest material maturity is in 2016 	
when the $302 million 7.75% senior notes mature.	
	
Recovery analysis	
See Standard & Poor's recovery report on Jabil, to be published on 	
RatingsDirect following the release of this report.	
	
Outlook	
The positive rating outlook reflects the potential for an upgrade if Jabil can 	
sustain leverage at current levels, while maintaining its moderate financial 	
policies and adequate liquidity in an industry known for revenue and earnings 	
volatility, and relatively low average returns on capital. Standard & Poor's 	
would consider raising the rating if the company sustains financial 	
performance at current levels through fiscal year 2012, while limiting 	
dividends to modest levels and share repurchases at or below discretionary 	
cash flows. Alternatively, if the company pursues a more aggressive financial 	
policy, either via acquisitions or share buybacks that increased leverage to 	
the low-2x area, we could revise the outlook to stable. 	
	
A downgrade is currently unlikely, given the company's revenue growth trend 	
and improved leverage; however, if leverage rose to above 3x on a sustained 	
basis we would consider lower the rating.	
	
Related Criteria And Research	
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 	
29, 2012	
     -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012	
     -- Industry Economic Outlook: Slow Global IT Spending Growth Is Likely To 	
Continue Into 2012, Jan. 12, 2012	
     -- Reshuffling The Debt: Global High-Tech M&A Activity Accelerates, Oct. 	
13, 2011	
     -- 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	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
	
Ratings Affirmed	
	
Jabil Circuit Inc.	
 Corporate Credit Rating                BB+/Positive/--    	
	
New Ratings	
	
Jabil Circuit Inc.	
 Senior Unsecured             	
  US$1.3 bil revolver bank ln due 2017  BB+                	
   Recovery Rating                      3                  	
	
Ratings Affirmed; Recovery Ratings Unchanged	
	
Jabil Circuit Inc.	
 Senior Unsecured                       BB+                	
   Recovery Rating                      3

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