Fitch Ratings has assigned a rating of 'BB+' to Jabil Circuit, Inc.'s (Jabil) proposed seven-year senior unsecured bond offering. Fitch continues to rate Jabil as follows:
--Issuer default rating (IDR) 'BB+';
--Senior unsecured revolving credit facility 'BB+';
--Senior unsecured debt 'BB+'.
The Rating Outlook is Positive.
Jabil intends to use the proceeds from its proposed senior unsecured notes issuance to finance a tender offer for the company's 5.875% $300 million senior unsecured notes which mature in July 2010. The decision by Jabil to effectively extend the maturity of at least a portion of its 2010 notes reflects the company's intention to maintain sufficient liquidity for potential future growth during the continued credit market uncertainty. Fitch believes that a key consideration is that Jabil relies on two 364-day accounts receivable securitization facilities providing $450 million in total liquidity to finance its working capital needs. These facilities have become a less reliable and less cost-effective liquidity source in the current market environment.
The Positive Outlook largely reflects Fitch's expectation that Jabil will continue to reduce leverage (total debt/operating EBITDA) to 2 times (x) or below over the next 24 months. While the company may utilize excess cash and expected free cash flow to reduce debt, uncertainty in the credit markets could prompt the company to preserve excess liquidity over that time frame, particularly if warranted by renewed growth in revenue and resulting increase in working capital. In such a scenario, Fitch would expect EBITDA growth to contribute more significantly to leverage reduction rather than a decrease in nominal debt. As of May 31, 2009, Fitch estimates Jabil's leverage at 2.3x (3.0x when adjusted for off-balance sheet debt and operating leases) with interest coverage at 5.8x.
The ratings continue to reflect the following considerations:
--Strong diversification relative to the industry and significant exposure to non-traditional electronics manufacturing services (EMS) sectors which are expected to exhibit higher long-term growth rates as companies increasingly seek to outsource manufacturing operations.
--Annual free cash flow on a normalized basis should average $200 million or greater, although Fitch believes a meaningful upside will be constrained by significant capital spending needs. Quarterly free cash flow is expected to remain volatile due to the industry's high working capital intensity.
--Strong working capital management with cash conversion cycle (CCC) days of 31 (adjusted for the sale of accounts receivable), ahead of most peers.
--Fitch anticipates Jabil will opportunistically pursue strategic acquisitions to enhance its vertical integration capabilities going forward, which Fitch believes could be at least partially debt financed.
Liquidity as of May 31, 2009 was solid consisting primarily of $769 million in cash and a fully available $800 million senior unsecured revolving credit facility which expires in July 2012. Jabil also utilizes two accounts receivable securitization facilities for additional liquidity purposes, including an on-balance sheet $200 million committed foreign receivables and an off-balance sheet $250 million North American receivables securitization facility, both expiring in March 2010 after being recently renewed.
Total debt as of May 31, 2009 was $1.2 billion and consisted primarily of $300 million in 5.875% senior unsecured notes due July 2010; a $380 million senior unsecured term loan due July 2012; $400 million in 8.25% senior unsecured notes due March 2019; and $96 million outstanding under the aforementioned foreign receivables facility. Jabil also had $113 million outstanding under its off-balance sheet North American receivables securitization facility, which is included in Fitch's calculation of adjusted debt.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Contacts:
Fitch Ratings, New York
Jason Paraschac, 212-908-0746
Nick P.
Nilarp, CFA, 212-908-0649
or
Media Relations:
Cindy
Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com