Description
Jabil Circuit, Inc. Director MARTHA BROOKS bought 13,000 shares on 10-19-2012 at $ 17.14
BUSINESS OVERVIEW
Industry Background
The industry in which we operate is composed of companies that provide a range of manufacturing, design and aftermarket services to companies that utilize electronics components. The industry experienced rapid change and growth through the 1990s as an increasing number of companies chose to outsource an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry’s revenue declined as a result of significant cut-backs in customer production requirements, which was consistent with the overall downturn in the technology sector at the time. In response to this downturn in the technology sector, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Industry revenues generally began to stabilize in 2003 and companies began to turn more to outsourcing versus internal manufacturing. In addition, the number of industries serviced, as well as the market penetration in certain industries, by electronic manufacturing service providers has increased over the past several years. In mid-2008, the industry’s revenue declined when a deteriorating macro-economic environment resulted in illiquidity in the overall credit markets and a significant economic downturn in the North American, European and Asian markets. In response to this downturn, we implemented additional restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers.
Uncertainty remains regarding the extent and timing of the current economic recovery. We will continue to monitor the current economic environment and its potential impact on both the customers that we serve as well as our end-markets and closely manage our costs and capital resources so that we can respond appropriately as circumstances continue to change. Over the longer term, we believe the factors driving companies to favor outsourcing include:
• Reduced Product Cost. Manufacturing service providers are often able to manufacture products at a reduced total cost to companies. These cost advantages result from higher utilization of capacity because of diversified product demand and, typically, a higher sensitivity to elements of cost.
• Accelerated Product Time-to-Market and Time-to-Volume. Manufacturing service providers are often able to deliver accelerated production start-ups and achieve high efficiencies in transferring new products into production. Providers are also able to more rapidly scale production for changing markets and to position themselves in global locations that serve the leading world markets. With increasingly shorter product life cycles, these key services allow new products to be sold in the marketplace in an accelerated time frame.
• Access to Advanced Design and Manufacturing Technologies. Customers gain access to additional advanced technologies in manufacturing processes, as well as product and production design. Product and production design services may offer customers significant improvements in the performance, cost, time-to-market and manufacturability of their products.
• Improved Inventory Management and Purchasing Power. Manufacturing service providers are often able to more efficiently manage both procurement and inventory, and have demonstrated proficiency in purchasing components at improved pricing due to the scale of their operations and continuous interaction with the materials marketplace.
• Reduced Capital Investment in Manufacturing. Companies are increasingly seeking to lower their investment in inventory, facilities and equipment used in manufacturing in order to allocate capital to other activities such as sales and marketing and research and development (“R&D”). This shift in capital deployment has placed a greater emphasis on outsourcing to external manufacturing specialists.
Our Strategy
We are focused on expanding our position as one of the leading providers of worldwide electronic manufacturing services and solutions. To achieve this objective, we continue to pursue the following strategies:
• Establish and Maintain Long-Term Customer Relationships. Our core strategy is to establish and maintain long-term relationships with leading companies in expanding industries with size and growth characteristics that can benefit from highly automated, continuous flow manufacturing on a global scale. Over the past several years, we have made concentrated efforts to diversify our industry sectors and customer base. As a result of these efforts, we have experienced business growth from existing customers and from new customers. Additionally, our acquisitions have contributed to our business growth. We focus on maintaining long-term relationships with our customers and seek to expand these relationships to include additional product lines and services. In addition, we have a focused effort to identify and develop relationships with new customers who meet our profile.
• Utilize Business Units. Each of our business units is dedicated to one customer and operates with a high level of autonomy, primarily utilizing dedicated production equipment, production workers, supervisors, buyers, planners, and engineers. We believe our customer centric business units promote increased responsiveness to our customers’ needs, particularly as a customer relationship grows to multiple production locations.
• Expand Parallel Global Production. Our ability to produce the same product on a global scale is a significant requirement of our customers. We believe that parallel global production is a key strategy to reduce obsolescence risk and secure the lowest landed costs while simultaneously supplying products of equivalent or comparable quality throughout the world. Consistent with this strategy, we have established or acquired operations in Austria, Belgium, Brazil, China, England, France, Germany, Hungary, India, Ireland, Italy, Japan, Malaysia, Mexico, The Netherlands, Poland, Russia, Scotland, Singapore, South Korea, Taiwan, Turkey, Ukraine and Vietnam to increase our European, Asian and Latin American presence.
• Offer Systems Assembly, Direct-Order Fulfillment and Configure-to-Order Services. Our systems assembly, direct-order fulfillment and configure-to-order services allow our customers to reduce product cost and risk of product obsolescence by reducing total work-in-process and finished goods inventory. These services are available at all of our manufacturing locations.
• Offer Design and Aftermarket Services. We offer a wide spectrum of value-add design services for products that we manufacture for our customers. We provide these services to enhance our relationships with current customers by allowing them the flexibility to utilize complementary design services to achieve improvements in performance, cost, time-to-market and manufacturability, as well as to help develop relationships with new customers. We also offer aftermarket services from strategic hub locations. Our aftermarket service centers allow us to provide service to our customers’ products following completion of the traditional manufacturing and fulfillment process.
• Pursue Selective Acquisition Opportunities. Traditionally, Electronic Manufacturing Services (“EMS”) companies have acquired manufacturing capacity from customers to drive growth, expand footprint and gain new customers. More recently, our acquisition strategy has expanded beyond focusing on acquisition opportunities presented by companies divesting internal manufacturing operations to include opportunities to acquire smaller EMS competitors who are focused on our key growth areas which include specialized manufacturing, aftermarket services and/or design operations and other acquisition opportunities complementary to our services offerings. The primary goal of our acquisition strategy is to complement our current capabilities and diversify our business into new industry sectors and with new customers, and to expand the scope of the services we can offer to our customers. As the scope of our acquisition opportunities expands, the risks associated with our acquisitions expand as well, both in terms of the amount of risk we face and the scope of such risks. See “Risk Factors – We have on occasion not achieved, and may not in the future achieve, expected profitability from our acquisitions.”
Our Approach to Manufacturing
In order to achieve high levels of manufacturing performance, we have adopted the following approaches:
• Business Units. Each of our business units is dedicated to one customer and is empowered to formulate strategies tailored to individual customer needs. Most of our business units have dedicated production lines consisting of equipment, production workers, supervisors, buyers, planners and engineers. Under certain circumstances, a production line may include more than one business unit in order to maximize resource utilization. Business units have direct responsibility for manufacturing results and time-to-volume production, promoting a sense of individual commitment and ownership. The business unit approach is modular and enables us to grow incrementally without disrupting the operations of other business units.
• Business Unit Management. Our Business Unit Managers coordinate all financial, manufacturing and engineering commitments for each of our customers at a particular manufacturing facility. Our Business Unit Directors oversee local Business Unit Managers and coordinate worldwide financial, manufacturing and engineering commitments for each of our customers that have global production requirements. Jabil’s Business Unit Management has the authority (within high-level parameters set by executive management) to develop customer relationships, make design strategy decisions and production commitments, establish pricing, and implement production and electronic design changes. Business Unit Managers and Directors are also responsible for assisting customers with strategic planning for future products, including developing cost and technology goals. These Managers and Directors operate autonomously with responsibility for the development of customer relationships and direct profit and loss accountability for business unit performance.
• Automated Continuous Flow. We use a highly automated, continuous flow approach where different pieces of equipment are joined directly or by conveyor to create an in-line assembly process. This process is in contrast to a batch approach, where individual pieces of assembly equipment are operated as freestanding work-centers. The elimination of waiting time prior to sequential operations results in faster manufacturing, which improves production efficiencies and quality control, and reduces inventory work-in-process. Continuous flow manufacturing provides cost reductions and quality improvement when applied to volume manufacturing.
• Computer Integration. We support all aspects of our manufacturing activities with advanced computerized control and monitoring systems. Component inspection and vendor quality are monitored electronically in real-time. Materials planning, purchasing, stockroom and shop floor control systems are supported through a computerized Manufacturing Resource Planning system, providing customers with a continuous ability to monitor material availability and track work-in-process on a real-time basis. Manufacturing processes are supported by a real-time, computerized statistical process control system, whereby customers can remotely access our computer systems to monitor real-time yields, inventory positions, work-in-process status and vendor quality data. See “Technology” and “Risk Factors – Any delay in the implementation of our information systems could disrupt our operations and cause unanticipated increases in our costs.”
• Supply Chain Management. We make available an electronic commerce system/electronic data interchange and web-based tools for our customers and suppliers to implement a variety of supply chain management programs. Most of our customers utilize these tools to share demand and product forecasts and deliver purchase orders. We use these tools with most of our suppliers for just-in-time delivery, supplier-managed inventory and consigned supplier-managed inventory.
Our Design Services
We offer a wide spectrum of value-add design services for products that we manufacture for our customers. We provide these services to enhance our relationships with current customers and to help develop relationships with new customers. We offer the following design services:
• Electronic Design. Our electronic design team provides electronic circuit design services, including application-specific integrated circuit design and firmware development. These services have been used to develop a variety of circuit designs for cellular phones and accessory products, notebook and personal computers, servers, radio frequency products, video set-top boxes, optical communications products, personal digital assistants, communication broadband products and automotive and consumer appliance controls.
• Industrial Design Services. Our industrial design team designs the “look and feel” of the plastic and metal enclosures that house the electro-mechanics, including the printed circuit board assemblies (“PCBA”).
• Mechanical Design. Our mechanical engineering design team specializes in three-dimensional mechanical design with the analysis of electronic, electro-mechanical and optical assemblies using state of the art modeling and analytical tools. The mechanical team has extended Jabil’s product design offering capabilities to include all aspects of industrial design, advance mechanism development and tooling management.
• Computer-Assisted Design. Our computer-assisted design (“CAD”) team provides PCBA design services using advanced CAD/computer-assisted engineering tools, PCBA design testing and verification services, and other consulting services, which include the generation of a bill of materials, approved vendor list and assembly equipment configuration for a particular PCBA design. We believe that our CAD services result in PCBA designs that are optimized for manufacturability and cost, and accelerate the time-to-market and time-to-volume production.
• Product Validation. Our product validation team provides complete product and process validation. This includes system test, product safety, regulatory compliance and reliability.
• Manufacturing Test Solution Development. Our manufacturing test solution development team works as an integral function to the design team to embed design for testability and minimization of capital and resource investment for mass manufacturing. The use of software control instrumentation and test process management has enhanced our customer product quality with less human dependent test processes. The full electronic test data-log of customer products has allowed customer product test traceability and visibility throughout the manufacturing test process.
Our design centers are located in: Vienna, Austria; Hasselt, Belgium; Beijing and Shanghai, China; Colorado Springs, Colorado; St. Petersburg, Florida; Jena, Germany; Toa Payoh, Singapore; and Hsinchu, Taichung and Taipei, Taiwan. Our teams are strategically staffed to support Jabil customers for all development projects, including turnkey system design and design for manufacturing activities. See “Risk Factors – We may not be able to maintain our engineering, technological and manufacturing process expertise.”
We are exposed to different or greater potential liabilities from our design services than those we face from our regular manufacturing services. See “Risk Factors – Our design services and turnkey solutions offerings may result in additional exposure to product liability, intellectual property infringement and other claims, in addition to the business risk of being unable to produce the revenues necessary to profit from these services.”
Our Systems Assembly, Test, Direct-Order Fulfillment and Configure-to-Order Services
We offer systems assembly, test, direct-order fulfillment and configure-to-order services to our customers. Our systems assembly services extend our range of assembly activities to include assembly of higher-level sub-systems and systems incorporating multiple PCBAs. We maintain systems assembly capacity to meet the increasing demands of our customers. In addition, we provide testing services, based on quality assurance programs developed with our customers, of the PCBAs, sub-systems and systems products that we manufacture. Our quality assurance programs include circuit testing under various environmental conditions to try to ensure that our products meet or exceed required customer specifications. We also offer direct-order fulfillment and configure-to-order services for delivery of final products we assemble for our customers.
Our Aftermarket Services
As an extension of our manufacturing model and an enhancement to our total global solution, we offer aftermarket services from strategic hub locations. Jabil aftermarket service centers provide warranty and repair services to certain of our manufacturing customers, as well as to other customers. We have the ability to service our customers’ products following completion of the traditional manufacturing and fulfillment process.
Our aftermarket service centers are located in: Shanghai and Suzhou, China; Coventry, England; St. Petersburg, Florida; Szombathely, Hungary; Louisville, Kentucky; Penang, Malaysia; Chihuahua, Reynosa and Nogales, Mexico; Amsterdam, The Netherlands; Bydgoszcz, Poland; Ayr, Scotland; Memphis, Tennessee; Round Rock and McAllen, Texas; and Ankara, Turkey.
Technology
We believe that our manufacturing and testing technologies are among the most advanced in the industry. Through our R&D efforts, we intend to continue to offer our customers among the most advanced highly automated, continuous flow manufacturing process technologies for precise and aesthetic mechanical components and system assembly. These technologies include automation, electronic interconnection, advanced polymer and metal material science, automated tooling, single/multi-shot injection molding, stamping, multi-axed Computer Numerical Control (“CNC”), spray painting, vacuum metallization, digital printing, anodization, thermal-plastic composite formation, plastic with embedded electronics, in-mold labeling, leather/wood overmolding, stamping cover with insert-molded or die-casting features for assembly, seamless display cover with integrated touch sensor, plastic cover with insert-molded glass lens and advanced testing solutions. In addition to our R&D activities, we are continuously making refinements to our existing manufacturing processes in connection with providing manufacturing services to our customers. See “Risk Factors – We may not be able to maintain our engineering, technological and manufacturing process expertise.”
Research and Development
To meet our customers’ increasingly sophisticated needs, we continually engage in research and product design activities. These activities include electronic design, mechanical design, software design, system level design, material processing research (including plastics, metal, glass and ceramic), component and product validation, as well as other design and process development related activities necessary to manufacture our customers’ products in the most cost-effective and reliable manner. We are engaged in advanced research and platform designs for products including: cellular phones and accessory products, multi-media tablets, two-way radios, health care and life science products, server and storage products, set-top and digital home products and printing products. These activities focus on assisting our customers in product creation and manufacturing solutions. For fiscal years 2011, 2010 and 2009, we expended $25.0 million, $28.1 million and $27.3 million, respectively, on R&D activities.
Financial Information about Business Segments
We derive revenue from providing comprehensive electronics design, production and product management services. Management evaluates performance and allocates resources on a divisional basis for manufacturing and service operating segments. At August 31, 2011, our reportable operating segments consisted of three segments – DMS, E&I and HVS. See Note 11 – “Concentration of Risk and Segment Data” to the Consolidated Financial Statements.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are one of the leading providers of worldwide electronic manufacturing services and solutions. We provide comprehensive electronics design, production and product management services to companies in the aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, solar, storage and telecommunications industries. The industry in which we operate is composed of companies that provide a range of manufacturing and design services to companies that utilize electronics components. The industry experienced rapid change and growth through the 1990s as an increasing number of companies chose to outsource an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry’s revenue declined as a result of significant cut-backs in customer production requirements, which was consistent with the overall downturn in the technology sector at the time. In response to this downturn in the technology sector, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Industry revenues generally began to stabilize in 2003 and companies began to turn more to outsourcing versus internal manufacturing. In addition, the number of industries serviced, as well as the market penetration in certain industries, by electronic manufacturing service providers has increased over the past several years. In mid-2008, the industry’s revenue declined when a deteriorating macro-economic environment resulted in illiquidity in the overall credit markets and a significant economic downturn in the North American, European and Asian markets. In response to this downturn, we implemented additional restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers.
Uncertainty remains regarding the extent and timing of the current economic recovery. We will continue to monitor the current economic environment and its potential impact on both the customers that we serve as well as our end-markets and closely manage our costs and capital resources so that we can respond appropriately as circumstances continue to change.
On September 1, 2010, we reorganized our business into the following three segments: Diversified Manufacturing Services (“DMS”), Enterprise & Infrastructure (“E&I”) and High Velocity Systems (“HVS”). Our DMS segment is composed of dedicated resources to manage higher complexity global products in regulated industries and bring materials and process technologies including design and aftermarket services to our global customers. Our E&I and HVS segments offer integrated global supply chain solutions designed to provide cost effective solutions for our customers. Our E&I segment is focused on our customers primarily in the computing, storage, networking and telecommunication sectors. Our HVS segment is focused on the particular needs of the consumer products industry, including mobility, display, set-top boxes and peripheral products such as printers and point of sale terminals.
We derive revenue principally from manufacturing services related to electronic equipment built to customer specifications. We also derive revenue to a lesser extent from aftermarket services, design services and excess inventory sales. Revenue from manufacturing services and excess inventory sales is generally recognized, net of estimated product return costs, when goods are shipped; title and risk of ownership have passed; the price to the buyer is fixed or determinable; and recoverability is reasonably assured. Aftermarket service related revenue is recognized upon completion of the services. Design service related revenue is generally recognized upon completion and acceptance by the respective customer. We assume no significant obligations after product shipment.
Our cost of revenue includes the cost of electronic components and other materials that comprise the products we manufacture; the cost of labor and manufacturing overhead; and adjustments for excess and obsolete inventory. As a provider of turnkey manufacturing services, we are responsible for procuring components and other materials. This requires us to commit significant working capital to our operations and to manage the purchasing, receiving, inspection and stocking of materials. Although we bear the risk of fluctuations in the cost of materials and excess scrap, we periodically negotiate cost of materials adjustments with our customers. Net revenue from each product that we manufacture consists of an element based on the costs of materials in that product and an element based on the labor and manufacturing overhead costs allocated to that product. We refer to the portion of the sales price of a product that is based on materials costs as “material-based revenue,” and to the portion of the sales price of a product that is based on labor and manufacturing overhead costs as “manufacturing-based revenue.” Our gross margin for any product depends on the mix between the cost of materials in the product and the cost of labor and manufacturing overhead allocated to the product. We typically realize higher gross margins on manufacturing-based revenue than we do on materials-based revenue. As we gain experience in manufacturing a product, we usually achieve increased efficiencies, which result in lower labor and manufacturing overhead costs for that product.
Our operating results are impacted by the level of capacity utilization of manufacturing facilities; indirect labor costs; and selling, general and administrative expenses. Operating income margins have generally improved during periods of high production volume and high capacity utilization. During periods of low production volume, we generally have idle capacity and reduced operating income margins.
We have consistently utilized advanced circuit design, production design and manufacturing technologies to meet the needs of our customers. To support this effort, our engineering staff focuses on developing and refining design and manufacturing technologies to meet specific needs of specific customers. Most of the expenses associated with these customer-specific efforts are reflected in our cost of revenue. In addition, our engineers engage in R&D of new technologies that apply generally to our operations. The expenses of these R&D activities are reflected in the research and development line item within our Consolidated Statement of Operations.
An important element of our strategy is the expansion of our global production facilities. The majority of our revenue and materials costs worldwide are denominated in U.S. dollars, while our labor and utility costs in operations outside the U.S. are denominated in local currencies. We economically hedge these local currency costs, based on our evaluation of the potential exposure as compared to the cost of the hedge, through the purchase of foreign exchange contracts. Changes in the fair market value of such hedging instruments are reflected within the Consolidated Statement of Operations. See “Risk Factors – We are subject to risks of currency fluctuations and related hedging operations.”
We currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our net revenue and upon their growth, viability and financial stability. A significant reduction in sales to any of our large customers or a customer exerting significant pricing and margin pressures on us would have a material adverse effect on our results of operations. In the past, some of our customers have terminated their manufacturing arrangements with us or have significantly reduced or delayed the volume of design, production or product management services ordered from us, including moving a portion of their manufacturing from us in order to more fully utilize their excess internal manufacturing capacity. There can be no assurance that present or future customers will not terminate their manufacturing arrangements with us or significantly reduce or delay the volume of design, production or product management services ordered from us, or move a portion of their manufacturing from us in order to more fully utilize their excess internal manufacturing capacity. Any such termination of a manufacturing relationship or change, reduction or delay in orders could have a material adverse effect on our results of operations or financial condition. See “Risk Factors – Because we depend on a limited number of customers, a reduction in sales to any one of our customers could cause a significant decline in our revenue,” “Risk Factors – Most of our customers do not commit to long-term production schedules, which makes it difficult for us to schedule production and capital expenditures, and to maximize the efficiency of our manufacturing capacity,” “Risk Factors – Our customers may cancel their orders, change production quantities, delay production or change their sourcing strategy” and Note 11 – “Concentration of Risk and Segment Data” to the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. For further discussion of our significant accounting policies, refer to Note 1 – “Description of Business and Summary of Significant Accounting Policies” to the Consolidated Financial Statements.
Revenue Recognition
We derive revenue principally from manufacturing services related to electronic equipment built to customer specifications. We also derive revenue to a lesser extent from aftermarket services, design services and excess inventory sales. Revenue from manufacturing services and excess inventory sales is generally recognized, net of estimated product return costs, when goods are shipped; title and risk of ownership have passed; the price to the buyer is fixed or determinable; and recoverability is reasonably assured. Aftermarket service related revenue is recognized upon completion of the services. Design service related revenue is generally recognized upon completion and acceptance by the respective customer. We assume no significant obligations after product shipment.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts related to receivables not expected to be collected from our customers. This allowance is based on management’s assessment of specific customer balances, considering the age of receivables and financial stability of the customer. If there is an adverse change in the financial condition and circumstances of our customers, or if actual defaults are higher than provided for, an addition to the allowance may be necessary.
Inventory Valuation
We purchase inventory based on forecasted demand and record inventory at the lower of cost or market. Management regularly assesses inventory valuation based on current and forecasted usage, customer inventory-related contractual obligations and other lower of cost or market considerations. If actual market conditions or our customers’ product demands are less favorable than those projected, additional valuation adjustments may be necessary.
Long-Lived Assets
We review property, plant and equipment and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the undiscounted projected cash flows that the asset(s) or asset group(s) are expected to generate. If the carrying amount of an asset or an asset group is not recoverable, we recognize an impairment loss based on the excess of the carrying amount of the long-lived asset or asset group over its respective fair value, which is generally determined as either the present value of estimated future cash flows or the appraised value. The impairment analysis is based on significant assumptions of future results made by management, including revenue and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include unforeseen decreases in future performance or industry demand and the restructuring of our operations resulting from a change in our business strategy or adverse economic conditions. For further discussion of our current restructuring program, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Restructuring and Impairment Charges.”
We have recorded intangible assets, including goodwill, in connection with business acquisitions. Estimated useful lives of amortizable intangible assets are determined by management based on an assessment of the period over which the asset is expected to contribute to future cash flows. The fair value of acquired amortizable intangible assets impacts the amounts recorded as goodwill.
We perform a goodwill impairment analysis using the two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. We determine the fair value of our reporting units based on an average weighting of both projected discounted future results and the use of comparative market multiples. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of loss, if any.
We completed our annual impairment test for goodwill during the fourth quarter of fiscal year 2011 and determined that the fair values of our reporting units are substantially in excess of the carrying values and that no impairment existed as of the date of the impairment test.
Restructuring and Impairment Charges
We have recognized restructuring and impairment charges related to reductions in workforce, re-sizing and closure of certain facilities and the transition of production from certain facilities into other new and existing facilities. These charges were recorded pursuant to formal plans developed and approved by management and our Board of Directors. The recognition of restructuring and impairment charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with these plans. The estimates of future liabilities may change, requiring additional restructuring and impairment charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with the restructuring programs. For further discussion of our restructuring programs, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Restructuring and Impairment Charges.”
Retirement Benefits
We have pension and postretirement benefit costs and liabilities in certain foreign locations that are developed from actuarial valuations. Actuarial valuations require management to make certain judgments and estimates of discount rates, compensation rate increases and return on plan assets. We evaluate these assumptions on a regular basis taking into consideration current market conditions and historical market data. The discount rate is used to state expected future cash flows at a present value on the measurement date. This rate represents the market rate for high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations and increases pension expense. When considering the expected long-term rate of return on pension plan assets, we take into account current and expected asset allocations, as well as historical and expected returns on plan assets. Other assumptions include demographic factors such as retirement, mortality and turnover. For further discussion of our pension and postretirement benefits, refer to Note 8 – “Postretirement and Other Employee Benefits” to the Consolidated Financial Statements.
Income Taxes
We estimate our income tax provision in each of the jurisdictions in which we operate, a process that includes estimating exposures related to examinations by taxing authorities. We must also make judgments regarding the ability to realize the deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets that we do not believe meet the “more likely than not” criteria. We assess whether an uncertain tax position taken or expected to be taken in a tax return meets the threshold for recognition and measurement in the Consolidated Financial Statements. Our judgments regarding future taxable income as well as tax positions taken or expected to be taken in a tax return may change due to changes in market conditions, changes in tax laws or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances and/or tax reserves established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
The Internal Revenue Service (“IRS”) completed its field examination of our tax returns for the fiscal years 2003 through 2005 and issued a Revenue Agent’s Report (“RAR”) on April 30, 2010 proposing adjustments primarily related to the IRS contentions that (1) certain corporate expenses relate to services provided to foreign affiliates and therefore must be charged to those affiliates, and (2) valuable intangible property was transferred to certain foreign affiliates without charge. If the IRS ultimately prevails in its positions, our income tax payment due for the fiscal years 2003 through 2005 would be approximately an additional $69.3 million before utilization of any tax attributes arising in periods subsequent to fiscal year 2005. In addition, the IRS will likely make similar claims in future audits with respect to these types of transactions (at this time, determination of the additional income tax due for these later years is not practicable). Also, the IRS has proposed interest and penalties on us with respect to fiscal years 2003 through 2005, and we anticipate the IRS may seek to impose interest and penalties in subsequent years with respect to the same types of issues.
We disagree with the proposed adjustments and are vigorously contesting this matter through applicable IRS and judicial procedures, as appropriate. As the final resolution of the proposed adjustments remains uncertain, we continue to provide for the uncertain tax position based on the more likely than not standards. Accordingly, we did not record any significant additional tax liabilities related to this RAR on the Consolidated Balance Sheets during fiscal year 2011. While the resolution of the issues may result in tax liabilities, interest and penalties, which are significantly higher than the amounts provided for this matter, management currently believes that the resolution will not have a material effect on our financial position or liquidity. Despite this belief, an unfavorable resolution, particularly if the IRS successfully asserts similar claims for later years, could have a material effect on our results of operations and financial condition (particularly during the quarter in which any adjustment is recorded or any tax is due or paid). For further discussion related to our income taxes, refer to Note 4 – “Income Taxes” to the Consolidated Financial Statements and “Risk Factors – We are subject to the risk of increased taxes”.
Stock-Based Compensation
We recognize stock-based compensation expense within our Consolidated Statements of Operations related to stock appreciation rights using a lattice model to determine the fair value. Option pricing models require the input of subjective assumptions, including the expected life of the option or stock appreciation right, risk-free rate, expected dividend yield and the price volatility of the underlying stock. Judgment is also required in estimating the number of stock awards that are expected to vest as a result of satisfaction of time-based vesting schedules or the achievement of certain performance or market conditions. If actual results or future changes in estimates differ significantly from our current estimates, stock-based compensation expense could increase or decrease. For further discussion of our stock-based compensation, refer to Note 10 - “Stockholders’ Equity” to the Consolidated Financial Statements.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are one of the leading providers of worldwide electronic manufacturing services and solutions. We provide comprehensive electronics design, production and product management services to companies in the aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, solar, storage and telecommunications industries. We serve our customers primarily with dedicated business units that combine highly automated, continuous flow manufacturing with advanced electronic design and design for manufacturability. We currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our revenue, net of estimated return costs (“net revenue”). Based on net revenue, during the nine months ended May 31, 2012, our largest customers currently include Agilent Technologies, Apple Inc., Cisco Systems, Inc., Ericsson, EchoStar Corporation, General Electric Company, Hewlett-Packard Company, International Business Machines Corporation, NetApp, Inc. and Research in Motion Limited. During the nine months ended May 31, 2012, we had net revenues of approximately $12.8 billion and net income attributable to Jabil Circuit, Inc. of approximately $311.9 million.
We offer our customers comprehensive electronics design, production and product management services that are responsive to their manufacturing and supply chain management needs. Our business units are capable of providing our customers with varying combinations of the following services:
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integrated design and engineering;
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component selection, sourcing and procurement;
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automated assembly;
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design and implementation of product testing;
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parallel global production;
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enclosure services;
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systems assembly, direct order fulfillment and configure to order; and
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aftermarket services.
We currently conduct our operations in facilities that are located in Argentina, Austria, Belgium, Brazil, Canada, China, England, France, Germany, Hungary, India, Ireland, Israel, Italy, Japan, Malaysia, Mexico, The Netherlands, Poland, Russia, Scotland, Singapore, South Korea, Taiwan, Turkey, Ukraine, United Arab Emirates, the U.S. and Vietnam. Our global manufacturing production sites allow customers to manufacture products simultaneously in the optimal locations for their products. Our services allow customers to improve supply-chain management, reduce inventory obsolescence, lower transportation costs and reduce product fulfillment time. We have identified our global presence as a key to assessing our business opportunities.
The industry in which we operate is composed of companies that provide a range of manufacturing, design and aftermarket services to companies that utilize electronics components. The industry experienced rapid change and growth through the 1990s as an increasing number of companies chose to outsource an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry’s revenue declined as a result of significant cut-backs in customer production requirements, which was consistent with the overall downturn in the technology sector at the time. In response to this downturn in the technology sector, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Industry revenues generally began to stabilize in 2003 and companies began to turn more to outsourcing versus internal manufacturing. In addition, the number of industries serviced, as well as the market penetration in certain industries, by electronic manufacturing service providers has increased over the past several years. In mid-2008, the industry’s revenue declined when a deteriorating macro-economic environment resulted in illiquidity in the overall credit markets and a significant economic downturn in the North American, European and Asian markets. In response to this downturn, we implemented additional restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers.
Uncertainty remains regarding the extent and timing of the current global economic recovery, particularly in those countries (such as much of Europe) where the economic conditions have recently regressed. We will continue to monitor the current economic environment and its potential impact on both the customers that we serve as well as our end-markets and closely manage our costs and capital resources so that we can respond appropriately as circumstances continue to change.
Gross Profit . Gross profit increased to $329.3 million (7.8% of net revenue) and $991.5 million (7.7% of net revenue) during the three months and nine months ended May 31, 2012, respectively, compared to $318.4 million (7.5% of net revenue) and $925.4 million (7.6% of net revenue) during the three months and nine months ended May 31, 2011, respectively. The increase in gross profit on an absolute basis and as a percentage of net revenue was primarily due to additional growth in the DMS segment, which typically has higher margins than the E&I and HVS segments, increased revenue from certain of our existing customers, including new program wins with these customers, which allow us to better utilize capacity and absorb fixed costs and an increased focus on controlling costs and improving productivity.
Selling, General and Administrative. Selling, general and administrative expenses increased to $162.7 million (3.8% of net revenue) and $481.4 million (3.8% of net revenue) during the three months and nine months ended May 31, 2012, respectively, compared to $154.1 million (3.6% of net revenue) and $438.4 million (3.6% of net revenue) during the three months and nine months ended May 31, 2011. Selling, general and administrative expenses increased from the same periods of the prior fiscal year due to additional salary and salary related expenses largely associated with increased headcount to support the continued growth of our business and additional selling, general and administrative expenses associated with the acquisition of Telmar Network Technology, Inc. (“Telmar”) during the second quarter of fiscal year 2012. In addition, during the nine months ended May 31, 2012, we recognized additional selling, general and administrative expenses associated with the acquisition of F-I Holding Company (which directly or indirectly wholly owns certain French and Italian operations) during the second quarter of fiscal year 2011.
Research and Development. Research and development expenses remained relatively consistent at $6.5 million (0.2% of net revenue) and $19.1 million (0.1% of net revenue) during the three months and nine months ended May 31, 2012, respectively, compared to $6.5 million (0.2% of net revenue) and $18.8 million (0.2% of net revenue) during the three months and nine months ended May 31, 2011, respectively.
Amortization of Intangibles. Amortization of intangible assets decreased to $3.5 million and $13.4 million during the three months and nine months ended May 31, 2012, respectively, compared to $5.2 million and $16.8 million during the three months and nine months ended May 31, 2011, respectively. The decrease was primarily attributable to certain intangible assets that became fully amortized since the comparative period, partially offset by an increase to amortization expense associated with the definite lived intangible assets acquired in connection with the acquisition of Telmar. Refer to Note 12 – “Business Acquisitions” to the Condensed Consolidated Financial Statements for discussion of our acquisition of Telmar.
Other Expense. Other expense remained relatively constant at $1.9 million during the three months ended May 31, 2012 compared to $1.8 million during the three months ended May 31, 2011. Other expense increased to $6.5 million during the nine months ended May 31, 2012 compared to $2.4 million during the nine months ended May 31, 2011. The increase during the nine months ended May 31, 2012 was primarily due to (a) an incremental gain of $1.2 million recognized during the nine months ended May 31, 2011 associated with the purchase of receivables from an unrelated third party; (b) an incremental gain of $0.4 million recognized during the nine months ended May 31, 2011 associated with the sale of an available-for-sale security; (c) an incremental loss of $1.5 million recognized during the nine months ended May 31, 2012 under the foreign asset-backed securitization program, largely due to such expense being recorded to interest expense during a portion of the comparable period (as the program was accounted for as a secured borrowing until May 11, 2011) and (d) $0.6 million of expense recognized during the nine months ended May 31, 2012 related to fair value adjustments associated with customer warrants. Refer to Note 7 – “Trade Accounts Receivable Securitization and Sale Programs” to the Condensed Consolidated Financial Statements for further discussion of the foreign asset-backed securitization program.
Interest Income. Interest income decreased to $0.7 million and $1.6 million during the three months and nine months ended May 31, 2012, respectively, compared to $0.9 million and $2.5 million during the three months and nine months ended May 31, 2011, respectively. The decrease during these periods was primarily due to reduced cash investments.
Interest Expense. We recorded interest expense of $26.5 million and $78.3 million during the three months and nine months ended May 31, 2012, respectively, compared to $25.1 million and $73.1 million during the three months and nine months ended May 31, 2011, respectively. The increase was primarily due to increased borrowings associated with our five year unsecured credit facility amended as of December 7, 2010 (the “Credit Facility”) which was further amended and restated on March 19, 2012 (the “Amended and Restated Credit Facility”). These increases were partially offset by the losses recognized in connection with the asset-backed securitization programs that were recorded to interest expense during the three months and nine months ended May 31, 2011 because the asset-backed securitization programs were accounted for as secured borrowings for a portion of the period. Refer to Note 7 – “Trade Accounts Receivable Securitization and Sale Programs” to the Condensed Consolidated Financial Statements for further discussion of the asset-backed securitization programs.
Income Tax Expense. Income tax expense reflects an effective tax rate of 21.2% and 20.5% during the three months and nine months ended May 31, 2012, respectively, as compared to an effective tax rate of 17.6% and 21.4% during the three months and nine months ended May 31, 2011, respectively. The effective tax rate for the three months ended May 31, 2012 increased from the effective tax rate for the three months ended May 31, 2011 primarily due to the mix of tax rates and the expiration of tax incentives in various jurisdictions in which we do business, partially offset by the tax benefit from releasing tax reserves related to the anticipated resolution of a non-U.S. governmental tax audit. The effective tax rate for the nine months ended May 31, 2012 decreased from the effective tax rate for the nine months ended May 31, 2011 primarily due to no tax benefit related to the acquisition losses of F-I Holding Company being recognized in the second quarter of fiscal year 2011 and the release of tax reserves related to the anticipated resolution of a non-U.S. governmental tax audit, partially offset by the mix of tax rates and the expiration of tax incentives in various jurisdictions in which we do business. Most of our international operations have historically been taxed at a lower rate than in the U.S., primarily due to tax incentives granted to our sites in Brazil, China, Hungary, Malaysia, Poland, Singapore and Vietnam. The material tax incentives continue to expire at various dates through 2020. Such tax incentives are subject to conditions with which we expect to continue to comply.
Non-U.S. GAAP Core Financial Measures
The following discussion and analysis of our financial condition and results of operations include certain non-U.S. GAAP financial measures as identified in the reconciliation below. The non-U.S. GAAP financial measures disclosed herein do not have standard meaning and may vary from the non-U.S. GAAP financial measures used by other companies or how we may calculate those measures in other instances from time to time. Non-U.S. GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP. Also, our “core” financial measures should not be construed as an inference by us that our future results will be unaffected by those items which are excluded from our “core” financial measures.
Management believes that the non-U.S. GAAP “core” financial measures set forth below are useful to facilitate evaluating the past and future performance of our ongoing manufacturing operations over multiple periods on a comparable basis by excluding the effects of the amortization of intangibles, distressed customer charges, stock-based compensation expense and related charges, restructuring and impairment charges, settlement of receivables and related charges and loss on disposal of subsidiaries. Among other uses, management uses non-U.S. GAAP “core” financial measures as a factor in determining certain employee performance when determining incentive compensation.
We are reporting “core” operating income and “core” earnings to provide investors with an additional method for assessing operating income and earnings, by presenting what we believe are our “core” manufacturing operations. A significant portion (based on the respective values) of the items that are excluded for purposes of calculating “core” operating income and “core” earnings also impacted certain balance sheet assets, resulting in a portion of an asset being written off without a corresponding recovery of cash we may have previously spent with respect to the asset. In the case of restructuring charges, we may be making associated cash payments in the future. In addition, although, for purposes of calculating “core” operating income and “core” earnings, we exclude stock-based compensation expense (which we anticipate continuing to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholders’ ownership interest. We encourage you to evaluate these items and the limitations for purposes of analysis in excluding them.
Sources
We may need to finance day-to-day working capital needs, as well as future growth and any corresponding working capital needs, with additional borrowings under our Amended and Restated Credit Facility (which is further discussed in the following paragraphs) and our other revolving credit facilities described below, as well as additional public and private offerings of our debt and equity. Currently, we have a shelf registration statement with the SEC registering the potential sale of an indeterminate amount of debt and equity securities in the future, from time-to-time over the three years following the registration, to augment our liquidity and capital resources. The current shelf registration statement will expire in the first quarter of fiscal year 2015 at which time we currently anticipate filing a new shelf registration statement. Any future sale or issuance of equity or convertible debt securities could result in dilution to current or future shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of ordinary shares, and the terms of this debt could impose restrictions on operations, increase debt service obligations, limit our flexibility as a result of debt service requirements and restrictive covenants, potentially negatively affect our credit ratings, and limit our ability to access additional capital or execute our business strategy. We continue to assess our capital structure and evaluate the merits of redeploying available cash to reduce existing debt or repurchase common shares.
We regularly sell designated pools of trade accounts receivable under two asset-backed securitization programs, a factoring program and three uncommitted trade accounts receivable sale programs (collectively referred to herein as the “programs”). Transfers of the receivables under the programs are accounted for as sales and, accordingly, net receivables sold under the programs are excluded from accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. Discussion of each of the programs is included in the following paragraphs. In addition, refer to Note 7 – “Trade Accounts Receivable Securitization and Sale Programs” to the Condensed Consolidated Financial Statements for further details on the programs.
a. Asset-Backed Securitization Programs
We continuously sell designated pools of trade accounts receivable under our asset-backed securitization programs to special purpose entities, which in turn sell 100% of the receivables to conduits administered by unaffiliated financial institutions (for the North American asset-backed securitization program) and an unaffiliated financial institution (for the foreign asset-backed securitization program). Any portion of the purchase price for the receivables which is not paid in cash upon the sale taking place is recorded as a deferred purchase price receivable, which is paid from available cash as payments on the receivables are collected. Net cash proceeds up to a maximum of $300.0 million for the North American asset-backed securitization program and $200.0 million for the foreign asset-backed securitization program are available at any one time.
The foreign asset-backed securitization program was amended on May 15, 2012 to expire on May 15, 2015.
In connection with our asset-backed securitization programs, at May 31, 2012, we had sold $868.7 million of eligible trade accounts receivable, which represents the face amount of total outstanding receivables at that date. In exchange, we received cash proceeds of $316.4 million, and a net deferred purchase price receivable. At May 31, 2012, the deferred purchase price receivable totaled approximately $542.2 million, net of a $10.1 million valuation allowance established for accounts receivable sold into the asset-backed securitization programs that, subsequent to its sale, became involved in a legal dispute between us and the customer, which was recorded initially at fair value as prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. Refer to Note 10 – “Commitments and Contingencies” to the Condensed Consolidated Financial Statements for further details on the aforementioned legal dispute.
b. Trade Accounts Receivable Factoring Agreement
In connection with a factoring agreement, we transfer ownership of eligible trade accounts receivable of a foreign subsidiary without recourse to a third party purchaser in exchange for cash. Proceeds from the transfer reflect the face value of the account less a discount. In April 2012, the factoring agreement was extended through September 30, 2012, at which time it is expected to automatically renew for an additional six-month period.
During the three months and nine months ended May 31, 2012, we sold $19.2 million and $62.6 million of trade accounts receivable, respectively, and received cash proceeds of $19.2 million and $62.6 million during the three months and nine months ended May 31, 2012, respectively.
c. Trade Accounts Receivable Sale Programs
In connection with two separate uncommitted trade accounts receivable sale agreements with banks, the second of which was entered into during the first quarter of fiscal year 2012, we may elect to sell and the banks may elect to purchase at a discount, on an ongoing basis, up to a maximum of $250.0 million and $50.0 million of specific trade accounts receivable at any one time. The $250.0 million uncommitted trade accounts receivable sale agreement has no defined termination date and either party can elect to cancel the agreement by giving prior written notification to the other party of no less than 30 days. The $50.0 million uncommitted trade accounts receivable sale agreement will expire no later than June 1, 2015, though either party can elect to cancel the agreement by giving prior written notification to the other party of no less than 30 days. A $200.0 million uncommitted trade accounts receivable sale agreement, which we were previously party to, was terminated on May 31, 2012.
During the three months and nine months ended May 31, 2012, we sold $0.5 billion and $1.6 billion of trade accounts receivable under these programs, respectively, and we received cash proceeds of $0.5 billion and $1.6 billion during the three months and nine months ended May 31, 2012, respectively.
CONF CALL
Beth Walters - SVP, Investor Relations and Communications
Thank you. Welcome to our fourth quarter of 2012 earnings call. Joining me today are President and CEO, Timothy Main, and Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, Jabil.com, in the Investor section.
Our fourth quarter press release and corresponding webcast slides are also available on our website. In these slides, you will find the financial information that we cover during this conference call. We ask that you follow our presentation with the slides on the website and beginning with slide 2, 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 first quarter of fiscal 2013 net revenue and earnings results, our long-term outlook for our Company, 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, 2011, 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.
Today’s call will begin with our fourth quarter and full fiscal year 2012 results, highlights and comments from Forbes Alexander, as well as guidance on our first quarter of 2013. Tim Main will follow on with macro environment and Jabil specific comments about our performance, our updated long-term guidance and our current outlook. We will then open it up to questions from call attendees. As a remainder, we cannot discuss customer specific programs and relationships and we will not be doing so on today’s call.
I will now turn the call over to Forbes.
Forbes I.J. Alexander - CFO
Thank you, Beth and hello everyone. I ask you to start with slide 3. Net revenue for the fourth quarter was $4.3 billion, an increase of 1% on a year-over-year basis. GAAP operating income was $144.2 million or 3.3% of revenue, which compares to $165.5 million of GAAP operating income on revenues of $4.3 billion or 3.9% for the same period in the prior-year.
GAAP diluted earnings per share with $0.39. Core operating income excluding amortization of intangibles, stock-based compensation, and a distressed customer charge decreased 6% to $175 million, and represented 4% of revenue. This compares to $187 million, or 4.4% for the same period in the prior-year. Core diluted earnings per share was $0.54, a decrease of 13% over the prior-year.
Please note that our GAAP operating results were negatively impacted by approximately $5.9 million during the quarter, as a result of charges taken connected to our solar business. These charges were isolated with one customer. Given the very difficult industry conditions, we’re operating with an abundance of caution with any solar or solar related opportunity with strict contractual operating agreements in place.
Now I’d ask you to turn to slide 4. In the fiscal 2012, net revenue was $17.2 billion, an increase of 4% on a year-over-year basis. GAAP operating income increased 7% to $622 million, representing 3.6% of revenue. This compares to $579 million for operating income on revenues of $16.5 billion and 3.5% of revenue in fiscal 2011.
Diluted earnings per share was $1.87, an 8% increase over the prior-year. Core operating income excluding amortization of intangibles, stock-based compensation, loss on disposal subsidiaries, settlement of receivables and related charges increased 3% to $736 million and represents 4.3% of revenue. This compares to $715 million or 4.3% for the same period in the prior-year. Core diluted earnings per share was $2.40, an increase of 3% over fiscal 2011.
I’d now ask you to turn to slide 5 to discuss our fourth quarter segment performance. In the fourth quarter, our Diversified Manufacturing Services segment grew 14% on a year-over-year basis, driven by continued strength in Specialized Services, growth in Instrumentation & Healthcare offset by softening of demand in Defense and Aerospace and Industrial & Clean Tech.
Revenue for the segment was approximately $1.9 billion representing 45% of total Company revenue. Core operating income declined in the quarter to 5.3% of revenue. The core operating income results were negatively impacted by a challenging ramp within our Specialized Services sector, and lower income levels in certain Diversified Manufacturing Services programs.
The Enterprise & Infrastructure segment declined 5% on a year-over-year basis. Revenue was approximately $1.3 billion representing 30% of total Company revenue in the fourth quarter. Core operating income for the segment was 2.4%, an improvement of 20 basis points on a sequential basis. We expect to see continued positive progression during the course of fiscal 2013 with regards to operating performance.
The High Velocity segment decreased 10% on a year-over-year basis, driven by continued weakness in handset volumes. Revenue was $1.1 billion, representing approximately 25% of total Company revenue in the quarter. Despite large declines in our handset business, core operating income for the segment remained 3.8% of revenue.
I now ask you to turn to slide 6, for discussion of our segment performance on a yearly basis. In fiscal 2012, our Diversified Manufacturing Services segment grew 24%. Revenue was approximately $7.5 billion, representing 44% of total Company revenue. Core operating income was 6.1% of revenue for the full-year.
The Enterprise & Infrastructure segment decreased 2% in fiscal 2012. Revenue was approximately $5.1 billion representing 29% of total Company revenue. Core operating income was 2.1% for the full-year. The High Velocity segment decreased 14%. Revenue was approximately $4.6 billion representing 27% of total Company revenue. The core operating income was 3.8% for the full-year.
Total Company revenue grew 4% with core operating income for the year at 4.3%. For the full fiscal year there were three 10% customers, Apple, Cisco and RIM. And for fiscal 2013 we currently expect to have one 10% customer within our diversified manufacturing Services segment.
I would now ask you to turn to slide 7, where I like to review some of our balance sheet metrics. We ended the fiscal year with cash balances approximately $1.2 billion. The cash balance reflects $443 million of cash flow from operations in the fourth fiscal quarter. $500 million of proceeds from a recent 4.7% senior secured – unsecured notes offering and the subsequent pay down of $240 million of revolver subsidiary debt.
As a result of our successful bond offering, net interest expense were increased by approximately $20 million equivalent to $0.09 of earnings per share in fiscal 2013 versus that in fiscal 2012. In the quarter our inventory decreased by approximately 5% to $2.3 billion while inventory turns remained at 7.
EBITDA in the quarter was $263 million or $1,073 million for the full fiscal year, representing 6.3% of revenue, a 20 basis point expansion over the prior fiscal year. For the year we purchased approximately 3.2 million shares, totaling $71 million, $29 million remains available under this stock repurchase authorization. Our GAAP return on invested capital was 22% for the full fiscal year.
Let’s take a moment on slide 8, to discuss our capital investments. The capital expenditures during the fiscal year – excuse me, capital expenditures during the quarter were approximately $202 million, $481 million for the fiscal year. Of the $481 million 70% was related to investments in our Diversified Manufacturing Services segment.
Our fiscal 2013 expectations, the capital expenditures should be in the range of $400 million to $500 million, depending on levels of capacity and production and consistent with fiscal 2012 70% of the spend will be directed towards our Diversified Manufacturing Services segment. We currently expect minimal investments in our Enterprise & Infrastructure and High Velocity segments.
For the first fiscal quarter of 2013, the capital expenditures are estimated to be in the range of $175 million to $200 million, depending on the timing of completion of our infrastructure and capacity expansions. Last quarter I discussed expansion of our capacity in our Specialized Services sector. The additional square footage in Wuxi, China has been completed and shall be fully occupied in the coming weeks. As you will recall, we signed an agreement to establish a site in Chengdu, China. The first phase of this construction is anticipated to be complete late in the calendar year.
Turn to slide 9, I would like to discuss our cash flows. We’re pleased with our operating cash flow performance in fiscal 2012. Cash flow from operations for the fiscal year were $634 million, with cash flows after capital expenditures of $152 million. As a result of anticipated EBITDA expansion and continued working capital management, we currently estimate the cash flows from operations in fiscal 2013 will be $1 billion, with cash flows after capital expenditures in the range of $500 million to $600 million.
From a liquidity standpoint, we’re extremely well positioned to support business with further investment, seek acquisitions that would enhance our capabilities in key areas and return capital to shareholders via our ongoing dividend and stock repurchase programs. Our Board of Directors has authorized the repurchase of up to $100 million of shares during the next 12 months. This authorization is consistent with our fiscal 2012 actions to minimize the impact of equity issuance and diluted share count. I’d remind you that $20 million remains available on the previous authorization.
I now ask you to refer to Slide 10, where we will discuss our segment targets. Beginning in fiscal ’13, we feel it’s appropriate to reset some of our long-term targets to better reflect the current dynamics within our operating segments. The Diversified Manufacturing Services segment, we believe a 15% growth is an appropriate expectation on an organic basis. Our new core operating income target is 5.5% to 7%.
For the Enterprise & Infrastructure segment, we’re slightly reducing our core operating target to 3% to 4%, with our revenue growth expectation for this segment being in the range of 0% to 5%. Conversely we’re increasing our core operating target to the High Velocity business to 2.5% to 3.5% range, as a result of operational efficiencies and high levels of execution. Our revenue expectation for this segment is in the range of 0% to 5%.
Tim will provide some further color regarding these new targets in his section of the call. On an overall Company basis, we still believe a 5% core operating margin is attainable and realistic as the profile of our revenue continues to shift towards Diversified Manufacturing Services.
I now ask you to refer to slides 12 and 13, where I will discuss fiscal ’13 and first quarter guidance. We enter fiscal 2013 with the backdrop of a challenging macroeconomic climate. Consistent with our strategy, we remain well positioned to continue the growth momentum by Diversified Manufacturing Services segment throughout the fiscal year. As a result, we would estimate year-over-year GAAP and core earnings per share growth to be in the range of 5% to 10% in fiscal ’13.
The first quarter of fiscal 2013 we estimate revenue on a year-over-year basis to increase by approximately 2% in the range of $4.3 billion to $4.5 billion. GAAP operating income is estimated to be in the range of $140 million to $175 million or 3.3% to 3.9% of revenue. GAAP earnings per share are expected to be in the range of $0.37 to $0.50 on a per diluted share basis, with a diluted share count of 212 million shares. Based on current expectations the GAAP tax rate is expected to be 28%.
Core operating income is estimated to be in the range of $170 million to $200 million and core operating margins in the range of 4% to 4.4%. Our core earnings per share are estimated to be in the range of $0.51 to $0.62 per diluted share. Based on the current estimates of production, the tax rate on core operating income is expected to be 22% for the fiscal year.
Finally turning to our segments and the year-on-year performance, the Diversified Manufacturing Services segment is expected to increase 12%. The Enterprise & Infrastructure segment is expected to increase 14% on a year-over-year basis and finally our High Velocity segment is expected to decline 24% on a year-over-year basis.
I’d now like to hand the call over to Tim Main.
Timothy L. Main - President and CEO, Director
Thank you, Forbes. I will take a few minutes to discuss FQ4 results and near-term outlook. I will then pull back to a more macro view to address our long-term growth and margin range changes and our thoughts behind those changes. We are disappointed with our income and margin performance for the fourth quarter. We are ramping a large scale complex program within our Materials Technology Group.
Although we expected challenges with the program during the startup phase, quality and efficiency levels, lagged behind our assumptions for the quarter. We intentionally widened our guidance range for FQ4 2012 in order to accommodate some expected inefficiencies during this ramp. For FQ4 ’12, our mix shift was also unfavorable as revenue was lower than expected in Diversified Manufacturing Services and higher than expected in High Velocity. Finally, income levels in certain DMS programs, notably in Defense and Clean Tech were lower than expected.
We are very pleased with our cash flow performance for the quarter and for the year. We produced $442 million of cash flow from operations and $240 million of free cash flow in our fourth fiscal quarter. For the year, we produced $643 million in cash flow from operations, more than adequate to cover our capital expenditures and return $136 million in capital to shareholders.
We are also very pleased to reduce inventory levels by over $100 million in the fourth quarter. As we reach more mature levels of production on new programs and as the balance of the business is stable to improving, we would expect operating income levels above $200 million per quarter in the second half of fiscal 2013. We would expect this to result in a fourth consecutive record year for Jabil in FY ’13.
Turning toward our longer term outlook, we believe this is an appropriate time to review our long-term growth and margin targets for our three business groups. Looking back over the past three years, actual performance to our strategic plan has been very good. From FY 2010 through FY 2012, the Company has grown revenue and EPS at a compound annual growth rate of 13% and 55% respectively.
In Diversified Manufacturing Services from fiscal ’10 through fiscal ‘12, we have posted a compound annual growth rate in revenue of 33%, while earning margins in the targeted range. In fiscal 2010, the DMS business was $4.2 billion in revenue. By 2012, we expanded the business by $3.3 billion to a total revenue level of $7.5 billion. DMS now comprises 45% of our total business and is our largest sector by far.
So with that success, why change targets? For one, we’re working from a much larger revenue base and we’ve learned a few things about growing this business, particularly, in highly complex areas such as healthcare, for example. Balanced growth requires significant investment in engineering, design, quality resources, and capabilities.
Our growth platform is premised on genuine differentiation, driven by unique capabilities. We will expand our capabilities and make the investments necessary to grow with a long-term view. Over the next few years, that could mean brief periods at the low end of the new margin range, followed by periods where we have a realistic opportunity to perform at the high end of the margin range, because we’re working from a larger revenue base and because individual program wins tend to be small, with long gestation periods and very long product cycles, we will target a 15% organic growth rate.
You can expect us to make strategic acquisitions in this area, which could periodically drive growth above 15%. One note of exception to this formula is our Materials Technology Group. MTG remains poised for robust revenue growth above the 15% target for DMS. Growth will come from its core mobility business, as well as expansion in the healthcare and other strategic markets and initiatives.
Turning to Enterprise & Infrastructure, for the three-year period from FY ’10 to FY ’12, we have posted the compound annual growth rate of 7.4%, while recently margins have gone under pressure, partly from poor performance in Europe and more recently slowing momentum in growth. It appears to us that this business is undergoing fundamental change.
Businesses and governments are spending less on hardware and more on services and functionality. The reasons behind this go beyond a soft global economy and budget constraints. Computing, power, bandwidth, hardware technology have all advanced a great deal in recent years, further reducing the need for hardware spend. The movement in cloud computing is real and will continue.
We believe Jabil will continue to play an important role with the world’s best customers in this business area. If spending picks-up, I think we would outperform the market, but with lower growth rates and standardization comes commoditization and lower margins. Our expectations are similar to the High Velocity sector.
Again, I would expect Jabil to continue to play an important role with strategic customers in this area. In 2012 this business operated with a margin profile of 1.2% by focusing on lean manufacturing, new engagement models and focusing on fewer key customer relationships, financial performance improved significantly. We believe that improvement is sustainable over the next few years.
Our growth and margin expectations for High Velocity and Enterprise & Infrastructure are converging into a similar range. We think this will be the natural direction for traditional EMS markets over the next few years. In the E&I High Velocity sectors we expect to drive strong cash flow and financial returns appropriate to risk.
We will certainly focus intently on lean manufacturing, operational performance, service excellence and key customers. Over the next three years we will see Jabil move deeper and more aggressively into our DMS markets. If we continue to deliver on our strategic plan in this area Jabil should continue to set the bar for our industry.
We will focus less on top-line and more on the quality of growth and bottom-line performance. For the Company overall delivering on our promise of quality, long-term growth will further strengthen the business and make Jabil a better supplier, employer, customer and investment.
Beth Walters - SVP, Investor Relations and Communications
Operator, we are ready to now take Q&A from our call attendees.
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Fund Letters
