Rating Action: Moody's affirms Jabil's Baa3 senior unsecured rating; outlook stable

Global Credit Research - 31 Aug 2020

New York, August 31, 2020 -- Moody's Investors Service, ("Moody's") affirmed the Baa3 senior unsecured rating of Jabil Inc. (Jabil) and assigned a (P)Baa3 senior unsecured rating to the company's recent shelf registration covering debt and equity securities. The outlook remains stable.

RATINGS RATIONALE

The affirmation of the Baa3 senior unsecured rating reflects Jabil's growing scale and increased diversification, trends which Moody's expects will continue once the pandemic subsides. In less than three years, Jabil's top line has increased 37% to over $26 billion from $19 billion in FY2017, which not only improves overall end-market diversification but will also lead to enhanced margins. Moody's anticipates Jabil will continue to expand its Diversified Manufacturing segment particularly given the multi-year revenue lift from its strategic collaboration with Johnson & Johnson as well as expected growth in packaging of groceries and dry goods.

Jabil benefits from its market position as a leading North American Tier-1 EMS provider to global companies in numerous verticals including automotive, computing & storage, consumer electronics, healthcare, industrial, networking & telecommunications, and packaging. Jabil's scale and geographic reach allow the company to compete for major awards from large multinational OEMs, and Moody's expects Jabil will continue to benefit from the ongoing shift to outsourced manufacturing by technology and non-tech OEMs. Ratings are further supported by Jabil's expanding footprint into non-traditional EMS end-markets, expertise across a mix of materials technologies, and the likelihood for improving adjusted operating margins from multi-year programs as well as from higher complexity products and services.

The following is a summary of today's rating actions:

..Issuer: Jabil Inc.

.Affirmations:

..Senior Unsecured Notes -- Affirmed Baa3

..Senior Unsecured Commercial paper -- Affirmed P-3

.Assignments:

..Senior Unsecured Shelf - Assigned (P)Baa3

.Outlook actions: ..Outlook -- Remains Stable RATINGS RATIONALE

Improved diversification has allowed Jabil to continue growing its top line in FY2020, albeit at a slower pace due to the impact of COVID-19. The coronavirus outbreak reduced revenues in the digital print & retail segment as a result of office closures and stay at home orders, the automotive segment reflecting OEM factory closures, and the enterprise segment due to lower overall spend. These declines, however, are being more than offset by strength in healthcare & packaging as well as wireless/5G & cloud. Healthcare benefits from demand for COVID-19 related products while packaging benefits from stay at home orders increasing demand for grocery and dry goods packaging. Cloud benefits from increased demand for cloud infrastructure as a result of global lockdowns, while wireless customers continue with their 5G rollouts.

Despite revenue gains, adjusted operating margins for FY2020 will compress by roughly 0.5% compared to FY2019 reflecting unplanned costs related to COVID-19 precautions. Over the next several months, the global recession will mute top line gains and adjusted operating margins, but Jabil will still benefit from solid free cash flow generation and will be well positioned for revenue growth and margin expansion when global economies and IT demand recover. Jabil recently announced plans to reduce its cost structure by an incremental $50 million which will help offset unplanned expenses related to COVID-19.

Jabil's single customer concentration is high relative to peers, but this exposure is diversified across numerous products. Although Jabil's revenue concentration with Apple Inc. remains a concern, Moody's expects Jabil will continue to target limiting exposure to a single product/product set to no more than 5% of annual operating cash flow. Jabil should also be able to minimize the negative impact of large working capital swings related to new program wins while maintaining good returns on invested capital.

Moody's expects Jabil will maintain robust liquidity supported by ample cash balances, good free cash flow, and over $3 billion of availability under committed credit lines. Revolvers and receivables securitization programs are periodically increased as revenues and working capital needs grow.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework due to the substantial implications for public health and safety. Given Jabil's exposure to global economies, the company remains vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

Jabil has reduced exposure to environmental risks as one of the largest North American electronics manufacturing services providers with manufacturing operations across Asia, the Americas and Europe. The company's geographic and program diversity limits risk in a scenario in which a given program is impacted by an environmental event. Jabil has generally adhered to its financial policies including maintaining investment grade leverage metrics and capital allocation while making progress towards reducing exposure to a single product set. Jabil is publicly traded with its largest shareholders, Fidelity, Vanguard, and BlackRock, each owning roughly 8.5% to 15% of common shares, followed by other investment management companies holding 6% or less. Good governance is supported by a board of directors with eight of the company's ten board seats being held by independent directors.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that, beyond the impact of COVID-19, revenues will grow in the low single digit percentage range and adjusted operating margins will return to prior levels as unplanned costs related to COVID-19 precautions are offset by higher margin revenue streams. Moody's also expects future acquisitions, investments, and share repurchases will be funded primarily with internally generated cash flow.

Ratings could be upgraded with further revenue diversification, expansion in higher margin end markets, and operating margins exceeding 4% (Moody's adjusted). Adjusted debt to EBITDA would also need to be maintained below 2x with improved cash flow generation including adjusted free cash flow to debt being sustained above the mid 20% range. Ratings could be downgraded if Jabil experiences significant customer or program losses without offsetting increases in new business, or if there is deterioration in revenue diversification. A decline in core operating margins towards 2% (Moody's adjusted) or adjusted debt to EBITDA being sustained above 2.75x could also result in a downgrade.

Headquartered in St. Petersburg, Florida, Jabil Inc. is an electronic product solutions provider offering electronics design, manufacturing, supply chain, and product management services to global companies across numerous verticals including networking & telecommunications, computing & storage, industrial, automotive, consumer electronics, healthcare, and packaging. Moody's expects net revenues will exceed $26 billion over the next twelve months.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carl Salas VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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