Jabil, Johnson & Johnson strike ‘transformational’ deal

Jabil Inc. will acquire 14 sites from Johnson & Johnson Medical Devices Companies, as part of a strategic collaboration.

The deal is part of an initiative by Jabil (NYSE: JBL), an electronics services firm and manufacturer, to bring $2 billion in new business into the company in the coming year, Mark Mondello, CEO, said on a conference call with analysts Tuesday.

Jabil, the largest company headquartered in St. Petersburg with $22.1 billion in revenue for the fiscal year that ended Aug. 31, historically has relied on Apple (NASDAQ: AAPL) for a big chunk of its revenue. Jabil makes iPhone casings and other products, and Apple accounted for 24 percent of its total revenue in fiscal year 2017.

But Jabil has been focused on diversification for several years, and Mondello’s goal is for no single product or product set to be more than five percent of  annual cash flow or annual income.

Much of the new business Jabil expects to add is from cloud services, which will account for about $800 million of the total, Mondello said. Another $300 million in new business will come from each of several sectors: healthcare, 5G and wireless services, automotive and other industries.

Not all of the new business will lead to an immediate increase in earnings because it will take time to ramp up, Michael Dastoor, chief financial officer, told analysts.

Mondello singled out the Johnson & Johnson (NYSE: JNJ) deal on the conference call. It’s a long-term strategic collaboration that significantly expands a 12-year partnership between the firms, Mondello said.

“We’ll be acquiring 14 sites from Johnson & Johnson, and we’ll be supporting and protecting the Johnson & Johnson brand in areas of endo-surgical, spine, trauma and instrumentation,” Mondello said. “I feel this collaboration has wonderful potential. We also think it will be truly transformational.”

Integration costs and charges directly associated with the deal will be in the range of $80 million, and will be neutral to core earnings in 2019, Mondello said. Annual revenue from the deal will grow to top $1 billion a year, he said.

In response to an analyst’s question, he declined to say where the 14 sites are located, saying he would share more details over time.

Jabil has several plants in China, so analysts also asked about the potential impact of tariffs imposed by President Trump.

“It continues to be a moving target. You wake up one day and there’s a tweet. You wake 48 hours later and something else is going on. It’s a very complicated issue in terms of what’s going to be, how bad will it get,” Mondello said.

Mondello does not expects the trade and tariff issues, specifically with China, to escalate.

“But if they do, it absolutely will affect our business as it will affect everyone’s business,” he said. “If the trade and tariffs end up continuing to be posturing, going back and forth, and there’s some reasonable resolution to them over time, I think that Jabil is really well-positioned.”

Jabil operates from more than 100 facilities in 29 countries and is the largest U.S.-domiciled manufacturing company in the world.

Jabil reported net income of $86.3 million, or 49 cents a share, on revenue of $22.1 billion for the fiscal year ended Aug. 31. Revenue was up 15.9 percent from a year earlier. Net income dipped from $129 million in the previous fiscal year, in part because Jabil took a $111 million tax hit from the Tax Cut and Jobs Act approved in late 2017, Dastoor said. The company also had a one-time charge of $18 million as a result of liquidity issues experienced by a networking customer, and $8 million in acquisition and integration costs related to the Johnson & Johnson deal.

For the current fiscal year, FY 2019, Jabil expects $24.5 billion in revenue, and core earnings per share of $3.