Jabil Stock Drops Hard on Restatement

In an 8-K filing with the SEC late yesterday, Jabil Circuit (JBL) disclosed that the company concluded on November 7 that it will need to restate its 2005 financial statements and disclosures.

The company reached that conclusion as part of its internal review of historical stock options granting practices. “The issues under review principally reflect changes in the Company’s understanding of the requirements for identifying appropriate measurement dates for option grants as defined in relevant accounting guidance or errors in interpreting such guidance, and administrative and logistical errors made in effecting the options program,” the company said in the filing. It added that the review is ongoing and not complete.

Jabil noted that it is the subject of several shareholder derivative suits in connections with its stock options practices; it also is the subject of an informal inquiry from the SEC, and it has received a subpoena from the U.S. Attorney for the Southern District of NewYork.

The company said it will file its 10-K for the August 31,2006 fiscal year “as soon as practicable.”

Jim Suva, an analyst at Citigroup, this morning noted that he does not think the stock will be delisted by the NYSE; but he warns that “we do not rule out internal control/management changes.” He also notes that the company had previous denied any wrongdoing, “and therefore opens itself up for increased litigation.”

“We would have preferred the company simply to state it is a legal matter and they cannot comment on the issue rather than public denial (analyst day in May). We do not believe interpretation/understanding or rules or logistical/administrative issues give reason to dispel claims and that the company’s legal and accounting advisors should have stopped the company from making such bold claims of denial, which we believe will spur additional legal costs,” Suva writes.

Michael Walker, an analyst with Credit Suisse, sees three new dangers for the stock:

• The possibility that ultimately one or more members of management will be forced to resign.
• That the ongoing investigation will be a continued distraction to management, increasing the risk of further execution issues
• Visibility toward JBL’s margin recovery from 2006’s issues will be further postponed.

The first two points, he notes, suggest increasing risk to estimates; the third implies risk to the valuation investors are willing to pay.

Here’s another thing I’m wondering: the filing notes that the company reached the conclusion that it needs to restate on November 7. So why did it take a week to disclose the news?

This morning, Jabil shares are down $1.63 at $28.75.