filings.toolsItem 15. Exhibits and Financial Statement Schedules
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Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this Report: |
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| 1 | Financial Statements. Our consolidated financial statements, and related notes thereto, with the independent registered public accounting firm reports thereon are included in Part IV of this report on the pages indicated by the Index to Consolidated Financial Statements and Schedule. |
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| 2 | Financial Statement Schedule. Our financial statement schedule is included in Part IV of this report on the page indicated by the Index to Consolidated Financial Statements and Schedule. This financial statement schedule should be read in conjunction with our consolidated financial statements, and related notes thereto. |
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Schedules not listed in the Index to Consolidated Financial Statements and Schedule have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
| 3 | Exhibits. See Item 15(b) below. |
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| (b) | Exhibits. The following exhibits are included as part of, or incorporated by reference into, this Report. |
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EXHIBIT LIST
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| † | Indicates management compensatory plan, contract of arrangement. |
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| * | Filed or furnished herewith. |
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| ** | XBRL (Extensible Business Reporting Language) Filed Electronically with this report. |
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Certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries are not filed herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of any such instrument to the SEC upon request.
| (c) | Financial Statement Schedules. See Item 15(a) above. |
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JABIL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Jabil Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule13a-15(f) of the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, the Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of August 31, 2019. Management based this assessment on the framework as established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the effectiveness of its internal control over financial reporting.
Based on this assessment, management has concluded that, as of August 31, 2019, the Company maintained effective internal control over financial reporting.
Ernst & Young LLP, the Company’s independent registered public accounting firm, issued an audit report on the effectiveness of the Company’s internal control over financial reporting which follows this report.
October 22, 2019
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Jabil Inc.
Opinion on Internal Control over Financial Reporting
We have audited Jabil Inc. and subsidiaries’ internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Jabil Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the operations acquired from Johnson & Johnson Medical Devices Companies (JJMD), which are included in the 2019 consolidated financial statements of the Company and constituted 1.8% of consolidated total assets as of August 31, 2019 and 1.3% of consolidated net revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the operations acquired from JJMD.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated October 22, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
Tampa, Florida
October 22, 2019
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Jabil Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Jabil Inc. and subsidiaries (the Company) as of August 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated October 22, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
As discussed in Note 18 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers and certain fulfillment costs in 2019 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). See below for discussion of our related critical audit matter.
As discussed in Note 2 to the consolidated financial statements, the Company changed its classification of cash receipts on the deferred purchase price receivable on asset-backed securitization transactions in 2019 due to the adoption of ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Adoption of ASU No. 2014-09, Revenue from Contracts with Customers | ||
| Description of the Matter | As more fully described above and in Note 18 to the consolidated financial statements, effective September 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, on a modified retrospective basis, which resulted in a $43 million transition adjustment to increase retained earnings. Auditing the Company’s implementation of the new revenue standard was challenging due to the judgment in applying the new standard regarding whether performance obligations within the Company’s contracts with customers are satisfied over time or at a point in time. More specifically, applying the criteria within the new standard for determining the timing of satisfaction of performance obligations, such as whether an enforceable right to payment for performance completed to date exists, was complex. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s implementation of the new revenue standard. We tested controls over management’s contract reviews, including controls over the application of the new standard to contracts to assess whether performance obligations are satisfied over time or at a point in time. To test the Company’s implementation of the new revenue standard, our audit procedures included, among others, assessing whether the Company’s new accounting policy complies with the new standard, evaluating the terms of the Company’s contracts with customers and evaluating management’s application of the new standard to the Company’s contracts. More specifically, we inspected the terms of a sample of the Company’s contracts and evaluated management’s determination of whether performance obligations are satisfied over time or at a point in time based on the criteria within the new standard. We also tested the data and assumptions used in the computation of the Company’s transition adjustment. | |
| Uncertain Tax Positions | ||
| Description of the Matter | As disclosed in Note 4 to the consolidated financial statements, the Company operates in a complex multinational tax environment and is subject to laws and regulations in various jurisdictions regarding intercompany transactions. Uncertain tax positions may arise from interpretations and judgments made by the Company in the application of the relevant laws, regulations and tax rulings. The Company uses significant judgment in (1) determining whether the technical merits of tax positions for certain intercompany transactions are more-likely-than-not to be sustained and (2) measuring the related amount of tax benefit that qualifies for recognition. Auditing the tax positions related to certain intercompany transactions was challenging because the recognition and measurement of the tax positions is highly judgmental and is based on interpretations of laws, regulations and tax rulings. | |
| How We Addressed the Matter in Our Audit | We tested controls over the Company’s process to assess the technical merits of tax positions related to certain intercompany transactions and also tested controls over the Company’s process to determine the application of the relevant laws, regulations and tax rulings, including management’s process to recognize and measure the related tax positions. In testing the recognition and measurement criteria, we involved tax professionals to assist in assessing the technical merits of the Company’s tax positions. In addition, we used our knowledge of and experience with the application of domestic and international income tax laws by the relevant tax authorities to evaluate the Company’s accounting for those tax positions. We also assessed the Company’s assumptions and data used to measure the amount of tax benefit that qualifies for recognition, and tested the accuracy of the calculations. Lastly, we evaluated the Company’s income tax disclosures included in Note 4 in relation to the Company’s uncertain tax positions. |
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2010.
Tampa, Florida
October 22, 2019
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JABIL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
| August 31, | ||||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,163,343 | $ | 1,257,949 | ||||
| Accounts receivable, net of allowance for doubtful accounts | 2,745,226 | 1,693,268 | ||||||
| Contract assets | 911,940 | — | ||||||
| Inventories, net of reserve for excess and obsolete inventory | 3,023,003 | 3,457,706 | ||||||
| Prepaid expenses and other current assets | 501,573 | 1,141,000 | ||||||
| Total current assets | 8,345,085 | 7,549,923 | ||||||
| Property, plant and equipment, net of accumulated depreciation | 3,333,750 | 3,198,016 | ||||||
| Goodwill | 622,255 | 627,745 | ||||||
| Intangible assets, net of accumulated amortization | 256,853 | 279,131 | ||||||
| Deferred income taxes | 198,827 | 218,252 | ||||||
| Other assets | 213,705 | 172,574 | ||||||
| Total assets | $ | 12,970,475 | $ | 12,045,641 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current installments of notes payable and long-term debt | $ | 375,181 | $ | 25,197 | ||||
| Accounts payable | 5,166,780 | 4,942,932 | ||||||
| Accrued expenses | 2,990,144 | 2,262,744 | ||||||
| Total current liabilities | 8,532,105 | 7,230,873 | ||||||
| Notes payable and long-term debt, less current installments | 2,121,284 | 2,493,502 | ||||||
| Other liabilities | 163,821 | 94,617 | ||||||
| Income tax liabilities | 136,689 | 148,884 | ||||||
| Deferred income taxes | 115,818 | 114,385 | ||||||
| Total liabilities | 11,069,717 | 10,082,261 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| Jabil Inc. stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value, authorized 10,000,000 shares; no shares issued and outstanding | — | — | ||||||
| Common stock, $0.001 par value, authorized 500,000,000 shares; 260,406,796 and 257,130,145 shares issued and 153,520,380 and 164,588,172 shares outstanding at August 31, 2019 and August 31, 2018, respectively | 260 | 257 | ||||||
| Additional paid-in capital | 2,304,552 | 2,218,673 | ||||||
| Retained earnings | 2,037,037 | 1,760,097 | ||||||
| Accumulated other comprehensive loss | (82,794 | ) | (19,399 | ) | ||||
| Treasury stock at cost, 106,886,416 and 92,541,973 shares as of August 31, 2019 and August 31, 2018, respectively | (2,371,612 | ) | (2,009,371 | ) | ||||
| Total Jabil Inc. stockholders’ equity | 1,887,443 | 1,950,257 | ||||||
| Noncontrolling interests | 13,315 | 13,123 | ||||||
| Total equity | 1,900,758 | 1,963,380 | ||||||
| Total liabilities and equity | $ | 12,970,475 | $ | 12,045,641 | ||||
See accompanying notes to Consolidated Financial Statements.
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JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net revenue | $ | 25,282,320 | $ | 22,095,416 | $ | 19,063,121 | ||||||
| Cost of revenue | 23,368,919 | 20,388,624 | 17,517,478 | |||||||||
| Gross profit | 1,913,401 | 1,706,792 | 1,545,643 | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | 1,111,347 | 1,050,716 | 907,702 | |||||||||
| Research and development | 42,861 | 38,531 | 29,680 | |||||||||
| Amortization of intangibles | 31,923 | 38,490 | 35,524 | |||||||||
| Restructuring and related charges | 25,914 | 36,902 | 160,395 | |||||||||
| Loss on disposal of subsidiaries | — | — | 2,112 | |||||||||
| Operating income | 701,356 | 542,153 | 410,230 | |||||||||
| Restructuring of securities loss | 29,632 | — | — | |||||||||
| Other expense | 53,750 | 37,563 | 28,448 | |||||||||
| Interest income | (21,460 | ) | (17,813 | ) | (12,525 | ) | ||||||
| Interest expense | 188,730 | 149,002 | 138,074 | |||||||||
| Income before income tax | 450,704 | 373,401 | 256,233 | |||||||||
| Income tax expense | 161,230 | 285,860 | 129,066 | |||||||||
| Net income | 289,474 | 87,541 | 127,167 | |||||||||
| Net income (loss) attributable to noncontrolling interests, net of tax | 2,363 | 1,211 | (1,923 | ) | ||||||||
| Net income attributable to Jabil Inc. | $ | 287,111 | $ | 86,330 | $ | 129,090 | ||||||
| Earnings per share attributable to the stockholders of Jabil Inc.: | ||||||||||||
| Basic | $ | 1.85 | $ | 0.50 | $ | 0.71 | ||||||
| Diluted | $ | 1.81 | $ | 0.49 | $ | 0.69 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 155,613 | 172,237 | 181,902 | |||||||||
| Diluted | 158,647 | 175,044 | 185,838 | |||||||||
See accompanying notes to Consolidated Financial Statements.
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JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net income | $ | 289,474 | $ | 87,541 | $ | 127,167 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Change in foreign currency translation | (21,729 | ) | (50,151 | ) | 41,244 | |||||||
| Change in derivative instruments: | ||||||||||||
| Change in fair value of derivatives | (67,773 | ) | 1,225 | 13,434 | ||||||||
| Adjustment for net losses (gains) realized and included in net income | 20,259 | (23,076 | ) | 8,749 | ||||||||
| Total change in derivative instruments | (47,514 | ) | (21,851 | ) | 22,183 | |||||||
| Change in available for sale securities: | ||||||||||||
| Unrealized (loss) gain on available for sale securities | (24,508 | ) | (8,679 | ) | 10,611 | |||||||
| Adjustment for net losses realized and included in net income | 33,333 | — | 10,139 | |||||||||
| Total change in available for sale securities | 8,825 | (8,679 | ) | 20,750 | ||||||||
| Actuarial (loss) gain | (3,012 | ) | 8,194 | 10,372 | ||||||||
| Prior service credit (cost) | 35 | (1,532 | ) | (52 | ) | |||||||
| Total other comprehensive (loss) income | (63,395 | ) | (74,019 | ) | 94,497 | |||||||
| Comprehensive income | $ | 226,079 | $ | 13,522 | $ | 221,664 | ||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 2,363 | 1,211 | (1,923 | ) | ||||||||
| Comprehensive income attributable to Jabil Inc. | $ | 223,716 | $ | 12,311 | $ | 223,587 | ||||||
See accompanying notes to Consolidated Financial Statements.
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JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Total stockholders’ equity, beginning balances | $ | 1,963,380 | $ | 2,368,344 | $ | 2,457,497 | ||||||
| Common stock: | ||||||||||||
| Beginning balances | 257 | 253 | 250 | |||||||||
| Shares issued under employee stock purchase plan | 1 | 1 | 1 | |||||||||
| Vesting of restricted stock | 2 | 3 | 2 | |||||||||
| Ending balances | 260 | 257 | 253 | |||||||||
| Additional paid-in capital: | ||||||||||||
| Beginning balances | 2,218,673 | 2,104,203 | 2,034,525 | |||||||||
| Shares issued under employee stock purchase plan | 26,999 | 24,865 | 21,791 | |||||||||
| Vesting of restricted stock | (2 | ) | (3 | ) | (2 | ) | ||||||
| Recognition of stock-based compensation | 58,882 | 89,608 | 47,889 | |||||||||
| Ending balances | 2,304,552 | 2,218,673 | 2,104,203 | |||||||||
| Retained earnings: | ||||||||||||
| Beginning balances | 1,760,097 | 1,730,893 | 1,660,820 | |||||||||
| Declared dividends | (51,026 | ) | (57,126 | ) | (59,017 | ) | ||||||
| Cumulative effect adjustment for adoption of new accounting standards | 40,855 | — | — | |||||||||
| Net income attributable to Jabil Inc. | 287,111 | 86,330 | 129,090 | |||||||||
| Ending balances | 2,037,037 | 1,760,097 | 1,730,893 | |||||||||
| Accumulated other comprehensive (loss) income: | ||||||||||||
| Beginning balances | (19,399 | ) | 54,620 | (39,877 | ) | |||||||
| Other comprehensive (loss) income | (63,395 | ) | (74,019 | ) | 94,497 | |||||||
| Ending balances | (82,794 | ) | (19,399 | ) | 54,620 | |||||||
| Treasury stock: | ||||||||||||
| Beginning balances | (2,009,371 | ) | (1,536,455 | ) | (1,217,547 | ) | ||||||
| Purchases of treasury stock under employee stock plans | (11,918 | ) | (22,597 | ) | (12,268 | ) | ||||||
| Treasury shares purchased | (350,323 | ) | (450,319 | ) | (306,640 | ) | ||||||
| Ending balances | (2,371,612 | ) | (2,009,371 | ) | (1,536,455 | ) | ||||||
| Noncontrolling interests: | ||||||||||||
| Beginning balances | 13,123 | 14,830 | 19,326 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 2,363 | 1,211 | (1,923 | ) | ||||||||
| Acquisition of noncontrolling interests | 1,112 | — | — | |||||||||
| Purchase of noncontrolling interests | — | — | (134 | ) | ||||||||
| Disposition of noncontrolling interests | (1,785 | ) | — | — | ||||||||
| Declared dividends to noncontrolling interests | (1,500 | ) | (2,920 | ) | (2,293 | ) | ||||||
| Foreign currency adjustments attributable to noncontrolling interests | — | 2 | (146 | ) | ||||||||
| Other | 2 | — | — | |||||||||
| Ending balances | 13,315 | 13,123 | 14,830 | |||||||||
| Total stockholders’ equity, ending balances | $ | 1,900,758 | $ | 1,963,380 | $ | 2,368,344 | ||||||
See accompanying notes to Consolidated Financial Statements.
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JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Cash flows provided by (used in) operating activities: | ||||||||||||
| Net income | $ | 289,474 | $ | 87,541 | $ | 127,167 | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | 771,833 | 773,704 | 760,405 | |||||||||
| Restructuring and related charges | (3,566 | ) | 16,264 | 94,346 | ||||||||
| Recognition of stock-based compensation expense and related charges | 61,346 | 90,664 | 48,544 | |||||||||
| Deferred income taxes | 20,998 | 52,705 | (63,001 | ) | ||||||||
| Provision for allowance for doubtful accounts | 15,867 | 38,030 | 10,112 | |||||||||
| Restructuring of securities loss | 29,632 | — | — | |||||||||
| Other, net | 37,017 | (13,600 | ) | 22,109 | ||||||||
| Change in operating assets and liabilities, exclusive of net assets acquired: | ||||||||||||
| Accounts receivable | (586,511 | ) | (2,334,367 | ) | (2,828,328 | ) | ||||||
| Contract assets | (878,469 | ) | — | — | ||||||||
| Inventories | 483,074 | (499,105 | ) | (445,089 | ) | |||||||
| Prepaid expenses and other current assets | 28,897 | (97,795 | ) | 95,593 | ||||||||
| Other assets | (38,188 | ) | (34,747 | ) | (30,413 | ) | ||||||
| Accounts payable, accrued expenses and other liabilities | 961,662 | 815,258 | 744,470 | |||||||||
| Net cash provided by (used in) operating activities | 1,193,066 | (1,105,448 | ) | (1,464,085 | ) | |||||||
| Cash flows (used in) provided by investing activities: | ||||||||||||
| Acquisition of property, plant and equipment | (1,005,480 | ) | (1,036,651 | ) | (716,485 | ) | ||||||
| Proceeds and advances from sale of property, plant and equipment | 218,708 | 350,291 | 175,000 | |||||||||
| Cash paid for business and intangible asset acquisitions, net of cash | (153,239 | ) | (109,664 | ) | (36,620 | ) | ||||||
| Cash receipts on sold receivables | 96,846 | 2,039,298 | 2,720,728 | |||||||||
| Other, net | (29,289 | ) | (2,360 | ) | (1,360 | ) | ||||||
| Net cash (used in) provided by investing activities | (872,454 | ) | 1,240,914 | 2,141,263 | ||||||||
| Cash flows used in financing activities: | ||||||||||||
| Borrowings under debt agreements | 11,985,978 | 9,677,424 | 7,434,107 | |||||||||
| Payments toward debt agreements | (12,013,004 | ) | (9,206,016 | ) | (7,479,150 | ) | ||||||
| Payments to acquire treasury stock | (350,323 | ) | (450,319 | ) | (306,640 | ) | ||||||
| Dividends paid to stockholders | (52,004 | ) | (57,833 | ) | (59,959 | ) | ||||||
| Net proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan | 26,999 | 24,865 | 21,791 | |||||||||
| Treasury stock minimum tax withholding related to vesting of restricted stock | (11,918 | ) | (22,597 | ) | (12,268 | ) | ||||||
| Other, net | (1,500 | ) | (12,568 | ) | (2,427 | ) | ||||||
| Net cash used in financing activities | (415,772 | ) | (47,044 | ) | (404,546 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 554 | (20,392 | ) | 5,228 | ||||||||
| Net (decrease) increase in cash and cash equivalents | (94,606 | ) | 68,030 | 277,860 | ||||||||
| Cash and cash equivalents at beginning of period | 1,257,949 | 1,189,919 | 912,059 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,163,343 | $ | 1,257,949 | $ | 1,189,919 | ||||||
| Supplemental disclosure information: | ||||||||||||
| Interest paid, net of capitalized interest | $ | 185,696 | $ | 167,278 | $ | 130,635 | ||||||
| Income taxes paid, net of refunds received | $ | 168,053 | $ | 180,423 | $ | 187,871 | ||||||
See accompanying notes to Consolidated Financial Statements.
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JABIL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Jabil Inc. (together with its subsidiaries, herein referred to as the “Company”) is one of the leading providers of manufacturing services and solutions. The Company provides comprehensive electronics design, production and product management services to companies in various industries and end markets. The Company’s services combine a highly automated, continuous flow manufacturing approach with advanced electronic design and design for manufacturability technologies. The Company is headquartered in St. Petersburg, Florida and has manufacturing operations principally in the Americas, Europe and Asia.
Significant accounting policies followed by the Company are as follows:
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts and operations of the Company, and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in preparing the consolidated financial statements. The Company has made certain reclassification adjustments to conform prior periods’ Consolidated Financial Statements and Notes to the Consolidated Financial Statements to the current presentation.
Use of Accounting Estimates
Management is required to make estimates and assumptions during the preparation of the consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates and assumptions.
Cash and Cash Equivalents
Cash equivalents consist of investments that are readily convertible to cash with original maturities of 90 days or less.
Accounts Receivable
Accounts receivable consist of trade receivables and other miscellaneous receivables. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Bad debts are charged to this allowance after all attempts to collect the balance are exhausted. Allowances of $17.2 million and $15.2 million were recorded as of August 31, 2019 and 2018, respectively. As the financial condition and circumstances of the Company’s customers change, adjustments to the allowance for doubtful accounts are made as necessary.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing a customer (“contract assets”) while a liability is recognized when a customer pays an invoice prior to the Company transferring control of the goods or services (“contract liabilities”). Amounts recognized as contract assets are generally transferred to receivables in the succeeding quarter due to the short-term nature of the manufacturing cycle. Contract assets are classified separately on the Consolidated Balance Sheets and transferred to receivables when right to payment becomes unconditional.
The Company reviews contract assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable after considering factors such as the age of the balances and the financial stability of the customer.
Inventories
Inventories are stated at the lower of cost (on a first in, first out (FIFO) basis) and net realizable value. Inventory is valued based on current and forecasted usage, customer inventory-related contractual obligations and other lower of cost and net realizable value considerations. If actual market conditions or customer product demands are less favorable than those projected, additional valuation adjustments may be necessary.
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Fulfillment Costs
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract or anticipated contracts, ii) are expected to generate or enhance the Company’s resources that will be used to satisfy the performance obligation under the contract, and iii) are expected to be recovered through revenue generated from the contract. Capitalized fulfillment costs are amortized to cost of revenue as the Company satisfies the related performance obligations under the contract with approximate lives ranging from 1-3 years. These costs, which are included in prepaid expenses and other current assets and other assets on the Consolidated Balance Sheets, generally represent upfront costs incurred to prepare for manufacturing activities.
The Company assesses the capitalized fulfillment costs for impairment at the end of each reporting period. The Company will recognize an impairment loss to the extent the carrying amount of the capitalized costs exceeds the recoverable amount. Recoverability is assessed by considering the capitalized fulfillment costs in relation to the forecasted profitability of the related manufacturing performance obligations.
Property, Plant and Equipment, net
Property, plant and equipment is capitalized at cost and depreciated using the straight-line depreciation method over the estimated useful lives of the respective assets. Estimated useful lives for major classes of depreciable assets are as follows:
| Asset Class | Estimated Useful Life | |
| Buildings | Up to 35 years | |
| Leasehold improvements | Shorter of lease term or useful life of the improvement | |
| Machinery and equipment | 2 to 10 years | |
| Furniture, fixtures and office equipment | 5 years | |
| Computer hardware and software | 3 to 7 years | |
| Transportation equipment | 3 years |
Certain equipment held under capital leases is classified as property, plant and equipment and the related obligation is recorded as accrued expenses and other liabilities on the Consolidated Balance Sheets. Amortization of assets held under capital leases is included in depreciation expense in the Consolidated Statements of Operations. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Operations as a component of operating income.
Goodwill and Other Intangible Assets
The Company accounts for goodwill in a business combination as the excess of the cost over the fair value of net assets acquired and is assigned to the reporting unit in which the acquired business will operate. The Company tests goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of each fiscal year or whenever events or changes in circumstances indicate the carrying amount 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. The Company determines the fair value of its 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 step is performed to measure the amount of loss, if any.
The recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount to the fair value. The Company determines the fair value of its indefinite-lived intangible assets principally based on a variation of the income approach, known as the relief from royalty method. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, the indefinite-lived intangible asset is considered impaired.
Business combinations can also result in other intangible assets being recognized. Finite-lived intangible assets are amortized on either a straight-line or accelerated basis over their estimated useful life and include contractual agreements and customer relationships, tradenames and intellectual property. No significant residual values are estimated for the amortizable intangible assets.
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Long-lived Assets
Long-lived assets, such as property, plant and equipment, and finite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of the asset or asset group is measured by comparing its carrying amount to the undiscounted future net cash flows the asset is expected to generate. If the carrying amount of an asset or asset group is not recoverable, the Company recognizes 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 the present value of estimated future cash flows or as the appraised value.
Derivative Instruments
All derivative instruments are recorded gross on the Consolidated Balance Sheets at their respective fair values. The accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is initially reported as a component of accumulated other comprehensive income (“AOCI”), net of tax, and is subsequently reclassified into the line item within the Consolidated Statements of Operations in which the hedged items are recorded in the same period in which the hedged item affects earnings. The ineffective portion of the gain or loss is recognized immediately in current earnings. For derivative instruments that are not designated as hedging instruments, gains and losses from changes in fair values are recognized in earnings. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash flows from the items being hedged on the Consolidated Statements of Cash Flows.
Accumulated Other Comprehensive Income
The following table sets forth the changes in AOCI, net of tax, by component during the fiscal year ended August 31, 2019 (in thousands):
| Foreign Currency Translation Adjustment | Derivative Instruments | Actuarial (Loss) Gain | Prior Service (Cost) Credit | Available for Sale Securities | Total | |||||||||||||||||||
| Balance as of August 31, 2018 | $ | 7,431 | $ | 8,116 | $ | (25,021 | ) | $ | (643 | ) | $ | (9,282 | ) | $ | (19,399 | ) | ||||||||
| Other comprehensive (loss) income before reclassifications | (21,729 | ) | (67,773 | ) | (3,753 | ) | 79 | (24,508 | ) | (117,684 | ) | |||||||||||||
| Amounts reclassified from AOCI | — | 20,259 | 741 | (44 | ) | 33,333 | 54,289 | |||||||||||||||||
| Other comprehensive (loss) income**(1)** | (21,729 | ) | (47,514 | ) | (3,012 | ) | 35 | 8,825 | (63,395 | ) | ||||||||||||||
| Balance as of August 31, 2019 | $ | (14,298 | ) | $ | (39,398 | ) | $ | (28,033 | ) | $ | (608 | ) | $ | (457 | ) | $ | (82,794 | ) | ||||||
| (1) | Amounts are net of tax, which are immaterial. |
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The following table sets forth the amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line item, net of tax, for the periods indicated (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||||||
| Comprehensive Income Components | Financial Statement Line Item | 2019 | 2018 | 2017 | ||||||||||||
| Foreign currency translation adjustment | Operating income | $ | — | $ | — | $ | 5,947 | |||||||||
| Realized losses (gains) on derivative instruments:(3) | ||||||||||||||||
| Foreign exchange contracts | Cost of revenue | 21,982 | (9,379 | ) | 4,799 | |||||||||||
| Interest rate contracts | Interest expense | (1,723 | ) | (13,697 | ) | 3,950 | ||||||||||
| Actuarial loss | (1) | 741 | 1,127 | 1,929 | ||||||||||||
| Prior service credit | (1) | (44 | ) | (88 | ) | (138 | ) | |||||||||
| Available for sale securities | (2) | 33,333 | — | 10,139 | ||||||||||||
| Total amounts reclassified from AOCI(4) | $ | 54,289 | $ | (22,037 | ) | $ | 26,626 | |||||||||
| (1) | Amounts are included in the computation of net periodic benefit pension cost. Refer to Note 9 – “Postretirement and Other Employee Benefits” for additional information. |
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| (2) | The portions of AOCI reclassified into earnings during the fiscal years ended August 31, 2019 and 2017 for available for sale securities were due to a restructuring of securities loss and an other than temporary impairments on securities, respectively, and were recorded to restructuring of securities loss and other expense, respectively. |
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| (3) | The Company expects to reclassify $17.0 million into earnings during the next twelve months, which will primarily be classified as a component of cost of revenue. |
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| (4) | Amounts are net of tax, which are immaterial for the fiscal years ended August 31, 2019 and 2017. The amount for the fiscal year ended August 31, 2018 includes a reduction to income tax expense related to derivative instruments of $14.8 million. |
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Foreign Currency Transactions
For the Company’s foreign subsidiaries that use a currency other than the U.S. dollar as their functional currency, the assets and liabilities are translated at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at the average exchange rate for the period. The effects of these translation adjustments are reported in accumulated other comprehensive income. Gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in operating income.
Revenue Recognition
Effective September 1, 2018, the Company’s revenue recognition accounting policies changed in conjunction with the adoption of ASU 2014-09, Revenue Recognition (Topic 606). For further discussion, refer to Note 18—“Revenue” to the Consolidated Financial Statements.
The Company provides comprehensive electronics design, production and product management services to companies in various industries and end markets. The Company derives substantially all of its revenue from production and product management services (collectively referred to as “manufacturing services”), which encompasses the act of producing tangible products that are built to customer specifications, which are then provided to the customer.
The Company generally enters into manufacturing service contracts with its customers that provide the framework under which business will be conducted and customer purchase orders will be received for specific quantities and with predominantly fixed pricing. As a result, the Company considers its contract with a customer to be the combination of the manufacturing service contract and the purchase order, or any agreements or other similar documents.
The majority of the Company’s manufacturing service contracts relate to manufactured products which have no alternative use and for which the Company has an enforceable right to payment for the work completed to date. As a result, revenue is recognized over time when or as the Company transfers control of the promised products or services (known as performance obligations) to its customers. For certain other contracts with customers that do not meet the over time revenue recognition criteria, transfer of control occurs at a point in time which generally occurs upon delivery and transfer of risk and title to the customer.
Most of the Company’s contracts have a single performance obligation as the promise to transfer the individual manufactured product or service is capable of being distinct and is distinct within the context of the contract. For the majority of customers, performance obligations are satisfied over time based on the continuous transfer of control as manufacturing services are performed and are generally completed in less than one year.
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The Company also derives revenue to a lesser extent from electronic design services to certain customers. Revenue from electronic design services is generally recognized over time as the services are performed.
For the Company’s over time customers, it believes the measure of progress which best depicts the transfer of control is based on costs incurred to date, relative to total estimated cost at completion (i.e., an input method). This method is a faithful depiction of the transfer of goods or services because it results in the recognition of revenue on the basis of the Company’s to-date efforts in the satisfaction of a performance obligation relative to the total expected efforts in the satisfaction of the performance obligation. The Company believes that the use of an input method best depicts the transfer of control to the customer, which occurs as the Company incurs costs on its contracts. The transaction price of each performance obligation is generally based upon the contractual stand-alone selling price of the product or service.
Certain contracts with customers include variable consideration, such as rebates, discounts, or returns. The Company recognizes estimates of this variable consideration that are not expected to result in a significant revenue reversal in the future, primarily based on the most likely level of consideration to be paid to the customer under the specific terms of the underlying programs.
Taxes collected from the Company’s customers and remitted to governmental authorities are presented within the Company’s Consolidated Statement of Operations on a net basis and are excluded from the transaction price. The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the goods. Accordingly, the Company records customer payments of shipping and handling costs as a component of net revenue, and classifies such costs as a component of cost of revenue.
Stock-Based Compensation
The Company recognizes stock-based compensation expense, reduced for estimated forfeitures, on a straight-line basis over the requisite service period of the award, which is generally the vesting period for outstanding stock awards.
The stock-based compensation expense for time-based and performance-based restricted stock unit awards (“restricted stock units”) is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock. For restricted stock units with performance conditions, stock-based compensation expense is originally based on the number of shares that would vest if the Company achieved 100% of the performance goal, which is the intended outcome at the grant date. Throughout the requisite service period, management monitors the probability of achievement of the performance condition. If it becomes probable, based on the Company’s performance, that more or less than the current estimate of the awarded shares will vest, an adjustment to stock-based compensation expense will be recognized as a change in accounting estimate in the period that such probability changes.
The stock-based compensation expense for market-based restricted stock units is measured at fair value on the date of grant. The market conditions are considered in the grant date fair value using a Monte Carlo valuation model, which utilizes multiple input variables to determine the probability of the Company achieving the specified market conditions. Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period regardless of whether the market condition is satisfied, provided that the requisite service period has been completed.
The Company currently expects to satisfy share-based awards with registered shares available to be issued.
See Note 11 – “Stockholders’ Equity” for further discussion of stock-based compensation expense.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income in the period that includes the enactment date of the rate change. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers future taxable income and ongoing feasible tax planning strategies in assessing the need for the valuation allowance.
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Earnings Per Share
The Company calculates its basic earnings per share by dividing net income attributable to Jabil Inc. by the weighted average number of shares of common stock outstanding during the period. The Company’s diluted earnings per share is calculated in a similar manner, but includes the effect of dilutive securities. The difference between the weighted average number of basic shares outstanding and the weighted average number of diluted shares outstanding is primarily due to dilutive unvested restricted stock units and dilutive stock appreciation rights.
Potential shares of common stock are excluded from the computation of diluted earnings per share when their effect would be antidilutive. Performance-based restricted stock units are considered dilutive when the related performance criterion have been met assuming the end of the reporting period represents the end of the performance period. All potential shares of common stock are antidilutive in periods of net loss. Potential shares of common stock not included in the computation of earnings per share because their effect would have been antidilutive or because the performance criterion was not met were as follows (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Stock appreciation rights | — | — | 265 | |||||||||
| Restricted stock units | 796 | 2,426 | 4,539 |
Fair Value of Financial Instruments
Fair value is categorized in one of three levels based on the lowest level of significant input used. Level 1 – quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – unobservable inputs for the asset or liability.
2. Trade Accounts Receivable Securitization and Sale Programs
The Company regularly sells designated pools of trade accounts receivable under a foreign asset-backed securitization program, a North American asset-backed securitization program and uncommitted trade accounts receivable sale programs (collectively referred to herein as the “programs”). The Company continues servicing the receivables sold and in exchange receives a servicing fee under each of the programs. Servicing fees related to each of the programs recognized during the fiscal years ended August 31, 2019, 2018 and 2017 were not material. The Company does not record a servicing asset or liability on the Consolidated Balance Sheets as the Company estimates that the fee it receives to service these receivables approximates the fair market compensation to provide the servicing activities.
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 Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Consolidated Statements of Cash Flows. The adoption of Accounting Standards Update No. 2016-15 (“ASU 2016-15”) described in Note 17, New Accounting Guidance, resulted in a reclassification of cash flows from operating activities to investing activities for all periods presented in the Company’s Consolidated Statement of Cash Flows for cash receipts related to collections on the deferred purchase price receivable (i.e. beneficial interest) on asset-backed securitization transactions. In addition, the beneficial interest of $162.2 million, $2.0 billion, and $2.8 billion for the fiscal years ended August 31, 2019, 2018, and 2017, respectively, obtained in exchange for securitized receivables are reported as non-cash investing activities.
Asset-Backed Securitization Programs
The Company continuously sells designated pools of trade accounts receivable, at a discount, under its foreign asset-backed securitization program to a special purpose entity, which in turn sells certain of the receivables to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution on a monthly basis. Effective October 1, 2018, the foreign asset-backed securitization program terms were amended and the program was extended to September 30, 2021. In connection with this amendment, there is no longer a deferred purchase price receivable for the foreign asset-backed securitization program as the entire purchase price is paid in cash when the receivables are sold.
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As of October 1, 2018, approximately $734.2 million of accounts receivable sold under the foreign asset-backed securitization program was exchanged for the outstanding deferred purchase price receivable of $335.5 million. The remaining amount due to the financial institution of $398.7 million was subsequently settled for $25.2 million of cash and $373.5 million of trade accounts receivable sold to the financial institution. The previously sold trade accounts receivable were recorded at fair market value. Prior to the amendment, any portion of the purchase price for the receivables not paid in cash upon the sale occurring was recorded as a deferred purchase price receivable, which was paid from available cash as payments on the receivables were collected. The amended foreign asset-backed securitization program contains a guarantee of payment by the special purpose entity, in an amount equal to approximately the net cash proceeds under the program. No liability has been recorded for obligations under the guarantee as of August 31, 2019.
The special purpose entity in the foreign asset-backed securitization program is a separate bankruptcy-remote entity whose assets would be first available to satisfy the creditor claims of the unaffiliated financial institution. The Company is deemed the primary beneficiary of this special purpose entity as the Company has both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive the benefits that could potentially be significant to the entity from the transfer of the trade accounts receivable into the special purpose entity. Accordingly, the special purpose entity associated with the foreign asset-backed securitization program is included in the Company’s Consolidated Financial Statements.
The North American asset-backed securitization program was terminated on October 9, 2018 and as of this date approximately $500.0 million of accounts receivable sold under the program was exchanged for the outstanding deferred purchase price receivable of $300.0 million and $200.0 million of cash. The previously sold trade accounts receivable were recorded at fair market value.
On November 27, 2018, the Company entered into a new North American asset-backed securitization program. The Company continuously sells designated pools of trade accounts receivable, at a discount, under its new North American asset-backed securitization program to a special purpose entity, which in turn sells certain of the receivables to conduits administered by unaffiliated financial institutions on a monthly basis. The special purpose entity in the North American asset-backed securitization program is a wholly-owned subsidiary of the Company and is included in the Company’s Consolidated Financial Statements. There is no longer a deferred purchase price receivable for the North American asset-backed securitization program as the entire purchase price is paid in cash when the receivables are sold. Additionally, certain unsold receivables covering the maximum amount of net cash proceeds available under the program are pledged as collateral to the unaffiliated financial institution as of August 31, 2019.
Following is a summary of the asset-backed securitization programs and key terms:
| Maximum Amount of Net Cash Proceeds (in millions)(1) | Expiration Date | |||||||
| North American | $ | 390.0 | November 22, 2021 | |||||
| Foreign | $ | 400.0 | September 30, 2021 |
| (1) | Maximum amount available at any one time. |
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In connection with the asset-backed securitization programs, the Company recognized the following (in millions):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019(3) | 2018 | 2017 | ||||||||||
| Trade accounts receivable sold | $ | 4,057 | $ | 8,386 | $ | 8,878 | ||||||
| Cash proceeds received(1) | $ | 4,031 | $ | 7,838 | $ | 8,300 | ||||||
| Pre-tax losses on sale of receivables(2) | $ | 26 | $ | 15 | $ | 9 | ||||||
| Deferred purchase price receivables as of August 31 | $ | — | $ | 533 | $ | 569 |
| (1) | The amounts primarily represent proceeds from collections reinvested in revolving-period transfers. |
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| (2) | Recorded to other expense within the Consolidated Statements of Operations. |
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| (3) | Excludes $650.3 million of trade accounts receivable sold, $488.1 million of cash and $13.9 million of net cash received prior to the amendment of the foreign asset-backed securitization program and under the previous North American asset-backed securitization program. |
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The asset-backed securitization programs require compliance with several covenants. The North American asset-backed securitization program covenants include compliance with the interest ratio and debt to EBITDA ratio of the five-year unsecured credit facility amended as of November 8, 2017 (“the 2017 Credit Facility”). The foreign asset-backed securitization program covenants include limitations on certain corporate actions such as mergers and consolidations. As of August 31, 2019 and 2018, the Company was in compliance with all covenants under the asset-backed securitization programs.
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Trade Accounts Receivable Sale Programs
Following is a summary of the trade accounts receivable sale programs with unaffiliated financial institutions where the Company may elect to sell receivables and the unaffiliated financial institution may elect to purchase, at a discount, on an ongoing basis:
| Program | Maximum Amount (in millions)(1) | Type of Facility | Expiration Date | |||||||||
| A | $ | 800.0 | Uncommitted | August 31, 2022 | (2) | |||||||
| B | $ | 150.0 | Uncommitted | November 30, 2019 | (3) | |||||||
| C | 800.0 | CNY | Uncommitted | June 30, 2020 | ||||||||
| D | $ | 100.0 | Uncommitted | May 4, 2023 | (4) | |||||||
| E | $ | 50.0 | Uncommitted | August 25, 2020 | ||||||||
| F | $ | 150.0 | Uncommitted | January 25, 2020 | (5) | |||||||
| G | $ | 50.0 | Uncommitted | February 23, 2023 | (2) | |||||||
| H | $ | 100.0 | Uncommitted | August 10, 2020 | (6) | |||||||
| I | $ | 100.0 | Uncommitted | July 21, 2020 | (7) | |||||||
| J | $ | 740.0 | Uncommitted | February 28, 2020 | (8) | |||||||
| K | $ | 110.0 | Uncommitted | April 11, 2020 | (9) |
| (1) | Maximum amount available at any one time. |
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| (2) | Any party may elect to terminate the agreement upon 15 days prior notice. |
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| (3) | The program will automatically extend for one year at each expiration date unless either party provides 10 days notice of termination. |
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| (4) | Any party may elect to terminate the agreement upon 30 days prior notice. |
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| (5) | The program will be automatically extended through January 25, 2023 unless either party provides 30 days notice of termination. |
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| (6) | The program will be automatically extended through August 10, 2023 unless either party provides 30 days notice of termination. |
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| (7) | The program will be automatically extended through August 21, 2023 unless either party provides 30 days notice of termination. |
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| (8) | The program will be automatically extended through February 28, 2024 unless either party provides 90 days notice of termination. |
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| (9) | The program will be automatically extended each year through April 11, 2025 unless either party provides 30 days notice of termination. |
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In connection with the trade accounts receivable sale programs, the Company recognized the following (in millions):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Trade accounts receivable sold | $ | 6,751 | $ | 5,480 | $ | 2,968 | ||||||
| Cash proceeds received | $ | 6,723 | $ | 5,463 | $ | 2,962 | ||||||
| Pre-tax losses on sale of receivables(1) | $ | 28 | $ | 17 | $ | 6 |
| (1) | Recorded to other expense within the Consolidated Statements of Operations. |
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3. Inventories
Inventories consist of the following (in thousands):
| August 31, 2019 | August 31, 2018 | |||||||
| Raw materials | $ | 2,310,081 | $ | 2,070,569 | ||||
| Work in process | 468,217 | 788,742 | ||||||
| Finished goods | 314,258 | 659,335 | ||||||
| Reserve for excess and obsolete inventory | (69,553 | ) | (60,940 | ) | ||||
| Inventories, net | $ | 3,023,003 | $ | 3,457,706 | ||||
4. Income Taxes
Provision for Income Taxes
Income (loss) before income tax expense is summarized below (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Domestic(1) | $ | (415,707 | ) | $ | (426,897 | ) | $ | (373,690 | ) | |||
| Foreign(1) | 866,411 | 800,298 | 629,923 | |||||||||
| $ | 450,704 | $ | 373,401 | $ | 256,233 | |||||||
| (1) | Includes the elimination of intercompany foreign dividends paid to the U.S. |
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Income tax expense (benefit) is summarized below (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Current: | ||||||||||||
| Domestic – federal | $ | (23,675 | ) | $ | 69,080 | $ | 2,436 | |||||
| Domestic – state | 1,383 | 134 | 12 | |||||||||
| Foreign | 175,993 | 178,790 | 188,872 | |||||||||
| Total current | 153,701 | 248,004 | 191,320 | |||||||||
| Deferred: | ||||||||||||
| Domestic – federal | (8,000 | ) | (24,342 | ) | 253 | |||||||
| Domestic – state | (2,202 | ) | 93 | 30 | ||||||||
| Foreign | 17,731 | 62,105 | (62,537 | ) | ||||||||
| Total deferred | 7,529 | 37,856 | (62,254 | ) | ||||||||
| Total income tax expense | $ | 161,230 | $ | 285,860 | $ | 129,066 | ||||||
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Reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is summarized below:
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| U.S. federal statutory income tax rate | 21.0 | % | 25.7 | % | 35.0 | % | ||||||
| State income taxes, net of federal tax benefit | (1.7 | ) | (1.5 | ) | (3.3 | ) | ||||||
| Impact of foreign tax rates(1)(2) | (9.9 | ) | (19.3 | ) | (42.7 | ) | ||||||
| Permanent impact of non-deductible cost | 1.8 | 5.9 | 2.9 | |||||||||
| Income tax credits(1) | (3.1 | ) | (2.8 | ) | (6.3 | ) | ||||||
| Changes in tax rates on deferred tax assets and liabilities(3) | 0.2 | 4.0 | 0.3 | |||||||||
| One-time transition tax related to the Tax Act(4) | (0.5 | ) | 62.2 | — | ||||||||
| Indefinite reinvestment assertion impact(4) | 0.9 | 5.8 | — | |||||||||
| Valuation allowance(5) | 1.3 | (16.4 | ) | 14.8 | ||||||||
| Non-deductible equity compensation | 1.4 | 5.5 | 4.5 | |||||||||
| Impact of intercompany charges and dividends(6) | 10.4 | 7.3 | 38.3 | |||||||||
| Reclassification of stranded tax effects in AOCI | — | (4.0 | ) | — | ||||||||
| Global Intangible Low-Taxed Income(7) | 10.4 | — | — | |||||||||
| Other, net | 3.6 | 4.2 | 6.9 | |||||||||
| Effective income tax rate | 35.8 | % | 76.6 | % | 50.4 | % | ||||||
| (1) | The Company has been granted tax incentives for various subsidiaries in Brazil, China, Malaysia, Poland, Singapore and Vietnam, which expire at various dates through fiscal year 2031 and are subject to certain conditions with which the Company expects to comply. These tax incentives resulted in a tax benefit of approximately $67.3 million ($0.43 per basic share), $52.1 million ($0.30 per basic share) and $38.6 million ($0.22 per basic share) during the fiscal years ended August 31, 2019, 2018 and 2017, respectively. |
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| (2) | For the fiscal years ended August 31, 2019 and 2018, the decrease in the impact of foreign tax rates was primarily due to a decrease in the U.S. federal statutory income tax rate due to the Tax Act. |
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| (3) | For the fiscal year ended August 31, 2018, the increase in the changes in tax rates on deferred tax assets and liabilities was primarily due to the Tax Act, excluding the impact of the enacted rate change on the U.S. valuation allowance. |
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| (4) | The indefinite reinvestment assertion impact for the fiscal year ended August 31, 2018 is related to the Tax Act as further discussed below. |
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| (5) | The valuation allowance change for the fiscal years ended August 31, 2019 and 2018 was primarily due to utilization of domestic federal net operating losses and tax credits against the one-time transition tax and the change in enacted tax rate applied to U.S. deferred tax assets and liabilities for the fiscal year ended August 31, 2018. The increase for the fiscal year ended August 31, 2019 was partially offset by an income tax benefit of $17.5 million for the reversal of a U.S. valuation allowance due to an intangible asset reclassification from indefinite-life to finite-life. |
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| (6) | For the fiscal year ended August 31, 2018, the decrease in the impact of intercompany charges and dividends was due to a change in the U.S. taxation of foreign dividends as a result of the Tax Act. |
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| (7) | GILTI applied beginning in the fiscal year ended August 31, 2019 and primarily related to the utilization of current year U.S. federal operating losses. |
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Tax Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act reduced the corporate tax rate, limited or eliminated certain tax deductions, introduced Global Intangible Low-Taxed Income (“GILTI”) as a newly defined category of foreign subsidiary income which is taxable to U.S. shareholders each year, and changed the taxation of foreign earnings of U.S. multinational companies. The enacted changes included a mandatory income inclusion of the historically untaxed foreign earnings of a U.S. company’s foreign subsidiaries and effectively taxed such income at reduced tax rates (“transition tax”). As a result of the one-time transition tax, the Company has a substantial amount of previously taxed earnings that can be distributed to the U.S. without additional U.S. taxation. Additionally, the Tax Act provides for a 100% dividends received deduction for dividends received by U.S. corporations from 10-percent or more owned foreign corporations. During the fiscal year ended August 31, 2018, the Company made reasonable estimates related to certain impacts of the Tax Act and, in accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act (“SAB 118”), recorded a net provisional income tax expense (benefit). During the fiscal year ended August 31, 2019, the Company completed its accounting for the effects of the Tax Act under SAB 118 based on the analysis, interpretations and guidance available at that time. During the first quarter of fiscal year 2019, the Company elected to record the GILTI effects as a period cost.
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The following table summarizes the tax expense (benefit) related to the Tax Act recognized during the SAB 118 measurement period (in millions):
| One-time transition tax, inclusive of unrecognized tax benefits (1) | Re-measurement of the Company’s U.S. deferred tax attributes | Change in indefinite reinvestment assertion (2) | Other | Income tax expense (benefit) | ||||||||||||||||
| Provisional income tax expense (benefit) – recognized in fiscal year 2018 | $ | 65.9 | $ | (10.5 | ) | $ | 85.0 | $ | 1.9 | $ | 142.3 | |||||||||
| Income tax (benefit) expense adjustment – recognized in fiscal year 2019 | $ | (19.7 | ) | $ | 1.6 | $ | — | $ | (0.3 | ) | $ | (18.4 | ) | |||||||
| Income tax expense (benefit) related to the Tax Act | $ | 46.2 | $ | (8.9 | ) | $ | 85.0 | $ | 1.6 | $ | 123.9 | |||||||||
| (1) | The calculation of the one-time transition tax is based upon post-1986 earnings and profits, applicable foreign tax credits and relevant limitations, utilization of U.S. federal net operating losses and tax credits and the amount of foreign earnings held in cash and non-cash assets. The adjustments during the fiscal year ended August 31, 2019 were primarily related to further analysis of the Company’s utilization of foreign tax credits and applicable limitations. |
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| (2) | The liability recorded for a change in the indefinite reinvestment assertion on certain earnings from the Company’s foreign subsidiaries is primarily associated with foreign withholding taxes that would be incurred upon such future remittances of cash. |
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Deferred Tax Assets and Liabilities
Significant components of the deferred tax assets and liabilities are summarized below (in thousands):
| Fiscal Year Ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forward | $ | 183,297 | $ | 119,259 | ||||
| Receivables | 6,165 | 7,111 | ||||||
| Inventories | 9,590 | 7,634 | ||||||
| Compensated absences | 10,401 | 8,266 | ||||||
| Accrued expenses | 81,731 | 81,912 | ||||||
| Property, plant and equipment, principally due to differences in depreciation and amortization | 66,268 | 97,420 | ||||||
| Domestic federal and state tax credits | 42,464 | 70,153 | ||||||
| Foreign jurisdiction tax credits | 15,345 | 25,887 | ||||||
| Equity compensation – Domestic | 7,617 | 7,566 | ||||||
| Equity compensation – Foreign | 2,179 | 2,401 | ||||||
| Domestic federal interest carry forward | 5,853 | — | ||||||
| Cash flow hedges | 9,878 | — | ||||||
| Unrecognized capital loss carry forward | 7,799 | — | ||||||
| Revenue recognition | 19,195 | — | ||||||
| Other | 21,907 | 18,176 | ||||||
| Total deferred tax assets before valuation allowances | 489,689 | 445,785 | ||||||
| Less valuation allowances | (287,604 | ) | (223,487 | ) | ||||
| Net deferred tax assets | $ | 202,085 | $ | 222,298 | ||||
| Deferred tax liabilities: | ||||||||
| Unremitted earnings of foreign subsidiaries | 75,387 | 74,654 | ||||||
| Intangible assets | 39,242 | 39,122 | ||||||
| Other | 4,447 | 4,655 | ||||||
| Total deferred tax liabilities | $ | 119,076 | $ | 118,431 | ||||
| Net deferred tax assets | $ | 83,009 | $ | 103,867 | ||||
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Based on the Company’s historical operating income, projection of future taxable income, scheduled reversal of taxable temporary differences, and tax planning strategies, management believes that it is more likely than not that the Company will realize the benefit of its deferred tax assets, net of valuation allowances recorded. The net increase in the total valuation allowance for the fiscal year ended August 31, 2019 is primarily related to the increase of a net operating loss carry forward due to a release of a non-U.S. unrecognized tax benefit and the increase of deferred tax assets in sites with existing valuation allowances. The decrease in domestic federal and state tax credits is primarily related to the utilization of tax credits against the one-time transition tax.
As of August 31, 2019, the Company intends to indefinitely reinvest the remaining earnings from its foreign subsidiaries for which a deferred tax liability has not already been recorded. The accumulated earnings are the most significant component of the basis difference which is indefinitely reinvested. As of August 31, 2019, the indefinitely reinvested earnings in foreign subsidiaries upon which taxes had not been provided were approximately $1.9 billion. The estimated amount of the unrecognized deferred tax liability on these reinvested earnings was approximately $0.2 billion.
Tax Carryforwards
The amount and expiration dates of income tax net operating loss carryforwards and tax credit carryforwards, which are available to reduce future taxes, if any, as of August 31, 2019 are as follows:
| (dollars in thousands) | Last Fiscal Year of Expiration | Amount | ||||||
| Income tax net operating loss carryforwards:(1) | ||||||||
| Domestic – state | 2039 | $ | 57,299 | |||||
| Foreign | 2039 or indefinite | $ | 565,609 | |||||
| Tax credit carryforwards:(1) | ||||||||
| Domestic – federal | 2029 | $ | 39,784 | |||||
| Domestic – state | 2027 | $ | 3,313 | |||||
| Foreign(2) | 2027 or indefinite | $ | 15,345 |
| (1) | Net of unrecognized tax benefits. |
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| (2) | Calculated based on the deferral method and includes foreign investment tax credits. |
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Unrecognized Tax Benefits
Reconciliation of the unrecognized tax benefits is summarized below (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Beginning balance | $ | 256,705 | $ | 201,355 | $ | 149,898 | ||||||
| Additions for tax positions of prior years | 20,158 | 14,465 | 2,155 | |||||||||
| Reductions for tax positions of prior years(1) | (106,252 | ) | (21,045 | ) | (12,233 | ) | ||||||
| Additions for tax positions related to current year(2) | 35,769 | 81,866 | 77,807 | |||||||||
| Cash settlements | — | (1,659 | ) | (2,298 | ) | |||||||
| Reductions from lapses in statutes of limitations | (2,570 | ) | (7,496 | ) | (10,446 | ) | ||||||
| Reductions from settlements with taxing authorities(3) | (35,582 | ) | (5,928 | ) | (6,061 | ) | ||||||
| Foreign exchange rate adjustment | (3,845 | ) | (4,853 | ) | 2,533 | |||||||
| Ending balance | $ | 164,383 | $ | 256,705 | $ | 201,355 | ||||||
| Unrecognized tax benefits that would affect the effective tax rate (if recognized) | $ | 93,237 | $ | 117,455 | $ | 75,223 | ||||||
| (1) | The reductions for tax positions of prior years for the fiscal year ended August 31, 2019 are primarily related to a non-U.S. taxing authority ruling related to certain non-U.S. net operating loss carry forwards, offset with a valuation allowance and the impacts of the Tax Act. |
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| (2) | The additions for the fiscal years ended August 31, 2019 and 2018 are primarily related to the impacts of the Tax Act and taxation of certain intercompany transactions. The additions for the fiscal year ended August 31, 2017 are primarily related to certain non-U.S. net operating loss carry forwards, previously offset with a valuation allowance, that can no longer be recognized due to an internal restructuring. |
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| (3) | The reductions from settlements with taxing authorities for the fiscal year ended August 31, 2019 are primarily related to the settlement of a U.S. audit. |
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The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company’s accrued interest and penalties were approximately $18.9 million and $20.4 million as of August 31, 2019 and 2018, respectively. The Company recognized interest and penalties of approximately $(1.5) million, $(6.7) million and $5.2 million during the fiscal years ended August 31, 2019, 2018 and 2017, respectively.
It is reasonably possible that the August 31, 2019 unrecognized tax benefits could decrease during the next 12 months by $5.8 million, primarily related to a state settlement.
The Company is no longer subject to U.S. federal tax examinations for fiscal years before August 31, 2015. In major non-U.S. and state jurisdictions, the Company is no longer subject to income tax examinations for fiscal years before August 31, 2009.
The Internal Revenue Service (“IRS”) completed its field examination of the Company’s tax returns for fiscal years 2009 through 2011 and issued a Revenue Agent’s Report (“RAR”) on May 27, 2015, which was updated on June 22, 2016. The IRS completed its field examination of the Company’s tax returns for fiscal years 2012 through 2014 and issued an RAR on April 19, 2017. The proposed adjustments in the RAR from both examination periods relate primarily to U.S. taxation of certain intercompany transactions. On May 8, 2019, the tax return audits for fiscal years 2009 through 2014 were effectively settled when the Company agreed to the IRS Office of Appeals’ Form 870-AD (Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment) adjustments, which were substantially lower than the initial RAR proposed adjustments. The settlement did not have a material effect on the Company’s financial position, results of operations, or cash flows and no additional tax liabilities were recorded.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
| August 31, | ||||||||
| 2019 | 2018 | |||||||
| Land and improvements | $ | 146,719 | $ | 144,136 | ||||
| Buildings | 962,559 | 849,975 | ||||||
| Leasehold improvements | 1,092,787 | 1,013,428 | ||||||
| Machinery and equipment | 4,262,015 | 3,983,025 | ||||||
| Furniture, fixtures and office equipment | 209,257 | 192,243 | ||||||
| Computer hardware and software | 671,252 | 601,955 | ||||||
| Transportation equipment | 16,423 | 17,215 | ||||||
| Construction in progress | 83,234 | 42,984 | ||||||
| 7,444,246 | 6,844,961 | |||||||
| Less accumulated depreciation and amortization | 4,110,496 | 3,646,945 | ||||||
| $ | 3,333,750 | $ | 3,198,016 | |||||
Depreciation and maintenance and repair expenses were as follows for the periods indicated (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Depreciation expense | $ | 739,910 | $ | 735,213 | $ | 724,856 | ||||||
| Maintenance and repair expense | $ | 288,309 | $ | 266,691 | $ | 234,332 |
As of August 31, 2019 and 2018, the Company had $235.2 million and $253.6 million, respectively, included in accounts payable for the acquisition of property, plant and equipment, which is considered a non-cash investing activity in the Consolidated Statements of Cash Flows.
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6. Goodwill and Other Intangible Assets
The Company completed its annual impairment test for goodwill and indefinite-lived intangible assets during the fourth quarter of fiscal year 2019 and determined the fair values of the reporting units and the indefinite-lived intangible assets were in excess of the carrying values and that no impairment existed as of the date of the impairment test.
The following table presents the changes in goodwill allocated to the Company’s reportable segments, Electronics Manufacturing Services (“EMS”) and Diversified Manufacturing Services (“DMS”), during the fiscal years ended August 31, 2019 and 2018 (in thousands):
| EMS | DMS | Total | ||||||||||
| Balance as of August 31, 2017 | $ | 52,574 | $ | 555,610 | $ | 608,184 | ||||||
| Acquisitions and adjustments(1) | 30,763 | (8,186 | ) | 22,577 | ||||||||
| Change in foreign currency exchange rates | (667 | ) | (2,349 | ) | (3,016 | ) | ||||||
| Balance as of August 31, 2018 | 82,670 | 545,075 | 627,745 | |||||||||
| Change in foreign currency exchange rates | (702 | ) | (4,788 | ) | (5,490 | ) | ||||||
| Balance as of August 31, 2019 | $ | 81,968 | $ | 540,287 | $ | 622,255 | ||||||
| (1) | Includes $8.2 million of goodwill reallocated between DMS and EMS during fiscal year 2018. |
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The following table is a summary of the Company’s gross goodwill balances and accumulated impairments as of the periods indicated (in thousands):
| August 31, 2019 | August 31, 2018 | |||||||||||||||
| Gross Carrying Amount | Accumulated Impairment | Gross Carrying Amount | Accumulated Impairment | |||||||||||||
| Goodwill | $ | 1,642,077 | $ | 1,019,822 | $ | 1,647,567 | $ | 1,019,822 |
The following table presents the Company’s total purchased intangible assets as of August 31, 2019 and 2018 (in thousands):
| Weighted Average Amortization Period (in years) | August 31, 2019 | August 31, 2018 | ||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Contractual agreements and customer relationships | 12 | $ | 292,797 | $ | (175,199 | ) | $ | 117,598 | $ | 289,947 | $ | (153,415 | ) | $ | 136,532 | |||||||||||||
| Intellectual property | 6 | 173,771 | (157,606 | ) | 16,165 | 168,181 | (148,672 | ) | 19,509 | |||||||||||||||||||
| Finite-lived trade names | Not applicable | 77,536 | (5,036 | ) | 72,500 | 5,091 | (5,091 | ) | — | |||||||||||||||||||
| Trade names | Indefinite | 50,590 | — | 50,590 | 123,090 | — | 123,090 | |||||||||||||||||||||
| Total intangible assets | 11 | $ | 594,694 | $ | (337,841 | ) | $ | 256,853 | $ | 586,309 | $ | (307,178 | ) | $ | 279,131 | |||||||||||||
In the fourth quarter of fiscal year 2019, the Company made a strategic decision that the indefinite-lived trade name of $72.5 million acquired during the acquisition of Nypro would be phased out over the next four years. In connection with a strategic shift to further diversify our portfolio, focus on innovation and technology within the Company’s healthcare business and as a result of the strategic collaboration with a certain medical device company, management decided to implement a rebranding initiative to Jabil Healthcare. Management believes the name change better leverages the Jabil brand and the full range of services available to its customers.
As a result of the decision to rebrand, the Company determined the indefinite-lived trade name should no longer be classified as an indefinite-lived intangible asset. Accordingly, prior to reclassifying the trade name to a finite-lived intangible asset, the Company tested it for impairment and determined the fair value of the asset exceeded the carrying value. As such, this trade name was assigned a four-year estimated useful life and will be amortized on an accelerated basis.
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Intangible asset amortization for fiscal years 2019, 2018 and 2017 was approximately $31.9 million, $38.5 million and $35.5 million, respectively. The estimated future amortization expense is as follows (in thousands):
| Fiscal Year Ended August 31, | ||||
| 2020 | $ | 54,165 | ||
| 2021 | 43,780 | |||
| 2022 | 28,291 | |||
| 2023 | 25,877 | |||
| 2024 | 10,976 | |||
| Thereafter | 43,174 | |||
| Total | $ | 206,263 | ||
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| August 31, 2019 | August 31, 2018 | |||||||
| Contract liabilities | $ | 511,329 | $ | — | ||||
| Deferred income | — | 691,365 | ||||||
| Accrued compensation and employee benefits | 600,907 | 570,400 | ||||||
| Obligation associated with securitization programs | 475,251 | — | ||||||
| Other accrued expenses | 1,402,657 | 1,000,979 | ||||||
| Accrued expenses | $ | 2,990,144 | $ | 2,262,744 | ||||
8. Notes Payable and Long-Term Debt
Notes payable and long-term debt outstanding as of August 31, 2019 and 2018 are summarized below (in thousands):
| Maturity Date | August 31, 2019 | August 31, 2018 | ||||||||||
| 5.625% Senior Notes(1)(2) | Dec 15, 2020 | 398,886 | 397,995 | |||||||||
| 4.700% Senior Notes(1)(2) | Sep 15, 2022 | 498,004 | 497,350 | |||||||||
| 4.900% Senior Notes(1) | Jul 14, 2023 | 299,057 | 298,814 | |||||||||
| 3.950% Senior Notes(1)(2)(3) | Jan 12, 2028 | 494,825 | 494,208 | |||||||||
| Borrowings under credit facilities(4)(5)(6) | Nov 8, 2022 and Aug 24, 2020 | — | — | |||||||||
| Borrowings under loans(4)(5) | Nov 8, 2022 and Aug 24, 2020 | 805,693 | 830,332 | |||||||||
| Total notes payable and long-term debt | 2,496,465 | 2,518,699 | ||||||||||
| Less current installments of notes payable and long-term debt | 375,181 | 25,197 | ||||||||||
| Notes payable and long-term debt, less current installments | $ | 2,121,284 | $ | 2,493,502 | ||||||||
| (1) | The notes are carried at the principal amount of each note, less any unamortized discount and unamortized debt issuance costs. |
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| (2) | The Senior Notes are the Company’s senior unsecured obligations and rank equally with all other existing and future senior unsecured debt obligations. |
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| (3) | During the fiscal year ended August 31, 2018, the Company issued $500.0 million of publicly registered 3.950% Senior Notes due 2028 (the “3.950% Senior Notes”). The net proceeds from the offering were used for general corporate purposes, including to redeem $400.0 million of the Company’s outstanding 8.250% Senior Notes due 2018 and pay related costs and a “make-whole” premium. |
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| (4) | On November 8, 2017, the Company entered into an amended and restated senior unsecured five-year credit agreement to support the continued growth of the business. In addition, the revolving credit facility supports commercial paper outstanding, if any. The credit agreement provides for: (i) a Revolving Credit Facility in the initial amount of $1.8 billion, which may, subject to the lenders’ discretion, potentially be increased up to $2.3 billion (“the 2017 Revolving Credit Facility”) and (ii) a $500.0 million Term Loan Facility (“the 2017 Term Loan Facility”), collectively “the 2017 Credit Facility.” The 2017 Credit Facility expires on November 8, 2022. The 2017 Revolving Credit Facility is subject to two whole or partial one-year extensions, at the lender’s discretion. Interest and fees on the 2017 Credit Facility advances are based on the Company’s non-credit enhanced long-term senior unsecured debt rating as determined by Standard & Poor’s Ratings Service, Moody’s Investors Service and Fitch Ratings. |
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During the fiscal year ended August 31, 2019, the interest rates on the 2017 Revolving Credit Facility ranged from 3.1% to 5.7% and the 2017 Term Loan Facility ranged from 3.5% to 3.9%. Interest is charged at a rate equal to (a) for the 2017 Revolving Credit Facility, either 0.000% to 0.575% above the base rate or 0.975% to 1.575% above the Eurocurrency rate and (b) for the 2017 Term Loan Facility, either 0.125% to 0.875% above the base rate or 1.125% to 1.875% above the Eurocurrency rate. The base rate represents the greatest of: (i) Citibank, N.A.’s prime rate, (ii) 0.50% above the federal funds rate, and (iii) 1.0% above one-month LIBOR, but not less than zero. The Eurocurrency rate represents adjusted LIBOR or adjusted CDOR, as applicable, for the applicable interest period, but not less than zero. Fees include a facility fee based on the revolving credit commitments of the lenders and a letter of credit fee based on the amount of outstanding letters of credit.
| (5) | On August 24, 2018, the Company entered into a senior unsecured two-year credit agreement to support the continued growth of the business. The credit agreement provides for: (i) a Revolving Credit Facility in the initial amount of $150.0 million (“the 2018 Revolving Credit Facility”) and (ii) a $350.0 million Term Loan Facility (“the 2018 Term Loan Facility”), collectively “the 2018 Credit Facility.” The 2018 Credit Facility expires on August 24, 2020. |
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During the fiscal year ended August 31, 2019, the interest rates on the 2018 Revolving Credit Facility ranged from 3.1% to 3.4% and the 2018 Term Loan Facility ranged from 3.3% to 3.8%. Interest is charged at a rate equal to (a) for the 2018 Revolving Credit Facility, either the base rate or 0.9750% above the Eurocurrency rate and (b) for the 2018 Term Loan Facility, either 0.125% above the base rate or 1.125% above the Eurocurrency rate. The base rate represents the greatest of: (i) Mizuho Bank, Ltd.’s prime rate, (ii) 0.50% above the federal funds rate, and (iii) 1.0% above one-month LIBOR, but not less than zero. The Eurocurrency rate represents adjusted LIBOR for the applicable interest period, but not less than zero. Fees include a facility fee based on the revolving credit commitments of the lenders.
Additionally, the Company’s foreign subsidiaries had various additional credit facilities that finance their future growth and any corresponding working capital needs.
As of August 31, 2019, the Company has $2.6 billion, in available unused borrowing capacity under its revolving credit facilities.
| (6) | On August 15, 2019, the Company entered into a commercial paper program with a borrowing capacity of up to $1.8 billion. The Company intends to use the net proceeds from the commercial paper to support more efficient financing terms. The revolving credit facility supports commercial paper outstanding, if any. As of August 31, 2019, no commercial paper had been issued. |
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In the ordinary course of business, the Company has letters of credit and surety bonds with banks and insurance companies outstanding of $119.1 million as of August 31, 2019. Unused letters of credit were $74.7 million as of August 31, 2019. Letters of credit and surety bonds are generally available for draw down in the event the Company does not perform.
Debt Maturities
Debt maturities as of August 31, 2019 are as follows (in thousands):
| Fiscal Year Ended August 31, | ||||
| 2020 | $ | 375,181 | ||
| 2021 | 441,858 | |||
| 2022 | 49,797 | |||
| 2023 | 1,134,613 | |||
| 2024 | 120 | |||
| Thereafter | 494,896 | |||
| Total | $ | 2,496,465 | ||
Debt Covenants
Borrowings under the Company’s debt agreements are subject to various covenants that limit the Company’s ability to: incur additional indebtedness, sell assets, effect mergers and certain transactions, and effect certain transactions with subsidiaries and affiliates. In addition, the 2017 and 2018 Revolving Credit Facilities and the 4.900% Senior Notes contain debt leverage and interest coverage covenants. The Company is also subject to certain covenants requiring the Company to offer to repurchase the 5.625%, 4.700%, 4.900% or 3.950% Senior Notes upon a change of control. As of August 31, 2019 and 2018, the Company was in compliance with its debt covenants.
Fair Value
Refer to Note 16 – “Fair Value Measurements” for the estimated fair values of the Company’s notes payable and long-term debt.
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9. Postretirement and Other Employee Benefits
Postretirement Benefits
The Company has a qualified defined benefit pension plan for employees of Jabil Circuit UK Limited (the “UK plan”). The UK plan, which is closed to new participants, provides benefits based on average employee earnings over a three-year service period preceding retirement and length of employee service. The Company’s policy is to contribute amounts sufficient to meet minimum funding requirements as set forth in UK employee benefit and tax laws plus such additional amounts as are deemed appropriate by the Company.
Additionally, as a result of acquiring various other operations in Europe, Asia and Mexico the Company assumed both qualified and unfunded nonqualified retirement benefits covering eligible employees who meet age and service requirements (the “other plans”).
The UK plan and other plans are collectively referred to herein as the “plans.”
Benefit Obligation and Plan Assets
The benefit obligations and plan assets, changes to the benefit obligation and plan assets and the funded status of the plans as of and for the fiscal years ended August 31 are as follows (in thousands):
| Pension | ||||||||
| 2019 | 2018 | |||||||
| Change in projected benefit obligation | ||||||||
| Beginning projected benefit obligation | $ | 161,104 | $ | 167,714 | ||||
| Service cost | 1,437 | 1,063 | ||||||
| Interest cost | 3,715 | 3,807 | ||||||
| Actuarial loss (gain) | 19,060 | (6,019 | ) | |||||
| Curtailments gain | — | (998 | ) | |||||
| Total benefits paid | (6,568 | ) | (6,211 | ) | ||||
| Plan participants’ contributions | 35 | 31 | ||||||
| Amendments | — | 1,864 | ||||||
| Acquisitions | 6,040 | — | ||||||
| Effect of conversion to U.S. dollars | (10,133 | ) | (147 | ) | ||||
| Ending projected benefit obligation | $ | 174,690 | $ | 161,104 | ||||
| Change in plan assets | ||||||||
| Beginning fair value of plan assets | 151,715 | 146,698 | ||||||
| Actual return on plan assets | 19,784 | 8,146 | ||||||
| Employer contributions | 1,717 | 1,811 | ||||||
| Benefits paid from plan assets | (5,435 | ) | (4,758 | ) | ||||
| Plan participants’ contributions | 35 | 31 | ||||||
| Effect of conversion to U.S. dollars | (9,715 | ) | (213 | ) | ||||
| Ending fair value of plan assets | $ | 158,101 | $ | 151,715 | ||||
| Unfunded status | $ | (16,589 | ) | $ | (9,389 | ) | ||
| Amounts recognized in the Consolidated Balance Sheets | ||||||||
| Accrued benefit liability, current | $ | 368 | $ | 428 | ||||
| Accrued benefit liability, noncurrent | $ | 16,221 | $ | 8,961 | ||||
| Accumulated other comprehensive loss(1) | ||||||||
| Actuarial loss, before tax | $ | 24,343 | $ | 22,387 | ||||
| Prior service cost, before tax | $ | 690 | $ | 719 |
| (1) | The Company anticipates amortizing $0.8 million and $0.0 million, before tax, of net actuarial loss and prior service costs balances, respectively, to net periodic cost in fiscal year 2020. |
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Net Periodic Benefit Cost
The following table provides information about the net periodic benefit cost for the plans for fiscal years 2019, 2018 and 2017 (in thousands):
| Pension | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Service cost | $ | 1,437 | $ | 1,063 | $ | 1,068 | ||||||
| Interest cost | 3,715 | 3,807 | 2,942 | |||||||||
| Expected long-term return on plan assets | (5,291 | ) | (5,954 | ) | (4,206 | ) | ||||||
| Recognized actuarial loss | 741 | 1,127 | 1,929 | |||||||||
| Amortization of prior service credit | (44 | ) | (88 | ) | (138 | ) | ||||||
| Net settlement loss | 634 | 116 | 1,472 | |||||||||
| Net periodic benefit cost | $ | 1,192 | $ | 71 | $ | 3,067 | ||||||
On September 1, 2018, the Company adopted a new accounting standard, which changes the presentation of net periodic benefit cost in the Consolidated Statements of Operation. The Company adopted the standard on a retrospective basis which results in reclassifications for the service cost component of net periodic benefit cost from selling, general and administrative expense to cost of revenue and for the other components from selling, general and administrative expense to other expense. Prior periods have not been reclassified due to immateriality.
Assumptions
Weighted-average actuarial assumptions used to determine net periodic benefit cost and projected benefit obligation for the plans for the fiscal years 2019, 2018 and 2017 were as follows:
| Pension | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net periodic benefit cost: | ||||||||||||
| Expected long-term return on plan assets(1) | 3.6 | % | 3.8 | % | 3.3 | % | ||||||
| Rate of compensation increase | 4.4 | % | 3.3 | % | 2.7 | % | ||||||
| Discount rate | 2.2 | % | 2.1 | % | 1.9 | % | ||||||
| Projected benefit obligation: | ||||||||||||
| Expected long-term return on plan assets | 2.0 | % | 3.6 | % | 4.0 | % | ||||||
| Rate of compensation increase | 4.3 | % | 4.4 | % | 4.4 | % | ||||||
| Discount rate(2) | 1.7 | % | 2.2 | % | 2.3 | % |
| (1) | The expected return on plan assets assumption used in calculating net periodic benefit cost is based on historical return experience and estimates of future long-term performance with consideration to the expected investment mix of the plan. |
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| (2) | The discount rate is used to state expected cash flows relating to future benefits at a present value on the measurement date. This rate represents the market rate for high-quality fixed income investments whose timing would match the cash outflow of retirement benefits. Other assumptions include demographic factors such as retirement, mortality and turnover. |
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Plan Assets
The Company has adopted an investment policy for a majority of plan assets, which was set by plan trustees who have the responsibility for making investment decisions related to the plan assets. The plan trustees oversee the investment allocation, including selecting professional investment managers and setting strategic targets. The investment objectives for the assets are (1) to acquire suitable assets that hold the appropriate liquidity in order to generate income and capital growth that, along with new contributions, will meet the cost of current and future benefits under the plan, (2) to limit the risk of the plan assets from failing to meet the plan liabilities over the long-term and (3) to minimize the long-term costs under the plan by maximizing the return on the plan assets.
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Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives with prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due. Within the equity securities class, the investment policy provides for investments in a broad range of publicly traded securities including both domestic and international stocks. Within the debt securities class, the investment policy provides for investments in corporate bonds as well as fixed and variable interest debt instruments. The Company currently expects to achieve a target mix of 35% equity and 65% debt securities in fiscal year 2020.
Fair Value
The fair values of the plan assets held by the Company by asset category are as follows (in thousands):
| August 31, 2019 | August 31, 2018 | |||||||||||||||||||
| Fair Value Hierarchy | Fair Value | Asset Allocation | Fair Value | Asset Allocation | ||||||||||||||||
| Asset Category | ||||||||||||||||||||
| Cash and cash equivalents(1) | Level 1 | $ | 7,705 | 5 | % | $ | 6,682 | 4 | % | |||||||||||
| Equity Securities: | ||||||||||||||||||||
| Global equity securities(2)(3) | Level 2 | 20,215 | 13 | % | 35,932 | 24 | % | |||||||||||||
| Debt Securities: | ||||||||||||||||||||
| Corporate bonds(3) | Level 2 | 42,522 | 27 | % | 41,088 | 27 | % | |||||||||||||
| Government bonds(3) | Level 2 | 69,880 | 44 | % | 51,597 | 34 | % | |||||||||||||
| Other Investments: | ||||||||||||||||||||
| Insurance contracts(4) | Level 3 | 17,779 | 11 | % | 16,416 | 11 | % | |||||||||||||
| Fair value of plan assets | $ | 158,101 | 100 | % | $ | 151,715 | 100 | % | ||||||||||||
| (1) | Carrying value approximates fair value. |
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| (2) | Investments in equity securities by companies incorporated, listed or domiciled in developed and/or emerging market countries. |
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| (3) | Investments in global equity securities, corporate bonds, government securities and government bonds are valued using the quoted prices of securities with similar characteristics. |
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| (4) | Consist of an insurance contract that guarantees the payment of the funded pension entitlements, as well as provides a profit share to the Company. The profit share in this contract is not based on actual investments, but, instead on a notional investment portfolio that is expected to return a pre-defined rate. Insurance contract assets are recorded at fair value and is determined based on the cash surrender value of the insured benefits which is the present value of the guaranteed funded benefits. Insurance contracts are valued using unobservable inputs (Level 3 inputs), primarily by discounting expected future cash flows relating to benefits paid from a notional investment portfolio in order to determine the cash surrender value of the policy. The unobservable inputs consist of estimated future benefits to be paid throughout the duration of the policy and estimated discount rates, which both have an immaterial impact on the fair value estimate of the contract. |
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Accumulated Benefit Obligation
The following table provides information for the plans with an accumulated benefit obligation for fiscal years 2019 and 2018 (in thousands):
| August 31, | ||||||||
| 2019 | 2018 | |||||||
| Projected benefit obligation | $ | 174,690 | $ | 161,104 | ||||
| Accumulated benefit obligation | $ | 161,729 | $ | 152,380 | ||||
| Fair value of plan assets | $ | 158,101 | $ | 151,715 |
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Cash Flows
The Company expects to make cash contributions between $0.4 million and $0.6 million to its funded pension plans during fiscal year 2020. The estimated future benefit payments, which reflect expected future service, are as follows (in thousands):
| Fiscal Year Ended August 31, | Amount | |||
| 2020 | $ | 5,017 | ||
| 2021 | 4,788 | |||
| 2022 | 5,365 | |||
| 2023 | 5,877 | |||
| 2024 | 6,274 | |||
| 2025 through 2029 | 40,828 |
Profit Sharing, 401(k) Plan and Defined Contribution Plans
The Company provides retirement benefits to its domestic employees who have completed a 30-day period of service through a 401(k) plan that provides a matching contribution by the Company. The Company also has defined contribution benefit plans for certain of its international employees. The Company contributed approximately $49.0 million, $40.5 million and $33.6 million for defined contribution plans for the fiscal years ended August 31, 2019, 2018 and 2017, respectively.
10. Commitments and Contingencies
Lease Agreements
The Company leases certain facilities under non-cancelable operating leases. Lease agreements may contain lease escalation clauses and purchase or renewal options. The Company recognizes scheduled lease escalation clauses over the course of the applicable lease term on a straight-line basis in the Consolidated Statements of Operations. The future minimum lease payments under non-cancelable operating leases as of August 31, 2019 were as follows (in thousands):
| Fiscal Year Ending August 31, | Amount | |||
| 2020 | $ | 118,312 | ||
| 2021 | 102,915 | |||
| 2022 | 84,729 | |||
| 2023 | 63,206 | |||
| 2024 | 51,091 | |||
| Thereafter | 182,932 | |||
| Total minimum lease payments | $ | 603,185 | ||
Total operating lease expense was approximately $125.4 million, $130.2 million and $117.2 million for fiscal years 2019, 2018 and 2017, respectively.
Legal Proceedings
The Company is party to certain lawsuits in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
11. Stockholders’ Equity
The Company recognized stock-based compensation expense within selling, general and administrative expense as follows (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Restricted stock units | $ | 53,766 | $ | 84,082 | $ | 42,122 | ||||||
| Employee stock purchase plan | 7,580 | 6,891 | 6,334 | |||||||||
| Other (1) | — | 7,538 | 88 | |||||||||
| Total | $ | 61,346 | $ | 98,511 | $ | 48,544 | ||||||
| (1) | For the fiscal year ended August 31, 2018, represents a one-time cash-settled stock award that vested on November 30, 2017. |
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Equity Compensation Plan
The 2011 Stock Award and Incentive Plan (the “2011 Plan”) provides for the grant of restricted stock awards, restricted stock unit awards and other stock-based awards. The maximum aggregate number of shares that may be subject to awards under the 2011 Plan is 23,300,000.
Following is a reconciliation of the shares available to be issued under the 2011 Plan as of August 31, 2019:
| Shares Available for Grant | ||||
| Balance as of August 31, 2018 | 12,837,158 | |||
| Restricted stock units granted, net of forfeitures(1) | (796,577 | ) | ||
| Balance as of August 31, 2019 | 12,040,581 | |||
| (1) | Represents the maximum number of shares that can be issued based on the achievement of certain performance criteria. |
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Stock Appreciation Rights (“SARS”)
The following table summarizes SARS activity from August 31, 2018 through August 31, 2019:
| SARS Outstanding | Average Intrinsic Value (in thousands) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (years) | |||||||||||||
| Outstanding as of August 31, 2018 | 156,801 | $ | 1,748 | $ | 18.41 | 3.10 | ||||||||||
| SARS exercised | (33,300 | ) | $ | 18.24 | ||||||||||||
| Outstanding and exercisable as of August 31, 2019 | 123,501 | $ | 1,278 | $ | 18.46 | 2.11 | ||||||||||
Restricted Stock Units
Certain key employees have been granted time-based, performance-based and market-based restricted stock units. The time-based restricted stock units granted generally vest on a graded vesting schedule over three years. The performance-based restricted stock units generally vest on a cliff vesting schedule over three years and up to a maximum of 150%, depending on the specified performance condition and the level of achievement obtained. The performance-based restricted stock units have a vesting condition that is based upon the Company’s cumulative adjusted core earnings per share during the performance period. The market-based restricted stock units generally vest on a cliff vesting schedule over three years and up to a maximum of 200%, depending on the specified performance condition and the level of achievement obtained. The market-based restricted stock units have a vesting condition that is tied to the Company’s total shareholder return based on the Company’s stock performance in relation to the companies in the Standard and Poor’s (S&P) Super Composite Technology Hardware and Equipment Index excluding the Company.
On October 6, 2017, the Company’s Compensation Committee approved the modification of vesting criteria for certain performance-based restricted stock units granted in fiscal year 2015. As a result of the modification, 0.8 million awards vested during the first quarter of fiscal year 2018, which resulted in approximately $24.9 million of stock-based compensation expense recognized.
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The following table summarizes restricted stock units activity from August 31, 2018 through August 31, 2019:
| Shares | Weighted- Average Grant-Date Fair Value | |||||||
| Outstanding as of August 31, 2018 | 8,352,307 | $ | 24.34 | |||||
| Changes during the period | ||||||||
| Shares granted(1) | 3,144,205 | $ | 25.25 | |||||
| Shares vested | (1,983,411 | ) | $ | 25.07 | ||||
| Shares forfeited | (2,347,628 | ) | $ | 24.78 | ||||
| Outstanding as of August 31, 2019 | 7,165,473 | $ | 26.27 | |||||
| (1) | For those shares granted that are based on the achievement of certain performance criteria, the amount represents the maximum number of shares that can vest. During the fiscal year ended August 31, 2019, the Company awarded approximately 1.6 million time-based restricted stock units, 0.4 million performance-based restricted stock units and 0.4 million market-based restricted stock units based on target performance criteria. |
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The following table represents the restricted stock units and SARS stock-based compensation information for the periods indicated (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Intrinsic value of SARS exercised | $ | 335 | $ | 909 | $ | 5,053 | ||||||
| Fair value of restricted stock units vested | $ | 49,725 | $ | 62,592 | $ | 44,010 | ||||||
| Tax benefit for stock compensation expense(1) | $ | 611 | $ | 1,122 | $ | 560 | ||||||
| Unrecognized stock-based compensation expense — restricted stock units | $ | 41,778 | ||||||||||
| Remaining weighted-average period for restricted stock units expense | 1.3 years |
| (1) | Classified as income tax expense within the Consolidated Statements of Operations. |
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Employee Stock Purchase Plan
The maximum aggregate number of shares that are available for issuance under the 2011 Employee Stock Purchase Plan (the “ESPP”) is 12,000,000.
Employees are eligible to participate in the ESPP after 90 days of employment with the Company. The ESPP permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee’s compensation, as defined in the ESPP, at a price equal to 85% of the fair value of the common stock at the beginning or end of the offering period, whichever is lower. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. As of August 31, 2019, 3,397,019 shares remained available for issue under the 2011 ESPP.
The fair value of shares issued under the ESPP was estimated on the commencement date of each offering period using the Black-Scholes option pricing model. The following weighted-average assumptions were used in the model for each respective period:
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Expected dividend yield | 0.6 | % | 0.6 | % | 0.8 | % | ||||||
| Risk-free interest rate | 2.3 | % | 1.4 | % | 0.5 | % | ||||||
| Expected volatility(1) | 28.6 | % | 23.0 | % | 33.0 | % | ||||||
| Expected life | 0.5 years | 0.5 years | 0.5 years |
| (1) | The expected volatility was estimated using the historical volatility derived from the Company’s common stock. |
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Dividends
The following table sets forth certain information relating to the Company’s cash dividends declared to common stockholders during fiscal years 2019 and 2018:
| Dividend Declaration Date | Dividend per Share | Total of Cash Dividends Declared | Date of Record for Dividend Payment | Dividend Cash Payment Date | ||||||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||||||
| Fiscal Year 2019: | October 18, 2018 | $ | 0.08 | $ | 13,226 | November 15, 2018 | December 3, 2018 | |||||||||||||
| January 24, 2019 | $ | 0.08 | $ | 12,706 | February 15, 2019 | March 1, 2019 | ||||||||||||||
| April 18, 2019 | $ | 0.08 | $ | 12,681 | May 15, 2019 | June 3, 2019 | ||||||||||||||
| July 18, 2019 | $ | 0.08 | $ | 12,724 | August 15, 2019 | September 3, 2019 | ||||||||||||||
| Fiscal Year 2018: | October 19, 2017 | $ | 0.08 | $ | 14,588 | November 15, 2017 | December 1, 2017 | |||||||||||||
| January 25, 2018 | $ | 0.08 | $ | 14,272 | February 15, 2018 | March 1, 2018 | ||||||||||||||
| April 19, 2018 | $ | 0.08 | $ | 13,991 | May 15, 2018 | June 1, 2018 | ||||||||||||||
| July 18, 2018 | $ | 0.08 | $ | 13,677 | August 15, 2018 | September 4, 2018 |
Share Repurchases
In September 2019, the Company’s Board of Directors (“the Board”) authorized the repurchase of up to $600.0 million of the Company’s common stock as part of a two-year capital allocation framework (“the 2020 Share Repurchase Program”). From September 24, 2019 through October 14, 2019, the Company repurchased 874,475 shares, utilizing a total of $30.8 million of the $600.0 million authorized by the Board.
Common Stock Outstanding
The following represents the common stock outstanding for the fiscal year ended:
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Common stock outstanding: | ||||||||||||
| Beginning balances | 164,588,172 | 177,727,653 | 186,998,472 | |||||||||
| Shares issued upon exercise of stock options | 11,348 | 30,832 | 172,620 | |||||||||
| Shares issued under employee stock purchase plan | 1,282,042 | 1,105,400 | 1,228,316 | |||||||||
| Vesting of restricted stock | 1,983,261 | 2,727,229 | 2,102,049 | |||||||||
| Purchases of treasury stock under employee stock plans | (489,836 | ) | (793,052 | ) | (550,096 | ) | ||||||
| Treasury shares purchased(1) | (13,854,607 | ) | (16,209,890 | ) | (12,223,708 | ) | ||||||
| Ending balances | 153,520,380 | 164,588,172 | 177,727,653 | |||||||||
| (1) | During fiscal years 2018, 2017 and 2016, the Company’s Board of Directors authorized the repurchase of $350.0 million, $450.0 million and $400.0 million, respectively, of the Company’s common stock under share repurchase programs, which were repurchased during fiscal years 2019, 2018 and 2017, respectively. |
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12. Concentration of Risk and Segment Data
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. The Company maintains cash and cash equivalents with various domestic and foreign financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided on such deposits, but may generally be redeemed upon demand. The Company performs periodic evaluations of the relative credit standing of the financial institutions and attempts to limit exposure with any one institution. For trade receivables, the Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for potential credit losses on trade receivables.
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Sales of the Company’s products are concentrated among specific customers. For fiscal year 2019, the Company’s five largest customers accounted for approximately 42% of its net revenue and 85 customers accounted for approximately 90% of its net revenue. As the Company is a provider of manufacturing services and solutions and products are built based on customer specifications, it is impracticable to provide revenues from external customers for each product and service. Sales to the following customer that accounted for 10% or more of the Company’s net revenues, expressed as a percentage of consolidated net revenue, and the percentage of accounts receivable for the customer, were as follows:
| Percentage of Net Revenue Fiscal Year Ended August 31, | Percentage of Accounts Receivable as of August 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
| Apple, Inc.(1) | 22 | % | 28 | % | 24 | % | * | * |
| * | Amount was less than 10% of total. |
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| (1) | Sales to this customer were reported in the DMS operating segment. |
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The Company procures components from a broad group of suppliers. Some of the products manufactured by the Company require one or more components that are available from only a single source.
Segment Data
Operating segments are defined as components of an enterprise that engage in business activities from which they may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.
The Company derives its revenue from providing comprehensive electronics design, production and product management services. The chief operating decision maker evaluates performance and allocates resources on a segment basis. The Company’s operating segments consist of two segments – EMS and DMS, which are also the Company’s reportable segments. The segments are organized based on the economic profiles of the services performed, including manufacturing capabilities, market strategy, margins, return on capital and risk profiles.
The EMS segment is focused around leveraging IT, supply chain design and engineering, technologies largely centered on core electronics, utilizing the Company’s large scale manufacturing infrastructure and the ability to serve a broad range of end markets. The EMS segment is a high volume business that produces products at a quicker rate (i.e. cycle time) and in larger quantities and includes customers primarily in the automotive and transportation, capital equipment, cloud, computing and storage, defense and aerospace, industrial and energy, networking and telecommunications, print and retail, and smart home and appliances industries.
The DMS segment is focused on providing engineering solutions, with an emphasis on material sciences, technologies and healthcare. The DMS segment includes customers primarily in the edge devices and accessories, healthcare, mobility and packaging industries.
Net revenue for the operating segments is attributed to the segment in which the service is performed. An operating segment’s performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net revenue less cost of revenue, segment selling, general and administrative expenses, segment research and development expenses and an allocation of corporate manufacturing expenses and selling, general and administrative expenses. Segment income does not include amortization of intangibles, stock-based compensation expense and related charges, restructuring and related charges, distressed customer charges, acquisition and integration charges, loss on disposal of subsidiaries, settlement of receivables and related charges, impairment of notes receivable and related charges, restructuring of securities loss, goodwill impairment charges, business interruption and impairment charges, net, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations, other expense, interest income, interest expense, income tax expense or adjustment for net income (loss) attributable to noncontrolling interests.
Total segment assets are defined as accounts receivable, inventories, net, customer-related property, plant and equipment, intangible assets net of accumulated amortization and goodwill. All other non-segment assets are reviewed on a global basis by management. Transactions between operating segments are generally recorded at amounts that approximate those at which we would transact with third parties.
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The following tables set forth operating segment information (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net revenue | ||||||||||||
| EMS | $ | 15,430,529 | $ | 12,268,600 | $ | 11,077,622 | ||||||
| DMS | 9,851,791 | 9,826,816 | 7,985,499 | |||||||||
| $ | 25,282,320 | $ | 22,095,416 | $ | 19,063,121 | |||||||
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Segment income and reconciliation of income before tax | ||||||||||||
| EMS | $ | 480,047 | $ | 451,149 | $ | 436,110 | ||||||
| DMS | 396,564 | 316,998 | 230,893 | |||||||||
| Total segment income | $ | 876,611 | $ | 768,147 | $ | 667,003 | ||||||
| Reconciling items: | ||||||||||||
| Amortization of intangibles | (31,923 | ) | (38,490 | ) | (35,524 | ) | ||||||
| Stock-based compensation expense and related charges | (61,346 | ) | (98,511 | ) | (48,544 | ) | ||||||
| Restructuring and related charges | (25,914 | ) | (36,902 | ) | (160,395 | ) | ||||||
| Distressed customer charges | (6,235 | ) | (32,710 | ) | (10,198 | ) | ||||||
| Business interruption and impairment charges, net (1) | 2,860 | (11,299 | ) | — | ||||||||
| Acquisition and integration charges | (52,697 | ) | (8,082 | ) | — | |||||||
| Loss on disposal of subsidiaries | — | — | (2,112 | ) | ||||||||
| Restructuring of securities loss | (29,632 | ) | — | — | ||||||||
| Other expense | (53,750 | ) | (37,563 | ) | (28,448 | ) | ||||||
| Interest income | 21,460 | 17,813 | 12,525 | |||||||||
| Interest expense | (188,730 | ) | (149,002 | ) | (138,074 | ) | ||||||
| Income before income tax | $ | 450,704 | $ | 373,401 | $ | 256,233 | ||||||
| (1) | Charges, net of insurance proceeds of $2.9 million and $24.9 million, for the fiscal years ended August 31, 2019 and 2018, respectively, relate to business interruption and asset impairment costs associated with damage from Hurricane Maria, which impacted operations in Cayey, Puerto Rico, which is classified as a component of cost of revenue and selling, general and administrative expenses in the Consolidated Statements of Operations. |
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| August 31, 2019 | August 31, 2018 | |||||||
| Total assets | ||||||||
| EMS | $ | 4,353,465 | $ | 3,456,866 | ||||
| DMS | 4,988,198 | 5,378,436 | ||||||
| Other non-allocated assets | 3,628,812 | 3,210,339 | ||||||
| $ | 12,970,475 | $ | 12,045,641 | |||||
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The Company operates in 30 countries worldwide. Sales to unaffiliated customers are based on the Company location that maintains the customer relationship and transacts the external sale. The following tables set forth external net revenue, net of intercompany eliminations, and long-lived asset information where individual countries represent a material portion of the total (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| External net revenue: | ||||||||||||
| Singapore | $ | 6,718,495 | $ | 7,193,414 | $ | 5,585,837 | ||||||
| China | 4,958,462 | 4,585,355 | 4,012,950 | |||||||||
| Mexico | 4,526,456 | 3,533,437 | 3,207,059 | |||||||||
| Malaysia | 1,681,911 | 1,389,851 | 1,119,384 | |||||||||
| Hungary | 809,031 | 897,033 | 944,448 | |||||||||
| Other | 3,489,398 | 2,651,632 | 2,547,750 | |||||||||
| Foreign source revenue | 22,183,753 | 20,250,722 | 17,417,428 | |||||||||
| U.S. | 3,098,567 | 1,844,694 | 1,645,693 | |||||||||
| Total | $ | 25,282,320 | $ | 22,095,416 | $ | 19,063,121 | ||||||
| August 31, | ||||||||
| 2019 | 2018 | |||||||
| Long-lived assets: | ||||||||
| China | $ | 1,579,904 | $ | 1,770,732 | ||||
| Mexico | 418,641 | 256,086 | ||||||
| Singapore | 156,028 | 191,506 | ||||||
| Malaysia | 154,386 | 113,011 | ||||||
| Taiwan | 123,608 | 130,062 | ||||||
| Hungary | 85,809 | 91,063 | ||||||
| Spain | 77,855 | 79,991 | ||||||
| Poland | 57,794 | 60,847 | ||||||
| Other | 412,498 | 334,466 | ||||||
| Long-lived assets related to foreign operations | 3,066,523 | 3,027,764 | ||||||
| U.S. | 1,146,335 | 1,077,128 | ||||||
| Total | $ | 4,212,858 | $ | 4,104,892 | ||||
13. Derivative Financial Instruments and Hedging Activities
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, where deemed appropriate, uses derivatives as risk management tools to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency risk and interest rate risk.
Foreign Currency Risk Management
Forward contracts are put in place to manage the foreign currency risk associated with the anticipated foreign currency denominated revenues and expenses. A hedging relationship existed with an aggregate notional amount outstanding of $334.1 million and $293.4 million as of August 31, 2019 and 2018, respectively. The related forward foreign exchange contracts have been designated as hedging instruments and are accounted for as cash flow hedges. The forward foreign exchange contract transactions will effectively lock in the value of anticipated foreign currency denominated revenues and expenses against foreign currency fluctuations. The anticipated foreign currency denominated revenues and expenses being hedged are expected to occur between September 3, 2019 and August 31, 2020.
In addition to derivatives that are designated as hedging instruments and qualify for hedge accounting, the Company also enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable, fixed purchase obligations and intercompany transactions denominated in a currency other than the functional currency of the respective operating entity. The aggregate notional amount of these outstanding contracts as of August 31, 2019 and 2018, was $2.5 billion and $2.3 billion, respectively.
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Refer to Note 16 – “Fair Value Measurements” for the fair values and classification of the Company’s derivative instruments.
The gains and losses recognized in earnings due to hedge ineffectiveness and the amount excluded from effectiveness testing were not material for all periods presented and are included as components of net revenue, cost of revenue and selling, general and administrative expense, which are the same line items in which the hedged items are recorded.
The following table presents the net losses from forward contracts recorded in the Consolidated Statements of Operations for the periods indicated (in thousands):
| **Location of Loss on ** | Fiscal Year Ended August 31 | |||||||||||||
| **Derivatives Recognized ** | 2019 | 2018 | 2017 | |||||||||||
| Derivatives Not Designated as Hedging Instruments Under ASC 815 | in Net Income | Amount of Loss Recognized in Net Income on Derivatives | ||||||||||||
| Forward foreign exchange contracts(1) | Cost of revenue | $ | (29,557 | ) | $ | (27,774 | ) | $ | (95,665 | ) |
| (1) | For the fiscal years ended August 31, 2019, 2018, and 2017, the Company recognized $14.9 million, $36.7 million, and $90.3 million, respectively, of foreign currency gains in cost of revenue, which are offset by the losses from the forward foreign exchange contracts. |
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Interest Rate Risk Management
The Company periodically enters into interest rate swaps to manage interest rate risk associated with the Company’s borrowings.
Cash Flow Hedges
The following table presents the interest rate swaps outstanding as of August 31, 2019, which have been designated as hedging instruments and accounted for as cash flow hedges:
| Interest Rate Swap Summary | Hedged Interest Rate Payments | Aggregate Notional Amount (in millions) | Effective Date | Expiration Date (1) | ||||||||||||
| Forward Interest Rate Swap | ||||||||||||||||
| Anticipated Debt Issuance | Fixed | $ | 200.0 | October 22, 2018 | December 15, 2020 | (2) | ||||||||||
| Interest Rate Swaps(3) | ||||||||||||||||
| 2017 Term Loan Facility | Variable | $ | 200.0 | October 11, 2018 | August 31, 2020 | |||||||||||
| 2018 Term Loan Facility | Variable | $ | 350.0 | August 24, 2018 | August 24, 2020 |
| (1) | The contracts will be settled with the respective counterparties on a net basis at the expiration date for the forward interest rate swap and at each settlement date for the interest rate swaps. |
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| (2) | If the anticipated debt issuance occurs before December 15, 2020, the contracts will be terminated simultaneously with the debt issuance. |
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| (3) | The Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the one-month LIBOR for the 2017 Term Loan Facility and the three-month LIBOR for the 2018 Term Loan Facility. |
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14. Restructuring and Related Charges
Following is a summary of the Company’s restructuring and related charges (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2019 | 2018 | 2017(2) | ||||||||||
| Employee severance and benefit costs | $ | 16,029 | $ | 16,269 | $ | 56,834 | ||||||
| Lease costs | (41 | ) | 1,596 | 3,966 | ||||||||
| Asset write-off costs | (3,566 | ) | 16,264 | 94,346 | ||||||||
| Other costs | 13,492 | 2,773 | 5,249 | |||||||||
| Total restructuring and related charges(1) | $ | 25,914 | $ | 36,902 | $ | 160,395 | ||||||
| (1) | Includes $21.5 million, $16.3 million and $51.3 million recorded in the EMS segment, $2.6 million, $16.6 million and $82.4 million recorded in the DMS segment and $1.8 million, $4.0 million and $26.7 million of non-allocated charges for the fiscal years ended August 31, 2019, 2018 and 2017, respectively. Except for asset write-off costs, all restructuring and related charges are cash settled. |
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| (2) | Fiscal year ended August 31, 2017, includes expenses related to the 2017 and 2013 Restructuring Plans. |
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2017 Restructuring Plan
On September 15, 2016, the Company’s Board of Directors formally approved a restructuring plan to better align the Company’s global capacity and administrative support infrastructure to further optimize organizational effectiveness. This action includes headcount reductions across the Company’s selling, general and administrative cost base and capacity realignment in higher cost locations (the “2017 Restructuring Plan”).
The 2017 Restructuring Plan, totaling $195.0 million in restructuring and other related costs, is complete as of August 31, 2019.
The table below sets forth the cumulative restructuring and related charges incurred through August 31, 2019 for the 2017 Restructuring Plan (in thousands):
| 2017 Restructuring Plan(1) | ||||
| Employee severance and benefit costs | $ | 74,656 | ||
| Lease costs | 5,521 | |||
| Asset write-off costs | 106,974 | |||
| Other related costs | 7,395 | |||
| Total restructuring and related charges | $ | 194,546 | ||
| (1) | Includes $62.3 million allocated to the EMS segment, $101.6 million allocated to the DMS segment and $30.7 million of unallocated costs. |
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The tables below summarize the Company’s liability activity, primarily associated with the 2017 Restructuring Plan (in thousands):
| Employee Severance and Benefit Costs | Lease Costs | Asset Write-off Costs | Other Related Costs | Total | ||||||||||||||||
| Balance as of August 31, 2017 | $ | 33,580 | $ | 1,665 | $ | — | $ | 3,143 | $ | 38,388 | ||||||||||
| Restructuring related charges | 16,269 | 1,596 | 16,264 | 2,773 | 36,902 | |||||||||||||||
| Asset write-off charge and other non-cash activity | (127 | ) | 525 | (16,264 | ) | 25 | (15,841 | ) | ||||||||||||
| Cash payments | (31,591 | ) | (1,102 | ) | — | (5,419 | ) | (38,112 | ) | |||||||||||
| Balance as of August 31, 2018 | 18,131 | 2,684 | — | 522 | 21,337 | |||||||||||||||
| Restructuring related charges | 16,029 | (41 | ) | (3,566 | ) | 2,071 | 14,493 | |||||||||||||
| Asset write-off charge and other non-cash activity | (494 | ) | — | 3,566 | (18 | ) | 3,054 | |||||||||||||
| Cash payments | (30,504 | ) | (663 | ) | — | (1,786 | ) | (32,953 | ) | |||||||||||
| Balance as of August 31, 2019 | $ | 3,162 | $ | 1,980 | $ | — | $ | 789 | $ | 5,931 | ||||||||||
2020 Restructuring Plan
On September 20, 2019, the Company’s Board of Directors formally approved a restructuring plan to realign the Company’s global capacity support infrastructure, particularly in the Company’s mobility footprint in China, in order to optimize organizational effectiveness. This action includes headcount reductions and capacity realignment (the “2020 Restructuring Plan”). The 2020 Restructuring Plan reflects the Company’s intention only and restructuring decisions, and the timing of such decisions, at certain locations are still subject to consultation with the Company’s employees and their representatives.
The Company currently expects to recognize approximately $85.0 million in pre-tax restructuring and other related costs primarily over the course of the Company’s fiscal year 2020. This information will be subject to the finalization of timetables for the transition of functions, consultation with employees and their representatives as well as the statutory severance requirements of the particular jurisdictions impacted, and the amount and timing of the actual charges may vary due to a variety of factors. The Company’s estimates for the charges discussed above exclude any potential income tax effects.
15. Business Acquisitions
Fiscal year 2019
Acquisitions
During fiscal year 2018, the Company and Johnson & Johnson Medical Devices Companies (“JJMD”) entered into a Framework Agreement to form a strategic collaboration and expand its existing relationship. The strategic collaboration expands the Company’s medical device manufacturing portfolio, diversification and capabilities.
On February 25, 2019 and April 29, 2019, under the terms of the Framework Agreement, the Company completed the initial closing and second closing, respectively, of its acquisition of certain assets of JJMD. The preliminary aggregate purchase price paid for both the initial closing and second closing was approximately $153.2 million in cash, which remains subject to certain post-closing adjustments. The acquisition of the JJMD assets has been accounted for as a business combination using the acquisition method of accounting. Total assets acquired of $167.6 million and total liabilities assumed of $14.4 million were recorded at their estimated fair values as of the acquisition dates. The final closing, which is subject to customary closing conditions, is expected to occur during fiscal year 2020.
The Company is currently evaluating the fair values of the assets and liabilities related to this business combination. The preliminary estimates and measurements are, therefore, subject to change during the measurement period for assets acquired, liabilities assumed and tax adjustments. The results of operations were included in the Company’s consolidated financial results beginning on February 25, 2019 for the initial closing and April 29, 2019 for the second closing. The Company believes it is impracticable to provide pro forma information for the acquisition of the JJMD assets.
On September 30, 2019 the Company completed the third closing of its acquisition of certain assets of JJMD for a cash payment of $117.1 million, primarily for inventory and the assumption of certain employee liabilities. The purchase price for the third closing is subject to certain post-closing adjustments based on conditions within the Framework Agreement.
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Fiscal year 2018
Acquisitions
On September 1, 2017, the Company completed the acquisition of True-Tech Corporation (“True-Tech”) for approximately $95.9 million in cash. True-Tech is a manufacturer specializing in aerospace, semiconductor and medical machined components.
The acquisition of True-Tech assets was accounted for as a business combination using the acquisition method of accounting. Assets acquired of $114.7 million, including $25.9 million in intangible assets and $22.6 million in goodwill, and liabilities assumed of $18.8 million were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired assets and assumed liabilities was recorded to goodwill and was fully allocated to the EMS segment. The majority of the goodwill is currently expected to be deductible for income tax purposes. The results of operations were included in the Company’s consolidated financial results beginning on September 1, 2017. Pro forma information has not been provided as the acquisition of True-Tech is not deemed to be significant.
Fiscal year 2017
Acquisitions
On March 1, 2017, the Company completed the acquisition of Lewis Engineering, which was not deemed to be significant. The acquired business expanded the Company’s capabilities in precision machining, manufacturing and design engineering. The aggregate purchase price of the acquisition totaled approximately $31.4 million in cash.
The acquisition was accounted for as a business combination using the acquisition method of accounting. Assets acquired of $32.3 million, including $8.2 million in goodwill and $14.6 million in intangible assets, and liabilities assumed of $0.9 million were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired assets and assumed liabilities of $8.2 million was recorded to goodwill and was fully allocated to the DMS segment. The majority of the goodwill is currently expected to be deductible for income tax purposes. The Company expensed transaction costs in connection with the acquisition of approximately $0.8 million during the fiscal year ended August 31, 2017. The results of operations of the acquired business were included in the Company’s consolidated financial results beginning on the date of the acquisition. Pro forma information has not been provided as the acquisition is not deemed to be significant.
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16. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The following table presents the fair value of the Company’s financial assets and liabilities measured at fair value by hierarchy level on a recurring basis as of the periods indicated:
| (in thousands) | Fair Value Hierarchy | August 31, 2019 | August 31, 2018 | |||||||||
| Assets: | ||||||||||||
| Cash and cash equivalents: | ||||||||||||
| Cash equivalents | Level 1 | (1) | $ | 27,804 | $ | 21,412 | ||||||
| Prepaid expenses and other current assets: | ||||||||||||
| Short-term investments | Level 1 | 14,088 | — | |||||||||
| Deferred purchase price receivables (Note 2) | Level 3 | (2) | — | 533,113 | ||||||||
| Forward foreign exchange contracts: | ||||||||||||
| Derivatives designated as hedging instruments (Note 13) | Level 2 | (3) | 904 | 225 | ||||||||
| Derivatives not designated as hedging instruments (Note 13) | Level 2 | (3) | 6,878 | 10,125 | ||||||||
| Other assets: | ||||||||||||
| Senior Non-Convertible Preferred Stock | Level 3 | (4) | 33,102 | 47,300 | ||||||||
| Liabilities: | ||||||||||||
| Accrued expenses: | ||||||||||||
| Forward foreign exchange contracts: | ||||||||||||
| Derivatives designated as hedging instruments (Note 13) | Level 2 | (3) | $ | 15,999 | $ | 13,364 | ||||||
| Derivatives not designated as hedging instruments (Note 13) | Level 2 | (3) | 55,391 | 46,171 | ||||||||
| Interest rate swaps: | ||||||||||||
| Derivatives designated as hedging instruments (Note 13) | Level 2 | (5) | 5,918 | 117 | ||||||||
| Other liabilities: | ||||||||||||
| Forward interest rate swaps: | ||||||||||||
| Derivatives designated as hedging instruments (Note 13) | Level 2 | (5) | 35,045 | — |
| (1) | Consist of investments that are readily convertible to cash with original maturities of 90 days or less. |
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| (2) | Recorded initially at fair value using unobservable inputs, determined primarily using discounted cash flows, and due to its credit quality and short-term maturity, the fair value approximated book values. The unobservable inputs consist of estimated credit losses and estimated discount rates, which both have an immaterial impact on the fair value calculation. |
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| (3) | The Company’s forward foreign exchange contracts are measured on a recurring basis at fair value, based on foreign currency spot rates and forward rates quoted by banks or foreign currency dealers. |
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| (4) | During the fourth quarter of fiscal year 2019, the Company exchanged its investment in the Senior Non-Convertible Preferred Stock of iQor Holdings, Inc. (“iQor”) in association with iQor’s previously announced sale of its international logistics and product service assets. Prior to the restructuring, the Senior Non-Convertible Preferred Stock had a face value of $50.0 million, accumulated dividends at an annual rate of 8 percent and was redeemable on March 31, 2023 or upon a change in control. The restructured Senior Non-Convertible Preferred Stock has a face value of $55.0 million and is redeemable at iQor’s option or upon change of control for $55.0 million until December 31, 2023, $65.0 million during calendar year 2024 and is mandatorily redeemable for $75.0 million on April 1, 2025. |
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As a result of the restructuring, the Company recognized a restructuring of securities loss of $29.6 million, which primarily consisted of a credit loss. The credit loss was estimated utilizing a probability-weighted discounted cash flow model incorporating the concessions and modifications made as part of the restructuring, discounted at the loan’s effective interest rate. The Senior Non-Convertible Preferred Stock is valued each reporting period using unobservable inputs based on a discounted cash flow model and is classified as an available for sale debt security with any unrealized loss recorded to AOCI. As of August 31, 2019, the unobservable inputs have an immaterial impact on the fair value calculation. As of August 31, 2019, the amortized cost basis approximates fair value.
| (5) | Fair value measurements are based on the contractual terms of the derivatives and use observable market-based inputs. The interest rate swaps are valued using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs including interest rate curves and credit spreads. |
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Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value because of the short-term nature of these financial instruments. The carrying amounts of borrowings under credit facilities and under loans approximates fair value as interest rates on these instruments approximates current market rates.
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Notes payable and long-term debt is carried at amortized cost; however, the Company estimates the fair value of notes payable and long-term debt for disclosure purposes. The following table presents the carrying amounts and fair values of the Company’s notes payable and long-term debt, by hierarchy level as of the periods indicated:
| August 31, 2019 | August 31, 2018 | |||||||||||||||||||
| (in thousands) | Fair Value Hierarchy | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
| Notes payable and long-term debt: (Note 8) | ||||||||||||||||||||
| 5.625% Senior Notes | Level 2 | (1) | $ | 398,886 | $ | 416,000 | $ | 397,995 | $ | 415,704 | ||||||||||
| 4.700% Senior Notes | Level 2 | (1) | 498,004 | 525,890 | 497,350 | 503,545 | ||||||||||||||
| 4.900% Senior Notes | Level 3 | (2) | 299,057 | 318,704 | 298,814 | 306,535 | ||||||||||||||
| 3.950% Senior Notes | Level 2 | (1) | 494,825 | 509,845 | 494,208 | 476,010 |
| (1) | The fair value estimates are based upon observable market data. |
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| (2) | This fair value estimate is based on the Company’s indicative borrowing cost derived from discounted cash flows. |
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Refer to Note 9 – “Postretirement and Other Employee Benefits” for disclosure surrounding the fair value of the Company’s pension plan assets.
17. New Accounting Guidance
Recently Adopted Accounting Guidance
During fiscal year 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard, which is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The accounting standard became effective for the Company in the first quarter of fiscal year 2019. The Company implemented changes to its processes, policies and internal controls to meet the impact of the new standard and disclosure requirements. Refer to Note 18 – “Revenue” to the Consolidated Financial Statements for further details.
During fiscal year 2016, the FASB issued a new accounting standard to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This guidance became effective for the Company in the first quarter of fiscal year 2019, and was applied prospectively by means of a cumulative-effect adjustment to the Consolidated Balance Sheet as of September 1, 2018 to equity investments that existed as of the date of adoption of the standard. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements; however, the impact on future periods will depend on the facts and circumstances of future transactions.
During fiscal year 2016, the FASB issued a new accounting standard to address the presentation of certain transactions within the statement of cash flows with the objective of reducing the existing diversity in practice. This standard was adopted on September 1, 2018 on a retrospective basis and resulted in a reclassification of cash flows from operating activities to investing activities in the Company’s Consolidated Statement of Cash Flows for cash receipts related to collections on the deferred purchase price receivable (i.e. beneficial interest) on asset-backed securitization transactions. The increase in cash flow from investing activities and the corresponding decrease to cash flow from operating activities upon adoption of the standard was $96.8 million, $2.0 billion, and $2.7 billion for the fiscal years ended August 31, 2019, 2018 and 2017, respectively.
During fiscal year 2017, the FASB issued a new accounting standard to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new standard eliminates the exception for an intra-entity transfer of an asset other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. This guidance became effective for the Company beginning in the first quarter of fiscal year 2019. This guidance was adopted on a modified retrospective basis and an immaterial cumulative-effect adjustment was recorded, which reduced retained earnings as of September 1, 2018.
During fiscal year 2017, the FASB issued a new accounting standard which clarifies the scope of accounting for asset derecognition and adds further guidance for recognizing gains and losses from the transfer of non-financial assets in contracts with non-customers. This guidance became effective for the Company beginning in the first quarter of fiscal year 2019 coincident with the new revenue recognition guidance. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements; however, the impact on future periods will depend on the facts and circumstances of future transactions.
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During the second quarter of fiscal year 2018, the Securities and Exchange Commission (“SEC”) staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company applied SAB 118 and provided required disclosures in Note 4 – “Income Taxes.”
Recently Issued Accounting Guidance
During fiscal year 2016, the FASB issued a new accounting standard revising lease accounting. The new guidance requires organizations to recognize lease assets and lease liabilities on the Consolidated Balance Sheet and disclose key information regarding leasing arrangements. This guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The standard must be adopted using a modified retrospective approach. The Company intends to elect the package of practical expedients offered, which allows entities to not reassess: i) whether any contracts prior to the adoption date are or contain leases, ii) lease classification, and iii) whether capitalized initial direct costs continue to meet the definition of initial direct costs under the new guidance. In preparation for the adoption, the Company is implementing a new lease accounting system. Upon adoption, the Company expects to recognize right-of-use assets and lease liabilities, respectively, in the range of approximately $350.0 million to $500.0 million. The Company is continuing to assess implementation of changes to its processes, policies and internal controls to meet the requirements of the new standard. The adoption of this standard is not expected to have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.
During fiscal year 2016, the FASB issued an accounting standard, which replaces the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for the Company beginning in the first quarter of fiscal year 2021. This guidance must be applied using a modified retrospective or prospective transition method, depending on the area covered by this accounting standard. The Company is currently assessing the impact this new standard may have on its Consolidated Financial Statements.
During fiscal year 2017, the FASB issued a new accounting standard to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities by simplifying the application of hedge accounting and improving the related disclosures in its financial statements. This guidance is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The guidance must be applied using a modified retrospective approach. The adoption of this standard is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the impact on future periods will depend on the facts and circumstances of future transactions.
During fiscal year 2018, the FASB issued a new accounting standard which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for the Company beginning in the first quarter of fiscal year 2021. The Company is currently assessing the impact this new standard may have on its Consolidated Financial Statements.
Recently issued accounting guidance not discussed above is not applicable or did not have, or is not expected to have, a material impact to the Company.
18. Revenue
Effective September 1, 2018, the Company adopted ASU 2014-09, Revenue Recognition (Topic 606). The new standard is a comprehensive new revenue recognition model that requires the Company to recognize revenue in a manner which depicts the transfer of goods or services to its customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.
Prior to the adoption of the new standard, the Company recognized substantially all of its revenue from contracts with customers at a point in time, which was generally when the goods were shipped to or received by the customer, title and risk of ownership had passed, the price to the buyer was fixed or determinable and collectability was reasonably assured (net of
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estimated returns). Under the new standard, the Company recognizes revenue over time for the majority of its contracts with customers which results in revenue for those customers being recognized earlier than under the previous guidance. Revenue for all other contracts with customers continues to be recognized at a point in time, similar to recognition prior to the adoption of the standard.
Additionally, the new standard impacts the Company’s accounting for certain fulfillment costs, which include upfront costs to prepare for manufacturing activities that are expected to be recovered. Under the new standard, such upfront costs are recognized as an asset and amortized on a systematic basis consistent with the pattern of the transfer of control of the products or services to which to the asset relates.
The Company adopted ASU 2014-09 using the modified retrospective method by applying the guidance to all open contracts upon adoption and recorded a cumulative effect adjustment as of September 1, 2018, net of tax, of $42.6 million. No adjustments have been made to prior periods. Following is a summary of the cumulative effect adjustment (in thousands):
| Balance as of August 31, 2018 | Adjustments due to adoption of ASU 2014-09 | Balance as of September 1, 2018 | ||||||||||
| Assets | ||||||||||||
| Contract assets(1) | $ | — | $ | 591,616 | $ | 591,616 | ||||||
| Inventories, net(1) | $ | 3,457,706 | $ | (461,271 | ) | $ | 2,996,435 | |||||
| Prepaid expenses and other current assets(1)(2) | $ | 1,141,000 | $ | (37,271 | ) | $ | 1,103,729 | |||||
| Deferred income taxes(1)(2) | $ | 218,252 | $ | (8,325 | ) | $ | 209,927 | |||||
| Liabilities | ||||||||||||
| Contract liabilities(2)(3) | $ | — | $ | 690,142 | $ | 690,142 | ||||||
| Deferred income(2)(3)(4) | $ | 691,365 | $ | (691,365 | ) | $ | — | |||||
| Other accrued expenses(3)(4) | $ | 1,000,979 | $ | 40,392 | $ | 1,041,371 | ||||||
| Deferred income taxes(1) | $ | 114,385 | $ | 2,977 | $ | 117,362 | ||||||
| Equity | ||||||||||||
| Retained earnings(1)(2) | $ | 1,760,097 | $ | 42,602 | $ | 1,802,699 |
| (1) | Differences primarily relate to the timing of revenue recognition for over time customers and certain balance sheet reclassifications. |
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| (2) | Differences primarily relate to the timing of recognition and recovery of fulfillment costs and certain balance sheet reclassifications. |
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| (3) | Included within accrued expenses on the Consolidated Balance Sheets. |
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| (4) | Differences included in contract liabilities as of September 1, 2018. |
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The following table presents the effect of the adoption of the new revenue guidance on the Consolidated Balance Sheets as of August 31, 2019 (in thousands):
| August 31, 2019 | ||||||||
| As reported | Balance without the adoption of ASU 2014-09 | |||||||
| Assets | ||||||||
| Contract assets(1) | $ | 911,940 | $ | — | ||||
| Inventories, net(1) | $ | 3,023,003 | $ | 3,761,591 | ||||
| Prepaid expenses and other current assets(1)(2) | $ | 501,573 | $ | 514,769 | ||||
| Deferred income taxes(1) | $ | 198,827 | $ | 202,791 | ||||
| Liabilities | ||||||||
| Contract liabilities(2)(3) | $ | 511,329 | $ | — | ||||
| Deferred income(2)(3)(4) | $ | — | $ | 521,035 | ||||
| Other accrued expenses(3)(4) | $ | 1,877,908 | $ | 1,868,201 | ||||
| Deferred income taxes(1) | $ | 115,818 | $ | 111,304 | ||||
| Equity | ||||||||
| Retained earnings(1)(2) | $ | 2,037,037 | $ | 1,885,360 |
| (1) | Differences primarily relate to the timing of revenue recognition for over time customers and certain balance sheet reclassifications. |
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| (2) | Differences primarily relate to the timing of recognition and recovery of fulfillment costs and certain balance sheet reclassifications. |
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| (3) | Included within accrued expenses on the Consolidated Balance Sheets. |
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| (4) | Differences included in contract liabilities as of September 1, 2018. |
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The following table presents the effect of the adoption of the new revenue guidance on the Consolidated Statement of Operations for the fiscal year ended August 31, 2019 (in thousands):
| Fiscal Year Ended | ||||||||
| August 31, 2019 | ||||||||
| As reported | Balance without the adoption of ASU 2014-09 | |||||||
| Net revenue(1) | $ | 25,282,320 | $ | 24,864,754 | ||||
| Cost of revenue(2) | $ | 23,368,919 | $ | 23,057,603 | ||||
| Operating income | $ | 701,356 | $ | 595,105 | ||||
| Income tax expense | $ | 161,230 | $ | 164,054 | ||||
| Net income | $ | 289,474 | $ | 180,399 |
| (1) | Differences primarily relate to the timing of revenue recognition for over-time customers and to the recovery of fulfillment costs. |
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| (2) | Differences primarily relate to the timing of cost recognition for over-time customers and the recognition of fulfillment costs. |
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The following table presents the Company’s revenues disaggregated by segment (in thousands):
| Fiscal Year Ended | ||||||||||||
| August 31, 2019 | ||||||||||||
| EMS | DMS | Total | ||||||||||
| Timing of transfer | ||||||||||||
| Point in time | $ | 2,877,082 | $ | 6,055,716 | $ | 8,932,798 | ||||||
| Over time | $ | 12,553,447 | $ | 3,796,075 | $ | 16,349,522 | ||||||
| Total | $ | 15,430,529 | $ | 9,851,791 | $ | 25,282,320 | ||||||
Contract Balances
No impairment costs related to contract assets were recognized during the fiscal year ended August 31, 2019. Revenue recognized during the fiscal year ended August 31, 2019 that was included in the contract liability balance as of September 1, 2018 was $404.0 million.
Fulfillment Costs
As of August 31, 2019, capitalized costs to fulfill are $67.1 million. Amortization of fulfillment cost was $48.6 million during the fiscal year ended August 31, 2019. No impairments related to fulfillments costs were recognized during the fiscal year ended August 31, 2019.
Remaining Performance Obligations
The Company applied the practical expedient and did not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Previous: Item 14. Principal Accounting Fees and Services · Next: Item 16. Form 10-K Summary