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: |
| 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. |
| 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. |
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. |
| (b) | Exhibits. The following exhibits are included as part of, or incorporated by reference into, this Report. |
EXHIBIT LIST
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. |
JABIL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
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, 2020. 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.
The SEC’s general guidance permits the exclusion of an assessment of the effectiveness of a registrant’s controls and procedures as they relate to its internal control over financial reporting for an acquired business during the first year following such acquisition if, among other circumstances and factors, there is not an adequate amount of time between the acquisition date and the date of assessment. On September 30, 2019, we completed the third closing of our acquisition of certain assets of Johnson & Johnson Medical Devices Companies (“JJMD”). In accordance with the SEC guidance, the scope of our evaluation of internal controls over financial reporting as of August 31, 2020 did not include the internal control over financial reporting of these acquired operations. Assets acquired from JJMD during the third closing represent 2.1% of our total consolidated assets at August 31, 2020. Net revenue generated by these assets subsequent to the date of acquisition represents 1.9% of our
consolidated net revenue for the fiscal year ended August 31, 2020. We continue to evaluate internal controls over financial reporting for these acquired operations. From the acquisition date to August 31, 2020, the processes and systems of the acquired operations did not significantly impact our internal control over financial reporting.
Based on this assessment, management has concluded that, as of August 31, 2020, 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, 2020
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, 2020, 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, 2020, 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 in the third closing of the Company’s acquisition of certain assets of Johnson & Johnson Medical Devices Companies (JJMD), which are included in the 2020 consolidated financial statements of the Company and constituted 2.1% of consolidated total assets as of August 31, 2020 and 1.9% 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 in the third closing of the Company’s acquisition of certain assets of 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, 2020 and 2019, 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, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated October 22, 2020 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, 2020
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2020, 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, 2020, 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, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 13 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).
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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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 matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| Uncertain Tax Positions | |
| Description of the Matter | As disclosed in Note 15 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 clerical accuracy of the calculations. Lastly, we evaluated the Company’s income tax disclosures included in Note 15 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, 2020
JABIL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
| August 31, 2020 | August 31, 2019 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,393,557 | $ | 1,163,343 | |||
| Accounts receivable, net of allowance for doubtful accounts | 2,847,743 | 2,745,226 | |||||
| Contract assets | 1,104,700 | 911,940 | |||||
| Inventories, net of reserve for excess and obsolete inventory | 3,131,783 | 3,023,003 | |||||
| Prepaid expenses and other current assets | 657,102 | 501,573 | |||||
| Total current assets | 9,134,885 | 8,345,085 | |||||
| Property, plant and equipment, net of accumulated depreciation | 3,665,312 | 3,333,750 | |||||
| Operating lease right-of-use asset | 362,847 | — | |||||
| Goodwill | 696,853 | 622,255 | |||||
| Intangible assets, net of accumulated amortization | 209,870 | 256,853 | |||||
| Deferred income taxes | 165,407 | 198,827 | |||||
| Other assets | 162,242 | 213,705 | |||||
| Total assets | $ | 14,397,416 | $ | 12,970,475 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Current installments of notes payable and long-term debt | $ | 50,194 | $ | 375,181 | |||
| Accounts payable | 5,687,038 | 5,166,780 | |||||
| Accrued expenses | 3,211,528 | 2,990,144 | |||||
| Current operating lease liabilities | 110,723 | — | |||||
| Total current liabilities | 9,059,483 | 8,532,105 | |||||
| Notes payable and long-term debt, less current installments | 2,678,288 | 2,121,284 | |||||
| Other liabilities | 268,925 | 163,821 | |||||
| Non-current operating lease liabilities | 302,035 | — | |||||
| Income tax liabilities | 148,629 | 136,689 | |||||
| Deferred income taxes | 114,657 | 115,818 | |||||
| Total liabilities | 12,572,017 | 11,069,717 | |||||
| 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; 263,830,270 and 260,406,796 shares issued and 150,330,358 and 153,520,380 shares outstanding at August 31, 2020 and August 31, 2019, respectively | 264 | 260 | |||||
| Additional paid-in capital | 2,413,616 | 2,304,552 | |||||
| Retained earnings | 2,040,922 | 2,037,037 | |||||
| Accumulated other comprehensive loss | (34,168 | ) | (82,794 | ) | |||
| Treasury stock at cost, 113,499,912 and 106,886,416 shares as of August 31, 2020 and August 31, 2019, respectively | (2,609,250 | ) | (2,371,612 | ) | |||
| Total Jabil Inc. stockholders’ equity | 1,811,384 | 1,887,443 | |||||
| Noncontrolling interests | 14,015 | 13,315 | |||||
| Total equity | 1,825,399 | 1,900,758 | |||||
| Total liabilities and equity | $ | 14,397,416 | $ | 12,970,475 |
See accompanying notes to Consolidated Financial Statements.
JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Net revenue | $ | 27,266,438 | $ | 25,282,320 | $ | 22,095,416 | |||||
| Cost of revenue | 25,335,625 | 23,368,919 | 20,388,624 | ||||||||
| Gross profit | 1,930,813 | 1,913,401 | 1,706,792 | ||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 1,174,694 | 1,111,347 | 1,050,716 | ||||||||
| Research and development | 44,143 | 42,861 | 38,531 | ||||||||
| Amortization of intangibles | 55,544 | 31,923 | 38,490 | ||||||||
| Restructuring, severance and related charges | 156,586 | 25,914 | 36,902 | ||||||||
| Operating income | 499,846 | 701,356 | 542,153 | ||||||||
| Loss on securities | 48,625 | 29,632 | — | ||||||||
| Other expense | 31,165 | 53,750 | 37,563 | ||||||||
| Interest income | (14,559 | ) | (21,460 | ) | (17,813 | ) | |||||
| Interest expense | 173,877 | 188,730 | 149,002 | ||||||||
| Income before income tax | 260,738 | 450,704 | 373,401 | ||||||||
| Income tax expense | 203,959 | 161,230 | 285,860 | ||||||||
| Net income | 56,779 | 289,474 | 87,541 | ||||||||
| Net income attributable to noncontrolling interests, net of tax | 2,867 | 2,363 | 1,211 | ||||||||
| Net income attributable to Jabil Inc. | $ | 53,912 | $ | 287,111 | $ | 86,330 | |||||
| Earnings per share attributable to the stockholders of Jabil Inc.: | |||||||||||
| Basic | $ | 0.36 | $ | 1.85 | $ | 0.50 | |||||
| Diluted | $ | 0.35 | $ | 1.81 | $ | 0.49 | |||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 151,613 | 155,613 | 172,237 | ||||||||
| Diluted | 155,274 | 158,647 | 175,044 |
See accompanying notes to Consolidated Financial Statements.
JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Net income | $ | 56,779 | $ | 289,474 | $ | 87,541 | |||||
| Other comprehensive (loss) income: | |||||||||||
| Change in foreign currency translation | (22,297 | ) | (21,729 | ) | (50,151 | ) | |||||
| Change in derivative instruments: | |||||||||||
| Change in fair value of derivatives | (6,004 | ) | (67,773 | ) | 1,225 | ||||||
| Adjustment for net losses (gains) realized and included in net income | 14,406 | 20,259 | (23,076 | ) | |||||||
| Total change in derivative instruments | 8,402 | (47,514 | ) | (21,851 | ) | ||||||
| Change in available for sale securities: | |||||||||||
| Unrealized (loss) gain on available for sale securities | (35,963 | ) | (24,508 | ) | (8,679 | ) | |||||
| Adjustment for net losses realized and included in net income | 36,420 | 33,333 | — | ||||||||
| Total change in available for sale securities | 457 | 8,825 | (8,679 | ) | |||||||
| Actuarial gain (loss) | 62,126 | (3,012 | ) | 8,194 | |||||||
| Prior service (cost) credit | (62 | ) | 35 | (1,532 | ) | ||||||
| Total other comprehensive income (loss) | 48,626 | (63,395 | ) | (74,019 | ) | ||||||
| Comprehensive income | $ | 105,405 | $ | 226,079 | $ | 13,522 | |||||
| Comprehensive income attributable to noncontrolling interests | 2,867 | 2,363 | 1,211 | ||||||||
| Comprehensive income attributable to Jabil Inc. | $ | 102,538 | $ | 223,716 | $ | 12,311 |
See accompanying notes to Consolidated Financial Statements.
JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Total stockholders’ equity, beginning balances | $ | 1,900,758 | $ | 1,963,380 | $ | 2,368,344 | |||||
| Common stock: | |||||||||||
| Beginning balances | 260 | 257 | 253 | ||||||||
| Shares issued under employee stock purchase plan | 2 | 1 | 1 | ||||||||
| Vesting of restricted stock | 2 | 2 | 3 | ||||||||
| Ending balances | 264 | 260 | 257 | ||||||||
| Additional paid-in capital: | |||||||||||
| Beginning balances | 2,304,552 | 2,218,673 | 2,104,203 | ||||||||
| Shares issued under employee stock purchase plan | 30,118 | 26,999 | 24,865 | ||||||||
| Vesting of restricted stock | (2 | ) | (2 | ) | (3 | ) | |||||
| Recognition of stock-based compensation | 78,948 | 58,882 | 89,608 | ||||||||
| Ending balances | 2,413,616 | 2,304,552 | 2,218,673 | ||||||||
| Retained earnings: | |||||||||||
| Beginning balances | 2,037,037 | 1,760,097 | 1,730,893 | ||||||||
| Declared dividends | (50,027 | ) | (51,026 | ) | (57,126 | ) | |||||
| Cumulative effect adjustment for adoption of new accounting standards | — | 40,855 | — | ||||||||
| Net income attributable to Jabil Inc. | 53,912 | 287,111 | 86,330 | ||||||||
| Ending balances | 2,040,922 | 2,037,037 | 1,760,097 | ||||||||
| Accumulated other comprehensive loss: | |||||||||||
| Beginning balances | (82,794 | ) | (19,399 | ) | 54,620 | ||||||
| Other comprehensive income (loss) | 48,626 | (63,395 | ) | (74,019 | ) | ||||||
| Ending balances | (34,168 | ) | (82,794 | ) | (19,399 | ) | |||||
| Treasury stock: | |||||||||||
| Beginning balances | (2,371,612 | ) | (2,009,371 | ) | (1,536,455 | ) | |||||
| Purchases of treasury stock under employee stock plans | (23,128 | ) | (11,918 | ) | (22,597 | ) | |||||
| Treasury shares purchased | (214,510 | ) | (350,323 | ) | (450,319 | ) | |||||
| Ending balances | (2,609,250 | ) | (2,371,612 | ) | (2,009,371 | ) | |||||
| Noncontrolling interests: | |||||||||||
| Beginning balances | 13,315 | 13,123 | 14,830 | ||||||||
| Net income attributable to noncontrolling interests | 2,867 | 2,363 | 1,211 | ||||||||
| Acquisition of noncontrolling interests | — | 1,112 | — | ||||||||
| Disposition of noncontrolling interests | — | (1,785 | ) | — | |||||||
| Declared dividends to noncontrolling interests | (2,002 | ) | (1,500 | ) | (2,920 | ) | |||||
| Foreign currency adjustments attributable to noncontrolling interests | (165 | ) | — | 2 | |||||||
| Other | — | 2 | — | ||||||||
| Ending balances | 14,015 | 13,315 | 13,123 | ||||||||
| Total stockholders’ equity, ending balances | $ | 1,825,399 | $ | 1,900,758 | $ | 1,963,380 |
See accompanying notes to Consolidated Financial Statements.
JABIL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Cash flows provided by (used in) operating activities: | |||||||||||
| Net income | $ | 56,779 | $ | 289,474 | $ | 87,541 | |||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 794,581 | 771,833 | 773,704 | ||||||||
| Restructuring and related charges | 41,356 | (3,566 | ) | 16,264 | |||||||
| Recognition of stock-based compensation expense and related charges | 83,084 | 61,346 | 90,664 | ||||||||
| Deferred income taxes | 29,209 | 20,998 | 52,705 | ||||||||
| Loss (gain) on sale of property, plant and equipment | 29,393 | (2,522 | ) | — | |||||||
| Provision for allowance for doubtful accounts and notes receivable | 32,066 | 15,867 | 38,030 | ||||||||
| Loss on securities | 48,625 | 29,632 | — | ||||||||
| Other, net | 21,925 | 39,539 | (13,600 | ) | |||||||
| Change in operating assets and liabilities, exclusive of net assets acquired: | |||||||||||
| Accounts receivable | (135,973 | ) | (586,511 | ) | (2,334,367 | ) | |||||
| Contract assets | (104,601 | ) | (878,469 | ) | — | ||||||
| Inventories | (77,320 | ) | 483,074 | (499,105 | ) | ||||||
| Prepaid expenses and other current assets | (144,152 | ) | 28,897 | (97,795 | ) | ||||||
| Other assets | (10,669 | ) | (38,188 | ) | (34,747 | ) | |||||
| Accounts payable, accrued expenses and other liabilities | 592,972 | 961,662 | 815,258 | ||||||||
| Net cash provided by (used in) operating activities | 1,257,275 | 1,193,066 | (1,105,448 | ) | |||||||
| Cash flows (used in) provided by investing activities: | |||||||||||
| Acquisition of property, plant and equipment | (983,035 | ) | (1,005,480 | ) | (1,036,651 | ) | |||||
| Proceeds and advances from sale of property, plant and equipment | 186,655 | 218,708 | 350,291 | ||||||||
| Cash paid for business and intangible asset acquisitions, net of cash | (146,909 | ) | (153,239 | ) | (109,664 | ) | |||||
| Cash receipts on sold receivables | — | 96,846 | 2,039,298 | ||||||||
| Other, net | 22,176 | (29,289 | ) | (2,360 | ) | ||||||
| Net cash (used in) provided by investing activities | (921,113 | ) | (872,454 | ) | 1,240,914 | ||||||
| Cash flows used in financing activities: | |||||||||||
| Borrowings under debt agreements | 12,777,055 | 11,985,978 | 9,677,424 | ||||||||
| Payments toward debt agreements | (12,544,456 | ) | (12,013,004 | ) | (9,206,016 | ) | |||||
| Payments to acquire treasury stock | (214,510 | ) | (350,323 | ) | (450,319 | ) | |||||
| Dividends paid to stockholders | (50,462 | ) | (52,004 | ) | (57,833 | ) | |||||
| Net proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan | 30,117 | 26,999 | 24,865 | ||||||||
| Treasury stock minimum tax withholding related to vesting of restricted stock | (23,128 | ) | (11,918 | ) | (22,597 | ) | |||||
| Other, net | (39,739 | ) | (1,500 | ) | (12,568 | ) | |||||
| Net cash used in financing activities | (65,123 | ) | (415,772 | ) | (47,044 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (40,825 | ) | 554 | (20,392 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | 230,214 | (94,606 | ) | 68,030 | |||||||
| Cash and cash equivalents at beginning of period | 1,163,343 | 1,257,949 | 1,189,919 | ||||||||
| Cash and cash equivalents at end of period | $ | 1,393,557 | $ | 1,163,343 | $ | 1,257,949 | |||||
| Supplemental disclosure information: | |||||||||||
| Interest paid, net of capitalized interest | $ | 182,946 | $ | 185,696 | $ | 167,278 | |||||
| Income taxes paid, net of refunds received | $ | 163,571 | $ | 168,053 | $ | 180,423 |
See accompanying notes to Consolidated Financial Statements.
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 $25.8 million and $17.2 million were recorded as of August 31, 2020 and 2019, 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.
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 year to 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.
As of August 31, 2020 and 2019, capitalized costs to fulfill were $85.3 million and $67.1 million, respectively. Amortization of fulfillment cost were $56.6 million and $48.6 million during the fiscal years ended August 31, 2020 and 2019, respectively. Immaterial or no impairments for fulfillments costs were recognized during the fiscal years ended August 31, 2020 and 2019, respectively.
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 |
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.
Leases
Effective September 1, 2019, the Company’s lease accounting policies changed in conjunction with the adoption of Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842). For further discussion, refer to Note 5—“Leases” to the Consolidated Financial Statements.
The Company elected to apply the package of practical expedients, which among other things, allows entities to maintain the historical lease classification for existing leases. The Company has lease agreements that contain both lease and non-lease components. For lease agreements entered into or reassessed after the adoption of ASU 2016-02, the Company has elected the practical expedient to combine lease and non-lease components for building and real estate leases.
The Company primarily has leases for buildings and real estate with lease terms ranging from 1 year to 36 years. Leases for other classes of assets are not significant. For any leases with an initial term in excess of 12 months, the Company determines whether an arrangement is a lease at contract inception by evaluating if the contract conveys the right to use and control the specific property or equipment. Certain lease agreements contain purchase or renewal options. These options are included in the lease term when it is reasonably certain that the Company will exercise that option. Generally, the Company's lease agreements do not contain material residual value guarantees or material restrictive covenants.
Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized based on the present value of future lease payments over the lease term at the lease commencement date. When determining the present value of future payment, the Company uses the incremental borrowing rate when the implicit rate is not readily determinable. Any payment deemed probable under residual value guarantees is included in lease payments. Any variable payments, other than those that depend on an index or rate, are excluded from right-of-use assets and lease liabilities.
Leases with an initial term of 12 months or less are not recorded as right-of-use assets and lease liabilities in the Consolidated Balance Sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
Certain equipment and buildings held under finance leases are 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 finance leases is included in depreciation expense in the Consolidated Statements of Operations.
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 may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the qualitative assessment is not performed or if the Company determines that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, 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 may elect to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible is impaired. If the qualitative assessment is not performed or if the Company determines that it is not more likely than not that the fair value of an indefinite-lived intangible exceeds the carrying value, the Company determines the fair value 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.
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, 2020 (in thousands):
| Foreign Currency Translation Adjustment | Derivative Instruments | Actuarial (Loss) Gain | Prior Service Cost | Available for Sale Securities | Total | ||||||||||||||||||
| Balance as of August 31, 2019 | $ | (14,298 | ) | $ | (39,398 | ) | $ | (28,033 | ) | $ | (608 | ) | $ | (457 | ) | $ | (82,794 | ) | |||||
| Other comprehensive (loss) income before reclassifications | (22,297 | ) | (6,004 | ) | 66,285 | (17 | ) | (35,963 | ) | 2,004 | |||||||||||||
| Amounts reclassified from AOCI | — | 14,406 | (4,159 | ) | (45 | ) | 36,420 | 46,622 | |||||||||||||||
| Other comprehensive (loss) income**(1)** | (22,297 | ) | 8,402 | 62,126 | (62 | ) | 457 | 48,626 | |||||||||||||||
| Balance as of August 31, 2020 | $ | (36,595 | ) | $ | (30,996 | ) | $ | 34,093 | $ | (670 | ) | $ | — | $ | (34,168 | ) |
| (1) | Actuarial (loss) gain is net of tax of $(12.0) million. Amounts for other components of AOCI are net of tax, which are immaterial. |
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 | 2020 | 2019 | 2018 | ||||||||||
| Realized losses (gains) on derivative instruments:(1) | ||||||||||||||
| Foreign exchange contracts | Cost of revenue | $ | 15,507 | $ | 21,982 | $ | (9,379 | ) | ||||||
| Interest rate contracts | Interest expense | (1,101 | ) | (1,723 | ) | (13,697 | ) | |||||||
| Actuarial (gain) loss | (2) | (4,159 | ) | 741 | 1,127 | |||||||||
| Prior service credit | (2) | (45 | ) | (44 | ) | (88 | ) | |||||||
| Available for sale securities | Loss on securities | 36,420 | 33,333 | — | ||||||||||
| Total amounts reclassified from AOCI(3) | $ | 46,622 | $ | 54,289 | $ | (22,037 | ) |
| (1) | The Company expects to reclassify $4.7 million into earnings during the next twelve months, which will primarily be classified as a component of cost of revenue. |
| (2) | Amounts are included in the computation of net periodic benefit pension cost. Refer to Note 10 – “Postretirement and Other Employee Benefits” for additional information. |
| (3) | Amounts are net of tax, which are immaterial for the fiscal years ended August 31, 2020 and 2019. 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. |
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
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.
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 periodic cost of materials adjustments, 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 12 – “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.
The Company applies the incremental cash tax savings approach when analyzing the impact Global Intangible Low-Taxed Income (“GILTI”) could have on its U.S. valuation allowance. The incremental cash tax savings approach considers the realizable benefit of a net operating loss and deferred tax assets by comparing the incremental cash taxes in the calculation of GILTI with and without the net operating loss and other DTAs.
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, | ||||||||
| 2020 | 2019 | 2018 | ||||||
| Restricted stock units | 728 | 796 | 2,426 |
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 Sale Programs**
The Company regularly sells designated pools of high credit quality trade accounts receivable under uncommitted trade accounts receivable sale programs to unaffiliated financial institutions without recourse. As these accounts receivable are sold without recourse, the Company does not retain the associated risks following the transfer of such accounts receivable to the respective financial institutions. The Company continues servicing the receivables sold and in exchange receives a servicing fee under each of the trade accounts receivable sale programs. Servicing fees related to each of the trade accounts receivable sale programs recognized during the fiscal years ended August 31, 2020, 2019 and 2018 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 trade accounts receivable sale programs are accounted for as sales and, accordingly, net receivables sold under the trade accounts receivable sale 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 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 | $ | 600.0 | Uncommitted | December 5, 2020 | (2) | ||||
| B | $ | 150.0 | Uncommitted | November 30, 2020 | (3) | ||||
| C | 400.0 | CNY | Uncommitted | August 31, 2023 | |||||
| D | $ | 150.0 | Uncommitted | May 4, 2023 | (4) | ||||
| E | $ | 150.0 | Uncommitted | January 25, 2021 | (5) | ||||
| F | $ | 50.0 | Uncommitted | February 23, 2023 | (6) | ||||
| G | $ | 100.0 | Uncommitted | August 10, 2021 | (7) | ||||
| H | $ | 100.0 | Uncommitted | July 21, 2021 | (8) | ||||
| I | $ | 650.0 | Uncommitted | December 4, 2020 | (9) | ||||
| J | $ | 135.0 | Uncommitted | April 11, 2021 | (10) | ||||
| K | $ | 100.0 | CHF | Uncommitted | December 5, 2020 | (2) |
| (1) | Maximum amount of trade accounts receivable that may be sold under a facility at any one time. |
| (2) | The program will be automatically extended through December 5, 2025 unless either party provides 30 days’ notice of termination. |
| (3) | The program will automatically extend for one year at each expiration date unless either party provides 10 days’ notice of termination. |
| (4) | Any party may elect to terminate the agreement upon 30 days’ prior notice. |
| (5) | The program will be automatically extended through January 25, 2023 unless either party provides 30 days’ notice of termination. |
| (6) | Any party may elect to terminate the agreement upon 15 days’ prior notice. |
| (7) | The program will be automatically extended through August 10, 2023 unless either party provides 30 days’ notice of termination. |
| (8) | The program will be automatically extended through August 21, 2023 unless either party provides 30 days’ notice of termination. |
| (9) | The program will be automatically extended through December 5, 2024 unless either party provides 30 days’ notice of termination. |
| (10) | The program will be automatically extended each year through April 11, 2025 unless either party provides 30 days’ notice of termination. |
In connection with the trade accounts receivable sale programs, the Company recognized the following (in millions):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Trade accounts receivable sold | $ | 8,457 | $ | 6,751 | $ | 5,480 | |||||
| Cash proceeds received | $ | 8,440 | $ | 6,723 | $ | 5,463 | |||||
| Pre-tax losses on sale of receivables(1) | $ | 17 | $ | 28 | $ | 17 |
| (1) | Recorded to other expense within the Consolidated Statements of Operations. |
3**. Inventories**
Inventories consist of the following (in thousands):
| August 31, 2020 | August 31, 2019 | ||||||
| Raw materials | $ | 2,389,719 | $ | 2,310,081 | |||
| Work in process | 450,781 | 468,217 | |||||
| Finished goods | 376,542 | 314,258 | |||||
| Reserve for excess and obsolete inventory | (85,259 | ) | (69,553 | ) | |||
| Inventories, net | $ | 3,131,783 | $ | 3,023,003 |
4**. Property, Plant and Equipment**
Property, plant and equipment consists of the following (in thousands):
| August 31, 2020 | August 31, 2019 | ||||||
| Land and improvements | $ | 141,715 | $ | 146,719 | |||
| Buildings | 1,152,204 | 962,559 | |||||
| Leasehold improvements | 1,144,238 | 1,092,787 | |||||
| Machinery and equipment | 4,685,611 | 4,262,015 | |||||
| Furniture, fixtures and office equipment | 221,709 | 209,257 | |||||
| Computer hardware and software | 760,195 | 671,252 | |||||
| Transportation equipment | 9,061 | 16,423 | |||||
| Construction in progress | 76,337 | 83,234 | |||||
| 8,191,070 | 7,444,246 | ||||||
| Less accumulated depreciation and amortization | 4,525,758 | 4,110,496 | |||||
| $ | 3,665,312 | $ | 3,333,750 |
Depreciation and maintenance and repair expenses were as follows for the periods indicated (in thousands):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Depreciation expense | $ | 739,038 | $ | 739,910 | $ | 735,213 | |||||
| Maintenance and repair expense | $ | 333,772 | $ | 288,309 | $ | 266,691 |
As of August 31, 2020 and 2019, the Company had $422.4 million and $235.2 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.
5**. Leases**
Effective September 1, 2019, the Company adopted Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) using the modified retrospective approach and also elected to apply the package of practical expedients, which among other things, allows entities to maintain the historical lease classification for existing leases. The Company has lease agreements that contain both lease and non-lease components. For lease agreements entered into or reassessed after the adoption of ASU 2016-02, the Company has elected the practical expedient to combine lease and non-lease components for building and real estate leases.
Upon adoption of ASU 2016-02, the Company recorded $414.6 million and $437.5 million of right-of-use assets and lease liabilities, respectively, related to its existing operating lease portfolio. The accounting for the Company's finance leases remained substantially unchanged and balances were not significant on the adoption date. The adoption of this standard did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.
The following table sets forth the amount of lease assets and lease liabilities included on the Company's Consolidated Balance Sheets, as of the period indicated (in thousands):
| Financial Statement Line Item | August 31, 2020 | |||||
| Assets | ||||||
| Operating lease assets (1) | Operating lease right-of-use assets | $ | 362,847 | |||
| Finance lease assets (2) | Property, plant and equipment, net | 160,015 | ||||
| Total lease assets | $ | 522,862 | ||||
| Liabilities | ||||||
| Current | ||||||
| Operating lease liabilities | Current operating lease liabilities | $ | 110,723 | |||
| Finance lease liabilities | Accrued expenses | 7,465 | ||||
| Non-current | ||||||
| Operating lease liabilities | Non-current operating lease liabilities | 302,035 | ||||
| Finance lease liabilities | Other liabilities | 160,747 | ||||
| Total lease liabilities | $ | 580,970 |
| (1) | Net of accumulated amortization of $96.2 million. |
| (2) | Net of accumulated amortization of $12.8 million. |
The following table is a summary of expenses related to leases included on the Company's Consolidated Statements of Operations, for the periods indicated (in thousands):
| Fiscal Year Ended August 31, | |||
| 2020 | |||
| Operating lease cost | $ | 114,290 | |
| Finance lease cost | |||
| Amortization of leased assets | 5,470 | ||
| Interest on lease liabilities | 4,950 | ||
| Other | 15,038 | ||
| Net lease cost(1) | $ | 139,748 |
| (1) | Lease costs are primarily recognized in cost of revenue. |
The following table is a summary of the weighted-average remaining lease terms and weighted-average discount rates of the Company's leases, as of the period indicated:
| August 31, 2020 | ||||
| Weighted-average remaining lease term | Weighted-average discount rate | |||
| Operating leases | 5.4 years | 3.18 | % | |
| Finance leases | 5.7 years | 4.28 | % |
The following table sets forth other supplemental information related to the Company's lease portfolio (in thousands):
| Fiscal Year Ended August 31, | |||
| 2020 | |||
| Cash paid for amounts included in the measurement of lease liabilities: | |||
| Operating cash flows for operating leases(1) | $ | 112,267 | |
| Operating cash flows for finance leases(1) | 4,950 | ||
| Financing activities for finance leases(2) | 6,242 | ||
| Non-cash right-of-use assets obtained in exchange for new lease liabilities: | |||
| Operating leases | 91,350 | ||
| Finance leases | 111,591 |
| (1) | Included in accounts payable, accrued expenses and other liabilities in Operating Activities of the Company's Consolidated Statements of Cash Flows. |
| (2) | Included in payments toward debt agreements in Financing Activities of the Company's Consolidated Statements of Cash Flows. |
The future minimum lease payments under operating and finance leases as of August 31, 2020 were as follows (in thousands):
| Fiscal Year Ending August 31, | Operating Leases**(1)** | Finance Leases | Total | ||||||||
| 2021 | $ | 121,196 | $ | 12,383 | $ | 133,579 | |||||
| 2022 | 89,143 | 12,864 | 102,007 | ||||||||
| 2023 | 67,952 | 12,363 | 80,315 | ||||||||
| 2024 | 56,153 | 12,505 | 68,658 | ||||||||
| 2025 | 36,924 | 43,185 | 80,109 | ||||||||
| Thereafter | 85,799 | 101,111 | 186,910 | ||||||||
| Total minimum lease payments | $ | 457,167 | $ | 194,411 | $ | 651,578 | |||||
| Less: Interest | (44,409 | ) | (26,199 | ) | (70,608 | ) | |||||
| Present value of lease liabilities | $ | 412,758 | $ | 168,212 | $ | 580,970 |
| (1) | Excludes $137.8 million of payments related to leases signed but not yet commenced. Additionally, certain leases signed but not yet commenced contain residual value guarantees and purchase options not deemed probable. |
As disclosed in the Company’s Form 10-K for the fiscal year ended August 31, 2019, the future minimum lease payments of non-cancelable operating leases prior to the adoption of ASU 2016-02 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 prior to the adoption of ASU 2016-02 was approximately $125.4 million and $130.2 million for fiscal years 2019 and 2018, respectively.
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 2020 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, 2020 and 2019 (in thousands):
| EMS | DMS | Total | |||||||||
| 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 | ||||||||
| Acquisitions and adjustments | 5,358 | 55,999 | 61,357 | ||||||||
| Change in foreign currency exchange rates | (138 | ) | 13,379 | 13,241 | |||||||
| Balance as of August 31, 2020 | $ | 87,188 | $ | 609,665 | $ | 696,853 |
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, 2020 | August 31, 2019 | ||||||||||||||
| Gross Carrying Amount | Accumulated Impairment | Gross Carrying Amount | Accumulated Impairment | ||||||||||||
| Goodwill | $ | 1,716,675 | $ | 1,019,822 | $ | 1,642,077 | $ | 1,019,822 |
The following table presents the Company’s total purchased intangible assets as of August 31, 2020 and 2019 (in thousands):
| Weighted Average Amortization Period (in years) | August 31, 2020 | August 31, 2019 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Contractual agreements and customer relationships | 12 | $ | 302,314 | $ | (199,861 | ) | $ | 102,453 | $ | 292,797 | $ | (175,199 | ) | $ | 117,598 | ||||||||||
| Intellectual property | 8 | 174,373 | (164,671 | ) | 9,702 | 173,771 | (157,606 | ) | 16,165 | ||||||||||||||||
| Finite-lived trade names | Not applicable | 77,667 | (30,542 | ) | 47,125 | 77,536 | (5,036 | ) | 72,500 | ||||||||||||||||
| Trade names | Indefinite | 50,590 | — | 50,590 | 50,590 | — | 50,590 | ||||||||||||||||||
| Total intangible assets | 12 | $ | 604,944 | $ | (395,074 | ) | $ | 209,870 | $ | 594,694 | $ | (337,841 | ) | $ | 256,853 |
Intangible asset amortization for fiscal years 2020, 2019 and 2018 was approximately $55.5 million, $31.9 million and $38.5 million, respectively. The estimated future amortization expense is as follows (in thousands):
| Fiscal Year Ended August 31, | |||
| 2021 | $ | 45,246 | |
| 2022 | 30,038 | ||
| 2023 | 27,624 | ||
| 2024 | 12,724 | ||
| 2025 | 10,874 | ||
| Thereafter | 32,774 | ||
| Total | $ | 159,280 |
7**. Notes Payable and Long-Term Debt**
Notes payable and long-term debt outstanding as of August 31, 2020 and 2019 are summarized below (in thousands):
| Maturity Date | August 31, 2020 | August 31, 2019 | |||||||
| 5.625% Senior Notes(1)(2) | Dec 15, 2020 | — | 398,886 | ||||||
| 4.700% Senior Notes(1)(2) | Sep 15, 2022 | 498,659 | 498,004 | ||||||
| 4.900% Senior Notes(1) | Jul 14, 2023 | 299,300 | 299,057 | ||||||
| 3.950% Senior Notes(1)(2) | Jan 12, 2028 | 495,440 | 494,825 | ||||||
| 3.600% Senior Notes(1)(2)(3) | Jan 15, 2030 | 494,756 | — | ||||||
| 3.000% Senior Notes(1)(2)(4) | Jan 15, 2031 | 590,162 | — | ||||||
| Borrowings under credit facilities(5)(6)(7) | Apr 23, 2021, Jan 22, 2023 and Jan 22, 2025 | — | — | ||||||
| Borrowings under loans(5) | Jan 22, 2025 | 350,165 | 805,693 | ||||||
| Total notes payable and long-term debt | 2,728,482 | 2,496,465 | |||||||
| Less current installments of notes payable and long-term debt | 50,194 | 375,181 | |||||||
| Notes payable and long-term debt, less current installments | $ | 2,678,288 | $ | 2,121,284 |
| (1) | The notes are carried at the principal amount of each note, less any unamortized discount and unamortized debt issuance costs. |
| (2) | The Senior Notes are the Company’s senior unsecured obligations and rank equally with all other existing and future senior unsecured debt obligations. |
| (3) | On January 15, 2020, the Company issued $500.0 million of publicly registered 3.600% Senior Notes due 2030 (the “3.600% Senior Notes”). The net proceeds from the offering were used for the repayment of term loan indebtedness. |
| (4) | On July 13, 2020, the Company issued $600.0 million of publicly registered 3.000% Senior Notes due 2031 (the “3.000% Senior Notes”). The net proceeds from the offering were used for general corporate purposes, including to redeem the $400.0 million aggregate principal amount of the Company’s 5.625% Senior Notes due 2020 and pay the applicable “make-whole” premium. |
| (5) | On January 22, 2020, the Company entered into a senior unsecured credit agreement which provides for: (i) a Revolving Credit Facility in the initial amount of $2.7 billion, of which $700.0 million expires on January 22, 2023 and $2.0 billion expires on January 22, 2025 and (ii) a $300.0 million Term Loan Facility which expires on January 22, 2025, (collectively the “Credit Facility”). Interest and fees on the 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. In connection with the Company’s entry into the Credit Facility, the Company terminated the Company’s amended and restated five-year credit agreement dated November 8, 2017 and the credit agreement dated August 24, 2018. |
During the fiscal year ended August 31, 2020, the interest rates on the Revolving Credit Facility ranged from 1.2% to 4.3% and the Term Loan Facility ranged from 1.6% to 2.9%. Interest is charged at a rate equal to (a) for the Revolving Credit Facility, either 0.000% to 0.450% above the base rate or 0.975% to 1.450% above the Eurocurrency rate and (b) for the Term Loan Facility, either 0.125% to 0.750% above the base rate or 1.125% to 1.750% 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.
Additionally, the Company’s foreign subsidiaries had various additional credit facilities that finance their future growth and any corresponding working capital needs.
| (6) | On April 24, 2020, the Company entered into an unsecured 364-day revolving credit agreement up to an initial aggregate amount of $375.0 million, which was increased to $425.0 million on May 29, 2020 (the “364-Day Revolving Credit Agreement”). The 364-Day Revolving Credit Agreement expires on April 23, 2021. Interest and fees on the 364-Day Revolving Credit Agreement 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. |
As of August 31, 2020, no draws were made on the 364-Day Revolving Credit Agreement. Interest is charged at a rate equal to either (i) 0.450%, 0.525% or 0.800% above the base rate or (ii) 1.450%, 1.525% or 1.800% above the Eurodollar rate. The base rate represents the greatest of: (i) Mizuho’s base rate, (ii) 0.50% above the federal funds rate, and (iii) 1.0% above one-month LIBOR, subject to a floor of 0.75%. The Eurodollar rate represents adjusted LIBOR for the applicable interest period, subject to a floor of 0.75%. Fees include a facility fee based on the revolving credit commitments of the lenders.
| (7) | As of August 31, 2020, the Company has $3.7 billion in available unused borrowing capacity under its revolving credit facilities. The Revolving Credit Facility under the Credit Facility acts as the back-up facility for commercial paper outstanding, if any. The Company has a borrowing capacity of up to $1.8 billion under its commercial paper program. |
In the ordinary course of business, the Company has letters of credit and surety bonds with banks and insurance companies outstanding of $120.3 million as of August 31, 2020. Unused letters of credit were $94.0 million as of August 31, 2020. 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, 2020 are as follows (in thousands):
| Fiscal Year Ended August 31, | |||
| 2021 | $ | 50,194 | |
| 2022 | 7,672 | ||
| 2023 | 820,589 | ||
| 2024 | 30,130 | ||
| 2025 | 239,537 | ||
| Thereafter | 1,580,360 | ||
| Total | $ | 2,728,482 |
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 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 4.700%, 4.900%, 3.950%, 3.600% or 3.000% Senior Notes upon a change of control. As of August 31, 2020 and 2019, the Company was in compliance with its debt covenants.
Fair Value
Refer to Note 17 – “Fair Value Measurements” for the estimated fair values of the Company’s notes payable and long-term debt.
8**. Asset-Backed Securitization Programs**
The Company continuously sells designated pools of trade accounts receivable, at a discount, under its foreign asset-backed securitization program and its North American asset-backed securitization program to special purpose entities, which in turn sell certain of the receivables under the foreign program to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution and certain of the receivables under the North American program to conduits administered by an unaffiliated financial institution on a monthly basis.
The Company continues servicing the receivables sold and in exchange receives a servicing fee under each of the asset-backed securitization programs. Servicing fees related to each of the asset-backed securitization programs recognized during the fiscal years ended August 31, 2020, 2019 and 2018 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 asset-backed securitization programs are accounted for as sales and, accordingly, net receivables sold under the asset-backed securitization 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 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. As of August 31, 2020, the special purpose entity has liabilities for which creditors do not have recourse to the general credit of the Company (primary beneficiary). The liabilities cannot exceed the maximum amount of net cash proceeds under the foreign asset-backed securitization program.
The foreign asset-backed securitization program contains a guarantee of payment by the special purpose entity, in an amount approximately equal to the net cash proceeds under the program. No liability has been recorded for obligations under the guarantee as of August 31, 2020.
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. Certain unsold receivables covering the maximum amount of net cash proceeds available under the North American asset-backed securitization program are pledged as collateral to the unaffiliated financial institution as of August 31, 2020.
Following is a summary of the asset-backed securitization programs and key terms:
| Maximum Amount of Net Cash Proceeds (in millions)****(1)(2) | Expiration Date | ||||
| North American | $ | 390.0 | November 22, 2021 | ||
| Foreign | $ | 400.0 | September 30, 2021 |
| (1) | Maximum amount available at any one time. |
| (2) | As of August 31, 2020, the Company had up to $49.0 million in available liquidity under its asset-backed securitization programs. |
In connection with the asset-backed securitization programs, the Company recognized the following (in millions):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019**(3)** | 2018 | |||||||||
| Trade accounts receivable sold | $ | 4,333 | $ | 4,057 | $ | 8,386 | |||||
| Cash proceeds received(1) | $ | 4,314 | $ | 4,031 | $ | 7,838 | |||||
| Pre-tax losses on sale of receivables(2) | $ | 19 | $ | 26 | $ | 15 | |||||
| Deferred purchase price receivables as of August 31 | $ | — | $ | — | $ | 533 |
| (1) | The amounts primarily represent proceeds from collections reinvested in revolving-period transfers. |
| (2) | Recorded to other expense within the Consolidated Statements of Operations. |
| (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 which occurred during the first quarter of fiscal year 2019. |
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 entered into on January 22, 2020 (the “Credit Facility”). The foreign asset-backed securitization program covenants include limitations on certain corporate actions such as mergers and consolidations. As of August 31, 2020 and 2019, the Company was in compliance with all covenants under the asset-backed securitization programs.
9**. Accrued Expenses**
Accrued expenses consist of the following (in thousands):
| August 31, 2020 | August 31, 2019 | ||||||
| Contract liabilities(1) | $ | 496,219 | $ | 511,329 | |||
| Accrued compensation and employee benefits | 703,250 | 600,907 | |||||
| Obligation associated with securitization programs | 494,042 | 475,251 | |||||
| Other accrued expenses | 1,518,017 | 1,402,657 | |||||
| Accrued expenses | $ | 3,211,528 | $ | 2,990,144 |
| (1) | Revenue recognized during the fiscal years ended August 31, 2020 and 2019 that was included in the contract liability balance as of August 31, 2019 and September 1, 2018 was $308.1 million and $404.0 million, respectively. |
10**. 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.
As a result of the third closing of the JJMD acquisition, the Company assumed a pension obligation for employees in Switzerland (the “Switzerland plan”). The Switzerland plan, which is a qualified defined benefit pension plan, provides benefits based on average employee earnings over an approximately 8 years 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 Switzerland 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, Switzerland 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):
| Fiscal Year Ended August 31, | |||||||
| 2020 | 2019 | ||||||
| Change in projected benefit obligation | |||||||
| Beginning projected benefit obligation | $ | 174,690 | $ | 161,104 | |||
| Service cost | 24,606 | 1,437 | |||||
| Interest cost | 3,041 | 3,715 | |||||
| Actuarial (gain) loss | (81,409 | ) | 19,060 | ||||
| Settlements paid from plan assets(1) | (25,749 | ) | — | ||||
| Total benefits paid | (6,431 | ) | (6,568 | ) | |||
| Plan participants’ contributions | 14,171 | 35 | |||||
| Acquisitions | 404,297 | 6,040 | |||||
| Effect of conversion to U.S. dollars | 51,887 | (10,133 | ) | ||||
| Ending projected benefit obligation | $ | 559,103 | $ | 174,690 | |||
| Change in plan assets | |||||||
| Beginning fair value of plan assets | 158,101 | 151,715 | |||||
| Actual return on plan assets | 6,952 | 19,784 | |||||
| Acquisitions | 330,793 | — | |||||
| Settlements paid from plan assets(1) | (25,749 | ) | — | ||||
| Employer contributions | 10,084 | 1,717 | |||||
| Benefits paid from plan assets | (5,765 | ) | (5,435 | ) | |||
| Plan participants’ contributions | 14,171 | 35 | |||||
| Effect of conversion to U.S. dollars | 49,686 | (9,715 | ) | ||||
| Ending fair value of plan assets | $ | 538,273 | $ | 158,101 | |||
| Unfunded status | $ | (20,830 | ) | $ | (16,589 | ) | |
| Amounts recognized in the Consolidated Balance Sheets | |||||||
| Accrued benefit liability, current | $ | 646 | $ | 368 | |||
| Accrued benefit liability, noncurrent | $ | 20,184 | $ | 16,221 | |||
| Accumulated other comprehensive loss(2) | |||||||
| Actuarial (gain) loss, before tax | $ | (49,054 | ) | $ | 24,343 | ||
| Prior service cost, before tax | $ | 786 | $ | 690 |
| (1) | The settlements recognized during fiscal year 2020 relate primarily to the Switzerland plan. |
| (2) | The Company anticipates amortizing $5.1 million and $0.0 million, before tax, of net actuarial gain and prior service costs balances, respectively, to net periodic cost in fiscal year 2021. |
Net Periodic Benefit Cost
The following table provides information about the net periodic benefit cost for the plans for fiscal years 2020, 2019 and 2018 (in thousands):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Service cost | $ | 24,606 | $ | 1,437 | $ | 1,063 | |||||
| Interest cost | 3,041 | 3,715 | 3,807 | ||||||||
| Expected long-term return on plan assets | (14,115 | ) | (5,291 | ) | (5,954 | ) | |||||
| Recognized actuarial (gain) loss | (4,159 | ) | 741 | 1,127 | |||||||
| Amortization of prior service credit | (45 | ) | (44 | ) | (88 | ) | |||||
| Net settlement loss | 230 | 634 | 116 | ||||||||
| Net periodic benefit cost | $ | 9,558 | $ | 1,192 | $ | 71 |
Assumptions
Weighted-average actuarial assumptions used to determine net periodic benefit cost and projected benefit obligation for the plans for the fiscal years 2020, 2019 and 2018 were as follows:
| Fiscal Year Ended August 31, | ||||||||
| 2020 | 2019 | 2018 | ||||||
| Net periodic benefit cost: | ||||||||
| Expected long-term return on plan assets(1) | 3.0 | % | 3.6 | % | 3.8 | % | ||
| Rate of compensation increase | 2.0 | % | 4.4 | % | 3.3 | % | ||
| Discount rate | 0.5 | % | 2.2 | % | 2.1 | % | ||
| Projected benefit obligation: | ||||||||
| Expected long-term return on plan assets | 2.9 | % | 2.0 | % | 3.6 | % | ||
| Rate of compensation increase | 2.1 | % | 4.3 | % | 4.4 | % | ||
| Discount rate(2) | 0.8 | % | 1.7 | % | 2.2 | % |
| (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. |
| (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. |
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.
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 2021.
Fair Value
The fair values of the plan assets held by the Company by asset category are as follows (in thousands):
| August 31, 2020 | August 31, 2019 | ||||||||||||||
| Fair Value Hierarchy | Fair Value | Asset Allocation | Fair Value | Asset Allocation | |||||||||||
| Asset Category | |||||||||||||||
| Cash and cash equivalents(1) | Level 1 | $ | 14,900 | 3 | % | $ | 7,705 | 5 | % | ||||||
| Equity Securities: | |||||||||||||||
| Global equity securities(2)(3) | Level 2 | 208,384 | 38 | % | 20,215 | 13 | % | ||||||||
| Debt Securities: | |||||||||||||||
| Corporate bonds(3) | Level 2 | 237,812 | 44 | % | 42,522 | 27 | % | ||||||||
| Government bonds(3) | Level 2 | 58,095 | 11 | % | 69,880 | 44 | % | ||||||||
| Other Investments: | |||||||||||||||
| Insurance contracts(4) | Level 3 | 19,082 | 4 | % | 17,779 | 11 | % | ||||||||
| Fair value of plan assets | $ | 538,273 | 100 | % | $ | 158,101 | 100 | % |
| (1) | Carrying value approximates fair value. |
| (2) | Investments in equity securities by companies incorporated, listed or domiciled in developed and/or emerging market countries. |
| (3) | Investments in global equity securities, corporate bonds, government securities and government bonds are valued using the quoted prices of securities with similar characteristics. |
| (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. |
Accumulated Benefit Obligation
The following table provides information for the plans with an accumulated benefit obligation for fiscal years 2020 and 2019 (in thousands):
| August 31, 2020 | August 31, 2019 | ||||||
| Projected benefit obligation | $ | 559,103 | $ | 174,690 | |||
| Accumulated benefit obligation | $ | 535,513 | $ | 161,729 | |||
| Fair value of plan assets | $ | 538,273 | $ | 158,101 |
Cash Flows
The Company expects to make cash contributions between $21.7 million and $26.6 million to its funded pension plans during fiscal year 2021. The estimated future benefit payments, which reflect expected future service, are as follows (in thousands):
| Fiscal Year Ended August 31, | Amount | ||
| 2021 | $ | 36,361 | |
| 2022 | 28,541 | ||
| 2023 | 27,958 | ||
| 2024 | 27,531 | ||
| 2025 | 28,942 | ||
| 2026 through 2030 | 137,521 |
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 $56.1 million, $49.0 million and $40.5 million for defined contribution plans for the fiscal years ended August 31, 2020, 2019 and 2018, respectively.
11**. 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 $355.2 million and $334.1 million as of August 31, 2020 and 2019, 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 1, 2020 and August 31, 2021.
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, 2020 and 2019, was $2.9 billion and $2.5 billion, respectively.
Refer to Note 17 – “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 gains (losses) from forward contracts recorded in the Consolidated Statements of Operations for the periods indicated (in thousands):
| Derivatives Not Designated as Hedging Instruments Under ASC 815 | Location of Gain (Loss) on Derivatives Recognized in Net Income | Amount of Gain (Loss) Recognized in Net Income on Derivatives | ||||||||||||
| Fiscal Year Ended August 31, | ||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||
| Forward foreign exchange contracts(1) | Cost of revenue | $ | 42,077 | $ | (29,557 | ) | $ | (27,774 | ) |
| (1) | For the fiscal year ended August 31, 2020, the Company recognized $47.4 million of foreign currency losses in cost of revenue, which are offset by the gains from the forward foreign exchange contracts. For the fiscal years ended August 31, 2019 and 2018, the Company recognized $14.9 million and $36.7 million, respectively, of foreign currency gains in cost of revenue, which are offset by the losses from the forward foreign exchange contracts. |
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
Contemporaneously with the issuance of our 3.000% Notes in July 2020, the Company amended interest rate swap agreements with a notional value of $200.0 million, with mandatory termination dates from August 15, 2020 to February 15, 2022 and de-designated the interest rate swaps as cash flow hedges (the “2020 Extended Interest Rate Swaps”). No ineffectiveness was recognized in earnings upon the termination of the cash flow hedges. In addition, the Company entered into interest rate swaps to offset future exposures of fluctuations in the fair value of the 2020 Extended Interest Rate Swaps (the “Offsetting Interest Rate Swaps”). The change in the fair value of the 2020 Extended Interest Rate Swaps and the Offsetting Interest Rate Swaps will be recorded in the Consolidated Statements of Income through the maturity date as an adjustment to interest expense.
12**. Stockholders’ Equity**
The Company recognized stock-based compensation expense within selling, general and administrative expense as follows (in thousands):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Restricted stock units(1) | $ | 73,775 | $ | 53,766 | $ | 84,082 | |||||
| Employee stock purchase plan | 9,309 | 7,580 | 6,891 | ||||||||
| Other(2) | — | — | 7,538 | ||||||||
| Total | $ | 83,084 | $ | 61,346 | $ | 98,511 |
| (1) | As a result of a modification, 0.8 million awards vested during fiscal year 2018, which resulted in approximately $24.9 million of stock-based compensation expense recognized during the fiscal year ended August 31, 2018. |
| (2) | For the fiscal year ended August 31, 2018, represents a one-time cash-settled stock award that vested on November 30, 2017. |
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, 2020:
| Shares Available for Grant | ||
| Balance as of August 31, 2019 | 12,040,581 | |
| SARS canceled | 601 | |
| Restricted stock units granted, net of forfeitures(1) | (1,431,674 | ) |
| Balance as of August 31, 2020 | 10,609,508 |
| (1) | Represents the maximum number of shares that can be issued based on the achievement of certain performance criteria. |
Stock Appreciation Rights (“SARS”)
The following table summarizes SARS activity from August 31, 2019 through August 31, 2020:
| SARS Outstanding | Average Intrinsic Value (in thousands) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (years) | |||||||||
| Outstanding as of August 31, 2019 | 123,501 | $ | 1,278 | $ | 18.46 | 2.11 | ||||||
| SARS canceled | (601 | ) | $ | 14.88 | ||||||||
| SARS exercised | (107,900 | ) | $ | 18.48 | ||||||||
| Outstanding and exercisable as of August 31, 2020 | 15,000 | $ | 235 | $ | 18.49 | 1.13 |
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.
The following table summarizes restricted stock units activity from August 31, 2019 through August 31, 2020:
| Shares | Weighted- Average Grant-Date Fair Value | |||||
| Outstanding as of August 31, 2019 | 7,165,473 | $ | 26.27 | |||
| Changes during the period | ||||||
| Shares granted(1) | 2,280,625 | $ | 42.21 | |||
| Shares vested | (2,259,623 | ) | $ | 24.69 | ||
| Shares forfeited | (848,951 | ) | $ | 25.77 | ||
| Outstanding as of August 31, 2020 | 6,337,524 | $ | 32.64 |
| (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, 2020, the Company awarded approximately 1.2 million time-based restricted stock units, 0.3 million performance-based restricted stock units and 0.3 million market-based restricted stock units based on target performance criteria. |
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, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Intrinsic value of SARS exercised | $ | 2,329 | $ | 335 | $ | 909 | |||||
| Fair value of restricted stock units vested | $ | 55,799 | $ | 49,725 | $ | 62,592 | |||||
| Tax benefit for stock compensation expense(1) | $ | 1,159 | $ | 611 | $ | 1,122 | |||||
| Unrecognized stock-based compensation expense — restricted stock units | $ | 38,909 | |||||||||
| Remaining weighted-average period for restricted stock units expense | 1.3 years |
| (1) | Classified as income tax expense within the Consolidated Statements of Operations. |
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, 2020, 2,290,167 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, | ||||||||
| 2020 | 2019 | 2018 | ||||||
| Expected dividend yield | 0.4 | % | 0.6 | % | 0.6 | % | ||
| Risk-free interest rate | 1.9 | % | 2.3 | % | 1.4 | % | ||
| Expected volatility (1) | 30.7 | % | 28.6 | % | 23.0 | % | ||
| 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. |
Dividends
The following table sets forth certain information relating to the Company’s cash dividends declared to common stockholders during fiscal years 2020 and 2019:
| 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 2020: | October 17, 2019 | $ | 0.08 | $ | 12,647 | November 15, 2019 | December 2, 2019 | ||||||
| January 23, 2020 | $ | 0.08 | $ | 12,517 | February 14, 2020 | March 4, 2020 | |||||||
| April 15, 2020 | $ | 0.08 | $ | 12,452 | May 15, 2020 | June 3, 2020 | |||||||
| July 16, 2020 | $ | 0.08 | $ | 12,433 | August 14, 2020 | September 2, 2020 | |||||||
| 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 |
Common Stock Outstanding
The following represents the common stock outstanding for the fiscal year ended:
| Fiscal Year Ended August 31, | ||||||||
| 2020 | 2019 | 2018 | ||||||
| Common stock outstanding: | ||||||||
| Beginning balances | 153,520,380 | 164,588,172 | 177,727,653 | |||||
| Shares issued upon exercise of stock options | 56,999 | 11,348 | 30,832 | |||||
| Shares issued under employee stock purchase plan | 1,106,852 | 1,282,042 | 1,105,400 | |||||
| Vesting of restricted stock | 2,259,623 | 1,983,261 | 2,727,229 | |||||
| Purchases of treasury stock under employee stock plans | (621,250 | ) | (489,836 | ) | (793,052 | ) | ||
| Treasury shares purchased(1)(2) | (5,992,246 | ) | (13,854,607 | ) | (16,209,890 | ) | ||
| Ending balances | 150,330,358 | 153,520,380 | 164,588,172 |
| (1) | During fiscal years 2018 and 2017, the Company’s Board of Directors (“the Board”) authorized the repurchase of $350.0 million and $450.0 million, respectively, of the Company’s common stock under share repurchase programs, which were repurchased during fiscal years 2019 and 2018, respectively. |
| (2) | In September 2019, 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”). As of August 31, 2020, 6.0 million shares had been repurchased for $213.9 million and $386.1 million remains available under the 2020 Share Repurchase Program. |
13**. 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.
Sales of the Company’s products are concentrated among specific customers. For fiscal year 2020, the Company’s five largest customers accounted for approximately 47% of its net revenue and 73 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, | ||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | |||||||||
| Apple, Inc.(1) | 20 | % | 22 | % | 28 | % | * | * | |||||
| Amazon.com(2) | 11 | % | * | * | * | * |
- Amount was less than 10% of total.
| (1) | Sales to this customer were reported in the DMS operating segment. |
| (2) | Sales to this customer were reported primarily in the EMS operating segment. |
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 (“CODM”) 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 CODM 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, severance 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, loss on securities, goodwill impairment charges, business interruption and impairment charges, net, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations, other expense (excluding certain components of net periodic benefit cost), 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.
As of September 1, 2020, certain customers have been realigned within the Company’s operating segments. As there have been no changes to how the Company’s CODM assesses operating performance and allocates resources, the Company’s operating segments which are the reporting segments continue to consist of the DMS and EMS segments. Beginning in fiscal year 2021, customers within the automotive and transportation and smart home and appliances industries will be presented within the DMS segment. Prior period disclosures will be restated to reflect the realignment.
The following table presents the Company’s revenues disaggregated by segment (in thousands):
| Fiscal Year Ended August 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| EMS | DMS | Total | EMS | DMS | Total | ||||||||||||||||||
| Timing of transfer**(1)** | |||||||||||||||||||||||
| Point in time | $ | 4,385,128 | $ | 6,045,986 | $ | 10,431,114 | $ | 2,877,082 | $ | 6,055,716 | $ | 8,932,798 | |||||||||||
| Over time | 12,226,894 | 4,608,430 | 16,835,324 | 12,553,447 | 3,796,075 | 16,349,522 | |||||||||||||||||
| Total | $ | 16,612,022 | $ | 10,654,416 | $ | 27,266,438 | $ | 15,430,529 | $ | 9,851,791 | $ | 25,282,320 |
| (1) | Effective September 1, 2018, the Company adopted ASU 2014-09, Revenue Recognition (Topic 606) using the modified retrospective method by applying the guidance to all open contracts upon adoption and recording a cumulative effect adjustment as of September 1, 2018, net of tax, of $42.6 million. No adjustments were made to prior periods. |
The following tables set forth operating segment information (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Net revenue | ||||||||||||
| EMS | $ | 16,612,022 | $ | 15,430,529 | $ | 12,268,600 | ||||||
| DMS | 10,654,416 | 9,851,791 | 9,826,816 | |||||||||
| $ | 27,266,438 | $ | 25,282,320 | $ | 22,095,416 |
| Fiscal Year Ended August 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Segment income and reconciliation of income before tax | ||||||||||||
| EMS | $ | 447,284 | $ | 480,047 | $ | 451,149 | ||||||
| DMS | 416,769 | 396,564 | 316,998 | |||||||||
| Total segment income | $ | 864,053 | $ | 876,611 | $ | 768,147 | ||||||
| Reconciling items: | ||||||||||||
| Amortization of intangibles | (55,544 | ) | (31,923 | ) | (38,490 | ) | ||||||
| Stock-based compensation expense and related charges | (83,084 | ) | (61,346 | ) | (98,511 | ) | ||||||
| Restructuring, severance and related charges | (156,586 | ) | (25,914 | ) | (36,902 | ) | ||||||
| Distressed customer charges | (14,963 | ) | (6,235 | ) | (32,710 | ) | ||||||
| Business interruption and impairment charges, net (1) | (5,785 | ) | 2,860 | (11,299 | ) | |||||||
| Acquisition and integration charges | (32,167 | ) | (52,697 | ) | (8,082 | ) | ||||||
| Loss on securities | (48,625 | ) | (29,632 | ) | — | |||||||
| Other expense (net of periodic benefit cost) | (47,243 | ) | (53,750 | ) | (37,563 | ) | ||||||
| Interest income | 14,559 | 21,460 | 17,813 | |||||||||
| Interest expense | (173,877 | ) | (188,730 | ) | (149,002 | ) | ||||||
| Income before income tax | $ | 260,738 | $ | 450,704 | $ | 373,401 |
| (1) | Charges for the fiscal year ended August 31, 2020, relate to a flood that impacted the Company’s facility in Huangpu, China. 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. These charges are classified as a component of cost of revenue and selling, general and administrative expenses in the Consolidated Statements of Operations. |
| August 31, 2020 | August 31, 2019 | |||||||
| Total assets | ||||||||
| EMS | $ | 4,247,897 | $ | 4,353,465 | ||||
| DMS | 5,627,869 | 4,988,198 | ||||||
| Other non-allocated assets | 4,521,650 | 3,628,812 | ||||||
| $ | 14,397,416 | $ | 12,970,475 |
The Company operates in 31 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, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| External net revenue: | ||||||||||||
| Singapore | $ | 6,512,310 | $ | 6,718,495 | $ | 7,193,414 | ||||||
| Mexico | 4,685,790 | 4,526,456 | 3,533,437 | |||||||||
| China | 4,583,089 | 4,958,462 | 4,585,355 | |||||||||
| Malaysia | 1,903,163 | 1,681,911 | 1,389,851 | |||||||||
| Vietnam | 921,083 | 750,367 | 552,709 | |||||||||
| Other | 3,912,536 | 3,548,062 | 2,995,956 | |||||||||
| Foreign source revenue | 22,517,971 | 22,183,753 | 20,250,722 | |||||||||
| U.S. | 4,748,467 | 3,098,567 | 1,844,694 | |||||||||
| Total | $ | 27,266,438 | $ | 25,282,320 | $ | 22,095,416 |
| August 31, 2020 | August 31, 2019 | |||||||
| Long-lived assets: | ||||||||
| China | $ | 1,670,290 | $ | 1,579,904 | ||||
| Mexico | 375,902 | 418,641 | ||||||
| Malaysia | 232,165 | 154,386 | ||||||
| Switzerland | 218,851 | 158 | ||||||
| Singapore | 141,659 | 156,028 | ||||||
| Taiwan | 114,594 | 123,608 | ||||||
| Vietnam | 107,857 | 85,728 | ||||||
| Hungary | 101,437 | 85,809 | ||||||
| Other | 501,453 | 462,261 | ||||||
| Long-lived assets related to foreign operations | 3,464,208 | 3,066,523 | ||||||
| U.S. | 1,107,827 | 1,146,335 | ||||||
| Total | $ | 4,572,035 | $ | 4,212,858 |
14**. Restructuring, Severance and Related Charges**
Following is a summary of the Company’s restructuring, severance and related charges (in thousands):
| Fiscal Year Ended August 31, | ||||||||||||
| 2020**(2)** | 2019**(3)** | 2018**(3)** | ||||||||||
| Employee severance and benefit costs | $ | 94,031 | $ | 16,029 | $ | 16,269 | ||||||
| Lease costs | 7,666 | (41 | ) | 1,596 | ||||||||
| Asset write-off costs | 32,945 | (3,566 | ) | 16,264 | ||||||||
| Other costs | 21,944 | 13,492 | 2,773 | |||||||||
| Total restructuring, severance and related charges(1) | $ | 156,586 | $ | 25,914 | $ | 36,902 |
| (1) | Includes $61.9 million, $21.5 million and $16.3 million recorded in the EMS segment, $75.6 million, $2.6 million and $16.6 million recorded in the DMS segment and $19.1 million, $1.8 million and $4.0 million of non-allocated charges for the fiscal years ended August 31, 2020, 2019 and 2018, respectively. Except for asset write-off costs, all restructuring, severance and related charges are cash settled. |
| (2) | As the Company continues to optimize its cost structure and improve operational efficiencies, $56.6 million of employee severance and benefit costs was incurred in connection with a reduction in the worldwide workforce during the fiscal year ended August 31, 2020. The remaining amount primarily relates to the 2020 Restructuring Plan. The Company’s liability associated with the worldwide workforce reduction is $35.8 million as of August 31, 2020. |
| (3) | Primarily relates to the 2017 Restructuring Plan, which was complete as of August 31, 2019. |
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.
Upon completion of the 2020 Restructuring Plan, the Company expects to recognize approximately $85.0 million in restructuring and other related costs. The Company incurred $76.9 million of costs during fiscal year 2020 and anticipates incurring the remaining costs during fiscal year 2021 for employee severance and benefit costs, asset write-off costs, and other related costs.
The tables below summarize the Company’s liability activity (in thousands):
| Employee Severance and Benefit Costs | Lease Costs | Asset Write-off Costs | Other Related Costs | Total | ||||||||||||||||
| 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(1) | 3,162 | 1,980 | — | 789 | 5,931 | |||||||||||||||
| Restructuring related charges | 37,416 | 7,666 | 32,945 | 617 | 78,644 | |||||||||||||||
| Asset write-off charge and other non-cash activity | (222 | ) | (6,435 | ) | (32,945 | ) | 18 | (39,584 | ) | |||||||||||
| Cash payments | (32,213 | ) | (895 | ) | — | (998 | ) | (34,106 | ) | |||||||||||
| Balance as of August 31, 2020(2) | $ | 8,143 | $ | 2,316 | $ | — | $ | 426 | $ | 10,885 |
| (1) | Balance as of August 31, 2019 primarily relates to the 2017 Restructuring Plan. |
| (2) | Balance as of August 31, 2020 primarily relates to the 2020 Restructuring Plan. |
15**. Income Taxes**
Provision for Income Taxes
Income (loss) before income tax expense is summarized below (in thousands):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Domestic(1) | $ | (452,233 | ) | $ | (415,707 | ) | $ | (426,897 | ) | ||
| Foreign(1) | 712,971 | 866,411 | 800,298 | ||||||||
| $ | 260,738 | $ | 450,704 | $ | 373,401 |
| (1) | Includes the elimination of intercompany foreign dividends paid to the U.S. |
Income tax expense (benefit) is summarized below (in thousands):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Current: | |||||||||||
| Domestic - federal | $ | (3,054 | ) | $ | (23,675 | ) | $ | 69,080 | |||
| Domestic - state | 1,367 | 1,383 | 134 | ||||||||
| Foreign | 179,462 | 175,993 | 178,790 | ||||||||
| Total current | 177,775 | 153,701 | 248,004 | ||||||||
| Deferred: | |||||||||||
| Domestic - federal | (9,692 | ) | (8,000 | ) | (24,342 | ) | |||||
| Domestic - state | 107 | (2,202 | ) | 93 | |||||||
| Foreign | 35,769 | 17,731 | 62,105 | ||||||||
| Total deferred | 26,184 | 7,529 | 37,856 | ||||||||
| Total income tax expense | $ | 203,959 | $ | 161,230 | $ | 285,860 |
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, | ||||||||
| 2020 | 2019 | 2018 | ||||||
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | 25.7 | % | ||
| State income taxes, net of federal tax benefit | (2.6 | ) | (1.7 | ) | (1.5 | ) | ||
| Impact of foreign tax rates(1)(2) | (0.9 | ) | (9.9 | ) | (19.3 | ) | ||
| Permanent impact of non-deductible cost | 3.2 | 1.8 | 5.9 | |||||
| Income tax credits(1) | (2.5 | ) | (3.1 | ) | (2.8 | ) | ||
| Changes in tax rates on deferred tax assets and liabilities(3) | 10.3 | 0.2 | 4.0 | |||||
| One-time transition tax related to the Tax Act(4) | — | (0.5 | ) | 62.2 | ||||
| Indefinite reinvestment assertion impact(5) | — | 0.9 | 5.8 | |||||
| Valuation allowance(6) | 16.8 | 1.3 | (16.4 | ) | ||||
| Non-deductible equity compensation | 2.2 | 1.4 | 5.5 | |||||
| Impact of intercompany charges and dividends | 15.0 | 10.4 | 7.3 | |||||
| Reclassification of stranded tax effects in AOCI | — | — | (4.0 | ) | ||||
| Global Intangible Low-Taxed Income(7) | 13.7 | 10.4 | — | |||||
| Other, net | 2.0 | 3.6 | 4.2 | |||||
| Effective income tax rate | 78.2 | % | 35.8 | % | 76.6 | % |
| (1) | The Company has been granted tax incentives for various subsidiaries in Brazil, China, Malaysia, 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 $42.6 million ($0.28 per basic share), $67.3 million ($0.43 per basic share) and $52.1 million ($0.30 per basic share) during the fiscal years ended August 31, 2020, 2019 and 2018, respectively. |
| (2) | For the fiscal year ended August 31, 2020, the decrease in the impact of foreign tax rates was primarily related to decreased income in low tax rate jurisdictions. For the fiscal year ended August 31, 2019, 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. |
| (3) | For the fiscal year ended August 31, 2020, the increase in the changes in tax rates on deferred tax assets and liabilities was primarily due to the re-measurement of deferred tax assets related to an extension of a non-U.S. tax incentive of $21.2 million. For the fiscal year ended August 31, 2018, the changes in tax rates on deferred tax assets and liabilities included changes related to the Tax Act, excluding the impact of the enacted rate change on the U.S. valuation allowance. |
| (4) | The one-time transition tax impact for the fiscal year ended August 31, 2018 was due to the comprehensive tax legislation enacted on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“Tax Act”). 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”). 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.
| (5) | As a result of the Tax Act, the Company made a change to the indefinite reinvestment assertion for the fiscal year ended August 31, 2018 resulting in foreign withholding taxes that would be incurred upon such future remittances of cash. |
| (6) | The valuation allowance change for the fiscal year ended August 31, 2020 was primarily due to the increase in deferred tax assets for sites with existing valuation allowances. 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. |
| (7) | GILTI, a newly defined category of foreign subsidiary income which is taxable to U.S. shareholders each year, applied beginning in the fiscal year ended August 31, 2019 and primarily results in the utilization of current year U.S. federal operating losses. The Company records the effects of GILTI as a period cost. |
Deferred Tax Assets and Liabilities
Significant components of the deferred tax assets and liabilities are summarized below (in thousands):
| Fiscal Year Ended August 31, | |||||||
| 2020 | 2019 | ||||||
| Deferred tax assets: | |||||||
| Net operating loss carryforwards | $ | 197,516 | $ | 183,297 | |||
| Receivables | 7,749 | 6,165 | |||||
| Inventories | 10,917 | 9,590 | |||||
| Compensated absences | 12,292 | 10,401 | |||||
| Accrued expenses | 85,363 | 81,731 | |||||
| Property, plant and equipment, principally due to differences in depreciation and amortization | 42,484 | 66,268 | |||||
| Domestic tax credits | 29,426 | 42,464 | |||||
| Foreign jurisdiction tax credits | 15,282 | 15,345 | |||||
| Equity compensation | 11,369 | 9,796 | |||||
| Domestic interest carryforwards | 4,846 | 5,853 | |||||
| Cash flow hedges | 9,064 | 9,878 | |||||
| Capital loss carryforwards | 20,087 | 7,799 | |||||
| Revenue recognition | 43,376 | 19,195 | |||||
| Operating lease liabilities | 89,424 | — | |||||
| Other | 18,120 | 21,907 | |||||
| Total deferred tax assets before valuation allowances | 597,315 | 489,689 | |||||
| Less valuation allowances | (341,200 | ) | (287,604 | ) | |||
| Net deferred tax assets | $ | 256,115 | $ | 202,085 | |||
| Deferred tax liabilities: | |||||||
| Unremitted earnings of foreign subsidiaries | 76,711 | 75,387 | |||||
| Intangible assets | 32,262 | 39,242 | |||||
| Operating lease assets | 83,311 | — | |||||
| Other | 13,081 | 4,447 | |||||
| Total deferred tax liabilities | $ | 205,365 | $ | 119,076 | |||
| Net deferred tax assets | $ | 50,750 | $ | 83,009 |
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.
As of August 31, 2020, 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, 2020, the indefinitely reinvested earnings in foreign subsidiaries upon which taxes had not been provided were approximately $2.4 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, tax credit carryforwards, and tax capital loss carryforwards, which are available to reduce future taxes, if any, as of August 31, 2020 are as follows:
| (dollars in thousands) | Last Fiscal Year of Expiration | Amount | |||
| Income tax net operating loss carryforwards:(1) | |||||
| Domestic - state | 2040 or indefinite | $ | 57,131 | ||
| Foreign | 2030 or indefinite | $ | 667,388 | ||
| Tax credit carryforwards:(1) | |||||
| Domestic - federal | 2030 | $ | 26,315 | ||
| Domestic - state | 2027 or indefinite | $ | 3,858 | ||
| Foreign(2) | 2027 or indefinite | $ | 15,282 | ||
| Tax capital loss carryforwards:(3) | |||||
| Domestic - federal | 2025 | $ | 78,700 |
| (1) | Net of unrecognized tax benefits. |
| (2) | Calculated based on the deferral method and includes foreign investment tax credits. |
| (3) | The tax capital loss carryforwards were primarily from an impairment of an investment that was deemed worthless for tax purposes. |
Unrecognized Tax Benefits
Reconciliation of the unrecognized tax benefits is summarized below (in thousands):
| Fiscal Year Ended August 31, | |||||||||||
| 2020 | 2019 | 2018 | |||||||||
| Beginning balance | $ | 164,383 | $ | 256,705 | $ | 201,355 | |||||
| Additions for tax positions of prior years | 9,841 | 20,158 | 14,465 | ||||||||
| Reductions for tax positions of prior years(1) | (9,346 | ) | (106,252 | ) | (21,045 | ) | |||||
| Additions for tax positions related to current year(2) | 26,360 | 35,769 | 81,866 | ||||||||
| Cash settlements | (510 | ) | — | (1,659 | ) | ||||||
| Reductions from lapses in statutes of limitations | (1,054 | ) | (2,570 | ) | (7,496 | ) | |||||
| Reductions from non-cash settlements with taxing authorities(3) | (2,226 | ) | (35,582 | ) | (5,928 | ) | |||||
| Foreign exchange rate adjustment | 2,345 | (3,845 | ) | (4,853 | ) | ||||||
| Ending balance | $ | 189,793 | $ | 164,383 | $ | 256,705 | |||||
| Unrecognized tax benefits that would affect the effective tax rate (if recognized) | $ | 108,551 | $ | 93,237 | $ | 117,455 |
| (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 carryforwards, offset with a valuation allowance and the impacts of the Tax Act. |
| (2) | The additions for the fiscal years ended August 31, 2020 are primarily related to taxation of certain intercompany transactions. 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. |
| (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. |
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company’s accrued interest and penalties were approximately $22.8 million and $18.9 million as of August 31, 2020 and 2019,
respectively. The Company recognized interest and penalties of approximately $3.9 million, $(1.5) million and $(6.7) million during the fiscal years ended August 31, 2020, 2019 and 2018, respectively.
It is reasonably possible that the August 31, 2020 unrecognized tax benefits could decrease during the next 12 months by $4.9 million, primarily related to a taxing authority agreement associated with intercompany transactions.
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, 2010 and August 31, 2009, respectively.
16**. Business Acquisitions**
Fiscal years 2019 and 2020
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 and second closings, respectively, of its acquisition of certain assets of JJMD. The aggregate purchase price paid for the initial and second closings was approximately $167.4 million in cash. For the initial and second closings, total assets acquired of $173.5 million and total liabilities assumed of $6.1 million were recorded at their estimated fair values as of the acquisition dates.
On September 30, 2019, under the terms of the Framework Agreement, the Company completed the third closing of its acquisition of certain assets of JJMD. The aggregate purchase price paid for the third closing was approximately $113.1 million in cash. For the third closing, total assets acquired of $196.2 million, including $80.7 million in contract assets, $34.0 million in inventory and $56.0 million in goodwill, and total liabilities assumed of $83.1 million, including $73.5 million of pension obligations, were recorded at their estimated fair values as of the acquisition date. There were no intangible assets identified in this acquisition and the goodwill is primarily attributable to the assembled workforce. The majority of the goodwill is currently not expected to be deductible for income tax purposes.
The acquisitions of the JJMD assets have been accounted for as separate business combinations for each closing using the acquisition method of accounting. The results of operations were included in the Company’s consolidated financial results beginning on February 25, 2019 for the initial closing, April 29, 2019 for the second closing and September 30, 2019 for the third closing. The Company believes it is impracticable to provide pro forma information for the acquisitions of the JJMD assets.
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.
17**. 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, 2020 | August 31, 2019 | |||||||
| Assets: | ||||||||||
| Cash and cash equivalents: | ||||||||||
| Cash equivalents | Level 1 | (1) | $ | 33,869 | $ | 27,804 | ||||
| Prepaid expenses and other current assets: | ||||||||||
| Short-term investments | Level 1 | 16,556 | 14,088 | |||||||
| Forward foreign exchange contracts: | ||||||||||
| Derivatives designated as hedging instruments (Note 11) | Level 2 | (2) | 11,201 | 904 | ||||||
| Derivatives not designated as hedging instruments (Note 11) | Level 2 | (2) | 58,893 | 6,878 | ||||||
| Other assets: | ||||||||||
| Senior Non-Convertible Preferred Stock | Level 3 | (3) | — | 33,102 | ||||||
| Liabilities: | ||||||||||
| Accrued expenses: | ||||||||||
| Forward foreign exchange contracts: | ||||||||||
| Derivatives designated as hedging instruments (Note 11) | Level 2 | (2) | $ | 1,522 | $ | 15,999 | ||||
| Derivatives not designated as hedging instruments (Note 11) | Level 2 | (2) | 9,100 | 55,391 | ||||||
| Interest rate swaps: | ||||||||||
| Derivatives designated as hedging instruments (Note 11) | Level 2 | (4) | — | 5,918 | ||||||
| Derivatives not designated as hedging instruments (Note 11) | Level 2 | (4) | 540 | — | ||||||
| Extended interest rate swap not designated as a hedging instrument (Note 11) | Level 2 | (5) | 26,492 | — | ||||||
| Other liabilities: | ||||||||||
| Interest rate swap: | ||||||||||
| Derivatives designated as hedging instruments (Note 11) | Level 2 | (4) | — | 35,045 | ||||||
| Derivatives not designated as hedging instruments (Note 11) | Level 2 | (4) | 329 | — | ||||||
| Extended interest rate swap not designated as a hedging instrument (Note 11) | Level 2 | (5) | 13,111 | — |
| (1) | Consist of investments that are readily convertible to cash with original maturities of 90 days or less. |
| (2) | 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. |
| (3) | During the fourth quarter of fiscal year 2020, the Company recognized an impairment on its investment in the Senior Non-Convertible Preferred Stock of iQor Holdings, Inc. (“iQor”) in connection with iQor’s bankruptcy filing. The Company does not expect to recover any of the investment value and recognized the entire remaining investment of $36.4 million as a loss on securities. |
| (4) | 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. |
| (5) | The 2020 Extended Interest Rate Swaps are considered a hybrid instrument and the Company elected the fair value option for reporting. Fair value measurements are based on the contractual terms of the contract and use observable market-based inputs. The interest rate swaps are valued using a discounted cash flow analysis on the expected cash flows using observable inputs including interest rate curves and credit spreads. |
Assets Held for Sale
The following table presents the assets held for sale (in thousands):
| August 31, 2020 | August 31, 2019 | |||||||
| (in thousands) | Carrying Amount | Carrying Amount | ||||||
| Assets held for sale (1) | $ | 67,380 | $ | — |
| (1) | The fair value of assets held for sale exceeds the carrying value for $30.1 million of assets held for sale. For $37.3 million of assets held for sale, the carrying value approximates the fair value with the asset value measured using Level 2 inputs. |
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.
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, 2020 | August 31, 2019 | |||||||||||||||||
| (in thousands) | Fair Value Hierarchy | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| Notes payable and long-term debt: (Note 7) | ||||||||||||||||||
| 5.625% Senior Notes | Level 2 | (1) | $ | — | $ | — | $ | 398,886 | $ | 416,000 | ||||||||
| 4.700% Senior Notes | Level 2 | (1) | 498,659 | 537,180 | 498,004 | 525,890 | ||||||||||||
| 4.900% Senior Notes | Level 3 | (2) | 299,300 | 329,435 | 299,057 | 318,704 | ||||||||||||
| 3.950% Senior Notes | Level 2 | (1) | 495,440 | 551,930 | 494,825 | 509,845 | ||||||||||||
| 3.600% Senior Notes | Level 2 | (1) | 494,756 | 536,110 | — | — | ||||||||||||
| 3.000% Senior Notes | Level 2 | (1) | 590,162 | 611,616 | — | — |
| (1) | The fair value estimates are based upon observable market data. |
| (2) | This fair value estimate is based on the Company’s indicative borrowing cost derived from discounted cash flows. |
Refer to Note 10 - “Postretirement and Other Employee Benefits” for disclosure surrounding the fair value of the Company’s pension plan assets.
18**. Commitments and Contingencies**
Lease Agreements
The Company primarily has leases for buildings and real estate with lease terms ranging from 1 year to 36 years. Refer to Note 5 – “Leases” for the future minimum lease payments under operating and finance leases as of August 31, 2020.
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.
19**. New Accounting Guidance**
Recently Adopted Accounting Guidance
During fiscal year 2016, the FASB issued a new accounting standard revising lease accounting, which requires the Company to recognize right-of-use assets and lease liabilities on the Consolidated Balance Sheet and disclose key information regarding leasing arrangements. The accounting standard became effective for the Company in fiscal year 2020. Refer to Note 5 - “Leases” to the Consolidated Financial Statements for further details.
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 became effective for the Company beginning in fiscal year 2020. The guidance was applied using a modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
Recently Issued Accounting Guidance
During fiscal year 2016, the FASB issued an accounting standard, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net
amount expected to be collected. 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 adoption of this standard does not have a material impact on its Consolidated Financial Statements.
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 will be applied prospectively and is effective for the Company beginning in the first quarter of fiscal year 2021. The Company does not expect this new standard to have a material impact on its Consolidated Financial Statements.
During the third quarter of fiscal year 2020, the FASB issued a new accounting standard which provides guidance in accounting for contracts, hedging relationships, and other transactions that reference U.S. dollar LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are elective and were effective for the Company immediately upon issuance. The Company is currently assessing the impact of the transition from U.S. dollar LIBOR to alternative reference rates but does not expect this new standard to have a material impact 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.
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