JABIL INC - Quarter Report: 2019 February (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2019

or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-14063

 

 

 

JABIL INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		38-1886260
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10560 Dr. Martin Luther King, Jr. Street North, St. Petersburg, Florida 33716

(Address of principal executive offices) (Zip Code)

(727) 577-9749

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of March 28, 2019, there were 152,878,329 shares of the registrant’s Common Stock outstanding.

 

 

 

JABIL INC. AND SUBSIDIARIES INDEX

 

Part I – Financial Information
		Item 1.		Financial Statements
				Condensed Consolidated Balance Sheets as of February 28, 2019 and August 31, 2018			1
				Condensed Consolidated Statements of Operations for the three months and six months ended February 28, 2019 and 2018			2
				Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended February 28, 2019 and 2018			3
				Condensed Consolidated Statements of Stockholders’ Equity for the three months and six months ended February 28, 2019 and 2018			4
				Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2019 and 2018			5
				Notes to Condensed Consolidated Financial Statements			6
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37
		Item 4.		Controls and Procedures			37
Part II – Other Information
		Item 1.		Legal Proceedings			38
		Item 1A.		Risk Factors			38
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
		Item 3.		Defaults Upon Senior Securities			38
		Item 4.		Mine Safety Disclosures			38
		Item 5.		Other Information			38
		Item 6.		Exhibits			39
				Signatures			40

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

JABIL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)

 

		February 28, 2019 (Unaudited)				August 31, 2018
ASSETS
Current assets:
Cash and cash equivalents		$	749,057			$	1,257,949
Accounts receivable, net of allowance for doubtful accounts of $14,456 as of February 28, 2019 and $15,181 as of August 31, 2018			2,543,615				1,693,268
Contract assets			832,889				—
Inventories, net			3,248,273				3,457,706
Prepaid expenses and other current assets			532,223				1,141,000
Total current assets			7,906,057				7,549,923
Property, plant and equipment, net of accumulated depreciation of $3,860,332 as of February 28, 2019 and $3,646,945 as of August 31, 2018			3,279,505				3,198,016
Goodwill			627,296				627,745
Intangible assets, net of accumulated amortization of $321,965 as of February 28, 2019 and $307,178 as of August 31, 2018			274,439				279,131
Deferred income taxes			194,015				218,252
Other assets			195,282				172,574
Total assets		$	12,476,594			$	12,045,641
LIABILITIES AND EQUITY
Current liabilities:
Current installments of notes payable and long-term debt		$	175,186			$	25,197
Accounts payable			4,900,070				4,942,932
Accrued expenses			2,676,604				2,262,744
Total current liabilities			7,751,860				7,230,873
Notes payable and long-term debt, less current installments			2,482,387				2,493,502
Other liabilities			132,882				94,617
Income tax liabilities			133,066				148,884
Deferred income taxes			117,547				114,385
Total liabilities			10,617,742				10,082,261
Commitments and contingencies
Equity:
Jabil Inc. stockholders’ equity:
Preferred stock, $0.001 par value, authorized 10,000,000 shares; no shares issued and no shares outstanding			—				—
Common stock, $0.001 par value, authorized 500,000,000 shares; 259,739,745 and 257,130,145 shares issued and 152,878,329 and 164,588,172 shares outstanding as of February 28, 2019 and August 31, 2018, respectively			260				257
Additional paid-in capital			2,264,966				2,218,673
Retained earnings			1,966,100				1,760,097
Accumulated other comprehensive loss			(13,253	)			(19,399	)
Treasury stock at cost, 106,861,416 and 92,541,973 shares as of February 28, 2019 and August 31, 2018, respectively			(2,370,898	)			(2,009,371	)
Total Jabil Inc. stockholders’ equity			1,847,175				1,950,257
Noncontrolling interests			11,677				13,123
Total equity			1,858,852				1,963,380
Total liabilities and equity		$	12,476,594			$	12,045,641

See accompanying notes to Condensed Consolidated Financial Statements.

 

1

JABIL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share data)

(Unaudited)

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Net revenue		$	6,066,990			$	5,301,101			$	12,573,265			$	10,886,633
Cost of revenue			5,612,116				4,903,968				11,598,741				10,020,215
Gross profit			454,874				397,133				974,524				866,418
Operating expenses:
Selling, general and administrative			282,142				243,940				560,268				536,995
Research and development			10,155				8,344				21,298				17,453
Amortization of intangibles			7,777				9,890				15,423				19,869
Restructuring and related charges			817				5,427				6,842				16,815
Operating income			153,983				129,532				370,693				275,286
Other expense			11,757				10,485				25,307				16,367
Interest income			(4,760	)			(5,011	)			(9,139	)			(8,824	)
Interest expense			46,160				37,796				88,812				74,042
Income before income tax			100,826				86,262				265,713				193,701
Income tax expense			33,219				48,734				74,032				92,254
Net income			67,607				37,528				191,681				101,447
Net income attributable to noncontrolling interests, net of tax			253				220				727				344
Net income attributable to Jabil Inc.		$	67,354			$	37,308			$	190,954			$	101,103
Earnings per share attributable to the stockholders of Jabil Inc.:
Basic		$	0.44			$	0.21			$	1.21			$	0.58
Diluted		$	0.43			$	0.21			$	1.19			$	0.57
Weighted average shares outstanding:
Basic			154,725				174,635				158,160				175,792
Diluted			156,737				176,953				160,413				178,578

See accompanying notes to Condensed Consolidated Financial Statements.

 

2

JABIL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Net income		$	67,607			$	37,528			$	191,681			$	101,447
Other comprehensive income:
Change in foreign currency translation			12,535				24,721				12,912				20,921
Change in derivative instruments:
Change in fair value of derivatives			2,386				20,653				(16,083	)			28,396
Adjustment for net (gains) losses realized and included in net income			3,501				(9,893	)			17,686				(15,084	)
Total change in derivative instruments			5,887				10,760				1,603				13,312
Unrealized gain (loss) on available for sale securities			273				(349	)			(8,472	)			(1,814	)
Actuarial gain (loss)			—				(8	)			103				(431	)
Total other comprehensive income			18,695				35,124				6,146				31,988
Comprehensive income		$	86,302			$	72,652			$	197,827			$	133,435
Comprehensive income attributable to noncontrolling interests			253				220				727				344
Comprehensive income attributable to Jabil Inc.		$	86,049			$	72,432			$	197,100			$	133,091

See accompanying notes to Condensed Consolidated Financial Statements.

 

3

JABIL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Total stockholders’ equity, beginning balances		$	1,905,513			$	2,344,692			$	1,963,380			$	2,368,344
Common stock:
Beginning balances			259				256				257				253
Shares issued under employee stock purchase plan			1				1				1				1
Vesting of restricted stock			—				—				2				3
Ending balances			260				257				260				257
Additional paid-in capital:
Beginning balances			2,235,827				2,149,173				2,218,673				2,104,203
Shares issued under employee stock purchase plan			14,579				12,838				14,587				12,838
Vesting of restricted stock			—				—				(2	)			(3	)
Recognition of stock-based compensation			14,560				14,753				31,708				59,726
Ending balances			2,264,966				2,176,764				2,264,966				2,176,764
Retained earnings:
Beginning balances			1,911,451				1,779,335				1,760,097				1,730,893
Declared dividends			(12,705	)			(14,271	)			(25,806	)			(29,624	)
Cumulative effect adjustment for adoption of new accounting standards			—				—				40,855				—
Net income attributable to Jabil Inc.			67,354				37,308				190,954				101,103
Ending balances			1,966,100				1,802,372				1,966,100				1,802,372
Accumulated other comprehensive (loss) income:
Beginning balances			(31,948	)			51,484				(19,399	)			54,620
Other comprehensive income			18,695				35,124				6,146				31,988
Ending balances			(13,253	)			86,608				(13,253	)			86,608
Treasury stock:
Beginning balances			(2,223,673	)			(1,650,509	)			(2,009,371	)			(1,536,455	)
Purchases of treasury stock under employee stock plans			(1,489	)			(1,598	)			(11,204	)			(22,343	)
Treasury shares purchased			(145,736	)			(131,799	)			(350,323	)			(225,108	)
Ending balances			(2,370,898	)			(1,783,906	)			(2,370,898	)			(1,783,906	)
Noncontrolling interests:
Beginning balances			13,597				14,953				13,123				14,830
Net income attributable to noncontrolling interests			253				220				727				344
Acquisition of noncontrolling interests			1,112				—				1,112				—
Disposition of noncontrolling interests			(1,785	)			—				(1,785	)			—
Declared dividends to noncontrolling interests			(1,500	)			(2,920	)			(1,500	)			(2,920	)
Foreign currency adjustments attributable to noncontrolling interests			—				(2	)			—				(3	)
Ending balances			11,677				12,251				11,677				12,251
Total stockholders’ equity, ending balances		$	1,858,852			$	2,294,346			$	1,858,852			$	2,294,346

See accompanying notes to Condensed Consolidated Financial Statements.

 

4

JABIL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

		Six months ended
		February 28, 2019				February 28, 2018
Cash flows provided by (used in) operating activities:
Net income		$	191,681			$	101,447
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			381,510				382,322
Restructuring and related charges			(3,212	)			9,263
Recognition of stock-based compensation expense and related charges			32,946				59,938
Deferred income taxes			23,921				(24,535	)
Provision for allowance for doubtful accounts			5,598				17,271
Other, net			38,559				(792	)
Change in operating assets and liabilities, exclusive of net assets acquired:
Accounts receivable			(365,192	)			(1,245,493	)
Contract assets			(815,144	)			—
Inventories			225,036				(418,307	)
Prepaid expenses and other current assets			(4,895	)			(95,187	)
Other assets			(10,170	)			(19,272	)
Accounts payable, accrued expenses and other liabilities			407,127				369,346
Net cash provided by (used in) operating activities			107,765				(863,999	)
Cash flows (used in) provided by investing activities:
Acquisition of property, plant and equipment			(537,140	)			(544,401	)
Proceeds and advances from sale of property, plant and equipment			144,968				236,316
Cash paid for business and intangible asset acquisitions, net of cash			(80,778	)			(95,858	)
Cash receipts on sold receivables			96,846				1,162,184
Other, net			(13,504	)			(2,360	)
Net cash (used in) provided by investing activities			(389,608	)			755,881
Cash flows used in financing activities:
Borrowings under debt agreements			6,182,931				4,690,570
Payments toward debt agreements			(6,046,181	)			(4,555,233	)
Payments to acquire treasury stock			(350,323	)			(225,108	)
Dividends paid to stockholders			(27,422	)			(30,431	)
Net proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan			14,587				12,838
Treasury stock minimum tax withholding related to vesting of restricted stock			(11,204	)			(22,343	)
Other, net			(1,500	)			(11,237	)
Net cash used in financing activities			(239,112	)			(140,944	)
Effect of exchange rate changes on cash and cash equivalents			12,063				(61	)
Net decrease in cash and cash equivalents			(508,892	)			(249,123	)
Cash and cash equivalents at beginning of period			1,257,949				1,189,919
Cash and cash equivalents at end of period		$	749,057			$	940,796

See accompanying notes to Condensed Consolidated Financial Statements.

 

5

JABIL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the information set forth therein have been included. Jabil Inc. (the “Company”) has made certain reclassification adjustments to conform prior periods’ Condensed Consolidated Financial Statements to the current presentation. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Annual Report on Form 10-K of the Company for the fiscal year ended August 31, 2018. Results for the six months ended February 28, 2019 are not necessarily an indication of the results that may be expected for the full fiscal year ending August 31, 2019.

2. Earnings Per Share and Dividends

Earnings Per Share

The Company calculates its basic earnings per share by dividing net income attributable to the Company by the weighted average number of common shares 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 unit awards (“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 criteria 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):

 

Three months ended

Six months ended

February 28, 2019

February 28, 2018

February 28, 2019

February 28, 2018

Restricted stock units

1,348

2,476

1,348

2,354

Dividends

The following table sets forth cash dividends declared by the Company to common stockholders during the six months ended February 28, 2019 and 2018 (in thousands, except for per share data):

 

		Dividend Declaration Date		Dividend per Share				Total of Cash Dividends Declared				Date of Record for Dividend Payment		Dividend Cash Payment Date
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
Fiscal Year 2018:		October 19, 2017		$	0.08			$	14,588			November 15, 2017		December 1, 2017
		January 25, 2018		$	0.08			$	14,272			February 15, 2018		March 1, 2018

 

6

3. Inventories

Inventories consist of the following (in thousands):

 

		February 28, 2019				August 31, 2018
Raw materials		$	2,424,324			$	2,070,569
Work in process			467,496				788,742
Finished goods			422,910				659,335
Reserve for excess and obsolete inventory			(66,457	)			(60,940	)
Inventories, net		$	3,248,273			$	3,457,706

4. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

		February 28, 2019				August 31, 2018
Contract liabilities		$	583,300			$	—
Deferred income			—				691,365
Accrued compensation and employee benefits			472,621				570,400
Other accrued expenses			1,620,683				1,000,979
Accrued expenses		$	2,676,604			$	2,262,744

5. Stock-Based Compensation and Share Repurchases

The Company recognized stock-based compensation expense within selling, general and administrative expense as follows (in thousands):

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Restricted stock units and stock appreciation rights		$	13,604			$	12,952			$	28,655			$	56,459
Employee stock purchase plan			2,093				2,087				4,291				3,787
Other(1)			—				—				—				7,538
Total		$	15,697			$	15,039			$	32,946			$	67,784

 

(1)	Represents a one-time cash-settled stock award that vested on November 30, 2017.

As of February 28, 2019, the shares available to be issued under the 2011 Stock Award and Incentive Plan were 11,933,647.

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 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. During the six months ended February 28, 2019 and 2018, the Company awarded approximately 1.6 million and 1.4 million time-based restricted stock units, respectively, 0.4 million and 0.4 million performance-based restricted stock units, respectively and 0.4 million and 0.4 million market-based restricted stock units, respectively.

 

7

The following represents the stock-based compensation information for the period indicated (in thousands):

 

		Six months ended
		February 28, 2019
Unrecognized stock-based compensation expense—restricted stock units		$	66,046
Remaining weighted-average period for restricted stock units expense			1.5 years

Common Stock Outstanding

The following represents the common stock outstanding for the periods indicated:

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Common stock outstanding:
Beginning balances			157,986,896				176,305,660				164,588,172				177,727,653
Shares issued upon exercise of stock options			11,348				154				11,348				29,688
Shares issued under employee stock purchase plan			691,971				575,516				692,325				575,516
Vesting of restricted stock			219,764				220,022				1,905,927				2,694,147
Purchases of treasury stock under employee stock plans			(57,389	)			(59,708	)			(464,836	)			(784,031	)
Treasury shares purchased			(5,974,261	)			(4,978,414	)			(13,854,607	)			(8,179,743	)
Ending balances			152,878,329				172,063,230				152,878,329				172,063,230

Share Repurchases

In June 2018, the Company’s Board of Directors authorized the repurchase of up to $350.0 million of the Company’s common stock (the “2018 Share Repurchase Program”). The 2018 Share Repurchase Program expires August 31, 2019. As of February 28, 2019, 13.9 million shares had been repurchased for $350.0 million, which utilized the total amount authorized by the Board of Directors.

6. Concentration of Risk and Segment Data

Concentration of Risk

Sales of the Company’s products are concentrated among specific customers. During the six months ended February 28, 2019, the Company’s five largest customers accounted for approximately 46% of its net revenue and 78 customers accounted for approximately 90% of its net revenue. Sales to these customers were reported in the Electronics Manufacturing Services (“EMS”) and Diversified Manufacturing Services (“DMS”) operating segments.

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

Net revenue for the operating segments is attributed to the segment in which the service is performed. An operating segment’s performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net revenue less cost of revenue, segment selling, general and administrative expenses, segment research and development expenses and an allocation of corporate manufacturing expenses and selling, general and administrative expenses. Segment income does not include amortization of intangibles, stock-based compensation expense and related charges, restructuring and related charges, distressed customer charges, acquisition and integration charges, loss on disposal of subsidiaries, settlement of receivables and related charges, impairment of notes receivable and related charges, goodwill impairment charges, business interruption and impairment charges, net, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations, other expense, interest income, interest expense, income tax expense or adjustment for net income (loss) attributable to noncontrolling interests. Transactions between operating segments are generally recorded at amounts that approximate those at which we would transact with third parties.

 

8

The following table sets forth operating segment information (in thousands):

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Net revenue
EMS		$	3,804,727			$	2,870,488			$	7,307,830			$	5,732,548
DMS			2,262,263				2,430,613				5,265,435				5,154,085
		$	6,066,990			$	5,301,101			$	12,573,265			$	10,886,633
Segment income and reconciliation of income before income tax
EMS		$	88,654			$	95,283			$	172,749			$	180,993
DMS			102,405				83,313				271,970				224,823
Total segment income		$	191,059			$	178,596			$	444,719			$	405,816
Reconciling items:
Amortization of intangibles			(7,777	)			(9,890	)			(15,423	)			(19,869	)
Distressed customer charge			—				(14,706	)			—				(14,706	)
Stock-based compensation expense and related charges			(15,697	)			(15,039	)			(32,946	)			(67,784	)
Restructuring and related charges			(817	)			(5,427	)			(6,842	)			(16,815	)
Acquisition and integration charges			(12,785	)			—				(21,675	)			—
Business interruption and impairment charges, net(1)			—				(4,002	)			2,860				(11,356	)
Other expense			(11,757	)			(10,485	)			(25,307	)			(16,367	)
Interest income			4,760				5,011				9,139				8,824
Interest expense			(46,160	)			(37,796	)			(88,812	)			(74,042	)
Income before income tax		$	100,826			$	86,262			$	265,713			$	193,701

 

(1)

Charges, net of insurance proceeds of $6.1 million for the three months ended February 28, 2018, and $2.9 million and $16.4 million for the six months ended February 28, 2019 and 2018, respectively, relate to business interruption and asset impairment costs associated with damage from Hurricane Maria, which impacted our operations in Cayey, Puerto Rico.

As of February 28, 2019, the Company operated in 29 countries worldwide. Sales to unaffiliated customers are based on the Company’s location that maintains the customer relationship and transacts the external sale.

The following table sets forth, for the periods indicated, foreign source revenue expressed as a percentage of net revenue:

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Foreign source revenue			88.2	%			91.9	%			90.6	%			92.1	%

 

9

7. Notes Payable and Long-Term Debt

Notes payable and long-term debt outstanding as of February 28, 2019 and August 31, 2018 are summarized below (in thousands):

 

		Maturity Date				February 28, 2019				August 31, 2018
5.625% Senior Notes			Dec 15, 2020			$	398,441			$	397,995
4.700% Senior Notes			Sep 15, 2022				497,678				497,350
4.900% Senior Notes			Jul 14, 2023				298,935				298,814
3.950% Senior Notes			Jan 12, 2028				494,516				494,208
Borrowings under credit facilities(1)			Nov 8, 2022 and Aug 24, 2020				150,000				—
Borrowings under loans			Nov 8, 2022 and Aug 24, 2020				818,003				830,332
Total notes payable and long-term debt							2,657,573				2,518,699
Less current installments of notes payable and long-term debt							175,186				25,197
Notes payable and long-term debt, less current installments						$	2,482,387			$	2,493,502

 

(1)	As of February 28, 2019, the Company has $2.2 billion in available unused borrowing capacity under its revolving credit facilities.

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 5.625%, 4.700%, 4.900% or 3.950% Senior Notes upon a change of control. As of February 28, 2019 and August 31, 2018, the Company was in compliance with its debt covenants.

Fair Value

The estimated fair values of the Company’s publicly traded debt, including the 5.625%, 4.700% and 3.950% Senior Notes, were approximately $410.5 million, $508.0 million and $463.3 million, respectively, as of February 28, 2019. The fair value estimates are based upon observable market data (Level 2 criteria). The estimated fair value of the Company’s private debt, the 4.900% Senior Notes, was approximately $304.6 million, as of February 28, 2019. This fair value estimate is based on the Company’s indicative borrowing cost derived from discounted cash flows (Level 3 criteria). The carrying amounts of borrowings under credit facilities and under loans approximate fair value as interest rates on these instruments approximate current market rates.

8. Trade Accounts Receivable Securitization and Sale Programs

The Company regularly sells designated pools of trade accounts receivable under a foreign asset-backed securitization program, a North American asset-back securitization program and uncommitted trade accounts receivable sale programs (collectively referred to herein as the “programs”). The Company continues servicing the receivables sold and in exchange receives a servicing fee under each of the programs. Servicing fees related to each of the programs recognized during the three months and six months ended February 28, 2019 and 2018 were not material. The Company does not record a servicing asset or liability on the Condensed Consolidated Balance Sheets as the Company estimates that the fee it receives to service these receivables approximates the fair market compensation to provide the servicing activities.

Transfers of the receivables under the programs are accounted for as sales and, accordingly, net receivables sold under the programs are excluded from accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The adoption of Accounting Standards Update No. 2016-15 (“ASU 2016-15”) described in Note 14, New Accounting Guidance, resulted in a reclassification of cash flows from operating activities to investing activities in the Company’s Condensed Consolidated Statement of Cash Flows for cash receipts related to collections on the deferred purchase price receivable (i.e. beneficial interest) on asset-backed securitization transactions. In addition, the beneficial interest of $162.2 million for the six months ended February 28, 2019, and $366.3 million and $1.1 billion for the three months and six months ended February 28, 2018, respectively, obtained in exchange for securitized receivables are reported as non-cash investing activities.

 

10

Asset-Backed Securitization Programs

The Company continuously sells designated pools of trade accounts receivable under its foreign asset-backed securitization program to a special purpose entity, which in turn sells certain of the receivables to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution on a monthly basis. Effective October 1, 2018, the foreign asset-backed securitization program terms were amended and the program was extended to September 30, 2021. In connection with this amendment, there is no longer a deferred purchase price receivable for the foreign asset-backed securitization program as the entire purchase price is paid in cash when the receivables are sold.

As of October 1, 2018, approximately $734.2 million of accounts receivable sold under the foreign asset-backed securitization program was exchanged for the outstanding deferred purchase price receivable of $335.5 million. The remaining amount due to the financial institution of $398.7 million was subsequently settled for $25.2 million of cash and $373.5 million of trade accounts receivable sold to the financial institution. The previously sold trade accounts receivable were recorded at fair market value. Prior to the amendment, any portion of the purchase price for the receivables not paid in cash upon the sale occurring was recorded as a deferred purchase price receivable, which was paid from available cash as payments on the receivables were collected. The foreign asset-backed securitization program contains a guarantee of payment by the special purpose entity, in an amount equal to approximately the net cash proceeds under the program. No liability has been recorded for obligations under the guarantee as of February 28, 2019.

The special purpose entity in the foreign asset-backed securitization program is a separate bankruptcy-remote entity whose assets would be first available to satisfy the creditor claims of the unaffiliated financial institution. The Company is deemed the primary beneficiary of this special purpose entity as the Company has both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive the benefits that could potentially be significant to the entity from the transfer of the trade accounts receivable into the special purpose entity. Accordingly, the special purpose entity associated with the foreign asset-backed securitization program is included in the Company’s Condensed Consolidated Financial Statements.

The North American asset-backed securitization program was terminated on October 9, 2018 and as of this date approximately $500.0 million of accounts receivable sold under the program was exchanged for the outstanding deferred purchase price receivable of $300.0 million and $200.0 million of cash. The previously sold trade accounts receivable were recorded at fair market value.

On November 27, 2018, the Company entered into a new North American asset-backed securitization program. The Company continuously sells designated pools of trade accounts receivable under its new North American asset-backed securitization program to a special purpose entity, which in turn sells certain of the receivables to conduits administered by unaffiliated financial institutions on a monthly basis. The special purpose entity in the North American asset-backed securitization program is a wholly-owned subsidiary of the Company and is included in the Company’s Condensed Consolidated Financial Statements. There is no longer a deferred purchase price receivable for the North American asset-backed securitization program as the entire purchase price is paid in cash when the receivables are sold. Additionally, $197.0 million in receivables are pledged as collateral to the unaffiliated financial institution as of February 28, 2019.

Following is a summary of the asset-backed securitization programs and key terms:

 

		Maximum Amount of Net Cash Proceeds (in millions)(1)				Expiration Date
North American		$	390.0				November 22, 2021
Foreign		$	400.0				September 30, 2021

 

(1)	Maximum amount available at any one time.

In connection with the asset-backed securitization programs, the Company recognized the following (in millions):

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019(4)				February 28, 2018
Trade accounts receivable sold		$	1,078			$	2,057			$	1,828			$	4,449
Cash proceeds received(1)		$	1,072			$	1,507			$	1,816			$	3,895
Pre-tax losses on sale of receivables(2)		$	6			$	3			$	12			$	7
Deferred purchase price receivables as of February 28(3)		$	—			$	547			$	—			$	547

 

11

 

(1)	For the three months and six months ended February 28, 2019 and 2018, the amount primarily represented proceeds from collections reinvested in revolving-period transfers.

(2)	Recorded to other expense within the Condensed Consolidated Statements of Operations.

(3)

Recorded initially at fair value as prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets and are valued using unobservable inputs (Level 3 inputs), primarily discounted cash flows, and due to their credit quality and short-term maturity the fair values approximated book values. The unobservable inputs consist of estimated credit losses and estimated discount rates, which both have an immaterial impact on the fair value calculations.

(4)	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.

The asset-backed securitization programs require compliance with several covenants. The North American asset-based securitization program covenants include compliance with the interest ratio and debt to EBITDA ratio of the Credit Facility. The foreign asset-backed securitization program covenants include limitations on certain corporate actions such as mergers and consolidations. As of February 28, 2019 and August 31, 2018, the Company was in compliance with all covenants under the asset-backed securitization programs.

Trade Accounts Receivable Sale Programs

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

$

800.0

Uncommitted

August 31, 2022(2)

B

$

150.0

Uncommitted

November 30, 2019(3)

C

800.0

CNY

Uncommitted

June 30, 2019

D

$

100.0

Uncommitted

May 4, 2023(4)

E

$

50.0

Uncommitted

August 25, 2019

F

$

150.0

Uncommitted

January 25, 2020(5)

G

$

50.0

Uncommitted

February 23, 2023(2)

H

$

100.0

Uncommitted

August 10, 2019(6)

I

$

100.0

Uncommitted

July 21, 2019(7)

J

$

150.0

Uncommitted

February 25, 2020(8)

 

(1)	Maximum amount available at any one time.

(2)	Any party may elect to terminate the agreement upon 15 days prior notice.

(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)	The program will be automatically extended through August 10, 2023 unless either party provides 30 days notice of termination.

(7)	The program will be automatically extended through August 21, 2023 unless either party provides 30 days notice of termination.

(8)	The program will be automatically extended each year through February 23, 2024 unless either party provides 30 days notice of termination.

 

12

In connection with the trade accounts receivable sale programs, the Company recognized the following (in millions):

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Trade accounts receivable sold		$	1,719			$	1,640			$	3,553			$	2,734
Cash proceeds received		$	1,712			$	1,636			$	3,538			$	2,728
Pre-tax losses on sale of receivables(1)		$	7			$	4			$	15			$	6

 

(1)	Recorded to other expense within the Condensed Consolidated Statement of Operations.

9. Accumulated Other Comprehensive Income

The following table sets forth the changes in accumulated other comprehensive income (“AOCI”), net of tax, by component for the six months ended February 28, 2019 (in thousands):

 

		Foreign Currency Translation Adjustment				Derivative Instruments				Actuarial (Loss) Gain				Prior Service Cost				Available for Sale Securities				Total
Balance as of August 31, 2018		$	7,431			$	8,116			$	(25,021	)		$	(643	)		$	(9,282	)			(19,399	)
Other comprehensive income (loss) before reclassifications			12,912				(16,083	)			103				—				(8,472	)			(11,540	)
Amounts reclassified from AOCI			—				17,686				—				—				—				17,686
Other comprehensive income (loss)(1)			12,912				1,603				103				—				(8,472	)			6,146
Balance as of February 28, 2019		$	20,343			$	9,719			$	(24,918	)		$	(643	)		$	(17,754	)		$	(13,253	)

 

(1)

Amounts are net of tax, which are immaterial.

The following table sets forth the amounts reclassified from AOCI into the Condensed Consolidated Statements of Operations, and the associated financial statement line item, net of tax, for the periods indicated (in thousands):

 

						Three months ended								Six months ended
Comprehensive Income Components		Financial Statement Line Item				February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Unrealized (gains) losses on derivative instruments:
Foreign exchange contracts			Cost of revenue			$	3,931			$	(7,381	)		$	18,546			$	(10,060	)
Interest rate contracts			Interest expense				(430	)			(2,512	)			(860	)			(5,024	)
Total amounts reclassified from AOCI (1)(2)						$	3,501			$	(9,893	)		$	17,686			$	(15,084	)

 

(1)	The Company expects to reclassify $5.9 million into earnings during the next twelve months, which will primarily be classified as a component of cost of revenue.

(2)

Amounts are net of tax, which are immaterial for the three months and six months ended February 28, 2019. The amounts for the three months and six months ended February 28, 2018, include a reduction to income tax expense related to derivative instruments of $3.5 million and $7.0 million, respectively.

10. Commitments and Contingencies

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.

 

13

The Internal Revenue Service (“IRS”) completed its field examination of the Company’s tax returns for fiscal years 2009 through 2011 and issued a Revenue Agent’s Report (“RAR”) on May 27, 2015, which was updated on June 22, 2016. The IRS completed its field examination of the Company’s tax returns for fiscal years 2012 through 2014 and issued an RAR on April 19, 2017. The proposed adjustments in the RAR from both examination periods relate primarily to U.S. taxation of certain intercompany transactions. If the IRS ultimately prevails in its positions, the Company’s income tax payment due for the fiscal years 2009 through 2011 and 2012 through 2014 would be approximately $28.6 million and $5.3 million, respectively, after utilization of tax loss carry forwards available through fiscal year 2014. Also, the IRS has proposed interest and penalties with respect to fiscal years 2009 through 2011. The IRS may make similar claims in future audits with respect to these types of transactions. At this time, anticipating the amount of any future IRS proposed adjustments, interest and penalties is not practicable.

The Company disagrees with and intends to contest the proposed income tax payments assessed. As the final resolution of the proposed adjustments remains uncertain, the Company continues to provide for the uncertain tax positions based on the more likely than not standard. While the resolution of the issues may result in tax liabilities, interest and penalties, which may be significantly higher than the amounts accrued for these matters, management currently believes that the resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there can be no assurance that management’s beliefs will be realized.

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 $251.7 million and $293.4 million as of February 28, 2019 and August 31, 2018, respectively. The related forward foreign exchange contracts have been designated as hedging instruments and are accounted for as cash flow hedges. The forward foreign exchange contract transactions will effectively lock in the value of anticipated foreign currency denominated revenues and expenses against foreign currency fluctuations. The anticipated foreign currency denominated revenues and expenses being hedged are expected to occur between March 1, 2019 and November 30, 2019.

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 February 28, 2019 and August 31, 2018, was $3.9 billion and $3.4 billion, respectively.

The following table presents the fair values of the Company’s derivative instruments recorded in the Condensed Consolidated Balance Sheets utilized for foreign currency risk management purposes as of February 28, 2019 and August 31, 2018 (in thousands):

 

		Fair Values of Derivative Instruments
		Asset Derivatives										Liability Derivatives
		Balance Sheet Location		Fair Value as of February 28, 2019(1)				Fair Value as of August 31, 2018(1)				Balance Sheet Location		Fair Value as of February 28, 2019(1)				Fair Value as of August 31, 2018(1)
Derivatives designated as hedging instruments:
Forward foreign exchange contracts		Prepaid expenses and other current assets		$	6,560			$	225			Accrued expenses		$	1,104			$	13,364
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts		Prepaid expenses and other current assets		$	24,422			$	10,125			Accrued expenses		$	3,602			$	46,171

 

(1)	Classified as Level 2 in the fair-value hierarchy.

 

14

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.

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 from forward contracts recorded in the Condensed Consolidated Statements of Operations for the periods indicated (in thousands):

 

Derivatives Not Designated as Hedging Instruments Under ASC 815		Location of Gain on Derivatives Recognized in Net Income		Amount of Gain Recognized in Net Income on Derivatives
				Three months ended								Six months ended
				February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Forward foreign exchange contracts(1)		Cost of revenue		$	49,794			$	48,933			$	42,808			$	45,744

 

(1)

For the three months and six months ended February 28, 2019, the Company recognized $57.1 million and $52.6 million, respectively, of foreign currency losses in cost of revenue, which are offset by the gains from the forward foreign exchange contracts. During the three months and six months ended February 28, 2018, the Company recognized $41.7 million and $35.5 million, respectively, of foreign currency losses in cost of revenue, which are offset by the gains 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

During the first quarter of fiscal year 2019, the Company entered into forward interest rate swap transactions to hedge the fixed interest rate payments for an anticipated debt issuance. The forward starting swaps have an aggregate notional amount of $200.0 million and have been designated as hedging instruments and accounted for as cash flow hedges. The forward starting swaps are scheduled to expire on December 15, 2020. If the anticipated debt issuance occurs before December 15, 2020, the contracts will be terminated simultaneously with the debt issuance. The contracts will be settled with the respective counterparties on a net basis at the time of termination or expiration.

During the first quarter of fiscal year 2019, the Company entered into interest rate swap transactions to hedge the variable interest rate payments for the $500.0 million Term Loan Facility which expires on November 8, 2022 (the “2017 Term Loan Facility”). In connection with this transaction, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the one-month LIBOR. The interest rate swaps have an aggregate notional amount of $200.0 million and have been designated as hedging instruments and accounted for as cash flow hedges. The interest rate swaps were effective on October 11, 2018 and are scheduled to expire on August 31, 2020. The contracts will be settled with the respective counterparties on a net basis at each settlement date.

During fiscal year 2018, the Company entered into interest rate swap transactions to hedge the variable interest rate payments for the $350.0 million Term Loan Facility which expires on August 24, 2020 (the “2018 Term Loan Facility”). In connection with this transaction, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the three-month LIBOR. The interest rate swaps have an aggregate notional amount of $350.0 million and have been designated as hedging instruments and accounted for as cash flow hedges. The interest rate swaps were effective on August 24, 2018 and are scheduled to expire on August 24, 2020. The contracts will be settled with the respective counterparties on a net basis at each settlement date.

During fiscal year 2016, the Company entered into interest rate swap transactions to hedge the variable interest rate payments for the 2017 Term Loan Facility. In connection with this transaction, the Company pays interest based upon a fixed rate as agreed upon with the respective counterparties and receives variable rate interest payments based on the one-month LIBOR. The interest rate swaps have an aggregate notional amount of $200.0 million and have been designated as hedging instruments and accounted for as cash flow hedges. The interest rate swaps were effective on September 30, 2016 and are scheduled to expire on June 30, 2019. The contracts will be settled with the respective counterparties on a net basis at each settlement date.

 

15

During fiscal year 2016, the Company entered into forward interest rate swap transactions to hedge the fixed interest rate payments for an anticipated debt issuance (the 3.950% Senior Notes). The swaps were accounted for as a cash flow hedge and had a notional amount of $200.0 million. Concurrently with the pricing of the 3.950% Senior Notes in the second quarter of fiscal year 2018, the Company settled the swaps. The fair value of the cash received for the swaps at settlement was $17.2 million. The effective portion of the swaps is recorded in the Company’s Consolidated Balance Sheets as a component of AOCI and is amortized as a reduction to interest expense in the Company’s Consolidated Statements of Operations through January 2028.

12. Restructuring and Related Charges

Following is a summary of the Company’s restructuring and related charges (in thousands):

 

		Three months ended								Six months ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
Employee severance and benefit costs		$	3,768			$	2,012			$	8,947			$	5,989
Lease costs			—				7				9				7
Asset write-off costs			(3,396	)			2,451				(3,212	)			9,263
Other related costs			445				957				1,098				1,556
Total restructuring and related charges(1)		$	817			$	5,427			$	6,842			$	16,815

 

(1)

Includes $0.3 million and $2.1 million recorded in the EMS segment and $0.5 million and $3.3 million recorded in the DMS segment for the three months ended February 28, 2019 and 2018, respectively. Includes $4.7 million and $8.0 million recorded in the EMS segment, $2.1 million and $7.9 million recorded to the DMS segment and $0.0 million and $0.9 million of non-allocated charges for the six months ended February 28, 2019 and 2018, respectively. Except for asset write-off costs, all restructuring and related charges are cash costs.

2017 Restructuring Plan

On September 15, 2016, the Company’s Board of Directors formally approved a restructuring plan to better align the Company’s global capacity and administrative support infrastructure to further optimize organizational effectiveness. This action includes headcount reductions across the Company’s selling, general and administrative cost base and capacity realignment in higher cost locations (the “2017 Restructuring Plan”).

Upon completion of the 2017 Restructuring Plan, the Company expects to recognize approximately $195.0 million in restructuring and other related costs. The Company has incurred $187.1 million in costs-to-date as of February 28, 2019.

The table below summarizes the Company’s liability activity, primarily associated with the 2017 Restructuring Plan (in thousands):

 

		Employee Severance and Benefit Costs				Lease Costs				Asset Write-off Costs				Other Related Costs				Total
Balance as of August 31, 2018		$	18,131			$	2,684			$	—			$	522			$	21,337
Restructuring related charges			8,947				9				(3,212	)			1,098				6,842
Asset write-off charge and other non-cash activity			(240	)			—				3,212				(7	)			2,965
Cash payments			(17,804	)			(303	)			—				(1,160	)			(19,267	)
Balance as of February 28, 2019		$	9,034			$	2,390			$	—			$	453			$	11,877

 

16

13. Business Acquisitions

Fiscal year 2019

During fiscal year 2019, 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, under the terms of the Framework Agreement, the Company completed the initial closing of its acquisition of certain assets of JJMD for approximately $80.8 million in cash, which remains subject to certain post-closing adjustments. The acquisition of the JJMD assets has been accounted for as a business combination using the acquisition method of accounting. Assets acquired of $97.8 million and liabilities assumed of $17.0 million were recorded at their estimated fair values as of the acquisition date. The two subsequent closings, which are subject to customary closing conditions, are expected to occur during the second half of fiscal year 2019 and fiscal year 2020.

The Company is currently evaluating the fair values of the assets and liabilities related to this business combination. The preliminary estimates and measurements are, therefore, subject to change during the measurement period for assets acquired, liabilities assumed and tax adjustments. The results of operations were included in the Company’s condensed consolidated financial results beginning on February 25, 2019. The Company believes it is impracticable to provide pro forma information for the acquisition of the JJMD assets.

Fiscal year 2018

Acquisition

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 condensed 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.

14. New Accounting Guidance

Recently Adopted Accounting Guidance

During fiscal year 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard, which is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The accounting standard became effective for the Company in the first quarter of fiscal year 2019. The Company implemented changes to its processes, policies and internal controls to meet the impact of the new standard and disclosure requirements. Refer to Note 16 – “Revenue” to the Condensed Consolidated Financial Statements for further details.

During fiscal year 2016, the FASB issued a new accounting standard to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This guidance became effective for the Company in the first quarter of fiscal year 2019, and was applied prospectively by means of a cumulative-effect adjustment to the Consolidated Balance Sheet as of September 1, 2018 to equity investments that existed as of the date of adoption of the standard. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements; however, the impact on future periods will depend on the facts and circumstances of future transactions.

During fiscal year 2016, the FASB issued a new accounting standard to address the presentation of certain transactions within the statement of cash flows with the objective of reducing the existing diversity in practice. This standard was adopted on September 1, 2018 on a retrospective basis and resulted in a reclassification of cash flows from operating activities to investing activities in the Company’s Consolidated Statement of Cash Flows for cash receipts related to collections on the deferred purchase price receivable on asset-backed securitization transactions. The increase in cash flow from investing activities and the corresponding decrease to cash flow from operating activities upon adoption of the standard was $96.8 million and $1.2 billion for the six months ended February 28, 2019 and 2018, respectively.

 

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During fiscal year 2017, the FASB issued a new accounting standard to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new standard eliminates the exception for an intra-entity transfer of an asset other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. This guidance became effective for the Company beginning in the first quarter of fiscal year 2019. This guidance was adopted on a modified retrospective basis and an immaterial cumulative-effect adjustment was recorded, which reduced retained earnings as of September 1, 2018.

During fiscal year 2017, the FASB issued a new accounting standard which clarifies the scope of accounting for asset derecognition and adds further guidance for recognizing gains and losses from the transfer of non-financial assets in contracts with non-customers. This guidance became effective for the Company beginning in the first quarter of fiscal year 2019 coincident with the new revenue recognition guidance. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements; however, the impact on future periods will depend on the facts and circumstances of future transactions.

During fiscal year 2017, the FASB issued a new accounting standard to improve the presentation of net periodic pension benefit cost. The Company adopted the standard on September 1, 2018 on a retrospective basis which results in reclassifications for the service cost component of net periodic benefit cost from selling, general and administrative expense to cost of revenue and for the other components from selling, general and administrative expense to other expense. Prior periods have not been reclassified due to immateriality.

During the second quarter of fiscal year 2018, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company has applied SAB 118 and provided required disclosures in Note 15—“Income Taxes.”

Recently Issued Accounting Guidance

During fiscal year 2016, the FASB issued a new accounting standard revising lease accounting. The new guidance requires organizations to recognize lease assets and lease liabilities on the Consolidated Balance Sheet and disclose key information regarding leasing arrangements. This guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early application of the new standard is permitted and the standard must be adopted using a modified retrospective approach. In preparation for the adoption, the Company is implementing a new lease accounting system. The adoption of this standard will impact the Company’s Consolidated Balance Sheet. The Company is currently evaluating practical expedients and accounting policy elections, and assessing overall impacts this new standard will have on its Consolidated Financial Statements.

During fiscal year 2016, the FASB issued an accounting standard, which replaces the existing incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for the Company beginning in the first quarter of fiscal year 2021 and early adoption is permitted beginning in the first quarter of fiscal year 2020. This guidance must be applied using a modified retrospective or prospective transition method, depending on the area covered by this accounting standard. The Company is currently assessing the impact this new standard may have on its Consolidated Financial Statements.

During fiscal year 2017, the FASB issued a new accounting standard to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities by simplifying the application of hedge accounting and improving the related disclosures in its financial statements. This guidance is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The guidance must be applied using a modified retrospective approach. The adoption of this standard is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the impact on future periods will depend on the facts and circumstances of future transactions.

During fiscal year 2018, the FASB issued a new accounting standard which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company is currently assessing the impact this new standard may have on its Consolidated Financial Statements.

 

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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.

15. Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act reduced the corporate tax rate, limited or eliminated certain tax deductions, and changed the taxation of foreign earnings of U.S. multinational companies. The enacted changes include a mandatory income inclusion of the historically untaxed foreign earnings of a U.S. company’s foreign subsidiaries and will effectively tax such income at reduced tax rates (“transition tax”). During fiscal year 2018, the Company made reasonable estimates related to certain impacts of the Tax Act and, in accordance with SAB 118, recorded a net provisional income tax expense of $142.3 million for the fiscal year ended August 31, 2018. This net provisional expense was mainly comprised of $65.9 million related to the one-time transition tax inclusive of unrecognized tax benefits, $(10.5) million related to the re-measurement of the Company’s U.S. deferred tax attributes, and $85.0 million related to the foreign tax impact of a change in indefinite reinvestment assertion on certain earnings from the Company’s foreign subsidiaries.

During the first quarter of fiscal year 2019, the Company recorded an income tax benefit of $13.3 million, inclusive of unrecognized tax benefits, associated with the Tax Act. The income tax benefit was mainly related to the one-time transition tax to adjust the amount previously recorded during the fiscal year ended August 31, 2018. The adjustment to the one-time transition tax for the three months ended November 30, 2018 was primarily related to further analysis of the Company’s utilization of foreign tax credits and applicable limitations. The calculation of the one-time transition tax is based upon estimates of 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. During the three months ended February 28, 2019, the Company made no material adjustments to the net income tax expense related to the Tax Act. The Company has determined the Tax Act impacts based on the analysis, interpretations and guidance available at this time and considers the accounting for the effects of the Tax Act complete under SAB 118. There may be future adjustments based on changes in interpretations of the Tax Act, legislative updates or final regulations under the Tax Act, changes in accounting standards for income taxes, or changes in estimates we have utilized to calculate the transitional impact.

During the first quarter of fiscal year 2019, the Company elected to record the Global Intangible Low-Taxed Income effects as a period cost.

As a result of the one-time transition tax, the Company will have a substantial amount of previously taxed earnings that can be distributed to the U.S. without additional U.S. taxation. Additionally, the Tax Act provides for a 100% dividends received deduction for dividends received by U.S. corporations from 10-percent or more owned foreign corporations. During the fiscal year ended August 31, 2018, the Company recorded liabilities of $85.0 million from a change in the indefinite reinvestment assertion on certain earnings from its foreign subsidiaries, primarily associated with foreign withholding taxes that would be incurred upon such future remittances of cash. The Company intends to indefinitely reinvest the remaining earnings from the Company’s foreign subsidiaries for which a deferred tax liability has not already been recorded. The accumulated earnings are the most significant component of the basis differences which are indefinitely reinvested.

The effective tax rate of 33.0% and 27.9% during the three months and six months ended February 28, 2019, respectively, differed from the U.S. federal statutory rate of 21.0% primarily due to: (i) losses in tax jurisdictions with existing valuation allowances; and (ii) tax incentives granted to sites in Brazil, China, Malaysia, Singapore and Vietnam. In addition, the six months ended February 28, 2019 included adjustments to amounts previously recorded for the Tax Act.

The effective tax rate of 56.5% and 47.6% during the three months and six months ended February 28, 2018, respectively, differed from the blended U.S. federal statutory rate of 25.7% primarily due to the Tax Act, including the one-time transition tax and the re-measurement of the Company’s U.S. deferred tax attributes of $30.9 million, partially offset by a reduction in unrecognized tax benefits of $16.1 million for the lapse of statute in a non-U.S. jurisdiction. Other primary drivers for the difference between the effective tax rate and the blended U.S. federal statutory rate of 25.7% during the three months and six months ended February 28, 2018 are: (i) tax incentives granted to sites in Brazil, China, Malaysia, Singapore and Vietnam; and (ii) losses in tax jurisdictions with existing valuation allowances, including losses from stock-based compensation for the six months ended February 28, 2018.

16. Revenue

Effective September 1, 2018, the Company adopted ASU 2014-09, Revenue Recognition (Topic 606). The new standard is a comprehensive new revenue recognition model that requires the Company to recognize revenue in a manner which depicts the transfer of goods or services to its customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

 

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Prior to the adoption of the new standard, the Company recognized substantially all of its revenue from contracts with customers at a point in time, which was generally when the goods were shipped to or received by the customer, title and risk of ownership had passed, the price to the buyer was fixed or determinable and collectability was reasonably assured (net of estimated returns). Under the new standard, the Company will recognize revenue over time for the majority of its contracts with customers which will result in revenue for those customers being recognized earlier than under the previous guidance. Revenue for all other contracts with customers will continue to be recognized at a point in time, similar to recognition prior to the adoption of the standard.

Additionally, the new standard impacts the Company’s accounting for certain fulfillment costs, which include upfront costs to prepare for manufacturing activities that are expected to be recovered. Under the new standard, such upfront costs will be recognized as an asset and amortized on a systematic basis consistent with the pattern of the transfer of control of the products or services to which to the asset relates.

The Company adopted ASU 2014-09 using the modified retrospective method by applying the guidance to all open contracts upon adoption and recorded a cumulative effect adjustment as of September 1, 2018, net of tax, of $42.6 million. No adjustments have been made to prior periods. Following is a summary of the cumulative effect adjustment (in thousands):

 

		Balance as of August 31, 2018				Adjustments due to adoption of ASU 2014-09				Balance as of September 1, 2018
Assets
Contract assets (1)		$	—			$	591,616			$	591,616
Inventories, net (1)		$	3,457,706			$	(461,271	)		$	2,996,435
Prepaid expenses and other current assets (1)(2)		$	1,141,000			$	(37,271	)		$	1,103,729
Deferred income taxes (1)(2)		$	218,252			$	(8,325	)		$	209,927
Liabilities
Contract liabilities(2)(3)		$	—			$	690,142			$	690,142
Deferred income(2)(3)(4)		$	691,365			$	(691,365	)		$	—
Other accrued expenses (3)(4)		$	1,000,979			$	40,392			$	1,041,371
Deferred income taxes(1)		$	114,385			$	2,977			$	117,362
Equity
Retained earnings (1)(2)		$	1,760,097			$	42,602			$	1,802,699

 

(1)	Differences primarily relate to the timing of revenue recognition for over time customers and certain balance sheet reclassifications.

(2)	Differences primarily relate to the timing of recognition and recovery of fulfillment costs and certain balance sheet reclassifications.

(3)	Included within accrued expenses on the Condensed Consolidated Balance Sheets.

(4)	Differences included in contract liabilities as of September 1, 2018.

Significant Judgments

The Company is one of the leading providers of worldwide 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 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.

 

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