JABIL INC. Overview
We are one of the leading providers of worldwide manufacturing services and solutions. We provide comprehensive electronics design, production and product management services to companies in various industries and end markets. Our services enable our customers to reduce manufacturing costs, improve supply-chain management, reduce inventory obsolescence, lower transportation costs and reduce product fulfillment time. Our manufacturing and supply chain management services and solutions include innovation, design, planning, fabrication and assembly, delivery and managing the flow of resources and products. We derive substantially all of our revenue from production and product management services (collectively referred to as "manufacturing services"), which encompass the act of producing tangible components that are built to customer specifications and are then provided to the customer. We serve our customers primarily through dedicated business units that combine highly automated, continuous flow manufacturing with advanced electronic design and design for manufacturability. We depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our net revenue, which in turn depends upon their growth, viability and financial stability. Based on net revenue, for the six months endedFebruary 29, 2020 , our largest customers include Amazon.com, Inc., Apple, Inc., Cisco Systems, Inc., Hewlett-Packard Company, Ingenico Group, Johnson and Johnson,LM Ericsson Telephone Company , NetApp, Inc., SolarEdge Technologies Inc., and Valeo S.A. We conduct our operations in facilities that are located worldwide, including but not limited to,China ,Ireland ,Malaysia ,Mexico ,Singapore andthe United States . We derived a substantial majority, 82.6% and 82.2%, of net revenue from our international operations for the three months and six months endedFebruary 29, 2020 . Our global manufacturing production sites allow customers to manufacture products simultaneously in the optimal locations for their products. Our global presence is key to assessing and executing on our business opportunities. We have two reporting segments: Electronics Manufacturing Services ("EMS") and Diversified Manufacturing Services ("DMS"), which are organized based on the economic profiles of the services performed, including manufacturing capabilities, market strategy, margins, return on capital and risk profiles. Our EMS segment is focused around leveraging IT, supply chain design and engineering, technologies largely centered on core electronics, utilizing our large scale manufacturing infrastructure and our ability to serve a broad range of end markets. Our EMS segment is a high volume business that produces product 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. Our DMS segment is focused on providing engineering solutions, with an emphasis on material sciences, technologies and healthcare. Our DMS includes customers primarily in the edge devices and accessories, healthcare, mobility and packaging industries. We monitor the current economic environment and its potential impact on both the customers we serve as well as our end-markets and closely manage our costs and capital resources so that we can respond appropriately as circumstances change. Beginning in January of 2020, concerns related to the novel strain of coronavirus, that originated inWuhan, China , ("COVID-19") caused a disruption to our business. While customer demand for our services remained strong, our operations and our ability to satisfy customer orders were negatively impacted due to both workforce and supply chain constraints as a result of virus containment efforts that were undertaken inChina . During the three months endedFebruary 29, 2020 , we incurred approximately$53.0 million in direct costs associated with the COVID-19 outbreak, primarily due to incremental and idle labor costs leading to a reduction in factory utilization as a result of the travel disruptions and governmental restrictions. Additionally, certain of the Company's suppliers inChina were similarly impacted leading to supply chain constraints. As COVID-19 has spread to other jurisdictions and been declared a global pandemic, the full extent of this outbreak, the related governmental, business and travel restrictions in order to contain this virus are continuing to evolve globally. Accordingly, there is significant uncertainty related to the ultimate impact that this global pandemic will have on the results of our operations. For example, virus containment efforts (as a result of governmental actions or policies or other initiatives) could lead to reductions in capacity utilization levels and or facility closures under which we would expect to incur additional direct costs and lost revenue. If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers. Our performance is subject to global economic conditions, as well as their impacts on levels of consumer spending and the production of goods. These current conditions are significantly impacted by COVID-19, have had a negative impact on our results of operations during the second quarter of fiscal year 2020 and will continue to have a negative impact on our operations over the next fiscal quarter and likely beyond. See Risk Factors, "The effect of COVID-19 on our operations and the operations 26
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of our customers, suppliers and logistics providers will have a material, adverse impact on our financial condition and results of operations." Summary of Results The following table sets forth, for the three months and six months endedFebruary 29, 2020 andFebruary 28, 2019 , certain key operating results and other financial information (in thousands, except per share data): Three months ended Six months ended February 29, February 28, February 29, 2020 February 28, 2019 2020 2019 Net revenue$ 6,125,083 $ 6,066,990$ 13,630,781 $ 12,573,265 Gross profit $ 430,125 $ 454,874$ 983,964 $ 974,524 Operating income $ 90,630 $ 153,983$ 243,409 $ 370,693 Net (loss) income attributable to Jabil Inc. $ (3,283 ) $ 67,354$ 37,139 $ 190,954 (Loss) earnings per share-basic $ (0.02 ) $ 0.44$ 0.24 $ 1.21 (Loss) earnings per share-diluted $ (0.02 ) $ 0.43$ 0.24 $ 1.19 Key Performance Indicators Management regularly reviews financial and non-financial performance indicators to assess the Company's operating results. Changes in our operating assets and liabilities are largely affected by our working capital requirements, which are dependent on the effective management of our sales cycle as well as timing of payments. Our sales cycle measures how quickly we can convert our manufacturing services into cash through sales. We believe the metrics set forth below are useful to investors in measuring our liquidity as future liquidity needs will depend on fluctuations in levels of inventory, accounts receivable and accounts payable. The following table sets forth, for the quarterly periods indicated, certain of management's key financial performance indicators: Three months ended November February 29, 2020 30, 2019 August 31, 2019 May 31, 2019 Sales cycle(1) 30 days 23 days 19 days 27 days Inventory turns (annualized)(2) 5 turns 6 turns 6 turns 6 turns Days in accounts receivable(3) 34 days 43 days 38 days 39 days Days in inventory(4) 70 days 57 days 58 days 64 days Days in accounts payable(5) 74 days 77 days 77 days 76 days
(1) The sales cycle is calculated as the sum of days in accounts receivable and
days in inventory, less the days in accounts payable; accordingly, the
variance in the sales cycle quarter over quarter is a direct result of
changes in these indicators.
(2) Inventory turns (annualized) are calculated as 360 days divided by days in
inventory.
(3) Days in accounts receivable is calculated as accounts receivable, net,
divided by net revenue multiplied by 90 days. During the three months ended
timing of collections in the second quarter. During the three months ended
prior sequential quarter was primarily due to an increase in accounts
receivable, primarily driven by higher sales and timing of collections.
(4) Days in inventory is calculated as inventory and contract assets divided by
cost of revenue multiplied by 90 days. During the three months ended
February 29, 2020 , the increase is primarily driven by idle capacity and
supply chain constraints, largely in China due to COVID-19. During the
three months ended August 31, 2019 , the decrease in days in inventory fromthe prior sequential quarter was primarily due to increased sales activity
during the quarter.
(5) Days in accounts payable is calculated as accounts payable divided by cost
of revenue multiplied by 90 days.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements and related
disclosures in conformity with U.S. generally accepted accounting principles
("U.S. GAAP") requires management to make estimates and judgments that affect
our reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates and assumptions based upon historical experience and
various other factors and circumstances. Management believes that our estimates
and assumptions are reasonable under the circumstances; however, actual results
may vary from these estimates and assumptions under different future
circumstances. For further discussion of our significant accounting policies,
refer to Note 1 - "Description of Business and Summary of Significant Accounting
Policies" to the Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Critical
Accounting Policies and Estimates" in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2019 .
Recent Accounting Pronouncements
See Note 19 - "New Accounting Guidance" to the Condensed Consolidated Financial
Statements for a discussion of recent accounting guidance.
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Results of OperationsNet Revenue Generally, we assess revenue on a global customer basis regardless of whether the growth is associated with organic growth or as a result of an acquisition. Accordingly, we do not differentiate or separately report revenue increases generated by acquisitions as opposed to existing business. In addition, the added cost structures associated with our acquisitions have historically been relatively insignificant when compared to our overall cost structure. The distribution of revenue across our segments has fluctuated, and will continue to fluctuate, as a result of numerous factors, including the following: fluctuations in customer demand; efforts to diversify certain portions of our business; business growth from new and existing customers; specific product performance; and any potential termination, or substantial winding down, of significant customer relationships. Three months ended Six months ended (dollars in millions) February 29, 2020 February 28, 2019 Change February 29, 2020 February 28, 2019 Change Net revenue $ 6,125.1 $ 6,067.0 1.0 % $ 13,630.8 $ 12,573.3 8.4 % Net revenue increased during the three months endedFebruary 29, 2020 , compared to the three months endedFebruary 28, 2019 . Specifically, the EMS segment revenues increased 1% primarily due to (i) a 6% increase in revenues from existing customers within our cloud business, (ii) a 3% increase in revenues from existing customers within our capital equipment business and (iii) a 2% increase in revenues spread across various industries within the EMS segment. The increase is partially offset by (i) an 8% decrease from existing customers within our networking and telecommunications business and (ii) a 2% decrease in revenues spread across various industries within the EMS segment. DMS segment revenues increased 1% due to a 17% increase in revenues from new and existing customers in our healthcare and packaging businesses. The increase is partially offset by (i) a 15% decrease in revenue from customers within our mobility and edge devices and accessories businesses as our ability to meet customer demand was greatly diminished as COVID-19 containment efforts were implemented inChina and (ii) a 1% decrease in revenues spread across various industries within the DMS segment. Net revenue increased during the six months endedFebruary 29, 2020 , compared to the six months endedFebruary 28, 2019 . Specifically, the EMS segment revenues increased 13% primarily due to (i) a 16% increase in revenues from existing customers within our cloud business, (ii) a 2% increase in revenues from existing customers within our capital equipment business and (iii) a 3% increase in revenues spread across various industries within the EMS segment. The increase is partially offset by (i) a 7% decrease from existing customers within our networking and telecommunications business and (ii) a 1% decrease from existing customers within our computing and storage business. DMS segment revenues increased 2% due to a 14% increase in revenues from new and existing customers in our healthcare and packaging businesses. The increase is partially offset by a 12% decrease in revenue from customers within our mobility and edge devices and accessories businesses due to: (i) our ability to meet customer demand, which was greatly diminished as COVID-19 containment efforts were implemented inChina during the second quarter of fiscal year 2020 and (ii) decreased end user product demand and end market dynamics in the first quarter of fiscal year 2020. The following table sets forth, for the periods indicated, revenue by segment expressed as a percentage of net revenue: Three months ended Six months ended February 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019 EMS 63 % 63 % 61 % 58 % DMS 37 % 37 % 39 % 42 % Total 100 % 100 % 100 % 100 %
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 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019
Foreign source revenue 82.6 % 88.2 % 82.2 % 90.6 %
Gross Profit
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Three months ended Six months ended
(dollars in millions) February 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019
Gross profit $ 430.1 $ 454.9 $ 984.0 $ 974.5
Percent of net revenue 7.0 % 7.5 % 7.2 % 7.8 %
Gross profit as a percentage of net revenue decreased for the three months ended
Gross profit as a percentage of net revenue decreased for the six months endedFebruary 29, 2020 , compared to the six months endedFebruary 28, 2019 , primarily due to an increase of$46.7 million in incremental and idle labor costs associated with travel disruptions and governmental restrictions, largely related to the COVID-19 outbreak. Additionally, gross profit as a percent of revenue decreased for the EMS segment largely due to product mix and weakness in the capital equipment business during the first quarter. The decrease was partially offset by an increase in the DMS segment in the first quarter due to improved profitability across the various businesses. Selling, General and Administrative Three months ended Six months ended (dollars in millions) February 29, 2020 February 28, 2019 Change February 29, 2020 February 28, 2019 Change Selling, general and administrative$ 285.0 $ 282.1$ 2.9 $ 613.9 $ 560.3$ 53.6 Selling, general and administrative expenses increased during the three months endedFebruary 29, 2020 , compared to the three months endedFebruary 28, 2019 . The increase is predominantly due to (i)$6.3 million in costs related to the COVID-19 outbreak, including personal protection equipment and (ii) a$2.2 million increase in salary and salary related expenses and other costs primarily to support new business growth and development and our strategic collaboration with a healthcare company. The increase is partially offset by (i) a$5.0 million decrease in acquisition and integration charges related to our strategic collaboration with a healthcare company and (ii) a$0.6 million decrease in stock-based compensation expense. Selling, general and administrative expenses increased during the six months endedFebruary 29, 2020 , compared to the six months endedFebruary 28, 2019 . The increase is predominantly due to (i) a$32.7 million increase in salary and salary related expenses and other costs primarily to support new business growth and development and our strategic collaboration with a healthcare company, (ii) a$12.4 million increase in stock-based compensation expense, (iii)$6.3 million in costs related to the COVID-19 outbreak, including personal protection equipment and (iv) a$2.2 million increase in acquisition and integration charges related to our strategic collaboration with a healthcare company. Research and Development Three months ended Six months ended (dollars in millions) February 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019 Research and development $ 11.3 $ 10.2 $ 22.1 $ 21.3 Percent of net revenue 0.2 % 0.2 % 0.2 % 0.2 % Research and development expenses remained consistent as a percentage of net revenue during the three months and six months endedFebruary 29, 2020 , compared to the three months and six months endedFebruary 28, 2019 . Amortization of Intangibles Three months ended Six months ended (dollars in February 29, February 29, millions) 2020 February 28, 2019 Change 2020 February 28, 2019 Change Amortization of intangibles $ 13.6 $ 7.8$ 5.8 $ 29.7 $ 15.4$ 14.3 29
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Amortization of intangibles increased during the three months and six months endedFebruary 29, 2020 , compared to the three months and six months endedFebruary 28, 2019 , primarily driven by amortization related to the Nypro trade name, which was reclassified to a definite-lived intangible asset during the fourth quarter of fiscal year 2019 as a result of our decision to rebrand. As such, this trade name was assigned a four-year estimated useful life and is being amortized on an accelerated basis. Restructuring and Related Charges Following is a summary of the Company's restructuring and related charges (in millions): Three months ended Six months ended February 29, February 29, 2020(2) February 28, 2019(3) 2020(2) February 28, 2019(3) Employee severance and benefit costs $ 8.0 $ 3.8 $ 26.8 $ 8.9 Lease costs 6.2 - 6.5 - Asset write-off costs 9.1 (3.4 ) 25.4 (3.2 ) Other costs 6.3 0.4 16.2 1.1 Total restructuring and related charges(1)$ 29.6 $ 0.8 $ 74.9 $ 6.8
(1) Includes
million and $0.5 million recorded in the DMS segment and $0.4 million and
$0.0 million of non-allocated charges for the three months ended
February 29, 2020 and February 28, 2019 , respectively. Includes $32.1
million and $4.7 million recorded in the EMS segment, $39.7 million and
of non-allocated charges for the six months ended
restructuring and related charges are cash costs.
(2) Primarily relates to the 2020 Restructuring Plan.
(3) Primarily relates to the 2017 Restructuring Plan.
2020 Restructuring Plan OnSeptember 20, 2019 , our Board of Directors formally approved a restructuring plan to realign our global capacity support infrastructure, particularly in our mobility footprint inChina , in order to optimize organizational effectiveness. This action includes headcount reductions and capacity realignment (the "2020 Restructuring Plan"). The 2020 Restructuring Plan reflects our intention only and restructuring decisions, and the timing of such decisions, at certain locations are still subject to consultation with our employees and their representatives. We currently expect to recognize approximately$85.0 million in pre-tax restructuring and other related costs primarily over the course of our fiscal year 2020. The charges relating to the 2020 Restructuring Plan are currently expected to result in cash expenditures in the range of approximately$30.0 million to$40.0 million that will be payable over the course of our fiscal years 2020 and 2021. The exact timing of these charges and cash outflows, as well as the estimated cost ranges by category type, have not been finalized. This information will be subject to the finalization of timetables for the transition of functions, consultation with employees and their representatives as well as the statutory severance requirements of the particular jurisdictions impacted, and the amount and timing of the actual charges may vary due to a variety of factors. Our estimates for the charges discussed above exclude any potential income tax effects. The 2020 Restructuring Plan, once complete, is expected to yield annualized cost savings beginning in fiscal year 2021 of approximately$40.0 million . We expect cost savings of$25.0 million during fiscal year 2020. See Note 13 - "Restructuring and Related Charges" to the Condensed Consolidated Financial Statements for further discussion of restructuring and related charges for the 2020 Restructuring Plan. Impairment on Securities Three months ended Six months ended February 29, February 29, (dollars in millions) 2020 February 28, 2019 Change 2020 February 28, 2019 Change Impairment on securities$ 12.2 $ -$ 12.2 $ 12.2 $ -$ 12.2 30
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The increase in impairment on securities for the three months and six months endedFebruary 29, 2020 , compared to the three months and six months endedFebruary 28, 2019 is due to a non-cash impairment charge in connection with the sale of an investment in the optical networking segment. Other Expense Three months ended Six months ended February 29, February 29, (dollars in millions) 2020 February 28, 2019 Change 2020 February 28, 2019 Change Other expense $ 8.5 $ 11.8$ (3.3 ) $ 19.7 $ 25.3$ (5.6 ) Other expense decreased for the three months endedFebruary 29, 2020 , compared to the three months endedFebruary 28, 2019 , primarily due to: (i)$2.3 million related to a decrease in fees associated with the utilization of the trade accounts receivable sales programs and (ii)$2.6 million related to lower net periodic benefit costs. The decrease was partially offset by$1.6 million of other expense. Other expense decreased for the six months endedFebruary 29, 2020 , compared to the six months endedFebruary 28, 2019 , primarily due to: (i)$4.6 million related to a decrease in fees associated with the utilization of the trade accounts receivable sales programs and fees incurred for the amendment of the foreign asset-backed securitization program and the new North American asset-backed securitization program in fiscal year 2019 and (ii)$4.3 million related to lower net periodic benefit costs. The decrease was partially offset by$3.3 million of other expense. Interest Income Three months ended Six months ended February 29, (dollars in millions) 2020 February 28, 2019 Change
4.8 $ 0.5 $ 11.3 $ 9.1 $ 2.2
Interest income remained relatively consistent during the three months ended
February 29, 2020 , compared to the three months ended February 28, 2019 .
Interest income increased during the six months ended February 29, 2020 ,
compared to the six months ended February 28, 2019 , due to increased cash
equivalents (investments that are readily convertible to cash with maturity
dates of 90 days or less).
Interest Expense
Three months ended Six months ended
February 29, February 29,
(dollars in millions) 2020 February 28, 2019 Change 2020 February 28, 2019 Change
Interest expense $ 46.2 $ 46.2 $ - $ 91.1 $ 88.8 $ 2.3
Interest expense remained consistent during the three months ended February 29,
2020 , compared to the three months ended February 28, 2019 .
Interest expense increased during the six months ended February 29, 2020 ,
compared to the six months ended February 28, 2019 , due to additional borrowings
on our credit facilities and commercial paper program, partially offset by lower
interest rates.
Income Tax Expense
Three months ended Six months ended
February 29, 2020 February 28, 2019
Change
33.0 % 75.9 % 71.0 % 27.9 % 43.1 %
The effective income tax rate increased for the three months and six months
ended
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adjustments related to the Tax Cuts and Jobs Act of 2017 (the "Tax Act") for the six months endedFebruary 28, 2019 , including a$13.3 million income tax benefit recorded during the three months endedNovember 30, 2018 . Non-GAAP (Core) Financial Measures The following discussion and analysis of our financial condition and results of operations include certain non-GAAP financial measures as identified in the reconciliations below. The non-GAAP financial measures disclosed herein do not have standard meaning and may vary from the non-GAAP financial measures used by other companies or how we may calculate those measures in other instances from time to time. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance withU.S. GAAP. Also, our "core" financial measures should not be construed as an indication by us that our future results will be unaffected by those items that are excluded from our "core" financial measures. Management believes that the non-GAAP "core" financial measures set forth below are useful to facilitate evaluating the past and future performance of our ongoing manufacturing operations over multiple periods on a comparable basis by excluding the effects of the 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, impairment on securities, restructuring of securities loss, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations and certain other expenses, net of tax and certain deferred tax valuation allowance charges. Among other uses, management uses non-GAAP "core" financial measures to make operating decisions, assess business performance and as a factor in determining certain employee performance when evaluating incentive compensation. We determine the tax effect of the items excluded from "core" earnings and "core" diluted earnings per share based upon evaluation of the statutory tax treatment and the applicable tax rate of the jurisdiction in which the pre-tax items were incurred, and for which realization of the resulting tax benefit, if any, is expected. In certain jurisdictions where we do not expect to realize a tax benefit (due to existing tax incentives or a history of operating losses or other factors resulting in a valuation allowance related to deferred tax assets), a reduced or 0% tax rate is applied. We are reporting "core" operating income, "core" earnings and adjusted free cash flow to provide investors with an additional method for assessing operating income and earnings, by presenting what we believe are our "core" manufacturing operations. A significant portion (based on the respective values) of the items that are excluded for purposes of calculating "core" operating income and "core" earnings also impacted certain balance sheet assets, resulting in a portion of an asset being written off without a corresponding recovery of cash we may have previously spent with respect to the asset. In the case of restructuring and related charges, we may make associated cash payments in the future. In addition, although, for purposes of calculating "core" operating income and "core" earnings, we exclude stock-based compensation expense (which we anticipate continuing to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholders' ownership interest. We encourage you to consider these matters when evaluating the utility of these non-GAAP financial measures. Adjusted free cash flow is defined as net cash provided by (used in) operating activities plus cash receipts on sold receivables less net capital expenditures (acquisition of property, plant and equipment less proceeds and advances from the sale of property, plant and equipment). We report adjusted free cash flow as we believe this non-GAAP financial measure is useful to investors in measuring our ability to generate cash internally and fund future growth and to provide a return to shareholders. Included in the tables below are reconciliations of the non-GAAP financial measures to the most directly comparableU.S. GAAP financial measures as provided in our Condensed Consolidated Financial Statements: Reconciliation ofU.S. GAAP Financial Results to Non-GAAP Measures 32
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Three months ended Six months ended
(in thousands, except for per
share data) February 29, 2020 February 28, 2019 February 29, 2020 February 28, 2019
Operating income (U.S. GAAP) $ 90,630 $ 153,983 $ 243,409 $ 370,693
Amortization of intangibles 13,577 7,777 29,717 15,423
Stock-based compensation expense
and related charges 15,109 15,697 45,332 32,946
Restructuring and related
charges 29,604 817 74,855 6,842
Distressed customer charge (1) - - 14,963 -
Net periodic benefit cost (2) 2,776 - 4,601 -
Business interruption and
impairment charges, net(3) - - - (2,860 )
Acquisition and integration
charges(4) 7,752 12,785 23,886 21,675
Adjustments to operating income 68,818 37,076 193,354 74,026
Core operating income (Non-GAAP) $ 159,448 $ 191,059
$ 436,763 $ 444,719 Net (loss) income attributable to Jabil Inc. (U.S. GAAP) $ (3,283 ) $ 67,354 $ 37,139 $ 190,954 Adjustments to operating income 68,818 37,076 193,354 74,026 Impairment on securities 12,205 - 12,205 - Net periodic benefit cost(2) (2,776 ) - (4,601 ) - Adjustments for taxes(5) 3,091 (4,219 ) 3,588 (17,962 ) Core earnings (Non-GAAP) $ 78,055 $ 100,211 $ 241,685 $ 247,018 Diluted (loss) earnings per share (U.S. GAAP) $ (0.02 ) $ 0.43 $ 0.24 $ 1.19 Diluted core earnings per share (Non-GAAP) $ 0.50 $ 0.64 $ 1.55 $ 1.54 Diluted weighted average shares outstanding (U.S. GAAP) 152,058 156,737 156,171 160,413 Diluted weighted average shares outstanding (Non-GAAP) 155,714 156,737 156,171 160,413
(1) Charges relate to accounts receivable and inventory charges for certain
distressed customers primarily in the renewable energy sector.
(2) Following the adoption of Accounting Standards Update 2017-07, Compensation
- Retirement Benefits (Topic 715) ("ASU 2017-07"), pension service cost is
recognized in cost of revenue and all other components of net periodic
benefit cost, including return on plan assets, are presented in other
expense. We are reclassifying the pension components in other expense to
core operating income as we assess operating performance, inclusive of all
components of net periodic benefit cost, with the related revenue. There is
no impact to core earnings or diluted core earnings per share for this
adjustment.
(3) Charges, net of insurance proceeds of
costs associated with damage from Hurricane Maria, which impacted our
operations in Cayey, Puerto Rico .
(4) Charges related to our strategic collaboration with Johnson & Johnson
Medical Devices Companies ("JJMD").
(5) The six months ended
benefit for the effects of the Tax Act recorded during the three months
ended
Adjusted Free Cash Flow
Six months ended
(in thousands) February 29, 2020
107,765
Cash receipts on sold receivables - 96,846
Acquisition of property, plant and equipment (448,765 ) (537,140 )
Proceeds and advances from sale of property, plant and equipment
36,624 144,968
Adjusted free cash flow (Non-GAAP) $ (327,975 ) $ (187,561 )
(1) In fiscal year 2019, the adoption of Accounting Standards Update ("ASU")
2016-15, "Classification of Certain Cash Receipts and Cash Payments"
resulted in a reclassification of cash flows from operating activities to
investing activities for cash receipts for the deferred purchase price
receivable on asset-backed securitization transactions. The adoption of
this standard does not reflect a change in the underlying business oractivities. The effects of this change are applied retrospectively to all
prior periods.
Acquisitions and Expansion
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 our existing relationship. The strategic collaboration
expands our medical device manufacturing portfolio, diversification and
capabilities.
On February 25, 2019 and April 29, 2019 , under the terms of the Framework
Agreement, we completed the initial and second closings, respectively, of our
acquisition of certain assets of JJMD. The preliminary aggregate purchase price
paid for the initial and second closings was approximately $166.2 million in
cash. For the initial and second closings, total assets acquired of $172.3
million and total liabilities assumed of $6.1 million were recorded at their
estimated fair values as of the acquisition dates.
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OnSeptember 30, 2019 , under the terms of the Framework Agreement, we completed the third closing of our acquisition of certain assets of JJMD. The preliminary aggregate purchase price paid for the third closing was approximately$111.8 million in cash, which remains subject to certain post-closing adjustments based on conditions within the Framework Agreement. For the third closing, total assets acquired of$199.7 million , including$83.2 million in contract assets,$35.1 million in inventory and$70.4 million in goodwill, and total liabilities assumed of$87.9 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 acquisition of the JJMD assets have been accounted for as separate business combinations for each closing using the acquisition method of accounting. We are currently evaluating the fair values of the assets and liabilities related to the second and third closings of these business combinations. 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 our consolidated financial results beginning onFebruary 25, 2019 for the initial closing,April 29, 2019 for the second closing andSeptember 30, 2019 for the third closing. We believe it is impracticable to provide pro forma information for the acquisition of the JJMD assets. Liquidity and Capital Resources We believe that our level of liquidity sources, which includes available borrowings under our revolving credit facilities and commercial paper program, additional proceeds available under our asset-backed securitization programs and under our uncommitted trade accounts receivable sale programs, cash on hand, funds provided by operations and the access to the capital markets, will be adequate to fund our capital expenditures, the payment of any declared quarterly dividends, approved share repurchase programs, any potential acquisitions and our working capital requirements for the next 12 months. Despite the impacts of the COVID-19 pandemic on our ability to estimate capital expenditures for fiscal year 2020, we have historically been successful in balancing capital expenditures commensurate with customer demand and would expect to be able to do so in the future. We continue to assess our capital structure and evaluate the merits of redeploying available cash. Certain of our trade accounts receivable sale programs expire or are subject to termination provisions within the 2020 calendar year. In addition, our 5.625% Senior Notes mature onDecember 15, 2020 . While we expect to renew such trade accounts receivable sale programs and refinance our Senior Notes, market conditions, including the implications of the COVID-19 pandemic, at the time our current programs expire and debt matures, respectively, may create challenges in doing so, such as incurring a higher cost of capital. Cash and Cash Equivalents As ofFebruary 29, 2020 , we had approximately$696.7 million in cash and cash equivalents. As our growth remains predominantly outside ofthe United States , a significant portion of such cash and cash equivalents are held by our foreign subsidiaries. Most of our cash and cash equivalents as ofFebruary 29, 2020 could be repatriated tothe United States without potential tax consequences. Notes Payable and Credit Facilities Following is a summary of principal debt payments and debt issuance for our notes payable and credit facilities: 34
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Borrowings Total notes
under Borrowings payable
5.625% 4.700% 4.900% 3.950% revolving under Borrowings and
Senior Senior Senior Senior 3.600% Senior credit commercial paper under credit
(in thousands) Notes Notes Notes Notes Notes(1) facilities(2)(3) program(4) loans(2) facilities
Balance as of
August 31, 2019 $ 398,886 $ 498,004 $ 299,057 $ 494,825 $ - $ - $ - $ 805,693 $ 2,496,465
Borrowings - - - - 499,165 4,026,532 237,661 300,000 5,063,358
Payments - - - - - (4,026,532 ) - (806,356 ) (4,832,888 )
Other 446 328 121 307 (4,695 ) - - 758 (2,735 )
Balance as of
February 29,
2020 $ 399,332 $ 498,332 $ 299,178 $ 495,132 $ 494,470 $ - $ 237,661 $ 300,095 $ 2,724,200
Jan 22, 2023 and Jan 22,
Maturity Date Dec 15, 2020 Sep 15, 2022 Jul 14, 2023 Jan 12, 2028 Jan 15, 2030 2025(2)(3) (4) Jan 22, 2025(2)
Original
Facility/ $500.0 Maximum Capacity
$500.0 million million$3.3 billion (2)(3) (4)$301.7 million (2)
(1) On
Senior Notes due 2030 (the "3.600% Senior Notes"). The net proceeds from
the offering were used for the repayment of term loan indebtedness.
(2) On
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
Facility"). Interest and fees on the Credit Facility advances are based on
our non-credit enhanced long-term senior unsecured debt rating as
determined by
and Fitch Ratings. In connection with our entry into the Credit Facility,
we terminated our amended and restated five-year credit agreement dated
During the three months endedFebruary 29, 2020 , the interest rates on the Revolving Credit Facility ranged from 2.5% to 3.0% and the Term Loan Facility ranged from 2.9% to 3.2%. 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. (3) As ofFebruary 29, 2020 , we had$3.1 billion in available unused borrowing capacity under our revolving credit facilities, net of outstanding commercial paper borrowings.
(4) We have a borrowing capacity of up to
paper program. The revolving credit facility supports commercial paper
outstanding, if any. As of
paper has maturities of 90 days or less. During the three months ended
ranged from 2.0% to 2.6%.
We have a shelf registration statement with theSEC registering the potential sale of an indeterminate amount of debt and equity securities in the future to augment our liquidity and capital resources. Our Senior Notes and our credit facilities contain various financial and nonfinancial covenants. A violation of these covenants could negatively impact our liquidity by restricting our ability to borrow under the notes payable and credit facilities and potentially causing acceleration of amounts due under these notes payable and credit facilities. As ofFebruary 29, 2020 , we were in compliance with our debt covenants. Refer to Note 5 - "Notes Payable and Long-Term Debt" to the Condensed Consolidated Financial Statements for further details. Asset-Backed Securitization Programs We continuously sell designated pools of trade accounts receivable, at a discount, under our foreign asset-backed securitization program and our North American asset-backed securitization program to special purpose entities, which in turn 35
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sell certain of the foreign asset-backed receivables to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution and certain of the North American asset-backed receivables to conduits administered by an unaffiliated financial institution on a monthly basis. 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 ofFebruary 29, 2020 . 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 ofFebruary 29, 2020 . Following is a summary of our asset-backed securitization programs and key terms: Maximum Amount of Expiration Net Cash Proceeds (in millions)(1) 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 our asset-backed securitization programs, during the three months and six months endedFebruary 29, 2020 , we sold$1.1 billion and$2.3 billion , respectively, of trade accounts receivable and we received cash proceeds of$1.1 billion and$2.2 billion , respectively. As ofFebruary 29, 2020 , we had up to$76.3 million in available liquidity under our asset-backed securitization programs. Our asset-backed securitization programs contain various financial and nonfinancial covenants. As ofFebruary 29, 2020 andAugust 31, 2019 , we were in compliance with all covenants under our asset-backed securitization programs. Refer to Note 6 - "Asset-Backed Securitization Programs" to the Condensed Consolidated Financial Statements for further details on the programs. Trade Accounts Receivable Sale Programs Following is a summary of the trade accounts receivable sale programs with unaffiliated financial institutions. Under the programs we may elect to sell receivables and the unaffiliated financial institutions may elect to purchase, at a discount, on an ongoing basis: Maximum Amount Type of Expiration Program (in millions)(1) Facility Date A $ 500.0 Uncommitted December 5, 2020(2) B $ 150.0 Uncommitted November 30, 2020(3) C800.0 CNY Uncommitted June 30, 2020 D $ 150.0 Uncommitted May 4, 2023(4) E $ 50.0 Uncommitted August 25, 2020 F $ 150.0 Uncommitted January 25, 2021(5) G $ 50.0 Uncommitted February 23, 2023(6) H $ 100.0 Uncommitted August 10, 2020(7) I $ 100.0 Uncommitted July 21, 2020(8) J $ 650.0 Uncommitted December 4, 2020(9) K $ 110.0 Uncommitted April 11, 2020(10) L100.0 CHF Uncommitted December 5, 2020(2) (1) Maximum amount available at any one time. (2) The program will be automatically extended each year through December 5, 2025 unless either party provides 30 days notice of termination. 36
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(3) The program will automatically extend for one year at each expiration date
unless either party provides 10 days notice of termination.
(4) Any party may elect to terminate the agreement upon 30 days prior notice.
(5) The program will be automatically extended through
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
either party provides 30 days notice of termination.
(8) The program will be automatically extended through
either party provides 30 days notice of termination.
(9) The program will be automatically extended each year through December 5,
2024 unless either party provides 30 days notice of termination.
(10) The program will be automatically extended each year through
unless either party provides 30 days notice of termination.
During the three months and six months endedFebruary 29, 2020 , we sold$2.2 billion and$4.2 billion , respectively, of trade accounts receivable under these programs and we received cash proceeds of$2.2 billion and$4.2 billion , respectively. As ofFebruary 29, 2020 , we had up to$1.2 billion in available liquidity under our trade accounts receivable sale programs. Capital Expenditures At this time, due to the implications of the impact of COVID-19, our net capital expenditures are not estimable for fiscal year 2020. In general, our capital expenditures support ongoing maintenance in our DMS and EMS segments and investments in new markets. The amount of actual capital expenditures may be affected by general economic, financial, competitive, legislative and regulatory factors, among other things. Cash Flows The following table sets forth selected consolidated cash flow information (in thousands): Six months ended February 29, 2020 February 28, 2019 Net cash provided by operating activities $ 84,166 $ 107,765 Net cash used in investing activities (555,349 ) (389,608 ) Net cash provided by (used in) financing activities 14,273 (239,112 ) Effect of exchange rate changes on cash and cash equivalents (9,688 ) 12,063 Net decrease in cash and cash equivalents$ (466,598 )
Operating Activities Net cash provided by operating activities during the six months endedFebruary 29, 2020 was primarily due to non-cash expenses and decreased accounts receivable, partially offset by decreased accounts payable, accrued expenses and other liabilities and increased inventories, contract assets and prepaid expenses and other current assets. The decrease in accounts receivable is primarily driven by lower sales and the timing of collections. The decrease in accounts payable, accrued expenses and other liabilities is primarily due to a decrease in materials purchases due to a decrease in customer demand and the timing of purchases and cash payments. The increase in inventories is primarily driven by idle capacity and supply chain constraints due to COVID-19. The increase in contract assets is primarily due to the timing of revenue recognition for over time customers. The increase in prepaid expenses and other current assets is primarily due to an increase in value added tax receivables. Investing Activities Net cash used in investing activities during the six months endedFebruary 29, 2020 consisted primarily of capital expenditures principally to support ongoing business in the DMS and EMS segments and expenditures for assets acquired in connection with the third closing of the acquisition of certain assets of JJMD, partially offset by proceeds and advances from the sale of property, plant and equipment. Financing Activities 37
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Net cash provided by financing activities during the six months endedFebruary 29, 2020 was primarily due to (i) borrowings under debt agreements and (ii) net proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan. Net cash provided by financing activities was partially offset by (i) payments for debt agreements, (ii) the repurchase of our common stock, (iii) dividend payments and (iv) treasury stock minimum tax withholding related to vesting of restricted stock. Contractual Obligations As of the date of this report, other than the borrowings on the 3.600% Senior Notes and the Credit Facility (see Note 5 - "Notes Payable and Long-Term Debt" to the Condensed Consolidated Financial Statements) and the items disclosed below, there were no material changes outside the ordinary course of business sinceAugust 31, 2019 to our contractual obligations and commitments. In connection with the third closing of the acquisition of certain assets of JJMD, we assumed additional contractual obligations related to postretirement benefit plans and executed certain financing leases. The following table provides details of these assumed obligations: Payments due by period (in thousands) Less than 1 After 5 Total year 1-3 years 3-5 years years Pension and postretirement contributions and payments(1)$ 10,599 $ 10,599 $ - $ - $ - Finance lease obligations(2)$ 114,275 $ 5,904 $ 12,972 $ 13,102 $ 82,297
(1) Represents the estimated company contributions to the funded
plan during fiscal year 2020. These future payments are not recorded on
the Condensed Consolidated Balance Sheets but will be recorded as
incurred. Refer to Note 8 - Postretirement and other Employee Benefits for
further discussion of the assumed postretirement benefit obligation.
(2) The amount payable after five years includes
requirements at the end of the respective leases.
Dividends and Share Repurchases We currently expect to continue to declare and pay regular quarterly dividends of an amount similar to our past declarations. However, the declaration and payment of future dividends are discretionary and will be subject to determination by our Board of Directors each quarter following its review of our financial performance and global economic conditions. InSeptember 2019 , the Board of Directors authorized the repurchase of up to$600.0 million of our common stock as a part of a two-year capital allocation framework (the "2020 Share Repurchase Program"). As ofFebruary 29, 2020 , 4.4 million shares had been repurchased for$168.7 million and$431.3 million remains available under the 2020 Share Repurchase Program. 38
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