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. 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 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 5G, wireless and cloud, digital print and retail,
industrial and semi-cap, and networking and storage industries. Our DMS segment
is focused on providing engineering solutions, with an emphasis on material
sciences, technologies and healthcare. Our DMS segment includes customers
primarily in the automotive and transportation, connected devices, healthcare
and packaging, and mobility industries.
As of September 1, 2020 , certain customers were realigned within our operating
segments. Our operating segments, which are the reporting segments, continue to
consist of the DMS and EMS segments. Customers within the automotive and
transportation and smart home and appliances industries are now presented within
the DMS segment. Prior period disclosures are restated to reflect the
realignment.
Our cost of revenue includes the cost of electronic components and other
materials that comprise the products we manufacture; the cost of labor and
manufacturing overhead; and adjustments for excess and obsolete inventory. As a
provider of turnkey manufacturing services, we are responsible for procuring
components and other materials. This requires us to commit significant working
capital to our operations and to manage the purchasing, receiving, inspecting
and stocking of materials. At times, we collect deposits from our customers
related to the purchase of inventory in order to effectively manage our working
capital. Although we bear the risk of fluctuations in the cost of materials and
excess scrap, our ability to purchase components and materials efficiently may
contribute significantly to our operating results. While we periodically
negotiate cost of materials adjustments with our customers, rising component and
material prices may negatively affect our margins. Net revenue from each product
that we manufacture consists of an element based on the costs of materials in
that product and an element based on the labor and manufacturing overhead costs
allocated to that product. Our gross margin for any product depends on the mix
between the cost of materials in the product and the cost of labor and
manufacturing overhead allocated to the product.
Our operating results are impacted by the level of capacity utilization of
manufacturing facilities; indirect labor costs; and selling, general and
administrative expenses. Operating income margins have generally improved during
periods of high production volume and high capacity utilization. During periods
of low production volume, we generally have reduced operating income margins.
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 try to respond appropriately as circumstances
change.
We have consistently utilized advanced circuit design, production design and
manufacturing technologies to meet the needs of our customers. To support this
effort, our engineering staff focuses on developing and refining design and
manufacturing technologies to meet specific needs of specific customers. Most of
the expenses associated with these customer-specific efforts are reflected in
our cost of revenue. In addition, our engineers engage in research and
development ("R&D") of new technologies that apply generally to our operations.
The expenses of these R&D activities are reflected in the research and
development line item within our Consolidated Statement of Operations.
An important element of our strategy is the expansion of our global production
facilities. The majority of our revenue and materials costs worldwide are
denominated in U.S. dollars, while our labor and utility costs in operations
outside the U.S. are denominated in local currencies. We economically hedge
certain of these local currency costs, based on our evaluation of the potential
exposure as compared to the cost of the hedge, through the purchase of foreign
currency exchange contracts. Changes
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in the fair market value of such hedging instruments are reflected within the
Consolidated Statement of Operations and the Consolidated Statement of
Comprehensive Income.
See Note 13 - "Concentration of Risk and Segment Data" to the Consolidated
Financial Statements.
COVID-19
The COVID-19 pandemic, which began to impact us in January 2020 , has continued
to affect our business and the businesses of our customers and suppliers. Travel
and business operation restrictions arising from virus containment efforts of
governments around the world have continued to impact our operations in Asia ,
Europe and the Americas . Essential activity exceptions from these restrictions
have allowed us to continue to operate but virus containment efforts have
resulted in additional direct costs.
During the fiscal year ended August 31, 2020 , we incurred approximately $142
million in direct costs associated with the COVID-19 outbreak, primarily due to
incremental and idle labor costs and the procurement of personal protection
equipment for our employees globally. This increase in costs was partially
offset by governmental subsidies, such as lower payroll taxes or social
insurance in certain countries, related to COVID-19 incentives.
The impact on our suppliers has led to supply chain constraints, including
difficulty sourcing materials necessary to fulfill customer production
requirements and challenges in transporting completed products to our end
customers.
Summary of Results
The following table sets forth, for the periods indicated, certain key operating
results and other financial information (in millions, except per share data):
Fiscal Year Ended August 31,
2021 2020 2019
Net revenue $ 29,285 $ 27,266 $ 25,282
Gross profit $ 2,359 $ 1,931 $ 1,913
Operating income $ 1,055 $ 500 $ 701
Net income attributable to Jabil Inc. $ 696 $ 54 $ 287
Earnings per share - basic $ 4.69 $ 0.36 $ 1.85
Earnings per share - diluted $ 4.58 $ 0.35 $ 1.81
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
August 31, 2021 May 31, 2021 August 31, 2020
Sales cycle(1) 19 days 25 days 16 days
Inventory turns (annualized)(2) 5 turns 5 turns 6 turns
Days in accounts receivable(3) 38 days 40 days 35 days
Days in inventory(4) 71 days 68 days 56 days
Days in accounts payable(5) 90 days 84 days 75 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.
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(3)Days in accounts receivable is calculated as accounts receivable, net,
divided by net revenue multiplied by 90 days. During the three months ended
August 31, 2021 , the increase in days in accounts receivable from the three
months ended August 31, 2020 was primarily due to an increase in accounts
receivable, primarily driven by higher sales and the timing of collections.
During the three months ended August 31, 2021 , the decrease in days in accounts
receivable from the prior sequential quarter was driven primarily by the 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 August 31,
2021 , the increase in days in inventory from the three months ended August 31,
2020 was primarily to support expected sales levels in the first quarter of
fiscal year 2022 and supply-chain constraints as a result of the COVID-19
pandemic. During the three months ended August 31, 2021 , the increase in days in
inventory from the prior sequential quarter was primarily driven by supply-chain
constraints as a result of the COVID-19 pandemic.
(5)Days in accounts payable is calculated as accounts payable divided by cost of
revenue multiplied by 90 days. During the three months ended August 31, 2021 ,
the increase in days in accounts payable from the three months ended May 31,
2021 and August 31, 2020 was primarily due to an increase in materials purchases
and timing of payments.
Critical Accounting Policies and Estimates
The preparation of our 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. We have identified the following critical accounting policies
that affect the more significant judgments and estimates used in the preparation
of our Consolidated Financial Statements. 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.
Revenue Recognition
For our over time customers, we believe the measure of progress which best
depicts the transfer of control is based on costs incurred to date, relative to
total estimated cost at completion (i.e., an input method). This method is a
faithful depiction of the transfer of goods or services because it results in
the recognition of revenue on the basis of our to-date efforts in the
satisfaction of a performance obligation relative to the total expected efforts
in the satisfaction of the performance obligation. We believe that the use of an
input method best depicts the transfer of control to the customer, which occurs
as we incur costs on our contracts. The transaction price of each performance
obligation is generally based upon the contractual stand-alone selling price of
the product or service.
Certain contracts with customers include variable consideration, such as
periodic cost of materials adjustments, rebates, discounts, or returns. We
recognize estimates of this variable consideration that are not expected to
result in a significant revenue reversal in the future, primarily based on the
most likely level of consideration to be paid to the customer under the specific
terms of the underlying programs.
Inventory Valuation
We purchase inventory based on forecasted demand and record inventory at the
lower of cost and net realizable value. Management regularly assesses inventory
valuation based on current and forecasted usage, customer inventory-related
contractual obligations and other lower of cost and net realizable value
considerations. If actual market conditions or our customers' product demands
are less favorable than those projected, additional valuation adjustments may be
necessary.
Long-Lived Assets
We review property, plant and equipment and amortizable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of property,
plant and equipment is measured by comparing its carrying value to the
undiscounted projected cash flows that the asset(s) or asset group(s) are
expected to generate. If the carrying amount of an asset or an asset group is
not recoverable, we recognize an impairment loss based on the excess of the
carrying amount of the long-lived asset or asset group over its respective fair
value, which is generally determined as either the present value of estimated
future cash flows or the appraised value. The impairment analysis is based on
significant assumptions of future results made by management, including revenue
and cash flow projections. Circumstances that may lead to impairment of
property, plant and equipment include unforeseen decreases in future
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performance or industry demand and the restructuring of our operations resulting
from a change in our business strategy or adverse economic conditions.
We have recorded intangible assets, including goodwill, in connection with
business acquisitions. Estimated useful lives of amortizable intangible assets
are determined by management based on an assessment of the period over which the
asset is expected to contribute to future cash flows. The fair value of acquired
amortizable intangible assets impacts the amounts recorded as goodwill.
We perform a goodwill impairment analysis on an annual basis and whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. The Company may elect to perform a qualitative assessment to
determine whether it is more likely than not that a reporting unit is impaired.
If the qualitative assessment is not performed or if the Company determines that
it is not more likely than not that the fair value of the reporting unit exceeds
the carrying value, the recoverability of goodwill is measured at the reporting
unit level by comparing the reporting unit's carrying amount, including
goodwill, to the fair value of the reporting unit. If the carrying amount of the
reporting unit exceeds its fair value, goodwill is considered impaired and a
loss is recognized in the amount equal to that excess.
We perform an indefinite-lived intangible asset impairment analysis on an annual
basis and whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. The Company may elect to perform a qualitative
assessment to determine whether it is more likely than not that an
indefinite-lived intangible is impaired. If the qualitative assessment is not
performed or if the Company determines that it is not more likely than not that
the fair value of an indefinite-lived intangible exceeds the carrying value, the
recoverability is measured by comparing the carrying amount to the fair value.
If the carrying amount of the indefinite-lived intangible asset exceeds its fair
value, the indefinite-lived intangible asset is considered impaired.
We completed our annual impairment analysis for goodwill and indefinite-lived
intangible assets during the fourth quarter of fiscal year 2021. The qualitative
assessment was used for all reporting units and we determined that it is more
likely than not that the fair values of our reporting units and the
indefinite-lived intangible assets are in excess of the carrying values and that
no impairment existed as of the date of the impairment analysis.
Income Taxes
We estimate our income tax provision in each of the jurisdictions in which we
operate, a process that includes estimating exposures related to examinations by
taxing authorities. We must also make judgments regarding the ability to realize
deferred tax assets. The carrying value of our net deferred tax assets is based
on our belief that it is more likely than not that we will generate sufficient
future taxable income in certain jurisdictions to realize these deferred tax
assets. A valuation allowance has been established for deferred tax assets that
we do not believe meet the "more likely than not" criteria. We assess whether an
uncertain tax position taken or expected to be taken in a tax return meets the
threshold for recognition and measurement in the Consolidated Financial
Statements. Our judgments regarding future taxable income as well as tax
positions taken or expected to be taken in a tax return may change due to
changes in market conditions, changes in tax laws or other factors. If our
assumptions and consequently our estimates change in the future, the valuation
allowances and/or tax reserves established may be increased or decreased,
resulting in a respective increase or decrease in income tax expense. For
further discussion related to our income taxes, refer to Note 15 - "Income
Taxes" to the Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 19 - "New Accounting Guidance" to the Consolidated Financial Statements
for a discussion of recent accounting guidance.
Results of Operations
Refer to Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section contained in our Annual Report on Form 10-K
for the fiscal year ended August 31, 2020 for the results of operations
discussion for the fiscal year ended August 31, 2020 compared to the fiscal year
ended August 31, 2019 .
Net 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.
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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.
Fiscal Year Ended August 31, Change
(dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019(1)
Net revenue $ 29,285 $ 27,266 $ 25,282 7.4 % 7.8 %
(1)As of September 1, 2020 , certain customers were realigned within our
operating segments. Our operating segments, which are the reporting segments,
continue to consist of the DMS and EMS segments. Customers within the automotive
and transportation and smart home and appliances industries are now presented
within the DMS segment. Prior period disclosures are restated to reflect the
realignment.
2021 vs. 2020
Net revenue increased during the fiscal year ended August 31, 2021 compared to
the fiscal year ended August 31, 2020 . Specifically, the DMS segment net revenue
increased 17% due to: (i) a 6% increase in revenues from existing customers
within our mobility business as our ability to meet customer demand during the
fiscal year ended August 31, 2020 , was greatly diminished due to COVID-19
containment efforts in China , (ii) a 4% increase in revenues from existing
customers within our connected devices business, (iii) a 4% increase in revenues
from existing customers in our automotive and transportation business and (iv) a
3% increase in revenues from existing customers within our healthcare and
packaging businesses. The EMS segment net revenue decreased 1% due primarily to
a decrease in revenues from existing customers in our cloud business, which
began transitioning to a consignment model in fiscal year 2021.
2020 vs. 2019
Net revenue increased during the fiscal year ended August 31, 2020 compared to
the fiscal year ended August 31, 2019 . Specifically, the EMS segment revenues
increased 9% primarily due to (i) a 10% increase in revenues from existing
customers within our 5G, wireless and cloud business and (ii) a 3% increase in
revenues from existing customers within our industrial and capital equipment
business. The increase is partially offset by (i) a 2% decrease from existing
customers within our networking and storage business and (ii) a 2% decrease in
revenues from existing customers within our digital print and retail business.
DMS segment revenues increased 7% due to (i) an 8% increase in revenues from new
and existing customers in our healthcare and packaging businesses and (ii) a 1%
increase in revenues from existing customers in our automotive and
transportation business. The increase is partially offset by a 2% decrease in
revenue from customers within our connected devices business.
The following table sets forth, for the periods indicated, revenue by segment
expressed as a percentage of net revenue:
Fiscal Year Ended August 31,
2021 2020 2019
EMS 47 % 52 % 51 %
DMS 53 % 48 % 49 %
Total 100 % 100 % 100 %
The following table sets forth, for the periods indicated, foreign source revenue expressed as a percentage of net revenue:
Fiscal Year Ended August 31,
2021 2020 2019
Foreign source revenue 83.6 % 82.6 % 87.7 %
Gross Profit
Fiscal Year Ended August 31,
(dollars in millions) 2021 2020 2019
Gross profit $ 2,359 $ 1,931 $ 1,913
Percent of net revenue 8.1 % 7.1 % 7.6 %
2021 vs. 2020
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Gross profit as a percentage of net revenue increased for the fiscal year ended
August 31, 2021 compared to the fiscal year ended August 31, 2020 , primarily due
to: (i) product mix and improved profitability across various businesses and
(ii) a decrease of $72 million in incremental and idle labor costs associated
with travel disruptions and governmental restrictions, largely related to the
COVID-19 pandemic.
Selling, General and Administrative
Fiscal Year Ended August 31, Change
(dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Selling, general and
administrative $ 1,213 $ 1,175 $ 1,111 $ 38 $ 64
2021 vs. 2020
Selling, general and administrative expenses increased during the fiscal year
ended August 31, 2021 compared to the fiscal year ended August 31, 2020 . The
increase is predominantly due to (i) a $48 million increase due to higher salary
and salary related expenses and (ii) a $19 million increase in stock-based
compensation expense due to anticipated achievement levels for certain
performance-based stock awards, a higher stock price for awards granted during
fiscal year 2021 and a higher stock price for cash-settled awards. The increase
is partially offset by a $29 million decrease primarily due to lower acquisition
and integration charges related to our strategic collaboration with a healthcare
company.
Research and Development
Fiscal Year Ended August 31,
(dollars in millions) 2021 2020 2019
Research and development $ 34 $ 43 $ 43
Percent of net revenue 0.1 % 0.2 % 0.2 %
2021 vs. 2020
Research and development expenses remained relatively consistent as a percent of
net revenue during the fiscal year ended August 31, 2021 compared to the fiscal
year ended August 31, 2020 .
Amortization of Intangibles
Fiscal Year Ended August 31, Change
(dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Amortization of intangibles $ 47 $ 56 $ 32 $ (9) $ 24
2021 vs. 2020
Amortization of intangibles decreased during the fiscal year ended August 31,
2021 compared to the fiscal year ended August 31, 2020 primarily due to certain
intangible assets that were fully amortized during fiscal year 2020.
Restructuring, Severance and Related Charges
Following is a summary of our restructuring, severance and related charges:
Fiscal Year Ended
(dollars in millions) 2021(1) 2020(1) 2019(2) Employee severance and benefit costs $ 5 $ 94 $ 16 Lease costs (1) 8 - Asset write-off costs 5 33 (4) Other costs 1 22 14 Total restructuring, severance and related charges(3) $ 10$ 157 $ 26 (1)As the Company continued to optimize its cost structure and improve operational efficiencies,$57 million of employee severance and benefit costs was incurred in connection with a reduction in the worldwide workforce during the fiscal year endedAugust 31, 2020 . The remaining amount primarily relates to the 2020 Restructuring Plan, which was complete as ofAugust 31, 2021 . (2)Primarily relates to the 2017 Restructuring Plan, which was complete as ofAugust 31, 2019 . 33 -------------------------------------------------------------------------------- Table of Contents (3)Includes$0 million ,$62 million and$21 million recorded in the EMS segment,$9 million ,$76 million and$3 million recorded in the DMS segment and$1 million ,$19 million and$2 million of non-allocated charges for the fiscal years endedAugust 31, 2021 , 2020 and 2019, respectively. Except for asset write-off costs, all restructuring, severance and related charges are cash costs. See Note 14 - "Restructuring, Severance and Related Charges" to the Consolidated Financial Statements for further discussion of restructuring, severance and related charges for the 2020 Restructuring Plans. (Gain) Loss on Securities Fiscal Year Ended August 31, Change (dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 (Gain) loss on securities$ (2) $ 49 $ 30 $ (51) $ 19 2021 vs. 2020 The change in (gain) loss on securities during the fiscal year endedAugust 31, 2021 compared to the fiscal year endedAugust 31, 2020 , is due to cash proceeds received in connection with the sale of an investment partially offset by: (i) an impairment charge of$36 million during the fiscal year endedAugust 31, 2020 related to our investment in the Senior Non-Convertible Preferred Stock of iQorHoldings, Inc. ("iQor") as a result of iQor's bankruptcy filing and (ii) an impairment charge of$12 million during the fiscal year endedAugust 31, 2020 in connection with the sale of an investment in the optical networking segment. Other (Income) Expense Fiscal Year Ended August 31, Change (dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Other (income) expense$ (11) $ 31 $ 53 $ (42) $ (22) 2021 vs. 2020 The change in other (income) expense during the fiscal year endedAugust 31, 2021 compared to the fiscal year endedAugust 31, 2020 , is primarily due to: (i)$24 million related to a decrease in fees associated with lower utilization of both our trade accounts receivable sales and securitization programs during fiscal year 2021, (ii)$10 million primarily related to lower net periodic benefit costs in fiscal year 2021, (iii)$7 million of costs incurred during the fiscal year endedAugust 31, 2020 related to the redemption of the 5.625% Senior Notes due 2020 and (iv)$1 million arising from an increase in other income. Interest Income Fiscal Year Ended August 31, Change (dollars in millions) 2021 2020
2019 2021 vs. 2020 2020 vs. 2019
Interest income $ 6 $ 15 $ 21 $ (9) $ (6)
2021 vs. 2020
Interest income decreased during the fiscal year ended August 31, 2021 compared
to the fiscal year ended August 31, 2020 , due to lower interest rates, partially
offset by increased interest income on higher cash equivalents (investments that
are readily convertible to cash with maturity dates of 90 days or less).
Interest Expense
Fiscal Year Ended August 31, Change
(dollars in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Interest expense $ 130 $ 174 $ 188 $ (44) $ (14)
2021 vs. 2020
Interest expense decreased during the fiscal year ended August 31, 2021 ,
compared to the fiscal year ended August 31, 2020 , primarily due to lower
interest rates and lower borrowings on our credit facilities, partially offset
by additional borrowings on our commercial paper program and senior debt
issuances.
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Income Tax Expense
Fiscal Year Ended August 31, Change
2021 2020 2019 2021 vs. 2020 2020 vs. 2019Effective income tax rate 26.0 % 78.2 % 35.8 % (52.2) % 42.4 % 2021 vs. 2020 The effective income tax rate decreased for the fiscal year endedAugust 31, 2021 , compared to the fiscal year endedAugust 31, 2020 , primarily due to: (i) higher income before income tax for the fiscal year endedAugust 31, 2021 , driven in part by decreased restructuring charges in tax jurisdictions with minimal related income tax benefit and (ii) a$21 million income tax expense associated with the re-measurement of deferred tax assets related to the extension of a non-U.S. tax incentive recorded during the fiscal year endedAugust 31, 2020 . 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 reconciliation 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 inference 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, severance and related charges, distressed customer charges, acquisition and integration charges, loss on disposal of subsidiaries, settlement of receivables and related charges, impairment of notes receivable and related charges, goodwill impairment charges, business interruption and impairment charges, net, (gain) loss on securities, 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 cash flows 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, severance 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 a reconciliation of the non-GAAP financial measures to the most directly comparableU.S. GAAP financial measures as provided in our Consolidated Financial Statements: 35 -------------------------------------------------------------------------------- Table of Contents Reconciliation ofU.S. GAAP Financial Results to Non-GAAP Measures Fiscal Year Ended August 31, (in millions, except for per share data) 2021 2020 2019 Operating income (U.S. GAAP)$ 1,055 $ 500 $ 701 Amortization of intangibles 47 56 32 Stock-based compensation expense and related charges 102 83 61 Restructuring, severance and related charges(1) 10 157 26 Distressed customer charge(2) - 15 6 Net periodic benefit cost(3) 24 16 - Business interruption and impairment charges, net(4) (1) 6 (3) Acquisition and integration charges(5) 4 31 54 Adjustments to operating income 186 364 176 Core operating income (Non-GAAP)$ 1,241 $ 864 $ 877 Net income attributable to Jabil Inc. (U.S. GAAP)$ 696 $ 54 $ 287 Adjustments to operating income 186 364 176 (Gain) loss on securities(6) (2) 49 30 Net periodic benefit cost(3) (24) (16) - Adjustment for taxes(7) (3) (1) (20) Core earnings (Non-GAAP)$ 853 $ 450 $ 473 Diluted earnings per share (U.S. GAAP)$ 4.58
Diluted core earnings per share (Non-GAAP)$ 5.61
Diluted weighted average shares outstanding (U.S. GAAP and Non-GAAP) 152.1 155.3 158.6 (1)As the Company continued to optimize its cost structure and improve operational efficiencies,$57 million of employee severance and benefit costs was incurred in connection with a reduction in the worldwide workforce during the fiscal year endedAugust 31, 2020 . The remaining amount primarily related to the 2020 Restructuring Plan. (2)Relates to accounts receivable and inventory charges for certain distressed customers. (3)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. (4)Charges, net of insurance proceeds, for the fiscal years endedAugust 31, 2021 and 2020, relate to a flood that impacted our facility in Huangpu,China . (5)Charges related to our strategic collaboration withJohnson & Johnson Medical Devices Companies ("JJMD"). (6)Relates to an impairment of an investment with iQor and the sale of an investment in the optical networking segment during fiscal year 2020. (7)The fiscal year endedAugust 31, 2019 includes a$13 million income tax benefit for the effects of the Tax Cuts and Jobs Act of 2017 ("Tax Act") recorded during the three months endedNovember 30, 2018 . Adjusted Free Cash Flow Fiscal
Year Ended
(in millions) 2021 2020 2019 (1)
Net cash provided by operating activities (
- - 97
Acquisition of property, plant and equipment (1,159) (983) (1,005)
Proceeds and advances from sale of property, plant and equipment
366 187 218
Adjusted free cash flow (Non-GAAP) $ 640 $ 461 $ 503 (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
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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 or activities.
Quarterly Results (Unaudited)
The following table sets forth certain unaudited quarterly financial information
for the three months ended August 31, 2021 and 2020. In the opinion of
management, this information has been presented on the same basis as the audited
consolidated financial statements appearing elsewhere, and all necessary
adjustments (consisting primarily of normal recurring accruals) have been
included in the amounts stated below to present fairly the unaudited quarterly
results when read in conjunction with the audited consolidated financial
statements and related notes thereto. The operating results for any quarter are
not necessarily indicative of results for any future period.
Three Months Ended
(in millions, except for per share data) August 31, 2021 August 31, 2020
Net revenue $ 7,409 $ 7,300
Gross profit 587 491
Operating income(1) 265 197
Net income (1)(2) 175 69
Net income attributable to Jabil Inc.(1)(2) $ 175 $ 68
Earnings per share attributable to the stockholders of Jabil
Inc.
Basic $ 1.20 $ 0.45
Diluted $ 1.16 $ 0.44
(1)Includes direct costs related to the COVID-19 pandemic of $23 million and $22
million for the three months ended August 31, 2021 and 2020, respectively.
(2)Includes the impairment of an investment with iQor during the three months
ended August 31, 2020 .
Acquisitions and Expansion
During fiscal year 2018, the Company and 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 October 26, 2020 , under the terms of the framework agreement, we completed
the fourth closing of our acquisition of certain assets of JJMD. The aggregate
purchase price paid for the fourth closing was approximately $19 million in
cash. Total assets acquired of $30 million and total liabilities assumed of
$11 million were recorded at their estimated fair values as of the acquisition
date.
The acquisition of the JJMD assets was accounted for as a business combination
using the acquisition method of accounting. The Company is currently evaluating
the fair value of the assets and liabilities related to the fourth closing. 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 condensed
consolidated financial results beginning on October 26, 2020 for the fourth
closing. We believe it is impracticable to provide pro forma information for the
acquisition of the JJMD assets.
Refer to Note 16 - "Business Acquisitions" to the Consolidated Financial
Statements for further discussion.
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 global asset-backed securitization
program and under our uncommitted trade accounts receivable sale programs, cash
on hand, cash flows provided by operating activities and the access to the
capital markets, will be adequate to fund our capital expenditures, the payment
of any declared quarterly dividends, any share repurchases under the approved
program, any potential acquisitions and our working capital requirements for the
next 12 months. 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 fiscal year 2022. While we expect to renew such
trade accounts receivable sale programs, market conditions, including the
implications of the COVID-19 pandemic, at the time our current programs expire
may create challenges in doing so, such as incurring a higher cost of capital.
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Cash and Cash Equivalents
As of August 31, 2021 , we had approximately $1.6 billion in cash and cash
equivalents, of which a significant portion was held by our foreign
subsidiaries. Most of our foreign cash and cash equivalents as of August 31,
2021 could be repatriated to the United States without potential tax expense.
Notes Payable and Credit Facilities
Following is a summary of principal debt payments and debt issuance for our
notes payable and credit facilities:
Borrowings Total notes
under Borrowings payable
5.625% 4.700% 4.900% 3.950% 3.600% 3.000% revolving under Borrowings and
Senior Senior Senior Senior Senior Senior 1.700% Senior credit commercial paper under credit
(in millions) Notes Notes Notes Notes Notes Notes Notes(1) facilities(2)(3) program(3) loans(1) facilities
Balance as of August
31, 2019 $ 399 $ 498 $ 299 $ 495 $ - $ - $ - $ - $ - $ 805 $ 2,496
Borrowings - - - - 499 595 - 11,095 238 350 12,777
Payments (399) - - - - - - (11,095) (238) (806) (12,538)
Other - 1 - - (4) (5) - - - 1 (7)
Balance as of August
31, 2020 - 499 299 495 495 590 - - - 350 2,728
Borrowings - - - - - - 500 1,224 - - 1,724
Payments - - - - - - - (1,224) - (350) (1,574)
Other - - 1 1 - 1 (4) - - 1 -
Balance as of August
31, 2021 $ - $ 499 $ 300 $ 496 $ 495 $ 591 496 $ - $ - $ 1 $ 2,878
Jan 22, 2024 and Jan
Maturity Date Dec 15, 2020 Sep 15, 2022
22, 2026(2)(3) (3) Jul 31, 2026
Original Facility/ $3.8 $2
Maximum Capacity $400 million $500 million $300 million $500 million $500 million $600 million $500 million billion(2)(3) (3) million(1) (1)OnApril 14, 2021 , we issued$500 million of publicly registered 1.700% Senior Notes due 2026 (the "1.700% Senior Notes"). We used the net proceeds for general corporate purposes, including repayment of the prior$300 million Term Loan Facility. (2)OnApril 28, 2021 , we entered into an amendment (the "Amendment") to our senior unsecured credit agreement dated as ofJanuary 22, 2020 (the "Credit Facility"). The Amendment, among other things, (i) increased the commitments available under the three-year revolving credit facility (the "Three-Year Revolving Credit Facility") from$700 million to$1.2 billion , (ii) instituted certain sustainability-linked adjustments to the interest rates applicable to borrowings under the Credit Facility and (iii) primarily extended the termination date of the Three-Year Revolving Credit Facility toJanuary 22, 2024 , and of the Five-Year Revolving Credit Facility of$2.0 billion toJanuary 22, 2026 . (3)As ofAugust 31, 2021 , we had$3.8 billion in available unused borrowing capacity under our revolving credit facilities. The Credit Facility acts as the back-up facility for commercial paper outstanding, if any. We have a borrowing capacity of up to$1.8 billion under our commercial paper program. Borrowings with an original maturity of 90 days or less are recorded net within the statement of cash flows, and have been excluded from the table above. In the ordinary course of business, we have letters of credit and surety bonds with banks and insurance companies outstanding of$75 million as ofAugust 31, 2021 . Unused letters of credit were$76 million as ofAugust 31, 2021 . Letters of credit and surety bonds are generally available for draw down in the event we do not perform. 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 ofAugust 31, 2021 and 2020, we were in compliance with our debt covenants. Refer to Note 7 - "Notes Payable and Long-Term Debt" to the Consolidated Financial Statements for further details. Asset-Backed Securitization Programs Global asset-backed securitization program - EffectiveAugust 20, 2021 , the global asset-backed securitization program (formerly referred to as the North American asset-backed securitization program) terms were amended to: (i) add a foreign 38 -------------------------------------------------------------------------------- Table of Contents entity to the program, (ii) increase the maximum amount of net cash proceeds available at any one time from$390 million to$600 million and (iii) extend the expiration date of the program toNovember 25, 2024 . As ofAugust 31, 2021 , we had up to$24 million in available liquidity under our global asset-backed securitization program. Certain entities participating in the global asset-backed securitization program continuously sell designated pools of trade accounts receivable to a special purpose entity, which in turn sells certain of the receivables at a discount to conduits administered by an unaffiliated financial institution on a monthly basis. In addition, the foreign entity participating in the global asset-backed securitization program sells certain receivables at a discount to conduits administered by an unaffiliated financial institution on a daily basis. The special purpose entity in the global asset-backed securitization program is a wholly-owned subsidiary of the Company and is included in our Consolidated Financial Statements. Certain unsold receivables covering up to the maximum amount of net cash proceeds available under the domestic, orU.S. , portion of our global asset-backed securitization program are pledged as collateral to the unaffiliated financial institution as ofAugust 31, 2021 . Foreign asset-backed securitization program - We terminated the foreign asset-backed securitization program onJune 28, 2021 . In connection with the termination, we paid approximately$167 million in cash, which consisted of: (i)$68 million for the remittance of collections received prior toJune 28, 2021 , in our role as servicer of sold receivables and (ii) a repurchase of$99 million of all previously sold receivables, at fair value, that remained outstanding as ofJune 28, 2021 . As ofAugust 31, 2021 , we have substantially collected the repurchased receivables from customers. The special purpose entity in the foreign asset-backed securitization program is a separate bankruptcy-remote entity that is winding down as a result of the termination of the foreign-asset backed securitization program. We are deemed the primary beneficiary of this special purpose entity as we have 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 our Consolidated Financial Statements. The foreign asset-backed securitization program contained a guarantee of payment by the special purpose entity, in an amount approximately equal to the net cash proceeds under the program. As a result of the termination of the foreign asset-backed securitization program, all outstanding amounts have been settled with the unaffiliated financial institution as ofAugust 31, 2021 . As such, no liability has been recorded for obligations under the guarantee. Global and foreign asset-backed securitization programs - We continue servicing the receivables sold and in exchange receive a servicing fee under the global asset-backed securitization program. Servicing fees related to each of the asset-backed securitization programs recognized during the fiscal years endedAugust 31, 2021 , 2020 and 2019 were not material. We do not record a servicing asset or liability on the Consolidated Balance Sheets as we estimate that the fee received to service these receivables approximates the fair market compensation to provide the servicing activities. Refer to Note 8 - "Asset-Backed Securitization Programs" to the 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: 39
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Maximum
Amount Type of Expiration
Program (in millions)(1) Facility Date
A $ 600 Uncommitted December 5, 2021 (2)
B $ 150 Uncommitted November 30, 2021
C 400 CNY Uncommitted August 31, 2023
D $ 150 Uncommitted May 4, 2023 (3)
E $ 150 Uncommitted January 25, 2022 (4)
F $ 50 Uncommitted February 23, 2023 (5)
G $ 100 Uncommitted August 10, 2022 (6)
H $ 100 Uncommitted July 21, 2022 (7)
I $ 550 Uncommitted December 4, 2021 (8)
J $ 135 Uncommitted April 11, 2022 (9)
K 100 CHF Uncommitted December 5, 2021 (2)
L $ 90 Uncommitted January 23, 2022
(1)Maximum amount of trade accounts receivable that may be sold under a facility
at any one time.
(2)The program will be automatically extended through December 5, 2025 unless
either party provides 30 days notice of termination.
(3)Any party may elect to terminate the agreement upon 30 days prior notice.
(4)The program will be automatically extended through January 25, 2023 unless
either party provides 30 days notice of termination.
(5)Any party may elect to terminate the agreement upon 15 days prior notice.
(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 through December 5, 2024 unless
either party provides 30 days notice of termination.
(9)The program will be automatically extended through April 11, 2025 unless
either party provides 30 days notice of termination.
During the fiscal year ended August 31, 2021 , we sold $4.7 billion of trade
accounts receivable under these programs and we received cash proceeds of $4.7
billion . As of August 31, 2021 , we had up to $2.0 billion in available liquidity
under our trade accounts receivable sale programs.
Capital Expenditures
For Fiscal Year 2022, we anticipate our net capital expenditures will be
approximately $830 million . In general, our capital expenditures support ongoing
maintenance in our DMS and EMS segments and investments in capabilities and
targeted end 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
millions):
Fiscal Year Ended August 31,
2021 2020 2019
Net cash provided by operating activities $ 1,433 $ 1,257 $ 1,193
Net cash used in investing activities (851) (921) (872)
Net cash used in financing activities (413) (65) (416)
Effect of exchange rate changes on cash and cash
equivalents 4 (40) -
Net increase (decrease) in cash and cash
equivalents $ 173 $ 231 $ (95)
40-------------------------------------------------------------------------------- Table of Contents Operating Activities Net cash provided by operating activities during the fiscal year endedAugust 31, 2021 was primarily due to increased accounts payable, accrued expenses and other liabilities, non-cash expenses, net income, and decreased contract assets, partially offset by increased inventories, accounts receivable, and prepaid expenses and other current assets. The increase in accounts payable, accrued expenses and other liabilities is primarily due to the timing of purchases and cash payments. The decrease in contract assets is primarily due to the timing of billings to our customers. The increase in inventories is primarily to support expected sales levels in the first quarter of fiscal year 2022 and supply chain constraints due to the COVID-19 pandemic. The increase in accounts receivable is primarily driven by higher sales and the timing of collections. The increase in prepaid expenses and other current assets is primarily driven by the timing of payments. Investing Activities Net cash used in investing activities during the fiscal year endedAugust 31, 2021 consisted primarily of capital expenditures principally to support ongoing business in the DMS and EMS segments and expenditures in connection with the acquisition of certain assets of JJMD and the acquisition ofEcologic Brands, Inc. , partially offset by proceeds and advances from the sale of property, plant and equipment. Financing Activities Net cash used in financing activities during the fiscal year endedAugust 31, 2021 was primarily due to (i) payments for debt agreements, (ii) the repurchase of our common stock, (iii) dividend payments, (iv) the purchase of the noncontrolling interests, and (v) treasury stock minimum tax withholding related to vesting of restricted stock. Net cash used in financing activities was partially offset by (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. Dividends and Share Repurchases Following is a summary of the dividends and share repurchases for the fiscal years indicated below (in millions): Dividends Paid(1) Share Repurchases(2) Total Fiscal years 2016 - 2019 $ 233 $ 1,254$ 1,487 Fiscal year 2020 $ 50 $ 214$ 264 Fiscal year 2021 $ 50 $ 428$ 478 Total $ 333 $ 1,896$ 2,229 (1)The difference between dividends declared and dividends paid is due to dividend equivalents for unvested restricted stock units that are paid at the time the awards vest. (2)Excludes commissions. 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 million of our common stock as part of a two-year capital allocation framework ("the 2020 Share Repurchase Program"). As ofAugust 31, 2021 , 14.1 million shares had been repurchased for$600 million and no authorization remains under the 2020 Share Repurchase Program. InJuly 2021 , the Board of Directors approved an authorization for the repurchase of up to$1.0 billion of our common stock ("the 2022 Share Repurchase Program"). As ofAugust 31, 2021 , 0.7 million shares had been repurchased for$42 million and$958 million remains available under the 2022 Share Repurchase Program. Contractual Obligations Our contractual obligations as ofAugust 31, 2021 are summarized below. As disclosed below, while we have certain non-cancelable purchase order obligations for property, plant and equipment, we generally do not enter into non-cancelable purchase orders for materials until we receive a corresponding purchase commitment from our customer. Non-cancelable purchase orders do not typically extend beyond the normal lead time of several weeks, at most. Purchase orders beyond this time frame are typically cancellable. 41
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Payments due by period (in millions)
Less than 1 After 5
Total year 1-3 years 3-5 years years
Notes payable and long-term debt $ 2,878 $ -
537 102 142 126 167
Operating lease obligations(2) 489 118 165 97 109
Finance lease obligations(2)(3) 340 101 87 134 18
Non-cancelable purchase order obligations(4) 604 459 123 22 -
Pension and postretirement contributions and
payments(5) 46 28 3 3 12
Other(6) 60 28 14 18 -
Total contractual obligations(7) $ 4,954 $ 836 $ 1,333 $ 896 $ 1,889
(1)Consists of interest on notes payable and long-term debt outstanding as of
August 31, 2021 . Certain of our notes payable and long-term debt pay interest at
variable rates. We have applied estimated interest rates to determine the value
of these expected future interest payments.
(2)Excludes $72 million of payments related to leases signed but not yet
commenced. Additionally, certain leases signed but not yet commenced contain
residual value guarantees and purchase options not deemed probable.
(3)As of August 31, 2021 , the future minimum lease payments exclude $155 million
of residual value guarantees that could potentially come due in future periods.
The Company does not believe it is probable that any amounts will be owed under
these guarantees. Therefore, no amounts related to the residual value guarantees
are included in the lease payments used to measure the right-of-use assets and
lease liabilities.
(4)Consists of purchase commitments entered into as of August 31, 2021 primarily
for property, plant and equipment and software pursuant to legally enforceable
and binding agreements.
(5)Includes the estimated company contributions to funded pension plans during
fiscal year 2022 and the expected benefit payments for unfunded pension and
postretirement plans from fiscal years 2022 through 2031. These future payments
are not recorded on the Consolidated Balance Sheets but will be recorded as
incurred.
(6)Includes (i) a $21 million capital commitment, (ii) a $9 million obligation
related to a new human resource system and (iii) $30 million related to the
one-time transition tax as a result of the Tax Act that will be paid in annual
installments through fiscal year 2026.
(7)As of August 31, 2021 , we have $1 million and $151 million recorded as a
current and a long-term liability, respectively, for uncertain tax positions. We
are not able to reasonably estimate the timing of payments, or the amount by
which our liability for these uncertain tax positions will increase or decrease
over time, and accordingly, this liability has been excluded from the above
table.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risks
We transact business in various foreign countries and are, therefore, subject to
risk of foreign currency exchange rate fluctuations. We enter into forward
contracts to economically hedge transactional exposure associated with
commitments arising from trade accounts receivable, trade accounts payable,
intercompany transactions and fixed purchase obligations denominated in a
currency other than the functional currency of the respective operating entity.
We do not, and do not intend to use derivative financial instruments for
speculative or trading purposes. All derivative instruments are recorded on our
Consolidated Balance Sheets at their respective fair values.
The forward contracts (both those that are designated and not designated as
accounting hedging instruments) will generally expire in less than three months,
with 11 months being the maximum term of the contracts outstanding as of August
31, 2021 . The change in fair value related to contracts designated as accounting
hedging instruments is initially reported as a component of AOCI and
subsequently reclassified to the revenue or expense line in which the underlying
transaction occurs within our Consolidated Statements of Operations. The change
in fair value related to contracts not designated as accounting hedging
instruments will be reflected in cost of revenue within our Consolidated
Statements of Operations. The forward contracts are primarily denominated in
Chinese yuan renminbi, Euros, Indian Rupee, Malaysian ringgit and Mexican pesos.
Based on our overall currency rate exposures as of August 31, 2021 , including
the derivative financial instruments intended to hedge the nonfunctional
currency-denominated monetary assets and liabilities, an immediate 10%
hypothetical change of foreign currency exchange rates would not have a material
effect on our Consolidated Financial Statements. See Note 11 - "Derivative
Financial Instruments and Hedging Activities" to the Consolidated Financial
Statements for additional information.
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Interest Rate Risk
Our exposure to market risk includes changes in interest rates that could affect
the Consolidated Balance Sheet, Consolidated Statement of Operations, and the
Consolidated Statement of Cash Flows. We are exposed to interest rate risk
primarily on variable rate borrowings under the Credit Facility. There were no
borrowings outstanding under debt facilities with variable interest rates as of
August 31, 2021 .
We utilize valuation models to estimate the effects of sudden interest rate
changes. Primarily due to the current low interest rates, the impact of a
hypothetical change of 10% in variable interest rates would not have a material
effect on our Consolidated Financial Statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Note 7 - "Notes Payable and Long-Term Debt" to the
Consolidated Financial Statements for additional information regarding our
outstanding debt obligations.
To manage our exposure to market risk, we use derivative financial instruments
and hybrid instruments when deemed appropriate. We have interest rate swap
agreements with a notional value of $50 million , with a mandatory termination
date of February 15, 2022 (the "2020 Extended Interest Rate Swaps"). In
addition, we have entered into interest rate swaps to offset future exposures of
fluctuations in the fair value of the 2020 Extended Interest Rate Swaps. In
connection with our anticipated debt issuance, we have interest rate swaps with
aggregate notional amounts of $250 million and $150 million , which expire on
July 31, 2024 . See Note 11 - "Derivative Financial Instruments and Hedging
Activities" to the Consolidated Financial Statements for additional information
regarding our interest rate swap transactions. We do not, and do not intend to,
use derivative financial instruments for speculative or trading purposes.
Item 8. Financial Statements and Supplementary Data
Certain information required by this item is included in Item 7 of Part II of
this Report under the heading "Quarterly Results" and is incorporated into this
item by reference. All other information required by this item is included in
Item 15 of Part IV of this Report and is incorporated into this item by
reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with our accountants on
accounting and financial disclosure.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by Rules 13a-15 and 15d-15 under the
Exchange Act (the "Evaluation"), under the supervision and with the
participation of our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15 and 15d-15 under the Exchange Act as of August 31, 2021 .
Based on the Evaluation, our CEO and CFO concluded that the design and operation
of our disclosure controls were effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) accumulated and communicated to our
senior management, including our CEO and CFO, to allow timely decisions
regarding required disclosure.
(b) Management's Report on Internal Control over Financial Reporting
We assessed the effectiveness of our internal control over financial reporting
as of August 31, 2021 . Management's report on internal control over financial
reporting as of August 31, 2021 is incorporated herein at Item 15. Ernst & Young
LLP , our independent registered public accounting firm, issued an audit report
on the effectiveness of our internal control over financial reporting as of
August 31, 2021 , which is incorporated herein at Item 15.
Our management, including our CEO and CFO, does not expect that our internal
control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls may be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control.
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Table of Contents The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Notwithstanding the foregoing limitations on the effectiveness of controls, we have reached the conclusions set forth in Management's report on internal control over financial reporting as ofAugust 31, 2021 . (c) Changes in Internal Control over Financial Reporting For our fiscal quarter endedAugust 31, 2021 , we did not identify any modifications to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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