e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-14063
JABIL CIRCUIT, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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38-1886260
(I.R.S. Employer
Identification No.) |
10560 Dr. Martin Luther King, Jr. Street North, St. Petersburg, Florida 33716
(Address of principal executive offices) (Zip Code)
(727) 577-9749
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of June 24, 2010, there were 217,463,797 shares of the registrants Common Stock outstanding.
JABIL CIRCUIT, INC. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
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Item 1: |
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FINANCIAL STATEMENTS |
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
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May 31, |
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August 31, |
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2010 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
600,349 |
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$ |
876,272 |
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Trade accounts receivable, net of allowance for doubtful accounts of $13,894 at May
31, 2010 and $15,510 at August 31, 2009 |
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1,266,724 |
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1,260,962 |
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Inventories |
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1,781,798 |
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1,226,656 |
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Prepaid expenses and other current assets |
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353,621 |
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247,795 |
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Income taxes receivable |
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32,347 |
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37,448 |
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Deferred income taxes |
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23,128 |
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27,693 |
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Total current assets |
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4,057,967 |
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3,676,826 |
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Property, plant and equipment, net of accumulated depreciation of $1,153,767 at May 31, 2010
and $1,131,765 at August 31, 2009 |
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1,378,057 |
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1,377,729 |
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Goodwill |
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28,345 |
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25,120 |
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Intangible assets, net of accumulated amortization of $112,099 at May 31, 2010 and $98,772
at August 31, 2009 |
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113,119 |
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131,168 |
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Deferred income taxes |
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60,123 |
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49,673 |
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Other assets |
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55,672 |
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57,342 |
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Total assets |
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$ |
5,693,283 |
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$ |
5,317,858 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current installments of notes payable, long-term debt and long-term lease obligations |
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$ |
87,625 |
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$ |
197,575 |
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Accounts payable |
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2,369,005 |
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1,938,009 |
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Accrued expenses |
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514,791 |
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537,851 |
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Income taxes payable |
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19,505 |
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11,831 |
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Deferred income taxes |
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3,573 |
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660 |
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Total current liabilities |
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2,994,499 |
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2,685,926 |
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Notes payable, long-term debt and long-term lease obligations, less current installments |
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1,038,412 |
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1,036,873 |
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Other liabilities |
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56,933 |
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70,124 |
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Income tax liability |
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90,915 |
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78,348 |
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Deferred income taxes |
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890 |
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4,178 |
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Total liabilities |
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4,181,649 |
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3,875,449 |
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Commitments and contingencies |
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Equity: |
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Jabil Circuit, Inc. stockholders equity: |
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Common stock, $.001 par value, authorized 500,000,000 shares; issued and outstanding
210,078,576 at May 31, 2010 and 208,022,841 at August 31, 2009 |
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219 |
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217 |
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Additional paid-in capital |
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1,500,546 |
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1,455,214 |
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Retained earnings (Accumulated deficit) |
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79,805 |
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(13,700 |
) |
Accumulated other comprehensive income |
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127,630 |
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196,972 |
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Treasury stock at cost, 9,034,698 shares at May 31, 2010 and 8,683,917 shares at
August 31, 2009 |
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(209,028 |
) |
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(203,541 |
) |
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Total Jabil Circuit, Inc. stockholders equity |
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1,499,172 |
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1,435,162 |
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Noncontrolling interests |
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12,462 |
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7,247 |
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Total equity |
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1,511,634 |
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1,442,409 |
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Total liabilities and equity |
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$ |
5,693,283 |
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$ |
5,317,858 |
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See accompanying notes to Condensed Consolidated Financial Statements.
3
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(Unaudited)
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Three months ended |
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Nine months ended |
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May 31, |
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May 31, |
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May 31, |
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May 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenue |
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$ |
3,455,578 |
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$ |
2,615,101 |
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$ |
9,548,478 |
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$ |
8,885,010 |
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Cost of revenue |
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3,193,464 |
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2,466,512 |
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8,831,842 |
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8,357,162 |
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Gross profit |
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262,114 |
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148,589 |
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716,636 |
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527,848 |
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Operating expenses: |
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Selling, general and administrative |
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151,409 |
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125,419 |
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429,226 |
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368,134 |
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Research and development |
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6,331 |
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7,198 |
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21,453 |
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18,607 |
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Amortization of intangibles |
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6,206 |
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7,612 |
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19,954 |
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23,320 |
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Restructuring and impairment charges |
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1,635 |
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16,167 |
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5,705 |
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48,312 |
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Goodwill impairment charges |
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1,022,821 |
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Loss on disposal of subsidiary |
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15,722 |
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Operating income (loss) |
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96,533 |
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(7,807 |
) |
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224,576 |
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(953,346 |
) |
Other expense |
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960 |
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|
948 |
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3,123 |
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4,169 |
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Interest income |
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(626 |
) |
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(1,087 |
) |
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(2,177 |
) |
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(5,314 |
) |
Interest expense |
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19,503 |
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19,043 |
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59,649 |
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62,854 |
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Income (loss) before income tax |
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76,696 |
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(26,711 |
) |
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163,981 |
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(1,015,055 |
) |
Income tax expense |
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24,009 |
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2,528 |
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52,591 |
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156,909 |
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Net income (loss) |
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52,687 |
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(29,239 |
) |
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111,390 |
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(1,171,964 |
) |
Net income (loss) attributable to noncontrolling interests, net of
income tax expense |
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656 |
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(477 |
) |
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1,241 |
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(1,245 |
) |
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Net income (loss) attributable to Jabil Circuit, Inc |
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$ |
52,031 |
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$ |
(28,762 |
) |
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$ |
110,149 |
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$ |
(1,170,719 |
) |
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Earnings (Loss) Per Share: |
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Income (loss) attributable to the stockholders of Jabil Circuit, Inc.: |
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Basic |
|
$ |
0.24 |
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$ |
(0.14 |
) |
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$ |
0.51 |
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$ |
(5.66 |
) |
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Diluted |
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$ |
0.24 |
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$ |
(0.14 |
) |
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$ |
0.51 |
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$ |
(5.66 |
) |
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Weighted average shares outstanding: |
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Basic |
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213,881 |
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207,190 |
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214,051 |
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206,767 |
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Diluted |
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216,522 |
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207,190 |
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218,089 |
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206,767 |
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Cash dividends declared per common share |
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$ |
0.07 |
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$ |
0.07 |
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$ |
0.21 |
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$ |
0.21 |
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See accompanying notes to Condensed Consolidated Financial Statements.
4
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
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Three months ended |
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Nine months ended |
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May 31, |
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May 31, |
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May 31, |
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May 31, |
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|
2010 |
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2009 |
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2010 |
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|
2009 |
|
Net income (loss) |
|
$ |
52,687 |
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|
$ |
(29,239 |
) |
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$ |
111,390 |
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$ |
(1,171,964 |
) |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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(45,338 |
) |
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37,426 |
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(70,643 |
) |
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(131,712 |
) |
Change in fair market value of derivative instruments, net of tax |
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(2,058 |
) |
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|
493 |
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(1,662 |
) |
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|
470 |
|
Amortization of loss on hedge arrangements, net of tax |
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|
988 |
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|
600 |
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2,963 |
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1,801 |
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Comprehensive income (loss) |
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6,279 |
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|
9,280 |
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|
42,048 |
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(1,301,405 |
) |
Comprehensive income (loss) attributable to noncontrolling interests |
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|
656 |
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|
|
(477 |
) |
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1,241 |
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(1,245 |
) |
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Comprehensive income (loss) attributable to Jabil Circuit, Inc |
|
$ |
5,623 |
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|
$ |
9,757 |
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$ |
40,807 |
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$ |
(1,300,160 |
) |
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Accumulated foreign currency translation gains were $168.1 million at May 31, 2010 and
$238.7 million at August 31, 2009. Foreign currency translation adjustments primarily consist of
adjustments to consolidate subsidiaries that use a foreign currency as their functional currency.
See accompanying notes to condensed consolidated financial statements.
5
JABIL CIRCUIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Nine months ended |
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May 31, |
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May 31, |
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2010 |
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|
2009 |
|
Cash flows from operating activities: |
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|
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|
Net income (loss) |
|
$ |
111,390 |
|
|
$ |
(1,171,964 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |
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Depreciation and amortization |
|
|
211,943 |
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|
218,314 |
|
Recognition of deferred grant proceeds |
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(1,467 |
) |
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|
(1,352 |
) |
Amortization of loss on hedge arrangement |
|
|
2,963 |
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|
|
1,801 |
|
Amortization of bond issuance costs and discount |
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|
2,770 |
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|
|
1,061 |
|
Recognition of stock-based compensation expense |
|
|
67,980 |
|
|
|
33,044 |
|
Deferred income taxes |
|
|
(8,230 |
) |
|
|
107,338 |
|
Restructuring and impairment charges |
|
|
5,705 |
|
|
|
48,312 |
|
Goodwill impairment charges |
|
|
|
|
|
|
1,022,821 |
|
Provision for allowance for doubtful accounts and notes receivable |
|
|
(222 |
) |
|
|
9,642 |
|
Excess tax (benefit) from options exercised |
|
|
(118 |
) |
|
|
(2,376 |
) |
Loss (gain) on sale of property |
|
|
4,607 |
|
|
|
(2,709 |
) |
Loss on disposal of subsidiary . |
|
|
12,756 |
|
|
|
|
|
Change in operating assets and liabilities, exclusive of net assets acquired: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(70,093 |
) |
|
|
266,635 |
|
Inventories |
|
|
(607,742 |
) |
|
|
248,425 |
|
Prepaid expenses and other current assets |
|
|
(126,005 |
) |
|
|
5,365 |
|
Other assets |
|
|
1,556 |
|
|
|
(4,642 |
) |
Accounts payable and accrued expenses |
|
|
509,838 |
|
|
|
(392,371 |
) |
Income taxes payable |
|
|
24,545 |
|
|
|
951 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
142,176 |
|
|
|
388,295 |
|
|
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Cash flows from investing activities: |
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Cash paid for business and intangible asset acquisitions, net of cash acquired |
|
|
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|
|
(1,115 |
) |
Acquisition of property, plant and equipment |
|
|
(245,118 |
) |
|
|
(235,179 |
) |
Proceeds from sale of property, plant and equipment |
|
|
7,257 |
|
|
|
8,620 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(237,861 |
) |
|
|
(227,674 |
) |
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under debt agreements |
|
|
3,062,460 |
|
|
|
3,023,312 |
|
Payments toward debt agreements and capital lease obligations |
|
|
(3,171,960 |
) |
|
|
(3,161,480 |
) |
Dividends paid to stockholders |
|
|
(44,901 |
) |
|
|
(44,629 |
) |
Net proceeds from exercise of stock options and issuance of common stock
under employee stock purchase plan |
|
|
6,210 |
|
|
|
3,396 |
|
Treasury stock minimum tax withholding |
|
|
(5,487 |
) |
|
|
(853 |
) |
Net proceeds from issuance of ordinary shares of certain subsidiaries |
|
|
586 |
|
|
|
|
|
Bank overdraft |
|
|
9,665 |
|
|
|
|
|
Excess tax benefit from options exercised |
|
|
118 |
|
|
|
2,376 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(143,309 |
) |
|
|
(177,878 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(36,929 |
) |
|
|
13,249 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(275,923 |
) |
|
|
(4,008 |
) |
Cash and cash equivalents at beginning of period |
|
|
876,272 |
|
|
|
772,923 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
600,349 |
|
|
$ |
768,915 |
|
|
|
|
|
|
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
6
JABIL
CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the information set forth therein have been included. The
accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction
with the consolidated financial statements and footnotes included in the Annual Report on Form 10-K
of Jabil Circuit, Inc. (the Company) for the fiscal year ended August 31, 2009. Results for the
three month and nine month periods ended May 31, 2010 are not necessarily an indication of the
results that may be expected for the full fiscal year ending August 31, 2010.
Certain amounts in the prior periods financial statements have been reclassified to conform
to the current periods presentation.
Note 2. Inventories
The components of inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2010 |
|
|
2009 |
|
Raw materials |
|
$ |
1,279,861 |
|
|
$ |
878,739 |
|
Work in process |
|
|
337,595 |
|
|
|
208,266 |
|
Finished goods |
|
|
164,342 |
|
|
|
139,651 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,781,798 |
|
|
$ |
1,226,656 |
|
|
|
|
|
|
|
|
Note 3. Earnings (Loss) Per Share and Dividends
a. Earnings (Loss) Per Share
On September 1, 2009, the Company adopted accounting guidance on earnings per share which
provides that unvested share-based payment awards that contain non-forfeitable rights to dividends
or dividend equivalents, whether paid or unpaid, be considered participating securities and
therefore are included in the computation of earnings per share pursuant to the two-class method.
For the Company, participating securities consist of certain unvested restricted stock awards. All
prior-period earnings per share data has been retrospectively adjusted as required.
The Company calculates its basic earnings (loss) per share by dividing net income
(loss) attributable to Jabil Circuit, Inc. by the weighted average number of common shares and
participating securities outstanding during the period. In periods of a net loss, participating
securities are not included in the basic (loss) per share calculation as such participating
securities are not contractually obligated to fund losses. The Companys diluted earnings (loss)
per share is calculated in a similar manner, but includes the effect of dilutive securities. To
the extent these securities are anti-dilutive, they are excluded from the calculation of diluted
earnings (loss) per share. The following table sets forth the calculations of basic and diluted
earnings (loss) per share attributable to the stockholders of Jabil Circuit, Inc. (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Jabil Circuit, Inc. |
|
$ |
52,031 |
|
|
$ |
(28,762 |
) |
|
$ |
110,149 |
|
|
$ |
(1,170,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
209,813 |
|
|
|
207,190 |
|
|
|
209,121 |
|
|
|
206,767 |
|
Share-based payment awards classified as participating securities |
|
|
4,068 |
|
|
|
|
(2) |
|
|
4,930 |
|
|
|
|
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share |
|
|
213,881 |
|
|
|
207,190 |
|
|
|
214,051 |
|
|
|
206,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares issuable under the employee stock purchase plan and
upon exercise of stock options and stock appreciation rights |
|
|
413 |
|
|
|
|
|
|
|
265 |
|
|
|
|
|
Dilutive unvested non-participating restricted stock awards |
|
|
2,228 |
|
|
|
|
|
|
|
3,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Denominator for diluted earnings (loss) per share |
|
|
216,522 |
(1) |
|
|
207,190 |
(3) |
|
|
218,089 |
(1) |
|
|
206,767 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to the stockholders of Jabil Circuit, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
(0.14 |
) |
|
$ |
0.51 |
|
|
$ |
(5.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.24 |
|
|
$ |
(0.14 |
) |
|
$ |
0.51 |
|
|
$ |
(5.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months and nine months ended May 31, 2010, options to purchase
5,204,495 and 6,319,622 shares of common stock, respectively, and 7,990,732 and 7,997,232
stock appreciation rights, respectively, were excluded from the computation of diluted
earnings per share as their effect would have been anti-dilutive. |
|
(2) |
|
For the three months and nine months ended May 31, 2009, 6,239,000 and 6,520,000
participating securities, respectively, were excluded from the computation of earnings per
share due to the net loss for the periods. |
|
(3) |
|
For the three months and nine months ended May 31, 2009, no potential common
shares relating to the Companys equity awards were included in the computation of diluted
loss per share as their effect would have been anti-dilutive given the Companys net loss
for the periods. Accordingly for the three months and nine months ended May 31, 2009,
22,664,515 and 22,653,474 common share equivalents, which consist of stock options and
restricted stock awards, and 8,010,799 and 8,005,799 stock appreciation rights,
respectively, were excluded from the computation of diluted loss per share. |
b. Dividends
The following table sets forth certain information relating to the Companys cash dividends
declared to common stockholders of the Company during the nine months ended May 31, 2010 and 2009:
Dividend Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash |
|
|
|
|
|
|
|
Dividend |
|
Dividend |
|
|
dividends |
|
|
Date of record for |
|
Dividend cash |
|
|
declaration date |
|
per share |
|
|
declared |
|
|
dividend payment |
|
payment date |
|
|
|
|
(in thousands, except for per share data) |
|
|
Fiscal year 2010: |
|
October 22, 2009 |
|
$ |
0.07 |
|
|
$ |
15,186 |
(1) |
|
November 16, 2009 |
|
December 1, 2009 |
|
|
January 22, 2010 |
|
$ |
0.07 |
|
|
$ |
15,238 |
|
|
February 16, 2010 |
|
March 1, 2010 |
|
|
April 14, 2010 |
|
$ |
0.07 |
|
|
$ |
15,221 |
|
|
May 17, 2010 |
|
June 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2009: |
|
October 24, 2008 |
|
$ |
0.07 |
|
|
$ |
14,916 |
|
|
November 17, 2008 |
|
December 1, 2008 |
|
|
January 22, 2009 |
|
$ |
0.07 |
|
|
$ |
14,974 |
|
|
February 17, 2009 |
|
March 2, 2009 |
|
|
April 23, 2009 |
|
$ |
0.07 |
|
|
$ |
14,954 |
|
|
May 15, 2009 |
|
June 1, 2009 |
|
|
|
(1) |
|
Of the $15.2 million in total dividends declared during the first fiscal quarter of
2010, $14.4 million was paid out of additional paid-in capital (which represents the amount
of dividends declared in excess of the Companys retained earnings balance as of the date
that the dividend was declared). |
Note 4. Stock-Based Compensation
The Company recognizes stock-based compensation expense, reduced for estimated forfeitures, on
a straight-line basis over the requisite service period of the award, which is generally the
vesting period for outstanding stock awards. The Company recorded $27.5 million and $68.0 million
of gross stock-based compensation expense, which is included in selling, general and administrative
expenses in the Condensed Consolidated Statements of Operations for the three months and nine
months ended May 31, 2010, respectively. The Company recorded tax benefits related to the
stock-based compensation expense of $0.7 million and $1.3 million which is included in income tax
expense in the Condensed Consolidated Statements of Operations for the three months and nine months
ended May 31, 2010, respectively. Included in the stock-based compensation expense recognized by
the Company is $0.8 million and $3.0 million related to the Companys employee stock purchase plan
(ESPP) during the three months and nine months ended May 31, 2010, respectively. The Company
recorded $13.0 million and $33.0 million of gross stock-based compensation expense, which is
included in selling, general and administrative expenses in the Condensed Consolidated Statements
of Operations for the three months and nine months ended May 31, 2009, respectively. The Company
recorded tax benefits related to the stock-based compensation expense of $1.0 million and
$1.8 million which is included in income tax expense in the Condensed Consolidated Statements of
Operations
8
for the three months and nine months ended May 31, 2009, respectively. Included in the
stock-based compensation expense recognized by the Company is $1.1 million and $4.2 million related to the
ESPP during the three months and nine months ended May 31, 2009, respectively. The Company
capitalizes stock-based compensation costs related to awards granted to employees whose
compensation costs are directly attributable to the cost of inventory. At May 31, 2010 and August
31, 2009, $0.4 million and $0.3 million of stock-based compensation expense was classified as
inventory costs on the Condensed Consolidated Balance Sheets, respectively.
Cash received from exercises under all share-based payment arrangements, including the
Companys ESPP, for the nine months ended May 31, 2010 and 2009 was $6.2 million and $3.4 million,
respectively. The proceeds for the nine months ended May 31, 2010 and 2009 were offset by
$5.5 million and $0.9 million, respectively, in market value of restricted shares withheld by the
Company to satisfy the minimum amount of employee income tax withholding requirements. The market
value of the restricted shares withheld was determined on the date that the restricted shares
vested and resulted in the withholding of 350,747 shares and 108,985 shares of the Companys common
stock during the nine months ended May 31, 2010 and 2009, respectively. The amounts have been
classified as treasury stock on the Condensed Consolidated Balance Sheets. The Company currently
expects to satisfy share-based awards with registered shares available to be issued.
As described in Note 6 Commitments and Contingencies, the Company was involved in a
putative shareholder class action lawsuit in connection with certain historical stock option
grants. The plaintiffs did not petition the U.S. Supreme Court for a writ of certiorari by May 24,
2010 (which was the deadline for such petition). Accordingly, the Company considers this
litigation to be concluded.
a. Stock Option and Stock Appreciation Right Plans
The Companys 1992 Stock Option Plan (the 1992 Plan) provided for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and for
the granting of non-statutory stock options to employees and consultants of the Company. A total of
23,440,000 shares of common stock were reserved for issuance under the 1992 Plan. The 1992 Plan was
adopted by the Board of Directors in November of 1992 and was terminated in October 2001 with the
remaining shares transferred into a new plan created in fiscal year 2002.
In October 2001, the Company established a new Stock Option Plan (the 2002 Incentive Plan).
The 2002 Incentive Plan was adopted by the Board of Directors in October 2001 and approved by the
stockholders in January 2002. The 2002 Incentive Plan provides for the granting of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code and non-statutory stock
options, as well as restricted stock, stock appreciation rights and other stock-based awards. The
2002 Incentive Plan has a total of 41,808,726 shares reserved for grant, including 2,608,726 shares
that were transferred from the 1992 Plan when it was terminated in October 2001, 7,000,000 shares
authorized in January 2002, 10,000,000 shares authorized in January 2004, 7,000,000 shares
authorized in January 2006, 3,000,000 shares authorized in August 2007, 2,500,000 shares authorized
in January 2008, 1,500,000 shares authorized in January 2009 and 8,200,000 shares authorized in
January 2010. The Company also adopted sub-plans under the 2002 Incentive Plan for its United
Kingdom employees (the CSOP Plan) and for its French employees (the FSOP Plan). The CSOP Plan
and FSOP Plan are tax advantaged plans for the Companys United Kingdom and French employees,
respectively. Shares are issued under the CSOP Plan and FSOP Plan from the authorized shares under
the 2002 Incentive Plan.
The 2002 Incentive Plan provides that the exercise price of all stock options and stock
appreciation rights (collectively known as Options) generally shall be no less than the fair
market value of shares of common stock on the date of grant. Exceptions to this general rule apply
to grants of stock appreciation rights, grants of Options intended to preserve the economic value
of stock option and other equity-based interests held by employees of acquired entities, and grants
of Options intended to provide a material inducement for a new employee to commence employment with
the Company. It is and has been the Companys intention for the exercise price of Options granted
under the 2002 Incentive Plan to be at least equal to the fair market value of shares of common
stock on the date of grant. However, as we previously discussed in Note 2 Stock Option
Litigation and Restatements to the Consolidated Financial Statements in the Annual Report on Form
10-K for the fiscal year ending August 31, 2006, a certain number of Options were identified that
had a measurement date based on the date that the Compensation Committee or management (as
appropriate) decided to grant the Options, instead of the date that the terms of such grants became
final, and, therefore, the relating Options had an exercise price less than the fair market value
of shares of common stock on the final date of measurement. As a result, the holders of the Options
with an exercise price less than the fair market value of shares of common stock on the final date
of measurement may incur adverse tax consequences. Such adverse tax consequences relate to the
portions of such Options that vest after December 31, 2004 (Section 409A Affected Options) and
subject the option holder to accelerated income taxation and a penalty tax under Internal Revenue
Code Section 409A (Section 409A).
In October 2007, the Board of Directors approved comprehensive procedures governing the manner
in which Options are granted to, among other things, substantially reduce the likelihood that
future grants of Options will be made with an exercise price
9
that is less than the fair market value of shares of common stock on the Option measurement date for financial accounting and
reporting purposes.
With respect to any participant who owns stock representing more than 10% of the voting power
of all classes of stock of the Company, the exercise price of any incentive stock option granted is
equal to at least 110% of the fair market value on the grant date and the maximum term of the
option may not exceed five years. The term of all other Options under the 2002 Incentive Plan may
not exceed ten years. Beginning in fiscal year 2006, Options will generally vest at a rate of
one-twelfth 15 months after the grant date with an additional one-twelfth vesting at the end of
each three-month period thereafter, becoming fully vested after a 48-month period. Prior to this
change, Options generally vested at a rate of 12% after the first six months and 2% per month
thereafter, becoming fully vested after a 50-month period.
The Company applies a lattice valuation model for Options granted subsequent to August 31,
2005, excluding those granted under the ESPP. The lattice valuation model is a more flexible
analysis to value employee Options because of its ability to incorporate inputs that change over
time, such as volatility and interest rates, and to allow for actual exercise behavior of Option
holders. Prior to this change, the Company used the Black-Scholes model for valuing Options. The
Company uses historical data to estimate the Option exercise and employee departure behavior used
in the lattice valuation model. The expected term of Options granted is derived from the output of
the option pricing model and represents the period of time that Options granted are expected to be
outstanding. The risk-free rate for periods within the contractual term of the Options is based on
the U.S. Treasury yield curve in effect at the time of grant. The volatility used for the lattice
model is a constant volatility for all periods within the contractual term of the Option. The
constant volatility is a weighted average of implied volatilities from traded Options and
historical volatility corresponding to the contractual term of the Option. The expected dividend
yield of Options granted is derived based on the expected annual dividend yield over the expected
life of the Option expressed as a percentage of the stock price on the date of grant.
The weighted-average grant-date fair value per share of Options granted during the nine months
ended May 31, 2010 and 2009 was $6.36 and $3.50, respectively. The total intrinsic value of Options
exercised during the nine months ended May 31, 2010 and 2009 was $331.9 thousand and $3.6 thousand,
respectively. As of May 31, 2010, there was $10.2 million of unrecognized compensation costs
related to non-vested Options that is expected to be recognized over a weighted-average period of
1.2 years. The total fair value of Options vested during the nine months ended May 31, 2010 and
2009 was $14.0 million and $18.6 million, respectively.
Following are the weighted-average grant-date and range assumptions, where applicable, used
for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Expected dividend yield |
|
|
* |
|
|
|
* |
|
|
|
1.9 |
% |
|
|
4.3 |
% |
Risk-free interest rate |
|
|
* |
|
|
|
* |
|
|
0.1% to 3.4% |
|
0% to 2.9% |
Weighted-average expected volatility |
|
|
* |
|
|
|
* |
|
|
|
60.2 |
% |
|
|
68.1 |
% |
Weighted-average expected life |
|
|
* |
|
|
|
* |
|
|
5.6 years |
|
|
6.3 years |
|
|
|
|
* |
|
Note that the Company did not grant Options during the quarters ended May 31, 2010 and 2009. |
The fair-value method is also applied to non-employee awards. The measurement date for equity
awards granted to non-employees is the earlier of the performance commitment date or the date the
services required under the arrangement have been completed. Non-employee awards are classified as
liabilities on the Condensed Consolidated Balance Sheets and are therefore remeasured at each
interim reporting period until the Options are exercised, cancelled or expire unexercised. At May
31, 2010 and August 31, 2009, $37.0 thousand and $47.0 thousand, respectively, related to
non-employee stock-based awards were classified as a liability on the Companys Condensed
Consolidated Balance Sheets and a gain of $23.0 thousand and $10.0 thousand were recorded in the
Condensed Consolidated Statements of Operations for the three months and nine months ended May 31,
2010, respectively, resulting from re-measurement of the awards. The Company recognized a loss of
$27.0 thousand and a gain of $0.2 million in the Condensed Consolidated Statement of Operations for
the three months and nine months ended May 31, 2009, respectively, resulting from re-measurement of
non-employee awards.
At May 31, 2010, the Company had 111,414 Options outstanding that will be settled by the
Company with cash. The Company classifies cash-settled awards as liabilities on the Condensed
Consolidated Balance Sheets and measures these awards at fair value at each reporting date until
the award is ultimately settled (i.e. until the Option is exercised, canceled or expires
unexercised). All changes in fair value are recorded in the Condensed Consolidated Statements of
Operations at each reporting date. At May 31, 2010 and August 31, 2009, $0.2 million and $0.1
million, respectively, related to cash settled awards were recorded as a liability on the Condensed
Consolidated Balance Sheets. The Company recognized a gain of $40.1 thousand and a loss of $11.8
thousand in the Condensed Consolidated Statements of Operations for the three months and nine
months ended May 31, 2010, respectively, and a loss
10
of $4.5 thousand and a gain of $84.8 thousand for the three months and nine months ended May 31, 2009, respectively, to record the awards at fair
value.
The following table summarizes Option activity from September 1, 2009 through May 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
Shares |
|
|
|
|
|
|
Aggregate |
|
|
Average |
|
|
Remaining |
|
|
|
Available |
|
|
Options |
|
|
Intrinsic Value |
|
|
Exercise |
|
|
Contractual |
|
|
|
for Grant |
|
|
Outstanding |
|
|
(in thousands) |
|
|
Price |
|
|
Life (years) |
|
Balance at September 1, 2009 |
|
|
5,128,096 |
|
|
|
15,021,674 |
|
|
$ |
154 |
|
|
$ |
24.04 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized |
|
|
8,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(940,808 |
) |
|
|
|
|
|
|
|
|
|
$ |
23.03 |
|
|
|
|
|
Options granted(1) |
|
|
|
|
|
|
28,570 |
|
|
|
|
|
|
$ |
14.88 |
|
|
|
|
|
Options cancelled |
|
|
1,479,537 |
|
|
|
(1,479,537 |
) |
|
|
|
|
|
$ |
25.38 |
|
|
|
|
|
Restricted stock awards(2) |
|
|
(3,806,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(101,732 |
) |
|
|
|
|
|
$ |
13.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2010 |
|
|
10,060,695 |
|
|
|
13,468,975 |
|
|
$ |
1,169 |
|
|
$ |
24.12 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2010 |
|
|
|
|
|
|
12,167,252 |
|
|
$ |
952 |
|
|
$ |
24.24 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents stock appreciation rights that will be settled in cash. |
|
(2) |
|
Represents the maximum number of shares that can be issued based on the achievement
of certain performance criteria. |
b. Restricted Stock Awards
Beginning in fiscal year 2005, the Company granted restricted stock awards to certain key
employees pursuant to the 2002 Stock Incentive Plan. The awards granted in fiscal year 2005 vested
during the first quarter of fiscal year 2010, which is five years from the date of grant. In fiscal
year 2006, the Company began granting certain restricted stock awards that have performance
conditions that will be measured at the end of the employees requisite service period, which
provide a range of vesting possibilities from 0% to 200%. The performance-based restricted awards
generally vest on a cliff vesting schedule over a three-year period. The stock-based compensation
expense for these restricted stock awards (including restricted stock and restricted stock units)
is measured at fair value on the date of grant based on the number of shares expected to vest and
the quoted market price of the Companys common stock. For restricted stock awards with performance
conditions, stock-based compensation expense is originally based on the number of shares that would
vest if the Company achieved 100% of the performance goal, which was the probable outcome at the
grant date. Throughout the requisite service period management monitors the probability of
achievement of the performance condition. If it becomes probable, based on the Companys
performance, that more or less than the current estimate of the awarded shares will vest, an
adjustment to stock-based compensation expense will be recognized as a change in accounting
estimate.
During the second quarter of fiscal year 2009, it was determined that none of the restricted
stock awards that were granted in fiscal year 2008 with performance conditions were probable of
vesting. This change in estimate resulted in a reversal of $10.2 million in stock-based
compensation expense from the Condensed Consolidated Statements of Operations in the second quarter
of fiscal year 2009. During the second quarter of fiscal year 2010, it was determined that 40% of
the restricted stock awards that were granted in fiscal year 2008 with performance conditions were
probable of vesting. This change in estimate resulted in the recognition of $7.1 million in
stock-based compensation expense during the second quarter of fiscal year 2010. During the third
quarter of fiscal year 2010, it was further determined that 110% of the restricted stock awards
that were granted in fiscal year 2008 with performance conditions were probable of vesting. This
change in estimate resulted in the recognition of $14.3 million in stock-based compensation expense
during the third quarter of fiscal year 2010. The restricted stock awards that were granted in
fiscal years 2009 and 2010 continue to be recognized based on an estimated 100% performance goal,
the probable outcome.
The Company began granting time-based restricted stock to employees in fiscal year 2007. The
time-based restricted shares granted generally vest on a graded vesting schedule over three years.
The stock-based compensation expense for these restricted stock awards (including restricted stock
and restricted stock units) is measured at fair value on the date of grant based upon the quoted
market price of the Companys common stock.
In fiscal year 2008, the Company began granting certain restricted stock awards with a vesting
condition that is tied to the Standard and Poors 500 Composite Index. Such a market condition must
be considered in the grant date fair value of the award with such fair value determination made
using a lattice model, which utilizes multiple input variables to determine the probability of the
Company achieving the specified market conditions. Stock-based compensation expense related to an
award with a market condition
11
will be recognized over the requisite service period regardless of
whether the market condition is satisfied, provided that the requisite service period has been
completed.
At May 31, 2010, there was $51.5 million of total unrecognized stock-based compensation
expense related to restricted stock awards granted under the 2002 Stock Incentive Plan. This
expense is expected to be recognized over a weighted-average period of 1.6 years.
The following table summarizes restricted stock activity from September 1, 2009 through May
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted - |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Non-vested balance at September 1, 2009 |
|
|
10,201,552 |
|
|
$ |
15.50 |
|
|
|
|
|
|
|
|
|
|
Changes during the period |
|
|
|
|
|
|
|
|
Shares granted(1) |
|
|
5,787,295 |
|
|
$ |
14.28 |
|
Shares vested |
|
|
(1,561,511 |
) |
|
$ |
17.87 |
|
Shares forfeited |
|
|
(1,981,165 |
) |
|
$ |
25.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance at May 31, 2010 |
|
|
12,446,171 |
|
|
$ |
13.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the maximum number of shares that can vest based on the
achievement of certain performance criteria. |
c. Employee Stock Purchase Plan
The ESPP was adopted by the Companys Board of Directors in October 2001 and approved by the
shareholders in January 2002. Initially there were 2,000,000 shares reserved under the ESPP. An
additional 2,000,000 shares and 3,000,000 shares were authorized for issuance under the ESPP and
approved by stockholders in January 2006 and January 2009, respectively. The Company also adopted a
sub-plan under the ESPP for its Indian employees. The Indian sub-plan is a tax advantaged plan for
the Companys Indian employees. Shares are issued under the Indian sub-plan from the authorized
shares under the ESPP.
Employees are eligible to participate in the ESPP after 90 days of employment with the
Company. The ESPP permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 10% of an employees compensation, as defined in the ESPP, at a price equal to
85% of the fair market value of the common stock at the beginning or end of the offering period,
whichever is lower. The ESPP is intended to qualify under section 423 of the Internal Revenue Code.
Unless terminated sooner, the ESPP will terminate on October 17, 2011.
The
maximum number of shares that a participant may purchase in an
offering period is determined in June and December. As such, there were 740,720 and 580,887 shares
purchased under the ESPP during the nine months ended May 31, 2010 and 2009, respectively.
The fair value of shares issued under the ESPP was estimated on the commencement date of each
offering period using the Black-Scholes option pricing model. The following weighted-average
assumptions were used in the model for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Expected dividend yield |
|
|
0.8 |
% |
|
|
0.9 |
% |
|
|
0.8 |
% |
|
|
0.9 |
% |
Risk-free interest rate |
|
|
0.2 |
% |
|
|
2.1 |
% |
|
|
0.2 |
% |
|
|
2.1 |
% |
Weighted-average expected volatility |
|
|
49.0 |
% |
|
|
58.1 |
% |
|
|
49.0 |
% |
|
|
58.1 |
% |
Expected life |
|
.5 years |
|
|
.5 years |
|
|
.5 years |
|
|
.5 years |
|
Note 5. Concentration of Risk and Segment Data
a. Concentration of Risk
The Company operates in 24 countries worldwide. Sales to unaffiliated customers are based on
the Companys location that provides the electronics design, production, product management or
aftermarket services. The following table sets forth external net revenue, net of intercompany
eliminations, and long-lived asset information where individual countries represent a material
portion of the total (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
External net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico |
|
$ |
906,408 |
|
|
$ |
653,757 |
|
|
$ |
2,465,588 |
|
|
$ |
1,948,958 |
|
China |
|
|
568,882 |
|
|
|
496,704 |
|
|
|
1,706,632 |
|
|
|
1,828,872 |
|
United States |
|
|
541,154 |
|
|
|
407,111 |
|
|
|
1,479,988 |
|
|
|
1,446,050 |
|
Hungary |
|
|
340,856 |
|
|
|
303,644 |
|
|
|
862,959 |
|
|
|
834,293 |
|
Malaysia |
|
|
329,131 |
|
|
|
191,749 |
|
|
|
828,972 |
|
|
|
606,241 |
|
Brazil |
|
|
148,071 |
|
|
|
119,903 |
|
|
|
420,761 |
|
|
|
389,673 |
|
Other |
|
|
621,076 |
|
|
|
442,233 |
|
|
|
1,783,578 |
|
|
|
1,830,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,455,578 |
|
|
$ |
2,615,101 |
|
|
$ |
9,548,478 |
|
|
$ |
8,885,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2010 |
|
|
2009 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
China |
|
$ |
430,074 |
|
|
$ |
413,064 |
|
United States |
|
|
254,357 |
|
|
|
252,574 |
|
Mexico |
|
|
218,374 |
|
|
|
247,605 |
|
Taiwan |
|
|
115,140 |
|
|
|
133,395 |
|
Malaysia |
|
|
103,327 |
|
|
|
101,246 |
|
Poland |
|
|
92,509 |
|
|
|
91,188 |
|
India |
|
|
70,995 |
|
|
|
76,443 |
|
Hungary |
|
|
70,398 |
|
|
|
80,618 |
|
Other |
|
|
164,347 |
|
|
|
137,884 |
|
|
|
|
|
|
|
|
|
|
$ |
1,519,521 |
|
|
$ |
1,534,017 |
|
|
|
|
|
|
|
|
Total foreign source net revenue represented 84.3% and 84.5% of net revenue for the three
months and nine months ended May 31, 2010, respectively, compared to 84.4% and 83.7% for the three
months and nine months ended May 31, 2009, respectively.
Sales of the Companys products are concentrated among specific customers. For the nine months
ended May 31, 2010, the Companys five largest customers accounted for approximately 46% of its net
revenue and 48 customers accounted for approximately 90% of its net revenue. Sales to the above
customers were reported in the Consumer, Electronic Manufacturing Services (EMS) and Aftermarket
Services (AMS) operating segments.
Production levels for the Consumer division are subject to seasonal influences. The Company
may realize greater net revenue during our first fiscal quarter due to higher demand for consumer
products during the holiday selling season. Therefore, quarterly results should not be relied upon
as necessarily indicative of results for the entire fiscal year.
b. Segment Data
Operating segments are defined as components of an enterprise that engage in business
activities from which it may earn revenues and incur expenses; for which separate financial
information is available; and whose operating results are regularly reviewed by the chief operating
decision maker to assess the performance of the individual segment and make decisions about
resources to be allocated to the segment.
The Company derives its revenue from providing comprehensive electronics design, production,
product management and aftermarket services. Management, including the Chief Executive Officer,
evaluates performance and allocates resources on a divisional basis for manufacturing and service
operating segments. The Companys operating segments consist of three segments Consumer, EMS and
AMS.
Net revenue for the operating segments is attributed to the division in which the product is
manufactured or service is performed. An operating segments performance is evaluated on its
pre-tax operating contribution, or segment income. Segment income is defined as net revenue less
cost of revenue, segment selling, general and administrative expenses, segment research and
development expenses and an allocation of corporate manufacturing expenses and selling,
general and administrative expenses, and does not include amortization of intangibles, stock-based
compensation expense, restructuring and impairment charges, goodwill impairment charges, loss on
disposal of subsidiary, other expense, interest income, interest expense, income tax expense or
adjustment for net income (loss) attributable to noncontrolling interests. Total segment assets are
defined as trade accounts receivable, inventories, net customer related machinery and equipment,
intangible assets net of accumulated amortization and goodwill. All other non-segment
13
assets are
reviewed on a global basis by management. Transactions between operating segments are generally
recorded at amounts that approximate arms length.
The following table sets forth operating segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
$ |
1,148,596 |
|
|
$ |
920,753 |
|
|
$ |
3,339,442 |
|
|
$ |
3,197,770 |
|
EMS |
|
|
2,095,734 |
|
|
|
1,507,437 |
|
|
|
5,602,529 |
|
|
|
5,170,166 |
|
AMS |
|
|
211,248 |
|
|
|
186,911 |
|
|
|
606,507 |
|
|
|
517,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,455,578 |
|
|
$ |
2,615,101 |
|
|
$ |
9,548,478 |
|
|
$ |
8,885,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) and reconciliation of
income (loss) before income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Consumer |
|
$ |
11,326 |
|
|
$ |
(4,296 |
) |
|
$ |
42,377 |
|
|
$ |
53,311 |
|
EMS |
|
|
104,011 |
|
|
|
12,394 |
|
|
|
239,085 |
|
|
|
73,262 |
|
AMS |
|
|
16,524 |
|
|
|
20,913 |
|
|
|
52,475 |
|
|
|
47,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income |
|
|
131,861 |
|
|
|
29,011 |
|
|
|
333,937 |
|
|
|
174,151 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
27,487 |
|
|
|
13,039 |
|
|
|
67,980 |
|
|
|
33,044 |
|
Amortization of intangibles |
|
|
6,206 |
|
|
|
7,612 |
|
|
|
19,954 |
|
|
|
23,320 |
|
Restructuring and impairment charges. |
|
|
1,635 |
|
|
|
16,167 |
|
|
|
5,705 |
|
|
|
48,312 |
|
Goodwill impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022,821 |
|
Loss on disposal of subsidiary |
|
|
|
|
|
|
|
|
|
|
15,722 |
|
|
|
|
|
Other expense |
|
|
960 |
|
|
|
948 |
|
|
|
3,123 |
|
|
|
4,169 |
|
Interest income |
|
|
(626 |
) |
|
|
(1,087 |
) |
|
|
(2,177 |
) |
|
|
(5,314 |
) |
Interest expense |
|
|
19,503 |
|
|
|
19,043 |
|
|
|
59,649 |
|
|
|
62,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
$ |
76,696 |
|
|
$ |
(26,711 |
) |
|
$ |
163,981 |
|
|
$ |
(1,015,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2010 |
|
|
2009 |
|
Total assets |
|
|
|
|
|
|
|
|
Consumer |
|
$ |
1,680,402 |
|
|
$ |
1,723,934 |
|
EMS |
|
|
2,452,291 |
|
|
|
2,017,575 |
|
AMS |
|
|
264,670 |
|
|
|
280,126 |
|
Other non-allocated assets |
|
|
1,295,920 |
|
|
|
1,296,223 |
|
|
|
|
|
|
|
|
|
|
$ |
5,693,283 |
|
|
$ |
5,317,858 |
|
|
|
|
|
|
|
|
See Note 7 Restructuring and Impairment Charges for a discussion of the Companys
restructuring plans initiated in fiscal years 2009 and 2006.
Note 6. Commitments and Contingencies
a. Legal Proceedings
i. Private Litigation Related to Certain Historical Stock Option Grant Practices
In April and May of 2006, shareholder derivative lawsuits were filed in State Circuit Court in
Pinellas County, Florida on behalf of a purported shareholder of the Company naming the Company as
a nominal defendant, and naming certain of the Companys officers and directors as defendants.
Those lawsuits were subsequently consolidated (the Consolidated State Derivative Action). The
Consolidated State Derivative Action alleged breaches of certain fiduciary duties to the Company by
backdating certain stock option
14
grants between August 1998 and October 2004 to make it appear that
they were granted on a prior date when the Companys stock price was lower. Subsequently, two
similar federal derivative suits were filed and consolidated in January 2007 into one action (the
Consolidated Federal Derivative Action).
On May 3, 2006, the Companys Board of Directors appointed a Special Committee that reviewed
the allegations asserted in all of the above derivative actions and concluded that the evidence did
not support a finding of intentional manipulation of stock option grant pricing by any member of
management. In addition, the Special Committee concluded that it was not in the Companys best
interests to pursue the derivative actions and stated that it would assert that position on the
Companys behalf in each of the pending derivative lawsuits. The Special Committee identified
certain factors related to the controls surrounding the process of accounting for option grants
that contributed to the accounting errors that led to a restatement of certain of the Companys
historical consolidated financial statements.
In September 2007, the Company reached an agreement to resolve the Consolidated State
Derivative Action and the Consolidated Federal Derivative Action that did not involve the Company
paying any monetary damages, but it did adopt several new policies and procedures to improve the
process through which equity awards are determined, approved and accounted for. In April 2008, the
State Court entered an order dismissing the Consolidated State Action and finding that the proposed
settlement was fair, adequate and reasonable, and that awarded the plaintiffs counsel $700.0
thousand in attorney fees and costs ($575.0 thousand of which was paid by the Companys Directors
and Officers insurance carriers and $125.0 thousand of which was paid by the Company). On April 25,
2008, the Federal Court approved the proposed settlement agreement and dismissed the Consolidated
Federal Action.
In addition to the derivative actions, on September 18, 2006, a putative shareholder class
action was filed in the U.S. District Court for the Middle District of Florida, Tampa Division
against the Company and various present and former officers and directors, including Forbes I.J.
Alexander, Scott D. Brown, Laurence S. Grafstein, Mel S. Lavitt, Chris Lewis, Timothy Main, Mark T.
Mondello, William D. Morean, Lawrence J. Murphy, Frank A. Newman, Steven A. Raymund, Thomas A.
Sansone and Kathleen A. Walters on behalf of a proposed class of plaintiffs comprised of persons
that purchased the Companys shares between September 19, 2001 and June 21, 2006. A second putative
class action, containing virtually identical legal claims and allegations of fact was filed on
October 12, 2006. The two actions were consolidated into a single proceeding (the Consolidated
Class Action) and on January 18, 2007, the Court appointed The Laborers Pension Trust Fund for
Northern California and Pension Trust Fund for Operating Engineers as lead plaintiffs in the
action. On March 5, 2007, the lead plaintiffs filed a consolidated class action complaint (the
Consolidated Class Action Complaint). The Consolidated Class Action Complaint is purported to be
brought on behalf of all persons who purchased the Companys publicly traded securities between
September 19, 2001 and December 21, 2006, and names the Company and certain of its current and
former officers, including Forbes I.J. Alexander, Scott D. Brown, Wesley B. Edwards, Chris A.
Lewis, Mark T. Mondello, Robert L. Paver and Ronald J. Rapp, as well as certain of the Companys
directors, Mel S. Lavitt, William D. Morean, Frank A. Newman, Laurence S. Grafstein, Steven A.
Raymund, Lawrence J. Murphy, Kathleen A. Walters and Thomas A. Sansone, as defendants. The
Consolidated Class Action Complaint alleged violations of Sections 10(b), 20(a), and 14(a) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and the rules promulgated
thereunder. The Consolidated Class Action Complaint alleged that the defendants engaged in a scheme
to fraudulently backdate the grant dates of options for various senior officers and directors,
causing the Companys consolidated financial statements to understate management compensation and
overstate net earnings, thereby inflating the Companys stock price. In addition, the complaint
alleged that the Companys proxy statements falsely stated that it had adhered to its option grant
policy of granting options at the closing price of its shares on the trading date immediately prior
to the date of the grant. Also, the complaint alleged that the defendants failed to timely disclose
the facts and circumstances that led the Company, on June 12, 2006, to announce that it was
lowering its prior guidance for net earnings for the third quarter of fiscal year 2006. On April
30, 2007, the plaintiffs filed a First Amended Consolidated Class Action Complaint asserting claims
substantially similar to the Consolidated Class Action Complaint it replaced but adding additional
allegations relating to the restatement of earnings previously announced in connection with the
correction of errors in the calculation of compensation expense for certain stock option grants.
The Company filed a motion to dismiss the First Amended Consolidated Class Action Complaint on June
29, 2007. The plaintiffs filed an opposition to the Companys motion to dismiss, and the Company
then filed a reply memorandum in further support of its motion to dismiss on September 28, 2007. On
April 9, 2008, the Court dismissed the First Amended Consolidated Class Action Complaint without
prejudice and with leave to amend such complaint on or before May 12, 2008.
On May 12, 2008, plaintiffs filed a Second Amended Class Action Complaint. The Second Amended
Class Action Complaint asserts substantially the same causes of action against the same defendants,
predicated largely on the same allegations of fact as in the First Amended Consolidated Class
Action Complaint except insofar as the plaintiffs added KPMG LLP, the Companys independent
registered public accounting firm, as a defendant and added additional allegations with respect to
(a) pre-class period option grants, (b) the professional background of certain defendants, (c)
option grants to non-executive employees, (d) the restatement of the Companys financial results
for certain periods between 1996 and 2005 and (e) trading by the named plaintiffs and certain of
the defendants during the class period. The Second Amended Class Action Complaint also includes an
additional claim for insider trading against certain defendants pursuant to Rules 10b-5 and 10b5-1
promulgated pursuant to the Exchange Act. The Company filed a
15
motion to dismiss the Second Amended
Class Action Complaint. The Court dismissed the Second Amended Class Action Complaint with
prejudice. The plaintiffs appealed this dismissal to the U.S. Court of Appeals for the Eleventh
Circuit on February 20, 2009.
On January 19, 2010, the U.S. Court of Appeals for the Eleventh Circuit affirmed the Courts
prior dismissal with prejudice of the Second Amended Class Action Complaint. The plaintiffs
subsequently moved for a re-hearing on the matter, which motion was denied. The plaintiffs did not
petition the U.S. Supreme Court for a writ of certiorari by May 24, 2010 (which was the deadline
for such petition). Accordingly, the Company considers this litigation to be concluded.
ii. |
|
Securities Exchange Commission Informal Inquiry and U.S. Attorney
Subpoena Related to Certain Historical Stock Option Grant Practices |
In addition to the private litigation described above, the Company was notified on May 2, 2006
by the Staff of the Securities and Exchange Commission (the SEC) of an informal inquiry
concerning the Companys stock option grant practices. In May 2006, the Company received a subpoena
from the U.S. Attorneys office for the Southern District of New York requesting certain stock
option related material. Such information was subsequently provided and the Company did not hear
further from such U.S. Attorneys office. In addition, the Companys review of its historical stock
option practices led it to review certain transactions proposed or effected between fiscal years
1999 and 2002 to determine if it properly recognized revenue associated with those transactions.
The Audit Committee of the Companys Board of Directors engaged independent legal counsel to assist
it in reviewing certain proposed or effected transactions with certain customers that occurred
during this period. The review determined that there was inadequate documentation to support the
Companys recognition of certain revenues received during the period. The Companys Audit Committee
concluded that there was no direct evidence that any of the Companys employees intentionally made
or caused false accounting entries to be made in connection with these transactions, and the
Company concluded that the impact was immaterial. The Company provided the SEC with the report that
this independent counsel produced regarding these revenue recognition issues, the Special
Committees report regarding the Companys stock option grant practices, and the other information
requested and cooperated fully with the Special Committee, the SEC and the U.S. Attorneys office.
The Company received a letter from the SEC Division of Enforcement on November 24, 2008,
advising the Company that the Division had completed its investigation and did not intend to
recommend that the SEC take any enforcement action. Accordingly, the Company considers this
investigation to be closed.
The Company is party to certain other lawsuits in the ordinary course of business. The Company
does not believe that these proceedings, individually or in the aggregate, will have a material
adverse effect on the Companys financial position, results of operations or cash flows.
b. Warranty Provision
The Company maintains a provision for limited warranty repair of shipped products, which is
established under the terms of specific manufacturing contract agreements. The warranty liability
is included in accrued expenses on the Condensed Consolidated Balance Sheets. The warranty period
varies by product and customer industry sector. The provision represents managements estimate of
probable liabilities, calculated as a function of sales volume and historical repair experience,
for each product under warranty. The estimate is re-evaluated periodically for accuracy. A
rollforward of the warranty liability for the nine months ended May 31, 2010 and 2009 is as follows
(in thousands):
|
|
|
|
|
|
|
Amount |
|
Balance at August 31, 2009 |
|
$ |
14,280 |
|
Accruals for warranties |
|
|
5,434 |
|
Settlements made |
|
|
(6,196 |
) |
|
|
|
|
Balance at May 31, 2010 |
|
$ |
13,518 |
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Balance at August 31, 2008 |
|
$ |
9,877 |
|
Accruals for warranties |
|
|
7,106 |
|
Settlements made |
|
|
(4,102 |
) |
|
|
|
|
Balance at May 31, 2009 |
|
$ |
12,881 |
|
|
|
|
|
16
Note 7. Restructuring and Impairment Charges
a. 2009 Restructuring Plan
On January 22, 2009, the Companys Board of Directors approved a restructuring plan to better
align the Companys manufacturing capacity in certain geographies and to reduce its worldwide
workforce in order to reduce operating expenses (the 2009 Restructuring Plan). These
restructuring activities are intended to address the current market conditions and properly size
the Companys manufacturing facilities to increase the efficiencies of the Companys operations. In
conjunction with the 2009 Restructuring Plan, the Company currently expects to recognize
approximately $64.0 million in total restructuring and impairment costs, excluding valuation
allowances of $14.8 million on certain net deferred tax assets, primarily over the course of fiscal
years 2009 and 2010. Of this expected total, the Company charged $1.6 million and $5.4 million of
restructuring and impairment costs during the three months and nine months ended May 31, 2010,
respectively, to the Condensed Consolidated Statements of Operations, compared to charges of $16.1
million and $48.8 million of restructuring and impairment costs during the three months and nine
months ended May 31, 2009. These charges for the three months ended May 31, 2010 related to the
2009 Restructuring Plan primarily include approximately $1.5 million related to employee severance
and termination benefit costs and approximately $0.1 million related to lease commitment costs.
These charges for the nine months ended May 31, 2010 related to the 2009 Restructuring Plan
primarily include approximately $1.5 million related to employee severance and termination benefit
costs, approximately $3.3 million related to lease commitment costs and approximately $0.6 million
related to fixed asset impairments. These charges for the three months ended May 31, 2009 related
to the 2009 Restructuring Plan include $14.8 million related to employee severance and termination
benefits costs, $1.2 million related to fixed asset impairments and $0.1 million related to other
restructuring costs. These charges for the nine months ended May 31, 2009 related to the 2009
Restructuring Plan include $42.2 million related to employee severance and termination benefits
costs, $0.1 million related to lease commitment costs, $6.4 million related to fixed asset
impairments and $0.1 million related to other restructuring costs.
These restructuring and impairment charges related to the 2009 Restructuring Plan incurred
through May 31, 2010 of approximately $59.1 million include cash costs totaling approximately $52.2
million. These cash costs consist of employee severance and termination benefit costs of
approximately $48.6 million, lease commitment costs of approximately $3.4 million and other
restructuring costs of approximately $0.2 million. Non-cash costs of approximately $6.9 million
primarily represent fixed asset impairment charges related to the Companys restructuring
activities.
At May 31, 2010, accrued liabilities of approximately $7.1 million related to the 2009
Restructuring Plan are expected to be paid over the next twelve months.
Employee severance and termination benefit costs of approximately $1.5 million during the
three months and nine months ended May 31, 2010 are primarily related to the reduction of employees
across all functions of the business, partially offset by reduced estimates of severance and
termination benefits that will be paid by the Company. Employee severance and termination benefit
costs of approximately $14.8 million and $42.2 million recorded during the three months and nine
months ended May 31, 2009, respectively, were primarily related to the reduction of employees
across all functions of the business in manufacturing facilities in Europe, Asia and the Americas.
To date, approximately 4,000 employees have been included in the 2009 Restructuring Plan. The lease
commitment costs of approximately $0.1 million and $3.3 million recorded during the three months
and nine months ended May 31, 2010, respectively, primarily relate to a facility in the Americas
that was substantially vacated during the Companys first quarter of fiscal year 2010. The Company
identified certain fixed assets that have ceased being used by the Company and, accordingly,
recorded a fixed asset impairment charge of $0.6 million in the nine months ended May 31, 2010 and
$1.2 million and $6.4 million in the three months and nine months ended May 31, 2009, respectively.
In addition, as part of the 2009 Restructuring Plan, management determined that it was more
likely than not that certain deferred tax assets would not be realized as a result of the
contemplated restructuring activities. Therefore, the Company recorded a valuation allowance of
$14.8 million on net deferred tax assets for fiscal year 2009. The valuation allowances are
excluded from the table below as they were recorded to income tax expense in the Condensed
Consolidated Statements of Operations.
The tables below set forth the significant components and activity in the 2009 Restructuring
Plan during the three months and nine months ended May 31, 2010 (in thousands):
17
2009 Restructuring Plan Three Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
February 28, 2010 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Employee severance
and termination benefits. |
|
$ |
9,986 |
|
|
$ |
1,497 |
|
|
$ |
(580 |
) |
|
$ |
(5,557 |
) |
|
$ |
5,346 |
|
Lease commitment costs |
|
|
2,246 |
|
|
|
56 |
|
|
|
|
|
|
|
(550 |
) |
|
|
1,752 |
|
Fixed asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,232 |
|
|
$ |
1,563 |
|
|
$ |
(580 |
) |
|
$ |
(6,117 |
) |
|
$ |
7,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Restructuring Plan Nine Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
August 31, 2009 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Employee severance
and termination benefits. |
|
$ |
30,845 |
|
|
$ |
1,537 |
|
|
$ |
(269 |
) |
|
$ |
(26,767 |
) |
|
$ |
5,346 |
|
Lease commitment costs |
|
|
|
|
|
|
3,302 |
|
|
|
|
|
|
|
(1,550 |
) |
|
|
1,752 |
|
Fixed asset impairment |
|
|
|
|
|
|
553 |
|
|
|
(553 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,845 |
|
|
$ |
5,446 |
|
|
$ |
(822 |
) |
|
$ |
(28,371 |
) |
|
$ |
7,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below set forth the significant components and activity in the 2009
Restructuring Plan by reportable segment during the three months and nine months ended May 31, 2010
(in thousands):
2009 Restructuring Plan Three Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
February 28, 2010 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Consumer |
|
$ |
600 |
|
|
$ |
(520 |
) |
|
$ |
20 |
|
|
$ |
(33 |
) |
|
$ |
67 |
|
EMS |
|
|
11,092 |
|
|
|
2,420 |
|
|
|
(603 |
) |
|
|
(5,891 |
) |
|
|
7,018 |
|
AMS |
|
|
540 |
|
|
|
(337 |
) |
|
|
3 |
|
|
|
(193 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,232 |
|
|
$ |
1,563 |
|
|
$ |
(580 |
) |
|
$ |
(6,117 |
) |
|
$ |
7,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Restructuring Plan Nine Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
August 31, 2009 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Consumer |
|
$ |
709 |
|
|
$ |
(554 |
) |
|
$ |
36 |
|
|
$ |
(124 |
) |
|
$ |
67 |
|
EMS |
|
|
26,298 |
|
|
|
6,365 |
|
|
|
(1,500 |
) |
|
|
(24,145 |
) |
|
|
7,018 |
|
AMS |
|
|
3,838 |
|
|
|
(365 |
) |
|
|
642 |
|
|
|
(4,102 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,845 |
|
|
$ |
5,446 |
|
|
$ |
(822 |
) |
|
$ |
(28,371 |
) |
|
$ |
7,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
b. 2006 Restructuring Plan
In conjunction with the restructuring plan that was approved by the Companys Board of
Directors in the fourth quarter of fiscal year 2006 (the 2006 Restructuring Plan), the Company
recorded $0.1 million and $0.3 million of restructuring and impairment costs during the three
months and nine months ended May 31, 2010, respectively, to the Condensed Consolidated Statements
of Operations, compared to $0.1 million and $(0.5) million of restructuring and impairment costs
(reversals) during the three months and nine months ended May 31, 2009, respectively. The
restructuring and impairment costs for the three months ended May 31, 2010 consist of a $(0.1)
million cost reversal related to employee severance and termination benefit costs and $0.2 million
related to lease commitment costs. The restructuring and impairment costs for the nine months ended
May 31, 2010 consist primarily of $0.3 million related to lease commitment costs. The
restructuring and impairment costs (reversals) for the three months ended May 31, 2009 include
$(0.1) million related to employee severance and termination benefit costs and $0.2 million related
to lease commitment costs. The restructuring and impairment costs (reversals) for the nine months
ended May 31, 2009 include $(1.2) million related to employee severance and benefits costs and $0.7
million related to lease commitments.
These restructuring and impairment charges related to the 2006 Restructuring Plan incurred
through May 31, 2010 of $207.6 million include cash costs totaling $158.7 million, of which $1.5
million was paid in the fourth quarter of fiscal year 2006, $64.8 million was paid in fiscal year
2007, $57.2 million was paid in fiscal year 2008, $27.1 million was paid in fiscal year 2009 and
$3.4 million was paid in the first three quarters of fiscal year 2010. The cash costs consist of
employee severance and termination benefit costs of approximately $143.9 million, costs related to
lease commitments of approximately $21.0 million and other restructuring costs of approximately
$2.1 million. These cash costs were off-set by approximately $8.3 million of cash proceeds received
in connection with facility closure costs. Non-cash costs of approximately $48.9 million primarily
represent fixed asset impairment charges related to the Companys restructuring activities.
At May 31, 2010, accrued liabilities of approximately $2.3 million related to the 2006
Restructuring Plan are expected to be paid over the next twelve months. The additional remaining
accrued liabilities of $2.1 million relate primarily to the charges for certain lease commitment
costs and employee severance and termination benefits payments.
Employee severance and termination benefit cost reversals of $(0.1) million for the three
months ended May 31, 2010 and $(0.1) million and $(1.2) million recorded in the three months and
nine months ended May 31, 2009, respectively, were due to revised estimates of severance and
termination benefits that will be paid by the Company. Approximately 10,500 employees have been
included in the 2006 Restructuring Plan to date. Lease commitment costs of $0.2 million and $0.3
million recorded in the three months and nine months ended May 31, 2010, respectively, and lease
commitment costs of $0.2 million and $0.7 million recorded in the three months and nine months
ended May 31, 2009, respectively, primarily relate to future lease payments for a facility that was
vacated in the Americas.
The Company has substantially completed restructuring activities under the 2006 Restructuring
Plan. Approximately $3.6 million of remaining contract termination costs are expected to be
incurred over the remainder of fiscal year 2010 and fiscal year 2011.
In addition, as part of the 2006 Restructuring Plan, management determined that it was more
likely than not that certain entities within foreign jurisdictions would not be able to utilize
their deferred tax assets as a result of the contemplated restructuring activities. Therefore, the
Company recorded valuation allowances of $38.8 million on net deferred tax assets as part of the
2006 Restructuring Plan prior to September 1, 2009. The valuation allowances are excluded from the
table below as they were recorded to income tax expense in the Condensed Consolidated Statements of
Operations. See Note 4 Income Taxes to the Consolidated Financial Statements in the Annual
Report on Form 10-K for the fiscal year ended August 31, 2009 for further discussion of the
Companys net deferred tax assets and provision for income taxes.
The tables below set forth the significant components and activity in the 2006 Restructuring
Plan during the three months and nine months ended May 31, 2010 (in thousands):
19
2006 Restructuring Plan Three Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
February 28, 2010 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Employee
severance and
termination benefits |
|
$ |
3,998 |
|
|
$ |
(170 |
) |
|
$ |
(305 |
) |
|
$ |
(205 |
) |
|
$ |
3,318 |
|
Lease commitment costs |
|
|
1,099 |
|
|
|
242 |
|
|
|
(35 |
) |
|
|
(534 |
) |
|
|
772 |
|
Other |
|
|
397 |
|
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,494 |
|
|
$ |
72 |
|
|
$ |
(378 |
) |
|
$ |
(739 |
) |
|
$ |
4,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Restructuring Plan Nine Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
August 31, 2009 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Employee severance
and termination benefits. |
|
$ |
5,736 |
|
|
$ |
3 |
|
|
$ |
(480 |
) |
|
$ |
(1,941 |
) |
|
$ |
3,318 |
|
Lease commitment costs |
|
|
2,057 |
|
|
|
256 |
|
|
|
(35 |
) |
|
|
(1,506 |
) |
|
|
772 |
|
Other |
|
|
419 |
|
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,212 |
|
|
$ |
259 |
|
|
$ |
(575 |
) |
|
$ |
(3,447 |
) |
|
$ |
4,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below set forth the significant components and activity in the 2006
Restructuring Plan by reportable segment during the three months and nine months ended May 31, 2010
(in thousands):
2006 Restructuring Plan Three Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
February 28, 2010 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Consumer |
|
$ |
3,004 |
|
|
$ |
(170 |
) |
|
$ |
(246 |
) |
|
$ |
(205 |
) |
|
$ |
2,383 |
|
EMS |
|
|
2,097 |
|
|
|
242 |
|
|
|
(95 |
) |
|
|
(534 |
) |
|
|
1,710 |
|
AMS |
|
|
393 |
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,494 |
|
|
$ |
72 |
|
|
$ |
(378 |
) |
|
$ |
(739 |
) |
|
$ |
4,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Restructuring Plan Nine Months Ended May 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges and |
|
|
|
|
|
|
|
|
|
Liability Balance at |
|
|
Restructuring |
|
|
Other Non-Cash |
|
|
Cash |
|
|
Liability Balance at |
|
|
|
August 31, 2009 |
|
|
Related Charges |
|
|
Activity |
|
|
Payments |
|
|
May 31, 2010 |
|
Consumer |
|
$ |
3,606 |
|
|
$ |
(177 |
) |
|
$ |
(392 |
) |
|
$ |
(654 |
) |
|
$ |
2,383 |
|
EMS |
|
|
4,190 |
|
|
|
436 |
|
|
|
(123 |
) |
|
|
(2,793 |
) |
|
|
1,710 |
|
AMS |
|
|
416 |
|
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,212 |
|
|
$ |
259 |
|
|
$ |
(575 |
) |
|
$ |
(3,447 |
) |
|
$ |
4,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Note 8. Goodwill and Other Intangible Assets
The Company performs a goodwill impairment analysis using the two-step method on an annual
basis and whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. The recoverability of goodwill is measured at the reporting unit level, which the
Company has determined to be consistent with its operating segments, by comparing the reporting
units carrying amount, including goodwill, to the fair market value of the reporting unit. The
Company consistently determines the fair market value of its reporting units based on an average
weighting of both projected discounted future results and the use of comparative market multiples.
If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second test is performed to measure the amount of loss, if any.
The Company completed its annual impairment test for goodwill during the fourth quarter of
fiscal year 2009 and determined that no impairment existed as of the date of the impairment test.
The following table presents the changes in goodwill allocated to the Companys reportable
segments during the nine months ended May 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2009 |
|
|
|
|
|
|
May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Accumulated |
|
|
Additions and |
|
|
Currency |
|
|
Gross |
|
|
Accumulated |
|
|
|
|
Reportable Segment |
|
Balance |
|
|
Impairment Balance |
|
|
Adjustments |
|
|
Impact |
|
|
Balance |
|
|
Impairment Balance |
|
|
Net Balance |
|
EMS |
|
$ |
622,414 |
|
|
$ |
(622,414 |
) |
|
$ |
3,800 |
|
|
$ |
|
|
|
$ |
626,214 |
|
|
$ |
(622,414 |
) |
|
$ |
3,800 |
|
Consumer |
|
|
400,407 |
|
|
|
(400,407 |
) |
|
|
|
|
|
|
|
|
|
|
400,407 |
|
|
|
(400,407 |
) |
|
|
|
|
AMS |
|
|
25,120 |
|
|
|
|
|
|
|
|
|
|
|
(575 |
) |
|
|
24,545 |
|
|
|
|
|
|
|
24,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,047,941 |
|
|
$ |
(1,022,821 |
) |
|
$ |
3,800 |
|
|
$ |
(575 |
) |
|
$ |
1,051,166 |
|
|
$ |
(1,022,821 |
) |
|
$ |
28,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended May 31, 2010, the Company acquired a majority interest in a
newly formed venture to provide outsourced manufacturing products that contain some combination of
metal chassis, rack, machine components, precision metal finishing and electro-mechanical assembly.
As a result of this transaction, the Company has recognized $3.8 million in additional goodwill,
as well as $4.8 million in non-controlling interests on the Condensed Consolidated Balance Sheets.
Intangible assets consist primarily of contractual agreements and customer relationships,
which are being amortized on a straight-line basis over periods of up to 10 years, intellectual
property which is being amortized on a straight-line basis over a period of up to five years and a
trade name which has an indefinite life. The Company completed its annual impairment test for its
indefinite-lived intangible asset during the fourth quarter of fiscal year 2009 and determined that
no impairment existed as of the date of the impairment test. No significant residual value is
estimated for the amortizable intangible assets. The value of the Companys intangible assets
purchased through business acquisitions is principally determined based on valuations of the net
assets acquired. The following tables present the Companys total purchased intangible assets at
May 31, 2010 and August 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
May 31, 2010 |
|
amount |
|
|
amortization |
|
|
amount |
|
Contractual agreements and customer relationships |
|
$ |
91,911 |
|
|
$ |
(46,631 |
) |
|
$ |
45,280 |
|
Intellectual property |
|
|
85,327 |
|
|
|
(65,468 |
) |
|
|
19,859 |
|
Trade name |
|
|
47,980 |
|
|
|
|
|
|
|
47,980 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
225,218 |
|
|
$ |
(112,099 |
) |
|
$ |
113,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
August 31, 2009 |
|
amount |
|
|
amortization |
|
|
amount |
|
Contractual agreements and customer relationships |
|
$ |
99,583 |
|
|
$ |
(46,313 |
) |
|
$ |
53,270 |
|
Intellectual property |
|
|
83,729 |
|
|
|
(52,459 |
) |
|
|
31,270 |
|
Trade name |
|
|
46,628 |
|
|
|
|
|
|
|
46,628 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
229,940 |
|
|
$ |
(98,772 |
) |
|
$ |
131,168 |
|
|
|
|
|
|
|
|
|
|
|
21
The weighted-average amortization period for aggregate net intangible assets at May 31,
2010 is 7.2 years, which includes a weighted-average amortization period of 9.1 years for net
contractual agreements and customer relationships and a weighted-average amortization period of 4.8
years for net intellectual property.
The estimated future amortization expense is as follows (in thousands):
|
|
|
|
|
Fiscal year ending August 31, |
|
Amount |
|
2010 (remaining three months) |
|
$ |
6,134 |
|
2011 |
|
|
22,086 |
|
2012 |
|
|
13,941 |
|
2013 |
|
|
8,956 |
|
2014 |
|
|
7,673 |
|
Thereafter |
|
|
6,349 |
|
|
|
|
|
Total |
|
$ |
65,139 |
|
|
|
|
|
Note 9. Trade Accounts Receivable Securitization and Sale Programs
a. North American Asset-Backed Securitization Program
In February 2004, the Company entered into an asset-backed securitization program with a bank,
which originally provided for net cash proceeds at any one time of an amount up to $100.0 million
on the sale of eligible trade accounts receivable of certain domestic operations. Subsequent to
fiscal year 2004, several amendments adjusted the net cash proceeds available at any one time under
the securitization program to an amount of $200.0 million. The securitization program is accounted
for as a sale. Under the agreement, the Company continuously sells a designated pool of trade
accounts receivable to a wholly-owned subsidiary, which in turn sells an ownership interest in the
receivables to a conduit, administered by an unaffiliated financial institution. This wholly-owned
subsidiary is a separate bankruptcy-remote entity and its assets would be available first to
satisfy the creditor claims of the conduit. As the receivables sold are collected, the Company is
able to sell additional receivables up to the maximum permitted amount under the program. The
securitization program requires compliance with several financial covenants including an interest
coverage ratio and debt to EBITDA ratio, as defined in the securitization agreement, as amended.
The securitization agreement, as amended on March 17, 2010, expires on March 16, 2011.
For each pool of eligible receivables sold to the conduit, the Company retains a percentage
interest in the face value of the receivables, which is calculated based on the terms of the
agreement. Net receivables sold under this program are excluded from trade accounts receivable on
the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating
activities on the Condensed Consolidated Statements of Cash Flows. The Company is assessed a fee on
the unused portion of the facility of 0.575% per annum based on the average daily unused aggregate
capital during the period. Further, a usage fee on the utilized portion of the facility is equal to
1.15% per annum on the average daily outstanding aggregate capital during the immediately preceding
calendar month. The investors and the securitization conduit have no recourse to the Companys
assets for failure of debtors to pay when due.
The Company continues servicing the receivables sold. No servicing asset is recorded at the
time of sale because the Company does not receive any servicing fees from third parties or other
income related to servicing the receivables. The Company does not record any servicing liability at
the time of sale as the receivable collection period is relatively short and the costs of servicing
the receivables sold over the servicing period are not significant. Servicing costs are recognized
as incurred over the servicing period.
At May 31, 2010, the Company had sold $320.1 million of eligible trade accounts receivable,
which represents the face amount of total outstanding receivables at that date. In exchange, the
Company received cash proceeds of $175.5 million and retained an interest in the receivables of
approximately $144.6 million. In connection with the securitization program, the Company recognized
pretax losses on the sale of receivables of approximately $0.9 million and $2.9 million during the
three months and nine months ended May 31, 2010, respectively, compared to approximately $0.9
million and $4.2 million during the three months and nine months ended May 31, 2009, respectively,
which are recorded in other expense in the Condensed Consolidated Statements of Operations.
b. Foreign Asset-Backed Securitization Program
In April 2008, the Company entered into an asset-backed securitization program with a bank
conduit. In connection with the securitization program certain of its foreign subsidiaries sell, on
an ongoing basis, an undivided interest in designated pools of trade accounts receivable to a
special purpose entity, which in turn borrows up to $100.0 million from the bank conduit to
purchase those receivables and in which it grants security interests as collateral for the
borrowings. The securitization program is accounted for as a borrowing. The loan balance is
calculated based on the terms of the securitization program agreements. The securitization program
requires compliance with several covenants including a limitation on certain corporate actions such
as mergers, consolidations and
22
sale of substantially all assets. The Company pays interest at
designated commercial paper rates plus a spread. The securitization program, as amended on March
18, 2010, expires on March 17, 2011.
At May 31, 2010, the Company had $58.1 million of debt outstanding under the program. In
addition, the Company incurred interest expense of $0.4 million and $1.8 million recorded in the
Condensed Consolidated Statements of Operations during the three months and nine months ended May
31, 2010, respectively, compared to $0.6 million and $3.1 million for the three months and nine
months ended May 31, 2009, respectively.
c. Trade Accounts Receivable Factoring Agreements
In October 2004, the Company entered into an agreement with an unrelated third-party for the
factoring of specific trade accounts receivable of a foreign subsidiary. The factoring of trade
accounts receivable under this agreement is accounted for as a sale. Under the terms of the
factoring agreement, the Company transfers ownership of eligible trade accounts receivable without
recourse to the third-party purchaser in exchange for cash. Proceeds on the transfer reflect the
face value of the account less a discount. The discount is recorded as a loss in the Condensed
Consolidated Statements of Operations in the period of the sale. The factoring agreement was to
expire on March 31, 2010 but was extended for a six month period.
The receivables sold pursuant to this factoring agreement are excluded from trade accounts
receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by
operating activities on the Condensed Consolidated Statements of Cash Flows. The Company continues
to service, administer and collect the receivables sold under this program. The third-party
purchaser has no recourse to the Companys assets for failure of debtors to pay when due.
At May 31, 2010, the Company had sold $14.2 million of trade accounts receivable, which
represents the face amount of total outstanding receivables at that date. In exchange, the Company
received cash proceeds of $14.2 million. The resulting loss on the sale of trade accounts
receivable sold under this factoring agreement was $18.8 thousand and $60.0 thousand for the three
months and nine months ended May 31, 2010, respectively, compared to $25.3 thousand and $130.0
thousand for the three months and nine months ended May 31, 2009, respectively, which was recorded
to other expense in the Condensed Consolidated Statements of Operations.
In July 2007 and August 2009, the Company entered into separate agreements with unrelated
third parties (the Purchasers) for the factoring of specific trade accounts receivable of another
foreign subsidiary. The factoring of trade accounts receivable under these agreements does not meet
the criteria for recognition as a sale. Under the terms of the agreements, the Company transfers
ownership of eligible trade accounts receivable to the Purchasers in exchange for cash; however, as
the transaction does not qualify as a sale, the relating trade accounts receivable are included in
the Companys Condensed Consolidated Balance Sheets until the cash is received by the Purchasers
from the Companys customer for the trade accounts receivable. The Company had an outstanding
liability of approximately $0.1 million and $1.5 million on the Condensed Consolidated Balance
Sheets at May 31, 2010 and August 31, 2009, respectively, related to these agreements.
d. Trade Accounts Receivable Sale Program
In May 2010, the Company entered into an uncommitted accounts receivable sale agreement with a
bank which allows the Company and certain of its subsidiaries to elect to sell and the bank to
elect to purchase at a discount, on an ongoing basis, up to $150.0 million of specific trade
accounts receivable. The program is accounted for as a sale. Net receivables sold under this
program are excluded from trade accounts receivable on the Condensed Consolidated Balance Sheets
and are reflected as cash provided by operating activities on the Condensed Consolidated Statements
of Cash Flows. The Company paid an arrangement fee upon the initial sale and pays a transaction fee
each month over the term of the agreement which are recorded to other expense in the Condensed
Consolidated Statements of Operations. The sale program expires on May 25, 2011.
The Company continues servicing the receivables sold. No servicing asset or liability is
recorded at the time of sale as the Company has determined the servicing fee earned is at a market
rate. Servicing costs are recognized as incurred over the servicing period.
At May 31, 2010, the Company had sold $43.5 million of trade accounts receivable. In exchange,
the Company received cash proceeds of $43.5 million. The resulting loss on the sale of trade
accounts receivable sold under this sales program was $35.9 thousand for the three months and nine
months ended May 31, 2010, which was recorded to other expense in the Condensed Consolidated
Statements of Operations.
Note 10. Retirement Benefits
The Company sponsors defined benefit pension plans in several countries in which it operates.
The pension obligations relate primarily to the following: (a) a funded retirement plan in the
United Kingdom, which provides benefits based on average employee
23
earnings over a three-year
service period preceding retirement and (b) primarily unfunded retirement plans mainly in Taiwan,
France, Germany, Japan, The Netherlands, Poland and Austria, which provide benefits based upon
years of service and compensation at retirement.
There are no domestic pension or postretirement benefit plans maintained by the Company.
The components of net periodic benefit cost for the Companys pension plans are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
364 |
|
|
$ |
511 |
|
|
$ |
1,152 |
|
|
$ |
1,554 |
|
Interest cost |
|
|
1,353 |
|
|
|
1,527 |
|
|
|
4,338 |
|
|
|
4,721 |
|
Expected long-term return on plan assets |
|
|
(1,000 |
) |
|
|
(1,064 |
) |
|
|
(3,212 |
) |
|
|
(3,307 |
) |
Amortization of prior service cost |
|
|
(26 |
) |
|
|
(9 |
) |
|
|
(87 |
) |
|
|
(28 |
) |
Recognized actuarial loss |
|
|
292 |
|
|
|
293 |
|
|
|
932 |
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
983 |
|
|
$ |
1,258 |
|
|
$ |
3,123 |
|
|
$ |
3,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended May 31, 2010, the Company has made contributions of approximately
$3.1 million to its defined benefit pension plans. The Company presently anticipates total fiscal
year 2010 contributions to approximate $3.6 million to $4.3 million.
Note 11. Notes Payable, Long-Term Debt and Long-Term Lease Obligations
Notes payable, long-term debt and long-term lease obligations outstanding at May 31, 2010 and
August 31, 2009 are summarized below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2010 |
|
|
2009 |
|
5.875% Senior Notes due 2010 (a) |
|
$ |
5,064 |
|
|
$ |
5,064 |
|
7.750% Senior Notes due 2016 (b) |
|
|
301,353 |
|
|
|
300,063 |
|
8.250% Senior Notes due 2018 |
|
|
397,044 |
|
|
|
396,758 |
|
Short-term factoring debt |
|
|
141 |
|
|
|
1,468 |
|
Borrowings under credit facilities |
|
|
1,925 |
|
|
|
21,313 |
|
Borrowings under loans |
|
|
362,389 |
|
|
|
384,485 |
|
Securitization program obligations |
|
|
58,105 |
|
|
|
125,291 |
|
Miscellaneous borrowings |
|
|
16 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total notes payable, long-term debt and long-term lease obligations |
|
|
1,126,037 |
|
|
|
1,234,448 |
|
Less current installments of notes payable, long-term debt and long-term lease obligations |
|
|
87,625 |
|
|
|
197,575 |
|
|
|
|
|
|
|
|
Notes payable, long-term debt and long-term lease obligations, less current installments |
|
$ |
1,038,412 |
|
|
$ |
1,036,873 |
|
|
|
|
|
|
|
|
The $5.1 million of 5.875% senior unsecured notes (the 5.875% Senior Notes), $312.0
million of 7.750% senior unsecured notes (the 7.750% Senior Notes) and $400.0 million of 8.250%
senior unsecured notes (the 8.250% Senior Notes) outstanding are carried at the principal amount
of each note, less any unamortized discount. The estimated fair value of these senior notes was
approximately $5.1 million, $318.2 million and $416.0 million, respectively, at May 31, 2010. The
fair value estimates are based upon non-binding market quotes that are corroborated by observable
market data (level 2 criteria).
a. 5.875% Senior Notes Tender Offer
During the fourth quarter of fiscal year 2003, the Company issued a total of $300.0 million,
seven-year, publicly-registered 5.875% Senior Notes at 99.803% of par, resulting in net proceeds of
approximately $297.2 million. The 5.875% Senior Notes mature on July 15, 2010 and pay interest
semiannually on January 15 and July 15. Also, the 5.875% Senior Notes are the Companys senior
unsecured obligations and rank equally with all other existing and future senior unsecured debt
obligations. The Company is subject to covenants such as limitations on the Companys and/or its
subsidiaries ability to: consolidate or merge with, or convey, transfer or lease all or
substantially all of the Companys assets to, another person; create certain liens; enter into sale
and leaseback transactions; create, incur, issue, assume or guarantee funded debt (which only
applies to the Companys restricted subsidiaries); and guarantee any of its indebtedness (which
only applies to its subsidiaries). During the fourth quarter of fiscal year 2009, the Company
repurchased $294.9 million in aggregate principal amount of the 5.875% Senior Notes, pursuant to a
public cash tender offer, in which it also paid an early tender premium, accrued interest and
associated fees and expenses. The extinguishment of the validly tendered
24
5.875% Senior Notes
resulted in a charge of $10.5 million, which was recorded to other expense in the Condensed
Consolidated Statements of Operations for the fiscal year ended August 31, 2009.
b. 7.750% Senior Notes Offering
During the fourth quarter of fiscal year 2009, the Company issued a total of $312.0 million,
seven-year, publicly-registered 7.750% Senior Notes at 96.1% of par, resulting in net proceeds of
approximately $300.0 million. The 7.750% Senior Notes mature on July 15, 2016 and pay interest
semiannually on January 15 and July 15. Also, the 7.750% Senior Notes are the Companys senior
unsecured obligations and rank equally with all other existing and future senior unsecured debt
obligations. The Company is subject to covenants such as limitations on the Companys and/or its
subsidiaries ability to: consolidate or merge with, or convey, transfer or lease all or
substantially all of the Companys assets to, another person; create certain liens; enter into sale
and leaseback transactions; create, incur, issue, assume or guarantee funded debt (which only
applies to the Companys restricted subsidiaries); and guarantee any of its indebtedness (which
only applies to its subsidiaries). The Company is also subject to a covenant regarding its
repurchase of the 7.750% Senior Notes upon a change of control repurchase event.
Note 12. Derivative Financial Instruments and Hedging Activities
The Company is directly and indirectly affected by changes in certain market conditions.
These changes in market conditions may adversely impact the Companys financial performance and are
referred to as market risks. The Company, where deemed appropriate, uses derivatives as a risk
management tool to mitigate the potential impact of certain market risks. The primary market risks
managed by the Company through the use of derivatives instruments are foreign currency fluctuation
risk and interest rate risk.
All derivative instruments are recorded on the Condensed Consolidated Balance Sheets at their
respective fair values. The accounting for changes in the fair value of a derivative instrument
depends on the intended use and designation of the derivative instrument. For derivative
instruments that are designated and qualify as a fair value hedge, the gain or loss on the
derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk are
recognized in current earnings. For derivative instruments that are designated and qualify as a
cash flow hedge, the effective portion of the gain or loss on the derivative instrument is
initially reported as a component of accumulated other comprehensive income (AOCI), net of tax,
and is subsequently reclassified into the line item in the Condensed Consolidated Statements of
Operations in which the hedged items are recorded in the same period in which the hedged item
affects earnings. The ineffective portion of the gain or loss is recognized immediately in current
earnings. For derivative instruments that are not designated as hedging instruments, gains and
losses from changes in fair values are recognized currently in earnings.
For derivatives accounted for as hedging instruments, the Company formally designates and
documents, at inception, the financial instruments as a hedge of a specific underlying exposure,
the risk management objective and the strategy for undertaking the hedge transaction. In addition,
the Company formally assesses, both at inception and at least quarterly thereafter, whether the
financial instruments used in hedging transactions are effective at offsetting changes in the cash
flows on the related underlying exposures.
a. Foreign Currency Risk Management
Forward contracts are put in place to manage the foreign currency risk associated with various
commitments arising from trade accounts receivable, trade accounts payable and fixed purchase
obligations. At May 31, 2010, a hedging relationship existed that related to certain anticipated
foreign currency denominated expenses, with an aggregate notional amount outstanding at May 31,
2010 of $67.1 million. The related forward foreign exchange contracts have been designated as
hedging instruments and are accounted for as cash flow hedges. The forward foreign exchange
contract transactions will effectively lock in the value of anticipated foreign currency
denominated expenses against foreign currency fluctuations. The anticipated foreign currency
denominated expenses being hedged are expected to occur between June 1, 2010 and March 31, 2011.
In addition to derivatives that are designated and qualify for hedge accounting, the Company
also enters into forward contracts to economically hedge transactional exposure associated with
commitments arising from trade accounts receivable, trade accounts payable and fixed purchase
obligations denominated in a currency other than the functional currency of the respective
operating entity. The aggregate notional amount of these outstanding contracts at May 31, 2010 and
2009 was $320.8 million and $808.8 million, respectively.
The following table presents the Companys assets and liabilities related to foreign forward
exchange contracts measured at fair value on a recurring basis as of May 31, 2010, aggregated by
the level in the fair-value hierarchy within which those measurements fall (in thousands):
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts |
|
$ |
|
|
|
$ |
7,438 |
|
|
$ |
|
|
|
$ |
7,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts |
|
|
|
|
|
|
(9,909 |
) |
|
|
|
|
|
|
(9,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(2,471 |
) |
|
$ |
|
|
|
$ |
(2,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys forward foreign exchange contracts are measured on a recurring basis
at fair value, based on foreign currency spot rates and forward rates quoted by banks or foreign
currency dealers.
The following table presents the fair value of the Companys derivative instruments located on
the Condensed Consolidated Balance Sheets utilized for foreign currency risk management purposes at
May 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments |
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
|
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts |
|
Prepaid expenses and other current assets |
|
$ |
978 |
|
|
Accrued expense |
|
$ |
1,812 |
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts |
|
Prepaid expenses and other current assets |
|
$ |
6,460 |
|
|
Accrued expense |
|
$ |
8,097 |
|
The following table presents the impact that changes in fair value of derivatives utilized for
foreign currency risk management purposes and designated as hedging instruments had on AOCI and
earnings during the nine months ended May 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
|
|
|
|
Amount of Gain |
|
|
|
Amount of Gain |
|
|
Location of Gain (Loss) |
|
|
(Loss) |
|
|
|
|
|
|
(Loss) Recognized in |
|
|
|
(Loss) Recognized |
|
|
Reclassified from |
|
|
Reclassified from |
|
|
Location of Gain |
|
|
Income on Derivative |
|
|
|
in OCI on |
|
|
AOCI |
|
|
AOCI |
|
|
(Loss) Recognized in |
|
|
(Ineffective Portion |
|
|
|
Derivative |
|
|
into Income |
|
|
into Income |
|
|
Income on Derivative |
|
|
and Amount Excluded |
|
|
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
(Ineffective Portion |
|
|
from Effectiveness |
|
|
|
for the Nine months |
|
|
for the Nine months |
|
|
for the Nine months |
|
|
and Amount Excluded |
|
|
Testing) for the Nine months |
|
Derivatives in Cash |
|
ended May 31, |
|
|
ended May 31, |
|
|
ended May 31, |
|
|
from Effectiveness |
|
|
ended May 31, |
|
Flow Hedging Relationship |
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
Testing) |
|
|
2010 |
|
Forward foreign
exchange contracts |
|
$ |
(11,484 |
) |
|
Revenue |
|
$ |
(11,484 |
) |
|
Revenue |
|
$ |
42 |
|
Forward foreign exchange contracts |
|
$ |
9,635 |
|
|
Cost of revenue |
|
$ |
11,498 |
|
|
Cost of revenue |
|
$ |
2,437 |
|
Forward foreign exchange contracts |
|
$ |
(14 |
) |
|
Selling, general and administrative |
|
$ |
(14 |
) |
|
Selling, general and administrative |
|
$ |
29 |
|
As of May 31, 2010, the Company estimates that it will reclassify into earnings during the
next twelve months loss on hedging arrangements of approximately $1.4 million from the amounts
recorded in AOCI as the anticipated cash flows occur.
26
The following table presents the impact that changes in fair value of derivatives utilized for
foreign currency risk management purposes and not designated as hedging instruments had on earnings
during the nine months ended May 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in |
|
|
|
Location of Gain (Loss) Recognized in |
|
|
Income on Derivative for the Nine months |
|
Derivatives not designated as hedging instruments |
|
Income on Derivative |
|
|
ended May 31, 2010 |
|
Forward foreign exchange contracts |
|
Cost of revenue |
|
$ |
12,499 |
|
At May 31, 2010, the Company recognized a net unrealized loss of approximately $1.6 million on
forward foreign exchange contracts not designated as hedging instruments which was recorded to the
cost of revenue line in the Condensed Consolidated Statements of Operations and offset by the
change in the fair value of the underlying hedged assets or liabilities.
b. Interest Rate Risk Management
The Company enters into interest rate swaps to manage interest rate risk associated with the
Companys variable rate borrowings. During fiscal year 2010, a hedging relationship existed related
to interest payments associated with $100.0 million of the Companys variable rate debt. At May 31,
2010, the Company had no asset or liability related to interest rate swaps and $0.1 million remains
in AOCI. The following table presents the impact that changes in the fair value of the derivative
utilized for interest rate risk management and designated as a hedging instrument had on AOCI and
earnings for the nine months ended May 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Recognized in |
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
|
|
|
|
Income on Derivative |
|
|
|
Amount of Gain |
|
|
Location of Gain (Loss) |
|
|
(Loss) |
|
|
|
|
|
|
(Ineffective Portion |
|
|
|
(Loss) Recognized |
|
|
Reclassified from |
|
|
Reclassified from |
|
|
Location of Gain |
|
|
and Amount Excluded |
|
|
|
in OCI on |
|
|
AOCI |
|
|
AOCI |
|
|
(Loss) Recognized in |
|
|
from Effectiveness |
|
|
|
Derivative |
|
|
into Income |
|
|
into Income |
|
|
Income on Derivative |
|
|
Testing) |
|
|
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
(Ineffective Portion |
|
|
for the Nine |
|
Derivatives in Cash Flow |
|
for the Nine months |
|
|
for the Nine months |
|
|
for the Nine months |
|
|
and Amount Excluded |
|
|
months |
|
Hedging |
|
ended May 31, |
|
|
ended May 31, |
|
|
ended May 31, |
|
|
from Effectiveness |
|
|
ended May 31, |
|
Relationship |
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
Testing) |
|
|
2010 |
|
Interest rate swap |
|
$ |
(13 |
) |
|
Interest expense |
|
$ |
(214 |
) |
|
Interest expense |
|
$ |
|
|
As of May 31, 2010, the Company estimates that it will reclassify into earnings during
the next twelve months interest expense of approximately $0.1 million from the amount recorded in
AOCI as the anticipated cash flows occur for the above noted interest rate swap.
The changes related to cash flow hedges included in AOCI are as follows (in thousands):
|
|
|
|
|
|
|
Nine months ended |
|
|
|
May 31, 2010 |
|
Balance, August 31, 2009 |
|
$ |
143 |
|
Net loss for the period |
|
|
(1,875 |
) |
Net loss transferred to earnings |
|
|
213 |
|
|
|
|
|
Balance, May 31, 2010 |
|
$ |
(1,519 |
) |
|
|
|
|
Note 13. Income Taxes
The Internal Revenue Service (IRS) completed its field examination of the Companys tax
returns for the fiscal years 2003 through 2005 and issued a Revenue Agents Report (RAR) on April
30, 2010 proposing adjustments primarily related to: (1) certain costs that the Company treated as
corporate expenses and that the IRS proposes be charged out to its foreign affiliates as
intercompany service fee charges and (2) certain purported intangible values the IRS felt were
transferred to certain of the Companys foreign subsidiaries free of charge. If the IRS ultimately
prevails in its positions, the Companys income tax payment due for the fiscal years 2003 through
2005 would be approximately $71.0 million before utilization of any tax attributes arising in
periods subsequent to fiscal year 2005. In addition, the IRS will likely make
similar claims in future audits with respect to these types of transactions (at this time,
determination of the additional income tax due for these later years is not practicable). Also,
the IRS has proposed interest and penalties on the Company with respect to fiscal years 2003
through 2005 and the Company anticipates the IRS may seek to impose interest and penalties in
subsequent years with respect to the same types of issues.
27
The Company disagrees with the proposed adjustments and intends to vigorously contest this
matter through applicable IRS and judicial procedures, as appropriate. As the final resolution of
the proposed adjustments remains uncertain, the Company continues to provide for the uncertain tax
position based on the more likely than not standards. Accordingly,
the Company did not record any significant additional tax liabilities related to this RAR on the Condensed Consolidated
Balance Sheets for the three months ended May 31, 2010. While the resolution of the issues may
result in tax liabilities, interest and penalties, which are significantly higher than the amounts provided for this matter,
management currently believes that the resolution will not have a material effect on the Companys
financial position or liquidity. Despite this belief, an unfavorable resolution, particularly if
the IRS successfully asserts similar claims for later years, could have a material effect on the
Companys results of operations and financial condition (particularly in the quarter in which any
adjustment is recorded or any tax is due or paid).
Note 14. Loss on Disposal of Subsidiary
On October 27, 2009, the Company sold its subsidiary, Jabil Circuit Automotive, SAS, an
automotive electronics manufacturing subsidiary located in Western Europe to JCA Acquisition
Company Limited, an unrelated third-party. As a result of this sale, the Company recorded a loss
on disposition of $15.7 million in the first quarter of 2010, which included transaction-related
costs of approximately $4.2 million. These costs are recorded to loss on disposal of subsidiary on
the Condensed Consolidated Statements of Operations, which is a component of operating income.
Jabil Circuit Automotive had net revenue and an operating loss of $15.5 million and $1.4 million,
respectively from the beginning of the 2010 fiscal year through the date of disposition.
Note 15. New Accounting Guidance
a. Recently Adopted Accounting Guidance
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance related to
fair value disclosure requirements. The new guidance resulted in a change in the Companys
accounting policy effective March 1, 2010. Under this guidance, companies will be required to make
additional disclosures concerning significant transfers of amounts between the Level 1 and Level 2
fair value disclosures, as well as further disaggregation of the types of activity that were
previously disclosed in the rollforward of Level 3 fair value disclosures. Further, the guidance
clarifies the level of aggregation of assets and liabilities within the fair value hierarchy that
may be presented. The adoption of this guidance did not have a significant impact on the Companys
consolidated financial statements.
In August 2009, the FASB issued new accounting guidance concerning measuring liabilities at
fair value, which resulted in a change in the Companys accounting policy effective September 1,
2009. The new accounting guidance provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a reporting entity is
required to measure fair value using certain valuation techniques. Additionally, it clarifies that
a reporting entity is not required to adjust the fair value of a liability for the existence of a
restriction that prevents the transfer of the liability. The adoption did not have a significant
impact on the Companys consolidated financial statements.
Effective July 2009, the FASB codified accounting literature into a single source of
authoritative accounting principles, except for certain authoritative rules and interpretive
releases issued by the SEC. Since the codification did not alter existing U.S. GAAP, it did not
have an impact on the Companys consolidated financial statements. All references to pre-codified
U.S. GAAP have been removed from this Form 10-Q.
In December 2007, the FASB issued new accounting and disclosure guidance related to
noncontrolling interests in subsidiaries (previously referred to as minority interests), which
resulted in a change in the Companys accounting policy effective September 1, 2009. Among other
things, the new guidance requires that a noncontrolling interest in a subsidiary be accounted for
as a component of equity separate from the parents equity, rather than as a liability. It also
requires that consolidated net income be reported at amounts that include the amounts attributable
to both the parent and the noncontrolling interests. The new guidance is being applied
prospectively, except for the presentation and disclosure requirements, which have been applied
retrospectively. The adoption of this guidance did not have a significant impact on the Companys
consolidated financial statements.
In December 2007, the FASB amended its guidance on accounting for business combinations. The
new accounting guidance resulted in a change in the Companys accounting policy effective September
1, 2009, and is being applied prospectively to all business combinations subsequent to the
effective date. Among other things, the new guidance amends the principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree and the goodwill acquired.
It also establishes new disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. The adoption of this accounting guidance did not
28
have a significant impact on the Companys consolidated financial statements, and the impact it
will have on the Companys consolidated financial statements in future periods will depend on the
nature and size of business combinations completed subsequent to the date of adoption.
In June 2008, the FASB issued accounting guidance on earnings per share which provides that
unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents, whether paid or unpaid, be considered participating securities and therefore included
in the computation of earnings per share pursuant to the two-class method. The two-class method of
computing earnings per share is an earnings allocation formula that determines earnings per share
for each class of common stock and any participating securities as if all earnings for the period
had been distributed. The Companys participating securities consist of unvested restricted stock
awards. The new accounting guidance resulted in a change in the Companys accounting policy
effective September 1, 2009 and requires that all prior-period earnings per share data that is
presented be adjusted retrospectively. The adoption of this accounting guidance did not have a
significant impact on the Companys consolidated financial statements. Refer to Note 3
Earnings (Loss) Per Share and Dividends for further discussion on adoption of this accounting
guidance.
In September 2006, the FASB issued accounting guidance that provided a common definition of
fair value and established a framework to make the measurement of fair value under U.S. GAAP more
consistent and comparable. It also required expanded disclosures to provide information about the
extent to which fair value is used to measure assets and liabilities, the methods and assumptions
used to measure fair value, and the effect of fair value measures on earnings. In February 2008,
the FASB issued accounting guidance which permitted a one-year deferral of the application of such
fair value accounting guidance for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company adopted the non-deferred portion of this accounting guidance
as of September 1, 2008 and the deferred portion as of September 1, 2009. The adoption did not have
a significant impact on the Companys consolidated financial statements.
b. Recently Issued Accounting Guidance
In October 2009, the FASB issued new accounting guidance for revenue recognition with multiple
deliverables. This guidance impacts the determination of when the individual deliverables included
in a multiple-element arrangement may be treated as separate units of accounting. Additionally,
this new accounting guidance modifies the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. The new guidance is effective for the Company
prospectively for revenue arrangements entered into or materially modified beginning in the first
quarter of fiscal 2011. Early adoption is permitted. This accounting guidance is not expected to
have a significant impact on the Companys consolidated financial statements.
In June 2009, the FASB amended its guidance on accounting for variable interest entities
(VIE). The new accounting guidance will result in a change in the Companys accounting policy
effective September 1, 2010. Among other things, the new guidance requires a qualitative rather
than a quantitative analysis to determine the primary beneficiary of a VIE; requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE; enhances disclosures
about an enterprises involvement with a VIE; and amends certain guidance for determining whether
an entity is a VIE. Under the new guidance, a VIE must be consolidated if the enterprise has both
(a) the power to direct the activities of the VIE that most significantly impact the entitys
economic performance, and (b) the obligation to absorb losses or the right to receive benefits from
the VIE that could potentially be significant to the VIE. The Company does not expect the impact of
this new guidance to be material to its consolidated financial statements.
In June 2009, the FASB issued new accounting guidance on accounting for transfers of financial
assets. This guidance amends previous guidance by including: the elimination of the concept of a
qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the
initial measurement of a transferors interest in transferred financial assets. Additionally, the
guidance requires extensive new disclosure regarding an entitys involvement in a transfer of
financial assets. This new guidance will be effective for the Company on September 1, 2010. The
Company does not expect the adoption of this guidance to have a material impact on its consolidated
statement of operations. However, under the current North American asset-backed securitization
structure, accounts receivable will no longer qualify for sale treatment and will be accounted for
as a secured borrowing. As such, short-term debt will be recognized and accounts receivable will
remain on the Companys consolidated balance sheets until the point of cash receipt from the
customer. The secured borrowing will be recognized as a financing activity on the Companys
consolidated statement of cash flows as of September 1, 2010.
In December 2008, the FASB issued new accounting guidance that requires enhanced annual
disclosures about the plan assets of a companys defined benefit pension and other postretirement
plans intended to provide users of financial statements with a greater understanding of: (1) how
investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the major categories of plan assets; (3)
the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect
of fair value measurements, using significant unobservable inputs (Level 3) on changes in plan
29
assets for the period; and (5) significant concentrations of risk within plan assets. The Company
will provide the required disclosures beginning with the Companys Form 10-K for the year ending
August 31, 2010. This accounting guidance is not expected to have a significant impact on the
Companys consolidated financial statements.
Note 16. Subsequent Events
The Company has evaluated subsequent events that occurred through the date of the filing of
the Companys third quarter Form 10-Q. No significant events occurred subsequent to the balance
sheet date and prior to the filing of this report that would have a material impact on the
Condensed Consolidated Financial Statements.
30
JABIL CIRCUIT, INC. AND SUBSIDIARIES
References in this report to the Company, Jabil, we, our, or us mean Jabil Circuit,
Inc. together with its subsidiaries, except where the context otherwise requires. This Quarterly
Report on Form 10-Q contains certain statements that are, or may be deemed to be, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act) which are made in reliance upon the protections provided by such acts for forward-looking
statements. These forward-looking statements (such as when we describe what will, may or
should occur, what we plan, intend, estimate, believe, expect or anticipate will
occur, and other similar statements) include, but are not limited to, statements regarding future
sales and operating results, future prospects, anticipated benefits of proposed (or future)
acquisitions and new facilities, growth, the capabilities and capacities of business operations,
any financial or other guidance and all statements that are not based on historical fact, but
rather reflect our current expectations concerning future results and events. We make certain
assumptions when making forward-looking statements, any of which could prove inaccurate, including,
but not limited to, statements about our future operating results and business plans. Therefore, we
can give no assurance that the results implied by these forward-looking statements will be
realized. Furthermore, the inclusion of forward-looking information should not be regarded as a
representation by the Company or any other person that future events, plans or expectations
contemplated by the Company will be achieved. The ultimate correctness of these forward-looking
statements is dependent upon a number of known and unknown risks and events, and is subject to
various uncertainties and other factors that may cause our actual results, performance or
achievements to be different from any future results, performance or achievements expressed or
implied by these statements. The following important factors, among others, could affect future
results and events, causing those results and events to differ materially from those expressed or
implied in our forward-looking statements:
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business conditions and growth or declines in our customers industries, the
electronic manufacturing services industry and the general economy; |
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variability of our operating results; |
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our dependence on a limited number of major customers; |
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the potential consolidation of our customer base, and the potential movement by
some of our customers of a portion of their manufacturing from us in order to more fully
utilize their excess internal manufacturing capacity; |
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availability of components; |
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our dependence on certain industries; |
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our production levels are subject to the variability of customer requirements,
including seasonal influences on the demand for certain end products; |
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our substantial international operations, and the resulting risks related to our
operating internationally; |
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our ability to successfully negotiate definitive agreements and consummate
acquisitions, and to integrate operations following the consummation of acquisitions; |
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our ability to take advantage of our past, current and possible future
restructuring efforts to improve utilization and realize savings and whether any such
activity will adversely affect our cost structure, our ability to service customers and
our labor relations; |
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our ability to maintain our engineering, technological and manufacturing process
expertise; |
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other economic, business and competitive factors affecting our customers, our
industry and our business generally; and |
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other factors that we may not have currently identified or quantified. |
For a further list and description of various risks, relevant factors and uncertainties that
could cause future results or events to differ materially from those expressed or implied in our
forward-looking statements, see the Risk Factors and Managements Discussion and Analysis of
Financial Condition and Results of Operations sections contained elsewhere in this document, as
well as our Annual Report on Form 10-K for the fiscal year ended August 31, 2009, any subsequent
Reports on Form 10-Q and Form 8-K and other filings with the Securities and Exchange Commission.
Given these risks and uncertainties, the reader should not place undue reliance on these
forward-looking statements.
All forward-looking statements included in this Quarterly Report on Form 10-Q are made only as
of the date of this Quarterly Report on Form 10-Q, and we do not undertake any obligation to
publicly update or correct any forward-looking statements to reflect events or circumstances that
subsequently occur, or of which we hereafter become aware. You should read this document and the
documents that we incorporate by reference into this Quarterly Report on Form 10-Q completely and
with the understanding that our actual future results may be materially different from what we
expect. We may not update these forward-looking statements, even if our situation changes in the
future. All forward-looking statements attributable to us are expressly qualified by these
cautionary statements.
31
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Item 2: |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We are one of the leading providers of worldwide electronic manufacturing services and
solutions. We provide comprehensive electronics design, production, product management and
aftermarket services to companies in the aerospace, automotive, computing, consumer, defense,
industrial, instrumentation, medical, networking, peripherals, solar, storage and
telecommunications industries. We currently depend, and expect to continue to depend, upon a
relatively small number of customers for a significant percentage of our net revenue. Based on
revenue, net of estimated product return costs (net revenue), for the nine months ended May 31,
2010 our largest customers currently include Cisco Systems, Inc., EchoStar Corporation, General
Electric Company, Hewlett-Packard Company, International Business Machines Corporation, LG
Electronics Inc., NetApp. Inc., Nokia Corporation, Pace plc and Research in Motion Limited. For
the three months and nine months ended May 31, 2010, we had net revenues of approximately $3.5
billion and $9.5 billion, respectively, and net income attributable to Jabil Circuit, Inc. of
approximately $52.0 million and $110.1 million, respectively.
We offer our customers electronics design, production, product management and aftermarket
solutions that are responsive to their manufacturing needs. Our business units are capable of
providing our customers with varying combinations of the following services:
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integrated design and engineering; |
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component selection, sourcing and procurement; |
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design and implementation of product testing; |
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parallel global production; |
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systems assembly, direct order fulfillment and configure to order; and |
We currently conduct our operations in facilities that are located in Austria, Belgium,
Brazil, China, England, France, Germany, Hungary, India, Ireland, Italy, Japan, Malaysia, Mexico,
The Netherlands, Poland, Russia, Scotland, Singapore, Taiwan, Turkey, Ukraine, the U.S. and
Vietnam. Our global manufacturing production sites allow customers to manufacture products
simultaneously in the optimal locations for their products. Our services allow customers to improve
supply-chain management, reduce inventory obsolescence, lower transportation costs and reduce
product fulfillment time. We have identified our global presence as a key to assessing our business
performance.
We manage our business and operations in three divisions Consumer, Electronic Manufacturing
Services (EMS) and Aftermarket Services (AMS). We believe that these divisions provide
cost-effective solutions for our customers by grouping business units with similar needs together
into divisions, each with full accountability for design, operations, supply chain management and
delivery. Our Consumer division has dedicated resources designed to meet the particular needs of
the consumer products industry and focuses on cell phones and mobile products, televisions, set-top
boxes and peripheral products such as printers. Our EMS division focuses on business sectors such
as, aerospace, automotive, computing, defense, industrial, instrumentation, medical, networking,
solar, storage and telecommunications businesses. Our AMS division provides warranty and repair
services to customers in a broad range of industries, including certain of our manufacturing
customers.
The industry in which we operate is composed of companies that provide a range of
manufacturing and design services to companies that utilize electronics components. The industry
experienced rapid change and growth through the 1990s as an increasing number of companies chose
to outsource an increasing portion, and, in some cases, all of their manufacturing requirements. In
mid-2001, the industrys revenue declined as a result of significant cut-backs in customer
production requirements, which was consistent with the overall downturn in the technology sector at
the time. In response to this downturn in the technology sector, we implemented restructuring
programs to reduce our cost structure and further align our manufacturing capacity with the
geographic production demands of our customers. Industry revenues generally began to stabilize in
2003 and companies turned to outsourcing versus internal manufacturing. In addition, the number of
industries serviced, as well as the market penetration in certain industries, by electronic
manufacturing service providers has increased over the past several years. After several years of
growth, our net revenues for fiscal year 2009 declined by approximately 8.6% to $11.7 billion as
compared to $12.8 billion for fiscal year 2008. This decline was largely the result of a
deteriorating macro-economic environment within the last 18 to 21 months which resulted in
illiquidity in the overall credit markets and a significant economic downturn in the North
American, European and Asian markets. Such economic conditions led us to implement the 2009
Restructuring Plan. See Note 7 Restructuring and Impairment Charges to the Condensed
Consolidated Financial Statements. Also, as a result of recent economic conditions, some of our
customers have moved a portion of
32
their manufacturing from us in order to more fully utilize their excess internal manufacturing
capacity. This movement, and possible future movements, may negatively impact our results of
operations.
We have entered into a letter of intent to divest our remaining manufacturing operations in
France and Italy. Divested operations would include four sites and approximately 1,500 employees.
Revenues associated with these sites total approximately $300.0 million annually, and we expect the
divesture will have no material impact on our operating margin performance on an ongoing basis.
This transaction is expected to close during the fourth quarter of fiscal year 2010, and is subject
to final negotiations, customary regulatory periods and consultation with employees and their
representatives. We currently anticipate a loss of approximately $10.0 million associated with
this divesture to be recorded in the fourth fiscal quarter. As part of the transaction, we
anticipate making a loan to and entering into certain other arrangements with the subsidiaries
being sold. Depending upon the occurrence of certain future events related to these arrangements,
we could incur up to an additional $35 million of charges in the future.
Though significant uncertainty remains regarding the extent and timing of the economic
recovery, we continue to see signs of stabilization as the overall credit markets have
significantly improved and it appears that the global economic stimulus programs put in place are
having a positive impact, particularly in China. We will continue to monitor the current economic
environment and its potential impact on both the customers that we serve as well as our end-markets
and closely manage our costs and capital resources so that we can respond appropriately as
circumstances continue to change.
Summary of Results
Net revenues for the third quarter of fiscal year 2010 increased approximately 32.1% to $3.5
billion compared to $2.6 billion for the same period of fiscal year 2009 largely due to increases
in all of our sectors, except for our other sector (which includes our automotive business and
certain of our other businesses). These increases are primarily due to increased revenue from
existing customers and programs as our customers confidence in their markets strengthen and their
end-customers demand levels increase, as well as new customer wins and new program wins with
existing customers.
During the second quarter of fiscal year 2009, our Board of Directors approved a restructuring
plan to better align our manufacturing capacity in certain geographies and to reduce our worldwide
workforce by approximately 3,000 employees in order to reduce operating expenses (the 2009
Restructuring Plan). These restructuring activities were intended to address market conditions and
properly size our manufacturing facilities to increase the efficiencies of our operations. Based on
the analysis completed to date, we currently expect to recognize approximately $64.0 million in
pre-tax restructuring and impairment costs and reduce our worldwide headcount by a total of
approximately 4,000 employees over the course of fiscal years 2009 and 2010. In addition, we
recorded a valuation allowance of $14.8 million on certain net deferred tax assets related to the
2009 Restructuring Plan. The restructuring charges include pre-tax employee severance and
termination benefit costs, contract termination costs and other related restructuring costs. The
impairment charges include pre-tax fixed asset impairment costs, as well as valuation allowances
against net deferred tax assets. 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 legal jurisdictions impacted, and the amount
and timing of the actual charges may vary due to a variety of factors. Based on the ongoing
assessment of market conditions, it is possible that we may perform additional restructuring
activities in the future. For further discussion of this restructuring program and the
restructuring and impairment costs recognized, refer to Managements Discussion and Analysis of
Financial Condition and Results of Operations Results of Operations Restructuring and
Impairment Charges and Note 7 Restructuring and Impairment Charges to the Condensed
Consolidated Financial Statements. See also Risk Factors We face risks arising from the
restructuring of our operations.
The following table sets forth, for the three month and nine month periods indicated, certain
key operating results and other financial information (in thousands, except per share data).
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Three months ended |
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Nine months ended |
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May 31, |
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May 31, |
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May 31, |
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May 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenue |
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$ |
3,455,578 |
|
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$ |
2,615,101 |
|
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$ |
9,548,478 |
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$ |
8,885,010 |
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Gross profit |
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$ |
262,114 |
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$ |
148,589 |
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$ |
716,636 |
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$ |
527,848 |
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Operating income (loss) |
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$ |
96,533 |
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$ |
(7,807 |
) |
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$ |
224,576 |
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$ |
(953,346 |
) |
Net income (loss) attributable to Jabil Circuit, Inc |
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$ |
52,031 |
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$ |
(28,762 |
) |
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$ |
110,149 |
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$ |
(1,170,719 |
) |
Income (loss) per share basic |
|
$ |
0.24 |
|
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$ |
(0.14 |
) |
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$ |
0.51 |
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$ |
(5.66 |
) |
Income (loss) per share diluted |
|
$ |
0.24 |
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$ |
(0.14 |
) |
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$ |
0.51 |
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$ |
(5.66 |
) |
Cash dividend per share declared |
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$ |
0.07 |
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$ |
0.07 |
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$ |
0.21 |
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$ |
0.21 |
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33
Key Performance Indicators
Management regularly reviews financial and non-financial performance indicators to assess the
Companys operating results. The following table sets forth, for the quarterly periods indicated,
certain of managements key financial performance indicators.
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Three months ended |
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May 31, |
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February 28, |
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November 30, |
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August 31, |
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2010 |
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2010 |
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2009 |
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2009 |
Sales cycle
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16 days
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17 days
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16 days
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16 days |
Inventory turns
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7 turns
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7 turns
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8 turns
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9 turns |
Days in trade accounts receivable
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33 days
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35 days
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41 days
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41 days |
Days in inventory
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50 days
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51 days
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45 days
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42 days |
Days in accounts payable
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67 days
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69 days
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70 days
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67 days |
The sales cycle is calculated as the sum of days in trade 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. During the three months ended May
31, 2010, days in trade accounts receivable decreased two days to 33 days as compared to the prior
sequential quarter as a result of the sale of trade accounts receivable under the uncommitted trade
accounts receivable sale program, timing of sales and focused efforts on cash collection during the
quarter. During the three months ended May 31, 2010, days in inventory decreased one day to 50 days
and inventory turns remained constant at seven turns as compared to the prior sequential quarter
primarily due to increased sales during the period. We continue, however, to experience raw
material shortages due to a constrained materials environment which has caused material component
lead times to be extended. For further discussion of material shortages see Risk Factors We
depend on a limited number of suppliers for components that are critical to our manufacturing
processes. A shortage of these components or an increase in their price could interrupt our
operations and reduce our profits. During the three months ended May 31, 2010, days in accounts
payable decreased two days to 67 days as compared to 69 days in the prior sequential quarter, as a
result of the timing of purchases and cash payments during the quarter.
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. We have identified the following critical accounting policies
that affect the more significant judgments and estimates used in the preparation of our Condensed
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 in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2009.
Revenue Recognition
We derive revenue principally from the product sales of electronic equipment built to customer
specifications. We also derive revenue to a lesser extent from aftermarket services, design
services and excess inventory sales. Revenue from product sales and excess inventory sales is
generally recognized, net of estimated product return costs, when goods are shipped; title and risk
of ownership have passed; the price to the buyer is fixed or determinable; and recoverability is
reasonably assured. Aftermarket service related revenue is recognized upon completion of the
services. Design service related revenue is generally recognized upon completion and acceptance by
the respective customer. We assume no significant obligations after product shipment.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts related to receivables not expected to be
collected from our customers. This allowance is based on managements assessment of specific
customer balances, considering the age of receivables and financial stability of the customer. If
there is an adverse change in the financial condition and circumstances of our customers, or if
actual defaults are higher than provided for, an addition to the allowance may be necessary.
Inventory Valuation
We purchase inventory based on forecasted demand and record inventory at the lower of cost or
market. Management regularly assesses inventory valuation based on current and forecasted usage,
customer inventory-related contractual obligations and other lower of cost or market
considerations. If actual market conditions or our customers product demands are less favorable
than those projected, additional valuation adjustments may be necessary.
34
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
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 performance or industry demand and the restructuring of our operations
resulting from a change in our business strategy or adverse economic conditions. For further
discussion of our current restructuring program, refer to Note 7 Restructuring and Impairment
Charges to the Condensed Consolidated Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations Results of Operations Restructuring
and Impairment Charges.
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 allocation of amortizable intangible assets impacts the amounts allocable to goodwill.
We perform a goodwill impairment analysis using the two-step method on an annual basis and
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. The recoverability of goodwill is measured at the reporting unit level, which we have
determined to be consistent with our operating segments, by comparing the reporting units carrying
amount, including goodwill, to the fair market value of the reporting unit. We consistently
determine the fair market value of our reporting units based on an average weighting of both
projected discounted future results and the use of comparative market multiples. If the carrying
amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second
test is performed to measure the amount of loss, if any.
We completed our annual impairment test for goodwill during the fourth quarter of fiscal year
2009 and determined that no impairment existed as of the date of the impairment test.
Restructuring and Impairment Charges
We have recognized restructuring and impairment charges related to reductions in workforce,
re-sizing and closure of certain facilities, and the transition of production from certain
facilities into other new and existing facilities. These charges were recorded pursuant to formal
plans developed and approved by management and our Board of Directors. The recognition of
restructuring and impairment charges requires that we make certain judgments and estimates
regarding the nature, timing and amount of costs associated with these plans. The estimates of
future liabilities may change, requiring additional restructuring and impairment charges or the
reduction of liabilities already recorded. At the end of each reporting period, we evaluate the
remaining accrued balances to ensure that no excess accruals are retained and the utilization of
the provisions are for their intended purpose in accordance with the restructuring programs. For
further discussion of our restructuring programs, refer to Note 7 Restructuring and Impairment
Charges to the Condensed Consolidated Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations Results of Operations Restructuring
and Impairment Charges.
Retirement Benefits
We have pension and postretirement benefit costs and liabilities in certain foreign locations
that are developed from actuarial valuations. Actuarial valuations require management to make
certain judgments and estimates of discount rates, compensation rate increases and return on plan
assets. We evaluate these assumptions on a regular basis taking into consideration current market
conditions and historical market data. The discount rate is used to state expected future cash
flows at a present value on the measurement date. This rate represents the market rate for
high-quality fixed income investments. A lower discount rate increases the present value of benefit
obligations and increases pension expense. When considering the expected long-term rate of return
on pension plan assets, we take into account current and expected asset allocations, as well as
historical and expected returns on plan assets. Other assumptions include demographic factors such
as retirement, mortality and turnover. For further discussion of our pension and postretirement
benefits, refer to Note 10 Retirement Benefits to the Condensed Consolidated Financial
Statements.
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 the 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
35
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.
The Internal Revenue Service (IRS) completed its field examination of our tax returns for
the fiscal years 2003 through 2005 and issued a Revenue Agents Report (RAR) on April 30, 2010
proposing adjustments primarily related to: (1) certain costs that we treated as corporate
expenses and that the IRS proposes be charged out to our foreign affiliates as intercompany service
fee charges and (2) certain purported intangible values the IRS felt were transferred to certain of
our foreign subsidiaries free of charge. If the IRS ultimately prevails in its positions, our
income tax payment due for the fiscal years 2003 through 2005 would be approximately $71.0 million
before utilization of any tax attributes arising in periods subsequent to fiscal year 2005. In addition, the IRS will likely make similar claims in future audits with respect to these
types of transactions (at this time, determination of the additional income tax due for these later
years is not practicable). Also, the IRS has proposed interest and penalties with respect to
fiscal years 2003 through 2005 and we anticipate the IRS may seek to impose interest and penalties
in subsequent years with respect to the same types of issues.
We disagree with the proposed adjustments and intend to vigorously contest this matter through
applicable IRS and judicial procedures, as appropriate. As the final resolution of the proposed
adjustments remains uncertain, we continue to provide for the uncertain tax position based on the
more likely than not standards. Accordingly, we did not record any significant additional tax
liabilities related to this RAR on the Condensed Consolidated Balance Sheets for the three months
ended May 31, 2010. While the resolution of the issues may result in tax liabilities, interest and penalties, which are
significantly higher than the amounts provided for this matter, we currently believe that the
resolution will not have a material effect on our financial position or liquidity. Despite this
belief, an unfavorable resolution, particularly if the IRS successfully asserts similar claims for
later years, could have a material effect on our results of operations and financial condition
(particularly in the quarter in which any adjustment is recorded or any tax is due or paid). For
further discussion related to our income taxes, refer to Note 13 Income Taxes to the Condensed
Consolidated Financial Statements, Risk Factors We are subject to the risk of increased taxes
and Note 4 Income Taxes to the Consolidated Financial Statements in our Annual Report on Form
10-K for the fiscal year ended August 31, 2009.
Stock-Based Compensation
We began recognizing stock-based compensation expense in our Condensed Consolidated Statements
of Operations on September 1, 2005. The fair value of options granted prior to September 1, 2005
were valued using the Black-Scholes model while the stock appreciation rights granted after this
date were valued using a lattice model. Option pricing models require the input of subjective
assumptions, including the expected life of the option or stock appreciation right, risk-free rate,
expected dividend yield and the price volatility of the underlying stock. Judgment is also required
in estimating the number of stock awards that are expected to vest as a result of satisfaction of
time-based vesting schedules or the achievement of certain performance conditions. If actual
results or future changes in estimates differ significantly from our current estimates, stock-based
compensation expense could increase or decrease. For further discussion of our stock-based
compensation, refer to Note 4 Stock-Based Compensation to the Condensed Consolidated Financial
Statements.
Recent Accounting Guidance
See Note 15 New Accounting Guidance to the Condensed Consolidated Financial Statements
for a discussion of recent accounting guidance.
Results of Operations
The following table sets forth, for the periods indicated, certain statements of operations
data expressed as a percentage of net revenue:
|
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|
Three months ended |
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|
Nine months ended |
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|
|
May 31, |
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|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue |
|
|
92.4 |
% |
|
|
94.3 |
% |
|
|
92.5 |
% |
|
|
94.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7.6 |
% |
|
|
5.7 |
% |
|
|
7.5 |
% |
|
|
5.9 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
4.4 |
% |
|
|
4.8 |
% |
|
|
4.4 |
% |
|
|
4.1 |
% |
Research and development |
|
|
0.2 |
% |
|
|
0.3 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Amortization of intangibles |
|
|
0.2 |
% |
|
|
0.3 |
% |
|
|
0.2 |
% |
|
|
0.3 |
% |
36
|
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|
|
|
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|
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|
Three months ended |
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Nine months ended |
|
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May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Restructuring and impairment charges |
|
|
|
|
|
|
0.6 |
% |
|
|
0.1 |
% |
|
|
0.5 |
% |
Goodwill impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5 |
% |
Loss on disposal of subsidiary |
|
|
|
|
|
|
|
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2.8 |
% |
|
|
(0.3 |
)% |
|
|
2.4 |
% |
|
|
(10.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
% |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
)% |
Interest expense |
|
|
0.6 |
% |
|
|
0.7 |
% |
|
|
0.6 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
|
2.2 |
% |
|
|
(1.0 |
)% |
|
|
1.8 |
% |
|
|
(11.4 |
)% |
Income tax expense |
|
|
0.7 |
% |
|
|
0.1 |
% |
|
|
0.6 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1.5 |
% |
|
|
(1.1 |
)% |
|
|
1.2 |
% |
|
|
(13.2 |
)% |
Net income (loss) attributable to noncontrolling interests, net of income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Jabil Circuit, Inc. |
|
|
1.5 |
% |
|
|
(1.1 |
)% |
|
|
1.2 |
% |
|
|
(13.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three and Nine Months Ended May 31, 2010 Compared to the Three and Nine Months Ended
May 31, 2009
Net Revenue. Our net revenue for the three months ended May 31, 2010 increased 32.1% to $3.5
billion from $2.6 billion for the three months ended May 31, 2009. Specific increases include a 59%
increase in the sale of instrumentation and medical products; a 51% increase in the sale of
networking products; a 36% increase in the sale of digital home office products; a 26% increase in
the sale of computing and storage products; a 17% increase in the sale of mobility products; a 13%
increase in the sale of aftermarket services; and a 10% increase in the sale of telecom products.
These increases are primarily due to increased revenue from existing customers and programs as our
customers confidence in their markets strengthen and their end-customers demand levels increase,
as well as new customer wins and new program wins with existing customers. These increases were
partially offset by a 12% decrease in the sale of other products due to our decision to largely
exit the automotive sector in conjunction with the sale of our subsidiary Jabil Circuit Automotive,
SAS.
Our net revenue for the nine months ended May 31, 2010 increased 7.5% to $9.5 billion from
$8.9 billion for the nine months ended May 31, 2009. Specific increases include a 30% increase in
the sale of instrumentation and medical products; a 17% increase in the sale of aftermarket
services; an 11% increase in the sale of mobility products; and a 7% increase in the sale of
networking products. These increases are primarily due to increased revenue from existing customers
and programs as our customers confidence in their markets strengthen and their end-customers
demand levels increase, as well as new customer wins and new program wins with existing customers.
These increases were partially offset by an 8% decrease in the sale of telecom products; a 4%
decrease in the sale of computing and storage products; and an 18% decrease in the sale of other
products due to our decision to largely exit the automotive sector as discussed above.
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 report separately 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 following table sets forth, for the periods indicated, revenue by industry sector
expressed as a percentage of net revenue. The distribution of revenue across our industry sectors
has fluctuated, and will continue to fluctuate, as a result of numerous factors, including but not
limited to the following: fluctuations in customer demand as a result of the continuing overall
weakness in the macro-economic environment (despite our relatively recent increase in revenue due
to increases from existing customer programs, new customer wins and new program wins with existing
customers); efforts to de-emphasize the economic performance of certain sectors, most specifically,
our former automotive sector; seasonality in our business; and business growth from new and
existing customers, including production of new products in the mobility sector. During the first
quarter of fiscal year 2010, we began to report the display and peripheral sectors as a combined
sector called digital home office. In addition, the automotive sector is no longer reported
separately and has been combined in the other sector.
37
|
|
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|
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|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
EMS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Storage |
|
|
11 |
% |
|
|
11 |
% |
|
|
10 |
% |
|
|
11 |
% |
Instrumentation and Medical |
|
|
23 |
% |
|
|
20 |
% |
|
|
22 |
% |
|
|
19 |
% |
Networking |
|
|
18 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
|
16 |
% |
Telecommunications |
|
|
5 |
% |
|
|
6 |
% |
|
|
5 |
% |
|
|
6 |
% |
Other |
|
|
4 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EMS |
|
|
61 |
% |
|
|
58 |
% |
|
|
59 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Electronics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Home Office |
|
|
15 |
% |
|
|
14 |
% |
|
|
15 |
% |
|
|
17 |
% |
Mobility |
|
|
18 |
% |
|
|
21 |
% |
|
|
20 |
% |
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer Electronics |
|
|
33 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMS |
|
|
6 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign source revenue represented 84.3% and 84.5% of net revenue for the three months
and nine months ended May 31, 2010, respectively. This is compared to 84.4% and 83.7% of net
revenue for the three months and nine months ended May 31, 2009, respectively. We currently expect
our foreign source revenue to slightly increase as compared to current levels over the course of
the next twelve months.
Gross Profit. Gross profit increased to $262.1 million (7.6% of net revenue) and $716.6
million (7.5% of net revenue) for the three months and nine months ended May 31, 2010,
respectively, from $148.6 million (5.7% of net revenue) and $527.8 million (5.9% of net revenue)
for the three months and nine months ended May 31, 2009, respectively. The increase in gross profit
on an absolute basis and as a percentage of net revenue for the three months and nine months ended
May 31, 2010 versus the same period in the prior fiscal year was primarily due to increased revenue
from existing customers and programs as our customers confidence in their markets strengthen and
their end-customers demand levels increase, as well as new customer wins and new program wins with
existing customers, as well as the realization of certain cost savings associated with initiatives
that we commenced in fiscal year 2009 to reduce our cost structure in order to better align with
lower demand levels and increased capacity utilization which allows us to better leverage our cost
structure. This increase was partially offset by our failure to realize an incremental amount of
revenue due to supply constraints with certain materials, which, if realized, would have likely had
a positive impact on our gross profit and net income.
Selling, General and Administrative. Selling, general and administrative expenses increased to
$151.4 million (4.4% of net revenue) and $429.2 million (4.4% of net revenue) for the three months
and nine months ended May 31, 2010 from $125.4 million (4.8% of net revenue) and $368.1 million
(4.1% of net revenues) for the three months and nine months ended May 31, 2009. The increase in
selling, general and administrative expenses for the three months ended May 31, 2010 versus the
same period in the prior fiscal year was largely due to increases in stock-based compensation
expense of $14.4 million primarily due to a change in the estimated vesting of performance-based
restricted stock awards, $3.2 million related to professional fees associated with multiple
internal strategic and cost saving initiatives and $3.4 million related to additional salary and
salary related expenses to support increased headcount. The increase in selling, general and
administrative expenses for the nine months ended May 31, 2010 versus the same period in the prior
fiscal year was largely due to increases in stock-based compensation expense of $34.9 million
primarily due to a change in the estimated vesting of performance-based restricted stock awards and
incremental expense recognized related to the modification of certain existing equity awards to
include retirement eligibility provisions, $15.6 million related to additional salary and bonus
expense due to increased results of operations in the current fiscal year and $9.1 million related
to professional fees associated with multiple internal strategic and cost saving initiatives.
Research and Development. Research and development expenses decreased to $6.3 million (0.2% of
net revenue) and increased to $21.5 million (0.2% of net revenue) for the three months and nine
months ended May 31, 2010, respectively, compared to $7.2 million (0.3% of net revenue) and $18.6
million (0.2% of net revenue) for the three months and nine months ended May 31, 2009,
respectively. The decrease for the three months ended May 31, 2010 is primarily due to typical
research and development investment variability while the increase for the nine months ended May
31, 2010 is attributed primarily to our increased focus on vertical integration capabilities in our
mobility sector and increased capabilities and proficiencies in digital home office and printer
markets.
38
Amortization of Intangibles. We recorded $6.2 million and $20.0 million of amortization of
intangible assets for the three months and nine months ended May 31, 2010, respectively, as
compared to $7.6 million and $23.3 million for the three months and nine months ended May 31, 2009,
respectively. The decrease is primarily attributable to certain intangible assets that became fully
amortized since May 31, 2009. For additional information regarding purchased intangibles, see Note
8 Goodwill and Other Intangible Assets to the Condensed Consolidated Financial Statements.
Restructuring and Impairment Charges.
a. 2009 Restructuring Plan
In conjunction with the 2009 Restructuring Plan, we currently expect to recognize
approximately $64.0 million in total restructuring and impairment costs, excluding valuation
allowances of $14.8 million on certain net deferred tax assets, primarily over the course of fiscal
years 2009 and 2010. Of this expected total, we charged $1.6 million and $5.4 million of
restructuring and impairment costs during the three months and nine months ended May 31, 2010,
respectively, to our Condensed Consolidated Statements of Operations, compared to charges of $16.1
million and $48.8 million of restructuring and impairment costs during the three months and nine
months ended May 31, 2009. The charges related to the 2009 Restructuring Plan incurred during the
three months ended May 31, 2010 include approximately $1.5 million related to employee severance
and termination benefit costs and approximately $0.1 million related to lease commitment costs. The
charges related to the 2009 Restructuring Plan incurred during the nine months ended May 31, 2010
include approximately $3.3 million related to lease commitment costs and approximately $0.6 million
related to fixed asset impairments.
The $59.1 million in restructuring and impairment charges related to the 2009 Restructuring
Plan incurred through May 31, 2010 includes cash costs totaling approximately $52.2 million, of
which approximately $19.2 million was paid in fiscal year 2009 and approximately $28.4 million was
paid in the nine months ended May 31, 2010. The cash costs of approximately $52.2 million consist
of employee severance and termination benefit costs of approximately $48.6 million, lease
commitment costs of approximately $3.4 million and other restructuring costs of approximately $0.2
million. Non-cash costs of approximately $6.9 million primarily represent fixed asset impairment
charges related to our restructuring activities.
At May 31, 2010, accrued liabilities of approximately $7.1 million related to the 2009
Restructuring Plan are expected to be paid over the next twelve months.
Upon its completion, the 2009 Restructuring Plan is expected to yield annualized cost savings
of approximately $55.0 million. The majority of these annual cost savings are expected to be
reflected as a reduction in cost of revenue, with a small portion being reflected as a reduction of
selling, general and administrative expense. These expected annualized cost savings reflect a
reduction in employee expense of approximately $41.8 million, a reduction in depreciation expense
of approximately $5.9 million, a reduction in lease commitment costs of approximately $0.1 million,
a reduction of other manufacturing costs of approximately $3.8 million and a reduction of selling,
general and administrative expenses of approximately $3.4 million. Of the $55.0 million of
expected annualized cost savings, we have realized a cumulative cost savings of approximately $40.0
million by the end of the third quarter of fiscal year 2010.
As part of the 2009 Restructuring Plan, we have determined that it was more likely than not
that certain deferred tax assets would not be realized as a result of the contemplated
restructuring activities. Therefore, we recorded a valuation allowance of $14.8 million on net
deferred tax assets related to the 2009 Restructuring Plan. The valuation allowance is excluded
from the restructuring and impairment charge of $59.1 million incurred through May 31, 2010 as it
was recorded through income tax expense on our Condensed Consolidated Statements of Operations.
b. 2006 Restructuring Plan
Upon the approval by our Board of Directors, we initiated a restructuring plan in the fourth
quarter of fiscal year 2006 (the 2006 Restructuring Plan). We have substantially completed
restructuring activities under this plan and expect to incur the remaining costs over the remainder
of fiscal year 2010 with certain contract termination costs to be incurred through fiscal year
2011.
During the three months and nine months ended May 31, 2010, we recorded approximately $0.1
million and $0.3 million of restructuring and impairment charges, respectively, compared to $0.1
million and $(0.5) million of restructuring and impairment charges (reversals) recognized for the
three months and nine months ended May 31, 2009, respectively. The restructuring and impairment
costs for the three months ended May 31, 2010 is comprised of a $(0.1) million cost reversal
related to employee severance and termination benefit costs and $0.2 million related to lease
commitments. The restructuring and impairment costs for the nine months ended May 31, 2010 is
comprised of approximately $0.3 million related to employee severance and termination benefit
costs.
At May 31, 2010, liabilities of approximately $2.3 million related to the 2006 Restructuring
Plan are expected to be paid out over the next twelve months. The remaining liability of $2.1
million relates primarily to the charge for certain lease commitments and employee severance and
termination benefits payments.
39
As of May 31, 2010, as a result of the restructuring activities completed through May 31, 2010
related to the 2006 Restructuring Plan, we expect to avoid annual costs of approximately $151.5
million that would otherwise have been incurred if the restructuring activities had not been
completed. The expected avoided annual costs consist of a reduction in employee related expenses of
approximately $137.7 million, a reduction in depreciation expense associated with impaired fixed
assets of approximately $8.5 million, and a reduction in rent expense associated with leased
buildings that have been vacated of approximately $5.3 million. The majority of these annual cost
savings will be reflected as a reduction in cost of revenue, with a small portion being reflected
as a reduction in selling, general and administrative expense. These annual costs savings are
expected to be partially offset by decreased revenues associated with certain products that are
approaching the end-of-life stage; decreased revenues as a result of shifting production to plants
located in lower cost regions where competitive environmental pressures require that we pass those
cost savings onto our customers; and incremental employee related costs expected to be incurred by
those plants to which the production will be shifted. After considering these cost savings offsets,
we began to realize the full net annualized cost savings of approximately $39.0 million during the
third quarter of fiscal year 2009. For further discussion of the restructuring programs, see Note 7
Restructuring and Impairment Charges to the Condensed Consolidated Financial Statements.
Goodwill Impairment Charges. We recorded non-cash goodwill impairment charges of $1.0 billion
for the full fiscal year ended August 31, 2009 (of which the entire $1.0 billion charge was
incurred in the first two quarters) to reduce the carrying amount of our goodwill to its estimated
fair value based upon the results of two interim impairment tests conducted during the first and
second quarters of fiscal year 2009. We performed these impairment tests based upon a combination
of factors, including a significant and sustained decline in our market capitalization below our
carrying value, the deteriorating macro-economic environment, which resulted in a significant
decline in customer demand, and illiquidity in the overall credit markets. After recognition of
these charges, no goodwill remained with the Consumer and EMS reporting units, respectively, and
approximately $25.1 million remained with the AMS reporting unit. For further discussion of
goodwill impairment charges recorded, see Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical Accounting Policies and Estimates Long-Lived
Assets and Note 6 Goodwill and Other Intangible Assets to the Consolidated Financial
Statements and Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Estimates Long-Lived Assets in the Annual Report
on Form 10-K for the fiscal year ended August 31, 2009.
Loss on Disposal of Subsidiary. On October 27, 2009, we sold the operations of Jabil Circuit
Automotive, SAS, an automotive electronic manufacturing subsidiary located in Western Europe to JCA
Acquisition Company Limited, an unrelated third-party. In connection with this sale, we recorded a
loss on disposition of approximately $15.7 million, which includes approximately $4.2 million in
transaction costs incurred in connection with the sale.
Other Expense. We recorded other expense totaling $1.0 million and $3.1 million for the three
months and nine months ended May 31, 2010, respectively, as compared to other expense of $0.9
million and $4.2 million for the three months and nine months ended May 31, 2009, respectively.
Expense for the three months ended May 31, 2010 was relatively consistent with expense for the
three months ended May 31, 2009. The decrease in expense for the nine months ended May 31, 2010
compared to the nine months ended May 31, 2009 was primarily due to a decrease in the loss on the
sale of accounts receivable under our North American securitization program of $1.3 million which
was primarily due to a decrease in the amount of receivables sold under the program as well as a
decrease in borrowing costs. For further discussion of our accounts receivable securitization
program, see Note 9 Trade Accounts Receivable Securitization and Sale Programs to the
Condensed Consolidated Financial Statements.
Interest Income. Interest income decreased to $0.6 million and $2.2 million for the three
months and nine months ended May 31, 2010, respectively, from $1.1 million and $5.3 million for the
three months and nine months ended May 31, 2009, respectively. The decrease was primarily due to
lower overall interest rates during the periods.
Interest Expense. Interest expense increased to $19.5 million for the three months ended May
31, 2010 from $19.0 million for the three months ended May 31, 2009 primarily due to increased
borrowing during the period. Interest expense decreased to $59.6 million for the nine months ended
May 31, 2010 from $62.9 million for the nine months ended May 31, 2009 primarily due to lower
overall interest rates during the period.
Income Taxes. Income tax expense reflects an effective tax rate of 31.3% and 32.1% for the
three months and nine months ended May 31, 2010, respectively, as compared to an effective tax rate
of (9.5)% and (15.5)% for the three months and nine months ended May 31, 2009, respectively. The
effective tax rate differs from the previous period due to the loss before income taxes and
valuation allowances against certain deferred tax assets that were no longer more likely than not
to be realized during the three months ended May 31, 2009 and the impairment of non-deductible
goodwill and the corresponding valuation allowances during the nine months ended May 31, 2009. The
tax rate is predominantly a function of the mix of tax rates in the various jurisdictions in which
we do business. Most of our international operations have historically been taxed at a lower rate
than in the U.S., primarily due to tax incentives granted to our sites in Brazil, China, Hungary,
India, Malaysia and Poland that expire at various dates through 2020. Such tax incentives are
subject to conditions with which we expect to continue to comply. See Note 13 Income Taxes to
the Condensed Consolidated Financial Statements, Managements Discussion and Analysis of Financial
Condition and Results of Operations
40
Critical Accounting Policies and Estimates Income Taxes, Risk Factors We are subject to
the risk of increased taxes and Note 4 Income Taxes to the Consolidated Financial Statements
in the Annual Report on Form 10-K for the fiscal year ended August 31, 2009 for further discussion.
Non-U.S. GAAP Core Financial Measures
The following discussion and analysis of our financial condition and results of operations
include certain non-U.S. GAAP financial measures as identified in the reconciliation below. The
non-U.S. GAAP financial measures disclosed herein do not have standard meaning and may vary from
the non-U.S. GAAP financial measures used by other companies or how we may calculate those measures
in other instances from time to time. Non-U.S. GAAP financial measures should not be considered a
substitute for, or superior to, measures of financial performance prepared in accordance with U.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 which are excluded from our core financial
measures.
Management believes that the non-U.S. 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, restructuring and impairment charges, goodwill impairment charges, certain
distressed customer charges, loss on disposal of subsidiary, certain deferred tax valuation
allowance charges and stock-based compensation expense and related charges. Among other uses,
management uses non-U.S. GAAP core financial measures as a factor in determining employee
performance when determining incentive compensation.
We are reporting core operating income and core earnings to provide investors with an
additional method for assessing operating income and earnings from what we believe are our core
manufacturing operations. Most of the items that are excluded for purposes of calculating core
operating income and core earnings also impacted certain balance sheet assets, resulting in all
or 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 charges, we may be making
associated cash payments in the future. In addition, although, for purposes of calculating core
operating income and core earnings, we excluded 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 evaluate these items and the
limitations for purposes of analysis in excluding them.
Included in the table below is a reconciliation of the non-U.S. GAAP financial measures to the
most directly comparable U.S. GAAP financial measures as provided in our condensed consolidated
financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Operating income (loss) (U.S. GAAP) |
|
$ |
96,533 |
|
|
$ |
(7,807 |
) |
|
$ |
224,576 |
|
|
$ |
(953,346 |
) |
Amortization of intangibles |
|
|
6,206 |
|
|
|
7,612 |
|
|
|
19,954 |
|
|
|
23,320 |
|
Stock-based compensation and related charges |
|
|
27,487 |
|
|
|
13,039 |
|
|
|
67,980 |
|
|
|
33,044 |
|
Restructuring and impairment charges |
|
|
1,635 |
|
|
|
16,167 |
|
|
|
5,705 |
|
|
|
48,312 |
|
Goodwill impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022,821 |
|
Loss on disposal of subsidiary |
|
|
|
|
|
|
|
|
|
|
15,722 |
|
|
|
|
|
Distressed customer charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core operating income (Non-U.S. GAAP) |
|
$ |
131,861 |
|
|
$ |
29,011 |
|
|
$ |
333,937 |
|
|
$ |
181,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Jabil Circuit, Inc. (U.S. GAAP) |
|
$ |
52,031 |
|
|
$ |
(28,762 |
) |
|
$ |
110,149 |
|
|
$ |
(1,170,719 |
) |
Amortization of intangibles, net of tax |
|
|
6,191 |
|
|
|
7,561 |
|
|
|
19,919 |
|
|
|
22,787 |
|
Stock-based compensation and related charges, net of tax |
|
|
26,825 |
|
|
|
12,021 |
|
|
|
66,713 |
|
|
|
31,231 |
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Restructuring and impairment charges, net of tax |
|
|
1,693 |
|
|
|
12,312 |
|
|
|
5,777 |
|
|
|
57,930 |
|
Goodwill impairment charges, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018,157 |
|
Loss on disposal of subsidiary, net of tax |
|
|
|
|
|
|
|
|
|
|
15,722 |
|
|
|
|
|
Distressed customer charges, net of tax |
|
|
|
|
|
|
(79 |
) |
|
|
|
|
|
|
6,329 |
|
Deferred tax valuation allowance charges |
|
|
|
|
|
|
5,463 |
|
|
|
|
|
|
|
132,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core earnings (Non-U.S. GAAP) |
|
$ |
86,740 |
|
|
$ |
8,516 |
|
|
$ |
218,280 |
|
|
$ |
98,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in the calculations
of basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
outstanding (U.S. GAAP)(1) |
|
|
213,881 |
|
|
|
207,190 |
|
|
|
214,051 |
|
|
|
206,767 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment awards classified as
participating securities |
|
|
|
|
|
|
6,239 |
|
|
|
|
|
|
|
6,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
outstanding (Non-U.S. GAAP) |
|
|
213,881 |
|
|
|
213,429 |
|
|
|
214,051 |
|
|
|
213,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in the calculations
of diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
outstanding (U.S. GAAP)(1) |
|
|
216,522 |
|
|
|
207,190 |
|
|
|
218,089 |
|
|
|
206,767 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment awards classified as
participating securities |
|
|
|
|
|
|
6,239 |
|
|
|
|
|
|
|
6,520 |
|
Dilutive common shares issuable under
the ESPP and upon exercise of options
and stock appreciation rights |
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
Dilutive unvested non-participating
restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
outstanding (Non-U.S. GAAP) |
|
|
216,522 |
|
|
|
213,446 |
|
|
|
218,089 |
|
|
|
213,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: (U.S. GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
(0.14 |
) |
|
$ |
0.51 |
|
|
$ |
(5.66 |
) |
Diluted |
|
$ |
0.24 |
|
|
$ |
(0.14 |
) |
|
$ |
0.51 |
|
|
$ |
(5.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core earnings per share: (Non-U.S. GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.41 |
|
|
$ |
0.04 |
|
|
$ |
1.02 |
|
|
$ |
0.46 |
|
Diluted |
|
$ |
0.40 |
|
|
$ |
0.04 |
|
|
$ |
1.00 |
|
|
$ |
0.46 |
|
|
|
|
(1) |
|
For the three months and nine months ended May 31, 2009, no potential common
shares relating to our equity awards were included in the U.S. GAAP computation of basic
and diluted loss per share as their effect would have been anti-dilutive given the
Companys net loss for the periods. |
42
Core operating income for the third quarter of fiscal 2010 increased 354.5% to $131.9 million
compared to $29.0 million for the third quarter of fiscal 2009. Core earnings increased 918.6% to
$86.7 million compared to $8.5 million for the third quarter of fiscal 2009.
Acquisitions and Expansion
We have made a number of acquisitions that were accounted for using the purchase method of
accounting. Our Condensed Consolidated Financial Statements include the operating results of each
business from the date of acquisition. See Risk Factors We have on occasion not achieved, and
may not in the future achieve expected profitability from our acquisitions.
Seasonality
Production levels for our Consumer division are subject to seasonal influences. We may realize
greater net revenue during our first fiscal quarter due to higher demand for consumer products
during the holiday selling season. Therefore, quarterly results should not be relied upon as
necessarily indicative of results for the entire fiscal year.
Dividends
The following table sets forth certain information relating to our cash dividends declared to
common stockholders during fiscal years 2010 and 2009.
Dividend Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash |
|
|
|
|
|
|
|
Dividend |
|
Dividend |
|
|
dividends |
|
|
Date of record for |
|
Dividend cash |
|
|
declaration date |
|
per share |
|
|
declared |
|
|
dividend payment |
|
payment date |
|
|
|
|
(in thousands, except for per share data) |
|
|
Fiscal year 2010:
|
|
October 22, 2009 |
|
$ |
0.07 |
|
|
$ |
15,186 |
(1) |
|
November 16, 2009 |
|
December 1, 2009 |
|
|
January 22, 2010 |
|
$ |
0.07 |
|
|
$ |
15,238 |
|
|
February 16, 2010 |
|
March 1, 2010 |
|
|
April 14, 2010 |
|
$ |
0.07 |
|
|
$ |
15,221 |
|
|
May 17, 2010 |
|
June 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2009: |
|
October 24, 2008 |
|
$ |
0.07 |
|
|
$ |
14,916 |
|
|
November 17, 2008 |
|
December 1, 2008 |
|
|
January 22, 2009 |
|
$ |
0.07 |
|
|
$ |
14,974 |
|
|
February 17, 2009 |
|
March 2, 2009 |
|
|
April 23, 2009 |
|
$ |
0.07 |
|
|
$ |
14,954 |
|
|
May 15, 2009 |
|
June 1, 2009 |
|
|
July 16, 2009 |
|
$ |
0.07 |
|
|
$ |
14,992 |
|
|
August 17, 2009 |
|
September 1, 2009 |
|
|
|
(1) |
|
Of the $15.2 million in total dividends declared during the first fiscal quarter of
2010, $14.4 million was paid out of additional paid-in capital (which represents the amount
of dividends declared in excess of the Companys retained earnings balance at the date that
the dividends were declared). |
We currently expect to continue to declare and pay 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.
Liquidity and Capital Resources
At May 31, 2010, our principle sources of liquidity consisted of cash, available borrowings
under our credit facilities and the accounts receivable securitization programs.
The following table sets forth, for the nine months ended May 31, 2010, selected
consolidated cash flow information (in thousands):
43
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
May 31, |
|
|
May 31, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
142,176 |
|
|
$ |
388,295 |
|
Net cash used in investing activities |
|
|
(237,861 |
) |
|
|
(227,674 |
) |
Net cash used in financing activities |
|
|
(143,309 |
) |
|
|
(177,878 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(36,929 |
) |
|
|
13,249 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(275,923 |
) |
|
$ |
(4,008 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities for the nine months ended May 31, 2010 was
approximately $142.2 million. This resulted primarily from net income of $111.4 million, a $509.8
million increase in accounts payable and accrued expenses, $211.9 million in non-cash depreciation
and amortization expense, $68.0 million in non-cash stock-based compensation expense, a $24.5
million increase in income tax payable, $12.8 million in non-cash expense related to the disposal
of a subsidiary and $5.7 million in restructuring and impairment charges offset by a $607.7 million
increase in inventories, a $126.0 million increase in prepaid expenses and other current assets and
a $70.1 million increase in trade accounts receivable. The increase in accounts payable and accrued
expenses was primarily driven by the timing of purchases and cash payments. The increase in
accounts receivable was predominately attributable to timing of sales and focused efforts on cash
collection. The increase in inventories was primarily due to the ramp up of inventory levels to
support new business wins, as well as raw material shortages due to a constrained materials
environment which has caused material component lead times to be extended. For further discussion
of material shortages see Risk Factors We depend on a limited number of suppliers for components
that are critical to our manufacturing processes. A shortage of these components or an increase in
their price could interrupt our operations and reduce our profits.
Net cash used in investing activities for the nine months ended May 31, 2010 was $237.9
million. This consisted primarily of capital expenditures of $245.1 million for investments in
capacity to support the ongoing production of new programs within the mobility sector and
information technology infrastructure, partially offset by $7.3 million of proceeds from the sale
of property and equipment.
Net cash used in financing activities for the nine months ended May 31, 2010 was $143.3
million. This resulted from our receipt of approximately $3.1 billion of proceeds from borrowings
under existing debt agreements, which primarily included an aggregate of $2.7 billion of borrowings
under the revolving portion of the Companys existing amended and restated five year unsecured
credit facility dated as of July 19, 2007 (the Credit Facility) and $196.1 million in borrowings
under our short-term Indian working capital facilities. This was offset by repayments in an
aggregate amount of $3.2 billion during the nine months ended May 31, 2010, which primarily
included $2.7 billion toward repayment of borrowings under the revolving portion of the Credit
Facility and $217.4 million toward repayment of borrowings under our short-term Indian working
capital facilities. In addition, we paid $44.9 million of dividends to stockholders during the nine
months ended May 31, 2010.
We may need to finance day-to-day working capital needs, as well as future growth and any
corresponding working capital needs, with additional borrowings under our revolving credit
facilities described below, as well as additional public and private offerings of our debt and
equity. Currently, we have a shelf registration statement with the SEC registering the potential
sale of an indeterminate amount of debt and equity securities in the future, from time to time, to
augment our liquidity and capital resources.
During the second quarter of fiscal year 2004, we entered into an asset-backed securitization
program with a bank, which originally provided for net cash proceeds at any one time of an amount
up to $100.0 million on the sale of eligible trade accounts receivable of certain domestic
operations. Subsequent to fiscal year 2004, several amendments have adjusted the net cash proceeds
available at any one time under the securitization program to an amount of $200.0 million and
extended the program until March 16, 2011. Under this agreement, we continuously sell a designated
pool of trade accounts receivable to a wholly-owned subsidiary, which in turn sells an ownership
interest in the receivables to a conduit, administered by an unaffiliated financial institution.
This wholly-owned subsidiary is a separate bankruptcy-remote entity and its assets would be
available first to satisfy the claims of the conduit. As the receivables sold are collected, we are
able to sell additional receivables up to the maximum permitted amount under the program. The
securitization program requires compliance with several financial covenants including an interest
coverage ratio and debt to EBITDA ratio, as defined in the securitization agreements. For each pool
of eligible receivables sold to the conduit, we retain a percentage interest in the face value of
the receivables, which is calculated based on the terms of the agreement. Net receivables sold
under this program are excluded from trade accounts receivable on our Condensed Consolidated
Balance Sheets and are reflected as cash provided by operating activities on our Condensed
Consolidated Statements of Cash Flows. We continue to service, administer and collect the
receivables sold under this program. We pay a fee on the unused portion of the facility of 0.575%
per annum based on the average daily unused aggregate capital during the period. Further, we pay a
usage fee on the utilized portion of the facility equal to 1.15% per annum on the average daily
outstanding aggregate capital during the immediately preceding calendar month. The securitization
conduit and the investors in the conduit have no recourse to our assets for failure of debtors to
pay when due. At May 31, 2010, we had sold $320.1 million of eligible trade accounts receivable,
which represents the face amount of total outstanding receivables at that date. In exchange, we
received cash proceeds of $175.5 million and retained an interest in the receivables of
approximately $144.6 million. In connection with the securitization program, we recognized pretax
losses on the sale of receivables of
44
approximately $0.9 million and $2.9 million during the three months and nine months ended May
31, 2010, respectively, and $0.9 million and $4.2 million for the three months and nine months
ended May 31, 2009, respectively, which are recorded to other expense in the Condensed Consolidated
Statements of Operations. See Note 15 New Accounting Guidance to the Condensed Consolidated
Financial Statements.
During the first quarter of fiscal year 2005, we entered into an agreement with an unrelated
third-party for the factoring of specific trade accounts receivable of a foreign subsidiary. Under
the terms of the factoring agreement, we transfer ownership of eligible trade accounts receivable
without recourse to the third-party purchaser in exchange for cash. Proceeds on the transfer
reflect the face value of the account less a discount. The discount is recorded as a loss in our
Condensed Consolidated Statements of Operations in the period of the sale. In September 2009, the
factoring agreement was extended through March 31, 2010, at which time it is expected to
automatically renew for an additional six-month period. The receivables sold pursuant to this
factoring agreement are excluded from trade accounts receivable on our Condensed Consolidated
Balance Sheets and are reflected as cash provided by operating activities on our Condensed
Consolidated Statements of Cash Flows. We continue to service, administer and collect the
receivables sold under this program. The third-party purchaser has no recourse to our assets for
failure of debtors to pay when due. At May 31, 2010, we had sold $14.2 million of trade accounts
receivable, which represents the face amount of total outstanding receivables at that date. In
exchange, we received cash proceeds of $14.2 million. The resulting loss on the sale of trade
accounts receivable sold under this factoring agreement was $18.8 thousand and $60.0 thousand for
the three months and nine months ended May 31, 2010, respectively, and $25.3 thousand and $130.0
thousand for the three months and nine months ended May 31, 2009, respectively, which was recorded
to other expense in the Condensed Consolidated Statements of Operations.
During the third quarter of fiscal year 2010, we entered into an uncommitted accounts
receivable sale agreement with a bank which allows us and certain of our subsidiaries to elect to
sell and the bank to elect to purchase at a discount, on an ongoing basis, up to $150.0 million of
specific trade accounts receivable. The program is accounted for as a sale. Net receivables sold
under this program are excluded from trade accounts receivable on the Condensed Consolidated
Balance Sheets and are reflected as cash provided by operating activities on the Condensed
Consolidated Statements of Cash Flows. We paid an arrangement fee upon the initial sale and pay a
transaction fee each month over the term of the agreement which are recorded to other expense in
the Condensed Consolidated Statements of Operations. The sale program expires on May 25, 2011.
We continue to service the receivables sold. No servicing asset or liability is recorded at
the time of sale as we have determined the servicing fee earned is at a market rate. Servicing
costs are recognized as incurred over the servicing period.
At May 31, 2010, we had sold $43.5 million of trade accounts receivable. In exchange, we
received cash proceeds of $43.5 million. The resulting loss on the sale of trade accounts
receivable sold under this sales program was $35.9 thousand for the three months and nine months
ended May 31, 2010, which was recorded to other expense in the Condensed Consolidated Statements of
Operations.
45
Notes payable, long-term debt and long-term lease obligations outstanding at May 31, 2010 and
August 31, 2009 are summarized below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
August 31, |
|
|
|
2010 |
|
|
2009 |
|
5.875% Senior Notes due 2010 (a) |
|
$ |
5,064 |
|
|
$ |
5,064 |
|
7.750% Senior Notes due 2016 (b) |
|
|
301,353 |
|
|
|
300,063 |
|
8.250% Senior Notes due 2018 (c) |
|
|
397,044 |
|
|
|
396,758 |
|
Short-term factoring debt (d) |
|
|
141 |
|
|
|
1,468 |
|
Borrowings under credit facilities (e) |
|
|
1,925 |
|
|
|
21,313 |
|
Borrowings under loans (f) |
|
|
362,389 |
|
|
|
384,485 |
|
Securitization program obligations (g) |
|
|
58,105 |
|
|
|
125,291 |
|
Miscellaneous borrowings |
|
|
16 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total notes payable, long-term debt and long-term lease obligations |
|
|
1,126,037 |
|
|
|
1,234,448 |
|
Less current installments of notes payable, long-term debt and
long-term lease obligations |
|
|
87,625 |
|
|
|
197,575 |
|
|
|
|
|
|
|
|
Notes payable, long-term debt and long-term lease obligations,
less current installments |
|
$ |
1,038,412 |
|
|
$ |
1,036,873 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the fourth quarter of fiscal year 2003, we issued a total of $300.0 million,
seven-year, publicly-registered 5.875% Senior Notes (the 5.875% Senior Notes) at 99.803% of
par, resulting in net proceeds of approximately $297.2 million. The 5.875% Senior Notes mature
on July 15, 2010 and pay interest semiannually on January 15 and July 15. Also, the 5.875%
Senior Notes are our senior unsecured obligations and rank equally with all other existing and
future senior unsecured debt obligations. We are subject to covenants such as limitations on
our and/or our subsidiaries ability to: consolidate or merge with, or convey, transfer or
lease all or substantially all of our assets to, another person; create certain liens; enter
into sale and leaseback transactions; create, incur, issue, assume or guarantee funded debt
(which only applies to our restricted subsidiaries); and guarantee any of our indebtedness
(which only applies to our subsidiaries). During the fourth quarter of fiscal year 2009, we
repurchased $294.9 million in aggregate principal amount of the 5.875% Senior Notes, pursuant
to a public cash tender offer, in which we also paid an early tender premium, accrued interest
and associated fees and expenses. The extinguishment of the validly tendered 5.875% Senior
Notes resulted in a charge of $10.5 million which was recorded to other expense in our
Condensed Consolidated Statements of Operations for the twelve months ended August 31, 2009. |
|
(b) |
|
During the fourth quarter of fiscal year 2009, we issued a total of $312.0 million,
seven-year, publicly-registered 7.750% Senior Notes at 96.1% of par, resulting in net proceeds
of approximately $300.0 million. The 7.750% Senior Notes mature on July 15, 2016 and pay
interest semiannually on January 15 and July 15. Also, the 7.750% Senior Notes are our senior
unsecured obligations and rank equally with all other existing and future senior unsecured
debt obligations. We are subject to covenants such as limitations on our and/or our
subsidiaries ability to: consolidate or merge with, or convey, transfer or lease all or
substantially all of our assets to, another person; create certain liens; enter into sale and
leaseback transactions; create, incur, issue, assume or guarantee funded debt (which only
applies to our restricted subsidiaries); and guarantee any of our indebtedness (which only
applies to our subsidiaries). We are also subject to a covenant regarding our repurchase of
the 7.750% Senior Notes upon a change of control repurchase event. |
|
(c) |
|
During the second and third quarters of fiscal year 2008, we issued $250.0 million
and $150.0 million, respectively, of ten-year, unregistered 8.250% notes at 99.965% of par and
97.5% of par, respectively, resulting in net proceeds of approximately $245.7 million and
$148.5 million, respectively. On July 18, 2008, we completed an exchange whereby all of the
outstanding unregistered 8.250% Notes were exchanged for registered 8.250% Notes (collectively
the 8.250% Senior Notes) that are substantially identical to the unregistered notes except
that the 8.250% Senior Notes are registered under the Securities Act and do not have any
transfer restrictions, registration rights or rights to additional special interest. |
|
|
|
The 8.250% Senior Notes mature on March 15, 2018 and pay interest semiannually on March 15 and
September 15. The interest rate payable on the 8.250% Senior Notes is subject to adjustment
from time to time if the credit ratings assigned to the 8.250% Senior Notes increase or
decrease, as provided in the 8.250% Senior Notes. The 8.250% Senior Notes are our senior
unsecured obligations and rank equally with all other existing and future senior unsecured debt
obligations. |
|
|
|
We are subject to covenants such as limitations on our and/or our subsidiaries ability to:
consolidate or merge with, or convey, transfer or lease all or substantially all of our assets
to, another person; create certain liens; enter into sale and leaseback transactions; create,
incur, issue, assume or guarantee any funded debt (which only applies to our restricted
subsidiaries); and guarantee any of our indebtedness (which only applies to our subsidiaries).
We are also subject to a covenant regarding our repurchase of the 8.250% Senior Notes upon a
change of control repurchase event. |
46
|
|
|
|
|
During the fourth quarter of fiscal year 2007, we entered into forward interest rate swap
transactions to hedge the fixed interest rate payments for an anticipated debt issuance. The
swaps were accounted for as a cash flow hedge. The notional amount of the swaps was $400.0
million. Concurrently with the pricing of the first $250.0 million of the 8.250% Senior Notes,
we settled $250.0
million of the swaps by our payment of $27.5 million. We also settled the remaining $150.0
million of swaps during the second quarter of fiscal year 2008 by our payment of $15.6 million.
As a result, we settled the amount recognized as a current liability on our Condensed
Consolidated Balance Sheets. We also recorded $0.7 million to interest expense (as
ineffectiveness) in our Condensed Consolidated Statements of Operations during the three months
ended February 29, 2008, with the remainder recorded in accumulated other comprehensive income,
net of taxes, on our Condensed Consolidated Balance Sheets. On May 19, 2008, we issued the
remaining $150.0 million of 8.250% Senior Notes and recorded no additional interest expense (as
ineffectiveness) in the Condensed Consolidated Statements of Operations. The effective portion
of the swaps remaining on our Condensed Consolidated Balance Sheets will be amortized to
interest expense in our Condensed Consolidated Statements of Operations over the life of the
8.250% Senior Notes. |
|
(d) |
|
During the fourth quarter of fiscal year 2007 and the fourth quarter of fiscal year
2009, we entered into separate agreements with unrelated third parties for the factoring of
specific trade accounts receivable of a foreign subsidiary. The factoring of trade accounts
receivable under these agreements does not meet the criteria for recognition as a sale. Under
the terms of these agreements, we transfer ownership of eligible trade accounts receivable to
the third party purchasers in exchange for cash, however, as these transactions do not qualify
as a sale, the relating trade accounts receivable are included on our Condensed Consolidated
Balance Sheets until the cash is received by the purchasers from our customer for the trade
accounts receivable. We had an outstanding liability of $0.1 million and $1.5 million on our
Condensed Consolidated Balance Sheets at May 31, 2010 and August 31, 2009, respectively,
related to these agreements. |
|
(e) |
|
Various of our foreign subsidiaries have entered into several credit facilities to finance
their future growth and any corresponding working capital needs. These credit facilities are
denominated in various foreign currencies, including Russian rubles, as well as U.S. dollars.
At May 31, 2010, these credit facilities incur interest at both fixed and variable rates
ranging from 1.85% to 4.15% and range in outstanding amounts from $0.3 million to $1.3
million. |
|
(f) |
|
During the third quarter of fiscal year 2005, we negotiated a five-year, 400.0 million
Indian rupee construction loan for an Indian subsidiary with an Indian branch of a global
bank. Under the terms of the loan, we pay interest on outstanding borrowings based on a fixed
rate of 7.45%. The construction loan expired on April 15, 2010 was fully repaid. |
|
|
|
During the third quarter of fiscal year 2005, we negotiated a five-year, 25.0 million Euro
construction loan for a Hungarian subsidiary with a Hungarian branch of a global bank. Under the
terms of the loan facility, we pay interest on outstanding borrowings based on the Euro
Interbank Offered Rate plus a spread of 0.925%. Quarterly principal repayments began in
September 2006 to repay the amount of proceeds drawn under the construction loan. The
construction loan expired on April 13, 2010 and was fully repaid. |
|
|
|
During the second quarter of fiscal year 2007, we entered into a three-year loan agreement to
borrow $20.3 million from a software vendor in connection with various software licenses that we
purchased from them. The software licenses were capitalized and were being amortized over a
three-year period. The loan agreement was non-interest bearing and payments were due quarterly
through October 2009, when the loan agreement was terminated. |
|
|
|
Through the acquisition of a Taiwanese subsidiary in fiscal year 2007, we assumed certain
liabilities, including short and long-term debt obligations totaling approximately $102.2
million at the date of acquisition. At May 31, 2010, approximately $0.1 million of debt is
outstanding under the credit facility, with a current interest rate of 2.35% and denominated in
New Taiwan dollars. |
|
|
|
During the fourth quarter of fiscal year 2007, we entered into the five-year Credit Facility.
This agreement provides for a revolving credit portion in the initial amount of $800.0 million,
subject to potential increases up to $1.0 billion, and provides for a term portion in the amount
of $400.0 million. Some or all of the lenders under the Credit Facility and their affiliates
have various other relationships with us and our subsidiaries involving the provision of
financial services, including cash management, loans, letter of credit and bank guarantee
facilities, investment banking and trust services. We, along with some of our subsidiaries, have
entered into foreign exchange contracts and other derivative arrangements with certain of the
lenders and their affiliates. In addition, many, if not most, of the agents and lenders under
the Credit Facility held positions as agent and/or lender under our old revolving credit
facility and the $1.0 billion, 364-day senior unsecured bridge loan facility, that was entered
into on December 21, 2006, amended on December 20, 2007 and terminated on February 13, 2008. The
revolving credit portion of the Credit Facility terminates on July 19, 2012, and the term loan
portion of the Credit Facility requires payments of principal in annual installments of $20.0
million each, with a final payment of the remaining principal due on July 19, 2012. Interest and
fees on Credit Facility advances are based on our unsecured long-term indebtedness rating as
determined by S&P and Moodys. Interest is charged at a rate equal to either 0% to 0.75% above
the base rate or 0.375% to 1.75% above the Eurocurrency rate, where the base rate represents the
greater of Citibank, N.A.s prime rate or 0.50% above the federal funds rate, and the
Eurocurrency rate represents the applicable London Interbank Offered Rate, each as more fully
defined in this credit agreement. Fees include a facility fee |
47
|
|
|
|
|
based on the revolving credit
commitments of the lenders, a letter of credit fee based on the amount of outstanding letters of
credit, and a utilization fee to be added to the revolving credit interest rate and any letter
of credit fee during any period when the aggregate amount of outstanding advances and letters of
credit exceeds 50% of the total revolving credit commitments of the lenders. Based on our
current senior unsecured long-term indebtedness rating as determined by S&P and Moodys, the
current rate of interest (including the applicable facility and utilization fee) on a full draw
under the revolving credit would be 0.275%
above the base rate or 0.875% above the Eurocurrency rate, and the current rate of interest on
the term portion would be the base rate or 0.875% above the Eurocurrency rate. We, along with
our subsidiaries, are subject to the following financial covenants: (1) a maximum ratio of
(a) Debt (as defined in the credit agreement) to (b) Consolidated EBITDA (as defined in the
credit agreement) and (2) a minimum ratio of (a) Consolidated EBITDA to (b) interest payable on,
and amortization of debt discount in respect of, debt and loss on sales of trade accounts
receivables pursuant to our securitization program. In addition, we are subject to other
covenants, such as: limitation upon liens; limitation upon mergers, etc; limitation upon
accounting changes; limitation upon subsidiary debt; limitation upon sales, etc of assets;
limitation upon changes in nature of business; payment restrictions affecting subsidiaries;
compliance with laws, etc; payment of taxes, etc; maintenance of insurance; preservation of
corporate existence, etc; visitation rights; keeping of books; maintenance of properties, etc;
transactions with affiliates; and reporting requirements (collectively referred to herein as
Restrictive Financial Covenants). During the three months ended May 31, 2010, we borrowed $1.0
billion against the revolving credit portion of the Credit Facility. These borrowings were
repaid in full during the third quarter of fiscal year 2010. A draw in the amount of $400.0
million has been made under the term portion of the Credit Facility and $360.0 million remains
outstanding at May 31, 2010. |
|
|
|
In addition to the loans described above, at May 31, 2010, we have additional loans outstanding
to fund working capital needs. These additional loans total approximately $2.3 million and are
denominated in Euros. The loans are due and payable within 12 months and are classified as
short-term on our Condensed Consolidated Balance Sheets. |
|
(g) |
|
During the third quarter of fiscal year 2008, we entered into a foreign asset-backed
securitization program with a bank conduit. In connection with the foreign securitization
program certain of our foreign subsidiaries sell, on an ongoing basis, an undivided interest in
designated pools of trade accounts receivable to a special purpose entity, which in turn borrows
up to $100.0 million from the bank conduit to purchase those receivables and in which it grants
security interests as collateral for the borrowings. The securitization program is accounted for
as a borrowing. The loan balance is calculated based on the terms of the securitization program
agreements. The foreign securitization program requires compliance with several covenants
including a limitation on certain corporate actions such as mergers, consolidations and sale of
substantially all assets. We are assessed a monthly fee based on the maximum facility limit and,
in addition, pay interest based on LIBOR plus a spread. The foreign securitization program
expires on March 17, 2011. At May 31, 2010, we had $58.1 million of debt outstanding under the
program. In addition, we incurred interest expense of $0.4 million and $1.8 million recorded in
the Condensed Consolidated Statements of Operations during the three months and nine months
ended May 31, 2010, respectively, compared to $0.6 million and $3.1 million for the three months
and nine months ended May 31, 2009, respectively. |
At May 31, 2010 and 2009, we were in compliance with all Restrictive Financial Covenants
under the Credit Facility and our securitization programs.
Our working capital requirements and capital expenditures could continue to increase in order
to support future expansions of our operations through construction of greenfield operations or
acquisitions. It is possible that future expansions may be significant and may require the payment
of cash. Future liquidity needs will also depend on fluctuations in levels of inventory and
shipments, changes in customer order volumes and timing of expenditures for new equipment.
We currently anticipate that during the next twelve months, our capital expenditures will be
in the range of $300.0 million to $350.0 million, principally for information technology
infrastructure upgrades, maintenance levels of machinery and equipment and machinery and equipment
for new business including new process technology within our mechanical operations. We believe
that our level of resources, which include cash on hand, available borrowings under our revolving
credit facilities, additional proceeds available under our trade accounts receivable securitization
programs and potentially available under our uncommitted trade accounts receivable sale program and
funds provided by operations, will be adequate to fund these capital expenditures, the payment of
any declared quarterly dividends, payments for current and future restructuring activities and our
working capital requirements for the next twelve months. Our $200.0 million U.S. asset-backed
securitization program and our $100.0 million foreign asset-backed securitization program expire,
however, in March 2011 and our $150.0 million uncommitted trade accounts receivable sale program
expires in May 2011 and we may be unable to renew any or all of them.
Should we desire to consummate significant additional acquisition opportunities or undertake
significant additional expansion activities, our capital needs would increase and could possibly
result in our need to increase available borrowings under our revolving credit facilities or access
public or private debt and equity markets. There can be no assurance, however, that we would be
successful in raising additional debt or equity on terms that we would consider acceptable.
Our contractual obligations for short and long-term debt arrangements, future interest on
notes payable and long-term debt, future minimum lease payments under non-cancelable operating
lease arrangements, estimated future benefit payments to plan and
48
capital commitments as of May 31,
2010 are summarized below. We do not participate in, or secure financing for, any unconsolidated
limited purpose entities. 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 cancelable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (in thousands) |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
After 5 |
|
|
|
Total |
|
|
year |
|
|
1-3 years |
|
|
4-5 years |
|
|
years |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, long-term debt and long-term lease obligations |
|
$ |
1,126,037 |
|
|
$ |
87,625 |
|
|
$ |
340,014 |
|
|
$ |
1 |
|
|
$ |
698,397 |
|
Future interest on notes payable and long-term debt (a) |
|
|
422,566 |
|
|
|
62,027 |
|
|
|
124,053 |
|
|
|
115,631 |
|
|
|
120,855 |
|
Operating lease obligations |
|
|
172,997 |
|
|
|
47,557 |
|
|
|
60,409 |
|
|
|
44,114 |
|
|
|
20,917 |
|
Estimated future benefit payments to plan |
|
|
53,558 |
|
|
|
4,556 |
|
|
|
10,142 |
|
|
|
11,121 |
|
|
|
27,739 |
|
Capital commitments (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations (c) |
|
$ |
1,775,158 |
|
|
$ |
201,765 |
|
|
$ |
534,618 |
|
|
$ |
170,867 |
|
|
$ |
867,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain of our notes payable and long-term debt pay interest at variable rates. In the
contractual obligations table above, we have elected to apply interest rates applicable to the
current fiscal quarter to determine the value of these future interest payments. |
|
(b) |
|
During the first fiscal quarter of 2009, we committed $10.0 million to an independent private
equity limited partnership which invests in companies that address resource limits in energy,
water and materials (commonly referred to as the CleanTech sector). Of that amount, we have
invested $3.3 million as of May 31, 2010. The remaining commitment of $6.7 million is callable
over the next five years by the general partner. As the capital calls have no specified
timing, this commitment has been excluded from the above table as we cannot currently
determine when such commitment calls will occur. |
|
(c) |
|
At May 31, 2010, we have $3.1 million and $90.9 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. |
49
Item 3: 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 and fixed purchase obligations denominated in a currency other than the functional
currency of the respective operating entity. We do not intend to use derivative financial
instruments for speculative purposes. All derivative instruments are recorded on our Condensed
Consolidated Balance Sheets at their respective fair market values. At May 31, 2010, except for
certain foreign currency contracts, with a notional amount outstanding of $67.1 million and a fair
value of $1.0 million recorded in prepaid and other current assets and $1.8 million recorded in
accrued expenses, we have elected not to prepare and maintain the documentation required for the
transactions to qualify as accounting hedges and, therefore, changes in fair value are recorded in
our Condensed Consolidated Statements of Operations.
The aggregate notional amount of outstanding contracts at May 31, 2010 that do not qualify as
accounting hedges was $320.8 million. The fair value of these contracts amounted to a $6.5 million
asset recorded in prepaid and other current assets and a $8.1 million liability recorded to accrued
expenses on our Condensed Consolidated Balance Sheets. The forward contracts will generally expire
in less than four months, with five months being the maximum term of the contracts outstanding at
May 31, 2010. Upon expiration of the contracts, the change in fair value will be reflected in cost
of revenue in our Condensed Consolidated Statements of Operations. The forward contracts are
denominated in British pounds, Canadian dollars, Chinese yuan renminbis, Euros, Hungarian forints,
Indian rupees, Japanese yen, Malaysian ringgits, Mexican pesos, Polish zlotys, Russian rubles,
Singapore dollars and U.S. dollars.
Interest Rate Risk
A portion of our exposure to market risk for changes in interest rates relates to our domestic
investment portfolio. We do not, and do not intend to, use derivative financial instruments for
speculative purposes. We place cash and cash equivalents with various major financial institutions.
We protect our invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate these risks by generally investing in investment grade securities and by
frequently positioning the portfolio to try to respond appropriately to a reduction in credit
rating of any investment issuer, guarantor or depository to levels below the credit ratings
dictated by our investment policy. The portfolio typically includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. At May 31, 2010, there were no
significant outstanding investments.
We pay interest on several of our outstanding borrowings at interest rates that fluctuate
based upon changes in various base interest rates. There were $419.4 million in borrowings
outstanding under these facilities at May 31, 2010. See Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources and Note 11
Notes Payable, Long-Term Debt and Long-Term Lease Obligations to the Condensed Consolidated
Financial Statements for additional information regarding our outstanding debt obligations.
Item 4: CONTROLS AND PROCEDURES
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 President and 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
(Disclosure Controls) as of May 31, 2010. 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.
50
Changes in Internal Control over Financial Reporting
For our fiscal quarter ended May 31, 2010, 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.
Our internal control over financial reporting, including our internal control documentation
and testing efforts, remain ongoing to ensure continued compliance with the Exchange Act. For our
fiscal quarter ended May 31, 2010, we identified certain internal controls that management believed
should be modified to improve them. These improvements include further formalization of policies
and procedures, improved segregation of duties, additional information technology system controls
and additional monitoring controls. We are making improvements to our internal control over
financial reporting as a result of our review efforts. We have reached our conclusions set forth
above, notwithstanding those improvements and modifications.
Limitations on the Effectiveness of Controls and Other Matters
Our management, including our CEO and CFO, does not expect that our Disclosure Controls and
internal control over financial reporting will prevent all error 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.
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
nonetheless reached the conclusions set forth above on our disclosure controls and procedures and
our internal control over financial reporting.
CEO and CFO Certifications
Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The
Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certifications). This Item of this report, which you are currently reading is the
information concerning the Evaluation referred to in the Section 302 Certifications and this
information should be read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
PART II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
We have been involved in certain ongoing litigation matters and have received a subpoena from
a U.S. attorneys office relating to certain of our historical stock option grant practices, and we
have also had committees of our Board of Directors review certain of our historical stock option
grant and revenue recognition practices. These matters are more fully described in Part I, Item 3,
Legal Proceedings, of our Annual Report on Form 10-K for the fiscal year ended August 31, 2009
and Note 6 Commitments and Contingencies to the Condensed Consolidated Financial Statements.
As previously disclosed, on January 19, 2010, the U.S. Court of Appeals for the Eleventh
Circuit affirmed the U.S. District Court for the Middle District of Florida, Tampa Divisions prior
dismissal with prejudice of the Second Amended Class Action Complaint in the putative shareholder
class action that was previously filed against us, KPMG LLP, our directors and certain of our
current and former officers, and the plaintiffs subsequently moved for a re-hearing on the matter,
which motion was denied. The plaintiffs did not petition the U.S. Supreme Court for a writ of
certiorari by May 24, 2010 (which was the deadline for such petition). Accordingly, we consider
this litigation to be concluded.
In addition, we are party to certain other lawsuits in the ordinary course of business. We do
not believe that these proceedings, individually or in the aggregate, will have a material adverse
effect on our financial position, results of operations or cash flows.
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Item 1A: Risk Factors
As referenced, this Quarterly Report on Form 10-Q includes certain forward-looking statements
regarding various matters. The ultimate correctness of those forward-looking statements is
dependent upon a number of known and unknown risks and events, and is subject to various
uncertainties and other factors that may cause our actual results, performance or achievements to
be different from those expressed or implied by those statements. Undue reliance should not be
placed on those forward-looking statements. The following important factors, among others, as well
as those factors set forth in our other SEC filings from time to time, could affect future results
and events, causing results and events to differ materially from those expressed or implied in our
forward-looking statements.
Our operating results may fluctuate due to a number of factors, many of which are beyond our
control.
Our annual and quarterly operating results are affected by a number of factors, including:
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adverse changes in current macro-economic conditions, both in the U.S. and
internationally; |
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the level and timing of customer orders; |
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the level of capacity utilization of our manufacturing facilities and associated
fixed costs; |
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the composition of the costs of revenue between materials, labor and manufacturing
overhead; |
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changes in demand for our products or services; |
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changes in demand in our customers end markets; |
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our exposure to financially troubled customers; |
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our level of experience in manufacturing a particular product; |
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the degree of automation used in our assembly process; |
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the efficiencies achieved in managing inventories and fixed assets; |
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fluctuations in materials costs and availability of materials; |
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adverse changes in political conditions, both in the U.S. and internationally,
including among other things, adverse changes in tax laws and rates, adverse changes in
trade policies and adverse changes in fiscal and monetary policies; |
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seasonality in customers product requirements; and |
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the timing of expenditures in anticipation of increased sales, customer product
delivery requirements and shortages of components or labor. |
The volume and timing of orders placed by our customers vary due to variation in demand for
our customers products; our customers attempts to manage their inventory; electronic design
changes; changes in our customers manufacturing strategies; and acquisitions of or consolidations
among our customers. In addition, our Consumer division is subject to seasonal influences. We may
realize greater revenue during our first fiscal quarter due to high demand for consumer products
during the holiday selling season. In the past, changes in customer orders that reduce net revenue
have had a significant effect on our results of operations as a result of our overhead remaining
relatively fixed while our net revenue decreased. Any one or a combination of these factors could
adversely affect our annual and quarterly results of operations in the future. See Managements
Discussion and Analysis of Financial Condition and Results of Operations Results of Operations.
Because we depend on a limited number of customers, a reduction in sales to any one of our
customers could cause a significant decline in our revenue.
For the nine months ended May 31, 2010, our five largest customers accounted for approximately
46% of our net revenue and our top 48 customers accounted for approximately 90% of our net revenue.
We currently depend, and expect to continue to depend, upon a relatively small number of customers
for a significant percentage of our net revenue and upon their growth, viability and financial
stability. If any of our customers experience a decline in the demand for their products due to
economic or other forces, they may reduce their purchases from us or terminate their relationship
with us. Our customers industries have experienced rapid technological change, shortening of
product life cycles, consolidation, and pricing and margin pressures. Consolidation among our
customers may further reduce the number of customers that generate a significant percentage of our
net revenue and exposes us to increased risks relating to dependence on a small number of
customers. A significant reduction in sales to any of our customers or a customer exerting
significant pricing and margin pressures on us could have a material adverse effect on our results
of operations. In the past, some of our customers have terminated their manufacturing arrangements
with us or have significantly reduced or delayed
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the volume of design, production, product
management or aftermarket services ordered from us, including moving a portion of their
manufacturing from us in order to more fully utilize their excess internal manufacturing capacity.
A significant decline in our industrys revenue has occurred over the past 21 months as
consumers and businesses have postponed spending in response to tighter credit, negative financial
news, declines in income or asset values or general uncertainty about global economic conditions.
These economic conditions have had a negative impact on our results of operations over this period
and may continue to have a negative impact. In addition, some of our customers have moved a portion
of their manufacturing from us in order to more fully utilize their excess internal manufacturing
capacity and are expected to continue to have a negative impact on our operations over at least the
next several fiscal quarters. We cannot assure you that present or future customers will not
terminate their design, production, product management and aftermarket services arrangements with
us or significantly change, reduce or delay the amount of services ordered from us. If they do, it
could have a material adverse effect on our results of operations. In addition, we generate
significant accounts receivable in connection with providing design, production, product management
and aftermarket services to our customers. If one or more of our customers were to become insolvent
(which two of our customers experienced in fiscal year 2009) or otherwise were unable to pay for
the services provided by us on a timely basis, or at all, our operating results and financial
condition could be adversely affected. Such adverse effects could include one or more of the
following: a decline in revenue, a charge for bad debts, a charge for inventory write-offs, a
decrease in inventory turns, an increase in days in inventory and an increase in days in trade
accounts receivable.
Certain of the industries to which we provide services, have recently experienced
significant financial difficulty, with some of the participants filing for bankruptcy. Such
significant financial difficulty has negatively affected our business and, if further experienced
by one or more of our customers, may further negatively affect our business due to the decreased
demand of these financially distressed customers, the potential inability of these companies to
make full payment on amounts owed to us, or both. See Managements Discussion and Analysis of
Financial Condition and Results of Operations and Risk Factors We face certain risks in
collecting our trade accounts receivable.
Consolidation in industries that utilize electronics components may adversely affect our business.
Consolidation in industries that utilize electronics components may further increase as
companies combine to achieve further economies of scale and other synergies, which could result in
an increase in excess manufacturing capacity as companies seek to divest manufacturing operations
or eliminate duplicative product lines. Excess manufacturing capacity may increase pricing and
competitive pressures for our industry as a whole and for us in particular. Consolidation could
also result in an increasing number of very large companies offering products in multiple
industries. The significant purchasing power and market power of these large companies could
increase pricing and competitive pressures for us. If one of our customers is acquired by another
company that does not rely on us to provide services and has its own production facilities or
relies on another provider of similar services, we may lose that customers business. Such
consolidation among our customers may further reduce the number of customers that generate a
significant percentage of our net revenue and exposes us to increased risks relating to dependence
on a small number of customers. Any of the foregoing results of industry consolidation could
adversely affect our business.
Our customers face numerous competitive challenges, such as decreasing demand from their customers,
rapid technological change and short life cycles for their products, which may materially adversely
affect their business, and also ours.
Factors affecting the industries that utilize electronics components in general, and our
customers specifically, could seriously harm our customers and, as a result, us. These factors
include:
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recessionary periods in our customers markets; |
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the inability of our customers to adapt to rapidly changing technology and evolving
industry standards, which contributes to short product life cycles; |
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the inability of our customers to develop and market their products, some of which
are new and untested; |
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the potential that our customers products become obsolete; |
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the failure of our customers products to gain widespread commercial
acceptance; |
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increased competition among our customers and their respective competitors which
may result in a loss of business, or a reduction in pricing power, for our customers; and |
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new product offerings by our customers competitors may prove to be more successful
than our customers product offerings. |
If our customers are unsuccessful in addressing these competitive challenges, or any others
that they may face, then their business may be materially adversely affected, and as a result, the
demand for our services could decline. Even if our customers are successful in responding to these
challenges, their responses may have consequences which affect our business relationships with our
customers (and possibly our results of operations) by altering our production cycles and inventory
management.
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The success of our business is dependent on both our ability to independently keep pace with
technological changes and competitive conditions in our industry, and also our ability to
effectively adapt our services in response to our customers keeping pace with technological changes
and competitive conditions in their respective industries.
If we are unable to offer technologically advanced, cost effective, quick response
manufacturing services, demand for our services will decline. In addition, if we are unable to
offer services in response to our customers changing requirements, then demand for our services
will also decline. A substantial portion of our net revenue is derived from our offering of
complete service solutions for our customers. For example, if we fail to maintain high-quality
design and engineering services, our net revenue may significantly decline.
Most of our customers do not commit to long-term production schedules, which makes it difficult for
us to schedule production and capital expenditures, and to maximize the efficiency of our
manufacturing capacity.
The volume and timing of sales to our customers may vary due to:
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variation in demand for our customers products; |
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our customers attempts to manage their inventory; |
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electronic design changes; |
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changes in our customers manufacturing strategy; and |
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acquisitions of or consolidations among customers. |
Due in part to these factors, most of our customers do not commit to firm production schedules
for more than one quarter. Our inability to forecast the level of customer orders with certainty
makes it difficult to schedule production and maximize utilization of manufacturing capacity. In
the past, we have been required to increase staffing and other expenses in order to meet the
anticipated demand of our customers. Anticipated orders from many of our customers have, in the
past, failed to materialize or delivery schedules have been deferred as a result of changes in our
customers business needs, thereby adversely affecting our results of operations. On other
occasions, our customers have required rapid increases in production, which have placed an
excessive burden on our resources. Such customer order fluctuations and deferrals have had a
material adverse effect on us in the past, including the most recent several fiscal quarters, and
we may experience such effects in the future. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.
In addition to our difficulty in forecasting customer orders, we sometimes experience
difficulty forecasting the timing of our receipt of revenue and earnings following commencement of
manufacturing an additional product for new or existing customers. The necessary process to begin
this commencement of manufacturing can take from several months to more than a year before
production begins. Delays in the completion of this process can delay the timing of our sales and
related earnings. In addition, because we make capital expenditures during this ramping process
and do not typically recognize revenue until after we produce and ship the customers products, any
delays or excess costs in the ramping process may have a significant adverse effect on our cash
flows.
Our customers may cancel their orders, change production quantities, delay production or change
their sourcing strategy.
Our industry must provide increasingly rapid product turnaround for its customers. We
generally do not obtain firm, long-term purchase commitments from our customers and we continue to
experience reduced lead-times in customer orders. Customers have previously cancelled their orders,
changed production quantities, delayed production and changed their sourcing strategy for a number
of reasons, and may do one or more of these in the future. Such changes, delays and cancellations
have led to, and may lead in the future to a decline in our production and our possession of excess
or obsolete inventory which we may not be able to sell to the customer or a third party. This has
resulted in, and could result in future additional, write downs of inventories that have become
obsolete or exceed anticipated demand or net realizable value.
The success of our customers products in the market affects our business. Cancellations,
reductions, delays or changes in sourcing strategy by a significant customer or by a group of
customers have negatively impacted, and could further negatively impact in the future, our
operating results by reducing the number of products that we sell, delaying the payment to us for
inventory that we purchased and reducing the use of our manufacturing facilities which have
associated fixed costs not dependent on our level of revenue.
In addition, we make significant decisions, including determining the levels of business that
we will seek and accept, production schedules, component procurement commitments, personnel needs
and other resource requirements, based on our estimate of customer requirements. The short-term
nature of our customers commitments, their uncertainty about future economic conditions, and the
possibility of rapid changes in demand for their products reduce our ability to accurately estimate
the future requirements of those customers. In addition, uncertainty about future economic
conditions makes it difficult to forecast operating results and make production planning decisions
about future periods.
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On occasion, customers may require rapid increases in production, which can stress our
resources and reduce operating margins. In addition, because many of our costs and operating
expenses are relatively fixed, a reduction in customer demand can harm our gross profits and
operating results.
We depend on a limited number of suppliers for components that are critical to our manufacturing
processes. A shortage of these components or an increase in their price could interrupt our
operations and reduce our profits.
Most of our significant long-term customer contracts permit quarterly or other periodic
adjustments to pricing based on decreases and increases in component prices and other factors,
however we may bear the risk of component price increases that occur between any such re-pricings
or, if such re-pricing is not permitted, during the balance of the term of the particular customer
contract. Accordingly, certain component price increases could adversely affect our gross profit
margins. Almost all of the products we manufacture require one or more components that are only
available from a single source. Some of these components are allocated from time to time in
response to supply shortages. In some cases, supply shortages will substantially curtail production
of all assemblies using a particular component. A supply shortage could increase our cost of goods
sold, as a result of our having to pay higher prices for components in limited supply, and cause us
to have to redesign or reconfigure products to accommodate a substitute component. In addition, at
various times industry-wide shortages of electronic components have occurred, particularly of
semiconductor products. These shortages have resulted in our failure to realize an incremental
amount of revenue due to supply constraints with certain materials, which, if realized, would have
likely had a positive impact on our gross profit and net income. Some shortages are occurring
currently, and may continue to occur. We believe these shortages may be due to increased economic
activity following recent recessionary conditions. In the past, such circumstances have produced
insignificant levels of short-term interruption of our operations, but could have a material
adverse effect on our results of operations in the future. Also, our production of a customers
product could be negatively impacted by any quality or reliability issues with any of our component
suppliers. Finally, the financial condition of our suppliers could affect their ability to supply
us with components which could have a material adverse effect on our operations. See Managements
Discussion and Analysis of Financial Condition and Results of Operations and Business
Components Procurement in our Annual Report on Form 10-K for the fiscal year ended August 31,
2009.
Introducing programs requiring implementation of new competencies, including new process technology
within our mechanical operations, could affect our operations and financial results.
The introduction of programs requiring implementation of new competencies, including
new process technology within our mechanical operations, presents challenges in addition to
opportunities. Deployment of such programs may require us to invest significant resources and
capital in facilities, equipment and/or personnel. We may not meet our customers expectations or
otherwise execute properly or in a cost-efficient manner, which could damage our customer
relationships and result in remedial costs or the loss of our invested capital and anticipated
revenues and profits. In addition, there are risks of market acceptance and product performance
that could result in less demand than anticipated and our having excess capacity. The failure to
ensure that our agreed terms appropriately reflect the anticipated costs, risks, and rewards of
such an opportunity could adversely affect our profitability. If we do not meet one or more of
these challenges, our operations and financial results could be adversely affected.
Customer relationships with emerging companies may present more risks than with established
companies.
Customer relationships with emerging companies present special risks because such companies do
not have an extensive product history. As a result, there is less demonstration of market
acceptance of their products making it harder for us to anticipate needs and requirements than with
established customers. In addition, due to the current economic environment, additional funding for
such companies may be more difficult to obtain and these customer relationships may not continue or
materialize to the extent we planned or we previously experienced. This tightening of financing for
start-up customers, together with many start-up customers lack of prior operations and unproven
product markets increase our credit risk, especially in trade accounts receivable and inventories.
Although we perform ongoing credit evaluations of our customers and adjust our allowance for
doubtful accounts receivable for all customers, including start-up customers, based on the
information available, these allowances may not be adequate. This risk may exist for any new
emerging company customers in the future.
We compete with numerous other electronic manufacturing services and design providers and others,
including our current and potential customers who may decide to manufacture some or all of their
products internally.
Our business is highly competitive. We compete against numerous domestic and foreign
electronic manufacturing services and design providers, including Benchmark Electronics, Inc.,
Celestica, Inc., Flextronics International Ltd., Hon-Hai Precision Industry Co., Ltd., Plexus Corp.
and Sanmina-SCI Corporation. In addition, consolidation in our industry results in larger and more
geographically diverse competitors who have significant combined resources with which to compete
against us. Also, we may in the future encounter competition from other large electronic
manufacturers, and manufacturers that are focused solely on design and manufacturing services, that
are selling, or may begin to sell electronics manufacturing services. Most of our competitors have
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international operations and significant financial resources and some have substantially greater
manufacturing, R&D and marketing resources than us. These competitors may:
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respond more quickly to new or emerging technologies; |
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have greater name recognition, critical mass and geographic market presence; |
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be better able to take advantage of acquisition opportunities; |
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adapt more quickly to changes in customer requirements; |
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devote greater resources to the development, promotion and sale of their services; |
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be better positioned to compete on price for their services, as a result of any
combination of lower labor costs, lower components costs, lower facilities costs or lower
operating costs; and |
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have excess capacity, and be better able to utilize such excess capacity which may
reduce the cost of their product or service. |
We also face competition from the manufacturing operations of our current and potential
customers, who are continually evaluating the merits of manufacturing products internally against
the advantages of outsourcing. Recently, some of our customers have moved a portion of their
manufacturing from us in order to more fully utilize their excess internal manufacturing capacity.
We may be operating at a cost disadvantage compared to competitors who have greater direct
buying power from component suppliers, distributors and raw material suppliers or who have lower
cost structures as a result of their geographic location or the services they provide or who are
willing to make sales or provide services at lower margins than us. As a result, competitors may
procure a competitive advantage and obtain business from our customers. Our manufacturing processes
are generally not subject to significant proprietary protection. In addition, companies with
greater resources or a greater market presence may enter our market or increase their competition
with us. We also expect our competitors to continue to improve the performance of their current
products or services, to reduce their current products or service sales prices and to introduce new
products or services that may offer greater performance and improved pricing. Any of these
developments could cause a decline in sales, loss of market acceptance of our products or services,
profit margin compression or loss of market share.
The economies of the U.S., Europe and certain countries in Asia are in a recession.
There was an erosion of global consumer confidence amidst concerns over declining asset
values, inflation, volatility in energy costs, geopolitical issues, the availability and cost of
credit, rising unemployment, and the stability and solvency of financial institutions, financial
markets, businesses, and sovereign nations. These concerns slowed global economic growth and
resulted in recessions in many countries, including in the U.S., Europe and certain countries in
Asia. Even though we have seen signs of an overall economic recovery beginning to take place, such
recovery may be weak and/or short-lived. In fact, recessionary conditions may soon return. If any
of these potential negative, or less than positive, economic conditions occur, a number of negative
effects on our business could result, including customers or potential customers reducing or
delaying orders, increased pricing pressures, the insolvency of key suppliers, which could result
in production delays, the inability of customers to obtain credit, and the insolvency of one or
more customers. Thus, these economic conditions could negatively impact our ability to forecast
customer demand, our ability to effectively manage inventory levels and collect receivables, and
increase our need for cash, and have decreased our net revenue and profitability and negatively
impacted the value of certain of our properties and other assets. Depending on the length of time
that these conditions exist, they may cause future additional negative effects, including some of
those listed above.
The financial markets have recently experienced significant turmoil, which may adversely affect
financial arrangements we may need to enter into, refinance or repay.
The credit market turmoil could negatively impact the counterparties to our forward exchange
contracts and trade accounts receivable securitization and sale programs; our lenders under the
Credit Facility; and our lenders under various foreign subsidiary credit facilities. These
potential negative impacts could potentially limit our ability to borrow under these financing
agreements, contracts, facilities and programs. In addition, if we attempt to obtain future
additional financing, such as renewing or refinancing our $200.0 million U.S. asset-backed
securitization program expiring on March 16, 2011, our $100.0 million foreign asset-backed
securitization program expiring on March 17, 2011 or our $150.0 million uncommitted trade accounts
receivable sale program expiring on May 25, 2011, the credit market turmoil could negatively impact
our ability to obtain such financing. Finally, the credit market turmoil has negatively impacted
certain of our customers, especially those in the automotive industry, and certain of their
customers. These impacts could have several consequences which could have a negative effect on our
results of operations, including one or more of the following: a negative impact on our liquidity;
a decrease in demand for our services; a decrease in demand for our customers products; and bad
debt charges or inventory write-offs.
Our business could be adversely affected by any delays, or increased costs, resulting from issues
that our common carriers are dealing with in transporting our materials, our products, or both.
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We rely on a variety of common carriers to transport our materials from our suppliers to us,
and to transport our products from us to our customers. Problems suffered by any of these common
carriers, whether due to a natural disaster, labor problem, increased energy prices or some other
issue, could result in shipping delays, increased costs, or some other supply chain disruption, and
could therefore have a material adverse effect on our operations.
We derive a majority of our revenue from our international operations, which may be subject to a
number of risks and often require more management time and expense to achieve profitability than
our domestic operations.
We derived 84.3% and 84.5% of net revenue from international operations for the three months
and nine months ended May 31, 2010, respectively, compared to 84.4% and 83.7% for the three months
and nine months ended May 31, 2009, respectively. We currently expect our foreign source revenue to
slightly increase as compared to current levels over the course of the next 12 months. At May 31,
2010, we operate outside the U.S. in Vienna, Austria; Hasselt, Belgium; Belo Horizonte, Manaus and
Sorocaba, Brazil; Beijing, Huangpu, Nanjing, Shanghai, Shenzhen, Suzhou, Tianjin, Wuxi and Yantai,
China; Coventry, England; Brest and Lunel, France; Jena, Germany; Szombathely and Tiszaujvaros,
Hungary; Pune, Mumbai and Ranjangaon, India; Dublin, Ireland; Cassina de Pecchi, Marcianise and
Bergamo, Italy; Gotemba, Hachiouji and Tokyo, Japan; Penang, Malaysia; Chihuahua, Guadalajara,
Nogales and Reynosa, Mexico; Amsterdam and Eindhoven, The Netherlands; Bydgoszcz and Kwidzyn,
Poland; Tver, Russia; Ayr and Livingston, Scotland; Singapore City, Singapore; Hsinchu, Taichung
and Taipei, Taiwan; Ankara, Turkey; Uzhgorod, Ukraine and Ho Chi Minh City, Vietnam. We continually
consider additional opportunities to make foreign acquisitions and construct new foreign
facilities. Our international operations may be subject to a number of risks, including:
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difficulties in staffing and managing foreign operations; |
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less flexible employee relationships which can be difficult and expensive to
terminate; |
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labor unrest and dissatisfaction, including increased scrutiny of the labor
practices (including but not limited to working conditions, legal compliance and
compensation) of us and others in our industry by the media and other third parties,
which may result in further scrutiny, more stringent and burdensome labor laws and
regulations, higher labor costs, and/or loss of revenues if our customers become
dissatisfied with our labor practices and diminish or terminate their relationship with us; |
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political and economic instability (including acts of terrorism, widespread
criminal activities and outbreaks of war); |
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inadequate infrastructure for our operations (i.e. lack of adequate power, water,
transportation and raw materials); |
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health concerns and related government actions; |
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coordinating our communications and logistics across geographic distances and
multiple time zones; |
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risk of governmental expropriation of our property; |
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less favorable, or relatively undefined, intellectual property laws; |
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unexpected changes in regulatory requirements and laws or government or judicial
interpretations of such regulatory requirements and laws; |
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longer customer payment cycles and difficulty collecting trade accounts receivable; |
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export duties, import controls and trade barriers (including quotas); |
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adverse trade policies, and adverse changes to any of the policies of either the
U.S. or any of the foreign jurisdictions in which we operate; |
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adverse changes in tax rates; |
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adverse changes to the manner in which the U.S. taxes U.S.-based multinational
companies; |
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legal or political constraints on our ability to maintain or increase prices; |
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governmental restrictions on the transfer of funds to us from our operations
outside the U.S.; |
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burdens of complying with a wide variety of labor practices and foreign laws,
including those relating to export and import duties, environmental policies and privacy
issues; |
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fluctuations in currency exchange rates, which could affect local payroll and other
expenses; |
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inability to utilize net operating losses incurred by our foreign operations
against future income in the same jurisdiction; and |
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economies that are emerging or developing , that may be subject to greater
currency volatility, negative growth, high inflation, limited availability of foreign
exchange and other risks. |
These factors may harm our results of operations, and any measures that we may implement
to reduce the effect of volatile currencies and other risks of our international operations may not
be effective. In our experience, entry into new international markets
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requires considerable
management time as well as start-up expenses for market development, hiring and establishing
facilities before any significant revenue is generated. As a result, initial operations in a new
market may operate at low margins or may be unprofitable. See Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources.
Another significant legal risk resulting from our international operations is compliance with
the U.S. Foreign Corrupt Practices Act (FCPA). In many foreign countries, particularly in those
with developing economies, it may be a local custom that businesses operating in such countries
engage in business practices that are prohibited by the FCPA or other U.S. laws and regulations.
Although we have implemented policies and procedures designed to cause compliance with the FCPA and
similar laws, there can be no assurance that all of our employees, and agents, as well as those
companies to which we outsource certain of our business operations,
will not take actions in violation of our policies. Any such violation, even if prohibited by
our policies, could have a material adverse effect on our business.
If we do not manage our growth effectively, our profitability could decline.
Areas of our business may experience periods of rapid growth which could place considerable
additional demands upon our management team and our operational, financial and management
information systems. Our ability to manage growth effectively will require us to continue to
implement and improve these systems; avoid cost overruns; maintain customer, supplier and other
favorable business relationships during possible transition periods; continue to develop the
management skills of our managers and supervisors; and continue to train, motivate and manage our
employees. Our failure to effectively manage growth could have a material adverse effect on our
results of operations. See Managements Discussion and Analysis of Financial Condition and Results
of Operations.
We have on occasion not achieved, and may not in the future achieve expected profitability from our
acquisitions.
We cannot assure you that we will be able to successfully integrate the operations and
management of our recent acquisitions. Similarly, we cannot assure you that we will be able to
(1) identify future strategic acquisitions, (2) consummate these potential acquisitions on
favorable terms, if at all, or (3) if consummated, successfully integrate the operations and
management of future acquisitions. Acquisitions involve significant risks, which could have a
material adverse effect on us, including:
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Financial risks, such as (1) the payment of a purchase price that exceeds the
future value that we may realize from the acquired operations and businesses; (2) an
increase in our expenses and working capital requirements, which could reduce our return
on invested capital; (3) potential known and unknown liabilities of the acquired
businesses; (4) costs associated with integrating acquired operations and businesses;
(5) the dilutive effect of the issuance of any additional equity securities we issue as
consideration for, or to finance, the acquisition; (6) the incurrence of additional debt;
(7) the financial impact of incorrectly valuing goodwill and other intangible assets
involved in any acquisitions, potential future impairment write-downs of goodwill and
indefinite life intangibles and the amortization of other intangible assets; (8) possible
adverse tax and accounting effects; and (9) the risk that we spend substantial amounts
purchasing these manufacturing facilities and assume significant contractual and other
obligations with no guaranteed levels of revenue or that we may have to close or sell
acquired facilities at our cost, which may include substantial employee severance costs
and asset write-offs, which have resulted, and may result, in our incurring significant
losses. |
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Operating risks, such as (1) the diversion of managements attention to the
assimilation of the acquired businesses; (2) the risk that the acquired businesses will
fail to maintain the quality of services that we have historically provided; (3) the need
to implement financial and other systems and add management resources; (4) the need to
maintain customer, supplier or other favorable business relationships of acquired
operations and restructure or terminate unfavorable relationships; (5) the potential for
deficiencies in internal controls of the acquired operations; (6) we may not be able to
attract and retain the employees necessary to support the acquired businesses;
(7) unforeseen difficulties (including any unanticipated liabilities) in the acquired
operations; and (8) the impact on us of any unionized work force we may acquire or any
labor disruptions that might occur. |
Most of our acquisitions involve operations outside of the U.S. which are subject to various
risks including those described in Risk Factors We derive a majority of our revenue from our
international operations, which may be subject to a number of risks and often require more
management time and expense to achieve profitability than our domestic operations.
We have acquired and may continue to pursue the acquisition of manufacturing and supply chain
management operations from our customers (or potential customers). In these acquisitions, the
divesting company will typically enter into a supply arrangement with the acquirer. Therefore,
competition for these acquisitions exists. In addition, certain divesting companies may choose not
to offer to sell their operations to us because of our current supply arrangements with other
companies or may require terms and conditions that may impact our profitability. If we are unable
to attract and consummate some of these acquisition opportunities at favorable terms, our growth
and profitability could be adversely impacted.
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In addition to those risks listed above, arrangements entered into with these divesting
companies typically involve certain other risks, including the following:
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the integration into our business of the acquired assets and facilities may be
time-consuming and costly; |
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we, rather than the divesting company, may bear the risk of excess capacity; |
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we may not achieve anticipated cost reductions and efficiencies; |
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we may be unable to meet the expectations of the divesting company as to volume,
product quality, timeliness, pricing requirements and cost reductions; and |
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if demand for the divesting companys products declines, it may reduce their volume
of purchases and we may not be able to sufficiently reduce the expenses of operating the
facility we acquired from them or use such facility to provide services to other
customers. |
In addition, when acquiring manufacturing operations, we may receive limited commitments to
firm production schedules. Accordingly, in these circumstances, we may spend substantial amounts
purchasing these manufacturing facilities and assume significant contractual and other obligations
with no guaranteed levels of revenue. We may also not achieve expected profitability from these
arrangements. As a result of these and other risks, these outsourcing opportunities may not be
profitable.
We are expanding the primary scope of our acquisitions strategy beyond acquiring the
manufacturing assets of our customers and potential customers to include manufacturing service
providers with business plans similar to ours and companies with certain key technologies and
capabilities that complement and support our other current business activities. The amount and
scope of the risks associated with acquisitions of this type extend beyond those that we have
traditionally faced in making acquisitions. These extended risks include greater uncertainties in
the financial benefits and potential liabilities associated with this expanded base of
acquisitions.
We face risks arising from the restructuring of our operations.
Over the past few years, we have undertaken initiatives to restructure our business operations
with the intention of improving utilization and realizing cost savings in the future. These
initiatives have included changing the number and location of our production facilities, largely to
align our capacity and infrastructure with current and anticipated customer demand. This alignment
includes transferring programs from higher cost geographies to lower cost geographies. The process
of restructuring entails, among other activities, moving production between facilities, closing
facilities, reducing the level of staff, realigning our business processes and reorganizing our
management.
We continuously evaluate our operations and cost structure relative to general economic
conditions, market demands, cost competitiveness and our geographic footprint as it relates to our
customers production requirements. As a result of this ongoing evaluation, we have initiated the
2006 Restructuring Plan and the 2009 Restructuring Plan. See Managements Discussion and Analysis
of Financial Condition and Results of Operations Results of Operations Restructuring and
Impairment Charges and Note 7 Restructuring and Impairment Charges to the Condensed
Consolidated Financial Statements for further details. If we incur restructuring charges related to
the 2006 Restructuring Plan, the 2009 Restructuring Plan, or both, or in connection with any
potential future restructuring program, in addition to those charges that we currently expect to
incur, our financial condition and results of operations may suffer.
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We expect that in the future we may continue to transfer certain of our operations to lower cost
geographies, which may require us to take additional restructuring charges. We also may decide to
transfer certain operations based on changes in our customers requirements or the tax rates in the
jurisdictions in which we operate. Restructurings present significant potential risks of events
occurring that could adversely affect us, including a decrease in employee morale, delays
encountered in finalizing the scope of, and implementing, the restructurings (including extensive
consultations concerning potential workforce reductions, particularly in locations outside of the
U.S.), the failure to achieve targeted cost savings and the failure to meet operational targets and
customer requirements due to the loss of employees and any work stoppages that might occur. These
risks are further complicated by our extensive international operations, which subject us to
different legal and regulatory requirements that govern the extent and speed, of our ability to
reduce our manufacturing capacity and workforce. In addition, the current global economic
conditions may change how governments regulate restructuring as the global recession impacts local
economies. Finally, we may have to obtain agreements from our affected customers for the
re-location of our facilities in certain instances. Obtaining these agreements, along with the
volatility in our customers demand, can further delay restructuring activities.
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We may not be able to maintain our engineering, technological and manufacturing process expertise.
The markets for our manufacturing and engineering services are characterized by rapidly
changing technology and evolving process development. The continued success of our business will
depend upon our ability to:
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hire, retain and expand our qualified engineering and technical personnel; |
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maintain technological leadership; |
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develop and market manufacturing services that meet changing customer needs; and |
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successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis. |
Although we believe that our operations use the assembly and testing technologies, equipment
and processes that are currently required by our customers, we cannot be certain that we will
develop the capabilities required by our customers in the future. The emergence of new technology,
industry standards or customer requirements may render our equipment, inventory or processes
obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing
technologies and equipment to remain competitive. The acquisition and implementation of new
technologies and equipment may require significant expense or capital investment, which could
reduce our operating margins and our operating results. In facilities that we establish or acquire,
we may not be able to maintain our engineering, technological and manufacturing process expertise.
Our failure to anticipate and adapt to our customers changing technological needs and requirements
or to hire and retain a sufficient number of engineers and maintain our engineering, technological
and manufacturing expertise, could have a material adverse effect on our business.
If our manufacturing processes and services do not comply with applicable statutory and regulatory
requirements, or if we manufacture products containing design or manufacturing defects, demand for
our services may decline and we may be subject to liability claims.
We manufacture and design products to our customers specifications, and, in some cases, our
manufacturing processes and facilities may need to comply with applicable statutory and regulatory
requirements. For example, medical devices that we manufacture or design, as well as the facilities
and manufacturing processes that we use to produce them, are regulated by the Food and Drug
Administration and non-U.S. counterparts of this agency. Similarly, items we manufacture for
customers in the defense and aerospace industries, as well as the processes we use to produce them,
are regulated by the Department of Defense and the Federal Aviation Authority. In addition, our
customers products and the manufacturing processes that we use to produce them often are highly
complex. As a result, products that we manufacture may at times contain manufacturing or design
defects, and our manufacturing processes may be subject to errors or not be in compliance with
applicable statutory and regulatory requirements. Defects in the products we manufacture or design,
whether caused by a design, manufacturing or component failure or error, or deficiencies in our
manufacturing processes, may result in delayed shipments to customers or reduced or cancelled
customer orders. If these defects or deficiencies are significant, our business reputation may also
be damaged. The failure of the products that we manufacture or our manufacturing processes and
facilities to comply with applicable statutory and regulatory requirements may subject us to legal
fines or penalties and, in some cases, require us to shut down or incur considerable expense to
correct a manufacturing process or facility. In addition, these defects may result in liability
claims against us or expose us to liability to pay for the recall of a product. The magnitude of
such claims may increase as we expand our medical and aerospace and defense manufacturing services,
as defects in medical devices and aerospace and defense systems could seriously harm or kill users
of these products and others. Even if our customers are responsible for the defects, they may not,
or may not have resources to, assume responsibility for any costs or liabilities arising from these
defects, which could expose us to additional liability claims.
Our regular manufacturing processes and services may result in exposure to intellectual property
infringement and other claims.
Providing manufacturing services can expose us to potential claims that the product design or
manufacturing processes infringe third party intellectual property rights. Even though many of our
manufacturing services contracts generally require our customers to indemnify us for infringement
claims relating to the product specifications and designs, a particular customer may not, or may
not have the resources to assume responsibility for such claims. In addition, we may be responsible
for claims that our manufacturing processes or components used in manufacturing infringe third
party intellectual property rights. Infringement claims could subject us to significant liability
for damages, and potentially injunctive action and, regardless of merits, could be time-consuming
and expensive to resolve.
Our design services offerings may result in additional exposure to product liability, intellectual
property infringement and other claims, in addition to the business risk of being unable to produce
the revenues necessary to profit from these services.
We continue our efforts to offer certain design services, primarily those relating to products
that we manufacture for our customers, and we also continue to offer design services related to
collaborative design manufacturing and turnkey solutions
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(including end-user products and components as products). Providing such services can expose us to different or greater potential
liabilities than those we face when providing our regular manufacturing services. Our design
services business increases our exposure to potential product liability claims resulting from
injuries caused by defects in products we design, as well as potential claims that products we
design or processes we use infringe third-party intellectual property rights. Such claims could
subject us to significant liability for damages, subject the infringing portion of our business to
injunction and, regardless of their merits, could be time-consuming and expensive to resolve. We
also may have greater potential exposure from warranty claims and from product recalls due to
problems caused by product design. Costs associated with possible product liability claims,
intellectual property infringement claims and product recalls could have a material adverse effect
on our results of operations. When providing collaborative design manufacturing or turnkey
solutions, we may not be guaranteed revenue needed to recoup or profit from the investment in the
resources necessary to design and develop products. Particularly, no revenue may be generated from
these efforts if our customers do not approve the designs in a timely manner or at all, or if they
do not then purchase anticipated levels of products. Furthermore, contracts may allow the customer
to delay or cancel deliveries and may not obligate the customer to any volume of purchases, or may
provide for penalties or cancellation of orders if we are late in delivering designs or products.
We may even have the responsibility to ensure that products we design satisfy safety and regulatory
standards and to obtain any necessary certifications. Failure to timely obtain the necessary
approvals or certifications could prevent us from selling these products, which in turn could harm
our sales, profitability and reputation.
In our contracts with turnkey solutions customers, we generally provide them with a warranty
against defects in our designs. If a turnkey solutions product or component that we design is found
to be defective in its design, this may lead to increased warranty claims. Although we have product
liability insurance coverage, it may not be available on acceptable terms, in sufficient amounts,
or at all. A successful product liability claim in excess of our insurance coverage or any material
claim for which insurance coverage was denied or limited and for which indemnification was not
available could have a material adverse effect on our business, results of operations and financial
condition.
The success of our turnkey solution activities depends in part on our ability to obtain, protect
and leverage intellectual property rights to our designs.
We strive to obtain and protect certain intellectual property rights to our turnkey solutions
designs. We believe that having a significant level of protected proprietary technology gives us a
competitive advantage in marketing our services. However, we cannot be certain that the measures
that we employ will result in protected intellectual property rights or will result in the
prevention of unauthorized use of our technology. If we are unable to obtain and protect
intellectual property rights embodied within our designs, this could reduce or eliminate the
competitive advantages of our proprietary technology, which would harm our business.
Intellectual property infringement claims against our customers or us could harm our business.
Our turnkey solutions products and the products of our customers may compete against the
products of other companies, many of whom may own the intellectual property rights underlying those
products. Patent clearance or licensing activities, if any, may be inadequate to anticipate and
avoid third party claims. As a result, in addition to the risk that we could become subject to
claims of intellectual property infringement, our customers could become subject to infringement
claims. Additionally, customers for our turnkey solutions services, or collaborative designs in
which we have significant technology contributions, typically require that we indemnify them
against the risk of intellectual property infringement. If any claims are brought against us or
against our customers for such infringement, regardless of their merits, we could be required to
expend significant resources in the defense or settlement of such claims, or in the defense or
settlement of related indemnifcation claims from our customers. In the event of a claim, we may be
required to spend a significant amount of money to develop non-infringing alternatives or obtain
licenses. We may not be successful in developing such alternatives or obtaining such a license on
reasonable terms or at all. Our customers may be required to or decide to discontinue products
which are alleged to be infringing rather than face continued costs of defending the infringement
claims, and such discontinuance may result in a significant decrease in our business.
We depend on our officers, managers and skilled personnel.
Our success depends to a large extent upon the continued services of our executive officers
and other skilled personnel. Generally our employees are not bound by employment or non-competition
agreements, and we cannot assure you that we will retain our executive officers and other key
employees. We could be seriously harmed by the loss of any of our executive officers. In order to
manage our growth, we will need to recruit and retain additional skilled management personnel and
if we are not able to do so, our business and our ability to continue to grow could be harmed.
Any delay in the implementation of our information systems could disrupt our operations and cause
unanticipated increases in our costs.
We have completed the installation of an Enterprise Resource Planning system in most of our
manufacturing sites, excluding certain of the sites we acquired in the Taiwan Green Point
Enterprises Co., Ltd. (Green Point) acquisition transaction, and in our
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corporate location. We
are in the process of installing this system in certain of our remaining plants, including
additional Green Point sites, which will replace the current Manufacturing Resource Planning
system, and financial information systems. Any delay in the
implementation of these information systems could result in material adverse consequences,
including disruption of operations, loss of information and unanticipated increases in costs.
Compliance or the failure to comply with current and future environmental, product stewardship and
producer responsibility laws or regulations could cause us significant expense.
We are subject to a variety of federal, state, local and foreign environmental, product
stewardship and producer responsibility laws and regulations, including those relating to the use,
storage, discharge and disposal of hazardous chemicals used during our manufacturing process, those
requiring design changes or conformity assessments or those relating to the recycling of products
we manufacture. If we fail to comply with any present and future regulations, we could become
subject to future liabilities, and we could face the suspension of production, or prohibitions on
sales of products we manufacture. In addition, such regulations could restrict our ability to
expand our facilities or could require us to acquire costly equipment, or to incur other
significant expenses, including expenses associated with the recall of any non-compliant product or
with changes in our procurement and inventory management activities.
Certain environmental laws impose liability for the costs of investigation, removal or
remediation of hazardous or toxic substances on an owner, occupier or operator of real estate, even
if such person or company was unaware of or not responsible for the presence of such substances.
Soil and groundwater contamination may have occurred at some of our facilities. From time to time
we investigate, remediate and monitor soil and groundwater contamination at certain of our
operating sites. In certain instances where contamination existed prior to our ownership or
occupation of a site, landlords or former owners have retained some contractual responsibility for
contamination and remediation. However, failure of such persons to perform those obligations could
result in us being required to remediate such contamination. As a result, we may incur clean-up
costs in such potential removal or remediation efforts. In other instances, we may be solely
responsible for clean-up costs associated with remediation efforts.
From time to time new regulations are enacted, or existing requirements are changed, and
it is difficult to anticipate how such regulations and changes will be implemented and enforced. We
continue to evaluate the necessary steps for compliance with regulations as they are enacted.
Over the last several years, we have become subject to certain legal requirements, principally
in Europe, regarding the use of certain hazardous substances in, and the collection, reuse and
recycling of waste from, certain products that use or generate electricity. Similar requirements
are being developed or imposed in other areas of the world where we manufacture or sell products,
including China and the U.S. We believe that we comply, and will be able to continue to comply,
with such emerging requirements. We may experience negative consequences from these emerging
requirements however, including, but not limited to, supply shortages or delays, increased raw
material and component costs, accelerated obsolescence of certain of our raw materials, components
and products and the need to modify or create new designs for our existing and future products.
Our failure to comply with any applicable regulatory requirements or with related contractual
obligations could result in our being directly or indirectly liable for costs (including product
recall and/or replacement costs), fines or penalties and third-party claims, and could jeopardize
our ability to conduct business in the jurisdictions implementing them.
In addition, as global warming issues become more prevalent, the U.S. and foreign governments
are beginning to respond to these issues. This increasing governmental focus on global warming may
result in new environmental regulations that may negatively affect us, our suppliers and our
customers. This could cause us to incur additional direct costs in complying with any new
environmental regulations, as well as increased indirect costs resulting from our customers,
suppliers or both incurring additional compliance costs that get passed on to us. These costs may
adversely impact our operations and financial condition.
Our customers are also becoming increasingly concerned with environmental issues, such as
waste management (including recycling) and climate change (including reducing carbon outputs), and
are increasingly expecting suppliers such as us to be similarly concerned and responsive. Such
customer demands may grow and require increased investments of time and resources to attract and
retain customers.
We are subject to the risk of increased taxes.
We base our tax position upon the anticipated nature and conduct of our business and upon our
understanding of the tax laws of the various countries in which we have assets or conduct
activities. Our tax position, however, is subject to review and possible challenge by taxing
authorities and to possible changes in law (including adverse changes to the manner in which the
U.S. taxes U.S. based multinational companies). We cannot determine in advance the extent to which
some jurisdictions may assess additional tax or interest and penalties on such additional taxes.
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For example, during the fiscal quarter ended May 31, 2010, the IRS completed its field
examination of our tax returns for the fiscal years 2003 through 2005 and issued a Revenue Agents
Report on April 30, 2010 proposing adjustments primarily related to: (1) certain costs that we
treated as corporate expenses and that the IRS proposes be charged out to our foreign affiliates
and (2) certain purported intangible values the IRS felt were transferred to certain of our foreign
subsidiaries free of charges. If the IRS ultimately
prevails in its positions, our income tax payment due for the fiscal years 2003 through 2005
would be approximately $71.0 million before utilization of any tax attributes arising in periods
subsequent to fiscal year 2005. In addition, the IRS will likely make similar claims
in future audits with respect to these types of transactions (at this time, determination of the
additional income tax due for these later years is not practicable). Also, the IRS has proposed
interest and penalties with respect to fiscal years 2003 through 2005 and we anticipate the IRS may
seek to impose interest and penalties in subsequent years with respect to the same types of issues.
We disagree with the proposed adjustments and intend to vigorously contest this matter through
applicable IRS and judicial procedures, as appropriate. While we currently believe that the
resolution of these issues will not have a material effect on our financial position or liquidity,
an unfavorable resolution, particularly if the IRS successfully asserts similar claims for later
years, could have a material effect on our results of operations and financial condition
(particularly in the quarter in which any adjustment is recorded or any tax is due or paid). For
further discussion related to our income taxes, refer to Note 13 Income Taxes to the Condensed
Consolidated Financial Statements and Note 4 Income Taxes to the Consolidated Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended August 31, 2009.
In addition, our effective tax rate may be increased by the generation of higher income in
countries with higher tax rates, or changes in local tax rates. For example, China enacted a
unified enterprise income tax law, effective January 1, 2008, which has resulted in a higher tax
rate on operations in China as the rate increase is phased in over several years.
Several countries in which we are located allow for tax incentives to attract and retain
business. We have obtained incentives where available and practicable. Our taxes could increase if
certain tax incentives are retracted (which in some cases could occur if we fail to satisfy the
conditions on which such incentives are based), or if they are not renewed upon expiration, or tax
rates applicable to us in such jurisdictions are otherwise increased. It is anticipated that tax
incentives with respect to certain operations will expire within the next year. However, due to the
possibility of changes in existing tax law and our operations, we are unable to predict how these
expirations will impact us in the future. In addition, acquisitions may cause our effective tax
rate to increase, depending on the jurisdictions in which the acquired operations are located.
Our credit rating may be downgraded.
Our credit is rated by credit rating agencies. Our 5.875% Senior Notes, 7.750% Senior Notes
and our 8.250% Senior Notes are currently rated BBB- by Fitch Ratings (Fitch), Ba1 by Moodys and
BB+ by S&P, and are considered to be below investment grade debt by Moodys and S&P and
investment grade debt by Fitch. S&Ps rating downgrade in April 2008, along with those by Fitch
in October 2007 and Moodys in February 2007, and any potential future negative change in our
credit rating, may make it more expensive for us to raise additional capital in the future on terms
that are acceptable to us, if at all; may negatively impact the price of our common stock; may
increase our interest payments under existing debt agreements; and may have other negative
implications on our business, many of which are beyond our control. In addition, as discussed
previously in Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources, the interest rate payable on the 8.250% Senior Notes
and under the Credit Facility is subject to adjustment from time to time if our credit ratings
change. Thus, any potential future negative change in our credit rating may increase the interest
rate payable on the 8.250% Senior Notes, the Credit Facility and certain of our other borrowings.
Our amount of debt could significantly increase in the future.
As of May 31, 2010, our debt obligations on the Condensed Consolidated Balance Sheets
consisted of $5.1 million under our 5.875% Senior Notes, $400.0 million under our 8.250% Senior
Notes, $312.0 million under our 7.750% Senior Notes and $360.0 million outstanding under the term
portion of our Credit Facility. As of May 31, 2010, there was $62.6 million outstanding under
various bank loans to certain of our foreign subsidiaries and under various other debt obligations.
Refer to Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources and Note 11 Notes Payable, Long-Term Debt and Long-Term Lease
Obligations to the Condensed Consolidated Financial Statements for further details.
As of May 31, 2010, we have the ability to borrow up to $800.0 million under the revolving
credit portion of the Credit Facility. In addition, the Credit Facility contemplates a potential
increase of the revolving credit portion of up to an additional $200.0 million, if we and the
lenders later agree to such increase. We could incur additional indebtedness in the future in the
form of bank loans, notes or convertible securities.
Should we desire to consummate significant additional acquisition opportunities, undertake
significant additional expansion activities or make substantial investments in our infrastructure,
our capital needs would increase and could possibly result in our need to increase available
borrowings under our revolving credit facilities or access public or private debt and equity
markets. There can be
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no assurance, however, that we would be successful in raising additional debt
or equity on terms that we would consider acceptable. An increase in the level of our indebtedness,
among other things, could:
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make it difficult for us to obtain any necessary financing in the future for other
acquisitions, working capital, capital expenditures, debt service requirements or other
purposes; |
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limit our flexibility in planning for, or reacting to changes in, our business; |
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make us more vulnerable in the event of a downturn in our business; and |
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impact certain financial covenants that we are subject to in connection with our
debt and securitization programs, including, among others, the maximum ratio of debt to
consolidated EBITDA (as defined in our debt agreements and securitization programs). |
There can be no assurance that we will be able to meet future debt service obligations.
We are subject to risks of currency fluctuations and related hedging operations.
More than an insignificant portion of our business is conducted in currencies other than the
U.S. dollar. Changes in exchange rates among other currencies and the U.S. dollar will affect our
cost of sales, operating margins and net revenue. We cannot predict the impact of future exchange
rate fluctuations. We use financial instruments, primarily forward contracts, to economically hedge
U.S. dollar and other currency commitments arising from trade accounts receivable, trade accounts
payable, fixed purchase obligations and other foreign currency obligations. Based on our
calculations and current forecasts, we believe that our hedging activities enable us to largely
protect ourselves from future exchange rate fluctuations. If, however, these hedging activities are
not successful or if we change or reduce these hedging activities in the future, we may experience
significant unexpected expenses from fluctuations in exchange rates.
An adverse change in the interest rates for our borrowings could adversely affect our financial
condition.
We pay interest on outstanding borrowings under our revolving credit facilities and certain
other long term debt obligations at interest rates that fluctuate based upon changes in various
base interest rates. An adverse change in the base rates upon which our interest rates are
determined could have a material adverse effect on our financial position, results of operations
and cash flows.
We face certain risks in collecting our trade accounts receivable.
We generate a significant amount of trade accounts receivable sales from our customers. If any
of our customers has any liquidity issues (the risk of which could be relatively high, relative to
historical conditions, due to current economic conditions), then we could encounter delays or
defaults in payments owed to us which could have a significant adverse impact on our financial
condition and results of operations. For example, on January 14, 2009 and May 28, 2009, two of our
customers each filed a petition for reorganization under bankruptcy law. We have analyzed our
financial exposure resulting from both of these customers bankruptcy filings and as a result have
recorded an allowance for doubtful accounts based upon our anticipated exposure associated with
these events. Our allowance for doubtful accounts receivables was $13.9 million as of May 31, 2010
(which represented approximately 1% of our gross trade accounts receivable balance) and $15.5
million as of August 31, 2009 (which represented approximately 1% of our gross trade accounts
receivable balance).
Certain of our existing stockholders have significant control.
At May 31, 2010, our executive officers, directors and certain of their family members
collectively beneficially owned 12.4% of our outstanding common stock, of which William D. Morean,
our Chairman of the Board, beneficially owned 7.2%. As a result, our executive officers, directors
and certain of their family members have significant influence over (1) the election of our Board
of Directors, (2) the approval or disapproval of any other matters requiring stockholder approval
and (3) the affairs and policies of Jabil.
Our stock price may be volatile.
Our common stock is traded on the New York Stock Exchange (the NYSE). The market price of
our common stock has fluctuated substantially in the past and could fluctuate substantially in the
future, based on a variety of factors, including future announcements covering us or our key
customers or competitors, government regulations, litigation, changes in earnings estimates by
analysts, fluctuations in quarterly operating results, or general conditions in our industry and
the aerospace, automotive, computing, consumer, defense, instrumentation, medical, networking,
peripherals, solar, storage and telecommunications industries. Furthermore, stock prices for many
companies and high technology companies in particular, fluctuate widely for reasons that may be
unrelated to their operating results. Those fluctuations and general economic, political and market
conditions, such as recessions or international currency fluctuations and demand for our services,
may adversely affect the market price of our common stock.
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Provisions in our charter documents and state law may make it harder for others to obtain control
of us even though some shareholders might consider such a development to be favorable.
Our shareholder rights plan, provisions of our amended certificate of incorporation and the
Delaware Corporation Laws may delay, inhibit or prevent someone from gaining control of us through
a tender offer, business combination, proxy contest or some other method. These provisions may
adversely impact our shareholders because they may decrease the possibility of a transaction in
which our shareholders receive an amount of consideration in exchange for their shares that is at a
significant premium to the then current market price of our shares. These provisions include:
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a poison pill shareholder rights plan; |
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a restriction in our bylaws on the ability of shareholders to take action by less
than unanimous written consent; and |
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a statutory restriction on business combinations with some types of interested
shareholders. |
Changes in the securities laws and regulations have increased, and may continue to increase, our
costs; and any future changes would likely increase our costs.
The Sarbanes-Oxley Act of 2002, as well as related rules promulgated by the SEC and the NYSE,
required changes in some of our corporate governance, securities disclosure and compliance
practices. Compliance with these rules has increased our legal and financial accounting costs for
several years following the announcement and effectiveness of these new rules. While these costs
are no longer increasing, they may in fact increase in the future. In addition, given the recent
turmoil in the securities and credit markets, as well as the global economy, many U.S. and
international governmental, regulatory and supervisory authorities including, but not limited to,
the SEC and the NYSE, have recently enacted additional changes in their laws, regulations and rules
and are currently contemplating additional changes. Any such future changes may cause our legal
and financial accounting costs to increase.
Due to inherent limitations, there can be no assurance that our system of disclosure and internal
controls and procedures will be successful in preventing all errors or fraud, or in informing
management of all material information in a timely manner.
Our management, including our CEO and CFO, does not expect that our disclosure controls and
internal controls and procedures will prevent all error 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 reflects 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 or will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur simply because of error or
mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
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 may not be detected.
If we receive other than an unqualified opinion on the adequacy of our internal control over
financial reporting as of August 31, 2010 or any future year-ends as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of your shares.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring
public companies to include an annual report on internal control over financial reporting in their
annual reports on Form 10-K that contains an assessment by management of the effectiveness of the
companys internal control over financial reporting. Our independent registered public accounting
firm, KPMG LLP, issued an unqualified opinion on the effectiveness of our internal control over
financial reporting as of August 31, 2009. While we continuously conduct a rigorous review of our
internal control over financial reporting in order to assure compliance with the Section 404
requirements, if our independent registered public accounting firm interprets the Section 404
requirements and the related rules and regulations differently from us or if our independent
registered public accounting firm is not satisfied with our internal control over financial
reporting or with the level at which it is documented, operated or reviewed, they may issue an
adverse opinion. An adverse opinion could result in an adverse reaction in the financial markets
due to a loss of confidence in the reliability of our Condensed Consolidated Financial Statements.
In addition, we have spent a significant amount of resources in complying with Section 404s
requirements. For the foreseeable future, we will likely continue to spend substantial amounts
complying with Section 404s requirements, as well as improving and enhancing our internal control
over financial reporting.
66
There are inherent uncertainties involved in estimates, judgments and assumptions used in the
preparation of financial statements in accordance with U.S. generally accepted accounting
principles (U.S. GAAP). Any changes in U.S. GAAP or in estimates, judgments and assumptions could
have a material adverse effect on our business, financial position and results of operations.
The condensed and consolidated financial statements included in the periodic reports we file
with the SEC are prepared in accordance with U.S. GAAP. The preparation of financial statements in
accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported
amounts of assets, liabilities and related reserves, revenues, expenses and income. Estimates,
judgments and assumptions are inherently subject to change in the future, and any such changes
could result in corresponding changes to the amounts of assets, liabilities and related reserves,
revenues, expenses and income. Any such changes could have a material adverse effect on our
financial position and results of operations. In addition, the principles of U.S. GAAP are subject
to interpretation by the Financial Accounting Standards Board, the American Institute of Certified
Public Accountants, the SEC and various bodies formed to create appropriate accounting policies,
and interpret such policies. A change in those policies can have a significant effect on our
accounting methods. For example, although not yet currently required, the SEC could require us to
adopt the International Financial Reporting Standards in the next few years, which could have a
significant effect on certain of our accounting methods.
We are subject to risks associated with natural disasters and global events.
Our operations may be subject to natural disasters or other business disruptions, which could
seriously harm our results of operation and increase our costs and expenses. We are susceptible to
losses and interruptions caused by hurricanes (including in Florida, where our headquarters are
located), earthquakes, power shortages, telecommunications failures, water shortages, tsunamis,
floods, typhoons, fire, extreme weather conditions, geopolitical events such as terrorist acts or
widespread criminal activities and other natural or manmade disasters. Our insurance coverage with
respect to natural disasters is limited and is subject to deductibles and coverage limits. Such
coverage may not be adequate, or may not continue to be available at commercially reasonable rates
and terms.
Energy price increases may negatively impact our results of operations.
Certain of the components that we use in our manufacturing activities are petroleum-based. In
addition, we, along with our suppliers and customers, rely on various energy sources (including
oil) in our transportation activities. While significant uncertainty currently exists about the
future levels of energy prices, a significant increase is possible. Increased energy prices could
cause an increase to our raw material costs and transportation costs. In addition, increased
transportation costs of certain of our suppliers and customers could be passed along to us. We may
not be able to increase our product prices enough to offset these increased costs. In addition, any
increase in our product prices may reduce our future customer orders and profitability.
Item 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information relating to the Companys repurchase of common stock
for the third quarter of fiscal year 2010.
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|
|
|
|
|
|
|
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|
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Approximate |
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|
|
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|
|
|
|
|
|
Total Number of |
|
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Dollar Value of |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Shares that May |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Yet Be |
|
|
|
Total Number |
|
|
|
|
|
|
Part of Publicly |
|
|
Purchased |
|
|
|
of Shares |
|
|
Average Price |
|
|
Announced |
|
|
Under the |
|
Period |
|
Purchased (1) |
|
|
Paid per Share |
|
|
Program |
|
|
Program |
|
March 1, 2010 March 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
April 1, 2010 April 30, 2010 |
|
|
131,984 |
|
|
$ |
16.66 |
|
|
|
|
|
|
|
|
|
May 1, 2010 May 31, 2010 |
|
|
|
|
|
$ |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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Total |
|
|
131,984 |
|
|
$ |
16.66 |
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|
|
|
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|
|
|
|
|
|
(1) |
|
The number of shares reported above as purchased are attributable to shares surrendered to
us by employees in payment of the exercise price related to Option exercises or minimum tax
obligations related to vesting of restricted shares. |
Item 3: DEFAULTS UPON SENIOR SECURITIES
None.
67
Item 4: (REMOVED AND RESERVED)
Item 5: OTHER INFORMATION
None.
68
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Item 6: |
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EXHIBITS |
3.1(1)
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The Registrants Certificate of Incorporation, as amended. |
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3.2(2)
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The Registrants Bylaws, as amended. |
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4.1(3)
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Form of Certificate for Shares of the Registrants Common Stock. |
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4.2(4)
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Rights Agreement, dated as of October 19, 2001, between the Registrant and EquiServe Trust Company,
N.A., which includes the form of the Certificate of Designation as Exhibit A, form of the Rights
Certificate as Exhibit B, and the Summary of Rights as Exhibit C. |
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4.3(5)
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Senior Debt Indenture, dated as of July 21, 2003, with respect to the Senior Debt of the Registrant,
between the Registrant and The Bank of New York, as trustee. |
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4.4(5)
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First Supplemental Indenture, dated as of July 21, 2003, with respect to the 5.875% Senior Notes, due
2010, of the Registrant, between the Registrant and The Bank of New York, as trustee. |
|
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|
4.5(6)
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Indenture, dated January 16, 2008, with respect to the 8.250% Senior Notes, by the Registrant and The
Bank of New York Mellon Trust Company, N.A. (formerly known as The Bank of New York Trust Company,
N.A.), as trustee. |
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4.6(7)
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Form of 8.250% Registered Senior Notes issued on July 18, 2008. |
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4.7(8)
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Form of 7.750% Registered Senior Notes issued on August 11, 2009. |
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4.8(8)
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|
Officers Certificate of the Registrant pursuant to the Indenture, dated August 11, 2009. |
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31.1
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Rule 13a-14(a)/15d-14(a) Certification by the President and Chief Executive Officer of the Registrant. |
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|
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31.2
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer of the Registrant. |
|
|
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32.1
|
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|
Section 1350 Certification by the President and Chief Executive Officer of the Registrant. |
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32.2
|
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Section 1350 Certification by the Chief Financial Officer of the Registrant. |
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(1) |
|
Incorporated by reference to an exhibit to the Registrants Quarterly Report on Form 10-Q
for the quarter ended February 29, 2000. |
|
(2) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed by the
Registrant on October 29, 2008. |
|
(3) |
|
Incorporated by reference to an exhibit to Amendment No. 1 to the Registration Statement on
Form S-1 filed by the Registrant on March 17, 1993 (File No. 33-58974). |
|
(4) |
|
Incorporated by reference to the Registrants Form 8-A (File No. 001-14063) filed October 19,
2001. |
|
(5) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed by the
Registrant on July 21, 2003. |
|
(6) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed by the
Registrant on January 17, 2008. |
|
(7) |
|
Incorporated by reference to the Registrants Annual Report on Form 10-K for the fiscal year
ended August 31, 2008. |
|
(8) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed by the
Registrant on August 12, 2009. |
69
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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Jabil Circuit, Inc.
Registrant
|
|
Date: July 2, 2010 |
By: |
/s/ TIMOTHY L. MAIN
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Timothy L. Main |
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President and Chief Executive Officer |
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Date: July 2, 2010 |
By: |
/s/ FORBES I.J. ALEXANDER
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|
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Forbes I.J. Alexander |
|
|
|
Chief Financial Officer |
|
70
Exhibit Index
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Exhibit No. |
|
|
|
Description |
31.1
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification by the President and Chief Executive Officer of Jabil Circuit, Inc. |
|
|
|
|
|
31.2
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer of Jabil Circuit, Inc. |
|
|
|
|
|
32.1
|
|
|
|
Section 1350 Certification by the President and Chief Executive Officer of Jabil Circuit, Inc. |
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32.2
|
|
|
|
Section 1350 Certification by the Chief Financial Officer of Jabil Circuit, Inc. |
71