What changed in this filing

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Item 2. Management’s Discussion and Analysis

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We depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our net revenue, which in turn depends upon their growth, viability and financial stability.

Based on net revenue, for the six months ended February 29, 2020 , our largest customers include Amazon.com, Inc., Apple, Inc., Cisco Systems, Inc., Hewlett-Packard Company, Ingenico Group, Johnson and Johnson, LM Ericsson Telephone Company, NetApp, Inc., SolarEdge Technologies Inc., and Valeo S.A.

We conduct our operations in facilities that are located worldwide, including but not limited to, China, Ireland, Malaysia, Mexico, Singapore and the United States.

We derived a substantial majority, 82.6% and 82.2% , of net revenue from our international operations for the three months and six months ended February 29, 2020 .

Based on net revenue, for the nine months ended May 31, 2020 , our largest customers include Amazon.com, Inc., Apple, Inc., Cisco Systems, Inc., Hewlett-Packard Company, Ingenico Group, Johnson and Johnson, LM Ericsson Telephone Company, NetApp, Inc., SolarEdge Technologies Inc., and Tesla, Inc.

We conduct our operations in facilities that are located worldwide, including but not limited to, China, Malaysia, Mexico, Singapore, the United States and Vietnam.

We derived a substantial majority, 83.4% and 82.6% , of net revenue from our international operations for the three months and nine months ended May 31, 2020 .

Our global manufacturing production sites allow customers to manufacture products simultaneously in the optimal locations for their products.

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We monitor the current economic environment and its potential impact on both the customers we serve as well as our end-markets and closely manage our costs and capital resources so that we can respond appropriately as circumstances change.

Beginning in January of 2020, concerns related to the novel strain of coronavirus, that originated in Wuhan, China, (“COVID-19”) caused a disruption to our business.

While customer demand for our services remained strong, our operations and our ability to satisfy customer orders were negatively impacted due to both workforce and supply chain constraints as a result of virus containment efforts that were undertaken in China.

During the three months ended February 29, 2020, we incurred approximately $53.0 million in direct costs associated with the COVID-19 outbreak, primarily due to incremental and idle labor costs leading to a reduction in factory utilization as a result of the travel disruptions and governmental restrictions.

Additionally, certain of the Company’s suppliers in China were similarly impacted leading to supply chain constraints.

As COVID-19 has spread to other jurisdictions and been declared a global pandemic, the full extent of this outbreak, the related governmental, business and travel restrictions in order to contain this virus are continuing to evolve globally.

Accordingly, there is significant uncertainty related to the ultimate impact that this global pandemic will have on the results of our operations.

For example, virus containment efforts (as a result of governmental actions or policies or other initiatives) could lead to reductions in capacity utilization levels and or facility closures under which we would expect to incur additional direct costs and lost revenue.

If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers.

The COVID-19 pandemic, which began to impact us in January 2020, has continued to affect our business and the businesses of our customers and suppliers into our fiscal third quarter.

Travel and business operation restrictions arising from virus containment efforts of governments around the world have continued to impact our operations in Asia, Europe and the Americas.

With the exception of certain jurisdictions, essential activity exceptions from these restrictions have allowed us to continue to operate.

Nevertheless, virus containment efforts in the three and nine months ended May 31, 2020, led to a disruption in operations and certain facility or intermittent business closures in areas such as China, Malaysia, India and California, which have resulted in additional direct costs and a reduction in revenue in certain end markets.

Our first priority has been the health and safety of our employees and so we have incurred additional costs in order to procure the necessary equipment, including face masks, thermometers, hand sanitizers and personal protection equipment, to keep our employees safe.

We have implemented risk-mitigation activities including travel restrictions, social distancing practices, additional cleaning procedures within our facilities, contact tracing, COVID-19 testing, and requiring employees and visitors to have their temperatures taken and wear masks when they are at our sites.

During the three months and nine months ended May 31, 2020, we incurred approximately $67.4 million and $120.4 million, respectively, in direct costs associated with the COVID-19 outbreak, primarily due to incremental and idle labor costs leading to a reduction in factory utilization as a result of the travel disruptions and governmental restrictions and the procurement of personal protection equipment for our employees globally.

Additionally, certain of the Company’s suppliers were similarly impacted by the COVID-19 pandemic, leading to supply chain constraints, including difficulty sourcing materials necessary to fulfill customer production requirements and challenges in transporting completed products to our end customers.

We have implemented efforts across the organization to enhance our financial position, increase liquidity and reduce costs.

During the three months ended May 31, 2020, we added incremental short-term committed revolving credit agreements of $625.0 million.

In addition, we have taken aggressive steps to reduce expenses, including suspending base salary increases for Fiscal Year 2021.

Our Chief Executive Officer, Chief Financial Officer and other executive vice presidents will reduce their base salaries by 25% from June 1, 2020 through November 30, 2020 and will forego any bonus that would otherwise be due to them under Jabil’s Fiscal Year 2020 short-term incentive program.

Members of Jabil’s Board of Directors will also reduce by 25% their annual cash retainers that would otherwise be payable during the period from June 1, 2020 through November 30, 2020.

In order to further decrease operating expenses and better align with the needs of the business, we have reduced our worldwide workforce and implemented voluntary early retirement programs.

In connection with reducing our worldwide workforce, we incurred $52.3 million of severance and benefit costs during the three and nine months ended May 31, 2020.

Following this reduction in headcount, we expect annual savings beginning in Fiscal Year 2021 of approximately $40.0 million to $50.0 million.

We continue to focus on prioritizing spending related to future business.

Our performance is subject to global economic conditions, as well as their impacts on levels of consumer spending and the production of goods.

These current conditions are significantly impacted by COVID-19, have had a negative impact on our results of operations during the second quarter of fiscal year 2020 and will continue to have a negative impact on our operations over the next fiscal quarter and likely beyond.

See Risk Factors, “The effect of COVID-19 on our operations and the operations

of our customers, suppliers and logistics providers will have a material, adverse impact on our financial condition and results of operations.”

These current conditions are significantly impacted by COVID-19, have had a negative impact on our results of operations during the three months and nine months ended May 31, 2020 and will continue to have a negative impact on our operations over the next fiscal quarter and likely beyond.

See Risk Factors, “The effect of COVID-19 on our operations and the operations of our customers, suppliers and logistics providers has, and is expected to continue to have, a material and adverse impact on our financial condition and results of operations.”

Summary of Results

The following table sets forth, for the three months and six months ended February 29, 2020 and February 28, 2019 , certain key operating results and other financial information (in thousands, except per share data):

The following table sets forth, for the periods indicated, certain key operating results and other financial information (in thousands, except per share data):

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Operating income

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The sales cycle is calculated as the sum of days in accounts receivable and days in inventory, less the days in accounts payable;

accordingly, the variance in the sales cycle quarter over quarter is a direct result of changes in these indicators.

accordingly, the variance in the sales cycle quarter over quarter was a direct result of changes in these indicators.

Inventory turns (annualized) are calculated as 360 days divided by days in inventory.

Days in accounts receivable is calculated as accounts receivable, net, divided by net revenue multiplied by 90 days.

During the three months ended February 29, 2020, the decrease is primarily driven by lower sales and the timing of collections in the second quarter.

During the three months ended November 30, 2019, the increase in days in accounts receivable from the prior sequential quarter was primarily due to an increase in accounts receivable, primarily driven by higher sales and timing of collections.

During the three months ended May 31, 2020 and November 30, 2019, the increase in days in accounts receivable from the prior sequential quarter was primarily due to an increase in accounts receivable, primarily driven by higher sales and timing of collections.

During the three months ended February 29, 2020, the decrease was primarily driven by lower sales and the timing of collections in the second quarter.

Days in inventory is calculated as inventory and contract assets divided by cost of revenue multiplied by 90 days.

During the three months ended February 29, 2020, the increase is primarily driven by idle capacity and supply chain constraints, largely in China due to COVID-19.

During the three months ended August 31, 2019, the decrease in days in inventory from the prior sequential quarter was primarily due to increased sales activity during the quarter.

During the three months ended May 31, 2020, the decrease was primarily due to increased sales activity during the quarter.

During the three months ended February 29, 2020, the increase was primarily driven by idle capacity and supply chain constraints, largely in China due to COVID-19.

Days in accounts payable is calculated as accounts payable divided by cost of revenue multiplied by 90 days.

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specific product performance;

and any potential termination, or substantial winding down, of significant customer relationships.

and any potential termination, or substantial winding down, of

significant customer relationships.

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Net revenue increased during the three months ended February 29, 2020 , compared to the three months ended February 28, 2019 .

Specifically, the EMS segment revenues increased 1% primarily due to (i) a 6% increase in revenues from existing customers within our cloud business, (ii) a 3% increase in revenues from existing customers within our capital equipment business and (iii) a 2% increase in revenues spread across various industries within the EMS segment.

The increase is partially offset by (i) an 8% decrease from existing customers within our networking and telecommunications business and (ii) a 2% decrease in revenues spread across various industries within the EMS segment.

DMS segment revenues increased 1% due to a 17% increase in revenues from new and existing customers in our healthcare and packaging businesses.

The increase is partially offset by (i) a 15% decrease in revenue from customers within our mobility and edge devices and accessories businesses as our ability to meet customer demand was greatly diminished as COVID-19 containment efforts were implemented in China and (ii) a 1% decrease in revenues spread across various industries within the DMS segment.

Net revenue increased during the six months ended February 29, 2020 , compared to the six months ended February 28, 2019 .

Specifically, the EMS segment revenues increased 13% primarily due to (i) a 16% increase in revenues from existing customers within our cloud business, (ii) a 2% increase in revenues from existing customers within our capital equipment business and (iii) a 3% increase in revenues spread across various industries within the EMS segment.

The increase is partially offset by (i) a 7% decrease from existing customers within our networking and telecommunications business and (ii) a 1% decrease from existing customers within our computing and storage business.

Net revenue increased during the three months ended May 31, 2020 , compared to the three months ended May 31, 2019 .

Specifically, the DMS segment revenues increased 13% due to (i) a 7% increase in revenues from new and existing customers in our healthcare and packaging businesses, (ii) a 4% increase in revenues from existing customers within our edge devices and accessories business, and (iii) a 2% increase in revenues from existing customers within our mobility business.

The EMS segment revenues decreased 2% primarily due to (i) a 6% decrease from existing customers within our networking and telecommunications business, (ii) a 3% decrease in revenues from existing customers within our print and retail business, and (iii) a 4% decrease in revenues spread across various industries within the EMS segment, including our smart home and appliances and automotive and transportation businesses.

The decrease is partially offset by (i) an 8% increase in revenues from existing customers within our cloud business and (ii) a 3% increase in revenues spread across various industries within the EMS segment, including our capital equipment business.

Net revenue increased during the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 .

Specifically, the EMS segment revenues increased 8% primarily due to (i) a 13% increase in revenues from existing customers within our cloud business and (ii) a 2% increase in revenues from existing customers within our capital equipment business.

The increase is partially offset by a 7% decrease from existing customers within our networking and telecommunications business.

DMS segment revenues increased 5% due to a 12% increase in revenues from new and existing customers in our healthcare and packaging businesses.

The increase is partially offset by a 12% decrease in revenue from customers within our mobility and edge devices and accessories businesses due to:

(i) our ability to meet customer demand, which was greatly diminished as COVID-19 containment efforts were implemented in China during the second quarter of fiscal year 2020 and (ii) decreased end user product demand and end market dynamics in the first quarter of fiscal year 2020.

The increase is partially offset by a 7% decrease in revenue from customers within our mobility and edge devices and accessories businesses due to decreased end user product demand and end market dynamics in the first quarter of fiscal year 2020.

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

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

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Foreign source revenue

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Percent of net revenue

Gross profit as a percentage of net revenue decreased for the three months ended February 29, 2020, compared to the three months ended February 28, 2019, primarily due to an increase of $46.7 million in incremental and idle labor costs associated with travel disruptions and governmental restrictions, largely related to the COVID-19 outbreak.

Gross profit as a percentage of net revenue decreased for the six months ended February 29, 2020, compared to the six months ended February 28, 2019, primarily due to an increase of $46.7 million in incremental and idle labor costs associated with travel disruptions and governmental restrictions, largely related to the COVID-19 outbreak.

Additionally, gross profit as a percent of revenue decreased for the EMS segment largely due to product mix and weakness in the capital equipment business during the first quarter.

The decrease was partially offset by an increase in the DMS segment in the first quarter due to improved profitability across the various businesses.

Gross profit as a percentage of net revenue remained consistent for the three months ended May 31, 2020 , compared to the three months ended May 31, 2019 .

During the three months ended May 31, 2020, we recognized $50.9 million in incremental and idle labor costs associated with travel disruptions and governmental restrictions, largely related to the COVID-19 outbreak.

This increase in costs was partially offset by governmental subsidies, such as lower payroll taxes or social insurance in certain countries, related to COVID-19 incentives.

During the three months ended May 31, 2019, we had weakness in the capital equipment business and ramp costs associated with new business awards.

Gross profit as a percentage of net revenue decreased for the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 , primarily due to an increase of $97.6 million in incremental and idle labor costs associated with travel disruptions and governmental restrictions, largely related to the COVID-19 outbreak.

Additionally, gross profit as a percent of revenue decreased for the EMS segment largely due to product mix.

The decrease was partially offset by an increase in the DMS segment due to improved profitability across the various businesses.

Selling, General and Administrative

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Selling, general and administrative

Selling, general and administrative expenses increased during the three months ended February 29, 2020 , compared to the three months ended February 28, 2019 .

The increase is predominantly due to (i) $6.3 million in costs related to the COVID-19 outbreak, including personal protection equipment and (ii) a $2.2 million increase in salary and salary related expenses and other costs primarily to support new business growth and development and our strategic collaboration with a healthcare company.

The increase is partially offset by (i) a $5.0 million decrease in acquisition and integration charges related to our strategic collaboration with a healthcare company and (ii) a $0.6 million decrease in stock-based compensation expense.

Selling, general and administrative expenses increased during the six months ended February 29, 2020 , compared to the six months ended February 28, 2019 .

The increase is predominantly due to (i) a $32.7 million increase in salary and salary related expenses and other costs primarily to support new business growth and development and our strategic collaboration with a healthcare company, (ii) a $12.4 million increase in stock-based compensation expense, (iii) $6.3 million in costs related to the COVID-19 outbreak, including personal protection equipment and (iv) a $2.2 million increase in acquisition and integration charges related to our strategic collaboration with a healthcare company.

Selling, general and administrative expenses increased during the three months ended May 31, 2020 , compared to the three months ended May 31, 2019 .

The increase is predominantly due to (i) a $16.6 million increase in salary and salary related expenses and other costs primarily due to our strategic collaboration with a healthcare company, (ii) $16.5 million in costs related to the COVID-19 outbreak, including personal protection equipment for our employees globally and (iii) a $2.4 million increase in stock-based compensation expense.

The increase is partially offset by a $7.2 million decrease in acquisition and integration charges related to our strategic collaboration with a healthcare company.

Selling, general and administrative expenses increased during the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 .

The increase is predominantly due to (i) a $49.5 million increase in salary and salary related expenses and other costs primarily due to our strategic collaboration with a healthcare company, (ii) $22.8 million in costs related to the COVID-19 outbreak, including personal protection equipment for our employees globally and (iii) a $14.7 million increase in stock-based compensation expense.

The increase is partially offset by a $5.0 million decrease in acquisition and integration charges related to our strategic collaboration with a healthcare company.

Research and Development

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Percent of net revenue

Research and development expenses remained consistent as a percentage of net revenue during the three months and six months ended February 29, 2020 , compared to the three months and six months ended February 28, 2019 .

Research and development expenses remained consistent as a percentage of net revenue during the three months and nine months ended May 31, 2020 , compared to the three months and nine months ended May 31, 2019 .

Amortization of Intangibles

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Amortization of intangibles

Amortization of intangibles increased during the three months and six months ended February 29, 2020 , compared to the three months and six months ended February 28, 2019 , primarily driven by amortization related to the Nypro trade name, which was reclassified to a definite-lived intangible asset during the fourth quarter of fiscal year 2019 as a result of our decision to rebrand.

Amortization of intangibles increased during the three months and nine months ended May 31, 2020 , compared to the three months and nine months ended May 31, 2019 , primarily driven by amortization related to the Nypro trade name, which was reclassified to a definite-lived intangible asset during the fourth quarter of fiscal year 2019 as a result of our decision to rebrand.

As such, this trade name was assigned a four-year estimated useful life and is being amortized on an accelerated basis.

Restructuring and Related Charges

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

Restructuring, Severance and Related Charges

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

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Employee severance and benefit costs

Asset write-off costs

Total restructuring and related charges (1)

Includes $14.7 million and $0.3 million recorded in the EMS segment, $14.5 million and $0.5 million recorded in the DMS segment and $0.4 million and $0.0 million of non-allocated charges for the three months ended February 29, 2020 and February 28, 2019 , respectively.

Includes $32.1 million and $4.7 million recorded in the EMS segment, $39.7 million and $2.1 million recorded in the DMS segment and $3.1 million and $0.0 million of non-allocated charges for the six months ended February 29, 2020 and February 28, 2019 , respectively.

Except for asset write-off costs, all restructuring and related charges are cash costs.

Primarily relates to the 2020 Restructuring Plan.

Total restructuring, severance and related charges (1)

Includes $23.7 million and $7.6 million recorded in the EMS segment, $29.3 million and $0.0 million recorded in the DMS segment and $16.2 million and $1.7 million of non-allocated charges for the three months ended May 31, 2020 and 2019 , respectively.

Includes $55.8 million and $12.3 million recorded in the EMS segment, $69.0 million and $2.1 million recorded in the DMS segment and $19.2 million and $1.8 million of non-allocated charges for the nine months ended May 31, 2020 and 2019 , respectively.

Except for asset write-off costs, all restructuring, severance and related charges are cash costs.

As the Company continues to optimize its cost structure and improve operational efficiencies, $52.3 million of employee severance and benefit costs was incurred in connection with a reduction in the worldwide workforce during the three and nine months ended May 31, 2020.

The Company’s liability associated with the worldwide workforce reduction is $50.9 million as of May 31, 2020.

The remaining amount primarily relates to the 2020 Restructuring Plan.

Primarily relates to the 2017 Restructuring Plan.

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The 2020 Restructuring Plan reflects our intention only and restructuring decisions, and the timing of such decisions, at certain locations are still subject to consultation with our employees and their representatives.

We currently expect to recognize approximately $85.0 million in pre-tax restructuring and other related costs primarily over the course of our fiscal year 2020.

We expect to recognize approximately $85.0 million in pre-tax restructuring and other related costs over the course of our fiscal year 2020.

The charges relating to the 2020 Restructuring Plan are currently expected to result in cash expenditures in the range of approximately $30.0 million to $40.0 million that will be payable over the course of our fiscal years 2020 and 2021.

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We expect cost savings of $25.0 million during fiscal year 2020.

See Note 13 – “Restructuring and Related Charges” to the Condensed Consolidated Financial Statements for further discussion of restructuring and related charges for the 2020 Restructuring Plan.

See Note 13 – “Restructuring, Severance and Related Charges” to the Condensed Consolidated Financial Statements for further discussion of restructuring, severance and related charges for the 2020 Restructuring Plan.

Impairment on Securities

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Impairment on securities

The increase in impairment on securities for the three months and six months ended February 29, 2020, compared to the three months and six months ended February 28, 2019 is due to a non-cash impairment charge in connection with the sale of an investment in the optical networking segment.

The increase in impairment on securities for the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 is due to a non-cash impairment charge in connection with the sale of an investment in the optical networking segment during the three months ended February 29, 2020.

Other Expense

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Other expense

Other expense decreased for the three months ended February 29, 2020 , compared to the three months ended February 28, 2019 , primarily due to:

Other expense decreased for the three months ended May 31, 2020 , compared to the three months ended May 31, 2019 , primarily due to:

(i) $6.4 million related to a decrease in fees associated with the utilization of the trade accounts receivable sales programs and (ii) $2.7 million related to lower net periodic benefit costs.

The decrease was partially offset by $0.6 million of other expense.

Other expense decreased for the six months ended February 29, 2020 , compared to the six months ended February 28, 2019 , primarily due to:

Other expense decreased for the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 , primarily due to:

(i) $11.0 million related to a decrease in fees associated with the utilization of the trade accounts receivable sales programs and fees incurred for the amendment of the foreign asset-backed securitization program and the new North American asset-backed securitization program in fiscal year 2019 and (ii) $7.0 million related to lower net periodic benefit costs.

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Interest income

Interest income remained relatively consistent during the three months ended February 29, 2020 , compared to the three months ended February 28, 2019 .

Interest income increased during the six months ended February 29, 2020 , compared to the six months ended February 28, 2019 , due to increased cash equivalents (investments that are readily convertible to cash with maturity dates of 90 days or less).

Interest income decreased during the three months ended May 31, 2020 , compared to the three months ended May 31, 2019 , primarily due to lower interest rates on cash equivalents (investments that are readily convertible to cash with maturity dates of 90 days or less).

Interest income decreased during the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 , due to lower interest rates, partially offset by increased cash equivalents (investments that are readily convertible to cash with maturity dates of 90 days or less).

Interest Expense

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Interest expense

Interest expense remained consistent during the three months ended February 29, 2020 , compared to the three months ended February 28, 2019 .

Interest expense increased during the six months ended February 29, 2020 , compared to the six months ended February 28, 2019 , due to additional borrowings on our credit facilities and commercial paper program, partially offset by lower interest rates.

Interest expense decreased during the three months ended May 31, 2020 , compared to the three months ended May 31, 2019 due to lower interest rates.

Interest expense decreased during the nine months ended May 31, 2020 , compared to the nine months ended May 31, 2019 due to lower interest rates, partially offset by additional borrowings on our credit facilities and commercial paper program.

Income Tax Expense

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Effective income tax rate

The effective income tax rate increased for the three months and six months ended February 29, 2020 , compared to the three months and six months ended February 28, 2019 , primarily due to:

(i) decreased income for the three months and six months ended February 29, 2020, driven in part by increased restructuring charges with minimal related tax benefit;

adjustments related to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) for the six months ended February 28, 2019, including a $13.3 million income tax benefit recorded during the three months ended November 30, 2018.

The effective income tax rate increased for the three months and nine months ended May 31, 2020 , compared to the three months and nine months ended May 31, 2019 , primarily due to:

(i) decreased income for the three months and nine months ended May 31, 2020, driven in part by increased restructuring charges with minimal related tax benefit;

(ii) a $21.2 million income tax expense associated with the re-measurement of deferred tax assets related to an extension of a non-U.S.

tax incentive recorded during the three months ended May 31, 2020;

and (iii) adjustments related to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) for the nine months ended May 31, 2019, including a $13.3 million income tax benefit recorded during the three months ended November 30, 2018.

Non-GAAP (Core) Financial Measures

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Also, our “core” financial measures should not be construed as an indication by us that our future results will be unaffected by those items that are excluded from our “core” financial measures.

Management believes that the non-GAAP “core” financial measures set forth below are useful to facilitate evaluating the past and future performance of our ongoing manufacturing operations over multiple periods on a comparable basis by excluding the effects of the amortization of intangibles, stock-based compensation expense and related charges, restructuring and related charges, distressed customer charges, acquisition and integration charges, loss on disposal of subsidiaries, settlement of receivables and related charges, impairment of notes receivable and related charges, goodwill impairment charges, business interruption and impairment charges, net, impairment on securities, restructuring of securities loss, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations and certain other expenses, net of tax and certain deferred tax valuation allowance charges.

Management believes that the non-GAAP “core” financial measures set forth below are useful to facilitate evaluating the past and future performance of our ongoing manufacturing operations over multiple periods on a comparable basis by excluding the effects of the amortization of intangibles, stock-based compensation expense and related charges, restructuring, severance and related charges, distressed customer charges, acquisition and integration charges, loss on disposal of subsidiaries, settlement of receivables and related charges, impairment of notes receivable and related charges, goodwill impairment charges, business interruption and impairment charges, net, impairment on securities, restructuring of securities loss, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations and certain other expenses, net of tax and certain deferred tax valuation allowance charges.

Among other uses, management uses non-GAAP “core” financial measures to make operating decisions, assess business performance and as a factor in determining certain employee performance when evaluating incentive compensation.

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A significant portion (based on the respective values) of the items that are excluded for purposes of calculating “core” operating income and “core” earnings also impacted certain balance sheet assets, resulting in a portion of an asset being written off without a corresponding recovery of cash we may have previously spent with respect to the asset.

In the case of restructuring and related charges, we may make associated cash payments in the future.

In the case of restructuring, severance and related charges, we may make associated cash payments in the future.

In addition, although, for purposes of calculating “core” operating income and “core” earnings, we exclude stock-based compensation expense (which we anticipate continuing to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholders’ ownership interest.

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Operating income (U.S.

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Stock-based compensation expense and related charges

Restructuring and related charges

Restructuring, severance and related charges (1)

Distressed customer charge (2)

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Diluted weighted average shares outstanding (Non-GAAP)

Charges relate to accounts receivable and inventory charges for certain distressed customers primarily in the renewable energy sector.

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There is no impact to core earnings or diluted core earnings per share for this adjustment.

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

Charges for the three and nine months ended May 31, 2020, relate to a flood that impacted our facility in Huangpu, China.

Charges, net of insurance proceeds of $2.9 million for the nine months ended May 31, 2019 , relate to business interruptions and asset impairment costs associated with damage from Hurricane Maria, which impacted our operations in Cayey, Puerto Rico.

Charges related to our strategic collaboration with Johnson & Johnson Medical Devices Companies (“JJMD”).

The six months ended February 28, 2019 includes a $13.3 million income tax benefit for the effects of the Tax Act recorded during the three months ended November 30, 2018.

The nine months ended May 31, 2019 includes a $13.3 million income tax benefit for the effects of the Tax Act recorded during the three months ended November 30, 2018.

Adjusted Free Cash Flow

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Net cash provided by operating activities (U.S.

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On February 25, 2019 and April 29, 2019, under the terms of the Framework Agreement, we completed the initial and second closings, respectively, of our acquisition of certain assets of JJMD.

The preliminary aggregate purchase price paid for the initial and second closings was approximately $166.2 million in cash.

The aggregate purchase price paid for the initial and second closings was approximately $167.4 million in cash.

For the initial and second closings, total assets acquired of $173.5 million and total liabilities assumed of $6.1 million were recorded at their estimated fair values as of the acquisition dates.

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The acquisition of the JJMD assets have been accounted for as separate business combinations for each closing using the acquisition method of accounting.

We are currently evaluating the fair values of the assets and liabilities related to the second and third closings of these business combinations.

We are currently evaluating the fair values of the assets and liabilities related to the third closing of these business combinations.

The preliminary estimates and measurements are, therefore, subject to change during the measurement period for assets acquired, liabilities assumed and tax adjustments.

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Liquidity and Capital Resources

We believe that our level of liquidity sources, which includes available borrowings under our revolving credit facilities and commercial paper program, additional proceeds available under our asset-backed securitization programs and under our uncommitted trade accounts receivable sale programs, cash on hand, funds provided by operations and the access to the capital markets, will be adequate to fund our capital expenditures, the payment of any declared quarterly dividends, approved share repurchase programs, any potential acquisitions and our working capital requirements for the next 12 months.

Despite the impacts of the COVID-19 pandemic on our ability to estimate capital expenditures for fiscal year 2020, we have historically been successful in balancing capital expenditures commensurate with customer demand and would expect to be able to do so in the future.

We believe that our level of liquidity sources, which includes available borrowings under our revolving credit facilities and commercial paper program, additional proceeds available under our asset-backed securitization programs and under our uncommitted trade accounts receivable sale programs, cash on hand, funds provided by operations and the access to the capital markets, will be adequate to fund our capital expenditures, the payment of any declared quarterly dividends, any share repurchases under the approved program, any potential acquisitions and our working capital requirements for the next 12 months.

We continue to assess our capital structure and evaluate the merits of redeploying available cash.

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Cash and Cash Equivalents

As of February 29, 2020 , we had approximately $696.7 million in cash and cash equivalents.

As of May 31, 2020 , we had approximately $763.3 million in cash and cash equivalents.

As our growth remains predominantly outside of the United States, a significant portion of such cash and cash equivalents are held by our foreign subsidiaries.

Most of our cash and cash equivalents as of February 29, 2020 could be repatriated to the United States without potential tax consequences.

Most of our cash and cash equivalents as of May 31, 2020 could be repatriated to the United States without potential tax consequences.

Notes Payable and Credit Facilities

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Balance as of August 31, 2019

Balance as of February 29, 2020

Balance as of May 31, 2020

Maturity Date

Jan 22, 2023 and Jan 22, 2025 (2)(3)

Apr 23, 2021, Jan 22, 2023 and Jan 22, 2025 (2)(3)(4)

Jan 22, 2025 (2)

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In connection with our entry into the Credit Facility, we terminated our amended and restated five-year credit agreement dated November 8, 2017 and the credit agreement dated August 24, 2018.

During the three months ended February 29, 2020, the interest rates on the Revolving Credit Facility ranged from 2.5% to 3.0% and the Term Loan Facility ranged from 2.9% to 3.2% .

During the nine months ended May 31, 2020 , the interest rates on the Revolving Credit Facility ranged from 1.2% to 4.3% and the Term Loan Facility ranged from 1.6% to 3.5% .

Interest is charged at a rate equal to (a) for the Revolving Credit Facility, either 0.000% to 0.450% above the base rate or 0.975% to 1.450% above the Eurocurrency rate and (b) for the Term Loan Facility, either 0.125% to 0.750% above the base rate or 1.125% to 1.750% above the Eurocurrency rate.

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Fees include a facility fee based on the revolving credit commitments of the lenders and a letter of credit fee based on the amount of outstanding letters of credit.

As of February 29, 2020 , we had $3.1 billion in available unused borrowing capacity under our revolving credit facilities, net of outstanding commercial paper borrowings.

On April 24, 2020, we entered into an unsecured 364-day revolving credit agreement up to an initial aggregate amount of $375.0 million , which was increased to $425.0 million on May 29, 2020 (the “364-Day Revolving Credit Agreement”).

The 364-Day Revolving Credit Agreement expires on April 23, 2021.

Interest and fees on the 364-Day Revolving Credit Agreement advances are based on our non-credit enhanced long-term senior unsecured debt rating as determined by Standard & Poor’s Ratings Service, Moody’s Investors Service and Fitch Ratings.

As of May 31, 2020 , no draws were made on the 364-Day Revolving Credit Agreement.

Interest is charged at a rate equal to either (i) 0.450% , 0.525% or 0.800% above the base rate or (ii) 1.450% , 1.525% or 1.800% above the Eurodollar rate.

The base rate represents the greatest of:

(i) Mizuho’s base rate, (ii) 0.50% above the federal funds rate, and (iii) 1.0% above one-month LIBOR, subject to a floor of 0.75% .

The Eurodollar rate represents adjusted LIBOR for the applicable interest period, subject to a floor of 0.75% .

Fees include a facility fee based on the revolving credit commitments of the lenders.

As of May 31, 2020 , we had $3.7 billion in available unused borrowing capacity under our revolving credit facilities.

The Revolving Credit Facility under the Credit Facility acts as the back-up facility for commercial paper outstanding, if any.

We have a borrowing capacity of up to $1.8 billion under our commercial paper program.

The revolving credit facility supports commercial paper outstanding, if any.

As of February 29, 2020, the outstanding commercial paper has maturities of 90 days or less.

During the three months ended February 29, 2020, the interest rates on the commercial paper program ranged from 2.0% to 2.6% .

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 to augment our liquidity and capital resources.

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A violation of these covenants could negatively impact our liquidity by restricting our ability to borrow under the notes payable and credit facilities and potentially causing acceleration of amounts due under these notes payable and credit facilities.

As of February 29, 2020 , we were in compliance with our debt covenants.

As of May 31, 2020 , we were in compliance with our debt covenants.

Refer to Note 5 – “Notes Payable and Long-Term Debt” to the Condensed Consolidated Financial Statements for further details.

Asset-Backed Securitization Programs

sell certain of the foreign asset-backed receivables to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution and certain of the North American asset-backed receivables to conduits administered by an unaffiliated financial institution on a monthly basis.

We continuously sell designated pools of trade accounts receivable, at a discount, under our foreign asset-backed securitization program and our North American asset-backed securitization program to special purpose entities, which in turn sell certain of the foreign asset-backed receivables to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution and certain of the North American asset-backed receivables to conduits administered by an unaffiliated financial institution on a monthly basis.

The foreign asset-backed securitization program contains a guarantee of payment by the special purpose entity, in an amount approximately equal to the net cash proceeds under the program.

No liability has been recorded for obligations under the guarantee as of February 29, 2020 .

Certain unsold receivables covering the maximum amount of net cash proceeds available under the North American asset-backed securitization program are pledged as collateral to the unaffiliated financial institution as of February 29, 2020 .

No liability has been recorded for obligations under the guarantee as of May 31, 2020 .

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

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Maximum amount available at any one time.

In connection with our asset-backed securitization programs, during the three months and six months ended February 29, 2020 , we sold $1.1 billion and $2.3 billion , respectively, of trade accounts receivable and we received cash proceeds of $1.1 billion and $2.2 billion , respectively.

As of February 29, 2020 , we had up to $76.3 million in available liquidity under our asset-backed securitization programs.

In connection with our asset-backed securitization programs, during the three months and nine months ended May 31, 2020 , we sold $0.9 billion and $3.2 billion , respectively, of trade accounts receivable and we received cash proceeds of $0.9 billion and $3.2 billion , respectively.

As of May 31, 2020 , we had up to $136.6 million in available liquidity under our asset-backed securitization programs.

Our asset-backed securitization programs contain various financial and nonfinancial covenants.

As of February 29, 2020 and August 31, 2019 , we were in compliance with all covenants under our asset-backed securitization programs.

As of May 31, 2020 and August 31, 2019 , we were in compliance with all covenants under our asset-backed securitization programs.

Refer to Note 6 – “Asset-Backed Securitization Programs” to the Condensed Consolidated Financial Statements for further details on the programs.

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December 5, 2020 (2)

Maximum amount available at any one time.

Maximum amount of trade accounts receivable that may be sold under a facility at any one time.

The program will be automatically extended each year through December 5, 2025 unless either party provides 30 days notice of termination.

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The program will be automatically extended each year through April 11, 2025 unless either party provides 30 days notice of termination.

During the three months and six months ended February 29, 2020 , we sold $2.2 billion and $4.2 billion , respectively, of trade accounts receivable under these programs and we received cash proceeds of $2.2 billion and $4.2 billion , respectively.

As of February 29, 2020 , we had up to $1.2 billion in available liquidity under our trade accounts receivable sale programs.

During the three months and nine months ended May 31, 2020 , we sold $2.2 billion and $6.3 billion , respectively, of trade accounts receivable under these programs and we received cash proceeds of $2.2 billion and $6.3 billion , respectively.

As of May 31, 2020 , we had up to $932.4 million in available liquidity under our trade accounts receivable sale programs.

Capital Expenditures

At this time, due to the implications of the impact of COVID-19, our net capital expenditures are not estimable for fiscal year 2020.

For Fiscal Year 2020, we anticipate our net capital expenditures will be approximately $800.0 million.

In general, our c apital expenditures support ongoing maintenance in our DMS and EMS segments and investments in new markets.

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The following table sets forth selected consolidated cash flow information (in thousands):

Six months ended

February 29, 2020

February 28, 2019

Nine months ended

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

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Operating Activities

Net cash provided by operating activities during the six months ended February 29, 2020 was primarily due to non-cash expenses and decreased accounts receivable, partially offset by decreased accounts payable, accrued expenses and other liabilities and increased inventories, contract assets and prepaid expenses and other current assets.

The decrease in accounts receivable is primarily driven by lower sales and the timing of collections.

The decrease in accounts payable, accrued expenses and other liabilities is primarily due to a decrease in materials purchases due to a decrease in customer demand and the timing of purchases and cash payments.

The increase in inventories is primarily driven by idle capacity and supply chain constraints due to COVID-19.

Net cash provided by operating activities during the nine months ended May 31, 2020 was primarily due to non-cash expenses, decreased accounts receivable and increased accounts payable, accrued expenses and other liabilities, partially offset by increased contract assets, inventories and prepaid expenses and other current assets.

The decrease in accounts receivable is primarily driven by the timing of collections.

The increase in accounts payable, accrued expenses and other liabilities is primarily due to the timing of purchases and cash payments.

The increase in contract assets is primarily due to the timing of revenue recognition for over time customers.

The increase in inventories is primarily to support expected sales levels in the fourth quarter of fiscal year 2020.

The increase in prepaid expenses and other current assets is primarily due to an increase in value added tax receivables.

Investing Activities

Net cash used in investing activities during the six months ended February 29, 2020 consisted primarily of capital expenditures principally to support ongoing business in the DMS and EMS segments and expenditures for assets acquired in connection with the third closing of the acquisition of certain assets of JJMD, partially offset by proceeds and advances from the sale of property, plant and equipment.

Net cash used in investing activities during the nine months ended May 31, 2020 consisted primarily of capital expenditures principally to support ongoing business in the DMS and EMS segments and expenditures for assets acquired in connection with the third closing of the acquisition of certain assets of JJMD, partially offset by proceeds and advances from the sale of property, plant and equipment.

Financing Activities

Net cash provided by financing activities during the six months ended February 29, 2020 was primarily due to (i) borrowings under debt agreements and (ii) net proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan.

Net cash provided by financing activities was partially offset by (i) payments for debt agreements, (ii) the repurchase of our common stock, (iii) dividend payments and (iv) treasury stock minimum tax withholding related to vesting of restricted stock.

Net cash used in financing activities during the nine months ended May 31, 2020 was primarily due to (i) payments for debt agreements, (ii) the repurchase of our common stock, (iii) dividend payments and (iv) treasury stock minimum tax withholding related to vesting of restricted stock.

Net cash used in financing activities was partially offset by (i) borrowings under debt agreements and (ii) net proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan.

Contractual Obligations

As of the date of this report, other than the borrowings on the 3.600% Senior Notes and the Credit Facility (see Note 5 - “Notes Payable and Long-Term Debt” to the Condensed Consolidated Financial Statements) and the items disclosed below, there were no material changes outside the ordinary course of business since August 31, 2019 to our contractual obligations and commitments.

As of the date of this report, other than the borrowings on the 3.600% Senior Notes, the Credit Facility and the 364-Day Revolving Credit Agreement (see Note 5 - “Notes Payable and Long-Term Debt” to the Condensed Consolidated Financial Statements) and the items disclosed below, there were no material changes outside the ordinary course of business since August 31, 2019 to our contractual obligations and commitments.

In connection with the third closing of the acquisition of certain assets of JJMD, we assumed additional contractual obligations related to postretirement benefit plans and executed certain financing leases.

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In September 2019, the Board of Directors authorized the repurchase of up to $600.0 million of our common stock as a part of a two-year capital allocation framework (the “2020 Share Repurchase Program”).

As of February 29, 2020 , 4.4 million shares had been repurchased for $168.7 million and $431.3 million remains available under the 2020 Share Repurchase Program.

As of May 31, 2020 , 5.2 million shares had been repurchased for $188.9 million and $411.1 million remains available under the 2020 Share Repurchase Program.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis