What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-01-08 compared with 2020-06-29 · 120 added, 215 removed, 230 unchanged (59% of the section changed)

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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 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 .

We derived a substantial majority, 83.6% of net revenue from our international operations for the three months ended November 30, 2020.

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

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Our EMS segment is a high volume business that produces product at a quicker rate (i.e.

cycle time) and in larger quantities and includes customers primarily in the automotive and transportation, capital equipment, cloud, computing and storage, defense and aerospace, industrial and energy, networking and telecommunications, print and retail, and smart home and appliances industries.

cycle time) and in larger quantities and includes customers primarily in the 5G, wireless and cloud, digital print and retail, industrial and semi-cap, and networking and storage industries.

Our DMS segment is focused on providing engineering solutions, with an emphasis on material sciences, technologies and healthcare.

Our DMS includes customers primarily in the edge devices and accessories, healthcare, mobility and packaging industries.

Our DMS includes customers primarily in the automotive and transportation, connected devices, healthcare and packaging, and mobility industries.

As of September 1, 2020, certain customers have been realigned within our operating segments.

Our operating segments, which are the reporting segments, continue to consist of the DMS and EMS segments.

Customers within the automotive and transportation and smart home and appliances industries are now presented within the DMS segment.

Prior period disclosures are restated to reflect the realignment.

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.

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.

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

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

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.

Essential activity exceptions from these restrictions have allowed us to continue to operate.

Nevertheless, virus containment efforts have resulted in additional direct costs and a reduction in revenue in certain end markets.

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 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.”

These current conditions are impacted by COVID-19 and will continue to have an impact on our operations over the fiscal year and likely beyond.

See “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020, “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

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Operating income

Net (loss) income attributable to Jabil Inc.

(Loss) earnings per share—basic

(Loss) earnings per share—diluted

Net income attributable to Jabil Inc.

Earnings per share—basic

Earnings per share—diluted

Key Performance Indicators

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August 31, 2020

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Sales cycle (1)

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

During the three months ended 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.

During the three months ended November 30, 2020, 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.

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

During the three months ended 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.

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

During the three months ended November 30, 2020, the increase in days in accounts payable from the prior sequential quarter was primarily due to an increase for material purchases during the quarter and the timing of payments.

Critical Accounting Policies and Estimates

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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.

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;

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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 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 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.

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Net revenue increased during the three months ended November 30, 2020, compared to the three months ended November 30, 2019.

Specifically, the DMS segment revenues increased 13% due to (i) a 7% increase in revenues from existing customers within our mobility business, (ii) a 3% increase in revenues from existing customers within our connected devices business, (iii) a 2% increase in revenues from new and existing customers in our healthcare and packaging businesses, and (iv) a 1% increase in revenues from other business.

The EMS segment revenues decreased 4% primarily due to a decrease in revenues from existing customers within our cloud business, which began transitioning to a consignment model in fiscal year 2021.

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 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.

For the three months ended November 30, 2020, gross profit as a percentage of net revenue increased as compared to the three months ended November 30, 2019.

The increase is primarily due to product mix and 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 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.

Selling, general and administrative expenses decreased during the three months ended November 30, 2020, compared to the three months ended November 30, 2019.

The decrease is predominantly due to:

(i) a $24.4 million decrease in salary and salary related expenses due to the fiscal year 2020 worldwide workforce reduction and lower travel expenses related to a decrease in travel due to the COVID-19 pandemic and (ii) a $14.0 million decrease in acquisition and integration charges related to our strategic collaboration with a healthcare company.

The decrease is partially offset by (i) a $9.0 million increase in costs related to the COVID-19 pandemic, including personal protection equipment for our employees globally and (ii) a $3.3 million increase in stock-based compensation expense.

Research and Development

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Research and development

Percent of net revenue

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 .

Research and development expenses remained consistent as a percentage of net revenue during the three months ended November 30, 2020, compared to the three months ended November 30, 2019.

Amortization of Intangibles

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Amortization of intangibles

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.

Amortization of intangibles decreased during the three months ended November 30, 2020, compared to the three months ended November 30, 2019, primarily due to certain intangible assets that were fully amortized during fiscal year 2020.

Restructuring, Severance and Related Charges

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Employee severance and benefit costs

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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.

(1) Primarily relates to the 2020 Restructuring Plan, and includes $(3.0) million and $17.4 million recorded in the EMS segment, $1.0 million and $25.2 million recorded in the DMS segment and $0.3 million and $2.7 million of non-allocated charges for the three months ended November 30, 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.

2020 Restructuring Plan

On September 20, 2019, our Board of Directors formally approved a restructuring plan to realign our global capacity support infrastructure, particularly in our mobility footprint in China, in order to optimize organizational effectiveness.

This action includes headcount reductions and capacity realignment (the “2020 Restructuring Plan”).

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

We 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.

The exact timing of these charges and cash outflows, as well as the estimated cost ranges by category type, have not been finalized.

This information will be subject to the finalization of timetables for the transition of functions, consultation with employees and their representatives as well as the statutory severance requirements of the particular jurisdictions impacted, and the amount and timing of the actual charges may vary due to a variety of factors.

Our estimates for the charges discussed above exclude any potential income tax effects.

The 2020 Restructuring Plan, once complete, is expected to yield annualized cost savings beginning in fiscal year 2021 of approximately $40.0 million.

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

See Note 12 – “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 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

Other (Income) Expense

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Other expense

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 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.

The decrease was partially offset by $3.9 million of other expense.

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Other (income) expense

Other (income) expense decreased for the three months ended November 30, 2020, compared to the three months ended November 30, 2019, primarily due to:

(i) $7.6 million related to a decrease in fees associated with lower utilization of the trade accounts receivable sales programs, (ii) $3.9 million related to lower net periodic benefit costs and (iii) $1.6 million arising from a reduction in other expense.

Interest Income

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Interest income

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 income decreased during the three months ended November 30, 2020, compared to the three months ended November 30, 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 Expense

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Interest expense

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.

Interest expense decreased during the three months ended November 30, 2020, compared to the three months ended November 30, 2019 due to lower interest rates and lower 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 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.

The effective income tax rate decreased for the three months ended November 30, 2020, compared to the three months ended November 30, 2019, primarily due to increased income for the three months ended November 30, 2020, driven in part by decreased restructuring charges in tax jurisdictions with minimal related income tax benefit.

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, 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.

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, loss on securities, income (loss) from discontinued operations, gain (loss) on sale of discontinued operations and certain other expenses, net of tax and certain deferred tax valuation allowance charges.

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

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In certain jurisdictions where we do not expect to realize a tax benefit (due to existing tax incentives or a history of operating losses or other factors resulting in a valuation allowance related to deferred tax assets), a reduced or 0% tax rate is applied.

We are reporting “core” operating income, “core” earnings and adjusted free cash flow to provide investors with an additional method for assessing operating income and earnings, by presenting what we believe are our “core” manufacturing operations.

We are reporting “core” operating income, “core” earnings and cash flow to provide investors with an additional method for assessing operating income and earnings, by presenting what we believe are our “core” manufacturing operations.

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

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Operating income (U.S.

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Net periodic benefit cost (2)

Business interruption and impairment charges, net (4)

Acquisition and integration charges (3)

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Core operating income (Non-GAAP)

Net (loss) income attributable to Jabil Inc.

Net income attributable to Jabil Inc.

Adjustments to operating income

Impairment on securities

Net periodic benefit cost (2)

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Core earnings (Non-GAAP)

Diluted (loss) earnings per share (U.S.

Diluted earnings per share (U.S.

Diluted core earnings per share (Non-GAAP)

Diluted weighted average shares outstanding (U.S.

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.

GAAP and Non-GAAP)

(1) Relates to accounts receivable and inventory charges for certain distressed customers in the renewable energy sector during the three months ended November 30, 2019.

(2) Following the adoption of Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715) (“ASU 2017-07”), pension service cost is recognized in cost of revenue and all other components of net periodic benefit cost, including return on plan assets, are presented in other expense.

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

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.

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

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.

Cash receipts on sold receivables

Acquisition of property, plant and equipment

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Adjusted free cash flow (Non-GAAP)

In fiscal year 2019, the adoption of Accounting Standards Update ("ASU") 2016-15, "Classification of Certain Cash Receipts and Cash Payments" resulted in a reclassification of cash flows from operating activities to investing activities for cash receipts for the deferred purchase price receivable on asset-backed securitization transactions.

The adoption of this standard does not reflect a change in the underlying business or activities.

The effects of this change are applied retrospectively to all prior periods.

Acquisitions and Expansion

During fiscal year 2018, the Company and Johnson & Johnson Medical Devices Companies (“JJMD”) entered into a Framework Agreement to form a strategic collaboration and expand our existing relationship.

During fiscal year 2018, the Company and JJMD entered into a Framework Agreement to form a strategic collaboration and expand our existing relationship.

The strategic collaboration expands our medical device manufacturing portfolio, diversification and capabilities.

On 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 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.

On September 30, 2019, under the terms of the Framework Agreement, we completed the third closing of our acquisition of certain assets of JJMD.

The preliminary aggregate purchase price paid for the third closing was approximately $111.8 million in cash, which remains subject to certain post-closing adjustments based on conditions within the Framework Agreement.

For the third closing, total assets acquired of $199.7 million , including $83.2 million in contract assets, $35.1 million in inventory and $70.4 million in goodwill, and total liabilities assumed of $87.9 million , including $73.5 million of pension obligations, were recorded at their estimated fair values as of the acquisition date.

There were no intangible assets identified in this acquisition and the goodwill is primarily attributable to the assembled workforce.

The majority of the goodwill is currently not expected to be deductible for income tax purposes.

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

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

On October 26, 2020, under the terms of the Framework Agreement, we completed the fourth closing of our acquisition of certain assets of JJMD.

The preliminary aggregate purchase price paid for the fourth closing was approximately $18.4 million in cash, which remains subject to certain post-closing adjustments based on conditions within the Framework Agreement.

Total assets acquired of $30.6 million and total liabilities assumed of $12.2 million were recorded at their estimated fair values as of the acquisition date.

The acquisition of the JJMD assets was accounted for as a business combination using the acquisition method of accounting.

The Company is currently evaluating the fair values of the assets and liabilities related to the fourth closing.

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

The results of operations were included in our consolidated financial results beginning on February 25, 2019 for the initial closing, April 29, 2019 for the second closing and September 30, 2019 for the third closing.

The results of operations were included in our consolidated financial results beginning on October 26, 2020 for the fourth closing.

We believe it is impracticable to provide pro forma information for the acquisition of the JJMD assets.

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

Certain of our trade accounts receivable sale programs expire or are subject to termination provisions within the 2020 calendar year.

In addition, our 5.625% Senior Notes mature on December 15, 2020.

While we expect to renew such trade accounts receivable sale programs and refinance our Senior Notes, market conditions, including the implications of the COVID-19 pandemic, at the time our current programs expire and debt matures, respectively, may create challenges in doing so, such as incurring a higher cost of capital.

Cash and Cash Equivalents

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

As of November 30, 2020, we had approximately $1.1 billion 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 May 31, 2020 could be repatriated to the United States without potential tax consequences.

Most of our cash and cash equivalents as of November 30, 2020 could be repatriated to the United States without potential tax expense.

Notes Payable and Credit Facilities

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3.600% Senior Notes

3.000% Senior Notes

facilities (1)

commercial paper program (4)

Balance as of August 31, 2020

Balance as of May 31, 2020

Balance as of November 30, 2020

Maturity Date

Apr 23, 2021, Jan 22, 2023 and Jan 22, 2025

Jan 22, 2025 (2)

Original Facility/ Maximum Capacity

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$351.9 million

On January 15, 2020, we issued $500.0 million of publicly registered 3.600% Senior Notes due 2030 (the “ 3.600% Senior Notes”).

The net proceeds from the offering were used for the repayment of term loan indebtedness.

On January 22, 2020, we entered into a senior unsecured credit agreement which provides for:

(i) a Revolving Credit Facility in the initial amount of $2.7 billion , of which $700.0 million expires on January 22, 2023 and $2.0 billion expires on January 22, 2025 and (ii) a $300.0 million Term Loan Facility which expires on January 22, 2025, (collectively the “Credit Facility”).

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

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 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.

The base rate represents the greatest of:

(i) Citibank, N.A.’s prime rate, (ii) 0.50% above the federal funds rate, and (iii) 1.0% above one-month LIBOR, but not less than zero.

The Eurocurrency rate represents adjusted LIBOR or adjusted CDOR, as applicable, for the applicable interest period, but not less than zero.

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

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.

(1) As of November 30, 2020, we had $3.8 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.

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

As of November 30, 2020 and August 31, 2020, we were in compliance with our debt covenants.

Refer to Note 4 – “Notes Payable and Long-Term Debt” to the Condensed Consolidated Financial Statements for further details.

Asset-Backed Securitization Programs

We continuously sell designated pools of trade accounts receivable, at a discount, under our foreign asset-backed securitization program and our North American asset-backed securitization program to special purpose entities, which in turn 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 receivables under the foreign program to an unaffiliated financial institution and a conduit administered by an unaffiliated financial institution and certain of the receivables under the North American program 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 May 31, 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 May 31, 2020 .

No liability has been recorded for obligations under the guarantee as of November 30, 2020.

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

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(1) Maximum amount available at any one time.

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.

In connection with our asset-backed securitization programs, during the three months ended November 30, 2020, we sold accounts receivable of and received cash proceeds of $1.2 billion.

As of November 30, 2020, we had up to $6.3 million in available liquidity under our asset-backed securitization programs.

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

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.

As of November 30, 2020 and August 31, 2020, we were in compliance with all covenants under our asset-backed securitization programs.

Refer to Note

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

Trade Accounts Receivable Sale Programs

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November 30, 2021

June 30, 2020

May 4, 2023 (4)

August 31, 2023

May 4, 2023 (3)

January 25, 2021 (4)

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(1) 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.

The program will automatically extend for one year at each expiration date unless either party provides 10 days notice of termination.

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

(3) Any party may elect to terminate the agreement upon 30 days prior notice.

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

The program will be automatically extended each year through December 5, 2024 unless either party provides 30 days notice of termination.

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 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.

(8) The program will be automatically extended through December 5, 2024 unless either party provides 30 days notice of termination.

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

During the three months ended November 30, 2020, we sold accounts receivable of and received cash proceeds of $1.3 billion of trade accounts receivable under these programs.

As of November 30, 2020, we had up to $1.8 billion in available liquidity under our trade accounts receivable sale programs.

Capital Expenditures

For Fiscal Year 2021, 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.

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

The amount of actual capital expenditures may be affected by general economic, financial, competitive, legislative and regulatory factors, among other things.

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

Nine months ended

Three months ended

November 30, 2020

November 30, 2019

Net cash provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash used in 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 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.

Net cash provided by operating activities during the three months ended November 30, 2020 was primarily due to an increase in accounts payable, accrued expenses and other liabilities, partially offset by increased accounts receivable, inventories and prepaid expenses and other current assets.

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

The increase in accounts receivable is primarily driven by higher sales and the timing of collections.

The increase in inventories is primarily to support expected sales levels in the second quarter of fiscal year 2021.

The increase in prepaid expenses and other current assets is primarily due to an increase in forward contract assets driven by normal hedging activity.

Investing Activities

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.

Net cash used in investing activities during the three months ended November 30, 2020 consisted primarily of capital expenditures principally to support ongoing business in the DMS and EMS segments, partially offset by proceeds and advances from the sale of property, plant and equipment.

Financing Activities

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.

Net cash used in financing activities during the three months ended November 30, 2020 was primarily due to (i) payments for debt agreements, (ii) the repurchase of our common stock, (iii) treasury stock minimum tax withholding related to vesting of restricted stock and (iv) dividend payments.

Net cash used in financing activities was partially offset by borrowings under debt agreements.

Contractual Obligations

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.

The following table provides details of these assumed obligations:

Payments due by period (in thousands)

After 5 years

Pension and postretirement contributions and payments (1)

Finance lease obligations (2)

Represents the estimated company contributions to the funded Switzerland plan during fiscal year 2020.

These future payments are not recorded on the Condensed Consolidated Balance Sheets but will be recorded as incurred.

Refer to Note 8 - Postretirement and other Employee Benefits for further discussion of the assumed postretirement benefit obligation.

The amount payable after five years includes $75.1 million in purchase requirements at the end of the respective leases.

During the three months ended November 30, 2020, we assumed $80.1 million in additional contractual obligations related to new finance leases entered into during the period that are due in fiscal year 2023.

As of the date of this report, there were no other material changes outside the ordinary course of business since August 31, 2020 to our contractual obligations and commitments.

Dividends and Share Repurchases

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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 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.

As of November 30, 2020, 7.5 million shares had been repurchased for $263.9 million and $336.1 million remains available under the 2020 Share Repurchase Program.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis