JABIL CIRCUIT INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Glimpses |

Overview

We are one of the leading providers of worldwide electronic manufacturing services and solutions. We provide comprehensive electronics design, production and product management services to companies in the aerospace, automotive, computing, consumer, defense, healthcare, industrial, instrumentation, medical, networking, packaging, peripherals, solar, storage and telecommunications industries. We serve our customers primarily with dedicated business units that combine highly automated, continuous flow manufacturing with advanced electronic design and design for manufacturability. We currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our revenue, net of estimated return costs ("net revenue"). Based on net revenue, during the nine months ended May 31, 2014, our largest customers currently include Apple, Inc., BlackBerry Limited (as discussed elsewhere in this Quarterly Report on Form 10-Q, we are currently in the process of disengaging from this customer), Cisco Systems, Inc., Ericsson, Hewlett-Packard Company, Ingenico S.A., International Business Machines Corporation, NetApp, Inc., Valeo and Zebra. During the nine months ended May 31, 2014, we had net revenues of approximately $11.7 billion and net income attributable to Jabil Circuit, Inc. of approximately $267.5 million. We offer our customers comprehensive electronics design, production and product management services that are responsive to their manufacturing and supply chain management needs. Our business units are capable of providing our customers with varying combinations of the following services: • integrated design and engineering; • component selection, sourcing and procurement; • automated assembly; • design and implementation of product testing; • parallel global production; • enclosure services; • systems assembly, direct order fulfillment and configure to order; and

• injection molding, metal, plastics, precision machining and automation.

We currently conduct our operations in facilities that are located in Austria, Belgium, Brazil, China, France, Germany, Hungary, India, Ireland, Israel, Italy, Japan, Malaysia, Mexico, The Netherlands, Poland, Russia, Scotland, Singapore, South Korea, Taiwan, Ukraine, the U.S. and Vietnam. Our global manufacturing production sites allow customers to manufacture products simultaneously in the optimal locations for their products. Our services allow customers to reduce manufacturing costs, improve supply-chain management, reduce inventory obsolescence, lower transportation costs and reduce product fulfillment time. We have identified our global presence as a key to assessing our business opportunities. The industry in which we operate is composed of companies that provide a range of manufacturing and design services to companies that utilize electronics components. The industry experienced rapid change and growth through the 1990s as an increasing number of companies chose to outsource an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry's revenue declined as a result of significant cut-backs in customer production requirements, which was consistent with the overall downturn in the technology sector at the time. In response to this downturn in the technology sector, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Industry revenues generally began to stabilize in 2003 and companies began to turn more to outsourcing versus internal manufacturing. In addition, the number of industries serviced, as well as the market penetration in certain industries, by electronic manufacturing service providers has increased over the past several years. In mid-2008, the industry's revenue declined when a deteriorating macro-economic environment resulted in illiquidity in global credit markets and a significant economic downturn in the North American, European and Asian markets. In response to this downturn, and the termination of our business relationship with BlackBerry Limited, we implemented additional restructuring programs, including the restructuring plans that were approved by our Board of Directors in the first quarter of fiscal year 2014 (the "2014 Restructuring Plan") and in fiscal year 2013 (the "2013 Restructuring Plan"), to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Uncertainty remains regarding the extent and timing of the current global economic recovery, particularly in those countries (such as in much of Europe) where economic conditions remain at risk. We will continue to monitor the current economic environment and its potential impact on both the customers that we serve as well as our end-markets and closely manage our costs and capital resources so that we can respond appropriately as circumstances continue to change. 27

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Summary of Results

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

Three months ended Nine months ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013 Net revenue $ 3,785,875 $ 4,196,224 $ 11,705,901 $ 12,735,799 Gross profit $ 215,950 $ 297,572 $ 763,351 $ 898,348 Operating (loss) income $ (1,613 ) $ 93,128 $ 157,431 $ 379,859 Net income attributable to Jabil Circuit, Inc. $ 188,255 $ 50,083 $ 267,510 $ 244,463 Net earnings per share - basic $ 0.93 $ 0.25 $ 1.31 $ 1.20 Net earnings per share - diluted $ 0.93 $ 0.24 $ 1.30 $ 1.18 Cash dividend per share - declared $ 0.08 $ 0.08 $ 0.24 $ 0.24

Key Performance Indicators

Management regularly reviews financial and non-financial performance indicators to assess the Company's operating results. The following table sets forth, for the quarterly periods indicated, certain of management's key financial performance indicators: Three months ended May 31, February 28, November 30, August 31, 2014 2014 2013 2013 Sales cycle 3 days 7 days 3 days 1 day Inventory turns (annualized) 8 turns 7 turns 8 turns 8 turns Days in accounts receivable 24 days 24 days 27 days 23 days Days in inventory 47 days 49 days 45 days 46 days Days in accounts payable 68 days 66 days 69 days 68 days 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. During the three months ended May 31, 2014, days in accounts receivable remained consistent compared to the prior quarter at 24 days. During the three months ended May 31, 2014, days in inventory decreased two days to 47 days as compared to the prior sequential quarter due to a continued focus on inventory management. During the three months ended May 31, 2014, days in accounts payable increased two days to 68 days from the prior sequential quarter primarily due to the timing of purchases and cash payments for purchases during the respective quarters. The sales cycle was three days during the three months ended May 31, 2014. The changes in the sales cycle are due to the changes in accounts receivable, accounts payable and inventory that are discussed above.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements and related disclosures in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of our significant accounting policies, refer to Note 1 - "Description of Business and Summary of Significant Accounting Policies" to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013.

Recent Accounting Pronouncements

See Note 15 - "New Accounting Guidance" to the Condensed Consolidated Financial Statements for a discussion of recent accounting guidance.

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Results of Operations

The following table sets forth, for the periods indicated, certain statements of operations data expressed as a percentage of net revenue:

Three months ended Nine months ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013 Net revenue 100.0 \% 100.0 \% 100.0 \% 100.0 \% Cost of revenue 94.3 \% 92.9 \% 93.4 \% 92.9 \% Gross profit 5.7 \% 7.1 \% 6.6 \% 7.1 \% Operating expenses: Selling, general and administrative 5.0 \% 3.5 \% 4.3 \% 3.5 \% Research and development 0.2 \% 0.2 \% 0.2 \% 0.2 \% Amortization of intangibles 0.2 \% 0.1 \% 0.2 \% 0.1 \% Restructuring and related charges 0.3 \% 0.6 \% 0.6 \% 0.2 \% Loss on disposal of subsidiaries 0.1 \% - 0.0 \% - Impairment of notes receivable and related charges - 0.6 \% - 0.2 \% Operating (loss) income (0.1 )\% 2.1 \% 1.3 \% 2.9 \% Other expense 0.0 \% 0.0 \% 0.0 \% 0.0 \% Interest income (0.0 )\% (0.0 )\% (0.0 )\% (0.0 )\% Interest expense 0.8 \% 0.7 \% 0.8 \% 0.7 \% (Loss) income from continuing operations before tax (0.9 )\% 1.4 \% 0.5 \% 2.2 \% Income tax expense 0.5 \% 0.5 \% 0.3 \% 0.6 \% (Loss) income from continuing operations, net of tax (1.4 )\% 0.9 \% 0.2 \% 1.6 \% Discontinued operations: Income from discontinued operations, net of tax 0.1 \% 0.2 \% 0.2 \% 0.2 \% Gain on sale of discontinued operations, net of tax 6.3 \% - 2.0 \% - Discontinued operations, net of tax 6.4 \% 0.2 \% 2.2 \% 0.2 \% Net income 5.0 \% 1.1 \% 2.4 \% 1.8 \% Net income (loss) attributable to noncontrolling interests, net of tax 0.0 \% (0.0 )\% 0.0 \% (0.0 )\% Net income attributable to Jabil Circuit, Inc. 5.0 \% 1.1 \% 2.4 \% 1.8 \%

The Three Months and Nine Months Ended May 31, 2014, Compared to the Three Months and Nine Months Ended May 31, 2013

Net Revenue. Net revenue decreased 9.8\% to $3.8 billion during the three months ended May 31, 2014, compared to $4.2 billion during the three months ended May 31, 2013. Specific decreases include a 35\% decrease in the sale of High Velocity Systems ("HVS") products due principally to reductions in the sale of mobility handsets as a result of our disengagement from BlackBerry Limited and a 3\% decrease in the sale of Enterprise & Infrastructure ("E&I") products due to the continued decline in enterprise and infrastructure spending which was partially offset by strength in our telecom business. These decreases were partially offset by a 6\% increase in the sale of Diversified Manufacturing Services ("DMS") products due to increased revenue from new customers as a result of the Nypro acquisition and increased revenue from our industrial and instrumentation businesses, which were partially offset by decreased revenue as a result of reduced production levels due to weakened end user product demand within specialized services. Net revenue decreased 8.1\% to $11.7 billion during the nine months ended May 31, 2014, compared to $12.7 billion during the nine months ended May 31, 2013. Specific decreases include a 21\% decrease in the sale of HVS products due principally to reductions in the sale of mobility handsets as a result of our disengagement from BlackBerry Limited, a 6\% decrease in the sale of E&I products due to the continued decline in enterprise and infrastructure spending which was partially offset by strength in our telecom business and a 2\% decrease in the sale of DMS products as a result of reduced production levels due to weakened end user product demand within specialized services which was partially offset by both increased revenue from new customers as a result of the Nypro acquisition and increased revenue from our industrial and instrumentation businesses. 29

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Generally, we assess revenue on a global customer basis regardless of whether the growth is associated with organic growth or as a result of an acquisition. Accordingly, we do not differentiate or report separately revenue increases generated by acquisitions as opposed to existing business. In addition, the added cost structures associated with our acquisitions have historically been relatively insignificant when compared to our overall cost structure. The distribution of revenue across our sectors has fluctuated, and will continue to fluctuate, as a result of numerous factors, including but not limited to the following: fluctuations in customer demand as a result of recessionary conditions; efforts to de-emphasize the economic performance of certain sectors; seasonality in our business; business growth from new and existing customers; specific product performance; and the current termination of our business relationship with BlackBerry Limited and any other potential future termination, or substantial winding down, of other significant customer relationships. On April 1, 2014, we completed the sale of the AMS business (except for the Malaysian operations due to certain regulatory approvals that are still pending in that jurisdiction), which was included in the DMS segment. Accordingly, the results of operations of this business are classified as discontinued operations. See Note 2 - "Discontinued Operations" to the Condensed Consolidated Financial Statements for further details.

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

Three months ended Nine months ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013 DMS 43 \% 36 \% 44 \% 41 \% E&I 35 \% 33 \% 33 \% 33 \% HVS 22 \% 31 \% 23 \% 26 \% Total 100 \% 100 \% 100 \% 100 \% Foreign source revenue represented 83.7\% and 84.3\% of our net revenue during the three months and nine months ended May 31, 2014, respectively, compared to 86.1\% and 86.5\% of our net revenue during the three months and nine months ended May 31, 2013, respectively. We currently expect our foreign source revenue to increase as compared to current levels over the course of the next 12 months. Gross Profit. Gross profit decreased to $216.0 million (5.7\% of net revenue) and $763.4 million (6.6\% of net revenue) during the three months and nine months ended May 31, 2014, respectively, compared to $297.6 million (7.1\% of net revenue) and $898.3 million (7.1\% of net revenue) during the three months and nine months ended May 31, 2013, respectively. The decrease in gross profit is due to our revenues from existing customers decreasing at a higher rate than certain of our fixed costs, partially offset by increased revenue from new customers. Selling, General and Administrative. Selling, general and administrative expenses increased to $190.8 million (5.0\% of net revenue) and $497.8 million (4.3\% of net revenue) during the three months and nine months ended May 31, 2014, respectively, compared to $147.0 million (3.5\% of net revenue) and $441.8 million (3.5\% of net revenue) during the three months and nine months ended May 31, 2013, respectively. The increases during the three months and nine months ended May 31, 2014 as compared to the three months and nine months ended May 31, 2013 were primarily the result of an increase to incremental selling, general and administrative expense resulting from the acquisition of Nypro, which tends to generate a higher amount of selling, general and administrative expenses on a relative basis than our other operations, during the fourth quarter of fiscal year 2013. The increase during the nine months ended May 31, 2014 compared to the nine months ended May 31, 2013 was partially offset by a decrease to selling, general and administrative expense resulting from a $38.4 million reversal to stock-based compensation expense during the first quarter of fiscal year 2014 due to decreased expectations for the vesting of certain restricted stock awards. Research and Development. Research and development expenses remained relatively consistent over the prior period at $5.7 million (0.2\% of net revenue) and $21.4 million (0.2\% of net revenue) during the three months and nine months ended May 31, 2014, respectively, compared to $6.5 million (0.2\% of net revenue) and $21.3 million (0.2\% of net revenue) during the three months and nine months ended May 31, 2013, respectively. Amortization of Intangibles. Amortization of intangible assets increased to $5.7 million and $18.2 million during the three months and nine months ended May 31, 2014, respectively, compared to $2.2 million and $6.6 million during the three months and nine months ended May 31, 2013, respectively. The increase was primarily attributable to amortization expense associated with the definite lived intangible assets acquired in connection with the acquisition of Nypro. 30

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Restructuring and Related Charges.

a. 2014 Restructuring Plan

In conjunction with the 2014 Restructuring Plan, we recorded a $0.2 million reversal and charged $42.3 million of restructuring and related charges to the Condensed Consolidated Statement of Operations during the three months and nine months ended May 31, 2014, respectively. The 2014 Restructuring Plan is intended to address the termination of our business relationship with Blackberry Limited. The restructuring and related charges during the nine months ended May 31, 2014 include cash costs of $16.4 million related to employee severance and benefit costs, $1.7 million related to lease costs and $1.5 million of other related costs, as well as non-cash costs of $22.7 million related to asset write off costs. At May 31, 2014, accrued liabilities of approximately $0.7 million related to the 2014 Restructuring Plan are expected to be paid over the next twelve months. During the three months and nine months ended May 31, 2014, $5.2 million and $18.7 million, respectively, was paid relating to the 2014 Restructuring Plan. We currently expect to recognize approximately $42.3 million to $70.0 million in pre-tax restructuring and other related costs over the course of fiscal year 2014 under the 2014 Restructuring Plan. A majority of the total restructuring costs are expected to be related to employee severance and benefit costs and asset write offs. The exact amount and timing of these charges and cash outflows, as well as the estimated cost ranges by category type, have not been finalized, but are expected to be complete as of August 31, 2014. Much of the 2014 Restructuring Plan as discussed reflects our intention only and restructuring decisions, and the timing of such decisions, at certain plants are still subject to the finalization of timetables for the transition of functions and consultation with our employees and their representatives. Upon its completion, the 2014 Restructuring Plan is expected to yield annualized cost savings in the range of $10.0 million to $25.0 million on a net basis after taking into account potential future BlackBerry Limited revenues that will not be earned due to the termination of our business relationship. The majority of these annual cost savings are expected to be reflected as a reduction in cost of revenue. We began to realize a portion of these cost savings in the second quarter of fiscal year 2014 and we are still evaluating the full effect of the cost savings and any cost savings offsets.

b. 2013 Restructuring Plan

In conjunction with the 2013 Restructuring Plan, we charged $12.6 million and $23.3 million of restructuring and related charges to the Condensed Consolidated Statement of Operations during the three months and nine months ended May 31, 2014, respectively, compared to $23.2 million during the three months and nine months ended May 31, 2013. The 2013 Restructuring Plan is intended to better align our manufacturing capacity in certain geographies and to reduce our worldwide workforce in order to reduce operating expenses. These restructuring activities are intended to address current market conditions and customer requirements. The restructuring and related charges during the three months and nine months ended May 31, 2014 include cash costs of $6.8 million and $14.5 million related to employee severance and benefit costs, respectively, $0.0 and $0.4 million related to lease costs, respectively, and $0.5 million and $1.1 million of other related costs, respectively, as well as non-cash costs of $5.3 million and $7.3 million, respectively, related to asset write off costs. The restructuring and related charges during the three months and nine months ended May 31, 2013 include cash costs of $17.6 million related to employee severance and benefit costs and non-cash costs of $5.6 million related to asset write-off costs. At May 31, 2014, accrued liabilities of approximately $50.1 million related to the 2013 Restructuring Plan are expected to be paid over the next twelve months. During the three months and nine months ended May 31, 2014, $10.9 million and $22.9 million, respectively, was paid relating to the 2013 Restructuring Plan. We currently expect to recognize approximately $179.0 million, excluding the restructuring and related charges previously incurred for the AMS discontinued operations, in pre-tax restructuring and other related costs over the course of fiscal years 2013, 2014 and 2015 under the 2013 Restructuring Plan. While we expect the total amount of pre-tax restructuring and other related costs will be $179.0 million, we can only provide estimate ranges for certain of the major types of costs associated with the action: $123.0 million to $143.0 million of employee severance and benefit costs; $28.0 million to $48.0 million of asset write-off costs; $3.0 million of contract termination costs and $5.0 million of other related costs. Since the inception of the 2013 Restructuring Plan, a total of $103.8 million of restructuring and related costs have been recognized. A majority of the total restructuring costs are expected to be related to employee severance and benefit arrangements. The charges related to the 2013 Restructuring Plan, excluding asset write off costs, are currently expected to result in cash expenditures in a range of $131.0 million to $151.0 million that will be payable over the course of our fiscal years 2013, 2014 and 2015. The exact amount and timing of these charges and cash outflows, as well as the estimated cost ranges by category type, have not been finalized. Much of the 2013 Restructuring Plan as discussed reflects our intention only and restructuring decisions, and the timing of such decisions, at certain plants are still subject to the finalization of timetables for the transition of functions and consultation with our employees and their representatives. 31

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Upon its completion, the 2013 Restructuring Plan is expected to yield annualized cost savings of approximately $65.9 million. The expected avoided annual costs consist of a reduction in employee related expenses of $64.4 million, a reduction in depreciation expense associated with asset disposals of $1.1 million, and a reduction in rent expense associated with leased buildings that have been vacated of approximately $0.4 million. The majority of these annual cost savings are expected to be reflected as a reduction in cost of revenue as well as a reduction of selling, general and administrative expense. These annual costs savings are expected to be partially offset by decreased revenues and incremental costs expected to be incurred by those plants to which certain production will be shifted. After considering these partial cost savings offsets, we expect to realize annual cost savings of approximately $65.0 million. Other Expense. Other expense remained relatively consistent at $1.5 million and $4.5 million during the three months and nine months ended May 31, 2014, respectively, compared to $1.4 million and $4.5 million during the three months and nine months ended May 31, 2013, respectively. Interest Income. We recorded interest income of $1.1 million and $2.1 million during the three months and nine months ended May 31, 2014, respectively, compared to $0.4 million and $1.3 million during the three months and nine months ended May 31, 2013, respectively. The increase was primarily due to dividends (which are treated as interest income) on the Senior Non-Convertible Cumulative Preferred Stock received in connection with the sale of the AMS business on April 1, 2014. Interest Expense. We recorded interest expense of $32.1 million and $97.3 million during the three months and nine months ended May 31, 2014, respectively, compared to $30.7 million and $89.5 million during the three months and nine months ended May 31, 2013, respectively. The increase was primarily due to increased borrowings associated with our five year unsecured credit facility amended as of March 19, 2012 (the "Amended and Restated Credit Facility"). Income Tax Expense. Income tax expense reflects an effective tax rate of (54.7)\% and 70.9\% during the three months and nine months ended May 31, 2014, respectively, as compared to an effective tax rate of 36.1\% and 28.3\% during the three months and nine months ended May 31, 2013, respectively. The effective tax rate for the three months ended May 31, 2014 decreased from the effective tax rate for the three months ended May 31, 2013 primarily due to the overall loss from continuing operations despite having income in certain high tax-rate jurisdictions. The losses primarily occurred in tax jurisdictions in which little tax benefit has been recorded due to existing valuation allowances. This effective tax rate decrease was partially offset by decreases in income in low tax-rate jurisdictions that had no related tax benefit and the reversal of an existing valuation allowance during fiscal year 2013. The effective tax rate for the nine months ended May 31, 2014 increased from the effective tax rate for the nine months ended May 31, 2013 primarily due to the decrease in income from continuing operations in low tax-rate jurisdictions that had no related tax benefit, restructuring costs with minimal related tax benefit, and the reversal of an existing valuation allowance during fiscal year 2013. This effective tax rate increase was partially offset by a tax benefit from revaluing deferred tax assets related to the enactment of the Mexico 2014 tax reform and a partial valuation allowance release related to the U.S. deferred tax assets during fiscal year 2014. For the nine months ended May 31, 2014, we recorded out-of-period adjustments that increased net income from continuing operations by approximately $18.0 million, which related to fiscal year 2013 income tax benefit adjustments occurring in fiscal year 2014, reducing income tax expense. We assessed and concluded that these adjustments are not material to either the consolidated quarterly or annual financial statements for all impacted periods. The effective tax rate differed from the U.S. federal statutory rate of 35\% during the three months and nine months ended May 31, 2014 and 2013 due to the mix of earnings from more income in high tax-rate jurisdictions and losses in tax jurisdictions with existing valuation allowances. The effective tax rate was driven higher during these periods primarily due to restructuring costs with minimal related tax benefit. The effective tax rate was driven lower during these periods primarily due to: (a) tax incentives granted to sites in Brazil, Malaysia, Poland, Singapore and Vietnam; (b) income in tax jurisdictions with lower statutory tax rates than the U.S.; (c) a tax benefit from revaluing deferred tax assets related to the enactment of the Mexico 2014 tax reform during the second quarter of fiscal year 2014; (d) a partial valuation allowance release related to the U.S. deferred tax assets during the first quarter of fiscal year 2014; and (e) the reversal of an existing valuation allowance during the third quarter of fiscal year 2013. The material tax incentives expire at various dates through 2020. Such tax incentives are subject to conditions with which we expect to continue to comply.

Non-U.S. GAAP Core Financial Measures

The following discussion and analysis of our financial condition and results of operations include certain non-U.S. GAAP financial measures as identified in the reconciliation below. The non-U.S. GAAP financial measures disclosed herein do not have standard meaning and may vary from the non-U.S. GAAP financial measures used by other companies or how we may calculate those measures in other instances from time to time. Non-U.S. GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP. Also, our "core" financial measures should not be construed as an inference by us that our future results will be unaffected by those items which are excluded from our "core" financial measures. Management believes that the non-U.S. GAAP "core" financial measures set forth below are useful to facilitate evaluating the past and future performance of our ongoing manufacturing operations over multiple periods on a comparable basis by excluding the effects of the amortization of intangibles, stock-based compensation expense and related charges, restructuring and related charges, 32

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distressed customer charges, acquisition costs and certain purchase accounting adjustments, loss on disposal of subsidiaries, settlement of receivables and related charges, impairment of notes receivable and related charges, goodwill impairment charges, income (loss) from discontinued operations, gain 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-U.S. GAAP "core" financial measures as a factor in determining certain employee performance when determining incentive compensation. We are reporting "core" operating income and "core" earnings to provide investors with an additional method for assessing operating income and earnings, by presenting what we believe are our "core" manufacturing operations. A significant portion (based on the respective values) of the items that are excluded for purposes of calculating "core" operating income and "core" earnings also impacted certain balance sheet assets, resulting in a portion of an asset being written off without a corresponding recovery of cash we may have previously spent with respect to the asset. In the case of restructuring charges, we may be making associated cash payments in the future. In addition, although, for purposes of calculating "core" operating income and "core" earnings, we exclude stock-based compensation expense (which we anticipate continuing to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholders' ownership interest. We encourage you to evaluate these items and the limitations for purposes of analysis in excluding them.

Included in the table below is a reconciliation of the non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures as provided in our Condensed Consolidated Financial Statements (in thousands):

Three months ended Nine months ended May 31, May 31, May 31, May 31, 2014 2013 2014 2013

Operating (loss) income (U.S. GAAP) $ (1,613 ) $ 93,128 $

157,431 $ 379,859 Amortization of intangibles 5,679 2,221 18,180 6,591 Stock-based compensation expense and related charges 14,561 14,433 6,627 47,620 Restructuring and related charges 12,446 23,182 65,652 23,182 Distressed customer charges 11,371 - 15,113 - Loss on disposal of subsidiaries 2,905 - 2,905 - Impairment of notes receivable and related charges - 25,597 - 25,597

Core operating income (Non-U.S. GAAP) $ 45,349 $ 158,561 $

265,908 $ 482,849

Net income attributable to Jabil Circuit, Inc. (U.S. GAAP) $ 188,255 $ 50,083 $ 267,510 $ 244,463 Amortization of intangibles, net of tax 5,661 1,975 15,084 6,342 Stock-based compensation expense and related charges, net of tax 14,298 14,806 5,884 47,587 Restructuring and related charges, net of tax 9,862 21,977 55,443 21,977 Distressed customer charges, net of tax 8,889 - 11,234 - Acquisition costs and certain purchase accounting adjustments, net of tax (a) - - (9,064 ) - Loss on disposal of subsidiaries, net of tax 2,905 - 2,905 - Impairment of notes receivable and related charges, net of tax - 19,747 - 19,747 Income from discontinued operations, net of tax (2,699 ) (10,379 ) (21,515 ) (37,505 ) Gain on sale of discontinued operations, net of tax (238,497 ) - (229,542 ) -

Core (loss) earnings (Non-U.S. GAAP) $ (11,326 ) $ 98,209 $

97,939 $ 302,611

Earnings per share: (U.S. GAAP) Basic $ 0.93 $ 0.25 $ 1.31 $ 1.20 Diluted $ 0.93 $ 0.24 $ 1.30 $ 1.18 Core (loss) earnings per share: (Non-U.S. GAAP) Basic $ (0.06 ) $ 0.48 $ 0.48 $ 1.49 Diluted $ (0.06 ) $ 0.47 $ 0.48 $ 1.46 Weighted average shares outstanding used in the calculations of earnings per share (U.S. GAAP and Non-U.S. GAAP): Basic 202,008 202,648 203,995 203,142 Diluted 202,008 207,569 205,699 207,540

(a) This tax benefit relates to the partial release of the U.S. valuation

allowance due to the U.S. deferred tax liabilities from the Nypro

acquisition, which represent future sources of taxable income to support the

realization of the deferred tax assets. 33

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Core operating income decreased 71.4\% to $45.3 million and 44.9\% to $265.9 million during the three months and nine months ended May 31, 2014, respectively, compared to $158.6 million and $482.8 million during the three months and nine months ended May 31, 2013, respectively. Core (loss) earnings decreased 111.5\% to $(11.3) million and 67.6\% to $97.9 million during the three months and nine months ended May 31, 2014, respectively, compared to $98.2 million and $302.6 million for the three months and nine months ended May 31, 2013, respectively. These decreases were the result of the same factors described above in "Management's Discussion and Analysis of Financial Condition and Results of Operations - The Three Months and Nine Months Ended May 31, 2014, Compared to the Three Months and Nine Months Ended May 31, 2013."

Acquisitions and Expansion

As discussed in Note 14 - "Business Acquisition" to the Condensed Consolidated Financial Statements, we completed our acquisition of Nypro during the fourth quarter of fiscal year 2013. Acquisitions are accounted for using the acquisition method of accounting. Our Condensed Consolidated Financial Statements include the operating results of each business from the date of acquisition. See "Risk Factors - We have on occasion not achieved, and may not in the future achieve, expected profitability from our acquisitions."

Seasonality

Production levels for a portion of the DMS and HVS segments are subject to seasonal influences. We may realize greater net revenue during our first fiscal quarter due to higher demand for consumer related products manufactured in the DMS and HVS segments during the holiday selling season. Therefore, quarterly results should not be relied upon as necessarily being indicative of results for the entire fiscal year.

Liquidity and Capital Resources

At May 31, 2014, our principal sources of liquidity consisted of cash, available borrowings under our credit facilities, our asset-backed securitization programs, our trade accounts receivable factoring agreement and our committed and uncommitted trade accounts receivable sale programs.

Cash Flows

The following table sets forth selected consolidated cash flow information during the nine months ended May 31, 2014 and 2013 (in thousands):

Nine months ended May 31, May 31, 2014 2013 Net cash provided by operating activities $ 409,388 $ 809,681 Net cash provided by (used in) investing activities 270,848 (454,323 ) Net cash used in financing activities (374,466 ) (205,137 ) Effect of exchange rate changes on cash and cash equivalents 5,123

(15,751 )

Net increase in cash and cash equivalents $ 310,893 $ 134,470 34

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Net cash provided by operating activities during the nine months ended May 31, 2014 was approximately $409.4 million. This resulted primarily from net income of $267.9 million, $366.6 million in non-cash depreciation and amortization expense, a $315.3 million decrease in inventories, a $269.9 million decrease in prepaid expenses and other current assets and a $102.7 million decrease in accounts receivable; which were partially offset by a $666.8 million decrease in accounts payable and accrued expense and $239.3 million in non-cash gain on sale of discontinued operations. The decrease in inventories was primarily a result of a continued focus on inventory management coupled with lower sales levels. The decrease in prepaid expenses and other current assets was primarily due to decreases in the deferred purchase price receivable under our asset-backed securitization programs due to lower levels of sales and the timing of cash funding provided by the unaffiliated conduits and financial institutions as well as decreases in advance deposits. The decrease in accounts receivable was primarily driven by the timing of sales and collections activity coupled with lower sales levels. The decrease in accounts payable and accrued expenses was primarily driven by the timing of purchases and cash payments as well as decreased salary and salary related expenses associated with headcount reductions. Net cash provided by investing activities during the nine months ended May 31, 2014 was $270.8 million. This consisted primarily of $544.5 million in proceeds from the sale of AMS and $141.1 million in proceeds from the sale of property, plant and equipment, which included a one-time sale of approximately $121.9 million of equipment to a customer who allowed the equipment to remain on our premises on consignment; which were partially offset by capital expenditures of $414.7 million principally for machinery and equipment for new business within our DMS segment, maintenance levels of machinery and equipment and information technology infrastructure upgrades. Net cash used in financing activities during the nine months ended May 31, 2014 was $374.5 million. This resulted from our receipt of approximately $5.2 billion of proceeds from borrowings under existing debt agreements, which primarily included an aggregate of $5.1 billion of borrowings under the Amended and Restated Credit Facility. This was offset by repayments in an aggregate amount of approximately $5.3 billion, which primarily included an aggregate of $5.3 billion of repayments under the Amended and Restated Credit Facility. In addition, during the nine months ended May 31, 2014, we paid $129.1 million, including commissions, to repurchase 7,326,673 of our common shares, we paid $52.2 million in dividends to stockholders and we paid $34.2 million to the IRS or 1,561,171 of our common shares on behalf of certain employees to satisfy minimum tax obligations related to the vesting of certain restricted stock awards (as consideration for these payments to the IRS, we withheld $34.2 million of employee-owned common stock related to this vesting).

Sources

We may need to finance day-to-day working capital needs, as well as future growth and any corresponding working capital needs, with additional borrowings under our Amended and Restated Credit Facility (which is further discussed in the following paragraphs) and our other revolving credit facilities described below, as well as additional public and private offerings of our debt and equity. Currently, we have a shelf registration statement with the SEC registering the potential sale of an indeterminate amount of debt and equity securities in the future, from time-to-time over the three years following the registration, to augment our liquidity and capital resources. The current shelf registration statement will expire in the first quarter of fiscal year 2015 at which time we currently anticipate filing a new shelf registration statement. Any future sale or issuance of equity or convertible debt securities could result in dilution to current or future shareholders. Further, we may issue debt securities that have rights and privileges senior to those of holders of ordinary shares, and the terms of this debt could impose restrictions on operations, increase debt service obligations, limit our flexibility as a result of debt service requirements and restrictive covenants, potentially negatively affect our credit ratings, and limit our ability to access additional capital or execute our business strategy. We continue to assess our capital structure and evaluate the merits of redeploying available cash to reduce existing debt or repurchase common shares. We regularly sell designated pools of trade accounts receivable under two asset-backed securitization programs, a factoring agreement, a committed trade accounts receivable sale program and three uncommitted trade accounts receivable sale programs (collectively referred to herein as the "programs"). Transfers of the receivables under the programs are accounted for as sales and, accordingly, net receivables sold under the programs are excluded from accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. Discussion of each of the programs is included in the following paragraphs. In addition, refer to Note 8 - "Trade Accounts Receivable Securitization and Sale Programs" to the Condensed Consolidated Financial Statements for further details on the programs. Also, as described in Note 2 - "Discontinued Operations" to the Condensed Consolidated Financial Statements, on April 1, 2014, we completed the sale of our AMS business (except for the Malaysian operations due to certain regulatory approvals that are still pending in that jurisdiction) for consideration of $725.0 million, which consists of $675.0 million in cash and an aggregate liquidation preference value of $50.0 million in Senior Non-Convertible Cumulative Preferred Stock of iQor that accretes dividends at an annual rate of 8 percent and is redeemable in nine years or upon a change in control. As a result of the sale, we have additional funds to finance certain of our needs. 35

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a. Asset-Backed Securitization Programs

We continuously sell designated pools of trade accounts receivable under our asset-backed securitization programs to special purpose entities, which in turn sell 100\% of the receivables to conduits administered by unaffiliated financial institutions (for the North American asset-backed securitization program) and an unaffiliated financial institution (for the foreign asset-backed securitization program). Any portion of the purchase price for the receivables which is not paid in cash upon the sale taking place is recorded as a deferred purchase price receivable, which is paid from available cash as payments on the receivables are collected. Net cash proceeds up to a maximum of $200.0 million for the North American asset-backed securitization program, currently scheduled to expire on October 21, 2014, are available at any one time. We decreased our facility limit from $300.0 million to $200.0 million during the first quarter of fiscal year 2014. Net cash proceeds up to a maximum of $200.0 million for the foreign asset-backed securitization program, currently scheduled to expire on May 15, 2015, are available at any one time. In connection with our asset-backed securitization programs, at May 31, 2014, we had sold $758.4 million of eligible trade accounts receivable, which represents the face amount of total sold outstanding receivables at that date. In exchange, we received cash proceeds of $349.1 million, and a deferred purchase price receivable. At May 31, 2014, the deferred purchase price receivable in connection with the asset-backed securitization programs totaled $409.3 million. The deferred purchase price receivable was recorded initially at fair value as prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.

b. Trade Accounts Receivable Factoring Agreement

In connection with a factoring agreement, we transfer ownership of eligible trade accounts receivable of a foreign subsidiary without recourse to a third party purchaser in exchange for cash. Proceeds from the transfer reflect the face value of the account less a discount. In April 2014, the factoring agreement was extended through September 30, 2014, at which time it is expected to automatically renew for an additional six-month period. During the three months ended May 31, 2014, we sold no trade accounts receivable and received no cash proceeds under the factoring agreement. During the nine months ended May 31, 2014, we sold $1.1 million of trade accounts receivable and received cash proceeds of $1.1 million under the factoring agreement.

c. Trade Accounts Receivable Sale Programs

In connection with four separate trade accounts receivable sale agreements with unaffiliated financial institutions, we may elect to sell, at a discount, on an ongoing basis, up to a maximum of $200.0 million, $150.0 million, $150.0 million and $100.0 million, respectively, of specific trade accounts receivable at any one time. The $200.0 million trade accounts receivable sale agreement is a committed facility that was renewed during the first quarter of fiscal year 2014 and is scheduled to expire on November 28, 2014. One $150.0 million trade accounts receivable sale agreement is an uncommitted facility that was renewed during the first quarter of fiscal year 2014 and is scheduled to expire on November 28, 2014. The other $150.0 million trade accounts receivable sale agreement is an uncommitted facility that was entered into during the second quarter of fiscal year 2014 and is subject to expiration on August 31, 2014. The $100.0 million trade accounts receivable sale agreement is an uncommitted facility that was entered into during the first quarter of fiscal year 2014 and is scheduled to expire on November 1, 2014, although any party may elect to terminate the agreement upon 15 days prior notice. The agreement will be automatically extended each year for additional 365 day periods until November 1, 2018, unless any party gives no less than 30 days prior notice that the agreement should not be extended. A $40.0 million uncommitted trade accounts receivable sale agreement, which we were previously party to, was terminated effective March 19, 2014. During the three months and nine months ended May 31, 2014, we sold $0.4 billion and $1.3 billion of trade accounts receivable under these programs, respectively, and we received cash proceeds of $0.4 billion and $1.3 billion during the three months and nine months ended May 31, 2014, respectively.

Notes payable, long-term debt and capital lease obligations outstanding at May 31, 2014 and August 31, 2013, are summarized below (in thousands):

May 31, August 31, 2014 2013 7.750\% Senior Notes due 2016 $ 308,229 $ 306,940 8.250\% Senior Notes due 2018 398,570 398,284 5.625\% Senior Notes due 2020 400,000 400,000 4.700\% Senior Notes due 2022 500,000 500,000 Borrowings under credit facilities 55,007 200,000 Borrowings under loans 44,041 58,447 Capital lease obligations 31,517 35,372

Fair value adjustment related to terminated interest rate swaps on the 7.750\% Senior Notes

5,043

6,823

Total notes payable, long-term debt and capital lease obligations

1,742,407

1,905,866

Less current installments of notes payable, long-term debt and capital lease obligations

69,886

215,448

Notes payable, long-term debt and capital lease obligations, less current installments $ 1,672,521 $ 1,690,418 36

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At May 31, 2014 and August 31, 2013, we were in compliance with all covenants under the Amended and Restated Credit Facility and our asset-backed securitization programs.

Uses

On October 17, 2013, January 22, 2014 and April 17, 2014, our Board of Directors approved payment of a quarterly dividend of $0.08 per share to shareholders of record as of November 15, 2013, February 14, 2014 and May 15, 2014, respectively. Of the total cash dividend declared on October 17, 2013 of $17.2 million, $16.5 million was paid on December 2, 2013. The remaining $0.7 million is related to dividend equivalents on unvested restricted stock units that will be payable at the time the awards vest. Of the total cash dividend declared on January 22, 2014 of $17.0 million, $16.3 million was paid on March 3, 2014. The remaining $0.7 million is related to dividend equivalents on unvested restricted stock units that will be payable at the time the awards vest. Of the total cash dividend declared on April 17, 2014 of $16.7 million, $16.0 million was paid on June 2, 2014. The remaining $0.7 million is related to dividend equivalents on unvested restricted stock units that will be payable at the time the awards vest. We currently expect to continue to declare and pay regular quarterly dividends of an amount similar to our past declarations. However, the declaration and payment of future dividends are discretionary and will be subject to determination by our Board of Directors each quarter following its review of our financial performance. In December 2013, our Board of Directors authorized the repurchase of up to $200.0 million of our common shares during the twelve month period following their authorization. We repurchased 7,326,673 shares during the second and third quarters of fiscal year 2014 utilizing approximately $129.1 million of the $200.0 million authorized by our Board of Directors. Our working capital requirements and capital expenditures could continue to increase in order to support future expansions of our operations through construction of greenfield operations or acquisitions. It is possible that future expansions may be significant and may require the payment of cash. Future liquidity needs will also depend on fluctuations in levels of inventory and shipments, changes in customer order volumes and timing of expenditures for new equipment. At May 31, 2014, we had approximately $1.3 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. We estimate that approximately $971.4 million of the cash and cash equivalents held by our foreign subsidiaries could not be repatriated to the United States without potential income tax consequences. As of May 31, 2014, however, we intend to repatriate the Nypro pre-acquisition undistributed foreign earnings of approximately $240.0 million to our U.S. operations. Therefore, we recorded a deferred tax liability of approximately $58.6 million based on the anticipated U.S. income taxes of the repatriation. We intend to indefinitely reinvest the remaining earnings from our foreign subsidiaries.

For discussion of our cash management and risk management policies see "Quantitative and Qualitative Disclosures About Market Risk."

We currently anticipate that during the next 12 months, our capital expenditures will be in the range of $300.0 million to $350.0 million, principally for maintenance levels of machinery and equipment, information technology infrastructure upgrades and investments to support ongoing growth in our DMS operations. We believe that our level of resources, which include cash on hand (recently increased due to our receipt of proceeds from the sale of our AMS business on April 1, 2014), available borrowings under our revolving credit facilities, additional proceeds available under our trade accounts receivable securitization programs and committed trade accounts receivable sale program and potentially available under our uncommitted trade accounts receivable sale programs and funds provided by operations, will be adequate to fund these capital expenditures, the payment of any declared quarterly dividends, any potential acquisitions and our working capital requirements for the next 12 months. Our $200.0 million North American asset-backed securitization program is scheduled to expire on October 21, 2014, and our $200.0 million foreign asset-backed securitization program is scheduled to expire on May 15, 2015, and we may be unable to renew either of these. The $200.0 million trade accounts receivable sale agreement is a committed facility that was renewed during the first quarter of fiscal year 2014 and is scheduled to expire on November 28, 2014. One $150.0 million trade accounts receivable sale agreement is an uncommitted facility that was renewed during the first quarter of fiscal year 2014 and is scheduled to expire on November 28, 2014. The other $150.0 million trade accounts receivable sale agreement is an uncommitted facility that was entered into during the second quarter of fiscal year 2014 and is subject to expiration on August 31, 2014. The $100.0 million trade accounts receivable sale agreement is an uncommitted facility that was entered into during the first quarter of fiscal year 2014 and is scheduled 37

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to expire on November 1, 2014, although any party may elect to terminate the agreement upon 15 days prior notice. The agreement will be automatically extended each year for additional 365 day periods until November 1, 2018, unless any party gives no less than 30 days prior notice that the agreement should not be extended. A $40.0 million uncommitted trade accounts receivable sale agreement, which we were previously party to, was terminated effective March 19, 2014. We can offer no assurance under the uncommitted sales programs that if we attempt to sell receivables under such programs in the future that we will receive funding from the associated banks which would require us to utilize other available sources of liquidity, including our revolving credit facilities. Should we desire to consummate significant additional acquisition opportunities or undertake significant additional expansion activities, our capital needs would increase and could possibly result in our need to increase available borrowings under our revolving credit facilities or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on terms that we would consider acceptable. See "Risk Factors - Our amount of debt could significantly increase in the future." Contractual Obligations Our contractual obligations for short and long-term debt arrangements and capital lease obligations; future interest on notes payable, long-term debt and capital lease obligations; future minimum lease payments under non-cancelable operating lease arrangements; non-cancelable purchase order obligations for property, plant and equipment; pension and postretirement contributions and payments and capital commitments as of May 31, 2014 are summarized below. While, as disclosed below, we have certain non-cancelable purchase order obligations for property, plant and equipment, we generally do not enter into non-cancelable purchase orders for materials until we receive a corresponding purchase commitment from our customer. Non-cancelable purchase orders do not typically extend beyond the normal lead time of several weeks at most. Purchase orders beyond this time frame are typically cancelable. Payments due by period (in thousands) Less than 1 After 5 Total year 1-3 years 4-5 years years Notes payable, long-term debt and capital lease obligations (a) $ 1,737,364 $ 69,886 $ 340,854 $ 400,942 $ 925,682 Future interest on notes payable, long-term debt and capital lease obligations (b) 581,122 106,899 191,440 155,269 127,514 Operating lease obligations 383,568 82,721 124,172 69,779 106,896 Non-cancelable purchase order obligations (c) 103,047 101,300 1,747 - - Pension and postretirement contributions and payments (d) 14,195 4,568 1,424 2,175 6,028 Capital commitments (e) 900 900 - - - Total contractual cash obligations (f) $ 2,820,196 $ 366,274 $ 659,637 $ 628,165 $ 1,166,120

(a) The above table excludes a $5.0 million fair value adjustment related to the

former interest rate swap on the 7.750\% Senior Notes.

(b) Certain of our notes payable, long-term debt and capital lease obligations

pay interest at variable rates. In the contractual obligations table above,

we have elected to apply estimated interest rates based on May 31, 2014

interest rates to determine the value of these future interest payments.

(c) Consists of purchase commitments entered into as of May 31, 2014 for

property, plant and equipment pursuant to legally enforceable and binding

agreements.

(d) Includes the estimated company contributions to funded pension plans for the

annualized three month period following the third quarter of fiscal year 2014

and the expected benefit payments for unfunded pension and postretirement

plans through 2023. These future payments are not recorded on the Condensed

Consolidated Balance Sheets but will be recorded as incurred.

(e) During the first quarter of fiscal year 2009, we committed $10.0 million to

an independent private equity limited partnership which invests in companies

that address resource limits in energy, water and materials (commonly

referred to as the "CleanTech" sector). Of that amount, we have invested

$9.1 million as of May 31, 2014.

(f) At May 31, 2014, we have $3.2 million and $89.2 million recorded as a current

and a long-term liability, respectively, for uncertain tax positions. We are

not able to reasonably estimate the timing of payments, or the amount by

which our liability for these uncertain tax positions will increase or

decrease over time, and accordingly, this liability has been excluded from

the above table. 38

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