1. Description of Business and Summary of Significant Accounting Policies

Jabil Circuit, Inc. (together with its subsidiaries, herein referred to as the “Company”) is an independent provider of electronic manufacturing services and solutions. The Company provides comprehensive electronics design, production and product management services to companies in the aerospace, automotive, computing, defense, digital home, energy, healthcare, industrial, instrumentation, lifestyles, mobility, mold, networking, packaging, peripherals, storage, telecommunications and wearable technology industries. The Company’s services combine a highly automated, continuous flow manufacturing approach with advanced electronic design and design for manufacturability technologies. The Company is headquartered in St. Petersburg, Florida and has manufacturing operations in the Americas, Europe and Asia.

Significant accounting policies followed by the Company are as follows:

a. Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts and operations of the Company, and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in preparing the consolidated financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the information have been included. The Company has made certain reclassification adjustments to conform prior periods’ Consolidated Financial Statements and Notes to the Consolidated Financial Statements to the current presentation, including adjustments related to discontinued operations. Refer to Note 2 – “Discontinued Operations” and Note 12 – “Concentration of Risk and Segment Data” for further details.

b. Use of Accounting Estimates

Management is required to make estimates and assumptions during the preparation of the consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements. They also affect the reported amounts of net income. Actual results could differ materially from these estimates and assumptions.

c. Cash and Cash Equivalents

The Company considers all highly liquid instruments with original maturities of 90 days or less to be cash equivalents for consolidated financial statement purposes. Cash equivalents consist of investments in money market funds with original maturities of 90 days or less. At August 31, 2014 and 2013 there were $9.6 million and $6.5 million of cash equivalents, respectively. Management considers the carrying value of cash and cash equivalents to be a reasonable approximation of fair value given the short-term nature of these financial instruments.

d. Inventories

Inventories are stated at the lower of cost or market and use a first in, first out (FIFO) method.

e. Property, Plant and Equipment, net

Property, plant and equipment is capitalized at cost and depreciated using the straight-line depreciation method over the estimated useful lives of the respective assets. Estimated useful lives for major classes of depreciable assets are as follows:


*Asset Class*		*Estimated Useful Life*
Buildings		Up to 35 years
Leasehold improvements		Shorter of lease term or useful life of the improvement
Machinery and equipment		5 to 10 years
Furniture, fixtures and office equipment		5 years
Computer hardware and software		3 to 7 years
Transportation equipment		3 years

Certain equipment held under capital leases is classified as property, plant and equipment and the related obligation is recorded as notes payable, long-term debt and capital lease obligations on the Consolidated Balance Sheets. Amortization of assets held under capital leases is included in depreciation expense in the Consolidated Statements of Operations. Maintenance and repairs are expensed as they are incurred. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Operations as a component of operating income.

f. Goodwill and Other Intangible Assets

The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over the estimated useful life of the asset. The Company tests goodwill for impairment at least annually or more frequently under certain circumstances, using a two-step method. The Company conducts this review during the fourth quarter of each fiscal year absent any triggering events. Furthermore, identifiable intangible assets that are determined to have indefinite useful economic lives are not amortized, but are separately tested for impairment at least annually, using a one-step fair value based approach or when certain indicators of impairment are present.

g. Impairment of Long-lived Assets

Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of the asset or asset group is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If the carrying amount of an asset or asset group is not recoverable, the Company recognizes an impairment loss based on the excess of the carrying amount of the long-lived asset or asset group over its respective fair value which is generally determined as the present value of estimated future cash flows or as the appraised value.

h. Revenue Recognition

The Company’s net revenue is principally from the manufacturing services of electronic equipment built to customer specifications. The Company also derives revenue to a lesser extent from design services and excess inventory sales. Revenue from manufacturing services and excess inventory sales is generally recognized, net of estimated product return costs, when goods are shipped; title and risk of ownership have passed; the price to the buyer is fixed or determinable; and collectability is reasonably assured. Design service related revenue is generally recognized upon completion and acceptance by the respective customer. The Company generally assumes no significant obligations after product shipment. Taxes that are collected from the Company’s customers and remitted to governmental authorities are presented within the Company’s Consolidated Statement of Operations on a net basis. The Company records shipping and handling costs reimbursed by the customer in revenue.

i. Accounts Receivable

Accounts receivable consist of trade receivables, notes receivable and miscellaneous receivables. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Bad debts are charged to this allowance after all attempts to collect the balance are exhausted. Allowances of $2.0 million and $2.6 million were recorded at August 31, 2014 and 2013, respectively. As the financial condition and circumstances of the Company’s customers change, adjustments to the allowance for doubtful accounts are made as necessary.

j. Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income in the period that includes the enactment date of the rate change. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has considered future taxable income and ongoing feasible tax planning strategies in assessing the need for the valuation allowance.

k. Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share data).


	Fiscal Year Ended August 31,
	2014			2013			2012
Numerator:
(Loss) income from continuing operations, net of tax	$	(1,588	)	$	319,483		$	333,683
Net income (loss) attributable to noncontrolling interests, net of tax		952			(1,391	)		1,402

(Loss) income from continuing operations attributable to Jabil Circuit, Inc., net of tax	$	(2,540	)	$	320,874		$	332,281
Discontinued operations attributable to Jabil Circuit, Inc., net of tax		243,853			50,608			62,406

Net income attributable to Jabil Circuit, Inc.	$	241,313		$	371,482		$	394,687

Denominator for basic and diluted earnings per share:
Denominator for basic earnings per share		202,497			203,096			206,160

Dilutive common shares issuable under the employee stock purchase plan and upon exercise of stock options and stock appreciation rights		—			33			315
Dilutive unvested restricted stock awards		—			4,686			4,706

Denominator for diluted earnings per share		202,497			207,815			211,181

(Loss) earnings per share attributable to the stockholders of Jabil Circuit, Inc.:
Basic:
(Loss) income from continuing operations, net of tax	$	(0.01	)	$	1.58		$	1.61

Discontinued operations, net of tax	$	1.20		$	0.25		$	0.30

Net income	$	1.19		$	1.83		$	1.91

Diluted:
(Loss) income from continuing operations, net of tax	$	(0.01	)	$	1.54		$	1.57

Discontinued operations, net of tax	$	1.20		$	0.24		$	0.30

Net income	$	1.19		$	1.79		$	1.87

No potential common shares relating to outstanding stock awards have been included in the computation of diluted earnings per share as a result of the Company’s loss from continuing operations for fiscal year 2014. The Company accordingly excluded from the computation of diluted earnings per share 3,373,275 restricted stock awards, options to purchase 1,870,150 shares of common stock and 3,864,131 stock appreciation rights for fiscal year 2014.

For fiscal year 2013, options to purchase 3,664,364 shares of common stock and 4,485,266 stock appreciation rights were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

For fiscal year 2012, options to purchase 3,748,037 shares of common stock and 4,930,935 stock appreciation rights were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

l. Foreign Currency Transactions

For the Company’s foreign subsidiaries that use a currency other than the U.S. dollar as their functional currency, the assets and liabilities are translated at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at the average exchange rate for the period. The effects of these translation adjustments are reported in other comprehensive income. Gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and remeasurement adjustments for foreign operations where the U.S. dollar is the functional currency are included in operating income.

m. Fair Value of Financial Instruments

The three levels of the fair-value hierarchy include: Level 1 – quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than quoted market prices included in Level 1 above that are observable for the asset or liability, either directly or indirectly; and Level 3 – unobservable inputs for the asset or liability.

The carrying amounts of cash and cash equivalents, trade accounts receivable, income taxes receivable, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short-term nature of these financial instruments. Refer to Note 3 – “Trade Accounts Receivable Securitization and Sale Programs”, Note 8 – “Notes Payable, Long-Term Debt and Capital Lease Obligations”, Note 9 – “Postretirement and Other Employee Benefits” and Note 13 –“Derivative Financial Instruments and Hedging Activities” for disclosure surrounding the fair value of the Company’s deferred purchase price receivables, debt obligations, pension plan assets and derivative financial instruments, respectively.

Refer to Note 2 – “Discontinued Operations” for discussion of the Company’s Senior Non-Convertible Cumulative Preferred Stock. The Senior Non-Convertible Cumulative Preferred Stock is valued each reporting period using unobservable inputs (Level 3 inputs) based on an interest rate lattice model and is classified as an available for sale security with unrealized gain (loss) recorded to accumulated other comprehensive income (loss) (“AOCI”). The unobservable inputs have an immaterial impact on the fair value calculation of the Senior Non-Convertible Cumulative Preferred Stock. At August 31, 2014, the fair value was $33.5 million, and is included within other assets on the Consolidated Balance Sheets.

n. Stock-Based Compensation

The Company recognizes stock-based compensation expense, reduced for estimated forfeitures, on a straight-line basis over the requisite service period of the award, which is generally the vesting period for outstanding stock awards. The Company recorded $9.0 million, $62.6 million and $74.9 million of stock-based compensation expense gross of tax effects, which is included in selling, general and administrative expenses within the Consolidated Statements of Operations for fiscal years 2014, 2013, and 2012, respectively. During the fiscal year ended August 31, 2014, the Company recorded a $45.8 million reversal to stock-based compensation expense due to decreased expectations for the vesting of certain restricted stock awards. The Company recorded an additional tax benefit (expense) related to the stock-based compensation expense of $1.1 million, $(0.2) million and $1.3 million, which is included in income tax expense within the Consolidated Statements of Operations for fiscal years 2014, 2013 and 2012, respectively. Included in the compensation expense recognized by the Company is $4.7 million, $4.0 million and $4.0 million related to the Company’s employee stock purchase plan (“ESPP”) during fiscal years 2014, 2013 and 2012, respectively. The Company capitalizes stock-based compensation costs related to awards granted to employees whose compensation costs are directly attributable to the cost of inventory. At August 31, 2014 and 2013, $0.3 million of stock-based compensation costs were classified as inventories on the Consolidated Balance Sheets.

Cash received from exercises under all share-based payment arrangements, including the Company’s ESPP, for fiscal years 2014, 2013 and 2012 was $15.8 million, $18.3 million and $26.0 million, respectively. The proceeds for fiscal years 2014, 2013 and 2012 were offset by $34.3 million, $20.3 million and $31.2 million, respectively, of restricted shares withheld by the Company to satisfy the minimum amount of its income tax withholding requirements. The fair value of the restricted shares withheld was determined on the date that the restricted shares vested and resulted in the withholding of 1,569,059 shares, 1,184,162 shares and 1,590,721 shares of the Company’s common stock during the fiscal years ended August 31, 2014, 2013 and 2012, respectively. The shares have been classified as treasury stock on the Consolidated Balance Sheets. The Company currently expects to satisfy share-based awards with registered shares available to be issued.

See Note 11 – “Stockholders’ Equity” for further discussion of stock-based compensation expense.

o. Comprehensive Income

Comprehensive income is the changes in equity of an enterprise except those resulting from stockholder transactions.

The following table sets forth the changes in AOCI, net of tax, by component during the fiscal year ended August 31, 2014 (in thousands):


	Foreign currency translation adjustment			Derivative instruments			Actuarial loss			Prior service cost			Unrealized loss on available for sale securities			Total
Balance at August 31, 2013	$	125,594		$	(5,050	)	$	(40,258	)	$	962			—		$	81,248
Other comprehensive income before reclassifications		8,652			2,469			(2,700	)		432			(1,513	)		7,340
Amounts reclassified from AOCI		(10,835	)		7,153			2,254			(198	)		—			(1,626	)

Other comprehensive income		(2,183	)		9,622			(446	)		234			(1,513	)		5,714

Balance at August 31, 2014	$	123,411		$	4,572		$	(40,704	)	$	1,196		$	(1,513	)	$	86,962

The unrealized losses on derivative instruments recorded to AOCI during fiscal years 2014 and 2013 are net of tax benefits of $13.6 million and $14.1 million, respectively. The actuarial loss and prior service cost recorded to AOCI at August 31, 2014 are net of a tax benefit (expense) of $8.1 million and $(0.4) million, respectively. The actuarial loss and prior service cost recorded to AOCI at August 31, 2013 are net of a tax benefit (loss) of $6.9 million and $(0.3) million, respectively.

The following table sets forth the amounts reclassified out of AOCI, net of tax, during the fiscal year ended August 31, 2014 (in thousands):


Details about AOCI Components	Amounts Reclassified from AOCI during the fiscal year ended August 31, 2014			Affected Line Item in the Consolidated Statement of Operations
Foreign currency translation adjustments	$	10,835		Gain on sale of discontinued operations, net of tax

Gains (losses) on derivative instruments:
Forward foreign exchange contracts	$	(3,475	)	Net revenue
Forward foreign exchange contracts		1,106		Cost of revenue
Forward foreign exchange contracts		(258	)	Selling, general and administrative
Forward foreign exchange contracts		(576	)	Income from discontinued operations, net of tax
Interest rate swap		(3,950	)	Interest expense

Total loss on derivative instruments	$	(7,153	)

Defined benefit pension plan items:
Recognized actuarial loss		(2,817	)	(a)
Recognized actuarial gain		563		Gain on sale of discontinued operations, net of tax

Total actuarial loss	$	(2,254	)

Amortization of prior service cost	$	198		(a)

Total reclassified	$	1,626

(a)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost. Refer to Note 9 – “Postretirement and Other Employee Benefits” for additional details.

p. Derivative Instruments

All derivative instruments are recorded gross on the Consolidated Balance Sheets at their respective fair values. The Company does not intend to use derivative financial instruments for speculative purposes. Generally, if a derivative instrument is designated as a cash flow hedge, the change in the fair value of the derivative is recorded in other comprehensive income to the extent the derivative is effective, and recognized in the Consolidated Statement of Operations when the hedged item affects earnings. If a derivative instrument is designated as a fair value hedge, the change in fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the current period. Changes in fair value of derivatives that are not designated as hedges are recorded in earnings. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash flows from the items being hedged on the Consolidated Statements of Cash Flows. Refer to Note 13 – “Derivative Financial Instruments and Hedging Activities” for further discussion surrounding the Company’s derivative instruments.