UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-14063

 

JABIL CIRCUIT, INC.

(Exact name of registrant as specified in its charter)

Delaware		38-1886260
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of March 30, 2011, there were 218,513,166 shares of the registrant’s Common Stock outstanding.

 

 

JABIL CIRCUIT, INC. AND SUBSIDIARIES
INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets at February 28, 2011 and August 31, 2010			3
Condensed Consolidated Statements of Operations for the three months and six months ended February 28, 2011 and 2010			4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended February 28, 2011 and 2010			5
Condensed Consolidated Statements of Stockholders’ Equity at February 28, 2011 and August 31, 2010			6
Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2011 and 2010			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			60
Item 3. Defaults Upon Senior Securities			61
Item 4. (Removed and Reserved)			61
Item 5. Other Information			61
Item 6. Exhibits			62
Signatures			64
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1:		FINANCIAL STATEMENTS

JABIL CIRCUIT, INC. AND SUBSIDIARIES

		February 28,				August 31,
		2011 (Unaudited)				2010
ASSETS
Current assets:
Cash and cash equivalents		$	902,317			$	744,329
Trade accounts receivable, net of allowance for doubtful accounts of $7,611 at February 28, 2011 and $13,939 at August 31, 2010			1,051,482				1,408,319
Inventories			2,160,275				2,094,135
Prepaid expenses and other current assets			600,816				349,165
Income taxes receivable			38,213				35,560
Deferred income taxes			19,152				22,510
Total current assets			4,772,255				4,654,018
Property, plant and equipment, net of accumulated depreciation of $1,257,927 at February 28, 2011 and $1,166,807 at August 31, 2010			1,547,394				1,451,392
Goodwill			49,094				28,455
Intangible assets, net of accumulated amortization of $116,088 at February 28, 2011 and $112,687 at August 31, 2010			97,750				104,113
Deferred income taxes			67,497				55,101
Other assets			78,795				74,668
Total assets		$	6,612,785			$	6,367,747
LIABILITIES AND EQUITY
Current liabilities:
Current installments of notes payable and long-term debt		$	137,508			$	167,566
Accounts payable			2,672,382				2,741,719
Accrued expenses			699,002				672,252
Income taxes payable			33,275				19,236
Deferred income taxes			4,814				4,401
Total current liabilities			3,546,981				3,605,174
Notes payable and long-term debt, less current installments			1,100,547				1,018,930
Other liabilities			62,711				63,058
Income tax liability			91,889				86,351
Deferred income taxes			2,260				1,462
Total liabilities			4,804,388				4,774,975
Commitments and contingencies Equity:
Jabil Circuit, Inc. stockholders’ equity:
Common stock, $0.001 par value, authorized 500,000,000 shares; 223,439,475 and 219,532,908 shares issued and 213,723,960 and 210,496,989 shares outstanding at February 28, 2011 and August 31, 2010, respectively			223				220
Additional paid-in capital			1,595,848				1,541,507
Retained earnings			253,664				123,303
Accumulated other comprehensive income			161,219				122,062
Treasury stock at cost, 9,715,515 shares at February 28, 2011 and 9,035,919 shares at August 31, 2010			(218,768	)			(209,046	)
Total Jabil Circuit, Inc. stockholders’ equity			1,792,186				1,578,046
Noncontrolling interests			16,211				14,726
Total equity			1,808,397				1,592,772
Total liabilities and equity		$	6,612,785			$	6,367,747

See accompanying notes to Condensed Consolidated Financial Statements.

JABIL CIRCUIT, INC. AND SUBSIDIARIES

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Net revenue		$	3,928,663			$	3,004,644			$	8,010,844			$	6,092,900
Cost of revenue			3,632,263				2,781,898				7,403,853				5,638,378
Gross profit			296,400				222,746				606,991				454,522
Operating expenses:
Selling, general and administrative			141,807				146,264				284,256				277,817
Research and development			6,540				7,425				12,281				15,122
Amortization of intangibles			5,665				6,643				11,634				13,748
Restructuring and impairment charges			196				635				628				4,070
Settlement of receivables and related charges			13,607				—				13,607				—
Loss on disposal of subsidiaries			23,944				—				23,944				15,722
Operating income			104,641				61,779				260,641				128,043
Other expense			847				1,125				647				2,163
Interest income			(739	)			(644	)			(1,589	)			(1,551	)
Interest expense			25,777				20,030				47,939				40,146
Income before income tax			78,756				41,268				213,644				87,285
Income tax expense			23,038				11,446				50,515				28,582
Net income			55,718				29,822				163,129				58,703
Net income (loss) attributable to noncontrolling interests, net of income tax expense			315				(8	)			1,049				585
Net income attributable to Jabil Circuit, Inc.		$	55,403			$	29,830			$	162,080			$	58,118
Earnings per share attributable to the stockholders of Jabil Circuit, Inc.:
Basic		$	0.26			$	0.14			$	0.75			$	0.27
Diluted		$	0.25			$	0.14			$	0.74			$	0.27
Weighted average shares outstanding:
Basic			215,170				213,625				214,781				214,040
Diluted			221,022				214,760				219,469				215,916
Cash dividends declared per common share		$	0.07			$	0.07			$	0.14			$	0.14

See accompanying notes to Condensed Consolidated Financial Statements.

JABIL CIRCUIT, INC. AND SUBSIDIARIES

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Net income		$	55,718			$	29,822			$	163,129			$	58,703
Other comprehensive income (loss):
Foreign currency translation adjustment			25,265				(33,028	)			35,996				(25,307	)
Change in fair value of derivative instruments, net of tax			1,680				(1,926	)			2,529				(166	)
Amortization of loss on hedge arrangements, net of tax			(147	)			2,025				632				2,537
Comprehensive income (loss)			82,516				(3,107	)			202,286				35,767
Comprehensive income (loss) attributable to noncontrolling interests			315				(8	)			1,049				585
Comprehensive income (loss) attributable to Jabil Circuit, Inc.		$	82,201			$	(3,099	)		$	201,237			$	35,182

     Accumulated foreign currency translation adjustments were $204.4 million at February 28, 2011 and $168.4 million at August 31, 2010. Foreign currency translation adjustments primarily consist of adjustments to consolidate subsidiaries that use a foreign currency as their functional currency.

See accompanying notes to Condensed Consolidated Financial Statements.

JABIL CIRCUIT, INC. AND SUBSIDIARIES

		Jabil Circuit, Inc. Stockholders’ Equity
		Common Stock
																		Accumulated
										Additional								Other
		Shares				Par				Paid-in				Retained				Comprehensive				Treasury				Noncontrolling				Total
		Outstanding				Value				Capital				Earnings				Income				Stock				Interests				Equity
Balance at August 31, 2010			210,496,989			$	220			$	1,541,507			$	123,303			$	122,062			$	(209,046	)		$	14,726			$	1,592,772
Shares issued upon exercise of stock options			654,929				—				9,145				—				—				—				—				9,145
Shares issued under employee stock purchase plan			506,250				1				5,648				—				—				—				—				5,649
Issuance and vesting of restricted stock awards			2,745,143				2				(2	)			—				—				—				—				—
Purchases of treasury stock under employee stock plans			(679,351	)			—				—				—				—				(9,722	)			—				(9,722	)
Recognition of stock-based compensation			—				—				39,718				—				—				—				—				39,718
Tax (shortfall) of options exercised			—				—				(168	)			—				—				—				—				(168	)
Declared dividends			—				—				—				(31,719	)			—				—				—				(31,719	)
Comprehensive income			—				—				—				162,080				39,157				—				1,049				202,286
Foreign currency adjustments attributable to noncontrolling interests			—				—				—				—				—				—				436				436
Balance at February 28, 2011			213,723,960			$	223			$	1,595,848			$	253,664			$	161,219			$	(218,768	)		$	16,211			$	1,808,397

See accompanying notes to Condensed Consolidated Financial Statements.

JABIL CIRCUIT, INC. AND SUBSIDIARIES

		Six months ended
		February 28,				February 28,
		2011				2010
Cash flows from operating activities:
Net income		$	163,129			$	58,703
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			151,874				142,461
Recognition of deferred grant proceeds			(977	)			(979	)
Amortization of loss on hedge arrangement			1,953				1,975
Amortization of debt issuance costs and discount			2,734				1,844
Recognition of stock-based compensation expense			39,801				40,493
Deferred income taxes			(6,682	)			(4,709	)
Restructuring and impairment charges			628				4,070
Provision for allowance for doubtful accounts and notes receivable			225				(264	)
Excess tax benefit from options exercised			(72	)			(125	)
Loss on sale of property			1,983				3,302
Settlement of receivables and related charges			12,673				—
Loss on disposal of subsidiaries			23,944				12,756
Change in operating assets and liabilities, exclusive of net assets acquired:
Trade accounts receivable			178,311				43,214
Inventories			(104,299	)			(361,147	)
Prepaid expenses and other current assets			(14,590	)			(25,152	)
Other assets			(10,723	)			4,027
Accounts payable and accrued expenses			(84,673	)			166,645
Income taxes payable			12,366				17,678
Net cash provided by operating activities			367,605				104,792
Cash flows from investing activities:
Cash paid for business and intangible asset acquisitions, net of cash acquired			3,985				—
Acquisition of property, plant and equipment			(207,347	)			(116,371	)
Proceeds from sale of property, plant and equipment			9,817				5,325
Cost of receivables acquired, net of cash collections			(33,247	)			—
Proceeds on disposal of available for sale investments			5,800				—
Net cash used in investing activities			(220,992	)			(111,046	)
Cash flows from financing activities:
Borrowings under debt agreements			3,149,528				1,948,926
Payments toward debt agreements			(3,100,167	)			(1,988,253	)
Net proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan			14,794				5,832
Treasury stock minimum tax withholding related to vesting of restricted stock			(9,722	)			(3,288	)
Dividends paid to stockholders			(30,214	)			(29,921	)
Bond issuance costs			(14,547	)			—
Excess tax benefit from options exercised			72				125
Net cash provided by (used in) financing activities			9,744				(66,579	)
Effect of exchange rate changes on cash and cash equivalents			1,631				(9,302	)
Net increase (decrease) in cash and cash equivalents			157,988				(82,135	)
Cash and cash equivalents at beginning of period			744,329				876,272
Cash and cash equivalents at end of period		$	902,317			$	794,137

See accompanying notes to Condensed Consolidated Financial Statements.

JABIL CIRCUIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

     The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the information set forth therein have been included. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and footnotes included in the Annual Report on Form 10-K of Jabil Circuit, Inc. (the “Company”) for the fiscal year ended August 31, 2010. Results for the three month and six month periods ended February 28, 2011 are not necessarily an indication of the results that may be expected for the full fiscal year ending August 31, 2011.

     Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period’s presentation.

Note 2. Inventories

     The components of inventories consist of the following (in thousands):

		February 28,				August 31,
		2011				2010
Raw materials		$	1,535,767			$	1,509,886
Work in process			386,028				390,069
Finished goods			238,480				194,180
Total inventories		$	2,160,275			$	2,094,135

Note 3. Earnings Per Share and Dividends

a. Earnings Per Share

     The Company calculates its basic earnings per share by dividing net income attributable to Jabil Circuit, Inc. by the weighted average number of common shares and participating securities outstanding during the period. In periods of a net loss, participating securities are not included in the basic loss per share calculation as such participating securities are not contractually obligated to fund losses. The Company’s diluted earnings per share is calculated in a similar manner, but includes the effect of dilutive securities. To the extent these securities are anti-dilutive, they are excluded from the calculation of diluted earnings per share. The following table sets forth the calculations of basic and diluted earnings per share attributable to the stockholders of Jabil Circuit, Inc. (in thousands, except earnings per share data):

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Numerator:
Net income attributable to Jabil Circuit, Inc.		$	55,403			$	29,830			$	162,080			$	58,118
Denominator for basic and diluted earnings per share:
Weighted-average common shares outstanding			213,285				209,182				212,374				208,769
Share-based payment awards classified as participating securities			1,885				4,443				2,407				5,271
Denominator for basic earnings per share			215,170				213,625				214,781				214,040
Dilutive common shares issuable under the employee stock purchase plan and upon exercise of stock options and stock appreciation rights			915				285				893				157
Dilutive unvested restricted stock awards			4,937				850				3,795				1,719
Denominator for diluted earnings per share			221,022				214,760				219,469				215,916
Earnings per share:
Income attributable to the stockholders of Jabil Circuit, Inc.:
Basic		$	0.26			$	0.14			$	0.75			$	0.27
Diluted		$	0.25			$	0.14			$	0.74			$	0.27

     For the three months and six months ended February 28, 2011, options to purchase 4,154,857 and 4,190,297 shares of common stock, respectively, and 5,364,409 and 5,401,785 stock appreciation rights, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive. For the three months and six months ended February 28, 2010, options to purchase 5,328,227 and 6,646,807 shares of common stock, respectively, and 7,997,232 and 7,997,567 stock appreciation rights, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

b. Dividends

     The following table sets forth certain information relating to the Company’s cash dividends declared to common stockholders of the Company during the six months ended February 28, 2011 and 2010:

Dividend Information

Total Cash

Dividend

Dividend

Dividends

Date of Record for

Dividend Cash

Declaration Date

per Share

Declared

Dividend Payment

Payment Date

(in thousands, except for per share data)

Fiscal year 2011:

October 25, 2010

$

0.07

$

15,563

November 15, 2010

December 1, 2010

January 25, 2011

$

0.07

$

15,634

February 15, 2011

March 1, 2011

Fiscal year 2010:

October 22, 2009

$

0.07

$

15,186

(1)

November 16, 2009

December 1, 2009

January 22, 2010

$

0.07

$

15,238

February 16, 2010

March 1, 2010

Note 4. Stock-Based Compensation

     The Company recognizes stock-based compensation expense, reduced for estimated forfeitures, on a straight-line basis over the requisite service period of the award, which is generally the vesting period for outstanding stock awards. The Company recorded $20.3 million and $39.8 million of stock-based compensation expense gross of tax effects, which is included in selling, general and administrative expenses within the Condensed Consolidated Statements of Operations for the three months and six months ended February 28, 2011, respectively. The Company recorded tax effects related to the stock-based compensation expense of $0.3 million and $0.8 million, which is included in income tax expense within the Condensed Consolidated Statements of Operations for the three months and six months ended February 28, 2011, respectively. Included in the compensation expense recognized by the Company are $1.3 million and $2.0 million related to the Company’s employee stock purchase plan (“ESPP”) during the three months and six months ended February 28, 2011, respectively. The Company recorded $26.5 million and $40.5 million of gross stock-based compensation expense, which is included in selling, general and administrative expenses within the Condensed Consolidated Statements of Operations for the three months and six months ended February 28, 2010, respectively. The Company recorded tax effects related to the stock-based compensation expense of $0.3 million and $0.6 million, which is included in income tax expense within the Condensed Consolidated Statements of Operations for the three months and six months ended February 28, 2010, respectively. Included in the compensation expense recognized by the Company are $1.3 million and $2.2 million related to the Company’s ESPP during the three months and six months ended February 28, 2010, 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 February 28, 2011 and August 31, 2010, $0.4 million and $0.2 million, respectively, of stock-based compensation costs were classified as inventories on the Condensed Consolidated Balance Sheets.

     Cash received from exercises under all share-based payment arrangements, including the Company’s ESPP, for the six months ended February 28, 2011 and 2010 was $14.8 million and $5.8 million, respectively. The proceeds for the six months ended February 28, 2011 and 2010 were offset by $9.7 million and $3.3 million, respectively, of restricted shares withheld by the Company to satisfy the minimum amount of its income tax withholding requirements. The market value of the restricted shares withheld was determined on the date that the restricted shares vested and resulted in the withholding of 679,351 shares and 218,782 shares of the Company’s common stock during the six months ended February 28, 2011 and 2010, respectively. The shares have been classified as treasury stock on the Condensed Consolidated Balance Sheets. The Company currently expects to satisfy share-based awards with registered shares available to be issued.

          A new stock award and incentive plan (the “2011 Plan”) was adopted by the Board of Directors in the first quarter of fiscal year 2011 and approved by the stockholders in the second quarter of fiscal year 2011. The 2011 Plan provides for the granting of restricted stock awards, restricted stock unit awards and other stock-based awards. The maximum aggregate number of shares that may be subject to awards under the 2011 Plan is 8,850,000. If any portion of an outstanding award that was granted under the 2002 Stock Incentive Plan (the “2002 Plan”), which was terminated immediately upon the effectiveness of the 2011 Plan, for any reason expires or is terminated or canceled or forfeited on or after the date of termination of the 2002 Plan, the shares allocable to the expired, terminated, canceled, or forfeited portion of such 2002 Plan award shall be available for issuance under the 2011 Plan.

     The current ESPP was adopted by the Company’s Board of Directors in the first quarter of fiscal year 2002 and approved by the shareholders in the second quarter of fiscal year 2002. Initially there were 2,000,000 shares reserved under the current ESPP. An additional 2,000,000 shares and 3,000,000 shares were authorized for issuance under the current ESPP and approved by stockholders in the second quarter of fiscal years 2006 and 2009, respectively. A new ESPP was adopted by the Company’s Board of Directors in the first quarter of fiscal year 2011 and approved by the shareholders in the second quarter of fiscal year 2011 with 6,000,000 shares authorized for issuance. The new ESPP will begin issuing shares after the purchase period ending June 30, 2011. The Company also adopted a tax advantaged sub-plan under the ESPP for its Indian employees. Shares are issued under the Indian sub-plan from the authorized shares under the ESPP.

a. Stock Option and Stock Appreciation Right Plans

     The Company applies a lattice valuation model for Options granted, excluding those granted under the ESPP. The lattice valuation model is a more flexible analysis to value employee Options, as compared to a Black-Scholes model, because of its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of Option holders.

     There were no options granted during the six months ended February 28, 2011. The weighted-average grant-date fair value per share of Options granted during the six months ended February 28, 2010 was $6.36. The total intrinsic value of Options exercised during the six months ended February 28, 2011 and 2010 was $3.5 million and $1.0 million, respectively. As of February 28, 2011, there was $3.0 million of unrecognized compensation costs related to non-vested Options that is expected to be recognized over a weighted-average period of 1.0 year. The total fair value of Options vested during the six months ended February 28, 2011 and 2010 was $4.9 million and $10.2 million, respectively.

     Following are the grant date weighted-average and range assumptions, where applicable, used for each respective period:

Three months ended

Six months ended

February 28,

February 28,

February 28,

February 28,

2011

2010

2011

2010

Expected dividend yield

*

1.9

%

*

1.9

%

Risk-free interest rate

*

0.1% to 3.4

%

*

0.1% to 3.4

%

Weighted-average expected volatility

*

60.2

%

*

60.2

%

Weighted-average expected life

*

5.6 years

*

5.6 years

     The following table summarizes Option activity from August 31, 2010 through February 28, 2011:

																		Weighted-
														Weighted-				Average
		Shares								Aggregate				Average				Remaining
		Available				Options				Intrinsic Value				Exercise				Contractual
		for Grant				Outstanding				(in thousands)				Price				Life (years)
Balance at August 31, 2010			10,480,001				13,154,272			$	95			$	24.10				4.09
Options authorized			8,850,000				—
Options expired			(810,611	)			—							$	31.74
Options granted			—				—								—
Options canceled			1,072,898				(1,072,898	)						$	9.84
Restricted stock awards(1)			(4,753,554	)			—
Options exercised			—				(663,640	)						$	14.08
Balance at February 28, 2011			14,838,734				11,417,734			$	14,585			$	24.10				4.0
Exercisable at February 28, 2011							10,979,767			$	14,070			$	24.26				3.9

b. Restricted Stock Awards

     Certain key employees have been granted time-based, performance-based, and market-based restricted stock awards. The time-based restricted awards granted generally vest on a graded vesting schedule over three years. The performance-based restricted awards generally vest on a cliff vesting schedule over three years and provide a range of vesting possibilities from 0% to 200%, depending on the level of achievement of the specified performance condition. The market-based restricted awards have a vesting condition that is tied to the Standard and Poor’s 500 Composite Index.

     The stock-based compensation expense for these restricted stock awards (including restricted stock and restricted stock units) is measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock. For restricted stock awards with performance conditions, stock-based compensation expense is originally based on the number of shares that would vest if the Company achieved 100% of the performance goal, which was the probable outcome at the grant date. Throughout the requisite service period, management monitors the probability of achievement of the performance condition. If it becomes probable, based on the Company’s performance, that more or less than the current estimate of the awarded shares will vest, an adjustment to stock-based compensation expense will be recognized as a change in accounting estimate. For restricted stock awards with market conditions, the market conditions are considered in the grant date fair value of the award using a lattice model, which utilizes multiple input variables to determine the probability of the Company achieving the specified market conditions. Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period regardless of whether the market condition is satisfied, provided that the requisite service period has been completed.

     At February 28, 2011, there was $99.8 million of total unrecognized stock-based compensation expense related to restricted stock awards granted under the 2002 Plan and 2011 Plan. This expense is expected to be recognized over a weighted-average period of 1.5 years.

     The following table summarizes restricted stock activity from August 31, 2010 through February 28, 2011:

						Weighted -
						Average
						Grant-Date
		Shares				Fair Value
Non-vested balance at August 31, 2010			12,189,271				$13.13
Changes during the period
Shares granted(1)			6,102,534				$14.23
Shares vested			(2,649,143	)			$17.03
Shares forfeited			(1,348,980	)			$13.04
Non-vested balance at February 28, 2011			14,293,682				$12.88

c. Employee Stock Purchase Plan

     Employees are eligible to participate in the ESPP after 90 days of employment with the Company. The ESPP permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee’s compensation, as defined in the ESPP, at a price equal to 85% of the fair value of the common stock at the beginning or end of the offering period, whichever is lower. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code.

     The maximum number of shares that a participant may purchase in an offering period is determined in June and December. As such, there were 506,250 and 740,720 shares purchased under the ESPP during the six months ended February 28, 2011 and 2010, respectively. At February 28, 2011, a total of 6,297,969 shares had been issued under the ESPP.

     The fair value of shares issued under the ESPP was estimated on the commencement date of each offering period using the Black-Scholes option pricing model. The following weighted-average assumptions were used in the model for each respective period:

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Expected dividend yield			1.1	%			0.8	%			1.1	%			0.8	%
Risk-free interest rate			0.2	%			0.2	%			0.2	%			0.2	%
Weighted-average expected volatility			49.7	%			49.0	%			49.7	%			49.0	%
Expected life		.5 years				.5 years				.5 years				.5 years

Note 5. Concentration of Risk and Segment Data

a. Concentration of Risk

     The Company operates in 24 countries worldwide. Sales to unaffiliated customers are based on the Company’s location that provides the comprehensive electronics design, production and product management services. The following table sets forth external net revenue, net of intercompany eliminations, and long-lived asset information where individual countries represent a material portion of the total (in thousands):

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
External net revenue:
Mexico		$	943,808			$	716,051			$	1,958,835			$	1,559,181
China			791,137				520,147				1,595,142				1,137,750
United States			591,461				509,953				1,144,807				938,834
Hungary			416,137				282,061				839,016				522,103
Malaysia			280,228				280,272				556,547				499,842
Brazil			171,052				137,958				371,331				272,690
Other			734,840				558,202				1,545,166				1,162,500
		$	3,928,663			$	3,004,644			$	8,010,844			$	6,092,900

		February 28,				August 31,
		2011				2010
Long-lived assets:
China		$	513,366			$	483,181
United States			257,839				255,108
Mexico			203,294				212,409
Poland			124,065				98,395
Taiwan			116,465				110,237
Malaysia			114,907				102,700
Other			364,302				321,930
		$	1,694,238			$	1,583,960

     Total foreign source net revenue represented 84.9% and 85.7% of net revenue for the three months and six months ended February 28, 2011, respectively, compared to 83.0% and 84.6% for the three months and six months ended February 28, 2010, respectively.

     Sales of the Company’s products are concentrated among specific customers. For the six months ended February 28, 2011, the Company’s five largest customers accounted for approximately 47% of its net revenue and 49 customers accounted for approximately 90% of its net revenue. Sales to the above customers were reported in the Diversified Manufacturing Services (“DMS”), Enterprise & Infrastructure (“E&I”) and High Velocity Systems (“HVS”) segments.

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

b. Segment Data

     Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.

     The Company derives its revenue from providing comprehensive electronics design, production and product management services. Management, including the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer evaluates performance and allocates resources on a segment basis. Prior to the first quarter of fiscal year 2011, the Company managed its business based on three segments, Electronic Manufacturing Services, Consumer and Aftermarket Services. On September 1, 2010, the Company reorganized its reporting structure to align with the chief operating decision maker’s management of resource allocation and performance assessment. Accordingly, the Company’s operating segments now consist of three segments — DMS, E&I and HVS. All prior period disclosures below have been restated to reflect this change.

     Net revenue for the operating segments is attributed to the segment in which the product is manufactured or service is performed. An operating segment’s performance is evaluated based on its pre-tax operating contribution, or segment income. Segment income is defined as net revenue less cost of revenue, segment selling, general and administrative expenses, segment research and development expenses and an allocation of corporate manufacturing expenses and selling, general and administrative expenses, and does not include stock-based compensation expense, amortization of intangibles, restructuring and impairment charges, settlement of receivables and related charges, loss on disposal of subsidiaries, other expense, interest income, interest expense, income tax expense or adjustment for net income attributable to noncontrolling interests. Total segment assets are defined as trade accounts receivable, inventories, net customer-related machinery and equipment, intangible assets net of accumulated amortization and goodwill. All other non-segment assets are reviewed on a global basis by management.

     The following table sets forth operating segment information (in thousands):

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Net revenue
DMS		$	1,401,361			$	951,242			$	2,796,005			$	1,904,605
E&I			1,236,805				1,038,261				2,400,917				1,941,246
HVS			1,290,497				1,015,141				2,813,922				2,247,049
		$	3,928,663			$	3,004,644			$	8,010,844			$	6,092,900

Segment income and reconciliation of income before income tax

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
DMS		$	85,908			$	40,888			$	181,184			$	99,382
E&I			57,271				46,820				109,358				76,806
HVS			25,175				7,861				59,713				25,888
Total segment income			168,354				95,569				350,255				202,076
Reconciling items:
Stock-based compensation expense			20,301				26,512				39,801				40,493
Amortization of intangibles			5,665				6,643				11,634				13,748
Restructuring and impairment charges			196				635				628				4,070
Settlement of receivables and related charges			13,607				—				13,607				—
Loss on disposal of subsidiaries			23,944				—				23,944				15,722
Other expense			847				1,125				647				2,163

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Interest income			(739	)			(644	)			(1,589	)			(1,551	)
Interest expense			25,777				20,030				47,939				40,146
Income before income tax		$	78,756			$	41,268			$	213,644			$	87,285

		February 28,				August 31,
		2011				2010
Total assets
DMS		$	2,176,440			$	2,194,998
E&I			1,252,744				1,033,910
HVS			1,108,403				1,469,476
Other non-allocated assets			2,075,198				1,669,363
		$	6,612,785			$	6,367,747

Note 6. Commitments and Contingencies

a. Legal Proceedings

     The Company is party to certain lawsuits in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

b. Warranty Provision

     The Company maintains a provision for limited warranty repair of shipped products, which is established under the terms of specific manufacturing contract agreements. The warranty liability is included in accrued expenses on the Condensed Consolidated Balance Sheets. The warranty period varies by product and customer industry sector. The provision represents management’s estimate of probable liabilities, calculated as a function of sales volume and historical repair experience, for each product under warranty. The estimate is re-evaluated periodically for accuracy. A rollforward of the warranty liability for the six months ended February 28, 2011 and 2010 is as follows (in thousands):

		Amount
Balance at August 31, 2010		$	10,828
Accruals for warranties			3,960
Warranty liabilities acquired			3,986
Settlements			(96	)
Balance at February 28, 2011		$	18,678

		Amount
Balance at August 31, 2009		$	14,280
Accruals for warranties			4,237
Settlements			(4,215	)
Balance at February 28, 2010		$	14,302

Note 7. Goodwill and Other Intangible Assets

     The Company performs a goodwill impairment analysis using the two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level, which the Company has determined to be consistent with its operating segments, by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of loss, if any.

     The Company completed its annual impairment test for goodwill during the fourth quarter of fiscal year 2010 and determined the fair values of the reporting units were substantially in excess of the carrying values and that no impairment existed as of the date of the impairment test. For each annual impairment test the Company consistently determines the fair value of its reporting units based on an average weighting of both projected discounted future results and the use of comparative market multiples. On September 1, 2010, the Company reorganized its business into the DMS, E&I and HVS segments. In doing so, the Company reassigned its goodwill to the new reporting units (which are deemed to be consistent with the new segments) and was required to perform an interim goodwill impairment test based on these new reporting units. Based on this interim goodwill impairment test, the Company determined that the fair values of its new reporting units were substantially in excess of the carrying values and that no impairment existed as of the date of the interim impairment test.

     The following table presents the changes in goodwill allocated to the Company’s reportable segments during the six months ended February 28, 2011 (in thousands):

		August 31, 2010																February 28, 2011
										Acquisitions				Foreign								Accumulated
		Gross				Accumulated				&				Currency				Gross				Impairment
Reportable Segment		Balance				Impairment Balance				Adjustments				Impact				Balance				Balance				Net Balance
DMS		$	583,423			$	(558,768	)		$	—			$	377			$	583,800			$	(558,768	)		$	25,032
E&I			335,584				(331,784	)			20,262				—				355,846				(331,784	)			24,062
HVS			132,269				(132,269	)			—				—				132,269				(132,269	)			—
Total		$	1,051,276			$	(1,022,821	)		$	20,262			$	377			$	1,071,915			$	(1,022,821	)		$	49,094

     Intangible assets consist primarily of contractual agreements and customer relationships, which are being amortized on a straight-line basis over periods of up to 10 years, intellectual property which is being amortized on a straight-line basis over a period of up to five years and a trade name which has an indefinite life. The Company completed its annual impairment test for its indefinite-lived intangible asset during the fourth quarter of fiscal year 2010 and determined that no impairment existed as of the date of the impairment test. Significant judgments inherent in this analysis included assumptions regarding appropriate revenue growth rates, discount rates and royalty rates. No significant residual value is estimated for the amortizable intangible assets. The value of the Company’s intangible assets purchased through business acquisitions is principally determined based on valuations of the net assets acquired. The following tables present the Company’s total purchased intangible assets at February 28, 2011 and August 31, 2010 (in thousands):

		Gross								Net
		carrying				Accumulated				carrying
February 28, 2011		amount				amortization				amount
Contractual agreements and customer relationships		$	84,746			$	(48,660	)		$	36,086
Intellectual property			77,535				(67,428	)			10,107
Trade name			51,557				—				51,557
Total		$	213,838			$	(116,088	)		$	97,750

		Gross								Net
		carrying				Accumulated				carrying
August 31, 2010		amount				amortization				amount
Contractual agreements and customer relationships		$	83,746			$	(43,698	)		$	40,048
Intellectual property			85,166				(68,989	)			16,177
Trade name			47,888				—				47,888
Total		$	216,800			$	(112,687	)		$	104,113

     The weighted-average amortization period for aggregate net intangible assets at February 28, 2011 is 7.6 years, which includes a weighted-average amortization period of 9.5 years for net contractual agreements and customer relationships and a weighted-average amortization period of 5.0 years for net intellectual property.

     The estimated future amortization expense is as follows (in thousands):

Fiscal year ending August 31,		Amount
2011 (remaining six months)		$	10,222
2012			13,228
2013			8,837
2014			7,653
2015			4,748
Thereafter			1,505
Total		$	46,193

Note 8. Trade Accounts Receivable Securitization and Sale Programs

The Company regularly sells designated pools of trade accounts receivable under two asset-backed securitization programs, two trade accounts receivable sale programs and a factoring program.

a. Asset-Backed Securitization Program

     In connection with the asset-backed securitization program, the Company regularly sells a designated pool of trade accounts receivable to a wholly-owned subsidiary, which in turn sells 100% of the eligible receivables to conduits, administered by unaffiliated financial institutions. This wholly-owned subsidiary is a separate bankruptcy-remote entity and its assets would be available first to satisfy the creditor claims of the conduits. As the receivables sold are collected, the wholly-owned subsidiary is able to sell additional receivables up to the maximum permitted amount under the program. Net cash proceeds of $300.0 million are available at any one time under the securitization program.

     Prior to September 1, 2010, the transactions in this program were accounted for as sales under applicable accounting guidance. Effective September 1, 2010, the Company adopted new accounting guidance that resulted in more stringent conditions for reporting the transfer of a financial asset as a sale. As a result of the adoption of this new guidance, the accounts receivable transferred under this program no longer qualified for sale treatment and as such were accounted for as secured borrowings. During the first quarter of fiscal year 2011, this program was amended to again account for the transfers of the applicable accounts receivable as sales. Under the amended 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 by the conduits from available cash as payments on the receivables are collected. The securitization program requires compliance with several financial covenants including an interest coverage ratio and debt to EBITDA ratio, as defined in the securitization agreements. The securitization agreement, as amended on November 5, 2010, expires on November 4, 2011.

     Net receivables sold under this program are excluded from trade accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The wholly-owned subsidiary is assessed a fee on the unused portion of the program of 0.50% per annum based on the average daily unused aggregate receivables sold during the period and a usage fee on the utilized portion of the program is equal to 0.95% per annum (inclusive of the unused fee) on the average daily outstanding aggregate receivables sold during the immediately preceding calendar month. The securitization conduits and the investors in the conduits have no recourse to the Company’s assets for failure of debtors to pay when due.

     The Company continues servicing the receivables sold and in exchange receives a servicing fee. Servicing fees recognized during the three months and six months ended February 28, 2011 and 2010 were not material and are included in other expense within the Condensed Consolidated Statements of Operations. The Company does not record a servicing asset or liability as the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value.

     The Company has sold $1.5 billion and $2.9 billion of eligible trade accounts receivable during the three months and six months ended February 28, 2011, respectively. In exchange, the Company has received cash proceeds of $1.2 billion and $2.7 billion during the three months and six months ended February 28, 2011, respectively, and net deferred purchase price receivables. At February 28,

2011, the deferred purchase price was approximately $218.4 million, which was recorded initially at fair value as prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The deferred purchase price receivable was valued using unobservable inputs (Level 3 inputs), primarily discounted cash flows, and due to its credit quality and short-term maturity the fair value approximated book value.

     The Company had sold $1.3 billion and $2.5 billion of eligible trade accounts receivable during the three months and six months ended February 28, 2010, respectively. In exchange, the Company had received cash proceeds of $1.1 billion and $2.3 billion during the three months and six months ended February 28, 2010, respectively, and retained an interest in the receivables of approximately $203.3 million at February 28, 2010. The Company recognized pretax losses on the sales of receivables of approximately $0.9 million and $1.3 million during the three months and six months ended February 28, 2011 compared to $1.0 million and $2.0 million during the three months and six months ended February 28, 2010, respectively, which are recorded to other expense within the Condensed Consolidated Statements of Operations. Prior to execution of the previously discussed amendment, the Company recognized interest expense of approximately $0.5 million during the first quarter of fiscal year 2011 associated with the secured borrowings.

b. Foreign Asset-Backed Securitization Program

     In connection with the foreign asset-backed securitization program, certain of the Company’s foreign subsidiaries sell, on an ongoing basis, an undivided interest in designated pools of trade accounts receivable to a special purpose entity, which in turn borrows up to $100.0 million from a third party bank and grants a security interest in the accounts receivable as collateral for the borrowings. The securitization program is accounted for as a borrowing. The Company has the power to direct the activities of the special purpose entity and the obligation to absorb the majority of the expected losses or the right to receive benefits from the transfer of trade accounts receivable into the special purpose entity and, as such, is deemed the primary beneficiary. Accordingly, the Company consolidates the special purpose entity. The loan balance is calculated based on the terms of the securitization program agreements. The foreign asset-backed securitization program requires compliance with several covenants including a limitation on certain corporate actions such as mergers, consolidations and sale of substantially all assets. The Company pays interest at designated commercial paper rates plus a spread. The securitization program expires on May 20, 2011.

     The Company continues servicing the receivables in the program and in exchange receives a servicing fee. Servicing fees recognized during the three months and six months ended February 28, 2011 and 2010 were not material and are included in interest expense within the Condensed Consolidated Statements of Operations. The Company does not record a servicing asset or liability on the Condensed Consolidated Balance Sheets as the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value.

     The Company had $58.0 million and $111.2 million of debt outstanding under the program at February 28, 2011 and 2010, respectively. In addition, the Company incurred interest expense of $0.4 million and $0.6 million recorded within the Condensed Consolidated Statements of Operations during the three months and six months ended February 28, 2011, respectively, compared to $0.7 million and $1.4 million for the three months and six months ended February 28, 2010, respectively.

c. Trade Accounts Receivable Factoring Agreement

     In connection with a factoring agreement, the Company transfers ownership of eligible trade accounts receivable of a foreign subsidiary without recourse to a third party purchaser in exchange for cash. The factoring of trade accounts receivable under this agreement is accounted for as a sale. Proceeds on the transfer reflect the face value of the account less a discount. The discount is recorded as a loss to other expense within the Condensed Consolidated Statements of Operations in the period of the sale. In September 2010, the factoring agreement was extended through March 31, 2011, at which time it is expected to automatically renew for an additional six-month period.

     The receivables sold pursuant to this factoring agreement are excluded from trade accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The Company continues to service, administer and collect the receivables sold under this program. Servicing fees recognized during the three months and six months ended February 28, 2011 and 2010 were not material. The third party purchaser has no recourse to the Company’s assets for failure of debtors to pay when due.

     The Company had sold $12.8 million and $18.1 million of trade accounts receivable at February 28, 2011 and 2010, respectively, and in exchange, received cash proceeds of $12.8 million and $18.1 million at February 28, 2011 and 2010, respectively. The resulting losses on the sales of trade accounts receivables sold under this factoring agreement were recorded to other expense within the Condensed Consolidated Statements of Operations.

d. Trade Accounts Receivable Sale Programs

     Under two separate uncommitted accounts receivable sale programs with banks, the Company and certain of its subsidiaries can elect to sell and the banks can elect to purchase at a discount, on an ongoing basis, up to a maximum of $200.0 million and $150.0 million of specific trade accounts receivable at any one time. The programs are accounted for as sales. Net receivables sold under the

programs are excluded from trade accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The $200.0 million and $150.0 million sale programs expire on May 25, 2011 and August 24, 2011, respectively.

     The Company continues servicing the receivables in the program. Servicing fees recognized during the three months and six months ended February 28, 2011 were not material and are included in other expense within the Condensed Consolidated Statements of Operations. The Company does not record a servicing asset or liability on the Condensed Consolidated Balance Sheets as the Company estimates the fee it receives in return for its obligation to service these receivables is at fair value.

     For the three and six months ended February 28, 2011, the Company had sold $649.0 million and $1.1 billion of trade accounts receivable under these programs, respectively. In exchange, the Company received cash proceeds of $648.6 million and $1.1 billion, respectively. The resulting loss on the sale of trade accounts receivable was $0.4 million and $0.7 million for the three months and six months ended February 28, 2011, respectively, which was recorded to other expense within the Condensed Consolidated Statements of Operations.

Note 9. Retirement Benefits

     The Company sponsors defined benefit pension plans in several countries in which it operates. The pension obligations relate primarily to the following: (a) a funded retirement plan in the United Kingdom, which provides benefits based on average employee earnings over a three-year service period preceding retirement and (b) primarily unfunded retirement plans mainly in Austria, France, Germany, Japan, Poland, Taiwan and The Netherlands and which provide benefits based upon years of service and compensation at retirement.

     There are no domestic pension or postretirement benefit plans maintained by the Company.

     The components of net periodic benefit cost (gain) for the Company’s pension plans are as follows (in thousands):

		Three months ended								Six months ended
		February 28,				February 28,				February 28,				February 28,
		2011				2010				2011				2010
Service cost		$	381			$	390			$	760			$	788
Interest cost			1,412				1,475				2,818				2,985
Expected long-term return on plan assets			(1,100	)			(1,093	)			(2,196	)			(2,212	)
Amortization of prior service cost			(6	)			(30	)			(13	)			(61	)
Recognized actuarial loss			506				316				1,006				640
Curtailment gain			(1,874	)			—				(1,874	)			—
Net periodic benefit cost (gain)		$	(681	)		$	1,058			$	501			$	2,140

     For the six months ended February 28, 2011, the Company has made contributions of approximately $1.8 million to its defined benefit pension plans. The Company presently anticipates total fiscal year 2011 contributions to approximate $3.6 million to $4.2 million.

Note 10. Notes Payable and Long-Term Debt

     Notes payable and long-term debt outstanding at February 28, 2011 and August 31, 2010 are summarized below (in thousands):

		February 28,				August 31,
		2011				2010
7.750% Senior Notes due 2016		$	302,632			$	301,782
8.250% Senior Notes due 2018			397,328				397,140
5.625% Senior Notes due 2020 (a)			400,000				—
Borrowings under credit facilities			77,150				73,750
Borrowings under loans (b)			2,405				342,380
Securitization program obligations			57,953				71,436
Miscellaneous borrowings			3				8
Fair value adjustment (c)			584				—
Total notes payable and long-term debt			1,238,055			$	1,186,496
Less current installments of notes payable and long-term debt			137,508				167,566
Notes payable and long-term debt, less current installments		$	1,100,547			$	1,018,930

     The $400.0 million of 5.625% senior unsecured notes (the “5.625% Senior Notes”), $312.0 million of 7.750% senior unsecured notes (the “7.750% Senior Notes”) and $400.0 million of 8.250% senior unsecured notes (the “8.250% Senior Notes”) outstanding are carried at the principal amount of each note, less any unamortized discount. The estimated fair value of these senior notes was approximately $393.0 million, $353.3 million and $455.8 million, respectively, at February 28, 2011. The fair value estimates are based upon observable market data (Level 2 criteria).

a. 5.625% Senior Notes Offering

     During the first quarter of fiscal year 2011, the Company issued the ten-year publicly registered 5.625% Senior Notes at par. The net proceeds from the offering of $400.0 million were used to fully repay the term portion of its credit facility dated as of July 19, 2007 and partially repay amounts outstanding under the Company’s foreign asset-backed securitization program. The 5.625% Senior Notes mature on December 15, 2020. Interest on the 5.625% Senior Notes is payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2011. The 5.625% Senior Notes are the Company’s senior unsecured obligations and rank equally with all other existing and future senior unsecured debt obligations. The Company is subject to covenants such as limitations on its and/or its subsidiaries’ ability to: consolidate or merge with, or convey, transfer or lease all or substantially all of the Company’s assets to, another person; create certain liens; enter into sale and leaseback transactions; create, incur, issue, assume or guarantee any funded debt (which only applies to the Company’s “restricted subsidiaries”); and guarantee any of the Company’s indebtedness (which only applies to the Company’s subsidiaries). The Company is also subject to a covenant requiring its repurchase of the 5.625% Senior Notes upon a “change of control repurchase event.”

b. Amended and Restated Credit Facility

     On December 7, 2010, the Company amended and restated its five-year $800.0 million revolving credit facility (the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provides for a revolving credit in the amount of $1.0 billion, subject to potential increases up to $1.3 billion, and expires on December 7, 2015. Interest and fees on the Amended and Restated Credit Facility advances are based on the Company’s non-credit enhanced long-term senior unsecured debt rating as determined by S&P and Moody’s. Interest is charged at a rate equal to either 0.40% to 1.50% above the base rate or 1.40% to 2.50% above the Eurocurrency rate, where the base rate represents the greatest of Citibank, N.A.’s prime rate, 0.50% above the federal funds rate or 1.0% above one-month LIBOR, and the Eurocurrency rate represents the adjusted London Interbank Offered Rate for the applicable interest period, each as more fully described in the Agreement. 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. The Company, along with its subsidiaries, are subject to the following financial covenants: (1) a maximum ratio of (a) Debt (as defined in the credit agreement) to (b) Consolidated EBITDA (as defined in the credit agreement) and (2) a minimum ratio of (a) Consolidated EBITDA to (b) interest payable on, and amortization of debt discount in respect of, debt and loss on sales of trade accounts receivables pursuant to our securitization program. In addition, the Company is subject to other covenants, such as: limitation upon liens; limitation upon mergers, etc.; limitation upon accounting changes; limitation upon subsidiary debt; limitation upon sales, etc. of assets; limitation upon changes in nature of business; payment restrictions affecting subsidiaries; compliance with laws, etc.; payment of taxes, etc.; maintenance of insurance; preservation of corporate existence, etc.; visitation rights; keeping of books; maintenance of properties, etc.; transactions with affiliates; and reporting requirements.

c. Fair Value Adjustment

     This amount represents the fair value hedge accounting adjustment related to the 7.750% Senior Notes. For further discussion of the Company’s fair value hedges, see Note 11 — “Derivative Financial Instruments and Hedging Activities” to the Condensed Consolidated Financial Statements.

Note 11. Derivative Financial Instruments and Hedging Activities

     The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, where deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivatives instruments are foreign currency fluctuation risk and interest rate risk.

     All derivative instruments are recorded gross on the Condensed Consolidated Balance Sheets at their respective fair values. The accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is initially reported as a component of accumulated other comprehensive income (“AOCI”), net of tax, and is subsequently reclassified into the line item within the Condensed Consolidated Statements of Operations in which the hedged items are recorded in the same period in which the hedged item affects earnings. The ineffective portion of the gain or loss is recognized immediately in current earnings. For derivative instruments that are not designated as hedging instruments, gains and losses from changes in fair values are recognized currently in earnings.

     For derivatives accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instruments as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in the cash flows on the related underlying exposures.

a. Foreign Currency Risk Management

     Forward contracts are put in place to manage the foreign currency risk associated with various commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. A hedging relationship existed that related to certain anticipated foreign currency denominated revenues and expenses, with an aggregate notional amount outstanding of $137.0 million and $123.2 million at February 28, 2011 and 2010, respectively. The related forward foreign exchange contracts have been designated as hedging instruments and are accounted for as cash flow hedges. The forward foreign exchange contract transactions will effectively lock in the value of anticipated foreign currency denominated revenues and expenses against foreign currency fluctuations. The anticipated foreign currency denominated revenues and expenses being hedged are expected to occur between March 1, 2011 and December 31, 2011.

     In addition to derivatives that are designated and qualify for hedge accounting, the Company also enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable, fixed purchase obligations and intercompany transactions denominated in a currency other than the functional currency of the respective operating entity. The aggregate notional amount of these outstanding contracts at February 28, 2011 and 2010 was $654.3 million and $431.5 million, respectively.

     The following table presents the Company’s assets and liabilities related to forward foreign exchange contracts measured at fair value on a recurring basis as of February 28, 2011, aggregated by the level in the fair-value hierarchy within which those measurements fall (in thousands):

		Level 1				Level 2				Level 3				Total
Assets:
Forward foreign exchange contracts		$	—			$	5,090			$	—			$	5,090
Liabilities:
Forward foreign exchange contracts			—				(3,938	)			—				(3,938	)
Total		$	—			$	1,152			$	—			$	1,152

     The Company’s forward foreign exchange contracts are measured on a recurring basis at fair value, based on foreign currency spot rates and forward rates quoted by banks or foreign currency dealers.

          The following table presents the fair value of the Company’s derivative instruments located on the Condensed Consolidated Balance Sheets utilized for foreign currency risk management purposes at February 28, 2011 (in thousands):

		Fair Values of Derivative Instruments
		At February 28, 2011
		Asset Derivatives				Liability Derivatives
		Balance Sheet		Fair		Balance Sheet		Fair
		Location		Value		Location		Value
Derivatives designated as hedging instruments
Forward foreign exchange contracts		Prepaid expenses and other current assets		$1,517		Accrued expense		$549