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More Asset Write-Downs Coming at Jabil Circuit?

Jabil Circuit LogoJabil Circuit Inc. recorded a $318 million impairment charge in its fiscal first quarter 2009 ended November 30. The electronics-components maker wrote-down goodwill in its consumer division -- focused on products such as cell phones, telephones, PC peripherals, and set-top boxes -- due to the deteriorating economy, tight credit markets and a drop in its stock price. Surprisingly, although its electronics manufacturing services (EMS) segment is more sensitive to the slowing economy, the company concluded that the fair value of the division continued to exceed its carrying value and no impairment was assessed, according to the company's 10-Q regulatory filing:

  • At November 30, 2008, there was $638.3 million of goodwill recorded in the EMS reporting unit. Significant assumptions used in our fair value estimate are discount rates and market multiples. We noted that an increase in the discount rate of approximately 20% for EMS would have resulted in the need for us to perform the second step of the goodwill impairment analysis. In addition, a decrease in market multiples of approximately 7% for EMS would have resulted in the need for us to have performed the second step of the goodwill impairment analysis. If we experience a further significant decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate or slower growth rates, we may need to perform an interim impairment analysis under SFAS 142 in future periods, in addition to our annual impairment test, any of which may result in future goodwill impairment charges to the EMS reporting unit. Additionally, there are no assurances that valuation multiples will not decline, discount rates will not increase, or earnings or projected earnings and cash flows of our reporting units will not decline. It is reasonably possible that such changes may occur.
The EMS division, which accounts for 59 percent of aggregate sales, supplies electronic circuit boards used in electronics, instrumentation and medical, and automobiles. However, the company is dependent on a few large customers, such as Cisco, Hewlett-Packard, and Phillips. Ergo, its pricing power is limited. Further, the division competes against other contract manufacturers in India and the Far East, many of which -- despite making no profits -- continue to pump out products in desperate attempts to meet factory fixed costs during the current cyclical downturn. Going forward, awash with excessive inventory, combined with fading demand in key industries, Jabil Circuit will likely record additional goodwill adjustments in 2009.
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