SANMINA CORP - Quarter Report: 2009 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
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(Mark
one)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended June 27, 2009
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period
from to .
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Commission
File Number 0-21272
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Sanmina-SCI
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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77-0228183
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Number)
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2700
N. First St., San Jose, CA
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95134
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(Address
of principal executive offices)
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(Zip
Code)
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(408)
964-3500
(Registrant’s
telephone number, including area code)
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 x No
¨
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 (Section 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 ¨ No ¨
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
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company o
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(Do
not check if a smaller
reporting
company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o No
x
As
of July 29, 2009, there were 471,656,611 shares outstanding of the issuer’s
common stock, $0.01 par value per share.
SANMINA-SCI
CORPORATION
INDEX
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Page
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|||||
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PART I.
FINANCIAL INFORMATION
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|||||
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Item
1.
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Interim
Financial Statements (Unaudited)
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||||
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Condensed
Consolidated Balance Sheets
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3 | ||||
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Condensed
Consolidated Statements of Operations
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4 | ||||
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Condensed
Consolidated Statements of Cash Flows
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5 | ||||
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Notes
to Condensed Consolidated Financial Statements
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6 | ||||
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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23 | |||
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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33 | |||
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Item
4.
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Controls
and Procedures
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34 | |||
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PART II.
OTHER INFORMATION
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|||||
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Item
1.
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Legal
Proceedings
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35 | |||
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Item
1A.
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Risk
Factors Affecting Operating Results
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35 | |||
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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39 | |||
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Item
6.
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Exhibits
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40 | |||
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Signatures
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41 | ||||
SANMINA-SCI
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
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As of
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||||||||
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June
27,
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September 27,
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|||||||
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2009
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2008
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|||||||
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(Unaudited)
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||||||||
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(In thousands)
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||||||||
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ASSETS
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$
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877,613
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$
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869,801
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||||
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Accounts
receivable, net of allowances of $13,057 and $14,934 at June 27, 2009 and
September 27, 2008, respectively
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698,504
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986,312
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||||||
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Inventories
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696,243
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813,359
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||||||
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Prepaid
expenses and other current assets
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85,799
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100,399
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||||||
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Assets
held for sale
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44,459
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43,163
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||||||
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Total
current assets
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2,402,618
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2,813,034
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||||||
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Property,
plant and equipment, net
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577,589
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599,908
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||||||
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Other
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126,009
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117,785
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||||||
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Total
assets
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$
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3,106,216
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$
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3,530,727
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||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable
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$
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710,729
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$
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908,151
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||||
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Accrued
liabilities
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156,832
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191,022
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||||||
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Accrued
payroll and related benefits
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96,377
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139,522
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||||||
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Current
portion of long-term debt
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175,700
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—
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||||||
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Total
current liabilities
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1,139,638
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1,238,695
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||||||
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Long-term
liabilities:
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||||||||
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Long-term
debt
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1,275,586
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1,481,985
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||||||
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Other
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124,737
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114,089
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||||||
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Total
long-term liabilities
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1,400,323
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1,596,074
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||||||
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Commitments
and contingencies (Note 9)
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||||||||
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Stockholders’
equity
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566,255
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695,958
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||||||
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Total
liabilities and stockholders’ equity
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$
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3,106,216
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$
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3,530,727
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||||
See
accompanying notes.
SANMINA-SCI
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended
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Nine Months Ended
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|||||||||||||||
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June
27,
2009
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June
28,
2008
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June
27,
2009
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June
28,
2008
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|||||||||||||
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(Unaudited)
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||||||||||||||||
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(In thousands, except per share data)
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||||||||||||||||
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Net
sales
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$
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1,209,150
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$
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1,903,253
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$
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3,823,521
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$
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5,498,824
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||||||||
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Cost
of sales
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1,133,390
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1,763,612
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3,595,373
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5,105,609
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||||||||||||
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Gross
profit
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75,760
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139,641
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228,148
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393,215
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||||||||||||
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Operating
expenses:
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||||||||||||||||
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Selling,
general and administrative
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57,889
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77,425
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177,931
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245,839
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||||||||||||
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Research
and development
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3,811
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5,872
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12,723
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14,731
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||||||||||||
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Amortization
of intangible assets
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1,072
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1,650
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3,745
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4,950
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||||||||||||
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Restructuring
and integration costs
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14,135
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13,256
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38,944
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68,054
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||||||||||||
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Asset
impairment
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—
|
1,700
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7,182
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1,700
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||||||||||||
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Total
operating expenses
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76,907
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99,903
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240,525
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335,274
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||||||||||||
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Operating
income (loss)
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(1,147
|
)
|
39,738
|
(12,377
|
)
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57,941
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||||||||||
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Interest
income
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761
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3,572
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6,040
|
15,018
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||||||||||||
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Interest
expense
|
(29,391
|
)
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(29,961
|
)
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(86,686
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)
|
(96,935
|
)
|
||||||||
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Other
income (expense), net
|
2,708
|
5,895
|
8,184
|
5,527
|
||||||||||||
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Interest
and other expense, net
|
(25,922
|
)
|
(20,494
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)
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(72,462
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)
|
(76,390
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)
|
||||||||
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Income
(loss) from continuing operations before income
taxes
|
(27,069
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)
|
19,244
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(84,839
|
)
|
(18,449
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)
|
|||||||||
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Provision
for income taxes
|
14,057
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7,275
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19,098
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18,972
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||||||||||||
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Net
income (loss) from continuing operations
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(41,126
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)
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11,969
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(103,937
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)
|
(37,421
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)
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|||||||||
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Income
from discontinued operations, net of tax
|
—
|
3,359
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—
|
36,251
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||||||||||||
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Net
income (loss)
|
$
|
(41,126
|
)
|
$
|
15,328
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$
|
(103,937
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)
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$
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(1,170
|
)
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|||||
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Basic
income (loss) per share from:
|
||||||||||||||||
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Continuing
operations
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$
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(0.09
|
)
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$
|
0.02
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$
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(0.21
|
)
|
$
|
(0.07
|
)
|
|||||
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Discontinued
operations
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$
|
—
|
$
|
0.01
|
$
|
—
|
$
|
0.07
|
||||||||
|
Net
income (loss)
|
$
|
(0.09
|
)
|
$
|
0.03
|
$
|
(0.21
|
)
|
$
|
0.00
|
||||||
|
Diluted
income (loss) per share from:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.09
|
)
|
$
|
0.02
|
$
|
(0.21
|
)
|
$
|
(0.07
|
)
|
|||||
|
Discontinued
operations
|
$
|
—
|
$
|
0.01
|
$
|
—
|
$
|
0.07
|
||||||||
|
Net
income (loss)
|
$
|
(0.09
|
)
|
$
|
0.03
|
$
|
(0.21
|
)
|
$
|
0.00
|
||||||
|
Weighted
average shares used in computing per share amounts:
|
||||||||||||||||
|
Basic
|
480,307
|
531,197
|
501,448
|
530,546
|
||||||||||||
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Diluted
|
480,307
|
531,323
|
501,448
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530,546
|
||||||||||||
See
accompanying notes.
SANMINA-SCI
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Nine Months Ended
|
||||||||
|
June
27,
2009
|
June
28,
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
(In thousands)
|
||||||||
|
CASH
FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$
|
(103,937
|
)
|
$
|
(1,170
|
)
|
||
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
67,047
|
74,738
|
||||||
|
Stock-based
compensation expense
|
11,524
|
10,551
|
||||||
|
Non-cash
restructuring costs
|
3,154
|
1,777
|
||||||
|
Provision
(recovery) for doubtful accounts, product returns and other net sales
adjustments
|
(1,744
|
)
|
1,115
|
|||||
|
Deferred
income taxes
|
2,895
|
(73
|
)
|
|||||
|
Impairment
of assets and long-term investments
|
10,888
|
3,469
|
||||||
|
(Gain)/loss
on extinguishment of debt
|
(13,490
|
)
|
2,237
|
|||||
|
Other,
net
|
(1,426
|
)
|
(638
|
)
|
||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
287,585
|
42,723
|
||||||
|
Inventories
|
142,573
|
108,769
|
||||||
|
Prepaid
expenses and other assets
|
16,637
|
17,006
|
||||||
|
Accounts
payable
|
(187,524
|
)
|
(88,618
|
)
|
||||
|
Accrued
liabilities and other long-term liabilities
|
(82,702
|
)
|
25,632
|
|||||
|
Cash
provided by operating activities
|
151,480
|
197,518
|
||||||
|
CASH
FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
|
||||||||
|
Net
proceeds from sales/(purchases) of long-term
investments
|
(200
|
)
|
4,754
|
|||||
|
Net
proceeds from maturities of short-term investments
|
—
|
12,713
|
||||||
|
Purchases
of property, plant and equipment
|
(55,512
|
)
|
(99,313
|
)
|
||||
|
Proceeds
from sales of property, plant and equipment
|
3,589
|
27,879
|
||||||
|
Proceeds
from sale of business
|
—
|
15,243
|
||||||
|
Cash
paid for businesses acquired, net of cash acquired
|
(29,712
|
)
|
(4,264
|
)
|
||||
|
Cash
used in investing activities
|
(81,835
|
)
|
(42,988
|
)
|
||||
|
CASH
FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
|
||||||||
|
Change
in restricted cash
|
(19,876
|
)
|
—
|
|||||
|
Repayments
of long-term debt
|
(19,597
|
)
|
(120,000
|
)
|
||||
|
Repurchases
of common stock
|
(29,246
|
)
|
—
|
|||||
|
Cash
used in financing activities
|
(68,719
|
)
|
(120,000
|
)
|
||||
|
Effect
of exchange rate changes
|
6,886
|
13,610
|
||||||
|
Increase
in cash and cash equivalents
|
7,812
|
48,140
|
||||||
|
Cash
and cash equivalents at beginning of period
|
869,801
|
933,424
|
||||||
|
Cash
and cash equivalents at end of period
|
$
|
877,613
|
$
|
981,564
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$
|
61,768
|
$
|
72,770
|
||||
|
Income
taxes (excludes refunds of $1.9 million and $9.4 million for the nine
months ended June 27, 2009 and June 28, 2008,
respectively)
|
$
|
24,086
|
$
|
25,283
|
||||
See
accompanying notes.
SANMINA-SCI
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis of Presentation
The
accompanying condensed consolidated financial statements of Sanmina-SCI
Corporation (“the Company”) have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
(“GAAP”) have been omitted pursuant to those rules or regulations. The
interim condensed consolidated financial statements are unaudited, but reflect
all normal recurring and non-recurring adjustments that are, in the opinion of
management, necessary for a fair presentation. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended September 27,
2008, included in the Company’s 2008 Annual Report on
Form 10-K.
The
preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ
materially from those estimates.
During
2008, the Company sold its personal computing and associated logistics business
(“PC Business”). Unless otherwise noted, the following discussions in the notes
to the condensed consolidated financial statements pertain to continuing
operations.
Results
of operations for the nine months ended June 27, 2009 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
Company reclassified $16.8 million from accounts receivable, net to accounts
payable on the September 27, 2008 condensed consolidated balance sheet to
conform to the current presentation. This amount represents net credit balances
associated with customer claims and adjustments.
The
Company operates on a 52 or 53 week year ending on the Saturday nearest
September 30. Fiscal 2009 will be 53 weeks, with the additional week
included in the fourth quarter. All references to years relate to fiscal years
unless otherwise noted.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard
No. 166 (SFAS No. 166),
“Accounting for Transfers of Financial Assets an amendment to FASB Statement No.
140”. SFAS No. 166 eliminates the concept of a qualifying special-purpose
entity (“QSPE”), creates more stringent conditions for reporting a transfer of a
portion of financial assets as a sale, clarifies other sale-accounting criteria,
and changes the initial measurement of a transferor’s interest in transferred
financial assets. SFAS No. 166 will be effective for the Company in the first
quarter of 2011. The Company currently uses a QSPE in conjunction with sales of
accounts receivable from customers in the United States. Upon adoption of SFAS
166, the Company will be required to consolidate the QSPE if it is still in
existence. The Company plans to implement an accounts receivable sales program
that does not require use of a QSPE prior to adoption of this
standard.
In April 2009, the
FASB issued FASB Staff Positions (FSP) FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments”. This statement
requires disclosure of the fair value of financial instruments in interim
financial statements as well as the methods and significant assumptions used to
estimate the fair value of financial instruments and discussion of changes, if
any, to those methods or assumptions during the period. Financial
instruments consist of cash and cash equivalents, foreign currency forward and
option contracts, interest rate swap agreements, accounts receivable, accounts
payable and short and long-term debt obligations. With the exception of certain
of the Company's long-term debt obligations as disclosed in Note 8, the fair
value of these financial instruments approximates their carrying amount as of
June 27, 2009 due to the nature, or short maturity, of these instruments, or the
fact that the instruments are recorded at fair value in the condensed
consolidated balance sheets. The adoption of
this standard did not impact the Company’s financial position or results of
operations.
In
February 2008, the FASB issued FSP FAS 157-2, “The Effective Date of FASB
Statement No. 157”, which delayed the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. FSP 157-2 will be effective for the Company in
the first quarter of 2010 and is expected to apply only to assets held for
sale.
In
December 2007, the FASB issued SFAS No. 141(R) (Revised 2007),
“Business
Combinations”. This statement defines the acquirer as the entity that
obtains control of one or more businesses in a business combination, establishes
the acquisition date as the date that the acquirer achieves control and requires
the acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date. In
addition, SFAS No. 141(R) requires expensing of acquisition-related
and restructure-related costs, remeasurement of earnout provisions at fair
value, measurement of equity securities issued at the date of close of the
transaction and capitalization of in-process research and development related
intangibles. In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that Arise from
Contingencies”. An acquirer will recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed that arises from a
contingency if the acquisition date fair value of that asset or liability can be
determined during the measurement period. If the acquisition date fair value
cannot be determined during the measurement period, an asset or liability shall
be recognized at the acquisition date if (i) information available before the
end of the measurement period indicates that it is probable that an asset
existed or that a liability had been incurred at the acquisition date, and (ii)
the amount of the asset or liability can be reasonably estimated. SFAS
No. 141(R) and FSP FAS 141(R)-1 are effective for the Company’s
business combinations for which the acquisition date is on or after the
beginning of 2010.
Note 2.
Stock-Based Compensation
Stock
compensation expense was as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Cost
of sales
|
$
|
1,316
|
$
|
1,571
|
$
|
5,181
|
$
|
4,852
|
||||||||
|
Selling,
general & administrative
|
1,673
|
1,565
|
6,122
|
5,122
|
||||||||||||
|
Research
and development
|
47
|
50
|
221
|
227
|
||||||||||||
|
Continuing
operations
|
3,036
|
3,186
|
11,524
|
10,201
|
||||||||||||
|
Discontinued
operations
|
—
|
81
|
—
|
350
|
||||||||||||
|
Total
|
$
|
3,036
|
$
|
3,267
|
$
|
11,524
|
$
|
10,551
|
||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Stock
options
|
$
|
1,896
|
$
|
1,785
|
$
|
6,845
|
$
|
5,739
|
||||||||
|
Restricted
stock awards
|
(79
|
)
|
53
|
148
|
110
|
|||||||||||
|
Restricted
stock units
|
1,219
|
1,348
|
4,531
|
4,352
|
||||||||||||
|
Continuing
operations
|
3,036
|
3,186
|
11,524
|
10,201
|
||||||||||||
|
Discontinued
operations
|
—
|
81
|
—
|
350
|
||||||||||||
|
Total
|
$
|
3,036
|
$
|
3,267
|
$
|
11,524
|
$
|
10,551
|
||||||||
The
Company’s 1999 Stock Plan (“1999 Plan”) was terminated as to future grants on
December 1, 2008. Although the 1999 Plan has been terminated, it will
continue to govern all awards granted under it prior to its termination date. On
January 26, 2009, the Company’s stockholders approved the 2009 Incentive
Plan (“2009 Plan”) and the reservation of 45.0 million shares of common stock
for issuance thereunder.
At
June 27, 2009, an aggregate of 99.7 million shares were authorized for future
issuance under the Company's stock plans, which include stock options,
stock purchase rights and restricted stock awards and units. A total of
39.5 million shares of common stock were available for grant under the
Company's stock plans as of June 27, 2009. Awards under the 2009 plan that
expire or are cancelled without delivery of shares generally become available
for issuance under the plans.
Stock
Options
Assumptions
used to estimate the fair value of stock options granted were as
follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Volatility
|
79.0
|
%
|
62.8
|
%
|
78.6
|
%
|
60.3
|
%
|
||||||||
|
Risk-free
interest rate
|
1.91
|
%
|
2.80
|
%
|
2.08
|
%
|
3.19
|
%
|
||||||||
|
Dividend
yield
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
||||||||
|
Expected
life of options
|
5.0
years
|
5.0
years
|
5.0
years
|
5.0
years
|
||||||||||||
Stock
option activity was as follows:
|
Number of
Shares
|
Weighted- Average
Exercise Price
|
Weighted- Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value of
In-The-Money
Options
|
|||||||||||||
|
($)
|
(Years)
|
($)
|
||||||||||||||
|
Outstanding,
September 27, 2008
|
46,259,242
|
5.14
|
7.31
|
1,116,547
|
||||||||||||
|
Granted
|
6,824,000
|
0.49
|
||||||||||||||
|
Cancelled/Forfeited/Expired
|
(4,598,158
|
)
|
9.42
|
|||||||||||||
|
Outstanding,
December 27, 2008
|
48,485,084
|
4.08
|
7.80
|
—
|
||||||||||||
|
Granted
|
5,710,950
|
0.30
|
||||||||||||||
|
Cancelled/Forfeited/Expired
|
(2,494,241
|
)
|
3.00
|
|||||||||||||
|
Outstanding,
March 28, 2009
|
51,701,793
|
3.71
|
7.78
|
399,344
|
||||||||||||
|
Granted
|
132,500
|
0.51
|
||||||||||||||
|
Cancelled/Forfeited/Expired
|
(2,297,573
|
)
|
10.67
|
|||||||||||||
|
Outstanding,
June 27, 2009
|
49,536,720
|
3.38
|
7.71
|
558,695
|
||||||||||||
|
Vested
and expected to vest, June 27, 2009
|
43,952,989
|
3.60
|
7.57
|
446,956
|
||||||||||||
|
Exercisable,
June 27, 2009
|
23,444,521
|
5.33
|
6.49
|
4,666
|
||||||||||||
The
weighted-average grant date fair value of stock options granted during the three
and nine months ended June 27, 2009 was $0.33 per share and $0.26 per share,
respectively. The weighted-average grant date fair value of stock options
granted during the three and nine months ended June 28, 2008 was $0.89 per share
and $0.90 per share, respectively. No stock options were exercised during these
periods. The aggregate intrinsic value in the preceding table represents the
total pre-tax intrinsic value of in-the-money options that would have been
received by the option holders had all option holders exercised their options at
the Company’s closing stock price on the date indicated.
As
of June 27, 2009, there was $24.6 million of total unrecognized
compensation expense related to stock options. This amount is expected to be
recognized over a weighted average period of 3.8 years.
Restricted
Stock Awards
Activity
with respect to the Company’s nonvested restricted stock awards was immaterial
for the three and nine months ended June 27, 2009. At June 27, 2009,
unrecognized compensation expense related to restricted stock awards was
immaterial.
Restricted
Stock Units
The
Company grants restricted stock units to executive officers, directors and
certain management employees. These units vest over periods ranging from one to
four years. The units are automatically exchanged for shares of common stock at
the vesting date. Compensation expense associated with these units is recognized
ratably over the vesting period.
At
June 27, 2009, unrecognized compensation expense related to restricted stock
units was $5.2 million, and is expected to be recognized over a weighted average
period of eight months.
Activity
with respect to the Company’s nonvested restricted stock units was as
follows:
|
Number of
Shares
|
Weighted-
Grant Date
Fair Value
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
($)
|
(Years)
|
($)
|
||||||||||||||
|
Non-vested
restricted stock units at September 27, 2008
|
4,826,490
|
3.53
|
1.15
|
7,915,444
|
||||||||||||
|
Vested
|
(40,000
|
)
|
1.63
|
|||||||||||||
|
Cancelled
|
(78,000
|
)
|
3.72
|
|||||||||||||
|
Non-vested
restricted stock units at December 27, 2008
|
4,708,490
|
3.55
|
0.91
|
2,265,835
|
||||||||||||
|
Granted
|
1,565,520
|
0.30
|
||||||||||||||
|
Vested
|
(1,265,841
|
)
|
2.97
|
|||||||||||||
|
Cancelled
|
(413,083
|
)
|
2.57
|
|||||||||||||
|
Non-vested
restricted stock units at March 28, 2009
|
4,595,086
|
2.68
|
0.89
|
1,700,182
|
||||||||||||
|
Vested
|
(26,664
|
)
|
0.30
|
|||||||||||||
|
Cancelled
|
(33,500
|
)
|
4.80
|
|||||||||||||
|
Non-vested
restricted stock units at June 27, 2009
|
4,534,922
|
2.68
|
0.68
|
1,813,969
|
||||||||||||
|
Non-vested
restricted stock units expected to vest at June 27,
2009
|
3,491,890
|
2.68
|
0.68
|
1,396,756
|
||||||||||||
Note
3. Income Tax
The
provision for income tax expense was $14.1 million and $19.1 million for the
three and nine months ended June 27, 2009, respectively, compared to $7.3
million and $19.0 million for the three and nine months ended June 28, 2008.
Various factors affect the provision for income tax expense including the
geographic composition of pre-tax income/(loss), expected annual pre-tax
income/(loss), implementation of tax planning strategies and possible outcomes
of audits and other uncertain tax positions. Management carefully monitors these
factors and timely adjusts the interim income tax rate accordingly.
As
of September 27, 2008, the Company had a long-term liability for net
unrecognized tax benefits, including accrued interest, of $25.9 million,
all of which, if recognized, would result in a reduction of the Company’s
effective tax rate. During the nine months ended June 27, 2009, the Company’s
long-term liability for net unrecognized tax benefits increased $13.5 million
for current year positions and interest and decreased $8.5 million for prior
year positions and $1.6 million for settlements. The Company’s policy is to
classify interest and penalties on unrecognized tax benefits as income tax
expense.
During
the three months ended June 27, 2009, the Company’s long-term liability for
unrecognized benefits increased $11.3 million for current year tax positions and
interest and decreased $1.7 million for prior year tax positions. It is
reasonably possible that the amount recorded by the Company during the three
months ended June 27, 2009 could significantly increase or decrease within the
next 12 months based on final determinations by the taxing authorities and
resolution of any disputes by the Company.
In
general, the Company is no longer subject to United States of America federal or
state income tax examinations for years before 2003, except to the extent that
tax attributes in these years were carried forward to years remaining open for
audit, and to examinations for years prior to 2001 in its major foreign
jurisdictions.
Note 4.
Acquisition
On March 29, 2009, the
Company completed its purchase of all outstanding stock of a JDS Uniphase Corp.
(“JDSU”) entity and began to provide manufacturing services to JDSU pursuant to
an arrangement entered into in conjunction with the acquisition. The business
acquired from JDSU manufactures a variety of optical components and modules that
are used in JDSU’s optical communication business, which ultimately serves
telecommunications service providers, cable operators and network equipment
manufacturers. As a result of this purchase, the Company acquired leading-edge
optical technology, strengthened its research and development capabilities and
expanded its optical capabilities into a low-cost manufacturing
region.
Under
the FASB issued SFAS No. 141, “Business Combinations”, the
total purchase price of $30.0 million was allocated to tangible and identifiable
intangible assets based on their estimated fair values. The Company performed a
valuation of the net assets acquired as of March 31, 2009 (valuation date) with
the assistance of a third party valuation firm. The excess of the fair value of
net assets acquired over the purchase price was $2.7M, which was recorded as
negative goodwill and subsequently allocated to long-term assets in accordance
with SFAS No. 141.
The
purchase price was allocated as follows:
|
(In
thousands)
|
||||
|
Current
assets
|
$ | 38,514 | ||
|
Non-current
assets, including intangible assets of $1.0 million
|
12,671 | |||
|
Current
liabilities
|
(17,705 | ) | ||
|
Non-current
liabilities
|
(3,468 | ) | ||
|
Total
|
$ | 30,012 | ||
The
condensed consolidated financial statements include the operating results of the
acquired business from the date of acquisition. Pro forma results of operations
for the quarter ended June 27, 2009 are not presented because the effects were
not material to the Company’s financial results.
Note 5.
Inventories
Components
of inventories were as follows:
|
As
of
|
||||||||
|
June
27,
2009
|
September 27,
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Raw
materials
|
$
|
502,933
|
$
|
591,119
|
||||
|
Work-in-process
|
100,223
|
106,784
|
||||||
|
Finished
goods
|
93,087
|
115,456
|
||||||
|
Total
|
$
|
696,243
|
$
|
813,359
|
||||
Note 6.
Comprehensive Income (Loss)
SFAS
No. 130, “Reporting
Comprehensive Income”, establishes standards for the reporting of
comprehensive income and its components. Comprehensive income includes certain
items that are reflected in stockholders’ equity, but not included in net
income.
Other
comprehensive income (loss), net of tax as applicable, was as
follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Net
income (loss)
|
$
|
(41,126
|
)
|
$
|
15,328
|
$
|
(103,937
|
)
|
$
|
(1,170
|
)
|
|||||
|
Other
comprehensive income (loss):
|
||||||||||||||||
|
Foreign
currency translation adjustments
|
11,290
|
3,005
|
3,776
|
17,967
|
||||||||||||
|
Unrealized
holding gains (losses) on derivative financial
instruments
|
3,254
|
14,139
|
(10,543
|
)
|
(9,280
|
)
|
||||||||||
|
Minimum
pension liability
|
151
|
629
|
(1,403
|
)
|
(832
|
)
|
||||||||||
|
Comprehensive
income (loss)
|
$
|
(26,431
|
)
|
$
|
33,101
|
$
|
(112,107
|
)
|
$
|
6,685
|
||||||
The
net unrealized gain on derivative financial instruments for the three months
ended June 27, 2009 was primarily attributable to a decrease in the fair market
value of the Company’s liability under its interest rate swaps, which was
primarily caused by changes in the Company’s credit default swap
rate.
Accumulated
other comprehensive income, net of tax as applicable, consisted of the
following:
|
As of
|
||||||||
|
June
27,
2009
|
September 27,
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Foreign
currency translation adjustments
|
$
|
85,619
|
$
|
81,843
|
||||
|
Unrealized
holding losses on derivative financial instruments
|
(33,350
|
)
|
(22,807
|
)
|
||||
|
Unrecognized
net actuarial loss and unrecognized transition cost related to pension
plans
|
(4,662
|
)
|
(3,259
|
)
|
||||
|
Total
|
$
|
47,607
|
$
|
55,777
|
||||
Note 7.
Earnings Per Share
Basic
and diluted amounts per share are calculated by dividing net income or loss by
the weighted average number of shares of common stock outstanding during the
period, as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In thousands, except per share data)
|
||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net
income (loss) from continuing operations
|
$
|
(41,126
|
)
|
$
|
11,969
|
$
|
(103,937
|
)
|
$
|
(37,421
|
)
|
|||||
|
Income
from discontinued operations, net of tax
|
—
|
3,359
|
—
|
36,251
|
||||||||||||
|
Net
income (loss)
|
$
|
(41,126
|
)
|
$
|
15,328
|
$
|
(103,937
|
)
|
$
|
(1,170
|
)
|
|||||
|
Denominator:
|
||||||||||||||||
|
Weighted
average number of shares
|
||||||||||||||||
|
—basic
|
480,307
|
531,197
|
501,448
|
530,546
|
||||||||||||
|
—diluted
|
480,307
|
531,323
|
501,448
|
530,546
|
||||||||||||
|
Basic
income (loss) per share from:
|
||||||||||||||||
|
—Continuing
operations
|
$
|
(0.09
|
)
|
$
|
0.02
|
$
|
(0.21
|
)
|
$
|
(0.07
|
)
|
|||||
|
—Discontinued
operations
|
$
|
—
|
$
|
0.01
|
$
|
—
|
$
|
0.07
|
||||||||
|
—Net
income (loss)
|
$
|
(0.09
|
)
|
$
|
0.03
|
$
|
(0.21
|
)
|
$
|
(0.00
|
)
|
|||||
|
Diluted
income (loss) per share from:
|
||||||||||||||||
|
—Continuing
operations
|
$
|
(0.09
|
)
|
$
|
0.02
|
$
|
(0.21
|
)
|
$
|
(0.07
|
)
|
|||||
|
—Discontinued
operations
|
$
|
—
|
$
|
0.01
|
$
|
—
|
$
|
0.07
|
||||||||
|
—Net
income (loss)
|
$
|
(0.09
|
)
|
$
|
0.03
|
$
|
(0.21
|
)
|
$
|
(0.00
|
)
|
|||||
The
following table presents weighted-average dilutive securities that were excluded
from the above calculation because their inclusion would have had an
anti-dilutive effect:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Dilutive
securities:
|
||||||||||||||||
|
Employee
stock options
|
45,819,603
|
47,892,860
|
46,578,045
|
45,196,693
|
||||||||||||
|
Restricted
stock awards and units
|
2,940,146
|
3,497,591
|
3,158,268
|
4,577,421
|
||||||||||||
|
Total
anti-dilutive shares
|
48,759,749
|
51,390,451
|
49,736,313
|
49,774,114
|
||||||||||||
As
of June 27, 2009, all of the Company’s outstanding stock options and restricted
stock awards and units were anti-dilutive under SFAS No. 128, “Earnings Per Share”, either
because the exercise price was higher than the Company’s stock price, the
application of the treasury stock method resulted in an anti-dilutive effect or
the Company incurred a net loss. Had the Company reported net income instead of
a net loss for the three and nine months ended June 27, 2009, 1.7 million and
0.7 million of the 48.8 million and 49.7 million, respectively, potentially
dilutive securities would have been included in the calculation of diluted
earnings per share.
Note 8.
Debt
The
following table presents information regarding the estimated fair value, based
on quoted market prices, and carrying amount of the Company’s long-term
debt.
|
Fair
Value
|
Carrying
Amount
|
|||||||||
|
June
27,
2009
|
June
27,
2009
|
September 27,
2008
|
||||||||
|
(In thousands)
|
||||||||||
|
$300
Million Senior Floating Rate Notes due 2010 (“2010
Notes”)
|
$
|
168,672
|
$
|
175,700
|
$
|
180,000
|
||||
|
6.75%
Senior Subordinated Notes due 2013 (“6.75% Notes”)
|
304,000
|
400,000
|
400,000
|
|||||||
|
$300
Million Senior Floating Rate Notes due 2014 (“2014
Notes”)
|
216,516
|
270,645
|
300,000
|
|||||||
|
8.125%
Senior Subordinated Notes due 2016
|
432,000
|
600,000
|
600,000
|
|||||||
|
Unamortized
Interest Rate Swaps
|
—
|
4,941
|
1,985
|
|||||||
|
Total
|
$
|
1,121,188
|
$
|
1,451,286
|
$
|
1,481,985
|
||||
|
Less:
current portion (2010 Notes)
|
(168,672
|
)
|
(175,700
|
)
|
—
|
|||||
|
Total
long-term debt
|
$
|
952,516
|
$
|
1,275,586
|
$
|
1,481,985
|
||||
In
February and March 2009, the Company repurchased $4.3 million and $29.4 million
of its 2010 and 2014 Notes, respectively. Upon repurchase, holders of the notes
received $19.6 million, plus accrued interest of $0.3 million. In connection
with these repurchases, the Company recorded a gain of $13.5 million, net of
unamortized debt issuance costs of $0.6 million, in other income (expense), net
on the condensed consolidated statement of operations.
On
November 19, 2008, the Company terminated its revolving credit facility and
entered into a new credit facility. In connection with the termination of the
revolving credit facility, the Company also terminated an interest rate swap
associated with its 6.75% Notes. As a result of terminating the swap, the
Company was required to discontinue hedge accounting for the terminated swap and
the remaining three swaps designated under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, as hedges of the 6.75% Notes. These
swaps were being accounted for as fair value hedges. At the date hedge
accounting was discontinued, the swaps had a fair value of $5.7 million, which
will be amortized as a reduction to interest expense over the remaining life of
the debt. During the second quarter of 2009, the Company received termination
notices from its remaining counterparties exercising their right pursuant to
embedded call options to cancel interest rate swaps, totaling $300 million in
aggregate notional principal, associated with the Company’s 6.75% Notes. In
connection with the termination of the swaps, the Company received a payment
consisting of a call premium of $10.1 million plus accrued interest. During the
period from November 22, 2008 through the termination of the swaps (period
during which hedge accounting was discontinued), changes in the fair value of
the swaps were recorded in other income (expense), net on the condensed
consolidated statement of operations and resulted in a $5.7 million
gain.
New Credit Facility. During
the first quarter of 2009, the Company entered into a Loan, Guaranty and
Security Agreement, among the Company, the financial institutions party thereto
from time to time as lenders, and Bank of America, N.A., as agent for such
lenders.
The
new credit facility provides for a $135 million secured revolving credit
facility, subject to a reduction of between $25 million and $50 million
depending on the amount of the Company’s borrowing base. The new credit facility
has an initial $50 million letter of credit sublimit. As of June 27, 2009,
no loans and $30.3 million of letters of credit were outstanding under this
agreement. The facility may be increased by an additional $200 million upon
obtaining additional commitments from the lenders then party to the new credit
facility or from new lenders. The new credit facility expires on the earlier of
(i) the date that is 90 days prior to the maturity date of the 2010
Notes or the 6.75% Notes, in each case if such notes are not repaid, redeemed,
defeased, refinanced or reserved for under the borrowing base under the new
credit facility prior to such date or (ii) November 19, 2013 (the
“Maturity Date”).
Loans
may be advanced under the new credit facility based on eligible accounts
receivable and inventory balances. If at any time the aggregate principal amount
of the loans outstanding plus the face amount of undrawn letters of credit under
the new credit facility exceed the borrowing base then in effect, the Company
must make a payment or post cash collateral (in the case of letters of credit)
in an amount sufficient to eliminate such excess.
Loans
under the new credit facility bear interest, at the Company’s option, at a rate
equal to LIBOR or a base rate equal to Bank of America, N.A.’s announced prime
rate, in each case plus a spread. A commitment fee accrues on any unused portion
of the commitments under the new credit facility at a rate per annum based on
usage. Principal, together with accrued and unpaid interest, is due on the
Maturity Date.
The
Company’s obligations under the new credit facility are secured by (1) all
U.S. and Canadian accounts receivable (with automatic lien releases occurring at
time of sale of each accounts receivable transaction for those customers
included in the U.S. factoring facility); (2) all U.S. and Canadian deposit
accounts (except accounts used for collections for certain transactions);
(3) all U.S. and Canadian inventory and associated obligations and
documents; and (4) a 65% pledge of the capital stock of certain
subsidiaries of the Company.
The
Company is currently subject to covenants that, among other things, place
certain limitations on the Company’s ability to incur additional debt, make
investments, pay dividends, and sell assets. The Company was in compliance with
these covenants as of June 27, 2009.
Note 9.
Commitments and Contingencies
Litigation and other
contingencies. From time to time, the Company is a party to litigation,
claims and other contingencies, including environmental matters and examinations
and investigations by government agencies, which arise in the ordinary course of
business. The Company records a contingent liability when it is probable that a
loss has been incurred and the amount of loss is reasonably estimable in
accordance with SFAS No. 5, “Accounting for Contingencies”,
or other applicable accounting standards. As of June 27, 2009, the
Company had reserves of $28.8 million for these matters, which the Company
believes is adequate. Such reserves are included in accrued liabilities or other
long-term liabilities on the condensed consolidated balance sheet.
As
of June 27, 2009, the Company was in the process of remediating environmental
contamination at one of its sites in the United States of America. The Company
expects to incur costs of $10.7 million for assessment, testing and remediation
of this site, and intends to sell this site upon completion of its remediation
efforts. Actual costs could differ from the amount estimated upon completion of
this process. To date, $6.0 million of such costs have been
incurred.
On
January 14, 2009, one of the Company’s customers, Nortel Networks, filed a
petition for reorganization under bankruptcy law. As a result, the Company
performed an analysis as of December 27, 2008 to quantify its potential
exposure, considering factors such as which legal entities of the customer are
included in the bankruptcy reorganization, future demand from Nortel Networks,
and administrative and reclamation claim priority. As a result of the analysis,
the Company determined that certain accounts receivable may not be collectible
and therefore deferred recognition of revenue in the amount of $5.0 million
for shipments made in the first quarter of 2009. Additionally, the Company
determined that certain inventory balances may not be recoverable and provided a
reserve for such inventories in the amount of $5.0 million in the first quarter
of 2009. The Company updated its analysis at June 27, 2009 and determined that
no additional reserves were necessary. The Company’s estimates are subject to
change as additional information becomes available.
Warranty
Reserve. The following table presents information with respect
to the warranty reserve, which is included in accrued liabilities in the
condensed consolidated balance sheets:
|
As of
|
||||||||
|
June
27,
2009
|
June
28,
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Beginning
balance – end of prior year
|
$
|
18,974
|
$
|
23,094
|
||||
|
Additions
to accrual
|
8,478
|
17,094
|
||||||
|
Utilization
of accrual
|
(11,675
|
)
|
(17,321
|
)
|
||||
|
Ending
balance – current quarter
|
$
|
15,777
|
$
|
22,867
|
||||
Note 10. Restructuring Costs
Costs
associated with restructuring activities, other than those activities related to
business combinations, are accounted for in accordance with SFAS
No. 146,”Accounting for
Costs Associated with Exit or Disposal Activities”, or SFAS No. 112,
“Employers’ Accounting for
Postemployment Benefits”, as applicable. Pursuant to SFAS No. 112,
restructuring costs related to employee severance are recorded when probable and
estimable based on the Company’s policy with respect to severance payments. For
restructuring costs other than employee severance accounted for under SFAS No.
112, a liability is recognized in accordance with SFAS No. 146 only when
incurred. Costs associated with restructuring activities related to business
combinations are accounted for in accordance with EITF 95-3,”Recognition of Liabilities in
Connection with a Purchase Business Combination”.
2009
Restructuring Plan
During
the first quarter of 2009, the Company initiated a restructuring plan as a
result of a slowdown in the global electronics industry and worldwide economy.
The plan is designed to improve capacity utilization levels and reduce costs by
consolidating manufacturing and other activities in locations with higher
efficiencies and lower costs. Costs associated with this plan are expected to
include employee severance, costs related to owned and leased facilities and
equipment that are no longer in use, and other costs associated with the exit of
certain contractual arrangements due to facility closures. Actions taken under
the plan are expected to be initiated during 2009 and total costs for this plan
are expected to be in the range of $35 million to $40 million. Below is a
summary of restructuring costs associated with facility closures and other
consolidation efforts implemented under this plan:
|
Employee
Termination
Severance
and
Related Benefits
|
Leases
and Facilities Shutdown and Consolidation Costs
|
Impairment
of
Assets or Redundant
Assets
|
||||||||||||||
|
Cash
|
Cash
|
Non-Cash
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Balance
at September 27, 2008
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||
|
Charges
to operations
|
7,009
|
482
|
—
|
7,491
|
||||||||||||
|
Charges
utilized
|
(2,229
|
)
|
(482
|
)
|
—
|
(2,711
|
)
|
|||||||||
|
Balance
at December 27, 2008
|
4,780
|
—
|
—
|
4,780
|
||||||||||||
|
Charges
to operations
|
7,524
|
1,160
|
—
|
8,684
|
||||||||||||
|
Charges
utilized
|
(5,662
|
)
|
(1,160
|
)
|
—
|
(6,822
|
)
|
|||||||||
|
Balance
at March 28, 2009
|
6,642
|
—
|
—
|
6,642
|
||||||||||||
|
Charges
to operations
|
6,121
|
3,954
|
570
|
10,645
|
||||||||||||
|
Charges
utilized
|
(6,109
|
)
|
(3,583
|
)
|
(570
|
)
|
(10,262
|
)
|
||||||||
|
Reversal
of accrual
|
(321
|
)
|
—
|
—
|
(321
|
)
|
||||||||||
|
Balance
at June 27, 2009
|
$
|
6,333
|
$
|
371
|
$
|
—
|
$
|
6,704
|
||||||||
During
the three and nine months ended June 27, 2009, the Company recorded
restructuring charges of $5.8 million and $20.3 million, respectively, for
employee termination costs, of which $14.0 million has been utilized and $6.3
million is expected to be paid during the remainder of 2009. These costs were
provided for approximately 1,200 and 3,000 terminated employees for the three
and nine months ended June 27, 2009, respectively.
Restructuring
Plans — Prior Years
Below
is a summary of restructuring costs associated with facility closures and other
consolidation efforts that were implemented in prior years:
|
Employee
Termination
Severance
and
Related Benefits
|
Leases
and Facilities Shutdown and Consolidation Costs
|
Impairment
of
Assets or Redundant
Assets
|
||||||||||||||
|
Cash
|
Cash
|
Non-Cash
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Balance
at September 30, 2006
|
$
|
21,349
|
$
|
9,804
|
$
|
—
|
$
|
31,153
|
||||||||
|
Charges
(recovery) to operations
|
35,169
|
11,195
|
(831
|
)
|
45,533
|
|||||||||||
|
Charges
recovered (utilized)
|
(47,873
|
)
|
(12,132
|
)
|
831
|
(59,174
|
)
|
|||||||||
|
Reversal
of accrual
|
(2,505
|
)
|
(441
|
)
|
—
|
(2,946
|
)
|
|||||||||
|
Balance
at September 29, 2007
|
6,140
|
8,426
|
—
|
14,566
|
||||||||||||
|
Charges
to operations
|
64,126
|
16,519
|
2,456
|
83,101
|
||||||||||||
|
Charges
utilized
|
(45,248
|
)
|
(19,765
|
)
|
(2,456
|
)
|
(67,469
|
)
|
||||||||
|
Reversal
of accrual
|
(833
|
)
|
(892
|
)
|
—
|
(1,725
|
)
|
|||||||||
|
Balance
at September 27, 2008
|
24,185
|
4,288
|
—
|
28,473
|
||||||||||||
|
Discontinued
operations
|
5,607
|
—
|
—
|
5,607
|
||||||||||||
|
Balance
at September 27, 2008, including discontinued
operations
|
29,792
|
4,288
|
—
|
34,080
|
||||||||||||
|
Charges
to operations
|
3,222
|
1,989
|
644
|
5,855
|
||||||||||||
|
Charges
utilized
|
(11,651
|
)
|
(2,587
|
)
|
(644
|
)
|
(14,882
|
)
|
||||||||
|
Reversal
of accrual
|
(4,067
|
)
|
(44
|
)
|
—
|
(4,111
|
)
|
|||||||||
|
Balance
at December 27, 2008
|
17,296
|
3,646
|
—
|
20,942
|
||||||||||||
|
Charges
to operations
|
2,953
|
2,905
|
1,121
|
6,979
|
||||||||||||
|
Charges
utilized
|
(11,299
|
)
|
(2,839
|
)
|
(1,121
|
)
|
(15,259
|
)
|
||||||||
|
Reversal
of accrual
|
(89
|
)
|
—
|
—
|
(89
|
)
|
||||||||||
|
Balance
at March 28, 2009
|
8,861
|
3,712
|
—
|
12,573
|
||||||||||||
|
Charges
to operations
|
1,944
|
925
|
819
|
3,688
|
||||||||||||
|
Charges
utilized
|
(3,673
|
)
|
(2,460
|
)
|
(819
|
)
|
(6,952
|
)
|
||||||||
|
Reversal
of accrual
|
—
|
(123
|
)
|
—
|
(123
|
)
|
||||||||||
|
Balance
at June 27, 2009
|
$
|
7,132
|
$
|
2,054
|
$
|
—
|
$
|
9,186
|
||||||||
During
the three and nine months ended June 27, 2009, the Company recorded
restructuring charges of $1.9 million and $4.0 million, respectively, for
employee termination costs. These costs were provided for approximately 400 and
1,600 terminated employees for the three and nine months ended June 27, 2009,
respectively. In connection with restructuring actions the Company has already
implemented under these restructuring plans, the Company expects to pay
remaining facilities related restructuring liabilities of $2.1 million through
2010 and the majority of severance costs of $7.1 million through the remainder
of 2009.
All
Restructuring Plans
In
connection with all of the Company’s restructuring plans, restructuring costs of
$15.9 million were accrued as of June 27, 2009, of which $15.7 million was
included in accrued liabilities and $0.2 million was included in other long-term
liabilities on the condensed consolidated balance sheet.
Note 11.
Business Segment, Geographic and Customer Information
SFAS
No. 131, “Disclosure
about Segments of an Enterprise and Related Information”, establishes
standards for reporting information about operating segments, products and
services, geographic areas of operations and major customers. Operating segments
are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker or decision making group in deciding how to allocate resources
and in assessing performance. The Company operates in one operating
segment.
Geographic
information is as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Domestic
|
$
|
308,925
|
$
|
539,639
|
$
|
1,026,544
|
$
|
1,700,961
|
||||||||
|
International
|
900,225
|
1,363,614
|
2,796,977
|
3,797,863
|
||||||||||||
|
Total
net sales
|
$
|
1,209,150
|
$
|
1,903,253
|
$
|
3,823,521
|
$
|
5,498,824
|
||||||||
|
Operating
Income:
|
||||||||||||||||
|
Domestic
|
$
|
(27,031
|
)
|
$
|
6,888
|
$
|
(74,454
|
)
|
$
|
20,241
|
||||||
|
International
|
25,884
|
32,850
|
62,077
|
37,700
|
||||||||||||
|
Total
operating income (loss)
|
$
|
(1,147
|
)
|
$
|
39,738
|
$
|
(12,377
|
)
|
$
|
57,941
|
||||||
Note
12. Financial Instruments
The
Company partially adopted SFAS No. 157, “Fair Value Measurements”, at
the beginning of 2009 for all financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. The Company has elected to defer the adoption related to
non-financial assets and liabilities in accordance with FSP FAS 157-2, “Effective Date of FASB Statement
No. 157”.
The partial adoption of SFAS No. 157 did not have a material impact on the
Company’s condensed consolidated financial statements as of and for the three or
nine months ended June 27, 2009.
The
Company adopted FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” which
provides guidance when determining whether there has been a significant decrease
in the volume and level of activity in the market for an asset or liability as
well as other factors to consider in identifying transactions that are not
orderly. The adoption of FSP FAS 157-4 did not impact the Company’s financial
position or results of operations.
The
Company’s financial assets and financial liabilities subject to the requirements
of SFAS No. 157 are as follows:
· Money
market funds
· Mutual
funds
· Time
deposits
· Corporate
bonds
· Foreign
currency forward and option contracts
· Interest
rate swaps
SFAS
No. 157 defines fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which it would transact and also considers assumptions that market participants
would use when pricing an asset or liability.
Inputs
to valuation techniques used to measure fair value are prioritized into three
broad levels, as follows:
|
Level
1:
|
Observable
inputs that reflect quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level
1 assets and liabilities consist of money market fund deposits, time
deposits and marketable debt and equity instruments.
|
|||
|
Level
2:
|
Inputs
that reflect quoted prices, other than quoted prices included in Level 1,
that are observable for the assets or liabilities, such as quoted prices
for similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in less active markets; or inputs that are
derived principally from or corroborated by observable market data by
correlation.
|
|||
|
Level
3:
|
Inputs
that are unobservable to the valuation methodology which are significant
to the measurement of the fair value of assets or
liabilities.
|
The
following table presents information as of June 27, 2009 with respect to assets
and liabilities measured at fair value on a recurring basis:
|
Presentation in the Condensed Consolidated Balance Sheet
|
|||||||||||||||||||||
|
Fair Value
Measurements Using
Level
1, Level 2 or Level 3
|
Cash and
cash
equivalents
|
Prepaid expenses
and other current
assets
|
Other
assets
|
Accrued
liabilities
|
Other
long-term
liabilities
|
||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||
|
Assets:
|
|||||||||||||||||||||
|
Money
Market Funds
|
Level
1
|
$
|
370,274
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
|
Mutual
Funds
|
Level
2
|
—
|
—
|
1,136
|
—
|
—
|
|||||||||||||||
|
Time
Deposits
|
Level
1
|
69,658
|
—
|
16,623
|
—
|
—
|
|||||||||||||||
|
Corporate
Bonds —
Foreign Real
Estate
|
Level
2
|
—
|
—
|
2,730
|
—
|
—
|
|||||||||||||||
|
Derivatives
not designated as hedging instruments under FAS 133: Foreign Currency
Forward Contracts
|
Level
2
|
—
|
499
|
—
|
—
|
—
|
|||||||||||||||
|
Total
assets measured at fair value
|
$
|
439,932
|
$
|
499
|
$
|
20,489
|
$
|
—
|
$
|
—
|
|||||||||||
|
Liabilities:
|
|||||||||||||||||||||
|
Derivatives
designated as hedging instruments under FAS 133: Interest Rate
Swaps
|
Level
2
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
(33,598
|
)
|
|||||||||
|
Derivatives
not designated as hedging instruments under FAS 133: Foreign Currency
Forward Contracts
|
Level
2
|
—
|
—
|
—
|
(5,600
|
)
|
—
|
||||||||||||||
|
Total
liabilities measured at fair value
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
(5,600
|
)
|
$
|
(33,598
|
)
|
|||||||||
The
Company sponsors deferred compensation plans for eligible employees and
non-employee members of its Board of Directors that allow participants to defer
payment of part or all of their compensation. These plans are accounted for in
accordance with EITF Issue 97-14, “Accounting for Deferred
Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and
Invested”. Assets and liabilities associated with these plans of
approximately $8.5 million as of June 27, 2009 are recorded as other non-current
assets and other long-term liabilities in the condensed consolidated balance
sheet. The Company’s results of operation are not affected by these plans since
changes in the fair value of the assets are offset by changes in the fair value
of the liabilities. As such, assets and liabilities associated with these plans
have not been included in the above table.
The
Company has elected to use the income approach to value derivatives, using
observable Level 2 market expectations at the measurement date and standard
valuation techniques to convert future amounts to a single present value amount
assuming that participants are motivated, but not compelled to transact. The
Company seeks high quality counterparties for all its financing arrangements.
For interest rate swaps, Level 2 inputs include futures contracts on LIBOR for
the first three years, swap rates beyond three years at commonly quoted
intervals, and credit default swap rates for the Company and relevant
counterparties. For currency contracts, Level 2 inputs include foreign currency
spot and forward rates, interest rates and credit default swap rates at commonly
quoted intervals. Mid-market pricing is used as a practical expedient for fair
value measurements. SFAS No. 157 requires the fair value measurement of an asset
or liability to reflect the nonperformance risk of the entity and the
counterparty. Therefore, the counterparty’s creditworthiness when in an asset
position and the Company’s creditworthiness when in a liability position has
been considered in the fair value measurement of derivative instruments. As of
June 27, 2009, the fair value of the Company’s interest rates swaps has been
reduced by $5.3 million due to consideration of the Company’s creditworthiness,
as determined by credit default swap rates published by Bloomberg. The effect of
nonperformance risk on the fair value of foreign currency forward contracts was
not material as of June 27, 2009.
The
Company adopted SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” in the second quarter of 2009. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements.
The
Company is exposed to certain risks related to its ongoing business operations.
The primary risks managed by using derivative instruments are interest rate risk
and foreign exchange rate risk.
Interest
rate swaps are entered into on occasion to manage interest rate risk associated
with the Company's borrowings. The Company issued $600 million of floating
rate notes in 2007 and entered into interest rate swap agreements with two
independent swap counterparties to partially hedge its interest rate exposure
related to floating rate debt. The swap agreements, with an aggregate notional
amount of $300 million and expiration dates in 2014, effectively convert a
portion of the variable interest rate obligation to a fixed interest rate
obligation and are accounted for as cash flow hedges under
SFAS No. 133. Under the terms of the swap agreements, the Company pays
the independent swap counterparties a fixed rate of 5.594% and, in exchange, the
swap counterparties pay the Company an interest rate equal to the three-month
LIBOR. These swap agreements effectively fix the interest rate at 8.344% through
2014. The Company is required to maintain collateral, in the form of cash, under
its interest rate swap agreements. As of June 27, 2009, $19.9 million of
collateral had been pledged against these swaps and is included in other
non-current assets on the condensed consolidated balance sheet.
Forward
and/or option contracts on various foreign currencies are entered into monthly
to manage foreign currency risk associated with forecasted foreign currency
transactions and certain monetary assets and liabilities denominated in foreign
currencies.
The
Company’s primary foreign currency cash flows are in certain Asian and European
countries, Brazil and Mexico. The Company utilizes foreign currency forward
and/or option contracts to hedge certain operational (“cash flow”) exposures
resulting from changes in foreign currency exchange rates. Such exposures result
from forecasted sales denominated in currencies different from those for cost of
sales and other expenses. These contracts are typically less than 12 months
in duration and are accounted for as cash flow hedges under SFAS No.
133.
The
Company also enters into short-term foreign currency forward contracts to hedge
currency exposures associated with certain assets and liabilities denominated in
foreign currencies. The Company typically has forward contracts on approximately
15 foreign currencies at each period end. These contracts have maturities of
three months or less and are not designated as accounting hedges under SFAS No.
133. Accordingly, all outstanding foreign currency forward contracts not
designated as accounting hedges are marked-to-market at the end of each period
with unrealized gains and losses included in other income (expense), net, in the
condensed consolidated statements of operations. For the three and nine months
ended June 27, 2009, the Company recorded a loss of $3.9 million and a gain of
$9.3 million, respectively, associated with these forward
contracts.
As
of June 27, 2009, the Company had the following outstanding foreign currency
forward contracts that were entered into to hedge foreign currency
exposures:
|
Foreign
Currency
Forward
Contracts
|
Number
of
Contracts
|
Notional
Amount
(USD
in thousands)
|
||||||||||
|
Designated
|
Non-designated
|
|||||||||||
|
Buy
SGD
|
3
|
$
|
3,165
|
$
|
63,642
|
|||||||
|
Buy
MXN
|
2
|
4,612
|
10,677
|
|||||||||
|
Buy
ILS
|
3
|
1,275
|
6,621
|
|||||||||
|
Buy
CAD
|
2
|
—
|
3,408
|
|||||||||
|
Buy
HKD
|
1
|
—
|
2,362
|
|||||||||
|
Buy
JPY
|
2
|
—
|
8,766
|
|||||||||
|
Buy
MYR
|
1
|
—
|
3,217
|
|||||||||
|
Buy
HUF
|
2
|
—
|
5,044
|
|||||||||
|
Buy
SEK
|
1
|
—
|
1,276
|
|||||||||
|
Buy
THB
|
1
|
—
|
1,890
|
|||||||||
|
Sell
MXN
|
1
|
—
|
9,935
|
|||||||||
|
Sell
HUF
|
1
|
—
|
3,519
|
|||||||||
|
Sell
BRL
|
1
|
—
|
11,038
|
|||||||||
|
Sell
CNY
|
1
|
—
|
18,139
|
|||||||||
|
Sell
EUR
|
2
|
—
|
241,129
|
|||||||||
|
Sell
GBP
|
1
|
—
|
2,144
|
|||||||||
|
Sell
INR
|
1
|
—
|
5,008
|
|||||||||
|
Total
notional amount
|
$
|
9,052
|
$
|
397,815
|
||||||||
For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative is reported as a
component of accumulated other comprehensive income (AOCI), an equity account,
and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. Gains and losses on the derivative
representing hedge ineffectiveness are recognized in current earnings and were
not material for the three or nine months ended June 27, 2009. As of June 27,
2009, AOCI related to foreign currency forward contracts was not material and
AOCI related to interest rate swaps was a loss of $33.4 million, of which $13.6
million is expected to be amortized to interest expense over the next 12
months.
The
following table presents the effect of cash flow hedging relationships on the
Company’s condensed consolidated statement of operations for the three months
ended June 27, 2009:
|
Derivatives
in SFAS 133 Cash Flow Hedging Relationship
|
Amount
of Gain/(Loss) Recognized in OCI on Derivative (Effective
Portion)
|
Location
of Gain/(Loss) Reclassified
from
Accumulated OCI into Income
(Effective
Portion)
|
Amount
of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
||||||
|
(In
thousands)
|
|||||||||
|
Interest
rate swaps
|
$
|
8
|
Interest
expense
|
$
|
(3,136
|
)
|
|||
|
Foreign
currency forward contracts
|
868
|
Cost
of sales
|
758
|
||||||
|
Total
|
$
|
876
|
$
|
(2,378
|
)
|
||||
The
following table presents the effect of cash flow hedging relationships on the
Company’s condensed consolidated statement of operations for the nine months
ended June 27, 2009:
|
Derivatives
in SFAS 133 Cash Flow Hedging Relationship
|
Amount
of Gain/(Loss) Recognized in OCI on Derivative (Effective
Portion)
|
Location
of Gain/(Loss) Reclassified
from
Accumulated OCI into Income
(Effective
Portion)
|
Amount
of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
||||||
|
(In
thousands)
|
|||||||||
|
Interest
rate swaps
|
$
|
(18,334
|
)
|
Interest
expense
|
$
|
(7,741
|
)
|
||
|
Foreign
currency forward contracts
|
(4,354
|
)
|
Cost
of sales
|
(4,404
|
)
|
||||
|
Total
|
$
|
(22,688
|
)
|
$
|
(12,145
|
)
|
|||
Note
13. Stock Repurchase Program
On
October 27, 2008, the Company’s Board of Directors authorized the Company
to spend up to approximately $35 million on share repurchases. Purchases of
common shares shall be made at prevailing market prices or in privately
negotiated transactions. The authorization is effective through
December 2009. During the three and nine months ended June 27, 2009, the
Company repurchased 16.6 million shares and 60.5 million shares, respectively,
of its common stock for a total of $10 million and $29.2 million, respectively,
including commissions.
Note 14.
Sales of Accounts Receivable
On
June 26, 2008, the Company entered into a two-year global revolving trade
receivables purchase agreement ("Global Receivables Program") with a financial
institution that allows the Company to sell accounts receivable. The maximum
face amount of accounts receivable that may be outstanding at any time under
this agreement is $250 million. The purchase price for receivables sold
under this program ranges from 95% to 100% of the face amount. The Company pays
LIBOR plus a spread for the period from the date a receivable is sold to the
date the receivable is collected. Sold receivables are subject to certain
limited recourse provisions. The Company continues to service, administer and
collect sold receivables on behalf of the purchaser in exchange for a servicing
fee.
The
Global Receivables Program has a foreign component and a U.S. component. The
foreign component is governed by a Revolving Trade Receivables Purchase
Agreement ("Foreign Facility") dated June 26, 2008. The U.S. component is
governed by a Credit and Security Agreement dated November 24, 2008 that
requires the Company to make an absolute transfer of accounts receivable to a
special purpose entity (Borrower) to ensure that such transferred receivables
are unavailable to the Company's creditors and to ensure the interests of such
transferred receivables are fully transferred to the Borrower and its agent. The
Borrower is a qualifying special purpose entity as defined in SFAS No. 140,
“Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities”, and
accordingly, the Company does not consolidate this entity pursuant to FASB
Interpretation No. 46R, “Consolidation of Variable Interest
Entities.” For the three and nine months ended June 27, 2009, the
Company sold $64.7 million and $107.1 million, respectively, under these
programs for which the Company received proceeds of $61.5 million and $101.7
million, respectively. As of June 27, 2009, $63.2 million of sold receivables
were outstanding.
In
accordance with SFAS No. 140, accounts receivable sold are removed from the
Company's condensed consolidated balance sheets and the proceeds from such sales
are included as cash provided by operating activities in the condensed
consolidated statements of cash flows.
Note
15. Subsequent Events
On
July 20, 2009, the Board of Directors of the Company authorized a reverse split
of its common stock at a ratio of one for six, effective August 14, 2009. The
Company’s stockholders previously approved the reverse split in September
2008.
As
a result of the reverse split, every six shares of common stock outstanding will
be combined into one share of common stock. The total number of shares of common
stock outstanding will be reduced from approximately 472 million shares to
approximately 78 million shares and the number of authorized shares of common
stock will also be concurrently reduced on a proportional basis. The reverse
split will not affect the amount of equity the Company has nor will it affect
the Company’s market capitalization. However, the Company’s previously reported
earnings per share amounts will increase by a magnitude of six as a result of
the reverse split. For example, for the three months ended June 27, 2009, the
Company reported a net loss per share of $0.09. As a result of the reverse
split, the net loss will be adjusted to $0.54 per share on a prospective basis.
Likewise, the Company’s reported diluted net income per share of $0.03 for the
three months ended June 28, 2008 will be adjusted to $0.18 per share on a
prospective basis. With the exception of certain amounts in this footnote, all
share and per share amounts herein are presented on a pre-split
basis.
In accordance with SFAS No. 165, “Subsequent Events”, the
Company evaluated subsequent events through August 3, 2009, the date at which
the financial statements were issued.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). These statements relate to
our expectations for future events and time periods. All statements other than
statements of historical fact are statements that could be deemed to be
forward-looking statements, including any statements regarding trends in future
revenues or results of operations, gross margin or operating margin, expenses,
earnings or losses from operations, synergies or other financial items; any
statements of the plans, strategies and objectives of management for future
operations; any statements concerning developments, performance or industry
ranking; any statements regarding future economic conditions or performance; any
statements regarding pending investigations, claims or disputes; any statements
regarding the financial impact of customer bankruptcies; any statements
regarding future cash outlays for acquisitions; any statements concerning the
adequacy of our liquidity; any statements of expectation or belief; and any
statements of assumptions underlying any of the foregoing. Generally, the words
“anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,”
“should,” “estimate,” “predict,” “potential,” “continue” and similar expressions
identify forward-looking statements. Our forward-looking statements are based on
current expectations, forecasts and assumptions and are subject to the risks and
uncertainties contained in or incorporated from Part II, Item 1A of this report.
As a result, actual results could vary materially from those suggested by the
forward-looking statements. We undertake no obligation to publicly disclose any
revisions to these forward-looking statements to reflect events or circumstances
occurring subsequent to filing this report with the Securities and Exchange
Commission.
Overview
We
are a leading independent global provider of customized, integrated electronics
manufacturing services, or EMS. Our revenue is generated from sales of our
services primarily to original equipment manufacturers, or OEMs, in the
communications, enterprise computing and storage, multimedia, industrial and
semiconductor capital equipment, defense and aerospace, medical and automotive
industries.
Since
the fall of 2008, the business environment has become challenging due to adverse
global economic conditions. These conditions have slowed global economic growth
and have resulted in recessions in many countries, including the U.S., Europe
and certain countries in Asia. As a consequence, many of the industries to which
we provide products have experienced significant financial difficulty, with some
entities filing for bankruptcy. Such significant financial difficulty, if
experienced by one or more of our customers, may negatively affect our business
due to the decreased demand from these financially distressed customers, the
potential inability of these companies to make full payment on amounts owed to
us, or both.
We
exited our PC and associated logistics services business (“PC Business”) in 2008
and have reflected this business as a discontinued operation in the condensed
consolidated statements of operations for all prior periods
presented.
Unless
otherwise noted, all references to our operating results in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations pertain
only to our continuing operations and all references to years refer to our
fiscal years ending on the last Saturday of each year closest to
September 30. Fiscal 2009 will be a 53 week year, with the additional week
included in the fourth quarter.
A
relatively small number of customers have historically generated a significant
portion of our net sales. Sales to our ten largest customers represented 47.5%
and 48.3% of our net sales for the three and nine months ended June 27, 2009,
respectively. Sales to our ten largest customers represented 48.5% and 48.3% of
our net sales for the three and nine months ended June 28, 2008, respectively.
No customer represented 10% or more of our net sales for any of these
periods.
We
typically generate a significant portion of our net sales from international
operations. Sales from international operations during the three months ended
June 27, 2009 and June 28, 2008 were 74.5% and 71.6%, respectively, of our total
net sales. During the nine months ended June 27, 2009 and June 28, 2008, 73.2%
and 69.1%, respectively, of our total net sales were derived from international
operations. The concentration of international operations has resulted from a
desire on the part of many of our customers to source production in lower cost
locations such as Asia, Latin America and Eastern Europe. We expect this trend
to continue.
Historically,
we have had substantial recurring sales to existing customers. We generally do
not obtain firm, long-term commitments from our customers. Orders are placed by
our customers using purchase orders, some of which are governed by supply
agreements. These agreements generally have terms ranging from three to five
years and cover the manufacture of a range of products. Under these agreements,
a customer typically agrees to purchase its requirements for particular products
in particular geographic areas from us. These agreements generally do not
obligate the customer to purchase minimum quantities of products.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. We review the accounting policies used in reporting
our financial results on a regular basis. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, net sales and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate the process
used to develop estimates for certain reserves and contingent liabilities,
including those related to product returns, accounts receivable, inventories,
investments, intangible assets, income taxes, warranty obligations,
environmental matters, restructuring, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Our actual
results may differ materially from these estimates.
For
a complete description of our key critical accounting policies and estimates,
refer to our 2008 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on November 24, 2008.
Results
of Operations
Key
operating results
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
1,209,150
|
$
|
1,903,253
|
$
|
3,823,521
|
$
|
5,498,824
|
||||||||
|
Gross
profit
|
$
|
75,760
|
$
|
139,641
|
$
|
228,148
|
$
|
393,215
|
||||||||
|
Operating
income (loss)
|
$
|
(1,147
|
)
|
$
|
39,738
|
$
|
(12,377
|
)
|
$
|
57,941
|
||||||
|
Net
income/(loss) from continuing operations
|
$
|
(41,126
|
)
|
$
|
11,969
|
$
|
(103,937
|
)
|
$
|
(37,421
|
)
|
|||||
|
Income
from discontinued operations, net of tax
|
$
|
—
|
$
|
3,359
|
$
|
—
|
$
|
36,251
|
||||||||
|
Net
income/(loss)
|
$
|
(41,126
|
)
|
$
|
15,328
|
$
|
(103,937
|
)
|
$
|
(1,170
|
)
|
|||||
Net
loss from continuing operations includes restructuring costs of $14.1 million
and $13.3 million for the three months ended June 27, 2009 and June 28, 2008,
respectively, and $38.9 million and $68.1 million for the nine months ended June
27, 2009 and June 28, 2008, respectively. Additionally, net loss for the nine
months ended June 27, 2009 includes a $10 million reduction in gross profit
associated with Nortel Networks’ petition for reorganization under bankruptcy
law. Lastly, net loss for the nine months ended June 27, 2009 includes a gain on
repurchase of debt of $13.5 million.
Key
performance measures
|
Three
Months Ended
|
||||||||||||||||
|
June
27,
2009
|
March
28,
2009
|
December
27,
2009
|
September
27,
2008
|
|||||||||||||
|
Days
sales outstanding (1)
|
52
|
54
|
57
|
51
|
||||||||||||
|
Inventory
turns (2)
|
6.5
|
6.4
|
6.8
|
7.7
|
||||||||||||
|
Accounts
payable days (3)
|
57
|
55
|
53
|
52
|
||||||||||||
|
Cash
cycle days (4)
|
51
|
56
|
57
|
46
|
||||||||||||
|
(1)
|
Days
sales outstanding, or DSO, is calculated as the ratio of ending accounts
receivable, net, to average daily net sales for the
quarter.
|
|
(2)
|
Inventory
turns (annualized) are calculated as the ratio of four times our cost of
sales for the quarter to inventory at period
end.
|
|
(3)
|
Accounts
payable days is calculated as the ratio of 365 days divided by
accounts payable turns, in which accounts payable turns is calculated as
the ratio of four times our cost of sales for the quarter to accounts
payable at period end.
|
|
(4)
|
Cash
cycle days is calculated as the ratio of 365 days to inventory turns,
plus days sales outstanding minus accounts payable
days.
|
Net
Sales
Net
sales for the three months ended June 27, 2009 decreased 36.5%, from $1.9
billion in the third quarter of 2008 to $1.2 billion in the third quarter of
2009. The decrease was primarily the result of the weakening economy which
reduced demand across all of our end markets. Due to the weakening economy,
sales decreased $300 million in our communications end market, $161 million in
our high-end computing end market, $120 million in our multi-media end market,
$86 million in our automotive, defense and aerospace, and industrial and
semiconductor capital equipment end markets, and $27 million in our medical end
market.
Net
sales for the nine months ended June 27, 2009 decreased by 30.5% to $3.8
billion, from $5.5 billion for the nine months ended June 28, 2008. The decrease
was primarily the result of the weakening economy which reduced demand across
all of our end markets. Due to the weakening economy, sales decreased $622
million in our communications end market, $408 million in our high-end computing
end market, $350 million in our multi-media end market, $242 million in our
automotive, defense and aerospace, and industrial and semiconductor capital
equipment end markets, and $53 million in our medical end market.
Gross
Margin
Gross
margin decreased from 7.3% for the three months ended June 28, 2008 to 6.3% for
the three months ended June 27, 2009, and from 7.2% for the nine months ended
June 28, 2008 to 6.0% for the nine months ended June 27, 2009. The decreases for
the three and nine month periods were primarily a result of
significantly lower business volume in 2009, as discussed above, partially
offset by improved margins as a result of cost reduction
initiatives.
We
expect gross margins to continue to fluctuate based on overall production and
shipment volumes and changes in the mix of products demanded by our major
customers. Fluctuations in our gross margins may also be caused by a number of
other factors, some of which are outside of our control, including
(a) greater competition in the EMS industry and pricing pressures from
OEMs due to greater focus on cost reduction; (b) provisions for excess
and obsolete inventory that we are not able to charge back to a customer or
sales of inventories previously written down; (c) changes in operational
efficiencies; (d) pricing pressure on electronic components resulting from
economic conditions in the electronics industry, with EMS companies competing
more aggressively on cost to obtain new or maintain existing business; and (e)
our ability to transition manufacturing and assembly operations to lower cost
regions in an efficient manner.
Operating
Expenses
Selling,
general and administrative
Selling,
general and administrative expenses decreased $19.5 million, from $77.4 million,
or 4.1% of net sales, for the three months ended June 28, 2008, to $57.9
million, or 4.8% of net sales, for the three months ended June 27, 2009. For the
nine months ended June 27, 2009, selling, general and administrative expenses
decreased to $177.9 million, or 4.7% of net sales, from $245.8 million, or 4.5%
of net sales, for the nine months ended June 28, 2008. The decrease for both the
three and nine month periods was attributable to cost reduction initiatives,
primarily reductions in staffing related costs, across the Company.
Research
and Development
Research
and development expenses decreased $2.1 million, from $5.9 million, or 0.3% of
net sales, in the third quarter of 2008, to $3.8 million, or 0.3% of net sales,
in the third quarter of 2009. For the nine months ended June 27, 2009,
research and development expenses decreased to $12.7 million from $14.7 million
for the nine months ended June 28, 2008. The decrease for the three months and
nine months ended June 27, 2009 was the result of cost reduction initiatives
throughout the first nine months of 2009.
Restructuring
costs
Costs
associated with restructuring activities, other than those activities related to
business combinations, are accounted for in accordance with SFAS No. 146,
“Accounting for Costs
Associated with Exit or Disposal Activities”, or SFAS No. 112, “Employers’ Accounting for
Postemployment Benefits”, as applicable. Pursuant to SFAS No. 112,
restructuring costs related to employee severance are recorded when probable and
estimable based on our severance policy with respect to severance payments. For
restructuring costs other than employee severance accounted for under SFAS No.
112, a liability is recognized in accordance with SFAS No. 146 only when
incurred. Costs associated with restructuring activities related to business
combinations are accounted for in accordance with EITF 95-3, “Recognition of Liabilities in
Connection with a Purchase Business Combination”.
2009
Restructuring Plan
During
the first quarter of 2009, we initiated a restructuring plan as a result of the
slowdown in the global electronics industry and worldwide economy. The plan is
designed to improve capacity utilization levels and reduce costs by
consolidating manufacturing and other activities in locations with higher
efficiencies and lower costs. Costs associated with this plan are expected to
include employee severance, costs related to owned and leased facilities and
equipment that are no longer in use, and other costs associated with the exit of
certain contractual arrangements due to facility closures. Actions under this
plan are expected to be initiated during 2009 and total costs for this plan are
expected to be in the range of $35 million to $40 million. We expect actions
under this plan to increase our gross and operating margins and be cash flow
positive over the next 12 to 24 months as cash outlays for severance and
facility closures will be recovered by cost savings and asset sales resulting
from actions under the plan. However, there can be no assurance that these
benefits will be achieved due to changes in the restructuring plan that increase
costs or any failure of anticipated asset sales to generate projected amounts.
Below is a summary of restructuring costs associated with facility closures and
other consolidation efforts implemented under this plan:
|
Employee
Termination
Severance
and
Related Benefits
|
Leases
and Facilities Shutdown and Consolidation Costs
|
Impairment
of
Assets or Redundant
Assets
|
||||||||||||||
|
Cash
|
Cash
|
Non-Cash
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Balance
at September 27, 2008
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||
|
Charges
to operations
|
7,009
|
482
|
—
|
7,491
|
||||||||||||
|
Charges
utilized
|
(2,229
|
)
|
(482
|
)
|
—
|
(2,711
|
)
|
|||||||||
|
Balance
at December 27, 2008
|
4,780
|
—
|
—
|
4,780
|
||||||||||||
|
Charges
to operations
|
7,524
|
1,160
|
—
|
8,684
|
||||||||||||
|
Charges
utilized
|
(5,662
|
)
|
(1,160
|
)
|
—
|
(6,822
|
)
|
|||||||||
|
Balance
at March 28, 2009
|
6,642
|
—
|
—
|
6,642
|
||||||||||||
|
Charges
to operations
|
6,121
|
3,954
|
570
|
10,645
|
||||||||||||
|
Charges
utilized
|
(6,109
|
)
|
(3,583
|
)
|
(570
|
)
|
(10,262
|
)
|
||||||||
|
Reversal
of accrual
|
(321
|
)
|
—
|
—
|
(321
|
)
|
||||||||||
|
Balance
at June 27, 2009
|
$
|
6,333
|
$
|
371
|
$
|
—
|
$
|
6,704
|
||||||||
During
the three and nine months ended June 27, 2009, we recorded restructuring charges
of $5.8 million and $20.3 million, respectively, for employee termination costs,
of which $14.0 million has been utilized and $6.3 million is expected to be paid
during the remainder of 2009. These costs were provided for approximately 1,200
and 3,000 terminated employees for the three and nine months ended June 27,
2009, respectively.
Restructuring
Plans — Prior Years
Below
is a summary of restructuring costs associated with facility closures and other
consolidation efforts that were implemented in prior fiscal years:
|
Employee
Termination
Severance
and
Related Benefits
|
Leases
and Facilities Shutdown and Consolidation Costs
|
Impairment
of
Assets or Redundant
Assets
|
||||||||||||||
|
Cash
|
Cash
|
Non-Cash
|
Total
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Balance
at September 30, 2006
|
$
|
21,349
|
$
|
9,804
|
$
|
—
|
$
|
31,153
|
||||||||
|
Charges
(recovery) to operations
|
35,169
|
11,195
|
(831
|
)
|
45,533
|
|||||||||||
|
Charges
recovered (utilized)
|
(47,873
|
)
|
(12,132
|
)
|
831
|
(59,174
|
)
|
|||||||||
|
Reversal
of accrual
|
(2,505
|
)
|
(441
|
)
|
—
|
(2,946
|
)
|
|||||||||
|
Balance
at September 29, 2007
|
6,140
|
8,426
|
—
|
14,566
|
||||||||||||
|
Charges
to operations
|
64,126
|
16,519
|
2,456
|
83,101
|
||||||||||||
|
Charges
utilized
|
(45,248
|
)
|
(19,765
|
)
|
(2,456
|
)
|
(67,469
|
)
|
||||||||
|
Reversal
of accrual
|
(833
|
)
|
(892
|
)
|
—
|
(1,725
|
)
|
|||||||||
|
Balance
at September 27, 2008
|
24,185
|
4,288
|
—
|
28,473
|
||||||||||||
|
Discontinued
operations
|
5,607
|
—
|
—
|
5,607
|
||||||||||||
|
Balance
at September 27, 2008, including discontinued
operations
|
29,792
|
4,288
|
—
|
34,080
|
||||||||||||
|
Charges
to operations
|
3,222
|
1,989
|
644
|
5,855
|
||||||||||||
|
Charges
utilized
|
(11,651
|
)
|
(2,587
|
)
|
(644
|
)
|
(14,882
|
)
|
||||||||
|
Reversal
of accrual
|
(4,067
|
)
|
(44
|
)
|
—
|
(4,111
|
)
|
|||||||||
|
Balance
at December 27, 2008
|
17,296
|
3,646
|
—
|
20,942
|
||||||||||||
|
Charges
to operations
|
2,953
|
2,905
|
1,121
|
6,979
|
||||||||||||
|
Charges
utilized
|
(11,299
|
)
|
(2,839
|
)
|
(1,121
|
)
|
(15,259
|
)
|
||||||||
|
Reversal
of accrual
|
(89
|
)
|
—
|
—
|
(89
|
)
|
||||||||||
|
Balance
at March 28, 2009
|
8,861
|
3,712
|
—
|
12,573
|
||||||||||||
|
Charges
to operations
|
1,944
|
925
|
819
|
3,688
|
||||||||||||
|
Charges
utilized
|
(3,673
|
)
|
(2,460
|
)
|
(819
|
)
|
(6,952
|
)
|
||||||||
|
Reversal
of accrual
|
—
|
(123
|
)
|
—
|
(123
|
)
|
||||||||||
|
Balance
at June 27, 2009
|
$
|
7,132
|
$
|
2,054
|
$
|
—
|
$
|
9,186
|
||||||||
During
the three and nine months ended June 27, 2009, we recorded restructuring charges
of $1.9 million and $4.0 million, respectively, for employee termination costs.
These costs were provided for approximately 400 and 1,600 terminated employees
for the three and nine months ended June 27, 2009, respectively. In connection
with restructuring actions we have already implemented under these restructuring
plans, we expect to pay remaining facilities related restructuring liabilities
of $2.1 million through 2010 and the majority of severance costs of $7.1 million
through the remainder of 2009. We have substantially completed our actions under
these prior year restructuring plans.
All
Restructuring Plans
In
connection with all of our restructuring plans, restructuring costs of $15.9
million were accrued as of June 27, 2009, of which $15.7 million was included in
accrued liabilities and $0.2 million was included in other long-term liabilities
on the condensed consolidated balance sheet.
The
recognition of restructuring charges requires us to make judgments and estimates
regarding the nature, timing, and amount of costs associated with planned exit
activities, including estimating sublease income and the fair values, less
selling costs, of property, plant and equipment to be disposed of. Our estimates
of future liabilities may change, requiring us to record additional
restructuring charges or reduce the amount of liabilities already
recorded.
Asset
Impairment
During
the three months ended June 27, 2009 and June 28, 2008, we recorded impairment
charges of zero and $1.7 million, respectively. During the nine months ended
June 27, 2009 and June 28, 2008, we recorded impairment charges of $7.2 million
and $1.7 million, respectively, which related primarily to a decline in the fair
value of certain properties held for sale.
Interest
Income and Expense
Interest
income decreased from $3.6 million for the three months ended June 28, 2008 to
$0.8 million for the three months ended June 27, 2009, and from $15.0 million
for the nine months ended June 28, 2008 to $6.0 million for the nine months
ended June 27, 2009. The decreases were primarily attributable to lower interest
rates during 2009 as a result of weakening economic conditions and uncertainty
and volatility in the financial markets.
Interest
expense decreased to $29.4 million for the three months ended June 27,
2009, from $30.0 million for the three months ended June 28, 2008, and to
$86.7 million for the nine months ended June 27, 2009 from $96.9 million for the
nine months ended June 28, 2008. The decrease is related to a significant
reduction in LIBOR during 2009 as a result of uncertainty and volatility in the
financial markets, which reduced interest expense on our variable rate debt. In
addition, our average debt balance was lower due to the repurchase of $33.7
million of debt in the second quarter of 2009.
The
decrease for the nine month period was primarily attributable to the termination
of our hedging relationships for our 6.75% Notes during the second quarter of
2009, which caused the interest rate on these notes to become fixed at 6.75%,
which was lower than the variable rate in effect when the hedging relationships
were in place. In addition, LIBOR was significantly lower in 2009 as a result of
uncertainty and volatility in the financial markets, which reduced interest
expense on our variable rate notes, and our average debt balance was lower due
to debt repurchases, as noted above.
Other
Income (Expense), net
Other
income (expense), net was $2.7 million and $5.9 million for the three months
ended June 27, 2009 and June 28, 2008, respectively, and $8.2 million and $5.5
million for the nine months ended June 27, 2009 and June 28, 2008, respectively.
The following table presents the major components of other income (expense),
net:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Foreign
exchange gains (losses)
|
$
|
1,916
|
$
|
3,561
|
$
|
(6,990
|
)
|
$
|
6,692
|
|||||||
|
Gain/(loss)
on extinguishment of debt
|
—
|
—
|
13,490
|
(2,237
|
)
|
|||||||||||
|
Other,
net
|
792
|
2,334
|
1,684
|
1,072
|
||||||||||||
|
Total
other income (expense), net
|
$
|
2,708
|
$
|
5,895
|
$
|
8,184
|
$
|
5,527
|
||||||||
We
reduce our exposure to currency fluctuations through the use of foreign currency
hedging instruments; however, hedges are established based on forecasts of
foreign currency transactions. To the extent actual amounts differ from
forecasted amounts, we will have exposure to currency fluctuations, resulting in
foreign exchange gains or losses.
During
the second quarter of 2009, we repurchased $4.3 million and $29.4 million of our
2010 and 2014 Notes, respectively. Upon repurchase, holders of the notes
received $19.6 million, including accrued interest of $0.3 million. In
connection with these repurchases, we recorded a gain of $13.5 million, net of
unamortized debt issuance costs of $0.6 million that were expensed upon
repurchase of the notes. During the first quarter of 2008, we redeemed $120
million of debt that was due in 2010. In connection with this redemption, $2.2
million of debt issuance costs were expensed.
On
November 19, 2008, we terminated our revolving credit facility and entered
into a new credit facility. In connection with the termination of the revolving
credit facility, we also terminated an interest rate swap associated with our
6.75% Notes. As a result of terminating the swap, we were required to
discontinue hedge accounting for the terminated swap and the remaining three
swaps designated under SFAS No. 133 as hedges of the 6.75% Notes. During the
period from November 22, 2008 through termination of the remaining swaps in
January 2009 (period during which hedge accounting was discontinued), changes in
the fair value of the swaps resulted in a $5.7 million gain. This gain
was partially offset by a decrease of $1.3 million in the fair market value of
our deferred compensation plan assets that resulted from volatile conditions in
the financial markets and $3.7 million from the write-off of long-term
investments during 2009. These items are reflected in “Other, net” in the table
above.
Provision
for Income Taxes
We
estimate our annual effective tax rate at the end of each quarterly period. Our
estimate takes into account the geographic mix of our pre-tax income/(loss), our
expected annual pre-tax income (loss), implementation of tax planning strategies
and possible outcomes of audits and other uncertain tax positions. To the
extent there are fluctuations in any of these variables during a period,
our provision for income taxes may vary. Our provision for income tax expense
was $14.1 million and $19.1 million for the three and nine months ended June 27,
2009, compared to $7.3 million and $19.0 million for the three and nine months
ended June 28, 2008.
During
the three months ended June 27, 2009, we increased reserves for uncertain tax
positions by $11.3 million for current year tax positions. It is reasonably
possible that this amount could significantly increase or decrease within the
next 12 months based on final determinations by the taxing authorities and
resolution of any disputes by us.
Liquidity
and Capital Resources
|
Nine Months Ended
|
||||||||
|
June
27,
2009
|
June
28,
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
(In thousands)
|
||||||||
|
Net
cash provided by (used in):
|
||||||||
|
Operating
activities
|
$
|
151,480
|
$
|
197,518
|
||||
|
Investing
activities
|
(81,835
|
)
|
(42,988
|
)
|
||||
|
Financing
activities
|
(68,719
|
)
|
(120,000
|
)
|
||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
6,886
|
13,610
|
||||||
|
Decrease
in cash and cash equivalents
|
$
|
7,812
|
$
|
48,140
|
||||
Cash
and cash equivalents were $877.6 million at June 27, 2009 and $869.8 million at
September 27, 2008. Our cash levels vary during any given quarter depending
on the timing of collections from customers and payments to suppliers, the
extent and timing of sales of accounts receivable, borrowings under credit
facilities and other factors. Our working capital was $1.3 billion and $1.6
billion at June 27, 2009 and September 27, 2008, respectively.
Net
cash provided by operating activities was $151.5 million and $197.5 million for
the nine months ended June 27, 2009 and June 28, 2008, respectively. During the
nine months ended June 27, 2009 we generated $176.6 million of cash from changes
in net operating assets, which consist primarily of accounts receivable,
inventories, and accounts payable. Cash generated from changes in net operating
assets reflects our focused efforts to reduce the level of net operating assets
required to fund our operations.
Although
we were able to generate cash by reducing our net operating assets, the economic
slowdown negatively affected our working capital metrics for accounts receivable
and inventory. Our days sales outstanding (“DSO”) (a measure of how quickly we
collect our accounts receivable) increased from 51 days at September 27, 2008 to
52 days at June 27, 2009, as customers slowed their payment cycles. The DSO
metrics at September 27, 2008 and June 27, 2009 reflect the receipt of $15
million and $61.5 million from the sales of accounts receivables, respectively.
In absolute dollars, inventory decreased by $117.1 million, but due to lower
sales levels our inventory turns decreased from 7.7 turns during the three
months ended September 27, 2008 to 6.5 turns during the three months ended June
27, 2009. We expect to improve our inventory turns in the coming periods.
Partially mitigating the change in working capital metrics for accounts
receivable and inventory was our ability to increase our days payable
outstanding (a measure of how quickly we pay our suppliers) to 57 days for the
three months ended June 27, 2009 from 52 days for the three months ended
September 27, 2008.
Net
cash used in investing activities was $81.8 million and $43.0 million for the
nine months ended June 27, 2009 and June 28, 2008, respectively. During the nine
months ended June 27, 2009, we had $55.5 million of capital expenditures and
acquired, net of cash, a business operation from JDSU for $29.7 million (refer
to Note 4. Acquisition).
Net
cash used in financing activities was $68.7 million and $120.0 million for the
nine months ended June 27, 2009 and June 28, 2008, respectively. During the
second quarter of 2009, we redeemed $33.7 million of our 2010 and 2014 Notes for
$19.6 million and, during the first quarter of 2008, we redeemed $120.0 million
of our 2010 Notes at par. During the nine months ended June 27, 2009, we
repurchased 60.5 million shares of our common stock for a total of $29.2
million, including commissions, and we posted collateral of $19.9 million in the
form of cash against certain of our collateralized obligations.
Sales of Accounts
Receivable. Certain of our subsidiaries have entered into agreements
that permit them to sell specified accounts receivable. Proceeds from accounts
receivable sales under these agreements were $61.5 million and $101.7
million for the three and nine months ended June 27, 2009, respectively,
and $292.3 million and $844.3 million for the three and nine month periods ended
June 28, 2008, respectively. Sold receivables are subject to certain limited
recourse provisions. Proceeds from sales of accounts receivable are included in
cash flows from operating activities in the condensed consolidated statement of
cash flows.
Other
Liquidity Matters.
Current
weak economic conditions and tightening of credit markets have increased the
risk of delinquent or uncollectible accounts receivable. Additionally, such
factors have negatively affected our sales, net income and operating cash flows.
We expect this trend to continue in the near term.
On
January 14, 2009, one of our customers, Nortel Networks, filed a petition
for reorganization under bankruptcy law. As a result, we performed an analysis
as of December 27, 2008 to quantify our potential exposure, considering factors
such as which legal entities of the customer are included in the bankruptcy
reorganization, future demand from Nortel Networks, and administrative and
reclamation claim priority. As a result of the analysis, we determined that
certain accounts receivable may not be collectible and therefore deferred
recognition of revenue in the amount of $5.0 million for shipments made in the
first quarter of 2009. Additionally, we determined that certain inventory
balances may not be recoverable and provided a reserve for such inventories in
the amount of $5.0 million in the first quarter of 2009. We updated our analysis
at June 27, 2009 and determined that no additional reserves were necessary. Our
estimates are subject to change as additional information becomes
available.
In
the ordinary course of business, we are or may become party to legal
proceedings, claims and other contingencies, including environmental matters and
examinations and investigations by government agencies. As of June 27, 2009, we
had reserves of $28.8 million related to such matters. We may not be able
to accurately predict the outcome of these matters or the amount or timing of
cash flows that may be required to defend ourselves or to settle such matters.
For further information regarding legal proceedings, see Part II,
Item 1. Legal Proceedings.
As
of June 27, 2009, we have a liability of $29.4 million for uncertain tax
positions. Our estimate of our liability for uncertain tax positions is based on
a number of subjective assessments, including the likelihood of a tax obligation
being assessed, the amount of taxes (including interest and penalties), that
would ultimately be payable, and our ability to settle any such obligations on
favorable terms. Therefore, the amount of future cash flows associated with
uncertain tax positions may be significantly higher or lower than our recorded
liability.
We
have entered into, and continue to enter into, various transactions that
periodically require collateral. These obligations have historically arisen from
customs, import/export, VAT, utility services, debt financing, foreign exchange
contracts and interest rate swaps. We have collateralized, and may from time to
time collateralize, such obligations as a result of counterparty requirements or
for economic reasons. As of June 27, 2009, we had collateral of $19.9 million in
the form of cash against certain of our collateralized obligations.
Our
debt agreements currently contain a number of restrictive covenants, including
prohibitions on incurring additional debt, making investments and other
restricted payments, paying dividends and redeeming or repurchasing capital
stock and debt, subject to certain exceptions. We were in compliance with these
covenants as of June 27, 2009. However, we may be required to seek waivers or
amendments to certain covenants for our debt instruments if we are unable to
comply with the requirements of the covenants in the future. We may not be able
to obtain such waivers or amendments on terms acceptable to us or at all, and,
in such case, these covenants could materially adversely impact our ability to
conduct our business or carry out our restructuring plans.
Our
next debt maturity is in June 2010, at which time debt with a carrying amount of
$175.7 million matures. Our next debt maturity thereafter is in 2013. We
may, however, consider early redemptions of our debt in future periods, possibly
using proceeds from additional debt or equity financings. In addition to our
existing covenant requirements, future debt financing may require us to comply
with financial ratios and covenants. Equity financing, if required, may result
in dilution to existing stockholders.
We
announced on October 27, 2008 that our Board of Directors had approved a
stock repurchase program covering up to 10% of our shares based on our closing
stock price on October 29, 2008, which equates to repurchases of
approximately $35.0 million. Purchases under the program shall be made at
prevailing market prices or in privately negotiated transactions. The program
shall continue through December 31, 2009, unless otherwise determined by
the Board of Directors. During the nine months ended June 27, 2009, we
repurchased 60.5 million shares of our common stock for a total of $29.2
million, including commissions.
Our liquidity
needs are largely dependent on changes in our working capital, including
the extension of trade credit by our suppliers, investments in manufacturing
inventory, facilities and equipment, and repayments of obligations under
outstanding indebtedness. Our primary sources of liquidity include cash of
$877.6 million, our $135 million credit facility, our $250 million accounts
receivable sales program and cash generated from operations. As of June 27,
2009, we were eligible to borrow $79.7 million under our credit
facility.
We
believe our existing cash resources and other sources of liquidity, together
with cash generated from operations and planned sales of assets, will be
sufficient to meet our working capital requirements through at least the next
12 months. Should demand for our products decrease significantly over the
next 12 months, the available cash provided by operations could be
adversely impacted.
Item
3. Quantitative and
Qualitative Disclosures About Market Risk
Interest
Rate Risk
Our
primary exposure to market risk for changes in interest rates relates to certain
of our outstanding debt obligations. Currently, we do not use derivative
financial instruments in our investment portfolio. As of June 27, 2009, we had
no short-term investments.
As
of June 27, 2009, we had $1.45 billion of debt, of which $1.0 billion bears
interest at a fixed rate and $300 million of variable rate debt has been
converted to fixed rate through the use of interest rate swaps. Accordingly, our
exposure to interest rate changes is limited to variable rate debt of $145.0
million. The effect of an immediate 10% change in interest rates would not be
material to our results of operations.
Foreign
Currency Exchange Risk
We
transact business in foreign countries. Our foreign exchange policy requires
that we take certain steps to limit our foreign exchange exposures related to
certain assets and liabilities and forecasted cash flows. However, such policy
does not require us to hedge all foreign exchange exposures. Further, foreign
currency hedges are based on forecasted transactions, the amount of which may
differ from that actually incurred. As a result, we can experience foreign
exchange gains and losses in our results of operations.
Our
primary foreign currency cash flows are in certain Asian and European countries,
Brazil and Mexico. We enter into short-term foreign currency forward contracts
to hedge currency exposures associated with certain assets and liabilities
denominated in foreign currencies. These contracts typically have maturities of
three months or less and are not designated as part of a hedging relationship in
accordance with SFAS No. 133. All outstanding foreign currency forward
contracts are marked-to-market at the end of the period with unrealized gains
and losses included in other income (expense), net, in the condensed
consolidated statements of operations. At June 27, 2009, we had outstanding
foreign currency forward contracts to exchange various foreign currencies for
U.S. dollars in the aggregate notional amount of
$397.8 million.
We
also utilize foreign currency forward and option contracts to hedge certain
operational (“cash flow”) exposures resulting from changes in foreign currency
exchange rates. Such exposures result from forecasted sales denominated in
currencies different from those for cost of sales and other expenses. These
contracts are typically less than 12 months in duration and are accounted
for as cash flow hedges under SFAS No. 133, subject to periodic assessment
of effectiveness. The effective portion of changes in the fair value of the
contracts is recorded in stockholders’ equity as a separate component of
accumulated other comprehensive income and is recognized in the condensed
consolidated statement of operations when the hedged item affects earnings. We
had forward and option contracts related to cash flow hedges in various foreign
currencies in the aggregate notional amount of $9.1 million at June 27,
2009. The net impact of an immediate 10% change in exchange rates would not be
material to our condensed consolidated financial statements, provided we are
adequately hedged. However, if we are not adequately hedged, we could incur
significant gains or losses.
Item
4. Controls and
Procedures
Changes
in Internal Control Over Financial Reporting
There
was no change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the quarter ended June 27, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Evaluation
of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and Principal Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. Disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that their objectives are met. Further, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints, and the benefits of disclosure controls and procedures must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of disclosure controls and procedures can provide
absolute assurance that all disclosure control issues and instances of fraud, if
any, within the Company have been detected. Nonetheless, our Chief Executive
Officer and Principal Financial Officer have concluded that, as of June 27,
2009, (1) our disclosure controls and procedures were designed to provide
reasonable assurance of achieving their objectives, and (2) our disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports we file and submit under the
Exchange Act is recorded, processed, summarized and reported as and when
required, and that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Principal Financial
Officer, to allow timely decisions regarding its required
disclosure.
PART II.
OTHER INFORMATION
Item
1. Legal
Proceedings
As
previously disclosed, we were subject to federal and state lawsuits, as well as
investigations by the SEC and the Department of Justice (“DoJ”), in connection
with certain of our historical stock option administration
practices. Of these matters, only the DoJ investigation remains open,
all other matters having been concluded.
Non-U.S.
Proceedings
A
non-U.S. governmental entity has made a claim for penalties against us asserting
that we did not comply with bookkeeping rules in accordance with applicable tax
regulations. We have provided documents that we believe demonstrate our
compliance with these tax regulations. We have appealed the penalties in
administrative court, and have not paid the penalties pending review by the
court. The administrative court has not indicated when it will issue a
decision. We believe we have a meritorious position in this matter and are
contesting this claim vigorously.
Other
Proceedings
We
are also subject to other routine legal proceedings, as well as demands, claims
and threatened litigation, that arise in the normal course of our business. The
ultimate outcome of any litigation is uncertain and unfavorable outcomes could
have a negative impact on our results of operations and financial condition.
Regardless of outcome, litigation can have an adverse impact on us as a result
of incurrence of defense costs, diversion of management resources and other
factors. We record liabilities for legal proceedings when a loss becomes
probable and the amount of loss can be reasonably estimated.
Item
1A. Risk Factors Affecting
Operating Results
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. “Risk Factors Affecting
Operating Results” in our Annual Report on Form 10-K for the fiscal year
ended September 27, 2008 and in Part II, IA “Risk Factors Affecting
Operating Results” in our Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 27, 2008 and March 29, 2009, which have not materially changed
other than as set forth below.
Continued
adverse market conditions in the electronics industry could reduce our future
sales and earnings per share.
Recently,
the business environment in the electronics industry has become challenging due
to adverse worldwide economic conditions. There has been an erosion of global
consumer confidence amidst concerns over declining asset values, inflation,
volatility in energy costs, geopolitical issues, the availability and cost of
credit, rising unemployment, and the stability and solvency of financial
institutions, financial markets, businesses, and sovereign nations. These
concerns have slowed global economic growth and have resulted in recessions in
many countries, including in the U.S., Europe and certain countries in Asia. The
conditions have resulted, and may result in the future, in our customers
delaying purchases of the products we manufacture for them and our customers
placing purchase orders for lower volumes of products than previously
experienced or anticipated. We cannot accurately predict future levels of demand
for our customers’ electronics products. Consequently, our past operating
results, earnings and cash flows may not be indicative of our future operating
results, earnings and cash flows, which could be less than past
results.
If
these economic conditions continue to persist or worsen, in addition to our
customers or potential customers reducing or delaying orders, a number of other
negative effects on our business could result, including the insolvency of key
suppliers, which could result in production delays, the inability of customers
to obtain credit, and the insolvency of one or more customers. Any of these
effects could impact our ability to effectively manage inventory levels and
collect receivables, increase our need for cash, and decrease our net revenue
and profitability.
Many
of the industries to which we provide products have recently experienced
significant financial difficulty, with some of the participants filing for
bankruptcy. Such significant financial difficulty, if experienced by one or more
of our customers, may negatively affect our business due to the decreased demand
of these financially distressed customers, the potential inability of these
companies to make full payment on amounts owed to us, or both. For example, one
of our customers, Nortel Networks, has filed a petition for reorganization under
bankruptcy law.
We
may be unable to obtain sufficient financing to maintain or expand our
operations, which may cause our stock price to fall and reduce the business our
customers and vendors do with us.
In
order to allow us to better manage our working capital requirements, we entered
into a five-year $135 million credit facility in November 2008, of which
approximately $79.7 million may be borrowed as of June 27, 2009. Should we need
additional sources of liquidity above and beyond such facility, we cannot be
certain that financing will be available on acceptable terms or at all. In
addition, although we seek high quality counterparties for our financing
arrangements, there can be no assurance that any such counterparty will be able
to provide credit when and as required by our current or future financing
arrangements. If additional financing, including an expansion of the existing
credit facility, is not available when required, our ability to maintain or
increase our rates of production, expand our manufacturing capacity or refinance
our outstanding debt will be harmed, which could cause our stock price to fall
and reduce our customers’ and vendors’ willingness to do business with
us.
We
rely on a relatively small number of customers for a substantial portion of our
sales, and declines in sales to these customers would reduce our net sales and
net income.
Although
no single customer generates 10% or more of our sales, a significant portion of
our sales is generated by a small number of customers. Sales to our ten largest
customers represented 47.5% of our net sales during the third quarter of 2009.
We expect to continue to depend upon a relatively small number of customers for
a significant percentage of our sales. Consolidation among our customers may
further concentrate our business in a limited number of customers and expose us
to increased risks related to dependence on a small number of customers. In
addition, a significant reduction in sales to any of our large customers or
significant pricing and margin pressures exerted by a customer would adversely
affect our operating results. In the past, some of our large customers have
significantly reduced or delayed the volume of manufacturing services ordered
from us as a result of changes in their business, consolidations or divestitures
or for other reasons. In particular, certain of our customers have from time to
time entered into manufacturing divestiture transactions with other EMS
companies, and such transactions could adversely affect our revenues with these
customers. We cannot assure you that present or future large customers will not
terminate their manufacturing arrangements with us or significantly change,
reduce or delay the amount of manufacturing services ordered from us, any of
which would reduce our net sales and net income.
Consolidation
in the electronics industry may adversely affect our business by increasing
competition or customer buying power and increasing prices we pay for
components.
Consolidation
in the electronics industry among our customers, our suppliers and/or our
competitors may increase as companies combine to achieve further economies of
scale and other synergies, especially in light of the worldwide economic
downturn. Consolidation in the electronics industry could result in an
increasing number of very large electronics companies offering products in
multiple sectors of the electronics industry. The significant purchasing and
market power of these large companies could increase competitive pressures on
us. In addition, if one of our customers is acquired by another company that
does not rely on us to provide EMS services and has its own production
facilities or relies on another provider of similar services, we may lose that
customer’s business. There can be no assurance the new owner of these assets
will continue to purchase products from us after the acquisition has been
completed. In addition, consolidation in the electronics industry may also
result in excess manufacturing capacity among EMS companies, which could drive
down gross margins and therefore profitability. Similarly, consolidating among
our suppliers could result in a sole or limited source for certain components
used in our customers’ products. Any such consolidation could cause us to be
required to pay increased prices for such components, which would reduce our
gross margin and profitability.
Our
stock has been trading at less than $1.00 per share, which could cause our stock
to be delisted from the NASDAQ Global Select Market.
Effective
August 31, 2009, the rules of the NASDAQ Global Select Market will again
require that listed companies maintain a minimum price of $1.00 per share, and
will permit NASDAQ to delist companies whose stock price falls below $1.00 per
share for 30 consecutive trading days. Our stock has traded at less than $1.00
per share for more than the last thirty days. To avoid possible
delisting, as well as for other reasons, the Company has declared a reverse
split of one-for-six effective August 14, 2009. However, the effect of a reverse
split upon the market price of our common stock cannot be predicted with any
certainty. The market price of our common stock is primarily driven by other
factors unrelated to the number of shares outstanding, including our current and
expected future performance, conditions in the EMS industry and stock market
conditions generally. Therefore, it is possible that the per share price of our
common stock after the reverse split will not rise in proportion to the
reduction in the number of shares of our common stock outstanding resulting from
the reverse stock split, in which case our stock could be delisted from the
NASDAQ Global Select Market.
We
are subject to risks arising from our international operations.
We
conduct our international operations primarily in Asia, Latin America, Canada
and Europe, and we continue to consider additional opportunities to make foreign
acquisitions and construct new foreign facilities. We generated 74.5% of our net
sales from non-U.S. operations during the third quarter of 2009, and a
significant portion of our manufacturing material was provided by international
suppliers during this period. As a result of our international operations, we
are affected by economic and political conditions in foreign countries,
including:
· the
imposition of government controls;
· difficulties
in obtaining or complying with export license requirements;
· political
and economic instability, including armed conflicts;
· trade
restrictions;
· changes
in tariffs;
· labor
unrest and difficulties in staffing;
· inflexible
employee contracts in the event of business downturns;
· coordinating
communications among and managing international operations;
· fluctuations
in currency exchange rates;
· currency
controls
· increases
in duty and/or income tax rates;
· difficulties
in obtaining export licenses;
· excess
costs associated with reducing employment or shutting down
facilities;
· misappropriation
of intellectual property; and
· constraints
on our ability to maintain or increase prices.
Our
operations in certain foreign locations receive favorable income tax treatment
in the form of tax holidays or other incentives. In the event that such tax
holidays or other incentives are not extended, are repealed, or we no longer
qualify for such programs, our taxes may increase, which would reduce our net
income.
Additionally,
certain foreign jurisdictions restrict the amount of cash that can be
transferred to the United States of America or impose taxes and penalties
on such transfers of cash. To the extent we have excess cash in foreign
locations that could be used in, or is needed by, our U.S. operations, we
may incur significant penalties and/or taxes to repatriate
these funds.
To
respond to competitive pressures and customer requirements, we may further
expand internationally in lower cost locations, particularly in Asia, Eastern
Europe and Latin America. As we pursue continued expansion in these locations,
we may incur additional capital expenditures. In addition, the cost structure in
certain countries that are now considered to be favorable may increase as
economies develop or as such countries join multinational economic communities
or organizations, causing local wages to rise. As a result, we may need to
continue to seek out new locations with lower costs and the employee and
infrastructure base to support electronics manufacturing. We cannot assure you
that we will realize the anticipated strategic benefits of our international
operations or that our international operations will contribute positively to
our operating results.
We
can experience losses due to foreign exchange rate fluctuations, which would
reduce our net income.
Because
we manufacture and sell a substantial portion of our products abroad, our
operating costs are subject to fluctuations in foreign currency exchange rates.
Specifically, if the U.S. dollar weakens against the foreign currencies in which
we denominate certain of our trade accounts payable, fixed purchase obligations
and other expenses, the U.S. dollar equivalent of such expenses would increase.
We use financial instruments, primarily short-term foreign currency forward
contracts, to hedge certain forecasted foreign currency commitments arising from
trade accounts receivable, trade accounts payable and fixed purchase
obligations. Our foreign currency hedging activities depend largely upon the
accuracy of our forecasts of future sales, expenses and monetary assets and
liabilities. As such, our foreign currency forward contracts may exceed or not
cover our full exposure to exchange rate fluctuations. If these hedging
activities are not successful, we may experience significant unexpected expenses
from fluctuations in exchange rates. Although we believe our foreign exchange
hedging policies are reasonable and prudent under the circumstances, we can
provide no assurances that we will not experience losses arising from unhedged
currency fluctuations in the future, which could be significant.
We
are subject to a continuing government investigation concerning our historical
stock option practices, which could result in our liability for significant
penalties and costs.
As
a result of an investigation of our accounting for stock options, we filed a
comprehensive Form 10-K for 2006 which restated our consolidated financial
statements for prior years and which reduced our net income due to mispriced
stock options granted in prior periods. Following this filing, we became subject
to federal and state lawsuits, as well as investigations by the SEC and the
Department of Justice (“DoJ”). Of these matters, only the DoJ investigation
remains open, all other matters having been concluded. We cannot predict the
final resolution of the DoJ investigation, which could result in the payment of
significant penalties and costs to indemnify current or former officers and
directors of the Company.
Item
2. Unregistered Sales of
Equity Securities and Use of Proceeds
The
table below sets forth information regarding our repurchases of our common stock
during the nine months ended June 27, 2009.
|
TOTAL
NUMBER OF
SHARES
PURCHASED
|
AVERAGE
PRICE PAID
PER SHARE
|
TOTAL NUMBER OF
SHARES PURCHASED
AS PART OF
PUBLICLY
ANNOUNCED
PROGRAMS
|
MAXIMUM
DOLLAR VALUE OF
SHARES THAT
MAY YET BE
PURCHASED
UNDER THE
PROGRAMS
|
|||||||||||||
|
Month
#1
|
||||||||||||||||
|
September 28,
2008 through October 25, 2008
|
—
|
$
|
—
|
—
|
$
|
35,000,000
|
||||||||||
|
Month
#2
|
||||||||||||||||
|
October 26,
2008 through November 22, 2008
|
21,006,503
|
$
|
0.54
|
21,006,503
|
$
|
23,621,000
|
||||||||||
|
Month
#5
|
||||||||||||||||
|
January
25, 2009 through February 21, 2009
|
18,160,835
|
$
|
0.34
|
18,160,835
|
$
|
17,509,000
|
||||||||||
|
Month
#6
|
||||||||||||||||
|
February
22, 2009 through March 28, 2009
|
4,821,914
|
$
|
0.29
|
4,821,914
|
$
|
16,114,000
|
||||||||||
|
Month
#8
|
||||||||||||||||
|
April
26, 2009 through May 23, 2009
|
15,495,994
|
$
|
0.60
|
15,495,994
|
$
|
6,872,000
|
||||||||||
|
Month
#9
|
||||||||||||||||
|
May
24, 2009 through June 27, 2009
|
1,059,130
|
$
|
0.64
|
1,059,130
|
$
|
6,197,000
|
||||||||||
|
Total
|
60,544,376
|
$
|
0.48
|
60,544,376
|
||||||||||||
(1) All
months shown are our fiscal months. We did not repurchase any shares in months
omitted from the above table.
On
October 27, 2008, our Board of Directors authorized us to spend up to
approximately $35 million on share repurchases. As of June 27, 2009, we had
repurchased common stock for an aggregate purchase price of $29.2 million,
including commissions, under the program. Purchases shall be made at prevailing
market prices or in negotiated transactions off the market. The authorization is
effective through December 31, 2009, unless otherwise determined by the
Board of Directors.
Item
6.
Exhibits
|
Exhibit
Number
|
Description
|
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
32.1(1)
|
Certification
of the Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
|
|
|
32.2(1)
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished
herewith).
|
|
(1)
|
This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that Section, nor shall it be deemed incorporated by reference in any
filings under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any
filings.
|
SANMINA-SCI
CORPORATION
Pursuant
to the Requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
SANMINA-SCI
CORPORATION
|
||
|
(Registrant)
|
||
|
By:
|
/s/
JURE SOLA
|
|
|
Jure
Sola
|
||
|
Chief
Executive Officer
|
||
|
Date:
August 3, 2009
|
||
|
By:
|
/s/
TODD SCHULL
|
|
|
Todd
Schull
|
||
|
Senior
Vice President and
|
||
|
Corporate
Controller (Principal Financial and
|
||
|
Accounting Officer)
|
||
|
Date:
August 3, 2009
|
||
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
32.1(1)
|
Certification
of the Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
|
|
|
32.2(1)
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished
herewith).
|
|
(1)
|
This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that Section, nor shall it be deemed incorporated by reference in any
filings under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any
filings.
|