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Sanmina-SCI 10-Q 2007 UNITED STATES SECURITIES AND
EXCHANGE Washington, D.C. 20549 Form 10-Q
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 o Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
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 25, 2007, there were 529,845,823 shares outstanding of the issuer’s common stock, $0.01 par value per share.
SANMINA-SCI CORPORATION INDEX
2 SANMINA-SCI CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes. 3 SANMINA-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes. 4 SANMINA-SCI CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes. 5 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 (“Sanmina-SCI”, “we”, “our”, “the Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all normal recurring adjustments and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation. The results of operations for the nine months ended June 30, 2007, is not necessarily indicative of the results that may be expected for the full fiscal year. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2006, included in our 2006 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 unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Certain insignificant amounts reported in previous periods have been reclassified to conform to the current presentation. Recent Accounting Pronouncements On September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108, addresses quantifying the financial statement effects of misstatements; specifically, how the effects of prior year uncorrected misstatements must be considered in quantifying misstatements in the current year financial statements. In addition, SAB No. 108 provides guidance on the correction of misstatements, including the correction of prior period financial statements for immaterial misstatements. Importantly, SAB No. 108 offers a “one-time” special transition provision for correcting certain prior year misstatements that were uncorrected as of the beginning of the fiscal year of adoption. SAB No. 108 is effective for fiscal years ended after November 15, 2006. We expect to adopt this standard during the fourth quarter of fiscal year 2007. We are currently reviewing this bulletin to determine the potential impact to our financial statements. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” The statement requires an employer to recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status. The measurement date of the plans’ assets and obligations that determine the funded status will be as of the end of the Company’s fiscal year. The statement will be effective as of the end of fiscal 2007. We are currently reviewing this statement to determine the potential impact to our financial position, results of operations, and related cash flows. In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective for the Company beginning in the first quarter of fiscal 2008. The Company is currently evaluating the impact this statement will have on its consolidated financial statements. In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement,” (EITF 06-3). In EITF 6 06-3, a consensus was reached that entities may adopt a policy of presenting taxes assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, including but not limited to sales and value-added taxes in the income statement on either a gross or net basis. If an entity reports these taxes on a gross basis, the entity should disclose its policy of presenting taxes and the amount of taxes if reflected on a gross basis in the income statement if that amount is significant. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company presents revenues net of sales and value-added taxes in its Condensed Consolidated Statement of Operations in accordance with EITF 06-3. Note 2. Stock-Based Compensation Stock Options The Company’s stock option plans provide its employees the right to purchase common stock at the fair market value of such shares on the grant date. The Company recognizes compensation expense related to the stock options granted over the vesting period which is generally five years. New hire options vest 20% at the end of year one and then vest ratably each month, thereafter, for the remaining four years. Recurring option grants vest ratably each month over a five-year period. One year option grants vest ratably each month over a one year period. The contract term of the options is ten years. For all option grants prior to the adoption of SFAS No. 123R, the Company recognizes compensation cost using the multiple option approach. For all option grants subsequent to the adoption of SFAS No. 123R, the Company recognizes compensation cost ratably (straight-line) over the service period. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the table below. The expected life of options is based on observed historical exercise patterns. The expected volatility is an equally weighted blend of implied volatilities from traded options on our stock having a life of more than one year and historical volatility over the expected life of the options. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that the Company has not paid any dividends and has no intention to pay dividends in the foreseeable future. On May 15, 2007, the Company executed a tender offer to exchange certain outstanding options to purchase shares of its common stock, whether vested or unvested, for new options that are granted under its 1999 Stock Plan. A total of 1,472 eligible option holders participated in the Exchange Offer. The Company accepted for cancellation options to purchase an aggregate of 17,891,363 shares of its common stock granted under the Sanmina-SCI Corporation 1990 Stock Plan, the Sanmina-SCI Corporation 1999 Stock Plan, the Sanmina-SCI Corporation Stock Option Plan 2000, the Altron 1991 Stock Option Plan (ISO plan), the Hadco Corporation Non-Qualified Stock Option Plans (dated September 7, 1990 and November 5, 1995), or the SCI Non Qualified Stock Option Plan. Subject to the terms and conditions of the Exchange Offer, the Company granted new options under the Company’s 1999 Stock Plan to purchase an aggregate of 14,449,107 shares of its common stock in exchange for the options tendered and accepted pursuant to the Exchange Offer. Approximately $3.9 million of unamortized expense related to the cancelled options and approximately $9.6 million of incremental cost related to the Exchange will be recognized over a three year vesting period. The assumptions used for options granted during the three and nine months ended June 30, 2007 and July 1, 2006 are presented below:
The weighted-average grant date fair value of stock options granted during the three and nine months ended June 30, 2007, was $0.70 and $1.06, respectively. The weighted-average grant date fair value of stock options granted during the three and nine months ended July 1, 2006 was $2.82 and $2.58, respectively. The Company recorded approximately $1.5 million and $3.2 million of compensation expense related to stock options for the three and nine months ended June 30, 2007, respectively, in accordance with SFAS No. 123R. Compensation 7 expense recognised for the three and nine months ended July 1, 2006 was approximately $1.0 million and $5.0 million, respectively. As of June 30, 2007, there was $39.5 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 4.65 years. Employee Stock Purchase Plan In fiscal 2003, the Board of Directors and stockholders of the Company approved the 2003 Employee Stock Purchase Plan (the “2003 ESPP”). The maximum number of shares of common stock available for issuance under the 2003 ESPP is nine million shares. On February 27, 2006 an additional six million shares were reserved under the 2003 Employee Stock Purchase Plan. Under the 2003 ESPP, employees may purchase, on a periodic basis, a limited number of shares of common stock through payroll deductions over a six-month period. The per share purchase price is 85% of the fair market value of the stock at the beginning or end of the offering period, whichever is lower. The Company has treated the Employee Stock Purchase Plan as a compensatory plan and has recorded compensation expense of approximately $1.2 million and $3.1 million for the three and nine months ended July 1, 2006, respectively, in accordance with SFAS No. 123R. As a result of the stock option investigation, which has recently been concluded, the Company suspended the ESPP. The Company plans to re-activate the ESPP in the future. The Company did not record compensation expense for ESPP during the three and nine months ended June 30, 2007. The assumptions used for the three and nine months ended July 1, 2006 are presented below:
Restricted Stock Awards The Company grants awards of restricted stock to executive officers, directors and certain management employees. These awards vest at various periods ranging from one to four years. During the third quarter of fiscal 2007, based on new forfeiture information, the Company divided the restricted stock awards into three separate groups. Each group of restricted stock awards has its own estimated future forfeiture rate which is based on historical trends and management’s future expectations. Compensation expense computed for the three and nine months ended June 30, 2007 was approximately $4.0 million and $7.3 million, respectively. Compensation expense computed for the three and nine months ended July 1, 2006 was approximately $1.4 million and $1.1 million, respectively. At June 30, 2007, unrecognized cost related to restricted stock awards totaled approximately $3.2 million. These costs are expected to be recognized over a weighted average period of 0.36 years. At the end of the third quarter of fiscal 2007, the number of shares granted but still unvested was approximately 2.7 million. Restricted Stock Units During fiscal year 2006, the Company began issuing restricted stock units to executive officers, directors and certain management employees. These awards vest at various periods ranging from one to four years. The units are automatically exchanged for shares at the vesting date. Compensation expense computed based on the fair value of these awards for the three and nine months ended June 30, 2007 was approximately $2.0 million and $3.0 million, respectively. Compensation expense computed based on the fair value of these awards for the three and nine months ended July 1, 2006, was approximately $208,000 and $225,000, respectively. 8 At June 30, 2007, unrecognized cost related to restricted stock units totaled approximately $17.7 million. These costs are expected to be recognized over a weighted average period of 2.02 years. At the end of the third quarter of fiscal 2007, the number of shares granted, but unreleased was approximately 5.9 million. Performance Restricted Share Plan During the nine months ended July 1, 2006, the Company’s Compensation Committee approved the issuance of approximately 2.5 million performance restricted units at a weighted-average grant date fair value of $4.02 per unit to selected executives and other key employees. The units are automatically exchanged for vested shares when certain performance targets are met. The Company did not record any compensation expense related to the performance restricted units for the three and nine months ended June 30, 2007 as the Company did not meet the prescribed performance levels. The Company did not record any compensation expense related to the performance restricted units during fiscal 2006 as the prescribed performance level was not met. This resulted in the forfeiture of approximately 597,375 performance restricted units. The total unrecognized compensation expense to be recognized over the remaining two years would be approximately $7.5 million, assuming the performance targets are achieved. Note 3. Derivative Instruments and Hedging Activities The Company enters 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. Further, these contracts 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 consolidated statement of operations. At June 30, 2007 and September 30, 2006, the Company had outstanding foreign currency forward contracts to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $302.3 million and $403.4 million, respectively. The impact of these foreign currency contracts at June 30, 2007 and September 30, 2006 was not material. Hedging of Forecasted Foreign Currency Transactions The Company also utilizes 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 portions of forecasted sales and cost of sales denominated in currencies other than the U.S. dollar. These contracts typically are less than 12 months. At June 30, 2007 and September 30, 2006, the Company had outstanding forward and option contracts related to cash flow hedges in various foreign currencies in the aggregate notional amount of $70.9 million and $10.1 million, respectively. The impact of these foreign currency contracts at June 30, 2007 and September 30, 2006 was not material. Hedging of Interest Rate Exposures On February 24, 2005, the Company entered into interest rate swap agreements with four independent swap counterparties to hedge its interest rate exposures related to its $400 million 6.75% Senior Subordinated Notes due in 2013 (the “6.75% Notes”) – refer to Note 8 to the Condensed Consolidated Balance Sheets. The swap agreements, with an aggregate notional amount of $400 million and expire in 2013, effectively convert the fixed interest rate obligation to a variable rate obligation and are accounted for as fair value hedges under SFAS No. 133 but are exempt from periodic assessment of effectiveness under Paragraph 68 of SFAS No. 133. Under the terms of the swap agreements, the Company pays the independent swap counterparties an interest rate equal to the six-month LIBOR rate plus a spread ranging from 2.214% to 2.250%. In exchange, the Company receives a fixed rate of 6.75%. At June 30, 2007 and September 30, 2006, $22.9 million and $17.1 million, respectively, has been recorded in other long-term liabilities to record the fair value of the interest rate swap transactions, with a corresponding decrease to the carrying value of the 6.75% Notes on the Condensed Consolidated Balance Sheets. The differential paid or received on the interest rate swap is recognized in earnings as an adjustment to interest expense. Interest expense for the three and nine months ended June 30, 2007 was increased by $940 thousand and $3.0 million, respectively, as a result of the difference between the 6.75% fixed interest rate on the 6.75% Notes and the variable interest rates under the swap agreements which was an average of 7.69% and 7.73% during the three and nine months ended June 30, 2007, respectively. 9 On June 12, 2007, the Company entered into interest rate swap agreements with two independent swap counterparties to hedge its interest rate exposures related to its $300 million aggregate principal amount of Senior Floating Rate Notes due in 2014 (the “2014 Notes”) – refer to Note 8 to the Condensed Consolidated Balance Sheets. The swap agreements, with an aggregate notional amount of $300 million and expire in 2014, effectively convert the variable interest rate obligation to a fixed rate obligation and are accounted for as cash flow hedges under SFAS No.133, subject to periodic assessment of effectiveness. Under the terms of the swap agreements, the Company pays the independent swap counterparties a fixed rate of 5.594%. In exchange, the Company receives an interest rate equal to the three-month LIBOR plus a spread of 2.75%. These swap agreements effectively fix the interest rate on the Company’s 2014 Notes at 8.344% through 2014. At June 30, 2007 and September 30, 2006, $2.5 million and $0 million, respectively, has been recorded in other long-term liabilities to record the fair value of the interest rate swap agreements, with a corresponding decrease to accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheets. Over the next 12 months the Company expects to reclassify approximately $0.8 million to interest expense. Amounts in accumulated other comprehensive income (loss) will be reclassified when the hedged interest expense is realized in the consolidated statement of operations. The ineffective portion of the hedges is immediately recognized in the Condensed Consolidated Statement of Operations and was not material for the three and nine months ended June 30, 2007. The Company’s foreign exchange forward and option contracts and interest rate swaps expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by limiting the Company’s counterparties to major financial institutions. The Company does not expect material losses as a result of default by counterparties. Note 4. Inventories The components of inventories are as follows:
Note 5. Goodwill and Other Intangibles Assets The Company realigned its reporting structure based on recent organizational changes within the Company and the different types of manufacturing services offered to its customers. As a result, the Company has identified three reporting units: Electronic Manufacturing Services, Technology Components and Personal Computing. Management is in the process of determining the allocation of goodwill for its newly realigned reporting units using the relative fair value method. The Company expects to complete this analysis during the fourth quarter of fiscal 2007. As of June 30, 2007, the Company’s consolidated goodwill increased from $1,613 million to $1,618 million primarily as a result of $5.6 million of foreign currency translation adjustments and $2.3 million in tax reassessments related to pre-merger activity by SCI Technologies Inc, offset by a $3.6 million release of tax reserves related to a pre-merger acquisition by SCI Technologies Inc. Goodwill information for each reporting unit based on the Company’s previous reporting structure is as follows (in thousands):
10 The gross and net carrying values of other intangible assets at June 30, 2007 and September 30, 2006 are as follows (in thousands):
The decrease in other intangible assets from September 30, 2006 to June 30, 2007 was due to amortization expense of approximately $5.7 million. Estimated annual amortization expense for other intangible assets at June 30, 2007 is as follows:
Note 6. Comprehensive Income SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for the reporting of comprehensive income and its components. SFAS No. 130 requires companies to report “comprehensive income” that includes unrealized holding gains and losses and other items that have been excluded from net loss and reflected instead in stockholders’ equity. The components of other comprehensive income (loss) for the three and nine months ended June 30, 2007 and July 1, 2006 were as follows:
Accumulated other comprehensive income, net of tax as applicable, consists of the following:
Note 7. Earnings Per Share Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. While the conceptual computation of earnings per share is not changed by SFAS No. 123R (“Share-Based Payment”), the inclusion of compensation cost will affect the mechanics of the calculation. The compensation cost will be recognized under SFAS No. 123R only for awards that are expected to vest (determined by applying the pre-vesting forfeiture rate assumption), while all options or shares outstanding that have not been forfeited would be included in diluted earnings per share. The amount of stock-based compensation cost in the numerator includes a forfeiture rate assumption while the number of shares in the denominator does not. 11 The following table sets forth the calculation of basic and diluted loss per share:
The following table summarizes the weighted average dilutive securities that were excluded from the above computation of diluted net loss per share because their inclusion would have an anti-dilutive effect:
After-tax interest expense of zero and $2.7 million related to the 3% Convertible Subordinated Notes for the three months ended June 30, 2007 and July 1, 2006, respectively, was not included in the computation of diluted income per share because to do so would be anti-dilutive. After-tax interest expense of $5.0 million related to the 3% Convertible Subordinated Notes and $8.1 million related to the 3% Convertible Subordinated Notes and Zero Coupon Convertible Subordinated Debentures for the nine months ended June 30, 2007 and July 1, 2006, respectively, was not included in the computation of diluted income per share because to do so would be anti-dilutive. Note 8. Debt Senior Floating Rate Notes. On June 12, 2007, the Company issued $300 million aggregate principal amount of Senior Floating Rate Notes due 2010 (the “2010 Notes”) and $300 million aggregate principal amount of Senior Floating Rate Notes due 2014 (the “2014 Notes”). The Notes accrue interest at a rate per annum, reset quarterly, equal to three-month LIBOR plus 2.75%, which is payable in cash quarterly in arrears on March 15, June 15, September 15 and December 15, beginning on September 15, 2007. The 2010 Notes will mature on June 15, 2010 and the 2014 Notes will mature on June 15, 2014. The Company incurred debt issuance costs of $12.0 million which were included in prepaid expenses and other current assets and other non-current assets and amortized over the life of the debt as interest expense. 12 The Notes are senior unsecured obligations of the Company and rank equal in right of payment with all of the Company’s existing and future senior unsecured debt. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by substantially all of the Company’s domestic guarantor subsidiaries. The Company may redeem the 2010 Notes, in whole or in part, at any time, at par plus accrued and unpaid interest up to, but excluding, the redemption date. At any time prior to June 15, 2008, the Company may redeem up to 35% of the 2014 Notes with the proceeds of certain equity offerings at a redemption price equal to 100% of the principal amount of the 2014 Notes, plus a premium equal to the then-current interest rate, plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2014 Notes, in whole or in part, beginning on June 15, 2008, at redemption prices ranging from 100% to 102% of the principal amount of the 2014 Notes, plus accrued and unpaid interest to, but excluding, the redemption date, with the actual redemption price to be determined based on the date of redemption. Following a change of control, as defined in the Indentures, the Company will be required to make an offer to repurchase all or any portion of the Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The indentures for the Notes include certain customary covenants that limit the ability of the Company and its guarantor subsidiaries to, among other things: · incur additional debt, make investments and other restricted payments, pay dividends on capital stock, or redeem or repurchase capital stock or subordinated obligations; · create specified liens; · sell assets; · create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to it; · engage in transactions with affiliates; and · consolidate or merge with or into other companies or sell all or substantially all of the Company’s assets. The restrictive covenants are subject to a number of important exceptions and qualifications set forth in the Indentures. The indentures provide for customary events of default, including payment defaults, breaches of covenants, certain payment defaults at final maturity or acceleration of other indebtedness, failure to pay certain judgments, certain events of bankruptcy, insolvency and reorganization involving the Company or certain of its subsidiaries and certain instances in which a guarantee ceases to be in full force and effect. If any event of default occurs and is continuing, subject to certain exceptions, the trustee or the Holders (as defined in the Indentures) of at least 25% in aggregate principal amount of the then outstanding 2010 Notes or 2014 Notes, as applicable, may declare all the 2010 Notes or 2014 Notes, respectively, to be due and payable immediately, together with any accrued and unpaid interest, if any, to the acceleration date. In the case of an event of default resulting from certain events of bankruptcy, insolvency or reorganization involving the Company or certain of its subsidiaries, such amounts with respect to the 2010 Notes or 2014 Notes, as applicable, will be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the 2010 Notes or 2014 Notes, respectively. The Company entered into interest rate swaps to hedge its long-term interest rate exposures resulting from certain of its outstanding debt obligations. On June 12, 2007, the Company entered into interest rate swap transactions with independent third parties related to the 2014 Notes pursuant to which it paid the third parties a fixed rate and received a floating rate from the third parties. The interest rate swaps had a total notional amount of $300.0 million and were designated as cash flow hedges. Under the swap agreements, the Company paid a fixed rate of 5.594% in exchange for a three month LIBOR rate plus 2.75% on the swaps. These swap agreements effectively fix the interest rate on the Company’s 2014 Notes at 8.344% through 2014. Senior Unsecured Term Loan. On October 13, 2006, the Company entered into a Credit and Guaranty Agreement (the “Term Loan Agreement”) providing for a $600.0 million senior unsecured term loan which matures on January 31, 2008. The Company drew down the $600.0 million term loan simultaneously with the closing of the transaction. On June 12, 2007, the Company used the net proceeds of $588 million from the sale of the Senior Floating Rate Notes discussed above, together with cash on hand, to repay the principal amount together with accrued interest on its 13 existing Senior Unsecured Term Loan in full. The Company recorded a loss on extinguishment of debt of approximately $3.2 million relating to unamortized finance fees. As of June 30, 2007, no obligation remains and the Term Loan Agreement was fully paid and terminated. 8.125% Senior Subordinated Notes. On February 15, 2006, the Company issued $600 million aggregate principal amount of 8.125% Senior Subordinated Notes due 2016 (the “8.125% Notes”). Interest is payable on the 8.125% Notes on March 1 and September 1 of each year beginning on September 1, 2006. The maturity date of the 8.125% Notes is March 1, 2016. Debt issuance costs are included in prepaid expenses and other current assets and other non-current assets and amortized on a straight-line basis over the life of the debt as interest expense. As of June 30, 2007, $1.9 million is included in prepaid expenses and other current assets and $14.8 million is included in other non-current assets. The difference between the amount of amortization calculated using the straight-line method as compared to the effective interest method was immaterial. The 8.125% Notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior debt, as defined in the indenture under which the 8.125% Notes were issued. The Company may redeem the 8.125% Notes, in whole or in part, at any time prior to March 1, 2011, at a redemption price that is equal to the sum of (1) the principal amount of the 8.125% Notes to be redeemed, (2) accrued and unpaid interest on those 8.125% Notes to, but excluding, the redemption date and (3) a make-whole premium calculated in the manner specified in the Indenture for the 8.125% Notes. The Company may redeem the 8.125% Notes, in whole or in part, beginning on March 1, 2011, at declining redemption prices ranging from 104.063% to 100% of the principal amount of the 8.125% Notes, plus accrued and unpaid interest to, but excluding, the redemption date, with the actual redemption price to be determined based on the date of redemption. At any time prior to March 1, 2009, the Company may redeem up to 35% of the 8.125% Notes with the proceeds of certain equity offerings at a redemption price equal to 108.125% of the principal amount of the 8.125% Notes, plus accrued and unpaid interest to, but excluding, the redemption date, so long as after giving effect to any such redemption, at least 65% of the aggregate principal amount of the 8.125% Notes remains outstanding. Following a change of control, as defined in the Indenture, the Company will be required to make an offer to repurchase all or any portion of the 8.125% Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The indenture for the 8.125% Notes includes covenants that limit the ability of the Company and the ability of its restricted subsidiaries to, among other things: incur additional debt, make investments and other restricted payments, pay dividends on capital stock, or redeem or repurchase capital stock or subordinated obligations; create specified liens; sell assets; create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to the Company; engage in transactions with affiliates; incur layered debt; and consolidate or merge with or into other companies or sell all or substantially all of the Company’s assets. The restrictive covenants are subject to a number of important exceptions and qualifications set forth in the indenture for the 8.125% Notes. The 8.125% Notes provides for customary events of default, including: · payment defaults; · breaches of covenants; · certain payment defaults at final maturity or acceleration of certain other indebtedness; · failure to pay certain judgments; · certain events of bankruptcy, insolvency and reorganization; and · certain instances in which a guarantee ceases to be in full force and effect. If any event of default occurs and is continuing, subject to certain exceptions, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding 8.125% Notes may declare all the 8.125% Notes to be due and payable immediately, together with any accrued and unpaid interest, if any, to the acceleration date. In the case of an event of default resulting from certain events of bankruptcy, insolvency or reorganization, such amounts with respect to the 8.125% Notes will be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the 8.125% Notes. 14 On January 3, 2007, the Company and U.S. Bank National Association, as trustee, entered into a supplemental indenture to the indenture under which the Company’s 8.125% Notes were issued. As permitted by the indenture, the supplemental indenture released each of the note’s guarantors from its respective obligations under its notes guarantee and the indenture. 6.75% Senior Subordinated Notes. On February 24, 2005, the Company issued $400 million aggregate principal amount of its 6.75% Senior Subordinated Notes due 2013 (the “6.75% Notes”). Interest is payable on the 6.75% Notes on March 1 and September 1 of each year, beginning on September 1, 2005. The maturity date of the 6.75% Notes is March 1, 2013. In June 2005, the Company completed an exchange offer pursuant to which substantially all of the 6.75% Notes were exchanged for notes registered under the Securities Act of 1933. These notes evidence the same debt as the original 6.75% Notes and are issued and entitled to the benefits of the same indenture that governs the original the 6.75% Notes except that they are not subject to transfer restrictions. The 6.75% Notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior debt as defined in the indenture for the 6.75% Notes. The Company may redeem the 6.75% Notes, in whole or in part, at any time prior to March 1, 2009, at a redemption price that is equal to the sum of (1) the principal amount of the 6.75% Notes to be redeemed, (2) accrued and unpaid interest to, but excluding, the redemption date on those 6.75% Notes and (3) a make-whole premium calculated in the manner specified in the indenture for the 6.75% Notes. The Company may redeem the 6.75% Notes, in whole or in part, beginning on March 1, 2009, at declining redemption prices ranging from 103.375% to 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, with the actual redemption price to be determined based on the date of redemption. At any time prior to March 1, 2008, the Company may redeem up to 35% of the 6.75% Notes with the proceeds of certain equity offerings at a redemption price equal to 106.75% of the principal amount of the 6.75% Notes, plus accrued and unpaid interest to, but excluding, the redemption date, so long as after giving effect to any such redemption, at least 65% of the aggregate principal amount of the 6.75% Notes remains outstanding. Following a change of control, as defined in the indenture for the 6.75% Notes, the Company will be required to make an offer to repurchase all or any portion of the 6.75% Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The indenture for the 6.75% Notes includes covenants that limit the Company’s ability and the ability of its restricted subsidiaries to, among other things: incur additional debt, make investments and other restricted payments, pay dividends on capital stock, or redeem or repurchase capital stock or subordinated obligations; create specified liens; sell assets; create or permit restrictions on the ability of its restricted subsidiaries to pay dividends or make other distributions to the Company; engage in transactions with affiliates; incur layered debt; and consolidate or merge with or into other companies or sell all or substantially all of its assets. The restricted covenants are subject to a number of important exceptions and qualifications set forth in the indenture for the 6.75% Notes. The indenture for the 6.75% Notes provides for customary events of default, including payment defaults, breaches of covenants, certain payment defaults at final maturity or acceleration of certain other indebtedness, failure to pay certain judgments, certain events of bankruptcy, insolvency and reorganization and certain instances in which a guarantee ceases to be in full force and effect. If any event of default occurs and is continuing, subject to certain exceptions, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding 6.75% Notes may declare all the 6.75% Notes to be due and payable immediately, together with any accrued and unpaid interest, if any, to the acceleration date. In the case of an event of default resulting from certain events of bankruptcy, insolvency or reorganization, such amounts with respect to the 6.75% Notes will be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the 6.75% Notes. On January 3, 2007, the Company and U.S. Bank National Association, as trustee, entered into a supplemental indenture to the indenture under which the Company’s 6.75% Notes were issued. As permitted by the indenture, the supplemental indenture released each of the note’s guarantors from its respective obligations under its notes guarantee and the indenture. 3% Convertible Subordinated Notes due 2007. In March 2000, SCI issued $575.0 million aggregate principal amount of 3% Convertible Subordinated Notes due March 15, 2007, or 3% Notes. On October 13, 2006, SCI Systems, Inc., one of the Company’s wholly-owned subsidiaries (“SCI Systems”), initiated, in accordance with the terms thereof, the satisfaction and discharge of the Indenture, dated as of March 15, 2000, by and between SCI Systems and the Bank of New York Trust Company, National Association, as trustee (as supplemented, the “Indenture”), pursuant to which SCI Systems issued its 3% Notes due 2007. As a result, $532.9 million in cash was deposited with the trustee which represented a portion of the proceeds obtained from the Senior Unsecured Term Loan entered into on October 13, 2006 and was equal to the principal and interest due on the 3% Notes at maturity on March 15, 2007. The restricted cash of $532.9 million was released by the trustee to pay the bondholders upon maturity of the 3% Notes on March 15, 2007. Accordingly, as of June 30, 2007, the 3% Notes were fully satisfied and discharged. 15 Senior Credit Facility. On October 26, 2004, the Company entered into a Credit and Guaranty Agreement (the “Original Credit Agreement”) providing for a $500 million senior secured revolving credit facility with a $150 million letter of credit sub-limit. The senior secured credit facility provided for a maturity date of October 26, 2007. The Company entered into an Amended and Restated Credit and Guaranty Agreement, dated as of December 16, 2005, among the Company, certain of its subsidiaries, as guarantors, and the lenders that are parties thereto from time to time (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated the Original Credit Agreement among other things, to: · extend the maturity date from October 26, 2007 to December 16, 2008; · amend the leverage ratio; · permit the Company and the guarantors to sell domestic receivables pursuant to factoring or similar arrangements if certain conditions are met; and · revise the collateral release provisions. All of the Company’s existing and future domestic subsidiaries guaranty the obligations under the Restated Credit Agreement, subject to some limited exceptions. The Company’s obligations and the obligations of its subsidiaries under the credit facility are secured by: substantially all of the assets of its United States subsidiaries located in the United States; a pledge of all capital stock of substantially all of its United States subsidiaries; a pledge of 65% of the capital stock of certain of its and its United States subsidiaries’ first-tier foreign subsidiaries; and mortgages on certain domestic real estate. The Restated Credit Agreement requires the Company to comply with a fixed charge coverage ratio and a ratio of total debt to earnings before income tax, depreciation and amortization (“EBITDA”). Additionally, the credit facility contains numerous affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the credit facility contains negative covenants limiting the ability of the Company and its subsidiaries, among other things, to incur debt, grant liens, make acquisitions, make certain restricted payments, sell assets and enter into sale and lease back transactions. The events of default under the credit facility include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. At any time the aggregate face amount of receivables sold by the Company and the guarantors together with any outstanding amounts exceeds the thresholds set forth in the Restated Credit Agreement, the revolving credit commitments for purposes of making loans and issuing letters of credit will be zero. On October 13, 2006, the Company and the required lenders entered into an amendment for its Restated Credit Agreement to permit the Company to enter into the Senior Unsecured Term Loan described above. The amendment also revised the collateral release provision under the Restated Credit Agreement such that collateral (other than stock pledges and other collateral the Company requests not to be released) will be released at such time as specified conditions are met, including that the Company has repaid in full the outstanding amount under the Senior Unsecured Term Loan and its credit ratings meet specified thresholds. If following the release of any portion of the collateral pursuant to the provisions of the credit agreement described above, the Company’s credit ratings fall below specified thresholds, then the Company is required to take such actions as are necessary to grant and perfect a security interest in the assets and properties that would at that time comprise the collateral if the relevant collateral documents were still in effect. On December 29, 2006, the Company entered into an amendment and waiver to the Restated Credit Agreement. Among other things, this amendment amended the minimum required levels for both financial covenants and certain related definitions. The fees in regards to the amendment and waiver were deferred and amortized over the remaining term of the agreement. The amount of the fees was immaterial to the consolidated financial statements. 16 On June 5, 2007, the Company entered into an amendment to its Amended and Restated Credit and Guaranty Agreement dated as of December 16, 2005, to permit the Company to incur the indebtedness resulting from the issuance of the Senior Floating Rate Notes discussed above. In addition, the Amendment amended the required levels for the fixed charge coverage ratio and leverage ratio. The fees paid in regards to the amendment were deferred and amortized over the remaining term of the agreement. The amount of the fees was not material to the Condensed Consolidated Financial Statements. As of June 30, 2007, there was no balance outstanding under the Restated Credit Agreement as of June 30, 2007. Additionally, the Company pays a commitment fee of 0.35% per annum on the unused portion of the credit facility. The Company is in compliance with its covenants for the above debt instruments as of June 30, 2007. However, the Company may be required to seek waivers or amendments to certain covenants for the above debt instruments if it is unable to comply with the requirements of the covenants in the future or if the Company takes actions such as the divestiture of strategic assets that are not permitted by the covenants. Note 9. Sale of Accounts Receivable Certain of the Company’s subsidiaries have entered into agreements that permit them to sell specified accounts receivable. The purchase price for receivables sold under these agreements ranges from 95% to 100% of the face amount less a discount charge (based on LIBOR plus a percentage ranging from 0.4% to 1.5%) for the period from the date the receivable is sold to its collection date. Accounts receivable sales under these agreements were $558.7 million and $1.5 billion for the three and nine month periods ended June 30, 2007, respectively. The sold receivables are subject to certain limited recourse provisions. In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liability,” accounts receivable sold are removed from the Condensed Consolidated Balance Sheet and are reflected as cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. As of June 30, 2007, $331.3 million of sold accounts receivable remain subject to certain recourse provisions. The Company has not experienced any credit losses under these recourse provisions. The discount charge recorded during the three month periods ended June 30, 2007 and July 1, 2006 was $2.4 million and $1.6 million, respectively. The discount charge recorded during the nine month periods ended June 30, 2007 and July 1, 2006 was $6.8 million and $3.4 million, respectively. The discount charge is recorded in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations. As part of the sale of accounts receivable, the Company had a retained ownership interest (i.e. 100% of the receivable face amount less the purchase price) of $10.7 million at June 30, 2007. The retained interest was included in prepaid and other current assets. Note 10. Commitments and Contingencies Litigation and other contingencies. The Company is a so-called “nominal defendant” party in multiple shareholder derivative lawsuits and the Securities and Exchange Commission (“SEC”) and the Department of Labor are conducting informal inquiries. The Company has received a subpoena from the U.S. Attorney’s office and the Company has received an information document request from the Internal Revenue Service in connection with certain historical stock option grants. Presently, the Company is unable to predict the outcome of these matters. From time to time, the Company is a party to litigation and other contingencies, including examinations by taxing authorities, which arise in the ordinary course of business. The Company believes that the resolution of such litigation and other contingencies will not materially harm its business, financial condition or results of operations. 17 Warranty Reserve. The following tables summarize the warranty reserve balance:
Note 11. Restructuring Costs Costs associated with restructuring activities initiated on or after January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with SFAS No. 146 and SFAS No. 112 where applicable. Pursuant to SFAS No. 112, restructuring costs related to employee severance are recorded when probable and estimable. For all other restructuring costs, a liability is recognized in accordance with SFAS No. 146 only when incurred. Costs associated with restructuring activities initiated prior to January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with EITF 94-3 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the Consolidated Statements of Operations generally at the commitment date. Costs associated with restructuring activities related to purchase business combinations are accounted for in accordance with EITF 95-3. Accrued restructuring costs are included in accrued liabilities in the Condensed Consolidated Balance Sheets. In November 2006, the Company announced three new restructuring initiatives: · The realignment of its original design manufacturing activities to focus on joint development; · The separation of its personal and business computing business and the evaluation of strategic alternatives to enhance its value; and · Other consolidation and facility closure actions. Below is a summary of the activities related to restructuring initiated in the three and nine months ended June 30, 2007:
During the three months and nine months ended June 30, 2007, the Company recorded restructuring charges of approximately $6.2 million and $24.9 million, respectively. Approximately $16.0 million of employee termination benefits were utilized and approximately 400 employees were terminated during the three month period ended June 30, 2007. For the nine month period ended June 30, 2007, the majority of these restructuring charges were for employee termination benefits for approximately 1,300 employees. 18 Below is a summary of the activities related to restructuring activities that were announced in prior fiscal years:
During the three month period ended June 30, 2007, the Company recovered previously recognized restructuring expenses of approximately $71,000 from the sale of facilities that had previously been exited. The employee termination benefits were related to the involuntary termination of employees, the majority of which were involved in manufacturing activities. Approximately $1.1 million of employee termination benefits were utilized and approximately 1,100 employees were terminated. The Company reversed approximately $1.4 million of accrued restructuring cost due to a revision of the estimates. During the nine month period ended June 30, 2007, the Company recognized a net gain of approximately $3.9 million from the sale of facilities that had previously been exited. The employee termination benefits were related to involuntary termination of employees, the majority of which were involved in manufacturing activities. Approximately $19.4 million of employee termination benefits were utilized and approximately 4,800 employees were terminated. As of June 30, 2007, the Company’s accrued estimate of anticipated lease costs associated with facilities which were closed in connection with our restructuring activities that were announced in prior fiscal years was approximately $6.9 million. The Company expects to pay remaining facilities related restructuring liabilities for all restructuring plans announced in prior fiscal years through 2010. Total restructuring costs accrued as of June 30, 2007 were $22.8 million, of which $18.6 million was included in accrued liabilities and $4.2 million was included in other long-term liabilities on the Condensed Consolidated Balance Sheet. Segments. The following table summarizes the net restructuring costs incurred with respect to the Company’s reportable segments (in thousands): 19
The cumulative restructuring costs per segment have not been disclosed as it is impractical to do so. The recognition of restructuring charges requires the Company’s management to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activities, including estimating sublease income and the fair value, less selling costs, of property, plant and equipment to be disposed of. Management’s estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded. Note 12. 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 realigned its reporting structure based on recent organizational changes within the Company and the different types of manufacturing services offered to its customers. As a result, the Company identified three operating segments: Electronic Manufacturing Services, Technology Components and Personal Computing. Under the aggregation provisions of SFAS No. 131, the Company has aggregated the Technology Components operating segment into the Electronic Manufacturing Services operating segment. The realignment of the reporting structure did not change the previously reported reportable segments - Electronic Manufacturing Services and Personal Computing. The following table presents information about reportable segments for the following periods:
For the three months ended June 30, 2007, three customers in Personal Computing accounted for 12.9%, 11.5% and 11.4%, respectively, of total consolidated revenues. For the nine months ended June 30, 2007 three customers in Personal Computing accounted for 12.0%, 11.5% and 10.9%, respectively, of consolidated revenue. For the quarters ended June 30, 2007 and July 1, 2006, there were no inter-segment sales between Electronic Manufacturing Services and Personal Computing. 20 The following table summarizes financial information by geographic segment:
Note 13. Subsequent Events On July 30, 2007, the Company commenced a tender offer to exchange certain options to purchase shares of its common stock, whether vested or unvested, primarily for non-U.S employees in eligible countries. The exchange ratio for this offer will range from one (1) to three (3) exchanged stock options for every one (1) new stock option granted. This tender offer will expire on August 27, 2007 unless extended and is subject to the terms and conditions set forth in the Offer to Exchange Certain Outstanding Options for New Options, dated July 30, 2007, which was filed with the Securities Exchange Commission on July 30, 2007. If all eligible stock options are exchanged, existing options to purchase approximately 5 million shares will be cancelled and options to purchase approximately 4 million shares will be granted. The purpose of this exchange is to foster retention of our valuable employees and better align the interests of our employees and shareholders to maximize shareholder value, in addition to mitigate the exposure with respect to Internal Revenue Code Section 409A for U.S. employees. For more information, refer to our Tender Offer Statement filings with the Securities and Exchange Commission on July 30, 2007. 21 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. 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 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 risks, uncertainties and changes in condition, significance, value and effect. 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, personal and business computing, enterprise computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive industries. A relatively small number of customers historically have been responsible for a significant portion of our net sales. Sales to our ten largest customers accounted for 61.6% of our net sales for both the three and nine months ended June 30, 2007, respectively. Three customers accounted for 10% or more of our net sales during both the three and nine months ended June 30, 2007. Sales to our ten largest customers accounted for 60.1% and 61.6% of our net sales for the three and nine months ended July 1, 2006, respectively. One customer accounted for 10% or more of our net sales during the three months ended July 1, 2006, and two customers accounted for 10% or more of our net sales during the nine months ended July 1, 2006. In recent periods, we have generated a significant portion of our net sales from international operations. During the nine months ended June 30, 2007 and July 1, 2006, 75.7% and 74.9%, respectively, of our consolidated net sales were derived from non-U.S. operations. Consolidated net sales from international operations during the three month periods ended June 30, 2007 and July 1, 2006 represented 76.7% and 76.0%, respectively, of our consolidated net sales. The concentration of international operations has resulted from a desire on the part of many of our customers to move production to lower cost locations in regions such as Asia, Latin America and Eastern Europe. We expect this trend to continue. Historically, we have had substantial recurring sales from existing customers. We have also expanded our customer base through acquisitions. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and typically 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. In some circumstances our supply agreements with customers provide for cost reduction objectives during the term of the agreement. We have experienced fluctuations in gross margins and in our results of operations in the past and may continue to experience such fluctuations in the future. Fluctuations in our gross margins may be caused by a number of factors, including pricing, changes in product mix, competitive pressures, transition of manufacturing to lower cost locations and overall business levels. On November 16, 2006, we announced three restructuring actions: · The realignment of our original design manufacturing activities to focus on joint development activities; · The separation of our personal and business computing business and the evaluation of strategic alternatives to enhance its value; and 22 · Other consolidation and facility closure actions. On March 19, 2007, we commenced a tender offer to exchange certain stock options to purchase shares of our common stock, whether vested or unvested, held by our U.S employees, for new stock options that were granted under our 1999 Stock Plan. The exchange ratio for this offer ranged from one (1) to three (3) exchanged stock options for every one (1) new stock option granted. This tender offer expired on May 15, 2007 and was subject to the terms and conditions set forth in the Offer to Exchange Certain Outstanding Options for New Options, dated March 19, 2007, which was filed with the Securities Exchange Commission on March 19, 2007. We exchanged existing stock options to purchase 17,891,363 shares for options to purchase 14,449,107 shares in this tender offer. Approximately $3.9 million of unamortized expense related to the cancelled options and approximately $9.6 million of incremental cost related to the exchange will be recognized over a three year vesting period. The purpose of this exchange was to mitigate the exposure with respect to Internal Revenue Code Section 409A. For more information, refer to our Tender Offer Statement filings with the Securities and Exchange Commission on April 13, 2007 and April 30, 2007. On July 30, 2007, we commenced a tender offer to exchange certain stock options to purchase shares of our common stock, whether vested or unvested, primarily for non-U.S employees in eligible countries. The exchange ratio for this offer will range from one (1) to three (3) exchanged stock options for every one (1) new stock option granted. This tender offer will expire on August 27, 2007 unless extended and is subject to the terms and conditions set forth in the Offer to Exchange Certain Outstanding Options for New Options, dated July 30, 2007, which was filed with the Securities Exchange Commission on July 30, 2007. If all eligible stock options are exchanged, existing options to purchase approximately 5 million shares will be cancelled and options to purchase approximately 4 million shares will be granted. The purpose of this exchange is to foster retention of our valuable employees and better align the interests of our employees and shareholders to maximize shareholder value, in addition to mitigate the exposure with respect to Internal Revenue Code Section 409A for U.S. employees. For more information, refer to our Tender Offer Statement filings with the Securities and Exchange Commission on July 30, 2007. 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. 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, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be 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 from these estimates. For a complete description of our key critical accounting policies and estimates, refer to our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 3, 2007. Summary Results of Operations The following table sets forth, for the periods indicated, key operating results (in thousands):
The following table sets forth, for the three and nine months ended June 30, 2007 and July 1, 2006, certain items in 23 the Condensed Consolidated Statement of Operations expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto, which appear elsewhere in this report.
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