Sanmina-SCI 10-Q 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Exact name of registrant as specified in its charter)
(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 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):
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 April 29, 2009, there were 488,403,939 shares outstanding of the issuer’s common stock, $0.01 par value per share.
CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Sanmina-SCI Corporation (“Sanmina-SCI”, “we”, “our”, “us”, “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 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 six months ended March 28, 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 April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standards (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. FSP FAS 141(R)-1 will be effective for the Company’s business combinations for which the acquisition date is on or after the beginning of 2010.
In April 2009, the FASB issued 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 additional guidance in evaluating certain factors that are indicative of a significant decrease in the volume and level of activity for an asset or liability when compared to normal market activity. Additionally, this statement clarifies the circumstances to consider when evaluating whether a transaction is not orderly, in which quoted prices may not be determinative of fair value. FSP FAS 157-4 will be effective for the Company for the three months ending June 27, 2009. The Company is currently assessing the impact of FSP FAS 157-4 on its results of operations and financial position.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which requires disclosures about fair value of financial instruments for interim reporting periods, including disclosures of how the carrying amount relates to the assets or liabilities reported in the statement of financial position and the methods and significant assumptions used to estimate the fair value of financial instruments. FSP FAS 107-1 and APB 28-1 will be effective for the Company for the three months ending June 27, 2009.
In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”, which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. Specifically, employers are required to disclose information about investment policies and strategies, categories of plan assets, fair value measurement of plan assets and significant concentrations of credit risk. FSP FAS 132(R)-1 will be effective for the Company in 2010.
In February 2008, the FASB issued FSP FAS 157-2, “The Effective Date of FASB Statement No. 157”, which delays 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 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 the 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. SFAS No. 141(R) is 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:
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 and the reservation of 45.0 million shares of common stock for issuance thereunder.
At March 28, 2009, an aggregate of 102.1 million of 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 39.6 million shares of common stock were available for grant under the Company's stock plans as of March 28, 2009. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.
Assumptions used to estimate the fair value of stock options granted were as follows:
Stock option activity was as follows:
The weighted-average grant date fair value of stock options granted during the three and six months ended March 28, 2009 was $0.18 and $0.26, respectively. The weighted-average grant date fair value of stock options granted during the three and six months ended March 29, 2008 was $0.76 and $0.90, 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 March 28, 2009, there was $27.7 million of total unrecognized compensation expense related to stock options. This amount is expected to be recognized over a weighted average period of 3.9 years.
Restricted Stock Awards
Activity with respect to the Company’s nonvested restricted stock awards was immaterial for the three and six months ended March 28, 2009. At March 28, 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 March 28, 2009, unrecognized compensation expense related to restricted stock units was $6.7 million, and is expected to be recognized over a weighted average period of eleven months.
Activity with respect to the Company’s nonvested restricted stock units was as follows:
Note 3. Income Tax
The Company’s effective tax rate for the three and six months ended March 28, 2009 was 8.7%, compared to 30.0% for the three months ended March 29, 2008 and 31.0% for the six months ended March 29, 2008. The Company’s future effective income tax rate depends on various factors, such as the geographic composition of pre-tax income/(loss), implementation of tax planning strategies and possible outcomes of audits. 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 three months ended March 28, 2009, the Company’s liability decreased $1.8 million due primarily to favorable conclusions with foreign tax authorities and foreign currency revaluation. The Company’s liability decreased $6.2 million for the six months ended March 28, 2009 due primarily to favorable conclusions with foreign tax authorities and payments made in connection with such matters, offset partially by accruals for current year tax positions.
The Company’s policy is to classify interest and penalties on unrecognized tax benefits as income tax expense. Such amounts were not material for the three or six months ended March 28, 2009 and March 29, 2008.
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.
The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Note 4. Inventories
Components of inventories were as follows:
Note 5. 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) was as follows:
The net unrealized gain on derivative financial instruments for the three months ended March 28, 2009 was primarily attributable to a decline 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:
Note 6. 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:
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:
As of March 28, 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 or the application of the treasury stock method resulted in an anti-dilutive effect. Had the Company reported net income instead of a net loss for the three and six months ended March 28, 2009, none of the 52.6 million and 50.3 million, respectively, potentially dilutive securities would have been included in the calculation of diluted earnings per share.
Note 7. Debt
Long-term debt consisted of the following:
During the second quarter of 2009, the Company redeemed $4.3 million and $29.4 million of its 2010 and 2014 Notes, respectively. Upon redemption, holders of the notes received $19.6 million, plus accrued interest of $0.3 million. In connection with these redemptions, 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 133 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 March 28, 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 March 28, 2009.
Note 8. 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 March 28, 2009, the Company had reserves of $27.8 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 March 28, 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, $5.5 million of such costs have been incurred. During the second quarter of 2009, the Company recorded an impairment charge of $0.9 million related to this site due to a decrease in the estimated fair value of the site.
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 March 28, 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:
Note 9. 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 all other restructuring costs, 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. The plan is expected to be completed during 2009 and total costs for this plan are expected to be in the range of $25 million to $35 million. Below is a summary of restructuring costs associated with facility closures and other consolidation efforts implemented under the plan:
During the three and six months ended March 28, 2009, the Company recorded restructuring charges of $7.5 million and $14.5 million, respectively, for employee termination costs, of which $7.9 million has been utilized and $6.6 million is expected to be paid during the remainder of 2009. These costs were provided to approximately 1,300 employees who were terminated during the period.
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:
During the three months ended March 28, 2009, the Company recorded restructuring charges for employee termination costs for approximately 380 employees who were terminated during the period. 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 $3.7 million through 2010 and the majority of severance costs of $8.9 million through the remainder of 2009.
All Restructuring Plans
In connection with all of the Company’s restructuring plans, restructuring costs of $19.2 million were accrued as of March 28, 2009, of which $18.6 million was included in accrued liabilities and $0.6 million was included in other long-term liabilities on the condensed consolidated balance sheet.
Note 10. 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:
Note 11. 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 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 six months ended March 28, 2009, except as discussed below related to the fair value of the Company’s interest rate swaps.
The Company’s financial assets and financial liabilities subject to the requirements of FAS 157 are as follows:
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:
The following table presents information as of March 28, 2009 with respect to assets and liabilities measured at fair value on a recurring basis: