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| SANM > SEC Filings for SANM > Form 10-Q on 4-Aug-2008 | All Recent SEC Filings |
4-Aug-2008
Quarterly Report
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
our expectations concerning trends in future revenues and results of operations,
gross margin, operating margin, expenses, earnings or losses from operations,
the adequacy of our sources of liquidity and future restructuring charges; our
expectations concerning the amount of final proceeds from the Foxteq
transaction; any statements regarding future economic conditions or performance;
any statements regarding pending litigation, 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. These forward-looking statements are subject to
risks and uncertainties, including without limitation, those discussed in this
section, those contained in Part II, Item 1A, "Risk Factors" of this report on
Form 10-Q and those contained in Part I, Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors
Affecting Operating Results" in our Quarterly Reports on Form 10-Q for the
fiscal quarters ended December 29, 2007 and March 29, 2008. 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 ("SEC").
Overview
We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. Our revenue is generated from sales of services primarily to original equipment manufacturers, or OEMs, in the communications, enterprise computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive industries.
We recently exited our PC and associated logistics services business ("PC Business"). Our PC Business consisted of three customers, one of whom transitioned its business during the three months ended March 29, 2008 to a new third-party contract manufacturing provider as a result of our decision to exit the PC Business. The remaining portion of our PC Business was sold in two separate transactions, one of which closed on June 2, 2008 and the other of which closed on July 7, 2008.
We have reflected our PC Business as a discontinued operation in the condensed consolidated financial statements for all periods presented. We do not expect to recognize a significant gain or loss in connection with the sale of our PC Business. The remaining assets and liabilities of the portion of the PC Business sold on July 7, 2008 have been presented as held for sale in the condensed consolidated balance sheets as of June 28, 2008. The sale of our PC Business will materially reduce our future net sales, operating income and cash flows. See Note 12 of the notes to condensed consolidated financial statements for further information regarding the PC Business and assets held for sale.
Unless noted otherwise, all references to our operating results contained in this section pertain only to our continuing operations.
A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers represented 48.5% and 48.3% of our net sales for the three and nine months ended June 28, 2008, respectively. No customer represented 10% or more of our net sales during the three or nine months ended June 28, 2008. Sales to our ten largest customers represented 47.1% and 48.5% of our net sales for the three and nine months ended June 30, 2007, respectively, and no customer represented 10% or more of our net sales during either of those periods.
In recent periods, we have generated a significant portion of our net sales from international operations. Net sales from international operations during the three months ended June 28, 2008 and June 30, 2007 were 71.6% and 65.9%, respectively, of total net sales. During the nine months ended June 28, 2008 and June 30, 2007, 69.1% and 65.5%, respectively, of our total net sales were derived from non-U.S. operations. The concentration of international operations has resulted from a desire on the part of many of our customers to source production in lower cost locations such as Asia, Latin America and Eastern Europe.
Historically, we have had substantial recurring sales to 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 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.
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, foreign currency exchange rate changes, competitive pressures, transition of manufacturing to lower cost locations, operational efficiency and overall business levels.
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 we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. However, should any of these estimates prove to be incorrect, our future results of operations could be materially and adversely affected.
We adopted FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48), at the beginning of fiscal year 2008. FIN 48 involves an assessment of whether each of a company's income tax positions is "more likely than not" of being sustained upon audit based on its technical merits. For each income tax position that meets the "more likely than not" threshold, a company then assesses the largest amount of tax that is greater than 50% likely of being realized upon effective settlement with the taxing authority. Upon adoption of FIN 48, we decreased current income taxes payable by $18.8 million and increased long-term income tax liabilities by the same amount, as cash payments of such amounts are not expected to be made within 12 months.
A complete description of our critical accounting policies and estimates is
contained in our 2007 Annual Report on
Form 10-K filed with the SEC on November 28, 2007.
Summary Results of Operations
The following table presents items in the condensed consolidated statement of operations 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.
Three Months Ended Nine Months Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 92.7 94.3 92.8 93.5
Gross margin 7.3 5.7 7.2 6.5
Operating expenses:
Selling, general and administrative 4.1 5.2 4.5 5.0
Research and development 0.3 0.4 0.3 0.4
Restructuring costs 0.6 0.3 1.2 0.5
Amortization of intangible assets 0.1 0.1 0.1 0.1
Impairment of assets 0.1 - 0.0 -
Total operating expenses 5.2 6.0 6.1 6.0
Operating income (loss) from
continuing operations 2.1 (0.3 ) 1.1 0.5
Interest income 0.2 0.2 0.3 0.4
Interest expense (1.6 ) (2.4 ) (1.8 ) (2.4 )
Other income, net 0.3 0.1 0.1 0.2
Interest and other expense, net (1.1 ) (2.1 ) (1.4 ) (1.8 )
Income (loss) from continuing
operations before income taxes 1.0 (2.4 ) (0.3 ) (1.3 )
Provision for income taxes 0.4 0.1 0.4 0.2
Net income (loss) from continuing
operations 0.6 (2.5 ) (0.7 ) (1.5 )
Income from discontinued operations,
net of tax 0.2 0.8 0.7 1.0
Net income (loss) 0.8 % (1.7 )% 0.0 % (0.5 )%
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Key operating results were as follows:
Three Months Ended Nine Months Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
(In thousands)
Net sales $ 1,903,253 $ 1,673,298 $ 5,498,824 $ 5,383,888
Gross profit $ 139,641 $ 95,055 $ 393,215 $ 350,137
Operating income (loss) from
continuing operations $ 39,738 $ (5,515 ) $ 57,941 $ 25,785
Net income (loss) from continuing
operations $ 11,969 $ (42,202 ) $ (37,421 ) $ (83,405 )
Income from discontinued operations,
net of tax $ 3,359 $ 14,562 $ 36,251 $ 57,882
Net income (loss) $ 15,328 $ (27,640 ) $ (1,170 ) $ (25,523 )
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Net income (loss) from continuing operations includes restructuring costs of $13.3 million and $5.4 million for the three months ended June 28, 2008 and June 30, 2007, respectively, and $68.1 million and $27.6 million for the nine months ended June 28, 2008 and June 30, 2007, respectively.
Key performance measures
Certain key performance measures that we utilize to assess working capital management were as follows:
Three Months Ended
June 28, March 29, December 29,
2008 2008 2007
Days sales outstanding(1) 51 51 53
Inventory turns(2) 7.8 7.1 6.7
Accounts payable days(3) 49 51 57
Cash cycle days(4) 48 51 50
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The key performance measures in the above table were calculated using sales, cost of sales, accounts receivable, net; inventories and accounts payable relating only to our continuing operations (see Note 12). We believe this method of calculation is appropriate since it excludes the impact of discontinued operations and provides a more meaningful measure of our continuing operations.
(2) Inventory turns (annualized) are calculated as the ratio of four times our cost of sales for the quarter to inventory at period end.
(3) Accounts payable days are calculated as the ratio of 365 days divided by accounts payable turns, in which accounts payable turns is calculated as the ratio of four times our cost of sales for the quarter to accounts payable at period end.
(4) Cash cycle days are calculated as the ratio of 365 days to inventory turns, plus days sales outstanding minus accounts payable days.
Results of Operations
Net Sales
Net sales for the three months ended June 28, 2008 increased by 13.7% to $1.90 billion, from $1.67 billion for the three months ended June 30, 2007. The increase was primarily related to stronger demand from customers in our communications and multi-media end-markets, which increased by $156.8 million and $65.0 million, respectively.
Net sales for the nine months ended June 28, 2008 increased by 2.1% to $5.50 billion, from $5.38 billion for the nine months ended June 30, 2007. The increase was primarily related to stronger demand from customers in our communications and defense and aerospace end-markets, which increased by $142.3 million and $105.4 million, respectively. This increase was partially offset by reduced demand of approximately $114.9 million from our high-end computing end-market.
Gross Margin
Gross margin increased from 5.7% for the three months ended June 30, 2007 to 7.3% for the three months ended June 28, 2008, and from 6.5% for the nine months ended June 30, 2007 to 7.2% for the nine months ended June 28, 2008. The increase for the three months ended June 28, 2008 was due primarily to improved operational efficiencies in our enclosures business, consolidation of capacity within our printed circuit board fabrication business and favorable changes in product mix to more proprietary products within our memory modules and defense and aerospace businesses. The increase in gross margin for the nine months ended June 28, 2008 was due primarily to higher margins in our defense and aerospace business resulting from increased demand and favorable changes in product mix to more proprietary products and in our printed circuit board fabrication business resulting from the consolidation of capacity and greater efficiencies. These increases were partially offset by reduced margins in the remainder of our technology components group due to lower volume and reduced margins from the remaining EMS divisions due to start-up costs for new factories in low cost regions and costs associated with transitioning production between factories. We expect gross margins to continue to fluctuate in the future based on overall production and shipment volumes and changes in the mix of products purchased by our customers.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses decreased approximately $10.0 million, from $87.4 million, or 5.2% of net sales, for the three months ended June 30, 2007, to $77.4 million, or 4.1% of net sales, for the three months ended June 28, 2008. The decrease was primarily attributable to a reduction in stock-based compensation expense of $4.5 million, reduced personnel-related costs of $4.3 million due to headcount reductions in various functions and a reduction of $1.7 million for information technology infrastructure and related spending. For the nine months ended June 28, 2008, selling, general and administrative expenses decreased to $245.8 million, or 4.5% of net sales, from $267.8 million, or 5.0% of net sales, for the nine months ended June 30, 2007. The decrease was primarily attributable to reduced personnel-related costs of
$9.1 million due to headcount reductions in various functions, a reduction of $4.5 million in stock-based compensation expense, a reduction of $4.0 million for information technology infrastructure and related spending, and reduced expenses of $3.1 million in connection with matters arising out of our stock option investigation and restatement.
Research and Development
Research and development expenses decreased approximately $0.2 million, from $6.1 million, or 0.4% of net sales, in the third quarter of fiscal year 2007, to $5.9 million, or 0.3% of net sales, in the third quarter of fiscal year 2008. For the nine months ended June 28, 2008, research and development expenses decreased to $14.7 million, or 0.3% of net sales, from $24.1 million, or 0.4% of net sales, for the nine months ended June 30, 2007. The decrease in absolute dollars for all periods was primarily a result of our decision to realign original design manufacturing activities to focus on joint development activities, partially offset by increased spending for our defense and aerospace business to support anticipated growth in this end-market.
Restructuring costs
In recent years, we have initiated restructuring plans in order to streamline our operations, reduce our cost structure, eliminate excess capacity, and relocate our operations to locations near our customers or to lower cost regions. These plans affected facilities across all services offered in our vertically integrated manufacturing organization. The majority of our restructuring charges were recorded as a result of plans related to facilities located in North America and Western Europe. In general, manufacturing activities at these plants were transferred to other facilities located in lower cost regions. Although we have implemented significant actions in connection with our restructuring activities, there are still actions we expect to take in order to complete our restructuring plans. We expect to record additional charges of approximately $10.0 million to $18.0 million related to these anticipated actions within the next six-to-twelve months.
During the first quarter of fiscal year 2007, we began the final phase of our multi-phase restructuring strategy. Due to the immateriality of the remaining accrual balances related to prior phases, all phases have been combined for disclosure purposes.
Below is a summary of restructuring costs associated with facility closures and other consolidation efforts for the periods indicated:
Employee Leases and Impairment
Termination / Facilities of Fixed
Severance and Shutdown and Assets or
Related Consolidation Redundant Fixed
Benefits Costs Assets
Cash Cash Non-Cash Total
(In thousands)
Balance at September 30,
2006 $ 21,349 $ 9,804 $ - $ 31,153
Charges (recovery) to
operations 35,168 11,195 (831 ) 45,532
Charges recovered
(utilized) (47,872 ) (12,132 ) 831 (59,173 )
Reversal of accrual (2,505 ) (441 ) - (2,946 )
Balance at September 29,
2007 6,140 8,426 - 14,566
Charges to operations 2,300 3,346 1,232 6,878
Charges utilized (3,647 ) (4,281 ) (1,232 ) (9,160 )
Reversal of accrual (99 ) - - (99 )
Balance at December 29,
2007 4,694 7,491 - 12,185
Charges to operations 41,512 5,903 678 48,093
Charges utilized (3,879 ) (7,068 ) (678 ) (11,625 )
Reversal of accrual (74 ) - - (74 )
Balance at March 29, 2008 42,253 6,326 - 48,579
Charges (recovery) to
operations 10,401 3,531 (133 ) 13,799
Charges recovered
(utilized) (21,483 ) (4,068 ) 133 (25,418 )
Reversal of accrual (169 ) (374 ) - (543 )
Balance at June 28, 2008 $ 31,002 $ 5,415 $ - $ 36,417
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During the three and nine months ended June 28, 2008, we recorded restructuring charges for employee termination benefits for approximately 900 terminated employees and 2,500 terminated employees, respectively. We expect to pay
remaining facilities related restructuring liabilities of $5.4 million through 2010, and the majority of severance costs of $31.0 million through March 2009.
Restructuring costs of $36.4 million were accrued as of June 28, 2008, of which $34.9 million was included in accrued liabilities and $1.5 million was included in other long-term liabilities on the condensed consolidated balance sheet.
The recognition of restructuring charges requires us to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activities, including estimating potential sublease income and the fair values, less selling costs, of property, plant and equipment to be disposed of. Our estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded.
We plan to fund cash restructuring costs with cash flows generated by operating activities.
Interest Income and Expense
Interest income decreased from $3.8 million for the three months ended June 30, 2007 to $3.6 million for the three months ended June 28, 2008, and from $23.4 million for the nine months ended June 30, 2007 to $15.0 million for the nine months ended June 28, 2008. The decrease for the nine months ended June 28, 2008 was primarily attributable to lower interest rates on invested cash and the fact that we borrowed $600.0 million during the first quarter of fiscal year 2007 to fund the repayment of certain debt obligations that matured in the second quarter of fiscal year 2007. Of the amount borrowed, $532.9 million was distributed to a Trustee and held in an escrow account until repayment of the debt. We earned interest while the cash was held in escrow. This decrease was partially offset by increased interest income resulting from a higher average cash and cash equivalents balance during the first nine months of fiscal year 2008 compared to the first nine months of fiscal year 2007.
Interest expense decreased to $30.0 million for the three months ended June 28, 2008, from $41.0 million for the three months ended June 30, 2007, and from $130.2 million for the nine months ended June 30, 2007 to $96.9 million for the nine months ended June 28, 2008. The decrease for both periods was primarily attributable to the absence of interest expense in fiscal year 2008 on the $600 million unsecured term loan that was outstanding in the first quarter of fiscal year 2007 and repaid during the third quarter of fiscal year 2007, decreased weighted average borrowings against our revolving credit facility during fiscal year 2008, and lower interest rates during fiscal year 2008. These decreases were partially offset by higher interest expense incurred in fiscal year 2008 on the two $300 million senior floating rate notes issued during the third quarter of fiscal year 2007 (collectively, the "Senior Floating Rate Notes"). The decrease for the nine months ended June 28, 2008 was also attributable to the absence of interest expense in the first nine months of fiscal year 2008 on certain notes that were repaid during the second quarter of fiscal year 2007.
Other Income, net
Other income, net was $5.9 million and $2.6 million for the three months ended June 28, 2008 and June 30, 2007, respectively, and $5.5 million and $13.0 million for the nine months ended June 28, 2008 and June 30, 2007, respectively. The following table presents the major components of other income, net:
Three Months Ended Nine Months Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007
(In thousands)
Foreign exchange gains $ 3,561 $ 1,755 $ 6,692 $ 3,923
Loss on extinguishment of debt - (3,175 ) (2,238 ) (3,175 )
Gain from fixed asset disposals 143 2,107 322 8,419
Other, net 2,191 1,940 751 3,868
Total $ 5,895 $ 2,627 $ 5,527 $ 13,035
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Foreign exchange gains resulted primarily from the effect of a weakening of the US dollar relative to other currencies on partially hedged non-US dollar denominated asset positions. We reduce our exposure to currency fluctuations through the use of foreign currency hedging instruments; however, hedges are established based on forecasts of foreign currency transactions. To the extent actual amounts differ from forecasted amounts, we will have exposure to currency fluctuations.
On June 12, 2007, we used the net proceeds of $588 million from the sale of the Senior Floating Rate Notes, together with cash on hand, to repay in full the principal amount and accrued interest on an unsecured term loan. In
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