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| SANM > SEC Filings for SANM > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
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 (the "Exchange Act"). These statements relate to our
expectations for future events and time periods. All statements other than
statements of historical fact are statements that could be deemed to be
forward-looking statements, including any statements regarding trends in future
revenues or results of operations, gross margin or operating margin, expenses,
earnings or losses from operations, synergies or other financial items; any
statements of the plans, strategies and objectives of management for future
operations; any statements concerning developments, performance or industry
ranking; any statements regarding future economic conditions or performance; any
statements regarding pending investigations, claims or disputes; any statements
regarding the financial impact of customer bankruptcies; any statements
regarding future cash outlays for acquisitions; any statements concerning the
adequacy of our liquidity; any statements of expectation or belief; and any
statements of assumptions underlying any of the foregoing. Generally, the words
"anticipate," "believe," "plan," "expect," "future," "intend," "may," "will,"
"should," "estimate," "predict," "potential," "continue" and similar expressions
identify forward-looking statements. Our forward-looking statements are based on
current expectations, forecasts and assumptions and are subject to the risks and
uncertainties contained in or incorporated from Part II, Item 1A of this report.
As a result, actual results could vary materially from those suggested by the
forward-looking statements. We undertake no obligation to publicly disclose any
revisions to these forward-looking statements to reflect events or circumstances
occurring subsequent to filing this report with the Securities and Exchange
Commission.
Overview
We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. Our revenue is generated from sales of our services primarily to original equipment manufacturers, or OEMs, in the communications, enterprise computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive industries.
Recently, the business environment has become challenging due to adverse global economic conditions. These conditions have slowed global economic growth and have resulted in recessions in many countries, including the U.S., Europe and certain countries in Asia. As a consequence, many of the industries to which we provide products have recently experienced significant financial difficulty, with some entities filing for bankruptcy. Such significant financial difficulty, if experienced by one or more of our customers, may negatively affect our business due to the decreased demand from these financially distressed customers, the potential inability of these companies to make full payment on amounts owed to us, or both.
We exited our PC and associated logistics services business ("PC Business") in 2008 and have reflected this business as a discontinued operation in the condensed consolidated statements of operations for all prior periods presented.
Unless otherwise noted, all references to our operating results in this Management's Discussion and Analysis of Financial Condition and Results of Operations pertain only to our continuing operations and all references to years refer to our fiscal years ending on the last Saturday of each year closest to September 30. Fiscal 2009 will be a 53 week year, with the additional week included in the fourth quarter.
A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers represented 51.2% and 49.1% of our net sales for the three and six months ended March 28, 2009, respectively. Sales to our ten largest customers represented 50.2% and 48.8% of our net sales for the three and six months ended March 29, 2008, respectively. No customer represented 10% or more of our net sales for any of these periods.
We typically generate a significant portion of our net sales from international operations. Sales from international operations during the three months ended March 28, 2009 and March 29, 2008 were 72.4% and 68.0%, respectively, of our total net sales. During the six months ended March 28, 2009 and March 29, 2008, 72.6% and 67.7%, 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. We expect this trend to continue.
Historically, we have had substantial recurring sales to existing customers. We generally do not obtain firm, long-term commitments from our customers. Orders are placed by our customers using purchase orders, some of which are governed by supply agreements. These agreements generally have terms ranging from three to five years and cover the manufacture of a range of products. Under these agreements, a customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. These agreements generally do not obligate the customer to purchase minimum quantities of products.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate the process used to develop estimates for certain reserves and contingent liabilities, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, environmental matters, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.
For a complete description of our key critical accounting policies and estimates, refer to our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 24, 2008.
Results of Operations
Key operating results
Three Months Ended Six Months Ended
March 28, March 29, March 28, March 29,
2009 2008 2009 2008
(In thousands)
Net sales $ 1,195,107 $ 1,817,431 $ 2,614,371 $ 3,595,571
Gross profit $ 68,590 $ 124,645 $ 152,388 $ 253,574
Operating income (loss) $ (13,166 ) $ (8,613 ) $ (11,230 ) $ 18,203
Net loss from continuing operations $ (37,538 ) $ (39,937 ) $ (62,811 ) $ (49,390 )
Income from discontinued operations, net
of tax $ - $ 15,523 $ - $ 32,892
Net loss $ (37,538 ) $ (24,414 ) $ (62,811 ) $ (16,498 )
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Net loss from continuing operations includes restructuring costs of $15.6 million and $48.0 million for the three months ended March 28, 2009 and March 29, 2008, respectively, and $24.8 million and $54.8 million for the six months ended March 28, 2009 and March 29, 2008, respectively. Additionally, net loss for the six months ended March 28, 2009 includes a $10 million reduction in gross profit associated with Nortel Networks' petition for reorganization under bankruptcy law. Lastly, net loss for the three months ended March 28, 2009 includes a gain on repurchase of debt of $13.5 million.
Key performance measures
Three Months Ended
March 28, December 27, September 27,
2009 2008 2008
Days sales outstanding(1) 54 57 51
Inventory turns(2) 6.4 6.8 7.7
Accounts payable days(3) 55 53 52
Cash cycle days(4) 56 57 46
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(1) Days sales outstanding, or DSO, is calculated as the ratio of ending accounts receivable, net, to average daily net sales for the quarter.
(2) Inventory turns (annualized) are calculated as the ratio of four times our cost of sales for the quarter to inventory at period end.
(3) Accounts payable days is calculated as the ratio of 365 days divided by accounts payable turns, in which accounts payable turns is calculated as the ratio of four times our cost of sales for the quarter to accounts payable at period end.
(4) Cash cycle days is calculated as the ratio of 365 days to inventory turns, plus days sales outstanding minus accounts payable days.
Net Sales
Net sales for the three months ended March 28, 2009 decreased 34.2%, from $1.8 billion in the second quarter of 2008 to $1.2 billion in the second quarter of 2009. The decrease was primarily the result of the weakening economy which reduced demand across all of our end markets. Due to the weakening economy, sales decreased $187 million in our communications end market, $149 million in our multi-media end market, $143 million in our high-end computing end market, $116 million in our automotive, defense and aerospace, and industrial and semiconductor capital equipment end markets, and $27 million in our medical end market.
Net sales for the six months ended March 28, 2009 decreased by 27.3% to $2.6 billion, from $3.6 billion for the six months ended March 29, 2008. The decrease was primarily the result of the weakening economy which reduced demand across all of our end markets. Due to the weakening economy, sales decreased $323 million in our communications end market, $247 million in our high-end computing end market, $230 million in our multi-media end market, $156 million in our automotive, defense and aerospace, and industrial and semiconductor capital equipment end markets, and $26 million in our medical end market.
Gross Margin
Gross margin decreased from 6.9% for the three months ended March 29, 2008 to 5.7% for the three months ended March 28, 2009, and from 7.1% for the six months ended March 29, 2008 to 5.8% for the six months ended March 28, 2009. The decrease for the three month period was primarily a result of significantly lower business volume in 2009, as discussed above, partially offset by improved margins as a result of cost reduction initiatives.
The decrease for the six month period was primarily a result of significantly lower business volume in 2009, as discussed above, and adjustments recorded in the first quarter of 2009 related to a petition for reorganization under bankruptcy law by one of our customers, Nortel Networks. These adjustments reduced gross profit by $10 million. The adverse items above were partially offset by the effect of cost reduction initiatives.
We expect gross margins to continue to fluctuate based on overall production and
shipment volumes and changes in the mix of products demanded by our major
customers. Fluctuations in our gross margins may also be caused by a number of
other factors, some of which are outside of our control, including (a) greater
competition in EMS and pricing pressures from OEMs due to greater focus on cost
reduction; (b) provisions for excess and obsolete inventory that we are not able
to charge back to a customer or sales of inventories previously written down;
(c) changes in operational efficiencies; (d) pricing pressure on electronic
components resulting from economic conditions in the electronics industry, with
EMS companies competing more aggressively on cost to obtain new or maintain
existing business; and (e) our ability to transition manufacturing and assembly
operations to lower cost regions in an efficient manner.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses decreased $22.2 million, from $79.3 million, or 4.4% of net sales, for the three months ended March 29, 2008, to $57.1 million, or 4.8% of net sales, for the three months ended March 28, 2009. For the six months ended March 28, 2009, selling, general and administrative expenses decreased to $120.0 million, or 4.6% of net sales, from $168.4 million, or 4.7% of net sales, for the six months ended March 29, 2008. The decrease for both the three and six month periods was attributable to cost reduction initiatives, primarily reductions in staffing related costs, across the Company.
Research and Development
Research and development expenses increased $0.4 million, from $4.3 million, or 0.2% of net sales, in the second quarter of 2008, to $4.7 million, or 0.4% of net sales, in the second quarter of 2009. The increase was primarily a result of the initiation of new projects during the second quarter of 2009. Research and development expenses were $8.9 million for the six months ended March 28, 2009 and March 29, 2008 as the effect of projects initiated in 2009 was offset by cost reduction initiatives throughout the first six months of 2009.
Restructuring costs
Costs associated with restructuring activities, other than those activities related to business combinations, are accounted for in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", or SFAS No. 112, "Employers' Accounting for Postemployment Benefits", as applicable. Pursuant to SFAS No. 112, restructuring costs related to employee severance are recorded when probable and estimable based on our severance policy with respect to severance payments. For 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, we initiated a restructuring plan as a result of the slowdown in the global electronics industry and worldwide economy. The plan is designed to improve capacity utilization levels and reduce costs by consolidating manufacturing and other activities in locations with higher efficiencies and lower costs. Costs associated with this plan are expected to include employee severance, costs related to owned and leased facilities and equipment that are no longer in use, and other costs associated with the exit of certain contractual arrangements due to facility closures. 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. We expect actions under this plan to increase our gross and operating margins and be cash positive over a 12 to 24 month period as cash outlays for severance and facility closures will be recovered by cost savings and asset sales resulting from actions under the plan. Below is a summary of restructuring costs associated with facility closures and other consolidation efforts implemented under the plan:
Employee Leases and
Termination Facilities
Severance Shutdown and
and Related Consolidation
Benefits Costs
Cash Cash Total
(In thousands)
Balance at September 27, 2008 $ - $ - $ -
Charges to operations 7,009 482 7,491
Charges utilized (2,229 ) (482 ) (2,711 )
Balance at December 27, 2008 4,780 - 4,780
Charges to operations 7,524 1,160 8,684
Charges utilized (5,662 ) (1,160 ) (6,822 )
Balance at March 28, 2009 $ 6,642 $ - $ 6,642
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During the three and six months ended March 28, 2009, we 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 fiscal years:
Employee
Termination Leases and
Severance Facilities Shutdown Impairment of
and Related and Consolidation Assets or
Benefits Costs Redundant Assets
Cash Cash Non-Cash Total
(In thousands)
Balance at September 30, 2006 $ 21,349 $ 9,804 $ - $ 31,153
Charges (recovery) to operations 35,169 11,195 (831 ) 45,533
Charges recovered (utilized) (47,873 ) (12,132 ) 831 (59,174 )
Reversal of accrual (2,505 ) (441 ) - (2,946 )
Balance at September 29, 2007 6,140 8,426 - 14,566
Charges to operations 64,126 16,519 2,456 83,101
Charges utilized (45,248 ) (19,765 ) (2,456 ) (67,469 )
Reversal of accrual (833 ) (892 ) - (1,725 )
Balance at September 27, 2008 24,185 4,288 - 28,473
Discontinued operations 5,607 - - 5,607
Balance at September 27, 2008, including
discontinued operations 29,792 4,288 - 34,080
Charges to operations 3,222 1,989 644 5,855
Charges utilized (11,651 ) (2,587 ) (644 ) (14,882 )
Reversal of accrual (4,067 ) (44 ) - (4,111 )
Balance at December 27, 2008 17,296 3,646 - 20,942
Charges to operations 2,953 2,905 1,121 6,979
Charges utilized (11,299 ) (2,839 ) (1,121 ) (15,259 )
Reversal of accrual (89 ) - - (89 )
Balance at March 28, 2009 $ 8,861 $ 3,712 $ - $ 12,573
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During the three months ended March 28, 2009, we recorded restructuring charges for employee termination costs for approximately 380 employees who were terminated during the period. In connection with restructuring actions we have already implemented under these restructuring plans, we expect 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. We have substantially completed our actions under these prior year restructuring plans.
All Restructuring Plans
In connection with all of our restructuring plans, restructuring costs of $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.
The recognition of restructuring charges requires us to make judgments and estimates regarding the nature, timing, and amount of costs associated with planned exit activities, including estimating sublease income and the fair values, less selling costs, of property, plant and equipment to be disposed of. Our estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded.
Asset Impairment
During the three and six months ended March 28, 2009, we recorded impairment charges of $3.4 million and $7.2 million, respectively, which related primarily to a decline in the fair value of certain properties held for sale. No such charges were recorded for the three or six months ended March 29, 2008.
Interest Income and Expense
Interest income decreased from $5.2 million for the three months ended March 29, 2008 to $1.8 million for the three months ended March 28, 2009, and from $11.4 million for the six months ended March 29, 2008 to $5.3 million for the six months ended March 28, 2009. The decreases were primarily attributable to lower interest rates during 2009 as a result of weakening economic conditions and uncertainty and volatility in the financial markets.
Interest expense decreased to $28.1 million for the three months ended March 28, 2009, from $31.6 million for the three months ended March 29, 2008, and to $57.3 million for the six months ended March 28, 2009 from $67.0 million for the six months ended March 29, 2008. The decrease for the three month period was primarily attributable to the termination of our hedging relationships for our 6.75% Notes during the second quarter of 2009, which caused the interest rate to be fixed at 6.75%, versus a higher variable rate in previous periods during which the hedging relationships were in place. In addition, the decrease is related to a significant reduction in LIBOR during 2009 as a result of uncertainty and volatility in the financial markets, which reduced interest expense on our variable rate notes.
The decrease for the six month period was primarily attributable to the change from variable rate to fixed rate on our 6.75% Notes, as noted above. In addition, LIBOR was significantly lower in 2009 as a result of uncertainty and volatility in the financial markets, which reduced interest expense on our variable rate notes, and our average debt balance was lower due to redemption of $120 million of debt near the end of the first quarter of 2008.
Other Income (Expense), net
Other income (expense), net was $4.9 million and $4.3 million for the three months ended March 28, 2009 and March 29, 2008, respectively, and $5.5 million and $(0.4) million for the six months ended March 28, 2009 and March 29, 2008, respectively. The following table presents the major components of other income (expense), net:
Three Months Ended Six Months Ended
March 28, March 29, March 28, March 29,
2009 2008 2009 2008
(In thousands)
Foreign exchange gains (losses) $ (7,693 ) $ 5,880 $ (8,906 ) $ 3,131
Gain/(loss) on extinguishment of debt 13,490 - 13,490 (2,237 )
Other, net (874 ) (1,608 ) 892 (1,262 )
Total other income (expense), net $ 4,923 $ 4,272 $ 5,476 $ (368 )
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Foreign exchange gains and losses resulted primarily from the effect of a strengthening of the U.S. dollar during 2009 and a weakening of the U.S. dollar during 2008 relative to other currencies on partially hedged non-U.S. 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.
During the second quarter of 2009, we redeemed $4.3 million and $29.4 million of our 2010 and 2014 Notes, respectively. Upon redemption, holders of the notes received $19.6 million, including accrued interest of $0.3 million. In connection with these redemptions, we recorded a gain of $13.5 million, net of unamortized debt issuance costs of $0.6 million that were expensed upon redemption of the notes. During the first quarter of 2008, we redeemed $120 million of debt that was due in 2010. In connection with this redemption, $2.2 million of debt issuance costs were expensed.
On November 19, 2008, we terminated our revolving credit facility and entered into a new credit facility. In connection with the termination of the revolving credit facility, we also terminated an interest rate swap associated with our 6.75% Notes. As a result of terminating the swap, we were required to discontinue hedge accounting for the terminated swap and the remaining three swaps designated under SFAS 133 as hedges of the 6.75% Notes. During the period from November 22, 2008 through termination of the remaining swaps in January 2009 (period during which hedge accounting was discontinued), changes in the . . .
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