Table
of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark
One)
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x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 27,
2008
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or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File Number 0-21272
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Sanmina-SCI
Corporation
(Exact name of registrant as specified in its
charter)
Delaware
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77-0228183
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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2700 N. First St., San Jose, CA
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95134
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(Address of principal executive offices)
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(Zip Code)
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(408) 964-3500
(Registrants 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
o
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):
Large
accelerated filer
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
o
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(Do not check if a smaller
reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes
o
No
x
As of January 28, 2009,
there were 511,165,986 shares outstanding of the issuers common stock, $0.01
par value per share.
Table
of Contents
SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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As of
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December 27,
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September 27,
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2008
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2008
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(Unaudited)
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(In thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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796,774
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$
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869,801
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Accounts receivable, net of allowances of
$13,002 and $14,934 at December 27, 2008 and September 27, 2008,
respectively
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892,107
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986,312
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Inventories
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784,002
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813,359
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Prepaid expenses and other current assets
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88,505
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100,399
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Assets held for sale
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46,183
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43,163
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Total current assets
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2,607,571
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2,813,034
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Property, plant and equipment, net
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587,503
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599,908
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Other
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145,244
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117,785
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Total assets
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$
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3,340,318
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$
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3,530,727
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LIABILITIES
AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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781,920
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$
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908,151
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Accrued liabilities
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200,068
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191,022
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Accrued payroll and related benefits
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111,032
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139,522
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Total current liabilities
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1,093,020
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1,238,695
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Long-term liabilities:
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Long-term debt
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1,485,614
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1,481,985
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Other
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135,426
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114,089
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Total long-term liabilities
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1,621,040
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1,596,074
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Commitments and contingencies (Note 8)
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Stockholders equity
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626,258
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695,958
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Total liabilities and stockholders equity
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$
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3,340,318
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$
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3,530,727
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See
accompanying notes.
3
Table
of Contents
SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended
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December 27,
2008
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December 29,
2007
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(Unaudited)
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(In thousands, except per share data)
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Net sales
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$
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1,419,264
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$
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1,778,140
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Cost of sales
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1,335,466
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1,649,211
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Gross profit
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83,798
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128,929
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Operating expenses:
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Selling, general and administrative
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62,987
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89,078
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Research and development
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4,192
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4,606
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Amortization of intangible assets
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1,650
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1,650
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Restructuring costs
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9,235
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6,779
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Asset impairment
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3,798
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Total operating expenses
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81,862
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102,113
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Operating income
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1,936
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26,816
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Interest income
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3,450
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6,217
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Interest expense
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(29,183
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)
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(35,363
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)
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Other income (expense), net
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553
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(4,640
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)
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Interest and other expense, net
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(25,180
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)
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(33,786
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)
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Loss from continuing operations before
income taxes
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(23,244
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)
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(6,970
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)
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Provision for income taxes
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2,029
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2,483
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Net loss from continuing operations
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(25,273
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)
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(9,453
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)
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Income from discontinued operations, net of
tax
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17,369
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Net income (loss)
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$
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(25,273
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)
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$
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7,916
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Basic income (loss) per share from:
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Continuing operations
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$
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(0.05
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)
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$
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(0.02
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)
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Discontinued operations
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$
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$
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0.03
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Net income (loss)
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$
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(0.05
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)
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$
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0.01
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Diluted income (loss) per share from:
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Continuing operations
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$
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(0.05
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)
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$
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(0.02
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Discontinued operations
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$
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$
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0.03
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Net income (loss)
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$
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(0.05
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)
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$
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0.01
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Weighted-average shares used in computing
per share amounts:
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Basic
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523,316
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529,652
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Diluted
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523,316
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529,962
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See
accompanying notes.
4
Table
of Contents
SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended
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December 27,
2008
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December 29,
2007
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(Unaudited)
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(In thousands)
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CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
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Net income (loss)
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$
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(25,273
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)
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$
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7,916
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Adjustments to reconcile net income to cash
provided by operating activities:
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Depreciation and amortization
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23,490
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27,707
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Stock-based compensation expense
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4,162
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3,407
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Proceeds from sales of accounts receivable
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292,221
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Non-cash restructuring costs
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644
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1,232
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Benefit from doubtful accounts, product
returns and other net sales adjustments
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(1,799
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)
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(682
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)
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Deferred income taxes
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1,973
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(2,315
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)
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Impairment of tangible and other intangible
assets
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3,798
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Loss on extinguishment of debt
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2,238
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Other, net
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(415
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)
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305
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Changes in operating assets and
liabilities:
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Accounts receivable
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87,577
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(322,605
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)
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Inventories
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21,608
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(15,152
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)
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Prepaid expenses and other assets
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(533
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)
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5,531
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Accounts payable
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(112,056
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)
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139,448
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Accrued liabilities and other long-term
liabilities
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(14,067
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)
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(5,308
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)
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Cash provided by (used in) operating
activities
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(10,891
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)
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133,943
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CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
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Purchases of short-term investments
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(34
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)
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Purchases of long-term investments
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(200
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)
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Proceeds from maturities of short-term
investments
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97
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Purchases of property, plant and equipment
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(28,045
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)
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(37,752
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)
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Proceeds from sales of property, plant and
equipment
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275
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|
26,650
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Cash used in investing activities
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(27,970
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)
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(11,039
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)
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CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
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|
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Change in restricted cash
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(24,290
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)
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Repayment of long-term debt
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|
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(120,000
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)
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Repurchases of common stock
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|
(11,574
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)
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Cash used in financing activities
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(35,864
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)
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(120,000
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)
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|
|
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Effect of exchange rate changes
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1,698
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4,869
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|
Increase (decrease) in cash and cash
equivalents
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(73,027
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)
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7,773
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|
Cash and cash equivalents at beginning of
period
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869,801
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|
933,424
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|
Cash and cash equivalents at end of period
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$
|
796,774
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|
$
|
941,197
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|
|
|
|
|
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Supplemental disclosures of cash flow
information:
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|
|
|
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Cash paid during the period for:
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|
|
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Interest
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|
$
|
9,266
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|
$
|
13,272
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|
Income taxes (excludes refunds of $1.3
million and $0.8 million for the three months ended December 27, 2008
and December 29, 2007, respectively)
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$
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7,447
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$
|
5,959
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|
See
accompanying notes.
5
Table
of Contents
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, us, 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 omitted pursuant to
those rules or regulations. The interim condensed consolidated 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. 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 Companys
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). Accordingly, the condensed consolidated
statements of operations have been revised for all periods presented to reflect
the PC Business as a discontinued operation. Unless otherwise noted, the
following discussions in the notes to the condensed consolidated financial
statements pertain to continuing operations.
Results of operations for the three months ended December 27,
2008 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. All references to years relate to fiscal years unless otherwise
noted.
Recent
Accounting Pronouncements
In December 2008, the Financial
Accounting Standards Board (
FASB) issued FASB Staff Position (FSP)
Financial
Accounting Standards (FAS)
132(R)-1,
Employers Disclosures about Postretirement
Benefit Plan Assets,
which provides guidance on an employers
disclosures of a defined benefit pension or other postretirement plan. Specifically,
employers are required to disclose information about fair value measurements of
plan assets. FSP FAS 132(R)-1 will be effective for the Company in 2010.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133
.
SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133
with the intent to provide users of financial statements with an enhanced
understanding of how and why an entity uses derivative instruments, how
derivative instruments and the related hedged items are accounted for under
SFAS No. 133 and its related interpretations, fair value disclosures and
how derivative instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. SFAS No. 161
will be effective for the Company for the three months ending March 28,
2009.
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). FSP 157-2 will be effective at the beginning of 2010.
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 Companys business combinations for which the acquisition date is on or
after the beginning of 2010.
6
Table
of Contents
Note 2. Stock-Based Compensation
Stock compensation expense was as follows:
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Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(In thousands)
|
|
Cost of sales
|
|
$
|
1,865
|
|
$
|
1,700
|
|
Selling, general & administrative
|
|
2,212
|
|
1,481
|
|
Research & development
|
|
85
|
|
97
|
|
Continuing operations
|
|
4,162
|
|
3,278
|
|
Discontinued operations
|
|
|
|
129
|
|
Total
|
|
$
|
4,162
|
|
$
|
3,407
|
|
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(In thousands)
|
|
Stock options
|
|
$
|
2,468
|
|
$
|
1,928
|
|
Restricted stock awards
|
|
183
|
|
(152
|
)
|
Restricted stock units
|
|
1,511
|
|
1,502
|
|
Continuing operations
|
|
4,162
|
|
3,278
|
|
Discontinued operations
|
|
|
|
129
|
|
Total
|
|
$
|
4,162
|
|
$
|
3,407
|
|
The
Companys 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 Companys stockholders approved the 2009 Incentive
Plan and the reservation of 45.0 million shares of common stock for issuance
thereunder.
Stock Options
Assumptions used to estimate the fair value of stock
options granted were as follows:
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
Volatility
|
|
83.9
|
%
|
57.9
|
%
|
Risk-free interest rate
|
|
2.67
|
%
|
3.87
|
%
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
Expected life of options
|
|
5.0 years
|
|
5.0 years
|
|
Stock
option activity was as follows:
|
|
Number of
Shares
|
|
Weighted- Average
Exercise Price
|
|
Weighted- Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value of
In-The-Money
Options
|
|
|
|
|
|
($)
|
|
(Years)
|
|
($)
|
|
Outstanding, September 27, 2008
|
|
46,259,242
|
|
5.14
|
|
7.31
|
|
1,116,547
|
|
Granted
|
|
6,824,000
|
|
0.49
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited/Expired
|
|
(4,598,158
|
)
|
9.42
|
|
|
|
|
|
Outstanding, December 27, 2008
|
|
48,485,084
|
|
4.08
|
|
7.80
|
|
|
|
Vested and expected to vest,
December 27, 2008
|
|
42,304,226
|
|
4.35
|
|
7.63
|
|
|
|
Exercisable, December 27, 2008
|
|
19,602,568
|
|
6.86
|
|
6.15
|
|
|
|
7
Table
of Contents
The weighted-average grant date fair value of stock
options granted during the three months ended December 27, 2008 and December 29,
2007 was $0.33 and $1.05, respectively. 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 Companys closing stock price on the
date indicated.
As of December 27, 2008, there was
$30.3 million of total unrecognized compensation expense related to stock
options. This amount is expected to be recognized over a weighted average
period of 3.92 years.
Restricted Stock Awards
and Units
Activity with respect to the Companys nonvested
restricted stock awards and units was immaterial for the three months ended December 27,
2008. At December 27, 2008, unrecognized compensation expense related to
restricted stock awards and units was $8.2 million, which is expected to be
recognized over a weighted average period of 0.9 years.
Note 3.
Income Tax
The
Companys effective tax rate on its loss from continuing operations for the
three months ended December 27, 2008 and December 29, 2007 was 8.7%
and 35.6%, respectively. The Companys 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 net unrecognized tax benefits,
including accrued interest, of $25.9 million, all of which, if recognized,
would result in a reduction of the Companys effective tax rate. During the
three months ended December 27, 2008, the Companys long-term liability
for unrecognized tax benefits decreased $5.5 million, including $1.8 million of
accrued interest, due to favorable conclusions with foreign tax authorities and
increased $2.3 million for accruals related to current year tax positions and
foreign exchange revaluation. Total cash payments and other offsets made in
connection with the favorable conclusions discussed above were $1.6 million.
The
Companys policy is to classify interest and penalties on unrecognized tax
benefits as income tax expense. The Company accrued $0.4 million of interest
expense on unrecognized tax benefits for both the three months ended December 27,
2008 and December 29, 2007.
In
general, the Company is no longer subject to United States of America 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:
|
|
As of
|
|
|
|
December 27, 2008
|
|
September 27, 2008
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
548,677
|
|
$
|
591,119
|
|
Work-in-process
|
|
112,909
|
|
106,784
|
|
Finished goods
|
|
122,416
|
|
115,456
|
|
Total
|
|
$
|
784,002
|
|
$
|
813,359
|
|
8
Table
of Contents
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:
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
(25,273
|
)
|
$
|
7,916
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Net unrealized loss on derivative financial
instruments
|
|
(28,727
|
)
|
(9,999
|
)
|
Foreign currency translation adjustments
|
|
(7,199
|
)
|
6,572
|
|
Changes in minimum pension liability, net
of tax
|
|
(1,092
|
)
|
(30
|
)
|
Comprehensive income (loss)
|
|
$
|
(62,291
|
)
|
$
|
4,459
|
|
The
net unrealized loss on derivative financial instruments for the three months
ended December 27, 2008 is primarily related to interest rate swap
agreements associated with certain long-term debt. These swap agreements are
being accounted for as cash flow hedges; accordingly, changes in fair value of
the swap agreements are recorded in other comprehensive income and recognized
in earnings when the hedged interest expense is recognized.
Foreign
currency translation adjustments were primarily attributable to the
strengthening of the U.S. dollar against the Euro, British Pound, and other
foreign currencies.
Accumulated
other comprehensive income, net of tax as applicable, consisted of the
following:
|
|
As of
|
|
|
|
December 27,
2008
|
|
September 27,
2008
|
|
|
|
(In thousands)
|
|
Foreign currency translation adjustments
|
|
$
|
75,104
|
|
$
|
82,303
|
|
Unrealized holding losses on derivative
financial instruments
|
|
(51,994
|
)
|
(23,267
|
)
|
Unrecognized net actuarial loss and
unrecognized transition cost related to pension plans
|
|
(4,351
|
)
|
(3,259
|
)
|
Total
|
|
$
|
18,759
|
|
$
|
55,777
|
|
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:
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(In thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(25,273
|
)
|
$
|
(9,453
|
)
|
Net income from discontinued operations,
net of tax
|
|
|
|
17,369
|
|
Net income (loss)
|
|
$
|
(25,273
|
)
|
$
|
7,916
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average number of sharesbasic and
diluted
|
|
|
|
|
|
Basic
|
|
523,316
|
|
529,652
|
|
Diluted
|
|
523,316
|
|
529,962
|
|
|
|
|
|
|
|
Basic income (loss) per share from:
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
$
|
|
|
$
|
0.03
|
|
Net income (loss)
|
|
$
|
(0.05
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
Diluted income (loss) per share from:
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
$
|
|
|
$
|
0.03
|
|
Net income (loss)
|
|
$
|
(0.05
|
)
|
$
|
0.01
|
|
9
Table
of Contents
The following table presents weighted-average dilutive securities that
were excluded from the above calculation because their inclusion would have had
an anti-dilutive effect:
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
Potentially dilutive securities:
|
|
|
|
|
|
Employee stock options
|
|
46,444,415
|
|
43,140,076
|
|
Restricted awards and units
|
|
3,644,142
|
|
4,667,689
|
|
Total anti-dilutive shares
|
|
50,088,557
|
|
47,807,765
|
|
As of December 27, 2008, all of the Companys outstanding stock
options and restricted awards and units were anti-dilutive under SFAS No. 128,
Earnings Per Share, either because the exercise price was less than the
Companys stock price or the application of the treasury stock method resulted
in an anti-dilutive effect. Therefore, had the Company reported net income
instead of a net loss for the three months ended December 27, 2008, none
of the 50.1 million 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:
|
|
As of
|
|
|
|
December 27, 2008
|
|
September 27, 2008
|
|
|
|
(In thousands)
|
|
$300 Million Senior Floating Rate Notes due
2010
|
|
$
|
180,000
|
|
$
|
180,000
|
|
$300 Million Senior Floating Rate Notes due
2014
|
|
300,000
|
|
300,000
|
|
8.125% Senior Subordinated Notes due 2016
|
|
600,000
|
|
600,000
|
|
6.75% Senior Subordinated Notes due 2013
|
|
400,000
|
|
400,000
|
|
Interest Rate Swaps at estimated fair value
|
|
5,614
|
|
1,985
|
|
Total long-term debt
|
|
$
|
1,485,614
|
|
$
|
1,481,985
|
|
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% Senior
Subordinated Notes due 2013 (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 to interest expense over the
remaining life of the debt. During the period from November 22, 2008
through December 27, 2008 (period during which hedge accounting was
discontinued), changes in the fair value of the swaps were recorded in other
income and expense, and resulted in a $5.1 million gain. Since the remaining
interest rate swaps have not been re-designated as hedging instruments,
the interest rate exposure on the Companys
6.75% Notes will change from a variable rate of LIBOR plus a spread ranging
from 2.23% to 2.25% to a fixed rate of 6.75%.
New Credit Facility.
On November 19, 2008, 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 Companys borrowing base. The new credit
facility has an initial $50 million letter of credit sublimit. As of December 27,
2008, no loans and $23.6 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 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).
10
Table
of Contents
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 Companys 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 Companys 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 Companys ability to incur additional debt,
make investments, pay dividends, and sell assets. The Company was in compliance
with these covenants as of December 27, 2008.
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 December 27,
2008, the Company had reserves of $28.6 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 December 27, 2008, 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, remediation and restoration of this site. Actual costs could differ
from the amount estimated upon completion of this process. To date, $4.8
million of such costs have been incurred. The Company intends to sell this site
upon completion of its remediation efforts. Costs incurred in connection with
the remediation activities have been capitalized to the extent the estimated
fair value of the site exceeds its carrying cost.
Warranty Reserve
. The following tables present information with
respect to the warranty reserve, which is included in accrued liabilities in
the condensed consolidated balance sheets:
Balance as of
|
|
|
|
|
|
Balance as of
|
|
September 27,
|
|
Additions to
|
|
Accrual
|
|
December 27,
|
|
2008
|
|
Accrual
|
|
Utilized
|
|
2008
|
|
(in thousands)
|
|
$
|
18,974
|
|
$
|
2,415
|
|
$
|
(4,444
|
)
|
$
|
16,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
September 29,
|
|
Additions to
|
|
Accrual
|
|
December 29,
|
|
2007
|
|
Accrual
|
|
Utilized
|
|
2007
|
|
(in thousands)
|
|
$
|
23,094
|
|
$
|
5,172
|
|
$
|
(6,172
|
)
|
$
|
22,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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
.
11
Table of Contents
2009
Restructuring Plan
During
the three months ended December 27, 2008, the Company initiated a
restructuring plan as a result of the slowdown in the global electronics
industry and the worldwide economy. The plan was designed to reduce excess
capacity and affected facilities across all services offered in the Companys
global manufacturing organization. In connection with actions taken to date
under this plan, the Company recorded restructuring charges of $7.0 million for
employee termination benefits, of which $2.2 million was utilized during the
period and $4.8 million is expected to be paid during 2009. These benefits were
provided for approximately 800 employees. Additionally, the Company incurred
and utilized $0.5 million of costs related to closure of facilities under this
plan during the three months ended December 27, 2008.
Restructuring Plans Prior Years
Below
is a summary of restructuring costs associated with facility closures and other
consolidation efforts that were implemented in prior years:
|
|
Employee
|
|
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
|
|
35,169
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three months ended December 27, 2008, the Company recorded
restructuring charges for employee termination benefits for approximately 500
employees. 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 $3.6 million through
2010, and the majority of severance costs of $17.3 million through 2009.
All
Restructuring Plans
In
connection with all of the Companys restructuring plans, restructuring costs
of $25.7 million were accrued as of December 27, 2008, of which $24.8
million was included in accrued liabilities and $0.9 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 segment.
12
Table of Contents
Information by geographic segment was as
follows:
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(In thousands)
|
|
Net sales
|
|
|
|
|
|
Domestic
|
|
$
|
387,838
|
|
$
|
579,567
|
|
International
|
|
1,031,426
|
|
1,198,573
|
|
Total
|
|
$
|
1,419,264
|
|
$
|
1,778,140
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
Domestic
|
|
$
|
(16,594
|
)
|
$
|
11,077
|
|
International
|
|
18,530
|
|
15,739
|
|
Total
|
|
$
|
1,936
|
|
$
|
26,816
|
|
Note 11. Financial Instruments
The Company partially adopted SFAS No. 157,
Fair Value Measurements,
at the
beginning of 2009 for all financial assets and financial liabilities that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). SFAS 157 requires new disclosures that
establish a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. 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.
The Company considers the principal or most advantageous market in which it
would transact, and considers assumptions that market participants would use
when pricing an asset or liability when determining the fair value measurements
for assets and liabilities required or permitted to be recorded at fair value.
The Company has elected to defer the adoption of 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 Companys results of operations, cash
flows or financial position for the three months ended December 27, 2008.
Fair Value Hierarchy
The fair value hierarchy for disclosure
of fair value measurements under SFAS No. 157 is as follows:
|
|
Level 1:
|
|
Observable inputs that reflect quoted prices (unadjusted)
in active markets for identical assets or liabilities.
Level 1 assets and liabilities consist of money market
fund deposits, time deposits and marketable debt and equity instruments.
|
|
|
|
|
|
|
|
Level 2:
|
|
Inputs that reflect quoted prices, other than quoted
prices included in Level 1, that are observable for the assets or
liabilities, such as quoted prices for similar assets or liabilities in
active markets; quoted prices for identical assets or liabilities in less
active markets; or inputs that are derived principally from or corroborated
by observable market data by correlation.
|
|
|
|
|
|
|
|
Level 3:
|
|
Inputs that are unobservable to the valuation methodology
which are significant to the measurement of the fair value of assets or
liabilities.
|
13
Table of Contents
Assets and Liabilities Measured at Fair
Value on a Recurring Basis
The following table presents information as of December 27,
2008 with respect to assets and liabilities measured at fair value on a
recurring basis:
|
|
Fair Value Measurements Using
|
|
|
|
Presentation in the Condensed Consolidated Balance Sheet
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Cash and
cash
equivalents
|
|
Prepaid
expenses
and other
current
assets
|
|
Accrued
liabilities
|
|
Other assets
|
|
Other
long-term
liabilities
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market
Funds
|
|
$
|
319,511
|
|
$
|
|
|
$
|
|
|
$
|
319,511
|
|
$
|
319,511
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Mutual Funds
|
|
|
|
2,623
|
|
|
|
2,623
|
|
|
|
|
|
|
|
2,623
|
|
|
|
Time Deposits
|
|
106,300
|
|
|
|
|
|
106,300
|
|
91,811
|
|
|
|
|
|
14,489
|
|
|
|
Corporate Bonds
|
|
|
|
2,786
|
|
|
|
2,786
|
|
|
|
|
|
|
|
2,786
|
|
|
|
Derivatives:
Interest Rate Swaps (Fair Value Hedges)
|
|
|
|
9,566
|
|
|
|
9,566
|
|
|
|
|
|
|
|
9,566
|
|
|
|
Derivatives:
Foreign Currency Forward Contracts
|
|
|
|
5,720
|
|
|
|
5,720
|
|
|
|
5,720
|
|
|
|
|
|
|
|
Total assets
measured at fair value
|
|
$
|
425,811
|
|
$
|
20,695
|
|
$
|
|
|
$
|
446,506
|
|
$
|
411,322
|
|
$
|
5,720
|
|
$
|
|
|
$
|
29,464
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
Interest Rate Swaps (Cash Flow Hedges)
|
|
|
|
(52,210
|
)
|
|
|
(52,210
|
)
|
|
|
|
|
|
|
|
|
(52,210
|
)
|
Derivatives:
Foreign Currency Forward Contracts
|
|
|
|
(13,193
|
)
|
|
|
(13,193
|
)
|
|
|
|
|
(13,193
|
)
|
|
|
|
|
Total liabilities
measured at fair value
|
|
$
|
|
|
$
|
(65,403
|
)
|
$
|
|
|
$
|
(65,403
|
)
|
$
|
|
|
$
|
|
|
$
|
(13,193
|
)
|
$
|
|
|
$
|
(52,210
|
)
|
The Company has elected to use the income approach to value
derivatives, using observable Level 2 market expectations at the measurement
date and standard valuation techniques to convert future amounts to a single
present amount assuming that participants are motivated, but not compelled to
transact. Level 2 inputs are limited to quoted prices for similar assets or
liabilities in active markets (specifically futures contracts on LIBOR for the
first two years) and inputs other than quoted prices that are observable for
the asset or liability (specifically LIBOR cash and swap rates, LIBOR basis
spreads (if any swaps are not 3 month LIBOR), interest rates, forward rates and
credit risk at commonly quoted intervals). Mid-market pricing is used as a
practical expedient for fair value measurements. SFAS No. 157 states that
the fair value measurement of an asset or liability must reflect the
nonperformance risk of the entity and the counterparty. Therefore, the impact
of the counterpartys creditworthiness when in an asset position and the
Companys creditworthiness when in a liability position has also been factored
into the fair value measurement of the derivative instruments and did not have
a material impact on the fair value of these derivative instruments. Both the
counterparty and the Company are expected to continue to perform under the
contractual terms of the instruments.
The Company sponsors deferred compensation plans for eligible employees
and non-employee members of its board of directors that allow participants to
defer payment of part or all of their compensation. These plans are accounted
for in accordance with EITF Issue 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested.
Assets and liabilities associated with these plans are recorded as other
non-current assets and other long-term liabilities in the condensed
consolidated balance sheets. The Companys results of operation are not
affected by these plans since changes in the fair value of the assets are
offset by changes in the fair value of the liabilities. As such, assets and
liabilities associated with these plans have not been included in the above
table.
Note
12. Stock Repurchase Program
On
October 27, 2008, the Companys Board of Directors authorized the Company
to spend up to approximately $35 million on share repurchases. Purchases of
common shares shall be made at prevailing market prices or in negotiated
transactions off the market. The authorization is effective through December 2009.
During the three months ended December 27, 2008, the Company repurchased
21.0 million shares of its common stock for a total of $11.6 million, including
commissions.
14
Table of Contents
Note
13. Subsequent Events
On
January 14, 2009, one of the Companys customers, Nortel Networks, filed a
petition for reorganization under bankruptcy law. As a result, the Company performed an
analysis 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 claim priority. Based on
its analysis, the Company estimated a maximum exposure of approximately $20.0
million related to outstanding accounts receivable and on-hand inventory. The
Company considered collectibility of accounts receivable and determined that
certain amounts may not be collectible. Therefore, the Company deferred
recognition of revenue in the amount of $5.0 million for shipments made during
the three months ended December 27, 2008. 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 during the three
months ended December 27, 2008. The Companys estimates are subject to
change as additional information becomes available.
On
January 26, 2009, the Companys stockholders approved the 2009 Incentive
Plan and the reservation of 45.0 million shares of common stock for issuance
thereunder.
On
January 30, 2009, the Company received termination notices from two of its
counterparties exercising their right pursuant to embedded call options to
cancel interest rate swaps, totaling $175 million in aggregate notional
principal, associated with the Companys 6.75% Notes. In connection with the
termination of the swaps, the Company expects to receive a payment consisting
of a call premium of $5.9 million plus accrued interest on March 1, 2009.
These terminations will not have a material effect on the Companys
consolidated statement of operations for the three months ending March 27,
2009.
Item 2
. Managements
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, 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 worldwide economic
conditions. These conditions have slowed global economic growth and have
resulted in recessions in many countries, including in 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 of 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 Managements 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.
15
Table of Contents
A relatively small number of customers have
historically generated a significant portion of our net sales. Sales to our ten
largest customers represented 47.5% and 47.3% of our net sales for the three
months ended December 27, 2008 and December 29, 2007, respectively.
No customer represented 10% or more of our net sales for either of these
periods.
We typically generate a significant portion of our net
sales from international operations. During the first quarter of 2009 and 2008,
72.7% and 67.4%, respectively, of our 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
Managements 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
|
|
|
|
December 27, 2008
|
|
December 29, 2007
|
|
|
|
(In thousands of dollars)
|
|
Net sales
|
|
1,419,264
|
|
1,778,140
|
|
Gross profit
|
|
83,798
|
|
128,929
|
|
Operating income
|
|
1,936
|
|
26,816
|
|
Net loss from continuing operations
|
|
(25,273
|
)
|
(9,453
|
)
|
Income from discontinued operations, net of
tax
|
|
|
|
17,369
|
|
Net income (loss)
|
|
(25,273
|
)
|
7,916
|
|
Net loss from continuing operations includes
restructuring costs of $9.2 million and $6.8 million for the three months ended
December 27, 2008 and December 29, 2007, respectively. Additionally, net loss for the three months
ended December 27, 2008 includes a $10 million reduction in gross profit
associated with Nortel Networks petition for reorganization under bankruptcy
law.
16
Table of Contents
Key performance measures
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
September 27,
2008
|
|
December 29,
2007
|
|
Days sales outstanding(1)
|
|
57
|
|
51
|
|
53
|
|
Inventory turns(2)
|
|
6.8
|
|
7.7
|
|
6.7
|
|
Accounts payable days(3)
|
|
53
|
|
52
|
|
57
|
|
Cash cycle days(4)
|
|
57
|
|
46
|
|
50
|
|
(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 decreased 20.2%, from $1.8 billion in the first quarter of
2008 to $1.4 billion in the first quarter of 2009. The decrease was primarily
the result of the weakening economy which reduced demand across most of our end
markets. For example, sales decreased $135 million in our communications end
market, $103 million in our high-end computing end market, $81 million in our
multi-media end market and $41 million in our automotive defense and aerospace
and
industrial and semiconductor capital equipment end markets.
Gross Margin
Gross margin decreased from
7.3% in the first quarter of 2008 to 5.9% in the first quarter of 2009. The
decrease was primarily a result of significantly lower business volume in the
first quarter of 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 a
change in estimate related to the recovery rate we apply to excess and obsolete
inventory, reduced by $1.6 million of new excess and obsolete inventory
reserves, which together resulted in a $4.6 million increase in gross profit.
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, 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 $26.1 million, from $89.1 million in the first
quarter of 2008 to $63.0 million in the first quarter of 2009. As a percentage
of net sales, selling, general and administrative expenses decreased to 4.4% in
the first quarter of 2009 from 5.0% in the first quarter of 2008. The decrease
was primarily attributable to
cost reduction initiatives across the
Company. We expect to implement additional cost reduction initiatives in future
quarters that should enable us to maintain or reduce expenses from the level
achieved in the first quarter of 2009.
Research and Development
Research
and development expenses decreased $0.4 million, from $4.6 million in the first
quarter of 2008 to $4.2 million in the first quarter of 2009. The decrease was
primarily a result of cost reduction initiatives. Research and development
expense as a percentage of net sales remained consistent at 0.3% for both the
first quarter of 2009 and 2008.
17
Table of Contents
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 was
designed to reduce excess capacity and affected facilities across all services
offered in our global manufacturing organization. We expect actions under this
plan to increase our gross and operating margins and be cash positive over a 12
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. In connection with actions taken to date under this plan, we recorded
restructuring charges of $7.0 million for employee termination benefits, of
which $2.2 million was utilized during the period and $4.8 million is expected
to be paid during 2009. These benefits were provided for approximately 800
employees. Additionally, we incurred $0.5 million of costs related to closure
of facilities under this plan in the first quarter of 2009.
Restructuring
Plans Prior Years
Below
is a summary of restructuring costs associated with facility closures and other
consolidation efforts that were implemented in prior fiscal years:
|
|
Employee
Termination /
Severance and
Related
Benefits
|
|
Leases and
Facilities
Shutdown and
Consolidation
Costs
|
|
Impairment
of Fixed
Assets or
Redundant Fixed
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the first quarter of 2009, we recorded restructuring charges for employee
termination benefits for approximately 500 employees. In connection with
restructuring actions we have already implemented under these restructuring
plans, we expect to pay remaining facilities related restructuring liabilities
of $3.6 million through 2010, and the majority of severance costs of $17.3
million through 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 $25.7
million were accrued as of December 27, 2008, of which $24.8 million was
included in accrued liabilities and $0.9 million was included in other
long-term liabilities on the condensed consolidated balance sheet.
18
Table of Contents
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 first quarter of 2009, we recorded an
impairment charge of $3.8 million related to a decline in the fair value of
certain properties held for sale. No such charges were recorded in the first
quarter of 2008.
Interest Income and Expense
Interest income decreased
from $6.2 million in the first quarter of 2008 to $3.5 million in the first
quarter of 2009. The decrease is primarily attributable to
lower
interest rates in the first quarter of 2009 as a result of weakening economic
conditions and uncertainty and volatility in the financial markets
.
Interest expense decreased
to $29.2 million in the first quarter of 2009, from $35.4 million in
the first quarter of 2008. The decrease is primarily attributable to a
significant decrease in LIBOR during the first quarter of 2009 as a result of
uncertainty and volatility in the financial markets and a lower average
variable rate debt balance in the first quarter of 2009 as a result of the
redemption of $120 million of debt near the end of the first quarter of 2008.
Other Income (Expense), net
Other
income (expense), net was $0.6 million for the first quarter of 2009 and $(4.6)
million for the first quarter of 2008. The following table presents the major
components of other income (expense), net:
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(In thousands)
|
|
Foreign exchange losses
|
|
$
|
(636
|
)
|
$
|
(2,749
|
)
|
Loss on extinguishment of debt
|
|
|
|
(2,238
|
)
|
Other, net
|
|
1,189
|
|
347
|
|
Total other income (expense), net
|
|
$
|
553
|
|
$
|
(4,640
|
)
|
The decrease in foreign
exchange losses in the first quarter of 2009 is primarily the result of the
U.S. dollar strengthening against the Euro, which caused net favorable gains in
our European subsidiaries.
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 deferred financing fees were expensed.
On November 21,
2008, an interest rate swap agreement having a notional principal amount of
$100 million was terminated. As a result, we were required to discontinue hedge
accounting for the terminated swap and the remaining three interest rate swaps
designated under SFAS 133 as hedges of our 6.75% Notes
. During the period from November 22,
2008 through December 27, 2008 (period during which hedge accounting was
discontinued), a gain of $5.1 million was recorded to reflect the change in the
fair value of the interest rate swaps during that period. This gain was
partially offset by a decrease of $2.8 million in the fair market value of our
deferred compensation plan assets that resulted from volatile conditions in the
financial markets. These items are reflected in Other, net in the table
above.
Provision for Income Taxes
We estimate our annual
effective tax rate at the end of each quarterly period. Our estimate takes into
account our expected annual pre-tax income (loss), the geographic mix of our
pre-tax income/(loss), implementation of tax planning strategies and possible
outcomes of audits. To the extent there are fluctuations in any of these
variables during a period, our provision for income taxes may vary. Our
provision for income tax expense was $2.0 million for the three months ended December 27,
2008, compared to $2.5 million for the three months ended December 29,
2007.
19
Table of Contents
Liquidity
and Capital Resources
|
|
Three Months Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Net cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
|
$
|
(10,891
|
)
|
$
|
133,943
|
|
Investing activities
|
|
(27,970
|
)
|
(11,039
|
)
|
Financing activities
|
|
(35,864
|
)
|
(120,000
|
)
|
Effect of exchange rate changes
|
|
1,698
|
|
4,869
|
|
Increase (decrease) in cash and cash
equivalents
|
|
$
|
(73,027
|
)
|
$
|
7,773
|
|
Cash and cash equivalents
were $796.8 million at December 27, 2008 and $869.8 million at September 27,
2008. Our cash levels vary during any given quarter depending on the timing of
collections from customers and payments to suppliers, the extent of sales of
accounts receivable, borrowings under credit facilities and other factors.
Net cash provided by (used
in) operating activities was $(10.9) million and $133.9 million in the first
quarter of 2009 and 2008, respectively. During the first quarter of 2009,
accounts payable decreased $112.1 million due to lower business volume and
accrued and other long-term liabilities decreased $14.1 million due primarily to
bonus payouts and vacation usage. Those cash usages were offset by decreases of
$87.6 million and $21.6 million in accounts receivable and inventory,
respectively, resulting primarily from lower business volume. Working capital
was $1.5 billion and $1.6 billion at December 27, 2008 and September 27,
2008, respectively.
Net
cash used in investing activities was $28.0 million and $11.0 million for the
first quarter ended 2009 and 2008, respectively. During the first quarter of
2009, we paid $28.0 million for property, plant and equipment.
Net
cash used in financing activities was $35.9 million and $120.0 million for the
first quarter ended 2009 and 2008, respectively. During the first quarter of
2009, we repurchased 21.0 million shares of our common stock for a total of
$11.6 million, including commissions. Additionally,
we posted collateral of $24.3 million in the form of cash against certain of
our collateralized obligations.
Other Liquidity Matters.
Current
weak economic conditions and tightening of credit markets have increased the
risk of delinquent or uncollectible accounts receivable. Additionally, such
factors have negatively affected our sales, net income and operating cash
flows. We expect this trend to continue in the near term.
On
January 14, 2009, one of our customers, Nortel Networks, filed a petition
for reorganization under bankruptcy law. As a result, we performed an analysis
to quantify our potential exposure, considering factors such as which legal
entities of the customer are included in the bankruptcy reorganization, future
demand from Nortel Networks, and administrative and reclamation claim priority.
Based on our analysis, we estimated a maximum exposure of approximately $20
million related to outstanding accounts receivable and on-hand inventory. We
considered collectibility of accounts receivable and determined that certain
amounts may not be collectible. Therefore, we deferred recognition of revenue
in the amount of $5.0 million for shipments made in the first quarter of 2009.
Additionally, we determined that certain inventory balances may not be
recoverable and provided a reserve for such inventories in the amount of $5.0
million in the first quarter of 2009. Our estimates are subject to change as
additional information becomes available.
In the ordinary course of business, we are or may become party
to legal proceedings, claims and other contingencies, including environmental
matters and examinations and investigations by government agencies.
As
of December 27, 2008, we had reserves of $28.6 million related to
such matters.
We may not be able
to accurately predict the outcome of these matters or the amount or timing of
cash flows that may be required to defend ourselves or to settle such matters. For
further information regarding legal proceedings, see Part II, Item 1.
Legal Proceedings.
We have entered into, and continue to enter into, various transactions
that periodically require collateral. These obligations have historically
arisen from customs, import/export, VAT, utility services, debt financing,
foreign exchange contracts and interest rate swaps. We have collateralized, and
may from time to time collateralize, such obligations as a result of
counterparty requirements or for economic reasons.
20
Table
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Our liquidity
needs are largely dependent on changes in our working capital, including
the extension of trade credit by our suppliers, investments in manufacturing
inventory, facilities and equipment, and repayments of obligations under
outstanding indebtedness. Our primary sources of liquidity include cash of
$796.8 million, our $135 million credit facility, under which we were
eligible to borrow $86.3 million as of December 27, 2008,
our
accounts receivable sales program, pursuant to which the maximum face amount of
accounts receivable that may be outstanding at any time under this program is
$250 million, and cash generated from operations. There were no amounts outstanding
under our accounts receivable sales program as of December 27, 2008.
Our
debt agreements currently contain a number of restrictive covenants, including
prohibitions on incurring additional debt, making investments and other
restricted payments, paying dividends and redeeming or repurchasing capital
stock and debt, subject to certain exceptions. We were in compliance with these
covenants as of December 27, 2008. However, we may be required to seek
waivers or amendments to certain covenants for our debt instruments if we are
unable to comply with the requirements of the covenants in the future. We may
not be able to obtain such waivers or amendments on terms acceptable to us or
at all, and, in such case, these covenants
could materially adversely impact
our ability to conduct our
business or carry out our restructuring plans.
Our
next debt maturity is in 2010, at which time $180 million of debt
matures. Our next debt maturity thereafter is in 2013. We may, however,
consider early redemptions of our debt in future periods
.
In addition to our existing covenant
requirements, future debt financing may require us to comply with financial
ratios and covenants. Equity financing, if required, may result in dilution to
stockholders.
We announced on October 27, 2008 that our Board of Directors had
approved a stock repurchase program covering up to 10% of our shares based on
our closing stock price on October 29, 2008, which equates to repurchases
of approximately $35.0 million. Purchases under the program shall be made at
prevailing market prices or in negotiated transactions off the market. The
program shall continue through December 2009, unless otherwise determined
by the Board of Directors. During the first quarter of 2009, we
repurchased 21.0 million shares of our common stock for a total of $11.6
million, including commissions.
We
believe our existing cash resources and other sources of liquidity, together
with cash generated from operations,
planned sales of assets and sales
of accounts receivable under our factoring arrangements
will be sufficient to meet our working
capital requirements through at least the next 12 months. Should demand
for our products decrease significantly over the next 12 months, the
available cash provided by operations could be adversely impacted.
Item 3.
Quantitative and
Qualitative Disclosures About Market Risk
Interest Rate Risk
Our
exposures to market risk for changes in interest rates relate primarily to
certain of our outstanding debt obligations. Currently, we do not use
derivative financial instruments in our investment portfolio. We invest in high
quality credit issuers and, by policy, limit the amount of principal exposure
with any one issuer. As stated in our policy, we seek to ensure the safety and
preservation of our invested principal funds by limiting default and market
risk.
We
seek to mitigate default risk by investing in high quality credit securities
and by positioning our investment portfolio to respond to a significant
reduction in credit rating of any investment issuer, guarantor or depository.
We seek to mitigate market risk by limiting the principal and investment term
of funds held with any one issuer and by investing funds in marketable
securities with active secondary or resale markets. As of December 27,
2008, we had no short-term investments.
As
a result of the termination of an interest rate swap in November 2008, and
the related discontinuance of hedge accounting for the remaining three interest
rate swaps associated with our 6.75% Notes, approximately $5.7 million,
representing the fair value of the swaps on the date hedge accounting was discontinued,
will be amortized as a reduction to interest expense over the remaining life of
the debt.
On
June 12, 2007, we issued $300 million aggregate principal amount of
2014 Notes. We also entered into interest rate swap agreements with two
independent swap counterparties to hedge our interest rate exposures related to
our 2014 Notes. The swap agreements, with an aggregate notional amount of
$300 million that expires in 2014, effectively convert the variable
interest rate obligation to a fixed interest 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, we pay the
independent swap counterparties a fixed rate of 5.594%. In exchange,
our
swap counterparties pay us
an
interest rate equal to the three-month LIBOR. These swap agreements effectively
fix the interest rate on our 2014 Notes at 8.344% through 2014. At December 27,
2008 and September 27, 2008, $53.6 million and $22.9 million 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, on the
condensed consolidated balance sheets. Over the next 12 months, we expect to
amortize approximately $12.6 million to interest expense. Amounts in
accumulated other comprehensive income (loss) will be reclassified when the
hedged interest expense is realized in the condensed consolidated statement of
operations. The ineffective portion of the hedges was not material for the
first quarter of 2009.
21
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As
of December 27, 2008, we have floating rate debt instruments in the amount
of $180 million. An immediate 10% change in interest rates would result in an
increase or decrease in interest expense of $0.9 million.
Foreign Currency Exchange Risk
We
transact business in foreign countries.
Our foreign exchange policy
requires that we take certain steps to limit our foreign exchange exposures in
certain assets and liabilities and forecasted cash flows. However, such policy
does not require us to hedge all foreign exchange exposures. Further, foreign
currency hedges are based on forecasted transactions, the amount of which may
differ from that actually incurred. As a result, we can experience foreign exchange
rate gains and losses in our results of operations.
Our
primary foreign currency cash flows are in certain Asian and European
countries, Brazil, Canada and Mexico. We enter into short-term foreign currency
forward contracts to hedge currency exposures associated with certain assets
and liabilities denominated in foreign currencies. These contracts typically
have maturities of three months or less. 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 condensed consolidated statements of operations. At December 27,
2008 and September 27, 2008, we had outstanding foreign currency forward
contracts to exchange various foreign currencies for U.S. dollars in the
aggregate notional amount of $330.4 million and
$341.6
million, respectively. The net impact of an
immediate 10% change in exchange rates would not be material to our condensed
consolidated financial statements.
We
also utilize foreign currency forward and option contracts to hedge certain
operational (cash flow) exposures resulting from changes in foreign currency exchange
rates. Such exposures result from forecasted sales, cost of sales and expenses
denominated in currencies other than the
functional currency
. These contracts are typically less than
12 months in duration. Further, these contracts are accounted for as cash
flow hedges under SFAS No. 133, subject to periodic assessment of
effectiveness. The effective portion of changes in the fair value of the
contracts is recorded in stockholders equity as a separate component of
accumulated other comprehensive income and is recognized in the condensed
consolidated statement of operations when the hedged item affects earnings. The
ineffective portion of the hedges was not material for the first quarter of
2009. We had forward and option contracts related to cash flow hedges in
various foreign currencies in the aggregate notional amount of
$12.1 million and $49.3 million at December 27, 2008 and September 27,
2008, respectively.
Item 4.
Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures
Based
on an evaluation under the supervision and with the participation of our
management, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange
Act) were effective as of December 27, 2008 to provide reasonable
assurance that information required to be disclosed by us in reports that we
file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified by the Securities and
Exchange Commission rules and forms and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding timely
disclosure.
Changes in Internal Control Over Financial
Reporting
There
was no change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the quarter ended December 27, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations of Disclosure Controls
and Internal Control Over Financial Reporting
Our management, including our Chief Executive
Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures, or our internal controls, will prevent all error and
all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected.
22
Table
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PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
We are a so-called nominal defendant party to
multiple shareholder derivative lawsuits that were filed following our June 9,
2006 announcement that we had initiated an internal inquiry into our historical
stock option administration practices. In particular, five separate shareholder
derivative actions have been filed and consolidated into a single proceeding
pending in the United States of America District Court for the Northern
District of California, captioned
In re
Sanmina-SCI Corporation Derivative Litigation
, Master File No. C-06-3783-JF.
The first of these consolidated actions was filed June 15, 2006. A
consolidated complaint was filed on October 30, 2006. In addition, three
related shareholder derivative actions have been filed and consolidated into a
single proceeding pending in Superior Court for the State of California, County
of Santa Clara, captioned
In re Sanmina-SCI
Corporation Derivative Action
, Master File No. 1-06-CV-071786.
A consolidated complaint was filed on August 17, 2007.
In
all of these actions, the derivative plaintiffs allege that they are our
shareholders and purport to bring the actions on our behalf and for our
benefit. This is why we are a nominal defendant party to each of these
actions; no relief is sought against us in these lawsuits and any recovery (net
of any court award of attorneys fees and costs to derivative plaintiffs
counsel) would belong to us. As previously disclosed, the list of defendants
varies from action to action and includes 29 different current and former
directors and officers of the Company. The derivative plaintiffs allege
generally that the individual defendants manipulated the grant dates of our
stock options between 1994 and 2006, allegedly in breach of duties owed to us
and our shareholders, causing us to report our financial results inaccurately and
resulting in harm to us. Plaintiffs seek money damages against the individual
defendants, an accounting for damages allegedly caused by the individual
defendants, disgorgement of profits allegedly improperly obtained by the
defendants, and various other types of equitable and injunctive relief. In August 2006,
our Board of Directors created a Special Litigation Committee and vested that
committee with the full authority on our behalf to investigate the claims
asserted by the derivative plaintiffs, and to determine what action should be
taken with respect to the shareholder derivative actions including without
limitation whether we should pursue claims against the named defendants or
other persons. The Special Litigation Committees investigation is substantially
concluded although it has not yet issued a formal report. The parties conducted
mediation in March 2008 and have signed a Memorandum of Understanding
memorializing a resolution of the litigations in light of the Special
Litigation Committees tentative conclusions. A preliminary settlement approval
hearing is presently scheduled in the federal case for February 27, 2009.
However, we cannot provide any assurance that this hearing will not be
rescheduled or that it will result in a settlement in these actions. Although
the shareholder derivative lawsuits do not seek damages or other relief against
us, we do owe certain indemnification obligations to our current and former
directors, officers and employees involved with the stock option-related
proceedings, particularly to the extent that individuals are found not to have
engaged in any wrongdoing.
Additionally, the Securities and Exchange
Commission and the United States Attorney for the Northern District of
California have been conducting investigations into our historical stock option
administration practices. The Securities and Exchange Commission has notified
us that it has closed its investigation. We continue to cooperate fully with
the U.S. Attorneys investigation.
Non-US Proceedings
A non-US governmental entity has made a claim for
penalties against us asserting that we did not comply with bookkeeping rules in
accordance with applicable tax regulations. We have provided documents
that we believe demonstrate our compliance with these tax regulations. We
have appealed the penalties in administrative court, and have not paid the
penalties pending review by the court. The administrative court has not
indicated when it will issue a decision. We believe we have a meritorious
position in this matter and are contesting this claim vigorously.
Other Proceedings
We are also subject to other routine legal
proceedings, as well as demands, claims and threatened litigation, that arise
in the normal course of our business. The ultimate outcome of any litigation is
uncertain and unfavorable outcomes could have a negative impact on our results
of operations and financial condition. Regardless of outcome, litigation can
have an adverse impact on us as a result of incurrence of defense costs,
diversion of management resources and other factors. We record liabilities for
legal proceedings when a loss becomes probable and the amount of loss can be
reasonably estimated.
23
Table
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Item 1A.
Risk
Factors Affecting Operating Results
In addition to the other information set forth in
this report, you should carefully consider the factors discussed in Part I,
Item 1A. Risk Factors Affecting Operating Results in our Annual Report
on Form 10-K for the fiscal year ended September 27, 2008, which have
not materially changed other than as set forth below.
Continued adverse market conditions in the
electronics industry could reduce our future sales and earnings per share.
Recently, the business environment in the electronics industry has
become challenging due to adverse worldwide economic conditions. There has been an erosion of global consumer
confidence amidst concerns over declining asset values, inflation, volatility
in energy costs, geopolitical issues, the availability and cost of credit,
rising unemployment, and the stability and solvency of financial institutions,
financial markets, businesses, and sovereign nations. These concerns have
slowed global economic growth and have resulted in recessions in many
countries, including in the U.S, Europe and certain countries in Asia. The
conditions have resulted, and may result in the future, in our customers
delaying purchases of the products we manufacture for them and our customers
placing purchase orders for lower volumes of products than previously
experienced or anticipated. We cannot accurately predict future levels of
demand for our customers electronics products. Consequently, our past operating
results, earnings and cash flows may not be indicative of our future operating
results, earnings and cash flows, which could be less than past results.
If
these economic conditions continue to persist or worsen, in addition to our
customers or potential customers reducing or delaying orders, a number of other
negative effects on our business could result, including the insolvency of key
suppliers, which could result in production delays, the inability of customers
to obtain credit, and the insolvency of one or more customers. Any of these
effects could impact our ability to effectively manage inventory levels and
collect receivables, increase our need for cash, and decrease our net revenue
and profitability.
Many of the industries to
which we provide products have recently experienced significant financial
difficulty, with some of the participants filing for bankruptcy. Such significant financial difficulty, if
experienced by one or more of our customers, may negatively affect our business
due to the decreased demand of these financially distressed customers, the
potential inability of these companies to make full payment on amounts owed to
us, or both. For example, on January 14, 2009, one of our customers,
Nortel Networks, filed a petition for reorganization under bankruptcy law. As a
result, we performed an analysis to quantify our potential exposure considering
factors such as which legal entities of the customer are included in the
bankruptcy reorganization, future demand from Nortel Networks and
administrative claim priority. Based on our analysis, we estimated a maximum
exposure of approximately $20.0 million related to outstanding accounts
receivable and on-hand inventory. We considered collectibility of accounts
receivable and determined that certain amounts may not be collectible.
Therefore, we deferred recognition of revenue in the amount of $5.0 million for
shipments made during the first quarter of 2009. Additionally, we determined
that certain inventory balances may not be recoverable and provided a reserve
for such inventories in the amount of $5.0 million during the first quarter of
2009. Our estimates are subject to change as additional information becomes
available, and, as a result, could be adjusted higher in the future.
We may be unable to
obtain sufficient financing to maintain or expand our operations, which may
cause our stock price to fall and reduce the business our customers and vendors
do with us.
In order to allow us to better manage our
working capital requirements, we entered into a five-year $135 million
credit facility in November 2008, which may be expanded by
$200 million, subject to obtaining additional lender commitments and
increasing the borrowing base required under the facility. Should we need
additional sources of liquidity above and beyond such facility, we cannot be
certain that financing will be available on acceptable terms or at all. In
addition, although we seek high quality counterparties for our financing
arrangements, there can be no assurance that any such counterparty will be able
to provide credit when and as required by our current or future financing
arrangements. If additional financing, including an expansion of the existing
credit facility, is not available when required, our ability to maintain or
increase our rates of production, expand our manufacturing capacity or
refinance our outstanding debt will be harmed, which could cause our stock
price to fall and reduce our customers and vendors willingness to do business
with us.
If we are unable to comply with the
covenants in our credit arrangements, our outstanding debt could become
immediately payable.
Our debt agreements contain a number of
restrictive covenants, including prohibitions on incurring additional debt,
making investments and other restricted payments, paying dividends and
redeeming or repurchasing capital stock and debt, subject to certain
exceptions. In addition, such agreements include affirmative covenants
requiring, among other things, that we file quarterly and annual financial
statements with the SEC. If we are not able to comply with all of these
covenants, for any reason, some or all of our outstanding debt could become
immediately due and payable and the incurrence of additional debt under the new
credit facility would not be allowed.
If our cash is utilized to repay
outstanding debt, we could experience an immediate and significant reduction in
working capital available to operate our business.
24
Table
of Contents
We rely on a small number of
customers for a substantial portion of our sales, and declines in sales to
these customers would reduce our net sales and net income.
Most
of our sales are generated by a small number of customers. Sales to our ten
largest customers represented 47.5% of our net sales during the first quarter
of 2009. We expect to continue to depend upon a relatively small number of
customers for a significant percentage of our sales. Consolidation among our
customers may further concentrate our business in a limited number of customers
and expose us to increased risks related to dependence on a small number of
customers. In addition, a significant reduction in sales to any of our large
customers or significant pricing and margin pressures exerted by a customer
would adversely affect our operating results. In the past, some of our large
customers have significantly reduced or delayed the volume of manufacturing
services ordered from us as a result of changes in their business,
consolidations or divestitures or for other reasons. In particular, certain of
our customers have from time to time entered into manufacturing divestiture
transactions with other EMS companies, and such transactions could adversely
affect our revenues with these customers. We cannot assure you that present or
future large customers will not terminate their manufacturing arrangements with
us or significantly change, reduce or delay the amount of manufacturing services
ordered from us, any of which would reduce our net sales and net income.
Our stock price may continue to decline,
which could cause our stock to be delisted from the NASDAQ Global Select
Market.
Between September 30, 2008 and December 31, 2008, our stock
price fell approximately 66% to $0.47 per share. The rules of the NASDAQ
Global Select Market require that listed companies maintain a minimum price of
$1.00 per share. Although NASDAQ has waived such requirement through April 20,
2009, the waiver may not be extended beyond this date. Our stockholders have
approved an amendment to our certificate of incorporation that would permit us
to effect a reverse split of our outstanding and authorized common stock within
a range of one-for-three to one-for-ten in order to increase the stock price
above this level when and if the rule waiver expires. However, the effect
of a reverse split upon the market price of our common stock cannot be
predicted with any certainty. The market price of our common stock is primarily
driven by other factors unrelated to the number of shares outstanding,
including our current and expected future performance, conditions in the EMS
industry and stock market conditions generally. Therefore, it is possible that
the per share price of our common stock after the reverse split, if implemented
by the Board, will not rise in proportion to the reduction in the number of
shares of our common stock outstanding resulting from the reverse stock split,
in which case our stock could be delisted from the NASDAQ Global Select Market.
We are subject to risks arising from our
international operations.
We
conduct our international operations primarily in Asia, Latin America, Canada
and Europe, and we continue to consider additional opportunities to make
foreign acquisitions and construct new foreign facilities. We generated 72.7%
of our net sales from non-U.S. operations during the first quarter of
2009, and a significant portion of our manufacturing material was provided by
international suppliers during this period. As a result of our international
operations, we are affected by economic and political conditions in foreign
countries, including:
·
the imposition of
government controls;
·
difficulties in obtaining
or complying with export license requirements;
·
political and economic
instability, including armed conflicts;
·
trade restrictions;
·
changes in tariffs;
·
labor unrest and difficulties
in staffing;
·
inflexible employee
contracts in the event of business downturns;
25
Table of Contents
·
coordinating communications
among and managing international operations;
·
fluctuations in currency
exchange rates;
·
currency controls
·
increases in duty and/or
income tax rates;
·
difficulties in obtaining
export licenses;
·
excess costs associated
with reducing employment or shutting down facilities;
·
misappropriation of
intellectual property; and
·
constraints on our ability
to maintain or increase prices.
Our
operations in certain foreign locations receive favorable income tax treatment
in the form of tax holidays or other incentives. In the event that such tax
holidays or other incentives are not extended, are repealed, or we no longer
qualify for such programs, our taxes may increase, which would reduce our net
income.
Additionally,
certain foreign jurisdictions restrict the amount of cash that can be
transferred to the United States of America or impose taxes and penalties
on such transfers of cash. To the extent we have excess cash in foreign
locations that could be used in, or is needed by, our U.S. operations, we
may incur significant penalties and/or taxes to repatriate these funds.
To
respond to competitive pressures and customer requirements, we may further
expand internationally in lower cost locations, particularly in Asia, Eastern
Europe and Latin America. As we pursue continued expansion in these locations,
we may incur additional capital expenditures. In addition, the cost structure
in certain countries that are now considered to be favorable may increase as
economies develop or as such countries join multinational economic communities
or organizations, causing local wages to rise. As a result, we may need to
continue to seek out new locations with lower costs and the employee and
infrastructure base to support electronics manufacturing. We cannot assure you
that we will realize the anticipated strategic benefits of our international
operations or that our international operations will contribute positively to
our operating results.
We can experience
losses due to foreign exchange rate fluctuations.
Because we manufacture and sell a substantial
portion of our products abroad, our operating costs are subject to fluctuations
in foreign currency exchange rates. Specifically, if the U.S. dollar weakens
against the foreign currencies in which we denominate certain of our trade
accounts payable, fixed purchase obligations and other expenses, the U.S.
dollar equivalent of such expenses would increase. We use financial
instruments, primarily short-term foreign currency forward contracts, to hedge
certain forecasted foreign currency commitments arising from trade accounts
receivable, trade accounts payable and fixed purchase obligations. Our foreign
currency hedging activities depend largely upon the accuracy of our forecasts
of future sales, expenses and monetary assets and liabilities. As such, our
foreign currency forward contracts may exceed or not cover our full exposure to
exchange rate fluctuations. If these hedging activities are not successful, we
may experience significant unexpected expenses from fluctuations in exchange
rates. Although we believe our foreign exchange hedging policies are reasonable
and prudent under the circumstances, we can provide no assurances that we will
not experience losses arising from unhedged currency fluctuations in the future,
which could be significant.
Restructuring of our
operations could require us to take an accounting charge which would reduce our
net income.
We have incurred significant expenses related
to restructuring of our operations in the past. For example, we have moved, and
we intend to continue moving, our operations from higher-cost to lower-cost
locations to meet customer requirements. In addition, we have incurred
unanticipated costs related to the transfer of operations to lower-cost
locations, including costs related to integrating new facilities, managing
operations in dispersed locations and realigning our business processes. We
also have incurred costs related to workforce reductions, work stoppages and
labor unrest resulting from the closure of our facilities in higher cost
locations. We expect to be required to record additional charges related to
restructuring activities in the future, but cannot predict the timing or amount
of such charges. In addition, we expect actions under our 2009 restructuring
plan to increase our gross and operating margins and be cash positive over a 12
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. However, we cannot provide any assurance that such outlays will not
exceed the cost savings due to the possibility of future changes in the scope
of restructuring activities or failure to realize anticipated proceeds from
asset sales.
26
Table
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Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
The
table below sets forth information regarding our repurchases of our common
stock during the three months ended December 27, 2008.
Period (1)
|
|
TOTAL
NUMBER OF
SHARES
PURCHASED
|
|
AVERAGE
PRICE PAID
PER SHARE
|
|
TOTAL NUMBER OF
SHARES PURCHASED
AS PART OF
PUBLICLY
ANNOUNCED
PROGRAMS
|
|
MAXIMUM
DOLLAR VALUE OF
SHARES THAT
MAY YET BE
PURCHASED
UNDER THE
PROGRAMS
|
|
Month #1
|
|
|
|
|
|
|
|
|
|
September 28, 2008 through
October 25, 2008
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Month #2
|
|
|
|
|
|
|
|
|
|
October 26, 2008 through
November 22, 2008
|
|
21,006,503
|
|
$
|
0.54
|
|
21,006,503
|
|
$
|
23,621,000
|
|
Month #3
|
|
|
|
|
|
|
|
|
|
November 23, 2008 through
December 27, 2008
|
|
|
|
|
|
|
|
|
|
Total
|
|
21,006,503
|
|
$
|
0.54
|
|
21,006,503
|
|
$
|
23,621,000
|
|
(1) All
months shown are our fiscal months.
On October 27, 2008, our Board of Directors authorized us to spend
up to approximately $35 million on share repurchases. Purchases shall be made
at prevailing market prices or in negotiated transactions off the market. The
authorization is effective through December 2009. In addition, we
may from time to time offer to repurchase certain of our long-term debt
outstanding, subject to compliance with the restrictive covenants contained in
our debt agreements and upon prevailing discounts available in the market.
Our debt agreements contain a number of restrictive covenants,
including prohibitions on incurring additional debt, making investments and
other restricted payments, paying dividends and redeeming or repurchasing
capital stock and debt, subject to certain exceptions.
27
Table
of Contents
Item 6.
Exhibits
(a)
Exhibits
Refer
to item (c) below.
(c)
Exhibits
Exhibit Number
|
|
Description
|
3.5(1)
|
|
Amended and Restated Bylaws of Sanmina-SCI Corporation adopted by the
Board of Directors on December 1, 2008.
|
|
|
|
10.34(2)
|
|
Revolving Trade Receivables Purchase Agreement dated June 26,
2008 by and among, Sanmina-SCI Corporation, Deutsche Bank AG New York, as
administrative agent, and Sanmina-SCI Magyarország Elektronikai Gyártó Kft,
Sanmina Magyarország Elektrotechnikai Részegységgyártó Kft, Sanmina-SCI EMS
Haukipudas OY, a limited liability company incorporated under the laws of the
Republic of Finland, Sanmina-SCI Enclosure Systems OY, Sanmina-SCI Systems
Singapore Pte. Ltd,, Sanmina-SCI Israel Medical Systems Ltd.,
Sanmina-SCI Systems Canada, Inc., Sanmina-SCI Systems
(Thailand) Ltd., and Sanmina-SCI UK Ltd.
|
|
|
|
10.36(3)
|
|
Loan, Guaranty and Security Agreement, dated as of November 19,
2008, among Sanmina-SCI Corporation and certain of its subsidiaries as
borrowers, Sanmina-SCI Systems (Canada) Inc. and SCI Brockville Corp., as
Designated Canadian Guarantors, the financial institutions party thereto from
time to time as lenders and Bank of America, N.A., as agent for such lenders.
|
|
|
|
10.37(4)(5)
|
|
2009 Incentive Plan.
|
|
|
|
10.38
|
|
Credit and Security Agreement dated as of November 24, 2008 by
and among Sanmina SPV LLC, the lenders named therein and Deutsche Bank AG,
New York Branch, as administrative agent and collateral agent (filed
herewith).
|
|
|
|
10.39
|
|
Receivables Transfer and Contribution Agreement entered into as of
November 24, 2008 by and between Sanmina SPV LLC and Sanmina-SCI
Corporation (filed herewith).
|
|
|
|
31.1
|
|
Certification
of the Principal Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
|
31.2
|
|
Certification
of the Principal Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
|
32.1(6)
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
|
|
|
32.2(6)
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
(1)
Incorporated by
reference to Exhibit 3.2 of Registrants Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 5, 2008.
(2)
Incorporated
by reference to Exhibit 10.72 to the Registrants Quarterly Report on Form 10-Q
for the fiscal quarter ended June 28, 2008, filed with the Securities and
Exchange Commission on August 4, 2008.
(3)
Incorporated
by reference to Exhibit 10.36 to the Registrants Report on Form 10-K
for the fiscal year ended September 27, 2008, filed with the SEC on November 24,
2008.
(4)
Compensatory
plan in which an executive officer or director participates.
28
Table
of Contents
(5)
Incorporated
by reference to Exhibit 10.37 of Registrants Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 30, 2009.
(6)
This
exhibit shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
Section, nor shall it be deemed incorporated by reference in any filings under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
29
Table
of Contents
SANMINA-SCI CORPORATION
SIGNATURES
Pursuant
to the Requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
SANMINA-SCI
CORPORATION
|
|
(Registrant)
|
|
|
|
By:
|
/s/ JURE SOLA
|
|
Jure Sola
|
|
Chief Executive Officer
|
|
|
Date:
February 2, 2009
|
|
|
|
|
By:
|
/s/ DAVID L. WHITE
|
|
David L. White
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
|
|
Date:
February 2, 2009
|
|
|
|
|
|
30
Table
of Contents
EXHIBIT INDEX
Exhibit Number
|
|
Description
|
3.5(1)
|
|
Amended and Restated Bylaws of Sanmina-SCI Corporation adopted by the
Board of Directors on December 1, 2008.
|
|
|
|
10.34(2)
|
|
Revolving Trade Receivables Purchase Agreement dated June 26,
2008 by and among, Sanmina-SCI Corporation, Deutsche Bank AG New York, as
administrative agent, and Sanmina-SCI Magyarország Elektronikai Gyártó Kft,
Sanmina Magyarország Elektrotechnikai Részegységgyártó Kft, Sanmina-SCI EMS
Haukipudas OY, a limited liability company incorporated under the laws of the
Republic of Finland, Sanmina-SCI Enclosure Systems OY, Sanmina-SCI Systems
Singapore Pte. Ltd,, Sanmina-SCI Israel Medical Systems Ltd.,
Sanmina-SCI Systems Canada, Inc., Sanmina-SCI Systems
(Thailand) Ltd., and Sanmina-SCI UK Ltd.
|
|
|
|
10.36(3)
|
|
Loan, Guaranty and Security Agreement, dated as of November 19,
2008, among Sanmina-SCI Corporation and certain of its subsidiaries as
borrowers, Sanmina-SCI Systems (Canada) Inc. and SCI Brockville Corp., as
Designated Canadian Guarantors, the financial institutions party thereto from
time to time as lenders and Bank of America, N.A., as agent for such lenders.
|
|
|
|
10.37(4)(5)
|
|
2009 Incentive Plan.
|
|
|
|
10.38
|
|
Credit and Security Agreement dated as of November 24, 2008 by
and among Sanmina SPV LLC, the lenders named therein and Deutsche Bank AG,
New York Branch, as administrative agent and collateral agent (filed
herewith).
|
|
|
|
10.39
|
|
Receivables Transfer and Contribution Agreement entered into as of
November 24, 2008 by and between Sanmina SPV LLC and Sanmina-SCI
Corporation (filed herewith).
|
|
|
|
31.1
|
|
Certification
of the Principal Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a),as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
|
31.2
|
|
Certification
of the Principal Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
|
32.1(6)
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
|
|
|
32.2(6)
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
|
(1)
Incorporated
by reference to Exhibit 3.2 of Registrants Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 5, 2008.
(2)
Incorporated
by reference to Exhibit 10.72 to the Registrants Quarterly Report on Form 10-Q
for the fiscal quarter ended June 28, 2008, filed with the Securities and
Exchange Commission on August 4, 2008.
(3)
Incorporated
by reference to Exhibit 10.36 to the Registrants Report on Form 10-K
for the fiscal year ended September 27, 2008, filed with the SEC on November 24,
2008.
(4)
Compensatory
plan in which an executive officer or director participates.
(5)
Incorporated
by reference to Exhibit 10.37 of Registrants Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 30, 2009.
(6)
This
exhibit shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
Section, nor shall it be deemed incorporated by reference in any filings under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
31
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