See accompanying notes to condensed consolidated financial statements.
SANMINA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Sanmina Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to those rules or regulations. The interim condensed consolidated financial statements are unaudited, but reflect all adjustments, consisting primarily of normal recurring adjustments, that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 29, 2018, included in the Company's 2018 Annual Report on Form 10-K.
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Results of operations for the firstthird quarter of 2019 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
The Company operates on a 52 or 53 week year ending on the Saturday nearest September 30. Fiscal 2019 and 2018 are each 52-week years. All references to years relate to fiscal years unless otherwise noted.
Recent Accounting Pronouncements Adopted
In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715)". This ASU requires the service costs component of net periodic pension costs to be presented in the same line item as other compensation costs and all other components of net periodic pension costs to be presented in the income statement as non-operating expenses. This ASU was effective for the Company at the beginning of fiscal 2019 and has been applied retrospectively. A practical expedient permits the use of estimates for applying the retrospective presentation requirements.2019. The impact of adoption in the first quarter of 2019 was insignificant.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805)". This ASU provides guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This new standard was effective for the Company at the beginning of fiscal 2019. There was no impact upon adoption of this new standard in the first quarter of 2019.standard.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230)". This ASU requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Companies will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. This ASU was effective for the Company at the beginning of fiscal 2019, including interim periods within that annual period. There was no impact upon adoption of this new standard in the first quarter of 2019.standard.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)". This ASU simplifies the accounting for income tax consequences of intra-entity transfers of assets other than inventory by requiring recognition of current and deferred income tax consequences when such transfers occur. The new standard was effective for the Company at the beginning of fiscal 2019. There was no impact upon adoption of this new standard in the first quarter of 2019.standard.
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" (commonly referred to as ASC 606) which requires an entity to recognize revenue when (or as) goods are transferred or services are provided to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.
The Company adopted ASC 606 as of the beginning of its first quarter of 2019 using the modified retrospective approach, whereby the cumulative effect of initially applying the guidance was recognized as an adjustment to beginning retained earnings at the date of adoption. This adjustment resulted in an increase to beginning retained earnings of $28 million.
The adoption of ASC 606 resulted in a change to the manner in which the Company recognizes revenue for the majority of its revenue streams, including integrated manufacturing solutions, components, repair services and defense and aerospace programs.
Prior to the adoption of ASC 606, the Company generally recognized revenue from its integrated manufacturing solutions, the Company’s largest revenue stream, upon shipment or delivery of a product to a customer. Under ASC 606, because the Company has no alternative use for the end products generated by its vertically integrated manufacturing services and has an enforceable right to payment for work-in-progress upon a customer’s cancellation of a contract for convenience, the Company recognizes revenue from the sale of these products on an over time basis as the products are manufactured. Accordingly, the Company will recognize revenue under these contracts earlier than under the previous accounting rules.
Additionally, prior to the adoption of ASC 606, revenue from repair services was generally recognized upon completion of the services. Under ASC 606, revenue for these services will be recognized as the services are performed since the Company’s customers simultaneously receive and consume the benefits provided by these services.
Lastly, prior to the adoption of ASC 606, revenue from defense and aerospace programs was recognized on a percentage-of-completion basis by applying the units-of-delivery method. Under ASC 606, revenue for the majority of these programs will be recognized on an over time basis using the cost-to-cost method since the Company has no alternative use for the end products manufactured under these programs and has an enforceable right to payment for work-in-progress upon a customer’s cancellation of a contract for convenience. Revenue for certain other programs will be recognized upon shipment or delivery of a product, which is when control of a product transfers to a customer.
The timing of recognition of revenue did not change for some of the Company’s revenue streams as a result of the adoption of ASC 606. These revenue streams include logistics services, for which revenue will continue to be recognized as the services are performed, Company proprietary products, for which revenue will continue to be recognized upon shipment or delivery of the product, and design, development and engineering services for which revenue will continue to be recognized as the services are performed.
For revenue streams for which revenue is being recognized on an over time basis under ASC 606, work-in-progress and finished goods inventory were reduced to zero upon the adoption of ASC 606 and an associated contract asset was recorded to reflect amounts that would have been recognized as revenue prior to the adoption of ASC 606. This adjustment resulted in recognition of a contract asset of $376 million and a decrease in inventory of $350 million as of the beginning of the first fiscal quarter of 2019. No other balance sheet line items, with the exception of beginning retained earnings as mentioned previously, were materially impacted upon the adoption of ASC 606.
Refer to Note 3 for additional information and disclosures related to the adoption of ASC 606.
Recent Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued ASU 2018-07 "Improvements to Non-employee Share-Based Payment Accounting (Topic 718)". The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The standard aligns measurement and classification guidance for share-based payments to non-employees with the guidance applicable to employees. This ASU is effective for the Company at the beginning of fiscal 2020, including interim periods within that reporting period, although early adoption is permitted. The Company does not expect the impact of adoption to be significant.
In February 2018, the FASB issued ASU 2018-02,"Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income",which allows companies to reclassify stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (H.R. 1), from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election. This ASU is effective for the Company at the beginning of fiscal 2020, although early adoption is permitted. The Company is currently evaluating when to adopt this ASU, but does not expect the impact of adoption to be significant.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements for Accounting For Hedging Activities", simplifying hedge accounting guidance and improving the financial reporting of hedging relationships by allowing an entity to better align its risk management activities and financial reporting for hedging relationships through changes to both designation and measurement for qualifying hedging relationships and the presentation of hedge results. This standard eliminates the requirement to separately measure and report hedge ineffectiveness, resulting in full recognition of the change in fair value that impacts earnings in the same income statement line item that is used to present the
earnings effect of the hedged item. In addition, the guidance allows more flexibility in the requirements to qualify for and maintain hedge accounting. This ASU is effective for the Company at the beginning of fiscal 2020, although early adoption is permitted. The Company is currently evaluatingdoes not expect the potential impact of this ASU and whenadoption to adopt it.be significant.
In February 2016, the FASB issued ASU 2016-02, "Leases: Amendments to the FASB Accounting Standards Codification (Topic 842)". This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for the Company at the beginning of fiscal 2020, including interim periods within that reporting period. In addition, the FASB provided a practical expedient transition method to adopt the new lease requirements by allowingthat allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, as opposed to applying the requirements retrospectively and providing comparative prior period financial statements. The Company has decided to apply the above practical expedient transition method. The Company also plans to elect certain other transition options, including the option to not separate lease and non-lease components, the option to not recognize right of use assets and related liabilities that would enablearise from short-term leases (initial term of twelve months or less) and the package of practical expedients that allows the Company to not provide comparative period financial statements. Instead,reassess previous accounting conclusions as to whether existing arrangements are or contain leases, the Company would applyclassification of existing leases, and the transition provisionstreatment of the leases standard at its effective date.initial direct costs. The Company expects the impact of adopting this new accounting standard to be material to its consolidated balance sheet, but is still evaluating the impactimmaterial to its consolidated statement of income.
Note 2. Inventories
Components of inventories were as follows:
|
| | | | | | | |
| As of |
| June 29, 2019 | | September 29, 2018 |
| (In thousands) |
Raw materials | $ | 905,203 |
| | $ | 1,139,585 |
|
Work-in-process | 4,578 |
| | 132,803 |
|
Finished goods | 5,374 |
| | 101,616 |
|
Total | $ | 915,155 |
| | $ | 1,374,004 |
|
|
| | | | | | | |
| As of |
| December 29, 2018 | | September 29, 2018 |
| (In thousands) |
Raw materials | $ | 1,046,062 |
| | $ | 1,139,585 |
|
Work-in-process | 6,493 |
| | 132,803 |
|
Finished goods | 1,611 |
| | 101,616 |
|
Total | $ | 1,054,166 |
| | $ | 1,374,004 |
|
The significant decrease in work-in-process and finished goods was due to the adoption of ASC 606 in the first quarter of 2019, as further discussed in Notes 1 and 3.
Note 3. Revenue Recognition
The Company is a leading global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. For purposes of determining when to recognize revenue, and in what amount, the Company applies a 5-step model: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation. Each of these steps involves the use of significant judgments, as discussed below.
Step 1 - Identify the contract with a customer
A contract is defined as an agreement between two parties that creates enforceable rights and obligations. The Company generally enters into a master supply agreement (“MSA”) with its customers that provides the framework under which business will be conducted, and pursuant to which a customer will issue purchase orders or other binding documents to specify the quantity, price and delivery requirements for products or services the customer wishes to purchase. The Company generally considers its contract with a customer to be a firm commitment, consisting of the combination of an MSA and a purchase order or any other similar binding document.
Step 2 - Identify the performance obligations in the contract
A performance obligation is a promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company reviews its contracts to identify promised goods or services and then evaluates such items to determine which of those items are
performance obligations. The majority of the Company’s contracts have a single performance obligation since the promise to
transfer an individual good or service is not separately identifiable from other promises in the contract. The Company’s performance obligations generally have an expected duration of one year or less.
Step 3 - Determine the transaction price
The Company’s contracts with its customers may include certain forms of variable consideration such as early payment discounts, volume discounts and shared cost savings. The Company includes an estimate of variable consideration when determining the transaction price and the appropriate amount of revenue to be recognized. This estimate is limited to an amount which will not result in a significant reversal of revenue in a future period. Factors considered in the Company’s estimate of variable consideration are the potential amount subject to these contract provisions, historical experience and other relevant facts and circumstances.
Step 4 - Allocate the transaction price to the performance obligations in the contract
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In the event that more than one performance obligation is identified in a contract, the Company is required to allocate a portion of the transaction price to each performance obligation. This allocation would generally be based on the relative standalone price of each performance obligation, which most often would represent the price at which the Company would sell similar goods or services separately.
Step 5 - Recognize revenue when (or as) a performance obligation is satisfied
The Company is required to assess whether control of a product or services promised under a contract is transferred to the customer at a point-in-time or over time as the product is being manufactured or the services are being provided. If the criteria in ASC 606 for recognizing revenue on an over time basis are not met, revenue must be recognized at the point-in-time determined by the Company at which its customer obtains control of a product or service.
The Company has determined that revenue for the majority of its contracts is required to be recognized on an over time basis. This determination is based on the fact that 1) the Company does not have an alternative use for the end products it manufactures for its customers and has an enforceable right to payment, including a reasonable profit, for work-in-progress upon a customer’s cancelation of a contract for convenience or 2) the Company’s customer simultaneously receives and consumes the benefits provided by the Company’s services. For these contracts, revenue is recognized on an over time basis using the cost-to-cost method (ratio of costs incurred to date to total estimated costs at completion) which the Company believes best depicts the transfer of control to the customer. For contracts for which revenue is required to be recognized at a point-in-time, the Company recognizes revenue when it has transferred control of the related goods, which generally occurs upon shipment or delivery of the goods to the customer.
Contract Assets
A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice to its customer for payment. Contract assets are classified separately on the condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional. Because of the Company’s short manufacturing cycle times, the transfer from contract assets to accounts receivable generally occurs within the next fiscal quarter.
Other
Other than the impact upon adoption of ASC 606 at the beginning of the first quarter of 2019 (as discussed in Note 1), the application of ASC 606 during the first quarterthree quarters of 2019 did not materially impact any financial statement line item, with the exceptions of contract assets (increased by $44 million post-adoption) and inventory (decreased by $39 million post-adoption).item.
The Company has elected to apply the following practical expedients or policy elections under ASC 606:
Upon adoption, the Company elected to apply the requirements of ASC 606 only to open contracts as of the adoption date and to not perform an assessment of the impact of contract modifications prior to the period of adoption.
The promised amount of consideration under a contract will not be adjusted for the effects of a significant financing component because, at inception of a contract, the Company expects the period between when a good or service is transferred to a customer and when the customer pays for that good or service will generally be one year or less.
The Company has elected to not disclose information about remaining performance obligations that have original expected durations of one year or less, which is substantially all of the Company’s remaining performance obligations.
Incremental costs of obtaining a contract will not be capitalized if the period over which such costs would be amortized to expense is less than one year.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of sales.
Disaggregation of revenue
In the following table, revenue is disaggregated by segment, market sector and geography. The table also includes a reconciliation
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands) |
Segments: | | | | | | | |
IMS | $ | 1,709,835 |
| | $ | 1,481,148 |
| | $ | 5,268,795 |
| | $ | 4,271,227 |
|
CPS | 317,160 |
| | 332,218 |
| | 1,072,857 |
| | 962,568 |
|
Total | $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
| | | | | | | |
End Markets: | | | | | | | |
Communications Networks | $ | 736,281 |
| | $ | 673,124 |
| | $ | 2,276,920 |
| | $ | 1,994,305 |
|
Industrial, Medical, Automotive and Defense | 1,114,348 |
| | 936,211 |
| | 3,459,395 |
| | 2,682,598 |
|
Cloud Solutions | 176,366 |
| | 204,031 |
| | 605,337 |
| | 556,892 |
|
Total | $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
| | | | | | | |
Geography: | | | | | | | |
Americas (1) | $ | 1,003,024 |
| | $ | 917,866 |
| | $ | 3,268,600 |
| | $ | 2,644,373 |
|
EMEA | 273,735 |
| | 222,942 |
| | 777,989 |
| | 630,771 |
|
APAC | 750,236 |
| | 672,558 |
| | 2,295,063 |
| | 1,958,651 |
|
Total | $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
| | | | | | | |
(1) Mexico represents approximately 60% of the disaggregatedAmericas revenue withand the Company’s reportable segments.
U.S. represents approximately 35%.
|
| | | | | | | | | | | | | | | |
Timing of Revenue Recognition: | | | | | | | |
Goods/services transferred at a point in time | $ | 26,895 |
| | $ | 1,791,866 |
| | $ | 160,552 |
| | $ | 5,170,295 |
|
Goods/services transferred over time | 2,000,100 |
| | 21,500 |
| | 6,181,100 |
| | 63,500 |
|
Total | $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
|
| | | | | | | |
| Three Months Ended |
| December 29, 2018 | | December 30, 2017 |
| (In thousands) |
Segments: | | | |
IMS | $ | 1,780,884 |
| | $ | 1,422,043 |
|
CPS | 407,134 |
| | 322,757 |
|
Total | $ | 2,188,018 |
| | $ | 1,744,800 |
|
| | | |
End Markets: | | | |
Communications Networks | $ | 779,721 |
| | $ | 678,846 |
|
Industrial, Medical, Automotive and Defense | 1,182,484 |
| | 885,695 |
|
Cloud Solutions | 225,813 |
| | 180,259 |
|
Total | $ | 2,188,018 |
| | $ | 1,744,800 |
|
| | | |
Geography: | | | |
United States | $ | 454,771 |
| | $ | 314,808 |
|
Mexico | 662,148 |
| | 489,234 |
|
China | 433,422 |
| | 315,092 |
|
Malaysia | 122,905 |
| | 185,712 |
|
Other international | 514,772 |
| | 439,954 |
|
Total | $ | 2,188,018 |
| | $ | 1,744,800 |
|
| | | |
Timing of Revenue Recognition: | | | |
Goods/services transferred at a point in time | $ | 88,018 |
| | $ | 1,723,000 |
|
Goods/services transferred over time | 2,100,000 |
| | 21,800 |
|
Total | $ | 2,188,018 |
| | $ | 1,744,800 |
|
Note 4. Financial Instruments
Fair Value Measurements
Fair Value of Financial Instruments
The fair values of cash equivalents (generally 10% or less of cash and cash equivalents), accounts receivable, accounts payable and short-term debt approximate carrying value due to the short termshort-term duration of these instruments.
Fair Value Option for Long-term Debt
As of December 29, 2018, Additionally, the fair value of the Company'svariable rate long-term debt approximates carrying value as estimated based primarily on quoted prices (Level 2 input), approximate its carrying amount. The Company has elected not to record its long-term debt instruments at fair value.of June 29, 2019.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company's primary financial assets and financial liabilities measured at fair value on a recurring basis are deferred compensation plan assets and defined benefit plan assets, which are both measured using Level 1 inputs. Defined benefit plan assets are measured at fair value only in the fourth quarter of each year. Other financial assets and financial liabilities measured at fair value on a recurring basis include foreign exchange contracts and interest rate swaps, and contingent consideration, noneneither of which were material as of DecemberJune 29, 20182019 or September 29, 2018.
Offsetting Derivative Assets and Liabilities
The Company has entered into master netting arrangements with each of its derivative counterparties that allows net settlement of derivative assets and liabilities under certain conditions, such as multiple transactions with the same currency maturing on the same date. The Company presents its derivative assets and derivative liabilities on a gross basis on the unaudited condensed consolidated balance sheets. The amount that the Company had the right to offset under these netting arrangements was not material as of DecemberJune 29, 20182019 or September 29, 2018.
Other non-financial assets, such as intangible assets, goodwill and other long-lived assets, are measured at fair value as of the date such assets are acquired or in the period an impairment is recorded.
Derivative Instruments
Foreign Exchange Rate Risk
The Company is exposed to certain risks related to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange risk.
Forward contracts on various foreign currencies are used to manage foreign currency risk associated with forecasted foreign currency transactions and certain monetary assets and liabilities denominated in non-functional currencies. The Company's primary foreign currency cash flows are in certain Asian and European countries, Brazil, Israel and Mexico.
The Company had the following outstanding foreign currency forward contracts that were entered into to hedge foreign currency exposures:
|
| | | | | | | |
| As of |
| June 29, 2019 | | September 29, 2018 |
Derivatives Designated as Accounting Hedges: | | | |
Notional amount (in thousands) | $ | 124,631 |
| | $ | 116,992 |
|
Number of contracts | 54 |
| | 54 |
|
Derivatives Not Designated as Accounting Hedges: | | | |
Notional amount (in thousands) | $ | 305,924 |
| | $ | 356,076 |
|
Number of contracts | 47 |
| | 56 |
|
|
| | | | | | | |
| As of |
| December 29, 2018 | | September 29, 2018 |
Derivatives Designated as Accounting Hedges: | | | |
Notional amount (in thousands) | $ | 103,619 |
| | $ | 116,992 |
|
Number of contracts | 51 |
| | 54 |
|
Derivatives Not Designated as Accounting Hedges: | | | |
Notional amount (in thousands) | $ | 319,139 |
| | $ | 356,076 |
|
Number of contracts | 40 |
| | 56 |
|
The Company utilizes foreign currency forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such exposures generally result from (1) forecasted non-functional currency sales (2) forecasted non-functional currency materials, labor, overhead and other expenses and (3) anticipated capital expenditures denominated in a currency other than the functional currency of the entity making the expenditures. These
contracts are designated as cash flow hedges for accounting purposes and are generally one-to-two months in duration but, by policy, may be up to twelve months in duration.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI"), a component of equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The amount of gain (loss) recognized in Other Comprehensive Income ("OCI") on derivative instruments (effective portion), the amount of gain (loss) reclassified from AOCI into income (effective portion) and the amount of ineffectiveness were not material for any period presented herein.
The Company enters into short-term foreign currency forward contracts to hedge currency exposures associated with certain monetary assets and liabilities denominated in non-functional currencies. These contracts have maturities of up to two months and are not designated as accounting hedges. Accordingly, these contracts are marked-to-market at the end of each period with unrealized gains and losses recorded in other income (expense), net, in the unaudited condensed consolidated statements of operations. The amount of gains (losses) associated with these forward contracts werewas not material for any period presented herein. From an economic perspective, the objective of the Company's hedging program is for gains and losses on forward contracts to substantially offset gains and losses on the underlying hedged items. In addition to the contracts disclosed in the table above, the Company has numerous contracts that have been closed from an economic and financial accounting perspective and will settle early in the first month of the following quarter. Since these offsetting contracts do not expose the Company to risk of fluctuations in exchange rates, these contracts have been excluded from the above table.
In addition to the short-term contracts discussed above, the Company has a foreign currency forward contract that matures in 2020 and was entered into as a hedge of foreign currency exposure associated with a long-term promissory note issued in connection with a previous business combination.
Interest Rate Risk
The Company enters into forward interest rate swap agreements with independent counterparties to partially hedge the variability in cash flows due to changes in the benchmark interest rate (LIBOR) associated with anticipated variable rate borrowings. These interest rate swaps have a maturity date of December 1, 2023 and effectively convert the Company's variable interest rate obligations to fixed interest rate obligations. These swaps are accounted for as cash flow hedges under ASC Topic 815, Derivatives and Hedging. As of DecemberJune 29, 20182019 and September 29, 2018, interest rate swaps with an aggregate notional amount of $200$350 million and $50 million, respectively, were outstanding. The aggregate effective interest rate of these swaps as of DecemberJune 29, 20182019 was approximately 4.5%4.3%. As of June 29, 2019, due to a decline in interest rates since the time the swaps were put in place, these interest rate swaps had a negative value of $17 million, of which $3 million is included in accrued liabilities and the remaining amount is included in other long-term liabilities on the condensed consolidated balance sheets.
Note 5. Debt
Long-term debt consisted of the following:
|
| | | | | | | |
| As of |
| June 29, 2019 | | September 29, 2018 |
| (In thousands) |
Senior secured notes due 2019 ("2019 Notes") | $ | — |
| | $ | 375,000 |
|
Term loan due 2023 ("Term Loan"), net of issuance costs | 370,222 |
| | — |
|
Non-interest bearing promissory notes | 14,884 |
| | 17,667 |
|
Total long-term debt | 385,106 |
| | 392,667 |
|
Less: Current portion of non-interest bearing promissory notes | 14,884 |
| | 3,321 |
|
Current portion of long-term debt | 18,750 |
| | 375,000 |
|
Long-term debt | $ | 351,472 |
| | $ | 14,346 |
|
|
| | | | | | | |
| As of |
| December 29, 2018 | | September 29, 2018 |
| (In thousands) |
Senior secured notes due 2019 | $ | 375,000 |
| | $ | 375,000 |
|
Non-interest bearing promissory notes | 17,723 |
| | 17,667 |
|
Total long-term debt | 392,723 |
| | 392,667 |
|
Less: Current portion of non-interest bearing promissory notes | 3,362 |
| | 3,321 |
|
Current portion of long-term debt | 375,000 |
| | 375,000 |
|
Long-term debt | $ | 14,361 |
| | $ | 14,346 |
|
Short-term debt
On November 30, 2018, the Company entered into a Fourth Amended and Restated Credit Agreement (the "Amended Cash Flow Revolver") that providesprovided for a committed $375 million secured delayed draw term loan. The delayed draw term loanTerm Loan.
is available
On April 5, 2019, the Company entered into an amendment to be drawn through June 30, 2019. Proceeds from the delayed drawn term loan can only be used to repay the Company's senior secured notes due June 2019.
The amount available under the Amended Cash Flow Revolver for revolving loans isthat increased the amount available under the facility from $500 million. Subjectmillion to $700 million upon satisfaction of certain conditions, including obtaining additional commitments for existing and/or new lenders and potentially seeking a waiver underrepayment in full of the indenture for our Secured Notes dueCompany’s 2019 Notes.
On May 31, 2019, the Company may increasedrew down the revolver commitments underTerm Loan and used the proceeds to repay the Company's 2019 Notes. There was no gain or loss associated with the extinguishment of the 2019 Notes. As of June 29, 2019, costs incurred in connection with the amendment of the Amended Cash Flow Revolver upabove and Term Loan are classified as long-term debt and are being amortized to an additional $200 million. Theinterest expense over the life of the Term Loan using the effective interest method.
Following the satisfaction and discharge of the Indenture dated as of June 4, 2014 (the "Indenture"), using the proceeds of the Term Loan, and the release of all liens securing the 2019 Notes, the Company’s debt structure changed as follows, effective June 3, 2019: (i) revolving commitments under the Amended Cash Flow Revolver expire on November 30, 2023.increased for a total of $700 million in revolving commitments, (ii) the accordion feature of the Amended Cash Flow Revolver was reset so that the Company can obtain, subject to the satisfaction of specified conditions, additional revolving commitments in an aggregate amount of up to $200 million, and (iii) the Company and its subsidiary guarantors’ obligations under the Amended Cash Flow Revolver became secured by substantially all of the assets (excluding real property) of the Company and the subsidiary guarantors, subject to certain exceptions.
Loans under the Amended Cash Flow Revolver bear interest, at the Company's option, at either the LIBOR or a base rate, in each case plus a spread determined based on the Company's credit rating. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period in the case of LIBOR loans. Once borrowed, aA portion of the principal amount of the delayed draw term loanloans is required to be repaid in quarterly installments. The outstanding principal amount of all loans under the Amended Cash Flow Revolver, including, if drawn, the delay draw term loan,Term Loan, together with accrued and unpaid interest, is due on the maturity date. The $375 million Term Loan has a maturity date of November 30, 2023 and the Company is required to repay a portion of the principal amount of the loan equal to 1.25% in quarterly installments.
Maturities of the Term Loan as of June 29, 2019 by fiscal year are as follows:
|
| |
| (In Thousands) |
2019 | $4,688 |
2020 | $18,750 |
2021 | $18,750 |
2022 | $18,750 |
2023 | $18,750 |
2024 | $295,312 |
| $375,000 |
Certain of the Company’s domestic subsidiaries are required to be guarantors in respect of the Amended Cash Flow Revolver. The Company and certainthe subsidiary guarantors’ obligations under the Amended Cash Flow Revolver are secured by property of the Company and such guarantors, including, but not limited to cash, accounts receivables, inventory and the shares of the Company's subsidiaries, subject to limited exceptions.
The Amended Cash Flow Revolver requires the Company to comply with a minimum consolidated interest coverage ratio, measured at the end of each fiscal quarter, and at all times a maximum consolidated leverage ratio. The Amended Cash Flow Revolver contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations.
As of DecemberJune 29, 2018,2019, there were $330$121 million of borrowings and $8 million of letters of credit outstanding under the Amended Cash Flow Revolver.
As of DecemberJune 29, 2018,2019, certain foreign subsidiaries of the Company had a total of $69$72 million of short-term borrowing facilities, under which no borrowings were outstanding.
Debt covenants
The Company's Amended Cash Flow Revolver requires the Company to comply with certain financial covenants. In addition, the Company's debt agreements contain a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets and paying dividends, and redeeming or repurchasing capital stock and debt, subject to certain exceptions. The Company was in compliance with these covenants as of DecemberJune 29, 2018.2019.
Note 6. Accounts Receivable Sale Program
During 2018, the Company entered into a Receivable Purchase Agreement (the “RPA”) with certain third-party banking institutions for the sale of trade receivables generated from sales to certain customers. A maximumcustomers, subject to acceptance by the banks that are party to the RPA. On January 16, 2019, the Company entered into an amendment to its Amended Cash Flow Revolver which increased the percentage of $540 million ofits total accounts receivable that can be sold receivables can beand outstanding at any point in time under this program, subjectfrom 30% to limitations under the Company's Amended Cash Flow Revolver.40%. Trade receivables sold pursuant to the RPA are serviced by the Company.
In addition to the RPA, the Company has the option to participate in trade receivables sales programs that have been implemented by certain of the Company's customers, as in effect from time to time. The Company does not service trade receivables sold under these other programs.
Under each of the programs noted above, the Company sells its entire interest in a trade receivable for 100% of face value, less a discount. During the first quarter ofnine months ended June 29, 2019 and first quarter ofJune 30, 2018, the Company sold $561$2,155 million and $156$558 million, respectively, of accounts receivable under these programs. Upon sale, these receivables are removed from the condensed consolidated balance sheets and cash received is presented as cash provided by operating activities in the condensed consolidated statements of cash flows. Discounts on sold receivables were not material for any period presented. As of DecemberJune 29, 20182019 and September 29, 2018, $222$208 million and $189 million, respectively, of accounts receivable sold under the RPA and subject to servicing by the Company remained outstanding and had not yet been collected. The Company's sole risk with respect to receivables it services is with respect to commercial disputes regarding such receivables. Commercial disputes include billing errors, returns and similar matters. To date, the Company has not been required to repurchase any receivable it has sold due to a commercial dispute. Additionally, the Company is required to remit amounts collected as servicer under the RPA on a weekly basis to the financial institutioninstitutions that purchased the receivable.receivables. As
of DecemberJune 29, 20182019 and September 29, 2018, $95$77 million and $23 million, respectively, had been collected but not yet remitted. This amount is classified in accrued liabilities on the condensed consolidated balance sheets.
Note 7. Contingencies
From time to time, the Company is a party to litigation, claims and other contingencies, including environmental and employee matters and examinations and investigations by governmental 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 ASC Topic 450, Contingencies, or other applicable accounting standards. As of DecemberJune 29, 20182019 and September 29, 2018, the Company had reserves of $36$37 million and $35 million, respectively, for environmental matters, warranty, litigation and other contingencies (excluding reserves for uncertain tax positions) which the Company believes are adequate. However, there can be no assurance that the Company's reserves will be sufficient to settle these contingencies. Such reserves are included in accrued liabilities and other long-term liabilities on the unaudited condensed consolidated balance sheets.
In January 2018, the Company received a notice of intent from a foreign government agency to bring a claim seeking up to $23 million asserting that the Company had been out of compliance from April 2015 through September 2016 with certain requirements of its exemption from goods and services tax on imported goods. The Company provided its good faith arguments in defense of its actions to the government agency in writing, most recently in April 2018. In January 2019, the Company received written notice from the foreign government agency indicating that it would not further pursue this matter based upon the Company’s submissions.
Legal Proceedings
Environmental Matters
The Company is subject to various federal, state, local and foreign laws and regulations and administrative orders concerning environmental protection, including those addressing the discharge of pollutants into the environment, the management and disposal of hazardous substances, the cleanup of contaminated sites, the materials used in products, and the recycling, treatment and disposal of hazardous waste. As of DecemberJune 29, 2018,2019, the Company had been named in a lawsuit and several administrative orders alleging certain of its current and former sites contributed to groundwater contamination. One such order requires the Company's Canadian subsidiary to remediate certain environmental contamination at a site owned by the subsidiary between 1999 and 2006. As of DecemberJune 29, 2018,2019, the Company believes it has reserved a sufficient amount to satisfy currently anticipated future investigation and remediation costs at this site. Another such order demands that the Company and other alleged defendants remediate groundwater contamination at two landfills located in Northern California to which the Company may have sent wastewater in the past. The Company continues to investigate the allegations contained in this order and has reserved its estimated exposure for this matter as of DecemberJune 29, 2018.2019. However, there can be no assurance that the Company's reserve will ultimately be sufficient.
In June 2008, the Company was named by the Orange County Water District in a suit alleging that its actions contributed to polluted groundwater managed by the plaintiff. The complaint seeks recovery of compensatory and other damages, as well as declaratory relief, for the payment of costs necessary to investigate, monitor, remediate, abate and contain contamination of groundwater within the plaintiff’s control. In April 2013, all claims against the Company were dismissed. The plaintiff appealed this dismissal and the appeals court reversed the judgment in August 2017. In November 2017, the California Supreme Court denied the Company’s petition to review this decision and in December 2017, the Court of Appeal remanded the case back to the Superior Court for further proceedings. A trial date has been set foris scheduled to commence in September 2020. The Company intends to contest the plaintiff’s claims vigorously.
Other Matters
Two of the Company’s subsidiaries in Brazil are parties to a number of administrative and judicial proceedings for claims alleging that these subsidiaries failed to comply with certain bookkeeping and tax rules for certain periods between 2001 and 2011. These claims seek payment of social fund contributions and income and excise taxes allegedly owed by the subsidiaries, as well as fines. The subsidiaries believe they have meritorious positions in these matters and intend to continue to contest the claims.
In October 2018, an individual who was employed by the Company from November 2015 to March 2016 filed a lawsuit against the Company in the Santa Clara County Superior Court on behalf of himself and all other similarly situated Company employees in California, alleging violations of California labor code provisions governing overtime, meal and rest
periods, wages, wage statements and reimbursement of business expenses. The complaint seeks certification of a class of all non-exempt employees employed from four years before the filing of the complaint tothrough the time of trial, whether employed directly by the Company or through a temporary staffing agency. Although theThe Company is investigatingcontinues to investigate the allegations and cannot, at the current time, determine the outcome of this matter and has not providedtaken a reserve for this matter as of DecemberJune 29, 2018, the2019. The Company intends to defend rigorously against this matter vigorously.these claims.
Other Contingencies
One of the Company's most significant risks is the ultimate realization of accounts receivable and customer inventory exposures. This risk is partially mitigated by ongoing credit evaluations of, and frequent contact with, the Company's customers, especially its most significant customers, thus enabling the Company to monitor changes in business operations and respond accordingly. Customer bankruptcies also entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to the Company that are deemed a preference under bankruptcy laws.
Note 8. Restructuring
In the first quarter of 2018, the Company adopted a consolidated restructuring plan to address the closure and/or relocation of three of its manufacturing facilities. In addition, the Company is still in the process of completing restructuring actions under other plans.
The following table is a summary of restructuring costs associated with these plans:
|
| | | | | | | | | | | | | | | |
| Restructuring Expense |
| Three Months Ended | | Nine Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| | | |
Severance costs (approximately 2,900 employees) | $ | 963 |
| | $ | 758 |
| | $ | 1,715 |
| | $ | 25,250 |
|
Other exit costs | 1,228 |
| | 89 |
| | 5,100 |
| | 363 |
|
Total | 2,191 |
| | 847 |
| | 6,815 |
| | 25,613 |
|
Severance reimbursement | — |
| | — |
| | — |
| | (10,000 | ) |
Total - Q1 FY18 plan | 2,191 |
| | 847 |
| | 6,815 |
| | 15,613 |
|
Costs incurred for other plans | 5,795 |
| | 174 |
| | 6,322 |
| | 359 |
|
Total - all plans | $ | 7,986 |
| | $ | 1,021 |
| | $ | 13,137 |
| | $ | 15,972 |
|
|
| | | | | | | | | | | |
| | | Restructuring Expense |
| | | Three Months Ended |
| Estimated Costs to Implement | | December 29, 2018 | | December 30, 2017 |
| (In thousands) |
Severance costs (approximately 2,900 employees) | $ | 27,700 |
| | $ | 393 |
| | $ | 23,301 |
|
Other exit costs (will be recognized as incurred) | 7,300 |
| | 1,704 |
| | — |
|
Total | 35,000 |
| | 2,097 |
| | 23,301 |
|
Severance reimbursement | (10,000 | ) | | — |
| | — |
|
Total - Q1 FY18 plan | $ | 25,000 |
| | 2,097 |
| | 23,301 |
|
Costs incurred for other plans | | | 42 |
| | 241 |
|
Total - all plans | | | $ | 2,139 |
| | $ | 23,542 |
|
Q1 FY18 Plan
Actions under the Q1 FY18 plan began in the first quarter of 2018 and are expected to occur through calendar 2019. Cash payments of severance and other costs began in the second quarter of 2018 and are expected to occur through the end of calendar 2019. In connection with this plan, the Company entered into a contractual agreement with a third party pursuant to which up to $10 million of severance and retention costs incurred by the Company will be reimbursed. The Company recorded this amount as a reduction of restructuring costs in the second quarter of 2018 and, as of DecemberJune 29, 2018, $72019, $5 million was included in accounts receivable on the condensed consolidated balance sheets. Costs incurred for other exit costs consist primarily of costs to maintain vacant facilities that are owned and contract termination costs.
Other Plans
Other plans include a number of plans for which costs are not expected to be material individually or in the aggregate.
All Plans
The Company’s IMS segment incurred a benefit under all restructuring plans of $4$3 million infor the first quarter ofnine months ended June 29, 2019, primarily as a result of recovery from a third party of certain environmental remediation costs. This compares to costcosts incurred of $19$11 million for the first quarter ofnine months ended June 30, 2018. The Company’s CPS segment incurred costcosts under all restructuring plans of $6$16 million and $4$5 million for the first quarter ofnine months ended June 29, 2019 and June 30, 2018, respectively. As of DecemberJune 29, 20182019 and September 29, 2018, the Company had accrued liabilities of $25$11 million and $24$22 million, respectively, for restructuring costs (exclusive of environmental remediation liabilities).
In addition to costs expected to be incurred under the Q1 FY18 plan, the Company expects to incur restructuring costs in future periods primarily for vacant facilities and former sites for which the Company is or may be responsible for environmental remediation.
Note 9. Income Tax
The Company estimates its annual effective income tax rate at the end of each quarterly period. The estimate takes into account the geographic mix of expected pre-tax income (loss), expected total annual pre-tax income (loss), enacted changes in tax laws, implementation of tax planning strategies and possible outcomes of audits and other uncertain tax positions. To the extent there are fluctuations in any of these variables during a period, the provision for income taxes may vary.
The U.S. Tax Cuts and Jobs Act (“the Tax Act”) provision for Global Intangible Low-Taxed Income (“GILTI”), imposes taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations and is effective for the Company in fiscal year 2019. This income will be offset by federal net operating losses and, as a result, theThe Company will not pay cash taxes due to GILTI.GILTI because of either the utilization of federal net operating losses or foreign tax credits. The Company has determined that the GILTI provision will be accounted for under U.S. generally accepted accounting principles as a component of income tax expense in the period in which the Company is subject to the rules (the “period cost method”).
The Tax Act also imposes an additional minimum tax “base erosion and anti-abuse tax” (“BEAT”) on certain deductible payments made to a foreign subsidiary applicable to tax years beginning in 2018. The BEAT applies to the extent that a tentative BEAT on modified taxable income exceeds the regular tax liability. The Company does not expect thereBEAT to behave a material impact to the Company’s income taxes.
The Company's provision for income taxes for the first quarter ofthree months ended June 29, 2019 and June 30, 2018 was $26$16 million (40%(27% of income before taxes) and $166$7 million (1,497%(18% of income before taxes), respectively, and $69 million (36% of income before taxes) and $190 million (202% of income before taxes) for the nine months ended June 29, 2019 and June 30, 2018, respectively. The incomeIncome tax expense for the first quarter ofnine months ended June 29, 2019 included the imposition of GILTI (as discussed above). The incomeIncome tax expense for the first quarter ofnine months ended June 30, 2018 was almost entirely attributable to the estimated impact of the Tax Act resulting in a net increase to income tax expense of approximatelywas $162 million.
Note 10. Stockholder's Equity
Accumulated Other Comprehensive Income
Accumulated other comprehensive income, net of tax as applicable, consisted of the following:
|
| | | | | | | |
| As of |
| June 29, 2019 | | September 29, 2018 |
| (In thousands) |
Foreign currency translation adjustments | $ | 87,871 |
| | $ | 87,889 |
|
Unrealized holding losses on derivative financial instruments | (17,359 | ) | | (335 | ) |
Unrecognized net actuarial losses and transition costs for benefit plans | (12,511 | ) | | (13,610 | ) |
Total | $ | 58,001 |
| | $ | 73,944 |
|
|
| | | | | | | |
| As of |
| December 29, 2018 | | September 29, 2018 |
| (In thousands) |
Foreign currency translation adjustments | $ | 87,637 |
| | $ | 87,889 |
|
Unrealized holding losses on derivative financial instruments | (4,422 | ) | | (335 | ) |
Unrecognized net actuarial losses and transition costs for benefit plans | (13,122 | ) | | (13,610 | ) |
Total | $ | 70,093 |
| | $ | 73,944 |
|
Unrealized holding losses on derivative financial instruments includes losses (effective portion) from interest rate swap agreements with independent counterparties to partially hedge the variability in cash flows due to changes in the benchmark interest rate (LIBOR) associated with anticipated variable rate borrowings. These swaps are accounted for as cash flow hedges under ASC Topic 815, Derivatives and Hedging. As of June 29, 2019 and September 29, 2018, interest rate swaps with an aggregate notional amount of $350 million and $50 million, respectively, were outstanding. The aggregate effective interest rate of these swaps as of June 29, 2019 was approximately 4.3%. As of June 29, 2019, due to a decline in interest rates since the time the swaps were put in place, these interest rate swaps had a negative value of $17 million, of which $3 million is included in accrued liabilities and the remaining amount is included in other long-term liabilities on the condensed consolidated balance sheets.
Stock Repurchase Program
During the first quarter ofnine months ended June 29, 2019 and June 30, 2018, the Company repurchased 0.3 million and 1.04.8 million shares of its common stock for $7 million and $34$138 million, respectively. The Company did not repurchase any shares under its repurchase programs during the three months ended June 29, 2019. As of DecemberJune 29, 2018, subject to limitations on stock repurchases contained in certain of the Company's credit and debt agreements,2019, an aggregate of $101 million remains available under repurchase programs authorized by the Board of Directors.
In addition to the repurchases discussed above, the Company repurchased 176,000207,000 and 304,000328,000 shares of its common stock during the first quarter ofnine months ended June 29, 2019 and June 30, 2018, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock units. The Company paid $5$6 million and $11$12 million, respectively, in conjunctionconnection with these repurchases.
Note 11. Business Segment, Geographic and Customer Information
ASC Topic 280, Segment Reporting, 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 and evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance.
The Company's operations are managed as two businesses: Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS). The Company's CPS business consists of multiple operating segments which do not meet the quantitative threshold for being presented as reportable segments. Therefore, financial information for these operating segments is presented in a single category entitled "CPS" and the Company has only one reportable segment - IMS.
The following table presents revenue and a measure of segment gross profit used by management to allocate resources and assess performance of operating segments: | | | Three Months Ended | Three Months Ended | | Nine Months Ended |
| December 29, 2018 | | December 30, 2017 | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands) | (In thousands) |
Gross sales: | | | | | | | | | | |
IMS | $ | 1,793,182 |
| | $ | 1,428,847 |
| $ | 1,720,028 |
| | $ | 1,490,069 |
| | $ | 5,306,329 |
| | $ | 4,293,497 |
|
CPS | 455,803 |
| | 356,729 |
| 362,078 |
| | 374,642 |
| | 1,212,866 |
| | 1,077,103 |
|
Intersegment revenue | (60,967 | ) | | (40,776 | ) | (55,111 | ) | | (51,345 | ) | | (177,543 | ) | | (136,805 | ) |
Net sales | $ | 2,188,018 |
| | $ | 1,744,800 |
| $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
| | | | | | | | | | |
Gross profit: | | | | | | | | | | |
IMS | $ | 110,656 |
| | $ | 82,617 |
| $ | 109,318 |
| | $ | 85,381 |
| | $ | 334,811 |
| | $ | 253,914 |
|
CPS | 40,519 |
| | 29,866 |
| 40,402 |
| | 31,300 |
| | 121,213 |
| | 92,538 |
|
Total | 151,175 |
| | 112,483 |
| 149,720 |
| | 116,681 |
| | 456,024 |
| | 346,452 |
|
Unallocated items (1) | (1,838 | ) | | (3,017 | ) | (1,925 | ) | | 1,855 |
| | (5,790 | ) | | (3,752 | ) |
Total | $ | 149,337 |
| | $ | 109,466 |
| $ | 147,795 |
| | $ | 118,536 |
| | $ | 450,234 |
| | $ | 342,700 |
|
| |
(1) | For purposes of evaluating segment performance, management excludes certain items from its measure of gross profit. These items consist of stock-based compensation expense, amortization of intangible assets and charges or credits resulting from distressed customers. |
Net sales by geographic segment, determined based on the country in which a product is manufactured, were as
follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands) |
Net sales: | | | | | | | |
Americas (1) | $ | 1,003,024 |
| | $ | 917,866 |
| | $ | 3,268,600 |
| | $ | 2,644,373 |
|
EMEA | 273,735 |
| | 222,942 |
| | 777,989 |
| | 630,771 |
|
APAC | 750,236 |
| | 672,558 |
| | 2,295,063 |
| | 1,958,651 |
|
Total | $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
| |
(1) | Mexico represents approximately 60% of the Americas revenue and the U.S. represents approximately 35%. |
|
| | | | | | | | | | | |
| | | | | | | |
Percentage of net sales represented by ten largest customers | 55 | % | | 52 | % | | 54 | % | | 53 | % |
Number of customers representing 10% or more of net sales | 1 |
| | 1 |
| | 1 |
| | 1 |
|
|
| | | | | | | |
| Three Months Ended |
| December 29, 2018 | | December 30, 2017 |
| (In thousands) |
Net sales | | | |
United States | $ | 454,771 |
| | $ | 314,808 |
|
Mexico | 662,148 |
| | 489,234 |
|
China | 433,422 |
| | 315,092 |
|
Malaysia | 122,905 |
| | 185,712 |
|
Other international | 514,772 |
| | 439,954 |
|
Total | $ | 2,188,018 |
| | $ | 1,744,800 |
|
|
| | | | | |
Percentage of net sales represented by ten largest customers | 54 | % | | 54 | % |
Number of customers representing 10% or more of net sales | 2 |
| | 2 |
|
Note 12. Earnings Per Share
Basic and diluted per share amounts are calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period, as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands, except per share data) |
Numerator: | | | | | | | |
Net income (loss) | $ | 42,921 |
| | $ | 33,963 |
| | $ | 121,758 |
| | $ | (96,315 | ) |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares outstanding | 69,499 |
| | 68,907 |
| | 68,872 |
| | 70,366 |
|
Effect of dilutive stock options and restricted stock units | 2,508 |
| | 3,146 |
| | 2,588 |
| | — |
|
Denominator for diluted earnings per share | 72,007 |
| | 72,053 |
| | 71,460 |
| | 70,366 |
|
| | | | | | | |
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.62 |
| | $ | 0.49 |
| | $ | 1.77 |
| | $ | (1.37 | ) |
Diluted | $ | 0.60 |
| | $ | 0.47 |
| | $ | 1.70 |
| | $ | (1.37 | ) |
|
| | | | | | | |
| Three Months Ended |
| December 29, 2018 | | December 30, 2017 |
| (In thousands, except per share data) |
Numerator: | | | |
Net income (loss) | $ | 37,952 |
| | $ | (154,910 | ) |
| | | |
Denominator: | | | |
Weighted average common shares outstanding | 68,303 |
| | 71,605 |
|
Effect of dilutive stock options and restricted stock units | 2,598 |
| | — |
|
Denominator for diluted earnings per share | 70,901 |
| | 71,605 |
|
| | | |
Net income (loss) per share: | | | |
Basic | $ | 0.56 |
| | $ | (2.16 | ) |
Diluted | $ | 0.54 |
| | $ | (2.16 | ) |
Had the Company reported net income infor the first quarter ofnine months ended June 30, 2018 instead of a net loss, 43 million of potentially dilutive securities would have been included in the calculation of diluted earnings per share.
Note 13. Stock-Based Compensation
Stock-based compensation expense was attributable to:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands) |
Stock options | $ | 602 |
| | $ | 1,362 |
| | $ | 701 |
| | $ | 5,105 |
|
Restricted stock units, including performance based awards | 7,534 |
| | 8,399 |
| | 19,877 |
| | 23,593 |
|
Total | $ | 8,136 |
| | $ | 9,761 |
| | $ | 20,578 |
| | $ | 28,698 |
|
|
| | | | | | | |
| Three Months Ended |
| December 29, 2018 | | December 30, 2017 |
| (In thousands) |
Stock options | $ | 93 |
| | $ | 1,177 |
|
Restricted stock units, including performance based awards | 5,723 |
| | 7,465 |
|
Total | $ | 5,816 |
| | $ | 8,642 |
|
Stock-based compensation expense was recognized as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands) |
Cost of sales | $ | 2,729 |
| | $ | 2,055 |
| | $ | 7,046 |
| | $ | 6,354 |
|
Selling, general and administrative | 5,328 |
| | 7,490 |
| | 13,257 |
| | 22,042 |
|
Research and development | 79 |
| | 216 |
| | 275 |
| | 302 |
|
Total | $ | 8,136 |
| | $ | 9,761 |
| | $ | 20,578 |
| | $ | 28,698 |
|
The Company's 2009 Stock Plan ("2009 Plan") expired as to future grants on January 26, 2019. Although the 2009 Plan was terminated, it will continue to govern all awards granted under it prior to its termination date. On March 11, 2019, the Company's stockholders approved the Company's 2019 Equity Incentive Plan ("2019 Plan") and the reservation of 4.0 million shares of common stock for issuance thereunder, plus any shares subject to stock options or similar awards granted under the 2009 Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted that are forfeited to or repurchased by the Company.
|
| | | | | | | |
| Three Months Ended |
| December 29, 2018 | | December 30, 2017 |
| (In thousands) |
Cost of sales | $ | 1,735 |
| | $ | 2,448 |
|
Selling, general and administrative | 3,990 |
| | 6,164 |
|
Research and development | 91 |
| | 30 |
|
Total | $ | 5,816 |
| | $ | 8,642 |
|
As of DecemberJune 29, 2018,2019, an aggregate of 8.79.6 million shares were authorized for future issuance under the Company's stock plans, of which 6.75.1 million of such shares were issuable upon exercise of outstanding options and delivery of shares upon vesting of restricted stock units and 2.04.5 million shares of common stock were available for future grant.
Restricted Stock Units
Activity with respect to the Company's restricted stock units was as follows:
|
| | | | | | | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value ($) | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value ($) |
| (In thousands) | | | | | | (In thousands) |
Outstanding as of September 29, 2018 | 3,303 |
| | 30.33 |
| | 1.21 | | 97,913 |
|
Granted | 1,742 |
| | 24.83 |
| | | | |
Vested/Forfeited/Cancelled | (1,977 | ) | | 29.46 |
| | | | |
Outstanding as of June 29, 2019 | 3,068 |
| | 27.77 |
| | 1.52 | | 86,047 |
|
Expected to vest as of June 29, 2019 | 2,407 |
| | 27.94 |
| | 1.34 | | 67,512 |
|
|
| | | | | | | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value ($) | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value ($) |
| (In thousands) | | | | | | (In thousands) |
Outstanding as of September 29, 2018 | 3,303 |
| | 30.33 |
| | 1.21 | | 97,913 |
|
Granted | 1,627 |
| | 24.40 |
| | | | |
Vested/Forfeited/Cancelled | (1,198 | ) | | 29.76 |
| | | | |
Outstanding as of December 29, 2018 | 3,732 |
| | 27.93 |
| | 1.83 | | 88,781 |
|
Expected to vest as of December 29, 2018 | 2,699 |
| | 27.80 |
| | 1.63 | | 64,205 |
|
As of DecemberJune 29, 20182019, unrecognized compensation expense of $5437 million is expected to be recognized over a weighted average period of 1.61.4 years. Additionally, as of DecemberJune 29, 2018,2019, unrecognized compensation expense related to performance-based restricted stock units for which achievement of the performance criteria is not currently considered probable was $19$11 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q 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 revenue or results of operations, gross margin, operating margin, expenses, earnings or losses from operations, cash flow, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations and the anticipated benefits of such plans, strategies and objectives; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements regarding the financial impact of customer bankruptcies; any statements regarding the timing of closing of, future cash outlays for, and benefits of, completed, pending or anticipated acquisitions; any statements regarding expected restructuring costs;costs and benefits; any statements concerning the adequacy of our current liquidity and the availability of additional sources of liquidity; any statements regarding the amount of future potential tariffs to which we may become subject to;subject; our expectations for and timing of remediation of the material weakness identified in the fourth quarter of fiscal 2018; any statements regarding the impact of changes in tax laws; 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 and uncertainties, including those contained in Part II, Item 1A of this report. As a result, actual results could vary materially from those suggested by the forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.
Overview
We are a leading global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. Our revenue is generated from sales of our products and services primarily to original equipment manufacturers (OEMs) that serve the industrial, medical, defense and aerospace, automotive, communications networks and cloud solutions industries.
Our operations are managed as two businesses:
| |
1. | Integrated Manufacturing Solutions (IMS). Our IMS segment consists of printed circuit board assembly and test, final system assembly and test and direct-order-fulfillment. |
| |
2. | Components, Products and Services (CPS). Components include interconnect systems (printed circuit board fabrication, backplane and cable assemblies and plastic injection molding) and mechanical systems (enclosures and precision machining). Products include memory, RF, optical and microelectronic and enterprise, computing and data storage solutions from our Viking Technology division, defense and aerospace products from SCI Technology and cloud-based manufacturing execution solutions from our 42Q division. Services include design, engineering, logistics and repair services. |
Our only reportable segment is IMS, which represented approximately 80% of our total revenue in the firstthird quarter of 2019 and firstthird quarter of 2018. Our CPS business consists of multiple operating segments, which do not meet the quantitative thresholds for being presented as reportable segments under the accounting rules for segment reporting. Therefore, financial information for these operating segments is presented in a single category entitled “Components, Products and Services”.
All references to years in this section refer to our fiscal years ending on the last Saturday of each year closest to September 30. Fiscal 2019 and 2018 are each 52 weeks.
Our strategy is to leverage our comprehensive product and service offerings, advanced technologies and global capabilities to further penetrate diverse end markets that offer significant growth opportunities and that have complex products that require higher value-added services. We believe this strategy differentiates us from our competitors and will help drive more sustainable revenue growth and provide the potential for us to ultimately achieve operating margins that exceed industry standards.
There are many challenges to successfully executing our strategy. For example, we compete with a number of companies in each of our key end markets. This includes companies that are much larger than we are and smaller companies
that focus on a particular niche. Although we believe we are well-positioned in each of our key end markets and seek to
differentiate ourselves from our competitors, competition remains intense and profitably growing our revenues has been challenging. For example, gross margins of 6.2%6.3% and 8.9%10% during the nine months ended June 29, 2019 for our IMS and CPS businesses, respectively, arewere below our target model expectations at the current revenue levels due to inefficiencies and other factors. We continue to address these challenges on both a short-term and long-term basis.
A small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers have typically represented approximately 50% of our net sales. Two customersOne customer represented 10% or more of our net sales for the three months ended December 29, 2018 and December 30, 2017, respectively.all periods presented.
We typically generate about 80% of our net sales from products manufactured in our foreign operations. The concentration of foreign operations has resulted primarily from a desire on the part of many of our customers to manufacture in lower cost regions such as Asia, Latin America and Eastern Europe.
Historically, we have had substantial recurring sales to existing customers. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and can cover the manufacture of a range of products. Under these agreements, a customer typically purchases its requirements for specific products in particular geographic areas from us. However, these agreements generally do not obligate the customer to purchase minimum quantities of products, which can have the effect of reducing revenue and profitability. In addition, some customer contracts contain cost reduction objectives, which can also have the effect of reducing revenue from such customers.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our unaudited 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 liabilities. On an ongoing basis, we evaluate the process used to develop estimates related to product returns, accounts receivable, inventories, intangible assets, income taxes, warranty obligations, environmental matters, litigation and other contingencies. 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 critical accounting policies and estimates, refer to our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 15, 2018.
Results of Operations
Key Operating Results
| | | Three Months Ended | Three Months Ended | | Nine Months Ended |
| December 29, 2018 | | December 30, 2017 | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In thousands) | (In thousands) |
Net sales | $ | 2,188,018 |
| | $ | 1,744,800 |
| $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 6,341,652 |
| | $ | 5,233,795 |
|
Gross profit | $ | 149,337 |
| | $ | 109,466 |
| $ | 147,795 |
| | $ | 118,536 |
| | $ | 450,234 |
| | $ | 342,700 |
|
Operating income | $ | 77,543 |
| | $ | 13,788 |
| $ | 67,374 |
| | $ | 47,060 |
| | $ | 223,032 |
| | $ | 109,622 |
|
Net income (loss) (1) | $ | 37,952 |
| | $ | (154,910 | ) | $ | 42,921 |
| | $ | 33,963 |
| | $ | 121,758 |
| | $ | (96,315 | ) |
| |
(1) | Results of operations for the first quarter ofnine months ended June 30, 2018 include a $162 million non-cash tax charge due to the enactment of the U.S. Tax Cuts and Jobs Act. |
Net Sales
Sales by end market were as follows (dollars in thousands):
| | | Three Months Ended | Three Months Ended | | Nine Months Ended |
| December 29, 2018 | | December 30, 2017 | | Increase/(Decrease) | June 29, 2019 | | June 30, 2018 | | Increase/(Decrease) | | June 29, 2019 | | June 30, 2018 | | Increase/(Decrease) |
Communications Networks | $ | 779,721 |
| | $ | 678,846 |
| | $ | 100,875 |
| 14.9 | % | $ | 736,281 |
| | $ | 673,124 |
| | $ | 63,157 |
| 9.4 | % | | $ | 2,276,920 |
| | $ | 1,994,305 |
| | $ | 282,615 |
| 14.2 | % |
Industrial, Medical, Defense and Automotive | 1,182,484 |
| | 885,695 |
| | 296,789 |
| 33.5 | % | 1,114,348 |
| | 936,211 |
| | 178,137 |
| 19.0 | % | | 3,459,395 |
| | 2,682,598 |
| | 776,797 |
| 29.0 | % |
Cloud Solutions | 225,813 |
| | 180,259 |
| | 45,554 |
| 25.3 | % | 176,366 |
| | 204,031 |
| | (27,665 | ) | (13.6 | )% | | 605,337 |
| | 556,892 |
| | 48,445 |
| 8.7 | % |
Total | $ | 2,188,018 |
| | $ | 1,744,800 |
| | $ | 443,218 |
| 25.4 | % | $ | 2,026,995 |
| | $ | 1,813,366 |
| | $ | 213,629 |
| 11.8 | % | | $ | 6,341,652 |
| | $ | 5,233,795 |
| | $ | 1,107,857 |
| 21.2 | % |
Changes in customer demand and sales volumes for our vertically integrated system components and subassemblies;
Changes in the overall volume of our business, which affect the level of capacity utilization;
Parts shortages and extended parts lead times caused by high demand or natural disasters, and related operational disruption and inefficiencies;
Provisions for excess and obsolete inventory, including provisions associated with distressed customers;
Our ability to transition the location of and ramp manufacturing and assembly operations when requested by a customer in a timely and cost-effective manner.
In the first quarter of 2018, we adopted a consolidated restructuring plan to address the closure and/or relocation of three of our manufacturing facilities. In addition, we are still in the process of completing restructuring actions under other plans.
The following table is a summary of restructuring costs associated with this plan: