- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER: 0-21272
SANMINA-SCI CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 77-0228183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2700 N. FIRST ST., SAN JOSE, CA 95134
(Address of principal executive offices) (Zip Code)
</Table>
(408) 964-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
As of February 7, 2002, there were 522,875,626 shares outstanding of the
issuer's common stock, $0.01par value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SANMINA-SCI CORPORATION
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Condensed Consolidated Statements of Operations............. 2
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Cash Flows............. 4
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 28
Item 2. Changes in Securities....................................... 29
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
Signature................................................... 30
</Table>
1
SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
Net sales................................................... $1,130,461 $1,485,571
Cost of sales............................................... 1,077,354 1,222,673
---------- ----------
Gross profit.............................................. 53,107 262,898
---------- ----------
Operating expenses:
Selling, general and administrative....................... 51,988 76,209
Amortization of goodwill and intangibles.................. 1,478 6,968
Restructuring costs....................................... 62,691 --
---------- ----------
Total operating expenses............................... 116,157 83,177
---------- ----------
Operating income (loss)..................................... (63,050) 179,721
Other income (expense), net................................. (9,071) 6,150
---------- ----------
Income (Loss) before provision for income taxes............. (72,121) 185,871
Provision (benefit) for income taxes........................ (26,898) 69,920
---------- ----------
Net income (loss)......................................... $ (45,223) $ 115,951
========== ==========
Earnings (Loss) per share:
Basic..................................................... $ (0.12) $ 0.37
Diluted................................................... $ (0.12) $ 0.34
Shares used in computing per share amounts:
Basic..................................................... 374,883 316,582
Diluted................................................... 374,883 349,617
</Table>
See accompanying notes.
2
SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 29, SEPTEMBER 29,
2001 2001
------------ -------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 506,139 $ 567,649
Short-term investments.................................... 559,085 820,742
Accounts receivable, net.................................. 1,209,939 409,845
Inventories............................................... 1,479,920 503,822
Deferred income taxes..................................... 290,385 159,899
Income taxes receivable................................... 35,233 93,107
Prepaid expenses and other................................ 179,963 28,229
----------- ----------
Total current assets................................. 4,260,664 2,583,293
Property, plant and equipment, net........................ 1,183,754 632,590
Long-term investments..................................... 95,536 98,514
Goodwill and intangibles.................................. 4,501,029 294,397
Deposits and other........................................ 64,851 31,537
----------- ----------
Total assets...................................... $10,105,834 $3,640,331
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 260,093 $ 15,800
Accounts payable.......................................... 882,236 332,471
Accrued liabilities and other............................. 488,795 98,132
Accrued payroll and related benefits...................... 91,122 45,934
----------- ----------
Total current liabilities............................ 1,722,246 492,337
----------- ----------
Long-term liabilities:
Long-term debt, net of current portion.................... 2,129,150 1,218,608
Deferred income tax liability............................. 82,291 60,998
Other liabilities......................................... 69,205 27,408
----------- ----------
Total long-term liabilities.......................... 2,280,646 1,307,014
----------- ----------
Stockholders' equity:
Common stock.............................................. 5,234 3,224
Additional paid-in capital................................ 5,631,995 1,265,965
Treasury stock............................................ (99,170) (45,892)
Accumulated other comprehensive loss...................... (21,273) (13,696)
Retained earnings......................................... 586,156 631,379
----------- ----------
Total stockholders' equity........................ 6,102,942 1,840,980
----------- ----------
$10,105,834 $3,640,331
=========== ==========
</Table>
See accompanying notes.
3
SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (45,223) $ 115,951
Adjustments to reconcile net (loss) income to cash provided
by (used for) operating activities:
Adjustment to conform year end of pooled entities......... -- (5,259)
Restructuring charges..................................... 62,691 --
Depreciation, amortization and other...................... 54,184 55,017
Deferred taxes............................................ (67,515) --
Provision for doubtful accounts........................... (6,488) --
Loss on disposal of assets................................ 5,990 --
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.................................... 64,093 (121,821)
Net proceeds from asset securitization program......... 29,500 --
Inventories............................................ 281,887 (28,444)
Prepaid expenses, deposits and other................... 14,030 3,340
Income tax accounts.................................... 43,334 25,066
Accounts payable and accrued liabilities............... (359,525) (16,753)
----------- ---------
Cash provided by operating activities................ 76,958 27,097
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (395,386) (57,674)
Proceeds from maturity of short-term investments.......... 653,530 71,987
Purchases of long-term investments........................ (11,102)
Purchases of property and equipment, net of
acquisitions........................................... (19,413) (63,019)
Proceeds from sale of assets.............................. 1,112 --
Cash paid for businesses acquired, net of cash acquired... 63,623 --
----------- ---------
Cash provided by (used for) investing activities..... 303,466 (59,808)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt................................ (1,015,228) (3,782)
Proceeds from notes and credit facilities................. 600,000 --
Payments on long term liabilities......................... (1,525) --
Proceeds from sale of common stock, net of issuance
costs.................................................. 6,547 10,088
Repurchase of common stock................................ (31,997) --
----------- ---------
Cash (used for) provided by financing activities..... (442,203) 6,306
----------- ---------
Effect of exchange rate changes............................. 269 1,811
----------- ---------
Decrease in cash and cash equivalents....................... (61,510) (24,594)
Cash and cash equivalents at beginning of period............ 567,649 998,242
----------- ---------
Cash and cash equivalents at end of period.................. $ 506,139 $ 973,648
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $ 35,780 $ 9,521
Income taxes.............................................. $ 48,022 $ 49,551
Non-cash activity during the period for:
Stock issued for acquisition, net of acquisition costs.... $ 4,389,991 $ --
</Table>
See accompanying notes.
4
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") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules or regulations. The interim financial
statements are unaudited, but reflect all adjustments that are, in the opinion
of management, necessary for a fair presentation.
The results of operations for the three months ended December 29, 2001 are
not necessarily indicative of the results that may be expected for the year
ending September 28, 2002. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
for the year ended September 29, 2001, included in Sanmina-SCI's report on Form
10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 from those estimates.
Sanmina-SCI's fiscal year ends on the Saturday nearest September 30. All
general references to years relate to fiscal years unless otherwise noted.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Sanmina-SCI and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Foreign Currency Translation -- For foreign subsidiaries using the local
currency as their functional currency, assets and liabilities are translated at
exchange rates in effect at the balance sheet date and income and expenses are
translated at average exchange rates. The effects of these translation
adjustments are reported in accumulated other comprehensive income (loss).
Exchange gains and losses arising from transactions denominated in a currency
other than the functional currency of the entity involved and remeasurement
adjustments for foreign operations where the U.S. dollar is the functional
currency are included in other income (expense) net in the accompanying
consolidated statements of operations.
Asset Securitization -- Sanmina-SCI has an asset securitization program
whereby it sells an undivided interest in eligible trade receivables. When
Sanmina-SCI sells its receivables under this program, they are derecognized from
the balance sheet. Sanmina-SCI accounts for its transfer of receivables to the
limited purpose subsidiary, together with limited purpose subsidiary's sale of
undivided interests to conduit, as sales under FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. Proceeds from the sale of accounts receivable are used for
working capital purposes. Loss on sale of receivables represent the difference
between the carrying amount of the receivables sold and the fair value of the
receivables on the date of sale, which is the cash received in exchange for the
interest in the receivables. Sanmina-SCI services the receivables transferred to
the limited purpose subsidiary and receives a servicing fee approximating 0.50%
per annum of the amount of receivables sold, which management has determined
approximates market compensation for these services; therefore a servicing asset
or liability has not been established.
Impairment of Long-Lived Assets -- Sanmina-SCI reviews long-lived and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." An asset is considered impaired if
its carrying amount (including the
5
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
unamortized portion of goodwill allocated to the asset) exceeds the future net
cash flow the asset is expected to generate. If such asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset, including the allocated goodwill, if any, exceeds
its fair value. Sanmina-SCI assesses the recoverability of its long-lived and
intangible assets by determining whether the unamortized balances can be
recovered through undiscounted future net cash flows derived from such assets.
The amount of impairment, if any, is measured based on projected discounted
future net cash flows using a discount rate.
Goodwill and Intangibles -- In July 2001, the Financial Accounting
Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets" to
be effective for all fiscal years beginning after December 15, 2001. As part of
the adoption of SFAS No. 142, Sanmina-SCI will no longer amortize goodwill or
intangible assets with indefinite lives related to existing goodwill and
intangible assets or related to acquisitions subsequent to July 1, 2001.
Sanmina-SCI will test for impairment of goodwill at least annually and will use
a two-step approach to assess any impairment to goodwill at the established
reporting unit level. Sanmina-SCI will reassess the value and useful lives of
goodwill and intangible assets previously recorded in connection with prior
acquisitions. Certain identifiable intangible assets with finite lives will
continue to amortize over their respective useful lives.
Sanmina-SCI has elected to early adopt SFAS 142 in the first quarter of
fiscal 2002 and will no longer amortize goodwill, thereby eliminating annual
goodwill amortization of approximately $22 million, based on anticipated
amortization for fiscal 2002. At December 29, 2001, unamortized goodwill
approximated $4.4 billion. Sanmina-SCI will evaluate goodwill, at least, on an
annual basis and whenever events and changes in circumstances suggest that the
carrying amount may not be recoverable. Sanmina-SCI is in the process of
completing the first step of the transitional goodwill impairment test and
expects to complete their analysis by the end of their fiscal quarter ended
March 30, 2002. Sanmina-SCI will retroactively reflect the impact of any
impairment as a cumulative effect of the change in accounting principle in the
fiscal quarter ended December 29, 2001 if any impairment exists. As a result,
Sanmina-SCI has recognized no transitional impairment loss as of December 29,
2001 in connection with the adoption of SFAS 142. Sanmina-SCI is required to
perform goodwill impairment tests on an annual basis and between annual tests in
circumstances that suggest that the carrying amount may not be recoverable.
There can be no assurance that future goodwill impairment tests will not result
in a charge to earnings.
Goodwill information for each reportable segment is as follows (in
thousands):
<Table>
<Caption>
AS OF AS OF
SEPTEMBER 29, GOODWILL DECEMBER 29,
2001 ACQUIRED 2001
------------- --------- ------------
Segments:
Domestic....................................... 121,203 1,224,573 1,345,776
International.................................. 118,663 2,983,538 3,102,201
------- --------- ---------
Total............................................ 239,866 4,208,111 4,447,977
======= ========= =========
</Table>
During the first three months of fiscal 2002, Sanmina SCI recorded $4.2
billion of goodwill, $4.1 billion resulting from the acquisition of SCI Systems,
Inc. and $72 million from the acquisition of Electro Mechanical Solutions (see
Note 3).
6
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The pro forma effects of the adoption of SFAS 142 on net income and
earnings per share for Sanmina-SCI for the three months ended December 30, 2000
is as follows:
<Table>
<Caption>
THREE MONTHS
ENDED
DECEMBER 30,
2000
------------
Net income as reported...................................... $115,951
Add back: Goodwill amortization expense..................... 3,235
--------
Adjusted net income......................................... $119,186
========
Basic earnings per share, as reported....................... $ 0.37
Add back: Goodwill amortization expense..................... 0.01
--------
Pro forma................................................... $ 0.38
========
Diluted earnings per share, as reported..................... $ 0.34
Add back: Goodwill amortization expense..................... 0.01
--------
Pro forma................................................... $ 0.35
========
</Table>
Sanmina-SCI has certain identifiable intangible assets that are subject to
amortization. These intangibles relate to customer lists, developed technology,
trademarks and other intangibles with useful lives from ten to thirty years.
Sanmina-SCI has certain identifiable intangibles that are not subject to
amortization due to their infinite lives. During the first three months of
fiscal 2002, there were no additions to identifiable intangible assets that were
subject to amortization. Intangible asset amortization expense for the first
three months of fiscal 2002 was approximately $1.5 million. The components of
intangible assets are as follows (in thousands):
<Table>
<Caption>
DECEMBER 29, 2001 SEPTEMBER 29, 2001
-------------------------------------- --------------------------------------
GROSS GROSS
CARRYING ACCUMULATED NET CARRYING CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ ------------ -------- ------------ ------------
Amortized Intangibles..... $73,926 $27,020 $46,906 $73,926 $25,541 $48,385
Non-amortized
Intangibles............. 11,241 5,095 6,146 11,241 5,095 6,146
------- ------- ------- ------- ------- -------
Total..................... $85,167 $32,115 $53,052 $85,167 $30,636 $54,531
======= ======= ======= ======= ======= =======
</Table>
Expected future estimated annual amortization expense is as follows:
<Table>
Fiscal years:
2002 (remaining nine months).............................. $ 3,633
2003...................................................... 5,112
2004...................................................... 5,112
2005...................................................... 5,112
2006...................................................... 5,112
Thereafter................................................ 22,825
-------
$46,906
=======
</Table>
Revenue Recognition -- Sanmina-SCI generally recognizes revenue at the
point of shipment to its customers, under the contractual terms which are FOB
shipping point or when services have been performed. Title transfers upon
shipment and risk and rewards of ownership of the product are assumed by the
customer. In some cases, Sanmina-SCI will recognize revenue upon delivery of
shipment to the customer or its designated location. Except in specific
circumstances, there are no formal customer acceptance requirements
7
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
or further Sanmina-SCI obligations subsequent to shipment. In specific
circumstances in which there are such requirements or further Sanmina-SCI
obligations, revenue is recognized at the point of said formal acceptance and
upon completion of said obligations. Where appropriate, provisions are made for
estimated warranty and return costs.
Recent Accounting Pronouncements -- In October 2001, the Financial
Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" to be effective for all fiscal years beginning after June 15, 2002,
with early adoption permitted. SFAS 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation and its associated
asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets.
Sanmina-SCI is currently assessing the impact of SFAS 143 on its financial
position, results of operations and cash flows as well as timing of its
adoption.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS 144 supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions for
the Disposal of a Segment of a Business." The provisions of SFAS 144 are
effective in fiscal years beginning after December 15, 2001, with early adoption
permitted and, in general, are to be applied prospectively. Sanmina-SCI is
currently assessing the impact of SFAS 144 on its financial position, results of
operations and cash flows as well as timing of its adoption.
NOTE 3 -- BUSINESS COMBINATIONS
On July 13, 2001, Sanmina entered into a definitive merger agreement with
SCI Systems, Inc ("SCI"). On December 6, 2001, the merger was completed. SCI
Systems, Inc. ("SCI") merged with a wholly owned subsidiary of Sanmina
Corporation such that, SCI ecame a wholly owned subsidiary of Sanmina-SCI. Under
the terms of the merger, SCI stockholders received 1.36 shares of Sanmina common
stock for each share of SCI common stock. In addition, Sanmina-SCI issued
options to purchase shares of Sanmina-SCI common stock in exchange for each
issued and outstanding SCI option. The transaction was accounted for as a
purchase business combination. The purchase price was preliminarily allocated as
follows:
<Table>
Net tangible assets acquired................................ $ 263,213
Deferred compensation related to options.................... 4,562
Goodwill.................................................... 4,139,252
----------
Total purchase price........................................ $4,407,027
==========
</Table>
The total purchase price of approximately $4.4 billion consists of
approximately 200.6 million shares of Sanmina-SCI common stock with a fair value
of approximately $4.2 billion, 13.0 million vested and unvested stock options
with a fair value of $203.0 million, of which approximately $4.6 million was
recorded as deferred compensation related to the intrinsic value of the unvested
options, and direct transaction costs of $17.0 million. Included in merger costs
was a payment of $13.1 million to Merrill Lynch & Co., whose former chairman of
their Global Technology Investment Banking Group is a current director of
Sanmina-SCI. The value of the 200.6 million shares of Sanmina-SCI common stock
used to acquire SCI was based on a per share price of $20.87. This per share
price of Sanmina common stock was determined as the average closing market price
for the five trading days ending July 17, 2001. The fair value of the SCI common
stock options assumed was estimated using the Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rate of
4.48%, expected life of four years, expected dividend rate of 0% and volatility
of 105%.
8
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Estimated direct transaction costs of Sanmina-SCI consist primarily of fees for
investment bankers, attorneys, accountants, filing costs and financial printing.
Sanmina-SCI has recorded $4.1 billion related to goodwill, of which $1.2 billion
is related to domestic (U.S.A.) operations and $2.9 billion is related to
international operations. Of the $4.1 billion recorded for goodwill, the
majority is not deductible for tax purposes.
The purchase price was allocated to the tangible assets acquired and
liabilities assumed on the basis of their respective fair values on the
acquisition date. The preliminary allocations above are based on management's
estimate of the purchase accounting at the date of acquisition and estimates
will continue to be refined and the corresponding adjustments will be reflected
in goodwill. The purchase price allocation is subject to revision as management
obtains additional information. Revisions include, but are not limited to a
contingency based on the outcomes of negotiations regarding the "put" of excess
and/or obsolete inventory, on-hand at the date of the SCI acquisition, to
customers and the completion of the valuation analysis related to goodwill and
identifiable intangibles.
In connection with the merger, Sanmina changed its corporate name to
Sanmina-SCI Corporation and three former members of SCI's board of directors
joined the board of directors of Sanmina-SCI. As a result of the merger with
SCI, Sanmina-SCI will have a manufacturing presence in over 20 countries.
The consolidated financial statements include the operating results of SCI
from December 3, 2001, the accounting period close nearest to the acquisition
date of December 6, 2001. The net revenues for the three-day period between
December 3 and December 6 were $91 million.
The following unaudited pro forma financial information presents the
combined results of operations of Sanmina-SCI and SCI as if the acquisition had
occurred as of the beginning of fiscal 2002 and 2001, after giving effect to
certain adjustments and related income tax effects.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenue.................................................... $2,406,227 $4,068,166
Net (loss) Income.......................................... (191,235) 177,320
Basic earnings per share................................... $ (0.37) $ 0.34
Diluted earnings per share................................. $ (0.37) $ 0.32
</Table>
The pro forma financial information above includes restructuring charges of
$163.8 million and $29.8 million in merger costs incurred by SCI during the
first quarter of 2002.
In October 2001, Sanmina-SCI purchased certain assets of Electro Mechanical
Solutions ("E-M-Solutions"), a privately held manufacturer of electronic
enclosures. This transaction included the purchase of certain manufacturing
operations in the United States, as well as the stock of E-M-Solutions
subsidiaries incorporated in Mexico and Northern Ireland. The cash purchase
price for this transaction was $101.4 million, $10 million of which is to be
refunded in Sanmina-SCI's quarter ended March 30, 2002. Sanmina-SCI recorded
this transaction as a purchase business combination and recorded $72 million of
goodwill. The consolidated financial statements include the operating results of
E-M-Solutions from the date of acquisition. Pro forma results of operations have
not been presented because the effects of this acquisition were not material on
either an individual or aggregate basis.
On March 1, 2001, Sanmina-SCI acquired AB Segerstrom & Svensson
("Segerstrom"), a global supplier of integrated enclosure systems headquartered
in Sweden. The transaction was structured as a stock-for-stock exchange and was
accounted for as a pooling of interests. Under the terms of the agreement, each
9
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Segerstrom common share and convertible debenture was converted into
approximately 0.4519 shares of Sanmina-SCI common stock. Sanmina-SCI acquired
approximately 94% of the outstanding shares of Segerstrom pursuant to its offer
to acquire Segerstrom. Sanmina-SCI has commenced a compulsory acquisition
process for the remaining shares in accordance with Swedish law and business
practice. As of December 29, 2001, Sanmina-SCI has issued approximately 11.6
million shares of common stock in connection with the acquisition of Segerstrom.
This number represents 94% of the outstanding shares and convertible debentures
of Segerstrom, and the remaining 6% will be acquired under the compulsory
acquisition process which is expected to be completed in fiscal year 2002.
Segerstrom has manufacturing facilities in Sweden, Finland, Hungary, Scotland
and Brazil.
As a result of the pooling of interests accounting with Segerstrom,
Sanmina-SCI has restated its historical results of operations to include the
results of operations of Segerstrom. The financial information presented gives
effect to this restatement. A reconciliation of the financial statements for the
three months ended December 30, 2000, to previously reported information is as
follows (in thousands):
<Table>
<Caption>
THREE MONTHS
ENDED
DECEMBER 30,
2000
------------
REVENUE:
Sanmina-SCI............................................... $1,390,343
Segerstrom................................................ 96,010
Eliminations.............................................. (782)
----------
Combined............................................. $1,485,571
==========
NET INCOME:
Sanmina-SCI............................................ $ 110,692
Segerstrom............................................. 5,259
----------
Combined............................................. $ 115,951
==========
</Table>
NOTE 4 -- MERGER AND RESTRUCTURING COSTS
Below is a summary of the activity related to restructuring costs:
<Table>
<Caption>
BALANCE AT SCI PROVISION BALANCE AT
NATURE OF SEPTEMBER 29, RESTRUCTURING CHARGED TO CHARGES DECEMBER 29,
CASH AND NON-CASH PROVISIONS: CHARGES 2001 LIABILITY OPERATIONS UTILIZED 2001
- ----------------------------- ------------- ------------- ------------- ---------- -------- ------------
Employee severance and
related expenses........ Cash $ 7,731 $15,308 $12,733 $(15,820) $19,952
Restructuring and other
expenses................ Cash/Non-Cash 839 15,928 4,198 (4,012) 16,953
Shut down and consolidation
costs of duplicate
facilities.............. Cash 36,545 -- 19,137 (8,601) 47,081
Write-off of impaired or
redundant fixed assets... Non-Cash -- -- 26,623 (26,623) --
------- ------- ------- -------- -------
Total accrual............. $45,115 $31,236 $62,691 $(55,056) $83,986
======= ======= ======= ======== =======
</Table>
10
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
FISCAL 2002
In October 2001, due to the continued slowdown in the EMS industry and the
economy worldwide, Sanmina-SCI closed certain manufacturing facilities
throughout North America and Europe, and merged operations from these facilities
into existing manufacturing facilities within the same regions. These plant
closures were made to eliminate duplicate facilities, to better align capacity
to the reduced levels of customer demand and increase efficiencies. The recorded
costs associated with these closures was $63.5 million. Concurrent with the
plant closures, Sanmina-SCI reduced its workforce in the same regions by
approximately 1,008 people for an estimated cost of $11 million. As of December
29, 2001, 492 employees have been terminated for an approximate cost of $4.5
million, the balance of the terminations at the originally estimated cost will
be completed by October 2002. Sanmina-SCI also incurred restructuring costs
related to non-cancelable lease payments (less any assumed sublease income of
zero) for properties abandoned of $23.9 million of which approximately $6.0
million was utilized during the three month period ended December 29, 2001.
Management estimates of the time taken to sublet properties abandoned and
estimates of sublease income are subject to change based on actual events. Asset
related write-offs of $28.6 million consisted of excess equipment and leasehold
improvements to facilities that were abandoned and whose estimated fair market
value were zero. The closing of the plants discussed above are expected to be
completed by October 2002.
In December 2001, Sanmina-SCI acquired SCI in a purchase business
combination. As part of the acquisition of SCI, Sanmina-SCI recorded an assumed
liability based on managements plan in accordance with EITF 94-3, expected
involuntary employee termination costs of approximately $7.4 million for 158
employee positions. As of December 29, 2001, 100 employees have been terminated
for an approximate cost of $3.5 million. The balance of the remaining
terminations are expected to be completed by June 2002. Sanmina-SCI also
recorded an assumed liability of $2.3 million related to plant consolidations
and closures of which no amounts have been paid.
As part of the acquisition of SCI, Sanmina-SCI also recorded in accordance
with EITF 95-3, expected involuntary employee termination costs of approximately
$7.9 million for 1,127 employee positions. The terminations are expected to be
completed by December 2002. Sanmina-SCI also incurred restructuring costs
related to lease payments (less any applicable sublease income) for properties
abandoned and other costs of $13.6 million. None of the aforementioned costs
were utilized during the one month period ended December 29, 2001. The closing
and consolidation of the plants discussed above are expected to be completed by
December 2002.
Merger costs incurred by SCI of 29.8 million were recorded in fiscal 2002.
The assumed liability for SCI merger fees as of the merger date were
approximately $17.1 million and consisted of fees for investment banking,
accounting, legal and related fees and expenses for the SCI acquisition. Merger
costs of approximately $16.0 million were paid in the one month period ended
December 29, 2001. The remaining amounts will be paid in fiscal 2002.
FISCAL 2001
In March 2001, Sanmina-SCI acquired Segerstrom in a pooling of interests
business combination. Sanmina-SCI recorded in accordance with EITF 94-3,
expected involuntary employee termination costs of approximately $7.2 million
for 470 employee positions. As of December 29, 2001, all employees have been
terminated at the originally estimated costs. Sanmina-SCI also incurred
restructuring costs of $5.2 million related to consolidation of duplicate
facilities primarily in Europe. Costs utilized during the first fiscal quarter
of 2002 were $1.3 million for severance costs, $1.3 million for facility exit
and other costs and $2.6 million related to merger costs. The consolidation of
duplicate facilities and utilization of the remaining accrued amounts of
approximately $3.0 million are expected to be completed by March 2002.
11
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In July 2001, due to the slowdown in the EMS industry and the economy
worldwide, Sanmina-SCI closed certain manufacturing facilities throughout North
America and Europe, and merged operations from these facilities into existing
manufacturing facilities within the same regions. These plant closures were made
to eliminate duplicate facilities to better align capacity to reduced levels of
customer demand. Concurrent with the plant closures, Sanmina-SCI reduced its
workforce in the same regions by approximately 2,967 people for an estimated
cost of $18.2 million. During the quarter ended December 29, 2001, an additional
severance amount of approximately $1.7 million was recorded based upon revised
estimates obtained. During the quarter ended December 29, 2001, 744 employees
have been terminated for an approximate cost of $6.6 million. Sanmina-SCI also
incurred restructuring costs related to lease payments (less any applicable
sublease income) for properties abandoned. Asset related write-offs consisted of
excess equipment and leasehold improvements to facilities that were abandoned
and whose estimated fair market value were zero. Sanmina-SCI during the quarter
ended December 29, 2001, reversed $2.5 million related to excess equipment and
leasehold improvements based upon revised estimates obtained. Costs utilized
during Sanmina-SCI's first fiscal quarter of 2002 were approximately $5.3
million related to lease cancellation and facility exit costs. The closing of
the plants discussed above are expected to be completed by the fourth quarter of
fiscal 2002.
NOTE 5 -- COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components. SFAS No. 130
requires companies to report "comprehensive income" that includes unrealized
holding gains and losses and other items that have previously been excluded from
net income and reflected instead in stockholders' equity. Comprehensive income
(loss) for Sanmina-SCI consists of net income (loss) plus the effect of
unrealized holding gains or losses on investments classified as
available-for-sale and foreign currency translation adjustments, net of tax
effects was $(4.8) million and $1.7 million, for the three months ended December
29, 2001 and December 30, 2000, respectively. Comprehensive income (loss) for
the three months ended December 29, 2001 and December 30, 2000 was $(50.1)
million and $117.6 million, respectively. As of December 29, 2001, the
cumulative unrealized holding gain on investments and cumulative foreign
currency translation adjustments were $4.6 million and $(25.9) million,
respectively. As of December 30, 2000, the cumulative unrealized holding gain on
investments and cumulative foreign currency translation adjustments was $1.1
million and $(8.0) million, respectively.
NOTE 6 -- INVENTORIES
Inventories are stated at the lower of cost or market (first-in, first-out
method). Cost includes labor, material and manufacturing overhead. Provisions
when required are made to reduce excess inventories to their estimated net
realizable values. It is possible that estimates of net realizable values can
change in the near term. The components of inventories, net of provision, are as
follows:(in thousands):
<Table>
<Caption>
AS OF
----------------------------
DECEMBER 29, SEPTEMBER 29,
2001 2001
------------ -------------
Raw materials............................................... $1,068,695 $356,939
Work-in-process............................................. 283,376 57,886
Finished goods.............................................. 127,849 88,997
---------- --------
$1,479,920 $503,822
========== ========
</Table>
12
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7 -- EARNINGS PER SHARE ("EPS")
Basic EPS was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the first quarter of fiscal
2002 and 2001. Diluted EPS for the first quarter of fiscal 2002 and 2001
includes dilutive common stock equivalents using the treasury stock method, and
assumes that the convertible debt instruments were converted into common stock,
if dilutive. For the quarters ended December 29, 2001 and December 30, 2000,
30,218,177 and 10,761,116 potentially dilutive shares from the conversion of the
convertible subordinate debt and after-tax interest expense of $8.5 million and
$4.8 million, respectively, were not included in the computation of diluted
earnings per share because to do so would be anti-dilutive. Reconciliations of
the net income and weighted average number of shares used for the diluted
earnings per share computations for the first quarter of fiscal 2002 and 2001
are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net income (loss)........................................... $(45,223) $115,951
Interest expense, net of tax, related to convertible
subordinated debt (if dilutive)........................... -- 2,618
-------- --------
Income (loss) for calculating earnings per share............ $(45,223) $118,569
======== ========
Weighted average number of shares outstanding during the
period.................................................... 374,883 316,582
Weighted average number of shares for stock options
outstanding during the period............................. -- 17,055
Weighted average number of shares if convertible
subordinated debt were converted.......................... -- 15,980
-------- --------
Weighted average number of shares......................... 374,883 349,617
======== ========
Diluted earnings (loss) per share........................... $ (0.12) $ 0.34
======== ========
</Table>
13
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<Table>
<Caption>
AS OF
----------------------------
DECEMBER 29, SEPTEMBER 29,
2001 2001
------------ -------------
Convertible Subordinated Notes due 2004..................... $ 350,000 $ 350,000
9 1/2% Senior Subordinated Notes due 2008................... 29 12,121
Convertible Subordinated Notes due 2012..................... -- 2,135
Zero Coupon Convertible Subordinated Notes due 2020......... 790,706 783,821
Long-Term Notes due through 2006............................ 6,907 --
Convertible Subordinated Notes due 2007..................... 565,180 --
Revolving Credit Agreements................................. 600,000 6,150
Obligations under Capital Leases with Interest Rates ranging
from 7.0% to 7.75%........................................ 8,837 10,182
Bank Loans due through August 2010, at rates ranging from
4.63% to 6.10%............................................ 67,584 69,999
---------- ----------
Total............................................. 2,389,243 1,234,408
Less: Current Portion....................................... (260,093) (15,800)
---------- ----------
Total Long-Term Debt.............................. $2,129,150 $1,218,608
========== ==========
</Table>
9 1/2% Senior Subordinated Notes due 2008 -- On May 18, 1998, Hadco issued
$200.9 million aggregate principal amount of its 9 1/2% Senior Subordinated
Notes due 2008 (the "9 1/2% Notes"). Interest on the 9 1/2% Notes is payable
semi-annually on each June 15 and December 15 and commenced December 15, 1998.
The 9 1/2% Notes are redeemable at the option of Hadco, in whole or in part, at
any time on or after June 15, 2003, at 104.75% of their principal amount, plus
accrued interest, with such percentages declining ratably to 100% of their
principal amount, plus accrued interest. In addition, at any time prior to June
15, 2003, Hadco may redeem the 9 1/2% Notes, at its option, in whole or in part,
at a price equal to the principal amount thereof, together with accrued
interest, plus the applicable premium (as defined in the Indenture governing the
9 1/2% Notes). The 9 1/2% Notes are guaranteed, on a senior subordinated basis,
by each of certain Hadco subsidiaries. The net proceeds of $193.8 million
received by Hadco from the issuance of the 9 1/2% Notes, was used to repay
outstanding indebtedness incurred to, among other things, finance acquisitions.
In July 2000, Sanmina-SCI initiated an offer to purchase the 9 1/2% Notes.
The offer to redeem was required by the terms of the Indenture under which the
9 1/2% Notes were issued as a result of a change in control provision when
Sanmina-SCI acquired Hadco. The redemption was at 101% of the principal amount
of the 9 1/2% Notes. On August 24, 2000, Sanmina-SCI redeemed $187.9 million of
the outstanding 9 1/2% Notes. The redemption premium and deferred debt costs
related to the 9 1/2% Notes were expensed by Sanmina-SCI in the fourth quarter
of fiscal 2000. Costs of approximately $5.0 million, net of tax, are reflected
as an extraordinary charge relating to the early extinguishment of this debt.
During the first quarter of fiscal 2002, Sanmina-SCI repurchased the majority of
the remaining outstanding notes through the open market. As of December 29,
2001, there was $29,000 still outstanding.
Long-term notes due through 2006 -- SCI's subsidiaries have notes with
various institutions, maturing through 2006 amounting to $6.9 million at
December 29, 2001. Substantially all of the notes bear variable interest rates
ranging from 3.0% to 7.5%, as of December 29, 2001.
14
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Convertible Subordinated Notes due 2007 -- In March 2000, SCI issued $575
million of 3% convertible subordinated notes (the "3% Notes") maturing March 15,
2007. The 3% Notes are convertible into Sanmina-SCI common stock at $41.34 per
share. Sanmina-SCI may redeem the 3% Notes on or after May 20, 2003, although
there is no mandatory redemption prior to final maturity.
Revolving Credit Agreements -- In December 2001, Sanmina-SCI entered into a
$750 million revolving credit facility consisting of a $250 million 364-day
credit facility and a $500 million three-year credit facility with a syndicate
of banks. This facility also allows for the utilization of letters of credit
with certain requirements. As of December 29, 2001, no letters of credit were
outstanding under this agreement. Approximately $250 million from the proceeds
of loans under the 364-day credit facility and $350 million from the proceeds of
loans under the three-year facility together with approximately $385 million of
cash was used to repay certain indebtedness of SCI, a majority of which this
indebtedness became due and payable pursuant to change of control provisions in
connection with Sanmina-SCI's acquisition of SCI. These credit agreements bear
variable interest based on a defined bank rate, bank facility and commitment
fees, which totaled 3.54% for the 364-day credit facility and 3.54% for the
three-year credit facility at December 29, 2001. The 364-day revolving credit
line can be extended for one year under certain conditions. The agreements
contain certain covenants, which requires Sanmina-SCI to maintain certain ratios
for net worth, interest coverage, and leverage. In connections with these
facilities, Sanmina-SCI incurred costs of approximately $3.7 million that are
capitalized in the balance sheet and amortized over the life of the respective
agreements.
Asset Securitization -- In December 2001, Sanmina-SCI renewed an existing
SCI asset securitization agreement that gives it the option to periodically
transfer undivided percentage ownership interests, of up to $300 million, in a
revolving pool of the Sanmina-SCI's eligible trade receivables to a multi-seller
conduit administered by an independent financial institution. The agreement,
which expires in December 2002, is subject to renewal annually.
Under the terms of the agreement, certain wholly owned operating
subsidiaries of Sanmina-SCI transfer trade receivables to a wholly owned limited
purpose subsidiary and the conduit, or third party purchasers, purchase an
undivided ownership interest of those receivables from the limited purpose
subsidiary. All intercompany activity related to these transactions is
eliminated between the wholly owned subsidiaries of Sanmina-SCI. The limited
purpose subsidiary has been structured to be legally separate from the company
and bankruptcy remote however the limited purpose subsidiary is consolidated for
accounting purposes. The eligible receivables purchased by the conduit may
increase or decrease over time, depending on the characteristics of the limited
purpose subsidiary's receivables, including delinquency rates and debtor
concentrations.
As of December 29, 2001, receivables transferred to the limited purpose
subsidiary amounted to $400.1 million, of which $239.5 million has been sold
(the amount derecognized in the accompanying Condensed Consolidated Balance
Sheet). The net amount of $160.6 million held by the limited purpose subsidiary
are included in the accompanying Condensed Consolidated Balance Sheet. Loss on
sale (discount) of the trade receivables of $369,000 and related fees of
$121,000 for the period ended December 29, 2001 are included in interest expense
in the accompanying condensed Consolidated Statement of Operations. The conduit
has a secured interest in the total transferred receivables up to the amount of
outstanding purchases. As of December 29, 2001, Sanmina-SCI received net cash
proceeds of $29.5 million, which reflects the net accounts receivable sold from
the date of the acquisition of SCI.
Sanmina-SCI services the receivables transferred to the limited purpose
subsidiary and receives a servicing fee approximating 0.50% per annum, which
management has determined approximates market compensation for these services,
and is recorded in Other Income in the accompanying condensed consolidated
statement of operations. Sanmina-SCI pays commitment fees of up to .30% for
unused amounts under the line, program fees of up to .35% of outstanding amounts
and facility fees of up to .40%. Sanmina-SCI is
15
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
subject to certain financial covenants contained in the agreement, including
maintaining certain ratios for net worth, interest coverage, and leverage.
NOTE 9 -- BUSINESS SEGMENTS AND CONCENTRATION OF CREDIT RISK
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are defined as
components of an enterprise about 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.
Sanmina-SCI's chief operating decision maker is the Chief Operating
Officer. Based on the evaluation of financial information by the Chief Operating
Officer, management currently believes that Sanmina-SCI operates in two
geographic segments, domestic (U.S.A.) and international operations. Revenues
are attributable to the country in which the product is manufactured. During the
three months ended December 29, 2001 and December 30, 2000, there were no
material assets or revenues from any individual foreign country. Each segment
manufactures, tests and services a full spectrum of complex printed circuit
boards, custom backplane interconnect devices, electronic assembly services and
integrated enclosure systems. The chief operating decision maker evaluates
performance based upon each segment's operating income. Operating income is
defined as income before interest income or interest expense and taxes.
The following summarizes financial information by geographic segment (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
Net Sales:
Domestic.................................................. $ 555,627 $1,165,803
International............................................. 588,058 335,435
Intersegment.............................................. (13,224) (15,667)
---------- ----------
Total.................................................. $1,130,461 $1,485,571
========== ==========
Operating Income (loss):
Domestic.................................................. $ (33,843) $ 151,368
International............................................. (29,207) 28,353
---------- ----------
Total.................................................. $ (63,050) $ 179,721
========== ==========
</Table>
<Table>
<Caption>
AS OF
----------------------------
DECEMBER 29, SEPTEMBER 29,
2001 2001
------------ -------------
Long Lived Assets (excludes goodwill and intangibles):
Domestic.................................................. $ 753,390 $604,474
International............................................. 590,726 158,167
---------- --------
Total.................................................. $1,344,116 $762,641
========== ========
</Table>
Although Sanmina-SCI seeks to diversify its customer base, a small number
of customers are responsible for a significant portion of Sanmina-SCI's net
sales. During the three months ended December 29, 2001 and
16
SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
December 30, 2000, sales to Sanmina-SCI's ten largest customers accounted for
51.9% and 53.9% respectively, of Sanmina-SCI's net sales. In the three months
ended December 29, 2001 and 2000, only one of Sanmina-SCI's customers
individually represented over 10.0% of net sales during each period.
NOTE 10 -- SUBSEQUENT EVENT
In January 2002, Sanmina-SCI entered into an agreement with Alcatel to
purchase manufacturing facilities in Cherbourg, France, Gunzenhausen, Germany,
and Toledo, Spain. In connection with the purchase, Sanmina-SCI and Alcatel will
enter into a multi-year supply agreement covering the products manufactured at
these facilities. The transaction is expected to be completed through separate
closings for each facility, which are expected to take place in Sanmina-SCI's
third and fourth fiscal quarters. The transaction requires approval of various
regulatory bodies in the United States and Europe and appropriate consultation
with worker councils in each location.
In January 2002, Sanmina-SCI entered into an agreement with International
Business Machines Corporation ("IBM") under which IBM will outsource a
significant portion of its desktop personal computer manufacturing needs to
Sanmina-SCI and Sanmina-SCI will acquire IBM's NetVista desktop manufacturing
operations located in Research Triangle Park, North Carolina and Greenock,
Scotland. As part of the agreement, Sanmina-SCI will acquire IBM buildings and
certain equipment in North Carolina.
In January 2002, Sanmina-SCI acquired Davos Group LTD, a privately-held
designer and manufacturer of complex enclosure systems. The acquired operations
include a manufacturing facility in Shenzhen, China and a sales office in Hong
Kong. The cash purchase price for this acquisition was approximately $14.7
million.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements, which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by such forward looking statements as a result of certain factors,
including those set forth below. You should carefully consider the risks
described below in connection with any evaluation of our business and prospects.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations. A holder of
securities issued by Sanmina-SCI should be aware of these and other various
risks, including those just described and those described below. The risks set
in this quarterly report are not the only risks we face. If any of the risks set
forth above or if any of the following risks occur, our business, financial
condition and results of operations could be materially adversely affected. In
that case, the trading price of our common stock and our convertible
subordinated notes could decline.
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this report and in other reports and documents filed by Sanmina-SCI
with the Securities and Exchange Commission. These are statements that relate to
our expectations for future events and time periods. Generally, the words
"anticipate," "expect," "intend" and similar expressions identify
forward-looking statements. Forward-looking statements involve risks and
uncertainties, and future events and circumstances could differ significantly
from those anticipated in the forward-looking statements.
GENERAL
Sanmina-SCI Corporation ("Sanmina-SCI") was incorporated in Delaware in May
1989 to acquire its predecessor company, which had been in the printed circuit
board and backplane business since 1980. Sanmina-SCI is a leading independent
provider of customized integrated electronic manufacturing services ("EMS"),
including turnkey electronic assembly and manufacturing management services, to
original equipment manufacturers ("OEMs") in the electronics industry.
Sanmina-SCI's main customers include major industry leaders such as Alcatel,
Cisco Systems, Compaq, Dell Computer, Echostar, Ericsson, Hewlett-Packard,
Nokia, Nortel Networks, Phillips and Tellabs. Sanmina-SCI's electronic
manufacturing services consist primarily of the design and manufacture of
complex printed circuit board assemblies using surface mount ("SMT") and
pin-through hole ("PTH") interconnection technologies, the manufacture of custom
designed backplane assemblies, fabrication of complex multi-layered printed
circuit boards, metal stamping and plating, electronic enclosure systems,
subsystem assembly, testing, and assembly of completed systems and direct order
fulfillment. In addition to assembly, turnkey manufacturing management also
involves procurement and materials management, as well as consultation on
printed circuit board design and manufacturing. Sanmina-SCI also manufactures
custom cable and wire harness assemblies.
Sanmina-SCI manufactures its products in 101 decentralized plants,
consisting of 67 electronics assembly facilities, 9 printed circuit board
fabrication facilities, 4 cable assembly facilities, 20 enclosure assembly
facilities and 1 other manufacturing facility, located both domestically and
internationally. Sanmina-SCI has electronics assembly, printed circuit
fabrication, enclosure manufacturing, cable manufacturing and global technology
solution centers; domestically in Alabama, Arizona, California, Colorado,
Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York,
North Carolina, South Dakota, Texas, Utah, Virginia and Wisconsin; and
internationally in Australia, Brazil, Canada, China, England, Finland, France,
Hungary, Israel, Ireland, Japan, Malaysia, Mexico, The Netherlands, Scotland,
Singapore, Spain, Sweden, Taiwan, and Thailand. In addition to these facilities,
Sanmina-SCI has a 49.9% ownership interest in INBOARD, the remainder of which is
owned by Siemens AG. INBOARD is a manufacturer of complex printed circuit boards
and is located in Germany.
On December 6, 2001, SCI Systems, Inc. ("SCI") merged with a wholly owned
subsidiary of Sanmina Corporation and following the transaction SCI became a
wholly owned subsidiary of Sanmina-SCI. Under the terms of the merger, SCI
stockholders received 1.36 shares of Sanmina common stock for each share of SCI.
18
The transaction was accounted for as a purchase business combination. The
purchase price was preliminarily allocated as follows:
<Table>
Net tangible assets acquired................................ $ 263,213
Deferred compensation related to options.................... 4,562
Goodwill.................................................... 4,139,252
----------
Total purchase price........................................ $4,407,027
==========
</Table>
The total purchase price of approximately $4.4 billion consists of
approximately 200.6 million shares of Sanmina-SCI common stock with a fair value
of approximately $4.2 billion, 13.0 million vested and unvested stock options
with a fair value of $203.0 million, of which approximately $4.6 million was
recorded as deferred compensation related to the intrinsic value of the unvested
options, and current direct transaction costs of 17.0 million with anticipated
final transaction costs of $21.0 million. Sanmina-SCI has recorded $4.1 billion
related to goodwill, of which $1.2 billion is related to domestic (U.S.A.)
operations and $2.9 billion is related to international operations. Of the $4.1
billion recorded for goodwill, the majority is not deductible for tax purposes.
In connection with the merger, Sanmina changed its corporate name to
Sanmina-SCI Corporation and three former members of SCI's board of directors
joined the board of directors of Sanmina-SCI. As a result of the merger,
Sanmina-SCI has a manufacturing presence in over 20 countries.
In January 2002, Sanmina-SCI entered into an agreement with Alcatel to
purchase manufacturing facilities in Cherbourg, France, Gunzenhausen, Germany,
and Toledo, Spain. In connection with the purchase, Sanmina-SCI and Alcatel will
into a multi-year supply agreement covering the products manufactured at these
facilities. The transaction is expected to be completed through separate
closings for each facility, which are expected to take place in Sanmina-SCI's
third and fourth fiscal quarters. The transaction requires approval of various
regulatory bodies in the United States and Europe and appropriate consultation
with worker councils in each location.
In January 2002, Sanmina-SCI entered into an agreement with International
Business Machines Corporation ("IBM") under which IBM will outsource a
significant portion of its desktop personal computer manufacturing needs to
Sanmina-SCI and Sanmina-SCI will acquire IBM's NetVista desktop manufacturing
operations located in Research Triangle Park, North Carolina and Greenock,
Scotland. As part of the agreement, Sanmina-SCI will acquire IBM buildings and
certain equipment in North Carolina.
In January 2002, Sanmina-SCI acquired Davos Group Ltd, a privately-held
designer and manufacturer of complex enclosure systems. The acquired operations
include a manufacturing facility in Shenzhen, China and a sales office in Hong
Kong. The cash purchase price for this acquisition was approximately $14.7
million.
In October 2001, Sanmina-SCI purchased certain assets of Electro Mechanical
Solutions ("E-M-Solutions"), a privately-held manufacturer of electronic
enclosures. This transaction included the purchase of certain manufacturing
operations in the United States, as well as the stock of E-M-Solutions
subsidiaries incorporated in Mexico and Northern Ireland. The cash purchase
price for this transaction was $101.4 million, $10 million of which is to be
refunded in Sanmina-SCI's quarter ended March 30, 2002. Sanmina-SCI recorded
this transaction as a purchase business combination and recorded $72 million of
goodwill. The consolidated financial statements include the operating results of
E-M-Solutions from the date of acquisition. Pro forma results of operations have
not been presented because the effect of this acquisition was not material on
either an individual or aggregate basis.
Sanmina-SCI's results of operations have varied and may continue to
fluctuate significantly from period to period, including on a quarterly basis.
Sanmina-SCI's operating results are affected by a number of factors. These
factors include timing of orders from major customers, mix of product ordered by
and shipped to major customers, the volume of orders as related to Sanmina-SCI's
capacity, the ability of Sanmina-SCI to effectively manage inventory and fixed
assets, pricing and competitive pressures, component shortages which could cause
Sanmina-SCI to be unable to meet customer delivery schedules, and the ability of
Sanmina-SCI to time expenditures in anticipation of future sales. Sanmina-SCI's
results are also affected by the mix of
19
products between backplane assemblies and printed circuit boards as well as
general economic conditions in the electronics industry. Sanmina-SCI's results
can also be significantly influenced by development and introduction of new
products by Sanmina-SCI's customers. From time to time, Sanmina-SCI experiences
changes in the volume of sales to each of its principal customers, and operating
results may be affected on a period-to-period basis by these changes.
Sanmina-SCI's customers generally require short delivery cycles, and a
substantial portion of Sanmina-SCI's backlog is typically scheduled for delivery
within six months. Quarterly sales and operating results therefore depend in
large part on the volume and timing of bookings received during the quarter,
which are difficult to forecast, especially with the uncertainty and slowdown of
Sanmina-SCI's customers' end-markets
Sanmina-SCI's backlog also affects its ability to plan production and
inventory levels, which could lead to fluctuations in operating results. In
addition, a significant portion of Sanmina-SCI's operating expenses are
relatively fixed in nature and planned expenditures are based in part on
anticipated orders. Any inability to adjust spending quickly enough to
compensate for any revenue shortfall may magnify the adverse impact of such
revenue shortfall on Sanmina-SCI's results of operations. Results of operations
in any period should not be considered indicative of the results to be expected
for any future period. In addition, fluctuations in operating results may also
result in fluctuations in the price of Sanmina-SCI's convertible subordinated
notes and common stock.
Sanmina-SCI's customers include a diversified base of OEMs in the
communications (telecommunications and networking), high-speed computer systems,
industrial and medical instrumentation, multimedia entertainment and personal
computer sectors of the electronics industry. These industry sectors, and the
electronics industry as a whole, are subject to rapid technological change and
product obsolescence. Discontinuance or modification of products being
manufactured by Sanmina-SCI could adversely affect Sanmina-SCI's results of
operations. The electronics industry is also subject to economic cycles and has
in the past experienced, and is likely in the future to experience, recessionary
periods. In particular, many sectors of the electronics industry, including
particularly the telecommunications sector, are currently experiencing a
significant downturn in economic conditions. This downturn is leading to reduced
demand for the services provided by EMS companies, including Sanmina-SCI. These
changes in demand and in economic conditions have resulted and may continue to
result in customer rescheduling of orders and shipments, which could affect
Sanmina-SCI's results of operations. In addition, a protracted general recession
in the electronics industry could have a material adverse effect on
Sanmina-SCI's business, financial condition and results of operations.
Sanmina-SCI has no firm long-term volume commitments from its customers and over
the last few years has experienced reduced lead-time in customer orders. In
addition, customer orders can be canceled and volume levels can be changed or
delayed. The timely replacement of canceled, delayed or reduced orders with new
business cannot be assured. There can be no assurance that any of Sanmina-SCI's
current customers will continue to use Sanmina-SCI's manufacturing services. The
loss of one or more of Sanmina-SCI's principal customers, or reductions in sales
to any of such customers, could have a material adverse effect on Sanmina-SCI's
business, financial condition and results of operations.
Sanmina-SCI has pursued, and intends to continue to pursue, business
acquisition opportunities, particularly when these opportunities have the
potential to enable Sanmina-SCI to increase its net sales while maintaining
operating margin, to access new geographic markets, to implement Sanmina-SCI's
vertical integration strategy and/or to obtain access to new customers,
geographic regions, facilities and equipment on terms more favorable than those
generally available in the market. Acquisitions of companies and businesses and
expansion of operations involve certain risks, including:
- the potential inability to successfully integrate acquired operations and
businesses or to realize anticipated synergies, economies of scale or
other value,
- diversion of management's attention,
- difficulties in scaling up production at new sites and coordinating
management of operations at new sites and
- loss of key employees of acquired operations.
20
No assurance can be given that Sanmina-SCI will not incur problems with
integrating acquired operations, including the integration of SCI, which is
currently underway. In addition, there can be no assurance that Sanmina-SCI's
recent acquisitions, including the Sanmina-SCI merger, or any future acquisition
will result in a positive contribution to Sanmina-SCI's results of operations.
Furthermore, there can be no assurance that Sanmina-SCI will realize value from
any such acquisition that equals or exceeds the consideration paid. In addition,
there can be no assurance that Sanmina-SCI will realize anticipated strategic
and other benefits from expansion of existing operations to new sites. Any such
problems could have a material adverse effect on Sanmina-SCI's business,
financial condition and results of operations. In addition, future acquisitions
may result in dilutive issuances of equity securities, the incurrence of
additional debt, increases in operating expenses, large one-time write-offs, the
creation of other intangible assets that could result in amortization expense
and goodwill.
In addition, Sanmina-SCI expects to pursue opportunities to acquire
assembly operations being divested by electronics industry OEMs. Sanmina-SCI
expects that competition for these opportunities among electronics manufacturing
services firms will be intense because these transactions typically enable the
acquiror to enter into long-term supply arrangements with the divesting OEM.
Accordingly, Sanmina-SCI's future results of operations could be adversely
affected if Sanmina-SCI is not successful in attracting a significant portion of
the OEM divestiture transactions it pursues. In addition, due to the large scale
and long-term nature of supply arrangements typically entered into in OEM
divestiture transactions and because cost reductions are generally a major
factor as to why the OEM is divesting operations, pricing of manufacturing
services is likely to be less favorable to the manufacturer than in standard
contractual relationships. Accordingly, as Sanmina-SCI enters into new OEM
divestiture transactions, Sanmina-SCI may experience erosion in gross margins.
Furthermore, Sanmina-SCI has recently announced two OEM divestiture transactions
involving personal computer manufacturing operations. Although personal computer
manufacturing is likely to generate more stable revenues than other Sanmina-SCI
market segments, such as communications, and higher returns on assets due to
generally higher levels of inventory turns, margins for personal computer
manufacturing are generally lower than for other types of EMS activities.
21
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended December 29,
2001 and December 30, 2000, certain items as a percentage of net sales. The
consolidated financial statements include the operating results of SCI from
December 3, 2001, the accounting close nearest to the acquisition date of
December 6, 2001. The net revenues for this three-day period between December 3
and December 6 were $91 million. The table and the discussion below should be
read in connection with the condensed consolidated financial statements and the
notes thereto, which appear elsewhere in this report.
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
Net sales................................................... 100.0% 100.0%
Cost of sales............................................... 95.3 82.3
----- -----
Gross profit.............................................. 4.7 17.7
----- -----
Operating expenses:
Selling, general and administrative....................... 4.6 5.1
Amortization of goodwill and intangibles.................. 0.1 0.5
Restructuring costs....................................... 5.6 --
----- -----
Total operating expenses.................................... 10.3 5.6
----- -----
Operating income (loss)..................................... (5.6) 12.1
Other income (expense), net................................. (0.8) 0.4
----- -----
Income (loss) before provision for income taxes............. (6.4) 12.5
Provision (benefit) for income taxes........................ 2.4 (4.7)
----- -----
Net income (loss)........................................... (4.0)% 7.8%
===== =====
</Table>
Net sales for the first quarter of fiscal 2002 decreased by 23.9% to $ 1.1
billion from $1.5 billion in the corresponding quarter of the prior year. The
decrease in net sales for the first quarter of fiscal 2002 over the same period
in fiscal 2001, was primarily the result of the continuing downturn in economic
conditions worldwide and in the electronics industry in general and the
communications sector in particular. This downturn has had a significant impact
on our customers and their end markets during the last twelve months. These
economic conditions have led to a reduced demand for services provided by
Sanmina-SCI and other EMS companies. In addition, the three months ended
December 29, 2001 include the net sales of SCI, since the date of acquisition by
Sanmina-SCI, of $632 million.
The following summarizes financial information by geographic segment (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
Net Sales:
Domestic.................................................. $ 555,627 $1,165,803
International............................................. 588,058 335,435
Intersegment.............................................. (13,224) (15,667)
---------- ----------
Total.................................................. $1,130,461 $1,485,571
========== ==========
</Table>
Domestic sales for the first quarter of fiscal 2001 decreased by 52.3% to
$555.6 million from $1.2 billion and international sales increased by 75.3% to
$588.1 million from $335.4 million in the corresponding quarter of the prior
year. As a result of the merger with SCI, management's desire to increase the
global footprint of Sanmina-SCI and the general decline in the domestic
electronics market, a greater percentage of the Sanmina-SCI revenues are
generated from international facilities.
22
The following unaudited pro forma financial information presents the
combined results of operations of Sanmina-SCI and SCI as if the acquisition had
occurred as of the beginning of fiscal 2002 and 2001, after giving effect to
certain adjustments and related income tax effects.
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 29, DECEMBER 30,
2001 2000
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenue.................................................... $2,406,227 $4,068,166
Net (loss) income.......................................... (191,235) 177,320
Basic (loss) earnings per share............................ $ (0.37) $ 0.34
Diluted (loss) earnings per share.......................... $ (0.37) $ 0.32
</Table>
The pro forma financial information above includes infrequent charges of
$163.8 million related to restructuring and $29.8 million in merger costs
incurred by SCI during the first quarter of 2002.
As a result of the acquisition of Segerstrom, Sanmina-SCI has restated its
historical results of operations to include the results of operations of
Segerstrom. The financial information presented gives effect to this
restatement. A reconciliation of the financial statements for the three month
period ended December 30, 2000, to previously reported information is as follows
(in thousands):
<Table>
<Caption>
THREE MONTHS
ENDED
DECEMBER 30,
2000
------------
REVENUE:
Sanmina-SCI............................................... $1,390,343
Segerstrom................................................ 96,010
Eliminations.............................................. (782)
----------
Combined............................................... $1,485,571
==========
NET INCOME:
Sanmina-SCI............................................... $ 110,692
Segerstrom................................................ 5,259
----------
Combined............................................... $ 115,951
==========
</Table>
Gross margin decreased from 17.7% in the first quarter of fiscal 2001 to
4.7% in the first quarter of fiscal 2002. Sanmina-SCI expects gross margins to
continue to fluctuate based on overall production and shipment volumes as well
as changes in the mix of products ordered by and shipped to major customers. The
decrease in gross margins for the first quarter was primarily attributable to a
lower base of revenues, changes in product and customer mix and additions to
inventory reserves to account for changing customer demand, as compared to the
comparable quarter of the prior year. Due to increased competition, changes in
product and customer mix, and pricing terms negotiated as part of OEM
divestiture transactions, Sanmina-SCI may continue to experience fluctuations in
gross margins. Changes in customer demand and sales volumes could also result in
fluctuations in gross margins. Gross margins also reflect charges related to the
write down of excess and obsolete inventory and other manufacturing related
assets. These writedowns were related to:
- inventory written down to lower of cost or market (first-in, first-out
method),
- raw materials held specific to customers who were no longer in business,
- litigation and
- changes in customer demand for inventory that resulted in excess
quantities on hand.
23
Inventory is procured by Sanmina-SCI based on specific customer orders.
Correspondingly, customer modifications in orders for inventory previously
procured by Sanmina-SCI (e.g. cancellations as well as inventory that is highly
customized and therefore not available for use by other customers) resulted in
excess and obsolete inventory for the related customers that could not be
recovered through put back to vendors or the specific customer concerned. Due to
increased competition, product and customer mix, and pricing structures
negotiated in OEM divestiture transactions, including recent transactions and
possible future transactions, Sanmina-SCI may continue to experience decreases
in gross margins.
Selling, general and administrative expenses decreased from $76.2 million
in the first quarter of fiscal 2001 to $52.0 million in the first quarter of
fiscal 2002. As a percentage of sales, selling, general and administrative
expenses decreased from 5.1% in the first quarter of fiscal 2001 to 4.6% in the
first quarter of fiscal 2002. The decrease in selling, general and
administrative expense as a percentage of sales was primarily due to
Sanmina-SCI's ability to respond quickly to marketplace challenges and cost
effectively scale back our operations. For the first quarter of 2002, the
balance in the reserve for doubtful accounts increased to $93.7 million from
$48.6 million in the last quarter of fiscal 2001. Gross accounts receivable for
the first quarter of fiscal 2002 was $1.3 billion as compared to fiscal 2001,
which was $458.5 million or a 184% increase period over period as a result of
the acquisition of SCI. The increase in the reserve for doubtful accounts in
fiscal 2002 was related to the acquisition of SCI. Selling, general and
administrative expenses as a percentage of sales are anticipated to remain
relatively constant or decrease slightly, depending on sales volume and our
ability to scale back on operations to be in line with anticipated customer
demand. In addition, we expect to continue to achieve operating synergies as a
result of integration of acquired businesses and Sanmina-SCI's focus on
controlling operating expenses.
Amortization expense decreased from $7.0 million in the first quarter of
fiscal 2001 to $1.5 million in the first quarter of fiscal 2001. As part of the
adoption of SFAS No. 142, Sanmina-SCI will no longer amortize goodwill or
intangible assets with indefinite lives related to existing goodwill and
intangible assets or related to acquisitions subsequent to July 1, 2001. Prior
to July 1, 2001, amortization expense included the amortization of intangibles
and goodwill related to those acquisitions that were accounted for as purchase
transactions.
Operating expenses increased from $83.2 million in the first quarter of
fiscal 2001 to $116.2 million in the first quarter of 2002. As a percentage of
sales, operating expenses increased from 5.6% to 10.3% in the first quarter of
2001 compared to the first quarter of fiscal 2002. The increase in operating
expenses for the first quarter of fiscal 2002 as compared to the first quarter
in fiscal 2001 was mainly attributable to restructuring costs of $62.7 million
recorded in the first quarter of 2002 related to the SCI acquisition.
In October 2001, due to the continued slowdown in the EMS industry and the
economy worldwide, Sanmina-SCI closed certain manufacturing facilities
throughout North America and Europe, and merged operations from these facilities
into existing manufacturing facilities within the same regions. These plant
closures were made to eliminate duplicate facilities, to better align capacity
to the reduced levels of customer demand and increase efficiencies. The recorded
costs associated with these closures was $63.5 million. Concurrent with the
plant closures, Sanmina-SCI reduced its workforce in the same regions by
approximately 1,008 people for an estimated cost of $11 million. As of December
29, 2001, 492 employees have been terminated for an approximate cost of $4.5
million, the balance of the terminations at the originally estimated cost will
be completed by October 2002. Sanmina-SCI also incurred restructuring costs
related to non-cancelable lease payments (less any assumed sublease income of
zero) for properties abandoned of $23.9 million of which approximately $6.0
million was utilized during the three month period ended December 29, 2001.
Management estimates of the time taken to sublet properties abandoned and
estimates of sublease income are subject to change based on actual events. Asset
related write-offs of $28.6 million consisted of excess equipment and leasehold
improvements to facilities that were abandoned and whose estimated fair market
value were zero. The closing of the plants discussed above are expected to be
completed by October 2002.
In December 2001, Sanmina-SCI acquired SCI in a purchase business
combination. As part of the acquisition of SCI, Sanmina-SCI recorded an assumed
liability based on management's plan in accordance with EITF 94-3, expected
involuntary employee termination costs of approximately $7.4 million for
24
158 employee positions. As of December 29, 2001, 100 employees have been
terminated for an approximate cost of $3.5 million. The balance of the remaining
terminations are expected to be completed by June 2002. Sanmina-SCI also
recorded an assumed liability of $2.3 million related to plant consolidations
and closures of which no amounts have been paid.
As part of the acquisition of SCI, Sanmina-SCI also recorded in accordance
with EITF 95-3, expected involuntary employee termination costs of approximately
$7.9 million for 1,127 employee positions. The terminations are expected to be
completed by December 2002. Sanmina-SCI also incurred restructuring costs
related to lease payments (less any applicable sublease income) for properties
abandoned and other costs of $13.6 million. None of the aforementioned costs
were utilized during the one month period ended December 29, 2001. The closing
and consolidation of the plants discussed above are expected to be completed by
December 2002.
Merger costs incurred by SCI of $29.8 million were recorded in fiscal 2002.
The assumed liability for SCI merger fees as of the merger date were
approximately $17.1 million and consisted of fees for investment banking,
accounting, legal and related fees and expenses for the SCI acquisition. Merger
costs of approximately $16.0 million were paid through December 29, 2001. The
remaining amounts will be paid in fiscal 2002.
In March 2001, Sanmina-SCI acquired Segerstrom in a pooling of interests
business combination. Sanmina-SCI recorded in accordance with EITF 94-3,
expected involuntary employee termination costs of approximately $7.2 million
for 470 employee positions. As of December 29, 2001, all employees have been
terminated at the originally estimated costs. Sanmina-SCI also incurred
restructuring costs of $5.2 million related to consolidation of duplicate
facilities primarily in Europe. Costs utilized during the first fiscal quarter
of 2002 were $1.3 million for severance costs, $1.3 million for facility and
other costs, and $2.6 million related to merger costs. The consolidation of
duplicate facilities are expected to be completed by March 2002.
In July 2001, due to the slowdown in the EMS industry and the economy
worldwide, Sanmina-SCI closed certain manufacturing facilities throughout North
America and Europe, and merged operations from these facilities into existing
manufacturing facilities within the same regions. These plant closures were made
to eliminate duplicate facilities to better align capacity to reduced levels of
customer demand. Concurrent with the plant closures, Sanmina-SCI reduced its
workforce in the same regions by approximately 2,967 people for an estimated
cost of $18.2 million. During the quarter ended December 29, 2001, 744 employees
have been terminated for an approximate cost of $6.6 million. Sanmina-SCI also
incurred restructuring costs related to lease payments (less any applicable
sublease income) for properties abandoned. Asset related write-offs consisted of
excess equipment and leasehold improvements to facilities that were abandoned
and whose estimated fair market value were zero. The closing of the plants
discussed above are expected to be completed by the fourth quarter of fiscal
2002. Sanmina-SCI, during the quarter ended December 29, 2001, reversed $2.5
million of which $1.9 million related to excess equipment and $0.6 million
related to shutdown of duplicate facilities, based upon revised estimates
obtained. Costs utilized during Sanmina-SCI's first fiscal quarter of 2002 were
approximately $5.3 million related to lease cancellation and facility exit
costs.
25
Below is a summary of the activity related to restructuring costs:
<Table>
<Caption>
BALANCE AT SCI PROVISION BALANCE AT
NATURE OF SEPTEMBER 29, RESTRUCTURING CHARGED TO CHARGES DECEMBER 29,
CHARGES 2001 LIABILITY OPERATIONS UTILIZED 2001
------------- ------------- ------------- ---------- -------- ------------
CASH AND NON-CASH
PROVISIONS:
Employee severance and
related expenses..... Cash $ 7,731 $15,308 $12,733 $(15,820) $19,952
Restructuring and other
expenses............. Cash/Non-Cash 839 15,928 4,198 (4,012) 16,953
Shut down and
consolidation costs
of duplicate
facilities........... Cash 36,545 -- 19,137 (8,601) 47,081
Write-off of impaired
or redundant fixed
assets............... Non-Cash -- -- 26,623 (26,623) --
------- ------- ------- -------- -------
Total provision........ $47,697 $48,296 $62,691 $(73,648) $85,036
======= ======= ======= ======== =======
</Table>
Excluding merger and restructuring charges, for the first quarter of fiscal
2002, operating expenses as a percentage of sales decreased to 4.7% at 6.0%, as
compared to the same period for fiscal 2001. This decrease is due to
management's strong financial discipline and commitment to realign resources to
reflect market demand.
For the first quarter of fiscal 2001, Sanmina-SCI reported net other
expense of $9.1 million compared to net other income of $6.2 million for the
corresponding quarter of last year. The components of other income and expense,
comprising the overall net income or expense, are primarily interest income on
cash balances and short-term investments and interest expense on borrowings and
convertible subordinated notes. For the first quarter of fiscal 2002, the
increase in net other expense was largely due to interest expense incurred from
additional debt as a result of the SCI acquisition.
Sanmina-SCI's provision for income taxes for the first quarter of fiscal
2002 is based upon Sanmina-SCI's estimate of the effective tax rate for fiscal
2002 of 37.3 %. For the first quarter of fiscal 2001, the effective tax rate was
37.6%.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments as of December 29, 2001
and September 29, 2001 were $1.1 billion and $1.4 billion, respectively. For the
three months ending December 29, 2001, cash provided by operations was $77.0
million, which was primarily due to decreases in accounts receivable, inventory
and income tax accounts, offset by increases in current liabilities. Working
capital increased to $2.5 billion as of December 29, 2001 compared to $2.1
billion at September 29, 2001. This increase in working capital was primarily
due to increases in accounts receivable and inventory as a result of the SCI
acquisition.
Net cash provided by investing activities of $303.5 million for the first
three months of fiscal 2002 primarily related to $258.1 million in net proceeds
from maturities of short-term investments, and cash acquired from businesses
acquisitions of $63.6 million offset by purchases of property, plant, and
equipment of $19.4 million.
Net cash used for financing activities of $442.2 million for the first
three months of fiscal year 2002 was related to payments of long-term debt of
$1.0 billion and repurchases of common stock of $32.0 million offset by proceeds
received from revolving credit facilities of $600 million and proceeds from the
sale of common stock from the exercise of stock options and the employee stock
purchase plan of $6.5 million. In December 2001, Sanmina-SCI entered into a $750
million in revolving credit facilities consisting of a $250 million 364-day
credit facility and a $500 million three-year credit facility with a syndicate
of banks. Approximately $600 million from the proceeds of loans under these
facilities together with approximately $385 million of cash
26
was used to repay certain indebtedness of SCI, a majority of which this
indebtedness became due and payable pursuant to change of control provisions in
connection with Sanmina's acquisition of SCI.
In December 2001, Sanmina-SCI renewed an existing SCI asset securitization
agreement that gives it the option to periodically transfer undivided percentage
ownership interests, of up to $300 million, in a revolving pool of the
Sanmina-SCI's eligible trade receivables to a multi-seller conduit administered
by an independent financial institution. As of December 29, 2001, Sanmina-SCI
received net cash proceeds of $29.5 million, which reflects the net accounts
receivable sold from the date of the acquisition of SCI. The accounts receivable
balances were removed from the Condensed Consolidated Balance Sheet and the
proceeds received from the sale are reflected as cash provided by operating
activities in the Condensed Consolidated Statement of Cash Flows.
In fiscal 1999, Sanmina-SCI entered into an operating lease agreement for
new facilities in San Jose, California, which houses its corporate headquarters
and certain assembly operations. In connection with these transactions,
Sanmina-SCI pledged $52.9 million of its cash and investments as collateral for
certain obligations of the lease.
Sanmina-SCI's future needs for financial resources include increases in
working capital to support anticipated sales growth and investment in
manufacturing facilities and equipment. Sanmina-SCI has evaluated and will
continue to evaluate possible business acquisitions. In this regard, Sanmina-SCI
anticipates incurring additional expenditures during fiscal 2002 in connection
with the integrations of its recently acquired businesses and expenditures
associated with the anticipated growth.
Sanmina-SCI believes that its existing cash resources, together with cash
generated from operations, will be sufficient to meet its working capital
requirements through at least the next 12 months. Sanmina-SCI may seek to raise
additional capital through the issuance of either debt or equity securities.
Debt financing may require Sanmina-SCI to pledge assets as collateral and comply
with financial ratios and covenants. Equity financing may result in dilution to
stockholders.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" to be effective for all
fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS
143 establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. Sanmina-SCI is currently assessing the
impact of SFAS 143 on its financial position, results of operations and cash
flows as well as timing of its adoption.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS 144 supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions for
the Disposal of a Segment of a Business." The provisions of SFAS 144 are
effective in fiscal years beginning after December 15, 2001, with early adoption
permitted and, in general, are to be applied prospectively. Sanmina-SCI is
currently assessing the impact of SFAS 144 on its financial position, results of
operations and cash flows as well as timing of its adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been a material change in our exposure to interest rate and
foreign currency risks since the date of our report on Form 10-K for the fiscal
year ended September 29, 2001.
INTEREST RATE RISK
Sanmina-SCI's exposure to market risk for changes in interest rates relate
primarily to Sanmina-SCI's investment portfolio. Currently, Sanmina-SCI does not
use derivative financial instruments in its investment
27
portfolio. Sanmina-SCI invests in high credit quality issuers and, by policy,
limits the amount of principal exposure to any one issuer. As stated in
Sanmina-SCI's policy, Sanmina-SCI seeks to ensure the safety and preservation of
its invested principal funds by limiting default and market risk.
Sanmina-SCI seeks to mitigate default risk by investing in high-credit
quality securities and by positioning its investment portfolio to respond to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. Sanmina-SCI seeks 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.
The table below presents carrying amounts and related average interest
rates by year of maturity for Sanmina-SCI's investment portfolio as of December
29, 2001 (in thousands):
<Table>
<Caption>
YEAR ENDED
------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- ------ ---- ---- ---------- --------
(IN THOUSANDS)
Cash equivalents, short-term,
and long-term investments... $412,416 $220,483 52,850 -- -- -- $685,749
Average interest rate.... 4.51% 5.39% 2.41% -- -- -- 4.63%
</Table>
FOREIGN CURRENCY EXCHANGE RISK
Sanmina-SCI transacts business in foreign countries. Sanmina-SCI's primary
foreign currency cash flows are in certain European countries, Canada, Brazil
and Asia. Sanmina-SCI enters into short-term foreign currency forward contracts
to hedge only those currency exposures associated with certain assets and
liabilities denominated in foreign currencies. At December 29, 2001, Sanmina-SCI
had forward contracts to exchange various foreign currencies for U.S. dollars in
the gross amount of $35.9 million, which are recorded as short-term investments
on the balance sheet. Market value gains and losses on forward exchange
contracts are recognized in the Consolidated Statement of Operations as offsets
to the exchange gains and losses on the hedged transactions. Impact of these
foreign exchange contracts were immaterial to the results of operations for the
three months ended December 29, 2001 and December 30, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sanmina-SCI and certain of its subsidiaries, namely Hadco and SCI, are
involved in various administrative proceedings related to environmental matters.
Although Sanmina-SCI could incur significant costs relating to these matters,
Sanmina-SCI believes, on the limited information currently available, that the
cost of any remediation that may be required at these facilities would not
materially harm its business, financial condition or results of operations.
Sanmina-SCI is a party to certain other legal proceedings that have arisen
in the ordinary course of its business. The amounts in controversy in these
matters are not material to Sanmina-SCI, and Sanmina-SCI believes that the
resolution of these proceedings will not have a material adverse effect on
Sanmina-SCI's business, financial condition and results of operations.
On June 13, 2001, Sanmina-SCI filed a complaint against Metricom, Inc. in
the California state court. The complaint arose out of a July 2, 1999 Agreement
for Electronic Manufacturing Services and seeks compensation for cancellation
charges arising under this agreement. Sanmina-SCI's damages consist of the cost
of certain materials and work-in-process. Metricom has filed for Chapter 11
bankruptcy, and as a result, Sanmina-SCI's claim has been stayed. Accordingly,
Sanmina-SCI has filed a claim for its damages in the bankruptcy proceedings.
Sanmina-SCI currently estimates it has no additional exposure on this matter
(after exhausting allocated reserves).
28
ITEM 2. CHANGES IN SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 6, 2001, Sanmina held a special meeting of stockholders. The
matters voted upon at the meeting and the vote with respect to each such matter,
are set forth below:
1. To approve the issuance of shares of Sanmina common stock pursuant to
the agreement and plan of merger related to the merger with SCI Systems,
Inc.
For: 233,154,643 Against: 639,468 Withheld: 1,777,094
2. To change Sanmina's corporate name to "Sanmina-SCI Corporation"
effective upon completion of the merger with SCI Systems, Inc.
For: 233,643,060 Against: 732,728 Withheld: 1,195,417
3. To amend Sanmina's 1993 Employee Stock Purchase Plan.
For: 229,393,862 Against: 4,925,134 Withheld: 1,152,209
On January 28, 2002 Sanmina-SCI held its 2002 Annual Meeting of
Stockholders. The matters voted upon at the meeting, for shareholder of record
as of December 10, 2001 and the vote with respect to each such matter are set
forth below:
1. To elect directors of Sanmina-SCI
<Table>
<Caption>
FOR WITHHELD
----------- ----------
John C. Bolger.............................................. 394,753,083 1,997,073
Neil R. Bonke............................................... 394,746,421 2,003,735
Randy W. Furr............................................... 356,655,758 40,094,398
Mario M. Rosati............................................. 392,929,221 3,823,935
A. Eugene Sapp, Jr.......................................... 356,666,796 40,083,360
Joseph M. Schell............................................ 394,638,174 2,111,982
Wayne Shortridge............................................ 394,699,027 2,051,129
Jure Sola................................................... 354,579,965 42,170,191
Bernard V. Vonderschmitt.................................... 394,704,611 2,045,545
Jackie M. Ward.............................................. 394,686,737 2,063,419
</Table>
2. To approve the appointment of Arthur Andersen LLP as the independent
public accountants of Sanmina-SCI for the fiscal year ending September
28, 2002.
For: 393,116,437 Against: 2,646,611 Abstain: 987,108
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On December 12, 2001, Sanmina-SCI filed a report on Form 8-K relating to
the completion of the merger between Sanmina Corporation and SCI Systems, Inc.
after receiving approval from their respective stockholders of matters relating
to the merger, including the change of Sanmina's corporate name to Sanmina-SCI
Corporation.
29
SANMINA-SCI CORPORATION
SIGNATURE
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/ RANDY W. FURR
------------------------------------
Randy W. Furr
President and Chief Operating
Officer
By: /s/ RICK R. ACKEL
------------------------------------
Rick R. Ackel
Executive Vice President and
Chief Financial Officer
Date: February 11, 2002
30