1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sanmina Corporation ("Sanmina" or "the Company") is a leading independent
provider of customized integrated electronic manufacturing services ("EMS"),
including turnkey electronic assembly and manufacturing management services, to
original equipment manufacturers ("OEM") in the electronics industry. Sanmina's
electronics manufacturing services consist primarily of the 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, and testing and assembly of completed systems. 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, through its Sanmina Cable Systems ("SCS") subsidiary
(formerly known as Golden Eagle Systems), also manufactures custom cable and
wire harness assemblies for electronic industry OEMs. In addition, as part of
the Elexsys International ("Elexsys") acquisition completed in November 1997,
the Company acquired and currently operates a metal stamping and plating
business.
Sanmina's assembly plants are located in Northern California, Richardson, Texas,
Manchester, New Hampshire, Durham, North Carolina, Guntersville, Alabama, and
Dublin, Ireland. Sanmina's printed circuit board fabrication facilities are
located in Northern California, Southern California, Nashua, New Hampshire, and
Peterborough, England. SCS's manufacturing facility is located in Carrollton,
Texas. As a result of the Pragmatech Inc. ("Pragmatech") acquisition, completed
in February 1998, Sanmina added new assembly plants in Northern California. In
addition, as a result of Sanmina's recent acquisition of Altron Incorporated
("Altron"), Sanmina has added new fabrication and assembly plants in the Boston
Massachusetts area, Northern California, and Richardson, Texas.
Sanmina has pursued, and intends to continue to pursue, business acquisition
opportunities, particularly when these opportunities have the potential to
enable Sanmina to increase its net sales while maintaining operating margin, to
access new geographic markets, to implement Sanmina's vertical integration
strategy and/or to obtain facilities and equipment on terms more favorable than
those generally available in the market. In this regard, on September 2, 1998,
Sanmina entered into an Agreement and Plan of Merger with Altron providing for
the acquisition of Altron by Sanmina in a stock-for-stock merger transaction
under which each share of Altron Common Stock would be converted into 0.4545
shares of Sanmina Common Stock. The acquisition was completed November 30, 1998
and will be accounted for as a pooling-of-interest.
This report contains forward-looking statements within the meaning of Section
72A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual events and/or future results of operations may differ materially
from those contemplated by such forward-looking statements, as a result of the
factors described herein, and in the documents incorporated herein by reference,
including, in particular, those factors described under "Factors Affecting
Operating Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of
operations data expressed as a percentage of net sales.
Years Ended September 30,
----------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 78.0 80.0 77.9
Gross profit 22.0 20.0 22.1
Operating expenses:
Selling, general and
administrative expenses 6.1 7.7 7.6
Amortization of goodwill 0.4 0.3 0.4
Plant closure costs 0.0 1.6 0.0
Merger costs 0.5 0.0 0.0
Total operating expenses 7.0 9.6 8.0
Operating income 15.0 10.4 14.1
Other expense, net 0.2 0.4 0.3
Provision for income taxes 5.4 4.6 4.4
Net income 9.4% 5.4% 9.4%
================================================================================
Net Sales Net sales in fiscal 1998 increased 26.8% to $722.6 million from $569.8
million in fiscal 1997, which was an increase of 45.4% from fiscal 1996 sales of
$392.0 million. The increase in net sales for fiscal 1998 was due primarily to
increased shipments of EMS assemblies to both existing and new customers. The
increases in net sales for fiscal 1997 was the result of increased volumes of
business from established customers, the addition of several new major customers
during the year and the addition of customers resulting from acquisitions
completed during the year. EMS assembly revenues represented 84.3% of net sales
in 1998 as compared to 78.1% in 1997 and 69.5% in 1996. During these periods,
Sanmina's printed circuit board fabrication operations focused increasingly on
manufacturing printed circuit boards used in EMS assemblies manufactured by the
Company, rather than manufacturing "bare" boards for sale to third parties.
Growth in EMS assembly revenues during these periods was influenced by the
electronics industry trend towards outsourcing, expansion of the Company's
operations, both through acquisitions and Company-originated expansions, and a
generally positive economic environment in the telecommunications, networking
(data communications) and industrial and medical instrumentation segments of the
electronics industry. These segments continued to experience overall growth
during these periods.
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NET SALES
(in millions in dollars)
1996 1997 1998
---- ---- ----
392.0 569.8 722.6
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(as a percentage of net sales)
1996 1997 1998
---- ---- ----
7.6% 7.7% 6.1%
GROSS MARGINS
(as a percentage of net sales)
1996 1997 1998
---- ---- ----
22.1% 20.0% 22.0%
Gross Margin Gross margin was 22.0%, 20.0%, and 22.1% in fiscal 1998, 1997, and
1996 respectively. The Company expects gross margins to continue to fluctuate
based on product mix and customer mix. The increase in gross margin for fiscal
1998 was due to the Company's ability to realize synergies associated with the
Elexsys acquisition. Gross margin decreased to 20.0% in fiscal 1997 from 22.1%
for fiscal 1996. The decline in gross margin was primarily the result of the
Elexsys acquisition which had a lower gross margin on a stand-alone basis. As
part of the Elexsys acquisition, Sanmina assumed certain backlog obligations
which, combined with the increased overhead associated with the acquisition,
negatively affected gross margins during fiscal 1997. Synergies achieved through
integration of acquired operations, including the former operations of Elexsys
have contributed to the increase in gross margins experienced in 1998. As the
integration of these operations is complete, the Company does not anticipate
achieving incremental gross margin improvements in future periods as a result of
synergies achieved in connection with these acquisitions. Due to increased
competition, product and customer mix, the Company may experience decreases in
gross margins. Due to the nature of the Altron operations, which are most
heavily concentrated in the Boston, Massachusetts area, and the gross margin
improvements achieved during fiscal 1998, the Company does not believe that
synergies which may be realized from the Altron acquisition will enable it to
achieve gross margin improvements during fiscal 1999.
Selling, General and Administrative Expenses Selling, general and administrative
expenses for fiscal 1998, 1997 and 1996 were $43.8 million, $ 44.0 million, and
$ 29.7 million respectively. The absolute dollar and percentage decreases in
selling, general and administrative expenses for fiscal 1998 were due to the
Company's ability to realize synergies associated with the Elexsys acquisition.
This also reflects the Company's strategy of seeking sales growth while
maintaining or reducing operating expenses as a percentage of net sales. The
absolute dollar increases in selling, general and administrative expenses from
fiscal 1996 to 1997 were primarily the result of increased expenditures to
support higher sales volume.
Amortization of Goodwill The Company incurred $2.9 million, $2.0 million and
$1.7 million in amortization expense for fiscal years 1998, 1997 and 1996
respectively. These amortization expenses reflect the amortization of goodwill
related to acquisitions, which were accounted for as purchase transactions,
including the January 1996 acquisition of SCS and the February 1998 acquisition
of Pragmatech.
Merger Costs In 1998, the Company recorded a charge of $3.9 million related to
the acquisition of Elexsys. In addition, in connection with the acquisition of
Altron, the Company anticipates recording a charge during the first quarter of
fiscal 1999.
Net Interest Expense In fiscal 1998, net interest expense was $0.7 million as
compared to net interest expense of $2.5 million and $1.3 million in fiscal 1997
and 1996, respectively. For fiscal 1998, the decrease in net interest expense
was the result of a decrease in outstanding debt. In the first quarter of fiscal
1998, the Company paid approximately $12.8 million of outstanding Elexsys debt.
In addition, in August 1998, $86.3 million of outstanding convertible
subordinated notes, issued by the Company in August 1995, were converted into
Common Stock as a result of a redemption call for such notes issued by the
Company. For fiscal 1997, the increase in net interest expense was a result of
interest expense on the $86.3 million of convertible subordinated notes, and a
decrease in short-term investments in fiscal 1997 compared to fiscal 1996. These
reduced short-term investment balances were due to a decline in the Company's
cash balances as a result of the use of cash to fund certain acquisitions and
capital improvement programs during fiscal 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Provision for Income Taxes For fiscal 1998, 1997 and 1996, the Company's
effective tax rate was 36.5%, 46.3% and 32.3%, respectively. The effective rate
in 1997 increased from fiscal 1996 because the fiscal 1997 losses of Elexsys
were not tax benefited. For fiscal 1998, the rate decreased as utilization of
net operating loss carryforwards of Elexsys were recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its growth primarily through cash generated from
operations and financing transactions. In August 1995, the Company completed an
$86.3 million private placement of convertible debt. In August 1998, the notes
were called for redemption. The notes were converted to Sanmina's Common Stock
at a price of approximately $14.09, or approximately 70.94 shares of Sanmina's
Common Stock per $1,000 principal amount of Notes. Cash was paid in lieu of
fractional shares.
The Company generated cash from operating activities of $83.2 million, $55.1
million and $33.8 million in fiscal years 1998, 1997 and 1996, respectively.
These increases in cash generated from operations each year were primarily due
to the Company's increase in profitability.
Cash used for investing activities, including net purchases of short-term
investments, during fiscal 1998, 1997 and 1996 was $28.5 million, $56.0 million
and $114.8 million, respectively. Investing activities during 1998 included
$29.0 million in property, plant and equipment. Additionally, on February 23,
1998, the Company paid approximately $5.7 million in cash to acquire Pragmatech.
During fiscal 1997, investing activities included the November 1996 acquisition
of the assets of the former Comptronix Corporation for which the Company paid
cash of approximately $17.6 million, as well as investments in property, plant
and equipment of $41.9 million. Investing activities during 1996 included
investments in property, plant and equipment at the Company's EMS operations in
New Hampshire, Texas and North Carolina and equipment upgrades at the Company's
printed circuit board fabrication facilities.
Cash used for financing activities was $21.7 million in fiscal 1998. In fiscal
1998, the Company paid approximately $7.5 million in outstanding debt. The
payments for other long-term liabilities of $18.3 million, which included the
$12.8 million of outstanding Elexsys debt, were offset by the proceeds from
exercise of stock options and stock purchase rights of $9.7 million. Cash
provided by financing activities was $12.6 million and $3.5 million in fiscal
1997 and 1996, respectively. Financing activities in fiscal 1997 and 1996
consisted primarily of receipt of proceeds from exercise of stock options and
stock purchase rights.
The Company's future needs for financial resources include increases in working
capital to support anticipated sales growth and investment in manufacturing
facilities and equipment. Working capital was $227.5 million at September 30,
1998 and $182.0 million at September 30, 1997. The Company has evaluated and
will continue to evaluate possible business acquisitions. In this regard, the
Company anticipates incurring facilities related expenditures during fiscal
1999 in connection with the relocation of its San Jose, California area
assembly facilities and its corporate headquarters to a new campus facility.
The Company believes that its capital resources, together with cash generated
from operations, will be sufficient to meet its working capital and capital
expenditure requirements through at least fiscal 1999. The Company may seek to
raise additional capital through the issuance of either debt or equity
securities. Debt financing may require the Company to pledge assets as
collateral and comply with financial ratios and covenants. Equity financing may
result in dilution to stockholders.
YEAR 2000
Sanmina is subject to risks related to Year 2000 problems. Many currently
installed computer systems and software products are coded to accept only two
digit entries in the date code field. As the Year 2000 approaches, these code
fields will need to accept four digit entries to distinguish years beginning
with "19" from those beginning with "20." As a result, in less than two years,
computer systems and/or software products used by many companies may need to be
upgraded to comply with such Year 2000 requirements. Sanmina is currently
expending resources to review its products and services, as well as its internal
use software in order to identify and modify those products, services and
systems that are not Year 2000 compliant. Additionally, Sanmina is in the
process of evaluating the need for contingency plans with respect to Year 2000
requirements. The necessity of any contingency plan must be evaluated on a
case-by-case basis and will vary considerably in nature depending on the Year
2000 issue it may need to address. There can be no assurance however, that
Sanmina will be able to solve all potential Year 2000 issues. Sanmina's reliance
on its key suppliers, and therefore on the proper functioning of their
information systems and software, is increasing, and there can be no assurance
that another company's failure to address Year 2000 issues could not have an
adverse effect on Sanmina. Sanmina has initiated formal communications with each
of its significant suppliers and customers to determine the extent to which
Sanmina is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Sanmina is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program to
test for Year 2000 compliance. However, the response of those third parties is
beyond Sanmina's control. To the extent that Sanmina does not receive adequate
responses by December 31, 1998, it is prepared to develop contingency plans,
with completion of these plans scheduled for no later than March 31, 1999. At
this time, Sanmina cannot estimate the additional cost, if any, that might
develop from such contingency plans. Breakdowns in Sanmina's computer systems
and applications, such as its manufacturing application software, its bar-coding
systems, and the computer chips embedded in its plant equipment, as well as
other
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Year 2000-related problems such as disruptions in the delivery of materials,
power, heat or water to Sanmina's facilities, could prevent Sanmina from being
able to manufacture and ship its products. Sanmina plans to replace or upgrade
or otherwise work around any of its date driven systems that are not Year 2000
compliant. Sanmina's Year 2000 Project Team will have compliance solutions or
work arounds planned by January 31, 1999, and intends to complete compliance
testing by June 30, 1999. If Sanmina fails to correct a material Year 2000
problem, its normal business activities and operations could be interrupted.
Such interruptions could materially and adversely affect Sanmina's results of
operations, liquidity and financial condition. To date, Year 2000 costs are not
considered by Sanmina to be material to its financial condition. Sanmina
currently estimates that, in order to complete Year 2000 compliance, Sanmina
will be required to incur expenditures of approximately $1.1 million.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS 128 requires the replacement of previously reported primary and
fully diluted earnings per share (EPS) as required by Accounting Principles
Board Opinion No. 15 (APB 15) with basic earnings per share and diluted earnings
per share.
Basic EPS was computed by dividing net income by the weighted average number of
shares of common stock outstanding for all periods presented. Diluted EPS
includes dilutive common stock equivalents, using the treasury stock method, and
assumes that the convertible debt instruments were converted into common stock,
if dilutive. As a result of the adoption of SFAS No. 128, the Company's reported
earnings per share were restated for all periods presented.
In June 1998, the Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued by
the Financial Accounting Standards Board. SFAS 133 requires certain accounting
and reporting standards for derivative instruments and hedging activities.
Management does not believe the adoption of SFAS No. 133 will have a material
impact on the Company's financial statement disclosures.
QUARTERLY RESULTS
The following table contains selected unaudited quarterly financial data for the
eight fiscal quarters in the period ended September 30, 1998. In management's
opinion, the unaudited data has been prepared on the same basis as the audited
information and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the data for the periods
presented. The Company's results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of operations in any
period should not be considered indicative of the results to be expected from
any future period. In June 1998, the Company effected a two-for-one stock split
in the form of a stock dividend. Accordingly, all share and per share data has
been adjusted to retroactively reflect the stock split. Similarly, the merger
with Elexsys was accounted for as a pooling of interests, and therefore, all
prior periods presented were restated to combine the results of the two
companies.
(in thousands, except
percentages and per share amounts)
Years Ended September 30,
----------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ 159,107 $ 172,146 $ 197,139 $ 194,189 $ 125,174 $ 133,823 $ 150,198 $ 160,592
Gross profit 34,677 37,626 43,431 42,934 27,851 28,036 32,894 25,430
Gross margin 21.8% 21.9% 22.0% 22.1% 22.2% 21.0% 21.9% 15.8%
Operating income 20,170 26,433 30,820 30,604 18,429 17,778 21,149 1,963
Net income/(loss) 12,508 16,873 19,381 19,389 11,813 10,681 13,419 (5,388)
Net income/(loss)
per share (diluted) $ 0.27 $ 0.35 $ 0.40 $ 0.41 $ 0.26 $ 0.23 $ 0.29 $ (0.13)
Shares used in computing
per share amounts 50,227 50,127 50,727 50,616 48,670 49,188 49,348 40,920
Common stock prices:
High $ 44.00 $ 40.19 $ 46.88 $ 47.56 $ 27.50 $ 32.00 $ 33.00 $ 45.06
Low $ 28.72 $ 26.69 $ 33.88 $ 23.50 $ 19.06 $ 20.06 $ 21.88 $ 30.55
===============================================================================================================================
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5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FACTORS AFFECTING OPERATING RESULTS
In addition to the information set forth in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and in the Company's
report on Form 10-K for the fiscal year ended September 30, 1998, the following
factors should be carefully considered by prospective investors in the Company's
securities.
Sanmina is heavily dependent on the electronics industry. Sanmina's business is
heavily dependent on the health of the electronics industry. Sanmina's customers
are manufacturers in the telecommunications, networking (data communications),
industrial and medical instrumentation and high-end computer technology segments
of the electronics industry. These industry segments, and the electronics
industry as a whole, are subject to rapid technological change and product
obsolescence. Sanmina's customers can discontinue or modify products containing
components manufactured by Sanmina. Such discontinuance or modification could
adversely affect Sanmina'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. A general recession in the
electronics industry could have a material adverse effect on Sanmina's business,
financial condition and results of operations. Sanmina typically does not obtain
long-term volume purchase contracts from its customers and has recently
experienced reduced lead times in customer orders. Customer orders may be
canceled and volume levels may be changed or delayed. In particular, Sanmina
experienced certain cancellation and rescheduling of shipment dates of customer
orders during the fourth fiscal quarter of 1998. The timely replacement of
canceled, delayed or reduced contracts with new business cannot be assured.
Sanmina's results of operations can be affected by a variety of factors.
Sanmina's results of operations have varied and may continue to fluctuate
significantly from period to period, including on a quarterly basis. Sanmina'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's capacity, the
ability of Sanmina to effectively manage inventory and fixed assets, and the
ability of Sanmina to time expenditures in anticipation of future sales.
Sanmina's results are also affected by the mix of products between backplane
assemblies and printed circuit boards. Sanmina's results are also affected by
general economic conditions in the electronics industry. Sanmina's results can
also be significantly influenced by development and introduction of new products
by Sanmina's customers. From time to time, Sanmina 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's customers
generally require short delivery cycles, and a substantial portion of Sanmina's
backlog is typically scheduled for delivery within 120 days. 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. Sanmina'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'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'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 Common Stock.
Sanmina experiences customer concentration. A small number of customers are
responsible for a significant portion of Sanmina's net sales. During fiscal 1998
and 1997, sales to Sanmina's ten largest customers accounted for 59% and 52%,
respectively, of Sanmina's net sales. For fiscal 1998, sales to Cisco Systems
and DSC Communications each represented more than 10% of the Company's net
sales. For fiscal 1997, sales to DSC represented more than 10% of the Company's
net sales. Although there can be no assurance that Sanmina's principal customers
will continue to purchase products and services from Sanmina at current levels,
if at all, Sanmina expects to continue to depend upon its principal customers
for a significant portion of its net sales. Sanmina's customer concentration
could increase or decrease, depending on future customer requirements, which
will be dependent in large part on market conditions in the electronics industry
segments in which Sanmina's customers participate. The loss of one of more major
customers or declines in sales to major customers could have a material adverse
effect on Sanmina's business, financial condition and results of operations.
Sanmina is subject to risks associated with its strategy of acquisitions and
expansions. Sanmina has, for the past several fiscal years, pursued a strategy
of growth. This growth has come in part through acquisitions. These acquisitions
have involved both acquisitions of entire companies, such as the June 1995
acquisition of Assembly Solutions in Manchester, New Hampshire, the January 1996
acquisition of Golden Eagle Systems, now known as Sanmina Cable Systems, the
November 1997 merger with Elexsys, the February 1998 acquisition of Pragmatech
and the November 1998 merger with Altron. In addition, Sanmina has in other
instances acquired selected assets, principally equipment, inventory and
customer contracts and, in certain cases, facilities or facility leases.
Acquisitions of this nature completed by Sanmina include the November 1996
acquisitions of the Guntersville, Alabama operations of Comptronix Corporation
and certain assets of the custom manufacturing services division of Lucent
Technologies. In addition to these acquisitions,
26
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Sanmina has also grown its operations through internal expansion, such as the
opening of its Richardson, Texas assembly facility, its Durham, North Carolina
assembly facility and its Dublin, Ireland assembly facility. Acquisitions of
companies and businesses and expansion of operations involves certain risks,
including the following:
- - 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,
- - loss of key employees of acquired operations.
Accordingly, Sanmina may experience problems in integrating the Altron
operations or operations associated with any future acquisition. Accordingly,
there can be no assurance that the merger with Altron or any other future
acquisition will result in a positive contribution to Sanmina's results of
operations. Furthermore, there can be no assurance that Sanmina will realize
value from any such acquisition, which equals or exceeds the consideration paid.
In particular, the successful combination of Sanmina and Altron will require
substantial effort from each company, including the integration and coordination
of sales and marketing efforts. The diversion of the attention of management and
any difficulties encountered in the transition process, including, the
interruption of, or a loss of momentum in, Altron's activities, problems
associated with integration of management information and reporting systems, and
delays in implementation of consolidation plans, could have an adverse impact on
Sanmina's ability to realize the anticipated benefits of the Merger. Therefore,
there can be no assurance that Sanmina will realize any of these anticipated
benefits. In addition, there can be no assurance that Sanmina 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's business, financial condition and results of operations. In addition,
future acquisitions by Sanmina may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on
Sanmina's business, financial condition and results of operations.
Sanmina is subject to competition and technological change. The electronic
interconnect product industry is highly fragmented and it is characterized by
intense competition. Sanmina competes in the technologically advanced segment of
the interconnect product market, which is also highly competitive but is much
less fragmented than the industry as a whole. Sanmina's competitors consist
primarily of larger manufacturers of interconnect products, and some of these
competitors have greater manufacturing and financial resources than Sanmina as
well as greater SMT assembly capacity. As a participant in the interconnect
industry, Sanmina must continually develop improved manufacturing processes to
accommodate its customers' needs for increasingly complex products. During
periods of recession in the electronics industry, Sanmina's competitive
advantages in the areas of quick turnaround manufacturing and responsive
customer service may be of reduced importance to electronics OEMs, who may
become more price sensitive. In addition, captive interconnect product
manufacturers seek orders in the open market to fill excess capacity, thereby
increasing price competition. Sanmina may be at a competitive disadvantage with
respect to price when compared to manufacturers with lower cost structures,
particularly those with offshore facilities where labor and other costs are
lower.
Environmental matters are a key consideration in Sanmina's business. Proper
waste disposal is a major consideration for printed circuit board manufacturers
because metals and chemicals are used in the manufacturing process. Water used
in the printed circuit board manufacturing process must be treated to remove
metal particles and other contaminants before it can be discharged into the
municipal sanitary sewer system. In addition, although the electronics assembly
process generates significantly less waste water than printed circuit board
fabrication, maintenance of environmental controls is also important in the
electronics assembly process. Each of Sanmina's printed circuit board and
electronics assembly plants has personnel responsible for monitoring
environmental compliance. These individuals report to Sanmina's director of
environmental compliance, who has overall responsibility for environmental
matters. Each plant operates under effluent discharge permits issued by the
appropriate governmental authority. These permits must be renewed periodically
and are subject to revocation in the event of violations of environmental laws.
There can be no assurance that violations will not occur in the future as a
result of human error, equipment failure or other causes. In the event of a
future violation of environmental laws, Sanmina could be held liable for damages
and for the costs of remedial actions and could be also subject to revocation of
effluent discharge permits. Any such revocation could require Sanmina to cease
or limit production at one or more of its facilities, thereby having an adverse
impact on Sanmina's results of operations. Sanmina is also subject to
environmental laws relating to the storage, use and disposal of chemicals, solid
waste and other hazardous materials as well as air quality regulations.
Furthermore, environmental laws could become more stringent over time, and the
costs of compliance with and penalties associated with violation of more
stringent laws could be substantial.
Sanmina is subject to certain environmental contingencies at former Elexsys
International sites. In November 1997, Sanmina acquired Elexsys, which, by
virtue of such acquisition, became a wholly-owned subsidiary of Sanmina. Several
facilities owned or occupied by Elexsys at the time of the acquisition, or
formerly owned or occupied by Elexsys or companies acquired by Elexsys,
27
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
had either soil contamination or contamination of groundwater underneath or near
the facility including the following: Contamination was discovered at Elexsys'
Irvine, California facility in 1989 and Elexsys voluntarily installed a
groundwater remediation system at the facility in 1994. The California Regional
Water Quality Control Board has requested that Sanmina extend the investigation
of the groundwater contamination at the Irvine facility to off-site areas. It is
unknown what the results of this additional investigation will be and whether
any additional remediation activities will be required. Sanmina has been
required by the California Department of Toxic Substances Control to undertake
investigation of soil and/or groundwater at certain facilities formerly owned or
occupied by a predecessor company to Elexsys in Mountain View, California.
Depending upon the results of this soil sampling and groundwater testing,
Sanmina could be ordered to undertake soil and/or groundwater cleanup. To date,
Sanmina has not been ordered to undertake any soil or groundwater cleanup
activities at the Mountain View facilities, and does not believe any such
activities should be required. Test results received to date are not sufficient
to enable Sanmina to determine whether or not such cleanup activities are likely
to be mandated.
Contamination has also been discovered at other current and former Elexsys
facilities and has been reported to the relevant regulatory agencies. No
remediation or further investigation of such contamination has been required by
regulatory agencies. To date, the cost of the various investigations and the
cost of operating the remediation system at the Irvine facility have not been
material to Sanmina's financial condition. However, in the event Sanmina is
required to undertake additional groundwater or soil cleanup, the costs of such
cleanup are likely to be substantial. Sanmina is currently unable to estimate
the amount of such soil and groundwater cleanup costs because no soil or
groundwater cleanup has been ordered and Sanmina cannot determine from available
test results what remediation activities, if any, are likely to be required.
Sanmina believes, based on the limited information currently available, that the
cost of any groundwater or soil clean-up that may be required would not have a
material adverse effect on Sanmina's business, financial condition and results
of operations. Nevertheless, the process of remediating contaminated soil and
groundwater is costly, and if Sanmina is required to undertake substantial
remediation activities at one or more of the former Elexsys facilities, there
can be no assurance that the costs of such activities costs would not have a
material adverse effect on Sanmina's business, financial condition and results
of operations.
Altron was advised in 1993 by Olin Corporation that contamination resulting from
activities of prior owners of property owned by Olin Corporation and located
close to the Altron manufacturing plant in Wilmington, Massachusetts, had
migrated under the Altron plant. Olin has assumed full responsibility for any
remediation activities that may be required and has agreed to indemnify and hold
Altron harmless from any and all costs, liabilities, fines, penalties, charges
and expenses arising from and relating to any action or requirement, whether
imposed by statute, ordinance, rule, regulation, order, decree or by general
principles of law to remediate, clean up or abate contamination emanating from
the Olin site. Although the Company believes that Olin's assumption of
responsibility will result in no remediation cost to Altron from the
contamination, there can be no assurance that Altron will not be subject to some
costs regarding this matter, but Altron does not anticipate that such costs, if
any, will be material to its financial condition.
Sanmina's international operations involve additional risks. Sanmina opened its
first overseas facility, located in Dublin, Ireland, in June 1997. In addition,
Sanmina has obtained a printed circuit board fabrication facility in
Pererborough, England as a result of the acquisition of Elexsys. A number of
risks are inherent in international operations and transactions. International
sales and operations may be limited or disrupted by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, and difficulties in staffing, coordinating
communications among and managing international operations. Additionally,
Sanmina's business, financial condition and results of operations may be
adversely affected by fluctuations in international currency exchange rates as
well as increases in duty rates, difficulties in obtaining export licenses,
constraints on its ability to maintain or increase prices, and competition.
There can be no assurance that Sanmina will realize the anticipated strategic
benefits of its expansion in Ireland or that Sanmina's international operations
will contribute positively to Sanmina's business, financial condition and
results of operations. Furthermore, difficulties encountered in scaling up
production at overseas facilities or in coordinating Sanmina's United States and
international operations, as well as any failure of the international operations
to realize anticipated revenue growth, could, individually or in the aggregate,
have a material adverse effect on Sanmina's business, financial condition and
results of operations.
Possible Volatility of Stock Price. The trading price of the Sanmina Common
Stock has been and could in the future be subject to significant fluctuations in
response to variations in quarterly operating results, developments in the
electronics industry, general economic conditions, changes in securities
analysts' recommendations regarding Sanmina's securities and other factors. In
addition, the stock market in recent years has experienced significant price and
volume fluctuations which have affected the market prices of technology
companies and which have often been unrelated to or disproportionately impacted
by the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of Sanmina's Common Stock.
28
8
STATEMENT OF FINANCIAL RESPONSIBILITY
To the Stockholders:
The management of Sanmina is responsible for the preparation of the accompanying
consolidated financial statements. They have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and,
as such, include estimates and judgments of management. Management also prepared
the other information in the annual report and is responsible for its accuracy
and consistency with the financial statements. The consolidated financial
statements for the years ended September 30, 1998, 1997, and 1996 were audited
by Arthur Andersen LLP, independent public accountants.
The Company maintains an accounting system and related internal controls that it
believes are sufficient to provide reasonable assurance that assets are
safeguarded, that transactions are executed and recorded in accordance with
management's authorization, and that the financial records are reliable for
preparing financial statements. The concept of reasonable assurance is based on
the recognition that the cost of the system of internal control must be related
to the benefits derived and that the balancing of those factors requires
estimates and judgments. The system is monitored regularly by the Company for
compliance. In addition, solely for the purposes of planning and performing its
audit of the Company's consolidated financial statements, Arthur Andersen LLP
obtained an understanding of, and selectively tested, certain aspects of the
Company's system of internal control.
The Board of Directors has an Audit Committee comprised solely of outside
directors. The Committee meets with management and the independent public
accountants in connection with its review of matters relating to the annual
financial statements, the Company's system of internal accounting controls and
the services of the independent public accountants. Arthur Andersen LLP has full
and free access to meet with the Committee, with or without management
representatives present, to discuss the results of its audits, the adequacy of
internal accounting controls and the quality of financial reporting.
November 1, 1998
/s/ JURE SOLA /s/ RANDY W. FURR /s/ BERNARD J. WHITNEY
Jure Sola Randy W. Furr Bernard J. Whitney
Chairman of the Board and President and Executive Vice
Chief Executive Officer Chief Operating Officer President and Chief
Financial Officer
November 1, 1998
29
9
CONSOLIDATED BALANCE SHEETS
As of September 30,
------------------------
(in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 75,339 $ 42,345
Short-term investments 77,284 80,804
Accounts receivable, net of allowance for doubtful accounts of $4,669 and $3,620 96,930 77,333
Inventories 68,953 61,173
Deferred income taxes 19,389 9,115
Prepaid expenses 4,431 6,344
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 342,326 277,114
- ---------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Machinery and equipment 182,901 142,126
Furniture and fixtures 4,110 3,536
Leasehold improvements 22,199 20,281
Land and building 15,202 16,855
- ---------------------------------------------------------------------------------------------------------------------
224,412 182,798
Less: Accumulated depreciation and amortization 116,531 93,624
- ---------------------------------------------------------------------------------------------------------------------
Net property and equipment 107,881 89,174
- ---------------------------------------------------------------------------------------------------------------------
Other Assets:
Intangibles, net of accumulated amortization of $6,917 and $4,094 16,053 7,444
Deposits and other 1,320 2,122
- ---------------------------------------------------------------------------------------------------------------------
Total assets $467,580 $375,854
=====================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long-term debt $ 2,865 $ 8,840
Accounts payable 68,815 56,329
Accrued compensation and related liabilities 16,485 11,864
Other accrued liabilities 15,164 15,893
Income taxes payable 11,517 2,217
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 114,846 95,143
- ---------------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Convertible subordinated debt 5,767 98,250
Other liabilities 2,875 10,684
- ---------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 8,642 108,934
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (notes 5 and 7)
Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized: 5,000 shares
Outstanding: none -- --
Common stock, $.01 par value:
Authorized: 75,000 shares
Outstanding: 48,265 shares and 40,950 shares 483 410
Additional paid-in capital 194,591 90,805
Unrealized holding gain on investments and foreign currency translation adjustment 386 81
Retained earnings 148,632 80,481
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 344,092 171,777
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $467,580 $375,854
=====================================================================================================================
See accompanying notes.
30
10
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
---------------------------------------------
(in thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Net sales $ 722,581 $ 569,787 $ 391,982
Cost of sales 563,913 455,576 305,227
- ------------------------------------------------------------------------------------------------
Gross profit 158,668 114,211 86,755
- ------------------------------------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative 43,845 44,010 29,703
Amortization of goodwill 2,851 2,006 1,723
Provision for plant closing costs -- 8,876 --
Merger costs 3,945 -- --
- ------------------------------------------------------------------------------------------------
Total operating expenses 50,641 54,892 31,426
- ------------------------------------------------------------------------------------------------
Operating income 108,027 59,319 55,329
Other income (expense), net (688) (2,462) (1,345)
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 107,339 56,857 53,984
Provision for income taxes 39,188 26,332 17,419
- ------------------------------------------------------------------------------------------------
Net income $ 68,151 $ 30,525 $ 36,565
================================================================================================
Earnings per share:
Basic $ 1.61 $ 0.75 $ 0.93
Diluted 1.43 0.68 0.84
Shares used in computing per share amounts:
Basic 42,356 40,432 39,356
Diluted 50,400 49,426 47,490
See accompanying notes.
31
11
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Common Stock Additional
-------------------- Paid-in Retained
(in thousands) Shares Amount Capital Earnings Other Total
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 38,730 $ 387 $ 67,333 $ 13,391 $ (22) $ 81,089
Exercise of common stock options 604 6 2,199 -- -- 2,205
Issuance of common stock under
employee stock purchase plan 206 2 1,489 -- -- 1,491
Issuance of common stock
for businesses acquired 378 5 5,562 -- -- 5,567
Unrealized holding gain
on investments -- -- -- -- 19 19
Income tax benefit of disqualified
dispositions -- -- 1,301 -- -- 1,301
Net income -- -- -- 36,565 -- 36,565
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 39,918 400 77,884 49,956 (3) 128,237
Exercise of common stock options 820 8 5,852 -- -- 5,860
Issuance of common stock under
employee stock purchase plan 212 2 2,896 -- -- 2,898
Cumulative translation adjustment -- -- -- -- 42 42
Unrealized holding gain
on investments -- -- -- -- 42 42
Income tax benefit of disqualified
dispositions -- -- 4,173 -- -- 4,173
Net income -- -- -- 30,525 -- 30,525
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 40,950 410 90,805 80,481 81 171,777
Exercise of common stock options 1,018 10 5,778 -- -- 5,788
Issuance of common stock under
employee stock purchase plan 178 2 3,923 -- -- 3,925
Conversion of subordinated debt 6,119 61 86,189 -- -- 86,250
Cumulative translation adjustment -- -- -- -- 159 159
Unrealized holding gain
on investments -- -- -- -- 146 146
Income tax benefit of disqualified
dispositions -- -- 7,896 -- -- 7,896
Net income -- -- -- 68,151 -- 68,151
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 48,265 $ 483 $194,591 $148,632 $ 386 $344,092
==============================================================================================================
See accompanying notes.
32
12
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
---------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,151 $ 30,525 $ 36,565
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 27,284 21,320 13,554
Provision for plant closing costs -- 8,876 --
Provision for doubtful accounts 2,001 505 525
(Gain) loss on disposal of fixed assets (773) 124 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (16,629) (20,782) (8,118)
Inventories (3,833) (13,423) (12,066)
Prepaid expenses, deposits and other 488 -- (168)
Accounts payable and accrued liabilities (1,325) 30,034 3,789
Income tax accounts 7,876 (2,115) (246)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 83,240 55,064 33,835
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (103,020) (123,416) (169,739)
Proceeds from maturity of short-term investments 106,591 128,028 91,201
Cash paid for property and equipment (28,987) (41,912) (29,650)
Cash paid for businesses acquired (5,666) (18,879) (6,687)
Proceeds from sale of assets 2,554 216 27
- ----------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (28,528) (55,963) (114,848)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 8,033 118
Proceeds (payments) on line of credit, net (7,498) (1,543) 516
Repurchase of convertible debentures (5,681) -- --
Payments of long-term liabilities (18,250) (2,647) (866)
Proceeds from sale of common stock, net of issuance costs 9,711 8,758 3,695
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (21,718) 12,601 3,463
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,994 11,702 (77,550)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 42,345 30,643 108,193
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 75,339 $ 42,345 $ 30,643
============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year:
Interest $ 6,162 $ 6,775 $ 6,097
Income taxes $ 31,270 $ 28,472 $ 16,966
NON-CASH FINANCING INFORMATION:
Conversion of subordinated debt to equity $ 86,250 $ -- $ --
See accompanying notes.
33
13
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION OF THE COMPANY
Sanmina Corporation (the "Company") was incorporated in Delaware in 1989 and is
a leading independent provider of customized integrated electronics
manufacturing services, including turnkey electronic assembly and manufacturing
management services to original equipment manufacturers. Sanmina's services
consist primarily of the manufacture of complex printed circuit board assemblies
using surface mount and pin-through hole inter-connection technologies, the
manufacture of custom-designed backplane assemblies, fabrication of complex
multi-layered printed circuit boards, the manufacture of custom cable and wire
harness assemblies, and testing and assembly of completed systems. In addition,
Sanmina provides procurement and materials management, as well as consultation
on board design and manufacturing. The Company's manufacturing plants are
located in California, Texas, New Hampshire, North Carolina, Alabama, Ireland,
and England.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
Use of Estimates The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Cash Equivalents The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Short Term Investments The Company's investments are classified as available for
sale and are recorded at their fair value, as determined by quoted market
prices, with any unrealized gains or losses classified as a separate component
of stockholders' equity. Upon sale of the investments, any previously unrealized
gains or losses are recognized in results of operations. The specific
identification method is used to determine the cost of securities sold. Realized
gains and losses have not been material to date. As of September 30, 1998 the
difference between the aggregate fair value and cost basis was a net unrealized
gain of $207,336. The Company has the intent and ability to liquidate the
investments prior to the maturity period and, as such, has classified its
investments as short-term investments. The value of the Company's investments by
major security type is as follows (in thousands):
Amortized Aggregate Unrealized Unrealized
Cost Fair Value Gain Loss
- ------------------------------------------------------------------------------------------------------
As of September 30, 1998
U.S. government and agency securities $ 25,306 $ 25,384 $ 79 $ (1)
State and municipal securities 50,964 51,018 55 (1)
U.S. corporate and bank debt 31,140 31,215 77 (2)
- ------------------------------------------------------------------------------------------------------
$107,410 $107,617 $ 211 $ (4)
======================================================================================================
Amortized Aggregate Unrealized Unrealized
Cost Fair Value Gain Loss
- ------------------------------------------------------------------------------------------------------
As of September 30, 1997
U.S. government and agency securities $ 16,973 $ 16,990 $ 16 --
State and municipal securities 46,786 46,809 23 --
U.S. corporate and bank debt 36,439 36,460 22 (1)
- ------------------------------------------------------------------------------------------------------
$100,198 $100,259 $ 61 $ (1)
======================================================================================================
Approximately $30.3 million and $19.5 million of the total investments in debt
securities as of September 30, 1998 and 1997 respectively, are included in cash
and cash equivalents; the remaining balance is classified as short-term
investments. As of September 30, 1998, debt securities with a fair value of
$54.5 million mature within one year and $53.1 million mature beyond one year.
Inventories Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes labor, material and manufacturing overhead. The
components of inventories are as follows (in thousands):
As of September 30,
-----------------------------
1998 1997
- --------------------------------------------------------------------------------
Raw materials $39,320 $35,253
Work-in-process 16,677 13,503
Finished goods 12,956 12,417
- --------------------------------------------------------------------------------
$68,953 $61,173
================================================================================
Property and Equipment Property and equipment are stated at cost or, in the case
of property and equipment acquired through business combinations, at fair value
based upon the allocated purchase price at the acquisition date. Depreciation
and amortization are provided on a straight-line basis over the estimated useful
lives of the related assets (three to five years or twenty-five years, in the
case of buildings) or, in the case of leasehold improvements, over the remaining
term of the related lease, if shorter.
Intangibles Intangibles arising from the Company's acquisitions (see Note 6) are
amortized on a straight-line basis over the estimated useful life of five to ten
years.
Revenue Recognition The Company generally recognizes revenue from manufacturing
services at the time of product ship-
34
14
ment. Where appropriate, provisions are made at that time for estimated warranty
and return costs.
Net Income Per Share Basic earnings per share was computed by dividing net
income by the weighted average number of shares of common stock outstanding.
Diluted earnings per share includes dilutive common stock equivalents, using the
treasury stock method, and assumes that the convertible debt instruments were
converted into common stock, if dilutive. As a result of the adoption of SFAS
No. 128, the Company's reported earnings per share were restated for all periods
presented (see Note 3).
Stock Based Compensation Effective October 1, 1996, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS 123, the Company
continues to apply Accounting Principals Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock option plans.
New Accounting Standards In February 1997, FASB issued SFAS No. 129, "Disclosure
of Information about Capital Structure," which will be adopted by the Company in
fiscal 1999. SFAS 129 requires companies to disclose certain information about
their capital structure. SFAS 129 will not have a material impact on the
Company's financial statement disclosures.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS 130 is effective for fiscal year 1999. Management does
not believe the adoption of SFAS 130 will have a material impact on the
Company's financial statement disclosures.
In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 introduces a new model for segment
reporting, called the "management approach." SFAS 131 is effective for fiscal
year 1999. Management believes the adoption of SFAS 131 will increase its
disclosure requirements of operations of the Company.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 requires that derivative instruments be
recorded in the balance sheet at their fair market value, with changes in the
fair value recorded in the income statement unless specific hedging criteria is
met. Management does not believe the adoption of SFAS 133 will have a material
impact on the Company's financial statement disclosures.
NOTE 3. EARNINGS PER SHARE
In the first quarter of fiscal 1998, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share." SFAS 128 requires the replacement of previously
reported primary and fully diluted earnings per share (EPS) as required by APB
Opinion No. 15 (APB 15) with basic earnings per share and diluted earnings per
share.
Basic EPS was computed by dividing net income by the weighted average number of
shares of common stock outstanding during fiscal 1998, 1997, and 1996. Diluted
EPS includes dilutive common stock equivalents, using the treasury stock method,
and assumes that the convertible debt instruments were converted into common
stock upon issuance, if dilutive. A reconciliation of the net income and
weighted average number of shares used for the diluted earnings per share
computations follows:
(in thousands,
except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $68,151 $30,525 $36,565
Add back after-tax interest
expense for convertible
subordinated debt 3,676 3,101 3,152
- --------------------------------------------------------------------------------
Income for calculating
earnings per share $71,827 $33,626 $39,717
================================================================================
Weighted average number
of shares outstanding
during the period 42,356 40,432 39,356
Applicable number of
shares for stock options
outstanding for the period 2,618 2,875 2,015
Weighted average number
of shares if convertible
subordinated
debt were converted 5,426 6,119 6,119
- --------------------------------------------------------------------------------
Weighted average
number of shares 50,400 49,426 47,490
- --------------------------------------------------------------------------------
Diluted earnings per share $ 1.43 $ 0.68 $ 0.84
================================================================================
NOTE 4. CONVERTIBLE SUBORDINATED DEBT
On August 16, 1995, the Company issued $86.3 million of 5.5% convertible
subordinated notes (the "Notes") due on August 15, 2002. The notes were
convertible into common stock, at the option of the note holder, at a conversion
price of approximately $14.09 per share, after giving effect to stock splits,
subject to adjustments in certain events. The notes were subordinated in right
of payment to all existing and future senior indebtedness, as defined, by the
Company. The notes were redeemable at the option of the Company on or after
August 15, 1998, initially at 103.143% of the face value and at decreasing
prices thereafter to 100% at maturity, in each case together with accrued
interest. Interest was payable semi-annually on February 15 and August 15. On
August 19, 1998, the Company called for redemption of the notes which
represented $86.3 million in debt. All note holders elected to convert their
notes to equity.
On February 11, 1987, Elexsys issued $32,000,000 of 5.5% convertible
subordinated debentures (the "Debentures") due on March 1, 2012. The Debentures
are convertible into shares of common stock at $59.85, after the effect of the
merger and stock split, subject to adjustment under certain conditions. The
Debentures are redeemable by the Company at declining premiums prior to March 1,
1997 and thereafter at 100 percent of the principal amount. The Debentures are
also redeemable through the operation of a sinking fund at 100 percent of the
principal amount. Interest is payable semi-annually on September 1 and March 1
of each year. Mandatory annual sinking fund payments, sufficient to retire 5
percent of the aggregate principal amount of the Debentures issued, were to be
made on each March 1 commencing in 1997. As a result of two exchanges of common
stock for $16 million and $4 million of the Debentures in fiscal 1994 and fiscal
1995, respectively, the Company now has sinking fund credits available to offset
these obligations for twelve and one-half years, thus no sinking fund payments
will be required until 2009. In addition, the Company
35
15
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
repurchased approximately $6.2 million (including premiums) in Debentures during
fiscal 1998. The Debentures are subordinated to all senior indebtedness of the
Company.
NOTE 5. COMMITMENTS
The Company leases its facilities under operating leases expiring at various
dates through October 2010. The Company is responsible for utilities,
maintenance, insurance and property taxes under the leases. Minimum future lease
payments under non-cancelable operating leases are approximately as follows (in
thousands):
Years Ending September 30,
- --------------------------------------------------------------------------------
1999 $ 6,657
2000 5,305
2001 3,684
2002 3,052
2003 2,154
Thereafter 5,806
- --------------------------------------------------------------------------------
$26,658
================================================================================
Rent expense under operating leases was approximately $5.0 million, $5.1 million
and $4.9 million for the years ended September 30, 1998, 1997 and 1996,
respectively.
In November 1998, the Company entered into an operating lease agreement for its
corporate headquarters and certain of its assembly facilities. The campus
facility, approximately 330,000 square feet, is located in San Jose, California.
NOTE 6. ACQUISITIONS
In November 1997, the Company acquired Elexsys International, Inc. ("Elexsys")
in a merger transaction. Under the terms of the merger agreement, the Company's
common stock was exchanged for all of Elexsys' outstanding common stock.
Approximately 3.3 million shares of common stock were issued to acquire Elexsys.
The merger was accounted for as a pooling of interests, and therefore, all prior
periods presented were restated to combine the results of the two companies. A
reconciliation of the financial statements for the twelve months ended
September 30, 1997 and 1996, to previously reported information, is as follows
(in thousands):
1997 1996
- --------------------------------------------------------------------------------
Revenue:
Sanmina $ 405,212 $ 265,076
Elexsys 164,575 126,906
- --------------------------------------------------------------------------------
Combined $ 569,787 $ 391,982
================================================================================
Net Income (loss):
Sanmina $ 40,902 $ 28,095
Elexsys (10,377) 8,470
- --------------------------------------------------------------------------------
Combined $ 30,525 $ 36,565
================================================================================
On February 23, 1998, the Company acquired Pragmatech, Inc. ("Pragmatech") in a
stock purchase transaction. The purchase price was approximately $5.7 million.
The acquisition, which was accounted for as a purchase, included the payment of
cash and the assumption of liabilities. Accordingly, the results of operations
for the year ended September 30, 1998, include the results of operations of this
business from the date of acquisition. The acquisition resulted in goodwill of
$11.5 million which is being amortized over a ten year period.
The unaudited pro forma financial information for the years ended September 30,
1998, 1997, and 1996 is presented below as if Pragmatech had been acquired on
October 1, 1995:
Years ended September 30,
(Unaudited)
(in thousands, ----------------------------------------
except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenue $749,577 $624,341 $424,208
Net Income 65,596 28,647 34,374
Net income per share - diluted $ 1.37 $ 0.64 $ 0.79
Diluted shares used in
calculating per
share amounts 50,400 49,426 47,490
NOTE 7. CONTINGENCIES
In the normal course of business, the Company may be subject to litigation
matters. The Company does not believe the ultimate resolution of any such
pending or threatened litigation matters would have a material adverse effect on
the Company's financial position or results of operations.
NOTE 8. STOCKHOLDERS' EQUITY
Common Stock In June 1998, the Company effected a two-for-one stock split
payable in the form of a dividend. Accordingly, all share and per share data has
been adjusted to retroactively reflect the stock split.
Stock Option Plans The 1990 Incentive Stock Plan (the "Plan") provides for the
grant of incentive stock options, non-statutory stock options, and stock
purchase rights to employees and other qualified individuals to purchase shares
of the Company's Common Stock at amounts not less than 100% of the fair market
value of the shares on the date of the grant.
The 1995 Director Option Plan (the "Director Plan") provides for the automatic
grant of stock options to outside directors of the Company or any subsidiary of
the Company at amounts not less than 100% of the fair market value of the shares
on the date of grant.
The 1996 Supplemental Stock Option Plan (the "Supplemental Plan") permits only
the grant of non-statutory options and provides that options must have an
exercise price at least equal to the fair market value of the Company's Common
Stock on the date of the grant. Options under the Supplemental Plan may be
granted to employees and consultants, but executive officers and directors may
not be granted options under the Supplemental Plan.
Options under the three plans vest as determined by the Board of Directors and
in no event may an option have a term exceeding ten years from the date of the
grant. Total shares authorized for issuance under all plans are 9,900,000 at
September 30, 1998.
36
16
Option activity under all plans is as follows:
Options Outstanding
--------------------------------
Weighted Avg.
Shares Exercise Price
- -----------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 3,398,861 $ 5.46
Granted 1,662,723 $ 11.53
Exercised (521,917) $ 3.18
Cancelled (383,713) $ 6.03
- -----------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 4,155,954 $ 8.12
Granted 1,764,790 $ 20.83
Exercised (735,292) $ 6.64
Cancelled (235,310) $ 11.43
- -----------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 4,950,142 $ 12.69
Granted 1,835,700 $ 34.09
Exercised (1,039,179) $ 7.87
Cancelled (258,789) $ 21.06
BALANCE AT SEPTEMBER 30, 1998 5,487,874 $ 20.39
===================================================================================
The following table summarizes information regarding stock options outstanding
under the Company's option plans at September 30, 1998:
Options Outstanding Options Vested and Exercisable
------------------------------------------------- -----------------------------------
Weighted
Number Average Weighted Number Vested Weighted
Range of Outstanding Remaining Average And Exercisable Average
Exercise Prices As of 9/30/98 Contractual Life Exercise Price As of 9/30/98 Exercise Price
- -------------------------------------------------------------------------------------------------------------------
$ 0.50 - $ 8.69 1,385,889 5.48 $ 5.96 985,763 $ 5.51
$ 9.63 - $ 20.07 1,527,749 7.48 $ 14.95 643,210 $ 14.53
$ 20.13 - $32.32 1,534,439 8.80 $ 28.00 317,883 $ 27.33
$ 32.38 - $ 45.94 1,039,797 9.32 $ 36.27 122,453 $ 36.34
- -------------------------------------------------------------------------------------------------------------------
$ 0.50 - $ 45.94 5,487,874 7.70 $ 20.39 2,069,309 $ 13.49
===================================================================================================================
Employee Stock Purchase Plan The Company's employee stock purchase plan (the
"Purchase Plan") provides for the issuance of up to 1,700,000 shares of common
stock. Under the Purchase Plan, employees may purchase, on a periodic basis, a
limited number of shares of common stock through payroll deductions over a
six-month period. The per share purchase price is 85% of the fair market value
of the stock at the beginning or end of the offering period, whichever is lower.
As of September 30, 1998, 1,374,498 shares had been issued under the Purchase
Plan.
As of September 30, 1998, the Company has reserved the following shares of
authorized but unissued Common Stock:
Convertible subordinated debt 96,360
Stock option plans 6,835,636
Employee stock purchase plan 325,502
- --------------------------------------------------------------------------------
7,257,498
================================================================================
Stock-based Compensation The Company accounts for its stock option plans and
employee stock purchase plan under APB Opinion No. 25 and related
interpretations, under which no compensation cost has been recognized as the
exercise price per share for stock options was equal to the fair market value of
the stock on the date of grant and the Purchase Plan qualified as a
non-compensatory plan. Had compensation cost for these Plans been determined
consistent with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
Years Ended September 30,
----------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $ 68,151 $ 30,525 $ 36,525
Pro forma 49,414 19,703 30,711
Basic EPS:
As reported $ 1.61 $ 0.75 $ 0.93
Pro forma 1.17 0.49 0.78
Diluted EPS:
As reported $ 1.43 $ 0.68 $ 0.84
Pro forma 0.98 0.40 0.65
The weighted average fair values of options granted during fiscal 1998, 1997,
1996 was $18.50, $12.24, and $7.64 per share, respectively. The fair value of
each stock option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997 and 1996:
Years Ended September 30,
------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Volatility 75% 78% 78%
Risk-free interest rate 5.7% 6.3% 6.2%
Dividend yield 0% 0% 0%
Expected lives* (management
and directors) beyond vesting 0.6 1.0 1.0
Expected lives* (employees)
beyond vesting 0.3 0.6 0.6
* measured in years beyond vesting.
37
17
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Years Ended September 30,
------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Federal:
Current $ 42,802 $ 22,215 $ 16,329
Deferred (8,832) (1,535) (1,875)
================================================================================
33,970 20,680 14,454
- --------------------------------------------------------------------------------
State:
Current 6,451 5,646 3,419
Deferred (1,233) 6 (454)
================================================================================
5,218 5,652 2,965
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 39,188 $ 26,332 $ 17,419
================================================================================
The provision for income taxes differs from the amount estimated by applying the
statutory Federal income tax rate to income before taxes as follows (in
thousands):
Years Ended September 30,
------------------------------------------
1998 1997 1996
-------- -------- --------
Federal tax at
statutory rate $ 37,569 $ 26,546 $ 19,394
State income taxes,
net of federal benefit 5,218 3,473 2,427
Foreign subsidiary loss 410 -- 303
Effect of non-deductible
goodwill amortization 672 692 493
Tax exempt interest income (713) (436) (359)
FSC benefit (179) (530) (355)
Tax credits (792) (412) (507)
Change in valuation
allowance (11,598) (3,168) (3,636)
Other 8,601 167 (341)
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 39,188 $ 26,332 $ 17,419
================================================================================
The components of the net deferred income tax asset are as follows (in
thousands):
As of September 30,
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Cumulative temporary differences:
State taxes $ 1,726 $ 1,128
Accrued vacation 1,232 1,081
Allowance for doubtful accounts 1,772 1,438
Depreciation (511) (1,619)
Inventory reserve 6,255 5,489
Accrued bonuses 2,251 58
General reserve 1,645 605
Environmental reserve 2,216 2,381
Accrued plant closing costs 450 3,482
Net operating loss carryforwards 4,245 7,381
Tax credit carryforwards 405 961
Other 2,459 3,294
- --------------------------------------------------------------------------------
Total deferred income tax asset 24,145 25,679
Valuation allowance (5,267) (16,865)
- --------------------------------------------------------------------------------
Net deferred income tax asset $ 18,878 $ 8,814
================================================================================
The valuation allowance provides a reserve against deferred tax assets that may
expire or become unutilized by the Company. In accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," the
Company believes it is more likely than not the Company will not realize a
portion of the benefits of these deferred tax assets, and accordingly, has
provided a valuation allowance for them. Federal net operating loss
carryforwards of $6.9 million will expire at various dates from the year 2007
through 2010. State net operating loss carryforwards of $3.9 million will expire
in 1999. Foreign net operating loss carryforwards of $6.0 million will
carryforward indefinitely. Federal minimum tax credit carryforwards of $0.24
million will carryforward indefinitely and state tax credit carryforwards of
$0.25 million will expire at various dates from the year 2002 through 2005.
NOTE 10. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment - the manufacture, testing and
servicing of a full spectrum of complex printed circuit boards, custom backplane
interconnect devices, and electronic assembly services. Revenue is principally
derived from customers in the United States.
Sales to major customers who accounted for more than 10% of net sales were as
follows:
Years Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Customer - A 18.2% * *
Customer - B 13.0% 17.7% 20.3%
* less than 10% of net sales
The Company's most significant credit risk is the ultimate realization of its
accounts receivable. This risk is mitigated by (i) sales to well established
companies, (ii) ongoing credit evaluation of its customers, and (iii) frequent
contact with its customers, especially its most significant customers, thus
enabling the Company to monitor current changes in business operations and to
respond accordingly.
NOTE 11. SUBSEQUENT EVENTS
In November 1998, the Company and Altron, Inc. (Altron) merged through the
issuance of 7,200,638 shares of common stock in exchange for all of Altron's
outstanding common stock. The acquisition was accounted for as a pooling of
interests.
38
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Sanmina Corporation:
We have audited the accompanying consolidated balance sheets of Sanmina
Corporation (a Delaware Corporation) and its subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sanmina Corporation and its
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
San Jose, California /s/ ARTHUR ANDERSEN LLP
October 23, 1998 Arthur Andersen LLP
(except for the matter discussed
in Note 11, as to which the date is
November 30, 1998)
39