1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-27482
XETEL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2310781
(State of Incorporation) (I.R.S. Employer ID Number)
2105 GRACY FARMS LANE
AUSTIN, TEXAS 78758
(Address of principal executive offices, including zip code)
(512) 435-1000
(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 other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
As of the close of business on November 3, 2000, 9,783,141 shares of the
registrant's common stock, par value $.0001 per share, were outstanding.
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XETEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (unaudited)
Balance Sheets as of April 1, 2000 and September 30, 2000 3
Statements of Operations for the three and six months ended
September 25, 1999 and September 30, 2000 4
Statements of Cash Flows for the six months ended
September 25, 1999 and September 30, 2000 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 16
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
XETEL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
April 1, September 30,
2000 2000
-------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,398 $ 7,601
Trade accounts receivable, net 24,464 30,688
Inventories, net 23,074 41,038
Prepaid expenses and other 1,918 2,134
-------- --------
Total current assets 56,854 81,461
Property and equipment, net 6,367 6,684
Deferred tax asset 1,500 1,091
-------- --------
TOTAL ASSETS $ 64,721 $ 89,236
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 21,643 $ 30,705
Current portion of long-term debt 7,120 7,260
Accrued expenses and other liabilities 3,402 4,084
-------- --------
Total current liabilities 32,165 42,049
Deferred income taxes 133 133
Long-term debt, net of current portion 7,591 19,286
Commitments -- --
Stockholders' equity:
Preferred stock, $0.0001 par value, 4,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $0.0001 par value, 25,000,000 shares authorized,
9,482,431 and 9,750,798 shares issued and 9,476,433 and
9,744,802 shares outstanding, respectively 22,228 22,592
Retained earnings 2,625 5,176
Deferred compensation (21) --
-------- --------
Total stockholders' equity 24,832 27,768
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,721 $ 89,236
======== ========
The accompanying notes are an integral part of these financial statements.
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XETEL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
----------------------------- ------------------------------
September 25, September 30, September 25, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
Net sales $ 23,150 $ 46,719 $ 55,142 $ 89,416
Cost of sales 21,901 42,957 51,660 81,554
-------- -------- -------- --------
GROSS PROFIT 1,249 3,762 3,482 7,862
Selling, general and administrative
expenses 1,366 1,941 2,985 3,840
Recoveries (209) (338) (209) (1,062)
-------- -------- -------- --------
INCOME FROM OPERATIONS 92 2,159 706 5,084
Other expense, net (149) (563) (377) (972)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (57) 1,596 329 4,112
Provision (benefit) for income taxes (22) 605 125 1,561
-------- -------- -------- --------
NET INCOME (LOSS) $ (35) $ 991 $ 204 $ 2,551
======== ======== ======== ========
Basic earnings (loss) per share $ 0.00 $ 0.10 $ 0.02 $ 0.27
======== ======== ======== ========
Basic weighted average shares
outstanding 9,288 9,591 9,271 9,552
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.00 $ 0.10 $ 0.02 $ 0.26
======== ======== ======== ========
Diluted weighted average shares
outstanding 9,288 10,206 9,599 9,675
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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XETEL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
------------------------------
September 25, September 30,
1999 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 204 $ 2,551
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Deferred income taxes -- 409
Depreciation and amortization 992 974
Deferred compensation 69 21
(Gain) loss on disposal of equipment (9) --
Cash provided by (used in) changes in assets and liabilities:
Trade accounts receivable 219 (6,224)
Inventories 2,094 (17,964)
Prepaid expenses and other (151) (216)
Trade accounts payable (995) 9,062
Accrued expenses and other liabilities (972) 682
-------- --------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 1,451 (10,705)
Cash flows from investing activities:
Purchases of property and equipment (319) (1,291)
Proceeds from sale of equipment 68 --
-------- --------
CASH USED IN INVESTING ACTIVITIES (251) (1,291)
Cash flows from financing activities:
Net borrowings (repayments) under debt Agreements (1,342) 11,835
Proceeds from stock options exercised 50 310
Cash proceeds from stock issued under employee
stock purchase plan 130 54
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,162) 12,199
Increase (decrease) in cash and cash equivalents 38 203
Cash and cash equivalents, beginning of period 7,330 7,398
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,368 $ 7,601
======== ========
The accompanying notes are an integral part of these financial statements.
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XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. THE COMPANY AND DESCRIPTION OF BUSINESS ACTIVITIES
XeTel Corporation (the "Company") provides comprehensive and customized
electronics manufacturing solutions to original equipment manufacturers
primarily in the networking, telecommunications and computer industries. The
Company incorporates advanced prototype services and complex electronics
manufacturing assembly capabilities, together with materials and supply base
management, advanced testing, systems integration services and order
fulfillment, to provide turnkey solutions for its customers.
NOTE 2. BASIS OF PRESENTATION
These interim financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). All adjustments have been made to the accompanying
interim financial statements which are, in the opinion of the Company's
management, necessary for a fair presentation of the Company's operating results
and include all adjustments of a normal recurring nature. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. It is recommended that these
interim financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended April 1, 2000. The results of operations for any interim
period are not necessarily indicative of the results of operations for the
entire year. Certain reclassifications have been made in the prior period
financial statements to conform with the current period presentation.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. SFAS No. 133, as amended by SFAS No.
137, is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, with earlier application encouraged. The Company does not
currently use derivative instruments and, therefore, does not expect that the
adoption of SFAS No. 133 will have an impact on its financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its view regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will be
required to adopt SAB No. 101, as amended by SAB No. 101B, for the quarter
beginning December 31, 2000. The Company does not believe that the adoption of
SAB No. 101 will have a significant impact on its financial statements and
related disclosures.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44")
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25. FIN No. 44 clarifies the application of
APB No. 25 for only certain issues. It does not address any issues related to
the application of the fair value method in SFAS No. 123. Among other issues,
FIN No. 44 clarifies (a) the definition of employee for purposes of applying ABP
No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN No.
44 is effective July 1, 2000, but certain conclusions in the interpretation
cover specific events that occur after either December 15, 1998, or January 12,
2000. The Company has early adopted the provisions of FIN No. 44. The adoption
of FIN No. 44 did not have a significant impact on the Company's financial
statements and related disclosures.
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XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4. RECOVERIES
The components of Recoveries included in the Statements of Operations are as
follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------------------- ------------------------------
SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
(UNAUDITED)
(Recoveries) provision for doubtful accounts ...... $ (209) $ (338) $ (209) $ (437)
(Recoveries) provision for excess and obsolete
inventory .................................... -- -- -- (625)
------- ------- ------- -------
$ (209) $ (338) $ (209) $(1,062)
======= ======= ======= =======
NOTE 5. TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consist of the following (in thousands):
APRIL 1, SEPTEMBER 30,
2000 2000
-------- -------------
(UNAUDITED)
Accounts receivable .......................... $ 27,512 $ 33,299
Less: allowance for doubtful accounts ........ (3,048) (2,611)
-------- --------
$ 24,464 $ 30,688
======== ========
NOTE 6. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
APRIL 1, SEPTEMBER 30,
2000 2000
-------- -------------
(UNAUDITED)
Raw materials ............ $19,203 $30,374
Work in progress ......... 3,602 10,374
Finished goods ........... 269 290
------- -------
$23,074 $41,038
======= =======
As of April 1, 2000 and September 30, 2000, the Company had allowances for
obsolete raw materials (principally printed circuit board components) of $2.2
million $1.1 million, respectively.
Cost of sales for the three and six month periods ended September 25, 1999
and September 30, 2000 includes provisions to the allowance for obsolete
materials of $0 for both periods.
NOTE 7. NOTES PAYABLE AND LONG-TERM DEBT
As of April 1, 2000, the Company had (i) a three-year revolving loan
facility for $35 million with commercial banks and (ii) an equipment financing
facility from a financial services company. There was $14.7 million outstanding
under the commercial bank line of credit as of April 1, 2000. The Company's
financing facilities contain certain restrictions, which among others, require
maintenance of minimum financial ratios. At April 1, 2000, the Company was in
compliance with such financial covenants.
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XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
As of September 30, 2000, the Company had $51 million in credit lines and
equipment financing facilities, as follows: (i) a three-year revolving loan
facility for $35 million with commercial banks; and (ii) an equipment financing
facility for $16 million from a financial services company, of which $2.0
million was unused at September 30, 2000. There was $26.5 million outstanding
under the revolving loan facility at September 30, 2000. The Company was
eligible to borrow an additional $0.8 million, at September 30, 2000, pursuant
to the revolving loan facility's borrowing formula. At September 30, 2000, the
Company was in compliance with the financial covenants under its financing
facilities.
The Company may require additional financing in connection with its business
and may seek additional funds from time to time through public or private debt
or equity offerings or obtain further bank borrowings or off-balance sheet
financing. The need for funding, and the cost of and access to additional funds,
are dependent, in the long term, on future operating results as well as
conditions external to the Company. Working capital, together with cash
generated from operations and a planned increase to the revolving loan facility
and equipment lease line of credit will be sufficient to satisfy anticipated
sales growth and fund planned investments in manufacturing facilities and
equipment through the next 12 months.
NOTE 8. EARNINGS PER COMMON SHARE
Basic EPS is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the related period.
Diluted EPS is similar to basic EPS except that the weighted average of common
shares outstanding is increased to include the number of common share
equivalents, when inclusion is dilutive. Common share equivalents are comprised
of stock options. The number of common share equivalents outstanding relating to
stock options is computed using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings
per share (unaudited):
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------------------- ----------------------------
SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
Basic earnings per share:
Weighted average shares outstanding ....... 9,288 9,591 9,271 9,552
====== ======= ======= =======
Net income (loss) ......................... $ (35) $ 991 $ 204 $ 2,551
====== ======= ======= =======
Basic earnings per share .................. $ 0.00 $ 0.10 $ 0.02 $ 0.27
====== ======= ======= =======
Diluted earnings per share:
Weighted average shares outstanding ....... 9,288 9,591 9,271 9,552
Common stock equivalents:
Stock options ............................. -- 615 328 123
------ ------- ------- -------
9,288 10,206 9,599 9,675
====== ======= ======= =======
Net income ................................ $ (35) $ 991 $ 204 $ 2,551
====== ======= ======= =======
Diluted earnings per share ................ $ 0.00 $ 0.10 $ 0.02 $ 0.26
====== ======= ======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this filing. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks discussed in
"Risk Factors that May Affect Future Results, Financial Condition and Market
Price of Securities" set forth elsewhere in this filing.
All percentage amounts and ratios were calculated using the underlying data
in thousands. Operating results for the three-and-six month periods ended
September 25, 1999 and September 30, 2000 are not necessarily indicative of the
results that may be expected for the full fiscal year.
OVERVIEW
We were founded in 1984 and, since our inception, have manufactured surface
mount assemblies and performed other manufacturing services for original
equipment manufacturers, or OEMs, in the electronics industry. The development
and growth of our business have generally followed the trend by OEMs in the
electronics industry to outsource all or a portion of their manufacturing
requirements. In view of this trend, we have developed a range of electronics
manufacturing services including product development support and advanced
prototyping, materials procurement and supply base management, complex surface
mount assembly, total system assembly and integration, manufacturing in various
production volumes, advanced test engineering and testing, and after-market
support. We have sought to forge long-term relationships with our customers as a
single-source provider of comprehensive electronics manufacturing services. To
establish and expand these OEM relationships, we acquired full-service
manufacturing facilities in Dallas, Texas and San Ramon, California during 1996.
In recent years we have implemented strategies to diversify our customer
base, improve profitability, advance our manufacturing technologies and
capabilities, broaden our service offerings and expand our manufacturing
capacity. During fiscal 1999, a major OEM customer transferred its manufacturing
of certain computer products in house as a part of its restructuring. In
response, we reduced our cost structure by resizing our operations and
subletting excess administrative and manufacturing space. We also continued to
adopt advanced technologies, such as flip-chip and micro-ball grid array, in
advance of the continuing emergence and commercial introduction of more complex
electronics devices. In addition, we expanded into high growth markets requiring
low- to moderate-volume, highly complex manufacturing solutions, and reorganized
our service offerings by establishing dedicated service centers and broadening
our services in total system assembly, systems integration and order
fulfillment.
As a result of these efforts, we have experienced increases in our net sales
and profitability in recent quarters, fueled in large part by new relationships
that we have developed with networking and telecommunications OEMs. In the
quarter ended September 30, 2000, we derived approximately 48% of our net sales
from networking OEMs and 43% from telecommunications OEMs. In addition, the
percentage of revenues derived from our largest customer has decreased to 13% of
net sales in the second quarter of fiscal 2001, from a peak of 55% of net sales
in our first quarter of fiscal 1999. We have increased our gross profit margins
as a result of our increased asset utilization, higher sales levels and cost
management.
Our results of operations are affected by the level of capacity utilization
of our manufacturing facilities, indirect labor costs and selling, general and
administrative expenses. Accordingly, gross margins and operating income margins
have generally improved during periods of high volume and high capacity
utilization. Margins also vary based on the type of services we provide.
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, historical
statements of operations data for the three and six month periods ended
September 25, 1999 and September 30, 2000.
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------------------- -----------------------------
SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 94.6 91.9 93.7 91.2
------ ------ ------ ------
Gross profit ..................................... 5.4 8.1 6.3 8.8
Selling, general and administrative expenses ..... 5.9 4.2 5.4 4.3
Other charges (recoveries) ....................... (0.9) (0.7) (0.4) (1.2)
------ ------ ------ ------
Income from operations ........................... 0.4 4.6 1.3 5.7
Other (expense) income, net ...................... (0.7) (1.2) (0.7) (1.1)
------ ------ ------ ------
Income (loss) before income taxes ................ (0.3) 3.4 0.6 4.6
Provision (benefit) for income taxes ............. (0.1) 1.3 0.2 1.7
------ ------ ------ ------
Net income (loss) ................................ (0.2)% 2.1% 0.4% 2.9%
====== ====== ====== ======
NET SALES
Net sales for the second quarter ended September 30, 2000 were $46.7
million, reflecting an increase of 102% from our net sales in the comparable
second quarter period of the prior year of $23.2 million. Sales to our three
largest customers during the quarter ended September 30, 2000 represented 13%,
13% and 13% of total net sales, with no other customer accounting for more than
10% of net sales. Sales to our three largest customers during the quarter ended
September 25, 1999 represented 16%, 15% and 13% of total net sales, with no
other customer accounting for more than 10% of net sales.
Net sales for the six month period ended September 30, 2000, were $89.4
million, which reflected an increase of 62% from net sales of $55.1 million in
the comparable six-month period of the prior fiscal year.
The higher sales levels for the three-and-six month periods ended September
30, 2000, versus the comparable periods of the prior fiscal year, mainly
reflected programs for new customers primarily in the networking and
telecommunications segments of the electronics market.
GROSS PROFIT
Gross profit is defined as net sales less cost of sales. Cost of sales
consists of direct labor, direct material and manufacturing overhead (which
includes manufacturing and process engineering expenses). Gross profit is
affected by, among other factors, the level of sales, mix of services, component
costs and the level of capacity utilization at our facilities.
Gross profit for the three months ended September 30, 2000 was $3.8 million
versus $1.2 million for the three months ended September 25, 1999. Our gross
margin, which represents our gross profit as a percentage of net sales,
increased to 8.1% in the second quarter of fiscal 2001, versus 5.4% in the
second quarter of fiscal 2000.
Gross profit for the six months ended September 30, 2000 was $7.9 million
versus $3.5 million for the six months ended September 25, 1999. Gross margin
for the first six months of fiscal 2001 was 8.8% of net sales versus 6.3% in the
comparable prior year period.
The favorable change in gross profit and gross margin reflected the higher sales
levels, increased utilization of manufacturing assets, inventory variances and
cost management, which more than offset the unfavorable effect that
industry-wide component shortages had on manufacturing efficiency and higher
costs incurred to expedite delivery of materials.
OPERATING EXPENSES
Selling, general and administrative, or SG&A, expenses consist primarily of
salaries and related expenses, marketing and promotional expenses, and sales
commissions paid to direct sales personnel and independent sales representative
organizations.
SG&A expenses were $1.9 million in the quarter ended September 30, 2000
versus $1.4 million in the comparable quarter of the prior fiscal year. SG&A
expenses represented 4.2% of net sales for the three months ended September 30,
2000 versus 5.9% of net sales for the three month period ended September 25,
1999, with the decrease attributable to higher sales levels and cost management.
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SG&A expenses were $3.8 million in the first six months of fiscal 2001
versus $3.0 million in the comparable prior year period. SG&A expenses as a
percentage of net sales decreased to 4.3% for the first six months of fiscal
2001, from 5.4% in the comparable prior year period, primarily as a result of
higher sales levels.
RECOVERIES
Recoveries totaling $338,000 and $209,000 in the quarters ended September
30, 2000 and September 25, 1999, respectively, were realized from a work out
plan with a customer. For the six-month periods ended September 30, 2000 and
September 25, 1999, recoveries of $1.1 million and $209,000, respectively, were
realized.
The work out plan calls for the issuance of warrants to acquire shares of
the customer's common stock and the recovery of amounts due us in the form of
interest, accounts receivable and inventory. Due to the uncertainty of
realization, a value has not been recorded for these warrants. Interest is being
applied to amounts due us and then subsequently to interest income at such time,
if ever, amounts due are fully recovered.
OTHER EXPENSE, NET
Other expense, net for the three months ended September 30, 2000 increased
to $563,000 compared to $149,000 for the three months ended September 25, 1999.
Other expense, net for the six months ended September 30, 2000 increased to
$972,000 compared to $377,000 for the six months ended September 25, 1999. The
fiscal 2001 change in other expense, net over the comparable three-and-six month
periods of fiscal 2000 was due to increased interest expense incurred on higher
borrowings in fiscal 2001.
INCOME TAXES
The provision (benefit) for income taxes of $605,000 and ($22,000) for the
three months ended September 30, 2000 and September 25, 1999, respectively,
reflected an effective tax rate of 38%. The provision for income taxes of $1.6
million and $125,000 for the six months ended September 30, 2000 and September
25, 1999, respectively, also reflected an effective tax rate of 38%.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $39.4 million at September 30, 2000, compared to
$24.7 million at the end of fiscal 2000. In addition to our available working
capital at September 30, 2000, which included cash and cash equivalents of $7.6
million, we also had $2.8 million in unused credit facilities available under
our bank and equipment lines of credit.
Net cash used in operating activities was $10.7 million for the six months
ended September 30, 2000. Cash flows used in operating activities during the six
months ended September 30, 2000 primarily resulted from higher inventories and
accounts receivable balances associated with higher sales levels; these were
partially offset by other changes in working capital.
Capital expenditures during the six months ended September 30, 2000 were
$1.3 million. Management anticipates that capital expenditures in fiscal 2001
will increase from the level of capital expenditures made in fiscal 2000 to
accommodate higher sales levels in fiscal 2001. Our expenditures on research and
development in the second quarter and six months ended September 30, 2000 were
$76,000 and $120,000, respectively, versus $45,000 and $91,000 in the comparable
periods of fiscal 2000.
In connection with our relocation and expansion in Dallas, Texas, in June
2000 we entered into a seven-year lease for a 50,000 square foot manufacturing
facility. The lease requires payments of approximately $34,000 per month over
the duration of the lease.
As of September 30, 2000, we had $51 million in credit lines and equipment
lease facilities, made up of the following: (1) a three-year revolving loan
facility for $35 million that was entered into on March 31, 2000; and (2) an
equipment lease facility for $16 million from a financial services company, of
which $2.0 million was unused at September 30, 2000. There was $26.5 million
outstanding under the revolving credit facility at September 30, 2000. The
Company was eligible to borrow an additional $0.8 million, at September 30,
2000, pursuant to the revolving loan facility's borrowing formula. The revolving
loan facility provides for automatic renewals for successive terms of equal
duration thereafter unless terminated by either party prior to the renewal date.
The revolving loan facility bears interest at LIBOR plus 2.25% to 3.00%
depending upon certain financial ratios or prime or prime plus one-half of one
percent (such rate determined based upon the amounts, financial ratios and
period of loans), matures March 30, 2003 and is secured by certain of our
assets. The revolving loan facility requires the payment of a monthly commitment
fee equal to one-quarter of one percent (0.25% per annum) on the unused balance,
and borrowings are limited based upon certain collateral availability
requirements on eligible accounts receivable and inventory. The equipment lease
facility provides for the leasing of equipment over a five-year period
commencing on the date of acceptance of such equipment.
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Our financing facilities contain certain restrictions, which among other
things, require maintenance of minimum financial ratios. At September 30, 2000,
we believe we were in compliance with the covenants relating to our financing
facilities. We plan to increase our revolving loan facility and equipment lease
line to support future growth.
We may require additional financing in connection with our business. We may
seek additional funds from time to time through public or private debt or equity
offerings or obtain further bank borrowings or off-balance sheet financing. Our
need for funding, and the cost of and access to additional funds, are dependent,
in the long term, on our future operating results as well as conditions external
to us. We believe that our working capital, together with cash generated from
operations and a planned increase to our revolving loan facility and equipment
lease line will be sufficient to satisfy anticipated sales growth and fund our
planned investments in manufacturing facilities and equipment through the next
12 months.
BACKLOG
Our backlog at September 30, 2000 was approximately $206.8 million as
compared to $138.4 million at July 1, 2000, $107.8 million at April 1, 2000 and
$85.8 million at September 25, 1999. Backlog consists of purchase orders
received by us and commitments under scheduled releases, both of which generally
specify delivery dates within twelve months. Variations in the size and delivery
schedules of purchase orders received by us, as well as changes in customers'
delivery requirements or the rescheduling or cancellation of orders and
commitments, have resulted in the past and may result in the future in
substantial fluctuation in backlog from period to period. Accordingly, backlog
may not be a meaningful indicator of our future net sales.
EMPLOYEES
As of September 30, 2000, we had approximately 710 full-time employees,
supplemented from time to time by part-time employees. Our employees are not
subject to a collective bargaining agreement and we believe our employee
relations to be satisfactory.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND
MARKET PRICE OF SECURITIES
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS AND, IN SOME CASES, SOLE SOURCE
SUPPLIERS FOR CRITICAL COMPONENTS. IF WE CANNOT OBTAIN SUFFICIENT COMPONENTS ON
A TIMELY BASIS, OUR NET SALES WILL SUFFER.
We depend on suppliers approved by our customers, including limited and sole
source suppliers, to provide key components that are used in the products we
manufacture for our customers. We have experienced in the past, and likely will
continue to experience, delays in component deliveries which, in turn, can cause
delays in product shipments or require the redesign of customers' products. In
particular, the electronics industry recently has experienced shortages in the
available supply of semiconductor devices, including DRAM, SRAM, flash memory,
tantalum capacitors and other commodities, that have been caused by surges in
overall market demand and constraints on supplier capacity. We may not receive
adequate component supplies on a timely basis in the future. The inability on
our part or our customers' or suppliers' part to continue to obtain components
as required, or to develop alternative sources if required, could cause delays,
disruptions or reductions in product shipments which would delay our ability to
recognize revenues. Any extended delays in our ability to manufacture products
for our customers could damage our relationships with them and impair our
reputation in the industry, either of which could result in a reduction in our
net sales.
A MAJORITY OF OUR NET SALES COMES FROM A SMALL NUMBER OF CUSTOMERS. IF WE LOSE
ANY OF THESE CUSTOMERS, OUR NET SALES COULD DECLINE SIGNIFICANTLY.
In the past, we derived a significant percentage of our net sales from a
relatively small number of customers. Our three largest customers accounted for
approximately 38% of our net sales for the quarter ended September 30, 2000 and
approximately 34% and 47% of our net sales in the fiscal years ended April 1,
2000 and March 27, 1999, respectively. We expect that we will continue to depend
on a small number of customers in future periods for large percentages of our
net sales, and as a result, any material delay, cancellation or reduction of
orders from these customers could cause our net sales to decline significantly.
We may not be able to retain any of our largest customers.
In addition, our customers may materially reduce the level of services
ordered from us at any time, and typically may do so with 30 days' advance
notice. A significant reduction in the demand for our services would cause a
significant decline in our net sales which could continue over a period of
several fiscal quarters. Because many of our expenses are fixed in the short
term, we may not be able to reduce the accompanying expenses over the period in
which such a decline occurs. Moreover, our business, financial
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condition and results of operations will continue to depend in significant part
on our ability to obtain orders from new customers, as well as on the financial
condition and success of our customers, a number of which are emerging growth
technology companies with highly volatile results of operations. Therefore, any
adverse events affecting our customers or the demand for their products from end
users could materially and adversely affect our business.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.
Our quarterly operating results have fluctuated in the past and may
fluctuate in the future due to a number of factors, many of which are outside of
our control, including the following:
o the introduction or discontinuance of our customers' products;
o our ability to fully utilize our equipment and facilities, which in turn
is dependent on material availability and the duration of the production
run time for each customer's order;
o parts shortages which prevent us from shipping our products in a timely
manner;
o differences in gross margins associated with various types of our
manufacturing services;
o our ability to optimize the timing and amount of inventory purchases in
order to take advantage of volume discounts and to minimize expediting
and inventory holding costs;
o fluctuations in OEMs' demand for our services or in end-user demand for
the products that we manufacture for our customers;
o timing of capital and infrastructure expenditures in anticipation of
increased sales; and
o business cycles of our customers.
If any of these factors occur, our operating results could fall below the
expectations of securities analysts and investors. If this occurs, the market
price of our common stock could decline significantly and our business could be
harmed.
WE DEPEND UPON SEGMENTS OF THE ELECTRONICS INDUSTRY WHICH FOCUS ON
TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT PRODUCT LIFE CYCLES. IF WE CANNOT
MANUFACTURE PRODUCTS FOR OUR CUSTOMERS ON A COST-EFFECTIVE BASIS, OUR BUSINESS
WILL BE HARMED.
Most of our net sales are to companies in the networking and
telecommunications segments of the electronics industry. These segments of the
electronics industry are particularly susceptible to rapid technological changes
and short product life cycles. If our customers are unable to develop and
successfully introduce to market products that keep pace with the changing
technological environment, our customers' existing products could become
obsolete, thereby reducing the demand for our services. If we fail to offer
technologically advanced, cost-effective and quick response manufacturing
services to networking, telecommunications and other customers, our ability to
support their needs for manufacturing and related services will be impaired and
the demand for our services will decline.
WE MAY BEAR THE RISK OF PRICE INCREASES ASSOCIATED WITH SHORTAGES IN THE
AVAILABILITY OF ELECTRONICS COMPONENTS.
One of the services that we perform for many customers is materials
procurement and supply base management of the parts and components that are used
in manufacturing their products. Shortages of various types of components in the
electronics industry occur from time to time and are difficult to predict and
inevitably result in higher prices for products that are in short supply. As a
result, unless we are successful in recovering price increases under our
agreements with our customers, we may bear the risk of price increases for these
components which could negatively impact our profitability.
WE MAY FACE WORKING CAPITAL CONSTRAINTS DUE TO CUSTOMER INVENTORY REQUIREMENTS
OR MATERIALS SHORTAGES.
In performing materials procurement and supply base management services, we
typically purchase components and other materials on behalf of our customers
with our own working capital resources. Therefore, to the extent we experience
increases in orders for our services from new or existing customers, or the
schedule for manufacturing services is delayed for any reason, including an
inability to
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procure needed components, we incur a larger inventory of components and other
materials pending their use in manufacturing and assembly processes. The
acquisition of this inventory, combined with reductions in cash flow from delays
in our shipment of completed orders, has in the past placed a significant strain
on our working capital resources. If we incur significant delays in our shipment
of products, or if we receive significant new orders from customers that require
the purchase of additional components, we may experience significant challenges
in obtaining the working capital necessary to fund new component purchases or to
generally sustain our operations. If we are unable to purchase components in
advance for customer manufacturing programs, we may experience further delays in
our manufacturing processes and our business reputation and customer relations
may be impaired.
VARIABILITY IN THE VOLUME AND TIMING OF OUR SALES COULD ADVERSELY AFFECT OUR
FINANCIAL PERFORMANCE.
The volume and timing of sales of our services to our customers have varied
in the past and are expected to vary in the future due to:
o variation in end-user demand for our customers' products;
o our customers' management of their inventory;
o electronic design changes, including changes in industry standards;
o changes in our customers' manufacturing strategies; and
o acquisitions or consolidations involving our customers.
Continued variations in the volume and timing of sales could have a material
adverse effect on our operating results.
BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS, OUR CUSTOMERS MAY CANCEL THEIR
ORDERS OR CHANGE PRODUCTION QUANTITIES. ADDITIONALLY, CUSTOMERS MAY FAIL TO PAY
US FOR OUR SERVICES. THE OCCURRENCE OF ANY OF THESE EVENTS COULD HARM OUR
BUSINESS.
Because of uncertainty in the market demand for their products, our
customers are generally unwilling to enter into long-term purchase orders or
commitments with us. Instead, we typically work with our customers to develop
nonbinding forecasts of their future volume of orders. Based on such nonbinding
forecasts, we make commitments regarding the level of business that we will seek
and accept, the timing of production schedules, materials required and the
levels and utilization of personnel and other resources. Generally, customers
may cancel, reduce or delay purchase orders and commitments without penalty,
except for payment for services rendered, materials purchased or procured on
their behalf and, in some cases, charges associated with cancellations, order
reductions or scheduling delays. Cancellations, reductions or delays in
significant orders for our services by customers have adversely affected our
business, financial condition and results of operations in the past. To the
extent they occur in the future, our future results of operations could be
affected and could cause us to reduce manufacturing capacity through layoffs or
plant closures. In addition, we have experienced in the past, and may encounter
in the future, difficulty in the collection of accounts receivables from our
customers, particularly with respect to smaller, privately-held customers that
have a limited ability to readily access capital. Any failure by customers to
pay for the services that we perform for them could materially and adversely
affect our working capital and financial condition.
WE MAY FAIL TO SECURE NECESSARY ADDITIONAL FINANCING.
We have made and will continue to make substantial capital expenditures to
expand our operations and remain competitive in the electronics manufacturing
services, or EMS, industry. Our future success may depend on our ability to
obtain additional financing to support our continued growth and operations. We
may seek to raise capital by:
o issuing additional common stock or other equity instruments;
o issuing debt securities;
o obtaining additional lease financings;
o increasing our lines of credit; or
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o obtaining off-balance sheet financing.
We may not be able to obtain additional financing when we want or need it,
and financing may not be available on satisfactory terms. If we issue additional
equity securities or convertible debt to raise capital, our stockholders'
ownership interest may be diluted. Furthermore, any additional financing may
have terms and conditions that constrain our ability to operate our business,
such as the imposition of financial or operating covenants or high interest
rates.
THE RELOCATION OF OUR DALLAS MANUFACTURING FACILITY COULD DISRUPT OUR
OPERATIONS.
We are in the process of relocating our Dallas facility. This relocation
will entail a number of risks, including the potential disruption of our
manufacturing operations or our ability to ship products to our customers. The
relocation may result in damage to equipment and machinery, delays in scheduled
production and interruption of work in process. As a consequence, our business
and results of operations could be materially and adversely affected for the
second half of our fiscal year ending March 31, 2001.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
We have recently experienced an increase in the demand for our services. In
response, we have purchased additional capital equipment and expanded our
workforce. In addition, we plan to further expand our manufacturing capacity,
which also will increase our fixed costs and require us to recruit and retain
additional personnel. A continuing period of rapid growth, including additional
expansion and possible acquisitions, could place a significant strain on our
management, operations, financial and other resources. In order to manage our
growth, we must manage our existing resources efficiently, invest more resources
in our operations, extend our financial and management information systems and
internal process controls, and retain, motivate and manage our employees. If our
management is unable to manage growth effectively, the quality of our services
and our ability to retain key personnel could be materially and adversely
affected, which would impair our ability to grow our business and respond to new
market opportunities.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR REDUCTIONS IN PRICES FOR
OUR SERVICES.
The EMS industry is highly competitive. We compete against large U.S. and
foreign EMS providers that conduct operations in our markets, as well as
numerous EMS providers that operate on a local or regional basis. Consolidation
in the EMS industry has changed and intensified the competitive landscape by
creating larger and more geographically diverse competitors possessing
significant resources.
Many of our competitors have substantially broader manufacturing
capabilities, particularly in the area of volume production, and greater
financial and marketing resources. In addition, we may operate at a cost
disadvantage relative to manufacturers that have greater direct buying power
with component suppliers or that have lower cost structures. Furthermore,
current and prospective customers continually evaluate the merits of
manufacturing products internally and will from time to time bring manufacturing
services in house in order to utilize their own excess capacity.
Competition from existing or potential competitors may have a material
adverse effect on our business. The development of more advanced manufacturing
technology and processes could decrease the demand for our services. In
addition, the introduction of lower priced competition or significant price
reductions by our competitors could result in price reductions for our services.
WE DEPEND ON CERTAIN KEY PERSONNEL AND THE LOSS OF KEY PERSONNEL MAY HARM OUR
BUSINESS.
Our future success depends in large part on the continued service of our key
technical and management personnel and on our ability to continue to attract and
retain qualified employees, particularly highly skilled engineers involved in
providing product development support and advanced prototyping services. We
generally do not have employment agreements with our key employees. The
competition for these individuals is intense and the loss of key employees could
have a material adverse effect on our business.
WE ARE DEPENDENT ON THE CONTINUING TREND BY OEMS TO OUTSOURCE THEIR EMS NEEDS.
A substantial factor in our revenue growth is attributable to the continuing
trend by OEMs in the electronics industry to outsource their design, prototype
development, assembly, manufacturing and related needs to third-party service
providers. Our future growth is dependent in part on new opportunities to
provide our services to OEMs that are seeking to outsource their manufacturing
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requirements. Our current and prospective customers continually evaluate the
merits of manufacturing products internally and will "in-source" their
requirements when it is economically prudent. To the extent that new
opportunities to provide our services are not available or customers elect to
manufacture a portion of their product requirements internally, our future
growth would be impaired which would adversely affect our results of operations.
THE PRODUCTS THAT WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS
WHICH COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS
AGAINST US.
We manufacture highly complex products to our customers' specifications.
These products may at times contain design or manufacturing errors or failures.
Despite our quality control and quality assurance efforts, defects may be
discovered in products that we have previously manufactured or may manufacture
in the future. Defects in the products we manufacture, whether caused by a
design, manufacturing or component failure or error, may result in delayed
shipments to our customers, or in a reduction in or a cancellation of customers'
orders. If defects occur in large quantities of products that we manufacture or
occur too frequently, our business reputation also may be impaired. In addition,
defects may result in liability claims against us. It may be costly to defend
against and settle these claims. The occurrence of any of these events could
have a material adverse effect on our financial condition and results of
operations.
PROVISIONS IN OUR CHARTER DOCUMENTS, STOCKHOLDER RIGHTS PLAN AND AGREEMENTS WITH
EXECUTIVES AND PROVISIONS OF DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN
CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR STOCK.
Our certificate of incorporation and bylaws contain various provisions,
including provisions related to notice periods, staggered terms of office for
members of our board of directors and the issuance of preferred stock, that may
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. In addition, we have adopted a stockholder
rights plan which, if invoked in the context of a potential acquisition of our
company that is opposed by our board of directors, may cause substantial
dilution to the party that is attempting to acquire control of our company. We
have also entered into agreements with a number of our executives allowing for
cash payments to them following a change in control of our company under
specified circumstances, such as termination of their employment without cause.
Finally, Delaware law prohibits business combinations with some interested
stockholders. Any of these factors may dissuade a third party from attempting to
acquire our company, and as a result, the existence of these provisions may
limit the market price for shares of our common stock.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS.
As a company in the EMS industry, we are subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during our manufacturing processes. If we fail to
comply with environmental laws and regulations, we may be subject to liabilities
or the suspension of production. In addition, these laws and regulations could
restrict our ability to expand our facilities or require us to acquire costly
equipment or incur other significant costs to comply with regulations.
Furthermore, we cannot predict the nature, scope or effect of environmental
legislation or regulatory requirements that could be imposed or how existing or
future laws or regulations will be administered or interpreted. Compliance with
more stringent laws or regulations, as well as more vigorous enforcement
policies of regulatory agencies, could require substantial expenditures by us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We invest our cash in money market funds or instruments which meet high
credit quality standards specified by our investment policy. We do not use
financial instruments for trading or other speculative purposes. Our financing
facilities are subject to market risk by way of interest rate fluctuations. The
carrying amount of our long-term debt approximates fair value due to the
periodic adjustments of our interest rate on the debt to current market rates.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on August 23, 2000 in
Austin, Texas, the Company's stockholders voted on the election of directors and
a shareholder proposal. All directors recommended were elected. The shareholder
proposal was not approved.
Proposal 1: Election of Directors
Name of Nominee Votes in Favor Votes Against Abstentions
--------------- -------------- ------------- -----------
Alan R. Schuele (Class II Director) 8,756,224 33,350 --
C. Scott Kulicke (Class II Director) 8,883,987 33,350 --
Malcolm Hargrave 127,763 -- --
Total shares voted 8,917,337 with no broker non-votes.
The following directors terms of office will continue after the
Annual Meeting of Stockholders held on August 23, 2000:
Sam L. Densmore
Angelo A. Decaro, Jr.
Ronald W. Guire
Proposal 2: Stockholder Proposal to Amend Change-in-Control
Agreements
Votes in Favor Votes Against Abstentions
-------------- ------------- -----------
247,844 5,024,518 9,600
Broker non-votes amounted to 3,635,375.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The exhibits listed in the accompanying Index to Exhibits are
filed as part of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the three
month period ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XETEL CORPORATION
Date: November 14, 2000 By: /s/ Angelo A. DeCaro, Jr.
--------------------------------------------
Angelo A. DeCaro, Jr.
President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Richard S. Chilinski
--------------------------------------------
Richard S. Chilinski
Senior Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27.1 Financial Data Schedule