UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
or
o 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: 0-21272
Sanmina-SCI Corporation
(Exact name of registrant as specified in its charter)
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Delaware |
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77-0228183 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification Number) |
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2700 North First Street, San Jose, CA |
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95134 |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code:
(408) 964-3500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated or, a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate value of Common Stock held by non-affiliates of the Registrant was approximately $1,901,529,804 as of March 31, 2006 based upon the average of Registrant’s Common Stock reported for such date on the Nasdaq National Market. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 1, 2006, the Registrant had outstanding 531,606,934 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant’s annual meeting of stockholders to be held on February 26, 2007 to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
In this comprehensive Form 10-K, we are restating our consolidated financial statements and related disclosure for the fiscal years ended October 1, 2005 and October 2, 2004. We are also restating the pro forma disclosures for stock-based compensation expense required under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” included in Note 12 to the Consolidated Financial Statements. This Form 10-K also reflects the restatement of Selected Consolidated Financial Data for the fiscal years ended 2005, 2004, 2003, and 2002, in Item 6. Furthermore, under “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations of Operations”, we have included restated financial information for each affected quarter during fiscal 2005 and 2006.
For more information regarding the investigation and findings relating to stock option practices and the restatement of stock-based compensation and other items, please refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 of the Notes to Consolidated Financial Statements—“Restatement of Consolidated Financial Statements”. For more information regarding the investigation and findings relating to stock option practices and the restatement and our remedial measures, refer to Item 9A, “Controls and Procedures”.
We have not amended any of our other previously filed annual reports on Form 10-K for the periods affected by the restatement. For this reason, the consolidated financial statements and related financial information contained in such previously filed reports should no longer be relied upon.
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Management’s
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Changes and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 10. |
Directors and Executive Officers of the Registrant |
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Item 11. |
Executive Compensation |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions |
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Principal Accountant Fees and Services |
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We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. We provide these comprehensive services primarily to original equipment manufacturers, or OEMs, in the communications, computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical, and automotive industries. The combination of our advanced technologies, extensive manufacturing expertise and economies of scale enables us to meet the specialized needs of our customers in these markets in a cost-effective manner.
Our end-to-end services in combination with our global expertise in supply chain management enable us to manage our customers’ products throughout their life cycles. These services include:
· product design and engineering, including initial development, detailed design, preproduction services and manufacturing design;
· volume manufacturing of complete systems, components and subassemblies;
· final system assembly and test;
· direct order fulfillment and logistics services; and
· after-market product service and support.
Our high volume manufacturing services are vertically integrated, allowing us to manufacture key system components and subassemblies for our customers. By manufacturing key system components and subassemblies ourselves, we enhance continuity of supply and reduce costs for our customers. In addition, we are able to have greater control over the production of our customers’ products and retain incremental profit opportunities for the company. System components and subassemblies that we manufacture include high volume and high-end printed circuit boards, printed circuit board assemblies, backplanes and backplane assemblies, enclosures, cable assemblies, precision machine components, optical modules and memory modules.
We manufacture products in 18 countries on five continents. We seek to locate our facilities near our customers and our customers’ end markets in major centers for the electronics industry or in lower cost locations. Many of our plants located near customers and their end markets are focused primarily on final system assembly and test, while our plants located in lower cost areas engage primarily in high volume, less complex component and subsystem manufacturing and assembly.
We have become one of the largest global EMS providers by capitalizing on our competitive strengths, including our:
· end-to-end services;
· product design and engineering resources;
· vertically integrated volume manufacturing services;
· advanced technologies;
· global capabilities;
· customer-focused organization;
· expertise in serving diverse end markets; and
· experienced management team.
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Our business strategy enables us to win large outsourcing programs from leading multinational OEMs. Our customers primarily consist of OEMs that operate in a range of industries. Our top customers include: Alcatel, S.A., Applied Materials, Inc., Cisco Systems, EchoStar Communications Corporation, Hewlett-Packard Company (“HP”), International Business Machines Corporation (“IBM”), Koninklijke Philips Electronics NV, Lenovo Group, Ltd. (“Lenovo”), LSI Logic Corporation, Nokia Corp, Nortel Networks, Roche Diagnostics Operations, Inc., Sun Microsystems, Telefonaktiebolaget LM Ericsson, and Tellabs, Inc.
EMS companies are the principal beneficiaries of the increased use of outsourced manufacturing services by the electronics and other industries. Outsourced manufacturing refers to an OEMs’ use of EMS companies, rather than internal manufacturing capabilities, to manufacture their products. Historically, EMS companies generally manufactured only components or partial assemblies. As the EMS industry has evolved, OEMs have increased their reliance on EMS companies for additional, more complex manufacturing services, including design services. Some EMS companies now often manufacture and test complete systems and manage the entire supply chains of their customers. Industry leading EMS companies offer end-to-end services, including product design and engineering, volume manufacturing, final system assembly and test, direct order fulfillment, after-market product service and support and global supply chain management.
We believe increased outsourced manufacturing by OEMs will continue because it allows OEMs to:
Reduce Operating Costs and Capital Investment. In the current economic environment, OEMs are under significant pressure to reduce manufacturing costs and capital expenditures. EMS companies can provide OEMs with flexible, cost-efficient manufacturing services. In addition, as OEM products have become more technologically advanced, the manufacturing and system test processes have become increasingly automated and complex, requiring significant capital investments. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures.
Focus on Core Competencies. The electronics industry is highly competitive and subject to rapid technological change. As a result, OEMs increasingly are focusing their resources on activities and technologies in which they expect to add the greatest value. By offering comprehensive manufacturing services and supply chain management, EMS companies enable OEMs to focus on their core competencies, including next generation product design and development as well as marketing and sales.
Access Leading Design and Engineering Capabilities. The design and engineering of electronics products has become more complex and sophisticated and in an effort to become more competitive, OEMs are increasingly relying on EMS companies to provide product design and engineering support services. EMS companies’ design and engineering services can provide OEMs with improvements in the performance, cost and time required to bring products to market. EMS companies are providing more sophisticated design and engineering services to OEMs, including the design and engineering of complete products following an OEM’s development of a product concept.
Improve Supply Chain Management and Purchasing Power. OEMs face challenges in planning, procuring and managing their inventories efficiently due to fluctuations in customer demand, product design changes, short product life cycles and component price fluctuations. EMS companies employ sophisticated production management systems to manage their procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when needed basis. EMS companies are significant purchasers of electronic components and other raw materials, and can capitalize on the economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply,
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and return excess components. EMS companies’ expertise in supply chain management and their relationships with suppliers across the supply chain enable them to help OEMs reduce their cost of goods sold and inventory exposure.
Access Global Manufacturing Services. OEMs seek to reduce their manufacturing costs by having EMS companies manufacture their products in the lowest cost locations that are appropriate for their products and end customers. OEMs also are increasingly requiring particular products to be manufactured simultaneously in multiple locations, often near end users, to bring products to market more quickly, reduce shipping and logistics costs and meet local product content requirements. Global EMS companies are able to satisfy these requirements by capitalizing on their geographically dispersed manufacturing facilities, including those in lower cost regions.
Accelerate Time to Market. OEMs face increasingly short product life cycles due to increased competition and rapid technological changes. As a result, OEMs need to reduce the time required to bring their products to market. OEMs often can bring a product to market faster by using EMS companies’ expertise in new product introduction, including manufacturing design, engineering support and prototype production. OEMs often can more quickly achieve volume production of their products by capitalizing on EMS companies’ manufacturing expertise and global presence and infrastructure.
We offer our OEM customers end-to-end services that span the entire product life cycle:
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We believe that our competitive strengths differentiate us from our competitors and enable us to better serve the needs of OEMs. Our competitive strengths include:
· End-to-End Services. We provide services throughout the world to support our customers’ products during their entire life cycle, from product design and engineering, through volume manufacturing, to direct order fulfillment and after-market product service and support. We believe that our end-to-end services are more comprehensive than the services offered by our competitors because of our focus on adding value before and after the actual manufacturing of our customers’ products. Our end-to-end services enable us to provide our customers with a single source of supply for their EMS needs, reduce the time required to bring products to market, lower product costs and allow our customers to focus on those activities in which they expect to add the highest value. We believe that our end-to-end services allow us to develop closer relationships with our customers and more effectively compete for their future business.
· Product Design and Engineering Resources. We provide product design and engineering services to produce advanced electronic systems for both custom and standard designs. Our global design and engineering teams include approximately 600 designers and engineers located in 19 design and new product introduction centers in 11 countries. Our designers and engineers work closely with our customers to develop new products and manage products throughout their life cycles. Our design centers provide both hardware and software engineering services for a range of product technologies, including high-speed digital, analog, radio frequency, wireless, optical and electro-mechanical technologies. We also provide component-level design services in connection with our vertically integrated volume manufacturing services, including the design of complex printed circuit boards and printed circuit board assemblies, backplanes and backplane assemblies, enclosures, cable assemblies and modular memory solutions.
· Vertically Integrated Volume Manufacturing Services. We provide a range of vertically integrated volume manufacturing services. Key system components that we manufacture include complete printed circuit boards and printed circuit board assemblies, backplanes and backplane assemblies, enclosures, cable assemblies, precision machine components, memory modules and optical modules. By manufacturing these system components and subassemblies ourselves, we enhance continuity of supply and reduce costs for our customers. In addition, we are able to have greater control over the production of our customers’ products and retain incremental profit opportunities for us. Examples of products that we manufacture using our full range of services include wireless base stations, network switches, optical switches, enterprise-class servers, photolithography equipment, and equipment used in the semiconductor chip manufacturing process, including equipment for chemical mechanical polishing and physical vapor depositions and automated handling tools and robotics for wafer transfer.
· Advanced Technologies. We are a leader in providing services utilizing advanced technologies, which we believe allows us to differentiate ourselves from our competitors. These advanced technologies include the fabrication of complex printed circuit boards and backplanes having over 60 layers and process capabilities for a range of low signal loss, high performance materials, buried capacitors and resistors, and high density interconnects using micro via holes that are formed using laser drills. Our printed circuit board assembly technologies include micro ball grid arrays, fine pitch discretes, and small form factor radio frequency and optical components, as well as advanced packaging technologies used in high pin count application specific integrated circuits and network processors. We use innovative design solutions and advanced metal forming techniques to develop and fabricate high-performance indoor and outdoor chassis, enclosures and frames. Our assembly services use advanced technologies, including precision optical alignment, multi-axis precision
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stages and machine vision technologies. We use sophisticated procurement and production management tools to effectively manage inventories for our customers and ourselves. We have also developed build-to-order, or BTO, and configure-to-order, or CTO, systems that enable us to manufacture and ship finished systems within 48 to 72 hours after receipt of an order. To coordinate the development and introduction of new technologies to meet our customers’ needs in various locations and to increase collaboration among our facilities, we have established a centralized global technology group.
· Global Capabilities. Most of our customers compete and sell their products on a global basis. As such, they require global solutions that include regional manufacturing for selected end markets, especially when time to market, local manufacturing or content and low cost solutions are critical objectives. Our global network of facilities in 18 countries provides our customers a combination of sites to maximize both the benefits of regional and low cost manufacturing. To manage and coordinate our global operations, we employ an enterprise-wide software system that operates on a single IT platform and provides us with company-wide information regarding component inventories and orders. This system enables us to standardize planning and purchasing at the plant level and to optimize inventory management and utilization. Our systems also enable our customers to receive key information regarding the status of individual programs.
· Customer-Focused Organization. We believe customer relationships are critical to our success, and our organization is focused on providing our customers with responsive services. Our key customer accounts are managed by dedicated account teams, including a global business manager directly responsible for account management. Global business managers coordinate activities across divisions to effectively satisfy our customers’ requirements and have direct access to our senior management to quickly address customer concerns. Local customer account teams further support the global teams and are linked by a comprehensive communications and information management infrastructure.
· Expertise in Serving Diverse End Markets. We have experience in serving our customers in the communications, personal and business computing, enterprise computing and storage, multimedia and consumer, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive markets. Our diversification across end markets reduces our dependence upon any one customer or segment. In order to cater to the specialized needs of customers in particular market segments, we have dedicated personnel, and in some cases facilities, with industry-specific capabilities and expertise. We also maintain compliance with industry standards and regulatory requirements applicable to certain markets including, among others, the medical and defense and aerospace sectors.
· Experienced Management Team. We believe that one of our principal assets is our experienced management team. Our chief executive officer, Jure Sola, co-founded Sanmina in 1980. Hari Pillai, President, EMS Operations, joined our Company in 1994 and has served in manufacturing management positions since that time. We believe that the significant experience of our management team better enables us to capitalize on opportunities in the current business environment.
Our objective is to maintain and enhance our leadership position in the EMS industry. Key elements of our strategy include:
Capitalizing on Our Comprehensive Services. We intend to capitalize on our end-to-end services, which we believe will allow us to both sell additional services to our existing customers and attract new customers. Our end-to-end services include product design and engineering, volume manufacturing, final
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system assembly and test, direct order fulfillment, after-market product service and support and supply chain management. Our vertically integrated volume manufacturing services enable us to manufacture additional system components and subassemblies for our customers. When we provide a customer with a number of services, such as component manufacturing or higher value-added services, we are often able to improve our margins and profitability. Consequently, our goal is to increase the number of manufacturing programs for which we provide multiple services. To achieve this goal, our sales and marketing organization seeks to cross-sell our services to customers.
Extending Our Technology Leadership. We rely on advanced processes and technologies to provide our vertically integrated volume manufacturing services. We continually strive to improve our manufacturing processes and have adopted a number of quality improvement and measurement techniques to monitor our performance. We work with our customers to anticipate their future manufacturing requirements and align our technology investment activities to meet their needs. We use our design expertise to develop product technology platforms that we can customize by incorporating other components and subassemblies to meet the needs of particular OEMs. These technologies enhance our ability to manufacture complex, high-value added products, allowing us to continue to win business from existing and new customers.
Joint Design Manufacturing Solutions. As a result of customer feedback, and our customers’ desire to manage research and development expenses, we have expanded product designs services to develop systems and components jointly with our customers. In joint design manufacturing model, or JDM, our customers bring market knowledge and product requirements. We offer complete design engineering and new product introduction (NPI) services. Our offerings in design engineering include product architecture, development, integration, regulatory and qualification services; while NPI services include quick-turn prototyping, functional test development and introduction into volume production. For JDM products, typically the intellectual property is jointly owned by us and the customer and we realize manufacturing revenue associated with building and shipping the product.
Continuing to Penetrate Diverse End Markets. We focus our marketing efforts on major end markets within the electronics industry. We have targeted markets that we believe offer significant growth opportunities and for which OEMs sell complex products that are subject to rapid technological change because the manufacturing of these products requires higher value-added services. Our approach to our target markets is two-fold: we intend to strengthen our significant presence in the communications and enterprise computing markets, and also focus on under-penetrated target markets, including the medical, industrial and semiconductor capital equipment, automotive, and defense and aerospace industries, many of which have not extensively relied upon EMS companies in the past. We intend to continue our diversification across market segments and customers to reduce our dependence on any particular market.
Pursuing Strategic Transactions. We seek to undertake strategic transactions that give us the opportunity to access new customers, manufacturing and service capabilities, technologies and geographic markets, to lower our manufacturing costs and improve the margins on our product mix, and to further develop existing customer relationships. For example, in October 2004, we completed the acquisition of Pentex-Schweizer Circuits Limited, a printed circuit board manufacturer, in order to provide lower cost manufacturing capacity in China for our customers. In addition, we will continue to pursue OEM divestiture transactions that will augment existing strategic customer relationships with favorable supply agreement terms or build new relationships with customers in attractive end markets. Potential future transactions may include a variety of different business arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and equity or debt investments. We intend to continue to evaluate and pursue strategic opportunities on a highly selective basis.
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Continuing to Seek Cost Savings and Efficiency Improvements. We seek to optimize our facilities to provide cost-efficient services for our customers. We maintain extensive operations in lower cost locations, including Latin America, Eastern Europe, China and Southeast Asia, and we plan to expand our presence in these lower cost locations, as appropriate, to meet the needs of our customers. We believe that we are well positioned to take advantage of future opportunities on a global basis as a result of our vertically integrated volume manufacturing strategy.
We offer our OEM customers end-to-end services that span the entire product life cycle. Examples of products that we manufacture for OEMs include wireless and wireline communications switches, personal computers, high-end computers and servers, avionics, medical imaging systems and digital satellite set-top boxes. The manufacture of these products may require us to use all or some of our end-to-end services. Each element of our end-to-end services is described in greater detail below.
Product Design and Engineering. Our design and engineering group, which we believe is one of the strongest in the EMS industry, provides customers with design and engineering services for initial product development, detailed product design and preproduction. This group also complements our vertically integrated volume manufacturing capabilities by providing manufacturing design services for the manufacture of printed circuit boards, backplanes and enclosures. We provide initial product development and detailed product design and engineering services for products such as communications base stations, optical switches and modules, radio frequency amplifier modules, network switches, personal computers and servers.
· Initial Product Development. We provide a range of design and engineering services to customers to complement their initial product development efforts. During this phase, our design engineers work with our customers’ product development engineers to assist with design reviews and product concepts.
· Detailed Product Design. During the detailed product design phase, we work with our customers’ product development engineers to optimize product designs to improve the efficiency of the volume manufacturing of these products and reduce manufacturing costs. We further analyze product design to improve the ability of tests used in the manufacturing process to identify product defects and failures. We provide software development support for product development, including installing operating systems on hardware platforms, developing software drivers for electronic devices, and developing diagnostic, production test and support software. We design components that are incorporated into our customers’ products, including printed circuit boards, backplanes and enclosures.
· Preproduction. After a detailed product design has been completed and the product is released for prototype production, we can build a prototype on a quick turnaround basis. We then analyze the feasibility of manufacturing the product and make any necessary design modifications to the prototype and re-test the prototype to validate its design. We also provide early-stage test development during the prototype phase. We evaluate prototypes to determine if they will meet safety and other standards, such as standards published by Underwriters Laboratories, an independent product safety testing and certification organization, and other similar domestic and international organizations. We also typically provide low-volume manufacturing to satisfy our customers’ initial needs. We review the material and component content of our customers’ designs with a view to designing in alternative components that may provide cost savings. Our preproduction services help our customers reduce the time required to bring new products to market.
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· Manufacturing Design Services. We provide our own designs for our vertically integrated system components and subassemblies, including:
· Printed Circuit Board and Backplane Design. We have a dedicated printed circuit board design group that designs and engineers complex printed circuit boards and backplanes. These printed circuit boards and backplanes incorporate high layer counts and large form factors and are used in complex products such as optical networking products and communications switches. Our designs also incorporate component miniaturization technologies and other advanced technologies that increase the number and density of components that can be placed on a printed circuit board. These technologies enable OEMs to provide greater functionality in smaller products. We also provide signal integrity engineering services, which involve the maintenance of the quality and integrity of high speed electrical signals as they travel through a system.
· Enclosure Design. We have a dedicated enclosure design group that designs and engineers complex enclosures. We can design custom enclosures to meet customer specifications and offer a range of proprietary designs tailored to particular applications. Our enclosure design services include the design of thermal management systems, which dissipate heat generated by the components within an enclosure. We design enclosures that are used in both indoor and outdoor environments. We also design enclosures that include both stackable and rack mount chassis configurations. In stackable configurations, component modules are stacked on top of each other, while in rack mount configurations, component modules slide into racks within the enclosure. Rack mount configurations often are used for complex products, such as communications switches that are frequently upgraded in the field by inserting new components. Our design engineers work with a range of materials, including metal, plastic and die-cast material. We design indoor and outdoor wireless base station cabinets, enclosures for high-end servers and data storage systems and enclosures for magnetic resonance imaging systems.
Volume Manufacturing. Volume manufacturing includes our vertically integrated manufacturing services described in greater detail below.
· Printed Circuit Boards. Our ability to reliably produce printed circuit boards with high layer counts and narrow circuit track widths makes us an industry leader in complex printed circuit board fabrication. Printed circuit boards are made of laminated materials and contain electrical circuits and connectors that interconnect and transmit electrical signals among the components that make up electronic devices. We are among a small number of manufacturers that specialize in manufacturing complex multi-layer printed circuit boards. Multi-layering, which involves incorporating numerous layers of electrical circuitry into a single printed circuit board, expands the number of circuits and components that can be contained on a printed circuit board and increases the operating speed of the system by reducing the distance that electrical signals must travel. Increasing the density of the circuitry in each layer is accomplished by reducing the width of the circuit tracks and placing them closer together in the printed circuit board. We are currently capable of efficiently producing printed circuit boards with up to 60 layers and circuit track widths as narrow as three mils. We use sophisticated circuit interconnections between certain layers to improve the performance of printed circuit boards. We have developed a proprietary material technology known as buried capacitance as well as various other processes that are designed to improve electrical performance and connection densities on printed circuit boards.
· Printed Circuit Board Assembly and Test. Printed circuit board assembly involves attaching electronic components, such as integrated circuits, capacitors, microprocessors, resistors and memory modules, to printed circuit boards. The most common technologies used to attach
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components to printed circuit boards employ surface mount technology, or SMT, and pin-through-hole assembly, or PTH. SMT involves the use of an automated assembly system to place and solder components to the printed circuit board. In PTH, components are placed on the printed circuit board by insertion into holes punched in the circuit board. Components also may be attached using press-fit technology in which components are pressed into connectors affixed to the printed circuit board. We use SMT, PTH, press-fit as well as new attachment technologies that are focused on miniaturization and increasing the density of component placement on printed circuit boards. These technologies, which support the needs of our OEM customers to provide greater functionality in smaller products, include chip-scale packaging, ball grid array, direct chip attach and high density interconnect. We perform in-circuit and functional testing of printed circuit board assemblies. In-circuit testing verifies that all components have been properly inserted and attached and that the electrical circuits are complete. We perform functional tests to confirm that the board or assembly operates in accordance with its final design and manufacturing specifications. We either design and procure test fixtures and develop our own test software, or we use our customers’ test fixtures and test software. In addition, we provide environmental stress tests of the board or assembly that are designed to confirm that the board or assembly will meet the environmental stresses, such as heat, to which it will be subject.
· Backplanes and Backplane Assemblies. Backplanes are very large printed circuit boards that serve as the backbones of sophisticated electronics products and provide interconnections for printed circuit boards, integrated circuits and other electronic components. We fabricate backplanes in our printed circuit board plants. Backplane fabrication is significantly more complex than printed circuit board fabrication due to the large size and thickness of the backplanes. We manufacture backplane assemblies by press fitting high density connectors into plated through holes in the bare backplane. In addition, many of the newer higher technology backplanes require SMT attachment of passive discrete components as well as high pin count Ball Grid Array packages. These advanced assembly processes require specialized equipment and a strong focus on quality and process control. We also perform in-circuit and functional tests on backplane assemblies. We have developed proprietary technology and “know-how” which enables backplanes to run at data rates in excess of 10 gigabits per second, or Gbps. We are investing in research and development to manufacture backplanes with embedded optical channels capable of data rates of over 40 Gbps. We currently have capabilities to manufacture backplanes with up to 60 layers in sizes up to 32 ´ 54 inches and 0.500 inches in thickness, utilizing a wide variety of high performance laminate materials. These are among the largest and most complex commercially manufactured backplanes, and we are one of a limited number of manufacturers with these capabilities.
· Enclosures. Enclosures are cabinets that house and protect complex and fragile electronic components, modules and subsystems. Our enclosure manufacturing services include fabrication of cabinets, chassis and racks integrated with various electronic components such as power and thermal management systems. We manufacture a broad range of enclosures with numerous materials including metal, plastics and die cast materials. Enclosures we manufacture range from basic enclosures, such as enclosures for personal computers, to large and highly complex enclosures, such as those for indoor and outdoor communications base station products.
· Cable Assemblies. Cable assemblies are used to connect modules, assemblies and subassemblies in electronic devices. We provide a broad range of cable assembly products and services. We design and manufacture a broad range of high-speed data, radio frequency and fiber optic cabling products. Cable assemblies that we manufacture are often used in large rack systems to interconnect subsystems and modules.
· Precision Machine Components. We provide a broad range of manufacturing services for metals and plastics. With some of the largest horizontal milling machines in the United States, we are a
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preferred supplier of vacuum chamber systems for the semiconductor and flat panel display equipment markets. We are able to support both low volume engineering programs and high volume production. We utilize advanced computer numerically controlled machined tools enabling the manufacture of components to very tight tolerance standards.
· Optical Modules. Optical modules are integrated subsystems that use a combination of industry standard and/or custom optical components. We are a leading provider of complete optical systems for customers in telecommunications, networking, and military markets. Our experience in optical communications and networking products spans long haul/ultra long haul and metro regions for transport, access and switching applications, including last mile solutions. Our service offerings for optical communications customers are designed to deliver end-to-end solutions with special focus on system design, optical module assembly, optical test and integration.
· Memory Modules. Memory modules are integrated subsystems that use industry standard integrated circuits including processors, digital signal processors, or DSPs, non-volatile flash memory and dynamic random access memory, or DRAM. These modules consist of standard products that are sold for a wide range of applications to a broad base of customers and custom modules that are built and extensively tested for use in a particular OEM’s product or system. We design and manufacture a variety of modular solutions, including standard and custom processor modules, flash memory modules and DRAM modules. In addition, we are a leading supplier of solutions to increase memory component density on printed circuit boards. We offer advanced NexMod memory modules that contain multiple RDRAM memory layers vertically stacked and mounted to a printed circuit board. NexMod solutions are tailored for high-end network infrastructure and complex server applications. We also provide innovative DDRI and DDRII DRAM modules utilizing stacked CSP technology offering high densities in ultra small form factors. We provide custom module solutions including mixed memory and our proprietary foldable rigid assembly microelectronics module, or FRAMM. We integrate both standard and custom modules in products that we manufacture.
Final System Assembly and Test. We provide final system assembly and test in which assemblies and modules are combined to form complete, finished products. We often integrate printed circuit board assemblies manufactured by us with enclosures, cables and memory modules that we also produce. Our final assembly activities also may involve integrating components and modules that others manufacture. The complex, finished products that we produce typically require extensive test protocols. Our test services include both functional and environmental tests. We also test products for conformity to applicable industry, product integrity and regulatory standards. Our test engineering expertise enables us to design functional test processes that assess critical performance elements, including hardware, software and reliability. By incorporating rigorous test processes into the manufacturing process, we can help to assure our customers that their products will function as designed. Products for which we currently provide final system assembly and test include wireless base stations, wire line communications switches, optical networking products, high-end servers and personal computers.
Direct Order Fulfillment. We provide direct order fulfillment for our OEM customers. Direct order fulfillment involves receiving customer orders, configuring products to quickly fill the orders and delivering the products either to the OEM, a distribution channel (such as a retail outlet) or directly to the end customer. We manage our direct order fulfillment processes using a core set of common systems and processes that receive order information from the customer and provide comprehensive supply chain management, including procurement and production planning. These systems and processes enable us to process orders for multiple system configurations, and varying production quantities, including single units. Our direct order fulfillment services include BTO and CTO capabilities. BTO involves building a system having the particular configuration ordered by the OEM customer. CTO involves configuring systems to an end customer’s order. The end customer typically places this order by choosing from a variety of possible
12
system configurations and options. We are capable of meeting a 48 to 72 hour turn-around-time for BTO and CTO by using advanced manufacturing processes and a real-time warehouse management system and data control on the manufacturing floor. We support our direct order fulfillment services with logistics that include delivery of parts and assemblies to the final assembly site, distribution and shipment of finished systems, and processing of customer returns. Our systems are sufficiently flexible to support direct order fulfillment for a variety of different products, such as desktop and laptop computers, servers, workstations, set-top boxes, medical devices, scanners, printers and monitors.
After-Market Product Service and Support. We provide a wide range of after-market product service and support services, including replacing products at customer locations, product repair, re-manufacturing and maintenance at repair depots, logistics and parts management, returns processing, warehousing and engineering change management. We also provide support services for products that are nearing the end of their life cycles. These end-of-life support services involve both customer support and manufacturing support activities. We support the customer by providing software updates and design modifications that may be necessary to reduce costs or design-in alternative components due to component obsolescence or unavailability. Manufacturing support involves test engineering support and manufacturability enhancements. We also assist with product failure analysis, warranty and repair and field service engineering activities.
Global Supply Chain Management
Supply chain management involves the planning, purchasing and warehousing of product components. The objective of our supply chain management services is to reduce excess component inventory in the supply chain by scheduling deliveries of components on a just-in-time, as-and-when-needed basis. We use sophisticated production management systems to manage our procurement and manufacturing processes in an efficient and cost effective manner. We collaborate with our customers to enable us to respond to their changing component requirements for their products and to reflect any changes in these requirements in our production management systems. These systems often enable us to forecast future supply and demand imbalances and develop strategies to help our customers manage their component requirements. Our enterprise-wide software systems provide us with company-wide information regarding component inventories and orders to standardize planning and purchasing at the plant level. These systems enable us to transfer product components between plants to respond to changes in customer requirements or to address component or other raw material shortages.
We purchase large quantities of electronic components and other raw materials from a range of suppliers. As a result, we often receive volume discounts or other favorable terms from suppliers, which can enable us to provide our customers with greater cost reductions than they can obtain themselves. Our supplier relationships often enable us to obtain electronic components and other raw materials that are in short supply or return excess inventories to suppliers even when they are not contractually obligated to accept them.
We have targeted markets that offer significant growth opportunities and for which OEMs sell complex products that are subject to rapid technological change. We believe that markets involving complex, rapidly changing products offer us opportunities to produce products with higher margins because these products require higher value added manufacturing services and may also include our advanced vertically integrated components. Our approach to our target markets is two-fold—we intend to strengthen our significant presence in the communications and computing markets, while also focusing on other under-penetrated target markets, including the medical, automotive, industrial and semiconductor capital equipment and defense and aerospace industries, many of which have not extensively relied upon
13
EMS companies in the past. Our diversification across market segments and customers reduces our dependence on any particular market.
Communications: Wireless, Optical and Wireline Transmission and Enterprise. In the communications sector, we focus on wireless transmission systems, optical networking and enterprise networking systems. Our product design and engineering staff has extensive experience designing advanced communications products for these markets. Products we manufacture include point-to-point microwave systems, optical switches and transmission hardware, wireless base stations, wireline switches, routers, transceivers, satellite receivers, and various radio frequency appliances, among others.
Computing: Personal and Business (Enterprise) Computing and Storage Systems. We provide services for OEMs of personal computer, or PC, systems, enterprise computing, and storage systems.
We provide services to multiple major PC manufacturers. These services include primarily BTO and CTO manufacturing of desktop PC systems serving primarily the enterprise markets. Our PC manufacturing plants can build and configure systems and have them ready for shipment within 48 to 72 hours of receipt of a customer order. These plants are typically located in the geographic region to which the finished system will be shipped to rapidly deliver finished products.
We also provide services to the storage and server markets. Our expertise in manufacturing products for the storage and server markets stems from our technological capabilities and vertical integration. We are also the leading vertically integrated supplier of complex, multilayer printed circuit boards and backplanes, and many high-end computer designs incorporate these components. High-end computing products we manufacture include complex, fault tolerant servers and enterprise storage.
Multimedia. We manufacture digital satellite set-top boxes, personal video recorders, digital home gateways and internet protocol entertainment devices. For our multimedia OEM customers, we manage the production process for multimedia products, including product design and engineering, test development, supply chain management, manufacturing of printed circuit boards and assemblies, final system assembly and test, and direct order fulfillment, including our BTO and CTO capabilities.
Industrial and Semiconductor Systems. Our expertise in manufacturing highly complex systems includes production of semiconductor capital equipment, front-end environmental chambers, computer controllers, and test and inspection equipment. We also have significant experience manufacturing scanning equipment and devices, flat panel display test and repair equipment, optical inspection and x-ray equipment for use in the printed circuit board assembly industry, and deep ultraviolet photolithography equipment.
Defense and Aerospace. In December 2001, we merged with SCI Systems, Inc., or SCI. SCI began operations as Space-Craft, Inc., in the early 1960’s and was then principally a supplier to the defense and aerospace industries. We continue to offer our end-to-end services to the defense and aerospace industry. We believe that this industry currently represents a significant growth opportunity for us due to increased defense spending, as well as the growing desire of defense and aerospace OEMs to outsource non-core manufacturing activities in order to reduce costs. Our experience in serving the aerospace industry, as well as our product design and engineering capabilities, represent key competitive strengths for us in the defense and aerospace market. Defense and aerospace products that we design and manufacture include avionics systems, weapons guidance systems, cockpit communications systems, tactical and secure network communications systems, detection systems for homeland defense and space systems.
Medical. We provide comprehensive manufacturing and related services to the medical industry, including design and regulatory approval support. The manufacturing of products for the medical industry requires compliance with domestic and foreign regulations, including the Food and Drug Administration’s, or FDA’s, quality system regulations and the European Union’s medical device directive. In addition to complying with these standards, our medical manufacturing facilities comply with ISO 13485 (formerly
14
EN 46002) and ISO 9001:2000. Medical products that we manufacture include blood glucose meters, computer tomography scanners, respiration monitors, ventilators, anesthesia workstations, thermo-regulation devices, and cardio-resuscitation systems.
Automotive. In recent years, the electronics content in automobiles has increased substantially as new entertainment, wireless communication and navigation systems are being offered as standard features or factory options. We believe that this increased usage of electronic devices in automobiles will continue, and that there will be significant opportunities for EMS companies to manufacture automotive electronics. Accordingly, we have formed an automotive products group to focus on selective opportunities in this market.
A relatively small number of customers historically have been responsible for a significant portion of our net sales. Sales to our ten largest customers accounted for 60.8% of our fiscal 2006 net sales, 63.9% of our fiscal 2005 net sales and 69.3% of our fiscal 2004 net sales. For fiscal 2006, three customers, IBM, Lenovo and HP, accounted for greater than 10% of our net sales at 12.8%, 10.5% and 10.0%, respectively. For fiscal 2005, only one customer, IBM, accounted for greater than 10% of our net sales at 23.2%.
We seek to establish and maintain long-term relationships with our customers and have served many of our principal customers for several years. Historically, we have had substantial recurring sales from existing customers. We have also expanded our customer base through acquisitions and our marketing and sales efforts. We have been successful in broadening relationships with customers by providing vertically integrated products and services, as well as multiple products and services in multiple locations.
We typically enter into supply agreements with our major OEM customers with terms ranging from three to five years. Many of these supply agreements were entered into in connection with divestiture transactions, which are transactions in which we also acquire plants, equipment and inventory from the OEM. In these divestiture-related supply agreements, the customer typically agrees to purchase from us its requirements for particular products in particular geographic areas and for a specific period of time. Our OEM customer supply agreements that were not entered into in connection with divestitures typically do not require the customer to purchase their product requirements from us, and in these cases customers may have alternate sources of supply available to them. Our supply agreements with our OEM customers generally do not obligate the customer to purchase minimum quantities of products. However, the customer typically remains liable for the cost of the materials and components that we have ordered to meet the customer’s production forecast but which are not used, provided that the material was ordered in accordance with an agreed-upon procurement plan. In some cases, the procurement plan contains provisions regarding the types of materials for which our customers will assume responsibility. In particular, customers are increasingly requiring EMS companies, including us, to assume responsibility for industry standard components while retaining liability only for components specific to their products. Our supply agreements typically also contain provisions permitting cancellation and rescheduling of orders upon notice and subject, in some cases, to cancellation and rescheduling charges. Order cancellation charges typically vary by product type and depend upon how far in advance of shipment a customer notifies us of the cancellation of an order. In some circumstances, our supply agreements with customers provide for cost reduction objectives during the term of the agreement.
We generally do not obtain firm, long-term commitments from our customers under supply agreements. As a result, customers can cancel their orders, change production quantities or delay orders. Uncertain economic conditions and our general lack of long-term purchase contracts with our customers make it difficult for us to accurately predict revenue over the long term. Even in those cases where customers are contractually obligated to purchase products from us or repurchase unused inventory from us that we have ordered for them, we may elect not to immediately enforce our contractual rights because
15
of the long-term nature of our customer relationships and for other business reasons, and instead may negotiate accommodations with customers regarding particular situations.
At September 30, 2006 and October 1, 2005, our backlog was approximately $1.5 billion and $1.8 billion, respectively. Backlog consists of purchase orders received, including, in some instances, forecast requirements released for production under customer contracts. Cancellation and postponement charges generally vary depending upon the time of cancellation or postponement. Substantially all of our backlog as of September 30, 2006, is expected to be shipped in fiscal 2007. However, customers may cancel or postpone substantially all scheduled deliveries without significant penalty, except to the extent of any excess inventories as described above. Backlog may therefore not be a meaningful indicator of future financial results.
Our corporate marketing, sales and customer service staff consists of approximately 600 people. Our sales efforts are organized and managed on a regional basis, with regional sales managers in geographic regions in the United States and internationally.
We develop relationships with our customers and market our vertically integrated volume manufacturing services through our direct sales force and customer support specialists. Our sales resources are directed at multiple management and staff levels within target accounts. Our direct sales personnel work closely with the customers’ engineering and technical personnel to better understand their requirements. Our marketing and sales staff supports our business strategy of providing end-to-end services by encouraging cross-selling of vertically integrated volume manufacturing services and component manufacturing across a broad range of major OEM products. To achieve this objective, our marketing and sales staff works closely with our various manufacturing and design and engineering groups and engages in marketing and sales activities targeted towards key customer opportunities.
Each of our key customer accounts are managed by a dedicated account team, including a global business manager directly responsible for account management. Global business managers coordinate activities across divisions to effectively satisfy customer requirements and have direct access to our senior management to quickly address customer concerns. Local customer account teams further support the global teams and are linked by a comprehensive communications and information management infrastructure.
We face competition from other major global EMS companies such as Celestica, Inc., Flextronics International Ltd., Hon Hai (FoxConn), Jabil Circuit, Inc. and Solectron Corporation, as well as other EMS companies that often have a regional or product, service or industry specific focus. In addition, our potential customers may also compare the benefits of outsourcing their manufacturing to us with the merits of manufacturing products themselves.
We compete with different companies depending on the type of service or geographic area. We believe that the primary basis of competition in our target markets is manufacturing technology, quality, delivery, responsiveness, provision of value-added services and price. To remain competitive, we must continue to provide technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis and compete favorably on the basis of price. We believe that our primary competitive strengths include our ability to provide global end-to-end services, our product design and engineering resources, our advanced technologies, our high quality manufacturing
16
assembly and test services, our customer focus, our expertise in serving diverse end markets and an experienced management team.
We hold various United States and foreign patents primarily related to printed circuit boards, methods of manufacturing printed circuit boards, and enterprise computing. For other proprietary processes, we rely primarily on trade secret protection. We also have registered trademarks in the United States and many other countries throughout the world.
Although we do not believe that our current trademarks, manufacturing processes or patents infringe on the intellectual property rights of third parties, we cannot assure you that third parties will not assert infringement claims against us in the future. If such an assertion were to be made, it may become necessary or useful for us to enter into licensing arrangements or to resolve such an issue through litigation. However, we cannot assure you that such license rights would be available to us on commercially acceptable terms, if at all, or that any such litigation would be resolved favorably. Additionally, such litigation could be lengthy and costly and could materially affect our financial condition regardless of the outcome of such litigation.
We are subject to a variety of local, state and federal environmental laws and regulations in the United States, as well as foreign laws and regulations, relating to the treatment, storage, use, discharge, emission and disposal of chemicals, solid waste and other hazardous materials used during our manufacturing processes. We are also subject to occupational safety and health laws, and product take back, product labeling and product content requirements. Proper waste disposal is a major consideration in particular 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 municipal sanitary sewer systems. We operate on-site wastewater treatment systems at our printed circuit board manufacturing plants in order to treat wastewater generated in the fabrication process.
In addition, although the electronics assembly process generates significantly less wastewater than printed circuit board fabrication, maintenance of environmental controls is also important in the electronics assembly process because such operations can generate lead dust. Upon vacating a facility, we take on the responsibility to remediate the lead dust from the interior of the manufacturing facility. Although there are no applicable standards for lead dust remediation in manufacturing facilities, we endeavor to make efforts to remove the residues. To date, lead dust remediation costs have not been material to our operations. We also monitor for airborne concentrations of lead in our buildings and are not aware of any significant lead concentrations in excess of the applicable OSHA standards.
We have a range of corporate programs in place with regard to environmental compliance and reduction of the use of hazardous materials in manufacturing. In the environmental compliance area, we are developing corporate-wide standardized environmental management systems, auditing programs and policies to enable us to better manage environmental compliance activities. We are also developing programs to certify our facilities under ISO 14001, a set of standards and procedures relating to environmental compliance management. In addition, the electronics industry is subject to the European Union’s Restrictions of Hazardous Substances, or RoHS, and Waste Electrical and Electronic Equipment, or WEEE, directives which took effect beginning in 2005 and 2006. Parallel initiatives are being proposed in other jurisdictions, including several states in the United States and the Peoples’ Republic of China. RoHS prohibits the use of lead, mercury and certain other specified substances in electronics products and WEEE requires industry OEMs to assume responsibility for the collection, recycling and management of waste electronic products and components. We are in the process of making our manufacturing process
17
RoHS compliant. In the case of WEEE, the compliance responsibility rests primarily with OEMs rather than with EMS companies. However, OEMs may turn to EMS companies for assistance in meeting their WEEE obligations. We are in the process of developing programs that we can offer to our customers to assist them with WEEE compliance.
Asbestos containing materials, or ACM, are present at several of our manufacturing facilities. Although the ACM is being managed and controls have been put in place pursuant to ACM operations and maintenance plans, the presence of ACM could give rise to affirmative remediation obligations and other liabilities. No third-party claims relating to ACM have been brought at this time.
Each plant, to the extent required by law, operates under environmental 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. Any such revocation could require us to cease or limit production at one or more of our facilities, thereby having an adverse impact on our results of operations.
Primarily as a result of certain of our acquisitions, we have incurred liabilities associated with environmental contamination at facilities we have acquired. These liabilities include ongoing investigation and remediation activities at a number of sites, including our facilities located in Irvine, California (a former facility acquired as part of our acquisition of Elexsys); Owego, New York (a current facility that we acquired with our acquisition of Hadco Corporation); Derry, New Hampshire (a non-operating facility of Hadco) and Fort Lauderdale, Florida (a former facility of Hadco). Currently, we are unable to anticipate whether any third-party claims will be brought against us for the existence of such contamination. There can be no assurance that third-party claims will not arise and will not result in material liability to us. In addition, there are some sites, including our facility in Gunzenhausen, Germany (acquired from Alcatel) that are known to have groundwater contamination caused by a third party, and that third party has provided indemnity to us for the liability. Although we cannot assure you that we will not incur liability for clean-up costs or expenses at any of these sites, we have no reason to believe that such liability will occur and that it will be material to our business.
We have also been named as a potentially responsible party at several contaminated disposal sites operated by other parties, including the Casmalia Resources site, as a result of the past disposal of hazardous waste by companies we have acquired or by our corporate predecessors. Although liabilities for such historic disposal activities have not materially affected our financial condition to date, we cannot assure you that past disposal activities will not result in liability that will materially affect us in the future.
We use an environmental consultant to assist us in evaluating the environmental liabilities of the companies that we acquire as well as those associated with our ongoing operations, site contamination issues and historical disposal activities in order to establish appropriate accruals in our financial statements. In addition to liabilities associated with site contamination and related issues, we could also incur exposures associated with inventories containing restricted substances that we do not consume by the RoHS effective dates. We also undertake a process of re-evaluating and updating the reserves over time. As of September 30, 2006, based on the evaluations of our consultants, we have accrued $16.9 million for our environmental liabilities of which $5.3 million was accrued as a result of our adoption of Financial Accounting Standards Board Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations”. Although we believe these accruals are adequate, we cannot be certain that environmental liabilities will not exceed the accrued amounts.
As of September 30, 2006, we had 54,397 employees, including 13,494 temporary employees. None of our U.S. employees are represented by a labor union. In some international locations, particularly in Western Europe, Latin America and the Middle East, our employees are represented by labor unions on
18
either a national or plant level. Some Western European countries and Latin American countries also have mandatory legal provisions regarding terms of employment, severance compensation and other conditions of employment that are more restrictive than U.S. laws. We believe that our relationship with our employees is good.
Our Internet address is http://www.sanmina-sci.com. We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov.
Refer to the “Factors Affecting Operating Results” contained in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
Item 1B. Unresolved Staff Comments
None
Facilities. Our customers market numerous products throughout the world and therefore need to access manufacturing services on a global basis. To enhance our EMS offerings, we seek to locate our facilities either near our customers and our customers’ end markets in major centers for the electronics industry or, where appropriate, in lower cost locations. Many of our plants located near customers and their end markets are focused primarily on final system assembly and test, while plants located in lower cost areas are engaged primarily in high volume, less complex component and subsystem manufacturing and assembly.
As of September 30, 2006, we manufacture products in 77 plants, consisting of 54 electronics assembly facilities, 9 printed circuit board fabrication facilities, 4 cable assembly facilities, and 10 enclosure assembly facilities, located both domestically and internationally. Our domestic plants are located in key electronics industry centers, including Silicon Valley—(Northern California), Southern California, New England, Texas, Northern Alabama, the Research Park Triangle area and New York, as well as in several other locations. Internationally, we have plants in Australia, Latin America (Brazil and Mexico), Canada, Western Europe (United Kingdom, Ireland, France, Germany, Sweden, and Finland), Eastern Europe (Hungary), Israel and Asia (Peoples’ Republic of China, Indonesia, Japan, Malaysia, Singapore, and Thailand). For fiscal 2006, approximately 75.1% of our net sales were from operations outside of the United States.
Since the closing of our merger with SCI in December 2001, we have evaluated our global manufacturing operations and restructured our facilities and operations to bring our manufacturing capacity in line with demand and our manufacturing strategy and to provide cost efficient services for our customers. Through this process, we have closed certain facilities not required to satisfy current demand levels, but have retained strategic manufacturing facilities in the United States and Western Europe that focus on higher value added manufacturing activities. We provide extensive operations in lower cost locations, including Latin America, Eastern Europe, China and Southeast Asia, and we plan to expand our presence in these lower cost locations, as appropriate to meet the needs of our customers.
19
As of September 30, 2006, the approximate square footage of our facilities by country is as follows:
|
|
|
Approximate |
|
|
Australia |
|
59,772 |
|
|
Brazil |
|
230,685 |
|
|
Canada |
|
585,485 |
|
|
China |
|
1,502,698 |
|
|
Finland |
|
384,769 |
|
|
France |
|
292,259 |
|
|
Germany |
|
551,025 |
|
|
Hungary |
|
1,214,176 |
|
|
Indonesia |
|
66,056 |
|
|
Ireland |
|
115,000 |
|
|
Israel |
|
253,296 |
|
|
Japan |
|
13,870 |
|
|
Malaysia |
|
315,000 |
|
|
Mexico |
|
2,164,223 |
|
|
Singapore |
|
630,821 |
|
|
Sweden |
|
189,200 |
|
|
Taiwan |
|
2,500 |
|
|
Thailand |
|
138,500 |
|
|
United Kingdom |
|
240,074 |
|
|
United States |
|
4,542,290 |
|
|
TOTAL |
|
13,491,699 |
|
We also have manufacturing facilities (not included in the above figure) that are closed or in the process of closing as of September 30, 2006, which include facilities totaling approximately 1,627,376 square feet for domestic locations and approximately 1,366,684 square feet for international locations. We are currently undertaking an aggressive program to sublease or terminate leases for unused facilities and to sell owned properties that are no longer expected to serve our future needs. In addition, we have 291,191 (not included in the above figure) square feet of non-manufacturing space that we no longer expect to use that we are seeking to sell or sublease.
As of September 30, 2006, our active manufacturing facilities consist of approximately 10.4 million square feet in facilities that we own, with the remainder in leased facilities under lease terms expiring between fiscal 2007 and fiscal 2024.
We believe that our existing facilities are adequate to meet our reasonably foreseeable requirements. We regularly evaluate our expected future facilities requirements.
Certifications and Registrations. Certifications and registrations under industry standards are important to our business because many customers rely on them to confirm our adherence to manufacturing process and quality standards. Certain markets, such as communications, medical, defense, aerospace and automotive, require adherence to industry-specific standards. Substantially all of our manufacturing facilities are registered under ISO 9001:2000, a set of standards published by the International Organization of Standardization and used to document, implement and demonstrate quality management and assurance systems in design and manufacturing. As part of the ISO 9001:2000 certification process, we have developed a quality systems manual and an internal system of quality controls and audits. ISO 9001:2000 registration is of particular importance to the companies doing business
20
in the European Community, and we believe that United States electronics manufacturers are increasing their use of ISO 9001:2000 registration as a criteria for suppliers.
In addition to ISO 9001:2000, many of our facilities have been TL 9000 registered. TL 9000 is a relatively new telecommunications standard. The TL 9000 quality system requirements and quality system metrics are designed specifically for the telecommunications industry to promote consistency, efficiency, and improved customer satisfaction. Included in the TL 9000 system are performance-based metrics that measure the reliability and quality performance of the product. The majority of our facilities are also Underwriters Laboratory compliant. These standards define requirements for quality, manufacturing process control and manufacturing documentation and are required by many OEMs in the communications sector of the electronics industry.
Our medical products division has identified certain manufacturing facilities to be centers of excellence for medical products manufacturing. Currently most of those facilities are FDA and ISO 13485 registered and fully compliant to the FDA’s quality systems regulations.
Our defense and aerospace operations are headquartered in the Huntsville, Alabama area and are housed in dedicated facilities to meet the specialized needs of our defense and aerospace customers. Our defense and aerospace facilities are AS9100 registered and also certified under various U.S. military specifications as well as under ANSI and other standards appropriate for defense and aerospace suppliers.
Our automotive facilities are strategically located worldwide. Substantially all of our automotive facilities are QS 9000 and/or TS 16949 registered and also certified under the Automotive Industry Standard.
We are a so-called “nominal defendant” party to multiple shareholder derivative lawsuits that were filed following our June 9, 2006 announcement that we had initiated an internal inquiry into our historical stock option administration practices. In particular, five separate shareholder derivative actions have been filed and consolidated into a single proceeding pending in the United States District Court for the Northern District of California, captioned In re Sanmina-SCI Corporation Derivative Litigation, Master File No. C-06-3783-JF. The first of these consolidated actions was filed June 15, 2006. A consolidated complaint was filed on October 30, 2006. In addition, three related shareholder derivative actions have been filed in Superior Court for the State of California, County of Santa Clara. These three actions, captioned Salehinasab v. Sola, et al., Case No. 1-06-CV-071786 (filed September 25, 2006); Bahnmiller v. Sola, et al., Case No. 1-06-CV-074989 (filed November 17, 2006); and Judd v. Sola, et al., Case No. 1-06-CV-075019 (filed November 17, 2006), have not yet been consolidated although we expect that they will be.
In all of these actions, the derivative plaintiffs allege that they are our shareholders and purport to bring the actions on our behalf and for our benefit. This is why we are a “nominal defendant” party to each of these actions; however, no relief is sought against us in these lawsuits. While the list of defendants varies from action to action, 27 different current and former directors and officers have been named as defendants in one or more of the actions. The defendants include Rick Ackel, Samuel Altschuler, John Bolger, Neil R. Bonke, Stephen F. Bruton, Michael J. Clarke, Alain A. Couder, Randy W. Furr, Steven H. Jackman, Elizabeth J. Jordan, Michael Landy, Christopher D. Mitchell, Eric Naroian, Hari Pillai, Carmine Renzulli, Mario M. Rosati, A. Eugene Sapp, Jr., Joseph Schell, Wayne Shortridge, Peter J. Simone, Jure Sola, Michael Sparacino, Michael Sullivan, Jacquelyn M. Ward, David White, Bernard Whitney and Dennis Young. The derivative plaintiffs allege generally that the individual defendants manipulated the grant dates of our stock options between 1995 and 2006, allegedly in breach of duties owed to us and our shareholders, causing us to report our financial results inaccurately and resulting in harm to us. Plaintiffs seek money damages against the individual defendants, an accounting for damages allegedly caused by the
21
individual defendants, disgorgement of profits allegedly improperly obtained by the defendants, and various other types of equitable and injunctive relief. In August 2006, our Board of Directors created a Special Litigation Committee comprised of directors Alain A. Couder and Peter J. Simone, and vested that committee with the full authority on our behalf to investigate the claims asserted by the derivative plaintiffs, and to determine what action should be taken with respect to the shareholder derivative actions including without limitation whether we should pursue claims against the named defendants or other persons. The Special Litigation Committee’s investigation is ongoing. We have filed a motion asking the federal court to stay the derivative plaintiffs’ prosecution of the shareholder derivative lawsuits to permit the Special Litigation Committee reasonable time to consider the matters alleged by the derivative plaintiffs and to determine appropriate action in response to the lawsuit. We intend to file similar motions in the state court actions. Although we believe the stay motion to be well founded, there can be no assurance that the courts will grant our motions. While the shareholder derivative lawsuits do not seek remedies against us, we do owe certain indemnification obligations to our current and former directors, officers and employees involved with the stock option-related proceedings, particularly to the extent that individuals are found not to have engaged in any wrongdoing. We cannot currently predict whether the shareholder derivative lawsuits will result in any material net recovery for us.
Additionally, we are aware that both the Securities and Exchange Commission and United States Attorney for the Northern District of California are conducting inquiries into our historical stock option administration practices. We have received an informal request for documents and other information from the Securities and Exchange Commission and a grand jury subpoena from the United States Attorney. We are cooperating fully with both investigations.
In addition, we are a party to certain legal proceedings that have arisen in the ordinary course of our business. We believe that the resolution of these proceedings will not have a material adverse effect on our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Pursuant to General Instruction G(3), the information regarding our executive officers required by Item 401(b) of Regulation S-K is hereby included in Part I of this report.
The following table sets forth the name of each executive officer of Sanmina-SCI, the office held by such officer and the age, as of November 13, 2006 (ages are as of September 30, 2006), of such officer.
|
Name |
|
|
|
Age |
|
Position |
|
Jure Sola |
|
55 |
|
Chairman of the Board and Chief Executive Officer |
||
|
Hari Pillai |
|
46 |
|
President, Global EMS Operations |
||
|
David L. White |
|
51 |
|
Executive Vice President of Finance and Chief Financial Officer, Secretary |
||
|
Dennis Young |
|
55 |
|
Executive Vice President of Worldwide Sales and Marketing |
||
Jure Sola has served as our chief executive officer since April 1991, as chairman of our board of directors from April 1991 to December 2001 and from December 2002 to present, and co-chairman of our board of directors from December 2001 to December 2002. In 1980, Mr. Sola co-founded Sanmina and initially held the position of vice president of sales. In October 1987, he became vice president and general manager of Sanmina, responsible for manufacturing operations and sales and marketing and was president from October 1989 to March 1996.
Hari Pillai joined our Company in 1994 and has served in manufacturing management positions since that time. In January 2002, Mr. Pillai was appointed president and general manager of the EMS division of our company and in October 2004 was appointed president, global EMS operations.
David L. White has served as our executive vice president of finance and chief financial officer since August 2004 and became Secretary in December 2006. Prior to joining us, he was senior vice president and chief financial officer of Asyst Technologies, a provider of integrated automation solutions that enhance semiconductor and flat-panel display (FPD) manufacturing productivity. Previously, he was president and chief executive officer of Candescent Technologies, a developer of field emission display (FED) technology for next-generation thin FPDs.
Dennis Young has served as executive vice president of worldwide sales and marketing since March 2003. Prior to joining our company, Mr. Young was senior vice president of sales from May 2002 to March 2003 and vice president of sales from March 1998 to May 2002 of Pioneer-Standard Electronics, a provider of industrial and consumer electronic products.
23
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol SANM. The following table lists the high and low intra-day prices for our common stock as reported on Nasdaq.
|
Fiscal 2006 |
|
|
|
High |
|
Low |
|
||
|
First quarter |
|
$ |
4.73 |
|
$ |
3.45 |
|
||
|
Second quarter |
|
$ |
4.95 |
|
$ |
3.66 |
|
||
|
Third quarter |
|
$ |
5.85 |
|
$ |
3.90 |
|
||
|
Fourth quarter |
|
$ |
4.90 |
|
$ |
3.04 |
|
||
|
Fiscal 2005 |
|
|
|
High |
|
Low |
|
||
|
First quarter |
|
$ |
9.35 |
|
$ |
6.95 |
|
||
|
Second quarter |
|
$ |
8.68 |
|
$ |
4.64 |
|
||
|
Third quarter |
|
$ |
5.82 |
|
$ |
3.74 |
|
||
|
Fourth quarter |
|
$ |
6.02 |
|
$ |
4.03 |
|
||
As of December 1, 2006, we had approximately 2,296 common stockholders of record. On December 1, 2006, the last reported sales price of our common stock on the Nasdaq National Market was $3.76 per share.
We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. The indentures governing our 6.75% Senior Subordinated Notes and 8.125% Senior Subordinated Notes and the agreement governing our Senior Secured Credit Facility contain covenants that limit our ability to pay dividends; see also “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
24
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8—Financial Statements and Supplementary Data,” included elsewhere in this Form 10-K. The information presented in the following tables has been adjusted to reflect the restatement of our financial results which is more fully described in Note 2 “Restatement of Consolidated Financial Statements” in the Notes to Consolidated Financial Statements.
We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously-filed reports should no longer be relied upon.
FIVE YEAR SELECTED FINANCIAL HIGHLIGHTS
Consolidated Statements Of Operations Data:
|
|
|
Fiscal Year Ended |
|
|||||||||||||
|
|
|
2006(6) |
|
2005(4)(7) |
|
2004(7) |
|
2003(1)(7) |
|
2002(2)(3)(7) |
|
|||||
|
|
|
|
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
|||||
|
|
|
(In thousands, except per share data) |
|
|||||||||||||
|
Net sales |
|
$ |
10,955,421 |
|
$ |
11,734,674 |
|
$ |
12,204,607 |
|
$ |
10,361,434 |
|
$ |
8,761,630 |
|
|
Operating income (loss) |
|
53,317 |
|
(489,760 |
) |
84,482 |
|
(154,914 |
) |
(2,775,365 |
) |
|||||
|
Loss before income taxes, extraordinary gain and cumulative effect of accounting changes |
|
(150,153 |
) |
(639,825 |
) |
(36,800 |
) |
(275,245 |
) |
(2,826,074 |
) |
|||||
|
Provision for (benefit from) income taxes |
|
(5,766 |
) |
394,121 |
|
18,412 |
|
(53,592 |
) |
(127,690 |
) |
|||||
|
Extraordinary gain, net of tax of $0 |
|
— |
|
— |
|
3,583 |
|
— |
|
— |
|
|||||
|
Cumulative effect of accounting changes(5) |
|
2,830 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Net loss |
|
$ |
(141,557 |
) |
$ |
(1,033,946 |
) |
$ |
(51,629 |
) |
$ |
(221,653 |
) |
$ |
(2,698,384 |
) |
|
Basic net loss per share |
|
$ |
(0.27 |
) |
$ |
(1.99 |
) |
$ |
(0.10 |
) |
$ |
(0.43 |
) |
$ |
(5.60 |
) |
|
Diluted net loss per share |
|
$ |
(0.27 |
) |
$ |
(1.99 |
) |
$ |
(0.10 |
) |
$ |
(0.43 |
) |
$ |
(5.60 |
) |
|
Shares used in computing diluted per share amount |
|
525,967 |
|
520,574 |
|
515,803 |
|
510,102 |
|
481,985 |
|
|||||
(1) Includes an impairment of long-lived assets loss of $95.6 million.
(2) Includes goodwill impairment loss of $2.6 billion.
(3) On December 6, 2001, we merged with SCI in a purchase business combination. The consolidated financial statements include the operating results of SCI from December 3, 2001, the accounting period close nearest to the acquisition date of December 6, 2001.
(4) Includes a goodwill impairment loss of $600 million and an increase in deferred tax valuation allowance of $379.3 million. For additional information, refer to” Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Goodwill and Other Intangible assets” and “—Income taxes”.
25
(5) Includes $5.7 million credit, related to the adoption of SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”). In addition, includes $2.9 million charge related to the adoption of Financial Statement Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations”.
(6) Includes a $84.6 million expense related to the extinguishment of the 10.375% Notes (Refer to Note 13 (“Debt”) of the Notes to Consolidated Financial Statements) and a $15 million charge related to excess and obsolete inventories in our ODM business. In addition, we recorded a goodwill impairment charge of $3.8 million and an impairment of tangible and intangible assets of $7.9 million as a result of our decision to realign our ODM business to focus on JDM opportunities. We also recorded an impairment charge for tangible assets of $7.2 million related to a manufacturing facility and to our ODM business as a result of our SFAS No. 144 impairment analysis.
(7) For more information regarding the investigation and finding relating to stock option practices and the restatement of stock-based compensation and other items, please refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2—“Restatement of Consolidated Financial Statements” of the Notes to Consolidated Financial Statements.
26
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Statement of Operations as of the periods ended September 27, 2003 and September 28, 2002:
|
|
|
Fiscal Year Ended |
|
Fiscal Year Ended |
|
||||||||||||||||||||||
|
|
|
September 27, 2003 |
|
September 28, 2002 |
|
||||||||||||||||||||||
|
|
|
Previously |
|
Adjustments |
|
As Restated |
|
Previously |
|
Adjustments |
|
As Restated |
|
||||||||||||||
|
|
|
(Restated) |
|
(Restated) |
|
||||||||||||||||||||||
|
|
|
(In thousands) |
|
||||||||||||||||||||||||
|
Net sales |
|
$ |
10,361,434 |
|
|
$ |
— |
|
|
|
$ |
10,361,434 |
|
|
$ |
8,761,630 |
|
|
$ |
— |
|
|
|
$ |
8,761,630 |
|
|
|
Cost of sales |
|
9,898,964 |
|
|
35,493 |
A |
|
|
9,934,457 |
|
|
8,386,929 |
|
|
18,778 |
A |
|
|
8,405,707 |
|
|
||||||
|
Gross profit |
|
462,470 |
|
|
(35,493 |
) |
|
|
426,977 |
|
|
374,701 |
|
|
(18,778 |
) |
|
|
355,923 |
|
|
||||||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Selling, general, administrative and research and development |
|
321,686 |
|
|
41,137 |
A |
|
|
362,823 |
|
|
287,625 |
|
|
19,381 |
A |
|
|
307,006 |
|
|
||||||
|
Amortization of intangible assets |
|
6,596 |
|
|
— |
|
|
|
6,596 |
|
|
5,757 |
|
|
— |
|
|
|
5,757 |
|
|
||||||
|
Goodwill impairment |
|
95,600 |
|
|
— |
|
|
|
95,600 |
|
|
2,670,000 |
|
|
(28,825 |
)D |
|
|
2,641,175 |
|
|
||||||
|
Integration costs |
|
10,720 |
|
|
— |
|
|
|
10,720 |
|
|
3,707 |
|
|
— |
|
|
|
3,707 |
|
|
||||||
|
Restructuring costs |
|
105,744 |
|
|
408 |
A |
|
|
106,152 |
|
|
171,795 |
|
|
1,848 |
A |
|
|
173,643 |
|
|
||||||
|
Total operating expenses |
|
540,346 |
|
|
41,545 |
|
|
|
581,891 |
|
|
3,138,884 |
|
|
(7,596 |
) |
|
|
3,131,288 |
|
|
||||||
|
Operating loss |
|
(77,876 |
) |
|
(77,038 |
) |
|
|
(154,914 |
) |
|
(2,764,183 |
) |
|
(11,182 |
) |
|
|
(2,775,365 |
) |
|
||||||
|
Interest income |
|
15,938 |
|
|
— |
|
|
|
15,938 |
|
|
25,292 |
|
|
— |
|
|
|
25,292 |
|
|
||||||
|
Interest expense |
|
(128,501 |
) |
|
— |
|
|
|
(128,501 |
) |
|
(97,833 |
) |
|
— |
|
|
|
(97,833 |
) |
|
||||||
|
Other income (expense), net |
|
(7,768 |
) |
|
— |
|
|
|
(7,768 |
) |
|
21,832 |
|
|
— |
|
|
|
21,832 |
|
|
||||||
|
Interest and other expense, net |
|
(120,331 |
) |
|
— |
|
|
|
(120,331 |
) |
|
(50,709 |
) |
|
— |
|
|
|
(50,709 |
) |
|
||||||
|
Loss before income taxes |
|
(198,207 |
) |
|
(77,038 |
) |
|
|
(275,245 |
) |
|
(2,814,892 |
) |
|
(11,182 |
) |
|
|
(2,826,074 |
) |
|
||||||
|
Provision for (benefit from) income taxes |
|
(61,050 |
) |
|
7,458 |
B |
|
|
(53,592 |
) |
|
(118,139 |
) |
|
(9,551 |
)C |
|
|
(127,690 |
) |
|
||||||
|
Net loss |
|
$ |
(137,157 |
) |
|
$ |
(84,496 |
) |
|
|
$ |
(221,653 |
) |
|
$ |
(2,696,753 |
) |
|
$ |
(1,631 |
) |
|
|
$ |
(2,698,384 |
) |
|
|
Net loss per share before extraordinary item: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Basic |
|
$ |
(0.27 |
) |
|
$ |
(0.16 |
) |
|
|
$ |
(0.43 |
) |
|
$ |
(5.60 |
) |
|
$ |
(0.00 |
) |
|
|
$ |
(5.60 |
) |
|
|
Diluted |
|
$ |
(0.27 |
) |
|
$ |
(0.16 |
) |
|
|
$ |
(0.43 |
) |
|
$ |
(5.60 |
) |
|
$ |
(0.00 |
) |
|
|
$ |
(5.60 |
) |
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Basic |
|
$ |
(0.27 |
) |
|
$ |
(0.16 |
) |
|
|
$ |
(0.43 |
) |
|
$ |
(5.60 |
) |
|
$ |
(0.00 |
) |
|
|
$ |
(5.60 |
) |
|
|
Diluted |
|
$ |
(0.27 |
) |
|
$ |
(0.16 |
) |
|
|
$ |
(0.43 |
) |
|
$ |
(5.60 |
) |
|
$ |
(0.00 |
) |
|
|
$ |
(5.60 |
) |
|
|
Weighted average shares used in computing per share amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Basic |
|
510,102 |
|
|
|
|
|
|
510,102 |
|
|
481,985 |
|
|
|
|
|
|
481,985 |
|
|
||||||
|
Diluted |
|
510,102 |
|
|
|
|
|
|
510,102 |
|
|
481,985 |
|
|
|
|
|
|
481,985 |
|
|
||||||
A: Adjustment for additional stock compensation expense pursuant to APB No. 25.
B: Adjustment to the deferred tax assets arising from the stock-based compensation charge and net operating losses from the 956 Deemed Dividend.
C: Adjustment to the deferred tax assets arising from the stock-based compensation charge.
D: Adjustment for overstated goodwill impairment charge associated with the adjustment to stock-based compensation.
27
Consolidated Balance Sheet Data:
|
|
|
As of Fiscal Year Ended |
|
|||||||||||||||
|
|
|
2006 |
|
2005(1) |
|
2004(1) |
|
2003(1) |
|
2002(1) |
|
|||||||
|
|
|
|
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
|||||||
|
|
|
(In thousands) |
|
|||||||||||||||
|
Cash and cash equivalents |
|
|
$ |
491,829 |
|
|
$ |
1,068,053 |
|
$ |
1,069,447 |
|
$ |
889,574 |
|
$ |
1,064,534 |
|
|
Net working capital |
|
|
1,516,754 |
|
|
1,672,481 |
|
1,422,972 |
|
1,921,056 |
|
2,088,678 |
|
|||||
|
Total assets |
|
|
5,862,430 |
|
|
6,269,128 |
|
7,542,460 |
|
7,420,728 |
|
7,555,438 |
|
|||||
|
Long-term debt |
|
|
1,507,218 |
|
|
1,666,768 |
|
1,297,337 |
|
1,925,630 |
|
1,975,331 |
|
|||||
|
Stockholders’ equity |
|
|
2,270,563 |
|
|
2,383,811 |
|
3,360,993 |
|
3,347,963 |
|
3,446,256 |
|
|||||
(1) The information presented has been adjusted to reflect restatement of our financial condition which is more fully described in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2—“Restatement of Consolidated Financial Statements” of the Notes to Consolidated Financial Statements.
28
The following tables present the impact of the financial statement adjustments on our previously reported Condensed Consolidated Balance Sheets as of the periods ended October 2, 2004, September 27, 2003 and September 28, 2002:
|
|
|
As of October 2, 2004 |
|
|||||||||
|
|
|
Previously |
|
Adjustments |
|
Restated |
|
|||||
|
|
|
(In thousands, except par value) |
|
|||||||||
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|||
|
Current assets: |
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents |
|
$ |
1,069,447 |
|
|
$ |
— |
|
|
$ |
1,069,447 |
|
|
Short-term investments |
|
19,718 |
|
|
— |
|
|
19,718 |
|
|||
|
Accounts receivable, net |
|
1,668,973 |
|
|
— |
|
|
1,668,973 |
|
|||
|
Inventories |
|
1,064,518 |
|
|
— |
|
|
1,064,518 |
|
|||
|
Deferred income taxes |
|
303,965 |
|
|
(10,531 |
)B |
|
293,434 |
|
|||
|
Prepaid expenses and other current assets |
|
96,523 |
|
|
— |
|
|
96,523 |
|
|||
|
Total current assets |
|
4,223,144 |
|
|
(10,531 |
) |
|
4,212,613 |
|
|||
|
Property, plant and equipment, net |
|
782,642 |
|
|
27,354 |
C |
|
809,996 |
|
|||
|
Goodwill |
|
2,254,979 |
|
|
— |
|
|
2,254,979 |
|
|||
|
Other intangible assets, net |
|
35,891 |
|
|
— |
|
|
35,891 |
|
|||
|
Other non-current assets |
|
210,478 |
|
|
(6,959 |
)B |
|
203,519 |
|
|||
|
Restricted cash |
|
25,462 |
|
|
— |
|
|
25,462 |
|
|||
|
Total assets |
|
$ |
7,532,596 |
|
|
$ |
9,864 |
|
|
$ |
7,542,460 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|||
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|||
|
Accounts payable |
|
$ |
1,630,833 |
|
|
$ |
— |
|
|
$ |
1,630,833 |
|
|
Accrued liabilities |
|
381,123 |
|
|
— |
|
|
381,123 |
|
|||
|
Accrued payroll and related benefits |
|
164,357 |
|
|
3,582 |
D |
|
167,939 |
|
|||
|
Current portion of long-term debt |
|
609,746 |
|
|
— |
|
|
609,746 |
|
|||
|
Total current liabilities |
|
2,786,059 |
|
|
3,582 |
|
|
2,789,641 |
|
|||
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|||
|
Long-term debt, net of current portion |
|
1,297,337 |
|
|
— |
|
|
1,297,337 |
|
|||
|
Other |
|
94,489 |
|
|
— |
|
|
94,489 |
|
|||
|
Total long-term liabilities |
|
1,391,826 |
|
|
— |
|
|
1,391,826 |
|
|||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|||
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|||
|
Preferred stock |
|
— |
|
|
— |
|
|
— |
|
|||
|
Common stock |
|
5,420 |
|
|
— |
|
|
5,420 |
|
|||
|
Treasury stock |
|
(188,607 |
) |
|
— |
|
|
(188,607 |
) |
|||
|
Additional paid-in capital |
|
5,719,137 |
|
|
160,910 |
A |
|
5,880,047 |
|
|||
|
Accumulated other comprehensive income |
|
32,690 |
|
|
— |
|
|
32,690 |
|
|||
|
Accumulated deficit |
|
(2,213,929 |
) |
|
(154,628 |
) |
|
(2,368,557 |
) |
|||
|
Total stockholders’ equity |
|
3,354,711 |
|
|
6,282 |
|
|
3,360,993 |
|
|||
|
Total liabilities and stockholders’ equity |
|
$ |
7,532,596 |
|
|
$ |
9,864 |
|
|
$ |
7,542,460 |
|
A: Adjustment for additional stock compensation expense pursuant to APB No. 25.
B: Adjustment to the deferred tax assets arising from the reversal of fixed asset reserves in fiscal year 2001 and net operating losses from the 956 Deemed Dividend and stock-based compensation charge.
C: Reversal of excess fixed asset impairment reserve.
D: Adjustment for payroll tax associated with the adjustment to stock-based compensation.
29
|
|
|
As of September 27, 2003 |
|
|||||||||
|
|
|
Previously |
|
Adjustments |
|
Restated |
|
|||||
|
|
|
(In thousands) |
|
|||||||||
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|||
|
Current assets: |
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents |
|
$ |
1,043,850 |
|
|
$ |
(154,275 |
)E |
|
$ |
889,575 |
|
|
Short-term investments |
|
39,138 |
|
|
16,455 |
E |
|
55,593 |
|
|||
|
Accounts receivable, net |
|
1,576,392 |
|
|
— |
|
|
1,576,392 |
|
|||
|
Inventories |
|
977,799 |
|
|
— |
|
|
977,799 |
|
|||
|
Deferred income taxes |
|
362,124 |
|
|
(9,119 |
)B |
|
353,005 |
|
|||
|
Prepaid expenses and other current assets |
|
109,862 |
|
|
— |
|
|
109,862 |
|
|||
|
Total current assets |
|
4,109,165 |
|
|
(146,939 |
) |
|
3,962,226 |
|
|||
|
Property, plant and equipment, net |
|
902,868 |
|
|
27,353 |
C |
|
930,221 |
|
|||
|
Goodwill |
|
2,223,422 |
|
|
— |
|
|
2,223,422 |
|
|||
|
Other non-current assets |
|
155,447 |
|
|
149,412 |
E,B |
|
304,859 |
|
|||
|
Total assets |
|
$ |
7,390,902 |
|
|
$ |
29,826 |
|
|
$ |
7,420,728 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|||
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|||
|
Accounts payable |
|
$ |
1,506,998 |
|
|
$ |
— |
|
|
$ |
1,506,998 |
|
|
Accrued liabilities |
|
394,906 |
|
|
— |
|
|
394,906 |
|
|||
|
Accrued payroll and related benefits |
|
130,660 |
|
|
5,117 |
D |
|
135,777 |
|
|||
|
Current portion of long-term debt |
|
3,489 |
|
|
— |
|
|
3,489 |
|
|||
|
Total current liabilities |
|
2,036,053 |
|
|
5,117 |
|
|
2,041,170 |
|
|||
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|||
|
Long-term debt, net of current portion |
|
1,925,630 |
|
|
— |
|
|
1,925,630 |
|
|||
|
Deferred income tax liability |
|
30,940 |
|
|
— |
|
|
30,940 |
|
|||
|
Other |
|
75,025 |
|
|
— |
|
|
75,025 |
|
|||
|
Total long-term liabilities |
|
2,031,595 |
|
|
— |
|
|
2,031,595 |
|
|||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|||
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|||
|
Preferred stock |
|
— |
|
|
— |
|
|
— |
|
|||
|
Common stock |
|
5,304 |
|
|
— |
|
|
5,304 |
|
|||
|
Treasury stock |
|
(188,618 |
) |
|
— |
|
|
(188,618 |
) |
|||
|
Additional paid-in capital |
|
5,692,764 |
|
|
139,106 |
A |
|
5,831,870 |
|
|||
|
Accumulated other comprehensive income |
|
16,335 |
|
|
— |
|
|
16,335 |
|
|||
|
Accumulated deficit |
|
(2,202,531 |
) |
|
(114,397 |
) |
|
(2,316,928 |
) |
|||
|
Total stockholders’ equity |
|
3,323,254 |
|
|
24,709 |
|
|
3,347,963 |
|
|||
|
Total liabilities and stockholders’ equity |
|
$ |
7,390,902 |
|
|
$ |
29,826 |
|
|
$ |
7,420,728 |
|
A: Adjustment for additional stock compensation expense pursuant to APB No. 25.
B: Adjustment to the deferred tax assets arising from the reversal of fixed asset reserves in fiscal year 2001 and net operating losses from the 956 Deemed Dividend and stock-based compensation charge.
C: Reversal of excess fixed asset impairment reserve.
D: Adjustment for payroll tax associated with the adjustment to stock-based compensation.
E: Cash and cash equivalents decreased by approximately $154.3 million at September 27, 2003 due to adjustments of certain overdraft facilities to other non-current assets of $137.8 million and marketable securities of $16.5 million.
30
|
|
|
As of September 28, 2002 |
|
|||||||||
|
|
|
Previously |
|
Adjustments |
|
Restated |
|
|||||
|
|
|
(In thousands) |
|
|||||||||
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|||
|
Current assets: |
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents |
|
$ |
1,064,534 |
|
|
$ |
— |
|
|
$ |
1,064,534 |
|
|
Short-term investments |
|
99,140 |
|
|
— |
|
|
99,140 |
|
|||
|
Accounts receivable, net |
|
1,394,515 |
|
|
— |
|
|
1,394,515 |
|
|||
|
Inventories |
|
1,123,016 |
|
|
— |
|
|
1,123,016 |
|
|||
|
Deferred income taxes |
|
312,184 |
|
|
(10,531 |
)B |
|
301,653 |
|
|||
|
Prepaid expenses and other current assets |
|
165,649 |
|
|
— |
|
|
165,649 |
|
|||
|
Total current assets |
|
4,159,038 |
|
|
(10,531 |
) |
|
4,148,507 |
|
|||
|
Property, plant and equipment, net |
|
1,084,454 |
|
|
27,353 |
C |
|
1,111,807 |
|
|||
|
Goodwill |
|
2,101,650 |
|
|
— |
|
|
2,101,650 |
|
|||
|
Long-term investments |
|
73,955 |
|
|
— |
|
|
73,955 |
|
|||
|
Other non-current assets |
|
98,960 |
|
|
20,559 |
B |
|
119,519 |
|
|||
|
Total assets |
|
$ |
7,518,057 |
|
|
$ |
37,381 |
|
|
$ |
7,555,438 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|||
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|||
|
Accounts payable |
|
$ |
1,279,451 |
|
|
$ |
— |
|
|
$ |
1,279,451 |
|
|
Accrued liabilities |
|
366,500 |
|
|
— |
|
|
366,500 |
|
|||
|
Accrued payroll and related benefits |
|
142,139 |
|
|
5,840 |
D |
|
147,979 |
|
|||
|
Current portion of long-term debt |
|
265,899 |
|
|
— |
|
|
265,899 |
|
|||
|
Total current liabilities |
|
2,053,989 |
|
|
5,840 |
|
|
2,059,829 |
|
|||
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|||
|
Long-term debt, net of current portion |
|
1,975,331 |
|
|
— |
|
|
1,975,331 |
|
|||
|
Deferred income tax liability |
|
17,184 |
|
|
— |
|
|
17,184 |
|
|||
|
Other |
|
56,838 |
|
|
— |
|
|
56,838 |
|
|||
|
Total long-term liabilities |
|
2,049,353 |
|
|
— |
|
|
2,049,353 |
|
|||
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|||
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|||
|
Preferred stock |
|
— |
|
|
— |
|
|
— |
|
|||
|
Common stock |
|
5,254 |
|
|
— |
|
|
5,254 |
|
|||
|
Treasury stock |
|
(190,261 |
) |
|
|
|
|
(190,261 |
) |
|||
|
Additional paid-in capital |
|
5,675,401 |
|
|
61,442 |
A |
|
5,736,843 |
|
|||
|
Accumulated other comprehensive income |
|
(10,305 |
) |
|
— |
|
|
(10,305 |
) |
|||
|
Accumulated deficit |
|
(2,065,374 |
) |
|
(29,901 |
) |
|
(2,095,275 |
) |
|||
|
Total stockholders’ equity |
|
3,414,715 |
|
|
31,541 |
|
|
3,446,256 |
|
|||
|
Total liabilities and stockholders’ equity |
|
$ |
7,518,057 |
|
|
$ |
37,381 |
|
|
$ |
7,555,438 |
|
A: Adjustment for additional stock compensation expense pursuant to APB No. 25.
B: Adjustment to the deferred tax assets arising from the reversal of fixed asset reserves in fiscal year 2001 and net operating losses from stock-based compensation charge.
C: Reversal of excess fixed asset impairment reserve.
D: Adjustment for payroll tax associated with the adjustment to stock-based compensation.
31
Pro Forma Information under SFAS No. 123 for Periods Prior to Fiscal 2006 (Unaudited)
If compensation expense for our various equity compensation plans had been determined based upon estimated fair values at the grant dates in accordance with Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation”, our pro forma net loss, and basic and diluted loss per common share for stock options granted prior to the adoption of SFAS No. 123R, for the fiscal periods 1997 through 2003 would have been as follows (in thousands, except for per share data):
|
|
|
Fiscal Years ended |
|
|||||||||||||||||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
|||||||||||||||
|
|
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
(Restated) |
|
|||||||||||||||
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
As reported |
|
$ |
(221,653 |
) |
$ |
(2,698,383 |
) |
$ |
33,936 |
|
|
$ |
192,948 |
|
|
|
$ |
100,787 |
|
|
|
$ |
32,598 |
|
|
|
$ |
49,271 |
|
|
|
Stock-based employee compensation expense included in reported net income (loss)(1) |
|
79,484 |
|
39,856 |
|
27,953 |
|
|
23,761 |
|
|
|
4,386 |
|
|
|
707 |
|
|
|
85 |
|
|
|||||||
|
Stock-based employee compensation expense determined under fair value method(1) |
|
(79,504 |
) |
(119,929 |
) |
(144,455 |
) |
|
(84,307 |
) |
|
|
(44,026 |
) |
|
|
(31,293 |
) |
|
|
(19,715 |
) |
|
|||||||
|
Pro forma net income (loss) |
|
$ |
(221,673 |
) |
$ |
(2,778,456 |
) |
$ |
(82,566 |
) |
|
$ |
132,402 |
|
|
|
$ |
61,147 |
|
|
|
$ |
2,012 |
|
|
|
$ |
29,641 |
|
|
|
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
As reported |
|
$ |
(0.43 |
) |
$ |
(5.60 |
) |
$ |
0.11 |
|
|
$ |
0.63 |
|
|
|
$ |
0.35 |
|
|
|
$ |
0.27 |
|
|
|
$ |
1.02 |
|
|
|
Proforma |
|
$ |
(0.43 |
) |
$ |
(5.76 |
) |
$ |
(0.26 |
) |
|
$ |
0.43 |
|
|
|
$ |
0.21 |
|
|
|
$ |
0.02 |
|
|
|
$ |
0.61 |
|
|
|
Diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
As reported |
|
$ |
(0.43 |
) |
$ |
(5.60 |
) |
$ |
0.10 |
|
|
$ |
0.59 |
|
|
|
$ |
0.34 |
|
|
|
$ |
0.25 |
|
|
|
$ |
0.77 |
|
|
|
Proforma |
|
$ |
(0.43 |
) |
$ |
(5.76 |
) |
$ |
(0.24 |
) |
|
$ |
0.40 |
|
|
|
$ |
0.20 |
|
|
|
$ |
0.02 |
|
|
|
$ |
0.46 |
|
|
(1) Excludes tax effect.
For fiscal 2005 and 2004, refer to Note 12 of the Notes to Consolidated Financial Statements.
32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenues or results of operations, gross margin or operating margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry ranking; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue” and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. 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,” we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.
We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. Our revenue is generated from sales of our services primarily to original equipment manufacturers, or OEMs, in the communications, personal and business computing, enterprise computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive industries.
A relatively small number of customers historically have been responsible for a significant portion of our net sales. Sales to our ten largest customers accounted for 60.8%, 63.9% and 69.3% of our net sales for fiscal 2006, 2005 and 2004, respectively, and three customers, IBM, Lenovo and HP, accounted for 10% or more of our net sales for fiscal 2006. Our largest customer, IBM accounted for 10% or more of our net sales for fiscal 2005. Two customers, IBM and HP, accounted for 10% or more of our net sales for fiscal 2004.
In recent periods, we have generated a significant portion of our net sales from international operations. During fiscal 2006, 2005 and 2004, 75.1%, 76.2% and 72.7%, respectively, of our consolidated net sales were derived from non-U.S. operations. The concentration of international operations has resulted from overseas acquisitions and a desire on the part of many of our customers to move production to lower cost locations in regions such as Asia, Latin America and Eastern Europe. We expect this trend to continue.
Historically, we have had substantial recurring sales from existing customers. We have also expanded our customer base through acquisitions. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and cover the manufacture of a range of products. Under these agreements, a customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. These agreements generally do not obligate the customer to purchase minimum quantities of products. In some circumstances our supply agreements with customers provide for cost reduction objectives during the term of the agreement.
We have experienced fluctuations in gross margins in the past and may continue to in the future. Fluctuations in our gross margins may be caused by a number of factors, including pricing, changes in product mix, competitive pressures and transition of manufacturing to lower cost locations.
33
Stock-Based Compensation Expense. In May 2006, two analyst research reports were published wherein it was suggested that based on their analysis of our proxy statements that were filed with the Securities and Exchange Commission (“SEC”), we may have backdated stock option grants (the “Reports”) with respect to our officers.
Shortly after the Reports were published, we were contacted by the SEC with respect to its option practices for the years mentioned in the Reports. As a result of the publication of the Reports and concurrent with the SEC’s informal inquiry, a special meeting of the Board of Directors was convened on June 8, 2006. In response to these circumstances, the Board of Directors immediately created a Special Committee, which was comprised of independent disinterested directors, to conduct a comprehensive review of grants of stock options and restricted stock. The investigation was conducted with the assistance of a law firm and outside accounting consultants not previously involved with our stock option plans and Equity Plan administration. The review focused on the following:
· Option grants made to all employees, directors and consultants during the period from January 1997 through June 2006 (the “Investigation Period”);
· Restricted stock grants during the period from September 2003 (the date of the first grant of restricted stock) through July 2006; and
· Stock option grant modifications connected with employee terminations during the Investigation Period.
The Special Committee investigated substantially all of the option and restricted stock grants issued to individuals at all levels of our Company, including its directors and officers, during the Investigation Period. As a result of the investigation, it was determined that the original measurement date used by us for accounting purposes (the “Record Date”) for most of the options and restricted stock issued by us from January 1997 to June 2006 did not correspond to the closing price of our common stock on the appropriate measurement date. In nearly all such cases, the Record Date preceded the appropriate measurement date and the stock price on the Record Date was lower than the price on the appropriate measurement date.
In assessing how the errors relating to stock option accounting occurred, the investigation report identified concerns with respect to the actions of two former executives who were each involved in the authorization, recording and reporting of stock option grants, restricted stock grants and stock option modifications related to employee terminations. In addition, the investigation report also identified deficiencies in internal controls, including the process of preparing and retaining accurate documentation relating to our stock option plan administration activities.
Our historical procedures and methodologies for determining the number of shares and the Record Date of stock option and restricted stock grants made during the Investigation Period varied depending on the classification of the recipients of such awards. The following discusses, by category, the stock-based compensation processes generally followed by us to authorize and approve stock-based compensation awards:
Board of Director Grants. Non-employee Directors generally received automatic option grants pursuant to the 1995 Director’s Option Plan on October 1, or the first trading day thereafter.
Officer Grants. Equity awards issued to our employees were issued pursuant to our 1990 and 1999 Stock Option Plans. Equity awards issued to “reporting persons” as that term is defined under Section 16 of the Securities Exchange Act of 1934, as amended (“Officers”) were issued by authority of the Compensation Committee. Officer stock option grants were generally awarded annually at the October meeting of the Compensation Committee.
Non-Officer Grants. Equity awards issued to our non-Officer employees were generally administered as follows. First, the Compensation Committee met and authorized a “pool” of stock options and restricted
34
stock to be set aside for issuance to employees and delegated to management the responsibility for allocating the awards to specific recipients pursuant to the stock plan. Upon management’s conclusion of this allocation process, a final list of award recipients, along with the number of stock options and/or restricted stock to be awarded to each individual was presented to executive management for final review and approval.
Results of the Special Committee’s investigation generally concluded that the Record Date used to account for most of the equity awards issued by us from January 1997 to June 2006 differed from the appropriate measurement date. In nearly all such cases, the stock price on the appropriate measurement date was higher than the price on the Record Date. The types of grant discrepancies uncovered by the investigation and the financial statement impact of these errors are summarized as follows:
Misdated Grants. From fiscal 1997 through June 2006, we granted options on eleven different dates to our Officers. The investigation identified that the Record Date required revision on all eight (8) Officer Grants issued prior to October 2002 and no revisions were necessary for Officer Grants issued from October 2002 to the present. It was also determined that the Record Dates required revision with respect to nineteen (19) of the twenty-one (21) non-Officer Grants issued during the Investigation Period. In nearly all cases, the Record Date preceded the appropriate measurement date and the stock price on the Record Date was lower than the price on the appropriate measurement date. With regard to these discrepancies, the Record Date originally used by us in some cases preceded the date a definitive list of equity award recipients was approved. In other cases the stock price declined and the Record Date used was subsequent to the completion of the definitive list. As such, the revised measurement date was based on the date when the granting process of each of our grants was finalized. As a result, we have recognized pre-tax compensation expense of $115.2 million, (including restricted shares) relating to correcting the Record Date for the fiscal periods 1997 through 2005. For the years ended October 1, 2005 and October 2, 2004, we recognized pre-tax incremental stock based compensation of approximately $15.0 million and $12.2 million, respectively.
Option Exchange. In 2003, we gave eligible employees the opportunity to cancel stock options with an exercise price greater than $11.00 and in exchange receive a new option grant no earlier than six months and one day after the last cancellation day with the exercise price of the new options to be determined at the end of this period, on a date between September 12-17, 2003. Non-employee members of the board of directors and executive officers were not eligible for the exchange program. It was determined that the Record Date of the new options issued in exchange for the forfeited options was incorrect. The effect of using the correct Record Date was to increase pre-tax stock-based compensation expense by $26.0 million from fiscal 2003 through 2005. We recorded $58.6 million in fiscal 2003 of pre-tax compensation expense arising from the cancellation of the stock options submitted for the exchange. The effect of this correction to the years ended October 1, 2005 and October 2, 2004 was pre-tax incremental compensation expense of $12.0 million and $9.8 million, respectively.
Stock Option Grant Modifications Connected with Terminations. Compensation expense was also recognized as a result of modifications that were made to certain employee option grant awards in connection with certain employees’ termination agreements from fiscal 1999 through 2006. Compensation expense for these modifications was revised during the relevant periods. The nature of the modifications typically involved changes to employee stock option vesting rights subsequent to termination of employment. The total pre-tax stock-based compensation expense related to these modifications was approximately $24.4 million for the fiscal periods 1997 through 2005. There was $0 and $2.0 million of pre-tax incremental compensation expense related to modifications for the years ended October 1, 2005 and October 2, 2004, respectively.
The cumulative pre-tax incremental stock compensation expense recognized by us for these errors described above is approximately $224.2 million for the fiscal periods 1997 through 2005. The cumulative
35
pre-tax incremental stock compensation expense recognized by us for these errors described above for the years ended October 1, 2005 and October 2, 2004 was approximately $27.0 million and $24.0 million.
As a result of our pattern of establishing the Record Date prior or subsequent to the date a definitive list of equity award recipients was approved (see previous discussion entitled Misdated Grants), the revised measurement dates were based on the date on which all of the required granting actions for a specific grant were final (including any changes to the terms of the awards such as the number of options or restricted shares for any employee that received an award). To the extent any of these granting actions were not final for a specific grant, the measurement date was delayed until all required actions relating to the grant were completed, including delaying the measurement date for awards for which the exercise prices were not changed. We believe that this is the appropriate way to establish the measurement date.
Notwithstanding the foregoing, the lack of conclusive evidence in the case of certain grants required our management to apply significant judgment in establishing revised measurement dates. In those cases where a definitive measurement date could not be determined, the evidence was generally sufficient to establish: (1) a date which was defined as the earliest possible date that met all the conditions that constitute a measurement date under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (the “Inside Date”) and (2) a date which was defined as the latest possible date that met all the conditions that constitute a measurement date under APB No. 25 (the “Outside Date”). These dates, particularly the Outside Date, later became the basis for determination of the revised measurement dates used by us in the restatement as we determined that this approach is more appropriate in determining when the option grant was determined with finality and no longer subject to change. An example of an Outside Date for an Officer Grant might be the date the related Form 4 was filed. An example of an Outside Date for a Non-Officer Grant generally was the date at or around the date on which the option awards were communicated to employees.
In light of the significant judgment used by us in establishing revised measurement dates, alternate approaches to those used by us could have resulted in different compensation expense charges than those recorded by us in the restatement. For example, an alternative measurement date could be when communication occurred to a significant number of grant recipients included in an Annual grant rather than the Outside Date, when the option grant is determined with finality as the measurement date for those grant recipients for which there were changes made after the communication occurred. Based on the available evidence and applying the lowest and highest trading prices our common stock between alternative dates for each discrepant grant, the total cumulative pre-tax, non-cash, stock compensation charge that could alternatively have been recognized by us ranged from approximately $176.1 million to $297.8 million for the fiscal periods 1997 through 2005.
We determined that the total cumulative, pre-tax, non-cash, stock compensation expense resulting from revised measurement dates was $224.2 million from fiscal periods January 1997 through October 1, 2005. The cumulative effect of the restatement adjustment on our Consolidated Balance Sheet at September 28, 2003 was an increase in additional paid-in capital of $139.1 million and an increase in accumulated deficit of the same amount. There was no impact on revenue. From a cash perspective, the additional payable in regards to payroll taxes associated with the stock option grants was approximately $0.5 million for the fiscal periods 1997 through 2005.
Additionally, as part of our review of its accounting for stock option grants that were granted in prior periods, we also determined that we had overstated goodwill by approximately $28.8 million as a result of understating the intrinsic value of the unvested awards to be allocated to unearned compensation that were exchanged in our acquisition of SCI which was consummated on December 6, 2001. During fiscal 2002, we recorded an impairment charge relating to the goodwill arising from the SCI acquisition. As such the impairment charge recognized in fiscal 2002 was overstated by $28.8 million. The effect of correcting this
36
error increased accumulated deficit at September 28, 2003 by $28.8 million. This adjustment did not affect the results of operations for the three-years ended September 30, 2006.
Other Matters. We also modified the accounting treatment for an interest rate swap related to its 10.375% Notes. Although management believes the economics of the interest rate swap related to the 10.375% Notes achieved the original objectives of converting certain fixed rate debt to effectively variable rate obligations, certain technical documentation requirements for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and related interpretations were not sufficient at the time the transaction occurred. Specifically we did not meet the requirements of contemporaneous documentation related to the interest swap with respect to the 10.375 % Notes. As a result, mark to market adjustments of the interest rate swap were recognized in other income (expense) during the term of the interest rate swap agreement which began in October 2004 and was terminated in February 2006. The adjustment increased net loss by $22.1 million during the year ended October 1, 2005 and reduced net loss by $22.1 million during the year ended September 30, 2006 in the Consolidated Statements of Operations.
As part of restructuring activities, we established a reserve account for its restructured fixed assets which was applied against the net book value of the restructured fixed assets at the time the restructuring event occurred. We determined that the fixed asset reserve account was overstated by $27.4 million and that the overstatement occurred in fiscal 2001. The adjustment resulted in an increase of $27.4 million in the net book value of property, plant and equipment as of September 28, 2003. The adjustment also decreased deferred tax assets by $10.5 million resulting in a reduction of $16.9 million in the accumulated deficit as of September 28, 2003. The decrease in deferred tax assets also reduced the valuation allowance that was recorded during fiscal 2005 for certain of the Company’s deferred tax assets.
During a review of our accounting treatment of intercompany transactions, we discovered that certain Controlled Foreign Corporations (“CFCs”) of the U.S. group had significant intercompany payable and receivable balances with various U.S. legal entities that were unsettled as of the end of fiscal 2004 and fiscal 2005. Under U.S. tax rules, the gross intercompany payable balance of a U.S. legal entity owed to a foreign CFC constitutes an investment in U.S. property under Section 956 (“Section 956 property”). For U.S. tax purposes, Section 956 property is treated as a deemed dividend to the U.S. from the CFC and is taxable in the U.S. to the extent of the higher of the CFC’s earnings or its Section 956 property. In previous financial statements, we did not properly reflect the inclusion of taxable income under Section 956. During the period that the Section 956 property arose, we had substantial net operating losses that were in excess of the required income inclusion under Section 956. Accordingly, the recognition of Section 956 income resulted in a reduction of $35.6 million of net operating loss deferred tax assets and an increase of $35.6 million of our provision for income tax expense in fiscal 2004. This increase was partially offset by the reversal of a deferred tax liability of $8.1 million that had previously been established related to income not permanently reinvested as the recognition of the Section 956 deemed dividend was characterized as a deemed repatriation of this income. The net impact of the deemed dividend in fiscal 2004 was a net decrease of net deferred tax assets of $27.4 million and an increase in our provision for income tax expense of $27.4 million. As part of our review, $1.4 million of deferred tax liability related to income not permanently reinvested was reversed in fiscal 2003, reducing our provision for tax expense in fiscal 2003 by $1.4 million.
During fiscal 2005, we recorded a valuation allowance against certain of its deferred tax assets. As a result of our restatement adjustments, deferred tax assets were reduced causing a reduction in the valuation allowance that was recorded during the second quarter of fiscal 2005. Accordingly, this reduced our provision for income taxes by $18.0 million for the year ended October 1, 2005, respectively.
The restatement adjustments increased previously reported basic and diluted net loss per share by $0.06 and $0.08 for the years ended October 1, 2005 and October 2, 2004, respectively.
37
Summary Results of Operations
Net sales in fiscal 2006 decreased 6.6% to $11.0 billion from $11.7 billion in fiscal 2005. Approximately $772 million of the decline in sales in fiscal 2006 was due to decreased demand from existing customers in our personal and business computing business. The remaining decreases in sales for fiscal 2006 were primarily due to a decline in revenue of $262 million and $186 million from our enclosures and storage systems businesses, offset by an increase in other areas of our business.
The following tables sets forth, for the periods indicated, key operating results:
|
|
|
Fiscal Year Ended |
|
|||||||
|
|
|
September 30, |
|
October 1, |
|
October 2, |
|
|||
|
|
|
|
|
(Restated)(1) |
|
(Restated)(1) |
|
|||
|
|
|
(In thousands) |
|
|||||||
|
Net sales |
|
$ |
10,955,421 |
|
$ |
11,734,674 |
|
$ |
12,204,607 |
|
|
Gross profit |
|
$ |
621,736 |
|
$ |
630,182 |
|
$ |
606,926 |
|
|
Operating income (loss) |
|
$ |
53,317 |
|
$ |
(489,760 |
) |
$ |
84,482 |
|
|
Net loss |
|
$ |
(141,557 |
) |
$ |
(1,033,946 |
) |
$ |
(51,629 |
) |
(1) For more information regarding the investigation and finding relating to stock option practices and the restatement of stock-based compensation and other items, please refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 of the Notes to Consolidated Financial Statements—“Restatement of Consolidated Financial Statements”.
Key performance measures
The following table sets forth, for the periods indicated, certain key performance measures that management utilizes to assess operating results:
|
|
|
Three Months Ended |
|
||||||||||||||
|
|
|
September 30, |
|
July 1, |
|
April 1, |
|
December 31, |
|
||||||||
|
Days sales outstanding(1) |
|
|
51 |
|
|
|
53 |
|
|
|
48 |
|
|
|
51 |
|
|
|
Inventory turns(2) |
|
|
7.9 |
|
|
|
8.1 |
|
|
|
8.6 |
|
|
|
9.6 |
|
|
|
Accounts payable days(3) |
|
|
53 |
|
|
|
56 |
|
|
|
51 |
|
|
|
55 |
|
|
|
Cash cycle days(4) |
|
|
44 |
|
|
|
42 |
|
|
|
40 |
|
|
|
33 |
|
|
|
|
|
Three Months Ended |
|
||||||||||||||
|
|
|
October 1, |
|
July 2, |
|
April 2, |
|
January 1, |
|
||||||||
|
Days sales outstanding(1) |
|
|
48 |
|
|
|
51 |
|
|
|
50 |
|
|
|
50 |
|
|
|
Inventory turns(2) |
|
|
10.3 |
|
|
|
11.3 |
|
|
|
11.4 |
|
|
|
12.3 |
|
|
|
Accounts payable days(3) |
|
|
54 |
|
|
|
51 |
|
|
|
50 |
|
|
|
48 |
|
|
|
Cash cycle days(4) (Restated) |
|
|
29 |
|
|
|
32 |
|
|
|
31 |
|
|
|
31 |
|
|
(1) Days sales outstanding, or DSO, is calculated as the ratio of ending accounts receivable, net, for the quarter divided by average daily net sales for the quarter.
(2) Inventory turns are calculated as the ratio of four times our cost of sales for the quarter divided by inventory, net, at period end.
(3) Accounts payable days is calculated as the ratio of 365 days divided by accounts payable turns, in which accounts payable turns is calculated as the ratio of four times our cost of sales for the quarter divided by accounts payable at period end.
(4) Cash cycle days is calculated as the ratio of 365 days divided by inventory turns plus days sales outstanding minus accounts payable days.
38
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate the process used to develop estimates for certain reserves and contingent liabilities, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.
We believe the following critical accounting policies reflect our more significant judgments and estimates used in preparing our consolidated financial statements:
Revenue Recognition—We recognize revenue based on the shipping terms or when services have been performed. We also derive revenues from sales of certain inventory, including raw materials, to customers who reschedule, amend or cancel purchase orders after we have procured inventory to fulfill their purchase orders. Specifically, we recognize revenue when there exists a persuasive arrangement between us and the buyer, the price is fixed or determined, title to the product or the inventory is transferred to the customer, the customer assumes the risks and rewards of ownership of the product and collectibility is reasonably assured. Except in specific circumstances, there are no formal customer acceptance requirements or further Sanmina-SCI obligations to the product or the inventory subsequent to shipment. In specific circumstances in which there are such customer acceptance requirements or further Sanmina-SCI obligations, with the exception of our standard warranty, revenue is recognized at the point of formal acceptance and upon completion of obligations. In specific circumstances in which we are acting as an agent on behalf of the customer on procurement and shipment of goods in accordance with Emerging Issues Task Force (“EITF”) 99-19, gross revenue is not recognized on the sale of the goods. Instead, revenue is recognized net of the costs of the goods. Provisions are made for estimated, sales returns and adjustments at the time revenue is recognized. The provisions were not material to the financial statements.
Accounts Receivable and Other Related Allowances—We estimate product returns, and other adjustments related to current period net sales to establish related allowances. In making these estimates, we analyze the creditworthiness of our customers, past experience, changes in customer demand, and the overall economic climate in industries that we serve. If actual product returns, warranty claims or other adjustments differ significantly from our estimates, the amount of revenue or operating expenses we report would be affected. One of our most significant credit risks is the ultimate realization of our accounts receivable. This risk is mitigated by (i) sales to well-established companies, (ii) ongoing credit evaluation of our customers, and (iii) frequent contact with our customers, especially our most significant customers, which enables us to monitor current changes in business operations and to respond accordingly. To establish our allowance for doubtful accounts, we regularly estimate the credit risk associated with accounts receivable and consider concentrations of credit risks. We evaluate credit risk related to specific customers based on the current economic environment; however, we are not able to predict the inability of our customers to meet their financial obligations to us. Our largest customer represented approximately 14% of our gross accounts receivable as of September 30, 2006. We believe the allowances that we have established are adequate under the circumstances; however, a change in the economic environment or a customer’s financial condition could cause our estimates of allowances, and consequently the provision for doubtful accounts, to change which could have a significant adverse impact on our results of operations.
39
Stock-Based Compensation—On October 2, 2005, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options, restricted stock units and purchase rights under our Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. SFAS No. 123R supersedes previous accounting under APB No. 25 for periods beginning in fiscal year 2006. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 providing supplemental implementation guidance for SFAS No. 123R. We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123R.
SFAS No. 123R requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. We adopted SFAS No. 123R using the modified prospective transition method which requires the application of the accounting standard starting from October 2, 2005, the first day of our fiscal year 2006. Our Consolidated Financial Statements, for the fiscal year ended September 30, 2006, reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method we used in adopting SFAS No. 123R, our results of operations prior to fiscal year 2006 have not been restated to reflect, and do not include, the impact of SFAS No. 123R.
Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in fiscal 2006, included compensation expense for stock-based awards granted prior to, but not yet vested as of October 1, 2005, based on the fair value on the grant date estimated in accordance with the pro forma provisions of SFAS No. 123, and compensation expense for the stock-based awards granted subsequent to October 1, 2005, based on the fair value on the grant date estimated in accordance with the provisions of SFAS No. 123R. In conjunction with the adoption of SFAS No. 123R, we changed our method of attributing the value of stock-based compensation expense from the accelerated multiple-option method (for the purposes of pro forma information under SFAS No. 123) to the straight-line single option method. Compensation expense for all stock-based awards granted on or prior to October 1, 2005 will continue to be recognized using the accelerated multiple-option approach, while compensation expense for all stock-based awards granted subsequent to October 1, 2005, will be recognized using the straight-line single option method. As stock-based compensation expense recognized in our results is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to fiscal year 2006, we accounted for forfeitures as they occurred.
Upon adoption of SFAS No. 123R, we selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock options and purchase rights under ESPP. The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. For restricted stock units, compensation expense is calculated based on the fair market value of our stock on the date of grant. In regards to our performance restricted stock units, compensation expense is recognized pursuant to SFAS No. 123R only when we have met the performance probability criteria.
As a result of the adoption of SFAS No. 123R, our loss from continuing operations before income taxes and cumulative effect of accounting changes and net loss for the year ended September 30, 2006, was $6.6 million less than under our previous accounting methodology for share-based compensation. In addition, we recorded a benefit upon the adoption of SFAS No. 123R of approximately $5.7 million during the year ended September 30, 2006 which was recorded as cumulative effect of the accounting change.
40
Stock-Based Compensation (Restated)
As a result of the investigation which is described in Note 2 of the Notes to Consolidated Financial Statements, it was determined that the original measurement date used by us for accounting purposes (the “Record Date”) for most of the options and restricted stock issued by us from fiscal January 1997 to June 2006 did not correspond to the closing price of our common stock on the appropriate measurement date. With regard to these discrepancies, the Record Date originally used by us in some cases preceded the date a definitive list of equity award recipients was approved. In other cases the stock price declined and the Record Date used was subsequent to the completion of the definitive list.
As such, the revised measurement date was based on the date when the granting process of each of our grants were finalized (including any changes to the terms of the awards such as the number of options or restricted shares for any employee that received an award). To the extent any of these granting actions were not final for a specific grant, the measurement date was delayed for the award until all required actions relating to the grant were completed, including delaying the measurement date for awards for which the terms had not changed.
Generally, the date the grant was determined with finality and no longer subject to change was also the date which was defined as the latest possible date that all the conditions that constitute a measurement date could have existed under APB No. 25 (the “Outside Date”). An example of an Outside Date was the date at or around the date on which the option awards were communicated to the grant recipient. We believe that this is the appropriate way to establish the measurement date. However, in light of the significant judgment used by us in establishing revised measurement dates, alternate approaches to those used by us could have resulted in different compensation expense charges than those recorded by us in the restatement. For example, an alternative measurement date could be when communication occurred to a significant number of grant recipients included in an Annual grant rather than the Outside Date, when the option grant was determined in finality. Based on the available evidence and applying the lowest and highest trading prices of our common stock between alternative dates for each discrepant grant, the total cumulative pre-tax, non cash, stock compensation charge that could alternatively have been recognized by us ranged from approximately $176.1 million to $297.8 million for the fiscal periods 1997 through 2005.
Inventories—We state inventories at the lower of cost (first-in, first-out method) or market value. We regularly evaluate the carrying value of our inventories. Cost includes material, labor and manufacturing overhead incurred for finished goods and work-in-process. We determine expected inventory usage based on demand forecasts received from our customers. When required, provisions are made to reduce excess and obsolete inventories to their estimated net realizable values. In addition, the ultimate realization of inventory carrying amounts is affected by our exposure related to changes in customer demand for inventory that they are not contractually obligated to purchase and raw materials held for specific customers who are experiencing financial difficulty. Inventory reserves are established based on forecasted demand, past experience with the specific customers, the ability to redistribute inventory to other programs or back to our suppliers, and the presence of contractual language obligating the customers to pay for the related inventory.
We procure inventory based on specific customer orders and forecasts. Customers have limited rights of modification with respect to these orders. Correspondingly, customer modifications to orders affecting inventory previously procured by us (for example, cancellations or rescheduling of orders, as well as inventory that is highly customized and therefore not available for use by other customers) and our purchases of inventory beyond customer needs may result in excess and obsolete inventory for the related customers. Although we may be able to use some excess components and raw materials in our inventory for other products we manufacture, a portion of the cost of this excess inventory may not be returned to the vendors or recovered from customers. Write offs or write downs of inventory could relate to:
· declines in the market value of inventory;
41
· raw materials held for specific customers who are experiencing financial difficulty; and
· changes in customer demand for inventory, such as cancellation of orders and our purchases of inventory beyond customer needs that result in excess quantities on hand that we are not able to return to the vendor or charge back to the customer.
Our practice is to dispose of excess and obsolete inventory as soon as practicable after such inventory has been identified as having no value. Sales of such inventory have not been significant and have not had a material impact on our gross margins to date.
Restructuring Costs—We recognize restructuring charges related to our plans to exit certain activities resulting from the identification of excess manufacturing and administrative facilities that we choose to close or consolidate. In connection with our exit activities, we record restructuring charges for employee termination costs, long-lived asset impairments, costs related to leased facilities to be abandoned or subleased, and other exit-related costs. These charges were incurred pursuant to formal plans developed by management and accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities, and EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” Where applicable, employee termination costs are recorded pursuant to SFAS No. 112, “Employer’s Accounting for Postemployment Benefits.” Fixed assets that are written off or impaired as a result of restructuring plans are typically held for sale or scrapped. The remaining carrying value of such assets was not material at September 30, 2006 and October 1, 2005. The recognition of restructuring charges requires our management to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activity, including estimating sublease income and the fair value, less selling costs, of property, plant and equipment to be disposed of. Management’s estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure their adequacy, that no excess accruals are retained, and the utilization of the provisions are for their intended purposes in accordance with developed exit plans.
Goodwill and Other Intangibles assets—Costs in excess of the fair value of tangible and other intangible assets acquired and liabilities assumed in a purchase business combination are recorded as goodwill. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that companies no longer amortize goodwill, but instead test for impairment at least annually using a two-step approach. We adopted SFAS No. 142 on September 30, 2001 and evaluated goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss.
The preparation of the goodwill and other intangible assets impairment analysis requires management to make significant estimates and assumptions with respect to the determination of fair values of reporting units and long-lived assets. These estimates and assumptions may significantly differ from period to period. During fiscal 2005, we recorded a goodwill impairment loss of $600 million for our domestic reporting unit. The factors that caused us to record a write-off of our deferred tax assets, which primarily related to U.S. operations coupled with the then-recent decline in the market price of our common stock, led us to record this goodwill impairment loss during fiscal 2005. In particular, the shift of operations from U.S. facilities and other facilities in high cost locations to facilities in lower-cost locations has resulted in restructuring charges and a decline in sales with respect to our U.S. operations. The fair market valuation of the reporting units was based on an income and market approach. As of the time we performed this analysis, there was no impairment of goodwill or long-lived assets associated with our international operations. In
42
addition at July 1, of fiscal 2006, as well as at July 1, 2005 and 2004, we performed our annual impairment test pursuant to SFAS No. 142 and these tests did not identify any impairment losses. However, during fiscal 2006, we wrote off $3.8 million of goodwill as a result of our decision to align our original design manufacturer (“ODM”) business (see Note 9 of the Notes to Consolidated Financial Statements).
Income taxes—We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. Although we believe that our accruals for tax liabilities are reasonable, tax regulations are subject to interpretation and the tax controversy process is inherently uncertain; therefore, our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. To the extent that the probable tax outcome of these matters changes, such changes in estimates will impact the income tax provision in the period in which such determination is made.
We must also make judgments regarding the realizability of deferred tax assets. The carrying value of our net deferred tax asset is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets which we do not believe meet the “more likely than not” criteria established by SFAS No. 109, “Accounting for Income Taxes.” Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or decrease in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits and carryforwards, and the effectiveness of our tax planning strategies.
During the fiscal 2005, we established a valuation allowance for our U.S. and certain other net deferred tax assets. This was primarily due to cumulative losses from prior years and uncertainty regarding our ability to generate certain minimum levels of future taxable income. Because of continuing losses during fiscal 2006 in the U.S. and certain other countries, we will continue to record a full valuation allowance on future tax benefits in the U.S. and certain foreign jurisdictions.
43
Fiscal Years Ended September 30, 2006, October 1, 2005 and October 2, 2004
The following table sets forth, for the fiscal years indicated, certain statement of operations data expressed as a percentage of net sales.
|
|
|
Fiscal Year ended |
|
||||||||||
|
|
|
September 30, |
|
October 1, |
|
October 2, |
|
||||||
|
|
|
|
|
(Restated) |
|
(Restated) |
|
||||||
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
Cost of sales |
|
|
94.3 |
|
|
|
94.6 |
|
|
|
95.0 |
|
|
|
Gross margin |
|
|
5.7 |
|
|
|
5.4 |
|
|
|
5.0 |
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
3.4 |
|
|
|
3.1 |
|
|
|
2.8 |
|
|
|
Research and development |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
Amortization of intangible assets |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
In-process research and development |
|
|
— |
|
|
|
— |
|
|
|
|||