UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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)

 

 

(408) 964-3500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

 

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

As of April 23, 2007, there were 529,884,856 shares outstanding of the issuer’s common stock, $0.01 par value per share.

 

SANMINA-SCI CORPORATION

INDEX

				Page
		PART I FINANCIAL INFORMATION
Item 1.		Interim Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Operations		4
		Condensed Consolidated Statements of Cash Flows		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		45
Item 4.		Controls and Procedures		46
		PART II OTHER INFORMATION		48
Item 1.		Legal Proceedings		48
Item 4.		Submission of Matters to a Vote of Security Holders		49
Item 6.		Exhibits		49
Signatures				51

 

 

2

SANMINA-SCI CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2007			September 30, 2006
		(Unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	664,092		$	491,829
Accounts receivable, net of allowances of $10,213 and $8,971, at March 31, 2007 and September 30, 2006, respectively		1,408,198			1,526,373
Inventories		1,217,113			1,318,400
Prepaid expenses and other current assets		152,948			154,401
Total current assets		3,442,351			3,491,003
Property, plant and equipment, net		617,357			620,132
Other intangible assets, net		26,017			29,802
Goodwill		1,614,551			1,613,230
Other non-current assets		78,420			94,512
Restricted cash		13,194			13,751
Total assets		$	5,791,890		$	5,862,430
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,375,463		$	1,494,603
Accrued liabilities		192,661			223,263
Accrued payroll and related benefits		144,894			156,248
Current portion of long-term debt		700,114			100,135
Total current liabilities		2,413,132			1,974,249
Long-term liabilities:
Long-term debt, net of current portion		985,964			1,507,218
Other		107,901			110,400
Total long-term liabilities		1,093,865			1,617,618
Commitments and contingencies
Stockholders’ equity:
Common stock		5,487			5,519
Treasury stock		(185,583		)	(186,361		)
Additional paid-in capital		5,959,325			5,952,857
Accumulated other comprehensive income		47,607			42,608
Accumulated deficit		(3,541,943		)	(3,544,060		)
Total stockholders’ equity		2,284,893			2,270,563
Total liabilities and stockholders’ equity		$	5,791,890		$	5,862,430

 

See accompanying notes.

 

3

SANMINA-SCI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended						Six Months Ended
		March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
					(Restated)						(Restated)
		(Unaudited)
		(In thousands, except per share data)
Net sales		$	2,611,689		$	2,668,418		$	5,390,479		$	5,530,215
Cost of sales		2,473,969			2,503,859			5,084,081			5,197,169
Gross profit		137,720			164,559			306,398			333,046
Operating expenses:
Selling, general and administrative		93,496			87,049			189,814			177,152
Research and development		8,971			10,434			17,933			19,481
Amortization of intangible assets		1,611			2,071			3,261			4,304
Restructuring costs		18,947			20,593			22,162			56,221
Total operating expenses		123,025			120,147			233,170			257,158
Operating income		14,695			44,412			73,228			75,888
Interest income		8,671			5,091			19,571			11,016
Interest expense		(45,780		)	(30,724		)	(89,111		)	(63,676		)
Loss on extinguishment of debt		—			(84,600		)	—			(84,600		)
Other income (expense), net		(553		)	(3,682		)	10,408			(9,389		)
Interest and other expense, net		(37,662		)	(113,915		)	(59,132		)	(146,649		)
Income (loss) before income taxes and cumulative effect of accounting change		(22,967		)	(69,503		)	14,096			(70,761		)
Provision for (benefit from) income taxes		3,165			6,559			11,979			(6,398		)
Income (loss) before cumulative effect of accounting change		(26,132		)	(76,062		)	2,117			(64,363		)
Cumulative effect of accounting change, net of tax		—			—			—			5,695
Net income (loss)		$	(26,132	)	$	(76,062	)	$	2,117		$	(58,668	)
Net income (loss) per share before cumulative effect of accounting change:
Basic		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.12	)
Diluted		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.12	)
Net income (loss) per share:
Basic		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.11	)
Diluted		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.11	)
Weighted average shares used in computing per share amounts:
Basic		527,101			525,256			527,106			524,784
Diluted		527,101			525,256			528,570			524,784

 

See accompanying notes.

 

4

SANMINA-SCI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		March 31, 2007			April 1, 2006
					(Restated)
		(Unaudited)
		(In thousands)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)		$	2,117		$	(58,668	)
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		59,713			71,601
Restructuring (recovery of) non-cash costs		(3,753		)	21,069
Provision for (recovery of) doubtful accounts		1,242			(571		)
Stock-based compensation		6,054			5,736
Gain on disposal of property, plant and equipment, net		(6,312		)	(902		)
Loss on interest rate swap		—			5,464
Cumulative effect of accounting changes, net		—			(5,695		)
Proceeds from sale of accounts receivable		976,868			694,772
Loss on extinguishment of debt		—			84,600
Other, net		56			701
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(852,773		)	(654,204		)
Inventories		108,349			(129,113		)
Prepaid expenses and other current and non-current assets		3,689			4,346
Accounts payable and accrued liabilities		(166,690		)	(172,903		)
Restricted cash		1,146			—
Income tax accounts		(5,682		)	(21,666		)
Cash provided by (used in) operating activities		124,024			(155,433		)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of long-term investments		(250		)	(748		)
Purchases of property, plant and equipment		(40,398		)	(70,101		)
Proceeds from sale of property, plant and equipment		30,819			7,426
Cash paid for businesses acquired, net of cash acquired		(4,172		)	(44,644		)
Purchases of short-term investments		—			(17,755		)
Proceeds from maturities and sale of short-term investments		—			74,796
Cash used in investing activities		(14,001		)	(51,026		)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Change in restricted cash		—			22,460
Payments of long-term debt		(525,000		)	(750,929		)
Proceeds from long-term debt, net of issuance cost		593,409			587,123
Issuance of convertible debentures		—			(543		)
Interest rate swap termination associated with debt extinguishment		—			(29,785		)
Redemption premium associated with debt extinguishment		—			(70,751		)
Payments of notes and credit facilities, net		(104		)	(455		)
Proceeds from sale of common stock		382			12,109
Cash provided by (used in) financing activities		68,687			(230,771		)
Effect of exchange rate changes		(6,447		)	(5,617		)
Increase (decrease) in cash and cash equivalents		172,263			(442,847		)
Cash and cash equivalents at beginning of period		491,829			1,068,053
Cash and cash equivalents at end of period		$	664,092		$	625,206
Supplemental disclosures of cash flow information:
Cash paid during the period
Interest		$	79,161		$	71,749
Income taxes		$	20,966		$	25,407

 

See accompanying notes.

 

5

SANMINA-SCI CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Sanmina-SCI Corporation (“Sanmina-SCI”, “we”, “our”, “the Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all normal recurring adjustments and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation.

The results of operations for the six months ended March 31, 2007, is not necessarily indicative of the results that may be expected for the full fiscal year. We have restated our Condensed Consolidated Financial Statements for the six month period ended April 1, 2006, refer to our 2006 Annual Report on Form 10-K for more information.

These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2006, included in our 2006 Annual Report on Form 10-K.

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

On September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108, addresses quantifying the financial statement effects of misstatements; specifically, how the effects of prior year uncorrected misstatements must be considered in quantifying misstatements in the current year financial statements. In addition, SAB No. 108 provides guidance on the correction of misstatements, including the correction of prior period financial statements for immaterial misstatements. Importantly, SAB No. 108 offers a “one-time” special transition provision for correcting certain prior year misstatements that were uncorrected as of the beginning of the fiscal year of adoption. SAB No. 108 is effective for fiscal years ended after November 15, 2006. We expect to adopt this standard during the fourth quarter of fiscal year 2007, effective as of the beginning of fiscal year 2008. We are currently reviewing this bulletin to determine the potential impact to our financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” The statement requires an employer to recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status. The measurement date of the plans’ assets and obligations that determine the funded status will be as of the end of the Company’s fiscal year. The statement will be effective as of the end of fiscal 2007. We are currently reviewing this statement to determine the potential impact to our financial position, results of operations, and related cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective for the Company beginning in the first quarter of fiscal 2008. The Company is currently evaluating the impact this statement will have on its consolidated financial statements.

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement,” (EITF 06-3). In EITF

6

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06-3 a consensus was reached that entities may adopt a policy of presenting taxes assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, including but not limited to sales and value-added taxes in the income statement on either a gross or net basis. If an entity reports these taxes on a gross basis, the entity should disclose its policy of presenting taxes and the amount of taxes if reflected on a gross basis in the income statement if that amount is significant. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. This statement is effective immediately. The Company presents revenues net of sales and value-added taxes in its Condensed Consolidated Statement of Operations. The Company does not anticipate any impact to its financial position, results of operations, and related cash flows from the adoption of EITF 06-3.

Note 2.  Stock-Based Compensation

 Effective October 2, 2005, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with the SFAS No. 123R. Compensation cost associated with equity compensation recognized during the three and six months ended March 31, 2007 and April 1, 2006, includes: 1) stock-based compensation cost related to equity-based awards granted prior to October 2, 2005 that vested, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) stock-based compensation cost expensing of all stock option awards granted subsequent to October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The compensation expense for stock based compensation awards includes an estimate for forfeitures and is recognized over the vesting term using the ratable method. The Company recorded a cumulative effect benefit adjustment for estimated forfeitures of approximately $5.7 million for previously issued restricted stock and stock options upon the adoption of SFAS No. 123R during the six month period ended April 1, 2006.

Total stock compensation expense (excluding the $5.7 million benefit recorded on cumulative effect of accounting change) for the three and six months ended March 31, 2007 and April 1, 2006 (restated), respectively, are represented by expense categories in the table below:

		Three Months Ended						Six Months Ended
		March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
					(Restated)						(Restated)
Cost of sales		$	1,214		$	274		$	2,252		$	2,860
Selling, general & administrative.		2,104			(1,213		)	3,606			2,571
Research & development		101			56			196			305
		$	3,419		$	(883	)	$	6,054		$	5,736

 

Stock Options

The Company’s stock option plans provide its employees the right to purchase common stock at the fair market value of such shares on the grant date. The Company amortizes its stock options over the vesting period which is generally five years. New hire options vest 20% at the end of year one and then vest ratably each month, thereafter, for the remaining four years. Recurring option grants vest ratably each month over a five-year period. One year option grants vest ratably each month over a one year period. The contract term of the options is ten years. For all option grants prior to the adoption of SFAS No. 123R, the Company recognizes compensation cost using the multiple option approach. For all option grants subsequent to the adoption of SFAS No. 123R, the Company recognizes compensation cost ratably (straight-line) over the service period.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected life of options is based on observed historical exercise patterns. The expected volatility is an equally weighted blend of implied volatilities from traded options on our stock having a life of more than one year and historical volatility over the expected life of the options. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that we have not paid any dividends and have no intention to pay dividends in the foreseeable future.

7

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The assumptions used for options granted during the three and six months ended March 31, 2007 and April 1, 2006 are presented below:

		Three Months Ended				Six Months Ended
		March 31, 2007		April 1, 2006		March 31, 2007		April 1, 2006
Volatility		53.8	%	60.0	%	55.1	%	57.0	%
Risk-free interest rate		4.67	%	4.55	%	4.64	%	4.45	%
Dividend yield		0	%	0	%	0	%	0	%
Expected life of options		5.5 years		5.7 years		5.5 years		5.6 years

 

The Company recorded approximately $840,000 and $641,000 of compensation expense related to stock options for the three months ended March 31, 2007 and April 1, 2006 (restated), respectively, in accordance with SFAS No. 123R.  The Company recorded approximately $1.7 million and $4.0 million of compensation expense related to stock options for the six months ended March 31, 2007 and April 1, 2006 (restated), respectively, in accordance with SFAS No. 123R.  A summary of stock option activity under the plans for the three and six months ended March 31, 2007, is presented as follows:

Summary Details for Plan Share Options

		Number of Options		Weighted- Average Exercise Price ($)		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value of In-The-Money Options ($)
Outstanding, September 30, 2006		50,713,754		8.47		6.22		458,342
Granted		103,500		3.94
Exercised		—		—
Cancelled/Forfeited/Expired		(4,121,288	)	6.94
Outstanding, December 30, 2006		46,695,966		8.60		6.15		320,953
Exercisable, December 30, 2006		40,441,678		9.30		5.73		270,820
Granted		5,679,650		3.71
Exercised		—		—
Cancelled/Forfeited/Expired		(2,287,572	)	7.83
Outstanding, March 31, 2007.		50,088,044		8.08		6.40		445,102
Vested and expected to vest, March 31, 2007		47,725,043		8.29		6.25		419,736
Exercisable, March 31, 2007		39,045,981		9.26		5.56		326,560

 

The weighted-average grant date fair value of stock options granted during the three and six months ended March 31, 2007, was $1.99 and $2.00, respectively. The weighted-average grant date fair value of stock options granted during the three and six months ended April 1, 2006 (restated) was $2.41 and $2.23, respectively.  There were no stock options exercised during the three and six months ended March 31, 2007.  The total intrinsic value of stock options exercised during the three and six months ended April 1, 2006 (restated) was $222,000 and $2.6 million, respectively. The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value of in-the-money options based on the Company’s closing stock price of $3.62 as of March 31, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of March 31, 2007 was 289,949 and the weighted average exercise price was $2.49.

At March 31, 2007, an aggregate of 70.2 million shares were authorized for future issuance under our stock plans, which covers stock options, employee stock purchase plans, and restricted stock awards. A total of 7.9 million shares of common stock were available for grant under our stock option plans as of March 31, 2007. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.

As of March 31, 2007, there was $27.3 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 4.36 years.

On December 31, 2006, the Company adjusted the exercise price of option grants held by Section 16 officers to equal the fair market value at the measurement date of the original grant.  This was done to avoid negative tax consequences under IRC Section 409A.  There were eleven directors and Section 16 officers who elected to take advantage of this remediation and the exercise price of 998,146 shares was adjusted.  There was no incremental compensation cost resulting from the modification.  The weighted average exercise price of the shares before the modification was approximately $9.76.  The weighted average exercise price after the modification was approximately $12.41.

8

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On March 19, 2007, the Company commenced a tender offer to exchange certain options to purchase shares of its common stock, whether vested or unvested, for new options that will be granted under its 1999 Stock Plan.  The exchange ratio for this offer will range from one (1) to three (3) exchanged options for every one (1) new option granted.  This tender offer will expire on May 15, 2007 unless extended and is subject to the terms and conditions set forth in the Offer to Exchange Certain Outstanding Options for New Options, dated March 19, 2007, which was filed with the Securities Exchange Commission on March 19, 2007. If all eligible options are exchanged, then 23,041,735 existing options will be cancelled and 19,137,035 new options will be granted.  The purpose of this exchange is to mitigate the exposure with respect to Internal Revenue Code Section 409A. For more information, refer to our Tender Offer Statement filings with the Securities and Exchange Commission on April 13, 2007 and April 30, 2007.

Employee Stock Purchase Plan

In fiscal 2003, the Board of Directors and stockholders of the Company approved the 2003 Employee Stock Purchase Plan (the “2003 ESPP”). The maximum number of shares of common stock available for issuance under the 2003 ESPP is nine million shares. On February 27, 2006 an additional six million shares were reserved under the 2003 Employee Stock Purchase Plan. Under the 2003 ESPP, employees may purchase, on a periodic basis, a limited number of shares of common stock through payroll deductions over a six-month period. The per share purchase price is 85% of the fair market value of the stock at the beginning or end of the offering period, whichever is lower.

The Company has treated the Employee Stock Purchase Plan as a compensatory plan and have recorded compensation expense of approximately $600,000 and $1.9 million for the three and six months ended April 1, 2006 (restated), respectively, in accordance with SFAS No. 123R.  As a result of the stock option investigation, which has recently been concluded, the Company suspended the ESPP.   The Company plans to re-activate the ESPP in the future.   The Company did not record compensation expense for ESPP during the three and six months ended March 31, 2007.

The assumptions used for the three and six months ended April 1, 2006 are presented below:

 

Restricted Stock Awards

The Company grants awards of restricted stock to executive officers, directors and certain management employees. These awards vest at various periods ranging from one to four years.

Compensation expense computed for the three and six months ended March 31, 2007 was approximately $1.8 million and $3.3 million, respectively. Compensation expense computed for the three and six months ended April 1, 2006 (restated) was approximately $980,000 and $2.8 million, respectively.

There were no restricted stock awards granted during the three and six month periods ended March 31, 2007.   There were 103,698 restricted stock awards granted during the three and six month periods ended April 1, 2006 (restated).  The weighted-average grant date fair value of the restricted stock awards granted during the three and six month periods ended April 1, 2006 (restated) was $3.90 for both periods.  At March 31, 2007, unrecognized cost related to restricted stock awards totaled approximately $5.7 million. These costs are expected to be recognized over a weighted average period of 0.61 year.

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A summary of the status of the Company’s nonvested restricted shares for the three and six months ended March 31, 2007 is presented below:

 

Restricted Stock Units

During fiscal year 2006, the Company began issuing restricted stock units to executive officers, directors and certain management employees. These awards vest at various periods ranging from one to four years. The units are automatically exchanged for shares at the vesting date.

Compensation expense computed based on the fair value of these awards for the three and six months ended March 31, 2007 was approximately $766,000 and $1.0 million, respectively.  Compensation expense computed based on the fair value of these awards for the three and six months ended April 1, 2006 (restated), was approximately $9,000 and $14,000, respectively.

There were 4,627,074 restricted stock units granted during the three and six months ended March 31, 2007 and the weighted-average grant date fair value of the restricted stock units was $3.55 for both periods.  During the three and six months ended April 1, 2006 (restated), there were 77,500 shares of restricted stock units and 2,667,000 shares of restricted stock units granted, respectively.  The weighted-average grant date fair value of the restricted stock units was $4.38 and $4.03, respectively, during the three and six months ended April 1, 2006 (restated). At March 31, 2007, unrecognized cost related to restricted stock units totaled approximately $18.4 million. These costs are expected to be recognized over a weighted average period of 2.25 years.

A summary of the status of the Company’s nonvested restricted share units for the three and six months ended March 31, 2007 are presented below:

		Number of Shares		Weighted- Grant Date Fair Value ($)		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic ($)
Non-vested restricted stock units at September 30, 2006		1,526,500		4.79		3.54		5,709,110
Granted		—		—
Vested		—		—
Cancelled		(41,250	)	4.06
Non-vested restricted stock units at December 30, 2006		1,485,250		4.10		3.29		5,124,112
Granted		4,627,074		3.55
Vested		—		—
Cancelled		(66,500	)	4.85
Non-vested restricted stock units at March 31, 2007		6,045,824		3.84		2.25		21,885,883
Non-vested restricted stock units expected to vest at March 31, 2007		3,775,203		3.83		2.25		13,666,236

 

Performance Restricted Share Plan

During the three months ended April 1, 2006, the Company’s Compensation Committee approved the issuance of approximately 2.5 million performance restricted units at a weighted-average grant date fair value of $4.02 per unit to selected executives and other key employees. The units are automatically exchanged for vested shares when certain performance targets are met.

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The Company did not record any compensation expense related to the performance restricted shares for the three and six months ended March 31, 2007 as the Company did not meet the prescribed performance levels. The total unrecognized compensation expense to be recognized over the remaining two years would be approximately $7.5 million, assuming the performance targets are achieved.

The Company did not record any compensation expense related to the performance restricted shares during fiscal 2006 as the prescribed performance level was not met. This resulted in the forfeiture of approximately 597,375 performance restricted units.

Note 3.  Derivative Instruments and Hedging Activities

The Company enters into short-term foreign currency forward contracts to hedge currency exposures associated with certain assets and liabilities denominated in foreign currencies. These contracts typically have maturities of three months or less. Further, these contracts are not designated as part of a hedging relationship in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). At March 31, 2007 and September 30, 2006, the Company had open forward contracts to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $263.9 million and $403.4 million, respectively. The net unrealized loss on the contracts at March 31, 2007 was not material and was recorded in accrued liabilities on the Condensed Consolidated Balance Sheet. Realized gains and losses on forward exchange contracts are recognized in the Condensed Consolidated Statement of Operations in other income (expense), net. The net impact of these foreign exchange contracts was not material to the results of operations for the three and six months ended March 31, 2007 and April 1, 2006.

The Company also utilized foreign currency forward and option contracts to hedge certain forecasted foreign currency sales and cost of sales referred to as cash flow hedges which qualify for hedge accounting under SFAS No. 133. These contracts typically are less than 12 months. Gains and losses on these contracts related to the effective portion of the hedges are recorded in other comprehensive income until the forecasted transactions impact earnings. When the contracts expire, any amounts recorded in other comprehensive income are reclassified to earnings. Gains and losses related to the ineffective portion of the hedges are immediately recognized on the Condensed Consolidated Statement of Operations. At March 31, 2007 and September 30, 2006, the Company had forward and option contracts related to cash flow hedges in various foreign currencies in the aggregate notional amount of $49.5 million and $10.1 million, respectively. The net unrealized gain on the contracts at March 31, 2007 was not material and was recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The net impact of the foreign currency forward and option contracts was not material to the results of operations for the three and six months ended March 31, 2007 and April 1, 2006.

The Company entered into interest rate swaps in February 2005 to hedge its mix of short-term and long-term interest rate exposures. The aggregate notional amount of the combined swap transactions is $400.0 million. At March 31, 2007 and September 30, 2006, $14.1 million and $17.1 million, respectively, have been recorded in other long-term liabilities to record the fair value of the interest rate swap transactions, with a corresponding decrease to the carrying value of the 6.75% Notes on the Condensed Consolidated Balance Sheets.

The Company’s foreign exchange forward and option contracts and interest rate swaps expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by limiting the Company’s counterparties to major financial institutions. The Company does not expect material losses as a result of default by counterparties.

Note 4.  Inventories

The components of inventories, net of provisions, are as follows:

		As of
		March 31, 2007			September 30, 2006
		(In thousands)
Raw materials		$	884,922		$	905,236
Work-in-process		173,419			262,449
Finished goods		158,772			150,715
Total		$	1,217,113		$	1,318,400

 

 

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Note 5.  Goodwill and Other Intangibles Assets

On a consolidated basis, goodwill increased from $1,613 million to $1,615 million primarily as a result of translation adjustments offset by a $3.6 million release of tax reserves related to a pre-merger acquisition by SCI Technologies Inc.

Goodwill information for each reporting unit is as follows (in thousands):

		As of September 30, 2006			Additions  to Goodwill			As of March 31, 2007
Reporting units:
Standard Electronic Manufacturing Services		$	1,524,099		$	1,321		$	1,525,420
Personal Computing		89,131			—			89,131
Total		$	1,613,230		$	1,321		$	1,614,551

 

The gross and net carrying values of other intangible assets at March 31, 2007 and September 30, 2006 are as follows (in thousands):

		As of March 31, 2007												As of September 30, 2006
		Gross Carrying Amount			Impairment of Intangibles			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Impairment of Intangibles			Accumulated Amortization			Net Carrying Amount
		(In thousands)
Other intangible assets		$	72,106		$	(7,928	)	$	(38,161	)	$	26,017		$	72,106		$	(7,928	)	$	(34,376	)	$	29,802

 

The decrease in other intangible assets from September 30, 2006 to March 31, 2007 was due to amortization of approximately $3.7 million.

Estimated annual amortization expense for other intangible assets at March 31, 2007 is as follows:

 

Note 6.  Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for the reporting of comprehensive income and its components. SFAS No. 130 requires companies to report “comprehensive income” that includes unrealized holding gains and losses and other items that have been excluded from net income (loss) and reflected instead in stockholders’ equity.

The components of other comprehensive income (loss) for the three and six months ended March 31, 2007 and April 1, 2006 were as follows:

		Three Months Ended						Six Months Ended
		March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
					(Restated)						(Restated)
		(In thousands)
Net income (loss)		$	(26,132	)	$	(76,062	)	$	2,117		$	(58,668	)
Other comprehensive income (loss):
Foreign currency translation adjustment		(766		)	9,708			4,989			(1,339		)
Unrealized holding losses on derivative financial instruments		(16		)	(7		)	(16		)	(240		)
Minimum pension liability		(321		)	(22		)	26			(6		)
Comprehensive income (loss)		$	(27,235	)	$	(66,383	)	$	7,116		$	(60,253	)

 

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Accumulated other comprehensive income, net of tax as applicable, consists of the following:

		As of
		March 31, 2007			September 30, 2006
		(In thousands)
Foreign currency translation adjustment		$	52,153		$	47,164
Unrealized holding losses on derivative financial instruments		(16		)	—
Minimum pension liability		(4,530		)	(4,556		)
Total accumulated other comprehensive income		$	47,607		$	42,608

 

Note 7.  Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. While the conceptual computation of earnings per share is not changed by SFAS No. 123R (“Share-Based Payment”), the inclusion of compensation cost will affect the mechanics of the calculation. The compensation cost will be recognized under SFAS No. 123R only for awards that are expected to vest (determined by applying the pre-vesting forfeiture rate assumption), while all options or shares outstanding that have not been forfeited would be included in diluted earnings per share. The amount of stock-based compensation cost in the numerator includes a forfeiture rate assumption while the number of shares in the denominator does not.

The following table sets forth the calculation of basic and diluted income (loss) per share:

		Three Months Ended						Six Months Ended
		March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
					(Restated)						(Restated)
		(In thousands, except per share data)
Numerator:
Income (loss) before cumulative effect of accounting change		$	(26,132	)	$	(76,062	)	$	2,117		$	(64,363	)
Cumulative effect of accounting change, net of tax		—			—			—			5,695
Net income (loss)		$	(26,132	)	$	(76,062	)	$	2,117		$	(58,668	)
Denominator:
Weighted average number of shares—basic		527,101			525,256			527,106			524,784
Effect of dilutive potential common shares		—			—			1,464			—
Weighted average number of shares—diluted		527,101			525,256			528,570			524,784
Net income (loss) per share before cumulative effect of accounting change
—basic		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.12	)
—diluted		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.12	)
Net income (loss) per share
—basic		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.11	)
—diluted		$	(0.05	)	$	(0.14	)	$	0.00		$	(0.11	)

 

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The following table summarizes the weighted average dilutive securities that were excluded from the above computation of diluted net income (loss) per share because their inclusion would have an anti-dilutive effect:

		Three Months Ended				Six Months Ended
		March 31, 2007		April 1, 2006		March 31, 2007		April 1, 2006
				(Restated)				(Restated)
Employee stock options		46,825,981		51,958,155		47,197,942		53,180,189
Restricted stock		3,075,796		3,034,135		1,384,638		3,240,268
Shares issuable upon conversion of 4% notes		—		—		—		3,134
Shares issuable upon conversion of 3% notes		—		12,697,848		11,639,694		12,697,848
Total anti-dilutive shares		49,901,777		67,690,138		60,222,274		69,121,439

 

After-tax interest expense of $2.3 million and $2.7 million related to the 3% Convertible Subordinated Notes for the three months ended March 31, 2007 and April 1, 2006, respectively, were not included in the computation of diluted income per share because to do so would be anti-dilutive. After-tax interest expense of $5.0 million related to the 3% Convertible Subordinated Notes and $5.4 million related to the 3% Convertible Subordinated Notes and Zero Coupon Convertible Subordinated Debentures for the six months ended March 31, 2007 and April 1, 2006, respectively, were not included in the computation of diluted income per share because to do so would be anti-dilutive.

Note 8.  Debt

Senior Unsecured Term Loan.   On October 13, 2006, the Company entered into a Credit and Guaranty Agreement (the “Term Loan Agreement”) providing for a $600.0 million senior unsecured term loan which matures on January 31, 2008. The Company drew down the $600.0 million term loan simultaneously with the closing of the transaction.

The loan bears interest at the election of the Company at either the prime rate plus 1.5% or at an adjusted LIBOR rate plus 2.5%. On the 181st day after closing, the interest rate margins with respect to all loans will increase by 0.5% for the remaining life of the loans. Interest is payable quarterly in arrears with respect to prime rate loans. For LIBOR rate loans, interest is payable at the end of each interest period depending on the Company’s election of the length of borrowing period (i.e. one month, three months or six months). Principal, together with accrued and unpaid interest, is due at maturity. In addition, the Company is required to make mandatory prepayments of principal with the net cash proceeds from the sale of certain assets and the incurrence of certain debt.

All of the Company’s existing and future domestic subsidiaries will guaranty the obligations under the Term Loan Agreement, subject to some limited exceptions.

The Term Loan Agreement contains affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, certain reporting requirements in accordance with the agreement and compliance with applicable laws and regulations. Further, the Term Loan Agreement contains negative covenants limiting the ability of the Company and its subsidiaries, among other things, to incur debt, grant liens and make certain restricted payments. The events of default under the Term Loan Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events.

As of March 31, 2007 and September 30, 2006, the Company had no other term loans.

8.125% Senior Subordinated Notes.   On February 15, 2006, the Company issued $600 million aggregate principal amount of 8.125% Senior Subordinated Notes due 2016 (the “8.125% Notes”). Interest is payable on the 8.125% Notes on March 1 and September 1 of each year beginning on September 1, 2006. The maturity date of the 8.125% Notes is March 1, 2016. Debt issuance costs are included in prepaid expenses and other current assets and other non-current assets and amortized on a straight-line basis over the life of the debt as interest expense. As of March 31, 2007, $1.9 million is included in prepaid expenses and other current assets and $15.3 million is included in other non-current assets. The difference between the amount of amortization calculated using the straight-line method as compared to the effective interest method was immaterial. The 8.125% Notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior debt, as defined in the indenture under which the 8.125% Notes were issued.

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The Company may redeem the 8.125% Notes, in whole or in part, at any time prior to March 1, 2011, at a redemption price that is equal to the sum of (1) the principal amount of the 8.125% Notes to be redeemed, (2) accrued and unpaid interest on those 8.125% Notes to, but excluding, the redemption date and (3) a make-whole premium calculated in the manner specified in the Indenture for the 8.125% Notes. The Company may redeem the 8.125% Notes, in whole or in part, beginning on March 1, 2011, at declining redemption prices ranging from 104.063% to 100% of the principal amount of the 8.125% Notes, plus accrued and unpaid interest to, but excluding, the redemption date, with the actual redemption price to be determined based on the date of redemption. At any time prior to March 1, 2009, the Company may redeem up to 35% of the 8.125% Notes with the proceeds of certain equity offerings at a redemption price equal to 108.125% of the principal amount of the 8.125% Notes, plus accrued and unpaid interest to, but excluding, the redemption date, so long as after giving effect to any such redemption, at least 65% of the aggregate principal amount of the 8.125% Notes remains outstanding.

Following a change of control, as defined in the Indenture, the Company will be required to make an offer to repurchase all or any portion of the 8.125% Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase.

The 8.125% Notes Indenture includes covenants that limit the ability of the Company and its restricted subsidiaries to, among other things: incur additional debt, make investments and other restricted payments, pay dividends on capital stock, or redeem or repurchase capital stock or subordinated obligations; create specified liens; sell assets; create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to the Company; engage in transactions with affiliates; incur layered debt; and consolidate or merge with or into other companies or sell all or substantially all of the Company’s assets. The restrictive covenants are subject to a number of important exceptions and qualifications set forth in the Indenture for the 8.125% Notes.

The 8.125% Notes Indenture provides for customary events of default, including:

·  payment defaults;

·  breaches of covenants;

·  certain payment defaults at final maturity or acceleration of certain other indebtedness;

·  failure to pay certain judgments;

·  certain events of bankruptcy, insolvency and reorganization; and

·  certain instances in which a guarantee ceases to be in full force and effect.

If any event of default occurs and is continuing, subject to certain exceptions, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding 8.125% Notes may declare all the 8.125% Notes to be due and payable immediately, together with any accrued and unpaid interest, if any, to the acceleration date. In the case of an event of default resulting from certain events of bankruptcy, insolvency or reorganization, such amounts with respect to the 8.125% Notes will be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the 8.125% Notes.

On January 3, 2007, the Company and U.S. Bank National Association, as trustee, entered into a supplemental indenture to the indenture under which the Company’s 8.125% Senior Subordinated Notes due 2016 were issued. As permitted by the indenture, the supplemental indenture released each of the note’s guarantors from its respective obligations under its notes guarantee and the indenture.

6.75% Senior Subordinated Notes.   On February 24, 2005, the Company issued $400 million aggregate principal amount of its 6.75% Senior Subordinated Notes due 2013 (the “6.75% Notes”). Interest is payable on the 6.75% Notes on March 1 and September 1 of each year, beginning on September 1, 2005. The maturity date of the 6.75% Notes is March 1, 2013. In June 2005, the Company completed an exchange offer pursuant to which substantially all of the 6.75% Notes were exchanged for notes registered under the Securities Act of 1933. These notes evidence the same debt as the original 6.75% Notes and are issued and entitled to the benefits of the same indenture that governs the original the 6.75% Notes except that they are not subject to transfer restrictions.

The 6.75% Notes are unsecured and subordinated in right of payment to all of the Company’s existing and future senior debt as defined in the 6.75% Notes Indenture. The Company may redeem the 6.75% Notes, in whole or in part, at any time prior to March 1, 2009, at a redemption price that is equal to the sum of (1) the principal amount of the 6.75% Notes to be redeemed, (2) accrued and unpaid interest to, but excluding, the redemption date on those 6.75% Notes and (3) a make-whole premium calculated in the manner specified in the 6.75% Notes Indenture. The Company may redeem the 6.75% Notes, in whole or in part, beginning on March 1, 2009, at declining redemption prices ranging from 103.375% to 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, with the actual redemption price to be determined based on the date of redemption. At any time prior to March 1, 2008, the Company may redeem up to 35% of the 6.75% Notes with the proceeds of certain equity offerings at a redemption price equal to 106.75% of the principal amount of the 6.75% Notes, plus accrued and unpaid interest to, but excluding, the redemption date, so long as after giving effect to any such redemption, at least 65% of the aggregate principal amount of the 6.75% Notes remains outstanding.

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Following a change of control, as defined in the 6.75% Notes Indenture, the Company will be required to make an offer to repurchase all or any portion of the 6.75% Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase.

The 6.75% Notes Indenture includes covenants that limit the Company’s ability and the ability of its restricted subsidiaries to, among other things: incur additional debt, make investments and other restricted payments, pay dividends on capital stock, or redeem or repurchase capital stock or subordinated obligations; create specified liens; sell assets; create or permit restrictions on the ability of its restricted subsidiaries to pay dividends or make other distributions to the Company; engage in transactions with affiliates; incur layered debt; and consolidate or merge with or into other companies or sell all or substantially all of its assets. The restricted covenants are subject to a number of important exceptions and qualifications set forth in the 6.75% Notes Indenture.

The 6.75% Notes Indenture provides for customary events of default, including payment defaults, breaches of covenants, certain payment defaults at final maturity or acceleration of certain other indebtedness, failure to pay certain judgments, certain events of bankruptcy, insolvency and reorganization and certain instances in which a guarantee ceases to be in full force and effect. If any event of default occurs and is continuing, subject to certain exceptions, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding 6.75% Notes may declare all the 6.75% Notes to be due and payable immediately, together with any accrued and unpaid interest, if any, to the acceleration date. In the case of an event of default resulting from certain events of bankruptcy, insolvency or reorganization, such amounts with respect to the 6.75% Notes will be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the 6.75% Notes.

On January 3, 2007, the Company and U.S. Bank National Association, as trustee, entered into a supplemental indenture to the indenture under which the Company’s 6.75% Senior Subordinated Notes due 2013 were issued. As permitted by the indenture, the supplemental indenture released each of the note’s guarantors from its respective obligations under its notes guarantee and the indenture.

3% Convertible Subordinated Notes due 2007.   In March 2000, SCI issued $575.0 million aggregate principal amount of 3% Convertible Subordinated Notes due March 15, 2007, or 3% Notes. On October 13, 2006, SCI Systems, Inc., one of the Company’s wholly-owned subsidiaries (“SCI Systems”), initiated, in accordance with the terms thereof, the satisfaction and discharge of the Indenture, dated as of March 15, 2000, by and between SCI Systems and the Bank of New York Trust Company, National Association, as trustee (as supplemented, the “Indenture”), pursuant to which SCI Systems issued its 3% Notes due 2007. As a result, $532.9 million in cash was deposited with the trustee which represented a portion of the proceeds obtained from the Senior Unsecured Term Loan entered into on October 13, 2006 and is equal to the principal and interest due on the 3% Notes at maturity on March 15, 2007. The $532.9 million was recorded as restricted cash and classified in the Condensed Consolidated Financial Statements as a current asset as of December 30, 2006.  The restricted cash of $532.9 million was released by the trustee to pay the bondholders upon maturity of the 3% Notes on March 15, 2007.  Accordingly, as of March 31, 2007, the 3% Notes were fully satisfied and discharged.

Senior Credit Facility.   On October 26, 2004, the Company entered into a Credit and Guaranty Agreement (the “Original Credit Agreement”) providing for a $500 million senior secured revolving credit facility with a $150 million letter of credit sub-limit. The senior secured credit facility provided for a maturity date of October 26, 2007. The Company entered into an Amended and Restated Credit and Guaranty Agreement, dated as of December 16, 2005, among the Company, certain of its subsidiaries, as guarantors, and the lenders that are parties thereto from time to time (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated the Original Credit Agreement among other things, to:

·  extend the maturity date from October 26, 2007 to December 16, 2008;

·  amend the leverage ratio;

·      permit the Company and the guarantors to sell domestic receivables pursuant to factoring or similar arrangements if certain conditions are met; and

·  revise the collateral release provisions.

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All of the Company’s existing and future domestic subsidiaries guaranty the obligations under the Restated Credit Agreement, subject to some limited exceptions. The Company’s obligations and the obligations of its subsidiaries under the credit facility are secured by: substantially all of its assets; substantially all of the assets of substantially all of its United States subsidiaries located in the United States; a pledge of all capital stock of substantially all of its United States subsidiaries; a pledge of 65% of the capital stock of certain of its and its United States subsidiaries’ first-tier foreign subsidiaries; and mortgages on certain domestic real estate.

The Restated Credit Agreement requires the Company to comply with a fixed charge coverage ratio and a ratio of total debt to earnings before income tax, depreciation and amortization (“EBITDA”). Additionally, the credit facility contains numerous affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the credit facility contains negative covenants limiting the ability of the Company and its subsidiaries, among other things, to incur debt, grant liens, make acquisitions, make certain restricted payments, sell assets and enter into sale and lease back transactions. The events of default under the credit facility include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events.

At any time the aggregate face amount of receivables sold by the Company and the guarantors together with any outstanding amounts exceeds the thresholds set forth in the Restated Credit Agreement, the revolving credit commitments for purposes of making loans and issuing letters of credit will be zero.

On October 13, 2006, the Company and the required lenders entered into an amendment for its Restated Credit Agreement to permit the Company to enter into the Senior Unsecured Term Loan described above. The amendment also revised the collateral release provision under the Restated Credit Agreement such that collateral (other than stock pledges and other collateral the Company requests not to be released) will be released at such time as specified conditions are met, including that the Company has repaid in full the outstanding amount under the Senior Unsecured Term Loan and its credit ratings meets specified thresholds. If following the release of any portion of the collateral pursuant to the provisions of the credit agreement described above, the Company’s credit ratings fall below specified thresholds, then the Company is required to take such actions as are necessary to grant and perfect a security interest in the assets and properties that would at that time comprise the collateral if the relevant collateral documents were still in effect. On December 29, 2006, the Company entered into an amendment and waiver to the Restated Credit Agreement. Among other things, this amendment amended the minimum required levels for both financial covenants and certain related definitions.  The fees in regards to the amendment and waiver were deferred and amortized over the debt period.  The amount of the fees was immaterial to the consolidated financial statements.

There was approximately $100 million of loans outstanding under the Restated Credit Agreement at an average interest rate of 7.58% as of March 31, 2007. Additionally, the Company pays a commitment fee of 0.35% on the unused portion of the credit facility.

The Company is in compliance with its covenants for the above debt instruments as of March 31, 2007. However, the Company may be required to seek waivers or amendments to certain covenants for the above debt instruments if it is unable to comply with the requirements of the covenants in the future or if the Company takes actions such as the divestiture of strategic assets that are not permitted by the covenants.

Note 9.  Sale of Accounts Receivable

Certain of the Company’s subsidiaries have entered into agreements that permit them to sell specified accounts receivable. The purchase price for receivables sold under these agreements ranges from 95% to 100% of the face amount less a discount charge (based on LIBOR plus a percentage ranging from 0.4% to 1.5%) for the period from the date the receivable is sold to its collection date. Accounts receivable sales under these agreements were $498.5 million and $976.9 million for the three and six month periods ended March 31, 2007, respectively. The sold receivables are subject to certain limited recourse provisions. In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liability,” accounts receivable sold are removed from the Condensed Consolidated Balance Sheet and are reflected as cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. As of March 31, 2007, $320.5 million of sold accounts receivable remain subject to certain recourse provisions. The Company has not experienced any credit losses under these recourse provisions. The discount charge recorded during the period was not material to the Condensed Consolidated Financial Statements. The discount charge is recorded in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.

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As part of the sale of accounts receivable, the Company had a retained ownership interest (i.e. 100% of the receivable face amount less the purchase price) of $10.3 million at March 31, 2007. The retained interest was included in prepaid and other current assets. The retained interest has subsequently been collected.

Note 10.  Commitments and Contingencies

Litigation and other contingencies.   The Company is a so-called “nominal defendant” party in multiple shareholder derivative lawsuits, the Securities and Exchange Commission (“SEC”) and the Department of Labor are conducting informal inquiries. The Company has received a subpoena from the U.S. Attorney’s office and the Company has received an information document request from the Internal Revenue Service in connection with certain historical stock option grants.  Presently, the Company is unable to predict the outcome of these matters. The resolution of these litigations and investigations could adversely affect our financial condition or results of operations.

From time to time, the Company is a party to litigation and other contingencies, including examinations by taxing authorities, which arise in the ordinary course of business. The Company believes that the resolution of such litigation and other contingencies will not materially harm its business, financial condition or results of operations.

Warranty Reserve.  The following tables summarize the warranty reserve balance:

 

 

Note 11.  Restructuring Costs

Costs associated with restructuring activities initiated on or after January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with SFAS No. 146 and SFAS No. 112 where applicable. Pursuant to SFAS No. 112, restructuring costs related to employee severance are recorded when probable and estimable. For all other restructuring costs, a liability is recognized in accordance with SFAS No. 146 only when incurred. Costs associated with restructuring activities initiated prior to January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with EITF 94-3 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the Consolidated Statements of Operations generally at the commitment date. Costs associated with restructuring activities related to purchase business combinations are accounted for in accordance with EITF 95-3. Accrued restructuring costs are included in accrued liabilities in the Condensed Consolidated Balance Sheets.

In November 2006, the Company announced three new restructuring initiatives:

·                  The realignment of its original design manufacturing activities to focus on joint development;

·                  The separation of its personal and business computing business and the evaluation of strategic alternatives to enhance its value: and

·                  Other consolidation and facility closure actions.

 

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