Sanmina_Mar 30, 2013_10-Q
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 30, 2013
or
|
| |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-21272
Sanmina Corporation
(Exact name of registrant as specified in its charter)
|
| | | | |
| Delaware | | 77-0228183 | |
| (State or other jurisdiction of | | (I.R.S. Employer | |
| incorporation or organization) | | Identification Number) | |
| | | | |
| 2700 N. First St., San Jose, CA | | 95134 | |
| (Address of principal executive offices) | | (Zip Code) | |
(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 [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filer [ ] | Accelerated filer [x] | Non-accelerated filer [ ] | Smaller reporting company [ ] |
| | (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
As of April 22, 2013, there were 82,784,827 shares outstanding of the issuer's common stock, $0.01 par value per share.
SANMINA CORPORATION
INDEX
|
| | |
| | Page |
| PART I. FINANCIAL INFORMATION | |
Item 1. | Interim Financial Statements (Unaudited) | |
| Condensed Consolidated Balance Sheets | |
| Condensed Consolidated Statements of Operations | |
| Condensed Consolidated Statements of Cash Flows | |
| Notes to Condensed Consolidated Financial Statements | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
| PART II. OTHER INFORMATION | |
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 6. | Exhibits | |
Signatures | | |
SANMINA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| As of |
| March 30, 2013 | | September 29, 2012 |
| (Unaudited) |
| (In thousands) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 411,942 |
| | $ | 409,618 |
|
Accounts receivable, net of allowances of $11,693 and $12,032, respectively | 870,905 |
| | 1,001,543 |
|
Inventories | 798,820 |
| | 826,539 |
|
Prepaid expenses and other current assets | 74,680 |
| | 88,599 |
|
Total current assets | 2,156,347 |
| | 2,326,299 |
|
Property, plant and equipment, net | 547,850 |
| | 569,365 |
|
Other | 260,631 |
| | 272,122 |
|
Total assets | $ | 2,964,828 |
| | $ | 3,167,786 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 851,767 |
| | $ | 937,737 |
|
Accrued liabilities | 109,514 |
| | 104,741 |
|
Accrued payroll and related benefits | 100,984 |
| | 117,074 |
|
Short-term debt | 170,216 |
| | 59,995 |
|
Total current liabilities | 1,232,481 |
| | 1,219,547 |
|
Long-term liabilities: | | | |
Long-term debt | 574,046 |
| | 837,364 |
|
Other | 143,795 |
| | 147,094 |
|
Total long-term liabilities | 717,841 |
| | 984,458 |
|
Commitments and contingencies (Note 6) |
| |
|
Stockholders' equity | 1,014,506 |
| | 963,781 |
|
Total liabilities and stockholders' equity | $ | 2,964,828 |
| | $ | 3,167,786 |
|
See accompanying notes.
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (Unaudited) |
| (In thousands, except per share data) |
Net sales | $ | 1,427,642 |
| | $ | 1,463,082 |
| | $ | 2,922,587 |
| | $ | 2,965,448 |
|
Cost of sales | 1,327,338 |
| | 1,356,734 |
| | 2,725,355 |
| | 2,750,075 |
|
Gross profit | 100,304 |
| | 106,348 |
| | 197,232 |
| | 215,373 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 58,954 |
| | 62,940 |
| | 118,822 |
| | 122,081 |
|
Research and development | 6,020 |
| | 5,923 |
| | 11,415 |
| | 10,056 |
|
Restructuring and integration costs | 6,925 |
| | 5,486 |
| | 10,872 |
| | 9,540 |
|
Amortization of intangible assets | 474 |
| | 767 |
| | 948 |
| | 1,723 |
|
Asset impairments | 1,100 |
| | 1,024 |
| | 1,100 |
| | 2,077 |
|
Gain on sales of long-lived assets | (18,967 | ) | | — |
| | (23,185 | ) | | — |
|
Total operating expenses | 54,506 |
| | 76,140 |
| | 119,972 |
| | 145,477 |
|
| | | | | | | |
Operating income | 45,798 |
| | 30,208 |
| | 77,260 |
| | 69,896 |
|
| | | | | | | |
Interest income | 246 |
| | 442 |
| | 444 |
| | 726 |
|
Interest expense | (10,416 | ) | | (20,367 | ) | | (23,500 | ) | | (42,230 | ) |
Other expense, net | (1,477 | ) | | (4,841 | ) | | (16,399 | ) | | (6,359 | ) |
Interest and other, net | (11,647 | ) | | (24,766 | ) | | (39,455 | ) | | (47,863 | ) |
| | | | | | | |
Income before income taxes | 34,151 |
| | 5,442 |
| | 37,805 |
| | 22,033 |
|
Provision for income taxes | 12,960 |
| | 6,881 |
| | 15,993 |
| | 14,897 |
|
Net income (loss) | $ | 21,191 |
| | $ | (1,439 | ) | | $ | 21,812 |
| | $ | 7,136 |
|
| | | | | | | |
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.26 |
| | $ | (0.02 | ) | | $ | 0.27 |
| | $ | 0.09 |
|
Diluted | $ | 0.25 |
| | $ | (0.02 | ) | | $ | 0.26 |
| | $ | 0.09 |
|
| | | | | | | |
Weighted average shares used in computing per share amounts: | | | | | | | |
Basic | 82,543 |
| | 81,225 |
| | 82,226 |
| | 81,059 |
|
Diluted | 84,683 |
| | 81,225 |
| | 84,369 |
| | 83,511 |
|
See accompanying notes.
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (Unaudited) |
| (In thousands) |
Net income (loss) | $ | 21,191 |
| | $ | (1,439 | ) | | $ | 21,812 |
| | $ | 7,136 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | (201 | ) | | 1,474 |
| | (338 | ) | | (182 | ) |
Net unrealized gain on derivative financial instruments, net of tax | 1,937 |
| | 1,855 |
| | 20,117 |
| | 4,991 |
|
Changes in unrecognized net actuarial loss and unrecognized transition cost, net of tax | (136 | ) | | 78 |
| | (323 | ) | | (55 | ) |
Comprehensive income | $ | 22,791 |
| | $ | 1,968 |
| | $ | 41,268 |
| | $ | 11,890 |
|
| | | | | | | |
See accompanying notes.
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| Six Months Ended |
| March 30, 2013 | | March 31, 2012 |
| (Unaudited) |
| (In thousands) |
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | | |
Net income | $ | 21,812 |
| | $ | 7,136 |
|
Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 48,961 |
| | 50,511 |
|
Stock-based compensation expense | 9,008 |
| | 8,593 |
|
Benefit from doubtful accounts, product returns and other sales adjustments | (336 | ) | | (1,037 | ) |
Deferred income taxes | (1,701 | ) | | 1,399 |
|
Loss from extinguishments of debt | 1,401 |
| | 6,461 |
|
Loss (gain) on sales of assets, net | (23,003 | ) | | 176 |
|
Asset impairments | 2,082 |
| | 2,077 |
|
Loss from dedesignation of interest rate swap | 14,903 |
| | — |
|
Other, net | 125 |
| | (439 | ) |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 130,563 |
| | 85,839 |
|
Inventories | 28,262 |
| | 29,007 |
|
Prepaid expenses and other assets | 21,124 |
| | 11,440 |
|
Accounts payable | (76,021 | ) | | (147,354 | ) |
Accrued liabilities and other long-term liabilities | (15,427 | ) | | (7,086 | ) |
Cash provided by operating activities | 161,753 |
| | 46,723 |
|
| | | |
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (43,513 | ) | | (40,655 | ) |
Proceeds from sales of property, plant and equipment | 28,750 |
| | 2,517 |
|
Cash paid in connection with a previous business combinations | — |
| | (2,049 | ) |
Cash used in investing activities | (14,763 | ) | | (40,187 | ) |
| | | |
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: | | | |
Change in restricted cash | 3,260 |
| | 3,540 |
|
Repayments of long-term debt | (257,410 | ) | | (154,062 | ) |
Debt issuance costs | — |
| | (2,685 | ) |
Proceeds from short-term borrowings | 108,003 |
| | 44,000 |
|
Repayments of short-term borrowings | (97,783 | ) | | (74,200 | ) |
Proceeds from revolving credit facility borrowings | 357,520 |
| | — |
|
Repayments of revolving credit facility borrowings | (257,520 | ) | | — |
|
Net proceeds from stock issuances | 1,976 |
| | 1,702 |
|
Payments to acquire treasury stock | (1,525 | ) | | — |
|
Cash used in financing activities | (143,479 | ) | | (181,705 | ) |
| | | |
Effect of exchange rate changes | (1,187 | ) | | (700 | ) |
Increase (decrease) in cash and cash equivalents | 2,324 |
| | (175,869 | ) |
Cash and cash equivalents at beginning of period | 409,618 |
| | 640,288 |
|
Cash and cash equivalents at end of period | $ | 411,942 |
| | $ | 464,419 |
|
| | | |
Cash paid during the period for: | | | |
Interest, net of capitalized interest | $ | 22,006 |
| | $ | 39,434 |
|
Income taxes, net of refunds | $ | 9,416 |
| | $ | 6,890 |
|
See accompanying notes.
SANMINA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of Sanmina Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been omitted pursuant to those rules or regulations. The interim condensed consolidated financial statements are unaudited, but reflect all normal recurring and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 29, 2012, included in the Company's 2012 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 condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Results of operations for the six months ended March 30, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year.
The Company operates on a 52 or 53 week year ending on the Saturday nearest September 30. Fiscal 2013 and 2012 are each 52-week years. All references to years relate to fiscal years unless otherwise noted.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2013-2, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". ASU No. 2013-2 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. The adoption of ASU 2013-2 will not materially impact the Company's financial statements and will be effective beginning in 2014.
Note 2. Inventories
Components of inventories were as follows:
|
| | | | | | | |
| As of |
| March 30, 2013 | | September 29, 2012 |
| (In thousands) |
Raw materials | $ | 572,901 |
| | $ | 584,821 |
|
Work-in-process | 83,914 |
| | 96,757 |
|
Finished goods | 142,005 |
| | 144,961 |
|
Total | $ | 798,820 |
| | $ | 826,539 |
|
Note 3. Fair Value
Fair Value Option for Long-term Debt
The Company has elected not to record its long-term debt instruments at fair value, but has measured them at fair value for disclosure purposes. As of March 30, 2013, the carrying amount and estimated fair value of the Company's long-term debt instruments were $540.0 million and $562.5 million, respectively. Fair value was estimated based on quoted prices (Level 2 inputs).
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The Company's primary financial assets and financial liabilities are as follows:
| |
• | Foreign currency forward contracts |
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing an asset or liability.
Inputs to valuation techniques used to measure fair value are prioritized into three broad levels (fair value hierarchy), as follows:
Level 1: Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs that reflect quoted prices, other than quoted prices included in Level 1, that are observable for the assets or liabilities, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in less active markets; or inputs that are derived principally from or corroborated by observable market data by correlation.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of assets or liabilities.
There were no transfers between levels in the fair value hierarchy during any period presented herein. The following table presents information as of March 30, 2013 with respect to assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | |
| | Money market funds | | Time deposits | | Derivatives designated as hedging instruments under ASC 815: Foreign Currency Forward Contracts and Interest Rate Swaps | | Derivatives not designated as hedging instruments under ASC 815: Foreign Currency Forward Contracts and Interest Rate Swaps | | Total |
| | Level 1 | | Level 1 | | Level 2 | | Level 2 | | |
| | (In thousands) | | |
Balance Sheet Classification: | | | | | | | | | | |
Cash and cash equivalents | | $ | 435 |
| | $ | 3,785 |
| | $ | — |
| | $ | — |
| | $ | 4,220 |
|
Prepaid expenses and other current assets | | $ | — |
| | $ | — |
| | $ | 78 |
| | $ | 4,281 |
| | $ | 4,359 |
|
Other assets | | $ | — |
| | $ | — |
| | $ | 34,046 |
| | $ | — |
| | $ | 34,046 |
|
Accrued liabilities (1) | | $ | — |
| | $ | — |
| | $ | (53 | ) | | $ | (1,782 | ) | | $ | (1,835 | ) |
Other long-term liabilities (1) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (16,435 | ) | | $ | (16,435 | ) |
(1) Liabilities, or credit balances, are presented as negative amounts.
The following table presents information as of September 29, 2012 with respect to assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | |
| | Money market funds | | Time deposits | | Derivatives designated as hedging instruments under ASC 815: Foreign Currency Forward Contracts and Interest Rate Swaps | | Derivatives not designated as hedging instruments under ASC 815: Foreign Currency Forward Contracts | | Total |
| | Level 1 | | Level 1 | | Level 2 | | Level 2 | | |
| | (In thousands) | | |
Balance Sheet Classification: | | | | | | | | | | |
Cash and cash equivalents | | $ | 435 |
| | $ | 3,384 |
| | $ | — |
| | $ | — |
| | $ | 3,819 |
|
Prepaid expenses and other current assets | | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | 1,770 |
| | $ | 1,847 |
|
Other assets | | $ | — |
| | $ | — |
| | $ | 39,954 |
| | $ | — |
| | $ | 39,954 |
|
Accrued liabilities (1) | | $ | — |
| | $ | — |
| | $ | (175 | ) | | $ | (2,913 | ) | | $ | (3,088 | ) |
Other long-term liabilities (1) | | $ | — |
| | $ | — |
| | $ | (23,126 | ) | | $ | — |
| | $ | (23,126 | ) |
(1) Liabilities, or credit balances, are presented as negative amounts.
The Company sponsors deferred compensation plans for eligible employees and non-employee members of its Board of Directors that allow participants to defer payment of part or all of their compensation. The Company's results of operations are not significantly affected by these plans since changes in the fair value of the assets substantially offset changes in the fair value of the liabilities. As such, assets and liabilities associated with these plans have not been included in the above tables. As of March 30, 2013 and September 29, 2012, assets and liabilities associated with these plans were approximately $10.0 million and are recorded as other non-current assets and other long-term liabilities on the condensed consolidated balance sheets.
The Company values derivatives using observable Level 2 market inputs at the measurement date and standard valuation techniques to convert future amounts to a single present value amount assuming that participants are motivated, but not compelled, to transact. The Company seeks high quality counterparties for all financing arrangements. For interest rate swaps, Level 2 inputs include short-term LIBOR rates, futures contracts on LIBOR between two and four years, longer term swap rates at commonly quoted intervals, and credit default swap rates for the Company and relevant counterparties. For currency contracts, Level 2 inputs include foreign currency spot and forward rates and interest rates at commonly quoted intervals. Mid-market pricing is used as a practical expedient for fair value measurements. ASC Topic 820 requires the fair value measurement of an asset or liability to reflect the nonperformance risk of the entity and the counterparty. Therefore, the counterparty's creditworthiness when in an asset position and the Company's creditworthiness when in a liability position have been considered in the fair value measurement of derivative instruments. The effect of nonperformance risk on the fair value of derivative instruments was not material as of March 30, 2013 or September 29, 2012.
Non-Financial Assets Measured at Fair Value on a Nonrecurring Basis
Assets held-for-sale, consisting of land and buildings, are measured at fair value on a nonrecurring basis since these assets are subject to fair value adjustments only when the carrying amount of such assets exceeds the fair value of such assets or such assets have been previously impaired and the fair value exceeds the carrying amount by less than the amount of the impairment that has been previously recognized. Level 2 inputs consist of independent third party valuations based on market comparables. The carrying value of the Company's assets held-for-sale was $9.1 million and $10.2 million as of March 30, 2013 and September 29, 2012, respectively, and is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The Company recorded an impairment charge of $1.1 million during the three and six months ended March 30, 2013 related to assets held-for-sale.
Note 4. Derivative Financial Instruments
The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and foreign exchange rate risk.
Interest Rate Risk
Interest rate swaps are used to manage interest rate risk associated with borrowings under the Company's long-term debt arrangements.
Interest Rate Swaps Not Designated As Hedging Instruments
The Company has interest rate swaps with an aggregate notional amount of $257 million that were entered into in 2007 to hedge LIBOR-based variable rate interest payments expected to occur through June 15, 2014. During the first quarter of 2013, the Company determined, based on its intention of redeeming $257.4 million of its senior floating rates notes due in 2014 ("2014 Notes"), that it was no longer probable that LIBOR-based, variable rate interest payments would occur on $257 million of debt through June 15, 2014. Accordingly, the Company dedesignated its interest rate swaps in their entirety in the first quarter of 2013 and recorded a charge of $14.9 million to other expense, net, representing the portion of the value of the interest rate swaps previously recorded in accumulated other comprehensive income (AOCI) for which it was no longer probable that LIBOR-based variable rate interest payments would occur. During the second quarter of 2013, the Company redeemed its 2014 Notes in full using a combination of cash on hand and borrowings under the Company's revolving credit facility (LIBOR-based, variable rate facility). Therefore, LIBOR-based variable rate payments are only expected to occur on forecasted borrowings under the Company's revolving credit facility and only during the period of time these borrowings are expected to be outstanding. The AOCI balance as of March 30, 2013 was $1.9 million and is expected to be amortized to interest expense over the next 9 months.
Under the terms of the swap agreements, the Company pays the independent swap counterparties a fixed rate of approximately 5.6% and the swap counterparties pay the Company an interest rate equal to three-month LIBOR. As of March 30, 2013, the fair value of the interest rate swaps was $16.4 million and is included in other long-term liabilities on the condensed consolidated balance sheet. The Company does not intend to liquidate the swap agreements and will therefore continue to make and receive payments under the swaps through June 15, 2014. Beginning on the date the interest rate swaps were dedesignated, changes in the fair value of the interest rate swaps will be recorded to other expense, net, in the condensed consolidated statement of income. Such amounts were not material for the three and six months ended March 30, 2013.
Fair Value Hedge
The Company has $500 million of fixed-rate senior notes (the "2019 Notes") outstanding as of March 30, 2013 and has an interest rate swap with a single counterparty to hedge its exposure to changes in the fair value of the notes resulting from fluctuations in interest rates. The swap agreement, with a notional amount of $500 million and an expiration date of May 15, 2019, effectively converts these notes from fixed-rate debt to variable-rate debt. Pursuant to the interest rate swap, the Company pays the swap counterparty a variable rate equal to the three-month LIBOR plus a spread and receives a fixed rate of 7.0% from the swap counterparty. Consistent with the Company's ability to call the 2019 Notes beginning in May 2014, the swap counterparty has the unilateral right to terminate the swap beginning in June 2014 and pay the Company a market termination fee. In accordance with ASC Topic 815, the interest rate swap is accounted for as a fair value hedge and is exempt from periodic assessment of hedge effectiveness. Therefore, the change in the fair value of the 2019 Notes resulting from changes in interest rates is assumed to be equal and opposite to the change in the fair value of the interest rate swap. As of March 30, 2013, the fair value of the interest rate swap was $34.0 million and is included in other non-current assets and long-term debt on the condensed consolidated balance sheet.
Foreign Exchange Rate Risk
Forward contracts on various foreign currencies are used to manage foreign currency risk associated with forecasted foreign currency transactions and certain monetary assets and liabilities denominated in foreign currencies. The Company's primary foreign currency cash flows are in certain Asian and European countries, Israel, Brazil and Mexico.
The Company had the following outstanding foreign currency forward contracts that were entered into to hedge foreign currency exposures:
|
| | | | | | | |
| As of |
| March 30, 2013 | | September 29, 2012 |
Derivatives Designated as Accounting Hedges: | | | |
Notional amount (in thousands) | $ | 117,651 |
| | $ | 123,050 |
|
Number of contracts | 55 |
| | 49 |
|
Derivatives Not Designated as Accounting Hedges: | | | |
Notional amount (in thousands) | $ | 216,232 |
| | $ | 292,469 |
|
Number of contracts | 38 |
| | 33 |
|
The Company enters into short-term foreign currency forward contracts to hedge currency exposures associated with certain monetary assets and liabilities denominated in foreign currencies. These contracts have maturities of up to two months and are not designated as accounting hedges under ASC Topic 815. Accordingly, these contracts are marked-to-market at the end of each period with unrealized gains and losses recorded in other expense, net, in the condensed consolidated statements of income. For the three and six months ended March 30, 2013, the Company recorded a gain of $0.9 million and a loss of $1.8 million, respectively, associated with these forward contracts. For the three and six months ended March 31, 2012, the Company recorded a loss of $0.6 million and a gain of $4.6 million, respectively, associated with these forward contracts. From an economic perspective, gains and losses on forward contracts substantially offset gains and losses on the underlying hedged items for both periods presented herein.
The Company also utilizes foreign currency forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such exposures generally result from 1) forecasted sales denominated in currencies other than those used to pay for materials and labor and 2) anticipated capital expenditures denominated in a currency other than the functional currency of the entity making the expenditures. These contracts are up to twelve months in duration and are accounted for as cash flow hedges under ASC Topic 815.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI), an equity account, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivative instruments representing hedge ineffectiveness are recognized in current earnings. Other than ineffectiveness of $14.9 million recognized in the first quarter of 2013 in connection with a dedesignation of interest rate swaps, the amount of ineffectiveness on a quarterly basis has been immaterial. As of March 30, 2013, AOCI related to foreign currency forward contracts was not material.
The following table presents the effect of cash flow hedging relationships on the Company's condensed consolidated statements of operations:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Type and Income Statement Location | | Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Ineffective Portion) |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | | Six Months Ended |
| | March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| | (In thousands) |
Interest rate swaps - Other expense, net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (14,903 | ) | | $ | — |
|
Interest rate swaps - Interest expense | | $ | — |
| | $ | (1,565 | ) | | $ | 96 |
| | $ | (1,492 | ) | | $ | (1,932 | ) | | $ | (3,200 | ) | | $ | (4,958 | ) | | (6,513 | ) | | — |
| | — |
|
Foreign currency forward contracts - Cost of sales | | 103 |
| | (209 | ) | | 262 |
| | (1,410 | ) | | 98 |
| | (429 | ) | | 102 |
| | (1,380 | ) | | — |
| | — |
|
Total | | $ | 103 |
| | $ | (1,774 | ) | | $ | 358 |
| | $ | (2,902 | ) | | $ | (1,834 | ) | | $ | (3,629 | ) | | $ | (4,856 | ) | | (7,893 | ) | | (14,903 | ) | | — |
|
Note 5. Debt
Long-term debt consisted of the following:
|
| | | | | | | | |
| | As of |
| | March 30, 2013 | | September 29, 2012 |
| | (In thousands) |
Senior Floating Rate Notes due 2014 ("2014 Notes") | | $ | — |
| | $ | 257,410 |
|
Secured Debt due 2015 | | 40,000 |
| | 40,000 |
|
Senior Notes due 2019 | | 500,000 |
| | 500,000 |
|
Fair value adjustment (1) | | 34,046 |
| | 39,954 |
|
Total | | $ | 574,046 |
| | $ | 837,364 |
|
(1) Represents fair value hedge accounting balance related to interest rate swaps. See Note 4 for discussion.
During the second quarter of 2013, the Company redeemed all $257.4 million of its outstanding 2014 Notes at par plus accrued interest and incurred a loss of $1.4 million, consisting primarily of the write-off of unamortized debt issuance costs.
Other than the Company's secured debt due in 2015, the Company's debt agreements do not contain financial covenants currently applicable to the Company, but do include a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets, paying dividends and redeeming or repurchasing capital stock and debt, subject to certain exceptions. The Company's secured debt due in 2015 requires the Company to maintain a minimum fixed charge coverage ratio during its term. The Company was in compliance with these covenants as of March 30, 2013.
Short-term debt
The Company has a $300 million secured asset-backed revolving credit facility. Borrowings under this facility bear interest, at the Company's option, at a rate equal to LIBOR or a base rate equal to Bank of America, N.A.'s announced prime rate, in each case plus a spread. The facility expires on March 16, 2017. As of March 30, 2013, $100 million of borrowings and $23.3 million of letters of credit were outstanding.
During the second quarter of 2013, one of the Company's subsidiaries in China entered into a $100 million unsecured working capital loan facility to replace a $50 million facility. As of March 30, 2013, the Company had a total of $184 million of short-term borrowing facilities under its foreign subsidiaries, under which $59.9 million was outstanding. Borrowings under these facilities bear interest at a rate equal to LIBOR plus a spread. These facilities expire at various dates through the second quarter of 2015.
Note 6. Commitments and Contingencies
Litigation and other contingencies. From time to time, the Company is a party to litigation, claims and other contingencies, including environmental and employee matters and examinations and investigations by governmental agencies, which arise in the ordinary course of business. The Company records a contingent liability when it is probable that a loss has been incurred and the amount of loss is reasonably estimable in accordance with ASC Topic 450, Contingencies, or other applicable accounting standards. As of March 30, 2013 and September 29, 2012, the Company had reserves of $20.8 million and $18.5 million, respectively, for environmental matters, litigation and other contingencies, excluding reserves for uncertain tax positions, which the Company believes is adequate. Such reserves are included in accrued liabilities and other long-term liabilities on the consolidated balance sheet.
As of March 30, 2013, the Company had approximately $8.0 million of exposure, consisting of accounts receivable and inventory, with a certain customer that is experiencing financial difficulties. The customer recently filed for bankruptcy in the U.S. The Company's exposure is with certain of the customer's foreign subsidiaries which are not part of the bankruptcy filing and which are currently expected to continue to operate in the ordinary course of business. The Company has reserved $6.0 million of this exposure, $5.1 million of which was provided in the first quarter of 2013, and continues to monitor this situation closely.
The Company is subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including those addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the materials used in products, and the recycling, treatment and disposal of materials. As of March 30, 2013, the Company is a party to a regulatory agency order with respect to a former
site and has recorded a liability for this matter, representing the Company's current estimate of the costs required to assess and remediate the site. The Company believes it is reasonably possible that it will incur additional costs related to this matter, but cannot reasonably estimate such amount at this time.
Warranty Reserve. The following table presents information with respect to warranty reserves, which are included in accrued liabilities on the condensed consolidated balance sheets:
|
| | | | | | | |
| As of |
| March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Beginning balance — end of prior year | $ | 14,649 |
| | $ | 15,672 |
|
Additions to accrual | 3,757 |
| | 3,160 |
|
Utilization of accrual | (3,871 | ) | | (3,973 | ) |
Ending balance — current quarter | $ | 14,535 |
| | $ | 14,859 |
|
Note 7. Restructuring
Restructuring Plans — 2012
In 2012, the Company initiated restructuring plans related to plant closures and business reorganizations. Costs associated with these plans are expected to be $26.0 million and to include employee severance, costs related to facilities, asset impairment charges and other exit costs. In connection with actions taken to date under these plans, the Company recorded employee termination benefits of $13.4 million for 2,150 employees, of which $1.0 million was recorded during the second quarter of 2013, $3.2 million of costs related to facilities, of which $1.5 million was recorded during the second quarter of 2013, and $4.5 million of asset impairment charges, of which $1.0 million was recorded during the second quarter of 2013. These plans are expected to be completed in 2013. As of March 30, 2013, $5.5 million of severance remains payable and is expected to be paid in 2013.
Restructuring Plans — Prior to 2012
Due to completion of all actions under restructuring plans initiated prior to 2012 and immateriality of the remaining accrual balance related to such plans, these plans have been combined for disclosure purposes. In connection with these plans, the Company expects to incur restructuring costs in future periods associated primarily with vacant facilities until such time as those facilities have been sold or leased to third parties. The Company recorded no employee termination benefits or asset impairment charges and $3.4 million of costs related to facilities during the second quarter of 2013.
Costs incurred with respect to facilities consist primarily of (1) costs to maintain vacant facilities that are owned until such facilities can be sold and (2) the portion of the Company's lease payments that have not been recovered due to the absence of sublease income for vacant leased properties.
Below is a summary of restructuring costs associated with facility closures and other consolidation efforts for the above plans: |
| | | | | | | | | | | |
| 2012 Restructuring Plan | | Prior to 2012 Restructuring Plan | | Total |
| (In thousands) |
Accrual balance at September 29, 2012 | $ | 10,301 |
| | $ | 4,691 |
| | $ | 14,992 |
|
Employee severance and benefits | 1,830 |
| | 180 |
| | 2,010 |
|
Leases and facilities shutdown costs | 2,009 |
| | 4,375 |
| | 6,384 |
|
Non-cash charges | 1,680 |
| | 798 |
| | 2,478 |
|
Total restructuring charges | 5,519 |
| | 5,353 |
| | 10,872 |
|
Cash paid for employee terminations | (6,628 | ) | | (399 | ) | | (7,027 | ) |
Cash paid for leases and facilities shutdown costs | (1,993 | ) | | (4,622 | ) | | (6,615 | ) |
Non-cash charges | (1,680 | ) | | (798 | ) | | (2,478 | ) |
Total charges utilized / payments | (10,301 | ) | | (5,819 | ) | | (16,120 | ) |
Accrual balance at March 30, 2013 | $ | 5,519 |
| | $ | 4,225 |
| | $ | 9,744 |
|
The Company's IMS segment incurred restructuring costs under all restructuring plans of $2.6 million and $4.2 million for the three and six months ended March 30, 2013, respectively. For the three and six months ended March 31, 2012, restructuring costs incurred for the Company's IMS segment was $4.3 million and $7.2 million, respectively.
Note 8. Stockholder's Equity
Accumulated other comprehensive income
Accumulated other comprehensive income, net of tax as applicable, consisted of the following:
|
| | | | | | | |
| As of |
| March 30, 2013 | | September 29, 2012 |
| (In thousands) |
Foreign currency translation adjustments | $ | 107,382 |
| | $ | 107,720 |
|
Unrealized holding losses on derivative financial instruments (1) | (5,393 | ) | | (25,510 | ) |
Unrecognized net actuarial loss and transition cost | (19,054 | ) | | (18,731 | ) |
Total | $ | 82,935 |
| | $ | 63,479 |
|
(1) The net unrealized loss on derivative financial instruments is primarily related to interest rate swap agreements associated with certain debt. See Note 4 for discussion of change in balance from September 29, 2012. Additionally, amount includes a residual tax effect of $3.3 million in both periods.
Stock repurchase program
During the second quarter of 2013, the Company's Board of Directors authorized the Company to repurchase up to $100 million of the Company's common stock at prevailing market prices or in privately negotiated transactions. The common stock repurchase program has no expiration date and no purchases were made during the three months ended March 30, 2013.
Note 9. Business Segment, Geographic and Customer Information
ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments, products and services, geographic areas of operations and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance.
The Company's operations are managed as two businesses: Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS). The Company's CPS business consists of multiple operating segments which do not meet the
quantitative threshold for being presented as reportable segments. Therefore, financial information for these operating segments are presented in a single category entitled "CPS" and the Company has only one reportable segment - IMS.
The following table presents information for the following periods:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Gross sales: | | | | | | | |
IMS | $ | 1,159,005 |
| | $ | 1,184,354 |
| | $ | 2,362,640 |
| | $ | 2,419,040 |
|
CPS | 309,464 |
| | 314,440 |
| | 637,081 |
| | 618,409 |
|
Intersegment revenue | (40,827 | ) | | (35,712 | ) | | (77,134 | ) | | (72,001 | ) |
Net sales | $ | 1,427,642 |
| | $ | 1,463,082 |
| | $ | 2,922,587 |
| | $ | 2,965,448 |
|
| | | | | | | |
Gross profit: | | | | | | | |
IMS | $ | 69,365 |
| | $ | 77,813 |
| | $ | 139,284 |
| | $ | 162,352 |
|
CPS | 32,551 |
| | 29,843 |
| | 63,920 |
| | 55,340 |
|
Total | 101,916 |
| | 107,656 |
| | 203,204 |
| | 217,692 |
|
Unallocated items (1) | (1,612 | ) | | (1,308 | ) | | (5,972 | ) | | (2,319 | ) |
Total | $ | 100,304 |
| | $ | 106,348 |
| | $ | 197,232 |
| | $ | 215,373 |
|
(1) Represents amounts associated with items that management excludes from its measure of gross profit. These items include stock-based compensation expense, amortization of intangible assets, charges or credits resulting from distressed customers and similar items that either occur infrequently or are of a non-operational nature.
Net sales by geographic segment, determined based on the country in which a product is manufactured, was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Net sales | | | | | | | |
Domestic | $ | 260,911 |
| | $ | 285,638 |
| | $ | 520,565 |
| | $ | 563,512 |
|
Mexico | 344,391 |
| | 319,496 |
| | 687,413 |
| | 609,133 |
|
China | 351,236 |
| | 390,566 |
| | 766,213 |
| | 841,803 |
|
Other international | 471,104 |
| | 467,382 |
| | 948,396 |
| | 951,000 |
|
Total | $ | 1,427,642 |
| | $ | 1,463,082 |
| | $ | 2,922,587 |
| | $ | 2,965,448 |
|
| | | | | | | |
Percentage of net sales represented by ten largest customers | 50.3 | % | | 47.4 | % | | 49.5 | % | | 48.2 | % |
Number of customers representing 10% or more of net sales | 1 |
| | — |
| | — |
| | 1 |
|
Note 10. Earnings Per Share
Basic and diluted amounts per share are calculated by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period, as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands, except per share data) |
Numerator: | | | | | | | |
Net income (loss) | $ | 21,191 |
| | $ | (1,439 | ) | | $ | 21,812 |
| | $ | 7,136 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted average shares used in computing per share amount: | | | | | | | |
—Basic | 82,543 |
| | 81,225 |
| | 82,226 |
| | 81,059 |
|
—Diluted | 84,683 |
| | 81,225 |
| | 84,369 |
| | 83,511 |
|
| | | | | | | |
Net income (loss)per share: | | | | | | | |
—Basic | $ | 0.26 |
| | $ | (0.02 | ) | | $ | 0.27 |
| | $ | 0.09 |
|
—Diluted | $ | 0.25 |
| | $ | (0.02 | ) | | $ | 0.26 |
| | $ | 0.09 |
|
The following table presents weighted-average dilutive securities that were excluded from the above calculation because their inclusion would have had an anti-dilutive effect under ASC Topic 260, Earnings per Share, due to application of the treasury stock method:
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Potentially Dilutive Securities: | | | | | |
Employee stock options | 7,614 |
| | 11,391 |
| | 8,529 |
| | 7,583 |
|
Restricted stock units | 6 |
| | 2,198 |
| | 5 |
| | 360 |
|
Total | 7,620 |
| | 13,589 |
| | 8,534 |
| | 7,943 |
|
Note 11. Stock-Based Compensation
Stock compensation expense was attributable to:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Stock options | $ | 2,757 |
| | $ | 2,547 |
| | $ | 5,374 |
| | $ | 5,002 |
|
Restricted stock units | 1,585 |
| | 1,982 |
| | 3,634 |
| | 3,591 |
|
Total | $ | 4,342 |
| | $ | 4,529 |
| | $ | 9,008 |
| | $ | 8,593 |
|
Stock compensation expense was recognized as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Cost of sales | $ | 1,291 |
| | $ | 983 |
| | $ | 2,631 |
| | $ | 1,890 |
|
Selling, general and administrative | 3,004 |
| | 3,519 |
| | 6,299 |
| | 6,649 |
|
Research and development | 47 |
| | 27 |
| | 78 |
| | 54 |
|
Total | $ | 4,342 |
| | $ | 4,529 |
| | $ | 9,008 |
| | $ | 8,593 |
|
During the second quarter of 2013, the Company's stockholders approved the reservation of an additional 1.7 million shares of common stock for future issuance under the Company's 2009 Incentive Plan. As of March 30, 2013, an aggregate of
16.6 million shares were authorized for future issuance under the Company's stock plans, of which 13.0 million of such shares were issuable upon exercise of outstanding options and delivery of shares upon vesting of restricted stock units and 3.6 million shares of common stock were available for future grant.
Stock Options
Assumptions used to estimate the fair value of stock options granted were as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
Volatility | 84.7 | % | | 85.8 | % | | 85.4 | % | | 85.6 | % |
Risk-free interest rate | 0.8 | % | | 0.9 | % | | 0.7 | % | | 0.9 | % |
Dividend yield | — | % | | — | % | | — | % | | — | % |
Expected life of options (years) | 5.0 |
| | 5.0 |
| | 5.0 |
| | 5.0 |
|
Stock option activity was as follows:
|
| | | | | | | | | | |
| Number of Shares | | Weighted- Average Exercise Price ($) | | Weighted- Average Remaining Contractual Term
| | Aggregate Intrinsic Value of In-The-Money Options ($) |
| (In thousands) | | | | | | (In thousands) |
Outstanding, September 29, 2012 | 11,275 |
| | 13.15 |
| | 6.54 | | 18,548 |
|
Granted | 900 |
| | 8.54 |
| | | | |
Exercised/Cancelled/Forfeited/Expired | (366 | ) | | 8.97 |
| | | | |
Outstanding, December 29, 2012 | 11,809 |
| | 12.93 |
| | 6.57 | | 23,083 |
|
Granted | 50 |
| | 11.78 |
| | | | |
Exercised/Cancelled/Forfeited/Expired | (445 | ) | | 8.88 |
| | | | |
Outstanding, March 30, 2013 | 11,414 |
| | 13.08 |
| | 6.30 | | 31,538 |
|
Vested and expected to vest, March 30, 2013 | 10,982 |
| | 13.21 |
| | 6.20 | | 30,514 |
|
Exercisable, March 30, 2013 | 8,050 |
| | 14.46 |
| | 5.35 | | 23,044 |
|
The weighted-average grant date fair value of stock options granted during the three and six months ended March 30, 2013 was $7.80 per share and $5.83 per share, respectively. The weighted-average grant date fair value of stock options granted during the three and six months ended March 31, 2012 was $7.36 per share and $5.96 per share, respectively. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value of in-the-money options that would have been received by the option holders had all option holders exercised their options at the Company's closing stock price on the date indicated.
As of March 30, 2013, unrecognized compensation expense related to stock options was $20.1 million, and is expected to be recognized over a weighted average period of 2.5 years.
Restricted Stock Units
The Company grants restricted stock units to executive officers, directors and certain management employees. These units vest over periods ranging from one to four years and are exchanged for shares of common stock at the vesting date. Compensation expense associated with these units is recognized ratably over the vesting period.
As of March 30, 2013, unrecognized compensation expense related to restricted stock units was $10.4 million, and is expected to be recognized over a weighted average period of 1.7 years. Additionally, as of March 30, 2013, unrecognized compensation expense related to performance based restricted stock units was $2.7 million. No expense has been recorded for these performance based restricted stock units to date as achievement of performance criteria is not considered probable.
Activity with respect to the Company's restricted stock units was as follows:
|
| | | | | | | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value ($) | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value ($) |
| (In thousands) | | | | | | (In thousands) |
Outstanding, September 29, 2012 | 2,230 |
| | 9.51 |
| | 1.08 | | 21,272 |
|
Granted | 760 |
| | 8.53 |
| | | | |
Vested/Cancelled | (1,384 | ) | | 7.30 |
| | | | |
Outstanding, December 29, 2012 | 1,606 |
| | 10.94 |
| | 2.56 | | 16,561 |
|
Granted | 106 |
| | 11.85 |
| | | | |
Vested/Cancelled | (152 | ) | | 11.36 |
| | | | |
Outstanding, March 30, 2013 | 1,560 |
| | 10.96 |
| | 2.35 | | 18,487 |
|
Expected to vest, March 30, 2013 | 1,068 |
| | 11.58 |
| | 1.90 | | 12,656 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q 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 (the “Exchange Act”). 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 regarding the financial impact of customer bankruptcies; any statements regarding our expectations for future interest expense; any statements regarding timing of closing of future cash outlays for and benefits of acquisitions; any statements about future repurchases or redemptions of debt and stock; any statements concerning the adequacy of our liquidity; 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 the risks and uncertainties contained in or incorporated from Part II, Item 1A of this report. As a result, actual results could vary materially from those suggested by the forward-looking statements. 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.
Overview
We are a leading independent global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. Our revenue is generated from sales of our services primarily to original equipment manufacturers (OEMs) in the communications networks; computing and storage; multimedia; industrial and semiconductor capital equipment; defense and aerospace; medical; clean technology and automotive industries.
Our operations are managed as two businesses:
1) Integrated Manufacturing Solutions (IMS), which is a reportable segment consisting of printed circuit board assembly and test, optical and RF (Radio Frequency) modules, final system assembly and test, and direct order fulfillment.
2) Components, Products and Services (CPS), consisting of Components, which includes interconnect systems (printed circuit board fabrication and backplane and cable assemblies) and mechanical systems (enclosures, precision machining and plastic injection molding); Products, which includes memory and solid state drive products from Viking Technology; products from SCI Technology for use in the defense and aerospace industry and storage products from Newisys; and Services, which includes design, engineering, logistics and repair services.
All references to years, in this section, refer to our fiscal years ending on the last Saturday of each year closest to September 30th. Fiscal 2013 and 2012 are each 52 weeks.
Our strategy is to leverage our comprehensive service offering, advanced technologies, and global capabilities to further penetrate diverse end markets that we believe offer significant growth opportunities and have complex products that require higher value-added services. We believe this strategy differentiates us from our competitors and will drive more sustainable revenue growth and provide opportunities for us to ultimately achieve operating margins that exceed industry standards.
There are many challenges to successfully executing our strategy. For example, we compete with a number of companies in each of our key end markets. These include companies that are much larger than we are and smaller companies that focus on a particular niche. Although we believe we are well-positioned in each of our key end markets and seek to differentiate ourselves from our competitors, competition remains intense and growing our revenues has been challenging. For example, our revenues have been in the range of $6.1 billion to $6.6 billion for the last three years. Additionally, growing and leveraging our components businesses to improve our operating margins continues to be challenging. We continue to address these challenges, on both a short-term and long-term basis. We have experienced fluctuations in our results of operations in the past and may continue to experience such fluctuations in the future.
During 2012 and the first half of 2013, we reduced our net debt obligations by approximately $500 million, which has resulted in significant interest expense savings. For example, interest expense for the first half of 2013 was $23.5 million, compared to $42.2 million for the same period in 2012. Although these redemptions have reduced our interest expense and improved our operating results, these actions have also reduced our total sources of liquidity by approximately $100 million over the same time period, primarily due to amounts borrowed under our asset-backed revolving credit facility. In addition to our current sources of liquidity, we believe we have sufficient access to additional sources of capital should the need arise.
A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers represented 50.3% and 49.5% of our net sales for the three and six months ended March 30, 2013, respectively. Sales to our ten largest customers represented 47.4% and 48.2% of our net sales for the three and six months ended March 31, 2012, respectively. One customer represented more than 10% of our net sales for the three months ended March 30, 2013 and the six months ended March 31, 2012. Additionally, no customer represented 10% or more of our net sales for the three months ended March 31, 2012 or the six months ended March 30, 2013.
We typically generate approximately 80% of our net sales from products manufactured in international locations. The concentration of international operations has resulted primarily from a desire on the part of many of our customers to move production to lower cost locations such as Asia, Latin America and Eastern Europe.
Historically, we have had substantial recurring sales from existing customers. 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 specific 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 reductions objectives during the term of the agreement, which can have the effect of reducing revenue and profitability from such engagements.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 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, environmental matters, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are 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 materially from these estimates.
For a complete description of our critical accounting policies and estimates, refer to our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 21, 2012.
Results of Operations
Key operating results
|
| | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Net sales | $ | 1,427,642 |
| | $ | 1,463,082 |
| | 2,922,587 |
| | 2,965,448 |
|
Gross profit | $ | 100,304 |
| | $ | 106,348 |
| | 197,232 |
| | 215,373 |
|
Operating income | $ | 45,798 |
| | $ | 30,208 |
| | 77,260 |
| | 69,896 |
|
Net income | $ | 21,191 |
| | $ | (1,439 | ) | | 21,812 |
| | 7,136 |
|
Net Sales
Sales by end market were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | Increase/(Decrease) | | March 30, 2013 | | March 31, 2012 | | Increase/(Decrease) |
Communications | $ | 691,920 |
| | $ | 662,768 |
| | $ | 29,152 |
| 4.4 | % | | $ | 1,380,135 |
| | $ | 1,331,392 |
| | $ | 48,743 |
| 3.7 | % |
Industrial, defense and medical | 380,937 |
| | 368,153 |
| | 12,784 |
| 3.5 | % | | 751,003 |
| | 744,568 |
| | 6,435 |
| 0.9 | % |
Enterprise computing and storage | 194,210 |
| | 240,687 |
| | (46,477 | ) | (19.3 | )% | | 424,954 |
| | 473,980 |
| | (49,026 | ) | (10.3 | )% |
Multimedia | 160,575 |
| | 191,474 |
| | (30,899 | ) | (16.1 | )% | | 366,495 |
| | 415,508 |
| | (49,013 | ) | (11.8 | )% |
Total | $ | 1,427,642 |
| | $ | 1,463,082 |
| | $ | (35,440 | ) | (2.4 | )% | | $ | 2,922,587 |
| | $ | 2,965,448 |
| | $ | (42,861 | ) | (1.4 | )% |
Net sales decreased from $1.46 billion in the second quarter of 2012, to $1.43 billion in the second quarter of 2013, a decrease of 2.4%. Net sales decreased from $2.97 billion for the six months ended March 31, 2012, to $2.92 billion for the six months ended March 30, 2013, a decrease of 1.4%. Sales to customers in our communications end market increased primarily as a result of improved demand for optical and wireless communications products, both for established programs and new program wins. Sales to customers in our enterprise computing and storage and multimedia end markets decreased primarily as a result of reduced demand from existing customers and the wind down of certain customer programs.
Gross Margin
Gross margin decreased to 7.0% for the second quarter of 2013, from 7.3% for the second quarter of 2012. Gross margin decreased to 6.7% for six months ended March 30, 2013, from 7.3% for the six months ended March 31, 2012. The decrease for both periods was primarily attributable to deterioration in our IMS segment's gross margin resulting from lower business volume and costs associated with new program ramp-ups, partially offset by margin improvement in our CPS segment, particularly in our global services business, resulting from increased business volume.
We expect gross margins to continue to fluctuate based on overall production and shipment volumes and changes in the mix of products demanded by our major customers. Fluctuations in our gross margins may also be caused by a number of other factors, some of which are outside of our control, including (a) greater competition in the EMS industry and pricing pressures from OEMs due to greater focus on cost reduction; (b) provisions for excess and obsolete inventory that we are not able to charge back to a customer or sales of inventories previously written down; (c) changes in operational efficiencies; (d) any increases in the cost of electronic components resulting from economic conditions, supply chain interruptions or otherwise; and (e) our ability to transition manufacturing and assembly operations to lower cost regions in an efficient manner.
Operating Expenses
Selling, general and administrative
Selling, general and administrative expenses decreased $3.9 million, from $62.9 million, or 4.3% of net sales, in the second quarter of 2012 to $59.0 million, or 4.1% of net sales, in the second quarter of 2013. Selling, general and administrative expenses decreased $3.3 million, from $122.1 million, or 4.1% of net sales, in the six months ended March 31, 2012 to $118.8 million, or 4.1% of net sales, in the six months ended March 30, 2013. The decrease for the three month period was primarily due to lower incentive compensation expense and decreased bad debt expense. The decrease for the six month period was primarily due to lower incentive compensation expense.
Research and Development
Research and development expenses increased slightly from $5.9 million, or 0.4% of net sales, in the second quarter of 2012 to $6.0 million, or 0.4% of net sales, in the second quarter of 2013. Research and development expenses increased from $10.1 million, or 0.3% of net sales, in the six months ended March 31, 2012 to $11.4 million, or 0.4% of net sales, in the six months ended March 30, 2013. The increase for the six months period was primarily attributable to expenditures on new storage projects in our Newisys business.
Restructuring
Restructuring Plans — 2012
In 2012, we initiated restructuring plans related to plant closures and business reorganizations. Costs associated with these plans are expected to be $26.0 million and to include employee severance, costs related to facilities, asset impairment charges and other exit costs. In connection with actions taken to date under these plans, we recorded employee termination benefits of $13.4 million for 2,150 employees, of which $1.0 million was recorded during the second quarter of 2013, $3.2 million of costs related to facilities, of which $1.5 million was recorded during the second quarter of 2013, and $4.5 million of asset impairment charges, of which $1.0 million was recorded during the second quarter of 2013. These plans are expected to be completed in 2013. As of March 30, 2013, $5.5 million of severance remains payable and is expected to be paid in 2013.
Restructuring Plans — Prior to 2012
Due to completion of all actions under restructuring plans initiated prior to 2012 and immateriality of the remaining accrual balance related to such plans, these plans have been combined for disclosure purposes. In connection with these plans, we expect to incur restructuring costs in future periods associated primarily with vacant facilities until such time as those facilities have been sold or leased to third parties. We recorded no employee termination benefits or asset impairment charges and $3.4 million of costs related to facilities during the second quarter of 2013.
Costs incurred with respect to facilities consist primarily of (1) costs to maintain vacant facilities that are owned until such facilities can be sold and (2) the portion of our lease payments that have not been recovered due to the absence of sublease income for vacant leased properties.
Below is a summary of restructuring costs associated with facility closures and other consolidation efforts for the above plans:
|
| | | | | | | | | | | |
| 2012 Restructuring Plan | | Prior to 2012 Restructuring Plan | | Total |
| (In thousands) |
Accrual balance at September 29, 2012 | $ | 10,301 |
| | $ | 4,691 |
| | $ | 14,992 |
|
Employee severance and benefits | 1,830 |
| | 180 |
| | 2,010 |
|
Leases and facilities shutdown costs | 2,009 |
| | 4,375 |
| | 6,384 |
|
Non-cash charges | 1,680 |
| | 798 |
| | 2,478 |
|
Total restructuring charges | 5,519 |
| | 5,353 |
| | 10,872 |
|
Cash paid for employee terminations | (6,628 | ) | | (399 | ) | | (7,027 | ) |
Cash paid for leases and facilities shutdown costs | (1,993 | ) | | (4,622 | ) | | (6,615 | ) |
Non-cash charges | (1,680 | ) | | (798 | ) | | (2,478 | ) |
Total charges utilized / payments | (10,301 | ) | | (5,819 | ) | | (16,120 | ) |
Accrual balance at March 30, 2013 | $ | 5,519 |
| | $ | 4,225 |
| | $ | 9,744 |
|
Our IMS segment incurred restructuring costs under all restructuring plans of $2.6 million and $4.2 million for the three and six months ended March 30, 2013, respectively. For the three and six months ended March 31, 2012, restructuring costs incurred for our IMS segment was $4.3 million and $7.2 million, respectively.
Asset Impairments
We recorded $1.1 million of asset impairment charges for the three and six months ended March 30, 2013 and recorded $1.0 million and $2.1 million for the three and six months ended March 31, 2012, respectively. The asset impairment charges were related to declines in the fair value of certain properties being marketed for sale below the carrying amount of such properties.
Gain on Sales of Long-lived Assets
We recognized a gain of $19.0 million and $23.2 million for the three and six months ended March 30, 2013, respectively, from the sales of certain properties. We did not recognize any such gains for the three and six months ended March 31, 2012.
Interest Expense
Interest expense decreased $10.0 million, from $20.4 million for the second quarter of 2012 to $10.4 million for the second quarter of 2013, primarily due to interest savings of $10.1 million from the redemption of $400 million of our 2016 Notes in 2012 and $257.4 million of our 2014 Notes in 2013. Interest expense decreased $18.7 million, from $42.2 million for the six months ended March 31, 2012 to $23.5 million for the six months ended March 30, 2013, primarily due to interest savings of $18.6 million from the redemption of both the 2016 Notes and the 2014 Notes mentioned above.
Other Expense, net
The following table presents the major components of other income (expense), net:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 30, 2013 | | March 31, 2012 | | March 30, 2013 | | March 31, 2012 |
| (In thousands) | | | | |
Foreign exchange losses | $ | (499 | ) | | $ | (47 | ) | | $ | (1,073 | ) | | $ | (1,886 | ) |
Loss on extinguishments of debt | (1,401 | ) | | (6,461 | ) | | (1,401 | ) | | (6,461 | ) |
Loss on interest rate swap dedesignation | — |
| | — |
| | (14,903 | ) | | — |
|
Other, net | 423 |
| | 1,667 |
| | 978 |
| | 1,988 |
|
Total | $ | (1,477 | ) | | $ | (4,841 | ) | | $ | (16,399 | ) | | $ | (6,359 | ) |
We have interest rate swaps with an aggregate notional amount of $257 million that were entered into in 2007 to hedge LIBOR-based variable rate interest payments expected to occur through June 15, 2014. During the first quarter of 2013, we determined, based on our intention of redeeming $257.4 million of our 2014 Notes, that it was no longer probable that LIBOR-based, variable rate interest payments would occur on $257 million of debt through June 15, 2014. Accordingly, we dedesignated our interest rate swaps in their entirety in the first quarter of 2013 and recorded a charge of $14.9 million to other expense, net, representing the portion of the value of the interest rate swaps previously recorded in accumulated other comprehensive income (AOCI) for which it was no longer probable that LIBOR-based variable rate interest payments would occur. During the second quarter of 2013, we redeemed our 2014 Notes in full using a combination of cash on hand and borrowings under our revolving credit facility (LIBOR-based, variable rate facility). Therefore, LIBOR-based variable rate payments are only expected to occur on forecasted borrowings under our revolving credit facility and only during the period of time these borrowings are expected to be outstanding.
We reduce our exposure to currency fluctuations through the use of foreign currency hedging instruments; however, our hedges are established based on estimated foreign currency balances. To the extent actual amounts differ from estimated amounts, we will have exposure to currency fluctuations that results in foreign exchange gains or losses.
Provision for Income Taxes
We estimate our annual effective income tax rate at the end of each quarterly period. Our estimate takes into account the geographic mix of our expected pre-tax income (loss), expected total annual pre-tax income (loss), implementation of tax planning strategies and possible outcomes of audits and other uncertain tax positions. To the extent there are fluctuations in any of these variables during a period, our provision for income taxes may vary.
Our provision for income taxes for the three months ended March 30, 2013 and March 31, 2012 was $13.0 million and $6.9 million, respectively, and $16.0 million and $14.9 million for the six months ended March 30, 2013 and March 31, 2012, respectively. The increase for both periods was primarily due to a significant increase in pre-tax income and the jurisdictional mix of where our income was earned.
Liquidity and Capital Resources
|
| | | | | | | |
| Six Months Ended |
| March 30, 2013 | | March 31, 2012 |
| (In thousands) |
Net cash provided by (used in): | | | |
Operating activities | $ | 161,753 |
| | $ | 46,723 |
|
Investing activities | (14,763 | ) | | (40,187 | ) |
Financing activities | (143,479 | ) | | (181,705 | ) |
Effect of exchange rate changes on cash and cash equivalents | (1,187 | ) | | (700 | ) |
Increase (decrease) in cash and cash equivalents | $ | 2,324 |
| | $ | (175,869 | ) |
Key liquidity performance measures
|
| | | |
| Three Months Ended |
| March 30, 2013 | | September 29, 2012 |
Days sales outstanding (1) | 56 | | 58 |
Inventory turns (2) | 6.7 | | 7.1 |
Accounts payable days (3) | 58 | | 57 |
Cash cycle days (4) | 52 | | 52 |
| |
(1) | Days sales outstanding (a measure of how quickly we collect our accounts receivable), or "DSO", is calculated as the ratio of average accounts receivable, net, to average daily net sales for the quarter. |
| |
(2) | Inventory turns (annualized) are calculated as the ratio of four times our cost of sales for the quarter to average inventory. |
| |
(3) | Accounts payable days (a measure of how quickly we pay our suppliers), or "DPO", 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 to average accounts payable. |
| |
(4) | Cash cycle days is calculated as the ratio of 365 days to inventory turns, plus days sales outstanding minus accounts payable days. |
Cash and cash equivalents were $411.9 million at March 30, 2013 and $409.6 million at September 29, 2012. Our cash levels vary during any given quarter depending on the timing of collections from customers and payments to suppliers, borrowings under credit facilities, redemptions and repurchases of debt and capital stock, and other factors. Our working capital was $0.9 billion as of March 30, 2013 and $1.1 billion as of September 29, 2012.
Net cash provided by operating activities was $161.8 million and $46.7 million for the six months ended March 30, 2013 and March 31, 2012, respectively. Cash flows from operating activities consist of: 1) net income adjusted to exclude non-cash items such as depreciation and amortization, stock-based compensation expense, losses from swap dedesignations, etc., and 2) changes in net operating assets, which are comprised of accounts receivable, inventories, prepaid expenses and other assets, accounts payable, accrued liabilities and other long-term liabilities.
During the six months ended March 30, 2013, we generated $73.3 million of cash from net income, excluding non-cash items, and also generated $88.5 million of cash from a reduction of net operating assets, resulting primarily from decreases in accounts receivable and inventory of $130.6 million and $28.3 million, respectively, partially offset by a decrease in accounts payable of $76.0 million. These decreases were due primarily to decreased business volume in the first half of 2013. Although our DPO and DSO were fairly consistent for the three months ended March 30, 2013 and September 29, 2012, our working capital metrics tend to fluctuate from quarter-to-quarter based on factors such as the linearity of our shipments and purchases, customer and supplier mix, and the negotiation of payment terms with customers and suppliers. These fluctuations can significantly affect our cash flows from operating activities.
Net cash used in investing activities was $14.8 million and $40.2 million for the six months ended March 30, 2013 and March 31, 2012, respectively. During the six months ended March 30, 2013, we used $43.5 million of cash for capital expenditures and received proceeds of $28.8 million primarily from the sales of certain properties. During the six months ended March 31, 2012, we used $40.7 million of cash for capital expenditures, made payments of $2.0 million in connection with a previous business combination, and received proceeds of $2.5 million primarily from the sales of certain properties.
Net cash used in financing activities was $143.5 million and $181.7 million for the six months ended March 30, 2013 and March 31, 2012, respectively. During the six months ended March 30, 2013, we redeemed $257.4 million of long-term debt, received $110.2 million of net proceeds from short-term borrowings and reduced our restricted cash by $3.3 million. During the six months ended March 31, 2012, we redeemed $150.0 million of long-term debt, reduced our restricted cash by $3.5 million and repaid $30.2 million of short-term debt.
Other Liquidity Matters
During 2012 and first half 2013, we reduced our net debt obligations by approximately $500 million, which has resulted in significant interest expense savings. For example, interest expense for the first half of 2013 was $23.5 million, compared to $42.2 million for the same period in 2012. Although these redemptions have reduced our interest expense and improved our operating results, these actions have also reduced our total sources of liquidity by approximately $100 million over the same time period, primarily due to amounts borrowed under our asset-backed revolving credit facility. After giving effect to these redemptions, our next long-term debt maturity in the amount of $40 million will be in 2015, after which our next long-term debt maturity in the amount of $500 million will be in 2019. We may consider early redemptions of our debt in future periods, using either our existing cash or proceeds from additional debt or equity financings.
In March 2013, our Board approved a $100 million stock repurchase program with no expiration date. The timing of repurchases made under the program will depend upon capital needs to support the growth of our business, market conditions and other factors. Although the stock repurchase program is designed to increase stockholder value, purchases of shares made under this program will reduce our liquidity.
Beginning in May 2014, the interest rate swap on our 2019 Notes can be terminated at the option of the swap counterparty upon payment to us of a market termination fee. In such a case, we would no longer pay a variable rate of interest on such notes but would instead pay a fixed rate of 7%, which could be higher than the variable rate at the time of termination.
Other than our $40 million loan which used certain of our real property as collateral, our debt agreements do not contain financial covenants currently applicable to us, but do include a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets, paying dividends and redeeming or repurchasing capital stock and debt, subject to certain exceptions. Our $40 million loan requires us to maintain a minimum fixed charge coverage ratio during its term. These covenants could constrain our ability to grow our business through acquisition or engage in other transactions which the covenants would otherwise restrict, including refinancing our existing debt. In addition, such agreements include covenants requiring, among other things, that we file quarterly and annual financial statements with the SEC, comply with all laws, pay all taxes and maintain casualty insurance. If we are not able to comply with all of these covenants, for any reason, some or all of our outstanding debt as well as all amounts payable under our interest rate swaps on such debt, if any, could become immediately due and payable and the incurrence of additional debt under our asset-backed revolving credit facility would not be allowed, any of which could have a material adverse effect on our liquidity and ability to conduct our business. As of March 30, 2013, we were in compliance with these covenants.
In the ordinary course of business, we are or may become party to legal proceedings, claims and other contingencies, including environmental and employee matters and examinations by government agencies. As of March 30, 2013, we had accrued liabilities of $20.8 million related to such matters. We cannot accurately predict the outcome of these matters or the amount or timing of cash flows that may be required to defend ourselves or to settle such matters or that these accruals will be sufficient to fully satisfy our contingent liabilities.
As of March 30, 2013, we had a liability of $81.6 million for uncertain tax positions. Our estimate of liabilities for uncertain tax positions is based on a number of subjective assessments, including the likelihood of a tax obligation being assessed, the amount of taxes (including interest and penalties) that would ultimately be payable, and our ability to settle any such obligations on favorable terms. Therefore, the amount of future cash flows associated with uncertain tax positions may be significantly higher or lower than our recorded liability. Additionally, we are unable to reliably estimate when cash settlement may occur.
We have entered into, and continue to enter into, various transactions that periodically require collateral. These obligations have historically arisen from customs, import/export, VAT, utility services, debt financing, foreign exchange contracts and interest rate swaps. We have collateralized, and may from time to time collateralize, such obligations as a result of counterparty requirements or for economic reasons. As of March 30, 2013, we had posted collateral of $8.7 million in the form of cash against certain of our collateralized obligations. Cash used for collateral is not available for other purposes.
Our liquidity needs are largely dependent on changes in our working capital, including the extension of trade credit by our suppliers, investments in manufacturing inventory, facilities and equipment, repayments of obligations under outstanding indebtedness, redemptions of our outstanding debt and repurchases of common stock. Our primary sources of liquidity as of March 30, 2013 included (1) cash of $411.9 million; (2) our $300 million asset-backed revolving credit facility, of which $176.7 million, net of letters of credit and outstanding borrowings, was available as of March 30, 2013; (3) foreign short-term borrowing facilities of $184 million, of which $124.1 million was available as of March 30, 2013; and (4) cash generated from operations. In addition, we are actively marketing a portfolio of surplus real estate with an aggregate list price of over $80 million. Proceeds from the sales of properties in this portfolio will provide additional liquidity. However, there can be no assurance as to the amounts that may actually be raised or the exact timing of any such payments.
We believe our existing cash resources and other sources of liquidity, together with cash generated from operations, will be sufficient to meet our working capital requirements for the next 12 months. Should demand for our services change significantly over the next 12 months or should we experience increases in delinquent or uncollectible accounts receivable, our cash provided by operations would be adversely impacted.
As of March 30, 2013, approximately 44% of our cash balance was held by our foreign subsidiaries. Should we choose or need to remit cash to the United States, we may incur tax obligations which would reduce the amount of cash ultimately available to the United States. We believe that cash held in the United States, together with cash available under our United States credit facility and cash from foreign subsidiaries that could be remitted to the United States without tax consequences, will be sufficient to meet our United States liquidity needs for at least the next 12 months.
Off-Balance Sheet Arrangements and Contractual Obligations
As of March 30, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. In addition, there have been no material changes to our contractual obligations or commitments during the quarter ended March 30, 2013, other than the redemption of the remaining $257.4 million of our 2014 Notes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our primary exposure to market risk for changes in interest rates relates to certain of our outstanding debt obligations. Currently, we do not use derivative financial instruments in our investment portfolio. As of March 30, 2013, we had no short-term investments.
As of March 30, 2013, we had $540.0 million of long-term debt, of which $40.0 million bears interest at a floating rate and $500.0 million of fixed rate debt has been converted to variable rate debt through the use of an interest rate swap. Accordingly, our exposure to interest rates is limited to variable rate long-term debt of $540.0 million and $159.9 million of variable-rate short-term borrowings outstanding as of March 30, 2013. An immediate 10% change in interest rates would not have a significant impact on our results of operations.
Foreign Currency Exchange Risk
We transact business in foreign countries. Our foreign exchange policy requires that we take certain steps to limit our foreign exchange exposures in certain assets and liabilities and forecasted cash flows. However, such policy does not require us to hedge all foreign exchange exposures. Furthermore, foreign currency hedges are based on forecasted transactions and estimated balances, the amount of which may differ from that actually incurred. As a result, we can experience foreign exchange rate gains and losses in our results of operations.
Our primary foreign currency cash flows are in certain Asian and European countries, Israel, Brazil and Mexico. We enter into short-term foreign currency forward contracts to hedge currency exposures associated with certain monetary assets and liabilities denominated in foreign currencies. These contracts typically have maturities of up to two months and are not designated as part of a hedging relationship in accordance with ASC Topic 815. All outstanding foreign currency forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in other income (expense), net, in the condensed consolidated statements of operations. As of March 30, 2013, we had outstanding foreign currency forward contracts to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $216.2 million.
We also utilize foreign currency forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such exposures result from (1) forecasted sales denominated in currencies other than those used to pay for materials and labor and (2) anticipated capital expenditures denominated in a currency other than the functional currency of the entity making the expenditures. The effective portion of changes in the fair value of the contracts is recorded in stockholders' equity as a separate component of accumulated other comprehensive income and recognized in earnings when the hedged item affects earnings. We had forward contracts related to cash flow hedges in various foreign currencies in the aggregate notional amount of $117.7 million as of March 30, 2013.
The net impact of an immediate 10% change in exchange rates would not be material to our condensed consolidated financial statements, provided we accurately forecast and estimate our foreign currency exposure. If such forecasts are materially inaccurate, we could incur significant gains or losses.
Item 4. Controls and Procedures
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that their objectives are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of disclosure controls and procedures must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of disclosure controls and procedures can provide absolute assurance that all disclosure control issues and instances of fraud, if any, within the Company have been detected. Nonetheless, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 30, 2013, (1) our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, and (2) our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding its required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 23, 2008, the Orange County Water District filed suit against Sanmina Corporation and 17 other defendants in California Superior Court for Orange County alleging that the defendants' actions had polluted groundwater managed by the plaintiff. The complaint sought recovery of compensatory and other damages, as well as declaratory relief, for the payment of costs necessary to investigate, monitor, remediate, abate and contain contamination of groundwater within the plaintiff's control. Sanmina has disputed the plaintiff's claims and asserted various defenses. On April 9, 2013, the Superior Court ruled in favor of Sanmina's motion for summary adjudication dismissing it from the suit. The ruling is subject to appeal.
From time to time, we may become involved in routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on us as a result of incurrence of defense costs, diversion of management resources and other factors. We record liabilities for legal proceedings when a loss becomes probable and the amount of loss can be reasonably estimated.
See also Note 6 of Notes to Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
Adverse market conditions in the electronics industry could reduce our future sales and earnings per share.
We cannot accurately predict future levels of demand for our customers' electronics products. Consequently, our past operating results, earnings and cash flows may not be indicative of our future operating results, earnings and cash flows. Beginning in the fourth quarter of calendar 2011 and continuing through the second quarter of 2013, adverse worldwide economic conditions led to challenging conditions in the electronics industry. A number of factors, including price instability, the availability and cost of credit, high global unemployment and concerns about the stability and solvency of financial institutions, financial markets, businesses, and sovereign nations have slowed global economic growth in many countries. These conditions resulted in our customers delaying purchases or placing purchase orders for lower volumes of products than previously experienced or anticipated. Such conditions could also cause a reduction in orders from our customers or potential customers due to a reduced availability of credit and the insolvency of one or more customers or suppliers. Any of these factors could reduce our revenues, increase our costs and decrease our liquidity.
We may experience component shortages or price increases, which could cause us to delay shipments to customers and reduce our sales and net income.
We are dependent on certain suppliers, including limited and sole source suppliers, to provide key components we incorporate into our products. We have experienced, and may experience in the future, delays in delivery and shortages of components, which in turn could cause delays in product shipments to customers, result in reduced revenue from and have an adverse effect on our relationship with affected customers, and our reputation generally as a reliable service provider. Component shortages can result in increased component prices which would result in decreased gross profit. Component delays and shortages can also result from natural disasters occurring in the regions in which our suppliers operate, such as the March 2011 earthquake in Japan and the widespread flooding in Thailand during late 2011. We may purchase components in advance of our requirements for such components as a result of a threatened or anticipated shortage. In this event, we may incur additional inventory carrying costs and have a heightened risk of exposure to inventory obsolescence, the cost of either of which may not be recoverable from our customers. Such costs would reduce our margins and net income. Finally, if key components become scarce, we may be required to look to second tier vendors or to procure components through brokers. Such components may be of lesser quality than those otherwise available and could cause us to incur costs to qualify such components or to replace them if they prove to be defective.
Our customers could experience credit problems, which would reduce our future revenues and net income.
Many of the industries for which we provide products have previously experienced significant financial difficulty, with some of the participants filing for bankruptcy. Such financial difficulty, if experienced by one or more of our customers, may negatively affect our business due to the decreased demand from these financially distressed customers, the lengthening of customer payment terms, the potential inability of these companies to make full payment on amounts owed to us or to purchase inventory we acquired to support their businesses. For example, during the first quarter of 2013, we recorded charges of $5.1 million relating to a distressed customer. Customer bankruptcies also entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to us that are deemed a preference under bankruptcy laws. We do not carry insurance against the risk of customer default on their payment obligations to us.
We seek to mitigate the impact of collection problems with our customers on our financial results by evaluating their creditworthiness on an ongoing basis and by maintaining an allowance for doubtful accounts that is assessed for adequacy quarterly. However, should customer defaults increase substantially or exceed the level of our allowance, our revenue, net income and cash position would be reduced, perhaps significantly.
Our cash generated from operations is variable, which can adversely affect our ability to plan and invest in the business.
Our ability to make capital expenditures and pay down debt and the extent to which we need to utilize our borrowing facilities depends in large part on our ability to generate cash from operations. Cash generated from operations is highly variable. For example, during 2010, we used $78 million of cash in operating activities, in 2011 and 2012 we generated over $200 million in cash from operating activities in each year and during the first six months of fiscal 2013, we generated $162 million in cash from operating activities. Our cash generated by or used in operations is impacted by a number of variables, including our growth and profitability, customer and supplier payment terms, timeliness of customer payments to us and the extent to which we need to increase inventories in response to customer
forecasts. To the extent our cash from operations fluctuates significantly in the future, our ability to make investments in our business and reduce our debt could be adversely impacted.
Our strategy to pursue higher margin business depends in part on the success of our Components, Products and Services (CPS) business, which, if not successful, could cause our future gross margins and operating results to be lower.
A key part of our strategy is to grow our CPS business, which includes printed circuit boards, backplane and cable assemblies, mechanical systems, memory, defense and aerospace and enterprise computing products and design, engineering, logistics and repair services. A decrease in orders for these products and services can have a disproportionately adverse impact on our profitability since these products and services generally carry higher than average contribution margins. In addition, in order to grow this portion of our business profitability, we must continue to make substantial investments in the development of our product development capabilities, research and development activities, test and tooling equipment and skilled personnel, all of which reduce our operating results in the short term. The success of our CPS business also depends on both our ability to increase sales of our proprietary products, cause our customers to agree to purchase our components for use in the manufacture of their products and expand the number of our customers who contract for our design, engineering, logistics and repair services. We may face challenges in achieving commercially viable yields and difficulties in manufacturing components in the quantities and to the specifications and quality standards demanded by our customers, as well as in qualifying our components for use in our customers' designs. Our proprietary products and design, engineering, logistics and repair services must compete with products and services offered by established vendors which focus solely on development of similar technologies or the provision of similar services. Any of these factors could cause our CPS revenue and margins to be less than expected, which would have an overall adverse and potentially disproportionate effect on our revenues and profitability.
Our future gross margins and operating results may be adversely impacted by reduced demand for, or execution problems with, our integrated manufacturing solutions business.
The substantial majority of our revenues are derived from our integrated manufacturing solutions (IMS) business. We experience continued pressure from OEMs to reduce prices for these solutions, and competition remains intense. These factors can result in reduced IMS revenue, which would reduce our gross margins. Gross margins in our IMS business can also be negatively impacted by our product mix, with lower margins resulting from the provision of less complex services, and by execution issues and operational inefficiencies at our plants. If we experience reduced demand or revenues from our IMS business for any reason, or experience execution problems or operational inefficiencies, our gross margins and operating results in future periods may be lower than expected.
Adverse changes in the key end markets we target could harm our business by reducing our sales.
We provide products and services to companies that serve the communications networks, computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical, clean technology and automotive industries. Adverse changes in any of these markets could reduce demand for our customers' products or make these customers more sensitive to the cost of our products and services, either of which could reduce our sales, gross margins and net income. A number of factors could affect any of these industries in general, or our customers in particular, and lead to reductions in net sales, thus harming our business.
These factors include:
| |
• | short product life cycles of our customers' products leading to continuing new requirements and specifications and product obsolescence, either of which could cause us to lose business; |
| |
• | failure of our customers' products to gain widespread commercial acceptance which could decrease the volume of orders customers place with us; and |
| |
• | recessionary periods in our customers' markets which decrease orders from affected customers. |
We realize a substantial portion of our revenues from communications equipment customers. This market is highly competitive, particularly in the area of price. Should any of our larger customers in this market fail to effectively compete with their competitors, they could reduce their orders to us or experience liquidity difficulties, either of which would have the effect of reducing our revenue and net income, perhaps substantially. Revenue from our multimedia business, which is driven primarily by sales of set-top boxes, could decline as more content is delivered over the internet or through alternative methods and not through set-top boxes, particularly in the U.S. or Europe. In addition, in the case of our defense business, implementation of the United States budget sequester or other budget actions and the scheduled
withdrawal of armed forces from Afghanistan could result in a decrease in defense spending, which in turn could cause a reduction or delay in orders placed by the government or defense contractors for products manufactured by our defense and aerospace (DAS) division. Since such products carry higher margins than many of our other products and services, such a decrease would disproportionately reduce our gross margin and profitability. There can be no assurance that we will not experience declines in demand in these or other areas in the future.
Our operating results are subject to significant uncertainties, which make predictability of our future sales and net income difficult.
Our operating results are subject to significant uncertainties, including:
| |
• | conditions in the economy as a whole and in the electronics industry; |
| |
• | fluctuations in components prices and component shortages caused by high demand, natural disaster or otherwise; |
| |
• | timing of new product development by our customers, which creates demand for our services, but which can also require us to incur start-up costs relating to new tooling and processes; |
| |
• | levels of demand in the end markets served by our customers; |
| |
• | our ability to replace declining sales from end-of-life programs with new business wins; |
| |
• | timing of orders from customers and the accuracy of their forecasts; |
| |
• | inventory levels of customers, which if high relative to their normal sales volume, could cause them to reduce their orders to us; |
| |
• | timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor; |
| |
• | increased labor costs in the regions in which we operate; |
| |
• | mix of products ordered by and shipped to major customers, as high volume and low complexity manufacturing services typically have lower gross margins than more complex and lower volume services; |
| |
• | degree to which we are able to utilize our available manufacturing capacity; |
| |
• | our ability to maintain desired plant operating efficiencies, including achieving acceptable yields, effectively planning production and managing our inventory and fixed assets to avoid high carrying costs and excess working capital; |
| |
• | customer insolvencies resulting in bad debt or inventory exposures that are in excess of our reserves; |
| |
• | our ability to efficiently move manufacturing activities to lower cost regions without adversely affecting customer relationships while controlling costs related to the closure of facilities and employee severance; |
| |
• | pricing and other competitive pressures; |
| |
• | fluctuations in the values of our assets, including real property and assets held for sale, which could result in charges to income; |
| |
• | volatility of foreign currency exchange rates; |
| |
• | changes in our tax provision due to changes in our estimates of pre-tax income in the jurisdictions in which we operate, including our ability to utilize our deferred tax assets; and |
| |
• | political and economic developments in countries in which we have operations which could restrict our operations or increase our costs. |
If any of these uncertainties should be realized, our financial results could be adversely impacted.
A portion of our operating expenses is relatively fixed in nature and planned expenditures are based in part on anticipated orders, which are difficult to predict. If we do not receive anticipated orders as expected, our profitability will decline. Moreover, our ability to reduce our costs as a result of current or future restructuring efforts may be limited because consolidation of operations can be a costly and lengthy process to complete.
Our business may experience seasonality, which could result in material changes in our operating results from quarter to quarter.
Seasonality in our business has historically been driven by customer and product mix, particularly the end markets which our customers serve. Recently, we have observed that our revenue levels have typically been highest in our fourth fiscal quarter and lowest during our second fiscal quarter. However, there can be no assurance that this trend will continue and the extent to which our business remains depends upon our future customer base and the end markets that they serve, which we are unable to predict.
We may be unable to generate sufficient liquidity to reduce our debt levels or maintain or expand our operations, which may cause our stock price to fall and reduce the business our customers and vendors do with us; we could experience losses if one or more financial institutions holding our funds were to fail.
Our liquidity is dependent on profitability and business volume which affects working capital, including inventory requirements, the extension of trade credit by our suppliers, the degree of alignment of payment terms from our suppliers to payment terms granted to our customers, investments in facilities and equipment, acquisitions, repayments and redemptions of our outstanding indebtedness and repurchases of our common stock. In order to improve our liquidity, during the second quarter of 2012, we renewed and increased our asset-backed revolving credit facility increasing the facility to $300 million, under which we could borrow $176.7 million, net of letters of credit and outstanding borrowings, as of March 30, 2013 and in the fourth quarter of 2012, we borrowed $40 million secured by our corporate headquarters. We also have $184 million in short-term financing facilities of which $124.1 million remained available to be borrowed as of March 30, 2013. Our asset-backed revolving credit facility expires in March 2017 and our foreign short-term facilities expire at various dates through the second quarter of 2015.
In the event we need additional capital, whether for working capital, debt repayment, stock repurchases or otherwise, there can be no assurance that such additional debt or equity capital will be available on acceptable terms or at all. In addition to our existing covenant requirements, future debt financing may require us to comply with financial ratios and covenants. New financing could require us to issue additional equity securities, which could cause dilution to existing stockholders. If additional or continued financing, including the continued extension of trade credit by our suppliers, is not available when required, our liquidity would be reduced. The risks of reduced liquidity include an inability to maintain or increase our rates of production, to make necessary capital expenditures in order to maintain and expand our manufacturing capacity as needed, and to repay, reduce or refinance our debt. Any of these issues could cause our stock price to fall and reduce our customers' and vendors' willingness to do business with us.
A principal source of our liquidity is our cash and cash equivalents, which are held with various financial institutions. Although we distribute such funds among a number of financial institutions that we believe to be of high quality, there can be no assurance that one or more of such institutions will not become insolvent in the future, in which case all or a portion of our uninsured funds on deposit with such institutions could be lost.
Our credit arrangements contain covenants which may adversely impact our business and the failure to comply with such covenants could cause our outstanding debt to become immediately payable.
Other than our $40 million loan, under which certain of our real property is pledged as collateral, our debt agreements do not contain financial covenants currently applicable to us, but do include a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets, paying dividends and redeeming or repurchasing capital stock and debt, subject to certain exceptions. Our $40 million loan requires us to maintain a minimum fixed charge coverage ratio during its term. Collectively, these covenants could constrain our ability to grow our business through acquisition or engage in other transactions, including refinancing our existing debt. In addition, such agreements include covenants requiring, among other things, that we file quarterly and annual financial statements with the SEC, comply with all laws, pay all taxes and maintain casualty insurance. If we are not able to comply with all of these covenants, for any reason, some or all of our outstanding debt as well as all amounts payable under our interest rate swaps on such debt, if any, could become immediately due and payable and the incurrence of additional debt under our asset-backed credit facility would not be allowed, any of which could have a material adverse effect on our liquidity and ability to conduct our business.
Redemptions of debt and repurchases of common stock reduce our working capital and liquidity; debt refinancing can entail higher interest expense, which would lower our net income; interest payments on variable rate debt can increase, which would lower our net income.
During 2011 and 2012, we redeemed net $80 million and net $360 million of our long-term debt, respectively. In addition, during the second quarter of fiscal 2013, we redeemed our remaining 2014 Notes outstanding using existing cash and borrowings under our credit facility and announced a $100 million stock repurchase program. Although redemptions of debt and repurchases of stock improve our operating results by reducing our interest expense and increase our earnings per share, these actions also reduce our liquidity. If we should repurchase or redeem additional debt or equity, our working capital and liquidity would be further reduced. In addition, should we undertake to refinance any of our outstanding long-term debt, there can be no assurance that the terms of such refinancing, particularly the interest rate, would be favorable to us. Should we be forced to replace lower interest rate debt with higher interest rate debt, our net income would be reduced. An aggregate of $540 million of our long-term debt and all of our short-term
borrowings bear interest at a variable rate based upon LIBOR, either under the terms of such debt or as a result of interest rate swaps. Interest rates, including LIBOR, can change due to a variety of factors, including governmental debt levels, ratings downgrade of U.S. or other sovereign debt, the pace of economic growth and central bank actions. In addition, volatility of LIBOR could increase following recent governmental investigations concerning the manner in which LIBOR rates are determined. Should LIBOR increase substantially in the future for any reason, interest payments on our variable interest rate debt would also increase. At the same time, the interest rate swap counterparty for our 2019 Notes has the unilateral right, beginning in May 2014, to terminate such swap and pay us a market termination fee, in which case we would pay a 7% interest rate on such notes, which could be higher than the variable interest rate we currently pay through the swap. Any increase in the interest rates paid by us on our debt would lower our net income.
We are subject to intense competition in the EMS industry which could cause us to lose sales and therefore hurt our financial performance.
The electronics manufacturing services (EMS) industry is highly competitive and the industry has been experiencing a surplus of manufacturing capacity, particularly in light of the slowdowns in the United States and certain international economies. Our competitors include major global EMS providers such as Benchmark Electronics, Inc., Celestica, Inc., Flextronics International Ltd., Jabil Circuit, Inc. and Plexus Corp., as well as other EMS companies that have a regional, product, service or industry specific focus. Some of those companies have greater manufacturing and financial resources than we do. We also face competition from current and potential OEM customers who may elect to manufacture their own products internally rather than outsourcing to EMS providers.
We may not be able to offer prices as low as some of our competitors because those competitors may have lower operating costs as a result of their geographic location, greater economies of scale or the services they provide or because these competitors are willing to provide EMS services at prices we are unable or unwilling to offer. There can be no assurance that we will not lose business in the future in response to such competitive pricing or other inducements which may be offered by our competitors, which would decrease our sales and net income.
We generally do not obtain long-term volume purchase commitments from customers and, therefore, cancellations, reductions in production quantities, delays in production by our customers and changes in customer requirements could reduce our sales and net income.
We generally do not obtain firm, long-term purchase commitments from our customers and our bookings may generally be canceled prior to the scheduled shipment date. Customers may cancel their orders, reduce production quantities or delay production for a number of reasons, including significant decreases in demand for their products and services. Although the customer is generally liable for finished goods and work-in-process at the time of cancellation, we may be unable or, for other business reasons, choose not to enforce our contractual rights. Cancellations, reductions or delays of orders by customers would:
| |
• | reduce our sales and net income by decreasing the volumes of products that we manufacture for our customers; |
| |
• | delay or eliminate recovery of our expenditures for inventory purchased in preparation for customer orders; and |
| |
• | lower our asset utilization, which would result in lower gross margins and lower net income. |
In addition, customers sometimes require that we transfer the manufacturing of their products from one facility to another to achieve cost reductions and other objectives. These transfers have resulted in increased costs to us due to facility downtime, less than optimal utilization of our manufacturing capacity and delays and complications related to the transition of manufacturing programs to new locations. These transfers also have required us to close or reduce operations at certain facilities, particularly those in high cost locations such as the United States, Canada and Western Europe, and as a result we have incurred, and may incur in the future, significant costs for the closure of facilities, employee severance and related matters. We may be required to relocate additional manufacturing operations in the future and, accordingly, we may incur additional costs that decrease our net income.
As a result of our components ordering policies and customer-requested ship dates, we may incur, and not be able to fully recover from our customers, the purchase price or carrying costs of components, work-in-process and finished goods, which would decrease our margins and net income.
In order to satisfy customer orders, we are frequently required to order components and other parts in advance of customer payment, particularly for long lead-time items. Furthermore, we may be required to keep additional
components, work-in-process and finished goods in inventory in order to meet customer delivery dates. While our supply agreements with our customers generally allocate most of the liability for payment for such items to the customers, we may nonetheless incur additional carrying costs or not ultimately be compensated for these items should the customer default upon its obligations. To the extent we incur any such costs, our gross margins and net income would be reduced.
Commodity price fluctuations may negatively impact our results of operations.
Our components are manufactured using a number of commodities, including petroleum, gold, copper and other metals that are subject to frequent and unpredictable changes in price due to worldwide demand, investor interest and economic conditions. We do not hedge against the risk of these fluctuations, but rather attempt to adjust our product pricing to reflect such changes. Should significant increases in commodities prices occur and should we not be able to increase our product prices enough to offset these increased costs, our gross margins and profitability would decrease, perhaps significantly.
Energy price increases may negatively impact our results of operations.
We, along with our suppliers and customers, rely on various energy sources (including oil) in our manufacturing and transportation activities. There has been significant volatility in the prices of energy during the recent past and such volatility is likely to continue in the future. A sustained increase in energy prices could cause an increase to our raw material, components and transportation costs. We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability.
We rely on a relatively small number of customers for a substantial portion of our sales, and declines in sales to these customers would reduce our net sales and net income.
Sales to our ten largest customers represented approximately half of our net sales during the second quarter of fiscal 2013. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our sales. A significant reduction in sales to any of our large customers or significant pricing and margin pressures exerted by our large customers would adversely affect our operating results. In the past, some of our large customers have significantly reduced or delayed the volume of manufacturing services ordered from us as a result of changes in demand for their product, consolidations or divestitures or for other reasons. In particular, certain of our customers have from time to time entered into manufacturing divestiture transactions with other EMS companies, and such transactions could reduce our revenues with these customers. We cannot assure you that present or future large customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the amount of manufacturing services ordered from us, any of which would reduce our net sales and net income.
We are subject to risks arising from our international operations.
We conduct our international operations primarily in Asia, Latin America, Canada and Europe, and we continue to consider additional opportunities to make foreign acquisitions and construct new foreign facilities. The substantial majority of our net sales are generated through our non-U.S. operations and a significant portion of our manufacturing material is provided by international suppliers. As a result of our international operations, we are affected by economic, political and other conditions in foreign countries, including:
| |
• | the imposition of government controls; |
| |
• | compliance with United States and foreign laws concerning trade and employment practices; |
| |
• | difficulties in obtaining or complying with export license requirements; |
| |
• | labor unrest, including strikes, and difficulties in staffing; |
| |
• | regional military tension or hostilities; |
| |
• | inflexible employee contracts in the event of business downturns; |
| |
• | coordinating communications among and managing international operations; |
| |
• | fluctuations in currency exchange rates; |
| |
• | increases in duty and/or income tax rates; |
| |
• | adverse rulings in regards to tax audits; |
| |
• | excess costs associated with reducing employment or shutting down facilities; |
| |
• | misappropriation of intellectual property; and |
| |
• | constraints on our ability to maintain or increase prices. |
Our operations in certain foreign locations receive favorable income tax treatment in the form of tax holidays or other incentives. In the event that such tax holidays or other incentives are not extended, are repealed, or we no longer qualify for such programs, our taxes may increase, which would reduce our net income.
Additionally, a significant portion of our worldwide cash reserves are generated by, and therefore held in, foreign jurisdictions. Some jurisdictions restrict the amount of cash that can be transferred to the United States or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our United States operations, we may incur significant taxes to repatriate these funds.
We operate in countries that have experienced labor unrest and political instability, including Brazil, China, India, Malaysia and Thailand and we have experienced work stoppages and similar disruptions in certain foreign jurisdictions. To the extent such developments prevent us from adequately staffing our plants and manufacturing and shipping products in those jurisdictions, our margins and net income could be reduced and our reputation as a reliable supplier could be negatively impacted.
Failure to comply with domestic or international employment and related laws could result in the payment of significant damages, which would reduce our net income.
We are subject to a variety of domestic and foreign employment laws, including those related to safety, wages and overtime, discrimination, whistle-blowing, classification of employees and severance payments. Enforcement activity relating to these laws, particularly outside of the United States, can increase as a result of increased media attention due to violations by other companies, changes in law, political and other factors. There can be no assurance that we won't be found to have violated such laws in the future, due to a more aggressive enforcement posture by governmental authorities or for any other reason. Any such violations could lead to the assessment of fines against us by federal, state or foreign regulatory authorities or damages payable to employees, which fines could be substantial and which would reduce our net income.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could increase our taxes and decrease our net income.
We are subject to income, sales, value-added, withholding and other taxes in the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for taxes and, in the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Our effective tax rates and liability for other taxes could increase as a result of changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, our cash management strategies and other factors. Our tax determinations are regularly subject to audit by tax authorities. For example, we are currently undergoing audits of our tax returns for certain recent tax years in a number of jurisdictions, including the United States and Mexico. Developments in these or future audits could adversely affect our tax provisions, including through the disallowance or reduction of deferred tax assets or the assessment of back taxes, interest and penalties. Although we believe that our tax estimates are reasonable and our existing tax reserves are adequate, the final determination of tax audits or tax disputes may be different from what is reflected in our historical tax provisions, which could lead to an increase in our taxes payable and a decrease in our net income.
We have taken substantial restructuring charges in the past and we may need to take material restructuring charges in the future.
We have incurred significant expenses related to restructuring of our operations in the past and may continue to do so in the future. For example, we have moved, and may continue to move, our operations from higher-cost to lower-cost locations to meet customer requirements. We have incurred in the past, and may incur in the future, costs related to workforce reductions, facility closures and subsequent environmental remediation, work stoppages and labor unrest resulting from the closure of facilities. In addition, we have incurred unanticipated costs related to the transfer of operations to lower-cost locations, including costs related to integrating new facilities, managing operations in dispersed locations and realigning our business processes. We also have incurred costs to restructure operations that have been acquired in order to integrate them into our Company. We expect to be required to record additional charges related to
restructuring activities in the future, but cannot predict the timing or amount of such charges. Any such charges would reduce our net income.
Our results may be adversely affected by rising labor costs.
There is substantial uncertainty about future labor costs, in particular within the lower cost regions in which we operate. Demographic changes and economic development in these regions put upward pressure on wages in these regions. If we are required to make any substantial increase in wages in these regions, our profitability could be reduced.
If we manufacture or design defective products, or if our manufacturing processes do not comply with applicable statutory and regulatory requirements, we could be subject to claims, damages and fines and lose customers.
We manufacture products to our customers' specifications, and in some cases our manufacturing processes and facilities may need to comply with various statutory and regulatory requirements. For example, many of the medical devices that we manufacture, as well as the facilities and manufacturing processes that we use to produce them must comply with standards established by the United States Food and Drug Administration. In addition, our customers' products and the manufacturing processes that we use to produce them often are highly complex. As a result, products that we design or manufacture may at times contain design or manufacturing defects, and our manufacturing processes may be subject to errors or may not be in compliance with applicable statutory and regulatory requirements. Defects in the products we design or manufacture may result in product recalls, warranty claims by customers, including liability for repair costs, delayed shipments to customers or reduced or canceled customer orders. If these defects or deficiencies are significant, our results of operations and business reputation could be harmed. The failure of the products that we design or manufacture or of our manufacturing processes and facilities to comply with applicable statutory and regulatory requirements may subject us to legal fines or penalties and, in some cases, require us to shut down or incur considerable expense to correct a manufacturing program or facility. In addition, these defects may result in product liability claims against us. The magnitude of such claims may increase as we expand our medical, automotive, and aerospace and defense manufacturing services because defects could result in death or significant injury to end users of these products. Even if our customers are contractually responsible for defects in the design of a product, we could nonetheless be named in a product liability suit over such defects and could be required to expend significant resources to defend ourselves.
We design products on a contract basis or jointly with our customers. The design services that we provide can expose us to different or greater potential liabilities than those we face when providing our regular manufacturing services. For example, we have increased exposure to potential product liability claims resulting from injuries caused by defects in products we design, as well as potential claims that products we design infringe third-party intellectual property rights. Such claims could subject us to significant liability for damages and, regardless of their merits, could be time-consuming and expensive to resolve. Any such costs and damages could be significant and would reduce our net income.
Our business could be adversely affected by any delays, or increased costs, resulting from the use of common carriers to transport our materials and products.
We rely on a variety of common carriers to transport our raw materials and components from our suppliers to us, and to transport our products to our customers. The use of common carriers is subject to a number of risks, including increased costs due to rising energy prices and labor, vehicle and insurance costs, criminal activity, such as hijackings, resulting in losses of shipments, delivery delays resulting from labor disturbances and strikes and other factors beyond our control. While we attempt to mitigate our liability for any losses resulting from these risks through contracts with our customers, suppliers and insurance carriers, any costs or losses that cannot be mitigated could reduce our profitability, require us to manufacture replacement product or damage our relationships with our customers.
Our key personnel are critical to the continued growth of our business and we cannot assure you that they will remain with us.
Our success depends upon the continued service of our key personnel, particularly our highly skilled operations managers and engineers involved in the manufacture of existing products and development of new products and processes. Such employees may be heavily recruited by other companies, including our competitors. Generally, these employees are not bound by employment agreements and we rely on competitive pay packages in order to help attract and retain such personnel. Should our key employees choose to terminate their employment with us in order to accept higher pay packages or otherwise, our operations and growth prospects could be negatively impacted.
If we are unable to maintain our technological and manufacturing process expertise, our business could be adversely affected.
Improvements to and refinements of our manufacturing processes are necessary to manufacture next generation products for our customers in a cost-efficient manner. As a result, we are continually evaluating the cost-effectiveness and feasibility of new manufacturing processes. In some cases, we will be required to make capital expenditures and incur engineering expense in order to qualify and validate any such new process. Such expenses would reduce our net income. In addition, any delay in the deployment of such new process, or problems commencing volume production using a new process could also reduce our margins and net income and harm our reputation with our customers.
Our international sales are subject to laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
We are required to comply with all applicable domestic and foreign export control laws, including the International Traffic in Arms Regulations and the Export Administration Regulations (“EAR”). Some items manufactured by us are controlled for export by the United States Department of Commerce's Bureau of Industry and Security under the EAR. In addition, we are subject to the Foreign Corrupt Practices Act and international counterparts relating to bribery of foreign governments and officials. Violation of any of these laws or regulations could result in significant sanctions, including large monetary penalties and suspension or debarment from participation in future business opportunities, which could reduce our future revenue and net income and damage our reputation as a reputable supplier.
We are subject to a number of U.S. governmental procurement rules and regulations, the failure to comply with which could result in damages or reduction of future revenue.
We are subject to a number of laws and regulations relating to the award, administration and performance of U.S. government contracts and subcontracts. Such laws and regulations govern, among other things, price negotiations, cost accounting standards and other aspects of performance under government contracts. These rules are complex and our performance under them is subject to audit by the Defense Contract Audit Agency and other government regulators. If an audit or investigation reveals a failure to comply with regulations or other improper activities, we may be subject to civil or criminal penalties and administrative sanctions by either the government or the prime customer, including termination of the contract, payment of fines and suspension or debarment from doing further business with the U.S. government. Any of these actions would increase our expenses, reduce our revenue and damage our reputation as a reliable government supplier.
We can experience losses due to foreign exchange rate fluctuations, which would reduce our net income.
Because we manufacture and sell a substantial portion of our products abroad, our operating costs are subject to fluctuations in foreign currency exchange rates. If the U.S. dollar weakens against the foreign currencies in which we denominate certain of our trade accounts payable, fixed purchase obligations and other expenses, the U.S. dollar equivalent of such expenses would increase. We use financial instruments, primarily short-term foreign currency forward contracts, to hedge certain forecasted foreign currency commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. Our foreign currency hedging activities depend largely upon the accuracy of our forecasts of future sales, expenses, capital expenditures and monetary assets and liabilities. As such, our foreign currency forward contracts may exceed or not cover our full exposure to exchange rate fluctuations. If these hedging activities are not successful, we may experience significant unexpected expenses from fluctuations in exchange rates, which could be significant and which would decrease our net income.
Any failure to comply with applicable environmental laws could adversely affect our business by causing us to pay significant amounts for cleanup of hazardous materials or for damages or fines.
We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances and wastes in the ordinary course of our manufacturing operations. If we violate environmental laws or if we occupy or occupied in the past a site at which a predecessor company caused contamination, we may be held liable for damages and the costs of remedial actions. We cannot assure you that we will not violate environmental laws and regulations in the future as a result of human error, equipment failure or other causes. Although we estimate and regularly reassess our potential liability with respect to violations or alleged violations and accrue for such liability, we cannot assure you that our accruals will be sufficient. Any increase in existing reserves or establishment of new reserves for environmental liability would reduce our net
income. Our failure to comply with applicable environmental laws and regulations could also limit our ability to expand facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with these laws and regulations.
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 remediation obligations and other liabilities.
Our plants generally operate under environmental permits issued by governmental authorities. For the most part, 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. These liabilities include ongoing investigation and remediation activities at a number of current and former sites, including ones located in Irvine, California; Owego, New York; Derry, New Hampshire; Fort Lauderdale, Florida; and Brockville, Ontario. There are some sites, including our acquired facility in Gunzenhausen, Germany, that are known to have groundwater contamination caused by a third-party, and that third-party has provided indemnity to us for the liability. However, third party indemnities may not be effective to reduce our liability for environmental contamination. For example, Nortel Networks, which had provided us an indemnity with respect to environmental investigation activities being undertaken at our former Brockville site, is party to bankruptcy proceedings that may cause it not to fully honor its indemnification obligations to us. As a result, we could be required to absorb the full expense of any remediation of that site.
The time required to perform environmental remediations can be lengthy and there can be no assurance that the scope, and therefore cost, of these activities will not increase as a result of the discovery of new contamination or contamination on adjoining landowner's properties or the adoption of more stringent regulatory standards covering sites at which we are currently performing remediation activities.
Although liabilities for historical treatment and 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, nor can we provide assurance that we do not have environmental exposures of which we are unaware and which could adversely affect our future operating results.
Over the years, environmental laws have become, and in the future may continue to become, more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations. We operate in several environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes in or restrictions on discharge limits, emissions levels, permitting requirements and material storage or handling could require a higher than anticipated level of remediation activities, operating expenses and capital investment or, depending on the severity of the impact of the foregoing factors, costly plant relocation.
In addition, the electronics industry became subject to the European Union's RoHS (Restriction of Hazardous Substances) and WEEE (Waste from Electrical and Electronic Equipment) directives which took effect beginning in 2005. Parallel initiatives have been adopted in other jurisdictions, including several states in the United States and the People's 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. Although we believe we have implemented procedures to make our manufacturing process RoHS compliant, a successful assertion by a governmental entity of non-compliance could result in significant costs and/or penalties. 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, which could increase our costs.
Consolidation in the electronics industry may adversely affect our business by increasing customer buying power and increasing prices we pay for components.
Consolidation in the electronics industry among our customers, our suppliers and/or our competitors may increase as companies combine to achieve further economies of scale and other synergies. Consolidation in the electronics industry could result in an increasing number of very large electronics companies offering products in multiple sectors of
the electronics industry. The significant purchasing and market power of these large companies could decrease the prices paid to us by these customers. In addition, if one of our customers is acquired by another company that does not rely on us to provide EMS services either because it has its own production facilities or relies on another provider of similar services, we may lose that customer's business. Similarly, consolidation among our suppliers could result in a sole or limited source for certain components used in our customers' products. Any such consolidation could cause us to be required to pay increased prices for such components, which would reduce our gross margin and profitability.
Cybersecurity breaches and other disruptions of our IT network and systems could interrupt our operations.
We rely on information technology networks and systems, some of which are owned and operated by third parties, to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including worldwide financial reporting, inventory management, procurement, invoicing and email communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and similar events. Despite the implementation of network security measures, our systems and those of third parties on which we rely may also be vulnerable to computer viruses, break-ins, malware and similar disruptions. Malware, if surreptitiously installed on our systems and not timely detected and removed, could collect and disclose sensitive information relating to our customers, employees or others, exposing us to legal liability and causing us to suffer reputational damage. If we or our vendors are unable to prevent such outages and breaches, our operations could be disrupted.
Employee theft or fraud could result in loss.
Certain of our employees have access to, or signature authority with respect to, bank accounts or other company assets, which exposes us to the risk of fraud or theft. In addition, certain employees have access to key IT infrastructure and to customer and other information that is commercially valuable. Should any employee, for any reason, compromise our IT systems, or misappropriate customer or other information, we could incur losses, including losses relating to claims by our customers against us, the willingness of customers to do business with us may be damaged and, in the case of our defense business, we could be debarred from future participation in government programs. Any losses due to employee fraud or malfeasance may not be fully covered by insurance.
We may not be successful in implementing and integrating strategic transactions or in divesting assets or businesses, which could harm our operating results.
From time to time, we may undertake strategic transactions that give us the opportunity to access new customers and new end-customer markets, to obtain new manufacturing and service capabilities and technologies, to enter new geographic manufacturing locations, to lower our manufacturing costs and improve our profits, and to further develop existing customer relationships. Strategic transactions involve a number of risks, uncertainties and costs, including the following:
| |
• | integrating acquired operations and businesses including in regions or countries in which we have not previously operated; |
| |
• | incurring severance and other restructuring costs, which would reduce our net income; |
| |
• | obtaining regulatory approvals or other conditions to closing, which could delay the closing and increase the costs of strategic transactions; |
| |
• | diverting management attention from day-to-day duties in order to implement and integrate strategic transactions; |