10-Q 1 e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED JULY 1, 2000 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ . COMMISSION FILE NUMBER: 0-21272 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. [X] Yes [ ] No As of August 7, 2000, there were 151,391,529 shares outstanding of the issuer's common stock, $0.01 par value. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 SANMINA CORPORATION INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements Condensed Consolidated Statements of Operations.... 1 Condensed Consolidated Balance Sheets.............. 2 Condensed Consolidated Statements of Cash Flows.... 3 Notes to Condensed Consolidated Financial Statements.......................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 17 Item 3. Quantitative and Qualitative Disclosures about Market Risks.............................................. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................... 24 Item 6. Exhibits and Reports on Form 8-K.................... 24 Signature.......................................... 25
i 3 SANMINA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ------------------------ JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 2000 1999 ---------- -------- ---------- ---------- Net sales.................................. $1,000,632 $604,622 $2,639,580 $1,729,693 Cost of sales.............................. 853,266 494,517 2,235,849 1,433,057 ---------- -------- ---------- ---------- Gross profit............................. 147,366 110,105 403,731 296,636 ---------- -------- ---------- ---------- Operating expenses Selling, general and administrative...... 69,131 38,584 154,638 115,338 Amortization of goodwill................. 5,110 3,971 15,241 11,786 Provision for plant closing and relocation costs...................... -- -- -- 16,875 Write down of long-lived assets.......... 8,750 -- 8,750 11,400 Merger and restructuring costs........... 47,201 -- 47,201 5,479 ---------- -------- ---------- ---------- Total operating expenses......... 130,192 42,555 225,830 160,878 ---------- -------- ---------- ---------- Operating income........................... 17,174 67,550 177,901 135,758 Other income (expense), net................ 2,147 (5,483) (4,310) (18,185) ---------- -------- ---------- ---------- Income before provision for income taxes............................... 19,321 62,067 173,591 117,573 Provision for income taxes................. 17,500 22,602 73,416 43,752 ---------- -------- ---------- ---------- Net income................................. $ 1,821 $ 39,465 $ 100,175 $ 73,821 ========== ======== ========== ========== Earnings per share: Basic.................................... $ 0.01 $ 0.29 $ 0.69 $ 0.54 Diluted.................................. $ 0.01 $ 0.27 $ 0.65 $ 0.51 Shares used in computing per share amounts: Basic.................................... 150,818 137,481 145,200 136,432 Diluted.................................. 158,995 144,958 153,202 144,039
See accompanying notes. 1 4 SANMINA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) ASSETS
JULY 1, OCTOBER 2, 2000 1999 ---------- ---------- Current assets: Cash and cash equivalents................................. $ 397,273 $ 148,754 Short-term investments.................................... 342,954 318,457 Accounts receivable, net.................................. 542,481 335,288 Inventories............................................... 480,496 299,261 Deferred income taxes..................................... 40,723 34,414 Prepaid expenses and other................................ 31,018 19,959 ---------- ---------- Total current assets.............................. 1,834,945 1,156,133 Property, plant and equipment, net.......................... 604,525 549,434 Long-term investments....................................... 53,108 53,056 Goodwill and intangibles.................................... 279,499 229,070 Deposits and other.......................................... 14,120 19,748 ---------- ---------- $2,786,197 $2,007,441 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 409,430 $ 280,914 Accrued liabilities and other............................. 163,585 122,781 Income taxes payable...................................... 12,061 10,088 ---------- ---------- Total current liabilities......................... 585,076 413,783 ---------- ---------- Long-term liabilities: Convertible subordinated notes............................ 354,965 355,259 Long-term debt and other.................................. 306,030 374,305 ---------- ---------- Total long-term liabilities....................... 660,995 729,564 ---------- ---------- Stockholders' equity: Common stock.............................................. 1,511 800 Additional paid-in capital................................ 1,066,598 480,651 Accumulated other comprehensive loss...................... (6,398) (1,864) Retained earnings......................................... 478,415 384,507 ---------- ---------- Total stockholders' equity........................ 1,540,126 864,094 ---------- ---------- $2,786,197 $2,007,441 ========== ==========
See accompanying notes. 2 5 SANMINA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED ---------------------- JULY 1, JULY 3, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 100,175 $ 73,821 Adjustments to reconcile net income to cash provided by operating activities: Adjustment to conform year end of pooled entities...... (6,267) -- Depreciation, amortization and other................... 127,243 96,656 Relocation, plant closing, merger costs and other charges............................................... 47,201 23,686 Write down of long-lived assets........................ 8,750 11,400 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable.................................. (214,394) (56,072) Inventories.......................................... (145,083) (34,782) Prepaid expenses, deposits and other................. (29,659) (1,365) Accounts payable and accrued liabilities............. 117,877 25,128 Income tax accounts.................................. 1,358 16,161 --------- --------- Cash provided by operating activities............. 7,201 154,633 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments....................... (289,812) (263,164) Proceeds from maturity of short-term investments.......... 265,315 121,645 Purchases of long-term investments........................ -- (52,850) Purchases of property and equipment, net of acquisitions........................................... (129,992) (88,421) Cash paid for businesses acquired, net of cash acquired... (109,848) (19,369) --------- --------- Cash used for investing activities................ (264,337) (302,159) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (payments) of long-term liabilities.............. (75,826) 284,783 Proceeds from sale of common stock, net................... 581,481 26,971 --------- --------- Cash provided by financing activities............. 505,655 311,754 --------- --------- Increase in cash and cash equivalents....................... 248,519 164,228 Cash and cash equivalents at beginning of period............ 148,754 96,425 --------- --------- Cash and cash equivalents at end of period.................. $ 397,273 $ 260,653 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest.................................................. $ 15,158 $ 29,361 Income taxes.............................................. $ 73,022 $ 34,065
See accompanying notes. 3 6 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" or "Sanmina") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments that are, in the opinion of management, necessary for a fair presentation. The results of operations for the three months and/or nine months ended July 1, 2000 are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended October 2, 1999, included in Sanmina's annual report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Sanmina's fiscal year ends on the Saturday nearest September 30. All general references to years relate to fiscal years unless otherwise noted. NOTE 2 -- ACQUISITIONS On June 1, 2000, Sanmina acquired Essex AB ("Essex"), a major electronics manufacturing services (EMS) supplier in Scandinavia. The transaction was structured as a stock-for-stock exchange and was accounted for as a pooling of interests. Under the terms of the agreement, each share of Essex Common Stock was converted into approximately 10.20 shares of Sanmina Common Stock. Approximately 2.0 million shares of common stock were issued to acquire Essex. Essex has four manufacturing facilities in Sweden and Finland. Capabilities include engineering design, printed circuit board assembly, system integration and test, as well as distribution and repair. On June 23, 2000, Sanmina completed its acquisition of Hadco Corporation ("Hadco"), a major manufacturer of advanced electronic interconnect products. As a result of the transaction, which was structured as a merger, each outstanding share of Hadco Common Stock was converted into 1.40 shares of Sanmina Common Stock and Hadco became a wholly-owned subsidiary of Sanmina. Approximately 19.6 million shares of common stock were issued to acquire Hadco. The transaction was accounted for as a pooling of interests. Hadco's key customers include leading electronic manufacturers in the communications, industrial automation, and high-end computing industries. Through the acquisition of Hadco, Sanmina received added circuit fabrication capacity enabling Sanmina to meet customer demands for higher layer count, higher density, and advanced printed circuit boards. As mentioned above, the mergers were accounted for as poolings of interests and the condensed consolidated financial statements have been restated to reflect the combined operations of all entities for the periods presented. The year-ends of the merged companies have not been conformed for periods prior to fiscal 2000. For the periods after fiscal 1999 the quarters and year-ends have adopted Sanmina's year-end of a 52 or 53 week year ending on the Saturday nearest September 30. Prior to being acquired by Sanmina, Essex operated under a calendar year end, and, accordingly, Essex' statements of operations, shareholders' equity and cash flows for the three and nine month periods ended September 30, 1999 have been combined with the corresponding Sanmina consolidated statements for the three and nine month periods ended July 3, 1999. During fiscal 2000, Essex' year-end was changed from 4 7 SANMINA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) December 31 to a 52 or 53 week year ending on the Saturday nearest September 30 to conform to Sanmina's fiscal year end. Accordingly, Essex' operations for the three months ended December 31, 1999, which included net sales of $54 million and net income of $1.6 million have been included in the consolidated results of Sanmina for fiscal 2000 and was reported as an adjustment to retained earnings in the third quarter of fiscal 2000. Prior to the merger with Sanmina, Hadco's fiscal year ended on the last Saturday in October and, accordingly, Hadco's statements of operations, shareholders' equity and cash flows for the three and nine month periods ended July 31, 1999 have been combined with the corresponding Sanmina consolidated statements for the three and nine month periods ended July 3, 1999. For fiscal 2000, Hadco adopted Sanmina's fiscal year end of the Saturday nearest September 30. As a result, operations for the one month ended October 31, 1999, which included net sales of $109 million and net income of $4.7 million have been included in the consolidated results of fiscal 2000 and was reported as an adjustment to retained earnings in the third quarter of fiscal 2000. As a result of the pooling of interests accounting for Essex and Hadco, Sanmina has restated its historical results of operations to include the results of operations of Essex and Hadco. The financial information presented gives effect to such restatement. A reconciliation of the financial statements for the nine months ended July 3, 1999, to previously reported information is as follows (in thousands): REVENUE: Sanmina................................................ $ 866,169 Essex.................................................. 122,270 Hadco.................................................. 743,926 Eliminations........................................... (2,672) ---------- Combined....................................... $1,729,693 ========== NET INCOME: Sanmina................................................ $ 59,568 Essex.................................................. 1,031 Hadco.................................................. 13,222 ---------- Combined....................................... $ 73,821 ==========
The merger and restructuring costs of $47.2 million are comprised of $27.3 million for executive severance, expected work force attrition and related costs (accrual made in accordance with the criteria in EITF 94-3 "Liability Recognition for Costs to Exit an Activity" (including certain costs incurred in a restructuring)), $15.9 million for investment banking and related fees and expenses, $2.9 million for accounting, legal and related fees and expenses, and $1.1 million of other related restructuring costs. On June 27, 2000, Sanmina acquired InterWorks for a cash purchase price of approximately $45 million. Interworks is a designer and manufacturer of standard and custom modular subsystems, focused on meeting the growing needs of the networking equipment and communications sectors. This transaction was accounted for as a purchase. InterWorks designs, manufactures, tests and distributes a complete line of Digital Signal Processor modular solutions and advanced memory products to leading electronics original equipment manufacturers serving the networking and telecommunications markets. Pro forma information reflecting the acquisition of Interworks has not been presented, as the operations of Interworks are not material to Sanmina's restated consolidated financial statements. 5 8 SANMINA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 3 -- PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Sanmina and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. NOTE 4 -- COMPREHENSIVE INCOME Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components. SFAS No. 130 requires companies to report a "comprehensive income" that includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders' equity. Comprehensive income for Sanmina consists of net income plus the effect of unrealized holding gains or losses on investments classified as available-for-sale and foreign currency translation adjustments. For the nine months ended July 1, 2000, the net unrealized holding loss on investments and foreign currency translation adjustments were approximately $0.5 million and $2.2 million, respectively. For the nine months ended July 3, 1999, the net unrealized holding loss on investments and foreign currency translation adjustments were approximately $0.3 million and $1.4 million, respectively. Comprehensive income for the nine months ended July 1, 2000 and July 3, 1999 was $97.5 million and $72.2 million respectively. NOTE 5 -- LONG-LIVED ASSETS Sanmina continually evaluates whether long-lived assets have been impaired in value. This process includes evaluating whether projected results of operations of acquired businesses would support the carrying value of related assets including the future amortization of the remaining unamortized balance of goodwill. In the first quarter of fiscal 1999, such evaluation with respect to the acquisition of Pragmatech, Incorporated ("Pragmatech"), indicated the fair value of assets related to Pragmatech were less than the carrying value of the Pragmatech assets. Accordingly, in the first quarter of fiscal 1999, Sanmina recorded an adjustment to write down the remaining $11.4 million of unamortized goodwill arising from the acquisition. The fair value of Pragmatech at the acquisition date was based on the estimated future cash flows to be generated from the assets based on reasonable and supportable assumptions. Financial projections prepared at the time of the acquisition of Pragmatech reflected Sanmina's belief that Sanmina would continue to provide electronics manufacturing services to existing Pragmatech customers and would grow the Pragmatech business at Pragmatech's existing facilities. However, the existing Pragmatech customer relationships could not be restructured to conform to Sanmina's pricing and revenue models, and as a result, the relationships with the former Pragmatech customers have terminated. In addition, Sanmina closed several of the former Pragmatech facilities in fiscal 1998. As a result of these operational factors, Sanmina's analysis of projected revenues, results of operations, and cash flows attributable to the few remaining Pragmatech customers did not support the carrying value of Pragmatech assets, including the unamortized goodwill. During the third quarter of fiscal 2000, such evaluation, with respect to the merger with Hadco, indicated that the fair value of certain intangible assets related to Hadco were less than their carrying value. Accordingly, in the third quarter of fiscal 2000, Sanmina recorded an adjustment to write down $8.75 million of intangible assets. The fair value of the intangible assets at the time of original acquisition by Hadco was based on expected future cash flows to be generated from the assets based on reasonable and supportable assumptions. The existing customer relationships, and in-place workforce, valued at the time of the original acquisition by Hadco, however, could not be supported at their current carrying values at the time of the merger. As a result, based on future expected cash flows from the related customer base, and from experienced and expected work force attrition, Sanmina recorded adjustments to the carrying value of these intangible assets in the amounts of $7.5 million and $1.25 million, respectively. 6 9 SANMINA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 6 -- INVENTORIES Inventories, stated at the lower of cost or market (first-in, first-out method), consist of:
JULY 1, OCTOBER 2, 2000 1999 -------- ---------- (IN THOUSANDS) Raw materials.......................................... $251,634 $182,711 Work-in-process........................................ 153,027 87,811 Finished goods......................................... 75,835 28,739 -------- -------- $480,496 $299,261 ======== ========
NOTE 7 -- EARNINGS PER SHARE ("EPS") Basic EPS was computed by dividing net income by the weighted average number of shares of common stock outstanding during the third quarter and first nine months of fiscal 2000 and 1999. Diluted EPS for the third quarter and first nine months of fiscal 2000 and 1999 includes dilutive common stock equivalents using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock, if dilutive. Reconciliations of the net income and weighted average number of shares used for the diluted earnings per share computations for the third quarter and first nine months of fiscal 2000 and 1999 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income............................................ $ 1,821 $ 39,465 $100,175 $ 73,821 Add back after-tax interest expense for convertible subordinated debt................................... -- -- 99 -- -------- -------- -------- -------- Income for calculating earnings per share............. $ 1,821 $ 39,465 $100,274 $ 73,821 ======== ======== ======== ======== Weighted average number of shares outstanding during the period.......................................... 150,818 137,481 145,200 136,432 Applicable number of shares for stock options outstanding for the period.......................... 8,177 7,477 7,833 7,607 Weighted average number of shares if convertible subordinated debt were converted.................... -- -- 169 -- -------- -------- -------- -------- Weighted average number of shares..................... 158,995 144,958 153,202 144,039 ======== ======== ======== ======== Diluted earnings per share............................ $ 0.01 $ 0.27 $ 0.65 $ 0.51 ======== ======== ======== ========
NOTE 8 -- EQUITY OFFERING On February 8, 2000, Sanmina completed a public offering of 9,550,000 shares of Common Stock at $59.00 per share. These shares were weighted in the second quarter of fiscal year 2000 based upon the number of days outstanding, and fully weighted for the third quarter. The net proceeds will be used for working capital and other general corporate purposes. 7 10 SANMINA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 9 -- LONG-TERM DEBT AND OTHER Long-term debt and other consists of the following (in thousands):
JULY 1, OCTOBER 30, 2000 1999 -------- ----------- Variable rate mortgages..................................... $ 592 $ 640 Revolving credit facility................................... -- 75,000 9 1/2% Senior subordinated notes due 2008................... 199,467 199,422 Obligations under capital leases with interest rates ranging from 7% to 7 3/4%......................................... 4,393 5,762 -------- -------- 204,452 280,824 Less -- Current portion..................................... (2,458) (2,515) -------- -------- Long-term debt.............................................. 201,994 278,309 Other liabilities........................................... 104,036 95,996 -------- -------- Total long-term debt and other.................... $306,030 $374,305 ======== ========
In July 2000, Sanmina's Hadco subsidiary initiated an offer to purchase an aggregate of $200 million of 9 1/2% senior subordinated notes due 2008 issued by Hadco in May 1998. This offer to purchase was required by the terms of the indenture under which the notes were issued as a result of the change in control of Hadco which occurred when Hadco was acquired by Sanmina. The purchase in the offer is 101% of the principal amount of the notes. Holders have until August 23, 2000 to elect to have their notes redeemed. Sanmina will fund the redemption of any notes that holders elect to have redeemed. Any notes that are not redeemed will remain outstanding, although Sanmina may in the future elect to purchase notes through open market or negotiated transactions, additional tender or exchange offers or otherwise. NOTE 10 -- COMMITMENTS In November 1998, Sanmina entered into an operating lease agreement for a new corporate headquarters and new facilities for its principal Northern California assembly facilities. This campus facility, which comprises approximately 330,000 square feet, is located in San Jose, California. A condition of this operating lease is that Sanmina pledges $52.9 million to the administrative agent until the end of the lease's initial term. Sanmina has classified this amount as a long-term investment in the accompanying consolidated balance sheets. NOTE 11 -- SUBSEQUENT EVENTS On July 10, 2000, Sanmina acquired a PCB assembly and system assembly facility located in Shenzhen, Guang Dong province in China. The acquisition, which will be accounted for as a purchase, also includes administrative offices in Hong Kong and a branch procurement office in Taiwan. The purchase price was approximately $65 million in cash. The facilities in China include a manufacturing facility with administrative and dormitory buildings. The business focuses on PCB assembly and targets the telecommunication, networking, computer and medical electronics markets. Also on July 10, 2000, Sanmina announced that it has signed a definitive agreement to acquire certain Electronics Computer-Aided Design (ECAD), Electronics Systems Packaging Design (ESP) and Product Integrity (PI) operations from Nortel Networks. The agreement calls for the acquisition of test facilities and related equipment and would involve the transfer of employees in several expert physical design teams. The transaction is expected to close during the fourth quarter of fiscal 2000 and will be accounted for as a purchase. The purchase price for this acquisition was approximately $6.5 million in cash. 8 11 SANMINA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 12 -- BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK Sanmina adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during fiscal 1999. SFAS No. 131 established standards for reporting information about operating segments in financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about product and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers, or decision making group, in deciding how to allocate resources and in assessing performance. Sanmina's chief operating decision-maker is the Chief Operating Officer. Based on the evaluation of financial information, including the financial information related to Hadco and Essex, by the Chief Operating Officer, Sanmina operates in one business segment -- the manufacture, testing and servicing of a full spectrum of complex printed circuit boards, custom back plane interconnect devices, and electronic assembly services. Revenue is principally derived from customers in the United States. Although Sanmina seeks to diversify its customer base, a small number of customers are responsible for a significant portion of Sanmina's net sales. Sanmina's most significant credit risk is the ultimate realization of its accounts receivable. This risk is mitigated by (i) sales to well-established companies, (ii) ongoing credit evaluation of its customers, and (iii) frequent contact with its customers, especially its most significant customers, thus enabling Sanmina to monitor current changes in business operations and to respond accordingly. NOTE 13 -- RECENT ACCOUNTING PRONOUNCEMENT In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements and is effective for fiscal years beginning after December 31, 2000. Sanmina does not believe that SAB 101 will have a material effect on the financial statements. In March 2000, the FASB issued Financial Standards Board Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation -- an Interpretation of APB Opinion No. 25" ("FIN No. 44"). FIN No. 44 addresses the application of APB No. 25 to clarify, among other issues, (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent FIN No. 44 covers events occurring during the period after applying the interpretation, the events will be recognized on a prospective basis from July 1, 2000. Sanmina is currently evaluating FIN No. 44 and does not expect that it will have a material effect on its financial position or results of operations. NOTE 14 -- SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS Basis of presentation. On May 18, 1998, Sanmina's recently acquired entity, Hadco, sold $200 million aggregate principal amount of 9 1/2% Senior Subordinated Notes due in 2008 (the "Notes"). The Notes are fully and unconditionally guaranteed on a senior subordinated basis, jointly and severally, by certain of Hadco's (now Sanmina's) wholly-owned domestic subsidiaries (the "Guarantors"). The Guarantors are Hadco Santa Clara, Inc., Hadco Phoenix, Inc., CCIR of Texas Corp. and CCIR of California Corp. The consolidating condensed financial statements of the Guarantors are presented below and should be read in connection with the Consolidated Condensed Financial Statements of the Company. Separate financial statements of the Guarantors are not presented because (i) the Guarantors are wholly-owned and have fully 9 12 SANMINA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) and unconditionally guaranteed the Notes on a joint and several basis and (ii) the Company's management has determined such separate financial statements are not material to investors and believes the consolidating condensed financial statements presented are more meaningful in understanding the financial position of the Guarantors. There are no significant restrictions on the ability of the Guarantors to make distributions to the Company. 10 13 SANMINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED) ASSETS
AS OF JULY 1, 2000 ----------------------------------------------------------------------- GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL ------------ ------------- ----------- ----------- ------------ (IN THOUSANDS) Current assets: Cash, cash equivalents and short-term investments......... $ (2,124) $ 2,724 $ 739,627 $ -- $ 740,227 Accounts receivable, net.......... 65,934 8,799 467,748 -- 542,481 Inventories....................... 39,269 4,538 436,689 -- 480,496 Deferred income taxes............. -- -- 40,723 -- 40,723 Prepaid expenses and other........ 1,727 110 29,181 -- 31,018 --------- ------- ---------- --------- ---------- Total current assets...... 104,806 16,171 1,713,968 -- 1,834,945 Property, plant, and equipment, net............................ 136,806 48,142 419,577 -- 604,525 Intercompany receivable........... 35,950 3,329 23,994 (63,273) -- Investments in subsidiaries....... 8,986 -- 289,971 (298,889) 68 Goodwill and intangibles.......... 162,432 -- 117,067 -- 279,499 Deposits and other................ 52 -- 67,108 -- 67,160 --------- ------- ---------- --------- ---------- $ 449,032 $67,642 $2,631,685 $(362,162) $2,786,197 ========= ======= ========== ========= ========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities: Accounts payable.................. $ 42,552 $ 8,371 $ 358,507 $ -- $ 409,430 Intercompany payable.............. 17,894 45,379 -- (63,273) -- Accrued payroll and other employee benefits....................... 1,840 423 41,773 -- 44,036 Other accrued expenses............ 51,726 542 77,031 -- 129,299 Current portion of long-term debt........................... 2,168 57 86 -- 2,311 --------- ------- ---------- --------- ---------- Total current liabilities............. 116,180 54,772 477,397 (63,273) 585,076 --------- ------- ---------- --------- ---------- Long-term debt, net of current portion........................ 2,031 (4) (2,027) -- -- --------- ------- ---------- --------- ---------- Deferred tax liability............ 44,676 -- (44,179) -- 497 --------- ------- ---------- --------- ---------- Other long-term liabilities....... -- -- 660,498 -- 660,498 --------- ------- ---------- --------- ---------- Stockholders' investment: Common Stock................... 3 8,303 1,511 (8,306) 1,511 Additional paid in capital..... 400,624 21,482 1,066,468 (421,976) 1,066,598 Unrealized holding gain (loss) on investments and cumulative foreign currency translation adjustments.................. -- -- (6,398) -- (6,398) Deferred compensation.......... -- -- -- -- -- Retained earnings.............. (114,482) (16,911) 478,415 131,393 478,415 --------- ------- ---------- --------- ---------- Less: treasury stock........... -- -- -- -- -- --------- ------- ---------- --------- ---------- Total stockholders' investment.............. 286,145 12,874 1,539,996 (298,889) 1,540,126 --------- ------- ---------- --------- ---------- $ 449,032 $67,642 $2,631,685 $(362,162) $2,786,197 ========= ======= ========== ========= ==========
11 14 SANMINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING CONDENSED BALANCE SHEET (CONTINUED) (UNAUDITED) ASSETS
AS OF OCTOBER 2, 1999 ----------------------------------------------------------------------- GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATED SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTAL ------------ ------------- ----------- ----------- ------------ (IN THOUSANDS) Current assets: Cash, cash equivalents and short-term investments......... $ (2,679) $ 1,378 $ 468,512 $ -- $ 467,211 Accounts receivable, net.......... 49,926 7,566 277,796 -- 335,288 Inventories....................... 28,085 6,590 264,586 -- 299,261 Deferred income taxes............. -- -- 34,414 -- 34,414 Prepaid expenses and other........ 2,221 244 17,494 -- 19,959 --------- -------- ---------- --------- ---------- Total current assets...... 77,553 15,778 1,062,802 -- 1,156,133 Property, plant, and equipment, net............................ 141,510 49,638 358,286 -- 549,434 Intercompany receivable........... 24,783 3,122 46,365 (74,270) -- Investments in subsidiaries....... 12,162 -- 280,444 (292,606) -- Goodwill and intangibles.......... 179,319 -- 49,751 -- 229,070 Deposits and other................ 29 -- 72,775 -- 72,804 --------- -------- ---------- --------- ---------- $ 435,356 $ 68,538 $1,870,423 $(366,876) $2,007,441 ========= ======== ========== ========= ========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities: Accounts payable.................. $ 41,842 $ 5,583 $ 233,489 -- $ 280,914 Intercompany payable.............. 28,089 46,181 -- (74,270) -- Accrued payroll and other employee benefits....................... 1,628 300 (1,928) -- -- Other accrued expenses............ 37,355 97 91,346 -- 128,798 Current portion of long-term debt........................... 2,114 73 1,884 -- 4,071 --------- -------- ---------- --------- ---------- Total current liabilities............. 111,028 52,234 324,791 (74,270) 413,783 --------- -------- ---------- --------- ---------- Long-term debt, net of current portion........................ 3,307 43 299,947 -- 303,297 --------- -------- ---------- --------- ---------- Deferred tax liability............ 44,676 -- (44,676) -- -- --------- -------- ---------- --------- ---------- Other long-term liabilities....... -- -- 426,267 -- 426,267 --------- -------- ---------- --------- ---------- Stockholders' investment: Common stock................... 3 8,303 800 (8,306) 800 Additional paid-in-capital..... 400,624 21,352 480,651 (421,976) 480,651 Unrealized holding gain (loss) on investments and cumulative foreign currency translation adjustments.................. -- -- (1,680) -- (1,680) Deferred compensation.......... -- -- (184) -- (184) Retained earnings.............. (124,282) (13,394) 384,507 137,676 384,507 --------- -------- ---------- --------- ---------- Less: treasury stock........... -- -- -- -- -- --------- -------- ---------- --------- ---------- Total stockholders' investment.............. 276,345 16,261 864,094 (292,606) 864,094 --------- -------- ---------- --------- ---------- $ 435,356 $ 68,538 $1,870,423 $(366,876) $2,007,441 ========= ======== ========== ========= ==========
12 15 SANMINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JULY 1, 2000 ------------------------------------------------------------------------ GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATION SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS ------------ ------------- ----------- ----------- ------------- (IN THOUSANDS) Net sales............................ $133,816 $15,599 $851,217 $ -- $1,000,632 Cost of sales........................ 110,330 15,747 727,189 -- 853,266 -------- ------- -------- ------- ---------- Gross profit....................... 23,486 (148) 124,028 -- 147,366 Operating expenses before goodwill... 2,574 1,306 121,202 -- 125,082 Amortization of goodwill............. 3,051 -- 2,059 -- 5,110 -------- ------- -------- ------- ---------- Income (loss) from operations...... 17,861 (1,454) 767 -- 17,174 Other income, (expense) net.......... 333 1,257 (1,017) 1,574 2,147 Interest expense..................... (52) (6) 58 -- -- -------- ------- -------- ------- ---------- Income (loss) before provision for income taxes.................... 18,142 (203) (192) 1,574 19,321 Provision for income taxes........... 8,816 246 8,438 -- 17,500 Equity in income (loss) of subsidiary......................... (2,023) -- 8,877 (6,854) -- -------- ------- -------- ------- ---------- Net income................. $ 7,303 $ (449) $ 247 $(5,280) $ 1,821 ======== ======= ======== ======= ==========
FOR THE NINE MONTHS ENDED JULY 1, 2000 ------------------------------------------------------------------------ GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATION SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS ------------ ------------- ----------- ----------- ------------- (IN THOUSANDS) Net sales........................... $352,207 $46,425 $2,240,948 $ -- $2,639,580 Cost of sales....................... 306,728 44,239 1,884,882 -- 2,235,849 -------- ------- ---------- -------- ---------- Gross profit...................... 45,479 2,186 356,066 -- 403,731 Operating expenses before goodwill.......................... 7,187 3,040 200,362 -- 210,589 Amortization of goodwill............ 9,154 -- 6,087 -- 15,241 -------- ------- ---------- -------- ---------- Income (loss) from operations..... 29,138 (854) 149,617 -- 177,901 Other income, (expense) net......... 1,320 1,961 (11,651) 4,060 (4,310) Interest expense.................... (179) (18) 197 -- -- -------- ------- ---------- -------- ---------- Income (loss) before provision for income taxes................... 30,279 1,089 138,163 4,060 173,591 Provision for income taxes.......... 15,135 583 57,698 -- 73,416 Equity in income (loss) of subsidiary........................ (3,554) -- 15,650 (12,096) -- -------- ------- ---------- -------- ---------- Net income................ $ 11,590 $ 506 $ 96,115 $ (8,036) $ 100,175 ======== ======= ========== ======== ==========
13 16 SANMINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED)
FOR THE THREE MONTHS ENDED JULY 3, 1999 ------------------------------------------------------------------------ GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATION SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS ------------ ------------- ----------- ----------- ------------- (IN THOUSANDS) Net sales............................ $113,971 $12,359 $478,292 $ -- $604,622 Cost of sales........................ 98,357 12,020 384,140 -- 494,517 -------- ------- -------- ------- -------- Gross profit....................... 15,614 339 94,152 -- 110,105 Operating expenses before goodwill... 2,301 763 35,520 -- 38,584 Amortization of goodwill............. 3,049 -- 922 -- 3,971 -------- ------- -------- ------- -------- Income (loss) from operations...... 10,264 (424) 57,710 -- 67,550 Other income, (expense) net.......... (284) 51 (6,100) 850 (5,483) Interest expense..................... (82) (7) 89 -- -- -------- ------- -------- ------- -------- Income (loss) before provision for income taxes.................... 9,898 (380) 51,699 850 62,067 Provision for income taxes........... 5,146 108 17,348 -- 22,602 Equity in income (loss) of subsidiary......................... (1,338) -- 4,264 (2,926) -- -------- ------- -------- ------- -------- Net income................. $ 3,414 $ (488) $ 38,615 $(2,076) $ 39,465 ======== ======= ======== ======= ========
FOR THE NINE MONTHS ENDED JULY 3, 1999 ------------------------------------------------------------------------ GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATION SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS ------------ ------------- ----------- ----------- ------------- (IN THOUSANDS) Net sales........................... $343,967 $34,583 $1,351,143 $ -- $1,729,693 Cost of sales....................... 304,773 34,436 1,093,848 -- 1,433,057 -------- ------- ---------- ------- ---------- Gross profit...................... 39,194 147 257,295 -- 296,636 Operating expenses before goodwill.......................... 6,727 2,326 140,039 -- 149,092 Amortization of goodwill............ 9,175 -- 2,611 -- 11,786 -------- ------- ---------- ------- ---------- Income (loss) from operations..... 23,292 (2,179) 114,645 -- 135,758 Other income, (expense) net......... (914) (358) (18,586) 1,673 (18,185) Interest expense.................... (297) (12) 309 -- -- -------- ------- ---------- ------- ---------- Income (loss) before provision for income taxes................... 22,081 (2,549) 96,368 1,673 117,573 Provision for income taxes.......... 12,424 220 31,108 -- 43,752 Equity in income (loss) of subsidiary........................ (4,442) -- 6,888 (2,446) -- -------- ------- ---------- ------- ---------- Net income (loss)......... $ 5,215 $(2,769) $ 72,148 $ (773) $ 73,821 ======== ======= ========== ======= ==========
14 17 SANMINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 1, 2000 ---------------------------------------------------------------------------- GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATION SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS ------------ ------------- ----------- ----------- ------------- (IN THOUSANDS) Net cash provided by (used in) operating activities................. $ 15,688 $ 4,723 $ (17,270) $ 4,060 $ 7,201 -------- ------- --------- ------- --------- Cash flows from investing activities: Foreign sales corp. dividend......... -- (4,060) 4,060 -- -- Purchase of property, plant, and equipment......................... (14,454) (3,347) (112,778) -- (130,579) Proceeds from sale of property, plant, and Equipment.............. 543 33 (576) -- -- Purchase of short-term investments... -- -- (289,812) -- (289,812) Proceeds from short-term investments....................... -- -- 265,315 -- 265,315 Cash paid/acquired from acquisition....................... -- -- (109,848) -- (109,848) Proceeds from sale of assets......... -- -- 587 -- 587 Investments in subsidiaries.......... -- 4,060 -- (4,060) -- -------- ------- --------- ------- --------- Net cash used in investing activities...................... (13,911) (3,314) (243,052) (4,060) (264,337) -------- ------- --------- ------- --------- Cash flows from financing activities: Principal payments of long-term debt.............................. (1,222) (63) (65,475) -- (66,760) Proceeds from issuance of long-term debt.............................. -- -- 65,000 -- 65,000 Repurchase of convertible debentures........................ -- -- (294) -- (294) Proceeds from equity offering, net... -- -- 540,196 -- 540,196 Payments on long-term liabilities.... -- -- (73,772) -- (73,772) Proceeds from sale of stock.......... -- -- 41,285 -- 41,285 -------- ------- --------- ------- --------- Net cash used in financing activities...................... (1,222) (63) (506,940) -- 505,655 -------- ------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents and short-term investments.......................... 555 1,346 246,618 -- 248,519 Cash, cash equivalents, and short-term investments, beginning of period..... (2,679) 1,378 150,055 -- 148,754 -------- ------- --------- ------- --------- Cash, cash equivalents, and short-term investments, end of period........... $ (2,124) $ 2,724 $ 396,673 $ -- $ 397,273 ======== ======= ========= ======= =========
15 18 SANMINA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (CONTINUED) (UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 3, 1999 ---------------------------------------------------------------------------- GUARANTOR NON-GUARANTOR PARENT ELIMINATION CONSOLIDATION SUBSIDIARIES SUBSIDIARIES CORPORATION ENTRIES TOTALS ------------ ------------- ----------- ----------- ------------- (IN THOUSANDS) Net cash provided by (used in) operating activities................ $ 14,303 $ 6,440 $ 132,217 $ 1,673 $ 154,633 -------- ------- --------- ------- --------- Cash flows from investing activities: Foreign sales corp. dividend........ -- (1,673) 1,673 -- -- Purchase of property, plant, and equipment........................ (14,097) (5,648) (68,846) -- (88,591) Proceeds from sale of property, plant, and Equipment............. 131 12 (143) -- -- Purchase of short-term investments...................... -- -- (263,164) -- (263,164) Proceeds from short-term investments...................... -- -- 121,645 -- 121,645 Purchase of long-term investments... -- -- (52,850) -- (52,850) Cash paid/acquired from acquisition...................... -- -- (19,369) -- (19,369) Proceeds from sale of assets........ -- -- 170 -- 170 Investments in subsidiaries......... -- 1,673 -- (1,673) -- -------- ------- --------- ------- --------- Net cash used in investing activities..................... (13,966) (5,636) (280,884) (1,673) (302,159) -------- ------- --------- ------- --------- Cash flows from financing activities: Principal payments of long-term debt............................. (1,354) (254) 1,608 -- -- Proceeds from note payable.......... -- -- 12,705 -- 12,705 Issuance of convertible debentures, net.............................. -- -- 341,085 -- 341,085 Payments on long-term liabilities... -- -- (69,007) -- (69,007) Proceeds from sale of stock......... -- -- 26,971 -- 26,971 -------- ------- --------- ------- --------- Net cash used in financing activities..................... (1,354) (254) 313,362 -- 311,754 -------- ------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents and short-term investments......................... (1,017) 550 164,695 -- 164,228 Cash, cash equivalents, and short-term investments, beginning of period.... 836 2 95,587 -- 96,425 -------- ------- --------- ------- --------- Cash, cash equivalents, and short-term investments, end of period.......... $ (181) $ 552 $ 260,282 $ -- $ 260,653 ======== ======= ========= ======= =========
16 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Sanmina Corporation ("Sanmina") was incorporated in Delaware in May 1989 to acquire its predecessor company which had been in the printed circuit board and backplane business since 1980. Sanmina is a leading independent provider of customized integrated electronic manufacturing services ("EMS"), including turnkey electronic assembly and manufacturing management services, to original equipment manufacturers ("OEM") in the electronics industry. Sanmina's electronics manufacturing services consist primarily of the manufacture of complex printed circuit board assemblies using surface mount ("SMT") and pin-through hole ("PTH") interconnection technologies, the manufacture of custom designed backplane assemblies, fabrication of complex multi-layered printed circuit boards, electronic enclosure systems manufacture, and testing and assembly of completed systems. In addition to assembly, turnkey manufacturing management also involves procurement and materials management, as well as consultation on printed circuit board design and manufacturing. Sanmina, through its Sanmina Texas LP subsidiary (formerly known as Sanmina Cable Systems and Golden Eagle Systems), also manufactures custom cable and wire harness assemblies for electronic industry OEMs. In addition, as part of the Elexsys International ("Elexsys") merger completed in November 1997, Sanmina acquired and currently operates a metal stamping and plating business. Sanmina's assembly plants are located in Northern California, Richardson, Texas, Manchester, New Hampshire, Durham, North Carolina, Guntersville, Alabama, and Dublin, Ireland. Sanmina's printed circuit board fabrication facilities are located in Northern California, Southern California, and Nashua, New Hampshire. Sanmina Texas LP's manufacturing facility is located in Carrollton, Texas. As a result of Sanmina's November 1998 merger with Altron Incorporated ("Altron"), Sanmina has added new fabrication and assembly plants in the Boston, Massachusetts area, Northern California, and Plano, Texas. In addition, as a result of Sanmina's merger with Telo Electronics Incorporated ("Telo") and Manu-Tronics, Inc. ("Manu-Tronics"), Sanmina has added new assembly plants in San Jose, California and in the greater Chicago area. As part of Sanmina's agreement to acquire certain assembly operations of Nortel Networks Corporation, Sanmina added an assembly plant in Calgary, Alberta, Canada on October 1, 1999. In addition, Sanmina also added an assembly plant in Chateaudun, France in November 1999. As part of Sanmina's agreement to acquire certain manufacturing assets of Harris, Sanmina added an assembly plant in San Antonio, Texas. As part of Sanmina's acquisition of Devtek Electronics Packaging Systems Division on October 5, 1999, Sanmina added an enclosure facility in Toronto, Ontario, Canada. In addition, Sanmina also added an enclosure facility in Clinton, North Carolina in March 2000, with the acquisition of Alcatel's electronic enclosure systems facility. With the acquisition of Hadco on June 23, 2000, Sanmina added printed circuit board fabrication facilities in metropolitan Boston, southern New Hampshire, New York state, Watsonville, California, San Jose, California, Santa Clara California, Austin, Texas, Phoenix, Arizona and Kuching, Malaysia. This acquisition also added backplane and system assembly operations in Salem, New Hampshire and San Jose, California. By acquiring Essex in June, 2000, Sanmina added assembly plants in Sweden and Finland. On June 27, 2000, Sanmina purchased InterWorks, thus adding an EMS Technology Division in Orange County, California. Sanmina's results of operations have varied and may continue to fluctuate significantly from period to period, including on a quarterly basis. Sanmina's operating results are affected by a number of factors. These factors include timing of orders from major customers, mix of product ordered by and shipped to major customers, the volume of orders as related to Sanmina's capacity, the ability of Sanmina to effectively manage inventory and fixed assets, pricing and competitive pressures, supplier component shortages, which could cause Sanmina to be unable to meet customer delivery schedules, and the ability of Sanmina to time expenditures in anticipation of future sales. Sanmina's results are also affected by the mix of products between backplane assemblies and printed circuit boards. Sanmina's results are also affected by general economic conditions in the electronics industry. Sanmina's results can also be significantly influenced by development and introduction of new products by Sanmina's customers. From time to time, Sanmina experiences changes in the volume of sales to each of its principal customers, and operating results may be affected on a period-to-period basis by these changes. Sanmina's customers generally require short delivery cycles, and a substantial portion of Sanmina's backlog is typically scheduled for delivery within six months. Quarterly sales and operating results 17 20 therefore depend in large part on the volume and timing of bookings received during the quarter, which are difficult to forecast. The nature of Sanmina's backlog also affects its ability to plan production and inventory levels, which could lead to fluctuations in operating results. In addition, a significant portion of Sanmina's operating expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. Any inability to adjust spending quickly enough to compensate for any revenue shortfall may adversely impact Sanmina's results of operations. Results of operations in any period should not be considered indicative of the results to be expected for any future period. In addition, fluctuations in operating results may also result in fluctuations in the price of Sanmina's convertible subordinated notes and Common Stock. Sanmina's customers include a diversified base of OEMs in the communications (telecommunications and networking), industrial and medical instrumentation and high-speed computer systems segments of the electronics industry. These industry segments, and the electronics industry as a whole, are subject to rapid technological change and product obsolescence. Discontinuance or modification of products being manufactured by Sanmina could adversely affect Sanmina's results of operations. The electronics industry is also subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. A general recession in the electronics industry could have a material adverse effect on Sanmina's business, financial condition and results of operations. In addition, Sanmina does not have firm long-term volume commitments from its customers and over the last few years has experienced reduced lead-time in customer orders. In addition, customer orders can be canceled and volume levels can be changed or delayed. The timely replacement of canceled, delayed or reduced orders with new business cannot be assured. There can be no assurance that any of Sanmina's current customers will continue to use Sanmina's manufacturing services. The loss of one or more of Sanmina's principal customers, or reductions in sales to any of such customers, could have a material adverse effect on Sanmina's business, financial condition and results of operations. Sanmina has pursued, and intends to continue to pursue, business acquisition opportunities, particularly when these opportunities have the potential to enable Sanmina to increase its net sales while maintaining operating margin, to access new geographic markets, to implement Sanmina's vertical integration strategy and/or to obtain facilities and equipment on terms more favorable than those generally available in the market place. Acquisitions of companies and businesses and expansion of operations involves certain risks, including (i) the potential inability to successfully integrate acquired operations and businesses or to realize anticipated synergies, economies of scale or other value, (ii) diversion of management's attention, (iii) difficulties in scaling up productions at new sites and coordinating management of operations at new sites and (iv) loss of key employees of acquired operations. No assurance can be given that Sanmina will experience such issues with integrating acquired operations, and there can be no assurance that Sanmina's recent acquisitions, or any future acquisition will result in a positive contribution to Sanmina's results of operations. Furthermore, there can be no assurance that Sanmina will realize value from any such acquisition which equals or exceeds the consideration paid. In addition, there can be no assurance that Sanmina will realize anticipated strategic and other benefits from expansion of existing operations to new sites. Any such issues could have a material adverse effect on Sanmina's business, financial condition and results of operations. In addition, future acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense. In addition, Sanmina expects to pursue opportunities to acquire assembly operations being divested by electronics industry OEMs. Sanmina expects that competition for these opportunities among electronics manufacturing services firms will be intense as these transactions typically enable the acquirer to enter into long-term supply arrangements with the divesting OEM. Accordingly, Sanmina's future results of operations could be adversely affected if Sanmina is not successful in attracting a significant portion of the OEM divestiture transactions it pursues. In addition, due to the large scale and long-term nature of supply arrangements typically entered into in OEM divestiture transactions and because cost reductions are generally a major reason why the OEM is divesting operations, pricing of manufacturing services may be less favorable to the manufacturer than in standard contractual relationships. Accordingly, as Sanmina enters into new OEM divestiture transactions, Sanmina may experience erosion in gross margins. 18 21 Sanmina did not experience any interruption to its business activities or incur any impairment to its financial condition or results of operations as a result of passing into calendar year 2000. Sanmina will continue to monitor its own internal systems and products to determine the impact, if any, of problems associated with the Year 2000. This report contains forward-looking statements within the meaning of Section 72A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Sanmina's future results from operations could vary significantly from these contemplated by such forward-looking statements as a result of the factors described herein. The financial and other information contained herein should be read in conjunction with Sanmina's annual report on Form 10-K for the fiscal year ended October 2, 1999. RESULTS OF OPERATIONS The following table sets forth, for the three and nine months ended July 1, 2000 and July 3, 1999, certain items as a percentage of net sales. The table and the discussion below should be read in connection with the condensed consolidated financial statements and the notes thereto, which appear elsewhere in this report.
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- JULY 1, 2000 JULY 3, 1999 JULY 1, 2000 JULY 3, 1999 ------------ ------------ ------------ ------------ Net sales................................... 100.0% 100.0% 100.0% 100.0% Cost of sales............................... 85.3 81.8 84.7 82.9 Gross profit.............................. 14.7 18.2 15.3 17.1 Selling, general and administrative......... 6.9 6.4 5.9 6.7 Amortization of goodwill.................... 0.5 0.6 0.6 0.6 Provision for plant closing and relocation................................ -- -- -- 1.0 Write down of long-lived assets............. 0.9 -- 0.3 0.7 Merger costs................................ 4.7 -- 1.8 0.3 Operating income.......................... 1.7 11.2 6.7 7.8 Other income, net........................... 0.2 (0.9) (0.1) (1.0) Income before income taxes................ 1.9 10.3 6.6 6.8 Provision for income taxes.................. 1.7 3.8 2.8 2.5 Net income........................ 0.2 6.5 3.8 4.3
Sales for the third quarter of fiscal 2000 increased by 65.5% to $1 billion from $604.6 million in the corresponding quarter of the prior year. For the nine months ended July 1, 2000, sales increased by 52.6% to $2.6 billion from $1.7 billion in the first nine months of fiscal year 1999. The results reflect continued strong demand for Sanmina's advanced technologies and total manufacturing solution capabilities. The increase in net sales for the third quarter of fiscal 2000 was due primarily to increased shipments of EMS assemblies to both existing and new customers obtained through internal growth and strategic acquisitions. Sales to Nortel Networks continued to increase substantially in the third quarter of fiscal 2000 as compared to the third quarter of the prior year due to the purchase of certain manufacturing facilities from Nortel Networks by Sanmina in the first quarter of fiscal 2000. The overall growth in EMS assembly revenues during the first nine months of fiscal 2000 was influenced by the expansion of Sanmina's existing operations through acquisitions as well as a generally positive economic environment in the communications, medical and industrial instrumentation, and high-speed computer segments of the electronics industry. Sales to companies in the communications market segment, representing both voice and data, contributed 74% of Sanmina's net revenues for the third quarter of fiscal 2000. We attribute the strength in the communications sector to the demand for Internet infrastructure switching, the demand for high-speed Internet access equipment, and wireless infrastructure equipment. Revenue growth was also influenced by the electronics industry trend towards outsourcing. On June 1, 2000, Sanmina acquired Essex AB ("Essex"), a major electronics manufacturing services (EMS) supplier in Scandinavia. The transaction was structured as a stock-for-stock exchange and was accounted for as a pooling of interests. Under the terms of the agreement, each share of Essex Common Stock was converted into approximately 10.20 shares of Sanmina Common Stock. Approximately 2.0 million shares 19 22 of common stock were issued to acquire Essex. Essex has four manufacturing facilities in Sweden and Finland. Capabilities include engineering design, printed circuit board assembly, system integration and test, as well as distribution and repair. On June 23, 2000, Sanmina completed its acquisition of Hadco Corporation ("Hadco"), a major manufacturer of advanced electronic interconnect products. As a result of the transaction, which was structured as a merger, each outstanding share of Hadco Common Stock was converted into 1.40 shares of Sanmina Common Stock and Hadco became a wholly-owned subsidiary of Sanmina. Approximately 19.6 million shares of common stock were issued to acquire Hadco. The transaction was accounted for as a pooling of interests. Hadco's key customers include leading electronic manufacturers in the communications, industrial automation, and high-end computing industries. Through the acquisition of Hadco, Sanmina received added circuit fabrication capacity enabling Sanmina to meet customer demands for higher layer count, higher density, and advanced printed circuit boards. As mentioned above, the mergers were accounted for as pooling of interests and the condensed consolidated financial statements have been restated to reflect the combined operations of all entities for the periods presented. The year-ends of the merged companies have not been conformed for periods prior to fiscal 2000. For the periods after fiscal 1999 the quarters and year-ends have adopted Sanmina's year-end of a 52 or 53 week year ending on the Saturday nearest September 30. Prior to being acquired by Sanmina, Essex operated under a calendar year end, and, accordingly, Essex' statements of operations, shareholders' equity and cash flows for the three and nine month periods ended September 30, 1999 have been combined with the corresponding Sanmina consolidated statements for the three and nine month periods ended July 3, 1999. During fiscal 2000, Essex' year-end was changed from December 31 to a 52 or 53 week year ending on the Saturday nearest September 30 to conform to Sanmina's fiscal year end. Accordingly, Essex' operations for the three months ended December 31, 1999, which included net sales of $54 million and net income of $1.6 million have been included in the consolidated results of Sanmina for fiscal 2000 and was reported as an adjustment to retained earnings in the third quarter of fiscal 2000. Prior to the merger with Sanmina, Hadco's fiscal year ended on the last Saturday in October and, accordingly, Hadco's statements of operations, shareholders' equity and cash flows for the three and nine month periods ended July 31, 1999 have been combined with the corresponding Sanmina consolidated statements for the three and nine month periods ended July 3, 1999. For fiscal 2000, Hadco adopted Sanmina's fiscal year end of the Saturday nearest September 30. As a result, operations for the one month ended October 31, 1999, which included net sales of $109 million and net income of $4.7 million have been included in the consolidated results of fiscal 2000 and was reported as an adjustment to retained earnings in the third quarter of fiscal 2000. 20 23 As a result of the pooling of interests accounting for Essex and Hadco, Sanmina has restated its historical results of operations to include the results of operations of Essex and Hadco. The financial information presented gives effect to such restatement. A reconciliation of the financial statements for the nine months ended July 3, 1999, to previously reported information is as follows (in thousands): REVENUE: Sanmina........................................ $ 866,169 Essex.......................................... 122,270 Hadco.......................................... 743,926 Eliminations................................... (2,672) ---------- Combined....................................... $1,729,693 ========== NET INCOME: Sanmina........................................ $ 59,568 Essex.......................................... 1,031 Hadco.......................................... 13,222 ---------- Combined....................................... $ 73,821 ==========
The merger and restructuring costs of $47.2 million are comprised of $27.3 million for executive severance, expected work force attrition and related costs ((accrual made in accordance with the criteria in EITF 94-3 "Liability Recognition for Costs to Exit an Activity" (including certain costs incurred in a restructuring)), $15.9 million for investment banking and related fees and expenses, $2.9 million for accounting, legal and related fees and expenses, and $1.1 million of other related restructuring costs. On June 27, 2000, Sanmina acquired InterWorks for a cash purchase price of approximately $45 million. Interworks is a designer and manufacturer of standard and custom modular subsystems, focused on meeting the growing needs of the networking equipment and communications sectors. This transaction was accounted for as a purchase. InterWorks designs, manufactures, tests and distributes a complete line of Digital Signal Processor modular solutions and advanced memory products to leading electronics original equipment manufacturers serving the networking and telecommunications markets. Pro forma information reflecting the acquisition of Interworks has not been presented, as the operations of Interworks are not material to Sanmina's restated consolidated financial statements. Gross margin decreased from 18.2% in the third quarter of fiscal 1999 to 14.7% in the third quarter of fiscal 2000. For the nine months ended July 1, 2000, gross margin decreased to 15.3% from 17.1% in the first nine months of fiscal year 1999. The decrease in gross margins for the third quarter and first nine months of fiscal year 2000 was attributable to pricing terms negotiated as part of OEM divestiture transactions, principally the Nortel Networks transaction which was completed in the first quarter of fiscal 2000 and transactions with Harris and Alcatel which were completed during fiscal 2000. Changes in product and customer mix also contributed to the decline in gross margin. Sanmina expects gross margins to continue to fluctuate based on the mix of products ordered by and shipped to major customers, increased competition, and pricing terms negotiated as part of OEM divestiture transactions. Selling, general and administrative expenses increased from $38.6 million in the third quarter of fiscal 1999 to $69.1 million in the third quarter of fiscal 2000. As a percentage of sales, selling, general and administrative expenses increased from 6.4% in the third quarter of fiscal 1999 to 6.9% for the third quarter of fiscal 2000. The absolute dollar increase in selling, general and administrative expenses was primarily the result of increased expenditures to support higher sales volume. Sanmina anticipates that selling, general and administrative expenses will continue to increase in absolute dollars due to projected additions to the sales force and other administrative expenditures to support higher sales volume. For the nine months ended July 1, 2000, selling, general and administrative expenses increased to $154.6 million from $115.3 million for the first nine months ended July 3, 1999. As a percentage of sales, selling, general and administrative expenses decreased from 6.7% for the first nine months of fiscal 1999 to 5.9% for the first nine months of fiscal 2000. Selling, general and administrative expenses as a percentage of sales are anticipated to remain relatively 21 24 constant or decrease depending upon sales volume and Sanmina's ability to achieve expected operating efficiencies as a result of the integration of acquired businesses. Operating expenses increased from $42.6 million in the third quarter of fiscal 1999 to $130.2 million in the third quarter of fiscal 2000. As a percentage of sales, operating expenses increased from 7.0% to 13.0% in the third quarter of fiscal 2000. For the nine months ended, operating expenses in absolute dollars increased from $160.9 million in fiscal 1999 to $225.8 million in fiscal 2000 and operating expenses as a percentage of sales decreased from 9.3% in fiscal 1999 to 8.6% in fiscal 2000. The increase in operating expenses for the first nine months of fiscal 2000 as compared to the first nine months ended in fiscal 1999 was mainly attributable to certain charges recorded in the third quarter of fiscal 2000. These charges of $47.2 million related to merger costs. The merger and restructuring costs of $47.2 million are comprised of $27.3 million for executive severance, expected work force attrition and related costs ((accrual made in accordance with the criteria in EITF 94-3 "Liability Recognition for Costs to Exit an Activity" (including certain costs incurred in a restructuring)), $15.9 million for investment banking and related fees and expenses, $2.9 million for accounting, legal and related fees and expenses, and $1.1 million of other related restructuring costs. Excluding merger and restructuring charges from the first nine months of fiscal 2000, operating expenses as a percentage of sales decreased from 7.2% in the first nine months of fiscal 1999 to 5.8% in the first nine months of fiscal 2000. This decrease in operating expenses as a percentage of sales reflects Sanmina's strategy to leverage its operating margin by growing the top line at a faster rate than its operating expenses. During the third quarter of fiscal 2000, such evaluation, with respect to the merger with Hadco, indicated that the fair value of certain intangible assets related to Hadco were less than their carrying value. Accordingly, in the third quarter of fiscal 2000, Sanmina recorded an adjustment to write down $8.75 million of intangible assets. The fair value of the intangible assets at the time of original acquisition by Hadco was based on expected future cash flows to be generated from the assets based on reasonable and supportable assumptions. The existing customer relationships, and in-place workforce, valued at the time of the original acquisition by Hadco, however, could not be supported at their current carrying values at the time of the merger. As a result, based on future expected cash flows from the related customer base, and from experienced and expected work force attrition, Sanmina recorded adjustments to the carrying value of these intangible assets in the amounts of $7.5 million and $1.25 million, respectively. For the third quarter of fiscal 2000, Sanmina reported net other income of $2.1 million compared to net other loss of $5.5 million for the corresponding quarter of the prior year. For the first nine months of fiscal 2000, Sanmina reported net other loss of $4.3 million compared to net other loss of $18.2 million for the first nine months of fiscal 1999. The increase was primarily attributable to the interest earned on the higher cash balances available following the $540.2 million net proceeds from the issuance of common stock completed in the second quarter of fiscal 2000. Sanmina's provision for income taxes for the third quarter of fiscal 2000 is based upon Sanmina's estimate of the effective tax rate for fiscal year 2000 of 38.0%. For the third quarter of fiscal 1999, Sanmina's effective tax rate was 36.4%. The increase in the rate for the current year and quarter is largely the result of a change in the mix and size of income inclusive of acquisitions. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents, and short-term investments as of July 1, 2000 were $740.2 million as compared to $467.2 million at October 2, 1999. For the nine months ending July 1, 2000, cash provided by operations was $7.2 million, which was primarily due to increases in payables and depreciation resulting from higher inventory levels required to meet current demand. Working capital increased to $1.2 billion as of July 1, 2000 compared to $742.4 million at October 2, 1999 primarily due to the proceeds received from the issuance of common stock in February 2000 and increases in receivables and inventories. Net cash used for investing activities for the first nine months of fiscal 2000 primarily related to the purchase of short-term investments of $289.8 million, and the purchase of property, plant, and equipment of $130.0 million required to meet customer demand. In addition, Sanmina paid approximately $109.8 million in 22 25 cash for businesses acquired. In connection with the purchase of equipment and inventory from Harris, Sanmina has additional cash commitments of $28 million to purchase additional facilities of Harris. Net cash provided by financing activities for the first nine months of fiscal year 2000 primarily related to the $540.2 million of proceeds from the issuance of common stock in February 2000. Sanmina has entered into an operating lease agreement for new facilities in San Jose, California which house its corporate headquarters and certain assembly operations. In connection with these transactions, Sanmina pledged $52.9 million as collateral for certain obligations of the lease. In July 2000, Sanmina's Hadco subsidiary initiated an offer to purchase an aggregate of $200 million of 9 1/2% senior subordinated notes due 2008 issued by Hadco in May 1998. This offer to purchase was required by the terms of the indenture under which the notes were issued as a result of the change in control of Hadco which occurred when Hadco was acquired by Sanmina. The purchase in the offer is 101% of the principal amount of the notes. Holders have until August 23, 2000 to elect to have their notes redeemed. Sanmina will fund the redemption of any notes that holders elect to have redeemed. Any notes that are not redeemed will remain outstanding, although Sanmina may in the future elect to purchase notes through open market or negotiated transactions, additional tender or exchange offers or otherwise. On July 10, 2000, Sanmina acquired a PCB assembly and system assembly facility located in Shenzhen, Guang Dong province in China. The acquisition, which will be accounted for as a purchase, also includes administrative offices in Hong Kong and a branch procurement office in Taiwan. The purchase price was approximately $65 million in cash. The facilities in China include a manufacturing facility with administrative and dormitory buildings. The business focuses on PCB assembly and targets the telecommunication, networking, computer and medical electronics markets. Also on July 10, 2000, Sanmina announced that it has signed a definitive agreement to acquire certain Electronics Computer-Aided Design (ECAD), Electronics Systems Packaging Design (ESP) and Product Integrity (PI) operations from Nortel Networks. The agreement calls for the acquisition of test facilities and related equipment and would involve the transfer of employees in several expert physical design teams. The transaction is expected to close during the fourth quarter of fiscal 2000 and will be accounted for as a purchase. The purchase price for this acquisition was approximately $6.5 million in cash. Sanmina expects to make additional capital expenditures relating to facility and equipment enhancements as well as information systems upgrades in existing facilities. Future liquidity needs will be dependent upon, among other factors, the extent of capital investments made by Sanmina in plant and equipment, working capital needs of acquired businesses, levels of shipments by Sanmina and changes in volumes of business and other factors. Sanmina believes that its existing cash resources, together with cash generated from operations, will be sufficient to meet Sanmina's liquidity and working capital requirements through at least the next 12 months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has not been a material change in our exposure to interest rate and foreign currency risks since the date of our report on Form 10-K for the fiscal year ended October 2, 1999. Interest Rate Risk Sanmina's exposure to market risk for changes in interest rates relate primarily to Sanmina's investment portfolio. Currently, Sanmina does not use derivative financial instruments in its investment portfolio. Sanmina invests in high credit quality issuers and, by policy, limits the amount of principal exposure to any one issuer. As stated in Sanmina's policy, Sanmina seeks to ensure the safety and preservation of our invested principal funds by limiting default and market risk. Sanmina seeks to mitigate default risk by investing in high-credit quality securities and by positioning our investment portfolio to respond to a significant reduction in a credit rating of any investment issuer, guarantor or depository. Sanmina seeks to mitigate market risk by limiting the principal and investment term of funds 23 26 held with any one issuer and by investing funds in marketable securities with active secondary or resale markets. Foreign Currency Exchange Risk Sanmina enters into foreign exchange contracts to hedge certain of its assets and liabilities denominated in foreign currencies. At July 1, 2000, Sanmina had forward contracts to exchange various foreign currencies for U.S. dollars in the gross amount of $17.9 million. Market value gains and losses on forward exchange contracts are recognized as offsets to the exchange gains or losses on the hedged transactions. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Sanmina is not currently a party to any material pending legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial Data Schedule for nine month period ended July 1, 2000 27.2 Financial Data Schedule for the nine month period ended July 3, 1999
(b) Reports on Form 8-K On July 7, 2000, Sanmina filed a report on Form 8-K relating to the acquisition of Hadco. 24 27 SIGNATURE Pursuant to the Requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 11, 2000 SANMINA CORPORATION (Registrant) By: /s/ RANDY W. FURR ------------------------------------ Randy W. Furr President and Chief Operating Officer By: /s/ RICK R. ACKEL ------------------------------------ Rick R. Ackel Executive Vice President and Chief Financial Officer 25 28 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial Data Schedule for nine month period ended July 1, 2000 27.2 Financial Data Schedule for the nine month period ended July 3, 1999