SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1994
-- Commission File No.0-2251
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SCI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0583436
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o SCI Systems (Alabama), Inc.
2101 West Clinton Avenue
Huntsville, Alabama 35805
(Address of principal executive offices) (Zip Code)
_________________________________________
(302) 998-0592
(Registrant's telephone number, including area code)
________________________________________
Second amendment to Form 10-K for revision to Part II. Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(First amendment was for Financial Data Schedules)
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 28, 1995 SCI SYSTEMS, INC.
By: Olin B. King/s/
----------------
Olin B. King
Chairman of the Board
and Chief Executive Officer
PART II
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
1994 Results Compared with 1993
The fiscal year ended June 30, 1994 was a period of important transition for
SCI Systems, Inc. New growth initiatives matured and a strategic acquisition
was consummated while several activities were slated for discontinuance.
Significantly higher revenue levels were achieved by year-end. New customers
were developed to replace declining revenues from several customers
losing market share in dynamic industries. Manufacturing capacity was increased
to support unit volume and revenue growth in both traditional and new product
areas.
During a several quarter period spanning fiscal years 1993 and 1994, a
major customer transition occurred. A number of the Company's larger
customers experienced market share difficulties and revenue declines,
resulting in a substantial decline in SCI's sales to those customers.
During the same period the Company was growing its sales to a number of
additional customers; that growth was masked by the traditional customer
declines with the result of an apparent revenue "flat spot.'' By the
fourth fiscal quarter the declines were over, and with newer customer
sales growth continuing to accelerate, a revenue ``breakout'' occurred.
Quarterly sales increased to $585 million and a new revenue base was
established.
An expanded number of production lines for finished product assembly,
burn-in, and test were placed in operation to meet a growing number of
customers' requirements, including rapid direct shipment to their customers.
The Mexican plant was doubled in size during the year to accommodate
growing demand for low cost products for both Latin American and domestic
customers. Surface mount assembly was expanded and a finished product assembly
capability became operational. Several new customers broadened the plant's
product and customer bases as evidence of growing interest in this location.
One of the Company's Huntsville plants supports a number of
leading companies with a full range of design engineering support,
manufacturing, and distribution services. This business experienced
dynamic growth by providing innovative finished products that were brought to
market in minimum time, custom manufactured in large volumes, and shipped
directly to multiple market channels as well as directly to end users.
Late in the year, the Company acquired from Hewlett-Packard its Grenoble,
France plant. Also, fiscal year 1994 was the first full year of operation
for the Watsonville, California plant since it was acquired from Tandem
Computers.
Fiscal 1994 sales of $1.852 billion increased $180 million
(11%) from $1.672 billion in fiscal 1993. The largest of the
increase came in the fourth quarter, when sales increased 35%
over a year earlier. A substantial portion of the sales increase
came from finished product assembly services offered by the
Company. Geographically, domestic sales increased 24%, while
foreign sales decreased 6%.
Some of the markets influencing the Company's foreign operations have not
recovered to the same extent as for domestic operations. The Singapore plant
recovered from some softness in market demand in the early part of the fiscal
year. Several network devices and electronic assemblies for personal computers
are being produced for a number of new customers. These recent additions
reduced the Singapore plant's historical dependence on the production of
electronic assemblies for the disk drive industry. The European Region is
well postured to expand full service manufacturing in Europe as that market
experiences economic recovery and growth.
Income from continuing operations was $30 million in fiscal
1994, as compared to $31 million a year earlier. As a percent of
sales, income from continuing operations was 1.6% in fiscal 1994
versus 1.8% in fiscal 1993. The decline mainly resulted from an
effective tax rate increase to 36.2% from 28.6%. Fiscal 1994's
income from continuing operations before income taxes remained
at approximately the same percentage of sales as in fiscal 1993.
Fiscal 1994's fully diluted earnings per share from continuing
operations were $1.08 as compared with $1.21 in the previous
year.
Operating income for fiscal 1994 was 3.3% of sales, down
slightly from the 3.5% in fiscal 1993. A negative impact on
fiscal 1994's operating profit resulted from operating losses (compared
with fiscal 1993 operating profit) of a domestic plant associated
with government business that was slated for closing during the
year and related closing costs aggregating approximately $5 million.
Additionally, the Company wrote down certain assets to net
realizable value in the amount of approximately $4 million.
(See Notes E and L to the Consolidated Financial Statements which
is incorporated herein by reference.) Fiscal 1993's operating profit
included an inventory write down of $10 million associated with
a customer's bankruptcy .
Interest expense decreased $1.4 million in fiscal 1994 from
that incurred in the prior year. While borrowings on a
year-to-year basis increased, the Company's quarterly average
borrowings were relatively constant. The interest expense
decrease was primarily the result of lower effective interest
rates.
Income tax expense increased $4.7 million, mainly as a result
of an increased effective income tax rate (36.2% in fiscal 1994
compared with 28.6% in fiscal 1993). The effective tax rate
increase primarily resulted from higher state income taxes
(state income tax loss carryforwards were available in fiscal
1993); higher foreign income taxes (as certain tax holidays
expired); and reduced income tax credits. (See Note H to the
Consolidated Financial Statements which is incorporated herein by reference.)
During the third quarter of fiscal 1994, the Company adopted
plans for disposal of certain business units. (See Note J to the
Consolidated Financial Statements which is incorporated herein
by reference.) The estimated disposal loss of $4.5 million
reduced earnings per share by $.16. On August 26, 1994, the
Company entered into an agreement for the sale of a substantial
part of the discontinued operations (Cambridge Computer, Ltd.).
The potential sale proceeds for this operation approximate the
amount the Company assumed in its disposal loss provision, and
no material adjustment to the provision is anticipated. The
remaining discontinued operations are available for sale. If
reasonable purchase offers are not received for these
operations, the Company will close them. In either case, the
third quarter estimated disposal loss is currently believed to
be materially sufficient.
The discontinued operations represent substantially all of the Company's
proprietary products. Unlike the Company's major line of business
(contract manufacturing for OEMs), the discontinued product lines
were primarily developed and designed exclusively for sales
through distribution channels.
Prior to fiscal 1994, the discontinued operations' sales were
insignificant as their products were substantially still in the development
process. In fiscal 1993, the Company began to expand its marketing efforts for
a consumer electronic product with the completion of a viable product design.
This marketing effort accounted for almost all of fiscal 1994's and fiscal
1993's increases of discontinued products. With increased market penetration,
especially in fiscal 1994, it became apparent that current products could not
be sold at profit nor would it be prudent for the Company to continue to fund
further research and development and marketing expenses. The majority of
fiscal 1994's losses from discontinued operations represented the excess of
product cost, research and development and marketing expenses over sales.
Previous to fiscal 1994, the discontinued operations' pretax losses primarily
represented product development and introductory expenses.
The discontinuation of substantially all of the Company's proprietary
products will have a favorable impact on future operating results and cash
flows as a result of reduced cash expenditures.
Exchange rate fluctuations during the year, especially in the
Company's European Region, had a minor impact on revenue and net
income. The Company uses the U.S. Dollar as the functional
currency of a majority of its foreign operations. (See Note F to
the Consolidated Financial Statements for discussion of foreign
currency gains, which is incorporated herein by reference.)
Average asset turnover in fiscal 1994 was 2.2 times compared
to fiscal 1993's 2.4 times. This small decline correlated to
increased accounts receivable and inventory levels.
See pages 2 to 8 of the Company's 1994 Annual Report to
Shareholders, which is incorporated herein by reference, for
further management discussion and analysis information.
Capital Resources and Liquidity
At June 30,1994 working capital was $396 million compared with
$337 million at June 30, 1993, an increase of 17.5%. The June
30, 1994 ratio of current assets to current liabilities (current
asset ratio) was 2.2 as compared to 2.4 a year earlier. The
increase in working capital resulted from larger current asset
balances to support revenue growth.
"Available funds'' at June 30, 1994 approximated $183 million,
consisting of $36 million in cash and $147 million in unused
credit facilities and commitments. (See Note C to the Company's
1994 Consolidated Financial Statements, which is incorporated
herein by reference.) Increased borrowings are anticipated
during fiscal 1995 to finance higher levels of working capital
to support planned revenue growth.
The Company's 1994 capital expenditures approximated 1994's
depreciation and amortization (depreciation and amortization
exceeded capital expenditures by $2.1 million). Fiscal 1995's
capital expenditures are currently budgeted at fiscal 1995's
estimated depreciation and amortization of $50 million.
Inflationary trends are not expected to have a material impact
on operations as relatively high asset turnover and long-term
financing minimize the effects of inflationary conditions.
1993 Results Compared with 1992
Fiscal 1993 sales of $1.672 billion increased $634 million
(61%) from $1.038 billion in fiscal 1992. The sales increase was
the result of improved economic conditions, new customers, and
new product unit volume increases. The Company also benefited
from a continuing shift to outsourcing by original equipment
manufacturers (OEMs) and recent capacity expansion.
Geographically, domestic sales increased 50% in fiscal 1993,
while foreign sales increased 77%.
Recovery from the prior recession was completed in the first
fiscal quarter. The last three fiscal quarters saw the Company
develop a stable new revenue base during the year. New orders,
backlog, sales and earnings each reached record levels.
Operating margins steadily improved during the year. Average
selling price declines, which were very troublesome in the prior two years,
stimulated markets and led to substantial unit volume increases.
While the Government Division's revenues grew during the year,
a general slowdown was being experienced by government customers
as federal budgets were reduced. In contrast, unit volumes
continued to grow rapidly across the computer industry. As a
result, both selling prices and profits of most computer
companies declined. Those conditions caused the industry to migrate
to additional outsourcing to reduce costs.
Net income and primary earnings per share in fiscal 1993 were
$26.6 million and $1.09, respectively, as compared to $3.8 million
and $.18 in fiscal 1992. Fully diluted earnings per share were $1.07
in fiscal 1993; there was no dilution in fiscal 1992. Net income was 1.6%
of sales in fiscal 1993 as compared with 0.4% in fiscal 1992.
The earnings increase was after the effects of starting up
twenty-six new surface mount technology lines.
Operating income of $58.0 million in fiscal 1993 was $39.4
million greater than the $18.6 million of the prior year.
Operating income was 3.5% of sales in fiscal 1993 as compared
with 1.8% in fiscal 1992. The overall improvement in operating
income was due primarily to operating efficiencies and reduced
manufacturing variances as a result of higher volumes.
Exchange rate fluctuations during the year, especially in the
Company's European Region, had a small negative impact on
revenue and net income. The Company uses the U.S. Dollar as the
functional currency of the majority of its foreign operations.
(See Note F to the Consolidated Financial Statements for
discussion of foreign currency gains, which is incorporated
herein by reference.)
The Company believes an important indicator of its performance
is Asset Turnover (Sales divided by Total Assets). Turnover
indicates how well the Company's assets are utilized. Turnover
times profit margin yields return on assets. Turnover on average
assets for fiscal year 1993 was 2.4 times, as compared with 1.8
times for fiscal 1992.
Interest expense increased $1.3 million during fiscal 1993 from
$15.5 million in fiscal 1992. This increase was the net of
increased interest expense due to increased bank borrowings
resulting from sales growth, and reduced interest expense from
the conversion of approximately $70 million of 9% Convertible
Subordinated Debentures into Common Stock. (See Note C to the
Company's 1994 Consolidated Financial Statements, which is
incorporated herein by reference.)
Net other income in fiscal 1993 was $1.7 million compared to
$3.7 million in fiscal 1992. The decrease resulted primarily
from reduced foreign exchange gains on financing transactions.
(See Note F to the Consolidated Financial Statements, which is
incorporated herein by reference.)
Income taxes were $12.3 million in fiscal 1993 compared to a
credit of $2.3 million in fiscal 1992. Fiscal 1993's effective
income tax rate differed from the U.S. statutory rate primarily
due to lower effective income taxes on foreign earnings
considered permanently invested, and utilization of U.S.
research and development tax credit carryforwards. Income taxes
increased in fiscal 1993 over the prior fiscal year largely due
to increased taxable income, especially from domestic
operations. Fiscal 1992's income tax credit mainly arose from
recognition of a foreign net operating loss carryforward.
