UNITED STATES
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, 1998
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
incorporation or organization) Identification No.)
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)
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, $.10 Par Value New York Stock Exchange
----------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes .X. No ....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ X ]
At August 24, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $1,682,949,803. At August 24,
1998, there were 60,055,644 outstanding shares of the registrant's Common Stock.
Documents Incorporated By Reference Portions of the registrant's 1998
Annual Report to Shareholders are incorporated by reference into Parts I and II.
Portions of the registrant's definitive Proxy Statement for its October 23,
1998, Annual Meeting of Shareholders are incorporated by reference into Part
III.
<PAGE>
PART I AND II DOCUMENTS INCORPORATED BY REFERENCE
The following information required by Parts I and II is incorporated herein
by reference to the Company's 1998 Annual Report to Shareholders, included
herein as Exhibit 13: Excerpts from
Form 10-K
(contained in the 1998
Annual Report to
Annual Shareholders)
Report Page (s)
Pages
PART I.
ITEM 1. Business Inside Front 1 to 3
Cover and 4 to
20
ITEM 2. Properties 18 and 19 3
ITEM 3. Legal Proceedings 3 and 4
ITEM 4. Submission of Matters to
a Vote of Security Holders 4
PART II.
ITEM 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 4 and 14
ITEM 6. Selected Financial Data 1
ITEM 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 2 and 3 4 to 6
ITEM 7A.Quantitative and Qualitative
Disclosure About Market Risk 6
ITEM 8. Consolidated Financial Statements
and Supplementary Data 7 to 14
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure Not Applicable
PART III
DOCUMENT INCORPORATED BY REFERENCE
The following information required by Part III is incorporated herein by
reference to the Company's definitive Proxy Statement pursuant to Regulation 14A
for the October 23, 1998 Annual Meeting of Shareholders, filed with The
Securities and Exchange Commission within 120 days after close of the fiscal
year:
Proxy Statement
Page (s)
ITEM 10. Directors and Executive Officers
of the Registrant 2,3,6 and 7
ITEM 11. Executive Compensation 7 to 9
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 1 and 2
ITEM 13. Certain Relationships and Related Transactions None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to exhibits, financial statements and schedules
1. Financial Statements
The following consolidated financial statements of the registrant
are included in Item 8:
Excerpts from
Form 10-K
(contained in
the 1998 Annual
Report to
Shareholders)
Page (s)
------------------
Consolidated Balance Sheets as of June 30, 1998,
1997, and 1996 7
For the years ended June 30, 1998, 1997 and 1996:
Consolidated Statements of Income 8
Consolidated Statements of Shareholders' Equity 8
Consolidated Statements of Cash Flows 9
Notes to Consolidated Financial Statements 10 to 14
Report of Ernst & Young LLP, Independent Auditors 14
2. Schedules
Financial Statements Schedules are omitted as allowed by Rule 4-02
for immaterial amounts. Accounts receivable valuation accounts at
June 30, 1998, 1997, and 1996, represent less than five percent (5%)
of the year end gross accounts receivable balance.
3. Exhibits
Number DESCRIPTION
3.1 Second Restated Certificate of Incorporation, as amended,
and Certificate of Amendment of the Second Restated
Certificate of Incorporation as filed with the Secretary of
State of Delaware on January 26, 1996. (Incorporated herein
by reference to Exhibit 4.1 to Registration Statement on
Form S-3, File No. 333-05917, as amended.)
3.2 By-laws of the Registrant, as amended. (Incorporated herein
by reference to Exhibit 4.2 to Registration Statement on
Form S-3, File No. 333-05917, as amended.)
4.1 Indenture dated as of April 23, 1996, between the Company
and PNC Bank, Kentucky, Inc., as trustee, relating to the
Company's 5% Convertible Subordinated Notes due 2006.
(Incorporated herein by reference to Exhibit 4.3 to
Registration Statement on Form S-3, File No. 333-05917,
as amended.)
4.2 Registration Agreement dated April 23, 1996, by and
among the Company, Salomon Brothers Inc, Merrill Lynch
& Co., and Montgomery Securities, as initial purchasers
of the Company's 5% Convertible Subordinated Notes due
2006. (Incorporated herein by reference to Exhibit 4.4 to
Registration Statement on Form S-3, File No.333-05917,
as amended.)
10(a)(1) Credit Agreement dated June 25, 1993, by and between the
Registrant, its Obligated Subsidiaries and its Lenders.
(Incorporated herein by reference to exhibit of the same
number to the Registrant's Annual Report on Form 10-K for
the year ended June 30, 1993.)
(2) Amended and Restated Credit Agreement dated as of
August 3, 1995, by and between the Registrant, its
Obligated Subsidiaries and its Lenders. (Incorporated
herein by reference to exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1995.)
(3) First Modification of Amended and Restated Credit Agreement
(dated as of August 3, 1995) made as of December 8, 1995
between the Registrant, its Obligated Subsidiaries and its
Lenders. (Incorporated by reference to Exhibit 10 to Form
10-Q for the quarter ended December 24, 1995.)
(4) Second Modification of Amended and Restated Credit
Agreement (dated as of August 3, 1995) made as of March 26,
1996 between the Registrant, its Obligated Subsidiaries and
its Lenders. (Incorporated herein by reference to Exhibit of
the same number to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1996.)
(5) Third Modification of Amended and Restated Credit Agreement
(dated as of August 3, 1995) made as of June 28, 1996
between the Registrant, its Obligated Subsidiaries and its
Lenders. (Incorporated herein by reference to Exhibit of
the same number to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1996.)
(6) Fourth Modification of Amended and Restated Credit Agreement
(dated as of August 3, 1995) made as of December 31, 1997
between the Registrant, its Obligated Subsidiaries and its
Lenders. (Incorporated herein by reference to Exhibit 10 to
Form 10-Q for the quarter ended December 28, 1997.)
(b)(1) Receivable Purchase Agreement dated as of June 30, 1995,
among SCI Technology, Inc., as Seller, SCI Systems, Inc.,
as Guarantor, and Receivables Capital Corporation, as
Purchaser, and Bank of America National Trust and Savings
Association, as Administrative Agent. (Incorporated herein
by reference to exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the year
ended June 30, 1995.)
(2) First Amendment to Receivable Purchase Agreement dated
as of July 14,1995. (Incorporated herein by reference to
Exhibit of the same number to the Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.)
<PAGE>
3. Exhibits
Number DESCRIPTION
(3) Second Amendment to Receivable Purchase Agreement dated
as of August 30,1995. (Incorporated herein by reference to
Exhibit of the same number to the Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.)
(4) Third Amendment to Receivable Purchase Agreement dated
as of December 15,1995. (Incorporated herein by reference to
Exhibit of the same number to the Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.)
(5) Fourth Amendment to Receivable Purchase Agreement dated
as of April 1, 1996. (Incorporated herein by reference to
Exhibit of the same number to the Registrant's Annual Report
on Form 10-K for the year ended June 30, 1996.)
(c)(1) SCI Systems, Inc. 1994 Stock Option Incentive Plan.
(Management contracts or compensatory plan) (Incorporated
herein by reference to exhibit 10(d)(1) to the
Registrant's Annual Report on Form 10-K for the year
ended June 30, 1995.)
(d)(1) Savings Plan of the SCI Systems, Inc. Employee Financial
Security Program, dated July 1, 1991.(Management
contracts or compensatory plan)(Incorporated herein by
reference to Exhibit 10 (i)(1) to the Registrant's Report
on Form 10-K for the fiscal year ended June 30, 1994.)
(e)(1) Deferred Compensation Plan of SCI Systems Employee
Financial Security Program, as amended and restated January
1, 1992.(Management contracts or compensatory plan)
(Incorporated herein by reference to Exhibit 10(j)(1) to
the Registrant's Report on Form 10-K for the fiscal year
ended June 30, 1994.)
(f)(1) Supplemental Retirement Plan of the SCI Systems, Inc.
Employee Financial Security Program, as amended and
restated April 1994. (Management contracts or
compensatory plan) (Incorporated herein by reference
to Exhibit 10 (k)(1) to the Registrant's Report on
Form 10-K for the fiscal year ended June 30, 1994.)
(g)(1) Adjustable Rate Senior Notes due 2006 Purchase Agreement,
made as of June 28, 1996.(Incorporated herein by reference
to Exhibit 10 (i)(1) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997.)
(h)(1) Senior Executive Officers Annual Incentive Plan. (Management
contracts or compensatory plan) (Incorporated herein by
reference to Exhibit 10 (j)(1) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1997.)
13 1998 Annual Report to Shareholders. Except for the parts
of the SCI Systems, Inc. Annual Report expressly
incorporated into this Form 10-K by reference, the Annual
Report is not to be deemed filed with the Securities and
Exchange Commission.
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports
The Company filed no reports on Form 8-K during the period of March 29,
1998 to June 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
SCI SYSTEMS, INC.
Date: September 24, 1998 By:/s/Olin B. King
Olin B. King
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE TITLE
September 24, 1998 /s/Olin B. King Chairman of the Board and
Olin B. King Chief Executive Officer
(Principal Executive Officer)
(Principal Financial and
Accounting Officer)
September 24, 1998 /s/A. Eugene Sapp, Jr. Director, President, and
A. Eugene Sapp, Jr. Chief Operating Officer
(Principal Operating Officer)
September 24, 1998 /s/Howard H. Callaway Director
Howard H. Callaway
September 24, 1998 /s/William E. Fruhan Director
William E. Fruhan
September 24, 1998 /s/Wayne Shortridge Director
Wayne Shortridge
September 24, 1998 /s/G. Robert Tod Director
G. Robert Tod
September 24, 1998 /s/Jackie M. Ward Director
Jackie M. Ward
[EXHIBIT 13]
BEGINNING OF 1998 ANNUAL REPORT TO SHAREHOLDERS
[COVER OF 1998 ANNUAL REPORT TO SHAREHOLDES]
SCI SYSTEMS, INC.
Annual Report 1998
Worldwide Electronics Manufacturing Services
[INSIDE FRONT COVER OF ANNUAL REPORT TO SHAREHOLDERS]
A Company Overview
SCI Systems, Inc., is a diversified international electronics manufacturer
with multibillion dollar annual sales. It designs, manufactures, markets,
distributes, and services electronic products for the computer, aerospace,
defense, telecommunication, medical, and entertainment industries, as well as
the U.S. Government. SCI, the world's largest electronics contract
manufacturer, operates the largest surface mount technology (SMT) production
capacity in the merchant market.
The Company conducts its activities through eight operational Divisions,
with six organized on a geographic basis and the other two structured along
functional lines. Serving a diversified and growing customer base across the
world, each Division operates multiple plants which manufacture components,
subassemblies, and finished products primarily for original equipment
manufacturers, but also for a variety of service providers and government
agencies. The Divisions also offer their customers a wide range of design,
engineering, purchasing, distribution, and other support services.
While the Company provides traditional "batch" manufacturing services, it
routinely provides "just-in-time" delivery from single or multiple regional
production facilities. A rapidly growing specialty is custom manufacturing and
shipping in "lot size of one" with as short as twenty-four hour delivery from
receipt of order.
Although the Company derives a majority of its revenues from hardware
manufacturing and maintains a broad technology base, it is primarily a
vertically integrated engineering and manufacturing services provider.
Dedication to close customer interaction constitutes the cornerstone of its
activities. The key elements of SCI's competitive focus - quality products,
competitive pricing, and customer responsiveness - are a proven foundation for
success. These fundamentals will continue to guide the Company as it capitalizes
upon the numerous growth opportunities available.
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SCI Facilities Around The World
A map of the world pin pointing the following SCI plant locations:
Pointe-Claire, CA, Rapid City, San Jose, Watsonville, Co.Springs, Fountain,
Huntsville, Augusta, Hooksett, Graham, Guadalajara, ME, Mexico City, ME,
Pathum Thani, TH, Penang, MA, Singapore, SI, Hortolandia, BR, Motala, SW,
Oulu, FI, Irvine, UK, Fermoy, IR, Grenoble, FR, Leek, NF, Tatabanya, HU
Caption:
The Company operates twenty-nine manufacturing facilities in fourteen countries
around the world.
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<PAGE>
[PAGE 1 OF ANNUAL REPORT TO SHAREHOLDERS]
Financial Highlights
Annual Report for the Year Ended June 30, 1998
(Dollars in thousands except for per share data)
No cash dividends were declared in the periods presented.
(See Part II, Items 7 and 8 of Excerpts from Form 10-K for Fiscal 1998, bound
herein.)
<TABLE>
<S> <C> <C> <C> <C> <C>
Fiscal Year 1998 1997 1996 1995 1994
Net Sales $6,805,893 $5,762,656 $4,544,759 $2,673,783 $1,852,478
Income from Continuing Operations 145,085 112,713 80,955 45,243 29,936
Per Common Share (Diluted) 2.13 1.69 1.34 .79 .54
Net Income 145,085 112,713 80,955 45,243 21,161
Per Common Share (Diluted) 2.13 1.69 1.34 .79 .39
Interest Expense, net of interest income 21,304 17,993 24,165 16,945 14,520
Taxes on Income from Continuing Operations 90,826 76,721 55,103 30,418 16,980
Total Assets 1,944,728 1,869,852 1,283,195 981,292 920,212
Borrowings 441,884 458,702 343,738 162,090 284,283
Cash and Cash Equivalents 184,346 290,809 46,493 10,277 35,822
Working Capital 759,428 754,222 549,650 280,124 395,628
Capital Expenditures 236,799 109,739 109,912 80,316 46,488
Depreciation and Amortization 103,534 76,848 60,972 49,839 48,623
Net Property, Plant, and Equipment 436,097 300,997 264,054 214,025 182,768
Shareholders'Equity 747,957 594,662 472,261 349,776 304,634
Per Common Share $ 12.46 $ 9.96 $ 7.98 $ 6.38 $ 5.58
Common Shares Outstanding 60,045,444 59,715,424 59,184,424 54,871,984 54,612,198
Employees 22,324 18,470 15,524 13,185 12,027
Manufacturing Plants 29 24 21 20 19
Facility Square Footage 5,005,015 3,885,000 3,510,000 3,021,600 2,834,000
Automated Assembly Lines 307 229 198 169 154
Pin-in-Hole Technology 61 48 43 40 42
Surface Mount Technology 246 181 155 129 112
</TABLE>
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An illustration of the flags of the following countries, along with the
country's abbreviation.
Caption:
Country Abbreviation Index:
Brazil (BR), Canada (CA), Finland (FI), France (FR), Hungary (HU), Ireland (IR),
Malaysia (MA), Mexico (ME), The Netherlands (NE), Singapore (SI), Sweden (SW),
Thailand (TH), United Kingdom (UK), United States (US)
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<PAGE>
[PAGE 2 OF ANNUAL REPORT TO SHAREHOLDERS)
Executive Letter
To the Shareholders:
The fiscal year ended June 30, 1998, was one of high activity and
considerable progress for SCI Systems, Inc. Revenues and earnings again reached
record levels. Profitability grew. Capacity was increased markedly in concert
with an ongoing infrastructure expansion program. Balance sheet strength was
maintained and several important ratios were improved. Customer relationships
were enhanced and refined. The Company's organizational and management
structures were updated to match current conditions and opportunities.
Revenues. Sales in fiscal year 1998 increased to $6.81 billion from the
$5.76 billion level of a year earlier. In spite of the effects of continued
rapid declines of average selling prices, liquidation of excess customer
distribution channel inventories, and a year of Asian economic turmoil, net
revenues grew 18.1%. Outsourcing of manufacturing services continues to gain
momentum as a major trend and sustained industry and Company growth prospects
are clearly favorable.
Income and Returns. Net income in fiscal year 1998 was $145.1 million,
28.7% above the $112.7 million of the prior year. (See five year history chart
below.) Earnings per share for the year was $2.42 on a basic basis and $2.13 on
a diluted basis, compared to $1.89 (up 28%) and $1.69 (up 26%) respectively in
fiscal 1997. Operating margin improved approximately 20 basis points during the
year. Return on average shareholders' equity for the year was 21.61% compared
to 21.13% in the previous year, once again exceeding the 20% plus profitability
objective of the Company.
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A bar chart showing Five Year Net Income ($ Millions):
Fiscal Year Net Income
94 21,161
95 45,243
96 80,955
97 112,713
98 145,085
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Balance Sheet. The Company's balance sheet retained its strength during
fiscal year 1998 with all balance sheet ratios well within their target ranges.
A sustained cash position enabled excellent liquidity in spite of much increased
capital expenditures in support of capacity expansion. Asset management focus
permitted 18% revenue growth and 45% fixed asset (net PP&E) growth without
increased working capital and with somewhat reduced indebtedness. The Company's
debt to capital ratio has steadily improved for each of the last eight quarters.
Shareholders' equity reached the three quarter billion dollar level at year end,
multiplying by two and a half times in the past five years.
Customers. During the year several important new customers were added.
(Several customers were also lost due to factors such as customer consolidation
and customer product line discontinuance.) At year end a very attractive list of
new customer prospects was being actively worked as the worldwide trend to
outsourcing was accelerated by the effects of tightened economic conditions.
Product Mix. The Company manufactures two broad classes of products:
subassemblies (typically called "cards") and finished products (typically called
"boxes"). The former are usually shipped to customer final assembly plants while
the latter are usually shipped directly to distribution channels or, in a
growing number of cases, directly to the end user. Each category has its own
distinct advantages. SCI's mix between the two types of products has stabilized
at approximately 50/50 on a dollar value basis. The Company is pleased with this
result and has the objective of sustaining approximately that mix level on an
ongoing basis.
Capacity Strategy. As average selling prices have declined rapidly,
attainment of revenue growth goals dictates that unit volume output be raised
substantially. This in turn requires large increases in total unit capacity.
During fiscal 1998 that growth was implemented, as in prior years, in three
basic ways: physical expansion of existing plants, construction of new "green
field" plants, and limited acquisition of customer plant divestitures. That
balanced approach is continuing into fiscal year 1999. Several specific
objectives are guiding the Company's expansion process. Customer prospects
should well match plant size and geographic location criteria. Importantly, at
maturity new capacity should have a cost structure which will allow it to be
fully competi-
<PAGE>
[PAGE 3 OF ANNUAL REPORT TO SHAREHOLDERS]
tive. Management and labor pools should be sufficiently elastic to support the
dynamics of SCI's business and be adequately flexible so as to be
philosophically compatible. Customer, product, and geographic diversification
should be maximized as much as possible. Capital cost and addition of long-term
liabilities should be as reasonable as possible. Resulting financial
intangibles, if any, should be as low as possible so as not to dilute the
Company's carefully nurtured balance sheet. All new capacity should be fully
modern and completely compatible with achieving the highest quality standards
existing anywhere in the world. Capacity expansion of course requires
expenditures for machinery and equipment to accommodate the latest technology
while improving both productivity and quality. This investment is ongoing
throughout the Company in both existing and new plants. The chart below
illustrates the growth in number of automated lines for subassembly production.
Fiscal year 1998 additions were by far the largest in SCI's history. The newer
generations of equipment are significantly faster and thus provide substantial
productivity and capacity increases.
Information Systems. The Company continues to invest sizable capital and
management resources in evolving and upgrading its internal information systems.
The Company remains committed to a multitiered system architecture with
appropriate levels of distributed functions. New applications and functionality
are being developed in support of evolving customer requirements and ongoing
supply chain management enhancements. Considerable effort and attention has been
applied to investigation, and remediation where required, of potential "Year
2000" problems. The Company aims for full hardware and software Year 2000
compatibility well in advance of the millennium.
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A bar chart showing Five Year Automated Assembly Lines:
Fiscal Year Automated Assembly Lines
94 154
95 169
96 198
97 229
98 307
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Organization and Personnel. During the year the Company adjusted its
organizational structure to match current circumstances and growth
opportunities. Six of SCI's Divisions are now aligned on a geographic basis and
two Divisions are structured along functional lines. Each of the eight Divisions
is headed by a Senior Vice President who reports to the Company's President and
Chief Operating Officer; during the year Mike Missios and David Rees were
promoted to two of those positions. Several individuals were named Vice
Presidents to serve as Plant Mangers as the number of facilities grew: Al Austin
and David Snape were promoted from within; Mark Klaver was rehired after
practicing law for an interim period; Krister Rapp and Antti Hintikka joined SCI
with the acquisition of the Scandinavian activities which they managed for
Nokia. During the year employment grew to 22,324 persons as expanded and new
facilities were staffed.
Outlook. Long-term trends remain favorable to the Company's mission and
goals. Near-term market conditions, however, are expected to moderately dampen
revenue growth rates and pressure profit margins. Product prices have fallen
rapidly and market demand has slowed somewhat in several product areas. A number
of the Company's customers have experienced difficulties from which SCI cannot
be fully insulated. The Company has provided the investment community with
fiscal year 1999 guidance which also reflects the impact on margins in the
September and December quarters of several new plants coming on line and several
customer and product transitions occurring. Both opportunities and challenges
abound. The Company's management looks forward with enthusiasm to addressing
each as the Company continues to broaden its scope and grow its revenues and
earnings.
/s/ Olin B. King /s/ A.E. Sapp, Jr.
Olin B. King A. Eugene Sapp, Jr.
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
<PAGE>
[PAGE 4 OF ANNUAL REPORT OF SHAREHOLDERS]
Computers
SCI is a leading supplier of manufacturing services to the computer
industry. That industry continues to expand its utilization of outsourcing
providers to minimize cost and streamline product introduction, manufacturing,
distribution, and after-sale support. The Company is a leading provider of
printed circuit board assemblies to a number of large computer companies on a
multinational basis. SCI is also a leading supplier of finished computers and
continues to benefit as the trend of recent years continues in the computer
industry's outsourcing of engineering support, build-to-order manufacturing,
distribution, and customer service.
The majority of SCI's plants produce printed circuit board assemblies for
one or more of the leading computer companies. Those are used in a wide range of
finished products from notebooks to enterprise servers. These printed circuit
board assemblies vary widely in complexity and size and employ a broad range of
interconnect, component, and process technology innovations.
During fiscal year 1998 additions of SMT assembly equipment exceeded any
year in the history of the Company, in part to support growth in customer demand
for computer motherboards and other complex assemblies. Two expansions of SCI's
plant in Guadalajara, Mexico, were implemented to support assembly requirements
of customers that are among the fastest growing in the industry. Those expanded
volumes, along with those of several other SCI plants, more than offset the
unprecedented declines in average selling prices experienced in computer
products during the year. PC motherboard export activities were strong in Asia
with the Division there producing record quantities.
A major computer company has selected SCI to produce PC motherboards at
multiple locations beginning in early fiscal year 1999. This new initiative will
involve SCI's plants in Mexico, Malaysia, Hungary, and Brazil in support of
customer requirements for North America, Southeast Asia, Europe, and South
America.
SCI's finished computer and related services business grew during the year
as leading customers benefited from market growth. Approximately three million
finished computers were delivered by SCI to customers, third party distribution
channels, and end users. A mix of mobile, home, small office, large office, and
enterprise computer systems were produced, supported by a broad range of
engineering, product validation, distribution, and after-sale activities.
Customers for finished computers continue to grow in number as others
recognize the benefits of SCI's advanced manufacturing support systems,
technical depth, volume production, and build-to-order expertise. Recent
customer additions will lead to growth in server and high end workstation
activities as well as introduction of computers and workstations specifically
designed to provide high quality 3-D graphics capabilities. Several of these new
activities will be carried out in the Fountain, Colorado, plant originally
purchased from Apple Computer. This plant is expert in the introduction,
production, and support of finished computer products.
Two product families of the Company's largest customer have both enjoyed
significant volume growth, resulting in required capacity expansions. A new
facility in Huntsville, Alabama, has been specifically designed to house the
manufacturing of one of the product families; it will commence operations in the
second quarter of fiscal year 1999. Facility space currently dedicated to both
programs will be modified to provide enhanced manufacturing processes and
significant capacity growth for the other product family.
The Company's largest computer customer has further leveraged its strategic
relationship with SCI by selecting it to produce finished computers in Europe.
These activities are being carried out in a recently occupied Dutch facility.
Full scale production is expected there by the middle of fiscal year 1999.
SCI continues to expand its design and engineering resources globally in
support of customers' new product developments; a growing number of customers
are using these resources to produce custom designs in both printed circuit
board assemblies and finished products. During fiscal year 1998 the Company
combined the design resources of several of its operations to form a
consolidated base of engineering talent and service as part of a newly formed
Technology Division. The trend of outsourcing design and engineering support
activities is expected to continue. SCI is well postured to take advantage of
this practice in support of existing and future customers.
[PAGE 5 OF ANNUAL REPORT TO SHAREHOLDERS]
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Three pictures on the page with the captions:
1.) Personal computers are produced in "lot-size-of-one" and shipped directly to
distribution or directly to the end user.
2.) SCI produced "thin client" computers provide numerous architectural options
in the networking environment.
3.)SCI produces millions of finished computers, workstations, and servers each
year for a wide variety of applications.
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<PAGE>
[PAGE 6 OF ANNUAL REPORT TO SHAREHOLDERS]
Datacom and Telecom Products
Datacom and telecom products represent an increasing portion of SCI's
production activities. Demand for these products is growing at an accelerating
rate and major telecommunication companies are rapidly expanding their use of
outsourcing as a key element of their manufacturing strategies. High demand for
products by a growing number of users is expected to continue well into the
future.
The Company produces a wide range of products for applications including
local area networks (LANs), wide area networks (WANs), wireless communications,
telephone switching, video conferencing, the Internet, multiple online servers,
and special purpose data networks. A steady stream of new products is being
introduced to provide new user services and satisfy demand for transmission of
voice, data, and video.
The Company continues to provide printed circuit board assemblies to five
of the top six telecommunication companies in the public switching equipment
business. The Company's manufacturing partnership with Ericsson Telecom AB
involves the production of selected printed circuit board assemblies for their
large switches used in public telecom networks. During the year these assemblies
were introduced into full production at SCI's Scottish facility and production
begun in Hungary and Mexico as well. An additional SCI manufacturing location
for Ericsson is expected to commence operation before the end of calendar 1998.
Near the end of the fiscal year, SCI expanded its relationship with Nokia
Corporation of Finland by acquiring the assets and personnel associated with an
assembly plant in Oulu, Finland, and entering into a multiyear manufacturing
agreement to support Nokia from that facility. Assemblies produced there are
primarily used in the customer's fixed access switches and wireless base station
product lines. The Oulu plant provides new product introduction, local
manufacturing services, and a gateway to other SCI plants for capacity
optimization, flexibility, and geographical diversification as required by the
customer. This relationship is structured to allow the customer to enhance its
focus on its core competencies in mobile communications, fixed
telecommunications, and data communications while leveraging SCI's multinational
manufacturing skills and resources.
SCI has been selected as a strategic manufacturing partner for a major
telecommunication company headquartered in North America. This corporate
relationship places the Company in an excellent position to support several
customer divisions and build on the work already ongoing for the customer at
multiple SCI locations.
Another major company has selected SCI to produce assemblies for
ground-based radio frequency telephone communication systems designed to provide
wireless telephone services to a large numbers of potential users in Asia and
Latin America. This program is significant to SCI as it is indicative of
numerous new outsourcing initiatives of this and other large multinationals in
the telecommunication business.
SCI supplies a broad range of printed circuit board assemblies and finished
products to the network product businesses of several customers. Products
supported from multiple Company locations include routers, hubs, switches, and
multiplexers.
A broad range of computer and computer peripheral interconnect cards are
produced by several plants. Modem boards and products are also produced for
multiple customers, as are large volumes of PCMCIA format plug-in modems for a
customer's highly successful line of notebook computers.
The privatization of the telephone system in Brazil has led to significant
opportunities for SCI's Brazilian operations. The Company is involved with
several of the partners in the modernization of Brazil's telephone systems.
During the year production commenced of a family of complex assemblies for use
in a large cellular network base station implementation. In early fiscal year
1999 the Brazilian plant will begin production of advanced multiplex equipment
for a new customer there.
The Company produces cable modems that provide computer owners high speed
internet access over TV cables, data terminals for tracking the location and
status of vehicles and cargo containers via satellite data links, and broadband
digital access products that handle voice, data, and switched digital video over
fiber-to-the-curb (FTTC) installations.
As datacom and telecom technologies, services, and number of users continue
to expand, equipment demand and increased outsourcing are presenting numerous
new opportunities for growth in this product segment.
<PAGE>
[PAGE 7 OF ANNUAL REPORT TO SHAREHOLDERS]
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Three pictures on the page with the captions:
1.) Functional tests are performed on a complex asynchronous transfer mode (ATM)
switch assembly for the U.S. market.
2.) An asychronous transfer mode (ATM) product is produced in the Thailand
facility for a European customer.
3.) SCI manufactured token ring switches undergo extensive testing and
configuration validation prior to shipment.
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[PAGE 8 OF ANNUAL REPORT TO SHAREHOLDERS]
Computer Peripherals
SCI produces a broad range of subassemblies for computer peripherals as
well as finished products. They vary widely in complexity from small memory
modules to large format high resolution color plotters. A growing number of
peripheral products manufactured by SCI employ mechanisms and are driving
expansion in the Company's mechanical assembly capabilities and activities.
For several years SCI's Asian operations were the leading supplier of
printed circuit board assemblies for the disk drive industry concentrated in
that area. Industry consolidations, pricing pressures, and other factors have
led to replacement of much of that business with more complex and more
diversified products.
Large volumes of memory assemblies are produced by SCI's Singapore plant.
A range of standard in-line modules for computer add-in memory are assembled and
tested using high levels of automation throughout the processes. Millions of
such modules have been produced for a major semiconductor company with
exceptional process efficiency and quality.
The Company also produces unique three dimensional stacked memory modules.
The support requirements for ultra-high density packaging of memory devices to
satisfy space constraints imposed by several commercial and government
applications.
SCI is a major supplier to a leading company in the mass storage systems
business. Printed circuit board assemblies are produced for use in the
customer's Redundant Array of Inexpensive Disk (RAID) systems, optical storage
systems, and large automated tape libraries. A number of other customers are
provided electronic assemblies for use in tape drives and optical storage
devices.
The Company produces high volumes of 3-D graphics adapter cards for several
companies in the personal computer and workstation businesses. This
multinational business involves several SCI plants and a range of products that
are marked by rapid feature growth and frequent model turnover.
During the year SCI began producing a family of printed circuit board
assemblies for a world leader in graphic design systems. Peripheral assemblies
such as memories, backplanes, and video cards are being provided along with
workstation motherboards. SCI expects this relationship to grow as the customer
proceeds with planned performance and design enhancements and several new
product offerings.
A major customer obtains printed circuit board assemblies for its ink-jet
printers from SCI. Volumes grew significantly during the year requiring facility
expansions and equipment additions. The Company is broadening its relationship
with this customer and has been selected to manufacture finished printer
products, for which board assemblies are already being produced. Finished
product assembly will commence in the second quarter of fiscal year 1999 with
full scale production reached in the fourth quarter.
A high performance color ink-jet printer for the graphics art industry is
being fully produced by SCI. This product resulted from a joint development
effort between the Company and the customer and leveraged SCI's mechanical and
electronic design skills, as well as its experience in producing finished
electronic products that employ complex mechanisms. A high end expanded format
version of the printer is in final stages of development with manufacturing
switchover to this newer model planned in the near future.
SCI continues to supply electronic assemblies for a major customer's line
of color plotters. Multiple SCI plants are participants in this activity. The
customer relies upon the Company for several new product engineering services.
During the year SCI produced large volumes of high resolution color
scanners on a finished product basis. Manufactured in a cleanroom environment,
these scanners are a further demonstration of the Company's success in deploying
unique manufacturing processes as well as its mechanical assembly expertise.
A leading supplier of point-of-sale data entry and management systems for
the hospitality industry has selected SCI to provide the majority of its
manufacturing requirements on a finished product basis. The customer has also
contracted with the Company to provide ongoing product design services with the
view of achieving improved performance and cost reductions through design
improvement, design standardization, and reduced manufacturing complexity.
SCI produces a number of other peripheral products including video
monitors, X-Terminals, special purpose terminals, ATM control boxes, notebook
computer docking stations, and a number of add-in circuit boards that enhance or
expand peripherals' functionality.
[PAGE 9 OF ANNUAL REPORT TO SHAREHOLDERS]
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Three pictures on the page with the captions:
1.) In-circuit testing is carried out by the latest equipment in each facility
to ensure the highest levels of quality and performance.
2.) Production of optical scanners involves precision assembly in a tightly
controlled and carefully monitored cleanroom.
3.) Computerized point-of-sale terminals with a built-in card reader are
produced in volume for various hospitality industry applications.
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[PAGE 10 OF ANNUAL REPORT TO SHAREHOLDERS]
Medical Products
A growing number of SCI's plants are approved to manufacture medical
products to the FDA's stringent requirements covering manufacturing practices,
process controls, documentation, and traceability. These plants provide a wide
variety of electronic subassemblies and finished products for diagnostic,
monitoring, treatment, and patient care applications. Such products are growing
in sophistication and electronic content with attendant opportunities for SCI to
expand its manufacturing activities and related services in support of the
medical products industry.
For several years SCI has manufactured a family of patient monitoring
equipment for a major medical company. These products are manufactured complete
and shipped in multiple language configurations to the customer's domestic and
foreign markets. Multiple configurations are employed to automatically provide
non-invasive real time and recorded measurement of a range of vital
physiological parameters. These monitoring instruments are widely distributed
throughout hospital acute care settings such as Emergency, Progressive Care, Day
Surgery, Labor and Delivery, GI/Endoscopy, and Medical/Surgery Units.
Enhancements of existing products, and introduction of new ones, are expected to
sustain these activities well into the future.
The Company continues to enjoy a strategic partnership with a European
based multinational medical products company in designing and manufacturing the
customer's line of blood glucose monitors. Those design and manufacturing
services are provided in the U.S. and Europe and are growing in both locations.
The primary products are hand-held monitors that permit self measurement of
blood glucose levels using quick and simple procedures. Nearly five million
finished units have been supplied by SCI and production rates continue to
accelerate. A special version of a monitor for blind diabetics and a clinical
version with expanded capabilities have broadened SCI's design and manufacturing
support of this customer. This mutually beneficial relationship is expected to
expand to include other technologies introduced by the customer.
- --------------------------------------------------------------------------------
One picture on the page with the caption:
Final validation, testing, and calibration are performed on blood glucose meters
before distribution to doctors' offices and hospitals.
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[PAGE 11 OF ANNUAL REPORT TO SHAREHOLDERS]
A number of medical imaging products are supported by SCI. A complete
electronic control system is being produced in a U.S. plant for use with a major
electronic company's advanced X-ray equipment. At the customer's request, these
activities will soon move to the Company's new plant in Monterrey, Mexico. This
is anticipated to provide a solid base for growth of medical product
manufacturing at this location.
Numerous printed circuit board assemblies are manufactured for Computed
Tomography (CT) Scanners, Magnetic Resonance Imaging (MRI) machines and X-ray
systems. SCI also produces assemblies that are used for viewing, manipulation,
mass storage, and retrieval of medical images as well as other electronic
assemblies for kidney dialysis machines, sleep apnea pressure pumps, hospital
ventilator systems, and color ultrasound systems.
The Company's well established base of medical product activities, and the
numerous opportunities identified, should produce growth in number of products
supplied to existing and new customers.
- --------------------------------------------------------------------------------
Two pictures on the page with the captions:
1.) Sophisticated electronics are functionally tested in high performance X-ray
equipment produced by SCI for a leading company.
2.) Patient monitoring equipment is manufactured in volume for a leading health
care equipment company.
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[PAGE 12 OF ANNUAL REPORT TO SHAREHOLDERS]
Consumer Products
Consumer electronics have emerged in recent years as a multinational growth
market for the Company. Both subassemblies and finished products are
contributing significant revenues. New consumer services such as the Internet,
digital direct broadcast TV, and wireless voice and data communications are
proliferating around the world with extraordinary speed. An expanding number of
multifunction interactive "electronic home appliances" should evolve to handle
the growth in voice, data, and video services from an increasing number of
sources. SCI has established itself as a primary provider of such products to
several large companies.
The Company is supplying a family of direct broadcast satellite receivers
for a leading marketer from several plants in North America and Europe. These
receivers provide reception of a wide range of digital TV channels including
selected pay-per-view programming. A number of high quality music channels are
also accommodated by the receivers. The customer currently provides services to
North American consumers from four self-owned satellites. The introduction of
lower cost receiver models with advanced features, including reception of local
programming, should stimulate growth in demand for these products. Ongoing
development and release of new products with new features is expected to sustain
consumers' interest. Direct broadcast receivers are being delivered by SCI at a
rate of over two million per year to support the customer's rapidly expanding
subscriber base.
SCI has been selected by the Digital Video Systems group of a large
multinational company to manufacture a family of digital satellite receiver
products. The market for such receivers is becoming increasingly global in
nature and SCI is well positioned to serve the customer's needs in multiple
geographies. The customer is expanding its markets in response to the
proliferation of digital technology for the transmission, distribution, and
reception of multimedia content, i.e., video, audio, and data. Production has
begun in an existing SCI Mexican factory. During fiscal year 1999 this work will
be moved to a new facility in Monterrey, Mexico, which is well suited by
location, capacity, and design to support the production and distribution of
these products. Production will soon spread to Brazil and plans are being made
to also support the customer's growth from SCI plants in Europe and Asia.
During the year the Company purchased the assets of a major
telecommunication company's Multimedia Network Terminals manufacturing facility
in Sweden, hired related personnel, and commenced production in the facility
under a multiyear supply agreement. This is an expansion of the Company's
strategic partnership with this customer that spans other product lines as well.
The customer now focuses its resources on product design for various digital
media including direct broadcast satellite, fixed cable, and ground based
broadcast, with SCI manufacturing the products for shipment to various markets.
SCI produces an Internet "TV set top" product that uses infrared (IR) TV
remote control for simple Internet browsing and a remote IR keyboard for text
interface such as E-mail. This product was developed on a cooperative basis with
a large multinational customer. The Company made significant contributions to
the product's electronics design.
The Company produces volumes of miniature printed circuit board assemblies
that provide electronic control for a customer's camera products. Printed
circuit board assemblies, including direct mounted keypad and display, are also
produced in volume for a large multinational's cellular telephone product line.
SCI's line of Conductive Supply Equipment for Electric Vehicles includes a
consumer Level I portable device that allows an Electric Vehicle to be connected
to a standard 120 VAC outlet by the driver. The device offers the vehicle owner
the ability to deliver charging current to the vehicle's batteries while away
from the customary charging base station. SCI should benefit from the expected
increase in Electric Vehicle sales as alternate energy sources receive increased
attention.
SCI's consumer products business is expected to grow with the high level of
functional sophistication and product proliferation associated with the "digital
age." Existing consumer product activities and the Company's continued expansion
of its final assembly and distribution operations suggest that consumer product
growth will be weighted heavily towards production and distribution of finished
products.
[PAGE 13 OF ANNUAL REPORT TO SHAREHOLDERS]
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Three pictures on the page with the captions:
1.) A newly acquired facility in Sweden is producing multimedia network
terminals for a rapidly growing European market.
2.) Mainboards for satellite TV receivers undergo functional testing during
production for the U.S. domestic market.
3.) SCI is producing millions of direct broadcast satellite receivers annually
for a number of customers in several plants worldwide.
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[PAGE 14 OF ANNUAL REPORT TO SHAREHOLDERS]
Industrial Products
SCI is expert in designing and producing high reliability equipment exposed
to harsh environments for military and aerospace applications. This experience
is benefiting a number of customers requiring industrial grade printed circuit
board assemblies and finished products. Industrial requirements are
characterized by wide variation in product type with lower volumes than with
many other electronic product categories. SCI's supply chain management systems
and flexible manufacturing processes are particularly attractive to customers
requiring rapid response in high mix manufacturing.
The Company provides ruggedized high reliability printed circuit boards and
module assemblies to a leading producer of railroad locomotives. These critical
electronic products satisfy the rigorous performance and safety requirements of
this transportation segment. Over five hundred different items are delivered in
varying quantities.
SCI produces hundreds of printed circuit board assembly types that are used
in the live and taped broadcast industry for studio and remote programming,
special effects generation, and signal and transmission routing and processing.
The Company has recently supported its customer's major product phase-over from
analog to digital and HDTV formats.
Printed circuit board assemblies are currently supplied to factory
automation customers in the U.S. and Europe. Board assemblies are also
manufactured for use in a range of commercial instruments and test equipment, as
well as a gasoline pump system that features automatic fueling and customer
billing.
The Company supplies a large international customer a product for
installation in cargo containers that allows the owner of the container to
continuously monitor its location by satellite using the Global Positioning
System. SCI also manufactures a hand-held tracking device for a major small
package shipping company. This product permits shipments to be scanned and
tracked as they pass through the customer's courier and transportation system.
Leveraging the Company's power management
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One picture on the page with the caption:
SCI utilizes a large class 1,000 cleanroom facility to assemble a variety of
equipment used in the production of semiconductors.
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[PAGE 15 OF ANNUAL REPORT TO SHAREHOLDERS]
experience in military and aerospace applications, SCI has developed a family of
devices to control and monitor the delivery of energy to battery chargers
onboard Electric Vehicles (EV). Environmental and energy concerns are expected
to stimulate the development and production of EVs and SCI's family of charge
supply and control products will support the market as it develops.
The Company provides a number of semiconductor processing equipments to the
microelectronics industry. A family of chemical and gas cabinets are produced to
distribute and mix pure gases and chemicals used in semiconductor processing.
Automated wet benches supplied by SCI robotically handle semiconductor wafers
under computer control as they pass through various liquid washes in a series of
processing tanks.
SCI also supplies a hand-held engine analyzer for a major customer which
developed the product for one of the world's largest automobile companies. These
units are used by dealer technicians to perform computerized analysis of engine
performance.
- --------------------------------------------------------------------------------
Two pictures on the page with the captions:
1.) SCI manufactures control electronics for the railroad locomotive product
line of a large multinational customer.
2.) The Company produces hand-held engine diagnostic equipment for use by
service technicians in automobile dealerships.
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[PAGE 16 OF ANNUAL REPORT TO SHAREHOLDERS]
Military and Aerospace Products
SCI designs and manufactures military and aerospace products for U.S. and
foreign governments and their prime contractors, as well as domestic and foreign
aerospace companies. These activities are the responsibility of the Technology
Division which has broad capabilities in electronic and electromechanical design
and manufacturing. Products and systems are provided for aircraft, launch
vehicle, missile, satellite, and surface applications.
SCI continues to provide voice and communications control systems for the
F-15, F-16, F/A-18, C-130J, and AV-8B aircraft. It also supplies the NAVSTAR
Global Positioning System (GPS) User Equipment in multiple configurations for
use on fixed-wing aircraft, helicopters, and ships. SCI also produces the
digital audio intercommunications unit for the V-22 Osprey tilt rotor aircraft
and is developing a variant of that equipment to support the Special Operations
Forces V-22.
Multiyear production continues of the systems computers, weapons computers,
and digital intercommunications systems for the Apache Longbow helicopter. These
items upgrade the Apache aircraft's avionics, weapons control, and voice
communications capabilities, all of which play a significant role on
contemporary "digital" battlefields. Initial sales of Apache equipment include
units for the U.S. fleet as well as aircraft ordered by the United Kingdom and
The Netherlands.
The Company is producing the U.S. Army's Patriot Missile's Integrated
Digital Operator Control System and the Enhanced Fiber Optic Guided Missile's
gunner's console and fiber optic dispenser systems.
The Company has been a leading provider of a wide range of data bus
products for military and aerospace applications. SCI continues to produce
Current Mode Couplers and Standard Interface Modules, critical elements of the
fly-by-wire system employed on the Boeing 777 aircraft now in service with
airlines around the world. Fly-by-wire provides for operation of the aircraft's
engines and flight control surfaces as commanded by electronic
- --------------------------------------------------------------------------------
One picture on the page with the caption:
SCI designed and built weapons processor computers for the Apache Longbow
helicopter are tested and programed prior to delivery.
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[PAGE 17 OF ANNUAL REPORT TO SHAREHOLDERS]
signals transmitted over wire, rather than by the conventional mechanical
linkages.
SCI provides a family of versatile flight test instrumentation systems in
modular form; these are designed for joint service applications on a full range
of aircraft. The latest miniaturized version of this equipment is supporting the
Joint Strike Fighter development program.
Other aerospace products include nonvolatile memories for aircraft and
satellite applications, interference blanker units (processors) for the F-16 and
Japanese F-2 aircraft, Digital Data Acquisition Systems for the Air Force's
Titan IV Launch Vehicle, and a family of standard VME bus computer subsystems.
Several military customers have for some time outsourced electronics
manufacturing to SCI. A growing number of industrial customers are now
leveraging those capabilities where critical products are ruggedized to operate
in harsh environments and are produced under the stringent controls typically
imposed by military specifications.
- --------------------------------------------------------------------------------
Two pictures on the page with the captions:
1.) Communications equipment for the F-15 family of aircraft has been produced
by SCI since the inception of the program.
2.) SCI standard product equipment based upon the popular VME bus is employed by
a growing number of military programs.
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[PAGE 18 OF ANNUAL REPORT TO SHAREHOLDERS]
Facility Additions
During fiscal 1998 the Company leased buildings as interim facilities in
six locations to support expanding unit volumes. Those facilities are being
phased out as permanent facilities are completed and the leases expire.
The Company has implemented a floor space expansion and upgrading of its
existing plant in Singapore. The Company has completed construction of the fifth
phase of its existing plant in Guadalajara, Mexico, followed by renovation and
expansion of the first phase of that facility. The Company's Quebec, Canada,
plant was housed since its inception in a leased facility which had been
outgrown. A doubling of the plant space in Quebec, Canada, was accomplished
during the year by constructing an owned facility to replace the leased one.
Design has been completed, land acquired, and construction begun of an expansion
of SCI's Irish facility to approximately double its size. In late fiscal year
1997 the Company acquired the nucleus of a Brazilian business unit which was
housed in two leased facilities. During the year SCI acquired nearby land and
existing buildings in Hortolandia, Sao Paulo State. An extensive remodeling
program was well progressed at year end with completion scheduled in September
1998. At that time SCI's Brazilian activities will be consolidated at the much
larger new site.
At year end SCI acquired manufacturing activities from Nokia Corporation in
Motala, Sweden, and Oulu, Finland. The facilities were leased from Nokia and
remain in service.
SCI entered the Central European market during the year with land purchase
and facility construction in Tatabanya, Hungary. Located on the motorway between
Budapest and Vienna, the area has cost characteristics of Eastern Europe while
positioned at a main gateway to Western Europe. During the year SCI was selected
by a major customer to construct and operate a computer manufacturing plant in
The Netherlands. A building has been leased and outfitted in Leek in Groningen
Province and production has begun. Land has been acquired in Heerenveen in
adjacent Friesland Province and design completed of a permanent building to be
constructed there during fiscal and calendar 1999. During the year land was
acquired and construction completed of a new facility in Huntsville, Alabama.
The plant will serve as the manufacturing site of a new product for a medical
products customer with portions of the building used initially for other
products. An adjacent tract of land has been purchased and construction is in
progress of an additional manufacturing facility to be dedicated to a division
of a major customer. That facility is scheduled for completion in September
1998. Land for a second Guadalajara, Mexico, facility has been acquired and
construction initiated for September 1998 completion. In order to further
diversify the Company's Mexican operations, a plant is under construction in
Apodaca, Nuevo Leon, Mexico, a suburb of Monterrey, with expected completion
also in September 1998.
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One picture on the page with the caption:
A Guadalajara, Mexico, facility had additional phases of construction completed
during fiscal year 1998.
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[PAGE 19 OF ANNUAL REPORT TO SHAREHOLDERS]
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Six pictures on the page with the captions:
1.) A new facility has recently been placed in operation and an adjacent
facility is nearing completion in Huntsville, Alabama.
2.) The new Pointe-Claire, Quebec, Canada, facility was completed during the
year and is now occupied and in full operation.
3.) SCI started operations in this interim facility in Leek, The Netherlands,
during the fourth quarter of fiscal 1998.
4.) A new first phase facility in Tatabanya, Hungary, was completed during the
year and is now in full operation.
5.) A Hortolandia, Brazil, manufacturing campus has been purchased and is being
upgraded to meet SCI requirements.
6.) SCI acquired the assets housed in this Oulu, Finland, facility from an SCI
customer in the fourth quarter of fiscal 1998.
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[PAGE 20 OF ANNUAL REPORT TO SHAREHOLDERS]
Equipment and Assembly Technology
Sixty-five surface mount technology (SMT) and thirteen pin-in-hole (PIH)
automated assembly lines were installed during the year, bringing line counts to
246 and 61 respectively. This represents the largest expansion ever installed by
the Company in a single year. The newest generation of equipment operates at
substantially higher speeds to provide much increased productivity per line.
SCI's history is rooted in the ongoing deployment of the latest technology
in its manufacturing processes. Through continuous process development and
implementation of Computer Integrated Manufacturing, the Company offers a full
range of advanced capabilities to its customers. With International Organization
Standards registration of its design (ISO9001) and quality assurance systems
(ISO9002), SCI consistently receives high scores from its customers in the areas
of workmanship, specification compliance, and product quality.
In the area of surface mount technology, SCI has high volume assembly
capabilities for leaded semiconductor devices with lead spacings as close as
0.010 inches and discrete components with package size designations as small as
0201 (.020 x .010 inches). To support these requirements, the Company employs
automated solder paste application, precision device placement, and
sophisticated soldering equipment and processes. The Company has the installed
capability to handle virtually any plastic or ceramic Area Array based component
package, including Ball Grid Array and Column Grid Array, with input/output
counts as high as 1089.
SCI is a leader in combining conventional microelectronics technology with
SMT (surface mount technology) and successfully integrates COB (chip on board),
COF (chip on flex), TCP (tape carrier package), MCM-L (multi-chip module on
laminate), and CSP (chip scale package) in mixed technology assemblies.
The Company is committed to preserving the environment and works to
identify and incorporate environmentally friendly materials into its
manufacturing processes. The Company is actively pursuing ISO14000 registration
for its facilities worldwide.
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Three pictures on the page with the captions:
1.) A specialized automated manufacturing line produces flexible circuit
assemblies in a class 10,000 cleanroom.
2.) SCI operates a total of 246 surface mount technology (SMT) assembly lines in
many plants around the world.
3.) Ball Grid Array component packages require precision alignment as they are
assembled by high speed SMT equipment.
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<PAGE>
Excerpts From
Form 10-K
SCI SYSTEMS, INC.
Fiscal 1998
Annual Report
to the
United States
Securities and Exchange
Commission
<PAGE>
[PAGE 1 OF EXCERPTS FROM FORM 10-K]
EXCERPTS FROM FORM 10-K
FOR FISCAL 1998
(EXCEPT FOR THE PARTS OF SCI SYSTEMS, INC.
ANNUAL REPORT TO SHAREHOLDERS EXPRESSLY INCORPORATED IN THE FORM 10-K BY
REFERENCE, THE ANNUAL
REPORT TO SHAREHOLDERS IS NOT TO BE DEEMED FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION)
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[...X...] ANNUAL REPORT TO SHAREHOLDERS PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
Commission File No. 0-2251
SCI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
PART I
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation:
(i) statements regarding future business, backlog, seasonality, government
programs, operations' growth, the sufficiency of the Company's liquidity and
capital resources, projected capital expenditures, Year 2000 readiness, and
qualitative disclosure about market risks; (ii) statements under the caption
"Outlook" on page 3 of the 1998 Annual Report to the Shareholders; and (iii)
statements containing the words "may," "believes," "anticipates," "estimates,"
"expects," and words of similar import. These statements are subject to certain
risks, uncertainties, and other factors which could cause actual results to
differ materially from those anticipated, including, without limitation, the
risks described herein.
ITEM 1. BUSINESS.
See inside front cover and pages 2 to 20 of the 1998 Annual Report to
Shareholders ("Annual Report to Shareholders"), incorporated herein by
reference.
MARKETING, CUSTOMER CONCENTRATION, AND
DEPENDENCE ON THE ELECTRONICS INDUSTRY
A majority of the Company's revenues are derived from direct sales to original
equipment manufacturers. Marketing is conducted primarily by factory-based
personnel in Brazil, Canada, Finland, France, Hungary, Ireland, Malaysia,
Mexico, The Netherlands, Singapore, Sweden, Thailand, the United Kingdom, and
the United States. The Company advertises on a small scale and participates in a
modest number of industry trade shows.
Although the Company has several hundred customer accounts, a significant
percentage of sales is derived from a limited group of customers in any
particular period. Sales to individual customers that exceeded 10% of annual
sales in any of the last three fiscal years were: Hewlett-Packard,$2,692 million
in 1998, $2,054 million in 1997, and $2,152 million in 1996; and Apple Computer,
$1,134 million in 1997. In fiscal year 1998 the Company's ten largest customers
contributed more than 75% of revenues. Significant reductions in sales to any of
these customers could have a material adverse effect on the Company's results of
operations. Customer contracts can be canceled and volume levels changed or
delayed at any time without notice. Timely replacement of cancelled, delayed, or
reduced contracts with new business cannot be assured. These risks are
exacerbated as a majority of the Company's sales are to customers in the
electronics industry, which is subject to rapid market and technological changes
and frequent product obsolescence. Factors affecting the electronics industry in
general, or any of the Company's major customers in particular, could have a
material adverse effect on the Company's results of operations.
The majority of the Company's contracts are with customers in the high
technology industry. Credit terms relating to both accounts receivable and
contract inventories are extended to customers after performing credit
evaluations. When significant credit risks exist, letters of credit or other
appropriate security are generally requested. However, credit losses on customer
contracts have occurred in the past and no assurances can be given that credit
losses, which could be material, will not reoccur.
ORDER BACKLOG
In recent years, components used in the Company's products have experienced
substantial price and lead time fluctuations. These fluctuations have
significantly affected the timing and size of order placements by the Company's
customers. Consequently, backlog is not considered a definitive indication of
future revenue and, to minimize erroneous conclusions, will only be reported in
the future annually as is required by the Securities and Exchange Commis-
[PAGE 2 OF EXCERPTS FROM FORM 10-K]
sion. June 30, 1998's backlog approximated $2.6 billion as compared with $3.2
billion on June 30, 1997. The decline is attributable largely to much reduced
component delivery lead times.
GROWTH MANAGEMENT
The Company has experienced rapid growth in recent years. It has acquired and
built facilities in several locations and may continue to do so from time to
time. There can be no assurance that historical revenue growth will continue or
that the Company will successfully manage existing operations or future plants
it may acquire or build. As the Company manages its operations and expands
geographically, it may experience inefficiencies related to new operations and
broadened geographic dispersion. The Company could also be adversely affected if
its new facilities do not achieve growth sufficient to offset increased
expenditures associated with geographic expansion. In addition should the
Company increase expenditures in anticipation of future sales levels which do
not materialize, profitability could be adversely affected. Moreover,
occasionally customers may require rapid production increases which can stress
the Company's resources.
SEASONALITY
The Company has historically not considered its business to be consistently
seasonal, although seasonal demands for its customers' products sold to
consumers may impact quarterly revenues. In recent periods the proportion of the
Company's products ultimately sold at retail has expanded, which has increased
seasonality in the Company's sales.The Company believes this trend may continue.
GLOBAL BUSINESS CONSIDERATIONS
The Company operates internationally with the majority of revenue generated in
the United States, but with significant foreign activities. The Company's U.S.
export and foreign sales were $2.292 billion in 1998, $1.514 billion in 1997,
and $1.611 billion in 1996, representing 34% of total sales in 1998,26% in 1997,
and 35% in 1996.
Much of the Company's manufacturing material is sourced from international
suppliers; accordingly, the Company is subject to the risks of currency
fluctuations, possible fund transfer restrictions, and the burden of compliance
with a variety of laws. To date these factors have not had a material adverse
impact on the Company, but could in the future.
(See Note G to the 1998 Consolidated Financial Statements, incorporated herein
by reference.)
PATENTS AND LICENSES
Patents are not significant to the Company's business. The Company believes that
its success depends more upon the creativity of its personnel than upon patent
ownership. Because of rapid technological change and rate of new patent
issuance, certain of the Company's products may inadvertently infringe others'
patents. If patent infringements inadvertently occur, the Company believes
that, based upon industry practice, necessary licenses could be obtained without
material adverse impact; however, there can be no assurance given to that
effect.
COMPETITION AND OTHER FACTORS
The Company primarily operates in the Electronics Manufacturing Services (EMS)
industry. The Company competes against numerous domestic and foreign companies.
It also faces competition from current and prospective customers who evaluate
the Company's capabilities against the merits of internal manufacturing.
Competition varies depending on the type of service sought and the geographic
area of competition. Competition is intense and is expected to continue to be so
as more companies enter the EMS industry and existing ones expand capacity. The
Company could be adversely affected if its competitors introduce superior or
lower priced services or products. During the last three fiscal years
electronics manufacturing services accounted for over 90% of total revenues.
The Company devotes considerable resources to designing and developing new
products, internal information systems, and advanced manufacturing processes.
Computer aided design centers are employed at strategic regional plants. New
product development is usually undertaken in support of customer contractual
requirements. (See Note A to the 1998 Consolidated Financial Statements,
incorporated herein by reference.)
The Company has developed internal systems to support manufacturing of
customized finished products for delivery directly to distribution channels, or
directly to end users. The Company believes these systems to be important to
obtaining future, and maintaining existing, finished product assembly contracts.
To remain competitive the Company must continue to develop and provide
technologically advanced engi-
[PAGE 3 OF EXCERPTS FROM FORM 10-K]
neering and manufacturing services, maintain high quality, offer flexible
delivery schedules, deliver finished products on a timely basis, and continue to
price its products and services competitively. Additionally, maintaining and
updating internal systems are believed important to obtaining future, and
maintaining existing, contracts. Failure to satisfy any of the foregoing
requirements could adversely affect the Company.
COMPONENT AVAILABILITY AND IMPACT ON SALES
Components are sourced on a global basis. Component availability is periodically
subject to constraints, shortages, and abundances. Although no assurances can be
given, the Company has generally been able to obtain adequate supply to maintain
production when shortages occur. However, shipment delays have occurred and may
reoccur. Significant component constraints could adversely affect the Company.
The Company's sales are mainly generated from turnkey manufacturing services.
Accordingly, average selling prices (ASPs) for the Company's products fluctuate
proportionally to component prices. During fiscal 1998 components were generally
readily available and experienced significant price and delivery lead time
reductions.
POSSIBLE TERMINATION OF GOVERNMENT PROGRAMS
The Company's contracts with the U.S. Government and its prime contractors are
subject to audit and termination at the election of the Government. The Company
believes that its ongoing principal government programs will continue to be
funded, but there can be no assurance given to that effect. No current
government program accounts for more than 1% of consolidated revenue.
EMPLOYEES
At June 30, 1998, the Company employed 22,324 persons, of which 10,680 were
based in the United States. Except for five foreign plants, employees are not
subject to collective bargaining agreements. There have been no work stoppages
caused by employee activities. The Company believes that its
employee relations in general are good.
The Company's success depends largely upon the efforts and abilities of key
managerial and technical employees. The loss of services of certain key
personnel could adversely affect the Company. The Company's business depends
upon its ability to recruit, train, and retain senior managers, skilled
professional and technical salaried personnel, and skilled and semiskilled
hourly employees at competitive costs, for which there is intense competition.
Failure to do so could adversely affect the Company.
VARIATIONS IN OPERATING RESULTS
The Company's operating results are dependent on its ability to identify and
react in a timely manner to changes in business conditions, especially the
Company's actions in balancing inventory quantities; property, plant and
equipment capacity; staffing levels; and liquidity amounts. Accordingly,
operating results could vary over time as conditions change.
ITEM 2. PROPERTIES.
The Company added over 1.1 million square feet of space in fiscal 1998. The
increase was to accommodate existing business growth and that anticipated in the
near-term. Domestically the Company owns, or finances with Industrial Revenue
Bonds (treated as purchases for financial statement purposes), facilities in
Alabama, California, Colorado, Maine, New Hampshire, New York, North Carolina,
and South Dakota, with total area of 2,978,800 square feet. Internationally the
Company owns facilities in Brazil, Canada, France, Hungary, Ireland, Malaysia,
Mexico, Singapore, Thailand, and the United Kingdom, with total area of
1,464,750 square feet, and leases space in Finland, Mexico, The Netherlands, and
Sweden, with total area of 492,000 square feet. Miscellaneous space amounting to
68,865 square feet is also leased in various locations. The Company believes its
facilities are modern, in good repair, and suitable for services offered to
customers.
Refer to page 18 of the 1998 Annual Report to Shareholders, incorporated
herein by reference, for further discussion of facilities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to several lawsuits incidental to its various activities
and incurred in the ordinary course of business. The Company believes that it
has meritorious claims and defenses in each case. After consultation with
counsel it is the opinion of management that, although there can be no assurance
given, none of the associated claims when resolved will have a material adverse
effect upon the Company's consolidated financial position.
The Company is subject to a variety of environmental regulations relating to the
use, storage, discharge,
[PAGE 4 OF EXCERPTS FROM FORM 10-K]
and disposal of hazardous materials used in its manufacturing processes. Failure
by the Company to comply with present and future regulations could subject it to
future liabilities or the suspension of production. In addition such regulations
could restrict the Company's ability to expand its facilities or could require
the Company to acquire costly equipment or to incur other significant expenses
to comply with environmental regulations. The Company is not involved in any
material environmental proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
At August 24, 1998, there were 2,018 shareholders of record. See Note I to the
Company's 1998 Consolidated Financial Statements, incorporated herein by
reference, for fiscal year 1998 and 1997 quarterly high and low stock
prices.
The Company has not paid cash dividends on its Common Stock to date. Payment of
dividends is restricted as described in Note B to the Company's 1998
Consolidated Financial Statements, incorporated herein by reference. During
August 1997 the Company declared and paid a two-for-one common stock split in
the form of a 100% stock dividend.
ITEM 6. SELECTED FINANCIAL DATA.
See page 1 of the Company's 1998 Annual Report to Shareholders, incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
1998 RESULTS COMPARED WITH 1997
Sales in fiscal 1998 increased to $6.81 billion from the $5.76 billion level of
a year earlier. In spite of the effects of continued rapid declines of average
selling prices, liquidation of excess customer distribution channel inventories,
and essentially a full year of Asian economic turmoil, net revenues grew 18.1%.
Outsourcing of manufacturing services continued to gain momentum as a major
trend. Finished product assembly accounted for approximately one-half of fiscal
year 1998 sales. The Company's Mexican operations had substantial sales growth
in 1998 due to higher customer demands for its lower cost manufacturing
operations. This growth, together with improving European markets, accounted for
larger percentage growth in foreign sales than domestic sales.
Consolidated operating margins improved to 3.78% in fiscal 1998 from 3.58% in
fiscal 1997. Foreign operating margins declined as a result of increased pricing
pressures. The Company faces increased foreign competition as others enter lower
cost non-U.S. locations.
The Company operates principally in the Electronics Manufacturing Services (EMS)
industry. It serves the same and similar customers in its domestic and foreign
businesses. The Company's management views geographically organized divisions
not only as individual operating entities, but as elements of strategic global
relationships. Thus, the geographic data presented in Note G to the Company's
1998 Consolidated Financial Statements, incorporated herein by reference, is not
considered equitable as to the effect each geographic unit has on consolidated
operating results.
Net interest expense again was .31% of sales in 1998. The net interest expense
dollar amount increase resulted from reduced interest income as cash was used to
purchase assets. Interest income netted against interest expense was earned from
temporary cash investments.
The effective income tax rate declined to 38.5% in 1998 from 40.5% in 1997. This
reduction resulted from lower U.S. income taxes being provided on undistributed
foreign earnings. During the fourth quarter of 1998, the Company acquired the
assets of certain European manufacturing plants from Nokia Corporation. These
acquisitions, together with further planned foreign expansion, affords the
Company the ability to permanently reinvest lower taxed foreign earnings in non-
U.S. taxable operations.
Net income improved to 2.13% of sales in 1998 from the 1.96% experienced in
1997. Return on average Shareholders' Equity improved to 21.61% in 1998 from
21.13% in 1997 as operating margins improved.
Currency exchange rate fluctuations have had small impact on the Company's past
consolidated operating results, as the majority of its foreign operations use
the U.S. dollar as their functional currency.
[PAGE 5 OF EXCERPTS FROM FORM 10-K]
1999 OUTLOOK
See paragraph entitled "Outlook" in the Executive Letter on page 3 of the 1998
Annual Report to Shareholders, incorporated herein by reference.
See pages 2 and 3 of the 1998 Annual Report to Shareholders, incorporated herein
by reference, for further management discussion and analysis.
CAPITAL RESOURCES AND LIQUIDITY
Both June 30, 1998's working capital and current ratio remained at approximately
the same levels as at June 30, 1997. Working capital was $759 million at June
30, 1998, and $754 million at June 30, 1997. Current ratio was 2.0 at both June
30, 1998 and 1997.
June 30, 1998's available liquidity was $844 million, comprised of $660 million
in unused credit facilities and $184 million in cash. The Company believes that
existing liquidity is sufficient to support near-term growth. Fiscal year 1999's
capital expenditures are currently estimated to approximate depreciation and
amortization expense of approximately $125 million. However, if market and
competitive conditions change from those currently anticipated, the Company may
increase or decrease the capital expenditure level.
The Company's Board of Directors has authorized the repurchase of up to 2
million shares of the Company's outstanding stock, and up to $100 million of
outstanding 5% Convertible Subordinated Notes. Any such purchases would be
funded from available liquidity. Any repurchases will be subject to
market prices and other conditions.
Inflationary trends are not expected to have a material impact on operations as
relatively high asset turnover and sizable fixed rate long-term financing
minimize the effects of inflationary conditions.
YEAR 2000 READINESS
The Year 2000 computer issue refers to a condition in computer software where a
two digit field rather than a four digit field is used to distinguish a calendar
year. Unless corrected some computer programs could be unable to function on
January 1, 2000 (and thereafter until corrected), as they will be unable to
distinguish the correct date. Such an uncorrected condition could significantly
interfere with the conduct of the Company's business, could result in disruption
of its operations, and could subject it to potentially significant legal
liabilities.
The Company has been and is in the process of updating much of its existing
software for Year 2000 compliance by acquiring new and upgraded third party
software packages to replace those currently used by the Company and by
modifying existing internally developed software. While the Company believes it
has made substantial progress in resolving any Year 2000 issues, sufficient
testing to date has not been completed to fully validate readiness. Additional
testing is planned during fiscal 1999 to reasonably ensure Year 2000 readiness.
If such resolution does not occur, the Company believes it will be able to
conduct its business, possibly at reduced volume, using its already Year 2000
compliant mainframe, server, and personal computer software until resolution
occurs.
The remote possibility also exists that the Company could inadvertently fail to
correct a Year 2000 problem with a mechanical equipment microcontroller. The
Company believes the impact of such an occurrence would be minor, as substantial
Year 2000 compliant equipment additions and upgrades have occurred in recent
years.
The Company has surveyed its major customers and suppliers regarding their
progress on resolving Year 2000 issues. Responses indicate substantial progress
by them with ongoing programs in effect.
To date Year 2000 readiness has cost the Company an estimated $3 million
(including upgrades to existing systems) and could cost a comparable amount to
complete.
1997 RESULTS COMPARED WITH 1996
Sales in 1997 increased 26.8% to $5.76 billion from $4.54 billion in 1996. Net
income increased 39.2% to $112.7 million compared with $81.0 million in the
prior fiscal year.
Increased revenues resulted from increased unit volume, especially in finished
product assembly. Finished product assembly increased to approximately 58% of
1997 sales from 44% in 1996. The average selling prices of many of the Company's
products declined during 1997 as electronic components experienced substantial
price reductions, which were passed through to customers.
Consolidated operating margins increased to 3.6% of sales in 1997 from 3.5% in
1996, mainly as a result of improvements in the Company's foreign operations.
Domestic operating margins decreased in 1997 from that experienced in 1996, due
to a higher finished product mix with characteristically lower margins.
[PAGE 6 OF EXCERPTS FROM FORM 10-K]
Domestic 1997's sales increase of 42% resulted principally from increased
finished product assembly. Fiscal 1997 was the first full year of operations for
the Fountain, Colorado, plant purchased from Apple Computer on May 31, 1996. The
small decline in foreign operations' sales in 1997 from 1996 resulted mainly
from reduced disk drive participation in Asia.
During 1997 improved operating margins were experienced in Europe as a result of
cost containment, and in Mexico, as volumes grew. These improvements were
partially offset by the effects in Asia of customer discontinuance of certain
disk drive programs resulting in lower production volumes.
Net interest expense declined to .31% of sales in 1997 from .53% in 1996. Return
on average shareholders' equity increased to 21.1% in 1997 from 19.7% in 1996,
as operating margins improved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Short-term interest rate changes can impact the Company's interest expense on
its variable interest rate debt, as well as the discount (reflected as interest
expense)on its accounts receivable sold under an asset securitization agreement.
Variable interest rate debt of $59 million was outstanding at June 30, 1998. No
amounts were sold under the asset securitization agreement at June 30, 1998. The
impact of a hypothetical 200 basis point (two percent) change in short-term
interest rates would not be material to the Company (an increase in annual
interest expense of approximately $1.2 million could result). This hypothetical
short-term interest rate change impact is based on existing business and
economic conditions and does not consider alternative financing available to the
Company.
The Company predominantly conducts its foreign sales and purchase transactions
in U.S. dollars, or under customer contract provisions that protect against most
major currency risks. The largest currency risk at June 30, 1998, was that
associated with Brazilian operations. Unlike other foreign operations of SCI,
the plant there may be subject to the effects of currency devaluation on certain
customers' contracts until forward pricing is adjusted accordingly (normally
monthly). At June 30, 1998, the Company had approximately $20 million of net
current assets subject to this currency exposure. While the Brazilian currency
has been relatively stable, the Company considers the devaluation outlook too
uncertain to predict.
Other currency exchange risks are primarily limited to current liabilities
payable in other than U.S. dollars. Such amounts generally relate to foreign
plant wages, taxes and facility operating costs. Accordingly, the Company does
not believe the effects of changes in currency exchange rates upon such non-U.S.
dollar transactions would be material. Changes in certain foreign currency
exchange rates may impact the geographic area where the Company's revenue is
derived. If foreign currencies are devalued, manufacturing costs of plants in
those countries may become more competitive with domestic plants.
The Company, when advisable, may enter into hedge contracts to reduce its
currency risks on known transactions. Additionally, when deemed advantageous,
the Company may enter into interest rate swap agreements to adjust the interest
rate on existing debt. The Company has not entered into speculative interest or
currency agreements, nor does it expect to do so. When significant currency
exposures arise, the Company may endeavor to balance exposed assets with
offsetting exposed liabilities where practical.
<PAGE>
[PAGE 7 OF EXCERPTS FROM FORM 10-K]
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<S> <C> <C> <C>
JUNE 30,
-----------------------------------
Assets 1998 1997 1996
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $184,346 $290,809 $46,493
Accounts receivable, less allowances of
$11,100 in 1998, $11,200 in 1997, 633,835 630,867 372,058
and $6,000 in 1996.
Inventories 639,283 569,846 554,090
Refundable and deferred federal and
foreign income taxes 10,876 43,950 16,480
Other current assets 17,623 12,582 15,244
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,485,963 1,548,054 1,004,365
- --------------------------------------------------------------------------------
Property, Plant, and Equipment - Note B
Land 30,740 23,613 19,830
Buildings and leasehold improvements,
including construction in process 152,492 126,145 109,847
Equipment 671,023 499,182 419,122
Less accumulated depreciation and (418,158) (347,943) (284,745)
amortization
- --------------------------------------------------------------------------------
NET PROPERTY, PLANT, AND EQUIPMENT 436,097 300,997 264,054
- --------------------------------------------------------------------------------
OTHER NONCURRENT ASSETS 22,668 20,801 14,776
- --------------------------------------------------------------------------------
TOTAL ASSETS $1,944,728 $1,869,852 $1,283,195
================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $663,600 $713,377 $400,682
Accrued payroll and related expenses 34,529 28,084 26,845
Federal, foreign, and state income taxes 27,024 47,977 22,223
Current maturities of long-term debt 1,382 4,394 4,965
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 726,535 793,832 454,715
- --------------------------------------------------------------------------------
Deferred Income Taxes 10,659 9,901 5,313
NONCURRENT PENSION LIABILITY 3,000 5,133 4,533
DEFERRED COMPENSATION 16,075 12,015 7,600
LONG-TERM DEBT - NOTE B
Industrial revenue bonds 21,215 21,310 21,310
Long-term notes 136,414 150,801 35,846
Convertible subordinated notes 282,873 282,197 281,617
- --------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 440,502 454,308 338,773
- --------------------------------------------------------------------------------
COMMITMENTS - NOTE B
SHAREHOLDERS' EQUITY
Preferred Stock, 500,000 shares authorized -0- -0- -0-
but unissued
Common Stock, $.10 par value: authorized 6,010 5,978 5,924
200,000,000 shares;
issued 60,104,810 shares in 1998,
59,774,790 shares in 1997, and
59,243,790 shares in 1996
Capital in excess of par value 180,464 172,910 165,177
Retained earnings 565,948 420,863 308,150
Currency translation adjustment (4,124) (4,747) (6,649)
Treasury stock - 59,366 shares at cost (341) (341) (341)
- --------------------------------------------------------------------------------
Total Shareholders' Equity 747,957 594,663 472,261
- --------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $1,944,728 $1,869,852 $1,283,195
================================================================================
</TABLE>
See notes to Consolidated Financial Statements.
[PAGE 8 OF EXCERPTS FROM FORM 10-K]
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C> <C>
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net sales $6,805,893 $5,762,656 $4,544,759
Costs and expenses 6,548,792 5,556,480 4,385,284
- --------------------------------------------------------------------------------
Operating Income 257,101 206,176 159,475
- --------------------------------------------------------------------------------
Other income (expense):
Interest expense (net of interest
income of$9,347 in 1998, $12,581 in (21,304) (17,993) (24,165)
1997, and $1,742 in 1996)
Other income, net 114 1,251 748
- --------------------------------------------------------------------------------
Income before Income Taxes 235,911 189,434 136,058
Income taxes - Note F 90,826 76,721 55,103
- --------------------------------------------------------------------------------
Net Income $145,085 $112,713 $80,955
================================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C>
Earnings per share - Note C:
- --------------------------------------------------------------------------------
Basic $2.42 $1.89 $1.37
Diluted 2.13 1.69 1.34
================================================================================
</TABLE>
See notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C> <C> <C>
YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Common Stock
Balance at July 1 $5,978 $5,924 $5,493
Conversion of debt -0- -0- 368
Stock options exercised 32 54 63
- --------------------------------------------------------------------------------
Balance at June 30 $6,010 $5,978 $5,924
================================================================================
Capital in excess of par value
Balance at July 1 $172,910 $165,177 $123,377
Conversion of debt -0- -0- 38,456
Stock options exercised 7,554 7,733 3,344
- --------------------------------------------------------------------------------
Balance at June 30 $180,464 $172,910 $165,177
================================================================================
Retained earnings
Balance at July 1 $420,863 $308,150 $227,195
Net income for the year 145,085 112,713 80,955
- --------------------------------------------------------------------------------
Balance at June 30 $565,948 $420,863 $308,150
================================================================================
Currency translation adjustment
Balance at July 1 $(4,747) $(6,649) $(5,948)
Translation gain (loss) 623 1,902 (701)
- --------------------------------------------------------------------------------
BALANCE AT JUNE 30 $(4,124) $(4,747) $(6,649)
================================================================================
</TABLE>
See notes to Consolidated Financial Statements.
<PAGE>
[PAGE 9 OF EXCERPTS FROM FORM 10-K]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C> <C> <C>
YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Operating Activities
Net income $145,085 $112,713 $80,955
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization 103,534 76,848 60,972
Deferred income taxes 37,778 (22,599) (4,587)
Changes in current assets and liabilities:
Accounts receivable (2,741) (255,961) (113,093)
Inventories (68,839) (14,591) (99,032)
Refundable income taxes (3,946) (271) 763
Other current assets (5,028) 2,896 (5,004)
Accounts payable and accrued expenses (43,513) 310,502 (11,788)
Income taxes (16,480) 29,589 3,145
Other noncash items - net (1,939) 1,099 (958)
- --------------------------------------------------------------------------------
Net Cash Provided by (Used for) Operating 143,911 240,225 (88,627)
Activities
- --------------------------------------------------------------------------------
Investing Activities,
Purchase of property, plant, and equipment (236,799) (109,739) (109,912)
Proceeds from sale of property, plant, 1,141 195 826
and equipment
Change in noncurrent assets 1,262 (3,390) 9,956
- --------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (234,396) (112,934) (99,130)
- --------------------------------------------------------------------------------
Financing Activities
Net decrease in commercial paper and -0- -0- (34,790)
short-term financing
Payments on long-term debt (241,748) (66,010)(10,739,220)
Proceeds from long-term debt 224,107 178,942 10,994,667
Issuance of common stock 3,090 3,935 3,407
- --------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY FINANCING (14,551) 116,867 224,064
ACTIVITIES
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,427) 158 (91)
- --------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (106,463) 244,316 36,216
Cash and cash equivalents at beginning
of year 290,809 46,493 10,277
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $184,346 $290,809 $46,493
- --------------------------------------------------------------------------------
</TABLE>
Cash equivalents are primarily short-term interest bearing deposits.
Interest paid was $30,144 in 1998, $28,179 in 1997, and $22,564 in 1996.
Income taxes paid were $76,221 in 1998, $68,298 in 1997, and $53,763 in 1996.
See notes to Consolidated Financial Statements.
[PAGE 10 OF EXCERPTS FROM FORM 10-K]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
Consolidated Financial Statements include accounts of the Company and its
subsidiaries after elimination of material intercompany accounts and
transactions, and are based on management estimates. The functional currency of
the majority of the Company's foreign operations is the U.S. dollar.
Sales and Cost of Sales are recorded generally as units are shipped. Costs
and expenses principally represent engineering, manufacturing, and other costs
incurred in support of customer contracts.
Inventories primarily consist of costs incurred in support of customer
contracts stated at the lower of cost (principally first-in, first-out method)
or market, adjusted for potential contract valuation issues.
Property, Plant, and Equipment are recorded at cost, and depreciated on
the straight-line method over the estimated useful lives of individual assets.
Leasehold improvements are amortized over the shorter of the lease term or
useful lives.
Goodwill and noncompete agreement, included in other noncurrent assets, are
the unamortized excess of cost over the underlying net tangible value of assets
acquired. Such assets are amortized on a straight-line basis over the shorter of
ten years or agreement term. Goodwill and noncompete agreement, net of
amortization, at year end amounted to $4,842,393 in 1998, $6,251,000 in 1997,
and $2,084,000 in 1996.
Deferred income taxes are provided on temporary differences as certain
contract related revenues and expenses are reported in periods which differ from
those in which they are taxed. U.S. income taxes in excess of estimated foreign
income tax credits have not been provided on certain undistributed earnings of
foreign subsidiaries aggregating $78 million at June 30, 1998, which are
considered to be permanently invested. Otherwise, $18 million of additional
deferred U.S. income taxes (net of related estimated foreign income tax credits)
would have been provided.
Research and Development is conducted by the Company under both customer
sponsored and company sponsored programs. Company sponsored programs include
research and development related to government products and services, which are
allocable and recoverable in the same manner as general and administrative
expense under U.S. Government regulations. Customer sponsored research and
development costs are accounted for as any other program cost. Total research
and development costs incurred by the Company were $36,961,000 in 1998,
$36,569,000 in 1997, and $33,556,000 in 1996.
General and administrative expense included in costs and expenses
approximated $24,279,000 in 1998, $22,854,000 in 1997, and $18,965,000 in 1996.
Stock Split. The Company declared and paid a two-for-one stock split in the
form of a 100% dividend in August 1997. All share and per share data in the
financial statements reflect the effect of this stock split.
Adoption of New Financial Accounting Standards. The Company does not
anticipate any material difference in the presentation of its financial
statements when it adopts FASB Statement No. 130, Reporting on Comprehensive
Income, in fiscal 1999. Currently, the only item of comprehensive income not
presented in the Company's Consolidated Statements of Income is currency
translation adjustment. Reportable geographic data will not change significantly
from that currently presented when FASB Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, is adopted in fiscal 1999.
NOTE B - LONG-TERM DEBT
Industrial Revenue Bonds. The Company is obligated by lease or guarantee
for $21,676,000 at June 30, 1998, ($21,707,000 at June 30, 1997, and $21,738,000
at June 30, 1996) of industrial revenue bonds maturing through the year 2015.
The majority of such borrowings currently bear variable interest ranging between
3.61% and 6.96%, and are secured by related properties or irrevocable letters of
credit.
Long-term Notes. The Company is obligated under mortgages and notes
maturing through the year 2006 amounting to $38,574,000 at June 30, 1998,
($56,535,000 at June 30, 1997, and $41,791,000 at June 30, 1996). Substantially
all of the notes bear variable interest rates ranging between 2.97% and 6.41% at
June 30, 1998. $22,625,000 of the June 30, 1998's balance is collateralized by
the related properties.
In July 1996 the Company borrowed $100,000,000 under a Senior Note
agreement with a group of institutional lenders. The Notes bear interest at
7.59%, and are payable in six annual installments of $16,667,000 beginning in
July 2001. The interest rate may be adjusted upwards by .75% if the Company
fails to meet certain financial ratios.
The Company has a credit facility with a group of domestic and
international banks, consisting of a $260 million revolving credit line and a
$150 million commercial paper agreement. The initial renewal date for this
facility is December 8, 2002. Borrowings under the revolving credit line, at the
Company's option, bear interest at a rate based upon either a defined Base Rate
or the London Interbank Offered Rate (LIBOR) plus or minus applicable margins.
The agreement allows the Company to enhance the marketability of its commercial
paper with an irrevocable letter of credit in order to borrow at rates generally
below revolving credit rates. Conversion privileges are provided in the event of
nonsalability of commercial paper. At June 30, 1998,
[PAGE 11 OF EXCERPTS FROM FORM 10-K]
1997 and 1996, no amounts were outstanding under the facility. Under the credit
agreement, the Company must maintain certain financial ratios and meet certain
balance sheet tests. Under the most restrictive provision of the credit
agreement, $117,929,000 of June 30, 1998's retained earnings are available for
the payment of cash dividends. A commitment fee of 0.25% is paid on the unused
revolving credit amount. No compensating balances are required under the
facility.
Short-term borrowings may be drawn under the credit agreement. Because of
the Company's ability and intent to refinance such borrowings, total borrowings
under the agreement and other short-term borrowings expected to be refinanced,
including commercial paper, may be classified as long-term.
The Company has an asset securitization agreement under which up to
$200,000,000 of certain accounts receivable can be sold with limited recourse.
As funds are collected, additional eligible receivables may be sold to bring the
outstanding balance to the desired level. At June 30, 1998, no receivables were
sold under the agreement compared with $35,998,000 at June 30, 1997, and
$190,000,000 at June 30, 1996. A commitment fee of 0.25% was paid in 1998 on the
unused portion.
Unused credit facilities and commitments at June 30, 1998, approximated
$660 million.
Convertible Subordinated Notes. In May 1996 the Company issued $287,500,000
of 5% Convertible Subordinated Notes due May 1, 2006. The Notes are convertible
into Common Stock at $24.38 per share and are redeemable beginning in May 1999.
Deferred charges netted against total year end long-term debt were
$5,866,000 in 1998, $7,040,000 in 1997, and $7,291,000 in 1996.
Debt, Lease, and Rental Payments. Long-term debt maturities for the next
five fiscal years are: $2,213,000 in 1999; $4,693,000 in 2000; $3,709,000 in
2001; $19,126,000 in 2002; and $19,126,000 in 2003. While the Company leases
certain real property in its operations, annual rental expense and future
commitments are not material to its operations.
NOTE C - EARNINGS PER SHARE
In the second quarter of fiscal 1998, the Company adopted the new earnings
per share computations required by FASB Statement No. 128. Basic earnings per
share are computed by dividing reported net income for the period by the
weighted average number of shares of common stock outstanding during the period.
A reconciliation of the net income and weighted average number of shares used
for the diluted earnings per share computations follows:
<TABLE>
<S> <C> <C> <C>
(In thousands of dollars, except
share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $145,085 $112,713 $80,955
Add back after-tax interest
expense for convertible subordinated notes 9,232 8,956 1,875
- --------------------------------------------------------------------------------
Adjusted net income $154,317 $121,669 $82,830
================================================================================
Weighted average number of shares
outstanding during period 59,860,594 59,495,448 58,934,718
Applicable number of shares for stock
options outstanding for period 922,366 858,344 825,478
Number of shares if convertible
subordinated notes were converted 11,794,872 11,794,872 2,223,624
- --------------------------------------------------------------------------------
Weighted average number of shares 72,577,832 72,148,664 61,983,820
- --------------------------------------------------------------------------------
Diluted earnings per share $2.13 $1.69 $1.34
================================================================================
</TABLE>
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
June 30, 1998's estimated fair values of the financial instruments represented
by cash and cash equivalents approximated their recorded values. Convertible
Subordinated Notes had a year end trading price of 161.70 in 1998, 145.25 in
1997, and 105 in 1996 on the Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") Market. All other debt instruments' fair value is
estimated to approximate their recorded value, as their applicable interest
rates approximate current market rates.
NOTE E - EMPLOYEE BENEFIT PLANS
The Company provides retirement benefits to its domestic employees who meet
certain age and service requirements through three plans: a defined benefit
supplemental pension plan; a qualified savings plan (401(k) Plan); and a
deferred compensation plan. Pension plan benefits are computed based upon
compensation earned during the member's career at the Company, or its
subsidiaries, and years of credited service. The Company funds its retirement
benefit obligations annually at an amount that approximates the maximum
deductible for income taxes. Company
[PAGE 12 OF EXCERPTS FROM FORM 10-K]
contributions to savings and deferred compensation plans are equal to a
percentage of employees' contributions and are fully funded when the liability
is incurred. The Company's and employees' contributions to the deferred
compensation plan are held in an irrevocable "rabbi trust." Nonemployee
Directors also participate in an irrevocable "rabbi trust" deferred compensation
plan. The Company also has defined contribution pension plans for its European
employees who meet certain requirements, and savings plans for its Canadian and
Thai employees. Company contributions to these various plans amounted to
$7,482,000 in 1998, $6,686,000 in 1997, and $6,255,000 in 1996. June 30, 1998's
domestic pension plan's accumulated benefit obligation (including $1,789,000
nonvested) amounted to $24,517,000, compared with the fair value of its assets
of $26,093,000. The plan's projected benefit obligation at June 30, 1998, was
$34,059,000. June 30, 1998's unrecognized transition liability and prior service
costs were $547,000, excluding unrecognized losses of $1,545,000. At June 30,
1998, domestic pension plan assets were invested 73% in equity based mutual
funds, 20% in corporate bond mutual funds, and 7% in money market funds.
NOTE F - INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<S> <C> <C> <C>
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Income before income taxes:
Domestic $ 156,219 $ 126,173 $ 105,103
Foreign 79,692 63,261 30,955
- --------------------------------------------------------------------------------
Total $ 235,911 $ 189,434 $ 136,058
================================================================================
Taxes currently payable:
Domestic $ 55,977 $ 89,931 $ 68,215
Foreign (2,929) 9,302 2,857
Deferred taxes:
Domestic 15,419 (22,212) (16,722)
Foreign 22,359 (300) 803
- --------------------------------------------------------------------------------
Total $ 90,826 $ 76,721 $ 55,103
================================================================================
</TABLE>
The reconciliation of the provision for income taxes and that based on the
U.S. statutory rate is:
<TABLE>
<S> <C> <C> <C>
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Income taxes at U.S. statutory rate $ 82,569 $ 66,302 $ 47,620
Effects of U.S. state income 5,780 5,406 2,925
taxes, net of federal benefits
Effects of loss carryforwards 31 1,166 1,685
Effects of foreign operations (1,607) (519) 802
Permanent differences 4,053 4,366 2,071
- --------------------------------------------------------------------------------
Income taxes $ 90,826 $ 76,721 $ 55,103
================================================================================
</TABLE>
At June 30, 1998 and 1997, the net deferred tax asset was:
<TABLE>
<S> <C> <C> <C> <C>
1998 1997
---------------------------------------------
Deferred Deferred
(In thousands of dollars) Asset Asset
Temporary Difference Amount (Liability) Amount (Liability)
- --------------------------------------------------------------------------------
Difference between book and tax
recognized contract profits:
U.S. $78,603 $27,511 $98,531 $34,485
Foreign (93,010) (28,932) 2,277 542
Undistributed foreign earnings
not currently taxable in U.S. (61,940) (17,999) (79,126) (20,657)
Accrued expenses not currently
deductible:
U.S. 23,798 8,329 54,860 19,201
Foreign 2,022 320 1,508 226
Difference between books and
tax depreciation:
U.S. (3,163) (1,107) (4,131) (1,445)
Foreign 10,819 5,240 1,938 776
Other (1,629) (570) 28 10
Net operating loss carryforwards 14,686 4,885 7,190 2,462
Valuation allowance:
Beginning of year (7,190) (2,373) (6,265) (226)
Net change for year 319 145 (925) (2,147)
- --------------------------------------------------------------------------------
Total $(36,685) $(4,551) $75,885 $33,227
================================================================================
</TABLE>
<PAGE>
[PAGE 13 OF EXCERPTS FROM FORM 10-K]
In accordance with SFAS No. 123, the U.S. income tax benefit associated
with exercised stock options of $4,497,000 in 1998, and $3,851,000 in 1997 is
classified as an addition to Capital in excess of par value.
NOTE G - GEOGRAPHIC DATA
The Company operates principally in the Electronics Manufacturing Services
(EMS) industry. It serves the same and similar customers in its domestic and
foreign businesses. The Company's management views geographically organized
divisions not only as individual operating entities, but as elements of
strategic global relationships. Thus, the following geographic data is not
equitable as to the effect each geographic area has on consolidated operating
results.
(IN THOUSANDS OF DOLLARS)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Identifiable Assets Sales Operating Income
----------------------------------- ---------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----------------------------------- ---------------------------------- ---------------------------------
Domestic $913,206 $1,010,751 $820,044 $4,699,582 $4,350,482 $3,063,460 $175,550 $136,097 $125,303
Foreign 907,921 571,234 397,410 2,106,311 1,412,174 1,481,299 81,551 70,079 34,172
Corporate 123,601 287,867 65,741 N/A N/A N/A N/A N/A N/A
----------------------------------- ---------------------------------- ---------------------------------
Consolidated $1,944,728 $1,869,852 $1,283,195 $6,805,893 $5,762,656 $4,544,759 257,101 206,176 159,475
=================================== ==================================
Corporate net other expense (21,190) (16,742) (23,417)
---------------------------------
Consolidated income $235,911 $189,434 $136,058
before income taxes =================================
</TABLE>
The Company's foreign geographic units performs certain manufacturing
services for its domestic geographic units. Such production is incorporated in
final products sold by the domestic geographic units to their customers.
Intergeographic transfers amounted to approximately $400,000,000 in 1998, and
$255,000,000 in 1997. Corporate assets include domestic cash and cash
equivalents, refundable and deferred income taxes, "rabbi trust" assets, and
notes receivable. Major customer data, including credit risk concentration, is
incorporated by reference from Part I, Marketing and Customers, of the Company's
Form 10-K for the year ended June 30, 1998. U.S. export sales approximated
$185,000,000, $102,000,000, and $130,000,000 for the years ended June 30, 1998,
1997, and 1996, respectively.
NOTE H - STOCK OPTION PLANS
The Company's stock option plan grants options to officers. Under the Plan
the Board of Directors may award options at less than market price, but to date
have granted all options at not less than 100% of market value on grant date.
Vesting is 20% upon granting, with 20% per annum thereafter. Options expire ten
years after granting. Stock options are accounted for in accordance with APB
Opinion 25 and related Interpretations. Accordingly, no nonmonetary fair value
compensation costs associated with options have been recorded. The amount of
fair value compensation computed under SFAS No. 123 for options granted during
1998, 1997, and 1996 is not material to the Company's consolidated net income.
Such costs may in the future become material as the initial phase-in period of
SFAS No.123 expires. Information relating to the changes in the Company's stock
options follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Shares in thousands) 1998 1997 1996
------------------------- ------------------------- -------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Outstanding at
beginning of year 2,461.7 $13.52 2,366.0 $ 8.91 2,450.2 $ 6.10
Granted 701.0 $45.45 694.0 $ 24.65 588.0 $ 17.40
Exercised (330.0) $ 9.36 (530.8) $ 7.41 (618.2) $ 5.51
Canceled (109.7) $32.02 (67.5) $ 14.27 (54.0) $ 10.59
------------------------- ------------------------- -------------------------
Outstanding at
end of year 2,723.0 $21.50 2,461.7 $ 13.52 2,366.0 $ 8.91
========================= ========================= =========================
Exercisable at 1,569.0 $13.86 1,364.9 $ 8.97 1,398.8 $ 6.19
June 30 ========================= ========================= =========================
</TABLE>
Shares available for additional granting at June 30 were 428,400 in 1998,
1,019,800 in 1997, and 1,646,200 in 1996.
[PAGE 14 OF EXCERPTS FROM FORM 10-K]
The following table summarizes June 30, 1998's outstanding stock option
information:
(SHARES IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
$ 3.00 - $ 6.31 531.0 2.87 years $ 4.22 531.0 $ 4.22
$ 7.50 - $ 9.44 537.8 5.87 $ 9.24 463.0 $ 9.22
$10.13 - $18.75 410.4 7.29 $ 17.14 219.2 $ 17.01
$20.50 - $28.56 592.8 8.33 $ 24.85 225.6 $ 24.80
$32.50 - $47.00 651.0 9.35 $ 45.41 130.2 $ 45.41
=============== ========== ================ ================ ============ ==================
$ 3.00 - $47.00 2,723.0 6.87 years $ 21.50 1,569.0 $ 13.86
=============== ========== ================ ================ ============ ==================
</TABLE>
NOTE I - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial results and stock prices for the last two fiscal years were:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997
---------------------------------------------- ----------------------------------------------
(In thousands Fourth Third Second First Fourth Third Second First
of dollars Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
except per
share data)
Net sales $1,590,856 $1,686,849 $1,786,423 $1,741,765 $1,541,504 $1,319,310 $1,481,837 $1,420,005
Operating
profit 59,212 64,405 68,105 65,379 57,083 48,186 53,418 47,489
Net income 36,860 34,284 37,559 36,382 31,940 26,117 29,631 25,025
Diluted
earnings
per share $.54 $.50 $.55 $.53 $.47 $.39 $.44 $.38
Market stock
price range:
High $44 13/16 $49 $53 3/8 $49 7/8 $34 5/16 $29 7/16 $31 1/2 $29 1/4
Low 30 1/4 35 9/16 36 1/8 31 1/4 24 1/8 21 5/8 22 3/4 15
</TABLE>
Fiscal 1997's stock prices have been restated for the August 1997 stock
dividend. 1998 first quarter's and all of 1997's diluted earnings per share have
been restated - See Note C. Quarterly and annual earnings per share are
independently computed using the estimated effective income tax rate and Common
Stock market prices applicable for that period. Consequently, the sum of
individual quarterly diluted earnings per share does not equal the total for the
years presented.
================================================================================
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
SCI Systems, Inc.
We have audited the accompanying consolidated balance sheets of SCI Systems,
Inc. as of June 30, 1998, 1997 and 1996, and the related consolidated statements
of income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
<PAGE>
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SCI Systems, Inc.
at June 30, 1998, 1997 and 1996, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
August 3, 1998
<PAGE>
[INSIDE BACK COVER OF ANNUAL REPORT TO SHAREHOLDERS]
Corporate Directory
[LEFT COLUMN]
Board of Directors
Olin B. King (1)
Chairman of the Board of the
Company
Huntsville, Alabama
Howard H. Callaway (2)(4)
CEO, Crested Butte Mountain
Resort, Inc.
Crested Butte, Colorado
Chairman
Callaway Gardens Resort, Inc.
Pine Mountain, Georgia
William E. Fruhan (2)(3)
Professor of Business Administration
Harvard University
Boston, Massachusetts
A. Eugene Sapp, Jr. (1)(3)
President of the Company
Huntsville, Alabama
Wayne Shortridge (1)(3)
Partner
Paul, Hastings, Janofsky & Walker
Atlanta, Georgia
G. Robert Tod (2)(4)
Retired President, CML Group, Inc.
Acton, Massachusetts
Jackie M. Ward (3)(4)
Chief Executive Officer
Computer Generation Incorporated
Atlanta, Georgia
Director Emeritus
Joseph C. Moquin
Retired CEO
Teledyne Brown Engineering
Madison, Alabama
Committees of the Board
(1) Executive Committee
(2) Audit Committee
(3) Investment Committee
(4) Compensation Committee
[MIDDLE COLUMN]
Officers
Chairman of the Board and
Chief Executive Officer
Olin B. King
President and Chief Operating
Officer
A. Eugene Sapp, Jr.
Senior Vice President and Assistant to the President
Peter M. Scheffler
Senior Vice Presidents
David F. Jenkins
George J. King
Jerry W. Lee
LeRoy H. Mackedanz
Michael H. Missios
Charles N. Parks
W. David Rees
Jerry F. Thomas
First Vice President
C. T. Chua
Vice Presidents
Alvin G. Austin
Charles Barnhart
Patrick R. Barry
James P. Bilodeau
Warren F. Cline, Jr.
William C. Coker
Joseph J. Cosgrove
Robert P. Eisenberg
James M. Ferguson
James H. Ferry
Francis X. Henry
V. Antti Hintikka
Mark J. Klaver
Steven T. Korn
Sampath R. Kumar
David L. Lengel
David L. Marler
Michael P. McCaughey
Ronald E. Patterson
P. William Quinn
Sven Krister Rapp
Yvonne Sanchez-Navarro
David Snape
Francois M. Thionet
Christopher J. White
John R. Wilkins, Jr.
F. M. Wong
Secretary and Corporate Counsel
Michael M. Sullivan
Treasurer
Ronald G. Sibold
[LEFT COLUMN]
General Counsel
Powell, Goldstein, Frazer & Murphy
Atlanta, Georgia
Auditors
Ernst & Young
Birmingham, Alabama
Transfer Agent and Registrar
Chase Mellon Shareholder Services
1-800-756-3353
Security Trading Markets
Common Stock
New York Stock Exchange
Symbol "SCI"
Common Stock Options
Chicago Board Options Exchange
Symbol "SSQ"
1-800-OPTIONS
Agent Banks
Revolving Credit
Citibank
Commercial Paper
ABN AMRO Bank
Asset Securitization
Bank of America
Annual Shareholders' Meeting
Fourth Friday in October
Shareholder Relations
2000 Ringwood Avenue
San Jose, California 95131
(408) 943-9000
Internet Website
http://www.sci.com
Annual Report to the S.E.C.
The annual report to the Securities and Exchange Commission on Form 10-K
provides complete exhibits and schedules. Copies will be furnished upon written
request to Shareholder Relations at the address above.
[BACK COVER OF ANNUAL REPORT TO SHAREHOLDERS]
SCI SYSTEMS, INC.
Printed by free enterprise in the USA
[END OF ANNUAL REPORT TO SHAREHOLDERS]
[END OF EXHIBIT 13]
EXHIBIT 21--SUBSIDIARIES OF REGISTRANT
Listed below are the principal subsidiaries of the Company and the
percentage of voting securities owned by the Company. The Company's other
subsidiaries, taken in the aggregate, would not constitute a significant
subsidiary.
Jurisdiction in which Percentage
Incorporated or Organized of Voting
Securities Owned
SCI Systems (Alabama), Inc. Alabama 100%
SCI Technology, Inc. Alabama 100%
SCI Foreign Sales, Inc. U.S. Virgin Islands 100%
SCIMEX, Inc. Alabama 100%
SCI Systems de Mexico S.A. Mexico 100%
SCI Holdings, Inc. Delaware 100%
SCI Manufacturing Singapore Pte. Ltd. Singapore 100%
SCI Systems (Thailand) Limited Thailand 100%
SCI Irish Holdings Republic of Ireland 100%
SCI Ireland Limited Republic of Ireland 100%
SCI Alpha Limited Republic of Ireland 100%
SCI Systems (Canada), Inc. Canada 100%
Newport, Inc. Georgia 100%
SCI Holding France, S.A. France 100%
SCI France, S.A. France 100%
SCI Manufacturing (Malaysia) SDN BHD Malaysia 100%
SCI Funding, Inc. Delaware 100%
SCI Hungary Ltd. Hungary 100%
Advanced Electronic Technology, LTDA. Brazil 100%
Advanced Electronic Integration, LTDA. Brazil 100%
SCI Systems Finland OY Finland 100%
SCI Systems Sweden AB Sweden 100%
SCI Systems Spain SA Spain 100%
AET Holland CV Netherlands 100%
SCI Netherlands Holding BV Netherlands 100%
SCI Netherlands Netherlands 100%
Interagency Inc. Delaware 100%
Exhibit 23 - Consent of Independent Auditor
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SCI Systems, Inc. of our report dated August 3, 1998, included in the 1998
Annual Report to Shareholders of SCI Systems, Inc.
We also consent to the incorporation by reference in (i) the Registration
Statement (Form S-8 No. 2-86230) and related Prospectus pertaining to the
Savings Plan of the SCI Systems, Inc. Employee Financial Security Program; (ii)
the Registration Statement(Form S-8 No. 2-91587) and related Prospectus
pertaining to the Incentive Stock Option Plan of SCI Systems, Inc.; and, (iii)
the Registration Statement (Form S-8 No. 33-11894) and related Prospectus
pertaining to the Non-Qualified Stock Option Plan of SCI Systems, Inc., of our
report dated August 3, 1998, with respect to the consolidated financial
statements of SCI Systems, Inc. incorporated by reference in this Annual Report
for the year ended June 30, 1998.
/s/ Ernst & Young LLP
Birmingham, Alabama
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1998'S BALANCE SHEET AND THE INCOME STATEMENT FOR THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 184,346
<SECURITIES> 0
<RECEIVABLES> 644,924
<ALLOWANCES> 11,089
<INVENTORY> 639,283
<CURRENT-ASSETS> 1,485,963
<PP&E> 854,255
<DEPRECIATION> 418,158
<TOTAL-ASSETS> 1,944,728
<CURRENT-LIABILITIES> 726,535
<BONDS> 440,502
0
0
<COMMON> 6,010
<OTHER-SE> 741,947
<TOTAL-LIABILITY-AND-EQUITY> 1,944,728
<SALES> 6,805,893
<TOTAL-REVENUES> 6,805,893
<CGS> 6,548,792
<TOTAL-COSTS> 6,548,792
<OTHER-EXPENSES> (9,461)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,651
<INCOME-PRETAX> 235,911
<INCOME-TAX> 90,826
<INCOME-CONTINUING> 145,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,085
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.13
</TABLE>
