UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file Number 0-2251
SCI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0583436
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SCI SYSTEMS, INC.
2101 WEST CLINTON AVENUE
HUNTSVILLE, ALABAMA 35805
(Address of principal executive offices) (Zip Code)
______________________________________________
(256) 882-4800
(Registrant's telephone number, including area code)
______________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.10 par value - 72,118,637
Outstanding at May 7, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 28, June 30,
1999 1998
(IN THOUSANDS OF DOLLARS) (Unaudited) (*)
- ---------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 193,131 $ 184,346
Accounts receivable 708,999 633,835
Inventories 703,863 639,283
Refundable and deferred federal and foreign
income taxes 6,190 10,876
Other current assets 48,021 17,623
-------------------------------
TOTAL CURRENT ASSETS 1,660,204 1,485,963
PROPERTY, PLANT, AND EQUIPMENT
(Less accumulated depreciation of
$473,944 at March 28, 1999, and
$418,158 at June 30, 1998) 433,527 436,097
Other Noncurrent Assets 28,125 22,668
-------------------------------
TOTAL ASSETS $2,121,856 $1,944,728
===============================
</TABLE>
* Derived from audited financial statements, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to condensed consolidated financial statements.
<PAGE>
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<S> <C> <C>
March 28, June 30,
1999 1998
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA) (Unaudited) (*)
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 740,967 $ 663,600
Accrued payroll and related expenses 42,913 34,529
Federal, foreign and state income taxes 39,430 27,024
Current maturities of long-term debt 1,643 1,382
-------------------------------
TOTAL CURRENT LIABILITIES 824,953 726,535
DEFERRED INCOME TAXES 10,679 10,659
NONCURRENT PENSION LIABILITY 3,000 3,000
DEFERRED COMPENSATION 20,555 16,075
LONG-TERM DEBT - NOTE D
Industrial revenue bonds 21,210 21,215
Long-term notes 115,095 136,414
Convertible subordinated notes 283,379 282,873
-------------------------------
TOTAL LONG-TERM DEBT 419,684 440,502
SHAREHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized
but unissued -0- -0-
Common stock, $.10 par value: authorized
200,000,000; issued 60,324,376 shares at
March 28, 1999, and 60,104,180 shares at
June 30, 1998 6,032 6,010
Capital in excess of par value 187,150 180,464
Retained earnings 660,962 565,948
Currency translation adjustment (8,495) (4,124)
Shares held in Rabbi trusts, 75,302 at
March 28, 1999, at cost (2,323) -0-
Treasury stock of 59,366 shares, at cost (341) (341)
-------------------------------
TOTAL SHAREHOLDERS' EQUITY 842,985 747,957
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,121,856 $1,944,728
===============================
</TABLE>
* Derived from audited financial statements, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to condensed consolidated financial statements.
<PAGE>
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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QUARTER ENDED:
March 28, March 29,
(In thousands of dollars except share data) 1999 1998
- ---------------------------------------------------------------------------
Net sales $1,603,024 $1,686,849
Costs and expenses 1,547,383 1,622,444
-------------------------------
OPERATING INCOME 55,641 64,405
Other income (expense):
Interest expense (net of interest
income of $1,451 in fiscal year
1999 and $1,229 in fiscal year 1998) (5,220) (6,483)
Other, net (199) (302)
-------------------------------
INCOME BEFORE INCOME TAXES 50,222 57,620
Income taxes - Note B 17,834 23,336
-------------------------------
NET INCOME $ 32,388 $ 34,284
===============================
Earnings per share - Note C:
Basic $.54 $.57
Diluted $.48 $.50
Weighted average number of shares used in computation:
Basic 60,172,242 59,888,479
Diluted 72,769,530 72,574,081
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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NINE MONTHS ENDED:
March 28, March 29,
(In thousands of dollars except share data) 1999 1998
- ---------------------------------------------------------------------------
Net sales $4,908,531 $5,215,037
Costs and expenses 4,743,250 5,017,148
-------------------------------
OPERATING INCOME 165,281 197,889
Other income (expense):
Interest expense (net of interest
income of $4,993 in fiscal year
1999 and $7,379 in fiscal year 1998) (15,247) (15,838)
Other, net (405) (160)
-------------------------------
INCOME BEFORE INCOME TAXES 149,629 181,891
Income taxes - Note B 54,615 73,666
-------------------------------
NET INCOME $ 95,014 $ 108,225
===============================
Earnings per share - Note C:
Basic $1.58 $1.81
Diluted $1.41 $1.58
Weighted average number of shares used in computation:
Basic 60,039,324 59,807,081
Diluted 72,618,328 72,573,004
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
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NINE MONTHS ENDED:
March 28, March 29,
(In thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 95,014 $ 108,225
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 83,922 74,434
Changes in current assets and liabilities:
Accounts receivable (76,292) 22,145
Inventories (65,220) (146,804)
Refundable income taxes 4,686 -0-
Other current assets (30,672) (10,599)
Accounts payable and accrued expenses 87,688 (48,575)
Income taxes 12,283 18,703
Other non cash items - net (1,095) (1,317)
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 110,314 16,212
-------------------------
INVESTING ACTIVITIES
Purchase of property, plant, and equipment (81,778) (192,366)
Other (3,298) 1,187
-------------------------
NET CASH USED FOR INVESTING ACTIVITIES (85,076) (191,179)
-------------------------
FINANCING ACTIVITIES
Payments on long-term debt (20,704) (234,793)
Proceeds from long-term debt 457 222,761
Issuance of common stock 4,112 2,134
-------------------------
NET CASH USED FOR FINANCING ACTIVITIES (16,135) (9,898)
-------------------------
Effect of exchange rate changes on cash (318) (2,031)
-------------------------
Net increase (decrease) in cash and cash equivalents 8,785 (186,896)
Cash and cash equivalents at beginning of period 184,346 290,809
-------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 193,131 $ 103,913
=========================
</TABLE>
Cash equivalents consist of short-term deposits and liquid marketable securities
which are stated at cost that approximates market value.
See notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries after elimination
of significant intercompany accounts and transactions. The financial statements
have been prepared in accordance with instructions to Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Independent auditors
have not examined the statements (and all other information in this report), but
in the opinion of the Company all adjustments, which consist of normal recurring
accruals necessary for a fair presentation of the results for the period, have
been made. The results of operations for the period ended March 28, 1999, are
not necessarily indicative of the results of operations for the year ending June
30, 1999. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended June 30, 1998.
NOTE B - INCOME TAXES
U.S. income taxes in excess of estimated foreign income tax credits have not
been provided on certain undistributed earnings of foreign subsidiaries
aggregating $107 million at March 28, 1999, which are considered to be
permanently invested. Otherwise, approximately $25 million of cumulative
deferred income taxes would have been provided. The estimated income tax
provision for fiscal 1999 differs from the U.S. statutory income tax rate due to
state income taxes offset by lower taxed foreign earnings considered permanently
invested.
NOTE C - EARNINGS PER SHARE
Basic earnings per share are computed by dividing reported net income for the
period by the weighted average number 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:
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QUARTER ENDED: NINE MONTHS ENDED:
(IN THOUSANDS OF DOLLARS, March 28, March 29, March 28, March 29,
EXCEPT SHARE DATA ) 1999 1998 1999 1998
----------------------- ------------------------
Net income $ 32,388 $ 34,284 $ 95,014 $108,225
Add back after-tax interest
expense for convertible
subordinated notes 2,427 2,263 7,169 6,646
----------------------- ------------------------
Adjusted net income $ 34,815 $ 36,547 $102,183 $114,871
======================= ========================
Weighted average number of
shares outstanding during
period 60,172,242 59,888,479 60,039,324 59,807,081
Applicable number of shares
for stock options outstanding
for period 802,416 890,730 784,132 971,051
Number of shares if convertible
subordinated notes were
converted 11,794,872 11,794,872 11,794,872 11,794,872
----------------------- ------------------------
Weighted average number of
shares 72,769,530 72,574,081 72,618,328 72,573,004
======================= ========================
Diluted earnings per share $.48 $.50 $1.41 $1.58
======================= ========================
</TABLE>
<PAGE>
NOTE D - CHANGES IN AMOUNT OUTSTANDING OF SECURITIES OR INDEBTEDNESS
Total unused credit amounts available to the Company at March 28, 1999,
including those available under an asset securitization agreement, approximated
$654 million.
In a subsequent event, substantially all of the outstanding Convertible
Subordinated Notes due May 1, 2006, ($283 million outstanding at March 28, 1999)
were converted to the Company's common stock on May 3, 1999.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income consists of the following:
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QUARTER ENDED: NINE MONTHS ENDED:
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
(IN THOUSANDS OF DOLLARS) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net income $32,388 $34,284 $95,014 $108,225
------------------------------------------------
Currency translation adjustment
(loss) income (3,864) 1,025 (4,371) 882
Income tax (benefit) expense (1,372) 415 (1,595) 357
------------------------------------------------
Other comprehensive (loss)income (2,492) 610 (2,776) 525
------------------------------------------------
Comprehensive income $29,896 $34,894 $92,238 $108,750
================================================
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
From time to time, the Company may publish forward-looking statements, including
statements herein, relating to such matters as anticipated financial
performance, business prospects and outlook, plant expansions, foreign sales and
currency risks, technological developments, price competition, operating margin,
liquidity, and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In compliance with
such safe harbor terms, the Company notes that a variety of factors could cause
the Company's actual results and experience to differ materially from
anticipated results or other expectations expressed in the Company's
forward-looking statements or from past performances. The risks and
uncertainties that may cause actual results to differ materially include
component availability and pricing, management of growth, customer
concentration, customer order flow, competition, technological change, trends in
selling prices for the Company's customers' products, foreign currency
fluctuations and other factors noted in Item 1. of SCI Systems, Inc.'s Annual
Report on Form 10-K for the fiscal year ended June 30, 1998.
RESULTS OF OPERATIONS
Sales declined 5.0% in the third quarter to $1.60 billion from $1.69 billion in
the same period a year earlier. Net income declined 5.5% to $32.4 million in the
third quarter of fiscal 1999 from $34.3 million in the same quarter of fiscal
1998. Basic and diluted earnings per share for the quarter were $.54 and $.48,
respectively, compared with $.57 and $.50 per share a year earlier.
Sales for the first nine months of fiscal year 1999 declined 5.9% from that in
fiscal 1998's first nine months ($4.91 billion compared with $5.22 billion,
respectively). Net income was $95.0 million compared with $108.2 million a year
earlier. Basic and diluted earnings per share for the first nine months were
$1.58 and $1.41, respectively, compared with $1.81 and $1.58 per share for the
prior fiscal year's first nine months.
Finished product assembly accounted for approximately one-half of the Company's
sales both in the first nine months of fiscal year 1999 and in total for fiscal
year 1998. Foreign sales represented 41% of consolidated sales in fiscal year
1999's first nine months in comparison to 31% in total in fiscal year 1998. The
trend for increased percentage of the Company's sales being generated by its
lower cost foreign operations is expected to continue.
As an electronic manufacturing services company, the Company sales are affected
by shifts in its customers' market shares. Certain of those shifts, together
with declining average selling prices, resulted in lower sales in the third
quarter and first nine months of fiscal 1999.
Operating margins declined from the year earlier periods primarily because of
startup and transition costs of new and enlarged facilities and projects, and
because of industry price pressures.
Net interest expense declined as a percent of sales for the third quarter of
fiscal 1999 from that incurred in the same quarter of fiscal 1998 (.32% in
fiscal 1999 and .38% in fiscal 1998). Lower interest expense resulted from
reduced borrowing requirements. Net interest expense remained at the same
approximate percent of sales for the first nine months. Interest expense is
expected to decline in the fourth quarter and may remain at a reduced level for
several quarters as a result of conversion of Convertible Subordinated Notes in
May 1999. (Reduced interest expense resulting from the conversion will not
increase diluted earnings per share. Interest of the Convertible Subordinated
Notes is added back for purposes of computing diluted earnings per share.)
The estimated effective income tax rate differs from the U.S. statutory rate
primarily due to the effects of state income taxes, offset by lower taxed
foreign earnings considered permanently invested. Increased lower taxed foreign
earnings account for a reduced effective income tax rate in fiscal 1999.
Third quarter net income as a percent of sales was 2.0% both in fiscal 1999 and
1998. Net income as a percent of sales declined to 1.9% for fiscal 1999's first
nine months compared with 2.1% in the same period a year earlier.
This decline principally resulted from lower operating margins.
CAPITAL RESOURCES AND LIQUIDITY
Working capital at March 28, 1999, was $835 million compared to $759 million at
June 30, 1998. This change mainly resulted from increased current assets in
support of larger quarterly revenues. March 28, 1999's current ratio was
consistent with June 30, 1998's 2.0.
Available liquidity at March 28, 1999, was $847 million, which consisted of $654
million in unused credit facilities and $193 million in cash and cash
equivalents. Somewhat lower available liquidity may result during the remainder
of fiscal 1999 as it is used to fund expenditures in support of revenue growth.
The Company believes that existing liquidity is more than sufficient to support
near term needs. As a result of conversion of outstanding Convertible Notes in
May 1999, Shareholders' Equity will exceed $1.1 billion and outstanding debt,
net of cash, will be less than zero.
Fiscal 1999's capital expenditures are presently estimated to approach $150
million. However, if market conditions change from those currently anticipated,
the Company may increase or decrease its capital expenditure level. Capital
expenditures will also be impacted if the Company further acquires any
manufacturing operations from other companies. The Company has an ongoing
program of actively investigating business opportunities generated by other
companies' divestitures.
The acquisition of HP VeriFone, Inc.'s Kunshan, China, operation on April 30,
1999, was funded from existing liquidity.
YEAR 2000 READINESS
The Company is actively engaged in a Year 2000 readiness project to assess
compatibility of its software and equipment. The Company has established a
working group to oversee its Year 2000 readiness efforts, and to monitor
vendors' and customers' status in this area as well. This working group is
headed by a Company Senior Vice President.
Year 2000 compliant software revisions to various software packages (both
internally developed and externally purchased) that process the Company's
interlocking order entry, shop floor control and other manufacturing systems
have been substantially completed. Year 2000 compliant software for the
Company's accounting applications has also been completed, and for the most part
are currently being used. The Company is in the testing stage for Year 2000
compliant software not in current use.
The possibility exists that the Company may inadvertently fail to identify and
correct a Year 2000 problem. The Company believes the impact of such an
occurrence would be insubstantial and correctable, as it has upgraded and
purchased substantial quantities of Year 2000 compliant software and equipment,
and continues to do so.
Based on its inquiries to date, the Company believes satisfactory progress is
being made by its major vendors and customers on Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company believes it is not subject to any material foreign currency
exposure.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) Exhibit 27.1 - Financial Data Schedule for March 28, 1999.
(b) Reports
The Company filed no reports on Form 8-K during the period of December
28, 1998, to March 28, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCI Systems, Inc.
(Registrant)
Date: May 12, 1999 By: /s/ Olin B. King
Olin B. King
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 28,
1999's BALANCE SHEET AND THE INCOME STATEMENT FOR THE NINE MONTHS 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-28-1999
<CASH> 193,131
<SECURITIES> 0
<RECEIVABLES> 720,087
<ALLOWANCES> 11,088
<INVENTORY> 703,863
<CURRENT-ASSETS> 1,660,204
<PP&E> 907,471
<DEPRECIATION> 473,944
<TOTAL-ASSETS> 2,121,856
<CURRENT-LIABILITIES> 824,953
<BONDS> 419,684
0
0
<COMMON> 6,032
<OTHER-SE> 836,953
<TOTAL-LIABILITY-AND-EQUITY> 2,121,856
<SALES> 4,908,531
<TOTAL-REVENUES> 4,908,531
<CGS> 4,743,250
<TOTAL-COSTS> 4,743,250
<OTHER-EXPENSES> (4,588)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,240
<INCOME-PRETAX> 149,629
<INCOME-TAX> 54,615
<INCOME-CONTINUING> 95,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,014
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.41
<FN>
<F1>EPS - PRIMARY REPRESENTS EPS-BASIC
</FN>
</TABLE>
