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 September 26, 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)
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(256) 882-4800
(Registrant's telephone number, including area code)
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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 - 72,095,071
Outstanding at November 1, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SCI Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
September 26, June 30,
1999 1999
(In thousands of dollars) (Unaudited) (*)
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 146,504 $ 216,085
Accounts receivable 599,169 821,925
Inventories 957,944 719,008
Refundable and deferred federal and
foreign income taxes 12,379 12,522
Other current assets 59,678 62,159
-----------------------------------
Total Current Assets 1,775,674 1,831,699
Property, Plant, and Equipment
(Less accumulated depreciation and
amortization of $516,314 at
September 26, 1999, and
$492,098 at June 30, 1999) 484,877 447,985
Goodwill
(Less accumulated amortization of
$7,590 at September 26, 1999, and
$5,444 at June 30, 1999) 189,328 21,033
Other Noncurrent Assets 35,016 21,943
-----------------------------------
Total Assets $2,484,895 $2,322,660
===================================
</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
<TABLE>
<S> <C> <C>
September 26, June 30,
1999 1999
(In thousands of dollars except share data) (Unaudited) (*)
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 973,365 $874,709
Accrued payroll and related expenses 53,398 44,142
Federal, foreign and state income taxes 45,504 36,117
Current maturities of long-term debt 1,862 341
-----------------------------------
Total Current Liabilities 1,074,129 955,309
Deferred Income Taxes 36,225 34,587
Noncurrent Employee Benefits 30,400 27,094
Long-term Debt - Note D
Industrial revenue bonds 19,846 21,119
Long-term notes 119,153 119,734
-----------------------------------
Total Long-term Debt 138,999 140,853
Shareholders' Equity
Preferred stock, 500,000 shares authorized
but unissued -0- -0-
Common stock, $.10 par value: authorized
200,000,000; issued 29,746,395
72,154,437 shares at September 26, 1999,
and 72,138,237 shares at June 30, 1999 7,215 7,214
Capital in excess of par value 469,916 469,393
Retained earnings 744,477 703,796
Currency translation adjustment (12,535) (11,288)
Shares held in Rabbi trusts, at cost,
119,152 shares at September 26, 1999,
and 136,296 at June 30, 1999 (3,590) (3,957)
Treasury stock of 59,366 shares, at cost (341) (341)
-----------------------------------
Total Shareholders' Equity 1,205,142 1,164,817
-----------------------------------
Total Liabilities and Shareholders' Equity $2,484,895 $2,322,660
===================================
</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)
<TABLE>
<S> <C> <C>
Quarter Ended:
September 26, September 27,
(In thousands of dollars except share data) 1999 1998
- --------------------------------------------------------------------------------
Net sales $1,664,006 $ 1,569,577
Costs and expenses 1,598,313 1,516,514
Goodwill and contract intangibles
amortization expense 2,978 363
-----------------------------------
Operating Income 62,715 52,700
Other income (expense):
Interest expense (net of interest
income of $1,912 in fiscal year 1999
and $1,886 in fiscal year 1998) (1,994) (5,143)
Other, net (3) 14
-----------------------------------
Income before Income Taxes 60,718 47,571
Income taxes - Note B 20,037 17,601
-----------------------------------
Net Income $ 40,681 $ 29,970
===================================
Earnings per share - Note C:
Basic $.57 $.50
Diluted $.56 $.45
Weighted average number of shares used in computation:
Basic 71,970,272 60,056,089
Diluted 72,973,278 72,601,425
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SCI Systems, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<S> <C> <C>
(Unaudited)
Quarter Ended:
September 26, September 27,
(In thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
Operating Activities
Net income $ 40,681 $ 29,970
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 30,711 28,430
Changes in current assets and liabilities:
Accounts receivable 223,199 (40,384)
Inventories (239,203) (3,914)
Other current assets 2,714 (2,879)
Accounts payable and accrued expenses 107,373 51,952
Income taxes 9,809 6,541
Other non cash items - net 1,749 (8)
---------------------------
Net Cash Provided by Operating Activities 177,033 69,708
---------------------------
Investing Activities
Purchase of property, plant, and equipment (65,068) (24,237)
Acquisition costs in excess of underlying
asset values (170,441) -0-
Other (12,004) 65
---------------------------
Net Cash Used for Investing Activities (247,513) (24,172)
---------------------------
Financing Activities
Payments on long-term debt (59,101) (20,976)
Proceeds from long-term debt 58,747 -0-
Issuance of common stock 525 194
---------------------------
Net Cash Provided by (Used for) Financing Activities 171 (20,782)
---------------------------
Effect of exchange rate changes on cash 728 -0-
---------------------------
Net increase (decrease) in cash and cash equivalents (69,581) 24,754
Cash and cash equivalents at beginning of period 216,085 184,346
---------------------------
Cash and Cash Equivalents at End of Period $146,504 $209,100
===========================
</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
September 26, 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 September 26, 1999,
are not necessarily indicative of the results of operations for the year ending
June 30, 2000. 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, 1999.
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 $78 million at September 26, 1999, which are considered to be
permanently invested. Otherwise, approximately $17 million of cumulative
deferred income taxes (net of related estimated foreign income tax credits)
would have been provided. The estimated income tax provision for fiscal 2000
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:
<TABLE>
<S> <C> <C>
Quarter Ended:
--------------------
(In thousands of dollars, September 26, September 27,
except share data ) 1999 1998
---------------------------
Net income $40,681 $29,970
Add back after-tax interest expense for
convertible subordinated notes -0- 2,371
------- -------
Adjusted net income $40,681 $32,341
======= =======
Weighted average number of shares outstanding
during period 71,970,272 60,056,089
Applicable number of shares for stock options
outstanding for period 1,003,006 750,464
Number of shares if outstanding convertible
subordinated notes were converted -0- 11,794,872
(substantially converted in May 1999) ---------- ----------
Weighted average number of shares 72,973,278 72,601,425
========== ==========
Diluted earnings per share $.56 $.45
==== ====
</TABLE>
<PAGE>
Note D - Changes in Amount Outstanding of Securities or Indebtedness
Total unused credit amounts available to the Company at September 26, 1999,
including those available under an asset securitization agreement, approximated
$495 million. At September 26, 1999, the Company has sold $190 million of
accounts receivable under its asset securitization agreement. The approximate
annualized effective interest rate paid on the amount sold at September 26,
1999, was 5.8%.
Note E - Comprehensive Income
Comprehensive income consists of the following:
<TABLE>
<S> <C> <C>
Quarter Ended:
September 26, September 27,
(In thousands of dollars) 1999 1998
--------------------------------------------------------------------------
Net income $40,681 $29,970
---------------------------
Currency translation adjustment loss (1,247) (1)
Income tax benefit 412 -0-
---------------------------
Other comprehensive (loss) income (835) (1)
---------------------------
Comprehensive income $39,846 $29,969
===========================
</TABLE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
From time to time the Company may publish or express forward-looking statements,
including those 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
margins, liquidity, and similar matters. Such statements generally contain the
words "may," "believes," "anticipates," "estimates," "expects," and words of
similar import. 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 past performance or from
anticipated results or other expectations expressed in the Company's
forward-looking statements. 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, projected capital expenditures, year
2000 readiness, qualitative market risk disclosures, and other similar
statements and risks described in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999.
Results of Operations
Sales for the first quarter were $1.66 billion compared with $1.57 billion in
the same period a year earlier (a 6% increase). Net income was $40.7 million in
the quarter compared with $30.0 million in the same quarter of fiscal 1999, an
increase of 35.7%. Basic and diluted earnings per share for the quarter were
$.57 and $.56, respectively, compared with $.50 and $.45 per share a year
earlier, an increase of 24.4% on diluted earnings per share.
Substantial growth occurred in the Company's foreign operations which now
represent approximately 44% of total sales compared with approximately 42% for
all of fiscal 1999. Foreign operation sales are expected to continue to grow
faster than domestic sales. Lower average selling prices were offset by volume
increase and sales generated by the Company's acquisitions subsequent to last
fiscal year's first quarter. Finished product sales continue to approximate 50%
of the Company sales.
Operating margins improved to 3.77% in fiscal 2000's first quarter from 3.36% a
year earlier. This increase resulted largely from increased sales volumes,
especially in operations that were in a startup phase in fiscal 1999. Such
operations are quickly coming up to existing full production capacity.
Production capacity is being increased at several locations coming out of their
startup phase, especially those in Mexico. Mexico represents the fastest growing
geographic area for the Company. Its low production costs and geographic
proximity to U.S. markets, make it extremely attractive to the Company's
customers. Several major programs previously produced at the Company's domestic
facilities have been transferred to the Mexican plants. Operating results for
the Company's Brazilian plant improved significantly during the first quarter.
Planned fiscal 2000 production capacity expansions should not adversely impact
operating margins as much as startup operations did in fiscal 1999. Fiscal 2000
planned expansions represent capacity increases to existing facilities that are
currently at or near full production levels. Fiscal 2000 first quarter's
operating margin was partially impacted by the slowing effects of the summer
season.
The Company believes comparative quarterly growth rates are accelerating,
supported by strong new business bookings. Growth is occurring in a broad range
of industry areas as the Company continues its focus on broadening and balancing
its product and industry activities on a global basis. Long lead times and
shortages are currently being experienced on certain components. While the
Company believes sufficient component purchase contracts exist to enable it to
meet its planned sales for the next several quarters, any potential upswing
could be impacted by these component market conditions. Besides the potential
impact on component deliveries of the recent earthquake in Taiwan, component
deliveries may be impacted by suppliers' and internal system difficulties
relating to Year 2000 readiness upgrades.
The conversion of Convertible Subordinated Notes in May 1999 largely generated
the net interest expense decline to 0.12% of sales for the first quarter of
fiscal 2000 from 0.33% in fiscal 1999's first quarter. (Reduced interest expense
resulting from the conversion did 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 the reduced estimated effective income tax rate in fiscal
2000.
First quarter net income increased to 2.44% compared with 1.91% a year earlier
as a result of the aforementioned items.
Capital Resources and Liquidity
Working capital declined to $702 million at September 26, 1999, from $876
million at June 30, 1999, mainly due to the $190 million sale of accounts
receivable. Current ratio also declined to 1.7 from the 1.9 at June 30, 1999,
primarily for the same reason. Inventories increased at September 26, 1999, from
June 30, 1999, in support of greater sales for the coming quarter. Accounts
payable and accrued expenses also increased accordingly. The increase in
Goodwill primarily relates to the acquisition of Nortel Networks' Brockville,
Ontario, Canada, plant and certain other manufacturing assets in August 1999.
Available liquidity at September 26, 1999, was $642 million, which consisted of
$495 million in unused credit facilities and $147 million in cash and cash
equivalents. The Company expects to use a substantial portion of its currently
available credit facility for anticipated acquisitions and internal growth. With
shareholders' equity now approximating $1.2 billion, additional financing is
believed to be available to the Company as needed. Accordingly, the Company
believes it can adequately fund its expected growth in the intermediate term.
Capital expenditures could exceed $500 million in fiscal 2000 under existing
plans. Changes in market conditions and acquisition opportunities can impact
actual capital expenditures substantially. The August 30, 1999, acquisition of
Nortel Networks' Brockville plant and manufacturing assets was funded with
existing liquidity. The pending acquisition of TAG Manufacturing will also be
funded from existing liquidity when completed. The Company has an ongoing
program of actively investigating business opportunities generated by other
companies' divestitures.
Year 2000 Readiness
The Year 2000 compliance 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 may not 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
impact the Company, possibly resulting in disruption to its operations, and
possibly subjecting it to legal liabilities.
The Company has updated much of its existing software for Year 2000 compliance
by acquiring new or upgraded third party software packages, and by modifying
existing internally developed software. The Company has tested all significant
software for Year 2000 readiness and believes all such software is now compliant
and is currently using such software. The Company believes it has sufficiently
reduced mechanical equipment microcontroller Year 2000 exposure through
substantial compliant equipment additions or replacements.
The possibility exists, however, that the Company may fail to correct an
internal Year 2000 issue in its software or manufacturing equipment. The Company
believes this possibility would not significantly impact its operations, as it
should be able to effectively conduct its business using Year 2000 compliant
software and equipment currently installed.
The Company has been advised by its major customers and vendors that they are
substantially Year 2000 ready and do not expect any material related disruption.
The major exposure to the Company with Year 2000 readiness is believed to be the
status of utility providers, especially in foreign countries. Not only could the
Company's production be disrupted if one of its utility providers fails to be
fully Year 2000 ready, but also indirectly if a parts supplier's utility
provider is not Year 2000 ready. A prolonged utility outage could significantly
adversely affect the Company until production is shifted to other facilities or
to suppliers not impacted by utility outages.
To date, Year 2000 readiness cost to the Company has been approximately $7
million (including upgrades to existing systems).
Item 3. 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. Outstanding variable interest rate debt and accounts receivable sold
aggregated $213 million at September 26, 1999. A one percentage point change in
short-term interest rates would currently have a minor impact on the Company
(estimated to result in an approximate $500,000 increase in quarterly interest
expense). In the future, the Company expects changing interest rates to have a
greater impact. Increased use of the asset securitization agreement and
borrowings is expected to finance anticipated growth.
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 September 26, 1999, was that
associated with Brazilian operations. Unlike most other foreign operations of
SCI, this plant is directly subjected to the effects of currency devaluation on
certain customers' contracts until forward pricing is adjusted accordingly
(normally monthly). During fiscal 1999 the Brazilian currency experienced severe
devaluations. This devaluation adversely impacted the results of the Brazilian
operation. At September 26, 1999, the Company had approximately $18 million of
net current assets and $19 million of long-term intercompany advances subject to
this currency exposure. Approximately $15 million of inventory is subject to
repricing arrangements for currency fluctuations. The Company considers the
Brazilian economic outlook, while improving, too uncertain to predict.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(1) Exhibit 27 - Financial Data Schedule for September 26, 1999.
(b) Reports
The Company filed one report on Form 8-K during the period of July 1,
1999, to September 26, 1999. The report was filed on September 10, 1999,
and dealt with the acquisition of a wholly-owned subsidiary and certain
other assets from Nortel Networks Corporation together with entering into
a multiyear manufacturing agreement during August 1999.
<PAGE>
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)
SCI SYSTEMS, INC.
Date: November 9, 1999 By: /s/ James E. Moylan, Jr.
-------- -- ---- --- ----- -- ------- ---
James E. Moylan, Jr.
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 9, 1999 By: /s/ John M. Noll
-------- -- ---- --- ---- -- ----
John M. Noll
Assistant Vice President,
Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 26, 1999'S BALANCE SHEET AND THE INCOME STATEMENT FOR THE QUARTER 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-26-1999
<CASH> 146,504
<SECURITIES> 0
<RECEIVABLES> 609,456
<ALLOWANCES> 10,287
<INVENTORY> 957,944
<CURRENT-ASSETS> 1,775,674
<PP&E> 1,001,191
<DEPRECIATION> 516,314
<TOTAL-ASSETS> 2,484,895
<CURRENT-LIABILITIES> 1,074,129
<BONDS> 138,999
0
0
<COMMON> 7,215
<OTHER-SE> 1,197,927
<TOTAL-LIABILITY-AND-EQUITY> 2,484,895
<SALES> 1,664,006
<TOTAL-REVENUES> 1,664,006
<CGS> 1,598,313
<TOTAL-COSTS> 1,601,291
<OTHER-EXPENSES> (1,909)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,906
<INCOME-PRETAX> 60,718
<INCOME-TAX> 20,037
<INCOME-CONTINUING> 40,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,681
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.56
</TABLE>
