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 December 27, 1998
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.)
C/O SCI SYSTEMS (ALABAMA), INC.
2101 WEST CLINTON AVENUE
HUNTSVILLE, ALABAMA 35805
(Address of principal executive offices) (Zip Code)
----------------------------------------------
(408) 943-9000
(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 - 60,294,735
Outstanding at February 5, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 27, June 30,
1998 1998
(IN THOUSANDS OF DOLLARS) (Unaudited) (*)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 191,621 $ 184,346
Accounts receivable 742,009 633,835
Inventories 708,242 639,283
Refundable and deferred federal and
foreign income taxes 6,351 10,876
Other current assets 45,469 17,623
------------------------------------
TOTAL CURRENT ASSETS 1,693,692 1,485,963
PROPERTY, PLANT, AND EQUIPMENT
(Less accumulated depreciation of
$453,835 at December 27, 1998, and
$418,158 at June 30, 1998) 436,301 436,097
OTHER NONCURRENT ASSETS 28,852 22,668
------------------------------------
TOTAL ASSETS $2,158,845 $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
<TABLE>
<S> <C> <C>
December 27, June 30,
1998 1998
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA) (Unaudited) (*)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 833,446 $ 663,600
Accrued payroll and related expenses 39,871 34,529
Federal, foreign and state income taxes 15,054 27,024
Current maturities of long-term debt 1,706 1,382
------------------------------------
TOTAL CURRENT LIABILITIES 890,077 726,535
DEFERRED INCOME TAXES 10,679 10,659
NONCURRENT PENSION LIABILITY 3,000 3,000
DEFERRED COMPENSATION 20,271 16,075
LONG-TERM DEBT - NOTE C
Industrial revenue bonds 21,201 21,215
Long-term notes 117,870 136,414
Convertible subordinated notes 283,211 282,873
------------------------------------
TOTAL LONG-TERM DEBT 422,282 440,502
SHAREHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized
but unissued -0- -0-
Common stock, $.10 par value: authorized
200,000,000; issued 60,242,335 shares at
December 27, 1998, and 60,104,180 shares
at June 30, 1998 6,024 6,010
Capital in excess of par value 184,675 180,464
Retained earnings 628,574 565,948
Currency translation adjustment (4,631) (4,124)
Shares held in Rabbi trusts, 68,922 at
December 27, 1998, at cost (1,765) -0-
Treasury stock of 59,366 shares, at cost (341) (341)
------------------------------------
TOTAL SHAREHOLDERS' EQUITY 812,536 747,957
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,158,845 $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)
<TABLE>
<S> <C> <C>
QUARTER ENDED:
December 27, December 28,
(In thousands of dollars except share data) 1998 1997
- --------------------------------------------------------------------------------
Net sales $1,735,930 $1,786,423
Costs and expenses 1,678,990 1,718,318
------------------------------------
OPERATING INCOME 56,940 68,105
Other income (expense):
Interest expense (net of interest income
of $1,655 in fiscal year 1999 and $2,624
in fiscal year 1998) (4,884) (5,142)
Other, net (220) 161
------------------------------------
INCOME BEFORE INCOME TAXES 51,836 63,124
Income taxes - Note B 19,179 25,565
------------------------------------
NET INCOME $ 32,657 $ 37,559
====================================
Earnings per share - Note C:
Basic $.54 $.63
Diluted $.48 $.55
Weighted average number of shares used in computation:
Basic 60,023,777 59,799,900
Diluted 72,628,811 72,608,255
</TABLE>
See notes to condensed consolidated financial statements.
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<S> <C> <C>
QUARTER ENDED:
December 27, December 28,
(In thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
Net income $32,657 $37,559
------------------------------------
Currency translation adjustment (loss) income (506) 1,022
Income tax (benefit) expense (187) 414
------------------------------------
OTHER COMPREHENSIVE INCOME (319) 608
------------------------------------
COMPREHENSIVE INCOME $32,338 $38,167
====================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<S> <C> <C>
SIX MONTHS ENDED:
December 27, December 28,
(In thousands of dollars except share data) 1998 1997
- --------------------------------------------------------------------------------
Net sales $3,305,507 $3,528,188
Costs and expenses 3,195,867 3,394,704
------------------------------------
OPERATING INCOME 109,640 133,484
Other income (expense):
Interest expense (net of interest income
of $3,542 in fiscal year 1999 and $6,150
in fiscal year 1998) (10,027) (9,354)
Other, net (206) 141
------------------------------------
INCOME BEFORE INCOME TAXES 99,407 124,271
Income taxes - Note B 36,781 50,330
------------------------------------
NET INCOME $ 62,626 $ 73,941
====================================
Earnings per share - Note C:
Basic $1.04 $1.24
Diluted $ .93 $1.08
Weighted average number of shares used in computation:
Basic 59,973,482 59,765,530
Diluted 72,543,345 72,571,613
</TABLE>
See notes to condensed consolidated financial statements.
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<S> <C> <C>
SIX MONTHS ENDED:
December 27, December 28,
(In thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
Net income $62,626 $73,941
------------------------------------
Currency translation adjustment loss (507) (143)
Income tax benefit (188) (58)
------------------------------------
OTHER COMPREHENSIVE INCOME (319) (85)
------------------------------------
COMPREHENSIVE INCOME $62,307 $73,856
====================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SCI SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<S> <C> <C>
SIX MONTHS ENDED:
December 27, December 28,
(In thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 62,626 $ 73,941
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 56,128 46,997
Changes in current assets and liabilities:
Accounts receivable (108,594) (41,790)
Inventories (69,227) (131,723)
Refundable income taxes 4,526 -0-
Other current assets (27,986) (4,935)
Accounts payable and accrued expenses 175,957 112,199
Income taxes (10,542) (7,022)
Other non cash items - net (522) (1,908)
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 82,366 45,759
--------------------------
INVESTING ACTIVITIES
Purchase of property, plant, and equipment (56,576) (121,414)
Other (3,604) 1,103
--------------------------
NET CASH USED FOR INVESTING ACTIVITIES (60,180) (120,311)
--------------------------
FINANCING ACTIVITIES
Payments on long-term debt (20,620) (18,018)
Proceeds from long-term debt 2,344 4,848
Issuance of common stock 2,796 1,097
--------------------------
NET CASH USED FOR FINANCING ACTIVITIES (15,480) (12,073)
--------------------------
Effect of exchange rate changes on cash 569 1,609
--------------------------
Net increase (decrease) in cash and cash equivalents 7,275 (85,016)
Cash and cash equivalents at beginning of period 184,346 290,809
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $191,621 $205,793
==========================
</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
DECEMBER 27, 1998
(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 December 27, 1998, 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 $91 million at December 27, 1998, which are considered to be
permanently invested. Otherwise, approximately $20 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:
<TABLE>
<S> <C> <C> <C> <C>
QUARTER ENDED: SIX MONTHS ENDED:
(IN THOUSANDS OF DOLLARS, December 27, December 28, December 27, December 28,
EXCEPT SHARE DATA ) 1998 1997 1998 1997
------------------------- -------------------------
Net income $32,657 $37,559 $62,626 $73,941
Add back after-tax interest
expense for convertible
subordinated notes 2,371 2,191 4,741 4,383
-------------------- ----------------------
Adjusted net income $35,028 $39,750 $67,367 $78,324
==================== ======================
Weighted average number of
shares outstanding during
period 60,023,777 59,799,900 59,973,482 59,765,530
Applicable number of shares
for stock options
outstanding for period 810,162 1,013,483 774,991 1,011,211
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 72,628,811 72,608,255 72,543,345 72,571,613
======================= =========================
Diluted earnings per share $.48 $.55 $.93 $1.08
======================= =========================
</TABLE>
<PAGE>
Note D - CHANGES IN AMOUNT OUTSTANDING OF SECURITIES OR INDEBTEDNESS
Total unused credit amounts available to the Company at December 27, 1998,
including those available under the asset securitization agreement, approximated
$654 million.
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, 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 2.8% in the second quarter to $1.74 billion from the $1.79
billion in the same period a year earlier. Net income declined 13.1% to $32.7
million in the second quarter of fiscal 1999 from the $37.6 million in the same
quarter of fiscal 1998. Basic and diluted earnings per share for the quarter
were $.54 and $.48, respectively, compared with $.63 and $.55 per share a year
earlier.
Sales for the first six months of fiscal year 1999 declined 6.3% from that in
fiscal 1998's first six months ($3.31 billion compared with $3.53 billion,
respectively). Net income was $62.6 million compared with $73.9 million a year
earlier. Basic and diluted earnings per share for the first six months were
$1.04 and $.93, respectively, compared with $1.24 and $1.08 per share for the
prior fiscal year's first six months.
Finished product assembly accounted for approximately one-half of the Company's
sales both in the first six 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 six 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.
Operating margins declined from the year earlier periods primarily because of
startup and transition costs of new and enlarged facilities and projects in
addition to intense industry price pressures. While a number of new projects are
proceeding, certain customer market share shifts have occurred with a resultant
effect on sales.
Net interest expense for the second quarter of fiscal 1999 remained at the same
approximate percent of sales as that incurred in same quarter of fiscal 1998
(.28% in fiscal 1999 and .29% in fiscal 1998). For the first six months, fiscal
1999's net interest expense increased to .30% from .27% in fiscal 1998. This
increase resulted from lower interest income as interest rates declined and cash
was used to purchase assets. Interest income netted against interest expense was
earned from temporary investment of cash.
Estimated effective income tax rate differs from the U.S. statutory rate
primarily due to the effects of state income taxes offset by lower income taxes
on foreign earnings considered permanently invested. The estimated effective
income tax rate declined in fiscal 1999 from that estimated a year earlier due
to increased lower taxed foreign earnings.
Fiscal 1999 second quarter's and first six months' net income as a percent of
sales were 1.9% compared with 2.1% in the prior fiscal year's similar periods.
This decline principally resulted from lower margins as previously discussed.
OUTLOOK
The Company's current outlook is that March and June quarter revenue and
earnings figures will not meet earlier expectations but, however, should meet or
exceed year earlier results. A multiplant headcount reduction program is in
progress in the interest of efficiency enhancement.
The recently announced consolidation of the Company's Watsonville, California,
plant with other plants is not currently expected to materially impact future
earnings.
CAPITAL RESOURCES AND LIQUIDITY
Working capital at December 27, 1998, was $804 million compared to $759 million
at June 30, 1998. This change mainly resulted from increased current assets in
support of larger quarterly revenues. December 27, 1998's current ratio declined
slightly from June 30, 1998's 2.0 to 1.9.
Available liquidity at December 27, 1998, was $846 million, comprised of $654
million in unused credit facilities and $192 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 capacity
expansion. The Company believes that existing liquidity is sufficient to support
near term needs.
Fiscal 1999's capital expenditures are currently estimated at $150 million.
However, if market conditions change from those currently anticipated, the
Company may increase or decrease the capital expenditure level. Capital
expenditures will also be impacted if the Company acquires any further
manufacturing operations from other companies. The Company has an ongoing
program of actively investigating business opportunities generated by other
companies' outsourcing.
The recently announced pending acquisition of VeriFone, Inc.'s Kunshan, China,
operation will be funded from existing liquidity. The acquisition is anticipated
to be completed in the Company's June quarter.
YEAR 2000 READINESS
The Company is actively engaged in a Year 2000 readiness project to address
compatibility compliance 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. Testing of Year 2000 readiness is anticipated
to be substantially completed by June 1999.
All of the Company's accounting systems, except payroll and invoicing, are
currently being processed on upgraded Year 2000 compliant software packages.
Upgraded Year 2000 compliant software packages for payroll and invoicing are
currently being tested, and are planned to be fully installed during fiscal
1999's fourth quarter.
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 minor 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's Brazilian operations are the source of its primary foreign
currency exposure. (Refer to Item 7a. of the Company's June 30, 1998, Form
10-K.) Recently, the Brazilian currency has seen a substantial devaluation. This
devaluation will result in a currency exchange loss in the Company's third
quarter. Net current assets of approximately $13 million at December 27, 1998
are partially exposed to Brazilian currency fluctuations. The Company is taking
steps to reduce its exposure to the Brazilian currency in all reasonable ways.
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting of shareholders held on October 23, 1998, the
following individuals were elected as Class II Directors:
<TABLE>
<S> <C> <C>
Votes Against
Votes in Favor and Withheld
-------------- -------------
Jackie M. Ward 54,530,850 299,705
Wayne Shortridge 54,538,064 292,491
William E. Fruhan 54,628,047 202,508
</TABLE>
The other matters voted on at the meeting were:
<TABLE>
<S> <C> <C> <C> <C>
Votes Against
Votes in Favor and Withheld Abstentions Broker Nonvotes
-------------- ------------- ----------- ---------------
Amendment of the Company's
1994 Stock Option Incentive Plan
to increase number of shares
issuable under the Plan 41,987,859 12,693,136 149,560 Not applicable
Selection of Ernst & Young
LLP as the Company's inde-
pendent auditors for the
fiscal year ending June 30, 1999 54,648,756 91,780 90,019 Not applicable
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) Exhibit 27.1 - Financial Data Schedule for December 27, 1998.
(b) Reports
The Company filed no reports on Form 8-K during the period of September 28,
1998, to December 27, 1998.
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: February 9, 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 DECEMBER
27, 1998's BALANCE SHEET AND THE INCOME STATEMENT FOR THE SIX 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> DEC-27-1998
<CASH> 191,621
<SECURITIES> 0
<RECEIVABLES> 753,099
<ALLOWANCES> 11,090
<INVENTORY> 708,242
<CURRENT-ASSETS> 1,693,692
<PP&E> 890,136
<DEPRECIATION> 453,835
<TOTAL-ASSETS> 2,158,845
<CURRENT-LIABILITIES> 890,077
<BONDS> 422,282
0
0
<COMMON> 6,024
<OTHER-SE> 806,512
<TOTAL-LIABILITY-AND-EQUITY> 2,158,845
<SALES> 3,305,507
<TOTAL-REVENUES> 3,305,507
<CGS> 3,195,867
<TOTAL-COSTS> 3,195,867
<OTHER-EXPENSES> (3,336)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,569
<INCOME-PRETAX> 99,407
<INCOME-TAX> 36,781
<INCOME-CONTINUING> 62,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,626
<EPS-PRIMARY> 1.04
<EPS-DILUTED> .93
<FN>
<F1>EPS - PRIMARY REPRESENTS EPS-BASIC
</FN>
</TABLE>
