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 24, 2000
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 - 145,920,743
Outstanding at November 1, 2000
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SCI Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 24, June 30,
2000 2000
(In thousands of dollars) (Unaudited) (*)
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 89,655 $ 166,759
Accounts receivable 887,593 796,616
Inventories 1,407,410 1,277,979
Refundable and deferred federal and foreign income taxes 83,929 63,132
Other current assets 96,747 86,272
-------------------------------
Total Current Assets 2,565,334 2,390,758
Property, Plant, and Equipment
(Less accumulated depreciation and amortization of $596,386 at
September 24, 2000, and $565,657 at June 30, 2000) 603,665 589,159
Goodwill
(Less accumulated amortization of $28,629 at
September 24, 2000, and $21,472 at June 30, 2000) 330,010 316,175
Other Noncurrent Assets 59,237 55,212
-------------------------------
Total Assets $3,558,246 $3,351,304
===============================
</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.
2
<PAGE>
SCI Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 24, June 30,
2000 2000
(In thousands of dollars except share data) (Unaudited) (*)
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $1,054,535 $1,014,368
Accrued payroll and related expenses 52,351 53,504
Federal, foreign and state income taxes 24,058 19,743
Current maturities of long-term debt 30,681 14,361
------------------------------
Total Current Liabilities 1,161,625 1,101,976
Other Non Current Liabilities 127,449 133,004
Long-term Debt - Note E
Industrial revenue bonds 19,716 19,769
Long-term notes 261,918 164,459
Convertible notes 564,233 564,174
------------------------------
Total Long-term Debt 845,867 748,402
Shareholders' Equity
Preferred stock, 500,000 shares authorized but unissued -0- -0-
Common stock, $.10 par value: authorized 200,000,000; issued
147,015,574 shares at September 24, 2000, and 144,996,374
shares at June 30, 2000 14,700 14,500
Capital in excess of par value 532,337 477,531
Retained earnings 950,986 900,531
Currency translation adjustment (24,366) (17,227)
Shares held in Rabbi trusts, at cost, 299,248 shares at
September 24, 2000, and 288,472 shares at June 30, 2000 (8,110) (7,072)
Treasury stock, at cost, 884,045 shares at September 24, 2000,
and 118,732 shares at June 30, 2000 (42,242) (341)
------------------------------
Total Shareholders' Equity 1,423,305 1,367,922
------------------------------
Total Liabilities and Shareholders' Equity $3,558,246 $3,351,304
==============================
</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.
3
<PAGE>
SCI Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended:
September 24, September 26,
(In thousands of dollars except share data) 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $2,027,988 $1,664,006
Costs and expenses 1,933,538 1,598,313
Goodwill and contract intangibles amortization expense 7,989 2,978
--------------------------------
Operating Income 86,461 62,715
Other income (expense):
Interest expense (net of interest income of $1,877 in
fiscal year 2001 and $1,912 fiscal year 2000) (11,770) (1,994)
Other, net 616 (3)
--------------------------------
Income Before Income Taxes 75,307 60,718
Income taxes - Note C 24,851 20,037
--------------------------------
Net Income $ 50,456 $ 40,681
================================
Earnings per share - Note F:
Basic $.34 $.28
Diluted $.34 $.28
Weighted average number of shares used in computation:
Basic 146,900,388 143,940,544
Diluted 159,515,092 145,946,556
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SCI Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended:
September 24, September 26,
(In thousands of dollars) 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 50,456 $ 40,681
Adjustments to reconcile net income to net cash (used for)
provided by operations:
Depreciation and amortization 42,835 30,711
Changes in current assets and liabilities:
Accounts receivable (94,045) 223,199
Inventories (133,891) (239,203)
Other current assets (13,034) 2,714
Accounts payable and accrued expenses 41,960 107,373
Income taxes 4,373 9,809
Other non cash items - net 3,756 1,749
-------------------------------
Net Cash (Used for) Provided by Operating Activities (97,590) 177,033
-------------------------------
Investing Activities
Purchase of property, plant, and equipment (52,617) (65,068)
Acquisition costs in excess of underlying asset values (20,992) (170,441)
Other (1,567) (12,004)
-------------------------------
Net Cash Used for Investing Activities (75,176) (247,513)
-------------------------------
Financing Activities
Payments on long-term debt (317,379) (59,101)
Proceeds from long-term debt 430,875 58,747
Issuance of common stock, net of treasury stock purchases (22,120) 525
-------------------------------
Net Cash Provided by Financing Activities 91,376 171
-------------------------------
Effect of exchange rate changes on cash 4,286 728
-------------------------------
Net decrease in cash and cash equivalents (77,104) (69,581)
Cash and cash equivalents at beginning of period 166,759 216,085
-------------------------------
Cash and Cash Equivalents at End of Period $ 89,655 $ 146,504
===============================
</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.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
September 24, 2000
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its majority-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 24, 2000,
are not necessarily indicative of the results of operations for the year ending
June 30, 2001. 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, 2000.
In July 2000, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This adoption had an insignificant effect on
the accompanying financial statements.
Note B - Stock Split in the Form of a Stock Dividend
The Company paid a two-for-one stock split in the form of a stock dividend on
February 18, 2000, to shareholders of record as of February 4, 2000. All number
of shares and earnings per share amounts presented in the accompanying financial
statements for fiscal year 2000 reflect this stock split.
Note C - Income Taxes
U.S. income taxes in excess of estimated foreign income tax credits have not
been provided on certain undistributed pretax earnings of foreign subsidiaries
aggregating $136 million at September 24, 2000, which are considered to be
permanently invested. Otherwise, approximately $27 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 2001
differs from the U.S. statutory income tax rate due to state income taxes offset
by lower taxed foreign earnings considered permanently invested. The $35 million
income tax benefit associated with exercised stock options during the quarter
has been classified as other contributed capital in accordance with SFAS No.
123.
Note D - Acquisitions
EOG Incorporated, a mid-Atlantic domestic electronics design and manufacturing
services manufacturer was acquired in August 2000. EOG specializes in the
assembly of highly engineered electronics for the medical, telecommunications
and optical networking markets.
Three additional acquisitions were concluded subsequent to the end of fiscal
2001's first quarter in October 2000: Telerad Network Ltd.'s Ma'alot facility in
Israel which produces printed circuit board assemblies and other products for
Telerad and Nortel Networks; ERG Group Limited's telecommunications
manufacturing operations in Perth, Western Australia and Belgium that include
production of Nokia Networks' GSM base stations and ERG's telecommunications
business products in Perth and ERG's telecommunications transit business
products in Belgium; and CMS Hartzell, Inc., which operates eight U.S.
production facilities engaging in sheet metal fabrication, plastic molding and
die casting together with providing significant enclosure industry engineering
capabilities.
6
<PAGE>
None of these acquisitions is considered significant to the Company's
operations, and accordingly, no pro forma information is presented.
Also in October 2000, the Company announced a multiyear, multibillion dollar
outsourcing agreement with Ericsson. The Company will assume production of all
current and future radio base systems conducted in Ericsson's Lynchburg,
Virginia facility. This transaction is expected to be concluded in fiscal 2001's
second quarter.
Note E - Changes in Amount Outstanding of Securities or Indebtedness
Total unused credit facilities available to the Company at September 24, 2000,
approximated $511 million. At September 24, 2000, the Company had sold $209
million of accounts receivable under its asset securitization agreement. The
Company increased its borrowings $115 million under its bank lines during the
quarter.
Note F - Earnings per Share
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, after
adjustment for the February 20000 stock split, follows:
<TABLE>
<CAPTION>
Quarter Ended:
----------------------------------------
(In thousands of dollars, September 24, September 26,
except share data ) 2000 1999
------------ ------------
<S> <C> <C>
Net income $50,456 $40,681
Add back after-tax interest expense for
convertible subordinated notes 3,140 -0-
------- -------
Adjusted net income $53,596 $40,681
======= =======
Weighted average number of shares
outstanding during period 146,900,388 143,940,544
Applicable number of shares relating to
stock options outstanding during the period 2,388,846 2,006,012
Number of shares if outstanding convertible
subordinated notes were converted 10,225,858 -0-
----------- -----------
Weighted average number of shares 159,515,092 145,946,556
=========== ===========
Diluted earnings per share $.34 $.28
==== ====
</TABLE>
Note G - Treasury Stock Transaction
During the first quarter, the Company's retired Chairman exercised all of his
outstanding stock options and purchased 1,745,000 shares. Under the Stock Option
Plan provisions, he elected to exchange common stock of the Company that he
owned, valued at the exchange date's market price, as payment for these options
and the required minimum withholding tax liabilities. The exchanged common stock
(765,313 shares) is reflected as Treasury Stock.
7
<PAGE>
Note H - Comprehensive Income
Comprehensive income consists of the following:
Quarter Ended:
----------------------------
September 24, September 26,
(In thousands of dollars) 2000 1999
----------------------------------------------------------------------------
Net income $50,456 $40,681
Net currency translation adjustment loss (9,860) (1,247)
Income tax benefit 2,721 412
----------------------
Other comprehensive income (7,139) (835)
----------------------
Comprehensive income $43,317 $39,846
======================
These currency translation losses are the net result of translations of the
Swedish subsidiary's non-U.S. functional currency financial statements to U.S.
dollars and of non-U.S. dollar long-term intercompany advances.
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,
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, 2000.
8
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales of items on the Consolidated Statements of Income. This financial
information and the following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained in this Form 10-Q.
Quarter Ended:
----------------------------
September 24, September 26,
2000 1999
------------- -------------
Net Sales 100.00% 100.00%
Cost and expenses (95.35) (96.05)
Intangibles amortization (0.39) (0.18)
--------- ---------
Operating income 4.26 3.77
Net interest expense (0.58) (0.12)
Other income (expense) 0.03 -0-
--------- ---------
Income before income taxes 3.71 3.65
Income taxes (1.22) (1.21)
--------- ---------
Net income 2.49% 2.44%
========= =========
Sales for the first quarter were $2.03 billion, 22% higher than the $1.66
billion in the same period a year earlier. Net income was $50.5 million in the
quarter, a 24% increase over the $40.7 million in the same quarter of fiscal
2000. Basic and diluted earnings per share for the quarter were $.34 each,
compared with $.28 each a year earlier, an increase of 21%. Diluted earnings per
share excluding the after-tax effect of goodwill amortization, referred to as
"Cash EPS", were $.37 per share compared with $.29 a year earlier.
The majority of the sales growth occurred in operations that have been in
service for over a year. Operations that were acquired subsequent to fiscal
2000's first quarter, or in the case of the acquisition of Nortel Networks'
Brockville facility in September 1999, accounted for approximately eight
percentage points of the sales growth. Foreign operations accounted for 57% of
fiscal 2001's first quarter sales compared with 44% in fiscal 2000's first
quarter and approximately 50% in total for fiscal 2000. Asia, Europe and Mexico
all had strong sales growth in fiscal 2001's first quarter in comparison to last
fiscal year's first quarter. Foreign operations first quarter sales grew 59%
year over year, while domestic operations' sales declined by 7%. Domestic
operations' growth is expected to substantially increase as a result of recent
acquisitions, especially as a result of the pending acquisition of Ericsson's
Lynchburg, Virginia operation.
The run rate at the end of fiscal 2001 telecommunications products is estimated
to be in the mid 30s as a percent of sales, with PC finished units being in the
low teens. Sales generated by PC related products are expected to decline to
less than a third of SCI's business by the end of fiscal 2001.
Continued telecommunication product diversification, and a lower PC finished
products concentration led, to higher operating margin in fiscal 2001's first
quarter. Special asset carrying charges to customers also contributed to a
higher operating margin in the quarter. This change partially offset the higher
interest expense in fiscal 2001's first quarter. Operating margins before
intangible amortization increased to 4.65% of sales in fiscal 2001's first
quarter from 3.95% in fiscal 2000's same quarter. This operating margin may be
slightly higher than is maintainable in future quarters due to product mix and
asset carrying charges variations.
9
<PAGE>
Interest expense increased in fiscal 2001's first quarter from a year ago
primarily as a result of higher borrowings and amounts sold under the asset
securitization program. Increased financing was required to fund revenue growth,
acquisitions and increased days of sales in accounts receivable and inventories.
Current customer and component market conditions, together with a lower sales
percentage of PC finished products with their innate higher asset turnover, led
to higher asset days of sales than in the past. We believe some relief in the
time required to fill critical shortages, as well as lead time stability, is
occurring in the component shortage market condition.
Earnings before interest expense, income taxes, depreciation and amortization
(EBITDA) increased 36% in fiscal 2001's first quarter to $129.2 million from
$95.3 million in fiscal 2000's first quarter.
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 taxes on
foreign earnings considered permanently invested.
Capital Resources and Liquidity
Cash was used for operating activities in the first quarter of fiscal 2001
primarily as a result of increased days of sales in accounts receivable and
inventories as previously discussed. During the first quarter of fiscal 2001, we
increased the amount sold under our asset securitization program by $67 million,
compared with the $190 million sold in fiscal 2000's first quarter. Cash used by
operations in the first quarter was primarily funded by available cash balances.
The $115 million increase in working capital at September 24, 2000, from that at
June 30, 2000, mainly resulted from the aforementioned changes. The $75 million
of cash used for investing activities was funded by the $115 million increase in
borrowings under the bank credit agreement.
Fiscal 2001's capital expenditures, including acquisitions, could substantially
exceed last fiscal year's $596 million. We believe we can adequately fund such
capital expenditures and our foreseeable working capital requirements.
Available liquidity at September 24, 2000, was $601 million, $511 million in
available credit and $90 million in cash. In October 2000, a $200 million
short-term bank facility was obtained to fund potential additional cash
requirements. In anticipation of possibly obtaining required funding through
public markets, we have on file with the Securities and Exchange Commission
shelf-registration statements covering $1,225 million in unissued securities
which may be issued in various forms.
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
approximated $423 million at September 24, 2000. A one percentage point change
in short-term interest rates could have a current impact of increasing interest
expense by approximately $4.2 million on an annual basis. Interest rates are
expected to increase in the near future. Changing interest rates could have a
larger impact on future earnings if variable interest rate debt is used to
finance acquisitions and growth beyond that currently projected. Presently,
fixed-rate debt is largely being used to finance the Company's operations.
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 24, 2000, was that
associated with the Brazilian operations. Unlike most other foreign operations
of SCI, this plant is directly
10
<PAGE>
subjected to the effects of currency devaluation on certain customers' contracts
until forward pricing is adjusted accordingly (normally monthly). At September
24, 2000, the Company had approximately $38 million of net current assets offset
by $24 million in long-term intercompany advances subject to this currency
exposure. Approximately $24 million of inventory is subject to repricing
arrangements for currency fluctuations. The Company considers the Brazilian
economic outlook 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 24, 2000.
(b) Reports
The Company filed no reports on Form 8-K during the period of July 1,
2000, to September 24, 2000.
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 7, 2000 By: /s/ James E. Moylan, Jr.
---------------- ------------------------
James E. Moylan, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 7, 2000 By: /s/ John M. Noll
---------------- ----------------
John M. Noll
Assistant Vice President,
Corporate Controller
(Principal Accounting Officer)
11
