Business Context and Reporting Period
Company: Sanmina-SCI Corporation (formerly Sanmina Corporation)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended September 29, 2001
Business Overview: Sanmina-SCI is a leading independent provider of customized integrated electronic manufacturing services (EMS), including turnkey electronic assembly, printed circuit board fabrication, and enclosure systems. The company serves OEMs in communications, high-speed computer systems, medical, and industrial sectors.
Recent Developments: In December 2001, the company completed a merger with SCI Systems, Inc., changing its name to Sanmina-SCI Corporation. During the fiscal year, the company also acquired assets from Electro Mechanical Solutions, IBM Japan, Nortel Networks, and Nokia UK.
Key Financial Metrics
| Metric | Fiscal 2001 | Fiscal 2000 | Fiscal 1999 |
|---|---|---|---|
| Net Sales | $4,054.0 million | $4,239.1 million | $2,620.6 million |
| Gross Profit | $541.5 million | $676.7 million | $434.5 million |
| Gross Margin | 13.4% | 16.0% | 16.6% |
| Operating Income | $63.5 million | $361.5 million | $197.0 million |
| Net Income | $40.4 million | $210.1 million | $104.7 million |
| Diluted EPS | $0.12 | $0.65 | $0.35 |
| Cash from Operations | $401.5 million | $89.2 million | $267.6 million |
| Total Assets | $3,640.3 million | $3,835.6 million | $2,124.8 million |
| Long-Term Debt | $1,218.6 million | $1,200.8 million | $696.4 million |
| Working Capital | $2,091.0 million | $1,913.6 million | $764.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 4.4% to $4.05 billion, primarily due to a global economic downturn and a significant slowdown in the communications sector.
- Profitability Compression: Operating income plummeted 82.4% to $63.5 million. Gross margins contracted from 16.0% to 13.4% due to fixed costs applied to lower revenue, product mix changes, and inventory write-downs.
- Restructuring and Impairment Charges: The company incurred $159.1 million in restructuring costs (severance, facility closures) and a $40.3 million write-down of long-lived assets and goodwill, largely related to the Hadco acquisition and facility consolidations.
- Inventory Write-downs: Raw materials inventory was written down by $152.6 million in 2001, compared to $29.4 million in 2000, reflecting excess inventory from customer order cancellations.
- Customer Concentration: Sales to the ten largest customers accounted for 55.3% of combined net sales for fiscal 2001. No single customer exceeded 10% of sales in 2001, whereas Nortel Networks exceeded 10% in 2000.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects operating results to fluctuate significantly due to the downturn in the electronics industry. The company anticipates incurring additional restructuring charges in fiscal 2002 to align capacity with reduced demand.
- Merger Integration: The company faces risks related to the integration of SCI Systems, Inc., including potential customer attrition, employee retention issues, and unanticipated integration costs.
- Environmental Liabilities: The company has identified environmental contamination at various current and former sites (e.g., Elexsys, Hadco, Segerstrom). Total reserves for environmental matters were $27.4 million as of September 29, 2001. Management believes these costs will not materially harm financial condition, though future remediation costs are uncertain.
- Legal Proceedings: Sanmina-SCI filed a claim against Metricom, Inc. for cancellation charges; Metricom filed for Chapter 11 bankruptcy. The company estimates no additional exposure after exhausting reserves. A patent infringement case involving Gemstar-TV Guide is pending before the International Trade Commission.
- Accounting Changes: The company is analyzing the impact of SFAS No. 142 (Goodwill and Other Intangible Assets), which will eliminate annual goodwill amortization (approximately $22 million) but requires annual impairment testing.
Key Facts for Investor Verification
- Merger Completion: Verify the final accounting treatment and integration progress of the December 2001 merger with SCI Systems, Inc.
- Restructuring Execution: Monitor the execution of the $159.1 million restructuring plan and the timeline for facility closures and workforce reductions.
- Inventory Levels: Assess the adequacy of remaining inventory reserves given the $152.6 million write-down and the risk of further customer order cancellations.
- Debt Covenants: Review the company's ability to meet financial covenants on its $1.2 billion long-term debt, particularly given the sharp decline in operating income.
- Environmental Reserves: Track the status of environmental remediation at acquired sites (Elexsys, Hadco, Segerstrom) to ensure the $27.4 million reserve remains sufficient.