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 April 2, 2005

or

o                                 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 0-21272

Sanmina-SCI Corporation

(Exact name of registrant as specified in its charter)

Delaware	77-0228183
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
2700 N. First St., San Jose, CA	95134
(Address of principal executive offices)	(Zip Code)

 

(408) 964-3500

(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. Yes x    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes x    No o

As of May 8, 2005, there were 525,556,936 shares outstanding of the issuer’s common stock, $0.01 par value per share.

SANMINA-SCI CORPORATION

INDEX

			Page
PART I   FINANCIAL INFORMATION
Item 1.	Interim Financial Statements
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Cash Flows		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		61
Item 4.	Controls and Procedures		62
PART II   OTHER INFORMATION
Item 1.	Legal Proceedings		63
Item 4.	Submission of Matters to a Vote of Security Holders		63
Item 6.	Exhibits		63
Signatures			65

 

2

SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

		April 2, 2005			October 2, 2004
		(Unaudited)
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	1,183,817		$	1,108,949
Short-term investments		21,614			19,718
Accounts receivable, net		1,595,983			1,668,973
Inventories		962,242			1,064,518
Deferred income taxes		25,109			303,965
Prepaid expenses and other		102,416			96,523
Total current assets		3,891,181			4,262,646
Property, plant and equipment, net		751,978			782,642
Goodwill		1,694,739			2,254,979
Other assets		125,532			246,369
Total assets		$	6,463,430		$	7,546,636
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	223,595		$	609,746
Accounts payable		1,510,491			1,630,833
Accrued liabilities		400,214			381,123
Accrued payroll and related benefits		162,880			164,357
Total current liabilities		2,297,180			2,786,059
Long-term liabilities:
Long-term debt, net of current portion		1,680,106			1,311,377
Other		125,997			94,489
Total long-term liabilities		1,806,103			1,405,866
Stockholders’ equity:
Common stock		5,440			5,420
Treasury stock		(188,566		)	(188,607		)
Additional paid-in-capital		5,724,831			5,719,137
Other comprehensive income		43,513			32,690
Accumulated deficit		(3,225,071		)	(2,213,929		)
Total stockholders’ equity		2,360,147			3,354,711
Total liabilities and stockholders’ equity		$	6,463,430		$	7,546,636

 

See accompanying notes.

3

SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended						Six Months Ended
		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
		(In thousands, except per share data)
		(Unaudited)
Net sales		$	2,885,402		$	2,862,386		$	6,138,108		$	5,832,667
Cost of sales		2,735,235			2,717,287			5,810,974			5,546,377
Gross profit		150,167			145,099			327,134			286,290
Operating expenses:
Selling, general and administrative		87,084			81,304			174,393			158,350
Research and development		7,278			7,020			14,768			13,919
Amortization of intangibles		2,071			2,281			4,101			4,401
Integration costs		169			2,051			283			3,782
Restructuring costs		57,636			83,904			78,061			91,110
Goodwill impairment		600,000			—			600,000			—
Total operating expenses		754,238			176,560			871,606			271,562
Operating income (loss)		(604,071		)	(31,461		)	(544,472		)	14,728
Interest income		13,149			6,526			25,203			9,964
Interest expense		(48,906		)	(30,613		)	(87,509		)	(58,818		)
Other income (expense)		(5,254		)	(2,236		)	(4,984		)	(4,884		)
Other income (expense), net		(41,011		)	(26,323		)	(67,290		)	(53,738		)
Income (loss) before provision for income taxes		(645,082		)	(57,784		)	(611,762		)	(39,010		)
Provision (benefit) for income taxes		390,426			(13,928		)	399,380			(10,923		)
Net income (loss)		$	(1,035,508	)	$	(43,856	)	$	(1,011,142	)	$	(28,087	)
Earnings (loss) per share:
Basic		$	(1.99	)	$	(0.09	)	$	(1.95	)	$	(0.05	)
Diluted		$	(1.99	)	$	(0.09	)	$	(1.95	)	$	(0.05	)
Shares used in computing per share amounts:
Basic		519,700			514,924			519,453			514,152
Diluted		519,700			514,924			519,453			514,152

 

See accompanying notes.

4

SANMINA-SCI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		April  2, 2005			March 27, 2004
		(In thousands)
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(1,011,142	)	$	(28,087	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Restructuring costs		6,999			13,859
Depreciation and amortization		95,138			96,461
Provision (benefit) for doubtful accounts		(3,036		)	(1,269		)
Deferred compensation		5,102			5,778
(Gain) loss on disposal of property and equipment		(1,016		)	327
Loss from investment in 50% or less owned companies		—			4,045
Deferred tax asset valuation allowance		379,239			—
Write-off deferred financing costs in connection with bond redemption		6,127			—
Goodwill impairment		600,000			—
Other, net		438			(627		)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		104,886			42,574
Inventories		122,420			(163,160		)
Prepaid expenses, deposits and other		(16,153		)	769
Income tax accounts		10,032			2,685
Accounts payable and accrued liabilities		(125,046		)	169,755
Cash provided by operating activities		173,988			143,110
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments		(27,917		)	(53,614		)
Proceeds from maturities of short-term investments		25,926			38,693
Purchases of long-term investments		(765		)	(11,954		)
Purchases of property and equipment		(31,137		)	(33,350		)
Proceeds from sale of property and equipment		24,875			15,476
Cash paid for businesses acquired, net of cash acquired		(83,033		)	(51,184		)
Cash used for investing activities		(92,051		)	(95,933		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of convertible notes		(398,726		)	—
Payments of long-term debt		(12,148		)	(11,072		)
Payments of long-term liabilities		(2,750		)	—
Proceeds from long-term debt, net of issuance costs		403,307			64
Payments of notes and credit facilities, net		(3,046		)	(14,440		)
Proceeds from sale of common stock, net of issuance costs		10,363			16,667
Cash used for financing activities		(3,000		)	(8,781		)
Effect of exchange rate changes		(4,069		)	(6,491		)
Increase in cash and cash equivalents		74,868			31,905
Cash and cash equivalents at beginning of period		1,108,949			1,027,394
Cash and cash equivalents at end of period		$	1,183,817		$	1,059,299

 

See accompanying notes.

5

SANMINA-SCI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—Basis of Presentation

The accompanying condensed consolidated financial statements of Sanmina-SCI Corporation (“Sanmina-SCI”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all normal recurring adjustments and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation.

The results of operations for the six months ended April 2, 2005 are not necessarily indicative of the results that may be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended October 2, 2004, included in Sanmina-SCI’s annual report on Form 10-K.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Auction rate securities in the amount of $7.2 million have been reclassified from cash and cash equivalents to short-term investments in the October 2, 2004 consolidated balance sheet to conform to the fiscal 2005 financial statement presentation. The purchases and sales of these auction rate securities has been reclassified in the consolidated statements of cash flows, which decreased cash flows from investing activities by $0.8 million for the six months ended March 27, 2004.

Note 2—Summary of Significant Accounting Policies

Fiscal Year.   Sanmina-SCI operates on a 52 or 53-week year ending on the Saturday nearest September 30. Accordingly, the 2004 fiscal year ended on October 2 and the 2005 fiscal year will end on October 1. All general references to years relate to fiscal years unless otherwise noted.

Principles of Consolidation.   The consolidated financial statements include the accounts of Sanmina-SCI and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Foreign Currency Translation.   For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates. The effects of these translation adjustments are reported as a separate component of stockholders’ equity. Remeasurement adjustments for non-functional currency monetary assets and liabilities are included in other income (expense) in the accompanying condensed consolidated statements of operations.

Derivative Instruments and Hedging Activities.   Sanmina-SCI accounts for derivative instruments and hedging activities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities—an Amendment of SFAS 133” and SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” In

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accordance with these standards, every derivative instrument is recorded in the balance sheet as either an asset or liability measured at its fair value. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded in stockholders’ equity as a separate component of accumulated other comprehensive income (loss) and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in fair value of cash flow hedges are immediately recognized in earnings. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the current period.

Sanmina-SCI conducts business on a global basis in several currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. Sanmina-SCI uses various derivatives, such as foreign currency forward contracts and foreign currency option contracts, to reduce foreign exchange risks. Sanmina-SCI’s objective in holding derivatives is to minimize the volatility of earnings and cash flows associated with changes in foreign currency. Derivatives are not used for trading or speculative purposes.

Sanmina-SCI’s foreign exchange forward and option contracts expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. Sanmina-SCI minimizes such risk by limiting its counterparties to major financial institutions. Management does not expect material losses as a result of default by counterparties.

Cash and Cash Equivalents.   Sanmina-SCI considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At April 2, 2005, cash and cash equivalents includes $25.5 million of restricted cash and cash equivalents, primarily relating to accounts collateralizing letters of credit.

Inventories.   Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes labor, material and manufacturing overhead. Provisions when required are made to reduce excess inventories to their estimated net realizable values. It is possible that estimates of net realizable values can change in the near term. The components of inventories, net of provisions, are as follows:

		As of
		April 2, 2005			October 2, 2004
		(In thousands)
Raw materials		$	612,609		$	673,815
Work-in-process		228,095			189,077
Finished goods		121,538			201,626
		$	962,242		$	1,064,518

 

Exit Costs.   Sanmina-SCI recognizes restructuring charges related to its plans to exit certain activities resulting from the identification of excess manufacturing and administrative facilities that it chooses to close or consolidate. In connection with its exit activities, Sanmina-SCI records restructuring charges for employee termination costs, long-lived asset impairments, costs related to leased facilities to be abandoned or subleased, and other exit-related costs. These charges were incurred pursuant to formal plans developed by management and accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” Emerging Issues Task Force, or EITF, Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” Where applicable, employee termination costs are recorded pursuant to SFAS No. 112, “Employer’s Accounting for Postemployment Benefits.” Fixed assets that are written off or impaired as a result of restructuring plans are typically held for sale or scrapped. The remaining carrying value of such assets was not material at April 2, 2005 or October 2, 2004. The recognition of restructuring charges requires Sanmina-SCI’s management to make judgments and estimates regarding the nature,

7

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timing, and amount of costs associated with the planned exit activity, including estimating sublease income and the fair value, less sales costs, of equipment to be disposed of. Management’s estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded. At the end of each reporting period, Sanmina-SCI evaluates the remaining accrued balances to ensure their adequacy, that no excess accruals are retained, and the utilization of the provisions are for their intended purposes in accordance with developed exit plans.

Goodwill and Intangibles.   Costs in excess of the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in a purchase business combination are recorded as goodwill. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that companies no longer amortize goodwill, but instead test for impairment at least annually using a two-step approach. Sanmina-SCI evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Sanmina-SCI has determined that there are two reporting units: international and domestic. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.

During the quarter ended April 2, 2005, Sanmina-SCI recorded a goodwill impairment loss of $600 million for the domestic reporting unit in accordance with SFAS No. 142. The factors that led to the Company’s decision to provide a valuation allowance against certain of its deferred tax assets (see Note 5), coupled with the recent decline in the market price of the Company’s common stock, led the Company to perform an impairment analysis of its goodwill prior to the annual test scheduled for the fourth quarter of fiscal 2005. As a result of this impairment analysis, the Company concluded that a portion of its goodwill associated with its domestic reporting unit was impaired, and accordingly, recognized an impairment loss of $600 million. This analysis indicated that there was no impairment of goodwill or long-lived assets associated with the Company’s international reporting unit.

Goodwill information for each reporting unit is as follows (in thousands):

		As of October 2, 2004			Additions  to Goodwill					Goodwill Impairment			Adjustments to Goodwill					As of April 2, 2005
Segments:
Domestic		$	1,221,406			$	9,649			$	(600,000	)		$	(2,968	)		$	628,087
International		1,033,573				31,180				—				1,899				1,066,652
Total		$	2,254,979			$	40,829			$	(600,000	)		$	(1,069	)		$	1,694,739

 

Additions to goodwill represent the initial allocation of goodwill to businesses acquired in the current period as well as earnouts. Certain acquisition agreements that we entered into in connection with purchase business combinations may require us to pay additional consideration determined by the future performance of the acquired entity. The amount and likelihood of the payments are not determinable as of April 2, 2005. Adjustments to goodwill primarily represent purchase price allocation adjustments related to business combinations consummated in prior periods.

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Sanmina-SCI has certain identifiable intangible assets that are subject to amortization. Intangible assets are included in other assets in the consolidated balance sheets. The components of intangible assets are as follows:

		April 2, 2005											October 2, 2004
		Gross Carrying Amount			Accumulated Amortization					Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization					Net Carrying Amount
Amortizable intangibles		$	76,459			$	(42,998	)		$	33,461		$	74,788			$	(38,897	)		$	35,891

 

Intangible asset amortization expense for the six months ended April 2, 2005 and March 27, 2004 was approximately $4.1 million and $4.4 million, respectively.

Estimated annual amortization expense for intangible assets at April 2, 2005 is as follows (in thousands):

Fiscal Year:
2005 (remainder)				$	4,304
2006				6,943
2007				6,729
2008				6,729
2009				5,045
2010				3,711
Thereafter				—
				$	33,461

 

Revenue Recognition.   Sanmina-SCI generally recognizes revenue at the point of shipment to its customers, under the contractual terms which in general are FOB shipping point or when services have been performed. Sanmina-SCI also derives revenues from sales of certain inventory, including raw materials, to customers who reschedule, amend or cancel purchase orders after Sanmina-SCI has procured inventory to fulfill their purchase orders. Title to the product or the inventory transfers upon shipment and the customer’s assumption of the risks and rewards of ownership of the product. In some cases, Sanmina-SCI will recognize revenue upon receipt of shipment by the customer or at its designated location. Except in specific circumstances, there are no formal customer acceptance requirements or further Sanmina-SCI obligations to the product or the inventory subsequent to shipment. In specific circumstances in which there are such customer acceptance requirements or further Sanmina-SCI obligations, revenue is recognized at the point of formal acceptance and upon completion of obligations. Provisions are made for estimated warranty costs, sales returns, and adjustments.

Warranty Reserves.   Sanmina-SCI establishes a warranty provision on shipped products based on individual manufacturing contract requirements and past warranty experience. Each period end the balance is reviewed to ensure its adequacy. Accrued warranty reserves at April 2, 2005 and October 2, 2004 were less than one percent of total current liabilities.

Earnings Per Share.   Basic earnings (loss) per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings or loss per share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. For the quarters ended April 2, 2005 and March 27, 2004, 15,344,130 and 20,112,918 potentially dilutive shares from the conversion of convertible subordinated debt and after-tax interest expense of $10.5 million and $7.9 million, respectively, were not included in the computation of diluted earning (loss) per share because to do so would be anti-dilutive. For the six months ended April 2, 2005 and March 27, 2004, 17,728,524 and

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20,112,918 potentially dilutive shares from the conversion of convertible subordinated debt and after tax interest expense of $18.4 million and $14.9 million respectively, were not included in the diluted earnings (loss) per share calculations because of their anti-dilutive effect. Stock options with exercise prices greater than the average fair market price for a period, which are defined as anti-dilutive, are not included in the diluted earnings (loss) per share calculations because of their anti-dilutive effect. For the quarters ended April 2, 2005 and March 27, 2004, 47,891,616 and 23,800,563 stock options, respectively, were anti-dilutive and excluded from the diluted earnings per share calculation due to either the exercise prices being greater than the average fair market price or due to Sanmina-SCI incurring net losses in each of these quarters. For the six months ended April 2, 2005 and March 27, 2004, 48,182,650 and 23,163,803 stock options, respectively, were anti-dilutive and excluded from the diluted earnings (loss) per share calculation due to either the exercise prices being greater than the average fair market price or due to Sanmina-SCI incurring net losses in each of these fiscal periods. Contingently issuable stock, such as restricted stock, is included in the diluted earnings (loss) per share calculations unless anti-dilutive. For the three months ended April 2, 2005, and March 27, 2004, 3,861,111 and 900,983 shares, respectively, of restricted stock were anti-dilutive due to Sanmina-SCI incurring net losses in each of these quarters and therefore excluded from the diluted earnings per share calculation. For the six months ended April 2, 2005 and March 27, 2004, 2,264,917 and 636,015 shares of restricted stock, respectively, were anti-dilutive due to Sanmina-SCI incurring net losses in each of these periods and excluded from the diluted earnings (loss) per share calculation. The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share data):

		Three Months Ended						Six Months Ended
		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
		(In thousands, except per share data)
Numerator:
Net income (loss)		$	(1,035,508	)	$	(43,856	)	$	(1,011,142	)	$	(28,087	)
Denominator:
Weighted average shares—basic		519,700			514,924			519,453			514,152
Effect of dilutive potential common shares		—			—			—			—
Weighted average number of shares—diluted		519,700			514,924			519,453			514,152
Net income (loss) per share—basic		$	(1.99	)	$	(0.09	)	$	(1.95	)	$	(0.05	)
Net income (loss) per share—diluted		$	(1.99	)	$	(0.09	)	$	(1.95	)	$	(0.05	)

 

Stock-Based Compensation.   SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB 25”), and provide pro forma net income and earnings per share disclosures for employee stock compensation as if the fair-value-based method defined in SFAS No. 123 had been applied. Sanmina-SCI continues to apply the provisions of APB 25 and provide the pro forma disclosures with respect to its stock-based compensation plans in accordance with the provisions of SFAS Nos. 123 and 148.

Sanmina-SCI uses the Black-Scholes option-pricing model to determine the pro forma impact under SFAS Nos. 123 and 148 on the company’s net income (loss) and earnings (loss) per share. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the fair value of stock options

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granted. The assumptions used for the three and six months ended April 2, 2005 and March 27, 2004 are presented below:

				Three Months Ended				Six Months Ended
Stock Options				April 2, 2005		March 27, 2004		April 2, 2005		March 27, 2004
Volatility				75	%	75	%	75	%	75	%
Risk-free interest rate				4.13	%	2.81	%	4.13	%	2.81	%
Dividend yield				0	%	0	%	0	%	0	%
Expected life of option(1)				4.4 years		4.3 years		4.4 years		4.3 years

 

				Three Months Ended				Six Months Ended
Employee Stock Purchase Plan				April 2, 2005		March 27 2004		April 2, 2005		March 27, 2004
Volatility				75	%	75	%	75	%	75	%
Risk-free interest rate				4.13	%	2.81	%	4.13	%	2.81	%
Dividend yield				0	%	0	%	0	%	0	%
Expected life				0.5 years		0.5 years		0.5 years		0.5 years

(1)   The expected life of options for the three and six month periods ended March 27, 2004 have been conformed to the current fiscal year presentation of measuring expected life of options from grant date. There was no material impact to pro forma net income (loss) for the periods presented.

Sanmina-SCI has several stock option plans which are described in the Company’s most recent Annual Report on Form 10-K. Sanmina-SCI accounts for its stock option plans and employee stock purchase plan in accordance with APB Opinion No. 25 and related interpretations. Had compensation cost for all plans been determined consistent with SFAS Nos. 123 and 148, Sanmina-SCI’s net income (loss) and earnings (loss) per share would have been the following pro forma amounts (in thousands, except per share data):

		Three Months Ended						Six Months Ended
		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
		(In thousands, except per share data)
Net income (loss):
As reported		$	(1,035,508	)	$	(43,856	)	$	(1,011,142	)	$	(28,087	)
Stock-based employee compensation expense included in reported net income (loss), net of tax		1,433			1,905			3,163			3,802
Stock-based employee compensation expense determined under fair value method, net of tax		(13,552		)	(14,220		)	(29,164		)	(29,923		)
Pro forma		$	(1,047,627	)	$	(56,171	)	$	(1,037,143	)	$	(54,208	)
Basic earnings (loss) per share:
As reported		$	(1.99	)	$	(0.09	)	$	(1.95	)	$	(0.05	)
Pro forma		$	(2.02	)	$	(0.11	)	$	(2.00	)	$	(0.11	)
Diluted earnings (loss) per share:
As reported		$	(1.99	)	$	(0.09	)	$	(1.95	)	$	(0.05	)
Pro forma		$	(2.02	)	$	(0.11	)	$	(2.00	)	$	(0.11	)

 

On May 2, 2005, the Company’s Board of Directors approved the acceleration of vesting of “underwater” unvested stock options held by employees, including executive officers and non-employee directors. This approval was based on the recommendation of the Compensation Committee of the Board

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of Directors. A stock option was considered “underwater” if the option exercise price was greater than $7.00 per share. The vesting of options granted after November 1, 2004 was not accelerated. The Compensation Committee, which consists entirely of independent directors, as well as the independent directors on the full Board of Directors unanimously approved the acceleration of vesting of underwater stock options including those underwater stock options held by the Chief Executive Officer and the other executive officers of the Company. These actions were taken in accordance with the applicable provisions of the Company’s stock option plans.

The decision to accelerate vesting of these underwater stock options was made primarily to avoid recognizing compensation expense in future financial statements upon the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (see discussion below) because the Company believes underwater stock options may not be offering the affected employees sufficient incentive when compared to the potential future compensation expense that would have been attributable to these stock options. As the exercise price of all the stock options affected was greater than their fair market price on the date of vesting acceleration, there will be no impact under APB 25 on our consolidated statements of operations. The Company is currently estimating the amount for which compensation expense will be reduced in the future upon adoption of SFAS No. 123 as a result of taking this action. The Company is also in the process of determining the employee groups and number of employees who will be affected by this action.

Recent Accounting Pronouncements.   In December 2004, FASB issued SFAS No. 123 (revised 2004) “Share-based Payment,” which requires companies to recognize in the statement of operations grant date fair value of stock options and other equity-based compensation issued to employees. This statement supersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” but does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS No. 123 as originally issued. SFAS No. 123 (revised 2004) is effective as of the beginning of Sanmina-SCI’ first quarter of fiscal 2006 and it will likely have a material impact on Sanmina-SCI’s results of operations. Sanmina-SCI has not yet determined the impact that the statement will have on its financial condition and results of operations.

In December 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“SFAS 153”). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and the fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. The provisions of SFAS 153 are effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. Sanmina-SCI does not anticipate that the adoption of this standard will have a material impact on its financial position or results of operations.

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Note 3—Restructuring Costs

Costs associated with restructuring activities initiated on or after January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with SFAS No. 146 and SFAS No. 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the consolidated statements of operations when a liability is incurred. The accrued restructuring costs are included in “accrued liabilities” in the condensed consolidated balance sheet. Below is a summary of the activity related to restructuring costs recorded pursuant to SFAS No. 146 and SFAS No. 112 through the second quarter of fiscal year 2005.

		Employee Termination Benefits					Lease and Contract Termination Costs					Other Restructuring Costs					Impairment of Fixed Assets					Total
		(In thousands)
		Cash					Cash					Cash					Non-cash
Balance at September 28, 2002			$	—				$	—				$	—				$	—			$	—
Charges to operations			5,959					10,323					597					8,085				24,964
Charges utilized			(2,089		)			(8,861		)			(597		)			(8,085		)		(19,632		)
Balance at September 27, 2003			3,870					1,462					—					—				5,332
Charges to operations			59,076					11,186					18,890					18,079				107,231
Charges utilized			(45,618		)			(9,677		)			(18,848		)			(18,079		)		(92,222		)
Reversal of accrual			(1,832		)			(1,384		)			—					—				(3,216		)
Balance at October 2, 2004			15,496					1,587					42					—				17,125
Charges to operations			12,660					2,873					1,363					1,224				18,120
Charges utilized			(11,718		)			(1,805		)			(200		)			(1,224		)		(14,947		)
Balance at January 1, 2005			16,438					2,655					1,205					—				20,298
Charges to operations			42,346					8,216					1,366					4,004				55,932
Charges utilized			(28,176		)			(6,720		)			(2,374		)			(4,004		)		(41,274		)
Balance at April 2, 2005			$	30,608				$	4,151				$	197				$	—			$	34,956

 

In fiscal year 2003, Sanmina-SCI approved actions pursuant to SFAS No. 146 to close and consolidate certain of its manufacturing facilities in the United States and Europe as a result of the ongoing slowdown in the electronics industry. During fiscal year 2003, Sanmina-SCI recorded charges to operations of $6.0 million for termination benefits related to the involuntary termination of approximately 1,100 employees, and approximately $2.1 million of the charges had been utilized as of September 27, 2003. A total of 880 employees had been terminated as of September 27, 2003. Sanmina-SCI also recorded charges to operations of $10.3 million for the termination of non-cancelable leases, lease payments for permanently vacated properties and other contract termination costs, and utilized $8.9 million related to these charges. Sanmina-SCI incurred charges to operations of $8.1 million during fiscal 2003 for the impairment of excess equipment at the vacated facilities, all of which were utilized as of September 27, 2003.

During fiscal 2004, Sanmina-SCI recorded restructuring charges of approximately $107.2 million related to restructuring activities initiated after January 1, 2003. With the exception of $7.8 million of restructuring charges associated with phase three restructuring plan announced in July 2004, these restructuring charges were incurred in connection with phase two restructuring plan announced in October 2002. These charges included employee termination benefits of approximately $59.0 million, lease and contract termination costs of approximately $11.2 million, other restructuring costs of approximately $18.9 million, primarily costs incurred to prepare facilities for closure, and impairment of fixed assets of $18.1 million consisting of excess facilities and equipment to be disposed of. The employee termination benefits were related to the involuntary termination of 2,000 employees, the majority of which were

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involved in manufacturing activities. Approximately $45.6 million of employee termination benefits were utilized during fiscal 2004 for the termination of approximately 1,900 employees. Sanmina-SCI also utilized $9.7 million of lease and contract termination costs and $18.8 million of the other restructuring costs during fiscal 2004. During fiscal 2004, Sanmina-SCI reversed approximately $1.8 million of accrued employee termination benefits and approximately $1.4 million of accrued lease costs due to revisions of estimates.

During the six months ended April 2, 2005, Sanmina-SCI recorded restructuring charges of approximately $74.0 million, of which $72.1 million relates to our phase three restructuring plan and the remainder relates to our phase two restructuring plan. These charges included employee termination benefits of approximately $55.0 million, lease and contract termination costs of approximately $11.1 million, other restructuring costs of approximately $2.7 million, incurred primarily to prepare facilities for closure, and impairment of fixed assets of approximately $5.2 million consisting of excess facilities and equipment to be disposed of. This $5.2 million was fully utilized in the second quarter of 2005. The employee termination benefits were related to the involuntary termination of 1,433 employees, the majority of which were involved in manufacturing activities. Approximately $39.9 million for employee termination benefits was utilized during the six months ended April 2, 2005. A total of approximately 4,776 employees were terminated during the six months ended April 2, 2005 pursuant to this restructuring plan. Sanmina-SCI also utilized $8.5 million of lease and contract termination costs and $2.6 million of the other restructuring costs during the six months ended April 2, 2005.

Costs associated with restructuring activities initiated prior to January 1, 2003, other than those activities related to purchase business combinations, are accounted for in accordance with EITF 94-3 and SFAS 112 where applicable. Accordingly, costs associated with such plans are recorded as restructuring costs in the consolidated statements of operations generally at the commitment date. The accrued restructuring costs are included in “accrued liabilities” in the condensed consolidated balance sheet. Below is a summary of the activity related to restructuring costs recorded pursuant to EITF 94-3 and SFAS 112 pursuant to Sanmina-SCI’s ongoing restructuring plans through the second quarter of fiscal year 2005.

		Employee Severance and Related Expenses					Restructuring and Other Expenses					Facilities Shutdown and Consolidation Costs					Write-off Impaired or Redundant Fixed Assets					Total
		(In thousands)
		Cash					Cash					Cash					Non-cash
Balance at September 28, 2002			$	10,344				$	779				$	35,887				$	—			$	47,010
Charges to operations			18,138					(779		)			31,977					38,400				88,515
Charges utilized			(12,476		)			—					(51,906		)			(38,400		)		(103,561		)
Reversal of accrual			(6,267		)			—					(1,468		)			—				(7,735		)
Balance at September 27, 2003			9,739					—					14,490					—				24,229
Charges to operations			8,205					—					35,730					3,500				47,435
Charges utilized			(9,667		)			—					(28,279		)			(3,500		)		(41,446		)
Reversal of accrual			(7,050		)			—					(7,016		)			—				(14,066		)
Balance at October 2, 2004			1,227					—					14,925					—				16,152
Charges to operations			329					—					1,216					760				2,305
Charges utilized			(1,180		)			—					(3,473		)			(760		)		(5,413		)
Balance at January 1, 2005			376					—					12,668					—				13,044
Charges to operations			96					—					593					1,015				1,704
Charges utilized			—					—					(1,914		)			(1,015		)		(2,929		)
Balance at April 2, 2005			$	472				$	—				$	11,347				$	—			$	11,819

 

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The following sections separately present the charges to the restructuring liability and charges utilized that are set forth in the above table on an aggregate basis.

Fiscal 2002 Plans

September 2002 Restructuring.   In September 2002, Sanmina-SCI approved a plan pursuant to EITF 94-3 to close and consolidate certain of its manufacturing facilities in North America, Europe and Asia as a result of the ongoing slowdown in the industry. In fiscal years 2002 and 2003, Sanmina-SCI recorded charges to operations of $10.1 million for planned employee severance expenses related to the involuntary termination of approximately 800 employees, and utilized charges of approximately $5.8 million as a result of terminating approximately 790 employees. In fiscal 2002 and 2003 Sanmina-SCI also recorded charges to operations of $22.3 million for the shutdown of facilities related to non-cancelable lease payments for permanently vacated properties and associated costs, and utilized charges of $17.7 million related to the shutdown of these facilities. Sanmina-SCI also incurred charges to operations of $74.3 million in fiscal years 2002 and 2003 related to the impairment of buildings and excess equipment and leasehold improvements at permanently vacated facilities.

During fiscal 2004, Sanmina-SCI recorded charges to operations of approximately $1.9 million and utilized $2.6 million for employee severance expenses. Approximately 10 employees were terminated during fiscal 2004. During fiscal 2004, Sanmina-SCI also recorded charges to operations of approximately $26.7 million and utilized approximately $16.1 million for non-cancelable lease payments, lease termination costs and related costs for the shutdown of facilities. In addition, in fiscal 2004 Sanmina-SCI reversed approximately $3.6 million of accrued employee severance due to lower than anticipated payments at various plants and approximately $5.8 million of accrued facilities shutdown costs due to a change in use of the facilities or achieving greater sublease income than we anticipated. Sanmina-SCI also incurred charges to operations of $3.5 million related to the impairment of buildings and leasehold improvements at permanently vacated facilities in fiscal 2004. The closing of the plants discussed above as well as employee terminations and other related activities have been completed, however, the leases of the related facilities expire in 2009; therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are made.

During the six months ended April 2, 2005, Sanmina-SCI recorded charges to operations of $75,000 and utilized $46,000 for employee severance costs. No employees were terminated during the six months ending April 2, 2005 pursuant to the September 2002 restructuring plan. In addition, Sanmina-SCI recorded charges of $309,000 and utilization of $1.6 million due to shutdown costs for closed facilities. In addition, $800,000 was charged to operations and utilized due to the impairment of fixed assets to be disposed of.

October 2001 Restructuring.   In October 2001, Sanmina-SCI approved a plan pursuant to EITF 94-3 to close and consolidate certain of its manufacturing facilities throughout North America and Europe as a result of the continued slowdown in the industry and economy worldwide. In fiscal years 2002 and 2003, Sanmina-SCI recorded net charges to operations of $34.7 million for the expected involuntary termination of approximately 5,400 employees associated with these plant closures, and utilized charges of approximately $24.5 million as a result of terminating approximately 5,000 employees. Sanmina-SCI also incurred net charges to operations of $46.1 million in fiscal years 2002 and 2003 for non-cancelable lease payments for permanently vacated properties and other costs related to the shutdown of facilities, and utilized approximately $44.2 million of these charges in fiscal years 2002 and 2003. In fiscal year 2003, Sanmina-SCI reversed accrued severance charges of $6.3 million and accrued lease cancellation charges of $700,000 due to lower than estimated settlement costs at three European sites. Sanmina-SCI also incurred and utilized charges to operations of $56.4 million in fiscal years 2002 and 2003 related to the write-offs of fixed assets consisting of excess equipment and leasehold improvements to facilities that were permanently vacated.

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During fiscal 2004, Sanmina-SCI recorded charges to operations of approximately $5.2 million for employee severance costs and approximately $4.8 million for non-cancelable lease payments and other costs related to the shutdown of facilities. Sanmina-SCI utilized accrued severance charges of approximately $6.6 million and accrued facilities shutdown related charges of $3.7 million during fiscal 2004. During fiscal 2004, Sanmina-SCI reversed approximately $1.3 million of accrued severance and approximately $530,000 of accrued lease costs due to lower than expected payments at various sites. Sanmina-SCI have terminated all employees affected under this plan. The remaining accrued severance at April 2, 2005 is expected to be paid within the next nine months. Manufacturing activities at the facilities affected by this plan ceased in fiscal year 2003 or prior; however, final payments of accrued costs may not occur until later periods.

During the six months ended April 2, 2005, Sanmina-SCI recorded charges to operations of $317,000 for employee severance costs and $129,000 for facility shutdown charges. There was a write-down of $1.7 million due to impairment of fixed assets to be disposed of. Sanmina-SCI utilized accrued severance charges of $1.1 million, accrued facilities shutdown related charges of $1.5 million, and $1.7 million for impairment of fixed assets during the six months ended April 2, 2005.

Fiscal 2001 Plans

Segerström Restructuring.   In March 2001, Sanmina-SCI acquired Segerström in a pooling of interests business combination and announced the restructuring plan. During fiscal years 2001 and 2002, Sanmina-SCI recorded net charges to operations of $5.7 million for the involuntary termination of 470 employee positions, and utilized $5.4 million of these charges in fiscal years 2001, 2002 and 2003. During those periods Sanmina-SCI also recorded charges to operations of $5.2 million related to the consolidation of facilities, of which $1.3 million was utilized in fiscal years 2001, 2002 and 2003. During fiscal 2004, Sanmina-SCI utilized approximately $300,000 of accrued severance charges. In addition, during fiscal 2004 Sanmina-SCI recorded charges to operations of approximately $103,000 and utilized approximately $818,000 with respect to the shutdown and consolidation of facilities. Sanmina-SCI also reversed $642,000 of accrued facilities shutdown costs in fiscal 2004 due to lower than expected payments. During the six months ended April 2, 2005, Sanmina-SCI utilized $327,000 with respect to the shutdown and consolidation of facilities.

July 2001 Restructuring.   In July 2001, Sanmina-SCI approved a plan to close and merge manufacturing facilities throughout North America and Europe as a result of the ongoing slowdown in the EMS industry. During fiscal years 2001 and 2002, Sanmina-SCI recorded charges to operations of $24.0 million for severance costs for involuntary employee terminations, of which $22.7 million was utilized for the termination of approximately 3,800 employees during fiscal years 2001, 2002 and 2003. During those periods Sanmina-SCI recorded net charges to operations of $45.2 million for lease payments for permanently vacated properties and other costs related to the shutdown of facilities, of which $37.9 million was utilized during fiscal years 2001, 2002 and 2003. Also during fiscal years 2001 and 2002, Sanmina-SCI recorded and utilized $7.3 million of asset related write-offs of equipment and leasehold improvements to permanently vacated properties. During fiscal year 2003 Sanmina-SCI reversed accrued facilities costs of $768,000 due to the early termination of the related lease.

During fiscal 2004, Sanmina-SCI recorded approximately $4.1 million and utilized approximately $7.7 million of accrued costs related to the shutdown of facilities. In addition, Sanmina-SCI recorded charges to operations of approximately $1.1 million, utilized $164,000 and reversed approximately $2.1 million of accrued severance due to lower than anticipated payments during fiscal 2004. Manufacturing activities at the plants affected by this plan had ceased by the fourth quarter of fiscal 2002; however, the leases of the related facilities expire between 2005 and 2010, therefore, the remaining accrual will be reduced over time as the lease payments, net of sublease income, are made.

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During the six months ended April 2, 2005, Sanmina-SCI recorded approximately $1.4 million and utilized approximately $2.0 million of accrued costs related to the shutdown of facilities. In addition, Sanmina-SCI recorded charges to operations of approximately $33,000 and utilized $70,000 related to employee severance. During the six months ended April 2, 2005, Sanmina-SCI recorded and utilized $2.7 million for the impairment of fixed assets to be disposed of.

Acquisition related restructuring.   Costs associated with restructuring activities related to a purchase business combination are accounted for in accordance with EITF 95-3. Accordingly, costs associated with such plans are recorded as a liability assumed as of the consummation date of the purchase business combination and included in the cost of the acquired entity. The accrued restructuring costs are included in “accrued liabilities” in the condensed consolidated balance sheet. Below is a summary of the activity related to restructuring costs recorded pursuant to EITF 95-3 for the periods in which restructuring activities have taken place through the second quarter of fiscal 2005.

		Employee Severance and Related Expenses					Facilities Shutdown and Consolidation Costs					Write-off Impaired or Redundant Fixed Assets					Total
		(In thousands)
		Cash					Cash					Non-cash
Balance at September 28, 2002			$	39,954				$	23,559				$	4,081			$	67,594
Additions to restructuring accrual			30,540					7,224					3,251				41,015
Accrual utilized			(36,516		)			(16,164		)			(7,332		)		(60,012		)
Reversal of accrual			(23,968		)			(1,007		)			—				(24,975		)
Balance at September 27, 2003			10,010					13,612					—				23,622
Additions to restructuring accrual			10,858					—					6,024				16,882
Accrual utilized			(20,826		)			(11,434		)			(6,024		)		(38,284		)
Balance at October 2, 2004			42					2,178					—				2,220
Additions to restructuring accrual			—					—					—				—
Accrual utilized			(42		)			(568		)			—				(610		)
Balance at January 1, 2005			—					1,610					—				1,610
Additions to restructuring accrual			—					—					—				—
Accrual utilized			—					(64		)			—				(64		)
Balance at April 2, 2005			$	—				$	1,546				$	—			$	1,546

 

The following sections separately present the charges to the restructuring liability and charges utilized that are set forth in the above table on an aggregate basis.

Other Acquisition-Related Restructuring Actions.   In fiscal 2003, as part of an insignificant business acquisition completed in December 2002, Sanmina-SCI closed an acquired manufacturing facility in Texas as of the acquisition date and transferred the business to an existing Sanmina-SCI plant. Sanmina-SCI recorded and utilized total charges to the restructuring liability of $2.4 million relating the closure of this plant. The charge consisted of $311,000 for salary related costs for employees participating in the closure of the plant and $2.1 million for excess equipment. In fiscal 2003, Sanmina-SCI also recorded charges to the restructuring liability of $7.5 million related to a manufacturing facility in Germany acquired in fiscal 2002. The charges consisted of severance costs for involuntary employee terminations of approximately 210 employees. Sanmina-SCI utilized $897,000 and $6.6 million of the accrued severance in fiscal 2003 and 2004 to terminate 145 and 60 employees, respectively. In addition, during fiscal 2004, Sanmina-SCI recorded charges to the restructuring liability of $10.9 million, and utilized $10.8 million, related to employee terminations at manufacturing facilities in Europe and Mexico acquired in fiscal 2003 due to the transfer of a portion of the manufacturing activities to existing Sanmina-SCI plants. The charges were related to the elimination of approximately 340 employees. Sanmina-SCI also recorded and utilized

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charges to the restructuring liability of approximately $6.0 million related to excess machinery and equipment to be disposed of. In the six months ended April 2, 2005, Sanmina-SCI utilized $42,000 relating to employee severance.

SCI Acquisition Restructuring.   In December 2001, Sanmina merged with SCI in a purchase business combination and formally changed its name to Sanmina-SCI Corporation. As part of the merger with SCI, Sanmina-SCI also recorded charges to the restructuring liability of $119.6 million during fiscal years 2002 and 2003 consisting of planned involuntary employee termination costs for approximately 7,900 employees and utilized $92.1 million in charges with respect to the termination of those employees. During fiscal years 2002 and 2003 Sanmina-SCI also incurred net charges to the restructuring liability of $41.0 million for restructuring costs related to lease payments for permanently vacated properties and other costs, and utilized approximately $26.3 million of these charges. Sanmina-SCI also incurred charges to the restructuring liability of $24.9 million of asset related write-offs consisting of excess equipment and leasehold improvements to facilities that were permanently vacated. During fiscal year 2003, Sanmina-SCI reversed a total of $24.0 million of accrued severance costs, approximately $18.4 million of which was due to lower than anticipated settlement costs at a major European manufacturing site, and approximately $5.6 million of which related to two plants that were not closed as initially planned due to a change in business requirements. Sanmina-SCI also reversed $1.0 million of accrued facilities shutdown costs due to lower than estimated costs at various sites. During fiscal 2004, Sanmina-SCI utilized a total of approximately $11.4 million of facilities-related accruals and $3.4 million of accrued severance. During the six months ended April 2, 2005, Sanmina-SCI utilized $632,000 due to facilities shutdown.

Note 4—Comprehensive Income

SFAS No. 130 “Reporting Comprehensive Income” establishes standards for reporting and display of comprehensive income and its components. SFAS No. 130 requires companies to report “comprehensive income” that includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity.

The components of other comprehensive income (loss) were as follows:

		Three Months Ended						Six Months Ended
		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
		(In thousands)
Net income (loss)		$	(1,035,508	)	$	(43,856	)	$	(1,011,142	)	$	(28,087	)
Other comprehensive income (loss):
Foreign currency translation adjustment		(6,387		)	(2,745		)	10,969			12,303
Unrealized holding loss on investments		(393		)	(196		)	(94		)	(1,311		)
Minimum pension liability		(125		)	3,072			(51		)	3,072
Comprehensive income (loss)		$	(1,042,413	)	$	(43,725	)	$	(1,000,318	)	$	(14,023	)

 

Accumulated other comprehensive income consists of the following:

		As of
		April 2, 2005			October 2,  2004
		(In thousands)
Foreign currency translation adjustment		$	49,379			$	38,410
Unrealized holding gains (losses) on investments		(55		)		39
Minimum pension liability		(5,810		)		(5,759		)
Total accumulated other comprehensive income		$	43,514			$	32,690

 

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