Sanmina Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended March 30, 2013; comparisons are to the periods ended March 31, 2012. Amounts are in U.S. dollars unless noted.
Business context
Sanmina provides integrated manufacturing solutions, components, products, repair, logistics and aftermarket services to OEMs. Its businesses are Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS); IMS is the sole reportable segment.
Key financial results
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $1,427.6m | $1,463.1m | $2,922.6m | $2,965.4m |
| Gross profit | $100.3m | $106.3m | $197.2m | $215.4m |
| Gross margin | 7.0% | 7.3% | 6.7% | 7.3% |
| Operating income | $45.8m | $30.2m | $77.3m | $69.9m |
| Net income (loss) | $21.2m | $(1.4)m | $21.8m | $7.1m |
| Diluted EPS | $0.25 | $(0.02) | $0.26 | $0.09 |
Q2 operating margin was approximately 3.2% and net margin approximately 1.5%. Operating income included a $19.0m gain on property sales; the six-month gain was $23.2m. Gross profit declined despite higher operating income, with lower operating expenses and property-sale gains contributing to the operating-income improvement.
- Revenue mix: Q2 sales decreased 2.4% year over year. Communications grew 4.4% and industrial, defense and medical grew 3.5%; enterprise computing and storage fell 19.3%, and multimedia fell 16.1%. Management attributed the latter declines to weaker existing-customer demand and program wind-downs.
- Margins: Lower IMS volume and new-program ramp costs pressured gross margin; CPS margins improved, particularly in global services. Management expects gross margins to fluctuate with volumes and product mix.
- Cash flow: Six-month operating cash flow was $161.8m, versus $46.7m a year earlier. Investing activities used $14.8m, including $43.5m of capital expenditures and $28.8m of property-sale proceeds. Financing activities used $143.5m, principally reflecting debt repayments.
- Liquidity: Cash was $411.9m at March 30, 2013, versus $409.6m at September 29, 2012. Working capital was $0.9bn, down from $1.1bn. The company reported $176.7m available under its $300m revolving facility and $124.1m available under foreign short-term facilities. Management believes liquidity is sufficient for the next 12 months.
- Debt: Balance-sheet short-term debt was $170.2m and long-term debt was $574.0m at quarter-end. The long-term amount includes a $34.0m fair-value hedge adjustment; the debt table lists $540m of underlying long-term principal. Sanmina redeemed its $257.4m 2014 Notes during the quarter, using cash and revolving-credit borrowings, and recorded a $1.4m extinguishment loss. Management said net debt had fallen about $500m since 2012, reducing first-half interest expense to $23.5m from $42.2m.
Material changes, outlook and risks
- The $19.0m Q2 property-sale gain and $23.2m first-half gain materially benefited reported operating results; no comparable gains occurred in 2012. The first-half results also include a $14.9m charge for dedesignating interest-rate swaps and a $1.4m debt-extinguishment loss.
- The 2012 restructuring program is expected to cost $26m and be completed in 2013; $5.5m of severance remained payable at quarter-end. Restructuring costs were $6.9m in Q2 and $10.9m for the first half.
- No specific revenue or earnings guidance was provided. Management noted that sales growth remains challenging, competition and OEM price pressure are intense, and margins are sensitive to volume, mix, ramp-up costs, component costs and operational execution.
- Customer concentration is significant: the ten largest customers generated 50.3% of Q2 sales. One customer exceeded 10% of Q2 revenue. A financially distressed customer had about $8.0m of receivables and inventory exposure; $6.0m was reserved, and the customer had filed for U.S. bankruptcy.
- Environmental, litigation and other contingency reserves totaled $20.8m. Sanmina also reported an $81.6m liability for uncertain tax positions and said the timing of any cash settlement could not be reliably estimated. Additional environmental remediation costs are reasonably possible but not estimable.
- A $100m share-repurchase program was authorized with no expiration date; no shares were repurchased during Q2. Repurchases could reduce liquidity. The company was in compliance with applicable debt covenants at quarter-end.
- The Orange County Water District suit was dismissed as to Sanmina on April 9, 2013, subject to appeal. Controls and procedures were reported effective; no material change in internal control was reported for the quarter.
Investor verification points
- Assess underlying operating performance excluding property-sale gains, restructuring charges and the swap-dedesignation charge.
- Track IMS volume, new-program ramp costs, CPS growth and the continued declines in enterprise computing/storage and multimedia.
- Verify debt and revolver utilization, liquidity after debt repayment and any share repurchases, and the effect of variable interest rates and the 2019-note swap.
- Monitor the distressed customer’s recoveries and reserve adequacy, customer concentration, and the uncertain-tax and environmental exposures.
- Check whether restructuring reaches completion on schedule and whether gross margins stabilize as volumes and product mix change.