Sanmina Corporation — Q1 FY2013 Form 10-Q
Business context and reporting period. The unaudited quarter ended December 29, 2012; comparative figures are for the quarter ended December 31, 2011. Sanmina provides electronics manufacturing, components, products and related services. Its reportable segment is Integrated Manufacturing Solutions (IMS); Components, Products and Services (CPS) is presented separately.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,494.9 million | $1,502.4 million | Down 0.5% |
| Gross profit / margin | $96.9 million / 6.5% | $109.0 million / 7.3% | Margin down 0.8 percentage points |
| Operating income / margin | $31.5 million / 2.1% | $39.7 million / 2.6% | Down $8.2 million |
| Net income | $0.6 million | $8.6 million | Down $8.0 million |
| Diluted EPS | $0.01 | $0.10 | Down $0.09 |
| Operating cash flow | $97.1 million | $(13.3) million | Improved $110.3 million |
| Capital expenditures | $27.4 million | $24.3 million | Up $3.1 million |
Cash and cash equivalents were $490.7 million at quarter-end, versus $409.6 million at September 29, 2012. Working capital was approximately $1.0 billion. Current assets were $2.25 billion and current liabilities $1.21 billion. Balance-sheet debt comprised $162.6 million of short-term debt and $734.9 million of long-term debt.
Changes, drivers and unusual items
- Sales were broadly flat. Communications revenue rose 2.9%, while multimedia revenue fell 8.1%, principally as certain set-top-box programs wound down. Industrial, defense and medical revenue declined 1.7%; enterprise computing and storage declined 1.1%.
- Gross margin weakened mainly in IMS due to operational inefficiencies associated with late-quarter revenue pushouts, a distressed-customer charge, new-program ramp costs and lower volume. CPS gross profit increased to $31.4 million from $25.5 million; IMS gross profit declined to $69.9 million from $84.5 million.
- Interest expense fell to $13.1 million from $21.9 million, primarily following 2012 debt redemptions. This benefit was more than offset by $14.9 million of expense from dedesignating interest-rate swaps, contributing to other expense of $14.9 million versus $1.5 million in the prior-year quarter.
- Operating results included a $4.2 million gain on sale of a building. The company also recorded $3.9 million of restructuring and integration costs and no asset impairment charge, compared with $1.1 million of impairment charges a year earlier.
- Operating cash flow reflected reductions in accounts receivable ($104.0 million) and inventory ($46.7 million), partly offset by a $98.7 million reduction in accounts payable. Management attributed the working-capital changes primarily to lower business volume.
Debt, outlook and risks
- After quarter-end, Sanmina redeemed $100 million of its 2014 Notes on January 9, 2013, and called the remaining $157.4 million for redemption on January 28. The company expected to fund the redemptions with cash and revolving-credit borrowings and expected a $1.5 million write-off of unamortized debt issuance costs. Management said debt reduction should lower interest expense but also reduce liquidity.
- Management expected existing cash, credit availability and operating cash generation to meet working-capital requirements for the next 12 months. As disclosed, $276.7 million was eligible to be borrowed under the $300 million asset-backed facility as of January 16, 2013; $74 million was available under foreign short-term facilities at quarter-end. Approximately 41% of cash was held by foreign subsidiaries, and repatriation could incur taxes.
- The company expected gross margins to fluctuate with production volumes and product mix; it gave no specific revenue or earnings guidance. Its 2012 restructuring plans were expected to cost $24 million in total and be completed in 2013; $6.1 million of severance remained payable at quarter-end.
- Key risks include intense pricing competition, uncertain customer orders and forecasts, customer concentration (the ten largest customers generated 49% of sales), component availability and cost, execution and utilization pressures, foreign-exchange exposure, and customer credit risk. Sanmina disclosed approximately $8.0 million of receivables and inventory exposure to a financially distressed customer that filed for U.S. bankruptcy; it had reserved $6.0 million, including $5.1 million in Q1, and said certain foreign subsidiaries were outside the filing and expected to continue operating.
- Environmental and other contingency reserves were $18.4 million. The company said additional remediation costs at a former site were reasonably possible but could not be estimated. It also reported $81.8 million in liabilities for uncertain tax positions.
Important facts for investors to verify
- Whether gross margins recover as revenue pushouts, new-program ramp costs and operational inefficiencies ease.
- The effect of the 2014 Notes redemptions and related revolving-credit borrowing on interest expense, debt levels and available liquidity.
- Collections and recoveries related to the distressed customer, including whether the $6.0 million reserve proves adequate.
- Cash conversion and working-capital trends, particularly the sustainability of operating cash flow generated by lower receivables and inventory.
- Actual restructuring costs and completion timing, and developments in environmental, litigation and uncertain-tax-position exposures.