Sanmina-SCI Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; comparative quarter ended January 1, 2011. The company provides electronic manufacturing services (EMS) to OEMs across communications, industrial/defense/medical, enterprise computing and storage, and multimedia markets. Results are unaudited.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,502.4 million | $1,662.5 million | Down 9.6% |
| Gross profit / margin | $109.0 million / 7.3% | $128.0 million / 7.7% | Margin down 0.4 percentage points |
| Operating income / margin | $39.7 million / 2.6% | $61.0 million / 3.7% | Down 34.9% |
| Net income | $8.6 million | $28.4 million | Down 69.8% |
| Diluted EPS | $0.10 | $0.34 | Down $0.24 |
| Cash used in operating activities | $13.3 million | $2.3 million | Greater cash use |
Net sales fell chiefly because of weaker communications demand, especially wireless and optical products. Communications revenue declined 16.2%; industrial, defense and medical fell 7.9%; multimedia fell 3.4%. Enterprise computing and storage increased 4.2%. Management attributed lower gross margin mainly to under-absorption of fixed costs as capacity utilization and revenue declined faster than costs could be reduced.
Interest expense was $21.9 million, down from $26.7 million, reflecting 2011 debt repurchases, partly offset by new variable-rate debt. The $8.0 million tax provision was slightly higher than the prior-year $7.7 million despite lower pretax income; a $1.9 million write-down of Mexico-related deferred tax assets, following a tax-law change, was a principal factor.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $604.5 million at December 31, 2011, down $35.8 million from October 1, 2011. Working capital was reported at $1.4 billion.
- Operating cash use was driven by working-capital movements, including a $124.4 million reduction in accounts payable and a $13.2 million inventory increase, partly offset by an $82.8 million reduction in receivables. Capital expenditures were $24.3 million; investing cash use totaled $24.3 million.
- Balance-sheet debt comprised $59.1 million short term and $1,184.6 million long term. Long-term debt includes a $27.2 million fair-value hedge accounting adjustment; the notes’ stated principal totaled $1,157.4 million. Cash was $604.5 million.
- The company reported $135 million in short-term foreign borrowing facilities, with $75.9 million available, and eligibility to borrow $186.2 million under its $235 million asset-backed credit facility. Debt covenants were in compliance; no financial covenants were currently applicable.
- Management intended to redeem up to $150 million of notes due 2016 using cash, with a call date anticipated for March 1, 2012. The next long-term debt maturity was 2014.
Outlook, risks and unusual items
Management said it remained cautious about 2012, citing broad demand weakness and a significant decline in cellular wireless access product demand. It gave no numerical revenue, earnings or margin guidance in the provided filing text. Management expected gross margins to fluctuate with production volume and customer/product mix, among other factors, and believed existing liquidity and operating cash generation would meet working-capital needs for the next 12 months.
- Customer concentration is significant: the ten largest customers represented 49% of sales, and one customer exceeded 10% of quarterly sales. Kodak filed for bankruptcy protection on January 19, 2012, after quarter-end. Sanmina said a loss was reasonably possible but not estimable, and did not expect any loss to be material.
- Recent Thailand flooding constrained supply and contributed to disk-drive shortages affecting multimedia sales; the company also identified continuing component-supply and natural-disaster risks.
- Environmental, litigation and other contingency reserves were $18.6 million. The company disclosed groundwater-contamination litigation and a regulatory order concerning a former site; potential loss or range could not be reasonably estimated.
- About half of cash was held outside the U.S.; repatriation could trigger taxes. The company had $61.9 million of liabilities for uncertain tax positions, with settlement timing not reliably estimable.
- Liquidity risks include working-capital volatility, customer credit or demand deterioration, and renewal or replacement of borrowing facilities expiring in 2012 and 2013. The company also noted that properties listed for sale exceeded $100 million, with no assurance about timing or proceeds.
- Restructuring and integration costs were $4.1 million, and asset impairment charges were $1.1 million. Prior-plan restructuring accruals were $5.0 million; most were expected to be paid by the end of 2012.
Key investor verification points
- Whether demand and margins stabilized after the steep year-over-year sales and earnings declines, particularly in communications and higher-contribution components operations.
- Whether the planned $150 million debt redemption occurred, and its effect on cash, interest expense and liquidity.
- Actual cash generation and working-capital trends, including inventory turns, receivables collection and supplier-payment timing.
- The financial and customer-exposure consequences, if any, of Kodak’s bankruptcy, and developments in environmental matters and uncertain tax positions.
- Availability and renewal of credit facilities, and any constraints or costs associated with foreign-held cash and planned property sales.