Sanmina-SCI Corporation — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 1, 2011; comparable period ended January 2, 2010. The company provides electronic manufacturing services (EMS) to OEMs. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $1,662.5 million | $1,478.3 million | +12.5% |
| Gross profit | $128.0 million | $109.7 million | +16.7% |
| Gross margin | 7.7% | 7.4% | +0.3 percentage points |
| Operating income | $61.0 million | $39.7 million | +53.7% |
| Operating margin | 3.7% | 2.7% | +1.0 percentage point |
| Net income | $28.4 million | $59.4 million | -52.2% |
| Diluted EPS | $0.34 | $0.74 | -54.1% |
| Operating cash flow | $(2.3) million | $13.0 million | Declined |
| Capital expenditures | $33.2 million | $13.2 million | Increased |
Revenue growth reflected improved global conditions and new program wins. Communications sales rose 60.3% to $797.9 million; industrial, defense and medical sales rose 3.4% to $408.7 million. Enterprise computing and storage fell 27.6% to $223.8 million, and multimedia fell 15.9% to $232.0 million. Management attributed improved gross margin to higher volume and better components-manufacturing performance. The company reported its fifth consecutive profitable quarter.
Net income fell despite higher sales and operating income, chiefly because the prior-year quarter included a $35.6 million litigation settlement gain and a $12.3 million tax benefit from resolution of an uncertain tax position. Q1 FY2011 included a $1.6 million gain on sale of long-lived assets, $5.0 million of restructuring charges and $0.6 million of integration costs. The prior-year quarter included $3.3 million of restructuring and integration costs.
Balance sheet, debt and liquidity
- At January 1, 2011, cash and cash equivalents were $548.5 million, down from $592.8 million at October 2, 2010. Working capital was $1.4 billion.
- Total debt was approximately $1.294 billion: $53.4 million short-term and $1.240 billion long-term. The next long-term maturity was in 2013. Long-term notes include $380 million due 2013, $257.4 million of floating-rate notes due 2014 and $600 million due 2016.
- Operating activities used $2.3 million of cash. Management attributed the outflow mainly to a $78.5 million decline in accounts payable, partly offset by lower receivables and inventory. Investing activities used $36.6 million, including $33.2 million in capital expenditures and $8.5 million of acquisition-related consideration. Financing activities used $8.0 million, including $11.6 million of short-term debt repayments.
- Available liquidity included $548.5 million of cash, $185.0 million eligible to borrow under a $235 million credit facility, and $31.6 million available under $85 million of short-term borrowing facilities. The company said these resources and operating cash generation should meet working-capital needs for at least 12 months.
- Debt agreements contain restrictive covenants; the company reported compliance and no currently applicable financial maintenance covenants. It had $25 million of letters of credit outstanding against a $50 million available amount. Cash collateral posted against obligations was $27.1 million.
Material changes, outlook and risks
- Management said quarterly revenue had increased through 2010, while Q1 FY2011 revenue was down 1.5% sequentially from Q4 FY2010. It provided no specific numerical earnings or revenue guidance. It expects margins to vary with volumes, product mix, pricing pressure, inventory provisions, operating efficiency and the transition of production to lower-cost regions.
- A 2010 restructuring plan, initiated following a business combination, could cost up to $15 million; $7.2 million had been incurred to date. The company anticipated implementing the actions by March 2011, with additional facility-related costs possible until vacant facilities are subleased. Total restructuring accruals were $6.4 million, with most expected to be paid by year-end 2011.
- Customer and market concentration remain significant: the ten largest customers generated 49.2% of sales, and two customers each exceeded 10%. Internationally manufactured products represented 82.7% of sales.
- Key risks include component shortages and price increases, volatile customer demand and cancellations, intense EMS competition and pricing pressure, customer credit/default risk, working-capital swings, foreign-exchange exposure, international operating risks, and dependence on successful integration and restructuring. Supply agreements generally do not require customers to purchase minimum quantities.
- Unrecognized tax benefits, including interest, were $51.6 million; management said the amount could change significantly within 12 months, but the change could not be reasonably estimated. A non-U.S. governmental penalty claim remained under appeal; the company contested it, but stated an adverse outcome could materially affect future results. Other litigation and environmental matters are also disclosed.
- Two-month foreign-exchange forward contracts had notional amounts of $322.2 million for non-designated contracts and $90.6 million for cash-flow hedges. Swaps fixed the effective rate on $257.4 million of floating-rate notes at 8.344% through 2014. Management said the estimated immediate 10% exchange-rate change would not be material if exposures were forecast accurately.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist, particularly as communications growth offsets declines in enterprise computing and multimedia.
- Whether working-capital movements, especially supplier-payment timing and the longer cash cycle, affect operating cash generation in subsequent quarters.
- Progress and ultimate cost of the restructuring plan, including the ability to sublease vacant facilities.
- Customer concentration, customer credit quality and exposure to component shortages or supplier-credit changes.
- Debt repayment and refinancing plans, covenant compliance, availability under borrowing facilities, and the resolution of tax and legal contingencies.