Business Context and Reporting Period
Company: Sanmina-SCI Corporation (Sanmina)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended July 2, 2011
Business Overview: Sanmina is a leading independent global provider of customized, integrated electronics manufacturing services (EMS). The company serves original equipment manufacturers (OEMs) in communications, industrial, defense, medical, enterprise computing, and multimedia markets. Operations are heavily international, with approximately 81.7% of net sales derived from non-U.S. operations for the nine months ended July 2, 2011.
Key Financial Metrics
| Metric | Three Months Ended July 2, 2011 |
Nine Months Ended July 2, 2011 |
Nine Months Ended July 3, 2010 |
|---|---|---|---|
| Net Sales | $1,674.2 million | $4,905.7 million | $4,630.9 million |
| Gross Profit | $131.6 million | $376.5 million | $351.3 million |
| Gross Margin | 7.9% | 7.7% | 7.6% |
| Operating Income | $52.9 million | $158.5 million | $146.6 million |
| Net Income | $9.4 million | $50.8 million | $91.0 million |
| Diluted EPS | $0.11 | $0.61 | $1.10 |
| Cash and Equivalents | $582.8 million (as of July 2, 2011) | N/A | |
| Operating Cash Flow (9mo) | $155.9 million | $(44.4) million | |
| Total Debt | $1,212.3 million (Short-term $60.4m + Long-term $1,151.9m) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.0% quarter-over-quarter and 5.9% year-over-year (nine months). Growth was driven primarily by the Communications segment (+17.7% QoQ, +36.7% YoY), offset by declines in Multimedia (-18.2% QoQ) and Enterprise Computing (-7.8% QoQ).
- Profitability Decline: Despite revenue growth, Net Income for the nine months ended July 2, 2011, dropped significantly to $50.8 million from $91.0 million in the prior year. This decrease was primarily due to a $16.1 million loss on the extinguishment of debt and the absence of a $35.6 million legal settlement gain recorded in the prior year.
- Debt Restructuring: The company significantly altered its debt profile. It issued $500 million in 7% Senior Notes due 2019 and used proceeds to redeem $380 million of 2013 Notes and $200 million of 2016 Notes. This extended the average life of long-term debt to 5.7 years and reduced interest expense.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased year-over-year for the nine-month period ($187.7 million vs. $191.4 million) due to reduced incentive compensation and bad debt expense, despite higher personnel costs. Research and Development expenses increased to $14.9 million (nine months) due to investments in new projects.
Guidance, Outlook, and Risks
- Outlook: Management expects gross margins to continue to fluctuate based on production volumes and product mix. Revenue from defense and aerospace and optical customers has decreased in 2011 and is expected to decrease further in the upcoming quarter, creating pressure on operating margins.
- Liquidity: The company believes existing cash resources ($582.8 million), a $235 million credit facility (with $165 million available), and operating cash flows are sufficient to meet working capital requirements for the next 12 months.
- Key Risks:
- Customer Concentration: Sales to the ten largest customers represented 49.2% of net sales for the nine months ended July 2, 2011. One customer represented more than 10% of sales.
- Supply Chain: Risks include component shortages, price increases, and potential disruptions from the natural disaster in Japan, which could impact supply of components sourced there.
- Competition: Intense competition in the EMS industry, including from larger global providers and OEMs bringing manufacturing in-house, creates pricing pressure.
- Debt Covenants: While currently in compliance, debt agreements contain restrictive covenants regarding additional debt, investments, and dividends. Failure to comply could result in immediate debt acceleration.
Investor Verification Checklist
- Debt Extinguishment Impact: Verify the specific components of the $16.1 million loss on debt extinguishment (redemption premiums, write-offs) and its effect on future interest expense.
- Defense/Aerospace Exposure: Assess the magnitude of the expected revenue decline in the defense and aerospace sectors and its impact on future margin targets.
- Working Capital Trends: Monitor Days Sales Outstanding (DSO), which increased from 52 to 54 days, and Accounts Payable days, which decreased from 55 to 54 days, indicating potential shifts in customer/supplier payment terms.
- Customer Concentration: Review the identity and financial health of the top 10 customers, who account for nearly half of total revenue.
- Restructuring Costs: Track the remaining $3.1 million in accrued restructuring costs and the timeline for facility closures and subleasing efforts.