Sanmina-SCI Corporation — Q3 2012 Form 10-Q
Business context and reporting period. The company provides electronic manufacturing services to OEMs across communications, industrial/defense/medical, enterprise computing and storage, and multimedia markets. This unaudited quarter ended June 30, 2012; comparisons are with the quarter ended July 2, 2011. The filing also reports year-to-date results for the nine months ended June 30, 2012. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,549.3 | $1,674.2 | $4,514.8 | $4,905.7 |
| Gross profit / margin | $105.3 / 6.8% | $131.6 / 7.9% | $320.6 / 7.1% | $376.5 / 7.7% |
| Operating income / margin | $35.4 / 2.3% | $52.9 / 3.2% | $105.3 / 2.3% | $158.5 / 3.2% |
| Net income / diluted EPS | $8.9 / $0.11 | $9.4 / $0.11 | $16.1 / $0.19 | $50.8 / $0.61 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $94.3 | $155.9 |
- Q3 revenue fell 7.5% year over year; nine-month revenue fell 8.0%. Communications and multimedia were the main areas of weakness. Nine-month enterprise computing and storage revenue rose 5.9%, while communications fell 11.2% and multimedia fell 15.0%.
- Gross margin declined year over year in both periods. Management attributed the pressure primarily to lower sales, particularly in components manufacturing services, which typically carry higher contribution margins.
- Q3 net income was nearly flat year over year despite lower operating income, as net interest and other expense improved from $39.3 million to $22.6 million. Nine-month net income fell substantially, to $16.1 million from $50.8 million.
- Cash and cash equivalents were $394.9 million at June 30, down from $640.3 million at October 1, 2011. Current assets were $2.335 billion and current liabilities $1.157 billion; reported working capital was $1.2 billion, versus $1.4 billion at fiscal year-end.
- Nine-month investing cash use was $57.1 million, including $56.1 million of capital expenditures. Financing used $283.3 million, primarily reflecting $256.8 million of debt repayments. Cash declined $245.4 million over the period.
- At June 30, balance-sheet debt included $940.0 million of long-term debt and $30.0 million of short-term debt; long-term debt’s carrying amount includes a $32.6 million fair-value hedge adjustment. Stated principal of long-term notes was $907.4 million. Cash was therefore below total reported debt by about $575 million.
Changes, outlook, and notable items
- Management cited weak industry demand through the first nine months, particularly for wireless communications products and set-top boxes. It expected demand to improve in Q4 across key end markets except multimedia; it also expected components-services revenue in the upcoming quarter to decline from the comparable 2011 period. These are management expectations, not quantified earnings guidance.
- Interest expense declined year over year, which management attributed to debt repurchases in 2012 and 2011, partly offset by interest on debt issued in 2011. The company redeemed $250 million of 2016 Notes during the first nine months and recorded a $10.7 million extinguishment loss.
- After quarter-end, the company redeemed the remaining $150 million of 2016 Notes on July 23, expecting a further $6.2 million loss. It also reported a July 19 $40 million property-secured loan and subsequent $80 million ABL and $30 million short-term borrowings associated with the redemption. The next long-term debt maturity was 2014.
- The amended asset-backed revolving facility was $300 million, with $23 million of letters of credit and no loans outstanding at June 30. The company said it was eligible to borrow $266 million under the borrowing base then; its foreign short-term facilities totaled $120 million, with $30 million drawn. Management believed liquidity would meet working-capital needs for the next 12 months.
- A new facility-closure plan was expected to cost $1.7 million and included severance for 845 employees. Prior-plan restructuring accruals were $3.7 million, with most expected to be paid by the end of 2013. Nine-month property impairments were $2.1 million.
- The company had a $680 million U.S. deferred-tax valuation allowance and said approximately $100 million might be reversed in Q4 2012 if evidence of realizability improved; timing and amount were uncertain. A $1.9 million write-down of Mexico-related deferred tax assets was recorded earlier in the year.
- Customer and legal exposures include $2.8 million reserved for a customer in bankruptcy and approximately $10 million, primarily inventory, exposed to another financially distressed customer. Environmental and litigation reserves were $18.7 million; additional losses on identified environmental matters could not be reasonably estimated.
Key risks and investor verification points
- Verify subsequent-period sales, gross margins, and whether the expected Q4 demand improvement occurred, especially given continued weakness in multimedia and components services.
- Track cash generation and working-capital movements: nine-month operating cash flow declined to $94.3 million, while days sales outstanding rose to 57 days and the cash cycle lengthened to 55 days.
- Confirm the final debt, borrowing availability, maturities, and covenant position after the July debt redemption and additional borrowings; note the new secured loan’s fixed-charge coverage requirement.
- Monitor the two financially stressed customer exposures, including potential inventory write-downs, receivable losses, or bankruptcy-related claims.
- Assess the uncertain realization of deferred tax assets and the potential valuation-allowance reversal, alongside the $68 million liability for uncertain tax positions.
- Follow environmental claims and remediation costs: the filing identifies matters with possible or probable losses for which a range could not be estimated.
- Consider customer concentration: the ten largest customers generated 49.1% of nine-month sales, and one customer represented at least 10% of sales in that period.