Sanmina Corporation — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended June 29, 2013; unaudited. Comparisons are to the periods ended June 30, 2012, except balance-sheet comparisons, which are to September 29, 2012.
Business context and performance
Sanmina provides integrated manufacturing solutions, components, products, repair, logistics and aftermarket services to OEMs. Its businesses are Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS); IMS is the sole reportable segment. Fiscal 2013 and 2012 are each 52-week years.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $1,489.2m | $1,549.3m | $4,411.8m | $4,514.8m |
| Gross profit | $114.3m | $105.3m | $311.5m | $320.6m |
| Gross margin | 7.7% | 6.8% | 7.1% | 7.1% |
| Operating income | $35.7m | $35.4m | $112.9m | $105.3m |
| Net income | $18.7m | $8.9m | $40.6m | $16.1m |
| Diluted EPS | $0.22 | $0.11 | $0.48 | $0.19 |
Q3 sales fell 3.9%; nine-month sales fell 2.3%. Computing and storage and multimedia weakness, reflecting lower existing-customer demand and program wind-downs, drove declines. Nine-month sales also benefited from stronger optical and wireless communications demand and industrial, defense and medical services growth. Q3 gross-margin improvement was attributed mainly to CPS business mix, prior restructuring and higher volume; IMS gross profit declined year over year while CPS gross profit increased.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $227.8m, versus $94.3m a year earlier. Capital expenditures were $53.5m; investing cash outflow was $24.6m, including $29.0m of property-sale proceeds.
- Cash and equivalents were $416.4m at quarter-end, up from $409.6m at fiscal year-end 2012. Working capital was $0.9bn, down from $1.1bn. DSO improved to 54 days from 58; inventory turns were 6.9 versus 7.1.
- Balance-sheet carrying debt was $675.0m: $113.9m short-term and $561.2m long-term. The long-term debt note reports $540m of principal debt before a $21.2m fair-value hedge adjustment. The company redeemed its $257.4m 2014 Notes during Q2, using cash and revolving-credit borrowings; management said net debt had fallen approximately $560m during 2012 and the first nine months of 2013.
- At June 29, the $300m asset-backed revolver had $35m drawn and $23.6m of letters of credit; $241.4m was available. Foreign short-term facilities totaled $184m, with $60m drawn and $124m available. Management said existing liquidity and operating cash generation should meet working-capital needs for the next 12 months.
Material changes and unusual items
- Interest expense declined to $8.9m in Q3 from $16.1m and to $32.4m for nine months from $58.4m, mainly following prior debt redemptions, including the 2014 Notes.
- Nine-month results included a $23.4m gain on sales of long-lived assets, primarily real estate, and a $14.9m charge from dedesignating interest-rate swaps after the planned debt redemption. The company also recorded a $1.4m debt-extinguishment loss.
- Restructuring and integration costs were $20.3m for nine months, versus $13.5m. The 2012 plans were expected to cost $30.4m in total and be completed in 2013; $8.5m of restructuring accruals remained at quarter-end.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expects gross margins to fluctuate with production volumes, customer and product mix, competition, pricing pressure, operational efficiency and inventory provisions. It cited intense competition and challenging revenue growth, while emphasizing CPS expansion and higher-value services as strategic priorities.
- Customer concentration is significant: the ten largest customers generated 51.4% of Q3 sales. One customer exceeded 10% of sales in Q3 FY2013. A customer in bankruptcy accounted for $7.8m of receivables and inventory exposure; $5.9m was reserved.
- Environmental, litigation and other contingency reserves were $23.0m, excluding uncertain tax positions. The company said additional remediation costs at a former site were reasonably possible but not estimable. Uncertain tax-position liabilities were $82.5m.
- About 48% of cash was held by foreign subsidiaries; repatriation could result in tax costs. Debt covenants restrict certain actions, although the company reported compliance. The $500m 2019 Notes are effectively variable-rate through a swap that the counterparty may terminate beginning May 2014.
- The board authorized a $100m share-repurchase program with no expiration date; no shares had been repurchased by quarter-end. Repurchases would reduce liquidity.
- Other principal risks include volatile electronics demand, customer cancellations or insolvency, component shortages and cost increases, restructuring execution, foreign-exchange exposure, and environmental and regulatory obligations.
Important facts for investors to verify
- Whether sales stabilization and CPS margin gains continue, particularly given weakness in computing and storage and multimedia.
- The sustainability of operating cash flow, which included working-capital cash generation amid lower business volume.
- Debt and interest-rate exposure, including swap terms, the May 2014 termination option and available credit-facility capacity.
- Actual costs and timing of restructuring, real-estate sales, customer-bankruptcy recovery and environmental remediation.
- Potential cash and earnings effects of customer concentration, uncertain tax positions and foreign-cash repatriation.