Sanmina-SCI Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended October 1, 2011 (52 weeks). The filing also reports unaudited fourth-quarter results. Sanmina-SCI provides integrated electronics manufacturing, engineering, supply-chain, fulfillment and repair services to OEMs across communications, computing, industrial, defense, medical and other markets.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $6.602 billion | $6.319 billion |
| Gross profit / margin | $510.4 million / 7.7% | $483.0 million / 7.6% |
| Operating income / margin | $212.0 million / approximately 3.2% | $204.8 million / approximately 3.2% |
| Net income | $68.9 million | $122.4 million |
| Diluted EPS | $0.83 | $1.48 |
| Cash from operations | $234.9 million | Cash used: $78.3 million |
| Capital expenditures | $107.6 million | $81.4 million |
| Cash and cash equivalents, year-end | $640.3 million | $592.8 million |
| Working capital, year-end | $1.363 billion | $1.339 billion |
FY2011 sales rose 4.5% and gross margin edged up from 7.6%. Net income declined despite higher operating income, reflecting lower non-operating income—FY2010 included a $35.6 million litigation settlement gain—and higher income tax expense. FY2011 tax expense was $30.6 million versus $16.8 million; the reported effective tax rate was 30.8% versus 12.1%.
Fourth-quarter FY2011 sales were $1.697 billion, gross profit $133.9 million (7.9% margin), operating income $53.5 million (3.2% margin), and net income $18.1 million, or $0.22 diluted EPS. Compared with Q4 FY2010, sales increased slightly from $1.688 billion, while net income declined from $31.4 million. The prior-year quarter included a $29.0 million revenue-recognition timing benefit, adding $2.8 million to gross profit and net income and $0.03 to diluted EPS.
Markets, cash, debt and liquidity
- Communications sales increased 26.2% to $3.135 billion. Industrial, defense and medical sales were essentially flat at $1.609 billion; enterprise computing and storage fell 14.9% to $913.1 million; multimedia fell 17.7% to $945.4 million.
- Operating cash flow improved to $234.9 million, supported by earnings excluding non-cash items and working-capital changes. Receivable days rose to 55 from 52, inventory turns declined to 7.0 from 7.3, and the cash cycle lengthened to 50 from 47 days.
- Year-end debt was approximately $1.2 billion of long-term debt plus $60.2 million of short-term borrowings. The company issued $500 million of 7% notes due 2019 and redeemed or repurchased $580 million of debt, recording a $16.1 million extinguishment loss. Long-term debt maturities begin in 2014; the next stated long-term maturity is $257.4 million in 2014.
- The $235 million asset-backed facility had $141.2 million available to borrow, subject to its borrowing base; short-term facilities had $24.8 million available. Management said cash resources, facilities and expected operating cash flow should meet working-capital needs for at least 12 months. Restrictions and taxes may limit access to some overseas cash.
- No cash dividends have been paid, and none were anticipated in the foreseeable future. Debt covenants restrict certain transactions, including additional debt, acquisitions, dividends and debt or share repurchases; the company reported compliance at year-end.
Changes, outlook and risks
- Management said economic conditions worsened again in FY2011’s fourth quarter, with customers reducing or rescheduling orders, and described its outlook entering FY2012 as cautious. No quantified revenue or earnings guidance is provided.
- Optical and vertically integrated components revenue had declined during FY2011, and management expected further declines in the upcoming quarter. Defense and aerospace revenue fell significantly during the year but appeared to have stabilized. Communications growth was offset by weakness in computing/storage and multimedia.
- Management attributed the modest gross-margin improvement to higher business volume and improved components-manufacturing performance. It identified excess capacity, operational inefficiencies, pricing pressure and weaker higher-margin businesses as constraints on profitability.
- Customer concentration is significant: the ten largest customers accounted for 49.9% of FY2011 sales, and one customer exceeded 10%. Customer agreements generally lack minimum purchase commitments; orders may be delayed, reduced or cancelled.
- Supply-chain exposure includes component shortages and price increases, plus potential disruption from the 2011 Japan earthquake and tsunami and Thailand floods. The filing said these events had not significantly affected FY2011 results to date, but further disruption could affect supply, sales and margins.
- Other risks include intense EMS competition, variable operating cash flow, customer credit/default risk, foreign-exchange and interest-rate exposure, rising labor and commodity costs, restructuring needs, and regulatory or product-quality liabilities. Environmental matters include contamination investigations and claims, including an Orange County groundwater lawsuit and a regulatory order concerning a former Canadian site; the company reported $18.9 million accrued for environmental, litigation and other contingencies.
- FY2011 included $29.6 million of restructuring and integration costs. The company also reclassified $32.2 million of property from held-for-sale to held-for-use and recorded $4.0 million of catch-up depreciation. It was actively marketing properties with a reported carrying amount of $42.2 million, with no assurance of sale timing or proceeds.
Important facts for investors to verify
- Whether the cautious FY2012 outlook and expected declines in optical/components revenue materialized, and how these affected margins.
- Whether operating cash flow remains strong as receivable days, inventory turns and the cash cycle deteriorated year over year.
- Debt repayment and refinancing capacity, variable-rate exposure, covenant restrictions, and availability under borrowing facilities.
- Exposure to the largest customer and whether customer order changes, program endings or cancellations increase.
- Potential costs and timing of environmental, tax and other contingencies; the filing reports $61.0 million of long-term liabilities for uncertain tax positions.
KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of October 1, 2011.