Sanmina-SCI Corporation: Q2 2010 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended April 3, 2010, and the six-month period ended on the same date. Sanmina-SCI Corporation is a leading global provider of customized, integrated electronics manufacturing services (EMS). The company operates on a 52-week fiscal year for 2010. As of April 28, 2010, there were approximately 79.5 million shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended April 3, 2010 |
Six Months Ended April 3, 2010 |
|---|---|---|
| Net Sales | $1,527,451 | $3,005,753 |
| Gross Profit | $117,477 | $227,164 |
| Gross Margin | 7.7% | 7.6% |
| Operating Income | $45,238 | $84,896 |
| Net Income | $10,091 | $69,473 |
| Diluted EPS | $0.12 | $0.85 |
| Cash and Equivalents | $672,962 | $672,962 |
| Long-Term Debt | $1,261,340 | $1,261,340 |
| Operating Cash Flow | Not provided for quarter | $(19,170) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 27.8% quarter-over-quarter (Q2 2010 vs. Q2 2009) and 15.0% year-to-date, driven by improved demand in multimedia, high-end computing, and industrial/defense sectors.
- Profitability Turnaround: The company returned to profitability, reporting net income of $10.1 million for the quarter compared to a net loss of $37.9 million in the prior year quarter. Operating income improved from a loss of $13.2 million to a profit of $45.2 million.
- Margin Expansion: Gross margin improved to 7.7% from 5.7% in the prior year quarter, attributed to higher volume and cost reduction initiatives.
- Debt Reduction: The company redeemed $175.7 million of long-term debt (2010 Notes) in November 2009, reducing interest expense. Total long-term debt remained stable at approximately $1.26 billion.
- Restructuring Costs: Restructuring and integration costs decreased significantly to $3.9 million for the quarter from $15.6 million in the prior year period.
Guidance, Outlook, and Risks
- Acquisition: On April 26, 2010, the company signed a definitive agreement to acquire BreconRidge Corporation for approximately $34 million in cash, assuming $20 million of debt. Closing is expected within 30 days.
- Liquidity: Management believes existing cash resources ($673 million) and credit facilities (increased to $235 million) are sufficient for the next 12 months. The company expects to generate $30–$50 million from asset sales in the remainder of 2010.
- Unusual Items: Net income for the six months ended April 3, 2010, includes a $35.6 million gain from a litigation settlement. Additionally, a $5.5 million error correction regarding product development design arrangements was recorded in the current quarter, reducing net income by $4.5 million.
- Risks: Key risks include customer concentration (top 10 customers represent ~50% of sales), component shortages, foreign currency fluctuations, and the potential for customer insolvency (referencing past impact from Nortel Networks).
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of the $35.6 million litigation settlement gain included in the six-month net income.
- Working Capital Trends: Monitor the increase in accounts receivable ($819M) and inventory ($816M) against the negative operating cash flow of $(19.2) million for the six-month period.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly given the recent redemption of the 2010 Notes and the reliance on the asset-backed lending facility.
- Customer Concentration: Assess the impact of the top customer representing 12.5% of six-month sales on future revenue stability.
- Acquisition Integration: Track the closing and integration costs associated with the BreconRidge acquisition.