Sanmina-SCI Corporation — Q2 FY2012 Form 10-Q
Business context and period. Sanmina-SCI provides electronics manufacturing services to OEMs across communications, industrial/defense/medical, enterprise computing and storage, and multimedia markets. This unaudited report covers the quarter and six months ended March 31, 2012; comparisons are to the periods ended April 2, 2011. Fiscal 2012 is a 52-week year.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1.463 billion, down 6.8% | $2.965 billion, down 8.2% |
| Gross profit / margin | $106.3 million / 7.3%, versus $116.8 million / 7.4% | $215.4 million / 7.3%, versus $244.9 million / 7.6% |
| Operating income | $30.2 million, versus $44.6 million | $69.9 million, versus $105.6 million |
| Net income (loss) | $(1.4) million, versus $13.1 million | $7.1 million, versus $41.4 million |
| EPS | $(0.02), versus $0.16 | $0.09 diluted, versus $0.50 |
| Operating cash flow | $46.7 million for six months, versus $104.5 million |
- Quarterly sales fell in communications (10.5%), industrial/defense/medical (8.1%) and multimedia (11.3%); enterprise computing and storage grew 13.3%. Management attributed weakness chiefly to lower customer demand, including wireless/optical products and set-top boxes.
- Management linked lower gross margin to declining sales, particularly in higher-contribution components manufacturing services. Operating results also included a $6.5 million loss on early debt redemption; the six-month tax provision included a $1.9 million write-down of Mexico-related deferred tax assets.
- Cash and cash equivalents were $464.4 million at March 31, down from $640.3 million at October 1, 2011. Working capital was $1.3 billion. Current assets were $2.324 billion and current liabilities $1.073 billion.
- Long-term debt was $1.033 billion and short-term debt $30.0 million. Sanmina redeemed $150 million of 2016 Notes in March and, on April 9, redeemed another $100 million; it expected to record a further $4.2 million loss in Q3. The next long-term debt maturity was 2014.
Changes, outlook and risks
- Compared with the prior-year periods, revenue, gross profit, operating income and net income declined; operating cash generation also fell. Interest expense decreased, partly reflecting prior debt reductions.
- Management expected overall demand to improve during the remainder of 2012, but provided no numeric revenue or earnings guidance. It cautioned that gross margins would fluctuate with volumes, product mix, pricing pressure, inventory and operating efficiency.
- The amended asset-backed revolving facility provides $300 million of commitments, with a $100 million letter-of-credit sublimit; no loans and $23.3 million of letters of credit were outstanding at March 31. Management reported $262.6 million eligible to borrow under the ABL as of April 17, and $105 million available under $135 million of short-term foreign facilities as of March 31. Management believed liquidity sources would cover working-capital needs for the next 12 months.
- Risks include adverse electronics-market conditions, customer concentration and credit exposure, component shortages, competition and pricing pressure, working-capital volatility, international and currency exposure, and the need to refinance or repay debt. Ten largest customers represented 48.2% of six-month sales; one customer exceeded 10%. About half of cash was held outside the U.S.
- A customer filed for bankruptcy in January; the company recorded $2.8 million of reserves for potential claims and balances that may not be recoverable. Environmental and other contingency reserves totaled $19.1 million, but potential losses on specified groundwater matters and a former-site regulatory order could not be reasonably estimated; no liability was recorded for the latter.
- A new facility-closure plan was expected to cost $1.7 million, including severance for 845 employees; remaining costs were expected by June 30, 2012. The company also had $64.8 million of liabilities for uncertain tax positions. It reported debt-covenant compliance and effective disclosure controls as of March 31.
Most important facts for investors to verify
- Whether demand and sales recover as management expected, particularly in communications and multimedia, and whether enterprise growth continues.
- Whether lower volume and reduced components revenue continue to pressure gross margin and operating cash flow.
- Cash use from debt redemptions, the timing and terms of the 2014 debt maturity, and the availability and expiry of revolving and foreign borrowing facilities.
- Customer bankruptcy recoveries and any further exposure, as well as the eventual costs and timing of environmental matters and uncertain tax positions.
- Whether the facility restructuring is completed on the stated schedule and within the estimated cost.