Business Context and Reporting Period
Company: Sanmina-SCI Corporation (Sanmina Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 3, 2010 (Third Quarter of Fiscal 2010)
Business Overview: A leading global provider of customized, integrated electronics manufacturing services (EMS) serving communications, enterprise computing, multimedia, industrial, defense, aerospace, medical, and automotive industries. The company operates primarily in international locations, with 78.5% of net sales derived from non-U.S. operations in the first nine months of 2010.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 3, 2010 |
Nine Months Ended July 3, 2010 |
Nine Months Ended June 27, 2009 |
|---|---|---|---|
| Net Sales | $1,625,170 | $4,630,923 | $3,823,521 |
| Gross Profit | $124,115 | $351,279 | $228,148 |
| Gross Margin | 7.6% | 7.6% | 6.0% |
| Operating Income | $61,740 | $146,636 | $(12,377) |
| Net Income | $21,563 | $91,036 | $(105,137) |
| Diluted EPS | $0.26 | $1.10 | $(1.26) |
| Cash and Equivalents | $664,569 | $664,569 | $877,613 |
| Total Debt (Long-term + Short-term) | $1,291,603 | $1,291,603 | $1,437,714 |
| Operating Cash Flow | N/A | $(44,436) | $151,480 |
Note: Total Debt includes $50,600 in short-term debt and $1,241,003 in long-term debt as of July 3, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34.4% quarter-over-quarter and 21.1% year-over-year (nine months), driven by improved demand from existing programs and new program wins across communications, industrial, defense, and medical sectors.
- Profitability Turnaround: The company returned to profitability, reporting net income of $21.6 million for the quarter and $91.0 million for the nine months, compared to a net loss of $41.5 million and $105.1 million, respectively, in the prior year periods.
- Margin Expansion: Gross margin improved to 7.6% from 6.3% (quarter) and 6.0% (nine months) due to higher volume and cost reduction initiatives. The prior year included a $10 million gross profit reduction related to Nortel Networks' bankruptcy.
- Unusual Items:
- Gain on Asset Sales: Recognized $13.8 million in gains from the sale of long-lived assets (buildings) in the current quarter and nine-month period.
- Litigation Settlement: Recorded $35.6 million in other income from a litigation settlement received in the first quarter of 2010.
- Restructuring: Restructuring and integration costs decreased significantly to $6.2 million (quarter) and $13.4 million (nine months) compared to $14.1 million and $38.9 million in the prior year.
- Cash Flow: Operating cash flow turned negative ($44.4 million used) for the nine months ended July 3, 2010, primarily due to a $202.5 million increase in net operating assets (receivables and inventory) to support higher sales volume, despite strong net income.
Guidance, Outlook, and Risks
- Acquisition: Completed the acquisition of BreconRidge Corporation for $33.5 million to strengthen optical technology and R&D capabilities. The acquisition did not materially impact results for the period.
- Restructuring Plan: Initiated a new 2010 restructuring plan with expected costs of $16 million to $18 million to consolidate facilities and eliminate redundant employees. Approximately $2.1 million has been charged to date.
- Liquidity: Cash and cash equivalents decreased to $664.6 million. The company maintains a $235 million asset-backed revolving credit facility with $116.4 million available as of July 3, 2010. Management believes existing resources are sufficient for the next 12 months.
- Risks and Contingencies:
- Customer Concentration: Sales to the ten largest customers represented 50.3% of net sales for the nine months ended July 3, 2010. One customer represented 11.7% of sales.
- Legal/Investigation: The company is investigating the misappropriation of payments at one location, with a $3.2 million reserve recorded. A portion may be recoverable via insurance.
- Tax Uncertainty: A long-term liability of $47.3 million exists for net unrecognized tax benefits. The company is subject to audits in various jurisdictions.
- Market Conditions: Risks include component shortages, pricing pressure from OEMs, and potential customer insolvencies.
Investor Verification Checklist
- Cash Flow Sustainability: Verify the ability to generate positive operating cash flow in future quarters given the significant cash outflow ($44.4 million) in the first nine months of 2010 driven by working capital increases.
- Customer Concentration: Assess the financial health of the top 10 customers, who account for over 50% of revenue, and the specific impact of the customer representing 11.7% of sales.
- Restructuring Execution: Monitor the execution of the new $16-$18 million restructuring plan and the associated timeline for cost savings realization.
- Legal Reserves: Track the investigation into the misappropriation of payments ($3.2 million reserve) and the outcome of the non-U.S. tax penalty claim.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly regarding restrictions on additional debt, dividends, and asset sales, given the company's leverage levels.