SANMINA CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenues or results of operations, gross margin or operating margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry ranking; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements regarding the financial impact of customer bankruptcies; any statements regarding timing of closing of future cash outlays for and benefits of acquisitions; any statements about future repurchases or redemptions of debt; any statements concerning the adequacy of our liquidity; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words "anticipate," "believe," "plan," "expect," "future," "intend," "may," "will," "should," "estimate," "predict," "potential," "continue" and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to the risks and uncertainties contained in or incorporated from Part II, Item 1A of this report. As a result, actual results could vary materially from those suggested by the forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.

Overview We are a leading independent global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services.

Our revenue is generated from sales of our services primarily to original equipment manufacturers (OEMs) in the communications networks; computing and storage; multimedia; industrial and semiconductor capital equipment; defense and aerospace; medical; clean technology and automotive industries.

Our operations are managed as two businesses: 1) Integrated Manufacturing Solutions (IMS), which is a reportable segment consisting of printed circuit board assembly and test, optical and RF (Radio Frequency) modules, final system assembly and test, and direct order fulfillment.

2) Components, Products and Services (CPS), consisting of Components, which includes interconnect systems (printed circuit board fabrication and backplane and cable assemblies) and mechanical systems (enclosures, precision machining and plastic injection molding); Products, which includes memory and SSD products from Viking Technology; products from SCI Technology for use in the defense and aerospace industry and storage products from Newisys; and Services, which includes design, engineering, logistics and repair services.

All references to years, in this section, refer to our fiscal years ending on the last Saturday of each year closest to September 30th. Fiscal 2013 and 2012 are each 52 weeks.

Our strategy is to leverage our comprehensive service offering, advanced technologies, and global capabilities to further penetrate diverse end markets that we believe offer significant growth opportunities and have complex products that require higher value-added services. We believe this strategy differentiates us from our competitors and will drive more sustainable revenue growth and provide opportunities for us to ultimately achieve operating margins that exceed industry standards.

There are many challenges to successfully executing our strategy. For example, we compete with a number of companies in each of our key end markets. These include companies that are much larger than we are and smaller companies that focus on a particular niche. Although we believe we are well-positioned in each of our key end markets and are continuing to differentiate ourselves from our competitors, competition remains intense and growing our revenues has been challenging. For example, our revenues have been in the range of $6.1 billion to $6.6 billion for the last three years. Additionally, growing and leveraging our components businesses to improve our operating margins continues to be challenging. We continue to address these challenges, on both a short-term and long-term basis. We have experienced fluctuations in our results of operations in the past and may continue to experience such fluctuations in the future.

During 2012, we reduced our net long-term debt obligations by $360.0 million, which is expected to result in significant interest expense savings in future periods primarily due to our redemption of $400.0 million of notes due in 2016 which carried 19 -------------------------------------------------------------------------------- a fixed interest rate of 8.125%. In addition, on January 9, 2013, we redeemed $100 million of our long-term debt and, on January 28, 2013, we announced that we would redeem an additional $157.4 million of our long term debt using existing cash and borrowings under our credit facility. Although these redemptions have reduced, and are expected to continue to reduce, our interest expense, and to improve our operating results, these actions have also reduced our liquidity.

A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers represented 49% of our net sales for both the first quarter of 2013 and 2012. No customer represented 10% or more of our net sales during the first quarter of 2013 and one customer represented 10% or more of our net sales during the first quarter of 2012.

We typically generate approximately 80% of our net sales from products manufactured in international locations. The concentration of international operations has resulted primarily from a desire on the part of many of our customers to move production to lower cost locations such as Asia, Latin America and Eastern Europe.

Historically, we have had substantial recurring sales from existing customers.

We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and cover the manufacture of a range of products. Under these agreements, a customer typically agrees to purchase its requirements for specific products in particular geographic areas from us. These agreements generally do not obligate the customer to purchase minimum quantities of products. In some circumstances, our supply agreements with customers provide for cost reductions objectives during the term of the agreement.

Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate the process used to develop estimates for certain reserves and contingent liabilities, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, environmental matters, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.

For a complete description of our critical accounting policies and estimates, refer to our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 21, 2012.

Results of Operations Key operating results Three Months Ended December 29, December 31, 2012 2011 (In thousands) Net sales $ 1,494,945 $ 1,502,366 Gross profit $ 96,928 $ 109,025 Operating income $ 31,462 $ 39,688 Net income $ 621 $ 8,575 Net Sales Net sales were essentially unchanged at $1.5 billion in the first quarter of 2013, when compared to the first quarter of 2012. Sales by end market were as follows (dollars in thousands): 20 -------------------------------------------------------------------------------- Three Months Ended December 29, 2012 December 31, 2011 Increase/(Decrease) Communications $ 688,215 $ 668,623 $ 19,592 2.9 % Industrial, defense and medical 370,066 376,415 (6,349 ) (1.7 )% Enterprise computing and storage 230,744 233,293 (2,549 ) (1.1 )% Multimedia 205,920 224,035 (18,115 ) (8.1 )% Total $ 1,494,945 $ 1,502,366 $ (7,421 ) (0.5 )% Sales to customers in our communications end market increased primarily as a result of increased demand, particularly for optical and wireless communications products, from existing customers, both for established programs and new program wins. Sales in the multimedia market decreased primarily as a result of reduced demand for set-top boxes, due in part to the wind down of certain customer programs.

Gross Margin Gross margin decreased to 6.5% for the first quarter of 2013, from 7.3% for the first quarter of 2012. The decrease was primarily attributable to deterioration in our IMS segment's gross margin as a result of operational inefficiencies largely driven by revenue pushouts late in the quarter, charges associated with a distressed customer, costs associated with new program ramp-ups, and lower volume, partially offset by margin improvement in CPS, particularly in our mechanical systems business.

We expect gross margins to continue to fluctuate based on overall production and shipment volumes and changes in the mix of products demanded by our major customers. Fluctuations in our gross margins may also be caused by a number of other factors, some of which are outside of our control, including (a) greater competition in the EMS industry and pricing pressures from OEMs due to greater focus on cost reduction; (b) provisions for excess and obsolete inventory that we are not able to charge back to a customer or sales of inventories previously written down; (c) changes in operational efficiencies; (d) pricing pressure on electronic components resulting from economic conditions in the electronics industry; and (e) our ability to transition manufacturing and assembly operations to lower cost regions in an efficient manner.

Operating Expenses Selling, general and administrative Selling, general and administrative expenses increased $0.8 million from $59.1 million, or 3.9% of net sales, in the first quarter of 2012 to $59.9 million, or 4.0% of net sales, in the first quarter of 2013. The increase was primarily due to increased bad debt expense, partially offset by reduced incentive compensation expense.

Research and Development Research and development expenses increased from $4.1 million, or 0.3% of net sales, in the first quarter of 2012 to $5.4 million, or 0.4% of net sales, in the first quarter of 2013. The increase was primarily attributable to expenditures on new projects for our enterprise computing and storage end market.

Restructuring Restructuring Plans - 2012 In 2012, we initiated restructuring plans related to plant closures and business reorganizations. Costs associated with these plans are expected to be $24.0 million and to include employee severance, costs related to facilities, asset impairment charges and other exit costs. In connection with actions taken to date under these plans, we recorded employee termination benefits of $12.4 million for 2,150 employees, of which $0.8 million was recorded during the first quarter of 2013, $1.7 million of costs related to facilities, of which $1.1 million was recorded during the first quarter of 2013, and $3.5 million of asset impairment charges, of which none was recorded during the first quarter of 2013.

These plans are expected to be completed in 2013. As of December 29, 2012, $6.1 million of severance remains payable and is expected to be paid in 2013.

Restructuring Plans - Prior to 2012 21 -------------------------------------------------------------------------------- Due to completion of all actions under restructuring plans initiated prior to 2012 and immateriality of the remaining accrual balance related to such plans, these plans have been combined for disclosure purposes. In connection with these plans, we expect to incur restructuring costs in future periods associated primarily with vacant facilities until such time as those facilities have been sold or leased to third parties.

Costs incurred with respect to facilities consist primarily of (1) costs to maintain vacant facilities that are owned until such facilities can be sold and (2) the portion of our lease payments that have not been recovered due to the absence of sublease income for vacant leased properties. We expect to pay the majority of accrued restructuring costs by the end of 2014.

Below is a summary of restructuring costs associated with facility closures and other consolidation efforts for the above plans: 2012 Restructuring Prior to 2012 Plan Restructuring Plan Total (In thousands)Accrual balance at September 29, 2012 $ 10,301 $ 4,691 $ 14,992 Employee severance and benefits 830 180 1,010 Leases and facilities shutdown costs 1,123 1,419 2,542 Non-cash charges - 395 395 Total restructuring charges 1,953 1,994 3,947 Cash paid for employee terminations (5,013 ) (235 ) (5,248 ) Cash paid for leases and facilities shutdown costs (1,125 ) (1,835 ) (2,960 ) Non-cash charges - (395 ) (395 ) Total charges utilized / payments (6,138 ) (2,465 ) (8,603 ) Accrual balance at December 29, 2012 $ 6,116 $ 4,220 $ 10,336 Our IMS segment incurred restructuring costs under all restructuring plans of $1.6 million and $2.9 million for the first quarter of 2013 and 2012, respectively.

Asset Impairments We did not record any asset impairment charges for the first quarter of 2013 but recorded $1.1 million for the first quarter of 2012. The asset impairment charges were related to a decline in the fair value of certain properties being marketed for sale below the carrying amount of such properties.

Gain on Sale of Long-lived Asset We recognized a gain of $4.2 million from the sale of a building during the first quarter of 2013. We recognized no such gain during the first quarter of 2012.

Interest Expense Interest expense decreased $8.8 million from $21.9 million in the first quarter of 2012 to $13.1 million in the first quarter of 2013. The decrease was primarily due to interest savings from the redemption of $400 million of long-term debt in 2012.

Other Expense, net The following table presents the major components of other income (expense), net: 22 -------------------------------------------------------------------------------- Three Months Ended December 29, December 31, 2012 2011 (In thousands) Foreign exchange losses $ (574 ) $ (1,839 ) Loss on interest rate swap dedesignation (14,903 ) - Other, net 555 321 Total $ (14,922 ) $ (1,518 ) We have interest rate swaps with an aggregate notional amount of $257 million that were entered into in 2007 to hedge LIBOR-based variable rate interest payments expected to occur through June 15, 2014. As of December 29, 2012, we had $257.4 million of 2014 Notes (LIBOR-based, floating rate debt) outstanding.

However, in the second quarter of 2013, we redeemed $100.0 million of our 2014 Notes (redeemed on January 9, 2013) and, on January 28, 2013, we called the remaining $157.4 million for redemption. These redemptions are expected to be funded with a combination of cash on hand and borrowings under our revolving credit facility (LIBOR-based, variable rate facility). Therefore, we determined it was no longer probable that LIBOR-based, variable rate interest payments would occur on the portion of 2014 Notes expected to be redeemed with cash on hand. Instead, LIBOR-based variable rate payments are only expected to occur on forecasted borrowings under our revolving credit facility and only during the period of time these borrowings are outstanding. Accordingly, we dedesignated our interest rate swaps in their entirety in the first quarter of 2013 and recorded a charge of $14.9 million, representing the portion of the value of the interest rate swaps previously recorded in accumulated other comprehensive income for which it is no longer probable that LIBOR-based variable rate interest payments will occur.

We reduce our exposure to currency fluctuations through the use of foreign currency hedging instruments; however, our hedges are established based on estimated foreign currency balances. To the extent actual amounts differ from estimated amounts, we will have exposure to currency fluctuations that results in foreign exchange gains or losses.

Provision for Income Taxes We estimate our annual effective income tax rate at the end of each quarterly period. Our estimate takes into account the geographic mix of our expected pre-tax income (loss), expected total annual pre-tax income (loss), implementation of tax planning strategies and possible outcomes of audits and other uncertain tax positions. To the extent there are fluctuations in any of these variables during a period, our provision for income taxes may vary.

Our provision for income taxes was $3.0 million for the first quarter of 2013 compared to $8.0 million for the first quarter of 2012. The decrease in income tax expense from 2012 was primarily due to a significant reduction in global pre-tax income and a release of $1.7 million of tax reserves related to one of our foreign operations due to a change in a prior year position.

23 --------------------------------------------------------------------------------Liquidity and Capital Resources Three Months Ended December 29, December 31, 2012 2011 (In thousands) Net cash provided by (used in): Operating activities $ 97,084 $ (13,251 ) Investing activities (18,842 ) (24,259 ) Financing activities 3,368 1,024Effect of exchange rate changes on cash and cash equivalents (535 ) 667 Increase (decrease) in cash and cash equivalents $ 81,075 $ (35,819 ) Key liquidity performance measures Three Months Ended December 29, September 29, 2012 2012 Days sales outstanding (1) 57 58 Inventory turns (2) 7.0 7.1 Accounts payable days (3) 58 57 Cash cycle days (4) 52 52 (1) Days sales outstanding (a measure of how quickly we collect our accounts receivable), or "DSO", is calculated as the ratio of average accounts receivable, net, to average daily net sales for the quarter.

(2) Inventory turns (annualized) are calculated as the ratio of four times our cost of sales for the quarter to average inventory.

(3) Accounts payable days (a measure of how quickly we pay our suppliers), or "DPO", is calculated as the ratio of 365 days divided by accounts payable turns, in which accounts payable turns is calculated as the ratio of four times our cost of sales for the quarter to average accounts payable.

(4) Cash cycle days is calculated as the ratio of 365 days to inventory turns, plus days sales outstanding minus accounts payable days.

Cash and cash equivalents were $490.7 million at December 29, 2012 and $409.6 million at September 29, 2012. Our cash levels vary during any given quarter depending on the timing of collections from customers and payments to suppliers, borrowings under credit facilities, redemptions and repurchases of debt, and other factors. Our working capital was $1.0 billion as of December 29, 2012 and $1.1 billion as of September 29, 2012.

Net cash provided by (used in) operating activities was $97.1 million and $(13.3) million for the first quarter of 2013 and 2012, respectively. Cash flows from operating activities consist of: 1) net income adjusted to exclude non-cash items such as depreciation and amortization, stock-based compensation expense, losses from swap dedesignations, etc., and 2) changes in net operating assets, which are comprised of accounts receivable, inventories, prepaid expenses and other assets, accounts payable, accrued liabilities and other long-term liabilities.

During the first quarter of 2013, we generated $40.9 million of cash from net income, excluding non-cash items, and we also generated $56.2 million of cash from a reduction of net operating assets, resulting primarily from decreases in accounts receivable and inventory of $104.0 million and $46.7 million, respectively, partially offset by a decrease in accounts payable of $98.7 million. These decreases were due primarily to decreased business volume in the first quarter of 2013. Our DPO and DSO were fairly consistent for both periods.

Our working capital metrics tend to fluctuate from quarter-to-quarter based on factors such as the linearity of our shipments and purchases, customer and supplier mix, and the negotiation of payment terms with customers and suppliers.

These fluctuations can significantly affect our cash flows from operating activities.

24 -------------------------------------------------------------------------------- Net cash used in investing activities was $18.8 million and $24.3 million for the first quarter of 2013 and 2012, respectively. During the first quarter of 2013, we used $27.4 million of cash for capital expenditures and received proceeds of $8.5 million from the sale of a building. During the first quarter of 2012, we used $24.3 million of cash for capital expenditures.

Net cash provided by financing activities was $3.4 million and $1.0 million for the first quarter of 2013 and 2012, respectively. During the first quarter of 2013, we reduced our restricted cash by $1.3 million, received $0.8 million of proceeds from issuances of common stock pursuant to stock option exercises and received $2.7 million of net proceeds from short-term borrowings, partially offset by $1.4 million of cash used for common stock repurchases to fund employee tax withholding obligations. During the first quarter of 2012, we reduced our restricted cash by $2.0 million and repaid $1.1 million of short-term debt.

Other Liquidity Matters During 2012, we reduced our net long-term debt obligations by $360.0 million, which is expected to result in significant interest expense savings in future periods primarily due to our redemption of $400.0 million of notes due in 2016 which carried a fixed interest rate of 8.125%. In addition, on January 9, 2013, we redeemed $100 million of our long-term debt and, on January 28, 2013, we announced that we would redeem an additional $157.4 million of our long term debt using existing cash and borrowings under our credit facility. Although these redemptions have reduced, and are expected to continue to reduce, our interest expense, and to improve our operating results, these actions have also reduced our liquidity. After giving effect to these redemptions, our next long-term debt maturity in the amount of $40 million will be in 2015, after which our next long-term debt maturity will be in 2019. We may consider early redemptions of our debt in future periods, using either our existing cash or proceeds from additional debt or equity financings. In addition to our existing covenant requirements, future debt financing may require us to comply with financial ratios and covenants. Equity financing, if required, may result in dilution to existing stockholders.

The interest rate swap on our 2019 Notes can be terminated at the option of the swap counterparty beginning in 2014. In such a case, we would no longer pay a variable rate of interest on such notes but would instead pay a fixed rate of 7%, which could be higher than the variable rate at the time of termination.

Other than our $40 million loan which used certain of our real property as collateral, our debt agreements do not contain financial covenants currently applicable to us, but do include a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets, paying dividends and redeeming or repurchasing capital stock and debt, subject to certain exceptions. Our $40 million loan requires us to maintain a minimum fixed charge coverage ratio during its term. These covenants could constrain our ability to grow our business through acquisition or engage in other transactions which the covenants would otherwise restrict, including refinancing our existing debt. In addition, such agreements include covenants requiring, among other things, that we file quarterly and annual financial statements with the SEC, comply with all laws, pay all taxes and maintain casualty insurance. If we are not able to comply with all of these covenants, for any reason, some or all of our outstanding debt as well as all amounts payable under our interest rate swaps on such debt, if any, could become immediately due and payable and the incurrence of additional debt under our asset-backed credit facility would not be allowed, any of which could have a material adverse effect on our liquidity and ability to conduct our business. As of December 29, 2012, we were in compliance with these covenants.

In the ordinary course of business, we are or may become party to legal proceedings, claims and other contingencies, including environmental and employee matters and examinations by government agencies. As of December 29, 2012, we had accrued liabilities of $18.4 million related to such matters. We cannot accurately predict the outcome of these matters or the amount or timing of cash flows that may be required to defend ourselves or to settle such matters or that these accruals will be sufficient to fully satisfy our contingent liabilities.

As of December 29, 2012, we had a liability of $81.8 million for uncertain tax positions. Our estimate of liabilities for uncertain tax positions is based on a number of subjective assessments, including the likelihood of a tax obligation being assessed, the amount of taxes (including interest and penalties) that would ultimately be payable, and our ability to settle any such obligations on favorable terms. Therefore, the amount of future cash flows associated with uncertain tax positions may be significantly higher or lower than our recorded liability. Additionally, we are unable to reliably estimate when cash settlement may occur.

We have entered into, and continue to enter into, various transactions that periodically require collateral. These obligations have historically arisen from customs, import/export, VAT, utility services, debt financing, foreign exchange contracts and interest rate swaps. We have collateralized, and may from time to time collateralize, such obligations as a result of 25 -------------------------------------------------------------------------------- counterparty requirements or for economic reasons. As of December 29, 2012, we had posted collateral of $10.7 million in the form of cash against certain of our collateralized obligations. Cash used for collateral is not available for other purposes.

Our liquidity needs are largely dependent on changes in our working capital, including the extension of trade credit by our suppliers, investments in manufacturing inventory, facilities and equipment, repayments of obligations under outstanding indebtedness and redemption of our outstanding debt.

Our primary sources of liquidity as of December 29, 2012 included (1) cash of $490.7 million; (2) our $300 million asset-backed credit facility, of which we were eligible to borrow $276.7 million as of January 16, 2013; (3) short-term borrowing facilities of $134 million, of which $74 million was available as of December 29, 2012; and (4) cash generated from operations. In addition, we are actively marketing a portfolio of surplus real estate with an aggregate list price of approximately $100 million, of which approximately $20 million is expected to be realized in the second quarter of 2013. Proceeds from the sales of properties in this portfolio will provide additional liquidity. However, there can be no assurance as to the amounts that may actually be raised or the exact timing of any such payments.

We believe our existing cash resources and other sources of liquidity, together with cash generated from operations, will be sufficient to meet our working capital requirements for the next 12 months. Should demand for our services change significantly over the next 12 months or should we experience increases in delinquent or uncollectible accounts receivable, our cash provided by operations would be adversely impacted.

As of December 29, 2012, approximately 41% of our cash balance was held by our foreign subsidiaries. Should we choose or need to remit cash to the U.S., we may incur tax obligations which would reduce the amount of cash ultimately available to the U.S. We believe that cash held in the U.S., together with cash available under U.S. credit facilities and cash from foreign subsidiaries that could be remitted to the U.S. without tax consequences, will be sufficient to meet our U.S. liquidity needs for at least the next 12 months.

Off-Balance Sheet Arrangements As of December 29, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

26--------------------------------------------------------------------------------

[ Back To Technology News's Homepage ]