Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SANM > SEC Filings for SANM > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for SANMINA CORP

Form 10-Q for SANMINA CORP


25-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 and the anticipated benefits of such plans, strategies and objectives; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements regarding the expected restructuring costs; any statements regarding our expectations for future interest expense; any statements about future redemptions of debt or repurchases of stock; any statements about the expected results of real property sales; any statements concerning the adequacy of our current liquidity and the availability of additional sources of 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 systems, defense and aerospace, medical, clean technology and automotive industries.

Our operations are managed as two businesses:

1) Integrated Manufacturing Solutions (IMS). IMS is a reportable segment consisting of printed circuit board assembly and test, final system assembly and test, and direct-order-fulfillment.

2) Components, Products and Services (CPS). Components include interconnect systems (printed circuit board fabrication, backplane and cable assemblies) and mechanical systems (enclosures, precision machining and plastic injection molding); Products include our Viking memory and solid state drive products, defense and aerospace products from SCI Technology, our Newisys storage products and optical and RF (Radio Frequency) modules; and Services include 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 30. Fiscal 2014 and 2013 are each 52 weeks.

Our strategy is to leverage our comprehensive service offerings, advanced technologies, and global capabilities to further penetrate diverse end markets that we believe offer significant growth opportunities and that have complex products that require higher value-added services. We believe this strategy differentiates us from our competitors and will help 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 seek to differentiate ourselves from our competitors, competition remains intense and profitably growing our revenues has been challenging. Additionally, further growing and leveraging our CPS business to improve our operating margins continues to be an integral part of our strategy.

Since the end of 2012, and including $135.6 million of debt redeemed on July 7, 2014, we have reduced our net debt obligations by $302 million, which has resulted in significant interest expense savings. For example, interest expense for the nine months ended June 28, 2014 was $23.4 million, compared to $32.4 million for the same period in 2013. Despite the


significant cash outlay required to reduce our debt, our total sources of liquidity have increased $61 million over this same 21-month period to $771 million, primarily attributable to cash generated from operations of $516 million and increased capacity from short-term borrowing facilities of $61 million. In addition to our current sources of liquidity, we believe we have sufficient access to additional sources of capital should the need arise.

A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers typically represent approximately 50% of our net sales. One customer represented 10% or more of our net sales for the nine months ended June 28, 2014 and the three and nine months ended June 29, 2013. No customer represented 10% or more of our net sales for the three months ended June 28, 2014.

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

Historically, we have had substantial recurring sales to 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. However, these agreements generally do not obligate the customer to purchase minimum quantities of products and in some circumstances provide for cost reductions objectives during the term of the agreement, which can have the effect of reducing revenue and profitability.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based upon our unaudited 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, litigation and other contingencies. 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 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 27, 2013.

Results of Operations

Key Operating Results
                     Three Months Ended           Nine Months Ended
                   June 28,       June 29,      June 28,     June 29,
                     2014           2013          2014         2013
                                    (In thousands)
Net sales        $ 1,604,727    $ 1,489,214    4,528,937    4,411,801
Gross profit     $   126,913    $   114,251      356,665      311,483
Operating income $    53,328    $    35,681      138,145      112,941
Net income       $    20,721    $    18,738       64,662       40,550


Net Sales

Sales by end market were as follows (dollars in thousands):
                                            Three Months Ended                                                  Nine Months Ended
                       June 28, 2014       June 29, 2013        Increase/(Decrease)        June 28, 2014       June 29, 2013       Increase/(Decrease)
Communications       $       677,496     $       717,686     $    (40,190 )    (5.6 )%   $     1,977,581     $     2,071,774     $    (94,193 )   (4.5 )%
Industrial, defense
and medical                  579,465             426,282          153,183      35.9  %         1,537,885           1,203,332          334,553     27.8  %
Computing and
storage                      195,366             194,183            1,183       0.6  %           566,212             619,137          (52,925 )   (8.5 )%
Multimedia                   152,400             151,063            1,337       0.9  %           447,259             517,558          (70,299 )  (13.6 )%
Total                $     1,604,727     $     1,489,214     $    115,513       7.8  %   $     4,528,937     $     4,411,801     $    117,136      2.7  %

Net sales increased from $1.49 billion in the third quarter of 2013, to $1.60 billion in the third quarter of 2014, an increase of 7.8%. Net sales increased from $4.41 billion for the nine months ended June 29, 2013, to $4.53 billion for the nine months ended June 28, 2014, an increase of 2.7%. For both periods, sales to customers in our industrial, defense, and medical end market increased significantly, primarily as a result of acquisitions and increased demand from existing customers, both for established programs and new program wins. Sales to customers in our communications end market decreased primarily as a result of reduced demand for wireless communications products. For the nine months ended June 28, 2014, sales to customers in our multimedia and computing and storage end markets decreased primarily as a result of reduced demand from existing customers and the wind down of certain customer programs.

Gross Margin

Gross margin increased to 7.9% for the third quarter of 2014, from 7.7% for the third quarter of 2013. Gross margin increased to 7.9% for the nine months ended June 28, 2014, from 7.1% for the nine months ended June 29, 2013. The increase for the three month period was primarily attributable to increased business volume and more favorable product mix in our IMS segment. The increase for the nine month period was primarily attributable to improvement in our IMS segment resulting from addressing inefficiencies associated with new program ramp-ups in 2013 and more favorable product mix.

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) any increases in the cost of electronic components resulting from economic conditions, supply chain interruptions or otherwise; 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 $0.9 million, from $62.1 million, or 4.2% of net sales, in the third quarter of 2013 to $63.0 million, or 3.9% of net sales, in the third quarter of 2014. Selling, general and administrative expenses increased $3.6 million, from $180.9 million, or 4.1% of net sales, for the nine months ended June 29, 2013 to $184.5 million, or 4.1% of net sales, for the nine months ended June 28, 2014. The increase for the nine month period was primarily due to increased incentive compensation expense, partially offset by lower bad debt expense.

Research and Development

Research and development expenses increased from $6.8 million, or 0.5% of net sales, in the third quarter of 2013 to $7.8 million, or 0.5% of net sales, in the third quarter of 2014. Research and development expenses increased from $18.2 million, or 0.4% of net sales, for the nine months ended June 29, 2013 to $24.6 million, or 0.5% of net sales, for the nine months ended June 28, 2014. The increase for both periods was primarily attributable to expenditures on new projects for the computing and storage end market.


Restructuring

Due to substantial completion of all actions under restructuring plans 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 primarily for vacant facilities and former sites for which we are or may be responsible for environmental remediation. Costs incurred with respect to vacant 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 and operating costs that have not been recovered due to the absence of sublease income for vacant leased properties.

Below is a summary of restructuring costs associated with facility closures and other consolidation efforts (in thousands):

Accrual balance at September 28, 2013              $ 6,278
Employee severance and benefits                        279
Leases and facilities shutdown costs                 7,026
Non-cash charges                                     1,266
Cash paid for employee terminations                   (591 )
Cash paid for leases and facilities shutdown costs  (7,891 )
Non-cash charges                                    (1,266 )
Accrual balance at June 28, 2014                   $ 5,101

We expect to pay the majority of accrued restructuring costs by the end of 2015.

Gain on Sales of Long-lived Assets

We recognized a gain of $23.4 million for the nine months ended June 29, 2013 from sales of certain properties.

Interest Expense

Interest expense decreased $0.5 million for the three months ended June 28, 2014, compared to the three months ended June 29, 2013. Interest expense decreased $9.1 million for the nine months ended June 28, 2014 compared to the nine months ended June 29, 2013. The decrease for both periods was primarily due to interest savings resulting from the redemption of $257.4 million of our debt in the second quarter of 2013.

Other Expense, net

The following table presents the significant components of other expense, net:
                                            Three Months Ended         Nine Months Ended
                                          June 28,      June 29,     June 28,     June 29,
                                            2014          2013         2014         2013
                                              (In thousands)
Foreign exchange losses                  $    (154 )   $ (1,158 )   $   (957 )   $  (2,231 )
Loss on extinguishment of debt              (8,192 )          -       (8,192 )      (1,401 )
Loss on interest rate swap dedesignation         -            -            -       (14,903 )
Other, net                                   2,245        1,120        4,552         2,098
Total                                    $  (6,101 )   $    (38 )   $ (4,597 )   $ (16,437 )

We had 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. During the first quarter of 2013, we determined, based on our intention of redeeming $257 million of our debt due in 2014 ("2014 Notes"), that it was no longer probable that LIBOR-based, variable rate interest payments would occur on $257 million of debt through June 15, 2014. Accordingly, we dedesignated our interest rate swaps in their entirety in the first quarter of 2013 and recorded a charge of $14.9 million to other expense, net, representing the portion of the value of the interest rate swaps previously recorded in accumulated


other comprehensive income (AOCI) for which it was no longer probable that LIBOR-based variable rate interest payments would occur.
On June 4, 2014, we redeemed $264.4 million of our outstanding senior notes due 2019 ("2019 Notes") at par plus a redemption premium and accrued interest and recorded a net loss on extinguishment of debt of $8.2 million, consisting of redemption premiums of $14.8 million, a write-off of unamortized debt issuance costs of $3.9 million and third party costs of $0.5 million, partially offset by an $11.0 million credit for the fair value hedge adjustment associated with the extinguished 2019 Notes.
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 annual effective income tax rate at the end of each quarterly period. The estimate takes into account the geographic mix of expected pre-tax income (loss), expected total annual pre-tax income (loss), enacted changes in tax laws, 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, the provision for income taxes may vary.

In March 2014, a foreign tax authority completed its audit of our 2006 tax return and issued an assessment challenging certain of our tax positions, most notably intercompany transfer pricing. We disagree with the assessment and are vigorously contesting it through the appropriate administrative procedures. In accordance with the accounting requirements for uncertain tax positions, we have concluded that we will more likely than not prevail in all positions based upon their technical merits. The final outcome of this audit cannot be reliably predicted and could materially affect our financial statements if not resolved in a manner consistent with our tax positions.
We are subject to income taxation in many jurisdictions around the world and are therefore also subject to examination by domestic and foreign tax authorities. In connection with these examinations, we frequently face challenges regarding the amount of taxes due. These challenges can involve complex issues, interpretations and judgments made by us related to the timing, nature and amount of deductions and the allocation of income between various tax jurisdictions. Resolution of these examinations may span many years, particularly if subject to negotiation or litigation. We believe our reserves for uncertain tax positions are adequate.
The provision for income taxes for the third quarter of 2014 and 2013 was $18.3 million and $8.4 million, respectively, and $46.7 million and $24.3 million for the nine months ended June 28, 2014 and June 29, 2013, respectively. The increase for both the three and nine month periods was primarily due to an increase in pre-tax income, changes in the jurisdictional mix of where income was earned and discrete events including changes in tax law in certain foreign jurisdictions. As a result of tax law and tax rate changes in certain foreign jurisdictions, we recorded a benefit of $3.1 million in the first quarter of 2014 related to revaluation of certain deferred tax assets. Additionally, in the third quarter of 2014, we recorded tax expense of $3.3 million upon the maturity of certain interest rate swaps.


Liquidity and Capital Resources
                                                                 Nine Months Ended
                                                              June 28,      June 29,
                                                                2014          2013
                                                                  (In thousands)
Net cash provided by (used in):
Operating activities                                         $ 198,493     $ 227,842
Investing activities                                          (122,631 )     (24,571 )
Financing activities                                            72,365      (195,107 )
Effect of exchange rate changes on cash and cash equivalents       911        (1,388 )
Increase in cash and cash equivalents                        $ 149,138     $   6,776

Key Liquidity Performance Measures

                              Three Months Ended
                           June 28,   September 28,
                             2014         2013
Days sales outstanding (1)    54           55
Inventory turns (2)          7.0           7.0
Days inventory on hand (3)    52           52
Accounts payable days (4)     62           61
Cash cycle days (5)           44           46

(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) Days inventory on hand is calculated as the ratio of average inventory for the quarter to average daily cost of sales for the quarter.

(4) 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.

(5) Cash cycle days is calculated as days inventory on hand plus days sales outstanding minus accounts payable days.

Cash and cash equivalents were $552.0 million at June 28, 2014 and $402.9 million at September 28, 2013. 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 capital stock, and other factors. Our working capital was approximately $1.0 billion as of June 28, 2014 and September 28, 2013.

Net cash provided by operating activities was $198.5 million and $227.8 million for the nine months ended June 28, 2014 and June 29, 2013, 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 and losses from debt extinguishment and swap dedesignations, 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 nine months ended June 28, 2014, we generated $176.3 million of cash from net income, excluding non-cash items, and also generated $22.2 million of cash from a reduction of net operating assets, resulting primarily from an increase in accounts payable of $116.8 million, partially offset by increases in accounts receivable and inventories of $27.8 million and $64.9 million, respectively. Our DSO and DPO were fairly consistent. 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.


Net cash used in investing activities was $122.6 million and $24.6 million for the nine months ended June 28, 2014 and June 29, 2013, respectively. During the nine months ended June 28, 2014, we used $47.4 million of cash for capital expenditures, received proceeds of $5.7 million primarily from the sales of certain properties and paid $80.9 million in connection with business combinations. During the nine months ended June 29, 2013, we used $53.5 million of cash for capital expenditures and received proceeds of $29.0 million primarily from the sales of certain properties.

Net cash provided by (used in) financing activities was $72.4 million and $(195.1) million for the nine months ended June 28, 2014 and June 29, 2013, respectively. During the nine months ended June 28, 2014, we received $373.1 million of net proceeds from the issuance of long-term debt and short-term borrowings, received $16.5 million from termination of interest rate swaps, received $9.6 million of proceeds from issuances of common stock pursuant to stock option exercises, redeemed $264.4 million of long-term debt for $279.6 million and paid $51.3 million for repurchases of common stock, including $1.2 million of cash used for common stock repurchases to fund employee tax withholding obligations. During the nine months ended June 29, 2013, we redeemed $257.4 million of long-term debt, received $53.9 million of net proceeds from short-term borrowings and reduced our restricted cash by $3.3 million.

Other Liquidity Matters

During the third quarter of 2014, we issued $375 million of our Secured Notes. The Secured Notes mature on June 1, 2019 and bear interest at an annual rate of 4.375%. Refer to Note 5 to the condensed consolidated financial statements for additional information regarding these notes. Additionally, we redeemed $264.4 million of our 2019 Notes and called for redemption $135.6 million of these notes. The call was completed on July 7, 2014, at which time our outstanding 2019 Notes were reduced to $100 million. The net effect of these transactions was a $25 million reduction in long term debt.

Since the end of 2012, and including $135.6 million of debt redeemed on July 7, 2014, we have reduced our net debt obligations by $302 million, which has resulted in significant interest expense savings. For example, interest expense for the nine months ended June 28, 2014 was $23.4 million, compared to $32.4 . . .

  Add SANM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SANM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.