Still Cautious on Sanmina

Sanmina-SCI (SANM - Analyst Report) third quarter revenue was in line with consensus, while the EPS beat consensus by $0.01. 

Revenue was down 36.5% year over year to $1.21 billion, but was up 1.2% sequentially. Sales for the quarter were in-line with the company’s guidance of $1.175 - $1.250 billion and our estimate of $1.21 billion. End market results were mixed. Communications (44% of total revenue) was down 0.2% sequentially, Multimedia (14%) down 0.8%, Medical (14%) down 4.1%, High-End Enterprise Computing/Storage (15%) up 4.0%, and Industrial/Defense/Aerospace/Automotive (13%) up 11.5%. Although, demand in the June quarter was more stable compared to the March quarter, the company continues to be impacted by a challenging economy. 

Sanmina reported third quarter non-GAAP (excluding one time charges and stock based compensation expenses) net loss from continuing operations was $10.9 million or $0.02 per basic share versus a net income of $26.0 million or $0.05 per diluted share in the year-ago quarter and net loss of $30.9 million or $0.06 per basic share in the previous quarter. Loss per share was in-line with the company guidance of $0.04 to $0.02 and beat our expectations of a loss of $0.04 per share. 

Despite higher margins and cost reduction efforts shown by lower SG&A (down 25.2% year over year) and R&D (down 35.1% year over year) in the quarter, lower revenue (down 36.5% year over year) pulled down EPS. 

In response to the challenging global business environment, Sanmina has implemented aggressive cost cutting initiatives. During the quarter, the company incurred $13.9 million in restructuring expense related to reductions in force associated with previously announced plant closures and the restructuring of various corporate functions. 

The company’s net cash balance (cash less debt including current portion) was a deficit of $1.19 per basic share versus $1.20 in the second quarter of 2009. Although, cash flow from operations declined to $65.3 million in the quarter versus $97.0 million in the previous quarter, we applaud the company’s initiative to generate positive cash flow amid this difficult environment. 

Looking ahead, the company expects an adjusted loss of $0.03 to $0.01 in the fourth quarter on revenues of $1.20 billion to $1.30 billion. The Street expects a loss of $0.02 on revenue of $1.26 billion. The company’s top line has been sluggish since fiscal 2008. With a less favorable product mix, declining profitability, and a slower-than-anticipated improvement in the enclosure business, the company has struggled to meet expectations. We see a continued challenging backdrop for Sanmina for the next couple of quarters. 

We remain concerned about weak global economic conditions and lingering foreign exchange rate volatility that may impact near-term prospects at Sanmina. In order to achieve growth, the company will need to grow its top-line, at which point we could become more positive. Until then we maintain our Sell rating on Sanmina.