Granted the report is a few weeks old, but nevertheless, it is helpful information...
Key Points *** Down as much as 29% intraday yesterday from its intraday high, we believe selling in Sanmina-SCI�s stock related to Moody�s review is overdone: (1) operating margins have bottomed, (2) the company is heading into seasonal strength for revenues, and (3) free cash flow generation is robust.
*** Operating margins bottomed in March, improving 19 basis points to 1.12% (after intangible amortization), or 20% sequentially in June and we currently expect operating margins to increase again in September to 1.25%.
*** Sanmina-SCI is going into a period of seasonal strength in PCs (39% of total sales) with key customers including HP (10%+ of sales), IBM (10%+ of sales), Dell, and Compaq. Sanmina-SCI also manufactures HP Inkjet printers (a shared program with Flextronics).
*** The company�s balance sheet improved in the June quarter and it generated significant free-cash flow. Sanmina-SCI�s debt-to-cap ratio is 30%, its cash on the balance sheet increased by $153 million to $1.1 billion, which is attributable primarily to ongoing inventory reductions.
Inventories were reduced $29.6 million or 4% in the quarter (excluding inventory from acquisitions, it would have declined $100 million or 8% sequentially) which combined with the 8.6% sales increase led to a solid rise in inventory turns from 7.1x to 7.9x.
Accounts receivable decreased $58 million from $1.5 billion to $1.4 billion, largely as a result of the company�s ongoing focus on improving collections, although DSOs showed no measurable improvement remaining at 51 days.
Cash conversion cycle (CCC) days improved from 56 days to 51 days versus a proforma peak of 78 in September 2001. Cash flow from operations was approximately $365 million in Q3; after capital expenditures of $35 million, the company generated approximately $330 million in free cash flow during the quarter (versus $278 million last quarter) of which approximately $150 million was spent on acquisitions.