Sanmina Corporation — Q2 FY2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended March 28, 2015; comparisons are with the periods ended March 29, 2014. Sanmina provides integrated manufacturing, components, products and related services. Its reportable segment is Integrated Manufacturing Solutions (IMS); Components, Products and Services (CPS) comprises other operations. Fiscal 2015 has 53 weeks, with the extra week in Q4.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $1,527.5 million | $1,476.7 million | $3,198.7 million | $2,924.2 million |
| Gross profit / margin | $115.3 million / 7.5% | $119.0 million / 8.1% | $241.6 million / 7.6% | $229.8 million / 7.9% |
| Operating income | $49.7 million | $45.3 million | $103.1 million | $84.8 million |
| Net income | $14.7 million | $20.8 million | $37.4 million | $43.9 million |
| Diluted EPS | $0.17 | $0.24 | $0.43 | $0.51 |
| Operating cash flow | Not separately provided for the quarter | $63.6 million | $46.8 million |
- Q2 sales rose 3.4%; six-month sales rose 9.4%. Industrial, defense and medical sales grew 20.0% in Q2 and 30.0% for the half, primarily from customer program acquisitions. Communications sales declined 7.4% in Q2, mainly following program transfers.
- Q2 gross margin fell 0.6 percentage points year over year, which management attributed mainly to unfavorable IMS mix; IMS and CPS margins both declined. First-half margin was also affected by a $3.9 million GT Advanced Technologies inventory reserve.
- Operating expenses declined to 4.3% of sales from 5.0% in both comparison periods, primarily due to lower incentive compensation and professional fees. Operating income increased despite lower gross profit.
- Net income declined despite higher operating income, principally reflecting higher income tax expense. The Q2 tax provision was $28.6 million versus $17.8 million; the six-month provision was $51.8 million versus $28.4 million. A foreign tax audit settlement increased tax expense by $15.5 million.
Financial position, cash flow and capital
- At March 28, 2015, cash and equivalents were $407.7 million, down from $466.6 million at September 27, 2014. Working capital was approximately $1.0 billion.
- Total debt was approximately $470.5 million, down from approximately $544.1 million at fiscal year-end. Sanmina redeemed $100 million of 2019 Notes for $105.3 million, recording a $2.9 million net extinguishment loss. Its $40 million secured loan was extended to December 2017. The company reported compliance with debt covenants.
- Six-month operating cash flow was $63.6 million. Investing used $44.5 million, including $51.3 million of capital expenditures; financing used $78.8 million, including debt repayments and $23.0 million of share repurchases. Cash decreased by $58.9 million.
- Liquidity sources included $407.7 million cash, $207.8 million available under the $300 million revolving facility after letters of credit, and $74 million of available foreign short-term facilities. Management said these resources and operating cash generation should cover working capital needs for the next 12 months.
- Working-capital measures weakened versus September 2014: DSO rose to 56 from 52 days, inventory days to 57 from 52, and the cash cycle to 45 from 39 days; inventory turns fell to 6.4 from 7.0. Management cited lower-than-expected Q2 sales and shipment/purchase timing.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects gross margins to fluctuate with production volumes and customer product mix. The company plans to continue pursuing higher-value markets and growing CPS, while noting that profitable growth remains challenging.
- Sanmina was marketing surplus real estate with an aggregate list price of approximately $55 million; timing and proceeds were uncertain. It also had a $28.6 million commitment for a facility purchase and fit-up, including a $20.3 million purchase scheduled for Q3 FY2015.
- Customer concentration remains material: the ten largest customers represented 49.6% of Q2 sales. No single customer represented at least 10% of Q2 FY2015 sales. GT Advanced Technologies’ bankruptcy led to a $3.9 million inventory reserve; Sanmina reported no additional reserve was needed at quarter-end.
- Environmental, litigation and other contingency reserves were $21.0 million. Risks include unresolved environmental matters and the possibility that reserves prove insufficient. The company also reported $76.4 million in liabilities for uncertain tax positions and ongoing tax audits.
- Other notable items include a $2.0 million impairment charge on assets held for sale during the half and a $3.3 million cash receipt upon termination of an interest-rate swap. The filing identifies exposure to customer demand and credit, competitive pricing, foreign operations and currency, supply-chain disruptions, labor costs, environmental obligations, and execution of CPS growth.
Important facts for investors to verify
- Whether sales growth in industrial, defense and medical markets can offset continued weakness in communications, and whether the growth is sustainable.
- Whether gross margins recover from unfavorable mix and whether CPS growth improves consolidated profitability.
- How the foreign tax settlement, remaining uncertain tax positions and future tax provisions affect reported earnings and cash.
- Whether working-capital trends, especially DSO, inventory days and the cash cycle, reverse or continue to constrain cash generation.
- Actual proceeds and timing from surplus property sales, and the impact of facility commitments, buybacks and debt obligations on liquidity.
- Developments in customer concentration and the GT Advanced Technologies exposure, as well as environmental and other contingent liabilities.