Sanmina Corporation — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended June 28, 2014. Comparisons are with the periods ended June 29, 2013, unless otherwise noted. Sanmina provides integrated manufacturing, components, products and related services to OEMs across multiple end markets.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $1.605 billion | $1.489 billion | $4.529 billion | $4.412 billion |
| Gross profit / margin | $126.9 million / 7.9% | $114.3 million / 7.7% | $356.7 million / 7.9% | $311.5 million / 7.1% |
| Operating income | $53.3 million | $35.7 million | $138.1 million | $112.9 million |
| Net income | $20.7 million | $18.7 million | $64.7 million | $40.6 million |
| Diluted EPS | $0.24 | $0.22 | $0.75 | $0.48 |
- Q3 operating margin was approximately 3.3%, compared with 2.4% a year earlier. Nine-month operating margin was approximately 3.1%, compared with 2.6%.
- Operating cash flow was $198.5 million for the nine months, versus $227.8 million. Capital expenditures were $47.4 million; cash used in investing was $122.6 million, including $80.9 million for acquisitions. Cash increased by $149.1 million to $552.0 million.
- At June 28, current assets were $2.504 billion and current liabilities $1.488 billion; working capital was approximately $1.0 billion. Inventory was $880.3 million, up from $781.6 million at September 28, 2013.
- Balance-sheet short- and long-term debt totaled approximately $700.5 million. The debt note reports $675.0 million of debt before its current portion; the difference reflects short-term debt classification. Management reported $665.4 million of long-term debt for market-risk disclosure. Cash exceeded debt by roughly $148 million on the balance-sheet amounts.
Changes and notable items
- Q3 sales rose 7.8%; nine-month sales rose 2.7%. Industrial, defense and medical revenue increased 35.9% in Q3, primarily from acquisitions and customer demand. Communications sales fell 5.6%, mainly on lower wireless demand. Nine-month computing and storage and multimedia sales declined 8.5% and 13.6%, respectively.
- Management attributed improved gross margin mainly to higher volume and product mix, and, for the nine-month period, better execution on IMS program ramp-ups. It cautioned that margins fluctuate with volumes, mix, competition, pricing, inventory and operating efficiency.
- Sanmina issued $375 million of 4.375% senior secured notes due 2019 and redeemed $264.4 million of existing 2019 notes, recording an $8.2 million extinguishment loss. It called a further $135.6 million for redemption; the redemption occurred July 7, 2014. Management said these transactions reduced long-term debt by $25 million overall and that, after the July redemption, 90% of long-term debt would not mature until mid-2019.
- Interest expense for the first nine months fell to $23.4 million from $32.4 million. The quarter included higher other expense, including the $8.2 million debt-extinguishment loss; a hedge-accounting credit partly offset that loss.
- The nine-month effective tax rate was approximately 41.9%, versus 37.5% a year earlier. The company cited income levels, geographic earnings mix and discrete tax items; a foreign tax authority’s assessment of its 2006 return, particularly transfer pricing, remains disputed.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management expects gross margins to continue fluctuating and said existing cash, borrowing capacity and operating cash flow should cover requirements for the next 12 months.
- Liquidity sources at June 28 included $552.0 million cash, $277.3 million available under the U.S. revolving facility and $84 million in available foreign short-term facilities. The July debt redemption used $142.7 million of cash. Management was marketing surplus real estate listed at approximately $70 million, without assurance of sale proceeds or timing.
- Key exposures include customer and end-market concentration (the ten largest customers represented 51.2% of Q3 sales), limited firm purchase commitments, competitive pricing, component availability, foreign-currency and international-operation risks, and potential working-capital volatility.
- Accrued environmental, litigation and other contingency reserves were $21.7 million. The company disclosed an appeal in the Orange County groundwater case and said potential loss in a separate groundwater-contamination matter could not be reasonably estimated. A foreign tax assessment could materially affect results if not resolved in line with the company’s position. Uncertain tax positions totaled $82.3 million.
- Restructuring accruals were $5.1 million; management expected to pay most by the end of 2015. The filing reports no material changes to internal controls and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether margin improvement and growth in industrial, defense and medical demand persist as weaker communications and other end markets evolve.
- Cash conversion and inventory growth, including whether working-capital movements continue to support operating cash flow.
- Debt balances and cash use after the July 7 redemption, and the interest-cost and covenant implications of the refinancing.
- Resolution and potential financial effects of the tax assessment, groundwater proceedings and other contingencies.
- Acquisition integration, customer concentration, and the timing and proceeds of planned surplus-property sales.