Sanmina Corporation (SANM) — FY 2012 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended September 29, 2012; “Q4” refers to the fiscal fourth quarter. Sanmina provides global electronics manufacturing, components, products, logistics, repair and engineering services to OEMs. Integrated Manufacturing Solutions (IMS) generated 81% of FY 2012 revenue; Components, Products and Services (CPS) includes higher-value components, products and services. The company changed its name from Sanmina-SCI Corporation to Sanmina Corporation on November 15, 2012.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $6.093 billion | $6.602 billion |
| Gross profit / margin | $435.8 million / 7.2% | $510.4 million / 7.7% |
| Operating income / margin | $137.5 million / 2.3% | $212.0 million / 3.2% |
| Net income | $180.2 million | $68.9 million |
| Diluted EPS | $2.16 | $0.83 |
| Operating cash flow | $215.4 million | $234.9 million |
| Capital expenditures | $78.6 million | $107.6 million |
FY 2012 net income included a $158.7 million release of the U.S. deferred-tax-asset valuation allowance. The company reported a $130.3 million income-tax benefit despite $49.9 million of pretax income; the resulting net income should not be viewed as solely reflecting operating improvement.
Fourth-quarter FY 2012 sales were $1.579 billion, gross profit $115.2 million (7.3% margin), operating income $32.2 million (2.0% margin), and net income $164.2 million, including the valuation-allowance release. Q4 diluted EPS was $1.96.
At September 29, 2012, cash and cash equivalents were $409.6 million, working capital $1.107 billion, total debt $857.4 million and stockholders’ equity $963.8 million. Cash declined $230.7 million during the year, primarily reflecting debt repayments. Operating cash flow remained positive, but was below FY 2011. DSO increased to 58 days from 55; inventory turns improved to 7.1 from 7.0.
Material changes versus FY 2011
- Revenue fell 7.7%; communications sales declined 8.8% and multimedia sales 23.8%. Enterprise computing and storage sales increased 5.9%.
- Gross margin decreased 0.5 percentage points. Management attributed the decline principally to lower sales, particularly in CPS, whose products generally have higher contribution margins than IMS.
- Operating income declined 35.1%, while SG&A expense decreased in dollars but rose as a share of revenue.
- Net income increased substantially, primarily because of the tax valuation-allowance release, partly offset by lower operating income and a $16.9 million loss on debt extinguishment.
- The company redeemed the remaining $400 million principal amount of its 8.125% notes due 2016 and reported a $360.2 million net reduction in debt. Interest expense fell to $71.7 million from $99.1 million.
- Management changed how it manages the business in Q4, separating IMS and CPS internally; IMS is the sole reportable segment. CPS revenue decreased year over year.
Outlook, risks and unusual items
- Outlook: The filing provides no specific numeric revenue, earnings or margin guidance. Management said it expects existing cash, available credit and operating cash generation to meet working-capital needs for at least 12 months, subject to demand, collections and other conditions. It expects to expand two international facilities and complete the 2012 restructuring plans within the following year.
- Demand and customer exposure: Management described 2012 as a more challenging environment, with customers reducing or rescheduling orders. The ten largest customers represented 49.7% of sales, and one customer exceeded 10%. Supply agreements generally do not require minimum purchases, and customers can cancel or defer orders.
- Margins and execution: Intense EMS competition, customer pricing pressure, product mix, component shortages, labor costs and underperformance in higher-margin CPS activities could pressure margins. The company announced closure of a foreign components plant and changes to CPS management.
- Debt and liquidity: The next long-term debt maturity was $257.4 million in 2014. The $300 million asset-backed facility had $232 million of borrowing availability at year-end, subject to its borrowing base; foreign short-term facilities had $68 million available. The company also had a $40 million secured loan and restrictive debt covenants. Approximately 45% of cash was held outside the United States, and repatriation may incur taxes.
- Restructuring and property: 2012 restructuring plans were estimated to cost $23.4 million; $15.6 million had been recorded under those plans by year-end. The company was marketing surplus properties listed at more than $100 million, with no assurance on timing or proceeds.
- Contingencies: Accrued liabilities for environmental, litigation and other contingencies were $18.5 million. Environmental investigations and remediation, a groundwater-contamination lawsuit, and a foreign tax-penalty dispute remain unresolved. The company said potential additional remediation costs in one matter could not be reasonably estimated.
- Customer credit risk: The company disclosed approximately $10 million of exposure, primarily inventory, to a financially distressed customer and was negotiating a payment and inventory-consumption plan.
- Other risks: Foreign operations, variable-rate debt, foreign exchange, supplier concentration, natural disasters, regulatory compliance and customer or supplier insolvency may affect results. Management reported no material off-balance-sheet arrangements. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Investor verification priorities
- Separate recurring operating performance from the $158.7 million tax valuation-allowance release when evaluating FY 2012 net income and EPS.
- Track revenue, gross margin and orders in communications and multimedia, and whether CPS revenue and margins recover.
- Review refinancing and repayment plans for the 2014 maturity, borrowing-base availability, covenant compliance and the cost of accessing foreign-held cash.
- Monitor the distressed-customer exposure, environmental and legal matters, tax audits, and actual restructuring costs and property-sale proceeds.
- Confirm whether demand conditions, customer cancellations and working-capital movements support management’s 12-month liquidity expectation.