Sanmina Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017 (52 weeks); fourth quarter ended September 30, 2017. The filing was signed November 13, 2017.
Business context
Sanmina provides electronics manufacturing, components, products, engineering, logistics and repair services to OEMs across communications, industrial, medical, defense and aerospace, energy, automotive, computing and storage markets. IMS generated approximately 80% of FY2017 revenue; CPS generated approximately 20%. The company reported one financial-reporting segment, IMS. It operated in 23 countries and had approximately 47,000 employees, including temporary employees.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $6.869 billion | $6.481 billion |
| Gross profit / margin | $519.9 million / 7.6% | $514.3 million / 7.9% |
| Operating income / margin | $226.5 million / 3.3% | $224.8 million / 3.5% |
| Income before taxes | $213.5 million | $204.6 million |
| Income tax expense | $74.6 million | $16.8 million |
| Net income | $138.8 million | $187.8 million |
| Diluted EPS | $1.78 | $2.38 |
| Operating cash flow | $251.0 million | $390.1 million |
| Capital expenditures, cash basis | $111.8 million | $120.4 million |
At September 30, 2017, cash and equivalents were $406.7 million, working capital was approximately $1.0 billion, and total assets were $3.85 billion. Balance-sheet debt was approximately $479.9 million, including $85 million drawn on the revolving facility; the company reported $276.9 million of additional revolver availability and $74.1 million of unused foreign short-term borrowing facilities. It was in compliance with debt covenants. Long-term debt included $375 million of 4.375% senior secured notes due June 2019.
FY2017 gross margin was 7.6% and operating margin 3.3%. Fourth-quarter sales were $1.755 billion, gross margin 7.1%, operating margin 2.5%, net income $25.8 million and diluted EPS $0.33. Cash conversion weakened: DSO rose to 55 days from 53, inventory turns fell to 6.2 from 6.6, and the cash cycle increased to 43 days from 42.
Material changes versus prior period
- Full-year sales grew 6.0%. Industrial, medical and defense sales rose 10.4%, communications networks rose 9.8%, and embedded computing and storage fell 10.8%.
- Gross margin declined from 7.9% to 7.6%, primarily reflecting lower IMS margin (7.2% versus 7.5%), unfavorable customer mix, supply constraints, design changes and low yields during new program ramps. CPS margin remained 8.9%.
- Net income declined despite higher sales and pretax income, largely because FY2016 included a $96.2 million deferred-tax valuation-allowance release. FY2017’s effective tax rate was 35.0%, versus 8.2% in FY2016.
- Operating cash flow fell by $139.2 million, principally as growth in receivables and inventory absorbed cash. Receivables increased $136.1 million and inventory $104.5 million; higher payables partly offset this use.
- The company repurchased 4.3 million shares for approximately $159.7 million during FY2017. A new $200 million authorization was approved in the fourth quarter; $253.2 million remained available under repurchase programs at year-end.
- Leadership changed in October 2017: Jure Sola became Executive Chairman, Robert Eulau became CEO, and David Anderson became CFO.
Outlook, commentary and risks
- Management said it expects existing cash resources, borrowing availability and operating cash generation to meet working-capital needs for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Management described CPS growth as below expectations: FY2017 CPS revenue rose 3.6%, but gross profit increased only $5.5 million; management believes the business can deliver higher margins.
- Major risks include reliance on a concentrated customer base (the ten largest represented 52.9% of FY2017 sales; two customers each exceeded 10%), customer order cancellations or delays, pricing pressure, component shortages, program-ramp execution and foreign operations and currency exposure.
- Environmental and legal matters include remediation obligations and the Orange County groundwater case, where an appellate court reversed a dismissal in August 2017 and the company petitioned for California Supreme Court review. Brazilian subsidiaries continue to contest tax-related proceedings. Recorded reserves for environmental, warranty, litigation and other contingencies were $36.1 million; outcomes and sufficiency of reserves remain uncertain.
- Uncertain tax positions totaled $107.2 million, and the timing of any cash settlement was not reliably estimable. Approximately $571.4 million of undistributed foreign earnings were intended to remain invested abroad.
- Upcoming accounting changes could affect reported results: the company expected revenue-recognition adoption in FY2019 to change timing for a significant portion of revenue, and lease accounting adoption in FY2020 to materially affect the balance sheet. Adoption of share-based-payment guidance in FY2018 was expected to increase deferred tax assets by approximately $44 million and could increase tax-provision variability.
Investor verification priorities
- Check whether sales growth and new program ramps translate into recovering gross and operating margins, particularly in IMS and CPS.
- Assess customer concentration, program losses or cancellations, and the financial health and payment behavior of major customers.
- Track working-capital trends, inventory and receivables conversion, and operating cash flow relative to reported earnings.
- Review the 2019 secured-note maturity, revolver usage and availability, covenant compliance, and the effects of ongoing share repurchases on liquidity.
- Monitor tax-audit and uncertain-tax-position developments, environmental remediation and litigation outcomes, and the effects of revenue-recognition and lease-accounting changes.