Sanmina Corporation — Fiscal 2017 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended January 2, 2016, unless otherwise noted. Sanmina provides integrated manufacturing solutions, components, products and related services, principally to OEMs. IMS is its sole reportable segment; CPS comprises other businesses.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $1,720.0 million | $1,534.7 million | +12.1% |
| Gross profit / margin | $132.2 million / 7.7% | $123.6 million / 8.1% | Margin down 0.4 percentage points |
| Operating income | $58.7 million | $54.1 million | +8.5% |
| Net income | $44.9 million | $27.1 million | +65.4% |
| Diluted EPS | $0.58 | $0.33 | +75.8% |
| Operating cash flow | $53.9 million | $62.7 million | Down $8.7 million |
Sales growth was led by industrial, medical and defense (+27.5%), primarily from a customer program acquisition, and communications networks (+6.3%), primarily from new program wins. Embedded computing and storage sales fell 6.3%, primarily due to lower demand for a customer’s point-of-sale equipment. IMS gross margin declined to 7.3% from 7.7%, attributed mainly to product mix and new-program ramp costs; CPS gross margin rose to 9.5% from 8.7%.
Operating expenses increased to $73.5 million from $69.6 million, but declined as a share of sales to 4.3% from 4.5%. Higher incentive and stock-based compensation contributed to the increase; stock-based compensation was $12.0 million versus $4.1 million. The effective tax rate fell to 18.2% from 43.6%, primarily because of a tax benefit from restructuring certain foreign entities. This helped lift net income despite only moderate operating-income growth.
Cash, debt and liquidity
- Cash and cash equivalents were $405.2 million at quarter-end, up from $398.3 million at October 1, 2016. Working capital was approximately $1.0 billion.
- Operating activities provided $53.9 million; investing activities used $18.1 million, including $21.7 million in capital expenditures and $3.6 million in property-sale proceeds; financing activities used $30.2 million. Cash increased by $7.0 million.
- Total debt was approximately $436.7 million, comprising $43.4 million current and $393.3 million long-term debt. The company reported no borrowings on its $375 million revolving facility and $16.8 million of letters of credit; $358.2 million was available under that facility.
- Management said existing cash, available credit and operating cash generation should meet working-capital needs for at least 12 months. The company was in compliance with debt covenants at December 31, 2016.
- After quarter-end, Sanmina elected to repay its $40 million secured debt early; payment was scheduled for February 7, 2017, without a prepayment penalty.
Changes, outlook and risks
- Revenue rose 12.1%, but gross margin narrowed. Higher sales in industrial, medical and defense offset the decline in embedded computing and storage.
- Management gave no quantified revenue or earnings guidance in the filing. It expects gross margins to fluctuate with production volumes, customer and product mix, capacity utilization, competition, input costs and other operating factors.
- Customer concentration increased: the ten largest customers represented 51.8% of sales versus 48.2% a year earlier; two customers each accounted for at least 10% of sales, compared with none in the prior-year quarter. Customer agreements generally do not require minimum purchases.
- Environmental, warranty, litigation and other contingency reserves were $42.2 million, down from $46.0 million at October 1, 2016. The filing describes groundwater matters, including an appeal in the Orange County Water District case expected to be heard in calendar 2017, and Brazilian tax and bookkeeping proceedings. Outcomes and ultimate costs remain uncertain.
- Sanmina disclosed $89.7 million in liabilities for uncertain tax positions and possible acquisition-related contingent payments of up to $18.0 million if specified earnings targets are achieved over the next three years.
- Management identified customer demand and credit, order cancellations, pricing and competition, supply constraints, foreign operations and currency exposure, labor and geopolitical disruption, and environmental and regulatory matters as risks. It noted that a 10% exchange-rate move would not be material if exposures are forecast accurately; inaccurate forecasts could result in significant gains or losses.
- Revenue standard Topic 606 is expected to change the timing of recognition for a significant portion of revenue from point-in-time to over-time recognition and could materially affect the statements on adoption in fiscal 2019. The transition method had not been selected.
Key facts for investors to verify
- Whether the industrial, medical and defense program-related sales gains persist, and whether new IMS programs improve margins as ramp costs ease.
- Whether customer concentration, order patterns and customer credit quality affect future sales, receivables or inventory exposure.
- Whether the lower effective tax rate is sustainable; the quarter’s rate benefited from a foreign-entity restructuring.
- Repayment of the $40 million secured debt and continued covenant compliance, liquidity availability and cash generation.
- Developments in environmental and other legal contingencies, uncertain tax positions, and the potential acquisition-related payment.
- The quantified financial and operational effects of adopting Topic 606; the filing does not provide a clear estimate.