Sanmina Corporation — Fiscal 2015 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 27, 2015; comparisons are with the periods ended June 28, 2014. Sanmina provides integrated manufacturing solutions, components, products and related services to OEMs across several end markets. Fiscal 2015 has an extra week in the fourth quarter.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1.539 billion | $1.605 billion | $4.738 billion | $4.529 billion |
| Gross profit | $120.6 million | $126.9 million | $362.2 million | $356.7 million |
| Gross margin | 7.8% | 7.9% | 7.6% | 7.9% |
| Operating income | $47.3 million | $53.3 million | $150.4 million | $138.1 million |
| Net income | $24.5 million | $20.7 million | $61.9 million | $64.7 million |
| Diluted earnings per share | $0.29 | $0.24 | $0.72 | $0.75 |
- Quarterly sales fell 4.1% year over year, while nine-month sales rose 4.6%. Communications sales declined 14.8% in Q3; industrial, defense and medical sales increased 7.6%. For the nine-month period, industrial, defense and medical sales rose 21.6%.
- Q3 IMS gross margin improved to 7.3% from 6.7%, but CPS gross margin fell to 9.6% from 11.0%. Management attributed the overall quarterly margin decline mainly to lower CPS sales. For nine months, lower CPS volume and $4.9 million in distressed-customer charges weighed on margin.
- Q3 operating expenses were $73.3 million, approximately flat year over year. They included a $6.0 million environmental remediation charge, partly offset by lower incentive compensation and gains on asset sales.
- Nine-month income tax expense increased to $67.6 million from $46.7 million. The company recorded a $15.5 million net tax expense following an unfavorable foreign tax audit resolution.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $176.2 million, down from $198.5 million. Capital expenditures were $76.2 million; investing cash outflow was $61.2 million, compared with $122.6 million in the prior-year period.
- Cash and equivalents were $416.5 million at June 27, 2015, versus $466.6 million at September 27, 2014. Working capital was approximately $1.0 billion.
- Balance-sheet short-term and long-term debt totaled approximately $432.2 million at quarter end ($8.4 million current and $423.8 million long-term), compared with approximately $544.1 million at September 27, 2014. Nine-month financing cash outflow was $165.5 million, including $108.7 million of long-term debt repayments and $70.8 million of share repurchases.
- A new $375 million secured revolving credit facility replaced the $300 million asset-backed facility in May 2015. At quarter end, $5.0 million was borrowed and $22.4 million of letters of credit were outstanding; $347.6 million was available net of letters of credit. The company reported compliance with debt covenants.
- Management stated that cash, available credit, foreign borrowing facilities and expected operating cash flows should meet working-capital needs for the next 12 months. Forty-three percent of cash was held in the United States; repatriating some foreign cash could incur tax.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects gross margins to fluctuate with production volumes and customer/product mix and cited pricing pressure, capacity utilization, wage and materials costs, parts shortages, operational efficiency and manufacturing transitions as factors affecting results.
- Customer concentration remains material: the ten largest customers represented 47.7% of Q3 sales and 49.0% of nine-month sales. Management notes that customer supply agreements generally do not require minimum purchases.
- Environmental reserves for litigation and other contingencies were $26.8 million at quarter end. A further $6.0 million remediation reserve was recorded in Q3; the company cautioned that remediation scope and costs could increase. It also reported a Canadian environmental remediation proceeding.
- GT Advanced Technologies’ bankruptcy led to a $3.9 million inventory reserve in Q1 2015; the company reported no additional reserve was needed at quarter end. The filing also reports $78.4 million of liabilities for uncertain tax positions and ongoing tax audits.
- After quarter end, Sanmina acquired an oil-and-gas equipment business for approximately $15.1 million cash, with up to $23.5 million additional contingent consideration, and repaid $15.3 million of assumed debt. It also completed a previously exercised $20.5 million facility purchase early in Q4.
- The company repurchased $69.4 million of shares during the nine months; $55.7 million remained available under its repurchase authorizations at quarter end. The filing identifies customer demand and concentration, international operations, competition, supply-chain disruption, foreign exchange, environmental liabilities, taxes and debt covenants among its risks.
Important facts for investors to verify
- Whether communications-market declines persist and whether growth in industrial, defense and medical sales offsets them.
- Whether CPS sales and margins recover, given their higher contribution margins and recent weakness.
- Cash conversion and working-capital trends, including the rise in cash-cycle days from 39 to 42.
- Actual costs and timing of environmental remediation, tax-audit settlements and other contingencies.
- Acquisition performance, contingent consideration and the impact of continued share repurchases on liquidity.