Sanmina Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended October 3, 2015; the fourth quarter included an extra week. Sanmina provides global electronics manufacturing, components, products, logistics and repair services. IMS generated about 80% of FY2015 revenue; CPS generated about 20%.
Financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $6.375 billion | $6.215 billion |
| Gross profit / margin | $483.9 million / 7.6% | $488.3 million / 7.9% |
| Operating income / margin | $203.1 million / 3.2% | $199.7 million / 3.2% |
| Net income | $377.3 million | $197.2 million |
| Diluted EPS | $4.41 | $2.27 |
| Cash from operating activities | $174.9 million | $307.4 million |
Fourth-quarter sales were $1.637 billion, versus $1.686 billion in Q4 FY2014. Q4 gross margin was 7.4%, operating margin 3.2%, and net income $315.4 million. The quarter’s net income was substantially affected by a $287.4 million tax valuation-allowance release.
At year-end, cash and cash equivalents were $412.3 million, working capital was $1.017 billion, and stockholders’ equity was $1.520 billion. Debt was approximately $537.4 million, including current and long-term debt. The $375 million revolving facility had $110 million drawn and $243 million available; Sanmina reported covenant compliance. Cash declined $54.4 million during the year.
Changes and operating performance
- Annual revenue rose 2.6%; operating income rose 1.7%, while gross profit fell about 0.9% and gross margin contracted 30 basis points.
- Industrial, medical and defense sales increased 17.1% to $2.529 billion, becoming the largest end market. Communications networks declined 7.4% to $2.482 billion; embedded computing and storage decreased 0.9% to $1.364 billion.
- IMS gross margin improved from 6.9% to 7.1%. CPS revenue fell 6.6% and its gross margin decreased from 10.3% to 9.5%, which management identified as a challenge to its higher-margin growth strategy.
- Operating cash flow fell $132.5 million year over year, primarily reflecting working-capital movements, including lower accounts payable and higher inventory. The cash cycle lengthened from 39 to 45 days.
- Interest expense declined to $25.0 million from $30.8 million. Sanmina redeemed the remaining $100 million of its 2019 senior notes and replaced its asset-backed facility with the $375 million secured revolver.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said existing cash, available borrowing capacity and operating cash generation should meet working-capital needs for at least the next 12 months. Its strategy emphasizes diverse end markets, higher-value offerings and improved CPS performance.
- FY2015 net income includes a $288.7 million release of deferred-tax valuation allowance, versus $87.6 million in FY2014. Further releases may be possible if earnings support them; lower future taxable-income expectations could require a new allowance and reduce earnings.
- Customer concentration remains significant: the ten largest customers generated 48.3% of sales. Customer orders are generally cancellable or changeable, and the company depends substantially on international operations and foreign manufacturing.
- Risks include competitive pricing and margin pressure, demand weakness in communications, customer credit and inventory exposure, component shortages and cost volatility, foreign-exchange movements, labor and geopolitical disruption, cybersecurity, product liability, and environmental compliance and remediation.
- GT Advanced Technologies-related receivable and inventory exposures were fully reserved at year-end. Contingency reserves were $49.2 million; uncertain tax-position liabilities were $83.4 million. A Canadian environmental remediation estimate was increased by $6.0 million during the year. These matters and other proceedings may require additional cash or reserves.
- Sanmina repurchased 5.8 million shares for $121.2 million under its programs in FY2015; $204 million remained authorized. It does not anticipate cash dividends in the foreseeable future.
- The company acquired an oil-and-gas equipment business for approximately $13.9 million cash, with up to $23.5 million in contingent consideration. A separate manufacturing-operation purchase agreement was signed after year-end and was expected to close in FY2016.
Investor verification priorities
- Separate recurring earnings and cash generation from the large deferred-tax valuation-allowance release; assess the realizability of remaining tax assets and potential audit outcomes.
- Check whether CPS revenue and margins recover, and whether the decline in communications sales and gross margin stabilizes.
- Track working-capital efficiency, inventory turns, operating cash flow and cash conversion after the FY2015 deterioration.
- Review customer concentration, order-cancellation protections, distressed-customer reserves and exposure to supplier or component disruptions.
- Reconcile debt balances, revolver availability and covenant restrictions with cash needs for repurchases, capital spending and acquisitions; monitor environmental and other contingency exposures.