Sanmina Corporation — Q1 Fiscal 2014 10-Q
Reporting period: Three months ended December 28, 2013; comparison is the three months ended December 29, 2012. The company provides integrated manufacturing solutions (IMS) and components, products and services (CPS) to OEMs across multiple end markets.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $1,447.5 million | $1,494.9 million | Down 3.2% |
| Gross profit / margin | $110.8 million / 7.7% | $96.9 million / 6.5% | Margin up 1.2 percentage points |
| Operating income | $39.5 million | $31.5 million | Up 25.6% |
| Net income | $23.1 million | $0.6 million | Up $22.5 million |
| Diluted EPS | $0.26 | $0.01 | Up $0.25 |
| Cash from operating activities | $38.2 million | $97.1 million | Down $58.8 million |
Interest expense fell to $7.5 million from $13.1 million, primarily following the 2013 redemption of $257.4 million of debt. Income tax provision was $10.6 million versus $3.0 million; the current-quarter provision included a $3.1 million benefit from revaluation of certain deferred tax assets.
Balance sheet and liquidity
- Cash and cash equivalents were $407.1 million at December 28, 2013, compared with $402.9 million at September 28, 2013. Working capital was approximately $1.0 billion.
- Current assets were $2.204 billion and current liabilities $1.240 billion. Accounts receivable was $917.2 million; inventory was $792.0 million.
- Long-term debt had a reported carrying amount of $560.6 million, including a $20.6 million fair-value hedge adjustment; the underlying debt comprised $500 million of notes due 2019 and $40 million secured debt due 2015. Short-term debt was $83.8 million.
- The $300 million asset-backed revolver had $60.0 million drawn and $23.2 million of letters of credit; $206.5 million was available. Foreign short-term borrowing facilities totaled $184 million and were undrawn.
- Management reported total sources of liquidity of $798 million and said existing resources and operating cash were expected to meet working-capital needs for the next 12 months.
Operating cash flow was lower year over year, with a $37.1 million decline in accounts payable partly offset by a $28.8 million decrease in receivables. Investing activities used $71.1 million, including $57.7 million for an acquisition and $13.6 million in capital expenditures. Financing activities provided $37.0 million, including net short-term borrowing, partly offset by $25.6 million of share repurchases.
Material changes and management commentary
- Sales declined in multimedia (down 28.2%) and computing and storage (down 19.4%), primarily due to weaker existing-customer demand and program wind-downs. Industrial, defense and medical sales rose 18.3%, reflecting existing programs and new wins. Communications sales decreased 2.2%.
- Gross margin improved mainly because IMS addressed inefficiencies from prior-year new-program ramp-ups and the prior-year quarter included distressed-customer charges. Management cautioned that gross margins may fluctuate with production volumes, product mix, pricing pressure, inventory charges and operational efficiency.
- IMS gross profit rose to $81.0 million from $69.9 million; CPS gross profit was $31.6 million versus $31.4 million. Segment sales were affected by the fourth-quarter 2013 transfer of Optical and RF modules from IMS to CPS; prior-year segment figures were recast.
- Sanmina acquired a manufacturing operation serving the oil and gas market on December 18, 2013, for $57.7 million cash. The acquisition did not significantly affect quarterly results; purchase-price allocation remained preliminary.
- The company repurchased 1.671 million shares under its $100 million program for approximately $25.2 million; $74.9 million remained available at quarter-end.
- The 2012 restructuring plans were expected to cost $31.8 million in total and be completed in 2014. Restructuring costs were $3.7 million for the quarter; the reported accrual balance was $6.1 million.
Outlook, risks and contingencies
- The filing provides no numerical revenue, earnings or margin guidance. Management noted that results for the first quarter are not necessarily indicative of the full fiscal year and described historical seasonality, with sales often higher in the second half.
- Key risks include intense EMS competition and OEM price pressure, reliance on a concentrated customer base, demand volatility, customer cancellations or credit problems, component shortages, execution and inventory risks, and exposure to international operations and foreign exchange. The ten largest customers represented 49.2% of sales; one customer accounted for at least 10%.
- Interest-rate exposure includes $540 million of long-term debt treated as variable-rate exposure through floating-rate debt and swaps, plus $60 million of variable-rate revolver borrowings. The counterparty may terminate the swap on the 2019 notes beginning May 2014; Sanmina could then pay the notes’ fixed 7% rate. Management said an immediate 10% interest-rate change would not significantly affect results.
- Environmental, litigation and other contingency reserves were $22.1 million, excluding uncertain tax positions. A groundwater-contamination lawsuit presents a reasonably possible loss, but the amount or range could not be estimated. The uncertain-tax-position liability was $91.3 million; timing and ultimate cash settlement were not reliably estimable.
- Management stated it was in compliance with applicable debt covenants. The filing reported no material off-balance-sheet arrangements. Forty-six percent of cash was held by foreign subsidiaries, and repatriation could result in tax costs.
Important facts for investors to verify
- Whether improved gross margin is sustainable as sales declined and product mix and pricing pressures remain important.
- Whether the weaker multimedia and computing and storage demand is offset by continued growth in industrial, defense and medical markets.
- Cash conversion and working-capital trends, particularly the lower operating cash flow and changes in accounts payable, receivables and inventory.
- Acquisition integration, final purchase-price allocation and the acquired oil-and-gas operation’s contribution to future results.
- Debt, refinancing and interest-rate exposure, including the 2019-note swap termination option and scheduled 2015 maturity.
- Potential cash exposure from environmental and legal matters, uncertain tax positions, customer concentration and foreign cash repatriation.