Sanmina Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended October 1, 2016 (52 weeks). The filing also reports fourth-quarter results; FY2015 was a 53-week year. Sanmina provides global electronics manufacturing, components, products, engineering, logistics and repair services to OEMs. Integrated Manufacturing Solutions (IMS) accounted for about 80% of FY2016 revenue; Components, Products and Services (CPS) accounted for about 20%.
Financial performance and position
- FY2016 revenue: $6.481 billion, up 1.7% from $6.375 billion.
- Profitability: Gross profit was $514.3 million and gross margin 7.9%, versus $483.9 million and 7.6% in FY2015. Operating income was $224.8 million, with a 3.5% operating margin, compared with $203.1 million and 3.2%.
- Net income and EPS: Net income was $187.8 million and diluted EPS was $2.38, compared with $377.3 million and $4.41 in FY2015. FY2015 included a substantially larger deferred-tax valuation-allowance release.
- FY2016 cash flow: Operating cash flow was $390.1 million; investing cash outflow was $174.5 million; financing cash outflow was $231.4 million. Capital expenditures were $120.4 million. Cash declined by $14.0 million to $398.3 million.
- Liquidity: Working capital was $974.4 million. The $375 million revolving facility had $25.0 million borrowed and $333.2 million available after letters of credit; the company reported compliance with debt covenants. Management said available resources and operating cash flow should meet working-capital needs for at least 12 months.
- Debt: Balance-sheet short-term debt, including current maturities, was $28.4 million; long-term debt was $434.1 million. Major obligations included $375 million of secured notes due 2019 and $40 million secured debt due 2017, subject to possible extensions.
- Fourth quarter: Revenue was $1.666 billion, gross margin 7.6%, operating income $55.1 million and net income $100.8 million. The quarter’s net income included a $96.2 million deferred-tax valuation-allowance release.
Changes versus comparable periods
- FY2016 revenue growth was driven by Industrial, Medical and Defense, up 9.7% to $2.775 billion. Communications Networks declined 2.8% to $2.414 billion, and Embedded Computing and Storage declined 5.2% to $1.293 billion.
- IMS gross margin improved from 7.1% to 7.5%, primarily on better operating efficiencies. CPS gross margin fell from 9.5% to 8.9%, reflecting unfavorable mix and weak oil-and-gas conditions. Management said CPS revenue and gross margins had declined in each of the preceding two years.
- Operating cash flow increased from $174.9 million to $390.1 million, supported in part by a $95.2 million increase in accounts payable. Cash-conversion measures improved: DSO fell to 53 days from 56, inventory turns rose to 6.6 from 6.3, and the cash cycle shortened to 42 days from 45.
- Sanmina repurchased 6.8 million shares for approximately $141.2 million in FY2016. The ten largest customers represented 52.0% of sales, up from 48.3%; Nokia, including Alcatel-Lucent, exceeded 10% of sales.
Outlook, commentary and risks
- The filing provides no numerical revenue or earnings guidance. Management’s stated strategy is to expand higher-value, vertically integrated solutions and diversify end markets; it acknowledged that profitable CPS growth remains challenging.
- Customer concentration and limited firm purchase commitments expose revenue and inventory to cancellations, rescheduling, reduced demand and customer credit problems. The top ten customers typically account for about half of sales.
- Other key risks include intense EMS price competition; weak oil-and-gas conditions; component shortages and cost inflation; foreign-exchange, geopolitical and labor risks; cybersecurity and operational disruptions; and reliance on international manufacturing.
- Environmental and legal matters include remediation obligations at certain current and former sites, an appealed Orange County groundwater judgment in Sanmina’s favor expected to be heard in 2017, and contested Brazilian tax proceedings. Accrued liabilities for contingencies were $46.0 million; the company also reported $91.6 million of liabilities for uncertain tax positions.
- Tax results are unusually sensitive to deferred-tax judgments: Sanmina released $96.2 million of valuation allowance in FY2016 and reported no remaining U.S. federal valuation allowance. Revenue-recognition guidance effective in FY2019 is expected to change timing for a significant portion of revenue from point-in-time recognition to recognition over time; the company said adoption could materially affect its financial statements.
- Two FY2016 acquisitions had aggregate consideration of $90.3 million. A $7.6 million reduction in contingent consideration, driven mainly by weaker oil-and-gas conditions, benefited cost of sales; a separate $1.6 million bargain-purchase gain was recorded in other income.
Important facts for investors to verify
- How much of FY2016 earnings and fourth-quarter net income reflects recurring operations versus the $96.2 million tax valuation-allowance release and other acquisition-related items.
- Whether CPS revenue and margins stabilize or improve, given the recent declines and weaker oil-and-gas market.
- Customer exposure, especially Nokia and the rising share of sales represented by the ten largest customers, alongside customers’ ability to cancel or change orders.
- Cash-flow sustainability and working-capital movements, particularly the contribution from increased accounts payable, and the effect of buybacks and capital spending on liquidity.
- Potential cash costs and timing associated with debt maturities, tax audits and uncertain tax positions, environmental remediation, pension underfunding, and other contingencies.