Sanmina Corporation — Q2 FY2016 Form 10-Q
Reporting period: Quarter ended April 2, 2016; six-month results compared with the periods ended March 28, 2015. Sanmina provides electronics manufacturing, components, products and related services. IMS is its sole reportable segment; CPS combines several other businesses.
Financial results
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $1,611.2M | $1,527.5M | $3,145.9M | $3,198.7M |
| Gross profit / margin | $136.7M / 8.5% | $115.3M / 7.5% | $260.4M / 8.3% | $241.6M / 7.6% |
| Operating income / margin | $61.1M / 3.8% | $49.7M / 3.3% | $115.2M / 3.7% | $103.1M / 3.2% |
| Net income | $30.4M | $14.7M | $57.5M | $37.4M |
| Diluted EPS | $0.39 | $0.17 | $0.72 | $0.43 |
- Q2 sales rose 5.5%; six-month sales declined 1.7%. Industrial, medical and defense sales increased, while communications networks sales fell. Embedded computing and storage grew in Q2 but were slightly lower for the six-month period.
- Q2 gross-margin improvement reflected higher sales, improved IMS efficiencies and a $7.6M credit from reducing acquisition earnout estimates. Six-month margin also benefited from IMS improvement and a $3.9M distressed-customer charge recorded in the prior-year period. CPS margins were lower year over year in both comparisons.
- Operating expenses increased to $75.6M in Q2 and $145.2M for six months, primarily from higher incentive and stock compensation and R&D spending. The Q2 effective tax provision was lower than the prior year; the prior-year period included a $15.5M net charge related to resolving a foreign tax audit.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $205.3M, versus $63.6M in the prior-year period. Investing used $116.6M, including $58.9M for acquisitions and $58.0M for capital expenditures. Financing used $94.2M, including $104.0M of share repurchases. Cash decreased $4.9M to $407.3M.
- At April 2, 2016, current assets were $2.393B and current liabilities $1.495B; working capital was approximately $0.9B. Accounts receivable were $998.6M and inventory $922.7M.
- Balance-sheet debt was approximately $574.0M, comprising $136.4M of short-term debt (including current maturities) and $437.6M of long-term debt. Cash less reported debt was approximately $166.7M. The $375M revolving facility had $115.0M drawn and $27.2M of letters of credit; $232.8M was available net of letters of credit. Foreign short-term facilities of $74.4M were undrawn.
- Management said available liquidity and expected operating cash flow should cover working-capital needs for at least 12 months. Forty percent of cash was held in the United States; repatriating some foreign cash could create tax costs.
Material developments, outlook and risks
- Sanmina acquired a storage-software provider and a Malaysian manufacturing facility during the quarter. The acquisitions had no material effect on Q2 operating results. The filing records a $1.6M bargain-purchase gain and describes acquisition consideration that includes promissory notes.
- Management provided no quantified revenue or earnings guidance in the supplied filing text. It expects gross margins to fluctuate with production volumes, customer and product mix, capacity utilization, pricing pressure, labor and materials costs, and operational efficiency. It identified profitable CPS growth as an ongoing strategic challenge.
- Customer concentration increased: the ten largest customers represented 53.9% of Q2 sales and 52.2% for the six-month period; one customer exceeded 10% of sales in each FY2016 period. Customer agreements generally do not require minimum purchases.
- Key exposures include weaker oil and gas conditions, reduced demand in wireless communications programs, intense EMS competition and pricing pressure, international operations and currency movements, customer credit and inventory risk, and supply-chain disruptions. The $7.6M earnout-liability remeasurement reflects weakened oil and gas conditions and uncertainty about customer-industry consolidation.
- Environmental, Brazilian tax and other legal matters remain contingent. Reserves for environmental, warranty, litigation and other contingencies were $43.5M; management believes them adequate but cannot assure they will be sufficient. The company reported compliance with debt covenants and effective disclosure controls.
Most important facts for investors to verify
- How much of the margin and earnings improvement is repeatable apart from the $7.6M earnout credit, the acquisition gain and prior-year comparison items.
- Whether sales declines in communications and oil and gas-related markets persist, and how customer concentration and the absence of minimum-purchase commitments affect future results.
- Cash conversion and working-capital trends, including receivables, inventory, supplier-payment timing and the impact of acquisitions and customer deposits.
- Debt maturities, revolver availability and covenant headroom, alongside continued buybacks and acquisition funding needs.
- Developments in environmental remediation and Brazilian tax proceedings, and any change in the $43.5M contingency reserves or $85.5M uncertain-tax-position liability.