Sanmina Corporation — Q1 FY2016 Form 10-Q
Business and period: Global electronics manufacturing services provider, with Integrated Manufacturing Solutions (IMS) as its sole reportable segment and Components, Products and Services (CPS) reported together. The quarter ended January 2, 2016; comparisons are to the three months ended December 27, 2014. Fiscal 2015 included an extra week in Q4, not Q1.
Financial performance
| Metric | Q1 FY2016 | Prior comparable quarter |
|---|---|---|
| Net sales | $1.535 billion | $1.671 billion |
| Gross profit / margin | $123.6 million / 8.1% | $126.3 million / 7.6% |
| Operating income / margin | $54.1 million / 3.5% | $53.5 million / 3.2% |
| Net income | $27.1 million | $22.7 million |
| Diluted EPS | $0.33 | $0.26 |
| Operating cash flow | $62.7 million | $(6.2) million |
| Capital expenditures | $28.9 million | $28.7 million |
- Sales declined 8.2%. Communications Networks revenue fell 11.7%, Industrial, Medical and Defense fell 5.0%, and Embedded Computing and Storage fell 7.0%.
- Management attributed improved gross margin mainly to better IMS performance and the prior-year quarter’s $3.9 million distressed-customer charge. IMS gross margin rose to 7.7% from 7.3%; CPS gross margin declined to 8.7% from 9.0%.
- Operating expenses were $69.6 million, down $3.3 million, primarily due to lower restructuring and impairment charges. Interest and other expense improved by $1.7 million, mainly because the prior-year period included a debt-extinguishment loss.
- Operating cash flow improved substantially year over year. Working-capital movements included cash sources from lower inventory and receivables, partly offset by reductions in accounts payable and accrued liabilities.
Balance sheet and liquidity
- Cash and equivalents were $398.4 million, versus $412.3 million at October 3, 2015. Working capital was approximately $1.0 billion.
- Total debt was approximately $513.5 million, including $89.4 million current/short-term and $424.1 million long-term. The $375 million revolving facility had $86.0 million borrowed and $21.9 million of letters of credit outstanding; $267.1 million was available net of letters of credit.
- The company also had $74.1 million of foreign short-term borrowing facilities, with no borrowings outstanding. It was in compliance with debt covenants at quarter-end.
- Cash declined $13.8 million during the quarter. Financing cash use of $48.4 million included $28.7 million of share repurchases and $24.0 million of net short-term debt repayments.
- Cash cycle days increased to 47 from 45 at fiscal year-end; days inventory on hand rose to 59 from 58, while accounts payable days fell to 66 from 69.
Outlook, risks and notable items
- No numerical revenue or earnings guidance is provided. Management expects margins to fluctuate with production volumes and customer/product mix, and says it believes available cash, credit and operating cash generation will cover working-capital needs for at least 12 months.
- Management cited ongoing challenges to profitable growth and CPS expansion; CPS revenue and gross margin had also declined versus Q4 FY2015. Demand weakness included depressed oil and gas conditions, delayed medical product transitions, and delayed set-top-box transitions.
- Customer concentration remains significant: the ten largest customers represented 48.2% of sales, although no customer individually accounted for 10% or more. Customer cancellations, order delays, pricing pressure and customer credit problems could affect sales, margins and cash generation.
- After quarter-end, on January 5, 2016, the company acquired a private software company for approximately $40 million. It expected to pay roughly half in Q2 and the remainder, less escrow, in Q3. A separate manufacturing-facility and asset purchase was expected to close in Q2 and entail a significant cash outlay.
- Environmental, warranty, litigation and other contingency reserves were $51.5 million. Matters include groundwater claims, an appealed dismissal in the Orange County Water District case, and Brazilian tax proceedings that could adversely affect results. The company also reported an $82.0 million liability for uncertain tax positions.
- Other risks include foreign-exchange exposure, international operations, component supply and cost volatility, and restrictive debt covenants. Management reported no material off-balance-sheet arrangements and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales declines across the three end markets stabilize, and whether IMS improvement can offset continued CPS weakness.
- Cash conversion and working-capital trends, especially supplier-payment timing, inventory, and customer collections.
- Funding and integration of the software acquisition and expected Q2 facility transaction, including their actual cash impact.
- Developments in environmental and Brazilian tax proceedings, uncertain tax positions, and adequacy of recorded reserves.
- Revolver availability, covenant compliance, and the effect of continued share repurchases on liquidity.