Sanmina Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014 (52 weeks); the filing also reports unaudited fourth-quarter results. Sanmina provides global electronics manufacturing, components, products, engineering, logistics and repair services. Integrated Manufacturing Solutions (IMS) generated 79% of FY2014 revenue; Components, Products and Services (CPS) generated 21%.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $6.215 billion | $5.917 billion |
| Gross profit / margin | $488.3 million / 7.9% | $426.8 million / 7.2% |
| Operating income / margin | $199.7 million / 3.2% | $157.6 million / 2.7% |
| Income before taxes | $161.7 million | $103.4 million |
| Net income / diluted EPS | $197.2 million / $2.27 | $79.4 million / $0.93 |
| Cash from operations | $307.4 million | $317.9 million |
Fourth-quarter sales were $1.686 billion, gross margin was 7.8%, operating income was $61.5 million, and net income was $132.5 million. The fourth-quarter profit included a material tax benefit from releasing valuation allowances.
- Revenue mix: Industrial, medical and defense revenue rose 30.5% to $2.160 billion. Communications fell 4.1% to $2.680 billion; computing and storage fell 4.0% to $779.0 million; multimedia fell 9.1% to $597.0 million.
- Cash and liquidity: Cash and equivalents were $466.6 million, versus $402.9 million a year earlier. Working capital was $916.8 million, down from $997.9 million. Cash from operations was $307.4 million; capital expenditures were $69.5 million.
- Debt: Total debt, including current debt, was $544.1 million at year-end. The company reported $386.7 million of long-term debt excluding current maturities. Debt was reduced by approximately $353 million versus FY2012. Interest expense declined to $30.8 million from $41.0 million.
- Available borrowing: No borrowings were outstanding under the $300 million asset-backed facility; $278.2 million was available after letters of credit. Foreign short-term facilities of $74 million were also undrawn. Management estimated total sources of liquidity at approximately $819 million.
- Capital returns: Sanmina repurchased 4.2 million shares for $75.0 million under its buyback authorizations during FY2014. It does not pay a cash dividend and said it expects to retain earnings.
Material changes and management commentary
- FY2014 revenue increased 5.0%, the company’s first annual revenue growth since 2011; FY2013 revenue had declined 2.9%.
- Gross margin improvement reflected better IMS execution after new-program ramp-up inefficiencies in 2013 and a more favorable mix. CPS revenue grew 13.4%, but its gross margin declined to 10.3% from 10.8%, mainly from unfavorable mix. Management said it believes CPS can deliver better results.
- Net income increased substantially, but comparability is affected by an $87.6 million release of deferred-tax valuation allowance in FY2014, versus $21.5 million in FY2013. The FY2014 effective tax rate was negative 21.9%.
- Sanmina issued $375 million of 4.375% senior secured notes due 2019 and redeemed $400 million of its 7% notes during FY2014. It called the remaining $100 million of 7% notes for redemption in FY2014; redemption was completed early in FY2015.
- Two acquisitions added oil-and-gas precision machining and industrial manufacturing capabilities. Total consideration was approximately $94 million; management said neither materially affected FY2014 results.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management said existing cash, credit availability and operating cash generation should meet working-capital needs for at least 12 months, while noting that weaker demand or slower collections could impair cash generation.
- Customer exposure remains concentrated: the ten largest customers generated 50.3% of sales. No customer exceeded 10% of sales in FY2014, but customer orders are generally not firm long-term commitments and can be reduced, delayed or cancelled.
- Key risks include intense EMS price competition; demand and product-mix swings; dependence on communications customers; foreign operations, currency and labor risks; component shortages and commodity-cost increases; and operational disruption, including from natural disasters or IT/cyber incidents. Approximately 80% of sales were from products manufactured in foreign operations.
- Tax uncertainty is significant: the company reported $86.1 million of liabilities for uncertain tax positions, including interest and penalties, and tax audits were ongoing. Further valuation-allowance releases were possible but dependent on future evidence of sustainable taxable income.
- Contingencies included $24.8 million accrued for environmental, litigation and other matters, excluding uncertain tax positions. Matters included Brazilian tax proceedings, environmental remediation and an appeal in the Orange County groundwater case. The company stated the ultimate outcomes and costs were uncertain.
- After year-end, customer GT Advanced Technologies filed for bankruptcy. Sanmina deferred $1.9 million of revenue after assessing potential receivable exposure.
- Restructuring costs were $12.6 million, down from $24.9 million in FY2013; future costs may include maintaining vacant facilities and environmental remediation. Management was marketing surplus real estate listed at over $65 million.
Important facts for investors to verify
- How much of FY2014 and fourth-quarter earnings growth is sustainable apart from the $87.6 million tax valuation-allowance release?
- Whether IMS margin gains persist and CPS improves margins despite FY2014 mix pressure.
- Customer-program trends, particularly communications demand, and the risk from concentrated customers and cancellable orders.
- Debt maturities, redemption costs, secured-note terms and compliance with debt covenants; the $40 million secured debt was due in July 2015.
- Potential cash requirements from tax audits, environmental remediation and litigation, including whether recorded reserves prove sufficient.