Sanmina Corporation — FY2013 Form 10-K
Business context and reporting period. Sanmina provides electronics manufacturing, components, products, engineering, logistics and repair services to OEMs across communications, computing and storage, multimedia, industrial, defense and aerospace, medical, clean technology and automotive markets. The fiscal year ended September 28, 2013 (52 weeks); the filing also reports fourth-quarter results. IMS generated about 80% of FY2013 revenue, with CPS contributing about 20%. Sanmina has one reportable segment, IMS; CPS combines several operating businesses.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $5.917 billion | $6.093 billion | Down 2.9% |
| Gross profit / margin | $426.8 million / 7.2% | $435.8 million / 7.2% | Profit down; margin flat |
| Operating income / margin | $157.6 million / 2.7% | $137.5 million / 2.3% | Income up |
| Net income | $79.4 million | $180.2 million | Down 56.0% |
| Diluted EPS | $0.93 | $2.16 | Down |
| Cash from operations | $317.9 million | $215.4 million | Up |
FY2013 fourth-quarter sales were $1.505 billion, gross margin 7.7%, operating income $44.7 million and net income $38.8 million. Fourth-quarter diluted EPS was $0.44.
- End markets: Communications sales were essentially flat at $2.858 billion. Industrial, defense and medical rose 2.8% to $1.591 billion. Computing and storage fell 16.1% to $811.3 million, and multimedia fell 8.9% to $656.6 million. Management attributed the latter declines mainly to weaker existing-customer demand and program wind-downs.
- Margins and segments: CPS gross margin improved to 10.8% from 8.8%, while IMS margin declined to 6.1% from 6.6%. Management cited better CPS mix, restructuring benefits and higher volume; IMS was affected by lower sales. Consolidated gross margin remained 7.2%.
- Cash, working capital and investment: Cash and equivalents were $402.9 million at year-end, versus $409.6 million. Working capital was $1.0 billion, down from $1.1 billion. Operating cash flow increased partly through lower inventory and receivables. Capital expenditures were $76.0 million; investing cash outflow was $42.9 million, including $33.1 million in property-sale proceeds.
- Debt and liquidity: Total debt was approximately $562.3 million, down $295.1 million year over year; long-term debt on the balance sheet was $562.5 million, including a $22.5 million fair-value hedge adjustment. Interest expense fell to $41.0 million from $71.7 million. Sanmina reported $853 million in total liquidity sources, including $402.9 million cash, $266.4 million available under its asset-backed revolver and $184 million in foreign facilities, all undrawn. Management said liquidity should meet working-capital needs for at least 12 months.
- Balance sheet: Total assets were $2.996 billion, stockholders’ equity $1.092 billion, and net working capital $997.9 million. The company reported no outstanding borrowings under its $300 million asset-backed revolver at fiscal year-end and was in compliance with debt covenants.
Material changes and unusual items
- Net income fell despite higher operating income, in part because FY2012 included a $158.7 million release of deferred-tax valuation allowance; FY2013 included a smaller $21.5 million release. FY2013 tax expense was $24.1 million versus a $130.3 million tax benefit in FY2012.
- FY2013 included a $14.9 million charge from dedesignating interest-rate swaps after the planned redemption of the 2014 notes, and a $1.4 million loss on debt extinguishment. A $23.4 million gain on sales of long-lived assets, primarily real estate, partially benefited operating results.
- Sanmina redeemed $257.4 million of debt due in 2014. It also had $500 million of 7% senior notes due in 2019 and $40 million of secured debt due in 2015. A swap effectively converts the 2019 notes to variable-rate exposure; the counterparty may terminate it beginning May 2014.
- In March 2013, the board authorized a $100 million share-repurchase program; no shares were repurchased under it during FY2013. The company has not paid cash dividends and does not anticipate doing so in the foreseeable future.
- FY2013 restructuring and integration costs were $24.9 million. A restructuring plan covering four plant closures and reorganizations had expected total costs of $29.8 million; $0.7 million of severance remained payable at year-end. Sanmina was marketing surplus real estate listed for more than $80 million in aggregate.
Outlook, commentary and principal risks
Sanmina provided no specific revenue or earnings guidance in the supplied filing text. Management’s stated strategy is to grow higher-margin CPS, broaden end-market exposure, expand integrated solutions and improve efficiency. It noted declining revenue in each of the prior two years and said profitable growth remained challenging. Management characterized CPS as capable of better results despite FY2013 revenue growth of 5% and a 200-basis-point gross-margin improvement.
- Customer and market concentration remain significant: the ten largest customers represented 50.3% of sales, and one customer exceeded 10%. Alcatel-Lucent exceeded 10% in FY2013 and FY2012. Customer agreements generally lack minimum purchase commitments; orders can be cancelled, reduced or delayed.
- Other key risks include volatile electronics demand, intense pricing competition, dependence on communications customers, component shortages and cost increases, operating and transition inefficiencies, customer credit or insolvency exposure, and working-capital volatility. Sanmina recorded $6.6 million of charges related to a distressed customer in FY2013.
- International operations generated about 80% of sales. Foreign-currency movements, labor costs, political and regulatory conditions, and restrictions or taxes on repatriating foreign cash may affect results and liquidity.
- Environmental remediation, tax audits and other legal matters are contingencies. Accrued liabilities for environmental, litigation and other contingencies were $22.2 million, excluding uncertain tax positions. A Canadian remediation plan could require modification and higher costs; the filing says the potential loss range in a groundwater lawsuit could not be reasonably estimated. Brazilian tax proceedings are also ongoing.
- Uncertain tax positions were reported at $90.3 million in the liquidity discussion; the tax note separately reports $65.1 million of unrecognized tax benefits plus $27.1 million of accrued interest and penalties. The timing and ultimate cash settlement are uncertain.
- About 51% of cash was held by foreign subsidiaries; repatriation to the U.S. could incur taxes. The company also reported an underfunded pension amount of $22.3 million.
Investor verification checklist
- Confirm the drivers and sustainability of falling sales, especially computing and storage and multimedia, and assess customer-program transitions and concentration.
- Separate recurring earnings and cash generation from tax-valuation-allowance releases, property-sale gains, restructuring charges and the swap-dedesignation charge.
- Reconcile the debt and liquidity disclosures, including variable-rate exposure, the 2019-note swap’s termination provision, debt maturities and the geographic availability of cash.
- Track CPS growth and margins against IMS performance, and whether CPS investment produces durable consolidated margin improvement.
- Monitor customer credit and inventory exposure, environmental remediation, Brazilian tax disputes, tax audits and the uncertain-tax-position disclosures.
- Review the full audited financial statements and notes for definitions and reconciliation of segment results, cash-flow movements and the reported liquidity totals.