Sanmina Corporation — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended July 2, 2016; comparisons are to the periods ended June 27, 2015. Sanmina provides integrated manufacturing, components, products and related services to OEMs. Its reportable segment is Integrated Manufacturing Solutions (IMS); Components, Products and Services (CPS) combines other operating businesses.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $1,669.5 million | $1,539.3 million | $4,815.4 million | $4,738.0 million |
| Gross profit / margin | $126.7 million / 7.6% | $120.6 million / 7.8% | $387.0 million / 8.0% | $362.2 million / 7.6% |
| Operating income | $54.6 million | $47.3 million | $169.7 million | $150.4 million |
| Net income | $29.5 million | $24.5 million | $87.0 million | $61.9 million |
| Diluted EPS | $0.38 | $0.29 | $1.10 | $0.72 |
- Quarterly sales rose 8.5%; nine-month sales rose 1.6%. Quarterly growth was led by industrial, medical and defense, up 16.5%, and communications networks, up 5.4%. Nine-month communications sales declined 3.2%; industrial, medical and defense grew 7.9%.
- Quarterly gross margin declined 0.2 percentage points, reflecting unfavorable IMS mix and weaker oil and gas conditions that pressured CPS margins. Nine-month gross margin improved 0.4 points, supported by IMS efficiencies, a $7.6 million contingent-consideration credit, and a prior-year distressed-customer charge.
- Operating cash flow was $286.8 million for the nine months, versus $176.2 million a year earlier. Investing used $139.2 million, including $84.5 million of capital expenditure and $58.9 million paid for acquisitions. Financing used $152.0 million, including $114.4 million of share repurchases.
- Cash was $409.6 million at quarter-end, versus $412.3 million at October 3, 2015. Total debt was approximately $517.5 million; cash less debt implies net debt of approximately $107.9 million. Working capital was approximately $0.9 billion. The $375 million revolver had $80.0 million drawn and $17.3 million of letters of credit; $277.7 million was available net of letters of credit. Sanmina reported compliance with debt covenants.
- Quarter-end current assets were $2.38 billion and current liabilities $1.45 billion. Nine-month effective tax rate was 43.1%, compared with 52.2% in the prior-year period, primarily because the prior year included an unfavorable foreign tax audit resolution.
Changes, outlook and notable items
- Quarterly earnings increased despite slightly lower gross margin; nine-month earnings growth benefited from higher sales, improved IMS efficiency and lower tax expense versus the prior year.
- CPS nine-month revenue was essentially flat year over year, and CPS gross margin fell from 9.6% to 9.3%. Management said profitable CPS growth remains challenging and is an important part of its strategy.
- Management expects gross margins to fluctuate with volumes, customer and product mix, utilization, competition, input costs, supply availability and operational efficiency. The filing provides no specific revenue or earnings guidance. Management believes cash, borrowing availability and operating cash generation are sufficient for working-capital needs for at least 12 months, subject to demand and collections.
- Two fiscal 2016 acquisitions had aggregate consideration of $90.3 million. They were not material to reported-period results. A separate oil-and-gas acquisition earnout estimate was reduced by $7.6 million in Q2, credited to cost of sales in response to weaker industry conditions; a Malaysian facility acquisition also generated a $1.6 million bargain-purchase gain.
- Customer concentration is significant: the ten largest customers represented 52.8% of quarterly sales and 52.4% of nine-month sales. Two customers each exceeded 10% of quarterly sales; one did so for the nine-month period.
- Key exposures include depressed oil and gas markets, intense price competition, customer concentration and credit risk, international operations and foreign exchange, and dependence on customer forecasts and cancellable orders. Sanmina said a new revenue standard, effective for it in fiscal 2019, is expected to change timing for a significant portion of revenue from point-in-time to over-time recognition and could materially affect its statements upon adoption.
- Contingencies include environmental matters, Brazilian tax and bookkeeping proceedings, and other litigation. Reserves for environmental, warranty, litigation and other contingencies were $44.4 million; management cautioned reserves may prove insufficient. A $12.0 million GT Advanced Technologies receivable and inventory exposure remained fully reserved. Uncertain tax-position liabilities were $84.7 million.
Important facts for investors to verify
- Whether quarterly margin pressure persists and whether CPS growth and profitability improve, particularly given continued weakness in oil and gas.
- Whether elevated customer concentration, demand changes or collection problems affect sales, working capital and operating cash flow.
- How the acquisition strategy, contingent consideration and acquired businesses contribute to future earnings and cash requirements.
- Potential cash impact and outcomes of environmental, Brazilian tax, litigation and uncertain-tax-position matters.
- Readiness for the fiscal 2019 revenue-recognition change and its stated potential material effect on reported revenue timing.
- Use of the remaining $90.6 million share-repurchase authorization alongside acquisition, capital expenditure and liquidity needs.