Sanmina Corporation — Q1 FY2015 10-Q Summary
Reporting period: Fiscal quarter ended December 27, 2014; comparative quarter ended December 28, 2013. Sanmina provides integrated manufacturing solutions, components, products and services to OEMs across communications, industrial, defense, medical, computing and other markets. FY2015 has 53 weeks, with the extra week in Q4.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $1.671 billion | $1.447 billion |
| Gross profit / margin | $126.3 million / 7.6% | $110.8 million / 7.7% |
| Operating income / margin | $53.5 million / 3.2% | $39.5 million / 2.7% |
| Net income | $22.7 million | $23.1 million |
| Diluted EPS | $0.26 | $0.26 |
| Operating cash flow | $(6.2) million | $38.2 million |
- Revenue increased 15.5%, led by industrial, defense and medical sales, up 41.0% to $641.8 million. Communications sales rose 4.0%; embedded computing and storage rose 3.2%.
- IMS gross margin improved to 7.3% from 7.0%, while CPS margin eased to 9.0% from 9.1%. Consolidated gross margin slipped 0.1 percentage point, primarily reflecting a $3.9 million distressed-customer inventory charge.
- Operating expenses were $72.9 million, including $2.0 million of property impairment. Higher operating income was offset at the bottom line by a higher tax provision ($23.1 million versus $10.6 million) and a $2.9 million debt-extinguishment loss. The tax increase reflected income levels, geographic earnings mix and discrete foreign tax-law events.
- Cash and cash equivalents were $391.1 million, down from $466.6 million at September 27, 2014. Working capital was approximately $1.0 billion. Operating cash use reflected a $55.2 million decrease in accounts payable and a $17.0 million increase in inventory; management cited $68.2 million of cash generated from net income excluding non-cash items, more than offset by operating asset and liability changes.
- Capital expenditures were $28.7 million. Investing cash use was $27.8 million; financing cash use was $41.5 million. Cash declined by $75.5 million during the quarter.
- Debt totaled approximately $490.3 million at quarter-end, comprising $63.4 million short-term and $426.9 million long-term debt, down from approximately $544.1 million at September 27, 2014. The company redeemed $100 million of senior notes for $105.3 million including premium and accrued interest.
Changes, outlook and material matters
- Revenue growth reflected customer program acquisitions in prior periods and stronger existing-program demand and new program wins in industrial, defense and medical; optical-product demand supported communications growth.
- Sanmina extended the maturity of its $40 million secured loan from July 2015 to December 2017 and reduced its interest rate by 0.75 percentage point. A fixed-charge coverage covenant applies only if specified rating or liquidity triggers occur; none existed at quarter-end. The company reported covenant compliance.
- Liquidity sources included $391.1 million cash, $217.9 million available under the $300 million asset-backed revolver after letters of credit, and $74 million of available foreign short-term facilities. Management said resources and expected operating cash flow should meet working-capital needs for the next 12 months. It was marketing surplus real estate listed at approximately $65 million; sale proceeds and timing are not assured.
- No specific revenue or earnings guidance was provided. Management expects gross margins to fluctuate with volume, product mix and other factors, and identifies profitable growth, especially in CPS, as a strategic objective.
- GT Advanced Technologies filed for bankruptcy in October 2014. Sanmina reserved $3.9 million for potentially unrecoverable inventory in Q1 FY2015; it had deferred $1.9 million of revenue in Q4 FY2014 over collectability concerns. The company also reported environmental, litigation and other contingency reserves of $21.2 million, and an $86.9 million liability for uncertain tax positions.
- A foreign tax authority’s assessment concerning the company’s 2006 tax positions, including transfer pricing, is being contested; the outcome is uncertain and could materially affect the financial statements. Other tax audits are ongoing. Management noted potential for a further valuation-allowance release in FY2015 if earnings evidence supports it, but gave no assurance.
- Key risks include customer concentration (the ten largest customers generated 50.0% of sales), competitive pricing, customer cancellations or insolvency, international and foreign-exchange exposure, supply-chain disruption, and environmental and tax contingencies. No single customer accounted for at least 10% of Q1 FY2015 sales; one did in the prior-year quarter. Management reported disclosure controls were effective and no material quarter-specific change in internal control over financial reporting.
Investor verification priorities
- Track whether industrial, defense and medical program growth continues and whether customer concentration or end-market mix changes.
- Verify the recovery of operating cash flow, inventory levels, supplier-payment trends and cash-cycle metrics; cash-cycle days increased to 40 from 39 at the prior fiscal year-end.
- Assess the effect of distressed-customer exposures, including GT Advanced Technologies, on receivables, inventory and margins.
- Monitor debt reduction, revolver availability, property-sale proceeds and compliance with debt restrictions and any triggered financial covenant.
- Follow tax-audit developments, uncertain tax positions, valuation-allowance judgments and environmental or litigation exposure.