Sanmina Corporation — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended March 30, 2024. Sanmina provides integrated manufacturing, components, products, repair and related services, primarily to OEMs. IMS is its sole reportable segment; CPS comprises multiple operating segments.
Financial results
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Net sales | $1.835 billion | $2.320 billion | $3.709 billion | $4.676 billion |
| Gross profit / margin | $154.8 million / 8.4% | $191.2 million / 8.2% | $315.6 million / 8.5% | $386.6 million / 8.3% |
| Operating income / margin | $76.0 million / 4.1% | $120.6 million / 5.2% | $163.5 million / 4.4% | $249.0 million / 5.3% |
| Net income attributable to common shareholders | $52.5 million | $79.6 million | $109.6 million | $171.6 million |
| Diluted EPS | $0.93 | $1.33 | $1.91 | $2.87 |
Q2 sales declined 20.9% year over year and six-month sales declined 20.7%. Management attributed the decline mainly to customers working through finished-goods inventory, particularly in telecommunications; new program wins partly offset the decrease. Q2 gross margin improved modestly, while operating income and earnings fell substantially as lower volume coincided with higher SG&A and restructuring expense. Q2 SG&A was $69.2 million, versus $63.4 million, primarily due to higher incentive compensation. Restructuring expense was $3.3 million, versus $0.8 million.
For the six-month period, Communications Networks and Cloud Infrastructure sales fell 37.8% to $1.228 billion; Industrial, Medical, Defense and Aerospace, and Automotive sales fell 8.1% to $2.482 billion. IMS sales were $2.950 billion versus $3.846 billion; CPS sales were $759.6 million versus $829.6 million. IMS gross margin improved, while six-month CPS margin declined due to lower volume and unfavorable mix.
Cash flow, debt and liquidity
- Six-month operating cash flow was $198.3 million, compared with $101.8 million a year earlier. Capital expenditures were $63.8 million, compared with $100.0 million.
- Cash and cash equivalents were $650.9 million at March 30, down from $667.6 million at September 30, 2023. Working capital was $1.8 billion. The cash balance includes $210 million held by the Indian subsidiary and unavailable for general corporate purposes.
- Debt comprised a $321.4 million term loan, net of issuance costs, including $17.5 million current and $303.9 million long-term. No revolving-credit borrowings were outstanding; $787 million was available after letters of credit. Foreign short-term facilities had $71 million available and undrawn.
- The company repaid $17.2 million of borrowings and used $133.4 million for common-stock repurchases and related withholding payments during the six months. A further $172 million remained authorized for repurchases. Debt covenants were met.
- Receivables sales totaled approximately $797 million during the six months, versus $1.7 billion in the prior-year period. The programs are subject to bank or customer approval and availability.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the filing. Management expects near-term revenue-growth headwinds as customers absorb inventory, while citing macroeconomic uncertainty, inflation, supply-chain conditions, currency movements, interest rates and geopolitical conflicts. Management believes existing liquidity and operating cash generation should cover working-capital needs for at least 12 months, subject to business conditions.
- Management says supply-chain constraints have eased but some delays and shortages may persist. Margin performance remains sensitive to utilization, customer and product mix, pricing, inventory provisions, cost recovery and execution on long-term contracts.
- Disclosure controls and procedures were deemed ineffective at March 30, 2024 because of material weaknesses in a division’s control environment, finance staffing and review of quarterly contract cost estimates. The weaknesses contributed to prior-period restatements and immaterial misstatements. Remediation actions are underway; management had not formally concluded remediation.
- Environmental contingencies, warranty, litigation and other matters carried estimated reserves of $40 million. In an Orange County groundwater case, the company recorded an estimated loss for past costs; additional losses are probable and could be material, but the amount cannot be estimated. The Dialight case is scheduled for trial in July 2024; Dialight seeks more than $200 million, while Sanmina disputes the claims and asserts a contractual liability cap below $2 million.
- The DOJ has issued civil investigative demands concerning SCI government-contract matters; no complaint had been served, and a loss was not considered probable or estimable. California employee class and representative actions are also pending; the company cannot estimate possible losses for the pending matters described.
- The IRS asserts an approximately $8 million tax underpayment relating to a proposed disallowance of a $503 million fiscal 2009 worthless-stock deduction. Sanmina disputes the position; if upheld, the impact from reduced tax-loss carryforwards and related tax and interest could be material. The company also expects to evaluate the potential impact of global minimum-tax rules beginning in fiscal 2025.
Investor verification priorities
- Track whether demand stabilizes, especially in communications and cloud markets, and whether customer inventory digestion continues to pressure sales.
- Assess whether margin improvement can persist despite lower volumes, mix changes, restructuring costs and higher operating expenses.
- Monitor remediation and independent testing of the material weaknesses in contract-estimate controls, and check for subsequent corrections or restatements.
- Review developments in the Orange County environmental case, Dialight litigation, DOJ inquiry and employee actions, including any changes to reserves or loss estimates.
- Follow the IRS audit dispute, potential NOL effects and the company’s exposure to future tax-law changes.
- Evaluate usable liquidity separately from cash restricted to the Indian subsidiary, and consider reliance on receivables sales, customer collections and supplier payment terms.