Sanmina Corporation (SANM) — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended April 1, 2023. Comparative 2022 financial results in this filing are restated. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and results
Sanmina provides integrated manufacturing solutions, components, products and related services to OEMs in industrial, medical, defense and aerospace, automotive, communications networks and cloud markets. IMS is its only reportable segment; CPS combines multiple smaller operating segments.
- Q2 net sales were $2.320 billion, up 21.1% year over year. Management cited improved materials availability, strong demand and a new telecommunications program, along with new programs and ramps in industrial, medical, defense and automotive markets.
- Q2 gross profit was $191.2 million, with an 8.2% gross margin versus 7.6% a year earlier. Higher volume supported margin improvement; CPS also benefited from improved operating efficiencies in the six-month comparison.
- Q2 operating income was $120.6 million, compared with $76.3 million. Net income attributable to common shareholders was $79.6 million, versus $48.6 million; diluted EPS was $1.33 versus $0.76.
- For the first six months, sales were $4.676 billion, up 27.4%; gross profit was $386.6 million, operating income $249.0 million, and common-shareholder net income $171.6 million. Diluted EPS was $2.87 versus $1.60.
- Q2 sales rose in both end-market groupings: industrial, medical, defense and automotive increased 17.6%; communications networks and cloud infrastructure increased 26.6%. The ten largest customers represented 49% of Q2 sales; one customer accounted for at least 10% of sales, compared with two customers in the year-ago quarter.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $718.2 million at April 1, 2023, up from $529.9 million at October 1, 2022. This included $171 million held by the India joint venture and unavailable for general corporate purposes.
- Current assets were $4.035 billion and current liabilities $2.255 billion, implying working capital of approximately $1.78 billion and a current ratio of about 1.8x.
- Carrying value of debt was approximately $338.3 million: $17.5 million current and $320.8 million long-term. The term loan’s principal balance was approximately $341 million. No revolving-credit borrowings were outstanding; $13 million of letters of credit left $787 million available under the $800 million facility. The company reported compliance with debt covenants at quarter-end.
- For the six months, operating cash flow was $101.8 million, versus $147.3 million in the restated prior-year period. Capital expenditures were $101.0 million versus $52.7 million. Cash flow from financing was $185.8 million, including approximately $216 million of proceeds from the India joint venture investment.
- Management said existing resources and expected operating cash flow should cover working-capital needs for at least 12 months, while warning that lower demand, customer collection problems or unrecovered inventory obligations could materially reduce cash generation.
- Receivables sales were substantially higher: approximately $1.7 billion during the six months, compared with $371 million a year earlier. Availability is subject to bank or customer approval and is not assured. The filing’s note reports $12 million of discounts on receivables sold, while MD&A describes discounts as not material; investors should reconcile this disclosure.
Material changes, restatement and unusual items
- The company restated comparative 2022 results following an Audit Committee-directed investigation into unsupported adjustments and inadequate updates to contract cost estimates in one division. Restatement adjustments primarily affected revenue, cost of sales, contract assets and inventory. Q2 2022 gross profit was reduced by $6.0 million, net income by $4.6 million and diluted EPS by $0.07; six-month 2022 net income was reduced by $7.1 million. The broader restatements also covered prior fiscal years and the first quarter of FY2023.
- Management concluded disclosure controls were not effective as of April 1, 2023, citing material weaknesses in the control environment, finance staffing and review of contract cost estimates. Management described planned staffing, reporting-line and oversight changes; remediation is not complete until controls operate effectively for a sufficient period and are tested.
- The October 2022 India transaction brought in approximately $216 million for a 50.1% interest in Sanmina SCI India Private Limited. Sanmina retained 49.9% but continues to consolidate the venture because it has contractual control over significant ordinary-course decisions; the venture’s $171 million cash balance is restricted to its operations.
- Q2 tax provision was $25.8 million, or 23% of pretax income, versus 31% a year earlier. Favorable discrete tax items included stock-compensation benefits and tax-reserve adjustments. The six-month effective rate was 21%, including an $8 million benefit from release of certain foreign tax reserves.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management cited ongoing supply-chain and inflation risks, customer demand and forecast variability, pricing pressure, capacity utilization and product mix as factors that may affect future results.
- The company reported a court decision finding it liable for certain past groundwater investigation costs in an environmental matter. Additional losses for future remediation and other costs are probable, and additional losses could be material, but the company said it could not estimate an amount or range.
- Sanmina and its SCI subsidiary received additional DOJ Civil Investigative Demands under the civil False Claims Act concerning government-related business dating back to 2010. No complaint had been filed; the company said a loss was not then considered probable or estimable.
- In the Dialight dispute, Dialight alleges damages exceeding $200 million. Sanmina says the claim is overstated and subject to a contractual liability limit of less than $2 million; a court dismissed Dialight’s willful-misconduct claim in March 2023. The case remains pending.
- The company filed this 10-Q after the May 16, 2023 deadline. It disclosed a technical credit-agreement default that was cured by filing within the stated cure period, and a Nasdaq notice concerning late filing. Sanmina said it believed the filings restored Nasdaq compliance.
- Other principal risks include customer concentration, international operations and currency exposure, tariffs, customer order cancellations, component shortages, litigation, and access to receivables-sale and credit-facility liquidity.
Important facts for investors to verify
- Progress and independent evidence of remediation of the material weaknesses, and whether further contract-estimate adjustments or restatements are needed.
- The eventual cost and timing of the environmental matter, and developments in the DOJ investigation and Dialight litigation.
- Underlying operating cash generation and dependence on receivables sales, including the inconsistent disclosure about factoring discounts.
- Availability of the India joint venture’s cash for Sanmina’s general use, and the effect of the venture’s noncontrolling interest on reported earnings.
- Whether recent sales and margin gains persist as supply constraints, customer demand, product mix and pricing change.