Sanmina Corporation (SANM) — Q3 FY2020 Form 10-Q
Reporting period: Third quarter ended June 27, 2020; fiscal 2020 is a 53-week year. Comparisons are with the quarter ended June 29, 2019 unless stated otherwise. Sanmina provides electronics manufacturing, components, products and related services through IMS and CPS; IMS is its sole reportable segment.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Change |
|---|---|---|---|
| Net sales | $1.655B | $2.027B | Down 18.4% |
| Gross profit / margin | $131.5M / 7.9% | $147.8M / 7.3% | Margin up 0.6 percentage points |
| Operating income | $64.1M | $67.4M | Down 4.9% |
| Net income | $44.9M | $42.9M | Up 4.6% |
| Diluted EPS | $0.64 | $0.60 | Up 6.7% |
For the first nine months, sales were $5.085B, down 19.8%; gross profit was $373.8M, down 17.0%; operating income was $145.7M, down 34.7%; and net income was $88.1M, down 27.6%. Nine-month diluted EPS was $1.23 versus $1.70.
Q3 sales declined across all end markets: industrial, medical, defense and automotive down 15.8%; communications networks down 19.1%; and cloud solutions down 31.2%. IMS revenue was $1.342B versus $1.710B; CPS revenue was $312.3M versus $317.2M.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $220.7M, compared with $192.8M a year earlier. Capital expenditures were $54.8M; investing cash outflow was $83.9M.
- Cash and cash equivalents were $1.117B at June 27, 2020, up from $454.7M at September 28, 2019; short-term investments were $30M. The cash increase primarily reflected a $650M revolver draw made as a precautionary liquidity measure.
- Reported debt totaled approximately $1.007B, including $650M drawn on the $700M revolving facility. The company reported $42M of revolver availability after borrowings and letters of credit, plus $72M available under foreign short-term facilities. Debt covenants were met.
- Working capital was approximately $1.3B. Management said available liquidity and expected operating cash flows should cover working-capital and other liquidity needs for at least 12 months, while warning that worsening demand or collections could reduce operating cash flow and require additional financing.
- Nine-month financing cash flow was $525.7M, including the revolver borrowing and $100.1M of share repurchases. The board-authorized repurchase capacity remaining was approximately $213M at quarter-end.
Material changes and management commentary
- Management attributed lower sales principally to COVID-19 disruptions from Q2 onward—including component shortages, facility closures, operating restrictions and customer disruption—and to unusually strong 2019 sales as component availability recovered from prior shortages.
- Gross margin improved despite lower sales. Management cited cost controls, lower U.S. self-insured medical claims, government subsidies at certain foreign subsidiaries and benefits from prior CPS plant closures. It cautioned that the same level of government subsidy is not expected in future quarters.
- COVID-19 also reduced staffing and logistics capacity and constrained which products could be manufactured. Management expected the pandemic to continue negatively affecting business, results and financial condition for the foreseeable future.
- The company recorded a $7M goodwill impairment for an oil-and-gas reporting unit and a $2M long-lived-asset impairment in Q2, tied to weaker oil-and-gas conditions. Nine-month restructuring expense was $20.3M; the company expected further actions in Q4 and estimated total FY2020 charges under its principal restructuring plan of approximately $13M–$20M.
- Two small automotive customers filed for bankruptcy in Q3; the reported impact was immaterial. Sales to the ten largest customers represented 57% of Q3 revenue, and one customer accounted for at least 10%.
Risks, contingencies and other items
- Key risks include prolonged pandemic effects, customer and supplier financial distress, supply-chain interruptions, demand weakness in automotive and oil and gas, pricing pressure, foreign operations and currency exposure, and reliance on a concentrated customer base.
- Environmental, employment, tax and commercial disputes remain. The company reported $35M of reserves for environmental, warranty, litigation and other contingencies, excluding uncertain tax positions; it said the reserves may not be sufficient. It could not reasonably estimate a loss range for the specified legal matters.
- The Orange County Water District groundwater case was scheduled for a multi-phase trial beginning April 2021 after COVID-related postponement. Sanmina intends to contest the claims. The company also disclosed California employment actions, Brazilian tax proceedings and a dispute with former customer Dialight.
- Uncertain tax-position liabilities were $102M. Interest-rate swaps hedged $350M of variable-rate exposure and had a negative fair value of $31M; management said an immediate 10% interest-rate change would not significantly affect results.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and margins recover as pandemic restrictions, supply shortages and customer demand evolve, especially in automotive, communications and cloud markets.
- How much of reported liquidity is supported by the precautionary revolver borrowing, and whether operating cash flow can sustain liquidity if customer collections or demand weaken.
- Whether restructuring actions, temporary subsidies and reduced medical claims continue to influence margins, and whether additional impairment charges arise.
- Potential customer concentration, bankruptcy-related credit or inventory exposure, and the performance of receivables-sale programs whose funding is uncommitted.
- Developments in environmental, employment, tax and Dialight proceedings, including whether recorded reserves remain adequate.