Sanmina Corporation — Q2 FY2020 Form 10-Q
Reporting period: Fiscal second quarter ended March 28, 2020; comparisons are with the quarter ended March 30, 2019. The six-month period ended March 28, 2020 is also compared with the corresponding 2019 period. Fiscal 2020 is a 53-week year, with the extra week in Q4.
Business context
Sanmina provides electronics manufacturing, components, products, repair, logistics and related services. Its reportable segment is Integrated Manufacturing Solutions (IMS); Components, Products and Services (CPS) comprises other businesses. IMS generated slightly more than 80% of first-half revenue. One customer accounted for at least 10% of sales, and the ten largest customers represented 55% of Q2 sales.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $1.591 billion | $2.127 billion | $3.431 billion | $4.315 billion |
| Gross profit | $107.4 million | $153.1 million | $242.3 million | $302.4 million |
| Gross margin | 6.8% | 7.2% | 7.1% | 7.0% |
| Operating income | $24.4 million | $78.1 million | $81.6 million | $155.7 million |
| Net income | $4.9 million | $40.9 million | $43.2 million | $78.8 million |
| Diluted EPS | $0.07 | $0.57 | $0.60 | $1.11 |
- Q2 sales fell 25.2% year over year; first-half sales declined 20.5%. Q2 operating income fell about 69%, and net income fell about 88%.
- Q2 operating margin was approximately 1.5%, versus 3.7% a year earlier; net margin was approximately 0.3%, versus 1.9%.
- Q2 sales decreased across all reported end markets: industrial, medical, defense and automotive fell 16.9%; communications networks fell 34.2%; cloud solutions fell 39.2%.
- For the first six months, operating cash flow was $156.9 million, versus $27.3 million; capital expenditures were $45.1 million, versus $73.0 million. Cash and cash equivalents increased to $1.115 billion from $454.7 million at September 28, 2019.
- Cash from operations included a $208.0 million reduction in accounts receivable, partly offset by a $185.2 million reduction in accounts payable. Sanmina sold $1.1 billion of receivables under its receivables programs during the half, compared with $1.4 billion a year earlier.
- At March 28, cash was $1.115 billion; current and long-term debt totaled approximately $1.012 billion, implying roughly $103 million of net cash. The company had $650 million drawn on its $700 million revolving facility, plus $8 million of letters of credit; $42 million was available net of borrowings and letters of credit. It reported covenant compliance.
- Working capital was approximately $1.2 billion, broadly unchanged from fiscal year-end. The cash cycle lengthened to 62 days from 52, while inventory turns decreased to 6.9 from 7.7.
Material changes, outlook and risks
- Management attributed lower sales to COVID-19 disruption and to unusually strong 2019 comparisons after component availability improved and the company fulfilled pent-up demand. Pandemic effects included supply interruptions, site closures, staffing restrictions, logistics constraints and lower customer demand.
- Management said near-term revenue and profitability were expected to be significantly below recent-quarter levels and that COVID-19 was likely to have a significant impact for the foreseeable future. No specific revenue, margin or EPS guidance was provided.
- Q2 gross margin was pressured by lower factory utilization, manufacturing inefficiencies and costs at under-utilized sites. Management expects margins to fluctuate with volume, product mix, capacity use, pricing pressure and pandemic-related disruptions.
- Operating expenses included $15.0 million of restructuring and other charges in Q2. The Q1 FY2020 restructuring plan is expected to cost $10 million to $20 million, primarily in cash severance; further actions were expected in the second half of FY2020.
- Sanmina recorded a $7 million goodwill impairment in its oil-and-gas-related CPS reporting unit following a sharp decline in commodity prices and a $2 million impairment of certain long-lived assets.
- The company borrowed $650 million under its revolver as a precautionary response to pandemic-related uncertainty. Management believed available cash and other liquidity sources would cover requirements for at least 12 months, while warning that weaker demand or collection problems could reduce operating cash flow and require additional financing.
- Key exposures include customer concentration and credit risk, component and logistics availability, factory utilization, foreign operations, tariffs, floating-rate debt, and reliance on uncommitted receivables-sale programs. Receivable sales are subject to bank or customer approval and may not always be available.
- Environmental, warranty, litigation and other contingency reserves were $34 million. The company also reported $105 million of liabilities for uncertain tax positions. Several legal matters remained unresolved; management said it could not reasonably estimate possible losses for the matters described.
- COVID-19 drove a $7 million goodwill impairment in the oil-and-gas-related reporting unit and increased uncertainty around estimates and customer and supplier solvency. The Orange County groundwater trial was postponed and was expected to begin around March 2021.
Most important facts for investors to verify
- Whether revenue, customer demand and manufacturing utilization stabilize as pandemic restrictions and supply-chain disruptions evolve.
- Whether operating cash generation remains adequate after considering receivable sales, customer collections, supplier payments and the longer cash cycle.
- Revolver availability, debt maturities, covenant headroom and the company’s capacity to service floating-rate borrowings; $42 million of revolver availability was reported at quarter-end.
- Whether restructuring charges, impairment exposure and other contingencies increase, and whether the $34 million reserve remains adequate.
- Customer concentration and credit quality, including potential effects of customer or supplier financial distress on receivables and inventory.