Sanmina Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended September 28, 2019 (52 weeks). The filing also reports unaudited fourth-quarter results. Sanmina provides global electronics manufacturing, components, products, engineering, logistics and repair services; IMS contributed about 80% of FY2019 revenue and CPS about 20%.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $8.234 billion | $7.110 billion |
| Gross profit / margin | $591.9 million / 7.2% | $463.8 million / 6.5% |
| Operating income / margin | $286.1 million / 3.5% | $119.4 million / 1.7% |
| Net income (loss) | $141.5 million | $(95.5) million |
| Diluted EPS | $1.97 | $(1.37) |
| Cash from operations | $383.0 million | $156.4 million |
- FY2019 sales rose 15.8%, which management attributed mainly to stronger demand across end markets and improved availability of supply-constrained components. Industrial, medical, defense and automotive sales increased 24.2%; communications networks rose 8.3%; cloud solutions rose 1.6%.
- Gross margin improved year over year. IMS margin was 6.4% versus 6.0%; CPS margin was 10.0% versus 8.1%, supported by operating improvements and benefits from prior plant closures. Management said both segment margins remained below target-model expectations at current revenue levels.
- FY2019 operating cash flow was $383.0 million. Capital expenditures were $134.7 million; investing cash outflow was $127.6 million. Financing cash outflow was $220.2 million, including debt repayment and share repurchases.
- At year-end, cash was $454.7 million, working capital was about $1.24 billion, and total debt was approximately $385.3 million, including the term loan and non-interest-bearing notes. The company had no revolver borrowings, $692 million available under its $700 million revolver after letters of credit, and $69 million available under foreign short-term facilities. It reported covenant compliance.
- Accounts receivable sales increased to about $2.7 billion in FY2019 from about $900 million in FY2018. This provided cash classified as operating cash flow; the program is uncommitted and subject to bank or customer acceptance.
Fourth-quarter results
FY2019 Q4 sales were $1.892 billion, gross profit $141.7 million (7.5% margin), operating income $63.1 million (3.3% margin), and net income $19.8 million, or $0.27 diluted EPS. Compared with FY2018 Q4, sales were slightly higher ($1.876 billion), while gross margin increased from 6.5% and operating income increased from $9.8 million. FY2018 Q4 included a $31 million goodwill impairment and a $12.5 million pre-tax adjustment for prior-period contract-accounting errors.
Material changes and unusual items
- Sanmina adopted ASC 606 in FY2019. Most revenue is now recognized over time as products are manufactured or services performed, versus predominantly at shipment or delivery previously. Adoption increased opening retained earnings by $28 million and recorded a $376 million contract asset while reducing opening inventory by $350 million. This limits direct comparability with prior periods.
- FY2018’s net loss included approximately $161 million of non-cash tax expense from U.S. tax reform and a $31 million goodwill impairment. FY2019 tax expense was $104.1 million, a 42.4% effective rate; a tax-related restructuring transaction contributed $22 million of deferred tax expense.
- FY2019 restructuring costs were $13.8 million. After year-end, the company announced a right-sizing plan expected to generate $10–$20 million of charges, primarily cash severance, in the first half of FY2020.
- Sanmina refinanced its $375 million secured notes due 2019 with a $375 million term loan due 2023 and expanded revolving commitments to $700 million. The revolver and term loan mature November 2023; obligations are secured by substantially all company and guarantor assets, subject to exceptions.
- The company repurchased $7 million of shares in FY2019 and had $101 million remaining under its existing authorization at year-end. After year-end, the board authorized an additional $200 million, bringing total authorization to $301 million.
Outlook, risks and contingencies
Management provided no specific revenue or earnings guidance in the supplied filing. It stated that existing cash, credit availability and operating cash generation should cover working-capital needs for at least the next 12 months. The company expects FY2020 lease-accounting adoption to add approximately $55–$65 million of right-of-use assets and lease liabilities; it did not expect a material impact on lease expense presentation.
- Key operating risks include intense EMS pricing competition, volatile customer demand and order cancellations, component shortages and lead times, labor and materials costs, manufacturing utilization and execution of new-program ramps.
- Customer and geographic concentration are meaningful: the ten largest customers represented 54.2% of FY2019 sales, one customer exceeded 10%, and about 80% of sales came from products manufactured outside the U.S. Nokia was at least 10% of sales in FY2019, FY2018 and FY2017.
- Tariffs, especially those involving U.S.–China trade, could pressure margins and cash flow if costs are not recovered promptly or fully. Management did not expect the net tariff impact, after customer recovery, to be material at the time of filing.
- Contingencies include environmental matters, Brazilian tax proceedings, and California employment-related lawsuits. The Orange County groundwater case was remanded for further proceedings, with trial scheduled for September 2020. Reserves for environmental, warranty, litigation and other contingencies totaled $36 million; outcomes and adequacy of reserves remain uncertain.
- Uncertain tax positions were recorded at $106 million. The company also reported an underfunded defined-benefit pension position of $44 million. Foreign cash repatriation may incur tax, and customer receivables, inventory exposure and availability of receivables-sale funding affect liquidity.
- A material weakness identified in FY2018 related to a management review control was reported as remediated by September 28, 2019. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How much of FY2019 sales and operating-cash-flow improvement reflects sustainable demand and operations versus working-capital movements and receivables sales.
- Whether IMS and CPS margins can improve toward management’s target expectations, and whether the FY2020 right-sizing plan produces the intended savings.
- The effect of ASC 606 timing and contract assets on reported revenue, cash conversion and comparison with prior periods.
- Customer concentration, tariff recovery, supply availability and the company’s ability to manage cancellations and inventory obligations.
- Future debt service, revolver covenant headroom, access to uncommitted receivables programs, and potential cash costs from tax, environmental, employment and other legal matters.