Business context and reporting period
Sanmina Corporation filed this unaudited Form 10-Q for its third quarter and first nine months of fiscal 2019, ended June 29, 2019. The company provides integrated manufacturing solutions, components, products and related services to OEMs. Its businesses are Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS); IMS is its sole reportable segment.
Financial performance and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $2.027 billion | $1.813 billion | $6.342 billion | $5.234 billion |
| Gross profit / margin | $147.8 million / 7.3% | $118.5 million / 6.5% | $450.2 million / 7.1% | $342.7 million / 6.5% |
| Operating income / margin | $67.4 million / 3.3% | $47.1 million / 2.6% | $223.0 million / 3.5% | $109.6 million / 2.1% |
| Net income (loss) | $42.9 million | $34.0 million | $121.8 million | $(96.3) million |
| Diluted earnings (loss) per share | $0.60 | $0.47 | $1.70 | $(1.37) |
For the nine months, operating cash flow was $192.8 million, investing cash flow was $(98.5) million, and financing cash flow was $(100.0) million. Capital expenditures were $102.0 million; operating cash flow less capital expenditures was approximately $90.7 million. Cash and cash equivalents were $414.3 million at quarter-end, versus $419.5 million at fiscal 2018 year-end. Working capital was approximately $1.17 billion, compared with $612.5 million.
At June 29, 2019, the balance sheet reported $154.6 million of short-term debt and $351.5 million of long-term debt. Cash less these reported debt balances was approximately $91.8 million. The company had $121 million drawn and $8 million in letters of credit under its revolver; $571 million remained available, net of borrowings and letters of credit. It also had $72 million of available foreign short-term borrowing facilities. The company reported compliance with debt covenants and said it expected available liquidity and operating cash generation to cover requirements for at least the next 12 months.
Material changes versus comparable periods
- Q3 sales rose 11.8% year over year; nine-month sales rose 21.2%. Management attributed growth primarily to stronger demand and improved availability of supply-constrained parts. Industrial, medical, defense and automotive sales rose 19.0% in Q3 and 29.0% for the nine months. Communications Networks sales rose 9.4% and 14.2%, respectively. Cloud Solutions sales declined 13.6% in Q3 but increased 8.7% for the nine months.
- Q3 gross margin improved to 7.3% from 6.5%. IMS margin was 6.4% versus 5.7%, and CPS was 11.2% versus 8.4%. Management cited higher revenue, operating efficiencies and, for CPS, benefits from plant closures. It noted that nine-month IMS and CPS gross margins of 6.3% and 10.0% remained below target-model expectations at current revenue levels.
- Nine-month net income improved from a loss to profit, but the 2018 comparison included a $162 million non-cash tax charge related to the U.S. Tax Cuts and Jobs Act. FY2019 nine-month tax expense was $69.5 million, including GILTI; the reported effective tax rate was 36% versus 202% in the prior-year period.
- ASC 606 adoption in Q1 FY2019 changed the timing of revenue recognition for most manufacturing and certain other contracts from shipment or delivery to recognition over time. Adoption increased beginning retained earnings by $28 million and created a $376 million contract asset while reducing inventory by $350 million. The company reported $387.3 million of contract assets at quarter-end. Prior-period figures were not restated, limiting comparability of revenue, inventory and working-capital measures.
- Operating cash flow increased to $192.8 million from $95.9 million. Inventory declined to $915.2 million from $1.374 billion, but accounts payable fell to $1.350 billion from $1.547 billion. The company sold $2.155 billion of receivables through sales programs during the nine months, versus $558 million in the prior-year period.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance was provided. Management expects gross margins to fluctuate with volumes, customer and product mix, capacity utilization, component availability, pricing, wages, materials costs, tariffs and operational efficiency.
- Management said the 2018 restructuring plan involving three facility closures or relocations was expected to continue through calendar 2019; severance and other cash payments were expected through year-end 2019. Nine-month restructuring expense across plans was $13.1 million. Further costs may arise for vacant facilities and environmental remediation.
- The company reported $37 million in reserves for environmental, warranty, litigation and other contingencies, excluding uncertain tax positions, and a $98 million liability for uncertain tax positions. It noted uncertainty that reserves will cover ultimate outcomes. Environmental proceedings include groundwater matters; a California labor class-action lawsuit had no reserve at quarter-end. The company intends to contest the claims.
- Customer concentration is significant: the ten largest customers represented 55% of Q3 sales and 54% of nine-month sales; one customer represented at least 10% of sales in each period. Other identified risks include tariffs and trade policy, component shortages and extended lead times, customer insolvency, foreign operations and currency exposure, and intense price competition.
- Disclosure controls and procedures were judged ineffective at quarter-end because of a previously identified material weakness in internal control over financial reporting. Management expected remediation by fiscal year-end, but the weakness would not be considered remediated until controls operated effectively and testing confirmed it.
- The company expected the fiscal 2020 lease-accounting standard to have a material effect on its consolidated balance sheet, but an immaterial effect on its income statement.
Important facts for investors to verify
- How much reported revenue growth reflects underlying demand versus ASC 606’s earlier, over-time revenue recognition, given prior periods were not restated.
- Whether margin improvement persists and whether IMS and CPS margins approach management’s target-model expectations.
- How operating cash flow and liquidity evolve, including dependence on receivables-sale programs and supplier payment terms.
- Debt repayment, revolver availability and compliance with financial covenants following the refinancing and secured-credit changes.
- Progress in remediating the material weakness, and developments in environmental, labor and uncertain-tax matters.