Sanmina Corporation (SANM) — Q3 FY2018 Form 10-Q
Reporting period: Third quarter ended June 30, 2018; year-to-date results cover the nine months ended June 30, 2018. Comparisons are against the quarter and nine months ended July 1, 2017.
Business context and financial performance
Sanmina provides electronics manufacturing, components, products and related services to OEMs across communications, industrial, defense and aerospace, medical, automotive and cloud markets. Integrated Manufacturing Solutions (IMS) generated about 80% of revenue. Sales are concentrated: the ten largest customers represented 52% of Q3 sales, and one customer accounted for at least 10%.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $1,813.4m | $1,711.4m | $5,233.8m | $5,113.6m |
| Gross profit | $118.5m | $130.7m | $342.7m | $396.1m |
| Gross margin | 6.5% | 7.6% | 6.5% | 7.7% |
| Operating income | $47.1m | $66.6m | $109.6m | $183.4m |
| Net income (loss) | $34.0m | $36.4m | $(96.3)m | $113.0m |
| Diluted EPS | $0.47 | $0.47 | $(1.37) | $1.45 |
Q3 revenue rose 6.0%, but gross profit fell 9.3% and operating income fell 29.3%. Medical sales increased 29.8% in the quarter; cloud solutions sales were up 4.2% in the quarter but down 10.6% year to date. IMS Q3 gross margin declined to 5.7% from 7.6%; CPS margin improved to 8.4% from 7.3%, though management said it remained below expectations. Q3 gross profit included a $4.8m benefit from reversing an acquisition-related contingent-consideration accrual.
Cash flow, debt and liquidity
- Cash was $404.8m at June 30, 2018, versus $406.7m at September 30, 2017. Working capital was about $0.6bn, down from $1.0bn.
- Nine-month operating cash flow was $95.9m, versus $201.7m a year earlier; capital expenditures were $97.5m, so operating cash flow was approximately $1.6m below capital spending. Inventory rose to $1,187.0m from $1,051.7m.
- Debt totaled approximately $626m, including $375m of senior secured notes due 2019 and $233m outstanding on the revolving facility. The balance sheet classified $611.3m as short-term debt, principally reflecting the notes’ 2019 maturity. Cash less total debt was approximately $221m.
- The amended revolver provides $500m of commitments; $258m was available after borrowings and letters of credit. A further $69m of foreign short-term facilities was available. The company reported compliance with debt covenants.
- Sanmina sold $558m of receivables through its receivables programs during the nine months; $217m of sold receivables remained uncollected at quarter end. These sales are included in operating cash flow.
Outlook, risks and unusual items
- Management said margins will continue to fluctuate with volumes, product mix, capacity utilization and other factors. Parts shortages, delayed program ramps, customer design changes, yield issues, freight premiums and under-absorption of labor and overhead pressured IMS results.
- A restructuring plan covering three facility closures or relocations and approximately 2,900 employees carries estimated costs of $25m after a reimbursement of up to $10m. Cash payments are expected through calendar 2019. A CPS plant closure completed in early July is expected to generate savings beginning in Q4 FY2018.
- A provisional $162m non-cash tax charge related to the U.S. Tax Cuts and Jobs Act drove the year-to-date net loss. The Q3 tax provision was $7.3m and included a $4.8m discrete tax benefit from a foreign tax settlement. The company said its Tax Act estimates remained subject to further analysis.
- Management believed existing resources and other liquidity sources would cover working capital needs for at least 12 months. It cautioned that weaker demand or higher delinquent or uncollectible receivables could reduce operating cash flow.
- Key exposures include customer and end-market concentration, component shortages and supply-chain disruption, pricing and mix pressure, international operations and currency risks, and potential tariffs. A foreign agency had indicated it might bring a claim of up to $23m relating to goods-and-services-tax compliance; no formal claim had been made and no reserve was recorded. The filing also describes environmental and other legal matters; recorded reserves for environmental, warranty, litigation and other contingencies were $34m.
- Management concluded disclosure controls were ineffective because of a material weakness in a business-performance review control at one significant division. The weakness had not caused a material financial-statement misstatement, but did result in an immaterial out-of-period adjustment. Enhanced procedures were operating in Q3; testing was underway, and management expected remediation before fiscal year-end.
Important facts for investors to verify
- Whether supply constraints, program ramps and IMS margin pressure improved after Q3, and whether the CPS closure delivered expected savings.
- Refinancing or repayment plans for the $375m notes due June 1, 2019, and compliance with the revolver’s liquidity condition and financial covenants.
- How inventory, receivables factoring and working-capital trends affect operating cash generation and liquidity.
- Final tax effects of the Tax Act, including any changes to the provisional $162m charge.
- Progress and testing results for remediation of the material weakness, and developments in the potential $23m tax-related claim and other contingencies.