Sanmina Corporation — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018; comparisons are to periods ended April 1, 2017. Sanmina provides integrated manufacturing solutions and components, products and services. IMS accounted for about 80% of first-half revenue; CPS comprises several businesses.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $1,675.6M | $1,682.3M | $3,420.4M | $3,402.2M |
| Gross profit / margin | $114.7M / 6.8% | $133.2M / 7.9% | $224.2M / 6.6% | $265.4M / 7.8% |
| Operating income | $48.8M | $58.2M | $62.6M | $116.8M |
| Net income (loss) | $24.6M | $31.7M | ($130.3M) | $76.6M |
| Diluted EPS | $0.33 | $0.41 | ($1.83) | $0.99 |
- Q2 sales declined 0.4% year over year, while first-half sales increased 0.5%. Q2 communications networks sales rose 2.8%; embedded computing and storage fell 5.3%.
- Q2 gross margin fell to 6.8% from 7.9%. Management attributed the decline to unfavorable program mix, parts shortages, under-absorbed costs, new-program ramp and yield issues. IMS margin was 6.3% versus 7.3%; CPS was 9.1% versus 10.2%.
- First-half net loss reflects a provisional $162M non-cash tax charge related to the U.S. Tax Cuts and Jobs Act. First-half tax expense was $183.1M, or 347% of pretax income.
- Cash from operations was $34.1M versus $142.6M in the prior-year half. Capital expenditures were $71.0M, implying operating cash flow less capex of approximately negative $36.9M. Cash declined $1.4M to $405.3M.
- Working capital was approximately $953M. Inventory was $1,122.0M, up from $1,051.7M at fiscal year-end. Cash-cycle days increased to 50 from 43.
- Debt was approximately $637.7M: $241M drawn on the revolving facility, $375M senior secured notes due 2019, and $21.7M of non-interest-bearing promissory notes. The company reported $250M of remaining revolver availability, net of borrowings and letters of credit, and was covenant-compliant.
Material changes, outlook and risks
- In February 2018, Sanmina amended its secured revolver, increasing commitments to $500M and extending the stated term to February 2023, subject to a liquidity condition ahead of the June 2019 notes maturity.
- The company repurchased 3.8M shares for $109M in the first half; $144M remained authorized, subject to debt-agreement limits.
- A new receivables sale program allows up to $140M of qualifying receivables to be outstanding. Receivables sold under all programs totaled $337M in the first half versus $216M a year earlier; $165M of sold receivables remained uncollected at quarter-end.
- A restructuring plan covering closure and/or relocation of three manufacturing facilities is expected to cost $25M net of up to $10M reimbursement and affect approximately 2,900 employees. Actions extend through calendar 2019; management expects some CPS savings beginning in Q4 FY2018. Q2 restructuring expense was a credit of $8.6M, including the reimbursement; first-half expense was $15.0M.
- Management believes available cash, credit facilities, receivables programs and operating cash will meet working-capital needs for at least 12 months. No quantified revenue or earnings guidance is provided in the filing.
- Management said parts shortages and delayed program ramps had hurt IMS revenue and margins; continued margin variability is possible. Customer concentration is material: the ten largest customers represented 53% of Q2 sales, and one customer represented at least 10% of Q2 sales. Supply constraints, demand and mix, customer cancellations, foreign operations and currency exposure are notable risks.
- Controls and procedures were deemed ineffective because of a material weakness in a business performance review control at one significant division. It caused an immaterial out-of-period adjustment to cost of sales and accrued liabilities, but no material financial-statement misstatement was identified. Management expected remediation and testing before fiscal year-end; remediation was not yet complete.
- Contingencies include a foreign agency’s notice of intent to seek up to $23M for alleged goods-and-services-tax noncompliance; no formal claim had been filed and no reserve was recorded. Reserves for environmental, warranty, litigation and other contingencies totaled $38M. The company also reported $111M of liabilities for uncertain tax positions.
- Revenue standard adoption is planned for FY2019 and is expected to shift a significant portion of revenue recognition from delivery-based recognition to recognition over time. Sanmina said initial adoption could materially affect the financial statements, though it did not expect a material effect on revenue or gross profit on a rollover basis afterward.
Important facts for investors to verify
- Whether gross margins recover as parts availability, program ramps, yields and capacity utilization improve.
- The final Tax Act accounting impact and whether the provisional $162M charge changes; also monitor future tax cash effects and uncertain tax positions.
- Progress and tested effectiveness of remediation for the material weakness before fiscal year-end.
- Restructuring execution, employee impacts, reimbursement collection and delivery of expected CPS savings.
- Working-capital and cash conversion trends, including inventory, receivables sales, and the ability to fund capex and repurchases while managing 2019 debt maturity.
- Developments in the potential $23M tax claim and other environmental, litigation and customer-credit exposures.