Sanmina Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 29, 2018 (52 weeks); filed November 15, 2018. Sanmina provides global electronics manufacturing, components, products, logistics, repair and engineering services to OEMs. Integrated Manufacturing Solutions (IMS) generated about 80% of revenue; Components, Products and Services (CPS) generated about 20%.
Financial performance and liquidity
- Revenue: $7.11 billion, up 3.5% from $6.87 billion in FY2017. Industrial, medical, defense and automotive sales rose 8.4%; communications networks rose 1.3%; cloud solutions fell 9.5%.
- Profitability: Gross profit was $463.8 million and gross margin 6.5%, down from $519.9 million and 7.6%. Operating income was $119.4 million, with a 1.7% margin, versus $226.5 million and 3.3%. Net loss was $95.5 million, or $1.37 per diluted share, compared with net income of $138.8 million, or $1.78 per diluted share.
- Segment margins: IMS gross margin declined to 6.0% from 7.2%; CPS declined to 8.1% from 8.9%.
- Cash flow: Operating cash flow was $156.4 million, down from $251.0 million. Capital expenditures were $118.9 million. Cash and cash equivalents ended at $419.5 million, compared with $406.7 million.
- Working capital: Inventory increased to $1.374 billion from $1.052 billion. Inventory turns fell to 5.5 from 6.2, and days inventory on hand increased to 67 from 59. Cash-cycle days rose to 48 from 43.
- Debt and liquidity: Total debt was approximately $607.7 million, including $375 million of secured notes due June 2019, classified as current, and $215 million borrowed under the revolving credit facility. The company had $277 million of revolver availability, plus $420 million cash; it was in compliance with debt covenants at year-end. Management said liquidity should cover at least the next 12 months and intended to refinance the notes.
Material changes and unusual items
- The $95.5 million net loss included approximately $161 million of non-cash tax expense from the U.S. Tax Cuts and Jobs Act, primarily the remeasurement of deferred tax assets. The effective tax rate was 197.9%, versus 35.0% in FY2017.
- Operating results were also reduced by $29.1 million of restructuring costs and a $30.6 million goodwill impairment in CPS. The impairment reduced goodwill in the affected operating segment to zero.
- Sanmina recorded an $11 million out-of-period reduction in FY2018 income related to errors in long-term contract accounting in one CPS division. The reported fourth-quarter pre-tax correction was $12.5 million; the filing says the prior-period and full-year impacts were immaterial. The correction was associated with a material weakness in controls.
- Fourth-quarter revenue was $1.876 billion, gross margin 6.5%, operating income $9.8 million and net income $0.8 million. The quarter included the goodwill impairment and the long-term contract adjustment.
- Sanmina repurchased 5.0 million shares for approximately $146 million in open-market purchases during FY2018. About $108 million remained authorized, subject to debt-agreement limits.
Outlook, commentary and risks
- Management said component supply constraints were expected to continue through at least the first half of calendar 2019. FY2018 margins were pressured by parts shortages, delayed program ramps, design changes, yield issues, unfavorable mix and under-absorption of labor and overhead.
- No specific revenue or earnings guidance was provided in the filing. Management expected existing liquidity and operating cash generation to meet working-capital needs for at least 12 months, but noted this depended on demand, inventory, receivable collections and continued access to receivables-sale funding.
- Customer concentration is significant: the ten largest customers represented 53.0% of sales, and Nokia accounted for at least 10%. Customer orders generally lack firm minimum-volume commitments and may be canceled, changed or delayed.
- Key risks include reliance on a small number of customers and communications markets, component shortages and cost increases, trade tariffs and foreign-exchange exposure, international operating risks, and pressure to pass costs through to customers.
- The auditor concluded that the financial statements fairly presented the company’s results, but reported ineffective internal control over financial reporting because of a material weakness in monitoring estimates for certain long-term contracts. Management expected remediation before fiscal 2019 ended; remediation was not yet complete at filing.
- Contingencies include a foreign agency notice of intent to seek up to $23 million for alleged goods-and-services-tax noncompliance, for which no reserve was recorded; environmental matters, including the remanded Orange County groundwater case; and ongoing Brazilian tax proceedings. Recorded reserves for environmental, warranty, litigation and other contingencies were $35 million, excluding uncertain tax positions.
Most important facts for investors to verify
- Progress and effectiveness of the planned remediation of the long-term-contract accounting control weakness, and whether further adjustments arise.
- Refinancing or repayment of the $375 million secured notes due June 2019, including the effect on revolver availability and covenant headroom.
- Whether component shortages ease as expected and whether IMS and CPS margins recover from FY2018 levels.
- Inventory conversion, receivables collections and cash generation, including the company’s reliance on receivables-sale programs.
- Developments in the unreserved potential $23 million tax claim and environmental and other legal contingencies.