Sanmina Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 28, 2019; comparative period ended December 29, 2018. Sanmina provides integrated electronics manufacturing, products and related services. IMS accounted for about 80% of revenue. Figures below are unaudited.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $1.840 billion | $2.188 billion | Down 15.9% |
| Gross profit / margin | $134.9 million / 7.3% | $149.3 million / 6.8% | Profit down; margin up |
| Operating income / margin | $57.2 million / 3.1% | $77.5 million / 3.5% | Down 26.3% |
| Net income | $38.3 million | $38.0 million | Up 1.0% |
| Diluted EPS | $0.53 | $0.54 | Down $0.01 |
| Operating cash flow | $21.2 million | $(78.4) million | Improved |
Cash and cash equivalents were $430.6 million at quarter-end, down $24.2 million from September 28, 2019. Working capital was approximately $1.3 billion. Capital expenditures were $28.5 million; cash used in investing activities was $28.0 million. Operating cash flow benefited from earnings and working-capital movements, including lower receivables and inventory; decreases in accounts payable and accrued liabilities and higher contract assets were cash uses.
Total debt was approximately $381.3 million, including the term loan and non-interest-bearing notes. The revolving facility had no borrowings and $8 million of letters of credit outstanding; the company reported $692 million available under it, net of borrowings and letters of credit. Sanmina was in compliance with debt covenants. The company also reported $72 million of available foreign short-term borrowing facilities.
Material changes and management commentary
- Sales declined in each reported end market: industrial, medical, defense and automotive fell 6.3%; communications networks fell 25.5%; cloud solutions fell 32.7%. Management attributed the overall decline partly to the prior-year recovery of pent-up demand after component shortages eased. Communications demand weakened, and cloud sales reflected a prior-year program ramp and lower set-top-box demand.
- Gross margin improved, which management attributed to operational efficiencies in IMS and CPS and, for CPS, benefits from prior plant closures. Operating income nevertheless fell as lower sales and higher restructuring expense weighed on results.
- The effective tax rate was 28%, versus 40% in the prior-year quarter. Management cited lower pretax income and the effect of a tax-related restructuring transaction effective in Q4 FY2019.
- Management said existing cash, credit availability, receivables programs and expected operating cash generation should meet working-capital needs for at least the next 12 months. This outlook depends on demand, collections and other liquidity conditions.
Outlook, risks and unusual items
- A company-wide restructuring plan adopted October 28, 2019 is expected to incur $10–$20 million of charges, primarily cash severance, mainly in the first half of FY2020. Approximately 1,450 employees are associated with the severance charges; $6.7 million was recorded under the plan in the quarter, and restructuring expense across all plans was $9.2 million.
- No specific revenue or earnings guidance is provided in the filing. Management expects gross margins to fluctuate with volume, product mix, capacity utilization, parts availability, pricing pressure, costs and the ability to pass tariffs through to customers.
- Customer concentration is significant: the ten largest customers represented 55% of sales, and two customers each represented at least 10%. Customer order changes, cancellations, credit problems and end-market weakness are key risks.
- Sanmina sold $538 million of receivables during the quarter through receivables-sale programs. The main RPA is uncommitted and subject to bank acceptance, so availability is not assured.
- Contingencies include environmental, warranty, litigation and other reserves of $35 million, plus a $108 million liability for uncertain tax positions. The filing says losses in several described legal matters were not considered probable and estimable, and a possible loss range could not be reasonably estimated. Dialight sued Sanmina over alleged contract and performance issues; Sanmina separately seeks about $10 million in unpaid receivables and inventory obligations.
- Lease accounting adoption at the start of FY2020 added approximately $65 million of right-of-use assets and lease liabilities; management said adoption did not materially affect income or cash flows. The quarter-end lease liability was $60.5 million.
Important facts for investors to verify
- Whether sales declines, particularly in communications networks and cloud solutions, continue and how they affect operating income and margins.
- Whether working-capital cash generation is sustainable, including reliance on receivables sales and supplier payment timing.
- Restructuring charges, execution and expected benefits, as well as any additional facility or environmental-related costs.
- Developments in customer concentration, the Dialight and employment cases, environmental exposures, and uncertain tax positions.
- Availability of revolving and receivables-sale liquidity if demand, customer collections or bank participation weakens.