Sanmina Corporation — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended March 30, 2019; filed May 2, 2019. Sanmina provides integrated manufacturing solutions, components, products and related services. Its IMS business represented about 80% of quarterly revenue; CPS is the other operating business.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $2.127 billion | $1.676 billion | $4.315 billion | $3.420 billion |
| Gross profit / margin | $153.1 million / 7.2% | $114.7 million / 6.8% | $302.4 million / 7.0% | $224.2 million / 6.6% |
| Operating income / margin | $78.1 million / 3.7% | $48.8 million / 2.9% | $155.7 million / 3.6% | $62.6 million / 1.8% |
| Net income (loss) | $40.9 million | $24.6 million | $78.8 million | $(130.3) million |
| Diluted EPS | $0.57 | $0.33 | $1.11 | $(1.83) |
- Q2 revenue increased 26.9%; six-month revenue increased 26.1%. Management attributed growth principally to stronger demand across end markets, improved availability of supply-constrained parts, and customer program ramps. Industrial, medical, defense and automotive was the largest end market, up 33.6% in both the quarter and first half.
- Management said gross margins remained below its expectations at current revenue levels, citing inefficiencies and other factors. Q2 IMS gross margin was 6.4% and CPS was 10.2%; first-half margins were 6.3% and 9.5%, respectively.
- First-half 2018 net loss included a $162 million non-cash Tax Act charge; the 347% effective tax rate in that period makes the net-income comparison unusually affected by tax. First-half FY2019 tax expense was $53.8 million, or 41% of pretax income.
Cash flow, debt and liquidity
- First-half operating cash flow was $27.3 million, versus $34.1 million a year earlier. Investing activities used $71.8 million, primarily for $73.0 million of capital expenditures. Cash decreased $14.0 million to $405.5 million.
- At March 30, 2019, current assets were $3.175 billion and current liabilities $2.419 billion; working capital was about $0.8 billion. Accounts receivable was $1.313 billion and contract assets $401.7 million.
- Debt totaled $643.4 million, reported as short-term debt, including $375 million of senior secured notes due June 2019, $250 million drawn on the revolver and $18.4 million of non-interest-bearing notes. Cash less reported debt was approximately $(237.9) million.
- The $500 million revolving facility had $242 million available after borrowings and letters of credit; separate foreign short-term facilities of $72 million were undrawn. An April 5, 2019 amendment increased the facility to $700 million subject to conditions, including repayment of the June 2019 notes. The company reported covenant compliance at quarter-end.
- Sanmina sold $1.394 billion of receivables through receivables-sale programs in the first half, compared with $337 million a year earlier. These sales are reflected in operating cash flow. The company stated existing liquidity and operating cash generation should meet requirements for at least 12 months.
Changes, outlook and material matters
- Revenue-accounting change: Sanmina adopted ASC 606 in Q1 FY2019 using the modified retrospective method; prior periods were not restated. Most integrated manufacturing and certain other revenue is now recognized over time rather than generally upon shipment. Adoption increased opening retained earnings by $28 million and created a $376 million opening contract asset, while reducing inventory by $350 million. Accordingly, reported revenue and working-capital comparisons with FY2018 are not fully like-for-like.
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects gross margins to fluctuate with volumes, product mix, capacity utilization, component availability, competition, costs and operational efficiency.
- Restructuring actions involving closure or relocation of three facilities were expected to continue through calendar 2019. First-half restructuring expense across plans was $5.2 million; accrued restructuring liabilities were $16 million.
- Disclosed risks include customer concentration (the ten largest customers were 54% of first-half sales; one customer represented at least 10%), intense pricing competition, supply-chain shortages, trade tariffs, foreign-exchange exposure, customer cancellations or insolvency, and environmental and litigation contingencies. Reserves for environmental, warranty, litigation and other contingencies were $37 million; uncertain tax-position liabilities were $100 million.
- Management concluded disclosure controls were not effective at March 30, 2019 because of a previously identified material weakness in internal control over financial reporting. It expected remediation by fiscal year-end 2019, subject to successful operation and testing of controls.
Important facts for investors to verify
- How much of reported year-over-year revenue growth reflects underlying demand and program ramps versus ASC 606’s changed revenue-recognition timing.
- Whether the June 2019 notes were repaid and the amended $700 million credit facility’s conditions were satisfied after quarter-end.
- Whether receivables sales, contract assets and collections support sustainable operating cash flow and liquidity.
- Progress on restoring effective controls, and any changes to the material weakness remediation timeline.
- Developments in customer concentration, component shortages, tariffs, environmental matters and uncertain tax positions.