Sanmina Corporation — Fiscal 2024 First-Quarter 10-Q
Reporting period: Three months ended December 30, 2023; unaudited. Comparative period: three months ended December 31, 2022.
Business context and results
Sanmina provides electronics manufacturing, components, products, engineering, repair and logistics services to OEMs. Its businesses are Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS); IMS is its sole reportable segment.
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $1.875 billion | $2.356 billion | -20.4% |
| Gross profit / margin | $160.8 million / 8.6% | $195.4 million / 8.3% | Profit down 17.7%; margin up 0.3 points |
| Operating income | $87.6 million | $128.4 million | -31.8% |
| Net income attributable to common shareholders | $57.1 million | $92.0 million | -38.0% |
| Diluted EPS | $0.98 | $1.54 | -36.4% |
| Cash from operating activities | $126.0 million | $37.2 million | Up $88.8 million |
| Capital expenditures | $34.2 million | $37.1 million | Down $2.8 million |
Operating margin was approximately 4.7%, versus 5.4% in the prior-year quarter; net margin was approximately 3.0%, versus 3.9%. IMS gross margin improved to 7.6% from 6.9%, attributed mainly to better efficiency and easing supply constraints. CPS gross margin fell to 13.0% from 14.5%, reflecting lower volume and efficiency.
Material changes and liquidity
- Sales fell primarily due to weaker telecommunications demand and customer inventory adjustments, partly offset by new program wins. Communications Networks and Cloud Infrastructure sales declined 39.1%; Industrial, Medical, Defense and Aerospace, and Automotive sales declined 6.2%.
- Cash and equivalents were $631.6 million at quarter-end, down from $667.6 million at September 30, 2023. Working capital was reported at $1.8 billion. Cash from operations benefited from lower receivables and inventory, partly offset by lower accounts payable.
- Capital expenditures were $34.2 million; operating cash flow less capital expenditures was approximately $91.8 million. Financing used $128.4 million, including $115.8 million for share repurchases and $12.8 million of debt repayments.
- Total term-loan debt was approximately $325.6 million, including current maturities; no revolver borrowings were outstanding. The company reported $787 million available under its $800 million revolving facility after letters of credit. It was in compliance with debt covenants.
- Of reported cash, $217 million was held by Sanmina SCI India and unavailable for general corporate purposes. Approximately 70% of cash was held outside the United States. Management believes available resources and operating cash flow will cover working capital needs for at least 12 months.
- Receivables sales were $407 million, down from $796 million in the prior-year quarter. These sales support operating liquidity and depend on bank or customer approval; availability is not assured.
- The company repurchased approximately 2.15 million shares for about $106 million under its programs; $173.8 million remained available at quarter-end.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided. Management expects near-term revenue-growth headwinds from customer inventory reductions and economic softness, while noting that supply-chain constraints have eased. It cites portfolio diversification, operational efficiency and cost actions as priorities.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of material weaknesses in internal control over financial reporting. Weaknesses involved the control environment and staffing at one division and controls over quarterly contract cost estimates. Sanmina reported immaterial misstatements for the quarter and described prior restatements of fiscal 2020–2022 and the first quarter of fiscal 2023. Remediation is underway; the weaknesses are not yet considered remediated.
- Environmental litigation: a court found Sanmina liable for certain past investigation costs at a former site. The company says additional losses are probable and could be material, but it cannot estimate the amount or range.
- The IRS asserted an approximately $8 million tax underpayment for fiscal 2009 relating to a proposed disallowance of a $503 million worthless-stock deduction. Sanmina disputes the position; an adverse outcome could reduce tax attributes and create additional tax and interest, potentially materially.
- The DOJ has issued Civil Investigative Demands concerning SCI government-related business dating back to 2010. No complaint has been served; Sanmina is cooperating and says loss is not currently probable or estimable.
- A former customer’s litigation seeks damages it alleges exceed $200 million; Sanmina disputes the claims and says a contractual liability limit would cap recovery below $2 million. Trial was set for July 2024. The filing also describes new California wage-and-hour and PAGA lawsuits; possible losses were not estimable.
- Other key exposures include demand and customer concentration, order cancellations and inventory risk, pricing and margin pressure, supply-chain and geopolitical disruption, foreign exchange and interest rates, and customer credit risk. The top ten customers accounted for 45% of sales, and one customer represented at least 10%.
Important facts for investors to verify
- Whether sales stabilize after the sharp decline, particularly in communications and cloud markets, and whether new program wins offset customer inventory adjustments.
- Whether IMS margin gains persist and CPS margins recover as volume and operating efficiency change.
- Progress and independent evidence of remediation of the material weaknesses in financial reporting controls, including the contract-estimate process.
- Cash generation and liquidity quality, including reliance on receivables sales and the $217 million of India cash unavailable for general corporate use.
- Developments and potential financial exposure in the environmental case, IRS audit, DOJ inquiry, Dialight litigation and California employment lawsuits.