Sanmina Corporation (SANM) — Q3 FY2021 Form 10-Q
Business context and period. Global electronics manufacturing and services provider serving industrial, medical, defense and aerospace, automotive, communications networks and cloud infrastructure markets. The quarter ended July 3, 2021; comparisons are with the quarter ended June 27, 2020. The nine-month period ended July 3, 2021 is compared with the prior-year nine months.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $1,657.7m | $1,654.7m | $5,112.7m | $5,085.4m |
| Gross profit / margin | $136.6m / 8.2% | $131.5m / 7.9% | $420.9m / 8.2% | $373.8m / 7.3% |
| Operating income / margin | $74.3m / 4.5% | $64.1m / 3.9% | $214.5m / 4.2% | $145.7m / 2.9% |
| Net income | $117.4m | $44.9m | $212.4m | $88.1m |
| Diluted EPS | $1.74 | $0.64 | $3.17 | $1.23 |
Cash flow and liquidity. Nine-month operating cash flow was $246.6m, investing cash outflow $60.8m and financing cash outflow $42.7m. Cash increased $143.3m to $623.8m from October 3, 2020. Working capital was approximately $1.5bn. Cash-flow conversion was affected by a $108.3m increase in accounts receivable; DSO rose to 62 days from 54. The company sold $406m of receivables in the nine months, versus $1.4bn in the prior-year period.
Debt. Term-loan debt was $334.7m, including $18.8m current; no revolver borrowings were outstanding, and $692m of revolver capacity remained available net of letters of credit. The company reported compliance with debt covenants. Cash exceeded reported debt by approximately $289m.
Changes and notable items
- Sales were nearly flat year over year in Q3 (+0.2%) and for the nine months (+0.5%). IMS revenue declined modestly for the nine-month period, while CPS revenue increased.
- Q3 IMS gross margin improved to 7.6% from 7.0%, attributed to operational efficiencies and cost-control actions. CPS gross margin fell to 11.2% from 12.1%, reflecting mix and costs of ramping defense programs.
- Net income included a $43m tax benefit from releasing certain foreign tax reserves. Q3 other income included a $15m intellectual-property sale and an $8m gain from liquidation of a foreign entity; nine-month other income also included $8m of antitrust settlement payments. These items materially affect comparison of reported earnings.
- Nine-month repurchases totaled $31.4m, including employee tax-withholding share repurchases; $113m remained under the authorization at quarter-end. A European business was acquired in April for $38.6m total consideration, with $21.4m net cash outlay after acquired cash.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management believed available cash, operating cash generation and other liquidity sources would meet working-capital needs for at least 12 months, while noting this depended on demand, collections and continued access to financing.
- Component shortages—especially capacitors, resistors and discrete semiconductors—were expected to persist at least through calendar 2021 and could delay shipments, reduce revenue and margins, and increase inventory and cash needs. Management also cited inflationary component costs and the risk of being unable to pass them through to customers.
- COVID-19 remained a source of uncertainty, including possible workforce disruption, facility restrictions, customer demand changes and supply/logistics interruptions. Management expected negative effects to continue for the foreseeable future.
- Customer concentration is significant: the ten largest customers generated 51% of Q3 sales, and one customer represented at least 10%. International operations, pricing pressure, customer order changes and reliance on limited or sole-source suppliers are additional risks.
- Recorded reserves for environmental, warranty, litigation and other contingencies were $37m; management cautioned they may be insufficient. An environmental groundwater case was in trial. The Dialight dispute seeks unspecified damages, and the company could not estimate possible losses for several matters. A California labor settlement was preliminarily approved, with expected payout of approximately $3.5m to $5m, subject to final approval.
Investor verification priorities
- Separate recurring operating performance from the $43m tax benefit and gains included in other income when assessing earnings quality.
- Track component availability, shipment delays, inventory levels and the ability to recover inflationary input costs through pricing.
- Monitor receivables, DSO and factoring activity, which affected operating cash flow and working-capital metrics.
- Review customer concentration and changes in major-customer demand, particularly given limited minimum-purchase commitments.
- Follow outcomes and reserve adequacy for environmental and other litigation, and confirm final approval and cost of the labor settlement.