Sanmina Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended October 3, 2020. FY2020 included 53 weeks; FY2019 included 52 weeks. The filing is an annual report, not a standalone Q4 filing. Unless noted, amounts are in U.S. dollars.
Business context
Sanmina provides electronics manufacturing, components, products, engineering, logistics and repair services to OEMs in industrial, medical, defense and aerospace, automotive, communications networks and cloud markets. Integrated Manufacturing Solutions (IMS) generated about 80% of FY2020 revenue; Components, Products and Services (CPS) generated about 20%. Nokia accounted for at least 10% of sales in each of FY2018–FY2020, and the ten largest customers represented 55.5% of FY2020 sales.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $6.960 billion | $8.234 billion |
| Gross profit / margin | $525.7 million / 7.6% | $591.9 million / 7.2% |
| Operating income / margin | $227.7 million / 3.3% | $286.1 million / 3.5% |
| Net income | $139.7 million | $141.5 million |
| Diluted EPS | $1.97 | $1.97 |
| Cash from operating activities | $300.6 million | $383.0 million |
| Capital expenditures | $66.0 million | $134.7 million |
At year-end, cash and cash equivalents were $480.5 million, working capital was approximately $1.3 billion, and total debt was approximately $348.0 million, including the current portion. The $700 million revolving facility had $692 million available after letters of credit; no revolver borrowings were outstanding. The company reported compliance with debt covenants and said available liquidity should cover requirements for at least 12 months, subject to business conditions.
FY2020 free cash flow, calculated as operating cash flow less capital expenditures, was approximately $234.6 million. The company repurchased $179.0 million of common stock during the year, including employee tax-withholding share repurchases.
Changes versus comparable periods
- Full-year sales declined 15.5% from FY2019. Management attributed the decline to the prior-year recovery of pent-up demand after component shortages eased, followed by COVID-19-related demand weakness, supply interruptions, operating restrictions and facility disruptions in FY2020.
- All three reported end-market groupings declined: industrial, medical, defense and automotive sales fell 9.7%; communications networks fell 20.1%; and cloud solutions fell 32.6%.
- Gross margin improved to 7.6% from 7.2%, supported by cost reductions, plant-closure benefits, lower U.S. self-insured medical claims and government subsidies to certain foreign subsidiaries. Management cautioned that the same level of subsidies was not expected to continue. Operating margin nevertheless fell to 3.3% from 3.5%.
- Net income was nearly flat year over year, while operating cash flow declined by $82.4 million. Receivables sales under company programs were $1.7 billion, versus $2.7 billion in FY2019; these proceeds are reported as operating cash flow.
- Q4 FY2020 sales were $1.875 billion, down about 1% from Q4 FY2019. Q4 gross margin was 8.1% versus 7.5%, operating margin was 4.4% versus 3.3%, and net income was $51.6 million versus $19.8 million.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management expected COVID-19 to continue negatively affecting the business, results and financial condition for the foreseeable future, while stating the full effect could not be reliably predicted.
- The company recorded $26.8 million in restructuring costs, including $17.9 million of severance under a company-wide plan affecting approximately 2,350 employees. Further plan actions and severance payments were expected into FY2021.
- A $6.6 million goodwill impairment related to the oil and gas reporting unit followed pandemic-related declines in oil and gas demand and commodity prices. The company also recorded $2 million of long-lived asset impairment.
- Key exposures include customer concentration and order cancellations, component shortages and logistics disruption, tariffs, foreign-exchange movements, and the risk that lower demand or customer financial distress could pressure margins, working capital and cash generation. Customer supply agreements generally do not require minimum purchase quantities.
- Contingencies include environmental matters, California employment lawsuits and litigation with former customer Dialight. Sanmina is seeking approximately $10 million from Dialight for receivables and obsolete inventory; Dialight has made counterclaims seeking unspecified damages. The company stated it could not reasonably estimate possible losses for the identified matters. Accrued reserves for environmental, warranty, litigation and other contingencies were $37 million, excluding uncertain tax positions.
- Other notable exposures include $115 million of liabilities for uncertain tax positions and $51 million of underfunded defined-benefit pension obligations. The auditor issued an unqualified opinion and identified government-contract revenue estimates using the cost-to-cost method as a critical audit matter. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether sales and operating margins recover after the FY2020 pandemic-related decline, and how much of the margin improvement depended on temporary subsidies and lower medical claims.
- Customer and end-market concentration, particularly Nokia exposure, and the pace of recovery in communications, cloud and automotive demand.
- Operating cash generation and working-capital needs, including the role and availability of receivables-sale programs in reported cash flow.
- Future restructuring cash costs, remaining share-repurchase activity and debt repayment requirements, including covenant headroom.
- Developments in the environmental, employment and Dialight proceedings, and any changes to related reserves or potential exposure.