Sanmina Corporation — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparisons are with the three months ended January 1, 2022. Sanmina provides integrated manufacturing, components, products, repair, logistics and aftermarket services to OEMs. IMS is its sole reportable segment; CPS combines other operating businesses.
Financial results and liquidity
| Metric | Q1 FY2023 | Prior comparable quarter |
|---|---|---|
| Net sales | $2.361 billion | $1.757 billion |
| Gross profit / margin | $190.7 million / 8.1% | $144.5 million / 8.2% |
| Operating income | $123.7 million | $81.4 million |
| Net income attributable to common shareholders | $88.4 million | $58.6 million |
| Diluted EPS | $1.48 | $0.89 |
| Cash from operating activities | $37.2 million | $68.3 million |
| Capital expenditures | $37.1 million | $25.4 million |
- Revenue rose 34.4%. Communications Networks and Cloud Infrastructure sales increased 44.6% to $1.016 billion; Industrial, Medical, Defense and Automotive sales increased 27.5% to $1.346 billion.
- IMS gross margin declined to 6.9% from 7.5%, as increased component costs passed through to customers carried little or no markup. CPS gross margin improved to 13.3% from 11.6%, attributed to volume, operating efficiencies and product mix.
- Cash and equivalents were $735.3 million at December 31, up from $529.9 million at October 1, 2022. Working capital was $1.8 billion. About $186 million of cash held by the Indian joint venture is not available for general corporate purposes.
- Total debt was approximately $342.5 million, including the current portion. The $800 million revolving facility had no borrowings and $9 million of letters of credit; reported availability, net of borrowings and letters of credit, was $791 million. The company was in covenant compliance.
- Operating cash flow was pressured by working-capital needs, including higher receivables and inventory, partly offset by increased payables and receivables factoring. Inventory rose to $1.728 billion from $1.691 billion.
Material changes and notable items
- Q1 revenue growth reflected strong telecommunications demand, improved material availability, new program wins and program ramps. The ten largest customers represented 51% of sales, versus 48%; one customer accounted for at least 10% in both periods.
- Sanmina completed an India joint venture with Reliance Strategic Business Ventures Limited. Reliance invested approximately $216 million for 50.1% of the Indian entity; Sanmina retained 49.9% but continues to consolidate it under a management-services arrangement. The transaction generated $215.8 million of financing cash proceeds and a $3.1 million noncontrolling-interest allocation of quarterly earnings.
- Receivables sold through factoring programs were approximately $796 million, compared with $93 million in the prior-year quarter. Sanmina reports proceeds as operating cash flow; the programs are subject to bank or customer approval, and the main facility is uncommitted.
- Net income benefited from an $8 million tax benefit following the release of certain foreign tax reserves. The effective tax rate was 18%, versus 26%.
- Interest expense increased to $8.7 million from $4.9 million, primarily due to higher revolving-credit-facility utilization and interest rates. Other expense was $6.7 million, compared with $2.1 million of other income, reflecting factoring costs, currency movements and Indian-rupee exposure.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided in the filing. Management expects existing liquidity and operating cash generation to meet working-capital needs for at least the next 12 months, while warning that weaker demand, unrecovered customer inventory obligations or slower collections could reduce operating cash flow.
- Sanmina expects component delays and shortages to persist through at least the first half of calendar 2023, potentially delaying shipments and reducing revenue, margins and operating cash flow. Inflation in component, labor and transportation costs may pressure profitability if not passed through to customers.
- Other key exposures include customer concentration and cancellations, competitive pricing, international operations and currency movements, tariffs, COVID-19 and supply-chain disruption, and the availability of customer receivables factoring.
- Environmental, warranty, litigation and other contingency reserves were $37 million. In an Orange County groundwater case, a tentative ruling found Sanmina and other defendants liable for certain past investigation costs; further phases may produce additional losses that could be material, but the amount cannot currently be estimated.
- In the Dialight dispute, Dialight claims damages exceeding $200 million; Sanmina disputes the allegations and believes contractual limits cap any recovery at less than $2 million. No trial date was set, and the filing says it cannot reasonably estimate a loss range for pending matters.
Investor verification points
- Assess whether revenue growth can continue as component shortages ease, and whether IMS margins recover from the lower year-over-year level.
- Track inventory, receivables, operating cash flow and the scale and availability of factoring programs when evaluating cash conversion.
- Verify the Indian joint venture’s operating performance, restricted cash needs, and the basis for Sanmina’s continued consolidation despite its minority ownership.
- Monitor the Orange County environmental litigation and any changes to estimated exposure or reserves; distinguish Dialight’s allegations from Sanmina’s stated position.
- Review customer concentration, the $8 million tax benefit’s nonrecurring nature, debt covenant headroom and liquidity available if demand or collections weaken.