Sanmina Corporation — Q3 FY2023 Form 10-Q
Business and period: Sanmina provides electronics manufacturing, components, products and related services. The quarter ended July 1, 2023; comparisons are with the quarter ended July 2, 2022. Prior-year comparative results were restated following an Audit Committee investigation into contract-cost estimates and other accounting misstatements.
Financial results
| Metric | Q3 FY2023 | Q3 FY2022, restated | Nine months FY2023 | Nine months FY2022, restated |
|---|---|---|---|---|
| Net sales | $2.207 billion | $2.023 billion | $6.883 billion | $5.695 billion |
| Gross profit / margin | $183.2 million / 8.3% | $162.2 million / 8.0% | $569.8 million / 8.3% | $450.0 million / 7.9% |
| Operating income / margin | $107.4 million / 4.9% | $91.6 million / 4.5% | $356.4 million / 5.2% | $246.1 million / 4.3% |
| Net income attributable to common shareholders | $76.5 million | $77.2 million | $248.1 million | $182.0 million |
| Diluted EPS | $1.28 | $1.25 | $4.14 | $2.83 |
| Operating cash flow | Not presented by quarter in the supplied filing text | $158.3 million | $249.0 million |
Quarterly sales rose 9.1%; nine-month sales rose 20.9%. Management attributed growth to improved material availability, new program ramps and stronger demand. Quarterly income attributable to common shareholders was slightly lower year over year despite higher revenue and operating income; the filing reports $5.2 million of quarterly income attributable to noncontrolling interest in 2023.
Quarterly gross margin improved primarily on higher IMS volume and operating efficiencies. CPS quarterly margin declined to 8.8% from 11.1%, including losses on certain fixed-price contracts. For the nine-month period, both IMS and CPS gross margins improved year over year.
Balance sheet, liquidity and capital
- At July 1, 2023, cash and cash equivalents were $656.6 million, including $167 million held by the Indian joint venture and unavailable for general corporate purposes. Working capital was $1.8 billion.
- Debt included $334.1 million of term-loan principal (including current portion; net long-term balance-sheet debt was $316.6 million). No revolver borrowings were outstanding; $13 million of letters of credit left $787 million available under the $800 million facility. The company reported compliance with debt covenants.
- Nine-month cash from operations of $158.3 million was below the prior-year $249.0 million; capital expenditures were $153.2 million. Inventory declined, but higher receivables and lower accounts payable weighed on operating cash flow. Cash increased by $126.7 million over the period, aided by approximately $216 million received for the Indian joint venture stake.
- Sanmina sold approximately $2 billion of receivables through sale programs during the nine months, versus approximately $1 billion in the prior-year period. Availability under the principal program is uncommitted and subject to bank approval.
- The company repurchased $51 million of shares under its programs during the nine months and authorized up to an additional $200 million of repurchases in Q3. $312 million remained available at quarter-end.
Outlook, controls, risks and contingencies
No numerical revenue or earnings guidance is provided in the supplied filing text. Management expects macroeconomic challenges, including inflation and market volatility, to persist in the near term, while noting that supply-chain constraints have eased somewhat. It believes cash, credit availability and operating cash generation should cover working-capital needs for at least 12 months, but warns that weaker demand, unrecovered customer inventory obligations or collection problems could materially reduce cash generation.
Material accounting and control issue: The investigation found unsupported adjustments and inadequate review of contract cost estimates at one division, including inaccurate or incomplete information provided to management and auditors. The company restated prior periods, and management concluded disclosure controls were ineffective as of July 1, 2023 because of material weaknesses in internal control over financial reporting. Remediation is planned through personnel changes, stronger finance oversight and control improvements; the weaknesses are not considered remediated until controls operate effectively and are tested.
Legal and other exposures: In an environmental case, a court found Sanmina liable for certain past investigation costs; additional losses are considered probable and could be material, but the company cannot estimate them. A DOJ investigation involving SCI Technology continues under civil investigative demands; no loss is currently considered probable or estimable. In the Dialight dispute, the former customer seeks damages it says exceed $200 million; Sanmina disputes the allegations and believes a contractual limit would cap recovery below $2 million. Recorded liabilities for environmental, warranty, litigation and other contingencies were $34 million. A technical default under the credit agreement due to a late prior-quarter filing was cured within the stated cure period.
Other notable risks include customer concentration (the ten largest customers represented 47% of Q3 sales), supply-chain and inflation exposure, customer cancellations, foreign-exchange and geopolitical risks, and dependence on receivables-sale programs. The company states it has no material off-balance-sheet arrangements.
Important facts for investors to verify
- Review the restatement amendments and assess the scope and remediation status of the material weaknesses in financial reporting controls.
- Monitor contract-cost estimates, especially fixed-price contracts and CPS performance, and confirm whether control remediation is operating effectively.
- Track operating cash flow, receivables, payables, factoring volumes and fees, and the extent to which liquidity depends on uncommitted receivables programs.
- Assess the potential financial exposure from the environmental case and the outcome of the DOJ inquiry and Dialight litigation.
- Confirm the availability of cash held in the Indian joint venture and evaluate planned repurchases against capital needs and debt covenants.