Sanmina Corporation (SANM) — Q3 FY2022 Form 10-Q
Reporting period: Third quarter ended July 2, 2022; comparative quarter ended July 3, 2021. Nine-month figures compare the same periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Sanmina provides integrated electronics manufacturing, components, products, repair, logistics and related services to OEMs. It reports IMS and CPS businesses; IMS is its sole reportable segment and represented about 80% of revenue in the first nine months of FY2022. Key markets include industrial, medical, defense and aerospace, automotive, communications networks and cloud infrastructure.
Financial performance
- Q3 revenue: $2,019 million, up 21.8% year over year. Industrial, medical, defense and automotive revenue rose 27.2%; communications networks and cloud infrastructure rose 14.4%.
- Q3 profit: Gross profit was $165 million versus $137 million; gross margin was 8.2% in both periods. Operating income increased to $95 million from $74 million. Net income fell to $80 million from $117 million, and diluted EPS to $1.29 from $1.74.
- Nine-month results: Revenue was $5,688 million, up 11.3%; gross profit was $462 million versus $421 million; operating income was $258 million versus $215 million. Net income declined to $191 million from $212 million, and diluted EPS to $2.98 from $3.17. Gross margin was 8.1% versus 8.2%.
- Margins and mix: Q3 IMS gross margin decreased to 7.3% from 7.6%, as passed-through component cost increases carried little or no markup. CPS gross margin improved to 11.9% from 11.1% on higher revenue and favorable mix. Nine-month CPS margin declined to 11.9% from 12.6% on less favorable mix.
- Cash flow: For the first nine months, operating cash flow was $249 million, investing cash outflow $84 million and financing cash outflow $319 million. Cash decreased $157 million to $493 million. Capital expenditures were $90 million, compared with $43 million a year earlier.
- Liquidity and working capital: Working capital was $1.4 billion, down from $1.5 billion at FY2021 year-end. The balance sheet showed $493 million cash, $317 million term debt and $692 million available under the revolver, net of borrowings and letters of credit. The company reported compliance with debt covenants. Inventory rose to $1,591 million from $1,037 million; accounts payable rose to $1,977 million from $1,465 million. Days inventory on hand increased to 74 from 58.
- Capital returns: Sanmina repurchased 7.4 million shares for $293 million under its buyback programs in the first nine months; total cash used for repurchases, including employee tax withholding, was $307 million. About $188 million remained authorized at quarter-end.
Material changes and unusual items
- Higher demand, component-cost pass-throughs and new industrial and data communications programs drove sales growth. Component shortages nevertheless prevented shipment of some products for which demand existed and contributed to higher inventory.
- Q3 other expense was $8 million, compared with $29 million of other income a year earlier. The prior-year period included a $15 million intellectual property sale, an $8 million gain from liquidation of a foreign entity and antitrust settlement receipts. Current-period results also reflected a decline in deferred-compensation plan investment values.
- Q3 income tax expense was $2 million versus a tax benefit of $18 million in the prior-year quarter. Both periods included benefits from releases of foreign tax reserves: approximately $15 million in 2022 and $43 million in 2021. The nine-month effective tax rate was 19% versus 11%, partly reflecting fewer favorable discrete tax items.
- Accounts receivable sales were approximately $1 billion in the first nine months, versus $406 million a year earlier. These sales are reported as operating cash flow; availability depends on bank or customer approval and is not assured.
Outlook, risks and contingencies
- Outlook: No formal revenue or earnings guidance is provided in the filing. Management expected component shortages and delays to persist through the remainder of 2022, potentially delaying shipments and reducing revenue, margins and operating cash flow. It expected pandemic-related disruption to remain a negative factor for the foreseeable future.
- Liquidity view: Management believed cash, available facilities and operating cash generation would meet working-capital needs for at least 12 months. It cautioned that weaker demand, elevated inventory or collection problems could materially reduce operating cash flow and require additional financing.
- Supply chain and operating risks: Semiconductor and other component shortages, inflation in components, labor and transportation, COVID-19 disruptions (including in China), geopolitical events, and dependence on limited or sole-source suppliers may constrain production. Passing higher costs to customers may not protect margins.
- Customer exposure: The ten largest customers represented 48% of Q3 sales; one customer accounted for at least 10%. Customer contracts generally do not require minimum purchase quantities, and orders may be canceled or delayed.
- Environmental litigation: In the Orange County groundwater case, a June 2022 tentative ruling found Sanmina and other defendants liable for certain past investigation costs. Sanmina recorded an estimated loss, but expects later trial phases on future remediation and allocation of damages; additional losses are probable and could be material, but the amount cannot currently be estimated.
- Other contingencies: Reserves for environmental, warranty, litigation and other matters were $38 million. In the Dialight dispute, the former customer seeks damages it says exceed $200 million; Sanmina disputes the claims and says a contractual liability cap limits potential recovery to less than $2 million. No trial date was set, and the filing says it cannot reasonably estimate possible losses for pending matters.
- Strategic transaction: Sanmina expected its India manufacturing entity to become a joint venture with Reliance Strategic Business Ventures, which would hold 50.1% and Sanmina 49.9%; closing was expected in Q4 FY2022.
Most important facts for investors to verify
- Whether component availability improves and elevated inventory converts into shipments and cash without write-downs or margin deterioration.
- Whether operating cash flow remains supported by receivables sales, and the availability and terms of those programs.
- Developments in the Orange County environmental case, including the final ruling, later trial phases and potential additional losses.
- Progress and final terms of the proposed India joint venture, including its expected closing and financial impact.
- Changes in major-customer demand and concentration, and the balance between share repurchases, liquidity and investment needs.