Sanmina Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended October 2, 2021. This is an annual filing, not a standalone Q4 report. FY2021 and FY2019 had 52 weeks; FY2020 had 53 weeks.
Business context
Sanmina provides integrated 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 FY2021 revenue; Components, Products and Services (CPS) generated about 20%. Nokia represented at least 10% of sales in each of FY2019–FY2021.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $6.757 billion | $6.960 billion |
| Gross profit / margin | $552 million / 8.2% | $526 million / 7.6% |
| Operating income / margin | $281 million / 4.2% | $228 million / 3.3% |
| Net income | $269 million | $140 million |
| Diluted EPS | $4.01 | $1.97 |
| Cash from operating activities | $338 million | $301 million |
| Capital expenditures | $73 million | $66 million |
At year-end, cash and cash equivalents were $650 million, working capital was approximately $1.5 billion, and total debt was approximately $330 million. The company had $692 million available under its revolver and was in compliance with debt covenants. Operating cash flow was affected by working-capital investment, including higher accounts receivable and inventory; inventory increased by $167 million, largely amid component shortages.
Changes versus prior year
- Sales declined 2.9%. Industrial, medical, defense and automotive sales fell 5.8%; communications networks and cloud infrastructure sales rose 1.2%.
- Gross margin increased to 8.2%, with improvement in both IMS and CPS, attributed to efficiency, cost-reduction actions, CPS volume and product mix.
- Net income rose substantially, helped by lower interest expense and a lower effective tax rate, as well as $44 million of net other income. That other income included a $15 million intellectual-property sale gain, an $8 million foreign-entity liquidation gain and $16 million from antitrust settlements.
- Effective tax rate was 12.4%, versus 30.4% in FY2020; a $43 million tax benefit from release of foreign tax reserves was a principal factor.
- Operating cash flow increased to $338 million, while receivables sold through sale programs declined to approximately $0.5 billion from $1.7 billion in FY2020.
Outlook, risks and unusual items
- Outlook: No numerical revenue or earnings guidance is provided in the filing. Management expected pandemic-related effects to continue to negatively affect business, results and financial condition for the foreseeable future. Component shortages were limiting production and shipments despite customer demand; management expected shortages to persist at least through mid-calendar 2022.
- Supply chain and margins: Delays and shortages, including capacitors, resistors and discrete semiconductors, could defer shipments, reduce revenue and margins, and increase inventory. Component and commodity cost inflation may pressure profitability if not passed through to customers.
- Concentration and demand: The ten largest customers represented 52.7% of sales. Customer orders generally lack firm long-term minimum purchase commitments and may be canceled or rescheduled. Communications is a significant market, and customer program ramps and end-market demand remain uncertain.
- Restructuring: FY2021 restructuring costs were $15 million. The company had incurred about $29 million under its October 2019 restructuring plan, which was substantially complete; remaining cash payments were expected through FY2022.
- Contingencies: The company recorded $37 million of reserves for environmental, warranty, litigation and other contingencies, but could not reasonably estimate possible losses for several matters. These include the Orange County groundwater litigation and claims between Sanmina and former customer Dialight. A separate labor settlement of approximately $3.8 million was expected to be paid in Q1 FY2022. Uncertain tax positions totaled $85 million.
- Other obligations: Defined-benefit pension plans were underfunded by $46 million. Foreign cash repatriation may involve taxes; the filing reports approximately 62% of cash held in the U.S. at year-end.
- Audit: PwC issued unqualified opinions on the financial statements and internal control. Its critical audit matter concerned cost-to-cost revenue estimates for defense and aerospace government contracts.
Important facts for investors to verify
- Whether component availability and logistics constraints eased as management expected, and whether customer demand converted into shipments and cash.
- Whether inventory, receivables and cash conversion improved; FY2021 days inventory on hand rose to 58 from 50 and days sales outstanding to 64 from 54.
- How much of FY2021 earnings growth reflected recurring operations versus tax-reserve releases and other income items.
- Exposure to major customers and markets, especially Nokia and communications, and the potential effects of order cancellations, pricing pressure and customer concentration.
- Developments in the Orange County and Dialight matters, environmental remediation, and the adequacy of the $37 million contingency reserve.
- Debt repayment requirements, revolver covenant headroom, receivables-sale program availability and the $85 million uncertain-tax-position liability.