Sanmina Corporation — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended April 2, 2022; comparative periods ended April 3, 2021. Fiscal 2022 is a 52-week year. Amounts below are in U.S. dollars.
Business context
Sanmina provides integrated manufacturing solutions, components, products, repair, logistics and aftermarket services to OEMs. Integrated Manufacturing Solutions (IMS) generated about 80% of first-half revenue; Components, Products and Services (CPS) comprises multiple operating businesses. The company identified stronger overall demand and new industrial and data communications programs as drivers of revenue growth.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $1.912 billion | $1.700 billion | $3.669 billion | $3.455 billion |
| Gross profit | $152.4 million | $143.1 million | $296.9 million | $284.3 million |
| Operating income | $82.2 million | $64.7 million | $163.7 million | $140.3 million |
| Net income | $53.2 million | $47.0 million | $111.9 million | $95.1 million |
| Diluted EPS | $0.83 | $0.70 | $1.71 | $1.42 |
- Quarterly sales rose 12.5%; first-half sales rose 6.2%. In Q2, Industrial, Medical, Automotive and Defense revenue grew 17.7%, while Communications Networks and Cloud Infrastructure grew 5.3%.
- Consolidated gross margin was 8.0% in Q2 versus 8.4% a year earlier, and 8.1% for the first half versus 8.2%. Q2 IMS margin improved to 7.0% from 6.9%; CPS margin fell to 12.1% from 14.2%, mainly due to less favorable mix.
- Operating income increased despite lower gross margin, with Q2 restructuring expense declining to $2.9 million from $11.9 million. First-half results included a $4.6 million gain on sale of long-lived assets.
- Cash provided by operations for the first half was $147.3 million versus $142.9 million. Inventory growth was a major cash use: inventory rose to $1.438 billion from $1.037 billion at fiscal year-end. Management attributed the increase to component shortages that constrained shipments.
- First-half investing cash use was $45.6 million, including $52.7 million of capital expenditures and $8.0 million of proceeds primarily from a property sale. Financing cash use was $190.3 million, including $182.3 million of share repurchases and employee tax withholding, and $9.4 million of term-loan repayments.
Balance sheet and liquidity
- Cash and cash equivalents were $559.9 million at April 2, 2022, down from $650.0 million at October 2, 2021. Working capital was approximately $1.5 billion at both dates.
- Term-loan debt, net of issuance costs, was $321.5 million, including $18.8 million current, versus $330.3 million at fiscal year-end. No revolver borrowings were outstanding; $8 million of letters of credit were outstanding. The company reported $692 million available under its revolver and $70 million available under foreign short-term facilities.
- The company was compliant with debt covenants. It stated that cash, available facilities and operating cash generation should be sufficient for working capital needs for at least the next 12 months, subject to risks including weaker demand and collection difficulties.
- Working-capital measures showed inventory turns down to 5.3 from 6.3 and days inventory on hand up to 70 from 58; days sales outstanding improved to 60 from 64.
Outlook, material developments and risks
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expected supply-chain delays and shortages to persist through the remainder of 2022 and said pandemic-related disruptions could weigh on results for the foreseeable future. China restrictions had disrupted some company and supplier plants.
- Management cited semiconductor and other component shortages, inflation in materials and labor, shipping constraints, and geopolitical events including the war in Ukraine. Shortages limited production and shipments despite demand; higher input costs could reduce profitability if not passed on to customers.
- On March 2, 2022, Sanmina agreed to establish its existing Indian manufacturing entity as a joint venture with Reliance Strategic Business Ventures. Reliance is to hold 50.1% and Sanmina 49.9% after closing; the company expected closing in Q4 FY2022.
- The board approved a new $200 million share repurchase program after quarter-end. At April 2, $111 million remained available under then-existing programs. First-half repurchases under programs totaled 4.4 million shares for $169 million, excluding employee tax-withholding share transactions.
- Sales concentration remains material: the ten largest customers represented 49% of first-half sales versus 56% a year earlier; two customers each represented at least 10% of sales, versus one in the prior-year period.
- Contingencies include environmental matters and a Dialight dispute. Dialight claims damages exceeding $200 million; Sanmina disputes the allegations and believes a contractual liability cap would limit any recovery to less than $2 million. The company said it could not reasonably estimate a range of possible loss for pending matters. Recorded reserves for environmental, warranty, litigation and other contingencies were $31 million.
- Sanmina reported an $89 million liability for uncertain tax positions and said it could decrease materially in the quarter ending July 2, 2022 as audits and statutes of limitations are resolved.
Key facts for investors to verify
- Whether supply constraints, inventory levels and customer demand improve, and whether Sanmina can ship delayed orders and recover higher input costs.
- Whether gross margin pressure in CPS and the overall business persists, including the effects of mix, pricing, labor and component costs.
- Cash conversion and liquidity trends, particularly inventory, receivable-sale program availability, and the level of cash used for repurchases.
- Progress and final terms of the India joint venture, including expected Q4 FY2022 closing and effects on Sanmina’s ownership and operations.
- Developments in the Dialight and environmental matters, and any changes to recorded reserves or potential exposure.