Sanmina Corporation — Q1 FY2021 10-Q
Reporting period: Three months ended January 2, 2021. Comparisons below are with the three months ended December 28, 2019, the prior-year quarter. Sanmina provides integrated manufacturing, components, products, repair, logistics and aftermarket services; IMS accounted for about 80% of revenue.
Financial results and changes
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1.755 billion | $1.840 billion | Down 4.6% |
| Gross profit / margin | $141.2 million / 8.0% | $134.9 million / 7.3% | Profit increased; margin up 0.7 percentage points |
| Operating income / margin | $75.6 million / 4.3% | $57.2 million / 3.1% | Operating income up about 32% |
| Net income | $48.0 million | $38.3 million | Up about 25% |
| Diluted EPS | $0.72 | $0.53 | Up $0.19 |
| Cash from operating activities | $61.8 million | $21.2 million | Increased |
Lower sales were primarily attributed to weaker industrial-market demand. Industrial, Medical, Defense and Automotive revenue fell 6.8%; Communications Networks and Cloud Infrastructure revenue fell 1.4%. IMS gross margin rose to 7.3% from 6.6%, and CPS gross margin to 12.4% from 10.9%. Management attributed margin improvement to operating efficiencies, cost controls and prior plant closures. SG&A declined to $59.0 million from $63.2 million, while restructuring expense declined to $1.9 million from $9.2 million.
Cash, debt and liquidity
- Cash and cash equivalents were $516.0 million, versus $480.5 million at October 3, 2020. Working capital was approximately $1.4 billion.
- Recorded debt was approximately $343.6 million, including $18.8 million current and $324.8 million long-term. The company had no revolving-credit borrowings and $8 million of letters of credit outstanding; $692 million of revolver capacity was available net of borrowings and letters of credit. Foreign short-term facilities provided another $69 million of available capacity.
- Capital expenditures were $11.2 million. Financing activities used $16.2 million, including debt repayments and share repurchases. Cash increased by $35.5 million during the quarter.
- Sanmina sold approximately $263 million of receivables through receivables-sale programs, compared with $538 million in the prior-year quarter. Availability is subject to bank or customer approval; the main RPA is uncommitted.
- Management said cash, available facilities and operating cash generation should meet working-capital needs for at least 12 months, while warning that a substantial demand decline or worsening collections could require additional liquidity.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expected COVID-19 to continue negatively affecting the business, results and financial condition for the foreseeable future.
- COVID-19 risks include demand disruption, employee absences or facility restrictions, component shortages, logistics constraints and customer or supplier financial distress. Other prominent risks include customer concentration, pricing pressure, volatile end markets, international operations, tariffs and foreign exchange.
- The ten largest customers generated 58% of sales, up from 55%; one customer represented at least 10% of sales, compared with two in the prior-year quarter. About 80% of sales typically come from foreign operations.
- The company had incurred about $19 million of charges under its October 2019 restructuring plan, against expected total charges of up to $20 million. Further actions were expected through Q2 FY2021, with severance payments through Q4 FY2021; additional future costs may arise for vacant facilities and environmental remediation.
- The tax provision was $24.7 million, or 34% of pretax income, versus $14.6 million, or 28%. The increase included approximately $4 million of discrete tax items. Management said uncertain tax liabilities could decrease significantly within 12 months if audits are resolved or statutes expire; the recorded liability was $122 million.
- Contingency reserves were $39 million. A California labor-law settlement remained subject to court approval, with a payout of approximately $3.5 million to $5 million. An Orange County groundwater case had a trial phase scheduled for April 2021; the company said it could not reasonably estimate a loss range for that and other noted matters. In the Dialight dispute, Sanmina seeks about $10 million in receivables and inventory obligations, while Dialight seeks unspecified damages.
- The company repurchased 383,595 shares for an average $24.60 per share under its program; approximately $125 million remained authorized. The company reported compliance with debt covenants and no material changes to internal control over financial reporting.
Investor verification priorities
- Confirm subsequent-quarter demand and margins, particularly recovery in industrial markets and the effects of COVID-19, supply constraints and customer program changes.
- Track whether operating cash generation remains strong and how much it depends on working-capital movements and receivables sales.
- Review customer concentration and any changes in major customer volumes, payment behavior or credit quality.
- Monitor tax-audit outcomes, the $122 million uncertain-tax-position liability, environmental reserves and pending litigation or settlement approvals.
- Check restructuring completion and costs, capital allocation and share repurchases, and continued compliance with credit-facility covenants.