Sanmina Corporation — Q1 FY2022 Form 10-Q
Reporting period: Three months ended January 1, 2022; compared with the three months ended January 2, 2021. Sanmina provides electronics manufacturing, components, products and related services. Its IMS business generated about 80% of quarterly revenue; CPS comprises multiple operating businesses.
Financial results
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1.757 billion | $1.755 billion | +0.1% |
| Gross profit / margin | $144.5 million / 8.2% | $141.2 million / 8.0% | Margin +0.2 percentage points |
| Operating income | $81.4 million | $75.6 million | +7.8% |
| Net income | $58.6 million | $48.0 million | +22.1% |
| Diluted EPS | $0.89 | $0.72 | +23.6% |
| Operating cash flow | $68.3 million | $61.8 million | +$6.5 million |
- Gross margin improved primarily from higher IMS margin (7.5% versus 7.3%), attributed to better operating efficiency. CPS margin declined to 11.6% from 12.4% on less favorable business mix.
- End-market sales shifted: Industrial, Medical, Defense and Automotive rose 2.2% to $1.055 billion; Communications Networks and Cloud Infrastructure fell 2.8% to $702.4 million.
- Cash and equivalents were $627.7 million, down $22.3 million from October 2, 2021. Current assets were $3.592 billion and current liabilities $2.065 billion; working capital was approximately $1.5 billion.
- Capital expenditures were $25.4 million; operating cash flow less capital expenditures was approximately $42.9 million. Investing activities used $17.4 million and financing activities used $72.5 million.
- Inventory increased $205.9 million from fiscal year-end to $1.242 billion. Management attributed the build primarily to component shortages that prevented shipment of products for which there was demand. Inventory turns declined to 5.7 from 6.3.
- Debt carrying value was approximately $325.9 million, including $18.8 million current and $307.2 million long-term; cash exceeded debt by approximately $301.8 million. No revolver borrowings were outstanding; $692 million was available net of letters of credit. The company was in compliance with debt covenants.
Material changes and unusual items
- Revenue was nearly flat year over year, while gross profit, operating income and net income increased. The lower effective tax rate (26% versus 34%) contributed to earnings growth; the prior-year rate included approximately $4 million of unfavorable discrete tax items.
- A $4.6 million gain, primarily from a real property sale, reduced operating expenses. The company also paid approximately $3.9 million to resolve a California labor-related settlement.
- Sanmina repurchased 1.55 million shares for approximately $60 million under its existing program and authorized a new $200 million repurchase program. Approximately $221 million remained available under the programs at quarter-end. Repurchases reduce liquidity.
- Receivables sold through factoring programs totaled approximately $93 million, versus $263 million a year earlier. Availability under the principal receivables program is uncommitted and subject to purchaser acceptance.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management believed available cash, credit facilities and operating cash generation would meet working-capital needs for at least 12 months.
- Management expected pandemic-related impacts and supply-chain disruption to remain a headwind for the foreseeable future. Component shortages were limiting the ability to manufacture and ship all products in demand; the filing expected shortages to persist at least through mid-calendar 2022. Higher component, shipping and labor costs could pressure margins if not passed on to customers.
- Key exposures include COVID-19 and employee availability, sole- or limited-source components, customer demand and concentration, pricing pressure, inventory and working-capital needs, international operations, foreign exchange, tariffs, and customer credit risk. The ten largest customers represented 48% of sales; one customer accounted for at least 10%.
- Environmental, warranty, litigation and other contingency reserves were $33 million. Sanmina said it could not reasonably estimate potential losses for pending matters. These include groundwater-related proceedings and Dialight’s claims seeking more than $200 million; Sanmina disputes the claims and asserts a contractual liability limit of less than $2 million. The company also reported an $86 million liability for uncertain tax positions.
Investor facts to verify
- Whether component availability improves as expected and the inventory build converts into shipments and cash.
- Whether rising component, freight and labor costs can be passed through without sustained margin erosion.
- Cash-flow and liquidity effects of working-capital growth, receivables-sale availability and continued share repurchases.
- Developments in the groundwater and Dialight litigation, and whether recorded contingency reserves prove adequate.
- Customer concentration, demand trends in communications and cloud markets, and CPS margin recovery.