Sanmina Corporation — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended April 3, 2021; comparative periods ended March 28, 2020. Fiscal 2021 is a 52-week year. Amounts below are in U.S. dollars unless otherwise noted.
Business context
Sanmina provides electronics manufacturing, components, products, repair, logistics and related services to OEMs in industrial, medical, defense and aerospace, automotive, communications and cloud markets. Its businesses are Integrated Manufacturing Solutions (IMS) and Components, Products and Services (CPS); IMS is the sole reportable segment. One customer accounted for at least 10% of sales in each period presented, and the ten largest customers represented 54% of Q2 sales.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $1,699.7 million | $1,590.6 million | $3,454.9 million | $3,430.7 million |
| Gross profit | $143.1 million | $107.4 million | $284.3 million | $242.3 million |
| Gross margin | 8.4% | 6.8% | 8.2% | 7.1% |
| Operating income | $64.7 million | $24.4 million | $140.3 million | $81.6 million |
| Net income | $47.0 million | $4.9 million | $95.1 million | $43.2 million |
| Diluted EPS | $0.70 | $0.07 | $1.42 | $0.60 |
Q2 operating margin was approximately 3.8% versus 1.5% a year earlier; six-month operating margin was approximately 4.1% versus 2.4%. Q2 revenue rose 6.9% year over year, while six-month revenue increased 0.7%. Communications Networks and Cloud Infrastructure drove much of the Q2 sales increase, rising 15.2%; Industrial, Medical, Defense and Automotive sales increased 1.5%.
For the first six months, IMS revenue was $2.82 billion and CPS revenue was $638 million. Management reported that both segments’ gross margins improved year over year, citing operating efficiencies and cost containment; CPS also benefited from higher volume, favorable mix and plant closures. The filing reports CPS gross profit of $91 million for the first half.
Cash flow, debt and liquidity
- Six-month operating cash flow was $142.9 million, compared with $156.9 million. Capital expenditures were $25.5 million, implying approximately $117.4 million of operating cash flow less capital expenditures.
- Cash and equivalents were $575.2 million at April 3, 2021, up from $480.5 million at October 3, 2020. Working capital was $1.4 billion.
- Total term-loan debt was approximately $339.2 million, including $18.8 million current and $320.4 million long-term. Cash exceeded term-loan debt by approximately $236 million. No revolver borrowings were outstanding; $692 million was available net of letters of credit and borrowings.
- The company was in compliance with debt covenants. Management said cash, available facilities and operating cash generation should meet working-capital needs for at least 12 months.
- Working-capital indicators included DSO of 59 days versus 54 at fiscal year-end, inventory turns of 7.8 versus 7.3, and cash-cycle days of 58 versus 54. Management attributed weaker cash conversion in part to lower accounts payable, higher receivables and less receivables factoring.
Material changes and unusual items
- Q2 earnings increased substantially year over year, reflecting higher sales and improved gross margins, as well as lower prior-year results amid greater COVID-19 disruption.
- Other income was $6.1 million in Q2 2021, versus an expense of $7.7 million in Q2 2020. The 2021 period included approximately $5 million of anti-trust class-action settlement receipts; the prior-year comparison was affected by a deferred-compensation investment decline.
- The company recorded $11.9 million of restructuring and other charges in Q2 and $13.8 million for the first half. The 2019 company-wide plan had incurred approximately $29 million of charges by April 3; implementation was expected to continue through Q4 FY2021, with severance payments through calendar 2021.
- After quarter-end, on April 6, Sanmina acquired a European subsidiary of a multinational customer for an expected net purchase price of $30 million to $35 million. Management expected the deal to expand IMS capabilities in Europe and not materially affect financial results.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expected component delays and shortages—particularly capacitors, resistors and discrete semiconductors—to continue at least through the end of calendar 2021, potentially delaying shipments, reducing revenue and margins, and increasing inventory. The company also said COVID-19 was likely to continue negatively affecting its business, results and financial condition for the foreseeable future.
Other key risks include customer concentration, pricing and competition, volatile demand and customer order changes, international operations and currency exposure, and supplier, logistics and commodity-cost pressures. A significant portion of revenue is generated outside the United States. Sales of receivables provide an additional liquidity source, but program availability is subject to counterparties’ acceptance and funding discretion.
Sanmina had $38 million in reserves for environmental, warranty, litigation and other contingencies, excluding uncertain tax positions. The company reported a $122 million liability for uncertain tax positions and said it was reasonably possible that this liability could decrease materially in the quarter ending July 3, 2021 as audits and statutes of limitations were resolved. Pending matters include environmental litigation, a proposed California labor settlement capped at $5 million subject to court approval, and litigation with former customer Dialight; the company could not estimate loss ranges for most matters.
Most important facts for investors to verify
- Whether component shortages and COVID-19 disruptions affect shipment timing, customer demand, margins and inventory as management anticipated.
- Whether improved gross margins persist, including the contribution from operational efficiencies, restructuring and business mix.
- Whether working-capital movements, receivables factoring and cash-cycle deterioration affect operating cash flow and liquidity.
- The realization and financial impact of the April 6 acquisition, and the timing and cost of remaining restructuring actions.
- Updates on the uncertain tax position liability, environmental and Dialight litigation, and court approval and final cost of the labor settlement.