Sanmina(SANM) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements (Unaudited) Presents unaudited financial statements for Q1 FY2021, showing $1.76 billion net sales, $48.0 million net income, and increased operating cash flow Condensed Consolidated Balance Sheet Highlights (As of Jan 2, 2021 vs. Oct 3, 2020) | Account | Jan 2, 2021 (In thousands) | Oct 3, 2020 (In thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $516,030 | $480,526 | | Total current assets | $2,842,876 | $2,819,442 | | Total assets | $3,779,734 | $3,772,656 | | Liabilities & Equity | | | | Total current liabilities | $1,473,447 | $1,522,589 | | Total liabilities | $2,101,786 | $2,142,740 | | Total stockholders' equity | $1,677,948 | $1,629,916 | Condensed Consolidated Statements of Income (Three Months Ended) | Metric | Jan 2, 2021 (In thousands) | Dec 28, 2019 (In thousands) | | :--- | :--- | :--- | | Net sales | $1,755,249 | $1,840,171 | | Gross profit | $141,235 | $134,882 | | Operating income | $75,559 | $57,181 | | Net income | $48,021 | $38,345 | | Diluted EPS | $0.72 | $0.53 | Condensed Consolidated Statements of Cash Flows (Three Months Ended) | Cash Flow Activity | Jan 2, 2021 (In thousands) | Dec 28, 2019 (In thousands) | | :--- | :--- | :--- | | Cash provided by operating activities | $61,811 | $21,171 | | Cash used in investing activities | ($11,191) | ($28,046) | | Cash used in financing activities | ($16,160) | ($17,386) | | Increase (decrease) in cash | $35,504 | ($24,177) | - The company recognizes over 95% of its revenue over time, using a cost-to-cost method, as products are manufactured or services are performed, based on contract terms that give the company an enforceable right to payment for work-in-progress[37] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 FY2021 financial results, noting a 4.6% decrease in net sales to $1.76 billion but improved gross margin to 8.0%, while addressing COVID-19 impacts and liquidity Net Sales by End Market (YoY Change) | End Market | Q1 2021 (In thousands) | Q1 2020 (In thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Industrial, Medical, Defense and Automotive | $1,032,518 | $1,107,547 | (6.8)% | | Communications Networks and Cloud Infrastructure | $722,731 | $732,624 | (1.4)% | | Total | $1,755,249 | $1,840,171 | (4.6)% | - Gross margin increased to 8.0% in Q1 2021 from 7.3% in Q1 2020, driven by increased operational efficiencies, cost reduction efforts, and benefits from prior plant closures[116] - The COVID-19 pandemic has negatively impacted operations, supply chains, and customer demand, and is expected to continue to have a negative impact on the business for the foreseeable future[106] - The company sold approximately $263 million of accounts receivable in Q1 2021 under its receivables sales programs, which contributed to operating cash flow[137] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk on its $347 million term loan with $350 million in swaps and hedges foreign currency risk using forward contracts - Interest rate risk from the $347 million floating-rate Term Loan is managed with interest rate swaps of a $350 million notional amount, effectively converting the variable-rate debt to fixed-rate[148] - To manage foreign currency risk, the company uses forward contracts, holding contracts with a notional amount of $123 million for cash flow hedges and $351 million for other currency exposures as of January 2, 2021[150][151] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of January 2, 2021, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of January 2, 2021[155] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[154] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in several legal proceedings, including a groundwater contamination lawsuit, a $5 million labor law class action settlement, and a commercial dispute with Dialight plc - The company is defending a lawsuit from the Orange County Water District regarding alleged groundwater contamination, with a trial scheduled to begin in April 2021[157] - A settlement in principle has been reached in a California labor law class action lawsuit, with the company's total payout not to exceed $5 million, subject to court approval[158] - The company is in a legal dispute with former customer Dialight plc, suing for approximately $10 million in unpaid receivables, while defending against Dialight's counterclaims of fraudulent inducement and breach of contract[159] Item 1A. Risk Factors This section outlines significant risks, including operational, regulatory, liquidity, and general business challenges, such as the COVID-19 pandemic, customer concentration, and supply chain vulnerabilities End Market and Operational Risks Key operational risks include the COVID-19 pandemic, adverse market changes, customer concentration, U.S. trade policies, and supply chain vulnerabilities - The COVID-19 pandemic is a primary risk, impacting revenue, operations, and supply chains, with continued negative effects anticipated[162][166] - A high concentration of sales comes from the ten largest customers, making the company vulnerable to reduced orders from this group[177] - U.S. trade policies and tariffs, particularly on goods from China, pose a risk by potentially increasing costs and reducing customer demand[178] - The success of the higher-margin Components, Products and Services (CPS) business is crucial to the company's strategy but faces challenges in investment, competition, and execution[185] Regulatory, Compliance and Litigation Risks Regulatory risks include U.S. export controls, product liability from defects, cyberattacks, intellectual property protection, and environmental law liabilities - The company is subject to complex U.S. export control and government contracting regulations, where violations could lead to damages, fines, and debarment[188] - Manufacturing defects, particularly in medical and automotive products, expose the company to product liability claims, recalls, and fines[189] - Cyberattacks on IT networks and systems pose a risk of operational interruption, data loss, and legal liability[195] - The company faces potential liabilities from environmental laws related to hazardous substance use and remediation of contaminated sites[196][197] Liquidity and Credit Risks Liquidity risks include customer creditworthiness, tax implications of foreign cash repatriation, and potential covenant breaches in the credit facility - Financial difficulties or bankruptcy of customers could lead to bad debt, reduced demand, and potential preference payment claims[204] - A majority of cash is held in foreign jurisdictions; repatriation to the U.S. could incur significant taxes, reducing the net amount available[208] - The Amended Cash Flow Revolver contains covenants (e.g., maximum leverage ratio) that could constrain the business, and a breach could trigger default and debt acceleration[209] General Risk Factors General risks include intense EMS industry competition, industry consolidation, foreign exchange fluctuations, insufficient insurance, and challenges in retaining key personnel - The EMS industry is highly competitive, which creates pricing pressure and could harm financial performance[211][212] - Operating results can be negatively impacted by foreign currency exchange rate fluctuations, and hedging activities may not fully mitigate this risk[215] - The company's operations are exposed to natural disasters and global events, such as earthquakes and pandemics, which could significantly disrupt manufacturing and supply chains[220] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 FY2021, the company repurchased 383,595 shares for approximately $9.4 million, with $125.3 million remaining available under the repurchase program Stock Repurchases in Q1 2021 | Period | Total Shares Purchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Month 1 (Oct 4 - Oct 31, 2020) | 90,339 | $24.54 | | Month 2 (Nov 1 - Nov 28, 2020) | 293,256 | $24.61 | | Month 3 (Nov 29 - Jan 2, 2021) | — | $— | | Total | 383,595 | $24.60 | - As of January 2, 2021, $125.3 million remained available for repurchase under the company's stock repurchase program, which has no expiration date[224] Item 6. Exhibits This section lists filed exhibits, including an amendment to the Receivables Purchase Agreement, CEO/CFO certifications, and XBRL interactive data files - A list of filed exhibits is provided, including an amendment to the Receivables Purchase Agreement, CEO/CFO certifications, and XBRL data files[227] Signatures - The report was duly signed on February 4, 2021, by Jure Sola, Chief Executive Officer, and Kurt Adzema, Executive Vice President and Chief Financial Officer[229]