Sanmina(SANM) - 2021 Q4 - Annual Report

PART I Business Sanmina provides integrated manufacturing solutions and services to OEMs across diverse industries through its IMS and CPS segments, facing COVID-19 impacts - Sanmina provides integrated manufacturing solutions, components, products, and services to OEMs across six key industries: industrial, medical, defense and aerospace, automotive, communications networks, and cloud solutions[11] Business Segment Revenue Contribution (FY 2021) | Business Segment | Description | Revenue Contribution | | :--- | :--- | :--- | | Integrated Manufacturing Solutions (IMS) | Includes printed circuit board assembly and test, high-level assembly and test, and direct-order-fulfillment | ~80% | | Components, Products and Services (CPS) | Includes interconnect systems, mechanical systems, memory solutions, storage platforms, optical/RF/microE services, defense products, and software | ~20% | - The company operates manufacturing facilities in 20 countries across six continents, strategically located either near customers for new product introductions or in lower-cost regions for high-volume production[12] - The COVID-19 pandemic has negatively impacted operations by disrupting supply chains, limiting manufacturing capacity, and causing temporary site closures, with these negative effects expected to continue for the foreseeable future[25][26] Our Business Strategy Sanmina's business strategy focuses on leveraging end-to-end solutions, advanced technology, and global presence to build long-term customer partnerships - Sanmina's business strategy is centered on several key pillars to drive growth and customer success[17] - Capitalizing on Comprehensive Solutions: Cross-selling end-to-end solutions (design, manufacturing, logistics, after-market support) to existing and new customers to improve margins[17] - Extending Technology Capabilities: Continuously improving manufacturing processes and developing advanced technologies to meet future customer needs[18] - Promoting NPI and JDM Solutions: Offering joint design manufacturing (JDM) and new product introduction (NPI) services to help customers manage R&D expenses and accelerate time-to-market[20] - Penetrating Diverse End Markets: Targeting mission-critical product markets with strict regulatory requirements to leverage high-value services and diversify business[21][22] - Pursuing Strategic Transactions: Seeking acquisitions, divestitures, and partnerships to access new customers, technologies, and markets[23] - Seeking Cost Savings: Investing in factory automation, robotics, and AI, and leveraging its global footprint in lower-cost regions to enhance efficiency[24] Our Products and Solutions Sanmina offers integrated manufacturing solutions (IMS) and a wide range of components, products, and services (CPS) - Integrated Manufacturing Solutions (IMS): Core services include Printed Circuit Board Assembly (PCBA) and Test, High-Level Assembly (HLA) and Test for complex systems, and Direct-Order-Fulfillment with build-to-order (BTO) and configure-to-order (CTO) capabilities[46][47][48] - Components, Products and Services (CPS): This segment offers a wide range of vertically integrated offerings, including: - Product Design & Engineering: Comprehensive services from concept to end-of-life support - Interconnect Systems: Advanced printed circuit boards (up to 70 layers), backplanes (over 60 layers), and various cable assemblies - Mechanical Systems: Enclosures, precision machined components, and plastic injection molded products - Proprietary Products: Includes Viking Technology (memory/storage), Viking Enterprise Solutions (data center storage), SCI Technology (defense/aerospace), and 42Q (cloud MES software) - Advanced Technologies: Optical, RF, and microelectronics design and manufacturing services - Global Services: After-market services like repair, refurbishment, and logistics[49][50][52] Our End Markets Sanmina serves diverse end markets including industrial, medical, defense, automotive, communications networks, and cloud solutions - Industrial/Medical/Defense/Automotive: - Industrial: Services for transportation, power management, capital equipment, and clean technology (solar, wind, EV) - Medical: Manufacturing for regulated medical devices like diagnostic systems, patient monitors, and surgical equipment, compliant with FDA and ISO 13485 standards - Defense: Design and manufacturing for avionics, tactical communications, and unmanned systems through its SCI Technology division - Automotive: Manufacturing for sensors, controllers, infotainment, and EV sub-modules in IATF 16949 certified facilities[74][76][77] - Communications Networks & Cloud Solutions: - Communications Networks: Manufacturing for 5G wireless infrastructure, optical networking, routers, and switches - Cloud Solutions: Design and manufacturing for embedded computing and data storage, including racks, enclosures, and high-level assembly for data centers[80][81] Customers The ten largest customers account for approximately 50% of net sales, with Nokia being a significant customer in recent fiscal years - The ten largest customers account for approximately 50% of net sales[82] - Nokia was the only customer representing 10% or more of net sales in fiscal years 2021, 2020, and 2019[82] - Supply agreements with major OEMs typically range from three to five years but generally do not obligate the customer to purchase minimum quantities, though customers are usually liable for materials ordered based on their forecasts[84] Human Capital Resources Sanmina employs approximately 35,000 individuals globally, emphasizing retention and workforce diversity - As of October 2, 2021, Sanmina had approximately 35,000 employees, including 3,000 temporary staff, across 23 countries[102] Employee Geographic Distribution (FY 2021) | Region | Percentage of Employees | | :--- | :--- | | Americas | 50% | | China and Asia Pacific | 37% | | EMEA | 13% | - The company emphasizes employee retention, with an average tenure of approximately eight years and over one-third of employees having more than ten years of service[107] - The workforce is diverse, with almost 50% of global employees being female and over 50% of U.S. employees being non-Caucasian[109] Risk Factors The company faces significant risks including COVID-19 impacts, supply chain shortages, customer concentration, trade policies, and regulatory compliance - COVID-19 Pandemic: The pandemic continues to negatively impact operations by interrupting component supply, reducing customer demand, limiting facility productivity, and posing health risks to employees[120][121] - Supply Chain Shortages: Global shortages of components like capacitors, resistors, and semiconductors are limiting the ability to manufacture and ship products, with these issues expected to persist at least through mid-calendar 2022[126] - Customer Concentration: Reliance on the ten largest customers for about half of net sales poses a risk, as the loss of or a significant reduction in sales to any of them could substantially harm revenue and margins[137] - Trade Policy and Tariffs: U.S. tariffs on products and components from China increase costs, potentially reducing gross margins if not passed to customers, and could shift manufacturing, reducing revenue[138] - Regulatory and Compliance: The company is subject to complex U.S. export controls (ITAR, OFAC), government contracting regulations, and environmental laws, with non-compliance potentially leading to significant damages, fines, and reputational harm[143][153] - Cybersecurity: Reliance on IT networks for global operations exposes the company to cyberattacks like ransomware, which could disrupt operations, lead to data loss, and result in legal liability[151] Properties Sanmina operates approximately 10.7 million square feet of global manufacturing facilities, mostly owned, with key sites in the US, Mexico, and China Top 3 Manufacturing Facility Footprints (as of Oct 2, 2021) | Country | Approximate Square Footage | | :--- | :--- | | United States | 2,801,904 | | Mexico | 2,234,186 | | China | 2,084,658 | | Total | 10,690,204 | - Of the total 10.7 million square feet of active manufacturing space, Sanmina owns approximately 9 million square feet and leases 2 million square feet[184] - The company maintains numerous industry-specific certifications, including ISO 13485 and FDA registration for medical facilities, AS9100 for defense and aerospace, and IATF 16949 for automotive operations, demonstrating adherence to stringent quality and process standards[188][189][190] Legal Proceedings Sanmina faces legal proceedings including a groundwater pollution lawsuit, a dispute with former customer Dialight plc, and a recently settled labor class action - The company is a defendant in a lawsuit by the Orange County Water District concerning alleged groundwater contamination, with the first phase of a multi-phase trial commencing in April 2021[192] - A settlement was reached in a California labor lawsuit for approximately $3.8 million, which is scheduled to be paid in the first quarter of fiscal 2022[193] - Sanmina is in litigation with former customer Dialight plc, with Sanmina suing to collect approximately $10 million in receivables, while Dialight sued for fraudulent inducement and breach of contract, seeking unspecified damages[194] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Sanmina's common stock trades on Nasdaq (SANM); the company does not pay dividends but actively repurchases shares, with $80.8 million available for buybacks - The company's common stock is traded on the Nasdaq Global Select Market under the symbol SANM[201] - Sanmina has never declared or paid cash dividends and does not plan to in the foreseeable future, retaining earnings for business operations and stock repurchases[206] Stock Repurchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Maximum Dollar Value Remaining for Purchase | | :--- | :--- | :--- | :--- | | Aug 29, 2021 - Oct 2, 2021 | 827,402 | $39.12 | $80,799,702 | Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2021, net sales decreased to $6.8 billion due to supply shortages, while gross margin and net income improved, generating $338 million in operating cash Key Operating Results (Fiscal Years 2019-2021) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Sales | $6,756.6M | $6,960.4M | $8,233.9M | | Gross Profit | $551.8M | $525.7M | $591.9M | | Gross Margin | 8.2% | 7.6% | 7.2% | | Operating Income | $281.3M | $227.7M | $286.1M | | Operating Margin | 4.2% | 3.3% | 3.5% | | Net Income | $269.0M | $139.7M | $141.5M | - Net sales decreased by 2.9% in 2021, driven by a decline in the Industrial, Medical, Defense, and Automotive end market, which was impacted by component shortages related to the COVID-19 pandemic[240][241] - Gross margin increased to 8.2% in 2021 from 7.6% in 2020, attributed to improved operational efficiencies, favorable product mix in the CPS segment, and cost reduction efforts[243][244] - The company generated $338.3 million in cash from operating activities in 2021 and ended the year with $650 million in cash and cash equivalents[261][266] - Working capital cash cycle days increased from 54 in 2020 to 58 in 2021, primarily due to an increase in days sales outstanding (DSO) and days inventory on hand (DIO), reflecting supply chain challenges and shipment linearity[262][268] Quantitative and Qualitative Disclosures About Market Risk Sanmina manages interest rate risk on its variable-rate Term Loan with swaps and hedges foreign currency exposure using forward contracts - Interest Rate Risk: The company's main exposure is its $333 million Term Loan with a floating interest rate, managed with interest rate swaps having a notional value of $350 million, which effectively fix the rate on that portion of the debt[296] - Foreign Currency Exchange Risk: The company uses foreign currency forward contracts to hedge exposures from its global operations, with outstanding contracts of $353 million for balance sheet hedging and $110 million for cash flow hedging as of October 2, 2021[298][299] Financial Statements and Supplementary Data PwC issued an unqualified opinion on FY2021 financial statements, noting revenue recognition as a critical audit matter, with total assets at $4.21 billion - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of October 2, 2021[305] - A critical audit matter was identified related to revenue recognition for government contracts in the Defense and Aerospace division, specifically the significant management judgment required for estimating costs under the cost-to-cost method[314][315] Consolidated Balance Sheet Highlights (as of Oct 2, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $3,281,664 | | Cash and cash equivalents | $650,026 | | Accounts receivable, net | $1,192,434 | | Inventories | $1,036,511 | | Total Assets | $4,206,719 | | Total Current Liabilities | $1,762,987 | | Accounts payable | $1,464,693 | | Total Liabilities | $2,328,091 | | Total Stockholders' Equity | $1,878,628 | Consolidated Income Statement Highlights (Year Ended Oct 2, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Net sales | $6,756,643 | | Gross profit | $551,805 | | Operating income | $281,300 | | Net income | $268,998 | | Diluted EPS | $4.01 | Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of October 2, 2021 - Management, including the CEO and CFO, concluded that as of October 2, 2021, the company's disclosure controls and procedures were effective at providing reasonable assurance[472] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of October 2, 2021, attested to by PricewaterhouseCoopers LLP[473][474] - There were no changes in internal control over financial reporting during the fourth quarter of fiscal 2021 that materially affected, or are reasonably likely to materially affect, internal controls[475] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Information for Items 10-14 is incorporated by reference from the 2022 Proxy Statement, covering governance, compensation, and ownership - The information required by Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting of Stockholders[479] - Information regarding executive officers is included in Part I of this Form 10-K[479] PART IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including corporate governance documents and SOX certifications - The financial statements required for this report are filed under Item 8[482] - Schedule II-Valuation and Qualifying Accounts is filed as a financial statement schedule with this report[482] - A list of exhibits filed with the report includes the Restated Certificate of Incorporation, Amended and Restated Bylaws, debt indentures, credit agreements, and various compensatory plans and agreements[484][486] - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[486]