SANMINA CORPORATION This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenue or results of operations, gross margin, operating margin, expenses, earnings or losses from operations, cash flow, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations and the anticipated benefits of such plans, strategies and objectives; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements regarding the timing of closing of, future cash outlays for, and benefits of, acquisitions; any statements regarding expected restructuring costs and benefits; any statements concerning the adequacy of our current liquidity and the availability of additional sources of liquidity; any statements regarding the impact of future potential tariffs on our business; any statements regarding the impact of changes in tax laws; any statements relating to the expected impact of accounting pronouncements not yet adopted; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words "anticipate," "believe," "plan," "expect," "future," "intend," "may," "will," "should," "estimate," "predict," "potential," "continue" and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks and uncertainties, including those contained in Part II, Item 1A of this report. As a result, actual results could vary materially from those suggested by the forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with theSecurities and Exchange Commission . Investors and others should note that the Company announces material financial information to its investors using its investor relations website (http://ir.sanmina.com/investor-relations/overview/default.aspx),SEC filings, press releases, public conference calls and webcasts. The Company uses these channels to communicate with its investors and the public about the Company, its products and services and other issues. It is possible that the information the Company posts on its investor relations website could be deemed to be material information. Therefore, the Company encourages investors, the media, and others interested in the Company to review the information it posts on its investor relations website. The content of our investor relations website are not incorporated by reference into this quarterly report on Form 10-Q or in any other report or document we file with theSEC .Sanmina Corporation and its subsidiaries (the "Company", "we" or "us") operate on a 52 or 53 week year ending on the Saturday nearestSeptember 30 . Fiscal 2019 was a 52-week year and fiscal 2020 will be a 53-week year, with the extra week in the fourth quarter. All references to years relate to fiscal years unless otherwise noted. Overview
We are a leading global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. Our revenue is generated from sales of our products and services primarily to original equipment manufacturers (OEMs) that serve the industrial, medical, defense and aerospace, automotive, communications networks and cloud solutions industries.
We operate in the Electronics Manufacturing Services ("EMS") industry and manage our operations as two businesses:
1. Integrated Manufacturing Solutions ("IMS"). Our IMS segment consists of
printed circuit board assembly and test, final system assembly and test
and direct-order-fulfillment.
2. Components, Products and Services ("CPS"). Components include interconnect
systems (printed circuit board fabrication, backplane, cable assemblies
and plastic injection molding) and mechanical systems (enclosures and
precision machining). Products include memory from our Viking Technology
division; enterprise solutions from our Viking Enterprise Solutions
division; radio frequency ("RF"), optical and microelectronic; defense and
aerospace products from
execution software from our 42Q division. Services include design,
engineering, logistics and repair services.
Our only reportable segment is IMS, which represented approximately 80% of our
total revenue in the first quarter of 2020 and first quarter of 2019. Our CPS
business consists of multiple operating segments, which do not meet the
quantitative thresholds for being presented as reportable segments under the
accounting rules for segment reporting. Therefore, financial information for
these operating segments is presented in a single category entitled "Components,
Products and Services".
22-------------------------------------------------------------------------------- Our strategy is to leverage our comprehensive product and service offerings, advanced technologies and global capabilities to further penetrate diverse end markets that offer significant growth opportunities and that have complex products that require higher value-added services. We believe this strategy differentiates us from our competitors and will help drive more sustainable revenue growth and provide the potential for us to ultimately achieve operating margins that exceed industry standards. There are many challenges to successfully executing our strategy. For example, we compete with a number of companies in each of our key end markets. This includes companies that are much larger than we are and smaller companies that focus on a particular niche. Although we believe we are well-positioned in each of our key end markets and seek to differentiate ourselves from our competitors, competition remains intense and improving our profitability while growing our revenue has been challenging. A small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers have typically represented approximately 50% of our net sales. Two customers represented 10% or more of our net sales for all periods presented. We typically generate about 80% of our net sales from products manufactured in our foreign operations. The concentration of foreign operations has resulted primarily from a desire on the part of many of our customers to manufacture in lower cost regions such asAsia ,Latin America andEastern Europe . Historically, we have had substantial recurring sales to existing customers. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and can cover the manufacture of a range of products. Under these agreements, a customer typically purchases its requirements for specific products in particular geographic areas from us. However, these agreements generally do not obligate the customer to purchase minimum quantities of products, which can have the effect of reducing revenue and profitability. In addition, some customer contracts contain cost reduction objectives, which can also have the effect of reducing revenue from such customers.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate the process used to develop estimates related to product returns, accounts receivable, inventories, intangible assets, income taxes, warranty obligations, environmental matters, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.
For a complete description of our critical accounting policies and estimates,
refer to our 2019 Annual Report on Form 10-K filed with the
Results of Operations
Key Operating Results
Three Months Ended
December 28, December 29,
2019 2018
(In thousands)
Net sales $ 1,840,171 $ 2,188,018
Gross profit $ 134,882 $ 149,337
Operating income $ 57,181 $ 77,543
Net income $ 38,345 $ 37,952
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Sales by end market were as follows (dollars in thousands):
Three Months Ended
December 28, December 29,
2019 2018 Increase/(Decrease)
Industrial, Medical, Defense and Automotive
580,743 779,721 (198,978 ) (25.5 )%
Cloud Solutions 151,881 225,813 (73,932 ) (32.7 )%
Total $ 1,840,171 $ 2,188,018 $ (347,847 ) (15.9 )%
Net sales decreased from $2.2 billion in the first quarter of 2019 to $1.8
billion in the first quarter of 2020, a decrease of 15.9%. In general, the
decrease was primarily due to the fact that sales in 2019 were favorably
impacted by the availability of components, the availability of which had been
constrained in 2018. Improved availability of these components in 2019 allowed
us to catch up to pent-up demand, beginning in the first quarter of 2019 and
continuing throughout 2019. Sales in our industrial, medical defense and
automotive end market addition were further impacted by a transition of certain
programs in our industrial segment, partially offset by new program ramps in our
automotive segment. Sales in our communications networks end market were also
impacted by decreased overall demand for routing and optical products. Sales to
customers in our cloud solutions end market decreased 32.7% primarily due to the
ramp of a new program with a Tier One cloud service provider in the first
quarter of 2019 and decreased demand for set top boxes.
Gross Margin
Gross margin increased to 7.3% for the first quarter of 2020 from 6.8% for the
first quarter of 2019. IMS gross margin increased to 6.6% for the first quarter
of 2020, from 6.2% for the first quarter of 2019, due primarily to improved
operational efficiencies. CPS gross margin increased to 10.9% for the first
quarter of 2020, from 8.9% for the first quarter of 2019, primarily due to
improved operational efficiencies and continued benefits of certain plant
closures during the past two years.
We expect our gross margins to continue to fluctuate based on overall production
and shipment volumes and changes in the mix of products required by our major
customers. Fluctuations in our gross margins may also be caused by a number of
other factors, some of which are outside of our control, including:
• changes in customer demand and sales volumes for our vertically
integrated system components and subassemblies;
• changes in the overall volume of our business, which affect the level
of capacity utilization;
• changes in the mix of high and low margin products demanded by our customers;
• parts shortages and extended parts lead times caused by high demand or
natural disasters, and related operational disruption and
inefficiencies;
• greater competition in the EMS industry and pricing pressures from
OEMs due to greater focus on cost reduction;
• provisions for excess and obsolete inventory, including those
associated with distressed customers;
• levels of operational efficiency and production yields;
• wage inflation and rising materials costs;
• resolution of claims with our customers;
• our ability to pass tariffs we incur upon importation of components for
production of our customers' products through to our customers; and
• our ability to transition the location of and ramp manufacturing and
assembly operations when desired or requested by a customer in a timely
and cost-effective manner.
Selling, General and Administrative
Selling, General and Administrative expenses increased$0.1 million , from$63.0 million , or 2.9% of net sales, in the first quarter of 2019 to$63.2 million , or 3.4% of net sales, in the first quarter of 2020.
Research and Development
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Research and Development expenses decreased $1.2 million , from $6.4 million , or
0.3% of net sales, in the first quarter of 2019 to $5.2 million , or 0.3% of net
sales, in the first quarter of 2020. This decrease resulted primarily from
certain plant closures and an increase in billable customer engineering products
that required our engineering resources, the cost of which would otherwise have
been absorbed by us.
Restructuring
The following table provides a summary of restructuring costs:
Restructuring Expense
Three Months Ended
December 28, December 29,
2019 2018
Severance costs (approximately 1,450 employees) $ 6,728 $ -
Other exit costs 8 -
Total - Q1 FY20 plan 6,736 -
Costs incurred for other plans 2,424 2,139
Total - all plans $ 9,160 $ 2,139
Q1 FY20 Plan
On October 28, 2019 , we adopted a Company-wide restructuring plan. Under this
plan, we expect to incur restructuring charges of approximately $10 million to
$20 million , consisting primarily of cash severance costs, primarily over the
first half of 2020. In addition, we are still in the process of completing
restructuring actions under other plans.
Actions under the Q1 FY20 plan began in the first quarter of 2020 and are expected to occur through fiscal 2020. Cash payments of severance began in the first quarter of 2020 and are expected to occur through fiscal 2020.
Other Plans
Other plans include a number of plans for which costs are not expected to be
material individually or in the aggregate.
All Plans
Our Integrated Manufacturing Solutions ("IMS") segment incurred costs under all
restructuring plans of $7 million for the three months ended December 28, 2019
and recognized a benefit under all restructuring plans of $4 million for the
three months ended December 29, 2018 , primarily as a result of a recovery from a
third party of certain environmental remediation costs. Our Components, Products
and Service ("CPS") segment incurred costs under all restructuring plans of $2
million and $6 million for the three months ended December 28, 2019 and
December 29, 2018 , respectively. As of December 28, 2019 and September 28, 2019 ,
we had accrued liabilities of $4 million and $5 million , respectively, for
restructuring costs (exclusive of environmental remediation liabilities).
In addition to costs expected to be incurred under the Q1 FY20 plan, we expect
to incur restructuring costs in future periods primarily for vacant facilities
and former sites for which we are or may be responsible for environmental
remediation.
Provision for Income Taxes
Our provision for income taxes for the three months endedDecember 28, 2019 andDecember 29, 2018 was$15 million (28% of income before taxes) and$26 million (40% of income before taxes), respectively. Income tax expense for the three months endedDecember 28, 2019 decreased primarily as a result of lower income before tax and the impact of a tax-related restructuring transaction that became effective in the fourth quarter of 2019. 25 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Three Months Ended
December 28, December 29,
2019 2018
(In thousands)
Net cash provided by (used in):
Operating activities $ 21,171 $ (78,436 )
Investing activities (28,046 ) (36,591 )
Financing activities (17,386 ) 104,723
Effect of exchange rate changes on cash and cash equivalents 84 66
Decrease in cash and cash equivalents $ (24,177
)
Key Working Capital Management Measures
As of
December 28, September 28,
2019 2019
Days sales outstanding (1) 54 56
Contract asset days (2) 20 19
Inventory turns (3) 7.8 7.7
Days inventory on hand (4) 47 47
Accounts payable days (5) 68 70
Cash cycle days (6) 53 52
(1) Days sales outstanding (a measure of how quickly we collect our accounts
receivable), or "DSO", is calculated as the ratio of average accounts
receivable, net, to average daily net sales for the quarter.
(2) Contract asset days are calculated as the ratio of average contract assets
to average daily net sales for the quarter.
(3) Inventory turns (annualized) are calculated as the ratio of four times our
cost of sales for the quarter to average inventory.
(4) Days inventory on hand is calculated as the ratio of average inventory for
the quarter to average daily cost of sales for the quarter.
(5) Accounts payable days (a measure of how quickly we pay our suppliers), or
"DPO", is calculated as the ratio of 365 days divided by accounts payable
turns, in which accounts payable turns is calculated as the ratio of four
times our cost of sales for the quarter to average accounts payable.
(6) Cash cycle days is calculated as days inventory on hand plus days sales
outstanding and contract assets day minus accounts payable days.
Cash and cash equivalents were $431 million at December 28, 2019 and $455
million at September 28, 2019 . Our cash levels vary during any given quarter
depending on the timing of collections from customers and payments to suppliers,
borrowings under credit facilities, sales of accounts receivable under numerous
programs we utilize, repurchases of capital stock and other factors. Our working
capital was $1.3 billion and $1.2 billion as of December 28, 2019 and
September 28, 2019 , respectively.
Net cash provided by (used in) operating activities was $21 million and $(78)
million for the three months ended December 28, 2019 and December 29, 2018 ,
respectively. Cash flows from operating activities consist of: (1) net income
adjusted to exclude non-cash items such as depreciation and amortization,
deferred income taxes and stock-based compensation expense and (2) changes in
net operating assets, which are comprised of accounts receivable, contract
assets, inventories, prepaid expenses and other assets, accounts payable,
accrued liabilities and other long-term liabilities. Our working capital metrics
tend to fluctuate from quarter-to-quarter based on factors such as the linearity
of our shipments to customers and purchases from suppliers, customer and
supplier mix, the extent to which we factor customer receivables and the
negotiation of
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--------------------------------------------------------------------------------payment terms with customers and suppliers. These fluctuations can significantly affect our cash flows from operating activities.
During the three months endedDecember 28, 2019 , we generated$77 million of cash primarily from earnings, excluding non-cash items, and consumed$55 million of cash due primarily to decreases in accounts payable and accrued liabilities and an increase in contract assets, partially offset by decreases in accounts receivable and inventory. The decreases noted previously were primarily due to decreased business volume. Our DPO decreased from 70 days as ofSeptember 28, 2019 to 68 days as ofDecember 28, 2019 due primarily to an unfavorable shift in the linearity of material receipts (i.e., more components were received and paid for within the quarter). Accrued liabilities decreased primarily due to a lower level of sales of accounts receivable for which we, as a servicer, collected on behalf of the financial institutions to which the receivables were sold, but had not yet remitted the collected funds to such financial institutions. Our DSO decreased from 56 days as ofSeptember 28, 2019 to 54 days as ofDecember 28, 2019 due primarily to a favorable shift in customer payment terms mix from customers with longer payment terms to customers with shorter payment terms and a favorable shift in linearity of product shipment to customers. Inventory decreased primarily due to decreased business volume, improved availability of supply-constrained parts that reduced the need to carry other inventory while waiting for these supply-constrained parts to become available, and other inventory reduction initiatives. Contract assets increased due primarily to spending on certain early-stage contracts for which customers have not yet been billed. Net cash used in investing activities was$28 million and$37 million for the three months endedDecember 28, 2019 andDecember 29, 2018 , respectively. During the three months endedDecember 28, 2019 , we used$28 million of cash for capital expenditures. During the three months endedDecember 29, 2018 , we used$37 million of cash for capital expenditures. Net cash provided for (used in) financing activities was$(17) million and$105 million for the three months endedDecember 28, 2019 andDecember 29, 2018 , respectively. During the three months endedDecember 28, 2019 , we repaid$5 million of the Term Loan, used$17 million of cash to repurchase common stock (including$8 million related to employee tax withholdings on vested restricted stock units) and received$4 million of net proceeds from issuances of common stock pursuant to stock option exercises. During the three months endedDecember 29, 2018 , we used$12 million of cash to repurchase common stock (including$5 million related to employee tax withholdings on vested restricted stock units), borrowed$115 million of cash under the Fourth Amended and Restated Credit Agreement (the "Amended Cash Flow Revolver"), received$4 million net proceeds from issuances of common stock pursuant to stock option exercises and incurred$2 million of debt issuance costs in connection with our revolving credit amendment.
Other Liquidity Matters
Our Board of Directors has authorized us to repurchase shares of our common stock, subject to a dollar limitation. The timing of repurchases will depend upon capital needs to support the growth of our business, market conditions and other factors. Although stock repurchases are intended to increase stockholder value, purchases of shares will reduce our liquidity. We repurchased 0.3 million and 0.3 million shares of our common stock for$9 million and$7 million during the three months endedDecember 28, 2019 andDecember 29, 2018 , respectively. As ofDecember 28, 2019 , an aggregate of$292 million remained available under our stock repurchase programs authorized by the Board of Directors, none of which is subject to an expiration date. We enter into forward interest rate swap agreements with independent counterparties to partially hedge the variability in cash flows due to changes in the benchmark interest rate (LIBOR) associated with anticipated variable rate borrowings. These interest rate swaps have a maturity date ofDecember 1, 2023 , and effectively convert our variable interest rate obligations to fixed interest rate obligations. These swaps are accounted for as cash flow hedges under ASC Topic 815, Derivatives and Hedging. As ofDecember 28, 2019 andSeptember 28, 2019 , interest rate swaps with an aggregate notional amount of$350 million , respectively, were outstanding. The aggregate effective interest rate under these swaps as ofDecember 28, 2019 was approximately 4.3%. As ofDecember 28, 2019 , due to a decline in interest rates since the time the swaps were put in place, these interest rate swaps had a negative value of$17 million , of which$4 million is included in accrued liabilities and the remaining amount is included in other long-term liabilities on the condensed consolidated balance sheets. The Amended Cash Flow Revolver requires us to comply with a minimum consolidated interest coverage ratio, measured at the end of each fiscal quarter, and at all times a maximum consolidated leverage ratio. The Amended Cash Flow Revolver contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the Amended Cash Flow Revolver contains customary negative covenants limiting our ability and that of our subsidiaries to, among other 27 --------------------------------------------------------------------------------
things, incur debt, grant liens, make investments, make acquisitions, make
certain restricted payments and sell assets, subject to certain exceptions. As
of
We have a Receivable Purchase Agreement (the "RPA") with certain third-party banking institutions for the sale of trade receivables generated from sales to certain customers, subject to acceptance by the banks party to the RPA. A maximum of$553 million of sold receivables can be outstanding at any point in time under this program, as amended, subject to limitations under our Amended Cash Flow Revolver. Additionally, the amount available under the RPA is uncommitted and, as such, is available at the discretion of our third-party banking institutions. OnJanuary 16, 2019 , we entered into an amendment to our Amended Cash Flow Revolver which increased the percentage of our total accounts receivable that can be sold and outstanding at any time from 30% to 40%. Trade receivables sold pursuant to the RPA are serviced by us. In addition to the RPA, we have the option to participate in trade receivables sales programs that have been implemented by certain of our customers, as in effect from time to time. We do not service trade receivables sold under these other programs. The sale of receivables under all of these programs is subject to the approval of the banks or customers involved and there can be no assurance that we will be able to sell the maximum amount of receivables permitted by these programs when desired. Under each of the programs noted above, we sell our entire interest in a trade receivable for 100% of face value, less a discount. During the three months endedDecember 28, 2019 andDecember 29, 2018 , we sold accounts receivable of$538 million and$561 million , respectively, under these programs. Upon sale, these receivables are removed from the condensed consolidated balance sheets and cash received is presented as cash provided by operating activities in the condensed consolidated statements of cash flows. Discounts on sold receivables were not material for any period presented. As ofDecember 28, 2019 andSeptember 28, 2019 ,$182 million and$241 million , respectively, of accounts receivable sold under the RPA and subject to servicing by us remained outstanding and had not yet been collected. Our sole risk with respect to receivables we service is with respect to commercial disputes regarding such receivables. Commercial disputes include billing errors, returns and similar matters. To date, we have not been required to repurchase any receivable we have sold due to a commercial dispute. Additionally, we are required to remit amounts collected as servicer on a weekly basis to the financial institutions that purchased the receivables. As ofDecember 28, 2019 andSeptember 28, 2019 ,$78 million and$76 million , respectively, had been collected but not yet remitted. This amount is classified in accrued liabilities on the condensed consolidated balance sheets. In the ordinary course of business, we are or may become party to legal proceedings, claims and other contingencies, including environmental, warranty and employee matters and examinations by government agencies. As ofDecember 28, 2019 , we had reserves of$35 million related to such matters. We cannot accurately predict the outcome of these matters or the amount or timing of cash flows that may be required to defend ourselves or to settle such matters or that these reserves will be sufficient to fully satisfy our contingent liabilities. As ofDecember 28, 2019 , we had a liability of$108 million for uncertain tax positions. Our estimate of liabilities for uncertain tax positions is based on a number of subjective assessments, including the likelihood of a tax obligation being assessed, the amount of taxes (including interest and penalties) that would ultimately be payable, and our ability to settle any such obligations on favorable terms. Therefore, the amount of future cash flows associated with uncertain tax positions may be significantly higher or lower than our recorded liability and we are unable to reliably estimate when cash settlement may occur. Our liquidity needs are largely dependent on changes in our working capital, including sales of accounts receivable under our receivables sales programs and the extension of trade credit by our suppliers, investments in manufacturing inventory, facilities and equipment, repayments of obligations under outstanding indebtedness and repurchases of common stock. Our primary sources of liquidity as ofDecember 28, 2019 consisted of (1) cash and cash equivalents of$431 million ; (2) our Amended Cash Flow Revolver, under which$692 million , net of outstanding borrowings and letters of credit, was available; (3) foreign short-term borrowing facilities of$72 million , all of which was available; (4) proceeds from the sale of accounts receivable under our uncommitted receivables sales programs and (5) cash generated from operations. We believe our existing cash resources and other sources of liquidity, together with cash generated from operations, will be sufficient to meet our working capital requirements for at least the next 12 months. Should demand for our services change significantly over the next 12 months or should we experience significant increases in delinquent or uncollectible accounts receivable, our cash provided by operations could be adversely impacted. 28 -------------------------------------------------------------------------------- As ofDecember 28, 2019 , 64% of our cash balance was held inthe United States . Should we choose or need to remit cash tothe United States from our foreign locations, we may incur tax obligations which would reduce the amount of cash ultimately available tothe United States . We believe that cash held inthe United States , together with liquidity available under our Amended Cash Flow Revolver and cash from foreign subsidiaries that could be remitted tothe United States without tax consequences, will be sufficient to meet ourUnited States liquidity needs for at least the next twelve months.
Off-Balance Sheet Arrangements
As ofDecember 28, 2019 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by theSEC , that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. 29
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