Sanmina Corp 10-Q for FY2020 Q3
Sanmina Corp (SANM)
10-Q
2020-07-31
For: 2020-06-27
View Original
Added on
April 08, 2026
About this 10-Q
Sanmina Corp filed this 10-Q on July 31, 2020, covering the quarter ended June 27, 2020 (FY2020 Q3).
Headline figures
Quarter ended June 27, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.65B
- down 18.4% from $2.03B a year earlier
- Net income
- $44.88M
- up 4.6% from net income of $42.92M a year earlier
- Diluted EPS
- $0.64
- up 6.7% from $0.60 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| (Mark one) | ||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended June 27, 2020
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission File Number 0-21272
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||||||||||||||||||||||||||
| incorporation or organization) | Identification Number) | |||||||||||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||||||||||||||
| (Registrant's telephone number, including area code) | ||||||||||||||||||||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:
[X] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company | ||||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
As of July 24, 2020, there were 67,763,797 shares outstanding of the issuer's common stock, $0.01 par value per share.
SANMINA CORPORATION
INDEX
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| Item 2. | ||||||||
| Item 3. | ||||||||
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| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
SANMINA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | |||||||||||||||||
| June 27, 2020 | September 28, 2019 | ||||||||||||||||
| (Unaudited) | |||||||||||||||||
| (In thousands) | |||||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | |||||||||||||||
| Short-term investments | |||||||||||||||||
Accounts receivable, net of allowances of $ | |||||||||||||||||
| Contract assets | |||||||||||||||||
| Inventories | |||||||||||||||||
| Prepaid expenses and other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
| Property, plant and equipment, net | |||||||||||||||||
| Deferred tax assets | |||||||||||||||||
| Other | |||||||||||||||||
| Total assets | $ | $ | |||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | $ | |||||||||||||||
| Accrued liabilities | |||||||||||||||||
| Accrued payroll and related benefits | |||||||||||||||||
| Short-term debt, including current portion of long-term debt | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Long-term liabilities: | |||||||||||||||||
| Long-term debt | |||||||||||||||||
| Other | |||||||||||||||||
| Total long-term liabilities | |||||||||||||||||
| Contingencies (Note 7) | |||||||||||||||||
| Stockholders' equity | |||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||||||||
| Restructuring and other | |||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Interest and other, net | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Weighted average shares used in computing per share amounts: | |||||||||||||||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||||||||||||||||||||
| Change in foreign currency translation adjustments | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Derivative financial instruments: | |||||||||||||||||||||||||||||||||||||||||
| Change in net unrealized amount | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Amount reclassified into net income | |||||||||||||||||||||||||||||||||||||||||
| Defined benefit plans: | |||||||||||||||||||||||||||||||||||||||||
| Changes in unrecognized net actuarial losses and unrecognized transition costs | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Amortization of actuarial losses and transition costs | |||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Common Stock and Additional Paid-in Capital | |||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Issuances under stock plans | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||||||||
| Other issuances | |||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | |||||||||||||||||||||||||||||||||||||||||
| Treasury Stock | |||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Repurchases of treasury stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Balance, end of period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balance, end of period | |||||||||||||||||||||||||||||||||||||||||
| Accumulated Deficit | |||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Cumulative effect of new accounting pronouncement (1) | |||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Total stockholders' equity | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Common Stock Shares Outstanding | |||||||||||||||||||||||||||||||||||||||||
| Number of shares, beginning of period | |||||||||||||||||||||||||||||||||||||||||
| Issuances under stock plans | |||||||||||||||||||||||||||||||||||||||||
| Number of shares, end of period | |||||||||||||||||||||||||||||||||||||||||
| Treasury Shares | |||||||||||||||||||||||||||||||||||||||||
| Number of shares, beginning of period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Repurchases of treasury stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Number of shares, end of period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
(1) Due to the adoption of ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective approach.
See accompanying notes to condensed consolidated financial statements.
6
SANMINA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended | |||||||||||||||||
| June 27, 2020 | June 29, 2019 | ||||||||||||||||
| (Unaudited) | |||||||||||||||||
| (In thousands) | |||||||||||||||||
| CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: | |||||||||||||||||
| Net income | $ | $ | |||||||||||||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||
| Deferred income taxes | |||||||||||||||||
| Goodwill and other asset impairments | |||||||||||||||||
| Other, net | ( | ||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | ( | ||||||||||||||||
| Contract assets | ( | ||||||||||||||||
| Inventories | |||||||||||||||||
| Prepaid expenses and other assets | |||||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||
| Accrued liabilities | ( | ||||||||||||||||
| Cash provided by operating activities | |||||||||||||||||
| CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: | |||||||||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||||||||
| Proceeds from sales of property, plant and equipment | |||||||||||||||||
| Purchases of investments | ( | ( | |||||||||||||||
| Cash used in investing activities | ( | ( | |||||||||||||||
| CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: | |||||||||||||||||
| Repayments of long-term debt | ( | ( | |||||||||||||||
| Proceeds from long-term debt | |||||||||||||||||
| Proceeds from revolving credit facility borrowings | |||||||||||||||||
| Repayments of revolving credit facility borrowings | ( | ( | |||||||||||||||
| Debt issuance costs | ( | ||||||||||||||||
| Net proceeds from stock issuances | |||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||
| Cash provided by (used in) financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes | |||||||||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||||||||
| Cash paid during the period for: | |||||||||||||||||
| Interest, net of capitalized interest | $ | $ | |||||||||||||||
| Income taxes, net of refunds | $ | $ | |||||||||||||||
| Unpaid purchases of property, plant and equipment at the end of period | $ | $ | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
7
SANMINA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Due to the COVID-19 global pandemic, the global economy and financial markets have been disrupted and there continues to be a significant amount of uncertainty about the length and severity of the consequences caused by the pandemic. The Company has considered information available to it as of the date of issuance of these financial statements and, other than two customer bankruptcies in the third quarter of 2020, the impact of which was immaterial, and the impairments described in Note 3, the Company is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or a revision to the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates.
Results of operations for the third quarter of 2020 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
Recent Accounting Pronouncements Adopted
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)", which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and which also clarifies and amends existing guidance to improve consistent application. The Company adopted this ASU in the second quarter of 2020. The impact of adoption was not material.
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", which allows companies to reclassify stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (H.R. 1) from accumulated other comprehensive income to retained earnings. The Company adopted this ASU at the beginning of fiscal 2020. There was no impact upon adoption.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements for Accounting For Hedging Activities", simplifying hedge accounting guidance and improving the financial reporting of hedging relationships by allowing an entity to better align its risk management activities and financial reporting for hedging relationships through changes to both designation and measurement for qualifying hedging relationships and the presentation of hedge results. This standard eliminates the requirement to separately measure and report hedge ineffectiveness, resulting in full recognition of the change in fair value that impacts earnings in the same income statement line item that is used to present the earnings effect of the hedged item. In addition, the guidance allows more flexibility in the requirements to qualify for and maintain hedge accounting. The Company adopted this ASU at the beginning of fiscal 2020. The impact of adoption was not material.
In February 2016, the FASB issued ASU 2016-02, "Leases: Amendments to the FASB Accounting Standards Codification (Topic 842)". This ASU requires the Company to recognize on the balance sheet the assets and liabilities for the
8
rights and obligations created by leases with terms of more than twelve months. This ASU also requires disclosures enabling the users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases. In addition, the FASB provided a practical expedient transition method that allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, as opposed to applying the requirements retrospectively and providing comparative prior period financial statements. The Company adopted the new standard on September 29, 2019, the first day of fiscal 2020, and applied the above practical expedient transition method. The Company elected certain other transition options which, among other things, allowed the Company to carry forward its prior conclusions about lease identification and classification.
Upon adoption of the new standard, the Company recognized approximately $65
Refer to Note 5 for additional information and disclosures related to the adoption of ASC 842.
Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)", which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Company has not yet applied any of the expedients and exceptions and is currently evaluating the impact of the provisions of ASU 2020-04.
In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance aligns the requirements for capitalizing implementation costs incurred in a cloud-based hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for the Company at the beginning of fiscal 2021, including interim periods within that reporting period.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which replaces the existing incurred loss impairment methodology with an expected credit loss methodology and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This new standard is effective for the Company at the beginning of fiscal 2021, including interim periods within that reporting period. The Company does not expect the impact of adoption to be significant.
Note 2. Revenue Recognition
The Company is a leading global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. For purposes of determining when to recognize revenue, and in what amount, the Company applies a 5-step model: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation. Each of these steps involves the use of significant judgments, as discussed below.
Step 1 - Identify the contract with a customer
A contract is defined as an agreement between two parties that creates enforceable rights and obligations. The Company generally enters into a master supply agreement (“MSA”) with its customers that provides the framework under which business will be conducted, and pursuant to which a customer will issue purchase orders or other binding documents to specify the quantity, price and delivery requirements for products or services the customer wishes to purchase. The Company generally considers its contract with a customer to be a firm commitment, consisting of the combination of an MSA and a purchase order or any other similar binding document.
Step 2 - Identify the performance obligations in the contract
A performance obligation is a promised good or service that is material in the context of the contract and is both capable of being distinct (customer can benefit from the good or service on its own or together with other readily available resources) and distinct within the context of the contract (separately identifiable from other promises). The Company reviews its contracts to identify promised goods or services and then evaluates such items to determine which of those items are performance obligations. The majority of the Company’s contracts have a single performance obligation since the promise to
9
transfer an individual good or service is not separately identifiable from other promises in the contract. The Company’s performance obligations generally have an expected duration of one year or less.
Step 3 - Determine the transaction price
The Company’s contracts with its customers may include certain forms of variable consideration such as early payment discounts, volume discounts and shared cost savings. The Company includes an estimate of variable consideration when determining the transaction price and the appropriate amount of revenue to be recognized. This estimate is limited to an amount which will not result in a significant reversal of revenue in a future period. Factors considered in the Company’s estimate of variable consideration are the potential amount subject to these contract provisions, historical experience and other relevant facts and circumstances.
Step 4 - Allocate the transaction price to the performance obligations in the contract
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In the event that more than one performance obligation is identified in a contract, the Company is required to allocate a portion of the transaction price to each performance obligation. This allocation would generally be based on the relative standalone price of each performance obligation, which most often would represent the price at which the Company would sell similar goods or services separately.
Step 5 - Recognize revenue when (or as) a performance obligation is satisfied
The Company is required to assess whether control of a product or services promised under a contract is transferred to the customer at a point-in-time or over time as the product is being manufactured or the services are being provided. If the criteria in ASC 606 for recognizing revenue on an over time basis are not met, revenue must be recognized at the point-in-time determined by the Company at which its customer obtains control of a product or service.
The Company has determined that revenue for the majority of its contracts is required to be recognized on an over time basis. This determination is based on the fact that 1) the Company does not have an alternative use for the end products it manufactures for its customers and has an enforceable right to payment, including a reasonable profit, for work-in-progress upon a customer’s cancellation of a contract for convenience or 2) the Company’s customer simultaneously receives and consumes the benefits provided by the Company’s services. For these contracts, revenue is recognized on an over time basis using the cost-to-cost method (ratio of costs incurred to date to total estimated costs at completion) which the Company believes best depicts the transfer of control to the customer. At least 95 % of the Company's revenue is recognized on an over time basis, which is as products are manufactured or services are performed. Because of this, and the fact that there is no work-in-process or finished goods inventory associated with contracts for which revenue is recognized on an over-time basis, 99 % or more of the Company’s inventory at the end of a given period is in the form of raw materials. For contracts for which revenue is required to be recognized at a point-in-time, the Company recognizes revenue when it has transferred control of the related goods, which generally occurs upon shipment or delivery of the goods to the customer.
Contract Assets
A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice to its customer for payment. Contract assets are classified separately on the condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional. Because of the Company’s short manufacturing cycle times, the transfer from contract assets to accounts receivable generally occurs within the next fiscal quarter.
Other
Other than the impact upon adoption of ASC 606 at the beginning of the first quarter of 2019, which was limited to beginning retained earnings, the application of ASC 606 has not materially impacted any financial statement line item for any period presented herein.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, and are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of sales.
The Company applies the following practical expedients or policy elections under ASC 606:
•The promised amount of consideration under a contract is not adjusted for the effects of a significant financing component because, at inception of a contract, the Company expects the period between when a good or service is transferred to a customer and when the customer pays for that good or service will generally be one year or less.
10
•The Company has elected to not disclose information about remaining performance obligations that have original expected durations of one year or less, which is substantially all of the Company’s remaining performance obligations.
•Incremental costs of obtaining a contract are not capitalized if the period over which such costs would be amortized to expense is less than one year.
Disaggregation of revenue
In the following table, revenue is disaggregated by segment, market sector and geography.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Segments: | |||||||||||||||||||||||||||||||||||||||||
| IMS | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| CPS | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| End Markets: | |||||||||||||||||||||||||||||||||||||||||
| Industrial, Medical, Automotive and Defense | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Communications Networks | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Cloud Solutions | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Geography: | |||||||||||||||||||||||||||||||||||||||||
| Americas (1) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| EMEA | |||||||||||||||||||||||||||||||||||||||||
| APAC | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
(1) Mexico represents approximately 60 % of the Americas revenue and the U.S. represents approximately 35 %.
Note 3. Financial Instruments
Fair Value Measurements
Fair Value of Financial Instruments
The fair values of cash equivalents (35 % of cash and cash equivalents), short-term investments, accounts receivable, accounts payable and short-term debt approximate carrying value due to the short-term duration of these instruments. Cash equivalents and short-term investments are invested in time deposits and money market funds, both of which are measured using Level 1 inputs. Additionally, the fair value of variable rate long-term debt approximates carrying value as of June 27, 2020.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company's primary financial assets and financial liabilities measured at fair value on a recurring basis are deferred compensation plan assets and defined benefit plan assets, which are both measured using Level 1 inputs. Deferred compensation plan assets were $39 million and $36 million as of June 27, 2020 and September 28, 2019, respectively. Defined benefit plan assets were $39 million as of September 28, 2019 and are measured at fair value only in the fourth quarter of each year. Other financial assets and financial liabilities measured at fair value on a recurring basis include foreign exchange contracts and interest rate swaps, which are both measured using Level 2 inputs. Foreign exchange contracts were not material
11
as of June 27, 2020 or September 28, 2019. Interest rate swaps had a negative value of $31 million and $20 million as of June 27, 2020 and September 28, 2019, respectively.
Offsetting Derivative Assets and Liabilities
The Company has entered into master netting arrangements with each of its derivative counterparties that allows net settlement of derivative assets and liabilities under certain conditions, such as multiple transactions with the same currency maturing on the same date. The Company presents its derivative assets and derivative liabilities on a gross basis on the unaudited condensed consolidated balance sheets. The amount that the Company had the right to offset under these netting arrangements was not material as of June 27, 2020 or September 28, 2019.
Non-Financial Assets Measured at Fair Value on a Nonrecurring Basis
Other non-financial assets, such as goodwill and other long-lived assets, are measured at fair value as of the date such assets are acquired or in the period an impairment is recorded. During the second quarter of 2020, commodity prices in the oil and gas market experienced a sharp decline due to a combination of an oversaturated supply and a decrease in demand caused by the COVID-19 global pandemic. This commodity price decline resulted in a negative impact to the projected cash flows of the Company’s oil and gas reporting unit that is part of the Company's Components, Products and Services ("CPS") operating segment and, therefore, the Company performed a goodwill impairment test for this particular reporting unit. The Company concluded that the fair value of the reporting unit was below its carrying value, resulting in a goodwill impairment charge of $7 million. The fair value of the reporting unit was estimated based on the present value of future discounted cash flows. The Company also recorded an impairment charge of $2 million in the second quarter of 2020 for certain long-lived assets. These impairment charges are included in "Restructuring and Other" on the condensed consolidated statements of income.
Derivative Instruments
Foreign Exchange Rate Risk
The Company is exposed to certain risks related to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange risk.
Forward contracts on various foreign currencies are used to manage foreign currency risk associated with forecasted foreign currency transactions and certain monetary assets and liabilities denominated in non-functional currencies. The Company's primary foreign currency cash flows are in certain Asian and European countries, Brazil, Israel and Mexico.
The Company had the following outstanding foreign currency forward contracts that were entered into to hedge foreign currency exposures:
| As of | |||||||||||||||||
| June 27, 2020 | September 28, 2019 | ||||||||||||||||
| Derivatives Designated as Accounting Hedges: | |||||||||||||||||
| Notional amount (in thousands) | $ | $ | |||||||||||||||
| Number of contracts | |||||||||||||||||
| Derivatives Not Designated as Accounting Hedges: | |||||||||||||||||
| Notional amount (in thousands) | $ | $ | |||||||||||||||
| Number of contracts | |||||||||||||||||
The Company utilizes foreign currency forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such exposures generally result from (1) forecasted non-functional currency sales and (2) forecasted non-functional currency materials, labor, overhead and other expenses. These contracts are designated as cash flow hedges for accounting purposes and are generally one to two months in duration but, by policy, may be up to twelve months in duration.
For derivative instruments that are designated and qualify as cash flow hedges, the Company excludes time value from its assessment of hedge effectiveness and recognizes the amount of time value in earnings over the life of the derivative instrument. Gains or losses on the derivative not caused by changes in time value are recorded in Accumulated Other Comprehensive Income ("AOCI"), a component of equity, and reclassified into earnings in the same period or periods during
12
which the hedged transaction affects earnings. The amount of gain or loss recognized in Other Comprehensive Income on derivative instruments and the amount of gain or loss reclassified from AOCI into income were not material for any period presented herein. Pursuant to a new accounting standard, as of the beginning of 2020, the Company is no longer required to separately measure and report hedge ineffectiveness. The amount of hedge ineffectiveness was not material for any 2019 period presented.
The Company enters into short-term foreign currency forward contracts to hedge currency exposures associated with certain monetary assets and liabilities denominated in non-functional currencies. These contracts have maturities of up to two months and are not designated as accounting hedges. Accordingly, these contracts are marked-to-market at the end of each period with unrealized gains and losses recorded in other income (expense), net, in the unaudited condensed consolidated statements of income. The amount of gains (losses) associated with these forward contracts was not material for any period presented herein. From an economic perspective, the objective of the Company's hedging program is for gains and losses on forward contracts to substantially offset gains and losses on the underlying hedged items. In addition to the contracts disclosed in the table above, the Company has numerous contracts that have been closed from an economic and financial accounting perspective and will settle early in the first month of the following quarter. Since these offsetting contracts do not expose the Company to risk of fluctuations in exchange rates, these contracts have been excluded from the above table.
Interest Rate Risk
The Company enters 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 of December 1, 2023 and effectively convert the Company's 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 of June 27, 2020 and September 28, 2019, interest rate swaps with an aggregate notional amount of $350 4.3 %. 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 $31 million as of June 27, 2020, of which $9 million is included in accrued liabilities and the remaining amount is included in other long-term liabilities on the condensed consolidated balance sheets.
Note 4. Debt
Long-term debt consisted of the following:
| As of | |||||||||||||||||
| June 27, 2020 | September 28, 2019 | ||||||||||||||||
| (In thousands) | |||||||||||||||||
| Term loan due 2023 ("Term Loan"), net of issuance costs | $ | $ | |||||||||||||||
| Non-interest bearing promissory notes | |||||||||||||||||
| Total long-term debt | |||||||||||||||||
| Less: Current portion of non-interest bearing promissory notes | |||||||||||||||||
Current portion of long-term debt | |||||||||||||||||
| Long-term debt | $ | $ | |||||||||||||||
Term Loan maturities as of June 27, 2020 by fiscal year are as follows:
| (In Thousands) | |||||
| Remainder of 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| $ | |||||
As of June 27, 2020, there was $650 million in borrowings and $8 million of letters of credit outstanding under the Fourth Amended and Restated Credit Agreement (the "Amended Cash Flow Revolver").
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As of June 27, 2020, certain foreign subsidiaries of the Company had a total of $72 million of short-term borrowing facilities available, under which no borrowings were outstanding.
Debt covenants
The Company's Amended Cash Flow Revolver requires the Company to comply with certain financial covenants, namely a maximum leverage ratio and a minimum interest coverage ratio, in both cases measured on the basis of a trailing 12 month look-back period. In addition, the Company's debt agreements contain a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets and paying dividends, subject to certain exceptions. The Company was in compliance with these covenants as of June 27, 2020.
Note 5. Leases
The Company's leases consist primarily of operating leases for buildings and land. These leases have initial lease terms of up to 44 years and, upon adoption of ASC 842, are recorded on the Company's balance sheet as lease liabilities and corresponding right-of-use ("ROU") assets. Certain of these leases contain an option to extend the lease term for additional periods or to terminate the lease after an initial non-cancelable term. Renewal options are considered in the measurement of the Company's initial lease liability and corresponding ROU asset only if it is reasonably certain that the Company will exercise such options. Leases with lease terms of twelve months or less are not recorded on the Company's balance sheet.
ROU assets and lease liabilities recorded in the condensed consolidated balance sheet as of June 27, 2020 are as follows:
| As of | |||||
| June 27, 2020 | |||||
| (In thousands) | |||||
| Other assets (1) | $ | ||||
| Accrued liabilities | |||||
| Other long-term liabilities | |||||
Total lease liabilities | $ | ||||
| Weighted average remaining lease term (in years) | |||||
| Weighted average discount rate | % | ||||
(1) Net of accumulated amortization of $12 million.
The Company’s lease liability and ROU assets represent the present value of future lease payments which, pursuant to the Company's accounting election, are a combination of lease components and non-lease components such as maintenance and utilities. Since the Company's leases generally do not provide an implicit rate, the Company uses an incremental borrowing rate based on information available at the lease commencement date for purposes of determining the present value of lease payments. The Company's incremental borrowing rate is based on the term of the lease, the economic environment of the lease and the effect of collateralization, if any. Upon adoption of ASC 842, the Company used an incremental borrowing rate as of that date for all leases that commenced prior to that date.
Operating lease expense, which is recognized on a straight-line basis over the term of a lease, was $5 million and $13 million for the three and nine months ended June 27, 2020, respectively. Cash payments for operating leases were $14 million for the nine months ended June 27, 2020. Certain of the Company’s lease payments are variable because such payments adjust periodically based on changes in consumer price and other indexes.
14
Future lease payments under non-cancelable operating leases as of June 27, 2020, by fiscal year, are as follows:
| Operating Leases | |||||
| (In thousands) | |||||
| Remainder of 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
Total lease payments | |||||
| Less: imputed interest | |||||
Total | $ | ||||
Note 6. Accounts Receivable Sale Program
The Company has entered into 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, and a funding commitment from, the banks that are party to the RPA. Trade receivables sold pursuant to the RPA are serviced by the Company.
In addition to the RPA, the Company has the option to participate in trade receivables sales programs that have been implemented by certain of the Company's customers, as in effect from time to time. The Company does not service trade receivables sold under these other programs.
Under each of the programs noted above, the Company sells its entire interest in a trade receivable for 100 % of face value, less a discount. During the nine months ended June 27, 2020 and June 29, 2019, the Company sold $1.4 billion and $2.2 billion, respectively, of accounts receivable 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 of June 27, 2020 and September 28, 2019, $105 million and $241 million, respectively, of accounts receivable sold under the RPA and subject to servicing by the Company remained outstanding and had not yet been collected. The Company's sole risk with respect to receivables it services is with respect to commercial disputes regarding such receivables. Commercial disputes include billing errors, returns and similar matters. To date, the Company has not been required to repurchase any receivable it has sold due to a commercial dispute. Additionally, the Company is required to remit amounts collected as servicer under the RPA on a weekly basis to the financial institutions that purchased the receivables. As of June 27, 2020 and September 28, 2019, $44 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.
Note 7. Contingencies
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Legal Proceedings
Environmental Matters
The Company is subject to various federal, state, local and foreign laws and regulations and administrative orders concerning environmental protection, including those addressing the discharge of pollutants into the environment, the management and disposal of hazardous substances, the cleanup of contaminated sites, the materials used in products, and the recycling, treatment and disposal of hazardous waste. As of June 27, 2020, the Company had been named in a lawsuit and several administrative orders alleging certain of its current and former sites contributed to groundwater contamination. One such order demands that the Company and other alleged defendants remediate groundwater contamination at four landfills located in Northern California to which the Company may have sent wastewater in the past. The Company is participating in a working group of other alleged defendants to better understand its potential exposure in this action and has reserved its estimated exposure for this matter as of June 27, 2020. However, there can be no assurance that the Company's reserve will ultimately be sufficient.
In June 2008, the Company was named by the Orange County Water District in a suit alleging that its actions contributed to polluted groundwater managed by the plaintiff. The complaint seeks recovery of compensatory and other damages, as well as declaratory relief, for the payment of costs necessary to investigate, monitor, remediate, abate and contain contamination of groundwater within the plaintiff’s control. In April 2013, all claims against the Company were dismissed. The plaintiff appealed this dismissal and the appellate court reversed the judgment in August 2017. In November 2017, the California Supreme Court denied the Company’s petition to review this decision and, in December 2017, the Court of Appeal remanded the case back to the Superior Court for further proceedings. The first part of a multi-phase trial, originally scheduled to commence on September 14, 2020, has been postponed to April 12, 2021 due to COVID-19-related judicial disruption. The Company intends to contest the plaintiff’s claims vigorously.
Other Matters
Two of the Company’s subsidiaries in Brazil are parties to a number of administrative and judicial proceedings for claims alleging that these subsidiaries failed to comply with certain bookkeeping and tax rules for certain periods between 2001 and 2011. These claims seek payment of social fund contributions and income and excise taxes allegedly owed by the subsidiaries, as well as fines. The subsidiaries believe they have meritorious positions in these matters and intend to continue to contest the claims.
In October 2018, a contractor who had been retained by the Company through a third party temporary staffing agency from November 2015 to March 2016 filed a lawsuit against the Company in the Santa Clara County Superior Court on behalf of himself and all other similarly situated Company contractors and employees in California, alleging violations of California Labor Code provisions governing overtime, meal and rest periods, wages, wage statements and reimbursement of business expenses. The operative amended complaint seeks certification of a class of all non-exempt employees, whether employed directly or through a temporary staffing agency, employed from four years before the filing of the initial complaint to the time of trial. Additionally, on November 1, 2019, another contractor retained through a temporary staffing agency filed a lawsuit against the Company in the Santa Clara County Superior Court. The complaint, which includes a single cause of action under California’s Private Attorneys General Act of 2004, alleges Labor Code violations substantially similar to those alleged in the October 2018 class action lawsuit and seeks penalties on behalf of the State of California and other “aggrieved employees” (defined to be current and former hourly, non-exempt employees employed by the Company between August 22, 2018 and the present). The Company intends to vigorously defend these matters.
In December 2019, the Company sued a former customer, Dialight plc (“Dialight”), in the United States District Court for the Southern District of New York to collect approximately $10 million in unpaid accounts receivable and net obsolete inventory obligations. Later the same day, Dialight commenced its own action in the same court. Dialight’s complaint, which asserts claims for fraudulent inducement, breach of contract, and gross negligence/willful misconduct, alleges that the Company fraudulently misrepresented its capabilities to induce Dialight to enter into a Manufacturing Services Agreement (the “Dialight MSA”), and then breached its obligations contained in the Dialight MSA relating to quality, on-time delivery and supply chain management. Dialight seeks an unspecified amount of compensatory and punitive damages. The Company intends to vigorously prosecute its claim against Dialight. Further, the Company strongly disagrees with Dialight’s allegations and intends to defend against them vigorously.
For each of the matters noted above, a loss is not currently considered probable and estimable and the Company is unable to reasonably estimate a range of possible loss at this time.
16
Note 8. Restructuring
The following table provides a summary of restructuring costs:
| Restructuring Expense | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
Severance costs (approximately | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Other exit costs (recognized as incurred) | |||||||||||||||||||||||||||||||||||||||||
| Total - Q1 FY20 Plan | |||||||||||||||||||||||||||||||||||||||||
| Costs incurred for other plans | |||||||||||||||||||||||||||||||||||||||||
| Total - all plans | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Q1 FY20 Plan
On October 28, 2019, the Company adopted a Company-wide restructuring plan ("Q1 FY20 Plan"). Under this plan, the Company expects to incur restructuring charges of approximately $13 million to $20 million, consisting primarily of cash severance costs, primarily in 2020. Further actions are expected to be implemented under the Q1 FY20 Plan in the fourth quarter of fiscal 2020 and cash payments of severance are expected to occur through the first quarter of fiscal 2021. In addition, the Company is still in the process of completing restructuring actions under other plans.
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
The Company’s Integrated Manufacturing Solutions ("IMS") segment incurred costs of $10 million for the nine months ended June 27, 2020. This compares to a benefit incurred of $3 million for the nine months ended June 29, 2019, primarily as a result of a recovery from a third party of certain environmental remediation costs. The Company’s CPS segment incurred costs of $8 million and $16 million for the nine months ended June 27, 2020 and June 29, 2019, respectively. In addition, $2 million of costs were incurred during the nine months ended June 27, 2020 for SG&A headcount reductions and were not allocated to the Company's IMS and CPS segments. The Company had accrued liabilities of $6 million and $5 million as of June 27, 2020 and September 28, 2019, respectively, for restructuring costs (exclusive of long-term environmental remediation liabilities).
In addition to costs expected to be incurred under the Q1 FY20 Plan, the Company expects to incur restructuring costs in future periods primarily for vacant facilities and former sites for which the Company is or may be responsible for environmental remediation.
17
Note 9. Income Tax
The Company estimates its annual effective income tax rate at the end of each quarterly period. The estimate takes into account the geographic mix of expected pre-tax income (loss), expected total annual pre-tax income (loss), enacted changes in tax laws, implementation of tax planning strategies and possible outcomes of audits and other uncertain tax positions. To the extent there are fluctuations in any of these variables during a period, the provision for income taxes may vary.
The Company's provision for income taxes for the three months ended June 27, 2020 and June 29, 2019 was $15 million (25 % of income before taxes) and $16 million (27 % of income before taxes), respectively, and $36 million (29 % of income before taxes) and $69 million (36 % of income before taxes) for the nine months ended June 27, 2020 and June 29, 2019, respectively. Income tax expense for the three and nine months ended June 27, 2020 decreased primarily as a result of lower income before tax, a favorable change in the geographic mix of income before tax and the impact of a tax-related restructuring transaction that became effective in the fourth quarter of 2019.
Note 10. Stockholder's Equity
Accumulated Other Comprehensive Income
Accumulated other comprehensive income, net of tax as applicable, consisted of the following:
| As of | |||||||||||||||||
| June 27, 2020 | September 28, 2019 | ||||||||||||||||
| (In thousands) | |||||||||||||||||
| Foreign currency translation adjustments | $ | $ | |||||||||||||||
| Unrealized holding losses on derivative financial instruments | ( | ( | |||||||||||||||
| Unrecognized net actuarial losses and transition costs for benefit plans | ( | ( | |||||||||||||||
| Total | $ | $ | |||||||||||||||
Unrealized holding losses on derivative financial instruments includes losses from 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 swaps are accounted for as cash flow hedges under ASC Topic 815, Derivatives and Hedging. As of June 27, 2020 and September 28, 2019, interest rate swaps with an aggregate notional amount of $350 4.3 %. 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 $31 million as of June 27, 2020, of which $9 million is included in accrued liabilities and the remaining amount is included in other long-term liabilities on the condensed consolidated balance sheets.
Stock Repurchase Program
During the first quarter of 2020, the Board of Directors authorized the Company to purchase an additional $200 million of its common stock on the same terms as previously approved repurchase programs with no expiration. During the nine months ended June 27, 2020 and June 29, 2019, the Company repurchased 3.4 million and 0.3 million shares of its common stock for $88 million and $7 million, respectively. As of June 27, 2020, an aggregate of $213 million remains available under repurchase programs authorized by the Board of Directors.
In addition to the repurchases discussed above, the Company repurchased 0.4 million and 0.2 million shares of its common stock during the nine months ended June 27, 2020 and June 29, 2019, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock units. The Company paid $12 million and $6 million, respectively, to applicable tax authorities in connection with these repurchases.
Note 11. Business Segment, Geographic and Customer Information
18
The Company's operations are managed as two businesses: IMS and CPS. The Company's CPS business consists of multiple operating segments which do not meet the quantitative threshold for being presented as reportable segments. Therefore, financial information for these operating segments is presented in a single category entitled "CPS" and the Company has only one reportable segment - IMS.
The following table presents revenue and a measure of segment gross profit used by management to allocate resources and assess performance of operating segments:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Gross sales: | |||||||||||||||||||||||||||||||||||||||||
| IMS | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| CPS | |||||||||||||||||||||||||||||||||||||||||
| Intersegment revenue | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||||||||||||||||||||
| IMS | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| CPS | |||||||||||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||||||||
| Unallocated items (1) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
(1) For purposes of evaluating segment performance, management excludes certain items from its measure of gross profit. These items consist of stock-based compensation expense, amortization of intangible assets and charges or credits resulting from distressed customers.
Net sales by geographic segment, determined based on the country in which a product is manufactured, were as
follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||
| Americas (1) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| EMEA | |||||||||||||||||||||||||||||||||||||||||
| APAC | |||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Percentage of net sales represented by ten largest customers | % | % | % | % | |||||||||||||||||||
| Number of customers representing 10% or more of net sales | |||||||||||||||||||||||
19
Note 12. Earnings Per Share
Basic and diluted per share amounts are calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period, as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||||||||||||||||||||
| Effect of dilutive stock options and restricted stock units | |||||||||||||||||||||||||||||||||||||||||
| Denominator for diluted earnings per share | |||||||||||||||||||||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Note 13. Stock-Based Compensation
Stock-based compensation expense was attributable to:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Stock options | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Restricted stock units, including performance based awards | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense was recognized as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
During the second quarter of 2020, the Company's stockholders approved the reservation of an additional 1.6 million shares of common stock for future issuance under the Company's 2019 Incentive Plan. As of June 27, 2020, an aggregate of 8.3 million shares were authorized for future issuance under the Company's stock plans, of which 4.1 million of such shares were issuable upon exercise of outstanding options and delivery of shares upon vesting of restricted stock units and 4.2 million shares of common stock were available for future grant.
Restricted and Performance Stock Units
The Company grants restricted stock units and restricted stock units with performance conditions ("PSUs") to executive officers, directors and certain other employees. These units vest over periods ranging from 1 year to 4 years and/or upon achievement of specified performance criteria and are automatically exchanged for shares of common stock at the vesting
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date. If performance metrics are not met within specified time limits, the award will be canceled. Compensation expense associated with restricted stock units and PSUs is recognized ratably over the vesting period, subject to probability of achievement for PSUs.
During the first two quarters of 2020, the Company granted PSUs for 304,500 shares for which vesting is contingent on cumulative non-GAAP earnings per share measured over three fiscal years. If a minimum threshold is not achieved, no shares will vest. If the minimum threshold is achieved or exceeded, the number of shares of common stock that will be issued will range from 80 % to 120 % of the number of PSUs granted, depending on the extent of performance. Additionally, the number of shares that vest may be adjusted up or down by up to 15 % based on the Company's total shareholder return relative to that of its peer group over this same period. These PSUs will expire on December 31, 2022 if such performance conditions have not been met.
Activity with respect to the Company's restricted stock awards was as follows:
| Number of Shares | Weighted- Average Grant Date Fair Value ($) | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value ($) | ||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
| Outstanding as of September 28, 2019 | |||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Vested/Forfeited/Cancelled | ( | ||||||||||||||||||||||
| Outstanding as of June 27, 2020 | |||||||||||||||||||||||
| Expected to vest as of June 27, 2020 | |||||||||||||||||||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 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, litigation, 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 potential or expected impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition; 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 regarding future repurchases of our common stock; 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 the Securities 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 contents 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 the SEC.
Sanmina Corporation and its subsidiaries (the “Company”, “we” or “us”) operate on a 52 or 53 week year ending on the Saturday nearest September 30. Fiscal 2019 was a 52-week year and fiscal 2020 will be a 53-week year, with the extra week occurring during 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 SCI Technology; and cloud-based manufacturing execution software from our 42Q division. Services include design, engineering, logistics and repair services.
Our only reportable segment is IMS, which represented slightly more than 80% of our total revenue in the first nine months of 2020 and 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”.
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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. In addition, the COVID-19 global pandemic created a unique and challenging environment in which our revenue and profitability in 2020 have been significantly impacted and will likely continue to be negatively impacted in at least the near term.
In March 2020, the World Health Organization declared COVID-19 to be a pandemic, which continues to spread throughout the U.S. and the world. During the second and third quarters of 2020, our results of operations were negatively impacted by rapidly changing market and economic conditions caused by the COVID-19 outbreak, as well as numerous measures imposed by government authorities to try to contain the virus. These conditions and measures disrupted our operations and those of our customers, interrupted the supply of components, limited the types of products we can manufacture and the capacity of our logistics providers to deliver those products, and resulted in temporary closures of manufacturing sites and reduced staffing as mandated by government orders. Although employee infections have not yet had a significant impact on our operations, they do require us to perform contact tracing, exclude potentially infected employees from the workplace and clean work areas used by infected employees. Should employee infections become widespread, they would have a significant and negative impact on our ability to sustain production at desired levels. Although we are unable to predict accurately the full impact that COVID-19 will have on our business due to a number of uncertainties, including the duration of the outbreak, imposition of government restrictions on staffing and the types of products we are permitted to build, plant closures, supply chain shortages and other interruptions, and the number of employees who may become infected in the future, it is likely that the pandemic will continue to have a negative impact on our business, results of operations and financial condition for the foreseeable future.
Separately, under our company-wide restructuring plan adopted in October 2019, we have incurred restructuring charges of approximately $13 million in 2020, consisting primarily of cash severance costs. Further actions are expected to be implemented under such plan in the fourth quarter of fiscal 2020 that could increase restructuring charges under this plan to $20 million for 2020.
In addition, during our second quarter of 2020, we borrowed $650 million under our Amended Cash Flow Revolver, which provides for a maximum of $700 million in revolving commitments, as a precautionary measure to provide additional liquidity in light of the global economic uncertainty and financial market conditions caused by the COVID-19 global pandemic. During our third quarter of 2020, we generated $60 million of cash from operations and, as of June 27, 2020, we had approximately $1.1 billion of cash and cash equivalents. We expect that current cash balances and cash flows that are generated from operations and are available from other sources will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months. See "Liquidity and Capital Resources" below for additional information about our sources of liquidity.
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 55% of our net sales. One customer 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 as Asia, Latin America and Eastern 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.
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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 in the 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. Due to the COVID-19 global pandemic, the global economy and financial markets have been disrupted and there is a significant amount of uncertainty about the length and severity of the consequences caused by the pandemic. We have considered information available to us as of the date of issuance of these financial statements and, other than the impairments described in Note 3 and the immaterial impact of two customer bankruptcies in the third quarter of 2020, are not aware of any specific events or circumstances that would require an update to its estimates or judgments, or a revision to the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information becomes available. Our actual results may differ materially from these estimates.
A complete description of our critical accounting policies and estimates is contained in our Annual Report on Form 10-K for the fiscal year ended September 28, 2019 filed with the Securities and Exchange Commission.
Results of Operations
Key Operating Results
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,654,691 | $ | 2,026,995 | $ | 5,085,412 | $ | 6,341,652 | |||||||||||||||||||||||||||||||||
| Gross profit | $ | 131,473 | $ | 147,795 | $ | 373,776 | $ | 450,234 | |||||||||||||||||||||||||||||||||
| Operating income | $ | 64,103 | $ | 67,374 | $ | 145,653 | $ | 223,032 | |||||||||||||||||||||||||||||||||
| Net income | $ | 44,880 | $ | 42,921 | $ | 88,107 | $ | 121,758 | |||||||||||||||||||||||||||||||||
Net Sales
Sales by end market were as follows (dollars in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | Increase/(Decrease) | June 27, 2020 | June 29, 2019 | Increase/(Decrease) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Industrial, Medical, Defense and Automotive | $ | 937,876 | $ | 1,114,348 | $ | (176,472) | (15.8) | % | $ | 3,012,065 | $ | 3,459,395 | $ | (447,330) | (12.9) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Communications Networks | 595,408 | 736,281 | (140,873) | (19.1) | % | 1,676,597 | 2,276,920 | (600,323) | (26.4) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cloud Solutions | 121,407 | 176,366 | (54,959) | (31.2) | % | 396,750 | 605,337 | (208,587) | (34.5) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,654,691 | $ | 2,026,995 | $ | (372,304) | (18.4) | % | $ | 5,085,412 | $ | 6,341,652 | $ | (1,256,240) | (19.8) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net sales decreased from $2.0 billion in the third quarter of 2019 to $1.7 billion in the third quarter of 2020, a decrease of 18.4%. Net sales decreased from $6.3 billion in the nine months ended June 29, 2019 to $5.1 billion in the nine months ended June 27, 2020, a decrease of 19.8%. These decreases were caused primarily by two factors. First, sales in 2019 were favorably impacted by the increased 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. Secondly, beginning in the second quarter of 2020, our sales were negatively impacted by the COVID-19 global pandemic, which resulted in supply shortages, restrictions on the types of products we could manufacture and disruptions to our operations and those of our customers.
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Gross Margin
Gross margin increased to 7.9% for the third quarter of 2020 from 7.3% for the third quarter of 2019. Gross margin increased to 7.3% for the nine months ended June 27, 2020 from 7.1% for the nine months ended June 29, 2019.
IMS gross margin increased to 7.0% for the third quarter of 2020, from 6.4% for the third quarter of 2019. IMS gross margin increased to 6.5% for the nine months ended June 27, 2020, from 6.3% for the nine months ended June 29, 2019. The increase for both periods was primarily due to cost reduction and containment efforts implemented in 2020, some of which were in response to the COVID-19 global pandemic. Additionally, our self-insured medical claims in the U.S. were significantly lower in the third quarter of 2020 because elective medical procedures were suspended in most states throughout the majority of the quarter due to the COVID-19 global pandemic. Lastly, during the second and third quarters of 2020, certain of our foreign subsidiaries received government subsidies to help mitigate the impact of COVID-19. We do not expect to receive the same level of funding in future quarters.
CPS gross margin increased to 12.0% for the third quarter of 2020, from 11.2% for the third quarter of 2019. CPS gross margin increased to 11.1% for the nine months ended June 27, 2020, from 10.0% for the nine months ended June 29, 2019. The increase for both periods was primarily due to continued benefits of certain plant closures during the past two years and the factors described above with respect to IMS gross margin.
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:
•disruptions to the operations of our customers, the extent to which government restrictions on staffing and the types of products we are permitted to build continue or are reinstated, whether plant closures are ordered by governmental authorities, the extent of employee infections that may result in reduced staffing at our plants and supply chain interruptions and shortages resulting from the COVID-19 global pandemic;
•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;
•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 provisions associated with distressed customers;
•levels of operational efficiency and production yields; and
•our ability to transition the location of and ramp manufacturing and assembly operations when requested by a customer in a timely and cost-effective manner.
Selling, General and Administrative
Selling, General and Administrative expenses decreased $7.5 million, from $66.8 million, or 3.3% of net sales, in the third quarter of 2019 to $59.3 million, or 3.6% of net sales, in the third quarter of 2020. This is primarily due to reduced headcount in 2020 as a result of actions under our Q1 FY20 restructuring plan and reduced travel and certain other expenses in 2020 in response to the COVID-19 global pandemic, partially offset by bad debt expense associated with two customers that declared bankruptcy in the third quarter of 2020.
Selling, General and Administrative expenses decreased $9.3 million, from $194.0 million, or 3.1% of net sales, in the nine months ended June 29, 2019 to $184.7 million, or 3.6% of net sales, in the nine months ended June 27, 2020. These decreases were primarily attributable to reduced costs commensurate with lower headcount because of actions under our Q1 FY20 restructuring plan and reduced travel costs in response to the COVID-19 global pandemic, partially offset by bad debt expense associated with two customers that declared bankruptcy in the third quarter of 2020.
Research and Development
Research and Development expenses decreased $2.1 million, from $7.3 million, or 0.4% of net sales, in the third quarter of 2019 to $5.2 million, or 0.3% of net sales, in the third quarter of 2020. Research and Development expenses decreased $5.2 million, from $21.3 million, or 0.3% of net sales, in the nine months ended June 29, 2019 to $16.1 million, or 0.3% of net sales, in the nine months ended June 27, 2020. These decreases resulted primarily from reduced headcount as a result of consolidating engineering resources in our enterprise computing and storage end market.
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Restructuring and Other
Restructuring
The following table provides a summary of restructuring costs:
| Restructuring Expense | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||||||||||||||||||||||||||||||
Severance costs (approximately 20 and 1,770 employees for the three and nine months ended June 27, 2020, respectively) | $ | 1,430 | $ | — | $ | 12,882 | $ | — | |||||||||||||||||||||||||||||||||
| Other exit costs | 17 | — | 69 | — | |||||||||||||||||||||||||||||||||||||
| Total - Q1 FY20 Plan | 1,447 | — | 12,951 | — | |||||||||||||||||||||||||||||||||||||
| Costs incurred for other plans | 1,366 | 7,986 | 7,377 | 13,137 | |||||||||||||||||||||||||||||||||||||
| Total - all plans | $ | 2,813 | $ | 7,986 | $ | 20,328 | $ | 13,137 | |||||||||||||||||||||||||||||||||
Q1 FY20 Plan
On October 28, 2019, we adopted a Company-wide restructuring plan ("Q1 FY20 Plan"). Under this plan, we expect to incur restructuring charges of approximately $13 million to $20 million, consisting primarily of cash severance costs, primarily in 2020. Further actions are expected to be implemented under the Q1 FY20 Plan in the fourth quarter of fiscal 2020 and cash payments of severance are expected to occur through the first quarter of fiscal 2021. In addition, we are still in the process of completing restructuring actions under other plans.
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 IMS segment incurred costs of $10 million for the nine months ended June 27, 2020. This compares to a benefit incurred of $3 million for the nine months ended June 29, 2019, primarily as a result of a recovery from a third party of certain environmental remediation costs. Our CPS segment incurred costs of $8 million and $16 million for the nine months ended June 27, 2020 and June 29, 2019, respectively. In addition, $2 million of costs were incurred during the nine months ended June 27, 2020 for SG&A headcount reductions and were not allocated to our IMS and CPS segments. We had accrued liabilities of $6 million and $5 million as of June 27, 2020 and September 28, 2019, respectively, for restructuring costs (exclusive of long-term 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.
Other
During the second quarter of 2020, commodity prices in the oil and gas market experienced a sharp decline due to a combination of an oversaturated supply and a decrease in demand caused by the COVID-19 global pandemic. This commodity price decline negatively impacted the projected cash flows of our oil and gas reporting unit, which is part of our CPS operating segment. Therefore, we performed a goodwill impairment test for this particular reporting unit and concluded that the fair value of the reporting unit was below its carrying value, resulting in an impairment charge of $7 million. The fair value of the reporting unit was estimated based on the present value of future discounted cash flows.
Other Income (Expense), net
Other income (expense), net was $3 million and $(1) million for the three months ended June 27, 2020 and June 29, 2019, respectively and $(3) million and $(8) million for the nine months ended June 27, 2020 and June 29, 2019, respectively. These fluctuations were caused by an increase in the market value of participant investment accounts in our deferred
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compensation plan during 2020 and a significant decrease in accounts receivable factoring during the third quarter of 2020 compared to the same period in 2019.
Provision for Income Taxes
Our provision for income taxes for the three months ended June 27, 2020 and June 29, 2019 was $15 million (25% of income before taxes) and $16 million (27% of income before taxes), respectively, and $36 million (29% of income before taxes) and $69 million (36% of income before taxes) for the nine months ended June 27, 2020 and June 29, 2019, respectively. Income tax expense for the three and nine months ended June 27, 2020 decreased primarily as a result of lower income before tax, a favorable change in the geographic mix of income before tax and the impact of a tax-related restructuring transaction that became effective in the fourth quarter of 2019.
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Liquidity and Capital Resources
| Nine Months Ended | |||||||||||||||||
| June 27, 2020 | June 29, 2019 | ||||||||||||||||
| (In thousands) | |||||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 220,666 | $ | 192,768 | |||||||||||||
| Investing activities | (83,897) | (98,467) | |||||||||||||||
| Financing activities | 525,674 | (100,038) | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 33 | 482 | |||||||||||||||
| Increase (Decrease) in cash and cash equivalents | $ | 662,476 | $ | (5,255) | |||||||||||||
Key Working Capital Management Measures
| As of | |||||||||||||||||
| June 27, 2020 | September 28, 2019 | ||||||||||||||||
| Days sales outstanding (1) | 53 | 56 | |||||||||||||||
| Contract asset days (2) | 21 | 19 | |||||||||||||||
| Inventory turns (3) | 6.9 | 7.7 | |||||||||||||||
| Days inventory on hand (4) | 53 | 47 | |||||||||||||||
| Accounts payable days (5) | 71 | 70 | |||||||||||||||
| Cash cycle days (6) | 56 | 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 (a measure of how quickly we transfer contract assets to accounts receivable) are calculated as the ratio of average contract assets to average daily net sales for the quarter.
(3) Inventory turns (annualized) (a measure of how quickly we sell inventory) are calculated as the ratio of four times our cost of sales for the quarter to average inventory.
(4) Days inventory on hand (a measure of how quickly we turn inventory into sales) 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 (a measure of how quickly we convert investments in inventory to cash) is calculated as days inventory on hand plus days sales outstanding and contract assets days minus accounts payable days.
Cash and cash equivalents were $1.1 billion at June 27, 2020 and $455 million at September 28, 2019. Cash levels increased primarily as a result of borrowings of $650 million under our Amended Cash Flow Revolver during the second quarter of fiscal 2020 as a precautionary measure to provide additional liquidity in light of the global economy uncertainty and financial market conditions caused by the COVID-19 global pandemic. Our cash levels vary during any given quarter depending on the timing of collections from customers and payments to suppliers, borrowings under our 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 as of June 27, 2020 and September 28, 2019, respectively.
Net cash provided by operating activities was $221 million and $193 million for the nine months ended June 27, 2020 and June 29, 2019, 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, impairments 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
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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 payment terms with customers and suppliers. These fluctuations can significantly affect our cash flows from operating activities.
During the nine months ended June 27, 2020, we generated $215 million of cash primarily from earnings, excluding non-cash items, and $6 million from changes in net operating assets. During the second and third quarters of 2020, our sales were negatively impacted by the COVID-19 global pandemic, which resulted in supply shortages, manufacturing site closures and reduced customer demand. This reduced business volume resulted in lower levels of accounts receivable and accounts payable. Our DSO decreased from 56 days as of September 28, 2019 to 53 days as of June 27, 2020 due primarily to a favorable shift in linearity from customers with longer payment terms to customers with shorter payment terms, partially offset by an unfavorable shift in linearity of shipments to customers.
Net cash used in investing activities was $84 million and $98 million for the nine months ended June 27, 2020 and June 29, 2019, respectively. During the nine months ended June 27, 2020, we used $55 million of cash for capital expenditures and purchased $30 million of short-term investments. During the nine months ended June 29, 2019, we used $102 million of cash for capital expenditures.
Net cash provided by (used in) financing activities was $526 million and $(100) million for the nine months ended June 27, 2020 and June 29, 2019, respectively. During the nine months ended June 27, 2020, we borrowed $650 million of cash under our Amended Cash Flow Revolver, used $100 million of cash to repurchase common stock (including $12 million related to employee tax withholdings on vested restricted stock units), repaid an aggregate of $30 million of long-term debt and received $5 million of net proceeds from issuances of common stock pursuant to stock option exercises. During the nine months ended June 29, 2019, we repaid $378 million of long term debt, borrowed $94 million of cash under our Amended Cash Flow Revolver, received $375 million from our Term Loan, used $13 million of cash to repurchase common stock (including $6 million related to employee tax withholdings on vested restricted stock units), received $13 million net proceeds from issuances of common stock pursuant to stock option exercises and incurred $3 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 3.4 million and 0.3 million shares of our common stock for $88 million and $7 million during the nine months ended June 27, 2020 and June 29, 2019, respectively. As of June 27, 2020, an aggregate of $213 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 of December 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 of June 27, 2020 and September 28, 2019, interest rate swaps with an aggregate notional amount of $350 million were outstanding. The aggregate effective interest rate under these swaps as of June 27, 2020 was approximately 4.3%. 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 $31 million as of June 27, 2020, of which $9 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, in both cases measured on the basis of a trailing 12 month look-back period. 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 provisions relating to events of default, including material adverse effects, and customary negative covenants limiting our ability and that of our subsidiaries to, among other things, incur debt, grant liens, make investments, make acquisitions, make certain restricted payments and sell assets, subject to certain exceptions. As of June 27, 2020, we were in compliance with all covenants.
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, and a funding commitment from, the
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banks that are 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. On January 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 receivables under 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 nine months ended June 27, 2020 and June 29, 2019, we sold accounts receivable of $1.4 billion and $2.2 billion, 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 of June 27, 2020 and September 28, 2019, $105 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 of June 27, 2020 and September 28, 2019, $44 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 of June 27, 2020, 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 of June 27, 2020, we had a liability of $102 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. During the second quarter of fiscal 2020, we borrowed $650 million under our Amended Cash Flow Revolver which provides for a maximum of $700 million in revolving commitments as a precautionary measure to provide additional liquidity in light of the global economic uncertainty and financial market conditions caused by the COVID-19 global pandemic. During the third quarter of 2020, we generated $60 million of cash from operations and had $1.1 billion of cash and cash equivalents as of June 27, 2020. Our primary sources of liquidity as of June 27, 2020 consisted of (1) cash and cash equivalents of $1.1 billion; (2) our Amended Cash Flow Revolver, under which $42 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 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. However, should demand for our services change significantly over the next 12 months or should we experience significant increases in delinquent or uncollectible accounts receivable for any reason, including in particular continued or worsening economic conditions caused by the COVID-19 global pandemic, our cash provided by operations could decrease significantly and we could be required to seek additional sources of liquidity to continue our operations at their current level.
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We distribute our cash among a number of financial institutions that we believe to be of high quality. However, there can be no assurance that one or more of such institutions will not become insolvent in the future, in which case all or a portion of our uninsured funds on deposit with such institutions could be lost.
As of June 27, 2020, 82% of our cash balance was held in the United States. Should we choose or need to remit cash to the United States from our foreign locations, we may incur tax obligations which would reduce the amount of cash ultimately available to the United States. We believe that cash held in the United States, together with liquidity available under our Amended Cash Flow Revolver and cash from foreign subsidiaries that could be remitted to the United States without tax consequences, will be sufficient to meet our United States liquidity needs for at least the next twelve months.
Off-Balance Sheet Arrangements
As of June 27, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our primary exposure to market risk for changes in interest rates relates to 1) our Term Loan of $361 million and 2) $650 million of borrowings under our Amended Cash Flow Revolver for which the interest rate we pay is determined at the time of borrowing based on a floating index. As of June 27, 2020, we had interest rate swaps with an aggregate notional amount of $350 million that effectively convert $350 million of our outstanding floating rate debt to fixed rate debt. Therefore, our net exposure to interest rate risk is on the unhedged balance of $661 million. An immediate 10 percent change in interest rates would not have a significant impact on our results of operations.
Foreign Currency Exchange Risk
We transact business in foreign currencies. Our foreign exchange policy requires that we take certain steps to limit our foreign exchange exposures resulting from certain assets and liabilities and forecasted cash flows. However, our policy does not require us to hedge all foreign exchange exposures. Furthermore, our foreign currency hedges are based on forecasted transactions and estimated balances, the amount of which may differ from that actually incurred. As a result, we can experience foreign exchange gains and losses in our results of operations.
Our primary foreign currency cash flows are in certain Asian and European countries, Israel, Brazil and Mexico. We enter into short-term foreign currency forward contracts to hedge currency exposures associated with certain monetary assets and liabilities denominated in non-functional currencies. These contracts generally have maturities of up to two months. These forward contracts are not designated as part of a hedging relationship for accounting purposes. All outstanding foreign currency forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in other income (expense), net, in the consolidated statements of income. From an economic perspective, the objective of our hedging program is for gains or losses on forward contracts to substantially offset gains and losses on the underlying hedged items. As of June 27, 2020, we had outstanding foreign currency forward contracts to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $279 million.
We also utilize foreign currency forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such exposures result from (1) forecasted non-functional currency sales and (2) forecasted non-functional currency materials, labor, overhead and other expenses. These contracts may be up to twelve months in duration and are designated as cash flow hedges for accounting purposes. The effective portion of changes in the fair value of the contracts is recorded in stockholders' equity as a separate component of accumulated other comprehensive income and recognized in earnings when the hedged item affects earnings. We had forward contracts related to cash flow hedges in various foreign currencies in the aggregate notional amount of $115 million as of June 27, 2020.
The net impact of an immediate 10 percent change in exchange rates would not be material to our unaudited condensed consolidated financial statements, provided we accurately forecast and estimate our foreign currency exposure. If such forecasts are materially inaccurate, we could incur significant gains or losses.
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Item 4. Controls and Procedures
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that occurred during the quarter ended June 27, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that their objectives are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of disclosure controls and procedures must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of disclosure controls and procedures can provide absolute assurance that all disclosure control issues and instances of fraud, if any, have been detected. Nonetheless, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 27, 2020, (1) our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, and (2) our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding its required disclosure.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as set forth below, reference is made to the legal proceedings disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended September 28, 2019 and in Part II, Item 1 of our Quarterly Reports on Form 10-Q for the quarters ended December 28, 2019 and March 28, 2020.
In June 2008, the Company was named by the Orange County Water District in a suit alleging that its actions contributed to polluted groundwater managed by the plaintiff. The complaint seeks recovery of compensatory and other damages, as well as declaratory relief, for the payment of costs necessary to investigate, monitor, remediate, abate and contain contamination of groundwater within the plaintiff’s control. In April 2013, all claims against the Company were dismissed. The plaintiff appealed this dismissal and the appellate court reversed the judgment in August 2017. In November 2017, the California Supreme Court denied the Company’s petition to review this decision and, in December 2017, the Court of Appeal remanded the case back to the Superior Court for further proceedings. The first part of a multi-phase trial, originally scheduled to commence on September 14, 2020, has been postponed to April 12, 2021 due to COVID-19-related judicial disruption. The Company intends to contest the plaintiff’s claims vigorously.
In addition, from time to time, we may become involved in routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. We record liabilities for such matters when a loss becomes probable and the amount of loss can be reasonably estimated. The ultimate outcome of any litigation is uncertain and unfavorable outcomes could have a negative impact on our results of operations and financial condition. Regardless of outcome, litigation can have an adverse impact on us as a result of incurrence of litigation costs, diversion of management resources, and other factors.
Refer also to Note 7 to Condensed Consolidated Financial Statements.
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Item 1A. Risk Factors
The COVID-19 pandemic has had, and will likely continue to have, a significant impact on our results of operations and financial condition by reducing demand from our customers, interrupting the flow of components needed for our customers’ products, limiting the operations or productivity of our manufacturing facilities, restricting the types of products we can build for our customers and creating health risks to our employees.
Our global operations expose us to the effects of the COVID-19 pandemic, which has now spread across the globe and is impacting economic activity worldwide. In particular, the pandemic:
•Resulted in the temporary closure of our facilities in China during the second quarter of 2020;
•Reduced the amount of staffing we are permitted to maintain at certain of our plants;
•Required us in some cases to pay staff who are not able to work due to government orders;
•Limited the capacity of logistics providers to deliver the products we manufacture;
•Reduced demand for certain of our customers’ products, particularly in the automotive end market;
•Prevented us from building certain products not deemed as essential under local, state and national public health orders covering the locations of our plants during portions of the second and third quarters of 2020; and
•Resulted in interruptions of supply of components, either because our suppliers have themselves been prevented from operating or because major distribution channels (e.g., sea transport) have been disrupted by the pandemic.
Collectively, these conditions significantly affected our revenue for the second and third quarters of 2020 and it is unclear when these impacts will be fully resolved.
Further, although we have implemented infection control measures recommended or required by the applicable public health authorities, and have not to date experienced a significant number of COVID-19 infections among our employees, should infections among our employees increase significantly, our operations could be impacted if we become required to temporarily exclude significant numbers of employees from our plants due to either infection or exposure to an infected person and/or close impacted plants in order to clean them. Furthermore, as a result of government orders, a large number of our employees have been working remotely since the end of the second quarter of fiscal 2020. Although these restrictions have been relaxed in some geographies and we have not experienced any significant disruptions to date as a result of remote work arrangements, should a substantial number of our employees supporting general and administrative functions, particularly at our California headquarters location, continue to be required to work remotely for an extended period of time, we could experience disruptions and reduced efficiencies.
More generally, the COVID-19 pandemic raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and the business restrictions are lifted. In particular, the pandemic also increases the risk that our customers and suppliers will face financial difficulties, which could impact their ability or willingness to satisfy their payment or delivery obligations to us. For example, in the third quarter of 2020, two of our small customers in the automotive end market declared bankruptcy. Although we have not experienced any significant increase in customer defaults as a result of the pandemic to date, the risk of such defaults will increase should pandemic conditions, and the commercial and social restrictions put in place in response to them by local, state and national governments, not end or be significantly relaxed in the near term.
Although we are unable to predict accurately the full impact that COVID-19 will have on us due to a number of uncertainties, including the number of employees who may become infected or exposed to infected persons who we become required to temporarily exclude from our plants, the duration of the outbreak, and actions that may be taken by government authorities, we believe it is likely that the COVID-19 global pandemic will continue to have a negative impact on our business, results of operations and financial condition for the foreseeable future.
Adverse changes in the key end markets we target could harm our business by reducing our sales.
We provide products and services to companies that serve the industrial, medical, defense and aerospace, automotive, communications networks and cloud solutions industries. Adverse changes in any of these end markets could reduce demand for our customers' products or make these customers more sensitive to the cost of our products and services, either of which could reduce our sales, gross margins and net income. A number of factors could affect any of these industries in general, or our customers in particular, and lead to reductions in net sales, thus harming our business. These factors include:
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•intense competition among our customers and their competitors, leading to reductions in prices for their products and increases in pricing pressure placed on us;
•failure of our customers' products to gain widespread commercial acceptance, which could decrease the volume of orders customers place with us. For example, our sales and margins have been negatively impacted in the past by the slower than expected ramp of 5G programs by our communications customers;
•changes in regulatory requirements affecting the products we build for our customers, leading to product redesigns or obsolescence and potentially causing us to lose business; and
•recessionary periods in our customers' markets, which decrease orders from affected customers, such as the currently depressed conditions due to the COVID-19 pandemic on the automotive and oil and gas industries, which have decreased orders from affected customers.
We realize a substantial portion of our revenues from communications equipment customers. This market is highly competitive, particularly in the area of price. Should any of our larger customers in this market fail to effectively compete with their competitors, they could reduce their orders to us or experience liquidity difficulties, either of which could have the effect of substantially reducing our revenue and net income. There can be no assurance that we will not experience declines in demand in this or in other end markets in the future.
Our operating results are subject to significant uncertainties, which can cause our future sales, net income and cash generated from operations to be variable.
Our operating results can vary due to a number of significant uncertainties, including:
•our ability to replace declining sales from end-of-life programs and customer disengagements with new business wins;
•conditions in the economy as a whole and in the industries we serve, which are being significantly impacted by the current COVID-19 pandemic;
•fluctuations in component prices, component shortages and extended component lead times caused by high demand, natural disasters, epidemics or pandemics, such as the COVID-19 pandemic, or otherwise;
•timing and success of new product developments and ramps by our customers, which create demand for our services, but which can also require us to incur start-up costs relating to new tooling and processes;
•levels of demand in the end markets served by our customers;
•timing of orders from customers and the accuracy of their forecasts;
•inventory levels of customers, which if high relative to their normal sales volume, could cause them to reduce their orders to us;
•customer payment terms and the extent to which we factor customer receivables during the quarter;
•increasing labor costs in the regions in which we operate;
•mix of products ordered by and shipped to major customers, as high volume and low complexity manufacturing services typically have lower gross margins than more complex and lower volume services;
•our ability to pass tariffs through to our customers;
•resolution of claims with our customers;
•degree to which we are able to utilize our available manufacturing capacity;
•customer insolvencies resulting in bad debt or inventory exposures that are in excess of our reserves;
•our ability to efficiently move manufacturing operations to lower cost regions;
•changes in our tax provision due to changes in our estimates of pre-tax income in the jurisdictions in which we operate, uncertain tax positions, and our ability to utilize our deferred tax assets; and
•political and economic developments in countries in which we have operations, which could restrict our operations or those of our suppliers and/or customers or increase our costs.
Variability in our operating results may also lead to variability in cash generated by operations, which can adversely affect our ability to make capital expenditures, engage in strategic transactions and repurchase stock.
We are subject to risks arising from our international operations.
The substantial majority of our net sales are generated through our non-U.S. operations. As a result, we are affected by economic, political and other conditions in the foreign countries in which we do business, including:
•changes in trade and tax laws that may result in us or our customers being subjected to increased taxes, duties and tariffs, which could increase our costs and/or reduce our customers’ willingness to use our services in countries in which we are currently manufacturing their products;
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•compliance with U.S. and foreign laws concerning the export of technology, including the International Traffic in Arms Regulations (ITAR), the U.S. Export Administration Regulations, sanctions administered by the Office of Foreign Asset Controls of the U.S. Treasury Department and the Foreign Corrupt Practices Act;
•rising labor costs;
•compliance with foreign labor laws, which generally provide for increased notice, severance and consultation requirements compared to U.S. laws;
•labor unrest, including strikes;
•difficulties in staffing due to immigration or travel restrictions imposed by national governments, including the U.S.;
•security concerns;
•political instability and/or regional military tension or hostilities;
•fluctuations in currency exchange rates, which may either increase or decrease our operating costs and for which we have significant exposure;
•the imposition of currency controls;
•exposure to heightened corruption risks;
•aggressive, selective or lax enforcement of laws and regulations by national governmental authorities;
•potentially increased risk of misappropriation of intellectual property; and
•an outbreak of a contagious disease, such as COVID-19, which may cause us or our suppliers and/or customers to temporarily suspend our operations in the affected city or country.
We operate in countries that have experienced labor unrest, political instability or conflict and strife, including Brazil, China, India, Israel, Malaysia, Mexico and Thailand, and we have experienced work stoppages and similar disruptions in these foreign jurisdictions. To the extent such developments prevent us from adequately staffing our plants and manufacturing and shipping products in those jurisdictions, our margins and net income could be reduced and our reputation as a reliable supplier could be negatively impacted.
Certain of our foreign manufacturing facilities are leased from third parties. To the extent we are unable to renew the leases covering such facilities as they expire on reasonable terms, or are forced to move our operations at those facilities to other locations as a result of a failure to agree upon renewal terms, production for our customers may be interrupted, we may breach our customer agreements, we could incur significant start-up costs at new facilities and our lease expense may increase, potentially significantly.
We are subject to risks associated with natural disasters and global events.
We conduct a significant portion of our activities, including manufacturing, administration and information technology management in areas that have experienced natural disasters, such as major earthquakes, hurricanes, floods, tsunamis and epidemics or pandemics, such as the COVID-19 outbreak. Our insurance coverage with respect to damages to or closure of our facilities, or damages to our customers' products caused by natural disasters, is limited and is subject to policy deductibles, coverage limits, and exclusions, and as a result, may not be sufficient to cover all of our losses. For example, our policies have very limited coverage for damages due to earthquakes or losses caused by business disruptions. In addition, such coverage may not continue to be available at commercially reasonable rates and terms. In the event of a major earthquake or other disaster affecting one or more of our facilities, our operations and management information systems, which control our worldwide procurement, inventory management, shipping and billing activities, could be significantly disrupted. Such events could delay or prevent product manufacturing for an extended period of time. Any extended inability to continue our operations at affected facilities following such an event could reduce our revenue.
We may be unable to generate sufficient liquidity to maintain or expand our operations, which may reduce the business our customers and vendors are able to do with us and impact our ability to continue operations at current levels without additional funding; we could experience losses if one or more financial institutions holding our cash or other financial counterparties were to fail; repatriation of foreign cash could increase our taxes.
Our liquidity is dependent on a number of factors, including profitability, business volume, inventory requirements, the extension of trade credit by our suppliers, the degree of alignment of payment terms from our suppliers with payment terms granted to our customers, investments in facilities and equipment, acquisitions, repayments of our outstanding indebtedness, stock repurchase activity, the amount available under our accounts receivable sales programs and availability under our revolving credit facility. In the event we need or desire additional liquidity to maintain or expand our business, make acquisitions or repurchase stock, there can be no assurance that such additional liquidity will be available on acceptable terms or at all. A failure to maintain adequate liquidity would prevent us from purchasing components and satisfying customer demand, which would reduce both our revenue and profitability.
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During the second quarter of fiscal 2020, we borrowed $650 million under our Amended Cash Flow Revolver, which provides for a maximum of $700 million in revolving commitments, as a precautionary measure to provide additional liquidity in light of the global economic uncertainty and financial market conditions caused by the COVID-19 global pandemic. Although we believe our existing cash resources and 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 for any reason, including in particular continued or worsening economic conditions caused by the COVID-19 global pandemic, our cash provided by operations could decrease significantly and we could be required to seek additional sources of liquidity to continue our operations at their current level. In such a case, there can be no assurance that such additional sources of financing would be available.
A principal source of our liquidity is our cash and cash equivalents, which are held with various financial institutions. Although we distribute such funds among a number of financial institutions that we believe to be of high quality, there can be no assurance that one or more of such institutions will not become insolvent in the future, in which case all or a portion of our uninsured funds on deposit with such institutions could be lost. In addition, a little more than one-third of our cash and cash equivalents, and all of our short-term investments, are in the form of short-term time deposits and money market funds. Under certain market conditions, the market value of these instruments can fall below the amount on deposit. Should this phenomenon, known as “breaking the buck,” occur and should we seek to withdraw our cash equivalents at such time, we could receive less than the face value of our deposits. Finally, if one or more counterparties to our interest rate or foreign currency hedging instruments were to fail, we could suffer losses and our hedging of risk could become less effective.
Additionally, a majority of our worldwide cash reserves are generated by, and therefore held in, foreign jurisdictions. Some of these jurisdictions restrict the amount of cash that can be transferred to the U.S. or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our U.S. operations, we may incur significant foreign taxes to repatriate these funds which would reduce the net amount ultimately available for such purposes.
Our Amended Cash Flow Revolver contains covenants that may adversely impact our business; the failure to comply with such covenants or the occurrence of an event of default could cause us to be unable to borrow additional funds and cause our outstanding debt to become immediately payable.
Our Amended Cash Flow Revolver contains a maximum leverage and minimum interest coverage ratio, in both cases measured on the basis of a trailing 12 month look-back period, and a number of restrictive covenants, including restrictions on incurring additional debt, making investments and other restricted payments, selling assets and paying dividends, subject to certain exceptions, with which we must comply. Collectively, these covenants could constrain our ability to grow our business through acquisition or engage in other transactions. Such facility also contains customary events of default, including that a material business interruption or cessation has not occurred. Finally, such facility includes covenants requiring, among other things, that we file quarterly and annual financial statements with the SEC, comply with all laws, pay all taxes and maintain casualty insurance. If we are not able to comply with these covenants or if an event of default were to occur and not be cured, all of our outstanding debt could become immediately due and payable and the incurrence of additional debt under our revolving credit facility would not be allowed, any of which would have a material adverse effect on our liquidity and ability to continue to conduct our business.
We rely on a relatively small number of customers for a substantial portion of our sales, and declines in sales to these customers could reduce our net sales and net income.
Sales to our ten largest customers have historically represented approximately half of our net sales. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our sales for the foreseeable future. The loss of, or a significant reduction in sales or pricing to, our largest customers could substantially reduce our revenue and margins.
We are subject to intense competition in the EMS industry, which could cause us to lose sales and, therefore, harm our financial performance.
The EMS industry is highly competitive and the industry has experienced a surplus of manufacturing capacity. Our competitors include major global EMS providers, including Benchmark Electronics, Inc., Celestica, Inc., Flex Ltd., Hon Hai Precision Industry Co., Ltd. (Foxconn), Jabil Circuit, Inc. and Plexus Corp., as well as other companies that have a regional,
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product, service or industry-specific focus. We also face competition from current and potential OEM customers who may elect to manufacture their own products internally rather than outsourcing to EMS providers.
Competition is based on a number of factors, including end markets served, price and quality. We may not be able to offer prices as low as some of our competitors for any number of reasons, including the willingness of competitors to provide EMS services at prices we are unable or unwilling to offer. There can be no assurance that we will win new business or maintain existing business due to competitive factors, which could decrease our sales and net income. In addition, due to the extremely price sensitive nature of our industry, business that we do win or maintain may have lower margins than our historical or target margins. As a result, competition may cause our gross and operating margins to fall.
Current U.S. trade policy could increase the cost of using both our onshore and offshore manufacturing services for our U.S. customers, leading them to reduce their orders to us.
Although we maintain significant manufacturing capacity in the U.S., the substantial majority of our manufacturing operations are located outside the U.S. This manufacturing footprint has allowed us to provide cost-effective volume manufacturing for our customers. As a result of continuing trade disputes, the U.S., China, the E.U. and several other countries have imposed tariffs on certain imported products. In particular, the U.S. has imposed tariffs impacting certain components and products imported from China by us into the U.S. These tariffs apply to both components imported into the U.S. from China for use in the manufacture of products at our U.S. plants and to certain of our customers’ products that we manufacture for them in China and that are then imported into the U.S. Any decision by a large number of our customers to cease using our manufacturing services due to the continued application of tariffs would materially reduce our revenue and net income. In addition, our gross margins would be reduced in the event we are for any reason unable to pass on any tariffs that we incurred to our customers. Although our customers are generally liable for tariffs we pay on their behalf on importation of components used in the manufacture of their products, our gross margins would be reduced in the event we were for any reason unable to recover tariffs or duties from our customers. Further, although we are required to pay tariffs upon importation of the components, we may not be able to recover these amounts from customers until sometime later, if at all, which would adversely impact our operating cash flow in a given period.
Our supply chain is subject to a number of economic, regulatory and environmental risks that could increase our costs or cause us to delay shipments to customers, reducing our revenue and margins and increasing our inventory.
Our supply chain is subject to a number of risks and uncertainties. For example, we are dependent on certain suppliers, including limited and sole source suppliers, to provide key components we incorporate into our products. We have in the past experienced, and may experience in the future, delays in delivery and shortages of components, particularly certain types of capacitors, resistors and discrete semiconductors used in many of the products we manufacture. These conditions, as well as the interruptions in supply of components and reduced capacity of logistics providers caused by the COVID-19 global pandemic, have resulted and could in the future result in increased component prices and delays in product shipments to customers, both of which would decrease our revenue and margins, as well as increase our inventory of other components, which would reduce our operating cash flow.
Our components are manufactured using a number of commodities, including petroleum, gold, copper and other metals that are subject to frequent and unpredictable changes in price due to worldwide demand, investor interest and economic conditions. We do not hedge against the risk of these fluctuations, but rather attempt to adjust our product pricing to reflect such changes. Should significant increases in commodities prices occur and should we not be able to increase our product prices enough to offset these increased costs, our gross margins and profitability could decrease, perhaps significantly.
Concern over climate change has led to state, federal and international legislative and regulatory initiatives aimed at reducing carbon dioxide and other greenhouse gas emissions and there is increased stockholder interest in corporate sustainability initiatives. Collectively, such initiatives could lead to an increase in the price of energy over time. A sustained increase in energy prices for any reason could increase our raw material, components, operations and transportation costs. We could also suffer reputational damage if our sustainability practices are not perceived to be adequate. Finally, government regulations, such as the Dodd-Frank Act disclosure requirements relating to conflict minerals, and customer interest in responsible sourcing could decrease the availability and increase the prices of components used in our customers' products. We may not be able to increase our product prices enough to offset these increased costs, in which case our profitability would be reduced.
We rely on a variety of common carriers to transport our raw materials and components from our suppliers to us, and to transport our products to our customers. The use of common carriers is subject to a number of risks, including
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increased costs due to rising energy prices and labor, vehicle and insurance costs, and hijacking and theft resulting in losses of shipments, delivery delays resulting from labor disturbances and strikes and other factors beyond our control. Although we attempt to mitigate our liability for any losses resulting from these risks through contracts with our customers, suppliers and insurance carriers, any costs or losses that cannot be mitigated could reduce our profitability, require us to manufacture replacement product or damage our relationships with our customers.
Cancellations, reductions in production quantities, delays in production by our customers and changes in customer requirements could reduce our sales and net income.
We generally do not obtain firm, long-term purchase commitments from our customers and our bookings may generally be canceled prior to the scheduled shipment date. Although a customer is generally liable for raw materials we procure on their behalf, finished goods and work-in-process at the time of cancellation, the customer may fail to honor this commitment or we may be unable or, for other business reasons, choose not to enforce our contractual rights. Cancellations, reductions or delays of orders by customers could increase our inventory levels, lead to write-offs of inventory that we are not able to resell to the customer, reduce our sales and net income, delay or eliminate recovery of our expenditures for inventory purchased in preparation for customer orders and lower our asset utilization, all of which could result in lower gross margins and lower net income.
Unanticipated changes in our tax rates or exposure to additional tax liabilities could increase our taxes and decrease our net income; our projections of future taxable income that drove the release of our valuation allowance in prior years could prove to be incorrect, which could cause a charge to earnings; recent corporate tax reform measures have reduced the value of our deferred tax assets and could result in taxation of untaxed foreign earnings.
We are or may become subject to income, sales, value-added, goods and services, withholding and other taxes in the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for taxes and, in the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Our effective tax rates and liability for other taxes could increase as a result of changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in enacted tax laws, the effectiveness of our cash and tax management strategies, our ability to negotiate advance pricing agreements with foreign tax authorities, compliance with local trade laws and other factors. Recent international initiatives require multinational enterprises, like ours, to report profitability on a country-by-country basis, which could increase scrutiny by foreign tax authorities. In addition, our tax determinations are regularly subject to audit by tax authorities. For example, we are currently undergoing audits of our tax returns for certain recent tax years in a number of jurisdictions, including the United States. Developments in these or future audits could adversely affect our tax provisions, including through the disallowance or reduction of deferred tax assets or the assessment of back taxes, interest and penalties, any of which could result in an increase to income tax expense and therefore a decrease in our net income.
Our strategy to pursue higher margin business depends in part on the success of our CPS business, which, if not successful, could cause our future gross margins and operating results to be lower.
A key part of our strategy is to grow our CPS business, which includes printed circuit boards, backplane and cable assemblies and plastic injection molding, mechanical systems, memory, RF, optical and microelectronic solutions, defense and aerospace products and data storage solutions and design, engineering, logistics and repair services. A decrease in orders for these components, products and services can have a disproportionately adverse impact on our profitability since these components, products and services generally carry higher than average contribution margins than our core IMS business. In addition, in order to grow this portion of our business profitably, we must continue to make substantial investments in the development of our product development capabilities, research and development activities, test and tooling equipment and skilled personnel, all of which reduce our operating results in the short term. The success of our CPS business also depends on our ability to increase sales of our proprietary products, convince our customers to agree to purchase our components for use in the manufacture of their products, rather than directing us to buy them from third parties, and expand the number of our customers who contract for our design, engineering, logistics and repair services. We may face challenges in achieving commercially viable yields and difficulties in manufacturing components in the quantities and to the specifications and quality standards required by our customers, as well as in qualifying our components for use in our customers' designs. Our proprietary products and design, engineering, logistics and repair services must compete with products and services offered by established vendors which focus solely on development of similar technologies or the provision of similar services. Any of these factors could cause our CPS revenue and margins to be less than expected, which would have an overall adverse and potentially disproportionate effect on our revenues and profitability.
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Our customers could experience credit problems, which could reduce our future revenues and net income.
Some companies in the industries for which we provide products have previously experienced significant financial difficulty, with a few filing for bankruptcy in the past. Such financial difficulty, if experienced by one or more of our customers, may negatively affect our business due to the decreased demand from these financially distressed customers, the lengthening of customer payment terms, the potential inability of these companies to make full payment on amounts owed to us or to purchase inventory we acquired to support their businesses. Customer bankruptcies also entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to us that are deemed a preference under bankruptcy laws. In the third quarter of 2020, two of our small customers declared bankruptcy, the impact of which was not material. There can be no assurance that additional customers will not declare bankruptcy.
Cyberattacks and other disruptions of our information technology ("IT") network and systems could interrupt our operations, lead to loss of our customer and employee data and subject us to damages.
We rely on internal and cloud-based networks and systems furnished by third parties for worldwide financial reporting, inventory management, procurement, invoicing, employee payroll and benefits administration and email communications, among other functions. In addition, our 42Q manufacturing execution solutions software used by us and certain of our customers operates in the cloud. Despite our business continuity planning, including redundant data sites and network availability, both our internal and cloud-based infrastructure may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and similar events. In addition, despite the implementation of network security measures that we believe to be reasonable, both our internal and our cloud-based infrastructure may also be vulnerable to hacking, computer viruses, the installation of malware and similar disruptions either by third parties or employees with access to key IT infrastructure. Cybersecurity attacks can come in many forms, including distributed denial of service attacks, advanced persistent threat, phishing and business email compromise efforts. Hacking, malware and other cybersecurity attacks, if not prevented, could lead to the collection and disclosure of sensitive personal or confidential information relating to our customers, employees or others, exposing us to legal liability and causing us to suffer reputational damage. In addition, our SCI defense division is subject to U.S. government regulations requiring the safeguarding of certain unclassified government information and to report to the U.S. government certain cyber incidents that affect such information. The increasing sophistication of cyberattacks requires us to continually evaluate new technologies and processes intended to detect and prevent these attacks. Our insurance coverage for cyber-attacks is limited. There can be no assurance that the security measures we choose to implement will be sufficient to protect the data we manage. If we and our cloud infrastructure vendors are not successful in preventing such outages and cyberattacks, our operations could be disrupted, we could incur losses, including losses relating to claims by our customers, employees or privacy regulators relating to loss of personal or confidential business information, the willingness of customers to do business with us may be damaged and, in the case of our defense business, we could be debarred from future participation in U.S. government programs.
Consolidation in the electronics industry may adversely affect our business by increasing customer buying power and increasing prices we pay for components.
Consolidation in the electronics industry among our customers, our suppliers and/or our competitors may increase, which could result in a small number of very large electronics companies offering products in multiple sectors of the electronics industry. In addition, if one of our customers is acquired by another company that does not rely on us to provide EMS services, we may lose that customer's business. Similarly, consolidation among our suppliers could result in a sole or limited source for certain components used in our customers' products. Any such consolidation could cause us to be required to pay increased prices for such components, which could reduce our gross margin and profitability.
Customer requirements to transfer business may increase our costs.
Our customers sometimes require that we transfer the manufacturing of their products from one of our facilities to another to achieve cost reductions, tariff reductions and other objectives. These transfers have resulted in increased costs to us due to facility downtime, less than optimal utilization of our manufacturing capacity and delays and complications related to the transition of manufacturing programs to new locations. These transfers, and any decision by a significant customer to terminate manufacturing services in a particular facility, could require us to close or reduce operations at certain facilities and, as a result, we may incur in the future significant costs for the closure of facilities, employee severance and related matters. We may be required to relocate additional manufacturing operations in the future and, accordingly, we may incur additional costs that decrease our net income. Any of these factors could reduce our revenues, increase our expenses and reduce our net income.
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Recruiting and retaining our key personnel is critical to the continued growth of our business.
Our success depends upon the continued service of our key personnel, particularly our highly skilled sales and operations executives, managers and engineers with many years of experience in electronics and contracts manufacturing. Such individuals can be difficult to identify, recruit and retain and are heavily recruited by our competitors. Should any of our key employees choose to retire or terminate their employment with us, we will be required to replace them with new employees with the required experience. Should we be unable to recruit new employees to fill key positions with us, our operations, financial controls and growth prospects could be negatively impacted.
If we are unable to protect our intellectual property or if we infringe, or are alleged to infringe, upon the intellectual property of others, we could be required to pay significant amounts in costs or damages.
We rely on a combination of copyright, patent, trademark and trade secret laws and contractual restrictions to protect our intellectual property rights. However, a number of our patents covering certain aspects of our manufacturing processes or products have expired and will continue to expire in the future. Such expirations reduce our ability to assert claims against competitors or others who use or sell similar technology. Any inability to protect our intellectual property rights could diminish or eliminate the competitive advantages that we derive from our proprietary technology.
We are also subject to the risk that current or former employees violate the terms of their proprietary information agreements with us. Should a key current or former employee use or disclose any of our or our customers' proprietary information, we could become subject to legal action by our customers or others, our key technologies could become compromised and our ability to compete could be adversely impacted.
In addition, we may become involved in administrative proceedings, lawsuits or other proceedings if others allege that the products we manufacture for our customers or our own manufacturing processes and products infringe on their intellectual property rights. If successful, such claims could force our customers and us to stop importing or producing products or components of products that use the challenged intellectual property, to pay up to treble damages and to obtain a license to the relevant technology or to redesign those products or services so as not to use the infringed technology. The costs of defense and potential damages and/or impact on production of patent litigation could be significant and have a materially adverse impact on our financial results. In addition, although our customers typically indemnify us against claims that the products we manufacture for them infringe others’ intellectual property rights, there is no guaranty that these customers will have the financial resources to stand behind such indemnities should the need arise, nor is there any guarantee that any such indemnity could be fully enforced. We sometimes design products on a contract basis or jointly with our customers. In these situations, we may become subject to claims that products we design infringe third party intellectual property rights and may also be required to indemnify our customer against liability caused by such claims.
Any of these risks could cause a reduction in our revenue, an increase in our costs and a reduction in our net income and could damage our reputation with our customers.
We can experience losses due to foreign exchange rate fluctuations and currency controls, which could reduce our net income and impact our ability to repatriate funds.
Because we manufacture and sell the majority of our products abroad, our operating results can be negatively impacted due to fluctuations in foreign currency exchange rates, particularly in volatile currencies to which we are exposed, such as the Euro, Mexican peso, Malaysian ringgit, Chinese renminbi and Brazilian real. We use financial instruments, primarily short-term foreign currency forward contracts, to hedge our exposure to exchange rate fluctuations. However, the success of our foreign currency hedging activities in preventing foreign exchange losses depends largely upon the accuracy of our forecasts of future sales, expenses, capital expenditures and monetary assets and liabilities. As such, our foreign currency hedging program may not fully cover our exposure to exchange rate fluctuations. If our hedging activities are not successful, we may experience a reduction of our net income. In addition, certain countries in which we operate have adopted currency controls requiring that local transactions be settled only in local currency rather than in our functional currency, which is generally different than the local currency. Such controls could require us to hedge larger amounts of local currency than we otherwise would and/or prevent us from repatriating cash generated by our operations in such countries.
Allegations of failures to comply with domestic or international employment and related laws could result in the payment of significant damages, which would reduce our net income.
We are subject to a variety of domestic and foreign employment laws, including those related to safety, wages and overtime, discrimination, organizing, whistle-blowing, classification of employees, privacy and severance payments. We may
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be required to defend against allegations that we have violated such laws. For example, in October 2018, a contractor who had been retained by us through a third-party temporary staffing agency from November 2015 to March 2016 filed a lawsuit against us in the Santa Clara County Superior Court on behalf of himself and all other similarly situated Company contractors and employees in California, alleging violations of California Labor Code provisions governing overtime, meal and rest periods, wages, wage statements and reimbursement of business expenses. Allegations that we have violated labor laws could lead to damages being awarded to employees or fines from or settlements with federal, state or foreign regulatory authorities, which amounts could be substantial and which would reduce our net income.
We are subject to a number of U.S. governmental procurement rules and regulations and failure to comply with such rules and regulations could result in damages or reduction of future revenue.
We are subject to a number of laws and regulations relating to the award, administration and performance of U.S. government contracts and subcontracts, including Federal Acquisition Regulations and the Defense Federal Acquisition Regulations. Such laws and regulations govern, price negotiations, cost accounting standards, procurement practices and many other aspects of performance under government contracts and subcontracts. These rules are complex, our performance under them is subject to audit by the Defense Contract Audit Agency, the Office of Federal Contract Compliance Programs and other government regulators, and in most cases must be complied with by our suppliers. If an audit or investigation reveals a failure to comply with regulations, we could become subject to civil or criminal penalties and administrative sanctions, including government pre-approval of our government contracting activities, termination of the contract, payment of fines and suspension or debarment from doing further business with the U.S. government and could also be subject to claims for breach of contract by our customers. Any of these actions could increase our expenses, reduce our revenue and damage our reputation as a reliable government supplier.
We may not have sufficient insurance coverage for potential claims and losses, which could leave us responsible for certain costs and damages.
We carry various forms of business and liability insurance in types and amounts we believe are reasonable and customary for similarly situated companies in our industry. However, our insurance program does not generally cover losses due to failure to comply with typical customer warranties for workmanship, product and medical device liability, intellectual property infringement, product recall claims, certain natural disasters, such as earthquakes, epidemics or pandemics, such as the COVID-19 outbreak, and environmental contamination. In addition, our policies generally have deductibles and/or limits or may be limited to certain lines or business or customer engagements that reduce the amount of our potential recoveries from insurance. As a result, not all of our potential business losses are covered under our insurance policies. Should we sustain a significant uncovered loss, our net income will be reduced. Additionally, if one or more counterparties to our insurance coverage were to fail, we would bear the entire amount of an otherwise insured loss.
Any failure to comply with applicable environmental laws could adversely affect our business by causing us to pay significant amounts for cleanup of hazardous materials or for damages or fines.
We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, generation, storage, discharge and disposal of hazardous substances and waste in the ordinary course of our manufacturing operations. If we violate environmental laws or if we own or operate, or owned or operated in the past, a site at which we or a predecessor company caused contamination, we may be held liable for damages and the costs of remedial actions. Although we estimate and regularly reassess our potential liability with respect to violations or alleged violations and accrue for such liability, our accruals may not be sufficient. Any increase in existing reserves or establishment of new reserves for environmental liability would reduce our net income. Our failure or inability to comply with applicable environmental laws and regulations could also limit our ability to expand facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with these laws and regulations.
Partly as a result of certain of our acquisitions, we have incurred liabilities associated with environmental contamination. These liabilities include ongoing investigation and remediation activities at a number of current and former sites. The time required to perform environmental remediation can be lengthy and there can be no assurance that the scope, and therefore cost, of these activities will not increase as a result of the discovery of new contamination or contamination on adjoining landowner's properties or the adoption of more stringent regulatory standards covering sites at which we are currently performing remediation activities.
We cannot assure that past disposal activities will not result in liability that will materially affect us in the future, nor can we provide assurance that we do not have environmental exposures of which we are unaware and which could adversely affect our future operating results. Changes in or restrictions on discharge limits, emissions levels, permitting requirements
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and material storage or handling could require a higher than anticipated level of remediation activities, operating expenses and capital investment or, depending on the severity of the impact of the foregoing factors, costly plant relocation, any of which would reduce our net income.
We may not be successful in implementing and integrating strategic transactions or in divesting assets or businesses, which could harm our operating results; we could become required to book a charge to earnings should we determine that goodwill and other acquired assets are impaired.
From time to time, we may undertake strategic transactions that give us the opportunity to access new customers and new end markets, increase our proprietary product offerings, obtain new manufacturing and service capabilities and technologies, enter new geographic manufacturing locations, lower our manufacturing costs and increase our margins, and to further develop existing customer relationships. Strategic transactions involve a number of risks, uncertainties and costs, including integrating acquired operations and workforce, businesses and products, resolving quality issues involving acquired products, incurring severance and other restructuring costs, diverting management attention, maintaining customer, supplier or other favorable business relationships of acquired operations, terminating unfavorable commercial arrangements, losing key employees, integrating the systems of acquired operations into our management information systems and satisfying the liabilities of acquired businesses, including liability for past violations of law and material environmental liabilities. Any of these risks could cause our strategic transactions not to be ultimately profitable.
In addition, we have in the past recorded, and may be required to record in the future, goodwill and other intangible assets in connection with our acquisitions. We evaluate, at least on an annual basis, whether events or circumstances have occurred that indicate all, or a portion, of the carrying amount of our goodwill and other intangible assets may no longer be recoverable. Should we determine in the future that our goodwill or other intangible assets have become impaired, an impairment charge to earnings would become necessary, which could be significant. For example, during our fiscal 2018 annual goodwill impairment analysis, we fully impaired goodwill of $31 million associated with the acquisition of a storage software business we purchased in 2016.
If we manufacture or design defective products, or if our manufacturing processes do not comply with applicable statutory and regulatory requirements and standards, we could be subject to claims, damages and fines and lose customers.
We manufacture products to our customers' specifications, and in some cases our manufacturing processes and facilities need to comply with various statutory and regulatory requirements and standards. For example, many of the medical products that we manufacture, as well as the facilities and manufacturing processes that we use to produce them, must comply with standards established by the U.S. Food and Drug Administration and products we manufacture for the automotive end market are generally subject to the ISO/TS 16949:2009 standard. In addition, our customers' products and the manufacturing processes that we use to produce them often are highly complex. As a result, products that we design or manufacture may at times contain design or manufacturing defects, and our manufacturing processes may be subject to errors or may not be in compliance with applicable statutory and regulatory requirements and standards. Defects in the products we design or manufacture may result in product recalls, warranty claims by customers, including liability for repair costs, delayed shipments to customers or reduced or canceled customer orders. The failure of the products that we design or manufacture or of our manufacturing processes and facilities to comply with applicable statutory and regulatory requirements and standards may subject us to legal fines or penalties, cause us to lose business and, in some cases, require us to shut down or incur considerable expense to correct a manufacturing program or facility. In addition, these defects may result in product liability claims against us. The magnitude of such claims may increase as we continue to expand our medical, automotive, defense and aerospace and oil and gas manufacturing services because defects in these types of products can result in death or significant injury to end users of these products or environmental harm. Even when our customers are contractually responsible for defects in the design of a product, there is no guarantee that these customers will have the financial resources to indemnify us for such liabilities and we could nonetheless be required to expend significant resources to defend ourselves if named in a product liability suit over such defects. Additionally, insolvency of our customers may result in us being held ultimately liable for our customers’ design defects, which could significantly reduce our net income.
Changes in financial accounting standards or policies have affected, and in the future may affect, our reported financial condition or results of operations; there are inherent limitations to our system of internal controls; changes in securities laws and regulations have increased, and are likely to continue to increase, our operating costs.
We prepare our consolidated financial statements in conformity with GAAP. Our preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the recorded amounts of assets, liabilities and net income during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a change to our estimates and could impact our future operating results.
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These principles are subject to interpretation by the Financial Accounting Standards Board ("FASB"), the SEC and various bodies formed to interpret and create accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced. For example, in fiscal 2019, we implemented the new revenue recognition standard, which is complex and requires significant management judgment. Although we believe the judgments we applied in implementation of the new revenue recognition standard are appropriate, there can be no assurance that we will not be required to change our judgments relating to implementation of such standard in the future, whether as a result of new guidance or otherwise. A significant change in our accounting judgments could have a significant impact on our reported revenue, gross profits or balance sheets. In general, changes to accounting rules or challenges to our interpretation or application of the rules by regulators may have a material adverse effect on our reported financial results or on the way we conduct business.
Our system of internal and disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives. However, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. As a result, there can be no assurance that our system of internal and disclosure controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner. For example, we identified a material weakness in our internal controls over financial reporting in 2018 that required remediation in 2019. Furthermore, due to the health risks caused by the COVID-19 global pandemic to employees who operate and monitor our internal controls and due to the requirement that a large number of employees work remotely, the COVID-19 global pandemic impact on staffing could cause challenges for the effective operation of our internal controls.
Finally, corporate governance, public disclosure and compliance practices continue to evolve based upon continuing legislative action, SEC rulemaking and stockholder activism. As a result, the number of rules and regulations applicable to us may increase, which could also increase our legal and financial compliance costs and the amount of time management must devote to compliance activities. Increasing regulatory burdens could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our Audit Committee, and qualified executive officers in light of an increase in actual or perceived workload and liability for serving in such positions.
The market price of our common stock is volatile and is impacted by factors other than our financial performance.
The stock market in recent years has experienced significant price and volume fluctuations that have affected our stock price. Recent stock market fluctuations related to the current COVID-19 pandemic have been particularly significant. These fluctuations have often been unrelated to our operating performance. Factors that can cause such fluctuations include announcements by our customers, competitors or other events affecting companies in the electronics industry, currency fluctuations, the impact of natural disasters and global events, such as the current COVID-19 pandemic, general market fluctuations and macroeconomic conditions, any of which may cause the market price of our common stock to fluctuate widely.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In September 2017, our Board of Directors authorized us to repurchase up to $200 million of our common stock in the open market or in negotiated transactions off the market. In October 2019, the Board authorized an additional $200 million stock repurchase program. These programs have no expiration date. The table below sets forth information regarding our repurchases of our common stock under these authorizations during the third quarter of 2020.
| Period (1) | TOTAL NUMBER OF SHARES PURCHASED | AVERAGE PRICE PAID PER SHARE (2) | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PROGRAMS | MAXIMUM DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PROGRAMS (2) | |||||||||||||||||||||||||
| Month #1 | |||||||||||||||||||||||||||||
| March 29, 2019 through April 25, 2020 | 511,000 | $ | 26.72 | 511,000 | $ | 217,086,498 | |||||||||||||||||||||||
| Month #2 | |||||||||||||||||||||||||||||
| April 26, 2019 through May 23, 2020 | 27,216 | $ | 24.82 | 27,216 | $ | 216,411,035 | |||||||||||||||||||||||
| Month #3 | |||||||||||||||||||||||||||||
| May 24, 2020 through June 27, 2020 | 129,026 | $ | 24.68 | 129,026 | $ | 213,226,780 | |||||||||||||||||||||||
| Total | 667,242 | $ | 26.25 | 667,242 | |||||||||||||||||||||||||
(1) All months shown are our fiscal months.
(2) Amounts do not include commission payable on shares repurchased. The total average price paid per share is a weighted average based on the total number of shares repurchased during the period.
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Item 6. Exhibits
| Exhibit Number | Description | |||||||
| 10.29* | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 (1) | ||||||||
| 32.2 (1) | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
________________________
* Corrected version being filed. Also a compensatory arrangement in which an executive officer or director participates.
(1) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
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SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SANMINA CORPORATION | ||||||||||||||
| (Registrant) | ||||||||||||||
| By: | /s/ HARTMUT LIEBEL | |||||||||||||
| Hartmut Liebel | ||||||||||||||
| Chief Executive Officer (Principal Executive Officer) | ||||||||||||||
| Date: | July 31, 2020 | |||||||||||||
| By: | /s/ KURT ADZEMA | |||||||||||||
| Kurt Adzema | ||||||||||||||
| Executive Vice President and | ||||||||||||||
| Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
| Date: | July 31, 2020 | |||||||||||||
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