SANMINA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME

SANMINA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

SANMINA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Sanmina Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to those rules or regulations. The interim condensed consolidated financial statements are unaudited, but reflect all adjustments, consisting primarily of normal recurring adjustments, that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 29, 2018,28, 2019, included in the Company's 20182019 Annual Report on Form 10-K.

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. Actual results could differ materially from those estimates.

Results of operations for the thirdfirst quarter of 20192020 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

The Company operates on a 52 or 53 week year ending on the Saturday nearest September 30. Fiscal 2019 was a 52-week year and 2018 are each 52-week years.fiscal 2020 will be a 53-week year, with the extra week in the fourth quarter. All references to years relate to fiscal years unless otherwise noted.

Recent Accounting Pronouncements Adopted

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

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 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. The new standard is effective for the Company at the beginning of fiscal 2020, including interim periods within that reporting period. 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 has decided to applyadopted the new standard on September 29, 2019, the first day of fiscal 2020, and applied the above practical expedient transition method. The Company also plans to electelected certain other transition options including the option to not separate lease and non-lease components, the option to not recognize right of use assets and related liabilities that arise from short-term leases (initial term of twelve months or less) and the package of practical expedients that allowswhich, among other things, allowed the Company to carry forward its prior conclusions about lease identification and classification.

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of income.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. Inventories

Note 3. Revenue Recognition

Contract Assets

Other than the impact upon adoption of ASC 606 at the beginning of the first quarter of 2019, (as discussed in Note 1),which was limited to beginning retained earnings, the application of ASC 606 during the first three quarters of 2019 didhas not materially impactimpacted any financial statement line item.item for any period presented herein.

The Company has elected to applyapplies the following practical expedients or policy elections under ASC 606:

Disaggregation of revenue

Note 4. Financial Instruments

Fair Value of Financial Instruments

The fair values of cash equivalents (generally 10% or less of cash and cash equivalents), accounts receivable, accounts payable and short-term debt approximate carrying value due to the short-term duration of these instruments. Additionally, the fair value of variable rate long-term debt approximates carrying value as of June 29,December 28, 2019.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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:

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 (2) forecasted non-functional currency materials, labor, overhead and other expenses and (3) anticipated capital expenditures denominated in a currency other than the functional currency of the entity making the expenditures. These

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI"), a component of equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The amount of gain (loss) recognized in Other Comprehensive Income ("OCI") on derivative instruments (effective portion),and the amount of gain (loss) reclassified from AOCI into income (effective portion) and the amount of ineffectiveness were not material for any period presented herein. Additionally, the amount of ineffectiveness was not material in the first quarter of 2019. 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 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 operations.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.

Note 5. Debt

Long-term debt consisted of the following:

As of December 28, 2019, there were 0 borrowings and $8 million of letters of credit outstanding under the Fourth Amended and Restated Credit Agreement (the "Amended Cash Flow Revolver") that provided for. The Amended Cash Flow Revolver provides a committed $375 million Term Loan.

As of June 29, 2019, there were $121 million of borrowings and $8 million of letters of credit outstanding under the Amended Cash Flow Revolver.

Debt covenants

Note 6.7. Accounts Receivable Sale Program

During 2018, theThe 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 the banks that are party to the RPA. On January 16, 2019, the Company entered into an amendment to its Amended Cash Flow Revolver which increased the percentage of its 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 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.

Note 7.8. Contingencies

Legal Proceedings

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 29,December 28, 2019, 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 requires the Company's Canadian subsidiary to remediate certain environmental contamination at a site owned by the subsidiary between 1999 and 2006. As of June 29, 2019, the Company believes it has reserved a sufficient amount to satisfy currently anticipated future investigation and remediation costs at this site. Another such order demands that the Company and other alleged defendants remediate groundwater contamination at twofour landfills located in Northern California to which the Company may have sent wastewater in the past. The Company continuesis participating in a working group of other alleged defendants to investigate the allegations containedbetter understand its potential exposure in this orderaction and has reserved its estimated exposure for this matter as of June 29,December 28, 2019. However, there can be no assurance that the Company's reserve will ultimately be sufficient.

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, an individuala contractor who was employedhad 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 codeLabor 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 throughto the time of trial, whether employed directly by the Company ortrial. Additionally, on November 1, 2019, another contractor retained through a temporary staffing agency.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 continues to investigatebetween August 22, 2018 and the allegations and has not taken a reserve for this matter as of June 29, 2019.present). The Company intends to vigorously defend rigorouslythese matters.

On December 20, 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 these claims.Dialight. Further, the Company strongly disagrees with Dialight’s allegations and intends to defend against them vigorously.

Other Contingencies

Note 8.9. Restructuring

In the first quarterThe following table provides a summary of 2018,restructuring costs:

On October 28, 2019, the Company adopted a consolidatedCompany-wide restructuring plan. Under this plan, the Company expects to addressincur restructuring charges of approximately $10 million to $20 million, consisting primarily of cash severance costs, primarily over the closure and/or relocationfirst half of three of its manufacturing facilities.2020. In addition, the Company is still in the process of completing restructuring actions under other plans.

All Plans

In addition to costs expected to be incurred under the Q1 FY18FY20 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.

Note 9.10. 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 29,December 28, 2019 and June 30,December 29, 2018 was $16$15 million (27%(28% of income before taxes) and $7$26 million (18%(40% of income before taxes), respectively, and $69 million (36% of income before taxes) and $190 million (202% of income before taxes) for the nine months ended June 29, 2019 and June 30, 2018, respectively. Income tax expense for the ninethree months ended June 29,December 28, 2019 includeddecreased primarily as a result of lower income before tax and the imposition of GILTI (as discussed above). Income tax expense for the nine months ended June 30, 2018 attributable to the estimated impact of a tax-related restructuring transaction that became effective in the Tax Act was $162 million.fourth quarter of 2019.

Note 10.11. Stockholder's Equity

Accumulated Other Comprehensive Income

Note 11.12. Business Segment, Geographic and Customer Information

The Company's operations are managed as two businesses: Integrated Manufacturing Solutions (IMS)IMS and Components, Products and Services (CPS).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 one1 reportable segment - IMS.

 

Net sales by geographic segment, determined based on the country in which a product is manufactured, were as

Note 12.13. Earnings Per Share

 

Note 13.14. Stock-Based Compensation

Stock-based compensation expense was attributable to:

Stock-based compensation expense was recognized as follows:

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.

Our only reportable segment is IMS, which represented approximately 80% of our total revenue in the thirdfirst quarter of 20192020 and thirdfirst quarter of 2018.2019. 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”.

A small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers have typically represented approximately 50% of our net sales. One customerTwo customers represented 10% or more of our net sales for all periods presented.

We typically generate about 80% of our net sales from products manufactured in our foreign operations. The concentration of foreign operations has resulted primarily from a desire on the part of many of our customers to manufacture in lower cost regions such 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.

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.America ("GAAP"). We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate the process used to develop estimates related to product returns, accounts receivable, inventories, intangible assets, income taxes, warranty obligations, environmental matters, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.

For a complete description of our critical accounting policies and estimates, refer to our 20182019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 15, 2018.8, 2019.

Results of Operations

Key Operating Results

Net sales increaseddecreased from $2.2 billion in the first quarter of 2019 to $1.8 billion in the thirdfirst quarter of 20182020, a decrease of 15.9%. In general, the decrease was primarily due to $2.0 billionthe fact that sales in 2019 were favorably impacted by the availability of components, the availability of which had been constrained in 2018. Improved availability of these components in 2019 allowed us to catch up to pent-up demand, beginning in the thirdfirst quarter of 2019 an increase of 11.8%. Net sales increased from $5.2 billion in the first nine months ended June 30, 2018 to $6.3 billion in the nine months ended June 29, 2019, an increase of 21.2%. In general, these increases were driven primarily by stronger demand in each of our end markets and continued stabilization of lead times for supply-constrained parts which allowed us to meet customer demand.

Gross margin increased to 7.3% for the thirdfirst quarter of 20192020 from 6.5%6.8% for the thirdfirst quarter of 2018, primarily due to increased revenue levels and improved operational efficiencies.2019. IMS gross margin increased to 6.4%6.6% for the thirdfirst quarter of 2020, from 6.2% for the first quarter of 2019, from 5.7% for the third quarter of 2018, due primarily to increased revenue.improved operational efficiencies. CPS gross margin increased to 11.2%10.9% for the thirdfirst quarter of 2020, from 8.9% for the first quarter of 2019, from 8.4% for the third quarter of 2018, primarily due to improved operational improvements and continued benefit of certain plant closures during the past 15 months.

Selling, General and Administrative expenses increased $5.3$0.1 million, from $61.4$63.0 million, or 2.9% of net sales, in the first quarter of 2019 to $63.2 million, or 3.4% of net sales, in the thirdfirst quarter of 2018 to $66.8 million, or 3.3% of net sales, in the third quarter of 2019. Selling, General and Administrative expenses increased $3.6 million, from $190.4 million, or 3.6% of net sales, for the nine months ended June 30, 2018 to $194.0 million, or 3.1% of net sales, in the nine months ended June 29, 2019. The increase for both periods was primarily attributable to higher incentive compensation expense attributable to our improved financial performance in fiscal year 2019.2020.

Research and Development expenses decreased $0.9$1.2 million, from $8.1 million, or 0.4% of net sales, in the third quarter of 2018 to $7.3 million, or 0.4% of net sales, in the third quarter of 2019. Research and Development expenses decreased $2.7 million, from $24.0 million, or 0.5% of net sales, for the nine months ended June 30, 2018 to $21.3$6.4 million, or 0.3% of net sales, forin the nine months ended June 29, 2019. These decreasesfirst quarter of 2019 to $5.2 million, or 0.3% of net sales, in the first quarter of 2020. This decrease resulted primarily from certain plant closures and an increase in billable customer engineering projects in the first quarter of 2019products that required our engineering resources.resources, the cost of which would otherwise have been absorbed by us.

In the first quarterThe following table provides a summary of 2018,restructuring costs:

On October 28, 2019, we adopted a consolidatedCompany-wide restructuring plan. Under this plan, we expect to addressincur restructuring charges of approximately $10 million to $20 million, consisting primarily of cash severance costs, primarily over the closure and/or relocationfirst half of three of our manufacturing facilities.2020. In addition, we are still in the process of completing restructuring actions under other plans.