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Operator
Ladies and gentlemen, thank you for standing by and welcome to the ON Semiconductor earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session.
(Operator Instructions) Thank you.
I would now like to turn the conference over to Mr.
Ken Rizvi.
Sir, you may begin.
- Director, Corporate Development IR
Thank you.
Good afternoon and thank you for joining ON Semiconductor Corporation's third quarter 2009 conference call.
I'm joined today by Keith Jackson, our President and CEO, and Donald Colvin, our CFO.
This call is be webcast on the investor relations section of our website at www.onsemi.com and will be available for approximately 30 days following this conference call.
Along with our earnings release for the third quarter of 2009.
The script for today's call is posted on our website and will be furnished via a Form 8-K filing.
Our earnings release in this presentation include certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the investor relations section.
In the upcoming quarter we will present at the Credit Suisse technology conference on December 1, and the Barclays Global Technology conference on December 9, during the course of this conference call we will make projections or other forward-looking statements regarding future events or the future financial performance of the Company.
Words believe, estimate, anticipate, intend, expect, plan or similar expressions are intended to identify forward-looking statements.
We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.
Important factors relating to our business including factors that could cause actual results to differ from our forward-looking statements are described in our Form 10-K, Form 10-Qs and other filings with the SEC.
The Company assumptions no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors.
Now let's hear from Donald Colvin, our CFO who will provide an overview of third quarter results.
Donald.
- CFO
Thank you, Ken, and thanks to everyone joining us today.
ON Semiconductor Corp.
today announced that total revenues in the third quarter of 2009 were $472.9 million, an increase of approximately 13% from the second quarter of 2009.
During the third quarter of 2009, the Company reported GAAP net income of $29.9 million or $0.07 per (inaudible) share.
The third quarter 2009 GAAP net income included net charges of $41 million or $0.09 per fully diluted share from special items which are detailed in schedules to our earnings release.
Third quarter 2009 non-GAAP net income was $70.9 million or $0.16 per share on a fully diluted basis.
We exited the third quarter of 2009 with cash, cash equivalents and short-term investments of $470.2 million, our record high in the Company's history.
In addition, we exited the third quarter with the lowest net debt position in the Company's history as a publicly traded company of approximately $425 million.
At the end of the third quarter total day sales outstanding decreased from the second quarter by approximately 4 days to approximately 51 days.
ON Semiconductor's total internal inventory was also down from the second quarter levels by approximately 6 days to 81 days.
Included in our internal inventory is approximately $4 million of inventory written off to fair value related to our acquisitions.
And approximately $30 million of bridge inventory built in preparation for our announced closures of front-end manufacturing lines.
Distribution inventories, were at the lowest level in the Company's history exiting the third quarter on a week's basis at approximately nine weeks.
Cash capital expenditures during the third quarter were approximately $9 million.
We currently expect capital expenditures for 2009 of approximately $75 million.
The increase from previous expectations is due to initial construction costs in the Philippines which will enable us the consolidation of assembly and test operations in that country.
Now I would like to turn it over to Keith Jackson for additional comments on the business environment.
- President, CEO
Thanks, Don.
Now for an overview of our end markets.
During the third quarter of 2009 our end market splits were as follows.
The computing end market represented approximately 27% of our third quarter 2009 sales.
The automotive end market represented approximately 18% of third quarter sales.
The communications end market which includes wireless and networking represented approximately 17% of sales.
Industrial, military and aerospace represented approximately 17% of sales, the consumer electronics end market represented approximately 17% of sales and the medical represented approximately 4% of sales.
During the third quarter on a direct billing basis no ON Semiconductor product OEM customer represented more than 5% of sales.
Our top five product OEM customers were Continental Automotive Systems, Delta, Halla, Motorola and Samsung.
On a geographic basis our contribution from sales in Asia represented approximately 64% of revenue.
Our sales in the Americas represented approximately 21% of revenue, and Europe represented approximately 15% of revenue during the quarter.
Looking across the channels, direct sales to OEMs represented approximately 46% of third quarter 2009 revenue.
Sales through the distribution channel were approximately 42% of the third quarter revenue and the EMS channel represented approximately 12% of revenue.
During the third quarter ON Semiconductor revenues broken out by our segments were as follows.
The standard products group represented approximately 32% of sales, the computing and consumer group represented approximately 24% of third quarter sales.
The automotive and power group represented approximately 23% of sales, and the digital and mixed signal product group represented approximately 21% of sales.
We will publish the quarterly revenue, gross margin and operating margin breakout of these segments in our Form 10-Q filing for this period.
Now I'd like to provide you with some details of other progress we have made.
ON Semiconductor Corporation has recently completed the acquisition of privately held PulseCore Holdings Inc.
in an all cash traction for initial consideration of approximately $17 million.
PulseCore's previous owners and other stakeholders also have the ability to receive additional earn-out proceeds if among other things PulseCore is able to meet certain revenue and objectives in 2010 and 2011.
The acquisition of PulseCore expands ON Semiconductor's high gross margin clock and circuit protection offerings for the consumer, wireless and computing end market customers.
PulseCore's capabilities in standard and custom high speed and low power analog and mixed signal solutions for electromagnetic interference reduction also enhanced ON Semiconductor's overall EMI filtering and circuit protection portfolios.
In addition, PulseCore's strong design capabilities and history in India represents ON Semiconductor's first for ray into design activity in that country.
The acquisition of PulseCore is another step forward in enabling ON Semiconductor to continue delivering increased value to our customers, shareholders and employees.
In the computing end market we saw growth of approximately 13% from the second quarter of 2009.
Since the lows of the first quarter of 2009, the computing end market revenues have grown by approximately 41%.
We continue to see strong demand for our products with key customers.
In the newest generation of desktop platforms that began ramping this quarter we have improved our content by approximately 10% year over year at two of the top three global desktop suppliers.
This equates to a content north of $4 per box.
We also continue to expand our presence in the notebook segment with qualification on reference designs for the latest generation of notebooks as well as qualification on the next generation video card, reference designs and the top three manufacturer.
Our overall product portfolio which includes controllers, MOSFETs, audio amplifiers, protection devices, thermal management and standard products continue to position ON Semiconductor as a leading supplier of power management products to the computing end market.
We also believe we will be the number one supplier in power management and next generation desktop platforms and are exceeding our earlier expectations in next generation notebook power management and believe we will exit this year with over 30% market share.
The automotive end market experienced sequential growth of over 20% versus the second quarter of 2009.
During what is normally a seasonally down quarter.
This recovery was helped by improving production rates from programs such as Cash for Clunkers, incentive program during the summer of 2009.
We also achieved growth from our increased content in multimedia and infotanium platforms at major US auto manufacturers.
While the overall automotive end market revenues still remain below historical highs they are up approximately 30% from the lows of the first quarter of 2009.
In addition, the fourth quarter of 2009 should represent the first quarter we should see year-over-year revenue growth in our analog end market since the recession began.
We continue to believe the automotive end market remains a long-term growth opportunity for ON Semiconductor with our broad portfolio of power management and standard products along with our custom ASIC capabilities we are able to support our automotive customer needs from multimedia and safety applications to powertrain and drive train systems.
The consumer end market experienced the largest sequential growth of all of our end markets growing by approximately 43% versus the second quarter of 2009.
The primary driver of this sequential growth came from the game console builds for the back-to-school and holiday seasons.
Our recent design wins and the latest platform for one of the top three game console manufacturers integrate our solutions into all of the major power management rails.
This helps spur the largest percent of growth in this end market.
Now I'd like to turn it back over to Donald for other comments and our forward-looking guidance.
Donald.
- CFO
Thank you, Keith.
Fourth quarter 2009 outlook.
Based upon current product booking trends, backlog levels and estimated turns levels we anticipate that total revenues will be approximately 480 million to $495 million in the fourth quarter of 2009.
Backlog levels at the beginning of the fourth quarter of 2009 were up from backlog levels at the beginning of the third quarter of 2009 and represent over 90% of our participated fourth quarter revenue.
We expect that average selling prices for the fourth quarter will be down approximately 1 to 2%.
Sequentially from the third quarter.
We expect cash capital expenditures of approximately $25 million for the fourth quarter.
For the fourth quarter we expect GAAP gross margin of approximately 38 to 39%.
Our GAAP gross margin in the fourth quarter will be negatively impacted from, among others expensing of replaced inventory fair market value step-up associated with our acquisitions of approximately $2 million and stock based compensation expense of approximately $3 million.
We expect non-GAAP gross margin of approximately 39 to 40%.
Non-GAAP gross margin excludes special items which we expect to be approximately $5 million.
For the fourth quarter of 2009 we also expect total GAAP operating expenses of approximately 130 million to $135 million, our GAAP operating expenses include the amortization of intangibles, stock based compensation expense, restructuring, asset impairment and other charges which total approximately $25 million.
We also expect total non-GAAP operating expenses of approximately 105 million to $110 million.
This is up slightly from third quarter levels due to the reinstatement of full salary levels.
We anticipate interest and other expenses will be approximately 10 million to $11 million for the fourth quarter.
We also anticipate noncash interest expense of approximately $8 million from the adoption of FASB stock position number APB 14-1 relating to our convertible senior subordinated notes.
GAAP taxes are expected to be approximately $5 million and cash taxes are expected to be approximately $2 million.
We also expect stock based compensation expense of approximately 12 million to $13 million in the fourth quarter.
Our current fully diluted share count is approximately 440 million shares based on the current stock price.
This includes the full impact from performance based restricted stock units that should vest over a three-year period based on meeting certain financial hurdles.
Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on form 10-Q and Form 10-K.
With that, I would like to start the Q&A session.
Operator
(Operator Instructions) We will pause for just a moment to compile the Q&A roster.
Your first question comes from Parag Agarwal with UBS.
- Analyst
Hey, guys, Dave Carter and thanks for taking my questions.
First thing about your guidance, you indicated that you were booked about 90% at the beginning of the quarter.
Can you give some color on the booking since the beginning of the quarter to so far?
- President, CEO
The booking has -- trends have been very strong.
We continue to see our customers requesting things pulled in and I would anticipate no troubles with getting the turns for the quarter.
- Analyst
And also can you comment about the lead times, how they are stretching and have you been able to meet all the demand or have you been capital constrained at all?
- President, CEO
Our lead times have stretched out approximately 11 weeks this quarter versus 9 in the previous quarters so they have stretched and no, our customers are requesting more than we can deliver this quarter.
- Analyst
Okay.
And my last question, just looking at the general environment, what is your view of the demand beyond Q4 in the sense that what your customers are telling you as we head into 2010 and especially about industrial and auto sectors?
- President, CEO
We are getting a picture from our customers that their demand continues to strengthen, they are more bullish about the first quarter than we have seen in many years, and so I guess the -- I would say it's a very positive outlook by the customers.
They are backing that up with orders in advance of that.
So right now I'd have to say it's a fairly positive environment.
Automotive, I do believe specifically will do some tapering off because the incentive programs are over and they will catch up with their inventory build sometime early next year.
- Analyst
Thank you very much.
Operator
Your next question comes from James Schneider of Goldman Sachs.
- Analyst
Thanks for taking my question.
I guess to put the previous question a little bit differently, how should we think about Q1's seasonality and the concept of that?
Clearly you've done a couple of acquisitions, are most notably AMI which has different seasonality than the historical business so how should we think about Q1 being, stronger or weaker than normal and then what is normal?
- President, CEO
So normal, I'll start with that.
Normal has been roughly down 3 to 8 or approximately 5% sequentially.
If you look at the last 10 years or so, that would be normal.
Clearly our customers are indicating to us, as I mentioned earlier, a more positive attitude than we normally see, but I can't give any guidance beyond Q4 right now, so we will frankly have to wait until the end of the quarter to know the story.
But right now at least, the customers are appearing a little more positive than they have in the past at this time of year.
- Analyst
Perfect.
And then on the factory network, can you give us an update on what your utilization rate was in the quarter and roughly what your incremental follow-through is right now?
- President, CEO
So for Q3 kind of low 80s, utilization rate and I believe our fall-through to the bottom line was about 70% of each incremental dollar produced.
- Analyst
And lastly, Donald, can you help us with the OpEx and how much of the temporary cost reductions you instituted have yet to come back?
Is all of that captured in the Q4 OpEx guidance or is there still more to go?
- CFO
Most of it is in the Q4 guidance.
We still have some temporary salaries for the Senior members of staff, the VPs above and we have shutdown of the year-end of North America for the support staff but I think you can see that just about all of it is in the numbers bar about $5 million or so.
- Analyst
Perfect.
Thanks very much.
Operator
Your next question comes from Chris Danely of JPMorgan.
- Analyst
Thanks, guys.
Just to actually follow-up on the OpEx questions, for Q1 do you expect GAAP and non-GAAP OpEx to go down?
- CFO
Well, if we are going to be restoring some things, I would expect more of a slight trend upwards in the first quarter, but, I mean, I think I gave the reigns there, Chris.
I think on an apples to apples basis, something like $5 million would be restored by the first quarter?
- Analyst
Got it.
- CFO
The remaining amount of the exceptional measures coming back in, but I will remain the audience here that even at that level on a similar basis we were running at approximately $136 million in the third quarter of last year, so we have base lined our business to a much lower level of operating expense.
- Analyst
Okay.
Great.
And then can you just give us your -- I guess your two cents on each of your major end markets and how you feel about them, maybe perhaps touch on where you think they are in the -- sort of the inventory replenishment stages and in particular in light of the recent chatter on on the PC market and the Cash for Clunkers and auto?
- President, CEO
Yes.
So I'm very familiar with the recent chatter and will preface everything I say is based on what our customers are telling us for their demand on our products in the PC space that continues to strengthen, they continue to ask for more pull-ins and they are probably the most positive bias going into next year on a sequential basis.
Normally as you know that market is down considerably.
Certainly what we are hearing from the mobile computer makers is it may not be as severe.
Again, that's what they are telling us.
Time will tell.
Automotive, clearly the Cash for Clunkers from an end automotive sale, when that expired, we saw a rapid drop in automobiles sold shortly after those programs ended in each of the countries.
They are still needing to do some supply chain replenishment but I do expect that will start rolling off next year as I mentioned earlier in the call.
The rest of the markets are going to be, I think, a little closer to seasonality.
The consumer market, the wireless markets, et cetera, I would guess would be a little bit more close to seasonal as we look forward based on the customer comments we are getting right now.
Operator
Your next question comes from John Barton with Cowen.
- Analyst
Thank you.
Keith, you made a comment earlier that you were seeing customers doing pull-ins, you pretty much repeated it in response to Chris.
Do you view that specifically as your customers are seeing things selling through to the end customers faster than they originally thought, vis-a-vis your backlog and that is the main driver of the pull-ins?
- President, CEO
I think, John, we do and I'll point you to two or three things around that but most notably some of the high volume markets we have are served mostly through distribution, particularly computing, wireless and consumer out of Asia, and we are at all time lows in our inventories.
In fact, by over a week's worth of supply all time lows.
So there's no detectable inventory build that we can find in the chain and of course our internal inventories are down as well.
So what we are seeing to the contrary of inventory building is we are still seeing inventory depletion as we go into the end of the quarter.
So I guess the simple answer I can give you is I haven't seen anybody giving us any kind of signals that they are going to be slowing down anytime soon.
- Analyst
You made the comment that orders were already being placed for Q1, kind of beyond the normal trend you would see.
If you looked at your Q plus 1 backlog, you know, how would that compare?
Obviously last year is not a good comparison but compared to previous--?
- President, CEO
Yes, it would be stronger than a normal year.
- Analyst
Can you quantify that any further or--?
- President, CEO
Well, I'm trying not to give numbers but let's just say it is very similar in magnitude to what we had going into the fourth quarter at the same time.
Operator
Your next question comes from Craig Ellis of Caris and Company.
- Analyst
Thanks for taking the question.
First question given how lean inventories are on hand and in the channel, how should we think about the way the Company wants to manage those as you go through and ultimately exit the fourth quarter.
Do you intend to rebuild them at all or do you want to keep them where they are presently?
- President, CEO
There's really not much I can do to impact through the fourth quarter because frankly we are sold out from a flow model perspective so I don't really expect to do much replenishment in Q4.
As I mentioned before, I think everything is being consumed.
What we would like to do as we enter next year, if we get some seasonal softness as is normal, we'd like to actually build a little bit of that back in the first half so that we can drain it off again in the second half.
- Analyst
Okay.
That's helpful.
And then as a follow-up to that, how should we think about the planned facility shutdowns as we go through 2010?
- President, CEO
So we will be closing our (inaudible) facility in Idaho at the end of this calendar year, so right at the end of December.
We would start seeing impact of that at the beginning of 2010 and as you bleed off some of that inventory, that would accelerate through the year but you should see kind of full quarters of that in Q2, Q3 time frame next year.
Our discrete facility, we are closing in Phoenix because of the high demand right now is not going to close probably until about midyear, meaning you'll start seeing that impact in the second half.
Operator
Your next question comes from Craig Berger of FBR Capital Markets.
- Analyst
Hey, guys.
Nice job and thanks for taking my question.
I guess the first question is on the revenue guidance, last quarter you were over 90% booked.
You beat it by several points, kind of what are the assumptions you're making regarding Christmas and turns that are baked into your revenue guidance and then I have a follow-up.
Thank you.
- President, CEO
So the turns a question I think we have kind of put our numbers out there.
We need less than 10% and we've had very strong turns bookings through October so I don't anticipate issues there.
We try and anticipate end of-year behavior by our customers and build that into our forecasts as well, but as I said right now, the customers are still giving us a very positive bias and momentum into the first half of the year.
- Analyst
And then as a follow-up, first of all just a clarification, on OpEx, how much is stock comp assumed in the fourth quarter in OpEx?
- CFO
We gave that out in the guidance and--.
- President, CEO
You didn't give it out by OpEx is what he meant.
- CFO
OpEx, $2 million -- 2 million or $3 million of the total is in COGS and so is the Delta is in the -- is in OpEx of the so if you look at what I gave as guidance, we stated that the stock expense is 12 million to $13 million and approximately $10 million of that would be in OpEx.
Is that okay?
Operator
Your next question comes from Tristan Gerra with Robert Baird.
- Analyst
Hi.
How should I look at utilization rate at Gresham currently versus over all camp any in materials of target you have for next year.
- President, CEO
So Gresham has ramped very nicely for us.
In fact, as we look at our plans next year, we will be moving out some of our trench MOSFETs which were the first things in the factory in favor of more integrated circuit products because we will be, quite frankly, about out of capacity with the existing tool set and the existing mix.
So it's ramping nicely.
I think again as our projections here is -- we are going to have to start moving products around to take best advantage of that factory.
- CFO
Just, that's one of the things that's underpinning our nice improvement in gross margin, is that we are awarding Gresham well and I think as Keith had mentioned he has a good fall-through of the revenue and recovering a lot more costs in Gresham and coming the corner very nicely.
- Analyst
Okay.
And also what was the mix of ECL business in the quarter as Cisco orders have rebounded and what was the impact, the positive impacts of mix on the gross margin in the quarter?
- President, CEO
We actually had our lowest ECL revenues in quite a while in the third quarter and I do understand Cisco had good numbers, but our sell-through for that business was actually about $11 million or so.
- Analyst
Okay.
Thank you.
Operator
Your next question comes from Kevin Cassidy with Thomas Weisel Partners.
- Analyst
Thanks for taking my question.
I wonder if you could give us a little more description of PulseCore's, what their annual revenue was and some of their key customers are?
- President, CEO
So kind of backwards looking they were approximately $10 million in the last 12 months and largest customer would be Samsung.
- Analyst
Okay.
And also, you're coming into your contract negotiation period for 2010.
Can you say what that looks like, what the ASP erosion might be for 2010?
- President, CEO
It is always tough, as you know, negotiationwise, but from what I can tell on the contracts so far, it looks fairly consistent with the declines we have seen in the market this year.
So, in other words, there's no acceleration in that.
Operator
Your next question comes from Ross Seymore with Deutsche Bank.
- Analyst
Hi this is (inaudible) for Ross Seymore, thanks for taking my question.
Could you tell us what your headcount at the end of the quarter and in light of the strong demand where do you think your headcount will end up at the end of the year?
- CFO
Well, most of the headcount we have are in manufacturing and I think we are about 13,000 people but headcount is not such an important indicator for ON because we count out a lot of people in low cost manufacturing areas and so I think the main thing we look at when we manage the business, we look at our gross margin which covers where most of the people are working and we look at our operating expense and I think I already gave the guidance to the operating expense and that's where the most expensive headcount are.
So we are not really -- we don't really see total Company headcount as being a meaningful measure.
- Analyst
Fair enough.
Your utilization rate you mentioned is already in kind of the low 80s.
What level are you comfortable with that you're getting at the right efficiency and whether, you're not too hot and not too cold?
- President, CEO
Yes, somewhere around 90 is a sweet spot.
It gives us enough flexibility to service unexpected customer needs and keeps us full enough that we get some pretty good returns on that overhead.
Operator
Your next question comes from Gus Richard with Piper Jaffray.
- Analyst
Thanks for taking my question.
In terms of your notebook business are you starting to see the bills for Cappella or is that some of the pull you're getting?
- President, CEO
We are seeing the initial orders coming in December deliveries.
- Analyst
Is that some of the hurry up?
- President, CEO
That's some of the hurry up although it's a pretty small quantity as compared to the total.
Operator
Your next question comes from Brian Piccioni with BMO Capital Markets.
- Analyst
Yes.
Of course most of my questions have already been asked and answered.
We have seen a lot of volatility, US currency relative to global currency.
Has that been helpful or a hindrance to operating performance?
Thanks.
- CFO
I think the -- in general I would say the weak dollar helps the demand for the final products, whether it's a TV or a PC, an iPod, (inaudible) or whatever one of the fundamental consumer products are denominated in dollars so the weak dollar makes it cheaper for the Europeans and the nondollar based economies to buy these products.
So I think generally it helps US exporters like ourself.
If we see too dramatic variations especially against currencies where we have manufacturing activities, it causes some instability in our earnings.
What we have to be very careful of is if the weak dollar has an offset in commodities, if it results in a rapid rising oil, copper, gold, then that is negative for us because we do have a large consumption direct and indirect and we have oil through freight, gases and chemicals, molding compound and we use a lot of copper through weak frames so as long as the weak currency doesn't have an offset in big increase in commodities, then it is generally positive to us.
- Analyst
Thank you.
Operator
Your next question comes from Ramesh Misra with Brigantine Advisers.
- Analyst
I don't expect you to provide much granularity in regards to AMI business going forward but with the downturn behind us I was hoping you could provide a qualitative view into how AMI business as trended and its recovery and are we back to prerecession levels at AMI or are we--?
- President, CEO
It has pretty much trended with the rest of our business.
There has not been a substantial deviation from the balance of our businesses at the Company.
So in other words they seem to be tied to the same markets and market responses as the other businesses.
So no, they haven't fully recovered yet, but, yes, they have recovered.
- Analyst
Okay.
Great.
Can you provide an update on your China backing facility and help us understand why you're ramping up in the Philippines instead of China.
- President, CEO
We have three major assembly test sites and they each have an expertise which gives us some additional efficiencies in each of those factories, so in China we build our smallest packages and they are extraordinarily good at doing very, very high volumes of small things.
In Malaysia we do our power packaging where again they focused on high power products which tend to be larger and more material and intense and then in the Philippines, they focus on our analog and mixed signal products and as is consistent with what we have told you in the past, our focus in investment has been in the analog and mixed signal area to continue to drive up our margins and so we are seeing the fastest growth there and so hence we need to make more investments.
- Analyst
Okay.
Great, Keith.
Just one final question or perhaps for Donald.
Can you remind us when the next major principal payments are on your long-term debt?
Thanks very much.
- CFO
Sure, we have a major payment to payoff the zero coupon of approximately $100 million which is due in April of next year, and as of the end of September, that is a major portion of the current due long-term debt of $166 million, $100 million is the remainder of our zero coupon convert in April of next year.
And I can also remind the listeners that initially this was a $260 million facility that we proactively repurchased on the market at a discount.
So although it was originally $260 million, the remains only $100 million and we fully intend to repay that in April of next year.
Operator
Your next question comes from Dave Smigie with Raymond James.
- Analyst
Seems like you've got the 166 in the short-term debt.
What are the plans for further debt paydowns?
You guys are at a great all time low of net debt.
That seems to continue to improve, assuming even a sort of normallish year next year, you guys be throwing off a lot of cash and I was just wondering how much you plan to pay down and I know you've got maybe some, I think it's Chinese and Japanese loans that seem pretty cheap that you could refinance so how much gets refinanced versus paying stuff down?
Thanks.
- CFO
Well, I think two points -- three points here, Steve.
We will continue to pay down debt and that we think is a great way of increasing shareholder value and we have historically had a lot of debt compared to a lot of our competitors so paying that down we see is very positive.
If you look at what happened in the third quarter, we generated approximately $17 million in cash.
If you consider what that can do over the next five quarters at a similar run rate, then you will get to a situation where at the end of next year net debt is very low and it would not be zero but it will be not far from zero so that is what we would like to continue to do with our business.
We have shown ourself to proactively buy back the bond when there's an arbitrage opportunity on the market, we will do that so you can assume that we will continue to reduce that debt, purchasing it where it makes sense.
And generating cash so our net debt falls of the as far as the debt in Asian countries or overseas is concerned, that certainly gives us some flexibility because it makes good sense to finance activities in these countries.
Walk away.
For instance, Keith mentioned the Philippines activity.
We are financing the building there locally and that makes good sense that our offshore activities have local financing, good sense from an operational, from a tax standpoint and also for -- from a treasury standpoint because it optimizes the amount of cash that we have available in the US to pay down debt proactively.
So that is central to financial management, to continue to reduce the debt burden on the Company.
- Analyst
Great.
Thank you very much.
Operator
Your next question comes from John Vinh with Collins Stewart.
- Analyst
Good afternoon.
Just to follow-up question on your comments on pull-ins.
Similar to that did you see any pushouts or pull-ins ahead of the extended Golden Week in China, related to that, also was the Windows 7 a factor as well?
Did you see any sort of pull-ins related to that in the quarter?
- President, CEO
We on the Golden Week comment, we were anticipating a strong end to the third quarter as people would normally prepare to get the materials in advance, but as it turns out, that was not a significant event.
We had run rates pre and post that that were very similar, so I guess we really didn't see a Golden Week impact as dramatic as we would have expected.
And relative to Windows 7, we know there was prebuild activities that did go on there, but dominantly what we have seen on the growth end on the netbook side and the notebook side really has just been to fill whatever demand has been out there so I guess I don't know that I could give you a Windows 7 windage in either direction.
- Analyst
Also in gross margins you seem to be doing pretty well there in terms of rebounding on gross margins.
Don, can you give us an update on kind of where do you see peak margins and in what sort of time frame could we get to that point?
- CFO
Well, I think it was on the last conference call that I gave our model which was $525 million model and something like a 43% gross margin, 23% operating expense, 20%, 20 to 21% operating income, all on a pure non-GAAP basis and that was to support the earnings model.
I told people afterwards in Q&A that if you plotted that simply on where we -- as an objective and where we had -- where we have been coming from, you see we are tracking well to the line.
I think this quarter is another illustration of the fact that we are well on the way to achieving that objective and our guidance for next quarter again confirms we are well on the way.
We, unfortunately, cannot control the end markets.
We can only control how much we spend.
We will make sure we manage our business to do that.
We don't know what the business is going to be in the second half of next year.
The only thing we can say is we are confident that there is a positive momentum in our business for the fourth quarter and the outlook at this stage for the first quarter is also encouraging, so hopefully we can reach that $525 million, 43% gross margin sooner rather than later.
Operator
Your next question comes from Gus Richard with Piper Jaffray.
- Analyst
Thanks for taking a quick second question.
On the noncash charge on interest are you going to put that in your pro forma or not?
- CFO
Sure.
I think we pull that out because it's a charge related to the interest on the convert so when we give a pro forma earnings we pull out that noncash charge.
- Analyst
Perfect.
Okay.
Thank you.
Operator
Your final question comes from Chris Danely of JPMorgan.
- Analyst
Two quick follow-ups.
Keith if you can just give us your take on the industrial and com end markets and then when do you guys think you'll be able to bring those lead times in?
- President, CEO
Okay.
I'll answer them in reverse.
We are hopeful that we are able to bring lead times in toward the end of the first quarter.
Obviously, the demand picture between then and now will determine whether we are successful but we are hopeful we can start getting some progress in Q1.
Industrial and communications, I would see those right now from an industrial perspective actually strengthening as we enter next year.
Across that sector, some of the things we put in there are like some of the test equipment, vendors, et cetera and we are seeing some nice pickups there.
We also have a lot of the building infrastructure stuff and we are starting to see that the general lighting market is picking up for some of that activity.
So I would say a positive bias on industrial and in communications you guys saw the relative releases here recently by companies in that sector and that again seems to be firming up in a positive direction for us.
- Analyst
Great, thanks.
Operator
Thank you of the this concludes today's conference.
Thank you for your participation.
You may now disconnect.