Sanmina Corp (SANM) 2002 Q4 法說會逐字稿

Good evening. My name is Corey, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sanmina-SCI fourth quarter and fiscal year-end 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 period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your tell telephone keypad. Thank you, ladies and gentlemen. I would now like to turn the conference over to Sanmina-SCI, Jure Sola Board and Compensation Committee Chairman of the Board and Chief Executive Officer.

Thank you, Cory. Good afternoon, ladies and gentlemen. Welcome to Sanmina SCA's fourth quarter 2002 conference call. Here with me today on this conference call are Randy Furr, Sanmina-SCI. Board, President and Chief Operating Officer.

Good afternoon.

Also joining me is Rick R. Ackel, Sanmina-SCI Executive Vice President and Chief Financial Officer.

Good afternoon.

At this time, we'd like to do is start out by thanking you all for your interest in our company.

On our agenda today, we have Rick Ackel to review the Sanmina-SCI financial results for this quarter. Randy Furr will review Sanmina-SCI's operations and future outlook, then I will follow with additional comments relative to Sanmina-SCI results and future goals. And now Rick.

Thank you, Jure. Prior to reviewing our financials with you, I'd like to take a moment to read the following safe harbor statement.

During this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly, as a result of various factors including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological change. The company's actual results of operations may differ significantly from those contemplated by such forward looking statements as a result of these and other factors and we refer you to the documents the company files from time to time with the securities and exchange commission, specifically the company's most recent annual report on form 10K and 10KA for the year-ended September 29, 2001, and our more recent 10Q filed in August 2002. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

At this time, we hope everyone has seen the press release. You'll note from the press releasethat we have, as is our custom, provided you with 2PL's. One reports our results on a gap bases to include merger restructuring cost impairment and other infrequent or unusual charges, and includes the results of acquisitions after their closing dates. The other is presented on a pro forma basis and it's presented without these charges. We have provided a reconciliation from gap net income to results presented on a pro forma bases. On today's call, I will review the results of our operations, discuss what we have done to improve the balance sheet, and finally, I will follow up with our guidance for our first quarter of fiscal 2003.

So let's start by discussing our debt paydown. We are pleased to announce that we have made significant strides towards strengthening our balance sheet. Our goal is to reduce shorter-term debt, and by that I mean debt due in the next three years, to acceptable levels considering today's environment as well as to extend the due date of the remaining shorter term debt thereby enhancing our debt maturity profile. We have significantly reduced amount of our convertible debt coming due in 2004 and 2005 during this September quarter by approximately $209 million through open market repurchases at a discount. However, because of the interest accruals associated with the zero coupon [debentures] the actual reduction in the amount due through the 05 put date is $228 million.

I am pleased to announce as of yesterday, October 28th, through additional repurchases this month of approximately 46 million, we have further reduced the 2004 and 2005 debt for a total debt reduction of 278 million related to converts due through 2005. For the September quarter, we reduced the 2004 bonds by approximately 59 million in our zeros which have a put [through date] in 2005 by approximately 150 million, totaling the 209 million in carrying value.

So to summarize, as of today, our 04 bonds have been reduced by 68.4 million to a total of approximately 280 million, and our 2005 put obligation on the zeros based on that amount due at the first put date has been reduced by approximately 210 million to a total of approximately 706 million. This represents a reduction of approximately 278 million on an amount due on maturity basis or approximately 22% of the amounts coming due in 2004 and 2005 for a cash outlay of only approximately 183 million.

Additionally, our finance strategy includes a process that contemplates the following. One, we want to extend the maturity dates of our shorter-term debt by replacing or restructuring our existing revolver and secured [station] to beyond 2005. Two, we want to enter into new arrangements with less restrictive financial covenants. Three, we want to continue to reduce or restructure our total debt. Four, our goal is to do this in the next several months and we are under way with this process now, and five, we want to do this at the lowest possible cost. So in summary, during the quarter we've accomplished a significant amount related to our finance strategy.

Next, let me move to our asset impairment test and other related items that we deem unusual or infrequent that are not part of our pro forma results. Sanmina-SCI has certain goodwill and intangibles subject to new rules which include the determination of the value on an annual basis. We earlier adopted SAF 142 as of September 30, 2001, and completed our first annual impairment test.

Companies must test for the impairment at least annually and use a two-step approach which is complicated by determining the fair market value of the company's reporting units which are then compared to the balance sheet net assets to assess any impairment to goodwill. For Sanmina-SCI, this test was performed at a domestic and international level. We engage Ernst & Young's evaluation services group to conduct our business valuation. Their valuation was performed under the guidelines established under SAF 142. The services provided by Ernst & Young do not include audit or accounting advice. Additionally, the valuations recommended by Ernst & Young were reviewed by our independent auditors KPMG as part of their normal audit process. This analysis has led us to conclude that an adjustment to our goodwill is needed is 2.7 billion. Sanmina-SCI remains in compliance with all of our financial covenants considering this adjustment.

During the quarter, we did have a few unusual or infrequent items that are not reported on a pro forma basis that I'd like to further mention. We concluded that a pretax charge of approximately 23 million was necessary to recognize the lower fair value of certain strategic investments that were made in the past. Further, as a result of the debt retirement at a discount that was described earlier, we recognized a 54 million pretax gain on this retirement debt and anticipate that approximately 14 million pretax gain in Q103 from the October activity to the date that I mentioned.

Finally, let me discuss our restructuring. As all of you know, our original estimate in December 2001 and from prior call, we had outlined our plan that called for approximately 686 million in restructuring plus or minus 5, now 6%. We are nearing completion of the SCI integration in the total restructure costs will be very close to this upper number when we are complete. During the September quarter, we incurred approximately 24 million in restructure costs pursuant to this plan. 15 million was cash, and virtually all of this represented purchase price adjustment.

This leaves us with an approximate balance of $50 million to be incurred over the next couple of quarters, of which the majority is expected to be purchase price adjustments.

We have taken a hard look at our overall capacity to ovation and as Randy will further describe, we have designed a new plan to increase the [capacity ovation] and to realign our operating costs to increase profitability over the next 12 months. Our new plan calls for up to an additional 250 million of restructuring costs. We anticipate that these costs will be spread over fiscal year 03 and into the first quarter of fiscal 2004.

Approximately $138 million of the total will be cash. Of this plan, we took some action in our September quarter. Approximately 49 million of costs were recorded in Q4 02. The cash versus noncash split was approximately 10 million and 39 million respectively, and we anticipate the Q1 restructuring cost to be approximately 30 million. Again, Randy will give you more details shortly.

Now I would like to turn the discussion over to the subject of our pro forma results for our fourth quarter 2002. I'll begin by presenting the results of operation instead of our follow up on the balance sheet and finally I will provide you with guidance for our first quarter fiscal 2003. In general for consistency, I will confine my comments to our results without charges and on a pro forma bases to facilitate comparability to prior periods.

Sales for the quarter which represented our fourth quarter fiscal 2002 were 2.6 billion, which is in line with guidance. Sales for the year were approximately 10 billion. Our top 10 customers made up roughly 67% of the total sales this quarter. The second 10 made up approximately 9% of total sales in Q4. For the quarter, our top 20 made up about 76% of total sales. The top 20 customers for the year were approximately 78%.

We had two customers in the fourth quarter whose sales were greater than 10% of total sales and those customers were HP and IBM. For our year, we also had two customers whose sales were greater than 10%. IBM and HP and the percentages for the entire year were 16.7 and 15.4% respectively. For the quarter, the mix of revenues as a percent of revenues breaks down as follows. Third-party merchant printed circuit board sales were 3%. Assembly and other EMS sales were approximately 97%.

Gross profit for the quarter was 110 million as a percentage of revenues, gross profit was 4.2% and for the year, gross profit was 4.3% or 431 million. Selling, general and administrative expenses for the fourth quarter were approximately 3% of sales and were approximately 78 million in absolute dollars. For the year, SG&A expenses were approximately 3.1% of sales, approximately 307 million in absolute dollars. Total operating expenses, selling, general and administrative expenses with an addition of amortization bringing total fourth quarter operating expenses to approximately 80 million which represented 3.1% of sales. For the year, amortization totaled 6.8 million, bringing full year operating expenses to approximately 314 million. We continue to focus on controllable costs and our ability to cost-effectively scale our manufacturing operations while maintaining our focus on overall strategy.

Depreciation and amortization were 60 million and 1.7 million respectively for the quarter. For the full year, depreciation was 264.7 million and amortization was approximately 6.8 million. Capex spending for this quarter was approximately 12 million. For the full year, capex was approximately 118 million. We continue to control capex tightly.

Operating income was approximately 30 million for the quarter, which equates to an operating margin of approximately 1.2%. For the year, operating income totaled approximately 117 million which equates to an operating margin of approximately 1.2% as well. Other expense net was approximately 27 million for the year, net other expense totaled approximately 97 million. Our tax rate for the year was 33% and will remain at 33% going forward. Net income for the quarter was approximately 3.2 million. This is in line with our guidance given at the beginning of the quarter for the year, net income was approximately 13.6 million. Additionally, cash net income for the fourth quarter was approximately 10.9 million and for the year was approximately 39.7 million, also in line with guidance.

Basic shares for the quarter were 511 million. Diluted shares were 513 million. Cash diluted shares were also 513 million, giving a cash EPS of 2 cents for the quarter. For the year, basic shares were 519 million. The diluted and cash diluted shares were 525 million. Cash EPS was 8 cents for the year.

Turning to our balance sheet, cash and short term investments are 1.2 billion. Our cash and short term investment balance has increased over last quarter by approximately 8% or 82 million. This was on top of cash outlays used to reduce our convertible debt and for acquisitions. So as you can see, we added a significant amount of cash during the quarter.

Accounts receivable at the end of the quarter were 1.4 billion. This represents an absolute dollar decrease of 42 million or 3% from the previous quarter.

Our DSO dropped by approximately one day over last quarter and is at 49 days. The change in DSO from Q1 02 to Q4 02 on an apples to apples basis was a reduction of eight days or 13%.

[inaudible days] were 37 for the quarter.

Inventory decreased this quarter over last quarter in absolute dollars by approximately 150 million or 12% to 1.123 million. Over the last three-quarters, inventory has decreased by approximately 357 million or 24%. Inventory terms improved this quarter by one turn or 13% to 8.9. Over the last three quarters, turns have improved by 2.7 turns or 44% improvement. Achieving these strong financial metrics takes a total focus on asset management, and I'd like to thank our team for doing an excellent job.

Cash flow from operations was approximately 303 million during the quarter, which has again allowed us to be able to self-fund debt repayments, capex and current quarter acquisitions. For the year, cash low flow from operations was approximately 1.1 billion. Our working capital was approximately 2.2 billion for the quarter. Taking a look at our cash cycle days, we have improved over last quarter by seven days or 14% from 50 to 43.

Further, we have made significant improvements since the date of merger. Over the last three quarters, our cash cycle days have decreased by approximately 37 days or 46%. We are pleased with this trend and expect it to continually improve and our goal is to be very close to cash cycle days of 30 by the end of the fiscal year.

So in conclusion, we have been focusing on key balance sheet metrics and we continue to make progress in reducing cash cycle days as well as generating strong cash flow from operations. Although we remain in a very difficult environment, we are committed to achieving our financial goals.

Now let me turn to the guidance for the first quarter of fiscal 2003. In today's environment looking out beyond one quarter remains difficult. As to our guidance for Q1 2003, the information I provide will generally be before merger, restructure or other unusual frequent charges. We are targeting sales to be between 2.3 and 2.6 billion. Gross margins will be between 4.5 and 4.6%, and we are targeting our operating margins to be approximately 1 to 1.35 or 1.4%. Net interest expense is expected to be approximately 28 million.

Our tax rate is expected to be 33%. Basic shares for Q1 are expected to be 513 million and diluted cash shares are targeted at 520 million. This equates to cash EPS of approximately zero to 2 cents. We are targeting continued improvement in asset management for Q1 03 and expect to generate cash flow from operations. We estimate that quarterly depreciation will be approximately 55 million and quarterly capex spending will be between 10 to 15 million. We estimate that our quarterly amortization will remain at 1.7 million. Obviously this could change as our economy improves and/or with new acquisitions.

So in conclusion, we continue to show profitability generated significant cash from operations, paid down significant debt, improved DSO, inventory terms, and cash cycle days as well as increase our cash balances. This positive trend continues from the date of merger. We believe we have managed our resources and cash responsibly. Our goal is to continue this trend next quarter.

We appreciate your time. Now I'll turn the discussion over to Randy.

Thanks, Rick. As you can see and as Rick mentioned from our Q4 02 press release, September quarter came in at the top line just over 2.6 billion, pro forma net income of 3 million. This gave us cash EPS of 2 cents, and we certainly believe given the challenges of the quarter and specifically our end markets, these are very respectable numbers.

Let me start with a few minutes on our top line. As you can see, again we achieved the 2.6 billion. This is essentially flat with our fiscal 03 top line. To reconcile revenue and Q3 to Q4, there were no new significant transactions that is closed in Q4. However, we benefited from having the contribution of all the Alcatel and HP and [inaudible] transactions for the entire quarter during Q4.

The incremental revenue contributed by these two

transactions for Q4 was approximate led 185 million. This meant that in Q4, our base business declined about 200 million or about 7.1/2%. For the quarter, the communications infrastructure market segment, again representing both voice and data, was 32%. This compares to 31% posted in Q3.

In this sector, our more heavily telecommunications focused companies, the ones that primarily rely on carrier spending, were actually up this quarter about 45 million in absolute dollars or about 6.5%. This was primarily attributed to the benefit of having the Alcatel Europe transaction for a full quarter.

Personal computing was 36%. This compares to 39% in Q3 02. This shift in mix was due to product transition in our personal computing customer base. High end computing was 17% for Q4. This was up from Q3's 16%. Industrial and medical instrumentation was 9% for the quarter. This compares to 8% in Q3. Growth here is consistent with our focus on the medical, semiconductor, capital equipment, defense aerospace and automotive markets.

Our final market segment, multimedia, was up slightly in absolute dollars. However, with rounding, the percentage was essentially the same as the prior quarter, which was 6%.

Let me turn the discussion to some comments relative to what we're seeing in these primary markets. First communications infrastructure. We expect the wire line, long haul transmission segment to remain weak through the first half of calendar 2003. I know this is no surprise. We expect this business to be in the flat to down 5% range for our first quarter of fiscal 03.

In the wireless subsector, the business environment is also best characterized as soft. We are seeing some activity here. However, it is mixed. Q4 revenues were in the flat to down 5% range when compared to Q3. We expect this subsector again to be in the flat to down 5% range for Q1.

The enterprise subsector has held up relatively well for Sanmina-SCI. Q4 revenue was in the flat to up 5% range. Once again, this increase was primarily driven by new program wins. We expect this subsector to be in the essentially flat range for Q1.

In our high-end computing sector, Q4 revenues were in the up 10% range. We expect this business to be in the flat to up 5% range for the next couple of quarters. Our industrial, medical instrumentation was up approximately 5% for Q4. Again, we expect further growth from this very important strategic sector during fiscal 2003. And for Q1 specifically, we expect this to be in the up 5% range.

Our PC computing sector, Q4 was in the down five to 10% range. We expect this business to be in the flat range for this coming December quarter. Finally, in our multimedia, Q4 revenue was in the flat to slightly up range. We expect this sector to benefit from the traditionally seasonally strong holiday season and to be in the upgraded and 10% range for our fiscal Q1.

I would now like to make some comments on our PCB fabrication enclosure divisions. The business is clearly navigating through a period of excess and surplus capacity given the commodity characteristics of the business. We have seen some pressure on pricing. In addition, we've seen a significant reduction in overall profitability due to underutilization of our facilities. None of this, I'm certain, is news to you if you follow this industry.

For the quarter, our board business experienced a top line decrease in revenue of approximately 10%. Our losses were in the $10 million range or about a penny a share net of taxes. Our strategy with respect to our PCB fabrication business again is to be very close to a break even from a profitability viewpoint and to generate positive cash flow. Once this is accomplished, we want to maintain as much capacity as we can to capitalize on future growth opportunities which will certainly come as our end markets improve.

As you might recall, I stated at the end of last quarter that based on what we're seeing today, we did expect to take out -- or we did not expect to take out any additional capacity. This was due to the fact that we were coming very close to hitting the short-term profitability target for the business. I also pointed out that we expect to see a continued increase in the top line, probably in the 5% range, and operating results again close to break even. This was based, as I mentioned last Quarter, as a strong end of June and the first two weeks of July and strengthened the book-to-bill that we were seeing during that period. Unfortunately, as you can see from the results I just mentioned, the strength experienced during the early part of the quarter did not hold. As such, and given our overall strategy of at least breaking even in the business, we will take out some additional capacity over the near term to closer align capacity with demand, and I'll talk a little bit more on this in a couple of minutes.

Our enclosure business, and again for Q4 was again solidly profitable.

Now I'd like to turn the discussion on the Sanmina-SCI merger integration. As I mentioned last quarter, with the exception of the I.T. systems integration, integration is behind us, we have an excellent management team and they're working well together. The IT integration is going well and is on schedule. We're in the final phase of the IT integration, and this phase is the actual site implementation. Last quarter, we crossed eight more sites off the list and we're scheduled to complete an additional six sites this quarter. By the end of the December quarter, we will have 80% of our facilities on oracle with only 9EMS facilities remaining which will be converted during the March quarter.

After that, only our personal computing, configured to order, build to order facilities and our defense aerospace operations will remain to be converted. I would like to compliment all of those that have been involved in this effort. It's one of the largest of its kind in the world, and not one facility has failed to make the transition. This has been a tremendous effort by not only our IT but also our operations management teams.

Once this is completed, we'll be one of the very few large companies in the world with such a large international presence on one common IT platform. This clearly will be a long-term strategic advantage, especially in the area of managing the supply chain. Minimizing supply chain risk and supply chain management is a critical area of focus by our customers in today's environment. Our new IT platform and our supply chain management business practices combine to offer substantially improved and innovative supply chain management techniques. So in summary, the integration is going well, and in fact, I believe it's gone better than we all could have hoped for. We're very pleased with the progress.

I'd now like to turn the discussion over to capacity. As you may recall last December, at the time of the Sanmina and SCI merger closing, we articulated during a conference call that we were planning on taking a charge of approximately $686 million. This charge was related to merger-related costs and to bring capacity in line with demand. The goal is to bring overall capacity utilization from just below 40% to just above 50%.

Even though we completed the restructuring set out in December, we found over the past 10 months since we made this announcement our overall end markets continued to experience weakness and the net result is at overall capacity utilization remains in the low to mid 40s in percentage terms. Given this, and the fact that near-term visibility is still a bit unclear, we believe an additional restructuring effort is required. Our goal is to bring capacity to approximately 60% for each our EMS and enclosure divisions and approximately 50% for our PCB fabrication division. This will mean that over the next four to five quarters, we will incur restructuring charges of approximately 225 to $250 million. Approximately 55% of this amount will be cash. Once completed, we will realize approximately $50 million in quarterly savings for which approximately 37 million will be cash savings and approximately 13 million noncash savings. Of the total, approximately 50% of the restructuring effort will be related to our EMS operations, 45% our PCB fabrication operations and the balance will be attribute attributable to our enclosure operations. Virtually all of the capacity is coming out in higher cost areas of North America and Europe. Once the restructuring is complete, approximately 40% of our capacity and close to 50% of our revenues will come from low cost regions.

Finally, I'd like to make a few comments relative to the future. I believe it is clear that predicting the future is becoming increasingly difficult to do. With this said, I know we need to provide some guidance as to what to expect for the upcoming December quarter. Again, this is difficult given the uncertainty in our end markets and given this uncertainty, we believe it is prudent to be somewhat conservative. For fiscal Q1-03, we expect to see a top line in the 2.3 to 2.6 billion range. For the bottom line, we expect to see December quarter and the cash EPS range of break even to a cash EPS of two cents a share.

Our challenge continues to be managed through this difficult time. We balance the needs of our investors, our customers, our employees and our suppliers. This balance includes positioning the company for a bright future, even with the significant hit to our top line, we've managed to stay in the break-even range and generated a significant amount of cash while maintaining our technology leadership position and sufficient capacity capable of meeting tomorrow's demands. We still believe that our industry and our company offer significant long-term growth prospects. We recognize that we still have a lot of work to do. However, I can assure you that this team is up to the challenge. Again, our goal hasn't changed. It's to stay on track quarter after quarter with positive news.

Again, thank you for your time, and now I'd like to turn it back to Jure.

Thank you, Randy. Ladies and gentlemen, as Randy said, we're continuing to operate under challenging market conditions. Based on our current input from our customers, we believe that the market will continue to be flat in the near term, and as we'll begin to see some gradual improvements in the second part of the fiscal year 2003.

So overall, as we look at our forecast for the year 2003, we still look at 2003 to be a better year than 2002.

During our fourth quarter, we focused on fundamentals of our business such as technology development, quality performance, customer relationships, and financial metrics. In our technology development, we are working very close and we are involved with our customers where we're helping them develop new products and processes, offering our customer end-to-end product solution.

Sanmina-SCI has a tremendous leverage in our product portfolios. On quality and performance, I'm really proud of this accomplishment. It's been very strong for Sanmina-SCI. Customer satisfaction index which is performed weekly, it is the highest ever. On customer relationships, they have been -- in our decor of our future success, our existing customer relationships are strong and we're expanding product penetration into our main customer base. We've been very successful with the addition of new products and new customers.

We are diversifying our market such as defense and aerospace, medical, semiconductor, industrial and automotive. I'd like to share with you some of our major customers that we do business in the following areas. On communication, Alcatel, Cisco, Ericsson, Lucent, Motorola, Nokia, Nortel, Seimens. On high-end computing, EMC, HP, IBM, Storagetech. On medical, G-Medical, Phillips Medical, Roach, [Spheris]. On Semi conductor and industrial, Applied Materials, Simer, KLA Tankcore, NCR, Texas Instruments. On personal computing, Dell, HP, IBM, Intel. On multimedia, Echostar, Hitachi, Hughes, Phillips. On government and aerospace, Boeing, Honeywell, Lockheed, Northrup, Raytheon. On automotive, Bausch, Saab, TOW, Volvo. These were in alphabetical order.

As you can see, of these customers that I mentioned, this brings a total approximately of 36 major customers. Additionally, we're working closely with additional 64 customers. So in summary, even in this bad economic environment, there's a lot of activity going on. Today we are focusing approximately on these top 100 major customers. The good thing about focusing on this 100 is that the total available market from this customer base is about $100+ billion. With these customers, we're involved from design of the product to global order fulfillment.

Now comments on financial metrics. You heard a lot of it from Rick and Randy, as we promised you during this challenging environment, we are focusing on things we can control which is managing the fundamentals of our business. We generate more than $300 million of cash from operation this quarter, and our operations should continue to generate positive cash in the future.

We'll continue to improve our financial metrics. In an interim goal, our goal is to improve our inventory terms to nine times plus, lower DSO to less than 48 days. Lower cash cycle days under 40, and the long term targets are inventory terms to be over 10 terms, DSO less than 45 days, and lower our cash cycle days less than 28 days. And as you can see from the metrics that we delivered in this quarter, we're not far away from these goals.

Sanmina-SCI's long term strategy is in its place. The merger with SCI is complete and it's working. Customer acceptance has been and remains very positive. I can tell you that we are one company and one team.

And although the ability continues to be tough, as I have said, we have very strong management team and I like our position in the EMS industry. We have developed technology leadership in all the key areas of our business. We've positioned our self with tremendous leverage to provide a total manufacturing solution to our customers.

So what is Sanmina-SCI's future? Our future is excellent and it's exciting. Sanmina-SCI has technology, operational excellence, management experience, and a customer base to deliver the leading financial metrics in our industry.

Now I would like to extend a special thanks to all our investors and analysts for participating on this conference call. At this time, Randy, Rick and I would like to answer any questions that you might have. Thank you again.

Operator, we're ready for questions.

At this time, I would like to remind everyone if would you like to ask a question, please press star 1 on your telephone keypad. If you would like to ask a question, press star followed by the number 1. We'll pause for just a moment to compile the Q and A roster.

We'll take our first question from Steve Savass at Goldman Sachs.

Good evening. Randy, you talked about PCs, I think your outlook for December quarter was on the flat side. Is that what you're seeing in terms of no seasonality or is there something else going on, any potential update with HP or is there just lack of sell-through maybe in the September quarter?

Well, you know, the very large majority, well north of 90% of the PC business that we do really ends up in the enterprise or business arena, and it tends to be less seasonality than the [part] that goes from a consumer point of view. So I'd just attribute this to, again, the conservative outlook on business spending and IT spending here gone forward.

And though your major customers would be looking at kind of sequential upticks even in the enterprise space?

Yeah. You know, I can't -- I can't talk about specifically which -- you know, their end market uptick because it's somewhat -- you know, varies across their product line so I can't talk about them specifically, but what I can say is that the PC build to order, configure to order that we do to our customers here primarily is the outlook for next quarter is relatively flat.

Okay. Thank you.

Thanks, Steve.

Your next question is from Mr. Scott Craig with Morgan Stanley.

Randy, can you please provide us a little bit more details on the additional restructuring? For example, maybe percentage of head count you'll be taking out or square footage or some sort of measure like that, and with regards to that, can you maybe break out the individual divisions and tell us what capacity utilization they're at now? You gave us an overall for the company but a little more detail would be appreciated. Thanks.

Okay. First off, again, the timing of this charge is really going to take place over five or six quarters here going forward. There are many variables that affect the timing of these charges. They're all pretty strictly regulated by the accounting rules as you know. Also, I want to be a little bit sensitive to the organization here as time goes on because there's a lot of people involved in our -- that could be affected. There are particular communities that we need to deal with, and it will be inappropriate for me to get too specific here. But in general today, we have roughly 100 sites in the world. As I mentioned earlier, virtually all of this activity will be in North America and Europe. There is somewhere around a quarter of our sites affected one way or the other -- or to be a little bit more specific, from 22 to 24 sites here. Square feet affected is between 3 million and 3.5 million of square feet.

Today our capacity utilization rates and our fabrication business, as I mentioned before prior to this effort, are in the low 30%. We expect this evident to get up to at least 45 and maybe close to 50% utilization. The capacity will remain in that business between about 900 million annually and 1 billion annually. And the enclosure business, prior to this effort, we're running capacity utilization in the high 40%. We think this effort will get us in the high 50%, and we will have capacity left after this of about 1.4 to 1.5 billion. In the EMS sector, today we're running in the mid 40% capacity utilization. After this, we'll be in the mid to high 50% utilization, and again, capacity in that business will still be depending upon mix, 17 to $19 billion.

So that is about all at this point I'm reasonably comfortable with giving.

The other thing that actually might be useful is talking about the charge that could be anticipated next quarter. I believe that's about $30 million.

Okay. Thanks a lot.

Thanks, Scott.

Your next question is from Mr. Jerry Labowitz with Merrill Lynch.

Yes, Randy, when you look at this restructure, if we go out lets say five or six quarters, what's the P & L going to look like? Where do you want to get SG&A? What percentage of sales will that be and where do you think gross margins are? I realize there's lots of variables, but if you can give us a range.

Well, that's a good question, Jerry, and I think I'm going to respond to that by saying that looking out, we expect some improvement on the top line as well as, as I said here, this is going to take about $50 million of cost per quarter out here going forward. But looking out over the next four quarters, we would expect to see running at a run rate of gross margins by the end of the fiscal year of somewhere between six 6 and 7%, again, with fairly conservative top line growth, and an SG&A number of around three -- maybe 2.9 to 3% here going forward as a result of this. Again, a lot of this is going to depend upon, you know, exactly what happens to the top line here as well, but we think with some modest growth on the top line and these actions, this is where those percentages will end up.

Okay. Thanks.

We'll take our next question from Thomas Hopkins of Bear Stearns.

Good afternoon. Thanks. Could you guys just remind us on the PC business with, you know, IBM and HP in there now, what's your mix, how much of this is motherboard assembly and how much of it is full systems build, and then where does Dell fit in with all of this, because I'm assuming that you're doing mostly board assembly and not systems build, and how do they fit in with the other two customers that are above 10%?

First of all, Thomas, on the personal computing, we do not do any board -- motherboard assembly for our two major customers, IBM and HP. What we do is basically final system build and configure to order. On Dell, we're a supplier but we're supplying them subsystems.

Subsystems?

And I might point out that a fair amount of the work done for Dell is server-related.

Right.

Not PC-related.

Okay. And then following up on the question with the bare boards, I think, Jure, or Randy, you said 45% of the effort would be focused on bare printed circuit boards, and I think the balance which would leave 5% on enclosures; is that correct?

That is correct.

Okay. So just to put it in perspective, about 45% of the effort would be focused on bare boards which are about 3% of sales?

That's correct.

Okay. So again, pointing out the leverage, the huge amount of leverage in the bare board operations, what would March and June look like in terms of this effort, EMS first, bare boards first, enclosure first? Because it seems like if the initial thrust of the effort were on bare boards, that, you know, you could get a penny or two into EPS by, say, June or maybe even March.

Okay. So let me -- first of all, I'm not -- we're not in a position to forecast or to go out beyond right now the December quarter because the big variable here is the end markets and the guidance that we give here was basically restricted to the December quarter, and I think that's pretty consistent with what we're hearing and we're seeing out there in the market today.

But with that said, from the restructuring effort here, and Tom, you know, you pointed out a good part is that 3% of our revenues is the boards, but if you go back historically, a huge percentage of Sanmina's profitability certainly prior to the merger with SCI, huge percentage of our profitability come from things like enclosures in the bare board business or these key components that are used in the system. Also as we've walked through these quarters, we can see that throughout the supply chain, the people at the end of the supply chain have been those that have been kind of hit the hardest here, so to speak, with economic downturn because there's been more inventory-related issues, and unfortunately, the enclosures themselves and the bare boards are custom and unique to each customer and to each program, unlike some other components that might be standard that if base stations are slow, they might be able to use on, for example, hand sets or something like that. So we've been struggling through this period here of -- for the last seven quarters, and as you know, the bare board business is a business that is relatively high fixed, low variable cost, and, therefore, there is a bigger drain, so to speak, or bigger negative impact on earnings overall as a result to the significant downturn that we've seen from there.

So what our attempt is here is to bring capacity closer in line with what we're seeing for demand, and again, to bring this up from roughly the low 30% compassity utilization to a number that's north of 45 and hopefully closer to 50% without really any recovery in the top line of that board business. If we can do that, that will take what's today roughly a penny loss or pretax $10 million range loss and that will take that to what we think is in the black. Granted, it's not going to be anything near what we see when that business gets back up in the 60, 70% range, but it's still a number today that there's no drain on earnings. It's a positive contribution here, and we think we can accomplish that certainly by the March quarter and move much closer to that here in the December quarter.

And just to add to that, if you look at these key components for us, which is circuit boards, enclosures, until this restructuring, we're still going to continue to keep the leadership of the technology and development, so it is -- if you talk to our customers, they're worried about a lot of these capacities going out of industry and as we talk to them, you know, they're concerned, so we feel very comfortable after this restructuring that we can keep enough capacity but leverage lot as the economy turns around.

Okay. How should we think about some of your former competitors under pressure or out of business like VEO systems does that help nut short term or put more pressure on you because they lower prices even more?

Well, it's a tough environment. I hate to pick on one supplier. We all do crazy things in a tough environment. But definitely for companies that survive and they have a financial strength benefiting, you know, we're winning a fair amount of new programs. The problem is, customers are not buying a lot of it yet. So from that point of view, I think we're positioning ourselves really well for a turnaround. And that's really our goal here, is that we keep these key technologies, they always give Sanmina-SCI an advantage.

Okay. Great. Thanks.

Unknown Speaker*: Thanks.

Your next question is from Mr. Jim Savage with Thomas Wyville.

Hello, Jim.

8Unknown Speaker*: Hi, how are you doing?

Good.

8Unknown Speaker*: Couple of questions. First, in terms of this quarter, we've been hearing from other people and I just want to get a sense as to whether you are seeing a larger number than usual seasonal layoffs at the OEMs causing sort of the end of the December quarter to be weaker than normal?

Well, you know, two, three months ago, I felt that fourth quarter or first quarter for us was going to be a better quarter than what we are forecasting right now. Our customers are having a bad disability at this time. You know, unfortunately in this environment, we've all been play laying off people. But starting from that point of view, especially when it comes to the layoffs and with my key customer, I think if anything, it has become a more stable and customers are starting to believe that good times will come again and they're willing to hold on to their key people to weather these tough times.

8Unknown Speaker*: I was just thinking more in terms of seasonal temporary shutdowns of facilities for their systems.

Definitely in this type of environment, you know, our customers are taking advantage of holiday season where a lot of our people don't mind taking extra vacation, you know, and we're going to do some ourselves, but to really cut the cost.

8Unknown Speaker*: Okay. And so I would guess then that December is generally going to be the weakest month of the quarter in terms of expectations?

Hopefully going forward, that's going to be the weakest one.

8Unknown Speaker*: You went through a very long list of customers in a lot of different segments, and at the beginning, we -- you discussed what the segment breakdown was going to be. If we go out a year, say the end of fiscal 03, do you think that there will be any significant changes in the segment breakdowns?

On a customer side or percentage wise?

8Unknown Speaker*: Percentagewise. You don't have to talk about specific customers.

We believe that we are gaining a certain niche market that we're going after. I think the medical side of the business, we're expanding that nicely, and if you look at our shipments comparing to our EMS industry, I think were pretty high. Revenuewise, we probably have more medical business than anybody else in our industry.

So you're going to see improvements, more percentage from medical, and military, you know, aerospace, automotive, semiconductor, you know, that's the area that we always were trying to develop, but I think we're taking the right step in the right direction. But we still don't forget our traditional customers, our great customer base in personal computing which is very solid, and I believe that we're going to do pretty well there. In high end computing, we have the area that we're expanding and I think we seem to be gaining shares there.

Communication area, you know, I know nobody wants to talk about it, but I only mention here seven, eight customers, but if you look at the communications side, I'm working with about 30 different customers. There's a lot of unique technology come out, you know, but I think long term, that's an industry also that's going to be okay for us.

Again in this tough environment, Jim, you really have to focus on new customer development, and that's where we're focusing most of our energy right now.

8Unknown Speaker*: So then I guess we're looking at potentially the industrial and medical segments being more than 10% a year out?

I would hope so.

8Unknown Speaker*: Okay. Just one other thing. In terms of the PCB business, obviously there's been a large migration of PCB fabrication to Asia and particularly to China over the last 12 to 18 months. You still don't have a facility in China, have you the one facility, major facility in Asia. Is there any expectation that you will be moving some of your commodity board production into China over the next 12 to 18 months?

Unknown Speaker*: Well, Jim, as you know, we just finished the major expansion in China for assembly part of our business. On the fabrication side, printed circuit fabrication side of our business, we have a major factory in Malaysia, [inaudible] and our factory in Malaysia which is very competitive from that point of view.

For the type of product which we're building, which is high end circuit boards, there's not huge demand right now. If you to Chinese factories right now, you're not going to see a lot of boards over 12 layers. Actually most of the product, if I can guess, it's probably 90% of the product is less than eight layers.

8Unknown Speaker*: What is your average layer count?

Our average layer count last time I checked is probably running over 14 layers. We've been taking some lower-end boards right now to fill some of the factories, but the price on our low end is pretty bad. As you get into the 14 to 20 layers, it becomes more stable and then as you go over 22 layers, which is our sweet spot, it becomes even more stable. And really, if you look at the new programs that we are trying to win, it's really the boards over 14 layers.

8Unknown Speaker*: And revenues are down to about 80 million a quarter at this point?

I think they're higher than that, Randy.

Yeah, they're approximately 100. If you're just using the 3%, bear in mind that's just third party and doesn't include the inner company.

Unknown Speaker*: Okay. Thanks.

Unknown Speaker*: That's per quarter.

We'll take our next question from Michael Morris with Salomon Smith Barney.

Hello, Michael.

Good afternoon, everybody.

Thanks.

Randy, you mentioned that, you know, your prior guidance on PCB production and reduction of capacity had been predicated on better revenues and you didn't get them and we appreciate you sharing that with us. I was wondering if you could let us know how much of the shortfall in revenue is based on units and how much of it is based on pricing. In other words, did you get the units that you thought but the pricing wasn't there, a combination of both, or you if could help us out there.

I could tell you there was no reduction in pricing but that wouldn't be truthful. We have experienced a combination of reduction in volume and a combination of reduction in pricing. The pricing is probably in the neighborhood of 5% a quarter kind of stuff that we've been seeing there, you know, 3 to 5% a quarter, and the balance is just actual reduction in actual demand that we have overall.

Okay. And then I know that you may not want to get into this, but if we think about the economics of the board business, and if your goal is to sort of hover around break-even, you're a little below that now and your goal is to get back to break even or slightly better. What are the relative depreciation and SG&A burdens for that business relative to a traditional EMS business. You don't have to give specifics, but if you could give us a range a multiple of, an average EMS operation, or just something that we could sort of do the break-even check.

Yeah, I tell you what, we're going to see if we have that right here. Do we have depreciation here? No? I tell you what, what I can't get you is depreciation. I'll have to get back to you on that. I can tell that we have run, you know, the internal cash numbers here. We just don't have them here, and the business is still positive from a cash flow point of view. Unfortunately, that's just one of the two metrics that we want to be in the positive ranges, as you know, we want profitability to be there as well, and as I mentioned, we're in the 10 million loss range for profitability point of view, so we will have to get back to you on what that depreciation is and if there's any amortization for that business.

Sure. That's fine. And then I guess my last question maybe bring in Mr. Ackel, Rick, you said that you purchased some additional notes in the open market since the close of the quarter. Should we just take out 50 million from the closing quarter cash balance and assume that that's your current cash position?

No, our current cash position obviously varies as you get more receivables collected and everything else. But if you want to hold it relatively stagnant and look on kind of a basis where it was, yeah, I think you can then pull out that extra $50 million at that point in time.

My second question to you has to do with you Rick has to do with the revolving lines of credit, and I think that with those you were intending to renegotiate those in December, you mentioned you'll be looking for additional flexibility. And yet you're in compliance. I don't want to infer anything negative if we shouldn't, but it seemed like you only needed about 8 million of EBIT to stay in compliance and you had much more than that. So, what's the right way to look at that?

The right way to look at that, Michael, is that our stated goal is to be able to take over a period of time and to term out, if you will, some of that debt. And this is really what I've been trying to work on, is being able to extend and improve the debt maturity profile not only by paying down current debt that we talked about, but hopefully taking some of the debt that was due in the relatively short term on the revolver securitization and be able to get into a program that pushes it out, you know, maybe five years or so.

That's really the goal behind that.

At the end of the process, would you still expect to have 364-day revolving line of credit funds?

It depends. Right now as we speak, the 364-day has been paid down. It was paid down by a combination for the most part of taking out that asset securitization that we talked about in the queue at the beginning of the quarter. So that was kind of eliminated. So it just depends [where we've grown that]. Michael, one of the other things, too we're looking to do, and yes, we're in compliance now, but long-term, we'd like to just be able to have less and less covenants obviously, so we're looking for a combination of things that goes forward.

okay. Thanks very much.

One more thing. I found the depreciation break-even analysis here for the board business. It's $18 million a quarter depreciation for the board business.

Very helpful. Thanks so much.

Thanks, Michael.

The next question will come from Lou Lou Misosa with Lehman Brothers.

Hello.

Thank you. Just want to go into the current guides. I guess when I look at the breakdown that you gave, most of the businesses didn't seem like they're going to be down, let's say, 10%, but yet your guidance was down anywhere from obviously flat to 10%. What do you think of the conditions that would end up having you hit the low end of the guidance? Would almost all the sectors have to be weaker or maybe just the com sector?

Well, you know, I'd say that the two bigger sectors, the com sector and the personal computing, you combine those together and you're not too far from 70% there, so those are going to be the two biggest variables in the equation that we have there going forward.

So to hit the guidance, to answer your question, I'd have to expect both the com infrastructure and the PC business to be down sequentially from where they were before.

Okay, great. From a revenue standpoint, not necessarily to give Sanmina guidance, but usually the March quarter is a seasonally weak quarter, so even though it doesn't look like we're getting much of an upswing from a budget flush or seasonality for tech going into December, unfortunately this past year, we end up getting the downsize anyway in March. Where do you think March might go from an industry perspective for tech?

Well, this is Jure. If I knew that, maybe I'll have your job. Probably make more money than I do today. I don't know if that's true or not. Listen, it's tough to really forecast March. I mean, we feel optimistic, some of the stuff that we're working on. If I had to guide you today, I would say, you know, flat to this quarter, but really we need time. The good thing about this business right now for us, anyway, inventories are very, very low. Especially some of the key components that we supply such as boards, [backlands], cables, enclosures, and so we believe even if overall tech might be flat, but our customers are going to have to start buying because they are running very, very low inventory. So today, with all these new things going on, I think you give us some more time, but I'm still optimistic hopefully we can do a little bit better.

Okay. Great. The way things are going on Wall Street lately, you might have the opportunity for my job soon. I guess my final question, if you look at it, how is just the general pipeline? I know that you walked away from the European deal with Seimens, might not look to be a good idea, but are some of these deals starting to come back from an organic sense to give us some wins to give you growth above the end markets in 03, if you can give us some color on that?

Well, pipeline, you know, is -- the deals are out there, they're available. Deals today are less risk year than before. We're looking into it. I think we're going to do the right ones, but we'll be very careful of what we take at this time.

Randy, you want to add to that?

Well, you know, the momentum behind or the desire by, I think, the OEMs who -- you know, in these difficult times has continued to be the leverage, the opportunities with the EMS companies. It certainly made sense in the good times to outsource, and I think it makes equal sense, if not more sense in these difficult times to outsource. The problem, and I've talked a little bit about this last time, is that if you go back a couple years ago, we could run all kinds of analysis and scenarios that assume that we're going to need the capacity and we're going to introduce new customers and if you just think through this whole concept, it meant that the OEMs selling the asset was only going to pay a portion of the cost of running that particular site as time went on, and probably a smaller portion and that's the kind of deals that were negotiated and transacted. With today, though, all of us, I would think, in this industry and certainly our approach here is that it's difficult for us to do modeling and scenarios out there that say different customers are going to be introduced to this site at least over the next 2,3,4 years. It's just unreasonable to expect that because there's surplus capacity today, therefore, the cost has to be mostly fully borne by the OEM there.

But there are some things that we can do that we think still make the savings there for the OEM go forward but it's much less attractive on their part than it would have been under the old way we used to value the businesses, and, therefore, the negotiations and the discussions because we're much less willing to take risk here take a lot longer to go through. And that's why I think you see some of these transactions for lack of a better term drag on and on just because of the negotiation process that we have to have. I would say in general, today, we as an EMS industry, I certainly think we as a company specifically are not willing to take anything close to the risks that we used to take historically. And that's probably the biggest change. I mean, the expected returns on the transactions are probably not significantly different. The only thing that is really different is that we're not willing to take too much risk in achieving those returns.

Just to add, our customers are realizing that and they're also looking at win-win situation for long-term. So the outsourcing will continue to grow even more because the customers are having tremendous benefits when they outsource their manufacturing to EMS industry. So from that point of view, it's still very positive long-term.

okay. Thank you.

The next question is from Todd Copeland with CIBC World Market.

Good evening, everyone. Just to follow up on Lou's question, you're saying the deals are changing, so we saw a restructured Lucent deal with the [plant back]. Do you have that flexibility with the IBM and HP deals that you did earlier in the year? I know you took those plants and agreed to keep them up and running, but just bring us up to date on that.

First of all, Todd, I can't comment on my competitors' deals but I can tell you that the deals that we have with our customers are fine and solid and we have no need to make a change.

So we should assume then that you keep those facilities of those recent PC transactions?

Well, you can't assume anything because you don't know -- I can't release what our are the long-term plans. A lot of this information the way we run our business with customers long term is very confidential, so what we do two, three years down the line is completely different than what is done today. So I really can't talk about that information.

But I'm afraid that there might be a misunderstanding from Todd here. In my opinion, the transaction that is were done this year on our watch here, these transactions were done on really kind of what I want to say on new rules. I mean, not to get into details into this, but what I am saying here is that we're very happy with those transactions. Those transactions are meeting the goals that were set out internally for us as well as we think meeting the goals that were set out for IBM and HP specifically.

Right.

The Alcatel transaction was one that was really close within the last, say, three months overall, and that was a transaction that was negotiated and done in what we think is very low periods of utilization, and, therefore, we're not experiencing any difficulties whatsoever with any of those three particular transactions.

That's correct.

So saying it another way, we wouldn't want to give them back even if there was a way to, we wouldn't want to.

Okay. And just to follow up on your outlook segment comments, you did mention you were seeing some mixed signals in the wireless infrastructure market. Could you just give us a little bit more color on that, maybe geographically what you're satisfy seeing from a technology perspective, and do you think that's going to carry over into 2003 in a material way?

I guess what I'm really saying there, I know you're probably going to have a follow-up question that I'm not going to be able to answer is that we're seeing some specific pockets of strength with two or three specific customers in that area, and with we have six or seven major customers in that area, so we're seeing some pockets of strength.

We're also seeing some strength in some CDMA segments, let's say some of that stuff going to China, and we're seeing some 3G strength in Europe. So what I meant to say there is that I don't necessarily view this as -- and why I chose those words, I don't view this as necessarily every customer seeing strength out there, we're seeing some pockets of strength, and we're seeing some other situations that are probably equally offsetting some of those strengths as well. So some customers are experiencing strength where other ones might not be.

And just to follow up on that, Todd, we're doing a fair amount of NPI products, a lot of new technology coming out, and a lot of changes in technology. , which we are benefiting at this time.

Just allow me a follow-up on that. So in Europe, the 3G, are you able to see whether or not that is test sites or rollout plans?

That's a good question, and I guess the answer to that is it's a rollout of a selected area, so I can't specifically answer that question. It is what is expected to be permanent deployment, but it's only a small area, it's only certain cities that they're doing this in.

It's a test and really installation for a future development.

Right.

Okay. And maybe just the same question on the high-end computing business. Is that -- yeah, that was the one you saw some strength in the fourth quarter as well. Could you just give us similar types of color there?

Well, you know, I think in general, the enterprise business spending has held up a little bit better than carrier spending has there, and, you know, we've focused on that particular segment here, we've had some new program wins, and that's really what's fueling the growth here going forward.

Okay. Great. Thanks a lot.

Thanks, Todd.

Your next question is from John McManus with Needham and Company.

Hello, John.

Good afternoon.

Could you give us your argument that gross margins would rise in the next -- in the December quarter with average lower revenue?

Let me answer that because I want to clarify that, and I need to clarify that. The expectations for gross margins to rise, John, and if I didn't appropriately communicate this, then I need to apologize to everyone, was a combination of cost reductions and some moderate top-line growth here going forward. So for example, and I'm just going to get specific, I'm saying that top-line growth could be in the 2.9 to 3.2, $3.3 billion range, and it's a combination of cost reductions, and we believe that will get the gross margin into the low to mid, say, 6.5% range depending upon those two things.

And for the fiscal first quarter?

Rick will walk through those there on the call.

How they're going to go up with lower revenue.

Well, what we're saying there, in the fiscal first quarter, is that we think the gross margins will be very close to flat, and they're able to achieve that through these cost reductions and these restructuring activities that we've experienced here and we're finally realizing benefits from that as well as the smaller phase 2, so to speak, that we announced today.

and John, I think we're going to start to become a little bit more efficient because of the restructuring.

And as you finalize this restructuring looking out four, five, maybe six quarters, is there a chance that your tax rate could go down as more your capacity has moved to off shore and you're generating more income off shore?

The answer to that, John, is yes, absolutely. As you look at the mix of business as it continues to shift is absolutely possible that the tax rate could go down. The tax rate is highly sensitized to not only to revenue, but to profitability. So in today's environment, certainly as you shift the mix to lower cost, you're going to get a bigger bang for the buck for the overall tax rate structure. So yes, it should -- it could very well go down depending upon the mix that gets shifted from high cost to low cost.

And my last question, you know, in the last conference call or two, you talked about your optimum sector mix, that PCs would be about 27%, in the communications 37%, the medical and industrial sectors 12%. Do you think now looking at, you know, this last quarter and going forward, that those are where you want to be or have you kind of thought out a little bit more of where you'd like the sectors to be and what you're aiming for long term?

Well, I think our long-term goal still doesn't change there. We feel that we can grow all our sectors. We just want to diversify. As you look at old Sanmina was mainly telecommunication company, we were 75, 80%. We're not giving up on communication totally. I think it's just we're going to go through a tough time here, but if you look at the technology, the new technology being developed, that's still a very niche area for us in the future. But we're just not going to wait for that alone. There's other areas as I talked about to diversify in these other areas such as, you know, government part of the business, aerospace, that's an area that the next five years, we see tremendous growth, it's a tremendous -- it's a high technology boards, high technology assemblies that I believe we can benefit, medical, semiconductor area, you know, but of course we're very strong in position on our computing side, and we're going to grow there. So we want to grow all these areas, but the key is to diversify. That's where I go back to our top 40 customers and then the second 60, but it's really basically we want to diversify with the customer base about 100 customers.

Thank you.

Thanks, John.

Your next question is from Mr. Chris Wittmore with Deutsche Banc.

Hello, Chris.

Good afternoon. Just a couple quick ones. What was the contribution from HP in the quarter, the incremental revenue?

As a percentage of revenue?

Just from the France acquisition.

Well, we don't -- unfortunately our customers don't -- have asked us and we have to comply to not getting too specific, so what I did do as part of the announcement is I said the contribution in the quarter, incremental growth to help you understand what's happening with our business overall, I said if we add the Alcatel, which those transactions closed in Q3 and right at the end of Q3, right at the beginning of Q4, 1 portion of that, if we add the incremental growth that we had from the Alcatel and HP, that closed in Q3 to Q4, that incremental growth is approximately $185 million.

Okay. And you can't provide splits between the two?

No, because then I'd be telling you how much HP --

Right.

And they've asked that we not disclose that kind of information. They want to do their own talking, I guess is the way to word it.

Okay. Can you talk about at all just for the PC segment overall kind of what the organic trends were in the quarter if you roll in all your customers together?

Flat.

Flat-ish?

Yeah.

Okay. And lastly, on the circuit board business, it sounds like the break-even point for capacity utilization is moving higher, you know, losses of 10 million this quarter on utilization in the low 40s differs significantly from break even in I think the 30s nine months ago. Can you talk about that a little bit and where you think the break-even utilization level for circuit boards will be in another six to nine months?

Let me clarify. What I really am saying here is that the capacity utilization today is still in the low 30's. Our goal is to move it up into the mid 40s, say roughly 45% with the restructuring activities, maybe even slightly higher depending on mix and things, with the restructuring activities that we had. What we experienced during the quarter was something in the neighborhood of a 10% reduction in top line. That 10% reduction could have resulted because this is a high variable cost -- I'm sorry -- low variable cost, high fixed cost business, that if you just -- if you multiply 10%, we'd been in the neighborhood of 110, say, or 105 to 110 I think is the range I gave before. If you multiplied that out, that would indicate somewhere around a 6 or $7 million hit to profit if you net that out, because that's in the neighborhood of 10 or $12 million of reduction in revenue. That would hit, that would be negative to our P & L.

In addition to that, I mentioned that there was some reduction in pricing that went with the quarter. So that added to that would be the negative impact. That was offset by continued cost reductions and restructuring that we had previously mentioned to bring what was somewhere in the neighborhood of a $5 million loss the quarter before to somewhere in the neighborhood of about a $10 million loss this quarter.

So if you add up all the negative stuff, it could have come close to $10 million. Offset by, say, something in the neighborhood of $5 million through cost savings, but because of the top line reduction, we weren't able to get this to the break even that we wanted. Therefore, if the business still lost somewhere around $10 million. And the main reason for that, even more than pricing, was the reduction in the top line there. They both contributed to it because we are continuing to be efficient, we are continuing to save money in that business.

By taking these charges that we outlined before, by taking that and realizing that, we think we can move capacity utilization, which is the biggest thing impacting us today in terms of profitability from, again, the low 30s to 45, maybe even slightly above that. I don't know if we can get to 50%, but certainly as a threshold, we want to get to 45 and maybe slightly better, and that will allow that business to get into the black. Maybe not significantly, but 5 million, 10 million into the black, which we don't want to do, but we don't see any choice to that because losing money to us in any business, certainly this business is unacceptable.

And again, I want to point out, this assumes no real pickup in end market business. So we're taking these actions based upon what we see today.

Very clear. Thanks a lot. What does it assume for the pricing environment?

Pricing environment is very tough, as I said earlier, on the product, 12 layers and less, it's continuing to be bad. If you go anything under eight layers, it's ridiculous. But the products between 14 and 20 layers, I think is stable right now, and the layers over 22 layers, even more stable. And becoming more stable, I'd say.

Thanks so much.

Thanks, Chris.

Your next question is from Sean Serveson with Raymond James.

Thank you. Good afternoon.

Unknown Speaker*: Randy, could you go through and be a little more specific where you see the quarterly cost savings coming through? I think you mentioned about $50 million, but could you sort of help understand, is that coming out of depreciation, how much in fixed costs, how much in variable?

I can possibly help with that a little bit here. The $50 million, as I said, we broke that down between cash and noncash savings. And we said that we give the percentages, but I think if you work that out, that's somewhere in the $37, $38 million will be cash savings going forward, and somewhere around $12 and $14 million will be noncash savings.

Clearly, most of those noncash savings are going to be depreciation related to that going forward. We have a detailed schedule for internal reasons that takes this and breaks down the anticipated charges by quarter, both cash and noncash, as well as the -- you know, as well as the savings. However, there is a number of things that trigger this, and we can't be certain of when they're going to happen. So we feel that if we outline that in detail, there's some risk associated with hitting that, and it's just better for us to say our preference is just to say, look, this is going to take four to five quarters to accomplish, and as we have the charges, there will be some benefits as a result of that, and overall, we expect somewhere around a five-quarter payback overall with respect to the timing of the charges and when it's paid back.

Okay.

And then maybe coming at it from a different angle, are those goals achievable in a flat revenue environment or to hit those targets, do you need some type of change in revenue, is this simply coming right off the cost structure?

Absolutely coming right off the cost structure. This is not in any way dependent upon revenue.

okay. Has there been any noticeable mix shift in the printed circuit board market or has it been just a little bit here and there as companies go out of business or have you seen major programs swinging around or just small ones from small competitors?

You know, I don't think there's really a major shift change in our fabrication business. I think, again, it's a business that, you know, right, wrong or indifferent, Sanmina's board business grew up in the telecommunications business. It's where, generally speaking, the highest demand for the highest technology boards come along. There's a lot of IP we have in that area that means that we're specific and unique to certain programs, and really it's more of just volumes that's gone on with those programs, you know? It includes in the com infrastructure space, and high end computing, optical and transport, the wireless arenas and all these, and as I said, some of those businesses are mixed, and from time to time, they'll run out of inventory and order some boards and it might last them a half a quarter or something, so it's more of just general mix things and not any fundamental change in the mix we're seeing in that business.

If I can also add, as we diversify in the overall total Sanmina-SCI business, we're looking to diversify our [inaudible] fabrication, an area that is looking really good for us is in the high-end computing, like storage area, as Randy said before most of our business came from telecom, but we've been really expanding to storage because they demanded some high-end boards. Also on medical side of the business and aerospace and government, those are the niche markets that I really believe the market that we did not participate before, it looks really sweet.

And especially the military business. That military business for us could be, you know, couple hundred million dollars in boards in the next few years, where today it's less than maybe $10 million a year.

And then just lastly, what's your printed circuit board focus going forward? I mean, do you intend to kind of expand that business to match what we see in your mix of assembly business, you know, include more in the consumer electronics, or set top area, PCs, are you going to really keep that as best you can the higher end of the spectrum?

First of all, we supply high-end boards to anybody in the world, so we don't -- our goal is not to use this internally. This division is an independent division and we'll do the boards business with anybody out there, including our competitors. But the key there is really to focus on the high end, and the niche market of our business. Low end circuit cards, we today buy over 2, $300 million of low end circuit cards from some of our Asian suppliers.

Okay. Thank you.

Bye-bye.

We'll take our next question from Mr. Chris Lipentaught with MacDonald Investments.

I just had a quick question. Just in your initial comments, you were discussing the fact that your outlook on gross margins coming up a little bit, I think actually 4.5%, were you looking at your operating margins at around 1-plus. It gives the impression that the SG&A is coming up at least for the next quarter. Could you just kind of give us a little bit of color as we go out for the next several quarters, perhaps, are we seeing SG&A going up again that kind of pace or just as far as restructuring, what are we looking at in terms of what's the impact there? Thanks.

Chris, you know, on the numbers we give, obviously these are just kind of projections. Our goal long-term, and if you've noticed, our SG&A has been holding a tight line in the 3.1, 3.2% range. I expect that's going to continue to go forward. We have some plans with some infrastructure build out a little bit, as we continue to move forward, we need to put a few more bodies here and there, and obviously when the sales level goes down, you're going to try to hold SG&A and kind of reduce it, but I think you're seeing a mathematical aberration for the most part. We tend to focus on operating margin, we always have, we always will, because of the fact that's how we run the business. I wouldn't get too hung up on those swings. We're going to continue to try to drive the overall operating expenses, the SG&A to the three, 3.1% level. That's been the goal we've been achieving even in downturns and we're going to continue to do that. We are just trying to give some people a range of where you might see some things.

I guess I was also thinking in terms of the long-term goals you're talking about in terms of the margins and operating line. Is that -- how much of a function of that are you looking at in terms of the top line growth? I think at one point somebody had commented on your thoughts as far as, you know, outlook for the long term.

Well, obviously it's a little bit of a function of top-line growth. Once you get to a certain level, we think we can continue to reduce that more, but certainly in what we're looking at for the year, we still think our goal is going to be in that 3 to 3.1% range overall based upon what revenue growth we're projecting.

And that's based on today's business, but Chris, you're right, as our business grows, our goal is really to bring that down, and it should come down because revenue should grow faster.

Okay. I guess also on that as well, do you see that perhaps changing even faster given your comments today with regards to the low-cost footprint, could that perhaps even change it more so, and if so, how much?

Well, let's put it this way. I think we are the company today, we look at everything that we spend, and I'll guarantee you there's no stone that is left unturned. The job is not done from taking the cost out yet. And that's why I think as you look at our financial metrics, they're starting to show up and we're going to continue to do that. At this time, I really believe that Sanmina's operating margin should be one of the best in the industry.

All right.

I mean operating costs. I'm story.

Taking down your debt levels, any thoughts as you look into the future as far as taking down additional debt levels?

Chris, our overall financial plan is to continue to look at the overall debt levels, and yes, as we build more cash and certainly incumbent in that plan is to take a look at the mix of debt that we have and potentially take some more out, absolutely.

Would you like to quantify that or is that just a goal right now?

It's a goal. I'm not going to quantify it at this point in time.

Okay. Thanks, Rick.

Okay. Thanks, Chris.

Next we have a question from Michael Grazen with Robert W. Baird.

Actually this is Michael Grazen. I just had one question regarding your asset securitization. How much was it during the quarter? Did it increase any over the quarter? And did it add anything to cash flow from operations?

No, that securitization is on the balance sheet, okay? So it doesn't really add anything certainly on the overall cash from ops. We took that down in early August, and the number has maintained relatively close to that throughout the quarter. It does fluctuate and we try to play a little bit of radar -- obviously we try to [inaudible] the lowest interest rates, and that is a low interest rate, but it was like 198 million or something like that, so it's stayed pretty much around that level.

Thank you.

Thanks, Michael.

Your next question is from Alex Blanton with Ingels Snyder.

Hi, Randy, I wanted to ask you something about what you said at the beginning of your presentation, and that is -- you referred to it later too -- that Alcatel and HP added an incremental 85 million to the quarter and that meant that your base business went down by 200 million. But that really assumes that those two programs were the only new programs that you had ramping. And that doesn't seem like a logical assumption. So could you elaborate on that and tell us what other new programs in general, I know you haven't announced any others, but you must have gotten some. What kinds of business, new business you're ramping right now and what we might expect from that also in the December quarter?

Let me make a brief comment here and then I'll turn it over to Jure and he might want to talk maybe some specifics here, but I doubt it. As a general rule, Alex, I think it's a very good question, and you're right, we've won a bunch of new programs here. My goal by saying what I've done, and I think we're a bit unique in doing this in our particular industry, but all I'm trying to do is help the investment community really understand what is revenue that was part of deals that we've done, and separate that from why this is -- what is most often commonly referred to as organic or base business growth. In that organic growth and base business is a normal part of our business, we routinely win new programs and phase out old programs, and probably a great example is to talk about the -- you know, a real short cycle is the PC business, because our customers, you know, are constantly introducing new programs and phasing out other programs, and the lifespan of those are as little as three or four months where we can go into the telecommunications business and sometimes the lifespan of those programs are 20 years.

So as part of our normal routine course of business, we constantly win new program from our existing customer base and phase out the other ones. As a general policy, we adopted years ago -- we don't very often announce these new program wins. And the exception to that is if our customers want to do that, being the flexible responsive customers we are, every so often you'll read something but it's usually -- every time it's generated on our customer and they're the ones that are really driving that, not us, because we just don't as a policy announce that, so that's a general comment. Jure, did you want to add anything?

No, I think you covered it pretty well, but Alex, I think just to give you an example, what I said earlier, in this economic environment, we've been doing a lot of new programs and winning a lot of these new programs. What's happening, the customer is not buying a lot of it. They're not going to -- introducing a new program, preproduction and then a reproduction right of way. Now what we do, we do NPI, new product introduction, do some preproduction, and then we're holding. So we have a lot of it. We are well positioned with our customer base, as I said, with our top 100 customers, we're really well positioned and we are gaining share in there, and we're starting to utilize our vertical integration more and more because we're adding so much value to the technical solutions especially in high end new products coming out.

I was really not talking about follow-on programs but new customer that you might be adding or further penetration of existing customer into product area that you hadn't been in before that, type of thing.

And we don't want to talk details of that for competitive reasons, but I can assure that existing customer base has been penetrated more with Sanmina value-added than ever before, and we've been very successful expanding the customer base, especially in this area that we were never in before.

Could I add one more question and that's --

You're the last guy, so we'll let you ask one more question.

Earlier, you had mentioned that on the HP and IBM PC business, you were not doing the PCBA for those? Is that what you said?

When we do personal computers, what we specialize in is the box build. We basically buy all the components from our partners, including OEMs, and we basically build the systems and we build it to order and configure to order and deliver all over the world.

So are you free to say where the PCBA is being done?

No, I can't talk about that.

Okay. Thank you.

Alex, thanks. Ladies and gentlemen, thank you. I know this was a little bit longer call than you typically are used to, but we felt that you had a lot of questions and hopefully we answered most of them. If not, please get back to us. Again, thank you for your support, and we'll talk to you soon.

Thank you.

This concludes today's Sanmina-SCI fourth quarter earnings release. You may now disconnect.