Sanmina Corp (SANM) 2008 Q4 法說會逐字稿

Good afternoon. My name is Chanell, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI fourth quarter fiscal year and 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 will now turn the conference over to Jure Sola, Chairman and Chief Executive Officer of Sanmina-SCI.

Thank you. Thank you, Chanell. Good afternoon, ladies and gentlemen, and welcome to Sanmina's fourth quarter 2008 conference call. Again thank you for being here, joining me on this conference today is Joe Bronson, Hari Pillai, and David White.

Just a few comments for those of you that didn't read our press release. We did make a management promotion here. Hari Pillai was promoted to be President and Chief Operating Officer starting today. Joe Bronson was brought here, has been a friend of mine for many years, as a customer, about a year ago I asked to help me strengthen the management. He knew it was a short project, which I want to say in front of everybody, Thank you Joe, and most importantly, I think Joe helped me transition this, I think Hari is the right for the job, after being here for 14 years. He is the best person for it. With that, I want to also congratulate Hari.

Thank you Jure.

Let's go to the agenda. David White will review our financial results for the fourth quarter of fiscal year 2008, then I will follow with comments relative to Sanmina's results and future goals. Then we will open for questions and answers, basically all of us here.

And now David.

Thank you Jure. Before I get started, please note that selected portions of our presentation today are available in the form of a slide presentation on the Internet, which can be accessed from the Investor Relations section of our website at www.Sanmina-SCI.com. I will be making references to these slides during the course of my remarks.

Prior to discussing the state of our business and financial information with you, I would like to take a moment to review the following Safe Harbor statement. Slide 2. During this conference call we may 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. 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 10-K for the year ended September 29, 2007 filed on November 28th, 2007, as well as our most recent report on Form 10-Q filed on August 4, 2008.

These documents contain identifying important factors that could cause actual results to differ materially from our projections or forward-looking statements. You will note in our press release issued today, that we have provided you with a statement of operations for the three months and 12 months ended September 27, 2008 on a GAAP basis, as well as certain non-GAAP financial information.

A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, loss on extinguishment of debt, non-cash stock based compensation expense, amortization expense, and other infrequent or unusual items to the extent material.

Any comments we make on this call as they relate to income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income, and earnings per share, we are referring to our non-GAAP information.

The GAAP financial information presented today is preliminary, given the recent significant decrease in the Company's market capitalization, similar to that experienced by other companies in the MS industry, the Company has taken an undertaken a review of the value of the goodwill contain on its balance sheet, using the 2-step test contained in the Statement of Accounting Standards SFAS-142, Goodwill and Other Intangible Assets.

The Company does not expect to complete this review until mid-November. Should the Company determine that its goodwill has become impaired under FAS-142, it will be required to record a non-cash charge which could be significant, and would reduce our reported GAAP net income and earnings per share, for the fiscal quarter and year ended September 27, 2008. And which would be included in the financial statements filed with the Company's Annual Report on Form 10-K.

The non-cash charge if any, would not impact the non-GAAP financial information presented in this release. Prior to describing our financial results you will recall that effective with our second quarter, our personal computing business and related logistics services have been accounted for as discontinued operations. Our fourth quarter results as reported here today, will also be the last quarter we report any results for the discontinued operations of this business.

My comments today will focus almost entirely on the results of our continuing operations, including a review of results of operations, a discussion of selected balance sheet accounts and corresponding metrics, an update with respect to our restructuring activities, and finally, I will conclude with guidance for the first quarter of fiscal 2009, ending December 27, 2009 (sic).

Slide 3. Revenue from continuing operations for the fourth quarter of fiscal 2008 was $1.7 billion, which was below the low end of our guidance of $1.8 to $1.9 billion, down 10.5% versus $1.9 billion in the prior quarter, and down 2.9% versus $1.75 billion in the same period a year ago. As you will see in my comments shortly, our quarter-over-quarter decrease in revenue was across all but one of our seven end markets, a fact that we largely attribute to a weakening global economy.

As for the fourth quarter, we reported GAAP earnings from continuing operations of approximately zero, which equated to $0.00 a share, and a total Company GAAP loss of $11.2 million, which equated to a $0.02 loss per share.

Non-GAAP earnings from continuing operations for the quarter were $24 million, or $0.05 per share. This compares with $0.05 per share in the prior quarter, and a loss of $0.02 per share in the same period a year ago. For the full year, we reported non-GAAP earnings from continuing operations of $69.6 million, or $0.13 per share, a $128 million improvement over the loss of $58.3 million, or $0.11 per share reported in the prior year.

Slide 4. For the fourth quarter our revenue by end market was as follows. The Communications end market represented 41.2% of our net sales, which in absolute dollar terms was down approximately 15.5% from last quarter. Enterprise Computing and Storage represented 18.4% of net sales during the quarter. Sequentially this market was down 10.1% in absolute dollar terms quarter-over-quarter.

The Multimedia end market accounted for 15.5% of net sales during the quarter, and was down 7.3% in absolute dollars terms, versus the prior quarter. The Medical end market accounted for 11.1% of net sales during the quarter, which was modestly down approximately 3.1% in absolute dollar terms from the prior quarter. Finally our Industrial Semiconductor Capital equipment, Defense, Aerospace, and Automotive end markets of our business collectively accounted for 13.8% of our net sales, and in absolute dollar terms were modestly down 3.3% relative to last quarter. The industrial segment was up, whereas the Automotive and Defense Aerospace segments were each down.

Slide 5. Our Top 10 customers accounted for 49% of total sales this quarter. Sales to our Top 20 customers accounted to about 62% of total sales in the fourth quarter. We had no customers in the fourth quarter whose sales were greater than 10% of total sales.

Slide 6 and 7. Gross profit for the fourth quarter was $132.8 million. As a percentage of sales gross profit was 7.8%, which was up approximately 40 basis points from the prior quarter, as a result of continued progress and improving operating efficiencies in our EMS business, as well as favorable resolution of certain inventory and warranty claims with customers. When compared to the same period a year-ago, our gross margins were up approximately 150 basis points.

Selling and general administrative expenses for the fourth quarter excluding stock compensation expenses were $68.8 million, down approximately $6.5 million quarter-over-quarter, and down approximately $12.8 million versus the same period a year ago. Research and development costs excluding stock compensation expenses for the fourth quarter amounted to $4.7 million, which was down $1.1 million quarter-over-quarter, and down approximately $900,000, versus the same quarter a year ago. Our combined R&D and SG&A expenses for the fourth quarter again excluding stock compensation expenses, amounted to $73.5 million, or 4.3% of sales.

These expenses have continued to trend downward over the last year, as we have focused on reducing infrastructure costs, in preparation for our exit of the personal computing business. Given the current economic environment, we expect to further reduce our operating expenses over the next 6 to 12 months, as we continue to drive for additional operating and administrative efficiencies.

Operating income for the quarter was $59.3 million. Our operating margin was 3.5%, up approximately 30 basis points quarter-over-quarter, and up 220 basis points on a year-over-year basis. Net interest and other expense, which consists primarily of interest income and expense, as well as gains and losses from foreign currency translation was $29.8 million, versus $23.1 million in the prior quarter.

This quarter-over-quarter change was primarily the result of a modest foreign exchange gain recognized in the third quarter, versus the modest foreign exchange loss in the fourth quarter. Net interest and Other expense in the same period a year ago was $35.8 million. Depreciation was $20 million for continuing operations for the fourth quarter, which was down $600,000 approximately from the prior quarter.

Our EBITDA for the quarter was $79 million. Our tax provision for the fourth quarter was an expense of $5.5 million, on pre-tax non-GAAP earnings of $29.5 million for a tax rate of approximately 19%. Our lower tax rate reflects the favorable impact of the first phase of a number of business model changes we are pursuing, to systematically reduce our effective tax rate over the next year.

Slide 8 and 9. Turning to the balance sheet. Accounts Receivable at the end of the quarter were $970 million, excluding any factoring of Receivables, our gross DSOs for the core business was approximately 52 days, which was up approximately 0.5 day from the prior quarter. Inventories at the end of the quarter were approximately $813 million, down approximately $137 million quarter-over-quarter, of which $49 million related to the final sale of inventory associated with our personal computing business.

Inventory days at quarter end were 47 days, or 7.7 turns, essentially flat versus the prior quarter. Our fourth quarter inventory performance for continuing operations, resulted in the lowest inventory levels in at least 12 quarters. Net capital expenditures in the quarter amounted to approximately $19 million.

Accounts Payable at the end of the quarter were $891 million, which equated to AP days of approximately 52, an improvement of 2.6 days versus the prior quarter. Overall our operating cash cycle for the fourth quarter, which we define as unfactored or gross cash cycle days was approximately 47.

Turning now to cash flow. Historically we have maintained a facility for selling or factoring our trade customer receivables associated with our personal computing business, and we regularly factored those qualifying receivables as a means of managing our available cash position. At the end of our third quarter, we had $292 million advanced to us under those facilities.

Subsequent to the sale of our personal computing business, we replaced that facility with a new $250 million committed facility, structured especially for our continuing EMS and component operations. Except for $16 million, that facility was largely undrawn at quarter end. We believe we have ample cash and available liquidity to meet the needs of the Company. As such, while we (technical difficulty) [think we will] maintain this new facility, we do not currently intend to be active in factoring our Receivables for the foreseeable future.

As a result of this however, our ending cash position was impacted unfavorably by about $280 million. If you exclude this amount, our normalized free cash flow was approximately $173 million for the quarter, and $329 million for the year. Free cash flow including this amount was a negative $144 million for the quarter, and a positive $51 million for the year.

Our debt at the end of the fourth quarter was $1.48 billion, which was flat with the prior quarter. Our earliest debt maturity is $180 million, which is due in June of 2010, and our next maturity after that isn't until 2013.

Cash and short-term investments at the end of the quarter were approximately $870 million. Based on the adequacy of our current available cash and other sources of liquidity, we announced today in our press release our intention to purchase up to 10% of the Company's outstanding shares of common stock, based on today's closing price.

We may purchase up to $10 million of our stock, the maximum amount currently permitted under our credit agreements. We may repurchase additional shares under the program as these restrictions expire, or are modified. Purchases under the program were made at prevailing market prices, or negotiated transactions off the market. This program will continue through December 2009, unless otherwise determined by our Board of Directors.

Let me now comment on restructuring. During the fourth quarter, we incurred $13.3 million in restructuring expenses, of which $12.6 million represented cash payments during the quarter. This expense primarily relates to reductions in force associated with previously announced plant closures, primarily located in Western Europe and North America, as well as restructuring of various corporate functions.

Slide 10. Now let me turn to guidance for the first quarter of fiscal 2009. Consistent with prior quarters, the information I provide will generally exclude stock-based compensation expenses, restructuring integration costs, impairment charges, loss on extinguishment of debt, amortization of expense and other infrequent or unusual items.

Our first quarter guidance for continuing operations is as follows. We are targeting first quarter revenues of between $1.425 and $1.625 billion. We expect gross margins to be in the range of 6.7 to 7.1%. We are targeting our operating margin to be between 2.1 and 2.6%. We expect our tax rate to be approximately 25%.

Basic and diluted shares for the first quarter are expected to be about 531 million, excluding any repurchase of outstanding stock. This equates to a non-GAAP diluted EPS of approximately $0.00 to $0.03 per share. We estimate the depreciation for the first quarter will be approximately $20 million, consistent with last quarter, and first quarter capital expenditures to be in the range of $20 to $25 million, primarily driven by our expansion activities in India. Finally, we expect our first quarter cash flow from operations to be positive.

This concludes my remarks and I thank you for your time. With that, I will turn the time over to you Jure.

Thanks David. Good afternoon, ladies and gentlemen. As David mentioned, our fourth quarter revenue came in at $1.7 billion, definitely below our expectations. We had a major customer rescheduling in the last weeks of the fourth quarter, which we scheduled out a quarter, well over $100 million in revenue. We had weaker than anticipated demand for virtually all of our markets, as David shared with you earlier.

On the positive side, we had a nice margin improvement in our fourth quarter. Record margins in the last seven years of 7.8%. Operating margin also a record of 3.5. So all the steps that we are taking are really driving those results nicely. EPS, $0.05. And also we generated a lot of cash in the fourth quarter of $173 million, or $0.33 per share. And as David mentioned, no AR factoring in the quarter.

Let me make a comment about 2008. It was a successful turnaround year for us. We did a lot of work finishing all our major restructuring, which is now behind us. We put a new strategy in place, focusing on the markets that we do have a competitive advantage. From the revenue point of view, it came in at about $7.2 billion, slightly up from 2007, but basically was a flat year. We had reasonably good visibility through the year, except last quarter.

We also improved the mix of the customer base in 2008, and really drove the quality of the margin up. That is one of the reasons I think our margin is up, because of the quality of the mix. On operating income, that grew nicely to $206 million, up 102%. EBITDA came in at $287 million.

So some nice results, in a year that we felt was a good year, and we just didn't expect that the fourth quarter would be slow, as it turned out to be. Positive cash flow was a key thing for us here to drive and 2008 was no different. We brought in $329 million of free cash flow, which is approximately $0.62 of free cash flow per share.

Now let me talk to you about our guidance for the December quarter, which is our first quarter of fiscal year 2009. First, today we have a definitely limited visibility. It is very challenging in this global economy today. We do estimate a quarter for fiscal year 2009 revenue to be in the range of $1.425 to $1.625 billion, and non-GAAP EPS of $0.00 to $0.03.

At this time, we anticipate demand to continue to be weak during this quarter. On the positive side, we do expect to generate positive cash flow in the quarter of $50 to $100 million, and for fiscal year 2009, we expect to generate $200 to $300 million of free cash flow.

Now the question is how is Sanmina-SCI going to weather this tough environment? So let me give you some facts. First we are well-positioned for this difficult economic environment. We are financially strong. We have $870 million of cash, and also as we just mentioned, we will continue to generate cash even in this tough environment.

With the major restructuring now completed, we have a wide global and geographic infrastructure in place, well-positioned to compete, and there is no major restructuring in our plans for fiscal year 2009. There is some tuning, but that is normal manufacturing efficiency that we focus on every day. Also during this period in 2008, we did improve our customer satisfaction significantly. Across our systems, in quality, delivery, technology, and overall cost.

I believe today we have a very efficient cost infrastructure in place, but in today's time we are taking additional steps. We continue to adjust our operational costs to meet today's demand, and as David mentioned, we drove our SG&A nicely in the last 12 months, and we are going to continue to drive that in 2009. The bottom line that we believe we can continue to build a stronger relationship with our customer, and gain market share in this environment. We are going to continue to diversify our markets as part of our key strategy, and most important, we are going to stay profitable, and generate positive cash even in this tough environment.

Let me now talk to you about our market opportunities and the conditions of the markets. At this time predicting the future is very difficult, so I am not ready to forecast our revenue and EPS for fiscal year 2009, but I can just give you some of the highlights, what we see today, and what we believe in. We do expect to generate higher operating income in 2009 than we did in 2008, which was a nice improvement over 2007.

In this market condition, our new structure allows us to be more focused with our customers, more flexible, and now establishing our IT system, I believe we are the only company in our industry that has a truly one global IT system, this helps us to control the cost, allows us to communicate closely and better with our customers. I truly believe it is our competitive advantage, especially when you go into this type of challenging environment.

Bookings in our fourth quarter fiscal year 2008 book to bill was 1.1 to 1. Let me talk to some of the major deals that we won in the fourth quarter. We won approximately $200 million of new business, which is going to be shippable in fiscal year 2009. We also expanded our customer base across key markets, in Communication, Industrial, Medical, and Defense and Aerospace.

In this challenging economic environment, we are starting to see even more outsourcing deals. As we look at what we have in front of us, and we look at our pipeline of new deals, there is approximately $1.5 to $2 billion of new deals that we are looking at. So we have a feeling that yes, it is a tough environment, but it just makes more sense for our customers that didn't outsource yet, to outsource more in the future.

I feel comfortable that we are winning in this environment. If you look at our customer base and the projects that we involve, we have got them in a place to really grow but unfortunately demand is a lot weaker than what our expectation was only eight weeks ago. But we do believe when markets and our customer demand improve, I believe that our company is well-positioned to take advantage of the market opportunities that is in front of us.

So in summary, we are facing a challenging economic environment, but I think we are ready to go through it. We have management experience to handle it. We went through this before, and I believe we are going to come out of this a stronger company. We have plenty of liquidity, not just to survive, but continue to build a greater company.

Again in the short-term, we are focused on this present storm. Here we are focused on customer support, customers who are facing similar issues in their markets, adjusting our cost structure to demand, focused on profitable business, and as we all talked all day long here already, generating free cash flow.

Longer term, we do expect to see the sun shine. We have seen it before. Intermediately and the longer term strategies are in place. We are focused on our long term projects, and we are focusing on markets and the products that will allow us to deliver superior financial performance, and we are driving to be a gross margin greater than 8%, operating greater than 4%, and return on investment capital over 20%, that is the model, and I believe that the standard cuts, and our projects that we are involved with, will allow us to do that.

As you can see last quarter even in a difficult market, we were able to move. So it is all driven for us right now in the short-term by demand. So now what I would like to do, is say thank you again to all of you for participating in this conference call. And I would also like to express my special thanks to our employees, for their hard work and dedication to this Company, especially in this tough environment.

Operator, we are now ready to open the lines for question and answers. Thanks again.

(OPERATOR INSTRUCTIONS). Your first question is from the line of Jim Suva with Citigroup.

You gave us some great information about the cash flow of next year $200 to $300 million. Can you let us know what the sales basis was for that assumption?

We are assuming that, right now it is hard to forecast the revenue, but we assume that the market is not going to get better. We did our budgets about eight weeks ago, two weeks ago we had to do a budget what we call plan B internally. So plan B is based on really assuming that nothing gets better.

As you can see based on our forecast, our customers especially in our Telecommunication, Enterprise Computing, Multimedia really is down a lot, so we think this is pretty bad right now. We assume let's say if this continues for the next four quarters, we would still be able to stay profitable, generate the cash that I just talked about, and position ourselves for a better time.

So out of prudence would you say it would be reasonable to generate or model sales down for next fiscal year?

Right now Jim, at this time really for us, it is tough to forecast. I mean, as I talk to our customers, some are more optimistic than others, but I don't know if it would be really fair for us to say what it's going to be. I would say it is going to be close to that. We can ship lots. Let's put it that way.

So I think we are just planning the worst case situation, and we are going to work very hard to fight what is out there, and hopefully we win. We feel comfortable we will, because the restructuring is behind us. The only thing that we have on our plate right now is watch the costs, and book the new order that the customer wants us to build.

Maybe I will switch topics for my follow-up then. When you talked about seeing additional outsourcing, can you talk about your appetite for asset purchases, versus outright outsourcing wins, and is seems like you still have internal capacity where you wouldn't need to make asset acquisitions, is that fair?

That is fair. We are not interested really in an asset unless there's maybe a transition period, and where our customer is paying for that, but we have no interest to take on more assets just for asset sakes.

Thank you very much.

Thanks Jim.

Your next question is from the line of Steven Fox with Merrill Lynch.

Good afternoon. A couple of questions. First of all I am a little confused at how on the $200 million sequential decline in sales, you were able to improve gross margins by 30 or 40 basis points, can you just break that down for me, please?

This business is all about the mix, and we had very good mix in the quarter, and we have been taking a lot of costs out. If we can ship 1.7 this quarter, I think you are going to find out our gross margins will be around a point. So we don't believe that is a one-time deal. We have been working improving this cost for the last six quarters, and I think our new model is very efficient, and as I said earlier, I think the business that we have today with the proper mix should deliver better than 8% gross margin.

Okay.

The biggest margin impact came from our EMS business. Our Component business still is not producing the gross margin at the corporate average.

So the EMS margins improved, but the Component margins didn't improve?

They improved slightly, but like I said, they are below the corporate average.

When you say that you are going to be able to get operating income to grow next year, but you are not willing to talk about the sales growth tied to that, what type of cost savings do you feel like you have built in to make a statement like that? How much cost savings are you anticipating, irrespective of volume growth?

As David said we are taking more out of our SG&A, and we are taking a fair amount of money out of our operational cost. Assume that business is not going to get better, we are taking the cost based on the present business, and based on that, plus efficiencies, that we were not 100% efficient last year either.

But it would be really helpful if you can put some specific numbers around this, so that we can assess the potential for you really doing it, given that you just -- sales were disappointing, and we have to lower our sales forecasts again. It is really hard to understand how that happened.

I think Steve, it is really tough to forecast, but I would say that we are going to, last year we shipped about $7.2 billion. Right now I would say plus to minus 5% from that number. If I have to guess, and that is strictly a guess.

You can grow operating income if you are plus or minus 5% of $7.2 billion?

Yes, I can.

That is helpful. Thank you.

Thanks.

Your next question is from the line of Brian White from Collins Stewart.

Hi Jure. Just kind of talk about maybe what you saw in September. You said it slowed at the end of the quarter, and then maybe what you are seeing in October, in terms of the end market demand trends, and do you think any markets will go up quarter on quarter in the December quarter?

Maybe I will turn that one over to Hari a little bit.

Brian, we have been pretty conservative in our planning, and we are not banking on any upside in any particular market. As David relayed, when we talked about our Q4 numbers, the softness was across all sectors.

And maybe discuss the trends in September/October? Is October further deteriorated from September?

I believe the pace at which we saw the dropoff has slowed down a bit, so we feel much more comfortable around the guidance we have given out today.

Okay. And if we look in the December quarter, what are the two markets that you think will go down the most?

Brian, that one is really hard to forecast right now what market will go down the most. We are talking to our customers, and making sure they don't go down. At this time, as Hari said, I think we feel more comfortable about our guidance today than if we had this call two weeks ago, but I think it would be, I would be just guessing if I give you any number out there, so it is not fair.

Maybe just on the PCB fab business, is that business profitable, and what margin level are we at there?

It is up towards a single digit profitability, and again our circuit board business is all now about the demand. We focused on a really advanced printed circuit board product, as you can see the biggest slowdown we had was in our Enterprise Computing and Communications side of the business, which is mainly for us infrastructure. But we are well-positioned there. All our restructuring is done, so that factor is really -- it's all about now growth again.

And single-digit operating margin or gross margin?

Right now, the way we -- it is a single-digit, the way we do it internally, is really we judge them on the gross margin, and then we bring it at the corporate number. But they made money.

Okay. Thank you.

Your next question is from the line of Lou Miscioscia with Cowen and Company.

Hello Lou.

Hi guys. Maybe if you could go into cash flow a little bit more, and break it down for us, in both the first quarter and for the full year. Those are obviously pretty nice free cash flow numbers, and net income is under pressure. So what else are you factoring in there, when you look at both first quarter and the full year?

Let me just give you my highlights here, and the way we are driving, and then David can give you more details here. If I look at approximately $300 million, about $200 plus million is going to come from our operations, and $80 to $100 million will come from our assets for sale, okay? But the first quarter, everything we do the majority of that is coming from operations. David?

Yes. The only color I would add to that is, if you look at our cash flow generation over the last couple of years, the large majority of it has been associated with aggressively going after our working capital metrics, reducing inventory, AR, AP, et cetera, and sometimes that may not necessarily show up in one bucket versus another, but we wind up getting it out on a net basis.

So for example we may give up something on the AP side, to get flexibility on the inventory side. So when you put that whole piece together, when we are negotiating with the supply chain, and customers and so forth, our objective is to bring that net number down, and I think that is really what we have done over the last couple of years, and that is certainly the plan for '09, that we believe we have still got opportunity out there to continue driving that down.

If I can, I think you have to look at historically what we accomplished, if you look at 2008, 2007, we generated almost around $800 million of free cash flow, and I think we have got our assets pretty efficient right now. This coming quarter we drove the inventory this quarter about $88 million, [am I off that one], and we are going to continue to drive inventory down. And even in a busy market, I think our inventory turns will go up.

Great. And then David another follow-up. Your comment on the goodwill, and also let me tie in the same question about the possible buy back, if goodwill does have to get written down is there anything that you want to mention to us about covenants you might have on your bonds, and then with the same concept, the covenants and wanting to buy back stock? How difficult will it be to change I guess some of those covenants, that seem to be restricting the actual buy back of stock?

So on the goodwill side of it, and in relation to our covenants, all of our covenants as a Company are public debt, as well as our bank debt, are all on the basis of cash earnings, which excludes non-cash charges like goodwill, write-offs, and so forth. So a goodwill write-off would have no impact whatsoever on any of our covenants.

As it relates to your question on the stock repurchase, currently we have a limitation of $10 million under our bank line of credit, and we expect that to be renegotiated before the end of the quarter.

Okay. And you already put in the press release that the Board authorized up to 10%.

Right. At today's ending price.

Okay. Thank you guys.

Thanks.

Your next question is from the line of William Stein with Credit Suisse.

Thanks. Hi, how are you doing? You mentioned there was $100 million pushout towards the end of the quarter. Did I get that right?

That is correct.

Can you tell us what end market that was, whether it was Components or EMS, or some combination?

It was really across our markets, mainly most of that came really from what we call EMS system assembly type of work, and as you can see, the biggest impact for us was Telecom infrastructure or enterprise.

So it wasn't a customer pushout, just a pushout of the forecast among several or many customers?

It was virtually, like I said, across most of our markets, all of our markets really, and many, many customers. It was really not just a one single customer. Typically in this situation, a customer moves something in, you always ask them to move out. You ask something to move in. But in this environment, there was no favors to be done.

At the same time, I think on a positive side, and I want to make sure everybody understands, there is really not a lot of inventory at our customer's side. Last time when we went through this major downturn in 2001, 2002, there was a lot of inventory in the pipeline. I can assure you that at least that I can see, there is not a lot of inventory out there, so at least when our customers are taking something, it is for real orders.

And turning to the buy back, last quarter I think we were talking about a reverse split on the equity, and I think in the past you have repurchased some debt, and I think you discussed doing more of that. Are you still contemplating either of those today?

Well like I said, the Board authorized to go out and purchase up to 10% of our outstanding shares, based on the value at today's price, so we have authorization whatever $35 million we can go out and purchase. But we definitely as we continue to generate cash, we are going to be looking at paying down some of the debt this year, and actually at our next Board meeting, which is in the first week of December, that is one of the -- an agenda to talk about, is to take some of this out. We feel very comfortable.

We have plenty of cash. But the Board today in this environment are very conservative, but they should be, and so they want to see maybe a little bit more sunshine, before we start spending the money, buying the debt back, but definitely we are going to look at it, and hopefully do something in this fiscal year 2009.

Where is the priority now in buying back at current prices, buying back stock or debt?

Today we the priority is to buy the stock. I think to me, it is a good investment, number 1. Number 2, I think we are going to show to our internal people that Sanmina is here to stay and we are going, this Company is positioned to be a great Company in the future, and I know I personally am going to be buying some stock as soon as I can, next week.

Thank you.

Thanks.

Your next question is from the line of Sherri Scribner with Deutsche Bank.

Thank you. I think looking at your filings, it seems like you have a credit facility that is coming due at the end of December. I don't know if that is correct. I think it is $500 million. Are you in the process of renegotiating that, and what are your expectations for that?

Yes. You are correct. Our bank facility expires at the end of this quarter, and we are in the midst of replacing that with another facility.

That facility was put in place three plus years ago, when we had not only the MS business, but we also had working capital financing needs for our personal computing business. So given that business is no longer part of the Company, and so forth, we do anticipate downsizing that facility, and we are in the middle of doing that right now.

And we have a high confidence that will be put in place pretty soon.

Okay. And then you mentioned a number of times how you have a lot of cash on the balance sheet, and a number of options for using that cash. What amount of cash do you need to run your business? I guess is one question. And then as part of that, are there certain covenants about how much cash you need to keep on your balance sheet, covenants on your debt?

Let me answer on how much money we need to run the business, and I will turn it over to you David to talk about covenants. First of all, Sherri, if this was a private company, I could run this company probably with a couple hundred million dollars worth of cash. Being a public company, and the comfort that we all feel, it is probably around $400 million. So that will be the comfort zone that we have.

Okay. Is any of that in foreign countries that is harder to get at?

Sure, let me see if I can address that question and the other one as it relates to covenants. First of all we have no covenants that require minimum cash balances on the books of the Company.

As it relates to where our cash is positioned, as we have gone through a transformation of the Company over the last five years, locating more and more capability in place overseas, our cash has necessarily gone there with it. That is where the Company today operates, and that is where our cash is generally generated and consumed.

There are periods of time when we need to move money from one place to another, and we work through the mechanics you might say of making that happen, and to date we have not had any issues in being able to move our cash around the Company tax efficiently without cost, as evidenced by the fact that we have taken out debt over the last couple of years, and have not really incurred any friction costs, to speak of, in doing so.

Okay. The question is more aimed at does that increase the $400 million that you think you need to run the business, if you have cash in other places, or is it still somewhere around $400 million?

I think it would still be the same. I will add one other comment to it. We have been working on some other strategies in the Company, that are going to ultimately form a basis, a new basis for how the Company is legally organized, and when that is completed, our cash will be much more concentrated, you might say, in one geography. It is going to simplify that.

If I can quickly follow up on the buy back, do you plan to -- what is your timing for that buy back? Is that something you would anticipate doing immediately in this next quarter, you would do the 10 million, or is that something you would see doing over the next year?

We will be buying some this quarter. We just have to set up the procedures, and make sure all the legal stuff is done. And as soon as that is done, we will start buying immediately.

Thank you.

Thanks Sherri.

Your next question is from the line of Joe Wittine with Longbow Research.

This is Joe Wittine for Shawn Harrison. With regards to the components business, you mentioned earlier that maybe margins did pick up, although to a lesser extent than you saw them pick up in the EMS business. But I am hoping you could just provide guidance on what utilization rate is right now in Components?

I will give you for the whole company. First of all, let me give you two different ways. If you look the -- just did an analysis on it yesterday, if you look by the people on our EMS we are running about a 98% utilization rate, based on people. On components it is about 95%. So we cut down exactly to what we need. If you look at it based on equipment, EMS is probably around 70%, and Components probably around 75%.

Okay. That is helpful. And moving along, in light of the projected slowdown that you are seeing, especially in the December quarter, you mentioned that large scale restructuring efforts are off the table, but do you have any smaller actions planned for the quarter? One of the components manufacturers today on the call mentioned that the EMS channel could see some extended holiday shutdown. Are you forecasting anything like that right now?

In our operations, let's say here on our campus we have three or four factories, so sometimes you combine two into one, things like that. So we don't have the major, everything that we are going to do this quarter and next quarter, or next three quarters, it is something that will immediately benefit, just what I call tuning operations. So the major write-offs, at least what we see for the next 12 months for us are basically no.

Okay. And then just lastly if I could. I think in the prepared remarks in the beginning, you mentioned that the Defense and Aerospace business has declined a little bit. That is the first I have heard of any weakness there. Can you provide any kind of detail on if that was moreso a disengagement, or if it's any kind of weak (multiple speakers) --?

I wouldn't say that market is weak. It just depends on the customer base, how much they take quarter to quarter. If you look at that business for us, they grew nicely year-over-year. So it is still a strong business for us, and it is also a business that we are driving very hard to grow.

Okay. Thanks a lot.

Operator, we have time for one more question.

Your final question comes from the line of Kevin Kessel with JPMorgan.

Hi guys.

Hi Kevin. We saved the best for last.

I just wanted to see if you could maybe update us in terms of the Components business today, what percentage of the Components business that is sold, is actually internally sold to Sanmina? And how would that compare maybe versus a year ago if that is easy to do?

I don't have a number, but I would say right now two-thirds would go outside, and one-third stays internally.

Okay. So that is actually rather high, relative to maybe in the past. I know your PC business obviously distorts it, or makes it go up a little bit.

[It throws you a little bit, so it gives you -- maybe looks a little bit better]. But it's -- Our biggest customers in our Components business is really the outside customers. When you qualify for major programs, let's say advanced printed circuit boards, you are building a 20 or 30 layer board, you will build some for all of our major competition, you will build some for Flex, build some for Jabil, Celestica, and so on, so that is how these programs work.

So to us it really doesn't really matter who we build it for. When we build for our competition or internally, we treat them the same, because those businesses have to be self-independent, they have to be profitable, and they have to be technology leaders. Otherwise no need to keep them.

I understand. And when you talked about the margins you said they were up slightly but below corporate average. Are you talking on the operating line?

Everything we do is really gross margin. It is really hard to bring it down to the operating line, because of the way we are structured.

Because of the way it is structured. So they are profitable on the growth line, but would you venture to say they are still profitable all of the components divisions, on the operating line as well, I know it is tough to slice and dice?

As a bucket, Kevin, they are profitable, but of course we have a few operations there, they are still not making as much -- or they're losing let's say, a few bucks, but as a group, as a division, they made money.

Okay. And then just on the overall cash flow, I apologize if you said this already, because I joined the call a little late, because I had an overlapping call, but what I did hear you say, I thought, was that next quarter, or December quarter, you expect $50 to $100 million in free cash flow, and $200 to $300 million in free cash flow for the full fiscal '09?

That is correct.

And you said that of that break down of the $200 to $300 million, you said $80 to $100 million was coming from asset sales, and $200 million from operations?

About $200 to $220 million from operations, the way we estimate today, and about $80 to $100 million from asset sales.

And I think I heard David say that a lot of that would be working capital driven, or that is the expectation today?

Certainly. It would be a component of that $200 million plus piece out of operations, yes.

So the $80 to $100 million I am wondering about? When you say asset sales are we talking about any parts of your Components business that you might potentially decide to sell in the upcoming year, or is this just real estate?

No. These are strictly -- the only thing that is for sale here, is our -- some of the empty buildings that we have on the market. These are the buildings that we used to do manufacturing, that we exited them, and they are basically in Europe and here in North America.

That is real estate strictly?

That is correct. We have got some if you want to buy some.

We will make you a deal.

I think there is a lot of real estate out there potentially for sale. So you will have your work cut out for you.

These are good deals.

Well, maybe we will see what happens. Anyway, I appreciate it.

Thanks.

Thanks.

If we didn't answer everybody's questions, I apologize but we are available. Give us a call, and we will go from there. Thanks a lot.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.