Sanmina Corp (SANM) 2010 Q2 法說會逐字稿

Good afternoon. My name is Kristin, and I will be your conference operator today. At this time I would like to welcome everyone to the Sanmina-SCI second quarter fiscal 2010 earnings conference call.

(Operator Instructions).

Thank you. I would now like to turn the call over to our host, Ms. Paige Bombino, Director of Investor Relations. Please go ahead.

Thank you, Kristin. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's second quarter fiscal 2010 earnings call. Today's call is being recorded, and is posted along with a copy of the earnings release, and a slide presentation on the quarter at www.Sanmina-SCI.com in the Investor Relations section. You can follow along with our prepared remarks on the slides posted on our website. Please turn to slide two, the Safe Harbor statement. During this conference call we may make projections or other forward-looking statements regarding the future events or future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operation may differ significantly as a result of various factors including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change.

We refer to you our documents the Company files from time to time with the Securities and Exchange Commission. These documents contain and identify 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 with you a statement of operations for the three months ended April 3, 2010 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 and is posted on our website. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, gains or losses of extinguishment of debt, noncash 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 the 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 you our non-GAAP information. I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you for all being here today. Joining me on today's conference call is Bob Eulau, our CFO.

Good afternoon, everyone.

Hari Pillai, our President and Chief Operating Officer.

Good afternoon, everybody.

So on today's agenda, we have for you that Bob Eulau will review our financial results for second quarter fiscal year 2010. Then I will follow with some comments relative to some (inaudible) results and future goals. Then Bob, Hari and I will open for Q&A. And now I would like to turn the call over to Bob. Bob?

Thanks, Jure. Please turn to slide three. As you can see, we had another solid quarter from a financial perspective. Revenue of $1.53 billion was up 3% on a sequential basis, and up 28% over the second quarter last year. This is at the high end of our guidance of $1.45 billion to $1.55 billion, and follows the December quarter, when we had 9% sequential growth. The revenue growth coupled with the restructuring and other cost reduction actions completed last year, led to an additional 20 basis point sequential increase in gross margin to 7.8% on a non-GAAP basis. This implies a contribution of 15.8% on the incremental -- on the incremental revenue, which was a little better than the range of 10% to 15% that we had expected. As an aside, while there has been some variability by quarter, our contribution margin over the last 12 months has been 14.7%. Accordingly, we believe that a 10% to 15% contribution margin over the next few quarters, continues to be very achievable. Non-GAAP EPS was at $0.29 per share, this was based on 82.8 million shares outstanding on a fully diluted basis.

Please turn to slide four. I will start by making a few comments on the GAAP numbers. For the second quarter, we reported a GAAP net income of approximately $10 million, which is equal to $0.12 per share. The decline in GAAP net income from last quarter is primarily related to the one-time benefits that we received last quarter. Restructuring totaled $3.9 million for the quarter, which is up slightly from $3.3 million last quarter. We will continue to see some minimal restructuring charges on our GAAP P&L of approximately $3 million to $4 million per quarter, that relate to the cost for past restructuring actions that are booked as incurred in accordance with GAAP. These expenses primarily relate to real estate, which is held for sale. We expect these expenses to decline over time as properties are sold.

My remaining comments will focus on the non-GAAP financials for the second quarter. At a $119.5 million, gross profit was up 7% over the prior quarter. Gross margin came in at 7.8%, which was up 20 basis points from the previous quarter. Part shortages continue to be a challenge for the quarter, but our operations team did a good job mitigating the impact on the P&L. The gross margin for the components businesses continued to make favorable progress, and is approaching the corporate average. We expect the favorable trend in the components margins to continue in the quarters ahead, and this trend will ultimately contribute margins significantly higher than the corporate average.

Operating expenses were relatively flat for the quarter, at $63.5 million. At $56 million, operating income improved by 15% over the prior quarter. Operating margin was 3.7%, which was a 40 basis point sequential improvement. The tax rate for the quarter came in at 20.3% of pre-tax income. This was lower than expected for the quarter, and we now expect a tax rate for the year to be around 21%. We believe that we will see our tax rate in the 18% to 20% range for fiscal year 2011. On a non-GAAP basis, we earned $24 million in net income. For modeling purposes, I want to mention that depreciation and amortization were $21 million, and that EBITDA for the quarter was $76 million.

Let's move to slide five. Here we're showing you some of our key non-GAAP P&L metrics. The revenue trend has been very strong the last three quarters as we moved out of the recession. We bottomed out in Q2 last year, and revenue has climbed 28% since then with 3% sequential growth this quarter. Gross profit has shown strong improvement since Q2 of last year with growth of 69%. Compared to Q2 of FY 2009, gross margin has improved from 5.9% to 7.8%. We believe this demonstrates how well positioned our cost structure is for the coming quarters. While revenue and gross profit have grown significantly over the last year, our operating expenses have remained well controlled. With relatively flat operating expenses, and strong gross profit growth, operating profit has grown even faster since the second quarter of FY 2009. In fact, it is up almost five times what we reported in the second quarter last year. During this period, the operating margin improved from 1% to 3.7%.

I would like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $673 million. Cash was down, primarily due to the increase in revenue which occurred late in the quarter affecting accounts receivable. Additionally, the second quarter includes a semi-annual interest payment of $38 million. Cash flow from operations was negative $32 million. Capital expenditures were $22 million for the quarter. As the Company grows quickly, we have plans to minimize our working capital requirements. We will talk more about the working capital metrics in a moment. We also have property on the balance sheet, which is listed for sale. The total value of this property is over $160 million. We are patient in selling the real estate, given market conditions, but we are scheduled to close on one property this week, which will generate approximately $21 million in cash. We're very confident in our estimate that we will bring in, between $30 million and $50 million in cash this year from the sale of real estate.

Let's turn to slide seven, to discuss some of the balance sheet metrics. I have already discussed cash, which remains strong, given our potential cash needs. In our business, inventory is a key focus. It is a challenging area, as the economy has improved and parts shortages have persisted. Our inventory turns remain the same, but frankly, we had expected to improve. We still have room to improve, and our goal is to get up to at least eight turns within a few quarters. In the lower left quadrant, we show our cash cycle days, which combine our cycle time for inventory, accounts receivable, and accounts payable. Inventory days were roughly flat, as they move from 51.4 days last quarter to 51.7 days this quarter. We saw an increase in day sales outstanding from 43 days to 46 days. This was primarily a reflection of more shipments later in the quarter, than in the prior quarter. Accounts payable was favorable, as it increased from 54 days to 56 days. Overall, cash cycle time increased from 41 days last quarter to 42 days.

Finally, the most important measure for us, is return on invested capital. We have made outstanding strides in this measure over the last four quarters. We believe this is the most important measure in demonstrating our ability to add value to our share holders. While we are pleased with an ROIC of 15.4%, we believe there is still room for significant improvement through both margin expansion, and better asset velocity.

I would like to make a few comments on our capital structure. In spite of the cash decline this quarter, we remain very committed to reducing our debt over time. With the operating momentum we currently have, we have looked for ways to improve our balance sheet and liquidity on a global basis, while simultaneously minimizing our taxes paid. With this goal in mind, earlier this month we closed on $100 million expansion in our asset-backed facility, which provides for additional liquidity as we grow. The total amount of this facility is now $235 million, with immediate availability of about half that amount. We will begin to use this facility to fund growth outside of the United States.

We have also put a new debt facility in place in China, to help fund our working capital requirements in the China region. The China facility starts at $50 million, with the capability to expand to $100 million over time. As we have stated on previous calls one of our key goals for 2010 is to reduce our overall leverage, while maintaining the necessary liquidity to finance our growth. We will continue to look for opportunities to optimize our capital structure, and strengthen our balance sheet, so we can pursue the growth opportunities we see from a position of financial strength. At this point, I will turn the discussion back over to Jure for more comments on the business and our guidance for next quarter.

Thanks, Bob. Again, good afternoon. This -- this is the fourth consecutive quarter of improved results. The Company is making good progress, and the future is more promising as Bob mentioned. And I will be talking more about it later. But now, could you please turn to slide number eight. What I like to do now, is really talk about our end market demand for the -- what happened in the second quarter. As Bob mentioned, revenue was $1.53 billion. Communication, which includes networking, wireline and wireless infrastructure, represented 34.8%. That was up nicely, up 7%. And we do expect to see growth in the third quarter in our communications side of the business. Enterprise computing, which includes servers and storage, high end, represented 18.2%. That was down 10% on a quarterly basis, and was mainly driven by a couple customers. But if you look at the forecast for the rest of the year, we think this was mainly seasonable, downturn there, and we do expect third quarter to be moving in the right direction.

Industrial, defense, aerospace and medical represented 26.3% of our revenue, and that was slightly up 2%. One area that was down in that market -- was a defense business -- was down, mainly by couple projects, bigger project. But if you look at what the forecasts are again, the booking for defense market was pretty strong. And we do expect this bucket, also to be up in the third quarter, or defense, could be flat or slightly down. Multimedia represented 20.7% of our revenue, and that was nicely up, up 14%. Multimedia for us includes gaming equipment, set-top box, cinema cameras type of equipment, point of sales systems, and automotive. We also do expect that business to be expanding in the right direction in the third quarter, and for the rest of the year. In the second quarter, Sanmina-SCI had one customer over 10% of revenue. And our top ten customers represented 50% of our revenue. So, we continue to diversify our customer base, and the markets pretty nicely.

Please turn now to slide number nine. Now I would like to talk to you about market opportunities. First of all, what a year a year makes. The market is definitely growing. We are gaining a lot of confidence that the demand is real, visibility good, and most importantly, is getting better. We're more optimistic now about the demand that we see for the rest of the calendar year 2010.

So the outlook for third quarter is following. Revenue, again, continued to expand, $1.55 billion to $1.65 billion. We also expect our gross margin to move -- to expand in the right direction, of 7.8% to 8.1%. Operating expenses should stay about flat, about $64 million. Operating margin should continue to improve to 3.8% to 4.1%. Interest expenses and other should be about $27 million. Depreciation and amortization, about $22 million. CapEx, would be about $30 million. We did spend about -- in the first quarter about $13 million, second quarter about $22 million. And I said now, for third quarter we expect about $30 million Tax rate, 21% for third quarter. And as Bob mentioned, we expect that tax rate to -- especially in 2011 to move down. And we should have approximately diluted outstanding shares about 84 million. And we also forecasting non-GAAP EPS to -- to expand to $0.30 to $0.36 a share.

Our customer base is solid, and we're continuing to provide industry leading solution to our customers, focusing on our high value add. We're growing and expanding relationships with both our existing and new customers. Market continues to drive a lot of opportunity for us, as we can see the bookings so far as being very strong in the second quarter. Book-to-bill for second quarter was 1.15 plus to 1. Also, during the quarter, we saw a lot of new wins, and we believe that will continue to be strong in the rest of the year. And we also forecasting for the third quarter, to be bookings to be nicely up also. So bookings are very -- very critical, especially as you guiding for a future. So it is good to see that they are -- that things are moving in the right direction.

So now, could you please turn to slide number ten. As you can see, we did a strategic acquisition. We have been actually working on this project for almost a year. We have been expanding into the optical capabilities in last couple of years, and Sanmina is well positioned. But to really take this capability to the next level, we felt that we needed this acquisition. And most important, this acquisition brings a lot of technology to us, in RF and micro -- micro-optical electronics. Combination of this operation of Breckenridge and Sanmina, will allow us to really provide our customer end-to-end best optical solution in our industry. Also, this organization brings to us a very strong engineering and leading-edge technology, some great people. And also we gaining some great customer base with first year revenue potential of $250 million to $300 million. And, again, financially, this was the right opportunity at this time.

So if you just look at the slide and you look at technical capability, what this operation is brings, as I mentioned earlier, some leading edge capabilities. We get involved in early stage of product development, and then take it all the way through manufacturing by providing our customer with some unique component capabilities, both in RF, microwave and optical applications. Today we are doing some product in this operation, up to 100 gig speeds. A lot of capabilities in multi-chip module solutions, and also, a fair amount semiconductor packaging, especially for high-end speeds in RF and optical. Again, if you will review this acquisition, what this really does, is it brings us the leading edge, high-end capabilities, and we believe this type of capability should help us grow our communication, medical, defense and aerospace markets. Again, very, very exciting opportunities for us.

So in summary, our strategy is working. Again, based on our current demand, visibility is good. Things are looking up for us for 2010, and we feel a lot more comfortable what is in front of us. Today, we are focused on sustainable margin expansion. And this will drive us to diversify our customer base, and also the markets that we serve, focusing as I mentioned to the higher value add services, including high end printer circuit boards, backplanes, mechanical which includes enclosures, machining, plastic, optical modules and memory modules.

Eighty percent of our revenue is manufactured in a low-cost region. That is very important because only a few years ago, that was completely opposite. So we're well positioned today, in global present, to compete basically with anybody in the market that we are focused on. We're also well aligned with our customer base. And we're very valuable partner to our customer in this growth technology markets. Again, we feel confident about our strategy. And now, I would like to thank all of you for joining us on this call today. We would also like to thank to our employees for their hard work, dedication and support. Operator, I am now ready to open these lines for questions and answers. Thanks, again.

(Operator Instructions).

And your first question is from the line of Jim Suva with Citi.

Thank you, Jure, and congratulations.

Thanks Jim.

A quick question. I believe in the past, you have been discussing about getting to gross margins of 10%, and operating margins of 6%. And clearly, you have been making great progress in the right direction. Two questions on these, on this topic. First is, what type of top line sales do you think you need to get to that? And secondly, and maybe even more important, can you help us understand why you think you can get there, yet the rest of the industry is nowhere close to it or maybe a few of the niche players are, but still struggle to get there. Why wouldn't the competitive bigger vertical EMS companies look to prevent you from getting to those type of extremely robust numbers?

Okay. Well, Jim, excellent questions. As you know, at (inaudible) conference, I think at September of last year, we talked about these forecasts at that time. We felt that the recession was behind us, and the Company was really positioned for the growth. So, we -- with that now behind us how do we get the margins? First of all, we went through major restructuring, and Company today is well positioned. I think our cost structure is right. As I mentioned few seconds ago, 80% of our revenue today is manufactured in low cost region. Where old Sanmina that was completely opposite. All our plants were North America and Europe. So I think we have the right structure in place to really build on. We are going to continue to work on improving our mix.

That is going to help us. Revenue growth, we have -- we think what we have in front of us, we have been very successful positioning in company in a down market for customer expansion, winning new programs, being involved in unique technologies. And this acquisition that we're just talking about, is the type of acquisition that will help us, you know, improve those margin, and help us get to the margins that I'm talking about. Because we are really focusing today, after the projects, that allows us to do that. We have a different strategy today than before. And if you really compare us to a smaller players, I think the smaller players have advantage sometimes because there are a lot more focused on the unique requirements, unique customer markets, what allows them to deliver the better margin and historically you seen that. So why Sanmina can get to -- to six plus operating margin.

First of all, I think you -- we've shown in last three quarters, that we're moving the right direction. As I said, our first step is to get over the 4% operating margin, I think we are close -- close there. We are forecasting next quarter to be between 3.8 and 4.1, and our job is to make a nice improvement. But the longer term, I think if you just see the type of product mix that we go after, that as our revenue grows there. As we get to the revenue $1.8 billion to $2 billion, and probably I would say right now is $1.8 billion to $1.9 billion, I don't think we need two to to get there. We can get there. That's not having a huge improvement on our component capability -- result. As a -- as we have seen in last couple of quarters, our components margins been improving. And as we get those margins to delivering the numbers, based on what they should be delivering, then getting to 6%-plus margin, it should be easy for us.

So, to answer the rest of your question, why bigger guys cannot prevent us from that. I don't -- I have been in this business for many, many years. I think if you look at the big guys, even on the products where we compete head-to-head with them, they are delivering just as good margins on those products as we are. I think it is where you focus. I think our focus is to be a different Company today. We going to expand based on a product that we adding a lot of value to our customer, and with our solution, that we offer to our customer allows us to make this better margin. And in our component businesses -- I mean, you have to make a lot better margins than -- than a 10% gross margin. Otherwise you can not be in this business long-term. So, we feel more confident today, Jim, about hitting our 10% gross margin plus, and operating margin 6 plus, and deliver in ROIC over 25% long-term than ever before.

Great, thank you, and congratulations, Jure.

Thanks.

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

Hi, William.

Hi, Jure, how are you?

Great.

Did I hear correctly when you were talking about the book-to-bill I think I heard a 1.15 in the quarter?

Yes, that's correct.

A little better than that, but I'm not trying to be too scientific. I'm trying to square that with your revenue guidance.

Okay.

Perhaps when you talk about book-to-bill, you're only talking about firm orders that are due in a very short window? Or perhaps there is something I don't understand about the way your business operates. But it just seems odd to me, to post 1.15 book-to-bill, and guide revenue up only 5% sequentially.

Let me give you an example. I am calling our bookings for next quarter, for defense, to be flat down. But our book-to-bill this quarter was actually 1.2 to 1 in our defense business. Because some of these projects when you book the business, they are scheduled to be shipped the next 12 months.

So it is the window --

So it is not always specifically in the quarter. But even if you look at our guidance, that is still a 20-plus percent growth rate year-over-year.

Okay. How on average, perhaps, how far out does your backlog extend then when you consider something booked?

We only -- in our backlog, the rules are very simple. It has to be scheduled for shipment.

How far out does that extend?

Typically 12 months.

Okay. Very helpful. And then one question, if I can turn to Breckenridge for a second. Can you give us a little bit of detail as to how this if its into your strategic objectives? And in particular, can you talk a bit about the customer base? I think you mentioned this driving a leadership position in optical, in optical components or optical transceivers perhaps. I know JDSU is a big customer there. Is that complementary to that or is this competitive to that potentially?

No, it is complementary to what we have already been doing, as good -- but two years ago -- well, I actually got an optical, Hari, help me.

About a year ago, we announced the transaction with JDSU. But before that -- Before that in 2002, a deal with ALCATEL.

So that was our foundation. Let me start it up, and Hari I will turn it over to you, and see if you can give him more color on it. It was strategic for us to expand in a unique capability, just like we -- when we talking about high-end printed circuit boards. high-end backplanes, high-end mechanical. We are trying to create a niche where we believe that we have a competitive advantage, and the value that we need to invest -- that our customers are looking for.

If you look at our customer base where we delivered the revenue, these are all high-end. It requires a lot of value add. Optical view, especially if you look at the communication infrastructure, the defense and aerospace industry, those too, and some medical and some industrial, there is a lot of demand for the -- for this optical type of capabilities. So, had it been looking to expand this over a year, as I said, this Breckenridge project started over a year ago, and we worked on it for a long time. This is a venture-funded type of operation. And when the venture guy didn't put enough money in this operation. then it really became a -- more -- more sense for them to really partner with somebody like -- like Sanmina. And they have a great customer base.

I don't really like to comment on a customer base here for confidential reasons. But definitely, this is a solid customer base, that we can build on. As I said, first -- first year revenue forecast $250 million to $300 million, but I -- as a second year goes on I really believe we can grow and expand. So it is a -- it is a good fit to what we have, and really puts us in a -- in a strong leadership when it comes to optical. On top of that we're really looking this other technology of this company brings, really the multichip module, a lot of micro RF and optical, a lot of, semiconductor packaging, that I believe that we can expand these areas. So I am personally very excited. Hari, anything else you want to bring up?

No, Jure, William I think it builds definitely on the strategy we have been sticking with over several years, from the Alcatel electronics transaction we did, and then the JDSU and to build up that thing. I would -- the number one reason that we wanted to -- to do this transaction was the engineering strength. The engineering strength in optical electronics and RF, that is applicable across all of our vertical markets. From wave guides in the defense and aerospace business, in our optical communications business, in our medical business, so we have a wide range of areas that we can use as capability. As Jure mentioned, the -- we -- it is also nice to have the rest of the the numbers line up and everything like that. So it really -- everything kind of coming together, great technology play. By the way, some good customers, and nice business that will be accretive next year -- accretive next year.

And a quick clarification, the quarterly revenue you discuss is any of that included in the current quarter guidance? Or is there potential upside?

There is a -- some potential upside. But in this quarter we probably expect no more revenue from that,than maybe four weeks of it.

Got it. Thank you very much.

It wouldn't be material.

Yes.

Thanks, William.

Thank you.

Your next question is from the line of Louis Miscioscia with Collins Stewart.

Hello, Louis.

Hey, Jure. How are you today?

Good, good.

Good, thanks. Maybe you could go into a little more detail. You had mentioned that component shortages -- what you were seeing was a little short out there. And also obviously since you are a component provider, is it -- does it also fall into the stuff you're delivering?

Okay, I will turn it over to Hari.

I think we're seeing component shortages. We have seen component shortages last quarter as Bob mentioned. We probably had the -- the fundamental capability to go a little higher. And to have smoother asset -- smoother linearity through the quarter, resulting in better asset management metrics. So, we did see some. But again we -- it is our culture not to allow those kind of things to affect our performance the our customers. The areas we have seen it, it pretty broad. Naturally you would see them tending to concentrate in the silicon-based areas, the more advanced technologies as opposed to a mechanical type areas. From our business, we -- we see strength. As Jure mentioned in the book-to-bill ratios and we obviously get leverage from our cost structure and hope to perform better in the future.

Were you all tight on delivering stuff yourself? Or did you basically meet the demand that came in from clients with your component businesses?

You talking about our own components like printed circuit boards and --

Yes, exactly.

Go ahead.

I think -- we in general performed well for our customers. I think from our component side, I wasn't aware of any major supply constraints. I think from a -- our overall business we could have probably done more, a little bit better.

Okay. So switching back maybe to something, Jure, that you had commented on in your opening remarks in the new wins. In the past from time to time, you have talked about dollar amounts there. And obviously it looks like fiscal 2010 is going very well for you all. Can you give us any dollar amounts of wins you had, and also maybe when we might be able to at least have an understanding of possibly fiscal 2011 type of growth from the wins you're get this year?

Yes, okay. We used to share that during the -- the recession period, where things were really, really tough out there. And I felt at that time that we had to share a little bit more, even for competitive reason, was always against my personal policy not to share that much information. So, we not going to share that at this time. As I told everybody last quarter, we're going to stop doing that. But I can tell that you our book-to-bill is getting very strong, and that's the key. If you ever worked in manufacturing you always want to be booking more than you're shipping, so you can that you can build a backlog in the longer term, be shipping more.

As I usually don't forecast the bookings for the next quarter. But what we see today, we believe that the bookings will improve over the second quarter. So assuming that -- let's assume that the economy, well, I think the economy is going to be okay right now in 2010. Let's just assume that that continues to improve slightly, I believe 2011 is going to be a great year for us, based on opportunities that we have in front of us. Fundamentally, well, new business -- first of all, I always believe in taking care of our existing customers. That is the most important business. I think we're well positioned to expand those, and win the new programs with our existing customers. But also we're being really successful adding new customers, especially in the unique markets, industrial, medical, defense side of the business.

Okay. Just one quick clarification. When you talk about the book-to-bill, you mean your entire revenue of Sanmina, not just the component portion?

No, this is entire revenue that's what I'm talking about yes.

Okay thanks guys.

Thanks, Louis.

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

Hello, Sherri. Hi, how are you, Jure, Hari? I just had a few quick questions. One, in terms of the top customer -- obviously there is one customer greater than 10%. Is that the same customer you had last quarter that was greater than10%?

Yes, it was, it is the same customer.

Okay. And then in terms of the guidance for the four segments, you seem to be implying that all the segments would be up sequentially. Am I understanding your comment correctly?

That is correct.

Okay. And then in terms of the server business, a little bit weaker than I would have expected, down 10% you said a couple of customers there. I was just wondering if there was any additional detail you could give.

Not much there. I believe it is more seasonality issue there for us. You analyze those customers, that we expect those customers for year to be up. I think it was just a timing issue for us.

Okay. Let me just ask one quick follow-up. On the CapEx guidance, your CapEx is up a bit. I know in the last call, you talked about that you have plenty of capacity. I think you said you have about 70% utilization right now. So I'm just curious is that for a specific project, or growing the optical business, or why is CapEx ticking up a little bit here?

As you can see we only spent $13 million in the first quarter, and $20 million in second quarter. The reason actually that we are expanding our capacity in China and India. We won some new projects in both of those regions, where we have to manufacture in those region, especially in India. And we adding the -- few more capabilities in those two regions.

Okay, great, thank you.

Thanks, Sherri.

Your next question is from the line of Christian Schwab with Craig Hallum Capital.

Hello, Christian.

Hey, how are you?

Great, great.

Good. Good quarter. I jumped on the call a little bit late. So -- I apologize if you already hit it, but does the components business -- I think you highlighted that gross margins were approaching the corporate average currently? Is that correct? Did I hear that correct?

They are slightly below, I said that as we made a nice improvement in the last quarter, but they are still slightly below. Now let me -- what we call component business, printed circuit boards, backplanes, enclosures. What we call mechanical, but under the mechanical we have enclosures, plastics, machining. And then we have a -- optical modules and then memory modules. So there are about six -- what we call six key items in the components. Three out of six are above the corporate average. And but -- three are below. But overall it is slightly below.

Perfect. Did you broke out what revenues were in the quarter for the components business?

No, we don't break that.

On a percentage basis, how much greater do they need to be to target at least 10% gross margin from the current revenue run rate?

I was just -- no, the first question was so, you were actually late. We believe that just by the -- by the growth -- first of all, with good cost structure in place that we have, additional revenue growth, better mix that we believe is coming -- because as we're diversifying the market, and the customer base, we are improving the mix. That alone, the growth alone can get us to 10%. Even if the components just stay the same, didn't improve at all. Okay. As the components improve, which we're driving to improve. And they will improve, because what happens, it is important to understand some of the key components especially printed circuit boards, backplanes, and mechanical, all those are moved from North America and Europe to the low cost regions.

And now we're -- it is really all revenue driven. As we drive the revenue up there, those components have no doubt will get the industry margins. It is going to take some time. But we can even get there without components, getting to the number. As we improve the components, that is what I said earlier, Christian, is that we have a lot more confidence today, hitting our 10% gross margin, and 6% plus operating margin than we had when we first start talking about 10 and 6

Fabulous. And then, -- and then just regarding, since you mentioned it, the migration of manufacturing to, lower cost regions, are the yields for the new workers optimal yet? Or is there still room for slight improvement?

Well, first of all, every time you move the high technology product, you assuming you asking about component dealer business. From no matter what, from high cost to low cost, we moved everything from North America and Europe, into the Mexico, and China and other parts of southeast Asia, it takes time to get the type of capabilities like we had. Because some of these factors were operating in North America for over 25, or Europe for 25 or 35 years. It takes time to get those capabilities up there. But I'm telling you today we have one of the best leading capabilities in high technology printed circuit boards in Malaysia. We expanded it in China. If you look at the Singapore, you look at the mechanical capabilities that we have in eastern Europe, Mexico, those are the leading edge capabilities. So, we feel very -- very confident there what is in front of us. Now it is all about driving the revenue.

Right. Right. And then my last question. And, again, I apologize if you already hit it. On inventory turns, Bob, I know you haven't been there all that long, is there still room for any improvement on inventory turns regarding cash generation?

Yes, we definitely think there is room to improve. We have been at 7.1 turns each of the last two quarters, and our goal is to get to eight. We're plagued by the parts challenges right now, but I think the team feels like we can get to eight, and beyond.

Perfect. And my last question, did you quantify the impact of the parts shortage on the quarter?

No, we did not. We probably could have done a little more but we didn't actually quantify that.

Would you like to?

No. No, we will pass.

We're getting used to it right now. I think it is going to be, Christian, shortage this year through the rest of this calendar year. Hopefully, it will improve every quarter. Right now, we work very close with our customers to, hopefully, there is no impact, but it is just a lot harder work and there is impact. Believe me, our supply chain guys and ladies working a lot harder now than they did last couple of years so.

Great, appreciate it. No further questions, thanks.

Thanks Christian.

Your next question is from the line of Shawn Harrison with Longbow Research.

Just a few follow-up questions on the components business. What was the capacity utilization rate this quarter?

We don't break those out as components. We give it as a Company. We, as we said based on our people as a Company, we're 85% to 90% based on equipment, runs approximately, 70, 75, and based on space about 60%. So we have plenty of space, as we restructure the Company, Shawn, around the world, we want to make sure we have plenty of space for growth. So only thing that we have to add is people, first and then equipment afterward. So we have plenty of capacity.

Okay. But suffice to stay with gross margins in some of the component operations running below the corporate average, they may be below that number.

Like I said, I'm not making comments on that. I think what I -- I think if you're going to look at our component business you got to look at the facts. The facts are number one. It took us long time to restructure. We -- we finished that. The restructuring was done about nine months ago and all of the factories that we have. Right now it is all rebuilding back again. And if I didn't believe that we can deliver the leading -- leading margins in each of our component businesses, this management will exit those businesses immediately We believe that we have a road map how to get there. And we -- and we are making improvements on quarterly basis. And that is why you see the margins moving the right direction and they will continue to move in the right direction.

Okay. In terms of Breckenridge, I think I caught a comment that the deal would be accretive to earnings within the first year. Does that mean the deal isn't accretive out of the gate? And then what should we expect in terms of normalized gross margins above the corporate average, in line? Maybe if you could just elaborate on that a little bit.

First of all, the deal, we just signed a definitive agreement, Shawn, on this thing. Definitely, we believe this type of business allows us to deliver better margins than corporate, and longer term substantially better. The type of product requires to be better, because it is -- it is a different product than typical EMS product. So that -- and that's why we expanded in this optical side of the area. And we hope that -- if you look at our optical capabilities, we will have over $500 million, $600 million capabilities right now. And can be a $1 billion dollars business in a couple years. So it is a definitely different model and a lot of better model than typically EMS model.

Okay. And then one final follow-up question. Given the challenges, and managing the components supply chain right now, do you think you will get back to free cash flow break even in the back half of the fiscal year? Or is it something where you will still be burning maybe a little bit of cash given the component challenges?

Okay, Bob?

So, we aren't giving specific numbers on cash flow. As we're growing, it is hard to forecast as I know you're aware. We're still very confident that cash flow from operations will be positive for the year. And I guess that means second half is going to be in pretty good shape.

Okay. Thanks a lot, and congratulations on the progress.

Thanks Shawn.

Your next question is from the line of Sean Hannan with Needham & Company .

Good afternoon.

Good afternoon.

So this is kind of going back to some of the program wins, you guys have talked about it a good bit. We're looking up 5% sequentially in June. There is a way perhaps Jure or Bob or Hari talk around, just how to differentiate what might be the uptick in the quarter in your business, specifically for -- what the fair balance is between organic program rebounds, versus new program wins that are actually wins that are actually coming on? When do you actually see the rebound having less of an impact here, versus then kind of switching over on your top line, and driving the growth through really more of a win orientation?

Well, first of all, Sean, I don't think we will share that information on this call exactly. Because first of all, we don't have the exact information let me make sure that is pretty clear. We have a -- approximately -- first of all, our customer base is a base that my opinion is at least a $2 billion run-rate base per quarter. So at least $8 billion run-rate. We're not there yet. Okay? I think definitely, our customer demand, most of our customer demand is up. It -- as you know, I think we're very fortunate during the downturn in 2009, that we're able to win the new programs with existing customer base that were very critical for us for the future. And that's what you are seeing today. A lot of the expansion is of course coming from the -- new programs that we have with existing customers and new customers. And that's kind of a normal process. If you don't have a new project, new programs, you're not going to grow at all.

I think so, we -- I think we did a reasonably good job in 2009, from that point of view. So far this year, I think we have been fortunate that we're able to win some critical programs to our future. The programs -- that all programs that we have, and they now turning to be a new programs with existing and new customers. So a lot of positive stuff from that point of view. And really, that's what is really driving the growth. Of course economy has to cooperate. And if I look at the risk in our model today, is strictly economy, because all the hard work is done. All the restructuring, all the layoffs, the major layoffs that you see today were -- my management used to fly all over the world shutting the plant down, holding customer hand, all that hard work is now behind us. I think today we're back into the -- what we're good at is running our operations. And we starting to have fun again. And let me leave it at that.

Sure. I think that is helpful. If I understand correctly I think through the color you provided, the vast majority of what we're seeing in terms of the top line is -- is more rebound oriented, whereas the expansion activity, that you have underway, is much more around the new program wins which would make sense.

Yes.

Yes.

Okay. Then just a quick question on Breckenridge. I don't know if I -- if I appropriately heard some of the color around where some of the overlap might be for customers within this business. And then, is there any involvement around some common platforms or tangential platforms where you have a presence today?

Yes, this is Hari, Sean. There was certainly customer overlap, but there is virtually zero program overlap. In fact, where there is customer overlap, we view it as very complementary and very good for us.

Yes.

Okay terrific. Thanks so much.

Thanks, Sean. We have time, operator, for one more question.

Your last question will come from the line of Amit Daryanani with RBC Capital Markets.

This is actually Ryan in for Amit. Congratulations on the quarter, guys.

Thanks, Ryan.

I just wanted to get some clarity. You talked about a 10% to 15% contribution margin to expect in the near term. I assume that is up to the $1.8 billion $1.9 billion mark. In normal seasonality you shouldn't be too far away from that mark this year. How are you thinking about contribution margins past that level?

Let me give you a comment from a business point of view. And I will turn it over to my CFO and he can make a comment more detailed on that one. First of all, if you look at our business, the -- the putting the right mix in the right plants around the world, it -- it can do a lot for your margin improvements, okay? Just as I mentioned earlier, we expanding India, expanding China, because we -- that is the area where we're growing but we have other parts of the world that we can take on more.

So, we are really focused right now improving the mix, additionally to revenue growth. As we improve the mix that is going to help us drive that contribution margin, hopefully, even over 15%. As we -- as we start seeing better -- better result, and higher revenue in our component businesses, our component businesses should deliver better than 15% contribution margins, okay? So, I believe, I feel very confident, that between today's number. And let's say $2 billion number per quarter, if anything, it should help us to deliver that contribution margin, at the higher percentage. Bob?

Yes, well, I think you hit the key points here. I mean, a lot of this is a function of mix. And we -- the components businesses should be delivering margin well in excess of corporate average. And as we have a higher and higher percentage of the business coming from that area, it is going to help a lot. But we have other areas to expand margin as well, better capacity utilization, and then the business mix that we have talked about some. So, I think 10% to 15% is very achievable over a long period of time. And if things go right from a mix standpoint, we could do even better than that.

All right. That's very helpful. I have just two quick ones. Does the $30 million to $50 million in cash this year you expect from the sale of real estate, include the $21 million you expect to receive this week, or that is incremental to the $21 million?

Yes, it includes the $21 million. And I brought up the $21 million, just so you guys would have the same confidence we do on the range of the $30 million to $50 million.

Okay, that makes sense. Then one final is your balance sheet is much healthier on a year-over-year basis. You have come through the recession now, you've seen a stabilization of the macro economic picture. Are you looking at any other M&A opportunities to expand the business, or how should we expect M&A as an alternative to the next 12 months?

Yes, well, Ryan, this is Jure. First of all, the M&A we're very careful, what we jump into. Okay. So as this optical project, this went on for 12 months, understanding it, studying it and putting the right deal together, that made sense for -- for long-term success of this Company. So, for us, I would say today, we're interested in M&A deals, that will expand our capabilities, in the unique capabilities that will add both on revenue, and margin expansion. And the bottom line has got to give us ROIC, well over 20% plus percent. So, those are criteria right now. We don't have anything on our plate. We're going to focus on what we have here today, and make sure that we integrate this Breckenridge properly

All right, thanks, and congratulations again.

Thanks, Ryan.

Well, ladies and gentlemen, that's end of our call. Thanks. Again, thanks for participating. I say on the positive side the business is good. Markets are up. Right now as I said earlier, it is what a year it makes. It is a lot more fun here today than a year-ago. And we expect to continue to grow our business. So with that, thank you very much.

Thank you.

Thanks.

This does conclude today's conference call. You may now disconnect.