Sanmina Corp (SANM) 2010 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to this Sanmina-SCI third quarter fiscal 2010 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. Ms. Bombino, you may begin your

Thank you, Marvin. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's third quarter fiscal 2010 earnings call. Today's call is being recorded and is posted along with a copy of our 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 and 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 the 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 you to the 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 we have provided with you a Statement of Operations, for the three months ending July 3, 2010 on a GAAP basis, as well as certain non-GAAP financial information. The 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 costs, acquisition and integration costs, impairment charges, gains or losses 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 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, operating income, operating margin, net income, and earnings per share, we are referring to 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. Welcome. Thank you all for being here with us today. Joining me on this call, conference today is Hari Pillai, our President and Chief Operating Officer.

Good afternoon.

And also, Bob Eulau, our Executive Vice President and CFO.

Hi everyone.

For our agenda today, we have Bob Eulau will review our financial results for the third quarter fiscal year 2010. Then I will follow-up with additional comments relative to Sanmina-SCI's results and future goals, then Bob, Hari and I will open for Q & A. Now, I would like to turn this call over to Bob.

Thanks, Jure. If you could turn to slide three. Overall this was out of fifth consecutive quarter of growth and improved profitability. Revenue of $1.63 billion was up 6% on a sequential basis. And up 34% over the third quarter last year. This was at the high end of our guidance of $1.55 billion to $1.65 billion. Gross margin was also in the range we expected, with a 10 basis point sequential increase to 7.9% on a non-GAAP basis.

This is also the fifth consecutive quarter of gross margin improvement. This implies a contribution margin of 9.6% on the incremental revenue, which was a little lower than the 10% to 15% we had expected. This was primarily driven by the business mix for the quarter. As an aside, while there has been some variability by quarter, our contribution margin over the last 12 months has been 12.5%. Accordingly, we believe that a 10% to 15% contribution margin over the next few quarters continues to be very achievable.

One of the highlights for the quarter was that for the first time in several years, the gross margin for the components businesses exceeded our corporate average gross margin for the quarter. Non-GAAP EPS was at $0.32 per share. While this is in the range of our previous guidance, our plan was to do better than this, and we were hit by several unusual items during the quarter. Specifically, our non-GAAP EPS includes total reserves for a small telecom customer based in Europe, of $3.2 million. And losses on foreign exchange of $1.5 million. We have filed suit to recover the bad debt, which we are confident we will win, but it may take several quarters to recover the bad debt.

One of the items that we anticipated, was our acquisition of BreconRidge, which we announced in our call last quarter and completed on May 28. The integration process has begun, and we continue to expect the transaction to be accretive within a year. In aggregate the various unusual items negatively impacted our EPS by over $0.06 per share. Taxes are always difficult to project. But the fact that our quarterly rate came in at 26% rather than our 21% expectation, reduced EPS by another $0.02. This was based on 83.7 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 third quarter, we reported a GAAP net income of approximately $21.6 million, which is equal to $0.26 per share. There were several one-time events affecting the GAAP numbers, in addition to the items I mentioned above. On the positive side, we recognize the gain of $13.8 million on the sale of real estate. The most disappointing event of the quarter was an embezzlement of $3 million in Asia, which appears to have occurred over the course of several years. We have accrued for this exposure although we expect that all but $500,000 of this will ultimately be covered by insurance.

Additionally, we had one customer enter bankruptcy at the end of the quarter, and we accrued $1.9 million for this exposure until the situation becomes more clear. This company was sold earlier this month, and we're, hopeful that we will ultimately get paid. Finally, as we anticipated, we had restructuring costs for the BreconRidge acquisition, in addition to the normal run rate of restructuring costs that we book as incurred for previously closed plants. Restructuring costs, coupled with the acquisition costs related to BreconRidge, totaled $7.4 million. With the acquisition of BreconRidge, we will see some increased restructuring costs over the next three quarters. We expect total restructuring costs for BreconRidge to be $16 million to $18 million. When restructuring is complete, we expect cost savings to be about $20 million per year. For Q4, the ongoing restructuring related to real estate for previously closed plants and BreconRidge, will total $7 million to $8 million.

My remaining comments will focus on the non-GAAP financials for the third quarter. At $129 million, gross profit was up 8% over the prior quarter. Gross margin came in at 7.9%, which was up 10 basis points from the previous quarter. While we were pleased that the components businesses have the gross margin above the corporate average, we expect to see continued improvement as we drive these margins to appropriate benchmarks.

Operating expenses were relatively flat for the quarter at $64.8 million. In spite of $2.6 million in bad debt expense, that was booked during the quarter for the customer I mentioned before. At $64.2 million, operating income improved by 15% over the prior quarter. Operating margin was 3.9%, which was a 20 basis point sequential improvement. The tax rate for the quarter came in higher than planned at 26% of pretax income. The tax rate reflects more profit from higher tax jurisdictions than we had previously forecast. The tax rate for FY 2010 is now expected to be 23%, plus or minus a couple points.

Based on our current profit mix assumptions for FY 2011, we continue to believe our FY 2011 rate will be in the 18% to 20% range. On a non-GAAP basis, we earned $26.6 million in net income. For modeling purposes, I want to mention that depreciation was $21 million and EBITDA for the quarter was $85 million. This is the highest EBITDA since the fourth quarter of FY 2007.

On slide five, we're showing you some of our key non-GAAP P&L metrics. The revenue trend has been very strong for the last fourth quarters as we moved out of the recession. Revenue has climbed 34% since the third quarter of last year. Gross profit has shown strong improvements since Q3 of last year, with growth of 67%. Compared to Q3 of FY 2009, gross margin has improved from 6.4% to 7.9%.

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 Q3 of FY 2009. In fact, it has almost quadrupled over the third quarter last year. During this period, operating margin improved from 1.4%, to 3.9%.

I would like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $665 million. Cash was down slightly from the previous quarter for several reasons. As planned, we completed the acquisition of BreconRidge on May 28, which resulted in cash usage from both an acquisition standpoint and a working capital perspective. In aggregate, we estimate that BreconRidge consumed a total of $47 million in cash during the quarter, which includes the cash acquisition costs, the debt redemption and working capital.

Moving on to accounts receivable, we had strong shipments in the second half of the quarter, which was the major factor in the increase in accounts receivable. The other factors in the increase in AR included the addition of $24 million in BreconRidge accounts receivable, and a $15 million decline in the use of our AR facility. Cash flow from operations was negative at $25 million, cash flow would have been positive had it not been for the reduction in accounts receivable factoring and the BreconRidge cash flow from operations. I should also note that free cash flow was just slightly negative, at $5 million after the real estate sales.

I will talk more about inventory and accounts payable in a moment. We have property on the balance sheet which is listed for sale. The list value of this property is over $130 million. This quarter, we sold three properties, which brought in $28.3 million of cash. Year-to-date, we have generated about $29 million in cash from the sale of real estate.

We made several minor adjustments to our capital structure during the quarter, including the redemption of $20 million in long-term debt. We also began to use our local working capital lines during the quarter. Specifically, we drew down $30 million in China, and $21 million in India. Finally, we have made the decision not to renew our accounts receivable facility. While this will reduce our cash flow from operations for the year, our other facilities make more economic sense at this time. We sold $15 million less in receivables this quarter, and we will sell $22 million less in the fourth quarter, as the program has already terminated. Capital expenditures were unusually low at $8.5 million for the quarter. We received a significant amount of capital equipment at the end of the quarter, and we expect that capital expenditures will be up significantly in Q4.

Let's turn to slide seven to discuss some of the balance sheet metrics. I have already discussed our cash position, which remains strong, given our potential cash needs. In our business, inventory is a key focus. Our inventory turns improved slightly to 7.2. But frankly, we had expected more improvement. 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're showing you cash cycle days, which combine our cycle time for inventory, accounts receivable and accounts payable. Inventory days had a positive impact as they moved from 51.7 days last quarter to 50.9 days this quarter. We saw an increase in accounts receivable day sales outstanding from 46.2 days to 48.3 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 55.5 days to 56.1 days. Overall, cash cycle time increased from 42.4 days last quarter, to 43.1 days.

Finally, we have made outstanding strides in return on invested capital 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're pleased with an ROIC of 15.6%, we believe there is still room for improvement through both margin expansion and better asset velocity. 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. Good afternoon, again, ladies and gentlemen. As you heard from Bob, it was a good quarter. I am pleased with the progress our Company is making. And we are continuing to benefit from our strategic transformation to a new strategy and improved operational efficiency.

Things are moving in the right direction. Per our strategy plan, is we expect from the beginning of our fiscal year 2010, business demand is improving and remains stable at this time. We cannot forecast the economy in the short term and the long term but I can tell that you as of now, the forecasts are trending the right direction, as we're finalizing the budget for our fiscal year 2011, the forecasts are coming in positive. Again, forecasts look good, at this time.

Now, could you please turn to slide eight. Here I would like to talk to you about our third quarter revenue mix. As you can see, our top 10 customer consist of 50%, so we have been working, diversifying the customer base pretty well. Our biggest piece of our revenue came from our communication business. This involves networking, wireless infrastructure. That business was very strong. Especially networking and wireless infrastructure. It was up 28%. As we look at the next quarter our fourth quarter fiscal year 2010 we expect communication infrastructure continue to move in the right direction.

Enterprise computing and storage, which includes high-end enterprise service and storage was 15.7%. That group was down approximately 8%. Mainly what is going on there is a product transition. Last quarter, we had one major customer that moved things around, and I mean by last quarter, second quarter, things are going to stabilize here and we expect next quarter, really to be flat and, hopefully, up as we have a lot of new products going to transition there.

Industrial, defense, and medical was flat. Industrial was strong. Medical and defense were slightly down. As we look at the fourth quarter, industrial should continue to be up. Medical with new programs there that are coming up, we should also see, some movement in the right direction. Defense, we expect to be flat next quarter. Multimedia consists of 17.6% of revenues. As you can see, that is down 9%. If you really look at the last three or four quarters, multimedia was very strong for us, and still is. I think here is strictly a timing issue. So, we expect next quarter to be flat, slightly up.

Now, please turn to slide nine. What I like to do is talk to you now about our market opportunities. Our customer base is very solid. And we're continuing to expand our customer base nicely this year. Our new (inaudible) improved products mix should help us drive market expansion.

We are focused on quality of our customers. Because the whole year, the focus is to really create the better mix of the customers so we can, again, focus on the right product, and this should help us drive our growth, and future margin expansion. So, if you look at the bookings for the third quarter, they came in pretty strong. Book to bill was 1.1 to 1.0. Also, most important, a lot of these new businesses that I'm talking about should be ramping up in the first half of fiscal year 2011.

Now let me talk to you about fourth quarter outlook. We continue to forecast fourth quarter bookings to go up. So outlook on the revenue point of view is 1.65 to 1.7. We expect gross margin to improve and go in the right direction, and we're guiding 7.9 to 8.2. Operating expenses, should be coming around $66 million per quarter. In there is about $1 million worth of SG&A that -- because of acquisition of BreconRidge but we believe that is going to go away at the end of the fourth quarter.

Operating margin will continue to also improve, and we are guiding 3.9% to 4.2%. Interest and expense and other should be around $27 million to $28 million. Depreciation and amortization about $22 million. CapEx, we expect to -- if you look at the first three quarters, we spent about $44 million, as Bob mentioned, the third quarter was very low, about $9 million. So, we are estimating that the fourth quarter will be around $40-plus million dollars. But for the year, it will stay per our plan to about $80 million, or $90 million. Again, most of these things are expansion where we're really focusing, extending our technology, and also, acquiring certain equipment that we need for our future growth.

Tax rate should be around 23% and, hopefully, longer term should come down. And we're using diluted shares outstanding. We're approximating today about 84 million shares. With all that, non-GAAP EPS, estimating $0.35 to $0.41.

Now what I would like to do is talk to you a little bit about our operations. We have been spending a lot of time really focusing on improvements here as we are positioning ourselves for 2011, so, we are driving efficiencies, and really focusing on lowering our costs. We remain market focused as we focus on a higher end, higher mix type of products. So we will continue to invest in technology, in people, and bring innovative solutions to our customers. By doing this we're providing leading technology solution to our customers which is very important in order for us to grow in the future.

Now I would like to make a few comments, on our latest acquisition. Latest acquisition is called BreconRidge, as Bob mentioned was completed May 28, 2010. This was a very strategic move on our part. We were complimenting optical capabilities that we have internally, and today, and with this capability that we have got, we really can provide one of the best end-to-end optical solutions in our industry. This division will focus on products, developing optical electronics and RF microwave. The market we will serve from this division will be high end communication, mainly into the networking side of the business, defense, industrial, and some medical.

Just some additional highlights on our acquisition, that is this operation had two major factories, one in Canada and one in China. We also had one of our new product introduction factory in Canada very close to BreconRidge. So we're going to combine these two factors in one. And also, -- these two factories in one. And also there is major operation in China that will be combined into Sanmina's operation in China.

So I can tell that transition so far is moving per plan. And, we expect to get all this done in the next few quarters. Based on this acquisition, we expect the new revenue potential with this operation, next 12 months to be in the range of $250 million to $300 million. And eventually deliver higher margin, than our obvious corporate margin. Again, this deal will be accretive in the first year.

Now, I would also like to make a few comments around our component business. We are pleased to report that our component business delivered margin above the corporate average. It has been a long time but it is starting to -- how do I say? Pay dividends, okay? So, we made a considerable progress improving the mix of this product. Focusing efficiencies.

I think our component business is going the right direction, and this is just one of the first steps and we expect these businesses, again, to continue to improve. However, there is still a lot of work to be done to accomplish our internal goals. But it looks good. Also, demand for component businesses, the bookings continue to be very strong for all our component businesses as of now.

So, in summary, as Bob mentioned, this is our fifth consecutive quarter of revenue growth and margin improvements. And most importantly, we are very optimistic this will continue in the future. Revenue growth for fiscal year 2010 will be approximately 20%-plus. We're focused on expanding customer base and developing new opportunities. We have been investing a fair amount of money here and we will continue to do that. Focusing both on existing and new customers and we expect to improve our business mix, which should help us drive margin improvements. And as I look at the new products that we won, really, it is really all focused about better mix and type of product that will help us improve the margins.

So the bottom line, we will continue to invest in the key new technologies, and the products for our customers. Because if you look at what our customers looking, it is all about providing the enhanced solutions for them, and having a better experience for our customers. We also believe that our strategy and long-term objectives are on target. Now, I would like to say thank you all, for all your time that you're spending with us today. I would like to also say thanks to our employees, for their hard work, and dedication, and support to this Company. Operator, now we are ready to open the line for question and answers. Thanks again.

(Operator Instructions). Our first question comes from the line of Lou Miscioscia, with Collins Stewart.

Hi, Lou.

Maybe if you could go into the tax situation a little more. If you came, obviously, close to your earnings, even though it sounded like there were a lot of one time events but did you actually have lower profit in some of the areas as it sounded like you had higher profit in higher tax jurisdictions?

I will turn it over to Bob.

It is awfully hard to forecast which jurisdictions are going to have what level profitability in a given quarter. And you're right, the mix came in different than we had expected this quarter which influenced the way we forecast the rest of the year. Taxes are pretty unique. You actually try each quarter to set a tax rate for the year, and then you have to make a year-to-date true-up in a given quarter. So, we now think the tax rate for FY 2010 will be 23% but because we had been accruing at a lower level, we had to bump up the Q3 rate.

Okay. Let's go into a couple of different areas. I guess the last quarter I thought you said computing storage would be up actually quarter-to-quarter? And obviously it was down about 8%. Maybe you could just go into a little more of an explanation, did a program move away from you or is it coming back or just what is happening?

Yes, basically in the second quarter we actually had a one major customer that had some moving the product out, that was all normalized in the third quarter. What we had this quarter is really what I would call product position, Lou. There is really no change in our customer base or product. If anything, we have a lot more new opportunities here. It is a timing issue. And as I mentioned, if you look at the enterprise computing so far, year-to-date grew 23%. So, we expect it to stabilize it and, hopefully, move in the right direction in the fourth quarter.

Okay. Final quick questions on the component business. Obviously congratulations, you're getting it above corporate average. Any obstacles coming in or does it just go back to your what you had said in the past really just driven by more revenue growth there?

Right now on the positive side our bookings have been coming in very strong for all our component businesses. So that is very critical for our future success. Right now, it is really loading these operations and focusing on efficiencies and bringing them more to the bottom line. So, we expect to make small movements-- positive movements I should say, small but positive in each quarter, and our still long term goal is to get these businesses to be delivered in operating margin as we always said in a 8% to 10%.

Thanks guys.

Thanks Lou.

Our next line comes from the line of Jim Suva with Citi.

Hello, Jim.

Thank you, and congratulations to you and your team. I had a couple questions. One is just a quick clarification. On the detailed press release that you gave, which is quite useful there was the $3 million contingency item expected to reverse in the future period? I just wanted -- is that the one that revolved, or hooks up to the embezzlement or is that two separate things?

Bob?

Yes, you're right. It is the $3 million embezzlement that we uncovered. As you remember in my comments, I said that we expect that all but $500,000 of that will be covered by insurance. But it is going to take several quarters for that to play out.

But -- I think, Jim, also will a question regarding that $3.2 million.

Yes, and then I was just wondering giving Sarbanes-Oxley rules that we're in today and stuff do you think you will be able to file full audited non-qualified financial statements, and just put this like in a footnote or something or does this have to be fully resolved for you to issue financial statements?

No we believe we will have no problem filing our financial statements. We understand this issue. It is still under investigation, right now. But it is an isolated situation, and we're putting additional controls in place.

Okay, great. And then maybe a more interesting question. Thanks for the details on that, for Jure, is Jure -- going forward, it looks like a lot of your heavy restructuring is finished. And I would assume the Company is going to start to generate pretty consistent stable cash flow. Seeing how you have kind of restructured and I assume you have a fair amount of utilization available, can you talk about your uses of cash flow? Would it be to grow the business organically or looking more accretive acquisitions such as BreconRidge or how should we think about your uses of cash as you have also delevered the balance sheet fair amount compared to years past.

Well, first of all, we need to start continuing to generate positive cash flow. That's a goal. And we expect as we look at our capital structure as our inventory turns improve, and we minimize the shortages in industry, I believe we're going to be -- our inventory returns should go up, and we should generate more cash. But in the meantime, it is driving the profits that is -- we want the operating margins to drive the profits up.

Once we get there, we're going to run this business. We want to deleverage the Company, but we're going to continue to look for the right opportunities. Our model is still to -- as I talk in to new confidence about almost a year-ago, our model is how we get to 10% up gross margin and 6% operating margin. Step one was always to get our gross margin over 8%, and operating margin over 4%. I think we are knocking on the door there, and then go from there.

But we will be opportunistic. But the most important is the quality of the earnings, as I said in my prepared statement, we really focus this year on quality of the customers. And making sure that we pick up the partners, that we can build a long-term relationship, number one, and also, the partners that we can make a little bit of money. And as we're going after these new wins and going after this new emerging markets, we are really looking at the customers to help us improve the margins, because as you go to these more industrial, medical, defense and some of the advanced unique stuff, we can deliver the better margin.

Back to this BreconRidge. That was one of the main reasons we went after the BreconRidge, because internally we had fair amount of technology, but I believe that the BreconRidge can help us get there. And if you look at the companies that are in that optical business, even today, they are delivering operating margin between 8% to 10%. Those type of strategic acquisitions that we're interested in, because, it is the quality of the earnings that we're going to be focused on.

Thank you and congratulations to you and your team.

Thanks Jim.

Thanks Jim.

Our next question comes from the line of William Stein with Credit Suisse.

Thanks.

Hi how are you?

Great. I am hoping you can help us understand what the contribution margin and long-term margin goals are today. Previously you have discussed 10% to 15% contribution getting to 6% op margin at I believe $1.9 billion in revenue.

Okay.

And today it would seem you need to be at the very high end of that contribution margin to get to that 6%.

Okay.

Any comments --

Let me -- I think we said before as we get to the revenue between $1.8 billion to $2 billion per quarter, in that range, we believe that our model should work to get to those margins. And William, it is all about the mix. As we drive our component businesses higher, to higher margin, and some of these other unique products we're getting involved, those are the ones that should help us drive the higher margin. But we feel very comfortable that we can get there and I will turn it over to Bob to talk a little bit more about the margin. Bob?

Yes, as I said, the contribution margin was a little below 10% this quarter. It was unusual quarter we think in terms of the business mix and we should be back in that range for the next few quarters. And if you go back over the last four quarters, we have been at about 12.5%. So, we think we will still have a strong contribution margin. And as Jure said, everything is very dependent on mix. So we're making good improvements across the board. In fact, every single one of the components areas showed gross margin improvement this quarter, and we believe we will continue to make progress there and then it is a function of mix.

And I would just add to that really if you look at our new bookings, I believe that they are lot more profitable than some of the old stuff that we have here.

Great. And then a more strategic question, Jure, if I can. You have I think partnered with JDS Uniphase in the past. I assume they are still an important customer, and now you have done the BreconRidge acquisition. That is more optical products. Do these two -- are they related at all? Is JDS buying products that are related to the BreconRidge deal? Can you clarify your strategy on optical?

Yes, first of all, this complements our relationship that we started with JDSU, even before JDSU, we acquired some assets years ago, and we have been doing a lot of research and development in Texas, and then a little bit in Asia, and a little bit here in California and then we partnered with JDSU and we build on it. But what BreconRidge brings to it is really a lot of design capabilities, really helps JDSU to win the customers because together now, we can go with the better solution and really create the win both for JDSU and Sanmina.

All right, thank you.

Our next question comes from the line of Amit Daryanani with RBC Capital Markets.

Good afternoon, guys.

Hi Amit.

Hi. Just had a question on the communications segment, it was up 28% sequentially. I'm sorry if I missed this. Can you talk about how much was that OpEx to BreconRidge because it seems like a fairly strong sequential growth versus what most of the OEMs are seeing there.

BreconRidge was really a small number in there. Because we only had BreconRidge for a month. But, no, it was the strength of our communication business. Because if you look for a year, that business year-to-date only grew 10%. Okay?

We had a strong quarter, and again, mainly driven by the networking and wireless infrastructure. And our customer base is pretty solid there. Our partnership with some key players in that area, I would say is the best in the industry, and I think we are gaining there based on our performance, and we expect to continue to gain in that market share. That is the strength of this Company. We offer a lot of technology there, I think we have a best end-to-end solution there, and we can go against anybody in that business.

Got it. And then just on the component side of things, it obviously is becoming a key and big part of Sanmina's story right now. I'm just curious, any desire or any way you can quantify how big the component business is for you today, where the margins are, and what do they need to get to for you eventually to see that 10% gross margin target.

Well, we stopped kind of separating our business for last two years when we decided to exit the PC business because it is really hard to break these things apart. Because they now are under just one organization. You have optical components, one group. You have printed circuit boards, you have metal fabrication, you got machining, you got plastics, you got custom memory margin. So this is different areas.

First of all, we like to -- this business is we always said is running a little bit over 20% of our revenue. We think that as I mentioned earlier, that we should be able to continue to -- to improve the margins here. Based on just a pure new structure that we have in place. And also, the bookings that we got in the last six months have been very strong. So we're gaining back our customer base that we used to have. When we did a restructuring, our component businesses, unfortunately, we lost some big customers. And I would say this year so far, we are able to go back into those key customers that we used to have, and we're ramping up. I would like to leave it there.

Thank you.

Thanks Amit.

Our next question comes from the line of Shawn Harrison with Longbow Research.

Hello, Shawn.

First just a clarification for guidance for OpEx. That's including both SG&A and R&D, the $66 million range, correct?

That's correct.

Then maybe just to follow-up, to an extent on Amit's question. The components business since it is doing better right now, can you kind of give a range of maybe capacity utilization rates across the different businesses that you mentioned?

Well, first of all, if you look at, based on people across all our businesses put together, we believe that we're running -- this is not very scientific, let me make sure that I'm clear. It's probably 85% to 90%, based on equipment we're still around 75%, and based on space, we're about 60%. So, we got a lot of room for expansion.

If you look at our component businesses, so let's just give you an example printed circuit boards. Our Asian factories are running 85% to 90% right now. We have one North America plant in circuit boards that is running over 90%, where we got another one that is running at 55% to 60%. We still have extra capacity here, and our goal here is to fill it up. As we start filling it up, it should drive the margin but to us, we're not chasing any business. I think that is the most important part of our new strategy is that we go out and go after the customers that we can add a lot of value to and we can compete based on technology, not just selling labor.

Okay. That was helpful. And -- were all six businesses above the corporate gross margin average in the quarter? Or was just the component business in aggregate?

The components in aggregate, we have some component businesses that are really beating corporate average by a lot, and then we had a still few left that are still below.

Okay. And then one just final question. In terms of the mix shift this quarter, a little bit confused by this, just what happened given the strength within the communications business, I would have expected, with the relationship in the components business and that business in general being typically high technology for you, that you said you witnessed a little bit of a negative mix shift, if you could elaborate on dynamic, it would be helpful. Thanks.

We had a fair amount of new programs that we brought on. We had especially one line, I'm not going to mention what plant around the world, that was all brand new business, and it was a great business. The problem is we couldn't maximize the margin in it because of a short drop-off.

That's very helpful. Congratulations on the progress.

Thanks, Shawn.

Our next question comes from the line of Sherri Scribner with Deutsche Bank.

Hi, thank you.

Hi, Sherri.

Hi, how are you, Jure?

Good, good.

So some nice revenue growth based on the guidance that you're giving for fiscal 2011, somewhere around 20% or more. I wanted to get a sense based on the new deal wins and the business you're ramping in fiscal 2011 what you're thinking about in terms of revenue growth next year.

Let me correct you, if I understood you there. I said fiscal year 2010 we expect to grow over 20%.

Right.

Okay, but -- I did not give a forecast for 2011.

Well, that's what I'm trying to understand. What do you --

Okay all right.

Based on the revenue growth you saw -- I apologize, I don't know if I misspoke but for fiscal 2011 based on the business that you've won. And the projects that you've won.

We're taking one quarter at a time. It is all when these programs gear up. If all the forecasts that I see today moving all the right directions, I would expect 2011 to be growing double digits. I don't know what percentage in double digits, but what is what it should be, but I like to really leave that maybe to answer that 90 days from now.

Okay. 90 days, okay.

Because we are just finishing the budget for 2011. As I said earlier, the forecasts are coming in, per plan and they look good. They are positive, but I think we need another 90 days just to make sure we understand where is this economy going and -- but I'm pretty optimistic, personally.

Okay. And are there any particular segments that you expect to be growing more -- I mean, it looks like communications continue to do very well. And industrial sounds like it is doing well, but medical and defense maybe was a little weaker. Is there any segment where --

Well, first of all, I think overall, if you just kind of look at 2010, year-to-date we are growing 21%. Multi-media was up and so far year-to-date 29%, industrial medical 37%, enterprise computing 23%, and communication 10%. I think going forward, the medical, for example, if you look at the last couple quarters, defense being down and flat or down. Now we have some new programs and especially in the medical side of the business, where these programs going to take some time to pop, so we expect those to be up in 2011. We expect, really most of our markets, I mean, all much our markets today, to be moving in the right direction. In order to grow double digits they have to all move in the right direction.

Okay, that's helpful.

That is the expectation right now.

Okay.

But I will give you more details, like I said, in 90 days from now.

Okay, all right, sounds good. And then in terms of the guidance for next quarter, and talking about the contribution margin -- I mean, I just did some rough math and it looks like your guidance is suggesting a contribution margin kind of at the low end of that 10% to 15% range. I'm trying to understand, how much more improvement do you think you can get out of the components business next quarter. How much of that is factored in and how much of the margin improvement is factored in as the revenue growth? Just trying to get a little more detail around that.

Well, first of all, every time we ship an extra dollar, hopefully, we will make an extra buck. Or extra penny, I should say. We expect our components to continue to improve on the margins. As Bob mentioned earlier, and I will have Bob add to this, we do expect contribution margins to be 10% to 15%. As our component business IS starting to grow at a faster rate and they start generating margin where they should be generating, then that number should be closer to that 15-plus. But definitely we do expect the contribution to improve in the fourth quarter. Bob?

Yes, I don't know I have a lot to add. You're right, the plan is about the midpoint of that range, is what the guidance implies. And, unfortunately, it was a little low this quarter. The previous four quarters, it had actually been above the 10% to 15% range. So I think planning in the middle and, hopefully, some things will go our way, and we will be at the high end.

Does that suggest that you really expect more improvement in the components business in fiscal 2011 versus the fourth quarter?

Oh yes. I mean, 2011 should be a lot better year for us than 2010, because 2010 for us was a year where we basically were pulling together, finished the restructuring, and started loading these plans and fixing some of these issues we had. I think we made a nice progress in 2010, and I expect to add a lot more to the bottom line in 2011.

Okay, great. Thank you.

Thanks.

Our next question comes from the line of Brian Alexander with Raymond James.

Thanks.

Hi, Brian.

How are you doing?

Good.

Just a clarification. When you guys talk about contribution margins, are you referring to incremental gross profit or incremental operating profit? Because I thought you said earlier 9.6% sequentially, which would be the incremental gross profit, not the incremental operating profit.

That's correct. We're measuring incremental gross profit divided by the change in revenue.

So when you talk about 10% to 15% is your goal, that's in the context of gross profit, not operating profit?

Right, right.

Okay.

But if anything, Brian, we believe that our SG&A will stay pretty flat so, hopefully, the gross margin will grow at the faster rate.

Right. So there should be a pretty healthy drop through from the gross margin line.

Yes.

Yes there is. And actually in the historical data, you really see that over the last four quarters.

If I did the math right from where we are in September, at least implied by the guidance to where you're hoping to get to, doesn't that suggest you actually need to get closer to 20% incremental margins, just -- it seems like you would have to get about $45 million of incremental operating profit on $225 million of incremental revenue, or am I doing something wrong there?

Well, you talking about how do you get to the 10% gross margin?

Just bridging from the operating margin, implied in your September guidance to the 6% goal that you would hope to achieve on $1.9 billion revenue.

As we grew the component mix, Brian, those contributions should be higher. For example, a circuit board can give you contribution margin, let's say 35 to 40%.

Yes.

Some of the other businesses that we have are high 20s. So as we drive other businesses up, the contribution margin should be a lot better than the traditional EMS.

Understood. I mean, I guess is there any way to be a little more specific on what -- because it sounds like this is mostly going to be mix driven, as opposed to --.

Well, I think it is combination of both. Combination of both. I think you're going to see from us, as you ever seen so far as I said earlier, for us I think step one, step two, step one is to get this gross margin over 8%, and get operating margin over 4%. And then go from there. But I think you will see it from both sides. As we're right now starting to load all our plants more evenly, a lot of that profit should fall down to the bottom line. Especially as component businesses are starting to improve the margins.

But -- is the components business that you think ultimately could be 35% to 40% of the revenue, or is it not going to be that much of a mix shift?

No, no, no, no, we're driving to get our component businesses well over $2 billion. Which, they are not there today. But yes, there will be a substantial amount.

Okay. And just shifting gears, just on wage inflation, in China, I think your foot print is a little north of 20% of your total footprint there. Just how are you responding in terms of passing through rising costs, or potentially relocating to lower cost regions, and how significant is that footprint in China for the overall components business? Thanks.

We are a global Company so China is going to play a major growth for us, in the future. The way we have structured the Company is to really focus on a long-term sustainable global Company. So our Chinese operation, hopefully, today they export 80%, and we ship internally only let's say 20% or less. The goal long-term I think will become reversed, where most of the stuff we build in China will probably ship to China and maybe 20%, 30% will go outside. So we're really setting up the operations to be meet long-term growth for China.

When it comes to the costs, those costs we did expect them to come in. Unfortunately they came a little faster than we thought they would. We expect the labor to go up, 25%, 30% plus this year. We are reviewing that with our customers. As you know, we have to pass that on, but at the same time we're making sure that we're efficient enough everywhere, but we have no other choice but to pass it on to our customers in a lot of cases, but that is part of the plan. This is done all gradually. We talk to our customers on a daily basis. We look at these things but it is something that is just part of running the business around the world. So, we are not planning to move out of China. We think we have the right infrastructure to build on and we will see what happens a couple years from now.

Okay. Thank you very much.

Thanks, Brian.

Our next question comes from the line of Alex Blanton with Ingalls & Snyder.

Hi, good afternoon.

Hey, Alex how are you?

I might have missed this but did you discuss component shortages?

No, we did not.

Did you have any and could you elaborate on that?

Let me turn it over to Hari. Maybe he is a lot more familiar with our material organization. Hari?

Yes, good afternoon, Alex. I think we did continue to experience component shortages. I would describe as choppy supply conditions. Which in turn affected our asset management metrics. But overall, I think the hard work that our supply management teams have been putting in and working with our suppliers are beginning to payoff in the -- qualitatively, we seem to see less issues, and we expect continued improvement over the next couple of quarters.

Do you have an estimate of what sales were lost because of shortages if at all?

Yes, Alex, I think we will really like to focus in on the guidance because we factor all of those things in and then we put the guidance out there. So that has already got all those built in.

I know that but how much more could you have shipped had you not had shortages?

Alex, this is Jure. To me I think this shortage has been going on for a year. I don't want sound like an excuses but because those are challenges I think that our material team did a good job making sure, and we are delivering in all the critical components that our customer needs. We find a way to get it done. Maybe we could have given a little bit more, but it is just the nature of this business, Alex right now. We can give you a number but doesn't really mean anything. I think for us, is most important right now is we believe that the shortages will get better. And, hopefully, by the end of summer we will see --

We have to keep working very hard, work with our customers and make sure that we do the best possible job to support them.

Okay. And you're doing a good job on SG&A. How low can a percent go before it has to go up? Significantly? How low can you get SG&A is the question.

Yes, we think that SG&A as based on our modeling as we get our revenue $1.9 billion to $2 billion run-rate, we expect our SG&A not to be over 75, 70 to 75. So, we can go that amount. And most of that investment it is really more in technical engineering and customer service is going to go in there. So I think our SG&A for what we shipping today, as far as I'm concerned, Alex, is too high. But we are positioning the Company for a lot bigger number than what we shipping today.

Okay. And finally, the labor cost increase in China is a fairly minor part of the overall, for many kinds of products. What is it for you? I mean, your labor costs in China are what percent of your total?

Well, it is a small percentage. Depends on the job. I mean, it can be a fraction of a percent, can be a couple percent. Typically that is what it runs in the range.

2%?

But it still adds up. Even on a high-end product that we build, our customers still want to get it low as possible cost. So they do matter. But, again, we have to communicate with our customers. We work with our customers. Work with our suppliers. Just the nature of the business. I mean, this stuff goes up and down everywhere, and still, China is one of the cheapest places in the world. I mean, maybe after India. At least now might be after two.

So what are you going to do with it the nature we have to deal with, you can't run away from it. Our customer is most important. They do understand this situation, and they -- it is just a balancing the world's supply chain and I think this is what is going on.

Just one more comment and can you react to this. Your labor costs go up 25 to 30%, but since it is only 2% of the total, doesn't affect your overall costs that much, but you buy a lot of materials that go into the product, and the labor costs to make those materials, if they're made in China, will be going up by a considerable amount, too, it would seem to me. So the overall price -- and I realize you can pass along these material costs. But from the standpoint of the customer, won't you ultimately be hit by a significant increase in price or cost to him, because of the material that is being passed through, so that there is a danger that, China gets not priced out of the market, but there is an incentive to move to lower cost regions is what I'm saying.

Well, no, Alex you analyze this thing better than I do, and so, you are correct there. But I think it is just the nature of the environment that we're involved in and we have seen this type of practices increase all around the world in the last 25 years. So this is just one of those things that we have to deal with, and we have got to work together with our suppliers. And making sure that we have a minimal impact on our customers. I mean, that's all we can do today.

Okay, thank you.

Thanks, Alex. Operator, we have a time for one more question.

Our last question comes from the line of Lou Miscioscia with Collins Stewart.

Wow that is a small miracle. Circled back around to me.

Hey. You get in first and last. You're lucky today, Lou.

Well, let's hope so when the markets open tomorrow. So let's just look at SG&A, again,. I guess it was up even after you factor out some of the one-time events in the quarter. And I guess I was modeling it to be much more flatish. Maybe can you just explain why was it up in this quarter and also, maybe just give me back the guidance that you had given me and it sounded like it would be up next quarter. I know you mentioned BreconRidge, but are there other things going on in there?

Let me make a comment. I will turn it over to Bob. I said $66 million for next quarter and there will be about $1 million that should go away next quarter so you're not going to see that in the first quarter. But let me turn it over to Bob.

Yes so first of all, to clarify Q3, embedded in the SG&A is $2.6 million of bad debt. So, if you factor that out, then we're at $59 million. And then in Q4, we have got obviously the BreconRidge business coming on line, and a few other factors. Including some adjustments and accruals that we know about in Q4. I don't know if that helps or not.

So, in your -- on your slide deck, in the supplemental section, where reconciliation to GAAP, so the $2.6 million of bad debt you actually did not pull back out?

That's correct. There is still $2.6 million in bad debt in the non-GAAP SG&A.

Okay. So that would definitely explain it. Are you expecting more of that, again, in next quarter? Because then you would still it sounds like be going up pretty considerably quarter-to-quarter.

Well, I mean, we're definitely still expecting SG&A to go up from Q3 to Q4. And there are a couple of factors in there. One of which we mentioned which is BreconRidge. And, others will be accrual related.

Okay.

I don't know there is a lot more color we can put on that.

Yeah just if you look at BreconRidge alone, approximately next quarter is about $2 million. $1 million will go away. $1 million will stay for long term.

Okay, that's helpful. And then just any comment on FX in the sense that whichever currencies matter the most for you, as at least the Euro has gone back up a bit in comparison. Does that help you next quarter because I think Jure made the quick comment it might have hit you about a penny this past quarter.

Yes it probably actually affected us by close to $0.02. But, in reality, the FX is a very complex area and I think the team did a very good job overall. Had we not had our hedging program, we would have had a very significant exposure. So, it is unpredictable. What will happen next quarter. It is unlikely you will see currency movements -- you won't see as drastic currency movement in such a short time frame as you saw this past quarter in Q4. But you never know for sure.

Lou, just to add to that. So if you take that $2.6 million that we took as reserves against this bad debt which we hope we're going to collect, and then FX is 1.3, that is approximately $3.9 million that really affected non-GAAP earnings there. Plus tax.

Okay. That's -- that's definitely helpful. Thank you.

Yes. If this thing didn't happen our numbers would be a lot better than what we expected it.

Okay.

Okay. Well, anything else, Lou?

I guess to clarify the bad debt, how does that compare I guess to prior quarters. That number was much higher than in prior periods, because I'm sure you have a little bit of an allowance every quarter for it?

There is some bad debt. But this was much higher than what we had seen in prior quarters.

Okay that's helpful. Thanks, guys.

All right. Ladies and gentlemen, if you have any more questions, please give us a call. Otherwise, thank you very much. And looking forward talking to you, three months from now. Have a nice day. Bye bye.

Thanks everyone.

This concludes today's conference call. You may now disconnect.