Sanmina Corp (SANM) 2010 Q4 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 2010 fourth quarter fiscal year end results 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. At this time I would like to turn the call over to our host, Ms Paige Bombino. Please go ahead.

Thank you, Kristin. Good afternoon, ladies and gentlemen and welcome to Sanmina-SCI's 2010 fourth quarter and fiscal year end earnings call. Today's call is being recorded and is posted along with a copy of our earnings release and slide presentation on the quarter at www.sanmina-sci.com in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on the website.

Please turn to page two, the Safe Harbor statement. During this conference call we may make projections or other forward-looking statements regarding 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 you to our quarterly and annual reports filed 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'll note in our press release issued today that we have provided you with statements of operation for the three months and 12 months ending October 2, 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 cost, acquisition and integration costs, impairment charges, gains and loss on extinguishment of debt, non-cash stock based compensation expense, amortization expense and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in the 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. And welcome. Thank you for being here with us today. Joining me on this conference call is Bob Eulau, our CFO.

Good afternoon, everyone.

And also President and Chief Operating Officer, Hari Pillai.

Good afternoon.

On today's agenda, we'll have Bob Eulau will review our financial results for the fourth quarter of fiscal year 2010. Then I will follow with comments relative to Sanmina-SCI results and future goals. Then Bob, Hari and I will open it for Q&A. And now I would like to turn this call over to Bob.

Thanks, Jure. It's a pleasure to be joining everyone today on this call. Please turn to slide three. Overall, this was our sixth consecutive quarter of growth and improved profitability. The fourth quarter was a solid finish to a year in which we dramatically improved our financial performance. Revenue of $1.69 billion was up 4% on a sequential basis, and up 25% over the fourth quarter last year. This was at the high end of our guidance of $1.65 billion to $1.7 billion.

Gross margin was below the range we expected, due to a specific issue that I will discuss in a moment. Operating margin was 4.1%, and non-GAAP EPS came in at $0.46 per share. Non-GAAP EPS was well above the range of our guidance, primarily because of continued expense control and implementation of another phase in our long-term tax strategy. Our tax restructuring is moving forward ahead of plan. We exited the full year with an effective tax rate of 20.1%. Had this been the tax rate for the fourth quarter, our non-GAAP earnings per share would have been $0.43 rather than the $0.46 that we have reported. This was based on 82.7 million shares outstanding, on a fully diluted basis.

Please turn to slide four. I'll start by making a few comments on the GAAP numbers. For the fourth quarter, we reported a GAAP net income of approximately $31 million, which results in earnings per share of $0.38. For FY 2010, our revenue increased 22% from $5.2 billion to $6.3 billion. Our GAAP net income improved dramatically from a loss of $138 million last year, to a profit of $122 million in FY 2010. Restructuring costs totaled $6.9 million in the fourth quarter. The restructuring costs were for the integration of the optical business acquired from BreconRidge, in addition to the normal run rate of restructuring costs that we book as incurred for previously closed plants.

As a result of the acquisition of BreconRidge, we will see increased restructuring costs in Q1 as we consolidate facilities. We expect total restructuring costs for the first quarter to be between $11 million and $13 million. After Q1, we expect the restructuring costs to return to our normal run rate of $3 million to $4 million per quarter. We have incurred about $5 million to date for BreconRidge restructuring. We now expect that total restructuring costs for this acquisition to be in the range of $13 million to $15 million. When the restructuring is complete, we expect annual cost savings to be around $20 million.

My remaining comments will focus on the non-GAAP financials for the fourth quarter. Our revenue was up $61 million to $1.69 billion. At $132 million, gross profit was up 3% over the prior quarter. Gross margin came in at 7.8%, which was down 10 basis points from the previous quarter. Gross margin was obviously a disappointment. Unfortunately, the components business has flipped back to slightly below the corporate average gross margin. We've made great strides in FY 2010 with the components businesses, but we had a specific cost and execution challenge in the printed circuit board area this quarter. The other components areas including backplanes, cables, memory modules, optical modules, the mechanical systems all made sequential progress. We believe the specific issue in printed circuit boards has been addressed and we should go back to continuing sequential progress in that area as well. Had we not experienced this specific issue, our gross margin would have been over 8% and in line with our guidance.

Operating expenses were down slightly for the quarter, at $63.3 million. At $68.9 million, operating income improved by 7% over the prior quarter. Our operating margin was 4.1%, which was a 20 basis point sequential improvement. The tax rate for the quarter came in lower than planned at 14% of pretax income. Based on our current profit mix assumptions for FY 2011, we believe our FY 2011 rate will be in the 16% to 18% range. On a non-GAAP basis, we earned $37.8 million in net income.

On slide five we are showing you some of our key non-GAAP P&L measures. The revenue trend has been very strong the last four quarters, as we've moved out of the recession. Revenue has climbed 25% since the fourth quarter of last year. For the fiscal year, revenue was up 22%. Gross profit has shown strong improvement since Q4 of last year, with growth of 37%. Compared to the fourth quarter of FY 2009, gross margin has improved from 7.1% to 7.8%.

While revenue and gross profit have grown significantly over the last year, our operating expenses have remained well-controlled. In fact, our operating expenses declined by 2% when compared to Q3. With relatively flat operating expense, and strong gross profit growth, operating profit has grown even faster since the fourth quarter of FY 2009. Additionally, operating profit is roughly doubled since the fourth quarter last year. During this period, operating margin improved from 2.6% to 4.1%. We also continue to see solid improvement in EBITDA in the fourth quarter. Our EBITDA for the fourth quarter was $93 million, and our EBITDA margin was 5.5% for the fourth quarter. For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Now please turn to slide six. Our earnings per share has improved dramatically since the fourth quarter of last year. After normalizing for tax rate changes, our EPS is still up significantly. As I mentioned earlier, at the annual tax rate, our EPS for the fourth quarter would have been $0.43.

I'd like to turn your attention to the balance sheet on slide seven. Our cash and cash equivalents were $593 million. Cash was down $72 million from the previous quarter for several reasons. The most significant items related to accounts receivable. As planned and previously communicated, we eliminated our accounts receivable factoring program this quarter. This caused a $22 million rise in accounts receivable and a commensurate decline in cash flow from operations. The single biggest factor in the cash flow from operations was an increase in accounts payable related to a higher percentage of our shipments occurring at the end of the quarter when compared to prior periods. When compared to the prior quarter, our calculations suggest this contributed to a $49 million increase in accounts receivable, and a corresponding reduction in cash flow from operations.

We have property on the balance sheet which is listed for sale. The list value of this property is over $130 million. For FY 2010 we generated about $29 million in cash from the sale of real estate. Capital expenditures were $37 million for the quarter. This brings the capital expense for the year up to $81 million, which is very close to the $80 million we indicated at the beginning of the year.

Let's turn to slide eight to discuss some of the balance sheet metrics. I've 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 7.3, but, frankly, we had expected more improvement. We still expect 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 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 50.9 last quarter to 49.9 days this quarter. We saw an increase in accounts receivable days sales outstanding from 48.3 to 51.8 days. This was primarily a reflection of more shipments later in the quarter than in the prior quarter. Accounts payable was unfavorable as it decreased from 56.1 days to 55.1 days. Overall, cash cycle time increased from 43.1 days last quarter, to 46.5 days this quarter.

Finally, we have made outstanding strides in return on invested capital over the last four quarters. We believe this is an important measure in demonstrating our ability to add value to our shareholders. While we are pleased with an ROIC of 18%, we believe there is still room to improve through both margin expansion and better asset velocity. At this point, I'll turn the discussion back over to Jure for more comments on the business and our guidance for next quarter.

Thanks, Bob. Ladies and gentlemen, first, fiscal year 2010 was a great year for us any way you look at it. Number one, I can tell you that our new strategy is working and most importantly that we differentiated our strategy in this competitive world. We are well focused on specialized technology offering, really focusing on key markets where we have a competitive advantage and focusing on key customers that we can grow with for many years to come. Our strategy allows us to position our Company during the fiscal year 2010 as a stronger leader with our customers and position us for a better future. And I'll talk more about it later.

Now, could you please turn over to slide nine. What you see here is a breakdown of revenue. So, what I'd like to do here is talk a little bit more about the end market demand for the fourth quarter fiscal year 2010, and talk about the forecast demand for the first quarter of fiscal year 2011. As you can tell, a great year to year comparison, we grew 22%. All our four key markets that we focus on grew in double-digits. Communication networks 23.2% year-over-year. Enterprise, computing and storage, 18.6% year-over-year. Industrial, defense and medical, 21%. And multimedia, 24.3%. But now let me talk to you a little bit more in details quarter to quarter and also thinking where we're going from here.

I'm going to use a couple comments here. I'm going to use the word near term. Near term, really means that next three months and long term, four to 12 months. So, as I look at communications networks that represent about 46% of our revenue last quarter. That grew nicely, 12.9% and most importantly, I think in the near term that business is still very stable. We expect some kind of flow growth in the short term, which is basically next three months. Longer term, I think we're well-positioned for strong growth in this market segment.

As I look at the enterprise computing and storage quarter to quarter, that market was down 9.8%. So, that was mainly driven by two customers. Programs that were involved, demand is very weak. But as we look at the future, we believe that in near term those programs will continue to be flat. The longer term, we expect to see growth, renew programs where we are really focused and we are positioned, I believe, to eventually grow that market segment again.

On industrial, defense and medical, it's a very important group for us. In the near term, we see a slow growth here. Longer term forecast also looks very strong. I think we're well-positioned for future expansion. Quarter to quarter growth there was 3.7%.

As we go to multimedia, quarter to quarter that was down 5.3%. So, in the near term, we still see that business flat, maybe slightly down. Longer term, again, the forecast looks good at this time. So, if you look at the fourth quarter, we also have one customer in communication networks that was 10.8%. Also just want to let you know this customer was not a 10% customer for fiscal year 2010. So, overall, we do expect to grow in all our markets in fiscal year 2011 and let me give you more comments later.

Now, what I'd like you to do is turn it over to slide 10 and here I want to talk to you a little bit about outlook and I'll make some comments. Revenue outlook for next quarter is $1.625 billion to $1.67 billion.(Sic-see press release) Gross margin, 8% to 8.2%. Operating expenses should be around $65 million. We expect operating margins to come in between 4.1% and 4.3%. Interest expense and other should be around $27 million. Depreciation and amortization for next quarter should be approximately $25 million.

For CapEx, we -- as Bob mentioned, we spent $37 million last quarter. This coming quarter, we're going to -- we're planning to spend around $40 million. For a year, probably that number is going to be between $90 million and $100 million. We spend a little bit more now at beginning because we've got some programs that we need to wrap up in later part of 2011. Tax rate is 16% to 18%. And for calculation, use number of shares, approximately 83 million to 84 million. Our non-GAAP EPS we expect to be in the range of $0.40 to $0.44.

Let me now make a few comments regarding this forecast. For the first quarter fiscal year 2011, our customer forecasts are more uncertain and because of that we have to be more conservative. Let me give you some of the reasons. What we see as the forecast that we see today are more customer specific and more program specific, and some customers have been driving supply chain very strong for many quarters and now they are pausing to review their future requirements. We also know that some of our customers have a lot of inventory in the pipeline and that's one of the -- one of the other reasons that is causing some of the slowdown in the near term. We still see -- we still have some component shortages and still expect to leave some sales on the table end of this first quarter fiscal year 2011. Again, it's still very hard to predict the future economy, but based on our customer forecasts and other input that we get from our customers on a daily basis, we expect to see good growth for fiscal year 2011.

Now I'd like to move on and talk to you a little about our margin goals in the short term and the long-term. Sanmina-SCI had a nice margin improvement in fiscal year 2010 and as we exit the fourth quarter at 4.1% margin, up from 2.6% year-ago, we believe that we are well positioned to continue to expand our margins through 2011. Next for SCI is to continue to improve these margins and drive margins over 5%. We believe as long as the economy cooperates with us, that we have a potential to accomplish that in calendar year 2011. We also want to reconfirm our long-term goal for operating margin of 6% plus. We definitely believe this is attainable and we do believe we have a road map to achieve that.

Now I'd like to give you some highlights, how and why do we believe that. First of all, let's go back to our strategy. As we're focused on our new strategy, which is really focused on being differentiated from our competition and as you review our business, we have a small percentage of our Company that focuses on consumer related products. Mainly, and I should say most of our revenue today comes from infrastructure, high end infrastructure products, focusing on communication networks, defense and aerospace industry, medical, industrial, semiconductor industry, clean technology. And with other markets that we also have at enterprise, computing and storage and multimedia, here we focus also a on higher end and unique products.

We also have component technology which will generate better than typical EMS average operating margin. This group has a much better potential in fiscal year 2011, basically what we accomplished in 2010. And I really believe as we look in the future, this group should contribute a lot better than what it did in 2010. We're also going to continue to invest in new technologies, skill and capabilities that will drive much better margin in the future, such as we did so far in 2010 in optical, RF and micro electronic products. We continued to invest in defense and aerospace products. This is not just defense and aerospace EMS, which we still go after, but really going after the products that we design and build directly for the government. Also, we continue to invest in medical, industrial, for future growth. Also we continue to invest in other businesses, that we're not ready to talk about right now, that will deliver a better, more sustainable growth and better margins in the future.

So, in summary, we believe the demand is still strong, new products are coming up. We have a fair amount of those in the pipeline and we believe that our wins will contribute fair amount of revenue in the second half of fiscal year 2011. So, bottom line, we do still expect a good growth for fiscal year 2011.

So, in summary, long-term road map remains solid for us. If you just look at 2011 and also the longer term in our strategy as we look three years out. So, I can tell you that our strategy is geared towards the long-term success, focusing on sustainable margin expansion and in all economic environments because we believe it will be driven by better product mix, no matter what happens in the economy. Of course, revenue growth is still important to us and we believe we'll continue to grow faster than industry. But margins should grow even at the faster rate. So, the bottom line, we do believe that our strategy is working. Now I would like to take this opportunity and thank you all for your time you're spending with us today. I would also like to thank all our employees for their hard work and dedication and support now for many years. So, with that, Operator, we are now ready to open the line for questions and answers. Thank you, again.

(Operator Instructions) And your first question is from Craig Hettenbach with Goldman Sachs.

Thank you. Jure, you mentioned the uncertainty for some customer forecasts. Can you just go by end market and talk about between com, industrial, the multimedia as well and just kind of see what you're seeing by end market.

Well, first of all, as I mentioned in my prepared statement, first of all, the communication networks for us seem like it's in a good position. While I think in the near term we see some adjustments in the forecast with our customer, but the long-term we feel very comfortable there. On industrial medical and defense and aerospace, again, that industry, similar. I think we've got a lot of new programs involved in that area. I think we're well-positioned, so the longer term we expect to see the growth.

In the short term, I think it's a similar thing. I think it's adjustments. Some of our customers were driving inventories or demand pretty hard in the last two, three quarters. So, we believe there's some adjustments going on. And at the same time, I think some customers are worried about economy. They're just looking and making sure that their forecast is going to be there. It's hard for us to, again, to forecast economy, but we really feel comfortable based on the pipeline that we have, especially organic wins that we've already won during the 2010, and the programs that we're working today.

On a multimedia, to us I think it's more -- it's mainly timing. There's a lot of talk going about seasonality. That business typically you can't predict in one quarter to another, but if you look at over the year, that business grew for us. We believe it's -- for us it's a temporary slowdown, maybe a quarter to quarter and-a-half. But we see that business coming back to just as strong numbers that we had this year and maybe even the larger numbers.

Okay. Thanks for all the color there. And Bob, if I could follow up, after the snapback that you expect in gross margin in the December quarter, how about as you go through the rest of fiscal 2011 in terms of your incremental gross margin target? Is it still in the 10% to 15% range or any update there?

Well, first of all, we do expect Q1 to come back and it's because of the specific issue which we've got, we're addressing at this point in time. So, I don't think Q1 is going to be a concern. We expect to continue to make sequential progress the way we have been and I don't want to get into specific contribution margins because, frankly, we haven't hit it the last two quarters, but I expect that we'll see progress during the year.

Okay. Thank you.

Thanks, Craig.

Your next question is from Lou Miscioscia of Collins Stewart.

Hello, Lou.

Hi, Jure, how are you today?

Great, great.

You mentioned some things shipped late in the quarter. Maybe if you could just a little bit about that. Was there anything particular about that? Especially, obviously you looked at the December quarter guidance being what would be a little bit on the conservative side in comparison to normal seasonality.

Right. Well, definitely, first of all, let's talk about December quarter. There's a lot less seasonality going on today. I don't know if we have any, to be honest with you, especially in the type of products that we build. As you know, our consumer business is almost -- nothing. What we call consumer is really -- it's in the bucket, but it's really not a true consumer business. So, linearity, what Bob talked about, if you look at the last quarter, it was not as linear as we typically quote. We think it's one quarter driven. We're hoping that this quarter will be a little bit better. Bob, you want to make any comments on that?

Again, I think it was an aberration. We're definitely being cautious moving forward. I don't know that I have a lot to add there.

And then as we look to maybe the first half of your fiscal year to obviously the second half, maybe help us out with March. March is usually a seasonally down quarter. Should we expect just your normal seasonality? I haven't recalculated the number yet, but expect that. Sounds like you've got some wins coming in, so then a pretty strong ramp from then into the June and then September quarters?

Well, first of all, I don't know if we're going to have a seasonal drop at all. If you look at the last year, we grew, March quarter was stronger than the December quarter. Can this happen this year? The answer is yes. I don't think we're ready at this time, Lou, to be able to tell you exactly what's going on. I think we need to wait at least next couple months to see how these forecasts are going to shake up with our customers before we can be firm on that. But overall, I think we expect a growth year and hopefully we'll accomplish a double-digit growth. Unless really something falls off the cliff, we expect to grow.

Okay. Thank you.

Thanks, Lou.

Thanks.

Your next question is from Jim Suva with Citi.

Hello, Jim.

Thank you. And congratulations to you and your team.

Thanks, Jim.

A quick question and then maybe a more detailed follow-up. Sounds like the seasonal where typically December is up in many of your businesses that right now given the inventory adjustments and uncertainty in demand, that basically all the segments are below normal seasonality for the December quarter? Is that correct?

Well, I would say -- I wouldn't put them all in a segment group. What I said in my prepared statements and I'm just giving you what we have here, it's really more customer-driven and sometimes project-driven or part number-driven. So, I can't tell you that every customer in communication network is going to be flat. We have some customers where really demand is very strong and some customers have certain part numbers or projects that are very, very strong and other ones are not, and that goes really to every bucket in my business, even the businesses that were down last quarter in those buckets, we have certain customers that are very strong. I would summarize that, Jim, more as customer-driven than just a segment-driven.

Okay. That's fair. But to circle back, it seems like there's always customer-driven things, programs starting and launching. So, either it's something specific to Sanmina or the March quarter should be meaningful, better than seasonality, and maybe that's what you're alluding to already.

That's what I was alluding. I personally believe that -- I don't see us going down in March at this time. But as Lou asked a similar question, I said I don't know if I'm ready to answer that directly. I'm just trying to say that I think we're going to have less seasonality going on.

Now I fully understand. Thank you, Jure. A quick follow-up. On the operating margins, you mentioned PCB challenges this quarter. Can you go into a little bit more details. Were those on the pricing? Were they on the yields? Were they something customer specific? Were they on transition of programs or how should we think about that and how quickly you'll have that resolved?

I think that was more specific plan related mainly to execution and the management.

Great. Thank you very much, Jure, to you and your team.

Thanks, Jim.

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

Can you hear me okay?

Yes, Joe.

Thanks. Jure, first off, just a quick clarification question. You had mentioned briefly you continuing to invest in other businesses. I know you can't provide a bunch of details, but just from a clarification perspective, were you talking about expanding into new markets organically or are you talking about completing more M&A like we saw with BreconRidge?

First of all, I think we have a lot of organic programs going on right now, but BreconRidge was a good example of we've been playing with optical business for last five, six years and few years ago we made a strategy to really drive into that business and grow that business. So, we really took that business in the right direction and I think BreconRidge is positioned -- completed a lot of the things that we're missing, especially from engineering point of view and some of the products capabilities point of view. So, that's one of them.

I think we will continue to look for right opportunity if they make business sense. So, we've been heavily focused also on our defense product where we are developing products directly for government. We are the general contractor in there. So, those are some of the things that we -- we've got to do something to improve this margin. We can't just focus on a typical EMS margins.

Combination of organic and inorganic you were referring to?

Right, right.

Okay. Then second question, you have talked about the issues in PCBs being up I guess. My question is kind of on the top line if you look at PCB. Just kind of curious what you saw as far as demand versus expectations there, how the linearity was, if you saw anything abnormal, such as back end weighting of the quarter any more than usual?

I would say printed circuit boards in all our components was pretty strong and continued to be pretty strong, and that's a good sign. That's a good sign that the demand for components is still strong and to be honest with you, any issues that we had, it was more delivering what our customers were looking for in the last quarter. So, we're optimistic that the component businesses will grow for us and I think they're positioned to grow hopefully at the higher rate and overall Company.

Last thing for you if I could. Hi, Bob, operating expense obviously was a positive surprise this quarter. If the beginning part of the fiscal year plays out like Jure is saying, kind of a flattish start to the year it looks like, how do you expect operating expense dollars to trend for you?

I think they're going to continue to be relatively flat. You'll see some very minor increases, perhaps. We really felt we could grow the business significantly without increasing operating expense much at all.

Thanks.

Thanks a lot.

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

Yes, good evening.

Hi, Sean.

Hi, Sean.

Was looking to see if we might be able to get a little bit of color. Previously or in the past, you certainly provided some detail around book-to-bill and then some more detail around the components and it sounds like you continue to make some progress there. So, if there's a way we could flush out at the corporate and then at the components level, that would be helpful.

Yes. I have a number in front of me that our corporate book-to-bill was about 1.4 to 1. And components I believe were better than that.

1.4 to 1?

Oh four, I'm sorry.

1.04. Okay.

To one.

From a utilization standpoint, is there a way you could provide a little bit of color around that?

It didn't change much from the last quarter. If you strictly look at the -- based on the factory, based on people, about 85% to 90% utilization. Based on equipment, about 75%.

Okay. And then lastly, you certainly talked for a while around deleveraging your business and as we're now entering the new fiscal year and you've talked a little bit around some of the thoughts you have on cash flow and of course your CapEx expectations, is there a way if you can provide a little bit more around how you see taking out a little bit more of your debt and the degree you can bring down some of those substantial interest payments?

Turn it over to my CFO.

Yes, hi, Sean. We are -- we continue to be committed to delevering the Company and doing that in a prudent way over time. Obviously, we were growing a lot this past year and so we paid down some debt. We paid down about $175 million in November. We were cautious as we were growing later in the year. I think the growth rate will be lower next year. I think it's probably still going to be double-digit, but I think it will be below last year and I think that should mean that we're able to generate significantly more cash next year and our commitment, again, over time is to delever the Company.

Okay. Great. Thanks.

Thanks, Sean.

And your next question is from Amit Daryanani with RBC Capital Markets.

Hello, Amit.

Hi, Jure, how you doing?

Good, good.

Just want to go back to the PCB issue. Just get some color on what sort of execution was it and have you already fixed, hence the comfort that you recover, the $3.5 million to $4 million headwind you had on the gross line.

I think what we said is exactly that. We have a cost issue and execution issue. We believe we've got our hands around it and we believe it's a one quarter scenario. But I think we're going to make sure that we get the job done there, we're 100% focused. My confidence is very high that, that is behind us.

All right. And just broadly when you look at your component business, aggregate companies seem to be seeing on the component side, lead times are starting to normalize, [prices have to erode] a little bit over here. Are you concerned with that scenario that your margin on the component side could actually trend down in the near term for the next few quarters?

I don't think so. Let me tell you why. Unless the whole demand falls off the cliff, okay, we believe that some of the issues that we have for a long time and bringing the new customer base, bringing the new management, all the destruction, all the hard work that we put behind us now is done. I think to us right now it's all about building these businesses again and I think we did a nice improvement in last year. Everything that I know today, we do expect to make even bigger improvement in 2011. And we also have brought in a lot more capabilities in those businesses including the optical side of the business and we're very confident that we're in the right track.

Got it. And then did you disclose who the customer was that was over 10% of revenues in the quarter?

We did not disclose that. It's from a communication networks.

You won't mention the OEM though?

No. It's 10.8%.

All right. Thank you.

Operator, we have time for one more call. Hello, Operator?

Yes, sir. Your next question is from Alex Blanton with Ingalls & Snyder.

Hello, Alex.

Hi, how are you?

Good, good.

Just curious, Jure, again on this component question. You've been making printed circuit boards for 30 years. That was the Company's original business.

That's correct.

So, what was it that caused this? Was it just one plant that -- and the management sort of failure in one plant and was this because you had moved production to China where you don't have the same degree of, perhaps, skill that you had in the US and in Europe when you were there? Is that what happened or -- ?

Let me explain it to you a little bit more, Alex. First of all, our component businesses are not performing at the margins that we expect them to perform. Our margins on average in component business should be at 15% plus gross margin with operating margin around 10%. They're not there today, okay.

Right.

The last quarter they were inching up better than our corporate average and this quarter they were in that direction. We had, what I would call, small misstep in one of the plants in Asia that caused us to go slightly below. So, these are the businesses that we are driving margin improvements and when you have a small bump in the road like this, it's hard to recover, especially when it happens in the quarter. It's really nothing more than -- these type of things happen. It's a part of manufacturing. Also the plant that it happened, this plant has been around for many, many years and so it's just one of those things. If you ever work in manufacturing, these things do happen. But it's things that is behind us. It's a one quarter scenario.

It wasn't your plant for many, many years, right?

It's been our plant for many years.

In Asia?

Yes.

Okay. With the yield situation or did things get -- did bad parts get shipped and discovered later or did you find out ahead of time before you shipped them?

No, no, nothing. This is more, as I said, it's a more cost issue, not a quality issue.

Not a quality, just cost issue?

That's correct. And execution. Cost and execution, the combined. If we had a better cost, we would have executed better, so it's really more around the cost.

More like a purchasing issue?

I don't want to go too much detail.

Okay. All right. Thanks.

But it's something that is behind us, Alex, and that's most important and we're excited that these businesses are moving in the right direction.

Thank you.

Operator, again, that's the last call we have for today. I really want to thank everybody for joining us on this call and if there's any more questions, please give us a call. Thanks again. Bye-bye.

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