Sanmina Corp (SANM) 2013 Q2 法說會逐字稿

Good afternoon. My name is Candace, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Sanmina second quarter fiscal year 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Ms. Paige Bombino, Director of Investor Relations, you may begin your conference.

Thank you, Candace. Good afternoon ladies and gentlemen, and welcome to Sanmina's second quarter fiscal 2013 earnings call. A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website.

Please turn to Page 2, the Safe Harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operation may differ significantly as a result of various factors, including the state of the global 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 risk factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release and slides issued today that we are providing you with you the Statements of Operations for the three months and six months ended March 30, 2013 on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is available, and provided in our press release and slides posted on the website.

In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, 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 our gross profit, gross margins, operating income, operating margin, taxes, 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. With me on this conference call is Bob Eulau, our CFO.

Hello, everyone.

On agenda we have that Bob will review our financial results for the second quarter. Then I will follow up with comments relative to some SG&A results and future goals. Then Bob and I will open it up for question-and-answers.

And now I turn this call over to Bob. Bob?

Thanks, Jure. Please turn to Slide 3.

As we expected, the second quarter was challenging from a revenue and an earnings per share perspective, the cash generation was excellent again. Revenue of $1.43 billion was down 4.5% on a sequential basis, and down 2.4% from the second quarter last year. Non-GAAP EPS was $0.30. This was based on 84.7 million shares outstanding on a fully diluted basis.

Cash generation was outstanding this quarter, with cash flow from operations at $65 million, and free cash flow at $69 million. I will discuss cash in more detail in a few minutes.

Please turn to Slide 4. Revenue was down 4.5%, or $67 million from Q1, to $1.428 billion. From a GAAP perspective, reported net income of approximately $21 million, which results in earnings per share of $0.25.

Restructuring charges for the quarter were $6.9 million. The restructuring is moving forward on the two facilities that we mentioned last year. We have finished production in both facilities as of the end of the second quarter. We are expecting restructuring of $4 million to $6 million in the third quarter.

My remaining comments will focus on the non-GAAP financials for the second quarter. At $102 million, gross profit was up $600,000 from the prior quarter. Gross margin was 7.1%, which was 30 basis points above the previous quarter.

Operating expenses were up $2 million for the quarter, at $61.9 million. This represents a 30 basis point increase in operating expenses as a percent of revenue. The increase was primarily related to increased spending in sales and engineering.

At $40 million, operating income decreased by 3.4% from the prior quarter. Operating margin was 2.8%, which was the same as last quarter. Other income and expense was at $10.2 million.

The tax rate for the quarter was 15% of pretax income, which was in the range we had expected. On a non-GAAP basis, we earned $25.3 million in net income, or $0.30 per share.

Please turn to Slide 5, where we're providing more information on the segments that we report. To refresh your memory, the Integrated Manufacturing Solutions segment includes printed circuit board assembly and test, optical and RF modules, final system assembly and test, as well as direct order fulfillment. As you can see from the graph on the left, the IMS segment was a challenge for us this quarter.

Our revenue was down $45 million, or 3.7% from last quarter, which was in line with what we had expected. Our gross margin improved by 20 basis points, in spite of this decline.

The second segment for us is Components, Product, and Services. Components include printed circuit board fabrication, backplane assemblies, cable assemblies, enclosures, precision machining, and plastic injection molding. Products include computing and storage products, defense and aerospace products, as well as memory and solid-state drive modules. Services include design and engineering, as well as logistics and repair services.

In aggregate, the revenue for this segment was down $18 million, or 5.5%, with gross margin up 90 basis points to 10.5%. This gross margin improvement reflects lower fixed costs in our printed circuit board business as we begin to realize the benefit of our restructuring efforts. This was partially offset by the impact of volume decreases in several of the other businesses.

On Slide 6, we are showing you some of our key non-GAAP P&L metrics. Revenue was down $67 million, or 4.5% from last quarter. Demand was mixed across the segments, with Communications and Medical defense and Industrial increasing during the quarter, while Computing and Storage and Multimedia were down. When compared to Q2 last year, total revenue was down 2.4%.

Moving onto gross profit, we had a $1 million increase in gross profit in the second quarter, while gross margin increased to 7.1%, which was up 30 basis points from the prior quarter. As you just saw, gross profit was up slightly for Components, Products, and Services, while gross profit in the Integrated Manufacturing Solution segment was down slightly.

Our operating profit decreased 3.4% from last quarter to $40 million. This led to operating margin at 2.8%. Net interest expense declined by $2.7 million this quarter, as we continued to see the benefits of the de-leveraging of our balance sheet.

Now I would like to turn your attention to the balance sheet on Slide 7. Our cash and cash equivalents were $412 million. Cash was down $79 million from the previous quarter. This decline in cash was driven by the significant reduction in total debt we had this quarter.

Accounts receivable declined this quarter, while both inventory and accounts payable increased during the quarter. Property, plant, and equipment was down $15 million for the quarter. The biggest change in the balance sheet was the $161 million reduction in long-term debt, which we announced last quarter.

Please turn to Slide 8. Solid cash generation combined with some well-timed capital market transactions has allowed us to make great strides in improving our capital structure. Since the end of fiscal year 2009, we have reduced our long-term debt by almost $900 million. We are now forecasting our net interest expense to be around $40 million for the current fiscal year. In addition to the substantial reduction in debt over the last three-plus years, we have also significantly changed the maturity profile of our debt. We do not have any significant long-term debt due until 2019.

Please turn to Slide 9, where we will review our balance sheet metrics. Cash was down $79 million from the first quarter, as a result of the $161 million reduction in long-term debt. Cash flow from operations for the quarter was strong, at $65 million. Gross capital expenditures were $16 million.

We sold real estate for $20.2 million, which resulted in net capital expenditures of minus $4 million for the quarter. Overall, this led to $69 million in free cash flow.

Inventory was a disappointment for the quarter. Inventory dollars were up $19 million from last quarter at $799 million, while the inventory turns declined from 6.9 to 6.7. Some of this inventory is related to April shipment commitments, but compared to Q2 last year, inventory is down $63 million.

We are showing cash cycle days, which combines our cycle time for inventory, accounts receivable, and accounts payable. Overall, cash cycle time increased slightly from 51.7 days last quarter to 52 days, a 1.7 day increase in inventory days was mostly offset by improvement by improvement in accounts receivable by 1.5 days. Days payable outstanding were flat.

Finally, return on investment capital was flat, at 9.9% for the second quarter. This metric is primarily impacted by our lower profitability in the first half of this year.

Please turn to Slide 10. I would now like to share with you our guidance for the third fiscal quarter of fiscal year 2013. Our view is that revenue will be in the range of $1.45 billion to $1.5 billion. We expect that gross margin will be in the range of 7% to 7.4%.

Operating expense should be $62 million to $64 million. This leads to an operating margin in the range of 2.8% to 3.2%. We expect that other income and expense will be in the range of $8 million to $10 million.

We expect the tax rate to remain in the range of 14% to 16%, and we expect our fully diluted share count to be around 85 million shares, plus or minus 0.5 million shares. When you consider all of this guidance, we believe that will you end up with earnings per share in the range of $0.32 to $0.38. Finally, for your cash flow modeling, we expect that gross capital expenditures will be around $20 million, while depreciation and amortization will be around $25 million.

Overall, we continue to navigate through a challenging macroeconomic environment. Profitable growth and free cash flow generation are our highest priorities, as we see improving growth prospects across our customer and business space. At this point, I will turn the discussion back over to Jure for more comments on our target markets and business strategy.

Thanks Bob. Ladies and gentlemen, I will also review business environment for second quarter, talk about short-term business environment, mainly what's going in our June quarter, then I will talk to you about outlook for the third quarter, and the rest of the calendar year 2013. So let me recap second quarter.

Our second quarter results were in line with our expectations, as Bob mentioned, but in this macroeconomic environment, what's challenging for some of our key customers, and forecasting demand during the quarter, was also challenging for us. But we also accomplished a lot of good things during the quarter. Working with our customers and new opportunities, and positioning for the future as these new projects are coming to the market. Overall, a respectable quarter to continue to build on.

Now please turn to Slide 12. Now, let me talk to you about the second quarter revenue by end markets. First, top 10 customers were 50.3% of our revenue. We had one customer at 10%-plus of our revenue.

I will make a few comments what happened during the quarter on market segments groups. If you look at Communication Networks, beginning of the quarter we did tell that you overall Communication Networks group is going to be down for the quarter. Actually, it came up about 0.5%.

Demand during the quarter did stabilize. We had a nice growth from our new projects. Computing and Storage segment, we did forecast to be down. That came down 15.8%, more than we forecasted internally. We basically had a weaker demand across all market segments.

Defense, Industrial, Medical, we did forecast to be up. Actually, that came in 2.9% growth. Defense and Medical was basically, I would say roughly flat. Industrial segment was up. That's what basically drove the growth in this segment.

Multimedia, we did forecast it to be down. This was a seasonally weak quarter for our Multimedia business. That came down approximately 22%.

Now please turn to Slide 13. Now let me talk to you about outlook for the third quarter. We starting to see more positive -- starting to feel more positive about rest of the calendar year 2013. We are forecasting that demand should continue to improve across most of our market segment.

As we look at outlook, as Bob talked about, $1.45 billion to $1.5 billion. And as also, would like to make a few comments about the market segmentation here. So we look at the Communication Networks, we're forecasting that to be slightly up. Demand is stable and starting to improve at networking and wireless infrastructure.

Enterprise Computing and Storage we also forecasting to be up. We're expecting better demand in this market segment. New projects are starting to drive the growth, and we are also continuing to work on some good opportunities in this segment.

Defense, Industrial and Medical we are forecasting to be slightly up for the quarter. Defense and Industrial segment should continue to improve. For Medical, we're forecasting flat, slightly up. Overall, good upside potential longer term for this segment.

Multimedia, we're forecasting to be slightly down. We should see more stability and improving in this market segment.

Now let me talk to you now about sales bookings. Bookings for second quarter, book-to-bill was positive. We saw strong bookings the last month of the quarter.

Also, as we look at the third quarter sales forecast, we remain encouraged by better customer forecasts. And we are expecting to improve sales bookings in the third quarter, and we believe this should continue to improve for the rest of the calendar year 2013. Overall market opportunities remain attractive for us.

So now, please turn to Slide 15. In summary, we have a better customer forecast, and we starting to -- we believe this will drive the growth during this quarter and the rest of the year. We continue to invest in research and development, manufacturing processes, and systems. Also, I can tell that inventory across most of our markets we serve are at the low levels, which should be a positive as we go into the few quarters from now. And overall, we continue to position the Company well, and I believe that our market opportunities are continue to be very positive.

So, ladies and gentlemen, now I would like to thank you for your time and support. Operator, we're now ready to open these lines for question and answers. Thank you, again.

(Operator Instructions)

And your first question comes from Sean Hannan with Needham & Company.

Good afternoon. Jure, thanks for the thoughts around the expectations you have for second half of the year. I was looking to see if perhaps you or Bob, if you want to chime in as well, if you could elaborate a little bit around what gives you the confidence of those second half ramps? Is it the nature of the product and markets that -- where you're getting some better forecasts from your customers? Is this the nature of, really, the incremental ramps that are coming in here, and are there any markets that really stand out in your mind that should drive some of that better performances as we move forward? Thanks.

Yes, Sean, let me make additional comments. I just talked about outlook that we have by market segments. Communication networks, as you know, is approximately 50% of our revenue in last quarter, and probably going to be very similar percentage this coming quarter. We see a lot more positive forecasts there, especially in the networking side, and wireless side of infrastructure. As you know, that business for us was kind of slow in the last couple of quarters. We see lot more action there. Also, some of the new programs that we had there, we won during the year, as I mentioned. Even the last quarter, we saw some positive upside, and that continues to be more positive in the third quarter. And I expect this segment to continue to improve for the rest of the calendar year.

Enterprise and Computing, again, that's been disappointing for us, especially last quarter. We knew it was going to be down. We expect it to be a little better than what it was. But overall, if you really analyze customer by customer, and project by project, we basically had a weaker demand across most of these programs. As we look for third quarter, we see more positive forecast there, and I believe, based on the projects that we're working on, most of these are new opportunities, that we expect also that segment to improve. On our third segment, Defense, Industrial, Medical, as I mentioned in my prepared statement, Industrial did a little bit better than what we expected last quarter.

Defense, we had some programs that got pushed out. Hopefully those programs will come in this quarter, and continue, at least in a stronger level through the rest of the year than what we saw in the second quarter. Medical. Medical for us, we have a lot of activities in Medical. I think we won during the year some good programs, and just getting these programs moving and starting shipment is a little bit behind. But as we look at the rest of the year, we also see some upside there. So my summary, Sean, and also the Multimedia. Typically seasonally for us, second quarter is the weaker quarter. I mean, they're starting to stabilize there, and we expect that to see some improvement. So overall, we're more positive with what we have in front of us, and I think the new programs also should help us drive the growth, definitely in this quarter, but also the rest of the calendar year.

Okay. That's helpful.

Yes, I don't have a lot to add. I mean, I agree with Jure. I mean, so much of the Company is driven by Communications, and it looks promising for the rest of the year, based on what we're getting on forecast from our customers. The other area that looks pretty promising for us is Industrial. Getting a lot of good indications from customers there, as well.

That's great. Okay. And then second question, when you look at the new program win environment, how would you characterize the environment today? Do you feel the wins that you had in a quarter ago, or even a year ago, were kind of similar dollar levels in terms of what you secured? Or, in other words, we saw some acceleration, I think, for a number of periods through '12 that occurred in new business. And trying to understand whether that acceleration continued for you, or has it normalized a little bit more in the near term? Thanks.

Yes. Sean, I think in the near-term, first of all, we've been really focused in the last couple of years, to focus on quality of the growth, quality of the earnings, so what we call intern is sustainable, customer base that will allowed us to make little bit of money long term. So we've been a lot more pickier. We've been working a lot of new opportunities. I think on positive side, if I look across, majority of our revenue is being driven by the, what I say, newer programs for our customer base. These programs are a lot more exciting for our customers, because it's really the future for most of our customers. So we're really fortunate that most of our revenue going forward is actually coming from the programs that we won in the last year or two.

Great. Thank you, Jure.

Thanks, Sean.

And your next question comes from Brian Alexander with Raymond James.

Thanks. Good evening, guys.

Hi, Brian.

Hi. Just to follow up on that, Jure, in terms of the higher level of confidence versus a quarter ago. When we look at the Communications segment, how much of the improvement there that you cited in networking and Wireless, and then also on the Enterprise Computing side, how much of the improvement is a function of better demand from your customers and improved forecast going forward from existing customers versus the new program ramps and new customer wins? I'm really trying to isolate the underlying demand picture and how much better you think that's gotten.

Brian, first of all, on Communication networks, definitely we having a stronger demand on the networking side and the wireless infrastructure, including LTE projects that are starting to pick up, and so on. So these are the programs, as I mentioned earlier, that we won in last 1 year, 1.5 years. So we starting to see stronger demand, and I believe, based everything I see today, that should continue to move in the right direction. On Enterprise Computing and Storage, our new programs that we're working on have not been growing as fast as what we expected, let's say, six months ago. So, but what we saw in second quarter, we just had, what I call, poor demand from across the segment there. As we look to the third quarter, we see a stronger demand across that segment, and also some of these new programs that we're working on, we should start seeing more revenue going out in short term, and hopefully more in the longer term.

Okay, and then just a follow-up, Bob. Based on your guidance for June, it seems like the revenue is going to be down year-over-year, but gross and operating margins and profit dollars should be up. I just want to confirm that's how you are thinking about the about the business, and do you think that that's sustainable in September as well, based on all the commentary you've given us about a better demand environment? In other words, do you think we've hit bottom on margins as we look forward on a year-over-year basis, even if revenue still is not growing?

Yes, our best estimate is that second quarter is the bottom in terms of both revenue and on an operating or a gross profit standpoint. So I think things will get better in Q3. I agree with your observations on Q3 relative to a year ago. If you look at the guidance that I gave you, and remember, we took actions late last year in order to improve our cost structure this year. As I mentioned in the last couple calls, we expect to be fully realizing those benefits by the time we get to the September quarter.

I guess spirit of the question, as you look to the September quarter, and realizing you're not giving guidance for that yet, but if what you are seeing continues, do you think that will be another quarter where margins will be up on a year-over-year basis?

Yes. I don't want to comment specifically year-over-year, but we do think we're going see margin improvement sequentially as we move forward from here.

And then just finally on the buyback, it doesn't sound like that's embedded in your share count forecast for June. So when are you thinking of being active on the buyback, and how aggressive do you think you might be?

Let me maybe broaden that question to one we often get, which is what are our plans in terms of use of all this cash we're generating? Our priorities remain the same, which is first, make sure that we've got the cash to grow the business, and we are expecting to be growing, as Jure mentioned, over the remainder of the year. So we need to make sure that we've got the cash for that. We did, as I said in my remarks, took out about, I think it was $154 million in total debt, $161 million in long-term debt. So we paid -- we used quite a bit of cash this past quarter in terms of bringing down the debt structure. We'll continue to look at small M&A transactions that fit with what we're doing strategically, and then it's really a question going forward of going through analysis at any given point in time, in terms of are we better offer continuing to de-lever the Company, are we better off repurchasing equity? Fortunately we're now in a state where we can make that decision and we aren't constrained by any of our existing debt.

Okay. All right, thanks very much.

Thanks, Brian.

And your next question comes from Wamsi Mohan with Bank of America Merrill Lynch.

Yes, thank you. Good evening.

Hi, Wamsi.

Hello. Can you perhaps comment on the strength in the component margins at 10.5%? This was one of the strongest we've seen in awhile. You noted in your prepared commentary that you realized some of the benefits of restructuring in the PCB business. Can you size that for us, and how sustainable do you think the margins here are?

Yes, I'll take the question, Wamsi. You're right. In my remarks, we definitely talked about to fact that the Components, Products, and Services margin went up about 90 basis points. Frankly, I think the aberration was last quarter where we took some one-time hits in our Kuching facility as we were winding it down. You may recall, I don't remember the numbers precisely, but I think I said at the time we had an extra $2 million to $2.5 million of costs in the first quarter. So we don't have that one-time hit here in the second quarter. We still had headwinds in this segment. Obviously, revenue was down across the board in this segment. And so what we really have to do is start to get a little bit of tailwind, get the restructuring completed that we've started, and I think there's plenty of head room in terms of what we can do on margin expansion for that segment.

Okay, great. Thanks. Then as a quick follow-up, your Communications was actually better than expected. How did that improvement play out through the course of the quarter? And more broadly, how was linearity in the quarter? Thanks.

well, first of all, I'll make a comment on the shipments here. Linearity, Bob, you can help me on that one. First of all, I think, as I mentioned, there Wamsi, is that we had a fair amount of new programs that helped us move the needle in the right direction. The good thing about these programs, these are the programs that are the future revenue for key players, or key customers of ours. So that was very positive. We see continued strong forecast on those in place right now, and we expect it to be more than just a one-quarter scenario.

Yes, from a linearity standpoint, I'd say the quarter was fairly typical. We're disappointed by the results, but in reality, they're pretty close to what we had guided for this quarter. So it's not a big surprise. Linearity is always such that the third month is by far the most significant month.

Excellent. Okay.

And your next question comes from Christian Schwab with Craig-Hallum Capital.

Great quarter, guys. (Multiple speakers). Thank you, Jure.

Hey, Christian.

I missed the beginnings of the call, unfortunately, and it sounds like you guys talked about it. So I don't want you to spend too much more time on it, but I guess, simplistically, is your visibility in the last 90 days, and your forecast for the second half of the year, is that better than it was 90 days ago?

Well, yes. As I said in prepared statement. Based on our customer forecast, we feel a lot more comfortable about the third quarter, guiding up a little bit in the third quarter. And we also said that based on what we see today, demand should continue to improve for the rest of the calendar year. So answer is yes.

Spectacular. No other questions. Thank you.

Thanks.

And your next question comes from Osten Bernardez with Cross Research.

Hey, good afternoon. Thanks for taking my questions.

Hello, Osten.

To begin, would you be able to comment on the Enterprise Computing demand you saw during the quarter? Would you say, were there any sort of competitive pressures there with respect to your products? Then as a follow-on to that, because I believe most of the -- most of what you do there is the New Isis project. Would you be able to comment on the profitability of New Isis, and also Viking, as it stands?

Well, first of all, if you look at this business for us, Osten, in the second quarter, as I mentioned earlier, we had a weaker demand across all the product that we are been building, most of them, let's put it, all the big ones. Which includes our standard Enterprise Computing and Storage product, including OEM that we do through New Isis and Viking does some of the storage product, because they also ship to the other markets. So if you really look at it across the board, it was weaker than what we expected it. Both New Isis, and of course, Viking, their products produced a higher revenue for -- I mean, better margins for us, but we don't break those down in pieces.

Okay. When you referenced the increased outlook from some of your customers, was that -- could you comment on sort of which sort of markets, and I would assume, obviously Communications, but any other served areas?

No, no, I mentioned, really as I -- on the first question that Sean asked, I talked about Communication Networks, we have a better forecast. We also talked about Enterprise Computing and Storage, that we expect a better demand in this market segment, across segment that was down in second quarter. As we look at further out, it seems like these programs look positive, and we also believe that the new programs that we have in Enterprise Computing and Storage should help us drive the growth. Also, we made a comment in Defense, Industrial, Medical, the Defense and Industrial should -- the forecast should continue to be better in the third quarter. And we called Medical to be flat, slightly up, and Multimedia was slightly down.

Thank you very much.

Thanks, Osten.

Thank you.

And your next question comes from Richard Todaro with Kennedy.

Hi guys, good quarter. Everything's fine. All my questions have been answered. I would just urge you to probably put a little bit towards the buyback sooner. It would just be nice to see the shareholders get something back by year-end. So that's it.

Thanks, Richard, for your support.

Yes, thanks, Rich.

And your next question comes from Jim Suva with Citi. Your line is now open.

hello, Jim.

Thank you. Hello. Thank you and congratulations for you and your team making some good progress.

Yes, thank you, Jim.

As we look at the outlook, it's been a long time since we had kind of normal seasonality. Are you seeing actually your end demand and your guidance to be stronger than normal, or kind of more normal? Because I believe this quarter that we just printed on is kind of a little bit originally disappointing on that outlook? So I want to say the base came down a little bit more. I'm just trying to differentiate your normal seasonality, or are you actually seeing much stronger than normal seasonality in your outlook and commentary?

Well, first of all, Jim, first of all, thanks for your comments. It's been, in this industry, especially in the hardware industry lately, it's not been easy, but I think we've been working a lot of positive things in our Company. And in a tough environment, you always focus on things you control, which is working with your customers, new opportunities, helping each other to take the product to the market, and hopefully each of us will make a little bit of money. So we've been working very closely to our customers, and that's why we're getting more positive results, especially if we look at the rest of the calendar year.

I think if you look at the third quarter, which is our June quarter, I think there's some of it is normal seasonality that we are improving, and some of is it driven by the -- we've been improving the mix of our business, mix of our customer base, and we believe in our mix of our customer base, and the mix of the business that we have in there, as the time goes, should help us, because we believe we have a lot better mix with the new programs as these new programs and new customers get to the level they're going to be making an impact. So yes, seasonal, but there's a lot of work that we're being putting into it. It's a different world this year than last year, and we're just going to take small steps, but what I would call stable, strong steps in the right direction.

So I guess just to circle back. Definitely seasonality helps. Are you saying it's better than seasonality, or it's kind of in line with seasonality?

I would say it's a bit better as I look at the rest of the year, based on the programs that we are working on.

Okay. And then last quarter, I believe that you had some customers that had some financial difficulties with some, whether it be inventory write-offs or accounts receivables write-offs. Were you able to collect on any of those, or benefit from any of that catching up, or on the other hand, have you identified any others that are struggling that we should be aware of, about any charges or reversals of charges?

Yes, Jim, this is Bob. There was a customer that we did take a significant charge for last quarter that I think you are referring to, and that's working its way through that bankruptcy proceedings. We don't really know how that's going to play out at this point. We assessed our reserves, and decided to leave them unchanged this quarter. I guess for your broader question, there are always customers on our watch list, and we manage that as proactively as we can. I don't anticipate significant things like we saw last quarter, but you never know for sure.

Okay. And my final question, Jure, you mentioned growth during the part of the year. I assume you're referring to sequentially, your quarter-over-quarter, as opposed to year-over-year. Can you just clarify that?

Yes, everything that I'm talking is quarter-over-quarter, Jim. I think to make sure that is -- because, really, there's nothing we can do about 2012. Our customer base, some cases have a different projects, so it's a different year for us. We're really focused on today and tomorrow, more importantly tomorrow.

Thank you, and congratulations to you and your team there at Sanmina.

Yes, thanks for your support, Jim, and please continue to follow us.

Thanks, Jim.

And your next question comes from Joe Wittine with Longbow Research.

Question on gross margins first off. Bob, within the guidance for the June quarter, 7% to 7.4%, does that include all the restructuring savings from the facility closures on an absolute basis?

Well, what we've said, and I still believe is true, is we don't think we will fully realize all the savings until we get to the September quarter, but we will begin to have some of those in the June quarter, and I think just as we transition through, we had fewer surprises, even in the March quarter.

Any way you can give an idea of the magnitude of it, the savings still to come, post the June quarter guidance? Is it 5, 10 bips, or higher than that?

Yes, I think, I'm trying to remember what we said when we announced the restructuring. I think we said the benefits would be $3 million to $5 million a quarter.

Okay. And maybe as a quick follow-up also, Bob, just in your guidance for guiding interest expense, $40 million for the full year. Is that a full number that includes your, quote unquote, other category, too?

Yes, that's other income and expense. So it's obviously interest expense. We have a little bit of interest income, and then we also book other things like foreign exchange in there as well.

Great. Thank you.

Thanks, Joe.

And your next question comes from Sherri Scribner with Deutsche Bank.

I was curious if you could give us a little bit of detail on the strength in the Industrial segment. Maybe some specifics on end markets, where you are seeing strength, and also you guided to stronger results there, just a little more detail?

Yes. Well, industrial market for us has been a market that we've been developing for long time. It's a market that we had lot of value through both through our component side, precision machining, precision frames, fabrication of the metal, plastics, and then integrating that with special electronics, operational systems, and so on. We've heavily been involved in it. I would say, even a semiconductor equipment is starting to pick up for us a little bit, and we are be putting in negative in that industry for almost last six quarters.

So when you really look at it, the whole cross-industrial segment of our business is moving in the right direction. Most importantly, we're able to widen the customer base, and I believe this customer base is a lot more sustainable for us for many years to come, because it takes a long time to develop these type of customers, but at the same time I think opportunities are more sustainable, and a lot more predictable longer term. So that's why we are optimistic about that. We're starting to pick up some fruits right now.

Okay. So semi-cap is doing a bit better. Are there any other end markets that you focus on, or is it generally just industrial across the board? I mean --

Industrial across the board. It can be heavy equipment, transportation, and so on and so on. Clean power, and anything that is industrial, what we call internally, a little bit grease there, we've been working with.

Okay. So semi-cap is doing a bit better, in industrial you're seeing strength.

Yes.

Then just wanted to touch on the Defense piece. I guess I am a bit surprised to hear that Defense was okay, and that you expect it to be up next quarter? Are you seeing any concern from your customers about sequestration? You're not seeing any cuts? Just maybe if you could give us some more detail on what your customers are telling you about their expectation? Thanks.

Yes. I would consider our business, we growing this business. We have some unique products that we sell directly to government. These are unique products, and those continue to be moving in the right direction. Not as high as we like it to be, or the way it was three, four years ago, but if you compare it quarter to quarter, I'm saying that we see some positive, and we expect to see some positive in the third quarter, and we think that should continue the rest of the calendar year. So we also offer, I think in this type of environment, better solution for this industry. I think we offer a lot more technology, and a lot of -- we can save these companies, really, a fair amount of money if they utilize Sanmina model. We're very excited as we look at the defense and aerospace, but to us, this is a more growing market for us than contracting market.

Okay. Great. Thank you.

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

Good afternoon, guys. Just a couple questions. One, could you just tell us, what do you think steady state OpEx run rate should be for the Company? Is $64 million, $65 million a fair number to think about, or are there some investments you expect to make throughout 2013 that would take it higher in the back half?

Yes, if you look at our OpEx over probably over the last three years, I think there was one quarter, perhaps, that was an exception, but we've run in the in $60 million to $64 million range. Now, in general, I think that's what you can expect for the second half. If we're successful, and if we have some pleasant upside surprises, we might see higher OpEx, but right now I think it's likely to be in that range.

Well, we've been spending a lot more R&D in those numbers. So we've been really actually delivering a lot more value at this level than we did in past, because we spending a lot more in R&D now.

Fair enough. And then I just have a question. Just looking at the guidance, I mean, you guys sound fairly positive about the June quarter expectations for the back half as well,. I think from both from an end demand and a new ramps perspective. The problem, just trying to reconcile it. If I look at your 3% sequential growth guidance for June quarter, that's lower than the five-year historical average of 5% growth you typically see in June. It looks like to me you're guiding sub-seasonal versus the five-year average, at least, but you guys sound fairly positive. I'm just trying to reconcile the delta. Are you guys being conservative? Are there offsets that maybe you should be thinking about? Any help there would be helpful.

Amit, in this business, if you are not positive, you will quit and run away. First of all, I don't -- you can't really focus what happened last year. I think we are -- we're building a different company that is going to focus more on quality of the customer and sustainable profitability. So it's really where we go from here. Yes, it's not a huge growth quarter-to-quarter, but we expect to move in the right direction, and we feel comfortable that we can move this in the right direction based on what we have in front of us.

Fair enough. Thanks a lot, guys. Best of luck.

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

And your last question comes from Sean Hannan with Needham and Company. Your line is now open.

hello, Sean.

You on mute, Sean?

Yes. Sorry, can you hear me?

Yes, we can.

Okay, great. Thanks. Just wanted to follow-up around some of the comments you made on the New Isis business, and I think you alluded to a little bit on the Viking business. Trying to get an understanding. I realize you still consider this somewhat earlier stage. Can you discuss the magnitude of any programs or customers you've been winning there, incremental qualifications in the recent quarter? I don't know if part of that optimism that you have within Computing and Storage is a good bit driven by, perhaps, incremental business that you've won, tied to New Isis. Just want to get a sense of how this business, or these businesses, are contributing to you today, and theoretically in coming quarters, and is there any real change in momentum here? Thanks.

Sean, let me try to simplify that answer here. Number one, Enterprise Computing and Storage for us in the second quarter was very weak quarter. It was below our expectation, and it was below our customers' forecast. So from the beginning quarter to the end of the quarter, demand with some of our key customers went down. So that was the biggest impact in the second quarter. The second impact was some of the new programs, which we've been winning amount of new programs through both directly to our customers and through our engineering services, including New Isis, those type of programs did not basically grow as fast as what we thought, or what the customers were telling us at beginning.

As we look at the third quarter, as I mentioned earlier, I believe that existing customer base that we have, that was slower in the second quarter, what we see today, we're going see a little bit more shipment in the third quarter, and based on the forecast we expect it to continue. Addition to that, I believe some of these new programs that we won should have a little bit higher shipment in the third quarter, and that should continue rest of the year. How much, it's hard to predict, but we expect it to the move in the right direction. So that's kind of an overall, if I summarize, when we compare the last quarter to this quarter, because it was so weak in the second quarter, we expect it to be stronger in the third quarter, and that go from there in the right direction.

Well, listen, that's all I have. Hopefully that answer that question, Sean. If not, please give us a call. Ladies and gentlemen, at this time, again we want to thank you for your time you spend with us today and your support. If you have any questions, please get back to us, and we will make sure that we answer any questions that you might have. Thanks again.

Thanks, everyone. Have a nice evening.

Bye-bye.

And this concludes today's conference call. You may now disconnect.