Sanmina Corp (SANM) 2014 Q1 法說會逐字稿

Good evening. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina first quarter fiscal 2014 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Paige Bombino. Ma'am, you may begin your conference.

Thank you, Rachel. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2014 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 slide 2, the Safe Harbor statement.

During this conference call, we may make projections or other forward-looking statements regarding our future events, or the future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors, including 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 can cause the 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 have provided you with a statement of operation for the three months ending December 28, 2013 on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and the non-GAAP financial information is also provided in the press release and slides posted on our website.

In general, on a 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 gross profit, gross margin, 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, and thank you all for being here today with us. With me on today's conference call is Bob Eulau, our CFO.

Hello, everyone.

For agenda today, Bob will review our financial results for the first quarter fiscal year 2014. I will follow up with comments relative to Sanmina's results and future goals.

Then Bob and I will open for question and answers. And now I would like to turn this call over to Bob. Bob?

Thanks, Jure. Please turn to slide 3.

Overall, the first quarter was about as expected from a revenue standpoint, and better than expected from a margin perspective. Revenue of $1.447 billion was down 3.8% on a sequential basis, and down 3.2% from the first quarter of last year. Our gross margin came in at 7.8%, which was unchanged for the third consecutive quarter.

Operating margin decreased 30 basis points from last quarter to 3.4%. Non-GAAP EPS was $0.41, which was at the high end of our guidance for the quarter. This was based on 87.3 million shares outstanding on a fully diluted basis.

Cash generation was good this quarter, with cash flow from operations at $38 million, and free cash flow at $25 million. We invested about $57.7 million to acquire assets for a major oil and gas services company, which will substantially accelerate our progress in that market segment.

We also invested $25.2 million in open market repurchases of our common stock. I will discuss the balance sheet in more detail in a few minutes. Please turn to slide 4.

Revenue was down 3.8% or $58 million from Q4 to $1.447 billion. From a GAAP perspective, we reported net income of approximately $23 million, which results in earnings per share of $0.26. This was down relative to last quarter by $0.18, but up $0.25 from a year ago.

The fourth quarter GAAP results included an incremental release of our valuation allowance against deferred tax assets which we did not have this quarter. The tax benefit recorded last quarter totaled $21.5 million, or $0.25 per share. If we adjust for the tax benefit from last quarter, EPS is up on both a sequential and a year-over-year basis.

The restructuring costs for Q1 were $3.7 million. Going forward, the restructuring costs we expect are associated with real estate we have on the market to be sold.

We expect these costs to be around $3 million next quarter. As of the end of December, we had about $86 million of real estate on the market at list price, after having sold around $88 million of property in the last four years.

My remaining comments will focus on the non-GAAP financial results for the first quarter. At $113 million, gross profit was down $4 million from the prior quarter. Gross margin came in at 7.8%, which was the same as we reported in Q3 and Q4 last year.

Operating expenses were up $2.3 million for the quarter at $64 million. This represents a 30 basis point increase in operating expenses as a percent of revenue. Overall, operating expenses were higher than last quarter, primarily due to low expense for professional services in Q4, and increased research and development in Q1.

At $48.6 million, operating income decreased by 12.7% from the prior quarter. Operating margin was 3.4%, which was a 30 basis point sequential decrease. Other expense at $5.8 million was down 33% from last quarter, and down 55% from the first quarter of last year, which was primarily driven by lower net interest expense.

The tax rate for the quarter was 17.2% of pre-tax income, which was slightly above the range we had expected. This is up 1.4 percentage points, when compared to the tax rate last year. The increase is primarily attributable to tax law changes enacted in Mexico, which became effective on January 1, 2014.

The tax benefits all companies received from the [keyless] status in Mexico were dramatically reduced, and accordingly we were impacted by that change. We have had little time to react, but we plan to critically assess the manner in which we transact business in Mexico.

On a non-GAAP basis, we earned $35.5 million in net income or $0.41 per share. Earnings per share were down 11% from Q4, but up 41% from Q1 last year.

Please turn to slide 5, where we are providing more information on the segments that we report. The integrated manufacturing solutions segment represents printed circuit board assembly and test, final system assembly and test, as well as direct order fulfillment.

As you can see from the graph on the left, the IMS segment revenue was down $56 million or 4.7% from last quarter. In spite of the drop in revenue, our gross margin improved by 40 basis points to 7%, which was driven by a good mix of business and excellent execution.

The second segment for us is components, products and services. Components include printed circuit board fabrication, back plane assemblies, cable assemblies, enclosures, precision machining and plastic injection molding.

Products include computing and storage products, defense and aerospace products, memory, and solid state drive modules, as well as optical and RF modules. Services include design and engineering, as well as logistics and repair services.

In aggregate, the revenue for this segment was flat with Q4, with gross margin down 1.8 percentage points to 9.1%. The biggest challenge was in our mechanical systems division, which was a disappointment in several plants. The products and services businesses performed well.

On slide 6, we are showing you some of our key non-GAAP P&L metrics. Revenue was down $58 million from last quarter. Demand was good in the multimedia, and the defense, medical and industrial segments, but this was not enough to offset weakness in other market segments. Compared to Q1 last year, total revenue was down 3.2%.

Moving on to gross profit. Gross profit was down $4 million in Q1, while gross margin at 7.8% was the same as the last two quarters. While volume and mix have varied in each quarter, we are pleased with the consistency of gross margin over the last three quarters.

Our operating profit decreased 12.7% from last quarter to $48.6 million. This led to operating margin of 3.4%. While this was down 30 basis points from last quarter, it was up 60 basis points from Q1 last year.

Net interest expense was down $1.7 million from last quarter, and down $6.2 million from the first quarter of last year to $6.7 million for the first quarter of this year.

Now I would like to turn your attention to the balance sheet on slide 7. The balance sheet was impacted in several areas by the asset acquisition I mentioned earlier, and the repurchases of common stock.

We used cash generated and short-term debt to acquire assets of $57.7 million from a major oil and gas services company on December 18. We also invested $25.2 million to repurchase 1.67 million shares of our common stock, at an average price per share of $15.05.

Our cash and cash equivalents were $407 million. Cash was up $4 million from the previous quarter.

Inventory was up $10 million from Q4 to Q1. Accounts receivable decreased by $28 million, and accounts payable decreased by $31 million due to lower revenue.

Property, plant and equipment was up $22 million, which includes $35 million in fixed assets which were just acquired. Other assets were up $26 million, which includes intangible assets of $14 million, which were just acquired.

Please turn to slide 8, where we will review our balance sheet metrics for the first quarter. Cash was up $4 million from Q4. Cash flow from operations for the quarter was good at $38 million, and net capital expenditures for the quarter were $13 million. This led to $25 million in free cash flow.

Inventory reduction and cash generation are an ongoing priority for our team. This quarter includes $7 million in inventory acquired in the transaction that I just discussed, but it was still a disappointment that we were not able to lower inventory with the lower revenue this quarter. Inventory dollars were up $10 million from last quarter at $792 million, while inventory turns declined from 7.0 to 6.8.

We are showing cash cycle days, which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time increased from 46.0 days last quarter to 47.3 days this quarter. This was the result of an increase in accounts receivable days sales outstanding of 2.8 days, and an increase in days of inventory of 1.9 days, offset by a 3.3 day improvement in our accounts payable days outstanding. When compared to Q1 last year, our cash cycle time improved by 4.4 days.

In conclusion, return on invested capital was up -- was 12.4% for the quarter, which was hurt primarily by lower profitability.

Please turn to slide 9. I would now like to share with you our guidance for the second fiscal quarter of fiscal year 2014. Our view is that revenue will be in the range of $1.425 billion to $1.475 billion.

We expect that gross margin will be in the range of 7.6% to 8.0%. Operating expense should be $64 million to $66 million. This leads to an operating margin in the range of 3.1% to 3.5%.

We expect that other income and expense will be in the range of $7 million to $8 million. We expect the tax rate to be 17.2%, plus or minus a percentage point, and we expect our fully diluted share count to be 86 million to 87 million shares.

When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.36 to $0.42. Finally, for your cash flow modeling, we expect that capital expenditures will be around $20 million, while depreciation and amortization will be around $25 million. We also anticipate real estate sales of around $4 million to $5 million this quarter.

Overall, we are pleased with our results in the first quarter, but we have room to improve in a few plants, and we will expect progress in Q2. We remain focused on driving growth, but it is imperative that we grow with the right kind of business.

At this point, I will turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Ladies and gentlemen, I will review business environment for December quarter. I will talk about the short-term business environment specifically, March quarter, quarter we are in, and I will talk to you more about outlook for the rest of the calendar year 2014.

As Bob said, Sanmina revenue for the first quarter was slightly down sequentially, as a result of seasonality and slower ramp-up of new projects. Basically, first quarter results came in per our expectations.

So in summary, results per our plan, very small surprises, one way or another. Overall, we see things getting better, and we welcome some good activity during the quarter.

Now please turn to slide 11. As you can see on this slide, I want to talk to you about our first quarter revenue by end markets. For first quarter, we had the top 10 customer represent about 49.2% of our revenue, and we had one customer over 10%.

Now let me give you a couple more comments what was going on in our market segments. For communication networks, for first quarter we did forecast demand to be flat to the last quarter. During the quarter, we saw weaker demand than what we expected at the beginning of the quarter. We also saw some schedule push-out during the quarter, which resulted, demand was down 8.9%.

If you look at the defense industry and medical, we forecast that to be flat. Industrial was nicely up. We had a strong growth there. Defense was down, and medical was slightly down. Overall, it was a flat plus 0.9%.

Computing and storage, we did forecast to be down. We basically continued to experience weaker demand in this segment, so overall it was 3.2% down.

For multimedia, we did forecast to be down. But overall, all the key markets in this segment were strong. Actually, was nicely up, 6.3%.

Now please turn to slide 12. Let me talk to you about outlook by market segments for this quarter.

Second quarter of fiscal year 2014, we do expect demand to be seasonally slower but stable, and we should see some more improvements in demand during the quarter. For communication networks, we are forecasting demand to be slightly down. But overall, we do expect demand to more stabilize, and start improving by end of the quarter. Longer term, we expect to see nice growth in this segment, driven by networking and wireless infrastructure such as LTE projects that we are involved in.

For defense, industrial and medical segments, we are forecasting that to be up. Industrial will continue to be -- continue to grow nicely. We have got some good projects there.

Defense, we are forecasting to be flat, slightly down. For medical, we are forecasting to be slightly down. But in total, in this group, there is a lot of good opportunities in the pipeline, and we look at the really long-term, this segment to continue to grow.

Computing and storage, we are forecasting to be flat for the quarter. So basically, flat demand in the short-term. But we are still positive about this segment, as we are working on some good opportunities in the pipeline.

For multimedia, we are forecasting slightly down for the second quarter, but we are improving mix in this segment. So that we do believe by third and fourth quarter, we should see a nice growth in this segment. Overall, for the most of the market segments, we do expect bookings to improve in the second quarter.

Now let me talk to you a little bit more about what we expect for the rest of the fiscal year 2014. Our customers are more positive about calendar year 2014, and we do expect to continue to improve our financial results in fiscal year 2014, driven by programs that we won in calendar year 2013, and is starting to ship now.

We are working on some exciting new projects that should help us drive the growth in 2014. We are also expanding into new markets, such as our new partnership that Bob talked about with a major customer in oil and gas industry.

We signed the contract end of December. It is a great project. It is a great opportunity to drive the growth for many years to come. Overall, we are confident about opportunities we have in the pipeline, actually a lot more confident than 90 days ago.

Now let me talk to you now about our customer base and relationships. We do have a strong customer base, and it is expanding. The relationship and collaboration with our customers are going strong, as we continue to deliver leading edge technology solution to our customers, through our components, products, services businesses.

Again, this is a strategic part of our business focus, and I can tell you that our strategy is working. We are creating lots of leverage in our business model through Sanmina business portfolios.

Now let me make a few more comments about Sanmina's business growth strategy. As we have been talking to you in last year, we continue to invest and drive the growth, and right now focus driving the growth in fiscal year 2014 and beyond.

By investing in the talent, right technologies, as we are providing more value to our customers. We believe this is our competitive advantage, and the key to our strategy is that Sanmina will continue to improve quality of the growth, that is sustainable long-term, allows us to continue to improve our financial results, and build the real partnerships with our key customers.

Please turn to slide 13. So in summary, for the first quarter as Bob mentioned, I would say it is good results for our expectations. For the second quarter, visibility is improving. We see more stable demand. We do have some customer base, and it is expanding.

So for fiscal year 2014, as we mentioned 90 days ago, we still feel more confident, and we are forecasting modest growth and future improvements in our financial results.

So ladies and gentlemen, now I would like to say thank you for your time and support. Operator, we are now ready to open lines for question and answers. Again, thanks again. Operator?

(Operator Instructions)

And your first question comes from the line of Brian Alexander.

All right, thanks, and good evening.

Hello, Brian.

How are you, Brian?

Good, Jure and Bob.

Maybe just to start out, this M&A transaction that you talked about. I think you spent a little over $57 million in December, oil and gas services related. I don't recall seeing a press release on it, but I could have missed it. So could you just talk about this in more detail, how much revenue are we talking about here?

What is the margin profile of this business relative to your corporate average? And is this an area that you think you will be investing more in over time, or is this more of a one-off type of deal that we should be thinking about?

Well, Brian, let me add a few comments to what I have already said; and I will turn it over to Bob to talk a little bit more about the financial side. First of all, we have been trying to expand in the oil and gas industry now for many years; and we had a few small customers here and there. At this time, we don't like to talk about the customer itself. It is a major win for us.

It is definitely into the precision machining, assembly and system build for the oil and gas industry. I think it is the beginning of the relationship.

We did acquire some assets; and reason we did that was because it really puts us into business immediately with this key customers. So definitely, if you look at it from a margin perspective, in precision machining, we do deliver better margins. It is an area that we want to diversify into, and because these margins are a lot better than your typical EMS business.

So we are very excited about the opportunity; and most importantly, we are very excited, it is a real partnership, that we worked with this customer for, like I said, for a long, long time, and we put it together. And again, it's a good opportunity; but the ball is in Sanmina's court. We have got to do a lot of work. If we do things right, I think the future is exciting. Bob?

Yes, so obviously, I agree with Jure's point. We have been talking for quite a while how we think we are extremely well positioned in the industrial segment; and specifically we think we are very well-positioned in oil and gas, with both our precision machining capability and our electronics capability. So we are excited.

We think we are in the early stages in this business. It's a business that is characterized by higher fixed costs, but higher contribution margins than we typically see for our Company. So we are very excited about it, and we have been doing business in oil and gas for a while. This is a major step forward for us, and I think really creates a promising future in that segment.

Any revenue that you could share with us on the specific win? How significant is it?

It will be ramping up over time. As you know, we don't like to give specifics on customers. But it will be a nice step forward in terms of revenue, and we believe that can grow to be very significant over time.

And just if I can add to that, this business we expect it to be nicely profitable in a few months from now.

Okay. Great. And then just a follow up on the components business, where you saw the margins come down sequentially from 11% to 9% on roughly flat revenue. I think you called out, Bob, some challenges in the mechanicals part of the business in several sites.

Can you just drill down on that a little bit more and talk about the nature of those challenges? Was that really Company-specific? Was it end market driven? And what do you have to do to fix that, and how long do you think it takes? Thanks.

Well, we were disappointed; and some of these issues were self-inflicted wounds. Some of it was a result of slow demand.

I think the issues are all fairly well understood at this stage; and I expect that in the current quarter, in the March quarter, we will see pretty significant improvement in most of the areas where we had issues.

Okay. Thank you.

Thanks, Brian.

Your next question is from Mark Delaney.

Thanks very much for taking the question.

Hello, Mark.

Hello, Jure and Bob. So I was hoping first, maybe you could elaborate a little bit more on the strength in the multimedia segment that you guys saw. I think you noted in your prepared remarks, that it was in several different areas.

Can you elaborate a little bit more? Is this some of the new product opportunities that you are hoping to do, or was this more of a cyclical benefit in some of the areas that you had previously been addressing?

Yes, Mark, we didn't really get a lot of significant upside because of seasonality. In this multimedia, what we call, we got the set-top box business -- where the gaming equipment, automotive, electronics and some high-end cameras, and a couple other things.

And so the key to for us, and again, we right now --when it comes to set-top business, we only have one customer in the bucket, a very good customer. But we are diversifying that group into some really good businesses.

And that is really -- these other businesses, I think help pretty well, and especially the gaming, automotive; and we expect that through what we see in the pipeline to really grow that side of the business. But it is going to come from other sides besides the set-top box business.

Okay. Understood. Can you elaborate a little bit more on your comments for this oil and gas acquisition?

You talked about it, Jure, being nicely profitable next quarter. And I know you don't want to get into too much specifics about how much revenue it's adding, but do you already expect it to be a positive for your corporate average margins in the March quarter?

Well, I don't know if we are able to -- we expect it to be profitable in March quarter, but I would say we expect it in June quarter to be better than corporate average. It is the nature of the business that precision machining is better than our corporate average.

Just to add to what I said earlier, when Brian asked the question, it is really part of our strategy, getting into this field. I think Sanmina's assets are best-positioned through this type of industry because we have a lot of high-end technology there including precision machining, electronics, a lot of special packaging. Again, we invested in last three years a lot of time and money in this segment.

So I believe it is a part of our strategy, trying to diversify our portfolio into the quality of the customer; so this is a quality customer, number one. A customer, if we do our job, needs us; and we can be with this customer for many, many years to come. So that is why we are excited about it, and these are the type of customers that we are working very hard to gain.

Thank you for that. If I could sneak one last one in. Jure, you talked about your expectations for improved bookings this quarter. Can you help us understand, is that something that you are already seeing; or that is just your best estimate of what you expect for the quarter?

Last quarter, book-to-bill was basically 1. It was flat, and we did expect that.

For this quarter, we do expect bookings to be stronger based on really the projects that we are involved in and some of the programs that got pushed out into this quarter. I think if you -- for those that listened to our call last time, really not major things happen, except as I said earlier, we are more confident about the rest of the year today than 90 days ago because 90 days in this business is a lot.

But knowing the programs that we are working on, knowing the customers that are talking to us on a daily basis, I am personally a lot more confident; and I believe the bookings will be a lot stronger in the second quarter.

Thank you very much.

Thanks.

Thanks, Mark.

Your next question is from the line of Jim Suva.

Hello, Jim.

Thank you. Thanks, Bob and Jure. Congratulations on good results in the margins.

A quick question again on the acquisition. I know you mentioned now that this year, you are pretty confident, seeing some modest or slight growth.

Without that acquisition, would you still be making the same question -- or same statement? And then this acquisition also, did you buy like a building or just some equipment that you are transferring from the customer into your building? Because we are just trying to figure out if you have the opportunity to load more customers in there, or how we should think about potential restructuring in the future or how this all takes place?

Okay. Well, first of all, we don't expect any restructuring in the future on this one. Number one, I think this is -- we bought basically a running -- it's a brand-new operation that our customers were trying to start themselves. We went into partnership, for example, that made sense for us to partner; and we take over these assets, which is basically a building and high-end technology precision machining equipment and people. So we are adding a lot of know-how here, and really growing this business.

So this -- I know, Jim, what you are trying to do. You are a pretty smart guy, trying to figure out the numbers.

Definitely this revenue that we are getting through this oil and gas will help us, gives us a lot more confidence that growth will come. As you know, when you forecast something for next nine months, it's always difficult.

You have got to have some great -- good opportunity that you are very confident you are going to get, and there is some other opportunity that could be some risk. And it's not risk, what we do ourselves. It is the risk in a market that we are involved in, that our customers have orders that get pushed out.

So we are trying to really -- when we talk about the growth for next year, yes, definitely this helps; it gives us more confidence. But there is always good and bad in a forecast, and hopefully there is going to be more good than bad. Bob?

Yes, and just to provide a little more color, Jim, I believe and based on what we are seeing in the business right now, we would be growing year over year without this acquisition. And when we made those remarks last quarter, that was our thought process.

In terms of the assets that we are acquiring, there is a building. As Jure said, it is only a year or two old; and there is significant new equipment in this building as well.

Some of the equipment has a long lead time. It's hard to acquire, and so we are fortunate to get involved in this as this factory was beginning to ramp up on its own.

So as we have said, it is a business that has much higher than average contribution margin for us. It is one that is going to have more fixed costs. It is going to have more depreciation. But as we continue to load this site, we think that it will contribute quite a bit to the Company.

Okay.

Jim, if I can add to that. I think the way you look at this, it's really more -- as I said, we worked on this for a long time. From the beginning, the purpose of this partnership, that is both from the customer side and our side, it is a real partnership. It only works when both sides are committed long term.

But again, it is very strategic from our part, because of the business that we want to get in. And also, it is strategic to be able to win a customer like this that is -- that needs a partnership for many years to come. So it is strategic,;but end of the day, still it is a ball in our court. We have got to execute.

Great. And then as a follow up on a different topic, the communications was a bit softer; supposed to be flat and it was actually down about 9%, and you mentioned some push-outs and things. Can you help us understand, was it more geographic-specific, such as North America or Asia or Europe? Or was it weather-related, as many parts of the world are -- US -- are more colder than California right now, or more technology delays; or how can we kind of think about that as far as the expectation?

I don't know. I don't know exactly. I can throw those in a bucket. But I would say, there was really more push-out from an end point, end customer; and we believe that these orders are not lost. I think it is more like timing.

Great. Congratulations to you and your team.

Thanks.

Thanks, Jim.

Your next question comes from the line of Sean Hannan.

Hello, Sean.

Hello, Sean.

Yes, good evening. Can you hear me?

Yes, we can, Sean.

Okay. Great. Just want to see if I can circle back actually on two topics that have been hit on. So oil and gas, the assets that you acquired there, is there a way to give us a little bit more of an indication in terms of the types of application that these programs would be relevant to? Is this kind of downhole drilling types of efforts within the oil and gas industry, or can you give us a little bit more color around that?

Yes, this is -- this will be more related in the high end of oil and gas, when it comes to precision machining, including the downhole.

Okay. All right. And then in terms of new programs, I think, Jure, if I heard you correctly or maybe if you can help to refine what I think I heard, it sounds like new programs that you won in 2013, you are starting now to get a little bit better momentum around those.

There may have been a little bit of a pause or some delays in terms of bookings and then ramping some of those programs in this last December quarter. But you are getting signals now that this is starting to pick up. And is that accurate, and then to what degree is that uniform across your segments? Thanks.

Yes, the number one, for new programs that I am talking about, it is really the ramps. Any time you win a new program, there is a process through NPI and transfer and so on, that depends if you transfer in somebody else or if you win as a new design. So definitely ramps, and also I think the forecast itself, were not as strong, the last year.

We are starting to see better forecasts and, most importantly, customers are starting to take products. So we believe these projects will contribute fair amount in 2014 and beyond.

On top of that, we believe that we got some good, exciting things that we are working on right now. There is basically in our control a high percentage, and we believe that those also will continue.

I think our existing customer base, existing business as I said, I think it is important to understand our relationships are strong. Collaboration with our customers is great.

It is a competitive business; but we are working very close together to add technology, add a lot on the supply chain, eliminate time to market and eliminate the waste. So a lot of these good things that I think we worked on are starting to pay off for us, and we continue invest in that side of our customers so that we can win more.

So the way, again, I would look at the whole package, is that things are better for us. We are more confident that 2014 is going to be a little bit better, but we have to take one quarter at a time.

As Jim Suva said, congratulations, but that was for last quarter. We need to deliver this one. So we will take one quarter at a time.

But I like the way the Company is positioned. We did a lot of work in the last couple of years, stronger balance sheet, lot of good things. I think it's all about growth -- growth, growth, growth for us right now. And I think we have lined things up, and we will invest more to drive the right growth as both Bob and I talked about earlier.

Okay, Jure. That's helpful. But in terms of whether that is uniform within your segments, is there anything built from a market behavior standpoint, where it is more specific for some of your segments? Or is this uniform across all of your business?

Yes. So sorry, I forgot to answer that question, Sean. First of all, as we have mentioned, both Bob and I, on the industrial side of the business, I think that part of the business for us will have the highest percentage of growth in 2014 because of these projects that we worked on.

I think the defense part -- I am talking the whole group there -- defense, we are positioned pretty well; but in that market, it is going to be challenging next couple years. In medical, we have got a lot of new wins. So it is all about taking those medical products to the market. I would say the highest percentage of expansion we will have is what we call defense, industrial and medical segment. Okay?

We do expect, as you know computing and storage, we have been investing a lot of money in that side of the business. We believe we got some both -- we are adding a lot of technology to our customer. We got some good ODM products internally that have been kind of stagnated. I would expect that also in the second half to do a little bit better.

I think communication networks itself will continue to be stable. I think the customer base we have is stable. I think they have got -- our customers have some good growth programs, yet we had some down in the first quarter. But as I said earlier, I don't think those orders were lost. I think it was more of a timing issue.

And the multimedia, we are diversifying the market segments. So I think a lot of the new customers will drive that. So overall, I would say across the board things are going to move in the right direction in 2014; but the biggest growth we will have in defense, industrial and medical.

Very helpful. Thanks, Jure.

Thanks.

Your next question is from Osten Bernardez.

Hello, Austin.

Hello, good afternoon, Bob and Jure. Thanks for taking my questions. To begin, I guess, could you clarify for me or add more color with respect to your commentary on the mechanical side of your business in terms of what happened during the quarter? I think you noted having some comfort with what is going on there, and what you expect going forward.

Is there -- are you -- do you foresee greater demand? Or has there been any alterations to the operations to make sure that those margins sort of pick up? Or is it just a matter of certain business coming in?

Yes so, Osten, I will answer that. As I mentioned before, really there were two root causes.

One is demand was down a bit, but we also created some issues on our own; and so we had some execution problems. The good news is I think we understood them very quickly; and I think the execution issues will be resolved this quarter, and we believe the demand will be stronger this quarter. So we think that mechanical systems will come back pretty well. But it was definitely a disappointment this quarter, and that is why we called it out.

Okay. And then, it was good to see the share repurchase during the quarter in addition to the oil and gas investment that you made.

I guess, going forward, any change in the way you view how you want to sort of use the cash you have on hand, given that this is your first time utilizing your latest share repurchase authorization, and that you do have some debt that you could start redeeming in a few months if you wanted to?

Yes, I view this quarter as a reasonable substantiation of the priorities that we have been articulating.

So as we have said for quite some time, of course we want to make sure we have the cash to grow the business. And then, it is a matter of doing very strategic M&A activity similar to the investment that we made in the December quarter. And then, it is a matter of being very analytical in terms of, is it better for our shareholders to repurchase equity or better to repurchase debt?

So we are very committed to creating shareholder value, and we will continue to do those analyses in real-time as we believe we will continue to be fortunate in terms of generating cash.

And I guess, lastly for me, when I look at your outlook for communications, is it fair to assume that you are expecting the back half to be -- obviously it will be back half-loaded, but do you expect that half to have growth to be better than it was in 2013?

Well, first of all, the percentage -- as you can see this quarter is 46% of our revenue. So in order for us to grow for a year, that part of that has to grow from what it is today.

And I don't remember the actual percentage numbers last year. But clearly, over the last two to three years, we have seen seasonality where the first half of our fiscal year is weaker than the second half; and we are seeing those same signals again this year, and that is why we are pretty confident we will see growth in the second half.

Thank you very much.

Thanks, Osten.

Your next question comes from the line of Christian Schwab.

Hello, Christian.

Hello, Christian.

Hello, how you doing, Jure? Just a follow-up on communications.

Can you tell us what type of infrastructure equipment that we could be monitoring that would have the biggest impact in improvement/stability in the second half of the year? Is it base stations? Is it optical? What should we be looking at?

Well, first of all, I said in my prepared statement that question that we think the networking and wireless infrastructure will drive most of our growth. Especially in the second half, definitely 4G will drive that. There is a lot of optical on the networking side.

So the good thing is that we are involved in all the new technologies, with almost every key customer in that segment. And so as long as that industry moves in the right direction, I believe that Sanmina is well-positioned to gain. So again, networking and wireless infrastructure.

Great. No other questions. Thank you.

Thanks, Christian.

Your next question is from Wamsi Mohan.

Hello, Wamsi.

Yes, thank you.

Hello, Wamsi.

Hello, Jure. Just to be clear on the margins in CPS, that did not relate to the oil and gas assets? Those are independent issues? Because you mentioned precision machining, so I just wanted to make sure that it was not related to the oil and gas assets?

No, I mean, that acquisition was just done, I believe, the 18th of December, right before the holidays. So we really didn't produce anything to speak of in the December quarter for that particular customer in that factory.

And, Bob, the mechanical systems sort of that you identified the issues, how do you get ahead at multiple sites with similar issues; or were there multiple issues at different sites, and you just sort of figured out what happened at each site independently? Or was it related to some particular ramp of the program?

Unfortunately, it was really different issues at different sites. And as I have said, some of it was related to our own execution; some of it was related to the demand situation. The good news is, we think that these issues are ones that at this point we have already remediated; and assuming the demand picture comes in the way we are expecting, we think that segment will come back pretty nicely in the March quarter.

Could you quantify the impact on the margin in the quarter because of the weaker margins that you realized because of mechanical?

Yes, I don't want to get into that much detail within the segment. It is a slippery slope. But I can tell you, I mean, it is a major explanation for the decline.

And then, Bob, on the tax related, it sounded like you might explore some alternatives to Mexico. Could you give any more color on that?

Well, we are evaluating alternatives right now, and obviously everything we do has to be within the constraints of the law in Mexico and every country that we operate in. So this is a change in the regime. It happened fairly quickly and fairly dramatically, and so we need to re-evaluate that.

I don't want to say exactly the things we are evaluating, but I think there may be some opportunity to improve. But it's nothing that we can talk about at this stage.

Okay. Thanks a lot.

Thanks, Wamsi. Operator, we have time for one more question. Thanks.

And your last question comes from the line of Sherri Scribner.

Hi. This is [Kripa Shetty] here, just calling on behalf of Sherri Scribner.

Hello.

Hello.

Hello.

Jure, I just had a question actually. I know we sort of touched upon this in the commentary.

You mentioned the soft first half of FY14, and I was just wondering, what is it that you are seeing in the market? You had mentioned cyclical benefits and seasonality, but is there anything else in terms of just particular segments?

Well, we have some flatness, I would say, in the first quarter because of seasonality. I think in the second quarter, we are having a little bit less seasonality.

I mean, 90 days ago, I thought we were going to have a little bit more than we -- so for us, things are more stable for second quarter. I think for the third quarter and fourth quarter, even beginning of the year, we thought we are going to have a stronger second half than first half.

Okay.

I think in the last 90 days, we are more optimistic for a couple reasons. I think we are still right that the second half is going to be a little bit better. And number two, I think some of the programs that we are involved in and working on, I believe they will grow faster and will help us both in the top line and the bottom line. So putting all this together, gives us a lot more confidence than 90 days ago.

Okay. All right. Great, and I had a follow-up question. Just with regards to what kind of demand trends you are seeing in the server and storage?

Well, as you -- as I mentioned earlier in my prepared statement, we did forecast it to be down for our first quarter; and we had a weaker demand -- well, basically, weaker demand, what we thought was going to happen, it was down 3% quarter-over-quarter. For this second quarter, we are forecasting to be flat.

We are still pretty optimistic about opportunities, because we are working on some good things. I just hope they happen sooner than later.

So we are still committed to the market. We have a lot of technology. We invested a lot of technology in this market. We are putting a lot of R&D money into this market right now.

So let's say, I am a little bit more optimistic than negative, but we just have to deliver it first.

Okay. Great. Thank you, and congratulations on a good quarter.

Thanks, young lady.

Thank you.

Well, ladies and gentlemen, I want to again thank you. If we didn't answer all your questions, we are available. Please get a hold of us any time, and looking forward to talking to you again in the next 90 days. Bye-bye.

Thanks, everyone. Have a nice evening.

Bye-bye.

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