Sanmina Corp (SANM) 2014 Q3 法說會逐字稿

Good afternoon. My name is Ian and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina third-quarter FY14 earnings call.

(Operator Instructions)

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

Thank you, Ian. Good afternoon, ladies and gentlemen, and welcome to Sanmina's third-quarter FY14 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 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 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'll note in the press release and the slides issued today that we have provided you with statements of operations for the three months and nine months ending June 28, 2014, 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 the slides posted on our 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 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, and welcome. Thank you all for being here with us today. With me on today's conference call is Bob Eulau, our CFO.

Hello, everyone.

For agenda, Bob and I will review our financial results for the third quarter. I will follow with comments relative to Sanmina's results and future goals. Then Bob and I will open for question and answers. And I'll turn this call over to Bob. Bob?

Thanks, Jure. Please turn to slide 3. Overall, the third quarter was better than expected from a revenue, margin and cash generation perspective. Revenue of $1.605 billion was up 8.7% on a sequential basis and up 7.8% from the third quarter last year. Our gross margin came in at 8.0%, which was down 80 -- I'm sorry, down 20 basis points from the second quarter and up 20 basis points from the third quarter last year. Operating margin increased 20 basis points from last quarter and 50 basis points from the third quarter last year to 3.8%.

Non-GAAP EPS was $0.53, which was above the high end of our guidance for the quarter. This was based on 86.2 million shares outstanding on a fully diluted basis. Cash flow from operations was outstanding at $152 million this quarter. We repurchased about $6 million of our common stock. Finally, as many of you know, we made a significant change in our capital structure this quarter which I'll discuss in a few minutes.

Please turn to slide 4. Revenue was up $128 million or 8.7% from Q2 to $1.605 billion. From a GAAP perspective, we reported net income of approximately $21 million, which results in earnings per share of $0.24. This was consistent with last quarter in both dollars and earnings per share. This was achieved while incurring a net charge of $8.2 million associated with the refinancing of our debt. The restructuring costs for Q3 were $2.3 million. Going forward, we expect our restructuring cost to be around $2 million to $3 million associated with real estate we have on the market to be sold. At the end of June, we had about $70 million of real estate on the market at list price.

My remaining comments will focus on the non-GAAP financial results for the third quarter. At $129 million, gross profit was up $8 million from the prior quarter and up $13 million from Q3 of last year. Gross margin came in at 8%. I'll discuss this more when we review the segment results.

Operating expenses were up slightly for the quarter at $67.9 million. This represents a 40 basis point decrease in operating expenses as a percent of revenue. At $60.9 million, operating income increased by 14.6% from the prior quarter. Operating margin was 3.8%, which was a 20 basis point sequential increase. Other expense at $7.4 million was up $500,000, or 7%, from last quarter, primarily due to approximately $1 million of additional interest expense associated with the overlapping debt we experienced as we went through the refinancing process this quarter. Other expense was down $1.1 million from the third quarter last year.

The tax rate for the quarter was 15.3% of pretax income, which was lower than we had expected. The change in the tax rate is primarily a function of the geographic mix of our pretax profit. The 15.3% rate includes an adjustment to get our tax rate to 16.5% on a year-to-date basis. We expect our pro forma tax rate to be 16.5% for the year. On a non-GAAP basis, we earned $45.3 million in net income or $0.53 per share. Earnings per share were up 18% from Q2 and up 32% from Q3 last year.

On slide 5 we're showing you some of our key non-GAAP P&L metrics. Revenue was up $128 million from last quarter. Demand was up in every segment on a sequential basis and was especially good in the industrial, medical and defense segment. Compared to Q3 last year, total revenue was up 7.8%, driven again by the industrial, medical, and defense segment.

Moving on to gross profit, gross profit was up $8 million in Q3 while gross margin was at 8.0%. While volume and mix have varied in each quarter, we are pleased with the consistency of gross margin over the last year. Our operating profit increased 14.6% from last quarter to $60.9 million. This led to operating margin of 3.8%. This was up 20 basis points from last quarter and was up 50 basis points from Q3 last year. Net interest expense was up $900,000 from last quarter, primarily due to the refinancing we executed this quarter. Net interest expense was down $300,000 from the third quarter last year to $8.2 million for the third quarter this year.

Please turn to slide 6, where we're 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 up 11% over last quarter and up 6% from Q3 last year, at $1.275 billion. While our gross margin was down 20 basis points following the excellent mix we had over the last couple of quarters, we continue to be pleased with the improvement in this segment over the last year.

The second segment for us is components, products 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, 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 up 1% from Q2 and up 16% from Q3 last year at $391 million. The gross margin in the CPS segment was at 11%, which was up 30 basis points from the Q2 results. The increase was primarily driven by improvement in the components businesses.

Now I'd like to turn your attention to the balance sheet on slide 7. Cash was $552 million this quarter, which was up by $161 million. The increase in cash was driven by the excellent cash flow from operations of $152 million, and the fact we had not completed the refinancing as of the end of the quarter. We invested about $27 million in cash associated with the acquisition we completed in the industrial, medical and defense segment. We used $6 million of cash to repurchase 307,000 shares of our common stock at an average price per share of $19.60. Accounts receivable increased by $20 million, primarily due to a $128 million increase in revenue, which was partially offset by a positive mix of customer terms.

Inventory was up $80 million from Q2 to Q3, driven again by the increase in business. Property, plant and equipment was up $18 million, primarily due to the acquisition we completed in the industrial business. From a liability standpoint, we had lots of activities during the quarter. First, we had $165 million increase in accounts payable during the quarter. This was driven primarily by increased business which also drove better ending days payable outstanding.

From a debt perspective, we now have two different tranches of debt due in 2019. During the quarter we retired $264 million of the 7% 2019 debt and issued $375 million of 4 3/8% 2019 debt. We completed a call to retire an additional $136 million of our 7% 2019 debt on July 7. The $136 million is included in short-term debt as of the end of the quarter, because we had committed to make this payment. The long-term debt includes $375 million of the new 4 3/8% debt, and the remaining $100 million of the 7% 2019 debt. At the end of the quarter, our gross leverage is a little higher than Q2 at 2.25. If the call had been completed by the end of the quarter, our gross leverage would have been 1.8.

Our goal with this refinancing was to reduce our interest rate exposure while simultaneously entering into a transaction that was positive from a net present value perspective. We had swapped the 7% 2019 debt to floating-rate payments during the last three years and we thought now was an opportunistic time to change the mix of fixed versus floating-rate debt. We terminated the swap related to the debt we redeemed which provided a gain to partially offset the premium that we paid on the redemption of the 7% debt. Following this opportunistic transaction, we are delighted with our capital structure.

Please turn to slide 8 where we will review our balance sheet metrics for the third quarter. Cash was up $161 million from Q2. Cash flow from operations for the quarter was $152 million, and net capital expenditures for the quarter were $12 million. This led to free cash flow of $140 million. We believe our free cash flow was unusually high this quarter. We'll return to more normal levels of positive free cash flow next quarter in spite of the growth that we have planned.

Inventory reduction and cash generation are ongoing priority for our team. Inventory dollars were up $80 million from last quarter at $880 million, while inventory turns improved to 7.0. We are showing cash cycle days which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time decreased from 48.5 days last quarter to 44.1 days this quarter. This was a result of a decrease of 3.0 days in accounts receivable days sales outstanding and a 1.7 day reduction of days in inventory. This was slightly offset by a decrease in average accounts payable days outstanding. When compared to Q3 last year, our cash cycle time has improved by 4.2 days. In conclusion, return on invested capital was 15.4% for the quarter, which was up by 2.3 percentage points from Q2 and was the highest we have had in the last year.

Please turn to slide 9. I would you now like to share with you our guidance for the fourth fiscal quarter of FY14. Our view is that revenue will be in the range of $1.6 billion to $1.65 billion. We expect that gross margin will be in the range of 7.8% to 8.2%. Operating expense should be $67 million to $69 million. This leads to an operating margin in the range of 3.6% to 4.0%.

We expect that other income and expense will be in the range of $6.5 million to $7.5 million. And we expect the tax rate to be 16.5%, plus or minus a percentage point, and we expect our fully diluted share count to be 87 million shares, plus or minus half a million shares. When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.50 to $0.55. Finally, for your cash flow modeling, we expect that capital expenditures will be around $25 million, while depreciation and amortization will also be around $25 million.

Overall, we are pleased with how the second half of the year is developing. We remain focused on driving growth but it is imperative that we grow with the right kind of business. At this point I'll 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 the business environment for the third quarter and what we are seeing for September quarter. I am pleased with our third-quarter results as we continue to benefit from new programs and a stable demand from our key customers. We continue to be focused on basics of our strategy by improving operating margin, continue to diversify our businesses and customer base. As Bob mentioned, the key to our strategy is continue to drive quality of the growth which remains priority number one for us. Overall, good quarter with solid results. Things are good with challenges and opportunities as we continue to focus on Sanmina's core strengths.

Now please turn to slide 11. Here I want to talk to you about third quarter revenue by end markets. On a very positive sign that each of our end market segments grew in the third quarter. Top 10 customer represented 51% of our revenue and we had no customer at 10%. For communication networks, it was up nicely, 5.6%. Overall, we had a -- demand was pretty stable in this segment but we had a wireless and optical networks were strong.

Industrial, medical and defense segment was strong, up 15.1%. Industrial was strong, mainly driven by new programs. Medical overall strong growth during the quarter. Defense was down. We basically experienced weaker demand on some of our existing programs.

Computing and storage up nicely, 5.7% on stable overall demand. We also had some good activities with our new projects which are starting to deliver. For multimedia was up nicely, 3.6% on better demand than what we expected it. And also new projects helped us overall growth in this segment.

Now please turn to slide 12. Now let me talk to you about our fourth-quarter outlook by market segments. Fourth-quarter outlook continues to be promising. As Bob mentioned, revenue forecasts are $1.6 billion to $1.65 billion. We remain optimistic about present demand and opportunities that we have in this quarter. Sanmina's business model still has a lot of leverage as we continue to drive and focus on our strategy every day.

Fourth-quarter outlook by market segments -- communication networks we're forecasting to be up. Basically, we're expecting continued demand to be stable. We've got some good projects in wireless and networking infrastructure products, so it should be a good quarter. For industrial, medical and defense, we're also forecasting to be up. For industrial, we're forecasting good demand to continue. Medical, stable demand. Defense, in short term we still expect it to be flat as we continue to work on new programs and overall some good opportunities that we have in the pipeline. Overall, for this segment, things are looking up.

Computing and storage, we're forecasting that to be slightly up. We're forecasting stable demand as we are working on some good opportunities and new projects. For multimedia for this quarter, we're forecasting flat. Overall, we expect stable demand in this segment as we continue to expand new customers in this segment.

Let me make a few more comments about sales and marketing opportunities. First of all, for the third quarter book-to-bill was positive. As we look at the market today, we see overall good market opportunities and things still look attractive for us. The goal is to grow with existing partners, continue to expand our new partnerships that we've been working on, and continue to invest in opportunities that will drive sustainable and profitable growth, long term. As we've been talking to you now for last few quarters, we are back to basics, building a better Sanmina.

Please turn to slide 13. In summary, third quarter was a solid result. Overall, demand is stable and remains positive for us. We're going to continue to diversify our business as we continue to focus on Sanmina's core strength, which is our competitive advantage. The key to our model is to deliver predictable and sustainable results for many quarters to go.

Ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we are now ready to open the lines for question and answers. Thank you again. Operator?

(Operator Instructions)

Your first question does come from Brian Alexander at Raymond James. Your line is now open.

Hello, Brian.

Okay. Hi, Jure. Hi, Bob.

Hi, Brian.

Congrats on a nice quarter and all the work on the balance sheet. I just want to touch on the revenue for a second.

So it's the second quarter in a row where revenue came in at the high end of guidance. Previously, the last several quarters, you were basically near the midpoint of your guidance. And if we look at where the upside came from it's mostly in industrial, defense, medical and it sounds like industrial in particular.

I think growth in IDM was up over 40% year-over-year. That's obviously well ahead of the overall market.

So can you just kind of walk through IDM in particular? What specifically is driving the upside in that segment for the second quarter in a row in terms of sub-segments, in terms of how representative that is across customers? And I know you talked about an oil and gas acquisition again this quarter, so I wanted to get more color on how that business is doing.

Brian, let me make a few comments on that. First of all, this is a business that we've been focusing for the last couple of years to drive the growth. We believe we're well positioned. We offer a lot of good technology in this segment, both in industrial, medical and also in our defense.

Industrial specifically in this quarter was very strong. We extended a partnership with a very key customer of ours that we had a long relationship and we took over one of their factories, basically, as Bob mentioned. We spent a little bit of money there, buying their inventory and a few pieces of equipment.

That was part of the strategy and we worked on this for a long time. Most importantly, we believe what we developed, including oil and gas in this segment, that now we are positioned to continue to have a stable demand.

We also have some new programs in that segment that I believe will continue to expand. It's a good area for us and we believe that we offer the right solution for our customers there.

Hey, Brian, it's Bob. I just wanted to clarify. The acquisition this quarter was in the industrial segment, but it was not in oil and gas.

Okay. And I guess what was the contribution to revenue of that acquisition and what was nature of that acquisition?

We don't get into specifics with a given customer, but it clearly was an important part of the growth that you saw in the industrial, medical and defense segment.

If I can add to that, again, Brian, it's a strategic long-term partnership that we established with one of our key customers that we had been doing business for a long time. We just expanded our relation.

This was part of our planning for the last 12 months, and it's really a -- most important it's a great customer and it's a customer that we can have for many, many years to come. The ball is in our court. It's all about execution and continue add technology.

If I look at the growth in industrial, the $170 million, roughly, of year-over-year revenue growth, how much of that is coming from these two acquisitions, the oil and gas and then the new industrial?

So first of all, in last quarter overall we saw the growth in all our -- basically, in overall industrial business, even without this new acquisition that we got. We don't release the percentage, how much we got from oil and gas six months ago. But overall, definitely those two are very two critical projects that we worked on. Like I said, over a year ago.

And it's really what's going to drive -- what's driving this business today and Brian what's going to drive this business in the future. It's a good two solid customers.

Great. Okay. Thanks for the details.

Thanks, Brian.

Your next question comes from the line of Sean Hannan from Needham & Company. Your line is now open.

Hello, Sean.

Hi, Sean.

Hi. Good afternoon. Thanks for taking my questions here.

So just a question on the guidance. Can you talk a little bit about your expectations for how you view the IMS piece of the business moving next quarter in the likelihood of the margins directionally, as well as if you can go into that four components a little bit? Thanks.

Sean, definitely we believe there is room for improvements in margin in our IMS business. We are expecting that IMS business to improve on top line and the bottom line next quarter. As you look at the component businesses, definitely there's a lot of leverage in that side of the business, as we talk to all the investors and analysts in May when we were in New York on our Analyst Day.

We expect those margins to improve from where they are today. It's going to take some time, but there's room for improvements. We are not hitting on all the cylinders.

As I run this Company, every day I know we can do better. It's going to take some time, but I think we're moving in the right direction, most importantly that we are improving quality of the customers that we have and quality of the business that we're winning. And I believe, and the rest of my management, believes that's the right strategy for us, to continue to add more technology, better solution and focus in the areas that we're good at. As long as I think we stay on that track, I personally believe it will allow us to hit our long-term margin goals.

Okay. That's helpful.

So if I were to then specifically look into the computing business of yours, it sounds like we're getting some positive commentary here from you folks today. In general, it seems that there have been at least some encouraging data points that have been starting to emerge in pockets. Just wanted to get your viewpoints on what you're perhaps seeing at an industry level, beyond just project orientation that you're designed in on.

And then secondarily, to see if we can get a pulse check on the ODM storage business of yours. I think there was a sense from the Analyst Day that we could perhaps be getting some momentum finally here materializing in the back half of calendar 2014 in terms of new business wins. So just wanted to get a sense of whether that remains on track, or instead maybe the foot is coming off the pedal, or any commentary around that would with great. Thanks.

Okay. First of all, in that computing section, overall as I mentioned we had stable demand and we're starting to see more activities, some of the new programs that we won and they're starting to deliver. First of all, in this segment in last quarter some of our key customers did better and that helped us to grow.

I think as an industry, we're still very optimistic, opportunities that is in this segment that we are focused on. And we're working very hard to really expand our relationship with existing customer base that we have and also we're working on some good opportunities to expand to the new customer base. And that's where I see more growth in some of these new opportunities that we're working on.

When it comes to the ODM specifically, our new Isis products, again we work both direct delivering our solution and also joint development with our customers. We're doing a little bit better than, let's say, three months ago. We still have a lot of more leverage in that side of the business.

Yes, I would expect that business to improve for us on a quarterly basis. Again, a lot of good opportunities. We'll see how these things move and we'll continue to bring new products to the market, which I think it's going to speed up some of the growth. So overall, optimistic on this segment and probably more optimistic as we get into 2015.

That's great. Thanks so much.

Thanks, Sean.

Your next question comes from the line of Wamsi Mohan at Bank of America-Merrill Lynch. Your line is now open.

Yes, thanks. Good afternoon.

Hi, Wamsi.

As you look at your industrial, medical and defense segment at 36% of revenues, a year ago was in the high 20%s, so rapidly approaching the size of your communication networks business segment. Do you think that as you look at the pipeline of new wins that you have and the investment that you are making in the industrial, medical, defense segment, that over the next 12 months do you see any quarter in which this might become the largest segment? Or do you see that within the next two years, this becoming the largest segment? And I have a follow-up.

If you look at these market opportunities in industrial, medical, defense for us is actually huge. It's bigger than the communication business for us from an opportunity point of view. So can we get that in two years to be same percentage or bigger? Answer is yes.

We expect to grow from this point and we continue to diversify. That's part of our key strategy, back to the quality of the growth and diversify into the businesses and the companies that are sustainable and repeatable for many years to come.

And that's really the key to our strategy is to focus on quality, quality of the growth. And now I'm repeating this stuff but believe me, we also repeat this internally every day because we're not interested just chase revenue for revenue's sake unless we believe that is a long-term relationship that is repeatable and allowed us to make a little bit of money. So back to the industrial, medical and defense, it's a huge potential.

On the defense side, that's been kind of flat and down but we've been really focused on that. We believe there will be a lot of activities in FY15, hopefully more than in 2014. We all know that the world is not the safest place and that the defense business will continue to expand. So I believe we are planting a lot of seeds in that side of the business and we expect that side to help us.

So overall, we are still very optimistic. At the same time, as you know, Wamsi, this is a business that moves slowly so that's good and bad. It takes a long time to win the customers but also if you do -- once you win them, as long as we do a great job and continue to add value, these customers will stay with you for many years to come.

Okay. Thanks for that color, Jure.

And what I find particularly impressive on the quarter is that you had a very strong quarter-on-quarter revenue increase. It's one of the strongest we've seen in a long time. Part of it is somewhat inorganic, but we haven't seen this sort of sequential increase since 2010.

But at the same time, your incremental margins have been very strong. So I was wondering, do you see the trend of incremental margins continue to exceed the reported margins over the next 12 months or are you going to see a more rapid sort of convergence between the two?

Wamsi, it's Bob. Our goal, again, is to drive the right mix of business, so we're trying to find opportunities where we can expand our margins over time. I think in each segment it's a little bit different.

On the IMS side, it's really a matter of going after the complex products where we can add more value and have sustainable relationships and over time get some margin expansion. On the components, products and services sides, those are already inherently higher-margin businesses so it's really a matter of winning our fair share of those. And I think with both of those actions we'll see margins expand over time.

And if I could add, Wamsi, again, as we mentioned in our analyst call in New York, the key here is putting a right business in the assets that we have. We believe we have a lot of capabilities, components, products, services, how do we expand those, how do we load those up, we'll really drive that margin. And then how do we load up these other assets that we have in IMS around the world, which we have some great assets, some great capabilities.

So the key is, again, that the quality of the customer. I think that's what's going to drive us and help us the most.

Thanks, guys.

Thanks, Wamsi.

Thank you.

Your next question comes from the line of Joe Wittine at Longbow Research. Your line is now open.

Hi. Thanks. Congrats on the quarter.

Bob, on components gross margin, just looking back a year ago we were 80 bps higher. Specifically, what would it take to get back to that level in the near future, or did something structurally change in the mix, et cetera?

Hi, Joe. I think you're asking about the overall segment, components, products and services.

That's right.

Within there, we also have mix issues. We've talked about that before. Components is an area within that segment where we've said quite candidly there's room for improvement.

We made some progress. We still think there's more room for improvement there. Products, it's really a question of mix that we have in any given quarter, and then services has been a real steady performer for us.

So I can't say when we'll get back there. We really expect to do quite a bit better than we did this past quarter over time. But it's, again, it's very mix dependent because the margins are quite a bit higher in some of the areas within that segment.

Okay. Got it. And then, just switching over to the acquisitions quickly. In both these situations, did you take over existing facilities at the customer base or are you moving these into existing Sanmina facilities?

In these two cases, we did take over facilities for the customer and over time we'll expand and hopefully move some other customers into each of those sites.

Okay. Then maybe one more quick follow-up kind of on that topic.

This real estate you have listed, I think it's been a while since it's been talked about. What's the strategy in keeping it out there so long? Just the fact that it's sitting out there for years kind of suggests that the prices you have it listed for aren't necessarily all that realistic.

Why not drop the prices and get rid of it and drop this issue? Or are these maybe such unique facilities that it's tough to find a buyer at all?

First of all, we'd love to sell it immediately. They aren't particularly liquid assets in many cases, so we have to be patient.

And I'd also note that we have sold quite a bit of real estate over the last four years to five years. I think one year we sold about $30 million. We probably average somewhere around $20 million a year.

We're definitely motivated to sell. We're not going to sell them at any price, but we're hopeful as the economy continues to improve that we'll have opportunities to liquidate more property.

Okay. Thanks. Congrats on the growth.

Thanks, Joe.

Thank you.

Your next question comes from the line of Osten Bernardez at Cross Research. Your line is now open.

Hi, good afternoon. Thanks for taking my questions.

Hi, Osten.

So just jumping -- with respect to communications, can you provide some color in terms of from an outlook perspective what sort of pace of sales should we be anticipating? Are you foreseeing any sort of ramp-up in production in the coming quarters? Tied into that, how would you characterize your forward forecast from your customers today versus, say, a quarter or two ago?

Osten, is that for communications segment?

Yes, strictly for communications.

First of all, as I mentioned in my prepared statement, we expect to have a stable demand to continue, overall more revenue than last quarter from that segment. I think customers are feeling positive in what's in front of them.

I think we're benefiting from the global expansion for telecommunication infrastructure as we are well positioned with all the key players in that segment. We have a high reputation. So I would expect that for us, definitely next quarter to be better and I'm hoping to continue to be a little bit better in 2015.

And with respect to customer forecasts today, longer-term forecasts?

That's what I said. I'm not ready to give a long-term forecast, but I would base everything I see today and projects that we're involved, what we accomplished in 2014 or another quarter to go, I believe we are well positioned for 2015 in this segment and other segments of our business.

And then just to clarify, with respect to IMS gross margin quarter-over-quarter, was the tick-down primarily a function of mix or start-up costs with respect to new deals?

It was really related to mix. And I think I had commented in each of the last two quarters that we had a particularly good mix in IMS. It's not a bad mix this quarter. It's just not as strong as it was the last two.

Thank you very much.

Thanks, Osten.

Your next question comes from the line of Jim Suva at Citi. Your line is now open.

Thank you and congratulations to you and your team there. Really impressive, great results.

Thanks, Jim.

Thank you, Jim.

One quarter at a time, you know.

On the commentary about the two acquisitions, if my memory serves correctly, am I correct that one was in prior to when the quarter closed? I think it was the oil and gas one. And then the other one occurred during this quarter? Is that correct?

Yes, that's correct.

And then of that one that was included that closed during the quarter, was that in your original guidance and outlook that you gave us about three months ago?

One of the reasons we gave such a wide range last quarter was we weren't 100% sure on the timing of when that acquisition would close. So the way it ended up closing, we were able to get towards the high end of the range.

Got you. Okay.

Then, when we look at -- can you just help us out what the organic growth rate, whether it's quarter-to-quarter or year-over-year, that Sanmina saw and does any of it flow into the September quarter for -- I don't know if it closed midway through the quarter. It must have, because we did our conference call about a month after your quarter closed.

Jim, this is Jure. I think it's very hard to say. As far as we're concerned, this is all organic.

This is a customer of ours that basically did not outsource any of the business before and we had a relationship with them and we worked on this project. We have multiple projects with this customer and they don't want us to talk too much about it. So far as we're concerned, this is all organic.

It's no different, because we only bought here is the material and some equipment. So it's no different than if we went down the street and bought a brand-new equipment and go and order the material.

The most important part of this project is that we were able to expand existing relationship and this relationship has a great future because both of us, both our customer wants it. I think we're provided the right solution. So we're very excited about it. Breaking it down, as far as we're concerned, it's organic.

Okay. And with this new one, do they move into the top 10 list as far as size goes?

Hopefully one day.

Okay. Well, again, congratulations to you and your team there at Sanmina and truly great results.

Thanks, Jim. A lot of work left but things moving in the right direction.

Your next question comes from the line of Mark Delaney at Goldman Sachs. Your line is now open.

Thanks very much for taking the question.

Hi, Mark.

How you doing?

Good.

I was hoping first you could elaborate a little bit more on this new oil and gas customer. And apologize if I missed this, but can you disclose how much cash you used to acquire the tools and material?

First of all, oil and gas partnership came in last quarter and a partnership with this industrial customer happened to be in the middle of this quarter, plus or minus a few days. Bob, I thought you already said it.

It was -- I believe it was $27 million in cash that we invested for the acquisition that we closed this quarter.

That's what I was looking for. Thanks, Bob.

In terms of the benefits from the debt refinancing, I know, Bob, you said there was some incremental benefits that weren't going to be recognized until the third quarter because of the timing of the tender. Can you just help us understand how much more savings you'd get in the December quarter when you get the full quarter's benefit of the second tranche of the 7% debt that you called?

I don't want to get too far out in time. A lot of the net present value we got out of this transaction was for the future years, not so much the current year, because we had swapped the existing debt, the floating. And what we've been able to do now is lock in rates very similar to what we were experiencing on a floating rate basis.

A lot of the MPV is driven by what we expect to be lower interest expense out in future years. Much less so in the current year.

Got it. And then one last one.

Jure, I know you talked about affirming customer forecast in the communications end market and how Sanmina's been well positioned on newer programs and that's positioned you well within that market. There's also just been some industry chatter or there had been about potential push outs in parts of the wireless segment. I'm hoping you can help us understand.

Did you guys see any of that and it was just your positioning on certain projects helped you still have growth in the communications segment? Or do you just think the market forecast was stronger than some people had expected?

First of all, Mark, let me qualify. I'm not a market expert, as Bob and I were actually talking about today.

I think a lot of times we can only make comments, what we know is projects that we are involved in. As you know, we operate in global environments with the global customers.

I think we're fortunate enough that the projects that we're involved are doing well. We'll expect them to do well, as I mentioned, early for next quarter. And I think overall our segment, as long as the economy's there and nothing crazy happens, we expect that we'll do in that segment good in 2015.

So right now I'm optimistic. That's all I can make a comment.

Got it. Thank you very much.

Thanks, Mark.

Operator, we have time for one more call.

And your next question, last question, comes from Sherri Scribner from Deutsche Bank. Your line is now open.

I squeezed in. Hi, guys, how are you?

We saved the best for last.

Thank you. Just wanted to ask a quick question about communications, circle back with that.

Communications has been declining on a year-over-year basis over the past couple quarters and the guidance suggests another decline. I'm trying to understand, should we expect communications to continue to decline as we move into FY15 or do you think that will start to stabilize and maybe we'll see some growth.

Make sure that I didn't understand. We did not say that the communication will decline in September quarter.

Okay. But on a year-over-year basis, depending what you assume for the Q-over-Q growth, it still looks like it's going to be a year-over-year decline.

Yes, but let me color qualify on that.

Okay.

I think with Sanmina you have to -- as much I would love to be comparing -- we made a lot of changes in this Company in the last year and-a-half, especially exiting certain businesses and so on and so on. The businesses didn't make a lot of money for us. So really from my point, to me it's not that critical right now to compare year-over-year. Maybe a year from now will make more sense to do that.

I would say communication for us, I think I said it last quarter, we'll do -- I said I believe my communication business will be stronger next four quarters. I think I said it three months ago, six months ago, then the last four quarters. We still believe that.

So yes, there's some great opportunities. End of the day, we've got to continue to fight for every order and continue add value to our customers. Sherri, I'm optimistic what's in front of us on that segment.

As I always said, I think we're back to the basics. We're going to take one quarter at a time, and not -- make sure we don't get ahead of ourselves.

Okay. All right. So, it sounds like potentially there could be some growth next year on a year-over-year basis as we turn that around.

Yes, I would expect that.

Okay. Super.

Assuming that economy's okay. There's a lot of crazy things going on in the world right now, but as long as the economy is there I believe Sanmina will be fine.

The good thing is, we're well positioned today. We've been in the best position since 2000 right now, that we can operate in any environment. We're really excited what's in front of us.

Okay. Super.

And then Bob, just quickly, with all the changes in the debt can you give us a sense of what you think interest expense should be in FY15 and then what type of tax rate should we use? Thanks.

So again, as I just mentioned, most of the interest expense benefit is in future years and I guess 2015 is one of those. I think interest expense will be relatively flat. Part of what we did is we took the floating-rate debt out and we're much more fixed than we were before. I would probably model it somewhat similar on a run rate basis.

And then from a tax rate standpoint, we think right now the run rate on a pro forma basis is around 16.5% and that's the best information we have. I wouldn't anticipate it changing as of today, but you never know. Tax laws change all over the world, it seems like, quite a bit. But right now I think 16.5% is the number I would use.

Okay. Great. Thank you.

Thanks, Sherri.

Thanks, Sherri. Ladies and gentlemen, that's the end of our call today. I appreciate your time you're spending with us today.

If we didn't answer all your questions, please give us a call. In the meantime, thank you again for your support and looking forward to talking to you 90 days from now. Bye-bye.

Bye, everyone.

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