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Sanmina Corporation (NASDAQ:SANM)

Q1 2013 Earnings Call

January 28, 2013 5:00 am ET

Executives

Paige Bombino - Director, IR

Jure Sola - Chairman and Chief Executive Officer

Bob Eulau - Executive Vice President and Chief Financial Officer

Analysts

Jim Suva - Citigroup

Wamsi Mohan - Bank of America

Brian Alexander - Raymond James

Kevin LaBuz - Deutsche Bank.

Amit Daryanani - RBC Capital Market

Joe Wittine - Longbow Research

Osten Bernandez - Cross Research

Operator

Good afternoon. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina First Quarter Fiscal 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).

I would now like to turn the conference over to Ms. Paige Bombino, Director of Investor Relations. You may begin.

Paige Bombino

Thank you, Heather. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first 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 slide posted on our website. Please turn to page two, the Safe Harbor Statement.

During this conference call, we may make projections or other forward-looking statements regarding future events or 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 economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change.

We refer you to our quarterly and annual reports filed with the Securities and Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release and slides issued today that we have provided you with statements of operations for the three months ended December 29, 2012 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 it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in the conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Jure Sola

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome. Also, thank you all for being here today with me on this today's conference call as Bob Eulau, our CFO.

Bob Eulau

Hello, everyone.

Jure Sola

For agenda, we have that Bob will review our financial results for the first quarter. Then I will follow up with the comments relative to Sanmina-SCI 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 Eulau

Thanks, Jure. Please turn to slide three.

The first quarter was challenging from a revenue and earnings per share perspective, but cash generation was excellent again. Revenue of $1.49 billion was down 5.3% on a sequential basis and roughly flat with the first quarter last year. Non-GAAP EPS was $0.29. This was based on 84 million shares outstanding on a fully diluted basis. Cash generation was outstanding this quarter, with cash flow from operations at $97 million and free cash flow at $78 million.

I’ll discuss cash in more detail in a few minutes. Please turn to slide four.

Revenue was down 5.3% or $84 million from Q4 to $1.495 billion. From a GAAP perspective, we reported net income of approximately $1 million, which reflects in earnings per share of $0.01. There were three significant one-time events this quarter. The first was a reserve of roughly $5 million for distressed customer who stopped paying us during the quarter. After establishing this reserve, we now carry approximately $2 million of exposure related to this customer.

Today, we learned that this customer has filed for bankruptcy protection in the United States. We are currently evaluating this new development and it is possible that additional reserves may need to be established prior to our filing of our quarterly report on Form 10-Q. Therefore, it is possible that our GAAP financial results may change from those presented today. However, our non-GAAP results will not be impacted.

The second item relates to the redemption of our 2014 debt. There is a swap on this debt, which converted it from a floating rate obligation to a fixed rate obligation. Since we have plans to fully redeem this debt using primarily cash, a large portion of the swap is now accounted for as ineffective hedge. Without going into all of the details, the accounting for this swap results in a one-time non-cash charge of $14.9 million associated with the ineffective hedge.

The third item was a gain of $4 million associated with the sale of a building during the quarter. Restructuring charges for the quarter were $3.9 million. This is below the forecast that we have for the first quarter. The restructuring is progressing well on the two facilities that we are closing that we mentioned last quarter.

The first facility is in Kuching, Malaysia, which we discussed and the second facility we are closing is in Israel, where we are in the process of consolidating Israeli production into one site. We expect to complete operations for both factories by the end of March. We are forecasting restructuring costs of $4 million to $6 million for the March Quarter.

My remaining comments will focus on the non-GAAP financials for the first quarter. At $101 million, gross profit was down $16 million from the prior quarter, gross margin came in at 6.8%, which was 60 basis points below the previous quarter.

Operating expenses were down $1.2 million for the quarter at $59.9 million. This represents a 10-basis point increase in operating expenses as a percent of revenue. At $41.4 million, operating income decreased by 26% from the prior quarter. Operating margin was 2.8%, which was a 70-basis point sequential decrease.

Other income and expense was at $12.9 million. The tax rate for the quarter was 15% of free tax income, which was in the range we had expected. On a non-GAAP basis, we earned $24.2 million in net income or $0.29 per share.

Please turn to slide five, where we are providing more information on the segments that we started to report last quarter. 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 $80 million from last quarter, which was the primary driver in our gross margin decline at 70 basis points. In addition to the late decline in demand, new program ramps also impacted our overhead spending.

The second segment for us is components, products and services. Components include printed circuit board, fabrication, backplane assemblies, cable assemblies and closures, 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 fairly stable with gross margin declining to 9.6%, primarily due to the change in the footprint for the PCB business.

We were impacted by two weeks of extra production in the Malaysian PCB fab while the volume was actually lower than we had expected, but we are very pleased that the customer transitioned to other sites we incurred an extra $2.5 million in overhead absorption variances associated with the change in the PCB footprint.

On slide 6, we are showing you some of our key non-GAAP P&L metrics. Revenue was down $84 million, or 5.3% from last quarter. Demand was disappointing for all segments other than multimedia, which was quite strong for the quarter. When compared to Q1 last year, total revenue was down 50 basis points with growth in communications offsetting the decline in the multimedia segment.

Moving onto gross profit, we had a 13.5% decrease in gross profit in Q1, while gross margin declined to 6.8%, which was down 60 basis points from last quarter. As you just saw, most of the decline in gross profit was attributable to the integrated manufacturing solutions segment. Our operating profit decreased 26% from last quarter to $41.4 million. This led to operating margin of 2.8%. Net interest expense declined by about $200,000 this quarter as we continue to see the benefits of the deleveraging of our balance sheet.

Now, I would like to turn your attention to the balance sheet on slide seven. Our cash and cash equivalents were $491 million. Cash was up $81 million from the previous quarter. Accounts receivable, inventory and accounts payable, all declined this quarter as revenue was soft. Property, plant and equipment was down $6 million for the quarter. At the end of the quarter, there was a shift of a $100 million from long-term debt to short-term debt as a result of the call for the redemption of $100 million in 2014 notes, which was completed on January 9th.

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. Today, we announced the redemption of the remaining 2014 senior floating rate notes. By the end of this quarter, we will have reduced our long-term debt by almost $900 million since the end of fiscal year 2009. Short-term debt will be higher, but at much more attractive interest rates. We are now forecasting our net interest expense to be in the range of $40 million to $45 million for the fiscal year.

Please turn to slide 9. This slide reflects our debt maturity profile after we redeemed the remaining 2014 notes on February 27th. As you can see, 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. Once we redeem the 2014 notes, we do not have any significant long-term debt due until 2019.

Please turn to slide 10, where we will review our balance sheet metrics. Cash was up $81 million from Q4. Cash flow from operations for the quarter was very strong at $97 million and net capital expenditures for the quarter $19 million. Net capital expenditures benefitted from the sale of one building for $8.5 million during the quarter. This led to $78 million in free cash flow.

Inventory reduction and cash generation are ongoing priority for our team. Inventory dollars were down $47 million from last quarter at $780 million, while inventory turns declined from 7.1 to 6.9. Given the decline in demand that came in December, we are pleased with this outcome on inventory. Compared to Q1 last year, inventory was down $124 million.

We are showing cash cycle days, which combines our cycle time for inventory and accounts receivable and accounts payable. Overall, cash cycle time decreased from 51.9 days last quarter to 51.7 days. The modest increase in inventory days was more than offset by improvement in accounts receivable and accounts payable. Finally, ROIC was at 9.9% for Q1, which was impacted by our weaker profitability for the quarter.

Please turn to slide 11. I would now like to share with you our guidance for the second fiscal quarter of FY'13. Primarily due to seasonality, we expect our revenue to be down. Our view is that revenue will be in the range of $1.4 billion to 1.45 billion. We expect that gross margin will be in the range of 7% to 7.4%. Operating expenses should be $62 million to $63 million. This leads to an operating margin in the range of 2.6% to 3%.

We expect that other income and expense will be in the range of $10 million to $12 million. We expect the tax rate to remain in the range of 14% to 16%, and we expect that our fully diluted share count will be around 85 million shares plus or minus, 0.5 million shares. When you consider all of this guidance, we believe that we will end up with earnings per share in the range of $0.26 to $0.32. Finally, for your cash flow modeling, we expect that gross capital expenditures will be around $20 million to $25 million, which depreciation and amortization will be around $25 million as well. We also anticipate real estate sales of $20 million to $25 million this quarter.

Overall, we are navigating through a challenging macroeconomic environment. Growth is the biggest challenge as we see varying growth prospects across our customer and business base. In Q2, we will focus on finishing our efforts to right-size our printed circuit board in Israeli businesses.

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

Jure Sola

Thanks, Bob. Ladies and gentlemen, I will add few comments here to Bob's overview. I'll talk about December quarter, talk about short-term business environment for March quarter and I'll talk to you about our outlook for the rest of the calendar year 2013.

So let me recap first quarter of fiscal year 2013. At the start of December quarter, we said that headwinds and uncertainties into global economy will continue into 2013, and that short-term economic environment will be challenging. Basically, that's what we are experiencing today in this macro environment. So, as we expected, the first quarter continued to be challenged by relatively weak demand across most of our key market segments and ramp up of new programs was slower than what we forecasted. In summary, we had a fair amount of push outs and in the quarter and weaker demand than what was anticipated by our customers or by us.

We have two business portfolios, integrated manufacturing solutions. In that mix, we saw more push outs during the quarter. Components, products and services was basically flat, no major changes than what we forecasted internally.

Now, please turn to slide 12. Here I want to talk to about revenue breakdown by end markets. First, our top-10 customers that have presented 49% of our revenue, we also had one customer around 10% of revenue.

Let me talk to you about the market segments. Communication Networks was down 11.7%. We did forecast it to be down, but not as much as it turned out to be. We had a fair amount of push outs on wireless infrastructure, especially middle of the end of the quarter. There was a major impact for the quarter itself.

Computing and storage was down 9.8%. Actually, we forecasted at beginning of the quarter it to be up. We had a fair amount of weaknesses in demand on existing programs and ramp of the new programs was lot slower than what we anticipated.

Defense/industrial/medical was down 8.1%, industrial was down more. Defense and medical were slightly down. Multimedia as Bob mentioned was positive. They went up 46% quarter-over-quarter mainly driven by set-top box business and automotive business.

Please turn to slide 13. Here I want to talk to you about outlook by market segments. As Bob mentioned, second quarter we are forecasting to be down sequentially mainly driven by seasonality and continued uncertainties in this macro environment.

Communication Networks, we are forecasting to be slightly down. Let me make a few comments. Short-term wireless infrastructure demand will continue to be weak. Rest of the communication Networks are stable, and we also have a fair amount of new projects in works that should help us, maybe little bit in the second, but more maybe in the third quarter. Long-term, we are well positioned as demand improves in this segment, because we are well positioned with all the key players in this market.

Enterprise computing and storage, we are also forecasting down. Short-term basically we are going to continue to see weak demand. On a positive side, we do have a strong pipeline of new projects that we are working on. So, we you look at the long-term, we believe the forecast for the future are positive.

Defense/industrial/medical for this second quarter we are forecasting to be up. Overall defense part of our business was slightly up. Industrial, we have a strong pipeline, some new project we expected to move in the right direction. Medical, for us, should be flat some potential for upside, but overall in this group, we believe we have some good new opportunities that we are working on for the future. Multimedia, we are forecasting for the second quarter to be down, mainly driven by set-top box. Basically that business is very seasonal, especially in the second quarter. Rest of the business in the bucket such as gaming and automotive, we expected to be flat to slightly up.

Now, let me talk to you little bit more about rest of the calendar year 2013. Besides short-term demand challenges, we are positive about opportunities we are currently working on lots of activities across all our focus markets and customers.

A few comments on bookings, book-to-bill last quarter was slightly negative almost at par. But as we look at the sales bookings for the future, especially a short-term, not everything is negative. We are expecting better sales bookings in the second quarter and expect to improve for the rest of the 2013 based on our customer forecast and as we are still having good pipeline on major new projects in the works. Overall, our new product introduction operations are busy at this time. We believe this new opportunity should help us drive growth and margin expansion in the second half of 2013.

Now please turn to slide 14. Here, I want to talk about two portfolios of our businesses and just add few more comments on each of them. Overall, we are gaining market traction in each of our business unit as we talked about our strategy in our last analyst meeting. Now, let me break it down in pieces, so I'll start with components, products and services. I look at our Sanmina Global Services, design services. Those businesses are doing actually pretty well. We expanded those businesses end of the 2012, so the way we see the future has lot of growth and lots of potential. We are well positioned right now to grow those businesses. And, most importantly, the margin those businesses for us have been very good.

Next segment I want to mention and talk about is, interconnect system, which is high end circuit boards and backplanes. After this final restructuring that we are doing here in Malaysia and moving that product back to China and other parts of the world, I believe this business for us is going to become more stable. Most importantly that we are working on some good customers opportunity, especially high end of a high technology printed circuit boards look pretty promising.

Mechanical systems, overall, their business is starting to stabilize. We do have some good opportunities in our pipeline. The most important, we are starting to see some better trends from our customers especially on industrial slide of the business.

Now, let me talk to you about our products. I will start with the defense and aerospace. As we mentioned 90 days ago, we are rebranding our defense and aerospace group to SCI. We do have products here and we continue to invest in R&D, working on some good new opportunities. The most importantly, I think it's the business that is the long-term focus and we expect some positive things. In the meantime, they are some finance including financing their R&D.

The next business I want to talk about is Newisys. Again, we sell their product under the Newisys' brand. We've been investing fair amount in research and development in the storage side of our business. We have been adding some new talent. We are working on lot of new opportunities, so we are very excited what we have in front of us.

The third product group is called Viking Technology, again continue to invest in R&D there, and if I look at what we accomplished in last 12 months from the revenue point of view, year-over-year basically is flat, but we have lot of new programs. And when you look at the revenue today, all the revenue is really coming from the new programs, especially on solid state drives, so we look at the fair amount upside in that side of the business as the economic improves.

Now let me talk to you about integrated manufacturing solutions and make a few comments on that part of the business. We are improving our business mix and I believe that our customer base is stronger today than what we had, let's say even a year ago. We are also working very close with our existing customers and new customers some of the new programs, so I would say the pipeline is pretty strong for this type of businesses.

I believe we are also well positioned to compete basically around the world in this side of the business with the customer base that we are focused on. So, well positioned as the economy improves, which we believe the second half should be little better than what we are experiencing today. So if I look at our model today, there's still lots of leverage in our business model.

Please turn to slide 15. In summary, our customer' forecast are positive for second half of the year. We do have a good pipeline of new projects to help improve business mix and drive the growth. We also expect to continue to generate positive cash flow from operations. We are definitely building a stronger global company with a leading industry capabilities, technologies and services.

Now, ladies and gentlemen, 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.

Question-and-Answer Session

Operator

(Operator Instructions).Your first question comes from the line of Jim Suva.

Jim Suva - Citigroup

Thank you, Jure, and Sanmina and your team there. I have got a few questions. When you finished you're restructuring in rightsizing the business, which you've been spending a lot of effort focused on. What type of gross operating margins in financial structure do you see happening and when do you actually see that restructuring efforts kind of completely playing out in being done.

Bob Eulau

Hi, Jim. It's Bob. I'll take a stab at that. We are in, as you mentioned, the process of restructuring both, our PCB business and our business in Israel. We, as I mentioned last quarter, by the second half of the year we expect we will have reduced somewhere in the neighborhood of $3 million to $5 million in fixed cost per quarter, so we haven't put specific operating margin goals out there, but that gives you a sense of the benefit we expect to see on an ongoing basis.

Jim Suva - Citigroup

Great. And time line?

Bob Eulau

Again, second half of the fiscal year, we'll begin to see those benefits.

Jim Suva - Citigroup

Okay. Then my last question is, you mentioned a customer for bankruptcy and stuff and we realized that happens. Can you help us clarify about what segment that's in and other customers in that similar exposure or what are you doing differently to prevent this from happening?

Bob Eulau

So, I am happy to comment on that as well. The customer is in the communications segment, relatively small company and one that we have been monitoring for several quarters now. We obviously have an ongoing progress reviewing the credit situation with all of our customers whether they are large or small. And, unfortunately, these situations happen once in a while. We will obviously work diligently to recover as much as we can and we'll see how this plays out over the next quarter or two.

Jim Suva - Citigroup

Thank you and congratulations your team at Sanmina.

Operator

Your next question comes from the line of Wamsi Mohan.

Wamsi Mohan - Bank of America

My question is on gross margin. You guys spoke about the sequential decline, primarily because of revenues, but when you look on a year-on-year basis, revenues are almost flat and actually component revenues and margins are actually up, so the delta is really in the integrated manufacturing solutions, where there was a 110-basis point decline in gross margins on almost flat revenues, so can you talk a little bit about what has changed structurally in the past year? Even the mix doesn't seem like it's changed materially, so are we just headed for another leg down in industry margins, or can you explain why there's so much difference year-on-year?

Bob Eulau

Yes. Wamsi. It's Bob. I'll respond to that. As we mentioned, the integrated manufacturing solutions was clearly a disappointment this quarter and the revenue is down about $30 million I believe from Q1 of last year, so it's down some. We were affected as you alluded to on mix to some extent, but also impacted by new product introductions, which we were working on pretty diligently during the quarter, so we had some overhead spending, yet we didn't really get the revenue out the door the way we had anticipated. You know what happens when we have the demand dropped the way it did late in the quarter is, we end up having some absorption variances and so the timing on the decline in revenue [hurt] us.

Wamsi Mohan - Bank of America

Okay. Thanks. Just could you perhaps address one of the comments that you just made about the percentage of decline because of new product rams? Were the new product ramps disproportionately larger this quarter than last year's first quarter as a percentage and then I have one last follow-up.

Bob Eulau

In my recollection is they are probably the highest we have seen in several quarters in terms of new product introduction activity, so I don't have a particular recollection on Q1 last year, but it's not the biggest issue in terms of the decline certainly on a sequential basis, but it's a big impact nonetheless.

Jure Sola

If I can add to that, Wamsi, definitely these are the programs. These are high end programs, so not just that cost, but there's also delay in our timing getting these products out both, on customer side and somewhere in our side. These are very, very difficult programs, but they are also very exciting programs for us for the future.

Wamsi Mohan - Bank of America

Okay. Thanks, Jure. Then lastly from me, you made a comment about Communication Networks. I think you mentioned push outs in the middle and end of the quarter. Can you comment on if any of those push outs are actually being recognized as revenue here in 1Q or are you seeing continued push outs here in 1Q.

Jure Sola

Well, as I mentioned, I think on our wireless side we continue to see some push outs continually probably through end of this quarter maybe even beginning of the next quarter. At least that's what we are seeing in our forecast and these are mainly the projects that have been really delayed on our customer side. It's not projects that let's say our customers lost or we lost them. It's really the timing when they believe these installations will go in around the world. So, for us in communications side, that was the biggest impact in the first quarter and I think it's going to be continued to be in the second quarter.

Operator

(Operator Instructions). Your next question comes from Brian Alexander.

Brian Alexander - Raymond James

Good evening, Jure. Hi, Bob. Maybe a follow-up on the demand environment given that the month of December sounded like it was a lot weaker than you expect and what gives you the confidence to guide normal seasonality for the March quarter. It doesn't sound like we've seen much in the way of signs of life. And the follow-on to that would be, given the lower revenue base that we are contemplating here going forward, are you thinking about potentially more restructuring actions beyond the two facilities that we talked about.

Jure Sola

Brian first of all, yes, as I mentioned during my prepared statement beginning of the quarter, we knew that we are getting in a challenging environment. We had more push outs than what we anticipated middle the quarter, end of the quarter. As we look at the world today, we don't know what's going to happen with economy, so the lot of the guidance that we are giving today base what we are seeing today in a real world. We monitor those things on a daily, weekly basis.

We also believe that some of these new programs that we have in our pipeline should help us in this quarter, and everything that we see with the projects that we are on and the customers that we are working on that we are going to have some upside in hopefully end of this quarter, early next quarter, so that's why definitely we are still guiding it down quarter-over-quarter for seasonality reasons, but also I still believe there are some short-term challenges here.

Again, we also improved the mix of the customer that we have today and project even the customer that we just talked about that filed for a bankruptcy, we had a few customers that that was part of our plan to make sure we upgrade those and we continue to do some positive things and pipeline of some of the new programs and opportunities that we are working that we have a high confidence that we will win is pretty strong.

So, when you put all those together, we are going to take one quarter a time, but at the same time we are focusing on things that we can control. We still continue to invest in some of these products and services, businesses that would allow us to generate better margin and help us to win the stronger customer base.

When it comes to restructuring, and I'll let Bob to add to this one, I mean, two areas that we've been focused on these two areas was operations in Israel. We had two operations in Israel. We felt that we don't need two operations there. We have a very strong what we call integration, electronic and mechanical side and adding a surface new product introduction to their side made a lot of sense and moving some of the high volume production other parts of the world for Israel.

When it comes to Malaysia, transferring the circuit board plant into China and other parts of the world made lot of sense because of cost structure when it comes to getting all the supplies to Malaysia that was number one. And number two, with expansion in China, we just didn't need to have a two similar plants operating.

As of today, we believe that operations are tuned up in a pretty good shape. Things fall off the cliff. From economical point of view, I personally don't see any major restructuring going on at least what we see today. Bob?

Bob Eulau

Okay. So, I'll go back to your first question in terms of seasonality. That affects our thinking on restructuring as well. If you look at last year and you compare sequentially Q2 to Q1, we were down about 3%. When you look at what we have modeled at least as a midpoint in our guidance today, we are suggesting decline of about 5%, so we think we are actually planning on something a little more significant than what you might call normal seasonality.

Now, having said that, at the same time, we need to work our way through the restructurings that are going on right now, we are pretty confident as we come out the other side of that. The fixed cost structure will clearly be more advantageous for us. Then as we start to see some recovery in the demand, we start to get the benefits obviously product introduction activity we should be able to generate much better contribution margin and get it to flow through to the bottom line, better with the new structure we have in place, so there are no other plans for restructuring at this point.

Brian Alexander - Raymond James

Okay. Thanks. Bob, just to follow-up on the gross margin. If I heard you right, 7% to 7.4% for the March quarter, so up about 20 to 60 basis points despite revenue coming down 5%. Just trying to understand how gross margins will be rising. Mix is probably helping you with multimedia down and industrial up. Then I think you called out a $2.5 million cost for overhead absorption in the Malaysia facility situation and that will probably go away, so that's 20 basis points. I am just trying to understand what else is in there that will cause gross margins to recover this quickly if revenue isn't and if you are not yet benefitting from the restructuring savings?

Bob Eulau

Yes. You certainly called out one of the key things, which is we don't expect Kuching PCB situation on absorption variance to occur again. The net effect of that frankly was really a shift from restructuring cost back into operating cost, so that won't happen again next quarter and we are very confident we'll have that facility shutdown from an operating standpoint.

The other issue for us during the quarter was, we had December. We also had a significant issues with the new product ramp that I mentioned before, so we were digesting a lot of introductions. We incurred some overhead spending associated with that and we don't think we'll have this scenario again where we have the incremental overhead spending on new product introductions at the same time we are not getting the revenue out the door.

So I think between those two, we are pretty confident in our ability to increase the gross margins. I actually wouldn't put too much weight into the mix issue at this point. We are not really counting on a big improvement in mix, but it's more of those specific issues.

Operator

Our next question comes from Sherri Scribner.

Kevin LaBuz - Deutsche Bank.

Hi. This is Kevin LaBuz on behalf of Sherri Scribner.

Jure Sola

She has a nicer voice than you.

Kevin LaBuz - Deutsche Bank.

Thank you. Well, she thanks you on this. Thank you for that, but the first question is, how confident are you in the improvements in the back half of fiscal '13? The reason why I asked this is, because for the last few quarters, you've seen push outs some customers and you've seen lower demand in forecast cuts, so what's driving the confidence there?

Jure Sola

Yes. As I said, I think, few minutes ago, Kevin, I don't know what's going happen with economy. I think we are looking more at the projects that we are involved in. The projects the customers are shipping today. We are looking at the new programs that we are working on and based on their forecast. The way I see the world today, again, first six months going to be similar to what happen last year kind of flat and hopefully with some of this tune-up that we did in operation will deliver hopefully some improvements so that we are in better position for second half. If that happens, we think we are going to have some more upside in the second half than what we had last year, but it's really based on really the programs and projects that we are working on and the overall improving the mix of our business as the time goes on. If economy improves lot than there is a lot more upside.

Kevin LaBuz - Deutsche Bank.

Okay. Excellent, and just on the communication side, could you give a little more detail on what you are seeing on the wireless infrastructure and also it seems like the other side of that business, the wire line in the networking is doing a bit better, so what are you seeing there as well?

Jure Sola

Well, as I mentioned earlier in my prepared statement, I think, biggest impact for us in the first quarter was driven by wireless infrastructure, 3G, 4G programs for some of our customers, but if you really look at it, it's really been delay of installations some of these projects that our customer have. So, as we look at the second quarter, we don't see a major upside in our wireless infrastructure is not falling off as much down as what we saw in our first quarter, but we don't see major improvements in that side of the business. They will probably, like I said, end of the quarter early third quarter.

On the fixed, wire and all these other businesses in that group, as I mentioned they are stable. We have a fair amount of new programs in that group also that we just talked about that we are hoping that we'll make some good shipments on that this quarter and that will continue. So, overall I am very positive on this group. I think it's a more timing for Communication Networks than anything else, so demand for this type of products if you read everything is going to up and up and I really believe because we are well positioned here not just the market segment itself, we are well positioned with each of the leaders in this industry that I think Sanmina will benefit nicely as this industry turns around.

Operator

(Operator Instructions). Your next question comes from Amit Daryanani.

Amit Daryanani - RBC Capital Market

Good afternoon, guys. Just a couple of questions for me. One, I mean a little March quarter guide. You guys were talking about defense, aerospace segment to be up sequentially. Can you talk about why do you think you won't see any volatility or headwinds given still question marks around what the fiscal cliff and the dynamics would hold on the defense side at least over the next couple of months.

Jure Sola

Yes. Amit, that's excellent question. First of all you are right. I mean, government contract and political situation behind is not clear very well, but we are involved in some very unique products that we believe we will continue now really no matter what happens with the government spending here. At the same time, we are investing more in this business let's say, we started this project almost two years ago, really what we created basically a product it's called SCI now. We have a strong engineering. It's a product company. It's not an EMS company. We separated from Sanmina, so they can really focus driving the growth, so we got a lot of good opportunities here.

Now, the programs we have today are, like I said, very profitable, are financing around all R&D that we are investing in it and so there is a lot opportunities, so it's not going to be a huge growth, but we are seeing a steady improvement. We look at the next quarter, we see some upside.

Amit Daryanani - RBC Capital Market

Got it. That's helpful. Then maybe just on the communication side. I think I heard you talk about obviously you are modeling March quarter more seasonally down, which makes sense, but I thought you also said you are seeing more push outs. Could you maybe reconcile too if you see more push outs, wouldn't it be worse than seasonal and offset some new ramps…

Jure Sola

What I said, we [saw most] push outs Amit, in our first quarter, middle of the quarter and end of the quarter. That was the December quarter. As we look at today, it's just seasonally down, so when you look at the wireless, it's down and staying down. Like I said, I don't see major upside for those type of customers at lease what we are seeing based on installation schedules for them till the end of the March, early April timeframe.

Amit Daryanani - RBC Capital Market

Got it. Thank you.

Jure Sola

Operator, we have time for one more question.

Operator

Your next question comes from the line of Joe Wittine.

Joe Wittine - Longbow Research

Hi. Thanks. Jure, first question in the computing segment, is it correct to assume that the ramps that were slower than anticipated were either the ODM business or the SSD business?

Jure Sola

Well, it's both. First of all, I'll talk about both of them. On the storage product, we're really expanding our customer base. We have lot more programs this year in that ODM side, which is lot of the ODM, but it is customizing these systems. We've been investing more in those. We added lot more talent, so we are playing a bigger role with our key customer than we did a year ago. So, those are some of the new programs, we had some delays.

On SSD business similar thing, on our SSD is very positive because we are shipping lot of these programs. It's just that the volume is not there where we expected to be, but we are doing a lot of qualifications with different customers on SSD, so I would qualify SSD is doing really well from a profitability point of view, but we are not as growing on these new program as, but we probably anticipate a six month ago or so.

Joe Wittine - Longbow Research

Okay. That's helpful. Thanks. Then just some quick below-the-line follow ups for Bob. First, did you say on interest and other that the fiscal year it will be in the low 40s? So, that implies you're going to trend below $10 million a quarter in the second half of the fiscal year?

Bob Eulau

Yes. I said, we are expecting net interest expense to be $40 million to $45 million for the year. You are right. The implication is, by the time we get to the fourth quarter, we should be below $10 million in interest expense.

Joe Wittine - Longbow Research

Okay. And then just finally here, is there any update on the way you had handicapped the likelihood of the deferred tax asset evaluations being reversed? And then does that imply with these notes being retired too, that a share buyback could be under consideration for the second half of the year? Thanks.

Bob Eulau

Yes. So, the first question on deferred tax asset. That's something that we evaluate it at the end of each fiscal year, so we'll look at that again at the end of the September quarter, and it's not something that I really can or should try to handicap at this stage, but we are still profitable in the U.S. and we expect to be able to continue to use deferred tax assets.

In terms of what are our plans as we continue to de-lever the company, as I think I mentioned in the analyst meeting, we really view ourselves as being in a new equilibrium at this stage. And, by the time we complete this last repurchase of the debt, our leverage is going to be somewhere in the range of 2.5 in terms of our gross leverage measure.

So, I think we are really very comfortable with that and so it's really a matter of making sure first we are funding growth. And, as you heard from Jure, we think there are lot of good prospects out there for the second half of the year and so we need to make sure we got the cash to grow the business. We'll continue to look for small tuck-in M&A opportunities, where we think they are clearly accretive to our shareholders. Then we will begin to make analysis of is it better off for our shareholders to repurchase debt or to repurchase equity and we'll make those decisions as we move forward.

We will have more short-term debt following this last repurchase, so we will need to work that down over time, but we are definitely in a place where we are very, very comfortable with our debt structure and we'll make decisions based on what we believe some more shareholder value.

Joe Wittine - Longbow Research

Great. Thanks. Makes sense and congrats on the balance sheet firming.

Jure Sola

Operator, sorry, we are ahead of schedule, so we have time for one more question.

Operator

Okay. Your last question comes from the line of

Osten Bernandez - Cross Research

Good afternoon. Thanks for taking me in.

Jure Sola

Already almost cut off. We realized. We had a little bit extra time.

Osten Bernandez - Cross Research

No problem, just a couple of quick questions. With respect to the comments on the added expense for the new program introductions, the ramps that you are doing, was the larger than expected expense due to the sheer volume of the ramps or the complexity of the ramps?

Bob Eulau

The reality it's really both. We had lot more product activity hitting at the same point in time and then, as Jure mentioned earlier, these are complex products. They are very, very sophisticated from a technical standpoint. There's a lot of interaction between us and our customers and we need to make sure we do a very good job in terms of supporting that activity, so it's really a combination of both, complexity and volume.

Jure Sola

If I can add to that, it's really a good investment for us long-term. When you get involved in a project like this, you have to create a win-win and long-term will make this up.

Osten Bernandez - Cross Research

Okay. Thank you. Then switching over to the end market side, could you provide some more color in terms of what took place during the December quarter for your enterprise computing business? It seemed to be, obviously, it was down all your end markets were sort of almost, were worse than expected with the exception of one, but that business in particular seemed to be, I thought it was sort of turning around on a year-over-year basis and then this quarter was lighter than expected.

Jure Sola

Yes. As I mentioned earlier, we saw weak demand from existing customers' existing programs and the new programs that we are working on did not ramp up as fast as what we anticipated at the beginning of the quarter. As we look at the second quarter, we expect that weakness to continue, but if I look at the longer term, the projects that we are involved and investment that we are making in that side of business, it looks pretty positive. That's is a timing issue.

Osten Bernandez - Cross Research

So, finally, when you consider the overall business in particular, for com equipment and enterprise computing, when you consider sort of your cautious view on macro environment, how do you balance again the expected ramp versus the underlying business of the existing programs in your expectations for the year?

Jure Sola

Well, as you know I mean in this type of environment you focus on thing that is in our control. That is building and executing. Customer still needs execution, so flexibility time to market, quality, understanding when the upside is going to come and so how do you eliminate the cost short-term. At the same time, how you position yourself to be ready to maximize the upside when demand comes in, so those are things that we are working on. And in this environment, end of the day, that's why we are here. I know it's frustrating to almost forecast anything right now, but at the same time when you look at the opportunities, they are pretty exciting. So for us, as a management, this is a investment to spend lot of times with our customers and really understand what they are going through. It has been tough for our customers too, so we have to add value here to make sure that we help them in the programs.

Jure Sola

Well, ladies and gentlemen, I appreciate your time that you spent with us today. Thank you for your support, and if there is any more questions, please give us the call so that we can answer all the questions that you might have. Thanks again.

Bob Eulau

Thanks, everyone. Have a good evening.

Operator

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

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