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Sanmina-SCI Corporation (NASDAQ:SANM)

F2Q10 (Qtr End 04/0310) Earnings Call Transcript

April 26, 2010 5:00 pm ET

Executives

Paige Bombino – Director, IR

Jure Sola – Chairman & CEO

Bob Eulau – EVP & CFO

Hari Pillai – President & COO

Analysts

Jim Suva – Citi

William Stein – Credit Suisse

Louis Miscioscia – Collins Stewart

Sherri Scribner – Deutsche Bank Securities

Christian Schwab – Craig-Hallum Capital

Shawn Harrison – Longbow Research

Sean Hannan – Needham & Company

Ryan [ph] – RBC Capital Markets

Operator

Good afternoon. My name is Kirsten and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI second quarter fiscal 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call over to our host, Ms. Paige Bombino, Director of Investor Relations. Please go ahead.

Paige Bombino

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

Please turn to slide two, the Safe Harbor statement. During this conference call, we may make projections or other forward-looking statements regarding the future events or 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 documents the company files from time to time with the Securities & Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You'll note in our press release issued today that we have provided you with a statement of operations for the three months ended April 3rd, 2010 on a GAAP basis, as well as certain non-GAAP financial information.

A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and is posted on our Website. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, gains or losses of extinguishment of debt, non-cash stock-based compensation expense, amortization expense, and other infrequent or unusual items to the extent material.

Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income and earnings per share, we are referring you 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 and welcome. Thank you for all being here today. Joining me on today’s conference call is Bob Eulau, our CFO.

Bob Eulau

Good afternoon everyone.

Jure Sola

Hari Pillai, our President and Chief Operating Officer.

Hari Pillai

Good afternoon everybody.

Jure Sola

On today’s agenda, we have for you, that Bob Eulau will review our financial results for the second quarter of fiscal year 2010. Then I will follow with some comments relative to Sanmina-SCI results and future goals. Then Bob, Hari, and I will open for Q&A.

And now, I would like to turn the call over to Bob. Bob?

Bob Eulau

Thanks, Jure. Please turn to slide 3. As you can see, we had another solid quarter from a financial perspective. Revenue of $1.53 billion was up 3% on a sequential basis and up 28% over the second quarter last year. This was at the high end of our guidance of $1.45 billion to $1.55 billion and follows the December quarter when we had 9% sequential growth.

The revenue growth coupled with the restructuring and other cost reduction actions completed last year led to an additional 20 basis points sequential increase in gross margin to 7.8% on a non-GAAP basis. This implies a contribution of 15.8% on the incremental revenue, which was a little better than the range of 10% to 15% that we had expected. Having aside [ph], while there has been some variability by quarter, our contribution margin over the last 12 months has been 14.7%.

Accordingly, we believe that a 10% to 15% contribution margin over the next few quarters continues to be very achievable. Non-GAAP EPS was at $0.29 per share. This was based on 82.8 million shares outstanding on a fully diluted basis.

Please turn to slide four. I will start by making a few comments on the GAAP numbers. For the second quarter, we reported a GAAP net income of approximately $10 million, which is equal to $0.12 per share. The decline in GAAP net income from last quarter is primarily related to the one-time benefit that we received last quarter. Restructuring totaled $3.9 million for the quarter, which was up slightly from $3.3 million last quarter.

We will continue to see some minimal restructuring charges on our GAAP P&L of approximately $3 million to $4 million per quarter that relate to the cost for past restructuring actions that are booked as incurred in accordance with GAAP. These expenses primarily relate to real estate which is held-for-sale. We expect these expenses to decline overtime as properties are sold. My remaining comments will focus on the non-GAAP financials for the second quarter.

At a $119.5 million, gross profit was up 7% over the prior quarter. Gross margin came in at 7.8%, which was up 20 basis points from the previous quarter. Part shortages continue to be a challenge for the quarter, but our operations team did a good job in mitigating the impact on the P&L. The gross margin for the components businesses continued to make favorable progress and is approaching the corporate average.

We expect the favorable trend in the components margins to continue in the quarters ahead and this trend will ultimately contribute margins significantly higher than the corporate average. Operating expenses were relatively flat for the quarter at $63.5 million. At $56 million, operating income improved by 15% over the prior quarter. Operating margin was 3.7%, which was a 40 basis points sequential improvement.

The tax rate for the quarter came in at 20.3% of pretax income. This was lower than expected for the quarter, and we now expect the tax rate for the year to be around 21%. We believe that we will see our tax rate in the 18% to 20% range for fiscal year ’11. On a non-GAAP basis, we are $24 million in net income. For modeling purposes, I want to mention that depreciation and amortization was $21 million and that EBITDA for the quarter was $76 million.

Let’s move to slide five. Here we are showing you some of our key non-GAAP P&L metrics. The revenue trend has been very strong in the last three quarters as we moved out of the recession. We bottomed out in Q2 last year and revenue has climbed 28% since then with 3% sequential growth this quarter. Gross profit has shown strong improvement since Q2 of last year, with growth of 69%. Compared to Q2 of FY09, gross margin has improved from 5.9% to 7.8%. We believe this demonstrates how well positioned our cost structure is for the coming quarters.

While revenue and gross profit had grown significantly over the last year, our operating expenses have remained well controlled. With relatively flat operating expenses and strong gross profit growth, operating profit has grown even faster since the second quarter of FY09. In fact, it was up almost five times what we reported in the second quarter last year. During this period, the operating margin improved from 1% to 3.7%.

I would like to turn your attention to the balance sheet on slide 6. Our cash and cash equivalents were $673 million. Cash was down primarily due to the increase in revenue which occurred late in the quarter affecting accounts receivable. Additionally, the second quarter includes the semiannual interest payment of $38 million. Cash flow from operations was a negative $32 million. Capital expenditures were $22 million for the quarter. As the company grows quickly, we have plans to minimize our working capital requirements.

We will talk more about the working capital metrics in a moment. We also have property on the balance sheet, which is listed for sale. The total value of this property is over $160 million. We are patient in selling the real estate given market conditions but we are scheduled to close on one property this week which will generate approximately $21 million in cash. We are very confident in our estimate that we will bring in between $30 million and $50 million in cash this year from the sale of real estate.

Let’s turn to slide 7 to discuss some of the balance sheet metrics. I have already discussed cash which remains strong given our potential cash needs. In our business, inventory is a key focus. It is a challenging area as economy has improved and part shortages have persisted. Our inventory turns remain the same, but frankly, we had expected to improve. We still have room to improve and our goal is to get up to at least 8 turns within a few quarters. In the lower-left quadrant, we show our cash cycle days, which combined our cycle times for inventory and accounts receivable and accounts payable. Inventory days were roughly flat as they moved from 51.4 days last quarter to 51.7 days this quarter.

We saw an increase in days sales outstanding from 43 days to 46 days. This was primarily a reflection of more shipments later in the quarter than in the prior quarter. Accounts payable was favorable as it increased from 54 days to 56 days. Overall, cash cycle times increased from 41 days last quarter to 42 days.

Finally, the most important measure for us is return on invested capital. We have made outstanding strides in this measure over the last four quarters. We believe this is the most important measure in demonstrating our ability to add value to our shareholders. While we are pleased with an ROIC of 15.4%, we believe there is still room for a significant improvement through both margin expansion and better asset velocity.

I would like to make a few comments on our capital structure. In spite of the cash decline this quarter, we remain very committed to reducing our debt overtime. With the operating momentum we currently have, we have looked for ways to improve our balance sheet and liquidity on a global basis, while simultaneously minimizing our taxes paid. With this goal in mind, earlier this month, we closed on a $100 million expansion in our asset-backed facility, which provides for additional liquidity as we grow.

The total amount of this facility is now $235 million, with immediate availability of about half that amount. We will begin the use of this facility to fund growth outside of the United States. We have also put a new debt facility in place in China to help fund our working capital requirements in the China region. The China facility starts with $50 million with the capability to expand to $100 million overtime.

As we have stated on previous calls, one of our key goals for 2010 is to reduce our overall leverage while maintaining the necessary liquidity to finance our growth. We will continue to look for opportunities to optimize our capital structure and strengthen our balance sheet, so we can pursue the growth opportunities we see from a position of financial strength.

At this point, I will turn the discussion back over to Jure for more comments on the business and our guidance for next quarter.

Jure Sola

Thanks, Bob. Good afternoon again. This is the fourth consecutive quarter of improved results. The company is making good progress and the future is more promising as Bob mentioned. And I will be talking more about it later. And now, could you please turn to slide number 8. What I would like to do now is really talk to you about our end market demand for what happened in the second quarter.

As Bob mentioned, our revenue was $1.53 billion. Communications, which include networking, wireline and wireless infrastructure represented 34.8%. That was up nicely, up 7%. And we do expect to see growth in the third quarter in our Communications side of the business. Enterprise Computing which includes servers and storage high-end, represented 18.2%. That was down 10% on a quarterly basis and mainly was driven by couple of customers. But if you look at the forecast for the rest of the year, we think this was mainly seasonal downturn there and we do expect third quarter to be moving in the right direction.

Industrial, defense, aerospace and medical represented 26.3% of our revenue and that was slightly up 2%. One area that was down in that bucket was defense. Business was down mainly by a couple of projects, bigger projects, but if you look at what are the forecasts, again the bookings for defense market was pretty strong, and we do expect this bucket also to be up in the third quarter where defense could be flat or slightly down.

Multimedia represented 20.7% of our revenue and that was nicely up, up 14%. Multimedia for us includes gaming equipment, set-top box, cinema camera stock of equipment, point-of-sale systems and automotive. We also do expect that business that we will be expanding in the right direction in our third quarter and for the rest of the year. In the second quarter, Sanmina-SCI had one customer over 10% of revenue. And our Top 10 customers represented 50% of our revenue, so we continue to diversify our customer base end markets very nicely.

Please turn now to slide number 9. Now, I would like to talk to you about market opportunities. First of all, what a year it makes. Our market is definitely growing. We are gaining lot of confidence and demand is real, visibility is good, and most importantly it’s getting better. We are more optimistic now about demand that we see for the rest of the calendar year 2010. So, the outlook for the third quarter is as follows. Revenue again continued to expand $1.55 billion to $1.65 billion. We also expect our gross margin to expand in the right direction, up 7.8% to 8.1%. Operating expenses should stay about flat, about $64 million. Operating margin should continue to improve to 3.8% to 4.1%. Interest expenses and other should be about $27 million. Depreciation and amortization about $22 million, CapEx would be about $30 million.

We did spend in the first quarter about $30 million, second quarter about $22 million and as I said, now for the third quarter, we expect about $30 million. Tax rate, 21% for third quarter, and as Bob mentioned, we expect that tax rate, especially in 2011, to move down, and we should have approximately diluted outstanding shares of about 84 million. And we are also forecasting a non-GAAP EPS to expand to $0.30 to $0.36 a share.

Our customer base is solid and we continue to provide industry-leading solutions to our customers, both within our high value add. We are growing and expanding relationships with both our existing and new customers. Market continues to drive lot of opportunities for us. As we can see the bookings so far has been very strong in the second quarter, book-to-bill for second quarter was 1.15 plus to 1. Also during the quarter, we saw lot of new wins, and we believe that will continue to be strong in the rest of the year. And we are also forecasting for the third quarter to be, bookings to be nicely up also. So, bookings are very, very critical especially as you are guiding for the future. So, it’s good to see that things are moving in the right direction.

So, now could you please turn to slide number 10. As you can see, we did a strategic acquisition. We have been actually working on this project for almost a year. We have been expanding into the optical capabilities in the last couple of years, and Sanmina is well positioned, but to really take this capability to the next level, we felt that we needed this acquisition. And most importantly, this acquisition brings lot of technology to us in RF and Micro-optical electronics. Combination of this operation, BreconRidge and Sanmina will allow us to really provide our customers and end-to-end best optical solutions in our industry.

Also this organization brings to us a very strong engineering and leading-edge technology, some great people, and also we are gaining some great customer base, with first year revenue potential of $250 million to $300 million. And again, financially this was the right opportunity at this time. So, if you just look at this slides, when you look at the technical capabilities, what this operation brings as I mentioned earlier some leading-edge capabilities. We get involved in our early-stage of product development and then taken all away through manufacturing by providing our customers with some unique component capabilities, both in RF/Microwave and optical applications.

Today, we are doing some product in this operation that is up to 100 Gig speeds. Lot of capabilities in multichip module solution and also semiconductor packaging especially for high-end speeds in RF and optical. Again, if you review this acquisition, what this bring with us, it brings us the leading-edge high-end capabilities and we believe these are the capabilities for helping us grow our communications, medical, defense and aerospace markets, again very exciting opportunities for us.

So, in summary, our strategy is working. Again, based on our current demand visibility is good, things are looking up for us for 2010, and we feel lot more comfortable what’s in front of us. Today, we are focused on sustainable margin expansion and this will drive us to diversify our customer base and also the markets that we serve focusing as I mentioned to the higher value add services including high-end printed circuit boards, backplanes, mechanical which includes enclosures, machining, plastics, optical modules and memory modules.

80% of our revenue is manufactured in our low-cost region. That is very important because only few years ago, that was completely opposite. So, we are well positioned today in global presence to compete basically with anybody in the market that we are focused on. We are also well aligned with our customer base and we are a very valuable partner to our customer in this growing technology market.

Again, we feel confident about our strategy. And now, I would like to thank all of you for joining us on this call today. We would like to also thank to our employees for their hard work, dedication and support. Operator, I am now ready to open this line for question and answers. Thanks again.

Question-and-Answer Session

Operator

(Operator instructions) And your first question is from the line of Jim Suva with Citi.

Jim Suva – Citi

Hello, Jure, and congratulations.

Jure Sola

Thanks, Jim.

Bob Eulau

Thanks, Jim.

Jim Suva – Citi

A quick question, I believe in the past you have been discussing about getting to gross margins of 10% and operating margins of 6%, and clearly you have been making great progress in the right direction. Two questions on this topic. First is what type of top line sales do you think you need to get to that, and secondly, and maybe even more important, can you help us understand why you think you can get there, yet the rest of the industry is nowhere close to it or maybe a few of the niche players are, but still struggle to get there, why wouldn’t the competitive bigger vertical EMS companies look to prevent you from getting to those type of extremely robust numbers?

Jure Sola

Jim, excellent questions. As you know, a few conference, I think September of last year, we talked about these forecast at that time. We talked that the recession was behind us and the company was really positioned for the growth. So, we got now behind us, how do we get the margins. First of all, we went for a major restructuring and the company today is well positioned and I think our cost structure is right. As I mentioned few seconds ago, 80% of our revenue today is manufactured on low-cost region. What also means that was completely opposite. All our plants were in North America and Europe. So, I think we got the right structure in place to really build on. We are going to continue to work on improving our mix.

That’s going to help us revenue growth, we think what we have in front of us, we have been very successful positioning this company in a down market for customer expansion, winning new programs, being involved in unique technologies, and this acquisition that we are just talking about is a type of acquisition that will help us improve those margins and help us get to the margins that I am talking about, because we are really focused today after the projects that allows us to do that.

We have a different strategy today than before. And if you really compare us to our smaller players, I think the smaller players have advantage sometimes, because they are lot more focused on the unique requirements, unique customer end markets where it allows them to deliver the better margin, and historically you have seen that. So, while Sanmina can get to 6 plus operating margin, first of all, we have shown in last three quarters that we are moving in the right direction. As I said, our first step is to get over the 4% operating margin. I think we are close there. We are forecasting next quarter to be between 3.8 and 4.1, and our job is to make a nice improvement, but the longer term, I think if you just see the type of product mix that we go after that as our revenue goes there, as we get to the revenue of $1.8 billion to $2 billion and probably I would say right now is $1.8 billion to $1.9 billion, I don’t think we need to be at $2 billion to get there. But we can get there, and that’s not having a huge improvement on our component results.

As we have seen in last couple of quarters, our components module has been improving and as we get those margins to delivering the numbers based on what they should be delivering than getting to 6 plus percent margin, it should be easy for us. So, to answer the rest of your question why bigger guys cannot prevent us from that, I don’t – I have been in this business for many, many years. I think if you look at the big guys, even on the products where we compete head-to-head with them, they are delivering just as good margins on those products as we are. I think it’s where you focus. I think our focus is to be a different company today. We are going to expand based on our products that we are adding a lot of value to our customers and what our solutions that we offer to our customer allows us to make this better margins.

In our component businesses, I mean, you have to make a lot better margins than a 10% gross margin, otherwise you cannot be in this business long term. So, we feel more confident today, Jim, about hitting our 10% gross margin plus and operating margin 6 plus and deliver an ROIC over 25% long term than ever before.

Jim Suva – Citi

Great. Thank you and congratulations Jure.

Jure Sola

Thanks.

Operator

Your next question is from the line of William Stein with Credit Suisse.

Jure Sola

Hi, William.

William Stein – Credit Suisse

Hi, Jure, how are you?

Jure Sola

Great.

William Stein – Credit Suisse

Did I hear correctly when – you were talking about the book-to-bill, I think I heard a 1.15 in the quarter?

Jure Sola

Yes, that’s correct.

William Stein – Credit Suisse

So, I am trying just a real –

Jure Sola

A little bit better than that, but I am not trying to be too scientific.

William Stein – Credit Suisse

And trying to square that with your revenue guidance, perhaps when you talk about book-to-bill, you are only talking about firm orders that are doing a very short window or perhaps there is something I don’t understand about the way your business operates, but it just seems odd to me to post 1.15 book-to-bill and guide revenue up only 5% sequentially.

Jure Sola

Let me give you an example. I am calling our bookings for next quarter for defense to be flat down, but our book-to-bill this quarter was actually 1.2 to 1 in our defense business, because some of these projects when you book to business, they are scheduled to be shipped in the next 12 months.

William Stein – Credit Suisse

So, it’s –

Jure Sola

So, it’s not always specifically in the quarter, but even if you look at our guidance, that’s still a 20 plus percent growth rate year-over-year.

William Stein – Credit Suisse

Okay. How on average, perhaps how far out does your backlog extend and when you consider something booked?

Jure Sola

In our backlog, the rules are very simple. We have to be scheduled for shipments.

William Stein – Credit Suisse

How far out does that extend?

Jure Sola

Typically 12 months.

William Stein – Credit Suisse

Okay. Very helpful. And then one question, if I can turn to BreconRidge for a second, can you give us a little bit of detail as to how this fits in your strategic objective and in particular, can you talk a bit about the customer base? I think you mentioned this driving a leadership position in optical components or optical transceivers perhaps and I know JDSU is a big customer there. Is this complementary to that or is this competitive to that potentially, any strategic –?

Jure Sola

No, it’s complementary to what we have already been doing excluding JDSU. But two years ago, actually we got an optical, Hari, help me with that.

Hari Pillai

Okay. About a year ago, we announced the transaction with JDSU.

Jure Sola

Yes, but before that.

Hari Pillai

Before that, we did in 2002 a deal with Alcatel.

Jure Sola

Yes, so that was our foundation. Let me start it up and then to Hari, I will turn it over to see if he can give a more color on it. It was strategic for us to expand in a unique capability just like we, when we are talking about high-end printed circuit boards, high-end backplanes, high-end mechanical, we are trying to create a niche where we believe that we have a competitive advantage and the value that we need to invest that our customers are looking for. If you look at our customer base where we delivered the revenue, these are all high end. It requires a lot of value add.

Optical, you especially if you look at the communication infrastructure, defense and aerospace industry, those two and some medical and some industrial, there is a lot of demand for this optical type of capabilities. So, Hari has been looking to expand it over a year, as I said, this BreconRidge project started over a year ago, and we worked on it for a long time. This is a venture-funded type of operation and when that venture guy didn’t put enough money in this operation, then it really became more sense for them to really partner with somebody like Sanmina. And they have a great customer base. I don’t really like to comment on our customer base here for confidential reasons, but definitely this is a solid customer base that we can build on. As I said, first year revenue forecast $250 million to $300 million, but as the second year goes on, I really believe we can grow and expand. So, it’s a good fit to what we have and really puts us in a strong leadership when it comes to optical.

On top of that, we are really looking to this other technology this company brings really in the multichip module, lot of micro RF and optical, lot of semiconductor packaging, that I believe that we can expand this area. So, I am personally excited. Hari, anything else you want to bring up to there?

Hari Pillai

No, Jure. William, I think it builds definitely on the strategy we have been sticking with for over several years, from the Alcatel Optronics transaction we did and then the JDSU and to build up that thing. The number one reason that we wanted to do this transaction was the engineering strength. Engineering strength in opto-electronics and RF that is applicable across all of our vertical markets from wave guides in the defense and aerospace business, in our optical communications business, in our medical business. So, we have a wide range of areas that we can use as capability.

As Jure mentioned, it’s also nice to have the rest of the numbers line up and everything like that. So, really everything kind of come in together, great technology play, by the way some good customers, and nice business that will be accretive next year.

William Stein – Credit Suisse

And then just a quick clarification, the quarterly revenue that you discussed, is any of that included in the current quarter guidance, or is that potential upside?

Jure Sola

There is some potential upside, but in this quarter, we probably expect no more revenue from them that maybe four weeks of it.

William Stein – Credit Suisse

Got it. Thank you very much.

Hari Pillai

That wouldn’t be material.

Jure Sola

Yes, thanks, William.

William Stein – Credit Suisse

Thank you.

Operator

Your next question is from the line of Louis Miscioscia with Collins Stewart.

Jure Sola

Hello, Lou.

Louis Miscioscia – Collins Stewart

Hi, Jure. How are you, too?

Jure Sola

Good, good.

Louis Miscioscia – Collins Stewart

Good, thanks. Maybe we could just go into a little more detail, you had mentioned that component shortage is what you are seeing that’s a little bit short out there, and then also obviously since you are a component provider, does it also fall into the stuff that you are delivering?

Jure Sola

Okay. I will turn it over to Hari.

Hari Pillai

Yes, Lou, Hari here. I think we are seeing component shortages. We have seen component shortages last quarter. As Bob mentioned, we probably had the fundamental capability to go a little bit higher and to have smoother assets, smoother linearity through the quarter resulting in better asset management metrics. So, we did see some, but again, it’s our culture not to allow those kinds of things to affect our performance to our customers. The areas we have seen it, pretty broad. Naturally you would see them tending to concentrate in the silicone-based areas and more advanced technologies as opposed to mechanical type areas.

From our business, we see strength as Jure mentioned in the book-to-bill ratios and we obviously will get leverage from our cost structure and hope to perform better in the future.

Louis Miscioscia – Collins Stewart

Were you all tied on delivering stuff yourselves or did you basically meet the demand that came in from clients with your components businesses?

Jure Sola

You're talking about our components like printed circuit boards and –?

Louis Miscioscia – Collins Stewart

Yes, exactly.

Jure Sola

Hari?

Hari Pillai

I think we in general performed well for our customers. I think from our components side, it was nowhere of any major supply constraints. I think from our overall business, we could have probably done more, a little bit better.

Louis Miscioscia – Collins Stewart

Okay. Switching back maybe to something, Jure, that you had commented on in your opening remarks in that new wins, in the past, from time-to-time, you have talked about dollar amounts there and obviously it looks like fiscal ’10 is going very well for you all. Can you give us any dollar amounts of wins you had and also maybe when we might be able to at least have an understanding of possibly fiscal ’11 type of growth from the wins you are getting this year?

Jure Sola

Yes, okay. We used to share that during the recession period where things were really, really tough out there and I felt at that time, we have to share a little bit more even for competitive reason, was always against my personal policy not to share that much information. So, we are not going to share that at this time as I told everybody last quarter, we are going to stop doing that. But I can tell you that our book-to-bill is getting very strong, and that’s the key. If you ever work in manufacturing, you always want to be booking more than you are shipping, so that you can build a backlog in the longer term, be shipping more.

I usually don’t forecast bookings for the next quarter, but what we see today, we believe that the bookings will improve over the second quarter. So, assuming that or let’s assume economy, well I think economy is going to be okay right now. In 2010, let’s just assume that, that continues to improve slightly. I believe 2011 is going to be a great year for us based on our opportunities that we have in front of us. Fundamentally, new business – first of all, I always believe in taking care of our existing customers, that is the most important business. I think we are well positioned to expand those and win the new programs with our existing customers, but also we will be really successful adding new customers, especially in the unique markets, industrial, medical, defense side of the business.

Louis Miscioscia – Collins Stewart

Okay. Just one quick clarification, when you talk about the book-to-bill, you mean your entire revenue of Sanmina is not just a component?

Jure Sola

No, this is entire revenue. That’s what I am talking about, yes.

Louis Miscioscia – Collins Stewart

Okay. Thanks guys.

Jure Sola

Thanks, Lou.

Operator

Your next question is from the line of Sherri Scribner with Deutsche Bank.

Sherri Scribner – Deutsche Bank Securities

Hi.

Jure Sola

Hello, Sherri.

Sherri Scribner – Deutsche Bank Securities

Hi, how are you, Jure?

Jure Sola

Great.

Sherri Scribner – Deutsche Bank Securities

I just had a few quick questions. One, in terms of the top customer, you said you had one customer greater than 10%, is that the same customer that you had last quarter that as greater than 10?

Jure Sola

Yes, it’s the same customer.

Sherri Scribner – Deutsche Bank Securities

Okay, and then in terms of the guidance for the four segments, you seem to be implying that all the segments would be up sequentially, am I understanding your comments correctly?

Jure Sola

That’s correct.

Sherri Scribner – Deutsche Bank Securities

Okay. And then in terms of the server business, a little bit weaker than I would have expected, down 10%. You said a couple of customers there, I was just wondering is there any additional detail you could give us?

Jure Sola

Not much there. I believe it’s more a seasonality issue there for us. You analyze those customers that we expect those customers for year to be up. I think it was just the timing issue for us.

Sherri Scribner – Deutsche Bank Securities

Okay. Let me just ask one quick follow-up, on the CapEx guidance, your CapEx is up a bit. I know in the last call, you talked about you have plenty of capacity; I think you said you have about 70% utilization right now. So, I am just curious is that for a specific project, is that part of growing ops for business, or why is CapEx ticking up a little bit here?

Jure Sola

As you know, as you can see, we only spent $30 million in the first quarter, and $20 million in the second quarter. The reason actually that we are expanding our capacity in China and India. We want some new projects in both of those regions where we have to manufacture in those region especially in India, and we are having few more capabilities in those two regions.

Sherri Scribner – Deutsche Bank Securities

Okay. Great. Thank you.

Jure Sola

Thanks, Sherri.

Operator

Your next question is from the line of Christian Schwab with Craig-Hallum Capital.

Jure Sola

Hello Christian.

Christian Schwab – Craig-Hallum Capital

Hi, how are you?

Jure Sola

Great.

Christian Schwab – Craig-Hallum Capital

Good quarter. I jumped on the call a little bit late, so I apologize if you already hit it, but the components business, I think you highlighted that gross margins were approaching the corporate average currently, is that corrected, I hear that correct?

Jure Sola

That’s slightly below. We made a nice improvement in the last quarter, but there is still slightly below. Now, if you let me – what we call component businesses, it’s the printed circuit boards, backplanes and closures. Closures, we call mechanical, done that in the mechanical way of enclosures, plastics, machining, and then have optical modules and then memory modules.

So, there’s about six, what we call six key items in the components. Three out of six are above the corporate average, but three are below. But overall, it’s slightly below.

Christian Schwab – Craig-Hallum Capital

Perfect. Did you break out what revenues were in the quarter for the components business?

Jure Sola

No, we don’t break that.

Christian Schwab – Craig-Hallum Capital

On a percentage basis, how much greater do they need to be to target at least 10% gross margins from the current revenue run rate?

Jure Sola

The first question was, you were actually late, we believe that just by the growth, first of all, it’s a good cost structure in place that we have. Additional revenue growth, better mix that we believe is coming up, because as we are diversifying the markets and customer base, we are improving the mint. That alone, the growth alone can’t get us to 10%. Even if the components just stay the same, didn’t improve at all. Okay, as the components improve, which we are driving to improve and they will improve, because what happens is it is important to understand some of the key components especially printed circuit boards, backplanes and mechanical. All those are moved from North America and Europe into the low-cost regions.

And now, we are – it’s really all revenue driven. As we drive the revenue up there, those components have no doubt will get the industry margins. It is going to take some time, but we can even get there without components getting to the number. As we improve the components, that’s what I said earlier question is that we have a lot more confidence today hitting our 10% gross margin and 6 plus percent margin than we had when we first said and start talking about 10 and 6.

Christian Schwab – Craig-Hallum Capital

Fabulous. And then just regarding, since you mentioned, the migration of manufacturing to lower-cost regions, are the yields for the new workers optimal yet, or is there still room for slight improvement?

Jure Sola

First of all, every time you move the high technology product, assuming you are asking about components dealer business, no matter what, from high cost to low cost, we moved everything from North America and Europe and so the Mexico and China and other parts of Southeast Asia, it takes time to get capabilities like we have, because some of these factories are operating North America for over 25 or Europe, 25 to 30 years. So, it takes time to get those new capabilities out there, but I am telling you today, we have someone of the best leading capabilities in high technology printed-circuit boards in Malaysia. We expanded it in China.

If you look at Singapore, you look at the mechanical capabilities that we have in Eastern Europe, Mexico, those are the leading-edge capability. So, we feel very, very confident there what’s in front of us. Now, it’s all about driving the revenue.

Christian Schwab – Craig-Hallum Capital

Right. And then my last question, and I think I apologize if I already hit it. On the inventory turns, Bob, I know you haven’t been there all that long, is there still room for any improvement on the inventory turns regarding cash generation?

Bob Eulau

Yes, we definitely think there is room to improve. We have been at 7.1 turns each of the last two quarters, and our goal is to get to 8. We are plagued by the parts challenges right now, but I think the team feels like we can get to 8 and beyond.

Christian Schwab – Craig-Hallum Capital

Perfect. My last question, did you quantify the impact of the parts shortage on the quarter?

Bob Eulau

No, we did not. We probably could have done a little more, but we didn’t actually quantify that.

Christian Schwab – Craig-Hallum Capital

Would you like to?

Bob Eulau

No, we are past.

Jure Sola

We are getting used to it and what I think it’s going to be, Christian, sort of this year for the rest of this calendar year. Hopefully, it will improve every quarter. Right now, we work very close with our customers. So, hopefully there is no impact, but it’s just a lot harder work and there’s impact. I mean, believe me, our supply chain guys and ladies are working lot harder than now than they did the last couple of years.

Christian Schwab – Craig-Hallum Capital

Great. Appreciate it, no further questions. Thanks.

Jure Sola

Thanks, Christian.

Operator

Your next question is from the line of Shawn Harrison with Longbow Research.

Jure Sola

Hello, Shawn.

Shawn Harrison – Longbow Research

Hi, just a follow-up questions on the components business, what was the capacity utilization rate this quarter?

Jure Sola

We don’t break those out in our components. We give it as a company.

Shawn Harrison – Longbow Research

Okay.

Jure Sola

As we said based on our people as a company where 85% to 90% based on the equipment of approximately 70 to 75 and based on space, about 60%. So, we have a planning of space. As we restructure the company, Shawn around the world, we are going to make sure that we are planning a space for growth. So, the only thing that we have to do is people first and then equipment afterwards. So, we have planning capacity.

Shawn Harrison – Longbow Research

Okay. Suffice to say with gross margins in some of the components operations running below the corporate average, they may be below that number.

Jure Sola

Like I said, I am not making comments on that. I think if you are going to look at our components business, you got to look at the facts. The facts, number 1 is, it took us long time to restructure. We finished that, the restructuring was done about 9 months ago, all of the factories we have. Right now, it’s already building the back again, and if I didn’t believe that we can deliver the leading margins in each of our component businesses. This management will exit those businesses immediately. We believe that we have a roadmap how to get there, and we are making improvements on a quarterly basis, and that’s why you see our margins moving in the right direction and that we will continue to move in the right direction.

Shawn Harrison – Longbow Research

Okay. In terms of BreconRidge, I think I got a comment that this deal would be accretive to earnings within the first year. Does that mean the deal isn’t accretive out of the gate and then what should we expect in terms of normalized gross margins above the corporate average in line, maybe if you could just elaborate on that a little bit?

Jure Sola

First of all, the deal, we just signed a definitive agreement, Shawn on this thing. Definitely, we believe this type of business allows us to deliver better margins than corporate. And longer term, they are substantially better. This type of product requires to be better, because it is a different product than typical EMS product. And that’s why we expanded in this optical side of the area, and we hope that, if you look at optical capabilities, we have $500 million to $600 million capabilities right now, and it could be a $1 billion business in a couple of years.

So, it is a definite to different models and a lot better model than typical EPS model. Okay and then one final follow-up question. Given the challenges in managing the component supply chain right now, do you think you will get back to free cash flow break-even in the back half of the fiscal year? Is it something where you will still be burning, maybe a little bit of cash given the component challenges?

Jure Sola

Bob?

Bob Eulau

Yes. So, we aren’t giving specific numbers on cash flow. As we are growing, it’s hard to forecast, as I know you are aware, we are still very confident, cash flow from operations will be positive for the year, and I guess I mean, second half is going to be in pretty good shape.

Shawn Harrison – Longbow Research

Okay. Thanks a lot and congratulations on the progress.

Jure Sola

Thanks, Shawn.

Bob Eulau

Thanks.

Operator

Your next question is from the line of Sean Hannan with Needham & Company

Sean Hannan – Needham & Company

Good afternoon.

Jure Sola

Good afternoon.

Sean Hannan – Needham & Company

So, this is trying to going back to some of the program wins you guys have talked about it a good bit., and sort of looking up 5% sequentially in June, is there a way perhaps, Jure, or Bob, or Hari talk around just how to differentiate what might be the uptick in the quarter in your business specifically for what the fair balance is between organic program rebounds versus new program wins that are actually on, when do you actually see the rebound having a less of an impact here versus than kind of switching over on your top line, and driving the growth through more of a win orientation?

Jure Sola

First of all, Sean, I don’t think we will share that information on this call exactly, because first of all, we don’t have exact information, let me make that pretty clear. We have approximately – first of all, our customer base is a base that in my opinion is at least a $2 billion run rate base per quarter. So, at least $8 billion run rate. We are not there yet, okay. I think definitely customer demand; most of our customer demand is up. As you know, I think we are very fortunate during the downturn in 2009; they were able to win the new programs with existing customer base that were very critical for us for the future. And that’s what you are seeing today, a lot of expansion is of course, it’s coming from the new programs that we have with existing customers and new customers.

And that’s kind of a normal process. If you don’t have a new project, new programs, you are not going to grow at all. I think we did a reasonably good job in 2009 from that point of view. So far this year, I think we have been fortunate that we are able to win some critical programs to our future, all programs that we have, and they have now turning to be a new program with existing and new customers. So, lot of positive stuff from that point of view. And really, that’s what’s really driving the growth. Of course, economy has to cooperate, and if I look at the risk in our model today, it’s strictly economy, because all the hard work is done, all the restructuring, all the layoffs, the major layoffs that you see today or the rest of my management used to fly all over the world, shutting the plants down, holding the customer hands, all that hard work is now behind us.

I think today we are back into, what we are good at, is running our operations, and we are starting to have fun again. And let me leave it at that.

Sean Hannan – Needham & Company

Sure. That’s helpful. If I understand correctly, I think for the color you provided, the vast majority of what we are seeing in terms of the top line is more rebound-oriented whereas the expansion activity that you have underway is much more around the new program wins which would make sense?

Jure Sola

Yes.

Sean Hannan – Needham & Company

Yes. Okay. And just a quick question on BreconRidge, I don’t know if I appropriately heard some of the color around where some of the overlap might be for customers within this business and then is there any involvement around some common platforms or tangential platforms where you have a presence today?

Hari Pillai

This is Hari, Sean. There is certainly customer overlap but there is virtually zero program overlap. In fact, where there is customer overlap, we view it as very complementary and very good for us.

Jure Sola

Yes.

Sean Hannan – Needham & Company

Okay. Terrific. Thanks so much.

Jure Sola

Thanks Sean. And we have time now, operator, for one more question.

Operator

Your last question will come from the line of Amit Daryanani with RBC Capital Markets.

Ryan – RBC Capital Markets

Hi, thanks. This is actually Ryan [ph] in for Amit. Congratulations on the quarter guys.

Jure Sola

Yes. Thanks, Ryan.

Ryan – RBC Capital Markets

I just wanted to get some clarity. You talked about a 10% to 15% contribution margin that you expect in the near term and I assume that’s up to the $1.8 billion to $1.9 billion mark. And our normal seasonality, you shouldn’t be too far away from that mark this year, and how are you thinking about the contribution margins past that level?

Jure Sola

Let me give you a comment from our business point of view, I will now turn over to my Chief Financial Officer, he can make a comment in more detail on that one. First of all, if you look at our business, putting the right mix in the right plants around the world, you can do a lot for your margin improvement. Okay, just as I mentioned earlier, we expanding India, expanding China, because that’s the area we are growing, but we have other parts of the world that we can pick on more. So, we really focus right now improving the mix.

Additionally to revenue growth, as we improve the mix, that’s going to help us drive that contribution margin hopefully even over 15%. As we start seeing better results and higher revenue in our components business, our components businesses should deliver better than 15% contribution margin, okay. So, I believe I feel very confident that, that between today’s number and let’s say $2 billion number per quarter, if anything is to help us to deliver the contribution margin at the higher percentage. Bob?

Bob Eulau

I think you hit the key points here. I mean, a lot of it is the function of mix and the components businesses should be delivering margin well in excess of corporate average, and as we have a higher and higher percentage of the business coming from that area, it’s going to help a lot. But we have other areas to expand margin as well, better capacity utilization and then the business mix that we have talked about some. So, I think 10 to 15 is very achievable over a long period of time, and if things go right from a mix standpoint, we could do even better than that.

Ryan – RBC Capital Markets

All right. That’s very helpful. I have just two quick ones. The $30 million to $50 million in cash this year you expect from the sales and real estate include the $21 million you expect to receive this week, or is that incremental to the $21 million?

Bob Eulau

Yes, it includes the $21 million, and I brought up the $21 million just so you guys would have the same confidence we do on the range of about $30 million to $50 million.

Ryan – RBC Capital Markets

Okay. That makes sense. And then one final is the balance sheet is much healthier on a year-over-year basis and you have to come to the recession, now you have seen a stabilization in a macroeconomic picture, are you looking at any other M&A opportunities to expand the business or how should we expect M&A as an alternative through the next 12 months?

Jure Sola

Ryan, this is Jure. First of all, the M&A we are very careful what we jump into, okay. So, this optical project, this went on for 12 months understanding it and studying it and putting the right deal together that makes sense for a long-term success of this company. So, for us, I will say today we are interested in M&A deals that will expand our capabilities and unique capabilities that will add both on a revenue and margin expansion. And the bottom line got to give us ROIC well over 20 plus percent. So, those are criteria right now we don’t have anything on our plates. We are going to focus in what we have here today and make sure we integrate this BreconRidge properly.

Ryan – RBC Capital Markets

All right. Thanks and congratulations again.

Jure Sola

Thanks, Ryan.

Bob Eulau

Thank you.

Jure Sola

Ladies and gentlemen, that’s the end of our call. Again, thanks for participating. I say on a positive side, business is good, markets are up. Right now, as I said earlier, what a year it makes. It’s a lot more fun here today than a year ago and we expect to continue to grow our business. So, with that, thank you very much.

Hari Pillai

Thank you.

Operator

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

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