Flextronics F1Q11 (Qtr End 07/2/2010) Earnings Call Transcript

Flextronics (NASDAQ:FLEX)

F1Q11 (Qtr End 07/2/2010) Earnings Call

July 22, 2010 5:30 AM EST

Executives

Warren Ligan – SVP, Investor Relations and Treasury

Paul Read – CFO

Mike McNamara – CEO

Analysts

Brian Alexander – Raymond James

Matt Sheerin – Stifel Nicolaus

Brian White – Ticonderoga

Wamsi Mohan – Merrill Lynch

Amit Daryanani – RBC Capital Markets

Sherri Scribner – Deutsche Bank

Amitabh Passi – UBS

John Harrison – Longbow Research

Alex Blanton – Ingalls & Snyder

Louis Miscioscia – Collins Stewart

Jim Suva – Citi

Operator

Good afternoon, and welcome to the Flextronics International First Quarter Fiscal Year 2011 Earnings Conference Call. Today’s call is being record and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Warren Ligan, Flextronics Senior Vice President, Investor Relations and Treasury. Sir, you may begin.

Warren Ligan

Thank you, operator, and good afternoon, everyone, and welcome to Flextronics conference call to discuss our results for our fiscal 2011 first quarter ended July 2nd, 2010. With us on the call today is our Chief Executive Officer, Mike McNamara; and our Chief Financial Officer, Paul Read.

The presentation that corresponds to our comments today is posted on the Investor section of our website under Conference Calls and Presentations. Also, please note, that we have recently upgraded the Investor section of our website to include additional information we believe investors will fine helpful.

During the call today, Paul will first review our financial results, and Mike will comment on the business environment and demand trends for our company. Mike will also give guidance for the second quarter of fiscal 2011 ending on October 1st, 2010, and conclude with quarterly highlights, and following that, we will take your questions.

Please turn to slide two. This presentation contains forward-looking statements within the meaning of US Securities Law, including statements related to revenue and earnings guidance, our expectation about our future operating margins and return on invested capital, expected revenue growth in our market segments, expected improvements in profitability of our components business unit, our expectations about the availability of components for our products, the expected changes and savings associated with our restructuring activity and our expectations regarding end market demand for our products and our business in the current economic environment.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements, are based on our current expectation, and we assume no obligation to update them. Information about these risks is noted in the earnings press release on slide 12 of this presentation and in the Risk Factors and MD&A sections of our latest annual and quarterly reports filed with the SEC, as well as in our other SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements.

Throughout this conference call, we will reference both GAAP and non-GAAP financial measures. Please refer to the schedules to the earning press release and the GAAP versus non-GAAP reconciliation in the Investor section of our website, which contain the reconciliation to the most directly comparable GAAP results.

I will now turn the call over to Paul.

Paul Read

Thank you, Warren, and welcome, everyone. Today, I will summarize the highlights of our financial performance of the first quarter of fiscal 2011, and Mike will provide additional insights on our current business trends including our guidance for the second quarter of fiscal 2011.

Please turn to slide three. First quarter revenue came in at $6.6 billion, which was at the high end of our guidance range of $6.1 billion to $6.6 million and represented a healthy 11% sequential increase in sales. We saw solid sequential growth across our entire portfolio of businesses driven principally by new outsourcing programs with both new and existing customers, plus more favorable, seasonable trends from our mobile, consumer and computing businesses.

This strong growth performance was achieved in the face of continued components supply constraints across various component types, which we estimate impacted our revenues for the June quarter at the high end of the range of a $200 million, which was in line with what we had initially anticipated and fairly consistent with the impact last quarter. Mike will cover the impact of component shortages in our view of supply chain more detail later.

Adjusted operating income was $190 million, up $20 million or 12% sequentially and more than doubled the $90 million of a year-ago. GAAP operating income which includes stock option expense was a $175 million, up $40 million or 30% versus the prior quarter and substantially above the year-ago levels of $10 million.

Adjusted net income for the first quarter was a $154 million, increasing 18% sequentially from our fourth quarter and more than doubling from $63 million a year-ago. GAAP net income which includes the impact of intangible amortization was a $118 million, nearly twice the $60 million of last quarter and significantly above the GAAP loss of a $154 million a year-ago.

Full translates to adjusted earnings to diluted share for the June quarter of $0.19, which was at the high end of our EPS guidance of $0.16 to $0.19 and was above $0.16 or 19% above last quarter and well above the $0.08 of a year-ago. GAAP EPS was $0.14 doubled the $0.07 last quarter and well above the GAAP EPS loss of $0.19 from a year-ago.

Please turn to slide four. Adjusted SG&A expense totaled $184 million in the quarter, up $12 million sequentially and $14 million year-over-year on revenue increases of $626 million and $783 million respectively. Despite the SG&A dollar being slightly above our expected range, we recognized economy for scale within our SG&A, as we leverage our adjusted SG&A percent of revenue down slightly 2.8% from 2.9% last quarter and a year-ago. While we would expect the SG&A dollars to increase as we rapidly grow our top line sales, we remain confident that we can still drive further leverage in our SG&A as a percentage of sales.

Our adjusted operating margin was 2.9% and showed a significant 130 basis points improvements from 1.6% last year, driven by cost reductions and revenue expansion. Our components businesses remain below normalized operating profit performance level during the June quarter, as both camera modules and power continued to work through high volume product ramp challenges.

We experienced improvement in Multek, our printed circuit board business during the quarter and see significant year-over-year growth in this business for the remainder of the year. We expect increased contribution from our components businesses as a whole as revenue continues to be strong and as we work through the current program ramp challenges we are facing.

Our EBITDA rose $189 million in the June quarter, up 9.5% from $264 million in the prior quarter. Our EBITDA grew to roughly $1.1 billion on a LTM basis. Year-over-year our EBITDA grew more than a $100 million from a $184 million in the year-ago quarter. Our adjusted EPS rose to $0.19 from $0.16 in the prior quarter, an increase of 19%. It was more than twice the $0.08 we earned a year-ago.

Please turn to slide five, looking at the income statement items below the operating lines, adjusted interest and other expense, net was $23.5 million, down from $33.1 million last quarter and $28.8 million a year-ago. The company is seeing the benefits of deleveraging as we have realized the full quarter benefit of retiring our 6.5% senior subordinated notes back on March 23rd, 2010.

The adjusted tax expense for the quarter was $12.7 million, reflecting adjusted rate of approximately 7.6%, which was below our guidance range due to some one-time credits received as a result of outstanding tax audit matters. Going forward, we believe the 10% to 15% range remains a good range to use for modeling our result.

Our weighted average diluted shares outstanding came down slightly from $827 million to $824 million. However, previously announced stock buyback program is expected to have a more meaningful impact on a weighted average diluted share calculation next quarter when shares are expected to approach $800 million.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS, stock-based compensation was $14.6 million in the quarter and represented approximately a $0.02 EPS impact. Noncash interest expense was $4 million, but we’ll see this current quarter as the convertible bonds will be redeemed. Intangible amortization, net of tax was $16.7 million in the quarter, down from $20.2 million last quarter and also represented a $0.02 impact.

Please turn to slide six. Flextronics working capital management remained at industry-leading levels despite the cash conversion cycle moving up three days to 14 days, which is five days less than the year-ago level. Off the three-day increase, one day was a direct result of a change in accounting for an AR sales program.

We are confident we can maintain our cash conversion cycle in a 10 to 15-day range going forward which is a distinct competitive advantage that will allow us to continue to grow our business efficiently with significant positive free cash flow.

We believe that at these cash cycle levels, our net working capital as a percentage of sales will remain in the 3% to 5% range. Next quarter, we’ll work towards the higher end of that range of 4.9% mainly due to the inventory builds fall in higher revenue growth.

Inventory rose $445 million or 15% sequentially, but inventory turns improved slightly to 8 turns from 7.9 and marked the best inventory turnover for June quarter since June 2006. Nevertheless, this inventory performance has room for additional improvement as it has been accomplished amidst the headwinds of continued challenging component supply environment.

DSOs remain consistent at 37 days and still remain within our targeted range. (inaudible) has decreased 3 days sequentially to 69 days. Our asset management remains very strong, stable, which has driven substantial improvements and consistency in our return on invested capital. For the quarter, return on invested capital came in at 28.8% more than doubled the 14.2% of a year-ago and it’s flat with last quarter.

Please turn to slide seven. Flextronics generated $89 million in cash flow from operations during the quarter, marking the eight consecutive quarter the company has generated positive operating cash flow. Our cash flow for the quarter included $18.5 million in cash used for previously announced in recording restructuring activity.

Net capital expenditures for the quarter were $98 million versus a depreciation expense of $93 million. Free cash flow for the quarter was slightly negative at $10 million. During the June quarter, we’ve repurchased 21.9 million shares for a $135 million with an average price at $6.19. Under our existing repurchase plan, under which we have the authorization to purchase up to 200 million worth of our ordinary share. Cash payments for repurchases were a $105 million.

Please turn to slide eight. We ended the quarter with $1.7 billion in cash, down a $197 million versus the prior quarter, principally reflecting the $105 million in cash payments to repurchase common stock and the inventory build-offs that were the working capital improvement.

Total debt rose a $137 million sequentially as a result of our $150 million European and Asian ADX program having to be recognized as debt on our balance sheet, pursuing to the new accounting rules. As a reminder, since our deleveraging efforts began in 2008, we have reduced the consolidated debt level of the company by 34% or $1.3 billion.

Also during the quarter, our corporate debt received a positive endorsement from Fitch, which upgraded the rating to Triple B minus which is investment grade. As a result of the accounting for our ADX program and the reduction in cash driven by stock buyback activity, net debt which is divided into total debt by total cash rose to $663 million from $329 million.

Net debt still remains closer to lowest levels in the company history and has declined by over $1.2 billion or 65% from our June 2008 level. We closed the period with no borrowings under our $2 billion revolving credit facility providing ample liquidity.

Our debt-to-EBITDA level continued to decline and ended the quarter at 2.2 times, down from 2.3 times last quarter and 2.8 times last year. The graph at the bottom of the slide shows our significant debt maturities by calendar year.

Nothing has changed about this maturity schedule in the past quarter, a $240 million, 1% convertible notes and maturity in August 2010, outside of that, no additional debt is due until calendar year of 2010.

With that, I’ll turn the call over to our CEO, Mike McNamara.

Mike McNamara

Thank you, Paul. Our business environment remains healthy. Despite what appears to be an uncertain microenvironment, our orders and forecast continued to improve each quarter. In the upcoming quarter, we’re again forecasting sequential growth across all the markets we’ve served. I’ll expand on this further when I discuss each business in more detail.

Before I turn to our businesses, I’d like to address the topic of component shortages, because it remained a high-priority challenge for us throughout the quarter. We ended the quarter expecting component shortages to be very fairly similar to Q4 levels, which reduced revenue in the $150 million to $200 million. During Q1, demand continued to outpace supply. And in general semiconductor and component capacity is still inadequate, which drove the impact of component shortages on a revenue to the higher end of the $150 million to $200 million.

We are becoming more optimistic that the component shortages will begin to abate in our upcoming September quarter due to the incremental capacity coming online. For example, during the month of June, our escalations fell 20% relative to the prior four months. We see the issue of component shortages becoming less significant as we exit this calendar year.

Please turn to slide nine. Our high mix, low-volume businesses again grew nicely during the quarter. Infrastructure sales were $1.8 billion for the quarter and represented 28% of total sales. This segment expanded 2.5% sequentially and would have been even had stronger results, had it not been for the majority of our component shortages impacting it. Our September quarter outlook for infrastructure remained encouraging and we see solid sequential revenue growth.

Our growth continues to be supported by demand across multiple customer accounts as our top 20 customers in the segment generate of approximately 80% of our sales. We expect the growth in the infrastructure to continue over the next several quarters and we remain confident in our double-digit growth forecast by the end of the – for this fiscal year. Our capability in the segment continues to develop and our market position is strong.

Industrial, automotive, medical and other comprised 22% of total sales, up from 21% last quarter. This marks the second quarter in a row where this combined group has been our second largest behind only infrastructure. This group has a high value-add content and consistently contributes for the financial success of the company.

Our industrial segment displayed strong sequential growth in the low double digits. We had another very successful quarter of new program wins with a total of approximately $300 million, up from $250 million to $300 million last quarter. Our wins remain spread out across the diversified base of customers and markets.

Areas of strength within industrial continues to be a resurging capital equipment market, clean tech such as smart meters, solar modules and inverters, office equipment and kiosk. In fact, we’re also mentioned in a story by our customer Cabana [ph] innovation to help them support the oil spill containment efforts in the Gulf by stepping up our production of their solar LED marine lanterns.

We continued to feel confident about our competitive positioning within the clean tech supply chain and the capabilities we can bring to the table. This quarter brought additional new clean tech customers such as Pythagoras and Petra Solar, in addition to Sun Power which we added at the very beginning of the quarter. Overall, our outlook remains positive and with expected stable production from our industrial offering this next quarter.

Our medical segment performed well in the quarter, going to sequentially in a low double digit range above our earlier expectations. Medical upside was driven primarily in our medical equipment and consumer health divisions, which experienced strong demand as well as new product brands.

We’ve seen continued interest on the part of large healthcare OEM to embrace and accelerate outsourcing. After booking roughly 450 million in new medical programs over the past year, we booked nearly 70 million during Q1. We achieved our first $100 million revenue month in June and we’re extremely pleased with the progress in this segment.

The momentum in our automotive segment continued as it recorded its third straight quarter of sequential growth. June quarter sales were up in the low double digits versus the March quarter. The demand environment has remained strong, especially for our premium European car customers that were seeing strong growth in the Asia-Pacific region. We’ve also winning additional in-car connectivity programs while we have strong confidence. As a reminder, more than half of our automotive revenue today is considered ODM. And by the end of fiscal year ’12, it’s forecast to be almost two-thirds.

Mobile sales expanded almost 15% sequentially to $1.3 billion or 20% of sales, which was slightly ahead of our expectations and improved seasonality and new program ramps drove the majority of the (inaudible) growth. We experienced renewed interest from our customers in exploring global supply chain solutions due to the shifting cost structure dynamics in China. We welcome this interest, because we believe it plays to our strength of having a powerful global manufacturing logistics and services network.

In computing, we posted $1.3 billion in sales, which accounted for 19% of our total sales. This segment was up 7% sequentially in line with our prior expectations and was minimally impacted by component shortages. During the quarter, we lost three new notebook models, two new desktops and one new net book. We also had a very strong quarter in our storage business and some of our key storage customers recorded their highest growth quarters ever. For the September quarter, we are forecasting low double digit sequential growth and we expect to achieve our long-term growth targets. Overall, we continue to be selective as we grow this business.

Consumer digital rose 15% sequentially in the June quarter, a nice bounce back from its 30% seasonal, sequential decline in the March quarter and in line with our expectations at the start of the quarter. The segment ended at $716 million or 11% of total sales. For the September quarter, we are currently forecasting significant double-digit revenue growth driven by new program ramps for new products and increasing demands for existing products as we enter the holiday season.

Our components businesses are comprised primarily of Multek, VistaPoint and FlexPower, and all three of them are underperforming. Our components business had the mix of significant revenue expansion and we anticipate that revenue is growing in excess of 30% from fiscal 2010 levels. This steep growth is proving challenging through the complexity of the products and processes involved. We are very pleased with the revenue expansion and capabilities and we remain highly focused on continually expanding margins throughout the fiscal year.

Our global services business focus on logistics, repair services and service part logistics. Global service once again finished the quarter strongly, exceeding its targets on a number of key operational metrics. It also booked numerous new programs with both existing and new customers and overall our key activity remains strong.

Our retail technical services group or RTS business provides competitive and flexible field services for customers operation such as Verizon, Microsoft and AT&T. During the quarter, RTS launched our new Firedog business, which is focused on business-to-business and business-to-consumer field technical services. Firedog provides in-store, in-home phone and web based installation, maintenance and support service for electronic products. For more information on this new business, please go to www.firedog.com.

Now turning to our guidance on slide 10. We’re expect another strong growth quarter for the company with our revenue in the range of $6.8 billion to $7.2 billion, which corresponds to a sequential growth range of 4% to 10% and is up 7% at the midpoint.

We expect our adjusted earnings per share to be in the range of $0.19 to $0.21 versus the $0.19 just reported. Quarterly GAAP earnings per diluted share is expected to be lower than the guidance provided at yearend by approximately $0.04 for intangible amortization expense, stock-based compensation expense and noncash interest expense.

Please turn to slide 11. Our first quarter was one in which we achieved impressive growth on a number of different fronts. While we continue to experience challenging supply constraints, we’re once again able to deliver improving returns to shareholders. For the quarter ahead, we see continued growth in revenue, operating income and earnings per share.

Our key takeaways are as follows: we delivered strong sequential revenue and adjusted operating profit growth which came in at 11% and 12% respectively. This also translated into our net profit, where we grew adjusted earnings per share $0.19 quarter-over-quarter. Every market segment and business unit grew sequentially.

Our year-over-year growth was even more robust with revenue, adjusted operating profits and earnings per share raising 14, 111% and a 118% respectively. Our long-term market EBITDA, our last 12 months EBITDA, totaled $1.1 billion which is up 11% over the prior quarter and 10% over the prior year. Our debt-to-EBITDA ended the June quarter at 2.2, down from 2.3 in the prior quarter and 2.8 a year-ago.

ROIC ended quarter at 28.8% near company highs and we initiated a $200 million stock buyback program with $135 million repurchased during the quarter.

Now I’d like to open it up for questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question today will be from Brian Alexander from Raymond James. Your line is open.

Brian Alexander – Raymond James

Thank you. I think you previously said that you can achieve 3.5% operating margins at around a $7.5 billion quarterly revenue run rate. And I think in the September quarter, you’re guiding the midpoint of revenue to $7 billion, yet operating margins implied in the guidance were close to 3%.

So for the 3.5% margin target to hold you would need to generate a contribution margin of more than 10% on that incremental $500 million in revenue. And for the last three quarters, I think your contribution margins have been closer to 3% to 5%. So I guess the question is, do you still think you can deliver 3.5% margins on $7.5 billion in revenue. And, if so, how much of that comes from the component segment versus the core business, because it sounds like your components businesses isn’t recovering as you expected? Thanks.

Paul Read

Yes, thanks, Brian. You’re right. Going back to our investor day and the slides that we put up then, we said, we need around $7.5 billion of revenue and – but we would also need the mix to be in line with what we would expect September quarter, the mix isn’t quite bad. We would also need the components business performance to be roughly around 4% in operating margin and it isn’t bad either. So there’s a number of things that will bring that, but revenue is just one part of those – of that puzzle.

Brian Alexander – Raymond James

Well, maybe just drill a little bit more into the components business. It sounds like it was below breakeven. This quarter, I think you expected it to be profitable in September. So maybe just give us an update on whether you do expect it to be profitable in September and how quickly you think the aggregate the components business can get to that mid single digit operating margins are?

Mike McNamara

Yes, so I’ll take that Brian. The components business, we are behind in terms of our operating profit expectations. While we’re having very good results with the customer and delivering technologies that make a lot of sense and having very good success in the marketplace, we’re struggling with bringing them to yield and bringing them to our target operating profits as fast as we’d like. The revenue growth between Q4 and Q1 was like 18% sequentially. And then the expectations for Q1 to Q2 is to have it grow again 35% sequentially.

So over these last two quarters, we’re experiencing well over a 50% growth and we are experiencing significant challenges in terms of startup costs and getting to operating levels that we’re able to achieve our target margin. So I think we’re going to have Brian and like Paul said, to get to the 3.5%, there’s actually a several different conditions, one of which is we needed the components business to turnaround.

We expect continuous improvements in that components business. I would say we’re one to two quarters behind what we thought we would be. We’re certainly having a super success in the top line and in terms of booking real good customers, but we’re probably a little bit behind expectations as to where we were six months ago as to how fast we can bring those to the profit levels that we needed to go hit our 3.5 points.

Brian Alexander – Raymond James

I guess, final follow-up, is there anything specific you could point to that’s causing you to be one to two quarters behind? I guess, what are the key bottlenecks in getting the profitability up there? Thanks.

Mike McNamara

Well, it’s kind of a – it’s kind of everything. We’re bringing in a substantial increase in capacity in the power business. If I breakdown the power business, one the challenges we have there is not only that we’re bringing down more and more servers, which is kind of new product categories for us, but also we’re a little bit challenged with the wage rate increases in China.

Lot of the power business runs about 10% of labor and for direct labors a percentage of sales. We’re rapidly moving into a facility in Guangzhou which is several hundred miles away which will give us a reduction in labor cost and about 40%. That facility will be producing products within days.

On the camera module side, it’s a very, very, very complex electrical, mechanical assembly which we’re probably tripling the overall business year-on-year. And so we’re kind of drinking out of the fire hose there in terms of trying to ramp that business. These are very, very state of the art complex optical, electrical, mechanical assemblies. And the ability to bring them to yield is a challenge because of each of those three different technologies being embedded in one. So that’s – so in that particular case, we’re working hard on the yields.

And Multek is just getting the volume. So all we need to do with Multek is drive the volume more, it’s well over 1.2 book-to-bill for the last year, for the last several quarters even. And we anticipate a nice steady recovery with Multek over the next few quarters which has a lot less variability and a few workers been there, done that, and know how to run that business. So each one has different challenges and we can’t just group into one bundle. But it’s suffice to say that our operating margins are – we’re not going to hit our real target operating margin targets until we get that business to churn around.

Brian Alexander – Raymond James

Okay, thanks for the detail.

Operator

Our next question will be from Matt Sheerin, Stifel Nicolaus. Your line is open.

Matt Sheerin – Stifel Nicolaus

Yes, thanks. Just two question regarding your comments about labor costs Mike. Are you having discussions with customers about passing along those costs and how successful have you been there? And then just also about shifting programs to other regions where it make sense for either you or for your customer in terms of looking at other geographic regions like Eastern Europe, for instance in Mexico?

Mike McNamara

Yes, both good questions. In the cost increases, we are in process of doing everything we can to recover the pricing from our customers. Some of the businesses have almost no impact to tell you the truth. If you think about a personal computer, it’s well less – the direct labor is well less than 1% of the sales, so it’s not a big impact. And I mentioned you can have a power product where it goes all the way up to 10% of sales of the direct labor components. So each one is effective a little bit differently, but we are actively working to recover those costs.

So we kind of view it is – and the normal part of the business, we don’t view it as something we didn’t anticipate. We’re probably going to have the same increase next year. We would expect if I have some currency impact next year, then we’ll probably have another 15% or 20% price increase next year.

So the rest is just part of the business we need to go manage and I think we’re having relatively good success, considering the – and the mood of the supply base over there is to raise prices, the prices are substantial and I think it’s – I think the OEMs on average understand that.

As far as moving to other places, we’re just getting a lot more interest in Mexico and Eastern Europe and other location. So I would say over the last four, five years, the labor rate in Mexico as an example has been extremely stable and it really hasn’t changed at all, whereas the cost in China as a great example has continued to go up.

We also have a real vast portfolio even within Asia and we probably have 20,000 people in the South area which includes Indonesia and Malaysia, which arguably in many products has a lower cost than the China today. So we’re having a quite a bit of increased interest in those regions, we’re talking more about bringing on more customers into that area.

And I think customers are looking to diversify at China a little bit more. So as it happens, we’re pretty thrilled about it, we have such as sound base in Southeast Asia and such a strong operations in Eastern Europe and Mexico. So we do expect to see that, although we don’t expect to see much movement until probably next year as the people are working hard to create a stable supply base for the rest of this year.

Matt Sheerin – Stifel Nicolaus

Okay, that’s helpful. Thanks a lot.

Operator

Our next question is from Brian White at Ticonderoga. Your line is open.

Brian White – Ticonderoga

Yes, Mike, on the notebook business, do you still feel like you can get to $2 billion fiscal ‘11 and $4 billion in fiscal ’12?

Mike McNamara

Yes.

Brian White – Ticonderoga

Okay. And it seems like in September quarter, low double digit growth in computing, seems a little softer than I would expect, because you also have servers that should well in the September quarter. And I thought there was a big notebook ramp. Has something changed in the September quarter?

Mike McNamara

Yes, it’s – it kind of ramps mostly during the September quarter. It’s not at the run rate during that period, so I would say it’s just pretty backend loaded. I think I’ve made that comment before that we get pretty flat for the first half of this year in terms of any kind of computing growth and that our field accelerates towards the latter half.

I think the – so it does still have some quarter-to-quarter kind of seasonality, not really seasonality, but it has some unevenness for us just because we continued to work to diversify that business so that we have more programs so we don’t kind of have that lumpiness. But I think the key point to your first question, they did roughly $1 billion last year, we expect – we fully expect to do $2 billion this year, do not think that’s in risk in anyway. And then, I also think that – are pretty comfortable that will hit $4 billion or better next year.

Brian White – Ticonderoga

And the tablet market, a lot of excitement there, it will lead a little bit into notebooks. Do you have any tablet programs right now in the pipeline?

Mike McNamara

In terms of books programs in the pipeline, no. But in terms of – it just kind of ends up being just like desktops and net books, we’ll serve our notebooks in – within a year-and-a-half, we had both desktops and net books. So I – we’re assuming that this was just going to be a natural follow-on to the laptop business, to the notebook business. So we fully expect to do, but I would say we have not booked them at this time.

Brian White – Ticonderoga

Okay, thank you.

Operator

Wamsi Mohan, Merrill Lynch. Your line is open.

Wamsi Mohan – Merrill Lynch

Yes, thank you. Your inventories are up 15%, your guidance is indicating much low quarter-over-quarter growth. Can you address the mix between raw material and work in process inventory? And I guess some of your comments were about escalations were actually lower this quarter. So should we expect inventory to normalize next quarter?

Mike McNamara

I believe they will. The inventory turns were still okay. And if you do the calculation, of course, the inventory days did increase a little bit. And, of course, there was a – an absolute increase that was reasonably significant.

The – part of it is as you know we’re still – we’re still planning on – we’re still planning on – when you don’t know if you’re going to get the parts in it or not, you start to buy the other parts, it’s why the infrastructure division has had the most impact in terms of the component shortages, because of the most complex product.

So it may have 10,000 different components in that product to release one product and unless you get them all, you can’t ship it. So you do have to plan a little – you have to plan for success and when you don’t get those parts in, sometimes it strands them. So that’s a good part of it.

Part of it is the fact that we’ll increase inventory – we’ll increase revenue again this next year, we’re still even at the midpoint of the guidance at 7% and at the high end, it’s over 10%, so there’s still some expectation or some need to increase inventory just compare for that ramp. And when we come to the September quarter, we actually do expect a little bit of normalization getting back to your comment, because by the time, September quarter hits, we actually are expecting a pretty nice increase of inventory in inventory turns.

So all-in-all, I don’t find it alarming in anyway. I think it’s a little bit of component shortage. And we expect the component shortages to start mitigating going forward. So I think there’s going to be less, less on the dock so to speak. And so I think all-in-all, the inventory levels are not alarming. We – it’s just a view of some component shortages, it’s a view of preparing to build a higher revenue level this quarter and I think it will work its way out through the balance of the year.

Wamsi Mohan – Merrill Lynch

And to follow-up on that Mike, I mean, if you’d look at the infrastructure side, the one which you’re pointing to which would sort of saw the bulk of maybe the revenue, so that you’re unable to deliver in the quarter, because of these component mismatches. Is that something that now – how broad based was that? Was that sort of just a few programs where you just ended up with a lot of inventory across, because a few parts were missing or is that much more broad based than a?

Mike McNamara

Well, I think the component types and the amount of different programs and in terms of number of customers and number of programs, within customers, we’re all pretty broad based. So it’s not just one or two or three different things, it’s just not one or two different customers, it’s a pretty significant industry-wide problem still.

The escalation comment was an important one, it’s one of the ways that we measure. What we anticipate going into the future, because it’s not revenue that’s left in the dock, but it’s actually how many parts we’re chasing for a future scheduled which is not yet shipped. And that’s what we call escalations and those are starting to drop.

So we really do think this problem’s going to mitigate over the next couple of quarters and that in term is going to help our inventory turns improve. And it’ll help us get back to kind of normalized levels. Although, return to be – if you go back historically that we’re at today, it’s really not out of the line with what’s quite a good performance.

Wamsi Mohan – Merrill Lynch

Okay, thanks a lot for that color. And if I could follow-up with one last question here, it’s a follow-up on the China labor commentary. How much do you expect realistically wages can increase where you – to your exposure in China on an annual basis weighted by your exposure to the various regions within China? And what is the catalyst that would cause you to actually move capacity? Is there a certain level of wage increase that sort of triggers that moment for you or program a program, how are you going to measure that and how are you going to actually execute on that? Thank you.

Mike McNamara

Yes, well, we kind of favor every reasons a little bit different and we’re probably in 10 different locations in China. So, on average, we’re probably looking at 20% or 30% increase and doesn’t make us move. When you’re running 0.5% of sales on a program for direct label and it moves 20%, we have almost zero motivation to move. But when you talk about a power program like I had mentioned, a 10%, we’re really motivated.

And the Guangzhou operation that we’re putting up, we’re started working on probably six or seven months ago and we’re actually doing prototypes and pilots through that operation now. So it’s well along its way and we’ll actively run it and manage it and then we’ll motivate it to go move that part as quickly as we can. So it really just depends.

And as far as moving to other regions, like I said, we’ll see more interest in the Indonesia and Malaysia overtime, and I think every year that goes by, we’re going to see Mexico becoming more and more attractive and Eastern Europe, just more attractive as an alternative to China as those things narrow. So I think it’s not going to be a quick move, but I think it’s going to be an evolution, it’s going to be real flow and – but we’ll see it make some movements over the course of this next year.

Wamsi Mohan – Merrill Lynch

Okay, great. Thanks a lot. Appreciate the color.

Operator

Amit Daryanani from RBC Capital Markets. Your line is open.

Amit Daryanani – RBC Capital Markets

Yes, thanks. Good afternoon, guys. Just a couple of questions. First off, looking at the operating margin sequentially, despite the 10% uptick in sales, it doesn’t look like we’ve got a pound leverage and mix actually looks to be fairly normal sequentially. Could you just talk about what impeded the leverage I guess sequentially for you guys in this quarter?

Paul Read

Yes, Amid, this is Paul. So clearly our expectations improvements on the component side has been pushed out a quarter or two. And so – so that certainly cost us 10 or 20 basis points. But it’s just the ramp issues that Mike talked about, laid the cost issues on the power supply side.

I think Mike’s already gone through all of that. So that certainly caught us. I mean we did have a more favorable mix seasonality with some of our businesses on the consumer side that always has a little bit of a solution on that. But, in overall, we’re only 10 or 20 basis points away from where we’d hopefully end up.

Amit Daryanani – RBC Capital Markets

But sounds it was really a component centric issue more so than in the rest of your businesses. Is that kind of fair?

Paul Read

Yes.

Amit Daryanani – RBC Capital Markets

And so when you guys talk about being one to two quarters behind plan, I’m just curious what sort of growth number also a revenue number or a timeline do you really have to achieve to this 4% to 5% operating margin target that Jim talked about as a medium-term goal right now?

Paul Read

On the component side?

Amit Daryanani – RBC Capital Markets

Yes.

Paul Read

Well, the revenue growth of 30% this year on the bundle, we still feel very confident about. It’s actually the biggest challenge for us, it’s coming on very strong and supporting all these programs. And so from a revenue perspective, we’re certainly very encouraged by that. Is it – is that that question?

Amit Daryanani – RBC Capital Markets

Yes, no, I’m understanding what actually –

Mike McNamara

Just before you go that we are in the middle of the ramp if you will. I mentioned the 18% and the 35% growth go on from Q1 to Q2. So we’re still right in the middle of the challenge, if you will. If you look at the growth from Q2 to Q3 for that whole bundle – compare a bundle it’s like 6%. So what happens is, we’re going to continue the struggle absorbing these significant growth in Q2, it’s going to push that margins still in Q2.

And then, our expectation is that Q3, things start to get stable and that’s when we get stable is when we think we can work out the profitability. So we’ll have the revenue by the time Q3 comes, but – and that’s when the stability, the period of stability is going to come from the manufacturing standpoint. So to us, we still have one more quarter as we ramp this real hard, which is the future quarter we’re in now. And then, hopefully, we’re going to get a little bit more stable.

Amit Daryanani – RBC Capital Markets

You’ll have enough revenues to not only breakeven, but actually to get to 4% or 5% margins, but Q3 you’ll break even. And then, hopefully, a few quarters down, you get back to the 5% margin in components, is that fair?

Mike McNamara

Well, I think we’re going to make continued progress towards the 5%. I would expect to make significant margin improvement over the course of the remainder fiscal year. So that is for sure. I wonder it’s 5%. I mean, I don’t want to say now, because we’re delayed by a couple of quarters.

But, for sure, we’ll start hitting a more stable revenue flow in Q3 and then kind of drinking out of the fire hose kind of ends at which point we can really work on everything from yields and productivity will be up and running in our operations in Guangzhou and there’s just a lot of change that we’ll have gone through during this quarter. So I focus here this quarter to be a high transition quarter, this quarter being Q2 and I’m looking for real results improvement in the Q3 timeframe. So whether you’ll use the 5% by the end, they’ll have to see, but there is definitely sufficient revenue to highly utilize all the assets in power, camera modules and Multek.

Amit Daryanani – RBC Capital Markets

Thanks.

Operator

Sherri Scribner, Deutsche Bank. Your line is open.

Sherri Scribner – Deutsche Bank

Hi, thank you. I was curious to get your thoughts on your mix of businesses this quarter. And some of the comments we’ve heard from some of the other companies is that consumers have been a bit slower while the corporate side has been stronger and you guys seem to be somewhat different than that. Your consumer digital and mobile piece was very strong this quarter and then some of the more enterprise focused segments like computing were weaker. I know you mentioned that storage was good for you guys. But, why don’t you get your thoughts on sort of that discrepancy, what you’re seeing on the consumer side and also on the corporate side?

Mike McNamara

Well, on the consumer side, we just think it’s kind of business as usual to tell you the truth. We always start to have some movement up in June, September’s usually a very significant increase even over June. So to us, it’s kind of – kind of business as usual and maybe we have some program runs that will help things out, I don’t know.

But we’re not seeing real softness in that consumer business at least in the programs that we’re in. And, we always see a nice little jump in the September and it starts – it actually starts tailing off in December, is because a lot of that consumer product need to be shipped out by Thanksgiving. But, to us, it’s just a normal seasonal trend that we’re experiencing.

Sherri Scribner – Deutsche Bank

Okay. And what about on the corporate side, any comments?

Mike McNamara

I think that the corporate side will be fine. The –

Sherri Scribner – Deutsche Bank

I mean, your computer was a bit slower and then the infrastructure maybe that was impacted by the components.

Mike McNamara

Yes, I mean, infrastructure is probably a little more disappointing to us, it’s going to be up 2.5%. Alternatively, infrastructure for the year will still be double digits. So we actually anticipate our infrastructure to have Q2, Q3, and Q4 all with continuing revenue increases. But we’ll have to wait and see if we hit that.

But we’re actually seeing pretty nice strength even in the enterprise part, it’s just that we seem to be more challenging given the parts to get those completed. But if you look at our forecasts, you’ll see real strong growth. And if you look across the entire year, we’re still looking at double digits there.

Sherri Scribner – Deutsche Bank

Okay. Did you guys give an outlook for September for the mobile segment and the industrial segment? I didn’t get the details on that.

Mike McNamara

Hold on, Sherri. We’re checking out that.

Sherri Scribner – Deutsche Bank

Okay. If you didn’t, maybe you could give us some thoughts.

Mike McNamara

Yes. Well, Sherri, maybe I can just comment on it, each one of them. Basically, we anticipate each one of them to be growing on a sequential basis, each one of the different categories. Consumer digital by far will have the largest percentage growth quarter-on-quarter, just because of the nature of the business. But it’s going to be another kind of strong across the board growth rate going into September.

Sherri Scribner – Deutsche Bank

Okay, all right, thank you.

Operator

The next question is from Amitabh Passi, UBS. Your line is open.

Amitabh Passi – UBS

Hi, thank you. My first question just had to do with OpEx, a little higher in the quarter than I would have anticipated. Can you just give us some color in terms of what happened and how we should think about the OpEx line as we look forward to the September quarter?

Paul Read

Yes, during the quarter, we – we’re definitely having some ramping OpEx costs to supporting these new programs, whether it’s R&D or general business development, sales and marketing costs. So it was slightly above our range and we’ve given out, I think that was 175 to 180.

And I think we’ll be probably more on the 185 to 190 on a go-forward basis continuing to support these product ramps. But we should see some deleverage, some benefits from, you’re obviously increasing revenue in percentage of sales coming down, but the dollars should trend up.

Amitabh Passi – UBS

Okay, got you. And then, can you just remind us, normal seasonality for you in the December quarter is usually up double digits, low double digits sequentially, is that fair? And any reason do you think things might translate differently this year? Do you still expect a normal sort of seasonal pattern going from September into December?

Paul Read

I think that with the new computing business ramping, it’s changing the seasonality pattern slightly. We’re having a strong September here and that could result in the less than typically seasonal strong December. We expect growth, but whereas we would probably expect a double-digit growth in December, we’ll probably be in a single digit growth in December. That’s kind of how we feel from here today. Gets driven by a higher September.

Amitabh Passi – UBS

Got you. And then just one final question. I’m still struggling with this wage pressure issue in China, the prospect of relocating to other markets like Mexico and Eastern Europe. Maybe you can help me understand, I just assumed the wage differential between a market like Mexico and China is probably fairly significant. So I’m just trying to understand what does that do to your overall cost base relocating say from a China to Mexico and how do you sort of mitigate any incremental costs?

Mike McNamara

Maybe I didn’t describe it well before, but there’s going to be no mass relocation of anything, whether its Inland China or at least for our business and our customers, because it’s still – whether you’re spending $1.50 an hour in China or a $1.75 an hour in China, it’s still kind of the best deal around, because you have the entire supply base there.

You have outstanding logistics, you have the developing end market, it’s still pretty good. So the fact that you can move inventory $1.25 an hour is with a huge cost associated with that. It’s just not something that you need to rush into. And the difference of building in Mexico at $3 an hour, compared to a $1.75 or $1.50 is not a huge difference in the calculation.

So we’re not going to see any kind of mass relocation of any business. We’re going to see a tweak, the tweak’s going to happen overtime and often with maybe the next product cycle, but it’s going to be slow.

But no one’s going to pickup and just move in a pretty aggressive way. I mean, this still represents, kind of still represents some very low cost place to be (inaudible) and with very a confident supply base, a very confident operator base and outstanding freight lanes, and as you know, quickly developing consumer market. So this is a tweak, this is not going to be a dislocation of business.

Amitabh Passi – UBS

That’s helpful, Mike. Thank you.

Mike McNamara

Yes.

Operator

John Harrison, Longbow Research. Your line is open.

John Harrison – Longbow Research

Hi, good afternoon. Capital spending for the year, it looks like it was maybe a little bit ahead with expectations for the June quarter. Is it still $300 million to $325 million for the year, given the growth you’re seeing or if you increase the capital spending plan?

Paul Read

Hi, John. We’re seeing some real accelerated revenue growth and we’ll probably would be spending more $350 million to $400 million this year and maybe towards the higher end of that range, supporting these new program ramps that we have.

John Harrison – Longbow Research

Okay, and would be – it would be within the categories, component, and then on the computing side already discussed on the call or is – is there other categories that need capacity as well?

Mike McNamara

In the end, we – we’re probably going to be growing double digits on all product categories and with components being a more significant growth, upwards of 30%. So we’re going to have to tweak each one of them a little bit. That really depends on the revenues of where we end up with the revenues and then our expectations for revenues next year, so it’s hard to predict it. The rule of thumb is that, if you grow 10% or 15% revenues for the year, we can probably do that with $300 million against – a CapEx spend against the depreciation of $400 million.

If we start turning in the revenue growth, so 15% to 20%, we’ll probably going to start seeing our CapEx move into the $350 million, $400 million kind of range. So it really depends on what we see for revenue and again a lot of that CapEx that we spend this year is really positioning for programs next year. So there’s probably one of those tendency right now for us to leaning a little bit heavy on CapEx than it was at the beginning.

We’re pleased with June. We ended up having CapEx and appreciation roughly equivalent. But going forward, we’ll continue to see pretty good strength in the marketplace. As you know, it’s a pretty uncertain macro environment out there and we could see some headwinds coming out as that we don’t see today, that can end up change in that. So I think, in the end, it’s kind of a long answer, but I think Paul’s answer’s right, we’re leaning more towards the $350 million to $400 million kind of number for this year. But it really depends on what we look for next year and what the economies look like the next year.

John Harrison – Longbow Research

Okay. Then, two follow-ups, it’s just the interest expense assumption for the September quarter and then maybe Mike if you could comment on a notebook, PC, pricing. I know at that the analyst day you cited a few competitors getting a little bit more aggressive in that market. What are you seeing 45 days post the analyst day?

Paul Read

Yes, the interest and other, we had some favorable events there in this quarter with some FX gains and the full benefit of the 6.5 we paid out last quarter. And going forward, I think the range is probably around $28 million to $32 million for the quarter. I would probably get it around that.

Mike McNamara

And on the PC, I think this year, it has really represented a shift down in overall maybe operating profit or gross margin, however you want to describe it for the notebook, ODM marketplace of about a full percentage. And I think that’s – so there has been a deterioration to me in operating profit across the board of about 1% and as a result of renewed competition.

Whether that renewed competition will carry on to next year, I’m actually not sure, because there’s so much wage pressure and I think there’s a lot of challenge in maintaining those lower numbers. But certainly we’re in the middle of experiencing I think a shift down of about 1%. So it is more tight than it has was in the – has been in the past and that’s negative.

But, so our objective is to be real thoughtful about which programs we go after and we did a billion dollars last year and we did $24 million of total revenue, so this is a small percentage of a revenue and we’re not going to chase it once we can think we can make money of it, so we’re going to be selective, we think we’re going to be selective in that chase price down and still make our goals of a billion last year, $2 billion this year and $4 billion next year.

But there will be some profit headwinds on that as a results of a shift down of 1%. And we’re hopeful that – we’re still hopeful that the $4 billion to $5 billion that we bring on next year and we’ll end up having some relief on that, that price pressure building down, but we’ll have to wait and see how that looks next year.

John Harrison – Longbow Research

Thank you very much.

Mike McNamara

Welcome.

Operator

The next question will be from Alex Blanton, Ingalls & Snyder. Your line is open.

Alex Blanton – Ingalls & Snyder

Good afternoon.

Mike McNamara

Good afternoon.

Alex Blanton – Ingalls & Snyder

Wanted to start by asking – again going back to the components business and it’s really a huge ramp that you’re talking about, 59% in six months, the two percentages that you gave, where is that coming from? I mean, is that from your own internal programs or is that merchant business, you’re getting from the outside and what kind of business?

Mike McNamara

Well, for sure, it’s mostly outside business. In our components business, we probably run 15% and 20% inside and 80% to 85% of merchant business. And each one of those businesses are growing pretty rapidly. Camera modules on a percentage basis is growing the most. But Multek is will be up I think – good 25% year-on-year, and that includes all of that Multek which includes (inaudible) circuits and some of the materials businesses.

So camera modules are just kind of exploding for us. Technologies that we think are interesting, that customers think are interesting and they’re in pretty high demand and we’re in for some really interesting programs, so that one is going very rapidly.

And power again is power will be an $800 million run rate this quarter, whereas last year we did maybe $600 million or $550 million I don’t remember the exact numbers last year. So that the problem is that, they’re all going up and the challenges towards profitability are all different. As I mentioned, so I don’t want to go through those again. But really we’re just – and then I mentioned the book-to-bill and Multek continues to grow very rapidly. So it’s all of them.

Alex Blanton – Ingalls & Snyder

Just trying to understand why, because you’ve owned Multek or your predecessor company has owned Multek since 1994. And all of a sudden, the business is exploding 25%. I mean, why is that? And I don’t think the markets are growing that fast. And also, on the camera modules, it’s been out a few years, the power supplies are new, so I can understand that’s your startup. But these other ones, all of a sudden, they’re taking off, why is that? I mean, the markets aren’t growing that much.

Mike McNamara

Yes, so, on the camera modules, it’s a technology business. And if you hit a certain technology, maybe you’ve achieved an X, Y, Z height benefit through your own technology initiatives that create a demand for your products. So you know that’s basically what we’re experiencing with camera modules. It’s really a technology business. Multek – Multek’s coming from a low point.

While Multek will grow very significantly and well that is over $200 million of business this year in Multek, this year-on-year, it’s – it came from a whole alternatively and the recession that went down quite a bit. So, but, alternatively, in FY ’11, we actually expect higher revenues at Multek than we’ve ever achieved in the past. So it’s actually passing the ’08 and the ’09 levels.

Alex Blanton – Ingalls & Snyder

Well, in any cases –

Mike McNamara

I don’t know, we just have a nice product offering, I don’t know. I just wanted to –

Alex Blanton – Ingalls & Snyder

It’s better to get this –

Mike McNamara

Before we can get some profit out of it.

Alex Blanton – Ingalls & Snyder

Well, it’s better to get the top line than the bottom line right now I would think. The second question is, hasn’t been talked about here, but the Nokia, Siemens, Motorola deal, how is that going to affect you? And if at all are you doing business with both parties? How much with each party? What are the competitive aspects here? Is there any chance that either one of these entities might start in-sourcing as a result of this and could you discuss all that?

Mike McNamara

Yes. We probably do – it’s hard to say, between Nokia and Siemens and Motorola, we’re probably doing $200 million to $300 million of business, it’s kind of a best guess. I would say about significant portion of that is actually other things, they might be in closures, they might be – we’re operating in ticker boards, that we’re doing out of Multek, so it’s different elements making that up. In terms of downside risk, I view it as almost nothing. And in terms of upside risk or upside opportunity out, I would consider it to be not significant. But I kind of think it, it’s not going to be meaningful to us to tell you the truth.

Alex Blanton – Ingalls & Snyder

And one final thing, you mentioned double-digit growth on infrastructure for the year.

Mike McNamara

Yes.

Alex Blanton – Ingalls & Snyder

Yes. The slide that you presented May 25th, I think it needs to be corrected, because it’s still indicates on your website 5% to 10%. I think that was an error.

Mike McNamara

That we changed it (inaudible).

Alex Blanton – Ingalls & Snyder

You changed that, but it wasn’t changed on the presentation and the website, I just looked.

Mike McNamara

Okay, we’ll fix that.

Alex Blanton – Ingalls & Snyder

But it certainly is going to have to be a big increase for the next nine months, because you’re starting up with a 3% decline.

Mike McNamara

Yes, we’re actually kind of anticipating every quarter gets better in terms of dollars. So we’ve been kind of stuck in that category. Our profitabilities continued to improve and ROIC has continued to improve, so we actually haven’t been stuck as a Flextronics goal, but in terms of revenue, it’s been kind of flat.

And we think the flatness period is over and we’ve probably – those infrastructure programs take long to incubate sometimes and very often these programs lasts three, four years as you know. And the pan of cycles that we anticipate in infrastructure are very positive.

So we’re going to start entering into some new programs here or already are starting to build some new programs that are going to have multi-years of what we think it’s going to be pretty decent growth. So we’re actually anticipating that we’re going to have accelerating growth throughout the year.

Alex Blanton – Ingalls & Snyder

Sounds good.

Mike McNamara

Yes.

Alex Blanton – Ingalls & Snyder

Thank you.

Mike McNamara

Yes. You’re welcome.

Operator

Our next question will be from Louis Miscioscia, Collins Stewart. Your line is open.

Louis Miscioscia – Collins Stewart

Okay, thanks for taking my question. Just two quick ones. When you look at the labor issues in China, just from a sequential standpoint, has the wages come up and it’s now all in your income statement and/or guess our models or is it something that’s going to happen – have to happen over multiple quarters, that’s obviously worried about a risk that your margins are – might stagnate or go down because of the labor issues in China. And then, one quick follow-up.

Mike McNamara

Yes, we know what the increases are. What we don’t know is how much we can cover from the customer necessarily. But our best guess of that blend of the results of the price increases, simultaneously with the known cost increases, we think we’ll it is in our guidance.

So it’s fully planned for and the variable we’ll have is how well we’ll be able to cover those cost out of the customer. And there’s not an unknown variable in the cost structure. We know what that is and a lot of those costs are – and we increased some wages in April, we are increasing some more wages in July. So, but we know what those are (inaudible) so as best as we can we’re giving you the best indication of what the result will be.

Louis Miscioscia – Collins Stewart

Okay, good. And then, the last follow-up question as we’re running long here is that, on the supply chain, obviously you’ve made the comment on supply chain starting to ease. In general, I had heard that the supply chain issues were sporadic, sort of all over the place. You’re getting pretty good visibility that it’s really starting to come down and is there anything that’s still out there that are is still issues? And is this going to other than capturing that $180 million, $200 million in revenue, is there anything else that can benefit you, I mean would help your margin or is it just make business a bit easier?

Mike McNamara

Well, we just use the best data we can. We talk to the semiconductor guys all the time. We look at the amount of escalations we’re getting. We – as you know, we have large suppliers of capital equipment in the semiconductor industry, so we can look at what those trends look like when we get some indications from them, what they think the demand looks like and how fast their customers are catching up on – I mean, how fast they’re catching up on the customer demand.

So we just put all that into the best indication of what the future looks like that we can and our best guess is just gets better over the next two quarters. We didn’t know that as well. And it seems like the semiconductor industry might have some pretty reasonable growth next year. I don’t think there’s been a lot of capacity going into meet some of that growth. So I think we just have to wait and see, but our indications are it’s just getting a little bit better and the industry is catching up pretty nicely.

Louis Miscioscia – Collins Stewart

Okay, thank you.

Mike McNamara

Hi, operator, we have time for one more call.

Operator

Thank you. And our last question today will be from Jim Suva from Citi. Your line is open.

Jim Suva – Citi

Thank you and congratulations to you and your team.

Mike McNamara

Thank you.

Jim Suva – Citi

I have a question for Mike and then a follow-up question for Paul. Mike, on the inventory, there’s been a lot of questions asked about it. But when we look at the linearity of the September quarter and maybe things have changed. I believe the September quarter is somewhat backend loaded and that makes the 15% increase in the inventory even that much more puzzling.

Has there been any change in terms of OEMs asking you to hold more inventory or order more inventory or are you kind of taking some tight of it and some risk, because it just seems like with the 15% increase in a nonlinear quarter this backend loaded, we actually wouldn’t expect to see such a big bump?

And then, for Paul, the question – Paul, on the cash, maybe you can talk to us about the use of cashes as you deployed $135 million back to shareholders this quarter, which is over half of your stock buyback. Do you foresee exhausting it or using it or stock buyback or more look forward to M&A ahead? And then on the tax guidance, I just don’t recall for years any type of tax greater than 10% or let alone 10% to 15%. So it seems like maybe you’re guiding something, was there a mixed shift going on or some with the tax guidance, so just doesn’t seem to square what history has shown?

Mike McNamara

Well, let me start Jim with the backend loading. We are actually not very backend loaded. It’s hard when we have over 200,000 people that we backend loaded and just all of a sudden turn the crank. And we do – we just don’t have a business that has the characteristics of us being backend loaded. So we just don’t have that.

We don’t anticipate that comes into here, we don’t get nervous about at the of the quarters, whether or not revenue is going to come through. It’s actually reasonably linear. And September will be a little bit more than July of course, but it’s actually a pretty linear business on average and maybe it’s because of the amount of diversification we have, the number of different kind of product categories were involved and I’m not sure the reason is, but our business is historically reasonable linear through the month, through the quarter.

Jim Suva – Citi

Any change on terms of that inventory?

Mike McNamara

As far as – I mean, not really. If anybody has to hold it, we ask for inventory carrying charges, maybe we’re getting a little bit of that, but not too much, we are collecting some inventory carrying charges. I can say in the March quarter, we were collecting I think about the inventory carrying charges. So if customers ask us to place inventory, we’ll charge them for it, but that has a return on it, so we kind of lead of as being good business.

But (inaudible) a little bit of that going on, but not too much. I just think we’re mostly caught with – again, I think we’re just mostly caught with a little of bit of revenue growth and a little bit of component shortages, maybe a little tiny bit of holding us in inventory, but almost insignificant.

And I think it’s going to work its way out, kind of nicely. We did 7.9 turns in March, we’ll do 8 inventory turns in June. And I would expect it to be have a nice jump up in September on inventory turns. So we’re not actually no too worried about, we think it works its way out over the course of the next two quarters. And, once again, we also think doing 8 turns is probably fine.

Jim Suva – Citi

Thanks. And Paul?

Paul Read

Yes, Jim. So the stock buyback, you’re right, we did about 135 million in the June quarter and we probably expect to finish up our 200 million this September quarter and that’s kind of what we’re looking at.

We have the $240 million of debt, the 1% converts maturing in August, so we’re working on that. We obviously intend to retire that cash, but we’re being pretty comfortable with our leverage position where they are at in the debt-to-EBITDA, trying being very favorably for us.

We are looking at some other alternatives of replacing that debt that we’re working on. We might not get it done this quarter, but certainly working on it. We mentioned earlier the up ticking CapEx compared to our previous time that we talked to you back last quarter.

With a significant revenue ramp, we think the CapEx is going to trend up $350 million to $400 million from the $300 million to $350 million that we talked to you about before, so a bit more investment there. And we always have a slug for acquisitions every year, so we still have that in mind. And it really does fit the profile of that back at the investor day, I showed that slide of what a typical normalized period would like and it’s very much looking like that for us this year.

Jim Suva – Citi

And the tax item?

Paul Read

On the tax item, yes, you’re right. We really – we understand the 15 and truly operationally is kind of where it does come out. But we have a number of tax orders around the world. When you make acquisitions, when you pickup some legacy issues Selectron in particular and we’ve got some fairly large credits come back through successful negotiation of some audit matters around the world and we still have a few a lot less than we had before and we’re working through them. But an operational rate of 10 to 15 is actually is where it should be.

Jim Suva – Citi

Thank you and congratulations to you and your team.

Mike McNamara

Thank you, Jim. Okay, thanks everybody. We’ll look forward to talking with you again on October 27th, when we announce our second quarter results. Thank you. Good-bye.

Operator

This concludes today’s conference. You may disconnect at this time. Thank you.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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