Sanmina-SCI CEO Discusses F4Q2010 Results - Earnings Call Transcript

| About: Sanmina Corp (SANM)

Sanmina-SCI Corp. (NASDAQ:SANM)

F4Q2010 (Qtr End 10/02/2010) Earnings Call

November 1, 2010 5:00 pm ET


Paige Bombino - Director, IR

Jure Sola - Chairman and CEO

Bob Eulau - EVP and CFO

Hari Pillai - President and COO


Craig Hettenbach - Goldman Sachs

Louis Miscioscia - Collins Stewart

Jim Suva - Citi

Joe Whitney - Longbow Research

Sean Hannan - Needham & Company

Amit Daryanani - RBC Capital Markets

Alex Blanton - Ingalls & Snyder


At this time, I would like to welcome everyone to the Sanmina-SCI 2010 fourth quarter fiscal yearend results conference call. (Operator Instructions)

At this time, I would like to turn the call over to our host, Ms. Paige Bombino.

Paige Bombino

Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's 2010 fourth quarter and fiscal yearend earnings call. Today's call is being recorded and is posted along with a copy of our earnings release and a slide presentation on the quarter at in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on the website.

Please turn to Page 2, the Safe Harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological change.

We refer you to our quarterly and annual reports filed with the Securities & 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 statement of operations for the three months and 12 months ending October 2, 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 costs, acquisition and integration costs, impairment charges, gains and losses on the 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 the conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

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

Jure Sola

Good afternoon, ladies and gentlemen, and welcome. Thank you for being here with us today. Joining me on this conference call is Bob Eulau, our CFO; and also President and Chief Operating Officer, Hari Pillai.

And today's agenda we have is Bob Eulau will review our financial results for the fourth quarter and fiscal year 2010. Then I will follow with comments relative to Sanmina-SCI's results and future goals. Then Bob, Hari and I will open it up for Q&A.

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

Bob Eulau

Thanks, Jure. It's a pleasure to be joining everyone today on this call.

Please turn to Slide 3. Overall this was our sixth consecutive quarter of growth and improved profitability. The fourth quarter was a solid finish to a year in which we dramatically improved our financial performance. Revenue of $1.69 billion was up 4% on a sequential basis and up 25% over the fourth quarter last year. This was at the high end of our guidance of $1.65 to $1.7 billion.

Gross margin was below the range we expected due to a specific issue that I'll discuss in a moment. Operating margin was 4.1%, and non-GAAP EPS came in at $0.46 per share. Non-GAAP EPS was well above the range of our guidance, primarily because of continued expense control and implementation of another phase in our long-term tax strategy.

Our tax restructuring is moving ahead of plan. We exited the full year with an effective tax rate of 20.1%. Had this been the tax rate for the fourth quarter, our non-GAAP earnings per share would have been $0.43 rather than the $0.46 that we have reported. This was based on 82.7 million shares outstanding on a fully diluted basis.

Please turn to Slide 4. I'll start by making a few comments on the GAAP numbers. For the fourth quarter, we reported a GAAP net income of approximately $31 million which resulted in earnings per share of $0.38. For FY'10, our revenue increased 22% from $5.2 billion to $6.3 billion. Our GAAP net income improved dramatically from a loss of $138 million last year to a profit of $122 million in FY'10.

Restructuring costs totaled $6.9 million in the fourth quarter. The restructuring costs were for the integration of the optical business acquired from BreconRidge in addition to the normal run rate of restructuring cost that we book as incurred for previously closed plans. As a result of the acquisition of BreconRidge, we will see increased restructuring costs in Q1 as we consolidate facilities.

We expect total restructuring costs for the first quarter to be between $11 million and $13 million. After Q1, we expect the restructuring costs to return to our normal rate of $3 million to $4 million per quarter.

We've incurred about $5 million to date for BreconRidge restructuring. We now expect the total restructuring cost for this acquisition to be in the range of $13 million to $15 million. When the restructuring is complete, we expect annual cost savings to be around $20 million.

My remaining comments will focus on the non-GAAP financials for the fourth quarter. Our revenue was up $61 million to $1.69 billion. At $132 million, gross profit was up 3% over the prior quarter. Gross margin came in at 7.8%, which was down 10 basis points from the previous quarter.

Gross margin was obviously a disappointment. Unfortunately, the components business has slipped back to slightly below the corporate average gross margin. We've made great strides in FY '10 with the components businesses, but we had a specific cost and execution challenge in the printed circuit board area this quarter.

The other component areas, including backplanes, cables, memory modules, optical modules, the mechanical systems, all made sequential progress. We believe the specific issue in printed circuit boards has been addressed and we should go back to continuing sequential progress in that area as well. Had we not experienced this specific issue, our gross margin would have been over 8% and in line with our guidance.

Operating expenses were down slightly for the quarter at $63.3 million. At $68.9 million, operating income improved by 7% over the prior quarter. Our operating margin was 4.1%, which as a 20 basis point sequential improvement.

The tax rate for the quarter came in lower than planned at 14% of pre-tax income. Based on our current and profit mix assumptions for FY '11, we believe our FY '11 rate will be in the 16% to 18% range. On a non-GAAP basis, we earned $37.8 million in net income.

On Slide 5, we are showing you some of our key non-GAAP P&L measures. The revenue trend has been very strong for the last four quarters as we've moved out of the recession. Revenue has climbed 25% since the fourth quarter of last year.

For the fiscal year, revenue was up 22%. Gross profit has shown strong improvement since Q4 of last year, with growth of 37%. Compared to the fourth quarter of FY '09, gross margin has improved from 7.1% to 7.8%.

While revenue and gross profit has grown significantly over the last year, our operating expenses have remained well controlled. In fact, our operating expenses declined by 2% when compared to Q3. With relatively flat operating expense and strong gross profit growth, operating profit has grown even faster since the fourth quarter of FY '09.

Additionally, operating profit has roughly doubled since the fourth quarter last year.

During this period, operating margin improved from 2.6% to 4.1%. We also continue to see solid improvement in EBITDA in the fourth quarter. Our EBITDA for the fourth quarter was $93 million and our EBITDA margin was 5.5% for the fourth quarter.

For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Now please turn to Slide 6. Our earnings per share has improved dramatically since the fourth quarter of last year. After normalizing for tax rate changes, our EPS is still up significantly. As I mentioned earlier, at the annual tax rate our EPS for the fourth quarter would have been $0.43.

I'd like to turn your attention to the balance sheet on Slide 7. Our cash and cash equivalents were $593 million. Cash was down $72 million from the previous quarter for several reasons, the most significant items related to accounts receivable. As planned and previously communicated, we eliminated our accounts receivable factoring program this quarter. This caused a $22 million rise in accounts receivable and a commensurate decline in cash flow from operations.

The single biggest factor in the cash flow from operations was an increase in accounts payable related to a higher percentage of our shipments occurring at the end of the quarter when compared to prior periods. When compared to the prior quarter, our calculations suggest this contributed to $49 million increase in accounts receivable and a corresponding reduction in cash flow from operations.

We have property on the balance sheet which is listed for sale. The list value of this property is over $130 million. For FY '10 we generated about $29 million in cash from the sale of real estate.

Capital expenditures were $37 million for the quarter. This brings the capital expense for the year up to $18 million, which is very close to the $80 million we indicated at the beginning of the year.

Let's turn to Slide 8 to discuss some of the balance sheet metrics. I have already discussed our cash position, which remains strong, given our potential cash needs. In our business, inventory is a key focus. Our inventory turns improved slightly to 7.3, but frankly, we had expected more improvement. We still expect to improve, and our goal is to get up to at least 8 turns within a few quarters.

In the lower left quadrant, we are showing cash cycle days which combined our cycle time for inventory, accounts receivable and accounts payable. Inventory days had a positive impact as they moved from 50.9 days last quarter to 49.9 days this quarter.

We saw an increase in accounts receivable days sales outstanding from 48.3 to 51.8 days. This was primarily a reflection of more shipments later in the quarter than in the prior quarter. Accounts payable was unfavorable as it decreased from 56.1 days to 55.1 days. Overall, cash cycle time increased from 43.1 days last quarter to 46.5 days this quarter.

Finally, we have made outstanding strides in return on invested capital over the last four quarter. We believe this is an important measure in demonstrating our ability to add value to our shareholders. While we are pleased with an ROIC of 18%, we believe there is still room to improve through both margin expansion and better asset velocity.

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

Jure Sola

Thank, Bob. Ladies and gentlemen, first, fiscal year 2010 was a great year for us anyway you look at it. Number one, there are new strategies working and most importantly that we differentiated our strategy in the competitive world. But we are well focused on specialized technology offering. And really focusing on key markets where we have a competitive advantage and focusing our key customers that we can grow with for many years to come.

Our strategy allows us to position our company during the fiscal year 2010 as a stronger leader with our customers, and position us for a better future. And I'll talk more it later.

Now, could you please turn over to Slide 9? What you see here is a breakdown of our revenue. So what I'd like to do here is talk a little bit more about the end markets the main for our fourth quarter fiscal year 2010 and talk about the forecast for our first quarter in fiscal year 2011.

As you can tell, a great year-to-year comparison, we grew 22%. All our four key markets that we focus on grew in double digits. Communication networks, 23.2% year-over-year; enterprise computing and storage, 18.6% year-over-year; industrial, defense and medical, 21%, and multimedia 24.3%.

But now let me talk to you a little bit more in the details quarter-to-quarter and also thinking where we're going from here. I'm going to use a couple of comments here, I'm going to use the word near term. Near term means that it's next three months and long term four to 12 months. So as I look at communication networks that have presented about 46% of our revenue last quarter, they grew nicely, 12.9%.

And most importantly, I think in the near term, that business is still very stable. And we expect some kind of slow growth in the short term, which is basically the next three months. Longer term, I think we're well positioned for a strong growth in this market segment.

As I look at the enterprise computing and storage quarter-to-quarter, that market was down 9.8%. So that was mainly driven by two customers. Programs that we're involved, demand is very weak. But as we look at the future, we believe that in near term, those programs will continue to be flat. The longer term, we expect to see growth through new programs where we are really focused and we're positioned, I believe to eventually grow that market segment again.

On industrial, defense and medical, it's very important group for us. In the near term, we see a slow growth here. Longer term forecast also looked very strong. I think we're well positioned for our future expansion. Quarter-to-quarter growth there was 3.7%. as we go to multimedia, quarter-to-quarter that was down 5.3%, so in the near term we still see that business flat may be slightly down.

Longer term, again, the forecast looks good at this time. So if you look at the fourth quarter, we also have one customer in communication networks that was 10.8%. Also just want to let you know this customer was not a 10% customer for fiscal year 2010.

So overall, we do expect to grow in all our markets in fiscal year 2011. Now let me give you more comment later.

Now what I'd like you to do is turn it over to Slide 10, and here I want to talk to you a little bit about outlook and I'll make some comments. Revenue outlook for next quarter is $1.625 billion to $1.67 billion. Gross margin, 8% to 8.2%; operating expenses should be around $65 million. We expect operating margins to come in between 4.1% and 4.3%.

Interest expense and others should be around 27%. Depreciation and amortization for next quarter should be approximately $25 million. For CapEx, as Bob mentioned, we spend $37 million the last quarter. This coming quarter, we're planning to spend around $40 million. For a year, probably that number is going to be between $90 million and $100 million. We're spending a little bit of more now at beginning, because we got some programs that we need to ramp up in later part of 2011.

Tax rate is 16% to 18%. And for calculation, used number of shares is approximately 83 million to 84 million. Our non-GAAP EPS we expect to be in a range of $0.40 to $0.44.

Let me now make a few comments regarding this forecast. For the first quarter fiscal year 2011, our customers forecast are more uncertain and because of that we have to be more conservative. And let me give you some of the reasons. What we see in the forecast that we see it today are more customer specific and more program specific. And some customers have been driving supply chain very strong for many quarters, and now they are pausing to review their future requirements.

We also know that some of our customers have a lot of inventory in the pipeline, and that's one of other reason that is causing some of the slowdown in the near term. We still have some component shortages and still expect to lead some sales under table and of this first quarter fiscal year 2011. Again it's still very hard to predict future economy, but based on our customer forecast and other inputs that we get from our customers on daily basis, we expect to see good growth for fiscal year 2011.

Now, I'd like to move on and talk to you a little bit about our margin goals in our short term and our long term.

Sanmina-SCI had a nice margin improvement in fiscal year 2010, and as we exit the fourth quarter at 4.1% margin, up from 2.6% a year ago. We believe that we are well positioned to continue to expand our margins through 2011. Next step for us is to continue to improve this margin and drive margins over 5%.

We believe as long as the economy cooperates with us, that we have a potential to accomplish that in calendar year 2011. We also wanted to reconfirm our long-term goal for operating margin of 6% plus. We definitely believe this is attainable and we do believe we have a roadmap to achieve that.

Now, I'd like to give you some highlights of how and why do we believe that.

First of all, let's go back to our strategy as we are focused on our new strategy which is really focused on being differentiated from our competition. And as you review our business, we have a small percentage of our company that focuses on consumer related products. Mainly, and I should say, most of our revenue today comes from our high-end infrastructure products, focusing on communication networks, defense and aerospace industry, medical, industrial, semiconductor industry and technology. And with other markets that we also have enterprise computing and storage and multimedia, here we felt was also on a higher end in unique products.

We also have component technology which will generate better than typical EMS of its operating margin. This group has a much better potential in fiscal year 2011, basically what we accomplished in 2010. And we really believe as we look in the future, this group should contribute a lot better than what it did in 2010.

We're also going to coniine to invest in new technologies, skill and capabilities that will drive much better margin in the future, such as we did so far in 2010 in optical, RF and microelectronic products. We continued to invest in defense and aerospace product. This is not just a defense and aerospace EMS, which we still after, but really, going after the products that we design and build directly for the government.

Also we continued to invest in medical and industrial for future growth. Also we continue to invest in other businesses that we're not ready to talk about right now, that will deliver a better and more sustainable growth and better margins in the future.

So in summary, we believe the demand is still strong. New products are coming up, but a fair amount of those in the pipeline and we believe that our organic wins will contribute fair amount of revenue in the second half of fiscal year 2011. So bottomline, we do still expect a good growth for fiscal year 2011.

So in summary, long-term roadmap remains solid for us, if you just look at 2011 and also the longer term and our strategy as we look three years out. So I can tell you that our strategy is geared towards the long-term success, focusing on sustainable margin expansion and in all economical environment, because we believe it will be driven by better product mix, no matter what happens in economy.

Of course, revenue growth is still important to us and we believe we'll continue to grow faster than industry, but margin should grow even at a faster rate. For the bottomline, we do believe that our strategy is working.

Now I would like to take this opportunity and thank you all for your time you are spending with us today. I would also like to thank all our employees for their hard work and dedication support for many years. So with that, we're now ready to open this line for question and answers.

Question-and-Answer Session


(Operator Instructions)

And your first question is from Craig Hettenbach with Goldman Sachs.

Craig Hettenbach - Goldman Sachs

You mentioned the uncertainty for some customer forecast, can you just go by end market and talk about it between comm., industrial, the multimedia as well and just kind of see what you're seeing by end market.

Jure Sola

First of all, as I mentioned in my prepared statements, the communication networks for us seem like it's in a good position. Well, I think in the near term, we see some adjustments in the forecast with our customers but the long term we feel very comfortable there.

On industrial, medical and defense and aerospace, again that industry similar. I think we've got a lot of new programs involved in that area, I think we're well positioned for the longer term we expect to see the growth.

In the short term, I think it's a similar thing. I think it's a adjustment some of our customers were driving inventories or demand very hard in last two, three quarters. So, we believe there are some adjustments going on.

And at the same time, I think some customers are worried about economy. I mean they're just looking and making sure that their forecast is going to be there. It has for us, again, to forecast economy, but we really feel comfortable based on the pipeline that we have; especially organic wins that we already won during the 2010 and the programs that we're working today.

On a multimedia to us, I think it's mainly timing. There's a lot of talk going on about seasonality, their business, typically, you can't predict them one quarter to another. but if you look over the year, that business grew for us. We believe it's a temporary slowdown, maybe a quarter to quarter and a half. But we see that business coming back to just the strong numbers that we had this year and maybe even the larger numbers.

Craig Hettenbach - Goldman Sachs

And Bob, if I could follow up, after the snapback that you expect in gross margin in the December quarter, how about as you go through the rest of fiscal 2011 in terms of your incremental gross margin target? Is it still in the 10% to 15% range, or any update there?

Bob Eulau

Well, first of all we do expect Q1 to come back and it's because of a specific issue which we are addressing at this point in time. So I don't think Q1 is going to be a concern. We expect to continue to make sequential progress to where we have been.

And I don't want to get into specific contribution margins, because frankly we haven't hit it the last two quarters. But I expect that we will see progress during the year.


Your next question is from Louis Miscioscia from Collins Stewart.

Louis Miscioscia - Collins Stewart

So you mentioned something shipped late in the quarter. Maybe if you could just talk a little bit about that. Was there anything particular about that, especially, obviously as you look at the December quarter guidance being what would be a little bit on the conservative side in comparison to normal seasonality?

Jure Sola

Well, definitely. First of all, let's talk about the December quarter. There is a lot less seasonality going on today, and I don't know if we have any to be honest with you, especially in the type of products that we build. As you know, our consumer business is almost nothing. What we call sort of consumer is really, it's in that bucket but it's really not a true consumer business.

So I mean linearity that Bob talked about, if you look at the last quarter it was not as linear as we typically have over the quarter. We think it's a one-quarter driven. We are hoping that this quarter will be a little bit better. Bob, you have any comments on that?

Bob Eulau

Again I think it was an aberration. We are definitely being cautious moving forward. I don't know that I have a lot to have there.

Louis Miscioscia - Collins Stewart

Then as we look to maybe the first half of your fiscal year to obviously the second half, maybe help us out with March. March is usually a seasonally down quarter. Do you expect to see normal seasonality? I haven't recalculated the number yet but expect that.

And then it sounds like you've have got some wins coming in. So then a pretty strong ramp from then into the June and then September quarter?

Jure Sola

First of all, I don't know if we are going to have a seasonal drop at all. I mean if you look at the last year we grew. Our March quarter was stronger than December quarter. Can this happen this year? Answer is, yes.

I don't think we are ready at this time Lou, to be able to tell you exactly what's going on. I think we need to wait at least next couple of months to see how this forecast is going to shake up with our customers before we can be firm on that. But overall, I think we expect a growth year, and hopefully will accomplish a double digit growth. Unless really something falls off the cliff, we expect growth.


Your next question is from Jim Suva with Citi.

Jim Suva - Citi

A quick question, then maybe a more detailed follow up. It sounds like the seasonal, where typically December is up in many of your business that right now given the inventory adjustments and uncertainty demand that basically all the segments are below normal seasonality for the December quarter. Is that correct?

Jure Sola

Well, I wouldn't put them all in a segment group. What I said in my prepared statements, and I'm just giving you what we have here, it's really more customer-driven and sometimes project-driven or partner-driven. So I can't tell you that every customer and communication network is going to be flat. We have some customers, their demand is very strong; and some customers have certain part numbers or project that are very, very strong and other are not.

And that goes really to every bucket of my business, even the businesses that were down last quarter in those buckets where certain customers are very strong. So I will summarize that Jim more as customer-driven than just segment-driven.

Jim Suva - Citi

Okay, that's fair, but to circle back it just seems like there's always customer-driven things, the program starting and launching. So either it's something specific to Sanmina, or the March quarter should be meaningful, better than seasonality; and maybe that's what you are alluding to already.

Jure Sola

Yes, that's what I was alluding. I personally believe that I don't see us going down in March at this time. But when Louis asked a similar question, I said, I don't know if I'm ready to answer that directly, I'm just trying to say that I think we're going to have less seasonality going on.

Jim Suva - Citi

Now I fully understand. Thank you. And a quick follow up, on the operating margins you mentioned PCB challenges this quarter. Can you go into a little bit detail as to were those on the pricing or were they on the yields or were they something customer-specific, were they on transition of programs, or how should we think about that and how quickly you have that result?

Jure Sola

I think this was a more specific plan, aided mainly by execution and management.


And your next question is from the line of Joe Whitney with Longbow Research.

Joe Whitney - Longbow Research

Jure, first off just a quick clarification question. You had mentioned briefly, you guys continue to invest in other businesses. I know you can't provide a bunch of details. But just from a clarification perspective, were you talking about expanding into new markets organically or are you talking about completing more M&A like we saw at BreconRidge?

Jure Sola

First of all, I think we have a lot of organic programs going on right now, but BreconRidge was a good example of we being plainly the optical business for last five, six years. And a few years ago we made a strategy to really drive into that business and grow that business.

So we have really took that business in the right direction, and I think BreconRidge had completed a lot of the things that were missing, especially from engineering point of view and some of the products capabilities point of view. So that's one of them.

I think that we will continue to look for right opportunities if they make business sense. So we have been heavily focused also on our defense product where we are developing products directly for government where we are the general contractors in there.

We've got to do something to improve this margin. We can't just focus on typical EMS margins.

Joe Whitney - Longbow Research

Combination of organic and inorganic you're referring to?

Jure Sola


Joe Whitney - Longbow Research

And the second question, you guys have talked about the issues in PCBs enough I guess. But my question is kind of on the top-line, if you look at PCB. Just kind of curious what you saw as far as demand or expectations there, how the linearity was? If you saw anything abnormal, such as was the backend waiting of the quarter any more than usual?

Jure Sola

I would say printed circuit boards and all our components demand was pretty strong and continues to be pretty strong. And that's a good sign that the demand for components is still strong. And to be honest with you, if any issues that we have, that was more delivering what our customers were looking for in the last quarter.

So, we're optimistic that the component businesses will grow for us. And I think they are positioned to grow hopefully at the higher rate than overall company.

Joe Whitney - Longbow Research

Last thing for you, if I could Bob, operating expense is obviously a positive surprise this quarter. If the beginning part of the fiscal year plays out like you're saying, kind of a flattish start to the year it looks like. How do you expect operating expense dollars to turn from here?

Bob Eulau

I think they're going to continue to be relatively flat. I mean, you'll see some very minor increases perhaps, but we've really felt we can grow the business significantly without an increase in operating expense much at all.


Your next question is from Sean Hannan from Needham & Company.

Sean Hannan - Needham & Company

In the past, you've certainly provided some detail around book to bill and then some more detail around the components. It sounds like you continue to make some progress there. So if there is a way we could flush out at the corporate and the components level, that'd be helpful.

Jure Sola

Our corporate book to bill was about 1.04-to-1, and components I believe were a little better than that.

Sean Hannan - Needham & Company

From a utilization standpoint, is there a way if you can provide a little bit of color around that?

Jure Sola

It didn't change much from the last quarter. If you strictly look at the base, based on people, about 85% to 90% utilization; based on equipment, about 75%.

Sean Hannan - Needham & Company

You've certainly talked for a while around deleveraging your business. As we're now entering the new fiscal year and you've talked a little bit around some of the thoughts you have on cash flow and of course your CapEx expectations, is there a way if you can provide a little bit more around how you see taking out a little bit more of your debt and the degree you can bring down some of the substantial interest payments?

Bob Eulau

We continue to be committed to de-levering the company and doing that in a prudent way over time. Obviously we were growing a lot this past year. And so we paid down some debt. We paid down about $175 million in November. We were cautious as we were growing later in the year. I think the growth rate will be lower next year. I think it's probably still going to be double-digit, but I think it'll be below last year, and I think that should mean that we're able to generate significantly more cash next year. And our commitment over time is to de-lever the company.


And your next question is from Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets

If you go back to the PCB, could you just give us some color on what's our execution as you evolve that and have you already fixed it, hence the comfort that you've recovered the $3.5 million to $4 million headwind you got on the gross line?

Jure Sola

Well, I think what we said isn't exactly that. We have a cost issue and execution issue. We believe we got the hands around it, and we believe it's a long quarter scenario.

But I think we want to make sure that we get the job done there. We are 100% focused. My confidence is very high that that is behind us.

Amit Daryanani - RBC Capital Markets

And then just broadening a little bit of your component business side, and I believe your company seems to be sound on the component side, as lead times are starting to normalize (inaudible) a bit over here. Are you concerned of that scenario to margin on the component side, as you trend down in the near term for the next few quarters.

Jure Sola

Well, I don't think so unless the whole demand falls off the cliff. We believe that some of the issue that we have for bringing the new customer base and brining the new management, all the infrastructure and all the hard work that we've put behind us now is done.

I think to us right now, it's all about will we be in these businesses again. And I think we did a nice improvement in last year. Everything that I know today, we do expect to make even bigger improvements in 2011.

And we also have broadened a lot more capabilities in those businesses, including the optical side of the business. And we're very confident that we're in the right track.

Amit Daryanani - RBC Capital Markets

Did you say (inaudible) customer that was over 10% revenues in the quarter.

Jure Sola

We did not disclose that. It's from communication networks.

Amit Daryanani - RBC Capital Markets

You want to mention the OEM though.

Jure Sola

No, that's 10.8%.


Your next question is from Alex Blanton with Ingalls & Snyder.

Alex Blanton - Ingalls & Snyder

Just curious, Jure, on this component question. You've been making circuit boards for your 30 years. I mean that was the company's original business. So what was that that caused this? Was it just one plant and the management sort of failure in one plant? And was this because you'd moved production to China where you don't have the same degree of perhaps the skill that you had in U.S. and in Europe when you were there? Is that what happened?

Jure Sola

Let me explain it a little bit more, Alex. First of all, our component businesses are not performing at the margins that we expect them to perform. Our margins in the component businesses should be at 50%-plus gross margin with operative margin around 10%. They're not there today. So last quarter, they were inching up better than our corporate average. And this quarter, they were in that direction where we had what I would call small misstep in one of the plants in Asia that caused us to go slightly below.

So these are the businesses that we are driving margin improvements. And when you have a small bump on a road like this, it's hard to recover, especially when it happens in the quarter.

These types of things happen. It's a part of manufacturing. This plant has been around for many, many years. If you ever worked in manufacturing, these things do happen. But it's behind us. It's a one-quarter scenario.

Alex Blanton - Ingalls & Snyder

But it wasn't your plant for many, many years, right?

Jure Sola

Yes, it's been our plant for many years.

Alex Blanton - Ingalls & Snyder

Moving to yield situation, did bad products get shipped and discovered later, or did you find out ahead of time before you shipped them?

Jure Sola

It's a more cost issue, not a quality issue. Cost and execution, it's combined. If we had a better cost, we'd have executed better. So it's really more around the cost.

Alex Blanton - Ingalls & Snyder

More like a purchasing issue?

Jure Sola

I don't want to go in too much detail. But it's something that is behind us, Alex. And that's most important. We're excited that these businesses are moving in the right direction.

We want to thank everybody for joining us on this call. And if there is any more questions, please gives a call. Thanks again.


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

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