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Sanmina-SCI Corporation (NASDAQ:SANM)

F4Q12 Earnings Call

October 31, 2012 8:30 AM ET

Executives

Paige Bombino – Director, IR

Jure Sola – Chairman and CEO

Bob Eulau – EVP and CFO

Analysts

Brian Alexander – Raymond James

Wamsi Mohan – Bank of America Merrill Lynch

Sean Hannan – Needham

Craig Hettenbach – Goldman Sachs

Christian Schwab – Craig-Hallum Capital Group

Jim Suva – Citi

Rich Todaro – Kennedy Capital

Amit Daryanani – RBC Capital Markets

Osten Bernardez – Cross Research

Operator

Good morning. My name is Brent, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI Fourth Quarter Fiscal Yearend 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Bombino, you may begin your conference.

Paige Bombino

Thank you, Brent. Good morning, ladies and gentlemen, and welcome to Sanmina-SCI’s fourth quarter and fiscal yearend 2012 earnings call. A copy of today’s release is available on our website in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website.

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

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

You will note in our press release and slides that we have provided you with the statements of operations for the three months and 12 months ending September 29, 2012 on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in our press release and slides posted on our website.

In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense, and other infrequent or unusual items to the extent material.

Any comments we make on this call, as they relate to the income statement measures, will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income, and earnings per share, we are referring to our non-GAAP information.

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

Jure Sola

Thanks, Paige. Good morning to everybody, and welcome. First of all, I want to thank everybody for letting us change this conference call. I know that there’s been a lot of bad weather on the East Coast. So hopefully, everybody got through it okay. But with that, again, I want to thank you all for being here today. And on our conference call today – or this morning, I should say, I have Bob Eulau, our CFO.

Bob Eulau

Good morning, everyone.

Jure Sola

For agenda, is that Bob will review our financial results for our fourth quarter then I will follow up with the comments relative to Sanmina-SCI results and future goals. Then Bob and I will open for question-and-answers.

So now I’d like to turn this call over to Bob. Bob?

Bob Eulau

Okay. Thanks, Jure. Please turn to slide 3. Overall, the fourth quarter was solid from a margin standpoint and very strong from a cash generation perspective. Revenue of $1.58 billion was up 1.9% on a sequential basis and down 7% from the fourth quarter last year.

Our gross margin came in at 7.4%, which was up 60 basis points from the third quarter. Operating margin increased 70 basis points from last quarter to 3.5%.

Non-GAAP EPS was $0.46, which was well above the high end of our guidance for the quarter. This was based on 83.6 million shares outstanding on a fully diluted basis.

Finally, cash generation was outstanding this quarter, with cash flow from operations at $121 million and free cash flow at $99 million. I’ll discuss cash in more detail in a few minutes.

Please turn to slide 4. Revenue was up 1.9%, or $30 million, from Q3 to $1.58 billion. From a GAAP perspective, we reported net income of approximately $164 million, which results in earnings per share of $1.96. This was up relative to last quarter by $1.85.

The GAAP results included a benefit for income taxes due to a partial release of our valuation allowance against U.S. deferred tax assets. Given all available evidence, we now believe it is more likely than not that we will be able to utilize a significant portion of our U.S. tax attributes in the future. The tax benefit totaled $159 million, or $1.90 per share. Offsetting this benefit is a restructuring charge of $17.5 million which we recorded this quarter.

You may recall that we made a decision a couple years ago to expand our printed circuit board manufacturing capability in Wuxi, China, and that facility is now beginning to come online. We feel that we can compete on a global basis from this location. The supply chain infrastructure is outstanding and we have an experienced team in place in Wuxi.

We’ve been critically assessing the footprint of our printed circuit board business. While we had sequential growth in the components business this quarter, after a thorough review, we’ve decided to close one of our printed circuit board facilities, which is in Malaysia. This was a difficult decision, but one that we believe positions us for better financial results in both the short and long term.

What this closure, we were able to transfer a significant portion of the equipment in that factory to our new building in China. Our estimate is that we are saving approximately $20 million to $22 million which would have otherwise had – we would have otherwise had to spend on capital equipment within our other printed circuit board facilities.

We also believe that once we complete this transition, we will have eliminated approximately $3 million to $5 million in costs that we would have continued to incur on a quarterly basis. The payback period for this closure should be about six to nine months.

We’ve initiated restructuring at another facility in addition to the PCB factory that I just discussed. The restructuring costs for the two impacted facilities totals $11.9 million. Most of the remaining restructuring costs related to previously announced restructuring activities.

In the first quarter of fiscal year 2013, we expect a GAAP P&L charge of approximately $5 million to $7 million for the ongoing expenses that have to be recognized as incurred, associated with our announced restructuring activities.

For the year, revenue was down about $500 million, while net income increased $111 million to $180 million primarily due to the tax benefit I just mentioned. Earnings per share for the year were $2.16 versus $0.83 last year.

My remaining comments will focus on the non-GAAP financials for the fourth quarter. At $117 million, gross profit was up $11 million from the prior quarter. Gross margin came in at 7.4%, which was 60 basis points better than the previous quarter. Operating expenses were down $700,000 dollars for the quarter at $61.1 million. This represents a 10 basis point improvement in the operating expenses as a percent of revenue. At $56 million, operating income increased by 26.8% from the prior quarter. Operating margin was 3.5%, which was a 70 basis point sequential increase. Other income and expense was at $10.8 million, which reflects a significant reduction in interest expense over the last year and a one-time benefit from a government incentive program in a foreign country.

The tax rate for the quarter was 15.7% of pre-tax income, which was in the range we had expected. On a non-GAAP basis, we earned $38 million in net income, or $0.46 per share. Net income and earnings per share were up 74% from Q3.

Historically, we’ve reported our results as one segment, with occasional comments about certain parts of our business. Going forward, we’ll report our business in two newly defined segments. We believe this will provide you with greater insight into how we manage our business.

The first segment is Integrated Manufacturing Solutions, which comprises our high-mix, high value-added electronic manufacturing services, including printed circuit board assembly and test, optical and RF, module assembly, final system assembly and test, and direct order fulfillment. This represents about 80% of our total revenue.

The second segment for us is Components, Products & Services. Components include printed circuit board fabrication, backplane assemblies, cable assemblies, enclosures, precision machining, and plastic injection molding. Products include computing and storage products, defense and aerospace products, as well as memory and SSD modules. Services include design and engineering, logistics, and repair services.

The current and potential financial results of these two segments are somewhat different. Please turn to slide 5. Here, we are showing you the revenue for these two segments relative to last quarter and the fourth quarter last year. The Integrated Manufacturing Solutions business grew 1% sequentially, while Components, Products & Services grew 5% sequentially.

As you would expect, given the much higher revenue, the gross profit is higher in the Integrated Manufacturing Solutions segment, while gross margin is significantly higher in the Components, Products & Services segment.

We’ll plan to share more detail with you on segment profitability in our Analyst Meeting on November 15 in New York.

On slide 6, we’ve shown you some of our key non-GAAP P&L metrics. Revenue was up $30 million from last quarter. Demand was particularly strong in the communications and the enterprise computing and storage market segments, which more than offset continued weakness in the multimedia segment. Compared to Q4 last year, total revenue was down 7% and, again, most of the decline was attributable to the multimedia business.

Moving on to gross profit. We achieved a 10.5% increase in gross profit in Q4, while gross margin improved to 7.4%, which was up 60 basis points from last quarter.

Our operating profit increased 26.8% from last quarter to $56 million. This led to operating margin of 3.5%.

Net interest expense declined by $2.7 million this quarter as we continue to see the benefits of the deleveraging of our balance sheet.

Now I’d like to turn your attention to the balance sheet on slide 7. Our cash and cash equivalents were $410 million. Cash was up $15 million from the previous quarter. This increase in cash was achieved while we were simultaneously paying off the final $150 million remaining of the 2016 notes which had a coupon of 8.125%. The $150 million was paid off by using cash generated during the quarter along with a new mortgage on our San Jose campus of $40 million and short-term borrowings of $30 million.

While inventory was flat from Q3 to Q4, we benefited from a $15 million decrease in accounts receivable and a $42 million increase in accounts payable. Property, plant and equipment was up $3 million for the quarter. The large increase in other assets reflects the reduction of a valuation allowance against our deferred tax assets discussed earlier.

Please turn to slide 8. Solid cash generation combined with some well-timed capital markets transactions has allowed us to make great strides in improving our capital structure. Over the last three years, we’ve reduced our long-term debt by $600 million, and over the last year, we’ve reduced our long-term debt by $345 million. As I mentioned, during the quarter, we redeemed the remaining 2016 notes with cash and significantly lower-cost debt.

These collective actions have lowered our annual interest expense on a run rate basis to just under $55 million. Combining this with the fact that our next major debt maturity is in 2014, we feel very good about our capital structure. With all the progress that we’ve made in the last year, we still have room to improve the capital structure and balance sheet going forward, and we’ll continue to look for those opportunities.

Please turn to slide 9 where we will review our balance sheet metrics. Cash was up $15 million from Q3. Cash flow from operations for the quarter was very strong at $121 million. And net capital expenditures for the quarter were $22 million. This led to $99 million in free cash flow.

Inventory reduction and cash generation are an ongoing priority for our team. The inventory dollars were flat with last quarter at $127 million, while the inventory turns improved from 6.8x to 7.1x. Compared to Q4 last year, inventory is down $64 million.

We’re showing cash cycle days, which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time decreased from 55.2 days last quarter to 51.9 days. The biggest driver was our accounts payable days outstanding, which improved by 2.5 days. We also benefited from a decrease in inventory days of 1.8 days. These improvements were partially offset by an increase in accounts receivable days sales outstanding of 1.1 days. We’re pleased to see progress in our overall cash cycle time.

Finally, our return on non-invested capital was 13.4% for the quarter, which was helped by our better profitability while asset utilization also improved.

Please turn to slide 10. I would now like to share with you our guidance for the first quarter of fiscal year 2013. Our view is that revenue will be in the range of $1.5 billion to $1.55 billion. We expect the gross margin will be in the range of 7% to 7.4%. Operating expense should be $62 million to $63 million. This leads to an operating margin in the range of 2.9% to 3.3%.

We expect that other income and expense will be in the range of $13 million to $15 million. We expect the tax rate to remain in the range of 14% to 16% and we expect our fully diluted share count to be around 84 million shares, plus or minus 0.5 million shares.

When you consider all this guidance, we believe that we will end up with earnings per share in the range of $0.31 to $0.37.

Finally, for your cash flow modeling, we expect that capital expenditures will be around $30 million, while depreciation and amortization will be around $25 million. We also anticipate real estate sales of $25 million to $30 million this quarter.

Overall, we’re navigating through a challenging macroeconomic environment. Growth is the biggest challenge as we see varying growth prospects across our customer and business space.

In Q1, we will focus on completing the transformation of the printed circuit board business to improve profitability while revenue is at this level.

With the actions we’ve taken this quarter on the structuring of the business, we believe we are positioned for better earnings even with sluggish revenue growth.

I look forward to seeing you in New York on November 15, where we’ll update you on our progress in executing the strategy we laid out last year.

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

Jure Sola

Thanks, Bob. Again, ladies and gentlemen, what I would like to do is to give you a little bit more insight on our business environment for our September quarter – I mean the quarter that we just finished, and also talk about the short-term business environment in our first quarter, or December quarter, of our fiscal year 2013. And then what I would like to do is give you some outlook at what we are looking from our bookings as we go enter the calendar year 2013.

So just to add a few things. As Bob talked about, the fourth quarter, this was a modest growth in a quarter. Definitely was below our internal expectations, mainly driven by forecasts going up and down.

We did deliver a nice margin improvement per our expectations, driven by operating efficiencies and better product mix during the quarter. So overall, we’re pleased with the fourth quarter results and accomplishments in our fiscal year 2012, despite a challenged economical environment with just basically a lot of headwinds during our fiscal year 2012.

One comment that I would like to make is that in 2012 we made a significant improvement in our strategy that we laid out for you a year ago. We continued to diversify our customer base with a lot better opportunities. We reposition each of our business unit to be aligned with their customer needs and ability to compete independently.

So, our long-term opportunities are still very promising. And also on a positive side, that our customers are still cautiously optimistic about the future as we look at in a calendar year 2013.

So please turn to slide 11. As you can tell, our top 10 customers were 51.4% of our revenue. We also had a one customer around 10% of our revenue, and that was Alcatel-Lucent. Our largest segment of the market is communication networks, which for us includes the networking, wireline and wireless infrastructure. That was sequentially up 4.1%.

Enterprise and computing and storage for us continued to move in a right direction, and that was up 7.8%. Defense/industrial/medical was slightly up approximately 1%. Defense and aerospace for us continued to be moving in the right direction, especially our products. Industrial also was pretty strong. Medical was slightly down. And semiconductor equipment continued to be weak for us, and I think will continue to be weak for the rest of the – at least for next couple quarters. As Bob mentioned, multimedia came down approximately 14%, mainly driven by our set-top box business.

So please turn to slide 12. So as I look at in our first quarter here, let me make a couple of comments on our markets and demand. Communication networks, we are forecasting to be down in our first quarter, mainly driven by a weak demand from our wireless access product for infrastructure. The rest of the communication networks are stable and some are up. Enterprise computing and storage will continue to move in a right direction, slightly up in the first quarter.

Defense/industrial/medical, overall that group, I would say, is stable, flat. But let me make a comment on individual. Defense, we also think is going to move in the right direction. Industrial, we have a strong pipeline of new projects, so we expect it to continue to move up. Medical, flat, some upside potential. And again, semiconductor equipment continue to be weak during the quarter. Multimedia, we’re also forecasting December quarter to be up, so that seem like now it’s stabilized and it should move in the right direction.

So let me make some more comments, what we are planning to do for calendar year 2013. As Bob mentioned, it’s kind of tough to forecast, but we’ve got some positive news there.

Book-to-bill in the fourth quarter was positive and we also are forecasting book-to-bill for fiscal year 2013 to continue to improve. And this is mainly driven by strong programs in place and forecasting stronger demand from these programs in fiscal year 2013. Also, some of our new programs that we won in 2012 should start shipping also in our fiscal year 2013. Also, we have a strong pipeline of new opportunities and we have a high confidence that a good portion of these programs we’re going to win and make some shipments in our fiscal year 2013.

So overall, as I look at the fiscal year 2013 and really rest of the calendar year 2013, we expect to see improvements in revenue growth and margin. Again, that is based on the projects that we are involved and some of the new programs that we are working on today.

So in short-term, this macroenvironment will remain challenging from a demand point of view and be able to forecast good. How long is this going to go on? Again, it’s very hard to forecast at this time, and this could impact our future demand.

But as we look at the long-term growth, we are optimistic. And let me give you a couple of points why. We continue to build a strong balance sheet, as Bob talked about. This gives us a lot more flexibility to take advantage of market opportunities to drive the growth and margin expansions in the future. Also, our business model still has a lot of leverage as the economy improves.

And I think our focus strategy is gaining a lot of traction in each of our business unit. So what I’d like to do is to give you some more insight on that, so please turn to slide 13. As you know, about a year ago we talked to you about how we’re going to run our business going forward. We broke that down into two segment groups. Our traditional, what we call Integrated Manufacturing Solution, here we focus on higher technology products, high mix. We believe that business is being stable for us. I think it’s more driven but what’s the demand out there in the key markets.

The rest of the businesses, such as printed circuit boards; mechanical systems; defense and aerospace, mission-critical products; and Newisys, which is a storage product; Viking Technology, solid-state drives, advanced memory packaging; and then Sanmina Global Services and our repair and logistics. Those businesses, I think our strategy is working. The key here is to maximize the value in each of these business units. At the same time, we believe separating these units and running them independently allows them to really provide leading-edge technology for our customers and really allows us to focus on our core strengths in our key markets. And we’ve been investing a lot more in our higher margin business during this, what I’d call flat market in the last 12 months.

So back to the Components, Products & Services. I think our circuit board operations are well positioned today. We did expand in China with the high technology printed circuit boards. We’re bringing the technology up here. So we believe it will be one of the highest technology in Asia.

We continue to invest in precision machining, enclosure, plastic, casting. And that group is moving in the right direction.

Defense and aerospace. When I’m talking defense and aerospace here, I’m really talking about the mission-critical products. We’ve been investing in this product for many years and we continue to spend fair amount of R&D for this business. And I believe that this market, yeah, in the short term it’s not a huge growth but definitely is moving in the right direction.

Our storage product, which is basically a joint development – or ODM product that we supply on a high-end of storage product for our customers, that product is really doing well, some great opportunities in front of us.

Viking Technology, which is basically advanced custom modules and solid-state drive product that we provide to our customer. That business is being stable and we’ve been developing a lot of new products there, and I expect that to be also improving as we go into 2013.

I want to make more comments on our Sanmina Global Services, which is basically repairs and global logistics. We really expanded the footprint of that operation. We expect that business to be growing 20%, 30% a year. Most importantly it’s a business that has a foundation to be a billion dollar business in few years. So we’re really excited about that and the acquisitions that we made in 2012.

And of course, our design and engineering services, this kind of goes together with all these businesses.

So we’ll talk more about some of these unique capabilities at our Analyst Meeting. But in the meantime, I think our strategy is kind of putting – coming together and, most important, I think our customers are excited about the technology that we are providing in each of these segments.

So now please turn to slide 14. In summary, revenue grew approximately 5% sequentially in the second half of fiscal year 2012. We also did generate a strong cash flow from operations of approximately $215 million. And as Bob mentioned, we reduced the debt approximately $345 million in fiscal year 2012. And our goal there is to continue work on that debt to minimize our expenses there.

We expect to continue to generate positive cash flow from operations in fiscal year 2013. And as I mentioned earlier, I really believe that we have a strong pipeline of the new projects that should help us drive the growth in 2013.

So again in summary, it’s very hard to forecast for long term, but I can tell you that we’re in a better shape with a lot better position today for any economical environment than this company has been in a long time.

So with that, ladies and gentlemen, what I’d like to do is basically again thank you for your time and support.

And now, operator, we are ready to open the lines for question-and-answers. Thank you again.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Your first question comes from the line of Brian Alexander with Raymond James.

Jure Sola

Hello, Brian.

Brian Alexander – Raymond James

Hi, Jure. Hey, Bob, maybe talk a little bit more about the source of the gross margin upside in the quarter. Revenue is at the low end of the range, but gross margin was up 60 basis points and almost a 40% incremental margin. Looks like the components revenue was only up about 5% sequentially. So just talk about how much of the gross margin expansion came from components, improving profitability versus the core business, and maybe some mix factors that drove it.

Bob Eulau

Yeah. Okay. And thanks, Brian. So first of all, I’d go back to Q3 and say that was the biggest anomaly. If you look at this year, our overall gross margin’s been in the 7.3% to 7.4% range other than Q3. And you’ll recall, in Q3 we got hit by some FX issues as well as a particularly bad mix of business in the third quarter. So, part of your question is comparing to a fairly weak base period.

Now, with respect to your question on components, the way we’ve historically defined components, the gross profit was definitely up and was pretty good – not as good as it was in the second half of last year, but starting to recover. Revenue, again in the historical definition, was up as well, and in our new definition as well with the Components, Products & Services.

So I think, as Jure I think mentioned, mix was positive, and we’re comparing, particularly with Q3, to a weak base period.

Brian Alexander – Raymond James

And just to clarify, was the components gross margin above the corporate average this quarter?

Bob Eulau

So in our new segment, Components, Products & Services, the gross margin is higher than it is in the Integrated Manufacturing Solutions. And the components in the old definition was I believe still below.

Brian Alexander – Raymond James

Got it. And then just a follow-up from me. I know last quarter you alluded to more of a deep dive into some of the components operations to identify some opportunities for improving efficiency. It sounds like you’ve been able to do that in the PCB area with cost savings of I think you said $3 million to $5 million a quarter that are going to be coming. What’s the timing of the cost savings? Will all that be realized in December? And then, what about some of the other areas within components, have you dug deeper into those operations or is that still an opportunity going forward? Thanks.

Bob Eulau

So, yeah, thanks for that question as well, Brian. First, I would like to credit the team for really doing an extremely thorough analysis of all the alternatives that were available to us, and I think we’ve landed on a solution that makes a lot of sense for our shareholders. We think we’ll get the $3 million to $5 million in savings showing – it will begin – some of it will begin soon. But I think to fully realize that, it’s probably in the June quarter as we work our way through this transition.

Brian Alexander – Raymond James

And then just other areas within the components business, are you – go ahead.

Jure Sola

Yeah. So we scrubbed everything, as we had told you we would. And at this point, we’re pretty pleased with the footprint we’ve got, and in the other components areas; we’re also, as I mentioned, defining the business with Components, Products & Services and we’ll continue to invest in the product areas which are showing some pretty good momentum as well.

Brian Alexander – Raymond James

Okay. Thank you very much.

Bob Eulau

Yeah. Thanks, Brian.

Jure Sola

Thanks, Brian.

Operator

Your next question comes from the line of Wamsi Mohan with Bank of America Merrill Lynch.

Wamsi Mohan – Bank of America Merrill Lynch

Yes, thank you. Good morning and thanks for rescheduling this call.

Bob Eulau

Good morning, Wamsi.

Jure Sola

Morning.

Wamsi Mohan – Bank of America Merrill Lynch

Good morning. I had a question around this PCB transition you’re talking about from your Malaysia facility. Your Malaysian footprint was about 5% of your revenues; are you completely closing the Malaysian facility or is it a subset of that facility?

Jure Sola

Well, we’re going to be leaving some technology engineering group there that will be working on some research and development. So basically for all the practical purposes, we’re not going to be manufacturing printed circuit board at that factory in the future. And so really, the whole focus here, Wamsi, is to this new expansion that we created in China. It’s a really high technology product, and based on a present demand and a future demand, we believe we can provide a better solution from China and in other parts of the company.

I think it’s also important that we continue to invest in this business substantially. So our capabilities today, even with transitioning Malaysia operation into China and other parts of the factories around the world, are a lot stronger. And we believe that the areas that we focus on, that this was the right solution for us going forward.

Bob Eulau

Okay, just to clarify your Malaysia question, we continue to have an integrated manufacturing facility, or EMS type facility in Penang, Malaysia, and what we’re in the process of transitioning is our printed circuit board facility which is in Kuching, Malaysia.

Wamsi Mohan – Bank of America Merrill Lynch

Okay, thanks. Thanks, Jure. Thanks, Bob. And also, so if I understood that right, Bob, then we shouldn’t be expecting any change to your tax rate here because of this change.

Bob Eulau

No, I don’t anticipate this affecting the tax rate. I mean, it’s – tax rate, as you know, is always a function of where do the profits end up being (inaudible). But I don’t think this taxation will change.

Wamsi Mohan – Bank of America Merrill Lynch

Okay, thanks. And as a follow-up, Jure, last quarter you commented that you think that the inventory correction on the component side was more or less complete. This quarter you saw some sequential growth in the overall new segment basis – or do you think that that’s pretty much worked out of the way now from an inventory correction standpoint? And within components, could you just perhaps elaborate a little bit within the new segment where you’re seeing faster versus slower growth? Thank you.

Jure Sola

Yeah. Well, Wamsi, definitely as I look at the pipeline of inventories with our customers, are pretty, pretty low, with most of – and there’s few customers they have more. But overall, I still believe that the pipeline in industry today is operating with a very low industry – I mean a very low inventory.

We do expect that, as we mentioned, we saw some upside in our September quarter. We see some positive trends right now on some of these components in December quarter, and hopefully that will continue through the calendar year 2013.

Again, as I mentioned earlier, I think – as I talk to our customers, they’re pretty optimistic, and I’ve been spending a lot of time there. They’re cautious about the global economy and what’s going on in Europe and then election here in United States. And so but hopefully with now all this behind us that things will move in a right direction as we enter the January timeframe. So we’re pretty optimistic.

But again, back to these components, we do expect this portfolio to grow at a faster rate than traditional EMS business. Especially, how we are repositioned these businesses as independent as humanly possible, and also I think we strengthen them both from a capabilities point of view so they can compete in the future. I mean, if we didn’t believe that these businesses are not going to add a lot of value in the future, we would not be investing in these businesses. So we’re very excited, because that this is the side that should be a lot bigger than what it is today, has a lot of potential, and as the economy turns around, we’re pretty optimistic about this diversified portfolio of Components, Products & Services that we have.

As I mentioned on our call earlier, we really expanded our global services, which includes repairs, with some major partner in the mission-critical type of products. Most importantly we’ve built a foundation in that side of the business that can be a $1 billion plus business. And the margin in those type of business, as we all know, are better than traditional EMS.

So we’re really investing in the businesses that can deliver the better results going forwards. So, yeah, growth is very critical to us right now and there’s a lot of focus, but growing with the right customers, the right project and also invest in a businesses that are going to be sustainable for many years in the future.

Wamsi Mohan – Bank of America Merrill Lynch

Thanks, Jure.

Operator

Your next question comes from the line of Sean Hannan with Needham.

Jure Sola

Hello, Sean.

Sean Hannan – Needham

Yes. Thank you. Good morning. Can you hear me?

Jure Sola

Yes.

Sean Hannan – Needham

Okay. So, Jure, just to clarify if I understood your comments correctly, you’re explicitly looking for growth in fiscal 2013. I want to confirm that. And then, did you mean that you’re looking for the improvements year-over-year or are you also looking for improvements on your top and bottom line of your business sequentially through the year – or how do we think about that?

Jure Sola

Yeah, well, based on the – if you look at our projects that we have with existing customers that have been a long time, we’re very fortunate that we’re involved in a lot of new technology products. So that customer base is pretty strong with most of them. Some of the new programs that we’ve won also have a fair amount potential and the new projects that we’re presently involved.

So when you look at that, assuming all these things move in the right direction, I would expect us to deliver a better year than what we did in 2012. But at the same time, if the economy falls off a cliff, then it’s going to be a different world. But we do not expect that. We expect to see some improvements across most of our businesses, based on our opportunities that we have in front of us today; that’s really what I’m talking about. But overall, yes, we do expect to have a better 2013 on the top line and on the bottom line.

Sean Hannan – Needham

Okay. Well, just to follow on that, can you perhaps elaborate, when you think about that business providing the relative strength, as you look into December and into 2013, to what degree is there perhaps, A, the project orientation where it’s the momentum with the customers that’s underway versus, B, better relative demand for some of your customer products in their general marketplace versus, C, explicitly the magnitude of new programs and perhaps why the environment has not disrupted those ramps? Thanks.

Jure Sola

Yes. So let me kind of just give you a little bit more. If I look at our communication infrastructure product, overall we expect today a slight growth on that bucket. But if we look at the industrial side of the business, defense, the medical side, we expect more growth on that one. Also, our storage, what we call enterprise computing and storage, we expect that, based on a project that we have, to move in the right direction.

On the multimedia, with that business being down for us – and actually there’s a two reasons there. Demand, and we also decided to end a relationship with one of our customers there. That was a relationship that was not profitable for us and we made a decision to exit that. We believe, overall, that business now is stabilized. I think we have a right customer. So quality of the customer, I would say for us is a lot stronger in 2012.

We do have a fair amount of good opportunities in front of us, some new opportunities that we have a high confidence that we’ll benefit in 2013.

So, Sean, we’ve been expanding again in a unique market. So the key there is to focus on areas where it will allowed us to deliver not just a growth, but more sustainable growth and go invest in these unique technologies that will allowed us to make a little bit higher margin.

So if I can go back – and I know this is a long answer to your question – if I just look at our circuit boards, backplanes, overall, we expect that to do better in 2013 than what we’d accomplished in 2012. Same thing on mechanical, that we will deliver better numbers. I think defense and aerospace products, which are mission-critical products, I believe that will also move in the right direction in 2013. We got some new capabilities, we’ve been investing a fair amount. I think our storage product, our Sanmina ODM product, JDM product, I believe we are positioned to really win some good projects there and I think we got some new, unique technology that is competing in the high end of that game. We continue to invest in that business more.

I think our Viking Technology modules, 2012 was a kind of a flat year for us there. We’ve been developing a lot of new technology in the solid-state drives. Qualification orders on those type of products are taking a little bit longer than maybe what we anticipated in 2012. We also expect that demand to move in a right direction in 2013.

As I mentioned earlier, I think our Sanmina Global Services, we partnered with a couple of key players during 2012. We expanded the footprint of that – those capabilities, and I think we’re going to grow at least 20%, 30% a year in those areas. We improved our design and engineering service that works across all of these businesses.

So, we did a lot of work in 2012 to position the company to be able to win new programs and execute better in any economy. So we prepare for both ways. But today, overall, I would expect that – I don’t know how much, but 2013 overall for us should be a little bit better year.

Sean Hannan – Needham

Thanks very much, Jure.

Jure Sola

Thanks, Sean.

Operator

Your next question comes from the line of Craig Hettenbach with Goldman Sachs.

Craig Hettenbach – Goldman Sachs

Jure, you’d talked about a book-to-bill that was above 1x and some benefit from new programs, yet the end demand environment has weakened. Can you just walk us through kind of what you saw from customers as you progressed through last quarter and into the beginning of this quarter in terms of that up and down in forecast you mentioned?

Jure Sola

Well, the biggest impact, as you know, 50% of our business is communication networks. So our wireless access product demand from some of our customers is kind of weak this quarter; that affected our forecast for this quarter.

If you look at the demand for that product longer term, this is mainly 4G LTE type of projects. We believe there is a lot of momentum there and we expect that business to be fine. So again, as I said earlier, I think communication networks for us, we do expect it to be slightly up. It’s probably more difficult to forecast that at this time. On a positive side, we are involved in advanced new programs in that group. So enterprise computing and storage, I think we’ll continue to move that in a right direction. That’s really mainly driven by demand for our storage area. And I believe that we’ve been investing some good solutions there.

The other group that we talk about is medical, defense, industrial, I think all those will be okay. Semiconductor, capital equipment, still weak for us. We are involved in – in that business we really focus in a new products. We believe it – new technology coming out, that we will have some positive momentum in 2013. The energy area that we are really working on, and this is both from our – really crosses all energy area. It’s a new area for us. We got some positive things there.

So I think from a pure positioning, I believe that we are well-positioned, but again, from a demand itself, I will say the hardest one for me to forecast right now for our customer base will be the wireless access product, especially in the short term.

Craig Hettenbach – Goldman Sachs

Okay. And then any color or commentary in terms of how those customer forecasts and patterns changed as you went through the quarter?

Jure Sola

Well, at the beginning of the quarter they were a lot more positive than end of the quarter. And so we had a lot more change in our schedule there. And I believe that’s going to continue through this quarter, so it’s a little bit more difficult to forecast.

But at the same time, I want to also give ourselves a credit. This year was really hard to forecast the whole year. But I was just looking at my notes, internally, when we had a – in June time, we had a detailed review, we had a sales meeting and we look at what we going to ship in next two quarters, and we were in the $5 million. So we’re able to – there was a lot of changes in a product demand, but overall we were $5 million up. So from that point of view, we’re really micro-managing that today, and I think we need to continue to micro-manage that at least for the next 90 days and we’ll see how things shake up as we enter the January timeframe.

Craig Hettenbach – Goldman Sachs

Okay. And if I could just ask a follow-up. A couple of the companies in the EMS space have talked about some pressure in margins in the comm space and one of them reset their targets in terms of profit. Any commentary there from your end in terms of in addition to weak demand, are you seeing any changes to the pricing environment?

Jure Sola

Well, the nature of this business, Craig, here, we always have – it’s a tough pricing environment across all our businesses. So I don’t think there’s anything – at least with the projects that I’m involved, anything different now than it’s not there all the time. There’s a lot of pressure on all our customers right now in this environment to – they have to deliver the better numbers, their customer are asking for a better deals. So we have to be creative, we have to – in our part, we invested a lot of money in our supply chain. Material is the biggest cost here. We’re working very close with our customers to try to offer up better solutions when it comes to options and materials so that we can go and give them a savings there. So, those are the areas that we do. But, Craig, in this business there is always price pressure.

Craig Hettenbach – Goldman Sachs

Thank you.

Operator

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

Jure Sola

Hello, Christian.

Bob Eulau

Hello, Christian.

Christian Schwab – Craig-Hallum Capital Group

Hey, guys. I missed – I’m sorry, can you just repeat your guidance for gross margin and OpEx for the upcoming quarter? I missed that.

Bob Eulau

Yeah. So the gross margin guidance is 7% to 7.4% and our operating expense is $62 million to $63 million.

Christian Schwab – Craig-Hallum Capital Group

When we look at the cost reduction and the printed circuit board restructuring, of the $3 million to $5 million, what is the mix between COGS and OpEx?

Bob Eulau

It’s going to be mostly cost of sales.

Christian Schwab – Craig-Hallum Capital Group

Perfect. And then lastly, congratulations on finally selling some of the real estate this quarter. After this $25 million to $30 million sale, how much real estate do you have left for sale?

Bob Eulau

There is probably another somewhere between $50 million and $100 million that’s still available for sale. And you are right, 2012 was a tough year on real estate sales, but the prior two years we’d actually sold $25 million, $30 million as well.

Christian Schwab – Craig-Hallum Capital Group

Great. No other questions. Thank you.

Jure Sola

Thanks, Christian.

Operator

Your next question comes from the line of Jim Suva with Citi.

Jure Sola

Hello, Jim.

Jim Suva – Citi

Thank you. And congratulations to you and your team there at Sanmina.

Jure Sola

Thank you, Jim.

Bob Eulau

Thanks, Jim.

Jim Suva – Citi

A question and a follow-up question on the same topic. The main question is, can you give us a little bit more details on – it looks like the gross margins came in quite a bit more healthier or stronger than projected. Can you give us some details on that?

And then I guess on the forward guidance, should we expect gross margins to be relatively stable as we progress through the year or is there some volatility or changes seasonally through your gross margins as we look at potentially coming into a better environment, Jure, that you’d mentioned?

Jure Sola

Bob?

Bob Eulau

Yeah. I think it’s difficult to say what would happen with gross margins on a seasonal basis. I mean, we’re obviously working hard to improve. And as we see the benefits of some of the actions we’re taking now, I would hope that by the second half of the year that margins would be a bit better. So that’s certainly our goal.

And then with respect to this quarter’s gross margin and the guidance, I mean, we thought we had several one-time events last quarter that were negative, and so we were a bit cautious in terms of setting the guidance this quarter, just to make sure that we clearly understood what was going on there. And fortunately, now with the benefit of hindsight, it’s clear that the anomaly was really much more Q3 than it was for the current quarter.

Jure Sola

But, Jim, if I can add to that. For us right now is just loading these plants with better product mix and expanding these businesses that allows us to make a little bit better margin. And I think as we grow, those businesses should help us to improve the margins. So that’s the focus.

Jim Suva – Citi

Great. And then a quick question – follow-up, probably for Bob. On the other income expense line, I believe you guided that could be approximately $13 million to $15 million. Is that kind of a good run rate or is there some timing to where that’s going to keep going down lower in the future? Thank you, gentlemen.

Bob Eulau

Yeah, so at this point, I think that’s a reasonable run rate to assume. As you know, that particular line item just inherently has volatility because we have miscellaneous things that show up there. But I think the $13 million to $15 million range is a good way to think about it throughout FY 2013.

Jim Suva – Citi

Thank you. And congratulations to you and your team at Sanmina.

Bob Eulau

All right. Thank you, Jim.

Jure Sola

Thank you, Jim.

Operator

Your next question comes from the line of Richard Todaro with Kennedy Capital.

Rich Todaro – Kennedy Capital

Hi, guys.

Bob Eulau

Hi, Rich.

Rich Todaro – Kennedy Capital

I just was going through a scorecard of what you guys have accomplished in the last three years where your book values increased from like 7.25 to 11.50. You’ve paid down debt and you’ve done a really nice job. In prior years, it looks like when you’ve had losses they’ve mainly been below the line items, intangibles or acquisitions or shutting down divisions. So as I look forward – and I’m just projecting this out, with lower interest expense going forward now that your debt is lower, it appears that the company could throw off $600 million in net income in five years, and you have a $600 million market cap today. And I realize you have about $400 million in net debt.

So I guess my question is, if the company continues to generate this sort of earnings in a flat environment, one, what level of debt would you like to get the company down to; and then two, what do you start to do with the free cash flow? And I’m not necessarily asking you to back the free cash flow numbers or the net income numbers I’m giving, but at some point, the amount of cash you’re generating relative to your market cap starts to become ridiculous. And I don’t think analysts are assuming any sort of assumptions with those cash flows in their forward models when they give 4x and 5x earnings multiples to your stock.

Bob Eulau

Yeah. Thanks, Rich. I appreciate the observations and comments. With respect to your question on target debt and our plans over the next – longer period, I’d say five years or so, we haven’t put a specific target out there. Obviously the last – probably even the last decade, one of the key goals of the company has been to deleverage, and we’ve made a lot of progress on that over the last three years. If you go back to the recession, the gross leverage peaked at something over 8, and I think if you do the calculation now you’ll see it’s around 3.

I believe that we’re in a new equilibrium at this stage. We certainly have some appetite for continuing to deleverage, but we can make opportunistic decisions in terms of what we choose to do going forward. So – and by that, what I mean is we’ll make good capital allocation decisions. There may be times when it makes sense to repurchase more debt and there may be times when it makes sense to repurchase shares, there may be times when there are small strategic acquisitions that make sense and are synergistic with our strategy.

So I really do believe we’re in a new equilibrium now. I, again, can’t say what our plan is over the next five years, but if you look at the last five years, as you noted, we’ve generated a lot of cash, and we think we’ll be able to continue to generate cash going forward. And I think we can make some good decisions here over the next few years that will really benefit shareholders.

And I guess the final comment I would make is, on your observation, I agree with you, I find it remarkable that our company trades below book value with our ability to generate cash, and I think at some point in time, the market will catch up with that.

Rich Todaro – Kennedy Capital

I guess one observation is, is that in the past some of the shareholder value write-downs – which it looks like most of your acquisition write-downs are behind you hopefully, given where your goodwill’s at, et cetera, is that in the past some of the shareholder destruction has been having to write down something you purchased. And it seems like you have a decent business today, and so whether it’s in prior years paying 8% for leverage to somebody else to get a return or doing an acquisition or rewarding somebody else, it seems like if you stay on the same path, maybe do small acquisitions where you have to, that your shareholders today, including management, will be rewarded one way or another down the road based on these cash flow estimates. So I just wish you guys the best and I give you an A+ for the last three-year track record. Good job.

Jure Sola

Thanks, Richard.

Bob Eulau

Yeah, thanks, Rich. Actually there is one thing I wanted to add. And in terms of the book value, obviously the big increase this quarter is on the deferred tax asset and the valuation allowance we released. That was a partial release. So in addition to the cash generation capability that you mentioned, there still remains an evaluation allowance on probably close to $0.5 billion of deferred tax assets that if we’re profitable over the next five years, we’ll be able to recognize more and more of that as well.

Jure Sola

But, Rich, let me just add one more thing. I think we had a very difficult time to operate. We had a lot of debt after acquisition of SCI. Today, especially if you look at the last three years, we’ve brought it down to what I’d call reasonable. Personally I don’t like any debt and we’ll continue to drive debt down, but we have a lot more flexibility to do what’s right today in how we’re going to grow each of these businesses. So we’re not going to do anything crazy. I think, in a flat market, we’re going to continue to generate cash, try to improve the margin in each of these businesses. And in our growth area, I really believe we’re going to be throwing a lot of cash to the bottom line, because each of these businesses are now poised to do better. And I would like to leave it with that.

So I appreciate your positive comments, but we’re really excited what think we can accomplish the next couple of years.

Rich Todaro – Kennedy Capital

Thanks a lot, guys.

Bob Eulau

Yeah. Thanks, Rich.

Operator

Your next question comes from the line of Amit Daryanani with RBC Capital Markets.

Jure Sola

Hello, Amit.

Bob Eulau

Hi, Amit.

Amit Daryanani – RBC Capital Markets

How you guys doing?

Bob Eulau

Good.

Amit Daryanani – RBC Capital Markets

Just a couple of questions from me. One, sequentially, obviously we get gross margins have declined by about 40 basis points or so on the op line. Is there anything beyond the fact revenues will decline 3% or so sequentially that’s driving that op margin declines?

Bob Eulau

Well, the biggest issue – you’re talking about the Q1 guidance?

Amit Daryanani – RBC Capital Markets

Yeah.

Bob Eulau

Yeah. The biggest issue of course is that revenue was down from Q4 to Q1, and that impacts all line items. If we had obviously similar revenue, I think we’d be able to continue to see some progress on margins.

Amit Daryanani – RBC Capital Markets

Got it. And then, I think you guys had – and maybe I didn’t hear this properly, but you mentioned you had a one-time benefit from a government incentive program in a foreign country. Was that on the interest income line, and could you quantify that number for us?

Bob Eulau

Yeah, it was in the other – we call it other income and expense line, which includes interest expense. And, yeah, that item was around $2 million.

Amit Daryanani – RBC Capital Markets

And then just finally, you guys are obviously looking at communications network segment to be down sequentially in the December quarter. That’s, again, seasonal trends. Is there something specific you’re seeing with them, be that within wireline or wireless infrastructure, that’s driving that or is it really just broad-based demand softness across all the different sub-sectors there?

Jure Sola

No, it’s as I mentioned, Amit. That’s really mainly driven for us on that wireless access product. Rest of the networking, what we call communication networks, are actually pretty good shape.

Amit Daryanani – RBC Capital Markets

Perfect. Thanks a lot.

Bob Eulau

Yeah. Thank you.

Jure Sola

Thank you, Amit. Operator, I think we have a time for one more question.

Operator

Yes, sir. Your next question comes from the line of Osten Bernardez with Cross Research.

Jure Sola

Hello, Osten.

Osten Bernardez – Cross Research

Hey, Jure. Good morning. Thanks for taking the question. When I look at the mix of your components business, aside from the activity that’s taking place with respect to PCBs, where do you see the greatest margin improvement opportunity going forward into 2013?

Jure Sola

Well, as I said earlier, I’m very excited about our Global Services, which is repairs, logistic both forward and reverse. A lot of engineering services there that we sell. So that’s basically in the bag. I think that business is moving in the right direction. I think our products groups, both our storage products, defense, mission-critical products and also our solid-state drive solutions, what we call Viking Technology, I think all three of those have a fair amount of opportunity. And then, I see, as I mentioned earlier, we – unless the whole economy falls off the cliff, I would expect better results – or should I say, improvements from our high technology printed circuit boards and backplanes, and our mechanical systems group.

Osten Bernardez – Cross Research

And how should we be thinking about the – obviously you’ve done the internal studies to see – to make the decisions that you needed to make with respect to the upcoming restructuring, but how susceptible are the other sub-segments of your business, so the components business, to future restructuring?

Jure Sola

Well, first of all, as Bob mentioned earlier, we do a lot of reviews on all our businesses on a quarterly basis. We believe that what we have today, after this transformation – and really this transformation has been planned for a long, long time – we always review it. We made a major commitment, and with the investments in China, we got basically a huge new factory there.

It just didn’t make sense for us to have two similar type of factories, one in Malaysia and one in China, when we feel that one can provide the solution. And also, I think it’s important to understand type of product that we build; these are really – we’re driving to advance printed circuit boards that we can compete on some of these things even from North America. So we’ve been investing heavily in our North American operations that provide for a unique technology.

So we feel comfortable with what we have today. We’ve be tuning these things up. Most important for us right now is really the growth of these. And I believe we need some demand to improve. But as that demand comes, I think operationally we’re ready to execute.

Osten Bernardez – Cross Research

Thank you very much.

Jure Sola

Well, ladies and gentlemen, that’s all we have for today. I again appreciate your time and appreciate you letting us reschedule; and it’s an unfortunate thing that we have to do it, but I appreciate you guys being in our call today. If you guys have any more questions, we’d be ready to answer this at any time, so give us a call.

Bob Eulau

Yeah, thanks, everyone. And we’ll see many of you in New York in a couple of weeks.

Jure Sola

All right. Bye-bye.

Operator

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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