Sanmina-SCI Corp F4Q07 (Qtr End 9/29/07) Earnings Call Transcript

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Sanmina-SCI Corporation (NASDAQ:SANM) Q4 2007 Earnings Call October 30, 2007 5:00 PM ET

Executives

Jure Sola – Chairman & Chief Executive Officer

Joseph R. Bronson – President & Chief Operating Officer

David L. White – Chief Financial Officer & Executive Vice President - Finance

Analysts

Steven Fox – Merrill Lynch

[Gem Souza]

Kevin Kessel – Bear, Stearns & Co.

Thomas P. Danis – RCP Advisors

William Stein – Credit Suisse

Brian White – Jefferies & Company

[Matt Sharon]

Jeff Walkenhorst – Banc of America Securities

[Amit Ariani]

[Lewis Maciocia]

Yuri Krapivin – Lehman Brothers

[Alex Planton]

Operator

Good afternoon. My name is Lani and I will be your conference operator today. At this time I would like to welcome everyone to the Sanmina-SCI Fourth Quarter and Fiscal Year End 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. If you would like to ask a question during that time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two. Thank you. I will now turn the call over to Mr. Jure Sola, Chairman and CEO. Sir, you may begin your conference.

Jure Sola

Thank you Lani. Good afternoon ladies and gentlemen. Welcome to Sanmina’s Fourth Quarter 2007 Conference Call. Again, thank you all for being here. Joining me today on this conference call is Joe Bronson our President and Chief Operating Officer and David White, Chief Financial Officer.

David L. White

Good afternoon everyone.

Jure Sola

For the agenda, David White will review our financial results for the fourth quarter fiscal year 2007. Then, I will follow with additional comments on Sanmina’s results and future goals. Then, David, Joe and I will open up for question and answers. And, with that, I’d like to turn it over to David. David?

David L. White

Thank you Jure and good afternoon everyone. Before we get started please note that selected financial portions of this presentation are available in theform of a slide presentation which can be accessed from the investor relations section of our website atwww.Sanmina-SCI.com. I’ll be making references to these slides during the course of my remarks.

Prior to discussing the state of our business and financial information with you, I’d like to take a moment to review the following safe harbor statement. Slide two – During this conference all we may make projections or other forward looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company’s actual results may differ significantly as a results of various factors including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to the documents the company files from time to time with the Securities Exchange Commission, specifically, the company’s most recent annual report on Form 10K for the year ended September 30, 2006 filed on January 3, 2007, as well as our most recent report on Form 10Q filed on August 6, 2007. These documents contain and identify important factors that may cause actual results to differ materially from our projects or forward looking statements.

You’ll note in our press release today that we have provided you with a statement of operations for the three and 12 months ended September 29, 2007 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. In general, our non GAAP information excludes restructuring and integration costs, impairment charges, loss and extinguishment of debt, non cash stock base compensation expense, amortization expenses and other infrequent or unusual items to the extent material.

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

On today’s call I will review the results of our operations, discuss selected balance sheet accounts, corresponding metrics, provide an update with respect to our restructuring activities and finally, I will include the guidance for our first quarter of fiscal 2008 ending December 29, 2007.

Slide three – Revenue for the fourth quarter of fiscal 2007 amounted to $2.51 billion which is just above the low end of our guidance of $2.5-$2.6 billion versus $2.49 billion in the prior quarter and $2.72 billion in the same period a year ago. Non GAAP earnings for the quarter were $10.2 million which equated to $0.02 per share. This was above our guidance of breakeven. Non GAAP EPS was a loss of $0.04 in the prior quarter and zero cents in the corresponding period a year ago.

As noted in our press release, our fourth quarter GAAP statement of operations includes a $1.1 billion charge relating to the impairment of the carried value of goodwill. Pursuant to SFAS No. 142 companies are required to test the fair value of their non amortizing tangible assets of their reporting units at least annually to determine whether or not an impairment of those assets has occurred. We normally conduct this test in the fourth quarter utilizing the services of an independent valuation firm. As a result of the recent declines we’ve seen in the market capitalization of the company, we determined that a write down of the carrying value of our goodwill was required. This non cash charge caused us to report a GAAP loss per share of $2.10. I’d like to make mention of the fact that this write down which was of a non cash nature, did not have any impact of on our debt covenants compliance. We have been and continue to be in compliance with all debt covenants as of the end of the fiscal year.

Slide four – For the fourth quarter our revenue by end market was as follows: the communication end market represented 28.0% of our net sales which in absolute dollar terms was up approximately 4% from last quarter. High end computing and storage represented 11.8% of net sales during the quarter, sequentially in absolute dollar terms this end market was down approximately 10% quarter-over-quarter. The multimedia end market accounted for 13.4% of net sales during the quarter which was up about 53% in absolute dollar terms versus the prior quarter. You will recall, however, that the third quarter revenues in this end market were down $44 million due to a one time revenue recognition deferral. Excluding this item, revenue would have been up 27% in absolute dollar terms quarter-for-quarter. The medical end market accounted for 7.1% of net sales during the quarter which was down approximately 16% in absolute dollar terms from the prior quarter. The industrial semiconductor capital equipment, defense aerospace and automotive end markets of our business collectively accounted for 9.5% of our net sales and, absolute dollar terms were down approximately 1% from last quarter. Our defense and aerospace sector was up in the prior quarter whereas, our automotive industrial semiconductor sectors were down from the prior quarter. Finally, personal computing systems accounted for 30.2% of our total revenue which was down7% from the prior quarter.

Slide five – Our top 10 customers accounted for 62% of total sales for this quarter. Sales to our top 20 customers amounted to about 73% of total sales in the fourth quarter. We had three customers in the fourth quarter whose sales were greater than 10% of total sales.

Slide six – Gross profit for the fourth quarter was $134.1 million. As a percentage of sales, gross profit was 5.4%, up approximately 60 basis points from both the prior year’s results and from the results from the same period a year ago. Selling general administrative expenses for the fourth quarter excluding, stock compensation expenses were $85.6 million, modestly up by approximately $400,000 quarter-over-quarter. But, down approximately $3.5 million versus the same period a year ago. SG&A expenses as a percentage of sales were 3.4% for the quarter. Revenue and development costs, excluding stock compensation expenses for the fourth quarter amounted to $5.7 million, which is down approximately $370,000 from the prior quarter and down $4.1 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the fourth quarter, again, excluding stock compensation expenses amounted to $91.3 million or 3.6% of sales.

Operating income for the quarter was $32.8 million. Our operating margin for the fourth quarter was 1.7%, up approximately 50 basis points on both quarter-over-quarter and year-over-year basis. Other expense net which consists primarily of interest expense and income, as well as gains and losses from foreign currency translation was $35.8 million versus $31.5 million in the prior quarter. Depreciation was $26.1 million for the fourth quarter, down $1.4 million from the prior quarter. And, our EBITDA for the quarter was $68.9 million.

Our tax division for the quarter amounted to a benefit of $3.2 million on pre-tax non GAAP earnings of $7 million. Our tax benefit resulted substantially from a change in our actual mix of earnings across jurisdictions versus our anticipated mix of earnings previously. Our year end tax rate of 54% was unfavorably impacted as a result of our low earnings.

Slide seven – To provide investors a little more transparency into our business, we report two business segments in our public documents filed with the SEC. The first segment is our personal computing segment which includes business PCs and industry standard servers. The second segment is our core EMS segment which includes the rest of our businesses including our various component businesses. Fourth quarter revenue for our personal computing segment amounted to $736 million, down $64 million from the $800 million we reported in the prior quarter and, down $48 million from the $784 million we reported in the same period a year ago. Gross margins in this sector amount to 2.0% versus 1.9% in the prior quarter and 1.4% in the same quarter a year ago. Fourth quarter revenue for our core EMS segment amounted to $1.77 billion which was up 4.7% in absolute terms versus $1.69 billion in the prior quarter and $1.93 billion in the same period a year ago. Gross margins in our core EMS segment amounted to 6.8% versus 6.2% for both the prior quarter and the same quarter a year ago.

Slide eight – Turning to the balance sheet. Accounts receivable at the end of the quarter were $1.22 billion resulting in DSO of 43.8 days, down approximately 3.6 days from the prior quarter. Inventories at the end of the quarter were approximately $1.1 billion. On an absolute dollars basis inventory decreased by $72.7 million quarter-over-quarter. For the fiscal year, inventory was down approximately $258.5 million and at its lowest level in eight quarters. Inventory turn during the quarter an annualized rate of 8.9 times versus 8.4 times in the prior quarter. Capital expenditures in the quarter amounted to approximately $44 million.

Accounts payable at the end of the quarter were $1.45 billion resulting in EP days of 55.8, essentially flat for the prior quarter. Cash cycle days for the quarter improved to 28.7 days, an improvement of 6.8 days over the prior quarter. While we recognize we still have a lot more improvement to make in this area, our cash cycle days are the lowest since September, 2004.

Slide nine – During the fourth quarter we generated cash flow from operations of $144.9 million. Pre-cash flow, which is cash both from operating and investing activities was a source of approximately $149.6 million for the quarter. We expect to continue to generate positive cash flow throughout the foreseeable future as we continue to focus on reducing our inventories, improving our working capital metrics, selling certain surplus real estate and completing our targeted divestitures. These actions have collectively generated $494 million in cash flow in fiscal 2007.

As a result of our positive free cash flow in the quarter, we reaffirm our intentions of reducing our debt in short term out of our free cash flow. Cash and short term investments at the end of the quarter were approximately $933 million, up $153 million over the prior quarter.

Let me now comment on restructuring. During the fourth quarter we incurred approximately $15.7 million in restructuring expenses, essentially all of which was cash. This expenditure primarily relates to flat closures. During the fourth quarter we completed the previously announced closure of our PCD operations in Phoenix, Arizona. In connection with our remaining closures and other planned restructuring activities, we expect to incur restructuring charges of approximately $75-85 million over approximately the next six months or so. With only a few remaining closures, we believe our restructuring is nearing completion.

As we discussed previously we are actively engaged in the divestiture or restructuring of certain business units and operations of the company. During the fourth quarter we completed one of these divestitures with the sale of our manufacturing operations in Australia. Proceeds from the sale of this operation amounted to $22 million. In regards to the disposition of our personal computing business, we have indicated previously that our expectations were to complete this activity by the end of the fiscal year. As of year end, this action however, was still pending. While we are not in a position to comment on any specifics as it relates to this, or any other pending divestiture activities or negotiations, we do expect to sell or otherwise dispose of this business during the next 12 months. Accordingly, we expect to account for this business unit as a discontinue operation according to SFAS 144, accounting for the impairment or disposal of long lived assets, effective with our reporting of the results of the first fiscal quarter 2008.

Finally, in regards to our stated objectives of reducing our annual operating expense run rate by $60 million by the end of this fiscal year, as of the fourth quarter we achieved approximately $32 million of our targeted operating expense reduction based on the fourth quarter annualized rate of $365 million versus a $375 million annualized run rate as of the first quarter fiscal year 2007. We are continuing to pursue and implement costs reduction actions that would further reduce our operating expenses and expect that those incremental reductions, along with reductions resulting from our planned divestitures we’ll exceed this target. These additional savings should be realized over fiscal 2008.

Slide ten – Let me know turn to guidance for the first quarter fiscal 2008. Consistent with prior quarters, the information I provide will generally exclude stock base compensation expenses, restructuring and integration costs, impairment charges, loss and extinguishment of debt, amortization expense and other infrequent or unusual items to the extent material. Our first quarter guidance is as follows: we’re targeting first quarter revenue of between $2.5 and $2.65 billion. We expect gross margins to be in the range of 5.7 to 5.9%. We are targeting our operating margin to be around 2.2 to 2.4%. We expect our tax rate to be approximately 25%. Basic shares for the first quarter are expected to be in the 527 million range and, diluted shares are projected to be around 530 million. This equates to a non GAAP diluted EPS of approximately $0.02-$0.04 per share. We estimate the depreciation over the first quarter to be approximately $25 million and, first quarter capital expenditures will be in the range of $20-$30 million. Finally, we estimate first quarter cash flow from operations to be around the order of $100 million or more.

I thank you for your time and, with that I’ll turn the time back over to you Jure.

Jure Sola

Thank you Dave. Again, good afternoon ladies and gentlemen. I just want to add a couple of comments about the fourth quarter. I can say we met the financial targets planned basically that we put in place internally. We did have a nice growth in our full business of approximately 5% quarter-to-quarter. The only disappointing side was that our PT business was down approximately 6%. Otherwise, we could have hit the high end of our guidance. We did generate $127 million of pre cash flow, as David mentioned and, also for the year $494 million. I think, that was a good year from that point of view.

What can I say about 2007? It was a challenging year. We’re finishing our restructuring here. The good thing is we’re almost done. It was also tradition year for us, going to a new strategy. I can tell you that a lot of good things got accomplished and I believe that our company today is in a lot better position than a year ago to compete going forward.

Let me talk to you a little bit about restructuring. As I mentioned, it is almost complete. We do anticipate all these final restructuring initiatives to be completed by end of the calendar year 2007. I think there’s possibly one plan that might slip into January/February timeframe.

Now, I would like to also give you an update on our PC business. As we previously made announcement concerning our company’s PC business unit, although we remain focused to sell this business in the near future but, no matter what decision we are, we always have to consider our customers, employees and shareholders because, we have to look at their interests here. We believe this business is going to continue to be profitable and so there’s no panic here. We’re simply not going to give it away. We are expect to give you more information soon. I can tell you that we are working with two different parties at this time. But, at this time I’d really like to keep it at that level.

Now, let me talk to you about operations. I can tell you that overall our operations are executing really well except our end quota systems. As I mentioned to you last quarter, we have some efficiencies issues and unfortunately, this quarter this operation lost money. But, I can tell you during this quarter with new management in place this organization continues to make pleasant surprises and I believe these results will be evident within the company’s overall operating performance in the near future. So, we’re looking for a better day and I’m confident that this team will get the job done.

Let me now make a few comments on our strategy, basically give you some highlights from our strategy for 2008 and beyond. Again, we are exiting PC business, so as we look to the rest of the business for 2008 and beyond, we are really focused on these key markets where I believe technology we have provides, you know, with a global infrastructure in place, it gives us a clear advantage over our competitors. These are in some of the key markets such as communications infrastructure, high end enterprise computing, defense and aerospace, industrial semiconductor capital equipment, medical systems, multimedia, high end, basically high end entertainment at that side of the business and automotive side. I can tell you, as I mentioned earlier, that most of the hard work has been done. We did right size our business and today we are focused and growing these strategic end markets and the key customers. I believe we now have appropriate management team in place that is ready to take on the next growth, what I call internally a second solder. I think we have a right global footprint in place and we offer our customer a leading technology products and services that are basically second to none today globally.

Again, I firmly believe that this vertical integration model that we offer to our customers is key to our success as we do provide an end-to-end solution that our customers are looking for based [inaudible] customer discern and engineering services to high end printer circuit boards and high end back planes, high end enclosures, focusing on plastics, machine, optical module, memory module, all the way to the full system build and logistics. And, I think the key to this vertical model that we have is that each of these products that we offer has a global leadership and has a great global footprint to compete. So, I’m excited about what Sanmina has to offer to our customers, our employees, shareholders in 2008 and beyond.

I know David has just given you guidance but, I’d like to add a few things to that. On revenue, again, $2.5-2.65. Let me break it down by core and PC. For core business in the first quarter we expect to see growth potential up to 5% and for PC for first quarter we expect growth potential up to 10%. As David mentioned non GAAP EPS of $0.02-$0.04 and the most important is we will continue to generate positive cash, at least we expect to generate a minimum of $100 million plus in the first quarter. As we look at the year out from a cash flow, from a pre cash flow point of view, from operation, asset sale and this will also include selling our PC division, we expect to generate between $650 to $750 million in the fiscal year 2008.

As we look at our budget and what we see in front of us from our customers’ point of view, we do expect that we can deliver improved margin quarter after quarter in fiscal 2008 for our core business. We are also committed to drive our auto IC above our weighted cost of [inaudible] as we exited fiscal year 2008 and longer term goal auto IC greater than 20%. And, what I mean by longer term, 12 months out.

Let me talk to you now a little bit about the market conditions. Overall, I can tell you the market is stable. We do have some markets that are up and some a little bit down or sideways but, overall I would call it stable. If you just review our communication infrastructure market, as we mentioned, quarter-to-quarter that was up 4% but, for the year, that was down 28. Some of the main reasons there, as you know, Nortel business we loss in beginning of 2007 and two other customers with the lower demand.

As we look at 2008, we believe that this business is turning for us and, I think, has the potential to grow up to 10% in 2008. Some of the main reasons are some of the new programs that we are winning with existing, or we won with existing customers and we also getting some old programs that we loss at 12 months. So, we’re getting a substantial amount of those back plus the new customer that we’ve been working on in 2007. So, I feel a lot more comfortable about communication infrastructure for 2008. Medical market for us was down last quarter but, it’s really because we had some transition, product transition, mainly delays on the customer side. These are the programs that should start picking up next quarter and following quarter. But, overall, if you look at the medical business for 2007 was up 15% for the year. And, again, as we look at 2008 we do expect to see medical business to grow up, to have the potential for growth of 15% plus. As we look at the defense industrial and automotive group for the last quarter, that group was flat. But, if you look at it for the last year, it was up 17%.

Let me talk to you a little bit about our defense and aerospace. As I had talked to you last time, I told you that we’ve been winning a fair amount of business in that side of our market. Defense and aerospace business just on a quarterly basis was up 24% and year-over-year was up 37%. We definitely expect the defense and aerospace to continue to grow over 35% in 2008. But, if we look at it as a group defense, industrial and automotive we look at the growth of, potential growth [inaudible]. Right now our semiconductor, on the industrial side I will say that semiconductor is probably the slowest one but, the rest of the business are doing fine.

On the high end computing side of our market, that business quarter-to-quarter was down approximately 9%. And, if you look at the year it was down 22%. Now, let me give you some of the reasons. We did exit ODM business and that was really majority of a downturn of that business and, we also had one major customer that went through a merger and there was a delay on that demand. As we look to 2008, we believe this business has a potential for growth up to 5%. So, at least, you know, we stopped the bleeding here and we expect it to move in the right direction.

Multimedia business for us, as I said earlier, that’s for us mainly home entertainment was up quarter-to-quarter 52% and up for the year about 5%. This business is hard to forecast quarter-to-quarter as you always seen that [inaudible] but, if you really look at it on a yearly basis and as we look at 2008, I believe this market has a potential for growth for us up to 10%.

So, let me kind of summarize for you here. As a company we will continue to be very focused on these key opportunities where our high end technology and infrastructure gives us a clear advantage over our competitors and also provide the services that our customers are looking for. We are better positioned to compete than ever before in high end markets today as we are focused strictly in high end markets. The bottom line, we are committed to providing superior service and technology to our customer. Number two, we are focused on margin improvements, as I mentioned, in 2008 and we are focus on driving the shareholders volume. As I said earlier, we’re driving auto IC back to 20% in 12 months from now but, exiting fiscal year at least cost of capital.

Now, I would like to extend a special thank you to all of you for participating in this conference call and I would also like to take, really, express my special thanks to our employees for their hard work and dedication to this company, especially what we went through last couple of years. So, I think that better days are ahead of us. Now, operator we are now ready to open the lines for question and answer. Thank you again.

Question-and-Answer Session

Operator

As a reminder, to ask a question, please press star and then the number one on your telephone keypad. Your first question comes from the line of Steven Fox.

David L. White

Hey Steven.

Steven Fox – Merrill Lynch

Hi. Good afternoon. A couple of questions. First of all, on the divestiture, do you have any guesstimate on what the balance sheet impact will be from putting the PC business as discontinued?

David L. White

Hi Steve. You said the balance sheet impact?

Steven Fox – Merrill Lynch

Yeah. What would be the further write down to book value?

David L. White

Well, we wouldn’t expect any sort of write down to book value number one. As it relates to how we would report it, the assets and liabilities would both be consolidated and reported as one line number under current assets and one line under long term assets and one line item under long term assets, current liabilities I mean.

Steven Fox – Merrill Lynch

Okay. And then, are you suggesting then that we should start excluding it now in our estimates even though you gave guidance including it?

David L. White

I would say to do that in the Q1 call.

Steven Fox – Merrill Lynch

Okay. And then, when you look at the component business here, you mentioned that the enclosures business is still a drag. Can you give us more color on the overall components business? Where are the margins now? And, what happens specifically in PCBs during the quarter?

Jure Sola

Yeah. Overall the component business for us is profitable but it is below the corporate average. As you can see, our core business came in at 6.8%. We do expect to see a nice improvement in the enclosure business in this quarter and, if you look at our printer circuit board business [inaudible] executed really well. The main of that business is starting to come back so I expect them to move their margins in the right directions. Our back planes are doing well in cables and I would say machining and precision machining of that group is doing well. Memory modules was demand has been soft for the last, you know, few quarters. But, we really have a couple of new programs there out so, we expect that business to move in the right direction. I think Steven, if I can make a comment, I think if I look at our component business, this is a year for us to take this business to the next level. Restructuring our printer circuit boards today is 100% complete. What we have today is that we have in North America we’ve focused on military work and a new product introduction and some really [inaudible] boards such as Flex and Regions and so on. All the production has been now moved to Asia so, [inaudible] from that point of view. Enclosure, also all the restructuring is basically done. With the new management we do expect to see some immediate improvements and drive that business to double digit margins. And, of course, our goal to drive our circuit board margins to 20% plus. So, that’s internal goal and I think we’re going to make some right steps in the right direction hopefully, a quarter at a time.

Steven Fox – Merrill Lynch

Jure, can we get some more specifics around where the margins are today?

Jure Sola

The margins are in the just 3% or so.

Steven Fox – Merrill Lynch

Okay. As a combined components entity?

Jure Sola

Right. But, I’d say that, you know, it’s enclosures that [inaudible] last quarter.

Steven Fox – Merrill Lynch

I’m sorry, I lost you there. Can you repeat that?

Jure Sola

Cost of, enclosure [inaudible] us last quarter, I mean this quarter, I say last in Q4, I’d say a couple of cents.

Steven Fox – Merrill Lynch

Okay. And, just one last question on that. So, when you improved your core EMS business from 6.2 to 6.8% that was not, that did not have anything to do with the enclosures improving? Or, did that also?

Jure Sola

There was no, there was no, there was slight improvement but not that much. Most of that improvements came from other components and EMS.

Steven Fox – Merrill Lynch

Great. Thank you very much.

David L. White


Bye-bye.

Operator

Your next question comes from the line of [Gem Souza].

[Gem Souza]

Great. Thank you very much.

David L. White

Hey Gem.

[Gem Souza]

Hey, can you talk a little bit about your standard EMS business with the guidance that you’ve given us now and as we start to model it, it’s still going to be down year-over-year. When can we start to see that bleeding so to speak, to use your words that you did during the conference all, kind of stop now as far as losing share?

Jure Sola

You mean over year in 2008 or 2007?

[Gem Souza]

As we look forward?

Jure Sola

As we look forward we do expect our core business to be better than what we had in 2007. As you can see, last quarter the core went up approximately 5%. Our core business last quarter in Q4 was $1 billion 769.

[Gem Souza]

Right.

Jure Sola

And, as I mentioned earlier, we expect that business to improve up to 5% in first quarter.

[Gem Souza]

So, you’re starting out the first quarter to negative year-over-year and you’re saying in the second half of the year will be better than the first?

Jure Sola

Yeah. If you’re going to be comparing to the first quarter of last year?

[Gem Souza]

Yes.

Jure Sola

I’m not even looking at that. I’m really look at where we’re going from here gem. As I look at where we’re going from here, we do expect to see a growth on a quarterly basis definitely year-over-year.

[Gem Souza]

Okay. And then, as a quick follow up, can you give us the operating profit of the standard EMS business?

David L. White

Not at this time. We don’t normally break that up Gem. But, if you were to look at our business, you know, as we’ve indicated probably before, our PC business typically has about a half of percentage point revenue of operating expense attached to it. So, you can actually get pretty close to arithmetic, I think, yourselves.

[Gem Souza]

Okay. Great. Thank you very much.

David L. White


Thanks Gem.

Operator

Your next question comes from the line of Kevin Kessel.

David L. White

Hello Kevin.

Kevin Kessel – Bear, Stearns & Co.

Hi guys. Can you help us understand a little better what needs to happen to not only fix enclosures but, actually make it a profitable business again?

Jure Sola

Well, Kevin, the enclosures business for us is a key part of our strategy of providing our customer end-to-end. We believe that business will be profitable, nicely profitable in 2008 and we expect to make it profitable soon. That’s number one goal. Number two really is if you look at what is our total solution, what we offer to our customer is high end infrastructure products which require a lot of complicated back planes, a lot of complicated enclosures. We, you know, one of the reasons we’re getting out of the PC business is because we believe that will allow us to focus and grow our core business. As you look at our core business today, as we just mentioned earlier, we have margins of 6.8% and with components not performing at the level they need to be. As we going into 2008 and longer term, we believe that we should, you know, our core business should be a double digit margin business. So, enclosures is going to play a major part of that.

Kevin Kessel – Bear, Stearns & Co.


Right. But, I guess what I’m asking you is it sounds like there are quality issues within the enclosures operations.

Jure Sola

Not a quality issue. It’s really more an execution efficiency issue.

Kevin Kessel – Bear, Stearns & Co.

Execution efficiency issue. So, those get fixed how essentially? You say soon but, I’m just trying to understand because, I think we were at this point last quarter as well, it seems like. Maybe the loss got smaller but, it’s still.

Jure Sola

Okay Kevin, as I mentioned earlier, I think that the basics improvements with the new management took over 90 days, we made a nice improvement and we expect to see a tremendous improvement by, you know, during this quarter and, I don’t want to forecast any what the profitability is going to be but, we expect to make this operation profitable very soon.

Kevin Kessel – Bear, Stearns & Co.

Okay. Then, just a question.

David L. White

Kevin, if I could just add one thing. We do have a new management team and so forth. But, one of the things they have done, is they have built a road map to improving the profitability of that business. So, we do have a detailed plan of execution, you know, to correct some of those issues. It will take some time. But, you know, as Jure said earlier, we are trying, we are driving towards a plan that will have us exiting 08 returning greater than our cost of capital and that would include the enclosures business.

Kevin Kessel – Bear, Stearns & Co.


And, is this localized? Or, is this throughout the operations where these issues need to be addressed?

David L. White

It’s global.

Kevin Kessel – Bear, Stearns & Co.

It’s global. Okay. And, just a question for Joe, if I may. Joe, you’ve been there I guess now for two months or so. What are your top priorities as you see it going forward here?

Joseph R. Bronson

I think, excuse me, I have a terrible cold today. The enclosure business has to be fixed and to provide a little color on this is first of all, a lot of personnel has been changed, more of an experienced personnel deployment in the areas of [inaudible] manufacturing and the areas of supply chain management and design. These are occurring simultaneously in a bunch of plants. Particularly, we’re focusing on improving more than two plants very significantly so we can increase the revenue because, we have a lot more capacity once we introduce these techniques with a system we’ll have a lot more need for revenue and revenue is going to be the big driver of this.

Kevin Kessel – Bear, Stearns & Co.

Thank you.

David L. White

Thanks Kevin.

Joseph R. Bronson

There’s one other thing I’d like to talk about, customer focus is going to be very important and the ability to reduce cycle time is going to be extremely important from our quotation time to getting paid. So, these types of re-measuring our ability to deliver our products to the customers is going to be extremely important in gaining differentiation.

Operator

Our next question comes from the line of Thomas Danis.

Thomas P. Danis – RCP Advisors

Hi. Good afternoon guys.

Jure Sola

Hi Thomas.

Thomas P. Danis – RCP Advisors

Hi Jure. I wanted to just ask you a quick question about the defense and aerospace business. I think last quarter you had said it was running somewhere around $300 million run rate and was expected to grow about 30-40%. Did you have just a little bit better growth this quarter than you had expected and that’s why [inaudible] sort of better than 20 over this next year? Or, is that just, you know you’re kind of shaving that estimate?

Jure Sola

Actually, I said better than 35 next year.

Thomas P. Danis – RCP Advisors

Got it. Okay.

Jure Sola

The whole group, we put industrial defense and automotives in one group. We might change some of that next quarter but, that’s how it is. If you look at the defense itself, you know, we expect to have the run rate in fiscal year 2008 hopefully at $400 plus million. And, it’s really a good business for us and it’s definitely a business we think longer term can be a billion dollar business. As you know, we do have some of our own products down there that we develop so, it’s a sizing piece of the business and definitely delivers a lot better margin than standard EMS.

Thomas P. Danis – RCP Advisors

Okay. Then, one other just point of clarification on some of the comments you made about end market. In the communications business you mentioned getting some programs back. Can you provide a bit more detail as to exactly what that was? Were these prior disengagements? Or, were these where you guys had to fix one or two issues that you were having and then once you fixed those you got the revenue back? Just a little bit of clarification there.

Jure Sola

No, actually we loss some of the business in the communication side of the business, as I said, most of the losses came from Nortel and a couple of other customers that we didn’t have a demand. As you know, the loss business from Nortel had nothing to do with non performance, actually the opposite we performed at really great and our reputation with Nortel today is very, very high. We expect some of that business is coming back to us and we know we already won some of that business. That’s just the nature of this business, orders move back and forth.

Thomas P. Danis – RCP Advisors

Okay. Thank you.

Jure Sola

Thanks, Thomas.

Operator

Your next question comes from the line of Will Stein.

Jure Sola

Hello Will.

William Stein – Credit Suisse

Hey, Jure how are you?

Jure Sola

Good, good.

William Stein – Credit Suisse

David, actually a question for you, I think has been touched on in the past but, if the PC business is going to be put into discontinued ops next quarter, why exactly are we guiding for full company revenue and earnings results? I don’t understand. It sounds like you’re going to report numbers that are on a different basis than the guidance you’re providing.

David L. White

So, primarily two things. One is we’re in the process of trying to carve that out, number one. And, so, we want to have figures that will align themselves with GAAP because, GAAP has very specific perimeters as to how a discontinued operation is reported. And, actually, that’s really the primary reason right there.

William Stein – Credit Suisse


Can you give us a sense as to what the non GAAP EPS number, what the equivalent guidance would be outside of, you know, if we just look at the core business?

David L. White

Well, here’s what we’ve stated before about the PC business. It’s roughly an $800 million a year, or excuse me quarter business of revenue. We’ve already public disclosed a gross profit of about 2%. Our operating expenses on that business are roughly about half or three-quarters of a percent and, there you go. And, the PC division, the PC business operates primarily in low tax jurisdictions so, that will roughly right there be your number right there.

William Stein – Credit Suisse

Okay. Great. One other thing. I was under the impression that in the quarter that just closed that you guys were going to be buying back debt and, I don’t think you did. Is that a priority for cash use in the coming quarter? Any other comments you can provide as to uses of cash would be very helpful.

David L. White

So, we’re certainly not generating cash off the balance sheet towards it. Our intentions are to pay down debt. As you know, we’ve seen in the debt markets here recently in terms of a lot of the credit tightening and so forth, we are really just trying to proceed with caution before we go and take debt out permanently and make sure that we really have a sustainable cash flow in the company that we’re comfortable with. So, we’re just trying to proceed with a little bit of caution but, as I indicated in our comments, or my comments clearly, our intention with the cash flow is to take out debt and, we will be doing so in the next, you know, year.

William Stein – Credit Suisse

So, you’re not clear whether there will be any repurchase of debt in the current quarter?

David L. White

Well, since we haven’t announced anything to that extent, it would probably be inappropriate for me to comment on that at this point what our plans would be.

William Stein – Credit Suisse

Okay. That’s it for me for now. Thank you.

Jure Sola

Thank you Will.

Operator

Next question comes form the line of Brian White.

Brian White – Jefferies & Company

On the enclosure business, it disappointed in this quarter, what specifically was disappointing about the enclosure business and caused you to lose money?

Jure Sola

Well, it was just basically the execution part of the business not being able to ship what they need to ship and just keeping the cost down. That’s basically it.

Brian White – Jefferies & Company

Okay.

Jure Sola

I mean, it’s really, it’s very simple Brian. These are some issues that we have and we have a few plants that are doing okay in this division but, there are a few that need some help and we believe the new team is in place right now to take care of that. We’re confident it will be taken care of. It’s a very simple form of business, unfortunately, you know, it took a little bit longer to get the right team in there.

Brian White – Jefferies & Company

Okay. And, Jure, how many enclosure plants do we have today?

Jure Sola

Today we have six.

Brian White – Jefferies & Company

Six plants. And, what do you think the utilization is at these plants?

Jure Sola

Probably at high 50s.

William Stein – Credit Suisse

High 50s.

Jure Sola

[Inaudible] I mean, we could, I mean if you look at one thing about us right now, the way the structure is we still have a lot of capacity. As David mentioned earlier, we’re not spending a lot of money on additional equipment. So, this company can ship fair amount more with existing capacity.

William Stein – Credit Suisse

And, Jure, what was the growth rate in this business in 07, fiscal 07, sales growth?

Jure Sola

For enclosure?

William Stein – Credit Suisse

Yeah, for enclosures.

Jure Sola

It was basically, I don’t have it in front of me but, from my memory, it was, you know, flat or down.

William Stein – Credit Suisse

Flat or down. Okay.

Jure Sola

Yeah. And, mainly not because there’s no opportunity there. It was really because we couldn’t take orders on. We had to delay the orders, I mean, or turn orders down.

William Stein – Credit Suisse

Okay. And, you think this will.

Jure Sola

This is our first order we need to start taking on more business.

William Stein – Credit Suisse

Okay. And, you think this will grow in 08?

Jure Sola

Yes. Oh, definitely. Oh yes, yeah.

William Stein – Credit Suisse

Jure, just on the end markets, what happened in medical? Where there FDA delay issues in the quarter?

Jure Sola

Well, we can make a comment on that but, basically two customers we had, I’d rather use the word transition.

William Stein – Credit Suisse

Okay. And, how about enterprise? Enterprise, Jure, what happen in enterprise? It was down 10%.

Jure Sola

Enterprise there, if you really look at it was mainly demand from a few customers of ours.

William Stein – Credit Suisse

Okay. And, when we look into the December quarter Jure, what looks really strong in terms of end markets? And, what looks weak?

Jure Sola

Well, definitely defense and aerospace for us looks very strong. I don’t recall anything that is weak from this point of view. As I mentioned earlier, we do expect the core business to improve up to 5% or more. So, you know, nothing is falling off the cliff but, you can maybe say some of the demands could be a little soft.

William Stein – Credit Suisse

Okay. Thank you.

Jure Sola

Thanks.

Operator

Your next question comes from the line of [Matt Sharon].

Jure Sola

Hello Matt.

[Matt Sharon]

Yes. Hi, Jure. Just a follow up on the questions regarding components. Could you give us a revenue run rate for the entire component operation which would include enclosures?

Jure Sola

Well, we don’t break it but, approximately that business is about $1.5 billion run rate including [inaudible]. And, we expect to growth from there. If you look at their capacity, they can probably do well over $2-$2.5 billion.

[Matt Sharon]

Okay. And then, you talked about growth rate in enclosures. Was the PCB business also flat to down on a year-over-year basis for FY 07?

Jure Sola

The PC business was down year-over-year.

[Matt Sharon]

I know that you had some difficulty in transferring volume business and capacity to Asia. Now, how is that going?

Jure Sola

Well, like I said earlier, the good thing about our component business, what I’m personally excited about and I’m the one that is factoring, that is that transition [inaudible] high in printer circuit boards from North America and Europe was very difficult for us. I think we had a great team here in North America, we’re use to building 30, 40, 60 layer boards. As we move this product into Asia, you know, we went over there to compete in these high end boards, it took a long time to train people. If you come to our factories in Malaysia today, they’re building a product that is over 40 layer boards including large back planes. If you go to China, I mean, we acquired those operations two, three years ago, they were doing double sided products, today they’re building some products that are over 18 layer boards. You look at Singapore, I mean, they’re building some, you know, flex [inaudible] and really advanced stuff. So, we are, we move a lot of technology there. So, from a the pure bare point of view we are well positioned right now. And, similar thing with enclosures. I mean, enclosure was a combination of shutting the factories down and opening the new factories in other regions. New factory in Mexico, new factory in Hungary, new factory in China. Those were the challenges, especially in building some of the more advanced type of enclosures. There’s a lot of engineering going on. Stuff that we build is not a really high volume, it’s a high mix of what I call big and ugly but, requires a lot of engineering. That’s really what our strength is. So, that took a long time to get the capabilities up to the level that we use to do it when we were in Sweden or here in North America, or in England.

[Matt Sharon]

Okay. Then, you’re top, your 10% customers, could you remind us who they are? And, when you break out the PC business and your core EMS business, do you have any 10% customers?

Jure Sola

All our 10% customers are in the PC business and nobody else.

[Matt Sharon]

Okay. So that’s HP, Lenovo and IBM?

Jure Sola

Yes.

[Matt Sharon]

Okay. So, you won’t have any in the core business?

Jure Sola

No.

[Matt Sharon]

Okay. Thank you.

Jure Sola

Thanks, Matt.

Operator

Your next question comes from the line of Jeff Walkenhorst.

Jeff Walkenhorst – Banc of America Securities

Hi guys. Thank you. Jure, and I guess David and Joe, this is a question for all of you. You mentioned that you’re committed to driving your ROIC above your [inaudible] capital within the next 12 months. So, and Jure you talked about a 20% number. It seems a bit aggressive but, I guess the right, the [inaudible] helps you get your turns higher. It looks like you need to, where do you think your out margin needs to move to? It looks like basically, if your turns are five times, your out margin would have to be on an after tax basis about 4% and that would be the highest [inaudible]. You’ve been running kind of between 1-2% by our model. How do we, I mean, we’ve already talked about that you think there’s some, sounds like low hanging fruit on the PCB side and enclosure side. Is that really where you think what’s in the next couple of quarters we’ll see this change happen?

Jure Sola

Well, let me tell you where we’re at and then I’ll turn it over to the experts, both David and Joe on ROIC. I know David and Joe worked on it for a long time. First of all, if you look at our, what I call standard EMS business, today that business I think is functioning really well. I would say one of the best in the industry. We are delivering gross margin on that business well over 8%, okay. And, we believe we have room for growth, you know, both in top line and bottom line, that side of the business. Component business is what we call, if we’re going to call low hanging fruit, Jeff are there. We do believe that we can get there and David maybe can give you more, more information on that. But, the goal from a pure business demand is that we believe that the worst is behind us. We believe that even with no growth, if we just fixed our internal issues, we’d have a very good change at hitting, you know, cost of capital exiting fiscal year fourth quarter. But, hopefully, we’re going to do more than that. We do expect to drive the growth and, you know, fix our component business. Our component business should be, on an average it should be delivering over 15% gross margin. Our boats should be over flowing, our inflow should be between, you know, 13 and 15 and back plans and everything else. So, that’s, you know, that’s why we feel very confident that this new strategy will deliver to us a growth margin of 10% or plus. And, I don’t, for us to get the ROIC of cost of capital, David can make a comment on that.

David L. White

Yeah, I guess I would, Jeff, just make two comments. One is that laced our EMS business, our challenge on the EMS side of our business really is down, was really bringing down our net assets. Bringing our inventory down, reducing our AR and certainly stretching out our payables. So, from the EMS side of our business, our challenge in terms of getting to our regular average cost of capital is primarily a balance sheet challenge for us. And, as you look at the pre cash flow we generate over the last year, most of that pre cash flow all comes out of our EMS business. On the component side, the challenge is just the opposite. We certainly have room for improvement on the balance sheet side, I don’t want to take any, relax any on that side of it but, it’s primarily a profit turnaround as it relates to that side of the business. So, those two components together is how we kind of get to achieving that objective by the end of the year.

Jeff Walkenhorst – Banc of America Securities

Okay. A couple of follow ups. On the balance sheet, if you’re talking about stretching payables, where do you think the numbers go? You’re already in, you’re in the mid 50s now. Is that push higher to the 60s or?

David L. White

Well, if you look at all of our working capital metrics, our payable metrics are, perhaps, the most out of line with our competitors. And so, if you look at the difference between us and the leaders, you might say, in the industry and I think on this particular metrics we’re, you know, 15 days or so roughly behind them. And so, we have a lot of work to do on that and, you know, that’s going to involve customers, customer negotiations because, a lot of suppliers that we deal with they’re on their ABL approved by them. So, just a lot of hard work I think to make that move. But given our competitors have been able to demonstrate that we just don’t see any reason why with the right focus we can’t do the same.

Jeff Walkenhorst – Banc of America Securities

Okay.

Jure Sola

If I can add, Jeff, I would expect us to get over 60 days, easy.

Jeff Walkenhorst – Banc of America Securities

Okay. Alright. On the profit side of the component segment, is that down from where it was in the year ago period?

Jure Sola

Excuse me, Jeff, could you repeat that?

Jeff Walkenhorst – Banc of America Securities

The profit margin for the component side of the business, was that down?

Jure Sola

Yeah, I mean, if you compare it to a year ago, yeah. The margins in first quarter last year, margins were a lot better, I mean, then they are today. And, the biggest impact today really is enclosures. The rest of the business are very close to the company average.

Jeff Walkenhorst – Banc of America Securities

Okay. And, how confident are we that we can see improving, I think you did say that you expect to see improving margins kind of on a sequential basis as you move through 08.

Jure Sola

Yes. We’re expecting most of that, of course, most of those margins that we’ve been planning for this coming quarter, all the margin improvements are coming from our core business. They’re not coming from PC, they’re coming from the core business.

Jeff Walkenhorst – Banc of America Securities

Okay. And then, one last question, it sounds like from a macro standpoint even if you said your growth is flat, you still think you can achieve the better margins and ROIC gain.

Jure Sola

Even if the revenues flat, as long as we fix what we said we’re going to do in our component business, we should deliver the ROIC higher than taxable capital.

Jeff Walkenhorst – Banc of America Securities

Okay. Good luck guys.

Jure Sola

Thanks Jeff.

Operator

Your next question comes from the line of [Amit Ariani].

Jure Sola

Hello Amit.

[Amit Ariani]

Hi, how are you Jure? Just a quick [inaudible] on the AP stuff, you know, historically AP has been depressed because of your PC relationship. So, once that gets discontinued, or you guys sell that business eventually, how much of a benefit do you get on the AP basis from there?

David L. White

Not, the PC and AP days are not vastly different from the EMS. We’ll pick up a few days.

[Amit Ariani]

Alright.

David L. White

Not a lot.

[Amit Ariani]

Alright. And then, the multimedia segments, it sounds like we had some pretty good re-strength over there with an extra [inaudible] benefit. Was that seasonality? Or, was that new customer ramps?

Jure Sola

Well, for us that’s a grey water. You know, our multiple customers in that business, for us, you know, that business, it’s very hard for us, you know, forecast on a quarterly basis. It’s better to look at it on a yearly basis. So, just because you had a jump one quarter doesn’t mean it’s going to continue to jump every quarter. So, really, I mean, to look at this business more on a yearly basis and we expect that business to have a potential for growth about 10% flat next year.

[Amit Ariani]

Alright. I may have missed this but, enclosures in June quarter you had about $10 million losses. Was it worse or better than that this quarter? I know you had a loss but?

David L. White


It’s about the same.

[Amit Ariani]

Alright. And then, just finally, and I think somebody asked you about, you know, how you guys hedge your ROIC north of your cost of capital, I’m just wondering if fiscal 08 ends up being much to the end of the last three years. I mean, the revenues have gone down and ROIC is being single digits. What’s the plan b for the company in that scenario?

Jure Sola

We don’t have that plan. We have a plan we’re going to fix stuff. We’re not worried about that plan. I think, you know, we know where we’re at today, we know where our issues are, what we fixed and where we’re going. I think we make, you know, if you look at, you know, the improvements that we’ve made are very positive and, you know, we’re doing a great job for our customers and we expect, you know, it’s a $7 billion start up and, believe me, we’re going to be a player for many years to be there.

David L. White

I would just add, to reiterate a point Jure made earlier, our plan, our intentions are that even if revenues flat, we will improve ROIC. And, if you look at even last year, you know, we certainly generate a lot of cash throughout the balance sheet, you know, in that kind of scenario. So, we certainly believe we can achieve it, if flat.

[Amit Ariani]

Fair enough. Thanks a lot guys.

Jure Sola

Bye-bye.

Operator

Your next question comes from the line of [Lewis Maciocia].

David L. White

Hello Lou.

[Lewis Maciocia]

Hey, how are you guys?

Jure Sola

Good, good.

David L. White

We’re still having fun.

[Lewis Maciocia]

That’s all that counts. David, I guess, if we look at the PC business, can you share with us what the book value is of that?

Jure Sola

Well, I, you know, it depends on what inventory is. It can be anywhere from, you know $140-$175.

David L. White

To $175. Most of it’s inventory Lou.

Jure Sola

Yeah.

David L. White

Plant equipment is, you know, roughly $15-$20 million.

[Lewis Maciocia]

Okay.

David L. White

Which most of that’s building.

Lou

Okay. Just running through some of the quick numbers you had given on the call. I guess I get to that the PC business contributes because, it’s been consistently profitable and I’ve never been one to dislike it as far as your structure, about $0.085 on an annual basis? Is that about right?

David L. White

That’d be in the range.

Lou

And, I know that you’re going to take some cost out but, that’s below, you know, obviously the gross margin and the SG&A and R&D line. So, do you think you’re going to be able to make most of that back up? Or, do you think you’ll just have to replace that $0.085 through restructuring and other things?

David L. White

Well, we’ll use, you know, we’ll use it to pay off debt number one which, obviously reduces interest expense strain. So, that somewhat mitigates, some of it mitigates that. The other thing is, as you know, we are planning further cost reductions as I mentioned, you know, that we’ll take out during the cost of this year that will further mitigate it.

Lou

Okay. But, the interest on the debt you take out, probably only take out a quarter, or say half of it, I guess?

David L. White

Well, I’m not going to guide you on how much money we’re going to get for the PC business. Or, how much we get on the disposition of it.

Lou

Okay. Fair enough. One last question. On the infrastructure side, I guess, your comments on the high end enterprise, you gave great guidance, Jure, thank you for all the different areas. On those two areas, do you actually see more outsourcing coming? Or, are they all, obviously, pretty mature. I mean, you look at, obviously, CISCO, Nortel, Lucent and many others and they’re 100% virtual. So, is it mostly trying to get share gain and improve margins or is it actually to get new outsourcing?

Jure Sola

Well, I think, as you mentioned, most of these big companies outsource, you know, most of it. I would say probably, if I had to estimate, for some of the customers you mentioned, probably about 70%. But, they’re still there to be outsourced with some other players around the world. So, we believe outsourcing will continue fair amount of the growth is coming because of outsourcing and also, the new programs that are coming out and it’s just all those programs done by, you know, on and so on. So, we do expect that part of the business, for us, to turn in the right direction.

Lou

Okay. Great. Good luck on the new year coming.

Jure Sola

Thanks.

Operator

Your next question comes from the line of Yuri Krapivin.

Jure Sola

Hello Yuri.

David L. White

Hi Jure, how are you?

Jure Sola

Good, good.

Yuri Krapivin – Lehman Brothers

You know, question on your PC business. I thought that one of your customers there decided to bring business in-house. Has this process started yet?

Jure Sola

That process did not start yet.

Yuri Krapivin – Lehman Brothers

When do you expect it to start?

Jure Sola

It really, it’s hard to forecast at this time. We really can’t estimate it. We have some internal information but, we really can’t share that with you.

Yuri Krapivin – Lehman Brothers

Okay. And then, my second question is on the tax rate. So, you are guiding December quarter tax rate of 25%. I guess, that’s including the PC business. If we exclude the PC business, what should be a proper tax rate for the core business?

David L. White

We wouldn’t expect that to change materially.

Yuri Krapivin – Lehman Brothers

Okay. And, can you share with us your expectation for capital expenditure, I guess, for your core business in the coming year?

David L. White

I think the only guidance we’ve given is on a quarterly basis and that was $20-$3 million this quarter which is roughly the amount of cap ex to sustain the business.

Yuri Krapivin – Lehman Brothers

Cap ex, $25 million?

David L. White

$20-30 million a quarter.

Yuri Krapivin – Lehman Brothers

Okay. Thank you.

Jure Sola

Thanks Yuri.

Operator

Your next question comes from the line of [Alex Planton].

Jure Sola

Hello Alex.

[Alex Planton]

Good afternoon.

Jure Sola

How are you?

[Alex Planton]

Fine. You mentioned that you’re getting business from Nortel that you had previously loss and, of course, with the merger of Flextronics and Selectron, they really have only one supplier now. So, I would think that they would be looking to have some alternatives. Is that why the business is coming back to you? That they need to have more than just one supplier?

Jure Sola

Well, let me answer this way. Alex, we had relationship with Nortel now for 27 years and our relationship with Nortel was always perfect except one year out of 27. That was about a year ago. I mean, you know, as Nortel grows and they have new programs and they need additional capacity here and there, that’s kind of how we’re winning it. We’re really, you know, based on our performance and our relationship. It’s not fair for me to make comments what’s going on with other, you know, relationships. I know there are other company that does the majority of the work, does a great job for it. So, we just got to make sure we do our job and we have, you know, great opportunity there to win some of our business, well, maybe it’s not the same business but, at least get the dollars back that we use to do with them.

[Alex Planton]

So, it is communication infrastructure. Is it wireless or wired?

Jure Sola

Well, it’s basically across [inaudible].

[Alex Planton]

Excuse me?

Jure Sola

Across all the product lines.

[Alex Planton]

Across the product lines, you say?

Jure Sola

Across all the product lines.

[Alex Planton]

Okay. That’s useful. The second question is, on the goodwill write down $1.1 billion, I noticed you, I think, have about half a billion left. What was written down? The two biggest acquisitions that I remember were Hatco which was the PCB business and SCI. So, it was probably those two but, could you be more specific on what you wrote down. Because, that implies that the earnings power of that particular part of the business is impaired.

David L. White

Yeah, Alex let me see if I can explain it to you.

[Alex Planton]

Okay.

David L. White

Under accounting rules, when you do an acquisition and you create goodwill as a result of that.

[Alex Planton]

Right.

David L. White

That goodwill gets merged in to the goodwill of that reporting unit. So, we have three such segments in our business, the PC, the components and the EMS business.

[Alex Planton]

Okay.

David L. White

All of that goodwill is allocated only, is allocated across those three segments. We don’t have goodwill for, let’s say, pending the SCI merger, we don’t have goodwill for Hatco, we don’t have goodwill for any of those things. They all get kind of merged into a pot you might say for each of those reporting segments. So that when we do an impairment of it now said and so forth, you’re looking at the total amount of goodwill in that business relative to the income that that benefits can generate relative to the valuation of that business unit. And, to the extent that there’s an impairment, you’re just simply writing off an amount that came out of that pool. It’s not earmarked, you know, as to which acquisition.

[Alex Planton]

So, what you’re doing is you’re looking at those segments that generated the goodwill and you’re deciding what the future earnings could be, right? As a total?

David L. White

Again, to each of those segments. Right. Back stopped by what the current market valuation is. So, we may have certain expectations as to what we believe we can do with the business when we turn it around and improve it, etcetera.

[Alex Planton]

Yeah.

David L. White

But, given the market cap of the company and the other price value of our debt, etcetera, the market value of our debt, those two together. You’re some what capped from the valuation standpoint as to how much, you know, your projections really weigh into that analysis. So, you know, it’s all, like I said, it’s all in one pot and, you know, gets looked at individually and written off individually.

[Alex Planton]

Yes. Now, is it the case though that the earning power of these assets has really been interred?

David L. White

Well, I guess that’s a matter of debate, right. You know, I could put together an analysis, or I can show you our plans and so forth and they might lead to one answer but, when the market has voted with the valuation they prescribed to the company that’s voting for a different answer, right? So, we’re really capped by, you know, how the market kind of views the value of the company right now and that’s really what kind of drives the back end of that analysis.

[Alex Planton]

Alright. Thank you.

David L. White

You bet.

Jure Sola

Thanks Alex. Operator, that was the last question. So, again, I wanted to say thank you to everybody for participating on this call, I appreciate it. If you have any more questions, please give us a call and we’ll make sure that we get back to you. Thanks a lot. Bye-bye.

Operator

This concludes today’s conference call. You may now disconnect.

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