Sanmina Corporation
Q3 2008 Earnings Call Transcript
Published:
- Operator:
- Good afternoon. My name is Chanel, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI fourth quarter fiscal year 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. I will now turn the conference over to Jure Sola, Chairman and Chief Executive Officer of Sanmina-SCI.
- Jure Sola:
- Thank you, Chanel. Good afternoon, ladies and gentlemen and welcome to Sanmina's fourth quarter 2008 conference call. Thank you for being here. Joining me on this conference today are Joe Bronson, Hari Pillai, and David White. For those of you that didn't read our press release, we did make a management promotion here. Hari Pillai was promoted to President and Chief Operating Officer starting today. Joe Bronson was brought here, and was a friend of mine for many years, as a customer about a year ago, and I asked him to help me strengthen the management. He knew it was a short project. I want to say, in front of everybody, thank you, Joe. And most importantly, I think Joe helped me transition this. I think Hari is the right man for the job. After being here for 14 years, I think he's the best person for it. So with that I want to also congratulate Hari.
- Hari Pillai:
- Thank you, Jure.
- Jure Sola:
- Let's go to the agenda. David White will review our financial results for the fourth quarter of fiscal year 2008. Then I will follow up with comments related to Sanmina's results and future goals. Then we'll open for question-and-answers with basically all of us here. And now, David.
- David White:
- Thank you, Jure. Before I get started, please note that selected portions of our presentation today are available in the form of a slide presentation on the Internet, which can be accessed from the Investor Relations section of our website, www.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. During this conference call, 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 of operations may differ significantly as a result 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 and Exchange Commission, specifically the company's most recent Annual Report on Form 10-K for the year ended November 28, 2007, as well as our most recent report on Form 10-Q filed on August 4, 2008. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You'll note in our press release issued today that we have provided you with a statement of operations for the three months and twelve months ended September 27, 2008 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 on extinguishment of debt, non-cash stock based compensation expenses, 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 in our non-GAAP financials results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income, and earnings per share, we're referring to our non-GAAP information. The GAAP financial information presented today is preliminary. Given the recent significant decrease in the company's market capitalization, similar to that experienced by other companies in the EMS industry, the company has undertaken review of the value of the goodwill carried on its balance sheet using the two-step test contained in Statement of Financial Accounts Standards SFAS142, Goodwill and Other Intangible Assets. The company does not expect to complete this review until mid-November. Should the company determine that its goodwill has become impaired under FAS 142, it will be required to record a non-cash charge which could be significant and would reduce our reported GAAP net income and earnings per share for the fiscal quarter and year ended September 27, 2008, and which would be included in the financial statements filed with the company's annual report on Form 10-K. The non-cash charge if any, would not impact the non-GAAP financial information presented this release. Prior to describing our financial results, you'll recall that, effective with our second quarter, our personal computing business and the related logistic services have been accounted for as discontinued operations. Our fourth quarter results as reported here today will also be the last quarter we would report any results for the discontinued operations of this business. My comments today will focus almost entirely on results of our continuing operations, including a review of results of operations, a discussion of selected balance sheet accounts and corresponding metrics, an update with respect to our restructuring activities, and I will conclude with guidance for our first quarter of fiscal 2009 ending December 27, 2009. Revenue from continuing operations for the fourth quarter of fiscal 2008 was $1.7 billion, which was below the low end of our guidance of $1.8 to $1.9 billion, down 10.5% versus $1.9 billion in the prior quarter, and down 2.9% versus $1.75 billion in the same period a year ago. As you'll see in my comments shortly, our quarter-over-quarter decrease in revenue was across all but one of our seven end markets, a fact that we largely attribute to a weakening global economy. As for the fourth quarter, we reported GAAP earnings from continuing operations of approximately zero, which equated to $0.00 a share, and a total company GAAP loss of $11.2 million, which equated to a $0.02 loss per share. Non-GAAP earnings from continuing operations for the quarter were $24 million or $0.05 per share. This compares with $0.05 per share in the prior quarter and a loss of $0.02 per share in the same period a year ago. For the full year, we reported non-GAAP earnings from continuing operations of $69.6 million, or $0.13 per share, a $128 million improvement over a loss of $58.3 million, or $0.11 per share, reported in the prior year. For the fourth quarter, our revenue, by end-market, was as follows. The Communications end-market represented 41.2% of our net sales, which in absolute dollar terms was down approximately 15.5% from last quarter. Enterprise Computing and Storage represented 18.4% of net sales during the quarter. Sequentially, this market was down 10.1% in absolute dollar terms quarter-over-quarter. The Multimedia end market accounted for 15.5% in net sales during the quarter, and was down 7.3% in absolute dollars term versus the prior quarter. The Medical end market accounted for 11.1% of net sales during the quarter, which was modestly down approximately 3.1% in absolute dollar terms from the prior quarter. Finally, our Industrial Semiconductor Capital Equipment, Defense, Aerospace, and Automotive end-markets of our business collectively accounted for 13.8% of our net sales and in absolute dollar terms were modestly down 3.3% relative to last quarter. The industrial segment was up, whereas the automotive and defense aerospace segments were each down. Our top ten customers accounted for 49% of total sales this quarter. Sales to our top 20 customers accounted to about 62% of total sales in the fourth quarter. We had no customers in the fourth quarter whose sales were greater than 10% of total sales. Gross profit for the fourth quarter was $132.8 million. As a percentage of sales, gross profit was 7.8%, which was up approximately 40 basis points from the prior quarter as a result of continued progress in improving operating efficiencies in our EMS business, as well as favorable resolution of certain inventory and working claims with customers. When compared to the same period a year-ago, our gross margins were up approximately 150 basis points. Selling and general administrative for the fourth quarter, excluding stock compensation expenses, were $68.8 million, down approximately $6.5 million quarter-over-quarter, and down approximately $12.8 million versus the same period a year ago. Research and development costs, excluding stock compensation expenses, for the fourth quarter, amounted to $4.7 million which was down $1.1 million quarter-over-quarter, and down approximately $900,000 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 $73.5 million, or 4.3% of sales. These expenses have continued to trend downward over the last year, as we have focused on reducing infrastructure cost in preparation for our exit from the personal computing business. Given the current economic environment, we expect to further reduce our operating expenses over the next six to twelve months, as we continue to drive for additional operating (inaudible) efficiencies. Operating income for the quarter was $59.3 million. Our operating margin was 3.5%, up approximately 30 basis points quarter-over-quarter and up 220 basis points on a year-over-year basis. Net interest and other expenses, which consist primarily of interest income and expense as well as gains and losses from foreign currency translation, was $29.8 million versus $23.1 million in the prior quarter. This quarter-over-quarter change was primarily the result of a modest foreign exchange gain recognized in the third quarter, versus the modest foreign exchange loss in the fourth quarter. Net interest and other expense in the same period a year ago was $35.8 million. Depreciation was $20 million for continuing operations for the fourth quarter, which was down $600,000 approximately from the prior quarter. Our EBITDA for the quarter was $79 million. Our tax provision for the fourth quarter was an expense of $5.5 million on pre-tax, non-GAAP earnings of $29.5 million, for a tax rate of approximately 19%. Our lower tax rate reflects the favorable impact of first phase of a number of business model changes we are pursuing to radically reduce our effective tax rate over the next year. Turning to the balance sheet, accounts receivable at the end of the quarter were $970 million. Excluding any factoring of receivables, our gross DSOs for the core business was approximately 52 days, which was up approximately half a day from the prior quarter. Inventories at the end of the quarter were approximately $813 million, down approximately $137 million quarter-over-quarter, of which $49 million related to the final sale of inventory associated with our personal computing business. Inventory days at quarter end were 47 days or 7.7 turns, essentially flat versus the prior quarter. Our fourth quarter inventory performance for continuing operations resulted in the lowest inventory levels in at least 12 quarters. Net capital expenditures in the quarter amounted to approximately $19 million. Accounts payable at the end of the quarter were $891 million, which equated to AP days of approximately 52, an improvement of 2.6 days versus the prior quarter. Overall our cash operating cash cycle for the fourth quarter, which we define as unfactored, or gross cash cycle days, was approximately 47. Turning now to cash flow, we have maintained a facility for selling or factoring our trade custom receivables associated with our personal computing business, and we regularly factored those qualifying receivables a means of managing our available cash position. At the end of the third quarter, we had $292 million advanced to us under those facilities. Subsequent to the sale of our personal computing business, we had to replace that facility with a new $250 million committed facility structured especially for our continuing EMS income powered operations. Except for $16 million, that facility was largely undrawn at quarter end. We believe we have ample cash and available liquidity to meet the needs of the company. As such, while we will maintain this new facility, we do not currently intend to be active in factoring our receivables for the foreseeable future. As a result for this, however, our ending cash position was impacted unfavorably by about $280 million. If you exclude this amount, our normalized free cash flow was approximately $173 million for the quarter and $329 million for the year. Free cash flow including this amount was a negative $144 million for the quarter and a positive $51 million for the year. Our debt at the end of the fourth quarter was $1.48 billion, which was flat with the prior quarter. Our earliest debt maturity is $180 million which is due in June of 2010, and our next maturity isn't until 2013. Cash and short-term investment at the end of the quarter was approximately $870 million. Based on the adequacy of our current available cash and other sources of liquidity, we announced today in our press release our intention to purchase up to 10% of the company's outstanding shares of common stock based on today's closing price. We may purchase up to $10 million of our stock, the maximum amount currently permitted under our credit agreements. We may repurchase additional shares under the program as these restrictions expire or are modified. Purchases under the program were made at prevailing market prices or negotiated transactions off the market. This program will continue through December 2009, unless otherwise determined by our Board of Directors. Let me now comment on restructuring. During the fourth quarter, we incurred $13.3 million in restructuring expenses, of which $12.6 million represented cash payments during the quarter. This expense primarily relate to reductions in force associated with previous announcements in Western Europe and North America, as well as restructuring of various corporate functions. Now let me turn to guidance for the first quarter of fiscal 2009. Consistent with prior quarters, the information I provide will generally exclude stock-based compensation expenses, restructuring and integration cost, impairment charges, loss on extinguishment of debt, amortization of expense, and other infrequent unusual items. Our first quarter guidance for continuing operations is as follows
- Jure Sola:
- Thanks, David. Again, good afternoon, ladies and gentlemen. As David mentioned, our fourth quarter revenue came in at $1.7 billion, definitely below our expectations. We had major customer rescheduling in last weeks of the fourth quarter, which scheduled out of quarter well over $100 million in revenue. We had greater than anticipated demand for virtually all of our markets, as David shared with you earlier. On a positive side, we had a nice margin improvements in our fourth quarter, record margins for last seven years, of 7.8% Operating margin was also a record, up 3.5%, so all the steps that we are taking are really driving those results nicely. EPS up $0.05, and also we generated a lot of cash in the fourth quarter, $173 million or $0.33 per share, and as David mentioned no A/R factoring in the quarter. Let me make a comment about 2008. It was a successful turnaround year for us. We did a lot of work finishing all our major restructuring, which is now behind us. We put the new strategy in place, focusing on the markets in which we do have a competitive advantage. From the revenue point of view, it came in at about $7.2 billion, slightly up from 2007, but basically it was a flat year. We had a reasonability good visibility through the year, except the last quarter. We also improved the mix of the customer base in 2008, and really drove the quality of the margin up. That is one of the reasons I think that our margin is up; because of the quality of the mix. On operating income, grew nicely to $206 million, up 102%. EBITDA came in at $287 million. So some nice results in a year that we all felt was a good year, and we just didn't expect that the fourth quarter would be slow as it turned out to be. Positive cash-flow was a key thing for us here to drive, and 2008 was no different. We brought in $329 million of free cash flow, which is approximately $0.62 free cash flow per share. Now let me talk to you about our guidance for December quarter, which is our first quarter of fiscal year 2009. First, today we have a definitely limited visibility. It's very challenging in this global economy today. We do estimate the quarter for fiscal year 2009 revenue to be in the range of $1.425 billion to $1.625 billion, and non-GAAP EPS of (inaudible). At this time, we anticipate demand to continue to be weak during this quarter. On a positive side, we do expect to generate positive cash flow in the quarter of $50 million to $100 million, and for fiscal year 2009, we expect to generate $200 to $300 million of free cash flow. Now the question is how Sanmina-SCI is going to weather this stock environment. Let me give you some facts
- Operator:
- (Operator Instructions) Your first question is from the line of Jim Suva with Citigroup.
- Jure Sola:
- Hello Jim.
- Jim Suva:
- Great. Thanks very much. You gave us some great information about the cash flow of next year, $200 million to $300 million. Can you let us know what the sales basis was for that assumption?
- Jure Sola:
- Right now it's hard to forecast the revenue, but we assume that the market is not going to get better. We did our budget about eight weeks ago. Two weeks ago we had to do a budget what we call plan B internally. So, plan B is based on really assuming that nothing has gotten better. As you can see, based on forecast our customers especially in our Telecommunication, Enterprise Computing, Multimedia really is down a lot. So we think, this is pretty bad right now. We assume, if this continues for next four quarters, we'd still be able to stay profitable, generate the cash that I just talked about, and position ourselves for a better time.
- Jim Suva:
- So, on prudence, would you say it would be reasonable to generate or model sales down for next fiscal year?
- Jure Sola:
- Right now, Jim, at this time, for us it's tough to forecast. As I talk to our customers, some are more optimistic than others, but I don't know if it would be really fair for us to say what is going to be. I would say it's going to be close to that. We can ship lots. Let's put it that way. So, I think we are just planning the worst case situation and we are going to work very hard to fight what is out there and hopefully we win. We feel comfortable. We do because the restructuring is behind us; the only thing that we have on our plate right now is to watch the cost and book the new order that the customer wants us to bill.
- Jim Suva:
- Okay. Maybe I'll switch topics for my follow-up then. When you talked about seeing additional outsourcing, can you talk about your appetite for asset purchases versus outright outsourcing wins and it seems like you still have internal capacity where you wouldn't need to make asset acquisition, is that fair?
- Jure Sola:
- It is fair. We are not interested really, in an asset unless there's maybe a transition period, and what our customer is paying for that but we have no interest to take on more assets just for asset sakes.
- Jim Suva:
- Great. Thank you, very much.
- Jure Sola:
- Thanks Jim.
- Operator:
- Your next question is from the line of Steven Fox with Merrill Lynch.
- Jure Sola:
- Hello, Steve.
- Steven Fox:
- Hi, Good afternoon. First of all, how on the $200 million sequential decline in sales you were able to improve gross margins by 30 to 40 basis points. Can you just break that down for me, please?
- Jure Sola:
- Well, Steve, this business is all about the mix, and we have a very good mix in the quarter, and we've been taking a lot of cost out. If we can ship $1.7 billion this quarter, I think you are going to find out our gross margins will be around the point. So we don't believe that is a one time deal. We've been working in improving this cost for the last six quarters, and I think our new model is very efficient and as I've said earlier, I think the business that we have today with the proper mix should deliver better than 8% gross margin.
- Stephen Fox:
- Okay.
- Jure Sola:
- The biggest margin impact came from our EMS business. Our component business is still not producing the gross margin at the corporate average.
- Stephen Fox:
- So the EMS margins improved but the component margins didn't improve or how should we?
- Jure Sola:
- They improved slightly but, like I said, they are below the corporate average.
- Stephen Fox:
- Okay. When you say that you would be able to get operating income to grow next year but you are not willing to talk about the sales growth tied to that, what type of cost savings do you feel like you have built in to make a statement like that? How much cost savings are you anticipating irrespective of volume growth?
- Jure Sola:
- Well, as David said, we are taking more out of our SG&A and we are taking a fair amount of money out of our operational cost. Assume that business is not going to get better, we are taking the cost based on the present business and based on that, plus efficiencies that we were not 100% efficient last year either.
- Stephen Fox:
- Right, but it would be really helpful if you could put specific numbers around that so that we can sort of assess the potential for you really doing it, given that sales are disappointing and we have to lower our sales forecast again. It's really hard to understand how that happened.
- Jure Sola:
- Well, I think Steve, it's really tough to forecast, but I would say that we are going to -- let's say, last year we shipped about $7.2 billion. Right now I would say plus or minus 5% from that number if I have to guess, and that's strictly a guess.
- Stephen Fox:
- You can grow operating income if you are plus or minus 5% of $7.2 billion?
- Jure Sola:
- Yes, I can.
- Stephen Fox:
- Okay. All right, that's helpful. Thank you.
- Jure Sola:
- Thanks.
- Operator:
- Your next question is from the line of Brian White with Collins Stewart.
- Jure Sola:
- Hello, Brain.
- Brian White:
- What did you see in September? You said it slowed at the end of the quarter. And then maybe what you are seeing in October in terms of the end market demand trends, and do you think any markets will go up quarter-on-quarter in the December quarter?
- Jure Sola:
- Maybe I'll turn this one over to Hari a little bit.
- Hari Pillai:
- Brian, we've been pretty conservative in our planning, and we are not banking on any upside in any particular market. As David relayed, when we talked about our Q4 numbers the softness was across all sectors.
- Brian White:
- And maybe discuss the trend in September/October? Has October further deteriorated from September?
- Hari Pillai:
- I believe the pace at which we saw the drop-off has slowed down a bit, and so we feel much more comfortable around the guidance we've given out today.
- Brian White:
- Okay. And if we look in the December quarter, what are the two markets that you think will go down the most?
- Jure Sola:
- Brian, it is really hard to forecast right now what markets will going to go down the most. We are talking to our customer and making sure they don't go down. At this time, as Harry said, we feel more comfortable with our guidance today than if we had this call two weeks ago. But I think I would be just guessing if I give you any number out there, so it's not fair.
- Brian White:
- Okay. And Jure maybe just on the PCB fab business, is that business profitable and what margin level are we out there?
- Jure Sola:
- It is single-digit, it is up towards the single digit profitability, and again, our circuit board business is all now about the demand. We are focused on really advance circuit board product. As you can see, the biggest slowdown we have was in our enterprise computing and communications side of the business which is mainly for us infrastructure. But, we are well positioned there as our restructuring is done, so that factor is really all about now growth again.
- Brian White:
- And single digit operating margin or gross margin?
- Jure Sola:
- Right now, it's a single digit. The way we do it internally, it's really we judge them on the gross margin and then we bring into the corporate number. But they have made money.
- Brian White:
- Okay. Thank you.
- Operator:
- Your next question is from the line of Louis Miscioscia with Cowen and Company.
- Jure Sola:
- Hello, Lou.
- Louis Miscioscia:
- Hi. Maybe if you could go into cash flow a little bit more and break it down for us. In both first quarter and then for the full year, I mean, those are obviously pretty nice free cash flow numbers and obviously net income is under pressure, so what else are you factoring in there when you look at both first quarter and the full year?
- Jure Sola:
- Let me just give you my highlights here and the way we are driving and then David you can give you more details here. If I look at it, approximately $300 million, about $200 plus million is going to come from our operations, and $80 to $100 million will come from our asset for sale, okay? But, during the first quarter everything we do, majority of that is coming from operations. David?
- David White:
- Yes. The only color I would add to that Lou is if you look at our cash flow generation over the last couple of years, the large majority of it has been associated with aggressively going after our working capital metrics, reducing inventory, A/R, A/P et cetera, and sometimes that may not necessarily show up in one bucket versus another, but we wind up getting it out on net basis. So for example, we may give up something on the A/P side to get flexibility on the inventory side. So, when you put that whole piece together, when we are negotiating with supply chain and customers, and so forth, our objective is to bring that net number down, and I think that's really what we've done over the last couple of years, and that's certainly the plan for '09 and we believe we still got opportunity out there to continue driving that down.
- Jure Sola:
- Lou, if I can add? I think you have to look at historically what we accomplished. If you look at 2008, 2007, we generated almost around $800 million of free cash flow, and I think we've got our assets pretty efficient right now. This coming quarter we drove the inventory this quarter by $88 million, and we are going to continue to drive the inventory down. And even in a busy market, I think our inventory turns will go up.
- Louis Miscioscia:
- Great. David, another follow up. Your comment on the goodwill, and also let me tie in the same question about the possible buyback. If goodwill does have to get written down, is there anything that you want to mention to us about covenants you might have on your bonds, and then with the same concept, the covenants and wanting to buy back stock? How difficult will it be to change some of those covenants that seem to be restricting the actual buyback of stock?
- David White:
- On the goodwill side of it, and in relation to our covenants, all of our covenants as a company, our public debt as well as our bank debt, are all on the basis of cash earnings, which excludes non-cash charges like goodwill, write-offs and so forth. So a goodwill write-up would have no impact whatsoever on any of our covenants. As it relates to your question on the stock repurchase, currently we have a limitation of $10 million under one of our bank line of credit, and we expect that to be renegotiated before the end of the quarter.
- Louis Miscioscia:
- Okay. And you already put in the press release that the Board will authorized upto 10%.
- David White:
- Right; correct. At today's ending price.
- Louis Miscioscia:
- Okay, thank you.
- Jure Sola:
- Thanks, Lou.
- Operator:
- Your next question is from the line of William Stein with Credit Suisse.
- William Stein:
- Thanks.
- Jure Sola:
- Hi, Bill.
- William Stein:
- Hi, how are you doing?
- Jure Sola:
- Good.
- William Stein:
- You mentioned there was a $100 million push out towards the end of the quarter I think. Did I get that right?
- Jure Sola:
- Yes, that's correct.
- William Stein:
- Can you tell us at what end market that was, whether it was components or EMS or some combination?
- Jure Sola:
- It was really across our market. Mainly most of that came really from what we call EMS system assembly type of work, and as you could see, the biggest impact for the Telecom infrastructure enterprise.
- William Stein:
- Okay. So it wasn't a customer push out, it was just a push out of the forecast among several or many customers?
- David White:
- It was virtually, across most of our market, all of our markets really, and many, many customers. It was really not just a one single customer. Typically in these situations, customer moves something and you always ask them to move out you ask something to move in. But in this environment, there was no favors to be done. At the same time, I think on a positive side and I want to make sure everybody understands, there is really not a lot of inventory at our customer side. Last time when we went through this major downturn in 2001-2002, there was a lot of inventory in the pipeline but I can assure you at least, what I can see, there is not a lot of inventory out there So at least when our customers are taking something, it's for real orders.
- William Stein:
- Okay. And turning to the buyback, last quarter we were talking about a reverse split on the equity and I think in the past you've repurchased some debt and I think you discussed doing more of that. Are you still contemplating either of those today?
- David White:
- Like I said, the Board authorized to go out and purchase up to 10% of our outstanding shares based on value of today's price. So we have authorization whatever $35 million we can go out and purchase. But we definitely, as we continue to generate cash, we are going to be looking at paying down some of the debt this year and actually at our next board meeting which is in the first week of December, that's on an agenda to talk about is to take some of this out. We feel comfortable. We got plenty of cash. But the Board today, in this environment are very conservative, is what they should be, and so they want to see maybe a little bit more sunshine before we start spending the money, buying the debt back but definitely we are going to look and hopefully do something in this fiscal year 2009.
- William Stein:
- Where is the priority now in buying back at current prices buying back stock or debt?
- Jure Sola:
- Of course today, we have the priority is to buy the stock. I think to me, it's a good investment, number one. Number two, I think we are going to show to our internal people that Sanmina is here to stay and we are going a lot, this company's position to be a great company in the future, and I know I personally am going to buy some stock as soon as I can next week.
- William Stein:
- Okay. Thank you.
- Jure Sola:
- Thanks.
- Operator:
- Your next question is from the line of Sherri Scribner with Deutsche Bank.
- Sherri Scribner:
- Hi. Thank you
- Jure Sola:
- Hi Sherri.
- Sherri Scribner:
- Hi. I think looking at your filings, it seems like you have a credit facility that is coming due at the end of December. I don't know if that's correct, I think its 500 million. Are you in the process of renegotiating that and what are your expectations for that?
- David White:
- Yes. You are correct. Our bank facility expires at the end of this quarter, and we are in the midst of replacing that with another facility. That facility was put in place three plus years ago when we had not only the MS business but we also had working capital financing needs for our personal computing business. So given that, we have got business is no longer part of the company so forth. We do anticipate down sizing that facility and we are in the middle of doing that right now.
- Sherri Scribner:
- Okay.
- David White:
- And we have a high confidence that will be put in place pretty soon.
- Sherri Scribner:
- Okay. And then you mentioned a number of times how you have a lot of cash on the balance sheet and a number of options for using that cash. What amount of cash do you need to run your business, is one question. And then as part of that, are there certain covenants about how much cash you need to keep on your balance sheet, covenants on your debt?
- Jure Sola:
- Let me answer that on how much money we need to run the business and I'll turn it over to you David to talk about covenants. First of all, Sherri, if this was a private company, I could run this company probably with a couple of hundred million dollars worth of cash. Being a public company and the comfort that we all feel, it's probably around $400 million. So that will be a comfort zone that we have.
- Sherri Scribner:
- Okay. Is any of that in foreign countries that is harder to get at or?
- David White:
- Sure. So let me see if I can address that question and the other one as it relates to covenants. First of all, we have no covenants that require minimum cash balances on the books of the company. As it relates to where our cash is positioned, as we have gone through a transformation in the company over the last five years, locating more and more capability in place overseas, our cash is necessarily gone there with it; that is where the company today operates, and that's where our cash is generally generated and consumed. There are periods of time when we need to move money from one place to another, and we work through the mechanics you might say of making that happen, and today we have not had any issues in being able to move our cash around the company tax efficiently without cost, as evidenced by the fact we have taken out debt over the last couple of years, and have not really incurred any friction cost to speak in doing so.
- Sherri Scribner:
- Okay. The question is more aimed at, does that increase the $400 million that you think you need to run the business, if you have cash in other places or is at this time still around $400 million.
- David White:
- I think, it would still be the same. I would just add one other comment to it. We've been working on some other strategies in the company that are going to ultimately form a new basis for how the company is legally organized and when that is completed, our cash will be much more concentrated, you might say in one geography that will be simplify that.
- Sherri Scribner:
- Okay. If I can quickly follow-up on the buyback, what is sort of your timing for that buyback? Is that something you would anticipate doing immediately this next quarter you would do the $10 million or is that something that you see doing over the next year?
- David White:
- We're going to be buying some this quarter. We just have to set up the procedures and make sure all the legal stuff is done and as soon as that's done, we will buying immediately.
- Sherri Scribner:
- Okay. Thank you.
- Jure Sola:
- Thanks. Sherri.
- Operator:
- Your next question is from the line of Joe Wittine with Longbow Research.
- Jure Sola:
- Hello, Joe.
- Joe Wittine:
- Hi, it's Joe Wittine online for Shawn Harrison. With regards to the components business, you mentioned earlier that margins did pick up, although to a lesser extent than you saw them pick up in the EMS business. But I'm hoping you could provide guidance on what utilization rate is, right now in components?
- Jure Sola:
- I'll give you guidance for the whole company. First of all, let me give it to you two different ways. If you look at, just did analysis yesterday, if you look by the people on our EMS we're only about 98% utilization rate when based on people. And components are about 95%, so we cut down exactly to what we need. If you look at base and equipment, EMS is probably around 70% and components probably around 75%.
- Joe Wittine:
- Okay. That's helpful. Moving along, in light of the projected slowdown that you are seeing especially in the December quarter, you mentioned that a large scale restructuring effort are off the table, but do you have any kind of smaller actions planned for the quarter. One of the components manufacturer today on a call mentioned that the EMS channel could see some extended holiday shutdowns, so you are forecasting anything like that right now?
- Jure Sola:
- In our operations, we have, let's say, here in our campus we have a three or four factories, so sometimes you combine two in one and things like that. So we don't any thing major, and everything that we are going to do this quarter or next quarter or next three quarters, it's something that's going to immediately benefit what I call tuning operations. So the major write-offs at least what we see for the next 12 months for us are basically no.
- Joe Wittine:
- Okay. Then this last question if I could? I think in the prepared remark in the beginning you mentioned that the defense and aerospace business had declined a little bit. That is the first I've heard of any weakness there. Can you provide any kind of detail on it if that was more so a disengagement or if it's any kind of weakness in the market?
- Jure Sola:
- No I wouldn't say that market is weak. It just depends on the customer base, how much they take quarter to quarter. If you look at that business for us, they grew nicely year-over-year. So it's still a strong business for us, and it's also a business that we are driving very hard to grow.
- Joe Wittine:
- Okay. Thanks a lot.
- Jure Sola:
- Operator, we have time for one more question.
- Operator:
- Yes sir, your final question comes from the line of Kevin Kessel with JPMorgan.
- Jure Sola:
- Hello, Kevin.
- Kevin Kessel:
- Hello.
- Jure Sola:
- We see best for the last.
- Kevin Kessel:
- Jure, I just wanted to see if you could maybe update us in terms of the components business today; what percentage of the components business that's sold is actually internally sold to Sanmina? How would that compare maybe versus a year ago?
- Jure Sola:
- I don't have a number, but I would say right now, two-thirds would go outside and one-third stays internally.
- Kevin Kessel:
- Okay. So that's actually rather high relative to maybe in the past. I know your PC business obviously distorts it or makes it go up a little bit.
- Jure Sola:
- It distorts it a little bit and maybe looks a little bit better. Our biggest customer in our component business is really the outside customers. When you qualify for major programs, let's say advanced printed circuit boards, you are building a 20-color layer board; you'll build some for all our major competition. You build some for Flex, you build some for Jabil, Celestica so on. So that's how these programs work. So to us, really it doesn't really matter who we build it for. When we build for our competition or internally, we treat them the same because those business have to be self-independent, they have to be profitable, and they have to be technology leaders, otherwise there is no need to keep them.
- Kevin Kessel:
- Right. Now I understand. And when we talk about the margins and you say that they are up slightly but below corporate average, are you talking on the operating line?
- Jure Sola:
- Everything we do is really gross margin. It's really hard to bring it down to the operating line because the way we are just structured.
- Kevin Kessel:
- Because of the way it's structured. So, is it profitable on the growth line but would you venture to say that it's still profitable, all the components divisions on the operating line as well?.
- Jure Sola:
- As a bucket Kevin, they are profitable, but of course we have a few operations there that's still not making as much or they are losing a few bucks but as a group, as a division, they made money.
- Kevin Kessel:
- Okay. Then just on the overall cash flow, I apologize, if you said this already because I joined the call a little late, but because I had overlapping call. But, what I did hear you say I thought it was that next quarter, or December quarter, you expect $50 million to $100 million in free cash flow and $200 million to $300 million in free cash flow for the full fiscal '09?
- Jure Sola:
- That's correct.
- Kevin Kessel:
- That's correct and you said that of that break down of the 200 to 300, you said about 80 to 100 was coming from asset sales and 200 from operations?
- Jure Sola:
- About 200 points from operations, the way we estimated today and about 80 to 100 from asset sale.
- Kevin Kessel:
- Okay. I think I heard David, said a lot of that would working capital driven or that's expectation today.
- David White:
- Certainly, there would be a component of that 200 plus piece of operations, yes.
- Kevin Kessel:
- Okay. So then just I guess its 80 to 100 and I'm wondering about, when you say asset sales are we talking about any parts of your components business that you might or potentially decide to sell in the upcoming year or is it just a real estate.
- David White:
- No. The only thing that is for sale here is our some of our empty buildings that we have on the market. These are the buildings that we used to do manufacturing that we exited them and they are basically in Europe and here in North America.
- Kevin Kessel:
- That's real estate strictly?
- David White:
- That's correct. We have got some if you want to buy some. We'll make you a deal.
- Kevin Kessel:
- I think there is a lot of real estate out there, potentially for sale. So how do you work it out for you?
- Jure Sola:
- These are good deal.
- Kevin Kessel:
- Well, maybe we'll see what happens. Anyway, all right, I appreciate it.
- Jure Sola:
- Thanks.
- David White:
- Thanks. Kevin.
- Jure Sola:
- If we didn't answer everybody's question, I apologize but we are available, give us a call and we'll go from there. Thanks a lot. Bye, bye.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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