Flex Ltd. (FLEX) Q2 2014 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Flextronics International Second Quarter Fiscal Year 2014 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Flextronics Vice President of Investor Relations. Sir, you may begin.

Thank you, Gabrielle, and welcome to Flextronics' conference call to discuss the results of our fiscal 2014 second quarter ended September 27, 2013. We have published slides for today's discussion that can be found on the Investor Relations section of our website. With me today on our call is our Chief Executive Officer, Mike McNamara; and our Chief Financial Officer, Chris Collier. Today's call is being webcast live and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could materially differ. Such information is subject to change and we undertake no obligation to update these forward-looking statements. For a discussion of the risks and uncertainties, see our most recent filings with the Securities and Exchange Commission, including our current annual and quarterly reports. If this call references non-GAAP financial measures, these measures are located on the Investor Relations section of our website, along with the required reconciliation to the most comparable GAAP financial measures. I will now pass the call to our Chief Financial Officer, Chris Collier. Chris?

Thank you, Kevin, and thank you, everyone who is joining us today. We appreciate your interest. Let us start by turning to Slide 3 for our second quarter income statement highlights. In our second quarter, we generated $6.4 billion in revenue, which was at the high end of our guidance range. Our revenue increased over $600 million or 11% sequentially, driven by growth in our 3 largest business groups. Looking at our revenue over -- on a year-over-year basis, it was up 4% or $235 million, which was driven by double-digit growth in both our HRS and HVS business groups, helping to offset single-digit declines in our other business groups. We continue to expand our adjusted operating income, increasing it $22 million or 16% sequentially to $159 million, which was within our guidance range of $150 million to $175 million. After accounting for $9 million in stock-based compensation, our GAAP operating income totaled $150 million. Our adjusted net income for the second quarter was $134 million, which was up $22 million or 20% sequentially. This adjusted net income translated into adjusted EPS of $0.22 for the quarter, which is a sequential increase of 22% and was at the high end of our guidance range. Our EPS this quarter reflects a $0.01 benefit from a reduction in our interest in other expenses versus our guided range for this line item. Lastly, GAAP EPS for the second quarter was $0.19, which more than doubled on a sequential basis as we completed our restructuring programs last quarter and no longer have the associated expenses. All right. Now turning to Slide 4, you find our trended quarterly income statement highlights. Our adjusted gross profit dollars rose $22 million or 6% sequentially to $370 million. There are several key elements behind our gross profit improvement that I would like to highlight: first, we saw improved utilization in overhead absorption, driven by the revenue growth across 3 of our 4 segments; second, we realized continued operational improvement in Multek, our printed circuit board business; and then, to a lesser extent, we realized incremental benefits from our restructuring efforts that had commenced in the prior year. However, our gross profit expansion was offset by operational inefficiencies and greater product start-up costs associated with several of our complex programs that we are ramping. So while we expanded our gross profit dollars sequentially, our adjusted gross margin actually fell 20 basis points to 5.8%. This decrease in gross margin was also due to a change in the mix of our revenues resulting in a higher concentration of sales from our High Velocity Solutions business. We remain focused on expanding our operating income. This quarter, our adjusted operating income increased by $22 million or 16% sequentially to $159 million. This increase resulted from our improved gross profits and our ability to leverage our SG&A expense, which remained relatively flat sequentially at $212 million. Looking forward, we now expect a small increase in SG&A from our previous target of $215 million, primarily due to incremental costs from new operating sites, our acquisition of RIWISA and further investments in certain R&D in innovation initiatives. As a result, we are modeling quarterly SG&A expense roughly in the range of $220 million next quarter. This quarter, our operating earnings expansion resulted in our adjusted operating margin rising 10 basis points to 2.5%, and we remain focused on driving further operating profit dollar growth. Okay. Now let's turn to Slide 5 where I will give you color around other income statement highlights. Net interest and other expense amounted to roughly $14 million in the quarter, which was better than our anticipated range of $20 million to $25 million. The favorable performance was due to a number of factors, most notably, our realization of stronger-than-expected foreign currency gains. From a financial modeling perspective, we continue to estimate quarterly net interest and other expense to be in the range of $20 million. The company's effective income tax rate was 7.4% for the quarter. This was slightly below our expected range of 8% to 10%, merely due to geographic mix of our income. We continue to expect that our operating effective tax rate will be in the 8% to 10% range absent any discrete, onetime items. Now when reconciling between our quarterly GAAP and adjusted EPS, we see a negative impact of $0.03 on our adjusted EPS relating to our recognition of $9 million in stock-based compensation and approximately $8 million in intangible amortization. Our weighted average shares outstanding for the quarter was 624 million shares, which was in line with our guided range and down from 640 million in the prior quarter. This reduction reflects the impact from our share repurchase activity. During the quarter, we repurchased 12.2 million shares at an average cost of $8.47. Regarding our share repurchase program. The Singaporean government recently announced that the annual share repurchasing limitation was extended from a cap of 10% of total outstanding shares to 20%. Though, while this does not imply we'll immediately act on this increase, it is important to understand that it does provide us with greater flexibility around our long-term capital allocation decisions. Please turn to Slide 6 to discuss working capital management. We continue to manage our working capital within our targeted range of 6% to 8% of our net sales as our September quarter came in at 6.7%. We are confident in our ability to continue to manage working capital within our targeted range. Now during the quarter, our inventory had increased $724 million or 22%. This increase supported multiple new programs ramping over the course of the September quarter and into our December quarter, which resulted in greater prepositioning of raw materials to support this growth. Our cash conversion cycle this quarter was 24 days, which improved 1 day sequentially and improved 3 days from the prior year. We continue to see ourselves operating our cash conversion cycle within a 20- to 25-day range. If you turn now to Slide 7, I'll talk about our cash flows. We generated cash from operations of $155 million this quarter, and year-to-date, we have now generated $353 million. On a trailing 12-month basis, we've generated roughly $950 million of operating cash flow. We have used our operating cash flow to fund our capital expenditures of $170 million for the quarter, which was generally in line with our expectations. Our CapEx continues to be focused on investing in production equipment to support our revenue growth, increasing automation and further investing in our innovation strategies. Reducing our operating cash flow by our net capital expenditures results in negative free cash flow of $15 million for the quarter, which is roughly in line with our planned usage level. For fiscal 2014, our free cash flow estimate remains unchanged at approximately $400 million. Additionally, during the quarter, we paid $109 million for the repurchase of our ordinary shares. And over the past 12 months, we've spent approximately $513 million repurchasing 11% of our shares. Now turning to Slide 8. We are providing some insight into our current capital structure. As you can see, we continue to operate with a strong capital structure. Our total liquidity remains healthy at just over $2.6 billion with our cash totaling $1.1 billion. Our total debt remained slightly above $2 billion, and our debt-to-EBITDA ratio remained consistent with the prior quarter at 2x. I'd like to highlight that during the quarter, we successfully closed our refinancing of $600 million of various term loans with a new term loan that matures in 2018. As a result of this refinancing, we have reduced our weighted average interest rate by 20 basis points since the start of our fiscal year, and our debt maturity profile has been optimized with no near-term maturities and a balanced maturity schedule. All right. With that, I've concluded the recap of our second quarter performance. This was a solid quarter from a financial perspective as we hit many of our financial objectives. We grew our revenues, which came in at the high end of guidance; we continued to expand our operating profit, growing at 16% sequentially; we drove continued EPS accretion, which increased 22% sequentially; and we used our cash flows and cash on hand to invest further in the business, as well as repurchase an additional 2% or 12 million shares of our stock.

Thanks, Chris. We are pleased that we continue to expand our revenue, operating profit, operating profit percent and earnings per share. We are expecting to realize a full targeted level of cost savings from our prior restructuring efforts in our December quarter. Likewise, we are hitting an important flexion point in our Multek business, which we expect to be profitable in our December quarter as a result of the structural changes we undertook over the past few quarters. We are improving our cost structure while at the same time we continue to invest in our business to strengthen our position as a supply chain solutions company. We've been talking about our expectation for a muted seasonality for the past few quarters. Despite more positive data point a quarter ago, we remained cautious in our outlook and our views. It turns out that our cautiousness was not only prudent, but that many of our customers and suppliers underestimated just how muted the seasonality would ultimately be as evidenced by the earnings reported so far this quarter. We are seeing impacts ranging from more gradual ramps for new programs to some softness in end markets. Despite these challenges, we continue to grow revenue and operating profit sequentially for the third straight quarter. Over the last quarter, we saw healthy broad-based growth across 3 of our 4 business groups as expected. It is important to note that the vast majority of the growth across all 3 of these business groups was a result of ramping multiple new programs, many of which were complex in nature. We're experiencing a number of start-up costs as we ramp these programs to targeted profitability. In line with the past several years, we will continue to focus our M&A activities on markets and technologies that realize longer product life cycles, less volatility and higher margins. Our recent RIWISA acquisition, which is closing this quarter, is a great example of this as it increases our exposure to more predictable, sustainable higher-margin businesses. RIWISA provides us with a state-of-the-art, highly automated precision plastic solution for the medical industry and adds some new key medical customers. Please turn to Slide 9 where we will review our revenue performance. Our Integrated Network Solution, or INS, business group rose 2% sequentially, in line with our expectation for modest low single-digit growth. Revenue rounded up to the $2.6 billion for the quarter, $56 million above prior quarter levels. Networking grew sequentially in the low double digit, propelled by market share gains and increased MPI activity. Server storage rose modestly on a sequential basis as well. Telecom offset most of this growth with single-digit decline. For next quarter, we expect INS revenue to decline single digits. Industrial & Emerging Industries, or IEI, revenue totaled $940 million or 15% of total sales. Revenue rose 4% on a sequential basis, which is also in line with our expectations for low single-digit growth as new programs with new customers begin to ramp. Next quarter, we expect a high single-digit decline due to weakness in semiconductor capital equipment and other customers that are exhibiting more muted seasonality than previous forecasts. Our High Reliability Solutions group, or HRS, is comprised of our medical, automotive, defense and aerospace business and declined 3% sequentially, but grew 19% year-over-year. Much of this was in medical, which was off 4%, putting HRS below our expectations of flat sequential sales. Next quarter, further weakness around medical, predominantly due to the weaker diabetes market, is weighing on the HRS revenue outlook, which is expected to be down low single-digits sequentially. Our High Velocity Solutions, or HVS, revenue rose 36% sequentially or $550 million to $2.1 billion. This performance was above our expectations for 25% to 30% sequential growth due to multiple ramping new programs. For next quarter, HVS is forecasted to grow 15% to 20% sequentially. Continued growth in our Motorola partnership is expected to account for roughly 2/3 of the sequential growth. The remaining growth is from new customer programs ramps and seasonality. Lastly, I'd like to provide an update on our components business. Power recorded fourth straight quarter of profitability, of strong double-digit revenue growth and is performing very well. Turning to Multek. We ceased operations in our PCB factories in Germany and Brazil towards the end of the September quarter as planned. This activity was critical in reducing Multek's fixed costs and break-even point, and to put it on its path to be modestly profitable in the December quarter. Multek is where power was a year ago with infrastructure and site consolidation are now complete. It has been building a strong and diversified book of business. We have significantly enhanced its management team and are very encouraged by the progress. We believe that Multek's improved volumes and operating efficiencies, combined with reduced volatility, will drive better and more predictable profits over the coming quarters. Now turning to guidance on Slide 10. Although we continue to make positive progress in our transformation, our trajectory is a bit short in where we had been anticipating as we look at our December guidance. Recall that we have laid forth a framework of revenue and earnings expansion, taking us from trough levels this past March quarter to our targeted levels in our December quarter. So while we've been continuing to display strong growth on our top line and expanding our earnings, we are seeing some near-term pressure from the broader demand environment. This is resulting in some unfavorable mix changes and some slippage in new product ramps. However, we continue to believe that the Flextronics platform is fundamentally structured to continue to drive revenue growth, operating earnings expansion, free cash flow generation and EPS accretion. Guidance for our December quarter revenue is $6.5 billion to $6.9 billion. This reflects sequential growth of 4.5% at the midpoint. Our adjusted operating income is expected to be a range of $160 million to $190 million, which is 10% higher at the midpoint than the $159 million reported this past quarter. This equates to an adjusted earnings per share guidance range of $0.21 to $0.25 per share. Quarterly GAAP earnings per diluted share is expected to be lower than the adjusted EPS guidance that I just provided by approximately $0.03 for intangible amortization expense and stock-based compensation expense. With that, I would like to open up the call and hold the Q&A. Operator?

[Operator Instructions] Our first question is going to come from Sherri Scribner with Deutsche Bank.

I wanted to get a little more detail on the December quarter guidance. I guess, I would have thought you would be closer to your 3% operating margin number and it looks like the guidance is for operating margins to be up about 10 basis points. I was hoping you could give us a little more detail on why, if the restructurings are going to be all completed in December, we won't be closer to the 3%.

Sherri, so let me just break down December. It definitely has multiple moving parts. So as you look at December, if you roll back to where we were -- we've been setting up framework for the entire year, there's multiple levers that were being played. We had the restructuring lever that you just mentioned, which is on track, and we're seeing it by the end of the December quarter achieving a full $30 million benefit. So that is one contributing factor as we move forward. Multek is on track and is moving to modest profitability. The other 2 main drivers for the quarter center around our volume and our mix. And as you can see from the guidance where we're sitting at the $6.7 million at the midpoint, we are definitely impacted, as Mike alluded to in the prepared remarks, to various more muted seasonality, as well as delayed ramps where some of these are slower and some of them have been pushing out. So that, combined with the fact that 3 of our 4 higher-margin businesses where we had been looking to have those up modestly are now down modestly. So that mix impact is putting incremental pressure on that margin profile, as well as the operating profit dollars. And then lastly, we have the Motorola ramp that's underway, and we're just not achieving the targeted level margin profile for Motorola at this stage. So all in all, we're growing revenue again this quarter. We're expanding operating profit again this quarter. We're moving up. Midpoint of the guidance range will be within 10% to 15% to 20% margin improvement. And EPS is accreting, it's just not at the desired levels and it can be greater.

Okay. So thinking about that going forward, how do we get closer to the 3%? The restructurings are done. Multek is going to be profitable next quarter. Clearly, you'll have ramps on an ongoing base, but I assume those would go way over time. And then the Motorola ramp, I assume, would happen. So when can we get to that 3% margin?

So again, margin is not the specific focus, but will be a by-product. Our -- we're going to continue to grow our operating profit dollars for the various reasons you just alluded to. We have multiple levers that are allowing us to continue to grow, but the mix of our business is going to be the deciding factor on whether or not you're at 3% or plus or minus 10 or 20 basis points to that. But we're growing the business, the ramps will be behind us. We have a big mix change this current quarter. Again, the 3 of our 4 higher-margin businesses are actually sequentially down where we had anticipated those being up. So those will return to growth, and when those do, we're going to have higher-margin program, high-margin accretion from them. As well as we continue to manage the Motorola transaction, we continue to target -- achieving the target profile in the near future.

And Sherri, I would just add a little bit to that. We're growing revenue quite a bit. As you know, we're going up from $5.3 billion at the beginning of the year to $6.7 billion in the middle of the range. That's creating a tremendous amount of challenges as we go ramp that business. And you can imagine the amount of people we have to bring on and the new products that we have to go do to make that happen. Simultaneously, as we've got under this restructuring, we targeted closing 11 factories. We have 7 of those closed and we have 4 left, which will be completed over the next 2 quarters. So that's occurring exactly at the same time, which is also occurring at the same time of bringing on the Motorola ramp and some other things. There is a tremendous amount in play here and a lot of changes. And managing that -- managing the 11-factory shutdown simultaneously with managing all the ramps is a stress on the system in terms of the incremental costs that we have to do to manage it down, but also the costs that we have to do to manage it up. We're a little bit disappointed about the $6.7 billion target range that we're calling for. We certainly thought we would have been much higher. It changed a lot in the last 4 weeks. Even in our business, we had very, very stable 6 months of our -- the first 6 months of our 2 quarters. And we saw a lot of downside. So trying to chase down your higher-margin business when they have decreasing revenue when you're expecting them to have increasing revenue is very, very challenging from an operating standpoint. Simultaneously, have that with the start-up costs associated with new ramps and getting Motorola to where we need it, simultaneously with closing the factories is a super challenging environment. And so in getting back to your question about when do we get to 3%, while our objective is to drive operating margin dollars, earnings per share and return on invested capital, we would expect that as these margins -- as these ramps mature, and some of these have been delayed. Part of our $6.7 billion, which is away from our target revenue, part of that is delayed ramps. So it's not like the revenue went away. It just means it's a little bit later. So what's -- we just need to be able to get through those big ramps. Some of them are more complicated than others. And we need to be able to get our Motorola operation to its targeted profile, which we continue to believe is in our sights. And we're just not there yet. And once we hit that, then I think we'll likely be at the margin and operating profit dollar targets that we would expect. We would have a much more stable operation that would be quite a bit more predictable.

And our next question is going to come from Osten Bernardez with Cross Research.

To start off, Mike, I was just wondering if you could comment on other expansions, particularly in Texas, specifically in Austin where it looks like you may be considering onshoring another high-volume customer.

Yes, so we have a big operation in Austin. We've been there for many, many years. It's the highest -- it's the highest competent center that we have in the Americas. Certainly, it's a couple of thousand people, so been around for a long time. As far as any specific program ramps or anything else, I don't have any comment about those except to say this is a super high competent site. It's been around a while. It's large. It's almost 1 million square feet and we continue to grow the business there.

Okay. And could you sort of provide some color with respect to why the Mot business is not necessarily operating at target? Is it just a -- is it a matter of unexpected expenses, volume not being what you expected? Anything you could provide there?

Well, first of all, we don't -- the Motorola is somewhat challenging to try to predict when actually it's going to hit target margins. We've been in it now for 5 months or 6 months. We took it over in mid-April. We had to take over 2 factories. We had to put in our computer systems. We had to put in our Lean manufacturing. We had changed the weight, the flow and prepare for new products. Not only did we take over people, we added -- we've been in process of adding several thousand. At the same time, we put up a mass customization factory in Texas. So all this is -- and that Texas factory opened in, I think, about 8 weeks ago. So there's a tremendous amount of change and churn associated with bringing on this business, absorbing these people into our system. Some of the SG&A associated with hooking up these computer systems and interfacing into mass customizations that are coming in from the carrier and it is -- it's -- so it's just challenging. So the question is we know we have all these start-up expenses. Our kind of rule of thumb is that when we take on a new program, it's going to take about 6 months to get to target profit. We're not there yet. As we've now worked with the customer for the last 6 months and understand the progress that we've made in the factories, which we think is pretty stunning, we continue to see that target in sight. It's just that the question is how much time does it take? Does it take 6 months? Does it take 9 months? Does it take 12 months? And at what rate do you -- do you get there linearly? Or does it just step-function in? So we continue to see that target in sight. We're not the least bit uncomfortable with that. We continue to believe that, knowing what we know about the customer and the performance of our sites, that we think we'll be there. It's just -- we're just going to need more time to get there. And it's hard to for us to assess exactly what that time frame is because we now have a March quarter coming in. We're actually ramping multiple new products right now as we speak. And it's still a system that's somewhat in flux for us. So were getting more stable, but we're just not ready to declare we're completely done yet. And we are...

And our next question is going to come from Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Just to follow up on that, Mike. How much below the expected 2% margin are you for that business? And I just want to know if it's losing money. And would you say that your other large program ramp in HVS is meeting your profitability goals at this point? And then I assume that both of these programs peak in the December quarter and they probably decline in the first half of the calendar year. So how should we think about the profitability for HVS once we get beyond the seasonal ramp?

Yes, all good questions. So last quarter, we ran our big program slightly below profit. I'd call it like a mid-single-digit kind of dollar range. For this quarter, we expect modest profitability as it starts stepping in to be in a more profitable business and more stability. I mean, the amount of start-up charges we had over the last 2 quarters have been pretty stunning if you really saw what we did. So we would expect it to start being more stable in December quarter. As we look out into the March quarter, boy, it's really, really hard for us to predict what that's going to look like. It's hard to -- we have new programs. Our customer has new programs. There's new ramps. I mean, what -- how they choose to manage their business and pricing and success of new products we can't predict. But the one thing we do have is we have ramping programs going into the March, so hopefully that'll reduce any kind of traditional seasonality. It doesn't mean it'll eliminate, but hopefully it will reduce it. But we don't know is the bottom line. It's too difficult for us to tell because we just don't have enough history and I think there's too many new products that are coming out. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay, fair enough. And just a follow-up. Are the new program ramps, particularly in HVS, are they more working-capital intensive than you expected as well? Or was the inventory increase of 22% what you were expecting? I know you guys focus a lot on returns on capital, so I'm just curious about the returns on working capital in the HVS segment versus your expectations. Even if we adjust for the start-up costs, are they delivering on that?

Brian, this is Chris. So obviously, the 22% increase in inventory definitely had an impact based on the delays in the period around these ramps. So specifically, around the HVS business, there's no incrementally higher net working capital requirements for these programs versus what you've seen historically. So really, the function of this increase has been the prepositioning for some of the ramps, as well as some of the delay impacts that have come to play here. And then as a return profile, we potentially targeted 20% ROIC on our businesses as we manage the diversified portfolio. As it relates to HVS specifically, when you're under-performing on this profit side, it's going to be putting pressure on that return profile. So presently, we're not achieving that return profile until we start getting back up into those target margin profiles.

So getting back to inventory, just to give you some more color on that. I mean, this thing is up $724 million, up 22%, as Chris said. Our revenue is not up 22% going into this next quarter, you'll notice, which means we have -- we just have too much inventory. And the reason we have too much inventory is because a lot of what we received over the last 30 days is slowdowns and push-outs of ramps and some other things. So that's one of the reasons that we're challenged right now with operating profit. We actually were anticipating numbers that were well in excess of $6.7 billion just a month ago. That's why you see the inventory position there. Inventory is usually positioned for as long as its raw material, which most of this is. It's positioned for the next quarter's revenue. So it's -- we know we have too much. We'll get it out. It'll get delayed a little bit. But there's nothing we can see in any of these new programs that would cause us to think that our return on capital profile would be deteriorated or that our working capital assumptions that we like to run between 6% and 8% would be challenged. So we think we're right on the mark. We just have too much because we just get a little too many push-outs these last 30 days.

The next question comes from Amit Daryanani with RBC Capital Markets.

Couple of questions for me. One, I guess, when I look at the December quarter guide, maybe you could walk me through some math, but it looks like sales are up about $219 [ph] million sequentially. Operating income is up $16 million. But my understanding is restructuring a loan should add $8 million of benefits sequentially and then Multek getting to break-even would add another $8 million, $9 million of profits up sequentially. So I guess, my take is the math basically implies all the $219 [ph] million revenues are coming at 0% conversion margins. Maybe you could talk about what the offsets are there and quantify the start-up headwinds that you have had in September and December so far?

So let me try to bridge you from the quarter to $159 million up to the midpoint of our range. So we definitely are getting restructuring benefits. That's going to be roughly in the range of around $8 million, as well as the Multek improving profitability to a modest profit. That's going to increment, say, around $7 million. Offsetting some of this, again, is the SG&A increase that I highlighted in my prepared remarks, though centered around new operating sites, some incremental costs associated with the acquisition of RIWISA, as well as further investments in R&D and some of the innovation initiatives. So that's roughly around $8 million. The rest of the business is seeing some -- seeing contribution. However, again, I want to highlight that 3 out of our 4 high-margin businesses are trending sequentially down modestly in our December quarter. So that's putting some of that pressure on that incremental OP.

Got it, that's helpful. And then could you or maybe both of you talk about what would lead Flextronics to get more aggressive on the buyback program given that you do have approval to do 20% of buyback today? And I'm curious, do you have to seek this approval on an annual basis? Or going forward, can you automatically buy back 20% of your shares outstanding every year now?

Great questions. So obviously, management has been committed to increasing shareholder value and we've been doing so through the share repurchase plan. If you look back, we've been purchasing our shares up to the 10% threshold over the past couple of years. And we didn't like having the restriction in place. So now, this provides us increased flexibility. Essentially, we've eliminated that constraint. That constraint is now intact. We don't have to go seek that each year. So our share repurchase plan has been, is, and will continue to be an important feature of returning value to shareholders. And so we're just going to end up continuously evaluating that allocation pursuant to those guidelines.

Next question comes from Jim Suva with Citi.

Mike, and Chris, if we just take a step back from investors and when they look at their year-end financials, they see year-over-year sales, which are growing, which is great. But earnings per share, not growing, and in fact, actually being helped, the majority of it, from stock buyback. Can you help us understand is that kind of what we should expect for the next few quarters, given these program ramps? Because one would think you guys have been in the cell phone business very much for several, several years. I guess people are kind of surprised you haven't been able to mitigate some of these program ramps. So did you price too aggressively? Or are there complexity more than what you anticipated because high velocity is definitely not new to your company. But taking a step back, all the EPS is being saved really by stock buyback, or maybe I'm missing something?

Yes, I think you need to think about this year, Jim, as a transformational year. We went down to a trough in the March quarter and we've been rebuilding pretty aggressively since then. And the rebuilding is both from a restructuring standpoint, as well as a pretty significant revenue ramp standpoint. The -- so I think what you're seeing is when you're doing trough comparisons year-over-year, it doesn't look very good this quarter. When you start getting into next quarter and the quarter after that and quarter after that, you'll see huge revenue year-on-year increases. So I think you need to look at this more of as a trough period. And then I think what you'll see is significant earnings per share expansion year-on-year as a result of, not only buybacks, but one of the other things that we had last year. If you go back and analyze it, we had a tremendous amount of foreign exchange gains and our whole interest and other line item was actually pretty close to negative for the entire year. These earnings per share gains are coming with those total charges for the year being more along the range of $20 million to $25 million a quarter. So we are absorbing that as well in the earnings per share and still expanding -- still would hope to expand earnings this entire year. So there is some anomalies both in the interest and other lines that you have to look at on a year-on-year comparison. What you'll see as this trough is going to go away. I mean, this trough has been going away. We did 11% growth last quarter. We've actually gone up a lot. We went from $5.3 billion to $5.8 billion, to $6.4 billion in September. We're now targeting $6.7 billion, signaling some delayed ramps, which should lead for some strength into next year but also causing us to have start-up costs. And the start-up costs are absolutely never going to go away because to start a program, you have to, first, have a facility. You have to, first, buy equipment. And you have to hire people and train them before you touch your first product. So the concept of start-up costs is not going away -- or going away doesn't exist. If we're a company that has -- it's very, very stable and has $7 billion a year -- or a quarter every year for the next 5 quarters, you'll find us having -- being really stable. And we'll just absorb -- and what that means is we don't have a lot of start-up charges. So profitability is better. And this is one of the features that you look for as we go into next year is that some of these ramps and such are very significant. We don't see the same amount of ramps coming in next year. But we see stability out of the programs that we're ramping this year and a full year run rate from the programs this year. So we actually do expect more stability next year. But as we go through this transitionary period, as we climb down to $5.3 billion and then climb back up to $6.7 billion, it's going to be super rocky. And like I said, at the same time, you're going to -- we're absorbing all the costs associated with these facilities and things like that. So it's just a very, very rocky year, but we were still hoping -- we would have hoped to put this behind us by the December quarter, quite frankly as we looked at this in March. We would have said, boy, we're going to be done with all this stuff and should have a pretty good December. The reality is, is some customers slipped programs. Maybe we're off in terms of the complexity of some of the programs. You got a little bit weaker macro. You got some things happening. But I think you have to think about this being very, very transitional quarter and think about what we're trying to accomplish this year -- or this is a very transitional year and think about what we're trying to accomplish and the challenges associated with that, and then kind of do a look-forward to next year around what's likely to be a lot more stability. Start-up charges are never going to go away.

The next question comes from Matt Sheerin with Stifel. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Mike, I just want to get back to the issue of these product or program ramp push-outs because there's, I guess, $200 million to $300 million gap between what you had talked about your target, $6.9 billion to $7 billion or so. I'm trying to understand, is it coming across all your businesses? You talked a little bit about several of the programs from different end markets. How much of it is from HVS versus the Infrastructure business and then the other businesses?

Yes, that's a little bit hard to tell. But if I think about the ramps that got pushed out, they are in IEI, they're in INS, they're in HVS, what I'd consider to be different HVS programs. And I think it's actually a bundle of all of them. So the program ramp that's not getting pushed out is really Motorola. I mean, Motorola has actually more revenues that we would have anticipated as part of that $6.7 billion, if we laid it out at the very beginning of the year, we mentioned that we thought revenue would be more along the $750 million range. And in fact, it's probably going to be a couple $100 million more than that and that's one of the reasons that we're having some pressures on the operating margin this December quarter. So we're seeing a push-out of a lot of the other programs, but at the same time we're seeing very -- a lot of strength with the Motorola program. And that -- and like I said, it carries lower margins at this point. We don't think it will in the future, but it just does until we get it completely up and running and the learning curve sorted. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's helpful. And do you have -- did you have a 10% customer in the quarter? And was it Motorola?

Yes, we did. And it was Motorola. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, Chris, on the SG&A, I mean, I understand the reasons for the increase there, but looking into fiscal -- into the March quarter and then fiscal '15, do you think you can keep it in that range that you talked about or the $220 million range or so? Or due to the investments and increased R&D will that go up?

Yes, Matt. Thanks. I think you should be considering that $220 million as a stable position. Again, going back to where we are sitting at the $215 million mark where I've been referencing us to, the only way we're going to be stepping up from there was going to be around investments around our R&D, as well as other innovation activities and any time that we have acquisitions. So those are the only levers that will make us change from that $220 million. It's structured such that it should be stable at that level. Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And lastly, on the factories that you're still in the process of closing, what's the time line there and expected savings?

Yes. The savings are already baked into what Chris talked about in terms of his expected restructuring savings. He's laid out some pretty good -- some good data on that. We have 4 factories left and they'll all be done this quarter. I mean, it's possible one of them lingers on into March, but it would be a minor impact. But all of them will be done this fiscal year.

Next question is from Amitabh Passi from UBS.

Mike, I apologize if you covered this. I was on another call. I guess, I'm still a little confused. What changed in the last 4 to 5 weeks because I believe up until about 4 weeks ago, you were feeling pretty good about hitting the December quarter guidance. I apologize if you covered this, but if you could just summarize it again, I'm a little perplexed in terms of what changed in the last few weeks.

Yes, we did hit it. If we look back 4 weeks ago, we were probably expecting all of our segments to be having growth. It wasn't huge growth, but it was once again sequential growth. We had 3 or 4 segments with sequential growth this quarter. We would have expected -- we were actually expecting 4 out of 4 of those segments to have growth going into the last quarter. And we were there just till probably 30 days ago and then we got some program slowdowns or we had some just maybe what we'd call muted seasonality. And as a result of that, 3 out of 4 of the segments actually went down over the last few weeks, and I don't know if you've got the comment on the inventory, but our inventory went up $724 million. We were positioned to do much more revenue just a little while ago and even positioned inventory. So what you guys also -- it's not just inventory, but we also have to position people and make sure the facilities are ready. So it's actually a challenge for us when there's a big change. But that's predominantly it. I mean, we just got new forecasts in. I think the seasonality was a little bit more muted than anticipated or expected and we weren't expecting that much. But it's a challenge for us that we have to then go react to. And when you go to react to it, it costs money. So that's what put the pressure on things.

Is your sense, was this a fallout of all the drama out in Washington? Or do think it was independent of that?

No, I think it's independent of that. If we deep dive them into things like medical, the diabetes market is actually a little bit stressed. If you go in and look at the big diabetes manufacturers, that's probably the biggest impact that we have from an operating-profit-dollar standpoint because medical business tends to be a little more profitable than the rest of the business. So when that gets a surprise downside, then that's a big challenge for us. We hear a lot of noise about the government and about the slowdown. We hear some noise about it from our customers, but I don't think that's played through the system yet. The issue is, is whether or not we'll see any of that happening this quarter, I think. And we don't know for sure. It's a better edition for the OEMs.

And just a final one. What is your expectation for inventory in the December quarter?

We would expect that comes down roughly 10%-ish or even more.

Next question comes from Sean Hannan with Needham & Company. Sean K.F. Hannan - Needham & Company, LLC, Research Division: So also want to see if I can get a little more clarification on the December guidance. If I look at the sequential guide for both INS and then the IEI groups, when I kind of come out with my numbers here and I compare them to last year, both of those segments are down, probably upper single digits year-over-year -- on a year-over-year basis. And last fourth quarter, it wasn't a particularly strong quarter. So I'm trying to see if I can reconcile, what's the disconnect here as we look year-to-year? I don't think it's all program, new program ramp slippage. I know you did talk about semi cap equipment as -- at least as it relates to the IEI group. But that really hasn't been gang busters for a while. So can you help to explain where this business is really sitting versus a year ago and why?

Yes. So let me take -- particularly focus on INS and IEI. So what we have is we'll have HVS that's growing rapidly, so I don't need to talk about that. And we have HRS, which is probably going to be up 15% to 20% on a year-on-year basis. So we have good, strong growth -- I mean, those things are pretty well sorted out. The INS -- the business is very difficult to get a year-on-year growth story out of, in my view. If you go back and look at the hardware sales of the networking guys and the server guys and the storage guys and all of them as a bundle, and you strip of the services and the software, it's a challenging market. And it's probably like a 0% growth market. And so we view that we're competing in a very, very challenging market and part of that market tends to go -- even if you look at the China Awards it went into telecom. It went to Huawei and ZTE pretty heavily. And about 70% of it was picked up with those guys and we have business with those guys. But it tends to be a different kind of business, but generates lower operating profit dollars for us. So I think that market is just a little bit strained. I think it's very difficult to see any kind of growth in that market. So year-on-year, we're not going to see -- it's difficult to see growth. In the IEI market, I actually feel -- we've all been pretty excited about the growth -- the potential growth of that market. That market also has not grown very much, but I think we have not positioned ourselves well in that market. Some time ago, we repositioned our management team to be much more highly focused on sales. Part of our sales expense was to beef up the IEI sales force. We've added quite a few people in that model. We actually think this is a place even though it's down year-on-year, some of it down because of a lot of capital equipment and some real reasons. But I just think we have under-penetrated that market and the potential of that market and the amount of companies that are available to go penetrate IEI. I think we've under-penetrated them and I don't think we're getting the story out to them about the value creation that we can do for them. So I think what you'll see from the IEI standpoint, I actually -- while we're disappointed this quarter and it's a surprise to us, I actually think next year you'll see a pretty reasonable growth story and that's based on bookings that we've already won as opposed to -- and then some of that -- some of the IEI, by the way, are delayed ramps that we've not yet realized and have been delayed. So I actually think -- I think, the summary of that is INS, I think, is a slow, tough flat market, which continues to get heavily penetrated by the Chinese guys, which is not as good for the EMS guys. And I think on the IEI side, I just don't think we've created enough value statement for those customers to move enough business into our company. And we've invested over the last year to make that happen. So I think you'll see a turnaround.

Next question comes from Gausia Chowdhury from Longbow Research.

This is Gausia calling on behalf of Shawn Harrison. I had one question and then just 2 quick clarifications. My first question is just about the March quarter. Given the push-outs for all the segments x HVS, what does March quarter seasonality really look like now for those businesses? And then for HVS, given the strong Motorola ramps and then what does seasonality look like now for that business as well?

Yes, that's a good question. So if you go back, our normal seasonality runs about negative 16% from December quarter, so March to December. I've talked about a number of these different programs that kick in. I've also noted some new products that we don't know how they're going to perform that are also hitting in this quarter, that should ramp on through next quarter. So I would -- it certainly -- if we were to look at it today, we would certainly view that it would substantially better or substantially less than the 16%. Alternatively, we've had such a hard time, I mean, just even 30 days ago, it was -- we thought we had this quarter in the bag and now we don't. So I think it's too difficult to sit here in October and predict what March will be and that's especially considering we do have new customers, new products, new ramps, new products in the marketplace that we don't know how they'll perform. So structurally, we're set up. The good thing about delaying some ramps is you should have more of an upside coming in the March quarter. That's what we see today. But I don't think we can -- we're good enough to forecast what that might look like especially in some of the challenges we have with the macroeconomics, some of the challenges we have with the government programs, which may come across. There's still too much uncertainty for us to say what March will look like with any confidence, except to say that we sure think it's a lot better than 16%.

And then the clarifications. The first one is in terms of the run rate for restructuring, I thought you had originally said $40 million. Is the $30 million off from that target?

No, so we have not moved off. We were identifying a quarterly run rate of $40 million upon completion. We captured $10 million in our first -- or last quarter of last year. So in the current year rolling off of March to this December we're recapturing another $30 million of benefit. The final amount of that, roughly $8 million or so, will be achieved in this December quarter.

Okay. And then in terms of the buyback authorization with the 20% approval this year. Is that something that you would implement after the current program expires? Or is that something you could implement right away?

So that is a permanently established position now. They've removed that 10% threshold limitation and now moved it up to 20%. Again, it provides us the increased flexibility to purchase up to those thresholds. And as you know, our share repurchase plan continues to be a key feature for us in returning value to shareholders. And we've hit into those levels in the past. So in the past several years, you've seen us press in to that 10%. So it's something that allows us that increased flexibility and we'll continue to evaluate that as we move forward.

Mark Delaney with Goldman Sachs.

I guess, first, if you guys could help me understand on the recent order push-outs, which sounds like it's common really in the last month. Are you guys still seeing push-outs in your orders? Or are the orders starting to firm up now?

That's -- so Mark, every month is a new month in terms of getting new data from the marketplace and you know that looks like. So we, obviously -- to buy all these parts, we need forecast for 6 months to really get these parts in or maybe 4 months. So we work to long-term schedules but the reality is, is there's adjustments to those schedules basically every month. So from what we can see now, we've accounted for as much as we can see. We've taken a negative view of the macro when we've done our forecast, and we've done our best job at trying to forecast what that looks like for you guys and provide as much transparency as possible. But each month is a different month. And we're a little bit concerned about some of the slowdowns, especially as we went through the earnings releases of many companies. It seems to be a pretty common theme that people hit their September quarter and guided low in December. So that seems to be a pretty common theme across the industry, which is certainly concerning. We're a little bit more comforted in that we know we have a lot of start-up costs in this thing. We know we have a lot of transition costs with these factories coming out. We know we are confident that we can get Motorola to a better profitability position and we can get ramps behind us. So we actually have a lot of things that can set us up for next year that we're comfortable with, even in a bad environment. But every -- but we don't know what next month is really going to be able to do, what we're really going to do. And we could get more slowdown next month. We can get upside by next month.

For my follow-up, I know one of the reasons for engaging with Google and doing the Motorola X program, which has lower-than-corporate average operating margins was that you thought Google was a good partner to be aligned with and that you saw a potential new business opportunity beyond just doing the Moto X longer term. And I'm hoping you can help us understand now that you're working with Google and Motorola, specifically more hand-in-hand as you ramp the Moto X, are you starting to see some of those new opportunities materialize?

Yes, that was one of the cornerstones of doing the Motorola deal is that we thought it would carry across to a better relationship with Google and put us in the position there, especially given our proximity and the fact that we have a million square feet here in Silicon Valley and do a lot with just start-ups and new technologies and those kind of things. So we would say that's gone great. That was a premise for us doing the deal, is to think about the broader relationship and buying into that ecosystem. And we think that the most -- the only thing that's really been announced that many of you -- that we've talked about before is the Chromecast, which we would expect to be just a fabulous product where we're building it. And not only building that, but also using [ph] products in Multek in that product line. So good penetration. We're excited about it. We're very comfortable that we made the right decision moving into this relationship, and disappointed we're not at the margins yet, but very confident that we'll get there.

Thank you, everybody, for joining us today on our call. This concludes our conference call.

Thank you. This does conclude the conference. You may disconnect at this time.