Sanmina Corporation (SANM) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Candace, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina Corporation Third Quarter Earnings Conference Call. [Operator Instructions] Ms. Paige Bombino, Director of Investor Relations, you may begin your conference.

Thank you, Candace. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Third Quarter Fiscal 2013 Earnings Call. A copy of today's release is available on our website in the Investor Relations section. You can also follow along with our prepared remarks in the slides posted on our website. Please turn to Page 2, the Safe Harbor statement. During this conference call, we may make projections or other forward-looking statements regarding the future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors, including the state of the global economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to our quarterly and annual reports filed with the Securities and Exchange Commission. These documents contain risk factors that could cause actual results to differ materially from our projections or forward-looking statements. You will note in our press release and slides issued today that we have provided you with statement of operations for the 3 months and 9 months ending June 29, 2013, on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material. Any comments we make on this call, as they relate to the income statement measures, will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to our gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information. I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you all for being here today. With me on today's conference call is Bob Eulau, our CFO.

Hello, everyone.

Our agenda, Bob will review our financial results for the third quarter, then I will follow up with the comments relative to Sanmina results and future goals. Then Bob and I will open for questions and answers. And now, I'll turn this call over to Bob. Bob?

Okay, thanks, Jure. Please turn to Slide 3. As we expected, the third quarter was better from a revenue and an earnings per share perspective and cash generation continued to be excellent. Revenue of $1.49 billion was up 4.3% on a sequential basis and down 3.9% from the third quarter last year. Non-GAAP earnings per share was $0.40. This was based on 85.6 million shares outstanding on a fully diluted basis. Cash generation was excellent this quarter with cash flow from operations at $66 million and free cash flow at $56 million. I'll discuss cash in more detail in a few minutes. Please turn to Slide 4. Revenue was up 4.3% or $61 million from Q2 to $1.49 billion. From a GAAP perspective, we reported net income of approximately $19 million, which results in earnings per share of $0.22. Restructuring charges for the quarter were $9.4 million. Restructuring expense was higher than we expected this quarter. Roughly half of the restructuring costs were associated with the 2 facilities that we closed earlier this year. The other half is related to facilities that we had previously closed. Restructuring cost will be substantially lower next quarter and should be in the range of $4 million to $5 million. My remaining comments will focus on the non-GAAP financials for the third quarter. At $116 million, gross profit was up $14 million from the prior quarter and up $10 million from the third quarter a year ago. Gross margin was 7.8%, which was a 70 basis point -- which was 70 basis points above the previous quarter. Operating expenses were up $4 million for the quarter at $66 million. This represents a 10 basis point increase in operating expenses as a percent of revenue. The increase was primarily related to increased accruals for incentive compensation and increased investment in research and development. At $50 million, operating income increased by 24.4% from the prior quarter and was up 12.7% from the third quarter last year. Operating margin was 3.3%, which was 50 basis points better than last quarter. Other income and expense was at $9 million. The tax rate for the quarter was 17.4% of pretax income, which brings our estimated tax rate for the year to 16%, up one percentage point from what we had estimated last quarter. We revised our tax estimate for the year to 15% to 17%. On a non-GAAP basis, we earned $34 million in net income or $0.40 per share. Please turn to Slide 5. We're providing more information on the segments that we report. To refresh your memory, the Integrated Manufacturing Solutions segment includes printed circuit board assembly and test, optical and RF modules, final system assembly and test, as well as direct order fulfillment. As you can see from the graph on the left, the IMS segment recovered nicely for us this quarter. Our revenue was up $44 million or 3.8% from last quarter, which was slightly better than we had expected. Our gross margin improved by 60 basis points due to increased volume and a good mix of business. The second segment for us is Components, Products and Services. Components include printed circuit board fabrication, backplane assemblies, cable assemblies, enclosures, precision machining and plastic injection molding. Products include computing and storage products, defense and aerospace products, as well as memory and solid state drive modules. Services include design and engineering, as well as logistics and repair services. In aggregate, the revenue for this segment was up $16 million or 5.2% with gross margin up 50 basis points to 11%. This gross margin improvement reflects higher revenue coupled with better business mix. On Slide 6, we are showing you some of our key non-GAAP P&L metrics. Revenue was up $61 million or 4.3% from last quarter. Demand was good in most segments, although, as we expected, we continue to experience softness in the multimedia segment. When compared to the third quarter last year, total revenue was down 3.9%. Moving on to gross profit. We had a $14 million increase in gross profit in Q3, while gross margin increased 7.8% which was up 70 basis points from last quarter. As you just saw, gross profit was up $11 million for the Integrated Manufacturing Solutions segment, while gross profit was up $3 million in the Components, Products and Services segment. Our operating profit increased 24.4% from last quarter to $50 million, this led to operating margin of 3.3%. Net interest expense declined by about $1.7 million this quarter as we continue to see the benefits of the deleveraging of our balance sheet. Now I'd like to turn your attention to the balance sheet on Slide 7. Our cash and cash equivalents were $416 million. Cash was up $4 million from the previous quarter. This increase in cash was achieved while reducing total debt by $69 million during the quarter. Accounts receivable and accounts payable increased, while inventory was slightly down. Property, Plant and Equipment was down slightly at $544 million at the end of the quarter. The single biggest change in the balance sheet for the quarter was a $56 million reduction in short-term debt. Overall, our cash position and our balance sheet are in excellent condition. In fact, 2 of the 3 debt rating agencies have recognized our financial improvement with an increased debt rating since our last earnings call. Please turn to Slide 8, where we will review our balance sheet metrics. Cash was up $4 million from Q2 as a result of strong cash generation, offset by a $69 million reduction in total debt. Cash flow from operations for the quarter was slightly better than the second quarter at $66 million. Gross capital expenditures were unusually light at $10 million. Overall, this led to $56 million in free cash flow. Inventory dollars were down slightly from Q2 with inventory turns increasing from 6.7 to 6.9 during the quarter. Compared to Q3 last year, inventory is down $30 million. In the lower left-hand quadrant, we are showing cash cycle days, which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time decreased from 52 days last quarter to 48.3 days this quarter. Accounts receivable days sales outstanding, inventory days of supply and accounts payable days outstanding all improved during the quarter. Finally, return on invested capital improved to 12.6% for Q3. ROIC was helped by stronger profitability and better asset utilization. Please turn to Slide 9. I would now like to share with you our guidance for the fourth fiscal quarter of fiscal year 2013. Our view is that revenue will be in the range of $1.475 billion to $1.525 billion. We expect that gross margin will be in the range of 7.2% to 7.8%. Operating expense should be $62 million to $64 million. This leads to an operating margin in the range of 3.1% to 3.5%. We expect that other income and expense will be in the range of $8 million to $9 million. We expect the tax rate to be in the range of 15% to 17%, and we expect our fully diluted share count to be 86 million shares to 87 million shares. When you consider all this guidance, we believe you'll end up with earnings per share in the range of $0.37 to $0.43. Finally, for your cash flow modeling, we expect that gross capital expenditures will be around $20 million, while depreciation, amortization will be around $24 million. Overall, we continue to navigate through a slowly improving macroeconomic environment. Profitable growth and free cash flow generation are our highest priorities as we see improving growth prospects across our customer and business space. At this point, I'll turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Ladies and gentlemen, I will review the business environment for the third quarter. I'll talk about the short-term business environment for our fourth quarter and I'll talk also about our outlook for the rest of the calendar year 2013. As I look at the macroeconomic environment, I can see some economical improvements looking to be a lot more positive than 90 days ago. I am pleased with the third quarter results. I guess I would like to see a little bit more growth, but we believe things are moving in the right direction. As we accomplished a lot of good things during the quarter, we improved operational efficiencies, we delivered favorable business mix, we continue to improve our capital structure, delivered a strong free cash flow of $56 million in the third quarter and year-to-date, over $200 million of free cash flow. Overall, to us, it's a good quarter. Now please turn to Slide 12. Third quarter revenue by end markets, as you can tell, communication networks is the largest part of our revenue, 49%, grew nicely up 6%. Basically, it was driven by a stronger demand in networking and wireless part of the business. Demand was driven by LTE programs during the quarter. Computing and storage was 13% of revenue, overall flat. We had a weaker demand than anticipated and slower growth in our new programs. Defense, industrial and medical was 28% of our revenue, grew 7.7%, very nice improvements in industrial and defense segment. Medical was slightly down on a weak demand in our new programs. Multimedia was 10% of the revenue, it was down 5.9% as we forecasted. Overall, multimedia seasonally is a slower quarter. While we are continuing to make some improvements, diversifying our markets here -- I mean, our business here and also making nice improvements overall. Could you please turn now to Slide 13. Now let me review our fourth quarter outlook by market segments. We are forecasting that demand should continue to improve across most of our key market segments. Communication networks, we're forecasting for the fourth quarter to be slightly up. Demand in communication network is overall stable and should continue to improve, driven by networking and wireless infrastructure projects. Enterprise, computing and storage, we're forecasting to be flat for the quarter. Overall, slower demand but we expect to see some more improvements in the new projects, as we are continuing to work on some of the good opportunities in this segment of the market. Defense, industrial and medical, we're forecasting to be up. Defense, forecasting better demand to continue. On industrial, we're starting to see strong demand across all our Industrial segments. Medical, we're forecasting to be flat, slightly down, short-term weaker demand, but again, we also have some good opportunities in the pipeline with the new projects here. Multimedia, we're forecasting to be down, we do expect that during the quarter to get more stabilized. We expect better activities and better mix of the business for the future. Now let me make a few comments regarding the sales bookings. Bookings for the third quarter book-to-bill was positive and continue to improve. This was our strongest quarter in bookings for fiscal year 2013. Outlook for the rest of the calendar year 2013 looks positive. We remain overall encouraged by better customer forecast and stronger growth opportunities with these new projects. We have some good new opportunities in the pipeline that we are working on. Overall, looks very promising at this time. Please turn to Slide 14. In summary, third quarter, as Bob mentioned, we had a solid execution. Fourth quarter, we expect modest growth with the further improvements in our operating model. We continue to be focused on quality of our growth. And market opportunities remain attractive as economy starts to show signs of improvement. Our strategy is very simple, to continue to invest in our people and technology to create more value for our customers. Our goal is to be predictable and deliver sustainable results. So, ladies and gentlemen, now, I would like to thank you all for your time and support. Operator, we are now ready to open the lines for question and answers. Thank you, again.

[Operator Instructions] And your first question comes from Brian Alexander with Raymond James. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Just on the communications business, so it looks like you're expecting further improvement in the September quarter on a sequential basis. Could you maybe give us a sense for the magnitude of the improvement that you're expecting? And whether you're seeing the uptick in orders that you thought you would see a quarter ago? I know you were pretty excited about that business last call. And just the overall health of that segment? And then how should we think about the Nokia Siemens relationship in light of the transaction with Nokia and discussions about them potentially inviting more manufacturers to the table?

Okay, Brian. Well, first of all, as we know, the communication network for us, the first 2 quarters of this fiscal year was slower than what we anticipated. We've been very fortunate that we've been involved with the new projects in communication networks, both in a networking side and a wireless side. So we saw a nice growth last quarter, about 6 points -- 6%. We expect that growth to slightly improve in this quarter, and we expect them really to continue to improve for the rest of the calendar year. Again, we are well positioned. We've got some good programs. So at this time, things are looking up. When it comes to the Nokia comment there, we don't like to comment on the news reports about our customers. As you know, we have a long-term relationship with Nokia, we continue to do a great job. But Nokia, or any other customer, there's always positives and negatives. So -- but we're pretty optimistic about the future. Brian G. Alexander - Raymond James & Associates, Inc., Research Division: Okay. And then just a follow-up on the gross margins. 7.8% was well above the midpoint of your guidance, Bob, of I think 7.2% coming into the quarter. So where were you surprised from a gross margin perspective given that the revenue was really within your guidance? Was it mix, was it cost savings came in faster than expected? And then what's driving the down tick in gross margins in September?

Yes. So for the quarter, the mix was excellent in, really, both segments. So on the Integrated Manufacturing Solution side, that we had very good mix. Obviously, helped by the increase in volume there as it was up quite a bit sequentially. And then on the Components, Products and Services, it's really a matter of a lot of the actions we took before beginning to yield some benefits. And then we also had a pretty good mix on that part of the business. So with respect to your question on next quarter, we're assuming a, what I would say, back to a more normal mix. Mix could end up being better, we know never know for sure until the quarter is over. But we're being a little cautious on mix and we are pretty pleased with what we were able to deliver in the current quarter.

And your next question comes from Wamsi Mohan with Bank of America.

Jure, can you talk about the length of some of the programs in the wireless infrastructure, particularly LTE? Are we in the early innings there? Do you expect a multi quarter ramp on these programs? Can you give us some sense?

Yes. Well, I think we're very well-positioned with all our key customers on LTE. I would say that we are in early innings of LTE deployment, so I think we are well-positioned. Most importantly, we are positioned with the new projects for the future also. So as the growth in this side of the business improves and assuming the economy is going to support us, I believe that Sanmina will continue and have some nice benefits.

Okay. And, Bob, just on the component margins, I mean, you mentioned both mix and higher revenues as drivers. Any sense you could give us on how much the contribution from each of those were on a sequential basis so that we can sort of think about how those margins might play out going into the December quarter also?

Yes. The challenge is, I mean, there are a lot of moving parts. And so we definitely benefited from volume going up. When you start to peel the onion in Components, Products and Services, there -- some of those businesses, where revenue was down a bit, some were -- was up a bit, some were -- obviously, where it was up the contribution margins were quite healthy. So without getting into detail of every single one of those areas it's difficult to fully articulate what happened. But I can tell you, all of those businesses were really performing pretty well. And there were some areas -- some of the more profitable ones in the past, maybe revenue was down a little bit, some of the ones where we'd have some struggles in the past, we really saw improvement in profitability. So it was very much a mixed bag and it's difficult without getting into a lot of the detail to clearly articulate that.

But just, Wamsi, to add to that, as you know, our goal is to continue growth in our Components Products and Services. And as we talked about for a few years that there's a lot more opportunities there for us, and we want to take advantage there as the economy improves so that we can grow each of those segments and that should help us in the future.

I mean, Jure, thanks for the extra color but I mean is it reasonable to think that now like 10-percent-ish margin and that's when gross margin is more of a sustainable level for you guys?

Well, I think 10% is very sustainable. We're not happy with 11% right now. I mean, we should be able to do substantially better than that as we continue to improve and we get a little bit of tailwind in terms of volume increase.

It continue through the mix in that segment. All those things will add up and -- which we're well-focused right now. We've been investing fair amount in the business development side, in engineering and technology. As you know, Wamsi, we did arrange the management in that side of the business the last year or so. So things are moving in the right direction. As Bob said, we're not happy with the present gross margin.

And you're next question comes from Jim Suva with Citi.

In your prepared comments, you made a little bit of a commentary around medical being a little bit softer than expected. Can you kind of expand upon that a little bit? Because I kind of really wonder with ObamaCare coming out, does this yield the opportunity for you guys to see much more outsourcing coming in the medical sector? Or is there the tax change that is causing this to slowdown? Or how should we think about ObamaCare and the medical segment as this is a pretty important sector for you guys?

Well, Jim, definitely Medical is very important. I don't know if I'm an expert to be able to answer that question directly how ObamaCare is going to affect. I would -- really, my customers are probably more expert on than that. But let me tell you our situation. I'm really pleased where we are in the medical segment itself. In the last year or 1.5 years, we've really grown our customer base, expanded the opportunities. The only challenge in the medical side, it takes long to -- when you win these new programs, sometimes takes 1 or 2, 3 years to get them in production, especially when you win in these new programs in medical. And that's really our situation here, is more that some of these new programs that we won, not as moving as fast as customer forecast them. At the same time, sometimes moving these programs away from our customer to Sanmina manufacturing, it takes a little bit longer. So we got a lot of it in the pipeline. But overall, we are very optimistic about the opportunities that we have in the medical segment. Actually, I would say, I'm more optimistic about our medical business now than I've been for a long, long time.

Okay. And then taking a step back and looking at the overall Sanmina business, you mentioned that you had a very strong quarter of bookings, yet your sales outlook isn't overly robust. In fact, it looks more kind of flattish to slightly up. And so, can you help us bridge the difference between the commentary on the strong bookings and the revenue outlook?

Yes. Well, bookings -- we have strong bookings but not everything was scheduled for this coming quarter. So overall, I -- we -- first of all, as we look at the long-term, I think our goal internally is to focus on quality of the growth here, Jim, make sure we have right customers and right projects that are sustainable. We don't want to change the revenue for revenue's sake. Our goal is to, again, improve the quality of the customer, go after the projects that allow us to make a little bit more money and make sure that we properly load all our operations. As you know, we have circuit boards, we got backplanes, we got plastic, we got mechanical, we got EMS. Loading these things properly is the most important thing for us with the quality of the customer. So I think for us, it's a more focusing and be able to deliver predictable and sustainable growth is most important right now. So we're going to take, what I call, the right steps in the right direction in the short term but working on the bigger deals long-term. But those bigger deals got to be quality deals.

Great. And then, Bob, what was it? One customer above 10% or 2%, or how should we think of that?

There was one customer above 10% this quarter.

And your next question comes from Osten Bernardez with Cross Research.

Just real briefly, I wanted to get your feel for where you think and it was touched on already, but the trajectory for the mark for your CPS and IMS margins throughout the year. I know that mix comes into play, but do you expect both segments to improve throughout this calendar year on the fluid basis the way they have so far?

First of all, let me -- from a pure business mix, I'll make a comment on some of things that we do in operation and then our CFO can add to that. I think there's a lot of things that we do internally to improve our efficiencies, yields and so on. And as I said, driving the proper load for these factories, that is the key to us. And I think we are moving in the right direction. As we mentioned earlier, I believe that this Components, Products and Services have lot more opportunities for better margins because some of these businesses are not properly loaded yet. We also had some good opportunities, especially in the product side and services side that we won and working on that should help us contribute for the future. So there's a lot of exciting opportunities in our Components, Products and Services. Yes, in the short term, we are forecasting modest growth. But I would expect us to make improvements in the margin. On Integrated Manufacturing Solutions business, I think we had a nice improvement in this quarter. I think this coming quarter is going to be more dependent on the mix, how the mix comes in. But again, both of these segments, we are working very hard internally to drive the quality of the business and also focus on our businesses that we can make some improvements in margins. Bob?

Yes, I don't know how much I have to add. I mean, on the Integrated Manufacturing Solutions side, we are not going to see as much upside there as you're going to see on the Components, Products and Services. IMS is really a function of mix, and as Jure said, how we load the factories and getting better factory utilization. So there's definitely upside on Integrated Manufacturing. But on the Components, Products and Services, we think there's a significant upside potential there. Those are all businesses that have very high contribution margins. And so, the way we've got them positioned now, the way we've been able to lower some of the fixed costs, as we see some revenue come back, we should see a pretty substantial pick up in gross margin on that side.

And then separately, during the quarter, you signed-- your Viking group was able to sign a commercial customer. My question is, how should we think about future signings for the Viking group and the trajectory for that business to generate some volume?

Well, I mean, we've signed more than one customer, so I don't know exactly which one you're referring to.

Sorry, I was referring to the Supercom [ph] announcement.

Yes, so we're in the midst of a transition in Viking, we're doing more and more on the solid state drive side. We think we're well-positioned in niche markets with some of the solid state products we're working on. And we'll continue to have the memory module business, the business that's been very successful for us in the past, and the key is to catch the next wave on solid state drives.

And the margin picture there, still improving?

Well, the margins in the Viking business, as we -- I think we said in the last analyst meeting, are already at benchmark levels. And so, as we go through this transition, we need to continue to sustain that.

And your next question comes from Christian Schwab with Craig-Hallum Capital.

A quick question, a follow-up on some of these earlier questions. As we look to the September quarter guide kind of being up, say, 1% at the midpoint versus 6% the last couple of years in reality. When we look at that, how should we be thinking about that? Should we be thinking that, that is predominantly macro driven and we're seeing possibly less than typical seasonality as a result? Are there some moving parts in the revenue stream that are more negatively impacting that? Or delays in customer ramps of new products? I'm just wondering if there's any further color that you can share there other than it is what it is?

Yes. Well, Christian, as I mentioned earlier, a few things, let me try to add some more to that. First of all, as we look to this coming quarter, we see some -- as I mentioned earlier, we think overall business is stronger. There's a lot of positive signs. But based on what we see today, we saw communication network to be slightly up; enterprise computing to be flat; defense, industrial, medical to be nicely up, especially driven industrial side and in defense side of our business. Each segment we have here, we -- as I mentioned in my prepared statements on enterprise, computing and storage, we have some good opportunities, some of the new programs being delayed or pushed out. And as we talked about also a little bit about some of the medical products, as these new programs are coming up, they've been, not -- I wouldn't use the word pushed out, but they're coming to the market a little bit slower than what we anticipated. So we got some of that stuff going on and -- but on a positive side, I would say, I'm a lot more personally confident about the next 6 months today than I was 90 days ago. So to us, I think, most important for us is to stay on a conservative side and take advantage of every opportunity that we have during the quarter and deliver the -- hopefully a good quarter and be positioned to even a better opportunities in our December quarter. So that's really what we are planning on. It's a lot of work in front of us. But most importantly, there's a lot more positive opportunities now than what we were talking about 6 months ago.

That sounds great. And given the strong bookings and stuff that you talked about, I would assume it's safe to assume that the December quarter will be up from September. We just -- we'll have to determine how much?

Yes. It's hard to forecast and we'd like to take one quarter at a time. But I as I said in my prepared statement, our goal is to focus on sustainable and predictable. I think that is the most important part that we are -- as we are right now building what I call the new Sanmina. I think consistency and quality of the earnings is, with a good cash flow, is the most important part of our strategy.

Excellent. And then one last question. We could have done just a tremendous job of capital allocation towards reducing measurable debt and reducing the net interest expense. Any update on a two-pronged approach more aggressively on both debt and repurchasing of stock? Or are we just going to take that day-to-day?

Yes, our priorities on using the cash we're generating remain the same. I mean, as I've said before, #1 is making sure we have the working capital we need to grow the business. And as Jure said, there are a number of opportunities out there. So we need to make sure, first of all, we've got the cash we need to run the business. Secondly, we will continue to look at small, strategic acquisitions, similar to what we did last year. We did a couple of small services deals last year. We're looking at deals that are synergistic with our strategy as we've articulated it. So we'll continue to look at opportunities there. And then we get to the question you're posing, Christian, of is it better for shareholders to repurchase debt or is it better for our shareholders to repurchase stock and we'll continue to go through that analysis on an ongoing basis and we're -- we've already taken out quite a bit of debt this year. And we fortunately are still generating very good cash flow. So it's an important question and we'll continue to monitor it, but I can't say today exactly what we'll do.

And your next question comes from Sherri Scribner with Deutsche Bank.

This is actually Kevin LaBuz on behalf of Sherri. My first question is just on the communication side of your business. Was the upside there, was that driven by new program ramps or improving end markets or some mix thereof?

Well, we've been -- as I mentioned in the last couple quarters, we talked about -- we've been very fortunate that in our communication network, fair amount of our revenue is really coming from these new programs. So it's a combination of, I would say, number one, demand. And of course, most of the demand is coming from these new technologies, new programs. So it was -- it's pretty helpful, so let's put it that way.

Okay. And then just a brief one, as a follow up. Do you have any expectations for when you'll return to year-over-year growth on a revenue basis?

Well, for us, I would say that we're going to focus one quarter at a time. As I said earlier, is to hopefully -- the economy will cooperate with us and that our customer base will continue to expand that we can grow on a quarterly basis but I -- and I think to us, most important is quality of the growth, growth of the revenue itself without growing gross margin and operating margin and EPS doesn't mean anything to us anymore. So again, the quality of the growth, EPS, free cash flow and building a lot stronger company for the future, to me that's the key and that's what Bob and I and the rest of the team at Sanmina is focused every day. Bob, any comments?

I guess, the silver lining in the challenges we have for the first half of this year is that compares get easier as we move into next year. So I don't know for sure when we'll be back to year-over-year growth. But the challenge isn't as high as it was before. And I think the key is what Jure said, we have to take it a quarter at a time and keep going after the right markets that yield good benefit for both our customers and our shareholders.

And your next question comes from Joe Wittine with Longbow Research.

Bob, going back to the buyback, you sounded relatively conservative, I guess, when you're talking about how you're looking at cash deployment. Does that imply that we shouldn't expect that you'd consider drawing the credit facility to do some of the buyback?

I didn't mean to imply anything. I mean, it's something we monitor constantly and we'll continue to look at what we think makes the most sense from a shareholder standpoint. I mean, obviously, we're -- we have more information here in terms of things we're working on and trade-offs that we're making that I can talk about publicly. But we're here to create shareholder value. And so we'll make whatever the right -- whatever we believe is the right decision at that point in time.

Got it. And then in the guidance, OpEx is coming down sequentially. I was curious what's driving that. Is that restructuring savings or is some of that an R&D bump in the June quarter, onetime kind of expenses, if you could explain that?

Yes. The anomaly is really in the third quarter. We'd had, as you know, a very tough first half of the year and had accrued very little in terms of incentive compensation. And so, given the improved results, we did book more in the third quarter. And so, that will come back down to more normal levels in the fourth quarter.

Great. And then finally, if I could, you talked about at the Analyst Day, I remember, I think, of potentially easing of the valuation allowances against your deferred tax assets. Maybe -- I assume that's something you look at as you approach the end of the fiscal year. Is there any update on that with the kind of change in your operating model right now? Is it still the big dollar amount that you talked about? I think you said, potentially, up to $500 million, is that still a possibility at this time?

I doubt if we'll bring on that magnitude at any one point in time. It is something that as part of our normal process we'll be evaluating at the end of each fiscal year. And so, it's really a function of our assessment of our ability to use those NOLs. And I think over time, we're pretty confident we'll be able to use them. But I can't tell you what a number would be right now.

Your final question comes from Amit Daryanani with RBC Capital Markets.

A couple of questions. One, you talked about a $9.5 million restructuring charge this quarter, $4 million to $5 million next quarter. Can you just talk about are these more focused on the component side or the IMS side? And what sort of savings do you expect and then to decide [ph] to flow in to your P&L?

Yes, Amit, this is Bob. I'll take that question. So as I mentioned, overall restructuring was about $9.4 million this quarter and roughly half of that was associated with the plant in the PCB business that we made the decision to shut down in Malaysia and we're making very good progress on that and most of that expense is behind us at this point. And then the other part of that first half is associated with the plant that we're consolidating in Israel. So the stuff that we announced in the last few quarters is -- we've got a couple million more to go, but for the most part is behind us. And so, we think it will be down to the $4 million to $5 million range next quarter and then, as you go out into the future, it should drop even significantly lower than that.

And I guess, Bob, how do you think about the savings from this, call it, $13 million to $14 million restructuring for June and September quarter? Do you start to see that payback of 12 months, I'm assuming kick in to fiscal '14 or is it a more elongated payback?

What we said when we made these decisions is we really expected to begin to see the benefits -- we expect to begin to see benefits in the June quarter, which we did from those restructurings. And then fully realizing the benefits in the September quarter.

Got it. And then just finally, given the comments you guys have made on capital allocation, how much cash do you think you need to run the business on a day-to-day basis? I'm just trying to get some sense of how much excess cash you might be sitting on today and how much you'll generate going forward.

Yes, it's not a question that we've answered publicly. Although, I can tell you, we have substantially more cash on the balance sheet than we need to run the business on a day-to-day basis. So we're -- and we'll continue to be that way. I think, it's important that we're cautious with how we use our cash. It's important for both our shareholders and our customers. So we have a strong balance sheet and that we maintain reasonable cash balances.

Well, ladies and gentlemen, again, I want to thank you personally for taking your time and listening to us. If we did not answer all your questions, please give us a call. Otherwise, we'll be talking to you 90 days from now. Thanks again.

Thanks, everyone.

Bye-bye.

And this concludes today's conference call. You may now disconnect.