SanminaSCI Corp. CEO SOLA JURE bought 548400 shares on 11-03-2008 at $0.74
We are an independent global provider of customized, integrated electronics manufacturing services, or EMS. We provide these comprehensive services primarily to original equipment manufacturers, or OEMs, in the communications, computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical, and automotive industries. The combination of our advanced technologies, extensive manufacturing expertise and economies of scale enables us to meet the specialized needs of our customers in these markets in a cost-effective manner.
Our end-to-end services in combination with our global expertise in supply chain management enable us to manage our customers' products throughout their life cycles. These services include:
product design and engineering, including initial development, detailed design, preproduction services and manufacturing design;
volume manufacturing of components, subassemblies and complete systems;
final system assembly and test;
direct order fulfillment and logistics services; and
after-market product service and support.
Our high volume manufacturing services are vertically integrated, allowing us to manufacture key system components and subassemblies for our customers. By manufacturing key system components and subassemblies ourselves, we enhance continuity of supply and reduce costs for our customers. In addition, we are able to have greater control over the production of our customers' products and retain incremental profit opportunities for the company. System components and subassemblies that we manufacture include high-end printed circuit boards, printed circuit board assemblies, backplanes and backplane assemblies, enclosures, cable assemblies, precision machine components, optical modules and memory modules.
We manufacture products in 19 countries on five continents. We seek to locate our facilities near our customers and our customers' end markets in major centers for the electronics industry or in lower cost locations. Many of our plants located near customers and their end markets are focused primarily on final system assembly and test, while our plants located in lower cost areas engage primarily in high volume, less complex component and subsystem manufacturing and assembly.
We have become one of the largest global EMS providers by capitalizing on our competitive strengths, including our:
product design and engineering resources;
vertically integrated manufacturing services;
expertise in serving diverse end markets; and
experienced management team.
EMS companies are the principal beneficiaries of the increased use of outsourced manufacturing services by the electronics and other industries. Outsourced manufacturing refers to an OEMs' use of EMS companies, rather than internal manufacturing capabilities, to manufacture their products. Historically, EMS companies generally manufactured only components or partial assemblies. As the EMS industry has evolved, OEMs have increased their reliance on EMS companies for additional, more complex manufacturing services, including design services. Some EMS companies now often manufacture and test complete systems and manage the entire supply chains of their customers. Industry leading EMS companies offer end-to-end services, including product design and engineering, volume manufacturing, final system assembly and test, direct order fulfillment, after-market product service and support and global supply chain management.
We believe increased outsourced manufacturing by OEMs will continue because it allows OEMs to:
Reduce Operating Costs and Capital Investment. In the current economic environment, OEMs are under significant pressure to reduce manufacturing costs and capital expenditures. EMS companies can provide OEMs with flexible, cost-efficient manufacturing services. In addition, as OEM products have become more technologically advanced, the manufacturing and system test processes have become increasingly automated and complex, requiring significant capital investments. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures.
Focus on Core Competencies. The electronics industry is highly competitive and subject to rapid technological change. As a result, OEMs increasingly are focusing their resources on activities and technologies in which they expect to add the greatest value. By offering comprehensive manufacturing services and supply chain management, EMS companies enable OEMs to focus on their core competencies, including next generation product design and development as well as marketing and sales.
Access Leading Design and Engineering Capabilities. The design and engineering of electronics products has become more complex and sophisticated and in an effort to become more competitive, OEMs are increasingly relying on EMS companies to provide product design and engineering support services. EMS companies' design and engineering services can provide OEMs with improvements in the performance, cost and time required to bring products to market. EMS companies are providing more sophisticated design and engineering services to OEMs, including the design and engineering of complete products following an OEM's development of a product concept.
Improve Supply Chain Management and Purchasing Power. OEMs face challenges in planning, procuring and managing their inventories efficiently due to fluctuations in customer demand, product design changes, short product life cycles and component price fluctuations. EMS companies employ sophisticated production management systems to manage their procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when needed basis. EMS companies are significant purchasers of electronic components and other raw materials, and can capitalize on the economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. EMS companies' expertise in supply chain management and their relationships with suppliers across the supply chain enable them to help OEMs reduce their cost of goods sold and inventory exposure.
Access Global Manufacturing Services. OEMs seek to reduce their manufacturing costs by having EMS companies manufacture their products in the lowest cost locations that are appropriate for their products and end customers. OEMs also are increasingly requiring particular products to be
manufactured simultaneously in multiple locations, often near end users, to bring products to market more quickly, reduce shipping and logistics costs and meet local product content requirements. Global EMS companies are able to satisfy these requirements by capitalizing on their geographically dispersed manufacturing facilities, including those in lower cost regions.
Accelerate Time to Market. OEMs face increasingly short product life cycles due to increased competition and rapid technological changes. As a result, OEMs need to reduce the time required to bring their products to market. OEMs often can bring a product to market faster by using EMS companies' expertise in new product introduction, including manufacturing design, engineering support and prototype production. OEMs often can more quickly achieve volume production of their products by capitalizing on EMS companies' manufacturing expertise and global presence and infrastructure.
We believe that our competitive strengths differentiate us from our competitors and enable us to better serve the needs of OEMs. Our competitive strengths include:
End-to-End Services. We provide services throughout the world to support our customers' products during their entire life cycle, from product design and engineering, through volume manufacturing, to direct order fulfillment and after-market product service and support. We believe that our end-to-end services are more comprehensive than the services offered by our competitors because of our focus on adding value before and after the actual manufacturing of
our customers' products. Our end-to-end services enable us to provide our customers with a single source of supply for their EMS needs, reduce the time required to bring products to market, lower product costs and allow our customers to focus on those activities in which they expect to add the highest value. We believe that our end-to-end services allow us to develop closer relationships with our customers and more effectively compete for their future business.
Product Design and Engineering Resources. We provide product design and engineering services for new product designs, cost reductions and design for manufacturability (DFx). Our global design and engineering teams include approximately 450 engineers located in 24 design centers and New Product Introduction (NPI) centers in 14 countries. Our engineers work with our customers during complete product life cycle. Our design centers provide hardware, software, ECAD, verification, regulatory, and testing services. We design high speed digital, analog, radio frequency, wired, wireless, optical and electro-mechanical products.
Our engagement models include Joint Design Manufacturing (JDM), Contract Design Manufacturing (CDM) and consulting engineering for DFx and RoHS. We focus on industry segments to align with our technology focused markets. These include Communications, Medical, Defense & Aerospace, Enterprise Servers and Storage as well our vertically integrated components technologies, i.e. printed circuit boards, enclosures, memory modules and cable assemblies.
In the JDM model, our customers bring market knowledge and product requirements. We offer complete design engineering and NPI services. For JDM products, typically the intellectual property is jointly owned by us and the customer and we realize manufacturing revenue associated with building and shipping the product.
Vertically Integrated Volume Manufacturing Services. We provide a range of vertically integrated volume manufacturing services. Key system components that we manufacture include complete printed circuit boards and printed circuit board assemblies, backplanes and backplane assemblies, enclosures, cable assemblies, precision machine components, memory modules and optical modules. By manufacturing these system components and subassemblies ourselves, we enhance continuity of supply and reduce costs for our customers. In addition, we are able to have greater control over the production of our customers' products and retain incremental profit opportunities for us. Examples of products that we manufacture using our full range of services include wireless base stations, network switches, optical switches, enterprise-class servers, photolithography equipment, and equipment used in the semiconductor chip manufacturing process, including equipment for chemical mechanical polishing and physical vapor depositions and automated handling tools and robotics for wafer transfer.
Advanced Technologies. We provide services utilizing advanced technologies, which we believe allows us to differentiate ourselves from our competitors. These advanced technologies include the fabrication of complex printed circuit boards and backplanes having over 60 layers and process capabilities for a range of low signal loss, high performance materials, buried capacitors and resistors, and high density interconnects using micro via holes that are formed using laser drills. Our printed circuit board assembly technologies include micro ball grid arrays, fine pitch discretes, and small form factor radio frequency and optical components, as well as advanced packaging technologies used in high pin count application specific integrated circuits and network processors. We use innovative design solutions and advanced metal forming techniques to develop and fabricate high-performance indoor and outdoor chassis, enclosures and frames. Our assembly services use advanced technologies, including precision optical alignment, multi-axis precision stages and machine vision technologies. We use sophisticated procurement and production management tools to effectively manage inventories for our customers and ourselves. We have also developed build-to-order, or BTO, and configure-to-order, or CTO,
systems that enable us to manufacture and ship finished systems within 48 to 72 hours after receipt of an order. To coordinate the development and introduction of new technologies to meet our customers' needs in various locations and to increase collaboration among our facilities, we have established a centralized global technology group.
Global Capabilities. Most of our customers compete and sell their products on a global basis. As such, they require global solutions that include regional manufacturing for selected end markets, especially when time to market, local manufacturing or content and low cost solutions are critical objectives. Our global network of facilities in 19 countries provides our customers a combination of sites to maximize both the benefits of regional and low cost manufacturing. To manage and coordinate our global operations, we employ an enterprise-wide software system that operates on a single IT platform and provides us with company-wide information regarding component inventories and orders. This system enables us to standardize planning and purchasing at the plant level and to optimize inventory management and utilization. Our systems also enable our customers to receive key information regarding the status of individual programs.
Customer-Focused Organization. We believe customer relationships are critical to our success, and our organization is focused on providing our customers with responsive services. Our key customer accounts are managed by dedicated account teams, including a global business manager directly responsible for account management. Global business managers coordinate activities across divisions to effectively satisfy our customers' requirements and have direct access to our senior management to quickly address customer concerns. Local customer account teams further support the global teams and are linked by a comprehensive communications and information management infrastructure.
Expertise in Serving Diverse End Markets. We have experience in serving our customers in the communications, personal and business computing, enterprise computing and storage, multimedia and consumer, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive markets. Our diversification across end markets reduces our dependence upon any one customer or segment. In order to cater to the specialized needs of customers in particular market segments, we have dedicated personnel, and in some cases facilities, with industry-specific capabilities and expertise. We also maintain compliance with industry standards and regulatory requirements applicable to certain markets including, among others, the medical and defense and aerospace sectors.
Experienced Management Team. We believe that one of our principal assets is our experienced management team. Our chief executive officer, Jure Sola, co-founded Sanmina in 1980. Hari Pillai, President, EMS Operations, joined our Company in 1994 and has served in manufacturing management positions since that time. We believe that the significant experience of our management team better enables us to capitalize on opportunities in the current business environment.
Our Business Strategy
Our objective is to maintain and enhance our leadership position in the EMS industry. Key elements of our strategy include:
Capitalizing on Our Comprehensive Services. We intend to capitalize on our end-to-end services, which we believe will allow us to both sell additional services to our existing customers and attract new customers. Our end-to-end services include product design and engineering, volume manufacturing, final system assembly and test, direct order fulfillment, after-market product service and support and supply chain management. Our vertically integrated volume manufacturing services enable us to manufacture additional system components and subassemblies for our customers. When we provide a customer with a number of services, such as component manufacturing or higher value-added services, we are often able to improve our margins and profitability. Consequently, our goal is to increase the number of manufacturing programs for which we provide multiple services. To achieve this goal, our sales and marketing organization seeks to cross-sell our services to customers.
Extending Our Technology Leadership. We rely on advanced processes and technologies to provide our vertically integrated volume manufacturing services. We continually strive to improve our manufacturing processes and have adopted a number of quality improvement and measurement techniques to monitor our performance. We work with our customers to anticipate their future manufacturing requirements and align our technology investment activities to meet their needs. We use our design expertise to develop product technology platforms that we can customize by incorporating other components and subassemblies to meet the needs of particular OEMs. These technologies enhance our ability to manufacture complex, high-value added products, allowing us to continue to win business from existing and new customers.
Joint Design Manufacturing Solutions. As a result of customer feedback, and our customers' desire to manage research and development expenses, we have expanded product designs services to develop systems and components jointly with our customers. In joint design manufacturing model, or JDM, our customers bring market knowledge and product requirements. We offer complete design engineering and NPI services. Our offerings in design engineering include product architecture, development, integration, regulatory and qualification services; while NPI services include quick-turn prototyping, functional test development and introduction into volume production. For JDM products, typically the intellectual property is jointly owned by us and the customer and we realize manufacturing revenue associated with building and shipping the product.
Continuing to Penetrate Diverse End Markets. We focus our marketing efforts on major end markets within the electronics industry. We have targeted markets that we believe offer significant growth opportunities and for which OEMs sell complex products that are subject to rapid technological change because the manufacturing of these products requires higher value-added services. Our approach to our target markets is two-fold: we intend to strengthen our significant presence in the communications and enterprise computing markets, and also focus on under-penetrated target markets, including the medical, industrial and semiconductor capital equipment, automotive, and defense and aerospace industries, many of which have not extensively relied upon EMS companies in the past. We intend to continue our diversification across market segments and customers to reduce our dependence on any particular market.
Pursuing Strategic Transactions. We seek to undertake strategic transactions that give us the opportunity to access new customers, manufacturing and service capabilities, technologies and geographic markets, to lower our manufacturing costs and improve the margins on our product mix, and to further develop existing customer relationships. In addition, we will continue to pursue OEM divestiture transactions that will augment existing strategic customer relationships with favorable supply agreement terms or build new relationships with customers in attractive end markets. Potential future transactions may include a variety of different business arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and equity or debt investments. We intend to continue to evaluate and pursue strategic opportunities on a highly selective basis.
Continuing to Seek Cost Savings and Efficiency Improvements. We seek to optimize our facilities to provide cost-efficient services for our customers. We maintain extensive operations in lower cost locations, including Latin America, Eastern Europe, China and Southeast Asia, and we plan to expand our presence in these lower cost locations, as appropriate, to meet the needs of our customers. We believe that we are well positioned to take advantage of future opportunities on a global basis as a result of our vertically integrated volume manufacturing strategy.
Our Products and Services
We offer our OEM customers end-to-end services that span the entire product life cycle. Examples of products that we manufacture for OEMs include wireless and wireline communications, high-end computer servers and storage, avionics, medical imaging and diagnostic systems and digital satellite set-top boxes. To manufacture these products may require us to use all or some of our end-to-end services.
Product Design and Engineering. Our design and engineering groups, provide customers with design and engineering services from initial product design and detailed product development to production. This group also complements our vertically integrated volume manufacturing capabilities by providing manufacturing design services for the manufacture of printed circuit boards, backplanes and enclosures. Our offerings in design engineering include product architecture, development, integration, regulatory and qualification services; while NPI services include quick-turn prototype, functional test development and introduction in to volume production.
We provide initial product development and detailed product design and engineering services for products such as communications base stations, optical switches and modules, radio frequency amplifier modules, network switches, computer servers and storage products. We follow a well defined product life cycle process during our design and development.
Initial Product Development. We provide a range of design and engineering services to customers to complement their initial product development efforts. During this phase, our design engineers work with our customers' product design engineers to assist with product concepts, selecting key components and design reviews.
Detailed Product Design. During the detailed product development phase, we work with our customers' product development engineers to optimize product designs to improve the efficiency of the volume manufacturing (DFM) of these products and reduce manufacturing costs. We further analyze product design to improve the ability of tests (DFT) used in the manufacturing process to identify product defects and failures. We provide software development support for product development, including installing operating systems on hardware platforms, developing software drivers for electronic devices, and developing diagnostic, production test and support software. We design components that are incorporated into our customers' products, including printed circuit boards, backplanes, enclosures and cables.
Preproduction. After a detailed product design has been completed and the product is released for prototype production, we can build a prototype on a quick turnaround basis. We then analyze the feasibility of manufacturing the product and make any necessary design modifications to the prototype and re-test the prototype to validate its design. We also provide early-stage test development during the prototype phase. We evaluate prototypes to determine if they will meet safety and other standards, such as standards published by Underwriters Laboratories, an independent product safety testing and certification organization, and other similar domestic and international organizations. We also typically provide low-volume manufacturing to satisfy our customers' initial needs. We review the material and component content of our customers' designs with a view to designing in alternative components that may provide cost savings. Our preproduction services help our customers reduce the time required to bring new products to market.
Manufacturing Design Services. We provide design and technology support for our vertically integrated system components and subassemblies, including:
Printed Circuit Board and Backplane Design. We support our customers with printed circuit board and backplane design and development assistance for optimizing performance, manufacturability and cost factors critical to overall system performance. These printed circuit boards and backplanes incorporate high layer counts and large form factors and are used in complex products such as optical networking products and communications switches. These designs also incorporate component miniaturization technologies and other advanced technologies that increase the number and density of components that can be placed on a printed circuit board. These technologies enable OEMs to provide greater functionality in smaller products. We also provide signal integrity engineering services, which enable the transmission of high speed electrical signals through a system while maintaining signal quality and data integrity.
Enclosure Design. We have a dedicated enclosure design group that designs and engineers complex enclosures. We can design custom enclosures to meet customer specifications and offer a range of proprietary designs tailored to particular applications. Our enclosure design services include the design of thermal management systems, which dissipate heat generated by the components within an enclosure. We design enclosures that are used in both indoor and outdoor environments. We also design enclosures that include both stackable and rack mount chassis configurations. In stackable configurations, component modules are stacked on top of each other, while in rack mount configurations, component modules slide into racks within the enclosure. Rack mount configurations often are used for complex products, such as communications switches that are frequently upgraded in the field by inserting new components. Our design engineers work with a range of materials, including metal, plastic and die-cast material. We design indoor and outdoor wireless base station cabinets, enclosures for high-end servers and data storage systems and enclosures for magnetic resonance imaging systems.
Volume Manufacturing. Volume manufacturing includes our vertically integrated manufacturing services described in greater detail below.
Printed Circuit Boards. We have the ability to produce multilayer PCBs on a global basis with high layer counts and fine line circuitry. Our ability to support New Product Introduction and Quick Turn fabrication followed by volume manufacturing in both North America and Asia allows our customers to accelerate their time to market, as well as their time to volume. Standardized processes and procedures make transitioning of products easier for our customers. Our Technology Roadmaps provide leading edge capabilities and higher yielding processes. Engineering teams are available on a world-wide basis to support designers in Design for Manufacturability (DFM) analysis and assemblers with Field Application Support.
Printed circuit boards are made of fiberglass/resin laminated material layers and contain copper circuits which interconnect and transmit electrical signals among the components that make up electronic devices. Increasing the density of the circuitry in each layer is accomplished by reducing the width of the circuit tracks and placing them closer together in the printed circuit board along with adding layers and via hole structures. We are currently capable of efficiently producing printed circuit boards with up to 60 layers and circuit track widths as narrow as two mils (50 micron) in production volumes. Specialized production equipment along with an in-depth understanding of high performance laminate materials allow for fabrication of some of the largest form factor and highest speed (over 12.5 Gbps) backplanes available in the industry. We have also developed several proprietary technologies and processes which improve electrical performance, connection densities and reliability of printed circuit boards. Some of these technologies, such as Buried Capacitance Tm, have become industry standards and are actively licensed to other board fabricators.
Jure Sola has served as our chief executive officer since April 1991, as chairman of our board of directors from April 1991 to December 2001 and from December 2002 to present, and co-chairman of our board of directors from December 2001 to December 2002. In 1980, Mr. Sola co-founded Sanmina and initially held the position of vice president of sales. In October 1987, he became vice president and general manager of Sanmina, responsible for manufacturing operations and sales and marketing and was president from October 1989 to March 1996.
Joseph Bronson joined our Company as our president and chief operating officer in August 2007 at which time he joined the Company's Board of Directors. He previously served as president and chief executive officer of FormFactor, a semiconductor wafer probe card manufacturing company, from November 2004 to January 2007 and as director since April 2002. He was also an executive vice president of Applied Materials, a semiconductor equipment company, from December 2000 to October 2004. Mr. Bronson served as chief financial officer at Applied Materials from January 1998, as senior vice president from January 1998 to December 2000, and as group vice president from April 1994 to January 1998.
Hari Pillai joined our Company in 1994 and has served in manufacturing management positions since that time. In January 2002, Mr. Pillai was appointed president and general manager of the EMS division of our company and in October 2004 was appointed president, global EMS operations.
Walter Hussey joined our Company as president of the technology components group in July 2007. Prior to joining Sanmina-SCI, he served as vice president of Global Manufacturing and Distribution for Symbol Technologies, Inc., a telecommunication company, from 2003 to 2007.
David L. White has served as our executive vice president of finance and chief financial officer since August 2004. Prior to joining us, he was senior vice president and chief financial officer of Asyst Technologies, a provider of integrated automation solutions that enhance semiconductor and flat-panel display (FPD) manufacturing productivity, from 2003 to 2004. Previously, he was president and chief executive officer of Candescent Technologies, a developer of field emission display (FED) technology for next-generation thin FPDs from 1995 to 2002.
Michael Tyler has served as our executive vice president and general counsel since April 2007. Mr. Tyler became our corporate secretary in June 2007. Prior to joining us, he was senior vice president, chief legal and administrative officer of Gateway, Inc., a major personal computer manufacturer, where he was employed from 2000-2007. Prior to that, he served as senior corporate counsel - International, at Northrop Grumman Corporation from 1995 to 2000, as an associate at the law firm Heller, Ehrman, White & McAuliffe from 1991 to 1995, and as a law clerk for the United States Court of Appeals for the Ninth Circuit from 1987 to 1988.
Dennis Young has served as executive vice president of worldwide sales and marketing since March 2003. Prior to joining our company, Mr. Young was senior vice president of sales from May 2002 to March 2003 and vice president of sales from March 1998 to May 2002 of Pioneer-Standard Electronics, a provider of industrial and consumer electronic products.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. Our revenue is generated from sales of our services primarily to original equipment manufacturers, or OEMs, in the communications; personal and business computing; enterprise computing and storage; multimedia; industrial and semiconductor capital equipment; defense and aerospace; medical and automotive industries.
A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers represented 61.5%, 60.8%, and 63.9% of our net sales for fiscal 2007, 2006, and 2005, respectively, and three customers, IBM, Lenovo and HP, represented 10% or more of our net sales for fiscal 2007 and 2006. Our largest customer, IBM, represented 10% or more of our net sales for fiscal 2005.
In recent periods, we have generated a significant portion of our net sales from international operations. During fiscal 2007, 2006, and 2005, 75.9%, 75.1%, and 76.2%, respectively, of our consolidated net sales were generated from non-U.S. operations. The concentration of international operations has resulted from overseas acquisitions and a desire on the part of many of our customers to move production to lower cost locations in regions such as Asia, Latin America and Eastern Europe. We expect this trend to continue.
Historically, we have had substantial recurring sales from existing customers. We have also expanded our customer base through acquisitions. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and cover the manufacture of a range of products. Under these agreements, a customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. These agreements generally do not obligate the customer to purchase minimum quantities of products. In some circumstances, our supply agreements with customers provide for cost reduction objectives during the term of the agreement.
We have experienced fluctuations in gross margins and in our results of operations in the past and may continue to experience such fluctuations in the future. Fluctuations in our gross margins may be caused by a number of factors, including pricing, changes in product mix, competitive pressures, transition of manufacturing to lower cost locations, level of operational efficiences and overall business levels.
Consistent with previous announcements in the first quarter of fiscal 2007 concerning our personal and business computing business unit, we intend to separate this business unit from our core operations either by means of a sale or other disposition of the business. This business unit includes our personal computing and industry standard server businesses, our related BTO/CTO operations in Mexico and Hungary and our associated logistics activities. We expect the disposition of this business to occur within the next twelve months.
Summary Results of Operations
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate the process used to develop estimates for certain reserves and contingent liabilities, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.
We believe the following critical accounting policies reflect the more significant judgments and estimates used by us in preparing our consolidated financial statements:
Revenue Recognitionâ€” We derive revenue from sales of manufacturing services. We also derive revenues from sales of certain inventory, including raw materials, to customers who reschedule, amend or cancel purchase orders after we have procured inventory to fulfill their purchase orders. We recognize revenue for manufacturing services based on shipping terms. For other services, we recognize revenue when they have been performed. Specifically, we recognize revenue when a persuasive arrangement between us and the buyer exists, the price is fixed or determinable, title to the product or the inventory is transferred to the customer and collectibility is reasonably assured. Our assessment of collectibility involves the use of judgment. See "Accounts Receivable and Other Related Allowances" below for further discussion. Except in specific circumstances, there are no formal customer acceptance requirements or further Sanmina-SCI obligations related to the product or the inventory subsequent to shipment. In specific circumstances in which there are customer acceptance requirements or further Sanmina-SCI obligations, with the exception of our warranty, revenue is recognized at the point of formal acceptance or upon completion of obligations. Provisions are made for estimated sales returns and adjustments at the time revenue is recognized. Establishing these provisions requires management's judgment and the use of historical data and trends. Such provisions were not material to the Consolidated Financial Statements for any period presented herein. In specific circumstances in which we are acting as an agent on behalf of the customer on procurement and shipment of goods in accordance with Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", gross revenue is not recognized on the sale of the goods sold. Instead, revenue is recognized net of the costs of the goods. We present revenues net of sales taxes and value-added taxes in our Consolidated Statement of Operations in accordance with EITF 06-3, "How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement". Amounts billed to customers related to shipping and handling are classified as revenue, and our shipping and handling costs are included in cost of sales.
Accounts Receivable and Other Related Allowancesâ€” We estimate product returns, and other adjustments related to current period net sales, to establish related allowances. In making these estimates, we analyze the creditworthiness of our customers, past experience, changes in customer demand, and the overall economic climate in industries that we serve. If actual product returns, warranty claims or other adjustments differ significantly from our estimates, the amount of revenue or operating expenses we report would be affected. One of our most significant credit risks is the ultimate realization of our accounts receivable. This risk is mitigated by (i) sales to well-established companies, (ii) ongoing credit evaluation of our customers, and (iii) frequent contact with our customers, especially our most significant customers, which enables us to monitor current changes in their business operations and to respond accordingly. To establish our allowance for doubtful accounts, we regularly estimate the credit risk associated with accounts receivable and consider concentrations of credit risks.
We evaluate credit risk related to specific customers based on the current economic environment; however, we are not able to predict the inability of our customers to meet their financial obligations to us. We believe the allowances that we have established are adequate under the circumstances; however, a change in the economic environment or a customer's financial condition could cause our estimates of allowances, and consequently the provision for doubtful accounts, to change, which could have a significant adverse impact on our financial position and/or results of operations.
Stock-Based Compensationâ€” On October 2, 2005, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment", which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options, restricted stock units and purchase rights under our Employee Stock Purchase Plan ("ESPP") based on estimated fair values. Our Consolidated Statements of Operations for fiscal 2007 and 2006 reflect the provisions of SFAS No. 123R. Periods prior to 2006 are presented in accordance with accounting standards applicable for those periods.
SFAS No. 123R requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations. Upon adoption of SFAS No. 123R, we selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock options and purchase rights under the ESPP. The Black-Scholes model requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the option's expected term and the price volatility of the underlying stock. For restricted stock awards and units, compensation expense is calculated based on the fair market value of our stock on the date of grant. For performance restricted stock units, compensation expense is recognized only when we have met the performance probability criteria.
Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to fiscal 2006, we accounted for forfeitures as they occurred. Management's estimate of forfeitures is based primarily on historical data and trends.
In conjunction with the adoption of SFAS No. 123R, we changed our method of attributing the value of stock-based compensation expense from the accelerated multiple-option method (for the purposes of pro forma information under SFAS No. 123) to the straight-line single option method. Compensation expense for all stock-based awards granted on or prior to October 1, 2005 will continue to be recognized using the accelerated multiple-option approach, and compensation expense for all stock-based awards granted subsequent to October 1, 2005, will be recognized using the straight-line single option method.
Inventoriesâ€” We state inventories at the lower of cost (first-in, first-out method) or market value. Cost includes material, labor and manufacturing overhead incurred for finished goods and work-in-process. We regularly evaluate the carrying value of our inventories. When required, provisions are made to reduce excess and obsolete inventories to their estimated net realizable values. The ultimate realization of inventory carrying amounts is affected by our exposure to changes in customer demand for inventory that customers are not contractually obligated to purchase and raw materials held for specific customers who are experiencing financial difficulties. Inventory reserves are established based on forecasted demand, past experience with specific customers, the ability to redistribute inventory to other programs or back to our suppliers, and the presence of contractual language obligating the customers to pay for the related inventory. Prepayments received from customers for excess and obsolete inventories that have not been shipped to customers or otherwise disposed of are netted against inventory.
We procure inventory based on specific customer orders and forecasts. Customers have limited rights of modification with respect to these orders. Correspondingly, customer modifications to orders affecting inventory previously procured by us (for example, cancellations or rescheduling of orders, as well as inventory that is highly customized and therefore not available for use by other customers) and our purchases of inventory beyond customer needs may result in excess and obsolete inventory for the related customers. Although we may be able to use some excess components and raw materials for other products we manufacture, a portion of the cost of this excess inventory may not be returned to the vendors or recovered from customers. Write-offs or write-downs of inventory could relate to:
declines in the market value of inventory;
raw materials held for specific customers who are experiencing financial difficulty; and
changes in customer demand for inventory, such as cancellation of orders and our purchases of inventory beyond customer needs that result in excess quantities on hand that we are not able to return to the vendor or charge back to the customer.
Our practice is to dispose of excess and obsolete inventory as soon as practicable after such inventory has been identified as having no value to us. Sales of such inventory have not been significant and have not had a material impact on our gross margins to date.
Restructuring Costsâ€” We recognize restructuring charges in connection with our plans to exit certain activities resulting from the identification of excess manufacturing and administrative facilities that we choose to close or consolidate. In connection with our exit activities, we record restructuring charges for employee termination costs, long-lived asset impairments, costs related to leased facilities to be abandoned or subleased, and other exit-related costs. These charges are incurred pursuant to formal plans developed by management and accounted for in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities, and EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." When applicable, employee termination costs are recorded pursuant to SFAS No. 112, "Employer's Accounting for Postemployment Benefits." Pursuant to SFAS No. 112, restructuring costs related to employee severance are recorded when probable and estimable in accordance with our policy. Fixed assets that are written off or impaired as a result of restructuring plans are typically held for sale or scrapped. The recognition of restructuring charges requires our management to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activity, including estimating sublease income and the fair value, less selling costs, of property, plant and equipment to be disposed of. Management's estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure their adequacy, that no excess accruals are retained, and that the utilization of the provisions are for their intended purposes in accordance with developed exit plans.
Goodwillâ€” Costs in excess of the fair value of tangible and other intangible assets acquired and liabilities assumed in a purchase business combination are recorded as goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that companies not amortize goodwill, but instead test for impairment at least annually. We adopted SFAS No. 142 on September 30, 2001 and have evaluated goodwill on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies' data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss.
The preparation of the goodwill impairment analysis requires management to make significant estimates and assumptions with respect to the determination of fair values of reporting units and tangible and intangible assets. These estimates and assumptions may differ significantly from period to period. Estimates and assumptions include the Company's operating forecasts, revenue growth rates, risk-commensurate discount rates, probability-weighted scenarios, customer retention rates and return on assets.
We realigned our reporting structure in the third quarter of fiscal 2007 based on organizational changes within the Company and the different types of manufacturing services offered to our customers. As a result, in accordance with SFAS No. 142, we identified three reporting units: Electronic Manufacturing Services, Personal Computing and Technology Components. Previously, Technology Components was not a reporting unit but was included as part of the Electronic Manufacturing Services reporting unit. Refer to Impairment of Goodwill, Tangible and Intangible Assets for further discussion.
Tangible and Other Intangible Assets â€”We review long-lived tangible and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. We estimate fair value based on projected discounted future net cash flows using a discount rate reflecting our weighted-average cost of capital, or other appropriate methods of determining fair value. Management applies significant judgment in estimating future cash flows and in determining our weighted-average cost of capital.
Income Taxesâ€” We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. Although we believe our accruals for tax liabilities are reasonable, tax regulations are subject to interpretation and the tax controversy process is inherently uncertain; therefore, our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. To the extent that the probable tax outcome of these matters changes, such changes in estimates will impact the income tax provision in the period in which such determination is made.
We must also make judgments regarding the realizability of deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets which we do not believe meet the "more likely than not" criteria established by SFAS No. 109, "Accounting for Income Taxes." Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions, and consequently our estimates, change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or decrease in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits and carryforwards, and the effectiveness of our tax planning strategies.
During fiscal 2005, we established a valuation allowance for our U.S. and certain other net deferred tax assets. This action was taken primarily due to cumulative losses from prior years and uncertainty regarding our ability to generate certain minimum levels of future taxable income. Because of continuing losses during fiscal 2007 in the U.S. and certain other countries, we continue to maintain a full valuation allowance on future tax benefits in the U.S. and certain foreign jurisdictions.
Results of Operations
Fiscal Years Ended September 29, 2007, September 30, 2006, and October 1, 2005
Net sales in fiscal 2007 decreased 5.2% to $10.4 billion from $11.0 billion in fiscal 2006. Approximately $400 million of the decrease was related to the high-end computing end market and resulted from our exit of the original design manufacturer ("ODM") business at the end of the first quarter of fiscal 2007 and a delay in demand due to a customer merger. Additionally, approximately $400 million of the decrease is related to our communications end-market and resulted from reduced orders from three customers These decreases were partially offset by increases of $100 million from our medical end market, $82 million from our defense and aerospace end-market and $58 million from our multi-media end-market.
Net sales in fiscal 2006 decreased 6.6% to $11.0 billion from $11.7 billion in fiscal 2005. Approximately $772 million of the decline in sales in fiscal 2006 was due to decreased demand from existing customers in our personal and business computing business. The remaining decreases in net sales for fiscal 2006 were primarily due to a decline in revenue of $262 million and $186 million from our enclosures and storage systems businesses, respectively, offset by an increase in other areas of our business.
Gross margin was 5.3% in fiscal 2007, 5.7% in fiscal 2006 and 5.4% in fiscal 2005. The decrease in gross margin from fiscal 2006 to fiscal 2007 was primarily a result of weak demand in our communications and high-end computing end markets that significantly impacted sales in our printed circuit board fabrication business, enclosures business and new product introduction/gateway business. Lower demand in these higher margin businesses had a larger than proportional impact on our profitability. In addition, the decrease in gross margin was partially due to operational inefficiencies in our enclosures business. These negative impacts were offset by approximately 0.25% gross margin improvement as a result of a reduction in losses associated with our ODM business which we restructured late in fiscal 2006. The increase in gross margin from fiscal 2005 to fiscal 2006 was primarily attributable to changes in product mix as discussed above in Net Sales and improved cost efficiencies. We expect gross margins to continue to fluctuate based on overall production and shipment volumes as well as changes in the mix of products demanded by our major customers.
Fluctuations in our gross margins may be caused by a number of factors, including:
Greater competition in EMS and pricing pressures from OEMs due to greater focus on cost reduction;
Changes in the overall volume of our business;
Changes in the mix of high and low margin products demanded by our customers;
Changes in customer demand and sales volumes, including demand for our vertically integrated key system components and subassemblies;
Provisions for excess and obsolete inventory that we are not able to charge back to a customer or sales of inventories previously written down;
Pricing pressure on electronic components resulting from economic conditions in the electronics industry, with EMS companies competing more aggressively on cost to obtain new or maintain existing business; and
Our ability to transition manufacturing and assembly operations to lower cost regions in an efficient manner.
We have experienced fluctuations in gross margin in the past and may continue to do so in the future.
Selling, General and Administrative
Selling, general and administrative expenses were $374.2 million for fiscal 2007, $364.9 million for fiscal 2006 and $364.0 million for fiscal 2005. As a percentage of net sales, selling, general and administrative expenses were 3.6% for fiscal 2007, 3.4% for fiscal 2006, and 3.1% for fiscal 2005. The increase in absolute dollars from fiscal 2006 to fiscal 2007 was primarily attributable to an increase in stock based compensation expenses of $6.5 million resulting primarily from a change in our estimated forfeiture rate, an increase in the bad debt provision of $4.2 million ($1.7 million expenses in fiscal 2007 versus $2.5 million recovery in fiscal 2006), and an increase in administration fees of $3.0 million resulting from higher sales of accounts receivable during fiscal 2007, partially offset by reductions across selling, general and administrative functions due to cost saving initiatives. The increase in selling, general and administrative expenses as a percentage of sales from fiscal 2006 to fiscal 2007 was primarily attributable to increased expenses as noted above and lower net sales for fiscal 2007.
The increase in absolute dollars from fiscal 2005 to fiscal 2006 was primarily attributable to additional expenses incurred in connection with our investigation of stock option administration policies and procedures dating back to 1997 of approximately $10.9 million and less recovery of previously reserved accounts receivable of $2.9 million, offset by a reduction in stock-based compensation expense (from adoption of SFAS No. 123R in fiscal 2006) of $13.9M. The increase in selling, general and administrative expenses as a percentage of sales was primarily attributable to a decrease in net sales in fiscal 2006.
Research and Development
Research and development expenses were $30.1 million for fiscal 2007, $40.2 million for fiscal 2006, and $31.0 million for fiscal 2005. As a percentage of net sales, research and development expenses were 0.3% for fiscal 2007, 0.4% for fiscal 2006 and 0.3% for fiscal 2005. The decrease in both dollars and as a percentage of net sales from fiscal 2006 to fiscal 2007 was primarily a result of our decision to realign original design manufacturing activities to focus on joint development activities. The increase in research and development expenses in both dollars and as a percentage of net sales from fiscal 2005 to fiscal 2006 was primarily attributable to increased spending on certain ODM product initiatives in fiscal 2006.
Impairment of Goodwill, Tangible and Intangible Assets
We realigned our reporting structure in the third quarter of fiscal 2007 based on organizational changes within our company and the different types of manufacturing services offered to our customers. As a result, in accordance with SFAS No. 142, we identified three reporting units: Electronic Manufacturing Services, Personal Computing and Technology Components. Previously, Technology Components was not a reporting unit but was included as part of the Electronic Manufacturing Services reporting unit. In determining the allocation of goodwill to each reporting unit, we conducted a relative fair value analysis of the Electronic Manufacturing Services and Technology Components reporting units using an income and market approach. As a result of the analysis, management concluded that $1,303 million and $221 million of goodwill were attributable to the Electronic Manufacturing Services and Technology Components reporting units, respectively, as of the beginning of the fourth quarter of fiscal 2007. Goodwill for the Personal Computing reporting unit remained the same at $89.1 million as of the beginning of the fourth quarter of fiscal 2007. As required by SFAS No. 142, we must perform an impairment test of our goodwill at least annually or whenever a triggering event occurs. The annual test resulted in a goodwill impairment loss of $1,100 million ($821.9 million for Electronic Manufacturing Services, $57.1 million for Personal Computing and $220.7 million for Technology Components) for fiscal 2007. The factors that caused us to record an impairment loss in fiscal 2007 were a decline in sales, both domestically and internationally, a decrease in expected future cash flows, and a decline in the Company's stock price.
During fiscal 2006, we recorded a goodwill impairment charge of $3.8 million and a tangible and intangible assets impairment charge of $9.0 million due to our decision to realign our ODM business to focus on joint development manufacturing opportunities at the end of the fourth quarter of fiscal 2006. In addition, we recorded an impairment of tangible assets of $6.1 million related to a manufacturing facility as a result of our SFAS No. 144 impairment analysis in fiscal 2006.
During fiscal 2005, we recorded a goodwill impairment loss of $600 million for our domestic reporting unit. The factors that caused us to record a write-off of our deferred tax assets, which primarily related to U.S. operations coupled with the then-recent decline in the market price of our common stock, also led us to record this goodwill impairment loss. In particular, the shift of operations from facilities in the U.S. and other high cost locations to facilities in lower-cost locations resulted in restructuring charges and a decline in sales with respect to our U.S. operations. The fair market valuation of the reporting units was based on an income and market approach. As of the time we performed this analysis, there was no impairment of goodwill or long-lived assets associated with our international operations.
In recent years, we have initiated restructuring plans as a result of the slowdown in the global electronics industry and the worldwide economy. These plans were designed to reduce excess capacity and affected facilities across all services offered in our vertically integrated manufacturing organization. The majority of the restructuring charges were recorded as a result of plans related to facilities located in North America and Western Europe, and in general, manufacturing activities at these plants were transferred to other facilities.
Costs associated with restructuring activities, other than those activities related to purchase business combinations, are accounted for in accordance with SFAS No. 146 and SFAS No. 112 when applicable. Pursuant to SFAS No. 112, restructuring costs related to employee severance are recorded when probable and estimable in accordance with our policy. For all other restructuring costs, a liability is recognized in accordance with SFAS No. 146 only when incurred. Costs associated with restructuring activities related to purchase business combinations are accounted for in accordance with EITF 95-3. Accrued restructuring costs are included in accrued liabilities in the Consolidated Balance Sheets.
In November 2006, we announced three new restructuring initiatives:
The realignment of our original design manufacturing activities to focus on joint development;
The separation of our personal and business computing business and the evaluation of strategic alternatives to enhance its value; and
Other consolidation and facility closure actions.
Although some actions have been implemented, we expect to record additional charges that are currently not estimable related to these anticipated actions in the near term.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We are a leading independent global provider of customized, integrated electronics manufacturing services, or EMS. Our revenue is generated from sales of services primarily to original equipment manufacturers, or OEMs, in the communications, enterprise computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical and automotive industries.
We recently exited our PC and associated logistics services business (â€śPC Businessâ€ť). Our PC Business consisted of three customers, one of whom transitioned its business during the three months ended March 29, 2008 to a new third-party contract manufacturing provider as a result of our decision to exit the PC Business. The remaining portion of our PC Business was sold in two separate transactions, one of which closed on June 2, 2008 and the other of which closed on July 7, 2008.
We have reflected our PC Business as a discontinued operation in the condensed consolidated financial statements for all periods presented. We do not expect to recognize a significant gain or loss in connection with the sale of our PC Business. The remaining assets and liabilities of the portion of the PC Business sold on July 7, 2008 have been presented as held for sale in the condensed consolidated balance sheets as of June 28, 2008. The sale of our PC Business will materially reduce our future net sales, operating income and cash flows. See Note 12 of the notes to condensed consolidated financial statements for further information regarding the PC Business and assets held for sale.
Unless noted otherwise, all references to our operating results contained in this section pertain only to our continuing operations.
A relatively small number of customers have historically generated a significant portion of our net sales. Sales to our ten largest customers represented 48.5% and 48.3% of our net sales for the three and nine months ended June 28, 2008, respectively. No customer represented 10% or more of our net sales during the three or nine months ended June 28, 2008. Sales to our ten largest customers represented 47.1% and 48.5% of our net sales for the three and nine months ended June 30, 2007, respectively, and no customer represented 10% or more of our net sales during either of those periods.
In recent periods, we have generated a significant portion of our net sales from international operations. Net sales from international operations during the three months ended June 28, 2008 and June 30, 2007 were 71.6% and 65.9%, respectively, of total net sales. During the nine months ended June 28, 2008 and June 30, 2007, 69.1% and 65.5%, respectively, of our total net sales were derived from non-U.S. operations. The concentration of international operations has resulted from a desire on the part of many of our customers to source production in lower cost locations such as Asia, Latin America and Eastern Europe.
Historically, we have had substantial recurring sales to existing customers. We have also expanded our customer base through acquisitions. We typically enter into supply agreements with our major OEM customers. These agreements generally have terms ranging from three to five years and cover the manufacture of a range of products. Under these agreements, a customer typically agrees to purchase its requirements for particular products in particular geographic areas from us. These agreements generally do not obligate the customer to purchase minimum quantities of products.
We have experienced fluctuations in gross margins and in our results of operations in the past and may continue to experience such fluctuations in the future. Fluctuations in our gross margins may be caused by a number of factors, including pricing, changes in product mix, foreign currency exchange rate changes, competitive pressures, transition of manufacturing to lower cost locations, operational efficiency and overall business levels.
Critical Accounting Policies and Estimates
Managementâ€™s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate the process used to develop estimates for certain reserves and contingent liabilities, including those related to product returns, accounts receivable, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. However, should any of these estimates prove to be incorrect, our future results of operations could be materially and adversely affected.
We adopted FASB Interpretation 48 , â€śAccounting for Uncertainty in Income Taxes â€” an interpretation of FASB Statement No. 109â€ť (FIN 48), at the beginning of fiscal year 2008. FIN 48 involves an assessment of whether each of a companyâ€™s income tax positions is â€śmore likely than notâ€ť of being sustained upon audit based on its technical merits. For each income tax position that meets the â€śmore likely than notâ€ť threshold, a company then assesses the largest amount of tax that is greater than 50% likely of being realized upon effective settlement with the taxing authority. Upon adoption of FIN 48, we decreased current income taxes payable by $18.8 million and increased long-term income tax liabilities by the same amount, as cash payments of such amounts are not expected to be made within 12 months.
A complete description of our critical accounting policies and estimates is contained in our 2007 Annual Report on
Form 10-K filed with the SEC on November 28, 2007.
Results of Operations
Net sales for the three months ended June 28, 2008 increased by 13.7% to $1.90 billion, from $1.67 billion for the three months ended June 30, 2007. The increase was primarily related to stronger demand from customers in our communications and multi-media end-markets, which increased by $156.8 million and $65.0 million, respectively.
Net sales for the nine months ended June 28, 2008 increased by 2.1% to $5.50 billion, from $5.38 billion for the nine months ended June 30, 2007. The increase was primarily related to stronger demand from customers in our communications and defense and aerospace end-markets, which increased by $142.3 million and $105.4 million, respectively. This increase was partially offset by reduced demand of approximately $114.9 million from our high-end computing end-market.
Gross margin increased from 5.7% for the three months ended June 30, 2007 to 7.3% for the three months ended June 28, 2008, and from 6.5% for the nine months ended June 30, 2007 to 7.2% for the nine months ended June 28, 2008. The increase for the three months ended June 28, 2008 was due primarily to improved operational efficiencies in our enclosures business, consolidation of capacity within our printed circuit board fabrication business and favorable changes in product mix to more proprietary products within our memory modules and defense and aerospace businesses. The increase in gross margin for the nine months ended June 28, 2008 was due primarily to higher margins in our defense and aerospace business resulting from increased demand and favorable changes in product mix to more proprietary products and in our printed circuit board fabrication business resulting from the consolidation of capacity and greater efficiencies. These increases were partially offset by reduced margins in the remainder of our technology components group due to lower volume and reduced margins from the remaining EMS divisions due to start-up costs for new factories in low cost regions and costs associated with transitioning production between factories. We expect gross margins to continue to fluctuate in the future based on overall production and shipment volumes and changes in the mix of products purchased by our customers.
Selling, general and administrative
Selling, general and administrative expenses decreased approximately $10.0 million, from $87.4 million, or 5.2% of net sales, for the three months ended June 30, 2007, to $77.4 million, or 4.1% of net sales, for the three months ended June 28, 2008. The decrease was primarily attributable to a reduction in stock-based compensation expense of $4.5 million, reduced personnel-related costs of $4.3 million due to headcount reductions in various functions and a reduction of $1.7 million for information technology infrastructure and related spending. For the nine months ended June 28, 2008, selling, general and administrative expenses decreased to $245.8 million, or 4.5% of net sales, from $267.8 million, or 5.0% of net sales, for the nine months ended June 30, 2007. The decrease was primarily attributable to reduced personnel-related costs of $9.1 million due to headcount reductions in various functions, a reduction of $4.5 million in stock-based compensation expense, a reduction of $4.0 million for information technology infrastructure and related spending, and reduced expenses of $3.1 million in connection with matters arising out of our stock option investigation and restatement.
Research and Development
Research and development expenses decreased approximately $0.2 million, from $6.1 million, or 0.4% of net sales, in the third quarter of fiscal year 2007, to $5.9 million, or 0.3% of net sales, in the third quarter of fiscal year 2008. For the nine months ended June 28, 2008, research and development expenses decreased to $14.7 million, or 0.3% of net sales, from $24.1 million, or 0.4% of net sales, for the nine months ended June 30, 2007. The decrease in absolute dollars for all periods was primarily a result of our decision to realign original design manufacturing activities to focus on joint development activities, partially offset by increased spending for our defense and aerospace business to support anticipated growth in this end-market.
In recent years, we have initiated restructuring plans in order to streamline our operations, reduce our cost structure, eliminate excess capacity, and relocate our operations to locations near our customers or to lower cost regions. These plans affected facilities across all services offered in our vertically integrated manufacturing organization. The majority of our restructuring charges were recorded as a result of plans related to facilities located in North America and Western Europe. In general, manufacturing activities at these plants were transferred to other facilities located in lower cost regions. Although we have implemented significant actions in connection with our restructuring activities, there are still actions we expect to take in order to complete our restructuring plans. We expect to record additional charges of approximately $10.0 million to $18.0 million related to these anticipated actions within the next six-to-twelve months.
During the first quarter of fiscal year 2007, we began the final phase of our multi-phase restructuring strategy. Due to the immateriality of the remaining accrual balances related to prior phases, all phases have been combined for disclosure purposes.
During the three and nine months ended June 28, 2008, we recorded restructuring charges for employee termination benefits for approximately 900 terminated employees and 2,500 terminated employees, respectively. We expect to pay
remaining facilities related restructuring liabilities of $5.4 million through 2010, and the majority of severance costs of $31.0 million through March 2009.
Restructuring costs of $36.4 million were accrued as of June 28, 2008, of which $34.9 million was included in accrued liabilities and $1.5 million was included in other long-term liabilities on the condensed consolidated balance sheet.
The recognition of restructuring charges requires us to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activities, including estimating potential sublease income and the fair values, less selling costs, of property, plant and equipment to be disposed of. Our estimates of future liabilities may change, requiring us to record additional restructuring charges or reduce the amount of liabilities already recorded.
We plan to fund cash restructuring costs with cash flows generated by operating activities.
Interest Income and Expense
Interest income decreased from $3.8 million for the three months ended June 30, 2007 to $3.6 million for the three months ended June 28, 2008, and from $23.4 million for the nine months ended June 30, 2007 to $15.0 million for the nine months ended June 28, 2008. The decrease for the nine months ended June 28, 2008 was primarily attributable to lower interest rates on invested cash and the fact that we borrowed $600.0 million during the first quarter of fiscal year 2007 to fund the repayment of certain debt obligations that matured in the second quarter of fiscal year 2007. Of the amount borrowed, $532.9 million was distributed to a Trustee and held in an escrow account until repayment of the debt. We earned interest while the cash was held in escrow. This decrease was partially offset by increased interest income resulting from a higher average cash and cash equivalents balance during the first nine months of fiscal year 2008 compared to the first nine months of fiscal year 2007.
Interest expense decreased to $30.0 million for the three months ended June 28, 2008, from $41.0 million for the three months ended June 30, 2007, and from $130.2 million for the nine months ended June 30, 2007 to $96.9 million for the nine months ended June 28, 2008. The decrease for both periods was primarily attributable to the absence of interest expense in fiscal year 2008 on the $600 million unsecured term loan that was outstanding in the first quarter of fiscal year 2007 and repaid during the third quarter of fiscal year 2007, decreased weighted average borrowings against our revolving credit facility during fiscal year 2008, and lower interest rates during fiscal year 2008. These decreases were partially offset by higher interest expense incurred in fiscal year 2008 on the two $300 million senior floating rate notes issued during the third quarter of fiscal year 2007 (collectively, the â€śSenior Floating Rate Notesâ€ť). The decrease for the nine months ended June 28, 2008 was also attributable to the absence of interest expense in the first nine months of fiscal year 2008 on certain notes that were repaid during the second quarter of fiscal year 2007.
Other Income, net
Foreign exchange gains resulted primarily from the effect of a weakening of the US dollar relative to other currencies on partially hedged non-US dollar denominated asset positions. We reduce our exposure to currency fluctuations through the use of foreign currency hedging instruments; however, hedges are established based on forecasts of foreign currency transactions. To the extent actual amounts differ from forecasted amounts, we will have exposure to currency fluctuations.
On June 12, 2007, we used the net proceeds of $588 million from the sale of the Senior Floating Rate Notes, together with cash on hand, to repay in full the principal amount and accrued interest on an unsecured term loan. In connection with this repayment, we recorded a loss on extinguishment of debt of approximately $3.2 million representing unamortized finance fees. During the first quarter of fiscal year 2008, we redeemed $120 million of our senior floating rate notes due in 2010 (the â€ś2010 Notesâ€ť). In connection with this redemption, $2.2 million of deferred financing fees were expensed.
During the first quarter of fiscal year 2007, we sold a building that had previously been recorded as held for sale and realized a gain on sale of approximately $6.0 million. During the third quarter of fiscal year 2007, we recognized a $1.4 million gain from the disposal of a restructured facility that had previously been recorded as held for sale. We did not sell any such properties during the first nine months of fiscal year 2008.
During the third quarter of fiscal year 2008, we recognized a gain of $2.5 million in connection with contingent consideration related to a previous sale of our EMS business in Australia. This amount is included in other, net in the above table.
Provision for Income Taxes
We estimate our annual effective tax rate at the end of each quarterly period. Our estimate takes into account our expected annual pre-tax income (loss), the geographic mix of our pre-tax income (loss) and our interpretations of tax laws and possible outcomes of audits. To the extent there are fluctuations in any of these variables during a period, our provision for income taxes may vary. Our provision for income tax expense was $7.3 million and $19.0 million for the three and nine months ended June 28, 2008, respectively, compared to $2.1 million and $15.4 million for the three and nine months ended June 30, 2007, respectively. Income tax expense was primarily attributable to the Companyâ€™s profitable operations since such taxable income cannot be offset by losses incurred in other tax jurisdictions and losses incurred in the United States and certain other foreign jurisdictions required a full valuation allowance on future tax benefits.
Thank you, Chanel. Good afternoon, ladies and gentlemen and welcome to Sanmina's fourth quarter 2008 conference call. Thank you for being here. Joining me on this conference today are Joe Bronson, Hari Pillai, and David White.
For those of you that didn't read our press release, we did make a management promotion here. Hari Pillai was promoted to President and Chief Operating Officer starting today.
Joe Bronson was brought here, and was a friend of mine for many years, as a customer about a year ago, and I asked him to help me strengthen the management. He knew it was a short project. I want to say, in front of everybody, thank you, Joe. And most importantly, I think Joe helped me transition this. I think Hari is the right man for the job. After being here for 14 years, I think he's the best person for it.
So with that I want to also congratulate Hari.
Thank you, Jure.
Let's go to the agenda. David White will review our financial results for the fourth quarter of fiscal year 2008. Then I will follow up with comments related to Sanmina's results and future goals. Then we'll open for question-and-answers with basically all of us here. And now, David.
Thank you, Jure. Before I get started, please note that selected portions of our presentation today are available in the form of a slide presentation on the Internet, which can be accessed from the Investor Relations section of our website, www.sanmina-sci.com.
I'll be making references to these slides during the course of my remarks. Prior to discussing the state of our business and financial information with you, I'd like to take a moment to review the following Safe Harbor statement.
During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors, including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change
We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's most recent Annual Report on Form 10-K for the year ended November 28, 2007, as well as our most recent report on Form 10-Q filed on August 4, 2008.
These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You'll note in our press release issued today that we have provided you with a statement of operations for the three months and twelve months ended September 27, 2008 on a GAAP basis, as well as certain non-GAAP financial information.
A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, loss on extinguishment of debt, non-cash stock based compensation expenses, amortization expenses, and other infrequent or unusual items to the extent material.
Any comments we make on this call as they relate to income statement measures will be directed in our non-GAAP financials results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income, and earnings per share, we're referring to our non-GAAP information.
The GAAP financial information presented today is preliminary. Given the recent significant decrease in the company's market capitalization, similar to that experienced by other companies in the EMS industry, the company has undertaken review of the value of the goodwill carried on its balance sheet using the two-step test contained in Statement of Financial Accounts Standards SFAS142, Goodwill and Other Intangible Assets.
The company does not expect to complete this review until mid-November. Should the company determine that its goodwill has become impaired under FAS 142, it will be required to record a non-cash charge which could be significant and would reduce our reported GAAP net income and earnings per share for the fiscal quarter and year ended September 27, 2008, and which would be included in the financial statements filed with the company's annual report on Form 10-K. The non-cash charge if any, would not impact the non-GAAP financial information presented this release.
Prior to describing our financial results, you'll recall that, effective with our second quarter, our personal computing business and the related logistic services have been accounted for as discontinued operations.
Our fourth quarter results as reported here today will also be the last quarter we would report any results for the discontinued operations of this business. My comments today will focus almost entirely on results of our continuing operations, including a review of results of operations, a discussion of selected balance sheet accounts and corresponding metrics, an update with respect to our restructuring activities, and I will conclude with guidance for our first quarter of fiscal 2009 ending December 27, 2009.
Revenue from continuing operations for the fourth quarter of fiscal 2008 was $1.7 billion, which was below the low end of our guidance of $1.8 to $1.9 billion, down 10.5% versus $1.9 billion in the prior quarter, and down 2.9% versus $1.75 billion in the same period a year ago.
As you'll see in my comments shortly, our quarter-over-quarter decrease in revenue was across all but one of our seven end markets, a fact that we largely attribute to a weakening global economy.
As for the fourth quarter, we reported GAAP earnings from continuing operations of approximately zero, which equated to $0.00 a share, and a total company GAAP loss of $11.2 million, which equated to a $0.02 loss per share.
Non-GAAP earnings from continuing operations for the quarter were $24 million or $0.05 per share. This compares with $0.05 per share in the prior quarter and a loss of $0.02 per share in the same period a year ago.
For the full year, we reported non-GAAP earnings from continuing operations of $69.6 million, or $0.13 per share, a $128 million improvement over a loss of $58.3 million, or $0.11 per share, reported in the prior year.
For the fourth quarter, our revenue, by end-market, was as follows. The Communications end-market represented 41.2% of our net sales, which in absolute dollar terms was down approximately 15.5% from last quarter. Enterprise Computing and Storage represented 18.4% of net sales during the quarter. Sequentially, this market was down 10.1% in absolute dollar terms quarter-over-quarter. The Multimedia end market accounted for 15.5% in net sales during the quarter, and was down 7.3% in absolute dollars term versus the prior quarter.
The Medical end market accounted for 11.1% of net sales during the quarter, which was modestly down approximately 3.1% in absolute dollar terms from the prior quarter. Finally, our Industrial Semiconductor Capital Equipment, Defense, Aerospace, and Automotive end-markets of our business collectively accounted for 13.8% of our net sales and in absolute dollar terms were modestly down 3.3% relative to last quarter. The industrial segment was up, whereas the automotive and defense aerospace segments were each down.
Our top ten customers accounted for 49% of total sales this quarter. Sales to our top 20 customers accounted to about 62% of total sales in the fourth quarter. We had no customers in the fourth quarter whose sales were greater than 10% of total sales.
Gross profit for the fourth quarter was $132.8 million. As a percentage of sales, gross profit was 7.8%, which was up approximately 40 basis points from the prior quarter as a result of continued progress in improving operating efficiencies in our EMS business, as well as favorable resolution of certain inventory and working claims with customers. When compared to the same period a year-ago, our gross margins were up approximately 150 basis points.
Selling and general administrative for the fourth quarter, excluding stock compensation expenses, were $68.8 million, down approximately $6.5 million quarter-over-quarter, and down approximately $12.8 million versus the same period a year ago. Research and development costs, excluding stock compensation expenses, for the fourth quarter, amounted to $4.7 million which was down $1.1 million quarter-over-quarter, and down approximately $900,000 versus the same quarter a year ago. Our combined R&D and SG&A expenses for the fourth quarter, again excluding stock compensation expenses, amounted to $73.5 million, or 4.3% of sales. These expenses have continued to trend downward over the last year, as we have focused on reducing infrastructure cost in preparation for our exit from the personal computing business.
Given the current economic environment, we expect to further reduce our operating expenses over the next six to twelve months, as we continue to drive for additional operating (inaudible) efficiencies.
Operating income for the quarter was $59.3 million. Our operating margin was 3.5%, up approximately 30 basis points quarter-over-quarter and up 220 basis points on a year-over-year basis.
Net interest and other expenses, which consist primarily of interest income and expense as well as gains and losses from foreign currency translation, was $29.8 million versus $23.1 million in the prior quarter. This quarter-over-quarter change was primarily the result of a modest foreign exchange gain recognized in the third quarter, versus the modest foreign exchange loss in the fourth quarter. Net interest and other expense in the same period a year ago was $35.8 million.
Depreciation was $20 million for continuing operations for the fourth quarter, which was down $600,000 approximately from the prior quarter. Our EBITDA for the quarter was $79 million. Our tax provision for the fourth quarter was an expense of $5.5 million on pre-tax, non-GAAP earnings of $29.5 million, for a tax rate of approximately 19%. Our lower tax rate reflects the favorable impact of first phase of a number of business model changes we are pursuing to radically reduce our effective tax rate over the next year.
Turning to the balance sheet, accounts receivable at the end of the quarter were $970 million. Excluding any factoring of receivables, our gross DSOs for the core business was approximately 52 days, which was up approximately half a day from the prior quarter. Inventories at the end of the quarter were approximately $813 million, down approximately $137 million quarter-over-quarter, of which $49 million related to the final sale of inventory associated with our personal computing business. Inventory days at quarter end were 47 days or 7.7 turns, essentially flat versus the prior quarter. Our fourth quarter inventory performance for continuing operations resulted in the lowest inventory levels in at least 12 quarters. Net capital expenditures in the quarter amounted to approximately $19 million.
Accounts payable at the end of the quarter were $891 million, which equated to AP days of approximately 52, an improvement of 2.6 days versus the prior quarter. Overall our cash operating cash cycle for the fourth quarter, which we define as unfactored, or gross cash cycle days, was approximately 47.
Turning now to cash flow, we have maintained a facility for selling or factoring our trade custom receivables associated with our personal computing business, and we regularly factored those qualifying receivables a means of managing our available cash position. At the end of the third quarter, we had $292 million advanced to us under those facilities. Subsequent to the sale of our personal computing business, we had to replace that facility with a new $250 million committed facility structured especially for our continuing EMS income powered operations. Except for $16 million, that facility was largely undrawn at quarter end.
We believe we have ample cash and available liquidity to meet the needs of the company. As such, while we will maintain this new facility, we do not currently intend to be active in factoring our receivables for the foreseeable future. As a result for this, however, our ending cash position was impacted unfavorably by about $280 million. If you exclude this amount, our normalized free cash flow was approximately $173 million for the quarter and $329 million for the year. Free cash flow including this amount was a negative $144 million for the quarter and a positive $51 million for the year.
Our debt at the end of the fourth quarter was $1.48 billion, which was flat with the prior quarter. Our earliest debt maturity is $180 million which is due in June of 2010, and our next maturity isn't until 2013. Cash and short-term investment at the end of the quarter was approximately $870 million. Based on the adequacy of our current available cash and other sources of liquidity, we announced today in our press release our intention to purchase up to 10% of the company's outstanding shares of common stock based on today's closing price. We may purchase up to $10 million of our stock, the maximum amount currently permitted under our credit agreements. We may repurchase additional shares under the program as these restrictions expire or are modified. Purchases under the program were made at prevailing market prices or negotiated transactions off the market. This program will continue through December 2009, unless otherwise determined by our Board of Directors.
Let me now comment on restructuring. During the fourth quarter, we incurred $13.3 million in restructuring expenses, of which $12.6 million represented cash payments during the quarter. This expense primarily relate to reductions in force associated with previous announcements in Western Europe and North America, as well as restructuring of various corporate functions.
Now let me turn to guidance for the first quarter of fiscal 2009. Consistent with prior quarters, the information I provide will generally exclude stock-based compensation expenses, restructuring and integration cost, impairment charges, loss on extinguishment of debt, amortization of expense, and other infrequent unusual items.
Our first quarter guidance for continuing operations is as follows: We are targeting first quarter revenues of between $1.425 billion and $1.625 billion. We expect gross margin to be in the range of 6.7% to 7.1%. We are targeting our operating margin to between 2.1% and 2.6%. We expect our tax-rate to be approximately 25%.
Basic and diluted shares for the first quarter are expected to be about $531 million, excluding any repurchase of outstanding stock. This equates to a non-GAAP diluted EPS of approximately $0.00 to $0.03 per share. We estimate the depreciation for the first quarter will be approximately $20 million, consistent with last quarter, and first quarter capital expenditures to be in the range of $20 million to $25 million, primarily driven by our expansion activities in India. Finally, we expect our fourth quarter cash flow from operations to be positive.
This concludes my remarks, and I think you for your time. With that I'll turn the time back over to you, Jure.
Thanks, David. Again, good afternoon, ladies and gentlemen. As David mentioned, our fourth quarter revenue came in at $1.7 billion, definitely below our expectations. We had major customer rescheduling in last weeks of the fourth quarter, which scheduled out of quarter well over $100 million in revenue.
We had greater than anticipated demand for virtually all of our markets, as David shared with you earlier. On a positive side, we had a nice margin improvements in our fourth quarter, record margins for last seven years, of 7.8%
Operating margin was also a record, up 3.5%, so all the steps that we are taking are really driving those results nicely. EPS up $0.05, and also we generated a lot of cash in the fourth quarter, $173 million or $0.33 per share, and as David mentioned no A/R factoring in the quarter.
Let me make a comment about 2008. It was a successful turnaround year for us. We did a lot of work finishing all our major restructuring, which is now behind us. We put the new strategy in place, focusing on the markets in which we do have a competitive advantage.
From the revenue point of view, it came in at about $7.2 billion, slightly up from 2007, but basically it was a flat year. We had a reasonability good visibility through the year, except the last quarter.
We also improved the mix of the customer base in 2008, and really drove the quality of the margin up. That is one of the reasons I think that our margin is up; because of the quality of the mix.
On operating income, grew nicely to $206 million, up 102%. EBITDA came in at $287 million. So some nice results in a year that we all felt was a good year, and we just didn't expect that the fourth quarter would be slow as it turned out to be.
Positive cash-flow was a key thing for us here to drive, and 2008 was no different. We brought in $329 million of free cash flow, which is approximately $0.62 free cash flow per share.
Now let me talk to you about our guidance for December quarter, which is our first quarter of fiscal year 2009. First, today we have a definitely limited visibility. It's very challenging in this global economy today. We do estimate the quarter for fiscal year 2009 revenue to be in the range of $1.425 billion to $1.625 billion, and non-GAAP EPS of (inaudible).
At this time, we anticipate demand to continue to be weak during this quarter. On a positive side, we do expect to generate positive cash flow in the quarter of $50 million to $100 million, and for fiscal year 2009, we expect to generate $200 to $300 million of free cash flow.
Now the question is how Sanmina-SCI is going to weather this stock environment. Let me give you some facts: We are well positioned for this difficult economical environment. We are financially strong. We have $870 million of cash, and also, as we just mentioned, we'll continue to generate cash even in this tough environment.
With the major restructuring now completed, we have the right global and geographic infrastructure in place, well-positioned to compete, and there's no major restructuring in our plan for fiscal year 2009. There is some tuning, but that is normal manufacturing efficiency that we focus on everyday.
Also, during this period in 2008, we did improve our customer satisfaction significantly across our systems in quality, delivery, technology, and overall cost. I believe today we have very efficient cost infrastructure in place, but in today's time, we're taking additional steps, and continuing to adjust our operational cost to meet today's demand. As David mentioned, we drove our SG&A nicely in the last twelve months, and we're going to continue to drive that in 2009.
The bottom line is that we believe we can continue to build a stronger relationship with our customers and gain market share in this environment. We're going to continue to diversify our market as part of our fee strategy, and most important, we're going to stay profitable and generate positive cash even in this tough environment.
Let me now talk to you about our market opportunities and the conditions of the markets. At this time, predicting the future is very difficult, so I'm not ready to forecast our revenue and EPS for fiscal year 2009, but I can just give you some of the highlights, what we see today, and what we believe in.
We do expect to generate higher operating income in 2009 than we did in 2008, which was a nice improvement over 2007. In this market condition, our new structure allows us to be more focused on our customer, more flexible, and now establishing our IT system, we are the only company in our industry that has truly one global IT system.
I think this helps us to control the cost, and allows us to communicate better with our customers. I truly believe it's our competitive advantage, especially when you go in this type of challenging environment. Bookings in our fourth quarter fiscal year 2008, book-to-bill, was 1.1 to 1.
Let me talk to you about some of the major deals that we won in fourth quarter. We won approximately $200 million of new business, which is going to be shippable in fiscal year 2009. We also expanded our customer base across key markets in communication, industrial, medical, and defense and aerospace.
In this challenging economic environment, we are starting to see even more outsourcing deals. As we look at what we have in front of us, and we look at our pipeline of new deals, there's approximately $1.5 billion to $2 billion of new deals that we are looking at. So we have a feeling that, yes, it's a tough environment, but it just makes more sense for our customers that didn't outsource yet to outsource more in the future.
I feel comfortable that we are winning in this environment. If you look at our customer base and the projects that we involve, we have them in place to really grow, but unfortunately demand is a lot weaker than what our expectation was only eight weeks ago. We do believe that when markets and our customer demand improve, our company is well positioned to take advantage of the market opportunities in front of us.
We are facing challenging a economic environment, but I think we are ready to go through it. We have management experience to handle it. We went through this before, and I believe we are going to come out of this a stronger company. We have plenty of liquidity, not just to survive but continue to build a greater company. Again, in the short-term, we are focused on this present storm. Here we are focused on customer support, customers who are facing similar issues in their markets, adjusting our cost structure to demand, focused on profitable business, and as we all talked all day long here already, generating free cash flow.
Longer term, we do expect to see the sunshine; we've seen it before, intermediately and the longer term; strategies are in place. We are focused on our long-term project, and we are focusing on markets and products that will allow us to deliver superior financial performance, and we are driving to a gross margin greater than 8%, operating greater than 4%, and return on investment capital over 20%. That is the model, and I believe that the standard cost in our projects that we are involved in will allow us to do that. As you can see, last quarter, even in a difficult market, we were able to move. It's all driven for us right now in short-term, by demand.
So now what I'd like to do is say thank you again to all of you for participating in this conference call, and I would also like to express my special thanks to our employees for their hard work and dedication to this company, especially in this tough environment.
Operator, we are now ready to open the line for question and answers. Thank you again.