Bel Fuse Inc (BELFA) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bel Fuse First Quarter Results Conference Call.

(OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the conference over to Mr. Dan Bernstein, President. Please go ahead, sir.

Thank you, Shannon. And I would like to welcome everybody to our conference quarter review, Bel's first quarter 2008 financials.

Before we start, I would like to hand it over to Colin Dunn, our Vice President of Finance. Colin?

Good morning, everybody. Thanks, Dan. And then I'll start with the Safe Harbor Statement.

Except for historical information contained in today's news release and on this conference call, the matters discussed, including statements regarding improvements and performance and acquisition possibilities are forward-looking statements that involve risks and uncertainties.

Among the factors that could cause actual results to differ materially from such statements are the market concerns facing our customers, the continuing viability of sectors that rely on our products, the effect of business and economic conditions, capacity to supply constraints over difficulties, product development, commercializing or technological difficulties, the regulatory in trade environment, risks associated with foreign currencies, uncertainties associated with legal proceedings, the market's acceptance of the company's new products and competitive responses to those new products, and the risk factors detailed from time to time in the company's SEC reports. In light of the risks and uncertainties, there can be no assurance that any forward-looking statement will, in fact, prove to be correct. We undertake no obligation to update or revise any forward-looking statements.

Now, moving on to discuss our first quarter 2008 results.

Starting with sales, for the first quarter of 2008, our sales were $60.869 million, which was 1.5% lower than the $61.807 million in the first quarter of 2007. The $68-- $69,000 was also lower than the $69,000, $339,000--$69.339 million of the preceding quarter, ended December 2007. Sales for the first quarter--of the first quarter were up significantly in the Modules product group that includes DC-to-DC converters and custom modules, with other product groups down slightly.

The quarter--This quarter, both years, included the Chinese Lunar and New Year holiday period.

Products and costs-of-sales well ended the quarter on a GAAP basis with net after-tax earnings of $2.167 million. This is above the net earnings-- This is below the net earnings of $4.9 million for the first quarter of 2007, and below the $10.255 million the previous-- that's the fourth quarter of 2007.

Our gross margin for this first quarter was a profit of 18.5%, which, of course, was below the 22.5 gross margin for the same period in 2007. And the first quarter margin was below the 22.2% gross profit margin for the fourth quarter of 2007.

The lower margin, when compared to first quarter 2007, was primarily due to highest sales of margin products to return lower growth profit percentage margins as a large percentage of the bills and materials of purchase components, labor cost increases and lower labor productivity and material cost increases.

There has been a shortage of labor in the areas where our products are manufactured from the People's Republic of China. As we've said in our press release, 3,500 workers have been hired and we're expecting an additional 1,500 will be added. Many workers have returned to their homes for vacation over Chinese New Year and we cannot predict how many will return. The addition of new workers and lower productivity levels as they become familiar with our methods of production curtailed our output. Also, PRC officials announced an increase in wage range should be effective April 1, 2008 in the areas where our products are manufactured.

To encourage workers to both return or commence work at these factories, we needed to [uneffect] an early implementation of those higher wage rates in the first quarter of 2008. Additionally, the U.S. Dollar continue to fall in value against the PRC Yuan, in which all our PRC factory wages are paid. We continue to experience higher material costs that have not been able to go pass through to our customers, although going forward, our selling price increases. We feel that selling price increases are imminent throughout the industry.

Turning to selling general and administration expenses, the percentage relationship is selling general and administration expenses to net sales decreased from 15.3% during the third-- three-month period, ended March 31, 2007, to 14.7% during the three months just ended.

The decrease in selling general and administration expense for the 3 months, ended March 31, 2008, compared to the three months ended March 31, 2007, was approximately $600,000.

The decrease is principally attributed to the following -- legal and professional fees decreased by $0.5 million for the first quarter of 2007, especially due to the implementation of an internal audit and SOX, which reduced an external consultant fee significantly.

The general and administrative costs decreased by $300,000 during the first quarter of 2008, as compared to the first quarter 2007, and the company didn't accrue any bonuses during the first quarter of 2008 due to lower profitability during this quarter. There was also no bonus accrual, I might add, in the first quarter of 2007.

The company believes that the accrual recorded during the fourth quarter of 2007--that's the fourth quarter of our 2008 bonus period-- is adequate through March 31, 2008. Offsetting these factors in part was bad debt expense of $200,000 during the first quarter of 2008, as compared to the same period of 2007. This increase resulted from a specific reserve on a large account in Germany that was recorded during the first quarter of 2008.

On the tax front, the increase in taxes is principally related to an increase in the provision related to an anticipated state of New Jersey audit tax assessment in the amount of $200,000 during the quarter ended March 31, 2008, and higher U.S. taxable income to total pretax income during the quarter ended March 31, 2008, versus March 2007.

Turning to the balance sheet, at the end of March 2008, our cash equivalence and securities, including restricted cash was $126.8 million, which was some $12.1 million above the December 2007 balance of $114.7 million. Receivables net of allowances was $42.5 million of March 31, compared to $52.2 million of December 31, 2007. This was quite a significant reduction of almost $10 million.

Our accounts payable for the same period is $17.2 million.

Turning to inventories, for this March period, our inventories were $42.5 million, which was $3.5 million below December 31, 2007.

Impacting inventory dollar levels, of course, are the higher raw material prices that we're now paying.

Our balance sheet comments for the three months-- Capital spending was approximately $1.8 million while depreciation and amortization was alike, $1.8 million.

During the first quarter of 2008, we repurchased 12,207 Bel class A shares HCS at a cost of $392,000. And our book value as of March 31, 2008 was approximately $21.07.

Now, I'm going to turn the call back to Dan.

At this time, Shannon, we'd like to open up the phone for questions people might have.

Thank you very much. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Sean Hannenexe with Needham & Co. Please go ahead.

Yes, thank you. Good morning.

Good morning, Sean.

Good morning.

So, I guess my first question, is there a way to -- it doesn't seem like, from a demand standpoint, that you really had a problem. You commented in your release that backlog remains at least generally at high levels. Is there a way to talk about the linearity of demand through the quarter for each of your four product groups?

I think the major product, I think most-- The major demand came from the Magnetic product group and that is where we saw the major increase in backlog. And that is [Al Lodge's] product group. And I think the other three products were just stable over this period.

So, if I interpret that correctly, it was, when you say stable, it was just kind of similar levels throughout the quarter, whereas Magnetic actually ramped.

Yes, to about 40% increase.

Okay, but the demands flow actually increased as you progressed through the quarter.

Yes.

Okay.

Once again, what made it somewhat worse, though, is because the ramp-up came in the backlog in October, November, December. We really weren't able to hire any people in January and February and December because of Chinese New Year. We found it to be almost impossible to hire anybody in the later part of the year because they couldn't leave.They wouldn't leave their current job to work for us because they would lose Chinese bonus and other payments they have received from the other company. So basically had period of 10 weeks where we couldn't work the backlog at all.

So, you have been talking for sometime about having labor shortages.

Hindsight --

What does that --

Let me just disagree.

No? Okay.

I think-- I think me and Colin are debating this issue. I dont' think when you hire 3,500 people in Chinese New Year, I don't think you have a labor shortage. And with the process now of hiring 1,500, I think the problems that we're facing is more of the rules and regulation and how to bring-- make sure everything is in line that we can be competitive to attract people.

Okay, so -- .

I don't -- I'm not one, I don't believe what we had-- we had a labor shortage. There is no way we could have hired 3500 people.

Okay, so if you were to look, then, at 3,500 hires that you had and the 1,500 that you have planned, what is actually replacing staff for regional turnover versus what is incremental on your business plan?

Once again, the 3,500 people we're talking about is in addition to what we had before Chinese New Year.

Okay.

So it wasn't replacing people we lost at Chinese New Year. Once again, let's round it out. We didn't have 10,000 people from Chinese New Year, and after Chinese New Year we had 7,000 people. We roughly added a pretty good retention rate of 92%.

Okay, well that is helpful. That is actually a pretty good number.

Yeah. And if you try to hire 3,500 people from a logistic standpoint, you get everybody all fed, housed and then just get them trained. And we do have over this training period of 12 weeks-- We do have a very high turnover rate of, probably 30%. So when we say we hired 3,500 people, in reality, we probably hired 45 to 5,000 people, but then we were left with 3,500.

Okay. All right and then if I can just ask one more question and I'll jump back in the queue. So based on the commentary in the press release, it appears that you expect to recapture a certain level of Magnetics revenues in June. Is that correct?

Yes, we should start with -- Hopefully we start seeing the improvement in capturing sales and that should be increasing, yes.

So we should effectively think of June as including an incremental bump on top of where your revenues would actually have moved seasonally, or if you could provide thoughts around that revenue level, that would be helpful.

It's still kind of early for us to really see because of our other products and where they stand and what is going on. And so, we're also very concerned about what is going out in the industry where, if you look at us and look at the (inaudible) and Power-One, everybody is saying the same thing, that they would [upgrade] the sales to add more production. And that really concerns us when everybody says the same thing. But on the other hand, we listen to Cisco and other major companies that we supply, saying that it is hard to see a softening or a bump.

So we don't know if people, because of this one leave time, people have been double ordering and if there is, will we see the recession or not? I am still very, very cautious.

Okay, that is helpful. I'll jump back into the cue.

Ladies and gentlemen, as a reminder, to register a question, please press the 1 followed by the 4 on your telephone keypad. Our next question comes from the line of Todd Cooper with Stephens, Inc. Please go ahead.

Well, you answered a number of my questions. I was just going to kind of dance around the demand outlook going forward and how that not relate to guidance. So, I will be direct.

Colin, can you provide any guidance for the next quarter or two with regard to margin outlook and revenue growth?

Well, there is a couple of things.

One is we got the volume issue, and I think Dan addressed that and now concerns about the possible double ordering and issues related to that from the customers out there, and because the production has been pretty tight across the industry.

As we discussed, and we have been discussing for awhile, we have had these continuing cost increases. Material costs and of late, particularly labor increases. In addition, in this particular quarter, we had the productivity issues with trying to get some of the new workers up to speed. The labor issues are not going to go away. I don't see gold prices going down particularly, and I see a couple of prices going down, particularly.

So, one of the things I said this morning, and I don't know if you picked up on this, it's our feeling that we're going to have to see some price increases fairly imminently in this industry because I don't think anybody can can continue to produce that these margins were out at the moment.

So, obviously, we have got agreements in place with the number of the customers and we can't do anything, and we certainly are not going to elaborate those arrangements, but we certainly feel that there has to be some price increases to get us back to decent returns within the industry.

How quickly can those price increases be implemented and flow through your financials?

I don't think we probably just need marginal room by the end of the second quarter because generally we have -- we're all in contact quarterly or for six months. So, for the smaller customers, we can implement it very quickly. Once again, we're driven by the large customers and I don't think we see any of that till probably until then of the second quarter. So, just a slight improvement, I would think. Colin?

I agree and it could -- and I would say, at the end of the second quarter and a little beyond that. It's going to take awhile to get this into place. And obviously, there is going to be a lot of negotiations at the same time.

Okay, well gross margins have ran in the low 20% for some time, and you just reported 18.5% and with labor inefficiencies being what they were. I mean can -- with improvements there, can they get back to at least the 20% range in the current quarter?

No. It's just not going to happen without a price increase.

We have had approximately a 25% run-up in labor costs in China over the past six months.

We have had- We've had the dollar sink against the renminbi by about almost 15% and there was certainly no indications that the dollar is going to improve, and so we would expect to see additional labor cost increases, which are a major cost in China. That and our utility costs which [typically] relate to electricity to run the factories and that we -- which gets passed through to us.

So, improved labor is not going to get us there. It's -- there has to be some costs to pass through.

Okay, and at the worse point during the quarter, what were your lead times for the MagJack and Magnetics products?

I think our lead time goal is always to be eight weeks, and I think at a certain point we're just getting stretched at 16 to 18 weeks.

What do you think the average will be in the current quarters?

I think our goal is to get it down to, hopefully, 12 to 14 weeks, and then, by the beginning of the third quarter, get it back to 8 to 12 weeks.

And when you add the 5,000 new employees to your existing workforce, where will that put you in terms of record headcount for the company? Or is it a record?

I think we're still maybe a little less that our peak, but I think-- Once again, I think it puts us around 12,000 direct labor. Colin, is that number good?

That is (inaudible) fact, yeah.

Is the hiring and firing flexible enough to run it like you are where you state that you're concerned about demand going forward, yet you're hiring another 1,500 people. (inaudible)

Yes. Well, the problem is you can fire them but you can't hire them back.

That was our-- We sort-- And that was our biggest problem [is] in July and August, we saw a little softening in the marketplace and we laid off about 1,500 workers and because, once again, it was beyond midyear and when we saw the increase in the backlog, it's difficult to hire people.

We have tried to tell our customers with this product line that we can't see ramp-ups and ramp-outs and they really-- They refuse to develop stocking programs and work with us in stocking programs and because the training takes twelve weeks, it's just impossible to ramp up and down.

So, once again, if we see a softening in the marketplace, our problem is not getting rid of the workers. Our problem is if we see the ramp-up again in the fourth quarter, we'll be in the same situation we're at today.

So, what is the solution?

Now, the solution would be to sit down with our customers and say, "Hey, we're willing to take risks with you and we're willing to put in inventory, but you have to go 50/50 with us in this inventory situation. And if they can't make the commitment or 50/50 on the inventory, then we really don't have a solution.

I don't think-- We still have the memories of 2000 (inaudible) when we took a $20 million write-off in inventories. So, you know, we just can't go with a blank check and put tons of inventory in without a commitment from our customers.

And no one has been willing to take you up on that offer to date?

Not yet. And even on single-source items, they refuse to do that. I think, I think the [bean counters] of the world are controlling companies today.

Okay, thanks very much, guys.

Thanks, Todd.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Zahid Siddique from Gabelli and Company. Please go ahead.

Hi, good morning.

Good morning.

Good morning, Zahid.

Could you break down the revenue by geographic areas?

I don't have that with me.

We don't have it readily available, and to be honest, it's so misleading because if you look at it, I would probably say it's probably 60%, probably 20% North America. No, maybe 25% North America, 15% Europe.

That would be pretty close. Yes.

Okay.

The problem we have is that 60% in the Far East is probably 50% for U.S. customers that are subcontracting the Far East.

Okay, there is some overlap that way.

Yes, but most of that is majority of it. I would say the 60% we have in the Far East, 50% is probably for American customers. Like, for example, we sell something to Cisco or HP or [Lucent], they would use (inaudible) Electron (inaudible) and China. Those products are shipped in China but they really come back to the U.S., or come back to be, considered to the U.S. customers.

Sure. And my second question is with regards to your long-term obligations. I think on the press release you said about 16 million or so. Is that -- that's the debt you have or is that other obligations?

No, we have no debt.

Right, that is how I thought. So that is something else then?

I'm not quite sure which number --

Can you repeat the question again?

It says total long-term obligations of $16.6 million.

Oh, that just relates to lease obligations and going forward and stuff like that. It's just operating.

Okay, so your debt still remains at 0.

We have 0 debt, yes.

Okay, then one last question, any updates on Power-One?

We're still watching it very carefully. Once again, we listened to the investment yesterday. I think they clearly understand-- I think they understand that we're seriously interested in doing something with them. However, I think they would like to give the new president/CEO time to turn the company around. Yesterday he predicted that they would be break even in the second half of the year.

I don't -- I think at that point, if they're not break even by the second half of this year, that we have a lot more strength to put a little more pressure on them.

At this point, I think -- the impression I'm getting from the readings I'm doing, that they would like to give the new president an opportunity to turn the company around.

Okay, great. That was very helpful.

Our next question comes from the line of Will [Talashia ] from Talasi--I'm sorry. [Talashia] and Associates. Please go ahead.

Good morning.

Hi, [Will].

Hi, Will.

I was reading over the annual report and I noticed that you still carry a substantial portion of the [Toko] shares at a loss.

Can you update what the loss is currently, and whether you considered this when you decided to provide a bonus, I guess a 25% bonus on the shares that you sold profitably? And who was involved in making the decision on that bonus and did the board approve it?

We presented it to the board, the board did approve it. Regarding the Toko shares, Colin, what is the loss at this point?

I don't have it with me and I'm not in the office to just dig that out. It will be (inaudible) detailed, it will be in the cue when the cue comes out in a couple of weeks.

And I would think, and we are up on the Power-One stock, if that makes you feel any better.

Are you planning--

And today the Toko president resigned and we still have an interest in looking at Toko.

Okay.

Once--once again with that bonus, it was spread throughout the whole company not just to three or four people.

Yes, I understand. I'm more concerned with the fact that you sold the profitable shares and held on to losing shares.

It was not losing. It was all the shares at the same time.

All the shares were averaged, so it was not a matter of profitable shares and losing shares. What happened was we sold a certain number of shares when the market conditions were good. The market for the shares were down fairly rapidly and we stopped selling. And subsequent to that, we have some [currency] issues and Toko had a couple of bad quarters. Things did go down worse than what they are now. They have recovered somewhat. We have an agreement that we will be looking at that amount.

It's been a long time sitting on our books and it's very probable that any loss that is still there at the end of the second quarter, we will take to P&L.

And again, to be honest with you, I would be very comfortable if you would like to take our managers'' bonuses and compare us to anybody in the industry, our salary structure and bonus, and compare it to anybody in the industry. And you do a comparison and you tell me if Bel Fuse people are overpaid. I would love to see that presented to me.

Well, the bonuses presented [because] someone -- I guess -- .

Look at the -- once again, what I'm saying, look at the compensation of Bel and top management and compare it to any company our size and what we produce, and if you think we're overpaid after reviewing those [comparisons], I would be glad to sit down and talk to you.

This bonus was based upon the investment in the company and your profits. And, apparently, you have over $1.5 million --

If we take a loss from that, it will affect the bonuses and affect other things that we have going forward.

Bill, one of the things this quarter, because we had a poor quarter, there was absolutely no bonus accrual across the company.

All right. But it seems like every time -- do you plan to make any bonus awards based upon any profits in the Power-One situation?

Definitely. If we make money on Power-One, and we do very well with the stock, then it's going to be shared without the company. Like any other company, any other company. And your company, if you make money on stocks, how do you get paid?

Well, I think the bonus is generally on the company's profitability, not specifically on one acquisition or another.

That acquisition's the profitability of it.

Yes.

Once again, I think the overall thing, once again is, A, was that bonus given to three or four people? And what you want to see throughout a company, that bonus went to everybody in the company.

But --

And people in the Far East got one week's salary because of that.

Right. But the bonus with the artisan.

Same thing -- (overlapping)

That was upper management, right?

No.

No, that-- No. That was spread throughout the whole company.

The other thing is the Columbia Strategic Cash Portfolio. What is the current status on that, and how much money have you been able to take out, and what is the current payout rate?

We're taking out about $8 million. We have got-- let me just pull it up. I just got an update on that from them yesterday. Sorry. Just bear with me while I open it up. And again, we'll be detailing this in the quarterly report. They're expecting -- I'm quoting them at the moment. They expect by the end of 2008, they would liquidate another 40 to 45% of the fund, and then another 5 to 10% in June-July of 2009. And then a little uncertainty to the final.

At the moment, it's still paying about 3.5% interest. And the interest rate more than covers the degradation and the NAV, and the average material of the whole portfolio at the moment is 46 days.

All right. Thank you.

Thank you.

Thank you, our next question comes from the line of Lawrence Goldstein from Santa Monica Partners. Please go ahead.

I got to say something beyond the question I was going to ask. I just marvel at a company that made $26 million paying the top two guys less than $600,000 in total compensation. I don't know where you find that in America today.

As a matter of fact, I just put down the annual report in the proxy of a company south of you in New Jersey that does less than 10% of your revenues, and the chairman alone was paid $800,000, and the company had a year in which they made about $350,000. That is more the norm. Yours is abnormal. You guys are underpaid, and I think your salary and your bonuses -- and, by the way, it's great to see in a company that the bonuses go down when the results are not as terrific. You don't see that in too many companies too often.

But, Larry, you just gave me a heart attack. (overlapping)

You don't see that, either. So, the fellow callers in, we're getting a bargain in people here. The question I had is, the one division you don't talk about, but you just did in the last two questions is the money management division. You guys have, excluding the position to which you currently have a book loss, a terrific record in buying 5% of a company and profiting over the years many times. So, why the hell don't you allocate a few bucks to a money management division and, maybe, buy one or two stocks every few years, and if you keep up the ratio of success of the past, what would you have, one loser in about seven?

Yes. Colin, you want to touch that one?

Certainly. I think, Larry, we got to keep our eye on the ball. We have to run the business that we know how to run the best, and certainly we don't put money into these companies just to turn our buck. We put money into the companies because we think they have synergies, they think -- we think they would fit well with our portfolio, and for all those other reasons to expand the company. Now, you have to put a little money to get into the game, and sometimes after we put the money in, we find that the game is not quite the way, being played the way we want it to be played. And so, we've Certainly. I think, Larry, we got to keep our eye on the ball. We have to run the business that we know how to run the best, and certainly we don't put money into these companies just to turn our buck. We put money into the companies because we think they have synergies, they think -- we think they would fit well with our portfolio, and for all those other reasons to expand the company. Now, you have to put a little money to get into the game, and sometimes after we put the money in, we find that the game is not quite the way, being played the way we want it to be played. And so, we've bailed out. In some cases, we would like to have gone forward, and we just can't get the company to cooperate with us. So, I think we're not going to, at this stage, look at that as a part of our business.It's ancillary, and we got our hands full with trying to drive the main part of our business day in, day out. out. In some cases, we would like to have gone forward, and we just can't get the company to cooperate with us. So, I think we're not going to, at this stage, look at that as a part of our business. It's ancillary, and we got our hands full with trying to drive the main part of our business day in, day out.

Well, let me just ask you out of curiosity. Why don't you go to 9.9, or, indeed, why don't you go above 10 in any of these?

I think some of them we have gone up to 8%, 9%. I think the concern there is if we do abide them, with the bylaws of the stocks, that if we go above 10%, our hands get a lot more tied and gives us a lot less flexibility. I think the question that we have with [Power-One] is really because of them having seven years of losses, we really are kind of uncertain about them, of turning around the situation. But other companies that we feel a lot more confident with, I think we would go up to 10%. I think it more depends on the company. I think, once again, we are more concerned that we would like to have the freedom to move in and out and go above 10%. And I think that's when our hands become tied.

Spoken like a money manager. Okay, thank you.

Thank you, I appreciate your kind words. We don't get that often, Colin.

We have a follow-up question from the line of Sean Hannenexe from Needham & Company

Yes, thank you. So, if I can just jump back into March and what you saw for your different products categories. Well, actually, specifically modules. You commented earlier that DC-DC and custom modules, I think, is where you saw specific strengths in the quarter?

Yes.

Yes.

Is there a way to provide a little bit more color around that?

Hold on for one second. I should be able to. Roughly I would say we're up just a little bit more than $3.6 million.

Okay. And then from a probe -- is this specific to a few programs, or is this more broad-based strength that you saw?

Once again, I think, with us and all of our products, we have always been 20 customers driven. We don't have a broad-based customer base. So, most of our sales have come with key customs with key projects.

Okay. And so, can I infer that a lot of this was related ultimately to computing and storage and application?

I would definitely say networking, telecommunications, storage, yes.

Okay. And then, is there any way that you can talk a little bit around -- I think you started to touch on some of it earlier, but pricing with MagJack, and that has always been a topic.If there is a way can you provide, perhaps, a little bit of color around that and any additional sourcing concerns at the OEM level. And does this ever effectively become neutralized? Any comments there would be helpful.

I think, once again, and from our understanding is [Tyco and Rolex] have announced price increases in their connectors, and mainly, the gold and copper and the labor in China. There is no question we're going to go across the board with increases. Now, if we have some margin items that maybe have 50% because they're newer products, we might drop -- We might hold price to drop price. But in items that we're breaking even on, or low margins, we're definitely going to go from 5 to 7%. And, once again, with lead times of 16 weeks, besides all those other factors, why the hell you can't ship out products. And if you do ship out products, why the hell is it going to be low-cost margin product. So, I think at this point because of the long lead time and because of everything else affecting us, we really do have to come with a price increase across the board.

Okay. And it's ultimately after that has taken effect to, with your major OEMs where you're able, at the gross margin level, to return into that lower 20% range, if I heard that correctly.

Well, again, we're fighting two battles again.

Yes.

We're fighting the labor increase, we're fighting the dollar increase, and we're fighting the material increase. And I don't know -- once again, it's not a straight target.If you're going to tell me materials stay the same, labor is going to stay the same, then I have no problem with that comment. But more things have changed in China, Southern China, in the last four months than have changed in China the past four, five years.

Okay, so it's -- if inefficiencies were called out within the press release as a contributor to the gross margin degradation, is there a way quantify or talk about the size of the inefficiencies versus these other factors as being a headwind?

Colin, you want--

No.We've looked at that, Sean, and we've kicked it around, and we really just -- with so many people and so many departments, it's just not possible to get a meaningful number, and because that is one of the things, obviously, that we're trying to get our hands around. But as of yet, we don't have a good number, and I certainly have nothing to share with you at this time.

Sean, if we could, from a sales standpoint, we could have been anywhere from, I would say, $3 to 5 million higher in sales for the quarter if we had enough people.

Okay. All right. That's very helpful. Thanks so much.

Thanks, Sean.

We have another follow-up question from the line of Lawrence Goldstein with Santa Monica Partners. Please go ahead.

Yes, hi, Lawrence.

Mr. Goldstein, your line is now open. (OPERATOR INSTRUCTIONS)

Hi. One question. As part of our $100 million cash [flow], do we have any material matter of remedy or Hong Kong dollars?

No.

Sorry.

Thank you.

Okay.

There are no further questions at this time.

Thank you, and we appreciate everybody joining us today, and we look forward to speaking with you again. Colin, anything else?

That's it. Thanks, everybody. We'll talk to you next quarter.

Bye-bye.

Ladies and gentlemen, that does conclude today's conference call. We thank you very much for your participation, and we ask that you please disconnect your lines. Have a wonderful afternoon, everyone.