Benchmark Electronics Inc (BHE) 2002 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter earnings release conference call. All participants will be able to listen only until the question-and-answer session, and at that time you will be instructed on how to ask a question. This conference is also being recorded at the request of Benchmark Electronics for instant replay purposes. If anyone has any objections, you may disconnect at this time.

And I would now like to introduce your speaker for today's conference, Gayla Delly, CFO. You may begin when ready.

Good morning. Welcome to the Benchmark Electronics fourth quarter 2002 conference call. First I'd like to introduce our team that's present today. I am Gayla Delly, the CFO of Benchmark Electronics. And with me is Cary Fu, our President and Don Nigbor, our CEO. Before I begin I would like to say that I am getting over the flu, and I apologize for my voice today, and we'll get through the best I can. First, Don will provide an overview of the quarter, and then I will present the financial information, and we will conclude with both Cary and I answering your questions in the Q&A session. We will hold this conference call to one hour.

Before I begin I would like to read the forward-looking statements. During this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of our company. We would like to caution you that those statements reflect our current expectations and that actual events or results may differ materially. We refer you to the risk factors and cautionary language contained in the documents we file from time to time from the Securities and Exchange Commission, specifically our recent files on forms 10 K, 10 K, 8 K and S 3 to identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update projections or forward-looking statements in the future.

Don?

Thank you, Gayla.

I am very happy to report a very successful 2002. During the fourth quarter of 2002, we again stayed the course with our focus on customer satisfaction, expanding customer relationships, and improved financial performance overall. These efforts have been very rewarding. We are very glad for the fourth quarter 2002. We experienced both sequential revenue and earnings growth once again. The steps we have taken toward our strategic goals of expansion into the Asia area have progressed well. Both the integration of our acquisition of the Thailand facility and our Greenfield operation located in China are progressing to plan.

Now I will turn it over to Gayla to go over the financial performance for the quarter.

Thank you, Don.

As we reported this morning in our press release, we completed the fourth quarter of 2002 with revenues of $468 million, which is higher than our original guidance of $425-440 million. Our cash E.P.S. of 50 cents per share exceeds our guidance of 37-40 cents. Our quarterly revenues represent sequential growth of approximately 9% over $428 million for the third quarter of 2002. Once again, our fourth quarter earnings were on a GAAP basis and GAAP and cash E.P.S. were the same with no reconciling items between those two figures. We no longer have any goodwill amortization and there were no restructuring charges in the quarter.

This quarter was similar to the prior two quarters where in we witnessed a more stabilized forecast for many of our customers, and there was good acceptance of our customers' new product introductions. We do again note that we have not seen this in the telecom industry which is still suffering through the downturn. I'm again proud to be repetitive in some of my comments from the last quarter in saying that the Benchmark team has performed well yet again in the fourth quarter, effectively managing working capital and focusing on cost and efficiency improvements and maintaining great customer satisfaction. I'm extremely proud of our team for their operational and financial efforts in this challenging environment, and encourage these efforts to continue so that we can achieve our internal goals.

For the fourth quarter, our cash flows from operations was 85 million. Our inventory level was 196 million, which is a decrease of 13 million as compared to the third quarter, with improved inventory turns at 8.8 for the quarter, which compares to 7.6 for the previous quarter. Our gross margin for the fourth quarter was 7.8% of sales. The gross margin was up compared to the previous quarter which was 7.6% because of the favorable leverage by our volume increase.

Our goal set forth for 2003 in early 2001 was to align our model and our cost structure to achieve an 8% growth margin and a 3.5% SG&A Deriving an operating profit margin of 4.5%. We've made significant progress with these as our goals, achieving the gross margin of 7.8% and SG&A of 3.6%. SG&A was approximate will he 16.6 million, which is slightly below last quarter mainly due to the cost control efforts we've implemented throughout the last 18 months. As previously stated, goodwill amortization no longer exists under the new accounting pronouncements. Excuse me. And no impairment of good will was included upon adoption of the new pronouncements.

Interest expense was 2.8 million dollars for the quarter. Interest income was approximately $1.5 million and other income was approximately $167,000, primarily from the result of foreign currency gains. Our income tax rate for the fourth quarter was approximately 33%, due mainly to the overall tax impact of this geographic dispersion of earnings. Our weighted average shares outstanding, including the diluted effect of our convertible indebtedness was 27.141 million shares. The dilutive effect of the convertible debt impacted earnings by 1 cent.

Now I will go over a quick review of the year-over-year results. Our revenues for 2002 were 1.6 billion compared to 2001 revenues of 1.3 billion. Our SG&A. expense was 3.9% of revenue compared to the prior year which was 4.3% of revenue. Our operating margin was 3.6% for 2002 compared to 3.1% for 2001, excluding goodwill amortization asset writeoffs and restructuring charges for 2001. Our interest expense for 2002 declined to 11.4 million dollars compared to 17 million in 2002 as we paid down our revolver in term loans. Diluted cash earnings per share for 2002 was $1.51 compared to .81 for 2001. Our cash balance at December 31 was approximately 313 million, an increase of approximately 75 million compared to the prior quarter. Receivables were 179 million compared to 188 million for the third quarter of 2002.

Our sales outstanding improved to 34 days compared to 40 days for the third quarter of 2002. Inventory was 196 million compared to 209 million for the last quarter. Again, our team's performance was excellent in reducing the levels of inventory and higher than expected shipment levels also reduced this inventory level. Inventory turns increased to 8.8 times this quarter. Cash cycle days improved to 31 days. Current assets were 708 million in the current ratio was 2.21. Capital expenditures for the fourth quarter were approximately 1.8 million dollars and depreciation expense was 7.3 million.

Total debt is 137 million compared to 148 million in the previous quarter. We have no outstanding amounts under our revolver credit facility of 175 million in remaining in compliance with our debt covenant. Cash flows provided by operations were 85 million pour the fourth quarter and 222 million for the year ended December 31, 2002, highlighting our effective working capital management.

Our revenue break down by industry for this quarter was video-audio, 1%, medical 12%, telecommunications, 12%, computers 64%, industrial controls, 10%, and test and instrumentation, 1%. As you may know, there are no significant changes in the industry revenue mix for this quarter, indicating the overall improved strength across the board during the fourth quarter. Our top three customers represented 68% of revenues. Again, no significant change in the mix here. We believe that the level of concentration among our top three customers will decrease as we begin ramping our new programs and new product introductions come to volume. Revenue from the medical segment increased over the previous quarter as our new programs begin to ramp to full production in Q1, 2003. During this quarter we have booked seven new programs. One, in the high-end computer sector, one in the medical sector, one in telecom, two in industrial control, and two in test and instrumentation. These programs are expected to generate approximately 50-75 million dollars in revenues annually.

We are continuing to see what we described last quarter as a new way of outsourcing taking place with the duration of this downturn for out-lasting the expectations that many people have planned for as it began almost two years ago. Site visits and quotation levels are continuing to increase. Component markets have not changed over the past couple of quarters as demand still lags capacity in those markets. However, we believe that the electronics industry-wide component level, inventory levels have reached very low levels. Any significant business up-turns could stress the supply chain in the near term.

Q1 revenues are expected to be in the range of 440-455 million dollars. With the strong demand levels experienced during Q4, we do expect the Q1 revenue to be more closely aligned with our original expectations for Q4 showing a slight increase over those original revenue expectations. Capital spending programs, particularly I.T. spending are still in a holding pattern for many corporations. However, it's difficult to provide an outlook due to the uncertainties that still exist. Therefore, we have factored into our guidance for the first quarter the overall softness, which is being witnessed in the I.T. spending and the markets in general.

Benchmark continues to believe that it's prudent to provide forward guidance for only one quarter until better information is made available from our customers. Any guidance provided is based on the information available at this time, based on our customers' provided information, adjusting for the market conditions. Based on customer information, we currently expect 2003 first quarter revenues to be in the range of $440 million-455 million, with GAAP earnings per share in the range of 42-46 cents. Beyond Q1 we don't have or provide specific guidance, but we know the first half of 2003 does not show fundamental changes or improvements. We believe that the first quarter of 2003 will again be a challenging quarter as the economic uncertainties and the decline in technology spending could further impact the marketplace. We remain optimistic with our continued new program wins and new product introductions yet we are cautious and want to recognize that the softness in technology spending still exists and can impact us.

I'll turn it over to Cary now for a few comments before the Q&A session.

Good morning, this is Cary Fu. Be we start the Q.&A.session I just want to make a couple comments.

The technology turbulence has not subsided, and the challenge is still around us. However, our team continues to perform very well from sales MPI's, engineers, production, and the I.T. perspectives. We are very proud of our team and now pushing them even harder to achieve the excellent result that we can stronger during this time. This is quite rewarding to see the result of our 2000 efforts and results of the years. We believe it can provide us both strength and momentum to push forward into the year 2003. More importantly, we have a very strong year 2002, not only from a financial performance standpoint of view, but also from our customer satisfaction standpoint of view. We've seen several major customers offer us various types of recommendation for our service and flexibility. In addition, 2002 will have took the necessary steps to continue streamline the realign operation and resources in this environment in addition to expanding our Asian footprint. I believe all the action we've done in 2002, our teams are in a position to face the dynamics of 2003.

At this time I will turn the call back to Gayla for a quick Q.&A.section. Gayla?

During this section we request that you limit yourself to one question and one follow-up question in order to allow time for everyone's questions. Operator?

Yes. Thank you. At this time we are ready to begin our question-and-answer session. If you would like to ask a question, please press star 1. You'll be announced prior to asking your question. To withdraw your question, please press star 2. Once again to ask a question now, please press star 1. Our first question comes from Thomas Hopkins of Bear Stearns. You may ask your question now.

Yes. Good morning Gayla and Cary. I wanted to see if we could get a sense of the two plant acquisitions from AC., if the majority of the revenue is still from Emerson and Abbott laboratories, and what was the revenue increment in the quarter from that?

Tom, good morning. It's Cary. I think the acquisition for ACT went quite well. That's actually better than we expected. And indeed, when we acquired this operation, Emerson and Abbott was the major customers. Now we start moving in the newer program into those two sites, and we anticipate the revenue will be increased significantly, and in the coming years as the customer is more interested in our Asian footprint. As far as revenue, the contribution from those two locations, I don't have on hand. It's still very much in line with our previous guidance between 180-200 million a year. After we start moving the capacity, the customer into those two sites, it's very difficult to determine which part come from the acquisition of which part, organic transfer from Benchmark sites.

Okay. And just quickly, the medical increase that Gayla mentioned, would that partly be because of the incremental revenue from the Abbott laboratories?

We're not talking about a specific customer, but yes, that's part of the factor. We also have another program that will start kicking in, too.

Okay. Finally, Cary, Cisco, you don't really do business with them but yesterday they expressed some concern about customers getting a little nervous because of geopolitical concerns, and I think Gayla kind of echoed that. What is your sense -- with January over into the first week of February, what is your sense so far for the March quarter? Obviously, you've given your guidance but I'm just trying to see what your feeling and seeing from customers, orders as far as forecasts and et cetera.

Q4 was kind of an interesting quarter for us. We saw a lot of customers have the confidence and show a little more confidence, although we did not see a significant upward in the forecast or revenue forecast, and maybe pushing for the year-end revenue for their customers. But the nevertheless, we have not seen any significant changing of the pattern for Q1 yet, and we give the 440-455 revenues, actually we're adjusting to the market softness. There's definitely no recovery yet. The one good thing we had to point out, the customer tend to be thinking a little more longer term in the early part of 2002. Everyone still worried about inventory level, so on and so forth. Definitely it will be stronger, but you're right. The customers are concerned about uncertainty in the overall political environment, so --

Okay. Congratulations on a great quarter. Thanks.

Thanks, Thomas.

Our next question comes from Michael Gresens from Robert W. Baird. You may ask your question now.

Good morning and congratulations.

Thank you.

A couple of just minor questions. The reserves, what was the movement during the quarter on both AR and inventories?

Neither of those showed significant increases during the quarter, and as I believe we indicated last quarter with the downturn and the prolonged downturn in Telecom, we did address throughout this year the needs there, and I believe that given no further deterioration in Telecom that we have aligned all of our reserves with our business in accordance with GAAP and in this quarter did not have any significant increases.

Okay. And 10% customers, was there more than one during the quarter?

Excuse me. Our top three customers remained the same. I don't have it taken out to a full percentage as to whether it is -- it was specifically, 10%, but there were three top customers that if they weren't exactly 10%, they would be very close.

The top customer, did that reach or go above 50% during the quarter?

I believe the top customer -- again, I don't have the exact calculation to the digit place, but it will probably run approximately consistent with last quarter and in total, 68%, and I believe around 50% but I don't have a specific percentage.

And with the transition or the potential transition of your program with that major customer, is there the risk that in, say, three to four quarters the old program is going to transition down or ramp down and that there could be a gap in between the current generation, the next generation that could impact the results? Do you think that could happen?

I guess in any product transition with any of our customers, there is an opportunity for the decline in the existing generation of product to not properly dovetail in perfect alignment with the on ramp of new products but as we've indicated, we've got several new program introductions with each of our top customers. We feel very confident of the opportunities as we've aligned our business model, not knowing the timing or the sizing of any of those programs but are delighted to be working with each of our top major customers on the programs. But as you know, neither an OEM nor Benchmark have the infinite wisdom to know exactly the timing of termination or end of life on a program or the startup ramp. And oftentimes what we find probably more challenging than the actual on-ramp is the fact that when people try to end of life a program, that it typically continues long beyond what customers would desire as an end of life program.

One final question, cash. You have a significant balance right now and it appears to be the impediment between you getting your ROSC above your cost of capital. Do you have any plans or thoughts on what you're going to do with your cash?

We really don't have any significant plans for cash. I think from the marketing standpoint of view, a strong balance sheet and strong cash balance is very critical for us. As you noticed, we attract quite a bit of new programs through our year 2002. One of the facts, in addition to our service level, the strong financial precision, was a major factor and we believe in maintaining a strong balance sheet as a key element for continued success in the future. We have no plan to spend the cash flow for anything at this point in time.

Thank you.

Our next question comes from Brian White of Merrill Lynch. Sir, you may ask your question now.

Good morning, Cary.

Good morning, Brian.

It looks like you did great on operating margins, boosting by 70 basis points sequentially. Most of the increase seems to come from the SG&A line. You mentioned cost-cutting on SG&A expenses, but for SG&A expense to decline by 600,000 sequentially when sales rise 9% -- Is there something else that impacted margin the last quarter -- SG&A.expense last quarter that's not in there this quarter? And what kind of cost reductions are we talking about? Were people let go from past restructuring charges, or can you give more color on that?

Well, Brian, it's a combination of all of the above. Although we do quite well, we still have to be very careful review of our resources and allocation, and our resourcing the proper allocation is what our customers looking for. As we indicated in the prior quarter, Benchmark has to continue to streamline our operation and also expanding the footprint where needed to supply our customers. And from our standpoint of view, we don't call it restructure charges. We believe those are an ongoing operations expenses required to put your operation in line with the marketplace. Okay? And as Gayla indicated earlier, our internal goal was a gross margin at 8% and SG&A.of 3.5% which gives an operation profit of approximately 4.5%. And also, you know, Q3 we took quite a bit of reserve in the Telecom sector to recognize the potential issue in the softness in the Telecom market. So that will give us a little room for improvement from Q3 to Q4 from the research standpoint of view. We definitely will continue to push for a model of the 4.5% of the model target, and that's our goal so we'll continue to work very hard to that.

Okay, great. Just a follow up, and what do you think is maybe a goal? Return on invested capital has lagged some of the other metrics at Benchmark historically, and what is a longer-term invested capital goal, and how do you think you can get there?

Well, again, it's really coming from -- we'd like to see the return of the capital about 15% level. We're not there yet. But again, you had to take return on capital with the factors coming from revenue lines, your leverage model, and driving the probability, which the end result will improve your return on the equity side. And the key thing is this is -- we say all along, this is very much a leverage model. We are not expending our cost significantly. We built a facility in China at a very low cost solution for our customers, and once we achieve our top line, the return of equity would automatically be there. We continue to driving the efficiency, improve the top line. Those are models, but basically that's what we try do.

Okay. Thanks. Nice job.

Thanks.

Our next question comes from Roger Norberg of J.P. Morgan. Sir, you may ask your question now.

Hi. Good morning, Cary.

Good morning, Roger.

Just a couple things. First maybe could you give just a little color on what the trajectory has been on the programs that you've announced as wins in the last few quarters in terms of how they've ultimately come into the ramp phase versus initial expectation as far as timing and ultimate volumes? Have things stayed about true to original expectations or have they lead or lagged?

Well, it varies from program to program, Roger, and I still think that once the project -- most new product introduced to the market, you know, after the Q4 quarter you will see some slight decline, and not always necessary from a volume point of view but also from a pricing standpoint of view. You can see our revenue continues to go up, a lot to do with the ramping up of the new programs, and I will not say they are behind. I would say they are very much in line with what we expected, but the Telecom side still definitely tend to be one project, and you have a target revenue but it's not there yet. But from the other sectors, from the medical side and the computer side and the industrial side they are doing pretty much on target. It varies from segment and varies from the customer.

Okay. Secondly, I noticed, I think, during the quarter, you reduced head count again at the old EMD facility or EMD site in Winona. It looks like head count engineering headcount reduction. Should I read that as still a pretty soft market for the design support aspects of the business or am I reading that long?

No. In fact, we've been expanding our engineering headcount and aligning it specifically with the customer needs. As Cary indicated, on an ongoing basis we will tweak and adjust, but not specifically a restructuring effort. But you will find that we constantly adjust the sales and increment head count with the specific skills and resources that go along with the model that we're putting forth to the customers. And it may affect a head count here or there negatively and in other geographies and other specific skill sets, increase them. On a net-net basis our engineering headcount is actually up.

Okay. And just a final question. Cap Ex is currently still running -- has been leaned out to about a half a percent of sales. How much longer can that level of maintenance Cap Ex be maintained, and are there things that -- what other than a major upturn would change your capital spend plans in any material way?

Roger, I think the interesting point right now is the fact that the capital assets are so cheap, in essence, you're getting things for cents on a dollar is what you used to pay. In our industry there are not a lot of technological advances that have taken place in the equipment that supports our needs, so as such you're able to get some gently-used, if used at all equipment for very favorable prices. And I don't think you could sit here and tell our teams a few years ago that we'd be buying full-line capacity for what we're buying it for today. With that scenario, it's hard to say when it's going to exponentially increase. I would say that we might see with any increase in demand at the end of 2003, you would see some potential uptick, but until new technologies or pricing power comes back with everyone in our industry providing demand for the equipment, I don't see significant increases in that line item specifically.

Okay. That's good color. This is the last one, I'll get off. If that's the case, could you just take a stab at what normalizing say your Cap Ex expense would be if equipment was only available on a normalized pricing basis, new equipment and not being able to buy slightly used at a severe discount?

Well, Roger, we've been buying the equivalent in the open market at 20% or 30% of the market, old market value. And it's kind of a very interesting point you brought up. We did not spend a lot of money in the capital expenditures. What we did is we realigned our capital equipment into where the location customer want us to be, and keep in mind, the total expenditure for 2002, also including the Greenfield expenditure in China. So in a way, it's not really the expenditures. It really is expending the capacity, but what we're able to do in 2002 was very focused effort, putting equipment where it had to be, and the realign our resources to meet the customer needs. That is going to be very critical for the continued strength for the profitability of accommodating us to be able to control the depreciation expenses. If you look at a number at 1.7 million capital expenditures, you could be taxed three times, maybe $5 million, even in a good time. Again, it's reallocating and it's become a very focused effort of the company. We believe the only way we can achieve our model is to make the customer happy, continue expanding the customer base, as well as we very much manage our costs and fix the variable costs and put the right resources in the right place. Those are the factors for success in this very challenging environment.

Thank you.

Our next question comes from Michael Morris of Salomon Smith Barney. Sir, you may ask your question now.

Thank you. Good morning, everyone.

Good morning.

Good morning, Mike.

I wanted to follow-up. I believe Gayla commented during the segment discussion that you believe that the concentration will decline in 2003 based on the new programs and the new product introduction activities, and I believe you were talking about customer concentration.

Yes.

My question has to do with the end-market concentration and based on what you see today, do you expect the high-end computing segment to still be around 60-65% of your sales in '03, or will that change due to the new business that you have in the pipeline?

Well, Mike, if you look at the new program we have, you know, for the sectors, we have a very successful launching of the server from our customer last year, and now we have a very successful launching of the new storage device which was another customer in 2003. So we would see the other sector revenue drop. It's not necessary -- it's not necessary because we ship less units. Keep in mind when you have a new product introduction of any customers then you will have the most pricing opportunity for improvement standpoint of view in the first nine months to 12 months of your project. So we will continue, just based on even the volume is constant, even a 4, 5% volume increase, we see significant pricing drop. You will see the overall revenue drop from the sectors. I believe that sector will drop and for the overall revenue dollar standpoint of view but not necessarily from the volume standpoint of view. However, we anticipate the industry control to medical sites. Even the some of the newer Telecom customers will step in to take over the revenue from a high-end sites -- high-end computer sites.

Okay. And then the second question which is I guess sort of related in some ways, could you talk a little bit about how your system integration or box build segment either grew or declined in 2002 and where you think that may be at the end of '03, and whether that impacts your goal of an 8% gross margin if the box build segment is indeed growing?

2002 was definitely a significant increase of the revenue from the box field sites -- system integration sites because we now have three sights in four operations which includes Huntsville, Dublin and Singapore sites. More and more customers are looking forward to additional out-sourcing into a more box build out-sourcing which doesn't see a lot of opportunity there. We anticipate 2003 revenue from the system integration side will be increased from 2002, from a revenue standpoint of view. The challenging economic environment continued, we saw more customers are willing to talk about extending their out-sourcing, and I think that will be definitely a tremendous opportunity for Benchmark standpoint of views.

Okay. And I guess just a couple quick housekeeping maybe for Gayla. In '03, Gayla, tax rate in 4 Q, is that sustainable or does it go down and do you think SG&A. dollars will be down and absolute dollars in Q1? Thanks.

For the tax rate I would expect that that is as we anticipated at this point that it would be approximately consistent for next quarter and for next year. For SG&A., Mike, I think that the fourth quarter will be probably representative of what we see for Q1, but as always, we will look to make sure that we drive cost efficiencies and continue to try to bring that down. As I said, our goal is to get it to 3.5%, so I don't think we have gotten the level of efficiency I'd like to see out of that, but I do think in dollars we're probably approximately where we need to be.

Okay. Thank you very much.

Our next question comes from Steve Savas of Goldman Sachs. Sir, you may ask your question now.

Thanks. Good morning and congratulations on a nice quarter.

Thanks, Steve.

I want to follow-up on the customer concentration comments you made earlier. Any chance you can give us a sense of your goal maybe exiting '03 what the top three or top 10 customers might represent?

I think our goal is basically for 2003, actually for the year of the three top three customers, somewhere around 55% revenue.

Okay. And then I think part of the organic growth that you were talking about in the industrial and instruments area would be coming from Emerson. Do you have a sense of when Emerson might exceed or do you expect it to exceed 10% of revenue sometime in '03?

We're not going to give the guidance on that yet.

We don't like to specifically comment on the customers. As an industry, we do believe the industry as a whole is beginning to look at outsourcing more specifically.

Okay. Fair enough. And then just one last quick questions, any FX impact on the quarter on the other income line?

That number was not significant for the quarter. I believe it was approximately $167,000.

That would be insignificant. Thank you very much.

Our next question comes from Scot Robertson of Investec. Sir, you may ask your question.

Thank you. A question to Cary or Gayla. Can you talk a little bit about your server business and are you seeing any pickup there? Particularly, are you picking up any share from some of the other EMS providers out there?

We really don't talk about any particular customer or part of line, and we have no comment on where we're taking market share or loosing market share. Basically we'd like to point out we did real well for the program we have, and also we have -- we are very happy in engaging in a new program for most of our major customers. Can't comment about customer competitive. We just don't know.

Okay.

Our next question comes from Michael Walker of Credit Suisse First Boston. Sir, you may ask your question.

Thanks a lot. Just two questions on the end market breakout. It looks like Telecom grew sequentially even though you said the market was weak. I was wondering on that disparity.

We're continuing to win programs and actually supporting some customers in new program introductions there also, so it is gaining some strength with those new programs and new customers but it isn't quite taking off like we'd like to see it.

Are you able to say whether that's more on the wireless or the wireline side of Telecom?

I think it's still on the wireless side. Wireline side did not see a whole lot of recovery there, yet.

Okay. And secondly, on the new programs that you mentioned -- I think you talked about seven new programs. Are there any that are kind of in the large category that could be responsible for 20 million or more annually?

Yeah. We do have one program that has the potential go over 20 but the revenue, we hate to give the guidance on the new programs, you know. We had to discount quite a bit the number given to us by the customers because based on the experience that we have in 2002, a $50 million program could go down the tube fairly quick because of market conditions. And to make a modifier to the numbers given to us from our potential customers. But the more importantly thing for us to continue to be successful in 2003 is continuing to gain customers with good potential and as well see a good outlook. Maybe not six months but maybe a year or two down the road. As we indicated in our -- our sales teams, can you try to book a business and ship for the next six months. The selling cycle's so long and the run-off cycle's too long, too. And we're happy we can continue the booking of the new programs, and it's important for us to continue on that focus, but those are the only way we can continue to increase our revenue top line as well as be able to reduce our concentration with the top customers.

Is it fair to say those new programs tend to ramp on average on about a six-month time frame?

I would say six-nine-month program. Some are faster and some are slower.

Thanks a lot.

Thanks.

Our next question comes from Chris Lippincott of McDonald Investments.

Good morning and congratulations on great executions.

Good morning.

A quick question going back to the Asian facilities. You mentioned earlier in your discussion that I think you're talking about Thailand, essentially progressing according to plan. Is it fair to assume that Thailand is now at full volume?

Oh, no, no, no. That facility definitely have a lot of opportunity, and you have to know the background of this particular facility. It's been in operation over 15 years. It's one of the most established facility in Thailand, and I believe they had a capacity probably over 300 million dollars at that facility alone. It's still quite a bit of real estate, the wide space available in factories, and we had a big plan for the facilities, and actually we anticipate that revenue on the facility will be increased in 2003. More importantly, in the China facility will be on line fairly quick and we also had a big plan for that facility, too.

Okay. I guess for some reason last quarter I thought you had indicated that the Thailand facility was ready to be up by -- or at least near volume by December so I guess that's -- I misheard that?

They are up from previous quarter. They are still up from previous quarter but we have still -- I guess I want to point out that we have a significant opportunity for the facility 2003.

Okay. And just with your new facilities at the volume they are at right now, do you have a capacity utilization percentage? Was it up any given last quarters'?

Well, the capacity utilization is a function of the real estate equivalent and people. They are adding more equivalent. We are in the high 60s even with the new facilities online from Thailand and China. So we are in the high 60 today and probably one of the highest in the industry today.

Okay. And this last question, do you have a percentage of your low-cost footprint?

Once China's online, approximately over 30% and we also are looking for expanding those footprints. Importantly as I pointed out, we believe the low-cost solution is the supplement to what we're having domestically, and we'd like to continue to expand that facility and the capability to support the lot of high value type of customer we have in the U.S.

Okay, great. Thanks. Good quarter.

Our next question comes from Joseph Wolf of UBS Warburg. You may ask your question now.

Thank you. I was wondering if you could -- you talked about seven new customer wins. Could you tell us if those are all domestic wins or where those fit out geographically, and just your outlook for 2003 by geography in terms of prospects and your comment on softness in the industry. Does it apply equally to all the regions that you play in right now?

Most of the new customers we got is still very much the Europe and the U.S. customers, but importantly is a lot of customers are earmarked some of the product will go over in a low-cost center down the road. And we definitely believe the 2003, the Asian footprint revenue will be increased significantly.

Our next question comes from Jessie Pitchell of Needham and Company. You may ask your question now.

Two quick questions. Could you update us on the progress of your Greenfield facility in China, the timing of when we can expect revenues and your progress in filling that factory?

Well, it's a little bit behind because they were impacted by the delays in the west coast strike but we anticipate pre-production into their facility in Q1. And we also anticipate that facility ramp up pretty quickly in the second and third quarters.

Do you anticipate any balloon payments or expenses in association with Greenfield in this plant?

No. Everything we got is being expense.

Okay. And a question for Gayla. Built into your guidance, the swing factor, the range, is that all in the high-end computing segment and do you have a target for the top three customers' concentration?

No. Again, I think that we haven't seen any significant variances, nor do we have anything modeled in that would be inconsistent with what we've seen here before.

Might you have a tradeoff between your top one, your largest and your second-largest customer?

It's -- again, in normal modeling, I don't get into the level of granularity nor do I provide guidance at that level of granularity. In your forecasting you take in all sensitivities, and I don't specifically try to say low-end means this and high-end means this. I believe that our range includes a normalized level, and it doesn't matter whether it's customer one, two, or three, that between the top three, that they would be at a consistent level, and if there's swings in between those, so be it.

And I guess as a follow-up to my first question, could you comment on, you know, the anticipated margins from your plant in China compared to your other facilities, and in that, your ability to reach your 8% gross margin goal as you're bringing online your low-cost footprint?

Well, that's where the low-cost footprint is supposed to do for you, and you still want to maintain an 8% margin target, and just with a low cost. And we anticipate the -- our facilities very much in line with our goals and we anticipate China will be the same thing.

What end market will that plant serve initially?

Well, it is very difficult to say, and because of, you know, a lot of customers have interest in our facilities. And I believe in the Telecom everybody's interested in that.

For the local market primarily or for export?

Some of each, but still initially mostly we come back export mostly.

Thank you very much and congratulations.

Thanks.

Our next question comes from Keith Dunne of RBC Capital Markets. You may ask your question now. Mr. Dunn, your line is open.

Good morning. Can you hear me?

Yes.

The cash cycle was terrific. Can you give me any insights on what you might see as sustainable in terms of DSOs and inventory turns and what cash flow from operations you might anticipate in the first quarter of '03?

I would say more normalized levels would be somewhere around 35-36 days. Part of the reason we got such velocity in this quarter, as we indicated, is that as sales exceeded our expectations, the pull-through from the hub was greater than you would normally expect and model. So I believe that a 35-day turn would be normalized and run through the model.

And I agree with that thought process, except that you did so great with the DSOs, too. Is 35, 36 days where you can go on your DSOs? Is that a sustainable level?

It is. Keith, the key thing would be is the flow of the shipment. You have a large shipment and ship a lot in the last month of the quarter, your D.S.O. would be higher. For the product being stabilized, your new product you would see the 36-day Receivables.

I guess Keith I would say on a normal basis, no because the Christmas and New Year's holidays don't repeat themselves again. Christmas and new year's provides a period of time that you don't -- that you aren't doing as many shipments as the last few days of a quarter that is not repeated throughout every other quarter.

Do you have a cashflow target for the first quarter from operations?

No. Not that I -- not that we publicly display.

And someone came in when you were on the call explaining the other. I assume the 1.753 was interest income and a little foreign exchange gain. Is that correct?

Yes, sir.

And is that a good go-forward rate with the other lines for the first quarter?

That would be consistent with how we would model.

Great. And then last question for now and I'll let someone else take over. The end market mix when you look into the first quarter, can you give us any directional color on what end markets might go up versus go down as we look into the first quarter versus the fourth quarter?

Go ahead. I'm sorry. I didn't catch-all that.

It's not quite different than what we see earlier, Keith. We see the percent on the high-end computers will be down slightly. Medical will be up, investment control will be up, and telecom will be probably flat mainly because we will have new customers in there soon.

Okay, great. Thanks. Good job, guys.

Thanks.

Our next question comings from Shawn Severson of Raymond James. You may ask your question, sir.

Thank you. Good morning. Could you give a little color on where you think maybe the top three customer opportunities are in terms of increasing your penetration within those customers? I'm not talking about new customers but the ones you have today where the best opportunities are for more business?

The best opportunities for new business, again, we are supporting each of our major customers and some new program introductions, and some of the new programs that are exciting are not associated with named customers at this time. And at such time as they become new product introductions that are successfully received by the marketplace, we will be free and pleased to announce those. But at this time it has not launched to a point where we have addressed their names.

Fair enough. And in terms of the new programs you announced, how many of those are with new customers?

I'm sorry. Four of them are with new customers.

Okay. Just lastly, on the SG&A line, I know this has been touched on a little bit, but even in an area with ramping, with ramping revenue, is this something that's a highly-leverageable point for you, or do you feel that there are some needs that will have to be met in SG&A. as revenue ramming up during the year?

I think we do see the 3.5% is pretty much a healthy level or an appropriate level for SG&A.. So if you see the demands pick back up or if the industries and technology markets improve significantly, no doubt we would invest more in the infrastructures to support the growth if it was fast and very significantly growing by year end.

Thank you and congratulations.

Thank you all for joining us on the call today. I believe that we are out of time and we appreciate you joining us today, and we will be in the office if there's any followup.