Benchmark Electronics Inc (BHE) 2003 Q3 法說會逐字稿

Good morning and thank you for standing by. Welcome to the Benchmark Electronic's third-quarter earnings release conference call. All participants will be able to listen only until the question-and-answer session of the conference. This call is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your host for today's call Ms. Gayla Delly, Chief Financial Officer of Benchmark. Ma'm, you may begin.

Thank you, operator. Welcome to the Benchmark Electronic's third-quarter conference call for 2003. As the operator indicated, I am Gayla Delly, the CFO of Benchmark Electronic, and with me today are Don Nigbor, our CEO and Cary Fu, our President. 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 would like to caution you that those statements reflect our current expectations and that the actual events or results may differ materially. We refer you to the risk factors and the cautionary language contained in the documents that we file from time to time with the Securities and Exchange Commission, specifically our recent filings on forms 10-K, 10-Q. AK's and S3's that 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. First, I will ask Don to provide an overview of the quarter results, and then I will present the financial information. And we will conclude with both Cary and I answering your questions in a Q&A session. We will hold our conference call to one hour. Don?

Thank you, Gayla. Thank you everyone for joining us today as we provide you with a quarterly review and an update on Benchmarks' activities. During the third quarter of 2003, we continue to see a more stabilized business environment in technology with some bright spots being seen with firming demand levels and extended lead times in some commodities being witnessed for the first time in many quarters. It is not yet clear whether this is a true sign of a broad-based recovery. However, it is clear that our teams have found it refreshing to work with our customers in support of their order programs more frequently of late than we have seen in the last two years. The signs are still mixed overall but increasingly optimism is building. Alongside this optimism is the realization that capacity that has been taken out of many markets, allowing for traction to gained more rapidly when growth returns. 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 third quarter of 2003 with revenues of 455 million, which was at the upper end of our guidance provided during our last conference call, where we estimated revenues in the range of 445 to 460 million. Our third-quarter revenue was slightly above that of last quarter, and was 6 percent higher than third-quarter revenue for 2002. Our diluted earnings was 48 cents per share -- also at the upper end of our guidance, which was 44 to 48 cents per share. For the same quarter in 2002, our diluted earnings per share was 38 cents. This represents year-over-year growth in earnings per share of 26 percent.

Our gross margin for the third quarter was 8.1 percent of sales. The gross margin was slightly down as compared to 8.2 percent in the previous quarter, and the impact is due to the new program's start-up costs. Our SG&A was 16.3 million this quarter or 3.6 percent of revenues. This percentage of SG&A continues to the move closer to our goal of 3.5 percent as we grow our top-line revenue. Interest expense was 2 million dollars for the quarter. Interest and other income was approximately 1.1 million and other expenses were approximately 138,000 during the quarter. Other expenses were primarily foreign currency losses due to the U.S. dollar weakness -- but this did improve as compared to last quarter.

Our tax rate for Q3 was approximately 34.1 percent which equates to a slight increase of our overall estimated rate for the year, estimated currently to be 33.4 percent. Of course, in accordance with GAAP, this quarter included a catch-up with drives the single quarter rate up for Q2 -- Q3. Weighted average shares outstanding this quarter were 26.749 million, including the shares issued in connection with the conversion of $80.2 million of convertible debt during this quarter. We included those shares outstanding for the calculations for the period from conversion September 7th, 2003 through September 30, 2003. Please note that for purposes of calculating the weighted average shares outstanding for the fourth quarter, the number of shares will include these shares issued under the conversion of approximately 1.995 million shares for the whole quarter. This will have an impact of increasing the shares outstanding by an estimated 1.4 million when compared to the September quarter, resulting in roughly 28.2 million outstanding in the fourth quarter of shares.

Our balance sheet showed cash of approximately 329 million at September 30th, which is a decrease of 7 million from the June quarter. Receivables were 203 million compared to 192 million for the second quarter of 2003. And our day-sales outstanding were 40 days, which is slightly above that of the prior quarter. Inventory was 209 million and that compares to 186 million for last quarter. Inventory turns were 8.0 times, showing an increase in inventory associated with the new program wins and the expansion of our relationship with several of our customers during the quarter. Although these returns are not as high as what we have seen in some of the past few quarters, they are still in line with the expectation for our service model to our customers. Cash cycle days were 36 days, reflecting the increased inventory levels associated with our new program ramp. Current assets were 762 million, and our current ratio was 2.4 to 1. Capital expenditures for the third quarter were $5 million, and the depreciation expense was approximately 7.1 million. The majority of our capital expenditures during this quarter relate to the expansion of our capacity in low-cost geography.

Total debt was 27 million compared to $113 million in the previous quarter. This decrease was due to us having made the quarterly payment on our term loan and also reflects the conversion of our 80.2 million convertible bonds. We have no amounts outstanding under our revolving credit facility of 175 million and remain in compliance with our debt covenants. We have further improved our solid capital structure with a conversion of these bonds into equity. And we are pleased being one of the few companies since the downturn to have performance metrics, which allows debt holders to elect to convert 100 percent of the debt into equity.

Cash flows used by operation were approximately $1 million for the third quarter. Our revenue breakdown by industry for this quarter is as follows. Medical -- eight percent. Telecom -- 10 percent. Computers -- 61 percent. Industrial controls -- 13 percent. And test and instrumentation -- 8 percent. We saw an increase of approximately 4 percent in test and instrumentation this quarter, with an increase both in demand from customers for existing products, as well as from our expansion of our Agilent relationship, which we announced last quarter.

Our top three customers from last year represented 61 percent of revenue during the third quarter, which is down 2 percent compared to the second quarter -- with our top customer being down five percent once again this quarter. And you will note that this year, only two of our customers exceed 10 percent of our revenues. Our goal at the beginning of this year was to dilute the concentration of our top customers -- customer -- to the upper 30 percent range of quarterly revenues by the end of the year 2003, while maintaining a modest revenue growth plan through adding new customers and new programs. We continue on track to achieve our customer diversification, with a fourth quarter revenue expected to be down 5 percent, once again, from our top customer. At the end of last year, our major challenge was to reduce the revenue concentration of our top customer and to maintain modest growth in revenues while doing this. Year-to-date, we have seen revenue from our top customer down nearly 10 percent, while our revenue for the nine months ended September 30th has grown by over 15 percent compared to this same period for 2002. Maintaining this modest top-line growth and strong performance while reducing customer concentration, has been challenging. And we're proud of the Benchmark team's performance.

During this quarter, we once again booked several new programs. We estimate that these programs will result in $100 to $160 million in new revenue streams. The breakdown of these programs, once again, shows booking activity in each market of the market sectors -- two in medical, two in high-end computers, two in Telecom, two in industrial controls, and one in test and instrumentation. The pipeline of production(ph) at outsourcing activities remain strong. And the component markets have shown some signs of tightening, with lead times and pricing for some components beginning to increase.

We are pleased to provide the fourth quarter guidance, with revenues expected to be in the $460 to $475 million range, while revenues from our top customers are expected to be down in the mid-30 percent range as a portion of that revenue. The overall technology market, going into the fourth quarter, are generally showing positive signs. At this point, we believe that the consumer demand has improved, and it is beginning to have an impact on business spending. But it is difficult to anticipate whether these spending trends will continue in a positive manner.

We also noted in our press release that we will be closing our Scotland facility. The costs associated with that closure are expected to be approximately $1.4 million. Also, as a result of the facility closure, we may realize a tax benefit. Both the cost and the benefits associated with this have not been included in our guidance that we provided for the fourth quarter. As the market has not yet provided a track record for consistency, we will continue to provide forward-looking guidance for only one quarter until additional long-term information is available from our customers. Any guidance we do provide is based upon information available at this time. Again, as I mentioned earlier, we expect revenues for the fourth quarter of 2003 to be in the range of 460 to 475 million, which is based on indications from our customers. We believe that strong corporate spending controls remain intact, and our teams has executed well on behalf of our new and existing customers as you can see by the revenue growth that we have experienced through the program wins that we announced in the past nine to twelve months. We have more than exceeded the growth and backfill based on the reduction in concentration from our top customer. Now I will turn it over Cary for a few opening comments before our Q&A session.

Thank you, Gayla. I apologize for the cold. At this time, as Gala indicated, we have been seeing a more positive outlook from some of our customers in the market sectors, particularly within the industry control and test instrumentation area. We have very successfully met the challenge (indiscernible) backfill the decline in revenue from our top customer, as we had previously stressed. Our focus going forward in the Q4 is to support the successful (indiscernible) to separate the (indiscernible) costs in new program and (indiscernible) the supply chain. As we're moving in front (indiscernible) markets in the last two or three years into a tighter component market condition which lead time has began to stress. Our teams continue to execute well on behalf of customers and continue to expand the relationship with the new and existing customers because of our excellence in the execution. The playing field in China has began (indiscernible) programs from (indiscernible) into production. At this point in time, I would like to turn the call over to Gayla for Q&A questions. Gayla?

Operator, we are ready to open up for our Q&A session. Participants, during this session, we do request that you limit yourself to one question and one follow-on question in order to allow enough time for everyone's question.

Thank you. (OPERATOR INSTRUCTIONS) Shawn Severson with Raymond James. You may ask your question.

Thank you. Good morning. I just wanted to clarify -- on the customer concentration, you said it was down 5 percent as a percent of total revenue or a percent of their business itself being down 5 percent?

As a percentage of our revenues.

Okay. And then on the new customer announcements or new business announcements, could you help me understand which one of those are actually new customers versus additional programs from existing customers?

Of those, Shawn, there are -- five of them are representative of new customers.

Okay -- was your revenue guidance for those -- is that pretty evenly split among those projects or are potentially a couple of those might be fairly large?

The single largest program in there is represented by a new customer relationship. And the rest of them are probably, approximately in the same range -- $10 to $20 million range for the remainder of them.

Okay. Thank you.

Our next question is from John Mcmanus of Needham & Co.. You may ask your question.

Yes. Could you give us some more color of your ability to ramp your China plant -- as far as maybe number of customers and how that might unfold over the next several quarters and how the pending acquisition of assets from Adec (ph) might work with that Chinese plant?

Good morning, John. I guess the China facility was delayed due to the SARS severe (ph) situation. And we did (indiscernible) a new product introduction attribute (ph) in China. And, at this point in time, we will have three customers in there. Some of the production actually supporting our other location, i.e. shipping the product to Stay (ph) or Singapore (ph) support from the customers. We will continue to see a China facility ramping up and China is always (ph) going to be able to qualify the programs, and each customer wants to do their own qualification. We're very pleased that we see the progress we make there. And our Thai facility will also have a significant influence on the ramping up of products. And a lot of our Thai engineers, as well as Singapore staff, have been in China supporting ramping-up the capacity. I will let Gayla handle the Adec (ph) question now since she is in charge of that particular acquisition.

John, if you don't remind repeating the question with Adec -- I think you tied it in with China, and it's not specifically tied to China so if you could ask that question again for me?

My point was that if you acquire a leased facility in Washington -- in the Seattle area -- how it will that dovetail with that Oregon facility and with the China facility?

John, this is, I guess, more like a systems-integration facility, not specifically a printed-circuit board assembly. So, as you will know, we have several sites that are systems integration and several which are printed-circuit board assembly sites. And this one will be probably what I would consider like a related plant where we may have some production in the future going from the Oregon facility into Seattle but it is more of the complex systems-integration activity.

I guess what I'm trying to say, is could you be making subsystems there in China or Thailand -- shipping those there to final assembly there in Seattle and Oregon?

Yes, in fact in several of our system integration sites, you'll find that we have possibly what would be considered fear (ph) plants that will have boards in them from several different geographies, which get merged and married into a more complex system in any number of systems-integration sites. So it could come from another U.S. board assembly plant. It could come from Mexico, Thailand, or China. And it just depends on the complexity and the maturity of the boards that go into the system.

If that were to flow well from China and Thailand, could that lower your tax rate?

Taxes, in general, get to be a pretty complex area. But to the extent that you have some production and transfer-pricing which supports a high level of value-added and lower-cost geography with a lower tax rate, yes, that can overall help our tax rate. Of course, Mexico is a low-cost geography, but it does not necessarily have a better tax rate. So it really is going to depend on more that you can get out of China and Thailand in that overall tax rate.

Well, thank you very much.

(OPERATOR INSTRUCTIONS) Our next question today is from Patrick Parr (ph) of UBS. You may ask your question.

Good morning, folks. Question for you. What is your utilization rate currently? And how has that changed since the June quarter?

It remains a bit above mid-60 percent -- it's probably -- I mean, if you go through it mathematically, it's probably up about a percent as revenue has grown and we have not significantly increased the denominator.

Okay. And then as you ramp up this China facility, is there any trade-offs there in terms of reductions in capacity in other geographies right now?

I guess, in essence, as we close our Scotland facility and we continue to ramp to the China facility, we will probably see, as you indicate, a trade-off. But I don't see any significant net increase or decrease in capacity.

So it will be really volumes -- increased volumes that drive the high utilization rates?

Exactly.

Okay. Great. Thanks.

Our next question is from Thomas Hopkins of Bear Stearns. You may ask your question.

Yes. Good afternoon. Cary and Gayla, can you quantify somehow -- I know you don't like to get too specific in the details but when we look at the December-quarter guidance basically of 467 million, can you quantify what the contribution is -- 20, 30, 40 million from, say, some of the new programs in the aggregate like the expansion in Agilent, the Emulex, Siemens medical, some of the companies -- some of the new programs you have mentioned in quarters before?

Not specifically, Tom, I think what we've indicated or I tried to indicated in the call -- if you can go back for three or four quarters, what you'll see is that our actual revenue increase, which has come to offset the reduction in revenue from our top customer, actually exceeds what we had estimated -- if you go back three and four quarters ago and take a quarter's worth of that revenue and add it up -- our actual growth in revenue has exceeded that. So our guidance, specifically, does not carve out how much revenue is new or new from what period. But, typically, we tend to fold in our estimates in about a six-to-nine month period, unless it's an engineering and design program. And that could be one to two years.

Have you become more or less optimistic about some of those new ones I just talked about -- Agilent, Emulex, Siemens Medical? I mean has anything changed -- do you think these are going to better than you thought when you first talked about them or are they going to be worse?

I think, in essence, Tom, you're hitting the nail on the head for what I was indicating. From the time we booked those, nine to twelve months ago, we've actually seen that the revenue streams have improved as compared to what the expectation was at that point in time. Now it's hard to say exactly how much of that is conservatism that was built in versus how much of it is real improvement in market demand. But it does seem that there are more positive events taking place and you're seeing more strength in demand.

Okay. And finally on the acquisition front -- I think your net cash per share rose to 12.6 in the quarter. You've obviously got a great balance sheet, and you have the ability -- if you wanted to -- to do substantial acquisitions and bring in a lot of new revenue that way and reduce your top customer really very, very quickly, if you chose to. What's your stance now on acquisitions? Obviously, the ADIC thing is there. Are there any other EMS companies like we saw with (ph) MSL or are there any other customers' plants? What is the outlook for the near-term?

I believe what we see is a continued stance consistent with what had here before, Tom, in that we look at strategic acquisitions -- things that make sense, not just growing revenue for the sake of growing revenue or diversifying our customer base. I think that we think clearly see that we've made great strides and are doing an excellent job of diversification just through our normal sales efforts. And so I don't think we have to go into an acquisition simply for the sake of trying to dilute that top line unless the acquisition clearly makes sense in terms of the geographic footprint and the customer base and the capability it brings into the Benchmark fold.

So we continue to look at M&A activities. It's an ongoing part of our strategy, and to the extent that something makes sense, we will move forward on that. We continue to expand our engineering capabilities and joint design development areas that we work on with customers. So, we don't rule out M&A. We certainly have a very strong balance sheet -- a strong capital structure that enables us to move forward when we find something that makes sense. But we don't feel compelled or eager to have to do something because we do have a strong platform from which to operate.

Can you comment on whether you were involved or interested at all in the bidding on MSL?

I think that we would say that everyone who had an opportunity to look at any of the acquisitions that are out there, typically looks at the activities to see if it make sense for them.

Okay. Great.

Our next question is from Joseph Wolf of Banc of America Securities.

Thanks. Gayla or Cary, I was hoping you could -- you talked about in the opening comments about affirming and positive trends and more optimism at the customers. And, if I do the math -- and maybe I am doing it incorrectly -- but if I look at the decline from your top customer, it looks like you're looking at single digit growth for the rest of the business in the range of that guidance. Could you talk about current trends in seasonality? Whether you think your diverse business means you're not going to be as seasonal as in the past? Or you're just being a little bit conservative on the trends in the market that you're starting to see but aren't banking on right now?

I believe that -- and consistent with last year -- last year we saw the fourth quarter have an unusual amount of strength in hindsight and did not anticipate that as we moved into the fourth quarter. I do not believe that specifically our business -- since we do not serve the consumer market -- has a strong level of seasonality in it. Yes, Q4 usually shows some strength but it, by no means, is the type of strength that you see in consumer products. Having said that, I think we have the same conservative stance that we had going into the fourth quarter -- consistent with what our customers had last year. And it's yet to be seen the outcome of that. Will it continue to move strong throughout the quarter and have a strong end of the year? You know, I don't know that at this point in time. But I think we have approached it consistent with how we have each year previously and not from the viewpoint that Q4 actually is a seasonal quarter in our business.

Great. And then just a quick follow-on if you look at the potential ramps and you look at the SG&A, how independent right now is the -- obviously there is gross margin impact as you ramp up the new product lines but how independence is your SG&A costs from your product ramp?

It's primarily independent because we have the infrastructure in place to be able to support and expand a customer base. So there's not a lot of variability specifically associated with growth. Of course, you're going to get to some level at which you will find the need to expand but I don't think we see that specifically in the near-term. That will be a great opportunity when we get to the point where we need to see that. Maybe that's around 500 million. But I think right now we have the infrastructure in place to support the immediate growth we have.

Great. Thank you.

Our next question is from Thomas Stengis of J.P. Morgan. Your may ask question your question.

Hi, Gayla. Can you walk us through what your thoughts are on margins as we progress over, say, the next couple of quarters in terms of on the gross margin line as you ramp new programs -- you know, we saw the margins tick down a little bit this quarter -- as you do fill the China facility a little more with some volume there and so forth, what's the expectation that you guys have on the margins or are we sort in a position here where margins stay relatively in a fairly tight band and then growth is, primarily, on the earnings line is going to come from leverage off SG&A and the lower interest that you're going to have going forward?

I think in the near-term, as we add new customers, that you will see the new program ramps always have a little bit of pressure on the margin, as we saw this quarter. And as those ramps come into a full-volume production, we have the benefits of the velocity that the throughput has on our gross margin. So in the near-term, I would expect somewhere in the 8 to 8.1 percent is not unthinkable. But as you indicated, we get the favorable support from reduced SG&A. And then as we get those programs ramped to full volumes then you get back up and get the true benefit through both the SG&A being leveraged and the improved gross margin. So it will probably take a quarter or two before the full benefit of that comes through.

: Okay. And one quick follow-up on the balance sheet. In terms of the uptick in inventory and tightness that we're seeing in the component environment, as well as you've got some new program ramps and so forth accounting for much of the uptick here, what can we expect over the next quarter or two in terms of what we see on the balance sheet with working capital and so forth, especially since, by my model here, this is the first time you guys have been free cash flow negative for quite some time and had a nice streak there? I'm curious as to what your thoughts are going forward for the next quarter or two there?

Absolutely. There's an opportunity for improvement once again, as I indicated last quarter, I thought we add really done an excellent job of managing our working capital. I think, once again, we've gotten into an area where I would like to see some improvement on our inventory turns. But, overall, I think 36 days and cycle days is quite respectable. But what I look at going forward is the ability to get some inventory turns -- some velocity back again once we get the program ramps moving. I expect to see some improvement next quarter and then again the following quarter. So at about 8.2 inventory turn for next quarter, would be my goal. And I think you'll see that, once again, throws off some cash from operations.

Okay. Thank you.

Our next question is from Michael Walker of First Boston. You may ask your question.

Good morning, guys. First question is in the medical area -- it looks like revenues were down in the 4 million or so range sequentially . And I know Siemens, I think, isn't supposed to come online until next quarter. I am wondering if you can give some color there?

Well, the medical revenue (indiscernible) dropped slightly -- is mainly due to the couple of customers having issues on the product. But overall we anticipate a pretty major customer ramping up in next year -- first half of next year. So we anticipate a medical revenue will bounce back either Q1 or Q2 conference.

So you don't see it bouncing back in Q4?

I think we will probably maintain flat or slightly up. You know, the companies -- the medical companies talk about (indiscernible) we are still in the preproduction, qualification stage. So its timing is -- the estimate of timing of a new product into production for medical customers is a little bit tough to say because they have so many different requirements. But, overall, there's a trend on the medical portion of this (indiscernible) is up. And the timing may be Q4 but kind of I would say in Q1.

Okay. Thanks. Second question is that you spent a couple quarters orbiting around what had been your target gross margin -- actually, you were above your target gross margin of 8 percent. I wonder if you have a new sort of understanding of what kind of a gross margin is achievable over the next, let's say, two years?

Well, I would say (indiscernible) going back to the model we set for ourselves. We look at a gross margin of 8 percent and SG&A of 3.5 percent with operating income of 4.5 percent. That is our operational operating model. I think -- I really don't see a major deviation from that -- maybe slightly but not significantly. Going back to the earlier question about what the gross margin improvements will be -- I think our team is doing a fairly good job. Keep in mind, gross margins are really compiled of three things -- the volume, increase in efficiency and more importantly, its component market situation. And I do not see a component market to continue to improve from the material (indiscernible) point of view. (indiscernible) the market continues stress (ph) the lead time, you'll see a little more pressures on the component price. So that will be another variable we have to take into it. So you have the three forces (ph) you're dealing with -- constantly trying to balance between (ph) the efficiency, the volume, as well as the material price. I think the 8 percent is still a good model number with. And I think that our models -- depending on if you look at some of our competitors, they have a higher margin than we have. But the -- some of the complications between SG&A and the costs (indiscernible) so maybe impacts to that. But I'm looking at a purer operation model standpoint of view. Our target is 4.5 percent. If the top line goes up, it's definitely, you know, giving (ph) a lot of leverage from that.

Okay. Great. Thank you, guys.

Our next question is from Michael Morris of Smith Barney. You may ask your question.

Thanks. Good morning, everyone. (indiscernible) talk about your capital structure -- Gayla referenced the strength of it, and we agree, it's, I think, very strong and conservatively-financed company. I wonder if you would disagree with the assertion that you might be a little bit overcapitalized given your cash position. And if you could just perhaps talk about the level of cash you think you need to run the business if we're getting, indeed, modest top line growth as you've referenced? And if we could just start with that question please.

I think, Michael, that as you see that we have given guidance for the one quarter forward -- as you would say, it's modest growth, and it does not require a significant amount of cash for that level of growth. However, I don't think that the level of growth will stay suppressed on a forward-looking basis and as revenue growth returns and inventory lead times slide out, I think you can see the impacts that even half a point of inventory turns drive. And so the requirements for cash in our industry are very strong when lead times slip out on inventory and when revenue grows.

Having said that, I understand that having some level of indebtedness is appropriate but I think that you can clearly say that both in our industry and the technology markets overall, people tended to get a little bit over-indebted which caused challenges. And primarily what you've seen in the last few quarters or last couple of years, has been where people have been required to refinance their indebtedness not where they're strategically or opportunistically did it, although in some cases, it was portrayed as opportunistic. It was only opportunistic in the fact that it was lower-cost interest and that they had a need to rejigger (ph) their existing debt balances. Probably, most importantly, through this whole downturn, customers became very fearful of the level of indebtedness that some of the competition had on the balance sheet, and in some cases, it impacted customers where the ability for the inventory to be purchased according to normal terms was challenged. So while debt has a place in the capital structure, I don't feel that we believe it's uncomfortable to have a solid structure with which to go forward and support our customers. To the extent that we have significant growth or an opportunity with M&A, it may make sense, once again, to have some debt on our balance sheet.

Okay. And then just switching quickly to China. I wondered if you could update us on the number of lines that the building can potentially hold. How may lines are you running now? And if most of the business is transferred in from other jurisdictions or are these sort of new organic ones that are going there straight away?

We have a full line in China (indiscernible) facility today. And actually we are shipping additional lines in. The first floor (indiscernible) is capable of accommodating eight lines. The second floor has not been (indiscernible) any equipment yet. The interesting question -- (indiscernible) interesting question about what kind of customer we have. We actually not only transfer some of the customer (ph) from other locations into China. We are able to attract (ph) quite a bit of local customers -- not local -- local means the multinational companies have operations in China. And because there's no higher volume -- high, higher mix manufacturing capacity in China's site with a significant technology know-how. So we are able to attract some new customers locally, and includes our multinational company, to do the business with. It's actually kind of an interesting development (indiscernible) and recently, I thought (ph) we would not see any local customers for another year. But today we're going to see two customers joining (ph) us very quick.

Just to follow quickly, Cary, does that imply that you may be able to scale your system integration capabilities there?

Definitely, yes. And the challenged areas is (indiscernible) where you ship your product to, right? And if smallers(ph) a box, this cost (ph) not heavy, you can manufacture in China and ship out -- ship export to other countries. If you have good heavy equipment that would unrealistic from a cost standpoint of view. But if you talk (ph) about support local customers in the China market -- definitely, we are going to that direction, yes.

Okay. Thanks very much.

Our next question is from Keith Dunne of RBC capital.

Yes, thank you. A few follow-up questions please. First of all, just starting off, Gayla, I missed the cash flow from operations number in the quarter, please?

We had a use of $1 million.

Okay. And when we look at some of the end markets, Gayla, the AT (ph) had the big ramp -- and you mentioned Agilent starting to ramp. Is that fully ramped? Are we now looking at seasonal and end-market demands or have we not seen the initial ramp as we kind of look forward?

I think for the test and instrumentation, the increase has not fully ramped on yet. We still see some other customers just start to bounce back. So we should see a -- continue our trend for that sectors.

Even as a percent of sales, does it break 10 percent the next quarter or two?

I think there's a possibility there, yes.

Okay. And as far as -- on the other side -- the telecom business has been trending down pretty consistently the last several quarters. Is that expected to continue or are we seeing the transition out of a customer? What's happening there besides the global macro end-markets that we're aware of?

I think we have continued to add telecom customers, Keith, but against the overall revenue -- modest growth -- that we have seen, telecom is still not keeping pace with that. I think that it just has not gotten attraction that some of the other industries have gotten.

And do you see a bottom at all, you know. We talked about more stability in general but are we starting to hit where that's -- you know, the low-40s is a trough (ph) or not predicting a comeback but you do have any sense of a trough?

I would suspect that it's about trough, based on the new programs the we've added. If they showed the growth that we expect in new programs then that should be about the trough in whole dollars. And then it is just a matter of how much they represent as we go forward.

And the high-end computing area -- are there any major expected program transitions -- any wins coming up? But are there any major new programs -- you know, end of life as you wait for the new one to come up? Any of those kinds of issues?

No. I think that we have got a new program that we're in the design phase with new customers -- that it is always -- you know, the design programs are the ones that we do not estimate in our revenue forecasts. As far as when we give you are program wins, we do not quantify those in dollars. And the reason is -- number one, you can't quantify them, and number two, we don't know when they will actually come into the fold. So we have some of those on the drawing board. Do not have a good sense for when they will come in or what the size of those programs will be. So they are kind of a non-impact unless they happened to be favorable at some point in the future.

So in the next six months, you are not currently contemplating end of life of a major program and a ramp up coming up in any major way?

Not in the next six months. (Multiple Speakers)

And the tax -- the tax benefit that you mentioned, it's got (indiscernible) in one time kind of impact. Is the low 30s -- 32-ish, a decent number to start with next year?

Keith, that gets to be a pretty complex item and an area I don't have it fully quantified. It could be a very good benefit for us but I don't have it quantified. And there's a lot of hurdles you would have to get through before you actually take that benefit. By virtue of closing the Scotland (ph) facility, we are assured of getting the benefit that it becomes a timing as to when it gets recognized. But, in essence, we will have the benefit. I do expect it to be more sizable than a $1 million write-off, for instance.

And longer-term, we forget about just this one help (ph). Is low 32-ish a reasonable number to start out next year? And taxes they should trend down next year, is that fair (indiscernible) to say?

I would expect -- we will have to take another look at it next year -- but I would expect it as we continue to ramp Asia as a percentage of revenue -- that we would have an opportunity for reduction but I don't have that fully calculated. That's probably as reasonable as I would do on the back of envelope.

And my last question is, can you just repeat the other expense data you gave us? Someone came in at that moment, and I missed how you broke up the other income items.

Okay. If we go back through -- the interest expense was 2 million. Interest and other income was 1.1 million. And other expenses was 138,000. And other expenses were primarily foreign-currency losses.

Okay, that's it. Thanks very much.

Our next question is from Jesse Peitchel of Piper Jaffrey. You may ask your question.

Yes. Good morning. Could you tell me how many customers are in Quall in China? And what the scheduled break even is for China and what quarter you think it will hit break even?

Well, I was not able -- I probably should have totaled China (indiscernible) qualification probably between 4 and 6 customers. And the break even -- hopefully I will get in there about by Q2 of next year -- Q2 - Q3 next year. (multiple speakers) Keep in mind this is a very low-cost center, and it's not going to have a significant drag on our earning, anyway. And the total cost of the China were so significantly lower (ph) than we anticipated. So it's really not a significant impact from a P&L standpoint of view.

And you mentioned something during the call about servicing other plants. Is your strategy to provide subassemblies for your other plants from China or is it going to be on a stand-alone basis?

As I indicated, Jesse, it's not unusual for all of our low-cost geographies to be feeder plants, if you will, of board sets which then go into a systems integration. As Cary indicated, there may be instances where China ultimately could be a systems integration facility, if in fact, products will ultimately be delivered into the Asia market. But to the extent that the consumption of the products, especially the heavier and/or larger products are in either Europe or in the United States, it makes sense to take advantage of low-cost geographies for some of the board sets but to leave the heavier final product for systems integration work in another geography. So, in that case, you will have China, Thailand, Mexico and the United States all being potential feeder plants into a systems-integration site, wherever that system-integration site is located.

This business becomes very global business, as you know. You looking any particular customer could be supported by two, three, as many as seven factories -- based on the demand from the global standpoint of view. So China will be one of the feeder plants.

And could you talk a little bit about what the perception has been from your customers -- your new and existing customers that are looking to qual that plants -- in terms of their acceptance of China for a high-mix product, relating to IP and distribution efforts?

Well, there is probably school of thoughts there. And the one school is that we can go to China -- it's cheaper, better and faster. Another school of thought is that we don't want to be there because of IP concerns. So, it varies from customers to customers. If you have a lower technology-type of product, customer has a less concerned about IP, and they're more concerned about the cost. And you have more pushing to that direction. But the more -- the customer that has a higher IT technology, they tend to be selecting our Thai facility instead of the China facility. This is because of IP concerns.

Thank you very much.

Our next question is from Chris Lippincott of McDonald Investments. You may ask your question.

Good morning. Hi, how you doing? Sorry if you already answered this question. I got in late. Just seeing if the -- recently I have been seeing some strength in the quarter just from low-end servers and storage and what have you. I was wondering if you could kind of add a little bit of color to the fact that obviously we're seeing the computer section obviously dropping -- obviously your top customers there were pulling back a little bit. But I was wondering if you could just at a little bit of color and sort of reconcile the difference between top customer movement, perhaps having new programs or perhaps even additional customers in that area?

I think that, as we indicated previously, you always expect new products to come in and have -- well, you always hope they have the level of strength that we witnessed with some of the new programs that we supported over the last couple of years. But it would be inappropriate to consider that that strength is retained for an unusual length of time. So you always expect there to be strength going into a new product and then some tale off after that. I believe that is what we have witnessed. In more than one program, it's expected. We have indicated that. And so to the extent that there is added or additional strength that either comes back in into Q4 or Q1, as a result of new demand in the server market, that will yet to be seen. But I don't think that there is anything that has been unexpected or should be unexpected by you based on the guidance we have given.

Chris Lippincott Okay. And just looking into Q4 and perhaps even into Q1, as far as you have already touched on it, but how should we be thinking about the seasonality we have heard throughout the quarter thus far -- that some of the seasonality may be a little bit less than we have seen last year? I mean, are you also starting to see a little bit better visibility going out into perhaps Q1 or even farther out? Are you starting to get a little bit better comfort from some of your customers?

I guess, Chris, people seem to be postured a little bit stronger and feel a little bit more comfortable with the forecast they are given. But I have to have somewhat less (ph) because I will only grade them after I figure out whether their expectations are met and how accurate their forecast is ends up being with hindsight right? So, ultimately, I believe there is a bit more strength -- a bit more positive nature with the forecast they are given -- giving to us. I don't know how realistic and proper those forecasts will end up being. So I think the component market's tightening-up is always the first indication to customers that they may need to take a little bit longer outlook as to what forecast they need to be providing to us so that is an expected reaction to some of the lead times slipping out. And what we all need to be aware of and look for is how accurate those forecasts end-up being, moving into Q1 -- kind of post fourth-quarter consumer demand that is put into the pipeline.

Chris Lippincott Okay. And if you could just -- last question -- could you just review the new customer break down again?

Okay. We had new programs this quarter booked in the range of $100 to $160 million. Two of those programs were in medical, two were in computers, two in Telecom, two industrial controls, and one in test and instrumentation.

Chris Lippincott Okay. Thanks.

I believe we have time for about one more question, operator.

Thank you. Our next question is from is from Steve Savas of Goldman Sachs. You may ask your question.

Thanks. I guess I made it in on the wire. I just wanted to follow-up on your top customers. You said top three were at 61 percent, and there were two about 10 percent -- I don't think you named them. We probably all know one of them but on the second one -- who was that?

Second top customer that's over 10 percent is EMC.

Okay, so that's stayed at that. One of the customers that you have been clearly ramping a lot with, which has been great to help diversify you away from Sun, has been Emerson. Can you give us kind of an update on how progress there has been relative to your expectations? I know you named some others that have been tracking better than you originally anticipated. Emerson is a little bit different in the industrial are -- how has the been tracking?

Emerson is continuing to ramp as I indicated earlier in the call. Really, right now, at this year, we only have two customers over 10 percent. So, I guess, in essence, that would say that several of our new customers that are in the -- or not necessarily new -- not having a definition of what point in time those customers were added. But several customers that we have been growing our relationships with in the 5 to 10 percent range, none of them have exceeded 10 percent range yet. So we continue to expand relationships. And when they get above 10 percent, we will be talking more about them.

Okay. That's fine. And just one quick question on competitive win rates. You guys have been winning a lot of new business in the last couple of quarters in particular. Do you think your win rate has changed or has kind of cycled back over last couple of years? What some other companies of your size have felt is the big guys coming in to compete for $20 million business and win rates went down. Have you seen that and that's now starting to lift which is why you are winning a lot of new business? Or is your win rate with these kind of the same? Or is it just improving generally?

I think it's improving generally. And I think if I look back it probably has got several factors that are driving that. First of all, in the area in which we participate -- in the non-consumer goods on the more complex products and the high-mix operations -- we are one of the few -- and especially after the acquisition by Felesca (ph) of MSL -- we are one of the remaining few people in the marketplace that has a high-mix operation that also has a solid balance sheet and a solid execution model and a global footprint. So I think the combination of those factors -- being able to support customers in a flexible manner -- has really proven to differentiate us, both in the eyes of customers and prospective customers as we go out of win business. And it seems to be fairing well for us. And especially if consumer markets pick back up, more and more of the mega-tier players are focused on their growth targets, and in order to achieve those growth targets, they are going to be more and more aligned with their ODM strategy with their consumer products.

Okay. Thank you very much.

Thank you. Thank you everyone for joining us today. We will be available in our office for calls, and we appreciate you joining us. Thank you.