Benchmark Electronics Inc (BHE) 2003 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections you may disconnect at this time. I would like to turn the call over to your conference leader, Ms. Gayla Delly, Chief Financial Officer. Ma'am, you may begin.

Good morning. Welcome, everyone, to the Benchmark Electronics fourth quarter 2003 conference call. I would like to introduce our team present today. I'm Gayla Delly, the CFO of Benchmark Electronics. With me is Cary Fu, our President, and Don Nigbor, our CEO. First we will begin with Don providing an overview of the quarter, and then I will present the financial information. 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 began I will read the forward-looking statement.

During the 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 actual results and events 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 Form 10-K, 10-Q, 8-K, and S-3, which 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?

Good morning, everyone. I want to thank you for joining us today as we provide you with our year-end and fourth quarter review, as well as an update on Benchmark's activities going into 2004.

The fourth quarter of 2003 was one in which many positive news items began to appear in business headlines, this after an extended downturn during 2001 and 2002. For Benchmark, this quarter was a strong quarter and we continued to execute well for our customers, resulting in additional opportunities to book business and expand relationships with existing customers. We are the only EMS firm to report double-digit revenue growth during the downturn for both 2002 and 2003.

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 2003 with revenues of $487 million. This exceeded our guidance provided during the last conference call, which was revenues in the range of 460 to 475 million.

Our fourth quarter revenue represented a record quarter of revenues for Benchmark in the last two years and was four percent higher than the fourth quarter revenue for the prior year. And it was a sequential revenue growth of seven percent. Once again, fourth quarter technology spending was very strong. However, we do not see the same level of fall-off coming in the first quarter demand that we saw last year.

Our diluted earnings per share was 32 cents per share on a GAAP basis. For comparison to our guidance, when excluding the $2.8 million of costs associated with the restructuring of the Scotland operation, this calculates at 36 cents, which is equal to our guidance -- which exceeds our guidance of 31 to 34 cents per share. For the same quarter in the prior year, our diluted earnings per share was 33 cents.

Net income for the fourth quarter for 2003 was $13.4 million on a GAAP basis and 15.3 million excluding the restructuring costs net of tax. This compares to 2002 fourth quarter net income of 12.7 million, or a 20 percent increase on a year-over-year basis, and a sequential increase of 20 percent over Q3 2003 net income.

I want to note for you that on October 27th we declared a three-for-two stock split and this was completed on November 13, 2003, so all per share data in our discussion today has been adjusted to reflect this split.

For the year ended December 31, 2003, our revenues were 1.84 billion and our gross margin was 8.2 percent, as compared to revenues of 1.63 billion and a gross margin of 7.7 percent for the year ended December 31, 2002. This clearly shows the leverage that exists in the EMS model.

For the fourth quarter, our cash flow from operations was $34 million. For the year ended December 31, 2003, our cash flows from operations were $76 million.

Our inventory level at December 31st was 239 million, which was an increase of 30 million from Q3. And our inventory turns for the quarter were 7.5, which compared to 8 times in the previous quarter.

Our gross margin for the fourth quarter was 8.4 percent of sales. This gross margin was up as compared to 8.1 percent in the previous quarter. The gross margin was favorably impacted by the higher than expected volumes of production and also includes the favorable impact of foreign currency. You will note that the foreign currency losses are higher than in prior quarters also at $2.4 million.

The SG&A in whole dollars was 15.8 million, which represents 3.2 percent of revenues. We have continued to maintain strong cost controls. We expect SG&A in Q1 to slightly increase as we ramp several of our new programs and expend monies associated with those NPI efforts. For the year 2003, our SG&A was approximately 65 million, compared to 64 million in 2002. And this was when we had a revenue increase of 13 percent year-over-year -- very strong demonstration of cost controls.

Interest expense was approximately 820,000 for the quarter and interest income was approximately 916,000.

Other expenses were approximately 2.4 million and those are primarily foreign currency losses due continued weakness in the US dollar. Included in the foreign currency losses was $1.3 million related to the European restructuring.

The tax rate for the year was 33.2 percent, which resulted in the effective rate of 32.6 percent for the fourth quarter. We do expect to see an improvement in our overall tax rate for 2004 as we continue to expand the revenue base in our Asian operations.

Our net margin for 2003 was 3 percent, as compared to 2.2 percent for 2002, and both represented on a GAAP basis.

Our weighted average shares outstanding were 42.178 million shares, which does include the impact of our three-for-two stock split completed on November 13, 2003.

Moving now to the balance sheet, our cash balance at December 31st was approximately 356 million, an increase over September. And again, I must complement our team for diligently managing our working capital.

Receivables were 209 million, compared to 203 million in the third quarter of 2003. And our days sales outstanding were 39 days.

Inventory was 239 million, compared to 209 million last quarter, with inventory turns at 7.5 times. This is in line with expectations for our service model to the customers, although slightly down as compared to last quarter. As you'll note, at year-end the inventory in our finished goods hub were higher than they were last quarter.

Our cash cycle days were 33 days. Our current assets were approximately 832 million, resulting in a current ratio of 2.3-to-1.

Our capital expenditures for the fourth quarter were approximately 9.9 million and our depreciation expense was 7.1 million.

Total debt was approximately 21 million, which compares to 27 million in the previous quarter, having paid down our quarterly payment on our term loan. We have no amounts outstanding under our revolving credit facility which is at $175 million availability and we remain in compliance with our debt covenants. Also I want to note for you that subsequent to year-end we have fully paid down our term loan and we currently have no amounts outstanding under either our term or revolving loan facility.

Cash flows provided by operations, as I noted, were 34 million during the fourth quarter.

And now I will look at our revenue breakdown by industry. For the fourth quarter, our revenues from medical were 7 percent; telecommunications represented 12 percent; (indiscernible) computers 62 percent; industrial controls 10 percent; and test and instrumentation was 9 percent. You'll note that telecom increase by two percent, and likewise there was a slight decrease in test and instrumentation by two percent.

Only to customers exceeded 10 percent of our revenues for the quarter and together accounted for 53 percent of revenues, down from 57 percent last quarter, with revenue from our top customer down just over 2 percent this quarter compared to last quarter. We continue to expect a level of concentration among our top customers to decrease.

Our goal at the beginning of this year was to dilute the concentration of our top customer to the upper 30 percent range of quarterly revenues in the Q4 to Q1 timeframe while maintaining modest revenue growth plan through adding new customers in new programs. We have accomplish this, a notable achievement by our team, growing and winning new business.

During 2004 revenues from our remaining customer base, beyond the top two customers, grew by over 20 percent.

During the quarter we having the quarter we have booked six new programs. Some examples of our new programs are three new customers and the expansion of relationship with three existing customers. These once again represent not just one industry, but are spread amongst industrial controls, medical, telecom, and computer customers. The revenue potential from these new wins are 75 to $125 million on an annual basis when fully ramped.

Of course, some new products and new programs do not meet either the customer or our expectations from time to time. With the level of new product introductions we're supporting as the markets improve generally, it's difficult for either us or our customers to properly assess the revenue potential from the new product, and experience shows that in some cases programs significantly exceed our expectations, and some, of course, never meet our expectations.

The pipeline of quotation and outsourcing activities remains strong and it's highly competitive, given the aggressive marketing effort that some of our competition.

The component markets have shown tightening with several commodities experiencing extending lead-times (indiscernible) in their respective industries such as PCB, flash memory, and make-to-order components primarily.

We have recently seen generally improved conditions in the marketplace. However, long-term outlooks are still showing some signs of fluctuation. As the market has not yet provided a track record of consistency, we will once again provide forward guidance for one quarter only. We will continue this practice until more stability is seen in the long-term outlook and data available from our customers. Any guidance that we provide is based upon the information available at this time.

As I mentioned earlier, and as we disclosed in our press release, we currently expect revenues for the first quarter of 2004 to be in the range of 470 to 485 million, which is based on indications from our customers. The corresponding GAAP earnings per share is 33 to 37 cents per share guidance. We do anticipate the revenue from our top customer will drop further by two to four percent during the first quarter of 2004.

We believe that the strong corporate spending has benefited most technology markets recently. With improved demand for product and stronger financial conditions being experienced by many companies, we're seeing more investments in new products and R&D activities once again heat up. These are some of the strongest signals for potential rebounding that we've seen in the past two years, and the strength seems to be impacting several, if not all, of the industries that we serve. While these are promising and positive signs, we have seen cautious behavior by some customers who are still not convinced that the technology spending will continue at this strong and improved pace throughout 2004.

We believe that Benchmark is well positioned globally to have a good year for 2004. Our program wins over the past few quarters provide us great opportunities for growth, and if the new products successfully launch in their marketplaces.

I will turn it over to Cary for a few opening comments before we begin our Q&A session.

Good morning. This is Cary Fu. We have certainly seen some positive signs in the marketplace with increased demand. This is a welcome sign, but we have not seen it prove to be substantiable (ph) shift to a full-scale recovery. With the combination of the modest revenue growth, continued pricing pressures and tightened component markets, we're looking for a very dynamic year in our industries.

At this point in time I would like to congratulate and thank our team for the strong performance during 2003. We achieved our goals set forth at the beginning of the year, have seen the revenue growth with a strong cost control. This sets the stage for a strong 2004, but also set a very high standard against we will be measured in 2004.

In the first half of 2004 we are supporting many new programs, and the new programs will definitely create some margin pressures as we ramp up the cost and margin (ph) in new programs start-ups. Also, as we continue shipping the product to the low cost areas, we will see some improvement in our overall tax rate. Those impacts have been included in our guidance to earnings for the first quarter 2004.

At this point in time I will turn over the conference to Gayla for the Q&A session. Gayla?

During this session, we would like to request that you limit yourself to one question and one follow-up question in order to allow time for everyone to ask their questions. Operator?

(OPERATOR INSTRUCTIONS) Thomas Hopkins, Bear Stearns.

Nice quarter. Can you talk about the operating margins? I believe -- did they come in at like 5.1 percent? I don't have a release in front of me.

The operating margin came in for the quarter at 4.6 percent, including the restructuring -- I don't have it calculated --

Yes, I think if you back that out it's about 5.1 percent. So the question is, obviously you've exceeded at this point what many think the industry could do, which is around 5 percent, if you listen to what some of your competitors talk about recovering to. And I know Cary mentioned start-ups in the first half. But given that you've done such a good job on the operating margins, what do you see in terms of your ability to improve it from this quarter for the full year of '04 or '05 if we do continue to get a recovery?

I'll kind of move back up to the gross margin line for purposes of discussion and talk through. Tom, I think that we have had excellent performance throughout 2003. And as Cary indicated, the challenges to bring up the new programs in 2004 and supporting those, of course, has us incurring costs. Our overall margin that we indicated was a goal last year was in the 4.5 percent range, and anything exceeding that is really getting very good velocity and throughput and facility utilization. So as you look at the overall margins, the gross margin we've continued to improve and leverage the SG&A. We indicate SG&A will come up slightly.

On a net margin percentage, we had a very strong performance. And I expect on a net we should be able to maintain that, even though we may have some shifting as we look, as Cary said, some geography shifting on products being done in different geographies with lower tax rates that, of course, all comes into play.

So I don't want to indicate at this time that we would expect to see continued overall significant improvement in the margins. I believe we have very good velocity there and incremental improvement will come over time and slightly as we ramp new programs, but will not be immediate.

The follow-up is, excluding some of the start-up costs that Cary talked about, if you look at some of the new programs like ADIC and I believe in the past you have mentioned Emulex and Siemens Medical, and then EMC has announced that it's doing some acceleration of enhancements. If you look at that mix, just excluding the start-up costs, is that a richer mix than you've had over the last year? Is it about the same? Or is it worse?

I think the mix is very constant for Benchmark. I think where we see the real opportunities -- which also, opportunities bring challenges -- is we're seeing a lot more NPI activity, R&D activity. And I think those are the ones where you drive great benefit when the volume comes through, when you support a product through its extended lifecycle. And as I said, you have the cost up-front, so as you go into those programs you usually have downward pressure and as you get those into volume production you have favorable results.

Thanks.

Steve Savas, Goldman Sachs.

I want to follow-up just a little bit on the margin stuff that you were just talking about. Do you have a number for what would gross profit have been without the FX benefit? I understand what you're saying for net income margin, but I just want a sense of what impact FX had on gross margin.

I can only try to estimate it. I didn't really get into the granularity to give a strong representation on that. But the estimates that we have excluding that FX impact associated with shutting down our European facility, we expected it to be about 8.2 percent. I did not want to mislead and say that the gross margin of 8.4 percent is clearly representative; we did have a pretty strong FX impact there.

That's helpful. You also mentioned on tax rate, obviously things are shifting. Any view on how far down your tax rate might look on an annual basis or how we should think about that?

We would look to see it come down by as much as two percent as we move forward.

Thank you.

Joseph Wolf, Banc of America.

Just housekeeping. The first 10 percent -- the top 10 customers seem to have come down a little bit. Could you tells what the top 20 were as a percentage of sales?

No. I don't think we get into that level. But I think clearly in our industry that you see that it would be 80 percent. And when you get to 20 customers it's very common that we don't have a huge customer, given that we don't do a lot of specific engineering one-off jobs most of our customers are engineered and production customers. So we don't have a customer list of 250 or something.

Just as one more follow-up on the gross margin side, given the finished goods that you talked about in terms of building on the hubs going into Q1, should we see an offset to some of that challenge of bringing up new programs with the fact that you should have some better margin pull-through because of the stuff sitting in the hubs?

I don't think so. I don't think I can get that mathematical this morning quite yet. But I don't believe that that has a huge favorable impact when compared to -- as you can see, the increase in the hub is only probably 7, 8 million in finished goods and in comparison to total revenue that is not significant.

Thank you.

Michael Walker, Credit Suisse First Boston.

I think you've given out a top three percent before; do you have that top three customer percent number now?

Good question, Michael. The reason we've shifted the top two is because we currently have only two customers that exceed ten percent revenues, so in K filings and in our disclosures you'll see that now there's two top ten percent customers.

Then just on the end markets, you did mentioned the two percentage point gain on Telecom. That seems to have equated to a pretty big jump sequentially. I'm wondering if you could put any more clarity on that?

Really, we saw pretty much an across the board improvement and we've also added some new customers in telecom. I don't have specific insights into telecom enough to tell you any take-aways from that. But we do seem to see it across each of our telecom customers.

Just one more, if I could. Could you just talk about what your current capacity plans are? You have shut down Scotland. I think Suzio (ph) is online right now. What next steps do you have from a capacity perspective?

I believe we're pretty well aligned our capacity now to the needs and the opportunities we see with our existing and potential customer base. We continue to address it. One of the areas that we've spoken about before off and on is Eastern Europe. We continue to pulse that. It does not at this point seem to have competitive advantage. And Europe has not come back with any strength such that customers and prospective customers are indicating that we need to expedite that opportunity any. So overall, we are continuing to keep our eyes open. There's a lot of activities out there still. But we don't have any specific expansion plans on the near-term horizon that I'm aware of.

Thank you.

Michael Morris, Smith Barney.

So I guess I want to ask about a more kind of open ended topic. As we look at the competitive landscape and some announcements from leading OEMs, it appears that there's going to be more box build and full system integration on the horizon for the entire industry. We know that Benchmark has done a good job ramping that capability within your company, including the Ireland and Singapore and so on. Could you just talk a little bit about as the industry involves that level of work how does the skill set differ? What are the attributes that you need? How is Benchmark positioned for this? And if you could just kind of compare and contrast that with the PCBA work that the industry has historically been associated with, that's my first question.

I think probably the most important thing we had to recognize the -- there is some different skill sets from a PCB manufacturer verse a box build integration business. One of the efforts we've been putting together for the last couple of years is significant increase of engineering staff in all areas.

When you are getting from PCB into the system integration, number one, you have a different skill set, you have different issues you have to deal with, the test is different and logistics -- issue are different. So those kind of skill sets or mind-set had to be changed in a significant way.

You're right, we have seen more and more customers interested in moving into the box build system integration arena. Surprisingly, even medical customers start moving to that direction. So we are well positioned. In the near-term we are increasing our box build capability across the board. And also, we increased our skill sets and definitely the system integration is the trend of the industries.

The leverage is there. Once you get the leverage there, I think you will probably have a lot more opportunity for the (indiscernible) continue and launch their business (ph) in this segment.

As a follow-up, Cary, assuming that you stay in your historical competence of sort of higher complexity, higher engineering content, does the shift to box build have a meaningful impact on your gross margins and your velocity? How do those trade-offs look in your model?

When you looking at box build, you are probably looking at two different categories. You get into a very low-end box build, you'll probably see an impact on your margins. In the high-end in the box system integration, the skill set and the engineering requirements in that arena actually probably provides as good a margin as the PCB manufacturer.

Thanks very much.

Shawn Severson, Raymond James.

Can you give any more color on the customers -- the new business wins? Any of those likely to be in the 30, $40 million category? Or are six of them pretty small?

There's a couple of sizable opportunities in there in the upper-end category and the remainder of them are in the lesser category.

You again mentioned intense pricing pressure. I know it's normal for the business, but anything different in the last couple of months? Or are you just referring to normal pricing environment?

No, I haven't seen any new activities out there. I think all of it has pretty well been played through now and is pretty commonplace.

So is there any sense of pricing power yet, or urgency, or quick orders from customers? Or it is still under normal conditions?

I think kind of a couple of answers there. First of all, from customers what we're seeing is still more of what I call the load-and-chase mentality -- still quite accustomed to seeing availability and not accustomed to the lead-times slipping out, so the ability to drop in orders that they have had over the last couple of years will take some time before that is adjusted.

At the same time, on the component markets what you see is you see lead-times slipping out, but I haven't seen the confidence yet demonstrated by reacting to the marketplace such that they're adding people, adding cost to their structure with confidence that they can pass those costs along. I haven't seen that activity take place. So I think that tells you that in the marketplace, although there's good strength right now and confidence in the near-term, that people are not converting that into longer-term planning activities.

Lastly, outlook for March -- what's the normal linearity that you see for the March quarter and is it any different as you see it today for this particular quarter?

We've looked back over the past few years and trying to, as we identify what kind of disclosure and documentation we need to make and to say is there any real seasonality and if you look back over the past few years, it doesn't seem that there is. During the downturn we saw both last year and I believe it was a couple of years ago, of course, from the December quarter to March, a significant fall off. But outside of that you see some modest drawback, as we're indicating, for the first quarter of 2004 as compared to December. But I don't see that it is a fall off the cliff or the significant decline that we saw last year. Still seems to be a bit of strength in the spending habits that come through at year-end, but just not followed up by a strong drawback.

Thank you.

Jim Savage, Wells Fargo Securities.

For your largest customer, do you think that the March quarter is going to be a low point in revenues and that revenues can start to improve subsequently to that?

One of the goals that we set at the beginning of 2003 is as our customers' products mature we will see the revenue dollar percentage dropping. And we kind of anticipate at the beginning of 2003 that percentages will drop to high 30 percentage for 2003. For the 2004 we anticipate the top customer revenue concentration exiting Q4 being somewhere in the low 30 percent.

So it would be low 30s, but then with the revenue growth that you may have then it would be essentially flat in terms of the revenues year-over-year?

We're not going to talk any particular customer product cycle, but we anticipate the revenue for that -- the top customer will continue to decline.

It will continue to decline some? Okay. And can you give us an update in terms of some of the emerging customers -- Emerson, Agilent -- whether you're your anticipating -- you have talked previously about Emerson becoming a very significant customer in '04. Is that still an expectation that you have?

We're still anticipating that Emerson will be a good customer for us. We continue expanding our revenue base, and whether they will be a 10 percent remains to be seen. But we're very excited about the new customers we added in the last two years. And some we just start (ph) to see the benefit of that. And we discussed some of the customers in the past (ph) and we will continue to work very hard to grow these customers in the upcoming years.

One of the goals I set for our team this year is very much similar to last year's. One, we're going to maintain a modest revenue growth and (indiscernible) lessen the dependency on the top customers and still show a good cost control and adding more new customers. That continues (ph) the goal we set for the years, and it's not very easy. (indiscernible) excluding the top two customers, our revenue for the remainder customer base went up 20 percent in 2003. Those are big accomplishments in the downturn. (indiscernible) will be a little bit easier this year as the market recovers, but it's still a very tough thing to do. And the job is maintain the modest growth, lessen the revenue dependency on top customers, as well as deliver a cost control and good EPS growth.

A couple of other things for Gayla. Expectations for the year on CapEx and depreciation for '04?

We expect CapEx to be primarily, of course driven, by margin demand. And I would estimate at this point in time it would be about $10 million a quarter. And, of course, I expect, given that we have -- I think is the first quarter in quite a while where our CapEx actually has exceeded our depreciation expense, so it will take some time before the depreciation expense actually catches up. But I do expect it to start trending up over the next year slightly.

In terms of your SG&A expense, you're anticipating that there will be a bump up this quarter because of the new product and new program introductions. As we go forward, do you expect during the course of the year, and with potential revenue growth in the rest of the year, that you're going to have a flattening of SG&A, and therefore a reduction in SG&A expense as a percent of sales?

I think we've all along said that kind of a strong spot for us is in the 3.2 to 3.3 percent. That's where you're getting real good leverage in the model. And so, I would expect somewhere in the $16 million range is about where you would see on an ongoing basis SG&A to run -- 16 to 16.5 with new program introductions even in there.

So that then gets you down to that 3.2 some time later in the calendar year?

Yes.

Okay, great. Thank you.

Patrick Potter (ph), UBS.

Housekeeping question, to start. The geographic mix, could you provide that for the fourth quarter?

No, I do not have geographic information available at this time.

But you would put it in your Q, though?

Yes, we will put it in our K. This is our year-end.

Then a couple of segment-type questions all in one here. Industrial controls for the quarter looked like they were down about 18 percent, medical down 6 percent sequentially. I know these were areas where you have won some new business. Is it that the stuff that you have won has not started to ramp yet? Is there seasonality in these businesses? Could you help me a little bit with that?

I will do the best I can. Industrial controls and medical don't seem to have as much sensitivity such as maybe telecom and IT spending do to year-end, first of all. It doesn't seem that December has much of an impact on those industries. So I think that they are kind of dwarfed in comparison on spending habits at that point in time. And yes, we are ramping new programs.

Kind of a follow-on to Cary's response to Jim Savage earlier -- I think industrial controls is an area where when the other industries return to growth, they are a very staid and stable type of industry, and you don't see as rapidly new products coming out in that type of an industry. So they may be a very strong industry, but still not have the level of growth that you see. So I think a lot of the impact is seen simply when you compare it to the other industries, not necessarily in and of itself in comparison to itself.

One quick follow-up. You kind of characterized the environment still as being very competitive pricing. Is it safe to say, though, that it's less competitive in pricing than it may have been six months to twelve months ago? And what is your outlook there generally moving forward? Thanks.

I wouldn't say that it's any less competitive. And the fact of the matter is, all technology companies are still driven to reduce the costs of their product, and thus the drive to outsourcing. And with the number of outsourcing solutions that are available today and the overall capacity utilization still below what it was even three or four years ago, you're going to find a competitive environment.

I don't see that easing off in any near-term because you and I and everyone else wants to continue to pay less for every product that we buy. So the competitive pressures will remain and we will be driven to continue faster, better, cheaper. And everyone who survives who participates well will thrive and those who don't see that as a mind-set I think will be challenged.

Thanks.

Reik Reed (ph), Robert Baird & Co.

Can you talk a little bit about any risks that you would have associated with -- and I'm for primarily talking about the first quarter -- customers that are going through transition phases with their own products?

The challenge in our industry is always is goes through the transition -- the product transition either from product cycle or market transition changes and so on and so forth. But the important thing for our team, as well as all the EMS products continue to (indiscernible) to participate into the next generation of products and to continue adding the new customers. And I think we've worked both very hard on that.

And as far as any particular customers' products transition or market transition, we're not getting into the detail on that. But that happens on a daily basis, a weekly basis, a quarterly basis. There's nothing new with -- it is not something new to you. We do it all the time.

I think in order to make sure that we frame that for you, none of those catch us by surprise. We do anticipate it and understand where each of the products and programs are in its lifecycle and each of those is considered when we provide guidance. Thus, I think you can frame it that that we are working with each of our customers on product transitions. As Cary said, at any point in time we probably have a significant number of our customers, especially some of our larger customers, going through new generations, new product lifecycles on an ongoing basis, and that's why they're successful.

Second question for me on costs. Can you guys just characterize in terms of quantity the incremental project costs that you're seeing, both from new project ramps as you go through the year and then are there any project costs associated with shifts on a geographic basis?

Repeat that again to make sure I understand it.

Two separate costs questions -- one, costs associated with shifting programs on a geographic basis; and then two, the incremental costs associated with these project ramps, what might we see as we go through '04?

I don't really specifically carve out or make exception or allow allowances to our team for costs associated with transferring amongst them between geographies. That is not something that I want to get in the habit of carving out because I think we are kind of asking for an excuse there. That's part of doing business.

On the second question I believe you were talking about the ramp up costs associated with new programs. Again, that's an ongoing part of what it takes to do business, and that will very program by program and of course gets more intense the greater the size of the program. And as we have several of those ongoing at any point in time, we don't separate or disclose that separately either. That's just incorporates into our overall guidance.

Great. Thank you.

Chris Lippincott, McDonald Investments.

Looking at telecom and test, obviously they were up significantly for the quarter and obviously there's some program ramps going on there. I was wondering if you could perhaps try to break out, give us some kind of granularity as to how much were coming for ramps, how much coming from end markets. Just give us a little bit of color on that.

Since we have new programs for customers that are also ramping, I'm not sure I can slice and dice that effectively or meaningfully. But I think what you do see is test and instrumentation has -- they're probably one industry that is more familiar with the ups and downs of the marketplace than many of the other industries we participate in and they do seem to have enjoyed some improvement here of late. I don't know that there is any way to differentiate between new programs and the improvements that they've seen in existing programs.

Can you give us an idea perhaps of -- over the last several quarters it looks like you have been winning several hundred million dollars worth of incremental revenues from new programs. Any sense as to how much of that has already ramped?

Again, typically not. You don't see it for six to nine months. The larger of those programs take sometimes upwards of two years. So I can think of a couple of programs that we announced prior to year-end last year that are still not in the revenue fold at this point in time. I'd love to see the engineering process move much more rapidly, but that's what it takes to get the job done. So it varies significantly. And the larger the program, the longer it takes.

With all the increased volume I would presume that you are starting to see the utilization rates increase. I don't think you mentioned that in the quarter. I think last quarter you were talking about high 60s. Has it hit the 70 percent threshold yet?

No, I don't believe hit that. As you have seen, we have kind of expanded doing further system integration box built with both Agilent and ADIC and we took out Scotland. So on a net-net basis I think our overall capacity utilization is approximately the same.

Thanks a lot. Good quarter.

Keith Dunne, RBC Capital.

First, as the year progresses the foreign exchange impact -- does that tend to have a greater positive impact as the year progresses on gross margins, pretty much offset by greater negative impact in the other expense column? Or does it just kind of stabilize at these kind of levels?

I don't think we can truly answer that at this point in time. I can only probably tell you historically. The dollar has just been incredibly soft lately and

Keith Dunne (multiple speakers) because if the dollar just stays where it is is my implication of the question. Can you gauge it then?

Did it be flat, we would go back to kind of where we were before, where we have very insignificant foreign exchange activity.

The medical programs, when you look in the first quarter and beyond you kind of allude to some of these haven't ramped. Do we start seeing that in the beginning of the new year? Or is that not baked into your guidance for the first quarter?

I don't think you'll see the impact of it until the second quarter really. You may see some improvement in the first quarter.

The medical products are difficult to predict because all of the variable issues we talk about, including the regulatory affairs and product cycles and all of this stuff. But overall, we anticipate medical would be a -- medical segment of business will definitely go up in 2004 with the several new programs in the pipeline. Some programs were one-offs (ph) here in the medical side will not contribute anything until probably 2005 because the R&D stage efforts there. But definitely we will see the medical segment will go up, and we will see computer high-end may be flat or slightly down and test and instrumentation will be definitely go up this year.

Lastly, I didn't know -- did you give up top 10 percent? And can you -- there's been a lot of talk about Enteris (ph) giving you guys some programs. Can you verify or not, is that in the first quarter, wins that you just talked about earlier?

Under a nondisclosure with several of our customers, we do not give out customer names unless our customers usually initiate that, either in a press release or they initiate it. I don't know regarding the customer you mentioned or any other customers that anything has been mentioned, and I cannot discuss any specific names if they have not been mentioned. So I can only talk about the customers that we previously discussed.

And the top 10, are you releasing that so we can compare you versus the others in the industry?

I don't have that. We've got over 10 percent. I don't have a top 10 number for you specifically. I would clearly expect it to be somewhere in the 70 to 80 percent range, but I don't have it specifically, if it's 75 or 77 or what that actually is.

Thanks very much.

Thomas Dingham (ph), J.P. Morgan.

Just a quick qualitative question. There's been a lot of questions already talking about program ramps. And Gayla Delly you just alluded to a prior caller's question about some ramps that can take up to two years and so forth. If I look back over the last at least four quarters, you guys have average somewhere in the neighborhood of, say, five to ten new programs. And '02 was a similar mix there as well. Qualitatively, as you look at these -- and you already alluded to a few that were still in the engineering stage -- how many of these have met with your expectations in terms of both ramp to volume and maybe dollar size? And is there an expectation as the environment now is a little bit better in '04 that aside from any unforeseen last-minute changes on the engineering side, that perhaps you might see an acceleration to current schedules that are out there? And is that sort of inherent in some of the outlook that you have got going into '04 and your optimism there?

I believe that what we're seeing currently is a little bit more, if you will, excitement in the marketplace where people are more prepared to accelerate their schedules and bring products to market.

Now having said that, I do believe you still have all the engineering hurdles that you have to get through in order to bring a product to the marketplace and make sure that the design is exactly what they intend to meet the marketplace with. So I think to the extent that it's possible, people may have the opportunity to accelerate their schedules.

The level of confidence that we have, or the scoping of projects that customers give us, yes, they do seem to be more realistic and right-sized now as to the scope of the marketplace that they believe they're addressing. It seems to be more in line with some real market data that they have today than it may have been over the last couple of years.

Thank you.

Michael Walker, Credit Suisse First Boston.

I just had a quick follow-up. Did you say earlier when you were talking about your top customers that your top customer revenues were down two percent sequentially? Or did you say that the top customer percentage was down two points sequentially?

Our revenue from our top customer was approximately 40 percent of revenues for the quarter.

Great. Thank you.

There are no further questions.

Thank you all for joining us. We will be in our office if there's any clarifications or follow-ups needed. Thank you.