Benchmark Electronics Inc (BHE) 2004 Q1 法說會逐字稿

Good morning and welcome to the Benchmark Electronics first-quarter 2004 earnings conference call. All participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to the conference over to your conference leader, Ms. Gayla Delly, CFO.

Welcome, everyone, to the Benchmark Electronics first-quarter 2004 conference call. We appreciate your patience. We realize that there's a number of conference call in our industry today, and we seem to have a bit of a backlog of getting everyone logged into the call, so we do appreciate your patience. First, I would like to begin by introducing our team that is present with us today. I am Gayla Delly, of course, the CFO of Benchmark Electronics. With me is Cary Fu, our President, and Don Nigbor, our CEO. Barbara Sorensen (ph), our Director of Treasury Services, is also joining us today, and she will assist us in our discussions.

As we begin our call this morning, I want to highlight for you some important factors underlying our first-quarter results. These factors had an impact on our overall performance and results for the first quarter, and these same factors are very positive for our long-term outlook. First and foremost, we have continued to focus on revenue expansion, as well as the reduction of our concentration in revenue base over the past 1.5 years. We have seen favorable results from those efforts. During the first quarter, we saw revenue from top customer down to 33 percent of revenues of $481 million. This compares to the peak in Q3 2002, when over 50 percent of our revenues of $428 million were from our top customer.

This decline in the first quarter was much greater than was expected, and we are very pleased that the new program revenues compensated for this decline. It has been a great effort by our teams to bring up the number and the size of programs which we introduced during a very short timeframe. As you will see, this represents an increase in revenues from our other customers of over $425 million on an annualized basis. Our program wins are solid and we continue to see those activities very strong.

Secondly, as we discussed in our last conference call, with this level of new program introductions, we have seen the expected margin impacts, as well as the effects on working capital associated with program startups. Also, the gross margin for Q1 was impacted by the further expansion of our engineering services. This quarter, we saw two major programs push out launch dates by one quarter. The inventory and costs associated with program startups, along with the changes in scheduling, caused this inefficiency. This, in addition to ongoing schedule changes this quarter, resulted in our first-quarter revenue being more back-end loaded than what we typically experience. This back-end loading caused our Days Sales Outstanding to increase. We do anticipate both our margin and our working capital metrics to once again improve as these new programs ramp to volume.

Now I will turn it over to Don for a few comments regarding our quarter results, in addition to providing an overview for the quarter. And then Barbara will present financial information, and we will conclude with both Cary and I answering your questions in a Q&A session. Again, we will hold this conference call to 1 hour.

Before I begin, let me read the forward-looking statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We want to caution you that those statements reflect our current expectations, and actual events or results may differ materially. We refer you to the risk factors and cautionary language contained in the documents which we file from time to time with the Securities and Exchange Commission, specifically our recent filings on Form 10-K, our 10-Qs, 8-Ks, and S-3s, which identify important factors which 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.

Thank you for joining us today as we provide you with our first-quarter review and a quick update on the marketplace opportunities and challenges we see moving into 2004.

The first quarter of 2004 was an important quarter for Benchmark, as Gayla mentioned. We have been adding a significant number of programs and customers over the past 1.5 years, and working to reduce concentration of risk in our revenue base. During the past quarter, we saw significant level of activity occurring in the new programs to ramp these programs to volume.

The overall marketplace continued to show signs of improvement, but there are still some mixed reports within certain industries that might indicate that the challenges are not all behind technology companies quite yet. We are encouraged by the positive opportunities we see in the sales pipeline and the focus that OEMs are having on selecting their EMS partners. As the capacity utilization improves, we believe that the strategic alignment of resources and expertise between the OEMs and EMS partners will gain importance. We have seen this more recently than we saw in the last two years. This year, 2004, is shaping up to be a very exciting and promising year for Benchmark, as we ramp a number of new programs. Now I would like to turn over to Barbara to provide more specific input on our financial performance for the quarter.

Thank you, Don. As we reported this morning in our press release, we completed the first quarter of 2004 with revenues of $481 million. This was at the high end of the guidance provided during our last conference call, when we estimated revenues to be in the range of $470 million to $485 million. Our first-quarter revenue was 7 percent higher than the first-quarter revenue for the prior year. On a sequential basis, revenue was slightly down from our strong fourth-quarter revenues by approximately 1 percent. Fourth quarter technology spending was very strong, yet we did not see the level of falloff in first-quarter demand that we saw last year.

Our diluted earnings per share was 36 cents per share on a GAAP basis. For the same quarter in the prior year, our diluted earnings per share was 31 cents, excluding the gain on contract settlements, as we previously disclosed. Net income for the first quarter of 2004 was $15.2 million on a GAAP basis, compared to net income for the fourth quarter of 2003 of $13.4 million on a GAAP basis, and $15.5 million, excluding the restructuring costs net of tax. For the first quarter, our cash flows used in operations were $35 million.

Our inventory level was $270 million, an increase of $31 million from 12/31, with inventory turns at 6.6 for the quarter, compared to 7.5 in the previous quarter. The new program ramps and mix changes and extended leadtimes caused this increase in inventory during the first quarter.

Our gross margin for the first quarter was 7.7 percent of sales. As you will recall, for the fourth quarter of 2003, our gross margin was 8.4 percent, which was impacted by significant foreign currency exchange losses, which were included in other income and expenses. Considering the margin without the impact of foreign currency effects, we estimate that the margin would have been approximately 8.1 percent, as we discussed in our last call.

The gross margin was down from the 8.1 percent level to 7.7 percent in the first quarter because of the new program ramps, MPI (ph) delay, and high level of mix changes during the quarter. These activities combined to impact the level of efficiency in our production and negatively impacted our gross margin. SG&A in whole dollars was $15.7 million, which represents 3.3 percent of revenue. We have continued to maintain our strong cost controls, one area which was not specifically impacted by the new program or mix changes.

Our operating margin for the quarter was 4.5 percent and our pretax margin was 4.4 percent. Our ROIC was 14 percent for the first quarter. Interest expense was $765,000 for the quarter; interest and other income was approximately $1.1 million; and other expenses were approximately $627,000 and were primarily foreign currency losses due to the continued weakness of the U.S. dollar.

The tax rate for the quarter was 28 percent. Taxes have been favorably impacted as we expand our Asian operations. The increase in revenue and earnings on our low-cost geography has begun to make an impact on our overall tax rate, as we indicated would be the case in our last quarter call. Weighted average shares outstanding were 42.4 million.

On the balance sheet, our cash balance at March 31 was approximately $302 million, a decrease of $54 million from December. We did pay off $21 million of the remaining balance on our term loan during January, 2004. We maintain diligence in managing our working capital. We were impacted by the level of new program activities, mix changes, as well as the back-end loading of the quarter, which in combination affected both inventory and receivables in an adverse manner for cash flow purposes.

Receivables were $231 million, compared to $209 million for the fourth quarter of 2003. Our Days Sales Outstanding was 43 days. We do not see any negative trends in the quality of our accounts receivable, but we did see the impact of the back-end loading of the quarter demand. Inventory was $270 million, compared to $239 million last quarter. Inventory turns were 6.6 times. As noted earlier, the new program ramps, MPI delays, and mix changes caused this increase in inventory level during the first quarter of 2004. Cash cycle days were 44 days. We do see that once again we have an opportunity to improve on this, as we ramp some of our new programs to volume and reduce the level of inventory which we have built up in support of the anticipated program launches. Current assets were approximately $829 million and the current ratio was 2.4 to 1.

Capital expenditures for the first quarter were approximately $1.2 million, and depreciation expense was approximately $7.2 (ph) million. Total debt decreased by approximately $21 million during the first quarter, again having paid down our term loan. We have no amounts outstanding under our revolving credit facility or on our term loan of 175 million, and remain in compliance with our debt covenants. Cash flows used in operations were approximately $35 million for the first quarter of 2004.

Our revenue breakdown by industry for this quarter was approximately as follows. medical, 8 percent; telecom, 11 percent; computer, 62 percent; industrial controls, 12 percent; test and instrumentation, 7 percent. As we mentioned earlier, our revenue from our top customer was down to approximately 33 percent, or down 7 percent this quarter, as compared to last quarter. We continue to expect the level of concentration among our top customers to decrease. So, with revenues remaining essentially flat from Q4, we saw a $30 million increase in revenues from our other customers during Q1 alone. Now I will turn it over to Gayla to discuss our new program wins and guidance for next quarter.

Thank you, Barbara. During the first quarter, we booked seven new programs. We continue to see a good industry mix represented in the program wins, with new programs in industrial control, medical, telecom, and computer. The revenue potential from these wins is A (ph) to $115 million on an annual basis when fully ramped. As always, some new products and new programs do not meet customer expectations from time to time. With the level of new product introductions we are supporting as the markets improve generally, it is difficult for us and our customers to properly assess the revenue potential for the new products. And our experience has shown that in some cases, program revenues significantly exceed our expectations, and in other cases, programs never meet the expectations of us and our customers.

The pipeline of quotation and outsourcing activities remains very strong and highly competitive, as we do still see some aggressive marketing efforts by some of the competition. The component market has shown tightening, with several commodities experiencing extended leadtimes for the leaders in their respective industries, and the list of commodities impacted is growing. This has also impacted our inventory levels.

Last quarter, we highlighted impacts with PCBs, flash memory, and made-to-order components. This quarter, we saw PCB leadtimes improve slightly; however, pricing increased due to raw material costs. We also saw some standard logic devices and package-related IC assembly capacity constraints within the supply chain. We have recently seen improved conditions in the overall marketplace generally; however, the long-term outlooks are still showing some signs of fluctuation.

As the market has not yet provided a track record for consistency, we will again provide forward guidance for one quarter only. And we will continue this practice until more stability is seen in the long-term outlook data which is available from our customers. Any guidance we provide is based upon the information available at this time.

With that, we currently expect revenues for the second quarter of 2004 to be in the range of 465 to $490 million, which is based on indications from our customers. The corresponding GAAP earnings per share will be in the range of 35 to 39 cents, based on current indications. While we are not providing specific guidance beyond one quarter, I do want to note that we anticipate our operating margins to trend gradually upward from 4.5 percent to our target of 5 percent as we ramp these new programs by the end of 2004 or early 2005. We are very excited about the new programs and they are expected to have meaningful production levels beginning in Q4 of this year and early in 2005. Some of our larger designed production wins are on track to launch during this time frame. Now I will turn it over to Cary for a few opening comments before we begin our Q&A session.

Thank you, Gayla. First of all, I would like to thank our team for the outstanding performance in the quarter, Q1 of 2004. With a very high number of variable (ph) impact of quarters, our team remained focusing and flexible, delivering a very strong result.

Looking back, our performance in 2003 set a very high standard for us. As we discussed in the last conference call, margin compression we (indiscernible) when we bring out new programs, inventory grows in advance of volume production for those programs.

In the first half of 2004, we will be supporting many new program ramps. As always, the cost associated with the program startup is expensed (ph) as it occurs, and we will see some margin impact for those due to the size and the number of programming involved. Also, we expanded the level of the production support team, our low-cost bureaucracy (ph), who we expect to see improvement in our tax rate. This impact has been included in our guidance for earnings in the second quarter.

Our goal for the last two years has been to diversify our customer base by adding additional customers and programs. The decrease of our top customer during the first quarter of 2004 was obviously greater than we anticipated. We now anticipate that revenue from our top customers to reduce to the high 20 percent range by the end of the year 2004. Even with this reduction, we anticipate our revenue to show modest growth through 2004 through the expansion of our customer base.

In response to the greatly increased demand for the production in Asia and for Asian in-service, we have and will continue expanding our capacity in Asia and significantly increase our engineering resources. We have continued to see strong activity in our customer base, and we believe Benchmark is well-positioned globally to have a very good year in 2004. At this time, I would like to turn over the call to Gayla for the Q&A session.

During this section, we request that you limit yourself to one question and then one follow-up question, so that we allow enough time for everyone's questions.

Thank you. (OPERATOR INSTRUCTIONS) Patrick Parr of UBS.

Actually this is Ben Loo (ph) for Patrick. I had a question. If you are expecting your Sun business to ramp down into the high 20 percent by the end of 2004, clearly you are expecting a big ramp from you non-Sun related businesses. What can we expect in terms of startup costs associated with those program ramps? And as a follow-up to that, if you can give us a sense of how long it takes before your new program ramps actually turn into volume -- is it a quarter, two quarters? Thanks.

Thank you. As we previously have indicated, new programs typically take six to nine months before they begin providing revenue contribution. However, when we are on a design to production ramp, those sometimes extend to approximately two years, depending on how early in the lifecycle we are engaged. And more often, we are engaged very early in the design of a product. So it varies from project to project and program to program, and as I indicated in the call, some of the programs which have been designed to production wins we expect to ramp in Q4 to Q1 2005 time frame.

And our startup costs, which we have associated with the new programs, we do not delineate or have those separately culled out for because they're part of our ongoing support of the programs and we don't have a separate bucket for those to be delineated in. But that is part of what you see involved in the margin compression this quarter.

Going forward, if you are expecting continued strong growth in these new programs to offset the decline in the Sun business, should we see similar near-term manufacturing inefficiencies associated with ramping those new businesses?

As we indicated in the call, we expect our operating margin to gradually trend up from 4.5 percent up to 5 percent as we blend the new programs in. What we typically do see with the new program startups is that the costs are incurred and the inefficiencies are incurred as you bring the new project up. And as you get more familiar with the projects, you gain more efficiencies in the production, and then your margins improve after you've had that startup cost in them. So we do expect our margins to improve as we get those new programs ramped to volume production.

Thanks.

Joseph Wolf of Banc of America.

Kind of a follow-up on the last question. If you would look at other cycles in the business and you look at the operating metrics and some of the difficulties that you experienced in the quarter, would you call this a normal recovery scenario, or are there some specific areas that you can pinpoint which you could fix, even as you continue to grow? Because if we look at the velocity, or the number of contract wins that you have been announcing over the past couple of quarters, they've been pretty steady in both dollar amounts and number of new wins. So I'm wondering how long this all cycles through your operating model?

Again, the key there is the large programs that we support on the design to production phase, those typically have a longer time line, a significant amount of cost incurred upfront. And then they have a meaningful revenue contribution when they fold in, which we indicated we expect a couple of those to fold in in late Q4 or in the Q1 time frame of 2005. On an ongoing basis, as some of those programs come up -- and you will see that we typically -- if you look back six to nine months ago, we had some very good program wins that are beginning to come into the revenue fold now and into next quarter. And those other reasons why we were able to withstand a 7 percent decline in revenue from a single customer, and yet have an overall very strong quarter in the first quarter, and why we continue to have our inventories build, as we expect the revenue generation to come in Q4/Q1 time frame for the other programs that have not yet begun to generate the revenues.

So I guess you're asking us to look at it as the rolling ball approach?

I'm sorry, can you say that again?

It sounds like the rolling ball -- those wins are what is making the progress happen this quarter, and those new ones should continue in the future. But then you would look at the anomalies in this quarter, as some of the metrics that went through on the cash side, as just being onetime deals that you can now recover from?

They typically are going to be the -- if you look back in advance of some of our significant programs coming into the revenue stream, as you begin those new programs, if you look back, you'll see a quarter or two in advance of those you have the inventory buildup to be able to support the program launches. So you you've kind of got things at the starting gate, and once those production levels begin, then you see the velocity gain once again in the inventory turns and the receivable turns.

One last question on the topic and then I'll leave it. You talked about a couple of large programs starting, I guess, in the next quarter, or they are going to launch soon. How long have those specific ones been under consideration at Benchmark?

Some of those are the design-to-production wins that we have previously discussed, such as some in the medical arena.

Okay, thank you.

Brian White of Kaufman Brothers.

Your biggest customer, Sun, has publicly commented that they are putting in a new chip, UltraSPARC IV chip, and refreshing some of their existing products -- the products that you work on have been identified as being refreshed. How do we get our arms around that as far as how that could impact the business you currently work on from an end market perspective and from a cost perspective, as far as expenses you are going to have to incur to support this. And maybe a time line -- is the something we are going to see in the second quarter, third quarter, fourth quarter? How does it impact Benchmark in those different variables?

I think -- first of all, we don't really want to talk to any particular activity or any particular customers. But generally, you don't really start a new engineering project and today have the impact for tomorrow. Most of the projects we are participating for our top customers have been ongoing, and the cost being incurred for the last year and a half. And we anticipate definitely the cost has been consistently being recorded (indiscernible) for the full (ph) period of times already. So we don't really anticipate a significant cost -- goes up from what we have today.

Okay. And just looking at the revenue guidance for the next quarter, it seems a bit soft. The earnings are fine. It seems a bit soft. Can we assume that's part of just the product cycle that a customer is going through and all the variables that come with it?

The reason we're giving such a wide range, it is a lot of variables in the quarters and a lot of changes in the marketplace and there were a lot of new program startups. And we feel strongly about what we are able to do. And we are talking to all the variables we know at this point in time, and we put in pretty big ranges because the market condition changes as the new programs are ramping up. But we definitely feel this number (indiscernible) are very conservatively done and we should be pretty comfortable with that. And depending on timing as some programs ramp up and so on and so forth.

Thomas Hopkins of Bear Stearns.

Good morning. The revenue guidance looks like it down about 1 percent sequentially, basically flat next quarter, at the midpoint of your guidance. But the EPS is up one penny. Maybe we're splitting hairs, but that would seem to imply some sequential improvement, at least on the operating line. I do not know about the gross. But it does imply some margin improvement quarter-to-quarter. Can you comment on that first?

Again, as we ramp such a significant level of new programs during the first quarter, and as we indicated, that does give a level of inefficiency in your overall operations. And as such, we do expect some of those same programs which we began in Q1 to continue into Q2 with a greater level of efficiency. And we do expect to ramp some new programs in Q2. However, the more significant impact on the revenue side from those programs is expected to come later in the year. So while we do see improved overall efficiencies, the real uptick in the revenue generation is seen a little bit further out.

Again, back of the envelope, it looks like the operating margins should be at worst flat but maybe up a couple of blips in June, just based on your guidance.

Gayla Delly As you will see from the guidance, kind of from low to high, we expect to show some opportunities for improvement going forward, again based on the efficiencies we expect to gain.

Second question. Can you give us your perspective on acquisitions here, because you are still in probably the strongest position with respect to cash in the whole industry relative to the size of your Company. So you have a lot of cash and you could make a lot of the concerns around Sun go away, literally overnight, given your cash balance by just doing -- not even a sizeable -- kind of a mid-size acquisition, you would probably drive your Sun exposure down to 10 percent. So what is your thinking on that and your thinking on acquisitions, given the cash that you have?

We continue to have a lot of opportunities to look at different M&A proposals, if you will. As you know, Tom, sometimes the opportunities are fixer-uppers, and in those cases, the challenge there is how quickly and how effectively and efficiently we can bring them into the fold and at what cost. So we continue to look at the opportunities that are made available to us. Haven't seen one yet that is attractive enough to really go forward with. Continue to look at those opportunities. Additionally, once again, is another round of OEM activities and opportunities there in front of us, and of some of those may be more attractive. And so, don't have anything to report on at this time, but the opportunities in that area seem to be heating up once again.

Steve Savas of Goldman Sachs.

Good morning. Gayla, I just wanted to follow up on -- you had talked about you're still intact on the operating margin target or goal of 5 percent. And I know it's fuzzy -- I'm not trying to pin down a single quarter. But do you think that is an achievable goal in this calendar year? Or is it something kind of first half next year? Just roughly.

Thank you for not trying to pin me down. It is very difficult. As we said, at some point it becomes very challenging to determine if the new program launches that are coming up are going to actually get into Q4 or into Q1 next year. And that's really going to be the driving force, is when those come into the revenue fold, you get the momentum and the efficiency associated with that such that your operating margin is markedly improved. It's very difficult, even with all of the knowledge that we have as insiders, to be able to accurately predict whether it happens at Q4 or Q1 timeframe. But that is the point in time somewhere in that 6 month period that I would expect to see it, based on the information available to us today.

That's fine. In other words, no later than some time first half of next year, and it could be anywhere between third quarter and second quarter, or something like that?

That's about a broad -- that gave me a little bit of room to breathe.

Our margins, as we discussed in the previous conference call, and our operation models always run about at a 5 percent operating margin numbers, which is still our internal goals and we drive very hard to it. And we are 4.5 percent, very close. But another 0.5 percent is very -- you had a very delegated and (indiscernible) to get there.

Just one last question somewhat related, I guess, tax rate. I think you were at 28 percent for this quarter. Do you think it's going to continue to go down or is that your estimate for the average of what it will be for this year?

In accordance with GAAP, the 28 percent is what we anticipate our tax rate to be for the year. However, as we said, as we ramp new programs, the more contribution we have from the low-cost geographies, many of those low-cost geographies also have lower tax rates. As such, we could see opportunities as program wins continue to fold in for our tax rate to further improve. You will note that we are one of the higher tax rates in our industry, specifically because of our geographic mix. And so when you look at a net tax performance, some people have a much lower tax rate than we do, and that is driven by the lower-cost geographies. So there is opportunity there, but it comes with additional production that would be in the low-cost geographies.

David Seshrin (ph) of Smith Barney.

Last quarter you mentioned that inventory levels in the hub were up a little bit. Can you tell us what that looked like this quarter? Did you see a little bit better pull, or was some of the inventory build again this quarter related to that?

No, we did see an increase again in finished goods. Don't have all the detailed final numbers, but I expect we saw about a 6 to $7 million increase in our finished goods at the end of quarter this quarter compared to last quarter, again with some of the orders not coming in as we expected.

Are we expecting that to decline over the next couple of quarters, or where are you in terms of that?

My expectation, of course, is that that is going to come down next quarter, and we're going to drive very hard for our teams to bring that level down. Again, it comes back to the accuracy in forecasting sometimes and the arrangements we have with customers, but in each case and in each relationship, you're trying to fold back in the information and the knowledge you have from the history that you've built and determine what the appropriate level of builds are for the next quarter.

Along those same lines, what kind of opportunities are you seeing in terms of additional box build and system integration, and how might that impact the operating model going forward?

We continue to see some very good opportunities out there for the box build and system integration capabilities that our team has developed, and that takes, as you know, outsourcing to the next level. And ultimately, expect to see that continue to move forward. I believe it is still in the range of about 25 percent of revenues, is what we would expect to get to as we move forward.

Great, thank you.

Mr. Michael Walker of First Boston.

Two questions. The first is, is the steady decline of Sun as a percentage of the total of your business a good thing or a bad thing for gross margins?

I think that Sun in and of itself has the impact specifically related to the fact that it is a product that we have built for some period of time, and have some learning knowledge and some efficiencies associated with that. And then, of course, with the volume of business you have, probably the opposite of that impact. So really on an overall basis, it is not as meaningful of a change as is the new programs, and the new programs are absolutely a downward drag in all cases, because again in accordance with GAAP, we have costs, costs, costs hitting upfront, and the revenue is something that is in the offing and in the future quarters.

The new programs are a downward drag in the near-term as they come online, but as they get to the full ramp rate, the new programs are probably an upward drag on the (indiscernible).

Absolutely, so that's what we're saying. So that has probably more of an impact than specifically the decline in Sun.

Okay, my follow-up is that last quarter you gave the percentage for the top two customers. I'm wondering if you have that this quarter.

I believe the EMC portion was in the mid teens. I don't have the exact number in front of me here.

I'm sorry, the mid what?

Teens.

That represented the second customer?

Yes. We only have two customers over 10 percent still.

So mid teens for the second is what you're saying.

Correct.

All right, thanks.

John McManus of Needham & Co.

The high-end computing sector remained quite stable, even with the decline in Sun. Could you give us some color of what is moving up there in that sector?

We have continued to see growth in that sector, both from the addition of customers such as ADIC and additional program wins on other existing customers. So we have added several new customers in that arena, as I've mentioned previously. In fact, you are correct to kind of step back and see, wow, that's a significant decline in one customer, and yet the industry (indiscernible) is quite interesting.

John, I give you another indication. We have become very much an expert in handling that particular sectors, whether we are having a pretty good report on the performance we had in the past on the high-end system integration for the computer sector. So we will definitely see more opportunity in that area, as more and more high-end computer customers still outsourcing the system integration box for us.

Will you anticipate that cash flow from operations would trend positive in the second quarter?

I believe so. The reason for that is that they are -- there's a lot of back-end loaded shipping trends in Q1, and receivables interesting thing. You miss by one day, you could be at one day cash, and the next day will be in receivables, and that's how (indiscernible) the trend. But we feel the back-end loaded receivables shipping pattern in Q1 will definitely anticipate a lower receivable in Q2.

Are you going to be adding capacity in Asia, whether it be Thailand or China?

We have been adding additional capacity from the equivalent standpoint of view in both locations. And we are evaluating all the other alternatives to increase the capacity in the area, and hopefully we will have more to discuss in the near future on that particular subject.

Amy Younger (ph) of Robert W. Baird.

Just a quick clarification. The programs you said that pushed out by a quarter, was that you expected to hit this quarter and they're now going to be in the second, or is that second to third? You had mentioned there were two significant programs.

I tell you initially what started those two programs coming and they started release in Q2. And now we see them in probably the later part of Q3. And the impact of those two program delays really in raw materials inventory level, as well as expense level, because we did most of the work. We have a lot of inventory on hand ready to launch, but it's delayed. And as a result will cause the higher inventory raw material levels as well as the cost being incurred not having revenue to (indiscernible).

Understand. And also, just on your revenue guidance for next quarter, could you give us a little more detail maybe on specifics by end market, even if just directionally, what you're expecting there from market to market?

There are a lot of variables in the situation, and you can see we give a wider range because of so many variables. And we still believe this is a good guidance, based on the information we have. And we definitely want to make the number we project with. It's a lot of variable in the situation and it's difficult (indiscernible) line by line.

So no, Amy, we aren't going to give any more specifics as to industry, because you can imagine with the range that we have, we would have to give ranges for each industry. With that level of variability, there are some assumptions that some industries will have some changes, so I don't think we are prepared to give that level of granularity at this point.

Okay. Could you at least specify the two programs that are pushing out in the third quarter, what end markets those fall in?

Both of them are major medical projects.

Medical? Thank you very much.

Keith Dunne of RBC Capital.

I'm glad I went after Amy because she asked two of my questions.

Gayla Delly So you have to come up with another one.

No, I've got plenty. You mentioned that you are boosting Asia capacity and you made a point, Cary, I think, significantly boosting engineering services. Can you give us a sense of what the overall cost for the Company of engineering services might look like this year versus last year, or at least give us some color on this quarter versus last quarter?

The engineering service is a very difficult business to project with. Some of the engineering people you brought in would have generated revenue right away. Some will be having some delay factors as a result of the engineering projects ramping up or (indiscernible) or vice versa. I'll probably turn (ph) this thing around. I was going to give you the headcount information instead of the expense information. We are anticipating for the year we are going to increase our designs (indiscernible) in a number of about 50 people additionally.

And is that 10 percent or 20 percent or 5 percent?

It's difficult to tell percentages (indiscernible) define (indiscernible) or define engineer. But it's a significant from pure design stand point of view.

And modest sales up this year. I believe you had been saying that even with Sun down, you could do up 10 to 15 percent. Is modest defined now as more like 5 to 10 percent or is that some other kind of range?

Modest still (indiscernible) defined as modest. That's the point I'm making. Like last year, 2003, we said the same thing. And we anticipate business will drop significantly, but the increase is modest. And then with a lot of new programs ramping up, it's difficult to predict a precise number.

If you can appreciate our job standing out here. Gayla had given 10 to 15 percent and kind of quantified that. Does that mean you're not going to give us any kind of range for the full year at this point?

I would like to get there, and I will probably see the modest range -- I can't really give the percent you want at this point in time, but I think 15 will be the high end of that and --

Gayla Delly For clarification, Keith, I don't know that specifically I've ever given guidance as to modest being 10 to 15 percent. I believe that with the new programs that we have ramping up, based on folding them in, we could clearly have 10 to 15 percent in growth. We have not specifically defined modest, but as you can see, what we do have is an opportunity for the new programs that come in in Q4 or Q1, depending on when those come in as they are significant programs, could have an impact on that, which is why we really have hesitated to identify for this year -- which cuts off for us in December -- whether that is 10 percent, 7 percent, 15 percent. Because the size of those new programs are not known as to what date they are going to hit.

So that is why if it sounds like we are dancing around, trying to not answer that, because we don't know the answer of when those will hit revenues, I would probably likely say at this juncture, we would expect more in the 5 to 10 percent range if those programs don't come in. If they do come, it would be 10 to 15 percent. So, 5 to 15.

Shawn Severson of Raymond James.

Good morning. I just wanted to come back to the margin issue again. If I look at the fourth-quarter results, obviously, you had a lot of startup programs then as well, but you had pretty exceptional gross profit margin of 8.4 percent. And that was, I believe, even though Sun had declined sequentially in the quarter. I'm trying to understand why is it that now in this quarter we're seeing these startup costs. Is that just due to the timing of some stuff that you won last year and it's all hitting now, or is it more of an issue because the Sun business is falling as well that it's having more of an impact on your overall gross profit margins?

I think that's a two-part answer, Shawn. First of all, as Barbara highlighted in her comments on the call, last quarter, we had a significant level of foreign currency losses, which we believe as we take into consideration that impact associated with the gross margin, that without that 52, you would probably come in more at an 8.1 percent kind of margin.

So stepping from there, what we then see is that, yes, last quarter we had some new program ramps involved. This quarter the level of that activity was much more fast and furious. As you can see, we not only had the new programs brought up, but we also got them in very quickly, since we generated revenue from some of those on a very fast pace. Then the last part of that is associated with the programs that delayed, all you had in association with those was the cost, and those were not at the level they are now. As you get closer and closer to the launch date, you've got cost continuing to escalate into the final portion of the race to the launch.

Okay. And then secondly, is there anything we need to be aware of in terms of the Sun business throughout the year in regards to changes in margin profiles, or anything you really need to think of that could change dramatically for you in that business as the year progresses? Or do you feel that it's pretty locked in in terms of profitability for you?

Again, I don't see that as a key driver to the profitability. The key driver is going to be the maturity of programs that we have. So as we get some of the new programs ramped to volume and gain more efficiency there and get our velocity back on our inventory, then we will be able to see improved margins once again. With a 4.5 percent operating margin, I will reiterate our guidance is to say that we expect that to gradually increase. So when you take that information in tandem with the revenue information, we're saying that as we get the new programs folded into revenue and get our operating efficiencies up and our concentration of business down, we expect our margins to once again improve.

Maybe I'll ask that another way. You already know what your margin structure is with the Sun business, right? So we don't have to worry about that being a negative surprise, I guess, from what I'm looking at. I understand there is much more power (ph) on the margin side from getting the new programs up and running, but I just want to make sure that there isn't something with Sun that we need to think about in terms of versus the planning that you are using today with the Sun business. Is it a locked-in contract or how does it work?

As with all customers, you have locked-in contracts, you have ongoing challenges in the marketplace. You're constantly trying to drive prices down. I don't think today, yesterday, tomorrow is any different with Sun or any other customer. We are all in a technology marketplace. Prices continue to go down. We continue to drive prices down. Our customers continue to drive prices down. I don't think anything is changing in that environment or in that marketplace.

Thank you.

Jim Savage of Wells Fargo Securities.

Just getting in under the wire, I think. You are assuming that Sun will be somewhere around 25 percent of your business by the end of this calendar year? Is that correct?

We would say the Sun percentage of revenue will be the high 20s.

High 20s. So it should decline somewhat from here, is what we're looking at?

That is correct.

And can you identify the others in your top five customers at this point, other than Sun and EMC?

We have not disclosed, Jim, any customers -- anything less than 10 percent. Because (indiscernible) we're very proud of our customer base, and we had mentioned several names in the past, and they are great customers. And we talk about Emerson (ph) and we talk about Agilant (ph) and Medtronics. And of course, we talked about several new customers which are very exciting, such as Siemens Medical. And also, a lot of people ask about guidance and those are the interesting customers we will have in the future. So we do have a lot of very good customer base, and they are expanding and that's what's giving us a good feeling for the future.

I appreciate that. Can you give an idea as to whether you expect there to be any changes in your top 5 or top 10 base, based on some of the new program ramps that are going on at this point?

I think toward the end of the year we're probably going to see a couple changes. In other words, we will have a couple customers reaching to the top five customer range. And those are parties (ph) we've been announcing in the past and we've been working of the last two years (indiscernible). And our reward is coming. It's just the timing.

And those will be in multiple industries? I think multiple industries, but we have a (indiscernible) of having two very major partners kicking (ph) in the medical side, and we do have some others in some other industries too.

Okay, thank you very much.

Thank you all. We appreciate you joining us on our call today. If there's any follow-up questions, we will be in our office. Thank you again for joining us.