Benchmark Electronics Inc (BHE) 2004 Q3 法說會逐字稿

Good morning and welcome to the third quarter earnings release conference. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Ms. Gayla Delly, Executive Vice President and Chief Financial Officer.

Good morning. Welcome to the Benchmark Electronics third quarter 2004 conference call. I would like to introduce the team present here today. I'm Gayla Delly, the CFO of Benchmark Electronics. With me is Cary Fu, our President and CEO, and Barbara Sorensen, our Director of Treasury Services.

On our call this morning I would first like to begin with highlighting some points from our third quarter results. This is our first quarter, a record quarter, with over $500,000 million in revenue. We continue to focus on customer service and operational excellence, and have once again delivered solid financial results in this challenging environment.

Recently we were once again awarded Supplier of the Year award for Sun Microsystems. This is a great honor. Now our teams are focusing on moving forward and meeting even higher levels of performance. We noted in our last conference call guidance that we were ramping a number of new programs. These programs remain in various stages, with some ramping to volume in early 2005. And some of our more recent wins are ramping in the latter part of 2005. We are pleased with our 11 percent year-over-year improvement in revenues, and our 16 percent year-over-year improvement in operating margin for the third quarter.

We have achieved this while ramping several new programs. Several of these new programs are still in the early stages, and some are ramping to volume as noted such as our programs with Cray and Tekelek. As noted in our last call, we are participation in new generation and next generation of products for most of our major customers.

In Q3 our revenue from our top customer was 27 percent. And this was on record revenues of $505 million. Our Q3 revenue from this customer is expected to be at the low point for the year with revenue -- from a revenue dollar standpoint, due to the seasonality of this account, and with new programs ramping beyond Q4, 2004. This is again indicative of the number of new programs we have continued to add over the past years with our new and existing customers. Our sales pipeline remains solid with a drive to outsourcing very strong.

Now I will turn it over to Cary to provide an overview for the quarter. And then Barber will present the financial information. And we will conclude with both Cary and I answering your questions in Q&A. Once again we will hold this conference call to one hour. Before I began we will read the forward-looking statements.

During our conference call we may make projections or other forward-looking statements regarding future events or future financial performance of the Company. We would like to caution you those statements reflect our current expectations and our actual results may differ materially. We refer you to the risk factors and cautionary language contained in the documents we file from time to time with the Securities and Exchange Commission, specifically our recent filings on Form 10-Q and our 10-Ks.

Those identify important factors that could cause actual results to materially differ from our projections on forward-looking statements. We undertake no obligation to update reductions or forward-looking statements in the future.

Thank you for joining us today for a discussion of our Q3 results. Our performance continues to meet our high standards set in 2003. We are proud to announce our first-ever (indiscernible) billion dollar revenue quarter. I believe this is another milestone for Benchmark. I would like to take this opportunity to congratulate our team for a job well done.

During Q3 we have seen (indiscernible) years tech market conditions, but with a stronger outsourcing pace. Our new program booking provide us a solid foundation for (indiscernible) our 2004 move into 2005. In 2004 we have seen gross margin compression resulting from a new program ramp. Costs associated with the program ramp are expensed as they are incurred. We do anticipate our original margin to improve as we continually ramp the new program in the coming quarters. Also, as we expand our level of production in the low-cost geographies, we expect to see improvement in our tax rate.

We see continued demand for services in Asia and in the engineering design area. As we increase our revenue base in Asia, we do not anticipate it changing our business model. We do see that some of the program may have a higher level of (indiscernible), giving a higher material content and a lower labor cost. This same product typically demonstrating lower-level of SG&A expenses, but render the same operational margins.

We expect our operations -- operating margin to continue to improve to the 5 percent target, as we will grow our revenue base, improve our efficiency, and increase our utilization rates. We also -- I'm also delighted to report our new Korat, Thailand facility is now operational and shipped the first product in last quarter.

Now I'll turn the conference to get Barbara to provide more details on our financial performance for the quarter.

As we reported this morning in our press release, we completed the third quarter of 2004 with record revenues at 505 million. This was at the high end of the guidance provided during our last conference call when we estimated revenues in the range of 485 to 505 million. Our third quarter revenue was 11 percent higher than the third quarter revenue for the prior year, and sequentially (indiscernible) as compared to our strong second quarter revenue by approximately 3 percent.

Our diluted earnings per share were a record 43 cents per share on a GAAP basis. For the same quarter in the prior year our diluted earnings per share were 32 cents. Net income for the third quarter of 2004 was 18 million on a GAAP basis, compared to 12.9 million for the third quarter of 2003, an increase of 39 percent.

For the third quarter of 2004 our cash flows provided by operations were 1 million 2. Our inventory level was 290 million, an increase of 13 million from Q2, with inventory turns at 6.4 for the quarter compared to 6.5 in the previous quarter. Inventory pipeline sales in advance of new program ramps and MPI are impacting our inventory velocity, which we continue to drive for improvement.

Gross margin for the third quarter was 7.6 percent of sales as compared to 7.8 in the second quarter, decreasing slightly as we bring up new programs. MPI activities and schedule changes continued at high levels. And as we have noted previously, these activities impact the level of efficiency in our production and negatively impact our gross margins. SG&A in whole dollars was 14.6 million, which represents 2.9 percent of revenues compared to 3.1 percent in the previous quarter.

We have continued to maintain strong cost control and anticipate that SG&A will return to the $15 million level in future quarters. We did benefit slightly from an accounts receivable recovery during the third quarter.

Our operating margin for the quarter was 4.8 percent, an increase from 4.7 percent in Q2. Our pretax margin was also 4.8 percent in Q3 compared to 4.9 percent in Q2. Our ROIC was 14 percent for the third quarter. Interest expense was 392,000 for the quarter. Interest and other income was approximately 1.3 million, and other expenses were approximately 440,000. These expenses were foreign currency related.

The tax rate for the quarter was 26.2 percent with our effective tax rate for the year at 26.9 percent. Taxes have been favorably impacted as we expand our Asian operations. The weighted average shares outstanding were 42.3 million.

Our cash balance is consistent at September 30 with June at 312 million. Receivables were 260 million, an increase of 29 million from the second quarter of 2004. Our receivable balance increased primarily due to the back end loading of the quarter based on our customers' delivery dates. Our days sales outstanding was 46 days compared to 42 days last quarter.

Inventory was 290 million, compared to 277 million last quarter. Inventory turns were 6.4 times. As noted in our previous calls, our inventory levels, which are in support of the new program ramps, including next generation programs for several of our top customers, are continuing to build in advance of product introduction.

Cash cycle days were 50 days. We will have an opportunity to improve on this when some of our new programs are ramped to volume and a level of inventory which we had built up in support of the anticipated program launches has been reduced.

Current assets were approximately 892 million, and the current ratio remains at 2.5 to 1. Capital expenditures for the third quarter were approximately 5.7 million, and depreciation expense was 6.4 million. As we had indicated and anticipated our capital expenditures are increasing in support of our increased opportunity and new programs.

We have no amounts outstanding under our revolving credit facility of 159 million, which was extended to the end of the year and remain in compliance with our debt covenants. Cash flows provided by operations were approximately 1.2 million for the third quarter of 2004.

Our revenue breakdown by industry for this quarter approximates as follows, medical, 9 percent; telecom, 12 percent; computers, 56 percent; industrial controls, 12 percent; tests and instrumentation, 11 percent.

As we anticipated and mentioned earlier, our revenue from our top customer was down to 27 percent this quarter as compared with 32 percent last quarter. We do expect that the revenues from our top customer, as well as revenues for other customers in that industry, to show increase in the fourth quarter of 2004. This is expected based on both new program and product transitions in addition to general fourth quarter sales improvements in certain sectors.

This quarter was a significant quarter for Benchmark in the terms of the number of new programs introduced to our revenue stream, as can be seen by the increase in several sectors. Once again, we recognize the efforts of our teams for effectively supporting and managing the new program from sales through to production. The excellence in execution has once again been demonstrated through solid results in challenging conditions.

Now I will turn it over to Gayla to discuss our new program wins and guidance for next quarter.

During the third quarter we booked seven new programs. We continue to see a mix representing our program wins with new programs in industrial control, medical, telecom and computers. One of our large new program wins in the high-end computer sector has an annual revenue estimate in excess of 200 million. We also booked six other programs which have a revenue potential ranging from 50 to 80 million on an annual basis.

Some of the new products and/or new programs from time to time do not meet customer's expectations. And many of the programs we have announced this year are in the early ages -- stages of transition into the revenue stream. We're very excited about the strength of the sales pipeline and the abilities of our teams to transition from the sales to production phase, as Barbara mentioned.

The pipeline of quotation and outsourcing activities remains strong and highly competitive. And we do see some aggressive marketing efforts continue by some of our competition.

The component markets have shown some signs of easing with several commodities experiencing a more favorable pricing environment. This quarter we also saw some of the lead times improve slightly. We do see general market conditions remaining choppy, however, as the long-term outlooks are showing some positive signs.

There are mixed indicators in our industry and the technology marketplace overall. And the market has still not provided a track record for consistency, so we will once again provide forward guidance for one quarter only, and continue this practice until we see more stability in the long-term outlook.

We currently expect our revenues for the fourth quarter to be in the range of 505 million to 530 million, which is based on indications from our customers. The corresponding GAAP earnings per share is in the range of 41 to 45 cents.

Our market overview generally indicates that there are strong stronger opportunities for growth in high-end computers and medical, and moderate growth in industrial controls, with some weakness being seen in telecom and test and instrumentation.

Again, we're not providing guidance beyond one quarter, but I would like to note that we anticipate our operating margins to trend gradually upward, as Cary had indicated, from 4.7 percent to our target of 5 percent as we ramp some of these new programs.

At this time we'll open it up for Q&A discussion. And during the discussion we ask that you will limit yourself to one question with one follow-up, so that we allow time for everyone's questions.

(OPERATOR INSTRUCTIONS). Brian White with Kaufman Brothers.

When we look at this win in the high-end computing segment, the $200 million win, is this a next generation product for an existing customer, or is this a totally new product -- new win?

Is not a follow-on generation product. It is a new product.

It is something we will ramp over the next 9 to 12 months or sooner than that?

As new products come on they typically will take it in excess of a year.

And just quickly, the outlook for the December quarter. Top line looks a little bit soft. If you had to point the finger is this due to continued product transition with a couple of customers? Is it a particular market? Or how would you kind of size up just a little bit of softness it looks like in the top line?

I guess as we indicated in my closing remarks before we began Q&A, tests and instrumentation and telecom would be the two areas that I believe that we're beginning to see a decline in the outlook there.

Scott Craig with Bank of America.

Just on the margin front, I think the 5 percent operating margin targets you guys had were sort of for the first quarter or second quarter '05. Is that still achievable? And then, secondly, can you quantify the impact of the accounts receivable recovery that you had in the quarter?

On the margin, we are still continuing to target the improvement in the operating margin. And I don't have any indications as to why that would not be achievable. We're continuing to drive in that direction. I don't have the information. I believe the net recovery was under $500,000.

And then as far as the timing goes on the margin improvement, are you still confident in timing, or is that changed a little bit?

I guess I would say that I'm confident to the extent that the programs continue on track. I've seen nothing that slips any of the new programs coming in. But as we have seen throughout this year, as new programs come into the revenue stream the costs remain constant the day they ship, and actually become part of the revenue stream is what seems to continue to change. And that is -- we continue with the investment. We have we believe very strong opportunities, and that is the reason we are investing in the new programs. But the timing of those is always a challenge, so I would say that at this point we don't see anything that has taken us off our target.

Patrick Parr with UBS.

It is Ben Luke for Patrick. What would you think about your margins going forward? As a follow-up to that, if we are expecting your SG&A to come up a little bit, and as you ramp your new programs and incur a lot of start up costs, is it possible that we will see a little bit later in terms of when you will hit your operating margin target of 5 percent maybe towards end of '05?

Again -- well first of all to clarify, on SG&A in whole dollars going out to the $15 million range will not have a significant impact as we grow our revenues percentage-wise. I believe they will stay in the same range. As we grow the overall margin, as I indicated, it has a lot to do with the success of the timing of the new programs, but I believe those are on target. So in respect of your question, yes, it is possible that wouldn't be what we would expect at this point in time.

And with the market being choppy as you characterize it, are you seeing any slow down in the pace of new program ramps? Typically you have already characterized it as being 6 to 9 months for it to ramp to volume. Are you seeing any of your customers pull back a little bit in how fast they want you to ramp the programs?

No, I think that the new programs are continuing at a very solid clip. And people are excited about the new programs they're bringing to the marketplace. And you can tell that what with way they are approaching their product introductions. If there's anything that people have done that have been noted as conservatism, I think it is the quantification of maybe their expectations that you always see people rein in their expectations for themselves and for their management and for their investors as the markets are choppy at the end of this year.

And the last question, what should we think about tax rates heading into '05?

Our current tax rate, effective tax rate of 26.9 percent, is our estimated effective tax rate. What we were indicating is we have grown our revenues in Asia very successfully, and that does have a significant impact. As you can see, I think that while we have been growing our revenues in Asia and in the lower tax rate geographies, it has had a positive impact on our effective rate. But we still have one of the highest, if not the highest, tax rate of our industry. So there is a lot of opportunity for improvement there which generates a good solid impact on net income.

David Pescherine with Smith Barney.

Can you just give us a sense as to how much of the business is going to ramp in the December quarter? And then can you also maybe give us a conservative estimate for, as you sit today what new programs may represent next year for what you have already booked and what you expect in terms of ramps?

Probably not. It is an ongoing challenge. And included in our range of information are a lot of different data points in order for us to come up with our estimates. And I don't specifically go through and try to identify on a new program versus an existing program.

A lot of times our customers will also have revenue projections and timing that they expect to implement their new products into the stream. And it may change, but it will be a non-impact to the public markets, if in fact the success of the existing products remains in place. So while we're doing our forecasting, we try to take into consideration all of these factors. And so I don't specifically line out the ramps for instance in December as to what my expectation is there. But you can see that we do allow for some variability in the timing of those ramps, which is why our revenue range is a little bit more significant in what we're giving it to, top and bottom.

Okay. And how about then in terms of the December guidance? At the low end of your revenue guidance it looks like your margins would actually be down on flat sales. So can you help us understand what might be negatively impacting margins on flat sales next quarter?

Again if your sales are flat and you're continuing to invest more and more into the new program ramps, and they haven't come into the revenue, that would be a slight impact. I think if you do a model it is less than half a percent that it would even impact.

So the flat revenues would imply no new revenue streams coming online?

No, I think that would be -- the flat revenue maybe an indication of mix change too. It still have some new programs come online with some of the decline with some sectors.

Stephen Fox with Merrill Lynch.

With regard to the Thailand facility that is ramping up, is there any way to characterize how much of a drag it was on gross margins in the quarter. And what type of utilization you see that having say by the end of this year?

I don't -- as we indicated in the previous conference call, the Thai facility is a facility we acquired with a lot of acquisitions a couple of years ago. And all the expenses related to the facility has been recorded in our expenses throughout the last two years. So the start up costs are very, very minimal. And I do believe in Q4 the operation will be a break even or even makes some money. So there's absolutely no drag on our earnings from that facility at all.

Okay. What would that swing factor be in terms of gross margin opportunities say in the next couple of quarters? Is that worth 10 or 20 basis points or not really?

It is really hard to say. I understand a lot of questions was centered around the gross margin performance. We have, like Gayla indicated, we have a tremendous number of new program ramps and in the different stages. There is the product introductions, engineering efforts. In the midst of all that, we have the additional engineering headcount to support our customers. All those are the variables injected into the gross margin calculation.

But overall we believe as we get more efficient in the new program we start to ramp for the last two quarters, we should see a better efficiency in gross margin line, and at the same time continue to hold SG&A line at bay, therefore giving the opportunity for the operational margin to improve.

Shawn Severson with Raymond James.

How much of your business in this quarter was complete system assembly work?

I don't really have that information in front of me.

We continue to see that increase. I do not have that percentage breakdown in front of me.

But that is something, as you mentioned, it will be impacting the mix a little bit and the gross margins going forward, right, the greater box build percentage?

No, typically the type of system integration work we're doing, as opposed to box build for instance, box build has a significant impact because it is a low margin business. However, systems integration work is more comparable in complexity of the products we're doing, so does not typically have an impact on us.

Is the new $200 million program, will that the system assembly work as well?

Yes, that's correct. Yes.

Is the nature of the business -- how would you look at it? Maybe more from a hubbing aspect and from an inventory basis? Do you hold these until the very end of the quarter and then kind of see how much business gets pulled by the customers, or is it more of an even flow of business?

I think we see more and more of the systems integration type business where we're having closer to our customers' customer relationships. So yes, you do see an impact whether it is specifically a hubbing arrangement or whether there is some other terminology or methodology with which it is specifically handled. I think you're right on point with the fact that our involvement is getting us closer to the point where we are impacted by the back end loading of the sales effort at the OEM and see that impact coming through more.

As you're more involved in the system integration, your manufacture cycles tend to be a little bit longer. Instead of shipping the PCB assembly, we're now shipping the whole box, and that would definitely have some impact on the inventory turn, plus we're holding the -- extending our inventory -- the manufacture cycle and plus the hub arrangement.

Then just one last quick follow-up to that. Does that necessitate more geographic expansion on your behalf as you do more complete system integration work? And obviously you want to be closer to the end-user geographically with that business, or is the nature of the stuff you're doing is that not really an issue and you can easily just ship it from any location around the world?

I think we are -- geographically have the footprint that meets the needs of our customers. We continue to look at Eastern Europe and as such with our customers whether there is a demand level that it warrants an expansion in that area, as we have mentioned before. However, I think those of us that have participated in the industry for a longer period of time though, it used to be very important to be all but right next door to the customer as you have indicated. Now it is kind of the customers' customer being geographically located near is important.

However, one of the cost benefit of that is being more closely analyzed today so that shipping from the right continent makes sense, but you don't have to be co-located or located in close proximity to the customer. All those -- the transportation, logistics work is much more fluid today and able to be handled.

Amy Younger with Robert Baird.

A quick question on inventories. I can appreciate that those are ramping because new programs are coming online. But you have been continuing to win new programs throughout the last several quarters. Are we at a point now where that should -- we are at the peak quarter where hopefully we should see those going down more, or is it also a function of your customers asking you to hold additional inventory? And if that is the case, are they paying for that?

I haven't seen a significant change in the customer profile or methodology I don't believe. Of course customers are always pushing to see if they can utilize our balance sheet. I don't think I've seen that as a change. That has been de facto ever since the downturn, right? Because as Cary has indicated before, inventory is clearly a four letter word. And it is not something that people take pride in trying to grow on their balance sheet. But to the extent that we held inventory for customers, yes, we do.

We would have a charge or a cost to pass through down associated with that. But what we do see is, I would say qualitatively the inventory and the increase in inventory that we have as we look through it, it is associated with the new programs. It is associated with transitioning and making sure that we can effectively do the cut over and ramp to volume programs, because salespeople are -- at the OEM's -- are not satisfied with trying to sell a product for which there is not available product. So they have to be able to hit the field, selling a product for which a pipeline is full and ready to go.

So that being said, is it reasonable to assume that these levels will probably continue until you start fully ramping some of these larger programs? The level of inventory you have on your balance sheet now?

I would like to see it continue to improve. And I think that everyone on the call is fully aware that even as part of the team of Benchmark, I'm very critical of us having high levels of inventory. I would like to continue to see that improve. I do feel comfortable and positive about the quality of our inventory. I don't feel positive about the number, and do want to see us improve on the velocity. But we are investing in the right programs and have our inventory aligned. We just need to try to improve on bringing that number down in advance of having to wait for everything to be as fluid I would like it to be from a shipping standpoint.

Thanks. And just a last quick question. Can you give us your first first expectations for what cash flow might be in 2005?

It is hard to see at this point in time. I think as we have seen through any time we get the new program ramps we will expect our velocity to improve on the inventory, as I said. And said from an operation standpoint I would expect us to hopefully improve on our provision of cash from operations.

At the same time as we continue to grow, we will be investing in CapEx. So you have seen we went from like 1 million, 2 million, 6 million in the three quarters so far this year as our CapEx. And I expect to see that continue to grow.

Thomas Hopkins with Bear Stearns.

Just looking at the top customer, I believe you said they were 32 percent of sales last quarter and 27 percent of sales this quarter. So it looks like the revenue decline there about 13 percent, yet you were able to exceed the expectations in terms of the top line. So clearly the outsourcing that you discussed is definitely there and it is working. But can you just discuss a little bit more about that sequential decrease at that top customer?

Again, I'm going to hesitate and draw away from any specifics on a customer. Because I think that is something that we shouldn't get involved in doing. But I will say that we typically see IT spend ebb and flow such that June and December are strong points, and September for whatever reason IT spend seems to not be as strong unless there is a new product introduction that kind of takes it over the top, or we are involved in something that differentiates it from a normal IT spend. So I would say from our vantage point that we're not shocked it all. And we expect June and December to be stronger periods of time in IT spending.

So sequentially that top customer should be up in December? (multiple speakers) In terms of dollar amount, maybe not percent of sales, but the dollar amount?

Yes.

Yes, they should be.

And then just following up, as you look out -- I know this early you're not giving market guidance. But the last two quarters you guys really haven't had very much seasonality. You have only been down like 1 percent or 3 percent sequentially in March. Is there any reason to think it will be different than that this March?

It is very hard to say. I think two years ago March was a very weak quarter as opposed to December. Last year it was down slightly. I think typically you would expect March to be weak coming off of a good strong December just as a typical statement.

I don't have guidance, and I'm not providing guidance at this point for March, but it typically is not a strong as December. It is just a matter of how much it tails off, whether it is just flattish or whether it trends down significantly. My take on it historically has been if December comes on very, very strong, it is usually a time shift between December to March.

And then just finally, are you saying that we should be using around 26 percent of the tax rate in our model for '05, or are you saying that we should be looking at more of your effective tax rate?

I think that 26.9 percent is our effective tax rate. And until we see the new programs really coming in and any further geography shift, I wouldn't have a basis to take it down to 26 percent currently, but that is clearly where we are going to be driving.

Michael Walker with Credit Suisse First Boston.

The top customer you're saying would be up sequentially in December. Is that a result of seasonality or is that a result of new business with that customer?

I believe primarily it will be seasonality related.

And my second question is, the last couple of quarters you have given out the top two customers as a percentage of total. Do you have that number?

For Q3 it is 16. -- well 16 percent.

Chris Lippincott with KeyBanc Capital Markets.

I was wondering with reference to gross margin if you were able to give us a little bit of granularity as far as the impact from ramp costs versus any potential of raw material price increases versus the mix? Just sort of give us perhaps a little bit of understanding as to how we're seeing some of these impact the margins, which I think is down perhaps the fifth consecutive quarter?

The gross margin number is probably the most complicated number in our business model. If you look at the -- and all we talk about is the revenue, the volume, the utilization and the efficiency. That is pretty much driving the gross margin number. If you look at the Q3, and we do have a significant number of new program ramps. If lot of those are ahead of the product introductions, basically you will have the expenses ahead of the revenue curve.

The second thing is when you had a new program ramp you have less efficient -- people still go through the learning curve on the new products. And then the number three thing, as we indicated earlier, we are continually adding additional engineering resources at the gross level. And those people are not at the more efficient level, number one, generating the engineering billing time as well as additional training costs. All those combinations caused the margin slowdown -- decrease slightly in Q3.

But overall we have to look at the total business model. And as we indicated in various conference calls and meetings, we are always talking at an operation margin at a 4.5 percent. And I believe it is a combination of the cost control, cost of G&A, and continue to get more efficiency on the gross margin line, and we will get there.

And just the looking over the last three quarters, we're inching toward that number, and it takes time. And the -- it is not a precise number. We're getting so many new projects and the effort in front of us, and I am aware -- very proud with the performance. With this kind of a customer mix changes we see the new program ramp. And adding additional resources and adding new capacity you (indiscernible). We have continued to deliver better numbers. And we're very, very proud of our performance here.

One thing I do want to point out, because I think that for clarification, our margin has not been on a downward trend for five quarters. From September 2003 -- it went up in December of 2003 as we had more throughput, and not as many new product introductions at that point. And it came down in Q1 of 2004. And Q2 was up, and then the third quarter again we had more new product introductions. So it has been ebbing and flowing and changing as we bought in new products and depending on the mix and the throughput of the products. So it has not been on a continued downward slope.

Right, I see that. I was just wondering if you had sort of perhaps a percentage break out as to what the impact was? For example, was it a third, a third, a third ramp costs, material, mix, or was it lopsided to one side or the other. Just wondering at what percent?

No, I think the only one that specifically I would take out of that mix would be the materials, because they have not had a significant of an impact. And because the pricing that looked like it was toughening up in some prior periods did not continue in that vein. So we have seen the supply chain not have the pricing power that it once looked like it was going to get. So other than that, breaking it down between product mix and new product introductions, start up cost, I have really an assessment of what's what there.

And just as a second question, relative to your comment, you're saying IT CapEx being strong in December. Although the midpoint would suggest that perhaps there's less than normal seasonality, which we are also hearing from a number of your competitors. Are you seeing that perhaps there's any push into the March quarter? And perhaps you might see sort of a typically less than strong December quarter with perhaps a stronger than expected March quarter?

Again I don't have enough confidence in the information flowing through on March just because the changes continue to come through on an ongoing basis. So I would hesitate to put much credence in information related to March.

John McManus with Needham & Co.

Could you comment there on your activities in China, both what you're doing there in the Suzhou facility as far as expansion, and your efforts there in southern China, and how that might be going?

The Asian demand -- demand for the production in the Asian markets are definitely continue being very strong. We're actually expanding our capacity in Thai, as we indicated earlier. And we are also in the process to expanding our China facility. And I think the China facility had reached the critical point to need additional capacity to support next year year's demand from our customers. So there's something that is in progress.

As far as the adding additional capacity in southern China, it is still on the table. We're looking at various activities. Longer-term I would like to see a two facility in China, one in Suzhou and one in southern China, as we have talked about in the past. And those are, as I said, to continuing being a top priority for our efforts. And the one definitely is the Asian demand is so strong, and we have added additional capacity in place in to support that. Saying that, and our U.S. operation is not doing too bad either. And most of our U.S. operations are pretty busy.

Could you talk a little bit about how much you have expanded your engineering and design effort? Maybe some ideas of how many engineers you have now maybe compared to the quarter before, or the quarter before that?

I don't really have the precise number here with me. And the last number I looked is that we increased our total engineering resources in 2004 by almost 40 percent on a design engineering basis. So the significant engineering resources we will put in place, and that is including the design engineers and the test engineers -- test development engineers and as well as the component engineers.

And we did open up the new engineering capacity in Singapore, which will be supporting our engineering requirements in the Asian market, which is something we did in (indiscernible) our second quarter is ramping up very quickly too.

Last question from me. You know you were ramping there two major medical customers. I thought they are going to start to really hit here in the fourth quarter and the first quarter of next year. Could you talk a little bit about where that all stands?

I think the two major customers ramping from medical side -- one is on target. And that is why you see the medical sector increase from -- increased by 2 percent last quarter revenue. And another program has still have not seen this tremendous impact yet. It will be in the Q4, Q1 timeframe.

Keith Dunne with RBC Capital.

I want to clarify one thing first. I think I heard you say the seven programs, if I add that up that is an annual revenue of 5 to 680, comparing to last several quarters where it is been closer to $100 million. Is that comparison right?

We talk about --.

When I take 200, and then I take six programs at 50 to 80 was that in total or was that each?

In total.

In total. I'm sorry.

That is what I wanted to correct. So the comparison is it has been 75 to 100 the last several quarters, and now it is 250 to 280?

Yes, that was (indiscernible) in regard to this new computer program we have. And we anticipate it ramp up in 2005 and again in 2006. It is another project where the margin is designed to production. So it is very exciting and is world recognized for our capability in design to production in our high-end system integration products.

And it sounds like it is an existing customer?

Yes.

And then the other question I want to ask is actually I thought the medical is ramping a little quicker than I had modeled. In addition, what I want to focus on though is the automatic test equipment. That was also up 20 to 25 percent more than I thought. When you look at the fourth quarter for ATE and Telecom, do expect those sales to be less than the dollar amount shipped in the second quarter? Is that the kind of pull back you're talking?

I would say that all the indications that we have, test and instrumentation is clearly an area that has at least peaked momentarily and will not continue at that same level of strength. Telecom is going to be probably an interesting mix for us, specifically because, yes, I do see some weakness in telecom, but at the same time I am ramping some new customer programs there. So that could potentially offset the telecom general weakness.

So telecom sounds like it won't fall back to the second quarter levels. But on the other hand, we could see the test and measurements fall below the 44 millionish you did in the second quarter? Is that a way to summarize (multiple speakers).

Thanks for that point. And I'm talking in terms of dollars, so clearly as the revenue goes up in terms of percentages they could change.

Jesse Pichel from Piper Jaffray.

Are you seeing any acceleration of smaller OEMs shifting away from larger EMS suppliers? And could you perhaps characterize or quantify the number of wins that you have had perhaps away from Tier 1 suppliers?

I don't think it is -- I don't see a lot of OEMs that are small that are shifting. I don't see that as -- usually if they have a good relationship and they are fairly small, they are going to stay intact. You do see the large companies as they get -- maybe as they get out from under some of their prior commitments that they look around and said, alright do we have the best fit? Are we properly aligned with suppliers for their capabilities in what we're looking at meeting going forward? Probably that is more prevalent just because of the contracts that were previously signed up are coming to an end now.

Yes, probably another comment. Really the outsourcing thing -- process has become a very mature process. What I mean is you look at the industry has been in a crisis for a while. And most OEMs have a good understanding of the outsourcing requirement, typical of what the suppliers are looking for. And in most of the programs we won, some we will compete with the Tier 1 competitors, some with the smaller competitors.

We won the projects based on capability and the fit for the projects, not really because you are Tier 1 to Tier 2. And however you look at it, the capability we developed, and we compete quite well with the top tier suppliers in the marketplaces we focus on. That is probably evident with the customers for us two or three years most of them are very large OEMs. Those are -- contributed significantly to our growth.

And let me ask you, is your forecast, Gayla, of lower test a function of the cyclical semi cap equipment market? And perhaps are you see an increased activity of outsourcing there as suppliers will look to protect their profits in the cyclical downturn?

Yes, you see some activities and some moving around where people are trying to decide what they want to do going forward. And that always happens when things look like they're getting tougher. So that you're right, that is kind of sign one. And sign two is I think that inventory levels and the changes in the schedules really show you that it is not continuing to go up like it was.

Scott Robertson with the Stanford Group Company.

Nice quarter. I am curious on the six programs in the 50 to 80 million range is there -- is that roughly 10 to 12 million a piece on the six? Are they roughly equal size or is there one that is disproportionately large to the others?

I think they're pretty common sized on most of them. And several of them I believe are new relationships with existing customers, which this is actually what we have booked. And therefore they provide us opportunities that are much more sizable. So this is specifically relating to the book of business rather then a specific total opportunity.

Thomas Dinges with J.P. Morgan.

Very quickly, Cary, you had mentioned as you guys are expanding the facilities and adding new programs and so forth, the headcount was up. Can you give us a sense of what the headcount is now relative to what it was at the beginning of the year? I think you were about 6,300 as you exited the year last year, which was down a little bit. Are you above that level now, and exactly where you guys?

Definitely above that. And I don't believe we have the precise number at this point in time. The cost of you adding additional capacity (indiscernible) headcount has definitely increased.

And then finally maybe I missed it, can you just refresh me? Of the seven new programs you gave out that one was a computer program. Can you run through of the other six where they map out in terms of the segments? And then I have a follow-up on that as well?

Okay. Two were in medical, two were in industrial control, and one of the others was in telecom, and one in computers.

And then as you talked about the program there in the computing industry, can you kind of walk us through how you normally would expect programs like this to ramps, say, over the next 12 months? And do you get sort of a very modest MPI revenue flow over the next say two or three quarters. And then do we get sort of that full run rate at the end of the year, or do you expect it to come through more than you get kind of a split between Q3, Q4 up next year kind of a ramp?

Yes, it will be the second half of next year before you see any ramp in -- or anything really in terms of revenue going on probably it on a program like this. So you will be investing, and there will be a lot of work going on, a lot of cost associated with ramping, and then the revenue generation won't come until the second half of next year.

And then just very quickly, one last comment. I wanted to use clarify your comments about cash flow. On the free cash line would you guys expect to be free cash positive for this full year, fiscal year '04? That would imply that you get some fairly strong cash flow this next quarter, or do you think you'll probably consume a little cash this year?

It is going to be tough going. As I said earlier, we are going to drive our teams very hard to work on our receivables and inventory. And at the same time I can almost very confidently say each of our customers is going to do the same thing to hold onto their cash. So it is going to be a battle of the cash flow statements to see if we can continue to improve on that.

But as you can see, it is going to take some strong work on our part to be cash flow positive. And our teams know that that is our goal and objective. But on our September year-to-date we have now 44 million that we have used overall. And we're going to have to work hard to get that to a positive standpoint.

Okay, thank you.

We will take one more question. I think we're right on the wire here.

Our last question comes from Jim Savage with Wells Fargo Securities.

I actually have a couple of short ones. One is while you have the highest operating margins in the sector, you also have the lowest SG&A. You have lower SG&A than any of your top tier peers. Is there something that you're doing in terms of how you are reporting that would lead to that lower SG&A compared to what the peers are doing?

It could very well be a classification issue, although I don't know the industry has done any comparison and contrasting. It is not like we y share information with one another so that we really know that. That would be a potential impact of what it is. I think you see operating margins being more comparable.

And the other thing is no one has really addressed your balance sheet except in terms of the cash flow. But you still do have over $300 million in cash. And for a Company with a $2 billion annual run rate it seems that that is still excess cash. Is there anything that you are doing at this point to utilize the cash to improve your returns?

We're continuing to look at the opportunities to invest that cash in the operations, to improve on the return on it outside of our inventories and receivables. As you indicate, we are truly looking at M&A activity to see if there is a valid investment where we can improve on our invested capital return in that manner.

Would there be -- if there isn't anything that would be large enough to use a substantial portion of that cash, assuming that your profitability continues to be strong, at worst you're going to be relatively flat in terms of cash flow from operations. Would you consider a buy back of stock?

At this point -- again at this point in time we're looking -- as always looking at a lot of activity in the M&A front. And the activity sizes are various. And you know us for a long time. We're very, very particular in what we're buying. And we are also very focused what we try to get. So from that standpoint of view, there could be significant size and we could get something done.

And we get -- afterward when we finish that particular area, we need to get it done, and we will take a look at whenever we need to do, from whether it will be -- a buy back will be an option. So the focus had to be, number one, getting our capacity up to speed to meet the continuous demand for the service. And number two, we are looking to fill some of the gaps we still feel we need for our global footprint. And then we totally addressed all the other issues.

I think from a returns stand point of view, I think we did a good job. We have a ROIC of 14 percent, almost an industry high. We will continue to do that. And we believe we see the market expansion and the additional capacity we need -- we need to be a little more diligent to decide what we need to do with the cash. And at the end of the day, if we decide to buy back stock will be a good option, we will do that.

I guess the other part of that is that you do have a working capital line, and I assume that if there were a reason to place any additional debt that your balance sheet certainly -- your balance sheet and your operations could certainly support that?

No question on that. But I just kind of want to give you a quick feedback. I just come back from a 3, 4 major customer meeting recently. (indiscernible) balance sheet strength is definitely is a very, very good marketing advantage for Benchmark. A lot of customers come to Benchmark with major programs, it's because of our financial strength. They believe that we have the resources and technology and the expertise to continue expanding.

And you look at the size of the programs we're winning the strong balance sheet is a credit. A lot of the customers they are looking for a long-term relationship, and a strong balance sheet is definitely a plus for them.

Right. Obviously a program that is 10 percent of your current revenue run rate it is a major program.

Sure.

Thank you all. We appreciate you all joining us today. And we will be in the office if there is follow-up or clarification. Thank you again.