Benchmark Electronics Inc (BHE) 2004 Q4 法說會逐字稿

[Operator Instructions]. I would now like to turn the call over to Gayla Delly. Thank you ma'am, you may now begin.

Good morning, welcome to the Benchmark Electronics fourth quarter 2004 conference call. I would like to begin with introducing our team present today. I am Gayla Delly, the CFO of Benchmark Electronics and with me Cary Fu, our President and CEO. Also we have Barbara Swanson (ph), our Director of Treasury Services presenting this morning.

On our call, I want to highlight some points from our first fourth quarter results. Once again, the Benchmark team delivered solid financial results in a challenging environment. We had record revenues for the Q4 of 524 million and achieved $2 billion in revenue for the year.

We noted in our guidance last quarter that we were ramping a number of new programs. These programs remain in various stages with some that did ramp volume in Q4 and more will come in 2005. We are pleased with our 8% year-over-year growth in revenues for the quarters our 9% growth in revenue for the year.

This has been a key while ramping new programs. Several new programs are still in early stages and will continue to ramp to volume. Our Q4 revenue from our top customer, who has 31% and this, was on record revenues of $524 million. As we noted the previous call, the increase in revenue from our top customer in Q4 as compared to Q3 was expected due to their seasonality.

During the fourth quarter of 2004, we saw an improvement in our working capital metrics. Inventory turns were 7.5 times in Q4, which compared to 6.4 times in Q3. Our cash cycle days improved to 43 days in Q4, which compares to 50 days in Q3. This improvement was the result of our ramping to volume production in some of the new programs that have been in process over the last several quarters and our continued focus on working capital.

After I read our forward-looking statement, I will invite Cary to provide an overview of the quarter and Barbara will then present the financial information. We will then conclude with both Cary and I answering your questions in the Q&A session. Again, we will hold our conference call to one hour.

Now, for our forward-looking statements. During this 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 that those statements reflect our current expectations and actual events or results may differ materially.

We refer you to risk factors and cautionary language contained in the document we filed for the time to time with the Securities and Exchange Commission, specifically our recent filings on our Forms-10 K, 10 Q, 8 K, and S3, which identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update our projections or forward-looking statements. Cary?

Thank you for joining us today for review and discussion of our fourth quarter's 2004 results and update on our marketplace opportunity and challenges as we move into 2005.

Once again, we are proud to have the opportunity to announce a record quarter year for Benchmark in turnover, both revenue and earnings. I would like to highlight three points related to our 2004 performance. Number one, we reached a new milestone in our revenue, a new revenue over $2 billion. Number two; we reduced our top customer concentration from 44% of our 2003 revenue to 31% of our 2004 revenue. Number three; we have increased our shipment to customers other than our top customer by 34% or $355 million in 2004.

We achieved this accomplishment in the midst of ramping significant new programs, making customer product sensations, (inaudible; highly accented language) to Asia, and the realigning of our resources. I like to take this opportunity to congratulate and thank our team for a job well done.

In the fourth quarter, particularly in December, we witnessed a continued (inaudible; highly accented language) in the market condition; however, we do see a strong top (inaudible; highly accented language) out-sourcing trend. As noted in the previous calls in 2004, we have been effective in market (inaudible; highly accented language). We saw from our program initiation of rams (ph). Costs associated with program startup up spent up is incurred.

We are and will continue to see some margin impact on this program due to the size and number of the problems involved. We do anticipate our operational margin to improve as we continue to ramp our new program in the coming quarters.

We see a continued demand for our service in Asia in engineering and design areas. We have been very forcefully (inaudible; highly accented language) heavily on both of these areas. At (inaudible; highly accented language) these quarters, we are expanding our manufacturing in Asia with a (inaudible; highly accented language) to accommodate customer demand for system integration service. This site is expected to be operational by the end of Q1 2005.

As we increase our revenue base in Asia, our overall business model remains consistent. However, we see that some programs may have a high-level of cost (inaudible; highly accented language); this will result in a high material content of the product and low labor cost. This type of product typically demonstrated a low level of GNA by the vendor (ph), approximately the same operation margins.

Our (inaudible; highly accented language) 2004 operating margins remain consistent drive into the upper end of 4%, 4.5% to 5%. In 2005, we intend to further expand our market share by accelerating our new product development efforts driving value from our expending side. Expanding our technical capacity and increase in our focus on customer satisfaction. Now, I will turn the conference back to Barbara for providing more details of our financial performance for the quarter. Barbara?

Thank you, Cary. As we reported this morning in our press release, we completed the fourth quarter of 2004 with record revenues of 524 million. This was in line with analysts' consistence for the quarter and in an upper end of the guidance provided during our last conference call when we estimated revenues in the range of 505 million to 530 million.

Our fourth quarter revenue was 8% higher than the fourth quarter revenue for the prior year and sequentially as of compared to our strong third quarter revenues by approximately 4%. For the year ended December 31, our revenues were $2 billion, compared $1.8 billion for 2003, a 9% increase.

Diluted earnings per share for the year increased to a $1.67 per share for 2004 compared to a $1.39 per share for 2003. Our diluted earnings per share were record $0.47 per share on a GAAP basis for the fourth quarter of 2004. For the same quarter in the prior year, our diluted earnings per share were $0.32.

Net income for the fourth quarter of 2004 was 20.2 million on a GAAP basis compared to net income for the fourth quarter of 2003 at 13.4 million on a GAAP basis, an increase of 51%. For the fourth quarter of 2004, our cash flows provided by operations were 55.6 million, which showed improvement from Q3. Cash flows provided by operations for the year were $32.2 million.

Our inventory level was 257 million, a decrease of 33 million from Q3 with inventory turns at 7.5 for the quarter compared to 6.4 in the previous quarter. This improvement was driven by the ramping to volume of some of the programs that have been in process over the last several quarters.

Gross margin for the fourth quarter was 7.6% of sales, which is consistent with the gross margin for Q3. Our gross margin continues to be impacted by MPI activity and schedule changes that continue at higher levels. These activities impact the operating efficiency and our production and negatively impact our gross margin. Additionally, the increase in our production levels in Asia with higher material content has a slight impact on our margin.

SG&A and whole dollars was 15.5 million, which represents 3% of revenues compared to 2.9% in the previous quarter. This increase was anticipated and mentioned in our last quarter call. We do continue to maintain strong cost controls, just as other publicly held companies have been affected, we have been negatively impacted by the additional cost to third parties related to the requirement of Sarbanes-Oxley. These costs exceeded 325,000 during Q4 alone.

Our operating margin for the quarter was 4.6%, a decrease from 4.8% in Q3. Our pre-tax margin was 4.7% in Q4, compared to 4.8% in Q3. Our ROIC was 14% for the fourth quarter.

Interest expense was 164,000 for the quarter, interest and other income was approximately 1.7 million, and other expenses, foreign currency related, were approximately 1.1 million. The tax rate for the quarter was 18.1% with our effective tax rate for the year of 24.6%. Overall taxes have been favorably impacted as we expand our Asian operations.

In addition, during the fourth quarter of 2004, our tax rate was reduced by approximately 2% on a full-year basis. This favorable result was primarily related to the dissolution of an inactive foreign owned subsidiary. Weighted average shares outstanding were 42.6 million.

Our cash balance as of December 31was 367 million, an increase of 55 (ph) million from the September 30th balance. Receivables were 251 million, a decrease in 9 million from the third quarter of 2004. This decrease was primarily due to a low amount of vacuum loaded (ph) customer sales during Q4 in addition to our team's focus on our working capital of metrics.

Our day sales outstanding was 43 days compared to 46 days last quarter. Inventory was 257 million, a decrease when compared to 290 million last quarter. Inventory charges were 7.5 times, compared to 6.4 times in Q3. In prior quarters, our inventory levels were built at and support of new program ramps and product introductions that we had been working on over the last several quarters.

During Q4, some of these programs were ramped to volume, thus decreasing the inventory level. Also, as we mentioned, at the lead times in the component markets allowed us to improve on our inventory cycle days. Cash cycle days were 43 days, an improvement from 50 days in Q3. Again, this improvement was due to some of our new programs that ramped to the volume during the quarter and thus reducing our inventory levels. Current assets were approximately 898 million and the current ratio improved slightly to 2.7 to 1 in (ph) Q4 up from 2.5 to 1 (ph) and Q3.

Capital expenditures for the fourth quarter were 7.1 million and depreciation expense was approximately 6.5 million. As we had indicated and anticipated, our capital expenditures have been increasing in support of our increased opportunities in these programs. Our revolving credit facility of 159 million matured on December 31st. On January 20, 2005, we entered into a new three-year $100 million credit agreement with a group of banks. This can be increased up to 200 million. We have no debt outstanding at this time.

Cash flows provided by operations were approximately 55.6 million for the fourth quarter of 2004. Cash flows for the year were 32.2 million. Our revenue breakdown by industry for this quarter approximates as follows: Medical 10%, Telecom 16%, Computers 58%, Industrial Controls 11%, Testing Instrumentation 5%.

As we anticipated and mentioned in our previous call, our revenue from our top customer was up to 31% this quarter as compared with 27% last quarter. We did expect Q3 to be the low point for 2004 for this customer due to both new programs and product transitions in addition to general fourth quarter seasonality.

We anticipate the range of revenue for this customer to be in the low 30% during 2005. Testing Instrumentation was weaker in Q4 than in the prior quarter as expected.

Once again, this quarter was a significant quarter for Benchmark in terms of the number of new programs introduced to our revenue stream. Our teams continue to effectively support and manage the new programs from sales through to production. The excellence in execution has once again been demonstrated through solid results in challenging conditions. Now, I will now turn it over to Gayla to discuss our new program wins and guidance for next quarter.

Thank you Barbara. During the fourth quarter, we have up 60(ph) programs with $55 to $85 million in-annualized revenue. We continue to see a mix represented in our new program wins, with new programs in industrial controls, medical, telecom, and computers. Some of the new programs and products do not meet customer expectations from time to time.

Many of the new programs announced this year are still in the early stages as we mentioned and our transitioning to the revenue stream, and we are excited by the strength of the sales pipeline and abilities of our team to manage the program ramp as they go through their early stages.

The pipeline "out-sourcing activities" does remain strong and highly competitive and we do see some fairly aggressive marketing effort by some competitors. The components markets have continued to improve with reduce lead-time (ph) and several commodities are experiencing many favorable pricing environment.

We are still seeing healthy market conditions, however, and long-term outlook still show some very positive signs. Mixed indicators in our industry in the technology industry overall do continue. As the market has yet to provide a consistent track record, we will provide forward guidance for one quarter only and we will provide estimated overall growth for 2005.

Our guidance is based on the information available to us at this time and as always is subject to market and our customer's changes. We currently expect revenues for the first quarter of 2005 to be in the range of 510 to 530 million, which is based on indications from our customers. The corresponding GAAP earnings per share is in the range of $0.40 to $0.44.

For the fiscal year 2005, we currently expect revenue and earnings to be in the range of 10% to 15% growth. Our market overview generally indicates that there are stronger opportunities for growth and high in computers and medical and moderate growth in industrial controls and telecom. Weakness has been seen in testing instrumentation.

We continue to target our operating margins to trend gradually upward from 4.6% to our target of 5% in 2005 as we ramp to volume our new programs and gain efficiency and realign our call structure. At this time, I would like to open up for our Q&A session. During this questions we would like ask you to limit yourself to one question and one follow-up question so that we can allow enough time for everyone's questions. Wendy ?

[Operator Instructions]. Our first question comes from Brian White. You may ask your question and please state your company name.

Yes, Kaufman Brothers. Good morning. Could you talk a little bit about the outlook, I think at the midpoint, you are looking for almost flat sales yet, it looks like EPS could drop off a little bit. Could you talk about maybe why margins might be under pressure in the March quarter?

In the first quarter with the guidance we have given, once again we have a pretty good range of revenue opportunities and this is based on both the new programs that we are ramping. As we have seen over the past few quarters, do have an impact overall. As well, IT spending typically is not as strong for any of the IT customers in Q1 as is Q4.

So I think you will see that revenue mix has a good level of new program introductions, weaker IT spending and probably some continued weakness in testing instrumentation. Overall, that's our limited expectation at this point in time.

Okay, just a follow-up on the computer program that you announced last quarter, I think you targeted it at $200 million in annual revenue. When do you think that will start to ramp? Is that going to sometime in the September quarter, December quarter, or when are we going start to see that?

Consistent with the information that we provided last conference call, I don't believe anything has changed, that will be in the last half of the year. I don't specifically have a cut in date as to whether it is third or fourth quarter.

Okay. Thank you very much.

Our next question comes from Jim Savage (ph). You may ask your question and please state your company name.

I am at Wells Fargo Securities. In terms of your expectations for tax rate, tax rates certainly had an impact this quarter, where do you expect it to be for all of 2005?

At this point in time Jim, our estimated product tax rate for 2005 is approximately 27%.

27%? And the operating income in the December quarter year-over-year was actually down a little bit. Was there a onetime issue that led you to have a higher operating margin last December as relating to this December?

If you look at operating income in our press release, we do have a disclosure for special items in the fourth quarter, so that we had 2.8 million and a restructuring charge in the fourth quarter I believe.

But if you adjusted that, without that, you ended up with a little bit higher operating profits last year than this year.

Right. There is approximately $800,000 difference related to that and as we have said, in this quarter alone, we had 325,000 plus stock cost. I don't think I have one specific answer that answers, there is probably several items, such as cost overall, increase costs, operations, as well as the new program ramps, and the margin pressure that those have had as we have ramped as Cary indicated over $355 million of new programs are in this year.

Right. Just one another thing, it was nice to see positive cash flow from operations in the quarter. Do you think that there is an opportunity to continue to improve your working capital? Where do you think your CapEx is going to be in terms of being able to drive free cash flow for next year?

Our cycle day (ph) target is to have cash stock advantage of approximately 45 days, so I believe we're at a pretty high level of efficiency currently at 43 days, so 45 days is probably a normalized turn.

On the CapEx, I see if we continue to grow and ramp the new programs this quarter, you can see that we had significant growth as compared to the early part of the year with $7 million. I estimate that would probably run at about a $10 million clip during an average quarter next year, I don't know that it will be straight lined, but on average, I would expect it to be about $10 million.

The efficiency working capital has a lot to do with the marketplace and as we've said, the component markets - when the component markets are better, we are able to achieve more efficiency in our cash cycle days, but I don't know that that's necessarily a really positive sign because that means that the overall demand and growth is not as strong as we would like to see otherwise.

Okay, I assume your depreciation is going to go up next year because of the increase CapEx.

Yes, we would expect with $17 million as we depreciate that, that was our CapEx for this year and that will increment our depreciation expense. It will also be offset of course by any assets that are becoming fully depreciated.

Okay thank you.

Frank Reed, you may ask your question and please state your company name.

Hi, it's Robert W. Baird & Co. Can you guys just comment on where things are at (inaudible ) from a product transition? Are there any concerns that you have in terms of products that they may be ramping down in new programs as they ramp up, they ramp up at a different pace than those programs are ramping down at this point?

No, We will consistently defer to our customers to talk to their product transitions and to speak specifically to their products. I think that is out of school for us to discuss that.

On the telecom side, it looks like it was actually a little bit better than you guys had expected. Can you talk about what came through that was a little bit different and you still seem to be throwing a little bit of cold water on that? What do you see in there?

Telecom is clearly not the growth engine that it was. We have been very successful in growing our telecom revenues as we have added some customers to our customer base, but as a whole, the industry is not seeing growth from an existing base. It is simply coming as we add customers.

But it was different than what you guys expected and I am taking from your comments that that was because you had added more customers than you expected.

That is correct. Yes.

Okay, thank you.

Thank you. Carter Shelby (ph), you may ask your question and please state your company name.

Hi, thanks. I'm from Deutsche Banc. Just looking at the fourth quarter here, sales grew by 8% sequentially. I was wondering if you could talk a little bit about how much of that was coming from new program ramps versus organic business?

No, I don't have a specific breakup for the quarter that defines what new programs are, but specifically as you can see from the likes of the change in mix, such as the telecom growth, a good bit of the growth does come from the new programs that we have ramped throughout the year.

Okay, then also following-up with Jim's question there, if you look at the 8% sequential growth, operating income actually decreased 2% year-over-year, down roughly 50 basis points on operating margin basis. I was wondering if we could get a lot more granularity in regards to I mean - what is the profitability level of all these new programs coming on line? How they compare versus existing business? Is there a dramatic difference between what you guys are ramping now versus what you ramped say two to three years ago in regards to overall profitability?

We are adding $355,000 million of new programs in the year, that's a significant level. I have believe the calculation is bout 34% of growth, then when you are getting 34% of your new programs shipped during the year, not just booked, but shipped, that has a significant level of inefficiencies associated with it. I would like to say that we can bring in a new program and enjoy high level of efficiency and profitability from the first day we are you know, provided the documentation, but the reality is it takes a period of time to actually enjoy the benefits and the profitability as you ramp the program.

So to specifically quantify the impact of that, I don't know that anyone in our industry has come up with a methodology to do that, but I think you can see from all of us in the industry, that, depending upon the level of the new programs that you introduce, it does have a drag as a negative impact on your margin. We probably have, from the best I can tell, have had a higher level of new program introductions being brought into the revenue stream in such a short period of time.

Fair enough. Is it safe to assume then that you are expecting these new programs once fully ramped to be at similar operating margin levels despite the consistent pricing pressure in the industry?

Again, we have not changed our business model, our operating margin target. We are still targeting for 5% level. Yes, we meet the challenges on an ongoing basis and we realign our cost structure and managed to drive it to the same level efficiency that we've always been able to get our teams to produce.

Okay, Thank you.

Stephen Fox, you may ask a question and please state your company name.

Actually this is a (inaudible) Donna for Stephen Fox. I was just wondering if you could run down the list of her top 10 customers for the full year and their percentage of sales that they comprised?

No, actually we disclosed in accordance with the SEC rules that our customers that provide over 10% of revenues and our top two customers are Sun and EMC and our Q4 revenues from Sun were approximately 31% and EMC was approximately14%.

Okay, and then just as a follow-up, any thoughts as to the cash balance at year-end? What are your plans for that?

We continue to look at M&A activities. As we all know and see in the news that a single transaction can require a good sum of cash that allows us an added level of flexibility in our negotiations. As you look at opportunities, if we can act very quickly and have cash available.

Along those same lines, we continue to monitor and look at the activities to determine if there are any steps that should be taken and I note that we are constantly asked about the appropriateness of dividends, the appropriateness of stock buyback programs, and we and our board will continue to look at how that could or should be used. I will say that a dividend typically in our industry have not been framed as a good tool because we continue to be in a strong growth industry.

Okay, thank you.

Jesse Pichel, you may ask your question and please state your company name.

I'm Jesse Pichel from Piper Jeffrey. I think you mentioned that the industrial sector should be weak through 2005 and I was wondering why that is?

That is in the (inaudible; highly accented language) invitation, not (inaudible; highly accented language).

Industrial control typically does not grow as strong, so it is not; I think I was referring to it in terms of growth. So I see testing instrumentation has actually gone weak, industrial controls just doesn't have the same level of growth has some of the other industries.

Could you just update us on the status of the 650 million or of new programs that you have won over the last six quarters? I think you mentioned that 355 will ramp in2005, does that mean the rest kind of fell out of bed there or it is pushed to 2006?

Well Jesse. The new programs we have announced, some will take six to nine months to ramp to production, some take two years. As Gayla discussed in the conference call, we have to ramp a significant number of programs into production with about 300 some bucks in 2004. We anticipate the rest will come in 2005. Some will be in the first part of the year; some will be in the second part of the year. We're excited about the new programs we have on hand and if you look at the track record of Benchmark Electronics, we will continue to expand our top line and we will continue to able to attract a lot of new customers. We are very excited about the opportunities we have in 2005.

Fair enough. Thank you.

Patrick Par (ph), you may ask your question and please state your company name.

Hi, with UBS. I'm curious about how your ramp of some of your facilities in Asia are going and to comment as to how comfortable you are with your current manufacturing equipment.

Well, there's a lot of discussion today about whether Q4 margins and they are lower than 2003, but you have to look at what we've done for the company. For the last two to three years, we have a significant increased capacity in overseas. We have introduced a lot of customers up into our revenue stream. We also increased engineering capabilities significantly during 2004. Those all have impact on the operation margin we have.

To point out, the facilities we have started in the Far East, actually three, we had a (inaudible; highly accented language) facility with this, so it will be a backup facility for our PCB production for existing facility (inaudible; highly accented language) production and we are approaching break-even point very quickly.

The second site we announced during Q4 was a new system integration facility to accommodate a demand for our customers. That particular facility, we anticipate will be in production or in operation either by the end of the first quarter or early second quarter.

In addition to the two facilities, we have also finish an extension project we are having channel facility. We look our costs and some of the people will call those are non-recurring charges or whatever it is, for us it is basically, we are through all the costs into our operational margin line and that is the status of the expansion project we have.

Okay, would you view future growth to go more into the Asian facilities or do you expect to add further capacity in North American operations?

It's probably a balancing load between the Asian and the North American facility. We do see a more balanced load shifting some of the higher volume products to the Asian market and Asian sites. Saying that, are U.S. sites are very busy, and you look at, we are doing quite well in the U.S. operations.

Okay, thank you.

Michael Walker, you may ask your question and please state your company name.

It is (inaudible) thanks. Just a question again on margins, you talked about how the business you're doing in Asia is impacting the material content, which has a depressive effect on gross margin. You have got Opex already at 2.9 to 3% if you back up Sarbanes-Oxley taxes are down to 2.9% of sales, which is pretty well and you continue to ramp your programs, which also hurts gross margins. So, I am still trying to figure out exactly how you get from 4.6 today to5.0% in the operating margin line without a lot of opportunities showing up near term on either the Opex or the growth margin lines.

Growth margin line as we know is a (inaudible; highly accented language). Again, we have been talked about focus on our (inaudible; highly accented language) because as we R&D and engineering side business, we tentatively have expenses with cost of fiber, SG&A and all the manufacturing cost. We will be very focused on what it takes to get there. The overall growth margin line impacted by $0.03, loading factors, the efficiency, and the component pricing and I think the component pricing definitely, you see a positive trend, (inaudible; highly accented language) as we venture those new programs, which would be the first half of the years, give more efficiency, should give a more favorable impact on me operational line.

Typically, in the first couple quarters of the new program, it is very tough to make money. That's a reality. We are good, but we are not that good. You have to learn, you have to go through a lost of the startup cost, traveling, transfer cost, engineering cost, startup costs, those our product costs that we had incurred in the early stage of the process. Those all definitely impact your operating income. Between 4.5 to 5% is probably the top performance in industry. I don't feel bad about it. We are moving to 4.5 (ph), maybe take a little time to get there, but we will get there.

Okay, so with SG&A running at say 2.9% if you back up Sarbanes-Oxley impact, do expect that to get better or does all the up side come under gross margins?

I think the SG&A line will be pretty consistent and we will run as low as we can. If we look at the industry overall SG&A, we are probably one of the lowest one in the industry today. You've got to keep your infrastructure in place; you got to invest for the future. We are long-term players. We are look for are long-term benefit of the company. I never sacrifice these long-term golden opportunities for a short-term benefit of company. An example is to see the total engineering expense head count we increased this year is almost 40%. You know and I know it takes a lot (inaudible; highly accented language) those sites to be efficient and make money, but in the longer term there is something we've got to have. We investment for the future and I think we are well positioned with our new programs ramping in to the volume, we should be having more opportunities to improve our operational margin line.

I think the other way, Michael, probably to look at it that would explain it is. You know once again looking at the capacity utilization, although we'd are running highly efficiently for our industry right now, it's still not optimal utilization. We are about a 60% capacity utilization rate. That's still sub-optimal. I think that the opportunities that we have are to ramp to volume, have a richer mix of production that is actually in a ramped to volume stage and to get greater throughput on our overall capacity utilization. Those two facts in and of them lend to a better operating margin to delineate whether it really comes through on SG&A or gross margin may be more difficult. I don't think we could get much more efficient on our utilization of SG&A dollars, but having said that if we continue to increase our revenue line in our throughput as a percentage, yes, they will decline.

Okay, if I could ask one more, just on the testing and instrumentation side of things, that was cut in half it looks like after two quarters of really strong growth. That had a pretty material impact to your revenue line. Just wanted to give any more color there, on the semi-cap (inaudible) equipment side?

I believe that really is probably a timing Michael. I think we had seen that before. We have cut off with each quarter and whether it's this week, next week in medical, in testing instrumentation, we seem to be affected more by actual activities rather than calendar is if you will. So when some of the production and demands are centric to either customers or a group of customers that our customers are working with as the product sell, whatever time frame that happens in, there seems to be bubble, a demand. It doesn't add inflow necessarily naturally.

All right, thanks a lot.

Amit Durinani (ph), you may ask your question and please state your company name.

Amit Durinani, RBC Capital Markets. Thanks guys. Could you talk a bit about, you know talked about expanding your engineering and design capabilities in Asia, maybe you could give us some color on the head count of engineers you have in Asia and where it was last quarter, this quarter, where do yo see it going forward?

We basically have a two engineering sites in the state, one is in Venonas (ph), one is Huntsville site. Throughout the year 2004, we started expanding our engineering resources in Asia, very mainly in Singapore and Thailand. Those are the staff we are adding throughout the years and it is both of sides of (inaudible; highly accented language) fairly small upon engineering talents standpoint of view. The most engineering head count we had is in the states side and I don't really have a particular number to give, but the total increase in head count for the engineering side is about 40%.

All right. Second questions, you guys characterized the market as being fairly choppy, given that scenario, are you seeing the slow down, a sort of you know product ramp essentially? Typically it's characterized as being six to nine months for ramp to volume. Are you seeing you know changes and schedule, maybe extending that out a little bit from your end customers?

I really don't think the product introduction is being affected by the market conditions. What I called choppy, we see a lot of mix changes throughout the quarters. That maybe one of the reason that impacted the efficiency of the company. That means at the beginning of the quarter, you are loading a certain product and later quarter, you ship a completely different thing. That is the mix change demand by the customer. Due to the additional efficiency to the operation. We see the test instrumentation, definitely is very soft this point of time, but I still believe that is kind of short term for this point in time and I don't expect another two years in downturn industry, but the information we've got it should be nine months down instead of two- year downtime.

So, we are just looking at our current customer base, looking at new products introduction, looking at our current product requirements. It is definitely a continued push to take the market to the new products to the market. However, the mix change and the demand change are from the end customer, definitely seeing a lot of variations throughout the quarter. That's what we call choppiness.

Just one last question, you guys have a ROIC well over your cost of capital at this point and certainly one of the EMS companies are able to sustain that. Could you talk maybe a little bit about where do you see that going in to 2005? Do you still see more room for improvement in ROIC? Are these are the levels we expect them to remain?

I think that 14% ROIC return is not a bad number. I think there are days and we will continue to stay with those numbers and definitely that has a lot to do with how you expect to deliver your bottom lines and how you increase your top lines. Everything in the whole operation has to be taken care of. I think we continue to really focus on the revenue expansion and watch the cost controls and with that, we can deliver consistent ROIC numbers.

Thanks a lot guys.

Thank you. Chris Lippincott, you may ask your question and please state your company name.

This is Chris Thomas actually in for Chris Lippincott for KeyBanc Capital Markets. I was wondering you mentioned the tax rate at about 18%, it is a little lower than where it has been in the past few quarters. And then you said around 27% for next year. What were reasons behind that 18%, why was it so much lower than previous quarters?

As we said and identified in our press release, we have a foreign-owned subsidiaries, which we dissolved and without getting into the detail complexity of the tax law, basically we were able to benefit through the dissolution of an inactive foreign subsidiary and that reduced our effect of tax rate.

All right, thank you.

Tom Dinges, you may ask a question and please state your company name.

JP Morgan. Gayla, real quickly, can you run through with a little bit greater detail the new programs in terms of how many and various end market, and of those, of the 55 to 85, maybe where the majority of that you think the revenue will come from. What are the bigger programs buying market and then I have a quick followup?

We really at a good portion if you will, we have testing instrumention, medical, computer, telecom, and industrial controls represent it. So, no one wanted to be left out this quarter. The larger of the programs are probably in medical and testing instrumentation as they currently looks based on the information provided by our customers at this point, referring back to the earlier question as to the ramps of new programs, no, we're not seeing any industry fall by the wayside on either their out-sourcing agenda or on their ramping new programs to volume. There seems to be a lot of emphasis on R&D and a lot of emphasis on time to market. There's probably a level of activity that has continued to grow throughout this year.

Okay and then quickly, just a clarification, you had talked about CapEx for this '05 being somewhere in the neighborhood of an average rate of 10 million a quarter, is that correct?

That's correct.

That's more than a doubling of what you did last year. Obviously you're at a depressed level for the first couple of quarters to year. Can you talk about when that gets fully operational? What the expense of total capacity is going to be in terms of just what your dollars, if you're going to be at 68% utilization rate right now, you know doubling of CapEx, I am assuming SNT equipment and test equipment and so forth because of a lot of the footprint in terms of brick and mortar has been put in place, but just correct me if I'm wrong in thinking about that and what is your total dollar capacity going to increase from where you guys are running right now?

Overall I would say that a good bit of our CapEx will be kind of a refreshed, renewed, incremental specific capability to support customer programs rather than specific brick and mortar. I don't know that it necessarily affects the overall capacity utilization. It's more of efficiency and opportunities to support customers.

Okay and one last one if I may, just back on the operating expense question, that has been run through a little bit, the 300,000 or so that you had for Sarbanes-Oxley, when does that roll off or how much of that rolls off (inaudible) over the first couple of quarters.

We are hoping and praying-- I think the effects of Sarbanes-Oxley will continue how significant though costs are, probably ill defined. Obviously, the first year should be substantially and significantly higher than any follow on year. Hopefully our auditors are listening, right, but we do see that the cost will go down. I don't have a qualification of that yet. The first year is a very high cost. One of the other things that I think we should point out that our operating costs because I think it is a differentiate for Benchmark and no one has pointed out specifically, we continue to report our numbers on a GAAP basis and as Cary had indicated earlier, we continue to support an increased level of production in Asia and as we've done that, we've realigned our footprint, we have continue to add head count in the Asian locations. As we've done that, we've reported our earnings on a GAAP basis and we haven't had a level of write-offs or costs that we have carved out in order to refocus attention on specific numbers. We continue to report GAAP numbers. As we indicate the opportunities for improvement in margins, one of the other things that I think it's important to note is that as we get to have more by footprint realigned, we will see continued improvement in our efficiencies simply based on that.

Okay, thank you.

[Operator Instructions]. Our next question comes from Tom Leach. You may ask your question and please state your company name. Mr. Leach, you may ask your question. We will go on to our next question. We have a follow-up question from Jim Savage.

Can you just give us some idea as to where your footprint is now in terms of the percentages whether in low-cost versus higher cost regions and where you think it will be a year from now?

Jim, based on my recollection I think we have a 32 or 33% in low-cost area right now. We anticipate probably to go to the 40% in this year and early part of next year. It is still a significant demand from a new product and engineering efforts and pre-production as well as the high complex products will stay in our higher cost area. We will see continue definitely increase in the low cost footprint in the next two years.

Okay, thank you. One other thing, EMC declined modestly sequentially, I believe in the fourth quarter. Is there an expectation of it being relatively stable for next year? Do still expect -- you talk about (inaudible; highly accented language) obviously increasing in the back part of the year; will EMC remain relatively stable as a part of sales?

I think when we look on a year- over-year, last Q4, we also saw about the same percentage of revenue contribution from EMC, so as it ebbs closer over time, I think, I would say that in Q4, they do an excellent job of managing inventory levels and because of the (inaudible; highly accented language) on the production, they really have their inventory a place to support Q4 in advance of the actual Q4 quarter for production from us.

0In terms of the next year, do you anticipate that it will be relatively stable as a percent of sales?

I do believe so -- we don't talk about any particular customers, EMC has been a great customer for us. We increased our revenue to that particular account (inaudible; highly accented language) for the years. So it is anticipated that our relationship to be strong and continue to move upwards.

Thank you.

Carter Shelby, you may ask your question and please state your company name.

My follow-up question was answered.

Thank you. Jerome Randy (ph), you may ask your question and please state your company name.

Hi, Nober (ph) Capital. On the 350 million of annual programs for next year, I just want to clarify if the $200 billion customer you won in the third quarter is going to be in that number, if so, how much, I am trying to figure out a little bit of where that falls, it's been speculated in the analyst community that that is Sun, but if they're going to maintain the same concentration in '05 on a low 30's rate, that maybe is not true. Can you give some color on that?

I think there were several questions. The ramp of program that was referred to an approximately $200 million, since it falls in the latter half of the year, the impact of the ramp was mathematically be approximately 100 million or less. The 350 million that we referred to where $355 million of revenue throughput this year as a result of new programs. The 600 plus million referred to was a new programs booked over the year, so there's not necessarily a direct correlation, but if I try to directly a correlate those it would be 630 to 640 million minus the 350 million would be what's left to come from the new product introductions.

I don't know that those are measured over the same period of time and have a direct correlation. I haven't gone back to say okay in what period did we win the $355 million program that we now have ramped and put into revenue production, so maybe that is a good point to clarify. I don't know that those are lined up together, but the $200 million program would be expected to have less than $100 million impact since it begins in the second half of the year and specifically I don't know any program to my knowledge that hits the gate at a full pace.

Got it. Thanks. Second question. You brought up the cash point in contemplating dividends or buybacks. I just wanted to follow on that point, particular (inaudible) right now with $9 of cash on the balance sheet. Your comment regarding dividends not always being thought of as a good thing in your industry, I think it's germane because another thing speculated by some of the analysts following is that a buyback might make more sense. I try to figure out if that is true, I think it's not, and what is your perspective on that is, particularly when you consider that if were to do a special dividend, you're not required to do a quarterly dividend thereafter.

It's tax equivalent these days, it doesn't tie management resources in terms of deciding when to buy stocks and when not and what prices and all that and shareholders are certainly gets done on a certain date where as a lot of times companies say they are going to do a buy back until they wait for them to avoid the topic as whether they follow through or not. So can you explain a little bit of what that statement means and how you might look at one versus the other?

Hopefully so. Basically my reaction is it is a discussion point of topic that we are undertaking with our board and as we have had no press releases, I obvious have nothing to share specifically with the public. As we do have something that has been discussed and agreed and that is appropriate and proper measures for the company to take, we will make the announcement. I know that there's a lot of different thought processes going on surrounding us and several others in the industry based on our healthy balance sheet, but as we have seen, it really is useful and beneficial for us to maintain a healthy balance sheet, so that we can grow and ramp these programs.

As we saw just last quarter, there will quite a few on the call last quarter that took exception to the fact we have beefed up our inventories and we had back end loading on receivables and what a negative impact that had on our working capital. And one felt (inaudible) in this quarter we were able to generate working capital. I don't know that I have a specific number that I say is the correct number to have available to us to be supportive of our customers as we ramp programs, but we add that on top of the M&A activities that we are looking at, I think we do need to make sure that we maintain available levels of cash that is appropriate to manage smartly in our industry. So I will defer to our discussions with our board to determine what the appropriate to disclose and then we will go from there.

Thanks for that. Just one last, housekeeping thing, where is the interest income for this quarter, I am speculating it is probably 1.6 million or so and your other, you have a number quite a bit below that, so what is the offset or where should I be looking?

We put the others, which are other expenses typically foreign currency, exchange losses, and interest income is netted against each other.

Okay, got it. I actually wanted I (inaudible) not congratulating you on starting to initiate some kind since a year-end growth guidance, which I think is very appreciated from all of us. Thanks for that.

Okay.

Thank you all. We appreciate you for joining us today. Will be available for calls in our office today and once again, thank you for joining us on our call this morning.

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect at this time.