Benchmark Electronics Inc (BHE) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Benchmark Electronics third-quarter earnings release. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. At this time I'd like to turn the conference ever to the Chief Financial Officer, Gayla Delly. Please go ahead.

Good morning, everyone. Welcome to the Benchmark Electronics third-quarter 2005 conference call. I would like to introduce our team present today. I am Gayla Delly, CFO of Benchmark Electronics; with me is Cary Fu, our President and CEO, and Barbara Sorenson, our Vice President Finance.

Before we begin our call we do want to recognize and congratulate the Houston Astros for their win last night, the first pennant in Houston, and we're looking forward to the world series. But that's not the reason I'm horse today; please bear with me as I'm fighting a cold.

First I do want to begin with reading our forward-looking statement. During this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations and that actual events or 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 forms 10-K, 10-Q and 8-Ks 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 those projections or forward-looking statements in the future.

Now I will begin highlighting some points from our third-quarter 2005 results. The Benchmark team has delivered yet another solid quarter with revenues of 561 million for Q3, an 11.2% year-over-year improvement. As anticipated both operating and working capital metrics improved during the quarter as we roll out the efficiencies with new program ramps and product transitions moving forward.

We are very proud of our performance in Q3. On a year-to-date basis revenues or 1.6 billion for the nine months ended September 30, 2005. This is a 10.5% increase over the same period in 2004. This increase met our expectations and our plans of achieving 10% organic growth in revenue and earnings on a year-over-year basis for 2005. With the industry experiencing a flattish year overall, it is a tribute to our team's ability to develop and deliver the stable growth and profitability that we have. We have successfully grown and diversified our revenues and we're well-positioned to continue to benefit from outsourcing trends.

Net income increased 12.6% in Q3 2005 from the same quarter in the prior year, an 8.6% increase from Q2 2005. Again, our results in 2005 have been achieved while ramping many new programs. Some new programs launched in Q3 and yet other additional programs are scheduled to launch in coming months. The diluted earnings per share for Q3 was $0.47 compared to $0.44 for the second quarter of 2005, and this is a 7% increase.

Diluted earnings per share for the nine months ended September 30, 2005 was $1.31 compared to $1.20 for the same period in 2004, a 9% increase, and each of these numbers is on a GAAP basis. As we noted in our guidance last quarter, we excited revenues in the range of 555 to 580 million based on indications from our customers. Our actual results were within this guidance with improved operating margins compared to the previous quarter.

As we noted in our press release, this accomplishment was achieved in spite of the disruption of hurricane Rita during the last ten days of our quarter. We lost six production days in our Texas facility which did impact both our revenue and inventory for the quarter. The exact dollar impact of this is not quantified as many production priorities identified to support our customers to meet specific needs were to undertake in following this event. But clearly several million dollars in shipments were affected in total product shipments to customers.

Our primary concern was focused on the safety of our employees and the support of our customers as our teams return to work. Our teams did a tremendous job of meeting customers' needs upon returning to the Texas area as soon as possible to reopen after the mandatory evacuations in and around the Gulf Coast region. We again thank our global teams for their support and efforts during this time.

In Q3 our operating margin was 4.4% compared to 4.1% in Q2. Our Q3 operating margin result is moving toward our targeted operating margin range of 4.5 to 5%. Our near-term goal for operating margins is 4.5% which includes consideration of the impacts of current market pricing trends, new program ramps and product transitions. Our longer-term objective remains to gain further efficiencies to achieve our targeted 5% operating margins.

We are pleased with the increased levels of activity that we continue to see across all industry sectors. And again, we continue to focus on gaining efficiencies as we have many new projects starting up and new programs ramping efficiencies that we began to see to impact and improve our operating metrics in Q3. Q3 revenue from our top customer was approximately 26% on revenues of 561 million. This is a slight decrease from Q2 2005. We currently expect revenue from our top customers to remain in the high 20% range for the full year and for the fourth quarter 2005.

During the third quarter our solid booking activities continued as we booked six new programs with 55 to 80 million in annual revenues. We are clearly continuing to see a number of good program opportunities from new and existing customers. And we do continue to see a good mix represented in our program wins with the new programs this quarter in industrial control, medical, and test and instrumentation in telecom.

Flotation and outsourcing activities remain strong for us as the positive outsourcing trend from OEMs continue. The highly competitive nature of our industry is still evidenced by some aggressive marketing efforts by some of our competitors. Our revenue and earnings growth for 2005, consistent with the guidance we provided in the early part of this year, remains unchanged due to the fact that our planned growth from 2005 was driven by the ramping of new programs and not by overall in-market demand. We expect organic revenue and earnings growth of 10 to 15% for 2005; again, this remains unchanged from our early year estimate. Our efficiency improvements in Q3 shows that we are progressing well towards achieving this targeted range.

Now I will turn it over to Barbara to present financial information for the quarter. Cary will then provide a summary of the quarter and an overview of the marketplace and we will conclude with Cary and I answering your questions in a Q&A session. And once again, we will hold this conference call to one hour. Thank you. Barbara?

Thanks, Gayla. As we reported this morning in our press release, we completed the third quarter of 2005 with revenues of 561 million, an 11.2 year-over-year organic growth increase from the third quarter of 2004. Year-to-date revenues of 1.6 billion showed a 10.5% organic growth increase. We saw this increase in revenues across much of our industry sectors. And as Gayla noted, in Q3 we drove improvements in both our operating and working capital metrics.

Our diluted earnings per share were $0.47 per share. For the same quarter in the prior year our diluted earnings per share were $0.43. Net income for the third quarter of 2005 was 20.3 million compared to net income for the third quarter of 2004 of 18.0 million, a 12.6% increase. As is our practice, our metrics discussed here are presented on a GAAP basis.

Our inventory turns were 6.6 times for the quarter which is fairly consistent compared to 6.7 last quarter. Our overall inventory level did increase by 5 million to 318 million due to the increased forecasted revenues and activity for the coming months. We still target improvement in our turns to seven times by year-end as we ramp more programs to volume and achieve the increased velocity in the movement of our inventory.

Operating margin for the quarter improved to 4.4% compared to 4.1% for Q2. Pretax margin improved to 4.7% in Q3 showing an improvement from 4.5% in Q2. ROIC was 12.7% for the third quarter of 2005. Interest and other income was approximately $2 million for the quarter, interest expense was 85,000 and other income was approximately 89,000. Our effective tax rate is 25.1% for 2005 resulting in a tax rate for the quarter of 23.8%. Overall taxes continued to be favorably impacted as we expand our agent operations. Weighted average shares outstanding were 42.8 million shares.

For the third quarter our cash flows provided by operations were $45 million, our cash and short-term investments balance increased to 321 million at September 30th compared to 287 million at the June quarter end. As noted in our previous calls, our current cash position is continually monitored by management and the Board of Directors. There are many options that are reviewed for the use of this cash. These options include strategic M&A activities or proposals for the payment of dividends or a share buyback program.

Any decision related to these options would be made taking into consideration the best long-term value for our shareholders. Our day sales outstanding was 48 days for Q3 which is an improvement from 50 days last quarter. Receivables were 302 million, a decrease of 8 million from last quarter due to the effect of the timing of the Q2 inventory shipments. Inventory was 318 million, an increase of 5 million when compared to last quarter. Inventory turns were 6.6 times compared to 6.7 in Q2. We were not able to achieve our target inventory turns of 7 for the quarter due to our growing business and the inventory levels needed to support product ramps and transitions for our customers.

Cycle days improved to 54 days compared to 58 days in Q2. Note that Benchmark's cash cycle days should not expected to achieve the same velocity as some of our peers who serve the consumer end marketplace. Current assets were approximately 977 million and the current ratio was 2.7 to 1 in Q3 compared to 2.8 to 1 in Q2. Capital expenditures for the third quarter were 13.5 million and depreciation expense was approximately 6.5 million. We have no debt outstanding at this time.

Our revenue breakdown by industry for this quarter approximates as follows -- medical 12%; telecom 16%; computers 52%; industrial controls 12%; test and instrumentation 8%. When comparing the 2005 and 2004 September year-to-date periods Benchmark has experienced very positive changes in its revenue mix. The most significant of these changes was in a non-tech industry sector, the medical sector in addition to new outsourcing in other areas.

Revenues from the medical industry sector increased 64% to revenues of 193 million for the nine months ended September 30, 2005 compared to the same period in 2004. Revenues from the telecommunications industry sector increased 40% to revenues of 232 million from 2004 to 2005. Other changes in the mix of revenues included a 6% increase in computers, a 4% increase in industrial controls, a 32% decrease in test and instrumentation. Revenue from our top customer was approximately 26% for the quarter; revenue from our top customer is expected to be in the high 20% range for the full year 2005. Our top two customers represented approximately 40% of third-quarter revenue.

During Q3 our teams continued to effectively support and manage the ramping of new programs from sales through to production. We are pleased with the operating performance of our teams with the increased activity levels for the industries that we serve. Now we'll turn it over to Cary to provide a summary of the quarter and an overview of the marketplace.

Thank you, Barbara. Good morning. First of all, I'd like to take this opportunity to thank our team for the outstanding performance during the third quarter. Despite (indiscernible) mandatory evacuation order affecting our (indiscernible) facility during the last ten days of the quarter, we again met our revenue goal and, more importantly, our customer needs.

The accomplishments for the quarter were nothing short of remarkable. The evacuation order also gave us a chance to test and update our disaster recovery plan. I'm very glad to report our plan was extremely effective. From an (indiscernible) market point of view, we've not achieved end market demand flattish.

Hurricane damage in the Gulf Coast area this year generated a one time, but very limited demand for infrastructure improvement. However, we have also seen opportunity up quite strong, particularly in the medical, industrial control and the complicated system integration market.

I will also highlight another important accomplishment for the Benchmark team. About three years ago I set a corporate goal to diversify our top customer revenue concentration to about one-quarter of our total revenue while maintaining above market revenue and profit growth. Now we have accomplished that goal and more. Our organic revenue from the non-tech sector highlighted our effort in gaining business in the strongest sector of the outsourcing market.

Few companies (ph) in our industry have been able to match our record of consistency and execution since the tech downturn reflecting the soundness of our strategy. At the end of Q4 we are positioned to deliver another strong quarter based on the ramping status of several new projects. We'll continue to focus on new program ramps, low balancing, efficiency improvements and M&A activity during the current quarters.

We currently expect the revenue for the fourth quarter 2005 to be in the range of $585 to $650 million in revenue. (indiscernible) earnings per share is in the range of $0.49 to $0.54. At this time I'd like to open for the Q&A session. During this session we require that you limit yourselves to one question and one follow-up question in order to allow enough time for everyone else's questions.

(OPERATOR INSTRUCTIONS). Amit Daryanani, RBC Capital Markets.

Just looking at your third-quarter revenues, which came in at the lower end of guidance, and then also your fourth-quarter guidance is lighter than I think what most of us anticipated. Could you just talk about what drove that? Was it more of the ramps getting pushed out or end-market weakness? Because if I think it's just the hurricane impact, I would think your fourth-quarter numbers should be somewhat higher due to push-outs?

The major impact is ramping of new programs and the timing of those ramps. That, as we've always said, is a little bit challenging to identify exactly the sizing and the timing of the ramps. We are still on target with a number of the ramps and some did get starting blocks in Q3 that have not ramped to volume, but we still see those coming onboard.

And then just looking at your tax rate, it came down about 23%. Is that a sustainable step-down in the long run and what are you implying in your -- or what are you assuming in your fourth-quarter tax rate?

23.8% this quarter is the result of the overall annual effective rate being about 25.1. And that is basically a cumulative catch up to get the effective rate to 25.1%. So for the fourth quarter we estimate 25.1%. Now while that did have a favorable impact that I won't deny in the quarter, I do want to point out that we still have a good opportunity for improvement to come from tax rate reductions as you'll see -- I believe not necessarily a stellar number, but we do have the highest tax rates in our industry.

And as Barbara pointed out, as we continue to look at programs ramping in other geographies outside the U.S., we do expect that our effective tax rate will continue to trend down. Again, many in our industry are in the teens. I don't know that we'll necessarily get to that point, but the efficiency and effectiveness of bringing up new programs in some of the low-cost geographies do allow you to have a benefit in the tax rate area.

All right, thanks a lot.

Thomas Hopkins, Bear Stearns.

Good morning, everyone. It looks like -- I think Cary said that the top two customers were 40%, is that correct?

Yes.

So that would make the second customer 14% if the top customer was 26, right?

That's correct.

So it looks like you could almost explain all of the revenue shortfall from your second-largest customer going from 17% of sales last quarter to 14% this quarter?

I don't know that there's any one customer that you can do it with and without. There's always program shifts and timing shifts. No doubt IT spending probably across all sectors of IT is weaker in Q3 than it typically is in Q4. But I think we did have a combination of several impacts, some being the hurricane, some being the ramp and some just being IT -- either inventory levels, new program ramps, probably a combination. And that's why with so many factors contributing to it we're very proud of our results, but I don't have a breakdown as to a true root cause affect if you will.

Would you expect those top two customers to be around 40% or above or would you expect them to be up sequentially in Q4?

I don't think we have ever gone into that level of granularity on our forecast. I do expect IT spending in general, not specifically speaking to the top two customers, but IT typically has a stronger presence in our fourth-quarter revenue as a composition of revenues.

Okay. And then finally, just can give us all an update on how you see the balance sheet right now and what your latest thinking is on how you like to use your cash and if you have narrowed your timetable or the window at all?

I don't think we have honed in on a specific date. We've continued to look at opportunities to put the cash to use, if you will, in our business because of the opportunities we see in the business to continue to grow as outsourcing does remain strong. We do not have an M&A activity at this point in time to announce. We do stay actively engaged in looking at opportunities. We will not change our strategic focus. We're not out there to take on an acquisition simply for growing the revenue. That would make no sense.

But I think we have been very diligent in identifying opportunities that have undertaken a very good acquisitions to date and continue to see if there's something out there similar to some of the ones we have done historically that would make sense for us. If that were not the case, as Barbara said in her portion of the prepared comments, we would look in conjunction with our Board at what is the proper way to use that cash and be in a dividend, share buyback.

You can see some others in the industry have used those different mechanisms to do what's best for the shareholders. But at this time I don't have a specific time. I would say sometime in 2006 we would look at addressing it, but I don't have a specific timeline.

Okay, great. Thank you.

Shawn Severson, Raymond James.

I was wondering if you could elaborate a little bit on -- I think you used aggressive marketing efforts from other competitors. Is that real widespread across multiple programs in some of the new stuff you're winning or is this more from some of the bigger existing programs that you're seeing most of the aggression?

I don't think there's a single point you could point to, Shawn. What you see is what I would call basic supply and demand. I think in some of the recent conference calls you've heard some different types of activities that people have employed to either attract or retain customers. That in and of itself I think speaks volumes as to what people are willing to do and how they're willing to put their balance sheet to work to attract and retain customers. It varies from player to player as to what, why, when and where they will undertake the activities, but suffice it to say that if we hit the reverse button back a few years, no one would have undertaken that and that is simply the result of the underutilization of capacity today.

And has that led to some of the acceleration of transferring stuff into some of your low-cost areas as well? And then also, can you just kind of give an update on the transfer of those products? I know last quarter there was a little bit of pricing issue or maybe some costs associated with the transfer as well and just give an update on where you stand with that as well.

My take on it is that the end market for our customers are really driving the opportunity to look at the best geographic location for the manufacture of any variety of products be it ours, virtually all consumer products are probably in a low-cost geography already. And it's just identifying what is the best solution jointly with a customer and the risks and rewards and cost reductions, incremental costs associated with moving to a variety of geographic locations.

Yes, that has taken on a higher level of importance over the last couple years and I think, as I indicated last time, I expect to see that on an ongoing basis. A product will launch and they'll be destined for a low-cost geography from the day they hit the drawing board. Our task and our goal in business is to become more efficient even at doing that so that you will have your normal ramp and your normal cost associated with bringing programs up, but we will just even gain further efficiency in moving those to low-cost geographies.

Okay, thank you.

Scott Craig, Banc of America.

Gayla, with regards to the tax, does it make sense as we look out into '06 to take the tax rate down by 100 basis points or so? And then on the balance sheet, one of the areas that you addressed earlier in the year from the Accounts Receivable side of things was that you felt there were some timing issues there that had caused the DSOs to increase that hasn't really come back. Is there an opportunity there to generate some cash flow from the receivable side?

I think receivables -- my goal is always to get those towards a 45 day cycle. We don't do any factoring or other type activities that I know some in our industry participate in. We have a good, solid set of customers that we work with and it really has a lot to do with the timing of shipments. I think we'll continue to work to drive that. With the new program ramps it isn't specifically a calendar date that people are working against; it is specifically when all those requirements for the program can be met.

And if those come in towards the end of the quarter and you're able to launch then you're going to be back-end loaded. So we're still having some impact from program ramps which I think our teams have managed very well, but I do believe that we will have, once we get some improved velocity on both the inventory and the receivables it will come when we get those programs ramped.

On the tax rate, the best rate we have right now is the effective rate that we've identified for the year. I don't have a new update for 2006 for actually any of our numbers. We have not given guidance. But I would say that if we continue to see the trend towards the low-cost geographies I don't know that I am prepared to model with that in there at this point, but to the extent that we can support our customers in low-cost geographies I would expect that we have an opportunity, I just don't have a (technical difficulty).

Okay, thank you.

Thomas Dinges, JPMorgan.

I have a follow-up question on the efficiencies that you guys were talking about because the tone of calls over the last few quarters has been a lot of new programs ramping and that's been hurting things like inventories and then, as you just mentioned, the timing can impact DSOs a little bit. But if I take a little longer-term view here, since the end of 2003 you guys have grown the revenue base by about 20%, but the working capital base is almost twofold, then the biggest increases have obviously come from inventories and from receivables.

And I guess part of that has been you've decreased the amount of business you've done with your largest customers substantially as you've been wanting to do. But how much of the impact there do you think can be recouped over say the next 12 to 15 months or so as we look out into '06? Because obviously you've tied up a fair amount of cash in the working capital increases that we've seen over this time period here as you guys have been ramping new programs.

And how much of the near-term if we just think about what's happened over the last nine months has been because you guys have been moving production from some of those higher cost regions to the lower cost regions? And then I have a quick follow-up.

The production (ph) we ship and the ramps definitely have an impact, like you said, on the inventory receivable cycle. We've been talking about we have two major projects, one is medical and one is in the computer industry in the processor ramps and is scheduled to be more significant ramping in the coming quarter. So we see the new product into the production cycle you should see a release on the inventory particularly. On the receivables side, we'll (indiscernible) the customers are all more pushing to a 45-day payment term (indiscernible) we're probably going to stay with a 45 DSO. That's our goal there. So we should see some relief particularly from the inventory side.

Okay. And then quickly, Gayla, not asking for any kind of a revenue outlook or anything like that, but at least for modeling purposes would you expect to see the capital investments you guys for CapEx are going to make over the 2006 period, is that going to remain at the levels and trendlines you guys have been on of late? Or now that you've kind of put some of the heavy investment into some of the low-cost regions behind you, should we see that trend back down to maybe where it was a couple years back?

We have not given guidance for 2006. I'll hesitate to do that, but I in general expect that a normalized run rate will be in the 40 to 50 million range in general on out years, but I don't have a specific number for 2006.

Okay, thank you.

Chris Lippincott, KeyBanc.

Just want to get back to the working capital management question. The way I'm calculating it seems that working capital management has been slipping as of late. Especially in this quarter it seems that it slipped even with a little growth. I'm wondering, what can you do at this point as we look forward really to revive this, especially on the ROIC area which also has been slipping? What can you really do to get those back up to your former levels?

It has really bounced between financial metrics and the timing of the new product ramps. And we're very much focused on trying to get the projects into the -- from the NPI to the production range. And when you see that you see a significant working capital improvement. And the timing of the product release and the production ramp is really beyond our control in a way because our customers will be determining the timing of the release, the product and the production cycle run.

So as I said earlier, we see the new project will be fully -- will be released significantly in Q4. We should see some inventory downwards quite a bit for the coming quarter. Again, this is a balance between your new product introductions and your production ramp. And for me personally I'd like to continue to see a lot of activity going on in the API (ph) side. That's means indicating we have a lot of new opportunity down the road.

Okay. As you look forward it sounds to me that your goals are really to, as you mentioned, try to get some of the DSOs better on the inventory turns -- better. But I guess I'm wondering what do you see that balance between the NPI and the production runs? Are we starting to see that these NPIs are beginning to taper off somewhat or -- I know you've got the large $200 million computer program -- next gen computer program coming up, but as we start to see this kind of fading out should we begin to think in our minds that this is starting to taper off a bit to improve the working capital?

(indiscernible) we are targeting inventory turns at seven times and the DSO at 45 days. For the type of customer we serve that would be pretty good numbers. I would also like to remind everyone, we have some more product ramping up in 2006 too. This is a kind of continuous process, particularly if you get into some longer life cycle products, you have a little bit longer NPI or product ramp two times because all the different regulatory requirements so on, so forth.

Those are kind of unpredictable, but where we drive for our revenue. When you look at the revenue growth we have overall 60% revenue growth from the medical side and a lot having to do with all the effort we've put into it the last two or three years. You kind of get a benefit in the end, but it is a process will maybe criticize our working capital when we spend a little bit too much working capital. But for the long-term benefit of the Company I think that's something we have to do.

So you think that given your recent goals it would seem that your new cash flow levels would seem to be sustainable going forward?

Yes, we anticipate definitely for the year, that we talked about earlier, a positive cash flow, we'll continue to see positive cash flows in 2006.

Thanks.

Jesse Pichel, Piper Jaffray.

It looks like test was very strong in the quarter; is this the start of a new cycle or is it program related?

Last year we were about 9%, it went down to 4 and then went back to 8. And you can call it a cycle, you can call it whatever. But seriously, we do have new customers in that sector too. And combined -- is slowly -- some recovery in that particular industry, but we now see a pretty strong activity for that sector for the next probably -- who knows. (indiscernible) a pretty strong situation.

Cary, those are new test customers or instrumentation?

We don't differentiate customers.

And is sustainable -- then this revenue level is sustainable here for the next couple or few quarters?

I think it's hard to predict what that industry is going to do and how long. That's what Cary was indicating.

And really sometimes it goes for a year, sometimes three years, it really depends on market conditions and I'm not ready to make a prediction on that one at this point in time.

And then my second question is -- and I didn't get this from the call, but where was the ramp delay most pronounced? Was it in the computing and storage segment?

We did not specifically identify which programs were ramping slower than expected.

But looking out, can you just identify -- maybe you could just say where are most of your new programs due to ramp, in what end market segment?

I think two of the larger programs that are going to ramp are one medical and one in computing. But as you can see from our program wins over the last few quarters, we've got several programs of varying sizes in virtually all of our industries. We've got new ones coming in. So you can see by the numbers in telecom -- obviously telecom isn't as strong as our growth in telecom has been. So we have ramped some programs in that area and some of the other wins that we expect on a future basis to come in will be in all areas, probably the strongest two will be medical and computing.

One point I'd like to make here, the new program ramps, particularly from the revenue projections, that was very difficult. And in particular new projects you just see what is the market acceptance and projection and so on, so forth. But based on the guidance we're giving Q4 we are anticipating the two major projects in medical and the computer customers would ramp into Q4. And are we getting full production ramps or are we getting a full efficiency of the revenue projection? That's hard to say at this point in time. But we are making the best projection based on the information we have.

And again, it's new projects and it's affected by a lot of factors including the market and the customers' marketing efforts and all the other issues combined with the NPI activity. So we fill very good about the situation and in looking for the (indiscernible) projection for 2005 the total revenue is flattish and we are anticipating it will be above normal at 10%. Our team did a good job and (indiscernible) and the margin and the SG&A, but this is a total package. It's not one factor. We had to deliver everything, everything had to click to make it work.

As a follow-up to that, you disclose the new program wins every quarter and over the last five quarters or so it's about $0.5 billion. Could you update us on that number? What is that number? What's the real number because I assume that some of those programs maybe are further delayed or canceled?

That's what the -- we talked about it. In any new program ramps you have the delay or cancel or some perform better and some are worse. But keep in mind, the new program is the one driving force for the revenue growth. If you look at the market as a whole being flattish we continuing to grow. That means our new programming (indiscernible) delivered the incremental revenue we're looking for. Also keep in mind some of the product will go to the end of the life. And not every life product will continue forever.

We have utilized our new program ramp plus involving a new generation of product to continue goals of revenue. And I also discussed in the various meetings, if you don't participate in new growth -- new programs in your customer base you will see the revenue decrease quite a bit right away because either in the market or the product changes so on, so forth.

I think our team did an excellent job in just a very tough, challenging environment, continue to ramp the project and take the revenue up from quarter-to-quarter. Of course personally I don't think we'll get credit from the Street, but it's okay. We'll continue working on what we're doing and we'll deliver the good numbers, we'll deliver the best metrics (ph) in the industry today. And I think nobody can match our numbers.

I guess what we're trying to zero in on, Cary, is what is the aggregate value of the new programs that are ramping next year?

And I think that we have not given 2006 guidance and when we give that I think, Jesse, what you can see is that when we gave guidance for 2005 at the beginning of 2005, it is the same guidance for the year that we gave right now. If you look back in our industry, I think based on the information I have, we're the only ones that have done that. So we go out with the best information we have and credibly deliver on that.

For that reason with the number of new programs that we have ramping and the wins that we've had, that's why right now we're not giving guidance for 2006. But we want to provide that information when all of the new programs are better solidified and ramping so that in 2006 we once again can have beginning of the year guidance and end of the year results track with each other and not have to delay announcing something that is half of what we went out at at the beginning of this year.

Fair enough. Thanks very much.

Amy Junker, Robert W. Baird.

Good morning. I just had a quick question. Last quarter you talked a lot about you had 0.6 million in realignment costs that you highlighted and I think another 1.5 million in startup costs. Just to put it in context, can you tell us where those were this quarter, in the third quarter? Were they similar or were they significantly less?

Startup costs when we have some of the interruptions with the hurricane and everything probably are not clearly as identifiable because you have things such as overtime that you're trying to identify what caused that. Was it truly a new program ramp or was it because we were scrambling after the hurricane to make things happen? I don't have those, but my general sense, Amy, is that it is less as we get closer to the ramp and we just don't have restructuring this quarter.

And just a quick clarification on this. The medical and computing program, the two large programs that you expect to ramp in the fourth quarter, have those actually started ramping at this point or do you expect them just to start by the end of the year?

I guess our teams that are working on it would clearly say they have started because there's been a lot of toil and labor and time and commitment going into it. But as far as a meaningful revenue number, no, they have not converted themselves from hard work and effort into a meaningful revenue stream.

And Gayla, can you just tell us what you expect to be the impact from expensing options next year even if it's just a rough estimate at this point and how you anticipate reporting that number? There's been a lot of debate in the industry whether or not it will be a pro forma number that excludes the options expensing or if people just wrap it up in their numbers?

Our impact from options has not been very significant, probably about the 2% range. And we typically would not be the one in the industry to make the splash and identify how the industry will deal with options. I believe that from a comparative standpoint, whoever probably of the top four players comes out and takes a stance on how they're going to do it, whether that is the way we present it in accordance with what our accountants recommend or whether we just to it to provide you meaningful comparative information, I think we will be compelled to make sure that as an industry we are on the same footing, same basis for investors to be able to do the comparison. I just don't know where that's going to fall out at this point.

Thank you.

(OPERATOR INSTRUCTIONS). Steven Fox, Merrill Lynch.

Just a couple quick questions. First of all, Cary, do you have any further expansion plans that are being considered for next year given all the new business that you've won?

We definitely have some expansion projects in the Asian market and that's something we're continuing to work on.

But is anything definite in terms of more greenfield activity or do you feel you still have time to make that decision?

The decision has to come fairly quickly; within probably three months.

And then secondly, Gayla, just to clarify the options number, were you talking about 2% of net income when you said 2%?

A 2% impact on EPS.

Thank you.

Carter Shoop, Deutsche Bank.

I wanted to clarify a few things here with the computing ramp. One, can we talk about the size of the ramp? Are we still expecting that to ramp to $200 million for the full year? And then also, I think in 2Q you're talking about the program ramping in the second half of 3Q. Now in the beginning of 3Q you're talking about ramping around October. So now it sounds like it's going to be a November/December ramp? Is that accurate? In regards to ramping I mean volume production ramp.

I don't have a specific timeline and, to be frank, when we first talked about the program I don't remember the timeline. But I guess welcome to our world. Programs, as we first identify them at the pre design phase typically have some slip sliding around based on probably any number of factors in the marketplace, some of which we probably aren't even firsthand familiar with since we're not OEMs ourselves.

But there's a lot of decisions that go into what the product launch date finally plays out to be. I guess it would not surprise me to see that any of our programs can change their date anywhere from I would say six months forward to six months to nine months back just based on all of the considerations that have to be put into play.

At this point how confident are you that your computing program is going to ramp to volume production in the fourth quarter?

Very high.

And then on the $200 million target, is that still applicable?

That target we're still looking at this time, yes.

Great. And then a housekeeping question here. Can you talk a little bit about the Accounts Receivable reserves and inventory obsolescence in 3Q?

I don't think we've seen any significant changes in our reserves. And as we indicated in the prior periods, only when it was significant was it unique to us because that is unique in the industry for it to be significant. Given the level of new programs ramping in, the customer base that we have today, no, we don't see any significant changes in our reserves.

Rich Kugele, Needham & Co.

In 2005, obviously you've had a very successful streak here in winning and ramping new programs in areas like medical and computing. But it would be helpful from a qualitative standpoint, as you look into '06 which of those segments do you see the greatest outsourcing opportunities? And even as a follow-up to that, given some of the headwinds that the economy is facing, whether you're talking about oil or interest rates or whatever, have you seen any changes to the structures of these new programs that would imply either slower ramps or more flexibility in how these things may ramp or potential wider revenue ultimate opportunities among these?

I think that the trends in outsourcing post bubble have really been a lot of growth opportunities coming from -- and I hear different word groups used to describe the industry. But basically non-IT, non-telecom, non-tech items are having good opportunities for outsourcing. The reason for that is because some of those industries are in a relative sense newer to outsourcing than would be such as medical, industrial control, and some of the systems integration work, the higher level production.

So of course systems integration can run across a variety of industries and the other two are specifically industry sectors. Basically anywhere that people have not traditionally outsourced as the competitive pressures in the marketplace, as the pricing pressures continue they look to having additional cost that they can convert from fixed cost at the OEM level to variable cost where we can generate greater efficiencies. I think we continue to see those as marketplaces with good opportunities going forward.

And no changes from your perspective on how these programs are being structured?

Not really. We have not seen a lot of the program structure being changed. And you may have some more creative ways to try and schedule the product and transfer product from site to side, i.e. from the U.S. or Europe to low-cost geographies. That structure probably changes a little bit, but as far as the financial arrangement there's not a whole lot of changes.

Okay, thank you very much.

Michael Walker, First Boston.

Mike, we're going to let you be our last question.

I was going to say, I'm pretty fired up to get on this thing at all. Gross margin, I didn't hear exactly why it was up sequentially despite the revenues being flat. Can you just talk about the main drivers there?

As we indicated in the prior quarter, it really is driven based on efficiencies. The efficiency and some of the program ramps as well as some of the transition to low-cost geography. So thank you for noticing. I think that is a lot of good effort put forth by our teams on flattish revenue to have the increased effectiveness in our gross margin.

Is it fair to say that the mix of business that's running at production levels has increased over time relative to the mix of business that's ramping and that's what's caused the margin to be up?

I haven't done a slice and dice at this point to be able to actually say that. But I would say generally that is the sense I get; that the programs that are getting further into their lifecycle versus the ones that are in infancy is a better mix.

And my second question is is there a lot of production associated with your top two customers in your Angleton facility?

No.

So we can't blame Rita for the down tick among the top two?

No, and thanks, Mike. I think you do realize, we're not trying to blame Rita on that -- on anything. It was a disruption, it was -- did cause ineffectiveness, not on the top two customers, but we did have other customers that did have to prioritize and identify what they ultimately needed. Because you don't get everything out six days. If we had been in production those six days I can assure you people would not have been sitting around. So that production was lost.

It's not an excuse. Unfortunately there will be others in many other industries that will be affected, hopefully Wilma won't cause the type of evacuation in Florida that we had in Texas because, for any of us that participated in it, it was quite an astonishing event. As we left not knowing if we came back we were going to have homes or not homes.

I think one analyst was on the phone with me as I headed to the airport and I clearly said "don't use the tone of my voice as an indication of anything going on with Benchmark, It's just kind of a harrowing event. But it's not an excuse. We had very good performance, our teams did an excellent job. We could have done better had that not been the case.

And my last question is again on options. Can you quantitatively tell us either the actual dollar expense per quarter or the EPS impact per quarter?

I think the best way to do that, Michael, is to really point to the information that is in our Q. It typically is a nominal amount, a penny or two. We have not had a significant level of option impact that some others in the industry have had. I think a couple of analysts have tried to do some different analysis on it, but really right now the only quantitative information would be that which we have in our Q and it's about a penny or two.

Okay, great. That's it for me.

Thank you all for joining us today. We really appreciate it. Again, I apologize for my voice, it's already deep enough without being sick. Thank you all.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.