Benchmark Electronics Inc (BHE) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by. Welcome to Benchmark Electronics 2005 fourth-quarter earnings release conference call. During our meeting today, we will have all phone lines muted or in a listen-only mode. Following the presentation, there will be a facilitated question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded and replay information will be available at the conclusion of today's conference. At this time, I'd like to introduce our host, Executive Vice President Chief Financial Officer for Benchmark Electronics, Gayla Delly. Please go ahead.

Good morning. Welcome to Benchmark Electronics conference call to discuss our financial results for the fourth quarter and for the full year 2005. Thank you for joining us today and let me first again by introducing our team President today. I am Gayla Delly, the CFO of Benchmark Electronics, not CEO. I will start our call today by presenting an overview of our Q4 financial performance and our highlights for 2005 and then Barbara Sorenson, our Vice President of Finance, will then discuss our financial metrics for both Q4 and our fiscal year 2005 in greater detail. And then Cary Fu, our President and CEO, will follow providing comments on our strategy and overview of the marketplace and some highlights looking forward into 2006.

After our prepared remarks, we will take time for your questions in our Q&A session. During our conference call this morning, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations and actual events or results may differ materially.

We would also like to refer you to Benchmark's periodic reports that are filed from time to time with the Securities and Exchange Commission, including the Company's 8-K, quarterly filings on Form 10-Q and our annual report on Form 10-K. These documents contain cautionary language and identify important risk factors, which 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 am I'm pleased to share with you some highlights from our fourth quarter and our overall fiscal year 2005 results. From our press release, you can see we ended 2005 on a very positive note. We had record quarterly revenues of $625 million with strong customer demand. Including the cyclical increase in IT spending during Q4 and our continued program ramps, we exceeded both our expectations and our analyst consensus for the quarter. In our guidance last quarter, we expected revenues in the range of $585 million to $615 million based on the indications from our customers. Our Q4 2005 revenues of $625 million were up 19.3% year-over-year compared to revenues of $524 million in 2004. Our net income for Q4 2005 increased 22% compared to Q4 of 2004.

Looking back on 2005, it was yet another challenging and rewarding year as we achieved both our top and bottom-line goal. We had a significant level of program ramps occurring during the second half of the year. Our 2005 revenues grew organically 12.8% year-over-year and our earnings were up 13.5% year-over-year.

2005 continued our successful profitable growth trend. Over the last five years, our revenues increased 76.8%. We saw strong performance in a number of areas this year and this quarter specifically. Our operating metrics, which were strong last year, continued to improve during 2005 as we gained efficiencies with both our program ramps and our product transition. Our operating margin for the fourth quarter was 4.65% compared to 4.4% in Q3. We came within our targeted range of 4.5% to 5%, which we set forth for you last year.

We will continue to focus on gaining even greater efficiencies and strive for the upper end of our targeted range, which we set forth as a goal for operating margins over the next year. However, you'll note that we have not included or incorporated this improvement into our guidance and we remain conservative at this time.

As an A performer, you can appreciate that the incremental improvements we make are more difficult to come by. Also as we comment on further during this call, this will exclude a minor amount each quarter for restructuring charges and stock-based compensation expenses.

Our diluted earnings per share for Q4 was $0.57 compared to $0.47 for the third quarter of 2005. Our diluted earnings per share for the year, December 31, 2005, was $1.88 compared to $1.67 for 2004. With this and the general stability in the marketplace, we are positive and optimistic about the opportunities we see for 2006. OEMs globally are continuing to see opportunities to benefit from outsourcing and also to benefit from increased levels of outsourcing.

We are pleased at the increased level of activities that we see and others see in the industry are once again being seen across various industry sectors. During the fourth quarter, our bookings reflected this activity. The fourth quarter, which is not typically a strong quarter for OEMs finalizing their outsourcing decisions during the holiday, we booked seven new programs with 70 to $113 million in annual revenues.

New program opportunities are being derived from both new and existing customers and from a mix of the industries that we serve. These include industrial controls, medical, computer and telecom.

Looking forward to 2006, we are excited about the opportunities we see for both our growth opportunities and for the efficiency improvements through our continued lean manufacturing activities, expansion of supply chain development and increased levels of production in some of our low cost regions. Our revenues for 2006 are expected to be in the range of 2.47 to $2.54 billion with corresponding earnings of $2.11 to $2.17 per share, excluding restructuring and stock-based compensation expenses.

Now, I'd like to turn it over to Barbara to take you through a more detailed review of our financial information for the quarter. Cary will then follow and provide some comments regarding our year, looking forward to 2006 and then we will conclude with Cary and I answering your questions in the Q&A session and once again will hold this conference call to one hour. Barbara.

Thank you, Gayla. As we reported this morning in our press release, we completed the fourth quarter of 2005 with revenues of $625 million, a 19.3% year-over-year organic growth increase from the fourth quarter of 2004. Annual revenues of $2.3 billion showed a 12.8% organic growth increase for the year. We saw this increase in revenue across most of our industry sectors. And as Gayla noted, in Q4, we drove improvements in our operating metrics with program ramps and product transition continuing to progress.

Our diluted earnings per share were $0.57. For the same quarter in the prior year, our diluted earnings per share were $0.47. Net income for the fourth quarter of 2005 was $24.7 million compared to net income for the fourth quarter of 2004 of $20.2 million, a 22% increase. Diluted earnings per share for the year were $1.88 compared to $1.67 for 2004.

Net income for 2005 was $80.6 million compared to $71 million for 2004, a 13.5% increase. Our inventory turns were 6.4 times for the quarter, which is slightly below turns for the last quarter of 6.6 times. Our overall inventory level was 362 million with higher levels of inventory positioned to support the new program ramps for our customers during the upcoming quarters.

We continue to focus on getting this metric back to 6.7 times as we get further through our program ramps and transitions. Operating margin for the quarter improved to 4.65% compared to 4.4% for Q3. We're very pleased that we were able to achieve this operating margin target this quarter and while this is a good result, we will continue to focus on incremental efficiencies to strive for our 5% operating margin target, excluding any restructuring charges and stock-based compensation expenses.

Pretax margin was 5% in Q4 showing an improvement from 4.7% in Q3. Our ROIC was 17.2% for the fourth quarter of 2005. Note that we have updated our calculation to be comparative to the calculation that is used by our peers. Our ROIC continues to exceed our weighted average cost of capital.

Interest and other income was approximately $2.2 million for the quarter. Interest expense was $93,000 and other expense was approximately $58,000. Our effective tax rate was 23.8% for 2005 resulting in a tax rate for the quarter of 20.8%. The decrease in our tax rate reflects our continued profitable expansion in our low cost manufacturing operations.

Weighted average shares outstanding were 42.9 million. Now stepping to our cash balance and cash flows. Our cash and short-term investments balance increased to $327 million at December 31 from $321 million at September 30. Our sales cycle days for the fourth quarter improved to 51 days from 54 days for the third quarter. For Q4, our cash flows provided by operations were $15.1 million. For the year 2005, we did use $1.7 million in cash for operating activity in support of our growth in ongoing program ramps.

Our days sales outstanding were 53 days for Q4 compared to 48 days last quarter affected by strong year-end demand. Capital expenditures for the fourth quarter were approximately $12.4 million and $46.4 million for the full year. Depreciation expense was approximately $6.5 million for the quarter and $26.2 million for the year.

Receivables were $366 million, an increase of $63 million from last quarter due to the increased level of sales for the quarter in addition to the timing of those sales. Inventory was $362 million, an increase of $44 million when compared to last quarter. Inventory turns were 6.4 times compared to 6.6 in Q3. Our inventory levels increased in support of various product ramps and transitions for our customers.

Current assets were approximately $1.1 billion and the current ratio was 2.5 to 1 in Q4 compared to 2.7 to 1 in Q3 primarily due to the increased accounts receivable and higher year-end demand levels and inventory balances associated with ramping programs. We have no debt outstanding.

Our revenue breakdown by industry for this quarter approximates as follows -- medical 12%, telecom 12%, computers 55%, industrial control 13% and test instrumentation 8%. As you can see, the 2005 revenue breakdown by industry reflects solid growth and diversification in our revenue mix.

Let me highlight the most significant of these changes. We have seen a significant level of growth in the non-tech industry sector; medical and industrial controls. Revenues from the medical sector increased 56% to revenues of $266 million for the year 2005 compared to 2004. Revenues from the telecom sector increased 18% to revenues of $306 million from 2004 to 2005. Industrial controls had a year-over-year increase of 15% and we also saw a 9% increase in the computing sector. The test and instrumentation sector had a decline of 14% for 2005 as compared to 2004.

Revenue from our top customer was approximately 32% for the quarter and 29.7% for the year, which was in line with our expectations. Our top two customers represented approximately 43% of fourth-quarter revenues and 44% of revenues for the full year 2005. For these top customers, the revenue dollars increased $56.3 million or 6% when comparing 2005 to 2004.

Looking into 2006, Benchmark currently expects to incur stock-based compensation expenses under the new accounting guidelines of approximately $0.01 per share for each quarter except for Q2 in which we expect the effect to be $0.02 totaling approximately $0.05 per share for the full year of 2005. Now, I will turn it over to Cary to provide a summary of 2005 and an overview of the marketplace.

Thank you, Barbara. First of all, I would like to take this opportunity to thank our team for their outstanding execution and performance during Q4 and the year 2005. Our solid business model has helped us to continue to deliver industry-leading metrics in this very challenging environment. From a [year-end] market point of view, we see the demand for OEM is increasing and outsourcing of (indiscernible) remain very strong. We did see strong signs in the non-tech sector as they continue to pursue ways to reduce the cost and reduce their time to market.

We are also seeing opportunity -- computer being quite strong for us. Looking back at the year 2005, we had a great year both operationally and statistically. Number one, we reached record revenue and record earnings with [signal] growth exceeding our growth targets set up at the beginning of the year. Number two, we will continue to divert our customer base effective at ramping at high levels in new programs during 2005. Number three, we continue to realign our resources and expand our Asia footprint to gain efficiency in our production.

At the end of 2006, we are positioned to deliver another strong quarter based on the ramping status of several new programs. We continue to focus on our loading balance, efficiency improvement and M&A activity during the year. In addition to our focus on the efficiency improvement, we will continue to look at proper alignment of our footprint and resource according to the market demand. We will do so in 2006 through continue to expanding our production facility in Asia and through restructuring in some other geography.

We (indiscernible) we will incur approximately 3.5 to $4.5 million in restructuring charges during 2006 mainly as it relates to the closing of our Leicester, U.K. facility. We are also in the final stage of the decision process to greenfield, a new facility in China and we will continue looking for M&A activity in the general area.

At this point in time, I would like to open for the Q&A session. In this session, we request you limit your (indiscernible) to one question and one follow-up question in order to allow time for everyone's questions. Operator, we can begin the Q&A session of the call.

(OPERATOR INSTRUCTIONS). Steven Fox, Merrill Lynch.

Good morning. Actually this is Celeste Laurenzano for Steven Fox. Looking at your 2006 revenue outlook, what comprises the 9% to 13% growth you are looking for?

The majority of our growth is coming from continued new program wins and new product introductions. As you have seen over the past 12 to 18 months, we have had very good program wins and expansion of relationships with new and existing customers. So we are not counting on or baking in a significant portion of end market demand improvement. As we did note, the end market seemed more stable but we have not incorporated a significant level of growth in there at this time.

Can you provide a little more detail on the closure of the U.K. facility? What are you producing there?

No, we don't go into any specific details but I guess the important thing to note there is that we are continuing to support the customers in other geographies. It was a geographic location choice, not a loss of a customer that drove that decision.

Jim Suva, Citigroup.

Congratulations. First of all, regarding the outlook of 9% to 13%, are there any particular segments in those wins that are really exciting, new or that have come in greater than expected?

Well, Jim, as you can see as you look back over the program wins that we have indicated, it really shows a broad base that we had program wins in each of the industries. I'd Benchmark Electronics remiss to say that I wasn't excited about each and every one of those programs ramping. We are excited about each of those. Where we see some continued expansion in growth is in two different ways. As I mentioned in the call notes, we see incremental outsourcing from some of the non-technical or non-technology areas such as medical industrial controls as they are in some cases newer to outsourcing and therefore they are seeking opportunities to reduce their cost and embrace outsourcing.

The other areas we are seeing it in where people have outsourced and OEMs have outsourced for a longer period of time is incremental outsourcing, end-to-end services and we're seeing expansion opportunities there. One way I would say our growth is coming from a variety of industries. But on a comparative basis because some of the industries already comprise a greater portion of our revenues, the incremental growth would probably come on a percentage basis more from the industries that are a lower composition of our revenue right now.

And as a last question with the greenfield site in China and your profitable operations internationally, should one expect your tax rate going forward to be lower closer towards like the 21% range?

As you can see, we are still probably -- I guess as in all cases with taxes, you have to grin and pay. We are very pleased to be paying taxes, which means we are profitable. We have remained profitable and have the highest tax rate in our industry. As we continue to diversify our geographic footprint, some of the taxing jurisdictions, which are trying to spur growth are giving favorable tax holidays and of course the U.S. is not one of those. So as we grow in Asia for instance, we do see opportunities to continue to benefit from lower tax rates. Again, I do not see us getting down to the 0% to 2% range, which indicates that there are losses incorporated into the tax rate. But somewhere I believe in the low 20, upper teen percentages is maybe where some of the others in our industry that are profitable are baking out.

Don't have guidance for that at this point because you have to be able to demonstrate that that is where your revenue and profitability will be derived. But that is where you would potentially see over a longer period of time as we change our footprint more that we would have taxes going.

Thank you and congratulations.

Carter Shoop, Deutsche Bank.

Just to clarify that last point, so it sounds like maybe around a 23% range would be a good number for '06. You don't want to provide guidance but I think it would be helpful if you can kind of give us an idea of what you guys are thinking about when you guys compose your guidance here for the EPS line. Does that number sound about right, 23% or so?

Yes, 23%. We always bake in that which we know at the point in time. So the 23% is what we would estimate at this point.

Great. Two more quick housekeeping questions. For inventory obsolescence reserve and accounts receivable reserve, did that change meaningfully in the quarter?

No, we had no significant changes there.

One last question, on customer concentration looking out a year, would we expect that to change meaningfully with your top two customers or the current run rate or current percentage of sales at a reasonable level to assume?

Well, we anticipate the two top customers maintain about the same percentage.

For the full year or for what happened in the fourth quarter?

It would probably be the full year.

And then if you guys weren't involved with a particular program for its launch with one of your larger customers and then you guys were brought on as a second source supplier, is there usually like a three to six month lag there that we can expect?

I guess the other way to answer that is if you are transitioning a product from any location of manufacturer and it is being outsourced to you, typically those programs will take I'd say three to nine months to ramp. However, if you are involved from cradle to grave, which often you here in our industry, we like to participate in the design of the product, that of course will take a longer period of time as you are working with the OEMs in the development stage. So we have programs in both of those scenarios.

I guess I was thinking about let's say for example one of your larger customers had a major product announcement and they ramped in the fourth quarter and if you guys aren't involved as the primary manufacturer but maybe the secondary manufacturer, when would you bring on volumes there? Is it an industry norm to actually wait three to six months or do you typically ramp at the same time as the primary supplier?

I don't think I can answer that because I am not familiar enough. So your frame of reference and mine may be different and I don't think I can answer that.

Well, generally you can look at -- ramping the second source could be taking 6 to 12 months depending on the complexity of the product.

And do you guys expect EMC to rebound as a percentage of sales next quarter?

Well, we don't really discuss the percentage of revenue or projection for any particular customers and we do see some cross over on a product for our customers in the last couple of quarters. So we anticipate that the revenue should be slightly up and depends really on the inventory position and the data product introductions at this stage.

Michael Walker, Credit Suisse First Boston.

I'll keep it to two questions. The first one is I'm struggling a little bit with your guidance. I hear what you're saying about incremental margin improvement getting harder to come by going forward but you are still targeting the high -- I think you said as high as 4.5% to -- the high-end of the 4.5% to 5% but your guidance is basically telling us margins are going to be flat at best. So are you being conservative or what do you think margins are going to do?

I think as you can see, we typically are going to be flat in our guidance and drive for the higher end of it. I think that is consistently how we have driven our miles, Michael. So we're going to drive the 5% and not overpromise at 5% and be consistent with the guidance that we have currently.

Okay. And then on inventories, up pretty substantially, up 14% sequentially. Your turns are kind of back down to sort of the low point of the last three or four years. I know that you said you have got some new programs coming online but we hear that a lot from a lot of EMS companies. But it seems like this quarter in particular we have seen inventories start to pile up across the board and I am trying to understand if it is something more. Is there a demand issue? Are customer contracts starting to require more and more inventory carries? Is there one customer that this is tied to? Just some more color on the inventory build?

I would say in general, Mike, we are seeing stability and improvement in the marketplace and possibly as you see that in -- there are pockets where the supply chain is not as flexible. So that may cause an overall reaction. I haven't done -- I know one of the analysts follows through the supply chain to identify the overall inventory positioning. Haven't had a lot of time to study that specifically but you may find that in general because of the increased demand level throughout the supply chains that there may be more inventory in it. But I don't see it for the negative reasons. In fact, I see it more for stability and positive reasons that people are ensuring that they are aligned for the opportunities going forward.

Probably (indiscernible) we have seen some lead times pushed out and also when you see the activity start to improve, it's difficult to determine the exact mix of the customer demand. So you tend to draw the inventory up to meet the potential demand and maybe change throughout the process. And that is where you maybe see the inventory level go up slightly. Typically, looking back at the history of our industry, when the business kind of levels off a little bit, you'll see a reduction of inventory flow. This is because you have a better understanding of the market, as well as the flow to inventory. We (indiscernible) supporting our customers in a new product introduction. I think this has very much demonstrated how successful we are today and we continue to do that until we have no capacity to do that.

Amit Daryanani, RBC Capital Markets.

Congratulations on the quarter, guys. Just to follow one of the prior questions on your 11% revenue guidance for 2006, can you maybe just talk about how much of that growth is coming from programs that you've already booked versus programs that are in the pipeline and you anticipate closing over the next one to two quarters?

We really have not changed our process. Last year, we've given almost similar type guidance. We do not bake into either market recovery or significant new business booking for the full year for our revenue projections. And also we discussed earlier the booking cycle is so long, it takes sometimes six to nine months, and sometimes it will take that long to ramp our programs. So our sales team today are not working 2006 numbers. They are focused 2007. And this is what the process taking, and we will be happy to take additional business if we can ramp the business book as quickly as we can. But at this point in time, the guidance is not including any market recovery, as well as significant new business booking in 2006.

Gayla, just looking at your SG&A level, it's at 2.6% of sales. It's the lowest it has been in about a decade now. Can you talk of the 16 million in SG&A, how much of that was driven by SOX and audit costs in Q4 which you would expect to roll off in the next few quarters?

Amit, as you recall, we were one of the first -- not by choice -- to participate in SOX, so this is the second year for us. So that I don't think is a differentiator for a quarter. They are just on the payroll now, so to speak, to kind of amortize costs. So I don't see SOX as a driver. And generally, you see that the leverage is there in the model as we continue to grow. That is just the way the industry and the model works.

Another thing we need to probably point out here is there is a lot of just clarification in discussing between the SG&A and cost of goods sold, and (indiscernible) the engineering costs in certain time will be SG&A for R&D costs, once the product -- production would go to the cost itself. So we kind of encourage everybody to look at just the total operational margin percentage instead of looking at (indiscernible) as well as the gross margin line.

Just a final question. The restructuring charges you talk about, 3.5 to $4.5 million, can you just talk about how much of that will be cash related? Also, how much savings do you expect to realize from closure of the UK plant?

I don't believe -- well, most all of it will be cash, and we have not concluded specifically. The analysis is just something that is recent, but we have not concluded a number to be able to broadcast on the savings. But I think clearly as we look forward, we would expect to generate the savings associated with those reduced costs at or above which we invest in closing in.

Reik Read, Robert Baird & Co.

You guys in the past couple of quarters have just highlighted how challenging it is with visibility with respect to new program ramps. Can you talk a little bit about why you seem to have some more confidence giving full-year guidance at this point? Is it that you're experiencing fewer of these ramps, or do you have better visibility with some of the current ramps just because of the type of program?

Well, we gave guidance last year for the full year also at this point in time, and it is a range of guidance, not a dead-on very specific number. So within the range based on the fact that we aren't counting on market recovery and that we are looking at book of business that we are already booked, we feel comfortable with that. The reason we don't have a higher number out there, if you will, or a stretch goal specifically that we are broadcasting is just because of the reason you stated. If we were to bake in a lot of unbooked business or opportunistic challenges, if you will, then we wouldn't have the confidence. But with a more conservative known book of business, then we feel comfortable providing that.

And then just, Gayla, a quick question on the profitability, the gross margin relatively flat despite being up nicely quarter over quarter. Can you talk about the factors that were impacting that?

Repeat that one more time. I'm sorry.

Sure. The gross margin was flat sequentially despite the revenues being up nicely. Can you just talk about the factors that impacted -- thinking with the volume, you would see a little bit better improvement there?

Again I am going to point to operating margin versus gross margin. In our industry, there does seem to be a lack of consistency in that. As you can see from an operating margin, we are getting the leverage and the improvement there. So over the last three quarters, we have seen sequential improvement based on the efficiencies we gain as we ramp programs based on the transition of programs to cross geographies and associated production through revenue increases. So we are seeing that flow through to the bottom line and then it becomes semantic classification as to which line item it falls on.

And any change with respect to pricing here in the last quarter or so?

No, I don't think we have seen -- again, it is a healthy competitive marketplace out there. From time to time, you may see a player act randomly in their marketing or sales tactics but in general, OEMs are driving to seize the day to increase their marketshare and to be competitive in their marketplace. With that, they are driving their EMS partners to better service them cost competitively. That hasn't changed for as long as I have been in the business and I think we do offer up a good model and we drive through efficiency good strong operating results. As Barbara indicated, our return on invested capital continues to perform well and exceed many of the players in our industry and exceed our weighted average cost of capital.

Thomas Dinges, JPMorgan.

First, just a bookkeeping question. Can we get a little more detail on the new programs? How many specifically were with new customers? How many was existing and then by industry, a rough breakdown there and then I have a follow-up.

One second.

On the seven new programs, four come from new customers and three from existing customers. Two from (indiscernible) accounts, two from investment control, two from computer and one from medical.

Thank you. And then I want to tackle the inventory question just a slightly different way here. If we look at the last year, inventory has been up about roughly 40% year-on-year. In this latest quarter, you have obviously shown some nice top-line growth but you're also looking for some good top-line growth next quarter or next year I should say. If I look at free cash flow, this was one of only two years in the last 10 that you guys have actually consumed cash. The bulk of it obviously coming from the build up of some inventory to support the new program ramps. What are you guys planning on putting in place over the course of the next year because it seems as if you're still booking new business? You're going to be winning new business over the course of the next year that is going to get you to the point where you can better handle the ebbs and flows of what is going on in terms of supporting new programs with building of inventory on your own books because by my calculation, you consumed about $1 a share of cash over the last year, mostly just from this inventory side. Any help there would be much appreciated.

Well inventory is a very complex thing and as you are moving more product at a global basis, your lead times stretch out and they continue to realign your production capacity. To support customers globally, you stretch out the inventory lead times too. But nevertheless saying that, we just come out with very significant revenue growth in Q4, which implies significant inventory movements throughout the quarter. As I said earlier, in the beginning of the program, you have a lot of challenges to be sure you have all the right inventory, all the right mix, all the right place and those are the kinds of challenges you deal with as a significant program ramps. Once the product stabilizes, which we are anticipating in the near future, you will see -- you have better inventory improvement. It's based on the -- you get a better handle on the product and a better knowledge of the product.

I think one of the things I would like to draw your focus on is the overall improvement in the sales cycle days. While we had a high level of activity in the end of the quarter and you see receivable days reflecting that, you also see that we were positioning inventory for the upcoming quarters based on the overall improvement in sales cycle days, which is reflected through the [AP] days outstanding bringing that overall sales cycle days down. So we are not shortsighted in trying to do what I might call window dressing to ensure that our inventory days are low and shortchanging ourselves for the ability to meet ongoing customer demand early in the month as we come out of the holiday season and in essence you see that reflected on our balance sheet.

To follow up on that, Gayla, though I guess my broader question is isn't there a mechanism that you guys can put into place where it doesn't seem as if so much of the inventory has to be bought with your own capital and can be used through either supply chain services or so forth because obviously a lot of the distribution companies are out trying to talk about engaging people with supply chain agreements and so forth.

And part of this might answer the question of an earlier questioner's question about how much inventory is being just used for guys preparing for new programs and how much of it is on the demand side. But aren't there mechanisms out there because actually on a year-on-year basis, by my calculation at least, inventory days are up a couple of days and the cash cycle was actually up a little bit more than that as opposed to compared to last quarter. So are there mechanisms out there that over the next year that you guys can look to put into place that is going to end up where you can result next year with a pretty good year for cash flow or is it going to be another one where we're grinding it out because you've got a lot of new programs continuing to pile into the mix?

Well I can appreciate that question. We definitely take advantage of all the mechanisms available to us and from a supply chain standpoint of view. Keep in mind, there are a couple of things here as cost risk benefit. I don't see any arrangement or inventory arrangement or any kind of a vehicle you have is cost free. You have got to study waste cost versus benefit.

The number two thing we need to take into consideration -- we continue to move from a PCB assembly to the small serve assembly to the higher system integration level of integration. You will see longer inventory cycle days because you not only just shipped a PCB board, you shipped a box and some of the box have very long manufacturing cycle days and those had to be incorporated into the model. I think we will live and die by the inventory and this is something I think we're very good at. From a numbers standpoint, you may not see that but it is a very difficult thing to deal with and I think we have been pretty good with it. And the global manufacturing networks -- the longer the product cycle and had a better understanding that the new product will definitely give us an improvement inventory performance in the near term.

Brian White, Kaufman.

I'm wondering if you could talk a little bit more about the greenfield in China. Is it up and running? If not, when will it be? What's the square footage and how many lines can it hold?

well as I said earlier, we're in the final stage of a decision cycle of the greenfield and we are looking at both M&A and acquisition processes, as well as the greenfield. Not have a lot of detail provided yet. We're in the final stage of the evaluation and we should have more detail for next quarter and you probably recall, we did have a new greenfield facility in Bangkok in 2005 and we will definitely have one in 2006 in China. And we're working on that.

And you're looking at southern China or northern China?

We continue to feel that northern China is where the demand for our product is based on the customer demand and we still (indiscernible) northern China will be, from a greenfield standpoint, be exactly where we want to be. If we're looking for the potential acquisitions then southern China may be a potential site.

And then just on the new program ramp that started in the December quarter, did that meet your expectations and could you give us some color on what type of revenue contribution -- I think originally you had said it was a $200 million program in annual revenue?

We won't provide commentary on any specific programs or customers. I guess as we've said throughout the last few quarters. We -- in fact, in Q1, we have more programs ramping and expect them to come into the revenue fold. So don't do a specific lookback. We're very pleased with the ramps that we had. 2005, as you can see by coming in at the final result that we did, we clearly were successful in ramping our program.

I wanted to make sure that percentages you gave by end market were actually for the quarter or was that for the year?

The information Barbara provided was for the quarter.

For the quarter.

Jesse Pichel, Piper Jaffray.

A year ago, you had about $600 million of new wins announced in the prior four quarters and then you issued guidance for about 12.5% growth. And today, you have less than half of that, less than half the value there of new wins announced in the prior four quarters and you're issuing growth of about 10%. Can you help explain that difference and specifically are your assumptions for the end of life programs lower?

I guess two things there. Yes, we have less of a headwind if you will and more of a ramp where we were expanding relationships and expanding services to the existing customers and less end of life headwind. So it is a combination of those that are factored in there. As we have always indicated, unless it is a true identifiable segregated win then that is something that is announced. So that probably is somewhat confusing but we believe that is more appropriate. If it is a replacement, same as form, fit, function if you will new product, although it may provide very good revenue growth opportunity, it is not announced as a new program.

Could you quantify there the end of life for your top two customers in 2005? I mean did you effectively replace all the programs you're doing with your top two customers or was it say 50% of the program value?

Well thank you for asking backwards instead of forwards but even when we go to look backwards, I don't think, Brian, that I have the knowledge or wherewithal to even begin to understand product cycles or product overlap and how they fit together. So I think you would have to really look at the OEMs and what their information and their financial metrics provide because I just really don't get into that level of understanding.

We're going to take one more question I believe, operator.

Rich Kugele, Needham & Co.

And again, congratulations. Just real quick. In terms of the China operations, would your discussions about making an acquisition be for some type of capabilities you currently don't have or would it just be for capacity? Just interested because in general it's not very expensive to bring up capacity in China and some experience. So any thoughts there?

Well any major acquisition we do in the Far East site would be for capacity. It is not measured (indiscernible); it will be how expensive (indiscernible) the capacity. We are looking -- number one is that organization of the acquisition. That means you don't really need to establish a brand new team and an organization to accommodate the site. That's (indiscernible) the potential customers available. So if we acquire a company in the Far East, will be pretty much for capacity and for organization as well as potential revenue from customers. Of course, the greenfield will be much, much cheaper, which we can do that ourselves.

Thank you, operator. Thank you all for joining us on this call today and we look forward to speaking to you again next quarter.

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