Benchmark Electronics Inc (BHE) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Benchmark Electronics first-quarter 2006 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Chief Financial Officer, Gayla Delly. Please go ahead.

Good morning. Welcome, everyone, to the Benchmark Electronics conference call to discuss our financial results for the first quarter of 2006. Please let me begin with introducing our team present today. I am Gayla Delly, CFO of Benchmark Electronics, and I will present an overview of our Q1 financial performance and our overall outlook for 2006. Then Barbara Sorenson, our Vice President Finance, will discuss our financial metrics for Q1 in greater detail. Cary Fu, our President and CEO, will follow by providing comments on our strategy and overview of the marketplace and some highlights looking further into the remainder of the year 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 that actual events or results may differ materially.

We would also like to refer you to the Benchmark's periodic reports which are filed from time to time with the Securities and Exchange Commission, including the Company's 8-K 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.

Also, please note on March 15, 2006, we announced a three-for-two stock split that was paid on April 3, 2006, to shareholders of record as of March 27, 2006. So as of March 31, 2006, all of our share and per-share data that will be discussed during this call have been retroactively adjusted for this stock split.

In Q1 2006, our financial results contained three special items. They are as follows. Our restructuring charges of $2.8 million, or $2.6 million net of tax; stock based compensation expenses of $486,000, which is $372,000 net of tax, related to the implementation of FAS 123(R); and a tax benefit of approximately $4.8 million related to the closure of our UK facility.

With these, to help in a more meaningful comparative analysis, we will present certain financial information excluding these special items during our conference call. When we do so, we will call your attention to that fact. In today's press release, we have included a reconciliation of our GAAP results to our results excluding these items.

Now I am excited to share some of the highlights from our first-quarter 2006 results. First, I do want to thank our team and our customers for their support as we moved into the first quarter of 2006. We saw broad-based increases in demand levels with an exceptionally high level of production occurring in the last month of the quarter. What a great start to the year 2006.

The first quarter, which is typically lackluster, was a quarter where our teams were supporting very strong program ramps, high levels of mix changes, and increased demand levels from our customers. Our results reflect that. Our first quarter revenues reached a record $651 million, which is $36 million above the high end of our guidance provided in our conference call last quarter.

In our guidance last quarter, we expected revenues in the range of $590 million to $615 million, based on indications from our customers. Q1 2006 revenues of $651 million were up 27.8% on a year-over-year basis, which is compared to revenues of $510 million in 2005.

This is off organic growth from expanding our market share and from increased levels of outsourcing by OEMs, with each of our industry sectors experiencing growth in excess of 20% on a year-over-year basis. 2006 is off to a solid start, and we continue to see strong outsourcing trends to allow for our continued growth.

Our operating margin for the first quarter was 4.5%, excluding the special items we noted earlier. The significant upside in production, specifically the demand levels in the last month of the quarter, impacted our overall efficiencies including both our receivables and our inventory turns. Our shipments in March 2006 were approximately 50% of our total shipments for the first quarter; and that compares to what is more traditionally around a 40% level.

We continue to focus on our inventory turn metrics while meeting our customers' demands. We do anticipate that inventory turns will improve back to the 6.5 turn level during Q2, as the mix of new programs and our product transition crossovers become more stable.

Our GAAP net income for Q1 2006 was $26.5 million, a 57% increase compared to Q1 of 2005. Excluding the special items, net income was $24.7 million, a 46% increase over 2005.

During Q1, we had the benefit of a lower effective tax rate of 4.7% including the impact of the special items. Excluding those special items, our effective tax rate was approximately 21%; and going forward, we expect our effective tax rate to remain in the 21% range with the benefit of tax incentives for our expanded business levels in Asia.

Diluted earnings per share for Q1 were $0.41. Diluted earnings per share excluding special items were $0.38 compared to guidance for the quarter which was $0.33 to $0.36 per share. Diluted earnings per share for Q1 2005 were $0.26.

The marketplace for outsourcing remains very strong as we look further into 2006. We are both positive and optimistic about the continued opportunities for 2006, including those which we see outside our traditional marketplace. OEMs globally are continuing to seek opportunities to benefit from outsourcing and to increase their levels of outsourcing.

During the first quarter of 2006, our bookings continued to reflect this activity, as we booked seven new programs with 70 to $110 million in annual revenues. Our new program opportunities are being derived from both new and existing customers and represent a mix of the industries we serve, including industrial controls, medical, computer, and telecom.

Just a note. We are including in industrial control sector the Defense Department projects, some of which we have been recently awarded.

Looking at the remainder of 2006, and based on the strong activity we see for Benchmark, we have increased our guidance for the year. Our revenues for 2006 are expected to be in the range of $2.55 billion to $2.6 billion. This is increased from our range of 2.47 to $2.54 billion given on our last conference call.

On a non-GAAP basis the corresponding earnings per share is expected to be $1.48 to $1.53, which excludes the Q1 tax benefit and the restructuring and stock-based compensation expenses to be recognized during 2006. On a GAAP basis, the earnings per share is expected to be in the range of $1.46 to $1.51.

In developing our updated 2006 guidance, we included the potential for product transitions, product ramps, and the impact of new programs as they may encroach upon existing products.

Now I will turn it over to Barbara to take you through a detailed review of the financial information for the quarter. Then Cary will provide some comments regarding our year and looking further into 2006 and the overall marketplace. As I have said, we will conclude with Cary and I answering your questions in the Q&A session. We will hold our call to an hour. Barbara?

Thank you, Gayla. As we reported this morning in our press release, we completed the first quarter of 2006 with revenues of $651 million, a 27.8% year-over-year organic growth increase from the first quarter of 2005. Q1 2006 was a record quarter for Benchmark.

Diluted earnings per share for Q1 were $0.41, and $0.38 excluding the special items. Diluted earnings per share for Q1 2005 were $0.26.

GAAP net income for Q1 of 2006 was $26.5 million, a 57% increase compared to Q1 of 2005. Excluding the special items, net income was $24.7 million, a 46% increase from 2005.

As Gayla noted, our operating margin for the first quarter was 4.5%, excluding the special items discussed earlier. We are pleased that our efficiency efforts allowed for achieving this margin even with higher logistics costs, uneven component flows, mix changes received from customers, and increased schedule requirements in the last month of the quarter.

Our shipments in March 2006 were approximately 50% of our total shipments for the first quarter compared to 40% historically. We saw the back-end loading of the shipments impact not only our operating results but our inventory and receivable levels this quarter.

Our inventory turns were six times for the quarter and our overall inventory level was $403 million. The increase in inventory was due to the change in mix of the customer orders and positioning of inventory to meet our customers' strong demand in Q2. We continue to focus on our inventory turn metrics and anticipate this to improve to approximately 6.5 in Q2.

Pretax margin was 4.78% in Q1, excluding the special items. Our ROIC was 18% for the first quarter of 2006. Our ROIC continues to exceed our weighted average cost of capital.

Interest and other income was approximately $2.3 million for the quarter. Interest expense was $86,000. Other expense, foreign currency related, was approximately $619,000.

Our effective tax rate was 4.7% for Q1, including the impact of the special items. Excluding the special items, our effective tax rate was approximately 21%. This rate is improved when compared to our effective tax rate for 2005 of 23.8% due to additional benefits received from negotiating favorable tax incentives on our expanded business levels in Asia.

Weighted average shares outstanding were 64.8 million.

Our cash and short-term investments balance was $288 million at March 31. We continue to invest our growth and our ability to meet the increased demand we see from our customers. For Q1, our cash flows used by operations were $42.7 million in support of these working capital investments.

The cash used was primarily in the increase in accounts receivable of $81 million with the strong back-end demand in Q1. As noted earlier, approximately 50% of the Q1 shipments occurred in March. We anticipate cash flow to improve in Q2 to positive cash flows of approximately $50 million if the shipment pattern throughout the quarter reverts back to a more normalized level.

Capital expenditures for the first quarter were approximately $9.5 million. Depreciation and amortization expense was approximately $6.4 million for the quarter. Receivables were $447 million at March 31, increased from last quarter, with the heavy back-end loading of the Q1 shipments as well as the overall increased level of sales for the quarter.

Inventory was $403 million at March 31, an increased of $42 million when compared to last quarter. Inventory turns were 6 times. Again, our inventory levels increased due to a change in mix and customer orders and to support the continued growth in demand from our customers for Q2.

Current assets were approximately $1.2 billion, and the current ratio was 2.4 to 1 in Q1 compared to 2.5 to 1 in Q4. We have no debt outstanding at this time.

Our revenue breakdown by industry continues to show that we are not only growing our top-line revenue numbers but are continuing to diversify our revenue mix. The revenue breakdown by industry for this quarter approximates as follows. Medical 13%; telecom 12%; computers 58%; industrial control 12%; test and instrumentation 5%.

On a year year-over-year basis, we have had dramatic increases across the board in all of the industry sectors that we serve. In addition, we continue to see a significant level of growth in the non-tech industry sectors.

When comparing Q1 of 2006 to Q1 of 2005, we saw greater than 20% growth across all of our industry sectors. Revenues from the medical sector increased 33% to $81.5 million. Revenues from the telecom sector increased 21% to $79.6 million. Revenues from the computer sector were up 25% to $378 million. Revenues from the industrial control sector increased 33% to $78 million. Revenues from the test and instrumentation sector were up 66% to $34.1 million.

Revenue from our top customer was approximately 37% for the quarter with increased demand and new program ramps. We anticipate that revenues from our top customer will be in the mid 30% range for the full year of 2006. We do expect the percentage in the second half of the year to decline as product program crossovers and transitions occur.

Looking to the remainder of 2006, Benchmark continues to expect to stock-based compensation expenses under the new accounting guidelines of 123(R) to be approximately $0.02 per share in Q2 and $0.01 per share for Q3 and Q4. We also expect to incur approximately $2 million in additional restructuring charges during Q2 and Q3.

Now I will turn it over to Cary to provide a summary of Q1 and an overview of the marketplace.

Thank you, Barbara. First of all, I would like to take a moment to thank our customers and our team to helping us to achieve such an outstanding quarter. Q1 2006 was a record quarter for us. Our outlook for the remainder of 2006 remains very strong. I have confidence that our solid total customer solution business model will continue to help us deliver industry-leading metrics for our customers and our shareholders.

From the EMS market point of view, we see the demand from broad-based EMS is increasing. The outsourcing opportunity remains strong. We will continue to see strong growth [signs] in our non-tech sectors, as they continue to pursue ways to reduce costs and improve in their time to market. [We view the incremental] outsourcing opportunity continue to be strong for Benchmark.

As we end Q2 we are ready for another challenging quarter with strong demand from our customers and continued ramping of several new projects. Due to the continuous growth, we had to make a significant working capital investment to meet our customer requirements for Q1. For the balance of 2006, our primary challenge is to properly manage our growth and maintain our execution level.

Also, we will continue to address the proper alignment of our footprint and resources in according with the market demand. We will do so in 2006 through continuous expanding our production in the low-cost regions and through a restructuring in [our] geographies.

As a result of strong growth for our customers we had to raise our 2006 EPS and the revenue guidance. Our new 2006 guidance does include the impact of the new program ramps, customer product crossovers, and the selected transition away from certain programs which does not align with our business model.

At this point in time we would like to open for the Q&A session. During the session, please keep your questions to one, and one follow-up, in order to allow enough time for everyone. Operator?

(OPERATOR INSTRUCTIONS) Jim Suva of Citigroup.

Congratulations. The question regards how you had such a very strong last month in the quarter for March. Now that we are well into April, you know, April 20, can you talk about how those trends have continued, or if they have reverted back to more normal patterns? And any color on the segments for that strength in March in what we see?

Jim, we saw changes in the mix, which always has an impact of having a pronounced transition from the timing. When you are planning to ship product A and you end up shipping product B, you typically are not having the right mix of inventory on hand to be able to support the shipments. Once you get the inventory aligned to be able to ship, then it just provides back-end timing on that.

So what we really saw was increased demand for an unplanned product set for several of our customers. Combined with that, we saw just, I think, what was a better Q1 level of demand than was originally anticipated. So it was really kind of a two-part impact; one was the mix change, and two was a better-than-expected demand level.

At the same time, we did have some component [ND] challenges on certain components. I do not see that as an overall statement of the supply chain in general, but there were pockets where some of the components were not as readily available.

And how you see things right now in April?

In April, I have not seen a big mix change. Obviously, it is early in the quarter. Typically, if you are going to see that, it is going to be as we get towards the end of a quarter, where the sales activity really picks up and your forecast either is validated or changed. So, I kind of jokingly tell people often that we will see after it is over how well the forecast came out.

Thank you and congratulations.

Kevin Kessel of Bear Stearns.

Just a question here on the largest customer, which was up 20% sequentially. You spoke about the upside being relatively broad based, you know, multiple customers. Just on the face of it, I see obviously medical being up. But it seems like this customer drove essentially all the growth in the quarter, because they were up $40 million sequentially.

Was this something that took you guys a little bit by surprise in terms of when you originally presented your guidance you were not expecting such a ramp?

First of all, Kevin, I think we saw significant growth. If you look across, actually three out of five of our industry segments had growth on a quarter over quarter basis in the first quarter, which is typically flat, maybe even down. So for three industries to have growth really is, in my mind, quite broad based. It wasn't a single customer only that showed growth.

So I think that there were more than a couple of customers even that were pleasantly surprised at the demand levels in the marketplace that allowed for both the mix change and the upside to the revenues that we saw. So I think the marketplace, the sales levels, really were stronger in Q1 than what was originally anticipated.

Right; I guess I probably misspoke. I definitely agree I saw medical up, and telecom. I guess just the overall move in the top customer was somewhat surprising. I don't think many were people were expecting such a move.

Can you update us on the overall program size of this very large program you are expecting to ramp, that was supposed to be about $200 million a year? Is that still on track for that, or is it now well above that? What is update on that program?

That project is pretty much in full ramp right now.

It's in full ramp, and it's about 200 still? Or would you say it is higher than that?

It is still hard to identify the total program. Just still too early to tell, but that is probably in the ballpark numbers.

Okay. Then you guys traditionally give your top two largest customers. I didn't hear that on the call. Could you give us what the top two were as a percentage?

Our only customer in excess of 10% this quarter was at about 37%. Our second customer is just below 10% this quarter. So we did not have that disclosed.

I see. (inaudible). Then I think understood what you were saying on the taxes. My question is, on the --.

It's complicated.

Yes, a little bit. But in terms of just the working capital, I believe you said that you do expect cash flow to reverse next quarter, to be about $50 million of cash flow from ops, if shipments ship the way you expect. Would you venture to say what you think cash flow from ops might be for the full year? Or what you at least would target a range?

No, I think in general, we do expect the cash flows to improve for the full year. I would say that we clearly expect more than $100 million to be provided, with some even flows of production.

I think it is a challenge to see how much of the year will actually end up with the number of program ramps we have. But looking at it currently, we do have a number of programs that are ramping in second and third quarter. Once those programs ramps we should get back to a normalized velocity on inventory. With that, I would expect us to achieve $100 million or better in cash flows for the year.

Okay. That just begs the question in terms of cash, which is constantly a question with you guys. You have, what, I think, $4.50 in net cash per share. If it happens the way you expect, you will have obviously more at the end of the year.

You guys did not provide an update on your prepared marks in terms of where that stands. Obviously you are expanding Asia. Maybe you could update us on what that means; or give some color around what exactly you're doing in Asia today, greenfielding; and maybe you can say what you think you might do with the cash over time.

We're not changing our strategy from a cash standpoint of view. We all set a priority, number one, to grow the business. Then if we don't use the cash for that, we can use it for some sort of return for the shareholders. That continues being our thought. Our Board of Directors and management review the cash position on a quarterly basis.

Of course our definitely first goal is try to continue expanding our Asian footprint. Are building the new building in China; expect to be operational in the early part of 2007. At the same time we will continue looking at M&A activities in the U.S. as well as in the Far East side.

Again, we reemphasize our priority. Any acquisition in the Far East will be more a scale type of acquisition; and any smaller acquisition in the U.S. will be a scale type acquisition. So we have not changed in that objective (indiscernible).

We are working very hard on that, and a lot of activity going on. Unfortunately at this point in time I have nothing to report yet.

Great, that's helpful. Just the last thing on that China, can you give us an understanding of how many SMT lines, or square footage, or what the site is expected to be?

The site will be [do some less] in a PCB board as well for systems integration. We will still try to determine the layout, and depending on customer requirement; we will provide this detail later in the year.

Thank you.

Amit Daryanani from RBC Capital Markets.

Cary, when I sort of look at the midpoint of your Q2 guidance it looks like revenues in the first half of 2006 would be about $1.3 billion. Then from there, for you to hit the midpoint of your 2006 guidance of $2.58 billion, it would imply the back half of the year should see about $1.28 billion in revenues. Or essentially the back half is going to be down 1.5% versus the first half.

Now historically the second half of the year has been up 5% or 6% versus H-1. I am just trying to understand. Are you being a little too conservative with your guidance here? Or did you see some revenues get pulled into Q1 from the remainder of the year?

No, (indiscernible) I said earlier and our guidance includes, number one, program ramps; number two, some crossovers of the products; number three, we have some projects that will be transitioned away from us.

So those are all elements that will be put into the revenue projection. But I will say, [if you had to] look overall for the year, almost 15% growth of top line is not too bad organically.

All right. Inventory, it looks like it sort of inched up again. I know Gayla spoke about some component shortages. Can you talk specifically if you are actually holding some buffer inventory, given some extended lead times and component shortages right now?

Well, I don't think the markets, component markets have changed that much yet. We do see some lead times stretched out, in certain pockets.

The situations Gayla talked about are very unique components. We just saw a unique situation cause the -- inconsistent deliveries caused the issue for us. But it is not across the board. (indiscernible) being resolved, and we [are] working from there.

All right. Just finally, could you just talk about your capacity utilization, and just sort of talked about how comfortable you are with your U.S. footprint at this point?

We're close to 70%, very close to 70%. As you are aware we opened a new facility in Rochester, Minnesota, last Q4. That operation, that facility is operational, and hopefully it will be profitable this quarter.

So we will continue to see a pretty strong demand for even for U.S.-based activity. So we are watching our capacity very closely. This year we will have enough footprint in the right place to support our customer demand.

Thanks a lot.

Shawn Severson, Raymond James.

Could you just -- do you have any idea of the impact to the margins of the inefficiencies at the end of the quarter? Can you quantify it? Or is too hard to kind of get your arms around it in that detail?

I don't think I can quantify a with and without. But I think you clearly, from your knowledge of the industry, know that the impact of the inefficiencies associated with the level of back-end loading are clearly dampening on your margin. Whether it is the overtime, the interruption to the line, just all of those together have a downward thrust to your margin.

But again, I think that is part of doing the business we do. The high-mix operations are going to see that from time to time. This time it just was more pronounced than even normal.

Okay. I know you talked about some programs transitioning and stuff. Could you give some color on kind of what is like end of life, or it is market share? Just kind of what is going out in the second half that we should watch for?

You are obviously aware there are several very major projects kick in, the first half. I guess it is the -- whenever you have a new product you tend to be -- have encroaching on the existing projects from the revenue dollar standpoint of view.

I think you can call it conservatism, or whatever you want to call it, but we do put that into consideration for our projections.

Is that more worried about cannibalizing existing revenues, I guess, as the new products come on? That is the primary concern in the second half?

I'm sorry; can you repeat the question again?

I was just saying that you are more concerned about cannibalizing existing programs with new programs, versus transitioning or product -- total programs going away, or anything like that.

Yes, I am probably more concerned about the encroaching the projects from one to another; yes.

Okay. Then just lastly, do you have a complete system built number for a percentage of your revenue?

I don't have that at this point in time. We can get back to you.

Just the new large program that is ramping, that is a complete system build product, box build?

Yes, sir.

Thank you.

Carter Shoop of Deutsche Bank.

Can we talk about your second-largest customer? Over the past three quarters it has decreased roughly 40% sequentially. Are you going through a product transition there? Or is it more of a share shift that we will see permanently last, and we will actually see this customer remain below 10% for the full year?

I think we have seen the impact, probably last year, of a product transition in the fact that you were building two versions of a product and one ultimately gets kind of the market share going forward.

We believe we are maintaining our market share of the customer's production and that the overall relationship is strong. But the crossover really occurred last year and probably had a double-up effect, or not quite double-up but a duplication effect on the throughput.

Okay, so we should expect this customer to kind of remain in that kind of high single digit level for the remainder of the year?

I would expect so.

Then in regards to your largest customer, going from 37% down to kind of the mid 30s, should we expect that to be a pretty linear transition starting off in the second quarter, with that taking a step down as a percentage of total revenue?

Say that again; I'm sorry.

You're saying it is at 37% now; and it will be kind of in the mid 30%'s for the full year?

Yes.

So should we expect that to be a pretty linear progression there? Where we go from 37% to say 36%, 35% next quarter, etc. So we are ending kind of the low 30%'s in 4Q? Or is it more of a second half versus first-half effect?

I would say so. Some of the programs, as they get ramps in, they become shared programs. So as we get through the latter part of the year, I would see that probably taking place and the percentage leveling out at that point.

Okay. Last question. In your test and instrumentations market we saw some weakness there. Is that a result of some share loss at a particular customer? If so, is that fully out of the system now, or should we expect that to be down again in the second quarter?

No, I don't think we lost any share for that sector. I think you always have the aberration (indiscernible) from quarter-to-quarter due to the product order and the change and so on and so forth.

Do you expect to maintain share with all of your customers in that market throughout '06?

No, I don't believe so.

Thank you.

Jason Gursky with JPMorgan.

Gayla, maybe you could just kind of walk us through your thoughts on gross margins. You did have the impacts of the back-end load this quarter. But on a normalized basis, given the program ramps that you have now, where do you think gross margins go once everything is fully ramped and you have got kind of a normalized production pattern, given the current mix of the programs that you have got?

We are still driving towards the operating margin, 4.5% to 5% of our goal. We're clearly very pleased with the 4.5% operating margin with the mix change that we have seen this quarter.

As we ramp new programs and have transitions of programs, that does cause inefficiencies. For the most part, I would say that as we continue to manage the growth opportunities that we have, I would be very comfortable with a 4.5% operating margin.

If you run through the model and the guidance we have, we are not stretching that or over-guiding that. I think we clearly are going to move in the direction of the 5% over the longer term, but are very content and pleased with the results of the 4.5% range that we have currently.

Right. Then just a follow-up on the test and instrumentation. One of your customers does have an SEC filing out there that suggest that they may be shifting some of their business to one of your competitors. It seems that that revenue is being produced here in the United States.

I am just kind of curious what your thoughts are as we move into the second half, whether you're completely comfortable with your footprint here in the United States, if that business goes away; and whether we should be expecting any type of restructuring charges in the second half of the year as that business transitions away from you guys.

Well again, we don't comment on a single customer. We have looked at our footprint. We have addressed all of the restructuring charges that we currently believe are appropriate. We had $2.8 million this quarter; expect another $2 million next quarter or over the next two quarters. And do not believe that there's any additional restructuring charges that will be warranted or required with our footprint.

Oftentimes you will see, as customers go through changes in their ownership and other such changes, that they look at the proper alignment of their manufacturing solutions.

So I am not sure what SEC filings you might refer to. But generally as those come out, whether it be through an IPO, or someone doing a spin-off, or someone doing an acquisition, as those changes evolve, we address what our proper alignment is; and is it the business model that is appropriate for us.

So to the extent that there are changes associated with that, that is normal and in the normal course of business. As we said in our 2006 guidance, our full-year guidance, we have factored in full knowledge of everything we are aware of, both in program ramps, to the best of our ability to address cannibalization as it may happen from new products being ramped, and product transitions. So all of those are factored into each of our guidance points.

Okay, great. Thanks guys.

Steven Fox of Merrill Lynch.

Did you talk about the restructuring charges that you are going to take? Just specifically what are those associated with in terms of plants, etc.?

Well, those are typically -- they are very much typical. They are severance cost and leasehold cost.

Is it in the North American region or other places?

Yes, in the U.S.

Okay. Then in terms of the inventory, you were fairly specific about where you want your cash flows to be for this quarter. Does that imply that you've already worked out a substantial portion of the inventory that was on the books at the end of the last quarter?

We have a pretty good inventory strategy in place. Of course all the work had to be in a detailed execution level. We have a plan and we have a pretty good focus on thing. I feel pretty good about that.

Then lastly, on the operating margin, again. Gayla, you sort of already talked about this. But it sounds like for the year, given pushes and pulls, a 4.5% operating margin is about what is reasonable, even if you were to see some upside in the volume. Am I putting words in your mouth? Or is that a good way to look at it?

Well, I would say if we see upside above that which we have guided, then I would like to see upside in the margins. But I feel comfortable with the guidance we have given, which really is incorporating the lower end of the range and what we have been able to deliver thus far, rather than guiding to some upside there.

Right, because you had upside in the revenues this quarter, the quarter past, and you did not get the margin upside. So I guess I am wondering, why would you get margin upside in the forward quarters with revenue upside? What would be different?

As we mentioned earlier, whenever you have the new product introductions, and the ramps taking place, there is an associated level with the lack of clarity on forecasting and the timing of those forecasts.

Until we have some settling in of those new programs, I do not believe that we are going to see that completely go away and kind of get to a normalized level.

There is a lot of activity of the marketplace. It is an overall good marketplace. I expect to continue to see new programs ramp. But one of the things we have not mentioned, which really is going to come into play in the next couple of quarters is the RoHS versus non-RoHS.

As customers try to forecast and anticipate which products are going to ship, I'm going to in my forecast anticipate that some of those projections may change. As they do so, we will once again have some inefficiencies in operations which will impact our margins.

So call it conservative. I call it trying to be as realistic as we can. Then to the extent that we're able to better that, obviously, we will deliver that news when we can do it.

Thank you. That's very helpful.

Michael Walker, Credit Suisse.

You will be happy to know my tough questions have been asked. I guess I was just going to -- what I was going to ask about was the RoHS stuff. How big of a deal is that? Is that really going to be an issue for inventories for across the supply chain?

Michael, I like to think that it is the Y2K of engineers. My engineers assure me that it is not; it is a really big deal. I don't think the impact is probably truly known. Certain industries have a delayed implementation period. Other industries and geographies have a very urgent need. I think it's going to be a bit of an unknown, as really the sales pipeline at the end-customer will dictate what our customers’ action-reaction will be.

So although our customer may not be directly impacted by it, to the extent that their customers want to implement, even if it is optionally, implement early, that will drive things back through the supply chain that will affect us all. So that, I think, is the major unknown kind of driving a bit of challenge today.

So do you -- if you look at your inventory stockpiles, do you have a whole bunch of compliant stuff and a whole bunch of noncompliant stuff in there? And then the customers are saying, well, for this product, we're going to be compliant, and this one we're not.

Michael, I can only believe that if you sit there look at our numbers you're probably saying we have a bunch of everything.

It looks that way, Gayla.

I think we are clearly aligned with our customers on what their forecast is driving. My lack of certainty is around -- do we have what their customers ultimately want? And are we driving the right demand profiles?

(indiscernible) from a RoHs standpoint of view, you definitely see a challenging of a [managing] the inventory of the cost from a -- either from the lead part to the RoHS-compliant part. Yes, there is a challenge for the inventory in stockrooms, just because complexity and the -- you keep both inventory on hand, and you ultimately [don't] know the transitional times, and the so on and so forth.

It definitely is a challenge for the industry as a whole. But I don't see it is a significant impact from the inventory dollars standpoint of view. Just a volume standpoint of view is (indiscernible) tremendous (indiscernible).

All right. Thanks a lot.

Alex Blanton of Ingalls & Snyder.

It sounded to me, when you -- in your opening remarks that you were saying that the end markets are a lot stronger than you've expected. Is that correct?

Yes.

That is pretty much across the board?

Not (indiscernible) across the board, but if you look from sector to sector, (indiscernible) all segments are looking pretty decent, yes.

If you look at the surprise in the first-quarter sales, and the amount which was above your expectation, could you rank these different factors as to their importance in that? End market, stronger than expected, transfers from competitors, increased penetration of existing accounts, and just new wins -- could you rank those?

I don't think we could probably do a very effective job of saying here's what we expected and here is why we exceeded expectation. I think we are very pleased with the results; but there was a big [free basket] turnover.

As I said, if you look at our inventory levels and our receivables, you see that how back-end loaded we were. So there were a lot of changes as compared to what we originally anticipated and what actually happened in the mix.

Do you have a grasp of why the end-markets turned out to be so strong? Was this really purchasing at the ultimate retail level? Was there an inventory rebuilding that took place on the part of some of your customers? Could you just enlighten us a little bit more on that?

In other words, I am trying to get a sense of whether this would continue for the remainder of the year and where it is coming from.

It is difficult. You know, we look at -- we have approximately 75, 80 customers and everyone has a different way to do their planning and so on and so forth.

But one thing, I can say this though, I have met with several customers for the last couple or three weeks. The general posture from our customers is they are feeling pretty good. If that means converting to a dollars and cents for a significant market recovery, I don't think so.

But generally, a lot of new product introductions, and some of the products are being accepted very well by the market. That of course will transfer into an additional revenue for us. So we feel pretty good.

You look at the guidance we gave the Street today; we raised our revenue guidance and that indicates our customer base did give us a good indication they anticipate to do quite well for the year.

I don't have any (indiscernible) data point you can check. You can check a lot of the current reporting, earning reports for various companies. But just from our database standpoint of view, it's looking pretty positive at this point in time.

Okay, one final thing. Could you just remind us of what your capacity footprint is? How much is in low-cost regions versus high-cost at this point?

I don't have a precise number. The last number we looked at, I think we are 36%, 37% in low-cost areas. Of course there will be continuing increase as we close the UK facility, as well as open the additional facility in China.

So a year from now, where would you be?

(indiscernible) definitely the low-cost area is going to be over 40%. My goal is to say in the three-year, two or three-year time frame we will probably, like everybody else, going to be in the high 40% in the low-cost areas.

Okay, thank you.

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