Benchmark Electronics Inc (BHE) 2006 Q2 法說會逐字稿

Welcome to the Benchmark Electronics second-quarter 2006 earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. At this time then, I would like to turn the conference over to Gayla Delly. Please go ahead.

Good morning. Welcome, everyone, to the Benchmark Electronics conference call today to discuss our financial results for the second quarter of 2006. I will begin by introducing our team present today.

I'm Gayla Delly, the CFO of Benchmark Electronics. I will begin our call with an overview of our outstanding second quarter and our expectations for the remainder of 2006. Barbara Sorenson, our Vice President Finance, with then discuss our financial metrics for Q2 in greater detail. Cary Fu, our President and CEO, will then the follow, providing comments on our strategy and an overview of the current marketplace.

After we complete 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-Ks, quarterly filings on Forms 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.

Please do recall that on March 15, 2006, we announced a three-for-two stock split which was paid on April 3, 2006, to shareholders of record as of March 27, 2006. All share and per-share data for periods discussed during our conference call today have been retroactively adjusted for this stock split.

Our Q2 financial results contain two special items. They are as follows. Restructuring charges of $1.3 million, which is $1.0 million net of tax; and stock-based compensation expense, which is $1.1 million or $835,000 net of tax, which is related to the implementation of FAS 123(R) during 2006.

Looking to the remainder of 2006, Benchmark continues to expect stock-based compensation expenses under the new accounting guidelines of Financial Accounting Standard 123(R) to be approximately $0.01 per share for Q3 and again in Q4. We also expect to incur approximately $1 million in additional restructuring charges during Q3.

To help in a more meaningful comparative analysis, we will present certain financial information today excluding these special items in our conference call. We will call your attention to the fact that these items are being excluded when we do so.

In today's press release, we did include a reconciliation of our GAAP results to our results excluding these items.

We are pleased with the efforts of our teams in supporting our customers' increased demand levels and the program ramps during Q2. Our teams worked extremely hard to meet these challenges. I want to thank our dedicated teams and our customers for their support.

I am pleased to announce our Q2 2006 results with revenues a record $749 million. These revenues were $89 million or 13% above the high end of our guidance, which ranged from $630 million to $660 million, as we provided in our last conference call; and our revenues are up 33.6% year-over-year compared to revenue of $561 million in 2005.

We completed the second quarter of 2006 with significant increases in demand levels and several successful new program ramps. We supported the ramp of three new programs to volume during Q2 and also continued the support of ramps which began in the previous quarter. Together these, with the strength of the overall demand across the board, resulted in a very strong quarter.

During Q2, we experienced year-over-year growth in each of the industry sectors we serve and double-digit year-over-year growth in each of the sectors during the first half of 2006.

Our operating margin for the second quarter was 4.7%, excluding the special items we noted earlier. This is an improvement from Q1 and included the effects of inefficiencies with the significant upside in production we experienced during the quarter.

Our GAAP net income for Q2 2006 was $27.5 million, a 47% increase compared to Q2 of 2005. Excluding special items, net income was $29.4 million, a 57% increase from 2005.

Diluted earnings per share for Q2 were $0.42. Diluted earnings per share excluding special items were $0.45 compared to our guidance for the quarter of $0.36 to $0.39 per share. Diluted earnings per share for Q2 2005 was $0.29.

The marketplace for outsourcing remains strong as we look to the next six months. During the first half for 2006, we saw positive demand conditions throughout our business. OEMs globally are seeking opportunities to increase their level of outsourcing and reduce their operating costs.

During the second quarter, for 2006, our bookings continued to reflect these demand conditions, and we booked eight new programs representing [60] to $90 million in annual revenues. These program opportunities are with both new and existing customers and represent a mix of the industries we serve, which includes industrial controls, computers, and telecommunications.

Keep in mind that these are estimates, and actual revenues may differ from our estimated revenue run rate. Our experience has shown in some cases program revenues exceed expectations, and in other cases the programs never meet the expectations of us and our customers.

As a result of the continuing strong demand from our customers, we currently expect Q3 to be a strong quarter again, with revenues in the range of 710 to $750 million, which is based on indications from our customers.

The corresponding earnings per share is expected in the range of $0.40 to $0.45, which excludes the estimated restructuring charges of $1 million and stock-based compensation expenses of $500,000.

Based on our results to date, we are increasing our guidance for the full year. Our revenues for 2006 are expected to be in the range of 2.76 to $2.85 billion, increased from the previous range provided of 2.55 to $2.6 billion given on our last conference call.

On a non-GAAP basis, the corresponding earnings per share range is expected to be $1.61 to $1.69, which excludes the tax benefit in Q1 of restructuring expenses and stock-based compensation expenses to be recorded during 2006.

Included in our guidance for 2006 is the impact of our new programs ramping, selective transition away from programs not aligning with expectations, financial strategies, business models, and as well includes the potential impact of new programs which may encroach upon other existing products.

For the second half of 2006, we do see signs of strong activity for Q3 based on the forecast from our customers. The lower forecast for Q4 reflects several factors, which include product transitions, the overall macroenvironment, product crossovers, and the potential second sourcing for some products. Each of these factors has been considered in developing our guidance.

Now, I will turn it over to Barbara to take you through a detailed review of our financial information for the quarter; and Cary will then provide some comments regarding our year and an overview of the marketplace. We will lastly conclude with Cary and I answering your questions in a Q&A session. I will turn it over to Barbara now.

Thank you, Gayla. As we reported this morning in our press release, Benchmark had another quarter of record revenues. Q2 of 2006 was completed with revenues of $749 million, a 33.6% year-over-year organic growth increase from the second quarter of 2005. This was a 15% increase from the first quarter of this year.

Diluted earnings per share for Q2 were $0.42, and $0.45 excluding the special items. Diluted earnings per share for 2005 were $0.29.

GAAP net income for Q2 of 2006 was $27.5 million, and excluding the special items net income was $29.4 million.

Diluted earnings per share for the first six months of 2006 were $0.83, compared to $0.56 for the same period in 2005. GAAP net income for the first half of 2006 was $54 million compared to $35.6 million in 2005.

As Gayla noted, our operating margin for the second quarter was 4.7%, excluding the special items discussed earlier, which is an improvement from the first quarter of 2006. We achieved this improved margin even with the significant upside in production during the quarter and the mix and schedule changes received from customers throughout the period. These mix and schedule changes received from customers normally cause inefficiencies that include unplanned higher logistics cost and material receipt and timing issues.

Pretax margin was 4.93% in Q2, excluding the special items. Our return on invested capital was 16.5% for the second quarter of 2006, which exceeded our weighted average cost of capital. Interest and other income was approximately $2.5 million for the quarter.

Interest expense was $97,000, and other expenses, primarily foreign currency related, were approximately $530,000.

Our effective tax rate was approximately 20% for Q2, which is consistent with the expected 21% rate for the remainder of the year. This rate is improved when compared to our effective tax rate for 2005 of 23.8% due to additional benefits received for negotiating favorable tax incentives on our expanded business levels in Asia.

Weighted average shares outstanding were 65.3 million.

Our cash and short-term investments balance was $282 million at June 30. To meet our ongoing growth, customer demand, and change in requirements, we continued the need to invest in working capital, specifically in inventory, during Q2. Compared to Q1, our cash flows from operations did improve. For the second quarter, our cash flows provided by operations were $1.9 million, compared to cash flows used of $42.7 million in Q1.

Capital expenditures for the second quarter were approximately $12.8 million. Depreciation and amortization expense was approximately $6.6 million.

Receivables were $443 million at June 30, a decrease of $4 million from last quarter. Inventory was $481 million at June 30, an increase of $78 million when compared to last quarter. This increase was primarily due to an increase of $41 million in raw materials and $34 million in finished goods.

Our inventory turns for the quarter were 5.8 times. Our inventory levels have been positioned and aligned to support the continued variability in end customer demand and allow for extended supplier lead-times and the effects of RoHS material conversions. These factors have driven our inventory levels higher.

Current assets were approximately $1.2 billion, and the current ratio was 2.3 to 1 in Q2 compared to 2.4 to 1 in Q1. We have no debt outstanding at this time.

Comparing the first half of 2006 to the same period in 2005, we have had dramatic increases across the board in all of our industry sectors that we serve. On a year-over-year basis, revenues from the medical sector increased 42%. Revenues from the computer sector increased 31%. Revenues from industrial controls increased 24%. Revenues from the test and instrumentation sector increased 63%. Revenues from the telecom sector increased 14%.

As noted, we continued to see a significant level of growth in the nontech industry sectors, specifically the medical and industrial controls. The revenue breakdown by industry for this quarter continued to show consistency and approximates as follows. Medical 13%; telecom 11%, computers 59%, industrial controls 11%; and test and instrumentation 6%.

Now, I will turn it over to Cary to provide comments on Q2 and an overview of the marketplace.

Thank you, Barbara. Good morning. First of all, I would like to take this opportunity to thank our team for the outstanding performance during this very challenging quarter, and a record quarter for Benchmark.

During Q1 and Q2 of 2006, our revenue has increased over 30% compared to 2005, and the outlook for the remainder of 2006 remains very strong.

For the overall market point of view, we see the demand from OEMs is increasing. Their outsourcing activity remains very, very strong. Although recently we had a [see] market base, now it is providing some mixed signals, with some easing of the growth projection for the latter part of 2006.

As we go forward into Q3, we continue to see a strong demand in another challenging quarter. Our focus to improving our operational effectiveness to drive this continued success for Benchmark.

Also, as we grow, we will continue to address our four points to support our customer demand. Our new China facility will be expected to be online second-quarter 2007. Additionally, we are exploring additional, low-cost manufacturing opportunity in Asia.

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

(OPERATOR INSTRUCTIONS) Jim Suva from Citigroup.

Congratulations not only on a good quarter but a great outlook. As you look at this quarter and the next quarter outlook, can you maybe give a little bit of color on the end segments really that are kind of surprising you to the upside?

It seems you mentioned some comments of broad-based strength. But it looks like maybe high-end computing and test were exceptionally high; but I wondered if that is accurate. And what about for September?

As we said, in fact we saw strong increases across the board in each of our industries; as well, we saw it across all geographies. So with double-digit growth for the year to date in both industry and geography, I think clearly depicts the broad-based nature of the increases.

Additionally, the strong level of ramp in new products affects more than one industry. That has an impact which is not able to be clearly differentiated specifically from the end-market demand levels, but clearly impacts several of the areas in which we are ramping new programs both last quarter and this quarter.

Okay. Then as a follow-up, Cary had mentioned pursuing low-cost other areas. Can you give us an update as far as the status in China, and any cash flow outlays we can expect for that, and the timing for ramping of like a greenfield in China?

We are planning to bring the additional facility up in the first half; I believe specifically, in the second quarter time frame of 2007. We expect the capital expenditures for that facility to be in the 12 to $15 million range. The portion of it to be incurred this year, the major portion of that will actually be in 2007.

Above and beyond that, we will continue to look at opportunities to expand, first in Asia; and then potentially again we have always had on the radar screen to see if it is appropriate to identify anything in Eastern Europe that may make sense for us to expand into.

Great, thank you very much and congratulations.

Carter Shoop with Deutsche Bank.

On Q2, I mean, 13% upside versus the high end of the range, is there a way we can kind of talk about how much of that was end-demand related, versus more the new product introductions, or volume ramps? What was the real big surprise there? I mean, 13% is pretty unheard of.

Clearly, we had the demand across quite a few sectors, as you can see. It did not flow our overall percentage of business in any geo or any industry clearly, ahead of the others.

I think that that clearly says that a portion of it is from end-market demand. As I stated earlier, it is probably difficult for us to see with any level of clarity how much of that is specifically end-market demand driven versus new products, because new products are also benefiting from end-market demand levels.

Additionally, maybe one of the things that we didn't point out is that some of those new product introductions were actually pull-ins to a tighter time frame than was anticipated. I think that is a reaction to the positive, overall marketplace that has occurred over the past few months.

As a follow-up, fourth-quarter revenue guidance is a bit cautious. I’m looking at the midpoint of guidance for 3Q and 4Q, it's down about 8% or so when it usually is a seasonally strong quarter.

You mentioned four variables there. I was wondering if you could rank those in regards to what the biggest drivers are, or what you perceive the biggest drivers are, to a surprising -- to a somewhat weak fourth quarter, given the seasonal strength that you usually see.

Clearly the overriding story is the macroenvironment. At this point in time, there is quite a few mixed signals out there. There is probably not as much clarity from the customers as to what should be expected.

The level of positive demand that has been seen over the past six to nine months may overshadow and allow people to not have to invest as much or spend as much on the capital front in Q4, given the macroenvironment. So I clearly believe that is the biggest reason.

All along, as we have said, in our forecasting, as we look at things, we do not want to get ahead of ourselves in putting expectations out there amidst a marketplace that shows the kinds of signs that are seen right now.

Just to be on the same page here, if we see the type of growth rates and end-market demand that we saw in 2Q and 1Q, we should see upside to 4Q numbers, then; it is that safe to assume?

Clearly, if end-market demand is stronger than what is anticipated, we would expect to benefit from that.

Definitely.

I guess what I was trying to say is if it remains kind of at these levels -- so it sounds like you guys are expecting a pretty meaningful drop-off in demand. So if it kind of stays, if we see kind of a continued healthy environment, not robust, across your customer base, we would expect to see upside to 4Q numbers.

I am not sure I understand that well enough to respond meaningfully to it. But I guess, the answer is I cannot tell you, with the information that we have from our customers, what factoring or what haircutting specifically they put into it as a result of macroenvironment.

I don't have all of the formulary information that helps them determine why the drive is what it is; other than to say it appears to be that it is primarily based on the macroenvironment in and of itself.

Thank you.

Amit Daryanani with RBC Capital Markets.

Just a question on your cash flow from operations. What are the expectations for the remainder of the year? I know last quarter we spoke about it being positive $100 million. I am wondering, given the revenue trajectory you have now, would that suffer in the near term, perhaps?

We clearly made it quite challenging for ourselves. We did not deliver on the cash flow and deliver on the upside to the revenue that we had and the opportunities we see for the next quarter.

I do expect that as we have the year forecast right now, -- i.e., if Q4 does not have the strength in it that Q3 does -- we would see that we would get back the cash we have invested, in essence. So for the year, we would expect to be slightly positive overall for the year, and probably about $50 million positive to where we are now.

All right. Just a [longative] question for you all. Your SG&A level is around 2.3% of sales. All your peers right now, I think are struggling to rein in their SG&A to get within 4% of sales despite them having potentially a better footprint than you guys.

I am just wondering if you could talk about what is the differentiator for you guys that you're able to accomplish this. Is that sustainable in the long run?

I do believe that there is some classification difference, which I obviously do not have enough insight into some of the others' accounting methodology.

But I think us and others really look at the operating line, because of the lack of understanding as to what gets categorized in what area. Yet at the same time, I will give credit to our teams that we are continuing to drive efficiencies and to ensure that we are leveraging properly. But I do believe that a pretty good portion of it is probably associated with the reclassification, if you will.

Just one quick question. Did you guys talk about what percent of revenues come from your largest customer this quarter?

No, we will disclose the appropriate information for the disclosures that need to be made in our Q.

All right. Thanks a lot. Great job, guys.

Kevin Kessel with Bear Stearns.

In terms of inventory, can you guys talk about the sequential growth? You mentioned a couple of factors, and you also mentioned RoHS. Can you break that down? Because I think it was probably up more than you'd expect, and obviously you were supporting lots of ramps.

I think we really broke it down into two separate buckets in dollarized amounts, and then tried to provide some insight into the whys and wherefores. So when we look at the dollarized amount, raw materials were up about $41 million and finished goods were up approximately $34 million.

The primary reasons would be, and I don't have a weighting for these specifically, but we have seen lead-times expand in several areas; and hopefully, with some of the mixed signals in the marketplace, we will see those lead-times come back down and shrink once again. So that is a positive sign we are looking for.

We do see that there were the effects of RoHS, in that you are positioning the demands for both non-RoHS and RoHS in order to ramp and get through the cutover period specifically, which affected Europe first. So you have got that inventory position.

Then the third item is the variability in customer demands. As we have mentioned before, when we have a good level of upside and the opportunities are robust for customers, the customers and us work together to ensure that they are able to meet that customer demand, although there may not be total clarity within the sales force as to which end product will be required. Therefore the mix needs to have a level of flexibility around it, and that is what you see reflected in our inventory level.

Would you expect inventory then to be down next quarter, based on your projections? Or (inaudible) decline at the midpoint?

What I see is really your inventory at each quarter end is supporting the next quarter's production. So given our Q4 forecast, I would expect our ending inventory for Q3 to come down. If my forecast needs to be taken up, then we will look at what the inventory level needs to be. If it goes down you will -- so it all pings off of what the following quarter's revenue forecast is.

On the inventory level standpoint of view, that is something we would be very focused on. But just to add another point, there was a lot of discussion about inventory level in the whole industry as a whole.

But today you look at, based on the market share, we look at the inventory level are fairly low in the channel. What that means is make these revenue growth, volume increase, a lot of inflexibility in there. So that has caused a lot of issue, trying to bring the inventory in early; or trying to push inventory in as quick as we can.

So as we become more global and the distribution on the inventory, the right geo, plus the low inventory level in the channel, causes the inventory to go up slightly.

Some of our customers are concerned about the inventory, the lead time, and the increase in the demand for the buffer for safety stock for the raw materials side. So all those factors come in.

But you look at our revenue go up much so much, and the inventory was kind of higher than I like anticipated. But overall I think it will be coming down, as Gayla said, next quarter or so.

Then I think when you set out those four factors for the lower Q4 forecast, macro conditions being one, I think you said second sourcing of some products, which I think you guys have communicated in the past.

Can you just give us a little more understanding about what that means? Is this the new products that you have ramped over time will likely be second sourced with another provider?

No, I think that as a general statement that you do expect that at some point there will be opportunities that some will have second sourcing. So it is just a phenomenon in the industry. As you ramp production it is usually ramped with one source; and there may be others that come in at some point in time.

If a product continues to be very successful, you anticipate it would be in some sort of second sourcing (inaudible).

What is the reason that you guys aren't going to provide Sun's percentage on the call, as you have in the past? Or just the top customer percentages?

We will provide that information in our Q. That is just -- when we have one customer -- at one point in time we had three customers and we provided it. Now with only one, we will provide it in our Q, because we don't have any other customers that require any kind of disclosure at this point in time.

Thomas Dinges with JPMorgan.

I just wanted to follow up a little bit on that last question. Cary and Gayla, you guys have talked quite a bit about diversifying the customer mix. Obviously it is tough to turn away real strong business trends that you have seen with your largest customer and in your largest segment.

But I am just curious what incentives that you guys have put in place amongst your sales force to possibly accelerate the diversification that obviously would help not weigh so much on the sentiment out there on your name sometimes, when people do have concerns about what the trends are with your largest customer. Then I have a quick follow-up question as well.

Well, our sales force is clearly incentivized. The right sales teams really take on the challenges on a day by day basis. They have to be backed by very strong operating teams, because the salespeople are introducing the operations teams.

I think that our greatest challenge and opportunity is to continue to operate well, to take on the challenges of the upside, to execute on a day by day basis. That allows us to continue to diversify. It also allows us to continue to expand with existing customers.

So the keys to success really lie in maintaining focus on execution. As we go through the type of growth and the flexibility that we have to have, that is clearly the challenge.

Then also, on the SG&A line, when you actually look at the incremental move there, it is roughly in line with the move in sales, which is a bit of a question in my mind as to how much of the SG&A is variable.

Was there an increase, a dramatic increase, in the incentive comp for the year or something along those lines? Because I would not have expected with the rise in revenue that you guys saw to see sort of it an almost equal rise in the SG&A line there. Was there something else that was also accounted for there that possibly could have let me tie that together?

In Q2, we do have the incremental. A portion of it is the incremental option expense associated with our Board, which is only in Q2. So you will see we have Q1, Q3, and Q4 represent about $0.01; and in Q2 it represents $0.02 of option expense. So that is kind of the one item.

The rest of it, the remainder of it, outside of that about $600,000 would be associated with the fluctuation or increase in revenue, more specifically. But we do -- would carve out that $600,000 piece.

Okay, thank you.

Shawn Severson with Raymond James.

Could you talk about expansion in China and even in kind of Thailand? What are you seeing? What is the product mix that you're doing there now? I am just trying to get an idea of what types of programs you will be running in those facilities.

That's interesting. It is nonexclusionary. I think again one of the interesting things we see is across geographies and across industries, we have a pretty good representative of industries in most of our facilities at this point in time. So they are really up to speed on serving all sectors.

Then in terms of kind of box build, and I assume that you now complete system assembly and direct order fulfillment for some of your customers. How is that working as far as China and your Asian facilities? Then also, any plans for anything in Europe to facilitate additional box build work?

Well, our European facility, Dublin, really very much is a box build facility. Currently, our European customers support it by the [PTDO]. Our subassembly comes from the Asian side into the final box build in Europe.

Going back to the Asian side, we definitely see a stronger demand for box build in the region. As the overall economic sector picking up, we will see more [consumption] of the product we will produce in both Thailand and China being used in the Asian region. [We] still complete 100% export to U.S. or European market.

So one of the objectives we have in China for the expansion would be have a -- put a significant box build capability in our new building. Of course, you know earlier in this part of the year, we set up a new system integration, we call a box build facility, in Thailand, which is online today.

Okay. Do you have just a rough percentage what the sales are today that you are doing system build for?

Our systems integration is about 26%, 25%, 26%. So again, another kind of slice and dice as we talk about across industry, across geo, across the mix of origin systems, still see that running pretty consistent.

Thank you, congratulations.

Steven Fox with Merrill Lynch.

One clarification, first of all. Could you talk about -- you mentioned the percent of sales by different business segments. Was that for the quarter specifically, or the half?

For the quarter, I believe, Barbara, right?

Yes.

For the quarter.

Okay, great. Then could you just talk a little bit about metrics going forward? You obviously have put together some tremendous growth. Do you need to revisit any of the margin and inventory turn assumptions for your business, as you go over the next three to four quarters? Or do you think it was just a pocket of growth that maybe put pressure on those metrics?

We always need to revisit them to continue to drive improvements; and we do that internally. As far as revisit them to accommodate a changed business model, no.

I believe, we are continuing to maintain focus. We have got to again accelerate our inventory turns and our velocity to get that higher. We will take that kind of a step function at a time. We do want to see that driven above 6 turns again.

Then on the customer front, with the new programs that you have won, is it mainly with existing customers? Or have you been able to add some new customers that could help the diversification efforts?

That is always one of my favorite questions, because I am not sure how long we treat a new customer new. But by the time you have ramped a program they don't feel very new anymore; you have been through a lot of opportunities and challenges.

But we have seen a combination of both in that scenario also. You have seen, I think we have talked about before, where especially in the medical arena, with the growth we have seen there, that has been addressed by adding several new customers over the last probably 18 to 24 months. Then it is -- kind of definitionally, is that new still?

But yes, we have seen it as a combination of both new customers added over the last couple of years and existing customers that we've had longer-term relationships with.

Okay. Then one final question. With the significant amount of business you have ramped, you don't seem to have had any kind of cost overrun problems, like we have heard fairly consistent out of the industry. Is there any kind of philosophy or strategy that has allowed you to sort of ramp I guess more profitably, as far as we are seeing the numbers?

I guess I will take that as a compliment and say thank you; but that does not mean that we are without flaw or opportunity for improvement. I think our teams could clearly tell you that we are driving for even greater efficiency.

As Barbara mentioned in the course of the call notes, that ideally in our industry, any time you see a revenue increase, you would see a commensurate increase in margin.

It doesn't always flow through directly to the margin and to the bottom line when you are faced with the inefficiencies such as program ramps, such as nonlinearity of product deliveries and inventory inflows, and with mix changes. So we have incorporated those into our model; and I believe we do have very flexible teams. But we do need to continue to drive improvements so that we can get the margins up.

As we have mentioned before, incremental improvement continues to be more difficult to get as we drive our teams for improvement from an already strong operating model.

Steve, probably another point that I would like –- if you recall about three quarters ago we took quite significant costs related to startup costs. Those all really had a benefit us today.

In other things, it's -- are we much better than most of our competitors? We are probably better; not much, much better, I guess. I guess the way I am looking at the situation here is, you look now the loading factors on increase. You see in our business the loading factors, the efficiency utilization of these operations, definitely driving the improvement on the operation margin.

So on the one hand, you have a cost associated with the new projects and the startup and they run up the cost; but you also get a benefit of the higher volume efficiency, of the higher loading factors. So it kind of balances things out.

We have been very focused. The teams are coordinating very closely to be sure we execute the project very efficiently. I guess that is probably the only way we can answer. We're very focused on what we try to do with them.

Great, thank you very much.

Bernie Mahon with Morgan Stanley.

A question for you. I am trying to kind of piece together the upside in the June quarter and combine that with kind of the cautious outlook that you are giving for September. So maybe you can start; could you just talk about the linearity through the June quarter?

Then also, it sounds like some of your customers are being a little more cautious of -- maybe how do you see that? Is it downward revisions to orders? Is it just in conversations? And in what product categories are the customers most cautious?

Thank you, Bernie, for bringing out a point which I think we failed to specifically address in our conference call notes. Q3 is typically a lackluster quarter, or potentially seasonally down as compared to the June and December quarters.

So I think on our face is kind of a shock when you said Q3 was not that strong. It is a strong quarter, and the numbers reflect that when you compare that to what is typically an off-quarter. So I don't see an easing in Q3, other than specifically what is normal down. You know, Europe, vacations, whatnot.

I'm sorry; I meant Q4, actually. That would be sequentially down.

Q4, as we said, is really attributed to the factors such as the macroenvironment. So I think the true result is there are a lot of signs out there, a lot of indications in the marketplace that say hesitancy to over-forecast is probably prudent.

The further out you get, the less reliable those may be; and we are hopeful that they are, in fact, too conservative. But we don't have that factual information at this point.

Okay. Then just the linearity of the second quarter, did you end with pretty strong orders? I guess what I am trying to figure out is was it in the beginning of July? Was it the end of June? I mean, when did you start to get significantly more cautious?

Again, with the forecast that we have given for Q3, I don't see that as cautious. I see that as seasonal. So it is still strong demand, clearly; and that is how you see the inventories positioned to support it.

So really, Q4 is where we are probably seeing the hesitancy, if you will. The linearity was better than Q1.

Much better.

But not as linear as we would like it to be, or as we have seen other quarters. But it was not something that fell off the cliff, nor have we seen hesitancy in Q3.

Okay, thanks.

Brian White with Jefferies.

It doesn't sound like you are too cautious. You just beat by 13% and you're guiding up a similar revenue range for the September quarter. So, it doesn't sound like you are too cautious.

Let me ask you this. In terms of end markets and also outsourcing, did both surprise you in the June quarter?

I think it was just a very strong level of demand across; and as I said, maybe what surprised me more was both the drive and the ability of our joint teams with customers to accomplish some of the things that were accomplished, to achieve the results that we did.

Clearly, doing a pull-in of some of the startups was very challenging; and getting both the inventory position and the output completed was nothing short of somewhat heroic for some of the teams to accomplish.

So I think it was a delight to see it, but it was not just one specific area. I think it took all hands on deck to accomplish it, both from us and our customers.

Okay. When you -- typically this time of the year, how much visibility do you have in the December quarter?

I always say I look at it with hindsight, so I have not done any analysis to see how many times I have had changes to my December quarter from my June expectations. But I would not be surprised to say that I am often off. I haven't done an analysis, Brian.

But again, when markets are a bit volatile, you're going to have susceptibility to being wrong. Hopefully, after what people have seen in 2002, where everybody thought second half was going to be incredibly strong and it wasn't, and as you have heard different indicators -- such as the housing market, a variety of reports of earnings not being very strong -- I think it is cautious and appropriate for that to be taken into consideration in identifying Q4 expectations at this point.

Okay. Could you break out the 123(R) expenses for SG&A and COGS? How do we break it out?

No, it is mostly SG&A.

For the most (indiscernible) it is SG&A.

Okay. Just finally, inventory. If we had to think about what markets this inventory is concentrated in, is high-end computing a fair guess?

No; I mean, again, the inventory is to support the production, and you see the production and the growth we have had across industries. So yes, it would be fair to say that there is a good bit of inventory supporting high-end computing, when you have got a good bit of your revenue coming from that industry.

Okay, thank you.

Michael Walker with Credit Suisse.

It's Will Stein calling in for Mike. Just a quick question on components. If you could comment on lead-time changes, either tightening or moderating; and pricing as well; and how that might have changed through the quarter and here in the beginning of Q3. Thanks.

For our component situation there is the lead-time definitely stretched during the Q2. As I said earlier, and what was being discovered in the market with channel at a pretty low inventory level.

So whenever we have a significant demand increase, it definitely causes a lot of inconsistency from our supplier base. At this point in time, the PCB board, the lead-time definitely stretched out.

And prices are going up mainly due to the components related to the copper and the petrol and the price increase. But overall, we don't really see a significant lead-time push out, as long as the increases will stay within 10%. But the ones above that, we will see a lot of stress in the channels at this point in time, you know.

Great, thank you.

Operator, we will take one more call for today.

Alex Blanton with Ingalls & Snyder.

Good morning, you get to wrap us up again. Great.

I missed all of the percentages. This is just housekeeping, but on the gains by market segment, I think it was 42%; computers was what?

We will get Barbara to go back through those again, please.

The increase on a year-over-year basis -- medical was 42%; computer was 31%; industrial controls 24%; test and instrumentation 63%; and telecom 14%.

Okay, got it. On the new programs that ramped in the quarter, could you give us some more information on what those were? Do you disclose that? What kinds of products? Where those ramps took place, whether it was in China or other locations?

Something so we can judge, because the performance was remarkable, I think, with those kinds of ramp-ups going on, to achieve the margins you did.

We were ramping products in several geos, in several locations, and again in several industries. I think we specifically indicated last quarter or probably even the quarter before that we expected and did accomplish some ramps in the medical marketplace for the second quarter.

Medical? That would have taken place where?

We don't disclose specifics, but that is in several geos that we are ramping.

Okay, so it includes high-cost and low-cost regions?

Yes.

Okay. Any other product categories you care to mention besides medical that those products were in?

We did see some ramps in industrial controls also; and then continued ramps in some of the programs that we have had previously in test and instrumentation and computing. I think telecom is the only one that we still need to go get some more activity on.

Okay, all right. Thank you very much.

Okay, thank you all, everyone, for joining us this morning. We look forward to talking to you at our upcoming conferences.

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