Benchmark Electronics Inc (BHE) 2007 Q1 法說會逐字稿

Welcome to the Benchmark Electronics first-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to Chief Financial Officer, Don Adam. Please go ahead.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our financial results for the first quarter of 2007. I am Don Adam, Chief Financial Officer of Benchmark Electronics. I would like first to introduce our team members present today. I will begin our call with an overview of our first quarter and then review our expectations for the second quarter of 2007.

Barbara Sorenson, our Corporate Controller will then discuss our financial metrics for the first quarter in greater detail; Gayla Delly, our President, will then follow and provide a few comments on our strategy and an overview of the current marketplace. After our prepared remarks Gayla; Cary Fu, our CEO; and I will take time for your questions in our Q&A session. We will hold this call to one hour.

During this call we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations and that actual events or results may differ materially. We also 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's and S-4 filings, 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.

Before I begin with the details I would like to note that we are very pleased with our performance during the first quarter of 2007. During the quarter we saw some challenges, as others, in various technology sectors; this included softness in the marketplace and the demand impacts associated with the inventory corrections in the supply chain. We also worked diligently on the integration of our newly acquired facilities. Even with these challenges we were able to achieve our top and bottom line targets for the quarter.

Additionally, we saw strong bookings during the first quarter and continue to see a positive pipeline of opportunities and we expect our new bookings to remain strong in Q2. During the first quarter we booked 11 new programs with $150 million to $180 million potential in annual revenues. These new program opportunities are both with new and existing customers and from a mix of industries that we serve including industrial controls, computer, medical and telecommunications. We anticipate that the revenue and earnings benefits of these new bookings will be realized in late 2007 or early 2008 depending on the program. Keep in mind that these are estimates and actual revenues may differ significantly.

Looking forward to the remainder of 2007 we expect mixed performance among the sectors due to overall market weakness and expect to continue to see somewhat volatile forecasting from our customer base. Related to the acquisition of Pemstar we expect to incur restructuring charges, integration costs and the amortization of intangibles of approximately $10 million during 2007 as we integrate the combined organization and make adjustments in a new global footprint in support of our customers and market conditions.

We expect Q2 revenues based on the current indications from our customers, including new program ramps, to be in the range of $740 million to $775 million. The corresponding earnings per share is in the range of $0.36 to $0.41 per share excluding stock based compensation expenses of $1.3 million, the amortization of intangible assets of $447,000 and restructuring charges and integration costs of approximately $2 million due to the incremental opportunities we see in leveraging our resources.

This revenue range for Q2 is slightly below our expectations. Our Q2 guidance includes these two factors which impact our forecast. First, there are four medical programs totaling approximately $30 million per quarter which have been impacted by regulatory actions which have reduced our medical sector forecast for Q2 and the full year. We expect the resolution of these regulatory actions to come over the next two quarters. And secondly, the timing of new program ramps.

Given the impact of these factors above, we are updating our full-year guidance for 2007. Based on this for 2007 we expect top line growth of approximately 8% and bottom line growth of approximately 8 to 10% for the year excluding special items. Now let me share some actual highlights from our first quarter of 2007 noting that this is the first period that reflects the combined organization as a result of the acquisition of Pemstar as of January 8, 2007.

One of the highlights of Q1 was our improvement in cash flow from operations. During the first quarter our cash flow from operating activities was $95 million which exceeded our expectations. Please note that the first-quarter 2007 financial results contain three special items, they are as follows -- restructuring charges and integration costs of $3.3 million or $2.6 million net of tax; stock-based compensation expenses of $628,000 or $442,000 net of tax; and amortization of intangible assets of $447,000 or $322,000 net of tax. Also note that the first quarter 2006 included special items. Please see our press release for a description of these items.

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

During the first quarter of 2007 we had revenues of $752 million; these revenues were within our guidance of $735 million to $765 million provided in our last conference call and are up 15.5% year-over-year compared to revenues of $651 million in 2006. Our operating margin for the first quarter was 4.2% excluding the special items noted earlier. GAAP net income for the first quarter of 2007 was $24.5 million compared to $26.5 million for the first quarter of 2006. Excluding the special items, net income was $27.9 million, a 12.8% increase compared to the first quarter 2006 net income excluding special items of $24.7 million.

Diluted earnings per share were $0.34. Diluted earnings per share excluding the special items were $0.39 compared to our guidance for the quarter of $0.37 to $0.42 per share. Diluted earnings per share for the first quarter 2006 were $0.38 excluding special items. Please note that in 2007 the interest expense on convertible debt of $115,000 was used in the computation of earnings per share.

During the first quarter we experienced double-digit year-over-year growth in each of the industry sectors that we serve with the exception of the computing sector which experienced slower growth at a rate of 4% and which was in line with our expectations. Again, looking forward to the remainder of 2007 we expect mixed performance among the sectors due to the overall market softness and expect to continue to see somewhat volatile forecasting across the customer base.

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

Thank you, Don. As we reported this morning in our press release, Benchmark had another solid quarter. Q1 of 2007 revenues were $752 million, a 15.5% year-over-year increase from the first quarter of 2006. Diluted earnings per share for Q1 were $0.34 and $0.39 excluding the special items. Diluted earnings per share for Q1 2006 were $0.38 excluding special items. GAAP net income for Q1 was $24.5 million; excluding the special items net income was $27.9 million, a 12.8% increase compared to 2006.

Are operating margin for the first quarter was 4.2% excluding the special items discussed earlier and pretax margin was 4.4%. Our ROIC was 10.6% for the first quarter of 2007. Interest and other income was approximately $2 million for the quarter, interest expense was $811,000 due to the debt acquired and other expense foreign currency related was approximately $320,000.

Excluding the special items our effective tax rate was 15% for Q1 2007. On a GAAP basis the effective rate was 13.7%. For the full year of 2007 our estimated effective tax rate is 15%. Our tax rate has continued to benefit from favorable tax incentives on our expanded business levels in Asia. Weighted average shares outstanding for the quarter were 72.5 million. Our cash and short-term investments balance was $257 million at March 31st. Our cash balance improved when compared to December 31st, even after reducing acquired debt by $66 million during the quarter.

For the first quarter our cash flows from operations were approximately $95 million, capital expenditures were approximately $7.5 million, and depreciation and amortization expense was approximately $10.6 million. Receivables were $512 million at March 31st, an increase of $50 million from last quarter primarily due to be back end loading of customer shipments during the quarter. Inventory was $464 million at March 31st, and our inventory turns were 6.1 times for the quarter compared to 6.5 times in Q4. This was partially impacted by the delayed medical programs as discussed above and adding new programs.

Current assets were approximately $1.3 billion and the current ratio was 2.5 to 1 in Q1 compared to 2.9 to 1 in Q4. As of March 31st, we have $23.4 million in debt outstanding, all as a result of the acquisition. This debt includes a long-term capital lease on one facility, convertible debt in addition to other smaller amounts.

Comparing the first quarter 2007 to 2006, we did have double-digit increases across the board in all of the industry sectors that we serve, with the exception of the computer sector which we anticipated. On a year-over-year basis revenues from the medical sector increased 26%; computer sector increased 4%; revenues from the industrial controls sector increased 27%; the test and instrumentation sector increased 62%; and revenues from the telecom sector increased 30%.

The growth in the non-tech industry sectors, specifically the medical and industrial controls sectors, has continued into 2007, although growth in the medical sector market has been impacted due to the current regulatory actions discussed earlier.

Comparing the first-quarter of 2007 to the same period in 2006, the revenue breakdown by industry continues to show consistency. The breakdown is as follows; medical 14%, telecom 14%, computers 52%, industrial controls 13%, and test and instrumentation 7%.

During Q1 2007, we had one customer with revenue over 10% of total revenue. This customer's revenues represented 25% of total revenue during Q1. We expect that this percentage will remain for the balance of 2007, excluding new program ramps which could favorably impact our revenues during the latter part of 2007 or early in 2008.

Now I will turn it over to Gayla to provide comments on Q1 and an overview of the marketplace.

In Q1 of 2007, we saw mixed signals from the various industries we serve. Each of these signals was associated with customer-specific activity rather than a broad based level of softness and demand only. For some customers, the focus was on inventory reduction plans. For other customers, there was regulatory involvement which affected the timing of the medical sector shipments. But in the end for Benchmark, the result was a challenge to our efficiency and execution to our plans.

It was a tough quarter in that regard, and I want to thank our teams for supporting our customers through some of these challenges and the changes that were required during the quarter. During the quarter, we worked with our new teams on the integration of the new site. We continued to realign resources and footprint in anticipation of the changing market conditions and changing customer demands, and we also continue to develop our organizational depth and strength.

We're very pleased with the progress of the integration efforts to date and the continued diversification of our customer base. We continue to see opportunities to leverage our resources when we look at the combined operation. As you no doubt note from our operating results, we still have some integration efforts and benefits to be derived once we have assimilated our systems and processes across the site.

In addition, the diversification of our customer base is now broader than it has ever been with our strong engineering presence and our new customer relationships. Note, please, that we have recently been awarded new programs of each of our top five customers.

As we look into the remainder of 2007, we will continue to see some of the volatility and forecasting requirements from customers which is typical when inventory levels have been reduced and demand softness occurs. The pipeline for opportunities is robust, and as we said earlier, we're well-positioned for growth.

Our continued focus will be on improving our operational effectiveness, integrating the newly acquired facilities, alignment of our footprint and resources, further diversification of our customer base, and expanding and leveraging our service scope.

With that, Cary would like to add a couple of comments before we begin the Q&A section.

Thank you, Gayla. I would like to take this opportunity to thank our team for a job well done, executing through a challenging quarter while also focused on integration efforts of our new acquisition in a very unexpected soft market. Also, special thanks go to the exceptional efforts of our new team members for their focus during the quarter, (inaudible) are the changes always present in the acquisition integration, and their efforts do not go without notice.

We (inaudible) investment partner in bookings we talked about earlier, and opportunity we have of (inaudible) integrating this system and process for new site. We expect to see the steady improvement in our business performance as the year progresses.

At this time, we would like to open it for the Q&A session. In this session, we request you limit yourself to one question and one follow-up question in order to allow enough time for everyone's questions. Linda, we are ready for the Q&A session, please.

(OPERATOR INSTRUCTIONS) Jim Suva, Citigroup.

Thank you very much. Regarding your exposure, I know you mentioned that you expect it to be about 25% for that one customer going forward. And previously, I believe the customer used to be about 36% of sales for '06, and in your filings you had mentioned that it should go down around 25% looking forward, which by my math puts it around 29%.

Would that drop now larger than you initially expected, and was it a bigger step function or sooner than expected, and how does that impact you and how should we think about that?

No, Jim, it was in our expectations and it is about a 25% change overall, and it is about a 25% result. So it was as expected and as expected going forward except, as Barbara said, the impact of new program ramps and the timing of those.

Okay. As my follow-up, when we look at your top-line growth of 8% for full fiscal '07, can you break it down to what is organic for Benchmark, organic versus what Pemstar is adding?

No. In fact, I'm glad you brought that up, Jim, because one thing we did not specifically point out in our conference call notes was the impact of the acquisition. As we noted last time, we expected to see some opportunities from the newly-added customer base, given the stronger balance sheet and the business that may have otherwise not been awarded to the teams that were performing well on behalf of those customers.

We do expect to see that and are expecting the growth to come from that. So (multiple speakers) quickly at all the sites and the teams together it is not discernible as to kind of the root cause whether it's organic or acquired, but suffice it to say that the transaction is gaining traction where we're able to cross sell and use the benefits from the newly acquired sites to service some historical Benchmark legacy customers and vice versa as well as the strong balance sheet adding the strength to allow customers to increase their business level with Benchmark.

Okay, thank you.

Amit Daryanani, RBC Capital Markets.

Good afternoon, guys. A quick question on the new wins. $150 million to $180 million, that's a pretty big jump from the $60 million to $70 million I've seen you guys announced over the last few quarters. What's driving the big uptick? And could you just help me -- of the 11 customers, how many of them were actually Pemstar customers that Benchmark was able to leverage their manufacturing footprint to get more business out of?

Again, I don't want to segregate on the customer base, so I don't have that number off the top of my head as to be break down of the 11. But yes, you're right. We had strong bookings. We really were very pleased, a lot of those were actions that we have had in place and, as the sales team will clearly tell you, it takes a longer period of time on some of the activities to close. But I think we did see a mix. I don't know that I would be able to say that 40, 60 or whatnot as to a specific number of customers expanded on new business from the previous sites that were acquired. But I do think we just saw the benefit of the combination.

Barbara has handed me the list here and I really can't tell you kind of the root as to how we started the new relationships here. But we're just very pleased that the results were as favorable and we look forward to ramping those new programs.

I guess what I'm trying to understand is you're definitely seeing some meaningful revenue leverage from the acquisition in terms of expansion of revenues with the customers.

Yes.

And then just in terms of the restructuring charges, $3.5 million this quarter, $10 million is what you guys are expecting. Could you talk about how much of that is cash charge, what does it consist and what's sort of payback period are we looking at for it?

Most of those will be cash charges, other than obviously the amortization of the intangibles related to the acquisition.

And what sort of a payback would we expect for that?

This is Cary. If you're looking for the integration and the issues, basically they are the efforts such as consolidating the facility. We'll have for example in Dublin and the [Collin] and the Rochesters and also realign the footprint. We feel really confident of the payback on the particular charges, but nonetheless it is something we had to do to justify the business and realign the resource to meet the customer needs.

At the end of the day it's the I think it's a good acquisition and the -- I think it is a 17 -- the target we're looking at -- the $20 million achievable and the [Windsor South] market may be slightly delayed, but overall we feel very comfortable about it. And as you know, we do have (inaudible) from long-term (inaudible) for the Company and I think the fit overall is quite well from that point of view.

One of the other things I want to point out on that is important is we really have focused on ensuring that we are serving the customer base and looking at opportunities to grow the customer base. So some of the integration efforts you don't immediately implement and that's why some of them will take place over time such as two facilities in Rochester, there are still two facilities in Rochester and we'll look at the timing of when it's right to combine those and how we do that in a logical manner so as not to interrupt the service to the customers.

Just my last question. You guys have done a pretty good job with cash flow from operations this quarter, $95 million. How should we think about that for the remainder of 2007?

The (inaudible) the fourth quarter is extremely difficult to calculate it as a new business ramping, but the (inaudible).

Yes, I think our expectations for the next quarter, we expect to generate cash from operations of about $30 million to $50 million and beyond that, obviously as Cary indicated, it becomes more difficult with new program ramps.

Thank you.

Brian White, Jefferies.

Can you talk a little bit about where the inventory correction occurred and when we'll get through this?

I don't think, Brian, that it's a specific customer or a specific commodity if you will where we saw an inventory correction. But I think that what you saw was the OEMs taking an opportunity to look at realigning their supply chain as to what levels of inventory they felt comfortable with as the marketplace seemed to be softer. I don't think there's anything unusual, but lean initiatives, inventory reduction plans -- whatever the name of the program is I think you saw that across a number of customers, both within our customer base and customers we'd like to add to our customer base. But I don't think that it was anything unique or unusual that we saw.

And when do you think we'll get through that?

I would think that when we look at the Q1 inventory levels that my guestimate would be that we will see the supply chain show inventory level reductions almost across the board. I would say that by Q2 certainly we'll be through it, if not that we might already be through it. And as you know, the challenge in forecasting in that scenario is any uptick has a much stronger effect; but I think right now we are operating at reduced inventory levels. I just don't know where each of the industries are until everybody gets through their first quarter.

Okay. And when you talk about some markets being softer than expected -- the medical market is kind of a one off, it's not really demand trends, it's an approval process. What other markets stand out as being weaker than you thought?

Well, I think Telecom and computing are clearly ones that have seen softness compared to I think even what was expected when we did our last call and they also have been affected I guess just by spending controls. Those are the do that I think if you look at either us or any documents of the technology marketplace you would see that computing and Telecom are the ones that are pointed to.

Okay. And finally, it sounds like Pemstar you're gaining traction on terms of new programs. Are you satisfied with the profitability of Pemstar?

I would say yes, we are. We're clearly happy with the profitability, but at the same time, as you can see from our operating margin, that we're going to drive to have improvement once we get through the integration efforts. So not acquired site specifically, not the Benchmark site specifically. The overall profitability we are driving to is 4.5 to 5% and we're not there.

Okay, thank you.

Steven Fox, Merrill Lynch.

Good morning. Just going back over your full-year guidance, for earnings you said up 8 to 10% for the full year.

Yes, sir.

So that implies a ramp in earnings in the second half since the first half (multiple speakers) looks down year-over-year by about 6%?

Yes, sir.

Have you gotten any of the Pemstar savings or how much of the $20 million in savings do you expect to realize in the second half to help drive that turnaround?

I would say since we just closed on January 8th, there's probably not much savings that you could quantify as having been in the first quarter. When we look to the second half I think you will get a partial benefit from it. I don't have that calculated number as to say how much actually comes out, but probably 20 to 30% benefit would come out as you get the cash charges behind you and get the benefit.

And then secondly, just for the quarter just completed, Pemstar was dilutive to earnings, is that fair to say?

Again, I don't have a with-and-without calculation as we did have some progress on the integration and put the teams together and took the amortization on the customer charges. I don't have a specific breakout on that.

Okay. And then the last question would be in terms of getting $30 million to $50 million improvement in cash flow in the next quarter, would that be more driven by inventory turns improving from around six this quarter or -- I guess what I'm wondering is how soon can you get back to say eight turns?

Well, let's get to seven first.

I think obviously -- we've obviously put a range out there for the cash forecast and obviously there's a low and a high side and there are turns factored into that. So getting back to eight turns is certainly not in the model for next quarter.

I think the primary benefit, obviously you're driving some improvement in inventory and building on the earnings and we'll have capital spending at nominal levels, probably instead of a $40 million run rate we'll be at a 35'ish. So I think that you will see some improvement on inventory. But I would say that as we ramp new programs and as you see the level of bookings that we have, we will always have the impact of the slower inventory turns with that while we do plan to press forward with improved inventory turns on the more mature programs.

Maybe one thing -- inventories are very, very critical in our performance and as well the business model. If you look at our total target for the inventory turns is about seven times. Those are public and corporate or the business requirements we have and also as well as the current business development. As this business will get more global and the inventory -- sources of inventory are from more locations. So you have a lot of adding additional inventory transfer time from side to side as well as a longer manufacturing cycle and I think we laughed a little bit about eight times, but it's extremely difficult to get there and our business model targeted seven times the inventory turn would reach that I would be fairly happy with that.

Thank you very much for the explanation.

Kevin Kessel, Bear Stearns.

Thank you. My question is also on the full-year guidance. You mentioned that full-year top line guidance is not 8%. And I think it used to be 12 to 15%. And here in the first quarter we saw you basically go slightly above the midpoint of your guidance range and you had strong bookings. So what exactly is driving the reduction then in the full-year top line to 8%?

We talked a little bit about it earlier about the delay of the regulatory action on the (inaudible) medical customers and know something we cannot recover from. Basically the ones you have a subtle think on the regulatory action and we'll be just trying to have pushed revenue out for a couple of quarters. That's what we capped the number with and we still -- the program is not going away. It's just the timing of the program coming back in and that's what we'll test our number with and everything else is pretty much constant.

The new booking, as I was saying earlier, impacting the second half of the year and some of the new programs are related to engineering projects (inaudible) trying to get ramped. But the exciting thing about it is we're looking at probably another robust booking for the second quarter. And the focus on the (inaudible) for loss second half of 2006 was very, very much focused to (inaudible) new business to accommodate it -- all the issues we deal with.

But we're very glad to report that we have an exceptional good booking quarter and we'll continue to probably see another strong quarter in Q2. Again, those are our (inaudible) and the effort and benefits of those efforts we'll probably see second half and there recently we made the adjustment on the guidance.

And then the EPS of up 8 to 10%, can you just clarify, is that 8 to 10% year-on-year growth in net income or is it in earnings per share?

Net income.

That's a net income?

Yes, sir.

Then the other thing was in terms of Pemstar, if you could just say what the inventory was that you brought over from Pemstar and then what you feel is left to do in terms of integration. Like what are the main "to dos" that are still left to do?

Well, the one thing I wanted to kind of make clear is we do a very quick integration of the size and after a while (inaudible) inventory. So it's difficult to [segregate] that. That's both a benefit -- the way I look at things and the way we always integrate a company, once we acquire a unit we'll put everything together and (inaudible) new units versus old units with a focus how to reduce the total inventory as a whole. And in giving that direction, we are very less focused on (inaudible) keeping the customer happy and maintaining a good relationship with the customer. That the kind of focus we want.

And of course I'm sitting here today looking at all the questions raised about inventory reduction, but my priority in executing the integration was be sure I have a good customer base, happy; number two, who can continue to expanding a relationship to the customer. So it's difficult for me to inventory where does the inventory go here and there. As far as I'm concerned it's all (inaudible) family and the focus on it would be to focus on the efforts (inaudible) everybody in it together and try to make this and deliver the top line and bottom line. I don't intend to segregate that and there's no intent to do that. Whatever is good for the Company, that's what we're going to focus on.

Okay. So I guess there's no -- necessarily there's not even a rough number in terms of what came over from their balance sheet?

Well, I don't know. Don can probably --

It's probably about $65 million.

Recall that some of it will be reduced (inaudible) quarter and those kinds of things. It's very difficult (inaudible) to put them all together.

And then just lastly, do you guys expect to be able to keep the gross margins up here above 7% or slightly above 7% now that you've folded in the operations of Pemstar?

Again, we will be focused on (inaudible) market. And my goal is (inaudible) numbers. And what it will be -- gross margin or SG&A line reduction, that's what we'll focus on, what is the operation (inaudible) deliver.

Okay. Thank you very much.

Carter Shoop, Deutsche Bank.

Can we discuss your largest customer here and your confidence in the ability to maintain the current run rate with that customer going forward?

We gave guidance clearly in our K. We gave guidance on here as to what our percentage concentration was, and I think that's a sufficient adequate disclosure as proper on any specific customers. So no, I'm not giving any additional color.

I'm sorry. I guess I didn't need more disclosure on what you think it's going to be, just level of confidence. Do you feel pretty comfortable with that number you have out there now? What are some of the variables that could make that turn up a little bit or come in below expectations?

Again, I won't comment on the forecasting of a customer. So our guidance is our guidance, we stand by our guidance. But I can't say how well any of my customers forecast that would be. That's something I don't do. We give our guidance based on the information we have and we have a level of confidence in the information we provide so as to give it out and that's all we base it on.

Maybe another way to look at that is how comfortable are you that the customer is not going to further diversify somebody who is currently manufacturing at Benchmark to somebody else?

Again, we have given our guidance with all of the information. That's like asking me how comfortable do I feel that I'm going to win more programs. We're serving our customers well. We have good opportunities to continue to grow and with that customer and other customers and we feel very comfortable that we're serving our customers.

Again, probably another way I would answer the question would be if you're looking at the guidance we'll (inaudible) last few years. We've been pretty close to what the market condition is. Our process was taking the data from the units, as well from the customers, making necessary adjustments. We feel we've (inaudible) and come over the (inaudible) feel very comfortable with the number we're giving at this point in time.

And in regards to Pemstar, I know you don't have the exact revenue contribution in the quarter. Maybe similar to the inventory commentary, can you guys give us a rough ballpark on how Pemstar came in in the quarter on a sequential basis?

It was pretty close (inaudible) anticipated and, again, some of the number was a (inaudible) from side to side. It will be difficult to segregate it. And I don't have it in front of me, but it was pretty close to what we were anticipating.

Last question. On the earnings growth, I assume you're including the convert interest expense there?

Yes.

Yes.

Great, thanks.

Tom Dinges, JPMorgan.

Good morning, guys. Just a couple of housekeeping items here. Last quarter you guys talked about -- maybe about $50 million of CapEx. It sounds like -- is it possibly a little bit lighter now as you guys are looking at a little bit less revenue or are you still on target to do that? And then also, one quick item on the balance sheet. Can you talk a little bit about the linearity of inventory in the quarter because the payables line was up a little bit faster than the inventory line. I'm just kind of curious if there were any changes that you guys strategically made there for the quarter? That's it. Thank you.

From a CapEx standpoint of view I think we'll lower it from $50 million to $35 million as anticipated. And the way we look at a situation, we look at the total capacity with variables and we look at the current market situation. We feel and we also push the (inaudible) probably another quarter. So that's pretty much the impact on the CapEx numbers. Now the AP number, Don, can you answer that?

I think in terms of the payables, I don't think there was anything that was done internally or strategically, it's just the way payables work out. It's the timing of receipts and payments, etc. Nothing Magic about it.

Okay. I was looking more for maybe you worked down a little bit of inventory at the beginning of the quarter ex Pemstar. And then perhaps we're looking for a bigger surge at the end and you put some inventory on the books and that's why it came up. that was all I was looking for.

Again, we said earlier that focus on the inventory inflow control inventory, but more importantly be sure we're able to support our customers and there's (inaudible) of the inventory maybe have impact on the slightly increased our inventory, too.

Okay, thank you.

Will Stein, Credit Suisse.

Thanks, good morning. I just wanted to get into a little bit more detail on the medical side. I'm wondering if I heard that right. Is that $40 million per quarter among four programs?

$30 million.

$30 million, okay. So that's still about a third of your medical revenue from the last quarter. Do we think about that as completely coming out of the model over the next two quarters and then potentially returning after that? Is that the right way to think about it?

I don't believe it -- yes, it all comes out in the immediate quarter Q2. I don't think it all stays out for the same period of time. I believe some of the programs will be released back into production likely in Q3 and another one probably in Q4. So they're all independent and, ironically enough, very unique items as to where they are in the stage of the life cycle and what it takes to get back into the revenue stream. So they'll have a differing impact that is Q2 that is most significantly impacted.

Probably another way to look on the medical side, if just the medical products come in we will be having extremely stronger medical shipment too. So in just the way that business goes and we feel very strong about it and we also have some new business coming from the medical side. So that's still a -- medical is a very, very popular site, but once you get into regulatory issues you will have a slight delay, that's what the problem was.

So must a quick follow-up on that. How many customers -- four programs for $30 million per quarter I think you said. Is that four customers or is it one customer?

Three customers.

Three customers, four programs.

One customer has two projects with impact on.

Okay, I think that's helpful. Let me just see if I had anything else. The testing, I believe you guys saw a customer transition out. It was when Agilent spun out Verigy. Is that transition completed now or should we consider that partly done and there's more to go?

It's completely done.

Okay. That's all I had. Thank you.

Bernie Mahon, Morgan Stanley.

Good morning. A question for you on the gross margins. The gross margin improvement sequentially in the March quarter, was that all from the integration of Pemstar or is there anything else in there in terms of mix or pricing or anything else that really impacted it 10 basis points or so?

I think it was partially based on mix and service sites as well as the acquisition. So we had a good bit of engineering revenue in there as well as some mix that was strong. You can see some of the mix in the industry information that Barbara provided. So it was really a combination of all of those factors.

Okay. And then just on the -- you said you wanted to get back to the 4.5 to 5% operating margin. Do you think you'll get to the low-end of that at the end of this year or are you putting any kind of time frame on that?

Our goal is to get to that by the end of the year.

Okay. And will just the savings from Pemstar -- just those restructuring savings, will that get you there or what else do you need? You can get there on this revenue volume and is there anything else that you need to get there?

I think what it will likely take is to get some revenue increase along with some of the medical programs ramping back and I don't think it's one single item. Obviously to get the efficiency and the leverage out we need to ensure that all our programs are running as expected. So I think it's the mix of the engineering revenue, the integration and medical programs starting back into the revenue stream.

Okay, thanks a lot.

David Feinberg, Goldman Sachs.

Good morning. Just one follow-up question from earlier with regard to the medical business and the regulatory issues, I just want to be clear. Are the regulatory issues that are preventing these products from being produced or going into production, is that a Benchmark issue or is that a customer issue?

(multiple speakers) It's not a Benchmark issue, it's customer issues.

And at this point in order to get the customer in compliance with regulatory -- with the regulatory concerns, does Benchmark have to work with them or is it all on the customer in order to bring those products into compliance?

It's all customer issues, it's not our issues.

Thank you.

At this time we have no further questions. Please continue.

We thank you all for joining us today on our conference call and we'll be available in our office for follow ups. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.