Benchmark Electronics Inc (BHE) 2011 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Benchmark Electronics third quarter 2011 earnings call. At this time all participants are in a listen only mode and later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, CFO, Mr. Don Adam. Please go ahead, Sir.

Thank you. I am Don Adam, CFO of Benchmark Electronics. Cary Fu our CEO will begin the call today providing an overview of the unprecedented flooding in Thailand and the impact that is having on Benchmark. Cary will then discuss the overall financial performance for Benchmark for the quarter. Gayla Delly, our President, will then discuss the Thai flooding situation in greater detail along with guidance for Q4. I will then follow with a review of our financial metrics. After our prepared remarks, Cary, Gayla and I will take time for your questions in our Q&A session. We will hold this call to 1 hour.

During this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations and that actual events or results may differ materially. We would also like to refer you to Benchmarks periodic reports that are filed from time to time with the Securities and Exchange Commission including the Company's 8-K and S-4 filings -- quarterly filings, and form 10-Q, and our annual report on form 10-K. These documents contain cautionary language and identify important risk factors which could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update those projections or forward-looking statements in the future. Now, I will turn the call over to Cary.

Thank you Don. Good morning. Thank you for joining our call today. As noted in our recent press release our Thailand facility has been impacted by the unprecedented flooding in the country. In advance to the flooding, we initiated the contingency in our discovery -- disaster recovery point. Our plan -- our team worked diligently to move as much inventory, equipment, and records out of the plant or to the higher ground. As we announced on October 17, flood waters breached the south side levy protecting industrial park and the water inundated the Benchmark campus. The flooding has impacted Benchmark, our employees, and 100,000 other people and the thousands visiting Thailand. Thailand's entire Benchmark team extends our sympathies to those effected by the horrific flooding through the Thailand country.

Our first concern it was safety of our employees and their families. We continue to monitor the situation on a daily basis. We are grateful for our dedicated Thai employees who had to work tirelessly supporting our customers while managing their personal challenges associated with the flood. Their dedication and quick action has enabled us to bring our production in our other locations around the globe. Related to the performance during the third quarter, we obviously are disappointed as our revenue and results fell short to our expectations.

In the quarter, we were impacted by the unanticipated demand drop to our for competitive forecasts in a testing and instrumentation sector. The [sharp fall] primarily due to the continuous slowdown in the semi-cap equipment business. We also experienced a shortfall in the medical sector business mainly due to a component shortage which impacted our capability to ship the product.

The overall decrease in testing and instrumentation sector, significantly impact on our results for the sector including customers that utilize our precision technology services, which have historically high margins. So, not only did the [decline] impact us, also [the information on the prior call] -- we have been transitioning part of the business to Asia.

The first part of the transition to Singapore and the final transition was to [Pernan]. The final transition is now essentially complete. Over the last 9 months we have invested significantly to expand our global footprint as well as the depth of our precision technology capability. We believe this [investment] is appropriate to pull out a diversified customer base. However, the pace of the diversification efforts that was slower than rapid downturn on semi-cap business. This had included a significant margin pressures for the last 2 quarters. As we look forward, we are optimistic the semi-cap business downturn cycle will be recovered sometime in the first half of 2012. While we have been negatively impact in the short-term, by not only by the Thailand flood situation and the overall sluggish macro environment, we believe in Benchmark and in our customers. We will continue investing for futures to our outgoing engineering capabilities, as well as reorganizing our sales force to stand ready for the futures. Now, I turn the call to Gayla to talk more about the situation.

Thank you Cary. As Cary mentioned over the last several weeks, many of our team members have been focused on the flooding situation in Thailand. Our Thai facility is one of our largest facilities generating around 20% to 25% of our revenue and the near-term impact of the situation will be significant on Benchmark's revenue and operations for the next several quarters. However, I can say with great confidence that the joint efforts of our local Thai teams, our global Benchmark teams, and the best in customer support teams will result in a rapid recovery that is as effective and as efficient as is possible in this situation.

The relentless customer focus and passion for excellence that has made in this site such a flagship remains intact. The first floor of our Thai building was flooded around October 14 and since then the water level in the surrounding area has remained relatively constant and shows no signs of significant receding at this point. Local officials estimate the flooding to continue through the middle of November at which time they will begin to pump water from the industrial park. We are evaluating the situation on an ongoing basis and are working plans to mitigate the impacts to Benchmark and our customers. Currently as we work with customers on contingency and recovery plans to meet their critical needs in Q4, we also are planning to meet normalized demand in Q1.

We have restarted operations in our Korat facility which is unaffected by the floods and expect that this facility will be running around the first week of November. We are shifting production also to various other sites around our global location. Note the restart of the Korat facility as well as the shift of production there will impact our capital expenditures and working capital as we move through these challenging times with our customers. We do carry property and business interruption insurance and we believe that we have proper and appropriate and adequate insurance coverage for this situation.

Related to the Thai facility itself, currently we are working to safely remove equipment and inventory as we can, and transfer the material and equipment according to our ongoing disaster recovery plan. Based on indication from local authorities, they will begin pumping the water from the industrial park in mid-November and we expect to be back in the building during the first 2 weeks of December, assess damage, begin repairs and anticipate restarting the Thai facility sometime in December depending on the actual flooding and power situation, based on the direction of the local governmental authorities, and expect to bring back full production ramp in January.

Obviously, there are many variables and uncertainties surrounding this right now but I am extremely confident in the abilities of the dedicated Benchmark team and the strong execution skills necessary to drive the recovery of this operation. Again, we are striving to meet the critical needs of our customers during Q4 and driving for normalized demand support fully in Q1. The uncertainty of the impact of the Thai flooding on our operations make it challenging to provide guidance, but we are providing guidance today [divulged] using some assumptions. These are the assumptions we have used for our underlying guidance.

Our Korat facility will be restarted and back online in the first week of November. We will gain access to our Thai facility in the December to assess damage and begin recovery efforts. $4 million in insurance recovery proceeds will be received in December, and our guidance does not include any charges or expenses related to the actual flooding and return of the Thai facility to operations after the water recedes. The guidance encompasses our current assessment of the Thai situation, it's impact on our business, and please keep in mind that this is evolving every day. As of today, we estimate sales for the fourth quarter will be between $475 million and $525 million with a diluted earnings per share for the fourth quarter excluding special items to be between zero and $0.11.

We've spent a good bit of time today talking about the Thai situation but I want to spend a moment to focus on the positive momentum we have gained in our business model overall at Benchmark. First, we want to recognize our business development team for what they have accomplished. Q3 was another outstanding quarter for bookings. Our Q3 bookings included 38 new programs with 12 engineering projects and current estimated annual revenues of $136 million to $167 million in computing, medical, and industrial control sectors. And these represent bookings with those new and existing customers, and are of course subject to the risks of timing and ultimate realization of the estimated revenue. We continue our support of the program ramps for bookings in prior quarters.

Last quarter, we announced the booking of a computing program with annual revenue of approximately $35 million to $55 million. And this program is ramping and still on target to begin production in the first half of 2012. Related to the large computing program previously announced which has been delayed, we do anticipate this program will launch during 2012. As Cary recognized, our business strategy remains intact and are the investments we've made in our precision technology and our global footprint, we believe provides solid footing for us as we recover from the Thai challenges. At this time I want to turn the call back over to Don to discuss the specific financial metrics for Q3.

Thank you Gayla. We completed the third quarter of 2011 with revenues of $570 million. These revenues were lower than our guidance for the quarter of $585 million to $620 million. The shortfall in revenues in comparison to guidance also impacted our operational efficiencies during the quarter and therefore our operating results. Overall on a quarter-over-quarter basis we saw stronger shipments in the telecom sector, a flat quarter in the industrial control sector and then weaker shipments in the other industries that we serve.

Sequentially comparing Q3 of 2011 to the second quarter 2011. Revenues from the telecom sector were up 13% primarily to recent program ramps -- new program ramps, revenues from the industrial control sector were flat comparing it to the prior quarter. Revenues from the computing sector were down 5%. Revenues from the medical sector were down 8%, partially attributable to the component shortage that Cary mentioned, revenues from the test and instrumentation sector were down 34% due the continued slowdown in the semi-cap equipment market. Please note that the reported EPS amounts in today's press release reflect corrections to the Company's prior period financial statements related to inventory and accounts payable.

The aggregate impact corrections of earnings was $0.01 and $0.02 a share for the 3 and 9 months ended last year in September 2010. Our earnings per share, excluding restructuring items for the quarter, were $0.34 and our GAAP earnings per share was also $0.34, compared to $0.37 and $0.36 respectively last year. Our earnings per share amounts for the third quarter of 2011 include a discrete income tax benefit of approximately $9.2 million or $0.16 per diluted share primarily related to income tax valuation allowances.

During the third quarter of 2011, we incurred restructuring charges of $145,000. We expect to incur additional restructuring charges of approximately $3.4 million during the fourth quarter with the majority of costs related to our previously announced closing of our Dublin facility. To providing more meaningful comparative analysis, we will present certain financial information excluding these restructuring charges for the prior period during the call. We have also included a reconciliation of our GAAP results to these results excluding restructuring charges. Our margins for the quarter have been impacted by both the shortfall in revenues for the quarter in addition to the mix in business shift.

As previously noted our revenues from the test and instrumentation sector declined 34% quarter-over-quarter. This sector includes customers that utilize at our precision technology services which has historically resulted in higher margins. We experienced this decline at the same time that we were investing in more capacity in Asia for these capabilities and services. Our operating margins for the third quarter declined to 2.1%. Net income excluding restructuring charges was $20 million for the third quarter of 2011 compared to $22.8 million in Q3 of 2010. GAAP net income for Q3 2011 was $19.9 million. Interest income was approximately $446,000 for the quarter, interest expense was $334,000 and other expense was $200,000.

Our effective tax benefit was 72% compared to 2% primarily due to a $9.2 million of a discrete income tax benefit that we recognized. Excluding these discrete tax benefits the tax rate for the quarter would've been 7.4%. Diluted weight average outstanding shares for the quarter were 58.9 million. Our cash and long-term investments balance was $279 million at September 30, which includes $25 million of option rate securities classified as long-term, the unrealized loss on our option rate securities at September 30 was $3.3 million. Due to changes in the market value for the securities. The unrealized losses reflected in accumulated other comprehensive losses a component of shareholders equity. Note that we did receive principal payments at full par value of $4 million during the third quarter.

For the third quarter our cash flows were impacted by increased accounts receivable and inventory. During the quarter we used cash flow from operations of approximately $12 million. Capital expenditures for the third quarter were approximately $13.5 million. As Cary noted, we anticipate higher than normal expenditure -- capital expenditures in the fourth quarter due to the Thai flooding situation. We are accelerating our capital purchases to provide for additional capacity needed as part of our contingency plan. Next year we will see -- we believe these capital expenditures are being accelerated and we expect a [commeasure] of decrease in capital expenditures next year. We expect to spend about $20 million to $25 million in the fourth quarter on CapEx. Depreciation and amortization expense was approximately $8.8 million. Repurchases of common shares for the third quarter were $28.5 million or 2 million shares.

Since the inception of our share repurchase program in July 2007, we have repurchased approximately $286 million or 16.8 million shares. We have 38 million remaining under the approved share repurchase program. Due to the Thailand flooding situation we have ceased the repurchase program at this time. Receivables were $463 million at September 30, an increase of $10 million from last quarter due to the timing of sales when comparing it to prior periods. Inventory was $430 million on September 30, an increase of $33 million from June 30 primarily because we were positioned to be forecasted demand which did not materialize, in addition to inventory needed for Q4 ramps. Our inventory turns were 5.0 times for the quarter, compared to 5.5 times in Q2. Current assets were approximately $1.2 billion and the current ratio was 3.6-to-1 in Q3.

As of September 30 we have $11.1 million in debt outstanding which is a long-term capital lease on one of our facilities. Comparing the third quarter of 2011 to the same period last year, the revenue break down by industry is as follows. Industrial Controls issued were 29% versus 26% last year. Computing was 28% this year versus 31% last year. Telecom was 27% in 2011 versus 22% last year. Medical was 9% this year versus 10% last year. And finally, test and instrumentation was 7% this year versus 11% last year.

At this time I would like to open the call to our Q&A session. During the session we request that you limit yourself to 1 question and 1 follow-up question. Thank you.

Thank you. (Operator Instructions). Wamsi Mohan of Bank of America Merrill Lynch.

Good morning and this is [Rupu] filling in for Wamsi today. Just to start with the situation in Thailand, just wanted to ask you, of the sequential 12% decline in revenues for next quarter, can you break that down into how much of that is from the effect of the situation in Thailand versus the general slowdown in the economy?

When we look at the decline in revenue essentially the entire decline is related to the Thailand flood situation.

I see. And I know that you are ramping the Korat facility. Just in terms of capacity, does it have enough capacity to support the customers that were in a Ayudhaya facility? And if you can just clarify, you said CapEx would be slightly up as a result of this move. Can you just go through the numbers again? Thank you.

So, first off on the Korat facility it is not sufficient or equal in the capacity availability as compared to our Ayudhaya facility. However, we will be leveraging our capacity in some of our other remaining global facilities to support our immediate customer needs. So we will be ramping that. We will have capital expenditures in the current quarter, fourth quarter, to support the facilitization of that operation in Korat and expansion of some of our other sites by $20 million to $25 million that we would expect. And as Don indicated in essence that is a pull in of equipment that we otherwise would plan for next year in order to be able to ramp to support our customers.

As you might appreciate, in order to meet the immediate needs of our customers, they will be supported by first a buffer in inventory and contingency plans that are put in place just for cases such as this, supported by our Korat site. Other Benchmark sites and second sources that were already put in place by customers for that. We also are extracting, as we indicated, from our Ayudhaya facility albeit slowly. We will be extracting the equipment and inventory that is possible to safely extract from that facility for utilization and production.

Okay. Thank you. And good job in the face of a difficult situation.

Thank you.

Amit Daryanani at RBC Capital Markets.

Thanks. Good afternoon. Just a couple of questions. One, you know looking at the $17 million headwind, let's say from Thailand flooding, do you expect to recover that and if so what does the timeline look like in fiscal -- in calendar 2012?

Amit, repeat that. I'm sorry we didn't catch that.

Sorry, yes. [Deniya] has talked about a seeing about a $17 million revenue headwind because of the Thailand flooding issues in the December quarter. I'm trying to get a sense on do you expect to recover that revenue stream at some point and would it be logical that to expect the first half of 2012 is when you start to recover that revenue line?

So I guess basically, Amit, I will do the best that -- to try to and explain that. So, we do see that the majority, a significant portion of any revenue kind of shortfall from Q4 as compared to what had been previously planned. As you can see from our inventory levels we do have a number of new programs ramping and growth that was expected to come in Q4. And with the Thailand flooding, you see that our revenue guidance is down. So, really to answer the question of when does that bubble come back?

I believe that's a little bit hard at this point in time to see, but I do expect that those programs, as we are working with our customers, they are continuing in the pipeline. We expect the majority of those to come back. The only portion that I would say is not necessarily coming back would be to the extent that is a minor portion fulfilled by second sources but we don't see that as anything significant in this point in time.

Got it. And then I think in the press release you highlighted that you face some incremental costs in the September quarter associated with transitioning from business to low cost regions. Could you just quantify what that impact was and does it relate to the $3.1 million expense you had in June quarter for a specific customer kind of doing the same thing?

In terms of the cost Amit, the $3.1 million was a one-time event so it is unrelated to that. As Cary mentioned during his call, what we are doing is transitioning investing our funds in bringing up these peak key capabilities in Asia. While that occurred we saw a significant drop in revenue so we sort of had a double impact, if you will, during the quarter.

So Amit, what we have done is to expand our global footprint and support both the geographic and the depth and strength of capabilities in our precision, we have expanded into Singapore and then further into Penang. As you might appreciate some of the capabilities and the intellectual property is properly supported in Singapore, others maybe in Penang. As we've done that I don't have a specific number kind of to provide you as a with and without calculation on the impact of the under absorbed cost for those 2 facilities, but we do have those up, ramped, ready to support customers.

We did see the headwind of the decline in revenue as most of the production there has been to date supporting customer instrumentation. Our strategic direction we still believe is sound, and our growth opportunities I believe are well supported by the capabilities and the footprint we have now. The cost structure is there and we are looking at the growth opportunities still intact and simply the revenues decline in advance of the ramp and the booking of new programs in that portion of our business.

But realistically you do expect revenues to come back in that portion of the business? It's just a transition issue per se?

Yes, and so as we indicated we expect that -- don't have a date but we would expect -- the cycles getting shorter and tighter. At the same time they -- the highs and lows are more dramatic, but we do believe that in the first half of 2012 based on the indication that we have that we would see it come back.

Thanks a lot.

Sherri Scribner, Deutsche Bank.

Hello, thank you. I was hoping to get a little bit of detail on the margin decline and SG&A expectations for the December quarter. I assume SG&A would be relatively flat and that the decline in gross margins is primarily fixed costs absorption, but I was hoping to get a little more detail.

In terms of outlook, SG&A, we are anticipating that to be flat with this quarter. In terms of the margin, was that Q3 or Q4 Sherri?

For 4Q. Yes.

Yes, certainly it's just -- when you are taking a significant amount of revenue out, you hit it. It is an un-absorbed cost. It's having the -- it's certainly the largest impact on our margins for Q4 compared to Q3.

Like I said alternatively, Sherri, again we believe that our strategic duration is correct. We have got our plans in place and do not have a significant restructuring required in order to modify the business to support what we see going forward. We do have the Thailand issue and the shortfall in revenue and the precision technology industry, but we don't see major modifications to our business model.

Okay. And then, Gayla you had mentioned that you expect to get about $4 million back from insurance through this. I'm just trying to understand the dynamics of how that insurance recovery will flow through the income statement.

Again, this is going to be a very complicated and some of you may have followed. I do believe first off that this is the most significant and tragic event that I am aware of for anyone in our industry to have ever encountered. So don't necessarily want to be pioneers in this, but it looks like we are. And the gap I accounting rules are little bit complex, but to keep it simple I would say that for the property damage and the insurance for that, of course we have to first get access to the building, and we don't know when that's going to be. But clearly there will not be a settlement on that for some period of time to come.

On business interruption there is a waiting period and that will be ongoing, but it's very difficult to estimate when we will recognize that. For all practical purposes it is almost on a cash received, cash basis, and it is difficult to estimate when we will first get it so we believe that we should -- based on passage of time and the date of incurrence of the flooding that we should see some amount begin to flow in fourth quarter. As we go through the sequential periods we will have a better understanding. This is just our first stab and our first experience in -- thankfully in business interruption insurance.

And so I guess the question would be that $4 million, would it show up in the revenue line?

No, it would not be revenue. It would be identified in a separate line item Sherri.

Okay. All right. Thank you very much for all the detail on the Thailand issues. Good luck.

Sean Hannan at Needham & Company.

Good morning. And I apologize if this has already been asked as I just came over from another call. But of the revenues that you ended up taking on the chin for this quarter with -- I'm sorry, for the fourth quarter guidance with Thailand, how much of that has already been transferred to other facilities and what are your general expectations of how much could be transferred by the end of the quarter?

Sean, thanks for the question. I guess the Thailand as Gayla indicated, Thailand is our largest facility from a revenue standpoint, it accounts for 20% to 25% of our quarterly revenues. And we anticipated a shortfall approximately between $90 million and $100 million related to the flood situation. And a good majority of that are related to the Thailand flood situation. So is stuff (inaudible) recovers. Did I answer your question?

Yes, well, the first answers the question. I'm trying to determine, that since the issue was identified, how much have we been able to take action and resolve in some of that revenue transfer?

We believe it's about $50 million, and of course challenging our teams as are our customers to better that number every day. So to the extent our Thai teams are listening they know that the challenge is to better that number as well as our global team supporting our customers. So that's what's in the plans and we are going to move forward from there.

Terrific, thanks so much.

Brian Alexander at Raymond James.

Hello, this [Nuvel Hernando] in for Brian Alexander. I was wondering if you could provide some end market color that is embedded in your guidance and then can you speak to which end markets are likely to be more impacted by the flooding in Thailand.

I guess first, before we speak to that, I'll let Don speak to us -- because we want to try to separate the macro environment from our industry view because I believe the macro environment is definitely soft and partly cloudy. However, because of the new programs that we've booked that we're in front of ramping. Some of our industry outlook may be different what you would see in the macro environment. But I will let Don speak to the specifics of the industry.

Yes I think -- as we said during the call, I think the two sectors you will probably see most of the impact -- the three sectors are probably telecom, industrial controls and medical.

Okay. And then with regard to medical, can you talk about the component shortages? Have they eased and when do you expect the segment to return to growth for you?

Given the regulatory nature of medical to the extent that there is a component issue, it has a longer cycle time for correction and recovery. I would expect that it will be the -- so the combination of that challenge along with the Thailand issue will be what we expect to have impact on medical and that will probably be this first half when we see it recover.

All right. Thank you.

Jim Suva, Citi.

Thank you very much and it is quite encouraging to hear about your plans for a recovery post the sad situation in Thailand. As a follow-up on that topic, you gave some commentary that you expect Q1 to be back to normal. Just so we can calibrate a little bit of expectations, am I assuming meaning, like normal operations and equipment in place and ready to run, or actually normal levels of revenue which should be I would say kind of closer to the $600 million run rate or something like that. Can you just help us caliber eight about what you meant around the normal?

Turn to the normal, Jim, what we are talking about is it getting the equipment back up and running fully functioning for the quarter.

I guess Jim, what we decided the terminology, a cover the customer needs. And the other we discussed earlier, Q4 our goal is to try to meet the critical need for customers. Well, not everything they need or they have but critical component, we should be able to support them by utilizing the facility we want the goal to support them. In Q1, our goal is the most product and we still have some support from other factory. We should be able to support other demands and fulfill the demands by our customer for Q1.

There should be a very big recovery in Q1 for your Company sales then?

From the Q4 number, yes.

Right. And then that's great to hear that. It is very encouraging. And then, you gave some commentary about you still expect that new customer computing launch in 2012. Has that kind of been the plan for a while in 2012, or at some point was it like early in the year 2012 and has it shifted a little bit?

We are still looking at it in 2012 and it will be kicking this first half of 2012.

Great. Thank you again congratulations on a difficult situation to resolve there in Thailand and we look forward to you coming back. Thank you.

Brian White at Ticonderoga.

The computing market, could you give us some color around what is happening there? We fell in the September quarter sequentially which usually have some type of uptick. And what are you expecting in the December quarter in computing?

We anticipate a pretty robust computer sectors in Q4. As we talked about, our impact in computers is not much by the Thailand flood situation at this point in time. So the Q4 historically will have a pretty strong computing segment. Effectively, we will continue to believe that's going to be the case.

And Cary, you mentioned 3 markets in Thai. What is the biggest market in Thailand of those three?

Really, it is probably between telecom and industrial control those are 2 big sectors that we have down there. Those are our 2 largest segments we have in the Thailand facility.

And a lot of EMS companies spoke about the order cuts coming in maybe August, September, October. When did you start to see broad-based order cuts and where do you think it was most concentrated? Forget about Thailand.

We saw a weak demand starting in August/September and like our competitors. And of course at this point in time the most severe impact of the sectors are the test and (inaudible) factors, and that factory was much more severe than I anticipated. In retrospect we will see a very kind of soft demand. And the reason we are saying the majority of the revenue itself on Q4 unrelated to the Thailand facility is we have a several new program ramps which will able to compensate some of the markets softness out there.

And semi -- when you look at the tests and instrumentation it's going to go down again in the December quarter or is it done going down?

It will go down slightly, yes.

Okay. Thank you.

David Fondrie at Heartland Funds.

Yes, good morning. After you ramp the Korat facility back and then you bring back the facility near Bangkok, what ultimately -- do you then ramp that back down in the longer-term future or do you maintain it as you go forward?

Can you repeat that. You are breaking up a bit, I'm sorry.

I'm sorry Gayla. The Korat facility, after you facilitate it and ramp it up, six months from now, do you then turn around and ramp it back down or will you maintain it?

We would expect to maintain the site after we ramp in and continue to support customers with the that site.

And in the flooded facility, is it a 2-story facility such that you were able to move some of the equipment up to higher ground, so to speak, before it was inundated?

Yes, David this is Don. There's 2 facilities, one is 3 and one is 2 stories tall and yes we were able to move a large amount of the equipment as well as inventory up to higher ground.

And then lastly, on the Thailand situation, the $4 million that you are anticipating, is that purely interruption type insurance? Or is it also some estimate of the property and casualty piece?

That would strictly be business interruption. We have made -- we have excluded from the guidance anything related to inventory costs, insurance proceeds on inventory or property plant equipment. We can't assess the damage at this point.

Right. Okay, well thank you very much and is certainly good luck in these trying times.

Thank you very much.

Rick D'Auteuil at Columbia Management.

I'm just trying to -- I have written down a lot of information that you have put out here, so to understand the sequential move in Q4. And there was a comment saying it was all related. The decline was all related to the Thailand floods. You did $570 million in Q3. The midpoint of your guidance in Q4 is $500 million. You talked about a recovery on facilities that you are bringing up of $50 million in revenue. And you talked about the impact of Thailand be in a $90 million to $100 million impact. I am trying to get all the numbers to put. Can you work me through? I mean maybe there's real -- you said there was no impact in your Q4 guidance to weaker customer demand. It appears there is though.

We clearly apologize. We tried to make it as clear as possible and we understand that there is a lot of moving parts. I guess the starting point to triangulate around is that we did expect revenue sequentially to be up in Q4, and had a number of programs ramping. So we used that as the starting point as opposed to the Q3. I believe that is the piece -- that is not in your numbers there. So if you start with $600 million as your base, I believe that's when you can see, okay, the taking out of the Thailand revenues the adding back of the portion that we expect to support and other facilities, that's when the numbers I think make sense. but I think that starting point is the critical.

So let me just do that while I have you. If we are $600 million and we've lost $100 million from Thailand, that brings us down to $500 million and we are recovering to $50 million from other facilities. Doesn't that put the number around $550 million?

Yes. The $100 million is the net number.

So Thailand is actually doing more like $150 million?

It will be when we are also ramping new programs in that facility as well as other facilities.

Okay. And then there was another comment, and I think you may have started to address this. I think it was you actually, Gayla, that said that the next couple of quarters it will be significantly impacted by Thailand. Now we already know Q4 is, but with the discussion that followed that on how you expect to bring the Thailand facility up in January, I am having a hard time. What is significant? I agree that the guidance on Q4 is a significant impact. Q1 it would seem to me to be not nearly as significant as what you just did to Q4.

So, while we are not giving guidance for Q1, I will try to articulate kind of around the plans given the significant disruptive nature of this event. So we do expect to have plans in place to support the majority of our customers needs, but I do believe that there will be, when we get back into the facility, it will be clearly inefficient and there will be support costs and duplication of costs as we are moving products to other sites. And so it will have a continued impact on our overall financial performance. We do not have -- and once we start seeing how the insurance proceeds flow, what the actual level of capital expenditures that we incur, how much inventory is recovered, we will have a better feel for it. But as you can appreciate given the proximity of this call to the event, we believe we have gotten our arms around Q4 pretty well. Have plans in place for Q1 but don't have clarity around some of those specifics to understand. However, we clearly can see that it will not be the efficiency that we are used to operating with.

It sounds like revenues are likely to recover quite a bit but profits probably won't follow -- will lag. You won't make much -- the operating margin will be minimal.

I believe that the timing and extent of the insurance recoveries will be the big wild card. We know that we will incur some expenses that specifically should be recovered by in insurance that are not what I would call productive costs incurred, so those will be fixed costs that should be covered by insurance, but there won't be matching, for all practical purposes with the insurance proceeds.

Your last question for me. Your reaction in trying to get your customers whole on this, is that going to permanently impair your ability to achieve the operating margins that you guys have set as goals and we have not achieved? In other words, when things are up and normal again, the band-aid solutions that you are putting in place, will they impair your margin? Facilities that are brought up that were closed, that will continue to be operating, probably not operating at full capacity, but those kinds of issues. Where do you expect operating margins from this event to eventually settle out in a year assuming we've put this event behind us?

Our strategic plans remain in place. As we indicated much of the incremental capacity that we are putting in place isn't being accordioned, and we're pulling as we look at the growth that we have based on the programs that we are booking, we may modify the way in which we re-facilitize the Ayudhaya and our headcount, so that we are properly accommodating Korat and that would be our view right now, is to regain momentum towards our targeted OI, and not to rebuild infrastructure at the level that would cause us to have a dampening effect on that.

Thank you.

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