Benchmark Electronics Inc (BHE) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Benchmark Electronics third quarter 2012 earnings call. At this time all lines are in a listen-only mode. Later we'll conduct the question and answer session. Instructions will be given to you at that time.(Operator Instructions). And as a reminder today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Don Adam. Please go ahead.

Good morning and welcome to the Benchmark Electronics earnings results conference call for the third quarter of 2012. This call is being recorded and will be posted for audio playback on the Benchmark website. I will begin with a few opening statements then I will provide you with a review of our financial metrics for the quarter. After this I will turn the call over to Gayla Delly, our President and CEO, to provide an overview of our performance, the state of our business and the outlook for the fourth quarter. After our prepared remarks, Gayla and I will take time for your questions in our Q and A session. And we will hold this call to one hour. This morning, during our conference call, we will be discussing forward-looking information that involves future events and the future financial performance of the company.

We would like to caution you that those statements reflect our current expectations. Actual results or events may differ materially from our projections. We would 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 and S-4 filings, quarterly filings on Form 10-Q and our annual report on Form 10-K.

These documents contain cautionary language and identify important risk factors which could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update these projections or forward-looking statements in the future. First I would like to comment on our third quarter revenue and earnings per share.

We were pleased to complete the third quarter of 2012 with revenues of $611 million. These revenues were within our guidance for the quarter of $595 million to $625 million. Our earnings per share, excluding restructuring and the net Thailand flood-related recovery for the third quarter were $0.31 and our GAAP earnings per share were $0.34.

This compares to $0.34 for non-GAAP and GAAP EPS last year, which included a discrete income tax benefit of $9 million or $0.16 per diluted share. The revenue breakdown by industry for the third quarter of 2012 was follows -- computing was 30%, industrial controls were 27%, telecom was 28%, medical was 10% and test and instrumentation was 5%. The breakdown, when comparing the third quarter to the second quarter of this year is as follows -- telecom revenues were up quarter over quarter, again primarily associated with new program ramps. For the industrial control sector, our revenues increased slightly this quarter as compared to last, again also due to new program ramps.

Medical sector revenues were relatively flat and in the computing sector revenues were down as expected due to the softness in the overall marketplace, and in the test and instrumentation market sector revenues were significantly down with the continued deterioration in the semi cap equipment market. Now for a quick update on Thailand. Included in our financial results for the third quarter is a net Thailand flood-related recovery of $3.1 million, which consists of $1 million of cost directly attributed to the Thailand flood, offset by $4 million of insurance recovery in excess of previously recognized inventory and property, plant, and equipment losses.

We will continue to work with our insurance carriers on the claims and recovery process which will continue until all of our claims are finalized. And upon settlement recovery items, including lost profits, will be recorded and may result in gains to Benchmark.

To provide a more meaningful comparative analysis I will present certain financial information, excluding our restructuring in the net Thailand flood-related recovery for Q3 during this conference call. We have included a reconciliation of our GAAP results to our results excluding these items in today's press release. Our operating margin for the third quarter was 3.7%, which is consistent with the second quarter of this year.

Our net income was $17.5 million in the third quarter of 2012. Net income was $20 million for the third quarter of 2011, which included a discrete income tax benefit of $9 million. GAAP net income for the third quarter of 2012 was $19.3 million. Net income for the third quarter of 2011 was $19.9 million, which, again, included the discrete income tax benefit I just mentioned.

We have interest income of approximately $326,000 for the quarter, interest expense of $443,000, and other income of $178,000. The effective tax rate was approximately 22% for the third quarter and we expect the tax rate to be in the range of 20% to 22% in the fourth quarter. The diluted weighted average shares, outstanding using the calculations of EPS for the quarter, were 56 million. Our cash and long term investments balance was $340 million as of September 30th of which $14 million were option rate securities classified as long term.

The unrealized loss on these securities of $3 million is reflected in shareholders' equity. For the third quarter we generated $53 million in cash flows from our operations, including $23 million of Thailand flood insurance recoveries for inventory losses. Note that the replenishment of this inventory is reflected as a use of cash earlier in the year.

Capital expenditures for the third quarter were $14.6 million and depreciation and amortization expense was $9 million for the quarter. Of the third quarter CAPEX approximately $6 million is related to the replacement of property and equipment in Thailand. Repurchase of common shares for the third quarter were $8.1 million or 600,000 shares. As of September 30th we have an additional $104 million in common shares approved for repurchase. Our accounts receivable was $455 million as of September 30th, a decrease of $3 million from last quarter. Accounts receivable days were 67 for the quarter.

Inventory was $375 million as of September 30th, a decrease of $12 million from June 30th. Our inventory turns were six times for the quarter which is consistent with the second quarter of this year. Current assets were approximately $1.2 billion and the current ratio was 3.6 to 1. And finally, as of September 30th, we had $10.7 million in debt outstanding, which is a long-term capital lease on one of our facilities. And I will turn the call over to Gayla for her summary and remarks.

Thank you, Don. Good morning and thank you again everyone for being with us today. Wow. What an exciting year we've had thus far. A great first year experience in the seat of CEO. Just as we put the 2011 challenges behind us, the fall winds of uncertainty hit us, and others, in our business with a new feeling in the air. I, and others in the industry, have often used the word broad-based. However, I can state that I don't ever recall a time when where it has had the same powerful definition that it has today.

There has truly been a broad-based demand deterioration in recent weeks. So it is against this backdrop, and within this context, that we present our results today for Q3 and our outlook for Q4. Looking at Q3 we are pleased with our third quarter results and our overall solid performance. We've achieved our revenue and operating margin target. Our results continue to show consistency and stability in a number of key areas and these will enable us to effectively manage through the overall tough macro environment. I'm happy to highlight a few items from this morning's press release. Again, our revenues were $611 million compared to our guidance of $595 million to $625 million for the quarter.

This represents a 7% year-over-year revenue increase. Our earnings per share, excluding restructuring and the Thailand flood recovery, were $0.31 compared to our guidance of $0.27 to $0.32. Our operating margins, as I noted, excluding restructuring in the Thailand flood-related recovery, was 3.7%, consistent with Q2. Positive operating cash flow generation was $53 million for the quarter, and as Don noted, this includes $23 million in insurance recovery. Our inventory decreased $12 million when compared to June 30th and our inventory terms were six for Q3. Our teams also had another successful quarter of booking which we will discuss later.

As is evident buy our results, during the third quarter our teams continue to drive improvement and consistency in several areas, which include operating margin and operational performance, working capital focus, execution for our customers, and maintaining disciplined cost controls. We will continue to drive towards our operating margin target of 4%.

However, as you can see in our guidance, in the current marketplace we do not expect this to happen in Q4. As we have previously commented, achieving the 4% percent operating margin is dependent upon meeting of volume level of approximately $625 million in quarterly revenue and also having a normalized revenue mix.

As we have demonstrated during the first nine months of 2012, we will execute and continue to drive efficiency improvements and manage our controllable areas such as having strong cost control and effective and efficient management on new program ramps. Our focus on these areas will continue. Moving onto our revenue and new bookings, during the third quarter we booked 25 new programs, including ten engineering projects.

These bookings have an estimated annual revenue run rate of $100 million to $120 million. These bookings represent new programs with both new and existing customers and as always they are subject to the risk of timing and ultimate realization of estimated revenue. Importantly, because of the dynamics in the current business environment, including lack of forecast visibility and the timing of the market recovery, we have significantly tempered the top-side forecast and the top end of the range for the new product ramps as the pricing of these new programs is not any easier nor does it have any greater visibility than the forecast from our customers did for current programs in production.

Our focus on the diversification of our service offerings has added complexity to the product opportunities we see. Because of this, we are experiencing elongated booking and decision making processes, and in addition, we also see product ramps that often take longer than the traditional nine to 12 months. In fact we have a number of programs that were booked over the last several quarters that will not achieve their full projected ramps until 2014.

In today's environments, OEMs continue to seek ways to compete more effectively and improve their cost structures. Because of this, we still see strong outsourcing activities and I have a very positive view of the outsourcing opportunities we see. For our fourth quarter guidance we incorporated, as I mentioned, the current environment today with continuing market uncertainty remaining in the global economy.

Looking forward to Q4, it is normally a stronger quarter for Benchmark, but two industries are providing more cautious forecasts to us. And those specifically include defense and aerospace with impending sequestration activities and our customers have incorporated this into their forecast.

Additionally custom instrumentation has experienced, and will continue to experience, severe decline in Semi-Cap Equipment spend. We have incorporated this information into our guidance. Based on this we currently estimate that our fourth quarter revenues will be in the range of $580 million to $610 million. Diluted earnings per share for the fourth quarter, excluding restructuring and Thailand flood-related charges, are expected to be between $0.26 and $0.31 for the quarter.

We anticipate approximately $2 million in restructuring charges during the fourth quarter and we'll continue to evaluate any actions that may be necessary to react to the changing market. In summary, I'm extremely proud and excited to say that the challenges of late 2011 and early 2012 properly prepared the Benchmark global team to face the challenges and the macro environment today. We have stepped up our game to support our customers, increase demand during (inaudible) in the latter half of Q3. And in support of the elongated production ramps, including supporting our customers who often are facing resource constraints inherent to this environment.

We have also worked jointly with our customers to focus on initiatives to further increase agility and increase their cost competitiveness in their products. We want to ensure that we, that is us and our customers, are prepared to preserve and even gain share in this down market. Unfortunately, these efforts don't fully offset the downdraft of the demand vacuum caused by the many economic and spending challenges globally. But we are confident that our focus has allowed us to deliver solid results for Q3 and begin Q4 having the same diligence and focus required to navigate through this uncertain environment. I am grateful to our internal teams and our customers for their support and joint effort put forth thus far. We know there are many challenges ahead.

These challenging times are exactly when outsourcing proves its benefits. We can support our customers and prospective customers in reducing their cost structure. The Chinese language (inaudible) capture well my view of the environment today, having one symbol which represents both the word "Challenge" and "Opportunity", which is exactly what we see globally today and for the near term looking forward. We have the challenges supporting those program ramps and managing the demand volatility and the semi decline and also have clear opportunities to take on newly created outsourcing requirements driven by the intensiveness and the pervasiveness of the downturn. We will remain focused on our customers in driving profitable growth and we have the proven ability to manage through intense hardships. And it looks like this one may be another one for the record. Thank you, and I'll open it now for a Q and A session.

(Operator Instructions). First we'll go to the line of Sean Hannan with Needham and Company. Your line is open.

Good morning, Sean.

Yes, good morning. Thanks for taking my question. On the guidance, and then just a little bit more sense of what you're seeing in the broader environment, I realize, Gayla, you did emphasize this is a broad-based decline that you've seen. Can we get, perhaps, a little bit more color around this? And then, also, how does this feel versus the rate of decline that we saw in 2008?

It certainly seems like we're get more commentary, at present, that the recent week's forecasts across the EMS space have been more dramatically reduced. And so just getting a relative sense of what that incremental deterioration feels like to you, and then how much does your guidance, perhaps, contain conservatism for any incremental deterioration that you might be seeing from customers, whether market-focused or if it's inventory management. Thanks.

Thank you, Sean. I'm going to attack that from a couple of different angles. First of all, I guess, the interesting data point that we, and likely you, have seen in the news is that corporate earnings and profits remain strong. And in that environment we would expect to see continued investment in CAPEX and support of new programs and growth. However, there seems to be an increased level of hesitation for spending, and that's basically, I think, the key driver that we see for softness right now. There are specifically two industries that I pointed out that we've seen softness, one being Semi-Cap Equipment and test and instrumentation is a segment we capture that in. And we've seen significant volatility in that area.

But given some of the spin in that area we expected to see potential continued deterioration. But that only represents 5% of our revenue now. It could go down a bit more. I guess, importantly, also in our industrial control segment, we include defense and aerospace. That has quite a significant level of conservatism baked in. Not just by us, but also by our customers as they try to anticipate what the actions may be in the upcoming months with sequestration. In some cases customers have taken a very significantly reduced forecast and are really in a wait-and-see mode.

I believe that one, potentially, given what the outcome may be could potentially have some upside and be conservative. I don't know at what time those may change or when the adjustments would be made by customers reacting to that. Overall, I think what we do see is just a general conservative stance and, really, the agility programs that I talked about are in support of customers to react more timely to the volatility they're seeing, both on the down side and upside. And the more we're able to react very quickly to the upside, the better I think we and our customers are positioned to allow us to take advantage if, in fact, we have positioned ourselves too conservatively. But I think that is appropriate and provides us a very strong longer term opportunity.

Okay, that's helpful. And then when you look beyond December, and I realize you're not providing explicit commentary around 2013, but should Benchmark enter the year based on what you're seeing now? Should you be able to enter the year in a position to demonstrate some growth based on your existing base business and wins you've accumulated? Or is that just too difficult to get a sense of at this point today?

You know, Sean, I do believe it's probably a bit difficult to say. We've got a number of new programs ramping and, as I indicated, some of those are taking longer. Some of them because they're more complex, but also some of them just given the things going on in the environment today. So I do believe that the outlook into 2014, anything I would indicate would simply be conjecture on my point because I don't think our customers are moving forward even in giving forecasts. So while I have reason for belief in improvement, I'm not necessarily at a point where I would indicate that the macro environment is supporting me in believing that.

Okay, thank you, Gayla.

Thank you. Our next question comes from the line of Brian White with Topeka Capital Markets. Your line is open.

Hi Gayla. Just to be clear, are order cuts coming in worse than what you saw in 2008?

What? Order--?

Just forecast reductions.

Forecast reductions. Brian, I did not do a comparative analysis there. I guess, here is the difference. The primary difference was in 2008 it seemed to be built upon a momentum that we entered the year with and, therefore, was conditioned as an inventory correction for and by most customers. I don't hear as much discussion today related to inventory corrections. So if there is anything that gives us pause, I think it would be clearly that. That it may be consumption-driven rather than just an overdrive of inventory.

Okay. And this computing and telecom, the fourth quarter they will rise or decline sequentially?

I believe that they will be flattish. And, potentially, telecom we've seen some very good strength, specifically at Benchmark, really related to new program ramps. If you look at the underlying dynamics in telco, I don't see that industry providing the strength that we're seeing. So it really is going to be dependent upon the over all marketplace there, but I don't see that it's positive as an industry over all.

And defense aerospace -- what percent of industrial defense aerospace for you?

It's probably 15% to 20%, maybe.

Okay. Thank you.

Thank you. Our next question comes from the line of Rick D'Auteuil with Columbia Management. Your line is open.

Good morning.

Good morning, Rick.

Can you comment on the pricing environment and whether there's more than usual pressure on -- I guess I'm talking about the legacy base of business, not necessarily the new business. We'll address them separately. But what are you seeing on the pricing side of the equation?

I don't see that the environment has changed. Maybe I've always had a set of tough customers but, again, it's the focus with our customers to drive their ability to take market share. So it's not us winning and them losing. It is really how can we position jointly to make their products more competitive in the marketplace? And so that's the challenge moreso than, specifically, a customer looking to us to kind of solve the problem, if you will.

So I see the environment as being tough but I don't see what I would call anything usually different than in the past. That could change, given the clear underutilization of capacity coming up with some of the degrading demand that's out there, especially in the consumer products market. But currently haven't seen anything much different than what we've seen historically.

Also true on the new business side of the equation with your new wins? As those programs ramp should they be in that 4% plus range after they ramp?

Yes. We (inaudible) our model and we haven't changed our model. It really is an alignment. In fact, I believe most customers are aligned such that they want to make sure that they have a successful partner. The last thing that they would want to do on our business is to get to a point where it doesn't make good business sense for their partner and, therefore, they'd have to make a change of partners. It truly is a collaborative effort for both of us to be jointly successful.

And lastly, what, if any, are the cost actions that you're taking to adjust your expenses, given the -- given the reduced expectation on revenues?

Rick, I think it's all the normal ones. So it's making sure that we do what I'll call a bottoms-up review of all costs and insure that we go through the process to eradicate any costs we can that are truly controllable. Every controllable cost gets reviewed in an environment like this and, I guess, just as high water floats all boats, a low watermark exposes things that you may see as opportunities that you didn't recognize before. Absolutely. It's making sure we've got teams aligned with the opportunities we see in front of us.

Are there any specific head count targets knowing that we're in for a tough, at least three if not longer than that, kind of (inaudible)?

No. I guess you're kind of referring to the market. It's almost, like, every day we see someone with 6%, 5%, 10% headcount reductions. I don't have that in place currently and we would continue to align to the marketplace. We have, over the years, employed having a flexible workforce to the extent possible to ensure that we're able to balance. And I believe we have done a pretty good job of that and we'll continue to use that as a point of leverage as much as possible.

Thank you.

Thank you. Our next question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is open.

Thanks a lot. Good morning, guys. Just a couple of questions on my side. One -- because you recently talked about -- I think it was the December quarter (inaudible) segments you had the calling out defense aerospace and tests and instrumentation. I think it's about 8%, 9% of your total revenues. Is the implication that those segments are really going to be down 25%, 30%, something that severe? Maybe you could just talk about what do you see across some of the other segments in the December quarter. That would be helpful.

Yes, those could clearly be down by -- I don't -- I'm not -- we typically don't give out forecasts by industry, but those industries could be down that significant significantly. But looking at the other industries, as, I believe, we've seen across a number of the industries, the spend, although Q4 is typically strong, a CAPEX spend in computing has been weaker for hardware. And so we've tempered that into our expectations.

Likewise as I mentioned in telco, we've really grown and grown that share through taking share and new programs. But I don't see strength in telco itself. In medical I believe, again, we're ramping new programs but I don't see that as being a significant needle mover. But I could see medical being up in low single digits or mid single digits, potentially.

And then are you still (inaudible) -- you can talk about -- When you talk to your customers, is this more of a pause given the elections, a change of government in China and so on or is this a much more structural concern that 2013 could be a softer demand environment? When you talk to your customers, I'm just curious, what sense do you get out of those?

I think each of the items you mentioned come into discussion. Whether it be the slowing level of growth in China, whether it be the European recession, or the reduced level of growth in the US or, actually, no growth in the US, potentially. Again, it becomes very difficult to see how much of this is structural in the new marketplace. And I think that's where all customers are trying to level set their own expectations around what do we need to model for. I believe a general belief that it will not be as strong overall, maybe, as some of the double digit growth we've seen historically in some markets.

But I think it's somewhere much brighter than what is modeled in for the near term. There is just a lot of moving parts right now, as you mentioned, with the election in China, the election in the US and, I think, positioning around some of those dynamics currently.

Just finally for me -- you guys have had a decent cash flow quarter than in Q3. Given demand patterns are a little bit softer in the December quarter, should we expect sustained cash (inaudible) in that $40 million to $50 million range in December? Maybe you start with cash flow from operations for the next quarter.

I think, Amit, in terms of Q4, you're probably in the $25 million to $35 million range for cash flow from ops.

Perfect. Thanks a lot.

Thank you. (Operator Instructions). We'll go to the line of Jim Suva with Citi. Your line is open.

Thank you very much. Quick question. On the really major computing ramp program that you had, can you just let us know is that kind of still on track for ramping next year? I think I heard a rumor it was about $150 million. Or does this macro environment really even cause all customers and a customer like that to kind of reassess both A, the magnitude of the project as well as B, the timing to market? And then would they need to redesign it or -- if you can just kind of talk about those factors.

Jim, as we noted last quarter, I believe, we don't have that in our current forecast and aren't including it in any of our modeling. However, that is not to say that that customer has abandoned or has lost sight or investment in the opportunity. And we're continuing to work on those. I would think that when it comes about we'll give you as much insight as wehave and consider it a positive at that point instead of trying to continuously address and provide explanations for things that are really beyond our control and understanding of the dynamics in the marketplace. Still very excited about the opportunity. We're working very diligently with the customer but I don't have clarity about the timing of the ramp. I do know that the investment, though, is still worthy of attention and dollars from the customer.

Great. So it sounds like that would be upside next year. And then the second question I had is one of your peers or competitors this morning -- and I know you're preparing for their call -- but Plexus announced that they saw some additional pricing aggressive measures by some of those customers. This is always a tough industry, and I know your customers always want better and better pricing, but have you actually seen them increase the aggression on their pricing? Any thoughts about why Benchmark may not be seeing that if others are?

Jim, I really can't answer for kind of what they saw in their customers, of course, but, as I mentioned earlier, maybe we've always had aggressive customers. But clearly I think the focus for all of us all along-- And I'll give [Cary] clear credit for the many years that he trained our teams that in order for our customers to be successful, we have to assist them. And in doing so we have to be very aggressive on driving costs down. And that's what allows them to grow their business. So if they don't grow, we don't grow. And with that mindset, I think that (inaudible) the business is-- Yes, it's very competitive. Our margins are very tight. We have to constantly be vigilant. I can't have any explanation, though, for what a peer may have seen.

Great. Thank you and congratulations to you and your team there at Benchmark.

Thank you, Jim.

Thank you, Jim.

Thank you. We'll go to the line of David Fondrie with Heartland. Your line is open.

Yes. Thank you very much. Good morning.

Good morning, David.

Good morning.

Well, gosh, it was a pretty nice quarter, I thought, considering the environment and a pretty decent guidance.

Thank you, David.

Can you talk a little bit about the capacity utilization over in Malaysia or Penang?

We don't do a site by site level but I think we are pleased with our capacity utilization there, generally, and our seeing a drive to improvement there. As you can tell from our operating margin we have a better balance of utilization, generally, overall. But, again, I don't get into the specifics of a specific utilization rate in a site by site. I know there has been some movement in some of that area amongst competitors that have seen a significant decline. But that's not what we've seen.

Maybe you could give us some indication of overall, then, of past utilizations throughout the entire (inaudible) --

I'd say that we're probably about the 60% to 65%. We clearly have the ability to grow and have the actual capacity ready to take on the recovery of business. So our CAPEX is already in place. We don't have a new brick and mortar going on in any geography. And, in fact, you might know, as Don indicated, I believe, in the call notes, in our spend for CAPEX this quarter, it included about $6 million that clearly was a reinvestment from property and equipment, which the insurance proceeds were to go offset but nonetheless, it comes back through the CAPEX spends for this quarter.

Just the last comment or question is we still have this tremendous cash balance on the balance sheet. Any thought of perhaps initiating the dividend and opening your stock up to a wider array of investors?

Absolutely we'll continue to monitor and review that and I believe it really is one of the items of consideration that we have in conjunction with our full board as we identify how we can continue to provide value to shareholders.

(Inaudible) of people looking for yield, a small dividend might be supportive of the stock. Thanks.

Thank you, David.

Thank you, David.

Thank you. Our next question will come from the line of Brian Alexander with Raymond James. Your line is open.

Thanks. Maybe just a follow up on that last question. How much of the cash is in the US versus offshore? And then I just have a couple other follow ups.

It's roughly one-third, two-thirds, one-third being US.

Great. And I could be wrong but I thought the defense and the test and instrumentation segments, which you cited as disproportionately weak, are some of your higher margin businesses. Can you just maybe talk about the gross margin versus OpEx dynamics as we head into the December quarter, given the revenue guidance and what's ultimately incorporated in the operating margin target which, I think, is down about 20 basis points sequentially, which, to be fair, is not onerous given the environment.

Good point, Brian. Yes. The more complex businesses and regulated businesses typically have more service oriented value add. And those margins associated with them and they were down for Q3 and expected to be down for Q4, potentially, even further. That's incorporated in our Q3 actual and our Q4 guidance.

When I talk about the operational execution and efficiency that our teams have to focus on, that is very key to our effectiveness in making sure that we can achieve our goal. We don't speak specifically to gross margin. We know and we've done our own analysis that definition of gross margin is inconsistent across the industry so we really drive to that operating margin level and insure that we are focused on maintaining that. Did I answer all your questions? You may have had one more that I forgot.

Yes. I've got one more. Thanks, Gayla. So if I look at the December guidance your revenue at the mid point -- it's about $30 million away from where you want to be to get to a 4% operating margin. And I think your operating income, if I'm calculating it right, at about $20 million for Q4, is about $5 million away where you would need to be. I guess what I'm getting at is it would imply that you need a 15% contribution margin on that revenue growth to get back to a 4% margin. Is that how you're thinking about the business? And then just walk through how you get there given that a lot of the incremental revenue that you would hope to achieve is coming from new ramps. And, oftentimes, with new ramps come higher costs. Thanks.

Brian, you definitely understand the dynamics of the marketplace that we participate in very well. But as I indicated it really isn't just revenues. I think there may not be a whole lot of things everybody in our industry would comment on that's exactly the same, but this, I think, we would all agree on.

It's about mix and revenue. So if the more complex value-added industries are weak, it takes a lot higher revenue level or otherwise you've got an unutilized resources or capacity that you may elect for the longer term to maintain intact as a good strategy in support of those industries. But, nonetheless, they will have a drag on your operating margin when those industries are down.

Thanks for the detailed answers.

Thank you. Our next question comes from the line of Wamsi Mohan of Bank of America. Your line is open.

Thank you. Gayla, in your prepared remarks this is a broad-based slow down, something you haven't seen in a while. Given the complex backdrop, why not take a more aggressive stance towards structural changes that's not just related to your cost structure? And what would prompt you to go make those changes? Is there a particular revenue level that you're looking for that would trigger it? Is there more demand deterioration? What is it exactly that would want you to go implement more on the cost side?

Wamsi, I guess, in simple terms I would say that if we didn't expect there to be a recovery and we thought that this was a structural change and a long-term change we would definitely take strong and severe actions. I think, again, we have been aggressively positioned to deliver results and see opportunities in front of us that would warrant keeping our structure in place. If that changes we would certainly address that.

Okay, thanks. And, Don, can you remind us of what normal seasonality typically is in calendar 1Q and given what you've been seeing in terms of order patterns and the revenues or the weakness that we're expecting in 4Q? How should we be thinking about the seasonality for 1Q?

Historically, as Gayla said in her prepared comments, Q4 is typically up. And I think as you go from a normal Q4 into a Q1 you're probably down 5% to 7%.

I guess the point we said, Wamsi, and the unknown is if Q4 doesn't show the strength, does Q1 show an offset to something that isn't as strong as historical?

Okay. Thank you.

Thank you. Our next question comes from the line of Taylor Finch with Century Management. Your line is open.

Good morning, Gayla.

Good morning.

My question for you guys is to what extent does the lack of activity in the testing and instrumentation products business weigh on your margins right now?

I don't really have a -- what I offer and refer to is a with and without calculation. It is more an intense marketplace but I don't, we don't separate out industry by industry.

Okay. And how to you feel about your positioning in that market, potentially, in a recovery?

I'm not sure I understand the question, but, again, I believe that we have the footprint and the support for customers. I think this is really more about our customers' customer than it about any specific support structure that we have.

Okay. And is there any end market you look to in particular that you think growth in it would give you your best chance to reach the $630 million run rate or the mix necessary to get to 4%?

I don't think there is one that I would call it just a silver bullet. Clearly the ones that seem to have the most volumetric increase most rapidly would be computing and telco. They have the ability to swing very tough. Some of the growth that we have, of course, has been in telco and we expect it again in industrial control and also medical. And industrial control and medical are the ones that don't ramp as fast or have the significant volume increases. As I say, those are the key dynamics we see.

Great, thanks. That's it for me.

Thank you. Next we'll go to the line of Sherri Scribner of Deutsche Bank. Your line is open.

Hi. Thanks, Gayla and Don. I just wanted to explore the computing segment again. Typically, that segment for the fourth quarter you would see about 10% to 15% growth at a minimum. Very few quarters have you seen a decline in that business. And I think you guys are guiding to flat, so it's not as bad as sort of a recession. But I wanted to get a sense of what you're seeing there. You really don't expect any growth there? You're really seeing nothing from customers that makes you think you'll see sequential improvements?

We did have the one program, as we previously mentioned, that would be kind of a short cycle program. And that one is wound down, winding down and, therefore, the upside is really kind of buried against an offsetting (inaudible).

Okay. So the underlying business really is very weak at this point?

I would say so in comparison to what we've historically seen. The computing spend -- and you hear some declines on hardware being very significant.

And did you mention any greater than 10% customers this quarter?

We have one over 10% customer that would, yes, for this year.

Okay, great. Thank you.

Thank you. We have a follow up from the line of Brian White from Topeka Capital Markets. Your line is open.

I'm just wondering how we should think about SG&A in the fourth quarter just in dollars. Is it going to go up a little bit? Down? And gross margin, what type of decline should we think about there?

In terms of -- I would expect a modest decline in SG&A. I would say -- we finished at 3.7%. You should be in that same range for the quarter.

Okay. So as a percent (inaudible)?

Correct.

Okay, thank you.

Thank you. And with that, that was the final question. We have no other questions in queue. Please continue.

Again, thank you, everyone, for joining us today. And we'll be in our office for any follow-up questions you may have.

Thank you.

Thank you and have a good day.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.