CTS Corp (CTS) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing. Welcome to the CTS Corporation second-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to our host, Mr. George Newhart. Please go ahead, sir.

Thank you. I am George Newhart, Vice President of Investor Relations, and I will host the CTS second-quarter earnings conference call. Thank you for joining us today. Participating from the Company today are Don Schwanz, President and CEO; Vinod Khilnani, Senior Vice President and Chief Financial Officer; Don Schroeder, the Executive Vice President and Chief Technology Officer.

Before beginning the business discussion, I would like to remind our listeners that the conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties was set forth in last evening's press relates, and more information can be found in the Company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanations and reconciliations are available on our Web site in the Investor Relations section.

I will now turn the discussion over to CEO, Don Schwanz.

Thank you, George. Last evening we released our financial results for the second quarter, and I am happy to say that the results represent our best financial performance in three years. Sales reached their highest level since the second quarter of 2001 and earnings reached their highest level since the last quarter of 2000.

On a year-over-year basis, sales grew 17.9 percent over Q2 of 2003. In fact, this is now the third straight quarter that we have seen double-digit sales growth on a year-over-year basis. On a reporting segment basis, our EMS segment had the strongest year-over-year sales growth with Q2 up 31.7 percent over the second quarter last year. Operating earnings as a percent of sales, however, declined from 5.2 percent in Q2 last year to 2.7 percent this quarter with foreign exchange, pricing and the startup of our Singapore EMS operation all contributing. Actually the Singapore startup has gone very smoothly with revenue deliveries beginning in the second quarter. While there were some startup costs that impacted the quarter, the bigger impact on the EMS profit rate came from the allocation of facility and overhead costs. In this regard, however, it should be noted that our Components and Sensors business segment, which shares the same Singapore facility, received a corresponding and offsetting benefit.

The Components and Sensors segment generated 6.6 percent sales growth on a quarter-over-quarter basis, but also demonstrated significant earnings growth with operating earnings increasing from 2.8 percent to 12.8 percent of sales. Growth in this segment was driven by our automotive products as automotive-related sales climbed 16 percent on a quarter-over-quarter basis. On the other hand, nonautomotive component sales declined 1.9 percent versus the year ago quarter. This was partly due to the continuing decline in sales of products announced to go end of life in 2002.

We are also seeing a slow erosion of our component sales into the handset market due to technology trends and our decision to focus more resources on other markets with better long-term growth and margin prospects. Component sales into communications infrastructure, for example, grew by 50 percent on a year-over-year basis.

Vinod will discuss our financial results in more detail in a moment. Before that, however, I want to give you a little more color on the quarter as regards to the market conditions we are seeing as well as to update you on our growth initiatives.

First, as regards market conditions, we clearly saw demand growth take a breather toward the last half of the quarter. The slowdown occurred across most of our markets that was more pronounced in the components business. Despite the recent softness, our customers remain positive about the second half. We also see indications that the slowdown may at least in part be more of an inventory correction than a real change in direction. Our sense is that the slowdown is temporary, but it is a risk in our outlook.

While market trends are more of a factor in our short-term results, our growth initiatives are a very critical driver to our long-term outlook. I have discussed these growth strategies and initiatives in past conference calls, so I do not plan to address them in detail today. But I do want to give you a quick update.

Beginning with our automotive sensors and products business, our new products initiative continues to do very well. New products, in fact, drove most of the strong quarter-over-quarter sales growth to automotive markets which I mentioned earlier. Additionally, during the quarter, we won new model positions for our integrated accelerator pedals, including another order from a Chinese automotive OEM, as well as another model position for an active manifold sensor and a belt-tension sensor. We also continue to experience significant new customer activity with all of our new products.

My commentary generally focuses on new products that it have released to the market and are in early production or close to production. However, we also have several new product families in development that have reached the stage where we are beginning to show them to customers or are actually in development testing with respect to customers. One example is a Next Generation weight-based occupant classification system that is designed to work with the Next Generation of speed. We believe our patented technology offers installation performance and cost benefits over current systems. Though production is still several years away, if we are successful with this new product and so far customer testing is going well, sales could quickly grow to over $100 million a year once the product goes into production.

Expanding our automotive business in Asia and broadening our customer base are also key growth strategies, and we continue to make progress in both. In the second quarter, 70 percent of the new business wins came from Europe and about 15 percent came from China. In contrast, about one-third occurred current automotive product sales come from Europe and about 10 percent came from Asia.

In our nonautomotive components business, our primary objective has been improving profitability. Our growth initiatives have been largely focused on niche markets where we see attractive margin opportunities as well as growth potential. Communications infrastructure is one such example, and I have already noted the high growth rates we have been achieving in that area.

Our Clear-One line of termination products is another example. We continue to add to this product family and have recently introduced resistor capacitor rays as well as resistor capacitor inductor filters. Design-ins continue to grow at a good clip, and production continues to ramp with volumes today running over double last year's rate.

Within our EMS business, our growth initiative has focused on refining our business model, extending the application of the model into other industry sectors, and capturing new customers with solid growth potential. In the second quarter, we added five new customers, two of which came from industrial markets and three from communications.

In summary, we feel our growth initiatives are continuing to attract our expectations in the market giving us growing confidence in the long-term outlook for our business.

I also want to point out that while our growth initiatives are predominantly focused on our organic growth, we remain on the lookout for acquisitions that offer clear value propositions in our areas of confidence. In this regard, our strong balance sheet, which has been aided by our recently completed $60 million convertible offering, together with the cash proceeds from the sale of an unused facility in Taiwan and excess land in Canada positions the company to more easily to take advantage of acquisition opportunities. All that being said, there is no assurance we will find an acquisition opportunity that meets our criteria, and we feel no urgent need to execute an acquisition of any particular character.

Now I will turn the meeting over to Vinod Khilnani, our CFO, to provide some color on our financial results for the quarter.

Thanks, Don, and good morning, everyone. As Don noted, sales were up 17.9 percent year-over-year and 12.7 percent sequentially in the second quarter of 2004. Net earnings of 6.9 million or 19 cents per share diluted included a onetime 6 cents per share gain on the sale of excess Canadian land which we had flagged last quarter as pending. Excluding the gain on the sale of Canadian land, earnings per share of 13 cents were approximately twice the level of 7 cents in the previous quarter and 6 cents in the year ago quarter.

Gross margins in the second quarter were 21.0 percent, the same as Q2 of 2003, and up 0.9 percent sequentially in spite of higher mix of lower margin EMS sales. In addition year-over-year increased margins in the Components and Sensors segment were able to offset negative impacts on gross margins from higher mix of EMS sales and lower EMS margins which were caused by expenses related to their new operating location in Singapore, pricing and unfavorable currency exchange.

Please note that higher Singapore-related expenses for EMS are largely due to the relocation of facility and overhead expenses on Components and Sensors segment to the EMS segment as both business segments now share a common facility and services infrastructure in Singapore.

The unfavorable impact on EMS segment of this part allocation is offset by a favorable impact on Components and Sensors segment. Sequentially the higher margins of Components and Sensors segment enhanced all our CTS margins by 2 full percentage points, which more than offset the unfavorable impact of higher mix of EMS sales and lower EMS margins and allowed us to improve the overall margin sequentially from 20.1 percent in the first quarter to 21.0 percent in the second quarter of 2004.

SG&A and R&D expenses are 15.5 percent of sales or $21.3 million. As a percent of sales, they were 1.6 percentage points lower than the year ago quarter of 17.1 percent and 0.6 percentage points lower sequentially from the previous quarter expense level of 16.1 percent of sales.

While SG&A and R&D expenses in absolute dollars were up slightly due to certain volume-driven variable expenses and some incremental Sarbanes-Oxley implementation-related professional fees, the trend as a percent of sales continues downward. This downward trend demonstrating our ability to leverage operating expenses as we grow our revenues is in line with our previously stated expectations to drive them down to around 14 percent of sales over the next two to three years. The $3 million gain on the sale of assets highlighted in a separate line in our income statement was primarily due to the 2.7 million in gain on the sale of excess Canadian land as discussed earlier. Operating earnings, excluding the Canadian land sale gain, were still 7.9 million or 5.7 percent of sales, the highest operating margin since the heyday of year 2000 and our annual (inaudible) was $867 million.

Interest expense at $1.6 million was 0.3 million lower than a year ago quarter, primarily due to lower interest rates. Looking forward we expect our interest expense to come down further by approximately $500,000 per quarter, beginning in the third quarter of this year. This interest savings results from the fact that in late second quarter we paid off $40 million of over 7.5 percent industrial revenue bonds with proceeds from the convertible debt which carries a coupon of 2.125 percent.

I am pleased to report that in the second quarter we received formal notification from the tax authorities from one of our foreign jurisdictions that in order to provide tax incentives they are cutting our statutory tax rate in half retroactively from January 1st, 2004. This reduction combined with a shift in sales mix lowers our projected 2004 full-year effective tax rate from 25 percent to 23 percent. Our second-quarter 2004 catch-up effective tax rate was, therefore, 22.2 percent. This makes an effective tax rate in the first six months of this year at 23 percent.

Second-quarter net earnings of 6.9 million and earnings per share of 19 cents were significantly higher year-over-year and the highest in over three years.

From the balance sheet management perspective, it was also a very good quarter. Controllable working capital, which includes Accounts Receivable, inventory and Accounts Payable, was 11.4 percent of annualized sales at the end of the second quarter, 1.5 percentage points lower sequentially from first quarter 2004 level of 12.9 percent and 0.5 percentage points lower year-over-year.

Capital expenditures increased to a more normal level of 4.2 million in the second quarter from the lows of 2 million to 2.3 million in (inaudible) quarter and second quarter of 2003. Our full-year capital expenditures are still projected at the $18 to $20 million range as discussed in our earlier two earnings conference calls.

Please note that although we are incurring capital expenditures to support our new automotive product launches, the full-year 2004 projected capital expenditures are still relevant of our often stated range of 3 to 5 percent of sales.

Free cash flow, which CTS defines operating cash flow plus all investing activities, was a positive 14.4 million in the second quarter of 2004 versus a negative $3.6 million in the year ago quarter. The strong free cash flow of 14.4 million in the second quarter was generated by healthier profits, 8.1 million; improved working capital management, 3.3 million, and positive net cash provided by investing activities of 2.9 million as proceeds from the sale of assets exceeded capital expenditures for the quarter. As a result, our cash and equivalents balance increased to 48.2 million at the end of the second quarter of 2004 front 32.9 million at the end of the first quarter of this year and 6.7 million in the year ago quarter.

Total debt net of cash and cash equivalents came down further to 36.8 million versus 78.6 million a year ago and 48.3 million in the first quarter of 2004.

In summary, the second-quarter results were excellent, and they continue to demonstrate the positive impact of our financial initiatives in spite of negative impacts such as a weaker dollar, higher precious metal prices, incremental expenses driven by Sarbanes-Oxley requirements, lower pension income, and higher mix of EMS sales which inherently carry lower profit margins. It is clear that the initiatives which were taken in 2001 and 2002 timeframe to improve the cost structure and lower the (inaudible) are beginning to pay dividends as we begin to see volume increases. Focus on higher margins, product families like sensors and communication infrastructure, lower depreciation expenses as a result of attention to capital expenditure, tighter management of operating expenses to drive leverage as we increase revenues, capital structure initiatives and lower interest expense, and last but not least efforts to negotiate and achieve lower tax rates in foreign jurisdictions have all allowed us to continue the trend toward higher profitability and keep us on track to achieve our profit targets. Overall it was an excellent quarter with strong topline growth, highest profit margins since the 2000 timeframe, strong free cash flow and very healthy capital structure and strong cash position.

And now I will turn the meeting back to Don.

Thank you, Vinod. Q2 sales came in stronger than we had expected, most of that driven by stronger EMS sales and much of that extra driven by higher demand for infrastructure products. We know from experience, however, that infrastructure demand can be very lumpy. As I noted before, though, our customers remain cautiously optimistic for the second-half. As a result, we're raising our expectations for sales growth for the year to a range of 10 to 14 percent over 2003. Even so I want to remind our listeners that we still anticipate normal seasonal sales patterns to result in lower sales in Q3 than in Q2.

As regards earnings, Vinod noted in his comments that the interest savings achieved as a result of the convertible bond issue in the second quarter and the change in effective tax rate will have a favorable impact on full-year results. Those factors, along with a stronger sales outlook, allow us to raise our earnings outlook to a range of 50 cents to 54 cents per share for the year, including the onetime gain on the sale of the land that we reported in the second quarter.

Now I will open the call to questions.

(OPERATOR INSTRUCTIONS). Scott Merlin (ph).

Great quarter. Going a little deeper, can you give any sense of magnitude on startup costs at Singapore and the Forex and EMS? It seems like your earnings could have been a penny or two higher if you normalized for those numbers.

Scott, as far incremental expenses in Singapore are concerned which we highlighted were to some extent right pocket left pocket kind of a thing, from an EMS segment point of view, those numbers were $600,000 to $700,000 range for the quarter, which is roughly one full point as a return on sales kind of a number. And foreign exchange for the EMS segment was also up similar magnitude, $700,000 - $750,000 range, which is again one full point. So that explains two full points as a percent of sales for the EMS business. And as you know, it was quite a large change in the exchange rate in this timeframe. Year-over-year the dollar probably weakened close to 12 percent compared to Pound Sterling and close to 8, 9 percent compared to the Euro. So it was a pretty big change for us.

And the sales strength in EMS, HPE versus non-HPE, can you give us a sense of sales strength there and why it might continue?

Most of it was in the infrastructure side. It was strengthening in both segments, however, or both areas, however.

In other words, a lot came from non-HPE side of the business.

And last question regards just the electronic components that were down or the next-to-last question electronic components were down 1.1 percent. Were there some -- are there some money-losing businesses that you're trying to get out, and once you get out of those, are there low margin businesses buried in those electronic components that are being discontinued that will ultimately help your profitability once you wind them down? And any timing on winding down some of those discontinued businesses?

First of all, just a correction. I believe I said that components other than automotive were on a sales base 1.9 percent, not 1.1. I just wanted to correct that. And yes, our end of life components that we announced going end of life I believe it was September of '02, and that contributed -- if you compare year-over-year, there is still a fairly significant drop. The volumes are getting fairly low at this point in time. So going forward it would be much less of a factor.

Yes, I think going forward there would be minimal impact. Most of the benefits I think are beginning to reflect in our margin.

But those products we went end of life on them because the margins were very low, and so what you're seeing is those sales are going down and being replaced by sales coming from, for example, infrastructure markets where the margins are certainly much higher and in a range which we find much more attractive. So to some extent we're seeing some change in mix within the area right now as opposed to a topline growth driving the margin improvement.

So there is a positive mix shift in that tense?

Absolutely.

And the last question -- I had trouble hearing a little bit on the weight date. Was that the weight day safety sensor?

When I was talking about the new product? It is an occupant classification system. So it goes beyond just the belt-tension sensor.

Right. And that goes with -- that senses weight on the passenger side, its occupant protection?

Yes.

And weight sensing?

Yes.

So that can be -- is that stream gauged, or do you know is that stream gauged based?

It is stream gauge based.

And when does this become more likely? Right now can we say it is in the development stage, or when might we see actual orders?

It is in late development stage, so we would look for sometime in the next year.

That could be huge because the industry is looking for a new approach to that. Okay. Well, good quarter.

Kevin Kessel.

Good morning. Looking at your raised guidance for the year of 10 to 14 percent for sales, it seems from that that you are looking for a little bit of a slowdown in the second-half relative to the first whereas the first half grew about 17 percent. I know you addressed that earlier in your comments. Can you just revisit what you said and give a little more detail in terms of this slowdown? You mentioned seeing towards the -- I think you said towards the end of the quarter?

Yes. I did mention that it came more in the component side than the EMS side of the business. It was pretty broad-based. If you look at automotive, for example, automotive by and large has been I will say fairly steady this year over last year with the growth predominantly in Asia. But China has been slowing down all year long. Last year we were seeing year-over-year growth in China that was 50, 60, 70 percent. The growth rate in China in May I think year-over-year was down to around 20 percent. So that has been coming down. And I'm not expecting that to pop back up, but it is still a very significant growth rate. So I'm sure that is playing into it.

The other component demands, we saw some slowdown through distribution. That goes into a pretty broad set of markets. So it is hard to really tell. The distribution partners have indicated to us that they believe it is more inventory correction from what their customers are saying to them. So we should see that come back again.

I guess the other thing to note is that we typically see seasonal slowdowns in the third quarter because of the automotive shutdowns in the U.S. and in Europe, which are significant factors. You see a slowdown in infrastructure, and that also I pointed out that tends to be lumpy. There are big orders that get placed for infrastructure systems, and they get delivered in a relatively short timeframe. Then it will slow down for a while, and that is harder to predict.

So the slowdown, would you say it materialized in the last month, or was it actually the whole second half of the quarter?

It was probably the whole second half.

Okay. The last 1.5 months?

Yes.

In terms of the inventory balance, I think you guys have said that you thought might going into the quarter you're expecting it maybe to be flat to declining because it has been rising. It was up 15 percent sequentially. What is the outlook for inventory in terms of the next quarter going out?

I think we should see some reductions in the new inventory. You know we did have the relocation, or not relocation but expansion of EMS business. That required us to carry some additional inventories which are not fully deleted out of the system.

Are you talking about Singapore?

Singapore, yes. And then the higher sales obviously required us to carry some additional inventory. We should see some improvement in the inventory levels between now and year-end.

Okay. But in terms of next quarter, it is still unclear in terms of if next quarter will be up or down. But do you think by year-end you'll be able to take it down?

Yes. Yes, we may be able to take it down next quarter too, but we would rather feel more comfortable talking about a broader period of time than that.

And then just going back again to what you had said on the EMS business, you saw a great sequentially increase, but operating profit basically remained flat. That is being attributed mainly to the remaining amount of the Singapore expansion, which is now complete in terms of startup costs, as well the foreign exchange?

Well, there are two elements of it. One small piece is probably a onetime startup cost, but a bigger element is ongoing sharing of the overhead in Singapore. So that is a permanent increase in their cost base, which is really allocation of costs from our Components and Sensors segment to EMS. So not a negative impact, a no net impact on the Corporation as a whole, but between the two segments, we are shifting some costs from one to another.

The onetime startup costs when you put them in that category, there will be some additional costs of that nature that continue into the third quarter because we are still bringing on additional part members. That is not the bigger driver.

That is not, okay.

No.

Okay, go ahead.

And continuing on the foreign exchange, we said that the weaker dollar did affect that segment negatively by approximately $700,000 to $800,000. Having said that, we have said in the past that based on our currency flow between the two segments when the dollar weakens EMS business normally sees an unfavorable impact. But it gets partially offset by favorable impact in our Components and Sensors segment. So if you ask me what was the net impact on the Corporation of weaker dollar, I would probably say that number was roughly half of the negative impact of the EMS.

Okay. The five EMS ones that you spoke about, I think you said two in industrial, three in communications. Is there any rough approximation in some for what these might account for on an annual basis?

Let me put it in a little broader context. In the last 12 months or so, we have brought on I think it is 18 new customers, and obviously they have come on at different times and they got different ramp up schedules associated with them. But between this year and next year, those 18 -- we look to drive about $25 million of additional revenue from those 18 in 2005 versus 2004. Does that help you?

In 2005 over 2004 in annual revenue?

Yes.

Okay, that is helpful. And then I guess the last question is on the revolver. Where did the revolver balance end for the quarter?

Like the big zero number.

That is at zero now? Okay. Perfect. Thank you.

Reik Read.

I just wanted to follow-up on the Singapore facility. I don't understand what you're saying that it was an existing fixed cost and now you are shifting the allocation. But in effect you are filling that up with revenue now, and you should start to get some degree of leverage. Can you talk about the amount of what the revenue ramp up would be there and what the overall leverage might be to the total company margin?

Well, the ramp there is obviously pretty significant. I think we have said in the past that 50 to 60, 70 million range of numbers are moving in EMS sales from U.S. and UK to Singapore, and that clearly fills up that capacity and creates an overall leverage.

In the short run, because we essentially still have most of the overhead structure and the EMS operations in U.S. and UK, before the transfer and after the transfer, it is a small change, but the bulk of it is still the same. You don't see a net net leveraging on the total company. As we begin to increase volumes and fill up the capacity, behind those moves in the UK and the U.S. are further improve the volumes, we will begin to see some leverage on an overall basis.

What will become of the existing North American and UK facilities? Will those be closed down and would you expect charges?

Well, we still have sales in both of those locations. All it does is create more capacity in those two locations at this point, which we would try to fill.

And then if I can go just more broadly, can you guys talk a little bit about what the bookings trends are, and if you can disclose the book-to-bill? And then also within the automotive business, Don, as you had alluded to, you signed a number of automotive contracts or have had a number of automotive wins in the last 12 to 18 months, and you are starting to see a good ramp. Can you talk about what that ramp might look like as we get into the second half of '04 and into '05?

Let me attempt to answer the first part of the question on orders and bookings. To give you a rough indication, our orders in the second quarter were approximately 130 million, and that compared to 120 in the year ago quarter. So 120 million last year in second quarter versus 130 this year. That number is pretty similar to what we saw the activity level in the first quarter. So first-quarter, second-quarter numbers from order rate are very similar, but better year-over-year.

In terms of automotive, as I have mentioned already, the third quarter is typically the slowest from an automotive standpoint because of the shutdowns that go on. So that effects the second half of the year.

In terms of how new products get ramped, model change over time at the middle of the year is the ultimate driver, and in case of belt-tension sensors, we tend to see new belt-tension sensor applications come on at the end of the year and at the middle of the year, and so there will be a stepup in that area going into the last half of the year.

You know other model mix changes play into this thing as well. So it is not an easy question to answer for you where I can give you an absolute. The new products like pedals and stuff like that, some of those come on at different times during the year because the timing for the new models, so it is not so much as a step function.

If I may add some color to it, if you're trying to get a gauge or forecast second half, you do need to remember that in the second half we have the third quarter, which is the slow quarter from an automotive point of view. So even then you have a little bit of a growth in the fourth quarter. Normally you may not see a step up if you're looking at first half versus second half because of the seasonality of the third quarter.

I guess I was trying to ask a more broad question from the standpoint that you guys have announced a wide number of wins in the last 18 months, and just because you announced those automotive wins does not mean you start generating revenue right away. It usually takes a period of time, and I was just wondering has enough time elapsed that you guys are really starting to see the benefits of those wins, or is that more of an '05 event?

I think some of the benefits we are clearly seeing this year from those announcements, and I think there is a step function in '05. We began to see that in '05.

Absolutely. Just give me a moment here, and I will just give you an example. Pedals, for example, we have won a lot, 22 platforms. Actually more than that now because we picked up some in the last quarter or so. Many of these take several years to roll out. So based on what we have won, the revenue between 2004 and 2005 will roughly double between now and 2006 at about triples. Those are rough approximations.

When we say double and triple, we are talking about some 10 to 20 million and 20 to 30 million.

Yes and so there are significant chunks of revenue, but they don't all come on in the same timeframe. This is spread out over the year.

Lee Zeltser.

A few questions. I actually just got on the call a little bit late. So if you could just run through your end market summary for the quarter as a starting point?

From a revenue point of view?

From a revenue point of view, yes.

Stop me if this is not what you are looking for, but total sales into communications were 29 percent. That is a little higher than in the first quarter, which was about 28. Handsets was 6 in the quarter versus 7 in the first quarter. The computing, 37 percent versus 36. Automotive 25 versus 27. Other hung in there at 9.

Okay. And you mentioned your guidance for the third quarter, normally a seasonally slow quarter. Can you give us a sense of what bookings were like in July versus June and how the trend was there?

I don't even know the answer.

Maybe qualitatively.

Qualitatively, July is also a pretty slow month.

You had automotive shutdown. We just don't find watching bookings on a month-to-month basis to be a useful indicator. We don't use it ourselves.

It distorts especially for the summer months, and it gets again distorted around Chinese New Year timeframe. It becomes less meaningful really.

Okay. Understood. Just really trying to get a gauge of near-term demand trends, but I understand that it might not be as meaningful in your business.

You guys announced a stock buyback in early July. What is the status of that, and if you can give us a little bit more insight on the plans and how aggressive you guys feel you would be, or maybe at what price points I should say?

I think all we are prepared to say at this point is that we went to the board and got the authorization for I would say a pretty modest buyback program to just just give us the flexibility that if we feel that the stock is undervalued, we have the flexibility to go in the market and support it.

Okay. Have you been at all anxious since you announced the program?

No. We actually just got the authorization, and we are in the process of just putting the mechanics in place frankly.

Understood. Okay. Thank you very much.

Michelle Guseres (ph).

Good morning. I would like to ask about the (inaudible) for end market, and what you're seeing specifically in the (inaudible) if it's also strong? Is it wireless infrastructure or wireline? If you can give us a little more color?

Michelle, I did not hear the first part of your question.

The first part is top customers, anything that is over 10 percent in the top customers by end market segment?

On the top customers, which are 10 percent plus, I think we normally have -- we have talked about two, Hewlett-Packard and Motorola, and we are seeing some strength with Motorola, primarily on the infrastructure side where we do business with them in the EMS arena. And from wireline and wireless, Don, do you want to take that?

As far as top customers? I think the component side is benefiting, as well as the EMS side certainly from the infrastructure. As I mentioned, that's one of the areas where we saw substantial growth. I don't know that I can really answer it in terms of a customer. Most of what we do is driven by the wireless side.

Okay. Great. I have another question sort of on a larger picture basis. You guys have a very strong position in automotive, and that's probably one of the less penetrated areas in terms of the EMS business. Are you seeing any interest from other EMS companies? I know you talked about your acquisition strategy, but how about people who are interested in your business?

Do you mean interested in acquiring our business?

Exactly.

You mean from an EMS standpoint?

Exactly.

No.

Okay and you would not be interested in getting into that kind of negotiations or those (inaudible)?

I would not comment on that at all.

Okay. You know it is a very attractive market, and it is highly underpenetrated.

We consider all the businesses we are in very attractive and core to us.

Lee Zeltser.

Given some of the mechanics that are changing your business from both a revenue prospective, the mix has changed at least in the last couple of years, and some of the cost savings you guys have put into effect, can you give us some gross margin operating margin targets on a normalized basis? Not really so much in the next quarter, but what you can see as kind of a normal target.

I think operating margins is easy. We have stated several times publicly that we expect our operating margins over the next three-year timeframe to go up to we have said 8 to 10 percent range, and we have tied that with a revenue line at around 725-750 million range. So that we have stated as you know, Lee, several times, in the rest of the presentation and kind of talked about it a little bit as to the path we will take to get there.

We have on the gross margin side it is a little difficult to project the mix between our business. If you, for example, look at this quarter, year-over-year if you will look at it because we have a higher mix of EMS sales -- EMS sales now are 50 percent of sales in this quarter versus 45 a year back -- that mix along negatively affected us by 1.3 percent on the one hand, but we offset all of it because given the Components and Sensors segment, we are focusing more and more on the higher gross margin.

So there are two different pieces moving in the different directions, and the mix between them can have an impact on the gross margins, although we tend to offset that in the operating expense as a percent of sales line. So it is easier to probably focus on operating margins and difficult to project the components within it, i.e. gross margin versus operating expenses as a percent of sales.

And SG&A, I think you said earlier in the call, SG&A and R&D over the next few years you targeted at 14 percent of sales metric?

Yes, we think we will continue to improve as we go forward as we leverage that because we believe that we have a good bit of expense infrastructure in place, which we had to support a $800 million kind of a company. So between now and that level of activity, we see minimal increase in our overall infrastructure there.

So I guess folks can kind of back into the gross margin targets from those two metrics. Okay. Great. Thank you very much.

(OPERATOR INSTRUCTIONS). There appear to be no further questions. Please continue with any closing remarks.

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