CTS Corp (CTS) 2004 Q3 法說會逐字稿

Ladies and gentlemen thank you very much for standing by and good morning. Welcome to the CTS Corporation Third Quarter Earnings Release.

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With that being said, let's get right to today's agenda. Here with our opening remarks is CTS Corporation's Vice President of Investor Relations, Mr. George Newhart. Please go ahead sir.

Thank you Grant.

I'm George Newhart, Vice President of Investor Relations, and I will host the CTS Corporation Third Quarter Earnings Conference Call. Thank you for joining us this morning.

Participating from the Company today are Don Schwanz, President and CEO, Vinod Khilnani, Senior Vice President and Chief Financial Officer, and Don Schroeder, 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 were set forth in last evening's press release. And more information can be found in the Company's SEC filings.

To the extent that today's discussion refers to non-GAAP measures relative to Regulation G, the required explanations and reconciliations are available on our website in the Investor Relations section.

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

Thank you George and good morning.

Last evening we released our financial results for the third quarter. Overall, it was another solid quarter despite a slightly softer sales environment. Sales were up 19 percent over the third quarter last year, making this the fourth quarter in a row of double-digit sales growth. As is typical to our third quarter, sales were down sequentially from the second quarter due largely to the normal automotive shutdowns in North America and Europe.

GAAP earnings for the quarter were 11 cents per share versus 17 cents per share in the third quarter last year. However, in this case I don't believe GAAP earnings provide a good apples-to-apples basis of comparison because of the asset-impairment charge taken in the third quarter last year, as well as the unusual tax credit that benefited that quarter. Excluding these 2 unusual items from last year's Q3 results, net earnings of 11 cents per share in Q3 this year were up from the adjusted net earnings of 5 cents per share in Q3 last year, continuing the trend of year-over-year improvement that we have achieved the past 10 quarters.

While overall sales growth for the quarter was reasonably strong, the growth was predominantly driven by our EMS business segment, which is up nearly 40 percent year-over-year. Much of this increase came from Hewlett Packard, but we also saw sales increases from new customers as well as increases from other existing customers. Sequentially, EMS segment sales declined about 5 percent from Q2 reflecting a slowdown in deliveries for communications applications. But we continue to see sequential growth in our other markets.

Sales in the Sensors and Components segment were up 3 percent in the quarter on a year-over-year basis. The largest driver was automotive component and sensor sales, which were up about 10 percent year-over-year, but down about 13 percent sequentially. The third quarter decline in automotive product sales for our normal seasonal pattern was actually slightly greater than we expected, as light vehicle sales in North America, Europe, and China softened through the period. Vehicle sales growth in China, for example, are now essentially flat after delivering huge growth rates for the last couple of years. However, we see this as a short-term phenomenon and expect a very healthy growth rate will return to the China market before too long.

Component sales in the communication infrastructure market again showed year-over-year growth, but the market has barely softened in the last quarter. This is a reverse of the pattern from the last couple of years, where demands strengthened in the second half of the year after a weak first half. On a sequential basis, we saw our sales of components for communications infrastructure applications actually decline for the first time in 6 quarters. Market expectations seem to be for a flat Q4, with slight growth next year. We are also expecting a relatively flat Q4, but believe we will again outgrow the market next near.

Component sales in the handset applications were down year-over-year, but up slightly on a sequential basis. As you may recall, we have de-emphasized our participation in the handset market and are winding down deliveries of several products that were announced as going end-of-life. Today we still provide ceramic duplexers and filters that are used in handsets, but this market is expected to decline in size over time.

Component sales in the computing, industrial, and other applications were in general up on a year-over-year basis. ClearOne, for example, which is one of our newer product families was up significantly from our last year's third quarter. But again, we saw the same general pattern of softening in the third quarter that occurred across other component families in market.

To be clear, we have not seen a pattern we would characterize as a downward trend in demand. It's more like demand has just slowed a notch and now is holding there. Results so far in October do not suggest much change up or down.

As has been my practice in recent earnings conference calls, I would also like to take a few minutes to update you on the progress of our growth initiatives. Probably the biggest news in this regard came from our automotive component and sensors business, where we had 2 very significant announcements in the last quarter. First a major automotive OEM selected our belt-tension sensor for application on 7 additional automotive platforms. Product launch efforts are already underway, and production for most of these platform applications will begin before the end of the year. Overall, this award is expected to generate about $10 million in revenue next year and for each of the next several years.

The second major announcement involves Ford and has potentially very significant implications for automotive sales growth over the longer term. About a month ago after extensive testing, Ford selected CTS to develop and provide production and 10 prototypes of a new occupant classification system for possible use in future Ford vehicles. CTS has been developing this advanced occupant classification system for several years, and has successfully completed a variety of development tests intended to verify system performance.

Under this new award, Ford will test our production configuration systems. Any subsequent production award, of course, depends upon future test results and a variety of other commercial factors typical to this business. Nevertheless, this is an important milestone in the development of this new product line.

With the system ASP in the $50 to $70 range, depending on configuration, the market for occupant classification systems is about $1 billion a year, so the potential business opportunity for CTS is quite significant.

With the price of oil so high, there has been a lot more talk recently about new high-pressure diesel and gasoline engines would offer much greater fuel economy. One of the advanced sensors we are working on in our lab is a very accurate pressure sensor using a new patented technology that has enormous potential as a very cost-effective sensor for the high-pressure environments in these engines.

Several possible customers have shown strong interest in this technology. The market clearly is some years away, and the sensor is still in early development. But it offers significant promise and is a good example of how we are focusing our R&D and opportunities that can drive growth. Overall, I continue to be very pleased with the success of our automotive products growth initiative.

Earlier I mentioned the recent softness we have seen in our component sales for infrastructure applications. Part of the story on the new business side continues to be positive. Interest in our frequency and timing modules, for example, has continued to grow and we have captured a number of new awards that should drive module sales revenue to over $5 million next year from less than $1 million this year.

We are also continuing to expand the number of customers we serve with our precision frequency components and modules. In the last several months, we have received awards from 4 major OEMs that we had not previously served with this class of product.

Within our EMS business, a key growth initiative has been to broaden our customer base and industry focus. During Q3, we added 2 new customers, bringing the total to 15 in the last year. As these customers ramp up, they are expected to contribute $50 to $70 million of revenue a year, with about a third of that from the industrial, medical, and automotive markets, and the rest from computing and communications applications. Overall, new customer quota activity in our EMS business remains very strong.

So in spite of some recent demand softness, we continue to see a very positive market reaction to our growth initiatives, and believe these initiatives will drive growth in the year ahead.

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.

We are pleased to announce another strong quarter, with positive earnings and free cash flow. Considering the fact that our first and third quarters are generally lower due to seasonality, this was an excellent quarter. As Don noted, sales were up $20.6 million, or 19 percent year-over-year. Sequentially, they were down 6 percent due to seasonality.

Net earnings up $3.9 million, or 11 cents per share diluted, were more than twice the 5 cents adjusted net earnings per share level of third quarter of 2003 after excluding the favorable one-time tax credit of 22 cents and the unfavorable after-tax asset impairment of 10 cents.

Gross margins in the third quarter were 20.4 percent versus 21.8 percent in the year-ago quarter. This reduction of 1.4 percentage points was primarily due to higher mix of EMS business, which has lower gross margins. EMS sales were 51 percent of the total sales in the third quarter of 2004 versus only 43.4 percent in the year-ago quarter.

I am sure you have noted that margins in the EMS business were lower by 3.2 percentage points year-over-year. Two major drivers were the weaker U.S. dollar, and shared factory overhead expenses in our Singapore factory, which began EMS operations in the second quarter this year. However, these same 2 factors benefited Components and Sensor segment where a corresponding improvement in profit margins offset the unfavorable EMS impact.

The third quarter also saw new customers and product launch expenses, and an adverse mix shift within our EMS business, which also affected the margins adversely. We expect EMS margins to begin recovering in the next quarter. Some of these issues are expected to be one-time in nature.

We continue to leverage our SG&A and R&D expenses and bring them down to the percentage of sales. Year-to-date, these expenses are 15.9 percent of sales compared to 17.6 percent in the first 9 months of 2003. SG&A and R&D expenses in the quarter were $20.7 million, or 16 percent of sales versus 18.2 percent in the year-ago quarter. As we have stated before, we expect to drive SG&A and R&D expenses in total down to around 14 percent of sales for the next couple of years as our sales grow.

Interest expense for the quarter at $1.1 million was $1 million lower than the year-ago quarter, primarily due to pay down of our industrial revenue bonds, which carried a high coupon of 7.5 percent.

Net earnings of $3.9 million, or 3 percent of sales translated to diluted earnings per share of 11 cents. When comparing this performance with the year-ago quarter, please note again that there were 2 unusual items recorded in the third quarter of last year. We booked an unfavorable impairment charge of 10 cents per share, and a favorable tax credit of 22 cents per share. Excluding these 2 items, net earnings in the same quarter last year were 1.5 percent of sales, and the EPS was 5 cents.

Switching to the balance sheet, our controllable working capital, which includes accounts receivable, inventory, and accounts payable were 12.6 percent of annualized sales versus 12.2 percent last year in the same quarter. These working capital levels, although still within our previously-stated target range of 10 to 13 percent of sales are still at the higher end of the range. Inventory levels are somewhat higher due to some product transfers between our plants and new product launch activities. We expect our inventory levels and working capital overall to come down to around 10 percent to 11 percent of sales by year-end.

Capital expenditures for the third quarter at $3.9 million are 3 percent of sales, but again, this is within the normal range of 3 to 5 percent of sales. Our full-year capital expenditures are now projected in the range of $14 million to $17 million, which is lower than our earlier projections of $18 million to $20 million.

Free cash flow as CTS defines as operating cash flow plus all investing activities was a positive $1.3 million in the third quarter. Year-to-date free cash flow is a positive $18.8 million, up 36 percent from $13.8 million in the same period last year. Our cash and equivalent balance at the end of the third quarter was $48 million versus $20 million at the end of same quarter last year.

Total debt net of cash is $39.1 million, essentially flat compared to the last quarter, and $22.3 million lower than last year.

Debt-to-capital ratio at 22.3 percent is similar to last quarter and a year-ago quarter, and at the lower end of our 20 to 30 percent target range.

Stepping back from the quarter and looking at the year-to-date performance broadly, CTS financials underline strong year-over-year top-line growth of 17.5 percent and improved operating efficiencies. These have allowed us to maintain gross margins in the 20.5 percent to 21 percent range despite a higher mix of EMS sales, higher than normal product launch and transfer activities, weaker U.S. dollar, and higher commodity prices than we expected going into this year.

Leveraging of operating expenses is also tracking better than expected despite an asset-absorbing related quarter 4 expenses. Interest expense is coming down, and effective tax rate has been lowered structurally. As a result, adjusted operating earnings, which exclude the gain on sales of assets and asset-impairment charge, are up 64 percent, with operating margins now at 4.6 percent of sales.

Adjusted net earnings, which exclude these items and the $7.9 million tax credit of last year have almost tripled to $10.8 million. And finally, our adjusted diluted earnings per share year-to-date have increased to 30 cents versus 13 cents in the same period last year if we exclude the unusual items just discussed.

Before I turn the meeting back to Don, let me comment briefly on a couple of special items. First, we have just amended our bank agreement, which allows us to, a -- extend the term by 1 year to July 2007; b -- it allows CTS more flexibility to pursue acquisitions; and c -- it cleans up a few other administrative areas to give the Company more flexibility.

Second, new accounting rules have been announced on how to handle the reporting associated with contingency convertible debt instruments commonly referred to as CoCos. Except under certain specified conditions, this approach will require companies to include the effect of CoCos in their diluted earnings per share, even though the conversion trigger had not yet been met.

Fifty to sixty million convertible G&A subordinated ventures are considered CoCos and would have a diluted impact of 2 cents on our 2004 full-year earnings per share once the effective date of this change has been determined. This impact has not been reflected in our 2004 projection and guidance.

And finally, as you know the new tax legislation, which was passed by the Congress last week has a provision, which allows multi-nationals a one-time opportunity to repatriate their cash from overseas locations at a minimal tax rate. Since much of our $48 million cash is at our overseas locations, this will give us an opportunity to repatriate these funds and provide CTS with additional liquidity for potential shareholder value enhancement initiatives.

And now I will turn the meeting back to Don.

Thank you Vinod.

As I noted earlier, we saw some softness in our markets beginning in Q2, and that softness has pretty much continued through the third quarter. Clearly, some of this was driven by a modest inventory correction, but beyond that it is also apparent that the underlying demand is down from the first quarter. So the key question is when will we again see a strengthening in demand. Economic and industry indicators are flashing mixed signals, offering few solid clues. Even our customers seem unable to offer any special insight as to if, when, or how the market might change.

So based upon what we are seeing now, we expect fourth quarter sales to be up from 3 to 8 percent over Q4 last year. This is a lower sales growth rate, obviously than the sales growth in the teens achieved over the last 4 quarters. You may recall, however, that in the fourth quarter of 2003 we saw very robust sales growth driven by a surge in infrastructure spending. We frankly do not see that happening this year, as infrastructure spending has tended to weaken in the last quarter or so after a strong first quarter. We are also projecting our Component sales into handsets to be down in the fourth quarter from last year.

On the positive side, we are expecting automotive product sales and EMS sales to be up on the quarter over last year. For the full year, we expect sales to be in the range of $525 million to $532 million, which is 13 to 15 percent over 2003. Full-year earnings per share are expected to end the year in the range of 50 to 54 cents, including the one-time gain on the sale of the Canadian land that we announced in the second quarter. This represents a slight reduction in the anticipated operating profit rate from the estimate we provided in the second quarter conference call, reflecting a higher mix of EMS sales and additional start-up costs related to the new BTS platforms we recently won.

Now I will open the call to questions.

Indeed sir and thank you. (OPERATOR INSTRUCTIONS). Reik Read, Robert W. Baird and Company.

Don can you just start out and talk a little bit about what you're seeing book-to-bill wise and expand a little bit on your inventory comments. Are you guys seeing an end to the inventory that might be out there, that might be causing the softness that you're referring to? Or is that still another quarter or so away?

First of all on the book-to-bill, I don't recall the specific numbers, but book-to-bill for us is not a very good indicator we've found because a lot of the sales are very, very quick turn. And so we don't end up typically with big backlogs that build up. So we have not found it very useful as a predictor ourselves.

In terms of the inventory question, there clearly was excess inventory that got into the system. We saw it in the automotive side, particularly over in China. With the expectation of continued very high growth rates that we had been seeing, people were building ahead, ordering ahead. And then the growth rate slowed, and that's had an impact as we work through that. We saw it in the Components side of the business, in infrastructure, communications infrastructure, maybe to a lesser extent than some of the computing side. It's clearly in a better state today. I don't know that I can say that it's totally worked out of the system, but it does seem to be pretty close to being out of the system.

Okay, and then Vinod you talked a little bit about the operating margins by the 2 segments in discussing a number of the items that could affect that. Could you talk a little bit in more detail as we go through the next couple of quarters how the continued leveraging of Singapore and/or the ramp of new programs that you're seeing on the EMS side might start to impact that operating margin. When would we see, from your viewpoint kind of a boost up in that margin?

Reik I think we should begin to see improving those margins in the fourth quarter of this year. There are some items which have structurally moved some expenses between one segment to another, and that sharing of the same opportunity which moved some of the charges from Component and Sensor division to EMS division.

The other expenses, which are either product-launch related or rebalancing our capacities between our EMS locations, I believe you will see improvement in EMS margins starting from this current quarter.

And will the difference in Singapore as the EMS starts to improve, will that create a headwind for the Components business?

No, I think that improvement in the EMS business will not be at the expense of Component and Sensors business because as they complete their one-time launch-related expenses for new customers and new launches, that will be a net improvement in EMS not at the expense of the Component and Sensor business.

And just as we think about those margins longer term, what do you continue to expect to be the operating margins for EMS and for the Components area?

Well, we have not as a practice broken out those targets by those businesses. We internally, obviously, have targets for those businesses. You are right, we have talked publicly about our operating margins for the Company going up to 9 percent range, and net margins to go up -- net earnings as a percent of sales to go up around 6 percent.

Okay, great. Thank you Vinod.

Ray Carpenter, Southwest Securities.

I wondering -- your Components area is becoming more dependent on communications infrastructure and has over the last year. What are you doing to possibly diversify it away from the infrastructure area? And could you give us some examples?

Well, first of all from a segment standpoint, we include automotive sensors and components as well as components we sell into communications and computing applications, industrial and so on. So from a segment standpoint, very clearly the automotive portion is growing very rapidly.

In I'll say the non-automotive portion of it, the component sales into computing applications is growing, probably not as fast as the infrastructure side. But it is growing.

In terms of diversification of components, we also have some materials, PDT-related materials that go into medical applications, for example. While the volume is smaller, the growth is quite significant. It goes into inkjet applications. That's growing very rapidly and there are a number of new products coming along there. So there are other areas besides infrastructure that are showing growth.

Is there a certain target area from each of these areas within Components that you'd like to be at longer term?

I don't know that we think of it quite that way. We look at the opportunities to, from a market-growth standpoint, and then to challenge ourselves to outgrow the market.

Okay, all right. Thank you very much.

Scott Merlis, Thomas Weisel Partners.

Good quarter.

Looking at the EMS business, you said there would be some margin improvement in the fourth quarter, get over some start-up, etc.

Yes, that's correct.

Would you then consider that a normal run rate, or does the normal run rate come more early next year?

I would think that normal run rate would come more next year. You will begin to see that improvement, Scott, in the next quarter.

So there is some linearity?

Yes.

So without those start-up costs, an analyst could estimate that the 11 cents in this quarter would have been somewhat meaningfully higher without some of those start-up costs I guess?

Yes, I think that there are expenses, whether they are start-up related or absorbing asset-related or other unusual items which clearly have impacted this quarter, and excluding those the earnings would be higher.

Okay. In sticking with EMS, the new business that you're winning in other industries, do the margins in recurrent assets tend to be comparable to the existing business, lower, higher, or how do they compare?

No material significant differences which we can notice at this time, so I would say, or would be different slightly but nothing which indicates that there would be a structural change in the margins and costs of EMS business.

And also sticking with EMS, earlier in the quarter, HP had that big disappointment in mid-range storage, down 23 percent. You were not affected by that. Is that timing difference, slightly different product, different regions? What is, how were you not affected by HP's big glitch there that was headline news?

Good question -- we might have been affected. We still were up in spite of being affected. I don't know that I can totally explain it, but we were doing more for them. That probably contributed to it.

So you're guessing that your doing more for HP means you're gaining some share?

No, it's just a little bit of some of the content around some ancillary-related products that we're doing, gives us maybe a little bit more associated with the products. That probably contributed a little bit to it. But it's so product-specific that it's really hard to tell. I don't pretend to know exactly what their issues were.

We clearly didn't see an impact on our business in the quarter from HP.

Yes, that was intriguing, and the outlook is good.

Yes.

And then more in the longer-term question, the strain-gauge-based weight detection system has substantial potential. Are you able to start showing it to non-Ford customers? Are you able to start working with non-Ford customers in a more serious way? Is there anything in the Ford contract that would make it semi-exclusive or exclusive?

No, we are working with other customers as well.

Okay, so stay tuned there.

Yes.

Okay, well once again great quarter, and thank you very much.

Thanks Scott.

Kevin Kessel, Bear, Stearns.

In terms of your guidance, if you look at it on a sequential basis, it looks to be up about 4 to 12 percent sequentially. What are the expectations in terms of ending up either at the low end or the high end? What are you guys looking at there?

We do not have any feel and are not giving any color as to where we would be. The quarter still has a long way to go.

Right, I guess what I was saying is what needs to happen for you to end at the high end?

Again, I'm not going to speculate on that Kevin.

Okay. In terms of SG&A you mentioned longer-term targets of getting it down to 15 percent of sales. How fixed is adherement (ph) in the near term?

How fixed are we in the near term?

For SG&A.

I think our SG&A expenses are primarily fixed in nature. There is a content of expenses in that which are variable, like commissions and things like that. And our primary driver to bring them down to more like 14 percent of sales would be sales growth or mix change. As we go more and more to the EMS side as you know, that squeezes our growth margins, but to some extent the flip side is that it helps us to leverage our SG&A expenses more. So as we go forward, we believe we can keep our SG&A and our R&D cost structure pretty close to where it is and allow the increasing sales to leverage that number.

Okay, in terms of the EMS business, you've mentioned a couple of times that you expect improvement in margins in Q4. If we look back, Q4 of a year ago was, I think EMS margins were about 5.5 percent and they have been steadily declining throughout the year. You expect them to be up in Q4, but your guidance actually employs material improvement in margins. Where do you target EMS margins here in the near term?

We don't give out any target by period. Our longer-term target will be to take our EMS business back up to 4.5 or 5 percent range. As I stated earlier, shorter-term, short-to-medium term, we have a couple of items which make our expenses re-balance between the businesses. So we will not be able to go up to those levels in a quarter or two. But we will clearly see the path towards that and begin to improve them starting from the fourth quarter of this year.

The biggest impact on the margin decline there -- I know you obviously talked about the re-allocation of costs. But I think in this quarter you also mentioned pricing as well as product mix.

Yes, I think the biggest impact probably was the weaker U.S. dollar.

The weaker U.S. dollar?

It affected the EMS business adversely. However, it does benefit our Component and Sensor business, not to the same extent, but it offsets a large percent of the hit we get on the EMS side because of the weaker dollar.

Okay, that's great. Thank you very much.

(OPERATOR INSTRUCTIONS).

James Capello (ph), Kern Capital.

What do you think the dilution would be on the CoCo bonds in 2005?

We believe that would have an impact of approximately a penny a quarter. Four million shares will have an impact of a penny a quarter.

Four million shares, okay. And the tax repatriation that was just passed, so you have a lot of the $48 million in cash in foreign accounts. Can you tell me how much of the $48 million is in foreign accounts and how much you will repatriate?

Potentially all of it is outside. And I think we are looking at it very seriously to repatriate almost all of it back to the U.S.

Thank you.

Lee Zeltser, Needham.

Couple of questions. First if you can talk about the pricing environment, I guess what you saw in the different segments and what you expect to see going into the next quarter and possibly the outlook into '05 on pricing.

This is Don Schroeder. We haven't really seen anything of any significance. Very typical of the industry in single-digit pretty much in all segments.

Do you guys, at least in the Components business, have any negotiations or do you have annual supply contracts that you have with customers? Or is it really kind of quarter-to-quarter terms?

They don't all end in fourth quarter Lee. The negotiations, many of them are on an annual basis, but they are spread throughout the year.

How have some of your negotiations recently been going in terms of what kinds of concessions customers are asking for?

Nothing unusual again.

In that single-digit range?

Right.

Okay, and if you could talk about the month of October at all. I know it's still not fully completed, but how's the linearity in October relative to September?

Well, the only thing I'll just go back and repeat what I said. A couple of weeks into October looking at the market environment, we don't see anything that would suggest to us that it is beginning to strengthen or that it is weakening.

So the information isn't there for us to make any conclusions frankly.

Okay, so I guess the implication with the sequential growth from guidance is that some of that growth will probably come in the back end of the quarter.

So remember, just to try and verify here, there's market-driven demand growth. Then you've got some sequential factors that play into it. And I don't characterize that as demand growth. That's just the automotive factories are shut down for a couple of weeks during the quarter. And then there's demand that comes about as a result of the new winds or whatever, and that's more from a reflection of the growth initiatives and so on. That plays into this as well.

Okay, and then if you could touch a little bit about the patent infringement lawsuit that you have going on? How big a percentage of sales do those distributors constitute?

Are you talking about the recent press release we did in the last several days?

That's right.

Yes, okay. We're not talking about a substantial portion of sales at all here.

It's a fairly small portion of those sales.

Okay, and I'm guessing it shouldn't have a material impact on SG&A.

I would not expect it to.

Okay, all right. Thanks very much guys.

Darcell Mann, Delta Partners.

Yes, congrats and good morning. I have some questions regarding utilization rates. What sort of utilization rates are you seeing currently?

I think we have talked about utilization rates in the past and have pointed out that it is very difficult to give a clear picture because in different segments of our business, the utilization rates are very different. And on top of it, depending on the product mix, the utilization rate may vary.

Having said all of that, in most of our businesses and locations I would give you a very rough guess that the utilization rates are probably around 65 percent range. Now there are some areas we are at a higher level, and some we are at a lower level. But I would say overall, I would probably put a number around 65.

And for this, are we calculating the Singapore facility as well?

Yes.

Okay, great. And on total revenue, what percentage of revenues are coming from new products which were launched say in the last 12 or 18 months or so?

We don't actually calculate it that way.

Just an approximation would be great too.

I would say roughly that number would be what, George, around 20 percent or so? Or maybe a little bit higher than that.

You can really get caught up here as to what you mean. When we talk about new products, we don't typically talk about a product that's in an existing family that's a new version of it, a new iteration, a new specter, a new part number, or just for a new customer. We don't count it that way. So we typically talk about new products in the context of if it's a new product line, or a new family. And because we treat it that way, we look at that as our business expansion. We don't constrain it to just looking back a year. We'll look at this over a longer period of time to understand what that kind of growth does for us.

And in that context, the new products that we've talked about in the last couple of years, these are things like the pedal modules, the belt tension sensors, the active actuators in automotive, the small engine throttle position sensors, the modules within infrastructure -- the ClearOne family products. Those kinds of things are up around about 7 or 8 percent of total sales, and remember half of total sales is our EMS business. So all of these are on the Component and Sensor side, so at this point they're probably up around 15 percent of that side of the business.

And if you throw in new customers to it, depending on how you define it, the number goes up probably another 5 points or so.

Or if we have to understand it the other way around, say what percentage of products are getting out the cycle. If we understand the average life cycle of a product happens to be 2 to 3 years, so in this year what percentage of products are almost at the last end of their cycle for 2004? I mean, for 2005 out of the growth of 15 to 20 percent, what percent would revenue have to grow?

We just don't track it that way. It's not meaningful for us to try and manage the business that way. It varies so much from product family, industry.

We're also coming up constantly with new products that replace an existing product line, which we don't count in our thinking.

But if you have to count it, could you give me an approximation for that?

No we really haven't given out any ranges on those numbers.

And just finally, any talk about the growth rates for 2005 if you could?

We have not done that. We normally give that guidance out when we come out with the fourth quarter.

Thanks a lot.

And with that, Mr. Schwanz, Mr. Khilnani, and our host panel, I'll turn the call back to you. There are no further questions.

Thank you Grant.

I would like to remind our listeners that a replay of this conference call will be available from 4:15 EDT today through 1:00 a.m. EDT Wednesday, October 27. The telephone number for the replay is 800/475-6701 or 320/365-3844 if calling from outside the U.S. The access code is 747763.

Thank you for joining us this morning.

And ladies and gentlemen, that does conclude our Earnings Release for this quarter. Thank you very much for your participation as well as for using AT&T's Executive Teleconference service. You may now disconnect.