CTS Corp (CTS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTS Corporation first quarter results conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to our host Mr. Mitch Walorski, Director of Investor Relations, please go ahead sir.

I am Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation First quarter Earnings Conference Call. Thank you for joining us today. Participating from the Company today are Donald Schwanz, President and CEO, and Vinod Khilnani, Senior Vice President and Chief Financial 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 evenings press release 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 reconciliation are available on our Website in the Investor Relation section. I will now turn the discussion over to our CEO, Don Schwanz.

Last night, we released our first quarter financial results and these results continue our recent trend of sales growth and profit improvement. Sales of $155.3 million were up 27% over the first quarter of last year, and nearly 9% over the fourth quarter. Much of this growth was driven by the acquisition of SMTEK, which closed at the end of January. Excluding SMTEK, organic sales growth was approximately 8% on a year-over-year basis. Those sales were down sequentially from the fourth quarter about 7%, which is a typical seasonal pattern for us. Sales growth however was negatively impacted in two areas.

First in automotive products. Our sales to automotive markets were up about 9%, which is pretty good. Based on 2004 orders, we had expected even stronger automotive product sales. But a major customer for one of our newer products had to delay launches on several platforms because of issues unrelated to us. These applications will still launch over the next several quarters, but the impact on Q1 was significant. As these launches occurred as originally scheduled, automotive sales growth in the quarter would have been double digits on a year-over-year basis. We also lost a point or so in the sales growth due to the slow down in production at GM and Ford. Some of this we clawed back from sales to other OEMs, we are picking up share. But on balance this shift is slightly negative to us for now.

Secondly, we saw a greater than expected weakness in the communications infrastructure market especially when compared to the first quarter last year, which was quite strong. Among other factors, the Cingular and AT&T merger has delayed capital spending on infrastructure in North America. And, in China, problems at China Unicom have delayed base station orders to OEMs. This our complement sales as well as our EMS business, which ordinarily benefits quite strongly from demand in this region. Indications are that this is just a timing issue and may resolve itself over the next quarter or so. I should note that several industry analysts are predicting the Wireless infrastructure spending will pick up significantly later this year, but we have not seen any clear indication of this yet.

Switching the subject to earnings. Diluted earnings per share for the quarter came in at $0.09 versus $0.07 in the first quarter last year. This is the 12th straight quarter of year-over-year earnings improvements when unusual one-time gains and losses are excluded. Based on first quarter results and current market expectations, we are maintaining the same guidance for the year that we issued in January. We expect sales for the year to be in the range of $690 million to $720 million and earnings to be in the range of $0.65 to $0.72 per diluted share. This guidance reflects the SEC decision to delay the required implementation of new equity accounting treatment by six months. The roughly $0.02 benefit this delay gives us however is being offset by unfavorable segment mix and certain product launch related expenses. Vinod will provide some adequate color on these numbers in a moment. Before he does that, however I want to update you on our growth initiatives in other events for the quarter.

As I noted a moment ago, we closed on our acquisition of SMTEK at the end of January and have been operating the combined EMS business of SMTEK and CTS as a single entity since that time. Customer response to the combination has been extremely positive with the number of existing customers now exploring expansion of their outsourcing to CTS. During the quarter, the combined EMS business book to orders from 14 new customers, three of these were in the medical area, four in aerospace and defense, four in industrial and one each in automotive, consumer and communications. While these approved new programs ramp up over different time frames, they are expected to contribute about $10 million in sales this year growing to about $20 million next year. So the integration of SMTEK with our EMS operation is going very smoothly and at this point we are running a little ahead of the expected contribution to earnings this year from the acquisition.

Our automotive products growth initiative also showed good progress in the quarter. We received new awards for Belt Tension Sensors and Pedal Modules and also received a very significant award for a new active Manifold Actuator application that adds about 3 million a year in revenue beginning in 2006, growing to about 10 million a year by 2009. Based on currently booked business, we expect sales of Actuators to grow by a factor of 6 over the next several years. We also continued to make good progress in the development of a next generation occupancy classification system. Production and versions of this system are currently being fitted into new configuration seats, preparatory to the validation testing. Assuming everything goes as we expect, we would look for a production decision later this year.

As you may know, one of our automotive growth strategies is to expand our customer base. We continue to make great progress in this regard. In the most recent quarter for example, 70% of the new business we won based on 2005 to 2007 projected revenues, came from Asian and European OEMs. We also have been invited by two major Asian OEMs to work with them on next generation Pedal Module designs. This is especially significant, as it signals their confidence in CTS as a long-term partner. So overall, our automotive growth initiative is going very well and we continue to look for double-digit sales growth.

In Electronic components, our primary focus has been on improving margins. One initiative in this regard has been the consolidation of component operations and the transfer of production to Asia. While the major steps in this process were undertaken in 2001 and completed in 2003, we have continued migrating some of the remaining electronic component operations to Asia on an opportunistic basis. We also took action earlier this year to further consolidate certain overhead functions between our communications components division and our resistor components division. While this had a slightly negative effect on Q1 earnings, it will wash out through the year and have an ongoing positive impact on future profitability.

As many of you know, we have also been working to improve the mix of component sales, emphasizing growth in markets where margins are higher, while de-emphasizing or exiting markets where margins are typically lower.

Communications infrastructure is one of the markets where we have focused resources on growth and with considerable success as our sales and communications infrastructure market has been growing at double-digit rates for the past couple of years, even though infrastructure spending has been pretty flat.

In the first quarter this year, Engineered component sales and the Infrastructure applications were up only slightly on a year over year basis, reflecting delayed launch in some of our customers new age . The key to growth in this business is winning print positions with new OEM products and we continue to have good success in that regard. Many of these new wins are in 3G base stations, which are expected to show strong growth in coming quarters. So overall, we are pleased with our growth initiatives and continue to believe that we can drive above market growth rates. We further expect to continue to leverage our existing operating infrastructure with this growth allowing us to grow earnings at a greater rate than sales. Now, I'll turn the meeting over to Vinod Khilnani, our CFO to discuss our financial results in more detail.

Thanks Don and good morning, every one. We were pleased with the first quarter results overall, especially in light of somewhat soft market conditions. I'm sure you appreciate the fact that first quarter is our weakest quarter seasonally, which makes sequential comparisons difficult. Also complicating comparisons this year is the fact that we closed the acquisition of SMTEK on January 31. So first quarter therefore included two months of SMTEK financials.

As Don noted, sales were up 27.2% year over year in the first quarter of 2005. Excluding the impact of SMTEK, revenues still increased 8.2% year over year. Net earnings of 3.4 million or $0.09 per share diluted, compared favorably to prior year net earnings of 2.5 million or $0.07 per share.

Gross margins as a percent of sales were 18.2%, a 1.9 percentage points lower than prior year. Three primary factors drove this change. First, our higher mix-up of EMS sales had a downward impact on average margins by 2.2 percentage points. As you know, EMS business inherently has lower margins than components and sensors. So the simple mathematical averaging of the higher EMS content had the effect of lowering margin.

Secondly we have lower margins in the EMS segment itself, which is adversely effected the consolidated gross margins by three tenth of a percent. The lower margins was due to lower absorption of factory overhead expenses cost by burn off of finished inventories. Certain new products, new customer launch related expenses and picking up share factory expenses in Singapore. You may recall that we started EMS operations in Singapore in April last year at which time we will began sharing factory related overhead expense between our EMS segment and the components and censor segment. In this case the negative impact of the shared expenses on the EMS segment is 100% offset by the positive impact on component and census. Of course beginning in Q2 our year-over-year comparisons will be comparable.

And finally higher components and censor margins had a positive impact of six tenth of a percent on the consolidated gross margins partially offsetting the negative impact of EMS mix and EMS segment margins, which we just discussed. Higher margins in the components in terms of business was achieved primarily from higher sales, ongoing improvement initiatives and sharing up some Singapore factory expense to the BMS segment. Operating expenses defined as SG&A and R&D expenses were 14.5% of sales versus 16.1% in the first quarter of 2004.

Continued tight management of expenses along with the addition of sale tax revenue base allowed us to further leverage, our SG&A and R&D expenses. We have previously indicated that our target range for operating expenses as a percent of sales was 14% to 14.5%. Since EMS segment has become a bigger percent of our total sales, we expect to further lower our operating expenses to a range of 13% to 13.5% of sales in the next four quarters. Operating margins were 5.7 million or 3.7% of sales in the first quarter of 2005 versus 4.9 million or 4% in the first quarter last year. The sites from the impact of mix, the first quarter of 2005 also included net seven, and related expenses of approximately $1.3 million. These expenses are expected to be offset by corresponding savings to the rest of the year. However, it did have a negative 0.8% point impact on Q1 operating margins.

Net earnings of 3.4 million or 2.2% of sales in Q1 this year were up from 2.5 million or 2.1% of sales in the first quarter of last year. On the balance sheet front we had an excellent quarter with controllable working capital at 12.4% of sales versus 12.9% in the Q1 of 2004. Controllable working capital is defined to include accounts receivable, inventory and trade payable. Please note that when calculating working capital percent or receivable etcetera, we have to add annualized SMTEK sales in the base to ensure accuracy and comparability of such metrics.

Net cash provided by operating activity was a positive 10.9 million versus a negative 6.7 million in the same quarter of last year. First quarter 2005 balance sheet also reflected 48.6 million in cash outflow for the SMTEK acquisition, including 13 million to pay down their external debt. Our revolving credit facility was tapped to fund this amount, as a result at the end of that quarter over 75 million credit facility was approximately two-third utilized. Our cash balances, which are mostly at our overseas location, were 58.2 million at the end of the quarter. We are considering repatriating most of these funds under the American jobs creation Act of 2004, which gives corporations a one-time opportunity to repatriate cash at a very favorable tax rate.

Assuming repatriation our $75 million revolving credit facility would essentially be 100% unutilized. Total debt to capital ratio increased to 29.8% versus 21.5% at the end of first quarter last year. Again if cash repatriation process is reflected, debt to capital ratio will again be around 21% to 22% range, which is at the bottom of our 20 to 30% target range.

Looking ahead, we expect to generate 40 million to $45 million of cash flow from operating activities in 2005, and project our full-year capital expenditure in the range of 23 million to $26 million. Let me make a final comment on the impact of currency exchange before we open the call up for your questions.

Overall, a weaker dollar has a negative impact on our bottom line since we have more expenses in non-US currencies and revenues. In other words a largest percent of our revenues are dollar denominated. This metric formant of foreign currencies translate into a bigger expense in US dollar terms when US dollar weakens. Our estimate is that every 1% fall in US dollar versus all other currencies combined creates a net 250,000 with $350,000 hit to the bottom line, mostly in our EMS systems. Focusing on our operations in China and with all the recent discussions and news around the possibility of Chinese Renminbi getting revalued upwards, we estimate that a 5% revaluation of Chinese currency may create an unfavorable pre-tax annual impact of approximately $700,000. We believe this impact is manageable and will continue to go down as we further increase our Renminbi denominated sales to partially offset local currency expenses.

Overall, we are pleased with the results of this quarter considering less than ideal market conditions and the fact that we absorbed certain non-operating costs, which will allow us to improve our cost structure going forward. And with that we will open up the call for questions.

[OPERATOR INSTRUCTIONS] Sid Parakh, The Robins Group.

Can you just go over all the factors that impacted your auto revenues in more detail? And also give us a sense of whether there were any broader signs within the auto division that were declining and the ones which saw the most growth?

Well, as I mentioned it, the two major factors and I did discuss those, but the two major factors were the delayed launch on several platforms by a major OEM of orders that they had placed with us because of other issues that they had. They were focusing their people in some other areas, they delayed them, they will still launch later this year. So, that's the most significant impact in the quarter and obviously will have some impact on the full year, because your can't make that up. Very small impact coming from the lower production, I am trying to characterize that for you, just look at Ford and GM. It's in the 1 to 2 points range of auto sales. Some of that as I mentioned we do get back because others OEM's make up those sales. We just have different mix with them. So, those are the two big factors from an automotive standpoint and obviously overall automotive production, you compare Q1 this year versus Q1 last year is down slightly. I don't remember exactly how much, but just in general it was down in Europe and North America. Asia and China in particular, the production, if I remember correctly was up slightly, but the base is much smaller. So, those weren't big drivers. I do not have in front of me the data and we would normally talk about what's happening in specific product lines, but the new products that we have talked about, the pedals, the belt tension sensors, the actuators, all of those kinds of products continue to show strong success in the market place and many of those wins it takes, sometimes 12 or even 24 months from the time you've given the word before you even start to see the launch. So, they ramp up over a considerable period of time, but even aside from that, we are looking at very strong continuing growth rates of those products and that will continue to go on through the year.

Okay, also given the weakness in the auto industry, have you seen any impact on, say order flow or some visibility on the platforms going forward? I know, you've talked about delay in some platforms, but I think that's not related to the weakness. Is that correct?

It's not related to the weakness, that's correct. No, not really -- have not, other than what I talked about. We haven't really seen anything else.

Okay, also for SMTEK, SMTEK recorded revenues of 23.2 and that was 2 months. Now should we take that as annualized run rate?

Yes, you can't set, you just have to remember that our quarter is broken down between 4,4,5 kinds of week, so. We had 9 weeks out of 13 weeks in the first quarter.

And also the $1.3 million charge that you had first, severance related cost. Is that a one-time event? I am assuming it is, but...

Well, I cannot call it technically either a structuring on one-time event because those terms are strictly designed by the accounting community. But we did say that 1.3 million severance related items were incremental in the first quarter of '05 compared to the first quarter of '04. They are clearly larger than what I would characterize as a normal severance related expense. We don't incur that magnitude number normally, obviously.

Just to be clear, when you are operating a Company like this and we keep doing things to improve the operation, there is typically some level of this kind of thing going on in every quarter and we just don't make a point of it, because it is not that significant and it's normally operational. In this case it was a little bit larger than we would normally see from quarter over quarter basis and so we just wanted to clarify that point.

Okay, thank you gentlemen.

Thank you.

Scott Merlis, Thomas Weisel partners.

Good morning, how are you?

Good morning, Scott.

Just take any deeper dive into telecom infrastructure and base stations. To some extent those orders tend to be lumpy and it varies from quarter to quarter. And could you just review any visibility of orders that you may have to -- in subsequent quarters in communications. I guess, when Cingular, AT&T gets over the delay that create some visibility but, and I guess there is also 3G, but as we go into Q2, do you still see lumpiness or is there a certain amount of visibility that would suggest the net, the remaining 9 months of the year would be above Q1 levels.

A couple of things. First of all, we don't tend to have very long lead-time orders from this segment. So we can't look at the orders and tell very much about what's going to happen late in the year from that perspective. So we have to use other indicators. But you are correct, it does tend to be quite lumpy and we are fairly heavily weighted toward a few of the OEMs that operate in this segment. And while we've been broadening out our base, in that regards, it's still doesn't alter the fact that, the lumpiness that those OEMs see has an impact on us, a corresponding impact on us. So, I mentioned training, UNICOM, for example. Over the years what we have experienced is those orders tend to be very lumpy. When they come, they are big ones, the deliveries occur fairly quickly after that and then there is debt space again so to speak. Early, it is a significant slow down. And we now benefited quite strongly through our customer base. There, and as I noted to you, there has been some delays in orders there because of some issues over there. The expectation is that that's going to sort itself out here over the next quarter or two, so we would expect to see that come true. But beyond that, it's really hard to tell exactly how spending by any of the individual service providers might flow over the remaining quarters and how that will flow to us.

But there's a general sense that the first quarter might have been kind of a below average in that - -?

Certainly we had, for what we've been experiencing, we've been looking at typically stronger year-over-year growth in the quarter than we did this quarter. We know of some things that account for that. It doesn't particularly worry us at all because as I noted, when we look at what's happening from a design win standpoint, we know what position we have on base station content and the newer base stations, for example, we feel very comfortable with that, so it's not worrisome to us.

And is it also accurate to say that automotive is not worrisome despite all the negative headlines in the press, because your penetration is growing, you have got a lot of new products out there and that, it was basically healthy in the quarter, little shy of maybe, expectations but, you've probably done a - -the visibility is for, kind of healthy penetration and application rates for your - -.

Yes, we feel very comfortable with what's going on there.

And on the margin side, it might be helpful just to pull together or to review those numbers you gave us showing how EBIT margin was down year-over-year. For example, severance -- the increase in severance, year-over-year cost 0.8% of the margin decline and then there was the mass effect and some other effects, do you mind just reviewing it?

Sure, I think we said that if you compensate for the $1.3 million severance related items, that would add 8/10ths of a percent to the margin-- the operating margins. So, if you add that 8/10 of a percent to the margin, then it will clearly continue to show year-over-year improvement in the numbers. If you come back to the gross margins, as we said, that it is essentially due to the mix of EMS versus component segment. Looking forward, we feel comfortable that we will continue to improve operating margins in each of these segments separately year-over-year. However the combination of them, because of the mix may dilute that to some extent.

So, I think you also gave kind of an EMS effect on margins and then a few other?

Yes, we said EMS - -this mix--pure mix impact took away 2.2 percentage points from the margins. As you know, our margins were lower by only 1.9. We were able to actually, to some extent, claw back from the negative impact of mix by improving our margins in our bases.

Yes, that's the key point.

Other thing as we have frequently talked about is, when we talk about EMS business becoming a bigger and bigger percent of our sales, it is true that at gross margin to a large extent and operating margin to a smaller extent, we do see some dilution. However, we have pointed out that EMS business also has lot less asset intensity. And therefore, when you look at from a return on asset point of view, it compensates for all of that shortfall and more and we actually make higher return on asset margins or return on assets in EMS business and component intensive. If you look at from an ROA point of view, our ROA in the first quarter of 2005 is almost double our ROA in the first quarter of 2004. So, one has to put the balance sheet into that and if you do that, EMS business looks fairly attractive to us.

Yes, that's important. Also, cash flow-wise, how did cash flow compete to your expectations in vis-a-vis the 40 to 45 million?

Cash flow actually was a little bit ahead of our expectation in the first quarter. And if you compare year-over-year, we had negative cash flow, operating cash flow last year and we had a very strong positive operating cash flow in the first quarter of this year of $10.6 million, I believe.

Okay. Those are important points. I think that's about it for now. Thank you very much.

Reik Read, Robert Baird & Co.

Could you guys talk a little bit more about the product launch cost that you faced in the first quarter? It sounds like those occurred in the EMS side. What product lines or can you at least talk about why that occurred and to what extend do you think that continues in to the future?

Yes. Reik I will give you some color on that. You are right that the product launches were primarily on the EMS side and you remember that in the last several quarters, we have talked about the new customers in the EMS business and some of those customers required some front end setting up related expenses and we have several customers, one comes to mind specifically from our New Hampshire location where we incurred certain expenses in the first quarter, we set up everything but the sales actually will begin from the second quarter. So, its a combination of new products/new customer kind of activity, which was clearly more than normal in the first quarter and we incurred expenses but did not have the benefit of booking revenues in the first quarter.

And Vinod, is that a situation where as you ramp up clearly with the ones that you have done already. Those ramp up and those patriots of set up cost but you signed a bunch of new customers will you continue to have those types of set up as normal course of your business?

It can -- it kind of depend on exactly what you are doing for the customer. Some customers are pretty straightforward and you don't experience a lot of unusual cost to get going with them and you do it very quickly. Some is more extensive. In this case we were take on a very significant role and so was much more extensive preparing for that. I want to get customers like that. So, we keep looking for him, so I hope it happens again.

Don, with the customers that you've signed, can you give us some understanding of what your expectations are in terms of the level of set up required for those guys at this point?

I can't do that with real quality.

Also on the EMS side, you guy's mentioned that you reduced some inventory. Can you give us a sense as to where that is? Does it complete and do you expect utilization to begin to improve as a result of that?

I think a bulk of it, Reik, is in EMS side of the business again. And you remember in the last several quarters we talked about that we have little more inventory then we would like because of transfers and new customers and all that kind of related activity. So, we were actually increasing our efficiency on the inventory management side and that is a recurring kind of a benefit to us. Of course in the quarter you bring the inventory down. You do have a one-time impact because of lower absorption rates. So, it was again a larger than normal number. I think we will probably reduce inventory some more, but the impact of that absorption clearly will not be as much as we saw in this quarter. Coming back to your last question. I just want to quantify the magnitude of that, because you asked a questions, do we have customers, will launch credit cost -- or set up cost are becoming more and more difficult for us. That number is probably $0.5 million range, which we thought was unusual in this quarter. This is not a huge number and now we don't see signing up customers, which would have unusual large set up or launch cost. They would have normal launch cost but nothing unusual.

And then I just -- last question from me, I want to go back to the severance restructuring. Can you give us -- and you touched on this but I want to make sure I am clear on it? Can you give us a sense -- it sounds like that is something which you are continuing to go on with quarter after quarter, but its sounds like this past quarter was higher in magnitude. Is that something, which slowly ramps down, or does that return to a more of normal level right away?

I think it probably returns more to a normal level. There may be a little bit of ramp in it. But I would say it is a pretty rapid ramp down. And again, as Don said, we are continuously looking to find ways to more efficiently handle processes on the manufacturing side and the SG&A and R&D side. And as we look for those opportunities and if we believe that we can improve the cost structure, we will take those. But again this quarter was an unusually large quarter and if we have normal severance related items of 100, 200, 300, 400,000 magnitudes we don't talk about them because we think they are normal. This was clearly, a fairly substantial number compared to those kind of normal levels.

Okay, great. Thank you very much.

Kevin Kessel - Bear, Stearns & Company

Good morning. SMTEK's revenues came in a little higher than we had expected, but it appears -- I think that the gross margin was a little bit lower as well than we had expected. Was that maybe due as well, to set up costs or inefficiencies at the beginning or in terms of integration or --?

No. I think on SMTEK's side without quantifying their gross margins, their gross margins were right on our expectations, if not slightly better than expectations. I think, the gross margin or operating margins, which we had lower than expected on the EMS side, were more due to our traditional EMS business. That is where we had launch related things and that is where we have the mix related issues.

The severance cost that you've spoken about, was that booked solely in SG&A?

It was actually split between SG&A and the gross margin.

Do you happen to know roughly what that split was?

I would say that that split was roughly half and a half or maybe all upon that a little bit.

And then if we look at specific components business which wasn't impacted by SMTEK sequentially, operating income was down, I think about $3.3 million and clearly part of that was, of it related to the components severance costs being higher than typical. But the other decline, I mean the sales weren't down that much in components. Was that -- I know you guys mentioned pension income impact, is there a way to quantify that? Or what exactly was there as part of the impact there?

Well, the pension income -- again, before I answer that, be careful in our case because of the way the quarter stack . It is trickier to do sequential comparisons, it's probably more meaningful to do year-over-year comparisons, and we were better year-over-year. But coming back to your sequential question, overall for the company, our pension income -- our basic pension income was down close to a million dollars sequentially. And I would say a fairly large portion -- bulk of it does go in the component and sensor business and a very small part goes to EMS.

And then in terms of the guidance that you reiterated here for the full year, I assume that it assumes $0.09 here in Q1 as opposed to any pro forma. Does that mean that would exclude the severance?

Absolutely. It assumes $0.09 --.

Right. And so that would basically --

Actually should we be looking at pro forma and increase that number? Just kidding.

Obviously it implies, you know, a significant ramp here in your operating margin in the second half of the year, and clearly we can see the leverage coming here with SMTEK on the SG&A line but, what is your assumption here for the way gross margin is going to trend going forward to next ?

Well, staying with operating margins, first point I will make is that you do know that Q1 generally is our weakest. So you normally do see a ramp going up, going out from the first quarter. I would also note that, as Don pointed out, that some of these unusual severance related expenses, which were negative in the first quarter would come back to us and savings in the rest of year. So you do have that swing. You also have the impact of higher volumes beyond this quarter. If you ask a question more from a gross margin point of view, I would say that overall 2005 versus 2004 we expect to further improve our margin within our segments.The total combined margin obviously will depend on the mix between the two segments.

Okay. Thank you very much. Actually one last thing is the D&A adding cash there we .

Depreciation number for the quarter was 5.9 million versus 6.7 last year in the same quarter. Amortization expense was $1 million, which is an increase from 600,000 number from last year's first quarter or sequentially and that was due to SMTEK.

Great. Thank you very much.

Scott Merlis, Thomas Weisel Partners.

Hello again everybody. Just wanted to follow-up on the pension comment. You were down $1 million sequentially. Did you mention year over year?

Year over year, we were also down a million.

Okay. And that's a non-cash item.

That is a non-cash item.

So that's why you had one reason that wanted, cash was stronger?

That is one reason why the cash was strong exactly, I would note that we are using more conservative assumptions in our pension calculations and our pensions are over funded still so qualitatively. We have a very strong and positive pension .

Right. Are you able to mention the over funding at this time?

No. We try not to quantify, we do it obviously on an annual basis when we sit down with the .

And if we kind of summarize different cost captions that are going to benefit future periods, clearly the restructuring related to the severance starts to lead to lower cost structure but -- you assume to be doing stuff in Asia that could lead to improve profitability as well. And I guess the question would be, are there certain one-timers from the acquisition that will tend to go away next year or just, conceptually in theory SMTEK should have more of a contribution next year because there is different types of synergies or just the customers that showing interest today could actually be booked by next year. So I am trying to get a sense of timing of some of the new developments in the first quarter, trying to get a sense of timing of when certain things might kick in. It just seems like we already are laying a good foundation for late '05 and '06 earnings power, if you know what I mean?

I think you are right conceptually, but it's very hard for us to quantify those things at this point.

Right. But the, for SMTEK, are there certain one-time transitional costs that might go away, say by next year?

Very little. I think our SMTEK integration process really did not have any huge one-time expenses, which I can say that will go away. A lot of the transaction related expenses were obviously captured and capitalized and are being amortized. There are obviously some expense related items, but I think they would be relatively small.

Right. So if we get a new customer in that type of business, so you get an order today, what are the typical startup periods with some of their products in terms of new customers, new orders?

It depends a lot, Scott. I'll just give you some example. We have some medical customers, for example, that we have won or are working with them on products they are in trial. You are dealing with products that are in trail you can be looking at couple of years before you are looking at significant volumes. But they are good, when they come, so that's probably the longest kind of time line that we would typically run into. If we pick up a customer were we are doing -- we pick up their board work for example, and it's pretty straightforward. We can be up in running on that within just a few months. So that's not a big issue, if you take on complete product, which we do in some cases and so you got to set up to do the sub assemblies and final assemblies in the test and all those kinds of things. You might be looking at to get fully ramped, you might be looking at 6 months to a year, which will do a piece at a time.

So, is that the reaction?

It is. It varies a lot.

Well, so I guess in essence lot of your cost reduction and SMTEK is very much on track for the guidance you gave for the full year?

Yes, absolutely. Let me add one other thing. I mentioned when I was going to my prepared text that the 14 new customers will bring us about $10 million of revenue this year and we will look at it about 20 million next year. No, that is not a full ramp kind of run rate when they all get going and it is because some of those customers have longer-term ramps associated with them.

So, that is have a nice increment --?

Absolutely.

Okay, thank you very much for further details.

Kevin Kessel, Bear Stearns & Company

What was SMTEK's inventory balance, broader?

The inventory balance of SMTEK, which we brought over, was approximately $15 million. 18 was their receivables. 18 in receivables approximately and 15 in inventories.

And then in terms of the just the SMTEK integration, it sounds like it going well. What is to do, is everything done from a systems point of view? Are you going to be running the systems in your current EMS businesses they are running?

We will, but no everything is not done from that standpoint. So there is work. Some of that work will go on for a while. It is not hugely expensive as we noted but from an IT standpoint, there is work that has to be done. Then there are little things like integrating the coding systems between the 2 organizations and those kinds of things. So that is just changing processes and getting more aligned. Those of-- they are all with their way through the rest of the year. Not big deals.

But you do in fact expect to pretty much completed that by the end of the year?

Yes

And then it terms of the repatriation of cash, is there a time frame where you guys expect to make a decision on that?

Well, I think we would make a decision pending on some technical clarifications, we are still waiting. We recently saw a letter written by congressional leaders to hire us and department of treasury telling them go ahead and give those instructions, I think Wall Street had an article that they should be coming `any time in near future`. So, our guess is that those clarifications, will be coming out sometime in the second quarter. But, that is just a guess on our part.

And then last question I have. In terms of SMTEK's business, how seasonal is it? It seems like in the past it was relatively seasonal -- if they just look at what they contributed now, would imply maybe on a flat run rate they might contribute an additional of $10 million to June. But is it a seasonally down quarter for them like it appears, it may be or may be towards the North of that. Are they typically very seasonal or do you see many seasonal patterns in their order book?

I haven't totally sorted this yet. They have got some Aerospace and Defense business for example. Defense business around the government fiscal year tend to be seasonal around there. So, there are different factors that affect them, industrial markets tend to be impacted by capital spend cycles often slower in the first quarter and sometimes you get a little kick in the fourth quarter. So we are still trying to sort through this, there are parts of their business that each have certain characteristics and we have not put it all together yet, then the next thing is it bigger, how meaningful it is to the whole company.

I don't see it as a big driver.

It would not be a pronounced seasonality in their numbers. It will be smaller and be tougher do label that on seasonality. That will be the challenge.

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