Key Tronic Corp (KTCC) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Key Tronic second-quarter fiscal year 2016 conference call.

Please note today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Craig Gates.

Please go ahead, sir.

Good afternoon, everyone.

I'm Craig Gates, President and Chief Executive Officer of Key Tronic.

I'd like to thank everyone for joining us today for our investor conference call.

Joining me here in our Spokane Valley headquarters is Brett Larsen, our Chief Financial Officer.

Today we released our results for the second quarter of fiscal year 2016.

We are pleased to see sequential profit growth as our new programs continue to ramp and more than offset the reduced demand from a certain customer that has impacted our results in recent quarters.

This particular customer no longer represents a significant portion of our business.

At the same time, we continue to see a robust pipeline of potential new business.

We recently won four new programs involving industrial equipment, consumer products and lighting devices.

Our broader and more diversified customer base significantly lowers the potential risk and impact of the slowdown by any one customer.

Our successful integration of Ayrshire Electronics continues to make significant contributions to our progress and we're investing in expanding our S&P capabilities and in test patient of increased demand.

Moving into the second half of fiscal year 2016, we have many new programs in the process of on-boarding and several more nearing the end of the design phase and moving towards production stage.

While getting this new business up and running does impact our expense line in advance of revenue, we anticipate gradually increased operating efficiencies in coming periods.

Now I'd like to turn the call over to Brett to review our financial performance.

Then I'll come back to discuss our strategy going forward.

Brett?

Thanks, Craig.

As always, I would like to remind you that during the course of this call we might make projections or other forward-looking statements regarding future events or the Company's future financial performance.

Please remember that such statements are only predictions.

Actual events or results may differ materially.

For more information you may review the risk factors outlined in the documents that the Company has filed with the SEC, specifically our latest 10-K, quarterly 10-Qs and 8-Ks.

Please note that on this call we will discuss historical financial and other statistical information regarding our business and operations.

Some of this information is included in today's press release and a recorded version of this call will be available on our website.

For the quarter ended December 26, 2015, we reported total revenue of $116.4 million, up 2% from $114.3 million in the same period of fiscal 2015.

For the first six months of fiscal 2016, our total revenue was $242.6 million, up 20% from $200.7 million in the same period of fiscal 2015.

As expected, we saw a sequential improvement in overall profit.

For the second quarter of fiscal 2016, our gross margin was 7.8% and operating margin was 2.1%, up from 7.1% and 1.4% respectively in the prior quarter.

We expect margins to continue to gradually improve over coming quarters.

Our total operating expense was $6.7 million in the second quarter of fiscal 2016, down 6% from the prior quarter and comparable to the second quarter of last year.

Net income for the second quarter of fiscal 2016 was $1.8 million or $0.16 per share, up from $1.6 million or $0.14 per share for the second quarter of last year.

Note that our results for the second quarter of fiscal 2016 included a $675,000 or $0.06 per share of tax credits related to recently approved research and development federal tax incentives.

For the first six months of fiscal 2016, our net income was $2.6 million or $0.23 per share, up from $103,000 or $0.01 per share for the same period last year.

Note that last year's results for the first six months of fiscal 2015 included $775,000 or $0.07 per share of acquisition and integration costs of Ayrshire.

Turning to the balance sheet, we have continued to maintain a strong financial position.

As you will recall, our inventories were abnormally high last quarter reflecting the sudden cancellation of the program that we discussed.

In the second quarter of fiscal 2016, we are pleased to see a reduction in our inventory by $2.9 million from the previous quarter and we expect to see it to continue to decrease in coming periods, returning to levels more in line with revenue.

Our trade receivables were $60.8 million at the end of the second quarter, down $12.9 million from the previous quarter reflecting the decrease in revenues and to a lesser extent, increases in collections due to timing of shipments within the quarter.

Our consolidated DSOs remained steady at about 50 days and we expect that our DSOs will continue to remain at this level during the third quarter.

You will recall that we acquired Ayrshire using about $5 million from cash on hand, $35 million from a new term loan and $9 million from our revolving line of credit to fund the purchase price.

During the second quarter, we reduced our total combined borrowings by approximately $721,000.

Over the longer term, we expect to continue to gradually pay down both the term loan and the revolving line of credit.

Total capital purchases for the second quarter of fiscal 2016 were approximately $4 million as we continue to expand, our SMP electrical assembly, plastic injection molding and sheet metal fabrication capacity and capabilities.

For the full fiscal year, we expect our capital purchases to be about $10 million.

We will continue to finance these purchases through a variety of means including leasing options.

Moving into the third quarter of fiscal 2016, we expect more of our new customer programs to move into production and ramp.

As mentioned previously, revenue from a certain long-standing customer no longer represents a significant portion of our total revenue.

Taking these factors into consideration, we anticipate that the third quarter of fiscal 2016 we will have revenue in the range of $117 million to $122 million.

We expect that our overall gross margin percentage will gradually improve and anticipate earnings in the range of $0.12 to $0.17 per share for the third quarter.

This expected earnings range assumes a more normalized effective tax rate of 30%.

In summary, we expect to see sequential revenue and earnings growth in the third quarter as our new programs continue to ramp.

Overall, the financial health of the Company is strong and we believe that we are well-positioned to continue to profitably expand our business over the longer term.

That's it for me, Craig.

Okay, thanks, Brett.

We continue to believe our fundamental strategy remains sound.

We have returned to growth and managed to mitigate the impact of any one customer by adding new business.

We are very encouraged by the potential of our many new programs being on-boarded and we're continuing to invest in expanding our capabilities and capacity.

Entering the third quarter, we continue to win new business.

As we discussed before, we have three long-term major competitive advantages.

First, the boomerang effect of North American customers wanting to bring production back from China has intensified.

Increased costs and economic turmoil in China are driving demand for more localized production.

Among EMS providers, we stand alone in the excellence and breadth of our Mexican operations.

As more previously outsourced manufacturing business moves back from China, we stand to continue to benefit.

Second, our unique organizational structure honed over years of experience running geographically diverse operations.

Beyond the level of cost and service we can provide from our Mexico and China-based facilities, we offer US-based engineering prototyping with an exceptional level of offshore experience.

Our growing portfolio of customers increasingly want offshore cost savings but without the risk of managing offshore relationships, schedules, inventory uncertainty or IP loss.

Third, we offer a broader range of capabilities and manufacturing footprint than competitors our size.

We are not aware of EMS providers of our size offering offshore, regional and low-volume manufacturing, mechanical and electrical engineering, plastic molding, sheet metal fabrication, US-based program management and test equipment development and optimized global logistics and purchasing.

In order to get our comprehensive level capabilities, the next size CM option for a customer in our sweet spot is a multibillion dollar contract manufacturer.

Choosing that option means the customers' program commands a very small portion of the CM provider's total revenue and attention.

Our size to capabilities mix makes our customer relationships much more sticky.

As we work with our customers in transferring existing product to our factories or in designing, prototyping and ramping new product for them, multiple functions within the customer organization discover the breadth of our capabilities.

As a result, our companies become deeply and profoundly intertwined.

In many cases, we become the virtual VP of operations for the customer.

Over the longer term, the EMS market is expected to see steady growth.

While periodic fluctuations in customer demand, mix changes in our program portfolio, and costs associated with on-boarding new programs will continue to be part of our business, we believe our sustained focus on controlling costs, augmenting production processes and enhancing our capabilities will result in increasing competitive advantage.

We see more of our new customer programs moving into production and ramping up and our pipeline of new business opportunities looks increasingly robust.

We believe Key Tronic is increasingly well-positioned to grow profitably, capture market share and capitalize on emerging opportunities.

This concludes the formal portion of our presentation.

Brett and I will now be pleased answer your questions.

(Operator Instructions).

Andrew Huang, B. Riley & Company.

Thanks for taking my question, guys.

First, can you give us the revenue contribution from Ayrshire in the quarter, just so we can get a sense of how the organic business is doing?

We kind of lost track of that because we've been moving stuff from Ayrshire to Key Tronic and back and forth so we gave up on separating them.

Okay, and in terms of the results, it looks like your revenue was down 8% quarter on quarter and yet your gross margin improved 70 basis points quarter on quarter so can you give us some color on how you are able to achieve that?

Sure, we talked before after we had got through Q1 about the immense struggles we were having with a couple of new programs that we're starting, and we've since got those programs ramped and running now.

So that's played a big part in improving the gross margin.

Was there anything else aside from that or was that the biggest chunk (multiple speakers)?

There was.

In Q1, as we've mentioned before, there were some operating inefficiencies due to the abrupt cancellation of some orders during Q1 for a certain long-standing customer.

Got it.

okay.

In light of those comments, can you share with us some of the puts and takes that will affect the gross margin for the March quarter?

And then maybe give us a range for the gross margin for the March quarter?

You know, Andrew, I think from a couple of things -- a couple of takeaways of things that we've already stated, we plan for some additional sequential growth in revenue and also in gross margin to be able to quantify that, I don't think we want to do that.

But we do see both some operating efficiencies and sequential revenue growth in the near horizon during this next quarter.

Okay, and then I think on the call today you mentioned that you added some new customers.

Can you give us some color on those customer programs?

Yes, Bill will ask it later, so we will answer his question now.

All of them were between $5 million and $20 million in annualized revenue once we get them ramped up.

We are seeing what we anticipated happen and we talked before about 1 plus 1 we hoped would equal 3 when we bought Ayrshire.

And when we look at our customer both wins and our funnel of anticipated wins, we see that over half of them are coming from the union of Key Tronic and Ayrshire, not necessarily from Ayrshire, but from the fact that we're together now rather than apart.

What's unique about that is it tends to be more SMT business than what we've had in the past, so we have added quite a few SMT lines in Juarez.

We're adding a couple more and we're adding some higher end equipment.

I'm not sure that you were associated with us back when we were talking about this quite a bit, but to go back a little bit, we like our business to be complete product, but we learned a long time ago that people are hesitant to immediately outsource their entire product with a contract manufacturer that they haven't known or met before.

It's very much more comfortable for people to outsource PCB business first and then as trust grows end up giving us full box build.

In one case, we built PCBs for eight years for a customer before they trusted us with their full box build.

So that's kind of a quirk in our current growth versus our past growth in that quite a bit of the new business is more SMT centric than what we're used to, which is a good thing because it's not all that hard to add SMT capacity.

You just go buy a line and it's not a bunch of new technology that we have to figure out.

But it's also not as wonderfully stellar as box build is from gross margin but it's certainly plenty good to help us bump up back into the range we're hoping for.

Okay.

Thank you for that color.

When you add new SMT lines, presumably that would kind of bump up your depreciation, which I think would be included in your cost of goods sold, so even with the new SMT equipment that's going online, do you still expect your gross margin to improve sequentially?

Yes.

We do.

Okay, and then just one more question.

I guess last quarter you talked about new programs ramping in the June quarter that would total about $9 million in incremental revenue.

Was that correct?

Is there any update on that?

Yes, that was -- I think that was correct.

I'm not sure -- I hope your memory is as good as it sounds like.

If we said it, it was true.

It still is.

Still is.

In fact, it looks better than it did back then.

So we continue to see, as we said earlier in a narrative, we continue to see new programs ramp and new programs get ready to ramp.

Great.

Thanks for all the updates.

Bill Dezellem, Tieton Capital Management.

Thank you.

Since you already answered one of my questions, I'll just take it right from where you just left off, which was you said that the June quarter is looking better than it did when you reported results and had your last conference call.

If I heard that correct, would you please kind of discuss in more detail what you are seeing and why that's the case?

Well, we were predicting that a number of customers would go into production with us and we were predicting that a number of new products would hit production in the factory, not necessarily with new customers, but those are always just predictions and as we've gotten closer to it, a number of those have come true, so things are going as good or better than we predicted.

That might be a good lead-in to a little bit of a surprise that I had this quarter was that your March quarter is actually going to be up sequentially.

I in my mind for whatever reason had it to be down sequentially really on a seasonal basis and yet it's turning out to be otherwise.

Would you discuss that directional strength in the March quarter?

Well, it's a combination of two things.

One is existing customers aren't seeing as much of a slowdown as we had feared due to what's going on with the economy.

I can't promise that's going to continue, but I sure hope it does.

And then secondly, some of the new programs have seen more demand than what we had forecasted and that's obviously a great thing.

So those two things working together are what's making the March quarter be a little bit rosier than we were afraid it was going to be.

And this rarely happens but are you seeing customers pull in their ramps, so they are starting earlier rather than when you had originally anticipated?

Yes, it's been kind of strange against the backdrop of the economy.

For the previous probably half a year, just about every time the phone rang it was somebody wanting to move something out.

And for the past, I don't know, couple months, it's been most of the phone calls are people trying to pull stuff in.

So we're having a hard time figuring out if we are a lagging or leading economic indicator but something sure changed a couple months ago.

Congratulations.

I'm going to circle back to a variant of the question that I normally ask that you've already answered and since there are four programs, you said they range from $5 million to $20 million, that really accounts for two of them, the smallest one and the largest one.

I'm hoping you might provide some color on the others in the middle.

Is it skewed toward the larger and skewed toward the smaller end?

What additional color can you share?

Not much.

If you believe them, three out of the four are going to be $20 million.

If you listen to me, three out of four will be $5 million.

So we'll see where we end up.

And just to put that in perspective, you are starting to see some of the new programs are now stronger than anticipated so if that trend happens to continue, it would be toward the higher end of that?

That's true; it would be.

Okay.

That's helpful.

And then one of the things that we did notice is that the four wins -- this is your largest number of wins in six quarters.

I think it was a year and a half or so ago that you had this many wins in a particular quarter.

And so I don't want to take this too far, so I really would like to understand how you all are viewing that number of wins?

We view that as a number that interests Bill Dezellem but doesn't really get us excited.

So -- (laughter)

That pretty much ended that line of conversation then.

(laughter)

We're happy about it but in terms of a statistical -- statistically meaningful jump, I would not look at it that way.

I would just look at it as we continue to see a strong number of wins and a strong pipeline and go with the qualitative statement that it looks continually better rather than the same or worse.

And that's about all you should take from it because it's a real timing game on when we decide we've actually won a program, as we've discussed before.

Right, understood.

Thank you, though, for providing that additional perspective.

And I do have one more question I'd like to have you address that you mentioned in your -- either to the prior -- I think it was to the prior questioner, which is China.

The turmoil in China right now, if we heard you correctly, is leading to more business onshoring and I'd like you to -- if we heard you correct, I'd like you to kind of put your comments in perspective.

Wage growth seems to be slowing in China and the yuan is lower so that would imply costs there are lower.

So can you tie into that for us if you would, please?

We don't see that be accepted by people as a long-term situation and we see people fearing the unknown as much as they do the actual short-term trend.

So people have kind of been whipsawed by it going through the roof and then dropping and nobody knows for sure what's going to happen next.

And when you couple that with everybody's growing understanding of how hard it is to get stuff done over there, the sea change continues to be pushing back towards Mexico.

Great, thank you and I'll go back in queue and I do have a couple more questions, but I'll do that after others have asked.

Okay.

(Operator Instructions).

Vad Yazvinski, Jordan Capital.

Good afternoon.

Great quarter.

I didn't think I'm going to say that, but considering how the last few ones have gone, but this one looks a lot better and hopefully this is sort of the end of the surprises that we've seen here over the last several years now.

As usual, the question on my side is more related to shareholder friendliness and where we are obviously from the shareholder return standpoint and obviously you guys have -- seem to be turning the corner operationally and the numbers are picking up back to where they should have been -- they were about a year ago.

From the standpoint of what happened to the stock price, obviously, nobody including you or the Board, can go out there and exceed the almost 50% decline -- whatever -- 45% decline in the last year and kind of feel good about it, and obviously with the most recent filings coming out on Royce, it's pretty clear that some of the at least of the recent decline has been attributed to one of your -- not one -- the largest shareholder you have selling 50 days worth of volume of stock and you guys obviously have seen it and I'm assuming you speak to the shareholders once in a while.

At what point does doing something like a large block buy from your larger shareholders, the prices that seem incredibly inexpensive by any statistical measure become something that your Board would consider?

Well, I sure don't think we are at that point yet and nowhere near it.

Got you.

So what you're saying is that you think the Board thinks that the current price is satisfactory considering the -- your financial results?

I'm sure the Board doesn't think the share price is satisfactory but using our capital to try and prop the share price up temporarily is not something we're going to do.

No, it's not about propping up the share price.

Wouldn't that be a great investment if you can spend $3 million to buy 0.5 million shares at the current prices if you believe the business is growing?

And the current run rate, say if you increased the earnings by $0.05 a share for the next several quarters as programs ramp up, wouldn't that be the best potential investment you could make, even better than buying SMT lines?

No, because we can't make the share price go up if we don't buy SMT lines.

You've got to have the capital equipment to build it.

Absolutely, I agree with that, but --

So also you've got to realize that we're in debt, so --

I do.

You have (multiple speakers)

So talking to our bank and saying we're going to go buy a bunch of shares back and increase our debt is not something that's in the cards.

All right, okay.

Thank you for your feedback.

I mean that's pretty clear to me.

Yes.

Clarity is my goal at all times.

George Melas, MKH Management.

Good afternoon, guys.

A few quick questions.

First one, Brett, I'm just trying to understand the inventory level.

You clearly said that it came down a little bit, but it's extremely high and if your inventory is like $98 million and I calculate that your material cost is about maybe $69 million or $70 million for the quarter, you have like 129 days of inventory.

And it seems like it has a long way down to go.

So how far down could that go down?

I would love to say that our inventory ought to turn 6 times a year but in reality I think more of an historical level would be somewhere around 4 times.

So, yes, we do have some work to do.

I think based on my calculations, we are about 3 times.

Times, okay?

So it could come down at least $20 million?

It's also difficult to do though when you're ramping up new customers and you're seeing a sequential revenue growth, so you need to layer that in.

But yes, we are too inventory heavy at this point.

Okay, and actually how would you reduce inventory?

What would be the -- I imagine for some customers your inventory is right; for others it's too high.

I'm not sure what's the case of the inventory for the -- for that very large customer that has declined significantly.

Can you help us understand how you would reduce inventory?

Well, the problem with this business is that there are 65 customers and so you're really looking at 65 different situations.

So some customers have new programs that they are ramping and when the ramp gets delayed because of a technology issue, you end up with a bunch of inventory sitting there that you hope to push out the next quarter.

Other customers, everything's going great, and you don't want to cut your inventory any lower because it's matching up perfectly with inventory.

So about the only way you can do it is look at it by customer by customer, supplier by supplier standpoint and just grind it out.

So we've been doing that.

We're continuing to do that, and we hope to get back up to the turn levels we saw before.

But I haven't seen any magic bullet way to do it.

I can recite you 20 different techniques that we are using and have used that are best practices but inventory is just a grind.

Yes.

Is there a fair amount of inventory type that's associated with that Canadian customer that then you could put back to them or is it your inventory?

I'm not going to comment on specific customers.

Okay, okay.

Understood.

And another quick question on the OpEx.

Clearly it came down significantly this quarter sequentially.

I think your OpEx was $6.7 million.

Is that sustainable or was there some one-time good guys in there?

I wouldn't suspect -- I think our -- while there was a slight decrease in overall operating expenses, I think we're going to be back to somewhat what we were seeing in our first quarter.

There were some one-time or nonrecurring events that did drop our OpEx during this most recent quarter, second quarter.

Okay, great.

Okay, that makes sense.

And then that decline in customer, can you tell us what percentage of revenue it is at this point or is that sort of -- you don't want to comment on that?

I think I can.

We haven't told you who it is so we're just going to say that biggest customer is now down to I think around 2% or 3% of our revenue.

Okay.

and I remember last year there was another of your historically very large customer that also declined significantly and they were sort of in the casino and gambling and gaming space.

Any particular development with that customer?

No, not really.

It's pretty stable.

Pretty stable?

Okay, great.

And then, Craig, from a model -- not from my financial model but from sort of an understanding the business perspective, if you have roughly $100 million in revenue this quarter -- let's just imagine it's $100 million, and you don't add any new customers over the next 12 months, how much attrition do you have among your current customers?

How much is the whole in the bucket that you have to fill up in order to maintain revenue at the same level?

That's a good question, and it gets at the heart of what's been going on here for 3 1/2 years.

The leaks in the bucket are pretty visible to us six months out.

I'd say anywhere (technical difficulty) they have points where we can see a weakening in the wall of the bucket.

What we see today is a lot less attrition than what we've faced in the past and it's all due to the fact that that one big customer was at one time 35% of our business.

And we've known for 3 1/2 years that that was unhealthy and had to get fixed.

We wished it wouldn't have gotten fixed the way it did get fixed but nonetheless we saw the leak and knew it was coming.

So if I were to look at $100 million, if I were to size everything I know today, every customer, add them all up, they are $100 million today, if we won no more business, I don't see more than 2%, 2.5% of leaks that I know of.

Well, that's very little.

Yes.

I'm not speaking about economic downturns or any of that kind of garbage that's going to go on.

I'm just talking about customers leaving or choosing somebody else are going bankrupt or whatever.

Okay.

That's very helpful.

Let me just ask another question, sort of along those lines -- along the lines of the model.

Your CapEx are fairly meaningful at this point.

You point to the three real strengths of the model of the offering that you have, one of them being a wide range of capabilities.

Does this wide range of capabilities come with a certain cost to the operation, meaning that there is higher CapEx because you have to be able to do a whole bunch of different things?

I don't think so, because the CapEx is all tied to the revenue that it enables.

We've got a pretty sophisticated quote model that charges us, so to speak, for the CapEx and the depreciation in that department.

So we do a pretty good job of making sure that whatever piece of business we bring onboard has paid for the capital that it has forced us to buy.

And we don't have big chunks of capital sitting around unused because we needed to buy them for marketing purposes but they are not actually running and adding value.

So I wouldn't say that we're paying (multiple speakers)

speakers) investment?

I'm sorry.

I'm sorry.

Go ahead.

No, you go ahead.

If there is any cost of complexity, it's more related to bringing on programs that are supposed to be $6 million and then they turn out to be $1 million a year in annual revenue, and then we have to figure out if they are profitable enough to pay for the amount of work that goes with the program with higher margin at that small a revenue or if we need to help that customer find somebody else to do their product for them.

(multiple speakers) take risk for you.

Yes, yes.

We never take on a customer that we think is not going to work out, and so we always feel moral and ethical when we say, Jesus, he told us it was going to be $8 million and it's $800,000, you've got to find a new home.

So that's our risk.

And then the other cost of complexity is -- well I guess it's the same risk, it's just the overhead that it takes to run 20 programs and only ended up being $1 million rather than five programs ended up being $5 million.

Yes, yes, yes.

Okay, great.

And then my last question is for Brett.

Brett, on the currency side, we've had sort of a real benefit of a stronger dollar and sort of a weaker base compared to the dollar, and I imagine a fair amount of your costs are in peso.

Has that helped the gross margin and has that sort of contributed to where we are?

Yes, but probably not to the degree that you may expect.

I know we've discussed previously, we take out hedge contracts out almost three years for some portion of our expected Mexico spend.

So a portion of that is already locked in, thus not being able to take full advantage of the weakening peso currently, but also allowing us to do a better job of understanding what our true costs are going to be when we quote programs.

Now of course we don't hedge 100%, so there is some portion of our Mexican expenses that is cheaper today due to the very weak peso.

Okay, but in a way it also means that if we've had some benefit of that let's say in the last 12 months we should continue to have the benefit of that as some of those hedges roll off and sort of, let's say, better ones sort of are layered on?

Is that -- would that be a fair way to look at it?

You bet.

It's a nice tailwind for maybe the next 12 months at least, or something like that.

And hopefully longer because it's hard to really constrain Brett and hold him down to keep them from going out and buying futures at 20 pesos to the dollar.

(laughter)

Okay, guys.

Thank you very much.

Andrew Huang.

Oh, thank you.

I just wanted to clarify one thing.

When we talked about the $9 million in new programs ramping in the June quarter, will some of that revenue already be in the March quarter?

So in other words, the incrementals -- is it going from 0 to $9 million or is there going to be like -- $5 million going to $9 million?

It's not going from $5 million to $9 million but it's not going from 0 to $9 million.

Okay, so, there's going to be --

There is some of it in this quarter, but not a ton.

Got it.

okay, and then can you discuss in more detail -- maybe -- you said there are four new programs ramping and did you say one was in industrial?

Can you just go through each of them one more time?

Two were industrials and that's about all the definition we ever give.

Okay.

And then you said one was in lighting?

Yes.

And the fourth?

Consumer product.

Consumer product.

Okay.

Okay, I guess the other question is like as these new programs ramp, presumably there's yield issues, right and maybe higher-than-expected costs?

Is that all factored into your expectations that gross margins will still improve sequentially in the March quarter?

Yes, it's factored in but I never know what the heck actually is going to happen when we go try to build new stuff but we have certainly tried to put it in there with (inaudible) to allow for some inefficiencies as we start stuff up.

Great.

Thanks very much.

(Operator Instructions).

At this time we have no further questions in the queue.

I'll turn the -- I do apologize.

We have a follow-up from Bill Dezellem.

My apologies, for whatever reason it didn't ring through the first time.

First of all, since there is a public debate going on whether you should be buying shares back or not, I'd like to weigh in on that.

Until you are able to have free cash flow generation, to me it makes no sense to go borrow money to buy shares back which is essentially what you'd have to do, so there is my two cents.

Thank you.

Very well stated.

I would, Brett, like you to have an opportunity to visit -- and you've kind of been left out of this, so I don't want that to go on.

(laughter)

Oh, great.

Don't laugh, Craig; you're next.

So the 30% tax rate that you referenced, is that really the go-forward rate now, Brett, given that the R&D tax credit is permanent, or how should we look at that?

Yes, based on what our expected research and development activities are and have been historically, I think that is probably the new normalized effective tax rate.

Of course there's fluctuations each and every quarter based on repatriation and FX and --.

But yes, I think on average we're going to save a good 5 points of taxes per year based on the R&D credits being permanent at this point.

And we did understand that correctly that Congress has now made those permanent until they change that?

Until they change their mind, yes.

Yes, until they don't.

Okay, until they don't, right.

Thank you.

And then, Craig, I do have one question here that you may not want to answer but I'm going to throw it out anyhow.

The large customer, that long-standing customer that's had a decline that's been referenced a couple of different times, would you be willing to share even slightly more detail?

You said that they were 2% to 3% of revenues this quarter, so we can work into that number.

But the September quarter, can you share with us what the revenue number was in the September quarter?

What you're building in with your March expectation and what your best guess is for the June quarter?

Yes, I guess I can.

So, the quarter were in right now, so January, February, March, we're looking at $3.5 million to $4 million in revenue, and that flat line -- that stays pretty constant as far as their forecast goes.

And --

As far out as I can see.

I'm sorry, I interrupted.

Please go ahead.

So back in Q1, that unnamed customer was around $15 million to $16 million.

So just to make sure that I have kind of this -- the numbers all in place, call it $15 million in the September quarter, about $3 million in the quarter just completed, and then actually -- $3 million to $4 million?

Yes, closer to $4 million.

All right.

And then basically holding constant at the current level for the foreseeable future, which as you pointed out is really only one to two quarters that you have much visibility at all.

Yes.

Great.

Well, that's helpful.

Thank you for providing that perspective and I guess it gives us a lot more clarity just how big of a hole you had to deal with this quarter.

So, congratulations on a nice quarter and it's great to see a few things kind of coming your way getting pulled in rather than pushed out.

Thank you.

Thanks, Bill.

Thank you.

At this time we have no further -- I do apologize, we have a follow-up from George Melas.

Thanks, guys.

Thanks for taking the question.

It's very quick.

The amortization of intangibles this quarter, how much was it?

Just under $300,000.

$300,000?

Okay.

That's all.

Thank you very much.

Thank you, George.

At this time we have no further questions in the queue.

I'll turn the conference back over to our speakers for any additional or closing remarks.

Okay, well thank you, everybody, for participating in today's conference call.

Brett and I look forward to speaking with you next quarter.

Have a good day.

Thank you and again, ladies and gentlemen, that does conclude our conference for today.

We thank you for your participation.