Plexus Corp (PLXS) 2002 Q3 法說會逐字稿

Please stand by. The conference is about to begin.

Good morning, ladies and gentlemen, and welcome to the 2002 fiscal third quarter earnings conference call for Plexus Corporation.

At this time, all participants are in a listen-only model. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour.

I would now like to turn the program over to Mr. Kristian Talvitie, Plexus' Director of Investor Relations. Kristian?

Good morning and thank you for joining us today.

Before we begin, I would like to establish that statements made during this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in these - in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected, please refer to the company's periodic SEC filings.

In an effort to streamline the call today, we're not going to read through all of the numbers presented in the release, but instead we'll try to provide some color on significant events or items and then go right into Q&A. Now I'll turn the call over to Dean Foate, President and CEO.

Thanks, Kristian, and welcome, everyone.

As many of you know, Kristian is our new Director of Investor Relations and Corporate Communications. Moving forward, please feel free to use him as a contact for any questions or updates that you have - may have about Plexus. His contact information is contained in the press release and is available on our Web site.

Also with me today is Tom Sabol, Plexus' Chief Operating Officer, who is also acting as Interim CFO while we work to find the right person for that role. We are in the process of interviewing a number of excellent candidates and hope to introduce you to our new CFO in the near future.

Absent today is John Nussbaum. As previously announced, John retired at the end of June. On behalf of everyone at Plexus, I would like to thank John for his vision and passion for the business. John has been a tremendous leader and mentor, and we are fortunate to have him remain on the Plexus team as Chairman of our Board.

Earlier today, we announced sales for our third fiscal quarter of $235 million and diluted cash earnings per share of seven cents. This excludes non-reoccurring charges of $2.7 million related to the restructuring activities announced in May. These results were inline with the guidance we gave during the last quarter's call and reiterated again in May.

We continue to be impacted by softness in the certain end markets. Consequently, our revenues, gross and operating margins and cash EPS were down on a year over comparison. However, we did have sequential improvement in all four of these metrics again this quarter. We are continuing to see the results of the initiatives we have taken over the last couple of quarter to realign our cost structure with demand, while continuing to improve our asset management. Tom will talk more about this in a moment. I think it is important to point out, that even with our focus on improving P metrics near term, we continue to make progress on forward-looking initiatives that will improve our operating efficiencies and competitiveness as markets recover.

For the quarter, our top 10 customers represented 48 percent of business, down from 49 percent last quarter. None of our customers represented more than 10 percent of revenues. Our top customers, in alphabetical order, continue to be: GE, Juniper, which was formerly Unisphere, Powerwave, Sure, Siemans, and Unysis.

We had 12 new customer wins during the quarter, including six engineering, two NPI and four manufacturing customers; by industry six were networking data com, four medical and two were in our industrial commercial industry sector. In addition, we continue to win new programs during the quarter with existing customers. For example: Extreme Networks, JDS Uniphase, KLA Tencore and Trimtech.

Our broad customer base provides significant diversification, mitigating exposure to any single industry sector. During the quarter, we saw some shift in sequential revenue contribution among our primary industry sectors. The medical sector increased from 24 percent to 27 percent, and the industrial commercial was up from 17 to 21 percent, while the networking and data com sector decreased from 40 to 36 percent, computer was down from 13 to 11 percent. Our other sector remained relatively unchanged at five percent.

We believe there is significant opportunities for growth in our niche within each of our target sectors, and that with $103 million in cash and short-term investments, we are well positioned to take advantage of opportunities as they arise. We will continue to execute our disciplined strategic goals and acquisition strategy with a focus on Europe and Asia, as well as leveraging our global footprint and technological medical competency to generate new business. However, given the current economic environment, we are calling that revenue associated with new business wins is slow in developing.

Now for our guidance. Due to continued volatility in our customer's end markets, we are limiting specific guidance to our fiscal fourth quarter. Plexus currently expects fiscal fourth quarter 2002 sales to be in the range of 225 million to $235 million. Assuming these levels of sales, we expect to have diluted cash EPS of approximately five to eight cents before any non-reoccurring charges. I will turn the call over to Tom Sabol, the Chief Operating and Financial Officer.

Thanks Steve. For the quarter, gross and operating margins, excluding non-reoccurring charges and goodwill amortization, improved to 9.8 percent and 2.5 percent respectively, from 8.9 percent and 1.8 percent in our fiscal second quarter. This improvement was driven by our continuing restructuring efforts and improved operating efficiencies. These results exclude approximately 2.7 million in non-recurring restructuring charges associated with our May announcement of closing two facilities.

We expect a total amount recurring charges for these actions to ultimately total up to 5 million dollars with a balance occurring over the next couple of quarters. As Dean indicated, we are continuing to evaluate cost-saving iniciatives on an ongoing basis while recognizing that our value-added service offering may require some sustained excess-capacity in our front-end highly-skilled engineering and FDI organizations. We believe that the experience and technical knowhow we have built over the years is not only a competitive advantage for us, but also an intrical part of our business model in a significant contributor to our business development efforts. Currently, manufacturing capacity utilization remains at approximately 55%. However, this should increase to 60% over the next couple of quarters, as our restructuring activities move forward.

Capacity utilization within our engineering organization also remains at around 70%. In addition, the current backlog continues to lag historical levels. in administrative expenses were 17.3 million, or 7.4% of sales for the quarter. This includes over 1 million dollars of strengthening of our bad-debt reserves during the quarter. Please note that this 1 million dollars of bad-debt reserves is not included in our restructuring charges. We would expect STNA expenses to follow in dollar terms going forward. However, we continue investments in our information technology systems and in our sales organization.

Turning now to the balance sheet. We saw continued improvements this quarter on asset management. Day sales and accounts receivable deceased to 41 days, compared to 53 days last quarter. Inventory levels were down 26 million dollars sequencially compared to last quarter, with annualized inventory turns improving to 7.6 turns compared to 7.1 turns last quarter, and compared to 4.5 turns for the fiscal Q3 quarter of last year. Combining these items with our operating income, we generated approximately 66 million in cash flow from operations during the quarter. As Dean indicated, we now have over 103 million dollars in cash and short-term investments, with limited debt and debt-to-equity ratio of approximately 6%. The lowest in the industry.

Our off-balance sheet financing associated with our 50 million dollar asset securitization facility remains at approximately 17 million dollars at June 30, 2002. No change from last quarter. We also have a 250 million dollar line of credit facilities that is unutilized. Cap-ex for the quarter was approximately 8.5 million, and we still expect fiscal 2002 cap-ex to be approximately 25 to 30 million. Goodwill amortization for the quarter totalled 1.3 million and depreciation expense was approximately 8 million dollars. Finally, I would like to recognize and thank our employees for their support and dedication, especially over the past few months. I cannot think of a better example of what makes Plexus such a great company. I will now turn the call back to Dean for some more closing comments, and then we will open up the call for questions.

Thank you, Tom. In closing, we continue to improve our performance in this challenging environment. We have taken prudent steps to align our cost structure, without sacrificing our ability to service our customers and to take advantage of opportunities. We remain committed to further improvement regardless of end market environments.

Our balance sheet is strong and we have an active new business pipeline. We remain confident about our ability to continue to attract strategic customers with our differentiated service offering, especially giving our Asian presence, our class II and III medical competencies, and a reputation for service excellence. We believe we have a promising and awarding future ahead of us, we thank you for your continued support of Plexus. We will now take questions. Please remember that some of the statements made will be forward-looking statements, and you should refer to our SEC filings for a list of risks and uncertainties.

Very good. If you'd like to ask a question at this time, please press one now on your touch tone telephone. To withdraw yourself from the queue, press pound. Once again, to ask a question, please press one now on your touch tone phone. Due to time limitations, participants will be limited to one question and one follow up question. We'll take our first question, or participant, from the site of of Prudential Securities.

Good morning, gentlemen, quick question for you on the target cash convergence , what do you think that you could achieve over the next couple quarters on that front, and do you expect that you'll continue to be cash flow positive?

Yes, , this is Tom. Our internal goal for the current fiscal year is to get to eight turns from an inventory standpoint. We would hope to keep our days and AR at this lower level, our targets have always been approximately 40 to 42 days, and we basically hit that target this quarter. We would not expect to see any significant change there, and our AP days, we would expect also to remain fairly consistent. So we would expect to have a slight improvement in our cash cycle here in the fourth quarter.

And a follow up question is that we're seeing a lot more of your competitors become more focused on the medical equipment sector. Could you tell us what you're seeing on the competitive front there?

Well, we certainly are -- in the announcements, just like you have, relative to the focus on the medical equipment sector, I guess my comments about that would be that we believe we have a leadership position there. Obviously, there's no other competitor that has the concentration of medical business in their portfolio that we have. We have a track record of providing medical services now that spans 20 plus years in the company, and we have competencies here that are built up through those years and capabilities that we think are second to none. And we believe we have a first mover advantage in that marketplace.

So -- you know, we think that it's going to be increasing competition, certainly, out there, but we think that we're well positioned with the customers that we have, and we have a good pipeline of medical customers coming our way.

Great.

We'll take our next question from the site of of Merrill Lynch.

Yes, based on your September quarter outlook, it seems like business is still a bit soft. What markets do you expect to grow sequentially in the September quarter, and what markets do you think will decline?

Well, I think -- let me kind of walk through it on a sector by sector basis here, just to give you a little sense of what we're looking at next quarter. Our networking data comps sector, in particular, is -- we expect it to continue to be down. It's declining in revenue, we continue to experience a tremendous amount of volatility in that sector, although we do experience also kind of pull-in and drop-in orders that occur throughout the quarter, so it's very difficult to get any kind of forecast stability there. But we are projecting that sector right now to be down in the quarter.

Medical has been a growing sector for us, and we had good growth last quarter. We expect it to grow again this quarter. And we just also got some indication just in the last week or so of some increased demand at the - at the back end of the quarter, so we're hoping that we're going to gain a little bit more momentum there in the Medical sector.

Computer we expect to be a decent growth in the upcoming quarter. We're expanding some relationships with an existing customer. We've also had an emerging customer that's going to ramp during the quarter. We also have some significant activity in the U.K. with a customer there.

Industrial/Commercial - we're seeing softening demand coming off what we believe was a bit of a quarter - a rebound quarter last quarter. There's no real identifiable trend there. We had a lot of variability with our customers, and we are expecting that to be in the upcoming quarter.

And the Medical Industrial businesses rebounded nicely here from the March quarter to the June quarter. Was this new programs or end-market growth?

Well, with Medical in particular, we were - we ramped a significant program with a - with one of our top customers there, so we saw some nice growth, although we did see some softness with one of our other existing customers. So - that apparently had a little bit of inventory buildup, so Medical was definitely driven primarily by growth with a program ramp.

Industrial, we had demand that spread across a pretty long list of customers in the quarter, and it was up nicely. I think we were up about 22 percent in the current quarter. And we also had a new program from one of our existing customers there.

OK. And could you just talk about Asia? How many customers do you currently have at your facilities in Malaysia and China and could you give us the revenue contribution percentage for the quarter?

With regards to our customers in Malaysia and China, we have between eight and ten total customers currently doing manufacturing right now, and we're actually in the process of being qualified, both from a medical standpoint with a couple customers, as well as with a couple other networking customers.

With regards to Asia revenues for the quarter, those were approximately ...

They were about three percent.

... about three to four - actually about four percent for the quarter in Asia.

OK. And capacity utilization in Asia - do you have that by any chance?

From a - from a - from a equipment standpoint, we're actually probably at about 55 to 60 - actually approaching 60 percent. That's a little bit lower in China, as we're being qualified there with a couple new customers.

OK, great. Thanks a lot.

You're welcome.

Once again, participants will be limited to one question and one follow-up.

We'll take our next question from of Lehman Brothers. Go ahead, please.

Sure. Given the difficulties obviously all around you, but that you're positioning at least from a cash standpoint seems to be pretty good, is there, you know, any bold moves that you might want to consider here that you could share with us?

Well, I think, as we've stated, we've got a significant focus here on expanding our footprint. We're looking very proactively here at opportunities in Europe on the continent. And we're also looking to add some capabilities yet in Asia, as well. So there's nothing new-term that we'd like to comment on, but we do - we do have a very active emanating strategy and team, and we hope to utilize that cash and put it to work to continue to expand our footprint.

OK. As a follow up, and switching topics a little bit, when you look at your engineering business, could you give us what that normally runs at from capacity, utilization standpoint? And is there anything you can do specifically, obviously I'm sure you're still knocking on the customer doors pretty loud, but is it just the general condition of tech that has to bounce back before that comes back? Or is there anything else that you think you could try to do?

Well let me start off by addressing this question, and I think Tom has some things to add. As I see the engineering services marketplace, there's a number of good analysts in the industry that have written about the potential for expansion and growth in that sector of the EMS phase, and we believe there is substantial opportunity for us as well. We've seen some head count reductions, some hiring freezes and those types of things that all of the OEM's, I believe right now that they are trying very hard to hang on to their core resources, they're keeping many of the development activities internal, and it's making it very difficult to win business. I also would say that the scrutiny on programs and funding within programs is at a very high level, but I believe that as we see some recover here, I think that the model that we have is going to benefit greatly. And we still have, even though we've had some reduction force within our engineering services group, we have a significant critical mass there, as the service program's going forward. So we feel that it's important for us to sustain this service, because we believe we're going to benefit from it substantially here when things begin to turn around.

Tom, relative to utilization and things, go ahead.

Yeah, historically, Lou, we run at 100 percent utilization within our engineering organization. We're down roughly 30 percent off of where our normal historical levels are. And again, this something that really we had seen for 10 plus years, up until literally September 11. And the effects of that, we did see a little bit of a slowdown earlier in the year with kind of the networking data com bubble, say in the January timeframe of 2001, but we had ramped back up to that 100 percent level fairly quickly after that. But it has been muted since literally since the September 11 events.

I guess visibility on that, does it look like it's starting to come back in September or towards the end of the year at all?

Yeah, I actually - I meant to mention that we thought we had seen early in the third quarter, actually I don't want to say early, the first couple months of the third quarter were actually up from that level. But we've seen that fall back to that 70 percent level here. And that would be, at least as of right now with the limited visibility, what we would expect for Q4.

We'll take our next question from the site of Steve Sabbath of Goldman Sachs.

Good morning. I guess I was looking for an update on your early-stage company exposure. Kind of, where is total exposure now? Have any gone bust or effectively bust? And then, kind of, where do you expect total exposure to maybe go towards '03?

Yeah, what we refer to as an emerging technology customer basket. We had been saying that was about 15 to 17 percent of revenue, and we have seen that come down a little bit now. We're saying that range is more in that 14 to 16 percent, so it has come down just a little bit. There were a few companies that we were doing business with that were not successful getting funding to continue their operations.

We would expect that going forward, that you are going to see a further reduction in that number as we move the business, which was the former business, out of the merging technology basket into our ongoing customer basket there. But having said that, we still believe there are some very good potential among the remaining customers in this group. There are some folks that have gotten funded. They have some great technology, both in the telecom networking sector as well as their medical sector. So we are still very proactive about managing the opportunities there in that basket of customers.

I would just add also that recently we've also seen some additional activity in the data-storage computing area from some of our niche startup customers as well.

okay. I'll stick to one question. Thank you.

thank you.

our next question comes from the side of of and Company.

yes, you mentioned four customers. Could you talk about what you are doing for these four customers, and which ones are manufacturing customers?

yes we did mention four customers in the script. of course is a semi-conductor equipment space. We are doing products related to that extreme networks, again networking telecom sector, we don't really talk about specific programs and technologies. again in the optical components area, optical assemblies area, and then is a company that we also talked about. That's in our UK facility, and they're in the smart-card business.

and which ones were manufacturing customers?

all of these customers are manufacturing customers.

so those were the four manufacturing customers you indicated.

no. those were the four manufacturing customers that we indicated were new customers. These other four that were talked about were examples of companies where we won additional business.

I see. With regards to the four new manufacturing customers by industry, Dean, do you have that?

John, we apologize. We thought you were asking about the four current customers by industry, the four new customers. Dean do you have that?

I didn't break it all by industry.

John, we will follow up with that. I apologize that we don't have that right here at our fingertips.

on last question. On - I know you don't break out the contribution anymore of , but maybe you could give us a little flavor and color about their relative contribution compared to maybe the quarter before, and what rationalization steps might you take with that operation.

well, let me just address just in general here, and that we take some rationalization steps early on when we made the acquisition, and that we combined our facility in Fremont with their San Jose facility as an MTI site, and we also closed down their facility in Raleigh and consolidated that business into our other sites. Over all, the integration is going very well. I just visited our Boise site last week, they got an excellent management team there, provided that presentation, all the employees, and it's really an impressive operation. They are doing a great job for our customers, as our customers have provided us feedback.

The in China facilities, we got our president, Paul president of electronic assembly there, the China plant today, even though we have been in business there for almost a year, they had a grand opening ceremony there with some customers and suppliers and local dignitaries, so there is a lot of interest in that organization as well, so we -- as Tom indicated just a little bit earlier, we did see growth in our Asian operations, and we are continuing the process of qualifying those plants so we can build medical products so we have a medical customer there that -- a significant customer -- that wants us to expand services to them to support their overall strategy for moving products into China.

Now, Tom might want to talk about integration metrics and some expectations and those things.

Yes. From a revenue standpoint, and again, we're not going to break this out as our view here has indicated in the press release and in the comments is that the MCMS integration is actually going extremely well. We thank both our Plexus internal team as well as the new team at both the Boise and Asian sites for really a very smooth integration. The sales, of course, there are concentrated in networking data comm, and in computing, as indicated, Extreme Networks, and , that were two of those customers. We continue to win new programs. All of that work is -- for Extreme is being done in the MCMS sites, while the was moved out of Raleigh and into one of our sites.

So it's hard to compare apples to apples going forward here based on their sites, but overall, the revenues were in line, and we would say we continue from an operating standpoint to be above plan with where we had originally expected, and on plan with where we expected it coming into the quarter.

, just also real quick, with regards to the four new customers that were in manufacturing this quarter, three of those customers were telecom and one of those customers was industrial/commercial. We expect those to add to revenue going forward here over the next couple of quarters.

Our next participant is of Partners.

Hi, gentlemen. Can you -- obviously, you're gaining some market share with Extreme following the acquisition, and we know that Extreme does use some top tier suppliers. In the case of the , is there -- are we getting any closer to having a resolution as to your status with them?

, let me address consolidation in general, and I think it's important to understand, as you've indicated, that we have benefited from the consolidation activities in the industry. And I think some of the knocks against us when decisions were made some time ago was that we did not have the scale or global footprint that we have today, and our acquisition of MCMS certainly fixed that.

Also, several of our customers have recognized that this combination of a tier one and a tier two strategy works to their advantage, particularly where our value added services model fits their needs. There's no question our engineering, MPI capabilities attract customers, our manufacturing expertise, quality, and material strategies are second to no one in the industry. So customers have really -- they like our service excellence, our flexibility, our agility, and our can-do attitude. And with , we've done a fantastic job for them on , formerly ERX product.

As announced, many of the former resources are in leadership positions within , and we believe we're well positioned to continue and perhaps grow this relationship.

And is there any timetable where you would have real clarity about that, or do you feel confident that that's going to happen at this point.

There's no timetable that I'm comfortable with communicating to you today.

OK. Another question which just has to do with whether you anticipate that there will be a continuing mix shift over time - at this point, Industrial and Medical is almost half of your revenue. Do you think that networking will decline over the course of the next 12 to 24 months and that you're going to see increasing sales into Medical of medical equipment, for example?

Well, I - you know, certainly we do have a strong position in Medical and the Industrial/Commercial segment even though we are seeing a little of a slide here coming up into the next quarter on the Industrial/Commercial piece. But we also have some new business opportunities there that we feel are going to - are going to get that course corrected.

The Telecomm Networking piece has been very difficult to project just as you know and as many of our, you know, competitors know. But we believe that there still is a very strong opportunity for us to continue to grow that sector, and we still believe that that, you know, 40 percent growing toward 40 percent is a good number for us as we start to see some recovery in those markets. But it's just that there's just a lot of uncertainty about, you know, when the spend is going to start to pick back up there.

Right. Those are areas where, with relatively small companies, they don't have internal manufacturing. The Medical customers you have tend to have fairly significant internal manufacturing. Do you see a trend toward outsourcing more by them? Are there products that - next-generation products that are being taken out to be outsourced that were previously internally manufactured?

We continue to see - I would say Medical - let me first say that there are a number of Medical customers that we have that have no manufacturing, but certainly with some of the larger Medical customers that we have, they do manufacture products, as you've indicated, and we do continue to see a reevaluation of their business model and a move toward manufacturing more products externally and in different geographies.

And there's just one other question which is some of your mid-tier competitors are struggling in terms of their balance sheet and their viability at this point. Have you seen a pickup in sales activity or interest on the part of customers of other mid-tiers to come to you because of the strength of your balance sheet?

Well, there's no question that our balance sheet has become a great sales tool for us. The fact that we're - we are a strong company and we're stable has created opportunities for us on the sales side. Tom looks like he's looking to add something to this.

Yes, and clearly, you know, we're focused on those opportunities and we clearly are seeing those opportunities out there now, as well as expect to see more going forward.

Our next participant is of J.P. Morgan.

Good morning, guys. Two questions - first, gross margin's moving up nicely quarter-to-quarter even though utilization is low and utilization in engineering is low. Just one question off of that - on the Engineering business, I would assume then that even though the market's soft and utilization is soft that the pricing structure of that industry has not changed material?

Yes, we're out there trying to use some pricing incentives as a way to generate new business, but the reality is is we haven't seen a major price pressure situation from our customers. The ones that, you know, have programs that want to outsource them are - seem to have a willingness to continue to pay the kind of pricing that we've had in the past and, quite frankly, our pricing strategy was pretty reasonable the capabilities that we have anyway because our goal, obviously, was to try to win business and then move it into manufacturing.

So, you know, it hasn't - we haven't had a fire sale on engineering services that has been effective as a way of generating business at this point. It's just that the opportunities to participate are just not there.

OK. And just the other question. You know, looking at again, everybody's trying to promote headline value out of Sanger entering the medical business. But if I look at the reality of it, you guys have been working at this for about ten years. You're the acknowledged leader in the business, you have the relationships and the core engineering expertise, and the barrier to entry hurdles covered from regulatory.

And yet your business is $250 million roughly in medical. Doesn't that statistic alone say that the opportunity in medical for a $10 billion competitor with none of those, none of that ten-year history, that that's probably really a stretch of the imagination for that to be a good business for some of your competitors to even try to enter?

this is Tom. You know, there are clearly some opportunities for the tier ones in the class one non-regulated glucose monitor, you know, kind of consumer electronics in medical, you know, that really doesn't fit with our model. And though now with our Asian footprint and, you know, we're not necessarily against possibly doing that with some of our key customers, or opening the door with customers, but that's not necessarily where our focus is.

When you, when you move up the ladder to the complex class two and class three markets, we do believe that there are a significant number of barriers to enter there. And that, you know, just hiring an individual to run that organization, you know, internally is not enough, that these companies are looking and we actually have more than 15 years of experience building medical products, you know, for, you know, for GE Medical. And ...

16 to 17 years.

Yes. And so that, you know, we, as Dean indicated, you know, we feel we have a, we have an advantage there, that we're taking, that we're going to take advantage of going forward. This actually may help us, that all of our competitors are out there knocking on the doors of these companies, because we believe when they start to look, they're not going to just talk to one company, they're going to do their diligence like the J&Js have done, and the Siemens have done before them, and we believe that will open up more doors for us going forward.

Because when they come and audit the companies ultimately needing to, needing to do that, we believe we will show, you know, better, as well as some of our, you know, our competitors. But clearly better than all of the tier one competition out there.

OK. Maybe just, if we could just revisit that one other way, based on what you just said, if the, if there's some higher volume class one programs out there, that were not interesting before, but you're changing your footprint now so that you can do low cost business, but there's good volume there to be had.

Wouldn't it make sense just to leverage the relationships that you probably already have as kind of a line extension strategy to take that business rather than, take that business proactively rather than cede it to other competitors since you already have the relationship, and it's really just a line extension opened up off of your new cost profile?

Yes ...

you're absolutely right. You're absolutely right, and with our expanded footprint both in, you know, in Mexico and in Asia now we have an opportunity to go after pieces of business there that we had passed on, or just were not able to be competitive on in the past.

And I would also just like to add one other note to some of Tom's comments is that I think that, you know, the people pursuing this business are going to discover that winning this business takes a long period of time. The development cycles and the regulatory cycles are long. And that, you know, some of the, some of the pipeline for medical business that we've developed takes years. So this isn't something that just can drop in your lap overnight here.

And also some of the initial program sizes where some of these companies are extremely small. They typically are not going to drop a large program on you initially. Especially if you don't have the track record of doing it. We don't see there being a lot of hundred million dollar plus individual program sizes out there.

we'll take our next participant, of Salomon Smith Barney.

yes, thanks. Good morning everyone. I guess I'd like to talk a little bit about the charges that you began to take this quarter and I know, Tom, I think you referenced - one of you referenced it in the prepared remarks. You are at a little bit of a tough spot because your gross margins are best in the class, but your SG&A's heavy, but there are good reasons for it to be heavy, because you have tremendous human capital on your front-end services. So, I guess I'd like to know how do we see the pay back from the 5 million dollars in charges and kinda, will the SG&A reflect it more than gross margin, and at what point, if you assume, worse case scenario, flat sales for the indefinite future, will you make some tough decisions about that human capital.

well, as indicated in the prepared remarks, we would expect SG&A to come down in dollar terms here, going forward. We also expect it to come down in percentage terms, going forward as well. As indicated in the current quarter, there was some reserve strengthening taken from a A/R standpoint and, you take that out and actually, the SG&A percentage would have been down in a percentage - from a percentage standpoint on the sequential basis. We clearly - if we thought that sales were going to be flat for the indefinite future, would we need to reduce our SG&A costs, yes.

Do we have contingency plans to do that, yes. On the current restructuring though, the majority of that has clearly been up in the fixed cost line and has been a key reason, along with operating efficiencies on the manufacturing floor for the improvement in the gross margin line, and even on flat-to-down sales, this quarter, we would expect that gross margins would remain relatively strong here, even in the Q4 quarter. And that's without all the benefits of the closing of one of our sites, that won't really be fully closed until possibly early calendar 2003.

the full benefit of the charges, Tom, sort of middle of those three?

no we will see it by, I would say, early 2003, so January, February. So even a little bit more than half of the year. We'll see some improvement as we transfer business to other sites. But we won't see the full-scale savings until that site is closed.

our next participant is Daniel of .

hi guys. Good morning.

morning.

just have a quick question with regards to the new certifications in Asia that you eluded to previously. Would those be for incremental businesses or perhaps a shift from manufacturing in the U.S. to the new location.

Dean, I'll answer this. The certification that you are referring to are the medical capabilities that we're talking about there?

You mentioned medical as though working, if I am not mistaken.

Right. The answer to your question is really is both. We do have some products -- in our portfolio business that need to have the cost reduction that the Asian facilities will support. In addition to that, though, we are winning new business and new programs there that will be built in Asia. And it's really part of, you know, the strategy of one of our top medical customers there to have us support their footprint for new product development and product -- new product introduction and then volume production in that marketplace.

So they're really -- their goal here is to try to develop a significant medical business in the Asian marketplace. And we're working to prepare ourselves to support that.

OK. Now, on the balance sheet, good job on managing the balance sheet there. I was just wondering, on your receivables, charges declined substantially, you referred to the ratios before. Is this maybe due to a more strict , or is there any specifics there that you could provide some color on?

On the inventory -- the continued improvement on the inventory side, as indicated, again, earlier. You know, we've had an internal target to get to eight turns for this calendar year. It's a lot of hard work by both our strategic as well as our tactical group, and really working it from a top down as well as a bottoms up approach. One, from a top down, working with suppliers trying to have better flexibility with them with regards to stores and line stocking of inventory.

And from a bottom up, working each customer individually and focusing on what the root cause issues are for -- what we would say is having inventory turn levels lower than where we would have expected them to be. On the AR side, we have clearly tightened up payment terms with a number of our start up customers, and continue to focus there on that -- on that piece of the business. Otherwise, there's really been in no change in strengthening of terms overall with our customers, but just being more diligent, mainly with our start up customers.

Thanks.

We'll take our next question from the site of of Morgan Stanley. Go ahead.

Hey, Tom. Tom, can you provide us the capacity utilization on a regional basis?

Yes, on a regional basis, I had mentioned Asia, again -- and again, remember this is on a -- really on an equipped basis, this is not on a brick and mortar basis because clearly we have the brick and mortar to do significantly more business. Asia is running close to 60 percent, the UK is actually running around -- a little bit north of 60 percent. Mexico, we're actually in the process there of moving our Mexico site to our focused factory levels -- or, I'm sorry, our focused factory processes, so that is actually kind of in a little bit of a transition, but it's probably running actually a little bit below 50 percent at this point in time. And North America is running at right around 55 percent -- or, I'm sorry, the U.S. is running at about 55 percent.

It's important to keep in mind that our target percentage is -- you know, 85 percent, you want to kind of target that so you have available capacity to take on new business.

OK, and just as a follow up, can you talk a little about -- a little bit about the order and sales linearity in the quarter? Thanks.

Yes, for - actually, for this quarter, it was relatively flat. There was really no normal - you know, typically we would say we run kind of 30 - 30 - 40. It - typical - this was more of a one-third, one-third, one-third quarter. That is also what we're expecting right now in the September quarter, but with a slight pickup in September over August mainly due to Europe and vacation kind of timeframes in August.

Our next participant is of A.G. Edwards.

Thanks. Do you - do you believe there's a stronger tendency to pull Engineering business back in-house than Manufacturing back in-house by your customers?

There certainly is, but right now I think it's - you know, our Engineering Services model with some of our customers - it varies from customer to customer, but many of the customers that we had supported in the past would typically outsource a, you know - a percentage of their business based on just having flexibility of additional resources. And right now, you know, with the limited amount of work people, they're trying to keep their internal resources busy. And I think that that's - somewhat was affecting us.

And I think it's clear right now that the model or the evolution of the model's outsource engineering is not quite as mature as it is with manufacturing, so I think the tendency there is certainly higher that they're going to pull it back in-house than they would - than they would manufacturing. And many of our customers have no manufacturing capability whatsoever, so ...

And it sounds like you're implying that gross margins are going to decrease a little bit in the fourth quarter.

sales would be at the lower end of the range, we would expect that because the closing of building - the building here in Neenah isn't going to occur for another quarter or so after that, that gross margins may be down slightly at the lower end of the range.

And that's just due to lower utilization?

It is due to lower utilization.

Great. Thanks.

Our next participant is of Robert W. Baird.

Hi, guys. Following up on that same question, I guess I'm trying to reconcile the - a disconnect in the guidance. It seems to me that you back out the million dollars in accounts receivable reserves you added this quarter, it's about a penny-and-a-half a share or so. Adjusted, you did about eight-and-a-half cents. Yet, on flat to down revenue, you've got guidance of only five to eights cents which to me says gross margins may be down slightly, but you may also lose something on the SG&A line.

As indicated on the call, we are continuing to spend with our implementation as well as we are adding to our sales and marketing organization. And again, we could, from a percentage standpoint at the lower end of the range given on the guidance - yes, we could.

OK. And that isn't more than offset by some of the - still the ongoing restructuring even within the SG&A line?

Again, being conservative, we felt that the - you know, based on really the end-market top-line issues that it was appropriate to be, you know, rather conservative rather than being aggressive on the bottom line number at this point in time.

OK. And then just a third follow-up on that same point - it would seem to me you've signed up less networking customers as a percent of the new customer base over the last several quarters. So the margin mix should be improving as Medical and Industrial take on a greater share of the mix. So that, as well, should be working in your favor in the fourth quarter and in early fiscal '03.

We would hope that would work in our favor going forward, yes.

OK. Thank you.

Our next participant is of .

Yeah, just I was wondering if you could comment slightly on the individual programs and some of the networking area. Obviously we're seeing some weakness in some of the network and telecom and motorall. I was just wondering if I could get some generic comments on the performance in that area?

Well, I'll comment on it, and that, really I think our comments here are probably consistent over the last couple of quarters in that we just don't get any sort of decent visibility in orders. We see a tremendous amount of volatility in the forecast that we do receive. Typically our quarters start out with a number of forecast adjustments, and then we'll see some pull in certain products and product line and a drop in orders in the later half of the quarter to make up for it. You know, there's just no consistency here in what we're seeing from them. And very little visibility. So nothing has really changed there.

And clearly our customers are being impacted by the same macro-forces that all of the other networking data com customers are seeing. You know, cap-ex spends, a Worldcom clearly is a customer of some of our customers, the Qwests of the world, cap-ex spend of theirs continues to decrease. And that puts less pressure on some of the more stable companies out there like the Verizon's and the SBC's to spend money. All of that shrinks the pie and continues to result in a reduction in overall spending in networking data com. And also seeing the same types of things in the computing side of the business as well.

OK. And I guess given the guidance, it is fair to assume that some of the new wins that you're referencing really aren't offsetting any of the organic declines you're seeing? And if so, I wonder if you could comment on some of the revenue potential for some of your new customers.

Clearly in the networking data com and computing side, as Dean indicated, even though we've had new wins there, those are clearly not being enough to offset what we're seeing on the core side. Plus, again it becomes difficult as we win those customers, for them to give accurate forecasts with regards to where they believe numbers are here going forward. So it's just very difficult to say there. On the flip side, clearly on some of the medical and industrial, we're clearly benefiting by the ramp here of a new medical customer as well as being indicated some new customers in the industrial side as well.

OK, yeah, I was just going to say the industrial segment, if that's up 25 percent, is there anything specific that you'd note that's really driving that?

Again, I think Dean indicated that it was over several customers. Clearly the December quarter was extremely muted there in industrial. So we feel that there maybe a little bit a pick up from kind of that bottom in that group, but we're not yet comfortable that all of that has worked itself out either. But we again also have won some customers in that space that it's also helping.

Our next participant is Keith Dunn of Roberts and Stevens.

Yes, hi. Good morning. Couple of follow-up questions. One, can you give us a mix of sales from NPI, engineering and manufacturing in the quarter?

Do you have the numbers?

Yes.

82 percent was manufacturing ...

... Yes, manufacturing was up to 83 percent ...

... about 11 percent.

And NPI 11 percent. From a capacity utilization standpoint right now, you know, NPI is running at a little bit less than the average capacity of 55 percent.

And I'm sorry. I heard 11 for NPI, but I, there was noise, I didn't hear engineering and manufacturing was?

83 percent for manufacturing and engineering stayed at six percent.

And the second question comes back to that SG&A. Without the charge you had, you know, the reserve, it would have been about 16, you know, million less, 16 three, which is equal to last quarter, the March quarter. But in the March quarter I think you had about a half million transition expenses for MCMS. So if we kind of clean out those two, can SG&A actually get a little below 16 in the, in the September quarter?

Not sure if it would necessarily get quite to that, to that level. Probably would be 16 or maybe slightly above. Again mainly due to the adds in the, in the IT and sales and marketing organization.

OK. Thanks very much.

Our final question comes from of RBC.

Yes, good morning. Tom, could you just give us an update, I believe there was new medical customer that was going to start ramping, I guess, be fully ramped by the end of the September quarter, and then a com customer that was going to be ramped by the end of March. If you could just give us an update on those two customers?

Yes. The medical customer is ramping, and will be fully ramped here in the September quarter, that was clearly one of the drivers for the sequential increase in medical. On the networking data com customer, that continues to move forward, but the volume levels, again are really what's suspect there from what the, what we originally intended. And again, part of that will really depend upon where and/or when end market improvement occurs between now and, now and March.

And secondly, could you just talk about any re-pricing of contracts, and the impact that this might have on margin expectations?

Again, the, you know, that clearly the competitive nature out there is difficult, due to the, due to the excess capacity at all of the, all of the tier one and tier two companies. We don't feel that people are necessarily doing irrational type pricing across the board, though you see it every once in a while. I still continue to believe that, I feel the group in total, based on what we're seeing with our customer mix, has probably lost about 100 basis points at the gross margin line. And so if you're unable to reduce your SG&A costs, that ultimately would impact at the operating margin line. I still feel that that is, you know, is still a good representative impact of what has occurred right now from a pricing standpoint across the industry.

OK. Have you actually had to re-price any contracts because your customers' shopping business around to other players?

Nothing significant.

Well we haven't seen anything significant in that regard, other than just the normal, you know, re-pricing and cost reduction, you know, efforts and challenges that we see on an ongoing basis with our customers.

Yes. It's really on the new business where we're seeing it.

OK. Great, thank you.

You're welcome.

OK.

There are no further questions at this time.

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