Richardson Electronics Ltd (RELL) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Richardson Electronics second quarter earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. If you should need assistance during the conference, please press star, zero and an operator will assist you. As a reminder this call is being recorded.

I will now turn the call over to your host, Chief Executive Officer, Mr. Ed Richardson. Plead go ahead, sir.

Good morning. I have Bruce Johnson with me, who is President and Dario Sacomani, Chief Financial Officer and Greg Peloquin, who is Executive VP and General Manager of RF and wireless group.

We were pleased with another very strong quarter. The overall design activity and number of new projects that we're looking at is at an all-time high as far as numbers are concerned right now. Second quarter sales were 128.1 million, up 7.6% from the prior year. This was the sixth consecutive quarter of year-over-year growth. And we saw growth from all the SBU's, each one was up over the prior year. The fourth consecutive quarter that we've seen growth from all the SBU's. Net earnings were actually 11 cents versus 9 cents from a year ago. The numbers would have actually been higher than that, although we had $700,000 worth of additional interest expense, which Dario will go into in detail. The RF and wireless SBU, strategic business unit, was up 7.3% to 57.7 million; margin was just about flat at 22.3%. We saw some good gains in various areas of the RF and wireless business, plus we're seeing a tremendous amount of design activity. The mobile infrastructure portion of the business was up 22% in sales, at 20.8 million. Gross margin was down slightly, due to a high level of component business coming out of Asia. Asia as a geographic area was up 29%, still led by China, with sales in Asia up to 18.6 million. Margin still under pressure as more and more component business, again from China. Europe was up 28% with sales at 16.2 million, and gross margin was up there at 25.9%. Also we've been seeing some encouraging advice from the larger telecommunications companies, what we call the seven sisters. Several letters have been put out on production on new infrastructure and cell phones is back to normal volumes, and several instances they're now pulling in orders, and we're being advised to make sure that we have inventory. There are concerns that there may be shortages in the coming year, so all of those indications are really encouraging.

In the industrial power group sales were up 14.5% to 27.9 million. Margin excellent at 31.1%. This was led by the power component side of the business, the FCR and IBGT, the power semiconductor portion was up 24% at $8.4 million. Margin down slightly there at 26.9%. The tube business showed good growth. This is a good indicator. Actually, when we saw the economic downturn, the tube portion of the business, particularly in microwave generators for semiconductor wafer fab it was first area to show decline. We're seeing substantial increases in that portion of the business right now, and the overall tube business was up 10% in the quarter to 19.3 million at 33% gross margin.

Asia for IPG was also the highest growth area. They were up 45% at sales for IPG of 5.7 million, very nice margin at 32.1%, up from 30% a year ago. Europe had nice growth. They were up 24% for IPG, with sales at 7.7 million. Again, really nice margin at 31.9%. The security systems division continued to do well. Their sales were up 8.8% with another record quarter. Unit sales of 26.1 million, and margin up from 25.1 to 25.5%. Canada, again, was the leader. The Canadian operation has had record quarters for several years now. They were up 14%, sales were at 13.4 million, and again they increased margin from 26.8% to 27.8%. Europe did well for SSD for the securities systems division. They were up 12% with sales at 4.1 million, and their margin exceeded 30%.

The display systems group basically had a flat quarter. So much of their business today is project-based, and we saw several of those project not being delivered in the second quarter, but bookings are very strong, and we see a number of projects that will be booked in the third and fourth quarter. Sales at 14.9 million with growth margin at 25.1. The bright spot of DSG's performance was medical monitors, continues to increase nicely. The sale of medical monitors was up 23% at 5.6 million with margin of 25.1. The specialty display business was up 57% in the quarter, and really the area that was down are the custom displays or the project-based business. But we think with some of the projects that have been booked, that will be back to normal in the third and fourth quarter.

Sales by area: North America was actually down 3.2%. We're seeing more and more of the manufacturing done now in the Far East. A lot of the design work is done in North America but when it actually goes into production it goes to China. And so North America was down 3.2% at 65.7 million. Margin was up a little bit at 26%. Europe was up 23.5% in the quarter, at 31.6 million in sales. Margin was also up, gross margin in Europe was 28.5% versus 27.8 a year ago. Highlights there, Israel was up 116%. It's nice to see Israel come back. The business there is small, but they did 3.2 million in the quarter. France was up nicely. Their business was up 56% at 6.1 million. And Italy was up as well at 25% increase at 4.7 million for the quarter. And their margin was up. They were at 29.6%. Margin was up all across the board in Europe, excluding Israel where we're seeing margin pressure on large component orders. In Asia Pacific, overall sales were up 28% to 25.2 million. Looks like Asia Pacific will exceed 100 million this year for the first time, and it's obviously led by China. China was up 54% at 5.2 million in the quarter. Margin still under pressure with a lot of contract manufacturing and component sales there. Margin was at 19.9%. Southeast Asia, Singapore, and Thailand was up 81%. So they're doing well, and their margin was just about flat. Latin America still a problem for us. Latin America was down 8% in the quarter at 4.6 million. Margin was also under pressure.

So with that, I'll turn it over to Dario to discuss the P&L and the balance sheet, and then Bruce will go through bookings and highlights of the quarter.

Thanks, Ed.

Well, Ed covered the sales in detail but to summarize sales were 128.1, they were up 7.3% sequentially and 7.6 year-over-year. Bringing the year-to-date sales to 8.7% up from the prior year. Gross margins at 24.2 were down 20 basis points from the first quarter and 10 basis points from the second quarter of last year. With SSD continuing to expand margins, IPG and RWC basically holding, and DSG declining due to the timing of some custom display projects produced in our HUDson facility, as Ed mentioned. SG&A was at 25.4 million, that represents 19.9% of sales. And that was actually down from Q1 of '0, basically due to lower incentives and some favorable fringe rates associated with lower than planned medical claims. Versus the prior year, the increase is primarily currency related, the euro and the Canadian dollar. Other expenses, of course, were up 541 K, but that's where we booked our correcting entry. Interest excluding the adjustment was actually 2.6 million, which was flat from the prior year. The correcting entry associated with the reporting error that we mentioned in the press release actually occurred in our Sweden entity, and it was as a result of the fact that they use a separate software package to account for their results, which actually needs to be manually input to our corporate PeopleSoft general ledger. Fortunately, our finance systems road map will ultimately have all the subsidiaries on PeopleSoft in order to assure we don't experience that type of issue again. I can't do the math for you, but obviously our results would have been better without the adjustment. It all leads to EPS for 11 cents for the quarter compared to 9 cents in the year ago quarter and 15 cents for the first six month compared to 11 cents a year ago.

So if we turn to the balance sheet our performance here was absolutely superb. Cash at 20.8 is up 3.3 from May. Accounts receivable at 3.9, that represents about 59 days outstanding, which is flat from Q1. A big highlight was inventory at 91.3 million, which is down 2.3, but that represents about 85, 86 days, and that's down from 94.5 days in Q1 and Q4's 7 days, so good performance on inventory. Net property at 30.6, relatively flat from Q1. That included cap ex of 1.3 million, and depreciation of 1.2 million. I should let you know that our PeopleSoft implementation is on schedule, and that's most likely going to drive our cap ex up for the next two quarters, probably into the $2 million range. Accounts payable at 29.6, it represents 26 days, it's down slightly from Q1, we were at 27 days. Then debts at 134.8, down 3.6 million from May. So, bottom line of all the balance sheet, you know, year-to-date we're up 8.7% in sales and our net borrowings are down approximately 7 million.

So with that I'll pass it over the Bruce for highlights.

Good morning.

Well, bookings continue their positive ascension for the company overall. Sequentially we were up 18.4% and 6.2% over the prior year. In wireless, wireless had a very strong booking quarter, sequentially 37.1%, and over the prior year by 5.1% with a number of highlights that occurred. First of all, our RF power transistor business unit generated over 17.5 million in sales, representing the highest billing quarter in the history of the product line. ABX, which is a major passive component vendor, has expanded our current North American franchise agreement to now encompass all global geographies and most of our vendors now as of today have extended global franchise agreements to us. Maycom, a division of Tyco and a key RWC vendor, they've modified our previous European franchise agreement, and they now designate us as their exclusive pan-European distributor. Infineon, who acquired Ericsson about a year ago, has appointed Richardson as their worldwide distributor for RF and wireless products, and they did this primarily because of our strong engineering solutions capabilities, which is what they're looking for.

Turning to the industrial power group. This group is literally on fire, which is good news, because as Ed had mentioned this represents a lot of the aftermarket business, and it's a good sign, I think, for the economy overall. Sequentially they were up 4.6%, but they were 27% ahead of the prior year in bookings. And highlights there and recognition of our technical and global capabilities, Cornell Dubilier, which a major IBG capacitor vendor, appointed us as global microtransmitting master distributor where we're empowered to serve all worldwide distributors and customers. This product is used in AM transistors, induction heating, and semiconductor wafer fabrication equipment. Another good sign of the emerging economy is in the semiconductor wafer fab market, and IPG is experiencing a night ramp-up in sales. In the quarter they booked a large engineered solutions order for RF matching networks for a major manufacturer of semiconductor processing equipment, and they also received numerous orders from a large wafer fab in Taiwan to support their more bullish and updated forecast. They were also approved by a major manufacturer of medical MRI equipment to become their key supplier for their spares business, that represents their aftermarket business. Building on the fact that we already design and manufacture the generators that they use in their linear accelerators.

In the security systems business unit, sequentially we were up 9.2%, and we're ahead of the prior year by 6.6%. In display systems sequentially 8.6%, but down from the prior year by about 7.9%. As Ed has mentioned, activity has been very strong there, and we expect the bookings to return in terms of this quarter, the third quarter. Highlights are that CRT sales, which represent the Legacy business in this group, they were globally strong in the quarter, and then we booked over $750,000 to a security systems manufacturer in Italy, to a customer in China for a medical display application, and to the United Arab Emirates for a radar application. That shows our global reach. We've been appointed as a value-added for sharp's new line of large LCD, and we introduced a line in NEC for their 30 and 40-inch monitors. And turning to geography, North America was up 11.4% in bookings sequentially, down 6% from the prior year. Europe was up 27.7% sequentially and 27.3% over the prior year. Asia back up 17.1% sequentially, and ahead of the prior year by a whopping 35.2%. And sequentially Latin America was up 43.3%, but as Ed mentioned, conditions are still somewhat soft there. They were down 19% from the prior year.

I'll turn this back to Ed.

Thanks, Bruce. Well, there's certainly tremendous amount of activity. As Bruce mentioned, the orders are actually up 18% sequentially. Normally, the seasonal pattern would say that our third quarter, which, of course, has the holidays in it, would be down 3 or 4%. December normally is about a two-week month for us, which cuts into the quarter. But with the bookings being up, we're looking at the third quarter to be just about flat in sales with the second quarter, and we anticipate a lot of new products being shipped over this quarter. At the same time, because it's a large amount of the new businesses' components, we anticipate gross margins to be just about flat with the second quarter. And SG&A to be somewhere around 21%. The other side, other expenses should return to about 2.6 million range, somewhere in that area. And I would say overall the visibility is getting better. Lots of potential orders out there and all kinds of positive signs from companies seeing production returning to near normal levels.

Well, with that, Barb, I think we'll open it up for questions.

Very good. Ladies and gentlemen, if you'd like to ask a question please press star one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. You may remove yourself by pressing the pound key. If you're on a speakerphone, please pick up the handset before pressing the numbers. Once again, for questions, press star one. The first question in the queue is from Bill Benson from William Blair.

Good morning, guys. Nice quarter.

Thank you.

Just a few questions here. Ed, you talked about the visibility improving. Is it fair to say that they are giving you significantly better visibility at this point? I know you talked about the supplier letters that you may have received, and so if you could just give us some idea, you know, how to read that.

Okay. Well, we've had some order pull-ins, which is encouraging. I think everyone is still being cautious. The concern we're hearing from the major telecom customers is they're afraid because production is up that they're going to run into shortages again. So it's sort of a two-edged sword. On the one side, they're saying production is running at record levels. One of the big companies said they're running production through the holidays to try to stay caught up. But the other side is that the released orders and new orders are still very conservative, yet they don't want us to run low on inventory, so they're running into a shortage position. But I guess it's all encouraging anyway. The indications that we have is that at least for the foreseeable quarters, production is going to continue.

Okay. Great. And then you had talked a little bit about margin being kind of flat sequentially on a total company basis because of components. When do you expect actually maybe some of those engineered solutions to start to maybe get put into production? Do you expect that within the next couple of quarters, or what's your thinking on that?

Well, I think that the products that we've talked about for awhile, like the in-home compensator and some of these will go into production in the fourth quarter. The question is what volume and how soon we can actually get sales out there. But my feeling is the fourth quarter will start to see some of it and maybe the first quarter of next year.

Okay. And then Dario had talked on SG&A, it was obviously down surprisingly despite you guys' increasing sales pretty substantially. I didn't know if you could give me a little bit more color on that and why you might expect it to actually snap back up this quarter.

Yeah. Well, you know, there's an element of our incentive and commission scheme that's associated with our performance to budget, and so that's -- that -- compared to Q1 actually we were a little lower from our budget than we were in Q1. Then we budgeted very typically with a, you know, seasonal decrease in Q3. And like Ed mentioned we're thinking it's going to be flat.

Right.

So I think the combination of the fact that we'll probably be achieving numbers closer to plan in the third quarter, plus we've got some incremental PeopleSoft expenses. I mentioned that, you know, we're on target, I expect our cap ex to go up over the next couple of quarters, and I expect to see some incremental expenses in SG&A, so that's why we guided to 21.

Okay. Then just on the inventory days, obviously another improvement there. Was there anything specific that accounted for the continuing improvement there?

No. I think it's just, you know, the constant focus on inventory. I think we really need to, you know, start to pay attention to our service levels, so I'm not sure we're going to be able to maintain an 86. As you know, we had a long-range goal of about 80, so we might see that number come back into between 86 and 90, but still an outstanding performance in the quarter.

Yeah. Nice improvement there. Then just a final question on the accounting situation. It looks like, I know you didn't put a number around it, but it looks like it was about 5 cents pre-tax, so your number would have been significantly higher by my numbers. Am I missing that calculation, or is that something that you just are not supposed to say under the new rules?

I'm not supposed to say the actual number, but the number I quoted of 700 K was actually pre-tax.

Yeah. Okay.

And if you tax-effect that, you'll get there.

5 cents. Okay. Sought would have been significantly better. Now, do you feel pretty confident in going through everything that those are -- was that just one area, or is there other areas that could be impacted by this, or do you think it's basically all accounted for at this point?

No, I think we're in good shape. This one was a pretty complicated entity. Again, not on PeopleSoft, and I don't want to get into the details of it, but quite frankly it has a very complicated entity structure before it gets up to the corporate level. So I don't think we're going to have any problems like this going forward.

Okay. Great, guys. Very nice quarter.

Next question is from the line of Rob Damron from 21st Century Research.

Good morning. Great quarter, and just the outlook sounds like it's improving significantly from what we've heard over the last couple of years, so congratulations on seeing improving business trends. Wanted to ask you, I guess more specifically about these new product that are currently being beta tested. Could you just maybe go through several of them and where they are in the beta testing process? You mentioned some of them might be going into production here in the next several months, so maybe just bring us up to speed, and if could you put some revenue opportunity around each of these, that would be helpful.

Well, why don't I let Greg work that issue. Most of them are involved in the RF and wireless group.

Yeah, Rob, there's five that we've been developing, and working on. The in-home compensator that we've demo-ed and shown and is currently being beta-tested at very large service provider, and we expect, as we've said from the beginning, to see revenue from that in FY '05. We should see revenue in terms of a prototype order in Q4. And the beta site testing is going very, very well. We're meeting all their technical and cost specs before the time they actually need it. The other one is, of course, the wireless compensator for the telemanics application, same type of product but for the car. That will be FCC approved in February and we will seeing a gain a nice prototype order in Q4, then in production in FY '05. The Jammer, which we talked about again, is designed, developed, and ready to be shipped. One government agency in Mexico has approved it, and we will start producing that in Q4. The quantities, I can't tell you, again, because of lead times of the components, are jumping out to 12 to 16 weeks. The final two, the GSM booster for Europe, we have the order, we have the design complete, and we are shipping that unit in Q3 and Q4. The digital broadcast pellet for worldwide, that is designed and developed, and we are already shipping that. We had a nice shipment month here in December, and we'll ship that also in Q3 and Q4. So that's the status of the five major ones. The first three are big numbers, but we don't expect those numbers until FY '05.

Okay. Then I guess the in-home compensator, how is that planned to be, you know, I guess released to the market? Will the service providers, you know, fund part of the cost of this for the consumer? Have they started talking about how they're going to market this product to the customer base?

You know, they're kind of tight-lipped about that. Our opinion is the fact that we feel they'll subsidize it themselves to increase their subscriber base. They've actually put a cost, what it costs to get a new subscriber, but also when you lose one, to get them back, and it's double the cost of the compensator. So our opinion is they will subsidize it to get it to the market, but we're planning still to work through the service provider and use their logistic channels to bring it to market. We're a design company, and that's where we invest. We'll use somebody else's logistics channel to get into market. Of course, you get the family discount, and I'll deliver one to you.

Thank you. One last question. Just the gross margin trend, Asia is your largest growing geography, and it's the lowest gross margin. So as that continues to grow as a percentage of sales, it will probably be difficult for the company to increase gross margin, but maybe you could just talk about that a little bit. Do you believe that, you know, the gross margin trend can start moving upwards, even with Asia becoming a larger percentage of sales?

Rob, what happens, we're fairly new in China, particularly -- and that's the largest portion of the business, business was started there five years ago, and the growth has been phenomenal. But because of our model, we initially go in to sell components, and then once the customer becomes comfortable with our engineering expertise, we go up the next step, and we help them design the circuit, do custom work on the component, special testing selection. Then as the relationship develops, we work into a position where we start to actually do prototype design on the assembly, and then hopefully we get into the position where we actually do the manufacturing of the assembly, the amplifiers and the pallets. So you start out initially with a component cell where the margins, as you can see, are 20%, selling a commodity component. By the time you work up to the amplifier, the margins are 35%. And it normally takes several years to build that relationship, and the design of these engineered solutions products are six to 18 months on a new project. So the answer to it is, is we have to get more of the engineered solutions product through the channel. China is obviously the latest one to come on line with those kinds of products, and as that happens, the margins will move up. But in the interim, as the business increases, we're selling components there, and it's low margins. So for several quarters it's going to continue to have an impact, then as some of the engineered solutions get through the channel it will improve.

Okay. That helps. Great quarter. Thanks again.

Thanks, Rob.

Next question is from Walt Liptak from McDonald Investment. Please go ahead.

Thanks, Ed, Bruce, Dario, and Greg, and congratulations from me as well. Nice quarter.

Thanks.

Just going back to Rob's question, you know, in China, they're talking about some of these new China start-ups replacing some of the incumbents, like Ericsson, Nokia, Nortel. Are you working with local China manufacturers of wireless infrastructure or exclusively with the traditional ones?

Bruce and Greg just came back from China, so I'll let Greg work on that, China.

We deal directly with all the large OEMs, [Waway, Vingoo, ZTE], China Eastcom, and that's where a lot of our growth is, in terms of the component side. We just spent a week over there. Bruce traveled throughout China, and there are numerous opportunities that are coming because of the component design that we have done in the last couple of years for engineered solutions opportunities. Mainly focused on PHS, which is the latest protocol that's going to be very active in China. So, yeah, we deal directly with them. Some in cases we're exclusive with people like [AnaDigix] and [Maycom] to support that, but, as Ed mentioned, it's a great stepping stone for engineered solutions.

Let me comment on what both Ed and Greg said after having spent the last week or ten days over there. First of all, we went to three of the cities where we have three of our larger branches. There's a new one in Chengdu, which is just starting out. We didn't go there. But I'll tell you, a major focus of the trip was related to looking at developing a strategical plan to improve the gross margin, and with two areas. One in -- by the way, most of the business over there is primarily RWC business. We started that way there, and traditionally that's not the way we normally start in a new geography. It's usually starting with more of the aftermarket product, but we've taken advantage of the market there which obviously is heavily involved in RWC and so forth. We've hired a technical engineer who is going to drive the sales of engineered solutions products throughout China. The person is on board with a very good background, and we feel very optimistic about that. And we're also working with them to diversify some of their sales to get more of the business in terms of some of the other SBU's, primarily in terms of IPG as well as DSG.

Okay. Going back to the wireless group and the sequential order improvement of 37%, if it's largely component orders, should we see sequential improvement in the wireless group of close to 37% in the following quarter?

Oh, Rob, thanks -- I mean, Walt. You know, the bookings are very, very strong, and the most enlightening part of that is we had such a strong booking quarter in Q2 of last year, but we're still up over prior year. So -- but part of that has been the digital broadcast pallet, the GSM booster, that's the above 30% margin stuff that we have [INAUDIBLE] to have in terms of engineered solutions. So we will be 37%. These are forecasted bookings. But we'll continue to see growth better than we have with the 7 to 8%. It will be double-digit growth.

Hey, Walt, I just wanted to chime in and just mention the fact that a lot of those bookings are for business within the quarter. So as you know, we've talked before, you can't just look at it as what's going to happen in the next quarter, because a lot of it had to fill in what we did for the second quarter.

Okay. I think I got it. We'll stay conservative. And you mentioned in -- while you were talking about bookings and wireless, I think Bruce mentioned this, that Maycom modified their franchise agreement to include, I believe it was Asia. I know that Maycom in the past has been a very large customer. I wonder if they are your largest customer what, revenue they're running at. You were subtle about mentioning this, but is this a big deal?

Yeah, it's very big, but it's all part of a long-term partnership we had with them. Maycom is our largest supplier; we're also their largest customer. They just took our model and realized it would make more incremental growth to them if they made us exclusive, so they're in the process of expanding our agreement to make it exclusive, preferably today in Europe.

Can you quantify what kind of incremental revenue we might see from this?

Well, you know, it's very similar to our competitors going out of the business in terms of [Avant, Narrow, and New Horizons]. There will be a time frame when these people have placed large stocking orders to take care of existing business, so we'll start seeing the incremental revenue, we feel, at the end of Q4, beginning of FY '05. But today we do about 60%, 65% of their RF and wireless distribution business.

Okay. All right. Thanks. Then for Bruce, on the SG&A at 19.8%, I realize there's, you know, some accounting that goes into that, but in the past I remember that, you know, premark or premier were running at 17 to 18% SG&A to sales. Can Richardson run at that kind of a level, or what is the long-term target for SG&A as a percentage of sales?

Merry Christmas. The only number we've publicly quoted has been sub-20, and I think we did 18.8, I believe, I think it was FY '01. All I can say is this: We're running the business today based on ROA. We've put a lot of emphasis and pressure on the SBU's and the sales organizations to achieve their targets from that standpoint. We've held the expenses down. We're still investing in people; we're investing in China, Asia-pac, as an example. And I think what's going to happen now is we're going to realize the leverage from the top line, which, of course, we've been working on for the last two or three years, from that standpoint. But I don't have a number specifically that I want to quote at this time.

Okay. All right. And I apologize for jumping around here a little bit, but, you know, you said that there was a letter that went out from, you know, some of your customers worrying about parts shortages. Are you seeing any parts shortages on the wireless infrastructure side?

No, we have, with the downturn, put in numerous, and I mean numerous, check points to make sure we have the right inventory, not just reducing our inventory but making sure we have the right inventory in stock, and we have not seen that to date. And, Walt, you're very familiar with our DOQ system, and we use that. That in itself is probably one of the best forecasting systems in the industry because we buy and track by design-in, not by forecast, so we are buying towards the number of design wins that we have. So we haven't seen any shortages yet, but we'll continue to watch it daily to make sure our customers are taken care of.

Okay. Thanks a lot, guys.

Thanks, Walt.

Next question is from the line of Steven Lewis from Lewis Capital Management. Please go ahead.

Concerning running the company for ROA -- concerning running the company for ROA, what is the ROA for the last 12 months?

The way we've been calculating it, it's a formula. It depends how you calculate it, but we've been looking at just net income, including interest, over total assets, and it's been like 2 to 3%.

Is there anything in the bonus calculation that depends on ROA?

Yes, there is. There's a component for the business unit managers, there's a component of their incentives that is based on return on assets, yes.

What does the company have to achieve this year for maximum bonus?

We targeted -- well, we actually haven't published the number that's our internal budget, so I really can't disclose it.

Is there any change in the tax rate outlook? Looks like it's running a little over 35%.

No, I would expect to the hang out around 36.

What is the cash flow for the -- operating cash flow for the quarter?

Well, we did about -- actually, there was 3 million in free cash flow last quarter, and like I quoted, it's approximately seven year-to-date, so around the four, Mark.

4, so we add 6.6 from the first quarter, so that's 10.6, minus 2.5 of capital expenditures? Is that sounding right so far?

It was 7 through two quarters, and that included cap ex. It was 7 of free cash flow, if you will.

And the dividends of 500,000 each quarter?

Yeah.

Okay. Where are you as far as most restrictive covenants on any -- either the divestures or any bank debt?

We're fine. We have no covenant issue.

How much room do you have to borrow if you wanted to under the covenants?

We've got an outstanding credit line of 102 million, and we've drawn down approximately 64 right now.

How much further could you go under the -- what your results were for this quarter and 12 months?

Excuse me?

Can you draw down the whole 102?

Well, there's a borrowing base requirement, but, yeah, we could draw down the whole 102.

Thank you.

Thank you. Barb, do you have any more questions?

We have another one from Diana Monty from Lumus Sales. Please go ahead.

Hi, Diana.

Hi. How are you?

Good.

Just a basic question about China and Asia. What percent of the product that you're currently distributing are actually manufactured in Asia at this point?

That's a good question. I think it would be small, don't you?

Yeah, it's less than 5% for RWC. As a strategy, we align ourselves with the top one or two supplier -- or manufacturer of a specific component, and today that's mainly based in North America and Europe.

Okay. So as more manufacturing is moving to Asia, it sounds like they still need you as a distributor, there's not a way they can bypass you.

No, most of the products are western origin that we're selling there, so you're absolutely right.

Okay. And of your sales into Asia, can you just give me an idea of the -- how much go to contract manufacturers versus manufacturers that are making their own products?

I think overall we figured about 15% was penetrate manufacturing.

So very little.

Uh-huh.

Great. Thanks. Can you just talk about the impact of currency on your results and how you expect the weakening dollar to continue to affect you?

Actually, you know, there was -- if you look sequentially, you know, there hasn't really been a big impact sequentially, it's been relatively flat, but of the 7.6 that was like year-over-year, just to give you an idea, of the 7.6% growth in sales year-over-year, you're talking about like 4 to 5% from currency, but it's very, very difficult to say. That's the mathematical answer. But unfortunately, in some of these locations like Europe, for example, we actually sell indexed to the dollar, so it's a little bit deceiving and very difficult to tell. Even though we're selling in euros, since our sales contracts are sometimes, probably around 30 to 40% of the time, indexed to the dollar, it's very difficult to tell what the actual impact of currency is.

Okay. Can you give me an idea how much of your cost basis is in U.S. dollars? You know, your operating expenses.

Yeah, it eats around -- if you look at cost of goods sold, it's around 70%.

Okay. Great. Thanks a lot.

We have a follow-up question from Bill Benson from William Blair. Please go ahead.

Hey, guys. Greg, I don't think you should be hedging on the wireless thing, I think you should tell us you're going to do 37% growth this year.

Well, Bill, we start our budgeting process for FY '05 in 30 days, so with the guys sitting here, I don't know if I want to talk like that.

Only Packer fans hedge like that.

I'm putting on this weekend's game, not my budget.

Couple of quick follow ups here. Can you talk about maybe some of the impact from the new wireless hires so far, if there's been any sort of maybe update there? Then the second question is if you could just talk -- obviously, the orders were up -- the bookings were up huge sequentially, relative to sales even, so I'm just trying to get a feeling on how that pattern evolved throughout the quarter. Did it strengthen at the end of the quarter, was it strong at the beginning, or was it pretty even throughout?

In terms of the new wireless hires, Bruce mentioned one, the former design engineer from Motorola that we hired to help our engineered solutions in China. And then in terms of the people we picked up that we -- key people from the demise of the RF groups of Avant and Arrow, we are seeing incremental sales from that now. We figured it would be about six months, but the dollar amount is not anywhere near reporting, but the bookings and backlog has -- has nearly paid for themselves, so we're very happy with that strategy.

Great. So what about the 37%?

What about the 37%?

(laughter ) I'm just kidding.

November was our strongest month in two-and-a-half years, and our current backlog is the highest it's been in two years.

Okay. So --.

I don't know if it's enough for 37%.

I know, it's a little aggressive. But what about the pattern through the quarter? Every month, November was the strongest, or --.

Yeah, every month sequentially grew and our book to bill the last four month have been well over 1.

Okay. Great, guys. Good quarter again.

Thank you.

And a follow-up question from Walt Liptak from McDonald investment. Go ahead.

You know, I was only joking about the 37%.

I'm glad you called back and said that, because I don't think you were.

Yeah, we aren't, though. Bruce and I wrote it down.

The question I have is on the display segment. And, you know, it sounds like, in terms of visibility for next quarter, you don't have the bookings yet. Is there something in the pipeline that gives you confidence that the third and fourth quarters are going to be back to normal?

Well what, we do, since this is a project-based business, we get an update every month in terms of the projects that are in the queue, and there's a significant amount of those. And the SBU management is predicting that most of these will come to fruition. The only hedge is that you asked about, or somebody asked about shortages, and one thing we are experiencing in display, which everybody is, and that is that there is a shortage of 15 and 17-inch LCD monitors today, and primarily because a lot of this has been diverted to the consumer market for Christmas and the holiday season. Once that's over, of course, maybe things will return to more normal situation, but that's the only concern we really eve got at this time. I think the business prospect look very, very good, and the availability of product is the only hedge we have right now.

Thanks a lot, Greg. Great quarter again.

Again, any additional questions, press star one at this time. There are no further questions. Please continue.

Okay, Barb. Well, we thank you all for participating. Obviously we're really encouraged with the improved business environment, and look forward to increased sales and earnings going forward and hope some of these projects get booked, things will be much better. Anyway, we want to take this opportunity to wish you all a very merry Christmas and a happy, healthy, and prosperous new year. Thank you.

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