Molex, Inc. F2Q09 (Qtr Ending 12/31/08) Earnings Call Transcript

Molex, Inc. (MOLX)

F2Q09 Earnings Call

January 27, 2000 5:00 pm ET

Executives

Neil Lefort - Senior Vice President, Investor Relations

Dave Johnson - Chief Financial Officer

Martin Slark - Chief Executive Officer

Analysts

Brian White - Collins Stewart

Jim Suva - Citi

Matt Sheerin - Thomas Weisel

Ryan Jones (in for Amit Daryanani) - RBC Capital Markets

Steven Fox - Merrill Lynch

William Stein - Credit Suisse

Shawn Harrison - Longbow Research

Carter Shoop - Deutsche Bank

Presentation

Operator

Welcome to the second quarter 2009 Molex, Inc. earnings conference call. At this time all participants are in a listen only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) I would now like to turn the presentation over to Mr. Neil Lefort, Senior Vice President. Please proceed, sir.

Neil Lefort

Thank you, Nakita, and thank you to all of our participants for joining us today. With me on the call are Martin Slark, our CEO; Dave Johnson, our CFO and Liam McCarthy, our President and COO.

This call is being recorded and is available in telephone replay by dialing the number supplied in the press release. The call is also available live and in replay by accessing our website. Please note we have added slides to our presentation and those wishing to view the slides can do so on our website under the investor section. As usual, we would like to limit the call to one hour and in the Q&A mode we would like to ask for one question per participant and one follow-up question. Thank you.

Let’s begin with page one and I’m going to have a partial reading of our Safe Harbor statement. Statements in this call that are not historical are forward-looking and are subject to various risks and uncertainties that could cause actual results to vary materially from those stated. Words such as expect, believe, intend, plan, project, estimate, and similar expressions are used to identify these forward-looking statements. Forward-looking statements are based on currently available information and include among other things the discussion under outlook.

Forward-looking statements are based upon assumptions as future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed in these forward-looking statements.

As a result, this release and this call is only of a state and Molex disclaims any obligation to abide these forward-looking statements or to provide any updates regarding information contained in this release or call resulting from new information, future events, or otherwise.

Now turning to page two, page two is an explanation of during the call we will be using non-GAAP financial measures and there’s an explanation of those in our investor site.

Now, I’m going to turn it over to Martin who’s going to review the revenues.

Martin Slark

Thank you, Neil, and good afternoon everyone. If you’d now like to turn to page three, which is the chart showing our quarterly revenue performance. Revenues in Q2 was $667 million, which was within our revised outlook of $650 to $670 million, but was down 21% from the prior year as demand for our customers declined across basically all industry segments.

As we are all aware, it’s difficult in this environment to have much predictability in revenue in orders and it’s also difficult to analyze the December quarter results by industry in any great detail. Our customer declining revenues were compounded by the early manufacturing shutdowns for the holiday season.

If you now turn to page four, we’ve illustrated our change in revenue by industry to the December quarter. The automotive, an industrial market, experienced sequential decline of 27 and 20% respectively. Automotive results, the declining global cost sales, which have been more publicized, but were further reduced the suppliers by sharp cuts in car productions.

Industrial results were impacted by decline in residential and commercial construction, as well as by lower demands, factory automation, as the manufacturing sectors closed.

Several previously stronger areas such as petroleum exploration and refining have also declined. As the price for oil has delayed many plans. This is increasingly driven by the value net book segment of the market.

Demand is holding up better in the storage market. We’ve seen a lot of capital spending by their customers, especially financial institutions coming into these in the private sector. The mobile handset business has relative stability in the high end part of the phone market helped by expanding content at the leading small phone manufacturers.

Demand in both the low and mid range phone considerably reduced during the quarter. The decline in consumer electronics was perhaps the most difficult for Molex as it occurred in a sector that is normally a great strength for us and is normally very strong in the December quarter.

Asia Pacific manufacturers in particular remain very cautious and procuring components that they’ve adjusted a rapid decline in their exports to North America and Europe and now declined in their own domestic markets.

As mentioned on previous calls, we have growth initiatives extending beyond the current customer base. The results in the December quarter, our business grew by 10% at the 50 target customers included in our focus account program. These accounts are primarily second to your OEMs, where we currently have very low market share.

Another growth initiative is to qualify for preferred status and emerging OEM located in strong geographies and markets and recently we were selected as a preferred supplier by a leading Asia Pacific telecommunications and network infrastructure provider.

In addition, with our strategy with automotive must be broader than the significant cost reductions already implemented and those planned in the future. We were pleased our initiatives to increase our content with Asian automotive companies recently generated approximately $35 million in annual orders.

And now looking to page five in the change in orders by industry, there is basically a similar pattern to the one you just saw for the revenues, although it is even greater. The year-over-year numbers represent a comparison to a strong level of $859 million, which we reported one year ago, which at that time was a 1.02 and we were in the middle of the three quarter. Orders in the December quarter were very low and leading October with weakness getting significantly worse in November and December. The order rate of incoming orders for those months was approximately $243 million on the October month, $174 in November, and $145 in December.

The year-over-year reduction in automotive reflects the revenue drop at our major customers; however, for component suppliers, the decline by work in process or finished goods inventory reductions.

Many of our customers closed manufacturing early in December, preferring to sell out existing co-inventory.

The reduction in consumer electronics fairly well follows the revenue drop of our customers, where three major customers have already reported operating losses in December. The normal seasonal pickup in this market simply did not occur. Instead, customers [cut] manufacturing early opting to sell existing finished goods inventory.

The data and telecom markets followed similar trends with exception of the storage area, which remained positive in growth. The other major end markets struggled with declining demand.

Our orders were also reduced by inventory adjustments at the EMX companies, which we manufacture today in telecom OES.

The inventory adjustments in the automotive consumer electronics data markets were not resulted in over-supply of connectors, rather adjustments by our customers to the manufacturing base to lower the level of their own finished goods.

As this process takes place, orders for components declined at a faster rate than our customer sales. We experienced a similar situation with distribution sales channels, but here the decline is in connected. For example, a major distributor reported for the December quarter at the mid-point of sales, which represents the sales in Molex connectors declined only modestly. At the same time, at point of purchase, requirements for Molex declined by 17%, clearly indicating their desire to drive down inventory in the quarter.

One positive note on inventory adjustments is that the situation can turn around fairly quickly, but normally only after our customers see the stabilize or hopefully increase.

If you go to page six, we tried to summarize at least one chart. Many of the items that we’ve mentioned that we believe have impacted our orders this quarter. The pie chart you see on page six shows the actual or estimated hardware sales declines being reported by our top ten customers. This historically represents between 35 and 40% of our sales and includes suppliers in market such as mobile handsets, data, or networking infrastructure, consumer electronics, autos in distribution.

The weighted average rate placed on the experience base of their business was about 27% decline. This is a bigger rate of decline than our year-over-year revenues, but a lower rate of decline than a year-over-year drop in orders. While these customers are leaders in technology and development, and many of you know who these customers are, it is normal during these periods of uncertainty that they delay introduction of their new applications; however, we have earned their business and they have become top ten customers, because they rely on us as a leader in new connector technology.

We will introduce another hundred new products in the second half of 2009, added to the 113 that we have already in the first half. We believe our ongoing strategy of continuing to reduce new technology will support market share gains and our customers release new applications.

The distribution channel graph gives you some indication on a worldwide basis of how the drop by 27% of our sales to top customers could be magnified by the severe level of inventory adjustments late in the December quarter. Sales to distributors represent approximately 25% of our sales. Sales of our connector products by our distributors to their customers fell approximately 9% on a worldwide basis during the same period. So there was clearly a disconnect between their end sales to our end customers versus their purchases. This indicates a significant reduction in inventory levels for our products and I think that’s been illustrated by the results that negatively impacted orders in the December quarter.

Going forward, we will expect the level of inventory reductions to slow and eventually for replacement to begin as distributors anticipate recoveries. As previously mentioned, we were also impacted by similar adjustments in the EMX channels, which represent approximately 30% of our sales.

Industrial production graph shows on that chart as well, shows that year-over-year declines in industrial production have been more severe in the Asia Pacific countries than in North America. This is most likely the result of adjusting from high historical growth rates in Asia Pacific combined with the building of too much capacity and the severe decline in the region’s export business.

As approximately 55% of Molex’s sales are dependent on customers in the Asia Pacific region. This tends to magnify the current decline in our business; however, Asia Pacific also had a growing population with increasing disposable income and significant currency reserves and a relatively new production facilities. Going forward in the longer run, we would expect Asia Pacific to again lead our sales growth.

These factors in this chart we believe help to explain difficult results, but in all cases we believe a very reasonable conclusion is that they will eventually reverse and help our recovery.

Dave will now take us through the financial portion of our call and I will come back with some closing comments.

Dave Johnson

Thank you Martin. Page seven shows our summary PNO for the quarter compared to the prior year quarter. Our revenue declined by 21% year-over-year and also 21% sequentially for the reasons Martin discussed. This of course put pressure on our gross margin, which declined to 26.4% and this also resulted in an increase in our SG&A as a percent of revenue to 21.7%. I will go through both of these in more detail in a few minutes.

Net interest income decreased to $800,000, due to the combination of decreasing interest rate and an increase in our debt outstandings.

Other income of $18.4 million is comprised of investment income of $4.1 million dollars, plus exchange gain of $14.3 million. The unusually large exchange gain arose primarily as a result of the increase in the value of the U.S. dollar at the end of October. We have substantially U.S. dollar cash and receivable balances in Asia and the sudden increase in the U.S. dollar rate resulted in this benefit.

Our results were driven to a pre-tax loss of $82.2 million by two significant items – a restructuring charge of $39.8 million and an impairment charge of $93.1 million, both of which I will cover in more detail on the following slide.

The other significant impact on our income statement for the quarter is a $14.2 million non-recurring cost reduction relating to a curtailment gain for terminating retirement and medical benefits to reductions to the profit sharing payout for the calendar year, which is ended in December, and reductions in the expected bonus payout for the fiscal year that ends in June.

Finally, our expected tax rate for the quarter was 6.1%, which is due to the impairment charge which is not deductible for tax purposes. Our normalized tax rate for the year is approximately 34%.

Please turn to page 8 which is our GAAP to non-GAAP reconciliation. Starting with our GAAP EPS of a loss at $0.50, we add back the restructuring charge of $0.17 and add back the goodwill impairment charge of $0.53 to arrive at our non-GAAP EPS result of $0.20 per share.

The restructuring charge of $39.8 million is primarily severance costs for the recent reduction in four sections, as well as plants and other facility closures related to our accelerate restructuring program that I will explain in more detail on a later slide.

Due to the deep decline in the U.S. and European automotive industry, we took an impairment charge for 100% of the goodwill that has been reported over the years in that division.

After this $93.1 million charge, our goodwill balance for the company was reduced to under $300 million.

Our balance sheet metrics are on page nine. Our cash balance remains strong at $458 million, despite the stock buyback during the last three months, which amounts to $38 million and acquisitions of about $20 million.

We continue to monitor the health of our customers and suppliers, but we are not concerned about our own liquidity.

Accounts receivables decreased 19% from September, but today has increased to 87 days as a result of the sudden decline in revenue as well as customers holding back and making yearend payments due to holiday shutdowns. We have already seen a catch-up of the slow year in payments in early January and let me emphasize that we have and we will continue to be extremely diligent in following up with customer accounts due to this current environment.

Inventory decreased by $20 million from September, but increased to 91 days and we have increased an increase in inventory days both at our consigned vendor managed inventory sites, as well as our manufacturing and warehousing locations, as the rapid drop in customer demand has outpaced our ability to cut inventory levels in the short term.

The increase in debt, over $300 million dollars, is due in part to currency translation on our $15 billion yen denominated loans, plus additional amounts drawn on U.S. short-term facilities for U.S. cash requirements.

At the end of December, we had $115 million drawn on these U.S. credit lines, which as of now have been paid down to $105 million dollars.

Capital expenditures were $51.3 million and R&D was $41.2 million, reflecting our continued investment and new product introductions, but capital is being further reduced in the last half of this year to reflect the economic environment.

Our gross margin trend is reflected on the graph on page ten. As mentioned, the 330 basis point sequential drop in gross margin reflects primarily the sudden drop in revenue during the second quarter. In absolute dollars, our gross profit was $176 million for the quarter, down 30% on the 21% reduction in year-over-year revenue.

To give you some help in modeling our gross margin movement in times of sudden volume change, I will provide some general comments on the fixed and variable nature of our cost of sales. Material, which of course is 100% variable, is approximately 50% of cost of sales, and the combination of freight and duty, external manufacturing, and direct labor are another roughly 20%. Those later items, including direct labor are not purely variable, but are certainly variable costs over a medium term period.

Based on this, I would suggest that our variable costs of sales are somewhere in the 60-70% range and the balance is therefore fixed in the short term; however, when using this to model break-even scenarios, please understand that there are many other variables, including the ability to impact the fixed cost of sales in SG&A over the short tem. Commodity costs, price erosion, and very importantly, the mix of sales with inherent margin profiles.

On page 11, we show our SG&A trend as a percent of revenue, which increased almost 200 basis points to 21.7% in the quarter. We have added green bars to show the absolute SG&A dollars this quarter since the percent chart does not properly indicate the tremendous changes that we have made to our SG&A structure.

We reduced our SG&A costs sequentially by almost $22 million, of which $9.2 million related to the non-recurring benefit changes that I mentioned a few minutes ago. But we didn’t stop with the December quarter. In January, we implemented an additional global reduction in force, impacting 1,200 jobs, the majority of which were indirect SG&A, and we have made other changes to benefit the discretionary costs effective in the current quarter above and beyond the non-recurring benefit costs we have discussed. Effective February 1, we will reduce the pay of salary employees company wide between 5 and 20% of base dollar rate, depending upon their level within the organization.

Of course, we cannot just cost cut our way out of this economic downturn, but we are aggressively attacking our cost structure in ways that we have never done before.

Page 12 illustrates the trend in capital expenditure as a percent of revenue. Again, the percent analysis does not show the absolute reduction in capital spending, so we have inserted the green bars to show the real progress that we have made.

We intend to keep our capital spending in the $40-$50 million range for the balance of the year and we will only spend on necessary new product introductions to support the customer programs, which will enable us to take advantage of the significant operating leverage when our markets eventually return to normal demand levels.

Please turn to the restructuring slide on page 13. Since last quarter, we have been very busy. We have responded to the economic downturn with further expansion and acceleration of our restructuring activities. Fortunately, we already had a robust process in place for restructuring actions and we were able to act quickly to initiate many new and significant restructuring projects. The top chart shows the restructuring costs and annualized savings by fiscal year. We have never provided so much detail before on the timing of these actions, but we are sufficiently far enough along on some of the major items, that we feel the visibility to both cost and savings allows us to be clearer about the path forward.

The total restructuring costs are now estimated to be $220 million and the total annualized savings have grown to $200 million.

The chart below shows the current year broken out by first and second half, showing the acceleration in savings in the second half of the year. Please also note that the incremental savings in fiscal 2010 increase significantly as a result of the actions that were announced and will be announced in fiscal 2009.

Please turn to page 14, which details the recent quarter actions for our restructuring program. Between September and December, we reduced total headcount by 5,600 employees, our 17% of our workforce. In January, we announced the reduction of another 1,200 employees, and a targeted reduction in force which impacted all divisions and functions worldwide.

This, plus additional reductions, related to restructuring projects already announced and in process, will bring the total reduction in the March quarter to approximately 2,500 employees or a total 25% reduction of our workforce between September and March.

With respect to the specific actions that we can talk about at this time, we have announced the closing of additional automotive plants in Germany and Slovakia and in Shanghai China. During the last call, we mentioned the closure of a plant in Japan for our micro products division and the consolidation of two Canadian sites into one, as well as the closure of a warehouse in Texas for our automation and electrical products division.

These are very difficult times for many hard working and dedicated employees, but the changes are necessary to size the organization to the demand in environment that are currently facing.

And now, I’ll turn the call back to Martin for some final comments before questions.

Martin Slark

Thanks, Dave. If you could now turn to page 15. It’s obvious that the current uncertain global economy is making it very difficult for our customers to provide specific timing for recovery. In addition, lead times are further compressed resulting in approximately 60% of our revenues being ordered within any 30-day window.

So simply stated, we currently have very limited visibility and I think I’m sure you’re hearing a consistent message from many of our customers along those lines too.

As a result, we have used a very wide range for our March quarter outlook and initially estimated revenue in the range of $500-$570 million. As previously mentioned, our orders in the December quarter were $562 and were front-end loaded. The mid point of our revenue range is lower than the December orders, but at this time we do not know just what channel inventory adjustments will be made for the ongoing basis this quarter or when they will end and we have assumed that they will continue into at least February.

Molex, as you know, also has significant business in Asia and trainees new year on January 26, many of our Asian customers have closed the last week in January and the first week in February. We do believe that order should start to improve later in the quarter as customers begin production in facilities temporarily closed for either December or for the Chinese New Year period and after they utilize existing component inventory.

Should this occur, we would certainly expect our revenue to improve in the June quarter. For March, and given the wide range of potential revenue and difficulty in quantifying the impact of product mix, we did not provide an outlook for earnings per share, but we have provided the full cost, the cash flow for the quarter. Cash flow from operations is expected to be approximately the same level as the second quarter or approximately $100 million at the mid point of our revenue range.

Free cash flow of capital expenditures should be approximately $50 million at the mid point of our range.

As Dave mentioned, we’ve significantly reduced our capital expenditure estimate for fiscal year 2009 and we [full cost] in line with revenues a modest reduction in the absolute dollars that we’re spending on research and development. However, we’ll continue to invest in new products to support customer programs and ensure that we retain a strong competitive technological advantage.

Finally, we announced today to our employees a major change to our global division structure. We will consolidate down from our global product divisions into three global product divisions. At a high level, out of the next six months, our transportation product division will combine with our commercial product division and our automation and electrical product division will combine with our integrated product division. This is a further initiative to streamline the organization and will be accompanied by additional headcounts and cost reductions that have not yet been factored into our restructuring program.

Once this restructuring is complete, we will in effect have two connected divisions, one value added division, and then a global sales and marketing organization that will be selling our products on a worldwide basis.

In summary, the recession is certainly the most difficult that I have seen and that we have managed through as a company. While our current results are extremely disappointing, we are very proud of our organization and of our employees for the determination and loyalty that they continue to show.

We are very fortunate as we go into a very tough economic period to have a strong balance sheet and the global scope to work such that we can position our company for strong recovery when economic conditions improve.

Now, let’s open it up for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Brian White - Collins Stewart.

Brian White - Collins Stewart

I’m wondering if you could talk a little bit about when you think you can get back to break even levels and what sort of sales range we should think about?

Martin Slark

Brian, the forecast that we have and total forecast that we have from our divisions show that we would be above the break even position in the fourth quarter this fiscal year. That is accomplished through a combination of achieving the cost savings that we talked about in the restructuring plan and our projected increase in revenues that we’re expecting to see based on some recovery after the Christmas/Chinese New Year period. First indication will be what other run rates or bookings in March. Some portion of the slowdown that we saw in the October, November, December period was obviously an inventory correction which the underline weak economic climate. How much of that? It’s hard to tell. So certainly our belief right now, based on the fact that I talked about, would be that we would be above break even in Q4.

Brian White - Collins Stewart

Martin, if you look at all the markets were tough here in the fourth quarter, but if you look at a calendar 09, what markets are the most optimistic or should hold up the best and what markets do you think will be the most challenging over the next 12 months?

Martin Slark

I have to tell you that I think Molex along with a lot of other companies is looking at that, trying to understand which customers frankly within those end markets are going to continue to do well. I think when we look at that we assume that within the data market that data storage is likely to continue to be strong, because even though companies like Molex, for example, can cut back on their computer equipment renewal, the amount of data we store these days, there’s an ongoing need for that. And there’s a lot of legal requirements out there to store increased data.

We think that telecom infrastructure has good potential, because when you look at some of the government stimulus that is going on, and in particularly in Asia where the Chinese government talked about billion dollars plus going into the telecom market and the release of various licenses. There’s a lot of infrastructure we put in place there. So we think telecom infrastructure has some potential too.

We think the medical market could be good and we also think that alternative energy will be good. Then when you look at the cell phone market, I think there’s an increasing trend here to obviously replacement smart phone devices and there was some real segmentation I think in the cell phone market in that the medium range was very challenged the last quarter, but some selective smart phone suppliers did very well and I think you’ve got content on those phones, you can do quite well. But I think the cell phone markets lower and mid range will be challenged and I think the consumer markets will be challenged until people see their home prices stabilize and consumers feel confident about spending more money and I think finally talking about automotive, I don’t think expect to see much of a recovery in North America in automotive. Any recovery there is probably going to apt to based around working closer with the Asian manufacturers and emerging markets.

Operator

Our next question comes from Matt Sheerin - Thomas Weisel.

Matt Sheerin - Thomas Weisel

I appreciate the directional guidance and on the expense side, just getting a sense of what the starting point is coming out of December quarter, if you back out that one-time gain. So coming out of the quarter then, the SG&A would be $155 million?

Dave Johnson

The gain was about $9 million in the second quarter. It’s not a gain so much as it’s actions that we took to reduce our cost structure. Now there’s others. If you look at our proposal for further restructuring, there will be others including salary reductions that will take place in the next quarter that will be new in this quarter. So you back out the $9 million from our $145, but I think we’ll have other reductions that will probably offset that. You take the $145 and you add back the $9 to get you above $150, but then you probably have further reductions of about that same level. So about the same level of $145 I think.

Matt Sheerin - Thomas Weisel

Martin, and I know you and the rest of the staff have been at the company for a long time, can you recall a time when Molex is actually reported an operating loss in the quarter?

Martin Slark

Operating loss, no. I can remember I think an occasion when we’d taken some write-offs, but not an operating loss, and of course we’ve yet to report an operating loss and obviously as you can tell, we are doing everything we can to try and avoid that in the third quarter. I can tell you in 30 years of this industry, I think the dramatic reductions in bookings that we saw in the second quarter, and the interesting part about it, it wasn’t just the second quarter. It was really in November and December. There was just a huge fall off in those two months and so I think we have tried to project that forward and when you see that big of drop. I mean when you think about the fact that sequentially bookings were down 29% in the second quarter, you remember when the tech bubble burst, our industry went down 20% in 01 and another 10% in 02. They were individually the worst two years ever on record and the first primary industry went down two years in a row and it dropped 30% over two years. We effectively saw a 30% drop in one quarter.

So I think trying to adjust your cost structure to that within a one quarter period is extremely challenging. So what we’re trying to understand is some portion of that with inventory adjustment is what is likely to be the sustainable revenue level as you go into 09, get our cost in line with that and look at what market segments can we focus on to get growth above that level.

Matt Sheerin - Thomas Weisel

Just as a follow-up about that inventory adjustment that’s happening, what areas or markets will you be looking for for signs that we’re out of the woods or at least some light at the end of the tunnel there. Is it distribution? Is it your big OEM customers?

Martin Slark

I would say both of those too. I would say distribution and then the major customers that we have, managed inventory, got that, and direct computer linkage, and I think that we also have pretty good contact with the contract manufactures and there’s some correction going on there too. So I think we have to look at those three major segments – distribution, majors OEMs, and CN.

Operator

Our next question comes from Jim Suva - Citi.

Jim Suva - Citi

Can you touch upon, I noticed your inventories came down about 4% for the quarter. Given your pre-announcement in early December and now the outlook for March being down 15-25%, can you connect the dots as why inventory wasn’t down more in line with the revenue outlook?

Dave Johnson

Yes, Jim. The main reason as I said in the prepared comments is that our revenue dropped so suddenly at the end of the quarter. Certainly we are working on bringing our inventory down now, but we just get caught with that sudden drop off and that’s what spiked the days up.

Inventory was down in all areas and Martin mentioned the VMI inventory. That was actually down also in terms of absolute dollars, but up as a percent in terms of days.

Martin Slark

Jim, when you look at the number of days in inventory that we have and the calculation that we use, it was around 78 days in September. It stayed at 78 and then 80 days for November. It spiked in the month of December and I think a big chunk of that in the month of December was many of our customers in effect closed for two weeks. And so, I think that was the big factor that impacted us. And so, as we started to see the orders flow in November, we cut back on inventory and production, but that sudden drop off in December was certainly one of the things that impacted that.

Matt Sheerin - Thomas Weisel

For uses of cash, you have a dividend out there. You also do stock buyback and you also got acquisitions going. Can you let us know, in this environment, you’re also doing a lot of restructuring, where should we see cash use as going priority as of such?

Martin Slark

We intend to maintain the dividend. There’s been no discussions at all about any change there. We’ve slowed down the stock buyback and take a wait and see attitude on that and in terms of acquisitions, we’re looking at some smaller, what we think are highly impactful acquisitions for us, but we’re not looking at any large acquisitions at this time.

Matt Sheerin - Thomas Weisel

Tax rate going forward or maybe best way to look at it like a tax dollar amount?

Dave Johnson

The tax rate going forward I think will be about $0.34 as we said the normalized rate that we have and we put that in the release.

Operator

Our next question comes from Amit Daryanani - RBC Capital Markets.

Ryan Jones in for Amit Daryanani - RBC Capital Markets

You mentioned channels you’ll be looking at to see for when we might be out of the woods, but any indications on what those inventory levels are like right and is it two quarters from now that we might see those inventories depleted enough that they have to come back to buy?

Martin Slark

I’d like this comment first of all, I think when those of you on the call remember the tech bubble bursting, I think during that period the management of inventory and supply chain was no where near as tight as it is now.

The inventory is being better managed today and the supply chain is a lot tighter than it was four or five years ago. So I think the correction period is going to be quicker, but starting to see that trend late now, I think the stronger end demand is the function of getting the end demand there. I think we can burn through the inventory issue relatively quickly in terms of a couple of quarters, but I think in order to see that trend late to higher end is a function in demand.

Neil Lefort

Let me mention that we’re packing about two different inventories here. When we talk about the distributors, we have very good distributor inventory and we know point of sale and point of purchase as Martin showed on the chart and we know they’re actual inventory component. That’s where we saw a big drop late in December as the distributors’ point of sale was substantially higher than our point of purchase. So Dave brought down component inventory. We have better visibility there, because we can talk to our distributors and we can see the relationship of point in purchase and whether it’s increasing.

The other inventory that we’re really talking about is finished goods and work in process, not of connectors, but of our customers’ inventory somewhere in the supply chain, either with the OEM or with the contract manufacturers and that is much more difficult for us to be able to forecast when that’s going to get more in balance. Certainly the customers shop production in December, so they would not build their inventory, and also that really no one wanted to hold inventory at the end of that period.

So that’s more difficult, that part, and I think the leading indicator there is when you start hearing better news from the top ten customer list, then it’s pretty clear that they will a) start increasing production and buying more connectors, and b) start introducing more of the new products.

Operator

The next question comes from William Stein - Credit Suisse.

William Stein - Credit Suisse

Can you talk about trends in ASPs? Have we started to see that road maybe more than long term trends yet?

Martin Slark

Actually we’re able to track that pretty accurately through actually three systems and the price erosion rate actually in Q2 was slightly lower than it was in Q1. As you know, historically price erosion in our industry has averaged 5% or more. It’s down in the 3-4% range and actually trended down slightly in Q2.

I think part of that is that customers were various themselves in end demand and trying to adjust their own inventory and of course the dramatic reduction we seen in raw material cost has yet to flow through to raw materials.

So I think Q2, we were very pleased with what we saw there. I think if the demand environment stays low, you could see more pricing pressure obviously as we move into the next calendar year.

William Stein - Credit Suisse

Is the guidance you provided contemplate accelerating a fee erosion or kind of normal or current level?

Martin Slark

We’ve assumed in the guidance average price erosion. So I would say last quarter was slightly below the average and we assume average going forward.

William Stein - Credit Suisse

Timing and size of the acquisitions?

Martin Slark

The acquisition was completed in the early part of the quarter. It’s about $25 million in sales and is focused on some very sophisticated micro miniature technologies that we believe will help us…it’s $25 million in annual sales.

William Stein - Credit Suisse

The commentary, it sounds like there’s a bifurcation in demand in handsets where we’re seeing high end smart phones do very well. Is that concentrated in one or two customers or more broadly across OEM base?

Martin Slark

It’s broadly across the whole end market. I think the good news there is obviously the content in those phones is higher. I think, as you know, even though everybody has said that that part of the segment, particularly in North America where you’ve got saturation as people replace their devices, they’re replacing them with more sophisticated end products. There’s been some clear winners in that market.

Operator

Our next question comes from Steven Fox - Merrill Lynch.

Steven Fox - Merrill Lynch

What’s the for the next couple quarters?

Martin Slark

About 60 this quarter and it will trend down just slightly.

Steven Fox - Merrill Lynch

Martin, you referenced the production shutdowns across a variety of serve markets. What are you seeing from the customer now? I mean are you seeing things come back up at a steady pace or are customers planning to bring back partial production this quarter?

Martin Slark

We saw a lot of customers close down for the two week period over December and we saw a number of companies in the automotive market expand those shutdowns into January and I think that has been pretty widely publicized.

Then for the Asian customers, we’re seeing the Chinese New Year shutting the last week in January and the first week in February.

We saw some stability in the order rate in the middle of January and so I think in terms of where we go from here, our expectation is the first full month we’ll see of orders would be in March.

Steven Fox - Merrill Lynch

The Chengdu facility, if you use that as sort of a benchmark for some of the repositioning, how would you describe some of the initiatives underway? If I recall, that was going to be an automotive dedicated site. How do you adjust that facility as an example of what you have to do sort of on the fly here to adjust a new world, per se.

Martin Slark

Actually the intention with the Chengdu site was always that that would be a campus site that multiple divisions would use. As you know, Chengdu in the west of China has a cost basis to 25-30% lower than either southern or eastern China, but actually equally importantly has a very stable workforce in that many of our employees in southern and eastern China have moved from other parts of China. And so, we think the stability of that workforce really helps us in Chengdu and the plan there would be to have multiple divisions on their campus. We can leverage things like the plating, test labs, and things like that and tool rooms across the broader base of production.

Operator

Our next question is a follow-up from the line of William Stein.

William Stein - Credit Suisse

I think I missed this in discussion on the debt. I think all the debt you have is in short terms. Perhaps in the September timeframe, can you update us on what the plan is with that?

Dave Johnson

The two areas that we have debt is in Japan. We have a 15 yen facility which is due in September and it’s a facility that can’t be prepaid, but our plan is to work with those banks in Japan and to re-negotiate that and to replace that sometime in the July timeframe.

The other debt that we have credit lines here in the United States, credit facilities, and we’ve got three of those in place now and one more we’re putting in place. We are currently looking at expanding some of that, but we’ll keep you posted as we do so.

William Stein - Credit Suisse

Do you feel markets are open for you to re-negotiate or refinance both of those?

Dave Johnson

In Japan, we think yes. We’ve talked to the banks there. In the U.S., obviously markets are very tight, but with our credit profile we’ve been talking to all the banks that we deal with. We’re looking at borrowing, they’re open.

William Stein - Credit Suisse

The net other income that you’ve been getting. Obviously this quarter, there’s some one-time stuff in there, but normally there’s about $2.5 million dollar contribution from high P. How is that tracking, 20% ownership there.

Dave Johnson

Over the last four quarters, it’s been about the same levels. It’s between $3.5 and $4.5 million per quarter in terms of share of earnings and it’s improved slightly in Q2 versus Q1.

William Stein - Credit Suisse

What’s the outlook there?

Martin Slark

We think based on their customer mix, we certainly model that. We’d stay about the same level.

Operator

Next we have a question from the line of Shawn Harrison - Longbow Research

Shawn Harrison - Longbow Research

A few clarifications on prior points. The updated restructuring savings analysis, does the mix between Cogs and SG&A change from that 60/40 split that was discussed?

Martin Slark

It’s overall about the same. 60/40.

Shawn Harrison - Longbow Research

Does it change 2009, 2010, or 2011, kind of one weighted more toward SG&A or Cogs?

Dave Johnson

Yes. In the early part of 2010, it would weigh a little bit more toward Cogs and then comes back the other way. So it goes from 60/40 to 70/30 and back again, but overall I think it’s not an exact science to estimate in which category they come.

Shawn Harrison - Longbow Research

Follow-up on pricing. I believe you touched on raw materials not being the benefit to the P&L, even though commodity cost had fallen significantly. When would you expect to see the benefit from smaller prices begin to help your P&L.

Martin Slark

I’m not sure that we did say that it wasn’t a benefit. I think in fact in Q2 there was a sequential benefit versus Q1. We see another sequential benefit in Q3, though not to the degree we would like and that’s because the price of gold of course is going up. The average of gold for last quarter was about $795 dollars per tray ounce and today it’s about $900 dollars. So we’re seeing a detriment in Q3 for gold, but copper goes in the other direction and we’re seeing few pricing for copper.

Shawn Harrison - Longbow Research

I’m guessing plastics haven’t moved favorably yet?

Martin Slark

Not yet. With what’s happening with the price of oil. I mean the average price of copper for us year-over-year, if you look at Q2 this year versus Q2 last year, is down about 50%. We’ve seen some of that reflected in our metal base this quarter. We would expect to see some more benefit from that in the next quarter.

Dave Johnson

The other point I want to make about the gold is we have, as you may recall, a cap, an insurance policy, for price of gold. That cap is at $920 per tray ounce and for quite awhile we were well below that, but now we’re getting closer to that. So if it does move above $920, then we’re protected at the $920 level for about half of our purchases.

Shawn Harrison - Longbow Research

I know it’s very early in the March quarter here, but have you seen a narrowing of that variance between the point of sales and the point of purchase of distribution for say the first three and a half weeks here?

Martin Slark

I can’t answer that question, because we get data back through our FAP system, POS data from our distributors on a global basis that we use not only to track our distribution revenues, but also actually to measure reward our engineers, because they’re paid on distribution POS. We get that data at the end of the month. I can’t tell you what that looks like mid point in the month.

Operator

Our next question comes from Carter Shoop - Deutsche Bank.

Carter Shoop - Deutsche Bank

Two quick questions in regard to yen and then a couple follow-ups. Given where the yen is so far this quarter, would you expect to realize an FX gain in the March quarter if it were to hold at interest levels?

Martin Slark

Not a significant one. What we’ve done, in fact, the October movement was quite significant in terms of the U.S. dollar primarily versus other currencies versus Asian currencies, and U.S. cash and receivable balances in a country like Singapore and we hedge roughly 70% of our holdings there, 30% unhedged. When the dollar spikes up at the end of the quarter like it did, we get a gain from that. We have looked at all of our hedging and actually increased our hedges slightly in those locations just to be protected so if the value goes the other way, we don’t have such a significant movement.

So the $14 million benefit that we have, we think is quite unusual. Obviously it was positive, which was good. We’ve actually tightened up our hedges now so that we don’t see it go in the other direction.

William Stein - Credit Suisse

In regards to the debt you have in Japan, pretty favorable rate, I think it’s 1.3%. I know it’s a little early to start talking about where you could refinance that, but it sounds like you’ve been talking to some of the banks in Japan. What kind of refinancing rate do you envision, given the markets right now?

Dave Johnson

What they’re telling us is slightly higher, not well below 2%.

We’re not quite there with them yet and won’t go into negotiations at this point.

William Stein - Credit Suisse

Just to clarify some earlier comments on the SG&A line. Are you saying that if you back out that $9 million dollar benefit that we’d expect to see SG&A kind of round out $145 level in the March quarter?

Dave Johnson

Let me say that again and to clarify a little bit, because it’s $145 now. If you add back the $9 million dollars, which are one-time benefit, to $153, and I said that we could maybe have as much as $9 million of additional benefit now and next quarter. That may be a little bit aggressive I think if you’re looking at modeling, somewhere between $145 and $150 is probably a better place to be. I just think it’s hard to forecast.

William Stein - Credit Suisse

Would you be willing to also give us some ranges around where the gross margin could shake out in the March quarter?

Dave Johnson

Well that’s why I gave the variable and fixed portion. I think it’s hard when there’s big changes to estimate what that change is, but the variable and fixed numbers I gave you I think will help you to do kind of a fall-through analysis and see what you think. Looking at from Q1 to Q2, I would say analyze that fall-through on the drop in margin and that should be similar to a drop in margin that you would see into the third quarter.

William Stein - Credit Suisse

Can you tell me what the share count was exiting the quarter and if you bought any shares back thus far this quarter?

Dave Johnson

Exiting the quarter, it was $174.8 million. So far in this quarter in January, we have not bought back any shares in January, which is our usual practice up until we get through the conference call as well.

I made a comment a few minutes before that we’re in kind of a wait and see attitude in terms of our share buyback account.

Operator

Our final question is a follow-up from the line of

Operator

The next question comes from Anil Doradla - William Blair & Company.

Anil Doradla - William Blair & Company

Operator

The next question comes from John Harlow - Barrow Hanley.

John Harlow - Barrow Hanley

Operator

The next question comes from Alexander Paris - Barrington Research.

Alexander Paris - Barrington Research

Operator

The next question comes from Phil Marriott - ASB Advisors.

Phil Marriott - ASB Advisors

Operator

The next question comes from Brian White - Collins Stewart.

Brian White - Collins Stewart

Operator

The next question comes from William Stein - Credit Suisse.

William Stein - Credit Suisse

Operator

Our final question comes from the line Amit Daryanani - RBC Capital Markets.

Ryan Jones in for Amit Daryanani - RBC Capital Markets

Did you give us what the contribution to your outlook for operations would be from work in capital?

Dave Johnson

We didn’t say specifically. We just said what the cash flow from operations would be in terms of the range of $75 to $125 million. We’ll have a fairly significant contribution because of the revenue forecast that we have provided.

Martin Slark

Thank you very much for everybody’s attention this afternoon. Obviously we will be available for some follow-up questions outside of the call if people want to do that, but thank you again for your attention.

Operator

Thank you for your participation in today’s conference call. You may now disconnect. Good day.

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