Merix Corporation F4Q09 (Qtr End 05/30/09) Earnings Call Transcript

Merix Corporation (MERX)

Q4 2009 Earnings Call

July 13, 2009 5:00 pm ET

Executives

Michael Burger – President & CEO

Kelly Lang – CFO

Tom Ingham – EVP Global Marketing

Allan Muhich – VP Finance

Analysts

Joe Wittine – Longbow Research

Amit Daryanani – RBC Capital Markets

Matthew Sheerin – Thomas Weisel Partners

Nick Farwell – The Arbor Group

Michael Needleman – Unspecified Company

Sean Harrison – Unspecified Company

Presentation

Operator

Welcome to Merix Corporation's fourth quarter 2009 earnings conference call. Today's call is being recorded. Comments made during the course of this call that state the company's or management's intentions, goals, beliefs, plans, projections, expectations or predictions are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995.

Many factors could cause actual results to differ materially from the forward-looking statements including the factors discussed in the press release announcing our results, the company's Annual Report on Form 10-K for the year ended May 31, 2008 and Form 10-Q for the quarter ended February 28, 2009, that are on file with the SEC and those discussed from time to time in the company's other SEC filings.

I will now turn the call over to Mr. Michael Burger, President and Chief Executive Officer of Merix Corporation.

Michael Burger

Good afternoon everybody. Joining me on the call today is Kelly Lang, our Chief Financial Officer, Tom Ingham, Executive Vice President of Global Sales and Marketing, and Allan Muhich, Vice President of Finance.

Earlier today we reported our fiscal 2009 fourth quarter financial results, revenues of $58.9 million were within the expected range as we began the quarter and represented a decline of approximately 3% from the third quarter.

Our global demand while sharply below last year due to macroeconomic issues has remained relatively stable over the last nine months. Further when we analyzed available industry data and our own customer revenue variations, we continue to believe we’re holding share in this challenging market.

As expected our fourth quarter revenue benefited from shipments of panels in support of China’s significant 3G build out, as well as the new US Administration’s clean energy initiatives. These clean energy programs were the primary driver behind the nearly 30% sequential quarter growth in the industrial market segment.

This business was won due to our reputation in the market as a high quality provider. Equally as important was our value proposition as we won the initial quick turn orders in North America and then transitioned the volume work to our lower cost China-based facilities.

We anticipate these new programs and others will continue throughout fiscal year 2010. Our efforts to gain share in the defense and aerospace market yielded a nice 15% sequential quarterly growth. This growth genuinely came from well known but new to Merix customers who we have engaged with over the last nine to 12 months.

Today I am more confident in our ability to gain meaningful share in this key North American segment as not only our sales trends are improving but over the last 90 days we are seeing increasing levels of qualification activity. The feedback from these qualification activities are best summed up as excellent.

The credit goes to the technological and quality heritage of Merix as well as our recent 31032 certification of both North American factories. By the way many of the new aerospace customers have also expressed interest in our Asia based facilities which as most of you know is unique to Merix.

Included in the quarterly results were three unusual charges totaling $3.6 million. The first was $900,000 of non cash impairment charges associated with the estimated future lease and property tax payments for our former [Wood Village] factory. You will recall we were able to sublease this facility following our factory closure in April of 2008, however due to the current economic climate, the subleasee had defaulted on their lease payments requiring us to take this charge.

The second was a $1.1 million of cash severance payments made for previously announced headcount reductions that took place in March. Lastly, we incurred approximately $1.6 million of legal costs that are primarily related to our ongoing security litigation efforts.

The litigation relates to a lawsuit filed several years ago associated with a 2004 secondary equity offering. The discovery process kicked off in the fourth quarter which is typically the most expensive part of fighting these cases. The expense incurred in the fourth quarter brings the total spending up to the retention amount on our D&O insurance policy and therefore looking forward we anticipate only incurring legal costs for the defense of Merix underwriters which are not covered by the D&O policy in existence at the time of the claim.

These amounts should be relatively modest going forward. In looking at the underlying facts of this case we continue to believe the claims against the company are baseless. Excluding these non-recurring amounts and focusing on the underlying performance of the business, we did generate positive cash flow from the P&L.

This means at even our current depressed revenue levels, the cost actions we’ve taken over the last several months have positioned us well to preserve our liquidity. Outside of short-term working capital fluctuations we should remain cash flow neutral. We believe the GAAP break-even revenue level is approximately $70 million on a quarterly basis or nearly 30% lower than the $95 million rate just nine months ago.

When we return to this revenue level we do not anticipate needing to add much incremental capital or infrastructure. Thus when the economy and the market demand returns, we believe our cost structure is very competitive and will enable us to return to profitability at a significantly lower revenue level.

From a cash standpoint, we ended the year near a 21-month high at $17.6 million, while our borrowings remain unchanged from the February quarter at $78 million. Our overall liquidity position has improved significantly. First we increased our Banc of America borrowing base by approximately $7 million through a contract amendment that broadened the definition of qualifying receivables included in our collateral base.

Secondly, we signed a new credit agreement with a Chinese bank that provides us with up to $50 million [inaudible] of additional borrowing capacity or approximately $7.3 million US dollars depending upon the exchange rate. Today we have approximately $42.6 million of available and untapped borrowing capacity representing an $11.5 million increase from the end of the third quarter.

Given our current financial model and revenue levels, we do not anticipate needing these funds. The increased liquidity provides a safety cushion in case the market conditions deteriorate or to support the growth in our business when the market rebounds.

Finally, our factories are continuing to perform extremely well. Our global defective parts per million remain below 500 which we believe is in the top quartile for our industry and our on time delivery across all factories is consistently above 95%.

I am extremely pleased that the operations team has been able to realign their cost structures without sacrificing capacity, or performance to our customer base. I’ll now pass the call over to Kelly who will provide some additional details on our fourth quarter financial performance.

Kelly Lang

Thanks Michael and good afternoon everyone. As our press release indicated, fourth quarter revenues amounted to $58.9 million, down 3% from the third quarter. While in May, [ITC] did report an improvement in North American book-to-bill to above parity 1.03 for the first time in 13 months, the prior twelve months was below 1.0 and the market contracted by over 50%.

During the same time period Merix has seen its revenues decline roughly 35% which would imply that we are in fact holding share. Merix’s consolidated fourth quarter book-to-bill was 0.92 overall with 0.97 North America and 0.88 in Asia. Backlog at the end of the quarter was $27.6 million representing approximate four to six weeks of current demand.

Our gross margins increased to 8% in the fourth quarter representing more than a seven percentage point increase when compared to the third quarter of the fiscal year. The improvement was primarily [inaudible] four quarter’s impact of the cost reduction actions taken in January.

Fourth quarter operating expenses excluding the unusual charges Michael mentioned earlier were $8.1 million representing a $700,000 improvement when compared to the third quarter on a similar basis. The decrease was enabled by the full quarter impact of the cost reduction activities taken in the first few months of 2009 combined with a $400,000 decrease in bad debt expense.

Recall we incurred approximate $500,000 of higher than normal bad debt expense in the third quarter due to anticipated issues with our automotive market. Looking forward at SG&A expenses, we don’t anticipate any run rate increases at our spending levels however we will see some timing differences.

For instance we anticipate recognizing the bulk of our annual external audit costs in the first quarter of fiscal 2010 adversely affecting the reported expenses by approximate $0.50 million when compared to the fourth quarter. Our capital spending was $900,000 in the fourth quarter which compares to $18.1 million during the first three quarters of fiscal 2009.

This was expected given the fall completion of the HY technology and capacity expansion and the ERP implementations. The investments that we made in our factories over the last couple of years are paying off and we remain very competitive and our factory’s equipment are in good shape thus requiring little spending.

Currently we estimate first quarter capital spending will remain at approximately $1 million and is primarily focused on cost improvements that will result in a very short-term payback. As Michael mentioned our cash balance is $17.6 million and debt remained unchanged from the amount recorded last quarter at $78 million.

The debt balance is comprised of a $70 million bond and $8 million borrowed under the Banc of America revolver both due in 2013. Before I turn the call back over to Michael, let me explain some changes we’ll be making in our reporting of Asia during our first quarter.

As most of you know due to the immature and manual nature of financial systems inherited with the Asia acquisition, we’ve been reporting Merix Asia financial results on a one month lag. Due to the improvements we’ve made in our closing processes and by leveraging our new global ERP system, beginning next quarter we will align our reporting months such that both operating segments will report the same June, July, and August time periods.

Asia’s financial results for the month of May will not be reported specifically [inaudible] the fourth quarter or first quarter results but rather the financial impact of May will result in an adjustment to retained earnings.

I’ll now turn the call back over to Michael to make some closing remarks.

Michael Burger

Thanks Kelly, as I mentioned during our last conference call our factories and employees are performing well and our customers continue to value Merix technology, customer service, and quality. We are seeing market share gains in targeted markets and continue to receive excellent feedback from both existing customers and new customer qualifications.

Our booking rates seem to have stabilized and we also understand that some of our competitors are reporting similar trends. Thus although difficult to predict with certainty we anticipate first quarter revenues will remain relatively flat when compared to the fourth quarter.

Although it is uncertain I am becoming much more optimistic that we may see revenue growth by our fiscal second quarter. In summary I believe we’ve made the necessary investments in both North America and Asia that make Merix unique value proposition a reality.

Further over the last three quarters we’ve made the cost structure changes necessary to reduce our GAAP break-even point by nearly 30% and as we’ve just demonstrated reduced our cash break-even point to below $60 million in quarterly revenue. More importantly these cost reductions did not come at the expense of improvements we’ve made in our factories.

I believe this combination of strong operating metrics and significantly reduced cost structures position us well to reap the rewards in the market when it rebounds. Thus Merix will grow revenue and profits by maintaining its focus on its customers, and our continued commitment to quality, delivery, and technology.

And with that I’ll open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joe Wittine – Longbow Research

Joe Wittine – Longbow Research

Congrats on the progress made throughout the quarter, first off just a quick clarification point, the legal fees, those were on the OpEx line correct.

Kelly Lang

Yes they were.

Joe Wittine – Longbow Research

And then moving along the communications end market, you mentioned kind of in your initial comments that 3G continues to be an area of strength that particular market still fell sequentially, what’s the weakness that you’re seeing there, what do you forecast going forward.

Tom Ingham

I’d say that going forward our quarters will probably look somewhat sequentially flat, maybe with some slight ticks up. We’ve had, we’ve got a pretty mature customer base in the communications market and I think that their end offerings are pretty consistent with what the overall marketplace is.

So I’d tell you that future quarters are going to look a lot like they have. I think we had quite a bit of shift on communications over the last fiscal year and I think we’re going to be steady going forward.

Joe Wittine – Longbow Research

You gave some interesting guideposts I guess on break-even, GAAP break-even $70 million, operating, I think non cash break-even below 60, so should we assume that if we want to look for a non-GAAP break-even quarterly run rate, that’s in the maybe $63 to $65 million run rate. I guess really the question is D&A, going be a change of about $5 million going forward. I ask because TP&E came down a little bit during the quarter.

Allan Muhich

Yes, the depreciation and amortization looking forward we would anticipate to remain relatively unchanged. I also think looking forward that the differences between our GAAP results and our non-GAAP results will come very close together and therefore that GAAP result break-even revenue level that we discussed is really what we would expect from a non-GAAP perspective as well.

Joe Wittine – Longbow Research

Raw materials, curious what you have been seeing because copper has been kind of a little bit of a rollercoaster, running up significantly year to date, so curious as to kind of where you are as far as potentially seeing any increases versus where we were at the early part of the year.

Michael Burger

We have seen some modest increases and it’s been much spottier than I think we all thought would happen. We have built that in to our models so we feel pretty comfortable that we’ve got that understood unless something dramatic changes. But it’s built into our models and we feel pretty good about where we’re at right now with it.

It seems to have stabilized over the last I’d say probably month.

Operator

Your next question comes from the line of Amit Daryanani – RBC Capital Markets

Amit Daryanani – RBC Capital Markets

Just a question I guess on the, you talked about sequentially sales should be more or less flattish, should we expect the gross margins ex on the one-time items to remain in that 10.5% bandwidth or do you have some savings that should actually help that number go higher from here.

Kelly Lang

I think that overall I think our gross margins should be relatively steady because essentially our product mix is going to be about the same. We’ve gotten for the most part, I’ll call it the cost savings we anticipated. There are some things we are doing in some of our factories to improve margins further but I would say that just from a modeling standpoint I’d kind of stay about where you’re at.

We certainly see as we see revenue growth that we’d see some meaningful improvement to those margins.

Amit Daryanani – RBC Capital Markets

And just in general how surprising being so far in the quarter for you, is it [inaudible] to stabilize and not get any further aggressive or are you still seeing aggressive pricing.

Kelly Lang

I’ll comment just real brief on the actual pricing, we actually saw pricing quarter to quarter actually improve in both of our segments, both in Asia as well as in North America. I’d say North America probably had to do a little bit more with just kind of the technology mix, not really necessarily with I’ll call it with a prices going up. I think Asia also certainly is benefiting from the technology mix, but probably has more to do with the, I’ll say just the build out of our HY facilities last fall and getting some improvement there.

As well as frankly some product mix changes we’re seeing actually in both of our factories.

Tom Ingham

I’d say on the overall marketplace, in some of our Asia pricing is fixed and locked in for the year in the automotive market so that I would say will continue to be stable. It’s a definitely a competitive market out there. We’ve had the disciplines to choose not to participate in a areas that quite frankly just aren’t going to gain us profitable business.

So I really think that worst is a little bit over in terms of seeing price pressures. There’s always going to be a bit of that and I think that the price pressures might even be a little bit stronger on a day to day basis in North America just because we’re in the quick turn business and that’s a little bit more volatile.

But I’d say overall we’re in a pretty stable pricing environment.

Michael Burger

I’d add a little to that in that it looks particularly in North America, the material sets that we’re being asked to build today are becoming more and more complex on a bi-monthly basis and so that drives overall costs and ultimately drives panel pricing up. So kind of a little bit of background behind the mix and the mix change. It looks like we’re being asked to build more and more difficult boards in North America.

Operator

Your next question comes from the line of Matthew Sheerin – Thomas Weisel Partners

Matthew Sheerin – Thomas Weisel Partners

You talked about the book-to-bill in the quarter being just below one, where does it stand now. Is it a little bit better or just around one.

Kelly Lang

I think actually the last few weeks we’ve seen a general improvement from kind of what we saw in the fourth quarter but again, I’d say it’s been modest and it’s probably been more, it’s been variable within segments if you will. It certainly is not strong by any stretch of the imagination but it’s certainly shown some firming.

Tom Ingham

Yes, definitely firmer and to the positive side, a little bit of both.

Michael Burger

There’s no question we’re above parity.

Matthew Sheerin – Thomas Weisel Partners

And you talked about some strength from the 3G build out in China, is that coming from your Asian operation or are you shipping product out of North America for that as well.

Tom Ingham

No, that’s almost entirely out of the Asia op.

Matthew Sheerin – Thomas Weisel Partners

And on the cost side, it sounds like and you’ve done obviously a very good job there, it sounds like you’ve pretty much squeezed on the expense side most of the costs out, is that right, in terms of the annual run rate of the cost savings. Are you pretty much done.

Michael Burger

I’ll never say that publicly. That means my guys are listening and no, I think we’re always, we are very much focused on continuing to drive cost out. We, I don’t think you could expect an incremental or order of magnitude change. We’re attacking it on many, many different levels and I think it’s just an, it’s an evolution.

But to your point I think we have taken some of the big obvious chunks out and now the hard part is the last 5% which is always exponentially harder to do. But we’re very much focused on the cost and we’re going to continue to be.

Matthew Sheerin – Thomas Weisel Partners

And on the working capital side, looks like inventory has come down, probably to more normal levels so do you expect from a working capital or free cash flow perspective, do you think that will sort of flatten out as well.

Kelly Lang

I think as Michael said, there’s still some improvements even in that area. I think, we’re extremely pleased with what we’ve done at DSO, we’ve taken 10 days out in the last nine days and we certainly improved on the turns on the inventory side. But there’s probably a little bit but again it’s more modest. I don’t think there’s huge gains to be made in that area.

Matthew Sheerin – Thomas Weisel Partners

And I know that with this new reporting structure not counting May in the next quarter, is that a number that you could provide for us now or that you will provide at some point, the revenue and operating income number for the month of May.

Kelly Lang

Yes, we’ll do that in our first quarter release in October.

Matthew Sheerin – Thomas Weisel Partners

Okay, you’ll break that out. And just lastly, I know you’ve been through the ERP implementation in Asia, is that done now or is that still a work in progress.

Michael Burger

The implementation is done and I think it’s a work in progress for the rest of our lives.

Matthew Sheerin – Thomas Weisel Partners

But are you starting to see any improvements in productivity—

Michael Burger

Absolutely. And in fact I think Kelly alluded to, I think ERP was one of the enablers that has allowed us to actually bring Asia concurrent from a reporting perspective. It was one and I think from an operational perspective we now have the ability, our customer service people now have the ability to pull up a drawing anywhere in the world, any one of our factories for a customer and let them know where it’s at. And we’re now able to consolidate our MRT runs so that we now have a clear understanding what materials are being run and allows our purchasing guys now to consolidate purchasing which again was kind of the whole objective.

So we’re able to do that now globally.

Kelly Lang

--you can just to the [inaudible] example and financing and accounting this time last year we were roughly I think around 80 people and I think today its about mid 40 so a lot of that has to do with just the automation that’s now built—

Matthew Sheerin – Thomas Weisel Partners

And I actually have a couple more questions, one regarding the Hong Kong facility, what’s the update there.

Michael Burger

We are still actively marketing it. We’ve got really nothing to announce but we are still very, very active. Kelly and I were in Asia last week and I’m pleased with the progress we’re making but again we’ve got nothing to announce.

Matthew Sheerin – Thomas Weisel Partners

And then on the convert, have you looked at, given your much better balance sheet, cash, that revolver, using any of that to buy the converts back.

Michael Burger

We’re exploring all options as it relates to that. We’re really not in a position to talk about it yet. But we’re very well aware of what the credit market is doing right now and we’re working it.

Kelly Lang

I think it’s probably fair to, I think if you’ve seen we’ve meaningfully improved our liquidity with the two credit facilities and stuff and cash is obviously at a pretty nice high over the last couple of years but we need to maintain it. So I think we’re going to be cautious. I think just on the expectations is fair out there. That doesn’t mean that we’re not going to obviously look at opportunities that might exist. I think it’s important to say that although you can probably hear a tone change maybe from us from a market standpoint, its still a challenging market.

We’re still at revenue levels of roughly $60 million and that a tough market. So we’ve got to be cognizant of that as well.

Operator

Your next question comes from the line of Nick Farwell – The Arbor Group

Nick Farwell – The Arbor Group

Just to follow-up on the Hong Kong question and that is if in fact you initiate a transaction what do you think your rough estimate would be in terms of closing it. I realize every transaction is different but in general what do you think is a fair timeframe.

Michael Burger

It really [inaudible] on the type of transaction. If it’s an outright sale it could take much longer. There’s a couple of alternatives we’re looking at. So I think it’s probably a three to four month time line once the transaction is agreed upon.

Nick Farwell – The Arbor Group

And amongst that different structures might have a different payback I assume, like a pay to lease or, other structures may provide you liquidity faster than that for—

Michael Burger

That’s right. And we’re still actively looking at a lot of different options.

Nick Farwell – The Arbor Group

In terms of looking at the automotive business which is obviously the run rates on a quarterly basis have declined, how would you characterize the current run rate, I think it was $11.5 million, is that right, or maybe it was $10 million, I’m sorry, for this quarter. Is it seasonally adjusted, are you sensing that’s at a low point or do you think there’s still some decline to come from that level.

Tom Ingham

No I do think it’s a low point and really there’s no seasonality right now in the automotive business. It’s kind of beating to a different drummer and obviously with bankruptcies, with plant closures and things like that. I will say that in Q1 we are seeing a difference of positive to Q4 in terms of automotive specifically and that’s not to imply that it’s back to where it was at the beginning of our last fiscal year but there are certainly improvement in the automotive market.

It’s just, it was one of those things where you get to a low and it’s got to come off the low sooner or later.

Michael Burger

Yes, there’s definitely signs of life.

Nick Farwell – The Arbor Group

So what I think I hear you saying is that perhaps destocked to the point where they are now having to at least replenish inventory.

Tom Ingham

That’s exactly correct.

Michael Burger

Especially a bizarre scenario, we’re actually getting expedited at times which is just, because they’ve run so low from an inventory perspective they, they’re pushing the envelope from a planning perspective.

Nick Farwell – The Arbor Group

Isn’t that classic.

Michael Burger

We’ve been there.

Tom Ingham

And by the way, we’re there to help them.

Nick Farwell – The Arbor Group

Can you highlight or help us understand how you will report the Asian results, will it be highlighted in the first quarter results in the 10-Q or will you put it in the 10-K for year end and then comment on it in October or something.

Kelly Lang

I think if I understand your question, we’ve always had three segments where we’ve had Asia, San Jose, and Forest Grove and actually we’re going to two segments because again we’ve, again going back to some of the progress we’ve made in the last year or so, is that we’re now, we really talk about North America as one business and Asia itself. So essentially it will be two segments.

When you look at the 10-K you’ll see Asia and North America and we’ll continue to report that way. We’ll also likely restate last year’s numbers so that you have comparable number when you look at historical numbers as well because of the one month change.

Nick Farwell – The Arbor Group

Will you restate the year end in the 10-K then, or will you wait until the first quarter and then restate the prior year.

Kelly Lang

Exactly. We’ll do the first quarter.

Nick Farwell – The Arbor Group

So we won’t know those numbers until October.

Kelly Lang

There actually is a possibility, the SEC actually allows, you can actually get an exemption if the results aren’t materially different. Whether or not we restate, we have to kind of see how the SEC interprets it. But right now we would anticipate we’d give you something that’s going to be comparable to base your decisions on.

Nick Farwell – The Arbor Group

Could you give us a very sort of brief profile of who you consider your major competitors. I realize it’s a diverse selection of companies, but just list those two or three companies like TTM Technologies, DDI, whatever ones—

Michael Burger

I think, we’re kind of an odd duck in that we’re kind of, we’ve got a foot in two different markets so I think in North America it’s the guys you’ve just mentioned. I would include [Sanmina] in that group. And in Asia, it’s the catch-all, it’s the [Multechs] of the world, [Esue Pedisas], OPC, E&E, so it’s the big guys and frankly we’re moving more and more of our benchmarking toward the Asia guys because frankly that’s a much more competitive model long-term.

Nick Farwell – The Arbor Group

Are you finding a, now that the Chinese facility is I presume, its state of the art, if its likely to be looking out over the next couple of years after all the changes you’ve gone through since it was acquired, that your point of differentiation has changed measurably and people are at a point where that’s being recognized in the marketplace or are you still struggling for identity.

Michael Burger

Yes, absolutely. No we’re not struggling for identity. I think our traditional western customer base is beginning to take full advantage of the Asia facility and I think it has opened up a lot of new opportunities for the selling organization that frankly hasn’t materialized yet but certainly is in the works.

Nick Farwell – The Arbor Group

And you’d say that, and these never pinpoint an exact point in time, but would you say that inception or that transitional point has occurred over the last three to four months, or are you’re really at the bottom of that now, or seeing that now.

Michael Burger

Perhaps the way [I characterize it] when I talk to other investors is that we finished the build out of the technology ramp really half and I’ll call it September, October so I’d say that the cut over albeit there was a transition period, it wasn’t just a sharp cut over, it would have been roughly kind of that early fall timeframe.

The problem was that the market started to change dramatically which really changed the just the overall market dynamics so I think that the inflection point of where you want to say, really changed in the fall however I’d say that just because of demands and just market changes that have occurred, I think its becoming more and more absorbed and felt and customers are certainly seeking us out.

Before we talked a lot about being able to do the same technology in both regions, but now we actually can execute it.

Tom Ingham

Yes, I guess there’s a thing that we track internally, we don’t report out on it. We internally call it synergy business and that business, I won’t bore you with the definition, but basically what it amounts to is its business that would have likely come from our North American customers or European customers that typically might have put that business in someone else’s Asia facility.

Michael Burger

If we didn’t have one.

Tom Ingham

If we didn’t have one. And even in the market turmoil and everything like that, our last quarter it was a high water mark for us in terms of that synergy business. So we’ve continued to see that grow. It’s a, it’s probably not a concrete definition of exactly what you’re asking but I’d say it’s a pretty good indicator of the way our customers view us.

Because its basically our value proposition customers and to see continued growth in that even during a pretty tough economic times, I think pretty well speaks to what you’re asking in terms of the way we’re being perceived by our customer base.

Michael Burger

And I’d add that I think to just echo Kelly’s point, I think we’ve actually reported this at the end of our Q1 we said, hey listen we’re kind of all dressed up and no place to go and the market just kind of fell out from under us. I think now that the dust is pretty much settled and I think all of us, that’s not fair, I think a lot of us have talked ourselves into the fact that we’re at the bottom.

Most of us are now becoming more externally focused and that includes our customer base. And so the conversations that are occurring today are more about the future and where they see their supply base going and we feel really blessed that we’re in a position that we are today and we’re part of those conversations and so, and those are happening now.

I think as Kelly said we were ready earlier, but now that the market is kind of, the dust is settled, I think the conversations are taking on a little bit more credence.

Nick Farwell – The Arbor Group

The ERP cutover, have you, you said it was complete. I think Kelly said that, the ERP is complete, does that mean you’ve cut off the dual accounting system.

Kelly Lang

Yes.

Nick Farwell – The Arbor Group

That’s long been done.

Kelly Lang

Those systems have been cut over since last fall.

Nick Farwell – The Arbor Group

And then the last question, you said there’s still a little room for shrinkage in working capital. Obviously that’s a function of volume in some regard, but assume a steady state, are you talking a couple of million bucks, roughly.

Kelly Lang

Yes, if revenues didn’t change it would be roughly flat but one of the things is that as revenues grow, if the DSO [inaudible] we will consume working capital as that grows. But yes. There’s not a lot of dollars to be taken out of that at this point. There are a few but not a lot.

Nick Farwell – The Arbor Group

So what we’d like to see obviously is a build in working capital because that means you’re growing the business again. You may not get much more out of it unless you’re a steady state for another quarter to two.

Michael Burger

I’ll tell you that we’re running this company like this economy is going to stay right where it is and we are very much focused on cash control, very much focused on conserving and managing with the capital that we’ve got today.

Nick Farwell – The Arbor Group

One last thought, other than this legal suit that you are working your way through that you’ve just perhaps finished or in the process of finishing the discovery phrase, are there other, other events that are percolating in the company that could all of a sudden manifest themselves as an unfortunate expense occurrence.

Kelly Lang

Not that we’re aware of. If we thought there was we’d be accruing for it or disclosing it. Our 10-K will be filed here in a couple of weeks but I don’t think you are going to see anything new or surprising, so no.

Nick Farwell – The Arbor Group

And no major change in bad debts in the fourth quarter.

Kelly Lang

No.

Michael Burger

No it’s actually been pretty good.

Operator

Your next question comes from the line of Michael Needleman – Unspecified Company

Michael Needleman – Unspecified Company

Just in terms of customers was there a 10% customer and if so, who was it.

Kelly Lang

Yes we had one 10% customer and it was Motorola.

Michael Needleman – Unspecified Company

And in terms of top five customers, can you or have you in the past given approximate amount of revenue of your top five customers.

Kelly Lang

Yes, we’ve given a little of that in the past, its roughly 15%. There’s actually a chart in the back of the press release you’ll notice too.

Michael Needleman – Unspecified Company

Just in terms I think you said that you mentioned in the last four weeks you were above parity or close to parity, could you just tell us what the bidding activity is like now in terms of what you’re seeing that’s different than the fourth quarter.

Kelly Lang

I actually misspoke, I was looking at the next five, actually the top five were actually about 35%, I apologize for that.

Michael Needleman – Unspecified Company

So the top 10 then are 50%.

Kelly Lang

Roughly.

Michael Needleman – Unspecified Company

And then just in terms of my second question just in terms, could you just kind of keep us up or let us know what the bidding activity has been like. You mentioned that the parity of book-to-bill or close or a little bit above the last four weeks.

Michael Burger

We track quote activity and we quote and we track closure activity and quote activity over the last I would say the last four weeks is up about 15% over kind of what I would consider the trailing six weeks to eight weeks. And our closure rate has been, is maintained. So that being said, I think a phenomenon is occurring is that the average order size that we are booking in terms of the quantity per order is actually decreasing.

Which I think is more a function of the market in terms of the environment versus the traditional size that the customers place on us if that makes sense. So I think bottom line is we’re encouraged by the level of activity and the increase in activity. We continue to win a proportional share and we’re very focused on that. But it hasn’t materialized in large booking dollars because frankly the quantities per order has continued to contract and we think that what will happen when the market turns up, is we think the quote activity will either maintain or grow but the number of units per quote will increase.

Michael Needleman – Unspecified Company

Is that the same pattern that you saw this past quarter as far as the average order size decreasing a little bit or is that something new.

Michael Burger

It’s something new. I would say it’s probably six to eight weeks we’ve really noticed it because obviously we’re asking the question if quotes are going up, and we’re closing the same number of orders, how come our booking dollars aren’t going through the roof and that’s kind of the phenomenon.

Which is I think, hopefully we’re seeing that as a leading indicator. Again I don’t think any of us have ever been in an environment like this so it’s hard for us to say that but it is an interesting data point.

Michael Needleman – Unspecified Company

And then I wonder if you could just go vertically if you do a breakdown of your fourth quarter as far as terms of business, do you break that down as far as auto, communications, and defense and aerospace.

Kelly Lang

Yes we do, it’s actually, if you have the press release—

Michael Needleman – Unspecified Company

I’m sorry I don’t have the press release in front of me.

Kelly Lang

Okay I’ll give it to you really quickly, but communications from a, for the quarter on a percentage basis was 39% of sales, automotive 17%, computing peripherals 7%, test, industrial, medical 16%, defense and aerospace 12%, and other 9%.

Michael Needleman – Unspecified Company

And I’m sorry to ask this but I’ll be able to see it later, is that a significant difference than the prior quarter.

Kelly Lang

No, I think it’s relatively close. The only two areas where there was really much variation was in the test, industrial, medical which Michael commented we had a pretty nice order. We actually seen a number of orders from one particular customer that’s participating in this clean energy initiative and then we also some defense and aerospace, we had this nice sequential improvement which again goes back to some of the gain and strength that we’re starting to get there with the focus we’ve had in the last year.

Operator

Your next question comes from the line of Sean Harrison – Unspecified Company

Sean Harrison – Unspecified Company

Hopefully a quick question, regarding the military market and the progress you’ve made over the past few quarters, I was wondering if you could comment on a few things, whether you think you’re taking market share from existing players or programs that were already running or are these new programs coming to market, second, kind of your view on the underlying market trends in the military aerospace sector, particularly given concerns that budgets may be under a little bit of stress in their fiscal 2010. And then third just kind of maybe if you could characterize in any way a percentage growth opportunity off the run rate you’re seeing right now over say the next four quarters.

Tom Ingham

So first of all I’d say that primarily the gains that we are seeing are on new programs and that’s not unusual in the defense and aerospace industry once people lock in on a program generally outside of a supplier simply getting out of business for whatever reason or fire or something like that. Programs have a tendency to stay pretty entrenched with their current suppliers.

Sean Harrison – Unspecified Company

The second question was how do you view underlying growth trends over the next few quarters given the fact that budgets may be under a little bit of stress.

Tom Ingham

So as far as we’re concerned, it’s kind of a two prong question. One of them being that we do believe that the market is looking for new programs and established fairly sizable supplier in the North American marketplace so we believe that we have the opportunity to outgrow the pace of either growth or even if there was some decline in this segment. That’s certainly one of the things we keep on hearing from all the customers that we’re engaging with today.

Secondarily too there’s a lot of talk about cutting budgets. Historically budgets really don’t get cut as quickly as Congress says they’d like to. I mean individual states get effected on these things and the budget has a tendency to kind of contract very, very slowly. Also there isn’t quite as much pressure under a lot of the things that fall in the electronics segment because there are a lot around security and surveillance and things like that and that part of the segment is probably a little less resistant to being cut then some just having to do with armament part of it.

So we actually feel pretty good about being able to grow in this market.

Michael Burger

I think from a three year plan perspective we actually are very focused on effectively doubling our defense and aerospace revenue base and so we believe that that would look like a $50 to $70 million revenue on an annualized basis and we’re giving ourselves three years. That being said, in fact Kelly and I had this conversation this morning, I think we are all relatively pleased at the speed at which customers are engaging with us in factory qualifications.

We’ve actually not seen it materialize and all the activity that we’ve got, materialize into large revenues yet but we do anticipate particularly with some of the bigger guys, we think there’s a real opportunity to get there.

By the way, I think even at a $50 million annualized rate, our market share would be relatively small so I think its not inconceivable that to Tom’s point, we could gain share in this business if not from the major guys, which certainly we would love to do, but I think from a lot of the mom and pop guys and second tier guys that are in this market that have not been able to keep up with the technology.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Michael Burger

Thank you guys. We appreciate everybody’s interest in Merix and we’ll talk to you in October.

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