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09) Earnings and Merger Call Transcript 1 comment

October 07, 2009 | about: MERX

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Merix Corporation (MERX)

F1Q10 Earnings Call

October 7, 2009 10:30 am ET

Executives

Tom [Watson]

Michael Burger – President & CEO

David Sindelar – CEO, Viasystems

Gearld Sax – CFO, Viasystems

Kelly Lang – CFO

Analysts

Matthew Sheerin – Thomas Weisel Partners

Joe Wittine – Longbow Research

Jeff [Harley] – Barclays Capital

Eric Reubel – MTR Securities

Rich Kugele – Needham & Company

Jonathan Van Orden – Dominick & Dominick

Nick Farwell – The Arbor Group

Jason Bernstein – Quattro Global

Michael Needleman – Preservation Asset Management

Herman [ So] – Unspecified Company

Derek [Mell] – [Nomeera]

Eric [Silvan] – Jefferies & Co.

Sean Harrison – Longbow Research

Presentation

Operator

Welcome to the joint investor conference call to discuss the recently announced merger and Merix Corporation's first quarter earnings results. (Operator Instructions) I would now like to turn the conference over to Tom [Watson]. Please go ahead.

Tom [Watson]

Thank you. Good morning and thank you for joining today’s conference call. Participating in today’s call will be Dave Sindelar, CEO of Viasystems and Michael Burger, CEO of Merix. Also here and available for questions are Gearld Sax, CFO of Viasystems. During this call, management will plan on first addressing the recently announced merger of the two companies and then Mr. Burger and Mr. Lang will provide an overview of their first fiscal quarter’s results and recent demand activity. The call will then be opened for questions.

Before we begin please be advised that during this call the companies will be making forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on the current assessment of their markets and other factors that will affect the combined business. Actual results could differ materially from any implied projections due to one or more of the factors explained in form 10-K and other documents that both companies file with the Securities and Exchange Commission.

Viasystems and Merix do not undertake any obligation to publically update or revise any forward-looking statements whether as of the result of new information, future events or other circumstances. I will now turn the call over to David Sindelar. David?

David Sindelar

Thanks Tom. Good morning everybody. As announced last night, we reached a definitive agreement to merge with Merix Corporation, combining two leading producers of high end, print circuit boards and related electromechanical solutions. As stated in our press release, the combined companies will have the largest publically traded PCB manufacturer in the United States with a revenue base of approximately $84 million generated from a diverse global base of customers.

This merger creates a world-class leader in PCB and related electromechanical solutions with a complementary match up of market segments, customers and manufacturing capabilities to combine two global companies with leading edge PCB manufacturing capabilities.

Specifically, Via operates high volume, quick turn operations in China which will complement the high volume facilities that Merix operates in China. We see great value in the substantial increase in capacity and larger geographic coverage. The combined company will also benefit from Merix’s quick turn and prototyping and volume capabilities in the United States. We believe that our two companies make a great strategic fit for many reasons. By combining the global manufacturing and engineering capabilities we can provide customers with a complete spectrum of services and technology in two key geographic regions of the world, Asia and North America.

We will leverage the diverse geographic operations to serve the entire product life cycle of our expanded customer base. This means we can do quick turn and prototyping of newly engineered products and as volume ramps we can also provide the high volume production at competitive prices in both North America and Asia. This is truly a unique offering. We will have the right capacity, the right technical talent and expertise in the right places.

The combined companies also leverage both Viasystems and Merix’s technical products, reputation and philosophies regarding high quality, our deep customer relations and our proven operational expertise. By utilizing the best of both companies we can also build on our extensive industry experience to expand into complementary markets like aerospace and defense and greater market opportunities in the electromechanical space. We expect the combined companies to capitalize on the mutual strengths of both organizations. These competitive strengths also come with improved manufacturing efficiencies which should enable us to target about $20 million of expense synergies on an annualized basis.

So let me give you a brief overview of the company that will emerge from this transaction including several of the strategic benefits that will enable us to become even more competitive in this market place.

First, the merger will allow us to leverage the large-scale production and quick turn capabilities of both companies in order to expand our revenue opportunity with a large and diversified customer base. Specifically on the Viasystems side we will bring a well established customer base of more than 125 original equipment manufacturers that serve numerous end markets. These include many well known industry leaders. Merix also supplies a broad base of approximately 800 customers. While there is some overlap and we do compete in some end markets, for the most part we serve different customers. Among the top ten of both companies there are only three overlapping customers so the combination will have the desired effect of significantly diversifying our business over a larger customer base.

We will also benefit from a broader global presence. Viasystems is a high volume producer in China. Merix, in addition to high volume production in multiple facilities in China also has substantial North American quick turn and high volume production capabilities. Merix’s North American assets will better enable market penetration and expansion into the growing and profitable military and aerospace industry. Certainly we expect to add volume and bring operating efficiencies to many of these operations.

One of the most important mutual strengths is our distinct, yet complementary, capabilities of prototyping and quick turn. One example is the quick turn and prototyping capabilities that Merix offers in the U.S. In addition the company will have more diverse capabilities in Asia from both high production and high turn print circuit board manufacturing. We know the customers attribute great value to the ability to provide them with a global offering to manage their service needs through the product entire life cycle.

Viasystems also provides customers with electromechanical solutions that are new to the Merix service offering. Both companies bring a reputation of high quality and reliability which is not necessarily a given in this market. As a result, the combined company will be better able to take a product at the design stage and quickly transition it for high volume manufacturing at the location that best suits the customers’ needs.

I think it is clear this is an excellent strategic fit. The combination will substantially increase our business scale and diversify our customer base and open new opportunities for us. Once this transaction is completed no other PCB company in the world will provide the scope of services and technology offered as will the combined companies. These are two successful, innovative organizations coming together with one mission; to meet the rapidly changing needs of our customers by leveraging the diversified operations and complementary technologies as well as employing the management skill sets of both organizations for a combined company that is well positioned in a recovering industry.

We are confident in our plans to integrate our business and unlock tremendous value. It is a great opportunity for our employees, customers and stakeholders with a stronger and more competitive enterprise. With that I will turn it over to Mike so he can discuss the terms of the deal.

Michael Burger

Thank you David. As we mentioned in the press release, there are several steps needed to complete the merger including approval by Merix shareholders at a special meeting that is tentatively planned for December. At this special meeting, shareholders will be asked to approve the exchange of one Merix share for approximately 0.11 shares of newly issued Viasystems stock subject to adjustment as a result of exercise of equity awards including options and warrants between the signing and closing.

The major holders of Merix convertible notes have already agreed to the terms of the conversion of their holdings into cash and Viasystems stock as we have outlined in the press release. Another important requirement is for the new shares of Viasystems to be registered with the SEC. The timing of this registration is difficult to predict particularly because the SEC may require a lengthy review process. However, we will move as quickly as possible and are optimistic we can complete the merger by the end of 2009.

The new company will be more competitive and will have a unique and compelling customer offering. We will have a very manageable debt level of approximately $250 million with approximately $40 million in cash. We also see good potential for substantial synergies in terms of both revenue growth and cost efficiencies. However, we have not factored revenue synergies into our financial model. We are taking a very conservative view at this point. The new Viasystems will have approximately 20 million newly issued shares outstanding, about 80.5% of which will be owned by the current owners of Viasystems. Existing Merix shareholders will receive about 12.5% and Merix convertible note holders will receive approximately 7%.

The major equity and note holders of both companies have agreed to certain lock out restrictions regarding the trading of the new shares. So those are the primary terms of the deal that we are recommending to our shareholders. Let me add to David’s remarks that I am pleased that we are creating an exciting, new business that offers great potential for our customers, employees and stakeholders. This is an excellent strategic fit with compelling valuation considerations that offer both companies’ stakeholders tremendous value.

We drove this process towards Viasystems primarily as the combination uniquely validates, accelerates and adds scale to the value proposition that Merix began several years ago. This will be a company with outstanding technology and scale and a deep pool of talented employees. We will encourage a culture based on shared commitment to our customers and to each other. Clearly this combination capitalizes on our mutual strengths including our high quality, specialized technology, deep and diverse customer relationships and a proven operational capability. I believe that with the expanded resourcing capabilities that will be achievable through the joining of Viasystems and Merix our growth will accelerate and we will build a very sustainable business for the long-term.

Let me take a few minutes for Kelly and I to share some additional color on our fiscal first quarter results that were separately reported yesterday.

Our revenues of $57.8 million were within the expected range as we began the quarter and represented a decline of approximately 2% from the fourth quarter. Despite this relatively flat revenue performance, there is reason for optimism within both our revenue numbers and recent order trends. We are beginning to see the first signs of a turnaround in our overall business. Our last several weeks of the quarter we realized noticeable improvements in both our North America and Asian booking rates that were not reflected in our first quarter revenue.

These near-term trends resulted in an improvement in our first quarter book to bill with North America at 1.03 and Asia at 1.16. Our demand trends in North America and Asia have continued to improve throughout August and September. Looking at our regions, we saw Asia rebound in the automotive segment where it appears that the success in the government sponsored stimulus programs combined with the need for many of the automotive manufacturers to normalize inventory levels resulted in a nice uptick in demand.

Automotive revenue grew 27% in the first quarter from the fourth quarter. It remains to be seen whether the new automotive demand levels are sustainable or simply a replenishment of inventory. Either way it appears that demand is trending up off of the bottom in this segment.

In North America the improvement has been relatively broad based across customer end markets. Of particular note is the defense and aerospace segment where we reported sequential first quarter growth of 4%. This continued improvement has resulted from a strong focus and strong structured strategy for penetrating new accounts in this key segment. This effort has resulted in Merix having relationships with more than 2.5 times the number of customers we had just two years ago.

Although revenue growth from the defense and aerospace segment has not kept pace with the customer growth, we anticipate continued gains in coming quarters from this growing customer base and increased quote activity that we currently are experiencing. In our July call I mentioned we were transitioning our focus from cost reduction to managing the company for profitable growth. That focus has intensified over the last 90 days. We are systematically ensuring the proper balance between adequate manpower, capacity, increased customer demand and the incremental cost of adding labor.

Our initial first quarter demand increases were biased toward lower technology products. This anomaly has resulted in an average panel price decline in North America of roughly 4% and in Asia of about 10%. The average price reduction in Asia is heavily influenced by the previously mentioned 27% sequential quarterly revenue growth in Asia where the automotive pricing itself has remained relatively unchanged but it is lower technology and lower price and now a greater percentage of the mix leading to a perceived average price reduction.

Included in the first quarter results were three unusual expense items totaling $1.6 million. The first was $300,000 of severance costs associated with the relocation of our Asia based shared service resources from our Hong Kong facility to our HY facility in China. This move has now centralized our entire Asia administrative support structure into lower cost China and our Hong Kong facility is vacant in preparation for its eventual sale. The second was $700,000 of legal costs that are primarily related to our ongoing security litigation efforts as well as in support of our recently announced transaction with Viasystems. The third is $600,000 of asset impairment charges associated with the further efficiency of [inaudible] in North America that allowed us to decommission unnecessary equipment.

We generated positive operating cash flow in the first quarter. This means that even at first quarter’s depressed revenue levels the cost actions we have taken over the last several quarters is sufficient as well to preserve our liquidity. Outside of short-term working capital fluctuations we should remain cash flow neutral.

Finally, our factories are continuing to perform extremely well. The quality and on-time delivery metrics I outlined to you last quarter remain relatively unchanged and continue to provide our customers the performance they are seeking from a high quality PCB supplier. We have made significant progress in this area over the last six months and believe we have established repeatable processes that are sustainable as our demand increases.

I will now pass the call over to Kelly who will provide additional details on our first quarter financial performance.

Kelly Lang

Thanks Mike and good morning everyone. As our press release indicated, first quarter revenues amounted to $57.8 million down 2% from the fourth quarter. Revenue in North America declined 4% to $26.3 million while backlog shippable in the next 90 days increased slightly to $10.7 million representing a book to bill of 1.03.

It has been more than a year since we reported a North American book to bill that is greater than one. We believe this marks a significant milestone and provides further evidence we are coming out of the demand trough resulting from the latest marked downturn in the market.

First quarter revenue in Asia remained flat at $31.5 million while backlog increased by $3.2 million to $20.8 million translating into a book to bill of 1.16. Consolidated backlog at the end of the quarter was $31.5 million. As Mike mentioned earlier we have seen a nice rebound in the demand picture, first in Asia driven principally by the automotive segment, then in July we began to see an even broader demand growth coming from other market segments. Given the timing of orders, much of the demand growth experienced in Q1 was not shippable until Q2 translating into backlog increases and anticipated second quarter revenue growth. This improving demand trend has continued into the month of September as well.

Our gross margin decreased to 6% in the first quarter representing a three percentage point decline relative to the fourth quarter of fiscal 2009. This decrease was expected and of a short-term nature resulted from the modest decrease in revenue we experienced in the quarter. We also saw modest decline in our average panel pricing in North America and Asia as Mike mentioned earlier. Most of this was driven by the mix of business sold during the quarter. The underlying panel pricing continues to hold up very well.

First quarter operating expenses excluding the unusual charges Mike mentioned earlier were flat at $8 million compared to the fourth quarter on a similar basis. We do not anticipate any significant changes in these spending levels in the coming quarters. Our balance sheet is sound. From a cash standpoint we ended the quarter with $21.4 million. At quarter end we temporarily drew down on our credit facility, increasing our debt by $5.83 million.

The $5 million of incremental borrowings were repaid during the first week of September, leaving today’s outstanding debt at $78 million which is unchanged from Q4. We have approximately $42.2 million of available, untapped borrowing capacity representing a nearly $9 million increase from the end of the fourth quarter. The increased liquidity provides not only a cushion for normal changes in the market conditions but it supports growth in our business as the market continues to rebound.

Given our current financial model as well as current and expected future revenue levels we do not anticipate needing these funds. We firmly believe that the liquidity concerns that have surrounded the company in the past nine months are firmly behind us. Before I turn the call back to Mike, I want to remind you our first quarter results that were reported to you without [Asia’s] one month reporting lag that we have had in place since the acquisition of Asia in September 2005.

This means that both North American and Asian first quarter results represent the same June, July and August time period. As a side note, the month of May in Asia which is not included in either our fourth quarter or first quarter results is reported within our first quarter earnings announcement. You will see the details there. The results themselves are in line with our recent history and rolled directly in consolidated first quarter beginning [retained] earnings.

I will now turn the call back to Mike who will 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 target markets and continuing to receive excellent feedback from existing customers and new customer qualifications.

Our booking rates have improved and while we don’t have significant visibility into the future we do anticipate continued higher booking rates to varying degrees in all end market segments. Just as I have indicated during last quarter’s call, we anticipate second quarter revenues to grow and show a nice sequential improvement when compared to the first quarter. Today the biggest gaining item on revenue is our current direct labor base, not demand constraints. As such, we have begun to prudently add people as needed to meet the increase in demand.

In summary, I believe we have made the necessary investments in both North America and Asia to make Merix’s unique value proposition a reality. Now in today’s announced merger with Viasystems we have accelerated our ability to deliver the key differentiation to the new companies’ combined customer set. Our recent improvement in demand trends combined with our continued great customer relationships and strong operating metrics truly position the new company well.

With that I will open up the line for any questions you may have on our first quarter results or the recently announced merger with Viasystems.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Matthew Sheerin – Thomas Weisel Partners.

Matthew Sheerin – Thomas Weisel Partners

Could you expand or elaborate on the suggested cost savings? You talked about $20 million in synergies. How do you plan to achieve that?

David Sindelar

Most, if not all, of the synergies are coming from operational efficiencies, the elimination of duplicate functions, and some raw material purchasing benefits we think we can achieve. We have not anticipated or suggested any type of plant closings. We think this will be through the normal elimination of duplicate functions of two separate, stand alone companies becoming one.

Matthew Sheerin – Thomas Weisel Partners

Will the Merix operate in any way as a subsidiary or division? Will the name still be used, the brand be used out there or will they all be merged into Via?

David Sindelar

We quite frankly have had some brief conversations about what and how we should operate. I think in the past when we have gone through various acquisitions and stuff we have continued to use the name as, I don’t want to say product line or division but just used the name because there is value there. I don’t think we have really kind of latched on to the real details, marketing and sales plan. Obviously we have great regard for the Merix capability, name and reputation in the industry and that is an asset we don’t want to lose. We are just going to have to work through that as we go through.

While we have had a lot of conversation amongst the two teams, there are some things we still need to kind of work through and identify. I think it is fair to say we need to have one, overriding umbrella company which will be Viasystems and then we will need to figure out how we best go to market to try not to be foolish or arrogant to say it just has to be Viasystems, I think what we will try to do is do what is best for the combined company.

Matthew Sheerin – Thomas Weisel Partners

I know you talked in the press release about opportunities in the defense and aerospace sector. Can you talk about any other markets where the power of two players now will enhance your opportunities to take share in any specific markets or where you see real opportunity?

David Sindelar

I think we have both talked about, both Michael and myself, have talked about opportunities to kind of grow the revenue base in other markets and other areas. The one we are extremely excited about is the mil/aero side that Merix has a position in and it is a growing market for them. It is one that we are essentially, because of our primarily China base, have been locked out of. Most military purchasers don’t want to use a China operation for that for obvious reasons. We think that is a huge opportunity for us as a combined company.

As we look at the other markets, we don’t have a quick turn operation in North America. Merix does. We get questioned about quick turn opportunities at most all of our customers so we are hopeful that will be an opportunity for increased volume through the quick turn operation. We are also set up for long runs. Our China operations are high volume, low mix kind of operations so we don’t always fit a customer’s need when it becomes medium volume and higher mix. We think that will play well into the Oregon plant.

As we look in each one of the markets as we have said there was only three overlapping top ten customers so we think this is a true expansion of our customer base inside each of the markets. We think with our electromechanical services opportunity there is room to expand into the Merix customer base and my guess is while Merix has two great facilities in China we either fortunately got there sooner, we have been there since 1999, Merix has done a great job with upgrading the technology and capability of those facilities and we think we might be a little bit ahead of that for no other reason that time. We think that will play well into the customer’s needs.

So we think the combination of it all fits really great.

Matthew Sheerin – Thomas Weisel Partners

Lastly, did you say what those three top customers were? Those overlapping customers?

David Sindelar

We haven’t. We haven’t disclosed those names.

Operator

The next question comes from the line of Joe Wittine – Longbow Research.

Joe Wittine – Longbow Research

You gave some good numbers on the combined enterprise. It looks like an 8% margin with the restructuring somewhere north of 10% or 10.5%. Presumably that is on a trough 12 months of sales I guess. Any other visibility you can give or numbers or guide posts to provide for modeling for what a more normalized margin could be? On an incremental basis or incremental dollar of sales margin? Any additional numbers on margin?

Kelly Lang

I will just kind of jump in for Merix and perhaps maybe Gerry or David can comment on theirs. We have always spoken on our business and we certainly Via is going to operate the combined company and things will hopefully change. We are roughly in incremental dollar revenue there is kind of a roughly $0.50 flow through, if you will, from a contribution margin perspective. I think their model is similar. I think Gerry and Dave are probably more prepared or better prepared to address it from their vantage point.

Gearld Sax

From the Viasystems side, you correctly identified the trough of EBITDA is in recent history. If you look back a couple of quarters you would have seen ours at the 13-15% EBITDA range which primarily the measure we use here. We are targeting a similar figure on a go forward basis but as a practice for our business historically we have not given forward guidance.

Michael Burger

Let me just add a couple of things too. I think we all know we have all been going through a pretty significant trough and both businesses obviously are leveraged pretty steeply by just the gearing that you get out of revenue. As the economic cycles turn and improve we hope to be positive gearing from that. Hopefully from both companies.

Operator

The next question comes from the line of Jeff [Harley] – Barclays Capital.

Jeff [Harley] – Barclays Capital

Could you just go through the $68 million pro forma adjusted EBITDA and how that breaks out Viasystems, Merix and any other adjustments you made to the numbers?

Michael Burger

Gerry and Dave do you want to take that? I will take that. Perhaps we have a communication line problem. I think the pro forma LTM for Viasystems as of the end of June, the last 12 months, they were roughly $54-55 million of EBITDA. Merix LTM ending in August was $5 million, if you will, again very much affected by the revenue levels that both companies were going through in the market changes we were having. That is sort of the pro forma basis for both companies.

Jeff [Harley] – Barclays Capital

So some of the adjustments that were in Viasystems adjusted EBITDA were not included in that, it looks like from looking at the numbers directly?

Operator

The next question comes from the line of Eric Reubel – MTR Securities.

Eric Reubel – MTR Securities

Gerry could you walk me through the cash bridge? If I look at your balance sheet ending in June you had $110 million in cash. It looks like Merix has $21.3 million. You are paying $35 million in cash, so I guess that makes it 96.3 and the combined entities are supposed to have a cash balance of $40 million. Could you walk me through the bridge?

Michael Burger

The Via group line just disconnected. So they are dialing right back in. Perhaps maybe we could defer that question for just a moment and go to the next one and then re-ask it in a second?

David Sindelar

Somehow we got disconnected. Could you repeat your question please?

Eric Reubel – MTR Securities

Gerry, could you walk me through the cash bridge? I am looking at your ending cash balance for June of $110 million and the $21.3 million on the balance sheet for Merix, the $35 million cash payment. That leaves something like $96.3 million. The pro forma cash balance for the combined entity is $40 million. Could you walk me through the bridge?

Gearld Sax

Yes. Obviously we are projecting this is going to close sometime out in the future, probably by the end of this year. We anticipate that our cash balance plus the Merix cash balance before all of the transactions will be used to pay down Merix existing bank debt which is $13 million in their recent projection plus pay approximately $35 million to the existing Merix convertible debenture holders as part of the consideration for the transaction plus pay costs relative to the deal, all of the legal and investment banker and other fees.

Eric Reubel – MTR Securities

A follow-up, could you give us any more color on how you are thinking about the refinance for the segments?

David Sindelar

Let me kind of jump in on that. We have obviously been watching the markets as aggressively as possible and as I am sure most on the phone know that the bond markets are pretty hot right now. We have been kind of in the nicest sense of the word caught in the headlights of the car in that we couldn’t go out and refinance the bonds while the deal was about ready to be announced so we have been kind of stutter stepping. Now that we have got the merger transaction announced we will then kind of move aggressively and see what the market has available for us. That is my sense of it. Again, it is just my sense and I have been talking to whoever would talk to me about the bond market today but it has been hot and it continues to be hot. I at the moment am not overly concerned about getting the bonds refinanced sometime in the next 12-14 months. I hope quite frankly to get it done sooner. I think as we began these discussions quite awhile ago the credit markets were a lot more difficult than they are today. I think that is one of the positive things here. The combined company will have a new banking facility in the states of about $75 million. That coupled with the recently announced Asian China facility should give us access to credit lines of around $100 million.

From a liquidity standpoint from the combined standpoint and the bond market standpoint I am feeling pretty comfortable at the moment.

Eric Reubel – MTR Securities

Any color on the new facility? The new credit facility. Is that going to be a secured facility or unsecured?

Gearld Sax

The new $75 million facility will be an asset based loan in the U.S. The debt will be secured.

Eric Reubel – MTR Securities

Based on Merix facilities in the U.S.?

David Sindelar

Receivables.

Gearld Sax

In part, property and equipment. It basically replaces a similar agreement that Merix has in place in their [inaudible].

Operator

The next question comes from the line of Rich Kugele – Needham & Company.

Rich Kugele – Needham & Company

First, to give us all a little context could you talk about the genesis of the deal and specifically what I am interested in is your conversations with customers because you have done a good job over the years of extricating yourselves from North America. Now getting a little bit more of a North American presence, was that something your customers were requesting? Then secondly, again about the debt, what do you think the more longer term is the right debt load for the combined entity?

David Sindelar

That is a very similar conversation that I had with my [daughter]. When we started exiting as I call it the western world because we not only had North American plants but we had European plants as well which was probably back in 2000 to 2001, 2002 and 2003. At that juncture the U.S. and European print circuit board markets produced roughly $9-10 billion a piece. Today the North American/European market each produce somewhere in the neighborhood of $4-5 billion. So we have seen a dramatic decline in the U.S. and European production levels and as a result a lot of that production went to Asia.

I think that over time, over the next 3-4 years I think you are going to see China and Asia grow slightly higher than the western world is going to grow. I think the movement of production to China has stabilized. I don’t expect Europe and North America to go from $4-5 billion down to $2 billion so I think there is stabilization there. I also think that as we look forward you are going to see the world kind of balance out a little bit. We have seen labor inflation. We have seen currency inflation in China. We have seen transportation costs go up so unless you are producing high volume, low mix, easily stackable boards and different things I think the U.S. and North America is going to become a more logical place to keep production.

That coupled with I think we have had a desire to have quick turn capabilities for a long, long time. I think that is another big asset of the combining of the two companies because Merix has great quick turn capabilities in both of their facilities in North America. So it is kind of a combination of what was true 20 years ago versus 10 years ago versus now, everything is kind of evolving and I think the combination of the two will make a whole lot of sense today. That is market driven, customer driven, and kind of all of the above.

Moving on to the debt question, for the Via participants on the phone you all know we have operated under a wide range of debt levels over the last 10 years and debt doesn’t in and of itself scare me. I think the debt levels we have on the business are okay. They are not too high. They are not too low. With that said, I think that in the advent of us becoming a public company I think our focus is that I think these print circuit board companies fare better in a public environment with less debt. So our goal is to have less debt as opposed to more debt. I think as we sit here today with a, depending on how you do the math either pre-transaction or post-transaction, post-transaction we should have about $170-175 million of debt net of cash with the possibility of 2010 and 2011 being a recovery period. I think we will be more than adequately covered and comfortable with those levels. I don’t see any need to go out and do anything to increase our debt levels. I also don’t see any need to dramatically change them. I think over time because of the synergies in operations and hopefully the recovery in the markets we are going to be able to pay the debt levels down.

That was a bit of a rambling answer, but I think hopefully that answered it.

Operator

The next question comes from the line of Jonathan Van Orden – Dominick & Dominick.

Jonathan Van Orden – Dominick & Dominick

I am just trying to understand the implied value of 0.11 newly issued shares. How should we think about that?

Kelly Lang

The implied value really the exchange ratio is going to vary. It really depends kind of on the number of options and stock activity that happens between now and closing of the transaction. I think the better way, frankly, in how we are looking at it and what our Board [inaudible] the transaction, potential Merix is going to get 12.5%, the equity holders will get 12.5% of the combined business, if you will. So when you are kind of looking at the historical valuation we look at $68 million and synergies of roughly $88 million you put a multiple on that which I think of as kind of a mean of market comps out there, roughly similar to the [inaudible] market and back out the net debt you get kind of a net company value. Then you put that 12.5% number out there. I think that helps kind of drive a little bit of clarity to do that simple math.

Certainly the two businesses, as David indicated, assuming out into 2010 and 2011 are recovering periods which again I think today visibility is very difficult but certainly trends in the near term have been very, very good. From our vantage point. I think there should be hopefully some acceleration from a multiple standpoint.

Further, as I think our press release indicated, we are going to be really the leading PCB driver out there in the market, if you will, from a market capitalization and revenue standpoint. So I think that this is going to be really an exciting valuation or very compelling it seems from a shareholder standpoint. It is very different frankly from where Merix has been in the last few years. Hopefully that helps.

Operator

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